-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, AmCfHm67dex97NEXSrgSEoQkipJXDtbe4IL5cUS2YxC53tWN7TRRoOhy+y0DZnzu VPrZ6t2sU+e4P8+MpQ2kPg== 0000950132-95-000107.txt : 199507120000950132-95-000107.hdr.sgml : 19950711 ACCESSION NUMBER: 0000950132-95-000107 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRONTIER CORP /NY/ CENTRAL INDEX KEY: 0000084567 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 160613330 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04166 FILM NUMBER: 95524025 BUSINESS ADDRESS: STREET 1: ROCHESTER TEL CENTER STREET 2: 180 S CLINTON AVE CITY: ROCHESTER STATE: NY ZIP: 14646-0995 BUSINESS PHONE: 7167777100 FORMER COMPANY: FORMER CONFORMED NAME: ROCHESTER TELEPHONE CORP DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 COMMISSION FILE NUMBER 1-4166 ------------ FRONTIER CORPORATION (PREVIOUSLY ROCHESTER TELEPHONE CORPORATION) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW YORK 16-0613330 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 180 SOUTH CLINTON AVENUE, 14646-0700 ROCHESTER, NEW YORK (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (716) 777-7100 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: - -------------------------------------------------------------------------------
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------------------------------------------------------------------ Common Stock, par value $1.00 per share New York Stock Exchange
- ------------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE 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 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] The aggregate market value of the stock held by non-affiliates of the registrant as of March 7, 1995 is $1,577,641,731.00. The number of shares outstanding of Frontier Corporation's common stock (Par Value $1.00 per share) as of the close of March 7, 1995 is 72,723,675 shares. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the registrant's 1994 Financial Review including MD&A, Consolidated Financial Statements and Notes to Financial Statements, as presented in Exhibit No. 13 of this Form 10-K, are incorporated by reference in Parts II and IV hereof. (2) Portions of the Notice of Annual Meeting and Proxy Statement issued by the registrant in connection with its Annual Meeting of Shareowners to be held April 26, 1995, as presented in Exhibit No. 99 of this Form 10-K, are incorporated by reference in Parts II, III and IV hereof. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS Frontier Corporation, formerly known as Rochester Telephone Corporation, ("Frontier" or the "Company") is a major U.S. diversified telecommunications firm with headquarters in Rochester, New York. The Company was incorporated in 1920 under the laws of New York State to take over and unify the properties of a predecessor company and certain properties of the New York Telephone Company which were located in the same general territory. Currently, the Company's principal lines of business are Telecommunication Services and Telephone Operations. Telecommunication Services consists of a major regional long distance company, cellular and paging operations, and equipment sales. Telephone Operations consists of 36 local telephone companies which serve, as of December 31, 1994, approximately 918,000 access lines in thirteen states. Effective January 1, 1995, Frontier reorganized into a holding company structure. Historically, Telephone Operations has provided the majority of the Company's revenues and income. However, an increasing percentage of Frontier's revenues and income is being generated by the Company's long distance and wireless operations. In 1982, the Company made the strategic decision to enter the long distance business. It now provides long distance voice, video and data communication services throughout the United States with its major marketing and sales focus in New York State, New England, and the Mid-Atlantic and Midwest regions. The Company first began providing cellular communications services in the Rochester, New York metropolitan area in 1985. Today, it has ownership interests in wireless communications operations in five states and manages wireless operations serving over 4.4 million potential subscribers. The geographic reach of the Company's long distance operations will soon expand nationwide as a result of strategic acquisitions such as American Sharecom, Inc., which closed in early 1995, and WCT Communications Inc., which is also expected to close in 1995. Expansion through strategic acquisition and business alliances remains a key growth vehicle for the Company. Prior to 1988, the Company's Telephone Operations were heavily concentrated in New York State. Since 1988, the Company has acquired 29 local telephone companies and has significantly diversified its geographic base. The Company's largest telephone operation is in Rochester, New York and serves approximately 502,000 access lines. The Company refers to the 35 telephone companies outside of Rochester, New York as "Regional Telephone Operations". The latter group includes approximately 416,000 access lines with an aggregate revenue level nearly equal to that of the Rochester, New York operating company. As part of the Company's reorganization into a holding company which was effected January 1, 1995, the assets and businesses of the Rochester, New York operating company were divided between two new subsidiaries, Frontier Communications of Rochester, Inc. ("FCR") and Rochester Telephone Corp. ("RTC"). Because this division occurred after the close of the 1994 fiscal year, references in this Form 10-K will refer to the Company's operations prior to this division, unless otherwise indicated. A key growth strategy for the Company is to provide integrated communications services for its customers. These integrated services include long distance, wireless, and local telephone service as well as selected products and services that the Company will remarket to customers as a single source provider. Frontier is committed to growth through expansion of its existing businesses, the development of value added products and services, and selected acquisitions. Certain financial data relating to the Company's business segments is presented under "Business Segment Information" in Exhibit 13 to this Form 10-K. Frontier and NYNEX have formed a joint venture, the Upstate Cellular Network (the "Supersystem"), to manage and operate certain of their cellular properties located within New York State. This joint venture serves a territory that includes approximately 3.5 million potential customers and includes the cities of Buffalo, Syracuse, Rochester, Utica, and Watertown, New York. One of Frontier's subsidiaries serves as managing partner of Upstate Cellular Network. This is described in more detail under the caption "Wireless Communications", at page 5, infra. On February 15, 1994, the Company completed a public offering of its common stock. A total of 2,549,000 new shares were issued in connection with this offering. The public offering also included the sale of 2,885,000 shares that were held by a subsidiary of Sprint Corporation. In April 1994, the Company effected a stock split in the form of a 100% stock dividend. The principal executive offices of the Company are located at 180 South Clinton Avenue, Rochester, New York 14646-0700. The telephone number is (716) 777-1000. Telecommunication Services General Frontier's Telecommunication Services segment is comprised of Network Systems and Services, which provides long distance services, customer premises equipment, and wireless services. The Company's major deregulated business is long distance service. While regionally focused 2 currently in the Northeast, Mid-Atlantic and Midwest states from a marketing and sales perspective, customers of the Company's long distance business enjoy nationwide and international connectivity. Telecommunication Services' revenues have increased significantly over the past few years and have accounted for 38 percent of Frontier's total revenues for the year ended December 31, 1994. The Company intends to expand Telecommunication Services by increasing its existing commercial and residential customer base, continuing to develop new products, and effecting selected acquisitions. Long Distance Services The Company provides long distance services primarily through a subsidiary, Frontier Communications International, Inc. (previously RCI Long Distance, Inc., or "FCI"). FCI routes long distance traffic over its 100 percent digital state-of-the-art network and resells services obtained from other suppliers to route calls to areas where it does not have its own facilities. FCI currently owns and operates eight switching sites. These are located in Rochester, New York; New York City; Washington, D.C.; Atlanta, Georgia; Chicago, Illinois; Philadelphia, Pennsylvania; Cleveland, Ohio; and Burlington, Vermont. FCI's switched services include basic long distance or measured toll service which is accessible through "l + dialing", 800 services, a variety of long distance products targeted at specific consumer and business segments, and value-added services such as travel cards, prepaid cards and information services. In addition, FCI provides flexible billing services such as multi-location billing, customized accounting codes and electronic billing features. FCI currently focuses its marketing efforts in New York State, New England and the Mid-Atlantic, Southeast and Midwest regions. In these regions, FCI markets its products through a direct sales force, direct marketing campaigns, sales agents, and affiliated local exchange carriers. The majority of FCI's revenues are derived from small to medium-sized business customers. FCI has introduced a number of programs designed to attract new long distance customers. For example, the "Budget Call" feature enables any telephone user to dial an access code and complete a call through FCI's long distance network. The cost of the call is invoiced by the customer's local telephone company. The rates for such calls are typically 10 to 20 percent lower than the rates charged by a major long distance carrier such as AT&T. At December 31, 1994, Budget Call was available in nineteen states. This program is anticipated to continue expanding through 1995. As part of the Company's overall service integration strategy, FCI has significantly increased residential usage through its "Visions Long Distance" program (as described in "Telephone Operations-General" at page 8) where 3 FCI's long distance services are marketed through Company-owned as well as non- affiliated local exchange service providers. Through the Visions Long Distance program, the Company has achieved substantial penetrations in several markets as a result of customer preference for unified billing and service. Because residential long distance calling volumes peak in the evenings, on weekends and on holidays, when commercial traffic tends to be lowest, expanding the residential business increases revenues with virtually no need to increase existing switching and transmission facilities. During 1994, FCI signed definitive agreements to acquire two long distance companies. In November, it completed negotiations to acquire WCT Communications, Inc., a long distance company based in Santa Barbara, California, and announced that it had signed a definitive agreement to acquire American Sharecom, Inc., headquartered in Minneapolis, Minnesota. When these acquisitions are completed, the geographic reach of the Company's long distance business will extend from coast to coast, and the Company is projected to become the seventh largest long distance carrier in the nation. Both acquisitions are intended to further implement FCI's strategy to expand its customer and market base and are subject to regulatory approval. The Company intends to continue to pursue additional acquisitions to provide greater economies of size and scale to its operation and to enhance its customer and market reach. The long distance industry is dominated on a volume basis by the nation's three largest long distance providers, AT&T, MCI and Sprint, which generate an aggregate of approximately 84 percent of the nation's long distance revenue of approximately $61 billion. In each of its markets FCI competes with AT&T, MCI and Sprint, as well as with other national and regional long distance companies, for intercity communications transmission services such as 1+, dedicated access, 800 service and private line service. The primary bases for competition in the long distance business are pricing, product offering, and service. One element of service includes billing and customer information. FCI provides long distance services at prices often below the three large carriers, but generally above smaller third-tier carriers. In addition to basic long distance, 800 services, and private line services, FCI products include prepaid calling card services and operator services. FCI's prepaid calling card product has many features, is a market leader through its use of innovative technology, and is designed to meet standard needs while at the same time offering enhanced audio- text services to users. Although FCI does not currently offer some of the enhanced voice or data services provided by the three large carriers (such as frame relay and ATM), it is able to meet the needs of its targeted general business and residential markets. The Company intends to compete aggressively in the long distance business. 4 Wireless Communications Since 1985, the Company has provided cellular service in the Rochester Metropolitan Statistical Area ("MSA"), which has a population of approximately one million, in a partnership with ALLTEL Corporation. Frontier historically had an 85 percent interest in this partnership. In June, 1994 the Company and NYNEX Mobile formed a 50/50 joint venture and the Rochester MSA was contributed to the Upstate Cellular Network ("UCN" or the "Supersystem"). A Frontier subsidiary is the managing partner of that cellular "Supersystem" which provides service in much of upstate New York. The Supersystem provides the Company a larger geographic footprint than it would otherwise have. The greater concentration of customers resulting from the Supersystem's formation will enable the Company to take advantage of the efficiencies normally inherent with the economies of scale. By combining marketing and service efforts and integrating networks, the Company and NYNEX will be able to provide seamless cellular service to a population of approximately 3.5 million potential subscribers in upstate New York. The Company also manages a cellular system in Alabama with over 255,000 potential subscribers and has investments in wireless properties elsewhere in New York State and in Georgia, Illinois and Iowa. Through its subsidiaries, Frontier is a member of the MobiLink marketing alliance, a nationwide consortium of wireless operators. Frontier intends to continue to pursue additional investments in cellular or wireless operations with a preference for investment in properties which are adjacent to existing Company-owned properties or where a controlling interest can be obtained. In September, 1994 the Company signed a definitive agreement to purchase the Minnesota Cellular Telephone Company ("Minnesota Cellular") which owns the business and assets of a cellular company serving Rural Service Area ("RSA") Number 10 in Minnesota with a population of approximately 225,000 potential subscribers. The transaction, expected to close in the first quarter 1995, is anticipated to involve the issuance of the Company's Common Stock and is contingent upon regulatory approval. Despite intense price competition during the construction of its network in the Rochester, New York market, the Company's cellular business has remained profitable since its first full year of service. This business has consistently increased its subscriber base while maintaining an efficient cost structure. With the formation of the Supersystem, and the corresponding increase in geographic scope of the Company's cellular reach, overall the Company's wireless business has remained profitable. Nevertheless, price competition remains strong within all the Company's properties. 5 Cellular systems compete principally on the basis of network quality, customer service, price and coverage area. Each market currently has two cellular providers, and the Company's chief competition in each market is from the other cellular licensee in that market. In some markets additional entities resell cellular service and compete with the holders of cellular licenses. The Company believes that its technological expertise, emphasis on customer service and development of new products and services make it a strong competitor. Several recent FCC initiatives indicate that the Company is likely to face greater wireless competition in the future. The FCC has licensed specialized mobile radio ("SMR") system operators to construct digital mobile communications systems on existing SMR frequencies in many metropolitan areas throughout the United States. Also, in September 1993, the FCC announced its decision to allocate radio frequency spectrum for personal communications services ("PCS"), a form of wireless communication using lower power and more cell sites than current cellular service. The FCC's decision will permit the grant of seven new licenses: two 30 MHz blocks, one 20 MHz block and up to four 10 MHz blocks. (By comparison, the two cellular carriers in each market currently have 25 MHz of spectrum each.) The bidding for the two 30 Mhz blocks will be completed by May 1995. The Company has committed resources to evaluating the expansion of wireless communications to include PCS offerings, but has elected, thus far, not to participate in the bidding for PCS licenses. 6 Cellular Property Ownership Table The Company owned or was under contract to purchase the following cellular properties as of December 31, 1994:
1994 Pending Pending Estimated Ownership Adjusted Ownership Adjusted Market Population Interest Population Interest Population - ------------------------------------------------------------------- ---------- ---------- ---------- ---------- ---------- New York Buffalo*........................................................... 1,187,000 50.0% 594,000 50.00% 594,000 Rochester*......................................................... 1,024,000 42.5% 435,000 42.50% 435,000 Syracuse*.......................................................... 673,000 27.5% 185,000 27.50% 185,000 Utica-Rome*........................................................ 315,000 50.0% 158,000 50.00% 158,000 RSA #1*............................................................ 262,000 20.0% 52,000 20.00% 52,000 Total UCN Core Markets............................................. 3,461,000 1,424,000 1,424,000 NY RSA #2.......................................................... 232,000 12.5% 29,000 18.75% 44,000 NY RSA #3*......................................................... 482,000 22.5% 109,000 22.50% 109,000 NY RSA #4.......................................................... 359,000 0.0% 0 27.00% 97,000 Binghamton......................................................... 306,000 24.0% 73,000 32.50% 99,000 Elmira............................................................. 95,000 0.0% 0 50.00% 48,000 Alabama AL RSA #4*......................................................... 137,000 69.54% 95,000 69.54% 95,000 AL RSA #6*......................................................... 118,000 69.54% 82,000 69.54% 82,000 Managed Markets* 4,198,000 1,710,000 1,710,000 Pennsylvania PA RSA #3, B2...................................................... 58,000 0.0% 0 13.89% 8,000 PA RSA #4, B2...................................................... 72,000 0.0% 0 16.67% 12,000 Minnesota Minnesota RSA #10.................................................. 227,000 0.0% 0 100.00% 227,000 Minority Interests Orange-Poughkeepsie NY 597,000 15.00% 89,000 15.00% 89,000 Des Moines IA MSA.................................................. 420,000 4.00% 17,000 4.00% 17,000 GA RSA #3.......................................................... 205,000 25.00% 51,000 25.00% 51,000 IL RSA #2.......................................................... 252,000 6.67% 17,000 6.67% 17,000 IL RSA #3.......................................................... 200,000 6.38% 13,000 6.38% 13,000 Total.............................................................. 7,221,000 1,999,000 2,432,000
- -------------------------------------- * Company managed systems; NY RSA #2 is Company managed in 1995. 7 For each market listed above, the number in the "Adjusted Population" column represents an estimate of the Company's proportionate share of the number of potential cellular customers in such market as of December 31, 1994 and is calculated by multiplying the 1994 estimated population of such market by the Company's ownership interest in the cellular system serving that market as of such date. Similarly, the number in the "Pending Adjusted Population" column represents an estimate of the Company's proportionate share of the number of potential cellular customers in each such market as of December 31, 1994, and is calculated by multiplying the 1994 estimated population of such market by the Company's ownership interest in the cellular system serving that market, assuming completion of the proposed or pending transaction. Customer Premises Equipment Frontier Network Systems Inc., ("FNS") (previously "Rotelcom Inc."), was established in 1978. It markets and services a wide range of telecommunications and data equipment for mid- to large-size business customers, and competes directly with other interconnect vendors that market telephone systems to businesses and other enterprises. FNS's product line includes: private branch exchanges ("PBXs") from Siemens/ROLM and Northern Telecom; data communications equipment from leading manufacturers including Dowty and Newbridge; and videoconferencing equipment from PictureTel. Product lines purchased by FNS from its two largest suppliers, Siemens/ROLM and Northern Telecom, account for more than a majority of its purchases from suppliers. The Company believes FNS's relationships with its various suppliers is good. All of FNS's customers are in New York State. FNS is also a partner in Anixter-Rotelcom, a telecommunications supply joint venture with Anixter Bros., Inc., which was established in 1986 to combine Anixter Bros.' experience in computer-assisted, just-in-time telecommunications inventory delivery systems with FNS's interconnect (private telephone system) business and to provide just-in-time inventory control for the Company's regional telephone companies. Telephone Operations General As of December 31, 1994, the Rochester, New York operating company and the 35 other local exchange companies served approximately 918,000 access lines in 13 states. The local exchange carriers provide local, toll access 8 and resale services; sell, install and maintain customer premises equipment; and provide directory services. Effective January 1, 1995, the Company reorganized into a holding company structure. The assets of the Rochester local exchange company were transferred to two wholly-owned subsidiary companies. Rochester Telephone Corp. is a regulated telephone and network transportation corporation which offers retail services to existing customers as well as sells and markets wholesale network services and other services to retailers of telecommunications services in the Rochester, New York market. Its rates are subject to price cap regulation. Frontier Communications of Rochester, Inc., is a lightly regulated provider of telecommunications services to residential and business customers located, initially, in the Rochester, New York market. The Company has other existing subsidiaries, including many which provide local exchange services outside the Rochester, New York market. Since the beginning of 1988, the Company has invested over $620 million in upgrading its Telephone Operations business and over $480 million for the acquisition of independent telephone companies. Over this period, the Company installed advanced digital switching platforms throughout much of its switching network. The Company's network in Rochester, New York is fully digital, making Rochester one of the largest cities in the United States to be served by an all- digital network. In aggregate, the 35 local exchange companies outside of Rochester, New York have over 95 percent digital capability. This is illustrated in the "Access Line Table" located below. Frontier has achieved substantial cost reductions through the elimination of duplicative services and procedures and the consolidation of administrative functions. As of December 31, 1994, Telephone Operations had 34 employees per ten thousand access lines. The Company has reduced the number of telephone employees per ten thousand access lines by over 27 percent since 1990. The Company believes that additional reductions in employee levels will be necessary to further improve the competitive position of its Telephone Operations. The Company intends to vigorously pursue additional gains in productivity through reengineering while simultaneously improving customer service. In May 1994, the Company sold its Minot Telephone Company property located in Minot, North Dakota. In September 1994 it announced that a definitive agreement had been reached to sell the Ontonagon County Telephone Company and the Midway Telephone Company, both located in the Upper Peninsula of Michigan, and completed the transaction in March 9 1995. In each case, the telephone properties no longer fit the strategic purposes of the Company. Access Line Table The Table below sets forth certain information with respect to access lines as of December 31, 1994:
Percent of Total Company Access Telephone Properties Access Lines at Percent at December 31, 1994 Lines December 31, 1994 Digital - -------------------- ------ ----------------- -------- Rochester, NY....... 501,811 54.7% 100.0% Other NY Companies.. 86,125 9.3% 100.0% Total New York...... 587,936 64.0% 100.0% Alabama(1).......... 28,833 3.1% 100.0% Georgia............. 22,420 2.4% 100.0% Illinois(1)......... 17,782 1.9% 100.0% Indiana............. 4,605 0.5% 100.0% Iowa................ 52,125 5.7% 87.0% Michigan(1)......... 26,623 3.0% 100.0% Minnesota........... 101,992 11.1% 92.0% Mississippi......... 5,284 0.6% 100.0% Pennsylvania........ 34,682 3.8% 100.0% Wisconsin........... 35,856 3.9% 100.0% ------- ----- ----- Total Other States.. 330,202 36.0% 95.5% Consolidated Access Lines..... 918,138 100.0% 98.4% ------- ----- -----
(1) These companies also have properties in one or more other states. (An Alabama company has access lines in Florida, an Illinois company has access lines in Iowa, and a Michigan company has access lines in Ohio). The Company operates 71 central office and remote switching centers in Rochester, New York, and a total of 275 central office and remote switching centers in its other telephone territories. Of the 918,138 access lines in service on December 31, 1994, 663,293 were residence lines and 254,835 were business lines. Long distance network service to and from 10 points outside of the telephone companies' operating territories is provided by interconnection with the lines of interexchange carriers. As part of the Company's continuing strategy to provide a greater selection of value-added products, the Rochester, New York operating company has introduced advanced services such as Caller ID, distinctive ringing, directory- assisted call completion, and an enhanced voice mail platform. The Company is introducing similar advanced services, where appropriate, at its other telephone properties. Frontier is pursuing several alternatives to provide expanded broadband services to its customers. To date, the Company has installed over 10,000 miles of fiber optic facilities (over 500 sheath miles) in the Rochester, New York area to provide its customers with enhanced capacity and product capability. Throughout its telephone operations, Frontier has over 24,000 miles of fiber optic facilities in place. The Company also conducted marketing trials and tests of new technologies such as a video on demand service utilizing a hybrid fiber-optic/coaxial cable network. The Company marketed this technology to selected customers in its Rochester, New York service area during 1994. The Company provides expanded broadband services to select customers outside the Rochester, New York service area. These include video-distance learning arrangements at certain Midwest region telephone properties. In connection with its integration strategy, the Company has developed a new program known as "Visions Long Distance", where its local exchange companies resell FCI's long distance services. The Company believes that many customers prefer the convenience of obtaining their long distance service through their local telephone company and receiving a single bill. Visions Long Distance was introduced at nine local telephone exchange companies in 1993 and extended to two additional subsidiaries in 1994. The results of Visions Long Distance operations are included as part of the Telecommunication Services segment. Technological innovation and regulatory change are accelerating the level of competition in both local exchange and long distance services. New competitors now have the ability to provide basic local telephone service in some areas, including Rochester, New York. To benefit from these technological advances and broaden the scope and quality of its own product and service offerings, the Company has increased its fiber and digital switching capacity throughout its networks and has pursued regulatory alternatives such as the Open Market Plan, which is described in more detail below. Currently, the Company may be considered the primary provider of basic local telephone service in its Rochester, New York property and may be 11 considered the only provider of basic local exchange service in the various other geographic areas where it has telephone properties. Open Market Plan On February 3, 1993, the Company filed its Open Market Plan with the New York State Public Service Commission ("NYSPSC"). The plan was approved by an Order of the New York State Public Service Commission dated November 10, 1994, was approved by the Company's shareowners on December 19, 1994, and was implemented effective January 1, 1995. The Open Market Plan has formally opened the Rochester, New York local exchange market to competition. Frontier was the first communications company in the nation to propose such a plan for full open local competition. The Open Market Plan enables customers to choose their local telephone service provider and to select from a broad array of products, services and prices. It also gives Frontier the flexibility to broaden the scope and quality of its own competitive service offerings. Under the Open Market Plan, the Company's Rochester, New York local exchange operations were divided into two companies-a wholesale provider of basic network services ("Rochester Telephone Corp." or "RTC") and a retail provider of telecommunications services ("Frontier Communications of Rochester, Inc." or "FCR"). RTC and FCR are subsidiaries of the Company, which has become an unregulated parent holding company. The parent holding company structure provides financial flexibility for the Company to continue the acquisition and diversification efforts that are necessary for its long-term growth. RTC is a regulated company which sells basic network services such as access to the network, transport between offices, and switching services to FCR and all other local telecommunications companies. These local telecommunications companies, including FCR, may then package services for resale to local customers. RTC also provides services directly to end users, except for Centrex and high capacity private line services which it offers only on a wholesale basis. Under the Open Market Plan Agreement, RTC is subject to price cap regulation rather than rate of return regulation. This will enable the Company to retain the benefit of all productivity and revenue gains since its rate of return is subject to price cap regulation. Please see the Rate Stabilization Plan and Open Market Plan discussions at pages 14 and 15. FCR is an unregulated full service provider of a broad array of integrated telecommunications services, including local, long distance, cellular and, potentially, video and other value-added offerings. In addition, 12 FCR is able to package the network elements purchased from RTC and other network providers with services such as flat rate service, measured rate service, Centrex and ISDN. The Company intends that FCR will eventually offer products and services outside of the Rochester, New York market. Regulatory Matters Each of Frontier's local telephone service companies is regulated by the public utility regulatory agency of the state in which that company provides local telephone service. The respective states are listed on the Access Line Table on page 10. The competitive evolution of the telecommunications industry has resulted in a more fluid regulatory framework than was in place historically. In general, state regulatory agencies exercise authority over the prices charged for the provision of local telephone service and intrastate long distance service, the quality of service provided, the issuance of securities, the construction of facilities and other matters. Each of the Company's long distance and wireless companies may be regulated to a limited extent by the public utility regulatory agency of the state in which each is providing service. The Company's long distance and wireless service providers are also subject to FCC jurisdiction. (a) Royalty Proceeding. In 1984, the NYSPSC initiated a proceeding to investigate the issue of whether the Company's competitive subsidiaries should pay a royalty to the Rochester, New York local telephone service provider primarily for the alleged intangible benefits received from the use of the Rochester Telephone name and reputation. Under the Open Market Plan Agreement, the NYSPSC will not impute a royalty on either the Company or on Rochester Telephone Corp. during the term of the Rate Stabilization Plan (the "Rate Period") which was a component of the Open Market Plan or any prior period, subject to certain limited exceptions. After the termination of the Rate Period, however, the NYSPSC may impute a royalty for the period beginning on the termination date, subject to the outcome of any litigation regarding the royalty. The Company is continuing to pursue the litigation it instituted to challenge the Royalty Order. This proceeding remains unresolved and is discussed in more detail in Item 3, Legal Proceedings. (b) Incentive Regulation. In January 1990, the NYSPSC approved an incentive regulation agreement for the Rochester, New York operating company. This agreement expired at the end of 1992, and the Company proposed a new incentive regulation agreement in January 1993. An interim settlement was approved by the NYSPSC in February 1994. The settlement reduced the Company's revenue requirement in 1993 by $5 million and by an additional $4.5 million in 1994. Each of these reductions was subject to adjustment for depreciation changes and the outcome in the Generic Financing Proceeding, which is discussed on page 15. These issues were 13 settled in the Open Market Plan. The amount of allowable depreciation was the subject of a contested proceeding before the NYSPSC, but that issue was also resolved in the Open Market Plan Settlement. As part of the Open Market Plan Settlement, Rochester Telephone Corp. ("RTC") agreed to share with ratepayers fifty percent of earnings above a threshold rate of return. In addition, that company's revenue requirement was reduced by $5 million in 1993 and $9.5 million in 1994. The 1993 sharing amount was refunded through customer billing credits. The 1994 revenue requirement reduction, plus interest, was credited to RTC's depreciation reserve to alleviate a reserve deficiency rather than refunding cash to ratepayers. There was no 1994 sharing amount. (c) Rate Stabilization Plan. The Open Market Plan provides for a total of $21 million in rate reductions for Rochester Telephone Corp. (the "Rate Stabilization Plan") over a seven year period beginning January 1, 1995, subject to termination by either the Company or the NYSPSC after five years (the "Rate Period"). The Rate Stabilization Plan also precludes RTC from increasing basic residential and business telephone service rates during the rate period. In consideration of the rate reductions, the Rate Stabilization Plan provides that RTC's local exchange services be subject to price-cap regulation rather than rate of return regulation. The rates provided in the Rate Stabilization Plan are designed to permit RTC to recover its costs and to earn a reasonable rate of return, calculated using a methodology utilized by the NYSPSC to set the rate of return earned by providers of local exchange services in New York State. (d) Ice Storm. In March 1991, Rochester, New York experienced a severe ice storm which caused the Rochester, New York Operating Company to spend approximately $9.7 million to repair and replace outside plant facilities and to provide customers billing credits for service disruptions. The Rochester, New York operating company filed a petition with the NYSPSC requesting that it be allowed to defer and amortize the portion of those costs which were intrastate expenses. In November 1991, the NYSPSC approved the deferral and amortization of $5.2 million of the intrastate local service expenses over a forty-eight month period beginning January 1, 1992 and the amortization of $1.6 million of the intrastate long distance service expenses through June 1993. The Rochester, New York Operating Company also filed a petition with the FCC requesting that it be allowed to defer and amortize the portion of the ice storm expenses that were allocated to or assigned the interstate jurisdiction. The FCC approved an order effective January 23, 1992, which permitted the Company to begin the amortization of $2.0 million of interstate expenses over an eighteen month period. In order to recover the expenses, the FCC permitted the Rochester, New York Operating Company to establish a temporary surcharge on interstate switched access charges to be billed to interexchange carriers and a monthly increase in the interstate customer 14 access line charges applicable to Centrex and multiline business customers. All recovery was completed by the end of the first quarter of 1994. (e) FAS 106. The Company adopted Financial Accounting Standards Board Statement 106 (FAS 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions." It had previously adopted FAS 87, "Employers' Accounting for Pension Benefits." For the Rochester company, the accumulated postretirement benefit obligation as of January 1, 1994 was approximately $89.8 million, and the projected pension benefit obligation was approximately $275.7 million. The Company elected to defer the recognition of the accrued Transition Benefit Obligation over a period of twenty years. Each state regulatory agency may treat these obligations differently in the rate-making process. On September 7, 1993, the NYSPSC issued its Statement of Policy and Order concerning postretirement benefit and pension accounting. Consistent with this NYSPSC policy the Rochester, New York operating company included the FAS 106 costs in its incentive regulation settlement agreement discussed on page 13. The FCC originally suspended the Company's petition to include the incremental costs associated with adopting FAS 106 in its 1993 price cap filing. The Company, along with all other local exchange carriers (LECs) subject to price cap regulation, filed an appeal of the FCC's ruling with the United States Court of Appeals. In the court's decision, dated July 12, 1994, the FCC's original order was vacated and the FCC was remanded to reconsider the merits of the LECs' request for exogenous cost treatment under the price cap rules. The FCC has reopened its investigation of the carriers' filings. The Company is evaluating its options in light of the Court's decision and cannot predict the final outcome of the FCC's investigation. (f) Open Market Plan. The Company filed a petition in February 1993 with the NYSPSC in which the Company requested approval to reorganize the corporation. This Open Market Plan, which was implemented effective January 1, 1995, is discussed in more detail on pages 12 and 13. (g) Frontier Communications of Minnesota (formerly Vista Telephone Company of Minnesota). Frontier Communications of Minnesota filed with the Minnesota Public Service Commission a request to increase rates in March 1993. A stipulated settlement was executed by all parties and was submitted for approval to the Minnesota Public Service Commission. In April 1994, the Minnesota Public Service Commission granted the Company authority to increase annual revenues by $4.4 million. (h) Generic Financing Proceeding. In May 1993, the NYSPSC instituted a Generic Financing Proceeding to review its financial policy guidelines and to determine if there should be established a generic rate of return methodology 15 for New York State local exchange companies. The Company favors a generic methodology because it would streamline the ratemaking process, provide all stakeholders a much greater sense of predictability, and create an environment more conducive to long term planning. The Company supports the implementation of a generic rate of return methodology, but it cannot, at this time, predict the outcome of this proceeding. Because the Open Market Plan provides for "pure price cap regulation" rather than rate of return regulation, the outcome of this Generic Financing Proceeding will not apply to RTC during the Rate Period of the Rate Stabilization Plan component of the Open Market Plan. However, Frontier's other New York subsidiary telephone companies remain subject to rate of return regulation. (i) Frontier Communications of Iowa (formerly Vista Telephone Company of Iowa). Frontier Communications of Iowa filed in August 1993 for a rate increase in Iowa of approximately $4.5 million including a temporary increase of $4.1 million. In February 1994, the Iowa State Utilities Board issued an order approving a proposed settlement of this case. Under the terms of that order, the Board granted Vista Iowa an annual revenue increase of $2.9 million. (j) Undergrounding Proceeding. The NYSPSC, in an order dated September 21, 1993, stated that the Company's New York local exchange service providers should, for the next five years, accrue funds for the purposes of "undergrounding" construction of distribution plant in "visually significant areas." Any unspent amounts are to be carried over to the next year until expensed. The amount of the accrual is determined in accordance with a NYSPSC approved formula. The Company currently estimates the total amount of the accrual to be approximately $408,000 for all of its New York local exchange companies. The NYSPSC has also indicated that it intends to release an order requiring a pilot program to underground some existing plant in certain areas. The Company will consider its options to file for reconsideration or appeal if and when the Order is issued. However, the Company cannot predict the outcome at this time. Competition Traditionally, telecommunications industry businesses were considered monopolies. This industry has experienced a significant increase in competition in recent years. Factors such as technological advancement and a more fluid regulatory framework have encouraged competition. Frontier is intent on meeting and taking advantage of the various business opportunities which competition provides in the markets where it operates. The Open Market Plan, described in more detail at pages 12 and 13 is one way in which the Company is proactively meeting competition. The 16 Company is also addressing competition by focusing on improved customer satisfaction, by developing and offering products and services, and by reducing its cost base and becoming more efficient. (a) Local Exchange Networks. Prior to 1968, the telephone industry alone provided and maintained the telephones and lines of the public switched telecommunications network. In that year, an FCC order declared unlawful certain AT&T tariffs which prohibited customers from attaching their own equipment to the telephone network. However, the telephone equipment provided by telephone companies which remained in place on customers' premises remained regulated. By a subsequent FCC order, effective January 1, 1983, telephone companies were required to deregulate all new telephone equipment. Although Frontier experiences different levels of network regulation throughout the geographic territory of its telephone properties, in general the Company is subject to numerous competitors in the provision of equipment and facilities used in connection with the local exchange network. In the Rochester market competitors who have stated they will enter or have actually entered the local exchange market include Time Warner Communications and AT&T. Since the deregulation of telephone equipment, sales of telephone equipment have become commonplace throughout all geographic areas of the United States. Frontier has responded to this competition through operation of its retail Phone Centers for the direct sale of telephone sets, inside wire and telephone outlets. The Phone Centers also perform as maintenance centers where customers who lease equipment from the company can pick up or exchange telephones and receive a credit on their bills if they bring in a telephone that needs repair. In 1982, the Rochester, New York operating company formed its Consumer Equipment Services division to maintain all company provided leased equipment as well as maintain customer-owned equipment on a fee for service or contract basis. Many of the Company's other local exchange companies also sell, lease and maintain telephone sets and equipment. Business consumer equipment needs are another segment of the telecommunications network equipment market. Several of the Company's local exchange companies market equipment and facilities directly to business consumers. In addition, Frontier Network Systems, which was established in 1978 under the name Rotelcom Inc., markets and services a wide range of telecommunications and data equipment for mid-to large-size business customers, and competes directly with other interconnect vendors that offer for sale telephone systems to businesses and other enterprises. FNS's product line includes: private branch exchanges (PBX's) from ROLM, Siemens and Northern Telecom; data communications equipment from leading manufacturers including Dowty and Newbridge; and 17 videoconferencing equipment from PictureTel. The majority of FNS's customers are in New York State. FNS is also a partner in Anixter-Rotelcom, a joint telecommunications supply venture with Anixter Bros., Inc. Although competitive providers of local exchange basic service are not expected to be active for the near future at the Company's smaller rural properties, local exchange basic service competition is occurring today in the Rochester, New York marketplace. For example, MFS Telecom, Inc. ("MFS") and Time Warner Communications ("Time Warner") are alternative local exchange service providers in Rochester. AT&T Communications ("AT&T") is also actively remarketing local exchange service in the Rochester, New York marketplace as a reseller of RTC's services, as is Frontier's subsidiary, Frontier Communications of Rochester, Inc. ("FCR"). The Company is unaware of the exact revenues and market share of the local exchange market that MFS, Time Warner, AT&T or FCR account for in the Rochester, New York service area. On February 3, 1993, Frontier filed a plan with the NYSPSC, to open the local telephone market in the Rochester, New York service area to competition. This plan enables customers to choose their local telephone service company and will potentially provide them a broader selection of products, services and prices. It will also give the Company greater flexibility to broaden the scope and quality of its own competitive offerings. See the discussion on the Open Market Plan on pages 12 and 13 and Regulatory Matters on pages 13 through 16. Long distance companies largely access their end users through interconnection with local telephone companies. Those long distance companies pay access fees to the local telephone companies for this service. This is one reason the Company derives at least ten percent of its consolidated gross revenues from AT&T. The Company provides a number of other services to AT&T, such as billing and collection. Alternate Access Vendors are companies which provide alternative transmission services and provide access services to local exchange and long distance companies. Alternate Access Vendors compete with traditional local exchange companies. Currently, MFS, AT&T and Time Warner are the primary Alternate Access Vendors active in the Rochester, New York area and no significant Alternate Access Vendors are believed to be active in any of the Company's other properties. (b) Interexchange Service. During the past two decades, rulings by the FCC and associated court decisions have restructured the market for the provision of interexchange telecommunications services and have opened up this market to competition. The Company recognized an opportunity to compete 18 in this market. In 1984, Frontier Communications International, Inc., ("FCI") (previously RCI Long Distance) was launched and a digital switching and transmission system was built throughout the Northeast. Today FCI operates in New York, New England and the Mid-Atlantic and Midwest regions, an area which accounts for nearly 25 percent of the nation's total interexchange revenues. Through arrangements with other interexchange carriers, FCI provides connectivity to the entire United States and to over 200 countries around the world. In addition to growing its customer base in its original operating territory, FCI has expanded its network coverage and customer base through the acquisition of long distance companies in the Northeast: RCI Long Distance New England Inc., (previously operating as Long Distance North and now named Frontier Communications of New England, Inc., January 1991) and Taconic Long Distance Service Corp. (now named Frontier Communications of Taconic, Inc., July 1991), Mid Atlantic Telecom, Inc. (now named Frontier Communications of the Mid Atlantic, September 1994), and Budget Call Long Distance, Inc. (June 1993). In October 1994, the Company announced that it would purchase WCT Communications, Inc., ("WCT") a long distance reseller headquartered in California with annual revenues in excess of $100 million, and in November 1994, the Company announced that it would acquire American Sharecom, Inc., ("ASI") headquartered in Minnesota, with revenues of approximately $125 million. The ASI acquisition, completed in March 1995, and the prospective WCT acquisition will extend the geographic coverage nationwide and together are projected to make FCI the seventh largest long distance carrier in the nation. A number of companies, including AT&T, MCI, Sprint and smaller regional long distance companies, compete with FCI and offer interexchange services such as Wide Area Telephone Service ("WATS"), private line and switched message toll. Given the competitive nature of the interexchange service industry, FCI is not aware of its exact market share in any specific market. However FCI does not believe that it holds a dominant market position in any market in which it operates. (c) Wireless. The Company is the managing partner of Upstate Cellular Network ("UCN"), which is a partnership with NYNEX Mobile. The partnership operates a cellular system in central and western New York State. Frontier also manages, through a subsidiary, an Alabama cellular partnership and has investments in other cellular properties. Please see the Cellular Property Ownership Table at page 7 for a listing of the various cellular properties which the Company manages or in which it has investment interests. 19 Cellular systems generally have at least one competitor in each market. For example, in the Rochester, New York MSA the other cellular system is Genesee Telephone Company ("GTC") which does business as Cellular One. In 1994 Southwestern Bell acquired a controlling interest in GTC. Additionally, Time Warner Communications has recently begun to resell cellular service in the Rochester, New York MSA. In the cellular industry, competitive characteristics include the geographic coverage area, transmission clarity and the price of the service offerings. The Company believes that the transmission quality of its systems is generally comparable to or better than the quality of its competitor in each market. The Company also competes through pricing packages which provide certain benefits to customers. For example, one pricing package provides significantly reduced roaming rates throughout most of Upstate New York. In addition, the Company's strong geographical service coverage of much of the upstate New York area makes the Company a strong competitor. This coverage, which includes handheld level service in downtown Rochester and in most of its major commuting areas, is believed to be comparable or superior to the coverage of its competitors. Because the Company does not have information regarding its competitors' customer bases, the Company is unable to calculate any specific assessment of its market share in its various markets. In addition to UCN, the Company has partnership interests in various other MSAs and RSAs (Rural Service Areas.) Please see the "Cellular Property Ownership Table" on page 7 for a list of the Company's cellular ownership interests and the estimated population in each of the indicated cellular markets. Although in the future the Company may divest itself of selected cellular properties, the Company will continue to seek cellular service growth and expansion. To this end, the Company in 1994 entered into a definitive agreement for the purchase of a partnership which owns the business and assets of a cellular provider serving Minnesota RSA #10. Please also see the discussion of Upstate Partners on pages 2 and 5. Environmental and Other Matters Underground duct systems are often used to house telephone cable. Some of the existing ducts are made of a material containing asbestos. This material poses a potential removal and disposal problem if a realignment of the duct system is necessary due to road construction or similar projects. The Company is in the process of identifying the portions of the duct system that contain this material so necessary action may be taken in a timely fashion to minimize the cost of removal and disposal of such material. The asbestos presents no known health risk as long as it remains buried and undisturbed. It cannot be determined how much of the affected underground duct system will undergo future reconstruction and, therefore, an estimate of 20 the cost of asbestos removal and disposal cannot be made at this time. See Item 3. Legal Proceedings, for discussion of environmental litigation. Employees and Labor Relations As of December 31, 1994, the Company had 4,240 employees, of which 3,156 were employees of the various Telephone Operations businesses, and 1,084 were employees of the various Telecommunication Services businesses. At the Rochester, New York Operating Company, 663 clerical and service workers were represented by the Rochester Telephone Workers Association (RTWA) and 726 craft and clerical employees were represented by the Communications Workers of America (CWA), Local 1170. Under the current three-year contract between Rochester Telephone Corp. and the RTWA, effective August 12, 1994 bargaining unit employees received a 2.0 percent general increase. On February 12, 1995 they will receive a 1.0 percent general increase. The contract provides that they will receive the same amount of increase on February 18, 1996 and February 16, 1997. The RTWA contract will expire on August 12, 1997. Under the current three-year contract between Rochester Telephone Corp. and the CWA, effective January 1, 1994 bargaining unit employees received a wage increase of up to 4.5 percent, and on January 1, 1995, those employees received a wage increase of up to 4.25 percent plus a "Cost of Living Allowance" increase based on 70 percent of the movement of the Consumer Price Index above 9.25 percent during the period from November 1992 to November 1994. The CWA contract will expire on January 31, 1996. The International Brotherhood of Electrical Workers (IBEW) represents 159 employees at Frontier Communications of New York (previously Highland), 16 employees at Frontier Communications of Sylvan Lake and 11 employees at Frontier Communications of AuSable Valley. On May 25, 1993, Highland and the IBEW entered into a contract which expires February 13, 1997, and provides for an increase of 4 percent in September 1994, 4 percent in September 1995, and no increase thereafter until the contract is renegotiated. On September 29, 1992, Sylvan Lake and the IBEW entered into a three-year contract extension which provides for an increase of 3.0 percent in year one, 3.5 percent in year two, and 5.0 percent in year three of the contract. The current three-year contract between AuSable Valley and the IBEW granted bargaining unit employees an average wage increase of 3.6 percent effective May 1993, and also provides for an average 3.4 percent wage increase in the final year of the contract. That contract will expire May 10, 1995. 21 The IBEW also represents 22 employees of Frontier Communications of Michigan (previously C, C & S Telco, Inc.) On October 9, 1994, they entered into a three year contract which granted bargaining unit employees a 3.0 percent increase in October 1994, a 3.0 percent increase in October 1995, a 2.5 percent increase in October 1996 and a 2.25 percent increase in October 1997. That contract will expire October 8, 1997. The IBEW additionally represents 7 employees at Frontier Communications of Illinois (previously Midland), 5 employees at Frontier Communications - Inland, 1 employee at Frontier Communications - Lakeside, 1 employee at Frontier Communications -Prairie, and 4 employees at Frontier Communications of Mt. Pulaski. On November 1, 1994, each of these companies entered into three-year contracts with the IBEW that provided for a $.60 per hour wage increase on November 1, 1994, a $.55 per hour wage increase on November 1, 1995, and a $.50 per hour wage increase on November 1, 1996. The CWA, Local 7270, represents 172 employees at Frontier Communications of Minnesota (previously Vista Minnesota). On June 21, 1993, Vista Minnesota and the CWA entered into a three-year contract which provided for a wage increase of 3.0 percent in June 1994, and a minimum of 2 percent in June 1995, with an opportunity to receive, also in June 1995, up to an additional 1.25 percent based upon the performance of the Vista Minnesota telephone operation. The contract expires June 21, 1996. The CWA, Local 7171, represents 93 employees at Frontier Communications of Iowa (previously Vista Iowa). On May 1, 1993, Vista Iowa and the CWA entered into a three-year contract which provides for wage increases of 2.7 percent in May 1994, and a minimum of 2 percent in May 1995, with an opportunity to receive, also in May 1995, up to an additional 1.25 percent based upon the performance of the Vista Iowa telephone operation. The contract expires April 30, 1996. ITEM 2. PROPERTIES The Company's local exchange service providers own, in their respective operating territories, telephone property which includes: connecting lines between customers' premises and the central offices; central office switching equipment; buildings, land and miscellaneous property; and customer premise equipment. The connecting lines include aerial and underground cable, conduit, poles and wires, and microwave equipment. These facilities are located on public streets and highways or on privately owned land. The Company has permission to use these lands pursuant to governmental consent or lease, permit, easement, or other agreement. 22 The central office switching equipment includes electronic switches and peripheral equipment. The Company owns or leases the land and buildings in which its central offices, warehouse space, office and traffic headquarters are located. Frontier Corporation's headquarters are located in a leased seven story building at 180 South Clinton Avenue, Rochester, New York. The lease expires in 2003 and is renewable for two successive ten year periods. The Company's interexchange service providers own property in their respective operating territories which includes: fiber optic cable, switching equipment, microwave equipment, real estate and miscellaneous office and work equipment. These providers also lease facilities or transmission capacity from other carriers. The Company's wireless service providers own switching equipment, cell site towers and other site equipment, and miscellaneous office and work equipment. ITEM 3. 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 Rotelcom Inc., a wholly-owned subsidiary of the registrant held through intervening subsidiaries (now named Frontier Network Systems, Inc. or "FNS") and fourteen other corporate defendants for environmental "response costs" in the approximate amount of $1.5 million incurred by the plaintiffs pursuant to a consent decree entered into by plaintiffs with the United States Environmental Protection Agency (the "EPA"). Two additional defendants were named in 1994. In addition to FNS, the current defendants are: Agway, Inc.; BMC Industries, Inc.; Borg-Warner Corporation; Elf Atochem North America, Inc.; Mack Trucks, Inc.; Motor Transportation Services, Inc.; Pall Trinity Micro Corporation; The Raymond Corporation; Redding-Hunter, Inc.; Smith Corona Corporation; Sola Basic Industries, Inc.; Wilson Sporting Goods Company; Phillip A. Rosen; Harvey M. Rosen; City of Cortland; and New York State Electric & Gas Corporation. The consent decree concerned the clean-up of an environmental Superfund site located in Cortland, New York. It is alleged that the corporate defendants disposed of hazardous substances at the site and are therefore liable under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"). The Company anticipates that a final Record of Decision ("ROD") will be issued by the EPA in March 1995 23 and will prescribe the remediation requirements for the site. The aggregate amount of remediation costs to be incurred by the plaintiffs will be based on the requirements of the ROD. The total cost of remediation at the site is uncertain, although estimates have recently ranged from $25 million and $100 million. There has been no allocation of liability as among or between the plaintiffs or defendants. The extent to which plaintiffs can recover any of these costs from the defendants, including FNS, will be determined at a trial which is scheduled to begin in July 1995. The action is currently in discovery. FNS has been vigorously defending this lawsuit. The Company believes that it will ultimately be successful, but it is unable to predict the outcome with any certainty at this time. In its Opinion and Order in Case 87-C-8959, issued July 6, 1993, the New York State Public Service Commission (NYSPSC), by a three-to-two vote, imposed a royalty upon the Company in the amount of two percent of the total capitalization of the Company's unregulated operations. The NYSPSC justified the royalty on two grounds; first, that ratepayers are entitled to protection from the potential for cost misallocations and increased risk that accompany diversification of the Company's basic telephone business; and second, that the Company's unregulated operations benefit from their use of the Rochester name and reputation. The NYSPSC rejected the Company's statutory and constitutional defenses and concluded that it possessed the authority under the Public Service Law to impose a royalty and that its imposition is not unconstitutional. Based upon an initial interpretation of the Order, the company estimates that its potential effect is in the range of two million dollars per year. The royalty, if implemented, would be an imputation against the Rochester, New York operating Company's revenue requirement from regulated intrastate operations. The NYSPSC ordered the Rochester, New York operating company to file, by August 5, 1993, an accounting plan to account for the royalty amount, together with a plan for returning such amount to ratepayers. Although the Rochester, New York operating company requested the NYSPSC to waive this requirement, the NYSPSC denied this request. In compliance with the order of the NYSPSC, on August 5, 1993, the Rochester, New York operating company filed its plan. On August 6, 1993, the Rochester, New York operating company filed with Supreme Court, Albany County, its petition pursuant to Article 78 of the New York Civil Practice Law and Rules seeking judicial review of the NYSPSC's Opinion and Order. By order dated October 7, 1993, this proceeding was transferred to the Appellate Division, Third Department. The Company filed its Brief on December 16, 1993. Respondents' briefs were filed on February 28, 1994, and reply briefs were filed on March 16, 1994. Oral argument was held on April 26, 1994. On June 30, 1994, the Appellate Division unanimously upheld the NYPSC's Order. On July 29, 1994, the 24 Company filed a Notice of Appeal and a Motion for Leave To Appeal with the New York Court of Appeals. On December 8, 1994, the Court of Appeals accepted the Company's appeal and denied the Motion for Leave To Appeal as unnecessary. The Company filed its brief on February 6, 1995. Respondent's briefs are due on March 23, 1995 and the Company's Reply Brief is due April 3, 1995. On February 27, 1995, the NYPSC moved to dismiss the appeal as moot as a result of the Open Market Plan Settlement. The Company filed its opposition to that motion on March 13, 1995, and the motion is now before the Court for decision. The Company is vigorously contesting this case and is of the opinion that it will ultimately prevail, but cannot predict the outcome with any certainty at this time. This royalty issue has been settled for the Rochester, New York operating company for the duration of the Rate Period of the Rate Stabilization Plan, which is part of the Open Market Plan. The Regulatory Matters discussion in management's discussion of Business in Part 1, Item 1, on pages 13 through 16 is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (A) At the Special Meeting of Common Shareowners held on December 19, 1994, the common shareowners voted upon five proposals. The results were as follows: 1. Approval of the Open Market Plan Agreement, the transactions contemplated thereby, and related amendments to the Company's Restated Certificate of Incorporation (the "Certificate"). For: 50,049,132.1750 Against: 1,018,424.4810 Abstain: 640,975.6730 Broker Non-Vote: 4,702,811.0000
2. Approval of a Certificate amendment to increase the number of authorized shares of common stock from 100,000,000 to 300,000,000. For: 51,705,928.9710 Against: 4,179,853.0510 Abstain: 525,561.3070 Broker Non-Vote: -0-
25 3. Approval of a Certificate amendment to authorize 4,000,000 shares of a new class of preferred stock. For: 45,629,722.9470 Against: 5,288,386.5840 Abstain: 791,318.7980 Broker Non-Vote: 4,701,915.0000
4. Approval of a Certificate amendment to permit the redemption of shares of common stock to the extent necessary to prevent the loss of any governmental license or franchise held by the Company or any of its subsidiaries. For: 49,894,414.5340 Against: 1,164,518.0680 Abstain: 650,155.7270 Broker Non-Vote: 4,702,255.0000
5. Approval of a Certificate amendment to change the name of the Company to "Frontier Corporation". For: 53,493,461.3200 Against: 2,149,815.7720 Abstain: 768,066.2370 Broker Non-Vote: -0-
(B) At the Special Meeting of Preferred Shareowners held on December 19, 1994, the preferred shareowners voted upon one proposal. The results were as follows: 1. Approval of a Certificate amendment to authorize 4,000,000 shares of a new class of preferred stock. For: 138,001.0000 Against: 20,981.0000 Abstain: 1,661.0000 Broker Non-Vote: -0-
26 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY MATTERS The Company's Common Stock is traded on the New York Stock Exchange (Symbol - - FRO). A stock split in the form of a 100 per cent stock dividend was effected during 1994. The information in the table below is adjusted to reflect the effects of that stock split. The specific information required by this item is as follows:
1994 1993 1992 ------- ------- ------- Quarter High Low High Low High Low ------- ------- ------- ------- ------ ------- ------- Highest and lowest market prices for the 1st $22.44 $20.25 $ 19.44 $17.32 $ 17.00 $ 15.07 stock by quarter: 2nd 25.25 20.81 21.75 18.25 16.88 14.57 3rd 24.75 21.63 24.38 20.50 16.44 15.13 4th 24.63 20.50 25.13 21.69 17.88 15.32 Common stock 1st $.2025 $.1975 $.1925 dividends declared 2nd .2025 .1975 .1925 per share: 3rd .2025 .1975 .1925 4th .2075 .2025 .1975 ------ ------ ------ Total Dividends per Year $.8150 $.7950 $.7750 Number of Shareowners (at December 31) Individuals 2,291 20,338 19,731 Brokers, nominees and institutions 383 421 400 ------- ------- ------- Total Shareowners 22,674 20,759 20,131
27 ITEM 6. SELECTED FINANCIAL DATA The information required by this item should be read in conjunction with the consolidated financial statements and related notes included in Item 14 contained herein, and is as follows (in thousands, except per share data):
1994 1993 1992 1991 1990 ----------- ---------- ----------- ---------- ---------- Net Revenues and Sales............................. $ 985,492 $ 906,450 $ 804,049 $ 713,559 $ 612,994 Income from Continuing Operations (before Extraordinary Items and Cumulative Effect of Change in Accounting Principle)............................ $ 109,934 $ 82,720 $ 70,503 $ 75,289 $ 51,935 Consolidated Net Income............................ $ 102,737 $ 82,720 $ 69,431 $ 79,046 $ 51,935 Earnings per Common Share: Income before Extraordinary Items and cumulative effect of change in accounting principle................... $ 1.50 $ 1.21 $ 1.04 $ 1.15 $ 0.86 Extraordinary Items................................ --- --- $ (0.02) $ 0.06 --- Cumulative effect of change in accounting principle......................... $ (0.10) --- --- --- --- Earnings per Common Share-Primary $ 1.40 $ 1.21 $ 1.02 $ 1.21 $ 0.86 Earnings per Common Share-Fully Diluted......................................... $ 1.40 $ 1.20 $ 1.02 $ 1.21 $ 0.85 Cash Dividends Declared per Common Share...................................... $ 0.815 $ 0.795 $ 0 .775 $ 0.755 $ 0.735 Total Assets....................................... $1,760,951 $1,510,201 $1,513,897 $1,496,737 $1,198,858 Long-Term Debt..................................... $ 578,600 $ 492,555 $ 525,597 $ 591,232 $ 363,020
ITEM 7. MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION The information required by this item is presented in pages 18 through 28 of Exhibit No. 13 of this Form 10-K and is incorporated herein by reference. Exhibit 13 consists of material located at pages 17 through 48 of the 1994 Financial Review which was provided to shareowners on or about March 13, 1995 and bound together with the proxy statement for the Annual Meeting of Shareowners to be held April 26, 1995. 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements, together with the report thereon of Price Waterhouse LLP, dated January 16, 1995, is presented on pages 28 through 46 of Exhibit No. 13 of this Form 10-K and is incorporated herein by reference. Exhibit 13 consists of material located at pages 17 through 48 of the 1994 Financial Review which was provided to shareowners on or about March 13, 1995 and bound together with the proxy statement for the Annual Meeting of Shareowners to be held April 26, 1995. ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors The information required by this item for the Directors of Frontier Corporation is presented on pages 3 and 4 of the definitive proxy statement provided to shareowners on or about March 13, 1995 in connection with the Annual Meeting of Shareowners to be held April 26, 1995, which is Exhibit 99 to this Form 10-K and is incorporated by reference into this Item 10. Director John R. Block is not standing for re-election. Exhibit 99 consists of the Notice of Meeting plus material located at pages 1 through 16 of the Company's Proxy Statement for the April 26, 1995 Annual Meeting of Shareowners and Financial Review of the 1994 fiscal year. Executive Officers Certain information is set forth below regarding the Executive Officers of the Company as of February 28, 1995. Each Officer serves for a period of one year or until a successor is elected. 29
Other Positions Held Name Position and During the Past (Age) Offices Held Five Years - ------ ------------- ---------------------------- Ronald L. Bittner (53) Chairman, President From February 1992 to April and Chief Executive 1993 he was President and Chief Officer since Executive Officer. From May April 1993 1988 to February 1992 he was Executive Vice President and President-Telecommunication Group. Jeremiah T. Carr (52) President and CEO - From November 1993 to December Rochester Telephone 1994 he was Corporate Vice President Corp. and President - and President - Telephone Group. Rochester Telephone From February 1993 to November Group since 1993 he was Corporate Vice President January 1995 and President Telephone Operations. From February 1992 to February 1993 he was President Rochester Telephone Operations. From October 1991 to February 1992 he was President of Rotelcom. From January 1990 to October 1991 he was Vice President RCI and Corporate Vice President General Manager-NYS, and President Rotelcom. From 1988 to January 1990 he was Vice President of Consumer Markets-RCI. Dale M. Gregory (46) President - From November 1993 to December Frontier 1994 he was Corporate Vice President Communications and President - Telecommunication Group since January Group. From February 1993 to 1995 November 1993 he was Corporate Vice President and President-Network Systems and Services. From February 1992 to February 1993 he was Corporate Vice President and President-Telecommunication Services. From January 1991 to February 1992 he was President-RCI Network and Systems. From March 1991 to February 1992 he was also President, Dale M. Gregory Management Consultants, Inc. From June 1988 to March 1991, he was President and Chief Operating Officer, Advanced Telecommunications Corporation.
30
Other Positions Held Name Position and During the Past (Age) Offices Held Five Years - ------ ------------- ---------------------------- Louis L. Massaro (48) Corporate Vice From February 1993 to December President since 1994 he was Corporate Vice President December 1994 and Treasurer. From September 1991 to February 1993 he was Corporate Vice President and President- Rochester Operations. From May 1988 to September 1991 he was Vice President-Telecommunication Group. Martin T. McCue (44) Corporate From January 1994 to Vice President November 1994 he was Vice since December 1994 President/Corporate Planning and Legal Services of Rochester Telephone Corporation, and from April 1986 to December 31, 1993 he was Vice President and General Counsel of the United States Telephone Association. John K. Purcell (51) Corporate From February 1993 to November Vice President 1993 he was Corporate Vice since November 1993 President-Planning and President-Wireless Operations. From February 1992 to February 1993 he was Corporate Vice President- Development. From September 1991 to February 1992 he was Corporate Vice President-Corporate Partnering and Corporate Vice President and President-Telephone Subsidiaries. From May 1988 to September 1991 he was Vice President-Telephone Group. Janet F. Sansone (49) President - From November 1993 to December Frontier Services 1994 she was Corporate Vice Group since President - Human Resources and December 1994 Corporate Services. From March 1993 to November 1993 she was Corporate Vice President-Human Resources and Excellence. From July 1991 to March 1993 she was Manager Management and Human Resources Education, General Electric Corporation. From August 1989 to July 1991 she was Manager Recruiting and University Development, General Electric Corporation. Josephine S. Trubek (52) Corporate Secretary From January 1990 to April 1993 she since April 1993 was General Counsel and Secretary. From 1982 to January 1990 she was Corporate Counsel and Assistant Secretary.
31 As of March 31, 1992, Advanced Telecommunications Corporation was the fourth largest interexchange service provider in the United States and its common stock was traded on the National Market System. General Electric is one of the largest and most diversified industrial companies in the world. Its businesses include interests in a vast array of industrial products, as well as technology, service and communication entities. The United States Telephone Association is a leading trade association for the telephone industry. PART III ITEM 11. EXECUTIVE COMPENSATION The information required by this item is presented on page 2 of the Company's Proxy Statement (which was provided to shareowners on or about March 13, 1995 in connection with the Annual Meeting of Shareowners to be held on April 26, 1995) under the caption "Compensation of Directors" and on pages 5 through 12 under the captions "Report of Committee on Management", "Performance Graph", "Compensation of Company Management", and "Compensation Committee Interlocks and Insider Participation in Compensation Decisions" and is incorporated in this report by reference. The Company's Proxy Statement is found at Exhibit 99 to this Form 10-K. Exhibit 99 consists of the Notice of Meeting and material located at pages 1 through 16 of the Company's Proxy Statement for the April 26,1995 Annual Meeting of Shareowners and Financial Review of the 1994 fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is presented in the "Management and Directors Stock Ownership Table" and the "Stock Ownership of Certain Beneficial Owners Table" under the caption "Stock Ownership of Management, Directors and Certain Beneficial Owners" on page 4 of the definitive Proxy Statement for the Annual Meeting of Shareowners to be held April 26, 1995, and is incorporated in this report by reference. The Company's Proxy Statement is found at Exhibit 99 to this Form 10-K. Exhibit 99 consists of the Notice of Meeting and material located 32 at pages 1 through 16 of the Company's Proxy Statement for the April 26, 1995 Annual Meeting of Shareowners and Financial Review of the 1994 fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not Applicable PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Index to Financial Statements The financial statements and other information set forth below for the years 1992 through 1994 together with the report thereon of Price Waterhouse LLP dated January 16, 1995, as presented on pages 28 through 48 of Exhibit 13 of Form 10-K, are filed as part of this report: Report of Independent Accountants Business Segment Information Consolidated Statement of Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Shareowners' Equity Notes to Consolidated Financial Statements Report of Management Report of Audit Committee Chairman Condensed Six-Year Financial Statements Financial and Operating Statistics Exhibit 13 consists of material located at pages 17 through 48 of the Company's Proxy Statement for the April 26, 1995 Annual Meeting of Shareowners and Financial Review of the 1994 fiscal year. 2. Financial Statement Schedule for the years 1994, 1993 and 1992 33 The financial statement schedule listed below should be read in conjunction with the financial statements appearing on pages 29 through 30 of Exhibit No. 13 of this Form 10-K. Financial statement schedules not included in this Form 10-K Annual Report have been omitted because they are not applicable or the required information is shown on the financial statements or the notes thereto. Report of Independent Accountants on Financial Statement Schedule Valuation and Qualifying Accounts and Reserves - Schedule VIII Exhibit 13 consists of material located at pages 17 through 48 of the Company's Proxy Statement for the April 26, 1995 Annual Meeting of Shareowners and Financial Review of the 1994 fiscal year. 3. See Exhibit Index for list of exhibits filed with this report. (b) Reports on Form 8-K The Company filed the following seven reports on Form 8-K during the quarter ended December 31, 1994:
Financial SEC Filing Date Item No. Statements - ------------------- -------- ---------- October 11, 1994 5 None October 13, 1994 5 None October 14, 1994 5 None October 15, 1994 5 None November 18, 1994 5 None November 30, 1994 5 None December 28, 1994 5 None
34 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Shareowners of Frontier Corporation Our audits of the consolidated financial statements referred to in our report dated January 16, 1995, appearing on page 28 of Exhibit No. 13 (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP Rochester, New York January 16, 1995 35 FRONTIER CORPORATION SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED DECEMBER 31, 1994 (Table 1 of 3)
In thousands of dollars Additions ----------------------- Balance at Charged to Charged to Charged to beginning costs and other Balance at Description of year expenses accounts Deductions end of year - ------------ ---------- ---------- ---------- ---------- ----------- Reserve for uncollectible $5,078 $13,948 $9,125/(1)/ $21,847/(2)/ $6,304 accounts ====== ======= =========== ============ ====== Reserve for inventory $1,663 $ 728 $ 0 $ 1,916/(3)/ $ 475 obsolescence ====== ======= =========== ============ ====== and shrinkage Reserve for Insurance $ 184 $ 24 $ 10 $ 0 $ 218 ====== ======= =========== ============ ======
/(1)/ Primarily recoveries of uncollectible accounts. /(2)/ Uncollectible accounts written off. /(3)/ Primarily obsolete inventory written off. 36 FRONTIER CORPORATION SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED DECEMBER 31, 1993 (Table 2 of 3)
In thousands of dollars Additions ----------------------- Balance at Charged to Charged to Charged to beginning costs and other Balance at Description of year expenses accounts Deductions end of year - ------------ ---------- ---------- ---------- ---------- ----------- Reserve for uncollectible $2,455 $11,497 $8,531/(1)/ $17,405/(2)/ $5,078 accounts ====== ======= =========== ============ ====== Reserve for inventory obsolescence $2,049 $1,542 $ (22) $ 1,906/(3)/ $1,663 and shrinkage ====== ======= =========== ============ ====== Reserve for Insurance $ 526 $ (65) $ 9 $ 286 $ 184 ====== ======= =========== ============ ======
/(1)/ Recoveries of uncollectible accounts. /(2)/ Uncollectible accounts written off. /(3)/ Obsolete inventory written off. 37 FRONTIER CORPORATION SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED DECEMBER 31, 1992 (Table 3 of 3)
In thousands of dollars Additions ----------------------- Balance at Charged to Charged to Charged to beginning costs and other Balance at Description of year expenses accounts Deductions end of year - ------------ ---------- ---------- ---------- ---------- ----------- Reserve for uncollectible $3,144 $ 4,690 $5,238/(1)/ $10,617/(2)/ $2,455 accounts ====== ======= =========== ============ ====== Reserve for inventory $ 817 $ 2,310 $ (13) $ 1,065/(3)/ $2,049 obsolescence ====== ======= =========== ============ ====== and shrinkage Reserve for Insurance $ 572 $ 54 $ __ $ 100/(4)/ $ 526 ====== ======= =========== ============ ======
/(1)/ Recoveries of uncollectible accounts. /(2)/ Uncollectible accounts written off. /(3)/ Obsolete inventory written off. /(4)/ Payments to settle insurance cases. 38 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. FRONTIER CORPORATION (Registrant) /s/ Ronald L. Bittner By: ________________________________________________ Ronald L. Bittner Chairman, President and Chief Executive Officer Date: March 28, 1995 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald L. Bittner /s/ Louis L. Massaro - ------------------------------ ------------------------------------- Ronald L. Bittner Louis L. Massaro Chairman, President and Corporate Vice President- Chief Executive Officer and Finance (Principal Financial and Director Accounting Officer) Date: March 28, 1995 March 28, 1995 - ------------------------------ ------------------------------------- Patricia C. Barron John R. Block Date: March 28, 1995 March 28, 1995 * * - ------------------------------ ------------------------------------- Brenda E. Edgerton Jairo A. Estrada Date: March 28, 1995 March 28, 1995 * * - ------------------------------ ------------------------------------- Daniel E. Gill Alan C. Hasselwander Date: March 28, 1995 March 28, 1995 39 * - ------------------------------ ------------------------------------- Douglas H. McCorkindale Leo J. Thomas Date: March 28, 1995 March 28, 1995 /s/ Louis L. Massaro *By ___________________________________________ Manually signed powers Louis L. Massaro of attorney for each Attorney-in-Fact Director are attached hereto and filed herewith pursuant to Regulation S-K Item 601(b)24 as Exhibit 24. 40 EXHIBIT INDEX
Exhibit Number Exhibit Reference - ------- ------- ---------------------------------- 3.1 Restated Certificate of Filed herewith. Incorporation. 3.2 By-Laws. Filed herewith. 4.1 Agreement to furnish documents Filed herewith. of subsidiaries. 4.2 Agreement to Furnish Copies of Filed herewith. Debt Instruments. 4.3 Copy of Indenture between the Incorporated by reference to Company and Manufacturers Exhibit 4-12 to Form 10-K for the Hanover Trust Company, year ended December 31, 1986. Trustee, dated as of September 1, 1986. 4.4 Copy of First Supplemental Incorporated by reference to Indenture to said Indenture, Exhibit 4(b) to Registration made by the Company to Statement No. 33-32035. Manufacturers Hanover Trust Company, as Trustee, dated as of December 1, 1989. 4.5 Copy of 10.46% Non Negotiable Incorporated by reference to Convertible Debenture due Exhibit 4-14 to Form 10-K for the October 27, 2008 from the year ended December 31, 1988. Company to The Walters Trust. 4.6 Copy of 9% Debenture due Incorporated by reference to August 15, 2021. Exhibit 4-16 to Form 10-K for the year ended December 31, 1991. 10.1 Copy of the Bonus Plan. Incorporated by reference to Exhibit 10-7 to Form 10-K for the year ended December 31, 1986. 10.2 Copy of the Long Term Disability Incorporated by reference to Plan together with Amendment Exhibit 10-15 to Form 10-K for No. 1 thereto. the year ended December 31, 1987. 10.3 Copy of the Restated Incorporated by reference to Management Pension Plan and Exhibit 10-13 to Form 10-K for Amendments Nos. 1-5 thereto. the year ended December 31, 1988. 10.4 Form of management contracts Incorporated by reference to with each of Mr. Bittner, Mr. Exhibit 10-7 to Form 10-K for the Gregory, Mr. Massaro and Mr. year ended December 31, 1993. Purcell. 10.5 Copy of Amendments Nos. 6, 7, 8 Incorporated by reference to and 9 to the Restated Exhibit 10-13 to Form 10-K for Management Pension Plan. the year ended December 31, 1990.
41
Exhibit Number Exhibit Reference - ------- ------- ---------------------------------- 10.6 Copy of the Restated Supplement- Incorporated by reference to al Management Pension Plan Exhibit 10-14 to Form 10-K for and Amendments Nos. 1 and 2 the year ended December 31, thereto. 1990. 10.7 Copy of the Restated Performance Incorporated by reference to Unit Plan. Exhibit 10-15 to Form 10-K for the year ended December 31, 1990. 10.8 Copy of Joint Venture Agreement Incorporated by reference to dated as of March 9, 1993 by and Exhibit 10-13 to Form 10-K for between Rochester Tel Cellular the year ended December 31, Holding Corporation and New 1992. York Cellular Geographic Service Area, Inc. together with Exhibit A thereto. 10.9 Copy of Definitive Agreement to Incorporated by reference to Acquire American Sharecom, Inc., Exhibit 99 to the Registrant's dated as of November 8, 1994, by Form 8-K dated March 22, 1995. and between Frontier Corporation and American Sharecom, Inc. 10.10 Copy of Amendments Nos. 10 and Incorporated by reference to 11 to the Restated Management Exhibit 10-19 to Form 10-K for Pension Plan. the year ended December 31, 1991. 10.11 Copy of Amendments Nos. 12 and Incorporated by reference to 13 to the Restated Management Exhibit 10-16 to Form 10-K for Pension Plan. the year ended December 31, 1992. 10.12 Copy of Amendment No. 1 to the Incorporated by reference to Restated Performance Unit Plan. Exhibit 10-21 to Form 10-K for the year ended December 31, 1991. 10.13 Copy of Amendment No. 2 to the Incorporated by reference to Restated Performance Unit Plan. Exhibit 10-20 to Form 10-K for the year ended December 31, 1992. 10.14 Copy of Amendment No. 3 to the Incorporated by reference to Restated Supplemental Exhibit 10-22 to Form 10-K for Management Pension Plan. the year ended December 31, 1991. 10.15 Copy of Amendment No. 4 to the Incorporated by reference to Supplemental Management Exhibit 10-22 to Form 10-K for Pension Plan. the year ended December 31, 1992. 10.16 Copy of the Restated Incorporated by reference to Supplemental Retirement Exhibit 10-23 to Form 10-K for Savings Plan and Amendment the year ended December 31, No. 1 thereto. 1991.
42
Exhibit Number Exhibit Reference - ------- ------- ---------------------------------- 10.17 Copy of Amendment No. 2 to the Incorporated by reference to Supplemental Retirement Exhibit 10-24 to Form 10-K for Savings Plan. the year ended December 31, 1992. 10.18 Copy of the Employee Assistance Incorporated by reference to Program. Exhibit 10-25 to Form 10-K for the year ended December 31, 1992. 10.19 Copy of the Tel Flex Plan. Incorporated by reference to Exhibit 10-26 to Form 10-K for the year ended December 31, 1992. 10.20 Copy of the Directors Stock Incorporated by reference to Option Plan. Exhibit 10-27 to Form 10-K for the year ended December 31, 1992. 10.21 Copy of Amendment No. 1 to the Incorporated by reference to Directors Stock Option Plan. Exhibit 10-42 to Form 10-Q for the quarter ended March 31, 1994. 10.22 Copy of Amendment No. 3 to the Incorporated by reference to Performance Unit Plan. Exhibit 10-30 to Form 10-Q for the quarter ended March 31, 1993. 10.23 Copy of Amendments Nos. 14, 15 Incorporated by reference to and 16 to the Restated Exhibits 10-31 and 10-32 to Form Management Pension Plan. 10-Q for the quarter ended June 30, 1993. 10.24 Copy of Amendments Nos. 17 and Incorporated by reference to 18 to the Restated Management Exhibit 10-31 to Form 10-K for Pension Plan. the year ended December 31, 1993. 10.25 Copy of Amendments Nos. 19 and Filed herewith. 20 to the Restated Management Pension Plan. 10.26 Copy of Amendment No. 5 to the Incorporated by reference to Supplemental Management Exhibit 10-33 to Form 10-Q for Pension Plan. the quarter ended June 30, 1993. 10.27 Copy of Amendment No. 6 to the Incorporated by reference to Supplemental Management Exhibit 10-33 to Form 10-K for Pension Plan. the year ended December 31, 1993. 10.28 Copy of the Employees' Incorporated by reference to Retirement Savings Plan. Exhibit 10-35 to Form 10-K for the year ended December 31, 1993. 10.29 Copy of Amendment No. 1 to the Filed herewith. Employees Retirement Savings Plan.
43
Exhibit Number Exhibit Reference - ------- ------- ---------------------------------- 10.30 Copy of Amendment No. 3 to the Incorporated by reference to Supplemental Retirement Exhibit 10-35 to Form 10-Q for Savings Plan. the quarter ended June 30, 1993. 10.31 Copy of Amendment No. 4 to the Filed herewith. Supplemental Retirement Savings Plan. 10.32 Copy of Amendment No. 2 to the Incorporated by reference to Long Term Disability Benefit Exhibit 10-36 to Form 10-Q for Plan. the quarter ended June 30, 1993. 10.33 Copy of the Restated Executive Incorporated by reference to Stock Option Plan. Exhibit 10-41 to Form 10-Q for the quarter ended March 31, 1994. 10.34 Copy of the Plan for the Deferral Filed herewith. of Directors Fees. 10.35 Copy of Amendment No. 3 to the Incorporated by reference to Long Term Disability Benefit Exhibit 10-40 to Form 10-Q for Plan. the quarter ended September 30, 1993. 10.36 Copy of the Directors' Common Filed herewith. Stock Deferred Growth Plan. 11 Computation of Fully Diluted Filed herewith. Earnings Per Share. 13 1994 Financial Review including Filed herewith. MD&A, Consolidated Financial Statements and Notes to Financial Statements. 21 Subsidiaries of Frontier Filed herewith. Corporation. 23 Consent of Independent Filed herewith. Accountant as Experts. 24 Powers of Attorney for a majority Filed herewith. of Directors naming Louis L. Massaro attorney-in-fact. 27 Financial Data Schedule Filed herewith. 99 Proxy Statement for the Annual Filed herewith. Meeting of Shareowners to be held April 26, 1995.
44 EX-3.1 2 ARTICLES OF INCORPORATION EXHIBIT 3-1 RESTATED CERTIFICATE OF INCORPORATION OF FRONTIER CORPORATION Under Section 807 of the Business Corporation Law We, the undersigned, JOHN K. PURCELL, and JOSEPHINE S. TRUBEK, being respectively a Corporate Vice President and the Corporate Secretary of Frontier Corporation, do hereby CERTIFY that: 1. The name of the Corporation is "FRONTIER CORPORATION". 2. The Certificate of Incorporation of the Corporation was filed in the Department of State of the State of New York on February 25, 1920. A Restated Certificate of Incorporation was filed in the Department of state of the State of New York on April 2, 1968. 3. The text of the Certificate of Incorporation, as amended (or changed) heretofore, is hereby restated without further amendment or change to read as herein set forth in full: FIRST: The name of the Corporation is "Frontier Corporation". SECOND: The purposes for which the Corporation is formed are: To engage in any lawful act or activity for which corporations may be organized under the Business Corporation Law of the State of New York, except that the Corporation is not organized to engage in any act or activity requiring the consent or approval of any official, department, board, agency or other body of the State of New York without first obtaining such consent or approval. THIRD: The total number of shares which the Corporation shall have authority to issue is (i) Three Hundred Million (300,000,000) shares of Common Stock of the par value of One Dollar ($1.00) per share, (ii) Four Million (4,000,000) shares of Class A Preferred Stock of the par value of One Hundred Dollars ($100.00) per share and (iii) Eight Hundred Fifty Thousand (850,000) shares of Cumulative Preferred Stock of the par value of One Hundred Dollars ($100.00) per share (the Class A Preferred Stock and the Cumulative Preferred Stock referred to collectively herein as the "Preferred Stock"). Subject to any exclusive voting rights which may vest in holders of Preferred Stock under the provision of any series of Preferred Stock established by the Board of Directors pursuant to authority herein provided, and except as otherwise provided by law, the shares of Common Stock shall entitle the holders thereof to one vote for each share upon all matters upon which shareowners have the right to vote. No holders of shares of the Corporation of any class or series, now or hereafter authorized, shall have any preemptive rights to subscribe for or purchase any part of any issue, sale or offering of any shares of the Corporation of any class or series, now or hereafter authorized, or of any options, warrants or rights to subscribe for or purchase any such shares, or of any securities convertible into, or carrying options, warrants or rights to subscribe for or purchase, any such shares, regardless of whether such issue, sale or offering is for cash, property, services or otherwise. FOURTH: Subject to the limitations and in the manner provided by law and subject to the terms of this Certificate, shares of Class A Preferred Stock may be issued from time to time in series and the Board of Directors is hereby authorized to establish and designate series, to fix the number of shares constituting each series, and to fix the designations and the relative rights, preferences and limitations of the shares of each series and the variations in the relative rights, preferences and limitations as between series, and to increase and to decrease the number of shares constituting each series. Subject to the limitations and in the manner provided by law and subject to the terms of this Certificate, the authority of the Board of Directors with respect to each series shall include but shall not be limited to the authority to determine the following: (i) the designation of such series; (ii) the number of shares initially constituting such series; (iii) the increase, and the decrease to a number not less than the number of the outstanding shares of such series, of the number of shares constituting such series theretofore fixed; (iv) the rate or rates and the times at which dividends on the shares of such series shall be paid and whether or not such dividends shall be cumulative and, if such dividends shall be cumulative, the date or dates from and after which they shall accumulate; provided, however, that, if the stated dividends are not paid in full, the shares of all series of Class A Preferred Stock shall share ratably in the payment of dividends, including accumulations, if any, in accordance with the sums which would be payable on such shares if all dividends were declared and paid in full; and provided, further, that dividends or other distributions shall not be declared or paid on any shares of Class A Preferred Stock unless the current quarterly dividend upon all the Cumulative Preferred Stock then outstanding, together with all accumulations thereon, shall have been paid or declared and set apart for payment in accordance with the requirements of subdivision (B) of Article FIFTH; (v) whether or not the shares of such series shall be redeemable and, if such shares shall be redeemable, the terms and conditions of such redemption, including but not limited to the date or dates upon or after which such shares shall be redeemable and the amount per share which shall be payable upon such redemption, which amount may vary under different conditions and at different redemption dates; provided, that, unless the current quarterly dividend upon all the Cumulative Preferred Stock then outstanding, together with all accumulations thereon, shall have been paid or declared and set apart for payment in accordance with the requirements of subdivision (B) of Article FIFTH, the Corporation or any of its subsidiaries shall not redeem, purchase or otherwise acquire shares of Class A Preferred Stock (except by conversion into or exchange for, or out of the net cash proceeds from the concurrent sale of, stock of the Company ranking junior to the Cumulative Preferred Stock as to dividends); (vi) the amount payable on the shares of such series in the event of the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; provided, however, that (1) before any assets of the Corporation shall be distributed among or paid over to the holders of Class A Preferred Stock, each holder of Cumulative Preferred Stock then outstanding shall be entitled to be paid the amount described in subdivision (C) of Article FIFTH, and (2) the holders of shares of Class A Preferred Stock shall be entitled to be paid, or to have set apart for payment, not less than $100.00 per share before the holders of shares of Common Stock or the holders of any other class of stock ranking junior to the Class A Preferred Stock as to rights on liquidation shall be entitled to be paid any amount or to have any amount set apart for payment; provided, further, that, if the amounts payable on liquidation are not paid in full, the shares of all series of the Class A Preferred Stock shall share ratably in any distribution of assets other than by way of dividends in accordance with the sums which would be payable in such distribution if all sums payable were discharged in full. A liquidation, dissolution or winding up of the Corporation, as such terms are used in this clause (vi), shall not be deemed to be occasioned by or to include any consolidation or merger of the Corporation with or into any other corporation or corporations or a sale, lease or conveyance of all or a part of its assets; (vii) whether or not the shares of such series shall have voting rights, in addition to the voting rights provided by law and, if such shares shall have such voting rights, the terms and conditions thereof, including but not limited to the right of the holders of such shares to vote as a separate class either alone or with the holders of shares of one or more other series or class of stock and the right to have more than one vote per share; (viii) whether or not a sinking fund shall be provided for the redemption of the shares of such series and, if such a sinking fund shall be provided, the terms and conditions thereof; (ix) whether or not the shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or any other series of this class or any other securities or assets, and, if so, the terms and conditions of conversion or exchange, including but not limited to any provision for the adjustment of the rate or rates or the price or prices of conversion or exchange; and (x) any other relative rights, preferences and limitations. If any shares of Class A Preferred Stock shall be issued then, for purposes of clause (ii)(a) of subdivision (F) of Article FIFTH, such shares shall be deemed to have been authorized in connection with any prior authorization of shares of Class A Preferred Stock, notwithstanding any subsequent action by the Corporation's Board of Directors in connection with the issuance of such shares or the filing of any certificate required by law in connection with such issuance. FIFTH: The respective rights, preferences and limitations of the shares of Cumulative Preferred Stock are set forth in the following subdivisions designated (A) to (F) inclusive which are hereinafter referred to as subdivisions of this Article FIFTH. (Note: The words "preferential rights" whenever used in this Certificate with respect to the Cumulative Preferred Stock herein authorized or any preferred stock of any class or series hereafter authorized by any certificate filed pursuant to law, shall for the sake of brevity and convenience, mean and include the words "relative rights, preferences and limitations of the shares of each class" as used in the Business Corporation Law.) (A) The shares of Cumulative Preferred Stock shall be issuable from time to time in one or more series. The Board of Directors is hereby authorized to fix, from time to time before issuance, the preferential rights of the shares of each series of such Cumulative Preferred Stock, to the extent that such preferential rights are not herein expressly prescribed, determined and set forth. The preferential rights of shares of different series shall be identical, except that there may be variations, as hereinafter provided, in respect of the dividend rates, dates of payment of dividends and dates from which they are cumulative, redemption prices, sinking fund requirements and conversion and other rights. All shares of any one series will be alike in every particular and all shares of Cumulative Preferred Stock will rank equally. There shall be no discrimination as between different series of Cumulative Preferred Stock in the declaration and payment of dividends on the basis of the rates appertaining thereto; and if at any time there shall be outstanding Cumulative Preferred Stock of several series bearing different rates of dividends and dividends are to be declared on such stock at less than the full rates appertaining thereto, the shares of all such series shall share ratably in the payment of such dividends including accumulations, if any, in accordance with the sums which would be payable on said shares if all dividends were declared and paid in full. The Board of Directors is authorized to fix from time to time before issuance of each series of Cumulative Preferred Stock, but subject to the provisions of this Certificate covering all series of Cumulative Preferred Stock, the following: (a) the designation and number of shares of such series; (b) the dividend rate of such series; (c) the dates of payment of dividends on shares of such series and the dates from which they are cumulative; (d) the redemption price or prices for shares of such series; (e) the amount of the sinking fund or redemption or purchase fund or account, if any, to be applied to the purchase or redemption of shares of such series and the manner of its application; and (f) whether or not the shares of such series shall be made convertible into shares of any other class or classes or of any other series of the same class of stock of the Corporation, and if made so convertible the conversion price or prices and the provisions, if any, for the adjustment thereof and any other relative, participating, optional or other special rights (including rights to purchase stock or obligations of the Corporation) and powers and qualifications, limitations or restrictions thereof of shares of such series. (B) Dividends. The holders of the Cumulative Preferred Stock of any series shall be entitled to receive, when and as declared by the Board of Directors, but only out of funds legally available for the payment thereof, fixed yearly preferred dividends at the annual rate appertaining to such series, and no more, payable in lawful money of the United States of America quarterly on the first days of January, April, July and October in each year, or on such other dates as may be determined by the Board of Directors, before any dividends shall be paid upon or set apart for any junior stock (which term as used herein shall mean Common Stock, Class A Preferred Stock and any other class of stock of the Corporation which shall rank junior to the Cumulative Preferred Stock). Dividends on the Cumulative Preferred Stock shall be cumulative, so that if dividends on all outstanding shares of Cumulative Preferred Stock at the respective annual dividend rates appertaining thereto shall not have been paid for all past quarterly dividend periods, and the full dividends thereon at such rates for the current quarterly dividend period shall not have been paid, or declared and set apart for payment, the deficiency shall be fully paid or dividends equal thereto declared and set apart for payment at such rates, but without interest thereon, before any dividend shall be paid upon any junior stock. After the payment or declaration and setting apart for payment, for or in any calendar year, of the current quarterly dividend upon all the Cumulative Preferred Stock then outstanding, together with all accumulations as herein provided, the Corporation may declare and pay, but only out of funds legally available for the payment thereof, dividends on any class of junior stock, in accordance with the rights of such junior stock and respective classes thereof, in such amounts and at such time or times as the Board of Directors may determine. (C) Liquidation. The Cumulative Preferred Stock shall be preferred as to both earnings and assets, and in the event of any voluntary liquidation, dissolution or winding up of the Corporation, or of any distribution of assets by way of return of capital to its stockholders (other than redemption of Cumulative Preferred Stock in accordance with the provisions hereinafter set forth), each holder of Cumulative Preferred Stock shall be entitled, before any assets of the Corporation shall be distributed among or paid over to the holders of any junior stock, to be paid, from the assets of the Corporation available for distribution among its stockholders, an amount equal to the redemption price or prices current at the date of such payment as hereinafter provided (plus an amount equivalent to accrued and unpaid dividends, whether or not earned) on the respective shares of Cumulative Preferred Stock held by him. In the event of any involuntary liquidation, dissolution or winding up of the Corporation, or of any involuntary distribution of assets by way of return of capital to its stockholders, each holder of the Cumulative Preferred Stock shall be entitled, before any assets of the Corporation shall be distributed among or paid over to the holders of any junior stock, to be paid, out of the assets of the Corporation available for distribution among its stockholders, an amount equal to the par value of the respective shares of Cumulative Preferred Stock held by him, plus an amount equivalent to accrued and unpaid dividends, whether or not earned. If, in either of the foregoing events, there shall not be sufficient assets to make the full payment herein required, the outstanding shares of all series of Cumulative Preferred Stock shall share ratably in the distribution of assets in accordance with the sums which would be paid on such distribution if all sums payable were discharged in full. If the appropriate payment herein required shall have been made to the holders of the Cumulative Preferred Stock, the holders of the Cumulative Preferred Stock shall not be entitled to participate further in the distribution of the assets of the Corporation and after such payment and distribution to the holders of the Cumulative Preferred Stock, the remaining assets of the Corporation shall be distributed among the holders of the junior stock according to their respective rights and preferences and pro rata in accordance with the number of shares respectively held by such holders. (D) (a) Redemption of Cumulative Preferred Stock. Subject to the provisions of subsection (i) of this subdivision (D), the Corporation, at the option of the Board of Directors, expressed in a resolution adopted by said Board, may redeem, at any time or times and from time to time, all or any part of the shares of Cumulative Preferred Stock or all or any part of any one or more series of such Cumulative Preferred Stock outstanding, by paying the par value thereof plus an amount in the case of each such share of Cumulative Preferred Stock to be redeemed computed at the annual dividend rate for the series in question from the date from which dividends on such share became cumulative to the date fixed for such redemption, less the aggregate of dividends theretofore or on such redemption date paid thereon, plus such premium, if any, as shall have been fixed in accordance with the provisions of subdivision (A) of this Article FIFTH prior to the issuance thereof. Notice of every such redemption shall be given by publication, published at least once in each of two (2) calendar weeks in a daily newspaper (which term shall mean and include a newspaper published in morning editions or evening editions or both, and whether or not it shall be published in Sunday editions or on holidays) printed in the English language and published and of general circulation in the Borough of Manhattan, the City and State of New York, the first publication to be at least thirty (30) days and not more than sixty (60) days prior to the date fixed for such redemption. At least thirty (30) days' and not more than sixty (60) days' previous notice of every such redemption shall also be mailed to the holders of record of the Cumulative Preferred Stock to be redeemed, at their respective addresses as the same shall appear on the books of the Corporation; but no failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any shares of such Cumulative Preferred Stock so to be redeemed. The Board of Directors shall have full power and authority, subject to the limitations and provisions herein contained, to prescribe the manner in which and the terms and conditions upon which any shares of any series of the Cumulative Preferred Stock shall be redeemed from time to time. If such notice of redemption shall have been duly given by publication, and if on or before the redemption date specified in such notice all funds necessary for such redemption shall have been set aside so as to be available therefor, then, notwithstanding that any certificate for the shares of such Cumulative Preferred Stock so called for redemption shall not have been surrendered for cancellation, the shares represented thereby shall from and after the date fixed for redemption no longer be deemed outstanding, the right to receive dividends thereon shall cease to accrue from and after the date of redemption so fixed, and all rights with respect to such shares of Cumulative Preferred Stock so called for redemption shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable upon redemption thereof, but without interest; provided, however, that the Corporation may, after giving the first notice by publication of any such redemption or upon furnishing the depositary hereinafter mentioned with irrevocable authority to publish such notice of redemption on behalf of the Corporation and prior to the redemption date specified in such notice, deposit in trust, for the account of the holders of such Cumulative Preferred Stock to be redeemed, with a bank or trust company in good standing, organized under the laws of the United States of America, or of the State of New York, doing business in the City of Rochester, New York, or in the Borough of Manhattan, the City and State of New York, and having a capital, undivided profits and surplus aggregating at least $5,000,000, all funds necessary for such redemption, and upon such deposit all shares of such Cumulative Preferred Stock with respect to which such deposit shall have been made shall no longer be deemed to be outstanding, and all rights with respect to such shares of such Cumulative Preferred Stock shall forthwith upon such deposit in trust cease and terminate, except (1) the right of the holders thereof to receive the amount payable upon the redemption thereof, but without interest, or (2) the right of the holders of any Cumulative Preferred Stock, which may be convertible into shares of stock of the Corporation of any class or classes, or other securities, to convert such Cumulative Preferred Stock called for redemption within the time or up to a date specified in the terms of such convertible stock or as may be stated in any certificate filed pursuant to law creating such convertible stock. If less than all the Cumulative Preferred Stock of any series shall be redeemed, the stock to be redeemed shall be selected by lot in such manner as the Board of Directors may determine, by a bank or trust company appointed for that purpose by said Board, which, unless otherwise directed by said Board, shall be the bank or trust company with which the funds necessary for such redemption are to be deposited. (i) Unless all dividends accrued to the dividend date next preceding such redemption date shall be paid on all Cumulative Preferred Stock then outstanding, the Corporation shall not have the right to redeem less than all of the Cumulative Preferred Stock outstanding at the time of giving the notice of such redemption. (b) Purchase of Cumulative Preferred Stock. In the event that at any time the Corporation shall be in default in the payment of dividends on the Cumulative Preferred Stock then so long as such default shall continue, the Corporation shall not purchase or otherwise acquire for a consideration any shares of the Cumulative Preferred Stock unless such purchase or acquisition shall be pursuant to tenders, called for on at least 20 days' previous notice by mail to the holders of record (at the time of mailing such notice) of the Cumulative Preferred Stock at their respective addresses as the same shall appear on the books of the Corporation. The shares of stock to be purchased, pursuant to such tenders, shall be purchased at the lowest prices specified in such tenders, not exceeding, however, the redemption prices then in effect or then current, and the notice shall specify the method (whether by lot, or otherwise) of determining the stock to be purchased in the event that stock shall be tendered at the same price, whether the lowest or other price. (E) Increase of Authorized Stock. The Corporation, subject to the provisions of subsection (ii) of subdivision (F) of this Article FIFTH, may from time to time increase the authorized amount of the Cumulative Preferred Stock and may also from time to time create other classes of preferred stock with different preferential rights. (F) Voting Rights. The holders of the Cumulative Preferred Stock shall not be entitled to any voting rights whatsoever, except as specifically required by statute or as hereinafter expressly provided. (i) Voting rights upon default in dividends. In the event that, at any time, or from time to time, four full quarterly dividends (whether consecutive or not) on the Cumulative Preferred Stock then outstanding, at the dividend rate appertaining thereto shall be in arrears, the holders of such Cumulative Preferred Stock shall have the right, voting separately as a class, to elect the smallest number of directors then necessary to constitute a majority of the full Board, and in such event the holders of stock of any other class or classes then entitled to vote for directors shall have the right, voting separately as a class, to elect only the remaining directors. If and whenever the right of the holders of Cumulative Preferred Stock to elect directors hereunder shall accrue, the terms of office of all persons who may be directors of the Corporation at such time shall terminate upon the election of their successors. Such election may be held at a special meeting of all stockholders of the Corporation which shall be convened at any time after the accrual of such right, upon notice similar to that provided in the Bylaws of the Corporation for calling the annual meeting of the stockholders, at the written request of the holders of record of at least 10% of the number of shares of Cumulative Preferred Stock then outstanding, for which purpose any holder of record of Cumulative Preferred Stock shall have access to the stock books of the Corporation. In the event of the failure of the Secretary or other proper officer of the Corporation to give such notice within 10 days after receipt of such request, then such meeting may be called on like notice given by the holders of at least 10% of the Cumulative Preferred Stock then outstanding. If for any reason such special meeting shall not be held prior to the next annual meeting, then notice of such annual meeting shall be given to the holders of the Cumulative Preferred Stock then outstanding in the manner provided in the Bylaws, and at such meeting the holders of Cumulative Preferred Stock and the holders of any other class or classes of stock then entitled to vote for directors shall elect the number of directors for which they are then respectively entitled to vote under the provisions hereof, unless previously thereto all such defaults in dividends shall have been made good. In the event that the holders of the Cumulative Preferred Stock then outstanding shall not exercise their right to elect directors at such annual meeting then the holders of the other class or classes of stock then entitled to vote for the election of directors shall have the right to elect at such meeting the entire membership of the Board of Directors, and such directors so elected shall constitute the entire Board of Directors until such time as part thereof shall be retired and replaced by directors elected, as herein provided, by the holders of Cumulative Preferred Stock then outstanding. To entitle the holders of Cumulative Preferred Stock to vote for the election of directors hereunder at any meeting, there shall be present at such meeting in person or by proxy the holders of not less than a majority of the shares of Cumulative Preferred Stock then outstanding, but the holders of less than a majority of such shares may adjourn such meeting for a period or periods not exceeding four weeks in the aggregate. In order to validate an election of directors by the holders of Cumulative Preferred Stock as herein provided, such election shall be by a vote of at least a plurality of the shares of Cumulative Preferred Stock then outstanding present at such meeting in person or by proxy. In the event that any meeting at which the holders of Cumulative Preferred Stock shall have the right to elect directors to replace directors theretofore elected by holders of any other class or classes of stock shall be attended by the holders of at least a majority of the Cumulative Preferred Stock then outstanding, but not by the holders of at least a majority of the other class or classes of stock then entitled to vote for directors, such holders of Cumulative Preferred Stock shall nevertheless be entitled to proceed with the election of directors in place of directors theretofore elected as hereinabove provided, such retiring directors (if and so far as the necessary vacancies shall not be provided by voluntary resignations) to be determined by lot from the Board of Directors theretofore elected as aforesaid, not including, however, directors then holding the office of Chairman of the Board of Directors or President of the Corporation, and the remaining directors (i.e., those not resigning or selected by lot as aforesaid) theretofore elected by the holders of the other class or classes of stock shall continue to hold office until their successors shall have been duly elected as herein provided. Whenever by reason of the resignation, death or removal of any director or directors or any increase in the number of directors, the number of directors in office who have been elected by the holders of stock voting as a class shall become less than the total number then subject to election by such class, the vacancy or vacancies so resulting may be filled by the affirmative vote of the directors, if any, at the time in office who were elected by the vote of such class, although less than a quorum, or by vote of such class at a special meeting thereof (if there are then no directors in office who were elected by the vote of such class) which shall be called at any time at the request of the holders of record of at least 10% of the outstanding shares of such class, for which purpose such holders shall have access to the stock books of the Corporation. If at any time the right of the holders of the Cumulative Preferred Stock to elect directors hereunder shall accrue as aforesaid, and the holders of such stock shall not exercise such right at any meeting (whether annual or otherwise) at which directors may be elected, such failure to exercise such right shall not be construed as a waiver thereof, but the holders of such stock may, so long as the default in dividends aforesaid shall exist, exercise the right given them hereunder in the manner aforesaid at any annual meeting or at any special meeting called as hereinabove provided or at any adjournment of either thereof. The right of the holders of Cumulative Preferred Stock to elect directors, as hereinabove provided, shall continue until all accrued dividends on the Cumulative Preferred Stock at the full dividend rates thereto appertaining shall have been paid, or declared and set apart for payment, at which time such right shall cease. If and whenever the right of the holders of Cumulative Preferred Stock to elect directors as hereinabove provided shall terminate, then the terms of office of all persons who may be directors of the Corporation at such time shall terminate upon the election of their successors. Such election may be held at a special meeting of the holders of the class or classes of stock then entitled to vote for directors, which meeting may be convened at any time after the termination of such right, upon notice similar to that provided in the Bylaws of the Corporation for the annual meeting of stockholders, at the written request of the holders of record of at least 10% of such stock then outstanding. In the event of the failure of the Secretary or other proper officer of the Corporation to give such notice within 10 days after receipt of such request, such meeting may be called on like notice by the holders of record of at least 10% of such stock, for which purpose any holder of record of such stock shall have access to the stock books of the Corporation. If for any reason such special meeting be not held prior to the next annual meeting, then at such meeting the holders of the class or classes of stock then outstanding and entitled to vote for the election of directors shall elect all of the members of the Board. (ii) Authorization or Issue of Additional Preferred Stock. The Corporation may from time to time increase the authorized amount of Cumulative Preferred Stock and may also from time to time create other classes of preferred stock with different preferential rights but only in accordance with the provisions hereinafter set forth, so long as any shares of Cumulative Preferred Stock shall be outstanding. (a) Authorization. The authorized amount of Cumulative Preferred Stock shall not be increased beyond the 850,000 shares authorized by this Certificate, and no class of stock having preferential rights which are equal to those of the Cumulative Preferred Stock, and no obligations or shares of stock of any class convertible into or evidencing the right to purchase any class of stock having such preferential rights shall be authorized by any certificate hereafter filed pursuant to law, except upon the affirmative vote of the holders of record of at least a majority of the shares of Cumulative Preferred Stock then outstanding voting separately as a class. No class of stock having any preferential rights which are in any way superior to those of the Cumulative Preferred Stock and no obligations or shares of stock of any class convertible into or evidencing the right to purchase any class of stock having such superior preferential rights, shall be authorized except upon the affirmative vote of the holders of record of at least two-thirds of the then outstanding shares of Cumulative Preferred Stock voting separately as a class. (b) Issue. No shares of Cumulative Preferred Stock authorized by this Certificate in excess of the number of shares of the first series thereof, nor any shares of stock or obligations authorized pursuant to any of the provisions of the preceding subparagraph (a), shall be issued except upon compliance with the earnings requirements hereinafter set forth, unless such compliance shall have been waived by the affirmative vote of the holders of record of at least a majority of the shares of Cumulative Preferred Stock then outstanding voting separately as a class. In the event that any vote of the holders of Cumulative Preferred Stock shall be required to authorize any waiver under this subparagraph (b), such vote shall be taken at a meeting of the holders of the Cumulative Preferred Stock only, upon notice as hereinafter required. (c) Earnings Requirements. The earnings requirements herein referred to are as follows, to wit the gross earnings of the Corporation for a period of 12 consecutive calendar months within the 15 calendar months immediately preceding the issue of stock or obligations referred to in subparagraphs (a) and (b) above shall have been at least equal to one and one-half (1 1/2) times the sum of the annual interest requirements on all funded indebtedness and other borrowings of the Corporation to be outstanding on the date of the proposed issue and the annual dividend requirements on the Cumulative Preferred Stock then outstanding and on any other class of stock then outstanding having preferential rights equal or superior to those of the Cumulative Preferred Stock and the annual dividend requirements on the stock to be issued. "Gross earnings" for any period for the purposes of this subparagraph (c) shall be computed by adding to the net income (determined as hereinafter provided) of the Corporation for said period the amount deducted for interest on all funded indebtedness and other borrowings of the Corporation in determining such net income. "Net income" for any period for the purposes of this subparagraph (c) shall be determined in accordance with accepted accounting principles, not inconsistent, however, with the requirements of public regulatory authorities having jurisdiction in the premises, and in determining such net income for any period, there shall be deducted, in addition to other items of expense, the amount charged to income for said period on the books of the Corporation for taxes and provision for depreciation. The Board of Directors may make adjustments by way of increase or decrease in such net income to give effect to changes therein resulting from acquisition of properties or any redemption, acquisition, purchase, sale or exchange of stock or obligations by the Corporation, whether prior to the issue of any stock or obligations then to be issued, or in connection with such issue. In computing net income for the purposes of this subparagraph (c), adjustments shall be made so as to eliminate profits or losses from the sale or other disposition of capital assets and from appreciation or depreciation in value of capital assets and increases or decreases in book value resulting from reappraisal (if any) at higher or lower figures. (iii) Alteration of Terms of Cumulative Preferred Stock, etc. The Corporation shall not, except when authorized by the vote of the holders of record of at least two-thirds of the then outstanding shares of Cumulative Preferred Stock voting separately as a class (1) alter or abolish any preferential right of any outstanding shares of such stock affecting the holders of such shares adversely, or (2) create, alter or abolish any provisions or right in respect of the redemption of any outstanding shares of such stock affecting the holders of such shares adversely, or (3) abolish any voting right of the holders of shares of such stock or limit their voting rights, except as the same may be limited by the voting rights given to new shares of any class authorized by any certificate filed pursuant to law. Such vote, however, shall not affect the right of any holder of shares of Cumulative Preferred Stock not voting in favor of the authorization of any of the foregoing transactions (designated (1), (2) and (3)) to have such shares appraised and paid for as contemplated by the provisions of any then applicable provisions of the statutes of the State of New York. SIXTH: The designation of each series of Cumulative Preferred Stock of the Corporation, and a statement of the variations in the relative rights, preferences and limitations as between series to the extent not set forth in Article FIFTH of this Certificate, as fixed by the Board of Directors of the Corporation before issuance of each such series, are as follows: (a) An initial series of Sixty Thousand (60,000) shares of the Cumulative Preferred Stock of the Corporation, which shares are designated "Cumulative Preferred Stock, 5% Series" (herein called the "initial series"). The rate of dividends payable upon the initial series shall be 5% of the par value thereof per annum, payable quarterly on the first days of January, April, July and October in each year. The Corporation may redeem all or any part of the initial series at any time or times and from time to time, on the terms and conditions with respect thereto set forth in subdivision (D) of Article FIFTH of this Certificate, by paying, in the case of each such share to be redeemed, the par value thereof plus an amount computed at the annual dividend rate of 5% of said par value from the date from which said dividends on such share became cumulative to the date fixed for redemption, less the aggregate of such dividends theretofore or on such redemption date paid thereon, plus a premium of $1 per share. (b) A second series of Forty Thousand (40,000) shares of the Cumulative Preferred Stock of the Corporation, which shares are designated "Cumulative Preferred Stock, Second 5% Series" (herein called the "second series"). The rate of dividends payable upon the second series shall be 5% of the par value thereof per annum, payable quarterly on the first days of January, April, July and October in each year. The Corporation may redeem all or any part of the second series at any time or times and from time to time, on the terms and conditions with respect thereto set forth in subdivision (D) of Article FIFTH of this Certificate, by paying, in the case of each such share to be redeemed, the par value thereof plus an amount computed at the annual dividend rate of 5% of said par value from the date from which said dividends on such share became cumulative to the date fixed for such redemption, less the aggregate of such dividends theretofore or on such redemption date paid thereon, plus a premium of $2 per share if the redemption date shall be prior to July 1, 1971 and of $1 per share if the redemption date shall be on or subsequent to July 1, 1971. (c) A third series of Fifty Thousand (50,000) shares of the Cumulative Preferred Stock of the Corporation, which shares are designated "Cumulative Preferred Stock, 5.65% Series" (herein called the "third series"). The rate of dividends payable upon the third series shall be 5.65% of the par value thereof per annum, payable quarterly on the first days of January, April, July and October in each year. The Corporation may redeem all or any part of the third series at any time or times and from time to time, on the terms and conditions with respect thereto set forth in subdivision (D) of Article FIFTH of this Certificate, by paying, in the case of each such share to be redeemed, the par value thereof plus an amount computed at the annual dividend rate of 5.65% of said par value from the date from which said dividends on such share became cumulative to the date fixed for such redemption, less the aggregate of such dividends theretofore or on such redemption date paid thereon, plus a premium of $7 per share if the redemption date shall be on or prior to October 1, 1971; of $5 per share if the redemption date shall be subsequent to October 1, 1971 but on or prior to October 1, 1976; of $3 per share if the redemption date shall be subsequent to October 1, 1976 but on or prior to October 1, 1981; and of $1 per share if the redemption date shall be subsequent to October 1, 1981. (d) A fourth series of Fifty Thousand (50,000) shares of the Cumulative Preferred Stock of the Corporation, which shares are designated "Cumulative Preferred Stock, 4.60% Series" (herein called the "fourth series"). The rate of dividends payable upon the fourth series shall be 4.60% of the par value thereof per annum, payable quarterly on the first days of January, April, July and October in each year. The Corporation may redeem all or any part of the fourth series at any time or times and from time to time, on the terms and conditions with respect thereto set forth in subdivision (D) of Article FIFTH of this Certificate, by paying, in the case of each such share to be redeemed, the par value thereof plus an amount computed at the annual dividend rate of 4.60% of said par value from the date from which said dividends on such share became cumulative to the date fixed for such redemption, less the aggregate of such dividends theretofore or on such redemption date paid thereon, plus a premium of $5.00 per share if the redemption date shall be on or prior to September 30, 1968; of $3.50 per share if the redemption date shall be subsequent to September 30, 1968 but on or prior to September 30, 1973; of $2.50 per share if the redemption date shall be subsequent to September 30, 1973 but on or prior to September 30, 1978; and of $1.00 per share if the redemption date shall be subsequent to September 30, 1978; provided, however, that, prior to October 1, 1968, shares of the fourth series shall not be redeemed, directly or indirectly, by the application of borrowed funds or the proceeds of the issue of any stock ranking prior to or on a parity with the fourth series if such borrowed funds have an interest cost, or such shares have a dividend cost, to the Corporation of less than 4.60% per annum. (e) A fifth series of fifteen thousand (15,000) shares of the Cumulative Preferred Stock of the Corporation, which shares are designated "Convertible Preferred Stock 5% Series" (herein called the "fifth series"). The rate of dividends payable upon the fifth series shall be 5% of the par value thereof per annum payable quarterly on the first days of January, April, July and October in each year. The Corporation may redeem all or any part of the fifth series at any time or times and from time to time, on or after April 1, 1979, on the terms and conditions with respect thereto set forth in subdivision (D) of Article FIFTH of this certificate, by paying, in the case of each share to be redeemed, the par value thereof plus an amount computed at the annual dividend rate of 5% of said par value from the date from which said dividends on such share became cumulative to the date fixed for such redemption, less the aggregate of such dividends theretofore or on such redemption date paid thereon, plus a premium of $5 per share if the redemption date shall be on or prior to April 1, 1981; of $3 per share if the redemption date shall be subsequent to April 1, 1982, but on or prior to April 1, 1983; of $1 per share if the redemption date shall be subsequent to April 1, 1983, but on or prior to April 1, 1984; and no premium if the redemption date shall be subsequent to April 1, 1984. The conversion rights of shares of the fifth series shall be as follows: (i Shares of the fifth series may at any time after the date of issue, at the option of the holder, be converted into Common Stock of the Corporation (as such shares may be constituted on the conversion date) at the rate of four (4) shares of Common Stock for each share of the fifth series, subject to adjustment as provided herein; provided that, as to any shares of the fifth series which shall have been called for redemption, the conversion right shall terminate at the close of business on the business day prior to the date fixed for redemption unless default shall be made in the payment of the redemption price plus accrued and unpaid dividends. (ii The holder of a share or shares of the fifth series may exercise the conversion rights as to any thereof by delivering to the Corporation during regular business hours, or at the office of any transfer agent of the Corporation for the fifth series, if any, or at such other place as may be designated by the Corporation, the certificate or certificates for the shares to be converted, duly endorsed or assigned in blank to the Corporation (if required by it), accompanied by written notice stating that the holder elects to convert such shares and stating the name or names (with address) in which the certificate or certificates for Common Stock are to be issued. Conversion shall be deemed to have been effected on the date when such delivery is made, and such date is referred to herein as the "conversion date". As promptly as practicable thereafter, the Corporation shall issue and deliver to or upon the written order of such holder, at such office or other place designated by the Corporation, a certificate or certificates for the number of full shares of Common Stock to which he is entitled and a check, cash, scrip certificate or other adjustment in respect of any fraction of a share as provided in paragraph (e)(iv) below. The person in whose name the certificates for Common Stock are to be issued shall be deemed to have become a holder of Common Stock of record at the close of business on the conversion date unless the transfer books of the Corporation are closed on that date, in which event he shall be deemed to have become a holder of Common Stock of record at the opening of business on the next succeeding date on which the transfer books are open, but the conversion rate shall be that in effect on the conversion date. (iii) No payment or adjustment shall be made for dividends accrued on any shares of the fifth series converted or for dividends on any shares of Common Stock issuable on conversion, but until all dividends accrued and unpaid on the fifth series up to the quarterly dividend payment date next preceding the conversion date shall have been paid to the holder of the shares of the fifth series converted or to his assigns, or declared and set apart for such payment, in full, no dividend shall be paid or set apart for payment or declared on the Common Stock or on any other class of stock of the Corporation ranking as to dividends subordinate to the fifth series and no payment shall be made with respect to any purchase or acquisition of, or to any sinking fund with respect to, any class of stock of the Corporation ranking as to dividends or distribution of assets on a parity with or subordinate to the fifth series. (iv) The Corporation shall not be required to issue any fraction of a share upon conversion of any share or shares of the fifth series. If more than one share of the fifth series shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the total number of shares of the fifth series so surrendered. If any fractional interest in a share of Common Stock would be deliverable upon conversion, the Corporation shall make an adjustment therefore in cash unless its Board of Directors shall have determined to adjust fractional interests by issuance of scrip certificates or in some other manner. Adjustment in cash shall be made on the basis of the current market value of one share of Common Stock, which shall be taken to be the last sale price, regular way, of the Corporation's Common Stock on the New York Stock Exchange on the last trading day before the conversion date, or, if there is no reported sale on that day, the average of the closing bid and asked quotations, regular way, on that Exchange on that day or, if the Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or if it is not listed or admitted to trading on any national securities exchanges, the average of the closing bid and asked prices in the over-the-counter market on that date as furnished by any securities broker or dealer selected from time to time by the Corporation for that purpose. (v) The issuance of Common Stock on conversion of the fifth series shall be without charge to the converting holder of the fifth series for any fee, expense or tax which may be payable in respect of any transfer involved in the issuance and delivery of shares in any name other than that of the holder of record on the books of the Corporation of the shares of the fifth series converted, and the Corporation shall not, in any such case, be required to issue or deliver any certificate for shares of Common Stock unless and until the person requesting the issuance thereof shall have paid to the Corporation the amount of such fee, expense or tax or shall have established to the satisfaction of the Corporation that such fee, expense or tax has been paid. (vi) The conversion rate provided in paragraph (e)(i) shall be subject to the following adjustments, which shall be made to the nearest one-hundredth of a share of Common Stock or, if none, to the next lower one-hundredth: (A) In case the Corporation shall declare a dividend on its Common Stock in shares of its capital stock, subdivide its outstanding shares of Common Stock, combine its outstanding shares of Common Stock into a smaller number of shares, or issue by reclassification of its Common Stock (including any such reclassification in connection with a consolidation or merger in which the Corporation is the continuing corporation) any shares of its capital stock, the conversion rate in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the holder of any of the fifth series surrendered for conversion after such time shall be entitled to receive the kind and amount of shares which he would have owned or have been entitled to receive had the fifth series been converted immediately prior to such time. Such adjustment shall be made successively whenever any event listed above shall occur. (B) In case the Corporation shall fix a record date for the issuance of rights or warrants to all holders of its Common Stock entitling them (for a period expiring within 45 days after such record date) to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price (as defined below) on such record date, the number of shares of Common Stock into which each share of the fifth series shall be convertible after such record date shall be determined by multiplying the number of shares of Common Stock into which such share of the fifth series was convertible immediately prior to such record date by a fraction, of which the numerator shall be the sum of the total number of shares of Common Stock outstanding immediately prior to such record date and the number of additional shares of Common Stock to be offered for subscription or purchase, and of which the denominator shall be the sum of the total number of shares of Common Stock outstanding immediately prior to such record date and the number of shares of Common Stock which the aggregate offering price (without deduction for expenses or commissions of any kind) of the total number of shares so to be offered would purchase at such Current Market Price. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such rights or warrants are not so issued, the conversion rate shall again be adjusted to be the conversion rate which would then be in effect if such record date had not been fixed. (C) In case the Corporation shall fix a record date for the making of a distribution to all holders of its Common Stock (including any such distribution made in connection with a consolidation or merger in which the Corporation is the continuing corporation) of evidences of its indebtedness or assets (excluding dividends paid in, or distributions of, its capital stock, or cash paid out of earned surplus) or subscription rights or warrants (excluding those referred to in subparagraph (vi)(B)), then in each such case the number of shares of Common Stock into which each share of the fifth series shall be convertible after such record date shall be determined by multiplying the number of shares of Common Stock into which such share of the fifth series was convertible immediately prior to such record date by a fraction, of which the numerator shall be the Current Market Price on such record date, and of which the denominator shall be the Current Market Price on such record date less the fair market value (as determined by the Board of Directors of the Corporation, whose determination shall be conclusive, and described in a certificate of an officer of the Corporation filed in the Corporation's records) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one share of Common Stock. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the conversion rate shall again be adjusted to be the conversion rate which would then be in effect if such record date had not been fixed. (D) For the purpose of any computation under subparagraphs (vi)(B) and (vi)(C) above, the "Current Market Price" on any record date shall be deemed to be the average of the daily closing prices per share of Common Stock for the 30 consecutive business days commencing 45 business days before such date. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case on the New York Stock Exchange, or, if the Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or if it is not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices in the over-the-counter market on that date as furnished by any securities broker or dealer selected from time to time by the Corporation for that purpose. The closing price determined as stated above is herein called the "closing price". (E) No adjustment in the conversion rate shall be required unless such adjustment would require an increase or decrease in such rate of at least one-twentieth of a share; provided, however, that any adjustments which by reason of this subparagraph (E) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this paragraph (e)(vi) shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (F) In the event that at any time, as a result of an adjustment made pursuant to subparagraph (vi)(A) above, the holder of any of the fifth series thereafter surrendered for conversion shall become entitled to receive any shares of the Corporation other than shares of its Common Stock, thereafter the number of such other shares so receivable upon conversion of any of the fifth series shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this paragraph (e)(vi). No adjustment of the conversion rate provided in subparagraph (e)(i) shall be made by reason of the issuance of Common Stock for cash except as provided in subparagraph (e)(vi)(B), or by reason of the issuance of Common Stock for property or services; provided, that no such issuance of Common Stock for cash, property, or services shall be made unless the Board of Directors shall first have made a determination that consideration to be received with respect to any such issuance of Common Stock is fair and reasonable under the particular circumstances. Whenever the conversion rate is adjusted pursuant to this paragraph (e)(vi), advice of such adjusted conversion rate shall be sent to the holders of the fifth series at or about the time of the next dividend payment on such fifth series. (vii) In case of any reclassification or change of the outstanding shares of Common Stock of the Corporation (except a split or combination of shares) or in case of any consolidation or merger to which the Corporation is a party (except a merger in which the Corporation is the surviving corporation and which does not result in a reclassification of or change in the outstanding Common Stock of the Corporation except a split or combination of shares) or in case of any sale or conveyance to another corporation of all or substantially all of the property of the Corporation or by the successor or purchasing corporation so that the holder of each share of the fifth series then outstanding shall thereafter have the right to convert such share into the kind and amount of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock of the Corporation into which such share of the fifth series might have been converted immediately prior thereto, and that there shall be subsequent adjustments of the conversion rate which shall be equivalent, as nearly as practicable, to the adjustments provided for in paragraph (e)(vi) above. The provisions of this paragraph (e)(vii) shall similarly apply to successive reclassifications, changes, consolidations, mergers, sales or conveyances. (viii) Shares of Common Stock issued on conversion of shares of the fifth series shall be issued as fully paid shares and shall be non-assessable by the Corporation. The Corporation shall at all times reserve and keep available, free from preemptive rights for the purpose of effecting the conversion of the fifth series, such number of its duly authorized shares of Common Stock as shall be sufficient to effect the conversion of all outstanding shares of the fifth series. (ix) Shares of the fifth series converted as provided herein shall be cancelled, shall no longer be deemed outstanding, and shall revert to the status of authorized, unissued Preferred Stock of the Corporation, and the Board of Directors shall have authority to issue such Preferred Stock with such relative rights, preferences and privileges as it may fix and as if such stock had not been issued as a part of the initial series of the Preferred Stock. SEVENTH: (A) Notwithstanding any other provision of this Certificate, outstanding shares of Common Stock held by Disqualified Holders (as hereinafter defined in subdivision (ii) of Paragraph (B) of this Article SEVENTH) shall always be subject to redemption by the Corporation to the extent necessary, in the judgment of the Board of Directors, to prevent the loss or secure the renewal or reinstatement of any license or franchise from any governmental agency held by the Corporation or any of its Subsidiaries (as hereinafter defined in subdivision (v) of Paragraph (B) of this Article SEVENTH) to conduct any portion of the business of the Corporation or any of its Subsidiaries, which license or franchise is conditioned upon some or all of the holders of the stock of the Corporation possessing prescribed qualifications. The terms and conditions of such redemption shall be as follows, subject in any case to any additional or different rights of a particular Disqualified Holder or of the Corporation pursuant to any contract or agreement between such Disqualified Holder and the Corporation: (i) the redemption price of the shares to be redeemed pursuant to this Article SEVENTH shall be equal to the Current Market Value (as hereinafter defined in subdivision (i) of Paragraph (B) of this Article SEVENTH) of such shares; provided that such redemption price as to any Disqualified Holder who purchased such shares after November 18, 1994, and within one year of the Redemption Date (as hereinafter defined in subdivision (iii) of paragraph (B) of this Article SEVENTH) shall not (unless otherwise determined by the Board of Directors) exceed the purchase price paid by such Disqualified Holder for such shares; (ii) the redemption price of such shares may be paid in cash, Redemption Securities (as hereinafter defined in subdivision (iv) of Paragraph (B) of this Article SEVENTH) or any combination thereof; (iii) if less than all of the shares held by Disqualified Holders are to be redeemed, the shares to be redeemed shall be selected in such manner as shall be determined by the Board of Directors, which may include selection first of the most recently purchased shares thereof, selection by lot or selection in any other manner determined by the Board of Directors to be equitable; (iv) at least ten days' written notice of the Redemption Date shall be given to the record holders of the shares selected to be redeemed (unless waived in writing by any such holder), provided that the Redemption Date may be the date on which written notice shall be given to record holders if the cash or Redemption Securities necessary to effect the redemption shall have been deposited in trust for the benefit of such record holders and subject to immediate withdrawal by them upon surrender of the stock certificates for their shares to be redeemed; (v) on the Redemption Date, unless the Corporation shall have defaulted in paying or setting aside for payment the cash or Redemption Securities payable upon such redemption, any and all rights of Disqualified Holders in respect of shares so redeemed (including without limitation any rights to vote or participate in dividends), shall cease and terminate, and from and after such Redemption Date such Disqualified Holders shall be entitled only to receive the cash or Redemption Securities payable upon redemption of the shares so redeemed; and (vi) such other terms and conditions as the Board of Directors shall determine. (B) For purposes of this Article SEVENTH: (i) "Current Market Value" of a share of Common Stock shall mean the average of the daily closing prices for such a share for the 20 consecutive trading days commencing on the 22nd trading day prior to the date on which notice of redemption shall be given pursuant to subdivision (iv) of paragraph (A) of this Article SEVENTH (or, if such notice shall have been waived, the date that is ten days prior to the Redemption Date). The closing price for each day shall be the closing price on the New York Stock Exchange Composite Tape, or, if the Common Stock is not quoted on such Composite Tape, on the New York Stock Exchange, Inc., or if such stock is not listed on such exchange, on the principal United States registered securities exchange on which such stock is listed, or if such stock is not listed on any such exchange, the average of the closing bid and asked prices as reported by the electronic inter-dealer quotation system operated by NASDAQ, Inc. or a similar source selected from time to time by the Corporation for the purpose, or if no such prices or quotations are available, the fair market value on the applicable day as determined by the Board of Directors in good faith. (ii) "Disqualified Holder" shall mean any holder of shares of Common Stock of the Corporation whose continued holding of such stock, either individually or taken together with the holding of shares of stock of the Corporation by any other holder or holders of shares of stock of the Corporation, may result, in the judgment of the board of directors, in the loss of, or the failure to secure the renewal or reinstatement of, any license or franchise from any governmental agency held by the Corporation or any of its Subsidiaries to conduct any portion of the business of the Corporation or any of its Subsidiaries. (iii) "Redemption Date" shall mean the date fixed by the Board of Directors for the redemption of any shares of stock of the Corporation pursuant to this Article SEVENTH. (iv) "Redemption Securities" shall mean any debt or equity securities of the Corporation, any of its Subsidiaries or any other corporation, or any combination thereof, having such terms and conditions as shall be approved by the Board of Directors and which, together with any cash to be paid as part of the redemption price, in the opinion of any nationally recognized investment banking firm selected by the Board of Directors (which may be a firm which provides other investment banking, brokerage or other services to the Corporation), has a value, at the time notice of redemption is given pursuant to subdivision (iv) of paragraph (A) of this Article SEVENTH (or, if such notice shall have been waived, the date that is ten days prior to the Redemption Date), at least equal to the price required to be paid pursuant to subdivision (i) of paragraph (A) of this Article SEVENTH (assuming, in the case of Redemption Securities to be publicly traded, such Redemption Securities were fully distributed and subject only to normal trading activity). (v) "Subsidiary" shall mean any corporation or other entity of which at least a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by the Corporation. EIGHTH: The term of existence of the Corporation shall be perpetual. NINTH: The number of directors of the Corporation shall be not less than nine (9). TENTH: The office of the Corporation in the State of New York is located in the County of Monroe. The Secretary of State of the State of New York is hereby designated as an agent of the Corporation upon whom all process in any action or proceeding against the Corporation may be served within the State of New York. The address to which the Secretary of State shall mail a copy of any process which may be served upon him is 180 South Clinton Avenue, Rochester, New York 14646-0700, Attention: Secretary. ELEVENTH: No director of the Corporation shall be personally liable to the Corporation or its shareowners for damages for any breach of duty as a director unless the elimination or limitation of liability is expressly prohibited by the New York Business Corporation Law as currently in effect or as it may be amended. No amendment, modification or repeal of this Article shall adversely affect any right or protection of any director that exists at the time of such change. This Restatement of the Certificate of Incorporation of the Corporation was authorized by a resolution adopted by the Board of Directors of the Corporation at a meeting thereof duly called and held, followed by the affirmative votes of the holders of the requisite percentage of the outstanding shares of Common Stock of the Corporation, cast in person or by proxy, at the Special Meeting of Shareowners held on December 19, 1994, and, in addition, with respect to the authorization of a new class of preferred stock, by the affirmative votes of the holders of the requisite percentage of the outstanding shares of the Cumulative Preferred Stock, cast in person or by proxy, at a Special Meeting of Cumulative Preferred Shareowners held on December 19, 1994. The aforementioned Special Meetings were held upon notice, pursuant to Section 605 of the Business Corporation Law, to every shareholder of record entitled to vote thereon, and neither the Restated Certificate of Incorporation, as amended, nor any other Certificate filed pursuant to law require a larger proportion of votes. IN WITNESS WHEREOF, this restated certificate has been subscribed this 24th day of January, 1995 by the undersigned, who affirm that the statements made herein are true under the penalties of perjury. /s/ John K. Purcell ______________________________ John K. Purcell Corporate Vice President /s/ Josephine S. Trubek ______________________________ Josephine S. Trubek Corporate Secretary EX-3.2 3 BY LAWS EXHIBIT 3-2 FRONTIER CORPORATION By-Laws 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. 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. Section 7 - Qualification of Voters. Every shareholder of record of common stock of the Corporation shall be entitled at every meeting of shareholders to one vote for every share of common stock held by the shareholder in the shareholder's name on the record of shareholders, subject, however, to the voting rights granted to the holders of Cumulative Preferred Stock of the Corporation upon default in dividends thereon. Section 8 - Quorum of Shareholders. The holders of a majority of the shares entitled to vote at such meeting shall constitute a quorum at a meeting of shareholders for the transaction of any business, provided that when a specified item of business is required to be voted on by a class or series, voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum for the transaction of such specified item of business. The shareholders present, in person or by proxy, and entitled to vote may, by a majority of votes cast, adjourn the meeting despite the absence of a quorum. Section 9 - Vote of Shareholders. Directors shall, except as otherwise required by law, or by the certificate of incorporation as permitted by law, be elected by a plurality of the votes cast at a meeting of shareholders by the holders of shares entitled to vote in the election. Whenever any corporate action, other than the election of Directors, is to be taken by vote of the shareholders, it shall, except as otherwise required by law, or by the certificate of incorporation as permitted by law, be authorized by a majority of the votes cast at a meeting of shareholders by the holders of shares entitled to vote thereon. Section 10 - Proxies. Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent without a meeting may authorize another person or persons to act for that shareholder by proxy. Every proxy must be signed by the shareholder or the shareholder's attorney-in-fact. No proxy shall be valid after the expiration of eleven months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it except in those cases where an irrevocable proxy permitted by statute has been given. Section 11 - Fixing Record Date. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board of Directors may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than fifty nor less than ten days before the date of such meeting, nor more than fifty days prior to any other action. Section 12 - Order of Business.* The order of business at each meeting of shareholders shall be as determined by the chairman of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof, and the opening and closing of the voting polls. At any special meeting of shareholders, only such business may be transacted which is related to the purpose or purposes set forth in the notice of such meeting. At any annual meeting of shareholders, only such business (other than the nomination or election of directors) shall be conducted as shall have been brought before the annual meeting (i) by or at the direction of the chairman of the meeting or (ii) by any shareholder who is a holder of record at the time of the giving of the notice provided for in this Section 12, who is or will be entitled to vote at the meeting and who complies with the procedures set forth in this Section 12. 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 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 nine 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 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. 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; (6) The fixing or amendment of the compensation, benefits and perquisites of the chief executive officer. The Board of Directors, by resolution by a majority of the entire Board, may designate from among its members an Audit Committee consisting of three or more outside directors. The Audit Committee shall, among other things, review the scope of audit activities, review with management significant issues concerning litigation, contingencies or other material matters which may result in either potential liability of the Company or significant exposure to the Company, review significant matters of corporate ethics, review security methods and procedures, review the financial reports and notes, and make reports and recommendations with respect to audit activities, findings, and reports of the independent public accountants and the internal audit staff of the Company. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from among its members a Committee on Directors consisting of three or more outside directors. The Committee on Directors shall, among other things, review performance of incumbent directors, act as a nominating committee, and consider and report to the entire Board of Directors on all matters relating to the selection, qualification, compensation and duties of the members of the Board of Directors and any committees of the Board of Directors. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from among its members a Committee on Management consisting of three or more outside directors. The Committee on Management shall, among other things, fix or amend the compensation, benefits and perquisites of all executive officers of the Company and recommend such for the chief executive officer, select and administer executive compensation plans and employee benefit plans which have Company stock as an investment option, review succession planning for the Company and review with management significant human resources issues. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from among its members other committees each consisting of three or more directors. Unless a greater proportion is required by the resolution designating a committee of the Board of Directors, a quorum for the transaction of business of a committee shall consist of (a) a 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 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. (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 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 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 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. 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, 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. 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 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 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 amended, repealed, or adopted by the Board of Directors, but any By-Law adopted by the Board may be amended or repealed by the shareholders entitled to vote thereon as hereinabove provided. If any By-Law regulating an impending election of directors is adopted, amended or repealed by the Board of Directors, there shall be set forth in the notice of the next meeting of shareholders for the election of directors the By-Law so adopted, amended or repealed, together with a concise statement of the changes made. EX-4.1 4 AGRE. TO FURNISH SUBSIDIARY EXHIBIT 4-1 Frontier Corporation has not filed any instrument defining the rights of holders of long-term debt of its subsidiaries because the amounts authorized under any such instrument do not exceed ten percent (10%) of the total assets of Frontier Corporation and its subsidiaries on a consolidated basis. Frontier Corporation agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon its request. EX-4.2 5 AGRE. TO FURNISH DEBT EXHIBIT 4-2 Frontier Corporation hereby undertakes to provide to the Securities and Exchange Commission, upon request, all of the instruments defining the rights of holders of long term debt of Frontier Corporation and its consolidated subsidiaries, pursuant to Reg. Section 229.601(b)(4)(iii). EX-10.25 6 MANAGEMENT PENSION PLAN EXHIBIT 10-25 ROCHESTER TELEPHONE CORPORATION MANAGEMENT PENSION PLAN Amendment No. 19 to the January 1, 1987 Restatement Pursuant to Article XI, Section 2.37 is amended, effective January 1, 1994, to clarify an ambiguity in the Plan's language and to affirm prior administrative practice, by adding to the end thereof the following: For purposes of determining a Participant's Accrued Benefit, of applying the Plan's benefit formula and of determining the length of service needed for receiving an unreduced benefit, the term Year of Service shall include only those periods of time during which either (1) the Employer or an Affiliated Company maintained this Plan or (2) service credit is granted pursuant to the transfer policy in Section 4.3. IN WITNESS WHEREOF, the Employer has caused its duly authorized officer to execute this amendment on its behalf this 10th day of May, 1994. ROCHESTER TELEPHONE CORPORATION By /s/ Josephine S. Trubek --------------------------- Josephine S. Trubek Corporate Secretary EXHIBIT 10-25 ROCHESTER TELEPHONE CORPORATION MANAGEMENT PENSION PLAN Amendment No. 20 to the January 1, 1987 Restatement Pursuant to Article XI, Section 1.11 is amended, effective January 1, 1995, by deleting the current provision in its entirety and substituting in its place the following: "Compensation" means the total of an Employee's annual base rate of pay (including any differentials for acting assignments, team leader or shift differential), bonuses and commissions paid by the Employer during a Plan Year for services actually rendered by the Employee to the Employer. For any Employee who is participating in the Employer's Employees' Retirement Savings Plan or Tel Flex Plan, the term Compensation shall include amounts contributed to such plans on behalf of the Employee pursuant to a salary reduction agreement. Compensation does not include contributions to this Plan or any other plan of deferred compensation other than employee tax-deferred contributions to the Employees' Retirement Savings Plan, nor does it include any types of extra remuneration (except the bonuses or commissions included in the first sentence above) of whatever nature or an Employee's compensation in excess of $150,000 (adjusted for cost of living increases under the Code) per year. IN WITNESS WHEREOF, the Employer has caused its duly authorized officer to execute this amendment on its behalf this 17th day of October, 1994. ROCHESTER TELEPHONE CORPORATION By /s/ Barbara J. LaVerdi ----------------------------- Barbara J. LaVerdi Assistant Secretary EX-10.29 7 EMPLOYEES RETIRE. SAVINGS EXHIBIT 10-29 ROCHESTER TEL GROUP EMPLOYEES' RETIREMENT SAVINGS PLAN Amendment No. 1 Pursuant to Article XII the Plan is amended, effective January 1, 1995, as follows: 1. Section 1.11 is amended by adding the following parenthetical material following the word "wages" in the first sentence thereof: (including any differential associated with acting assignments, team leader or shift differential) 2. Section 4.1 is amended by deleting the last sentence thereof and substituting in its place the following: All Participating Company contributions will be made in cash. 3. Section 5.2 is amended by deleting the current provision in its entirety and substituting in its place the following: 5.2 Investment of Company Contributions. Except as otherwise noted in Appendix B, all Participating Company contributions and the earnings thereon shall be invested initially in Company Stock. All amounts required to be invested initially in Company Stock shall remain in the Company Stock fund until the fifth anniversary of the date of investment (the "Restricted Period"). At the expiration of the five year period the Restricted Stock, including the reinvested earnings on the initial contributions, in a Participant's Account shall lose its investment restriction and may be invested by the Participant, pursuant to Section 5.5 and any rules established thereunder, by the Committee in any other fund option or left in the Company Stock fund. Participating Company contributions not required to be invested initially in Company Stock may be invested in any fund option, including Company Stock, under the Plan. IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Amendment on its behalf this 15th day of November, 1994. ROCHESTER TELEPHONE CORPORATION By /s/ Barbara J. LaVerdi ----------------------------- Barbara J. LaVerdi Assistant Secretary EX-10.31 8 SUPP. RETIRE. SAVINGS EXHIBIT 10-31 ROCHESTER TELEPHONE CORPORATION SUPPLEMENTAL RETIREMENT SAVINGS PLAN Amendment No. 4 to May 1, 1990 Restatement Pursuant to Section 8.1, the Plan is hereby amended, effective January 1, 1995, by deleting the first paragraph of Section 5.1 and substituting in its place the following: The Participating Company of an eligible Employee shall have the ultimate obligation to pay out all deferred amounts plus the earnings thereon in accordance with the terms of this Plan. All Participating Company matching contributions and the earnings on them shall be invested in Rochester Telephone Corporation common stock until the fifth anniversary of the date of investment (the "Restricted Stock"). At the expiration of the five year period, the Restricted Stock in an eligible Employee's account shall lose its investment restriction and may be invested by the Employee, along with all other amounts in his or her account, among the investment choices made available from time to time by the Committee. An eligible Employee may also elect to change the investment of his or her account as frequently as the Committee in its sole discretion may permit. All such elections shall be made pursuant to such procedures as the Committee shall adopt. IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this amendment on its behalf this 15th day of November, 1994. ROCHESTER TELEPHONE CORPORATION By /s/ Barbara J. LaVerdi ------------------------ Barbara J. LaVerdi Assistant Secretary EX-10.34 9 DEFERRAL OF DIR. FEES EXHIBIT 10-34 [12/5/94] FRONTIER CORPORATION PLAN FOR THE DEFERRAL OF DIRECTORS FEES The Rochester Telephone Corporation Plan for the Deferral of Directors Fees is hereby amended and renamed, effective January 1, l995, as the Frontier Corporation Plan for the Deferral of Directors Fees (the "Plan") to reflect the company's reorganization and the change in the parent company's name to Frontier Corporation (the "Company") and to expand eligibility to outside directors of the Company's subsidiaries as follows: 1. Purposes The Plan has been established to assist outside directors of the Company and its subsidiaries with their individual tax and retirement income planning and to permit the Company and its subsidiaries to remain competitive in attracting and retaining their directors. 2. Plan Administrator The Executive Committee of the Company's Board of Directors shall be the Plan's administrator (the "Administrator"). The Administrator shall have the authority to adopt rules and regulations for carrying out the Plan and to interpret, construe and implement the provisions of this Plan, including eligibility for benefits prior to any change in control of the Company. 3. Eligibility Any director of the Company or of its subsidiaries who is not an employee of the Company or of its subsidiaries may elect to participate in this Plan. 4. Amount of Deferral A participant may elect to defer receipt of all or a specified portion of the fees otherwise payable to the participant for serving on the Board of Directors or any Board committee of the Company or of a subsidiary of the Company. 5. Time for Electing Deferral Any election to defer directors fees must be made prior to the beginning of the calendar year that such fees are to be earned by the participant, provided that in the first year of eligibility a deferral election for that year must be made within 30 days of commencing employment on the Board, and provided further that any election with respect to investing in Company Common Stock must be made irrevocably at least six months in advance of such transaction. An election to commence a deferral may be made at any time in accordance with the procedures set forth in section 6 and any election so made shall remain in effect until the participant elects in writing to change his or her election for future fees, but any such change with respect to investment in Company Common Stock will not be effective until six months after so elected. 6. Manner of Electing Deferral A participant shall elect a deferral by giving written notice to the Administrator in a form substantially the same as the Election Form attached hereto. The notice shall include (1) the amount to be deferred; (2) the time as of which deferral is to commence; (3) if applicable, whether the deferrals will be invested in Company Common Stock or in fixed income obligations; (4) whether the deferred amounts plus the earnings thereon will be paid within 30 days of termination from the Board or 30 days following the end of year in which termination occurs; and (5) an election of either a lump sum payment or the number of monthly installments (not to exceed 60) for the payment of the deferred amounts. 7. Participant Accounts If a trust arrangement has been established, each participant shall have a Participant Fixed Income Account or a Participant Common Stock Account, or both (collectively, the "Participant Account") to reflect his or her investment election as specified on the Election Form. Amounts deferred into a Participant Fixed Income Account shall be invested by the trustee in money market instruments, Treasury bills or other short-term, low-risk, highly-liquid forms of investments pursuant to the terms of the trust agreement. Amounts deferred into a Participant Common Stock Account shall be invested by the trustee in shares of Company Common Stock (par value $1.00 per share). The trustee shall purchase such shares on the open market at their fair market value at the time of purchase. Cash dividends paid on shares allocated to a Participant Common Stock Account shall be used to purchase additional shares of Common Stock. If no trust arrangement has been established, all deferrals will be credited with simple interest on any unpaid account balance at the rate fixed from time to time for the payment of funds deposited with the Company by the customers. The value of each Participant Account shall be adjusted no less frequently than annually to reflect deferrals into the account, payments from the account as hereinafter provided, earnings on investments and changes in the market value of investments. All amounts credited to Participant Accounts shall be fully vested at all times. Except for the possible claims of the general creditors of the Company or of its subsidiaries, they shall not be subject to forfeiture on account of any action by a participant or by the Company or its subsidiaries, including termination of service on the Board. 8. Transfer of Participant Accounts A Participant may make a one-time election at any time to transfer all or a portion of the value of his or her Participant Account from this Plan to the Company's Directors Common Stock Deferred Growth Plan. In such event, future earnings on the transferred amounts shall be based on the terms of the Directors Common Stock Deferred Growth Plan and payment from that plan shall be made in whatever medium (e.g., cash or property) may be provided for the payment of benefits from that plan. However, the timing, method of payment and all other elections selected by the Participant on his or her Deferred Election Form under this Plan shall remain irrevocable and shall continue to apply to the transferred amounts. No amounts held in the Directors Common Stock Deferred Growth Plan may be transferred to this Plan, including amounts previously transferred to such plan from this Plan pursuant to this Section 8. Notwithstanding the provisions of this Section 8 or a participant's Election Form regarding the time for payment of benefits, the Administrator may, in its sole discretion, accelerate payments in the light of an unforeseeable emergency. For this purpose, an unforeseeable emergency is an unanticipated emergency that is caused by an event beyond the control of the participant and that would result in severe financial hardship to the participant if early withdrawal were not permitted. Any early withdrawal pursuant to this Section 8 is limited to the amount needed to meet the emergency. 9. Payment of Deferred Amounts No withdrawal may be made from a Participant Account except as provided in this section 8. Payments from an Account shall either commence or be made in a lump sum within 30 days following termination from the Board or within 30 days following the close of the year in which termination occurs in accordance with a participant's election form. Payments from a Participant Fixed Income Account shall be made only in cash. Payments from a Participant Common Stock Account shall be made only in whole shares of Common Stock with any fractional share which is part of a lump sum payment or a final installment made in cash. Each participant or beneficiary shall execute any documents deemed necessary by the Administrator to comply with any applicable securities laws. Payments may be made in the form of either a lump sum payment or monthly installments over a period of years not to exceed five. Where payments are made in monthly installments, the balance credited to a Participant Account shall continue to be adjusted for earnings as provided in section 7. If installment payments are elected, the first installment shall equal the value of the Participant Account at such time multiplied by a fraction, the numerator of which is one and the denominator of which is the total number of monthly installments to be made. All subsequent installments shall equal the value of the Participant Account as of the last valuation date preceding the installment which is to be paid multiplied by a fraction, the numerator of which is one and the denominator of which is the total number of installments elected minus the number of installments already paid. In the event of a participant's death before he or she has received all of the deferred payments to which he or she is entitled hereunder, the remaining value of the Participant Account shall be paid to the participant's estate in a lump sum no later than 30 days following the end of the year in which the participant died. Notwithstanding a participant's election of installment payments, the Company and its subsidiaries, in their sole discretion, shall have a right to accelerate any such payments or to make payment of the balance of a Participant Account in a lump sum. 10. Participant's Rights Unsecured The maintenance of individual Participant Accounts is for bookkeeping purposes only. The Company and its subsidiaries may, but are not obligated to, acquire or set aside any particular assets for the discharge of their obligations, nor is any participant to have any property rights in any particular assets held by the Company or its subsidiaries, whether or not held for the purpose of funding the obligations of the Company or its subsidiaries under this Plan. The right of any participant or his or her estate to receive future installments under the provisions of this Plan shall be an unsecured claim against the general assets of the Company and its subsidiaries. 11. Change in Control In the event of a Change in Control, as defined in the trust agreement, amounts credited to Participant Accounts shall be paid out in accordance with the terms of the trust agreement and any participant elections. If no trust agreement is in effect, change in control shall have the meaning given this term in the Company's Supplemental Management Pension Plan and benefits shall be paid in accordance with participant elections. Notwithstanding the foregoing, shares of Common Stock purchased with deferred fees shall not be paid out until six months after the date of elction pursuant to which such purchase was made. 12. Statement of Account Statements will be sent to participants no less frequently than annually as to the value of their Participant Accounts. 13. Assignability No right to receive payments hereunder shall be transferable or assignable by a participant, except by will or by the laws of descent and distribution. 14. Amendment This Plan may at any time or from time to time be amended, modified or terminated by the Board of Directors of the Company. No amendment, modification or termination shall accelerate payment of amounts previously deferred, provide for additional benefits, or, without the consent of a participant, adversely affect such participant's accruals in his or her Participant Account. 15. Governing Law This Plan and any participant elections hereunder shall be interpreted and enforced in accordance with the laws of the State of New York. 16. Effective Date The effective date of this restated Plan shall be January 1, 1995. IN WITNESS WHEREOF, the Company's Board of Directors has caused its duly authorized member to execute this Plan document on its behalf this 19th day of December, 1994. FRONTIER CORPORATION By: /s/ Josephine S. Trubek -------------------------- Josephine S. Trubek Corporate Secretary EX-10.36 10 DIR. DEF. GROWTH PLAN EXHIBIT 10-36 [12/05/94] FRONTIER CORPORATION DIRECTORS COMMON STOCK DEFERRED GROWTH PLAN The Rochester Telephone Corporation Directors Common Stock Deferred Growth Plan is hereby amended and renamed, effective January 1, 1995, as the Frontier Corporation Directors Common Stock Deferred Growth Plan (the "Plan") to reflect the company's reorganization and the change in the parent company's name to Frontier Corporation (the "Company") and to expand eligibility to outside directors of the Company's subsidiaries as follows: 1. Purposes The purposes of the Plan are to assist directors of the Company and its subsidiaries with their individual tax and retirement income planning, to permit the Company and its subsidiaries to remain competitive in attracting and retaining their directors and to authorize deferred fees to be invested in Company securities. 2. Plan Administrator The Committee on Directors of the Company's Board of Directors shall be the Plan's administrator (the "Administrator"). The Administrator shall have the authority to adopt rules and regulations for carrying out the Plan and to interpret, construe and implement the provisions of this Plan, including eligibility for benefits. 3. Eligibility Any director of the Company or of its subsidiaries who is not an employee of the Company or of its subsidiaries may elect to participate in this Plan. 4. Amount of Deferral A participant may elect to defer receipt of all or a specified portion of the fees otherwise payable to the participant for serving on the Board of Directors or any committee thereof of the Company or of any subsidiary of the Company or of any subsidiary of the Company. 5. Time for Electing Deferral Any election to defer directors fees must be made prior to the beginning of the calendar year that such fees are to be earned by the participant, provided that in the first year of eligibility a deferral election for that year must be made within 30 days of commencing employment on the Board. An election to commence a deferral may be made at any time in accordance with the procedures set forth in section 6 and any election so made shall remain in effect until the participant elects in writing to change his or her election for future fees, but any such change with respect to an investment in Company securities will not be effective until six months after so elected. 6. Manner of Electing Deferral A participant shall elect a deferral by giving written notice to the Administrator in a form substantially the same as the Election Form attached hereto. The notice shall include (1) the amount to be deferred; (2) the time as of which the deferral is to commence; and (3) whether the deferred amounts plus the earnings thereon will be paid within 30 days of termination from the Board or 30 days following the end of year in which termination occurs. 7. Participant Accounts If a trust arrangement has been established, each participant shall have an account (the "Participant Account") to reflect his or her investment election as specified on the Election Form. Amounts deferred into a Participant Account shall be invested by the trustee in such securities of the Company as shall be specified by the Administrator. The trustee shall purchase such securities on the open market at their fair market value at the time of purchase. Earnings paid on securities allocated to a Participant Account shall be used to purchase additional securities of the Company. Funds allocated to a Participant Account that cannot be invested in Company securities may be invested in any fund or funds designated by the Administrator. If no trust arrangement has been established, all deferrals will be credited with simple interest on any unpaid account balance at the rate fixed from time to time for the payment of funds deposited with the Company by the customers. The value of each Participant Account shall be adjusted no less frequently than annually to reflect deferrals into the account, payments from the account as hereinafter provided, earnings on investments and changes in the market value of investments. All amounts credited to Participant Accounts shall be fully vested at all times. Except for the possible claims of the general creditors of the Company or of its subsidiaries, they shall not be subject to forfeiture on account of any action by a participant or by the Company or its subsidiaries, including termination of service on the Board. 8. Transfer of Participant Accounts A Participant may transfer to this Plan a participant account held under the Company's Plan for the Deferral of Directors Fees. In the event of any such transfer, the amounts will be invested in accordance with the terms of this Plan and shall be paid out in the medium provided for payments from this Plan. The Participant's deferral election under the Plan for the Deferral of Directors Fees shall otherwise remain irrevocable and shall govern the time and method of payment of the transferred amounts. No amounts held in this Plan, including amounts transferred to it pursuant to the foregoing paragraph may be transferred from this Plan to the Plan for the Deferral of Directors Fees. 9. Payment of Deferred Amounts No withdrawal may be made from a Participant Account except as provided in this section 9. Payments from an Account shall be made in a lump sum within 30 days following termination from the Board or within 30 days following the close of the year in which termination occurs in accordance with a participant's Election Form. Payments from a Participant Account that has been invested in Company securities shall be made only in whole shares of such securities with any fractional share made in cash. Each participant or beneficiary shall execute any documents deemed necessary by the Administrator to comply with any applicable securities laws. Notwithstanding the provisions of this Section 9 or a participant's Election Form regarding the time for payment of benefits, the Administrator may, in its sole discretion, accelerate payments in the light of an unforeseeable emergency. For this purpose, an unforeseeable emergency is an unanticipated emergency that is caused by an event beyond the control of the participant and that would result in severe financial hardship to the participant if early withdrawal were not permitted. Any early withdrawal pursuant to this Section 9 is limited to the amount needed to meet the emergency. 10. Participant's Rights Unsecured The maintenance of individual Participant Accounts is for bookkeeping purposes only. The Company and its subsidiaries may, but are not obligated to, acquire or set aside any particular assets for the discharge of their obligations, nor is any participant to have any property rights in any particular assets held by the Company or by its subsidiaries, whether or not held for the purpose of funding the obligations of the Company and its subsidiaries under this Plan. The right of any participant or his or her estate to receive future payments under the provisions of this Plan shall be an unsecured claim against the general assets of the Company and its subsidiaries. 11. Change in Control In the event of a Change in Control, as defined in the trust agreement, amounts credited to Participant Accounts shall be paid out in accordance with the terms of the trust agreement and any participant elections. If no trust agreement is in effect, change in control shall have the meaning given this term in the Company's Supplemental Management Pension Plan and benefits shall be paid in accordance with participant elections. Notwithstanding the foregoing, shares of Company securities purchased with deferred fees shall not be paid out until six months after the date of election pursuant to which such purchase was made. 12. Statement of Account Statements will be sent to participants no less frequently than annually as to the value of their Participant Accounts. 13. Assignability No right to receive payments hereunder shall be transferable or assignable by a participant, except by will or by the laws of descent and distribution. 14. Amendment This Plan may at any time or from time to time be amended, modified or terminated by the Board of Directors of the Company. No amendment, modification or termination shall accelerate payment of amounts previously deferred, provide for additional benefits, or, without the consent of a participant, adversely affect such participant's accruals in his or her Participant Account. 15. Governing Law This Plan and any participant elections hereunder shall be interpreted and enforced in accordance with the laws of the State of New York. 16. Effective Date The effective date of this restated Plan is January 1, 1995. IN WITNESS WHEREOF, the Company's Board of Directors has caused its duly authorized member to execute this Plan document on its behalf this 19th day of December, 1994. FRONTIER CORPORATION By: /s/ Josephine S. Trubek ------------------------- Josephine S. Trubek Corporate Secretary EX-11 11 STAT. PER SHARE EARNINGS EXHIBIT 11 FRONTIER CORPORATION CONSOLIDATED COMPUTATION OF NET INCOME PER AVERAGE SHARE OF COMMON STOCK ON A FULLY DILUTED BASIS In thousands, except per share data
Year Ended December 31, ----------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Income applicable to common stock $101,551 $81,533 $68,243 $77,857 $50,743 Add: Interest on convertible debentures 554 553 561 562 594 -------------------------------------------- $102,105 $82,086 $68,804 $78,419 $51,337 Less: Increase in related federal income taxes 194 194 191 191 202 -------------------------------------------- Adjusted income applicable to common stock $101,911 $81,892 $68,613 $78,228 $51,135 ============================================ Average common shares outstanding (excluding common stock equivalents) 72,252 67,410 66,638 64,206 59,348 Adjustments for: Convertible debentures 502 502 528 530 676 Stock Options 68 60 --- --- --- -------------------------------------------- Adjusted common shares assuming conversion of outstanding convertible debentures and stock options at the beginning of each period. (1) 72,822 67,972 67,166 64,736 60,024 =========================================== Net income per average share of common stock on a fully diluted basis $ 1.40 $ 1.20 $ 1.02 $ 1.21 $ .85
(1) As set forth in Notes 8 and 14 of the Notes to Consolidated Financial Statements. EX-13 12 ANNUAL REPORT EXHIBIT 13
Financial Review Management's Discussion of Results of Operations and Analysis of Financial Condition 18 Report of Independent Accountants 28 Report of Management 28 Report of Audit Committee Chair 28 Business Segment Information 29 Consolidated Statement of Income 30 Consolidated Balance Sheet 31 Consolidated Statement of Cash Flows 32 Consolidated Statement of Shareowners' Equity 33 Notes to Consolidated Financial Statements 34 Condensed Six-Year Financial Statements 47 Financial and Operating Statistics 48
The Corporation's 1994 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, including financial statements and schedules, is available without charge. Please address a written request to "Corporate Secretary," Frontier Corporation, Frontier Center, 180 South Clinton Avenue, Rochester, New York 14646-0700. ________________________________________ Financial Review Frontier Corporation 17 MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION ________________________________________________________________________________ DESCRIPTION OF BUSINESS Frontier Corporation (formerly Rochester Telephone Corporation) is a diversified telecommunications company, serving more than 1.5 million customers in 32 states throughout the United States. Frontier Corporation's principal lines of business are reported in two segments: Telecommunication Services and Telephone Operations. Telecommunication Services includes Frontier's long distance operations, cellular and paging operations, and telecommunications equipment sales. Telephone Operations is comprised of 36 local telephone companies providing service to over 900,000 access lines in the Northeast, Midwest and South. ________________________________________________________________________________ 1994 OVERVIEW Frontier Corporation (the Company) completed a landmark year in 1994, both financially and organizationally. Revenues increased 8.7 percent to just under $1 billion, and operating income surpassed $200 million for the first time in the Company's history. Earnings per share increased 23.9 percent in 1994 to $1.50 per share, before the impact of a change in accounting for certain employee benefits. Significantly, late in 1994, the Company secured state regulatory and shareowner approval of an unprecedented plan to open the Rochester, New York local service market to competition in return for local service "price cap" regulation in the Rochester market and approval for the formation of a holding company. The new regulatory plan for Rochester, New York removes the limit on earnings that was present under "rate of return" regulation for the duration of the plan. Finally, in recognition of the changing nature and expanding geographic presence of the Company, our shareowners approved changing the name of our company to Frontier Corporation. FINANCIAL HIGHLIGHTS The Company continued its recent pattern of substantial growth, driven mainly by its competitive long distance business which had revenues of $334 million in 1994, an increase of $71.5 million, or 27.2 percent, over 1993. Overall, Frontier Corporation's revenue mix continues to shift away from dependence upon regulated revenue sources and more toward non-regulated revenue streams, with the Telecommunication Services segment accounting for 38 percent of total revenue in 1994. This compares to 29 percent in 1992. As a result of the diversification efforts of the Company over the past several years, the Rochester, New York operating telephone company accounted for only 31 percent of total revenues in 1994, down from 46 percent in 1990. Operating income for 1994 was $223.3 million, which represents an increase of 14.5 percent over 1993. Consolidated net income reached an all time high in 1994 at a level of $102.7 million, a 24.2 percent increase over 1993. The percentage growth in net income was significantly higher than the corresponding percentage growth in operating income due to the combined impact of lower borrowing costs, higher investment income and the sale of our only regional telephone company in North Dakota, which resulted in an $11.3 million pre-tax gain. Including a one- time charge relating to a change in the method of accounting for certain post- employment benefits, earnings per share were $1.40 for the year. Excluding both the one-time charge for the accounting change and the gain from the sale of the telephone company in North Dakota, earnings per share were also $1.40, an increase of 15.7 percent over 1993. The number of common shares outstanding in 1994 was impacted by two events. In February 1994, the Company sold 5.4 million shares of its common stock at $42 per share in a public offering. As part of the offering, 2.5 million new primary shares were issued and sold directly by the Company and 2.9 million shares were sold by C FON Corporation, a subsidiary of Sprint Corporation. In April 1994, the Company implemented a 2-for-1 split of the Company's common stock, effected in the form of a 100 percent stock dividend with no change in the $1.00 per share par value. All historical share and per share data have been retro- actively adjusted to reflect the split, unless specifically indicated otherwise. CORPORATE NAME CHANGE AND RESTRUCTURING In December 1994, upon receiving shareowner approval, the Company reorganized as a holding company and changed its name from Rochester Telephone Corporation to Frontier Corporation. The new name reflects not only the pioneering heritage of our past but also our willingness to embrace the challenges of the future. The name also symbolizes the change from a company focused primarily in Rochester, New York to a company that is expanding geographically and currently operates in 32 states. ________________________________________ 18 Financial Review Frontier Corporation Also in December 1994, shareowners approved an unprecedented and landmark restructuring plan, referred to as the Open Market Plan Agreement, between the Company, the staff of the New York State Public Service Commission (PSC), and certain other interested parties. This seven year Agreement, with an effective date of January 1, 1995, was approved by the PSC on October 13, 1994 and allowed the Company to permanently reorganize into a holding company structure. The restructuring into a holding company allows the Company to pursue acquisitions and diversification initiatives without many of the financial and regulatory constraints present under its prior corporate status. Under the Agreement, the Rochester, New York local exchange market has been opened to competition. The Rochester, New York operating company, which formerly was subject to rate of return regulation, will operate under "price" regulation for the life of the agreement. This removes the limit on the Rochester operating company's earnings that was present under rate of return regulation. Frontier Corporation (formerly Rochester Telephone Corporation) now owns directly or indirectly all of the stock of: . Rochester Telephone Corp., a new regulated telephone and network transport company which holds virtually all of the local service assets used in Rochester, New York market. Rochester Telephone offers retail local telephone service and also markets wholesale network services and other services to other retail providers of telecommunication services in the Rochester market, . Frontier Communications of Rochester, Inc., a new retail provider of telecommunication services to residential and business customers located in the Rochester, New York market, . Frontier Information Technologies Inc. (formerly Distributed Solutions, Inc., or DSI), an existing subsidiary of the Company, providing computer, billing and other information processing services primarily to the Company's affiliates, . Frontier Communications International Inc. (formerly RCI Long Distance, Inc.), an existing subsidiary of the Company providing long distance telecommunication services to business and residential customers, and . the Company's other existing subsidiaries, including our wireless operations and 35 companies which provide local telephone service outside the Rochester, New York market, as well as companies that provide telecommunication equipment and services in the Rochester market and other markets. Renamed as Frontier Corporation after shareowner approval on December 19, 1994, the Company is entitled to issue securities and effect acquisitions or expand existing lines of business without obtaining the approval of the PSC, subject only to the same exceptions as any other holding company operating in New York State. As a result, the Company should be able to respond more quickly to customer needs and new opportunities. The establishment of Frontier Communications of Rochester, Inc. allows us to provide integrated communications services to customers. Frontier Communications of Rochester will buy network access from Rochester Telephone Corp. or other carriers, and package these services with its own and others' product lines such as long distance, wireless, data services and voice mail. Initially, Frontier Communications of Rochester's customer base includes Centrex and digital private line customers previously serviced by the former Rochester local operating company. Beginning on January 1, 1995, Frontier Communications of Rochester and other competitors were authorized to compete for local service customers from Rochester Telephone Corp.'s current customer base. Frontier Communications of Rochester intends to create value by becoming the single point of contact for sales and service for its customers. Its competitive strength will be the ability to create market-demanded packages of telecommunications products and services, and to provide a single bill for all of these services. While its services will initially be limited to customers in the Rochester, New York market, Frontier Communications anticipates that it may offer its services elsewhere. CERTAIN CONSIDERATIONS RELATED TO THE OPEN MARKET PLAN Management believes there are significant market and business opportunities associated with the Company's Open Market Plan. However, there are also uncertainties associated with the Plan and the corporate restructuring. In our opinion, these are the most significant: (a) Increased Competition in the Rochester, New York Market. The Open Market Plan is expected to hasten local telephone competition in the Rochester, New York market by providing for (1) the full interconnection of competing local networks including reciprocal compensation for terminating traffic, (2) equal access to network databases, (3) access to local telephone numbers and (4) telephone number portability. Some competitors have already announced an intention to provide basic local exchange services in the Rochester market. The inherent risk associated with opening the Rochester market to competition is that some customers will purchase services from competitors, which would reduce the number of customers of the Company and potentially cause a decrease in the Company's revenues and profitability. The Company believes, however, that usage of its network following implementation of the Open Market Plan will increase, and that new revenue will offset, to some extent, the loss of revenues from end- user customers. Increased competition may also lead to additional price _________________________________________ Financial Review Frontier Corporation 19 decreases for services of the Company, adversely impacting the Company's margins. However, price cap regulation will not require Rochester Telephone Corp. to rebate any additional earnings achieved through operating efficiencies that previously would have been shared with customers. Moreover, services in the Rochester, New York market are already subject to competition. This trend will probably continue with or without the Open Market Plan. The Open Market Plan allows the Company to anticipate the erosion of its market share in local exchange services on terms that the Company believes will be in the best interests of its customers, employees and shareowners. (b) Risk of Rate Stabilization Plan. The Rate Stabilization Plan incorporated in the Open Market Plan Agreement provides for a total of $21 million in rate reductions for Rochester Telephone Corp. over the life of the Agreement. During this time, the rates charged by Rochester Telephone Corp. for basic residential and business telephone service may not be increased for any reason. But, since Rochester Telephone Corp. will operate under a price cap environment with no rate of return regulation, the Company will be able to retain the full value of any cost savings it introduces over the life of the plan. Even though the rates provided in the Rate Stabilization Plan were designed to permit the Company to recover its costs and to earn a reasonable rate of return, there is no assurance that this will occur. The effect on the Company's results of operations cannot be predicted because of uncertainty about Rochester Telephone Corp.'s network usage and its costs. (c) Restraints on the Company's Control of Rochester Telephone Corp. The Open Market Plan Agreement limits the number of inside directors on the Board of Directors of Rochester Telephone Corp. and the ways in which its officers and senior management employees are compensated. The Open Market Plan also prohibits payment of dividends by Rochester Telephone Corp. to Frontier Corporation if (i) Rochester Telephone Corp.'s senior debt has been 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 Agreement. Dividends paid to the parent, Frontier Corporation, also are prohibited unless Rochester Telephone Corp.'s directors certify that such dividends will neither impair Rochester Telephone Corp.'s service quality nor its ability to finance its short and long term capital needs on reasonable terms while maintaining an S&P debt rating target of "A". Other financial covenants exist to ensure that Rochester Telephone Corp. will have the financial strength to provide quality service. The Company believes that these conditions will not affect the opportunities for either Frontier Corporation or Rochester Telephone Corp. (d) Holding Company Structure. The Company no longer directly owns any material assets other than its interest in the capital stock of its subsidiaries. As noted above, dividends from Rochester Telephone Corp. to Frontier Corporation are subject to the financial covenants of the Open Market Plan. (e) Potential Diversification Risk. The Company is now able to make acquisitions and investments, enter into new lines of business and geographic areas, issue equity securities and incur long-term indebtedness without PSC approval, subject to certain exceptions. The Company may pursue opportunities with both greater potential profits and greater business risk than it could pursue as a telephone company subject to the authority of the PSC. There can be no assurance that any expansion of the Company's business will be successful. However, it is the current intention of the Company to engage only in telecommunications-related businesses. (f) Other Considerations. (i) Although the royalty order discussed below, under Regulatory Matters, remains in litigation, the Open Market Plan Agreement precludes the PSC from seeking royalties for the next seven years. After that, subject to the outcome of the pending litigation, the PSC may be able to assert its authority to do so. (ii) Because Rochester Telephone Corp. and Frontier Communications of Rochester will, at least initially, be competing for the same customers, there may be some duplication of sales and service expenses in the consolidated company. Over time, this duplication is expected to reach minimal levels. INDUSTRY OUTLOOK AND STRATEGIES As evidenced by the revolutionary change occurring in the Company's Rochester, New York market, the Company believes competition will increasingly be recognized and promoted in public policy, and that consumers will increasingly have opportunities to make real choices for their telecommunications needs. We believe that regulation has created artificial distinctions among local, long distance, wireless and cable services, and that convergence among these industry segments is unavoidable. We expect the overall marketplace to expand as customers increasingly rely on communications products and services to improve productivity and profitability in their businesses, as well as to add convenience and time to their personal lives. Our objective is to serve our customers as their single source for integrated telecommunications solutions. Frontier Corporation's Vision is to become the premier company in the telecommunications industry by providing products, services and applications that delight our customers, by being a team of qualified employees committed and accountable to this Vision, and by delivering exceptional returns to shareowners. Our goal is to expand our role as a "value creator"--that is, to enhance the benefits that all of our stakeholders obtain from their ongoing relationships with us. We realize that changes in the industry are occurring rapidly and _________________________________________ 20 Financial Review Frontier Corporation that this will continue for the foreseeable future. We believe that Frontier Corporation's strong operating performance and our marketing and regulatory initiatives have firmly positioned the Company as a leader in our industry. One important challenge for the Company over the remainder of the decade is to increase significantly the size of our business. We want to grow. Such growth will give us the opportunity to provide more services to more customers, while taking advantage of size and scale economies. In 1994, the Company served customers in 32 states. In 1995, we expect to become a truly national company by serving customers in virtually every state in the union. Since 1990, the Company's revenue has grown on average by 13.2 percent per year. Frontier Corporation will continue to focus on expanding its existing customer and revenue base. We are proactively seeking acquisition opportunities and strategic alliances that can enhance our overall net-work and service offerings. Acquisitions are a function of both price and opportunity. Frontier is interested in acquisition opportunities that will significantly add to shareowner value. The areas that we believe have the strongest growth potential are long distance and wireless communications. We acknowledge the increasing importance of video technology and video services in the marketplace and are evaluating opportunities to participate more actively in the video arena in the future. We also maintain our interest in additional local exchange properties, particularly where we believe there are synergistic opportunities with our existing operations, or where the opportunity exists to add new concentrations of customers who are candidates for Frontier integrated services solutions. We have evaluated the potential benefits of Personal Communication Services (PCS), a short-range wireless service similar to cellular. We want to find value-conscious ways to use additional wireless spectrum to serve customers. Our current focus is on growing the Company in the continental U.S., but we are reviewing many international opportunities as well, as we expect our long-term growth will move us beyond domestic boundaries. Consistent with this growth strategy, the Company announced several acquisitions during 1994. In October, we announced our intent to acquire California-based WCT Communications, Inc., a long distance company which has annualized revenues in excess of $100 million. And in November, the Company announced an agreement to acquire American Sharecom, Inc., a long distance company headquartered in Minneapolis, Minnesota with annual revenues totaling approximately $125 million. The combination of WCT and American Sharecom with Frontier Communications International will bring Frontier's annual long distance revenues to over $550 million, establish our coast-to-coast network and make Frontier the seventh largest long distance company in the country. In July, the Company agreed to purchase the Minnesota Cellular Telephone Company, a non- wireline cellular telephone service provider whose territory is located in an area south of Minneapolis. All of these pending acquisitions are expected to be completed in early 1995. In June 1994, we finalized the formation of the Upstate Cellular Network (UCN), a wireless joint venture with NYNEX Corporation that is managed by Frontier. The formation of this joint venture allowed Frontier to significantly expand its presence in the wireless sector. Through the Upstate Cellular Network and our majority ownership interests in several Rural Service Areas (RSA) in Alabama and New York, the Company now manages cellular properties which have a total coverage that reaches 4.2 million people. Our pending acquisitions will further accelerate the transformation of the Company from one with a predominant base in local telephony to one that is more heavily focused on the long distance segment and on achieving communication services integration. In 1995, we expect that a significant majority of our total revenues will come from sources that no longer fall under traditional rate of return regulation. _______________________________________________________________________________ RESULTS OF OPERATIONS CONSOLIDATED Consolidated revenues and sales were $985.5 million in 1994, a $79.0 million, or 8.7 percent, increase over 1993. This performance followed a 12.7 percent increase in 1993 over 1992. The primary factor in these increases has been the rapid growth in the Company's long distance business, which has been driven by both increased market penetration and acquisitions. Consolidated costs and expenses were $762.2 million, $711.5 million, and $628.9 million in 1994, 1993 and 1992, respectively, reflecting 7.1 percent and 13.1 percent increases in 1994 and 1993. The Company continued to focus its efforts on cost containment, process redesign and operating synergies during 1994, as reflected in the improvement in consolidated operating margins from 21.8 percent in 1992 to 21.9 percent in 1993 and to 22.7 percent in 1994, excluding the impact of a $3.3 million software write-off in 1993. Several one-time events have occurred during the past three years that have impacted the comparability of the Company's results from operations. These items are summarized below. 1. ACQUISITIONS/DIVESTITURES In July 1994, the Company and NYNEX Corporation combined certain cellular interests and formed a 50/50 joint venture to operate a cellular network in upstate New York. Financial results of the joint venture have been reported by the Company on the equity method of accounting, reflecting Frontier's proportionate share of the joint venture's earnings in the "Other income and expense" section on the Consolidated Statement ________________________________________ Financial Review Frontier Corporation 21 Financial Review Frontier Corporation 21 of Income. Previously, the revenues and expenses of the Company's wireless operations in New York had been consolidated. (See Note 3 to the Consolidated Financial Statements.) In May 1994, we sold our only telephone operating company in North Dakota, Minot Telephone, for cash. Minot served approximately 27,000 access lines. The transaction resulted in a pre-tax gain of $11.3 million. In December 1993, the Company increased its cellular ownership from 50.6 percent to 69.6 percent in the South Alabama cellular partnership. This transaction gave the Company the right to manage the two cellular properties, Alabama RSA #4 and #6, which serve a territory with a population of approximately 252,000. As a result of this increased ownership, we began reporting the South Alabama cellular interests on a consolidated basis of accounting in 1994, whereas previously this partnership had been accounted for on the equity method. In September 1993, Frontier Communications of the Mid Atlantic, Inc. (formerly Mid Atlantic Telecom, Inc.) was acquired using 143,587 shares of treasury stock (before the 1994 stock split). In June 1993, we acquired Budget Call Long Distance, Inc. for $7.5 million in cash. Both transactions were accounted for as purchase acquisitions. Also in September 1993, the Company sold its interest in the S&A Telephone Company in Kansas (approximately 800 access lines) and its related minority cellular interest. In addition, the Company sold a substantial portion of its investment in a Canadian long distance company in November 1993. These sales resulted in pre-tax gains totaling $4.4 million. In April 1993, we acquired a 70 percent ownership interest in the Utica-Rome Cellular Partnership by issuing 702,737 shares of the Company's common stock (before the 1994 stock split). We recorded this transaction using the purchase method of accounting. In August 1992, we acquired Frontier Communications of Georgia (formerly Statesboro Telephone Company), a company with more than 15,000 access lines. A total of 1.5 million shares of common stock were issued in the transaction (before the 1994 stock split), which was accounted for as a pooling of interests. 2. ACCOUNTING FOR POSTEMPLOYMENT BENEFITS The Company changed its method of accounting for certain employee benefits in 1994. This change was necessitated by the Financial Accounting Standards Board, the authoritative body for accounting rules. This new rule, referred to as Financial Accounting Standards Board Statement No. 112 (FAS 112), "Employers' Accounting for Postemployment Benefits," addresses the manner in which companies must record expenses for postemployment benefits, including payments for disability, pre-pension leave (salary continuation) and severance pay. FAS 112 requires that projected future costs of providing postemployment benefits be recognized as an expense as employees render service rather than when the benefits are paid. This accounting change is very similar to the change made in 1993 for postretirement benefits, which was addressed by FAS 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." Adoption of FAS 112 required the Company to calculate, and record in 1994, the cumulative effect of the change in accounting methodology for all years prior to 1994. The cumulative effect of the change in accounting methodology for FAS 112 amounted to an after- tax charge of $7.2 million, net of taxes of $3.9 million. As required by the pronouncement, the Company reported this one-time charge as a special line item on the Consolidated Statement of Income in 1994. This accounting change does not have a material impact on the Company's cash flows or its earnings from continuing operations. 3. TAX RATE CHANGE The 1993 income tax provision includes the retroactive impact of the federal income tax rate increase from 34 percent to 35 percent. The overall impact of the tax rate change was approximately $2 million and includes approximately $400,000 attributable to years prior to 1993. (See Note 9 to the Consolidated Financial Statements.) 4. SOFTWARE WRITE-OFF In 1993, the Company recorded a $3.3 million pre-tax charge to write-off certain deferred costs associated with a project to redesign customer account records, order flow and customer billing systems. (See Note 5 to the Consolidated Financial Statements.) 5. FIRST MORTGAGE BOND REFINANCING In 1992, the Company recorded an extraordinary, after-tax charge of $1.1 million relating to costs incurred for the early extinguishment of its Series H, 9 1/2% first mortgage bonds. The bonds were retired using internally generated cash and the private placement of $35 million of debt at a telephone subsidiary. (See Note 5 to the Consolidated Financial Statements.) ________________________________________________________________________________ TELECOMMUNICATION SERVICES The Telecommunication Services segment is comprised of the Company's long distance business, wireless operations (where the Company has sufficient ownership to report on a consolidated basis), and equipment sales. This segment is the fastest growing part of the Company, as evidenced by its increasing contribution to our overall financial results. In 1994, revenues from Telecommunication Services comprised 38 percent of total revenue, up from 29 percent only two years ago. Similarly, operating income from this business segment accounted for 18 percent of the Company's total, as compared with 13 percent in 1992. _________________________________________ 22 Financial Review Frontier Corporation Telecommunication Services revenues include long distance usage and fixed monthly fee revenues, wireless access and usage charges, and sales of telecommunication systems and services. Principal expenses associated with these revenues consist of costs for leasing of transmission facilities and the payment of local access charges for our long distance business, charges for interconnection of cellular and paging operations with telephone companies, costs of cellular telephones and paging units sold, cost of telecommunications equipment sold, and labor. Revenues and expenses derived from our majority-owned cellular operations are reflected in the consolidated financial statements. Our minority interests, including the 50/50 joint venture with NYNEX in upstate New York that was formed in July 1994, are accounted for using the equity method. This method of accounting results in the Company's proportionate share of earnings (losses) being reflected in a single line item below operating income on the Company's Consolidated Statement of Income, entitled "Equity earnings (loss) from unconsolidated wireless interests." Prior to the formation of the wireless joint venture with NYNEX in July 1994, the revenues and expenses of our wireless operations in upstate New York had been consolidated. (See Note 3 to the Consolidated Financial Statements for additional information concerning our wireless operations.) Telecommunication Services sales were $375.8 million in 1994, up $63.2 million, or 20.2 percent, over 1993. This compares to an increase of $75.8 million, or 32.0 percent, the previous year. This growth in both years was driven by our long distance operation, Frontier Communications International, (formerly RCI Long Distance). Revenues in our Network Systems and Services line of business, which includes long distance, rose 24.2 percent in 1994 due to sales of services to additional customers, greater usage, growth in consumer services, price changes and the impact of the acquisitions of Budget Call Long Distance in July 1993 and Frontier Communications of the Mid Atlantic, Inc. (formerly Mid Atlantic Telecom, Inc.) in September 1993. Another factor for the growth in the long distance operation is our Visions Long Distance subsidiary, which resells services from Frontier Communications International to customers of a number of our local telephone subsidiaries under the brand name used by the local telephone company. Revenues from our Wireless Communications line of business decreased $5.0 million, or 16.8 percent, in 1994 because of the change in the method of accounting for the upstate New York cellular operation in July 1994. Through the first six months of 1994, the period prior to the adoption of equity accounting for the Upstate Cellular partnership, the Company's wireless revenues had increased 68.5 percent to $20.9 million from $12.4 million in 1993. In 1993, wireless revenues rose $8.5 million, or 40.1 percent, over 1992. Despite the change in the manner of reporting wireless operations, we are very committed to this business as indicated by the growth of our proportionate share of wireless revenues for properties we manage, which rose 30.2 percent in 1994, reaching $35.6 million. Although prices were relatively stable for cellular service in 1994, new customers generated a lower average volume of calls resulting in a 7.2 percent decrease in average revenue per customer. This is consistent with industry trends. The 40.1 percent increase in Wireless Communications revenues in 1993 over 1992 was a result of the combination of the acquisition of the Utica-Rome partnership in April 1993, price increases and a growing customer base. Costs and expenses for Telecommunication Services in 1994 totaled $335.8 million, reflecting an increase of 19.1 percent over 1993. The increase for 1993 versus 1992 was 31.9 percent. The increases in both years are primarily due to the increased volume of long distance traffic carried by the Company and the associated costs to originate and terminate the traffic on local telephone company facilities, in addition to the impact of acquisitions completed during 1993. Marketing and selling expenses have also risen in line with sales. As a percentage of sales, long distance costs of access continue to decrease as we improve the efficiency of our network and as the charges from local telephone companies and other access providers continue to decline. The increase in 1994 expenses was partially offset by the change in the method of reporting cellular results for the upstate New York joint venture. Operating margins for Telecommunication Services improved to 10.6 percent in 1994, following a margin of 9.8 percent in both 1992 and 1993. The gain in 1994 results is driven by better long distance margins which rose to 10.4 percent in 1994. Wireless operating margins were adversely affected by the accounting change for cellular properties in New York. ________________________________________________________________________________ TELEPHONE OPERATIONS Telephone Operations produced the majority of the Company's overall revenues and income in 1994. This segment, which is comprised of our local exchange telephone companies, continues to be very important to the Company. In addition to providing strong cash and overall financial returns, the local companies serve a large customer base that represents service integration sales opportunities. For several years the Company complemented the internal growth of telephone revenues with acquisitions in order to diversify its regulatory risks and increase the size of its customer base. The Company has further refined this strategy by disposing of certain telephone operating subsidiaries that no longer fit the Company's overall expansion plans. Both the sale of Minot Telephone in North Dakota in May 1994 and the pending divestiture of Ontonagon _________________________________________ Financial Review Frontier Corporation 23 Telephone in Michigan are results of the limited opportunity to expand the Company's presence in the respective geographic areas. The Company remains committed to the local telephone business and will consider additional acquisitions of local telephone properties if they are consistent with the Company's overall growth strategy. In 1994, Telephone Operations generated 62 percent of total revenues and 82 percent of operating income for the total company. Comparatively, in 1992, Telephone Operations generated 71 percent of total revenues and 87 percent of operating income. Revenues for this segment are derived from local telephone service and access fees from long distance companies, directory advertising, billing services and other services such as sales of telephone equipment and voice mail. As a result of recent regulatory reforms, traditional rate of return regulation is no longer applicable to much of our telephone revenues. Increasingly, a more flexible form of regulation called price, or price cap, regulation is replacing rate of return regulation, focusing on price levels as opposed to earnings levels. Telephone Operations expenses are mainly related to the development and maintenance of the local exchange networks. Additional expenses include the costs associated with customer service and billing. Telephone Operations revenues increased $15.8 million to $609.7 million in 1994, representing an increase of 2.7 percent over 1993. For 1993 versus 1992, revenues increased 4.7 percent to $593.9 million. Revenue growth resulted from increases in access lines, higher feature revenue, and rate increases at our regional telephone companies, offset partially by the sale of Minot Telephone in North Dakota which was completed in May 1994. Access line growth was 3.0 percent in 1994 and 2.3 percent in 1993, after adjusting for acquisitions and divestitures. The average revenue per employee for Telephone Operations in 1994 was $193,181, an increase of 12 percent over the prior year. Growth in toll revenues, primarily in network access service which represents fees charged to long distance companies for the use of our network, also contributed to the segment's revenue increase. Minutes of use related to long distance traffic increased 9.5 percent in 1994 and 7.7 percent in 1993. In general, prices being charged to long distance companies for access service usage have declined slightly over the past two years in order to address the need of our local telephone operating companies to remain competitive in their respective markets. We expect that this price decline will continue as competition increases. Telephone Operations revenues were reduced by $8.2 million in 1994 when compared with 1993 as a result of the divestitures made during the past two years. During 1994 and 1993, we continued to gain increased market penetration of enhanced services such as custom calling features and advanced number identification products like Caller ID. Revenue growth was also positively impacted in both years by rate increases at our regional telephone companies (see Regulatory Proceedings caption). Regulatory revenue reductions at our Rochester, New York operating company partially offset these increases. Costs and expenses for Telephone Operations decreased .7 percent in 1994 and increased 3.5 percent in 1993. The divestitures in 1993 and 1994 accounted for a reduction in expenses of $5.9 million in 1994. After adjusting for the impacts from divestitures and the $3.3 million software write-off in 1993, costs and expenses were flat in 1994 after increasing 2.7 percent between 1993 and 1992. In 1994, the Company continued to achieve benefits from redesigning work processes and combining administrative operations throughout the Telephone Operations segment. In addition, an early retirement program in March 1994 and lower employee benefits costs helped to contain expenses. Aside from the one- time software write-off, the primary reasons for expense increases in 1993 were higher wages and benefits, increased severance and other expenses associated with streamlining operations to arrive at a reduced cost structure, and an increase in right-to-use fees associated with network software upgrades. Operating margins for Telephone Operations were 30.1 percent in 1994, 28.2 percent in 1993 (after adjusting for the software write-off) and 26.8 percent in 1992. The composite depreciation rate for this segment was 6.4 percent in 1994, compared with 6.2 percent in 1993 and 6.4 percent in 1992. Through its interaction with regulatory authorities, the Company continues to pursue better alignment of depreciation rates with the economic lives of depreciable property. A common measure of the efficiency for telephone companies is the number of employees per 10,000 access lines. We continue to make efficiency improvements as evidenced by the decrease in this metric from 43 in 1992 and 38 in 1993, to 34 in 1994, near the best in our industry. ________________________________________________________________________________ OTHER INCOME STATEMENT ITEMS INTEREST EXPENSE Interest expense decreased 6.4 percent in 1994 and 7.0 percent in 1993 due to lower levels of debt outstanding throughout the year. In February 1994, we retired $9.4 million of debt at our regional telephone subsidiaries. In December 1994, as a part of our Open Market Plan implementation, we issued $120 million of debt and repurchased $30 million of outstanding debentures. These December transactions did not have a significant impact on 1994's interest expense. During 1993, we recalled a total of $115.4 million of debt. GAIN ON SALE OF ASSETS The gain on sales of assets in 1994 amounted to $10.1 million, a $5.6 million increase when compared to 1993. The 1994 amount resulted mainly from the sale _________________________________________ 24 Financial Review Frontier Corporation of our only telephone property in North Dakota in May 1994. In 1993, we recognized gains on sales of our only telephone property in Kansas, S&A Telephone Company, and a portion of our minority investment in a Canadian long distance company. EQUITY EARNINGS (lOSS) FROM UNCONSOLIDATED WIRELESS INTERESTS Equity earnings from the Company's interests in wireless partnerships in 1994 were $3.2 million, an increase of $1.9 million over 1993. This increase was the result of the change in accounting related to the formation of our 50/50 joint venture in July 1994 with NYNEX Corporation in order to operate a unified cellular network in upstate New York. Financial results for the joint venture have been reported on the equity method of accounting, reflecting our proportionate share of the joint venture's earnings. Previously, the Company's revenues and expenses associated with its Rochester and Utica-Rome cellular partnerships in New York State had been fully consolidated. OTHER INCOME (EXPENSE), NET In 1994, other income (expense), on a net basis, improved $2.3 million, or 10.1 percent, over 1993. This improvement is primarily related to higher interest income associated with increased cash balances, offset in part by higher business development and strategic planning activities and costs, and administrative expenses associated with the Company's restructuring. In 1993, net other expenses were $22.5 million, an increase of $8.8 million over 1992's net other expenses. This was due to administrative expenses associated with the Company's reorganization petition with the New York State Public Service Commission, debt refinancing expenses, and acquisition costs. INCOME TAXES The effective federal tax rate in 1994 was 34.4 percent, compared to 35.4 percent in 1993 and 34.2 percent in 1992. (See Note 9 to the Consolidated Financial Statements.) ________________________________________________________________________________ FINANCIAL CONDITION Management's overall objective is to maximize shareowner value. While increasing net income is an important component of the process, management believes that the primary source of value over the long term is cash generation over and above investment requirements. Key management decisions are made based on the value added to our shareowners' investment. Corporate performance, strategies, capital projects and acquisitions are evaluated and measured using cash flow analysis and investments are expected to provide a return that exceeds the risk-adjusted cost of capital of the Company, or specific business unit, as appropriate. There are a number of key financial metrics that can be used to monitor management's performance. While several of these metrics provide information on the Company's financial condition at a specific time, others, such as shareowner return, are somewhat dependent on the overall financial markets and are often more useful when viewed over an extended period of time.
KEY FINANCIAL DATA - ---------------------------------------------------------------------- ($'s in millions, except per share data) 1994 1993 1992 - ---------------------------------------------------------------------- Total debt $ 583 $ 497 $ 591 Total capital $1,406 $1,172 $1,213 Debt ratio 41.5% 42.4% 48.8% Operating margin 22.7% 21.5% 21.8% Pre-tax interest coverage 4.7x 3.9x 3.2x Capital expenditures $ 89 $ 106 $ 124 Dividends declared per share $ .815 $ .795 $ .775 Dividends paid per share $ .810 $ .790 $ .770 Dividend yield 3.9% 3.6% 4.4% Dividend payout ratio 57.9% 65.3% 75.1% Total shareowner return (2.8%) 31.1% 15.7% Year-end stock price $21.13 $22.57 $17.82 - ----------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES Cash flows from operations amounted to $212.5 million in 1994, a decrease of $16.2 million from 1993. In 1993, cash from operations was $228.6 million, an increase of $12.4 million over 1992. In 1994, higher net income and depreciation and amortization was offset in part by increased working capital requirements for our rapidly growing businesses. Cash from operations was negatively impacted by taxes associated with the gain on the sale of the Minot property in North Dakota in May 1994. The cash proceeds from this sale appears in the "Cash Flows from Investing Activities" section of the Consolidated Statement of Cash Flows. In 1993, the increase was the result of increases in net income, depreciation and amortization coupled with a small impact from an increase in accounts payable caused by the timing of purchases associated with the Company's capital expenditures from 1992. CASH FLOWS FROM INVESTING ACTIVITIES Cash used for investing activities decreased $58.6 million in 1994, from $109.1 million to $50.5 million. In 1993, cash used for investing activities decreased $12.4 million versus 1992. Capital expenditures continue to be the single- largest recurring use of the Company's funds. In 1994, capital spending, net of salvage, amounted to $87.0 million, a decrease of $15.1 million from 1993. An increase in the Company's liquid investments that have maturities of greater than three months but less than one year also resulted in a use of funds in 1994. Offsetting these cash outflows in 1994 were the proceeds from the sale of our telephone property in North Dakota. The decline in 1993's investing activities was caused by lower capital spending offset in part by an increased usage of cash related to acquisitions. _________________________________________ Financial Review Frontier Corporation 25 CASH FLOWS FROM FINANCING ACTIVITIES Cash flows from financing activities amounted to an inflow of $123.9 million in 1994, compared with outflows of $157.6 million in 1993 and $70.0 million in 1992. The increase for 1994 resulted from $106 million in proceeds from the Company's equity offering in February 1994 and the net increase of $90 million of debt in December 1994 as a part of the Company's reorganization, offset in part by the payment of dividends to shareowners and the retirement of certain high cost debt earlier in the year. The decreases for 1993 and 1992 resulted from the retirement of long-term debt and the payment of dividends. LIQUIDITY AND CAPITAL RESOURCES The Company must generate adequate amounts of cash to meet both short-term and long-term needs. The Company's liquidity is a function of our capital spending program, debt service requirements, internal generation of funds and access to securities markets. Management has emphasized the importance of cash throughout the organization by providing training and establishing cash measures that are critical in the determination of performance-based compensation. The Company closely monitors the components of its working capital in order to maximize cash flows. However, the timing of purchases for capital additions has a significant impact on the balance of accounts payable until refinanced or liquidated using internally generated funds. During 1994, we entered the capital markets on several occasions to finance the growth of our businesses (including acquisitions and new product development), as well as to retire certain high cost debt. In February 1994, new shares of common stock were issued that netted proceeds of $106 million. In August 1994, $125 million in committed credit facilities were negotiated with five commercial banks to provide the Company with sources of funds for the backup of its short-term commercial paper program, as well as for general corporate purposes. At year end, the Company had not borrowed against these facilities. In December 1994, a $160 million revolving credit facility with seven banks was established in order to provide debt for the Rochester, New York operating company as required under the Open Market Plan Agreement with the New York State Public Service Commission. At year end, $120 million was borrowed under this facility. A portion of the proceeds were used to retire other more costly long-term debt. At a special shareowners' meeting in December 1994, shareowners approved an increase in the number of authorized shares of common stock from 100 million shares to 300 million shares. Additionally, shareowners gave their approval to authorize 4 million shares of a new class of preferred stock which have been designated as Class A Preferred Stock. The Company proposed these changes so as to provide greater flexibility to raise capital and to structure acquisition transactions. At December 31, 1994, aggregate debt maturities amounted to $4.5 million for 1995, $4.7 million for 1996 and $4.5 million for 1997. During 1994 the Company met individually with its debt rating agencies to review the Company's financial performance. In May 1994, Duff and Phelps upgraded the Company's senior unsecured bond rating from A-to A. In January 1995, Standard and Poor's upgraded its rating on the Company's senior unsecured debt from A to A+, Moody's upgraded from A3 to A2 and Fitch upgraded from A to A+. The financing requirements associated with the Company's network modernization programs have remained relatively stable. We have in place a switching network that is essentially 100 percent digital, while a significant amount of fiber has been installed throughout our telephone and long distance operating territories. Total gross expenditures for property, plant and equipment in 1995 are anticipated to be $125 million. The total capital program represents an increase of $36 million over 1994. The increase is largely driven by capital requirements associated with the growth of our long distance and wireless operations and the integration of our pending long distance acquisitions. As discussed previously, the Company had three acquisitions pending at the end of 1994, each of which will play an important strategic role in the growth of the Company. Approximately 9.6 million new shares of common stock will be used for the acquisition of American Sharecom, Inc. (ASI) and the Minnesota Cellular properties which are anticipated to close early in 1995. As a result of the transaction with ASI, the two largest shareowners of ASI (Steven C. Simon, president, and James J. Weinert, vice president) are projected to become the largest individual shareowners of Frontier Corporation. Once the deal is consummated, they will hold a combined 10.6 percent of the outstanding common shares of the Company. For the pending acquisition of WCT Communications, Inc. in California, we plan to expend approximately $79.8 million in cash. It is expected that acquisitions will continue to be a significant factor in the growth of the Company, as will building alliances through partnering or forming joint ventures. Any investment opportunity will have the ultimate goal of improving shareowner value. In December 1994, the Board of Directors increased the quarterly dividend paid on common stock to 20.75 cents per share, payable February 1, 1995, to shareowners of record on January 13, 1995. This 2.5 percent increase raises the annualized common stock dividend to $0.83 per share. This represents the 35th consecutive annual increase in our dividend. ________________________________________________________________________________ REGULATORY MATTERS OPEN MARKET PLAN At its public meeting on October 13, 1994, the New York State Public Service Commission (PSC) unanimously approved the Company's Open Market Plan and Corporate Restructuring (Open Market Plan) and subsequently issued a written Order in November 1994. As previously discussed in more detail in the _________________________________________ 26 Financial Review Frontier Corporation section entitled "Corporate Name Change and Restructuring," the Open Market Plan was approved by shareowners in December 1994 and became effective on January 1, 1995. During the seven year period of the Open Market Plan Agreement, rate reductions of $21 million will be implemented for Rochester area consumers and rates charged for basic residential and business telephone service may not be increased. Although these rates have been designed to permit Rochester Telephone Corp. to recover its costs and to earn a reasonable rate of return, there is no assurance that this will actually happen. Also, under the Open Market Plan Agreement, Rochester Telephone Corp. will no longer be subject to rate of return regulation and thus the company is able to retain any expense savings or any additional revenue from the sale of increased services or usage. In addition, a total of $17 million will be credited to the depreciation reserve over the seven year life of the plan. Although Rochester Telephone Corp. is a wholly-owned subsidiary of Frontier Corporation, Frontier's ability to control the management and operations of Rochester Telephone Corp. are partially restricted by various provisions of the Open Market Plan. The Plan contains certain financial covenants that are intended to insure that Rochester Telephone Corp. will not lack the financial strength to provide quality service, including covenants relating to dividends that may be paid to the parent company and the level of debt that may be maintained at the subsidiary company. During its seven year duration, the Open Market Plan Agreement resolves certain financial questions that are linked to the royalty proceeding, a contested proceeding that has been in litigation for several years. In 1984, the PSC initiated a proceeding to investigate whether or not the Company's unregulated subsidiaries should pay a royalty to the Rochester, New York operating company for alleged intangible benefits received from the use of the Rochester Telephone name and reputation. The proceeding was reopened in 1990. In July 1993, the PSC imposed a royalty in the amount of two percent of the total capitalization of Frontier Corporation's unregulated operations. Based upon an initial interpretation of the PSC's Order, the Company estimated that the effect of the Order was in the range of $2 million per year. The Company vigorously disagreed with the PSC's determination and is pursuing judicial review of the PSC's Opinion and Order. The Appellate Division, on June 30, 1994, confirmed the PSC's Order and the Company appealed to the New York State Court of Appeals. On December 8, 1994, the Court of Appeals accepted the Company's appeal. The case is now being briefed before the Court of Appeals. The Open Market Plan temporarily resolves the royalty issue in that the PSC has agreed that the royalty will not be imposed by the PSC against the Company or Rochester Telephone during the seven year period of the Plan, subject to limited exceptions. However, the PSC is not precluded from seeking any royalties pursuant to the Royalty Order, on a prospective basis only, as it may be modified as a result of judicial appeal, subsequent to the expiration of the Open Market Plan. Under the Open Market Plan, the Company is permitted to continue its litigation challenging the Royalty Order, and it intends to pursue the case to conclusion. INCENTIVE REGULATION Prior to the Open Market Plan Agreement which became effective in January 1995, an incentive regulation agreement had been in effect for the Rochester, New York operating company. As part of that agreement, Rochester Telephone Corp. agreed to share with ratepayers 50 percent of earnings above a threshold rate of return. In addition, the company's revenue requirement was reduced by $5 million in 1993 and $9.5 million in 1994. The 1993 sharing amount was refunded through customer billing credits. The 1994 revenue requirement reduction, plus interest, was credited to the company's depreciation reserve to alleviate a reserve deficiency rather than refunding cash to ratepayers. There was no 1994 sharing amount. RATE AWARDS In 1994, two of the Company's telephone subsidiaries completed rate increase proceedings with state regulatory agencies that were initiated in 1993. In February 1994, the Iowa State Utilities Board approved a $2.9 million annual revenue increase for Frontier Communications of Iowa (formerly Vista Telephone Company of Iowa), effective retroactively to November 1993. In April 1994, Frontier Communications of Minnesota (formerly Vista Telephone Company of Minnesota) was granted the authority by the Minnesota Public Service Commission to increase annual revenues by $4.4 million. Frontier Communications of Minnesota had previously increased rates temporarily in May 1993. REGULATORY ACCOUNTING As discussed in Note 1 of the Notes to the Consolidated Financial Statements, the Company's regulated telephone operations comply with the provisions of Financial Accounting Standards Board Statement No. 71 (FAS 71), "Accounting for the Effects of Certain Types of Regulation." FAS 71 requires regulated entities to apply special accounting treatment to certain revenues and expenses that are recoverable through rates (prices) to be set by regulators in future periods. The applicability of FAS 71 is appropriate only if the Company expects that rates will be designed to recover costs from customers. The Company periodically reviews the criteria that would result in the discontinuance of FAS 71, including changes in the level of competition or a significant change in the manner in which rates are set by regulators. At this time, the Company believes that FAS 71 continues to be appropriate. However, if in the future it determines that FAS 71 is no longer applicable, the resulting impact to the Company's Statement of Income could be a material, extraordinary non-cash charge to earnings. __________________________________________ Financial Review Frontier Corporations 27 ________________________________________________________________________________ OTHER ITEMS The information presented in this Management's Discussion of Results of Operations and Analysis of Financial Condition should be read in conjunction with the Company's financial statements and accompanying Notes for the three years ended December 31, 1994. REPORT OF INDEPENDENT ACCOUNTANTS To the Shareowners of Frontier Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareowners' equity and cash flows present fairly, in all material respects, the financial position of Frontier Corporation (formerly Rochester Telephone Corporation) and its subsidiaries at December 31, 1994, 1993 and 1992, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 12 to the financial statements, during the first quarter of 1994 the Company adopted the provisions of Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." As discussed in Note 11 to the financial statements, during the first quarter of 1993 the Company adopted the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Post-retirement Benefits Other than Pensions." /s/ Price Waterhouse LLP January 16, 1995 1900 Chase Square Rochester, NY 14604 ________________________________________________________________________________ REPORT OF MANAGEMENT The integrity and objectivity of the financial information presented in this Annual Report is the responsibility of the management of Frontier Corporation. The financial statements report on management's accountability for corporate operations and assets. To this end management maintains a highly developed system of internal controls and procedures designed to provide reasonable assurance that the Company's assets are protected and that all transactions are accounted for in conformity with generally accepted accounting principles. The system includes documented policies and guidelines, augmented by a comprehensive program of internal and independent audits conducted to monitor overall accuracy of financial information and compliance with established procedures. Price Waterhouse LLP, an independent accounting firm, provides an objective assessment of the degree to which management meets its responsibility for financial reporting. They regularly evaluate the system of internal accounting controls and perform such tests and other procedures they consider necessary to express an opinion that the financial statements present fairly the financial position of the Company. /s/Louis L. Massaro Louis L. Massaro Corporate Vice President--Finance _______________________________________________________________________________ REPORT OF AUDIT COMMITTEE CHAIR The Audit Committee of the Board of Directors is comprised of three independent directors who are not officers or employees of the corporation. The committee oversees the Company's financial reporting process on behalf of the Board of Directors. The Audit Committee recommends to the Board of Directors the independent accountants for election by the shareowners. The committee also meets regularly with management and the independent accountants and internal auditors to review accounting, auditing, internal accounting controls, pending litigation and financial reporting matters. As a matter of policy, the internal auditors and independent accountants have unrestricted access to the Audit Committee. /s/Douglas H. McCorkindale Douglas H. McCorkindale Chair, Audit Committee _________________________________________ 28 Financial Review Frontier Corporation BUSINESS SEGMENT INFORMATION
- ----------------------------------------------------------------------------------------------- In thousands of dollars Years ended December 31, 1994 1993 1992 - ----------------------------------------------------------------------------------------------- TELEPHONE OPERATIONS REVENUES Local service $ 240,687 $ 231,676 $ 214,181 Network access service 230,938 220,196 203,768 Long distance network service 25,619 26,978 29,210 Directory advertising, billing services, and other 118,221 120,459 123,112 Less: Uncollectibles 5,787 5,438 2,999 - ----------------------------------------------------------------------------------------------- TOTAL REVENUES $ 609,678 $ 593,871 $ 567,272 =============================================================================================== OPERATING INCOME $ 183,259 $ 164,271 $ 152,032 =============================================================================================== DEPRECIATION $ 101,897 $ 99,995 $ 100,692 =============================================================================================== CONSTRUCTION $ 60,711 $ 89,823 $ 114,930 =============================================================================================== IDENTIFIABLE ASSETS(1) $1,655,379 $1,398,019 $1,416,630 =============================================================================================== TELECOMMUNICATION SERVICES SALES Network Systems and Services: Non-Affiliate $ 350,769 $ 282,747 $ 215,633 Affiliate 8,032 6,036 1,511 Wireless Communications 24,623 29,586 21,113 Eliminations (7,610) (5,790) (1,480) - ----------------------------------------------------------------------------------------------- TOTAL SALES $ 375,814 $ 312,579 $ 236,777 =============================================================================================== OPERATING INCOME Network Systems and Services $ 38,624 $ 27,344 $ 18,918 Wireless Communications 1,307 3,256 4,110 Eliminations 74 74 74 - ----------------------------------------------------------------------------------------------- TOTAL OPERATING INCOME $ 40,005 $ 30,674 $ 23,102 =============================================================================================== DEPRECIATION $ 15,427 $ 14,816 $ 13,335 =============================================================================================== CONSTRUCTION $ 27,904 $ 15,677 $ 8,941 =============================================================================================== IDENTIFIABLE ASSETS(1) $ 310,760 $ 281,701 $ 191,989 ===============================================================================================
(1) Includes intercompany accounts that are eliminated in consolidation of $205,188, $169,519, and $94,722 in 1994, 1993 and 1992, respectively. See accompanying Notes to Consolidated Financial Statements. _________________________________________ Financial Review Frontier Corporation 29 CONSOLIDATED STATEMENT OF INCOME
- -------------------------------------------------------------------------------------------------------------------- In thousands of dollars, except per share data Years ended December 31, 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------- REVENUES AND SALES Telephone Operations $609,678 $593,871 $567,272 Telecommunication Services 375,814 312,579 236,777 - -------------------------------------------------------------------------------------------------------------------- Total Revenues and Sales 985,492 906,450 804,049 - -------------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES Operating expenses 579,326 525,488 448,422 Cost of goods sold 18,850 20,819 21,634 Depreciation 117,324 114,811 114,027 Taxes other than income taxes 46,728 47,087 44,832 Software write-off -- 3,300 -- - -------------------------------------------------------------------------------------------------------------------- Total Costs and Expenses 762,228 711,505 628,915 - -------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 223,264 194,945 175,134 Interest expense 43,594 46,550 50,066 Other income and expense: Allowance for funds used during construction 1,096 1,330 1,309 Gain on sale of assets 10,063 4,449 Equity earnings (loss) from unconsolidated wireless interests 3,185 1,296 (661) Other income (expense), net (20,237) (22,518) (13,686) - -------------------------------------------------------------------------------------------------------------------- INCOME BEFORE TAXES, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 173,777 132,952 112,030 Income taxes 63,843 50,232 41,527 - -------------------------------------------------------------------------------------------------------------------- INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 109,934 82,720 70,503 Extraordinary item, net of income taxes -- -- (1,072) Cumulative effect of change in accounting principle for postemployment benefits (7,197) -- -- - -------------------------------------------------------------------------------------------------------------------- CONSOLIDATED NET INCOME 102,737 82,720 69,431 Dividends on preferred stock 1,186 1,187 1,188 - -------------------------------------------------------------------------------------------------------------------- INCOME APPLICABLE TO COMMON STOCK $101,551 $ 81,533 $ 68,243 ====================================================================================+=============================== EARNINGS PER COMMON SHARE Primary: Income before extraordinary item and cumulative effect of change in accounting principle $ 1.50 $ 1.21 $ 1.04 Extraordinary item -- -- (.02) Cumulative effect of change in accounting principle (.10) -- -- - -------------------------------------------------------------------------------------------------------------------- Earnings Per Common Share--Primary $ 1.40 $ 1.21 $ 1.02 ====================================================================================+=============================== Fully Diluted: Income before extraordinary item and cumulative effect of change in accounting principle $ 1.50 $ 1.20 $ 1.04 Extraordinary item -- -- (.02) Cumulative effect of change in accounting principle (.10) -- -- - -------------------------------------------------------------------------------------------------------------------- Earnings Per Common Share--Fully Diluted $ 1.40 $ 1.20 $ 1.02 ====================================================================================+===============================
See accompanying Notes to Consolidated Financial Statements. _________________________________________ 30 Financial Review Frontier Corporation CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------------------- In thousands of dollars December 31, 1994 1993 1992 - -------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 317,137 $ 31,284 $ 69,347 Short-term investments 9,047 349 634 Accounts receivable 168,542 157,320 133,973 Material and supplies 8,585 11,208 15,892 Prepayments and other 25,196 21,583 21,821 - -------------------------------------------------------------------------------------------- Total Current Assets 528,507 221,744 241,667 - -------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Telephone plant in service 1,554,856 1,561,032 1,577,985 Telephone plant under construction 36,130 33,048 36,619 - -------------------------------------------------------------------------------------------- 1,590,986 1,594,080 1,614,604 Less-Accumulated depreciation 713,869 652,578 657,682 - -------------------------------------------------------------------------------------------- Net Telephone Plant 877,117 941,502 956,922 - -------------------------------------------------------------------------------------------- Telecommunications property 168,691 153,954 140,476 Less-Accumulated depreciation 75,944 68,265 57,723 - -------------------------------------------------------------------------------------------- Net Telecommunications Property 92,747 85,689 82,753 - -------------------------------------------------------------------------------------------- GOODWILL 139,572 166,283 135,964 - -------------------------------------------------------------------------------------------- DEFERRED AND OTHER ASSETS 123,008 94,983 96,591 - -------------------------------------------------------------------------------------------- TOTAL ASSETS $1,760,951 $1,510,201 $1,513,897 ============================================================================================ LIABILITIES AND SHAREOWNERS' EQUITY CURRENT LIABILITIES Accounts payable $ 142,968 $ 147,152 $ 125,518 Notes payable 106 303 6,194 Advance billings 12,719 12,572 12,546 Dividends payable 15,487 14,058 13,462 Long-term debt due within one year 4,525 3,962 59,495 Taxes accrued 13,495 14,729 11,480 Interest accrued 12,305 13,583 16,434 - -------------------------------------------------------------------------------------------- Total Current Liabilities 201,605 206,359 245,129 - -------------------------------------------------------------------------------------------- LONG-TERM DEBT 578,600 492,555 525,597 - -------------------------------------------------------------------------------------------- DEFERRED INCOME TAXES 111,369 116,967 118,876 - -------------------------------------------------------------------------------------------- DEFERRED EMPLOYEE BENEFITS OBLIGATION 46,001 16,121 -- - -------------------------------------------------------------------------------------------- MINORITY INTERESTS 252 3,100 2,701 - -------------------------------------------------------------------------------------------- SHAREOWNERS' EQUITY Common stock 73,161 34,025 33,319 Capital in excess of par value 266,378 201,591 174,226 Retained earnings 460,808 418,889 391,256 - -------------------------------------------------------------------------------------------- 800,347 654,505 598,801 Less-Treasury stock, at cost -- 2,191 -- - -------------------------------------------------------------------------------------------- Common Shareowners' Equity 800,347 652,314 598,801 Preferred stock 22,777 22,785 22,793 - -------------------------------------------------------------------------------------------- Total Shareowners' Equity 823,124 675,099 621,594 - -------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $1,760,951 $1,510,201 $1,513,897 ============================================================================================
See accompanying Notes to Consolidated Financial Statements. _________________________________________ Financial Review Frontier Corporation 31 CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------ In thousands of dollars Years ended December 31, 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $102,737 $ 82,720 $ 69,431 - ------------------------------------------------------------------------------------------------------------------------ Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and amortization 136,460 132,723 121,554 Gain on sale of assets (10,063) (4,449) -- Equity (earnings) loss from unconsolidated wireless interests (3,185) (1,296) 661 Extraordinary item -- -- 1,564 Cumulative effect of change in accounting principle 11,072 -- -- Minority interests 511 399 183 Changes in operating assets and liabilities, exclusive of impacts of purchase acquisitions: (Increase) in accounts receivable (15,082) (12,644) (12,822) Decrease in material and supplies 1,824 4,728 3,253 Decrease in prepayments and other current assets 343 229 786 (Increase) in deferred and other assets (14,967) (2,423) (360) Increase in accounts payable 9,073 11,516 26,509 Increase in advance billings 188 26 72 Increase (decrease) in accrued interest and taxes (5,089) 1,498 (3,182) Increase in deferred employee benefits obligation 6,958 14,302 -- Increase (decrease) in deferred income taxes (8,325) 1,308 8,545 - ------------------------------------------------------------------------------------------------------------------------ Total Adjustments 109,718 145,917 146,763 - ------------------------------------------------------------------------------------------------------------------------ Net Cash Provided by Operating Activities 212,455 228,637 216,194 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property, plant and equipment (87,042) (102,156) (123,847) (Increase) decrease in investment securities (11,386) 8,610 2,980 Investment in cellular (3,939) (4,342) (665) Proceeds from asset sales 866 1,006 -- Investment in nonaffiliated entities (713) (1,161) -- Purchase of companies (4,355) (11,343) -- Proceeds from sale of company 55,689 -- -- Other investing activities 343 264 -- - -------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Investing Activities (50,537) (109,122) (121,532) - ------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in notes payable (197) (5,806) 184 Proceeds from long-term debt 120,485 35,500 980 Repayments of long-term debt (43,071) (130,063) (19,585) Dividends paid (59,388) (54,492) (51,582) (Purchase) issuance of treasury stock 2,302 (2,744) -- Issuance of common stock 103,812 35 -- Redemptions of preferred stock (8) (8) (10) - ------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 123,935 (157,578) (70,013) - ------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 285,853 (38,063) 24,649 Cash and Cash Equivalents at Beginning of Year 31,284 69,347 44,698 - ------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $317,137 $ 31,284 $ 69,347 =========================================================================================================================
See accompanying Notes to Consolidated Financial Statements. _________________________________________ 32 Financial Review Frontier Corporation CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
- ----------------------------------------------------------------------------------------- In thousands of dollars, except share data 1994 1993 1992 - ----------------------------------------------------------------------------------------- COMMON STOCK 300,000,000 shares authorized, par value $1.00 Balance, January 1 (shares issued 1994--34,024,532; 1993--33,318,943; 1992--33,323,165) $ 34,025 $ 33,319 $ 33,323 Equity offering (1994--2,549,087) 2,549 -- -- Stock split (1994--36,573,619 shares) 36,574 -- -- Retirement of treasury stock (1992--63 shares) -- -- -- Other subsidiary acquisitions (1993--697,623 shares; 1992--4,850 shares) -- 698 (5) Exercise of stock options (1994--13,595 shares; 1993--1,109 shares) 13 1 -- Conversion of: 4 3/4% Convertible debentures (1993--6,857 shares; 1992--691 shares) -- 7 1 - ----------------------------------------------------------------------------------------- Balance, December 31 (shares issued 1994--73,160,833; 1993--34,024,532; 1992--33,318,943) 73,161 34,025 33,319 - ----------------------------------------------------------------------------------------- CAPITAL IN EXCESS OF PAR VALUE Balance, January 1 201,591 174,226 174,358 Equity offering 101,565 -- -- Stock split (36,574) -- -- Stock issuance expenses (545) -- -- Issuance/retirement of treasury stock 111 -- (2) Other subsidiary acquisitions/divestitures -- 27,259 (137) Exercise of stock options 230 34 -- Conversion of: 4 3/4% Convertible debentures -- 72 7 - ----------------------------------------------------------------------------------------- Balance, December 31 266,378 201,591 174,226 - ----------------------------------------------------------------------------------------- RETAINED EARNINGS Balance, January 1 418,889 391,256 373,949 Net income 102,737 82,720 69,431 Dividends declared in cash: Preferred stock at required annual rates (1,186) (1,187) (1,188) Common stock (59,632) (53,900) (50,936) - ----------------------------------------------------------------------------------------- Balance, December 31 460,808 418,889 391,256 - ----------------------------------------------------------------------------------------- LESS-TREASURY STOCK, AT COST Balance, January 1 (1994--56,413; 1992--63) 2,191 -- 2 Common shares repurchased for acquisitions (1993--304,720) -- 12,572 -- Retirement of treasury stock (1992--63) -- -- (2) Common shares reissued for acquisitions/equity offering (1994--56,413; 1993--248,307) (2,191) (10,381) -- - ----------------------------------------------------------------------------------------- Balance, December 31 (1993--56,413 shares) -- 2,191 -- - ----------------------------------------------------------------------------------------- COMMON SHAREOWNERS' EQUITY 800,347 652,314 598,801 - ----------------------------------------------------------------------------------------- PREFERRED STOCK Balance, January 1 (shares outstanding 1994--227,848; 1993--227,928; 1992--228,025) 22,785 22,793 22,803 Redemptions (8) (8) (10) - ----------------------------------------------------------------------------------------- Balance, December 31 (shares outstanding 1994--227,768; 1993--227,848; 1992--227,928) 22,777 22,785 22,793 - ----------------------------------------------------------------------------------------- Total Shareowners' Equity $823,124 $675,099 $621,594 =========================================================================================
See accompanying Notes to Consolidated Financial Statements. _________________________________________________ Financial Review Frontier Corporation 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ________________________________________________________________________________ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of Frontier Corporation, formerly Rochester Telephone Corporation, and its affiliates (the Company). Intercompany transactions have been eliminated except for intercompany profit on regulated Company purchases (affiliate sales) from Telecommunication Services. In the opinion of management, prices charged by Telecommunication Services are comparable to prices the regulated companies would be required to pay other suppliers. BASIS OF ACCOUNTING The accounting policies of Frontier Corporation and its affiliates are in conformity with generally accepted accounting principles. In accordance with the provisions of Financial Accounting Standards Board Statement No. 71 (FAS 71), "Accounting for the Effects of Certain Types of Regulation," the Company conforms to the accounting principles as prescribed by federal and various state regulatory bodies, where applicable. The provisions of FAS 71 require, among other things, that regulated enterprises reflect rate actions of regulators in their financial statements, when appropriate. These rate actions can provide reasonable assurance of the existence of an asset, reduce or eliminate the value of an asset, or impose a liability on a regulated enterprise. MATERIAL AND SUPPLIES Material and supplies are stated at the lower of cost or market, based on weighted average unit cost. The caption "Cost of Goods Sold" relates to certain sales of Telecommunication Services equipment which amounted to $28.0 million, $29.5 million and $32.2 million in 1994, 1993, and 1992, respectively. TELEPHONE PLANT Additions to and replacements of telephone plant are capitalized at original cost, including the costs for benefits and supervision applicable to construction labor. The cost of depreciable property units retired, plus removal costs, less salvage is charged to accumulated depreciation. Replacements, renewals and betterments of units of property are capitalized. Replacement of items not considered units of property and all repairs and maintenance are charged to operating expense. TELECOMMUNICATION PROPERTY Property is recorded at cost. Improvements that significantly add to productive capacity or extend useful life are capitalized, while maintenance and repairs are expensed. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the accounts and the gain or loss, if any, is reflected in earnings for the period. DEPRECIATION Depreciation is computed on the straight-line method using estimated service lives of the various classes of plant. The range of service lives for property, plant and equipment is as follows: - ------------------------------------------------------ Furniture and fixtures 12 to 20 years Central office, switches and network equipment 10 to 20 years Local and toll service lines 27 to 35 years Station equipment 10 to 21 years Buildings and building improvements 5 to 35 years - ------------------------------------------------------
GOODWILL The excess of the cost of companies purchased over the net assets acquired is being amortized on a straight-line basis over 25 to 40 years. Accumulated amortization is $20.1 million, $15.6 million and $10.4 million at the end of 1994, 1993, and 1992, respectively. Management continually reviews the appropriateness of the carrying value of the excess acquisition cost of its subsidiaries and the related amortization periods. SERVICE PENSIONS AND BENEFITS The Company has contributory and noncontributory plans providing for service pensions and certain death benefits for substantially all employees. The plans also provide disability pensions and sickness, accident and death benefits (resulting from accidents occurring during employment) for all employees, which are paid and charged to current operating expense. The Company's provisions for service pensions and certain death benefits are remitted, at least annually, to the trustees. In addition to providing pension benefits, the Company provides health care, life insurance, and certain other retirement benefits for many of its employees. FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and cash equivalents are valued at their carrying amounts, which are reasonable estimates of fair value. The fair value of long-term debt is estimated using rates currently available to the Company for debt with similar terms and maturities. The fair value of all other financial instruments approximates cost as stated. _________________________________________________ 34 Financial Review Frontier Corporation FEDERAL INCOME TAXES The Company files a consolidated federal income tax return. Tax deferrals resulting from the elimination of gross profit on intercompany sales in the consolidated tax return are amortized to offset income taxes to be paid over the cost recovery periods of telephone plant. Deferred income taxes are provided by the unregulated operations on items recognized for financial reporting purposes in different periods than are recognized for income tax purposes. Deferred income taxes are recorded by regulated operations in compliance with the normalization provisions of current tax law and regulatory orders. The major temporary differences reflected in the deferred tax liability are depreciation and investment tax credits. Excess deferred taxes applicable to Telephone Operations are amortized in compliance with the normalization provisions of current tax law and regulatory orders. This amortization is normalized over the same time period as the related asset generating the deferral. Deferred income taxes have not been provided by Telephone Operations for the flow-through of temporary differences where the regulatory agencies permit only income taxes actually paid to be recognized. At December 31, 1994, the cumulative balance of tax reductions not previously offset by provisions for deferred federal income taxes amounted to $42 million. Similarly, the cumulative balance of tax reductions not previously offset by provision for deferred state income taxes amounted to $19 million at December 31, 1994. A deferred tax liability and a long-term deferred asset have been recorded to reflect the impact applicable to these cumulative reductions and the future revenue to be recovered when these taxes become payable. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION The Company includes in its telephone plant accounts an imputed cost of debt and equity funds used for the construction of telephone plant and credits such amounts to other income. The rates used in determining the allowance for funds used during construction are based on the assumption that construction funds are provided from sources of capital in the same proportion as each telephone company's capital structure. The rates used to calculate the allowance for funds used during construction for companies in Telephone Operations during 1994 ranged from 6 percent to 10.68 percent. EARNINGS PER SHARE Primary earnings applicable to each share of common stock and common stock equivalent are based on the weighted average number of shares outstanding during each year. The average number of common shares outstanding for each period was: 72,575,206 in 1994, 67,453,438 in 1993 and 66,637,904 in 1992. Computations of earnings per share on a fully diluted basis are determined by increasing the average outstanding common shares for contingent issuances that would reduce earnings per share. In computing the per share effect of the assumed conversions, convertible debenture interest (net of income taxes) has been added to income applicable to common stock. The number of common shares used to compute earnings per share on a fully diluted basis for each period was: 72,821,707 in 1994, 67,972,016 in 1993 and 67,165,512 in 1992. CASH FLOWS For purposes of the Statement of Cash Flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Actual interest paid was $44.9 million in 1994, $49.4 million in 1993 and $48.4 million in 1992. Actual income taxes paid were $76.0 million in 1994, $46.6 million in 1993 and $37.2 million in 1992. STOCK SPLIT In November 1993, the Board of Directors approved a 2-for-1 split of the common stock of the Company effected in the form of a 100 percent stock dividend with no change in the $1.00 per share par value. The New York State Public Service Commission (PSC) approved the stock split in March 1994 and distribution of certificates began on April 29, 1994. Historical share and per share data have been retroactively adjusted to reflect the split where appropriate. ________________________________________________________________________________ 2. ACQUISITIONS In April 1993, the Company acquired 70 percent ownership of the Utica-Rome Cellular Partnership using 702,737 shares of original issue common stock (prior to the April 1994 stock split). The transaction was accounted for as a purchase acquisition. In addition, the Telecommunication Services group acquired Budget Call Long Distance, Inc. in June 1993 for $7.5 million in cash and acquired Frontier Communications of the Mid Atlantic, Inc. (formerly Mid Atlantic Telecom, Inc.) in September 1993 using 143,587 shares of treasury stock (prior to the April 1994 stock split). Both transactions were accounted for as purchase acquisitions. In 1992, the Company acquired Frontier Communications of Georgia (formerly Statesboro Telephone Company) and accounted for the acquisition as a pooling of interests. Revenues and net income for the period January 1, 1992 to the acquisition date for Frontier Communications of Georgia were $6.1 million and $1.2 million, respectively. A total of 1.5 million shares of common stock (prior to the April 1994 stock split) were exchanged for all of the outstanding stock of Frontier Communications of Georgia. _________________________________________________ Financial Review Frontier Corporation 35 _______________________________________________________________________________ 3. UPSTATE CELLULAR NETWORK In March 1993, the Company signed a definitive agreement with a subsidiary of NYNEX Corporation to form a cellular supersystem joint venture in upstate and western New York State to provide cellular telephone customers with expanded geographic coverage. The supersystem includes the cellular markets in Buffalo, Rochester, Syracuse, Utica-Rome and New York Rural Service Area #1, which includes Jefferson, St. Lawrence, and Lewis counties. The structure of the transaction is a 50/50 joint venture partnership, with Frontier as the managing partner. The Upstate Cellular Network (UCN) joint venture began operating on July 1, 1994. In accordance with generally accepted accounting principles (GAAP), revenues, expenses and operating income in the Consolidated Statement of Income and Business Segment Information reflect results of wireless operations for only the affiliates in which the Company has an ownership interest of greater than 50 percent. The formation of UCN in July 1994 caused the Company to adopt the equity method of accounting for the financial results of the UCN cellular interests, reflecting only its proportionate share of earnings in the other income and expense section of the Consolidated Statement of Income. Consequently, the Consolidated Statement of Income and Business Segment Information, beginning with third quarter 1994 results, no longer reflect the revenues, expenses and operating income of the Company's New York State wireless properties. In order to provide more complete information about the Company's involvement in Wireless Communications, the following table sets forth unaudited, summarized financial data for this business segment. This table reflects both a full 100 percent consolidation and a proportionate share consolidation of entities in which the Company has a significant ownership interest or acts as managing partner. The proportionate results presented reflect the Company's ownership percentage of cellular interests consolidated for financial reporting purposes and the Company's ownership percentage of its significant unconsolidated cellular interests (which are accounted for on the equity method for financial reporting purposes).
- ----------------------------------------------------------------------------------------------------------- Total Properties Managed Frontier Assuming 100% Ownership Proportionate Share (a) ------------------------------------ ----------------------------------- Dollars in thousands (Unaudited) 1994 1993 1992 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------- Net Revenues--Wireless $67,125 $36,900 $25,943 $35,602 $27,352 $19,767 - ----------------------------------------------------------------------------------------------------------- Operating Expenses 38,203 21,361 14,903 20,074 15,319 10,826 Cost of Goods Sold 9,787 6,590 4,205 5,582 5,078 3,231 Depreciation 6,688 3,648 2,620 3,276 2,165 1,654 Taxes Other Than Income Taxes 2,580 1,409 1,079 1,303 1,086 847 - ----------------------------------------------------------------------------------------------------------- Total Costs and Expenses 57,258 33,008 22,807 30,235 23,648 16,558 - ----------------------------------------------------------------------------------------------------------- Operating Income--Wireless $ 9,867 $ 3,892 $ 3,136 $ 5,367 $ 3,704 $ 3,209 =========================================================================================================== Number of Customers 146,614 58,097 37,616 60,357 44,869 30,397 Total POPs 4,198,000 2,081,705 1,733,968 1,710,625 1,328,980 1,088,885 ===========================================================================================================
(a) At December 31, 1994, the Company's proportionate ownership interests in the various partnerships it manages were: 50% of UCN (which includes 100% of Buffalo, 100% of Utica-Rome, 85% of Rochester, 55% of Syracuse, 40% of NY RSA #1, and 100% of PageCo), 70% of Alabama RSA #4 and #6, and 22.5% of NY RSA #3. At December 31, 1993, the Company's proportionate ownership interests were 85% of Rochester, 70% of Utica-Rome, 100% of PageCo, 70% of Alabama RSA #4 and #6, and 22.5% of NY RSA #3. At December 31, 1992, the Company's proportionate ownership interests were 85% of Rochester, 50% of Alabama RSA #4 and #6, 100% of PageCo and 20% of NY RSA #3. _________________________________________________ 36 Financial Review Frontier Corporation _______________________________________________________________________________ 4. OTHER INCOME (EXPENSE), NET The major components included in this caption are as follows (amounts in thousands):
- ----------------------------------------------------------------- Income (Expense) 1994 1993 1992 - ----------------------------------------------------------------- Interest income $ 6,676 $ 1,659 $ 2,257 Joint venture income 749 727 1,682 Goodwill amortization (3,078) (3,928) (3,692) Corporate expenses (20,066) (14,707) (10,267) Miscellaneous income (expense), net (4,518) (6,269) (3,666) - ----------------------------------------------------------------- Total $(20,237) $(22,518) $(13,686) =================================================================
________________________________________________________________________________ 5. EXTRAORDINARY AND UNUSUAL ITEMS In May 1994, the Company completed the sale of Minot Telephone Company in Minot, North Dakota to a subsidiary of the Souris River Telecommunications Cooperative. Minot Telephone was the Company's only holding in North Dakota and the Company had reassessed its prospects for expansion in North Dakota. The sale of Minot Telephone Company resulted in a $7.1 million after-tax gain, or $.10 per share. As part of the Rochester, New York operating company's Settlement Agreement with the PSC finalized in the third quarter of 1993, the Company agreed to write-off one-half of the costs ($3.3 million) previously deferred as part of a project to redesign customer account records, order flow and customer billing systems. The costs were incurred from January 1990 to December 1992 and the project was abandoned after it was determined that the cost to complete it was substantially greater than initially estimated. The remaining one-half of the costs previously deferred are being amortized to expense and recovered in rates. This charge is reflected on the Consolidated Statement of Income in the caption "Software write-off." In December 1992, the Executive Committee of the Board of Directors approved the refinancing of the $40 million Series H, 9 1/2 percent first mortgage bonds. The Company recorded a charge of $1.1 million (net of taxes of $.5 million) in 1992 relating to the write-off of the call premium, the remaining initial discount and associated expenses of the transaction. The bonds were retired in January 1993 using internally generated cash and the private placement of $35 million of debt at a telephone subsidiary. ________________________________________________________________________________ 6. PROPERTY, PLANT AND EQUIPMENT Major classes of property, plant, and equipment are summarized below:
- --------------------------------------------------------------------------------------- In thousands of dollars 1994 1993 1992 - --------------------------------------------------------------------------------------- Land and Buildings $103,235 $ 107,165 $ 105,928 Local and Toll Service Lines 752,366 743,028 718,866 Central Office Equipment 584,434 583,928 572,507 Station Equipment 33,926 34,740 96,549 Switching and Network Facilities 119,598 106,701 92,080 Furniture, Office, Equipment, Vehicles, Tools, etc. 129,988 139,424 132,531 Plant Under Construction 36,130 33,048 36,619 Less: Accumulated Depreciation 789,813 720,843 715,405 - --------------------------------------------------------------------------------------- $969,864 $1,027,191 $1,039,675 =======================================================================================
________________________________________________________________________________ 7. NOTES PAYABLE AND LINES OF CREDIT At December 31, the Company had outstanding notes payable as follows:
- ------------------------------------------------- In thousands of dollars Amount Interest Rate - ------------------------------------------------- 1992 $6,194 4.00%--9.00% 1993 $ 303 6.00%--9.00% 1994 $ 106 9.00% - -------------------------------------------------
Also at December 31, 1994, the Company had $165 million of unused bank lines of credit, which were available for general corporate purposes. Of the $165 million, $125 million is available to provide support for commercial paper borrowings. No compensating balances are required and the commitment fees are .05 percent of the unused portion of the $125 million facility. _________________________________________________ Financial Review Frontier Corporation 37 ________________________________________________________________________________ 8. LONG-TERM DEBT
- ----------------------------------------------------------------------------------------------------------------------- In thousands of dollars At December 31, 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------- First Mortgage Bonds Series E, 4 3/4%, due September 1, 1993 -- -- $ 12,000/(a)/ Series F, 4 1/2%, due May 1, 1994 -- -- 18,000/(a)/ Series G, 7 5/8%, due March 1, 2001 -- -- 30,000/(a)/ Series H, 9 1/2%, due March 1, 2005 -- -- 40,000/(b)/ Frontier Communications of Minnesota, Inc.(formerly Vista Telephone Company of Minnesota) Senior Notes, 7.61%, due February 1, 2003 $ 35,000 $ 35,000 -- Rural Electrification Administration debt, 2%--9% due 1993 to 2026 77,045 80,667 85,048 Other debt issued by affiliates, 7.5%--12 3/4% -- -- 15,840 - ----------------------------------------------------------------------------------------------------------------------- 112,045/(c)/ 115,667 200,888 - ----------------------------------------------------------------------------------------------------------------------- DEBENTURES 4 3/4% Convertible, due March 1, 1994 -- -- 137/(d)/ 10.46% Convertible, due October 27, 2008 5,300/(e)/ 5,300 5,300 9%, due January 1, 2020 69,785/(f)/ 100,000 100,000 9%, due August 15, 2021 100,000 100,000 100,000 - ----------------------------------------------------------------------------------------------------------------------- 175,085 205,300 205,437 - ----------------------------------------------------------------------------------------------------------------------- Medium-Term Notes, 8.77%--9.30%, due 2000 to 2004 179,000 179,000 179,000 Revolving Credit and Term Loan Agreements 120,000/(g)/ -- 3,200 - ----------------------------------------------------------------------------------------------------------------------- Sub-total 586,130/(h)/ 499,967 588,525 Less-Discount on long-term debt, net of premium 3,005 3,450 3,433 Current portion of long-term debt 4,525 3,962 59,495 - ----------------------------------------------------------------------------------------------------------------------- Total Long-Term Debt $578,600 $492,555 $525,597 =======================================================================================================================
/(a)/ In July 1993, the Company redeemed all of its Series E, F and G First Mortgage Bonds. /(b)/ In December 1992, the Company entered into an agreement to repurchase its Series H $40 million, 9 1/2%, First Mortgage Bonds on January 15, 1993. The bonds were originally due March 1, 2005. As such, these bonds were reclassified from long-term to short-term at December 31, 1992. (See Note 5.) /(c)/ Certain assets of Telephone Operations are pledged as security for Mortgage Bonds, Rural Electrification Administration debt and other debt. /(d)/ In December 1992, the Company called its 4 3/4% convertible debentures. As such, they were reclassified from long-term to short-term debt at December 31, 1992. The redemption of these debentures occurred in January 1993. Prior to redemption, the debentures were convertible at any time into common stock at $5.75 per share subject to certain adjustments. During 1993, $79,000 face value of the debentures were converted into 13,714 shares of common stock and in 1992, $8,000 face value of the debentures were converted into 1,382 shares. /(e)/ The debenture is convertible into common stock at any time after October 26, 1998 for $10.5375 per share. A total of 502,966 shares of common stock are reserved for such conversion. /(f)/ In December 1994, the Company redeemed $30.2 million of its 9% debentures due January 1, 2020. This redemption was consummated through an open market purchase at a price of 99 percent of face value. /(g)/ On December 19, 1994, the Company entered into a Revolving Credit Agreement with seven commercial banks as part of its implementation of the Open Market Plan Agreement. The agreement established a $160 million secured line of credit until December 18, 1999. The debt is secured by the assets owned as of January 1, 1995 by Rochester Telephone Corp. Commitment fees during the revolving loan period are .08 percent per year on the outstanding commitment. Interest on amounts drawn down are based on either the prime rate, the London Interbank Offered Rate (LIBOR) plus .17 percent, or a competitive bid rate. On December 29, 1994, the Company drew down $120 million under this facility at LIBOR plus .17 percent, which resets monthly over the five year period of the loan. /(h)/ In accordance with Financial Accounting Standards Board Statement No. 107 (FAS 107), "Disclosures about Fair Value of Financial Instruments," the Company estimates that the fair value of the debt, based on rates currently available to the Company for debt with similar terms and remaining maturities, is $597.3 million. At December 31, 1994, aggregate debt maturities were:
- ------------------------------------------------------------------------- In thousands of dollars 1995 1996 1997 1998 1999 - ------------------------------------------------------------------------- $4,525 $4,663 $4,511 $4,408 $124,500 - -------------------------------------------------------------------------
_________________________________________________ 38 Financial Review Frontier Corporation ________________________________________________________________________________ 9. INCOME TAXES The provision for income taxes consists of the following:
- ---------------------------------------------------------------------------------- In thousands of dollars 1994 1993 1992 - ---------------------------------------------------------------------------------- Federal: Current $65,978 $45,013 $28,394 Deferred (8,353) 391 8,253 - ---------------------------------------------------------------------------------- 57,625 45,404 36,647 - ---------------------------------------------------------------------------------- State: Current 6,190 3,911 4,663 Deferred 28 917 217 - ---------------------------------------------------------------------------------- 6,218 4,828 4,880 - ---------------------------------------------------------------------------------- Total income taxes $63,843 $50,232 $41,527 ==================================================================================
The reconciliation of the federal statutory income tax rate with the effective income tax rate reflected in the financial statements is as follows:
- ---------------------------------------------------------------------------------- In thousands of dollars 1994 1993 1992 - ---------------------------------------------------------------------------------- Federal income tax expense at statutory rate $58,645 35.0% $44,844 35.0% $36,431 34.0% Accelerated depreciation 2,699 1.6 2,656 2.0 2,415 2.3 Investment tax credit (1,964) (1.2) (2,044) (1.6) (2,223) (2.1) Miscellaneous (1,755) (1.0) (52) -- 24 -- - ---------------------------------------------------------------------------------- Total federal income tax $57,625 34.4% $45,404 35.4% $36,647 34.2% ==================================================================================
As a result of the Revenue Reconciliation Act of 1993, the 1993 income tax provision includes the impact of the federal tax rate increase from 34 percent to 35 percent. The impact amounts to approximately $2 million, of which approximately $400,000 is attributable to prior years. Deferred tax liabilities (assets) are comprised of the following at December 31:
- --------------------------------------------------------------------------------- In thousands of dollars 1994 1993 1992 - --------------------------------------------------------------------------------- Accelerated depreciation $150,069 $153,910 $152,230 Investment tax credit 5,354 6,828 8,047 Miscellaneous 7,386 8,734 10,137 - --------------------------------------------------------------------------------- Gross deferred tax liabilities 162,809 169,472 170,414 - --------------------------------------------------------------------------------- Basis adjustment--purchased telephone companies (31,851) (42,741) (45,368) Employee Benefits Obligation (12,955) (5,415) -- Deferred compensation (1,664) (1,648) (1,081) Other (4,970) (2,701) (5,089) - --------------------------------------------------------------------------------- Gross deferred tax assets (51,440) (52,505) (51,538) - --------------------------------------------------------------------------------- Total Deferred Income Taxes $111,369 $116,967 $118,876 =================================================================================
Gross profit on affiliate sales to telephone companies is deferred by Telecommunication Services and is amortized to offset income taxes to be paid over the cost recovery periods of the telephone plant. The amortization of gross profit deferred in prior years exceeded current year deferrals by $332,000 in 1994, $558,000 in 1993 and $927,000 in 1992 resulting in deferred tax reversals of $116,000, $195,000 and $315,000, respectively. _________________________________________________ Financial Review Frontier Corporation 39 ________________________________________________________________________________ 10. Service Pensions and Benefits The Company provides retirement benefits for substantially all employees through various contributory and non-contributory defined benefit pension plans. Benefits, in general, are based on years-of-service and average salary. The majority of the Company's pension plans have plan assets that exceed accumulated benefit obligations. There are certain plans, however, with accumulated benefit obligations which exceed plan assets. The following tables summarize the funded status of the Company's pension plans and the related amounts that are recognized in the Consolidated Balance Sheet.
- ------------------------------------------------------------------------------------------------------------ Plans for Plans for which assets which exceed accumulated December 31, 1994 accumulated benefits In thousand of dollars benefits exceed assets Total - ------------------------------------------------------------------------------------------------------------ Actuarial present value of benefit obligations: Vested benefit obligation $ 294,140 $ 15,494 $ 309,634 Accumulated benefit obligation $ 308,432 $ 17,223 $ 325,655 ============================================================================================================ Plan assets at fair value, primarily fixed income securities and common stock $ 373,446 $ 6,641 $ 380,087 Projected benefit obligation (326,858) (20,774) (347,632) - ------------------------------------------------------------------------------------------------------------ Funded status 46,588 (14,133) 32,455 Unrecognized net (gain)/loss (23,244) 2,980 (20,264) Unrecognized net transition asset (3,935) 18 (3,917) Unrecognized prior service cost 6,563 5,240 11,803 Adjustment required to recognize minimum liability -- (4,728) (4,728) - ------------------------------------------------------------------------------------------------------------ Pension asset (liability) reflected in Consolidated Balance Sheet $ 25,972 $(10,623) $ 15,349 ============================================================================================================
- ------------------------------------------------------------------------------------------------------------ Plans for Plans for which assets which exceed accumulated December 31, 1993 accumulated benefits In thousand of dollars benefits exceed assets Total - ------------------------------------------------------------------------------------------------------------ Actuarial present value of benefit obligations: Vested benefit obligation $ 280,941 $ 2,626 $ 283,567 Accumulated benefit obligation $ 304,359 $ 2,657 $ 307,016 ============================================================================================================ Plan assets at fair value, primarily fixed income securities and common stock $ 395,698 $ 2,143 $ 397,841 Projected benefit obligation (350,946) (3,119) (354,065) - ------------------------------------------------------------------------------------------------------------ Funded status 44,752 (976) 43,776 Unrecognized net (gain)/loss (29,311) 582 (28,729) Unrecognized net transition asset (5,291) (151) (5,442) Unrecognized prior service cost 9,018 209 9,227 - ------------------------------------------------------------------------------------------------------------ Pension asset (liability) reflected in Consolidated Balance Sheet $ 19,168 $ (336) $ 18,832 ============================================================================================================
_________________________________________________ 40 Financial Review Frontier Corporation
- ------------------------------------------------------------------------------------------------------------------- Plans for Plans for which assets which exceed accumulated December 31, 1992 accumulated benefits In thousand of dollars benefits exceed assets Total - ------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $ 240,147 $ 3,160 $ 243,307 Accumulated benefit obligation $ 254,592 $ 3,301 $ 257,893 =================================================================================================================== Plan assets at fair value, primarily fixed income securities and common stock $ 367,841 $ 2,870 $ 370,711 Projected benefit obligation (312,169) (4,166) (316,335) - ------------------------------------------------------------------------------------------------------------------- Funded status 55,672 (1,296) 54,376 Unrecognized net (gain)/loss (42,977) 405 (42,572) Unrecognized net transition asset (4,732) (209) (4,941) Unrecognized prior service cost 6,058 1,013 7,071 - ------------------------------------------------------------------------------------------------------------------- Pension asset (liability) reflected in Consolidated Balance Sheet $ 14,021 $ (87) $ 13,934 ===================================================================================================================
The net periodic pension cost consists of the following:
- ------------------------------------------------------------------------------------------------------------------- In thousands of dollars Years Ended December 31, 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------- Service cost--benefits earned during the period $ 7,934 $ 7,758 $ 7,033 Interest cost on projected benefit obligation 25,565 23,932 23,123 Actual return on plan assets 2,229 (40,484) (24,860) Net amortization and deferral (37,863) 7,623 (9,033) - ------------------------------------------------------------------------------------------------------------------- Net periodic pension cost determined under FAS 87 (2,135) (1,171) (3,737) Amount expensed due to regulatory agency actions (1,743) (1,537) 6,787 - ------------------------------------------------------------------------------------------------------------------- Net periodic pension cost (benefit) recognized $ (3,878) $ (2,708) $ 3,050 ===================================================================================================================
The projected benefit obligation at December 31, 1994 was determined using an assumed weighted average discount rate of 8.5 percent and an assumed weighted average rate of increase in future compensation levels of 5.5 percent. The weighted average expected long-term rate of return on plan assets was assumed to be 9.0 percent. The unrecognized net transition asset as of January 1, 1987 is being amortized over the estimated remaining service lives of employees, ranging from 12 to 26 years. The Company's funding policy is to make contributions for pension benefits based on actuarial computations which reflect the long-term nature of the pension plan. However, under Financial Accounting Standards Board Statement No. 87 (FAS 87), "Employers' Accounting for Pensions," the development of the projected benefit obligation essentially is computed for financial reporting purposes and may differ from the actuarial determination for funding due to varying assumptions and methods of computation. During 1994, 1993 and 1992, the Company funded $ 1.0 million, $.2 million and $4.8 million, respectively, for employees' service pensions and certain death benefits. On November 30, 1992, a voluntary pension incentive plan was offered to the Rochester, New York operating company's employees who were pension-eligible and retired on or before December 31, 1992. A 7.5 percent additional pension benefit will supplement the normal pension benefit for up to five years or until age 65, whichever is earlier. Accordingly, pension costs for the fourth quarter of 1992 included a one-time charge of $.8 million. Payments will be made from pension plan assets. The Company has established a rabbi trust separate from the pension plan assets to provide funding for the benefits payable under its Supplemental Management Pension Plan ("SMPP"). The SMPP is a defined benefit plan under which the Company will pay supplemental pension benefits to key executives in addition to amounts received under the Company's retirement plan. The trust is irrevocable and assets contributed to the trust can only be used to pay such benefits with certain exceptions. The assets held in trust at December 31, 1994 amounted to $7.1 million consisting of primarily fixed income securities and common stock. The Company also sponsors a number of defined contribution plans. The most significant plan covers substantially all non-union employees, who make contri- butions through payroll deduction. The Company matches up to 75 percent of that contribution up to 6 percent of gross compensation. The total cost recognized for all defined contribution plans was $4.8 million for 1994 and $4.1 million for 1993. _________________________________________ Financial Review Frontier Corporation 41 - -------------------------------------------------------------------------------- 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides health care, life insurance, and certain other retirement benefits for substantially all employees. Effective January 1, 1993, the Company adopted Financial Accounting Standards Board Statement No. 106 (FAS 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions." FAS 106 requires that employers reflect in current expenses an accrual for the cost of providing postretirement benefits to current and future retirees. Prior to 1993, the Company recognized these costs as they were paid. Plan assets consist principally of life insurance policies and money market instruments. In adopting FAS 106, the Company elected to defer the recognition of the accrued obligation of $125 million over a period of twenty years. For 1993, the adoption of this standard resulted in additional operating expenses in the amount of $7.8 million, net of a deferred income tax benefit of $4.1 million. However, a substantial portion of this increase was offset by a change in accounting for pensions for rate making purposes at the Rochester, New York operating company. The change requires that the company amortize, over a ten year period, the cumulative amount of pension funding from January 1, 1987 over the amount of pension expense which would have been recognized through December 31, 1992 under FAS 87, reducing pension expense throughout the amortization period. The net impact of adopting FAS 106 and recording the accounting change for FAS 87 actually resulted in $3.8 million of additional operating expenses, net of the income tax benefit, in 1993. The funded status of the plans is as follows:
- ------------------------------------------------------------------------- In thousands of dollars December 31, 1994 1993 - ------------------------------------------------------------------------- Accumulated postretirement benefit obligation (APBO) attributable to: Retirees $ 79,935 $ 63,749 Fully eligible plan participants 22,812 44,399 Other active plan participants 28,877 34,892 - ------------------------------------------------------------------------- Total APBO 131,624 143,040 Plan assets at fair value 5,545 3,944 - ------------------------------------------------------------------------- APBO in excess of plan assets 126,079 139,096 Unrecognized transition obligation (109,730) (117,706) Unrecognized net prior service cost (6,003) (1,458) Unrecognized net gain (loss) 15,502 (3,811) - ------------------------------------------------------------------------- Accrued postretirement benefit obligation $ 25,848 $ 16,121 =========================================================================
The components of the estimated postretirement benefit cost are as follows:
- ------------------------------------------------------------------------- In thousands of dollars December 31, 1994 1993 - ------------------------------------------------------------------------- Service cost $ 1,323 $ 2,746 Interest on accumulated post- retirement benefit obligation 9,666 10,046 Amortization of transition obligation 6,094 6,241 Return on plan assets (385) (290) Amortization of prior service cost 383 -- Amortization of gains and losses (704) -- - ------------------------------------------------------------------------- Net postretirement benefit cost $16,377 $18,743 =========================================================================
To estimate these costs, health care costs were assumed to increase 11.2 percent in 1995 with the rate of increase declining consistently to 5.75 percent by 2006 and thereafter. The weighted discount rate and salary increase rate were assumed to be 8.5 percent and 5.5 percent, respectively. The expected long-term rate of return on plan assets was 9.0 percent. If the health care cost trend rates were increased by one percentage point, the accumulated postretirement benefit health care obligation as of December 31, 1994 would increase by $14.7 million while the sum of the service and interest cost components of the net postretirement benefit health care cost for 1994 would increase by $1.3 million. - -------------------------------------------------------------------------------- 12. POSTEMPLOYMENT BENEFITS In 1992 the Financial Accounting Standards Board released Statement No. 112 (FAS 112), "Employers' Accounting for Postemployment Benefits" which was required to be implemented by January 1, 1994. FAS 112 requires that the projected future costs of providing postemployment, but pre-retirement, benefits, such as disability, pre-pension leave (salary continuation) and severance pay, be recognized as an expense as employees render service rather than when the benefits are paid. The Company adopted the provisions of FAS 112 effective January 1, 1994. The Company recognized the obligation for postemployment benefits through a cumulative effect charge to net income of $7.2 million, net of taxes of $3.9 million. The adoption of FAS 112 is not expected to significantly impact future operating expense or the Company's cash flow. - -------------------------------------------------------------------------------- 13. STOCK OFFERING In February 1994, the Company sold 5.4 million shares of its common stock at $42 per share in a public offering. As part of the offering, 2.5 million new primary shares were issued and sold directly by the Company and 2.9 million shares were sold by C FON Corporation, a subsidiary of Sprint Corporation. All share and per share data is prior to the 2-for-1 stock split in April 1994. _________________________________________ 42 Financial Review Frontier Corporation - -------------------------------------------------------------------------------- 14. STOCK OPTION PLANS In 1992, the Company implemented a Directors Stock Option Plan and an Executive Stock Option Plan ("Plans"). Under the original Plans, which were approved by shareowners in 1990, the Company was authorized to issue a maximum of 400,000 shares of common stock over a ten-year period. At the April 1994 Annual Meeting, shareowners approved amendments to both Plans which increased the total number of option shares to 1.5 million. The amendments also provided for automatic increases in the number of shares that may be issued as a result of a stock split. Consequently, since the stock was split subsequent to the 1994 Annual Meeting, there is currently a maximum of 3 million option shares available for issuance. Under both plans, the exercise price is the fair market value of the stock on the date of the grant of the stock option. One third of the options become exercisable on the first year anniversary of the grant date. Another third become exercisable on the second year anniversary and the final third become exercisable on the third year anniversary of the grant date. The options expire ten years after the date of grant. Information with respect to options under the above plans follows:
- --------------------------------------------------------------------------- Option Price Shares Per Share Aggregate - --------------------------------------------------------------------------- Outstanding at August 1, 1992 -- -- Granted in 1992 96,400 $15.75--$15.69 $ 1,515,925 - --------------------------------------------------------------------------- Outstanding at December 31, 1992 96,400 1,515,925 Granted in 1993 258,038 $19.75--$18.44 4,935,175 Cancelled in 1993 (9,500) $19.06--$15.75 (176,125) Exercised in 1993 (2,218) $15.75--$15.69 (34,892) - --------------------------------------------------------------------------- Outstanding at December 31, 1993 342,720 6,240,083 Granted in 1994 408,400 $22.69--$21.19 8,826,975 Cancelled in 1994 (36,820) $22.69--$15.75 (737,529) Exercised in 1994 (13,595) $19.75--$15.69 (243,385) - --------------------------------------------------------------------------- Outstanding at December 31, 1994 700,705 $14,086,144 ===========================================================================
At December 31, 1994, 129,069 shares were exercisable and 2,283,482 shares were available for future grant. ____________________________________________________ Financial Review Frontier Corporation 43 ________________________________________________________________________________ 15. PREFERRED STOCK (CUMULATIVE)-PAR VALUE $100
- ---------------------------------------------------------------------------------------- In thousands of dollars, except share data 1994 1993 1992 - ---------------------------------------------------------------------------------------- Frontier Corporation--850,000 shares authorized 5.00% Series-redeemable at $101 per share Shares Outstanding 100,000 100,000 100,000 Amount Outstanding $ 10,000 $ 10,000 $ 10,000 5.65% Series-redeemable at $101 per share Shares Outstanding 50,000 50,000 50,000 Amount Outstanding $ 5,000 $ 5,000 $ 5,000 4.60% Series-redeemable at $101 per share Shares Outstanding 50,000 50,000 50,000 Amount Outstanding $ 5,000 $ 5,000 $ 5,000 Frontier Communications of New York, Inc. (formerly Highland Telephone Company) --40,000 shares authorized 5.875% Series A-redeemable at par Shares Outstanding 18,694 18,694 18,694 Amount Outstanding $ 1,869 $ 1,869 $ 1,869 7.80% Series B-redeemable at $100.80--$105.00 per share Shares Outstanding 6,320 6,400 6,480 Amount Outstanding $ 632 $ 640 $ 648 Frontier Communications of AuSable Valley, Inc. (formerly AuSable Valley Telephone Company, Inc.) --4,000 shares authorized 5.50% Series-redeemable at par Shares Outstanding 2,754 2,754 2,754 Amount Outstanding $ 276 $ 276 $ 276 - ---------------------------------------------------------------------------------------- Total Shares Outstanding 227,768 227,848 227,928 ======================================================================================== Total Amount Outstanding $ 22,777 $ 22,785 $ 22,793 ========================================================================================
At the special meeting in December 1994, Frontier Corporation shareowners authorized 4 million shares of a new class of preferred stock, having a value of $100.00 per share and designated as Class A Preferred Stock. This class of stock will rank junior to the cumulative preferred stock as to dividends and distributions, and upon the liquidation, dissolution or winding up of the Company. ________________________________________________________________________________ 16. LEASES AND LICENSE AGREEMENTS The Company leases buildings, land, office space, fiber optic network, computer hardware and other equipment, and has license agreements for rights-of-way for the construction and operation of a fiber optic communications system. Total rental expense amounted to $17.8 million in 1994, $15.5 million in 1993 and $16.4 million in 1992. Minimum annual rental commitments under non-cancellable operating leases and license agreements in effect on December 31, 1994 were as follows:
- ------------------------------------------------------------- In thousands of dollars Non-Cancellable Leases License ---------------------- Years Buildings Equipment Agreements 1995 $ 6,189 $ 5,080 $ 8,625 1996 5,869 4,544 8,853 1997 5,901 1,786 9,097 1998 5,578 333 9,326 1999 5,248 1 9,557 2000 and thereafter 20,128 0 21,128 - ------------------------------------------------------------- Total $48,913 $11,744 $66,586 =============================================================
________________________________________________________________________________ 17. OPEN MARKET PLAN AND CORPORATE RESTRUCTURING Effective December 19, 1994, upon receiving shareowner approval, the Company changed its name from Rochester Telephone Corporation to Frontier Corporation. The new name reflects not only the pioneering heritage of our past but our willingness to embrace the challenges of the future. The name also symbolizes the change from a company focused in Rochester, New York to a company that is expanding geographically and currently has customers in 32 states. At its public meeting in October 1994, the New York State Public Service Commission (PSC) unanimously approved the Company's Open Market Plan and Corporate Restructuring (Open Market Plan) and subsequently issued a written order in November 1994. This landmark decision resulted in opening up the Rochester, New York local exchange market to competition and simultaneously allowed the Company to form a holding Company. The Open Market Plan was approved by shareowners in December 1994 and became operational on January 1, 1995. ________________________________________________ 44 Financial Review Frontier Corporation As a result of the Open Market Plan, two new companies have been formed from the operating assets of the former Rochester operating telephone company. One company (Frontier Communications of Rochester, Inc.) is a competitive telecommunications company which will provide an array of services on a retail basis in the Rochester marketplace. This company has the flexibility to price and introduce services as necessary to compete. The second company (Rochester Telephone Corp.) is a network company which is regulated and will provide services to the new competitive subsidiary company and all other telecommunications providers on an equal basis. The network company also will continue to provide services to individual retail customers. This configuration has been established to better meet the current and emerging competition in the marketplace. For the seven-year period of the Open Market Plan, Rochester Telephone Corp. will no longer be subject to rate of return regulation. In its place, the company will be subject to price regulation. The local market for telephone service in Rochester will be opened to full competition. Over the course of the next seven years, rate reductions of $21 million will be implemented for Rochester area consumers. In addition, a total of $17 million will be credited to the depreciation reserve. The Open Market Plan temporarily resolves certain financial questions that are linked to the royalty proceeding, a contested proceeding that has been in litigation since 1984. In particular, the PSC has agreed that a royalty will not be imposed by the PSC against the Company or Rochester Telephone Corp. during the seven year period of the Plan, subject to limited exceptions. However, the PSC is not precluded from seeking any royalties pursuant to the Royalty Order, on a prospective basis only, as it may be modified as a result of judicial appeal, subsequent to the expiration of the Open Market Plan. Under the Open Market Plan, the Company is permitted to continue its litigation challenging the Royalty Order, and the Company intends to pursue it to conclusion. The Company has also reorganized into a holding company structure as allowed under the Open Market Plan Agreement. This structure provides additional financing flexibility to continue the acquisition and diversification efforts necessary for the long-term growth of the business. (See "Management's Discussion and Analysis of Results of Operations and Financial Condition" for additional information regarding the Open Market Plan.) ________________________________________________________________________________ 18. COMMITMENTS AND CONTINGENCIES It is anticipated that the Company will expend $125.0 million for additions to property, plant, and equipment during 1995. In connection with this construction program, the Company has made certain commitments for the purchase of material and equipment. In July 1994, the Company signed a definitive agreement to purchase the Minnesota Cellular Telephone Company (MSCTC) in a tax-deferred stock-for-stock transaction. MSCTC is the non-wireline cellular provider of service in Minnesota Rural Service Area #10. The transaction is expected to close in the first quarter of 1995, subject to regulatory approvals, and will be accounted for as a pooling of interests. In September 1994, the Company announced its intent to sell Ontonagon County Telephone Company and its subsidiary, Midway Telephone, to Mid-South Telecommunications. The pending sale is the result of the Company's plans to expand in areas other than Michigan's Upper Peninsula. The sale is expected to be completed in the first half of 1995, pending regulatory approvals. On November 8, 1994, the Company signed a definitive agreement to acquire WCT Communications, Inc., an interexchange carrier based in Santa Barbara, California that operates long distance and telemanagement businesses in California and other western states. Under the definitive agreement, as amended, each public WCT shareowner will receive $5.875 per share pursuant to a cash merger, with the exception of Richard Frockt, WCT's chairman and 24 percent shareholder, who will receive $3.75 per share. Mr. Frockt and Christopher Edgecomb, WCT's Executive Vice President and 7 percent shareholder, have agreed to vote their shares in favor of the merger. The total cash consideration to be paid by Frontier Corporation for all the outstanding shares of WCT will be approximately $79.8 million. When the transaction is consummated, WCT's interexchange operations, which generated $102 million of revenues in its fiscal year ended June 30, 1994, will be merged into Frontier Corporation's long distance operation, Frontier Communications International. The transaction will be accounted for as a purchase acquisition and is subject to necessary regulatory approvals. The expected closing date for the acquisition is in 1995. In November 1994, the Company announced an agreement to acquire all of the outstanding shares of American Sharecom, Inc. (ASI), a long distance company headquartered in Minneapolis, Minnesota. ASI is one of the largest privately owned long distance companies in the country with annual revenues of approximately $125 million. ASI's sales operations are concentrated in the Midwest, Northwest and California. Under the agreement, the Company will acquire all of the outstanding shares of ASI in exchange for 8.7 million shares (valued at $184 million at December 31, 1994) of Frontier common stock. The transaction will be accounted for as a pooling of interests, subject to regulatory approval and the completion of appropriate due diligence. The transaction is expected to close in the first quarter of 1995. The following pro forma summary reflects the results of operations of the Company for its pending acquisitions of WCT and ASI. The pro forma results of _________________________________________________ Financial Review Frontier Corporation 45 operations include WCT for 1994 only as this acquisition will be accounted for using the purchase method of accounting. The pro forma results of operations include ASI for 1994, 1993 and 1992 as this acquisition will be accounted for using the pooling of interests method of accounting. These pro forma results have been prepared for comparative purposes only and are not necessarily indicative of results that would have been achieved had the transactions been consummated at the beginning of 1994 or of results which may occur in the future.
- ---------------------------------------------------------- In thousands of dollars, Pro Forma (Unaudited) except per share data 1994 1993 1992 - ---------------------------------------------------------- Total Revenues and Sales $1,224,304 $995,195 $866,287 Consolidated Net Income 107,740 87,992 73,303 Earnings Per Common Share-Primary $ 1.31 $ 1.14 $ .96 - ----------------------------------------------------------
During 1994, the Company provided interconnection and billing and collection services to AT&T which accounted for greater than ten percent of consolidated gross revenues. There were no other individual customers that accounted for greater than ten percent of consolidated gross revenues. ________________________________________________________________________________ 19. BUSINESS SEGMENT INFORMATION Revenues and sales, operating income, depreciation, construction and identifiable assets by business segment are set forth in the Business Segment Information included on page 29 of this report. ________________________________________________________________________________ 20. Interim Data (Unaudited) Selected quarterly data follow:
- -------------------------------------------------------------------------------------------------------------------------------- Revenues and Sales Income Per Share -------------------------- -------------------- ------------------------------------------- Earnings Before Extraor- Tele- dinary communi- Items and Market Price (In thousands of dollars, cation Telephone Operating Net Cumulative ------------------- except per share data) Services Operations Total Income Income Effect Earnings High Low - -------------------------------------------------------------------------------------------------------------------------------- 1994 First Quarter $ 90,814 $150,999 $241,813 $ 52,063 $ 15,205/(1)/ $ .32 $ .22 $22.44 $20.25 Second Quarter 96,922 154,905 251,827 56,033 34,896 .47 .47 $25.25 $20.81 Third Quarter 92,957 150,149 243,106 54,914 26,200 .35 .35 $24.75 $21.63 Fourth Quarter 95,121 153,625 248,746 60,254 26,436 .36 .36 $24.63 $20.50 ----------------------------------------------------- Full Year $375,814 $609,678 $985,492 $223,264 $102,737 $1.50 $1.40 ===================================================== - -------------------------------------------------------------------------------------------------------------------------------- 1993 First Quarter $ 66,395 $144,574 $210,969 $ 44,364 $ 18,018 $ .27 $ .27 $19.44 $17.32 Second Quarter 74,549 148,303 222,852 48,949 19,830 .29 .29 $21.75 $18.25 Third Quarter 82,743 147,763 230,506 48,373 19,237 .28 .28 $24.38 $20.50 Fourth Quarter 88,892 153,231 242,123 53,259 25,635 .37 .37 $25.13 $21.69 ----------------------------------------------------- Full Year $312,579 $593,871 $906,450 $194,945 $ 82,720 $1.21 $1.21 ===================================================== - -------------------------------------------------------------------------------------------------------------------------------- 1992 First Quarter $ 55,802 $137,708 $193,510 $ 40,412 $ 15,291 $ .23 $ .23 $17.00 $15.07 Second Quarter 57,801 140,677 198,478 43,176 16,518 .24 .24 $16.88 $14.57 Third Quarter 59,478 142,116 201,594 46,118 18,448 .27 .27 $16.44 $15.13 Fourth Quarter 63,696 146,771 210,467 45,428 19,174/(2)/ .30 .28 $17.88 $15.32 ----------------------------------------------------- Full Year $236,777 $567,272 $804,049 $175,134 $ 69,431 $1.04 $1.02 ===================================================== - --------------------------------------------------------------------------------------------------------------------------------
/(1)/ Includes cumulative effect charge related to change in accounting principle of $7.2 million (see Note 12). /(2)/ Includes extraordinary loss on retirement of debt of $1.1 million (see Note 5). __________________________________________________ 46 Financial Review Frontier Corporation CONDENSED SIX-YEAR FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------------------- In thousands of dollars, except per share data Years ended December 31, 1994 1993 1992 1991 1990 1989 - -------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME Revenues and sales $ 985,492 $ 906,450 $ 804,049 $ 713,559 $ 612,994 $ 590,345 Costs and expenses 762,228 711,505 628,915 565,191 493,665 474,867 - -------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 223,264 194,945 175,134 148,368 119,329 115,478 Interest expense 43,594 46,550 50,066 44,604 33,426 27,510 Other income and expense (5,893) (15,443) (13,038) 18,595 (3,198) (2,755) Income taxes 63,843 50,232 41,527 47,070 30,770 27,827 - -------------------------------------------------------------------------------------------------------------------- INCOME BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 109,934 82,720 70,503 75,289 51,935 57,386 Extraordinary items -- -- (1,072) 3,757 -- 26,558 Cumulative effect of change in accounting principle for post- employment benefits (7,197) -- -- -- -- -- - -------------------------------------------------------------------------------------------------------------------- CONSOLIDATED NET INCOME 102,737 82,720 69,431 79,046 51,935 83,944 dividends on preferred stock 1,186 1,187 1,188 1,189 1,192 1,195 - -------------------------------------------------------------------------------------------------------------------- INCOME APPLICABLE TO COMMON STOCK $ 101,551 $ 81,533 $ 68,243 $ 77,857 $ 50,743 $ 82,749 ==================================================================================================================== EARNINGS PER COMMON SHARE: Primary $1.40 $1.21 $1.02 $1.21 $.86 $1.43 Fully Diluted $1.40 $1.20 $1.02 $1.21 $.85 $1.42 =================================================================================================================== CONSOLIDATED BALANCE SHEET Current Assets $ 528,507 $ 221,744 $ 241,667 $ 210,956 $ 180,175 $ 220,089 Property, Plant and Equipment-net 969,864 1,027,191 1,039,675 1,031,086 868,288 795,940 Goodwill 139,572 166,283 135,964 145,360 58,933 19,521 Deferred and Other Assets 123,008 94,983 96,591 109,335 91,462 86,597 - -------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,760,951 $1,510,201 $1,513,897 $1,496,737 $1,198,858 $1,122,147 ==================================================================================================================== Current Liabilities $ 201,605 $ 206,359 $ 245,129 $ 184,583 $ 197,861 $ 161,572 Long-Term Debt 578,600 492,555 525,597 591,232 363,020 354,302 Deferred income taxes 111,369 116,967 118,876 113,973 148,491 150,879 Deferred Employee Benefits Obligation 46,001 16,121 -- -- -- -- Minority interests 252 3,100 2,701 2,518 1,995 3 Shareowners' equity 823,124 675,099 621,594 604,431 487,491 455,391 - -------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $1,760,951 $1,510,201 $1,513,897 $1,496,737 $1,198,858 $1,122,147 ==================================================================================================================== CONSOLIDATED STATEMENT OF CASH FLOWS Cash flows from operating activities $ 212,455 $ 228,637 $ 216,194 $ 163,648 $ 121,518 $ 100,503 Cash flows from investing activities (50,537) (109,122) (121,532) (270,354) (129,924) (72,051) Cash flows from financing activities 123,935 (157,578) (70,013) 128,756 (39,933) 21,008 - -------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 285,853 $ (38,063) $ 24,649 $ 22,050 $ (48,339) $ 49,460 ====================================================================================================================
____________________________________________________ Financial Review Frontier Corporation 47 FINANCIAL AND OPERATING STATISTICS
- ------------------------------------------------------------------------------------------------------------------------------------ Dollars in thousands, except per share data Years ended December 31, 1994 1993 1992 1991 1990 1989 - ------------------------------------------------------------------------------------------------------------------------------------ Current ratio 2.62 1.07 .99 1.13 .90 1.36 Pre-tax interest coverage 4.7x 3.9x 3.2x 3.9x 3.5x 5.6x Total debt $583,231 $496,820 $591,286 $609,526 $430,016 $389,894 Debt ratio 41.5% 42.4% 48.8% 50.2% 46.9% 46.1% Common shareowners equity $800,347 $652,314 $598,801 $581,628 $464,680 $432,571 Rate of return on average common equity 14.0% 13.0% 11.6% 14.9% 11.3% 20.3% ==================================================================================================================================== Construction $ 88,615 $105,500 $123,871 $110,889 $109,219 $111,998 Percent of funds generated internally 173% 164% 135% 109% 63% 90% ==================================================================================================================================== Common shares outstanding--end of year* 73,161 67,936 66,638 66,646 60,684 58,146 Average common shares outstanding* 72,575 67,454 66,638 64,206 59,348 57,932 Total number of common shareowners 22,674 20,759 20,131 18,900 17,164 15,910 Market price per common share: High $ 25.25 $ 25.13 $ 17.88 $ 17.00 $ 20.75 $ 22.88 Low $ 20.25 $ 17.32 $ 14.57 $ 13.00 $ 12.32 $ 12.85 End of year $ 21.13 $ 22.57 $ 17.82 $ 16.07 $ 14.63 $ 20.25 ==================================================================================================================================== Dividends declared per common share $ .815 $ .795 $ .775 $ .755 $ .735 $ .715 Dividends paid per common share $ .810 $ .790 $ .770 $ .750 $ .730 $ .710 Dividend yield--end of year 3.9% 3.6% 4.4% 4.8% 5.1% 3.6% ==================================================================================================================================== Percent to total Telephone Operations revenues: Local service 40% 39% 38% 37% 37% 36% Network access service 38% 37% 36% 34% 31% 28% Long distance network service 4% 5% 5% 7% 9% 12% Miscellaneous/uncollectibles 18% 19% 21% 22% 23% 24% Percent to total Telecommunication Services sales: Network Services and Systems 94% 91% 91% 92% 94% 94% Wireless Communications 6% 9% 9% 8% 6% 6% Operating margin--Telephone Operations 30.1% 27.7% 26.8% 26.5% 26.3% 27.0% Operating margin--Telecommunication Services 10.6% 9.8% 9.8% 7.7% 4.9% 5.5% Composite depreciation rate--Telephone Operations 6.4% 6.2% 6.4% 6.3% 6.3% 5.8% Composite depreciation rate--Telecommunication Services 9.6% 10.1% 9.6% 9.2% 7.7% 8.7% ==================================================================================================================================== Access lines in service--business 254,845 248,128 238,643 226,668 181,877 167,584 Access lines in service--residence 663,293 669,512 657,758 641,236 506,812 477,411 - ------------------------------------------------------------------------------------------------------------------------------------ Total access lines in service 918,138 917,640 896,401 867,904 688,689 644,995 ==================================================================================================================================== Telephone Operations employees 3,156 3,444 3,885 3,915 3,251 3,020 Telecommunication Services employees 1,084 932 816 747 750 914 - ------------------------------------------------------------------------------------------------------------------------------------ Total employees 4,240 4,376 4,701 4,662 4,001 3,934 ==================================================================================================================================== Carrier access minutes--interstate* 2,079,328 2,015,602 1,912,531 1,569,309 1,233,045 1,140,081 Carrier access minutes--intrastate* 1,763,871 1,664,262 1,439,983 1,173,685 901,376 783,151 - ------------------------------------------------------------------------------------------------------------------------------------ Total carrier access minutes* 3,843,199 3,679,864 3,352,514 2,742,994 2,134,421 1,923,232 ====================================================================================================================================
*In thousands __________________________________________ 48 Financial Review Fronntier Corporation EX-21 13 SUBSIDIARY EXHIBIT 21 SUBSIDIARIES OF ROCHESTER TELEPHONE CORPORATION AS OF March 15, 1995
STATE OF NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED - ------------------ ------------- ------------------- Frontier Communications of AL Monroeville Telephone Alabama, Inc. Company, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of AL Lamar County Telephone Lamar County, Inc. Company, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of AL Southland Telephone the South, Inc. Company; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Montel Communications, Inc. AL Montel Communications, (A subsidiary of Frontier Inc. Communications of Alabama, Inc.) Southland Rural Cellular AL Southland Rural Company, Inc. Cellular Company, Inc. (A subsidiary of Frontier Communications of the South, Inc.) RCI Long Distance Canada Ltd. Ontario, RCI Long Distance (A subsidiary of Canada Canada Ltd. Frontier Telecommunications Inc.) Binghamton MSA Corp. DE Binghamton MSA Corp. (A subsidiary of Frontier Cellular Holding Inc.) Budget Call Long Distance, DE Budget Call Long Inc. Distance, Inc. (A subsidiary of Frontier Communications International Inc.) Frontier Cellular DE Rochester Tel Cellular Holding Inc. Holding Corporation; (A subsidiary of Frontier RTCHC; FCHI Telecommunications Holding Inc. Frontier Communications DE RCI Long Distance, International Inc. Inc.; Budget Call; (A subsidiary of Mid Atlantic Frontier Telecommunications Inc.) Telecom; Frontier
Frontier Communications of DE RCI Long Distance New New England, Inc. England, Inc.; Long (A subsidiary of Distance North; LDN; Frontier Telecommunications Inc.) Mid Atlantic Telecom; Frontier Frontier Communications of DE Frontier Communications Rochester, Inc. F-Com (A subsidiary of Frontier Corporation) Frontier Information DE Distributed Solutions; Technologies, Inc. DSI; FIT (A subsidiary of Frontier Corporation) Frontier InfoServices Inc. DE Visions Publishing (A subsidiary of Inc.; Visions Inc.; Frontier Subsidiary Telco Inc.) Frontier InfoServices Frontier Long Distance of DE Visions Long Distance America, Inc. America Inc; Breezewood (A subsidiary of Tel Long Distance; Frontier Subsidiary Telco Inc.) Canton Tel Long Distance; Vista Tel Long Distance; C,C&S Tel Long Distance; St. Croix Tel Long Distance; Frontier Frontier Network Systems Inc. DE Rotelcom Inc.; Anixter- (A subsidiary of Rotelcom; Rotelcom Frontier Telecommunications Inc.) Network Systems; SGT Business Systems; Frontier Frontier Subsidiary DE Rochester Tel Telco Inc. Subsidiary Telco, Inc.; (A subsidiary of RTSTI; FSTI Frontier Corporation) Frontier Telecommunications DE Rochester Tel Inc. Telecommunications (A subsidiary of Frontier Corporation; RTTC; FTI Telecommunications Holding Inc.) Frontier Telecommunications DE Rochester Tel Holding Inc. Telecommunications (A subsidiary of Frontier Holding Corporation; Corporation) RTTHC; FTHI NY RSA 4 Inc. DE NY RSA 4 Inc. (A subsidiary of Frontier Cellular Holding Inc.)
PAGECO, Inc. DE PAGECO, Inc. (A subsidiary of Frontier Cellular Holding Inc.) Rochester Subsidiary DE Rochester Subsidiary Twenty-Eight, Inc. Twenty-Eight, Inc. (A subsidiary of Frontier Telecommunications Inc.) RTC Main Street, Inc. DE RTC Main Street, Inc. (A subsidiary of Frontier Corporation) RTMC Holding, Inc. DE RTMC Holding, Inc. (A subsidiary of Frontier Cellular Holding Inc.) Rochester Holding Corporation DE Rochester Holding (A subsidiary of Corporation Frontier Corporation) Rochester Tel Mobile RSA 2, DE Rochester Tel Mobile Inc. RSA 2, Inc. (A subsidiary of Frontier Cellular Holding Inc.) Rochester Telephone DE RTMC, Inc. Mobile Communications, Inc. (A subsidiary of Frontier Cellular Holding Inc.) Rochester Tel Subsidiary DE Rochester Tel Capital Services Inc. Subsidiary Capital (A subsidiary of Services Inc. Frontier Corporation) Rochester Tel Subsidiary FL Rochester Tel Twenty-Six, Inc. Subsidiary Twenty-Six, (A subsidiary of Frontier Inc. Telecommunications Holding Inc.) Rochester Tel Subsidiary FL Rochester Tel Twenty-Seven, Inc. Subsidiary Twenty- (A subsidiary of Frontier Seven, Inc. Telecommunications Holding Inc.) Fairmount Cellular Inc. GA Fairmount Cellular Inc. (A subsidiary of Frontier Communications of Fairmount,Inc.)
Frontier Communications of GA Fairmount Telephone Fairmount, Inc. Company, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of GA Statesboro Telephone Georgia, Inc. Company; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Telecommunications IA Vista Telephone of Iowa, Inc. Company of Iowa; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) DePue Communications, Inc. IL DePue Communications, (A subsidiary of Frontier Inc. Communications of DePue, Inc.) Frontier Communications-Midland, IL Midland Telephone Midland, Inc. Company; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications-Prairie, IL Prairie Telephone Inc. Company; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications-Schuyler, IL Schuyler Telephone Inc. Company; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of IL DePue Telephone Company DePue, Inc. Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of IL Inland Telephone Illinois, Inc. Company; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of IL Lakeside Telephone Lakeside, Inc. Company; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of IL Mt. Pulaski Telephone Mt. Pulaski, Inc. and Electric Company; (A subsidiary of Mt. Pulaski Telephone Frontier Subsidiary Telco Inc.) Company; Frontier
Frontier Communications of IL Orion Telephone Orion, Inc. Exchange Association; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) O. T. Cellular Telephone IL O. T. Cellular Company Telephone Company (A subsidiary of Frontier Communications of Orion, Inc.) Schuyler Cellular, Inc. IL Schuyler Cellular, Inc. (A subsidiary of Frontier Communications - Schuyler, Inc.) Frontier Communications of IN Citizens Telephone Indiana, Inc. Company; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of IN Thorntown Telephone Thorntown, Inc. Company; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) TDCI, Ltd. IN Thorntown Development (A subsidiary of Company, Inc.; TDCI, Frontier Communications of Ltd. Thorntown, Inc.) C, C & S Service Corp. MI C, C & S Service Corp. (A subsidiary of C, C & S Systems, Inc.) C, C & S Systems, Inc. MI C, C & S Systems, Inc. (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of MI C, C & S Telco, Inc.; Michigan, Inc. Frontier (A subsidiary of C, C, & S Systems, Inc.) Frontier Communications MN Vista Telephone Company of Minnesota, Inc. of Minnesota; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Telemanagement Inc. MN Visions Telemanagement (A subsidiary of Services, Inc.; Frontier Subsidiary Telco Inc.) Frontier Telemanagement Frontier Communications of MS Mid-South Telephone Mississippi, Inc. Company, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.)
Mid-South Cablevision MS Mid-South Cablevision Company, Inc. Company, Inc. (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of NY AuSable Valley AuSable Valley, Inc. Telephone Company; (A subsidiary of Frontier Frontier Corporation) Frontier Communications of NY Highland Telephone New York, Inc. Company; Frontier (A subsidiary of Frontier Corporation) Frontier Communications of NY Seneca-Gorham Telephone Seneca-Gorham, Inc. Corporation; Frontier (A subsidiary of Frontier Corporation) Frontier Communications of NY Sylvan Lake Telephone Sylvan Lake, Inc. Company, Inc.; Frontier (A subsidiary of Frontier Corporation) Frontier Long Distance of NY Visions Long Distance New York, Inc. New York Inc.; (A subsidiary of Highland Tel Long Frontier Subsidiary Telco Inc.) Distance; Sylvan Lake Tel Long Distance; AuSable Valley Tel Long Distance; Frontier New York Independent Cellular NY NYICS Systems, Inc. (Part of Utica-Rome (A subsidiary of Cellular Partnership) Frontier Cellular Holding Inc.) Oneida County Cellular NY Oneida County Cellular Systems, Inc. (Part of Utica-Rome (A subsidiary of Cellular Partnership) Frontier Cellular Holding Inc.) Phoncom Inc. NY Phoncom Inc. (A subsidiary of (Part of Utica-Rome Frontier Cellular Holding Inc.) Cellular Partnership) Rochester Telephone Corp. NY Rochester Telephone (A subsidiary of Corp.; RTC Frontier Corporation) Taconic Long Distance NY Taconic Long Distance Service Corp. Service Corp. (A subsidiary of Frontier Telecommunications Inc.)
Vernon Cellular Inc. NY Vernon Cellular Inc. (A subsidiary of Part of the Utica-Rome Frontier Cellular Holding Inc.) Cellular Partnership Enterprise Marketing Services PA Enterprise Marketing Inc. Services Inc. (A subsidiary of Frontier Communications of Pennsylvania, Inc.) Frontier Communications of PA Breezewood Telephone Breezewood, Inc. Company; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of PA Canton Telephone Canton, Inc. Company; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of PA Lakewood Rural Lakewood, Inc. Telephone Company; (A subsidiary of Lakewood Telephone Frontier Subsidiary Telco Inc.) Company; Frontier Frontier Communications of PA Oswayo River Telephone Oswayo River, Inc. Company; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of PA Enterprise Telephone Pennsylvania, Inc. Company; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of VA Mid Atlantic Telecom, the Mid Atlantic, Inc. Inc.; Frontier (A subsidiary of Frontier Telecommunications Inc.) Frontier Communications- WI Lakeshore Telephone Lakeshore, Inc. Company; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications - WI St. Croix Telephone St. Croix, Inc. Company; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of WI Mondovi Telephone Mondovi, Inc. Company; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.)
Frontier Communications of WI Viroqua Telephone Viroqua, Inc. Company; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of WI Urban Telephone Wisconsin, Inc. Corporation; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) New Richmond Cable WI New Richmond Cable Company, Inc. Company, Inc. (A subsidiary of Frontier Communications - St. Croix, Inc.)
EX-23 14 ACCOUNTS CONSENT EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Forms S-3 (File Nos. 33-40824, 33-69420, 33-61784 and 33-57895), Form S-4 (File No. 33-61992) and Forms S-8 (File Nos. 33-67430, 33-54511, 33-67432, 33-54519, 33-67324, 33-51331, 33-51885 and 33-52025) of Frontier Corporation of our report dated January 16, 1995, appearing on page 28 of Exhibit No. 13 which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 35 of this Form 10-K. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Rochester, New York March 28, 1995 EX-24 15 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY I, the undersigned, hereby constitute and appoint LOUIS L. MASSARO as my true and lawful agent and attorney-in-fact to act with full power and authority and in my name, place and stead as I, myself, could act for the sole purpose of executing the Form 10-K of Frontier Corporation for the year ended December 31, 1994, pursuant to Instruction D(2)(a) of the Form 10-K and in accordance with Regulation S-K Item 601(b)(24) of the Securities Act of 1933 and the Securities Exchange Act of 1934, and with full and unqualified authority to delegate such power to any person or persons as my attorney-in-fact shall select. IN WITNESS WHEREOF, this Instrument has been signed and delivered by the undersigned as of February 13, 1995. ------------------------------------------- Patricia C. Barron /s/ Ronald L. Bittner ------------------------------------------- Ronald L. Bittner /s/ John R. Block -------------------------------------------- John R. Block /s/ Brenda E. Edgerton -------------------------------------------- Brenda E. Edgerton /s/ Jairo A. Estrada -------------------------------------------- Jairo A. Estrada /s/ Daniel E. Gill -------------------------------------------- Daniel E. Gill /s/ Alan C. Hasselwander -------------------------------------------- Alan C. Hasselwander /s/ Douglas H. McCorkindale -------------------------------------------- Douglas H. McCorkindale -------------------------------------------- Leo J. Thomas EX-27 16 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FRONTIER CORPORATION'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000084567 FRONTIER CORPORATION 1,000 YEAR DEC-31-1994 DEC-31-1994 317,137 9,047 168,542 0 8,585 528,507 1,759,677 789,813 1,760,951 201,605 578,600 73,161 0 22,777 727,186 1,760,951 0 985,492 18,850 762,228 0 0 43,594 173,777 63,843 0 0 (7,197) 0 102,737 1.40 1.40
EX-99 17 PROXY STATEMENT EXHIBIT 99 PROXY STATEMENT 1994 FINANCIAL REVIEW Including MD&A, Consolidated Financial Statements and Notes to Financial Statements FRONTIER CORPORATION Frontier Center 180 South Clinton Avenue Rochester, New York 14646-0700 [LOGO OF FRONTIER CORPORATION GOES HERE] NOTICE OF ANNUAL MEETING OF SHAREOWNERS TO BE HELD ON APRIL 26, 1995 DEAR SHAREOWNERS: The first Annual Meeting of Shareowners of Frontier Corporation (the "Company") will be held at the National Press Club, 14th and F Streets, N.W., Washington, D.C. 20045, at 10:00 a.m. on April 26, 1995, for the following purposes: . To elect nine Directors; . To consider and act upon a proposal to elect Price Waterhouse LLP as the Company's independent auditors for the fiscal year ending December 31, 1995; . To consider and act upon two proposals regarding employee and director compensation plans; and . To transact such other business, if any, as may properly come before the meeting or any adjournments thereof. The Board of Directors, on December 19, 1994, amended Article II, Section 2, of the By-Laws to reduce the number of Directors constituting the entire Board from twelve to nine, effective January 1, 1995. The Board of Directors has fixed the close of business on March 7, 1995, as the record date for the determination of shareowners entitled to notice of and to vote at the meeting. YOUR VOTE IS VERY IMPORTANT. PLEASE SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE, WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING. YOU MAY REVOKE YOUR PROXY AND VOTE IN PERSON IF YOU DECIDE TO ATTEND THE MEETING. IF YOU ARE PLANNING TO ATTEND THE ANNUAL MEETING, PLEASE CHECK THE BOX ON THE BACK OF THE PROXY CARD. By Action of the Board of Directors, /s/ Josephine S. Trubek Josephine S. Trubek Corporate Secretary Rochester, New York March 13, 1995 PROXY STATEMENT Proxy Solicitation 1 Voting at the Annual Meeting 1 Proposal 1--Election of Directors 1 Information about the Board of Directors 1 Nominees for Director 2 Stock Ownership of Management, Directors and Certain Beneficial Owners 4 Report of Committee on Directors 5 Report of Committee on Management 5 Performance Graph 7 Compensation of Company Management 8 Summary Compensation Table 8 Option/SAR Grants in Last Fiscal Year 9 Individual Grants in 1994 Table 9 Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values Table 9 Pension Plan Table 10 Compensation Committee Interlocks and Insider Participation in Compensation Decisions 11 Interest of Certain Persons in Matters to be Acted Upon 12 Indemnification of Certain Persons 12 Proposal 2--Election of Independent Auditors 12 Proposal 3--Management Stock Incentive Plan 13 Proposal 4--Directors Stock Incentive Plan 14 New Plan Benefits Table 16 Other Matters 16 Future Proposals of Shareowners 16 FINANCIAL REVIEW Management's Discussion of Results of Operations and Analysis of Financial Condition 18 Report of Independent Accountants 28 Report of Management 28 Report of Audit Committee Chair 28 Business Segment Information 29 Consolidated Statement of Income 30 Consolidated Balance Sheet 31 Consolidated Statement of Cash Flows 32 Consolidated Statement of Shareowners' Equity 33 Notes to Consolidated Financial Statements 34 Condensed Six-Year Financial Statements 47 Financial and Operating Statistics 48
PROXY STATEMENT 1995 ANNUAL MEETING OF COMMON SHAREOWNERS OF FRONTIER CORPORATION ________________________________________________________________________________ PROXY SOLICITATION This Proxy Statement and the enclosed proxy card are being sent to you in connection with the solicitation of proxies by the board of directors (Board of Directors) of Frontier Corporation, a New York corporation, (the "Company"), for use at the annual meeting of holders of the Company's $1.00 par value common stock. This meeting (the "Annual Meeting") will be held on April 26, 1995, at 10:00 a.m., local time at the National Press Club, 14th and F Streets, N.W., Washington D.C., 20045 or any later time, if adjourned, for the purposes set forth in the Notice of Annual Meeting of Common Shareowners also provided to you. The cost of the solicitation of proxies will be borne by the Company. In addition to the solicitation of proxies by mail, certain of the officers and employees of the Company, without extra remuneration, may solicit proxies personally or by telephone, facsimile, telegraph or cable. The Company will also request brokerage houses, nominees, custodians and fiduciaries to forward soliciting materials to the beneficial owners of stock held of record and will reimburse such persons for forwarding such materials. In addition, the Company has retained Georgeson & Co., Inc., New York, New York, to aid in the solicitation of proxies at a fee not to exceed $7,500, plus reimbursement for out-of-pocket expenses incurred by that firm on behalf of the Company. The principal executive offices of the Company are located at 180 South Clinton Avenue, Rochester, New York 14646, and its telephone number is (716) 777-1000. VOTING AT THE ANNUAL MEETING The close of business on March 7, 1995, has been fixed as the record date for the determination of the shareowners entitled to notice of, and to vote at, the Annual Meeting. On that date there were 72,723,675 shares of the Company's $1.00 par value common stock outstanding and entitled to vote at the meeting. Each shareowner is entitled to cast one vote for each share of common stock held as of the Record Date. Each proxy which is properly executed and returned in the enclosed return envelope will be voted at the Annual Meeting. Shares represented by proxies will be voted in accordance with the shareowner's directions as specified on the proxy card. If any proxy does not specify a choice, the shares will be voted for the election of the Directors nominated in the proxy; in favor of the election of Price Waterhouse LLP as independent auditors; and in favor of each of the proposals regarding employee and Director compensation plans. A shareowner granting a proxy has the right to revoke it by a duly executed proxy bearing a later date, by attending the meeting and voting in person, or by otherwise notifying the Company prior to the meeting. The proxy card contains spaces for the shareowner to indicate if he or she wishes to abstain on one or more of the proposals or to withhold authority to vote for one or more nominees for Director. Directors are elected by a plurality of the votes cast. Votes withheld in connection with the election of one or more of the nominees for Director will not be counted as votes cast in connection with that nominee's election. The election of auditors requires the affirmative vote of a majority of the votes cast. In accordance with New York law, abstentions are not counted in determining the votes cast in connection with the selection of auditors. Approval of the proposals with respect to employee and Director compensation plans (Proposals 3 and 4) requires the affirmative vote of a majority of the outstanding shares entitled to vote on those proposals; abstentions on any of the Plan proposals have the same effect as a vote against that proposal. Under the rules of the New York Stock Exchange, brokerage firms holding shares for the benefit of their clients may vote in their discretion on behalf of their clients with respect to "discretionary items" if the clients have not furnished voting instructions within ten days of the shareowner meeting. The election of Directors and auditors are discretionary items with respect to which brokerage firms may vote. The proposals relating to the employee and Director compensation plans are also discretionary items and brokers who receive no instructions from their clients have the discretion to vote on these proposals. Any broker "non- votes" will not be considered as votes cast with respect to the employee and Director compensation plan proposals but will have the same effect as a no vote since the proposals require approval by a majority of the outstanding shares entitled to vote. ________________________________________________________________________________ PROPOSAL 1-ELECTION OF DIRECTORS Information about the Board of Directors BOARD OF DIRECTORS The Board of Directors of the Company is currently composed of nine Directors. The Board of Directors nominates the nine persons named on page 3 for election to the Board of Directors. Eight of the nominees are currently Directors of the Company whose terms expire coincident with the Annual Meeting. Mr. Cesan is not currently a Director of the Company. If elected, all THIS PROXY STATEMENT AND FORM OF PROXY ARE BEING FIRST SENT TO SHAREOWNERS ON MARCH 13, 1995. nominees will serve until the Annual Meeting of Shareowners to be held in 1996 or until such time as their respective successors are elected. The Board of Directors held eight meetings during 1994. All of the Directors attended at least 75% of the total meetings of the Board and its committees which they were eligible to attend. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors conducts its business through meetings of the Board and through the activities of its committees. The standing committees of the Board are the Audit Committee, the Committee on Management, the Committee on Directors and the Executive Committee. AUDIT COMMITTEE The Audit Committee of the Board is composed at present of Douglas H. McCorkindale, Chair; John R. Block and Brenda E. Edgerton. This committee reviews the scope of audit activities and the financial reports of the Company, and reviews with management significant and material matters which may result in either potential liability to the Company or significant exposure to the Company. The Committee also makes 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 Audit Committee held two meetings in 1994. COMMITTEE ON MANAGEMENT The present members of the Committee on Management are Daniel E. Gill, Chair; Patricia C. Barron and Douglas H. McCorkindale. This committee is responsible for determining the compensation, benefits and perquisites of all executive officers of the Company, with the exception of the Chief Executive Officer, and for recommending the compensation, benefits and perquisites of the Chief Executive Officer to the full Board. This committee also develops and administers executive compensation plans and reviews succession planning for the Company and other significant human resources issues. The Committee on Management held three meetings in 1994. COMMITTEE ON DIRECTORS The Committee on Directors was created in 1993. It focuses the Board's attention on corporate governance issues and serves as a nominating committee. The Committee on Directors assists the Company in addressing a rapidly changing industry through its efforts to attract and retain qualified Board members. It is presently composed of Patricia C. Barron, Chair; Jairo A. Estrada and Dr. Leo J. Thomas. This committee is responsible for all matters relating to the selection, qualification, evaluation, and compensation of members of the Board of Directors and all nominees to the Board. The Committee on Directors held five meetings in 1994. The Committee on Directors will consider nominations by shareowners. Such shareowner submissions should include sufficient biographical information so that the committee can appropriately assess a nominee's qualifications. This information would include, at a minimum, the nominee's name and address, business and other experience, and a listing of any other Boards on which the nominee may be a member. All submissions should be sent by a letter addressed to the Corporate Secretary, Frontier Corporation, 180 South Clinton Avenue, Rochester, New York 14646-0700. Suggestions in connection with the 1996 Annual Meeting of Common Shareowners must be received by February 26, 1996, in order to receive consideration. EXECUTIVE COMMITTEE The present members of the Executive Committee are Jairo A. Estrada, Chair; Patricia C. Barron, Ronald L. Bittner, Daniel E. Gill, Alan C. Hasselwander, and Douglas H. McCorkindale. The Executive Committee possesses all of the powers of the Board of Directors except those which, by law or the Company's By-Laws, cannot be delegated to it. The Executive Committee met three times in 1994. COMPENSATION OF DIRECTORS The Company compensates its Directors through the payment of an annual retainer and meeting fees. The annual retainer is $18,000; effective April 26, 1995, this retainer will be increased to $25,000. However, if shareowners approve Proposal 4, Directors Stock Incentive Plan, the annual retainer will consist of $15,000 cash and 500 shares of Frontier Corporation common stock. Each Director also receives a $1,500 fee for each Board and/or committee meeting attended. Each committee chair receives an annual chairperson's retainer in the amount of $3,000; effective April 26, 1995, this amount will be increased to $4,000. Directors who are employees of the Company or its subsidiaries receive no Director fees. Directors may elect to defer payment of their fees to future years. Pursuant to the Company's Directors' Stock Option Plan, Directors annually receive an option to purchase 4,000 shares of the Company's common stock. These options expire ten years after issuance, and the exercise price is the value of the stock on the day the option was issued. Each outside Director received a grant of options for 4,000 shares at an exercise price of $22.6875 per share on April 27, 1994. The Company also provides its Directors with cellular telephone equipment and service and other nominal in-kind benefits. ________________________________________________________________________________ NOMINEES FOR DIRECTOR The Board believes that all of the nominees will be available and willing to serve as Directors. If any nominee is unable to serve, the shares represented by all valid proxies will be voted for the election of such substitute as the Board may recommend or the Board may fill the vacancy at a later date after selecting an appropriate nominee. _______________________________________ 2 Proxy Statement Frontier Corporation The following sets forth information concerning the principal occupations and business experience of the nominees for election at the Annual Meeting of Common Shareowners to be held on April 26, 1995: ________________________________________________________________________________ [PHOTO OF PATRICIA C. BARRON GOES HERE] Patricia C. Barron, 52, is President, Xerox Engineering Systems, Xerox Corporation, a manufacturer of office systems and equipment, and has held this position since February 1994. From March 1992 until February 1994 she was President, Office Documents Products Division, Xerox Corporation. From 1979 to March 1992 she was a Vice President of Xerox Corporation. She is a Director of Quaker Chemical Corporation and of Reynolds Metals Company. She has been a Director of the Company since 1990. ________________________________________________________________________________ [PHOTO OF RONALD L. BITTNER GOES HERE] Ronald L. Bittner, 53, is Chairman, President and Chief Executive Officer of the Company and has held this position since April 1993. From February 1992 to April 1993 he was President and Chief Executive Officer of the Company. From May 1988 to February 1992 he was Executive Vice President and President- Telecommunications Group of the Company. He is also a Director of Rochester Telephone Corp. He has been a Director of the Company since 1989. ________________________________________________________________________________ [PHOTO OF RAUL E. CESAN GOES HERE] Raul E. Cesan, 47, is Executive Vice President and President, Pharmaceuticals, Schering-Plough Corporation, a worldwide manufacturer and marketer of pharmaceutical and health care products and has held this position since September 1994. From September 1992 through September 1994, he was President, Schering- Plough Laboratories-U.S. Pharmaceutical Operations, Schering-Plough Corporation. From September 1988 to September 1992, he was President, Schering- Plough International. He will be a Director of the Company for the first time. ________________________________________________________________________________ [PHOTO OF BRENDA E. EDGERTON GOES HERE] Brenda E. Edgerton, 45, is Vice President, Finance-U.S. Soup, Campbell Soup Company, a manufacturer of prepared convenience foods and has held this position since May 1994. From August 1989 through April 1994 she was Vice President and Treasurer, Campbell Soup Company. From April 1988 to August 1989 she served as Deputy Treasurer of Campbell Soup Company. She has been a Director of the Company since 1993. ________________________________________________________________________________ [PHOTO OF JAIRO A. ESTRADA GOES HERE] Jairo A. Estrada, 47, is Chairman of the Board and Chief Executive Officer of Garden Way Incorporated, a company which manufactures outdoor power equipment. He is a Director of Garden Way Incorporated and of The Chase Manhattan Corporation. He has been a Director of the Company since 1989. ________________________________________________________________________________ [PHOTO OF DANIEL E. GILL GOES HERE] Daniel E. Gill, 58, is Chairman and Chief Executive Officer of Bausch & Lomb Incorporated, a worldwide manufacturer and marketer of health care and optical products. He is a Director of Bausch & Lomb and Reebok International, Ltd. He has been a Director of the Company since 1981. ________________________________________________________________________________ [PHOTO OF ALAN C. HASSELWANDER GOES HERE] Alan C. Hasselwander, 61, is Past Chairman of the Board of Rochester Tel (now Frontier Corporation). From February 1992 to April 1992 he was Chairman of the Company. From July 1984 to February 1992 he was President and Chief Executive Officer of the Company. He has been a Director of the Company since 1984. ________________________________________________________________________________ [PHOTO OF DOUGLAS H. McCORKINDALE GOES HERE] Douglas H. McCorkindale, 55, is Vice Chairman and Chief Financial and Administrative Officer of Gannett Co., Inc., a nationwide diversified communications company. He is a Director of Gannett Co., Inc., Continental Airlines, and seven mutual funds in the Prudential Mutual Fund complex of funds. He has been a Director of the Company since 1980. ________________________________________________________________________________ [PHOTO OF DR. LEO J. THOMAS GOES HERE] Dr. Leo J. Thomas, 58, is Executive Vice President of Eastman Kodak Company, a manufacturer of photographic and chemical products, and has held this position since January 1995. From September 1994 to January 1995 he was Executive Vice President and President, Imaging; and from September 1991 to September 1994 he was Group Vice President and President, Imaging, Eastman Kodak Company. From November 1989 to September 1991 he was Group Vice President and General Manager, Health Group of Eastman Kodak Company. From September 1988 to September 1989 he was Chairman of Sterling Drug, Inc., a subsidiary of Eastman Kodak. He is a Director of Eastman Kodak Company and of John Wiley & Sons, Inc. He has been a Director of the Company since 1984. MANAGEMENT RECOMMENDS A VOTE "FOR" THE ELECTION OF ALL OF THE ABOVE NOMINEES FOR DIRECTOR, DESIGNATED AS PROPOSAL 1 ON YOUR PROXY CARD. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF THE DIRECTION THEREON TO THE CONTRARY. _______________________________________ Proxy Statement Frontier Corporation 3 ________________________________________________________________________________ STOCK OWNERSHIP OF MANAGEMENT, DIRECTORS AND CERTAIN BENEFICIAL OWNERS In 1993, the Committee on Directors established guidelines for the minimum amounts of the Company's common stock which Directors should own. These guidelines take into account a Director's tenure on the Board in determining the level of stock ownership. By the end of 1995, each outside Director with at least five years' service on the Board should own at least 4,000 shares of the Company's common stock. Executive officers of the Company are also encouraged to own shares of the Company. The recommended stock ownership level is based on each officer's position in the organization and is a multiple of salary. Mr. Bittner's stock ownership target, to be achieved by January 1, 1999, is the beneficial ownership of Company common stock equal in value to four times his salary. The stock ownership target for each of the Company's Corporate Vice Presidents is beneficial ownership of Company common stock equal in value to two times his or her respective salary. Each Corporate Vice President is encouraged to achieve his or her target by January 1, 1999. The following table sets forth the number of shares of the Company's common stock beneficially owned by each Director and nominee, by each of the named executive officers, and by Directors and officers of the Company as a group as of February 28, 1995. No Director, officer or nominee owns more than 1% of the Company's outstanding shares of common stock, nor do the group's aggregate holdings exceed 1% of the Company's issued and outstanding common stock. MANAGEMENT AND DIRECTORS STOCK OWNERSHIP TABLE
- -------------------------------------------------------------------------------- Total Common Stock Beneficial Name Stock/(1)/ Options/(2)/ Ownership - -------------------------------------------------------------------------------- Directors and Nominees: Patricia C. Barron 1,497 3,996 5,493 Ronald L. Bittner/3/ 42,524 70,930 113,454 John R. Block 1,856 3,996 5,852 Raul E. Cesan 0 0 0 Brenda E. Edgerton 2,351 2,964 5,315 Jairo A. Estrada 12,333 3,996 16,329 Daniel E. Gill 2,888 3,996 6,884 Alan C. Hasselwander/4/ 35,220 1,332 36,552 Douglas H. McCorkindale 4,000 3,996 7,996 Dr. Leo J. Thomas 20,759 3,996 24,755 NAMED EXECUTIVE OFFICERS: Ronald L. Bittner/3/ 42,524 70,930 113,454 Jeremiah T. Carr 7,374 18,932 26,306 Dale M. Gregory 15,933 21,198 37,131 Louis L. Massaro 10,829 16,932 27,761 John K. Purcell 7,787 19,998 27,785 Directors and Executive Officers as a Group 188,423 196,522 384,945
________________________________________________________________________________ (1) Includes all shares which each Director, nominee or officer directly, through any contract, arrangement, understanding, relationship or otherwise, has or shares the power to vote or to direct the voting of such shares or to dispose or to direct the disposition of such shares. However, these amounts do not include shares which each such person has the right to acquire pursuant to options or other rights. Amounts in this column determine whether a Director or executive officer has met his or her stock ownership target. (2) Includes all shares which such persons have the right to acquire within the following 60 days pursuant to options or other rights. These amounts do not include shares which such persons have the right to acquire more than sixty days in the future. (3) Includes 123 shares owned by the parents of Mr. Bittner's spouse. Mr. Bittner disclaims beneficial ownership of these shares. (4) Includes 1,400 shares owned by Mr. Hasselwander's spouse. Mr. Hasselwander disclaims beneficial ownership of these shares. Set forth below is the name, address and stock ownership of each person or group of persons known by the Company to own beneficially more than 5% of the outstanding shares of common stock. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
- ------------------------------------------------------------------- Name and Address Common Stock Percent of Beneficial Owner of Class - ------------------------------------------------------------------- FMR Corp. 5,610,260/(1)/ 7.7% 82 Devonshire Street Boston, Massachusetts 02109 - -------------------------------------------------------------------
(1) FMR Corp. ("FMR") filed with the Securities and Exchange Commission a Schedule 13G, dated February 13, 1995, stating that it beneficially owned in the aggregate 5,610,260 shares, or approximately 7.67% of the Company's common stock outstanding as of December 31, 1994. Of that amount, 4,356,820 shares were beneficially owned by FMR's wholly-owned subsidiary Fidelity Management & Research Company (acting as investment advisor) and 1,253,440 shares were beneficially owned by FMR's wholly-owned subisidary Fidelity Management Trust Company (acting as investment manager). All these shares are also deemed beneficially owned by Edward C. Johnson 3d, who is FMR's Chairman and who is also a member of a controlling group with respect to FMR Corp. In its Schedule 13G filing, FMR also disclosed that with respect to the shares it beneficially owns, it has sole voting power with respect to 783,740 shares, sole investment power with respect to 5,610,260 shares, and no shared voting or shared investment power with respect to any shares. The Company's Directors, executive officers and shareowners holding in excess of 10% of the common stock are required to file reports with the Securities and Exchange Commission and the New York Stock Exchange, with copies to the Company, concerning ownership of and transactions in the Company's common stock. Based solely on those reports furnished to the Company and related information, the Company believes that all such filing requirements for 1994 were complied with in a timely fashion. _______________________________________ 4 Proxy Statement Frontier Corporation ________________________________________________________________________________ REPORT OF COMMITTEE ON DIRECTORS The Committee on Directors was created in 1993. It focuses the Board's attention on corporate governance issues and acts as a nominating committee. Since its formation, the Committee has undertaken several initiatives which are designed to increase the independence of the Board and to more closely align Directors interests with those of shareowners. These activities include: 1. Approval of formal Board Governance Guidelines dealing with size and composition of the Board, retirement, Committee structure, frequency of Board and Committee meetings, expected attendance, compensation, and fiduciary responsibility to shareowners. Each Committee, including the Executive Committee, operates under a written Committee Charter adopted by the Committee. The Board Governance Guidelines additionally provide that if a Director's primary job changes, the Director must submit his or her resignation from the Board. The Committee on Directors makes a recommendation to the full Board as to whether or not to accept that resignation. The Guidelines consider retirement a primary job change. 2. Approval of formal Directors' Stock Ownership Guidelines. Specific ownership targets are based upon Directors' Board tenure. The targets are: . Two years or less on the Board At least 1,000 shares . More than two but less than five years At least 2,000 shares . Five or more years At least 4,000 shares Each Director is encouraged to achieve his or her target by December 31, 1995. 3. Confidential surveys to assess the effectiveness of the Board. 4. Establishment of formal Selection Criteria and Performance Factors for use in consideration of candidates for nomination or renomination to the Boards of Frontier Corporation and its subsidiary Rochester Telephone Corp. The Selection Criteria include an evaluation of the candidate's ability, relevant experiences, business acumen and demonstrated management ability, independence, and whether the individual would enhance the Board's diversity. The Performance Factors are used to assess the performance of incumbent members of the Board. These Factors include an understanding of the Company's business, the level of attendance and participation in Board activities, an understanding of the Company's strategic direction and the financial implications of decisions, the contribution of diverse perspectives on issues important to the Company's business, and knowledge about the Company's industry, technology and markets. Your Committee on Directors supports and encourages an independent Board of Directors which is accountable to the shareowners of Frontier Corporation. For that reason, a majority of the Board is composed of outside Directors and all Directors currently must stand for reelection annually. Of the nine incumbent Directors, only Mr. Bittner and Mr. Hasselwander now or have ever been employees of the Company. Furthermore, all members of the Audit Committee, the Committee on Management and the Committee on Directors are independent Directors, and Committee assignments and the position of Committee Chair rotate on a periodic basis. There are five regular meetings of the Board including a multi-day annual planning session. In addition, the outside Directors meet informally on a periodic basis. Respectfully submitted, Patricia C. Barron (Chair) Jairo A. Estrada Dr. Leo J. Thomas February 13, 1995 ________________________________________________________________________________ Report of Committee on Management COMPENSATION PHILOSOPHY AND POLICY The philosophy of the Company's compensation program is to offer performance- based compensation to its employees, while rewarding employees whose efforts enable the Company to achieve its vision. The executive compensation program is designed to measure and enhance executive performance. The Company's executive compensation program has four components: . Base Salary . Annual Bonus . Long-Term Incentive Plan . Stock Option Plan These components are designed to provide incentives and motivate key executives whose efforts and job performance will enhance the strategic well- being of the Company and maximize value to its shareowners. The program is also structured to attract and retain the highest caliber executives. The executive compensation program rewards performance consistent with the Company's consolidated performance and the contribution of the individual executive officers, including Mr. Bittner, toward that performance. It is also competitive with compensation programs offered by comparable employers in this industry. The Company retains William M. Mercer, Inc., to review its executive compensation program on an annual basis. Information from this consulting firm, as well as public information concerning salaries paid by companies in the telecommunications industry, is used to determine what a comparable telecommunications firm would consider an appropriate performance-based compensation package for its executives. The analysis includes information from a self-constructed group of forty-two publicly-traded companies in the telephone, long distance, cable television and cellular industries. This group includes all companies reported in the Standard and Poor's Telephone Index, together with thirty-three additional companies. On a comparative basis, the base salary of the Company's CEO and its other executives, on average, would be considered within the second quartile. The Company's policy is to benchmark compensation levels at the median of comparative companies and to reward results based on performance. _______________________________________ Proxy Statement Frontier Corporation 5 BASE SALARY The salaries of the executive officers, including Mr. Bittner, were determined based on the executive's performance and an analysis of base salaries paid executive officers having similar responsibilities in other companies of similar size, both within and outside the telecommunications industry. This analysis included many of the companies in the self-constructed group of forty-two publicly-traded companies, together with additional companies from other industries with similar revenues and/or asset values. The level of Mr. Bittner's base salary was also based upon a subjective assessment of his individual performance and responsibilities as well as overall corporate performance as measured by actual earnings per share and cash flow versus pre-established targets; strategic goals and objectives for customer and employee satisfaction; and growth of the business. The other executive officers have similar measurements, but specific factors are more closely linked to individual responsibilities. No relative weights are attributed to any specific measurement factors. ANNUAL BONUS The Company's annual bonus plan is designed to provide performance-based compensation awards to executives for achievement during the past year. For executive officers, bonus awards are a function of individual performance and consolidated corporate results. Business unit performance is also a component of those involved in line operations below the executive officer level. The specified qualitative and quantitative criteria employed by the Committee in determining bonus awards vary individually and from year to year. These criteria, or targets, are established as a means of measuring executive performance. The corporate target for 1994 was an equally weighted earnings per share and cash flow target established by this Committee of the Board of Directors as an incentive to increase the Company's cash flow and thus improve long-term stock performance. Performance objectives and associated payouts were established at the beginning of the year and are identified as threshold, standard and premier objectives with standard performance yielding payouts at the median level competitively. No award will be paid unless threshold performance is achieved for both components. For 1994, earnings per share results were between the standard and premier levels while cash flow was between the threshold and standard levels. The overall performance was slightly above standard level for Mr. Bittner and at standard level for the other officers. All the Company's senior executives participate in the bonus plan with payout awards varying by salary grade. With respect to Mr. Bittner's participation, his annual bonus was based upon achievement of the corporate target, a mechanical application of the formula and an additional discretionary adjustment based on his individual performance. Specifically, this mechanical application of the plan was calculated by multiplying the corporate performance payout achieved, which for Mr. Bittner was 63.2%, times the higher of his actual salary or the market value of his position. For the 1994 awards, the Committee changed from using the higher of actual salary or the midpoint of the salary range to the higher of actual salary or the market value of the position. This was done to better associate the bonus award to competitive positions in the marketplace. LONG-TERM INCENTIVE PLAN The Company's long-term incentive plan, the Performance Unit Plan (PUP), is designed to motivate executives to improve shareowner value. The Plan focuses on the Company's stock performance over three-year cycles. Executives receive Plan payouts based equally on the Company's stock performance appreciation over the past three years as compared to a group of sixteen telecommunications firms and corporate performance against targets of various elements selected by this Committee at the beginning of the cycle. These elements, cash return on gross assets and stock performance measures, are intended to align executive compensation with the return received by Frontier's shareowners. Cycle payouts are a product of the Company's stock price at the end of the cycle, corporate performance against the selected targets, and the number of units granted to an executive for the cycle. Mr. Bittner's award was based upon performance achieved at 134.6% of the target levels. The awards made to the other executive officers were based upon performance achieved at 124.4% to 135.0% of the target levels. Beginning in 1994 PUP was discontinued. No new grants were issued in 1994, however, the remaining cycle, 1993-1995, will run to its conclusion. STOCK OPTION PLAN Stock option plans are an important component of executive compensation programs because they are a compensation vehicle which ties long-term compensation directly to furthering the interests of shareowners and to improving corporate performance. The Company's Executive Stock Option Plan is designed to align executive compensation with the long-term performance of the Company's stock. Options issued in 1994 do not expire until 2004, and the exercise price is the value of the option on the day the option was issued. Prior to the beginning of each year, option grant ranges are established by salary grade with the assistance of the William M. Mercer, Inc. consulting firm. This Committee makes a subjective determination of the specific stock option grant to be awarded to each executive officer. The factors considered by the Committee in making this determination are: (a) The executive officer's past performance of previously set objectives and (b) His or her expected future contribution to the long-term strategic goals and objectives of the Company. _______________________________________ 6 Proxy Statement Frontier Corporation No relative weights are attributed to either of these factors. All executive officers of the Company received options in 1994 based on their position in the Company, their contribution to the achievement of the Company's long-term objectives as assessed by Committee members based on their experience with the executive officers, and upon the recommendation of the chief executive officer. Upon this Committee's recommendation, the full Board awarded Mr. Bittner options based upon these factors as well. OTHER ACTIONS The Committee approved changes to the Restated Executive Stock Option Plan for presentation to shareowners for approval. See Management Stock Incentive Plan, page 13. The proposed changes are as follows: 1. Expansion of the plan to other key employees-- a group of approximately 150 managers across the Company. With this change approximately 215 of a total of about 4,400 employees will be eligible for stock compensation. 2. Introduction of restricted stock as an additional component of compensation. It is expected that restricted stock will be used selectively to reward key employees within the executive group. Vesting may occur based on continued employment or in conjunction with pre-established performance parameters, including, but not limited to, one or more of the following: total shareowner return, earnings per share growth, cash flow growth and return on equity. The Committee believes that stock-based programs are the best long-term incentives, are excellent motivators and better align the efforts of management with the objectives of the shareowners. The Committee has established stock ownership guidelines for the Company's executives. These guidelines are a multiple of salary. Mr. Bittner's target, to be achieved by January 1, 1999, is the beneficial ownership of Company common stock equal in value to four times his annual salary. Section 162(m) of the Internal Revenue Code limits the tax deduction to $1 million for compensation paid to the five highest paid executive officers unless certain requirements are met. The proposed changes to the Management Stock Incentive Plan, specifically as they relate to performance-based restricted stock, are designed to comply with Section 162(m) requirements. The Committee favors pay-for-performance and intends to continue to review executive compensation plans in consideration of the regulations. No member of this Committee is a former or current officer or employee of the Company or any of its subsidiaries. Respectfully submitted, Daniel E. Gill (Chair) Patricia C. Barron Douglas H. McCorkindale February 13, 1995 ________________________________________________________________________________ PERFORMANCE GRAPH The following graph charts the Company's cumulative total shareowner return performance against the Standard and Poor's Telephone Index as well as against the Standard and Poor's 500 Index. A variety of factors may be used in order to assess a corporation's performance. This Performance Graph, which reflects the Company's total return against the selected peer group, reflects one such method. The performance of the Standard and Poor's Telephone Index is weighted by the stock market capitalization of the companies within that peer group. [GRAPH APPEARS HERE]
COMPARISON OF FIVE YEAR CUMULATIVE RETURN AMONG FRONTIER CORP. S&P TELEPHONE INDEX AND S&P 500 INDEX ------------- ------------- ------- FRONTIER CORP. S&P TELEPHONE S&P 500 Measurement period ------------- ------------- -------- (Fiscal Year Covered) Index Index - --------------------- ------------- ------------- -------- Measurement PT - 0 100 100 100 $ ----- $ ----- $ ----- 12 31 90 75 95 97 FYE --/--/-- $ ----- $ ----- $ ----- 12 31 90 87 102 126 FYE --/--/-- $ ----- $ ----- $ ----- 12 31 92 102 112 136 FYE --/--/-- $ ----- $ ----- $ ----- 12 31 93 134 129 149 FYE --/--/-- $ ----- $ ----- $ ----- 12 31 94 130 120 151 FYE --/--/-- $ ----- $ ----- $ -----
_______________________________________ Proxy Statement Frontier Corporation 7 ________________________________________________________________________________ COMPENSATION OF COMPANY MANAGEMENT The tables and other information set forth below are included to enable our shareowners to better understand the compensation of the Company's executives. These tables reflect the various forms of compensation paid the executive officers of Frontier Corporation. Specifically, these include salary, bonus, stock options and a long-term incentive plan. The Company does not provide its executives with stock appreciation rights. Mr. Purcell was the only executive officer who exercised any stock options during 1994. The Report of the Committee on Management of the Board of Directors appears on page 5 of this Proxy Statement. This Report discusses the factors taken into consideration to set Mr. Bittner's compensation and the compensation of the other executive officers. A Performance Graph showing the performance of the Company's stock as compared to both the Standard and Poor's 500 Index and the Standard and Poor's Telephone Index appears on page 7 of this Proxy Statement. SUMMARY COMPENSATION TABLE The following table provides a summary of compensation paid to the CEO and the other four most highly compensated executive officers of the Company for services rendered to the Company and its subsidiaries over the past three fiscal years. The indicated titles are those currently held by each named executive officer.
- ------------------------------------------------------------------------------------------------- Long Term Annual Compensation Compensation - ------------------------------------------------------------------------------------------------- Awards Payouts ------------------------- Other Securities Annual Underlying All Other Name and Compen- Options/ LTIP Compen- Principal Salary Bonus sation SARs Payouts sation Position Year ($) ($) ($) (3) (#) ($) (4) ($) (5) - ------------------------------------------------------------------------------------------------------------- R. L. Bittner/1/ 1994 $408,333 $349,471 $ 0 88,800 $204,164 $41,369 Chairman, 1993 $360,000 $407,500 $ 0 46,000 $230,121 $26,856 President and CEO 1992 $292,750 $160,000 $ 0 16,000 $ 8,946 $14,901 J. T. Carr 1994 $200,275 $132,500 $8,330 22,000 $ 67,856 $10,508 President and CEO, 1993 $176,350 $ 87,750 $ 0 12,000 $ 80,702 $ 8,934 Rochester Telephone Corp. 1992 $156,900 $ 60,600 $ 0 5,400 $ 3,216 $34,029 and President, Frontier Telephone Group D. M. Gregory/2/ 1994 $219,542 $131,600 $3,799 26,400 $ 65,556 $17,306 President, Frontier 1993 $186,567 $131,625 $ 0 13,200 $ 69,753 $29,963 Communications Group 1992 $178,413 $ 67,200 $ 0 5,400 $ 0 $43,701 L. L. Massaro 1994 $189,442 $111,700 $ 0 22,000 $ 70,385 $16,600 Corporate Vice 1993 $174,800 $131,625 $ 0 9,000 $ 95,662 $11,721 President--Finance 1992 $165,100 $ 58,600 $ 0 5,400 $ 5,126 $19,247 J. K. Purcell 1994 $181,350 $ 98,000 $ 0 26,400 $ 70,223 $17,369 Corporate Vice 1993 $175,600 $131,625 $ 0 12,600 $ 98,589 $12,033 President 1992 $168,800 $ 63,100 $ 0 5,400 $ 5,135 $11,237 - -------------------------------------------------------------------------------------------------
(1) Mr. Bittner was named President and Chief Executive Officer effective February 16, 1992. The compensation indicated for 1992 includes 1992 compensation relating to his prior position as Executive Vice President of the Company. (2) Mr. Gregory became an employee and a Vice President of the Company effective February 16, 1992. From July 1, 1991, until February 16, 1992, he rendered consulting services as President of the Company's subsidiary RCI Network Services, Inc. (RCINS) but during that period he was not an employee of the company. (In October, 1994, the name of this company was changed to Frontier Communications International Inc.) This table reflects payments made by the Company and/or RCINS in 1992 to Dale M. Gregory Management Consultants, Inc., for these consulting services. The amount of these payments was $29,687. (3) The amounts reported in this column for 1994 include $3,799 paid to Mr. Gregory and $8,330 paid to Mr. Carr to offset income tax liabilities incurred by each of them because each received additional income in recognition of certain expenditures each made on behalf of the Company. (4) As described in more detail in the Report of Committee on Management at page 5 of this Proxy Statement, 1994 Performance Unit Plan awards are based upon performance achieved at 124.4% to 135.0% of the target levels. (5) "All Other Compensation" includes imputed income from term life insurance coverage and the Company's contributions to both the tax-qualified 401(k) and nonqualified defined contribution plans. For 1994, imputed income from term life insurance coverage was $4,656 for Mr. Bittner, $3,758 for Mr. Carr, $1,503 for Mr. Gregory, $2,152 for Mr. Massaro and $3,285 for Mr. Purcell. The Company's 1994 contributions on behalf of the named executive officers to the tax- qualified 401(k) and nonqualified defined contribution plans, respectively, were as follows: $5,805 and $30,908 for Mr. Bittner; $6,750 and $0 for Mr. Carr; $6,255 and $9,548 for Mr. Gregory; $6,274 and $8,174 for Mr. Massaro; and $6,262 and $7,822 for Mr. Purcell. For Mr. Gregory, "All Other Compensation" includes a special payment in 1994 in the amount of $4,860. For Mr. Carr, "All Other Compensation" includes a special payment in 1994 in the amount of $9,450. Each of these special payments was a one time reimbursement of expenses incurred by the named executive officer. ______________________________________ 8 Proxy Statement Frontier Corporation The following companion tables to the Summary Compensation Table list the stock options granted during the 1994 fiscal year to the named executive officers, their stock option exercises in 1994 and the aggregate options they held at the end of 1994, and the estimated retirement benefits which would be paid to them at age 65. OPTION/SAR GRANTS IN LAST FISCAL YEAR The following Individual Grants table includes two columns designated as "Potential Realized Value." The calculations in those columns are based on hypothetical growth assumptions, proposed by the Securities and Exchange Commission, of 5% and 10% for stock price appreciation for the option term. There is no way to anticipate what the actual growth rate of the Company's stock price will be.
INDIVIDUAL GRANTS IN 1994 - ----------------------------------------------------------------------------------------------------------------- Number of Potential Realized Value Securities % of Total at Assumed Annual Rates Underlying Options/SARs of Stock Price Appreciation Options/SARs Granted to Exercise or for Option Term Granted/(1)/ Employees in Base Price Expiration --------------------------- Name (#) Fiscal Year ($/Share) Date 5% ($) 10% ($) - ----------------------------------------------------------------------------------------------------------------- R. L. Bittner 71,000 32.07% $21.188 3/21/04 $ 946,054 $2,397,487 17,800 32.84% $22.688 4/27/04 $ 253,971 $ 643,613 J. T. Carr 17,600 7.95% $21.188 3/21/04 $ 234,515 $ 594,307 4,400 8.12% $22.688 4/27/04 $ 62,779 $ 159,095 D. M. Gregory 21,200 9.58% $21.188 3/21/04 $ 282,484 $ 715,869 5,200 9.59% $22.688 4/27/04 $ 74,194 $ 188,022 L. L. Massaro 17,600 7.95% $21.188 3/21/04 $ 234,515 $ 594,307 4,400 8.12% $22.688 4/27/04 $ 62,779 $ 159,095 J. K. Purcell 21,200 9.58% $21.188 3/21/04 $ 282,484 $ 715,869 5,200 9.59% $22.688 4/27/04 $ 74,194 $ 188,022 - -----------------------------------------------------------------------------------------------------------------
(1) The option grants have the following material terms: exercise price is the market price (based on the closing price of the Company's common stock on the New York Stock Exchange) on the date of the option grant; 1/3 of the options granted may be exercised commencing one year following the grant date, a second 1/3 may be exercised commencing two years following the grant date, and the remaining 1/3 may be exercised commencing three years following the grant date. The option grant dates were 3/21/94 and 4/27/94. Options may not be transferred other than by will or the laws of descent and distribution. An option may be exercised upon written notice to the Company accompanied by payment in full for the shares being acquired. In the event of a "change in control" as defined by the Executive Stock Option Plan, all options become immediately vested and exercisable.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES - ------------------------------------------------------------------------------------------------------------------- Number of Securities Value of Unexercised In- Shares Underlying Unexercised the-Money Options/SARs Acquired Value Options/SARs at FY End at FY End(2) ---------------------------- ---------------------------- On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ------------------------------------------------------------------------------------------------------------------ Name (#) (#)(1) (#) (#) ($) ($) - ------------------------------------------------------------------------------------------------------------------ R. L. Bittner 0 N/A 25,998 124,802 $89,618 $92,257 J. T. Carr 0 N/A 7,600 31,800 $27,600 $26,175 D. M. Gregory 0 N/A 8,000 37,000 $28,425 $27,825 L. L. Massaro 0 N/A 6,600 29,800 $25,538 $22,050 J. K. Purcell 800 $5,200 7,000 36,600 $23,713 $27,000 - -------------------------------------------------------------------------------------------------------------------
(1) Aggregate market value of the shares acquired or covered by the option less the aggregate exercise price. (2) Options are valued at the market value of Frontier Corporation (formerly Rochester Telephone Corporation) common stock at December 31, 1994, (closing price of $21.125) less the per share option exercise price, multiplied by the number of exercisable/unexercisable options. ______________________________________ Proxy Statement Frontier Corporation 9 PENSION PLANS The following table shows the estimated annual benefits payable upon retirement at age 65 to individuals in specified remuneration and years of service classifications. The amounts set forth in this table do not reflect early retirement incentives which the Company had previously offered certain of its management employees. Furthermore, the amounts set forth are neither subject to any deduction for Social Security benefits or any other offsets nor adjusted to reflect maximum allowable benefits under the Internal Revenue Code. All of the Company's officers, including those listed in the Summary Compensation Table, are participants in the Company's Management Pension Plan as supplemented by a Supplemental Management Pension Plan (SMPP). The annual aggregate pension benefit for an officer under these Plans is based upon several factors and is largely determined by the number of years of employment multiplied by a percentage of the officer's three consecutive years of highest average annual compensation preceding retirement.
PENSION PLAN TABLE - -------------------------------------------------------------------------------- Years of Service - -------------------------------------------------------------------------------- Remuneration (15) (20) (25) (30) (35) - -------------------------------------------------------------------------------- $ 150,000 33,273 44,364 55,455 66,546 77,637 175,000 39,048 52,064 65,080 78,096 91,112 200,000 44,823 59,764 74,705 89,646 104,587 225,000 50,598 67,464 84,330 101,196 118,062 250,000 56,373 75,164 93,955 112,746 131,537 300,000 67,923 90,564 113,205 135,846 158,487 350,000 79,473 105,964 132,455 158,946 185,437 400,000 91,023 121,364 151,705 182,046 212,387 450,000 102,573 136,764 170,955 205,146 239,337 500,000 114,123 152,164 190,205 228,246 266,287 550,000 125,673 167,564 209,455 251,346 293,237 600,000 137,223 182,964 228,705 274,446 320,187 650,000 148,773 198,384 247,955 297,546 347,187 700,000 160,323 213,764 267,205 320,646 374,087 750,000 171,873 229,164 286,455 343,746 401,037 800,000 183,423 244,564 305,705 366,846 427,987 850,000 194,973 259,964 324,955 389,946 454,937 900,000 206,523 275,364 344,205 413,046 481,887 950,000 218,073 290,764 363,455 436,146 508,837 1,000,000 229,623 306,164 383,705 459,246 535,787 1,050,000 241,173 321,564 401,955 482,346 562,737 1,100,000 252,723 336,964 421,205 505,446 589,687 1,150,000 264,273 352,364 440,455 528,546 616,637 1,200,000 275,823 367,764 459,705 551,646 643,587 1,250,000 287,373 383,164 478,955 574,746 670,537 1,300,000 298,923 398,564 498,205 597,846 697,487 1,350,000 310,473 413,964 517,455 620,946 724,437 1,400,000 322,023 429,364 536,705 644,046 751,387 1,450,000 333,573 444,764 555,955 667,146 778,337 - --------------------------------------------------------------------------------
_________________________________ 10 Proxy and Frontier Corporation Mr. Bittner, Mr. Gregory, Mr. Massaro, and Mr. Purcell each have executive contracts which may pay a benefit in the event of a "Change in Control" of the Company. These contracts are explained in detail on pages 11 and 12 of this Proxy Statement. Each of them also participates in the Company's Pension Plan. Under SMPP, their service factor would include, subject to certain limitations, the amount of service for which payment is made to them under their executive contract. The SMPP also provides that in the event of a Change in Control of the Company, the Board may not terminate a participant's benefit and the Employees' Benefit Committee may not change prior decisions regarding a participant's service factor. Effective January 1, 1994, the Company established a Supplemental Executive Retirement Plan (SERP) which covers all the officers named in the preceding tables plus two additional executive officers. The Plan has an accrual and vesting schedule based on years of service and age. A maximum benefit of 60% of final compensation will be paid to an executive retiring at age 50 or older with 30 or more years of service. Payments made under the Company's Management Pension Plan and the Supplemental Management Pension Plan are included in determining the ultimate benefit payable under the SERP. However, in order to qualify for the SERP benefit a covered executive must be at least 50 years of age. Executive officers who are not at least 50 years old when they retire would only receive the retirement benefits set forth in the above Pension Plan Table and would receive no SERP benefit. For the purposes of these Plans, annual compensation is the same as that given in the Salary and Bonus columns of the Summary Compensation Table for the named executive officers. The number of years of employment of such individuals for the purposes of these Plans currently are as follows: Mr. Bittner-32; Mr. Carr- 26; Mr. Gregory-16; Mr. Massaro-26; and Mr. Purcell-30. Additionally, the Company has agreed to bridge Mr. Gregory's prior service with other telecommunications companies provided he remains employed by Frontier Corporation until January 1, 1997. Effective that date, the Company will credit Mr. Gregory his additional six years and six months experience in the telecommunications industry. Neither Mr. Massaro nor Mr. Gregory has yet reached the age of 50 years. Assuming they retired as of the current date, each would receive only a reduced pension based upon the amount reflected in the Pension Plan Table and neither would receive any additional benefit under the SERP. Mr. Bittner and Mr. Purcell have each reached the age of 50 years and have accrued at least 30 years of service credit. If they retired as of the current date, each would receive a full pension based on the amount reflected in the Pension Plan Table. In addition, assuming annual compensation at the level each received as of February 28, 1995, under the SERP Mr. Bittner would receive his full pension plus an estimated SERP benefit of $75,041; and Mr. Purcell would receive his full pension plus an estimated SERP benefit of $40,511. Although Mr. Carr has reached the age of 50 years, his 26 years of service credit entitles him to only a reduced pension rather than a full pension. Assuming annual compensation at his February 28, 1995 level, if Mr. Carr were to retire, he would receive a reduced pension plus an annual SERP benefit of $56,651. ________________________________________________________________________________ COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS The members of the Committee on Management at the end of the last completed fiscal year were Ms. Barron, Mr. McCorkindale and Mr. Gill (Chair). None of these persons were, during 1994 or previously, an officer or employee of the Company or any of its subsidiaries. The full Board of Directors accepted the recommendation of the Committee on Management concerning Mr. Bittner's compensation. Mr. Hasselwander is a former officer of the Company and, during 1994, he participated in those deliberations of the registrant's Board of Directors in which the Board accepted the Committee on Management's recommendations concerning executive officer compensation. Mr. Hasselwander is not a member of the Committee on Management. No executive officer of the Company has, during 1994 or previously, served as a Director or member of the Compensation Committee of any other entity that has an executive officer who serves or has served either as a member of the Committee on Management or as a member of the Board of Directors of Frontier Corporation. EMPLOYMENT CONTRACTS The Company has entered into agreements, for an indefinite term, with Mr. Bittner, Mr. Gregory, Mr. Massaro and Mr. Purcell. Each agreement provides that, in the event of a change in control (as defined in the agreement) which is followed within three (3) years by termination of employment under circumstances other than one of _______________________________________ Proxy Statement Frontier Corporation 11 the following: (i) death, (ii) retirement, (iii) disability, (iv) termination by the Company for Cause (as defined in the agreement), or (v) Voluntary Termination (as defined in the agreement), the employee will be entitled to (a) continuation for three years of certain health and life insurance benefits, and (b) a cash severance payment equal to three (3) times the aggregate annual salary and bonus as determined under the agreement. Additionally, in the event any of these amounts are determined to trigger an Excise Tax (as defined in the agreement), the employee may also be entitled to a Gross-Up Payment (as defined in the agreement). The employee is also entitled to the above benefits if after a change in control the employee terminates his employment for Good Reason (as defined in the agreement) or during a "window period" (also as defined in the agreement). Mr. Bittner, Mr. Gregory, Mr. Massaro, and Mr. Purcell would each receive their individual severance payments in a lump sum. ________________________________________________________________________________ Interest of Certain Persons in Matters to be Acted Upon As disclosed at Proposal 3, Management Stock Incentive Plan, at pages 13 and 14, the executive officers of the Company would be entitled to participate in the Plan. Likewise, as disclosed at Proposal 4, Directors Stock Incentive Plan, at pages 14 and 15, the nominees for Director would be entitled to participate in that Plan. The benefits each group would receive under these Plans is set forth in the New Plan Benefits Table at page 16 of this Proxy Statement. ________________________________________________________________________________ Indemnification of Certain Persons As authorized by New York State Law, the Company and its subsidiaries have purchased insurance from the Chubb Group and from the National Union Fire Insurance Company of Pittsburgh, PA, insuring such companies against amounts they may pay as a result of indemnifying their officers and Directors for certain liabilities such officers and Directors might incur. These insurance policies also insure all officers and Directors of the Company and its affiliates for additional liabilities against which such officers and Directors may not be indemnified by the Company and its affiliates. The insurance was renewed on May 7, 1994 for a period of one year. During 1994, the Company paid $483,615 for this insurance and the renewal policy costs will be negotiated in March, 1995. ________________________________________________________________________________ PROPOSAL 2-ELECTION OF INDEPENDENT AUDITORS The Company's independent auditors are Price Waterhouse LLP. At the Annual Meeting, the shareowners will consider and vote upon a proposal to elect independent auditors for the Company's fiscal year ending December 31, 1995. The Audit Committee of the Board of Directors has recommended that Price Waterhouse LLP be re-elected as independent auditors for that year. No member of the Audit Committee is an officer or employee of the Company. The Board of Directors unanimously recommends that shareowners vote FOR this proposal. Proxies solicited by the Board of Directors will be voted FOR the foregoing proposal unless otherwise indicated. Approval of this proposal will require the affirmative vote of a majority of the votes cast at the Annual Meeting by the holders of the common stock outstanding. Representatives of Price Waterhouse LLP will be present at the Annual Meeting to make a statement, if they wish, and to respond to appropriate questions from shareowners. MANAGEMENT RECOMMENDS A VOTE "FOR" THE ELECTION OF PRICE WATERHOUSE LLP AS THE COMPANY'S INDEPENDENT AUDITORS, DESIGNATED AS PROPOSAL 2 ON YOUR PROXY CARD. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF THE DIRECTION THEREON TO THE CONTRARY. ________________________________________________________________________________ Proposals to Modify Employee and Director Compensation Plans The Company is requesting shareowner approval of amendments and modifications to existing employee and Director compensation plans. In general the modifications are designed to increase the participants' ownership of Company common stock. These proposals are included on pages 13 through 15 of this Proxy Statement as Proposals 3 and 4. Specifically, in the case of Proposal 3, shareowner approval is requested to increase the group of employees eligible to receive stock compensation and to institute a restricted stock plan. In the case of Proposal 4, shareowner approval is requested to expand the group of persons eligible to receive Directors stock options to include non-employee Directors of subsidiaries of Frontier Corporation and to implement a stock grant plan. A brief summary of the intent of each proposal is presented after the title of the proposal. As required by the regulations of the Securities and Exchange Commission, also included is a summary of the material provisions of each Plan. ________________________________________ 12 Proxy Statement Frontier Corporation Copies of each of these Plans and any amendments to them will be available at the meeting. They also will be sent to any shareowner upon written or oral request. Shareowners should direct such requests to the Corporate Secretary at the Company's office at Frontier Center, 180 South Clinton Avenue, Rochester, New York 14646. Alternatively, shareowners may request this material by calling the Shareowner Line, 1-800-836-0342. ________________________________________________________________________________ PROPOSAL 3-MANAGEMENT STOCK INCENTIVE PLAN SUMMARY OF PROPOSED ACTION As discussed in the Report of the Committee on Management at page 7 of this Proxy Statement, the Committee has adopted the Management Stock Incentive Plan (the "Plan"), subject to shareowners' approval, to enhance, restate and rename the Restated Executive Stock Option Plan. The purpose of the proposed action is to expand the group of key employees eligible to participate and add restricted stock as a component of compensation. This action will require the affirmative vote of a majority of the outstanding shares eligible to vote on this proposal. SUMMARY OF PLAN PROVISIONS The Company's Executive Stock Option Plan was originally adopted by the Board of Directors on November 20, 1989 and approved by shareowners on April 25, 1990. A restatement was approved by shareowners on April 27, 1994. The Restated Executive Stock Option Plan currently covers approximately 65 employees who may be granted either incentive stock options ("ISOs") or non-qualified stock options ("NQSOs") or a combination of the two. Options with respect to 695,871 shares of common stock were outstanding, as of February 28, 1995, to 54 employees. Plan Administration; Eligibility. A Committee of the Board of Directors (the "Committee") has discretion to select, from among the persons eligible for awards, the key employees to whom awards will be granted, to make any combination of awards to participants, and to determine the specific terms of each award, subject to the provisions of the restated and renamed Plan. Persons eligible to participate in the Plan generally will be those employees, as selected from time to time by the Committee, who are responsible for or who contribute to the management, growth, or profitability of the Company. This expanded group currently numbers approximately 215 managers and executives across the Company. Stock Options. The Plan permits the granting of both ISOs and NQSOs. The exercise price under each option is not less than the fair market value of the common stock at the time the option is granted. Options by their terms are not transferable by the participant other than by will or the laws of descent and distribution, by gift to family members or by the terms of a domestic relations order. Options become exercisable with respect to 33 1/3% of the shares subject to the option on the first anniversary of the date of the grant and with respect to an additional 33 1/3% of such shares on the second and third anniversaries of such grant. Options expire automatically if not exercised within ten (10) years following the date of grant. The maximum value of common stock under which an ISO granted under this Plan or any other Company plan which first becomes exercisable in any calendar year cannot exceed $100,000.00. Restricted Stock. Following shareowners' approval of the restated and renamed Plan, the Committee may also award shares of common stock subject to such conditions and restrictions as it may determine ("Restricted Stock"). These conditions and restrictions may include the achievement of certain performance goals and/or continued employment with the Company through a specified restricted period. For grants not related to performance, the vesting period will be a minimum of three years duration. For participants whose pay is subject to the $1 million cap under Section 162(m) of the Internal Revenue Code, the Committee may select one or more of the following performance targets: . Total shareowner return . Earnings per share growth . Cash flow return . Return on equity Shares Available. The aggregate number of shares of the Company's common stock available for award under this Plan during any calendar year will not exceed one percent of the number of issued shares, including treasury shares, of the Company's common stock. During the life of the Plan, a maximum of 5,000,000 shares may be issued in conjunction with ISOs. At any point during the life of the Plan, the aggregate number of shares which may be issued as restricted stock will not exceed three percent of the number of issued shares, including treasury shares, of the Company's common stock. The maximum individual annual grant levels for restricted stock and stock options will not exceed 100,000 and 500,000 shares respectively. If an award expires, terminates or is cancelled without being exercised, under certain circumstances, new awards may thereafter be granted incorporating such shares. No award will be granted more than 10 years after the Plan is approved by shareowners. Change in Control. In the event of a change in control of the Company, all of a participant's restricted stock awards shall become immediately vested to the same extent as if all restrictions had been satisfied and all options shall become immediately exercisable, unless directed otherwise by resolution of the Board adopted prior to and specifically relating to the occurrence of such change in control. Each participant also has the right, exercised by written notice to the Company _______________________________________ Proxy Statement Frontier Corporation 13 within sixty (60) days after the change in control, to receive, in exchange for the surrender of an option or any portion thereof to the extent the option is then exercisable, an amount of cash equal to the difference between the fair market value (as determined by the Board) on the date of surrender of the Common Stock covered by the option or portion thereof which is so surrendered and the option price of such Common Stock under the option. TAX CONSEQUENCES The Company has been advised by counsel that under present law the following are the Federal income tax consequences generally arising with respect to awards granted under the Plan. Stock Options. The grant of an option will create no tax consequences for an optionee or the Company. The optionee will have no taxable income upon exercising an ISO (except that the alternative minimum tax may apply), and the Company will receive no deduction when an ISO is exercised. Upon exercising an NQSO, the optionee must recognize ordinary income equal to the difference between the exercise price and the fair market value of the stock on the date of exercise. The Company will be entitled to a deduction for the same amount. The treatment of an optionee's disposition of shares acquired through the exercise of an option depends on how long the shares have been held and on whether such shares were acquired by exercising an ISO or by exercising an NQSO. Generally there will be no tax consequences to the Company in connection with the disposition of shares acquired under an option except that the Company may be entitled to a deduction in the case of the disposition of shares acquired under an ISO before the applicable holding periods have been satisfied. Restricted Stock. A recipient of Restricted Stock generally will be subject to tax at ordinary income rates on the fair market value of the stock at the time that the stock is no longer subject to forfeiture. However, a recipient who so elects under Section 83(b) of the Internal Revenue Code, within 30 days of the date of issuance of the Restricted Stock, will realize ordinary income on the date of issuance equal to the fair market value of the shares of Restricted Stock at that time (measured as if the shares were unrestricted and could be sold immediately). If the shares subject to such election are forfeited, the recipient will not be entitled to any deduction, refund or loss with respect to the taxes paid on the forfeited shares. The Company will receive a tax deduction equal to the amount includable as ordinary income to the recipient. MANAGEMENT RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE MANAGEMENT STOCK INCENTIVE PLAN, DESIGNATED AS PROPOSAL 3 ON YOUR PROXY CARD. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF THE DIRECTION THEREON TO THE CONTRARY. ________________________________________________________________________________ PROPOSAL 4-DIRECTORS STOCK INCENTIVE PLAN SUMMARY OF PROPOSED ACTION Increased common share ownership in the Company by non-employee Directors of the Company's subsidiaries will more closely align their interests to those of our general shareowner population. Based on management's recommendation, the Company's Board of Directors has recommended a modification to the Directors Stock Option Plan to permit expansion of the group of eligible participants to include non-employee Directors of the Company's subsidiaries and to authorize the award of stock grants to Directors of the Company (but not Directors of its subsidiaries). Currently eight persons are non-employee Directors of Frontier Corporation and five persons are non-employee Directors of Frontier Corporation subsidiaries. To reflect the expanded scope of the Plan, it will be renamed as the Frontier Corporation Directors Stock Incentive Plan. This action requires the affirmative vote of a majority of the outstanding shares eligible to vote on this proposal. SUMMARY OF PLAN PROVISIONS The Directors Stock Option Plan was adopted by the Board of Directors on November 20, 1989, approved by shareowners on April 25, 1990, and amended by shareowners on April 27, 1994. The Plan currently authorizes 1,000,000 shares to be available for grants. This authorization is sufficient to support the proposed new actions. The Plan provides for the automatic annual grant to Directors of Frontier Corporation of non-qualified options to purchase 4,000 shares of the Company's common stock. Grants are made each year on the date of the Annual Meeting electing Directors to the Board. Board members who begin service on the Board on a date other than the date of the Annual Meeting are granted an option to purchase a pro rata portion of 4,000 shares. All eight current non-employee Frontier Corporation Directors currently participate in this Plan. The following is a summary of the material provisions of the amended, restated and renamed Frontier Corporation Directors Stock Incentive Plan (the "Plan"). Each option granted under the Plan is evidenced by an option agreement between the individual Director and the Company. At the date each year that Directors are elected to the Board, each Director so elected (whether newly elected or continuing as a carryover Director) will receive an option to purchase a fixed number of shares of the Company's common stock. The exercise price under each option equals the fair market value of the common stock at the time the option is granted. Options are not transferable by the participant other than by will or the laws of descent and distribution. New options granted under the Plan may become exercisable with respect to one-third of the option shares on the first anniversary of the date of grant and with respect to an additional one-third of such shares on the second and third anniversaries of the grant. ________________________________________ 14 Proxy Statement Frontier Corporation Notwithstanding any of the provisions of the Plan, in the event of a change in control of the Company, all of a participant's options are immediately vested and exercisable, unless directed otherwise by resolution of the Board adopted prior to and specifically relating to the change in control. In the event of a change in control, each holder of an exercisable option shall also have the right at any time thereafter during the term of such option to exercise the option in full, notwithstanding any limitation or restriction in any option agreement or in the Plan. Each participant shall also have the right, exercised by written notice to the Company within sixty (60) days after the change in control, to receive, in exchange for the surrender of the option or any portion thereof to the extent the option is then exercisable, an amount of cash. This amount of cash will be equal to the difference between the fair market value (as determined by the Board) on the date of surrender of the common stock covered by the option or portion thereof which is so surrendered and the option price of such common stock under the option. PLAN MODIFICATIONS Eligibility. On January 1, 1995, five non-employee Directors began service on the Board of Frontier Corporation's subsidiary, Rochester Telephone Corp. The Frontier Corporation Board of Directors believes that it is advisable to encourage the Directors of Frontier Corporation subsidiaries to own Frontier Corporation common stock in order to more closely align their interests to the interests of the shareowners of Frontier Corporation. Shareowner approval is necessary to expand Plan participation to include the non-employee Directors of Rochester Telephone Corp. Approval of this plan modification would provide that the non-employee Directors of Rochester Telephone Corp. would receive, annually, a non-qualified option to purchase 3,000 shares of Frontier Corporation common stock. The terms of the option would be the same as discussed above for the current Plan participants. Stock Grants. The Board of Directors of Frontier Corporation believes it would further the purpose of aligning the interests of non-employee Directors of the Company and its shareowners if their non-employee Directors were granted shares of Frontier common stock along with stock options. Accordingly, the restated Plan provides that the first time a Director begins service on the Board, he or she will be awarded 1,000 shares of Frontier Corporation common stock. All other Directors will receive, on the date each year that Directors are elected to the Company's Board (whether newly elected or continuing as a carryover Director), a stock grant of 500 shares of the Company's common stock. A non-employee Director who is a first-time Director and who begins service on a date other than the date of the Annual Meeting will receive 1,000 shares plus a pro rata portion of the 500 shares he or she would have been entitled to receive for a full year's service. All shares obtained pursuant to stock grants will be fully and immediately vested. However, a Director may not sell, gift or otherwise transfer the 1,000 share initial grant while serving on the Company's Board unless the Board agrees to lift the transfer restriction. Directors of subsidiaries are not eligible to receive stock grants. No awards will be granted more than 10 years after the Plan is approved by shareowners. TAX CONSEQUENCES The Company has been advised by counsel that under present law the following are the Federal income tax consequences generally arising with respect to awards granted under the Plan. The grant of an option will create no tax consequences for the optionee or the Company. Upon exercising a non-qualified stock option ("NQSO"), the optionee must recognize ordinary income equal to the difference between the exercise price and the fair market value of the stock on the date of exercise. The Company will be entitled to a deduction for the same amount. The treatment of an optionee's disposition of the shares acquired through exercise of an NQSO depends on how long the shares have been held. Generally, there will be no tax consequences to the Company in connection with the disposition of the shares acquired through exercise on an NQSO. A recipient of a stock grant will be subject to tax at ordinary income rates on the fair market value of the stock at the time of the grant, provided that a Director who has elected to defer receipt of directors fees shall recognize income in accordance with the deferral election. The Company will be entitled to take a tax deduction equal to the amount includable in the Director's income. MANAGEMENT RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE DIRECTORS STOCK INCENTIVE PLAN, DESIGNATED AS PROPOSAL 4 ON YOUR PROXY CARD. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF THE DIRECTION THEREON TO THE CONTRARY. As required by regulations of the Securities and Exchange Commission, the following table shows the benefits under each of the Plans described in Proposals 3 and 4. The table indicates the Plan benefits which may be received by or allocated for the named executive officers, the executive officers as a group, Directors who are not executive officers, and Company employees who are not executive officers. The benefits are expressed in either dollar values or number of units. The Directors, nominees and executive officers will benefit from approval of the Plans in which they participate. ________________________________________ Proxy Statement Frontier Corporation 15
NEW PLAN BENEFITS - -------------------------------------------------------------------------------- Management Directors Stock Incentive Stock Incentive Plan/(1)/ Plan/(2)/ - -------------------------------------------------------------------------------- Name and Position (#) (#) - -------------------------------------------------------------------------------- R. L. Bittner 102,000 N/A Chairman, President and CEO J. T. Carr 26,400 N/A President and CEO, Rochester Telephone Corp. and President, Frontier Telephone Group D. M. Gregory 26,400 N/A President, Frontier Communications Group L. L. Massaro 26,400 N/A Corporate Vice President- Finance J. K. Purcell 11,000 N/A Corporate Vice President Executive Group 240,200 N/A Non-Executive N/A 52,000 Director Group Non-Executive Officer 180,600 N/A Employee Group
- -------------------------------------------------------------------------------- (1) All amounts are for stock options granted in 1995 to the persons currently eligible for options under the Executive Stock Option Plan. The number of stock options which would be granted to the expanded group of eligible employees and/or the restricted stock shares, if any, which may be awarded, is undeterminable at this time as any such grants are at the discretion of the Committee on Management. (2) All amounts are 1995 projections. This Plan is available only to Directors who are not employees of the Company or any of its affiliates. ________________________________________________________________________________ OTHER MATTERS As of the date of this Proxy Statement, the Board of Directors does not intend to present any matter for action at the Annual Meeting other than those set forth in the Notice of Annual Meeting. If any other matters properly come before the meeting, it is intended that the holders of the proxies will act in accordance with their best judgment. ________________________________________________________________________________ FUTURE PROPOSALS OF SHAREOWNERS In order to be eligible for inclusion in the proxy materials for the Company's 1996 Annual Meeting of Shareowners, any shareowner proposal to take action at such meeting must be received at the Company's principal executive offices by November 22, 1995. Any such proposal should be addressed to 180 South Clinton Avenue, Rochester, New York 14646, Attention: Josephine S. Trubek, Corporate Secretary. In addition, the Company's By-Laws establish an advance notice procedure with regard to certain matters, including shareowner proposals not included in the Company's proxy statement, to be brought before an annual meeting of shareowners. In general, in order to bring a matter before the meeting, notice must be received by the Corporate Secretary of the Company not less than 60 days nor more than 90 days prior to the anniversary of the immediately preceding annual meeting and must contain specified information concerning the matters to be brought before such meeting and concerning the shareowner proposing such matters. If the date of the annual meeting is more than 30 days earlier or more than 60 days later than the anniversary date, notice must be 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 the public announcement of the date of such meeting is first made. If a shareowner who has notified the Company of his or her intention to present a proposal at an annual meeting does not appear or send a qualified representative to present that proposal at the meeting, the Company need not present the proposal for a vote at the meeting. March 13, 1995 _______________________________________ 16 Proxy Statement Frontier Corporation -----END PRIVACY-ENHANCED MESSAGE-----