-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SAorsQjDY3zJajQt7t34eaG/WYGFMsl45edyR0ai89MAdh3VVEIf9COi9YdbN5va y97r13kgN6LQPnwhnC8usg== 0000950132-96-000172.txt : 19960328 0000950132-96-000172.hdr.sgml : 19960328 ACCESSION NUMBER: 0000950132-96-000172 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960327 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-04166 FILM NUMBER: 96539166 BUSINESS ADDRESS: STREET 1: ROCHESTER TEL CENTER STREET 2: 180 S CLINTON AVE CITY: ROCHESTER STATE: NY ZIP: 14646-0995 BUSINESS PHONE: 7167771000 FORMER COMPANY: FORMER CONFORMED NAME: ROCHESTER TELEPHONE CORP DATE OF NAME CHANGE: 19920703 10-K405 1 FORM 10-K405 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, 1995 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 incorporation or organization) Identification No.) 180 South Clinton Avenue Rochester, New York 14646-0700 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (716) 777-1000 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 voting stock held by non- affiliates of the registrant as of March 6, 1996 is $4,914,645,050. The number of shares outstanding of Frontier Corporation's common stock (Par Value $1.00 per share) as of the close of March 6, 1996 is 162,195,487 shares. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the registrant's 1995 Annual Report to Shareowners 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 24, 1996, 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 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. The Company's principal lines of business are Long Distance Communications Services, Local Communications Services, Wireless Communications Services and Corporate Operations and Other. Long Distance Communications Services consists primarily of long distance telecommunications services provided to customers throughout nearly all of the United States and in Great Britain. Local Communications Services consists of 34 local telephone companies which serve, as of December 31, 1995, approximately 951,000 access lines in thirteen states. Wireless Communications Services is comprised of the Company's interests in Alabama and Minnesota. Corporate Operations and Other is comprised of expenses traditionally associated with a holding company, an information services subsidiary (Frontier Information Technologies) and Frontier Network Systems which markets and installs telecommunications systems and equipment. Effective January 1, 1995, Frontier reorganized into a holding company structure. Prior to 1995, Local Communications Services provided the majority of the Company's revenues and income. 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 and in 1995, commenced operations in Great Britain. The geographic reach of the Company's long distance operations is nationwide as a result of acquisitions such as American Sharecom, Inc. ("ASI"), WCT Communications, Inc. ("WCT"), Schneider Communications, Inc. ("SCI"), and a merger with ALC Communications Corporation ("ALC"). Due to the merger with ALC, other long distance acquisitions and internal growth by sales to additional customers, the long distance segment represented 69% of the Company's revenue in 1995 and 53% of operating income before acquisition related charges. Expansion through strategic acquisition and business alliances remains a key growth vehicle for the Company. Prior to 1988, the Company's Local Communications Services 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 525,000 access lines. The Company refers to the 33 telephone companies outside of Rochester, New York as "Regional Telephone Operations". The latter group includes approximately 426,000 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 on January 1, 1995, the assets and businesses of the Rochester, New York operating telephone company were divided between two new subsidiaries, Frontier Communications of Rochester, Inc. ("FCR") and Rochester Telephone Corp. ("RTC"). 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. The Company merged with ALC on August 16, 1995. ALC provided national long distance telecommunications services primarily to commercial users. Under the terms of the merger agreement, the Company exchanged two shares of its common stock for each of ALC's common shares. The Company issued approximately 69.2 million shares to effect the merger, which was accounted for as a pooling of interests. On March 1, 1995, prior to the merger with Frontier, ALC acquired ConferTech International, Inc. ("ConferTech"), a telecommunications company specializing in teleconferencing services and the provision of audio bridge equipment. ALC paid approximately $66 million in cash for ConferTech. On March 17, 1995, the Company acquired ASI, a long distance company headquartered in Minneapolis, Minnesota. The Company acquired all of the outstanding shares of ASI in exchange for approximately 8.7 million shares of Frontier common stock. The transaction has been accounted for as a pooling of interests. On March 29, 1995, the Company acquired Minnesota Southern Cellular Telephone Company ("MSCTC"). A total of approximately 867,000 shares of Frontier common stock were reissued from treasury in exchange for all of the shares of MSCTC. MSCTC is the non-wireline provider of cellular service in Minnesota Rural Service Area #10. On May 18, 1995, the Company purchased WCT for approximately $80 million in cash. WCT is a long distance carrier headquartered in Santa Barbara, California. On July 11, 1995, the Company completed its purchase of Enhanced TeleManagement, Inc. ("ETI"), a privately-held telecommunications company specializing in the integration and resale of local, long distance, and ancillary telephone services to small and medium-sized business customers. Frontier paid approximately $29 million in cash for ETI. On August 8, 1995, Frontier acquired SCI and SCI's 80.8% interest in LinkUSA Corporation ("LinkUSA") for $130 million in cash. SCI provides telecommunications services in the Midwest. LinkUSA develops software applications for telecommunications firms. On February 2, 1996 the Company acquired the remaining 19.2% interest in LinkUSA for $2.3 million. On November 22, 1995, the Company completed its acquisition of Link-VTC, Inc. ("Link-VTC"), a Boulder, Colorado based telecommunications company specializing in videoconferencing services. The Company will pay a total cash purchase price in the range of approximately $12.4 million to $17.9 million, depending on the 1996 financial performance of Link-VTC. In 1995, the Company acquired, through a tender offer, $76.8 million of ALC's 9% Senior Subordinated Notes for $83.5 million plus accrued interest. The early retirement resulted in an extraordinary loss of $5.8 million, net of applicable income taxes of $3.7 million, including a debt issue cost write-off of $2.8 million. In 1995, the Company also retired early its outstanding 9% debentures scheduled to mature in 2020. The Company recorded an extraordinary loss of $3.2 million, net of applicable income taxes of $1.7 million. On November 15, 1995, the Company filed a $500 million universal shelf registration with the Securities and Exchange Commission which became effective on January 30, 1996. The shelf registration will allow the Company to issue and register a combination of debt securities, common stock, preferred stock or warrant securities. Proceeds will be used for general corporate purposes including, but not limited to, financing growth activities. 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. Long Distance Communications Services - ------------------------------------- General Frontier provides long distance telecommunications services primarily to commercial and, to a lesser extent, residential subscribers in the majority of the United States and completes subscriber calls to all directly dialable locations worldwide. Frontier is one of the few nationwide carriers of long distance services and in 1995 commenced operations in Great Britain. The Company operates its own switches, develops and implements its own products, monitors and deploys its transmission facilities and prepares and designs its own billing and reporting systems. The Company focuses on a segment of the long distance industry that offers comparatively high operating margins, specifically, commercial accounts. In this segment, calling volume consists primarily of calls made during regular business hours, which command peak-hour pricing. Commercial subscribers tend to make most of their calls on weekdays during normal business hours, while the Company's residential subscribers tend to make most of their calls in the evening and on weekends, when business usage is lowest. Neither commercial nor residential subscribers' access to the Company's service is limited as to the time of day or day of week. Products and Services The Company provides a variety of long distance products and services to commercial and residential subscribers nationwide. The bulk of the Company's revenue is derived from outbound and inbound long distance services which are generally marketed under the Frontier name. Many of the Company's products, however, differ from those of certain competitors due to the level of value-added services the Company offers and the flexibility of product pricing to maintain competitiveness. The variety of products offered are categorized by the Company based upon certain primary characteristics: pricing, value-added services, reporting and 800 services. Pricing-All of the Company's customers are identified by their telephone number, dedicated trunk or validated access code, and have a rating which is used to determine the price per minute that they pay on their outbound or inbound long distance calls. Rates typically vary by the volume of usage, the distance of the calls, the time of day that calls are made, the region that originates the call, and whether or not the product is being provided on a promotional basis. Value-added Services-The Company's value-added services are aimed primarily at the business subscriber, although the Company also offers products for residential customers. Value-added services include: Call Delivery, a message delivery service which enables a customer to send a prerecorded message to a number; VoiceQuote, an interactive stock quotation service; InfoReach, numerous audio/text programs such as news and weather; a voice mail service; Option USA, a service to provide calls to the U.S. from selected international locations; and three different teleconferencing services. The Company provides a full spectrum of facsimile services including Broadcast FAX, which allows the customer to send or fax documents to multiple locations at the same time; fax on demand, which allows the customer to make a fax document available to people who call an 800 number; fax mail, which allows a customer to receive facsimile messages in a fax mailbox and pick them up at a later date; PC software, which allows the customer to manage his facsimile lists and documents from a PC; and special international pricing to accommodate short duration facsimile traffic. Reporting Services-The Company offers a variety of billing options and media aimed primarily at business customers. When a new commercial account is opened, the customer is offered the opportunity to custom design the format of its reports. The Company also offers customers graphic reports of traffic patterns on a nationwide basis by state, within state by area of dominant influence ("ADI") and within ADI by zip code. The Company believes this service is useful to certain customers for direct response and customer service applications. The Company also offers its proprietary personal computer reporting service which allows customers to design their own reports, prepare separate itemized bills, do mark-up reporting and generate numerous other customer reports. 800 Services-The Company greatly expanded its 800 product offerings, capitalizing on opportunities resulting from Federal Communications Commission ("FCC") mandated number portability in May 1993 (which allows customers to select a different long distance carrier without changing their 800 number). These new offerings include area code blocking and routing; time of day routing; Home Connection 800, fractional 800 service which allows residential customers to access 800 service utilizing a 4 digit security Personal Identification Number ("PIN"); Multi-Point 800 services, which allows customers to use accounting codes on an 800 number or route a single 800 number to numerous locations simultaneously; Follow-Me 800, which allows customers to change call routing from a Touch Tone (R) telephone; and TargetLine 800, which routes calls to the closest location a customer identifies and provides custom prompts based upon a customer specific database. Transmission The Company endeavors to have sufficient switching capacity, local access circuits and long distance circuits at and between its network switching centers to permit subscribers to obtain access to the switching centers and its long distance circuits on a basis which exceeds industry standards regarding clarity, busy signals or delays. The network utilizes fiber optic and digital microwave transmission circuits to complete long distance calls. With the exception of digital microwave systems located in California, New York and Pennsylvania for which the Company holds FCC licenses and several short fiber optic systems, such facilities are leased on a fixed price basis under both short and long- term contracts. In recent years, abundant availability and declining prices have dictated a strategy of obtaining new capacity generally for terms between six months and one year. While the Company has several long term contracts, these contracts have annual "mark-to-market" clauses. These provisions function to keep the price the Company pays at or near current market rates. An important aspect of the Company's operation is planning the mix of the types of circuits and transmission capacity to be leased or used for each network switching center so that calls are completed on a basis which is cost effective for the Company without compromising prompt service and high quality to subscribers. The Company's network switching centers house equipment with varying capacities in order to meet the anticipated needs of the service origination region(s) served by the center. The equipment used by the Company is, for the most part, designed to permit expansion to its capacity by the addition of standard components. If the maximum capacity of the equipment in any center is reached, the Company replaces it with higher capacity switching equipment and attempts to move the replaced unit to a network switching center in a different service origination region. The Company is dependent upon local telephone companies for installing local access circuits and providing related service when establishing a network switching center. International service is provided through participation in the International Carrier Group ("ICG") with another major long distance company. The ICG in turn contracts with other long distance companies and foreign entities to provide high quality international service at competitive rates. The rapid growth of the Company has required it to assess the merits of owning additional transport facilities as a means to assure circuit availability either in areas where capacity on a resale basis is comparatively expensive, or to meet long-term strategic objectives. The Company continues to monitor the relative merits of owning capacity in comparison to leasing it in different parts of the country. Marketing The Company markets its services and products through a direct sales force, direct marketing campaigns, sales agents and affiliated local exchange carriers. Field sales representatives focus on making initial sales to commercial users. They solicit business through face-to-face meetings with small to medium sized businesses. Each field sales representative earns a commission dependent on the customer's usage and value-added services. The Company's sales strategy is to make frequent personal contact with existing and potential customers. The prices and promotions offered for the Company's services are designed to be competitive with other long distance carriers. Prices will vary as to interstate or intrastate calls as well as with the distance, duration and time-of-day of a call. In addition, the Company may offer promotional discounts based upon the duration of commitment to purchase services, an incremental increase in service or "free" trial use of the many value-added and reporting services. Volume discounts are also offered based upon the amount of monthly usage in the day, evening and night periods or based solely on total volume of usage. The Long Distance Communications Services' growth has been positively impacted by a major carrier customer whose revenue has increased substantially during the past year and represents approximately 14% of the segment's revenue in 1995. It is the Company's understanding that this customer may be installing long distance switching capacity, which, as completed, could result in a portion of this traffic gradually moving to the customer's network. However, the customer has entered into a three year agreement with the Company effective April 1, 1995 and amended October 27, 1995. Under the agreement, the Company will retain significant traffic volumes and has obtained provisions regarding exclusivity and minimums that it views as favorable. Local Communications Services - ----------------------------- As of December 31, 1995, RTC and the Company's 33 other local exchange companies together served 950,875 access lines in 13 states. The local exchange carriers provide local, toll, access 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 former Rochester local exchange company were transferred to two wholly-owned subsidiary companies, RTC and FCR. RTC is a regulated telephone and network transportation company 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. FCR is a lightly regulated provider of telecommunications services to residential and business customers located in the Rochester, New York market. As of September 30, 1995, the Company discontinued the application of Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting for the Effects of Certain Types of Regulation" for its local communications companies. The Company discontinued the use of FAS 71 based upon changes in regulation and increasingly rapid advancements in telecommunications technology and other factors increasing the level of competitors in markets served by the Company. The discontinuance of regulatory accounting methods resulted in a non-cash post-tax extraordinary charge of $112.1 million, net of applicable income taxes of $68.4 million, primarily caused by the reduction in the recorded value of long-lived telephone plant assets. Since the beginning of 1988, the Company has invested over $690 million in upgrading its Local Communications Services' 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 29 local exchange companies outside of New York have over 97.9 percent digital capability. This is illustrated in the "Access Line Table" located on the next page. Frontier has achieved substantial cost reductions through the elimination of duplicative services and procedures and the consolidation of administrative functions. As of December 31, 1995, Local Communications Services had 31 employees per ten thousand access lines. The Company has reduced the number of telephone employees per ten thousand access lines by over 34 percent since 1990. The Company believes that additional reductions in employee levels are possible. These reductions will be partially driven by technological changes and will be necessary to further improve the competitive position of its Local Communications Services' business. 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 March 1995, the Company sold the Ontonagon County Telephone Company and the Midway Telephone Company, both located in the Upper Peninsula of Michigan. 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, 1995:
Percent of Total Company Access Telephone Properties Access Lines at Percent at December 31, 1995 Lines December 31, 1995 Digital - ------------------------------------------------------------- Rochester, NY.......... 524,630 55.2% 100.0% Other NY Companies..... 90,078 9.5% 100.0% Total New York......... 614,708 64.7% 100.0% Alabama(1)............. 28,899 3.0% 100.0% Georgia................ 23,640 2.5% 100.0% Illinois(1)............ 18,111 1.9% 100.0% Indiana................ 4,803 0.5% 100.0% Iowa................... 53,316 5.6% 94.0% Michigan(1)............ 21,902 2.3% 100.0% Minnesota.............. 106,725 11.2% 96.4% Mississippi............ 5,481 0.6% 100.0% Pennsylvania........... 35,947 3.8% 100.0% Wisconsin.............. 37,343 3.9% 100.0% ------- ------ ------ Total Other States..... 336,167 35.3% 97.9% Consolidated Access Lines........ 950,875 100.0% 99.3% ------- ------ ------
(1) Companies in these states also have properties located in another state. (An Alabama company has access lines in Florida, an Illinois company has access lines in Iowa, and the 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 266 central office and remote switching centers in its other telephone territories. Of the 950,875 access lines in service on December 31, 1995, 674,841 were residential lines and 276,034 were business lines. Long distance network service to and from points outside of the telephone companies' operating territories is provided by interconnection with the facilities 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, Caller ID with Name, distinctive ringing, directory-assisted call completion, and an enhanced voice mail platform. This is particularly attractive for the Company in Rochester because of the presence of pure price regulation. The Company is introducing similar advanced services, where appropriate, at its other telephone properties. Frontier is pursuing several alternatives to provide expanded broadband capabilities 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 to position for new products. Throughout its Local Communications Services' operations, Frontier has over 24,000 miles of fiber optic facilities in place. The Company provides expanded broadband services to select customers, including video-distance learning arrangements for educational institutions. In connection with its integration strategy, the Company has developed a program known as "Frontier Long Distance", where its local exchange companies resell Frontier'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. Frontier Long Distance is currently offered in the product lines at fifteen of the Company's local telephone exchange companies. The results of Frontier Long Distance operations are included as part of the Long Distance Communications Services' segment. Technological innovation and regulatory change are accelerating the pace of competition for both local exchange and long distance services. New competitors now have the ability to provide basic local telephone service in some markets, 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 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 continues to be the primary provider of basic local telephone service in Rochester, New York and may be considered the only provider of basic local exchange service in most of the 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 and implement a plan for full 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. As a result of the Open Market Plan, two new companies were formed from the Rochester, New York local exchange operations. RTC is a provider of basic network services. The second company, FCR, is a retail provider of telecommunications services. RTC and FCR are subsidiaries of the Company, which became an unregulated parent holding company. This configuration has been established to better meet the current and emerging competition in the marketplace. The holding company structure also provides the flexibility for the Company to continue the acquisition and diversification efforts that are necessary for its long- term growth. FCR is a lightly regulated, full service telecommunications company which provides a broad array of integrated services including local, long distance, cellular and equipment. In addition, FCR is able to package the network elements purchased from RTC and others with services such as flat rate local, measured rate, Centrex and ISDN. FCR has the flexibility to price and introduce new services as necessary to compete. RTC is the more heavily regulated company which sells basic network services such as access to the network and transport between switching offices. These services are sold to FCR and all other telecommunications providers on a nondiscriminatory basis. These other telecommunications providers may then package services for resale to local customers. RTC also continues to provide retail services directly to individual customers, except for Centrex and high capacity private lines which it offers only on a wholesale basis. Management believes there are significant market and business opportunities associated with the Company's Open Market Plan. However, there are also uncertainties associated with the Plan. In the Company's opinion, the most significant issues relate to increased competition in the Rochester, New York market, the risk inherent in the Rate Stabilization Plan incorporated in the Open Market Plan Agreement and the potential diversification risk. Additional details about these risks can be found in Management's Discussion of Results of Operations and Analysis of Financial Condition in Exhibit No. 13. On October 3, 1995, AT&T Communications of New York filed a formal complaint with the NYSPSC requesting changes to the Open Market Plan. AT&T asked the NYSPSC to reduce RTC's wholesale rates to resellers by increasing the "wholesale discount" (the margin between wholesale and retail rates) for most services from 5% to 35%. AT&T also complained about other rates and about the terms and conditions of the provisioning of service to resellers. This is believed to be similar to AT&T's initiatives in other states. The NYSPSC considered AT&T's petition in December, 1995. The NYSPSC's comments indicated a desire for RTC and AT&T to meet first to discuss their differences, with a formal proceeding to follow. On February 2, 1996, the NYSPSC issued an order reconvening the parties to the Open Market Plan, to consider access to electronic systems, the existing wholesale/retail rate differential, the usage surcharge for residential service and information availability. Rochester Telephone filed a response in early March addressing each of the claims made by AT&T. Management cannot now predict the ultimate result. Wireless Communications Services - -------------------------------- From 1985 to mid 1994, the Company 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 had an 85 percent interest in this partnership. In July 1994, the Company and Bell Atlantic/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 enables the Company to take advantage of the efficiencies normally inherent with increased economies of scale. The UCN provides seamless cellular service to a population of approximately 5 million potential subscribers in upstate New York. Since the formation of the joint venture the results of the UCN are reported under the equity method of accounting and the Company's share of the joint venture earnings are reported in the Other Income category. The Company also manages a cellular system in Alabama, in which it has a 70% interest, with over 260,000 potential subscribers, and in Minnesota, in which the Company acquired a 100% interest in late March 1995, which has over 227,000 potential subscribers. In addition, the Company has investments in wireless properties elsewhere in New York State and in Georgia, Illinois, Iowa, and Wisconsin. Despite intense price competition throughout its operation, 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 the geographic scope of the Company's cellular reach, the Company's wireless business has remained profitable. Nevertheless, price competition remains strong within all the Company's operating areas. Cellular companies compete principally on the basis of network quality, customer service, price and coverage area. Each market currently has at least 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 more 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. In addition, the FCC has allocated radio frequency spectrum for Personal Communication Services ("PCS"). The FCC's decision has resulted in six additional wireless licenses in each market: three 30 Mhz blocks and three 10 Mhz blocks. (By comparison, the two cellular carriers in each market currently have 25 Mhz of spectrum each.) The first two 30Mhz licenses were awarded in March 1995 through an auction. The third 30 Mhz license is now being auctioned. Dates have not been announced for the auction of the remaining three 10 Mhz licenses. The Company continues to evaluate the merits of additional involvement in wireless communications, but has elected, thus far, not to participate in the bidding for PCS licenses. Cellular Property Ownership Table The Company owned or was under contract to purchase the following cellular properties as of December 31, 1995:
1995 Pending Pending Estimated Ownership Adjusted Ownership Adjusted Market Population Interest Population Interest Population - ------ ---------- -------- ---------- -------- ---------- New York Buffalo 1,205,000 50.00% 603,000 50.00% 603,000 Rochester 1,033,000 42.50% 439,000 42.50% 439,000 Syracuse 687,000 27.50% 189,000 27.50% 189,000 Utica-Rome 323,000 50.00% 162,000 50.00% 162,000 NY RSA #1 259,000 20.00% 52,000 20.00% 52,000 NY RSA #2 237,000 21.43% 51,000 21.43% 51,000 NY RSA #3 492,000 22.50% 111,000 77.50% 381,000 NY RSA #4 364,000 27.00% 98,000 27.00% 98,000 Binghamton 309,000 24.00% 74,000 32.50% 100,000 Elmira 96,000 0.00% 0 50.00% 48,000
---------- --------- --------- Total UCN Markets 5,005,000 1,779,000 2,123,000 --------- --------- --------- Pennsylvania PA RSA #3, B2 58,000 0.00% 0 13.89% 8,000 PA RSA #4, B2 65,000 0.00% 0 16.67% 11,000 Alabama AL RSA #4 141,000 69.54% 98,000 69.54% 98,000 AL RSA #6 119,000 69.54% 83,000 69.54% 83,000 Minnesota Minnesota RSA #10 227,000 100.0% 227,000 100.00% 227,000 Minority Interests Orange County, NY MSA 322,000 15.00% 48,000 15.00% 48,000 Poughkeepsie, NY MSA 265,000 15.00% 40,000 15.00% 40,000 Des Moines, IA MSA 413,000 4.00% 17,000 4.00% 17,000 GA RSA #3 207,000 25.00% 52,000 25.00% 52,000 IL RSA #2 256,000 6.67% 17,000 6.67% 17,000 IL RSA #3 204,000 6.38% 13,000 6.38% 13,000 Wisconsin RSA #8 228,000 2.00% 5,000 2.00% 5,000 --------- --------- --------- Total...... 7,510,000 2,379,000 2,742,000
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, 1995 and is calculated by multiplying the 1995 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, 1995, and is calculated by multiplying the 1995 estimated population of such market by the Company's ownership interest in the cellular system serving that market, assuming completion of proposed or pending transactions. Corporate Operations and Other - ------------------------------ Corporate Operations comprise the expenses traditionally associated with a holding company, including executive and board of directors expenses, corporate finance and treasury, investor relations, corporate communications, corporate planning, legal services and business development. The Other category is comprised primarily of Frontier Network Systems ("FNS") and the Company's information services subsidiary ("Frontier Information Technologies") which services much of the Company's operations. 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 located in New York State. Legislative and 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 and by the FCC. 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 for intrastate long distance service, and over 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. However, the Company's Wireless Communications Operations are no longer subject to rate regulation at the Federal or State level. (a) Telecommunications Act of 1996. On February 8, 1996, President Clinton signed into law the Telecommunications Act of 1996 (the "Act"). The Act substantially revised the Communications Act of 1934. The Act has particular relevance to the Company in three areas. First, the Act creates a duty on the part of the Company to interconnect its networks with those of its competitors and, in particular, creates a duty on the part of the Company's local exchange operations to negotiate in good faith the terms and conditions of such interconnection. The Act requires the FCC to establish the rules governing the terms and conditions of such interconnection within six months of its enactment. Second, the Act contains a number of provisions that reduce barriers to entry and promote competition in a variety of telecommunications markets, including both long distance and local exchange operations. As a part of this effort, the Act provides a framework under which the Bell companies may enter the interexchange communications business from which they were barred under the terms of the 1982 AT&T Consent Decree. Under the framework of the Act, a Bell company may provide long distance services in the states where it provides telephone service upon a showing to the affected state regulatory authority and to the FCC that: (a) it faces competition for local telephone service from at least one facilities-based competitor; and (b) that it satisfies a fourteen point checklist that would purport to show that the affected Bell company's local exchange operations are open to competition. The Act establishes deadlines within which both the affected state regulatory agency and the FCC must act upon applications filed by a Bell company to enter the long distance business. The Bell companies can provide long distance services immediately in other states, and also with certain restrictions, cellular, video and incidental services. Third, although the Act generally prohibits long distance companies from marketing their services jointly with local telephone services provided by a Bell company (at least until that Bell company is permitted to enter the long distance business), it contains an exception for companies that serve less than five percent of the nation's presubscribed access lines, such as the Company. Thus, the Act permits the Company to continue to market its long distance services jointly with local telephone services whether provided by the Company or provided by a Bell or non- affiliated company. (b) State Proceedings -- General. A number of states in which the Company has local or long distance operations are conducting proceedings related to the ground rules under which carriers may operate in an increasingly competitive environment. Among the issues that the regulatory agencies are examining include unbundling and interconnection, dialing parity for intra-LATA (or short-haul) toll traffic, number portability, resale of local exchange service and universal service. The Act has begun to have an effect on the timing and outcome of proceedings in many states, as State Commissions have begun to review their actions in light of the Act. The Company cannot, at this time, predict how these proceedings will ultimately be resolved, nor when a decision will be forthcoming. (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) 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, 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. On October 31, 1995, the New York Court of Appeals affirmed the NYSPSC's and the Appellate Division's determinations that, as a matter of general ratemaking authority, the NYSPSC possesses the authority to impose a royalty. The decision of the Court of Appeals anticipates that there will be subsequent challenges to royalties imposed by the NYSPSC in specific circumstances. This proceeding remains unresolved for the period after December 31, 2001, and is discussed in more detail in Item 3, Legal Proceedings. (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 December 31, 1995 was approximately $76.9 million, and the projected pension benefit obligation was approximately $88.1 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. 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 ordered 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 11 through 13. Competition - ----------- The telecommunications 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 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 11 through 13, is one way in which the Company is proactively meeting competition. The Company is also addressing competition by focusing on improved customer satisfaction, developing and offering new products and services, providing integrated communications services, and by reducing its cost base and becoming more efficient. (a) Long Distance Communications Services. Competition is based upon pricing, customer service, network and service quality and value-added services. The Company views the long distance industry as a three tiered industry which is dominated on a volume basis by the nation's three largest long distance providers: American Telephone and Telegraph Company ("AT&T"), MCI Telecommunications Corporation ("MCI"), and Sprint Communications, Inc. ("Sprint"). AT&T, MCI and Sprint generate an aggregate of approximately 85% of the nation's long distance revenue of $70 to $75 billion. Frontier is positioned in the second tier with three other companies with annual revenues of $600 million to $4 billion each. The third tier consists of more than 300 companies with annual revenues of less than $600 million each, the majority below $50 million each. The Company targets small- and medium-sized commercial customers with $100 to $50,000 in monthly long distance volume and seeks to provide the same focus and attention to customer service that compares favorably with what AT&T, MCI and Sprint offer to large commercial customers. Frontier is one of the few long distance companies with the ability to offer high quality value-added services to small- and medium-size commercial customers on a nationwide basis. A number of the Company's competitors are primarily regional in nature, limited by the size of their transmission systems or dependent on other parties for their billing services and product offerings. Generally, the current trend is toward decreased regulation for both the Company and its competitors. Regulatory trends had, and may have in the future, both positive and negative effects upon the Company. For example, more markets are opening up to the Company, as state regulators allow Frontier to compete in markets from which it was previously barred. On the other hand, the largest competitor, AT&T, has gained increased pricing flexibility over the years, allowing it to price its services more aggressively. Likewise, costs for access to local networks have declined in recent years, but this has triggered more demand for long distance services, including those provided by Frontier. A comprehensive revision of the Communications Act of 1934 was signed into law on February 8, 1996. It eliminates a number of barriers to competition across the industry and will lead to additional changes in the industry's structure. Significantly, the law will allow the Regional Bell Operating Companies ("RBOCs") to compete in the long distance market within their regions in exchange for opening their local markets to competition. Some of the RBOCs have already taken steps to enter the long distance business outside their region, and have announced plans to meet the requirements to offer long distance services within their region. See the discussion on the Telecommunications Act on page 16. The Company recognizes the need to grow to be able to compete effectively in the changing telecommunications industry and to avail itself of greater economies of scale and scope in its transport and local access requirements and in its back office operations. For this reason, Frontier began to expand its long distance business through acquisition of long distance businesses (see pages 3 and 4 for 1995 acquisitions). These acquisitions have expanded the Company to a national scope which will enhance the Company's ability to compete effectively in the long distance business. (b) Local Communications Services. The market for equipment connected to common carrier networks is now fully competitive. The Company faces many competitors in the provision of equipment and facilities used in connection with its local exchange networks. The market for the provision of local services itself is now competitive in Rochester, New York as a result of the Open Market Plan, and the Act is likely to result in significantly greater competition in other markets. The Open Market Plan enables customers to choose their local telephone service company and will potentially provide them a broader selection of products, services and prices. It gives the Company greater flexibility to broaden the scope and quality of its own competitive offerings. In the Rochester market, competitors who have stated they will enter or have actually entered the local exchange market include Time Warner Communications ("Time Warner") and AT&T. See the discussion on the Open Market Plan on pages 11 through 13 and Regulatory Matters on pages 15 through 18. Although competitive providers of basic local exchange service are not expected to be active for the near future in the Company's smaller rural properties, basic local exchange service competition is occurring today in the Rochester, New York marketplace. For example, MFS Telecom, Inc. ("MFS") and Time Warner are alternative local exchange service providers in Rochester. AT&T is also remarketing local exchange service in the Rochester, New York marketplace as a reseller of RTC's services, as is Frontier's subsidiary, FCR. The Company is unaware of the exact market share of the local exchange market that MFS, Time Warner, AT&T and FCR account for in the Rochester, New York service area. Long distance companies largely access their end user customers through interconnection with local telephone companies. These long distance companies pay access fees to the local telephone companies for this service. The provision of access services is considered to be competitive, and the Company has responded with price changes that meet the demands in its individual market areas. Competitive Access Providers (CAPs) are companies which provide alternative transmission services and provide access services to local exchange and long distance companies. CAPs compete with traditional local exchange companies. Currently, MFS, ACC and Time Warner are the primary CAPs active in the Rochester, New York area. No significant CAPs are believed to be active in any of the Company's other properties. (c) Wireless Communications Services. The Company is the managing partner of the UCN, which is a partnership with Bell Atlantic/NYNEX Mobile. The partnership operates cellular systems in central and western New York State. Frontier also manages, through subsidiaries, cellular properties in Alabama and Minnesota and has investments in other cellular properties. See the Cellular Property Ownership Table at page 14 for a listing of the various cellular properties which the Company manages or in which it has investment interests. 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 has recently begun to resell cellular service in the Rochester, New York MSA using the UCN's facilities and services. 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. The Company believes that additional competition for wireless services will come from PCS providers. AT&T, Sprint and OmniPoint have acquired licenses to provide wireless service in the Company's upstate New York markets. The Company believes these services will begin operation in 1997. In addition to the UCN, the Company has partnership interests in various other MSAs and RSAs (Rural Service Areas.) See the "Cellular Property Ownership Table" on page 14 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. See also the discussion of the Upstate Cellular Network on pages 13 through 15. Environmental and Other Matters - ------------------------------- Except for site specific issues, environmental issues tend to impact members of the telecommunications industry in consistent ways. The Environmental Protection Agency ("EPA") and other agencies regulate a number of chemicals and substances that may be present in facilities used in the provision of telecommunications service. These include preservatives in some wood poles, asbestos in certain underground duct systems and lead in some cable sheathing. Some components of the Company's network may include one or more of these substances. The Company believes that in their present uses, any such facilities of the Company pose no significant environmental or health risk that derives from EPA regulated substances. If EPA regulation of any such substance is increased, or if any facilities are disturbed or modified in such a way as to require removal, special handling, storage and disposal may be required for any such facilities removed from use. At this time the Company is not subject to any environmental litigation that requires disclosure, except as set out in Item 3, Legal Proceedings. Employees and Labor Relations - ----------------------------- As of December 31, 1995, the Company had 7,837 employees, of which 2,959 were employees of Local Communications Services, 4,203 were employees of Long Distance Communications Services, and 675 were employees of other operations. At the Rochester, New York Operating Company, 720 clerical and service workers were represented by the Rochester Telephone Workers Association ("RTWA") and 728 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, bargaining unit employees received a 2.0 percent general increase, effective August 12, 1994. On February 12, 1995 and February 18, 1996 they received a 1.0 percent general increase. The contract provides that they will receive the same amount of increase on February 16, 1997. The RTWA contract will expire on August 12, 1997. The CWA contract expired on January 31, 1996. Bargaining for a new contract has been underway for some time. To date, no new agreement has been reached. The International Brotherhood of Electrical Workers ("IBEW"), Local 503, represents 162 employees at Frontier Communications of New York, 15 employees at Frontier Communications of Sylvan Lake (through Local 320) and 11 employees at Frontier Communications of AuSable Valley (through Local 2176). On May 25, 1993, Frontier Communications of New York and the IBEW entered into a contract which expires February 13, 1997, and provides for an increase of 3.85% in September 1993, 4.0% in September 1994, 4.0% 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% in November 1993, 3.5% in November 1994, and 5.0% in November 1995. On May 11, 1995, AuSable Valley and the IBEW entered into a three year contract which provides for an increase of 3.25% percent effective May 1995, 3.5% in May 1996, and 3.75% in May 1997. The IBEW, Local 1106, represents 21 employees of Frontier Communications of Michigan. On October 9, 1994, they entered into a three year contract which granted bargaining unit employees a 3.0% increase in October 1994, a 3.0% increase in October 1995, a 2.5% increase in October 1996 and a 2.25% increase in October 1997. This contract will expire October 8, 1997. The IBEW, Local 51, represents 7 employees at Frontier Communications - Midland, 5 employees at Frontier Communications of Illinois, 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 177 employees at Frontier Communications of Minnesota. On June 21, 1993, Frontier Communications of Minnesota and the CWA entered into a three-year contract which provided for a wage increase of 2.0% in June 1994, and 2.0% in June 1995. In addition, "gain share" awards of 2.0% and 2.6% were given in June, 1994 and June, 1995, respectively, based upon the performance of the Frontier Communications of Minnesota telephone operation. The contract expires June 21, 1996. The CWA, Local 7171, represents 75 employees at Frontier Communications of Iowa. On May 1, 1993, Frontier Communications of Iowa and the CWA entered into a three-year contract which provided for wage increases of 2.0% in May 1994, and 2.0% in May 1995. In addition, "gain share" awards of 2.0% and 2.6% were given in May, 1994 and May, 1995, respectively, based upon the performance of the Frontier Communications of Iowa telephone operation. The contract expires April 30, 1996. ITEM 2. PROPERTIES The Company's local exchange service providers own telephone property in their respective operating territories 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, 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 local governmental consent or lease, permit, easement or other agreement. The central office switching equipment includes digital 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 Long Distance Operation owns property which includes: fiber optic and copper cable, switching equipment, microwave equipment, real estate and miscellaneous office and work equipment. The Company's Long Distance Operation also leases 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. These providers also lease or own the real estate on which the cell site towers are located. 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 fifteen corporate defendants, including Rotelcom Inc., a wholly-owned subsidiary of the registrant held through intervening subsidiaries (now named Frontier Network Systems, Inc. or FNS). The plaintiffs seek environmental "response costs" in the approximate amount of $1.5 million incurred by the plaintiffs pursuant to a consent decree entered into by plaintiffs with the United States Environmental Protection Agency (the "EPA"). Two additional defendants were named in 1994. In addition to FNS, the current defendants are: Agway, Inc.; BMC Industries, Inc.; Borg-Warner Corporation; Elf Atochem North America, Inc.; Mack Trucks, Inc.; Motor Transportation Services, Inc.; Pall Trinity Micro Corporation; The Raymond Corporation; Redding-Hunter, Inc.; Smith Corona Corporation; Sola Basic Industries, Inc.; Wilson Sporting Goods Company; Phillip A. Rosen; Harvey M. Rosen; City of Cortland and New York State Electric & Gas Corporation. The consent decree concerned the clean-up of an environmental Superfund site located in Cortland, New York. It is alleged that the corporate defendants disposed of hazardous substances at the site and are therefore liable under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"). The Company is anticipating that a final Record of Decision ("ROD") will be issued by the EPA and will prescribe the remediation requirements for the site. The aggregate amount of remediation costs to be incurred by the plaintiffs will be based on the requirements of the ROD. The total cost of remediation at the site is uncertain, although estimates have 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 trial. The litigation has been delayed by the bankruptcy filing of one of the defendants. 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 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 potential 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. At the time of the NYSPSC decision, the Company estimated the potential impact in the range of $2 million per year. The royalty, if implemented, would be an imputation against the Rochester, New York operating company's revenue requirement from regulated intrastate operations. On June 30, 1994, the Appellate Division unanimously upheld the Commission's Order. On October 31, 1995, the Court of Appeals affirmed the determination of the Appellate Division. Although the Court concluded that the specific application of the royalty to Rochester Telephone was rendered moot by the Open Market Plan settlement, it held that the Commission has the general authority to utilize the royalty as a ratemaking tool. The Court further held that the specific application of the royalty to any companies, including Rochester Telephone, in the future would need to be reviewed in the context of a company-specific proceeding. 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. From February 1994 to October 1995, a total of nine complaints were filed in Hennepin County (Minnesota) District Court by various former shareowners of ASI. Included among the defendants are ASI, its former principal shareowners Steven Simon and James Weinert, ASI legal counsel and Frontier. Class action status has been sought in two suits; no class has yet been certified. These suits allege generally that Simon and Weinert, with and through ASI, embarked upon a scheme to gain control of ASI and acquire all of its stock through common law fraud, breach of fiduciary duty and certain violations of the Minnesota Business Corporation Act. This Act requires shareowners in a closely held corporation to act fairly to one another and refrain from misappropriation. Some of the complaints assert shareowner derivative rights. The one complaint that names Frontier alleges that Frontier holds the ASI stock and that it should be found to control certain Frontier stock that was issued to Messrs. Simon and Weinert in Frontier's acquisition of ASI in trust for the benefit of the plaintiffs. Although it is too early to determine the outcome of these suits, Frontier, ASI and the other defendants each are contesting the claims asserted, and the parties have had discussions to resolve the litigation. To date, no settlement has been reached. In connection with the acquisition of ASI by Frontier, Simon and Weinert agreed to indemnify the Company for these claims. On April 10 and 11, 1995, three lawsuits were commenced against ALC as a result of its announced merger with the Company. In two of those actions, each filed in the Court of Chancery of the State of Delaware, in and for New Castle County by Martin Mayers and Mordecai Cohen, respectively, Frontier was named as a defendant, although it has not yet been served with process. The lawsuits purport to be class actions brought on behalf of all ALC stockholders against ALC and its directors. Among other things, the complaints sought to enjoin the business combination and/or to obtain an award of damages. On June 9, 1995, the Delaware Court entered an order consolidating the three cases for all purposes. Under the terms of that order, Mayers v. Irwin, et al., C.A. No. 14196 is designated as the consolidated complaint and the defendants are required to respond to the consolidated complaint. On July 10, 1995, ALC and its directors answered the consolidated complaint. The Company believes these actions to be without merit and will defend vigorously the claims asserted in the consolidated suit. To date, only cursory discovery has been conducted. On July 12, 1995, a Complaint was filed by Christopher E. Edgecomb, a former officer, director and employee of WCT, against Frontier, WCT, WCT's then President, Michael Coghill, a Frontier Corporation employee, and fifty unidentified additional defendants, in the California Superior Court for Santa Barbara. Edgecomb alleged that Frontier and WCT violated the terms of a non-compete agreement, executed by Edgecomb, by failing to make payments to Edgecomb in accordance with the agreement. Edgecomb has also alleged that the defendants violated an implied duty of good faith and fair dealing in the agreement and engaged in unfair competition in violation of California law. In addition, the complaint alleges that the defendants slandered Edgecomb. The complaint sought rescission of the non-compete agreement, compensatory damages in excess of $80 million, punitive damages, injunctive relief restraining further unfair competition, court costs and attorneys' fees. The case was settled on March 5, 1996. Terms of the settlement are confidential, but management views them as not material. The Regulatory Matters discussion in management's discussion of business in Part 1, Item 1, on pages 15 through 18 is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 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 historical information has been restated accordingly for the acquisitions of ALC and ASI. The specific information required by this item is as follows:
1995 1994 1993 ----------- ----------- ------------ Quarter High Low High Low High Low ------- ----------- ----------- ------------ Highest and lowest market prices for the 1st $23.38 $19.25 $22.44 $20.25 $19.44 $17.32 stock by quarter: 2nd 24.13 19.63 25.25 20.81 21.75 18.25 3rd 28.63 23.75 24.75 21.63 24.38 20.50 4th 30.00 25.50 24.63 20.50 25.13 21.69
Common stock 1st $ .2075 $ .2025 $ .1975 dividends declared 2nd .2075 .2025 .1975 per share: 3rd .2075 .2025 .1975 4th .2125 .2075 .2025 Total Dividends per Year $.8350 $ .8150 $ .7950 Number of Shareowners (at December 31) Individuals 26,184 24,128 22,313 Brokers, nominees and institutions 453 480 527 ------ ------ ------ Total Shareowners 26,637 24,608 22,840
On March 6, 1996, the closing price for the Company's stock was $30.38 per share as published in the Wall Street Journal. 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):
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Net Revenues $2,143,691 $1,667,545 $1,437,448 $1,252,244 $1,120,375 Income from Continuing Operations (before Extraordinary Items and Cumulative Effect of Changes in Accounting Principles) $ 144,768 $ 187,254 $ 128,644 $ 107,025 $ 80,187 Consolidated Net Income $ 22,083 $ 180,057 $ 121,154 $ 105,953 $ 86,574 Earnings per Common Share: Income before Extraordinary Items and Cumulative Effect of Changes in Accounting Principle $ .89 $ 1.16 $ .83 $ .75 $ .59 Extraordinary Items $ (.75) --- $ (.05) $ (.01) $ .05 Cumulative Effect of Changes in Accounting Principles $ (.01) $ (.04) --- --- --- Earnings per Common Share-Primary $ .13 $ 1.12 $ .78 $ .74 $ .64 Earnings per Common Share-Fully Diluted $ .13 $ 1.12 $ .78 $ .74 $ .64 Cash Dividends Declared per Common Share $0.835 $0.815 $0 .795 $0.775 $0.755 Total Assets $2,108,592 $2,060,794 $1,721,545 $1,679,743 $1,661,019 Long-Term Debt $ 618,867 $ 661,549 $ 581,707 $ 604,157 $ 636,099
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 24 of the Company's 1995 Annual Report to Shareowners which is Exhibit 13 to this Form 10-K, and is incorporated by reference into this Item 7. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements, together with the report thereon of Price Waterhouse LLP, dated January 22, 1996, is presented on pages 25 through 41 of the Company's 1995 Annual Report to Shareowners, which is Exhibit 13 to this Form 10-K and is incorporated by reference into this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Based upon the recommendation of the Audit Committee of the Board of Directors, the Board on January 22, 1996 approved the retention of Price Waterhouse LLP as the independent accountant for the Company and its significant subsidiary, Frontier Communications Services Inc. (formerly "Allnet Communication Services, Inc.") ("Allnet") for fiscal year 1996. This prospective change in Allnet's auditing firm from Ernst & Young LLP is due to the merger between ALC, the parent corporation of Allnet, and the Company, effective on August 16, 1995. Prior to the merger, Ernst & Young LLP served as independent accountants for ALC; Price Waterhouse LLP served as the Company's independent accountants. Since the Company is the parent corporation of ALC as a result of the merger, the Company's Audit Committee considered it appropriate to engage Price Waterhouse LLP rather than Ernst & Young LLP as independent accountants. The reports of Ernst & Young LLP on ALC's financial statements for the past two years did not contain an adverse opinion or a disclaimer of opinion and were not qualified as to uncertainty, audit scope or accounting principles. During ALC's two most recent fiscal years and through January 22, 1996, there were no disagreements between ALC and Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which disagreements, if not resolved to the satisfaction of Ernst & Young LLP, would have caused it to make a reference to the subject matter of the disagreement in connection with its reports. 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 11, 1996 in connection with the Annual Meeting of Shareowners to be held April 24, 1996, which is Exhibit 99 to this Form 10-K and is incorporated by reference into this Item 10. Exhibit 99 consists of the Notice of Meeting plus material located at pages 1 through 18 of the Company's Proxy Statement for the April 24, 1996 Annual Meeting of Shareowners. Executive Officers - ------------------ Certain information is set forth below regarding the Executive Officers of the Company as of March 26, 1996. Each Officer serves for a period of one year or until a successor is elected.
Other Positions Held Name Position and During the Past (Age) Offices Held Five Years - ----------------- ------------ -------------------- Robert L. Barrett (54) Executive Vice From May 1995 to March 1996 he was President and Executive Vice President and Chief President of Technology Officer of Banc One Network Systems & Corporation/1/. From May 1991 to May Services since 1995 he was President and Chief March 1996 Operating Officer of Banc One Services Corporation/1/. Kevin J. Bennis (42) Executive Vice From December 1994 to March 1996 President and he was President and Chief Executive President of Frontier Officer of the Integrated Client Communications Services Division of MCI/2/. From since March 1996 February 1994 to December 1994 he was President and Chief Operating Officer of MCI/BANAMEX/2/. From July 1992 to February 1994 he was Senior Vice President of the Business Markets division of MCI. From July 1988 to July 1992 he was Vice President of Sales-Northeast Division of MCI. Ronald L. Bittner (54) Chairman, President From August 1995 to November 1995 and Chief Executive he was Chairman and Chief Executive Officer since Officer. From February 1992 to April November 1995 and 1993, he was President and Chief For the period Executive Officer. From May 1988 April 1993 to to February 1992 he was Executive August 1995 Vice President and President- Telecommunications Group. Jeremiah T. Carr (53) Senior Vice President From January 1995 to May 1995 he since May 1995 and was President and Chief Executive Chairman- Officer of Rochester Telephone Corp., Rochester Telephone and President Telephone Group. Corp. From November 1993 to December 1994 he was Corporate Vice President and President - Telephone Group. From February 1992 to November 1993 he was Corporate Vice President and President 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. Joseph Enis (51) Treasurer since From June 1994 to December 1994 January 1995 he was Director of Finance. From 1992 to June 1994 he was Treasurer of National Service Industries (3). From 1984 to 1992 he was Treasurer of Cyclops Industries (4). H. Robert Gill (59) Senior Vice President From 1989 to February 1996 he was since December 1995 President and Chief Executive Officer and President - of ConferTech International, Inc. Enhanced Products Group Dale M. Gregory (47) Senior Vice President From January 1995 to May 1995 he since May 1995 and was President - Frontier Vice President - Communications Group. From Network & November 1993 to December 1994 he Operations was Corporate Vice President and President - Telecommunications Group. From February 1993 to 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-Telecommunications 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. Louis L. Massaro (49) Executive Vice From December 1994 to August 1995 President and Chief he was Corporate Vice President. Administrative Officer From February 1993 to December since August 1995 1994, he was Corporate Vice President 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- Telecommunications Group. Marvin C. Moses (51) Vice Chairman From August 1995 to November 1995, And Chief Financial he was Executive Vice President and Officer since Chief Financial Officer. From October November 1995 1988 to August 1995 he was Executive Vice President and Chief Financial Officer of ALC (5) Communications Corporation. Richard A. Smith (45) Controller From June 1994 to March 1995 he was since April 1995 President - Frontier Information Technologies, Inc. From February 1993 to June 1994 he was Senior Vice President - Midwest Region of Frontier's Telephone Group. From 1990 to February 1993 he was Vice President - Midwest Telephone Operations of Frontier's Telephone Group. Josephine S. Trubek (52) Corporate Secretary From January 1990 to April 1993 she since April 1993 was General Counsel and Secretary.
(1) Banc One is one of the 10 largest bank holding companies in the U.S. Banc One Services Corporation is a subsidiary of Banc One. (2) MCI is the 2nd largest provider of long distance services in the United States. MCI/BANAMEX is an MCI Joint Venture in Mexico. (3) National Service Industries is a public company with businesses in lighting, textile rentals and specialty chemicals. (4) Cyclops Industries is a public manufacturer of specialty steels and curtainwall systems. (5) ALC Communications Corporation was the 6th largest provider of long distance services in the United States when it was acquired by the Company in August 1995. 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 11, 1996 in connection with the Annual Meeting of Shareowners to be held on April 24, 1996) under the caption "Compensation of Directors" and on pages 6 through 14 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 by reference into this Item 11. 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 18 of the Company's Proxy Statement for the April 24, 1996 Annual Meeting of Shareowners. 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 pages 4 through 5 of the definitive Proxy Statement for the Annual Meeting of Shareowners to be held April 24, 1996, and is incorporated by reference into this Item 12. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not Applicable PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) 1. Index to Financial Statements
Page* Report of Management 25 Report of Audit Committee 25 Report of Independent Accountants 25 Business Segment Information 26 Consolidated Statements of Income 27 Consolidated Balance Sheets 28 Consolidated Statements of Cash Flows 29 Consolidated Statements of Shareowners' Equity 30 Notes to Consolidated Financial Statements 31-41 Report of Ernst & Young LLP 42**
*Pages 25 through 41 are incorporated by reference from the indicated pages of the 1995 Annual Report to Shareowners. **Set forth herein. 2. Financial Statement Schedule for the years 1995, 1994 and 1993: Report of Independent Accountants on Financial Statement Schedule Report of Ernst & Young LLP on Financial Statement Schedule Valuation and Qualifying Accounts and Reserves - Schedule II All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 3. See Exhibit Index for list of exhibits filed with this report. The Registrant hereby agrees to furnish the Commission a copy of each of the Indentures or other instruments defining the rights of security holders of the long-term debt securities of the Registrant and any of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed. (b) Reports on Form 8-K The Company filed the following three reports during the quarter ended December 31, 1995:
SEC Filing Date Item No. Financial Statements --------------- ---------- -------------------- October 5, 1995 5 None November 14, 1995 2,7 Yes November 21, 1995 5 None
The Company filed the following reports subsequent to the quarter ended December 31, 1995 through March 26, 1996: January 26, 1996 4 None March 26, 1996 5 None
(c) Refer to Item 14 (a) (3) above for Exhibits required by Item 601 of Regulation S-K. (d) Schedules other than set forth in response to Item 14 (a) (2) above for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 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 22, 1996, appearing on page 25 of the 1995 Annual Report to Shareowners (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. We did not audit the Financial Statement Schedule of ALC Communications Corporation, a wholly owned subsidiary, which statement reflects valuation and qualifying accounts and reserves of $40,078,000, $32,692,000 and $38,874,000 at December 31, 1995, 1994 and 1993 respectively. That Financial Statement Schedule was audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for ALC Communications Corporation, is based solely on the report of the other auditors. In our opinion, based on our audits and the report of other auditors, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Rochester, New York January 22, 1996 REPORT OF INDEPENDENT AUDITORS FINANCIAL STATEMENT SCHEDULE Board of Directors ALC Communications Corporation We have audited the financial statements of ALC Communications Corporation (ALC) as of December 31, 1995, 1994 and 1993 for each of the three years in the period ended December 31, 1995, and have issued our report thereon dated January 17, 1996. Our audits also included Schedule II of ALC (not presented separately herein) which is included in the related schedule of Frontier Corporation in its Annual Report on Form 10-K for the year ended December 31, 1995. This financial statement schedule is the responsibility of ALC management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule of ALC referred to above, when considered in relation to the ALC basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Ernst & Young LLP Ernst & Young LLP January 17, 1996 Detroit, Michigan FRONTIER CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED DECEMBER 31, 1995 (Table 1 of 3) In thousands of dollars
Additions ----------------- Balance Charged Charged at to costs to beginning and other Balance at Description of year expenses accounts Deductions end of year ----------- --------- -------- -------- ---------- ----------- Reserve for uncollectible accounts $11,407 $36,655 $24,986 (1) $44,533 (2) $28,515 Deferred tax asset valuation allowance $28,500 $0 $7,950 (3) $16,120 $20,330 Acquisition related reserves $0 $114,239 $0 $31,090 $83,149 (4)
(1) Primarily recoveries of uncollectible accounts and balances added through acquisitions. (2) Uncollectible accounts written off. (3) Balances added through acquisitions. (4) Included primarily in "Other liabilities" and "Property, plant and equipment" in the Consolidated Balance Sheets. FRONTIER CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED DECEMBER 31, 1994 (Table 2 of 3) In thousands of dollars
Additions ------------------ Balance Charged Charged at to costs to beginning and other Balance at Description of year expenses accounts Deductions end of year ----------- --------- -------- -------- ---------- ----------- Reserve for uncollectible accounts $9,832 $29,526 $11,084 (1) $39,035 (2) $11,407 Deferred tax asset valuation allowance $34,900 $0 $0 $6,400 $28,500
(1) Primarily recoveries of uncollectible accounts. (2) Uncollectible accounts written off. FRONTIER CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED DECEMBER 31, 1993 (Table 3 of 3) In thousands of dollars
Additions ------------------ Balance Charged Charged at to costs to beginning and other Balance at Description of year expenses accounts Deductions end of year ----------- --------- -------- -------- ---------- ----------- Reserve for uncollectible accounts $6,589 $25,885 $9,628 (1) $32,270 (2) $9,832 Deferred tax asset valuation allowance $33,200 $1,700 $0 $0 $34,900
(1) Recoveries of uncollectible accounts. (2) Uncollectible accounts written off. 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) By/s/Ronald L. Bittner -------------------------- Ronald L. Bittner Chairman, President and Chief Executive Officer Date: March 18, 1996 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. By/s/Ronald L. Bittner By/s/Marvin C. Moses ----------------- ---------------- Ronald L. Bittner Marvin C. Moses Chairman, President and Vice Chairman, Chief Executive Officer and Chief Financial Officer and Director Director (principal financial officer) Date: March 18, 1996 March 18, 1996 By/s/Richard A. Smith ---------------- Richard A. Smith Controller (principal accounting officer) Date: March 18, 1996 * * - --------------------------- -------------------------- Patricia C. Barron Raul E. Cesan Date: March 18, 1996 March 18, 1996 * - ------------------------ -------------------------- Brenda E. Edgerton Jairo A. Estrada Date: March 18, 1996 March 18, 1996 * * - -------------------------- --------------------------- Michael E. Faherty Daniel E. Gill Date: March 18, 1996 March 18, 1996 * * - ------------------------- --------------------------- Alan C. Hasselwander Robert J. Holland, Jr. Date: March 18, 1996 March 18, 1996 * * - ------------------------ --------------------------- Douglas H. McCorkindale Leo J. Thomas Date: March 18, 1996 March 18, 1996 * - ----------------------- Richard J. Uhl Date: March 18, 1996 *By/s/Josephine S. Trubek Manually signed powers of ------------------- attorney for each Josephine S. Trubek Director are attached Attorney-in-Fact hereto and filed herewith pursuant to Regulation S-K Item 601(b)24 as Exhibit 24. FRONTIER CORPORATION EXHIBIT INDEX
Exhibit Number Exhibit Description Reference - ------ ------------------------ -------------- 3.1 Restated Certificate of Filed herewith Incorporation dated January 24, 1995 3.2 Amendment to Restated Filed herewith Certificate of Incorporation dated April 9, 1995 3.3 By-Laws Filed herewith 4.1 Copy of Indenture between Incorporated by reference the Company and Manufacturers to Exhibit 4-12 to Form Hanover Trust Company, 10-K for the year ended Trustee, dated September 1, December 31, 1986 1986 4.2 Copy of First Supplemental Incorporated by reference Indenture to said Indenture, to Exhibit 4(b) to made by the Company to Registration Statement Manufacturers Hanover Trust 33-32035 Company, Trustee, dated December 1, 1989 4.3 Copy of 10.46% Non Negotiable Incorporated by reference Convertible Debenture due to Exhibit 4-14 to Form October 27, 2008 from the 10-K for the year ended Company to The Walters Trust December 31, 1988 4.4 Copy of 9% Debenture due Incorporated by reference August 15, 2021 to Exhibit 4-16 to Form 10-K for the year ended December 31, 1991 4.5 Copy of Indenture between the Filed herewith Company and Chase Manhattan Bank, N.A. dated August 9, 1995
FRONTIER CORPORATION EXHIBIT INDEX
Exhibit Number Exhibit Description Reference 10.1 Copy of the Restated Incorporated by reference Supplemental Management to Exhibit 10-14 to Form Pension Plan and Amendments 10-K for the year ended Nos. 1 and 2 thereto December 31, 1990 10.2 Copy of the Restated Incorporated by reference Performance Unit Plan to Exhibit 10-15 to Form 10-K for the year ended December 31, 1990 10.3 Copy of Amendment No. 1 to Incorporated by reference Restated Performance Unit to Exhibit 10-21 to Form Plan 10-K for the year ended December 31, 1991 10.4 Copy of the Restated Incorporated by reference Supplemental Retirement to Exhibit 10-23 to Form Savings Plan and Amendment 10-K for the year ended No. 1 thereto December 31, 1991 10.5 Copy of Amendment No. 3 to Incorporated by reference to Restated Supplemental to Exhibit 10-22 to Form Management Pension Plan 10-K for the year ended December 31, 1991 10.6 Copy of Joint Venture Incorporated by reference Agreement dated March 9, 1993 to Exhibit 10-13 to Form by and between Rochester Tel 10-K for the year ended Cellular Holding Corporation December 31, 1992 and New York Cellular Geographic Service Area, Inc. together with Exhibit A thereto
FRONTIER CORPORATION EXHIBIT INDEX
Exhibit Number Exhibit Description Reference 10.7 Copy of Amendment No. 2 to Incorporated by reference Restated Performance Unit to Exhibit 10-21 to Form Plan 10-K for the year ended December 31, 1992 10.8 Copy of Amendment No. 4 to Incorporated by reference to Restated Supplemental to Exhibit 10-22 to Form Management Pension Plan 10-K for the year ended December 31, 1992 10.9 Copy of Amendment No. 2 to Incorporated by reference the Supplemental Retirement to Exhibit 10-24 to Form Savings Plan 10-K for the year ended December 31, 1992 10.10 Copy of Amendment No. 3 to Incorporated by reference the Performance Unit Plan to Exhibit 10-30 to Form 10-Q for the quarter ended March 31, 1993 10.11 Copy of Amendment No. 5 to Incorporated by reference the Supplemental Management to Exhibit 10-33 to Form Pension Plan 10-Q for the quarter ended June 30, 1993 10.12 Copy of Amendment No. 3 to Incorporated by reference the Supplemental Retirement to Exhibit 10-35 to Form Savings Plan 10-Q for the quarter ended June 30, 1993 10.13 Copy of Amendment No. 6 to Incorporated by reference the Supplemental Management to Exhibit 10-33 to Form Pension Plan 10-K for the year ended December 31, 1993
FRONTIER CORPORATION EXHIBIT INDEX
Exhibit Number Exhibit Description Reference 10.14 Copy of the Plan for the Incorporated by reference Deferral of Directors Fees to Exhibit 10-34 to Form 10-K for the year ended December 31, 1994 10.15 Copy of Amendment No. 4 to Incorporated by reference the Supplemental Retirement to Exhibit 10-31 to Form Savings Plan 10-K for the year ended December 31, 1994 10.16 Copy of the Directors' Incorporated by reference Common Stock Deferred to Exhibit 10-36 to Form Growth Plan 10-K for the year ended December 31, 1994 10.17 Forms of employment contracts Incorporated by reference as amended to date for to Exhibits 10.1, 10.2 and Messrs. Oberlin and Zrno 10.3 to ALC Communications Corporation's Form 10-Q for the quarter ended September 30, 1995 10.18 Management contract Filed herewith for Mr. Moses 10.19 Copy of Amendment Nos. 7 and Filed herewith 8 to the Supplemental Management Pension Plan 10.20 Copy of the restated Filed herewith Management Pension Plan 10.21 Copy of Executive Bonus Plan Filed herewith 10.22 Copy of the restated Filed herewith Directors Stock Incentive Plan dated April 26, 1995
FRONTIER CORPORATION EXHIBIT INDEX
Exhibit Number Exhibit Description Reference 10.23 Copy of the Management Stock Filed herewith Incentive Plan dated April 26, 1995 10.24 Form of management contracts Filed herewith as amended with each of Messrs. Bittner, Massaro, Carr and Gregory 11 Computation of Fully Diluted Filed herewith Earnings Per Share 13.1 Specified portions (pages 18 Filed herewith through 41) of the Company's Annual Report to shareholders for the year ended December 31, 1995 13.2 Report of Ernst & Young LLP Filed herewith 21 Subsidiaries of Frontier Filed herewith Corporation 23.1 Consent of Independent Filed herewith Accountants - Price Waterhouse LLP 23.2 Consent of Independent Filed herewith Accountants - Ernst & Young LLP 24 Power of Attorney for a Filed herewith majority of Directors naming Josephine S. Trubek attorney-in-fact 27 Financial Data Schedule Filed herewith 99 Proxy Statement for the Filed herewith Annual Meeting of Shareowners to be held April 24, 1996
EX-3.1 2 RESTATED CERTIFICATE 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 AMENDMENT TO RESTATED CERT. OF INC. Exhibit 3.2 CERTIFICATE OF AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF FRONTIER CORPORATION (Under Section 805 of the Business Corporation Law of the State of New York) --------------------------- 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". The name under which the Corporation was incorporated is "ROCHESTER TELEPHONE 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. A second Restated Certificate of Incorporation was filed in the Department of State of the State of New York on February 17, 1995 (such second Restated Certificate of Incorporation, the "Restated Certificate of Incorporation"). 3. The Restated Certificate of Incorporation is hereby amended to add a provision to Article FOURTH thereof stating the number, designation, relative rights, preferences and limitations of the Series A Junior Participating Class A Preferred Stock as fixed by the Board of Directors of the Corporation and to set forth in full the text of such provision. To effect the foregoing, Article FOURTH of the Restated Certificate of Incorporation is amended to add the following at the end of such Article FOURTH: I. Series A Junior Participating Class A Preferred Stock There is hereby established a series of Class A Preferred Stock of the number and designation, and having relative rights, preference and limitations as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Class A Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be 3,000,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. Section 2. Dividends and Distributions. (A) Subject to the rights of the holders of any shares of any series of Preferred Stock of the Corporation (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock of the Corporation and of any other stock of the Corporation ranking junior to the Series A Preferred Stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of January, April, July, and October in each year (each such date being referred to herein as a "Dividend Payment Date"), commencing on the first Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock, declared on the Common Stock since the immediately preceding Dividend Payment Date or, with respect to the first Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Dividend Payment Date and the next subsequent Dividend Payment Date, a dividend of $1 per share on the Series A Preferred Stock shall nevertheless be payable, when, as and if declared, on such subsequent Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative, whether or not earned or declared, on outstanding shares of Series A Preferred Stock from the Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 50 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights; (A) Subject to the provision for adjustment hereinafter set forth and except as otherwise provided herein or in the Restated Certificate of Incorporation or required by law, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters upon which the holders of the Common Stock of the Corporation are entitled to vote. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or in the Restated Certificate of Incorporation or in any other Certificate of Amendment creating a series of Preferred Stock or any similar stock, and except as otherwise required by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not earned or declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (as to dividends) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (as to dividends) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (as to dividends and upon dissolution, liquidation or winding up) to the Series A Preferred Stock or rights, warrants or options to acquire such junior stock; (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (A) to the holders of the Common Stock or of shares of any other stock of the Corporation ranking junior, upon liquidation, dissolution or winding up, to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not earned or declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (B) to the holders of shares of stock ranking on a parity upon liquidation, dissolution or winding up with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (A) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are converted into, exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly converted into, exchanged for or changed into an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is converted, exchanged or converted. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the conversion, exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable from any holder. Section 9. Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up of the Corporation, junior to all other series of Preferred Stock and senior to the Common Stock. Section 10. Amendment. If any proposed amendment to the Restated Certificate of Incorporation (including this Certificate of Amendment) would alter, change or repeal any of the preferences, powers or special rights given to the Series A Preferred Stock so as to affect the Series A Preferred Stock adversely, then the holders of the Series A Preferred Stock shall be entitled to vote separately as a class upon such amendment, and the affirmative vote of two-thirds of the outstanding shares of the Series A Preferred Stock, voting separately as a class, shall be necessary for the adoption thereof, in addition to such other vote as may be required by the Business Corporation Law of the State of New York. Section 11. Fractional Shares. Series A Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Preferred Stock. 4. This Certificate of Amendment of the Restated Certificate of Incorporation of the Corporation was authorized by a majority vote of the Board of Directors of the Corporation pursuant to Section 502 of the Business Corporation Law of the State of New York. IN WITNESS WHEREOF, the undersigned have executed and subscribed this Certificate of Amendment of the Restated Certificate of Incorporation of the Corporation this 9th day of April, 1995. /s/ John K. Purcell -------------------------- John K. Purcell Corporate Vice President /s/ Josephine S. Trubek -------------------------- Josephine S. Trubek Corporate Secretary EX-3.3 4 BY-LAWS Exhibit 3-3 FRONTIER CORPORATION By-Laws As Revised Effective March 21, 1983 (And as amended 7/16/84, 11/19/84, 2/17/86, 2/16/87, 4/22/87, 11/20/89, 2/19/90, 11/19/90, 4/24/91, 4/29/92, 4/21/93, 4/27/94, 9/19/94, 1/1/95, 4/26/95, 8/16/95 1/22/96) 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 thirteen directors. Section 3 - Election, Term and Qualifications of Directors. At each annual meeting of shareholders, Directors shall be elected to hold office until the next annual meeting and until their successors have been elected and qualified. No person shall be eligible for election or reelection to the Board of Directors after reaching seventy years of age, or in the case of a retired Chairman of the Board of Directors or a retired President of the Corporation, after reaching sixty-seven years of age. The term of any Director who is also an Officer of the Corporation or any subsidiary of the Corporation, other than the Chairman of the Board or the President of the Corporation, shall end on the date of termination from active employment and such officer shall thereafter be ineligible for reelection to the Board of Directors. Section 4 - Quorum of the Board: Action by the Board. One-third of the entire Board of Directors shall constitute a quorum for the transaction of business, and the vote of a majority 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 compensation, benefits and perquisites of the chief executive officer shall be set by the outside directors of the full Board upon the recommendation of the Committee on Management. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from among its members other committees each consisting of three or more directors. Unless a greater proportion is required by the resolution designating a committee of the Board of Directors, a quorum for the transaction of business of a committee shall consist of (a) a 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-4.5 5 CREDIT AGREEMENT Exhibit 4.5 CREDIT AGREEMENT dated as of August 9, 1995 among FRONTIER CORPORATION the Banks signatory hereto and THE CHASE MANHATTAN BANK, N.A. as Agent TABLE OF CONTENTS ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS. . . . . . . . . . . .5 Section 1.01. Definitions. . . . . . . . . . . . . . . . .5 Section 1.02. Accounting Terms . . . . . . . . . . . . . 12 ARTICLE 2. THE CREDIT . . . . . . . . . . . . . . . . . . . . 12 Section 2.01. The Loans. . . . . . . . . . . . . . . . . 12 Section 2.02. The Notes. . . . . . . . . . . . . . . . . 13 Section 2.03. Purpose. . . . . . . . . . . . . . . . . . 13 Section 2.04. Borrowing Procedures . . . . . . . . . . . 13 Section 2.05. Prepayments and Conversions. . . . . . . . 13 Section 2.06. Interest Periods; Renewals . . . . . . . . 14 Section 2.07. Changes of Commitments . . . . . . . . . . 15 Section 2.08. Certain Notices. . . . . . . . . . . . . . 15 Section 2.09. Minimum Amounts. . . . . . . . . . . . . . 15 Section 2.10. Interest . . . . . . . . . . . . . . . . . 16 Section 2.11. Fees . . . . . . . . . . . . . . . . . . . 16 Section 2.12. Payments Generally . . . . . . . . . . . . 17 Section 2.13. Quoted Rate Loans. . . . . . . . . . . . . 17 ARTICLE 3. YIELD PROTECTION; ILLEGALITY; ETC. . . . . . . . . 18 Section 3.01. Additional Costs . . . . . . . . . . . . . 18 Section 3.02. Limitation on Types of Loans . . . . . . . 20 Section 3.03. Illegality . . . . . . . . . . . . . . . . 20 Section 3.04. Certain Conversions pursuant to Sections 3.01 and 3.03 . . . . . . . . . . . . . . . . . . . . . 20 Section 3.05. Certain Compensation . . . . . . . . . . . 21 ARTICLE 4. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . 22 Section 4.01. Documentary Conditions Precedent . . . . . 22 Section 4.02. Additional Conditions Precedent. . . . . . 23 Section 4.03. Deemed Representations . . . . . . . . . . 23 ARTICLE 5. REPRESENTATIONS AND WARRANTIES.. . . . . . . . . . 23 Section 5.01. Incorporation, Good Standing and Due Qualification . . . . . . . . . . . . . . . . . . . . . 23 Section 5.02. Corporate Power and Authority; No Conflicts . . . . . . . . . . . . . . . . . . . . . 23 Section 5.03. Legally Enforceable Agreements . . . . . . 24 Section 5.04. Litigation . . . . . . . . . . . . . . . . 24 Section 5.05. Financial Statements . . . . . . . . . . . 24 Section 5.06. Ownership and Liens. . . . . . . . . . . . 25 Section 5.07. Taxes. . . . . . . . . . . . . . . . . . . 25 Section 5.08. ERISA. . . . . . . . . . . . . . . . . . . 25 Section 5.09. Significant Subsidiaries . . . . . . . . . 25 Section 5.10. Borrower's Funded Debt . . . . . . . . . . 25 ARTICLE 6. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . 25 Section 6.01. Maintenance of Existence . . . . . . . . . 26 Section 6.02. Conduct of Business. . . . . . . . . . . . 26 Section 6.03. Maintenance of Insurance . . . . . . . . . 26 Section 6.04. Compliance with Laws . . . . . . . . . . . 26 Section 6.05. Reporting Requirements . . . . . . . . . . 26 Section 6.06. Other Funded Debt of Borrower. . . . . . . 29 ARTICLE 7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . 29 Section 7.01. Borrower Mergers . . . . . . . . . . . . . 29 Section 7.02. Liens. . . . . . . . . . . . . . . . . . . 30 Section 7.03. Debt . . . . . . . . . . . . . . . . . . . 31 Section 7.04. No Dividend Restrictions . . . . . . . . . 32 Section 7.05. Ownership of Significant Subsidiaries. . . 32 ARTICLE 8. FINANCIAL COVENANTS. . . . . . . . . . . . . . . . 33 Section 8.01. Minimum Net Worth. . . . . . . . . . . . . 33 Section 8.02. Leverage Ratio . . . . . . . . . . . . . . 33 ARTICLE 9. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . 33 Section 9.01. Events of Default. . . . . . . . . . . . . 33 Section 9.02. Remedies . . . . . . . . . . . . . . . . . 35 ARTICLE 10. THE AGENT; RELATIONS AMONG BANKS AND BORROWER . . 35 Section 10.01. Appointment, Powers and Immunities of Agent. . . . . . . . . . . . . . . . . 35 Section 10.02. Reliance by Agent . . . . . . . . . . . . 36 Section 10.03. Defaults. . . . . . . . . . . . . . . . . 36 Section 10.04. Rights of Agent as a Bank . . . . . . . . 36 Section 10.05. Indemnification of Agent. . . . . . . . . 37 Section 10.06. Documents . . . . . . . . . . . . . . . . 37 Section 10.07. Non-Reliance on Agent and Other Banks . . 37 Section 10.08. Failure of Agent to Act . . . . . . . . . 38 Section 10.09. Resignation or Removal of Agent . . . . . 38 Section 10.10. Amendments Concerning Agency Function . . 38 Section 10.11. Liability of Agent. . . . . . . . . . . . 38 Section 10.12. Transfer of Agency Function . . . . . . . 39 Section 10.13. Non-Receipt of Funds by the Agent . . . . 39 Section 10.14. Withholding Taxes . . . . . . . . . . . . 39 Section 10.15. Several Obligations and Rights of Banks . 39 Section 10.16. Pro Rata Treatment of Loans, Etc. . . . . 40 Section 10.17. Sharing of Payments Among Banks . . . . . 40 ARTICLE 11. MISCELLANEOUS . . . . . . . . . . . . . . . . . . 41 Section 11.01. Amendments and Waivers. . . . . . . . . . 41 Section 11.02. Usury . . . . . . . . . . . . . . . . . . 41 Section 11.03. Expenses. . . . . . . . . . . . . . . . . 41 Section 11.04. Survival. . . . . . . . . . . . . . . . . 42 Section 11.05. Assignment; Participations. . . . . . . . 42 Section 11.06. Notices . . . . . . . . . . . . . . . . . 43 Section 11.07. Setoff. . . . . . . . . . . . . . . . . . 43 SECTION 11.08. JURISDICTION; IMMUNITIES. . . . . . . . . 43 Section 11.09. Table of Contents; Headings . . . . . . . 44 Section 11.10. Severability. . . . . . . . . . . . . . . 44 Section 11.11. Counterparts. . . . . . . . . . . . . . . 44 Section 11.12. Integration . . . . . . . . . . . . . . . 44 SECTION 11.13. GOVERNING LAW . . . . . . . . . . . . . . 44 Section 11.14. Confidentiality . . . . . . . . . . . . . 44 Section 11.15. Treatment of Certain Information. . . . . 45 EXHIBIT 2.02A. . . . . . . . . . . . . . . . . . . . . . . . . 59 REVOLVING NOTE. . . . . . . . . . . . . . . . . . . . . . 59 EXHIBIT 2.02B. . . . . . . . . . . . . . . . . . . . . . . . . 62 QUOTED RATE NOTE. . . . . . . . . . . . . . . . . . . . . 62 EXHIBIT 4.01(b). . . . . . . . . . . . . . . . . . . . . . . . 65 AUTHORIZATION LETTER. . . . . . . . . . . . . . . . . . . 65 EXHIBIT 4.01(e). . . . . . . . . . . . . . . . . . . . . . . . 67 OPINION OF BORROWER'S COUNSEL . . . . . . . . . . . . . . 67 EXHIBIT 5.09 . . . . . . . . . . . . . . . . . . . . . . . . . 69 SIGNIFICANT SUBSIDIARIES. . . . . . . . . . . . . . . . . 69 EXHIBIT 5.10 . . . . . . . . . . . . . . . . . . . . . . . . . 72 BORROWER'S FUNDED DEBT. . . . . . . . . . . . . . . . . . 72 EXHIBIT 7.02 . . . . . . . . . . . . . . . . . . . . . . . . . 73 BORROWER'S LIENS. . . . . . . . . . . . . . . . . . . . . 73 CREDIT AGREEMENT dated as of August 9, 1995 among FRONTIER CORPORATION, a corporation organized under the laws of New York (the "Borrower"), each of the banks which is a signatory hereto (individually a "Bank" and collectively the "Banks") and THE CHASE MANHATTAN BANK , N.A., a national banking association organized under the laws of the United States of America, as agent for the Banks (in such capacity, together with its successors in such capacity, the "Agent"). The Borrower desires that the Banks extend credit as provided herein and the Banks are prepared to extend such credit. Accordingly, the Borrower, the Banks and the Agent agree as follows: ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS. Section 1.01. Definitions. As used in this Agreement the following terms have the following meanings (terms defined in the singular to have a correlative meaning when used in the plural and vice versa): "Affiliate" means any Person: (a) which directly or indirectly Controls, or is Controlled by, or is under common Control with, the Borrower or any of its Subsidiaries; (b) which directly or indirectly beneficially owns or holds 5% or more of any class of voting stock of the Borrower or any such Subsidiary; (c) 5% or more of the voting stock of which is directly or indirectly beneficially owned or held by the Borrower or such Subsidiary; or (d) which is a partnership in which the Borrower or any of its Subsidiaries is a general partner. "Agreement" means this Credit Agreement, as amended or supplemented from time to time. References to Articles, Sections, Exhibits, Schedules and the like refer to the Articles, Sections, Exhibits, Schedules and the like of this Agreement unless otherwise indicated. "Authorization Letter" means the letter agreement executed by the Borrower in the form of Exhibit 4.01(b) . "Banking Day" means any day on which commercial banks are not authorized or required to close in New York City and whenever such day relates to a Eurodollar Loan or notice with respect to any Eurodollar Loan, a day on which dealings in Dollar deposits are also carried out in the London interbank market. "Borrower" shall mean Frontier Corporation. "Borrowing" means the incurring of one or more Loans of the same type from one or more Banks on the same day and, in the case of Loans having an Interest Period, having the same Interest Period. "Capital Lease" means any lease which has been or should be capitalized on the books of the lessee in accordance with GAAP. "Closing Date" means the date this Agreement has been executed by the Borrower, the Banks and the Agent. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Commitment" means, with respect to each Bank, the obligation of such Bank to make Revolving Loans under this Agreement, in the following aggregate principal amount, as such amount may be reduced or otherwise modified from time to time: The Chase Manhattan Bank, N.A. $ 40,000,000; Chemical Bank $ 30,000,000; Marine Midland Bank $ 30,000,000; Union Bank of Switzerland $ 25,000,000; PNC Bank, National Association $ 25,000,000; Fleet Bank $ 25,000,000; First Union National Bank $ 25,000,000; of North Carolina Bank One, Columbus, N.A. $ 15,000,000; Comerica Bank $ 15,000,000; Star Bank, N.A. $ 10,000,000; Manufacturers and Traders Trust $ 10,000,000 Company Total: $250,000,000 ============
"Consolidated Funded Debt" means Funded Debt of the Borrower and its Consolidated Subsidiaries, as determined on a consolidated basis in accordance with GAAP. "Consolidated Net Worth" means the Net Worth of the Borrower and its Consolidated Subsidiaries, as determined on a consolidated basis in accordance with GAAP. "Consolidated Subsidiary" means any Subsidiary whose accounts are or are required to be consolidated with the accounts of the Borrower in accordance with GAAP. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. "Debt" means, with respect to any Person: (a) indebtedness of such Person for borrowed money; (b) indebtedness for the deferred purchase price of property or services (except trade payables in the ordinary course of business); (c) Unfunded Benefit Liabilities of such Person (if such Person is not the Borrower, determined in a manner analogous to that of determining Unfunded Benefit Liabilities of the Borrower); (d) the amount available for drawing under any outstanding standby letters of credit issued for the account of such Person, less the principal amount of any other Debt secured by such letters of credit; (e) obligations arising under acceptance facilities; (f) guaranties, endorsements (other than for collection in the ordinary course of business) and other contingent obligations to purchase, to provide funds for payment, to supply funds to invest in any Person, or otherwise to assure a creditor against loss; (g) obligations secured by any Lien on property of such Person; and (h) obligations of such Person as lessee under Capital Leases. "Default" means any event which with the giving of notice or lapse of time, or both, would become an Event of Default. "Default Rate" means, with respect to the principal of any Loan and, to the extent permitted by law, any other amount payable by the Borrower under this Agreement or any Note that is not paid when due (whether at stated maturity, by acceleration or otherwise), a rate per annum during the period from and including the due date, to, but excluding the date on which such amount is paid in full equal to 1% above the Variable Rate as in effect from time to time (provided that, if the amount so in default is principal of a Fixed Rate Loan and the due date thereof is a day other than the last day of the Interest Period therefor, the "Default Rate" for such principal shall be, for the period from and including the due date and to but excluding the last day of the Interest Period therefor, 2% above the interest rate for such Loan as provided in Section 2.10 hereof and, thereafter, the rate provided for above in this definition). "Dollars" and the sign "$" mean lawful money of the United States of America. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, including any rules and regulations promulgated thereunder. "ERISA Affiliate" means any corporation or trade or business which is a member of any group of organizations (i) described in Section 414(b) or (c) of the Code of which the Borrower is a member, or (ii) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which the Borrower is a member. "Eurodollar Loan" means any Loan, other than a Quoted Rate Loan, when and to the extent the interest rate therefor is determined on the basis of the definition of "Eurodollar Rate." "Eurodollar Rate" means, for any Eurodollar Loan, for any Interest Period therefor, a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Agent to be equal to the quotient of (i) the Fixed Base Rate for such Loan for such Interest Period, divided by (ii) one minus the Reserve Requirement for such Loan for such Interest Period. "Event of Default" has the meaning given such term in Section 9.01. "Facility Documents" means this Agreement, the Notes and the Authorization Letter. "Fixed Base Rate" means with respect to any Interest Period for a Borrowing of Eurodollar Loans, the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) quoted at approximately 11:00 a.m. London time by the principal London branch of the Reference Bank two Banking Days prior to the first day of such Interest Period for the offering to the Reference Bank in the London interbank market of Dollar deposits in immediately available funds, for a period, and in an amount, comparable to the Interest Period and principal amount of the Eurodollar Loan which shall be made by the Reference Bank and outstanding during such Interest Period. "Fixed Rate Loan" means any Eurodollar Loan and any Quoted Rate Loan. "Funded Debt" means, with respect to any Person, all indebtedness of such Person (including current maturities), for money borrowed (including Capital Leases), which by its terms matures more than one year from the date as of which such Funded Debt is incurred, and any such indebtedness of such Person maturing within one year from such date which is renewable or extendable at the option of the obligor to a date beyond one year from such date (whether or not theretofore renewed or extended), including any such indebtedness renewable or extendable at the option of the obligor under, or payable from the proceeds of other indebtedness which may be incurred pursuant to, the provisions of any revolving credit agreement or other similar agreement. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time, applied on a basis consistent with those used in the preparation of the financial statements referred to in Section 5.05 (except for changes concurred in by the Borrower's independent public accountants). "Interest Period" means, with respect to any Fixed Rate Loan, the period commencing on the date such Loan is made, converted from another type of Loan or renewed, as the case may be, and ending, as the Borrower may select pursuant to Section 2.06 or Section 2.13 as the case may be: (a) in the case of Eurodollar Loans, on the numerically corresponding day in the first, second, third, or sixth calendar month thereafter, provided that each such Interest Period which commences on the last Banking Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Banking Day of the appropriate subsequent calendar month; and (b) in the case of Quoted Rate Loans, on the date established by the lending Bank pursuant to Section 2.13. "Lending Office" means, for each Bank and for each type of Loan, the lending office of such Bank (or of an affiliate of such Bank) designated as such for such type of Loan on its signature page hereof or such other office of such Bank (or of an affiliate of such Bank) as such Bank may from time to time specify to the Agent and the Borrower as the office by which its Loans of such type are to be made and maintained. "Lien" means any lien (statutory or otherwise), security interest, mortgage, deed of trust, priority, pledge, charge, conditional sale, title retention agreement, financing lease (including any Capital Lease) or other encumbrance or similar right of others, or any agreement to give any of the foregoing. "Loan" means any loan made by a Bank pursuant to Section 2.01 or Section 2.13. "Margin" means for each Eurodollar Loan, a rate determined pursuant to the grid set forth below, based on Borrower's senior unsecured debt rating established from time to time by Standard & Poor's Ratings Group ("S & P") and Moody's Investors Service, Inc. ("Moody's"). For purposes of this grid, (i) if the S & P and Moody's ratings are different, the higher one shall be used to determine the Margin, (ii) the symbol "(greater than)/=" shall mean greater than or equal to, and (iii) the symbol "(less than)/=" shall mean less than or equal to. If at any given time neither S & P nor Moody's has an established senior unsecured debt rating for the Borrower, the Reference Bank shall determine an S & P and a Moody's senior unsecured debt rating which corresponds to the risk rating assigned by the Reference Bank to the Borrower, and the Reference Bank's determination shall be conclusive on the Borrower and the Banks.
S & P/Moody's Margin (in basis points) ------------- ------- (greater than)/= AA- / Aa3 13 (greater than)/= A- / A3 17 (greater than)/= BBB+ / Baa1 25 BBB / Baa2 30 BBB- / Baa3 40 (less than)/= BB+ / Ba1 50
"Multiemployer Plan" means a Plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Borrower or any ERISA Affiliate and which is covered by Title IV of ERISA. "Net Worth" means, at any date of determination thereof, the excess of total assets of Borrower over total liabilities of Borrower, determined in accordance with GAAP. "Note" means each Revolving Note and Quoted Rate Note. "OMP" means Rochester Telephone Corporation's Open Market Plan as contemplated in the Joint Stipulation and Agreement between the New York State Public Service Commission ("NYSPSC") and Rochester Telephone Corporation (among others), Case 93-C-0103 and Case 93-C-0033 and the subsequent Order No. 94-25 issued therein by the NYSPSC dated November 10, 1994. The term OMP shall include any amendments to such Open Market Plan that may become effective from time to time, provided that such term shall not include any such amendments that may reasonably be expected to have a material adverse effect on the risks assumed or to be assumed by the Banks, or the prospect of repayment of any present or future obligations of Borrower, pursuant to this Agreement or any other Facility Documents. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "Plan" means any employee benefit or other plan established or maintained, or to which contributions have been made, by the Borrower or any ERISA Affiliate and which is covered by Title IV of ERISA, other than a Multiemployer Plan. "Prime Rate" means that rate of interest from time to time announced by the Reference Bank at its principal office as its prime commercial lending rate. "Principal Office" means the principal office of the Agent, presently located at 4 Chase Metro Tech Center, 13th Floor, Brooklyn, New York, 11245. "Quoted Rate Loan" shall have the meaning given such term in Section 2.13. "Quoted Rate Note" means a promissory note of the Borrower in the form of Exhibit 2.02B, executed pursuant to Section 2.02 and evidencing Quoted Rate Loans made by a Bank hereunder. "Reference Bank" means The Chase Manhattan Bank, N.A. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented from time to time. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented from time to time. "Regulatory Change" means, with respect to any Bank, any change after the date of this Agreement in United States, state, municipal or foreign laws or regulations (including without limitation Regulation D) or the adoption or making after such date of any interpretations, directives or requests applying to a class of banks including such Bank of or under any United States, state, municipal or foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Required Banks" means, at any time while no Loans are outstanding, Banks having at least 66 % of the aggregate amount of the Commitments and, at any time while Loans are outstanding, Banks holding at least 66 % of the aggregate principal amount of the Loans. "Reserve Requirement" means, for any Interest Period for any Eurodollar Loan, the average maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D by member banks of the Federal Reserve System in New York City with deposits exceeding $1,000,000,000 against "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such member banks by reason of any Regulatory Change against (i) any category of liabilities which includes deposits by reference to which the Fixed Base Rate for Eurodollar Loans is to be determined as provided in the definition of "Fixed Base Rate" in this Section 1.01 or (ii) any category of extensions of credit or other assets which include Eurodollar Loans. "Revolving Loan" means a Eurodollar Loan, or a Variable Rate Loan, made pursuant to Section 2.01(a). "Revolving Note" means a promissory note of the Borrower executed pursuant to Section 2.02 and evidencing the Revolving Loans of a Bank hereunder. "SEC" means the Securities and Exchange Commission. "Significant Subsidiary" means at any time any Subsidiary of the Borrower (i) whose "attributable" Tangible Assets constituted 6% or more of Consolidated Net Worth as of the end of the most recent Fiscal Quarter or (ii) whose "attributable" net income contributed 10% or more of Borrower's and its Consolidated Subsidiaries' net income, as determined on a consolidated basis in accordance with GAAP, for the fiscal year most recently ended. The percentage of any Subsidiary's Tangible Assets or net income "attributable" to such Subsidiary for purposes of such computation shall be the same percentage of such Subsidiary's Tangible Assets and net income as are included, respectively, in Consolidated Net Worth and in Borrower's and its Consolidated Subsidiaries' net income. "Subsidiary" means, with respect to any Person, any corporation or other entity of which at least a majority of the securities, or other ownership interests having ordinary voting power (absolutely or contingently) for the election of directors or other persons performing similar functions are at the time owned directly or indirectly by such Person. "Tangible Assets" means, at any date of determination thereof, total assets less all intangible assets, all determined in accordance with GAAP. "Termination Date" means August 8, 2000; provided that if such date is not a Banking Day, the Termination Date shall be the next succeeding Banking Day (or, if such next succeeding Banking Day falls in the next calendar month, the next preceding Banking Day). "Unfunded Benefit Liabilities" means, with respect to any Plan, the amount (if any) by which the present value of all benefit liabilities (within the meaning of Section 4001(a)(16) of ERISA) under the Plan exceeds the fair market value of all Plan assets allocable to such benefit liabilities, as determined on the most recent valuation date of the Plan and in accordance with the provisions of ERISA for calculating the potential liability of the Borrower or any ERISA Affiliate under Title IV of ERISA. "Variable Rate" means, for any day, the Prime Rate for such day. "Variable Rate Loan" means any Loan made pursuant to Section 2.01(a), when and to the extent the interest rate for such Loan is determined in relation to the Variable Rate. Section 1.02. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP, and all financial data required to be delivered hereunder shall be prepared in accordance with GAAP. ARTICLE 2. THE CREDIT. Section 2.01. The Loans. (a) Subject to the terms and conditions of this Agreement, each of the Banks severally agrees to make Eurodollar Loans and Variable Rate Loans (each of which shall be a "Loan" and all of which shall be collectively referred to as "Revolving Loans") to the Borrower, from time to time from and including the date hereof to but excluding the Termination Date, up to but not exceeding in the aggregate principal amount at any one time outstanding, the amount of its Commitment. (b) Subject to the terms and conditions of this Agreement, each Bank may, in its discretion, make Quoted Rate Loans pursuant to Section 2.13. (c) Loans may be outstanding as Variable Rate Loans, Quoted Rate Loans or Eurodollar Loans (each a "type" of Loan). Each type of Loan of each Bank shall be made and maintained at such Bank's Lending Office for such type of Loans. (d) The Revolving Loans shall be entirely due and payable on the Termination Date, and each Quoted Rate Loan shall be due and payable on the maturity date therefor established pursuant to Section 2.13. Section 2.02. The Notes. The Revolving Loans of each Bank shall be evidenced by a single promissory note in favor of such Bank in the form of Exhibit 2.02A, (each a "Revolving Note"), and the Quoted Rate Loans of each Bank shall be evidenced by a single promissory note in favor of such Bank in the form of Exhibit 2.02B (each a "Quoted Rate Note"). The Notes shall each be dated the date of this Agreement and shall be duly completed and executed by the Borrower. Section 2.03. Purpose. The Borrower shall use Loan proceeds for any proper corporate purpose. Borrower shall not use such proceeds for the purpose, whether immediate, incidental or ultimate, of buying or carrying "margin stock" within the meaning of Regulation U. Section 2.04. Borrowing Procedures. The Borrower shall give the Agent notice of each Variable Rate Loan and each Eurodollar Loan to be made under Section 2.01 as provided in Section 2.08; and the Borrower shall give the Agent notice of each Quoted Rate Loan as provided in Section 2.13. Not later than 2:00 p.m. New York, New York time on the date of such Borrowing, each Bank shall, or in the case of a Quoted Rate Loan, the lending Bank shall, through its Lending Office and subject to the conditions of this Agreement, make the amount of the Loan to be made by it on such day available to the Agent at the Principal Office and in immediately available funds for the account of the Borrower. The amount so received by the Agent shall, subject to the conditions of this Agreement, be made available to the Borrower, in immediately available funds, by the Agent crediting an account of the Borrower designated by the Borrower and maintained with the Agent at the Principal Office. Section 2.05. Prepayments and Conversions. The Borrower shall have the right to make prepayments of principal, or to convert one type of Loans into another type of Loans, at any time or from time to time, provided that: (a) the Borrower shall give the Agent notice of each such prepayment or conversion as provided in Section 2.08; (b) Quoted Rate Loans may not be converted into another type of Loan, except as provided in Section 3.04; (c) Fixed Rate Loans may be prepaid or converted only on the last day of an Interest Period for such Loans, except that (i) if after giving effect to any reduction or termination of the Commitments pursuant to Section 2.07, either the outstanding aggregate principal amount of all Loans exceeds the aggregate amount of the Commitments or the outstanding aggregate principal amount of Variable Rate and Eurodollar Loans from one or more Banks exceeds the aggregate amount of such Banks' Commitments, the Borrower shall pay or prepay, on the date of such reduction or termination, one or more Loans in an aggregate principal amount equal to the excess, together with interest thereon accrued to the date of such payment or prepayment, and (ii) if Borrower receives a notice pursuant to either Section 3.01(a) or 3.01(c) that a Bank is entitled to compensation as contemplated therein, Borrower may prepay any Fixed Rate Loan(s) with respect to which such compensation is due, provided that Borrower then pays interest thereon accrued to the date of such prepayment(s) or conversion; and (d) Borrower shall have the right to designate the Loan(s) to be prepaid pursuant to clauses (i) and (ii) of Section 2.05(c), provided that, (i) it shall be required to select the type(s) of Loans to be prepaid in the following order of priority - - Quoted Rate Loans and Revolving Loans; and (ii) Borrower shall be required to prepay pro rata, in accordance with Section 10.16, in whole or in part, all Loans of a particular type that were borrowed as part of the same Borrowing, if it prepays any Loans of such type and Borrowing. Section 2.06. Interest Periods; Renewals. (a) In the case of each Fixed Rate Loan, the Borrower shall select an Interest Period of any duration in accordance with the definition of Interest Period in Section 1.01, subject to the following limitations: (i) in the case of a Eurodollar Loan, no Interest Period shall have a duration less than one month, and if any such proposed Interest Period would otherwise be for a shorter period, such Interest Period shall not be available; (ii) if an Interest Period would end on a day which is not a Banking Day, such Interest Period shall be extended to the next Banking Day, unless, in the case of a Eurodollar Loan, such Banking Day would fall in the next calendar month in which event such Interest Period shall end on the immediately preceding Banking Day; (iii) no Interest Period shall end after the Termination Date; (iv) no more than five Eurodollar Loans of each Bank may be outstanding at any one time; and (v) no more than ten Quoted Rate Loans may be outstanding at any one time. (b) Upon notice to the Agent as provided in Section 2.08, the Borrower may renew any Eurodollar Loan on the last day of the Interest Period therefor as the same type of Loan with an Interest Period of the same or different duration in accordance with the limitations provided above. If the Borrower shall fail to give timely notice to the Agent of such a renewal, such Eurodollar Loan shall automatically become a Variable Rate Loan on the last day of the current Interest Period. Section 2.07. Changes of Commitments. The Borrower shall have the right to reduce or terminate the amount of unused Commitments at any time or from time to time, provided that: (a) the Borrower shall give notice of each such reduction or termination to the Agent as provided in Section 2.08; and (b) each partial reduction shall be in an aggregate amount at least equal to $10,000,000. The Commitments once reduced or terminated may not be reinstated. Section 2.08. Certain Notices. Notices by the Borrower to the Agent of each Borrowing pursuant to Section 2.04, and each prepayment or conversion pursuant to Section 2.05 and each renewal pursuant to Section 2.06(b), and each reduction or termination of the Commitments pursuant to Section 2.07 shall be irrevocable and shall be effective on the Banking Day of receipt only if received by the Agent not later than 12:00 noon New York, New York time on such Banking Day, and otherwise, on the Banking Day following the day of receipt, and (a) in the case of Borrowings and prepayments of, conversions into and (in the case of Eurodollar Loans) renewals of (i) Variable Rate Loans, given on the Banking Day thereof, and (ii) Eurodollar Loans, given three Banking Days prior thereto; and (b) in the case of reductions or termination of the Commitments, given three Banking Days prior thereto. Each notice referred to in this Section 2.08 shall specify the Loans to be borrowed, prepaid, converted or renewed and the amount (subject to Section 2.09) and type of the Loans to be borrowed, or converted, or prepaid or renewed (and, in the case of a conversion, the type of Loans to result from such conversion and, in the case of a Eurodollar Loan, the Interest Period therefor) and the date of the Borrowing or prepayment, or conversion or renewal (which shall be a Banking Day). Each such notice of reduction or termination shall specify the amount of the Commitments to be reduced or terminated. Notices pursuant to Section 2.13 shall be given as provided therein. The Agent shall promptly notify the Banks of the contents of each such notice. Section 2.09. Minimum Amounts. Except for Borrowings which exhaust the full remaining amount of the Commitments, prepayments or conversions which result in the prepayment or conversion of all Loans of a particular type or conversions made pursuant to Section 3.04, each Borrowing, prepayment, conversion and renewal of principal of Loans of a particular type shall be in an amount at least equal to $1,000,000 in the aggregate for all Banks (Borrowings, prepayments, conversions or renewals of or into Loans of different types or, in the case of Fixed Rate Loans, having different Interest Periods at the same time hereunder to be deemed separate Borrowings, prepayments, conversions and renewals for the purposes of the foregoing, one for each type and Interest Period). Anything in this Agreement to the contrary notwithstanding, the aggregate principal amount of Eurodollar Loans of each type having concurrent Interest Periods shall be at least $5,000,000. Section 2.10. Interest. (a) Interest shall accrue on the outstanding and unpaid principal amount of each Loan for the period from and including the date of such Loan to but excluding the date such Loan is due at the following rates per annum: (i) for a Variable Rate Loan, at a variable rate per annum equal to the Variable Rate; (ii) for a Eurodollar Loan, at a fixed rate equal to the Eurodollar Rate plus the Margin; and (iii) for a Quoted Rate Loan, at the fixed rate for such Loan established pursuant to Section 2.13. If the principal amount of any Loan and any other amount payable by the Borrower hereunder or under a Note shall not be paid when due (at stated maturity, by acceleration or otherwise), interest shall accrue on such amount to the fullest extent permitted by law from and including such due date to but excluding the date such amount is paid in full at the Default Rate. (b) The interest rate on each Variable Rate Loan shall change when the Variable Rate changes and interest on each such Loan shall be calculated on the basis of a year of 365 (or, in the case of a leap year, 366) days for the actual number of days elapsed. Interest on each Fixed Rate Loan shall be calculated on the basis of a year of 360 days for the actual number of days elapsed. Promptly after the determination of any interest rate provided for herein or any change therein, the Agent shall notify the Borrower and the Banks. (c) Accrued interest shall be due and payable in arrears upon any payment of principal or conversion and (i) for each Variable Rate Loan, on the last day of each March, June, September and December, commencing the first such date after such Loan; (ii) for each Fixed Rate Loan, on the last day of the Interest Period with respect thereto and, in the case of an Interest Period greater than three months, at three-month intervals after the first day of such Interest Period; provided that interest accruing at the Default Rate shall be due and payable from time to time on demand of the Agent. Section 2.11. Fees. The Borrower shall pay to the Agent for the account of each Bank a facility fee on the daily average total amount of the Commitment of such Bank for the period from and including the date hereof to the earlier of the date the Commitments are terminated or the Termination Date at a rate per annum determined pursuant to the grid set forth below, calculated on the basis of a year of 360 days for the actual number of days elapsed. The accrued facility fee shall be due and payable in arrears upon any reduction or termination of the Commitments and on the last day of each March, June, September and December, for the calendar quarter then ended, commencing on the first such date after the Closing Date. The facility fee shall be calculated on the basis of the Borrower's senior unsecured debt rating established from time to time by Standard & Poor's Ratings Group ("S & P") and Moody's Investors Service, Inc. ("Moody's"). For purposes of this grid, (i) if the S & P and Moody's ratings are different, the higher one shall be used to determine the facility fee, (ii) the symbol "(greater than)/=" shall mean greater than or equal to, and (iii) the symbol "(less than)/=" shall mean less than or equal to. If at any given time neither S & P nor Moody's has an established senior unsecured debt rating for the Borrower, the Reference Bank shall determine an S & P and a Moody's senior unsecured debt rating which corresponds to the risk rating assigned by the Reference Bank to the Borrower, and the Reference Bank's determination shall be conclusive on the Borrower and the Banks.
S & P/Moody's Facility Fee ------------- (In basis points) (greater than)/= AA- / Aa3 7 (greater than)/= A- / A3 8 (greater than)/= BBB+/ Baa1 12.5 BBB / Baa2 15 BBB-/ Baa3 20
(less than)/= BB+ / Ba1 50
Section 2.12. Payments Generally. All payments under this Agreement or the Notes shall be made in Dollars in immediately available funds, without setoff or counterclaim, not later than 1:00 p.m. New York, New York time on the relevant dates specified above (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Banking Day) to the Agent's account number maintained at the Principal Office for the account of the applicable Lending Office of each Bank. The Agent, or any Bank for whose account any such payment is to be made, may (but shall not be obligated to) debit the amount of any such payment which is not made by such time to any ordinary deposit account of the Borrower with the Agent or such Bank, as the case may be, and any Bank so doing shall promptly notify the Agent. Subject to Section 10.16, the Borrower shall, at the time of making each payment under this Agreement or the Notes, specify to the Agent the principal or other amount payable by the Borrower under this Agreement, the Notes and the type of Loan(s) to which such payment is to be applied; but in the event that it fails to so specify, or if a Default or Event of Default has occurred and is continuing, the Agent may apply such payment as it may elect in its sole discretion subject also to Section 10.16. Except as otherwise provided in this Agreement, if the due date of any payment under this Agreement or the Notes would otherwise fall on a day which is not a Banking Day, such date shall be extended to the next succeeding Banking Day and interest shall be payable for any principal so extended for the period of such extension. Each payment received by the Agent hereunder or under any Note for the account of a Bank shall be paid promptly to such Bank, in immediately available funds, for the account of such Bank's Lending Office. Section 2.13. Quoted Rate Loans. From time to time the Borrower may request that any Bank or Banks, at the option of each, offer to make Loans to the Borrower under this Agreement at any time prior to the Termination Date, bearing interest at such rates (other than those provided for in Section 2.10 hereof), and for such Interest Period(s), as may be specified by the Bank in its offer. Each such Loan shall be due and payable on the last day of the Interest Period therefor and shall have such other terms as may be set forth in the Bank's offer. If the Borrower accepts any such offer within the time period for acceptance specified therein and such Loan is made by the Bank to the Borrower, such Loan (a "Quoted Rate Loan") shall be advanced pursuant to Section 2.04 and shall constitute a "Loan" for all purposes of, and shall be governed by, this Agreement, except to the extent the terms specifically applicable to such Loan are inconsistent with the provisions of this Agreement. The Borrower shall give the Agent notice of each Quoted Rate Loan, specifying the name of the lending Bank and the amount, interest rate and Interest Period of the Loan to be made by such Bank. Such notice must be received by the Agent, not later than 1 p.m. New York, New York time on the Banking Day on which the Loan is to be made. Each Quoted Rate Loan made by each Bank shall be deemed a separate "type" of Loan and Quoted Rate Loans shall be excepted from the pro rata borrowing and payment requirements of Section 10.16. No Quoted Rate Loan shall be deemed to utilize the individual Commitment of the lending Bank, but it shall be deemed to utilize the aggregate amount of the Commitments of all of the Banks as then in effect. Consequently, although a Bank may have one or more Quoted Rate Loans outstanding at any one time, its obligation to make Variable Rate Loans and Eurodollar Loans shall not be affected thereby, and it shall be required to advance its pro rata share of the Loans of such other types as provided in this Agreement, even though the aggregate unpaid principal balance of its outstanding Loans will thereafter exceed the amount of its Commitment. However, the aggregate unpaid principal balance of all outstanding Loans shall at no time exceed the aggregate amount of the Commitments of all of the Banks, as then in effect. ARTICLE 3. YIELD PROTECTION; ILLEGALITY; ETC. Section 3.01. Additional Costs. (a) The Borrower shall pay directly to each Bank from time to time on demand such amounts as such Bank may determine to be necessary to compensate it for any costs which such Bank determines are attributable to its making or maintaining any Fixed Rate Loans under this Agreement or its Notes or its obligation to make any such Loans hereunder, or any reduction in any amount receivable by such Bank hereunder (including any amount receivable under this Section 3.01) in respect of any such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any Regulatory Change which: (i) changes the basis of taxation of any amounts payable to such Bank under this Agreement or its Notes (including any amounts payable under this Section 3.01) in respect of any of such Loans (other than taxes imposed on the overall net income of such Bank or of its Lending Office for any of such Loans by the jurisdiction in which such Bank has its principal office or such Lending Office); or (ii) imposes or modifies any reserve, special deposit, deposit insurance or assessment, minimum capital, capital ratio or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Bank (including any of such Loans or any deposits referred to in the definition of "Fixed Base Rate" in Section 1.01); or (iii) imposes any other condition affecting this Agreement or its Notes (or any of such extensions of credit or liabilities). Each Bank will notify the Borrower of any event occurring after the date of this Agreement which will entitle such Bank to compensation pursuant to this Section 3.01(a) as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Any demand for payment under this Section 3.01(a) may include on a prospective basis any amounts required to be deducted from such payment to the extent that such amounts would be reimbursable hereunder when incurred. If any Bank requests compensation from the Borrower under this Section 3.01(a), or under Section 3.01(c), the Borrower may, by notice to such Bank (with a copy to the Agent), require that such Bank's Loans of the type with respect to which such compensation is requested be prepaid in accordance with Section 2.05 or be converted in accordance with Section 3.04. (b) Without limiting the effect of the foregoing provisions of this Section 3.01, in the event that, by reason of any Regulatory Change, any Bank either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Bank which includes deposits by reference to which the interest rate on Eurodollar or then outstanding Quoted Rate Loans is determined as provided in this Agreement or in the lending Bank's offer with respect to a Quoted Rate Loan, or a category of extensions of credit or other assets of such Bank which includes Eurodollar or then outstanding Quoted Rate Loans or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold, then, if such Bank so elects by notice to the Borrower (with a copy to the Agent), the obligation of such Bank to make or renew, and to convert Loans of any other type into, Loans of such type hereunder shall be suspended until the date such Regulatory Change ceases to be in effect (and all Loans of such type held by such Bank then outstanding shall be, at Borrower's election, prepaid in accordance with Section 2.05 or converted in accordance with Section 3.04). (c) Without limiting the effect of the foregoing provisions of this Section 3.01 (but without duplication), the Borrower shall pay directly to each Bank from time to time on request such amounts as such Bank may determine to be necessary to compensate such Bank for any costs which it determines are attributable to the maintenance, by it or any of its affiliates pursuant to any law or regulation of any jurisdiction or any interpretation, directive or request (whether or not having the force of law and whether in effect on the date of this Agreement or thereafter) of any court or governmental or monetary authority, of capital in respect of its Loans hereunder or its obligation to make Loans hereunder (such compensation to include, without limitation, an amount equal to any reduction in return on assets or equity of such Bank to a level below that which it could have achieved but for such law, regulation, interpretation, directive or request). Each Bank will notify the Borrower if it is entitled to compensation pursuant to this Section 3.01(c) as promptly as practicable after it determines to request such compensation. (d) Determinations and allocations by a Bank for purposes of this Section 3.01 of the effect of any Regulatory Change pursuant to subsections (a) or (b), or of the effect of capital maintained pursuant to subsection (c), on its costs of making or maintaining Loans or its obligation to make Loans, or on amounts receivable by, or the rate of return to, it in respect of Loans or such obligation, and of the additional amounts required to compensate such Bank under this Section 3.01, shall be conclusive, provided that such determinations and allocations are made on a demonstrably reasonable basis. Section 3.02. Limitation on Types of Loans. Anything herein to the contrary notwithstanding, if: (a) the Agent determines (which determination shall be conclusive) that quotations of interest rates for the relevant deposits referred to in the definition of "Fixed Base Rate" in Section 1.01 are not being provided in the relevant amounts or for the relevant maturities for purposes of determining the rate of interest for any Eurodollar Loans as provided in this Agreement; or (b) the Required Banks determine (which determination shall be conclusive) and notify the Agent that the relevant rates of interest referred to in the definition of "Fixed Base Rate" in Section 1.01 upon the basis of which the rate of interest for any Eurodollar Loans is to be determined do not adequately cover the cost to the Banks of making or maintaining such Loans; then the Agent shall give the Borrower and each Bank prompt notice thereof, and so long as such condition remains in effect, the Banks shall be under no obligation to make or renew Eurodollar Loans or to convert Loans of any other type into Eurodollar Loans and the Borrower shall, on the last day(s) of the then current Interest Period(s) for any outstanding Eurodollar Loans, either prepay such Loans or convert such Loans into another type of Loans in accordance with Section 2.05. Section 3.03. Illegality. Notwithstanding any other provision in this Agreement, in the event that it becomes unlawful, in the reasonable opinion of any Bank, for such Bank or its Lending Office to (a) honor its obligation to make or renew any Eurodollar or Quoted Rate Loan hereunder or convert Variable Rate Loans of any type into Eurodollar Loans, or (b) maintain any Eurodollar or Quoted Rate Loan hereunder, then such Bank shall promptly notify the Borrower thereof (with a copy to the Agent) and such Bank's obligation to make or renew such Eurodollar or Quoted Rate Loan, as the case may be, and to convert Variable Rate Loans into Eurodollar Loans shall be suspended until such time as such Bank may again make, renew, or convert and maintain such affected Loans, in which event such Bank shall promptly notify the Borrower thereof (with a copy to the Agent) and such Bank's outstanding Eurodollar or Quoted Rate Loan, as the case may be, shall be, at Borrower's election, either prepaid in accordance with Section 2.05 or converted in accordance with Section 3.04. Section 3.04. Certain Conversions pursuant to Sections 3.01 and 3.03. If the Fixed Rate Loans of any Bank of a particular type (Loans of such type being herein called "Affected Loans" and such type being herein called the "Affected Type") are to be converted pursuant to Section 3.01 or 3.03, by reason of Borrower's failure to prepay such Loans in accordance with Section 2.05, such Bank's Affected Loans shall be automatically converted into Variable Rate Loans on the last day(s) of the then current Interest Period(s) for the Affected Loans (or, in the case of a conversion required by Section 3.01(b) or 3.03, on such earlier date as such Bank may specify to the Borrower with a copy to the Agent) and, unless and until such Bank gives notice as provided below that the circumstances specified in Section 3.01 or 3.03 which gave rise to such conversion no longer exist: (a) to the extent that such Bank's Affected Loans have been so converted, all payments and prepayments of principal which would otherwise be applied to such Bank's Affected Loans shall be applied instead to its Variable Rate Loans into which the Affected Loans have been converted; and (b) if Eurodollar Loans are the Affected Type, all Loans which would otherwise be made or renewed by such Bank as Loans of the Affected Type shall be made instead as Variable Rate Loans and all Loans of such Bank which would otherwise be converted into Loans of the Affected Type shall be converted instead into (or shall remain as) Variable Rate Loans. If such Bank gives notice to the Borrower (with a copy to the Agent) that the circumstances specified in Section 3.01 or 3.03 which gave rise to the conversion of such Bank's Eurodollar Loans pursuant to this Section 3.04 no longer exist (which such Bank agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Loans of other Banks are outstanding, such Bank's Variable Rate Loans into which its Eurodollar Loans were converted shall be automatically converted, on the first day(s) of the next succeeding Interest Period(s) for such other Banks' outstanding Eurodollar Loans occurring at least three (3) Banking Days after such circumstances ceased to exist, to the extent necessary so that, after giving effect thereto, all Eurodollar Loans held by other Banks and by such Bank are held pro rata (as to principal amounts and Interest Periods) in accordance with their respective Commitments. Section 3.05. Certain Compensation. The Borrower shall pay to the Agent for the account of each Bank, upon the request of such Bank through the Agent, such amount or amounts as shall be sufficient (in the reasonable and demonstrable opinion of such Bank) to compensate it for any loss, cost or expense which such Bank determines is attributable to: (a) any payment, prepayment, conversion or renewal of a Fixed Rate Loan made by such Bank on a date other than the last day of an Interest Period for such Loan (whether by reason of required prepayment, required conversion, acceleration or otherwise); or (b) any failure by the Borrower to borrow, convert into or renew a Fixed Rate Loan to be made, converted into or renewed by such Bank on the date specified therefor in the relevant notice under Section 2.04, 2.05, 2.06 or 2.13, as the case may be. Without limiting the foregoing, such compensation shall include an amount equal to the excess, if any, of: (i) the amount of interest which otherwise would have accrued on the principal amount so paid, prepaid, converted or renewed or not borrowed, converted or renewed for the period from and including the date of such payment, prepayment or conversion or failure to borrow, convert or renew to but excluding the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, convert or renew, to but excluding the last day of the Interest Period for such Loan which would have commenced on the date specified therefor in the relevant notice) at the applicable rate of interest for such Loan provided for herein; over (ii) the amount of interest (as reasonably determined by such Bank) such Bank would have paid during the same period if it had bid on the first day of the then current Interest Period for such Loan in the London interbank market (if interest on such Loan is based on the Eurodollar Rate) or in any other relevant market (if such Loan is a Quoted Rate Loan) for Dollar deposits for amounts comparable to such principal amount and maturities comparable to such Interest Period. ARTICLE 4. CONDITIONS PRECEDENT. Section 4.01. Documentary Conditions Precedent. The obligations of the Banks to make the Loans constituting the initial Borrowing are subject to the condition precedent that the Agent shall have received on or before the date of such Loans each of the following, in form and substance satisfactory to the Agent and its counsel: (a) the Notes duly executed by the Borrower; (b) the Authorization Letter duly executed by the Borrower; (c) a certificate of the Secretary or Assistant Secretary of the Borrower, dated the Closing Date, attesting to all corporate action taken by the Borrower, including resolutions of its Board of Directors, authorizing the execution, delivery and performance of the Facility Documents and each other document to be delivered pursuant to this Agreement; (d) a certificate of the Secretary or Assistant Secretary of the Borrower, dated the Closing Date, certifying the names and true signatures of the officers of the Borrower authorized to sign the Facility Documents and the other documents to be delivered by the Borrower under this Agreement and certifying that attached thereto are true and correct copies of the Borrower's certificate of incorporation and by-laws as in effect on the date thereof; (e) a favorable opinion of Helen A. Zamboni, Esq., Corporate Counsel for the Borrower, dated the Closing Date, in substantially the form of Exhibit 4.01(e) and as to such other matters as the Agent or any Bank may reasonably request. Section 4.02. Additional Conditions Precedent. The obligations of the Banks to make any Loan (including the initial Borrowing), to convert any Loans pursuant to Section 2.05 or to renew or convert any Loans pursuant to Section 2.06, shall be subject to the further conditions precedent that on the date of any such Loan, conversion or renewal the following statements shall be true: (a) the representations and warranties contained in Article 5 are true and correct on and as of the date of such Loan, conversion or renewal as though made on and as of such date, provided that the representations and warranties in Sections 5.04, 5.09 and 5.10 are made only as of the date of this Agreement; and (b) no Default or Event of Default has occurred and is continuing, or would result from such Loan, conversion or renewal. Section 4.03. Deemed Representations. Each notice of Borrowing, conversion or renewal hereunder, each automatic conversion pursuant to Section 2.06(b), and acceptance by the Borrower of such conversion or renewal or of the proceeds of such Borrowing, shall constitute a representation and warranty that the statements contained in Sections 4.02(a) and (b) are true and correct both on the date of such notice and as of the date of such Borrowing, conversion or renewal. ARTICLE 5. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants that: Section 5.01. Incorporation, Good Standing and Due Qualification. Each of the Borrower and its Subsidiaries is duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its assets and to transact the business in which it is now engaged or proposed to be engaged, and is duly qualified as a foreign corporation and in good standing under the laws of each other jurisdiction in which such qualification is required. Section 5.02. Corporate Power and Authority; No Conflicts. The execution, delivery and performance by the Borrower of the Facility Documents to which it is a party have been duly authorized by all necessary corporate action and do not and will not: (a) require any consent or approval of its stockholders; (b) contravene its charter or by-laws; (c) to the extent material to the Borrower's financial condition, business, operations or properties, violate any provision of, or require any filing, registration, consent or approval under, any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Borrower or any of its Subsidiaries or Affiliates; (d) to the extent material to the Borrower's financial condition, business, operations or properties, result in a breach of or constitute a default or require any consent under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected; (e) result in, or require, the creation or imposition of any Lien, upon or with respect to any of the properties now owned or hereafter acquired by the Borrower and its Subsidiaries; or (f) cause the Borrower (or any Subsidiary or Affiliate, as the case may be) to be in default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, agreement, lease or instrument. Section 5.03. Legally Enforceable Agreements. Each Facility Document is, or when delivered under this Agreement will be, a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally. Section 5.04. Litigation. As of the date of this Agreement, other than as disclosed in Borrower's reports previously filed with the SEC under the Securities Exchange Act of 1934, there are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened, against or affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator, which could, in any one case or in the aggregate, materially adversely affect the financial condition, operations, properties or business of the Borrower or any such Subsidiary or the ability of the Borrower to perform its obligations under the Facility Documents. Section 5.05. Financial Statements. The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as at December 31, 1994, and the related consolidated income statement and statements of cash flows and changes in stockholders' equity of the Borrower and its Consolidated Subsidiaries for the fiscal year then ended, and the accompanying footnotes, together with the opinion thereon, of Price Waterhouse, independent certified public accountants included in Borrower's 1994 annual report to its shareholders filed with the SEC, and the interim consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as at March 31, 1995, and the related consolidated income statement and statements of cash flows and changes in stockholders' equity for the three month period then ended, included in Borrower's Form 10-Q Quarterly Report for the three months then ended, as filed with the SEC, copies of which have been furnished to each of the Banks, are complete and correct in all material respects and fairly present the financial condition of the Borrower and its Consolidated Subsidiaries as at such dates and the results of the operations of the Borrower and its Consolidated Subsidiaries for the periods covered by such statements, all in accordance either with GAAP consistently applied (subject to year end adjustments in the case of the interim financial statements), or with the rules and regulations of the SEC. There are no liabilities of the Borrower or any of its Consolidated Subsidiaries, fixed or contingent, which are material but are not reflected in such financial statements or in the notes thereto, other than liabilities arising in the ordinary course of business since March 31, 1995. No information, exhibit or report furnished by the Borrower to the Banks in connection with the negotiation of this Agreement contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statements contained therein not materially misleading. Since December 31, 1994, there has been no material adverse change in the condition (financial or otherwise), business, operations or prospects of the Borrower or any of its Subsidiaries. Section 5.06. Ownership and Liens. Each of the Borrower and its Consolidated Subsidiaries has title to, or valid leasehold interests in, all of its properties and assets, real and personal, including the properties and assets, and leasehold interests reflected in the financial statements referred to in Section 5.05 (other than any properties or assets disposed of in the ordinary course of business), and none of the properties and assets owned by the Borrower or any of its Subsidiaries and none of its leasehold interests is subject to any Lien, except as disclosed in such financial statements or as may be permitted hereunder, and except for Liens not material, individually or in the aggregate, with respect to Borrower's business, properties, operations or financial condition. Section 5.07. Taxes. Each of the Borrower and its Subsidiaries has filed all tax returns (federal, state and local) required to be filed and has paid all taxes, assessments and governmental charges and levies shown thereon to be due, including interest and penalties, to the extent material to Borrower's business, properties, operations or financial condition. Section 5.08. ERISA. Each Plan, and, to the best knowledge of the Borrower, each Multiemployer Plan, is in compliance in all material respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Code and any other applicable Federal or state law, and no event or condition is occurring or exists concerning which the Borrower would be under an obligation to furnish a report to the Banks in accordance with Section 6.05(d) hereof. Section 5.09. Significant Subsidiaries. Exhibit 5.09 lists the name, address and state of incorporation of each Subsidiary that constitutes a Significant Subsidiary as of the date of this Agreement, along with the computation by which Borrower has made such determination. Such Exhibit also describes the Debt of each Significant Subsidiary, and each Lien to which any of the assets of each Significant Subsidiary are subject, on the date hereof. Section 5.10. Borrower's Funded Debt. Exhibit 5.10 describes all Funded Debt of Borrower as of the date hereof, and contains a copy of each agreement, promissory note and other instrument related to or evidencing such Funded Debt. ARTICLE 6. AFFIRMATIVE COVENANTS. So long as any of the Notes shall remain unpaid or any Bank shall have any Commitment under this Agreement, the Borrower shall: Section 6.01. Maintenance of Existence. To the extent material to Borrower's business, properties, operations or financial condition, preserve and maintain, and cause each of its Significant Subsidiaries to preserve and maintain, its corporate existence and good standing in the jurisdiction of its incorporation, and qualify and remain qualified, and cause each of its Significant Subsidiaries to qualify and remain qualified, as a foreign corporation in each jurisdiction in which such qualification is required. Section 6.02. Conduct of Business. Continue, and cause each of its Significant Subsidiaries to continue, to engage in an efficient and economical manner in a business of the same general type as conducted by it on the date of this Agreement. Section 6.03. Maintenance of Insurance. Maintain, and cause each of its Significant Subsidiaries to maintain, insurance with financially sound and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in the same or a similar business and similarly situated, which insurance may provide for reasonable deductibility from coverage thereof. Section 6.04. Compliance with Laws. Comply, and cause each of its Significant Subsidiaries to comply, in all material respects with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property. Section 6.05. Reporting Requirements. Furnish to the Agent for distribution to each of the Banks: (a) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, a copy of Borrower's annual report to shareholders as filed with the SEC or, if Borrower does not prepare such a report, a copy of Borrower's Form 10-K Annual Report as filed with the SEC or, if Borrower does not prepare either such report, a separate document. In any such case, the report or separate document shall contain a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and a consolidated income statement and statement of cash flows and changes in stockholders' equity of the Borrower and its Consolidated Subsidiaries for such fiscal year, all either complying with the rules and regulations of the SEC, (if contained in a report filed with the SEC), or prepared in accordance with GAAP (if contained in a separate document) and accompanied by an opinion thereon acceptable to the Agent and each of the Banks by Price Waterhouse or other independent accountants of national standing selected by the Borrower; (b) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, a copy of Borrower's Form 10-Q Quarterly Report for such quarter as filed with the SEC, or, if Borrower does not prepare such report, a separate document. In either such case, the report or separate document shall contain a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and a consolidated income statement and statement of cash flows and changes in stockholders' equity, of the Borrower and its Consolidated Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, all either (i) complying with the rules and regulations of the SEC (if contained in a report filed with the SEC), or (ii) If contained in a separate document, prepared in accordance with GAAP and certified by the chief financial officer of the Borrower (subject to year-end adjustments); (c) as soon as possible and in any event within 10 days after the occurrence of each Default or Event of Default a written notice setting forth the details of such Default or Event of Default and the action which is proposed to be taken by the Borrower with respect thereto; (d) as soon as possible, and in any event within ten days after the Borrower has actual knowledge that any of the events or conditions specified below with respect to any Plan or Multiemployer Plan have occurred or exist, a statement signed by a senior financial officer of the Borrower setting forth details respecting such event or condition and the action, if any, which the Borrower or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to PBGC by the Borrower or an ERISA Affiliate with respect to such event or condition): (i) any reportable event, as defined in Section 4043(b) of ERISA, with respect to a Plan, as to which PBGC has not by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event (provided that a failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA including, without limitation, the failure to make on or before its due date a required installment under Section 412(m) of the Code or Section 302(e) of ERISA, shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code) and any request for a waiver under Section 412(d) of the Code for any Plan; (ii) the distribution under Section 4041 of ERISA of a notice of intent to terminate any Plan or any action taken by the Borrower or an ERISA Affiliate to terminate any Plan; (iii) the institution by PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Borrower or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by PBGC with respect to such Multiemployer Plan; (iv) the complete or partial withdrawal from a Multiemployer Plan by the Borrower or any ERISA Affiliate that results in liability under Section 4201 or 4204 of ERISA (including the obligation to satisfy secondary liability as a result of a purchaser default) or the receipt of the Borrower or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA; (v) the institution of a proceeding by a fiduciary or any Multiemployer Plan against the Borrower or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within 30 days; (vi) the adoption of an amendment to any Plan that pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA would result in the loss of tax-exempt status of the trust of which such Plan is a part if the Borrower or an ERISA Affiliate fails to timely provide security to the Plan in accordance with the provisions of said Sections; (vii) any event or circumstance exists which may reasonably be expected to constitute grounds for the Borrower or any ERISA Affiliate to incur liability under Title IV of ERISA or under Sections 412(c)(11) or 412(n) of the Code with respect to any Plan; and (viii) the Unfunded Benefit Liabilities of one or more Plans increase after the date of this Agreement in an amount which is material in relation to the financial condition of the Borrower and its Subsidiaries, on a consolidated basis. (e) promptly after the written request of any Bank, copies of each annual report filed pursuant to Section 104 of ERISA with respect to each Plan (including, to the extent required by Section 104 of ERISA, the related financial and actuarial statements and opinions and other supporting statements, certifications, schedules and information referred to in Section 103) and each annual report filed with respect to each Plan under Section 4065 of ERISA; provided, however, that in the case of a Multiemployer Plan, such annual reports shall be furnished only if they are available to the Borrower or an ERISA Affiliate; (f) promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports (in addition to those described above) which the Borrower or any of its Significant Subsidiaries sends to its stockholders, and copies of all regular, periodic and special reports, (in addition to those described above), and all registration statements which the Borrower or any such Significant Subsidiary files with the SEC or any governmental authority which may be substituted therefor, or with any national securities exchange; (g) promptly after sending or filing, or other receipt thereof, copies of any material amendments or notices sent, filed or received with respect to the OMP; (h) with each financial report submitted pursuant to Sections 6.05(a) and 6.05(b), a separate report describing (i) the names of each Significant Subsidiary as of the date of the balance sheet set forth in such report and of each Subsidiary (or former Subsidiary) listed on the last such report but not on the current report, along with the computation by which Borrower determined that each such Subsidiary (or former Subsidiary) did or did not constitute a Significant Subsidiary, (ii) the name, address and state of incorporation of each Subsidiary that became a Significant Subsidiary since the date of Borrower's latest such report, and (iii) the Debt of each Significant Subsidiary listed on such report, and each Lien to which any of the assets of each such Significant Subsidiary were subject, as of the date of such report; and (i) such other information respecting the condition or operations, financial or otherwise, of the Borrower or any of its Significant Subsidiaries as the Agent or any Bank may from time to time reasonably request. Section 6.06. Other Funded Debt of Borrower. If after the date of this Agreement, Borrower either incurs new Funded Debt (other than pursuant to this Agreement and other than that described in Exhibit 5.10) or amends any document related to Funded Debt (other than pursuant to this Agreement) or pursuant to which Borrower has the right to borrow Funded Debt, Borrower will furnish to the Agent for distribution to each of the Banks copies of all documents related to such new Funded Debt or to such amendments. If (in the reasonable opinion of the Required Banks) at any time and from time to time, after the date hereof, any of the covenants, representations and warranties or events of default, or any other material term or provision (other than any term or provision relating to payment terms, interest rates, penalties or the granting of a Lien permitted under Section 7.02), contained in any document, agreement or instrument from time to time entered into by the Borrower in respect of such other Funded Debt, is more favorable to the lenders of such other Funded Debt, than are the terms of this Agreement to the Banks, this Agreement shall be amended to contain each such more favorable covenant, representation and warranty, event of default, term or provision, and the Borrower hereby agrees to so amend this Agreement and to execute and deliver all such documents requested by the Required Banks to reflect such Amendment. Prior to the execution and delivery of such documents by the Borrower, this Agreement shall be deemed to contain each such more favorable covenant, representation and warranty, event of default, term or provision for purposes of determining the rights and obligations hereunder. ARTICLE 7. NEGATIVE COVENANTS. So long as any of the Notes shall remain unpaid or any Bank shall have any Commitment under this Agreement: Section 7.01. Borrower Mergers. Borrower shall not merge or consolidate with, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to, any Person, (or enter into any agreement to do any of the foregoing), except that Borrower shall be permitted to enter into mergers and consolidations in which Borrower is the surviving entity, provided that no Default or Event of Default either exists or will result therefrom. Section 7.02. Liens. Borrower shall not create, incur, assume or suffer to exist, or permit any of its Significant Subsidiaries to create, incur, assume or suffer to exist, any Lien, upon or with respect to any of its properties, now owned or hereafter acquired, except: (a) Existing Liens on Borrower's assets described in Exhibit 7.02 and existing Liens on Significant Subsidiaries' assets described in Exhibit 5.09; (b) Liens for taxes or assessments or other government charges or levies if not yet due and payable or, if due and payable, if they are being contested in good faith by appropriate proceedings and for which appropriate reserves are maintained; (c) Liens imposed by law, such as mechanic's, materialmen's, landlord's, warehousemen's and carrier's Liens, and other similar Liens, securing obligations incurred in the ordinary course of business which are not past due for more than 30 days, or which are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established; (d) Liens under workers' compensation, unemployment insurance, social security or similar legislation (other than ERISA); (e) Liens, deposits or pledges to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), leases (permitted under the terms of this Agreement), public or statutory obligations, surety, stay, appeal, indemnity, performance or other similar bonds, or other similar obligations arising in the ordinary course of business; (f) judgment and other similar Liens arising in connection with court proceedings; provided that the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings; (g) easements, rights-of-way, restrictions and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use and enjoyment by Borrower or any such Significant Subsidiary of the property or assets encumbered thereby in the normal course of its business or materially impair the value of the property subject thereto; (h) Liens securing obligations of a Significant Subsidiary to Borrower or another Significant Subsidiary; (i) purchase money Liens on any property hereafter acquired by Significant Subsidiaries that are regulated public utilities, or the assumption by such Subsidiaries of Liens on property existing at the time of such acquisition, or Liens incurred by such Subsidiaries in connection with any conditional sale or other title retention agreements or Capital Leases; and purchase money Liens on transmission equipment hereafter acquired by Significant Subsidiaries that are not regulated public utilities, or the assumption by such Subsidiaries of Liens on transmission equipment existing at the time of such acquisition, or Liens incurred by such Subsidiaries in connection with any acquisition of transmission equipment pursuant to any conditional sale or other title retention agreements or Capital Leases; and Liens attaching to the assets of businesses acquired by the Borrower or any Significant Subsidiary by merger, consolidation or the purchase of stock, which Liens existed at the time of such acquisition; provided, in each case, that: (i) any property subject to any of the foregoing is acquired by Borrower or any such Subsidiary either (x) in the ordinary course of its business and the Lien on any such property is created contemporaneously with such acquisition, or (xx) pursuant to the OMP; (ii) the obligation secured by any Lien so created, assumed or existing shall not exceed 100% of the lesser of cost or fair market value as of the time of acquisition of the property covered thereby to Borrower or such Subsidiary acquiring the same; and (iii) each such Lien shall attach only to the property so acquired and fixed improvements thereon. Section 7.03. Debt. Borrower shall not permit any of its Significant Subsidiaries to create, incur, assume or suffer to exist any Debt, except: (a) Debt outstanding on the date hereof and Debt now or hereafter incurred pursuant to existing agreements, in each case as described in Exhibit 5.09, including renewals, extension or refinancings thereof, provided that the principal amount thereof does not increase over the amount outstanding or available for borrowing on the date hereof; (b) Debt secured by Liens permitted pursuant to Section 7.02; (c) Debt of entities acquired by Significant Subsidiaries after the date hereof, which Debt exists on the date of acquisition and is assumed by such Significant Subsidiaries; (d) Debt of Significant Subsidiaries to Borrower incurred upon Borrower's advancing to such Significant Subsidiaries the proceeds of Loans; and (e) other Debt of Significant Subsidiaries that are regulated public utilities; provided, however, that the outstanding principal amount of all such permitted Significant Subsidiary Debt shall at no time aggregate more than $500,000,000. Section 7.04. No Dividend Restrictions. Borrower shall not permit any of its Significant Subsidiaries to create, assume or suffer to exist, any contractual, legal or other restriction that specifically prohibits or limits the payment of dividends by any such Significant Subsidiaries; provided, that the foregoing provision shall not apply to (i) Significant Subsidiaries that are regulated public utilities, to the extent that the agencies charged with regulating them (as public utilities) may specifically prohibit or limit dividend payments, (ii) restrictions that apply to Significant Subsidiaries that were acquired as Subsidiaries after the date hereof, if such Significant Subsidiaries were subject to such restrictions at the time of acquisition and if such restrictions do not extend to Borrower or any other Significant Subsidiary, or (iii) the existence and operation of financial covenants, such as maximum debt to net worth or minimum working capital ratios, as long as they do not specifically prohibit or restrict dividend payments. Section 7.05. Ownership of Significant Subsidiaries. Borrower shall not (a) permit any Significant Subsidiary to merge or consolidate with, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to any Person (or enter into any agreement to do any of the foregoing), except that: (i) any Significant Subsidiary may merge into or transfer assets to the Borrower; and (ii) any Significant Subsidiary may merge into or consolidate with or transfer assets to any other Subsidiary of the Borrower; or (b) sell or dispose of any equity or voting interest in any Significant Subsidiary, except that Borrower shall be permitted to sell or dispose of such equity or voting interest as long as the purchaser or transferee is an entity in which Borrower owns an equity interest; provided, however, that the transactions prohibited in clauses (a) and (b) above shall be permitted as long as (x) the proceeds thereof are received entirely in cash by Borrower or a Significant Subsidiary, as the case may be, and (xx) unless waived by all of the Banks, upon completion of any such transaction, Borrower reduces the total amount of the Commitments by the amount of such cash proceeds, less the expenses and the income and other taxes estimated to be due as a result of the transaction, and Borrower makes any prepayments of outstanding Loans necessary to reduce the aggregate outstanding principal balance of such Loans to the amount of the Commitments as so reduced. ARTICLE 8. FINANCIAL COVENANTS. So long as any of the Notes shall remain unpaid or any Bank shall have any Commitment under this Agreement, as of the end of each fiscal quarter: Section 8.01. Minimum Net Worth. Borrower shall maintain a Consolidated Net Worth of not less than $800,000,000 until completion of the contemplated merger with ALC Communications Corporation, and $900,000,000 thereafter; provided that in each case, the required minimum Consolidated Net Worth amount shall be reduced by the amount, which amount shall not exceed $200,000,000 in the aggregate, of any reduction(s) in Borrower's Consolidated Net Worth that result from (i) any election by Borrower to terminate the applicability of Statement of Financial Accounting Standards No. 71 and/or (ii) an accelerated adjustment of the Borrower's unrecognized transition obligation for its post- retirement benefit obligations, as recognized under Statement of Financial Accounting Standards No. 106. Section 8.02. Leverage Ratio. The Borrower shall maintain at all times a ratio of Consolidated Funded Debt to Consolidated Net Worth of not greater than 1.25 to 1. ARTICLE 9. EVENTS OF DEFAULT. Section 9.01. Events of Default. Any of the following events shall be an "Event of Default": (a) the Borrower shall: (i) fail to pay the principal of any Note as and when due and payable; or (ii) fail to pay interest on any Note or any fee or other amount due hereunder as and when due and payable and such failure shall continue for ten days; (b) any representation or warranty made or deemed made by the Borrower in this Agreement or in any other Facility Document or which is contained in any certificate, document, opinion, financial or other statement furnished at any time under or in connection with any Facility Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made; (c) the Borrower shall: (i) fail to perform or observe any term, covenant or agreement contained in Section 2.03 or Articles 7 or 8; or (ii) fail to perform or observe any term, covenant or agreement on its part to be performed or observed (other than the obligations specifically referred to elsewhere in this Section 9.01) in any Facility Document and such failure shall continue for 30 consecutive days; (d) the Borrower or any of its Significant Subsidiaries shall: (i) fail to pay any Debt, including but not limited to Debt for borrowed money (other than the payment obligations described in (a) above), of the Borrower and its Subsidiaries or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise); or (ii) fail to perform or observe any term, covenant or condition on its part to be performed or observed under any agreement or instrument relating to any such Debt, when required to be performed or observed, if the effect of such failure to perform or observe is to accelerate, or to permit the acceleration of, after the giving of notice or passage of time, or both, the maturity of such Debt, whether or not such failure to perform or observe shall be waived by the holder of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; (e) the Borrower or any of its Significant Subsidiaries (i) shall generally not, or be unable to, or shall admit in writing its inability to, pay its debts as such debts become due; or (ii) shall make an assignment for the benefit of creditors, or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets; or (iii) shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or (iv) shall have had any such petition or application filed or any such proceeding shall have been commenced, against it, in which an adjudication or appointment is made or order for relief is entered, or which petition, application or proceeding remains undismissed for a period of 30 days or more; or shall be the subject of any proceeding under which its assets may be subject to seizure, forfeiture or divestiture (other than a proceeding in respect of a Lien permitted under Section 7.02 (b)); or (v) by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application or proceeding or order for relief or the appointment of a custodian, receiver or trustee for all or any substantial part of its property; or (vi) shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of 30 days or more; (f) one or more judgments, decrees or orders for the payment of money in excess of $2,000,000 in the aggregate shall be rendered against the Borrower and/or any of its Significant Subsidiaries and such judgments, decrees or orders shall continue unsatisfied and in effect for a period of 30 consecutive days without being vacated, discharged, satisfied or stayed or bonded pending appeal; (g) any event or condition shall occur or exist with respect to any Plan or Multiemployer Plan concerning which the Borrower is under an obligation to furnish a report to the Bank in accordance with Section 6.05(d) hereof and as a result of such event or condition, together with all other such events or conditions, the Borrower or any ERISA Affiliate has incurred or in the opinion of the Required Banks is reasonably likely to incur a liability to a Plan, a Multiemployer Plan, the PBGC, or a Section 4042 Trustee (or any combination of the foregoing) which is material in relation to the financial position of the Borrower and its Consolidated Subsidiaries, on a consolidated basis; provided, however, that any such amount shall not be deemed to be material so long as all such amounts do not require payments by Borrower in excess of $2,000,000 in the aggregate; and (h) Any Person or group (as such term is defined pursuant to the Securities Exchange Act of 1934, and the regulations promulgated thereunder), acquires Control of the Borrower. Section 9.02. Remedies. If any Event of Default shall occur and be continuing, the Agent shall, upon request of the Required Banks, by notice to the Borrower, (a) declare the Commitments to be terminated, whereupon the same shall forthwith terminate, and (b) declare the outstanding principal of the Notes, all interest thereon and all other amounts payable under this Agreement and the Notes to be forthwith due and payable, whereupon the Notes, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided that, in the case of an Event of Default referred to in Section 9.01(e) above, the Commitments shall be immediately terminated, and the Notes, all interest thereon and all other amounts payable under this Agreement shall be immediately due and payable without notice, presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower. ARTICLE 10. THE AGENT; RELATIONS AMONG BANKS AND BORROWER. Section 10.01. Appointment, Powers and Immunities of Agent. Each Bank hereby irrevocably (but subject to removal by the Required Banks pursuant to Section 10.09) appoints and authorizes the Agent to act as its agent hereunder and under any other Facility Document with such powers as are specifically delegated to the Agent by the terms of this Agreement and any other Facility Document, together with such other powers as are reasonably incidental thereto. The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and any other Facility Document, and shall not by reason of this Agreement be a trustee for any Bank. The Agent shall not be responsible to the Banks for any recitals, statements, representations or warranties made by the Borrower or any officer or official of the Borrower or any other Person (other than Agent) contained in this Agreement or any other Facility Document, or in any certificate or other document or instrument referred to or provided for in, or received by any of them under, this Agreement or any other Facility Document, or for the value, legality, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Facility Document or any other document or instrument referred to or provided for herein or therein, for the perfection or priority of any collateral security for the Loans or for any failure by the Borrower to perform any of its obligations hereunder or thereunder. The Agent may employ agents and attorneys-in-fact and shall not be responsible, except as to money or securities received by it or its authorized agents, for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Neither the Agent nor any of its directors, officers, employees or agents shall be liable or responsible for any action taken or omitted to be taken by it or them hereunder or under any other Facility Document or in connection herewith or therewith, except for its or their own gross negligence or willful misconduct. The Borrower shall pay any fee agreed to by the Borrower and the Agent with respect to the Agent's services hereunder. Section 10.02. Reliance by Agent. The Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent. The Agent may deem and treat each Bank as the holder of the Loans made by it for all purposes hereof. As to any matters not expressly provided for by this Agreement or any other Facility Document, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by the Required Banks, and such instructions of the Required Banks and any action taken or failure to act pursuant thereto shall be binding on all of the Banks and any other holder of all or any portion of any Loan. Section 10.03. Defaults. The Agent shall not be deemed to have knowledge of the occurrence of a Default or Event of Default (other than the non-payment of principal of or interest on the Loans to the extent the same is required to be paid to the Agent for the account of the Banks) unless the Agent has received notice from a Bank or the Borrower specifying such Default or Event of Default and stating that such notice is a "Notice of Default." In the event that the Agent receives such a notice of the occurrence of a Default or Event of Default, the Agent shall give prompt notice thereof to the Banks (and shall give each Bank prompt notice of each such non-payment). The Agent shall (subject to Section 10.08) take such action with respect to such Default or Event of Default which is continuing as shall be directed by the Required Banks; provided that, unless and until the Agent shall have received such directions, the Agent may take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interest of the Banks; and provided further that the Agent shall not be required to take any such action which it determines to be contrary to law. Section 10.04. Rights of Agent as a Bank. With respect to its Commitment and the Loans made by it, the Agent in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as the Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Agent in its capacity as a Bank. The Agent and its affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to (on a secured or unsecured basis), and generally engage in any kind of banking, trust or other business with, the Borrower (and any of its Affiliates) as if it were not acting as the Agent, and the Agent may accept fees and other consideration from the Borrower for services in connection with this Agreement or otherwise without having to account for the same to the Banks. Although the Agent and its affiliates may, in the course of relationships with the Borrower and its Affiliates other than those related to this Agreement, and in the course of relationships with other Persons, acquire information about the Borrower, its Affiliates and such other Persons, the Agent shall have no duty to disclose such information to the Banks. Section 10.05. Indemnification of Agent. The Banks agree to indemnify the Agent (to the extent not reimbursed under Section 11.03 or under the applicable provisions of any other Facility Document, but without limiting the obligations of the Borrower under Section 11.03 or such provisions), ratably in accordance with the aggregate unpaid principal amount of the Loans made by the Banks (without giving effect to any assignments or participations, in all or any portion of such Loans, sold by them to any other Person) (or, if no Loans are at the time outstanding, ratably in accordance with their respective Commitments), for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent (but solely in its capacity as Agent) in any way relating to or arising out of this Agreement, any other Facility Document or any other documents contemplated by or referred to herein or the transactions contemplated hereby or thereby (including, without limitation, the costs and expenses which the Borrower is obligated to pay under Section 11.03 or under the applicable provisions of any other Facility Document but excluding, unless a Default or Event of Default has occurred, normal administrative fees, costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or of any such other documents or instruments; provided that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent. Section 10.06. Documents. The Agent will forward to each Bank, promptly after the Agent's receipt thereof, a copy of each report, notice or other document required by this Agreement or any other Facility Document to be delivered to the Agent for such Bank. Section 10.07. Non-Reliance on Agent and Other Banks. Each Bank agrees that it has, independently and without reliance on the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of Borrower and the current and contemplated Subsidiaries of Borrower and its own decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any other Facility Document. The Agent shall not be required to keep itself informed as to the performance or observance by the Borrower of this Agreement or any other Facility Document or any other document referred to or provided for herein or therein or to inspect the properties or books of Borrower or any Subsidiary. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of Borrower or any Subsidiary (or any of their Affiliates) which may come into the possession of the Agent or any of its affiliates. The Agent shall not be required to file this Agreement, any other Facility Document or any document or instrument referred to herein or therein, for record or give notice of this Agreement, any other Facility Document or any document or instrument referred to herein or therein, to anyone. Section 10.08. Failure of Agent to Act. Except for action expressly required of the Agent hereunder, the Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall have received further assurances (which may include cash collateral) of the indemnification obligations of the Banks under Section 10.05 in respect of any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Section 10.09. Resignation or Removal of Agent. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving written notice thereof to the Banks and the Borrower, and the Agent may be removed at any time with or without cause by the Required Banks; provided that the Borrower and the other Banks shall be promptly notified thereof. Upon any such resignation or removal, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or the Required Banks' removal of the retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a bank having a minimum capital and surplus of $50,000,000 and having an office in New York State. The Required Banks or the retiring Agent, as the case may be, shall upon the appointment of a successor Agent promptly so notify the Borrower and the other Banks. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from any further duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article 10 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. Section 10.10. Amendments Concerning Agency Function. The Agent shall not be bound by any waiver, amendment, supplement or modification of this Agreement or any other Facility Document which affects its duties hereunder or thereunder unless it shall have given its prior consent thereto. Section 10.11. Liability of Agent. The Agent shall not have any liabilities or responsibilities to the Borrower on account of the failure of any Bank to perform its obligations hereunder or to any Bank on account of the failure of the Borrower to perform its obligations hereunder or under any other Facility Document. Section 10.12. Transfer of Agency Function. Without the consent of the Borrower or any Bank, the Agent may at any time or from time to time transfer its functions as Agent hereunder to any of its offices in New York State, wherever located, provided that the Agent shall promptly notify the Borrower and the Banks thereof. Section 10.13. Non-Receipt of Funds by the Agent. Unless the Agent shall have been notified by a Bank or the Borrower (either one as appropriate being the "Payor") prior to the date and time as of which such Bank is to make payment hereunder to the Agent of the proceeds of a Loan or the Borrower is to make payment to the Agent, as the case may be (either such payment being a "Required Payment"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient on such date and, if the Payor has not in fact made the Required Payment to the Agent, the recipient of such payment (and, if such recipient is the Borrower and the Payor Bank fails to pay the amount thereof to the Agent forthwith upon demand, the Borrower) shall, on demand, repay to the Agent the amount made available to it together with interest thereon, for the period from the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the average daily federal funds rate for such period. Section 10.14. Withholding Taxes. Each Bank represents that it is entitled to receive any payments to be made to it hereunder without the withholding of any tax and will furnish to the Agent such forms, certifications, statements and other documents as the Agent may request from time to time to evidence such Bank's exemption from the withholding of any tax imposed by any jurisdiction or to enable the Agent to comply with any applicable laws or regulations relating thereto. Without limiting the effect of the foregoing, if any Bank is not created or organized under the laws of the United States of America or any state thereof, in the event that the payment of interest by the Borrower is treated for U.S. income tax purposes as derived in whole or in part from sources from within the U.S., such Bank will furnish to the Agent Form 4224 or Form 1001 of the Internal Revenue Service, or such other forms, certifications, statements or documents, duly executed and completed by such Bank as evidence of such Bank's exemption from the withholding of U.S. tax with respect thereto. The Agent shall not be obligated to make any payments hereunder to such Bank in respect of any Loan or such Bank's Commitment until such Bank shall have furnished to the Agent the requested form, certification, statement or document. Section 10.15. Several Obligations and Rights of Banks. The failure of any Bank to make any Loan to be made by it on the date specified therefor shall not relieve any other Bank of its obligation to make its Loan on such date, but no Bank shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank. The amounts payable at any time hereunder to each Bank shall be a separate and independent debt, and each Bank shall be entitled to protect and enforce its rights arising out of this Agreement, and it shall not be necessary for any other Bank to be joined as an additional party in any proceeding for such purpose. Section 10.16. Pro Rata Treatment of Loans, Etc. Except to the extent provided in Section 2.13 and as may be otherwise provided in this Agreement: (a) each Borrowing under Section 2.04 shall be made from the Banks, each reduction or termination of the amount of the Commitments under Section 2.07 shall be applied to the Commitments of the Banks, and each payment of facility fee accruing under Section 2.11 shall be made for the account of the Banks, pro rata according to the amounts of their respective Commitments; (b) each conversion under Section 2.05 of Loans of a particular type (but not conversions provided for by Section 3.04), shall be made pro rata among the Banks holding Loans of such type according to the respective principal amounts of such Loans by such Banks; and (c) each prepayment (but not prepayments provided for in clause (c)(ii) of Section 2.05) and payment of principal of or interest on Loans of a particular type and a particular Interest Period shall be made to the Agent for the account of the Banks holding Loans of such type and Interest Period pro rata in accordance with the respective unpaid principal amounts of such Loans of such type and Interest Period held by such Banks. Section 10.17. Sharing of Payments Among Banks. If a Bank shall obtain payment of any principal of or interest on any Loan made by it through the exercise of any right of setoff, banker's lien, or counterclaim, or by any other means during the existence of a Default or Event of Default, it shall promptly purchase from the other Banks participations in (or, if and to the extent specified by such Bank, direct interests in) the Loans made by the other Banks in such amounts, and make such other adjustments from time to time as shall be equitable to the end that all the Banks shall share the benefit of such payment (net of any expenses which may be incurred by such Bank in obtaining or preserving such benefit) pro rata in accordance with the unpaid principal and interest on the Loans held by each of them. To such end the Banks shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. The Borrower agrees that any Bank so purchasing a participation (or direct interest) in the Loans made by other Banks may exercise all rights of setoff, banker's lien, counterclaim or similar rights with respect to such participation (or direct interest). Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness of the Borrower. ARTICLE 11. MISCELLANEOUS. Section 11.01. Amendments and Waivers. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may be amended or modified only by an instrument in writing signed by the Borrower, the Agent and the Required Banks, or by the Borrower and the Agent acting with the written consent of the Required Banks and any provision of this Agreement may be waived by the Required Banks or by the Agent acting with the written consent of the Required Banks; provided that no amendment, modification or waiver shall, unless by an instrument signed by all of the Banks or by the Agent acting with the written consent of all of the Banks: (a) increase or extend the term, or extend the time or waive any requirement for the reduction or termination, of the Commitments, (b) extend the date fixed for the payment of principal of or interest on any Loan or any fee payable hereunder, (c) reduce the amount of any payment of principal thereof or the rate at which interest is payable thereon or any fee payable hereunder, (d) alter the terms of this Section 11.01, (e) amend the definition of the term "Required Banks" or (f) waive any of the documentary conditions precedent set forth in Section 4.01 hereof and provided, further, that any amendment of Article 10 hereof or any amendment which increases the obligations of the Agent hereunder shall require the consent of the Agent. No failure on the part of the Agent or any Bank to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof or preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Section 11.02. Usury. Anything herein to the contrary notwithstanding, the obligations of the Borrower under this Agreement and the Notes shall be subject to the limitation that payments of interest shall not be required to the extent that receipt thereof would be contrary to provisions of law applicable to a Bank limiting rates of interest which may be charged or collected by such Bank. Section 11.03. Expenses. The Borrower shall pay the Agent on demand for all costs, expenses, and charges (including, without limitation, reasonable fees and charges of external legal counsel for the Agent and costs allocated by its internal legal department) incurred by the Agent in connection with the preparation, execution and delivery of this Agreement, the other Facility Documents and the other documents to be executed contemporaneously herewith. In addition, the Borrower shall pay the Agent and the Banks on demand for all costs, expenses, and charges (including, without limitation, fees and charges of external legal counsel for the Agent and each Bank and costs allocated by their respective internal legal departments) incurred by the Agent or the Banks in connection with the performance or enforcement of this Agreement, the Notes and any other Facility Documents. The Borrower hereby indemnifies the Agent and each Bank and their respective directors, officers, employees and agents from, and holds each of them harmless against, any and all losses, liabilities, claims, damages or expenses (each an "Indemnified Liability") incurred by any of them arising out of or by reason of any investigation or litigation or other proceedings (including any threatened investigation or litigation or other proceedings) relating to or arising out of this Agreement or any actual or proposed use by the Borrower or any Subsidiary of the proceeds of the Loans, including without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation or litigation or other proceedings (but excluding any Indemnified Liability incurred by reason of the negligence or willful misconduct of the Person to be indemnified). The Borrower agrees that any Indemnified Liability will be promptly paid to the Person to be indemnified upon the written demand of such Person. Section 11.04. Survival. The obligations of the Borrower under Sections 3.01, 3.05 and 11.03 shall survive the repayment of the Loans and the termination of the Commitments. Section 11.05. Assignment; Participations. (a) This Agreement shall be binding upon, and shall inure to the benefit of, the Borrower, the Agent, the Banks and their respective successors and assigns, except that neither the Borrower nor any Bank may assign its rights or obligations, or transfer participations, hereunder other than as specifically permitted in this Section 11.05. Notwithstanding the foregoing, (i) provided that it obtains the prior written consent of the Borrower, which consent may not be unreasonably withheld or delayed, each Bank may transfer participations in all or any part of its Commitment, in principal amounts aggregating at least $5,000,000, to one or more other banks or other entities, and (ii) each Bank may transfer participations in all or any part of its Loans to one or more banks or other entities; provided, in each case, that the participant(s) shall have no rights under the Facility Documents and all amounts payable by the Borrower under Article 3 shall be determined as if such Bank had not sold such participation(s). The agreement executed by any such Bank in favor of any participant shall not give the participant the right to prevent such Bank from taking any action hereunder except action directly relating to (i) the extension of the Termination Date, (ii) the extension of a payment date with respect to any portion of the principal, interest or fees allocated to such participant that may be outstanding or payable hereunder, (iii) the reduction of the principal amount outstanding hereunder or (iv) the reduction of the rate of interest payable on such amount or any amount of fees payable hereunder to a rate or amount, as the case may be, below that which the participant is entitled to receive under its agreement with such Bank. Such Bank may furnish any information concerning the Borrower in the possession of such Bank from time to time to participants (including prospective participants); provided that such Bank shall require any such prospective participant to agree to maintain the confidentiality of such information. (b) In addition to the participations permitted under Section 11.05(a), any Bank may assign and pledge all or any portion of its Loans and Notes to (i) any affiliate of such Bank or (ii) any Federal Reserve Bank as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Bank from its obligations hereunder. (c) As used on this Section 11.05, (i) the term "participation" shall mean an undivided interest in the Commitment, or in one or more Loans, of a Bank, provided, that in acquiring such undivided interest the holder thereof acquires no rights under any Facility Document and no rights against any party thereto other than the transferor of such undivided interest; and (ii) the terms "assign" and "assignment" relate to transfers of an interest in the Commitment, or in one or more Loans, of a Bank, or of obligations of a Bank, pursuant to which the transferee acquires rights or obligations under one or more Facility Documents and rights against or obligations to one or more parties thereto. Section 11.06. Notices. All notices, requests and other communications provided for herein (including, without limitation, any modifications of, or waivers, requests or consents under, this Agreement) shall be given or made in writing (including, without limitation, by telex or facsimile transmission), or, with respect to notices given pursuant to Section 2.08 hereof, by telephone, confirmed in writing by facsimile transmission by the close of business on the day the notice is given, delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof; or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted (with confirmation of receipt) by telex or facsimile transmission or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. Section 11.07. Setoff. The Borrower agrees that, in addition to (and without limitation of) any right of setoff, banker's lien or counterclaim a Bank may otherwise have, each Bank shall be entitled, at its option, to offset balances (general or special, time or demand, provisional or final) held by it for the account of the Borrower at any of such Bank's offices, in Dollars or in any other currency, against any amount payable by the Borrower to such Bank under this Agreement or such Bank's Notes which is not paid when due (regardless of whether such balances are then due to the Borrower), in which case it shall promptly notify the Borrower and the Agent thereof and shall share such payments as set forth in Section 10.17; provided that such Bank's failure to give such notice shall not affect the validity thereof. Payments by the Borrower hereunder shall be made without setoff or counterclaim. SECTION 11.08. JURISDICTION; IMMUNITIES. (a) THE AGENT, THE BANKS AND THE BORROWER HEREBY IRREVOCABLY SUBMIT TO THE JURISDICTION OF ANY NEW YORK STATE SUPREME OR UNITED STATES FEDERAL COURT SITTING IN MONROE COUNTY OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTES, AND EACH PARTY HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE SUPREME OR FEDERAL COURT. EACH PARTY IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO THE OTHER AT ITS ADDRESS SPECIFIED IN SECTION 11.06, WITH, IN BORROWER'S CASE, A COPY TO ITS CORPORATE COUNSEL. EACH PARTY AGREES THAT, SUBJECT TO ANY RIGHTS OF APPEAL, A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. EACH PARTY FURTHER WAIVES ANY OBJECTION TO VENUE IN SUCH STATE AND ANY OBJECTION TO AN ACTION OR PROCEEDING IN SUCH STATE ON THE BASIS OF FORUM NON CONVENIENS. EACH PARTY FURTHER AGREES THAT ANY ACTION OR PROCEEDING BROUGHT AGAINST THE AGENT SHALL BE BROUGHT ONLY IN NEW YORK STATE SUPREME OR UNITED STATES FEDERAL COURT SITTING IN MONROE COUNTY. THE BORROWER, THE AGENT AND EACH BANK WAIVES ANY RIGHT IT MAY HAVE TO JURY TRIAL. (b) Nothing in this Section 11.08 shall affect the right of any party to serve legal process in any other manner permitted by law or affect the right of the Agent or any Bank to bring any action or proceeding against the Borrower or its property in the courts of any other jurisdictions. Section 11.09. Table of Contents; Headings. Any table of contents and the headings and captions hereunder are for convenience only and shall not affect the interpretation or construction of this Agreement. Section 11.10. Severability. The provisions of this Agreement are intended to be severable. If for any reason any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability thereof in any other jurisdiction or the remaining provisions hereof in any jurisdiction. Section 11.11. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Agreement by signing any such counterpart. Section 11.12. Integration. The Facility Documents set forth the entire agreement among the parties hereto relating to the transactions contemplated thereby and supersede any prior oral or written statements or agreements with respect to such transactions. SECTION 11.13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND INTERPRETED AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. Section 11.14. Confidentiality. Each Bank and the Agent agrees (on behalf of itself and each of its affiliates, directors, officers, employees and representatives) to use reasonable precautions to keep confidential, in accordance with safe and sound banking practices, any non-public information supplied to it by the Borrower pursuant to this Agreement which is identified by the Borrower as being confidential at the time the same is delivered to the Banks or the Agent, provided that nothing herein shall limit the disclosure of any such information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to counsel for any of the Banks or the Agent, (iii) to bank examiners, auditors or accountants, (iv) in connection with any litigation to which any one or more of the Banks is a party or (v) to any assignee or participant (or prospective assignee or participant) pursuant to Section 11.05; provided, further, that, unless specifically prohibited by applicable law or court order, each Bank shall, prior to disclosure thereof, notify the Borrower of any request for disclosure of any such non-public information (x) by any governmental agency or representative thereof (other than any such request in connection with an examination of the financial condition of such Bank by such governmental agency) or (y) pursuant to legal process; and provided finally that in no event shall any Bank or the Agent be obligated or required to return any materials furnished by the Borrower. Each Bank agrees to indemnify the Borrower with respect to any breach by such Bank of this Section 11.14. Section 11.15. Treatment of Certain Information. The Borrower (a) acknowledges that services may be offered or provided to it (in connection with this Agreement or otherwise) by each Bank or by one or more of their respective subsidiaries or affiliates and (b) acknowledges that any information delivered to each Bank or its subsidiaries or affiliates regarding the Borrower may be shared among such Bank and such subsidiaries and affiliates. This Section 11.15 shall survive the repayment of the Loans and the termination of the Commitments. SIGNATURE PAGES S-1 through S-13 TO FOLLOW IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. FRONTIER CORPORATION By: /s/ Louis L. Massaro --------------------- Name: Louis L. Massaro Title: Corporate Vice President- Finance Address for Notices: 180 S. Clinton Avenue Rochester, New York 14646 Attn: Treasurer Telephone: (716) 777-7130 Facsimile: (716) 232-8154 With a copy to: 180 S. Clinton Avenue Rochester, New York 14646 Attn: Corporate Counsel Telephone : (716) 777-7315 Facsimile: (716) 546-7823 S-2 AGENT: THE CHASE MANHATTAN BANK, N.A. By: /s/ Benedict A. Smith -------------------------- Name: Benedict A. Smith Title: Vice President Address for Notices: New York Agency 4 Chase Metro Tech Center 13th Floor Brooklyn, New York 11245 Telephone: (718) 242-7970 Facsimile: (718) 242-6909 S-3 BANKS: THE CHASE MANHATTAN BANK, N.A. By: /s/ Benedict A. Smith --------------------------- Name: Benedict A. Smith Title: Vice President Lending Office and Address for Notices: 1 Chase Square Rochester, New York 14643 Attn: Benedict A. Smith Telephone: (716) 258-5669 Facsimile: (716) 258-4258 S-4 BANKS: CHEMICAL BANK By: /s/ Virginia Allen ---------------------- Name: Virginia Allen Title: Lending Office and Address for Notices: 300 Linden Oaks Rochester, New York 14625 Attn: Virginia Allen Telephone: (716) 387-3624 Facsimile: (716) 586-2749 S-5 BANKS: MARINE MIDLAND BANK By: /s/ Ellen M. Wayne ---------------------------- Name: Ellen M. Wayne Title: Vice President Lending Offices and Address for Notices: One Marine Midland Plaza, 2nd Floor Rochester, New York 14639 Attn: Ellen M. Wayne Telephone: (716) 238-7286 Facsimile: (716) 238-7992 S-6 BANKS: UNION BANK OF SWITZERLAND By: /s/ Paul R. Morrison ----------------------------- Name: Paul R. Morrison Title: Assistant Vice President By: /s/ Robert A. High ---------------------------- Name: Robert A. High Title: Assistant Treasurer Lending Offices and Address for Notices: 299 Park Avenue New York, New York 10171-0026 Attn: Paul R. Morrison Telephone: (212) 821-3358 Facsimile: (212) 821-3383 S-7 BANKS: PNC BANK, National Association By: /s/ K. M. Wolters --------------------------- Name: Karen M. Wolters Title: Vice President Lending Offices and Address for Notices: Broad & Chestnut Streets Philadelphia, Pennsylvania 19110 Attn: Karen M. Wolters Telephone: (215) 585-6376 Facsimile: (215) 585-6680 S-8 BANKS: FLEET BANK By: /s/ Martin K. Birmingham ------------------------- Name: Martin K. Birmingham Title: Assistant Vice President Lending Offices and Address for Notices: One East Avenue Rochester, New York 14692 Attn: Martin Birmingham Telephone: (716) 546-9126 S-9 BANKS: FIRST UNION NATIONAL BANK OF NORTH CAROLINA By: /s/ Jim P. Redman --------------------------- Name: Jim P. Redman Title: Senior Vice President Lending Offices and Address for Notices: 301 South College Street/TW-19 Charlotte, NC 28288-0735 Attn: Bruce Levy Telephone: (704) 383-5292 Facsimile: (704) 374-4092 S-10 BANKS: BANK ONE, COLUMBUS N.A. By: /s/ D. H. Klamfoth --------------------------- Name: Douglas H. Klamforth Title: Vice President Lending Offices and Address for Notices: 100 East Broad Street Columbus, OH 43171-0209 Attn: Douglas Klamfoth Telephone: (614) 248-5839 Facsimile: (614) 248-5518 S-11 BANKS: COMERICA BANK By: /s/ Chris Geovassilis ------------------------- Name: Chris Georvassilis Title: Assistant Vice President Lending Offices and Address for Notices: One Detroit Center MC3281-9th Floor 500 Woodward Avenue Detroit, MI 48226 Attn: Chris Georvassilis Telephone: (313) 222-6239 Facsimile: (313) 222-3330 S-12 BANKS: STAR BANK, N.A. By: /s/ Nancy J. Cracolice --------------------------- Name: Nancy J. Cracolice Title: Vice President Lending Offices and Address for Notices: 425 Walnut Street/ML-8160 Cincinnati, OH 45201 Attn: Nancy Cracolice Telephone: (513) 632-4010 Facsimile: (513) 632-2068 S-13 BANKS: MANUFACTURERS AND TRADERS TRUST COMPANY By: /s/ John P. Chantra ------------------------ Name: John P. Chantra Title: Vice President Lending Offices and Address for Notices: 44 Exchange Street P.O. Box 22900 Rochester, NY 14692 Attn: John P. Chantra Telephone: (716) 258-8218 Facsimile: (716) 325-510 EXHIBIT 2.02A REVOLVING NOTE $ August , 1995 ----------- --- FRONTIER CORPORATION (the "Borrower"), a corporation organized under the laws of New York, for value received, hereby promises to pay to the order of [BANK X] (the "Bank") at the Principal Office of THE CHASE MANHATTAN BANK, N.A., at 4 Chase Metro Tech Center, 13th Floor, New York, New York 11245 (the "Agent'), for the account of the appropriate Lending Office of the Bank, the principal sum of [$(Commitment of Bank X)] or, if less, the amount loaned by the Bank to the Borrower as Revolving Loans pursuant to the Credit Agreement referred to below, in lawful money of the United States of America and in immediately available funds, on the date and in the manner provided in said Credit Agreement. The Borrower also promises to pay interest on the unpaid principal balance hereof, for the period such balance is outstanding, at said Principal Office for the account of said Lending Office, in like money, at the rates of interest as provided in the Credit Agreement described below, on the date(s) and in the manner provided in said Credit Agreement. The date and amount of each type of Revolving Loan made by the Bank to the Borrower under the Credit Agreement referred below, and each payment of principal thereof, shall be recorded by the Bank on its books and, prior to any transfer of this Note (or, at the discretion of the Bank, at any other time), endorsed by the Bank on the schedule attached hereto or any continuation thereof. This is one of the Revolving Notes referred to in that certain Credit Agreement (as amended from time to time the "Credit Agreement") dated as of August 9, 1995 among the Borrower, the Banks named therein (including the Bank) and the Agent and evidences the Revolving Loans made by the Bank thereunder. All terms not defined herein shall have the meanings given to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of principal upon the occurrence of certain Events of Default and for prepayments on the terms and conditions specified therein. The Borrower waives presentment, notice of dishonor, protest and any other notice or formality with respect to this Note. This Note shall be governed by, and interpreted and construed in accordance with, the laws of the State of New York. FRONTIER CORPORATION By: ------------------------------- Name: Title:
Amount Amount of Balance Notation Date of Loan Payment Outstanding By
EXHIBIT 2.02B QUOTED RATE NOTE [DATE] FRONTIER CORPORATION (the "Borrower"), a corporation organized under the laws of New York, for value received, hereby promises to pay to the order of [BANK X] (the "Bank") at the Principal Office of The Chase Manhattan Bank, N.A., at 4 Metro Tech Center, 13th Floor, Brooklyn, New York 11245 (the "Agent") , for the account of the appropriate Lending Office of the Bank, the aggregate unpaid principal amount loaned by the Bank to the Borrower as Quoted Rate Loans pursuant to the Credit Agreement referred to below, in lawful money of the United States of America and in immediately available funds, on the date(s) and in the manner provided in said Credit Agreement. The Borrower also promises to pay interest on the unpaid principal balance hereof, for the period such balance is outstanding, at said Principal Office for the account of said Lending Office, in like money, at the rates of interest as provided in the Credit Agreement described below, on the date(s) and in the manner provided in said Credit Agreement. The date and amount of each type of Quoted Rate Loan made by the Bank to the Borrower under the Credit Agreement referred below, and each payment of principal thereof, shall be recorded by the Bank on its books and, prior to any transfer of this Note (or, at the discretion of the Bank, at any other time), endorsed by the Bank on the schedule attached hereto or any continuation thereof. This is one of the Quoted Rate Notes referred to in that certain Credit Agreement (as amended from time to time the "Credit Agreement") dated as of August 9, 1995 among the Borrower, the Banks named therein (including the Bank) and the Agent and evidences the Quoted Rate Loans made by the Bank thereunder. All terms not defined herein shall have the meanings given to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of principal upon the occurrence of certain Events of Default and for prepayments on the terms and conditions specified therein. The Borrower waives presentment, notice of dishonor, protest and any other notice or formality with respect to this Note. This Note shall be governed by, and interpreted and construed in accordance with, the laws of the State of New York. FRONTIER CORPORATION By --------------------------- Name: Title:
Amount Amount of Balance Notation Date of Loan Payment Outstanding By
EXHIBIT 4.01(b) AUTHORIZATION LETTER August , 1995 ---- The Chase Manhattan Bank, N.A., as Agent One Chase Square Rochester, New York 14643 Attn: Benedict A. Smith Re: Credit Agreement dated as of August 9, 1995 (the "Credit Agreement") among Frontier Corporation, the Banks named therein (the "Banks"), and The Chase Manhattan Bank, N.A., as Agent for the Banks Ladies and Gentlemen: In connection with the captioned Credit Agreement, we hereby designate to you and to each of the Banks, any one of the following persons to give to you and any Bank instructions, including notices required pursuant to the Credit Agreement, orally or by telephone or facsimile: NAME (Typewritten) -------------------------- -------------------------- -------------------------- -------------------------- Instructions may be honored on the oral, telephonic or facsimile instructions of anyone purporting to be any one of the above designated persons even if the instructions are for the benefit of the person delivering them. We will furnish you and each Bank to whom any such instructions are directed, with confirmation of each such instruction either by telex (whether tested or untested) or in writing signed by any person designated above (including any facsimile which appears to bear the signature of any person designated above) on the same day that the instruction is provided to you or such Bank, but your and such Bank's responsibility with respect to any instruction shall not be affected by your or such Bank's failure to receive such confirmation or by its contents. You and each of the Banks shall be fully protected in, and shall incur no liability to us for, acting upon any instructions which any of you in good faith believe to have been given by any person designated above, and in no event shall any of you be liable for special, consequential or punitive damages. In addition, we agree to hold each of you and your agents harmless from any and all liability, loss and expense arising directly or indirectly out of instructions that we provide to any of you in connection with the Credit Agreement except for liability, loss or expense occasioned by the gross negligence or willful misconduct of you or your agents. Upon notice to us, you or any Bank may, at your or its option, refuse to execute any instruction, or part thereof, without incurring any responsibility for any loss, liability or expense arising out of such refusal if you or such Bank in good faith believe that the person delivering the instruction is not one of the persons designated above or if the instruction is not accompanied by an authentication method that we have agreed to in writing. Please provide a copy of this letter to each of the Banks, on receipt of which each Bank will be entitled to rely on the designations, agreements and other provisions hereof. We will promptly notify you, for transmission to each of the Banks, in writing of any change in the persons designated above and, until you and each Bank have actually received such written notice and have had a reasonable opportunity to act upon it, you and each such Bank are authorized to act upon instructions, even though the person delivering them may no longer be authorized. Very truly yours, FRONTIER CORPORATION By: ------------------------------ Name: Title: EXHIBIT 4.01(e) OPINION OF BORROWER'S COUNSEL (Letterhead of Helen A. Zamboni, Esq., counsel to the Borrower) [Closing Date] The Chase Manhattan Bank, N.A. 1 Chase Square Rochester, New York 14643 [other Banks] Ladies and Gentlemen: I have acted as counsel to Frontier Corporation (the "Borrower") in connection with the execution and delivery of that certain Credit Agreement (the "Credit Agreement") dated as of August , 1995 among the Borrower, the Banks signatory thereto --- and The Chase Manhattan Bank, N.A. as Agent. Except as otherwise defined herein, all terms used herein and defined in the Credit Agreement or any agreement delivered thereunder shall have the meanings assigned to them therein. In connection with this opinion, I have examined executed copies of the Facility Documents and such other documents, records, agreements and certificates as I have deemed appropriate. I have also reviewed such matters of law as I have considered relevant for the purpose of this opinion. Based upon the foregoing, I am of the opinion that: 1. Borrower and each Significant Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its state of incorporation set forth in Exhibit 5.09 to the Credit Agreement, has the corporate power and authority to own its assets and to transact the business in which it is now engaged or proposed to be engaged, and is duly qualified as a foreign corporation and in good standing under the laws of each other jurisdiction in which such qualification is required. 2. The execution, delivery and performance by the Borrower of the Facility Documents have been duly authorized by all necessary corporate action and do not and will not: (a) require any consent or approval of its stockholders; (b) contravene its charter or by-laws; (c) violate any provision of, or require any filing, registration, consent or approval under, any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Borrower or any of its Subsidiaries or affiliates; (d) result in a breach of or constitute a default or require any consent under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected; (e) result in, or require, the creation or imposition of any Lien, upon or with respect to any of the properties now owned or hereafter acquired by the Borrower; or (f) cause the Borrower (or any Subsidiary or affiliate, as the case may be) to be in default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, agreement, lease or instrument. 3. Each Facility Document is, or when delivered under the Credit Agreement will be, a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally. 4. To the best of my knowledge (after due inquiry), except as disclosed in Borrower's reports filed with the SEC pursuant to Section 13 of the Securities Exchange Act of 1934, there are no pending or threatened actions, suits or proceedings against or affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator, which may, in any one case or in the aggregate, materially adversely affect the financial condition, operations, properties or business of the Borrower or of any such Subsidiary or the ability of the Borrower to perform its obligations under the Facility Documents. Very truly yours, EXHIBIT 5.09 SIGNIFICANT SUBSIDIARIES I. Following is the name, address, state of incorporation, and county in which the principal office is located, of each Subsidiary of Borrower that constitutes a Significant Subsidiary as of the date of the foregoing Agreement:
State of Name Address County Incorp. Rochester Telephone 180 S. Clinton Ave. Monroe NY Corp. Rochester, NY 14646 Frontier Communications 145 North Main St. Orange NY of New York, Inc., P.O. Box 657 f/k/a Highland Monroe, NY 10950 Telephone Company Frontier Communications 180 S. Clinton Ave. Monroe DE International Inc., Rochester, NY 14646 F/K/A RCI Long Distance, Inc. Frontier Communications 600 First Avenue N. Webster IA of Iowa, Inc. F/K/A Fort Dodge, IA 50501 Vista Telephone Company of Iowa Frontier Communications 14450 Burnhaven Drive Dakota MN of Minnesota, Inc. Burnsville, MN 55337 F/K/A Vista Telephone Company of Minnesota
EXHIBIT 5.09 SIGNIFICANT SUBSIDIARIES II. Set forth after the name of each Significant Subsidiary is a computation by which the Borrower has determined that each of the Subsidiaries listed in Section I above constitutes a Significant Subsidiary:
% of % of Net Consol. Total Consol. Income Income Assets Net Worth ------ ------ ------ ---------- Rochester Telephone Corp. $111,873,331* 101.8% 565,865,175 69% Frontier Communications $ 9,288,586 8.4% 90,356,175 11% of New York, Inc. Frontier Communications $ 19,068,725 17.3% 166,982,926 20.3% International Inc. Frontier Communications $ 6,979,739 6.3% 77,474,045 9.4% of Iowa, Inc. Frontier Communications $ 11,011,813 10.0% 128,176,894 15.6% of Minnesota, Inc.
EXHIBIT 5.09-cont'd SIGNIFICANT SUBSIDIARIES III. Set forth after the name of each Significant Subsidiary is a description of the Debt of such Subsidiary as of the date of this Agreements: Rochester Telephone Corp. Revolving Credit $100,000,000 Agreement; Mid Term Notes 7.51%, $ 40,000,000 due 2002 Frontier Communications Debt to Frontier of New York, Inc. Corporation 8.4% due 2005 $ 5,900,000 6.5% due 2003 $ 3,000,000 Frontier Communications No Debt International Inc. Frontier Communications No Debt of Iowa, Inc. Frontier Communications Senior Notes, 7.61% $ 35,000,000 of Minnesota, Inc. due 2003
- -------------------- * Represents aggregate amount of Commitments. IV. No Significant Subsidiary is subject to any Lien or Liens that are individually or in the aggregate material to its financial condition, assets or Net Worth. EXHIBIT 5.10 BORROWER'S FUNDED DEBT Frontier Corporation Funded Debt in thousands of dollars Debentures 10.46%, Convertible, due $ 5,300 October 27, 2008 9%, due January 1, 2020 62,785 9%, due August 15, 2021 100,000 Medium-Term Notes 8.77% - 9.30%, due 2000 to 2004 $179,000 - --------------------------------------------------------------- Total $347,085
EXHIBIT 7.02 BORROWER'S LIENS Borrower is not subject to any Lien or Liens that are individually or in the aggregate material to its financial condition, assets or Net Worth. EX-10.18 6 EMPLOYMENT AGREEMENT (MARVIN C. MOSES) EXHIBIT 10.18 February 22, 1996 Frontier Corporation 180 South Clinton Avenue Rochester, New York 14646-0700 Dear Mr. Moses: With due regard to your recent increase in responsibility as an executive officer of Frontier Corporation ("Frontier") and its subsidiaries and affiliates (together, the "Company"), the Board of Directors of Frontier (the "Board") has determined that it is in the best interests of the Company and its shareowners to avail itself of your continued dedication and service to the Company. It is therefore the intent of this Agreement to encourage your service to the Company by providing you with compensation and benefit arrangements while you fulfill your duties, which provide you with a measure of security commensurate with your importance to the Company. Upon your signature on a counterpart of this Agreement, the following terms and conditions shall become effective as of November 20, 1995 (the "Effective Date"), and shall supersede any and all prior agreements between the Company and you related to the subject matter hereof, except that this Agreement shall not supersede any stock option agreements related to your prior service with ALC Communications Corporation ("ALC"), which shall each remain in full force and effect. 1. Employment 1.1 Employment term. The Company hereby employs Marvin C. Moses (the "Employee") as Vice Chairman and Chief Financial Officer of Frontier, and as Chief Financial Officer of ALC. The Employee shall also serve as a director on the Board and a member of the Board's Executive Committee as selected and elected by the Board and the Company's shareowners. The term of the Employee's employment (the "Employment Term") shall commence on the Effective Date and shall continue until December 31, 1999 unless sooner terminated in accordance with Section 7. 1.2 Duties and Responsibilities. The Employee shall perform all duties incidental to his position with the Company, or as may be assigned to him by the Chairman and CEO, and shall cooperate fully with the executive officers of the Company. Notwithstanding the foregoing or anything else contained in this Agreement to the contrary, (i) Employee may from time to time devote such time as he may determine reasonable to various charitable and other community activities, and (ii) Employee may from time to time devote a portion of his time to his own, personal investments and projects (for which he may or may not receive compensation), provided the amount of time he devotes does not materially affect his duties under this Agreement. The Company and the Employee agree that the Employee shall be able to work from an office in a location that is mutually agreeable to the Company and the Employee, and the Company and the Employee shall determine together whether and when relocation is appropriate. If the Company designates a work location other than Bingham Farms, Michigan, the Employee agrees to spend an amount of time reasonable under the circumstances working at such designated work location. 1.3 Extent of Service. The Employee agrees to use his best efforts in the business of the Company and to devote his full time, attention and energy to the business of the Company. The Employee shall not work, including on either a part-time or independent contracting basis, for any other business or enterprise during the Employment Term without the Company's prior written consent. 1.4 Compensation. The Employee shall receive annual Base Compensation, commencing as of the Effective Date until January 31, 1996, of $350,000, and thereafter of $450,000. Such annual Base Compensation shall thereafter be adjusted consistent with the performance of the Company and the Employee, but in no event less than $450,000. The Employee shall participate in the Company's short term incentive compensation program, with a bonus potential at Standard rating of 60% and at Premier rating of 105% of the Employee's Base Compensation for the calendar years 1995 (prorated from the Effective Date) and 1996 based on the performance of the Company and the Employee relative to certain Performance Goals established by the Chairman and CEO and concurred in by the Board. The Employee's short term incentive compensation for periods after 1996 shall be established by the Chairman and CEO and concurred in by the Board, consistent with the performance of the Company and the Employee. The Employee shall be eligible to participate in the retirement and pension plans currently maintained by the Company for its executive employees (the "Plans"). The Employee's prior employment in the telecommunications industry (the "Qualifying Service") shall be bridged for all purposes under the Plans as follows: half of the Employee's Qualifying Service shall be bridged effective on September 1, 1997 and the remaining half of the Employee's Qualifying Service shall be bridged effective on September 1, 1999. Notwithstanding the foregoing, however, the Plans may be amended, modified or terminated by the shareowners of the Company or by the Board or any committee thereof to which has been duly delegated the authority to so amend, modify or terminate the Plans. 1.5 Options. The Company acknowledges that the Employee has received options in Frontier's stock under the Frontier Management Stock Incentive Plan (the "Stock Option Plan") as set forth below:
Grant Date and Amount Granted Vesting Schedule ----------------------------- ---------------- August 16, 1995: 100,000 1/3 on August 16, 1996 1/3 on August 16, 1997 1/3 on August 16, 1998
The Company agrees that the Employee shall hereinafter have the right to earn, as described below, additional options, according to the following schedule, so long as the Employee meets the Performance Goals set for him by the Company on an annual basis and so long as the Employee remains in the employ of the Company:
Grant Date and Amount Granted Vesting Schedule ----------------------------- ---------------- August 16, 1996: 100,000 1/3 on August 16, 1997 1/3 on August 16, 1998 1/3 on August 16, 1999 August 16, 1997: 100,000 1/3 on August 16, 1998 1/3 on August 16, 1999 1/3 on August 16, 2000
To the extent permitted under the Stock Option Plan, the grants provided for above shall be Incentive Stock Options. Notwithstanding any other agreement by and between the Employee and the Company, should the Employee's employment with the Company be terminated under either Sections 7.4 or 7.5 hereunder, the Employee shall have the right to exercise in full, for 30 days following the date of his termination, any options previously granted to the Employee pursuant to this Section 1.5, which have vested as of the date of his termination. 2. Expenses. The Company shall reimburse the Employee for the reasonable expenses incurred by him in connection with his performance of services hereunder during the Employment Term upon presentation to the Company of any itemized account and written proof of such expenses. 3. Developments. All developments, including trade secrets, discoveries, improvements, ideas and writings which either directly or indirectly relate to or may be useful in the business of the Company (the "Developments") which the Employee, either by himself or in conjunction with any other person or persons, shall conceive, make, develop, acquire or acquire knowledge of during the Employment Term, shall become and remain the sole and exclusive property of the Company. The Employee hereby assigns, transfers and conveys, and agrees to so assign, transfer and convey, all of his right, title and interest in and to any and all such Developments and to disclose fully as soon as practicable, in writing, all Developments to the Chairman and CEO. At any time and from time to time, upon the request of the Company, the Employee will execute and deliver to the Company any and all instruments, documents and papers, give evidence and do any and all other acts which, in the opinion of counsel for the Company, are or may be necessary or desirable to document such transfer or to enable the Company to file and prosecute applications for and to acquire, maintain and enforce any and all patents, trademark registrations or copyrights under United States or foreign law with respect to any such Developments or to obtain any extension, validation, reissue, continuance or renewal of any such patent, trademark or copyright. The Company will be responsible for the preparation of any such instruments, documents and papers and for the prosecution of any such proceedings and will reimburse the Employee for all reasonable expenses incurred by him in compliance with the provisions of this Section 3. 4. Confidential Information. The Employee acknowledges that by reason of his employment by and service to the Company he will have access to confidential information of the Company including, without limitation, its strategies and corporate plans, information and knowledge pertaining to products and services, methods of operation, sales and profit figures, customer lists and relationships between the Company and its customers, suppliers and others who have business dealings with it. The Employee covenants that, either during or after the Employment Term, he will not disclose any such information to any person without the prior written authorization of the Board. 5. Non-Competition. The provisions of this Section 5 shall supersede any conflicting terms contained in any other agreement, instrument, contract or arrangement by and between the Employee and the Company, including, but not limited to, any option award described in Section 1.5. 5.1 During the Employment Term The Employee shall not, unless acting pursuant hereto or with the prior written consent of the Board, directly or indirectly, (i) own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing or control of, or be associated as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with, or use or permit his name to be used in connection with, any business or enterprise that is engaged in any business that is competitive with the business conducted during the Employment Term by the Company, or, during the Employment Term and for six months thereafter, (ii) offer or provide employment (whether such employment is with the Employee or any other business or enterprise), either on a full-time or part-time or consulting basis, to any person who then currently is, or who within three months prior thereto had been, employed by the Company; provided, however, that this provision shall not be construed to prohibit the ownership by the Employee of not more than 1% of any class of securities of any corporation which is engaged in a business competitive with the Company and has a class of securities registered pursuant to the Securities Exchange Act of 1934. 5.2 Following the Employment Term Upon Employee's termination of employment, for any reason, the Employee covenants and agrees that on or prior to August 16, 1997, he shall not be a full time consultant, agent, representative or employee of LCI Communications, Inc., WorldCom Corporation, Cable & Wireless, Inc. or AT & T (the "Competitors"). The foregoing notwithstanding, however, the Employee shall not be deemed to be in violation of this covenant if the Employee becomes a full time consultant, agent, representative or employee of an entity which, within such time period, is acquired by a Competitor pursuant to a merger, consolidation, share exchange, business combination, tender or exchange offer, purchase of all or substantially all the assets of such entity or other similar transaction. 5.3 Savings Clause. In the event that the provisions of this Section 5 should ever be adjudicated to exceed the time, geographic, or other limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic or other limitations permitted by applicable law. 6. Indemnification A. ALC and Employee agree to bind themselves to the provisions of the Amended and Restated Bylaws of ALC, attached hereto and made a part hereof as Exhibit 6.A., as a contractual agreement between them. B. Allnet Communication Services, Inc. and Employee agree to bind themselves to the provisions of the Amended and Restated Bylaws of Allnet Communication Services, Inc., attached hereto and made a part hereof as Exhibit 6.B., as a contractual agreement between them. C. Frontier and Employee agree to bind themselves to the provisions of the Amended and Restated Bylaws of Frontier, attached hereto and made a part hereof as Exhibit 6.C., as a contractual agreement between them. 7. Termination 7.1 Disability or Death. In the event that the Employee shall die or is unable to perform his duties and responsibilities hereunder to the full extent required by the Chairman and CEO by reason of illness, injury or incapacity for six consecutive months, during which time he shall continue to be compensated hereunder, the Employee's employment hereunder shall be terminated and the Company shall have no further liability or obligation to the Employee, or to his executors, administrators, heirs, assigns or any other person claiming under or through him hereunder, except for unpaid salary, incentive compensation (including for partial periods) and benefits including unreimbursed expenses accrued to the date of termination. The Employee agrees, in the event of any dispute under this Section 7.1 regarding his health, to submit to a physical examination by a licensed physician selected by the Company, the cost of such examination to be borne by the Company. 7.2 Cause by the Company. The Employee's employment hereunder may be terminated by the Chairman and CEO at any time for "cause." "Cause" shall mean the failure of the Employee to observe or perform (other than by reason of illness, injury or incapacity) any of the terms or provisions of this Agreement, dishonesty, willful misconduct, conviction of a felony or other crime involving moral turpitude, misappropriation of funds, habitual insobriety, use of controlled substances (other than under the supervision of a licensed physician), or other proper cause. Except as otherwise specified, the Company shall have no liability or obligation to the Employee hereunder upon termination under this Section 7.2 except for: (i) unpaid salary, (ii) incentive compensation in respect of full annual, but not partial, periods ended prior to the date of termination, (iii) benefits including unreimbursed expenses accrued to the date of termination and which are payable upon termination and (iv) any obligation arising under any of the Company's (and ALC's) stock option plans and stock awards. 7.3 Failure to Meet Goals. The Chairman and CEO may terminate the Employee's employment hereunder at any time for material failure to meet the Performance Goals. The Company shall have no liability or obligation to the Employee hereunder upon termination under this Section 7.3 except for: (i) unpaid salary, (ii) incentive compensation in respect of periods (including partial periods) ended prior to the date of termination, (iii) benefits including unreimbursed expenses accrued to the date of termination and which are payable upon termination, (iv) any obligation arising under any of the Company's (and ALC's) stock option plans and stock awards and (v) the salary to which the Employee would have been entitled for the succeeding twelve months, payable in installments at the times the same would have become due but for the termination, as well as during such time period all employee benefits to which Employee was entitled prior to such termination, other than any officer perquisites and 401(k) plan participation, and upon substantially the same terms and conditions including, but not limited to, Life, Health and Long-Term Disability Insurance coverage; provided, however, that if Employee obtains full-time employment prior to the expiration of the twelve-month period, the provision of these benefits shall terminate although the salary shall continue for the remainder of the period. 7.4 Without Cause by the Company. The Company may terminate the Employee's employment hereunder at any time, without cause. A. Upon such termination the Company shall not have any liability or obligation to the Employee hereunder except for (i) unpaid salary, (ii) incentive compensation in respect of periods (including partial periods) prior to termination, (iii) benefits including unreimbursed expenses accrued to the date of termination and which are payable upon termination, (iv) any obligation arising under any of the Company's (and ALC's) stock option plans and stock awards, (v) the salary to which the Employee would have been entitled for the succeeding twenty-four months, payable in installments at the time the same would have become due but for the termination, as well as during such time period all employee benefits to which Employee was entitled prior to such termination, other than any officer perquisites and 401(k) plan participation, and upon substantially the same terms and conditions including, but not limited to, Life, Health and Long-term Disability Insurance coverage; provided, however, that if Employee obtains full-time employment prior to the expiration of the applicable period, the provision of these benefits shall terminate, although the salary shall continue for the remainder of the period, and (vi) compensation equivalent to the sum of the prior incentive compensation awards for the two fiscal years immediately preceding said termination, payable pro rata over the period during which the salary is to be paid to Employee pursuant to Subsection 7.4(A)(v) herein. B. Notwithstanding anything to the contrary in this Section 7.4, if Employee's termination occurs prior to August 16, 1996, the compensation payable to Employee under Section 7.4(A)(vi) shall be reduced by $500,000, and an identical sum (payable over the same period) shall be paid to Employee as consideration for the noncompete described in Section 5.2. For each month following August 15, 1996 during which no termination of employment occurs, the amount of consideration reallocated under this Section 7.4(B) shall be reduced by $41,666.67. Thus, for example, if the Company terminates Employee on February 16, 1997, the amount of consideration reallocated under this Section 7.4 shall be $250,000, computed as [$500,000 - ($41,666.67 x 6)]. C. Upon termination under this Section 7.4 (or Section 7.5 below), Employee shall be entitled to exercise all stock options previously granted to him by ALC, for a period of twelve months following such termination date, or such period as specified under the terms of ALC's 1990 Stock Option Plan, as amended, whichever is longer. 7.5 Termination by the Employee. With or without cause, the Employee may terminate his employment hereunder by delivering written notice of such termination to the Company (the "Notice"), which notice shall specify an effective date of termination (the "Termination Date") at least sixty (60) days following the delivery date of the Notice. A. If the Termination Date is prior to April 1, 1997, the Employee shall receive, as an incentive for his continued dedication to the Company, each of the benefits described in Sections 7.4(A) and (C) above, subject to the reallocation of benefits described in Subsection 7.4(A)(vi), pursuant to Section 7.4(B). B. If the Termination Date is after March 31, 1997, and if Employee's termination is without cause, the Company's liability to the Employee shall include only (i) unpaid salary through the Termination Date, (ii) incentive compensation in respect of full annual, but not partial, periods ended prior to the date of termination, (iii) benefits including unreimbursed expenses accrued to the date of termination and which are payable upon termination and (iv) any obligation arising under any of the Company's (and ALC's) stock option plans and stock awards. C. If the Termination Date is after March 31, 1997, and if the Employee's termination is for cause against the Company, the Company's liability to the Employee shall include, in addition to the obligations described in Section 7.5(B) above, the obligation to pay the Employee incentive compensation in respect of partial periods prior to the Termination Date. For purposes of this Section 7.5(C) only, cause shall include the Company's failure to comply with any of its material obligations under this Agreement, after Employee has given notice of such failure to the Company and the Company has not cured such failure promptly after its receipt of such notice. 7.6 Survival. Notwithstanding the expiration or termination of the Agreement, the obligations of the Company with respect to payment of compensation (Section 1.4), incentive compensation (Section 1.5) and expenses (Section 2) earned or otherwise owed to Employee prior to the expiration of the Agreement as well as salary and benefit continuation with respect to the applicable periods set forth in this Section 7 of the Agreement shall survive and remain in full force and effect. Notwithstanding either the expiration or termination of the Agreement, or the termination of the Employee's employment under this Section 7, the obligations of the Employee under Sections 3, 4 and 5 shall survive and remain in full force and effect, and the Company shall be entitled to equitable relief against the Employee pursuant to the provisions of Section 8. Further, upon termination of the Employee's employment under this Section 7, subject to Section 5.2, Employee shall have no restriction hereunder from owning, managing, operating, financing, joining, controlling or participating in the ownership, management, operation, financing or control of, or be associated as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with, or use or permit his name to be used in connection with any business or enterprise that is engaged in any business that is competitive with the business conducted during the Employment Term by the Company. The liability of the Company, if any, for payments to the Employee by virtue of any wrongful termination of the Employee's employment hereunder shall not exceed the amount that would be payable to the Employee if the termination had been made under Section 7.4. 8. Equitable Relief. The Employee acknowledges that the restrictions contained in Sections 3, 4 and 5 are, in view of the nature of the business of the Company, reasonable and necessary to protect the legitimate interests of the Company, and that any violation of the provisions of those Sections will result in irreparable injury to the Company. The Employee also acknowledges that the Company shall be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, and to an equitable accounting of all earnings, profits and other benefits arising from any such violation, which rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. The Employee hereby agrees that in the event of any such violation the Company shall be entitled to commence an action for any such preliminary and permanent injunctive relief and other equitable relief in any court of competent jurisdiction and further irrevocably submits, for himself and in respect of his property, generally and unconditionally, to the jurisdiction of any Michigan state court located in Wayne or Oakland Counties or the United States court for the Eastern District of Michigan over any suit, action or proceeding arising out of or relating to this Section 8. The Employee hereby waives, to the fullest extent permitted by law, any objection that he may now or hereafter have to such jurisdiction or to the venue of any such suit, action or proceeding brought in such a court and any claim that such suit, action or proceeding has been brought in an inconvenient forum. The Employee agrees that effective service of process may be made upon him by mail under the notice provisions contained in Section 11. 9. Litigation Expenses. In the event of a lawsuit by either party to enforce the provisions of this Agreement, the prevailing party shall be entitled to recover reasonable costs, expenses and attorneys' fees from the other party. 10. Life Insurance. The Company agrees to insure the life of the Employee, and to pay the entire premium, under a term life insurance policy continuing during the duration of the Employment Term in an amount of at least $500,000, with the Employee having the sole right to designate one or more beneficiaries under such insurance policy. 11. Notice. All notices and other communications required or permitted hereunder or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when mailed by registered or certified mail, return receipt requested, as follows (provided that notice of change of address shall be deemed given only when received): If to the Company, to: Frontier Corporation 180 South Clinton Avenue Rochester, New York 14646 Attention: Chairman and CEO If to the Employee, to his residence as shown from time to time on the records of the Company or to such other name or address as the Company or the Employee, as the case may be, shall designate by notice to the other party hereto in the manner specified in this Section. 12. Contents of Agreement, Amendment and Assignment. This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and cannot be changed, modified or terminated except upon written amendment. all of the terms and provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by the respective heirs, representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of the Employee hereunder are of a personal nature and shall not be assignable in whole or in part by the Employee; provided, however, that in the event that the Company effects a merger with any corporation, or in the event that the business of the Company is otherwise combined with the business of any corporation or entity, then, notwithstanding anything herein to the contrary, the provisions of Section 1 hereof shall be applicable only with respect to the division or other unit of the Company or of such other corporation or entity that conducts the business previously conducted by the Company. 13. Severability. If any provision of this Agreement or application thereof to anyone or under any circumstances is adjudicated to be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application and shall not invalidate or render unenforceable such provision in any other jurisdiction. 14. Remedies Cumulative; No Waiver. No remedy conferred upon the Company by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given hereunder or now or hereafter existing at law or in equity. No delay or omission by the Company in exercising any right, remedy or power hereunder or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by the Company from time to time and as often as may be deemed expedient or necessary by the Company in its sole discretion. 15. Applicable Law. This Agreement shall be governed by the laws of the State of New York, notwithstanding the provisions contained herein regarding personal jurisdiction and venue. 16. Counterparts. This Agreement may be signed by the parties in one or more counterparts, each of which shall be one original but all of which together will constitute one and the same instrument. If this Agreement correctly sets forth our agreement on its subject matter, please sign and return to me the enclosed copy of this Agreement. Please keep the other copy for your records. Sincerely, FRONTIER CORPORATION /s/ Ronald L. Bittner By:------------------- Ronald L. Bittner Its: Chairman and CEO Agreed to on February 22, 1996 /s/ Marvin C. Moses - ----------------------------- Marvin Moses EX-10.19 7 SUPPLEMENTAL MANAGEMENT PENSION PLAN EXHIBIT 10.19 ROCHESTER TELEPHONE CORPORATION SUPPLEMENTAL MANAGEMENT PENSION PLAN Amendment No. 7 to September 1, 1989 Restatement Pursuant to Article Six, the Plan is amended, effective January 1, 1994, by adding the following new Section 4.2 immediately following Section 4.1 and by renumbering the remaining provisions of Article Four accordingly: 4.2 Subject to the conditions set forth below, an eligible Employee who terminates employment on or after reaching age 50 with at least five years of service while holding the position of Corporate Vice President or higher shall be entitled to receive a benefit equal to (a) minus (b) below where (a) equals the sum of (1) for each of the eligible Employee's first 15 years of service, 2.5 percent times his average annual compensation during the three consecutive years of service with the Company that produce the highest such average plus (2) for each of the next 15 years of service 1.5 percent times his average annual compensation during the three consecutive years of service with the Company that produce the highest such average, provided that in no event shall the amount under this subsection (a) exceed 60 percent of the eligible Employee's highest three years' average compensation; minus (b) equals the sum of the straight life annuity benefit payable under Section 4.1 of this Plan and the straight life annuity benefit payable under the Funded Plan. The normal form of benefit payable under this Section 4.2 is a straight life annuity commencing as of the eligible Employee's date of retirement and shall not be subject to actuarial reduction even if the benefit payable from the Funded Plan is subject to such reduction. IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Amendment on its behalf this 15th day of November, 1993. ROCHESTER TELEPHONE CORPORATION By: /s/ Josephine S. Trubek ------------------------------ Josephine S. Trubek Corporate Secretary FRONTIER CORPORATION SUPPLEMENTAL MANAGEMENT PENSION PLAN Amendment No. 8 to September 1, 1989 Restatement Pursuant to Article Six, the Plan is amended, effective January 1, 1995, by adding the following new Article Four A immediately following current Article Four: ARTICLE FOUR A - Other Benefits The Committee on Management may approve, individually or on a group basis, benefits that are in addition to the benefits provided in Article Four, including benefits to an employee of the Company or of an affiliated company even though such employee is not otherwise eligible to receive benefits under Article Four. In all such instances, however, the employee must be within a "select group of management or highly-compensated employees" as this phrase is used in Title I of ERISA. In the event such other benefits are provided, the following information with respect to such benefits shall be listed on Schedule A attached hereto: - the name of the employee or the class of employees to whom such other benefits will be paid - the amount of such benefits or the formula by which the benefit amounts may be determined and their frequency (e.g., benefits that are payable each month, year or other payment period) - the form of benefit (e.g., a life annuity, a joint and survivor annuity, or installment payments) - the date or the employee's age when benefits commence - any ancillary benefits that may be payable (e.g., death, disability or early retirement benefits) - any other terms and conditions that reflect the obligation to pay benefits as approved by the Committee on Management. The provisions of this Plan, other than Articles Three and Four, shall apply to the benefits payable under this Article Four A unless the context suggests otherwise or the Committee on Management, in its sole discretion, provides otherwise. IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this amendment on its behalf this 18th day of September, 1995. FRONTIER CORPORATION By: /s/ Josephine S. Trubek ----------------------------- Josephine S. Trubek Corporate Secretary Schedule A Other Benefits Provided Under Article Four A 1. Name of Employee: Amount and Frequency of Benefit: Form of Benefit: Benefit Commencement Date: Other Terms: EX-10.20 8 MANAGEMENT PENSION PLAN EXHIBIT 10.20 FRONTIER CORPORATION MANAGEMENT PENSION PLAN FRONTIER CORPORATION, a New York corporation (the "Employer"), hereby continues, amends and restates in its entirety the FRONTIER CORPORATION MANAGEMENT PENSION PLAN (the "Plan") for the exclusive benefit of its Employees who are eligible to become Participants. By separate agreement with Boston Safe Deposit and Trust Company, as Trustee, the Employer has established a Trust to hold the assets of the Plan. ARTICLE I - Introduction The name of this Plan is the Frontier Corporation Management Pension Plan. Its purpose is to provide retirement benefits to the eligible management Employees of Frontier Corporation. This Plan was originally established effective as of July 30, 1921 and last restated in its entirety as of January 1, 1987 to comply with the Tax Reform Act of 1986. Because of the subsequent adoption of regulations under that enactment, the passage of additional legislation and the desire to incorporate all amendments into a single document, the Plan is again amended and restated in its entirety. This restatement is generally effective January 1, 1994, except that in the case of any provision which itself contains a separate effective date, the separate date shall apply. No provision of this restated Plan shall operate to diminish or adversely affect the accrued benefits of any Participant determined immediately preceding the effective date of this restatement. ARTICLE II - Definitions SECTION 2.1 "Accrued Benefit" means the annual benefit accrued at any particular point in time for each Participant as determined in accordance with Section 4.2. SECTION 2.2 "Actuarial Equivalent" means the equivalent current value of the Article IV formula benefit determined pursuant to the 1984 George B. Buck Mortality Table assuming 55% male and 45% female at 8% interest; provided, however, that for purposes of determining the present value of any lump sum payout in Plan Years beginning after December 31, 1984: (1) for amounts not in excess of $25,000 the interest assumption shall be the rate that would have been used by the Pension Benefit Guaranty Corporation ("PBGC") as of the distribution date for purposes of determining the present value of a lump sum distribution on termination of a plan; (2) if the lump sum payout exceeds $25,000 using the PBGC rate, the interest assumption shall be 120 percent of the PBGC rate. SECTION 2.3 "Actuary" means an enrolled actuary selected by the Committee. SECTION 2.4 "Affiliated Company" means (1) a member of an affiliated service group within the meaning of Code section 414(m) of which the Employer is a member; (2) a member of a controlled group of corporations of which the Employer is a member; (3) an unincorporated business which is part of a group of trades or businesses (whether or not incorporated) under common control with the Employer as determined pursuant to section 414(c) of the Code, or (4) any other entity with which the Employer must be aggregated pursuant to section 414(o) of the Code. For purposes of this Section, a controlled group of corporations means a group defined under section 1563(a) of the Code determined without regard to Code sections 1563(a)(4) and 1563(e)(3)(C). SECTION 2.5 "Annuity Starting Date" means the first day of the month with respect to which a retirement income payment is payable under the Plan. SECTION 2.6 "Beneficiary" means, in the case of a married Participant, the Participant's surviving spouse. If the Participant is not married or if the surviving spouse of a married Participant waives the spouse's right to any death benefit, Beneficiary means any person (including a trustee) specified by the terms of this Plan to receive any death benefit which shall be payable under this Plan. SECTION 2.7 "Board" means the Board of Directors of Frontier Corporation or any committee of the Board of Directors authorized to act on behalf of the Board. Any such Board committee shall be composed of at least three members of the Board of Directors. As used in this Plan the term "Board-appointed committee" means any other committee appointed by the Board which need not be comprised of at least three Board members but may include or consist entirely of management personnel who are not members of the Board. SECTION 2.8 "Break in Service" means that an Employee fails to complete more than 500 Hours of Service during an Eligibility Computation Period or a Plan Year, whichever is applicable. SECTION 2.9 "Code" means the Internal Revenue Code of 1986, as amended from time to time. SECTION 2.10 "Committee" means the Employees' Benefit Committee appointed by the Board pursuant to Article X to administer the Plan. SECTION 2.11 "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 determining the $150,000 Compensation limit of any Participant who is a five percent owner or one of the ten most highly compensated Highly Compensated Employees of the Employer, the Participant, the Participant's spouse and the Participant's lineal descendants who have not attained age 19 before the close of the Plan Year (the "family unit") shall be treated as a single employee. If the actual aggregate compensation of all members of this family unit equals or exceeds $150,000 (as adjusted for cost of living increases) in a Plan Year, the $150,000 shall be allocated pro rata among all members of the family unit as their Compensation for the Plan Year. If any Participant's Accrued Benefit for Plan Years prior to the effective date of the Code Section 401(a)(17) compensation limit took into account compensation in excess of the 401(a)(17) compensation limit, such Participant's Accrued Benefit shall be determined pursuant to the rules described in Treasury Regulation Sec. 1.401(a)(17)-1(e). SECTION 2.12 "Contingent Annuitant" means the person designated by a Participant to receive lifetime monthly retirement income payments after his death in accordance with Article VI. SECTION 2.13 "Deferred Retirement Date" means the first day of the month next following the month in which a Participant actually retires after his Normal Retirement Date. SECTION 2.14 "Disability" means a physical or mental condition which, in the judgment of the Committee, based on medical reports and other evidence satisfactory to the Committee, will permanently prevent an Employee from satisfactorily performing his usual duties for the Employer. SECTION 2.15 "Early Retirement Date" means the first day of the month next following the month in which a Participant retires prior to Normal Retirement Age pursuant to Section 5.2 or Section 5.3. SECTION 2.16 "Election Period" means the period of time during which a Participant can elect, with the consent of his spouse, to waive the Qualified Joint and Survivor Annuity or the Qualified Pre-Retirement Survivor Annuity or can elect to revoke such a waiver. In the case of a Qualified Joint and Survivor Annuity, the Election Period is the 90 day period preceding the Annuity Starting Date. In the case of a Qualified Pre-Retirement Survivor Annuity the Election Period begins on the first day of the Plan Year in which a Participant attains age 35 and ends on the date of the Participant's death. SECTION 2.17 "Eligibility Computation Period" means the twelve-consecutive-month period beginning with an Employee's Employment Date and each anniversary thereof. SECTION 2.18 "Employee" means any individual who is employed by Frontier Corporation or who is within a class of employees designated as an eligible employee in any adoption agreement of an Affiliated Company which may adopt this Plan in accordance with Section 16.4. SECTION 2.19 "Employer" means Frontier Corporation, its predecessor or successor, and any Affiliated Company which, pursuant to Section 16.4, has adopted this Plan for the benefit of some or all of its employees. If this Plan is adopted by one or more Affiliated Companies, the term "Employer" means either one or more of the adopting companies acting individually or collectively as the context requires. SECTION 2.20 "Employment Date" means the date on which an Employee first performs an Hour of Service for the Employer or an Affiliated Company. SECTION 2.21 "ERISA" means the Employee Retirement Income Security Act of 1974 as amended from time to time and regulations issued thereunder. SECTION 2.22 "Former Participant" means a Participant whose employment with the Employer has terminated, and who has a vested benefit under the Plan which has not been paid in full. SECTION 2.23 "Hour of Service" means each hour for which an Employee is paid, or entitled to payment, during an applicable computation period in accordance with the following: (a) Performance of Services. An Hour of Service shall be credited for each hour that an Employee is paid or entitled to payment for the performance of services for the Employer. (b) Leaves of Absence, etc. An Hour of Service shall be credited for each hour during which no duties are performed but for which an Employee is paid or entitled to payment by the Employer (whether or not the employment relationship has terminated) for any other purpose, including without limitation payment due to vacation, holiday, illness, disability, layoff, jury duty or Leave of Absence. Credit shall also be given for any maternity or paternity leave (i.e., pregnancy of the Employee, birth or adoption of the Employee's child, or caring for the Employee's child immediately following birth or adoption) taken by an Employee. No more than 501 Hours of Service shall be credited under this provision, however, to an Employee on account of any single continuous period during which no services are performed for the Employer. In addition, no Hours of Service shall be credited with respect to payments made under a plan maintained by the Employer solely for complying with applicable workers' compensation, or disability insurance laws or to payments which reimburse an Employee for medical or medically-related expenses. (c) Back pay. To the extent not credited for either of the preceding purposes, an Employee shall be credited with an Hour of Service for each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. If back pay is made with respect to one of the purposes set forth in provision (b) above, the number of creditable Hours of Service shall be subject to the limitations set forth in that provision. (d) Computation and Crediting of Hours. The Committee shall determine the number of creditable Hours of Service in any computation period on the basis of any records kept by the Employer that accurately reflect Hours of Service. If any payments (including back pay awards) relate to any period for which no duties are performed, the number of creditable Hours of Service shall equal the number of regularly scheduled working hours upon which the payment is based. If the payment is not calculated on the basis of units of time for which the hours may be determined, the number of creditable Hours of Service shall be equal to the amount of the payment divided by the Employee's most recent hourly rate of compensation before the period during which no duties are performed. In no event, however, shall an Employee be credited with a greater number of Hours of Service than the number of regularly scheduled hours for the performance of services during the applicable period. Hours of Service shall be credited to the computation period in which the services were performed, the period to which payments are made when no services are performed, or the period to which back pay awards relate, whichever is applicable. Hours of Service pursuant to maternity/paternity leave shall be credited to the Employee in the Plan Year in which the absence from work begins only if the additional hours afforded would prevent the Participant from incurring a one year Break in Service; otherwise these hours shall be credited to the Participant in the Plan Year immediately following the date the Participant begins his absence from work. The crediting of Hours of Service for reasons other than the performance of services and the crediting of Hours of Service to computation periods shall be made in accordance with 29 C.F.R. sections 2530.200b-2(b) and (c) which are hereby incorporated by this reference. (e) Alternative Method of Crediting Hours. In lieu of counting an Employee's actual number of Hours of Service during any computation period, the Committee shall credit each Employee who earns at least one Hour of Service during any week of employment with 45 Hours of Service for each such week. (f) Military Service. An Hour of Service shall be credited for each hour of the normally scheduled work hours for each day during any period the Employee is on leave of absence from an Employer or any Affiliated Company for military service with the Armed Forces of the United States, but not to exceed the period required under the law pertaining to veterans' reemployment rights; provided that if he fails to report for work at the end of such leave during which he has employment rights, he shall not receive credit for hours on such leave. SECTION 2.24 "Investment Manager" means any individual or corporation selected by the Board or by any Board-appointed committee having the authority to select such person who (i) is registered as an investment adviser under the Investment Advisers Act of 1940; or (ii) is a bank, as defined in that Act; or (iii) is an insurance company qualified to manage, acquire or dispose of plan assets under the laws of more than one state and each individual or corporation acknowledges in writing that he or the corporation, as the case may be, is a fiduciary with respect to the Plan. SECTION 2.25 "Leased Employee" means any person (other than an employee of the Employer) who pursuant to an agreement between the Employer and any other person (the "leasing organization") has performed services for the Employer (or for the Employer and related persons determined in accordance with section 414(n)(6) of the Code) on a substantially full time basis for a period of at least one year, and such services are of a type historically performed by employees in the business field of the Employer. Contributions or benefits provided a Leased Employee by the leasing organization which are attributable to services performed for the Employer shall be treated as provided by the Employer. A Leased Employee shall not be considered an employee of the Employer if: (i) such employee is covered by a money purchase pension plan providing: (1) a nonintegrated employer contribution rate of at least 10 percent of compensation, as defined in section 415(c)(3) of the Code, but including amounts contributed by the Employer pursuant to a salary reduction agreement which are excludable from the employee's gross income under section 125, section 402(a)(8), Section 402(h) or section 403(b) of the Code, (2) immediate participation, and (3) full and immediate vesting; and (ii) Leased Employees do not constitute more than 20 percent of the Employer's Non-highly Compensated Employee workforce. SECTION 2.26 "Leave of Absence" means any leave formally granted in conformity with the rules of the Employer, as adopted from time to time, and leave on account of continued Disability following the expiration of a period of disability benefits. A Leave of Absence for a period not exceeding one month, except a leave following the expiration of disability benefits, will be granted automatically in accordance with the rules of the Employer without approval of the Committee. The period of absence shall be credited in computing the Employee's Hours of Service and the Employee shall be eligible for all benefits during his absence. A Leave of Absence for any period in excess of one month shall not be effective unless approved in writing by the Committee and in any case in which approval is given, the Committee shall indicate the effect of such leave on the Employee's entitlement to benefits. An Employee's absence following the expiration of a period of disability benefits shall be considered as a separation from service unless the Employee is granted a Leave of Absence by the Committee. The Committee may deem such absence to be an approved Leave of Absence, however, if satisfactory evidence is furnished that a Disability was continuous during the entire period of absence. SECTION 2.27 "Normal Retirement Age" means 65. Effective for Plan Years beginning after December 31, 1987, Normal Retirement Age means the later of age 65 or the fifth anniversary of the Participant's commencement of participation in the Plan. SECTION 2.28 "Normal Retirement Date" means the first day of the month coincident with or next following a Participant's Normal Retirement Age. SECTION 2.29 "Participant" means an Employee participating in this Plan in accordance with the provisions of Section 3.1. SECTION 2.30 "Plan" means the Frontier Corporation Management Pension Plan as set forth herein, as amended from time to time. SECTION 2.31 "Prior Plan" means the Frontier Corporation Management Pension Plan as in effect on December 31, 1986. SECTION 2.32 "Qualified Joint and Survivor Annuity" means an annuity for the life of the Participant with a survivor annuity for the life of the Participant's spouse which is 50 percent of the amount which is payable during the joint lives of the Participant and his spouse. The amount payable during the joint lives of the Participant and his spouse shall be the Actuarial Equivalent, determined on an individual Participant basis, of the amount otherwise payable to the Participant as a life annuity in accordance with the applicable benefit formula of Article IV, provided that in no event shall any reduction from the life annuity exceed 10 percent of the life annuity amount. If the Participant's spouse predeceases the Participant, the benefits thereafter payable to the Participant shall revert to the unreduced amount to which the Participant is entitled in accordance with the applicable benefit formula of Article IV. SECTION 2.33 "Qualified Pre-Retirement Survivor Annuity" means an annuity for the surviving spouse of a Participant in an amount equal to the amount payable to such surviving spouse if benefits had been paid as a Qualified Joint and Survivor Annuity. If the Participant dies after his Early Retirement Date the benefit amount shall be determined as if the Participant had retired with an immediate Qualified Joint and Survivor Annuity on the day before his death. In the case of a Participant who has any vested Accrued Benefit and who dies on or before his Early Retirement Date, the benefit amount shall be calculated as if he had (a) separated from service on his date of death; (b) survived to his Early Retirement Date; (c) retired with an immediate Qualified Joint and Survivor Annuity on his Early Retirement Date; and (d) died on the day after what would have been his Early Retirement Date. SECTION 2.34 "Trust" or "Trust Fund" means the Frontier Corporation Pension Fund (the "Pension Fund") or the Frontier Corporation Second Pension Fund (the "Second Pension Fund") or both as the context may require, maintained in accordance with the terms of the trust agreement, as from time to time amended, which constitutes a part of this Plan. The Pension Fund and Second Pension Fund constitute common trust funds for the Employer's Management Pension Plan, Craft Pension Plan-I and Craft Pension Plan-II, all of which funds are available to pay benefits under any of the three plans. SECTION 2.35 "Trustee" means Boston Safe Deposit and Trust Company or any other trustee appointed by the Board to administer the Trust. SECTION 2.36 "Year" or "Plan Year" means the twelve-consecutive-month period ending each December 31. The Plan Year shall be the accrual computation period, the vesting computation period and the limitation year as these terms are used in regulations issued pursuant to ERISA. SECTION 2.37 "Year of Service" means any Eligibility Computation Period or Plan Year during which an Employee completes at least 1,000 Hours of Service with the Employer or with an Affiliated Company. A Participant shall also be given credit for each month of service not included in a period for which a Year of Service has been earned under the 1000 hour rule, subject to the following: - the Participant must have worked at least 140 Hours of Service in the month; - the service must have been performed before the Participant commenced participation in this Plan; - the service must have been performed for Frontier Corporation but not already credited under any defined benefit plan of Frontier Corporation or any Affiliated Company; and - the service will be credited only to calculate the amount of a Participant's entitlement to an early or normal retirement service pension. A Participant whose last day of work at Frontier Corporation was February 5, 1993 shall also be given credit for each month of service not included in a period for which a Year of Service has been earned under the 1,000 hour rule. 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. SECTION 2.38 The masculine gender whenever used shall include the feminine and the singular shall include the plural, unless the context clearly indicates the contrary. ARTICLE III - Participation and Service SECTION 3.1 Eligibility. Every management Employee shall be eligible to become a Participant on the first day of the month after he meets the following age and service requirements: attains age 21; and completes one Year of Service during his Eligibility Computation Period. An Employee who satisfies the age and service requirements of this Section but who separates from the service of the Employer prior to his entry date is not entitled to become a Participant on that entry date. In the discretion of the Committee, an individual who is a management employee of Frontier Corporation but who is assigned to an Affiliated Company that has not adopted this Plan may participate in the Plan under such arrangements as the Committee may prescribe. Notwithstanding the above, this Plan does not cover any Employee who (1) is in a unit of employees covered by a collective bargaining agreement unless such agreement provides for the application of this Plan to the employees in such unit, (2) is not in a collective bargaining unit but is in a non-exempt hourly status, (3) is a temporary employee, or (4) is a Leased Employee. SECTION 3.2 Inactive Status. Any Participant who fails to complete 1,000 Hours of Service with the Employer in any Plan Year shall be treated as an inactive Participant for that Plan Year and shall not accrue a benefit for that Year. In the event such Participant completes 1,000 Hours of Service with the Employer in a subsequent Plan Year, he shall revert to active status with full rights and privileges under the Plan restored as of that Year. SECTION 3.3 Participation and Service upon Reemployment. Participation in the Plan shall cease as of the last day of the Plan Year in which a Participant has both terminated his employment with the Employer and has incurred a Break in Service, as this term is defined in Article II. Upon the reemployment of any person who had previously separated from the service of the Employer and suffered a Break in Service, the following rules shall apply in determining his participation in the Plan and his credit, if any, for Years of Service completed prior to termination: (a) Participation: If the reemployed Employee had satisfied the eligibility requirements of Section 3.1 (whether or not he had become a Participant) prior to suffering a Break in Service, he may become a Participant immediately upon his date of rehire. If the reemployed Employee had not satisfied either the age or service requirements prior to suffering a Break in Service, he must meet the requirements of Section 3.1 for participation in the Plan as if he were a new Employee. The date of rehire shall for this purpose be the Employee's new Employment Date. If he had completed the service requirement prior to his Break in Service he may become a Participant on the first day of the month after satisfying the Plan's age requirement on or following his date of rehire. (b) Vesting credit for prior Years of Service: In the case of a Participant whose prior employment terminated at a time when any portion of his Accrued Benefit had vested, all Years of Service attributable to his prior period of employment shall be reinstated as of the date of his reparticipation. In the case of a reemployed Employee who was not a Participant in the Plan during his prior period of employment or whose prior employment terminated at a time when no portion of his Accrued Benefit had become vested, any Years of Service attributable to his prior period of employment shall be restored except in those cases where the number of consecutive one-year Breaks in Service equals or exceeds the greater of (1) five or (2) the aggregate number of pre-break Years of Service. However, any rehired Employee who completes five Years of Service following his date of rehire shall be credited with all pre-break Years of Service. ARTICLE - Benefit Formula SECTION 4.1 Calculation of Benefit. The annual rate of retirement income benefit commencing on a Participant's Normal Retirement Date shall be the sum of (1) and (2) where (1) equals 1.39 percent times the Participant's Years of Service times the Participant's average annual Compensation during the five consecutive Years of Service during which the Participant was paid the highest annual Compensation, but not to exceed the Social Security Wage Base in effect during the calendar year preceding retirement; and (2) equals 1.54 percent times the Participant's Years of Service times the average of his last five years of Compensation preceding retirement in excess of the Social Security Wage Base in effect during the calendar year preceding retirement. The five year average compensation factor used in (1) above shall be the higher of the average obtained using calendar years of service or the average obtained using 12-consecutive-month years of service ending on a Participant's date of retirement or any anniversary thereof. In applying this formula with respect to any Participant whose Compensation includes amounts he has contributed to the Employer's Employees' Retirement Savings Plan, all such employee tax-deferred contributions shall be deemed to be Compensation in excess of the Social Security Wage Base. This formula benefit is computed on the basis of the benefit being payable in the form of an annuity for the life of the Participant with no further payments after his death. The actual amount of accrual or monthly benefit shall depend on the actual form of payment being paid in accordance with Article VI which shall, in any event, be a benefit of actuarially equivalent value of the rate determined under this Section 4.1. SECTION 4.2 Accrued Benefit. A Participant's Accrued Benefit at any particular point in time shall equal his Section 4.1 formula benefit based upon his Compensation and Years of Service as of the date such Accrued Benefit is being determined. SECTION 4.3 Transfer Policy. (a) Where the Code Treats this Plan and Another Plan as a Single Plan. This subsection (a) applies where a Participant in this Plan transfers to or from another defined benefit plan whose assets are considered to be a part of the assets of this Plan pursuant to the rules of Code section 414(1). In this event, the Participant's entitlement to receive benefits, and the level of such benefits, from either this Plan or the other plan shall be determined in accordance with the benefit formula of the plan in which the Participant then participates actively, taking into account all of his service and Compensation under both plans. No benefit shall be payable from the plan in which the Participant is not then active. In no event, however, shall the Participant's benefit from either plan be less than the accrued benefit he had earned under the other plan. (b) Where the Code Does Not Treat this Plan and Another Plan as a Single Plan. If a Participant ceases to be an active Participant in this Plan because he has been transferred to the employ of an Affiliated Company that maintains a defined benefit pension plan, his Accrued Benefit under this Plan together with an allocable portion of the Plan's assets shall be transferred to the plan maintained by the Affiliated Company. The transfer of assets and liabilities shall be made at such time and pursuant to such terms and conditions as the Committee may determine in accordance with applicable law. If an Employee who becomes an active Participant in this Plan has an accrued benefit under a defined benefit pension plan maintained by an Affiliated Company, the Committee shall accept a transfer of such accrued benefit together with an allocable portion of the other plan's assets at such time and pursuant to such terms and conditions as the Committee may determine in accordance with applicable law. In the event of such transfer, the Participant's benefits shall be determined pursuant to the terms of this Plan taking into account all of the Participant's compensation and service credited under the Affiliated Company's plan as of the date of transfer. If this Plan has a career pay formula, current and future benefit accruals shall be determined under this Plan's formula while a Participant's past service benefit shall equal the accrued benefit transferred to the Plan. In no event shall a Participant's Accrued Benefit under this Plan be less than the accrued benefit he earned under the Affiliated Company's plan as of the date such benefit is transferred to this Plan, including early retirement benefits, retirement-type subsidies and optional forms of benefits, all as determined pursuant to Code section 411(d)(6) and regulations thereunder. A Participant in this Plan shall be credited with all Years of Service with the Employer and with any Affiliated Company for purposes of eligibility, vesting and entitlement to benefits, whether or not the Participant had an accrued benefit in another plan that has been transferred to this Plan. (c) Transfers from Upstate Partners. A Participant may elect to transfer his accrued benefit from the Upstate Partners Pension Plan to this Plan in accordance with the terms of the Upstate plan. In this event, the Participant shall be credited for all purposes under this Plan with all service and compensation he has with both the Employer and, to the extent taken into account in determining his accrued benefit, the Upstate Partners. The Participant's Accrued Benefit shall be determined under the terms of this Plan taking into account such aggregate service and compensation provided that in no event shall the Accrued Benefit be less than the aggregate of the accrued benefit transferred from the Upstate Partners Pension Plan plus the Accrued Benefit under the Plan, if any, immediately preceding the transfer of the accrued benefit from the Upstate Partners Pension Plan to this Plan. ARTICLE V - Retirement Income Benefits SECTION 5.1 Normal Retirement. A Participant who retires upon reaching his Normal Retirement Age shall be 100 percent vested in the retirement income benefit calculated pursuant to Section 4.1. This benefit shall commence on the Participant's Normal Retirement Date unless a later date is chosen in accordance with the provisions of Section 6.4 and shall be paid in the form selected pursuant to the provisions of Article VI. SECTION 5.2 Unreduced Early Retirement Benefit. A Participant who reaches age 55 and completes at least 20 Years of Service or who completes at least 30 Years of Service, regardless of his age, may elect early retirement. The amount of his early retirement benefit shall be determined in accordance with Article IV using the Participant's relevant service and Compensation as of his Early Retirement Date. This benefit shall be payable on the Participant's Early Retirement Date without reduction to take account of its being paid prior to Normal Retirement Age. SECTION 5.3 Reduced Early Retirement Benefit. Each Participant who reaches age 50 but not 55 and who has completed at least 25 Years of Service may also elect early retirement. The amount of this benefit shall be determined in accordance with Article IV using the Participant's relevant service and Compensation as of his Early Retirement Date. If the benefit is payable prior to age 55 it shall be reduced by 0.5 percent for each calendar month or part thereof by which his age at termination of employment is less than 55 years. SECTION 5.4 Deferred Retirement. For Plan Years ending before January 1, 1988, any Participant who continues in employment after reaching his Normal Retirement Age shall receive a benefit commencing on the first day of the month following his actual retirement date which shall be equal to the benefit he would have received had he retired at Normal Retirement Age. This benefit shall be computed using the Section 4.1 formula in effect on the Participant's Normal Retirement Age, using the Participant's Compensation and service as of such Normal Retirement Age. No actuarial adjustment shall be made to account for the benefit payments commencing after Normal Retirement Age. A Participant who has at least one Hour of Service in any Plan Year beginning after December 31, 1987, and who retires after reaching his Normal Retirement Age, shall receive a benefit equal to the Section 4.1 formula benefit, using for this purpose the Participant's service and Compensation figures as of his actual retirement date. No actuarial adjustment shall be made to account for the benefit payments commencing after Normal Retirement Age. The actual benefit paid to the Participant shall be in the form selected pursuant to the provisions of Article VI. SECTION 5.5 Disability Benefit. A Participant who suffers a Disability and is eligible to receive benefits under the Employer's Long Term Disability Benefit Plan shall be entitled to receive a benefit beginning upon cessation of benefits under the Long Term Disability Benefit Plan at or after the Participant's Normal Retirement Date. The amount of this benefit shall be equal to the greater of the amount payable under Section 5.1 or the amount calculated pursuant to the benefit formula of Section 4.1 taking into account the following factors: - - Notwithstanding the limitations of Sections 2.23(b) and 2.36, a Year of Service shall be credited to the Participant for each Plan Year during which any benefits are payable to the Participant under the Long Term Disability Benefit Plan but no service credit shall be granted for any Year after the Year in which the Participant reaches age 65. - - Compensation shall be determined on the basis of remuneration paid to the Participant prior to the commencement of benefits under the Long Term Disability Benefit Plan. - - The maximum benefit provided using the foregoing service and compensation assumptions cannot exceed the level of benefits being paid to the Participant under the Long Term Disability Benefit Plan. SECTION 5.6 Deferred Vested Benefit. A Participant who has five or more Years of Service and terminates employment before he is eligible for a normal or an early retirement benefit shall be entitled to receive a deferred vested benefit, provided that for Plan Years ending before January 1, 1989, ten or more Years of Service are required for a deferred vested benefit. The amount of this benefit shall be equal to the Participant's Accrued Benefit as of his termination date. The deferred vested benefit shall be paid commencing on what would have been the Participant's Normal Retirement Date unless it is cashed out earlier in accordance with Section 5.7 or, at the Participant's election, is paid at what would have been the Participant's Early Retirement Date, providing that the Participant has sufficient service and has reached the age or ages prescribed in Sections 5.2 or 5.3, whichever is applicable. If a Participant elects to have his deferred vested benefit paid prior to Normal Retirement Age, the monthly benefit shall be reduced to the Actuarial Equivalent of the benefit which would have been payable at his Normal Retirement Date. SECTION 5.7 Cash out of Accrued Benefit. If a Participant terminates participation in the Plan at a time when the present value of his nonforfeitable Accrued Benefit attributable to Employer contributions is $3,500 or less, the present value of the benefit shall be paid in a lump sum in cash within one year of termination of participation. Unless the Participant makes a repayment of the cashout distribution as provided below, all years of participation to which the cashout relates shall be disregarded in any subsequent determination of his Accrued Benefit under Article IV. If an individual to whom this cashout provision applies later resumes participation in the Plan, he may repay the full amount of the cashout distribution plus interest from the date of distribution to the date of repayment, compounded annually at the rate required under Code section 411(c)(2)(C). If such repayment is made before the Participant has five consecutive one year Breaks in Service beginning after the distribution, the Accrued Benefit previously disregarded shall be restored. No cashout shall be permitted under this Plan if the present value of a Participant's Accrued Benefit exceeds $3500. SECTION 5.8 Normal Retirement Benefit. The amount of the normal retirement benefit provided shall be the greater of what a Participant or Former Participant could have received under the early retirement provisions of the Plan or the benefit commencing at his Normal Retirement Date. SECTION 5.9 Benefits Not Affected by Subsequent Social Security Changes. Any benefits which are being paid to a Participant, Former Participant, Beneficiary or Contingent Annuitant under this Plan and the vested benefit of a Participant or Former Participant who has separated from the service of the Employer shall not be decreased by reason of any post-separation increase in the benefit levels or the wage base under Title II of the Social Security Act effective after the later of September 2, 1974, or the date of first receipt of any benefit provided by this Plan. In the case of a Participant who separates from the service of the Employer with a vested benefit and who returns to employment and participation in the Plan, his vested benefit shall not be decreased by reason of any post-separation increase in Social Security benefit levels or the wage base effective after September 2, 1974, and during separation from service which would decrease the benefits to which he would have been entitled had he not returned to service after his separation. SECTION 5.10 Maximum Benefit. The maximum annual benefit (i.e., the benefit computed under Article IV) payable under this Plan and all other defined benefit plans of the Employer shall be limited to the maximum amounts permitted under Code section 415. In general, section 415 limits a Participant's annual benefit to the lesser of $90,000 or the Participant's average annual compensation during the three consecutive Years of Service as a Participant affording the highest such average, or during all years if less than three. If the Participant has not completed ten years of participation, such maximum annual dollar benefit shall be reduced in the ratio which the number of his years of participation bears to ten; if the Participant has less than 10 years of service with the Employer, the compensation limit shall be reduced by one-tenth for each year of service (or part thereof) less then ten. The maximum dollar limitation applies to a benefit payable at the Social Security retirement age and shall be adjusted in accordance with cost of living increases in the amount determined by the Commissioner of Internal Revenue. For any benefit payment which is to commence after the Social Security retirement age, the maximum dollar limitation shall be the actuarial equivalent of the maximum dollar limitation at the Social Security retirement age. In computing actuarial equivalency, the interest assumption shall be the lesser of five percent or the percent specified in the Plan's definition of Actuarial Equivalent. For any benefit payment which is to commence before the Social Security retirement age, the maximum dollar limitation shall be reduced in accordance with this paragraph. The dollar limitation for a Participant who has reached age 62 but not the Social Security retirement age shall be reduced by 5/9 of 1 percent for each month by which benefits commence before the month in which the Participant attains age 65 (assuming this is the Participant's Social Security retirement age). If the Participant's Social Security retirement age exceeds 65, the dollar limit shall be reduced by 5/9 of one percent for each of the first 36 months and 5/12 of 1 percent for each additional month that the date the Participant's Annuity Starting Date precedes his Social Security retirement age. For persons who retire prior to age 62 pursuant to the early retirement provisions of Sections 5.2 and 5.3 the maximum dollar limitation shall be further reduced for months prior to age 62 on an actuarial basis, using for this purpose an interest assumption of 5 percent and the 1984 George B. Buck Mortality Table assuming a blend of 55 percent male and 45 percent female. The dollar limitation for any other benefits paid prior to age 62 shall be reduced actuarially for months prior to age 62 using the Actuarial Equivalent assumptions set forth in Section 2.2 of this Plan. Notwithstanding the foregoing, if a Participant's annual benefit does not exceed $10,000 and he had not at any time participated in a defined contribution plan maintained by the Employer, he may receive the full amount of such retirement income benefit without regard to the limitations provided in this Section. For purposes of this Section, a Participant's compensation means the total remuneration paid to the Participant by the Employer during the Plan Year for personal services actually rendered, after the application of any salary reduction agreement the Participant may have entered into with the Employer, excluding Employer contributions to this Plan or any other plan of deferred compensation, amounts realized upon the exercise of a stock option or the lifting of restrictions on restricted stock, amounts realized upon a disqualifying disposition of stock acquired pursuant to an ISO or other qualified stock option or other amounts which receive special tax benefits provided in this Section. If the maximum dollar limitation under this Section 5.10 and under section 415 of the Code is increased in accordance with cost of living adjustments pursuant to section 415, all benefits in pay status that are subject to such limitation shall increase to the maximum level permitted taking into account the cost of living adjustment, provided that in no event shall the benefit be increased to more than the benefit level calculated under this Plan without regard to the Code's dollar limitation. SECTION 5.11 Limits for Combined Plans. If a person participates at any time in both a defined benefit plan and a defined contribution plan ever maintained by the Employer or any Affiliated Company, the sum of the defined benefit plan fraction and the defined contribution plan fraction for any Year may not exceed 1.0. For purposes of this Section, the defined contribution plan fraction for any Year is the person's annual additions, as defined in section 415 of the Code, in such Year and all prior Years of Service over the lesser of the following amounts for such Year and for each prior Year: (a) 1.25 times the dollar limitation of Code section 415(c)(1)(A) for the pertinent Year or (b) 1.4 times the amount that could be contributed under the percentage limitation of Code section 415(c)(1)(B) for the individual. The defined benefit plan fraction for any Year is the person's projected annual benefit under all defined benefit plans maintained by the Employer and any Affiliated Company over the lesser of the following amounts for such Year and for each prior Year: (a) 1.25 times the dollar limitation of Code section 415(b)(1)(A) for the pertinent Year or (b) 1.4 times the amount that could be taken into account under the percentage limitation of Code section 415(b)(1)(B) for the individual. In the case of a Participant in the Plan as of the limitation year beginning January 1, 1987, the limitations of this Section 5.11 and of Section 5.10 shall not require a reduction in the Participant's Accrued Benefit earned as of the last limitation year ending December 31, 1986. Excess Accrued Benefits shall be eliminated as of the limitation year commencing January 1, 1987. The Committee shall monitor the contributions and benefits with respect to each Participant under all plans maintained by the Employer and any Affiliated Company. The Committee in its discretion shall reduce any such contributions or benefits to prevent the combined defined benefit plan and defined contribution plan fractions from exceeding 1.0. SECTION 5.12 Suspension of Benefits. Neither an eligible Employee under Section 3.1 who continues working beyond Normal Retirement Age nor an eligible Employee under Section 3.1 who has commenced receiving Plan benefits and is subsequently reemployed by the Employer shall be entitled to receive benefits from this Plan during his period of employment with the Employer. Any such withholding of benefits shall apply only with respect to any month during which the Participant has 40 or more Hours of Service with the Employer or an Affiliated Company which maintains this Plan. The Committee shall notify each Participant to whom this suspension applies by personal delivery or first class mail during the first month in which payments are withheld that the Participant's benefits are suspended. Such notification shall contain a description of the specific reasons why benefit payments are being suspended, a general description and a copy of this Section and a statement that the applicable Department of Labor regulations may be found in section 2530.203-3 of Title 29 of the Code of Federal Regulations. A Participant whose benefits have been suspended in accordance with this Section shall be entitled to have his benefit payments commence or resume, as the case may be, as of the first payment date following the Participant's cessation of employment. The amount of such payment shall be the greater of (1) the benefit the Participant had been entitled to receive immediately prior to the suspension provided for in this Section, or (2) the benefit the Participant would be entitled to receive upon his ultimate cessation of employment taking into account, where required by the applicable benefits provisions, his service and compensation figures during the suspension. No actuarial adjustment shall be made to account for the period of suspension or the fact that benefits commence after Normal Retirement Age except, in the latter case, as may be provided for in the deferred retirement provisions of Section 5.4. SECTION 5.13 Notification to Participants of Benefits and Reductions. Once each Plan Year the Committee shall notify each Participant of the following information concerning his participation in the Plan: (1) his Accrued Benefit under the Plan; (2) the amount of his Accrued Benefit which is vested or, if no benefits have vested, the earliest date on which benefits can become vested; (3) any benefits that are forfeitable if the Participant dies before a certain date; and (4) any reduction in benefits required on account of the limits set forth in Sections 5.10 and 5.11 of the Plan. SECTION 5.14 Subsidized Pre-ERISA Joint and Survivor Annuity. Effective with the first benefit payment payable on or after July 1, 1989, benefits paid in the form of a joint and one-third survivor annuity to pre-ERISA retirees and to surviving annuitants of pre-ERISA retirees shall be paid in the form of a joint and 50 percent survivor annuity. The benefit payable during the joint lives of the retiree and the retiree's spouse shall not be decreased actuarially to reflect the increase from 33 1/3 percent to 50 percent in the benefit payable to the retiree's surviving annuitant. In addition, any actuarial reduction for the survivor option shall not exceed 10 percent of the life annuity amount. The increased benefits payable under this Section shall apply only to future monthly payments. SECTION 5.15 Benefit Supplement for Retirees. Except for a person receiving a deferred vested benefit or a contingent annuitant of such person, each individual receiving a pension benefit or a disability pension benefit prior to January 1, 1990, shall receive an increase in the amount of such benefit according to the following schedule:
Year Benefit Increase in Payment Commenced Benefit Payment - ------------------------------------ prior to 1967 7.0% 1967 - 1981 6.0% 1982 - 1986 5.5% 1987 - 1988 5.0% 1989 2.0%
The increase in benefits shall be effective with the first benefit payment due on or after March 1, 1991, and shall continue for as long as the recipient is entitled to receive Plan benefits. In applying the foregoing schedule for retiree benefits, the amount of the increase shall be based on the year in which benefit payments to the retiree commenced. For persons receiving survivor annuity benefits, the increase shall be based on the year in which the survivor annuity benefits commenced. SECTION 5.16 Enhanced Retirement Option. (a) Eligible Participants. This Section 5.16 provides enhanced benefits for Participants who are employed by the Employer on December 28, 1990, and who, without application of the terms of this Section, have at least 5 Years of Service on this date. Notwithstanding the foregoing, this Section does not cover persons who are on pre-pension leave on December 28, 1990, or executive officers of the Employer. (b) Increase in Accrued Benefit. Each eligible Participant's Accrued Benefit determined as of December 28, 1990 shall be calculated by adding 5 years to the Participant's actual age on such date and by adding 5 Years of Service to the Participant's actual Years of Service on such date. All other factors used in computing a Participant's Accrued Benefit on December 28, 1990 shall be those actually in effect on this date. Any Participant who becomes entitled to receive a benefit from the Plan on and after December 28, 1990, shall receive the higher of his or her Accrued Benefit determined under this Section as of such date or the benefit calculated in the normal fashion under Article IV using relevant factors on the determination date without the addition of the 5 years of age and service provided for in this Section. (c) Increase in Age and Service for Benefit Entitlement Purposes. As of December 28, 1990, each eligible Participant shall have 5 years added to his or her actual age on such date and 5 years to his or her actual Years of Service on such date for purposes of determining eligibility to receive a normal or an early retirement service pension under Sections 5.1, 5.2 or 5.3 of the Plan. In determining whether a Participant has the requisite age or service to retire on and after December 28, 1990, an eligible Participant shall be considered to have the higher of his or her age and service as determined under this provision on December 28, 1990 or his or her actual age and service on the date the determination is made. (d) One-time Supplement. An eligible Participant who voluntarily ceases active employment on December 28, 1990 and is eligible immediately following any vacation and pre-pension leave for either a service or an early retirement service pension under Sections 5.1, 5.2 or 5.3 (including a Participant who becomes eligible for such pension by application of the preceding provisions) shall have his or her monthly pension increased by 10 percent of the amount calculated after application of the preceding provisions. The 10 percent supplement shall be applied to the benefit after any reduction for early retirement under Section 5.3 but prior to any reduction for the Qualified Joint and Survivor Annuity under Section 6.1. Payment of the 10 percent supplement shall commence with the first pension payment on or after December 28, 1990 and continue in effect until the earliest of the following: - - December 31, 1995 - - the day preceding the Participant's 65th birthday - - the day the Participant returns to employment and becomes covered by this Plan - - the Participant's death The annual benefit payment under this subsection (d) shall not exceed the 1990 Social Security maximum benefit. SECTION 5.17 Voluntary Pension Incentive. A 7 1/2 percent supplemental pension benefit shall be paid to Plan Participants who satisfy all of the following criteria: - - on November 30, 1992 the Participant is in the active employ of an Employer, is on pre-pension leave or is on vacation incident to pre-pension leave; - - the Participant is not nor has ever been an executive officer of Frontier Corporation; - - the Participant is entitled to receive either a service or an early retirement service pension under Sections 5.1, 5.2 or 5.3 of the Plan after taking into account any accrued vacation or pre-pension leave to which he is entitled; and - - the Participant voluntarily chooses to retire and commences the retirement process on or before December 31, 1992. The 7 1/2 percent supplement amount shall be determined by multiplying 7 1/2 percent times the benefit amount to which the Participant is entitled after any reduction for early retirement under Section 5.3 but prior to any reduction for the Qualified Joint and Survivor Annuity under Section 6.1. Payment of the supplement shall commence with the first monthly pension payment made after December 31, 1992 and shall continue in effect until the earliest of the following: - - the completion of 60 monthly pension supplement payments; - - the date a Participant is first eligible to receive unreduced old-age insurance benefits under Title II of the Social Security Act; - - the Participant's death. The annual benefit payment under this Section 5.17 shall not exceed a Participant's annual unreduced old-age insurance benefits under Title II of the Social Security Act calculated on the assumption that a Participant has no FICA wages after the date he commences receiving benefits under this Plan. SECTION 5.18 QDRO's. Benefits shall be payable under this Plan to an alternate payee pursuant to the terms of any qualified domestic relations order. The Committee has the responsibility for determining if a domestic relations order is qualified and whether its payment terms are consistent with the terms of the Plan. SECTION 5.19 Enhanced Retirement Option. (a) Eligible Participants. This Section 5.18 provides enhanced benefits for Participants who are in the active employ of the Employer, on January 3, 1994, including Participants on vacation, and who, without application of the terms of this Section, have at least 5 Years of Service on this date. Notwithstanding the foregoing, this Section does not cover persons who on January 3, 1994 are on pre-pension leave or who are executive officers of the Employer. (b) Increase in Accrued Benefit. Each eligible Participant's Accrued Benefit determined as of January 3, 1994 shall be calculated by adding 5 years to the Participant's actual age on such date and by adding 5 Years of Service to the Participant's actual Years of Service on such date. Notwithstanding the above, an eligible Participant whose last day of work is on or before March 31, 1994 shall have the additional 5 Years of Service added to his actual Years of Service determined as of his or her retirement date. All other factors used in computing a Participant's Accrued Benefit on January 3, 1994 shall be those actually in effect on this date. Any Participant who becomes entitled to receive a benefit from the Plan on and after January 3, 1994, shall receive the higher of his or her Accrued Benefit determined under this Section as of such date or the benefit calculated under other applicable Plan provisions using relevant factors on the determination date without the addition of the 5 years of age and service provided for in this Section. (c) Increase in Age and Service for Benefit Entitlement Purposes. As of January 3, 1994, each eligible Participant shall have 5 years added to his or her actual age on such date and 5 years to his or her actual Years of Service on such date for purposes of determining eligibility to receive a normal or an early retirement service pension under Sections 5.1, 5.2 or 5.3 of the Plan. In determining whether a Participant has the requisite age or service to retire on and after January 3, 1994, an eligible Participant shall be considered to have the higher of his or her age and service as determined under this provision on January 3, 1994 or his or her actual age and service on the date the determination is made. (d) Impact on Vesting. Service credit granted under this Section 5.19 shall not be taken into account for determining the portion of a Participant's benefit that is vested. ARTICLE VI - Form of Benefit Payments SECTION 6.1 Normal Form of Payment. The normal form of payment of retirement income benefits shall be monthly installments determined as follows: (a) Unmarried Participant. If the Participant is not married when he becomes eligible to receive any benefits under this Plan, his retirement income benefit shall be payable in the form of a straight life annuity. Under such annuity, retirement income payments will be made monthly during the Participant's lifetime with no further payments on his behalf after his death. (b) Married Participant. If the Participant is married when he becomes eligible to receive any benefits under this Plan, the normal form of benefit shall be a Qualified Joint and Survivor Annuity. The amount of benefit payable in this form shall be the Actuarial Equivalent of the benefit determined under Article IV. (c) Election of Optional Method of Payment. In accordance with the terms of this subsection, a Participant may elect not to receive his benefit in the normal form of payment and elect instead one of the optional forms of benefits set forth in Section 6.2. The Committee shall provide each Participant, not less than nine months before his Early Retirement Date, a retirement application form describing the normal and optional forms of benefit payments, including their relative financial effects in terms of dollars per annuity payment on the Participant. The form shall indicate the Participant's right to waive a survivor annuity and his spouse's right to consent to such waiver or refuse such consent. This form shall provide a place for the Participant to indicate his Annuity Starting Date, the election of the normal or an optional method of payment and his Beneficiary or Contingent Annuitant, whichever is applicable. The completed form shall be signed by the Participant and bear the written consent of his spouse. The spouse's consent shall acknowledge the effect of the election and the form shall either be notarized or be witnessed by a Plan representative and must be returned to the Committee within the Election Period. Failure to obtain the spouse's consent or to designate an optional form of payment or the revocation of a previously designated optional method shall result in the Participant's receiving his benefits in the normal form of payment unless another election is made within the Election Period. In the event of the death of a Participant before his Early or Normal Retirement Date, no optional benefit shall be paid. SECTION 6.2 Optional Forms of Benefits. The optional benefits, all of Actuarial Equivalent value, which a Participant may elect pursuant to Section 6.1(c) are as follows: OPTION A: In the case of a married Participant, a straight life annuity. OPTION B: A reduced benefit payable during the Participant's life equal to 90 percent of the benefit to which he would otherwise be entitled with the provision that after his death an income at one-half the rate of his reduced benefit payable to his designated parent as Contingent Annuitant during the parent's life. If the parent predeceases the Participant, the benefits thereafter payable to the Participant shall revert to the unreduced amount to which he would have otherwise been entitled. SECTION 6.3 Facility of Payment. If the Committee shall find that any person to whom a benefit is payable from the Plan is unable to care for his affairs, any payment due (unless a prior claim therefor shall have been made by a duly appointed guardian, committee or legal representative) may be paid to the spouse, child, parent or to any person deemed by the Committee to have incurred expense for such person otherwise entitled to payment. Any such payment shall discharge the liability of the Plan therefor. SECTION 6.4 Time of Benefit Payments. In the event benefits become payable to a Participant or, in the event of his death, become payable to his Beneficiary, the Committee shall consult with the Participant or his Beneficiary, as the case may be, concerning the manner and the timing of benefit payments. Based on such consultation and any other pertinent factors, the Committee in its sole discretion shall direct the Trustee in writing concerning the manner and timing of benefits to the recipient. In any event, all distributions required under this Section shall be determined and made in accordance with the Income Tax Regulations under Code section 401(a)(9), including the minimum distribution incidental benefit requirement of section 1.401(a)(9)-2 of the regulations, which regulations are summarized generally in the following paragraphs. Unless the Committee in its discretion determines otherwise, payments shall begin no later than the April 1 following the calendar year during which the Participant dies, suffers a Disability or reaches his Normal, Early or Deferred Retirement Date, as the case may be, and has terminated employment with the Employer or an Affiliated Company. Notwithstanding the above, benefit payments must commence no later than the April 1 following the calendar year in which a Participant attains age 70 1/2 even if he continues in employment with the Employer. In no event shall payments begin later than sixty days after the close of the Plan Year in which the latest of the following occurs: (1) the Participant's attainment of age 65; (2) the termination of the Participant's service with the Employer; (3) the 10th anniversary of the Participant's commencement of participation in this Plan; or (4) for a Participant who commences participation in the Plan after age 60, the fifth anniversary of the Participant's commencement of participation in this Plan; or (5) the date specified in writing to the Committee by the Participant (but not later than the year in which the Participant attains age 70 1/2). Notwithstanding any direction by the Participant to the contrary, all payments must be payable pursuant to a schedule whereby the Participant's entire interest in the Plan is paid over a period that does not extend beyond the life of the Participant or over the lives of the Participant and any individual he has designated as his Beneficiary (or over the life expectancies of the Participant and his designated individual Beneficiary). In addition, unless the benefit is payable as a Qualified Joint and Survivor Annuity with the Participant's spouse as the contingent annuitant, the payment method selected must provide that more than 50 percent of the present value of the payments projected to be paid to the Participant and his Beneficiary will be paid to the Participant during his life expectancy. In the event of the death of a Participant, Former Participant or Beneficiary while benefits are being paid under a schedule which meets the requirements of the preceding paragraph payments shall continue over a schedule at least as rapid as the period selected. In the event of the death of a Participant or Former Participant before benefit payments have commenced, any death benefit shall be distributed within five years of death unless the following conditions are met: (a) payments are made to an individual Beneficiary designated by the Participant; (b) payments are made for the life of such individual Beneficiary or over a period not extending beyond his life expectancy; and (c) payments commence within one year of death. If the designated Beneficiary is the Participant's spouse, payments may be delayed until the date the Participant would have attained age 70 1/2. If the spouse dies before payments begin, the rules of this paragraph shall be applied as if the spouse were the Participant. SECTION 6.5 Small Benefits. In the case of a Participant whose vested percentage is 100 percent and whose monthly installments of retirement income would be less than $10, the Committee may adopt alternate payment procedures in lieu of making monthly installments, provided that a benefit of actuarially equivalent value is paid. In the case of a Participant whose vested percentage is less than 100 percent, and whose monthly installment of retirement income would be less than $10, the Committee may adopt alternate payment procedures consistent with the cash out rules of Section 5.7. SECTION 6.6 Rollovers from Plan. This Section applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Participant's election under this Section, a Participant may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the Participant in a direct rollover. An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the Participant except that an eligible rollover distribution does not include any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually made for the life (or life expectancy) of the Participant or the joint lives (or joint life expectancies) of the Participant and the Participant's designated Beneficiary, or for a specified period of ten years or more, any distribution to the extent such distribution is required under section 401(a)(9) of the Code: and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Employer securities). An eligible retirement plan is an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code, or a qualified trust described in section 401(a) of the Code, that accepts the Participant's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. A Participant includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in section 414(p) of the Code, are Participants with regard to the interest of the spouse or former spouse. A direct rollover is a payment by the Plan to the eligible retirement plan specified by the Participant. ARTICLE VII - Death Benefits SECTION 7.1 Intent of Plan. This Plan is designed primarily to provide retirement income. There are, however, the circumstances set forth in the following Sections under which death benefits are payable from this Plan. SECTION 7.2 Contingent Annuity. Upon the death of a Participant who was receiving his benefit in the form of a contingent annuity, his Contingent Annuitant shall receive the payments designated for the Contingent Annuitant. SECTION 7.3 Pre-Retirement Spouse's Benefit. Upon the death of a married Participant before retirement but after becoming vested in any part of his Accrued Benefit, his surviving spouse shall be entitled to receive a Qualified Pre-Retirement Survivor Annuity. In the case of a Participant who had attained his Early Retirement Date on or before his date of death, this benefit shall commence on the first day of the month next following the date of death. In other cases the benefit shall commence on the first day of the month following what would have been the Participant's Early Retirement Date. At any time during his Election Period, a Participant shall have the right to waive the Qualified Pre-Retirement Survivor Annuity and select, if otherwise available under the terms of this Plan, an alternative form of benefit. Any such waiver shall be in writing, shall contain the written consent of the Participant's spouse and shall be either notarized or witnessed by a Plan representative. This election, once made, may be revoked at any time during the Election Period. To assist the Participant in making the election, the Committee shall provide the Participant a notice substantially similar to the notice specified in Section 6.1(c). This notice may be supplied at any time within the period beginning on the first day of the Plan Year in which the Participant attains age 32 and ending on the last day of the Plan Year preceding the Plan Year in which the Participant attains age 35. SECTION 7.4 Sickness and Pensioner Death Benefits. Upon the death of any Employee or any pensioner who is receiving normal, early, deferred or disability pension benefits in accordance with the provisions of Sections 5.1, 5.2, 5.3, 5.4 or 5.5, which death is caused by sickness or injury except an injury arising in the course of employment with the Employer, a death benefit will be paid to: (a) the spouse of the deceased Employee or pensioner if the spouse is legally married to him at the time of his death; or (b) the unmarried child or children under the age of 23 years (or over that age if physically or mentally incapable of self-support) of the deceased Employee or pensioner who was actually supported in whole or in part by the deceased Employee or pensioner at the time of his death; or (c) a dependent parent who lives in the same household with the Employee or pensioner or who lives in a separate household in the vicinity which is provided for the parent by the Employee or pensioner; or (d) a trust for the benefit of any of the above beneficiaries. If none of the enumerated beneficiaries survives the Employee or pensioner, no death benefit will be paid under this Plan. If two or more of the enumerated beneficiaries survive the Employee or pensioner, the Committee, in its sole discretion, may pay the death benefit to one of the beneficiaries or allocate it among the beneficiaries in such portions as it may determine. The amount of the death benefit shall equal 12 months' wages computed at the Employee's or pensioner's most recent rate of pay at the date of death or at retirement, as the case may be. If the Employee or pensioner was not employed full time, the death benefit shall be prorated in accordance with the ratio that the individual's usual Hours of Service during a Plan Year bear to the Hours of Service of full time employees during a Plan Year. For purposes of this section, the term rate of pay means the total of the following amounts: (1) the Employee's annualized base rate of pay at death, (2) all bonuses paid to the Employee in the calendar year preceding his death and (3) all commissions paid to the Employee in the calendar year preceding his death. The term rate of pay shall not include overtime, tier payments or any other form of special or nonrecurring compensation except for bonuses and commissions included under the preceding sentence. The term rate of pay shall not include overtime or any other form of special or nonrecurring compensation except for bonuses and commissions included under the preceding sentence, or any amounts in excess of $150,000 (as adjusted for cost of living increases) paid to an Employee during any Plan Year. An Employee or pensioner may file with the Committee a written direction that the death benefit will be paid to his Beneficiary in equal monthly installments over any period of years up to ten. In the absence of such written direction, the Committee in its sole discretion may pay the death benefit in a lump sum or in installment payments, the number and size of which may be varied by the Committee as circumstances may indicate. All benefits under this Section are to be paid from the Second Pension Fund established for this purpose. ARTICLE VIII - Employer Contributions SECTION 8.1 Employer Contributions. The Employer shall contribute such amounts as it determines to be required for the purpose of meeting the costs of the Plan. The contributions will be determined by annual actuarial valuations on the basis of such actuarial methods and assumptions as are adopted by the Committee after consultation with an Actuary. The Employer shall comply with the applicable minimum funding standards provided in section 412 of the Code. SECTION 8.2 Employee Contributions. Employee contributions are neither required nor permitted under this Plan. SECTION 8.3 Diversion from Employees' Benefit Prohibited. All contributions by the Employer are for the exclusive benefit of Participants and any other person entitled to benefits under the Plan. Prior to the satisfaction of all liabilities with respect to such Participants and other persons, no amounts arising from the Employer's contributions will revert to the Employer. SECTION 8.4 Return of Erroneous Contributions. Notwithstanding Section 8.3, upon the Committee's request any contribution which was made by a mistake of fact or which is disallowed as a deduction under the Code, or which is made for a Year in which in the Plan is held not to be initially qualified under the Code, shall be returned to the Employer within one year after the payment of the contribution, the disallowance of the deduction (to the extent disallowed) or the denial of the initial qualification, whichever is applicable. All contributions to this Plan are made contingent upon their being deductible under the Code. SECTION 8.5 Funding Policy. The Committee shall from time to time communicate the liquidity and other needs of the Plan to the Trustee. ARTICLE IX - Trust Fund All contributions under this Plan shall be paid to the Trustee and deposited in the Trust Fund. The assets in the Trust Fund, including investment income, shall be held and invested by the Trustee or, if one has been appointed, by an Investment Manager in accordance with the terms of the trust agreement or investment manager agreement as the case may be. Benefits payable under this Plan shall be provided from the Trust Fund as the circumstances require. All assets of the Trust Fund, including investment income, shall be retained for the exclusive benefit of Participants, Former Participants, Contingent Annuitants and Beneficiaries and shall be used to pay benefits to such persons or to pay administrative expenses of the Plan and Trust Fund to the extent not paid by the Employer and shall not revert to or inure to the benefit of the Employer. ARTICLE X - Employees' Benefit Committee and Other Fiduciaries SECTION 10.1 Appointment of Committee. The Board shall appoint an Employees' Benefit Committee to administer the Plan. Any person, including an employee of the Employer or an Affiliated Company, is eligible for appointment as a member of the Committee. Such members shall serve at the pleasure of the Board. Any member may resign by delivering his written resignation to the Board. Vacancies in the Committee arising by resignation, death, removal or otherwise, shall be filled by the Board. SECTION 10.2 Named Fiduciary and Plan Administrator. The Committee shall be the named fiduciary and plan administrator as these terms are used in ERISA. The Committee shall appoint a secretary to assist it in administering this Plan. The secretary shall also be the agent for the service of legal process. The Committee may appoint other assistants as may be required to administer this Plan, including one or more departmental or Affiliated Company committees which shall have such authority as may be delegated by the Committee. SECTION 10.3 Powers and Duties of Committee. The Committee shall administer the Plan in accordance with its terms and shall have all powers necessary to carry out the provisions of the Plan, except such powers as are specifically reserved to the Board or some other person. The Committee's powers include the power to make and publish such rules and regulations as it may deem necessary to carry out the provisions of the Plan. The Committee shall interpret the Plan and shall determine all questions arising in the administration, interpretation, and application of the Plan. Any such determination by the Committee shall be conclusive and binding on all persons. SECTION 10.4 Operation of Committee. The Committee shall act by a majority of its members at the time in office, and such action may be taken either by a vote at a meeting or without a meeting. Any action taken without a meeting shall be reflected in a written instrument signed by a majority of the members of the Committee. A member of the Committee who is also a Participant shall not vote on any question relating specifically to himself. Any such question shall be decided by the majority of the remaining members of the Committee. The Committee may authorize any one or more of its members to execute any document or documents on behalf of the Committee, in which event the Committee shall notify the Trustee and the Investment Manager in writing of such action and the name or names of its member or members so designated. The Trustee and the Investment Manager thereafter shall accept and rely upon any document executed by such member or members as representing action by the Committee until the Committee shall file with the Trustee and the Investment Manager a written revocation of such designation. The Committee may adopt such by-laws or regulations as it deems desirable for the conduct of its affairs. The Committee shall keep a record of all its proceedings and acts and shall keep all such books of account, records, and other data as may be necessary for the proper administration of the Plan. SECTION 10.5 Power to Appoint Advisors. The Committee may appoint such Actuaries, accountants, attorneys, specialists, and other persons as it deems necessary or desirable in connection with the administration of this Plan. Such accountants and attorneys may, but need not, be accountants and attorneys for the Employer. The Committee shall be entitled to rely upon any opinions or reports which shall be furnished to it by any such Actuary, accountant, attorney or other specialist. SECTION 10.6 Expenses of Committee. The members of the Committee shall serve without compensation for services as such, but all reasonable expenses of the Committee shall be paid by the Employer. Such expenses shall include any expenses incident to the functioning of the Committee, including, but not limited to, fees of Actuaries, accountants, attorneys, and other specialists, and other costs of administering the Plan. SECTION 10.7 Duties of Fiduciaries. All fiduciaries under the Plan and Trust shall act solely in the interests of the Participants and their Beneficiaries and in accordance with the terms and provisions of the Plan and Trust insofar as such documents are consistent with ERISA, and with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims. Any person may serve in more than one fiduciary capacity with respect to the Plan and Trust. SECTION 10.8 Liability of Members. No member of the Committee shall incur any liability for any action or failure to act, excepting only liability for his own breach of fiduciary duty. To the extent not covered by insurance, the Employer shall indemnify each member of the Committee and any employee acting on its behalf against any and all claims, loss, damages, expense, and liability arising from any action or failure to act under this Plan. SECTION 10.9 Allocation of Responsibility. The Board, Trustee, Investment Manager and the committees established to administer the Plan possess certain specified powers, duties, responsibilities and obligations under the Plan and Trust. It is intended under this Plan that each be solely responsible for the proper exercise of its own functions and that each shall not be responsible for any act or failure to act of another, unless otherwise responsible as a breach of its own fiduciary duty. a. Generally, the Board shall be responsible for appointing the members of the committees it may establish to administer this Plan. If this Plan shall at any time permit employees to invest any portion of Plan assets in Employer securities, the Board shall have sole authority to terminate this Plan and to make any discretionary amendments, while any Board-appointed committee given such authority shall be responsible for making mandatory, non-discretionary amendments and for recommending to the Board any other Plan amendments it deems appropriate. b. The Board-appointed committees so authorized shall have the responsibilities of making Plan amendments not specifically reserved to the Board in the preceding subsection, including sole discretion to amend the Plan if employees are not authorized to invest Plan assets in Employer securities, to select Investment Managers, to direct the Trustee and the Investment Managers with respect to all matters relating to the investment of Plan assets, to review and report to the Board on the investment policy and performance of Plan assets and generally to administer the Plan according to its terms. c. The Trustee or the Investment Manager, as the case may be, is responsible for the management and control of the Plan's assets as specifically provided in the trust agreement or investment manager agreement. d. The Board may dissolve any committee it appoints or reserve to itself any of its powers previously delegated to a Board-appointed committee. In addition, the Board may reorganize the committees it establishes from time to time and reallocate their responsibilities between them or assign them to other persons or committees provided that the Employees' Benefit Committee shall at all times continue as plan administrator and named fiduciary as these terms are defined in ERISA unless the Board formally amends the Plan to reallocate these responsibilities. The Board and the various committees may designate persons, including committees, other than named fiduciaries to carry out their responsibilities (other than trustee responsibilities) under the Plan. SECTION 10.10 Claims Review Procedures. The Committee shall maintain a procedure under which any Participant or Beneficiary (hereinafter called "claimant") whose claim for benefits under the Plan has been denied will receive written notice which clearly sets forth the specific reason or reasons for such denial, the specific Plan provision or provisions on which the denial is based, any additional information necessary for the claimant to perfect the claim, if possible, an explanation of why such additional information is needed, and an explanation of the Plan's claims review procedure. Said procedure should allow a claimant at least 60 days after receipt of the written notice of denial to request a review of such denied claim, and the Committee shall make its decision based on such review within 60 days (120 days if special circumstances require more time) of its receipt of the request for review. The decision on review shall be in writing and shall clearly describe the reasons for the Committee's decision. ARTICLE XI - Amendments Any amendment may be made to this Plan which does not cause any part of the Plan's assets to be used for, or diverted to, any purpose other than the exclusive benefit of Participants, Former Participants, Contingent Annuitants or Beneficiaries, provided however, that any amendment may be made, with or without retroactive effect, if such amendment is necessary or desirable to comply with applicable law. Except in the case where approved by the Secretary of Labor because of substantial business hardship, as provided in section 412(c)(8) of the Code, no amendment shall be made to the Plan if it would decrease the Accrued Benefit of any Participant, eliminate or reduce an early retirement benefit or a retirement-type subsidy or eliminate an optional form of benefit as may be provided in regulations under Code section 411(d)(6). ARTICLE XII - Successor Employer and Merger or Consolidation of Plans SECTION 12.1 Successor Employer. In the event of the dissolution, merger, consolidation or reorganization of the Employer, provision may be made by which the Plan and Trust will be continued by the successor, and, in that event, such successor shall be substituted for the Employer under the Plan. The substitution of the successor shall constitute an assumption of Plan liabilities by the successor and the successor shall have all of the powers, duties and responsibilities of the Employer under the Plan. SECTION 12.2 Plan Assets. In the event of any merger or consolidation of the Plan with, or transfer in whole or part, of the assets and liabilities of the Trust after September 2, 1974, to another trust held under any other plan of deferred compensation maintained or to be established for the benefit of all or some of the Participants of this Plan, the assets of the Plan applicable to such Participants shall be transferred to the other trust only if: (a) each Participant would (if either this Plan or the other plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (if this Plan had then terminated); (b) resolutions of the Boards of Directors of the Employer under this Plan, and of any new or successor employer of the affected Participants, shall authorize such transfer of assets; and, in the case of the new or successor employer of the affected Participants, its resolutions shall include an assumption of liabilities with respect to such Participants' inclusion in the new employer's plan; and (c) such other plan and trust are qualified under sections 401(a) and 501(a) of the Code. ARTICLE XIII - Plan Termination SECTION 13.1 Right to Terminate. In accordance with the procedures set forth in this Article, and consistent with the provisions of title IV of ERISA, the Board may terminate this Plan at any time. In the event the Plan is terminated or partially terminated, whether by formal action or in actual operation, the funded Accrued Benefits of all affected Participants shall become fully vested. SECTION 13.2 Partial Termination. Upon termination of the Plan with respect to a group of Participants which constitutes a partial termination of the Plan, the Accrued Benefits of all affected Participants shall become fully vested. The Trustee shall, in accordance with the directions of the Committee, allocate and segregate for the benefit of the Participants or Former Participants with respect to which the Plan is being terminated the proportionate interest of such Participants in the Trust Fund. SECTION 13.3 Allocation of the Plan's Assets. If the Plan is to be of the terminated, by written notice or in Plan's Assets actual operation, it shall first be amended to provide for the allocation of the Plan's assets in accordance with the priorities established by section 4044 of ERISA and regulations thereunder. Any excess assets remaining after all liabilities of the Plan to Participants and their Beneficiaries have been satisfied shall be distributed to the Employer. In the event that Plan liabilities exceed Plan assets, the Employer's liability shall be limited to paying only such additional amounts which when added to existing Plan assets may be required to pay benefits which are guaranteed by the Pension Benefit Guaranty Corporation under Section 4022 of ERISA. SECTION 13.4 Nondiscrimination Payment of Benefits. In the event of plan termination, the benefits paid from this Plan in to any current or former Highly Compensated Employee shall be limited as necessary to satisfy the nondiscrimination requirements of Code section 401(a)(4). SECTION 13.5 Benefit Limits for Restricted Employees. (a) Subject to subsection (b), benefit payments to a "restricted employee" shall not exceed the periodic amounts payable under a single life annuity that is actuarially equivalent to the employee's entire Plan benefit. This limit shall not apply if either of the following is true: (1) Immediately after a payment of a benefit to the restricted employee Plan assets equal at least 110 percent of the Plan's current liabilities. (2) The value of the benefit paid is less than one percent of the Plan's current liabilities. For this purpose, "benefits" means all accrued and other Plan benefits; "benefits paid" includes regular payments, and death and disability payments; and "restricted employee" means one of the highest-paid 25 of the current and former Highly Compensated Employees with benefits under the Plan. (b) Benefits may be paid to a restricted employee in a lump sum or in faster installments than permitted under subsection (a) if the following conditions are met: (1) Before receiving any payments the restricted employee agrees in writing to repay the actuarial value of the amounts by which the payments exceed the amounts otherwise allowed under subsection (a) if the Plan is terminated at a time when neither of the tests (1) and (2) in subsection (a) are met. (2) The employee guarantees repayment under (1) by fulfilling the following conditions: (i) Providing security acceptable to the Committee equal to 125 percent of the amount that would have to be repaid if the Plan terminated on the date of distribution. (ii) Agreeing to keep the security arrangement in effect and to provide additional security from time to time as may be needed to restore the security to the 125 percent level if the market value of the security ever becomes less than 110 percent of the repayable amount. ARTICLE XIV - Top-Heavy Provisions SECTION 14.1 Rules to Apply if Plan Top-Heavy. Notwithstanding any other relevant provision of this Plan to the contrary, the following rules will apply for any Plan Year that the Plan becomes "top-heavy" (as defined in Section 14.2): (a) Vesting. Except to the extent they are more favorable to Participants at any point in time, the Plan's normal vesting provisions shall be disregarded and in their place an employee will become vested at the rate of 20 percent after two Years of Service and 20 percent each year thereafter until 100 percent vesting is achieved after six Years of Service. (b) Minimum Benefit and Accrual. For each Year the Plan is deemed "top-heavy" each participant who is a non-key employee shall have a minimum formula benefit and Accrued Benefit equal to the lesser of: (i) 20 percent of such non-key employee's average compensation; or (ii) 2 percent of his average compensation times his Years of Service. Such benefit shall be in the form of a life annuity. For the purposes of making this computation, the term "average compensation" means the average of the five consecutive Plan Years during which such Participant has the greatest aggregate compensation from the Employer. Compensation means the compensation of the Participant from the Employer for the year. The minimum benefit shall be payable regardless of a non-key employee's level of compensation or whether he is employed on a specified date, such as the last day of the Plan Year. (c) Limitation on Benefits. In applying the dollar limitations under Section 415(e) of the Code, the 1.25 limitation shall be supplanted by a 1.0 limitation for each year during which the Plan is top-heavy. (d) Maximum Compensation. The maximum annual compensation of each employee that may be taken into account under the Plan shall not exceed $150,000 (or such larger amount based on cost of living adjustments as may be permitted under the Code). SECTION 14.2 Top-Heavy Definition. For purposes of this Section, the Plan will be considered "top-heavy" if on any given determination date (the last day of preceding Plan Year or, in the case of the Plan's first year, the last day of such Year) the sum of the present value of the total accrued benefits for key employees is more than 60 percent of the present value of the total accrued benefits of all employees. The present value of accrued benefits shall be determined on the annual valuation date (the date used for computing plan costs for minimum funding purposes) that falls within the 12-month period ending on the determination date. The present value shall include distributions made during any given Plan Year containing the determination date and the preceding four Plan Years but shall not include the present value of the benefits for any person who has not received any compensation from the Employer at any time during the five-year period ending on the determination date. The method of determining the top-heavy ratio shall be made in accordance with Code section 416. In making the top-heavy calculation, (a) all the Employer's plans in which a key employee participates shall be aggregated with all other Employer plans which enable a plan in which a key employee participates to satisfy the Code's non-discrimination requirements; and (b) all Employer plans not included in subparagraph (a), above, may be aggregated with the Employer's plans included in subparagraph (a), above, if all of the aggregated plans would be comparable and satisfy the Code's non-discrimination requirements. SECTION 14.3 Key Employee Definition. A key employee is any employee or former employee who at any time during the Plan Year or the four preceding Plan Years is such within the meaning of Code section 416. As of the effective date, the term key employee includes the following individuals: (a) an officer (but not more than 50 persons or, if lesser, the greater of 3 or 10 percent of employees) having an annual compensation greater than 50 percent of the dollar limit for benefits payable from a defined benefit plan under Code section 415(b)(1)(A); (b) one of 10 employees owning the largest interests of the Employer (and having an annual compensation from the Employer which is at least equal to the dollar limitation for contributions to defined contribution plans as specified in Code section 415(c)(1)(A)); (c) a five-percent owner of the Employer; and (d) a one-percent owner of the Employer whose annual compensation from the Employer exceeds $150,000. SECTION 14.4 Relationship of the Normal and the Top-Heavy Vesting Schedules. If the Plan's top-heavy status changes and this change alters the Plan's normal vesting schedule, no Participant's vested accrued benefit immediately prior to such change in status shall be diminished on account of the change in the vesting schedule. In addition, the vesting for each Participant in the Plan at the time of the change in status shall be determined under whichever schedule provides the greatest vested benefit at any particular point in time. SECTION 14.5 Participation in Other Plans. A non-key employee who participates in both a defined contribution plan and a defined benefit plan of the Company shall not be entitled to receive minimum benefits and/or minimum contributions under all such plans. Instead, the employee shall receive the minimum benefit as set forth in Section 15.1(b). ARTICLE XV - Miscellaneous SECTION 15.1 Nonguarantee of Employment. Nothing contained in this Plan shall be construed as a contract of employment between the Employer and any Employee, or as a right of any Employee to be continued in the employment of the Employer, or as a limitation on the right of the Employer to discharge any of its Employees, with or without cause. SECTION 15.2 Right to Former Plan Assets. No Participant, Former Participant, Contingent Annuitant or Beneficiary shall have any right to, or interest in, any assets of the Plan upon termination of employment or otherwise, except as provided from time to time under this Plan, and then only to the extent of the benefits payable under the Plan to such Participant, Former Participant, Contingent Annuitant or Beneficiary out of the assets of the Plan. All payments of benefits provided for in this Plan shall be made solely out of the assets of the Plan. SECTION 15.3 Nonalienation of Benefits. Benefits payable under this Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, including any such liability which arises from the Participant's bankruptcy prior to actually being received by the person entitled to the benefit under the terms of the Plan. Any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any right to benefits payable hereunder, shall be void. The Plan shall not in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements or torts of any person entitled to benefits hereunder. Notwithstanding the foregoing, Plan benefits may be paid pursuant to a qualified domestic relations order as defined in Code section 414(p) pursuant to procedures adopted by the Committee. In addition, a Participant, Beneficiary or Contingent Annuitant whose benefits are in pay status may make a voluntary, revocable assignment or alienation of future benefit payments not to exceed, when all such amounts are aggregated, 10 percent of each benefit payment. No part of any such voluntary assignment or alienation may be used for defraying plan administrative costs. All requests for benefit assignments shall be in writing to the Committee on a form approved by it and pursuant to such rules as the Committee may prescribe. SECTION 15.4 Adoption by Affiliated Company. This Plan may, with the approval of the Board, be adopted by any Affiliated Company. Any such adoption must be authorized by the adopting company's board of directors and shall be evidenced by the execution of an adoption agreement which signifies the class of eligible employees, the extent to which Years of Service prior to the date of adoption shall be used to determine benefit levels, and any other relevant terms. Except to the extent otherwise required by law, each adopting company shall be responsible for making contributions, paying administrative expenses and incurring similar obligations only with respect to its own employees who are covered by this Plan. SECTION 15.5 Governing Law. To the extent not preempted by federal law, this Plan shall be interpreted and enforced in accordance with the laws of New York. IN WITNESS WHEREOF, the Employer has caused its duly authorized officer to execute this Plan document on its behalf this 26th day of May, 1995. FRONTIER CORPORATION By: /s/ Josephine S. Trubek ------------------------------------ Josephine S. Trubek, Corporate Secretary EX-10.21 9 EXECUTIVE BONUS PLAN EXHIBIT 10.21 Description of 1995 Executive Bonus Plan 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 the bonus plan for those involved in line operations below the executive officer level. All participants are subject to a discretionary adjustment, either positive or negative, based on individual performance. The specified qualitative and quantitative criteria employed by the Committee on Management ("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 1995 was an equally weighted earnings per share and cash flow target established by this Committee of the Board of Directors as an incentive to improve the financial performance of the firm and thus improve long-term stock performance. Performance objectives and associated payouts were established at the beginning of the year and were subsequently modified in September to reflect the financial structure and objectives of the Company following the completion of the Company's acquisition of ALC Communications Corporation and other significant acquisition and merger activity. The objectives are identified as threshold, standard and premier targets with standard performance yielding payouts at the median level competitively. No award will be paid unless threshold performance is achieved for both components. For 1995, both earnings per share and cash flow results were between the standard and premier levels. All the Company's senior executives are eligible to 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 targets, a mechanical application of the formula (which for Mr. Bittner was 105.0%, times his actual salary) and an additional discretionary adjustment based on his individual performance. EX-10.22 10 DIRECTOR'S STOCK INCENTIVE PLAN EXHIBIT 10.22 [2/14/95] FRONTIER CORPORATION DIRECTORS STOCK INCENTIVE PLAN The Rochester Telephone Corporation Directors Stock Option Plan is hereby amended, restated and renamed as the Frontier Corporation Directors Stock Incentive Plan (the "Plan") to reflect the company's reorganization and the change in the parent company's name to Frontier Corporation (the "Company"), to authorize the award of stock grants in addition to stock options and to expand eligibility to outside directors of the Company's subsidiaries as follows: 1. PURPOSE The purpose of the Plan is to enable the Company and its subsidiaries to attract and retain outside directors and provide them with an incentive to maintain and enhance the Company's long-term performance record. It is intended that this purpose will best be achieved by granting eligible directors non-qualified stock options ("options") and/or stock grants (collectively options and stock grants are referred to as "awards") under this Plan pursuant to the rules set forth in Section 83 of the Internal Revenue Code, as amended from time to time. 2. ADMINISTRATION The Plan shall be administered by the Company's Board of Directors (the "Board"). Subject to the provisions of the Plan, the Board shall possess the authority, in its discretion, (a) to prescribe the form of the stock option and stock grant agreements including any appropriate terms and conditions applicable to these awards and to make any amendments to such agreements or awards; (b) to interpret the Plan; (c) to make and amend rules and regulations relating to the Plan; and (d) to make all other determinations necessary or advisable for the administration of the Plan. The Board's determinations shall be conclusive and binding. No member of the Board shall be liable for any action taken or decision made in good faith relating to the Plan or any award granted hereunder. 3. ELIGIBLE DIRECTORS Members of the Board of Directors of the Company and its subsidiaries who are not also employees of the Company or its subsidiaries are eligible to participate in this Plan. Eligible directors of the Company's Board are entitled to receive both options and stock grants. Eligible directors of a subsidiary are entitled to receive only options. Beneficial owners of more than five percent of the Common Stock of the Company are not eligible to receive any awards under this Plan. 4. SHARES AVAILABLE An aggregate of 1,000,000 shares of the Common Stock (par value $1.00 per share) of the Company (subject to substitution or adjustment as provided in Section 9 hereof) shall be available for the grant of awards under the Plan. Such shares may be authorized and unissued shares. If an option expires, terminates or is cancelled without being exercised, new options may thereafter be granted covering such shares. No award may be granted more than ten years after the effective date of the Plan. 5. TERMS AND CONDITIONS OF OPTIONS Each option granted under the Plan shall be evidenced by an option agreement in such form as the Board shall approve from time to time, which agreement shall conform with this Plan and contain the following terms and conditions: (a) Number of Shares. At the date each year when new members are elected to the Company's Board, each eligible director who will be serving on the new Board (whether newly elected or continuing as a carryover director) shall receive an option to purchase 4000 shares of the Company's Common Stock. For an eligible director of a subsidiary's Board, the option shall be for 3000 shares. An eligible director who begins Board service on a date other than the date when new members are normally elected to the Board shall receive a pro rata grant to cover the partial year remaining until the next Board election. The number of shares subject to such option shall be 4000 (3000 in the case of a director of a subsidiary) multiplied by a fraction the numerator of which is the number of full or partial months in the period commencing on the first day of the month following the new Board member's appointment and ending on the next following date when new members are elected to the Board and the denominator of which is 12. Any fractional share shall be rounded up to the next highest whole number of shares. (b) Exercise Price. The exercise price under each option shall equal the fair market value of the Common Stock at the time such option is granted. For this purpose, fair market value shall equal the closing price of the Company's Common Stock on the New York Stock Exchange on the date an option is granted, or, if there was no trading in such stock on the date of such grant, the closing price on the last preceding day on which there was such trading. (c) Duration of Option. Each option by its terms shall not be exercisable after the expiration of ten years from the date such option is granted. (d) Options Nontransferable. Each option by its terms shall not be transferable by the participant otherwise than by will or the laws of descent and distribution, and shall be exercisable, during the participant's lifetime, only by the participant, the participant's guardian or the participant's legal representative. (e) Exercise Terms. Each option granted under the Plan shall become exercisable with respect to 33 1/3 percent of the shares subject thereto on the first anniversary of the date of grant and with respect to an additional 33 1/3 percent of such shares on each of the second and third anniversaries of such date of grant. Options may be partially exercised from time to time during the period extending from the time they first become exercisable until the tenth anniversary of the date of grant. (f) Payment of Exercise Price. An option shall be exercised upon written notice to the Company accompanied by payment in full for the shares being acquired. The payment shall be made in cash, by check or, if the option agreement so permits, by delivery of shares of Common Stock of the Company registered in the name of the participant, duly assigned to the Company with the assignment guaranteed by a bank, trust company or member firm of the New York Stock Exchange, or by a combination of the foregoing. Any such shares so delivered shall be deemed to have a value per share equal to the fair market value of the shares on such date. For this purpose, fair market value shall equal the closing price of the Company's Common Stock on the New York Stock Exchange on the date the option is exercised, or, if there was no trading in such stock on the date of such exercise, the closing price on the last preceding day on which there was such trading. 6. TERMS AND CONDITIONS OF STOCK GRANTS Each stock grant awarded under the Plan shall be evidenced by a stock grant agreement in such form as the Board shall approve from time to time, which agreement shall conform with the Plan and the following terms and conditions: (a) Number of Shares. At the date each year when new members are elected to the Company's Board, each eligible director of the Company who will be serving on the new Board (whether newly elected or continuing as a carryover director) shall be granted 500 shares of the Company's Common Stock. An eligible director who begins Board service on a date other than the date when new members are normally elected to the Board shall receive a pro rata grant to cover the partial year remaining until the next Board election. The number of shares subject to such grant shall be 500 multiplied by a fraction the numerator of which is the number of full or partial months in the period commencing on the first day of the month following the new Board member's appointment and ending on the next following date when new members are elected to the Board and the denominator of which is 12. Any fractional share shall be rounded up to the next highest whole number of shares. Notwithstanding the foregoing two paragraphs of this Section 6(a), an eligible director who begins his or her first service on the Company's Board, whether such service commences on the date of the Annual Meeting or on another date, shall be granted 1000 shares of the Company's Common Stock. (b) Vesting. All shares shall be fully and immediately vested at the date of grant. (c) Restriction on Transferability. The 500 shares (or the partial year pro rata portion of such shares) granted annually to each eligible director are not subject to any transfer restrictions under the terms of this Plan. However, the 1,000 shares granted to a first time director (including additional shares obtained through dividend reinvestment) may not be sold, gifted or otherwise transferred while the director remains on the Board of the Company unless the Board in its sole and absolute discretion determines otherwise. (d) Custody of Share Certificates. Certificates for all shares subject to the transferability restriction under subsection (c) above shall be held by the Company for the benefit of the director who shall deliver to the Company a stock power executed in blank covering such shares. Except for this custody restriction, the holder of a stock grant shall possess all the rights of a holder of the Company's Common Stock, including voting and dividend rights, provided that all dividends shall be automatically reinvested in additional shares of Company Common Stock rather than paid in cash. (e) Miscellaneous. All other provisions of the Plan not inconsistent with this Section 6 shall apply to stock grants and the holder thereof unless otherwise determined by the Board. Stock grants shall be considered as directors fees for purposes of any plan of deferred compensation that permits the deferral of directors fees. 7. GENERAL RESTRICTION ON ISSUANCE OF STOCK CERTIFICATES The Company shall not be required to deliver any certificate upon the grant of any award, the exercise of an option or the satisfaction of any condition with respect to any award until it has been furnished with such opinion, representation or other document as it may reasonably deem necessary to insure compliance with any law or regulation of the Securities and Exchange Commission or any other governmental authority having jurisdiction under this Plan. Certificates delivered upon such grant, exercise or satisfaction of any condition may bear a legend restricting transfer absent such compliance. Each award shall be subject to the requirement that, if at any time the Board shall determine, in its discretion, that the listing, registration or qualification of the shares subject to such award upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such award or the issue or purchase of shares thereunder, such award may not be granted or exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board of Directors in the exercise of its reasonable judgment. 8. TERMINATION OF EMPLOYMENT (a) Options. If a director dies, either before or after termination as a director, resigns from the Board as a result of a conflict of interest or is removed from the Board for cause, any option may be exercised by the director or by the director's personal representative, as the case may be, at any time prior to the earlier of the expiration date of the option or the first anniversary of the director's date of death, resignation or removal but only if, and to the extent that, the director was entitled to exercise the option at the date of death, resignation or removal. If a director's employment as a director terminates for any reason other than death, resignation due to a conflict or removal for cause, option rights shall continue to vest in accordance with the terms of the option agreement without regard to the termination of employment and may be exercised by the director pursuant to the terms of that agreement. (b) Stock Grants. Upon a director's termination of employment as a director for any reason, all certificates for shares of Common Stock held by the Company on account of the restriction on the transfer of stock grants during service on the Board shall be delivered to the director. In the event termination of employment is caused by the director's death such certificates shall be delivered to the director's personal representative. All such deliveries of certificates shall be made as soon as reasonably practicable on or following the date a director terminates employment as a director of the Company. 9. ADJUSTMENT OF SHARES In the event of any change in the Common Stock of the Company by reason of any stock dividend, stock split, recapitalization, reorganization, merger, consolidation, split-up, combination, or exchange of shares, or rights offering to purchase Common Stock at a price substantially below fair market value, or of any similar change affecting the Common Stock, the number and kind of shares authorized under Section 4, the number and kind of shares which thereafter are subject to an award under the Plan and the number and kind of shares set forth in options under outstanding agreements and the price per share shall be adjusted automatically consistent with such change to prevent substantial dilution or enlargement of the rights granted to, or available for, participants in the Plan. 10. NO EMPLOYMENT RIGHTS The Plan and any awards granted under the Plan shall not confer upon any director any right with respect to continuance as a director of the Company or any subsidiary, nor shall they interfere in any way with any right the Company or its subsidiaries may have to terminate the director's position as a director at any time. 11. RIGHTS AS A SHAREOWNER The recipient of any option under the Plan shall have no rights as a shareowner with respect thereto unless and until certificates for shares of Common Stock are issued to the recipient. The recipient of a stock grant shall have all rights of a shareowner except for the nontransferability and dividend reinvestment requirements. 12. AMENDMENT AND DISCONTINUANCE This Plan may be amended, modified or terminated by the shareowners of the Company or by the Company's Board of Directors, provided that Plan provisions relating to the amount, price and timing of awards may not be amended more than once every six months other than to comport with changes in the Internal Revenue Code or the regulations thereunder and provided further that the Board may not, without approval of the shareowners, materially increase the benefits accruing to participants under the Plan, increase the maximum number of shares as to which awards may be granted under the Plan, change the minimum exercise price, change the class of eligible persons, extend the period for which options may be granted or exercised, or withdraw the authority to administer the Plan from the Board or a Committee of the Board. Notwithstanding the foregoing, to the extent permitted by law, the Board may amend the Plan without the approval of shareowners, to the extent it deems necessary to cause the Plan to comply with Securities and Exchange Commission Rule 16b-3 or any successor rule, as it may be amended from time to time. Except as required by law, no amendment, modification, or termination of the Plan may, without the written consent of a director to whom any award shall theretofore have been granted, adversely affect the rights of such director under such option. 13. CHANGE IN CONTROL (a) Notwithstanding other provisions of the Plan, in the event of a change in control of the Company (as defined in subsection (c) below), all of a participant's options shall become immediately vested and exercisable and all of a participant's certificates held by the Company under a stock grant shall be immediately delivered to the participant, unless directed otherwise by a resolution of the Board adopted prior to and specifically relating to the occurrence of such change in control. (b) In the event of a change in control each participant holding an exercisable option (i) shall 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, and (ii) may, subject to Board approval and after written notice to the Company within 60 days after the change in control, or during the period beginning on the third business day and ending the twelfth business day following the first release for publication by the Company after such change of control of a quarterly or annual summary statement of earnings, which release occurs at least six months following grant of the option, whichever period is longer, receive, in exchange for the surrender of the option or any portion thereof to the extent the option is then exercisable in accordance with clause (i), 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. (c) For purposes of this section "change in control" means: 1) there shall be consummated i. any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which any shares of the Company's common stock are to be converted into cash, securities or other property, provided that the consolidation or merger is not with a corporation which was a wholly-owned subsidiary of the Company immediately before the consolidation or merger; or ii. any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; or 2) the shareowners of the Company approve any plan or proposal for the liquidation or dissolution of the Company; or 3) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of 30% or more of the Company's then outstanding common stock, provided that such person shall not be a wholly-owned subsidiary of the Company immediately before it becomes such 30% beneficial owner; or 4) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareowners, was approved by a vote of at least three quarters of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause (d), considered as though such person were a member of the Incumbent Board. 14. EFFECTIVE DATE The effective date of this restated Plan is January 1, 1995. 15. DEFINITIONS Any terms or provisions used herein which are defined in Section 83 of the Internal Revenue Code as amended, or the regulations thereunder or corresponding provisions of subsequent laws and regulations in effect at the time options are made hereunder, shall have the meanings as therein defined. 16. GOVERNING LAW To the extent not inconsistent with the provisions of the Internal Revenue Code that relate to non-qualified stock options and stock grants, this Plan and any agreement adopted pursuant to it shall be construed under the laws of the State of New York. Dated: 4/26/95 FRONTIER CORPORATION /s/ Josephine S. Trubek By ------------------------------ Josephine S. Trubek Corporate Secretary EX-10.23 11 MANAGEMENT STOCK INCENTIVE PLAN EXHIBIT 10.23 [2/14/95] FRONTIER CORPORATION MANAGEMENT STOCK INCENTIVE PLAN 1. BACKGROUND AND PURPOSE On April 27, 1994, the shareholders of Rochester Telephone Corporation approved the Restated Executive Stock Option Plan. Frontier Corporation (the "Company"), as successor to Rochester Telephone Corporation, hereby continues, amends, restates and renames the Restated Executive Stock Option Plan as the Frontier Corporation Management Stock Incentive Plan (the "Plan"). The purpose of this restated Plan remains to enable the Company to attract and retain key employees and provide them with an incentive to maintain and enhance the Company's long-term performance record. It is intended that this purpose will best be achieved by granting eligible key employees incentive stock options ("ISOs"), non-qualified stock options ("NQSOs") and restricted stock grants, individually or in combination, under this Plan pursuant to the rules set forth in Sections 83, 162(m), 421 and 422 of the Internal Revenue Code, as amended from time to time. 2. ADMINISTRATION The Plan shall be administered by the Company's Committee on Management (the "Committee"). This Committee shall consist of at least two members of the Company's Board of Directors all of whom shall, unless the Board determines otherwise, be "outside directors" as this term is defined in Code Section 162(m) and regulations thereunder and none of whom during the twelve months prior to commencement of service on the Committee, or during such service, has been granted or awarded any equity security or derivative security of the Company pursuant to the Plan or, except as permitted by Rule 16b-3 (c)(2)(i), or any successor provision, promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), any other plan of the Company. Subject to the provisions of the Plan, the Committee shall possess the authority, in its discretion, (a) to determine the employees of the Company to whom, and the time or times at which, ISOs and/or NQSOs (ISOs and NQSOs are collectively referred to as "options") and restricted stock grants (all three types of grants are collectively referred to as "awards") shall be granted; (b) to determine at the time of grant whether an award will be an ISO, a NQSO, a restricted stock grant or a combination of these awards and the number of shares to be subject to each award; (c) to prescribe the form of the award agreements and any appropriate terms and conditions applicable to the awards and to make any amendments to such agreements or awards; (d) to interpret the Plan; (e) to make and amend rules and regulations relating to the Plan; and (f) to make all other determinations necessary or advisable for the administration of the Plan. The Committee's determinations shall be conclusive and binding. No member of the Committee shall be liable for any action taken or decision made in good faith relating to the Plan or any award granted hereunder. 3. ELIGIBLE EMPLOYEES Awards may be granted under the Plan only to employees of the Company and its subsidiaries (which shall include all corporations of which at least fifty percent of the voting stock is owned by the Company directly or through one or more corporations at least fifty percent of the voting stock of which is so owned) who hold a position of manager or higher and who have the capability of making a substantial contribution to the success of the Company. 4. SHARES AVAILABLE The total number of shares of the Company's Common Stock (par value of $1.00 per share) available in the aggregate for awards under this Plan during any calendar year shall not exceed one percent (1%) of the number of issued shares of the Company's Common Stock, including treasury shares, determined as of the first day of such calendar year (subject to substitution or adjustment as provided in Section 10). In addition, not more than 5 million shares of Common Stock shall be available for ISO awards during the term of the Plan. Finally, the aggregate number of shares which may be issued under restricted stock grants at any one time during the life of the Plan may not exceed three percent (3%) of the number of issued shares, including treasury shares, of the Company's Common Stock. Shares to be granted may be authorized and unissued shares or may be treasury shares. The total number of shares with respect to which ISO and NQSO awards in the aggregate may be granted to any one participant may not exceed 500,000 per calendar year (subject to substitution or adjustment as provided in Section 10). The total number of shares with respect to which restricted stock awards may be granted to any one participant shall not exceed 100,000 per calendar year (subject to substitution or adjustment as provided in Section 10). If an award expires, terminates or is cancelled without being exercised or becoming vested, new awards may thereafter be granted under the Plan covering such shares unless Rule 16b-3 provides otherwise. No award may be granted more than 10 years after the effective date of the Plan. 5. TERMS AND CONDITIONS OF ISOS Each ISO granted under the Plan shall be evidenced by an ISO option agreement in such form as the Committee shall approve from time to time, which agreement shall conform with this Plan and contain the following terms and conditions: (a) Exercise Price. The exercise price under each option shall equal the fair market value of the Common Stock at the time such option is granted, or, if there was no trading in such stock on the date of such grant, the closing price on the last preceding day on which there was such trading. If an option is granted to an officer or employee who at the time of grant owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company (a "10-percent Shareholder"), the purchase price shall be at least 110 percent of the fair market value of the stock subject to the option. (b) Duration of Option. Each option by its terms shall not be exercisable after the expiration of ten years from the date such option is granted. In the case of an option granted to a 10-percent Shareholder, the option by its terms shall not be exercisable after the expiration of five years from the date such option is granted. (c) Options Nontransferable. Each option by its terms shall not be transferable by the participant otherwise than (i) by will or the laws of descent and distribution, (ii) pursuant to a domestic relations order, or (iii) to the extent permitted under the option agreement or interpretation of the Committee, by gift to family members or entities beneficially owned by family members or other permitted transferees under Rule 16b-3 promulgated under the Exchange Act, and shall be exercisable, during the participant's lifetime, only by the participant, the participant's guardian or the participant's legal representative, the participant's transferee under a domestic relations order or other permitted transferee under this section. To the extent required for the option grant and/or exercise to be exempt under Rule 16b-3, options (or the shares of Common Stock underlying the options) must be held by the participant for at least six months following the date of grant. (d) Exercise Terms. Each option granted under the Plan shall become exercisable with respect to 33 1/3 percent of the shares subject thereto on the first anniversary of the date of grant and with respect to an additional 33 1/3 percent of such shares on each of the second and third anniversaries of such date of grant. Options may be partially exercised from time to time during the period extending from the time they first become exercisable until the tenth anniversary (fifth anniversary for a 10-percent Shareholder) of the date of grant. No outstanding option may be exercised by any person if the employee to whom the option is granted is, or at any time after the date of grant has been, in competition with the Company or an affiliated company, including Upstate Cellular Network. The Committee has the sole discretion to determine whether an employee's actions constitute competition with the Company or an affiliated company, including Upstate Cellular Network. The Committee may impose such other terms and conditions on the exercise of options as it deems appropriate to serve the purposes for which this Plan has been established. (e) Maximum Value of ISO Shares. No ISO shall be granted to an employee under this Plan or any other ISO plan of the Company or its subsidiaries to purchase shares as to which the aggregate fair market value (determined as of the date of grant) of the Common Stock which first become exercisable by the employee in any calendar year exceeds $100,000. (f) Payment of Exercise Price. An option shall be exercised upon written notice to the Company accompanied by payment in full for the shares being acquired. The payment shall be made in cash, by check or, if the option agreement so permits, by delivery of shares of Common Stock of the Company beneficially owned by the participant, duly assigned to the Company with the assignment guaranteed by a bank, trust company or member firm of the New York Stock Exchange, or by a combination of the foregoing. Any such shares so delivered shall be deemed to have a value per share equal to the fair market value of the shares on such date. For this purpose, fair market value shall equal the closing price of the Company's Common Stock on the New York Stock Exchange on the date the option is exercised, or, if there was no trading in such stock on the date of such exercise, the closing price on the last preceding day on which there was such trading. 6. TERMS AND CONDITIONS FOR NQSOS Each NQSO granted under the Plan shall be evidenced by a NQSO option agreement in such form as the Committee shall approve from time to time, which agreement shall conform to this Plan and contain the same terms and conditions as the ISO option agreement except that the 10-percent Shareholder restrictions in Sections 5(a) and 5(b) and the maximum value of share rules of Section 5(e) shall not apply to NQSO grants. To the extent an option initially designated as an ISO exceeds the value limit of Section 5(e), it shall be deemed a NQSO and shall otherwise remain in full force and effect. 7. TERMS AND CONDITIONS OF RESTRICTED STOCK GRANTS The Committee may, evidenced by such written agreement as the Committee shall from time to time prescribe, grant to an eligible employee a specified number of shares of the Company's Common Stock which shall vest only after the attainment of the relevant restrictions described in Section 7(b) below ("restricted stock"). Such restricted stock shall have an appropriate restrictive legend affixed thereto. A restricted stock grant shall be neither an option nor a sale, but shall be subject to the following conditions and restrictions: (a) Restricted stock may not be sold or otherwise transferred by the participant until ownership vests, provided however, to the extent required for the restricted stock grant to be exempt under Rule 16b-3, the restricted stock must be held by the participant for at least six months following the date of vesting. (b) Ownership shall vest only following satisfaction of one or more of the following criteria as the Committee may prescribe: (1) the passage of three years, or such longer period of time as the Committee in its discretion may provide, from the date of grant. (2) the attainment of performance-based goals established by the Committee as of the date of grant. If the participant's compensation is subject to the $1 million cap of Code Section 162(m), the Committee may establish such performance goals based on one or more of the following targets: - total shareholder return - earnings per share growth - cash flow growth - return on equity and/or If the participant's compensation is not subject to the $1 million cap of Code Section 162(m), the Committee may establish the performance goal on the basis of the preceding four targets or any other target it may from time to time deem appropriate in its discretion. (3) any other conditions the Committee may prescribe, including a non-compete requirement. (c) Unless the Committee shall determine otherwise with respect to participants whose compensation is not governed by Code Section 162(m), the Committee shall grant and administer all performance-based awards under (b)(2) above with the intent of meeting the criteria of Code Section 162(m) for performance-based compensation. To this end, the outcome of all targeted goals shall be substantially uncertain on the date of grant; the goals shall be established no later than 90 days following the commencement of service to which the goals relate; the minimum period for attaining each performance goal shall be one year; and the Committee shall certify at the conclusion of the performance period whether the performance-based goals have been attained. Such certification may be made by noting the attainment of the goals in the minutes of the Committee's meetings. (d) Except as otherwise determined by the Committee, all rights and title to restricted stock granted to a participant under the Plan shall terminate and be forfeited to the Company upon failure to fulfill all conditions and restrictions applicable to such restricted stock. (e) Except for the restrictions set forth in this Plan and those specified by the Committee in any restricted stock agreement, a holder of restricted stock shall possess all the rights of a holder of the Company's Common Stock (including voting and dividend rights); provided, however, that prior to vesting the certificates representing such shares of restricted stock (and the amount of any dividends issued with respect thereto) shall be held by the Company for the benefit of the participant and the participant shall deliver to the Company a stock power executed in blank covering such shares. As the shares vest, certificates representing such shares shall be released to the participant. (f) All other provisions of the Plan not inconsistent with this section shall apply to restricted stock or the holder thereof, as appropriate, unless otherwise determined by the Committee. 8. GENERAL RESTRICTION ON ISSUANCE OF STOCK CERTIFICATES The Company shall not be required to deliver any certificate upon the grant, vesting or exercise of any award or option until it has been furnished with such opinion, representation or other document as it may reasonably deem necessary to insure compliance with any law or regulation of the Securities and Exchange Commission or any other governmental authority having jurisdiction under this Plan. Certificates delivered upon such grant or exercise may bear a legend restricting transfer absent such compliance. Each award shall be subject to the requirement that, if at any time the Committee shall determine, in its discretion, that the listing, registration or qualification of the shares subject to such award upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such awards or the issue or purchase of shares thereunder, such awards may not vest or be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee in the exercise of its reasonable judgment. 9. IMPACT OF TERMINATION OF EMPLOYMENT (a) Options If the employment of a participant terminates by reason of the participant's disability or death, any option may be exercised, in the case of disability, by the participant or, in the case of death, the participant's designated beneficiary (or personal representative if there is no designated beneficiary) at any time prior to the earlier of the expiration date of the option or the expiration of three years after the date of disability or death, but only if, and to the extent that the participant was entitled to exercise the option at the date of disability or death. If the employment of a participant terminates at any time on or after the participant is entitled to receive an early retirement service pension or a normal service pension under Sections 5.1, 5.2, or 5.3 of the Management Pension Plan, or the equivalent plan if the participant is not a participant in the Management Pension Plan, the participant may exercise any options pursuant to the terms of the option agreement governing such options. Upon termination of the participant's employment for any reason other than retirement, disability or death, all options held by the participant, whether vested or not, shall be forfeited. An option that remains exercisable after the expiration of three months from termination of employment shall be treated as a NQSO after three months even if it would have been treated as an ISO if exercised within three months of termination. Notwithstanding the foregoing, an option may not be exercised after retirement if the Committee reasonably determines that the termination of employment of such participant resulted from willful acts, or failure to act, by the participant detrimental to the Company or any of its subsidiaries. (b) Restricted Stock Grants (i) Passage of Time Vesting. If a participant has been awarded restricted stock whose vesting is conditioned solely on the passage of time, any termination of employment for any reason, shall result in the forfeiture of all restricted stock awards that were not vested prior to the termination of employment except as otherwise provided by the Committee. (ii) Performance-Based Vesting. If a participant has been awarded restricted stock whose vesting is based solely on the attainment of performance-based goals or partly on the attainment of performance-based goals and partly on the passage of time, any termination of employment except death, disability or retirement under Sections 5.1, 5.2 or 5.3 of the Management Pension Plan shall result in the forfeiture of all restricted stock awards that were not vested prior to the termination of employment. A participant who terminates employment on account of death, disability or retirement may, if the performance-based criteria are eventually attained, be awarded (or, in the event of death, the participant's designated beneficiary or personal representative if there is no designated beneficiary shall be awarded) up to a pro rata portion of the restricted shares based on the participant's length of service as of his or her termination of employment over the length of the award period ending on the date the performance-based criteria are satisfied (or the passage of time would have been satisfied, if later, for an award based in part on performance goals and in part on the passage of time). The Committee shall have the discretion whether to grant a full pro rata portion of the restricted shares, a lesser portion or no shares at all under this subsection (b)(ii). (c) Acts Not Constituting Termination of Employment. Unless otherwise determined by the Committee, an authorized leave of absence shall not constitute a termination of employment for purposes of this Plan. In addition, participants who transfer employment within the Frontier Group of companies, including Upstate Cellular Network, shall not be considered to have terminated employment. Any such transferred participants shall remain eligible to exercise previously granted options and to vest in restricted stock awards in accordance with their terms as if no termination occurred and shall be eligible to receive additional awards pursuant to the terms of employment with their new employer. 10. ADJUSTMENT OF SHARES In the event of any change in the Common Stock of the Company by reason of any stock dividend, stock split, recapitalization, reorganization, merger, consolidation, split-up, combination, or exchange of shares, or rights offering to purchase Common Stock at a price substantially below fair market value, or of any similar change affecting the Common Stock, the number and kind of shares authorized under Section 4, the number and kind of shares which thereafter are subject to an award under the Plan and the number and kind of unexercised options and unvested shares set forth in awards under outstanding agreements and the price per share shall be adjusted automatically consistent with such change to prevent substantial dilution or enlargement of the rights granted to, or available for, participants in the Plan. 11. WITHHOLDING TAXES Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, or whenever restricted stock vests, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy any federal, state and/or local income and employment withholding tax requirements prior to the delivery of any certificate or certificates for such shares or to take any other appropriate action to satisfy such withholding requirements. Notwithstanding the foregoing, subject to such rules as the Committee may promulgate and compliance with any requirements under Rule 16b-3, the recipient may satisfy such obligation in whole or in part by electing to have the Company withhold shares of Common Stock from the shares to which the recipient is otherwise entitled. 12. NO EMPLOYMENT RIGHTS The Plan and any awards granted under the Plan shall not confer upon any participant any right with respect to continuance as an employee of the Company or any subsidiary, nor shall they interfere in any way with the right of the Company or any subsidiary to terminate the participant's position as an employee at any time. 13. RIGHTS AS A SHAREHOLDER The recipient of any option under the Plan shall have no rights as a shareholder with respect thereto unless and until certificates for the underlying shares of Common Stock are issued to the recipient. The recipient of a restricted stock grant shall have all rights of a shareholder except as otherwise limited by the terms of this Plan. 14. AMENDMENT AND DISCONTINUANCE This Plan may be amended, modified or terminated by the Committee or by the shareowners of the Company, except that the Committee may not, without approval of the shareholders, materially increase the benefits accruing to participants under the Plan, increase the maximum number of shares as to which awards may be granted under the Plan, change the basis for making performance-based awards for participants whose compensation is subject to Section 162(m), change the minimum exercise price of options, change the class of eligible persons, extend the period for which awards may be granted or exercised, or withdraw the authority to administer the Plan from the Committee or a committee of the Committee consisting solely of outside directors unless the Board determines that inside directors may serve on the Committee. Notwithstanding the foregoing, to the extent permitted by law, the Committee may amend the Plan without the approval of shareholders, to the extent it deems necessary to cause the Plan to comply with Securities and Exchange Commission Rule 16b-3 or any successor rule, as it may be amended from time to time. Except as required by law, no amendment, modification, or termination of the Plan may, without the written consent of a participant to whom any award shall theretofore have been granted, adversely affect the rights of such participant under such award. 15. CHANGE IN CONTROL (a) Notwithstanding other provisions of the Plan, in the event of a change in control of the Company (as defined in subsection (c) below), 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 vested and exercisable, unless directed otherwise by a resolution of the Committee adopted prior to and specifically relating to the occurrence of such change in control. (b) In the event of a change in control each participant holding an exercisable option (i) shall 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, and (ii) may, subject to Committee approval and after written notice to the Company within 60 days after the change in control, or, if the participant is an officer subject to Section 16 of the Exchange Act and to the extent required to exempt the transaction under Rule 16b-3, during the period beginning on the third business day and ending on the twelfth business day following the first release for publication by the Company after such change of control of a quarterly or annual summary statement of earnings, which release occurs at least six months following grant of the option, whichever period is longer, receive, in exchange for the surrender of the option or any portion thereof to the extent the option is then exercisable in accordance with clause (i), an amount of cash equal to the difference between the fair market value (as determined by the Committee) 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. (c) For purposes of this section, "change in control" means: 1) there shall be consummated i. any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which any shares of the Company's common stock are to be converted into cash, securities or other property, provided that the consolidation or merger is not with a corporation which was a wholly-owned subsidiary of the Company immediately before the consolidation or merger; or ii. any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; or 2) the shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; or 3) any person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of 30% or more of the Company's then outstanding common stock, provided that such person shall not be a wholly-owned subsidiary of the Company immediately before it becomes such 30% beneficial owner; or 4) individuals who constitute the Company's Board of Directors on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three quarters of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause (d), considered as though such person were a member of the Incumbent Board. 16. EFFECTIVE DATE The effective date of the Plan shall be the date this restated Plan is approved by the affirmative vote of the owners of a majority of the Company's outstanding shares of Common Stock. 17. DEFINITIONS Any terms or provisions used herein which are defined in Sections 83, 162(m), 421, or 422 of the Internal Revenue Code as amended, or the regulations thereunder or corresponding provisions of subsequent laws and regulations in effect at the time awards are made hereunder, shall have the meanings as therein defined. 18. GOVERNING LAW To the extent not inconsistent with the provisions of the Internal Revenue Code that relate to awards, this Plan and any award agreement adopted pursuant to it shall be construed under the laws of the State of New York. Dated: 4/26/95 FRONTIER CORPORATION /s/ Josephine S. Trubek By---------------------------- Josephine S. Trubek Corporate Secretary Date of Shareholder Approval: 4/26/95 EX-10.24 12 EMPLOYMENT AGREEMENT EXHIBIT 10.24 August 16, 1995 [Name] [Address] Dear [Name]: The Board of Directors (the "Board") of Frontier Corporation, on behalf of Frontier and its subsidiaries and affiliates (together, the "Company") has determined that it is in the best interests of the Company and its shareowners to be able to avail itself of your continued dedication and service to the Company in the immediate future and in case of Change of Control, as defined later in this letter agreement ("Agreement"). It is therefore the intent of this Agreement to encourage your complete dedication to the Company by providing you with compensation and benefits arrangements while you fulfill your duties now and during the pendency of a Change of Control, should such an event occur, which provide you with a measure of security commensurate with your importance to the Company. Therefore, upon your signature on a counterpart of this Agreement, the following terms and conditions shall become effective as of August 16, 1995 and shall supersede any prior agreements between the Company and you related to the subject matter hereof. However, this Agreement does not supersede any stock option agreements, restricted stock grant agreements or agreements related to the bridging of your prior service with other employers for pension service credit purposes which may exist as of August 16, 1995 between the Company and you, all of which shall remain in full force and effect. 1. Employment. 1.1 Term. The Company shall employ you in a senior executive management capacity as the Company, with your consent, may from time to time designate. This Agreement shall become effective as of August 16, 1995 and shall continue until December 31, 1998, unless earlier terminated or extended in accordance with its terms. Beginning on January 1, 1998 and on each anniversary of that date thereafter, the term of this Agreement (the "Term") shall automatically be extended for one additional year unless either the Company or you has given written notice to the other no later than September 30 of the preceding year that the giver of the notice does not elect to extend the Term. Even if the Company has given you such a notice, if a Change of Control has occurred during the Term and you have met your obligations in the next paragraph of this Section 1.1, the Term will be automatically extended and this Agreement will remain in full force and effect until the last day of the 36th month following the month in which the Change of Control occurs. You acknowledge that, except as set forth in this Agreement, your employment is "at will". If, during the Term, a person (as that term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) commences any action that, if consummated, would result in a Change of Control of the Company, or if any person publicly announces an intention or proposal to commence any such action, you agree that you will not leave the Company's employ (other than as a result of death, Disability or Retirement) and will render the services contemplated in this Agreement for the reasonable duration of the Company's defense against such action and until such action has been abandoned or terminated or a Change in Control has occurred. Any termination of your employment during the Term for reasons other than your death shall be evidenced by a written Notice of Termination, which shall specify the provision of this Agreement relied upon for such termination and describe with reasonable detail the facts and circumstances claimed by the sender of such Notice of Termination to provide the basis for termination. Any such Notice of Termination shall also specify the effective date of termination (the "Termination Date"). If you die during the Term the Termination Date shall be the date of your death. 1.2 Duties. You shall perform all duties incidental to your position with the Company, or as may be assigned to you by the Board. You agree to use your best efforts in the business of the Company and to devote your full time attention and energy to the business of the Company. You agree not to work, either on a part-time or independent contracting or consulting basis, with or without compensation, for any other business or enterprise during the Term without the Company's prior consent. Such consent shall not be unreasonably withheld in the case of service on the boards of directors of other corporations and community organizations. 1.3 Base Compensation. The Company shall pay you as base compensation an annual salary of $ , in installments in accordance with the Company's policies from time to time in effect, until January 1, 1996. Thereafter, your annual salary may be adjusted by the Company consistent with the Company's results and your performance during the prior year. However, unless the annual salaries of all senior executives of the Company are reduced across-the-board, your annual salary in any year shall not be less than your annual salary during the prior year. 1.4 Incentive Compensation. The Company shall establish and review with you from time to time the performance goals ("Performance Goals") for the Company and you individually, and a methodology for calculating the amount of incentive compensation to be paid upon achievement of such Performance Goals. Incentive compensation shall be payable to you at such time or times as are established under the Company's policies (including the Company's Executive Compensation Program) in effect from time to time. 1.5 Benefits; Perquisites. You shall be entitled to receive the retirement and welfare benefits and perquisites provided by the Company under its Executive Compensation program in effect from time to time for executives at the Chief Executive Officer level. 1.6 Expenses. You shall be reimbursed for any reasonable expenses you incur in connection with your employment during the Term, upon presentation to the Company of an itemized account and receipts of such expenses as required by the Company's policies from time to time in effect. 2. Developments and Intellectual Property. You acknowledge that all developments, including but not limited to trade secrets (including strategies, business plans and customer lists), discoveries, improvements, ideas and writings which either directly or indirectly relate to or may be useful in the business of the Company (the "Developments") which you, either alone or in conjunction with any other person or persons, shall conceive, make, develop, acquire or acquire knowledge of during the Term are the sole and exclusive property of the Company. You will cooperate with the Company's reasonable requests to obtain or maintain rights or protections under United States or foreign law with respect to all Developments. The Company will reimburse you for all reasonable expenses incurred by you in order to comply with this provision of this Agreement, regardless of when such expenses may be incurred. 3. Confidential Information. You acknowledge that by reason of your employment by the Company, especially as a senior executive thereof, you will in the future have (and you have had prior to August 16, 1995), access to information of the Company that the Company deems to be confidential and/or proprietary, including but not limited to, information about the Company's strategies, plans, products and services, methods of operation, employees, sales, profits, expenses, customer lists and the relationships between the Company and its customers, suppliers and others who have business dealings with the Company. You covenant and agree that during the Term and thereafter, you will not disclose any such information to any person without the prior written authorization of the Board. 4. Non-Competition. 4.1 Covenant. In consideration of the benefits provided to you under this Agreement, which you acknowledge are independent consideration, you covenant and agree that during the Restricted Period (as defined below), you will not, directly or indirectly, without the Company's prior consent: (i) own, manage, operate, finance, join, control or participate in the ownership or control of, or be associated as an officer, director, executive, partner or principal, agent, representative, consultant or otherwise with, or use or permit your name to be used in connection with, any enterprise that directly or indirectly competes (as defined below) with the business of the Company in a Restricted Area (as defined below); or (ii) offer or provide employment to, or solicit, interfere with or attempt to entice away from the Company any individual who either is employed by the Company at the time of such offer, employment, solicitation, interference or enticement or has been so employed by the Company within 12 months prior to such offer, employment, solicitation, interference or enticement. This Section shall not be construed to prohibit the ownership by you of not more than 1% of any class of securities of any corporation which competes with the Company and which has a class of securities registered pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 4.2 Definitions. 4.2.1 "Competes" means the production, marketing or selling of any product or service of any person or entity other than the Company which resembles or competes with a product or service produced, marketed or sold by the Company (or to your knowledge was under development by the Company) during the period of your employment by the Company (whether under this Agreement or otherwise). 4.2.2 "Restricted Area" means: (a) The Standard Metropolitan Statistical Area (or the equivalent) in which any office, place of employment, business address or POP maintained by the Company is located; or (b) Any state of the United States, any province of Canada or any foreign country from which the Company or any of its material subsidiaries or affiliates derives 5% or more of its annual net income. 4.2.3 "Restricted Period" means: (a) The period of your employment by the Company (whether under this Agreement or otherwise), if your employment is terminated because of your death or Disability; (b) The period of your employment by the Company (whether under this Agreement or otherwise) and 24 months thereafter, if your employment is terminated because of your Retirement, or by the Company for Cause or without Cause (and not by the Company following Change of Control); (c) The period of your employment by the Company (whether under this Agreement or otherwise) and, if this Agreement is still in effect at the Termination Date, the number of months remaining in the Term at the Termination Date or 12 months, whichever is longer (but in no event more than 24 months), if you terminate your employment voluntarily (and not for Good Reason); or (d) The period of your employment by the Company under this Agreement, if your employment is terminated by you for Good Reason or by the Company following Change of Control. 4.3 Savings Clause. If any of the provisions of this Section 4 are ever determined by a court to exceed the time, geographic scope or other limitations permitted by applicable law in any jurisdiction, then such excessive provisions shall be deemed reduced, in such jurisdiction only, to the maximum time, geographic scope or other limitation permitted in such jurisdiction. 5. Equitable Relief. You acknowledge that the restrictions contained in Sections 2, 3 and 4 of this Agreement are, in view of the nature of the business of the Company, reasonable and necessary to protect the legitimate interests of the Company, and that any violation of the provisions of those Sections will result in irreparable injury to the Company. You also acknowledge that the Company shall be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, and to an equitable accounting of all earnings, profits and other benefits arising from such violation. These rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. You agree to submit to the jurisdiction of any New York State court located in Monroe County or the United States District Court for the Western District of New York or of the state court or the federal court located in or presiding over the county in which the Company has its corporate headquarters at the applicable time in any action, suit or proceeding brought by the Company to enforce its rights under Sections 2, 3 and/or 4 of this Agreement. 6. Company's Obligations upon Termination. The sole obligations of the Company upon the termination of your employment prior to the failure of either you or the Company to extend the Term in accordance with Section 1.1 of this Agreement are as set forth in this Section 6. Any and all amounts to be paid to you in connection with your termination shall be paid in a lump sum promptly after the Termination Date, but not more than 30 days thereafter. 6.1 Termination upon Disability or Death. If your employment with the Company ends by reason of your death or Disability (as defined later in this Agreement), the Company shall pay you all amounts earned or accrued through the Termination Date but not paid as of the Termination Date, including: 6.1.1 Base compensation; 6.1.2 Reimbursement for reasonable and necessary expenses incurred by you on behalf of the Company during the Term; 6.1.3 Pay for earned but unused vacation and floating holidays; 6.1.4 All compensation you previously deferred (if any) to the extent not yet paid; and 6.1.5 An amount equal to your "Pro Rata Bonus". Your Pro Rata Bonus shall be determined by multiplying the "Bonus Amount" (as defined below) by a fraction, the numerator of which is the number of days in the fiscal year through the Termination Date and the denominator of which is 365. The term "Bonus Amount" means: (i) a bonus calculated using the performance metrics of the Company's results and your individual performance for the fiscal year ended prior to the year in which the Termination Date occurs, applied to the payouts set forth under the incentive compensation program in effect for the year in which the Termination Date occurs; or (ii) if the Termination Date occurs after the end of a fiscal year but before any bonus related thereto was paid, the bonus you would have received for that fiscal year. The amounts described in Sections 6.1.1 through 6.1.4, inclusive, are called elsewhere in this Agreement, collectively, the "Accrued Compensation". Except as otherwise provided in this Section 6.1, your entitlement to any other compensation or benefits shall be determined in accordance with the Company's employee benefit plans and other applicable programs and practices then in effect. 6.2 Termination Without Cause. If the Company terminates your employment without Cause (as defined later in this Agreement), the Company shall pay you: 6.2.1 All Accrued Compensation; 6.2.2 A Pro Rata Bonus (as defined in Section 6.1.5 above); and 6.2.3 Severance ("Severance") equal to: (a) twice the sum of (i) the annual base compensation you would have received for the entire fiscal year in which the Termination Date occurs plus (ii) the Bonus Amount plus (iii) $ (being the agreed cash equivalent of the annual value of the perquisites provided to you under the Company's Executive Compensation Program) plus (iv) the Company contributions which would have been made on your behalf to the 401(k) retirement savings plan maintained by the Company (b) reduced by the present value (determined as provided in Section 280G(d)(4) of the Internal Revenue Code of 1986 as amended (the "Code")) of any other amount of severance relating to salary or bonus continuation to be received by you upon termination of your employment under any severance plan, policy or arrangement of the Company. In addition, the Company shall continue to provide to you and your family at the Company's expense, for 24 months following the Termination Date, the life insurance, disability, medical, dental, vision and hospitalization benefits provided to you and your family immediately prior to the Termination Date. Lastly, the Company shall credit you with an additional 24 months of service and age for the purposes of determining the level of your retirement benefits under any qualified or nonqualified defined benefit pension, supplemental or excess retirement plan maintained by the Company in which you are a covered employee (the "Retirement Plans"). Except as otherwise provided in this Section 6.2, your entitlement to any other compensation or benefits shall be determined in accordance with the Company's employee benefit plans and other applicable programs and practices then in effect. 6.3 Termination for Cause or Voluntary Termination. If your employment is terminated for Cause (as defined later in this Agreement), or if you voluntarily terminate your employment other than for Good Reason, the Company shall pay you all Accrued Compensation. Except as otherwise provided in this Section 6.3, your entitlement to any other compensation or benefits shall be determined in accordance with the Company's employee benefit plans and other applicable programs and practices then in effect. 6.4 Termination for Good Reason or by Company Following Change of Control. If you terminate your employment for Good Reason or the Company terminates your employment following a Change of Control, the Company shall pay you: 6.4.1 All Accrued Compensation; 6.4.2 A Pro Rata Bonus; 6.4.3 Severance equal to: (a) three times the sum of (i) the annual base compensation you would have received for the entire fiscal year in which the Termination Date occurs plus (ii) the Bonus Amount plus (iii) $ (being the agreed cash equivalent of the annual value of the perquisites provided to you under the Company's Executive Compensation Program) plus (iv) the Company contributions which would have been made on your behalf to the 401(k) retirement savings plan maintained by the Company (b) reduced by the present value (determined as provided in Section 280G(d)(4) of the Code or any other amount of severance relating to salary or bonus continuation to be received by you upon termination of your employment under any severance plan, policy or arrangement of the Company; 6.4.4 An amount equal to your "Supplemental Retirement Amount". Your Supplemental Retirement Amount shall be equal to the difference between (a) the benefit payable under the Retirement Plans which you would have received had your employment continued for 36 months following the Termination Date and (b) your actual benefit paid or payable, if any, under the Retirement Plans. Your Supplemental Retirement Amount will be determined in accordance with the procedures set forth in an Addendum to this Agreement, which is made a part hereof (the "Addendum"); and 6.4.5 An amount equal to your "SERP Payment". Your SERP Payment shall satisfy the Company's obligations to you under the supplemental or excess retirement plan or plans maintained by the Company for its executive employees (the "SERP") and shall be the actuarial equivalent (using the Actuarial Assumptions, as defined in the Addendum) of your benefit accrued under the SERP through the Termination Date. If all or a part of the SERP Payment is funded through a trust of which you are a beneficiary, the SERP Payment shall be paid from such trust to the extent of such funding. In addition, the Company shall continue to provide to you and your family at the Company's expense, for 36 months following the Termination Date, the life insurance, disability, medical, dental, vision and hospitalization benefits provided to you and your family immediately prior to the Termination Date. The Company shall reimburse you for all reasonable legal fees and expenses which you may incur following a Change of Control as a result of the Company's attempts to contest the validity or enforceability of this Agreement or your attempts to obtain or enforce any right or benefit provided to you under this Agreement, unless a court determines your actions to be frivolous. Except as otherwise provided in this Section 6.4, your entitlement to any other compensation or benefits shall be determined in accordance with the Company's employee benefit plans and other applicable programs and practices then in effect. 7. Gross-Up Payment. Notwithstanding anything else in this Agreement, if it is found that any or all of the payments made to you, including but not limited to payments made by the Company, or under any plan or arrangement maintained by the Company, to you or for your benefit (other than any additional payments required under this Section 7) (the "Payments") would be subject to the excise tax imposed by Section 4999 of the Code or you incur any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, collectively the "Excise Tax"), then you are entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that, after you pay all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, you will retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. The procedures for the calculation and contesting of any claim that such Excise Tax is due are set forth in the Addendum. 8. No Obligation to Mitigate Damages. You are not require to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, and the amounts to be paid to you under Section 6 of this Agreement shall not be reduced by any compensation you may earn from other sources. However, if, during any period that you would otherwise be entitled to receive any payments or benefits under this Agreement, you breach your obligations under Section 2, 3 or 4 of this Agreement, the Company may immediately terminate any and all payments and the provision of benefits (to the extent permitted by law and the terms of the benefit plans maintained by the Company from time to time) hereunder. 9. Successor to Company. The Company will require any successor or assignee to all or substantially all of the business and/or assets of the Company, whether by merger, sale of assets or otherwise, by agreement in form and substance reasonably satisfactory to you, to assume and agree to perform the Company's obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform them if such succession or assignment had not taken place. Such agreement of assumption must be express, absolute and unconditional. If the Company fails to obtain such an agreement within three business days prior to the effective date of such succession or assignment, you shall be entitled to terminate your employment under this Agreement for Good Reason. 10. Survival. Notwithstanding the expiration or termination of this Agreement, except as otherwise specifically provided herein, your obligations under Sections 2, 3 and 4 of this Agreement and the obligations of the Company under this Agreement shall survive and remain in full force and effect. This Agreement shall inure to the benefit of, and be enforceable by, your personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you die while any amounts are still payable to you, all such amounts, unless otherwise provided in this Agreement, shall be paid in accordance with the terms of this Agreement to your devisee(s), legatee(s) or other designee(s) or, if there is no such designee(s), to your estate. 11. Definitions. Whenever used in this Agreement, the following terms shall have the meanings below: 11.1 "Cause" means: 11.1.1 You have willfully and continually failed to substantially perform your duties (other than due to an incapacity resulting from physical or mental illness or due to any actual or anticipated failure after you have given a Notice of Termination for Good Reason) after a written demand for substantial performance is delivered to you by the Board which specifically identifies the manner in which it is believed that you have not substantially performed your duties; or 11.1.2 You have willfully engaged in conduct which is demonstrably and materially injurious to the Company (monetarily or otherwise); or 11.1.3 You have willfully engaged in conduct which is illegal or in violation of the Company's Code of Ethics; or 11.1.4 You have been convicted of a felony; or 11.1.5 You have violated the provisions of Section 2 and/or Section 3 and/or Section 4 of this Agreement and, in any of the events described in Sections 11.1.1 through 11.1.5 above, the Board adopts a resolution finding that in the good faith opinion of the Board you were culpable for the conduct set forth in any of Sections 11.1.1 through 11.1.5 and specifying the particulars thereof in detail. For the purposes of this Agreement, no act or failure to act on your part shall be considered willful unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interests of the Company. Any such resolution of the Board must receive the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for the purpose of considering the issue, and you must receive reasonable notice of the meeting and have an opportunity, with your counsel, to present your case to the Board. 11.2 "Change of Control" means: 11.2.1 The consummation of a consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which the shares of the Company's common, voting equity are to be converted into cash, securities or other property. For the purposes of this Agreement, a consolidation or merger with a corporation which was a wholly-owned direct or indirect subsidiary of the Company immediately before the consolidation or merger is not a Change of Control; or 11.2.2 The sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the Company's assets; or 11.2.3 The approval by the Company's shareowners of any plan or proposal for the liquidation or dissolution of the Company; or 11.2.4 Any person, as that term is used in Section 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities of the Company under an employee benefit plan of the Company, a direct or indirect wholly-owned subsidiary of the Company or any other company owned, directly or indirectly, by the shareowners of the Company in substantially the same proportions as their ownership of the Company's common, voting equity), is or becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of 30% or more of the Company's then outstanding common, voting equity; or 11.2.5 During any period of two consecutive years, individuals who at the beginning of such period constitute the Board, including for this purpose any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in this Section 11.2.5) whose election or nomination for election by the Company's shareowners was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period or whose election or nomination for election was previously so approved (the "Incumbent Board"), cease for any reason to constitute a majority of the Board. 11.3 "Disability" means: 11.3.1 Your absence from your duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness; or 11.3.2 A physical or mental condition which prevents you from satisfactorily performing your duties with the Company and such incapacity or condition is determined to be total and permanent by a physician selected by the Company or its insurers and reasonably acceptable to you and/or your legal representative. 11.4 "Good Reason" means: 11.4.1 Without your express written consent, after a Change of Control, the assignment to you of duties with the Company or with a person, as that term is used in Section 13(d) and 14(d) of the Exchange Act, in control of the Company materially diminished from the duties assigned to you immediately prior to a Change of Control; or 11.4.2 Without your express written consent, after a Change of Control, any reduction by the Company or any person, as that term is used in Section 13(d) and 14(d) of the Exchange Act, in control of the Company in your annual base compensation or annual bonus at Standard (or equivalent) rating from the amounts of such compensation and/or bonus in effect immediately before and during the fiscal year in which the Change of Control occurred (except that this Section 11.4.2 shall not apply to across-the-board salary or bonus reductions similarly affecting all executives of the Company and all executives of any person in control of the Company); or 11.4.3 Without your express written consent, after a Change of Control, the failure by the Company or any person, as that term is used in Section 13(d) and 14(d) of the Exchange Act, in control of the Company to increase your annual base compensation or annual bonus at Standard (or equivalent) rating at the times and in comparable amounts as they are increased for similarly situated senior executive officers of the Company and of any person, as that term is used in Section 13(d) and 14(d) of the Exchange Act, in control of the Company; or 11.4.4 Without your express written consent, after a Change of Control, the failure by the Company or by any person, as that term is used in Section 13(d) and 14(d) of the Exchange Act, in control of the Company to continue in effect any benefit or incentive plan or arrangement (except any benefit plan or arrangement which expires by its own terms then in effect upon the occurrence of a Change of Control) in which you are participating at the time of the Change of Control, unless a replacement plan or arrangement with at least substantially similar terms is provided to you; or 11.4.5 Without your express written consent, after a Change of Control, the taking of any action by the Company or by any person, as that term is used in Section 13(d) and 14(d) of the Exchange Act, in control of the Company which would adversely affect your participation in or materially reduce your benefits under any benefit plan or arrangement or deprive you of any other material benefit (including any miscellaneous benefit which is not represented and protected by a written plan document or trust) enjoyed by you at the time of a Change of Control; or 11.4.6 You terminate your employment (other than because of your death, Disability or Retirement) by giving the Company a Notice of Termination with a Termination Date not later than the first anniversary of the Change of Control; or 11.4.7 Any failure by the Company to comply with any of its material obligations under this Agreement, after you have given notice of such failure to the Company and the Company has not cured such failure promptly after its receipt of such notice. 11.5 "Retirement" means a voluntary or involuntary termination of your employment after age 65 or any voluntary termination at age 65 or earlier that entitles you to receive a normal or early retirement service pension under the Retirement Plans (or any successor or substitute plan or plans the Company puts into effect prior to a Change in Control). 12. Notice. All notices and other communications required or permitted under this Agreement shall be in writing and shall be deemed given when mailed by certified mail, return receipt requested, or by nationally recognized overnight courier, receipt requested, when addressed to you at your official business address when employed by the Company or at your home address as reflected in the Company's records from time to time and when addressed to the Company at its corporate headquarters, to the attention of the Board, with a required copy to the Company's Corporate Counsel. 13. Amendment and Assignment. This Agreement cannot be changed, modified or terminated except in a writing. You may not assign your duties with the Company to any other person. 14. Severability. If any provision of this Agreement or the application of this Agreement to anyone or under any circumstances is determined by a court to be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect any other provisions or applications of this Agreement which can be effective without the invalid or unenforceable provision or application, and such invalidity or unenforceability shall not invalidate or render unenforceable such provision in any other jurisdiction. 15. Remedies Cumulative; No Waiver. No remedy conferred on you or on the Company by this Agreement is intended to be exclusive of any other remedy, and each and every remedy shall be cumulative and shall be in addition to any other remedy given under this Agreement or now or later existing at law or in equity. No delay or omission by you or by the Company in exercising any right, remedy or power under this Agreement or existing at law or inequity shall be construed as a waiver of such right, remedy or power, and any such right, remedy or power may be exercised by you or the Company from time to time and as often as is expedient or necessary. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to any applicable conflicts of laws. 17. Counterparts. This Agreement may be signed by you and on behalf of the Company in one or more counterparts, each of which shall be one original but all of which together will constitute one and the same instrument. If this Agreement correctly sets forth our agreement on its subject matter, please sign and return to me the enclosed copy of this Agreement. Please keep the other copy for your records. Sincerely, FRONTIER CORPORATION By: -------------------------------------- Agreed to on ------------------------------ - ------------------------------------------- [Name] ADDENDUM TO LETTER AGREEMENT DATED AUGUST 16, 1995 The following provisions shall apply to the determination of the Supplemental Retirement Amount in accordance with Section 6.4.4 of the Agreement. 1. The Supplemental Retirement Amount shall be determined using the actuarial equivalent of the benefit payable under the Retirement Plans which you would have received had your employment continued for 36 months following the Termination Date and, using the Actuarial Assumptions (as defined below) of your actual benefit paid or payable, if any, under the Retirement Plans. The actuarial equivalent shall be determined by using the actuarial assumptions applied by the Company during the 90 day period immediately prior to a Change of Control in connection with the Retirement Plans (the "Actuarial Assumptions"). 2. The calculation of your Supplemental Retirement Amount shall also be based on the assumptions that your annual base and incentive compensation would have remained the same over those 36 months, all accrued benefits under the Retirement Plans are fully vested and the benefit accrual formulas are those provided for in the Retirement Plans during the 90 day period immediately prior to a Change of Control. 3. If all or a part of your Supplemental Retirement Amount is derived under a supplemental or excess retirement plan maintained by the Company for its executive employees (a "SERP"), then the amount of your Supplemental Retirement Amount which is derived from the SERP shall be paid from any trust of which you are a beneficiary to the extent of funding actuarially available in that trust to pay your Supplemental Retirement Amount. The following provisions shall apply to the calculation and procedures relating to the Gross-Up Payment in accordance with Section 7 of the Agreement. 1. The Company's independent auditors in the fiscal year in which the Change of Control occurs (the "Accounting Firm") shall determine whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be used in making such determination. The Accounting Firm shall provide detailed supporting calculations, together with a written opinion with respect to the accuracy of such calculations, to you and the Company within 15 business days of the receipt of a written request from either you or the Company. If the Accounting Firm is serving (or has served within the three years preceding the Change in Control) as accountant or auditor for the person in control of the Company following the Change of Control or any affiliate thereof, you may appoint another nationally recognized accounting firm to make the determinations required in connection with the Gross-Up Payment and the substitute accounting firm shall then be referred to as the Accounting Firm). The Company shall pay you any Gross-Up Payment, determined in accordance with this Addendum, within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that you will not be liable for any Excise Tax, it shall furnish you with a written opinion that your failure to report the Excise Tax on the applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon you and the Company. 2. If there is uncertainty about how Section 4999 is to be applied when the Accounting Firm makes its initial determination, and as a result the Gross-Up Payment made to you by the Company is determined (after following the procedures set forth in this Addendum) to be less than it should have been made (an "Underpayment"), and you are thereafter required to pay any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment and any such Underpayment shall be promptly paid by the Company to you or for your benefit. 3. You shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the Company to pay you the Gross-Up Payment. Your notice shall be given as soon as practicable but no later than ten business days after you have been informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. You shall not pay such claim prior to the expiration of the 30 day period following the date on which you gave such notice to the Company (or any shorter period, if the taxes claimed are due sooner). If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall: (a) give the Company any information reasonably requested by it relating to such claim, (b) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (c) cooperate with the Company in good faith in order effectively to contest such claim, and (d) permit the Company to participate in any proceedings relating to such claim. 4. The Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in connection with the claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and you agree to prosecute the contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts as the Company shall determine. 5. Any extension by the Company of the statute of limitations relating to payment of taxes for the taxable year for which such contested amount is claimed to be due shall be limited solely to such contested amount. The Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable under this Agreement and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 6. If the Company directs you to pay such claim and sue for a refund, the Company shall advance the amount of such payment to you, on an interest-free basis, and shall indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance. 7. If you receive a refund of any amount advanced to you by the Company, you will promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If the Company advanced to you any amounts and a determination is made that you will not be entitled to any refund with respect to such claim and the Company does not notify you in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and you will not be required to be repay it. The amount of such advance shall offset the amount of the Gross-Up Payment required to be paid. 8. The Company shall pay all fees and expenses of the Accounting Firm. The Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. EX-11 13 COMPUTATION OF NET INCOME PER SHARE 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, 1995 1994 1993 1992 1991 Income applicable to common stock $ 20,892 $178,870 $119,514 $101,511 $81,385 Add: Interest on convertible debentures (1) - 554 553 561 562 ------------------------------------------------- $ 20,892 $179,424 $120,067 $102,072 $81,947 Less: Increase in related federal income taxes (1) - 194 194 191 191 ------------------------------------------------- Adjusted income applicable to common stock $ 20,892 $179,230 $119,873 $101,881 $81,756 Average common shares outstanding (excluding common stock equivalents) 152,077 148,170 134,093 112,519 107,347 Adjustments for: Convertible debentures (1) - 502 502 528 530 Stock Options 9,592 12,183 19,137 23,661 20,280 ------------------------------------------------ Adjusted common shares assuming conversion of outstanding convertible debentures and stock options at the beginning of each period. 161,669 160,855 153,732 136,708 128,157 ================================================== Net income per average share of common stock on a fully diluted basis $ .13 $ 1.12 $ .78 $ .74 $ .64
(1) Convertible debentures are anti-dilutive in 1995. EX-13.1 14 MD&A AND FINANCIALS Exhibit 13.1 Management's Discussion of Results of Operations and Analysis of Financial Condition THE INFORMATION PRESENTED IN THIS MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES OF FRONTIER CORPORATION ("THE COMPANY" OR "FRONTIER") FOR THE THREE YEARS ENDED DECEMBER 31, 1995. ALL HISTORICAL FINANCIAL DATA PRESENTED HAVE BEEN RESTATED FOR 1995 POOLING OF INTERESTS TRANSACTIONS. Major Events The Company merged with ALC Communications Corporation (ALC) on August 16, 1995. ALC provided national long distance telecommunications services primarily to commercial users. Its revenues in 1994 exceeded $567 million. The merger with ALC gives the combined Company a nationwide presence in terms of size, strength and opportunities. Under the terms of the merger agreement, the Company exchanged two shares of its common stock for each of ALC's common shares. The Company issued 69.2 million shares to effect the merger. The merger was accounted for using the pooling of interests method of accounting. The Company completed several other acquisitions during 1995: . On March 1, 1995, prior to the merger with Frontier, ALC acquired ConferTech International, Inc. (ConferTech), a telecommunications company specializing in teleconferencing services and audio bridge equipment. ALC paid approximately $66 million in cash for ConferTech. . On March 17, 1995, the Company acquired American Sharecom, Inc. (ASI), a long distance company headquartered in Minneapolis, Minnesota. ASI had been one of the largest privately owned long distance companies in the country. ASI's sales operations are concentrated in the Midwest, Northwest and California. The Company acquired all of the outstanding shares of ASI in exchange for approximately 8.7 million shares of Frontier common stock. The transaction has been accounted for as a pooling of interests. . On March 29, 1995, the Company acquired Minnesota Southern Cellular Telephone Company (MSCTC). A total of 867,000 shares of Frontier common stock were reissued from treasury in exchange for all of the shares of MSCTC. The treasury shares were acquired from the sale of Ontonagon County Telephone Company and open market purchases. MSCTC is the non-wireline provider of cellular service in Minnesota Rural Service Area #10 and serves a population of 227,000 in an area south of Minneapolis. . On May 18, 1995, the Company purchased WCT Communications, Inc. for approximately $80 million in cash. WCT is a facilities-based long distance carrier providing service in 45 states primarily to carrier customers. . On July 11, 1995, the Company completed its purchase of Enhanced TeleManagement, Inc. (ETI), a privately-held telecommunications company specializing in the integration and resale of local, long distance, and ancillary telephone services to small and medium-sized business customers. ETI provides service in the Midwest and Northwest states. Frontier paid approximately $29 million in cash for ETI. . On August 8, 1995, Frontier acquired Schneider Communications, Inc. (SCI) and SCI's 80.8% interest in LinkUSA Corporation (LinkUSA) for $130 million in cash. SCI provides telecommunications services in the Midwest. LinkUSA develops software applications for telecommunications firms. On February 2, 1996, the Company acquired the remaining 19.2% interest in LinkUSA for $2.3 million. . On November 22, 1995, the Company completed its acquisition of Link-VTC, Inc. (Link-VTC), a Boulder, Colorado based telecommunications company specializing in videoconferencing services. The Company will pay a total cash purchase price in the range of approximately $12.4 million to $17.9 million, depending on the 1996 financial performance of Link-VTC. Revenues from the date of purchase for purchase acquisitions totaled $182 million in 1995. The Company expects to expand selectively through domestic and international acquisitions in the future. See Notes 2 and 3 to the Consolidated Financial Statements for additional information on all acquisitions. Consolidated Results of Operations Revenues were $2.1 billion in 1995, a $476.1 million, or 28.6%, increase over 1994. Revenues in 1994 increased $230.1 million or 16.0% over 1993. Increases in both years were led by Frontier's long distance communications services segment, which has reported higher sales through both internal growth and acquisitions. Costs and expenses were $1.9 billion, $1.3 billion, and $1.2 billion in 1995, 1994 and 1993, respectively. This resulted in operating margins of 18.6%, 19.5 % and 17.7% during 1995, 1994 and 1993, respectively, normalized for certain one time events. The reduction in 1995 operating margin results from the shift of the Company to a primarily long distance provider. The operating margin percent increase in 1994 over 1993 was driven by long distance revenue increases from billable minutes and improved operating efficiencies in the Local Communications Services segment. The Company has targeted operating synergies from the restructuring of the long distance operations, a process started in 1995, of $40 million in 1996 and $50 million per year thereafter. 18 Earnings per share were $.13, $1.12 and $.78 for the years ended 1995, 1994, and 1993, respectively. Excluding the impact of the nonrecurring adjustments discussed below, net income amounted to $218.7 million, $180.1 million and $127.5 million in 1995, 1994 and 1993 respectively. Earnings per share, excluding these adjustments, were $1.35, $1.12 and $.82 for the three years, increases of 20.5% and 36.6%, respectively. Nonrecurring Adjustments The consolidated results for the years 1993 through 1995 include a number of nonrecurring adjustments as summarized in the chart below and succeeding narrative.
- ------------------------------------------------------------------------ (All dollars, except per share amounts, are in thousands) 1995 1994 1993 - ------------------------------------------------------------------------ Earnings available for common $ 20,892 $178,870 $119,514 - ------------------------------------------------------------------------ Adjustments, net of taxes: Acquisition related and other 78,764 - 2,145 Gain on sale of assets (4,826) (7,109) (3,293) Early debt retirement 9,060 - 7,490 Regulatory accounting change 112,148 - - New accounting standards 1,477 7,197 - - ------------------------------------------------------------------------ Total adjustments 196,623 88 6,342 - ------------------------------------------------------------------------ Normalized earnings $217,515 $178,958 $125,856 ======================================================================== Earnings per share $ .13 $ 1.12 $ .78 - ------------------------------------------------------------------------ Adjustments: Acquisition related and other .49 - .01 Gain on sale of assets (.03) (.04) (.02) Early debt retirement .06 - .05 Regulatory accounting change .69 - - New accounting standards .01 .04 - - ------------------------------------------------------------------------ Total adjustments 1.22 - .04 - ------------------------------------------------------------------------ Earnings per share, after adjustments $ 1.35 $ 1.12 $ .82 ========================================================================
1. Acquisition Related and Other During 1995, in conjunction with the ALC merger and other acquisitions, the Company recorded an acquisition related charge of $78.8 million, net of an income tax benefit of $35.4 million. The acquisition related charge is associated with the integration of the Company's recent acquisitions as well as the ALC merger related transaction costs. The acquisition related charge consists of an asset writedown of $71.5 million, transaction costs of $19.0 million, severance costs of $11.8 million and other acquisition related items of $11.9 million. The remaining liability at December 31, 1995 was $83.1 million. The Company believes that this balance is adequate for the completion of these activities during 1996. See Note 4 to the Consolidated Financial Statements for further detail. During 1993, as part of the Rochester, New York operating company's Settlement Agreement with the New York State Public Service Commission, the Company agreed to write off one-half of the costs ($3.3 million, $2.1 million after tax) previously deferred as part of a project to redesign customer account records, order flow and customer billing records. 2. Gain on Sale of Assets Gain on sale of assets includes the sale of Ontonagon County Telephone Company during 1995 ($4.8 million non-taxable gain), Minot Telephone Company during 1994 ($11.3 million pre-tax gain, $7.1 million after taxes) and the sales of S&A Telephone Company and a substantial portion of an investment in a Canadian long distance company during 1993 ($4.4 million pre-tax gain, $3.2 million after taxes). 3. Early Debt Retirement In 1995, the Company acquired, through a tender offer, $76.8 million of ALC's 9% Senior Subordinated Notes for $83.5 million plus accrued interest. The early retirement resulted in an extraordinary loss of $5.8 million, net of applicable income taxes of $3.7 million, including other costs of $2.8 million. In 1995, the Company also retired early its outstanding 9% debentures scheduled to mature in 2020. The Company recorded an extraordinary loss of $3.2 million, net of applicable income taxes of $1.7 million. In 1993, ALC retired early $72.4 million of its 11-7/8% Senior Subordinated Notes. The early retirement resulted in an extraordinary loss of $7.5 million, net of applicable income taxes of $4.0 million. 4. Regulatory Accounting Change As a result of changes in regulation and increasing competition in the telecommunications industry, the Company discontinued the use of regulatory accounting, Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting for the Effects of Certain Types of Regulation" as of September 30, 1995 for its local communications companies. This non-cash, extraordinary write-off totaled $112.1 million, net of applicable income taxes of $68.4 million. The write-off was primarily related to the reduction in the recorded values of long lived telephone plant assets. Subsequent to September 30, 1995, the Company began using asset lives that are based on market forces and technological changes and not on regulatory requirements to depreciate its telephone plant assets. The impact of discontinuing FAS 71 will not be significant to the results of operations in the future. See Note 5 to the Consolidated Financial Statements for further detail. 5. New Accounting Standards Frontier adopted FAS 116, "Accounting for Contributions Received and Made" effective September 30, 1995. FAS 116 requires that the Company reflect in current expenses an accrual for the cost of multi-year charitable contributions. The cumulative effect of adopting FAS 116 was a charge of $1.5 million, net of applicable income taxes of $0.8 million. As of January 1, 1994, the Company adopted FAS 112, "Employers' Accounting for Postemployment Benefits," related to the accounting for certain employee benefits costs. The cumulative effect of adopting FAS 112 was an after-tax charge of $7.2 million, net of applicable income taxes of $3.9 million. Open Market Plan At its public meeting on October 13, 1994, the New York State Public Service Commission (PSC) unanimously approved the Rochester, New York subsidiary operation's (Rochester Telephone) Open Market Plan and Corporate Restructuring (Open Market Plan). Rochester Telephone generated 20.3% of the Company's 1995 normalized operating income. The PSC subsequently issued a written Order in November 1994. The Open Market Plan was 19 approved by shareowners in December 1994 and became operational on January 1, 1995. During the seven year period of the Open Market Plan Agreement, rate reductions of $21 million, $11.5 million of which occurred in 1995, will be implemented for Rochester area consumers and rates charged for basic residential and business telephone service may not be increased. Under the Open Market Plan Agreement, Rochester Telephone is no longer subject to rate of return regulation and thus the company is able to retain any expense savings as well as additional revenue generated from the sale of new products and services. The Open Market Plan promotes telecommunications competition in the Rochester, New York market by providing for (1) interconnection of competing local networks including reciprocal compensation for terminating traffic, (2) equal access to network databases, (3) access to local telephone numbers and (4) service provider telephone number portability. The inherent risk associated with opening the Rochester market to competition is that some customers are able to purchase services from competitors, which reduces the number of retail customers and potentially causes a decrease in the revenues and profitability for Rochester Telephone. However, results in 1995 indicate that a stimulation of demand in the use of the network and new product revenue can offset the losses from customer migration. Increased competition may also lead to additional price decreases for services, adversely impacting Rochester Telephone's margins. However, the Open Market Plan does not require Rochester Telephone to rebate any additional earnings achieved through operating efficiencies that previously would have been shared with customers. AT&T Communications of New York filed a complaint with the PSC for reconsideration of the Open Market Plan on October 3, 1995. A petition by AT&T to the same effect was dismissed earlier in 1995 as premature. The current complaint seeks numerous changes in light of AT&T's experience, including change in the minutes of use surcharge and a number of operational and support activities. Some of these issues also are being considered in other states in other unrelated local competition proceedings. The PSC has directed that the companies seek to resolve this complaint through negotiation before the PSC would act. Such discussions are continuing and the Company cannot predict the outcome of this matter. Although Rochester Telephone is a wholly-owned subsidiary of Frontier Corporation, the Company's ability to control the management and operations of Rochester Telephone is somewhat restricted by various provisions of the Open Market Plan. The Company has made certain commitments under the Open Market Plan that impact the operations of Rochester Telephone. These include certain financial covenants that are intended to insure that Rochester Telephone will continue to possess 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. Rochester Telephone is in compliance with all of the covenants as of December 31, 1995. Strategic Developments During 1995, Frontier began the transformation from a provider of local and long distance service in specific parts of the country to becoming a nationwide provider of integrated communications services. The Company's goal is to continue to develop its product and customer base and build larger customer clusters in target segments and geographic markets, with the objective of becoming a telecommunications company that operates across line-of-business boundaries. The Company will continue to look for partners to supplement and complement skills not available internally. The Company believes that the Federal telecommunications legislative reform approved by Congress on February 1, 1996 and subsequently signed by President Clinton, is favorable and will provide Frontier with additional competitive opportunities. It will allow the Company to more easily enter previously restricted markets and to provide integrated services to customers. The Company is one of few telecommunications companies today that can jointly market and sell local, long distance and wireless services as one company and one brand. The Company's success will be measured by its ability to outperform the competition, not by whether legislative rules are changed to reflect market forces. The Company believes that its experience in providing integrated services and the Open Market Plan competition it faced in 1995 are an advantage. The Company anticipates that the government, specifically the United States Department of Justice, will continue to play a meaningful role in any decision to approve or disapprove entry by the Regional Bell Operating Companies into the long distance market, including their compliance with provisions that mandate local service resale opportunities for competitors. With expanded competition, Frontier is exposed to an increased level of business risks. Frontier has formidable competitors of greater size and expects more entrants into the long distance business and its local markets. The Company also has larger customers than it had as a predominantly local exchange company, the loss of which could significantly reduce revenue, at least on a temporary basis. The Company believes that its strategies outlined above will mitigate the risks and uncertainties it faces. Results of Operations Frontier redefined its business segments in the beginning of 1995 to better distinguish its primary lines of business. The Company is now reporting its operating results in four segments: Long Distance Communications Services, Local Communications Services, Wireless Communications Services, and Corporate 20 Operations and Other. This classification replaces the previous manner of reporting which reflected only two groups, Telephone Operations and Telecommunications Services. Each of Frontier's segment results are reviewed below. Long Distance Communications Services Long Distance Communications Services is the Company's largest segment in terms of size and growth. It accounted for over 72% of the Company's 1995 fourth quarter revenue versus 27% in 1992 as reported. The Company expects to complete the integration of its long distance business with ALC and the other acquisitions during 1996. See Note 2 and Note 3 to the Consolidated Financial Statements for further details on the merger and other acquisitions. This restructuring process will minimize redundant facilities and staffing. These redundancies had a negative impact on the Company's gross margin during 1995. Revenues were $1.5 billion, $1.0 billion, and $.8 billion in 1995, 1994 and 1993, respectively, representing a 46.5% increase in 1995 and a 27.9% increase in 1994. Excluding the impact of 1995 purchase acquisitions, revenues grew 28.7% in 1995. In 1995, the Company introduced a unified product set to all of its customers called Clear Value, offering options for service that would ultimately include long distance, local and cellular services in all markets. Clear Value did not have a significant impact on 1995 revenues. It is expected to be the product set that is marketed across the Frontier organization in 1996. Carrier revenue growth was positively impacted by a major carrier customer whose revenue has increased substantially for the year and represents 14.2% of long distance revenues for 1995. It is the Company's understanding that this customer may be installing long distance switching capacity which, as completed, could result in a portion of this traffic gradually moving to the customer's network. However, the customer has entered into a three year agreement with the Company effective April 1, 1995 and amended October 27, 1995. The Company will retain significant traffic volumes and has obtained provisions under the agreement regarding exclusivity and minimums that it views as favorable. Minutes of use continue to grow as the Company expands its customer base. Minutes of use for 1995 exceeded 10.1 billion, representing a 114.9% increase since 1993. Revenue per minute, a common industry measure, has decreased 12.8% during the three years reported. The decrease in revenue per minute is due to an increasing percent of carrier traffic and price decreases that the Company believes are occurring across the industry as a result of increased competition. Although carrier revenue is at a lower rate than business and residential, the increased traffic has a positive impact on operating income due to lower selling, general and administrative expenses. Costs and expenses for the long distance operation were $1.3 billion, $.9 billion and $.7 billion in 1995, 1994 and 1993 respectively, excluding nonrecurring charges. This increase is primarily the result of increased traffic volumes due to internal growth and purchase acquisitions. Operating costs excluding purchase acquisitions increased by 27.7% in 1995 and 24.0% in 1994. Cost of access as a percentage of revenues was 58% in 1995 and 56% in 1994 and 1993. The 1995 cost of access percentage was higher than prior years primarily due to the acquisitions, which resulted in instances of redundant network and higher carrier traffic levels, which produces a lower revenue per minute rate than business and consumer segment traffic. The Company's network integration and reconfiguration is expected to be completed during 1996 and will result in network cost reductions. Other costs, which consist primarily of selling, marketing, customer service, administrative costs and depreciation and amortization decreased to 27.3% of revenues in 1995. This represents a 2.2% decrease from 1994 and a 9.1% decrease from 1993. These reductions as a percentage of revenues are due to increases in revenues without corresponding cost increases, partially offset by increased depreciation and amortization. Depreciation and amortization increased by $21.8 million over the prior year due to increased goodwill amortization of $10.8 million caused by the 1995 purchase acquisitions. The Company expects further decreases in other costs, mostly administrative, as integration efforts are realized in 1996. Operating income, excluding nonrecurring charges, rose 30.6% and 53.4% over 1994 and 1993, respectively. Operating margin as a percent of revenue decreased from 15.9% in the prior year to 14.2% in 1995. The reduction in 1995 operating margin percent was caused by: (1) the assimilation of the Company's long distance acquisitions, (2) an increased percent of lower margin carrier traffic and (3) aggressive product pricing designed to maximize operating income. As the network integration is completed, the Company expects that greater efficiencies will lead to improved operating margin. However, this cannot be assured given competitive conditions. Local Communications Services Local Communications Services is comprised of Frontier's local telephone operations in Rochester, New York and the regional operations, which are made up of 33 telephone subsidiaries in 13 states. In addition, the local service revenues and associated expenses generated from the efforts of Frontier Communications of Rochester, the newly formed competitive telecommunications company that provides an array of services on a retail basis in the Rochester marketplace, are included with the Rochester, New York segment. In addition to providing strong cash flow and overall financial returns, the local communications companies have been successful in marketing and selling integrated services to their customers. Revenues for 1995 were $621.7 million, an increase of $12.0 million or 2.0%. Revenues for 1994 increased 2.7% over the prior year. Excluding the sales of Ontonagon County Telephone Company in March 1995, and Minot Telephone Company in 21 May 1994, revenues increased 3.5% in 1995 and 4.1% in 1994. These revenues were driven by a 7.3% increase in access lines from 1993 to 1995, a 13.5% increase in minutes of use during the same period, and ongoing sales of enhanced features and services, offset by continued decreases in long distance access prices charged. In 1995, revenues in the Rochester market increased 3.1% over the prior year. Access line growth was 4.5% in 1995, more than double the 1994 growth rate of 1.9%. Higher demand for enhanced services in the environment of the Open Market also contributed to 1995 revenue increase. The 1994 revenue growth in the Rochester market compares favorably with a growth rate of 1.4% in 1993. In general, prices being charged both to customers and long distance companies for access service usage have declined over the past three years due to regulatory requirements and to increased competition in the Company's largest markets. The Company expects retail and wholesale prices to decline as competition increases and regulatory controls are relaxed. Costs and expenses, excluding acquisition related charges, were $423.4 million in 1995, a decrease of $6.0 million, or 1.4% from 1994. Prior year costs and expenses decreased $1.6 million. The 1995 decrease was due to the telephone company dispositions in Regional Operations ($6.2 million) and ongoing cost controls, offset by increased selling and marketing costs. The 1994 decrease was primarily caused by telephone company dispositions ($5.9 million), combining certain administrative operations, lower employee benefit costs and an early retirement program. Employees per 10,000 access lines, a common measure of efficiency for telephone companies, was 31 for 1995, 34 for 1994 and 38 for 1993 representing a decrease of 18.4% over this three year period. The Local Communications Services segment's operating margins continue to increase. Operating margins, excluding nonrecurring items, were 31.9% in 1995, 29.6% in 1994 and 27.4% in 1993. Wireless Communications Services Wireless Communications Services is comprised of the Company's ownership interests in Alabama Rural Service Area's (RSA) #4 and #6, in which the Company has a 70 percent interest, and Minnesota RSA #10, in which the Company acquired a 100 percent interest in late March 1995. This latter acquisition was accounted for as a purchase transaction. Revenues were $12.3 million for 1995, down $11.5 million, or 48.3%, from the comparable period in 1994. While the 1995 results reflect the operations of the Alabama and Minnesota cellular properties, the 1994 results reflect the operations associated with the Alabama cellular properties as well as the upstate New York wireless properties that are no longer consolidated as a result of a joint venture formed with NYNEX Corporation in July 1994. The Company's New York wireless properties 1994 revenues prior to July were $17.6 million. After July 1994, the Company's share of the joint venture earnings are reported below operating income. The joint venture was formed to operate a unified cellular network in upstate New York. Revenues from 1993 include a full year of the New York wireless properties contributed to the joint venture. During 1995, NYNEX Corporation contributed its cellular interests partnership into a new partnership it formed with Bell Atlantic Corporation. Corporate Operations and Other Corporate Operations comprise the expenses traditionally associated with a holding company, including executive and board of directors expenses, corporate finance and treasury, investor relations, corporate communications, corporate planning, legal services and business development. The Other category is comprised primarily of Frontier Network Systems ("FNS") and the Company's information technologies operation (Frontier Information Technologies). FNS markets and installs telecommunications systems and equipment. Costs and expenses, before nonrecurring charges, were relatively consistent for all years. During 1995, FNS operating costs were higher due to increased sales, but this was offset by lower Corporate operating expenses. Corporate costs were higher in 1994 and 1993 because of the Open Market Plan formation costs and the holding company organization costs. Other Income Statement Items Interest Expense Interest expense was $54.7 million in 1995, an increase of 6.5% over 1994. During 1995, the Company used excess cash generated in 1994 and borrowed against its line of credit to complete its long distance cash purchase acquisitions. The line of credit borrowings caused interest expense to increase. During the third and fourth quarters of 1995, the Company refinanced $76.8 million of the ALC 9% Senior Subordinated Notes and $62.8 million of the outstanding 9% Debentures scheduled for payment in 2020, which will lower interest charges in the future. Interest expense was lower in 1994 than in 1993 due to lower debt levels. In December 1994, as a part of the Open Market Plan implementation, Rochester Telephone Corp. issued $120 million of debt in the form of a Revolving Credit Agreement. The Company also repurchased $30 million of outstanding debentures. These December transactions did not have a significant impact on 1994 interest expense. During 1993, the Company recalled $160.4 million of debt, including the 11-7/8% ALC Subordinated Notes which had an effective interest rate of 13.6%. In addition, line of credit borrowings decreased in 1994 and 1993 due to improved cash from operations. Equity Earnings from Unconsolidated Wireless Interests Equity earnings from the Company's interests in wireless partnerships were $3.7 million in 1995, $3.2 million in 1994 and $1.3 million in 1993. Equity earnings from 1995 include a full year of the 50/50 joint venture formed with NYNEX Corporation, versus six months operations in 1994. Prior to 1994, the Company's revenues and expenses associated with its Rochester 22 and Utica-Rome cellular partnerships in New York State had been fully consolidated. Equity earnings from the joint venture in 1995 were lower than expected because of significant customer acquisition costs and higher than expected toll fraud roaming charges. Income Taxes The effective tax rate in 1995 was 41.1%, versus 36.8% in 1994 and 36.4% in 1993. The effective tax rate increased in 1995 primarily due to additional amounts of nondeductible goodwill amortization and nondeductible transaction costs from the Company's long distance merger and other acquisitions. Financial Condition Review of Cash Flow Activity Despite the Company's merger and acquisitions, Frontier was able to focus attention on translating financial results into a cash return on its investments. Cash provided from operations in 1995, normalized for $31.1 million of cash paid for acquisition related charges, amounted to $357.1 million. This compares favorably with cash from operations of $305.5 million in 1994 and $292.2 million in 1993. Cash from operations for 1995 was driven by the Company's expanded revenue base in long distance and the strong operating returns produced by the local communications services segment. The 1995 accounts receivable balance increased primarily because of the significant revenue growth in long distance. The Company was negatively impacted in 1995 by one time payments of accounts payable related to purchase acquisitions of $29.3 million. In 1994, cash from operations was offset in part by increased working capital requirements and the taxes associated with the gain on the sale of the Minot property in North Dakota in May 1994. Earnings before interest, taxes, depreciation and amortization (EBITDA) is a common measurement in the long distance industry of the ability to generate cash flow from operations. EBITDA should be used as a supplement to, not in place of, cash from operating activities. The Company's EBITDA was $568.2 million, $478.9 million and $403.7 million, excluding unusual items, in 1995, 1994 and 1993, respectively, representing a 40.7% increase over this time period. Cash used for investing activities was $519.3 million, $89.7 million and $151.2 million in 1995, 1994, and 1993, respectively. The Company's cash purchase acquisitions of $349.5 million were the largest use of investing activities in 1995. Cash used for investing activities in 1994 was offset by the excess cash generated from the sale of Minot Telephone of $55.7 million. Net expenditures for property, plant and equipment amounted to $163.7 million, $112.2 million and $120.5 million in 1995, 1994 and 1993, respectively. During this three year period, the Company has made significant investments in its long distance, local and wireless networks to upgrade the functionality, optimization and capacity required to meet its customers needs. Cash flows from financing activities amounted to net outflows of $134.5 million in 1995, compared with net inflows of $109.6 million in 1994 and net outflows of $177.4 million in 1993. During 1995, the Company made $4.9 million of scheduled debt repayments and also refinanced $274.4 million of its long term debt instruments. The refinancings included repayment of ALC's 9% Senior Subordinated Debt for $83.5 million plus accrued interest and the retirement of $69.8 million of 9% debentures due in 2020. These early retirements were financed with excess cash and commercial paper borrowings. Dividend payments in 1995 increased to $82.8 million because of the increase in common shares outstanding, which was primarily caused by the 69.2 million shares issued in connection with the ALC merger. The annualized fourth quarter dividends declared amount to $134.3 million. The increased annual dividend requirement is expected to be funded through increased operating cash flow. The increase in 1994 financing activities resulted from $104 million in proceeds from the Company's equity offering in February 1994 and the net proceeds of $70.9 million of debt as a part of the Company's Open Market Plan reorganization, offset in part by the payment of dividends to shareowners and the retirement of certain high cost debt earlier in the year. In 1993, the Company retired early $88 million of its First Mortgage Bonds and $72.4 million of ALC's 11-7/8% Senior Subordinated Notes. The Company used cash from operations and of other lower cost debt instruments to refinance these early retirements. Liquidity and Capital Resources The Company has the liquidity and capital to adequately meet its forecasted financing needs. In March 1995, Rochester Telephone Corp. issued $40 million of Medium Term Notes and used the proceeds to pay down a portion of its outstanding Revolving Credit Agreement balance. In addition, it amended the Rochester Telephone Corp. Revolving Credit Agreement to reduce the maximum line of credit from $160 million to $100 million and release the security interest on its assets. In August 1995, the Company consolidated its $125 million line of credit and increased the amount available to $250 million through the establishment of a Revolving Credit Agreement with eleven banks. The total borrowings and amounts available under these lines of credit were $187.6 million and $162.4 million, respectively, at December 31, 1995. On November 15, 1995, the Company filed a $500 million universal shelf registration with the Securities and Exchange Commission which became effective on January 30, 1996. The shelf registration will allow the Company to issue and register a combination of debt securities, common stock, preferred stock or warrant securities. 23 Proceeds will be used for general corporate purposes including, but not limited to financing and growth activities. Additionally, in 1994, shareowners gave their approval to authorize 4 million shares of a new class of preferred stock which has been designated as Class A Preferred Stock. The Company's working capital was $18.9 million, $368.1 million and $11.7 million at December 31, 1995, 1994 and 1993. The changes in the 1995 and 1994 working capital are due to the Company's acquisition program. Frontier's working capital program generates cash for operating needs and growth. At December 31, 1995, aggregate debt maturities amounted to $14.9 million for 1996, $8.1 million for 1997 and $6.2 million for 1998. Despite the Company's recent acquisition program, the debt to total capital ratio at December 31, 1995 remained strong at 41.0%, as compared to 41.2% in the prior year and 44.6% in 1993. Pretax interest coverage, which measures the Company's ability to adequately cover its financing costs was 7.6 times in 1995, versus 6.8 times in 1994 and 4.5 times in 1993, excluding nonrecurring charges for all years. As a result of Frontier's merger with ALC in August 1995, Standard & Poor's, Moody's and Fitch downgraded the Company's long-term credit ratings to "A", "A3" and "A", respectively. The remaining rating agency, Duff & Phelps, affirmed the Company's "A" rating following the announcement of the merger. In spite of the combined entity's strengthened financial position, the rating agencies cited concern with the dramatic shift in the Company's business risk associated with an increasing dependence on the more competitive long distance business. In addition, despite expected near term improvements in the Company's debt protection measures, Moody's also downgraded the Company's commercial paper rating from "P-1" to "P-2". Moody's is the only rating agency to have downgraded the Company's short-term credit rating as the three other agencies maintained their "P-1" rating. These ratings remained in effect at December 31, 1995. The financing requirements associated with the Company's network modernization programs have remained relatively stable. Frontier has a switching network that is over 99% digital. Total gross expenditures for property, plant and equipment in 1996 are currently anticipated to be about $175 million. The anticipated increase is largely due to capital requirements for capacity growth and the Company's networks. Frontier expects to generate sufficient operating cash to finance its capital program. In December 1995, the Board of Directors increased the quarterly dividend paid on common stock to $0.2125 cents per share, payable February 1, 1996, to shareowners of record on January 15, 1995. This 2.4% increase raises the annualized common stock dividend to $0.85 per share. This represents the 36th consecutive annual increase in the Frontier dividend. New Accounting Pronouncements The Financial Accounting Standards Board (FASB) issued FAS 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," effective for fiscal years beginning after December 15, 1995, which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, goodwill related to those assets to be held and used, and for long lived assets and certain intangibles to be disposed of. The Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. FAS 121 requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. The Company has not yet quantified the impact of adopting FAS 121, but it is not expected to significantly impact future operating activity. FAS 121 is required to be adopted in 1996. The FASB issued FAS 123, "Accounting for Stock-Based Compensation," effective for fiscal years beginning after December 15, 1995, which establishes accounting and reporting for stock-based employee compensation plans. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. This statement defines a fair value based method of accounting for an employee stock option or similar equity instrument, but also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25 (APB 25) "Accounting for Stock Issued to Employees". Entities electing to continue to measure compensation cost following the provisions of APB 25 are required to make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting as defined by this statement had been applied. The Company will adopt the provisions of FAS 123, effective January 1, 1996, and will elect to continue to follow the provisions of APB 25 and provide the pro forma fair value disclosures required by the new pronouncement. 24 Report of Independent Accountants [LOGO OF PRICE WATERHOUSE LLP] To the Shareowners of Frontier Corporation In our opinion, based upon our audits and the report of other auditors, 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 and its subsidiaries at December 31, 1995, 1994 and 1993, 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 did not audit the financial statements of ALC Communications Corporation, a wholly owned subsidiary, which statements reflect total assets of $432,146,000, $284,725,000 and $193,541,000 at December 31, 1995, 1994 and 1993, respectively, and total revenues of $852,057,000, $567,824,000 and $436,432,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for ALC Communications Corporation, is based solely on the report of the other auditors. 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 and the report of other auditors provide a reasonable basis for the opinion expressed above. As discussed in Note 14 to the financial statements, during the third quarter of 1995 the Company adopted the provisions of Statement of Financial Accounting Standards No. 116, "Accounting for Contributions Received and Contributions Made." As discussed in Note 5 to the financial statements, during the third quarter of 1995 the Company discontinued accounting for the operations of its local communications subsidiaries in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation." As discussed in Note 14 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." /s/ Price Waterhouse LLP Price Waterhouse LLP January 22, 1996 Rochester, NY Report of Management The integrity and objectivity of the accompanying financial information 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/ Marvin C. Moses Marvin C. Moses Vice Chairman and Chief Financial Officer Report of Audit Committee The Audit Committee of the Board of Directors is comprised of four 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 Chairman, Audit Committee 25 Business Segment Information
- ------------------------------------------------------------------------------------------------------------------- In thousands of dollars Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- Long Distance Communications Services Revenues $1,480,313 $1,010,425 $ 790,139 Operating Income: Operating Income Before Acquisition Related Charges 210,462 161,107 105,048 Acquisition Related Charges (91,448) -- -- - ------------------------------------------------------------------------------------------------------------------- Total Operating Income $ 119,014 $ 161,107 $ 105,048 Depreciation and Amortization $ 61,070 $ 39,290 $ 32,480 Capital Expenditures $ 68,265 $ 41,668 $ 30,884 Identifiable Assets/(1)/ $ 995,712 $ 482,890 $ 377,538 =================================================================================================================== Local Communications Services Revenues: Rochester, NY Operations $ 315,273 $ 305,734 $ 301,447 Regional Operations 306,452 303,944 292,424 - ------------------------------------------------------------------------------------------------------------------- Total Revenues $ 621,725 $ 609,678 $ 593,871 Operating Income: Operating Income Before Acquisition Related and Other Charges: Rochester, NY Operations $ 80,991 $ 76,655 $ 72,046 Regional Operations 117,290 103,595 90,801 Acquisition Related and Other Charges: Rochester, NY Operations (1,589) -- (3,300) Regional Operations (8,660) -- -- - ------------------------------------------------------------------------------------------------------------------- Total Operating Income $ 188,032 $ 180,250 $ 159,547 Depreciation and Amortization: Rochester, NY Operations $ 55,003 $ 59,098 $ 60,982 Regional Operations 47,886 49,490 51,541 - ------------------------------------------------------------------------------------------------------------------- Total Depreciation and Amortization $ 102,889 $ 108,588 $ 112,523 Capital Expenditures $ 73,766 $ 60,711 $ 89,823 Identifiable Assets/(1)/ $1,153,069 $1,250,798 $1,264,994 =================================================================================================================== Wireless Communications Services Revenues $ 12,314 $ 23,840 $ 29,119 Operating Income $ 1,164 $ 1,142 $ 3,125 Depreciation and Amortization $ 2,418 $ 4,522 $ 3,205 Capital Expenditures $ 3,308 $ 2,982 $ 3,003 Identifiable Assets/(1)/ $ 102,647 $ 67,166 $ 65,474 =================================================================================================================== Corporate Operations and Other Revenues $ 29,339 $ 23,602 $ 24,319 Operating Loss: Operating Loss Before Acquisition Related Charges $ (11,438) $ (16,873) $ (16,083) Acquisition Related Charges (12,542) -- -- - ------------------------------------------------------------------------------------------------------------------- Total Operating Loss $ (23,980) $ (16,873) $ (16,083) Depreciation and Amortization $ 3,332 $ 923 $ 558 Capital Expenditures $ 17,236 $ 8,374 $ 132 Identifiable Assets/(1)/ $ 200,895 $ 526,491 $ 283,219 =================================================================================================================== Consolidated Revenues $2,143,691 $1,667,545 $1,437,448 Operating Income: Operating Income Before Acquisition Related and Other Charges $ 398,469 $ 325,626 $ 254,937 Acquisition Related and Other Charges (114,239) -- (3,300) - ------------------------------------------------------------------------------------------------------------------- Total Operating Income $ 284,230 $ 325,626 $ 251,637 Depreciation and Amortization $ 169,709 $ 153,323 $ 148,766 Capital Expenditures $ 162,575 $ 113,735 $ 123,842 Identifiable Assets $2,108,592 $2,060,794 $1,721,545 ===================================================================================================================
(1) Includes intercompany accounts that are eliminated in consolidation of $343,731, $266,551, and $269,680, in 1995, 1994 and 1993, respectively. See accompanying Notes to Consolidated Financial Statements. 26 Consolidated Statements of Income
- ---------------------------------------------------------------------------------------------------------------------------- In thousands of dollars, except per share data Years Ended December 31, 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- Revenues $2,143,691 $1,667,545 $1,437,448 - ---------------------------------------------------------------------------------------------------------------------------- Costs and Expenses Operating expenses 1,527,050 1,139,587 982,996 Depreciation and amortization 169,709 153,323 148,766 Taxes other than income taxes 48,463 49,009 50,749 Acquisition related and other charges 114,239 -- 3,300 - ---------------------------------------------------------------------------------------------------------------------------- Total Costs and Expenses 1,859,461 1,341,919 1,185,811 - ---------------------------------------------------------------------------------------------------------------------------- Operating Income 284,230 325,626 251,637 Interest expense 54,660 51,312 58,022 Other income and expense: Gain on sale of assets 4,826 10,063 4,449 Equity earnings from unconsolidated wireless interests 3,676 3,185 1,296 Interest income 9,673 8,364 1,867 Other (expense) income, net (2,081) 406 926 - ---------------------------------------------------------------------------------------------------------------------------- Income Before Taxes, Extraordinary Items and Cumulative Effect of Changes in Accounting Principles 245,664 296,332 202,153 Income taxes 100,896 109,078 73,509 - ---------------------------------------------------------------------------------------------------------------------------- Income Before Extraordinary Items and Cumulative Effect of Changes in Accounting Principles 144,768 187,254 128,644 Extraordinary items (121,208) -- (7,490) Cumulative effect of changes in accounting principles (1,477) (7,197) -- - ---------------------------------------------------------------------------------------------------------------------------- Consolidated Net Income 22,083 180,057 121,154 Dividends on preferred stock 1,191 1,187 1,640 - ---------------------------------------------------------------------------------------------------------------------------- Income Applicable to Common Stock $ 20,892 $ 178,870 $ 119,514 ============================================================================================================================ Earnings Per Common Share Income before extraordinary items and cumulative effect of changes in accounting principles $ .89 $ 1.16 $ .83 Extraordinary items (.75) -- (.05) Cumulative effect of changes in accounting principles (.01) (.04) -- - ---------------------------------------------------------------------------------------------------------------------------- Earnings Per Common Share $ .13 $ 1.12 $ .78 ============================================================================================================================ Average Common Shares Outstanding (in thousands) 161,669 160,353 153,230 ============================================================================================================================
See accompanying Notes to Consolidated Financial Statements. 27 Consolidated Balance Sheets
- ---------------------------------------------------------------------------------------------------------------------------- In thousands of dollars, except per share data December 31, 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 31,449 $ 359,309 $ 33,970 Short-term investments -- 9,047 349 Accounts receivable, (less allowance for uncollectibles of $28,515, $11,407 and $9,832, respectively) 404,081 263,815 229,984 Materials and supplies 12,928 8,586 11,208 Deferred income taxes 43,588 5,712 3,329 Prepayments and other 31,089 27,357 24,594 - ---------------------------------------------------------------------------------------------------------------------------- Total Current Assets 523,135 673,826 303,434 Property, plant and equipment, net 881,309 1,034,442 1,080,135 Goodwill and customer base 550,081 222,442 215,962 Deferred and other assets 154,067 130,084 122,014 - ---------------------------------------------------------------------------------------------------------------------------- Total Assets $2,108,592 $2,060,794 $1,721,545 ============================================================================================================================ LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities Accounts payable $ 373,022 $ 230,702 $ 211,532 Advance billings 8,658 12,719 12,573 Dividends payable 33,247 15,487 14,057 Debt due within one year 14,871 4,966 4,962 Taxes accrued 26,842 28,070 30,170 Other liabilities 47,561 13,754 18,466 - ---------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 504,201 305,698 291,760 Long-Term debt 618,867 661,549 581,707 Deferred income taxes 15,644 98,217 104,232 Deferred employee benefits obligation 58,385 46,001 16,121 - ---------------------------------------------------------------------------------------------------------------------------- Total Liabilities 1,197,097 1,111,465 993,820 - ---------------------------------------------------------------------------------------------------------------------------- Shareowners' Equity Preferred stock 22,769 22,777 22,785 Common stock, par value $1.00, authorized 300,000,000 shares; 158,063,387 shares, 149,294,195 shares and 108,630,517 shares issued in 1995, 1994, and 1993 158,063 149,294 108,630 Capital in excess of par value 420,172 379,404 308,649 Retained earnings 317,149 397,854 289,852 - ---------------------------------------------------------------------------------------------------------------------------- 918,153 949,329 729,916 Less-- Treasury stock, 6,375 shares in 1995 and 56,413 shares in 1993, at cost 147 -- 2,191 Unearned compensation-restricted stock plan 6,511 -- -- - ---------------------------------------------------------------------------------------------------------------------------- Total Shareowners' Equity 911,495 949,329 727,725 - ---------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareowners' Equity $2,108,592 $2,060,794 $1,721,545 ============================================================================================================================
See accompanying Notes to Consolidated Financial Statements. 28 Consolidated Statements of Cash Flows
- ---------------------------------------------------------------------------------------------------------------------------- In thousands of dollars Years Ended December 31, 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 22,083 $ 180,057 $ 121,154 - ---------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary items 194,932 -- 11,490 Cumulative effect of changes in accounting principles 2,272 11,072 -- Acquisition related and other charges 114,239 -- -- Depreciation and amortization 169,709 153,323 148,766 Gain on sale of assets (4,826) (10,063) (4,449) Equity earnings from unconsolidated wireless interests (3,676) (3,185) (1,296) Other, net 1,326 511 399 Changes in operating assets and liabilities, exclusive of impacts of purchase acquisitions: Increase in accounts receivable (99,127) (37,691) (28,831) (Increase) decrease in materials and supplies (1,470) 1,824 4,728 Decrease (increase) in prepayments and other current assets 6,480 (2,434) (61) Increase in deferred and other assets (32,482) (17,478) (1,168) Increase in accounts payable and advance billings 30,585 32,544 21,514 Increase (decrease) in taxes accrued and other current liabilities 8,663 (746) 4,422 Increase in deferred employee benefits obligation 9,947 6,958 14,302 (Decrease) increase in deferred income taxes (92,631) (9,227) 1,263 - ---------------------------------------------------------------------------------------------------------------------------- Total adjustments 303,941 125,408 171,079 - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 326,024 305,465 292,233 - ---------------------------------------------------------------------------------------------------------------------------- Investing Activities Expenditures for property, plant and equipment (163,740) (112,162) (120,497) Decrease (increase) in short-term investments 6,225 (11,386) 8,610 Investment in cellular partnerships (12,090) (3,939) (4,342) Proceeds from asset sales -- 1,009 1,033 Purchase of companies, net of cash acquired (349,536) (18,546) (35,072) Proceeds from sale of company -- 55,689 -- Other investing activities (196) (370) (897) - ---------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (519,337) (89,705) (151,165) - ---------------------------------------------------------------------------------------------------------------------------- Financing Activities Proceeds from issuance of long-term debt 207,962 135,412 151,296 Repayments of debt (279,329) (64,747) (275,786) Dividends paid (82,801) (59,388) (57,849) Treasury stock, net (10,041) 2,302 (2,744) Issuance of common stock 31,957 107,244 13,175 Distribution to shareowners of pooled company (2,287) (11,236) -- Preferred stock conversions -- -- (7,119) Other financing activities (8) (8) 1,626 - ---------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (134,547) 109,579 (177,401) - ---------------------------------------------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (327,860) 325,339 (36,333) Cash and Cash Equivalents at Beginning of Year 359,309 33,970 70,303 - ---------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 31,449 $ 359,309 $ 33,970 ============================================================================================================================
See accompanying Notes to Consolidated Financial Statements. 29 Consolidated Statements of Shareowners' Equity
- ---------------------------------------------------------------------------------------------------------------------------- In thousands of dollars Years Ended December 31, 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- Preferred Stock Balance, January 1 $ 22,777 $ 22,785 $ 22,813 Redemptions (8) (8) (28) - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31 22,769 22,777 22,785 - ---------------------------------------------------------------------------------------------------------------------------- Common Stock Balance, January 1 149,294 108,630 89,616 Equity Offering -- 2,549 -- Stock Split -- 36,574 -- Retirements (117) -- -- Acquisitions -- -- 698 Exercise of stock options 2,434 713 1,512 Exercise of warrants 6,252 828 9,205 Restricted stock plan 200 -- -- Preferred stock and convertible debenture conversions -- -- 7,599 - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31 158,063 149,294 108,630 - ---------------------------------------------------------------------------------------------------------------------------- Capital in Excess of Par Value Balance, January 1 379,404 308,649 279,710 Equity offering -- 101,565 -- Stock split -- (36,574) -- Retirements (3,142) -- -- Acquisitions -- -- 27,259 Exercise of stock options 15,780 894 1,328 Exercise of warrants 8,095 1,242 766 Restricted stock plan 7,000 -- -- Tax benefit from exercise of stock options 15,252 4,062 5,452 Preferred stock and convertible debenture conversions -- -- (7,500) Other (2,217) (434) 1,634 - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 420,172 379,404 308,649 - ---------------------------------------------------------------------------------------------------------------------------- Retained Earnings Balance, January 1 397,854 289,852 224,238 Net Income 22,083 180,057 121,154 Distribution to shareowners of pooled company (2,287) (11,236) -- Common and preferred dividends (100,501) (60,819) (55,540) - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 317,149 397,854 289,852 - ---------------------------------------------------------------------------------------------------------------------------- Treasury Stock, at Cost Balance, January 1 -- (2,191) -- Purchases for acquisitions (20,041) -- (12,572) Issuances 19,894 2,191 10,381 - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31 (147) -- (2,191) - ---------------------------------------------------------------------------------------------------------------------------- Unearned Compensation-Restricted Stock Plan (6,511) -- -- - ---------------------------------------------------------------------------------------------------------------------------- Total Shareowners' Equity $ 911,495 $ 949,329 $ 727,725 ============================================================================================================================
See accompanying Notes to Consolidated Financial Statements. 30 Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Consolidation--The consolidated financial information includes the accounts of Frontier Corporation and its majority-owned subsidiaries (the "Company" or "Frontier") after elimination of all significant intercompany transactions. Preparation of financial statements in conformity with generally accepted accounting principles requires the use of management estimates. Materials and Supplies--Materials and supplies are stated at the lower of cost or market, based on weighted average unit cost. Property, Plant and Equipment--The investment in property, plant and equipment is recorded at cost. Improvements that significantly add to productive capacity or extend useful life are capitalized, while maintenance and repairs are expensed as incurred. The Company's provision for depreciation of property, plant and equipment is based on the straight-line method using estimated service lives of the various classes of plant. The range of service lives for furniture and fixtures is 5 to 20 years, network equipment is 7 to 17 years, local and toll service lines is 12 to 25 years and for station equipment is 8 to 13 years. The cost of depreciable telephone property units retired, plus removal costs, less salvage is charged to accumulated depreciation. When non-telephone property, plant and equipment is retired or sold, the resulting gain or loss is recognized currently as an element of other income. Goodwill and Customer Base--The excess of the cost of companies purchased over the net assets acquired is being amortized on a straight-line basis over 20 to 40 years. The purchase price of customer bases and other intangible assets acquired is being amortized on a straight-line basis over principally 5 to 7 years. Accumulated amortization is $64.0 million, $47.9 million and $37.2 million at the end of 1995, 1994, and 1993, respectively. Management continually reviews the appropriateness of the carrying value of the excess acquisition cost of its subsidiaries and the related amortization periods. Accounts Payable--The Company estimates an accrual for long distance cost of access. Subsequently, the accrual is adjusted based on invoices received from local exchange carriers and others. 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. Federal Income Taxes--Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when those differences are expected to reverse. Income tax benefits of tax deductions related to common stock transactions with the Company's stock option plans are recorded directly to capital in excess of par value. The Company provides a valuation allowance for its deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. 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. Revenue Recognition--Customers are billed as of monthly cycle dates. Revenue is recognized as service is provided and unbilled usage is accrued. Earnings Per Share--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. Common stock equivalents are primarily stock options assumed to be exercised for the purposes of the computation. Cash Flows--For purposes of the Statement of Cash Flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Actual interest paid was $57.9 million in 1995, $56.1 million in 1994 and $59.3 million in 1993. Actual income taxes paid were $108.6 million in 1995, $107.9 million in 1994 and $57.9 million in 1993. Reclassifications--Certain prior year amounts have been reclassified to conform to current year presentation. 2. Pooling of Interest Transactions On August 16, 1995, the shareowners of the Company and ALC Communications Corporation (ALC) approved a merger of the two companies. ALC, through its subsidiary Allnet Communication Services, Inc. (renamed Frontier Communications Services, Inc.), provides long distance products and services primarily to small and medium-sized business customers and carrier customers nationwide. Under the terms of the merger agreement, the Company exchanged two shares of its common stock for each of ALC's common shares. The total shares issued by the Company to effect the merger were 69.2 million. At the time of the merger, ALC had 3.9 million stock options and 3.3 million stock warrants outstanding providing on exercise, for the purchase of an equal number of its shares. As a result of the merger, each of these options and warrants was converted into an option or warrant for two shares of the Company's stock. The transaction has been accounted for as a pooling of interests and the consolidated financial statements have been restated for all periods prior to the merger to include the accounts and operations of ALC. On March 17, 1995, the Company acquired American Sharecom, Inc. (ASI), a long distance company headquartered in Minneapolis, Minnesota. ASI's sales operations are concentrated in the Midwest, Northwest and California. The Company acquired all of the outstanding shares of ASI in exchange for approximately 8.7 million shares of Frontier common stock. Subsequent to the acquisition, 117,336 shares of Frontier common stock were returned to the Company in settlement of a pre- acquisition liability and retired. The transaction has been accounted for as a pooling of interests and the consolidated financial statements have been restated for all periods prior to the acquisition to include the accounts and operations of ASI. 31 Combined and separate results of Frontier Corporation, ALC and ASI during the periods preceding the mergers were as follows:
- ----------------------------------------------------------------------------------------- Frontier FAS 109 In millions Corporation ALC ASI Adjustment Combined - ----------------------------------------------------------------------------------------- Seven months ended July 31, 1995: (unaudited) Net revenues $678.4 $443.8 $ 20.2 $1,142.4 Net income $ 71.2 $ 46.7 $ 2.1 $ 120.0 ========================================================================================= December 31, 1994: Net revenues $977.1 $567.8 $122.6 $1,667.5 Net income $102.7 $ 64.3 $ 13.1 $ 180.1 ========================================================================================= December 31, 1993: Net revenues $900.1 $436.4 $100.9 $1,437.4 Extraordinary item -- $ 7.5 -- $ 7.5 Net income $ 82.7 $ 45.4 $ 6.6 ($13.5) $ 121.2 =========================================================================================
The adjustment impacting 1993 net income reflects the restatement of ALC's provision for income taxes from the accounting methods prescribed by APB 11 to the accounting methods prescribed by Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes," which was implemented by the Company in 1992. 3. Purchase Acquisitions and Divestitures Purchase Acquisitions In November 1995, the Company acquired Link-VTC, Inc. (Link-VTC), a Boulder, Colorado based telecommunications company specializing in videoconferencing services. The Company will pay a total cash purchase price in the range of approximately $12.4 million to $17.9 million, depending on the 1996 financial performance of Link-VTC. In August 1995, Frontier acquired Schneider Communications, Inc. (SCI) and SCI's 80.8% interest in LinkUSA Corporation (LinkUSA) for $130 million in cash. SCI provides telecommunications services in the Midwest. LinkUSA develops software applications for telecommunications firms. In July 1995, the Company acquired Enhanced TeleManagement, Inc. (ETI), a privately-held telecommunications company specializing in the integration and resale of local, long distance, and ancillary telephone services to small and medium-sized business customers. ETI provides service in the Midwest and Northwest states. Frontier paid approximately $29 million in cash for ETI. In May 1995, the Company purchased WCT Communications, Inc. WCT is a facilities-based long distance carrier providing commercial and residential services in 45 states. The Company paid approximately $80 million in cash for all of the outstanding shares of WCT. In March 1995, the Company, through ALC, acquired ConferTech International, Inc. (ConferTech), a telecommunications company specializing in teleconferencing services and audio bridge equipment. ALC paid approximately $66 million in cash for ConferTech. In March 1995, the Company acquired Minnesota Southern Cellular Telephone Company (MSCTC) for 867,000 shares of Frontier common stock which were reissued from treasury in exchange for all of the shares of MSCTC. MSCTC is the non- wireline provider of cellular service in Minnesota Rural Service Area #10, an area south of Minneapolis. In April 1993, the Company acquired a 70 percent interest in the Utica-Rome Cellular Partnership for approximately 703,000 shares of the Company's common stock (prior to the April 1994 stock split). The transaction was accounted for as a purchase acquisition. In addition, the Company acquired Budget Call Long Distance, Inc. in June 1993 for $7.5 million in cash and acquired 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. The following unaudited pro forma results of operations for the twelve month periods ended December 31, 1995 and 1994 present information as if the purchase acquisitions had occurred at the beginning of the periods presented. The pro forma results of operations are provided for information purposes only. They are based upon historical information which has been restated to reflect the pooling of interests with ALC and ASI, and do not necessarily reflect the actual results that would have occurred nor are they necessarily indicative of future results of operations of the combined companies.
Pro Forma (unaudited) - --------------------------------------------------------------------------------- In thousands of dollars, except per share data 1995 1994 - --------------------------------------------------------------------------------- Revenues $2,273,348 $1,949,551 Income before extraordinary items and cumulative effect of changes in accounting principles $ 130,388 $ 157,756 Net Income $ 7,703 $ 150,559 Earnings Per Common Share: Earnings before extraordinary items and cumulative effect of changes in accounting principles $ .81 $ .98 Earnings Per Common Share $ .05 $ .93 =================================================================================
32 Divestitures In March 1995, the Company sold Ontonagon County Telephone Company in Michigan and its subsidiary, Midway Telephone Company. The sale resulted from the Company's plans to expand in areas other than Michigan's Upper Peninsula. The sale resulted in a non-taxable gain of $4.8 million, or $.03 per share. In May 1994, the Company completed the sale of Minot Telephone Company in Minot, North Dakota. 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 resulted in a $7.1 million after tax gain, or $.04 per share. 4. Acquisition Related and Other Charges The Company's current year operating results reflect acquisition related charges of $114.2 million associated with the integration of a number of companies over the last year, including the August 1995 merger with ALC. The integration of the acquired companies with the existing Frontier businesses has resulted in instances of redundant facilities, equipment and staffing. The acquisition related charges includes investment banker, legal fees and other direct costs resulting from the merger with ALC and the ASI transaction. Following is a schedule of the costs included in the acquisition related charges:
- ------------------------------------------------------- In millions - ------------------------------------------------------- Asset write-downs $ 71.5 Transaction costs 19.0 Severance 11.8 Other 11.9 - ------------------------------------------------------- $114.2 =======================================================
The acquisition related charges were reported as a separate component of operating expenses for the 1995 results. The Company estimates that approximately 300 employees will be terminated as a result of the integration. As of December 31, 1995, 43 employees have actually been terminated and were paid severance benefits of $1.2 million. The Company believes that the balance of reserves of $83.1 million at December 31, 1995, is adequate for the completion of those activities. The accrual for acquisition related charges is included in "Other liabilities" and "Property, plant and equipment" on the consolidated balance sheets. The Company anticipates that the integration of the companies acquired will be completed during 1996. As part of the Rochester, New York operating company's Settlement Agreement with the New York State Public Service Commission 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. This charge is reflected as a separate component of 1993 operating expenses. 5. Discontinuance of Regulatory Accounting Principles The Company determined in 1995 that FAS 71, "Accounting for the Effects of Certain Types of Regulation," was no longer applicable based upon changes in regulation, increasingly rapid advancements in telecommunications technology and other factors creating competitive markets. The Company does not believe with any certainty that prices can be maintained at levels that will recover its costs. As a result of the discontinuance of FAS 71, the Company recorded a non- cash extraordinary charge of $112.1 million, net of an income tax benefit of $68.4 million as of September 30, 1995. The components of the extraordinary charge follow:
- ---------------------------------------------------------------- In millions Pre-Tax After-Tax - ---------------------------------------------------------------- Increase to the accumulated depreciation balance $(185.6) $(115.4) Elimination of other net regulatory liabilities 5.1 3.3 - ---------------------------------------------------------------- $(180.5) $(112.1) ================================================================
The adjustment of $185.6 million to net telephone plant was necessary because estimated useful lives and depreciation methods historically prescribed by regulators did not keep up with the rapid pace of technological changes in the Company and differed significantly from those used by unregulated enterprises. The increase to the accumulated depreciation balance was determined by a depreciation reserve study that identified inadequate accumulated depreciation levels by individual asset categories. The Company believes these levels developed over the years as a result of the systematic underdepreciation of assets resulting from the regulatory process. When adjusting its net telephone plant, the Company gave effect to shorter, more economically realistic lives. The following is a summary of average lives before and after the discontinuation of FAS 71.
- ----------------------------------------------------- Asset Category Before After - ----------------------------------------------------- Central Office Equipment Digital Switching 20.0 13.5 Analog Switching 12.0 8.0 Circuit Equipment 12.0 8.0 Cable & Wire Facilities Aerial Metallic 27.0 19.0 Underground Metallic 35.0 12.0 Buried Metallic 24.0 18.0 Fiber Optic 35.0 25.0 =====================================================
The discontinuance of FAS 71 also required the Company to eliminate for financial reporting the effects of any actions of regulators that had been recognized as regulatory assets and liabilities pursuant to FAS 71. These net regulatory liabilities primarily consist of pension credits, interest on unfunded OPEB liability, deferred software costs and other assets being recognized over time for regulatory reporting. Tax-related adjustments were required to adjust excess deferred tax levels to the currently enacted statutory rates and to eliminate tax-related regulatory assets and liabilities. Prior to the discontinuance of FAS 71, the Company had recorded deferred income taxes on the cumulative amount of tax benefits previously flowed through to ratepayers and recorded a regulatory asset for the same amount. Also, the Company had recorded a regulatory liability for the difference between deferred taxes at higher historical tax rates than with those currently enacted. At the time the Company discontinued the application of FAS 71, the above tax-related regulatory assets and liabilities were eliminated and deferred tax balances adjusted to reflect the application of FAS 109 consistent with unregulated enterprises. In addition to these tax impacts, the Company, prior to the discontinuance of FAS 71, used the deferral method of accounting for investment tax credits. This method provided for the amortization of the credits as a reduction to tax expense over the life of the assets that gave rise to the tax credit. The impact of discontinuing FAS 71 will not be significant to the results of operations in the future. 33 6. Upstate Cellular Network In July 1994, Frontier Corporation and NYNEX Corporation combined certain of their respective cellular interests to form a cellular Supersystem joint venture in upstate and western New York State. 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. Financial results for the joint venture have been reported on the equity method of accounting, reflecting Frontier's proportionate share of the joint venture's earnings in the "Other income and expense" section of the Consolidated Statement of Income. Previously, revenues and expenses for these New York State wireless properties had been consolidated. During 1995, NYNEX Corporation contributed its cellular interests partnership into a new partnership it formed with Bell Atlantic Corporation. 7. Property, Plant and Equipment Major classes of property, plant and equipment are summarized below:
- -------------------------------------------------------------------------- In thousands of dollars 1995 1994 1993 - -------------------------------------------------------------------------- Land and Buildings $ 106,745 $ 103,235 $ 107,165 Local and Toll Service Lines 761,044 752,366 743,028 Central Office Equipment 587,814 584,434 583,928 Station Equipment 32,183 33,926 34,740 Switching and Network Facilities 330,567 234,433 207,952 Office Equipment, Vehicles and Tools 201,718 170,094 172,094 Plant Under Construction 77,091 36,130 33,048 Less: Accumulated Depreciation 1,215,853 880,176 801,820 - -------------------------------------------------------------------------- $ 881,309 $1,034,442 $1,080,135 ==========================================================================
Depreciation expense was $139.8 million, $130.7 million and $126.3 million for the years ending December 31, 1995, 1994 and 1993, respectively. 8. Long-Term Debt
- ------------------------------------------------------------------------------------- In thousands of dollars 1995 1994 1993 - ------------------------------------------------------------------------------------- Frontier Communications of Minnesota, Inc. Senior Notes, 7.61%, due February 1, 2003 $ 35,000 $ 35,000 $ 35,000 Rural Utilities Service debt, 2%-9% due 1994 to 2026 69,878 77,045 80,667 - ------------------------------------------------------------------------------------- 104,878/(a)/ 112,045 115,667 - ------------------------------------------------------------------------------------- Debentures 10.46% Convertible, due October 27, 2008 5,300/(b)/ 5,300 5,300 9%, due January 1, 2020 --/(c)/ 69,785/(c)/ 100,000 9%, due August 15, 2021 100,000 100,000 100,000 - ------------------------------------------------------------------------------------- 105,300 175,085 205,300 - ------------------------------------------------------------------------------------- 9% Senior Subordinated Notes, due 2003 3,233/(d)/ 80,000/(d)/ 85,000 Medium-Term Notes, 7.51%--9.3%, due 2000 to 2004 219,000/(e)/ 179,000 179,000 Revolving Credit and Term Loan Agreements 187,601/(f)/ 120,000 -- Capitalized Lease Obligations and Other Debt 17,376 3,971 5,817 - ------------------------------------------------------------------------------------- Sub-total 637,388/(g)/ 670,101 590,784 Less-Discount on long-term debt, net of premium 3,650 3,586 4,115 Current portion of long-term debt 14,871 4,966 4,962 - ------------------------------------------------------------------------------------- Total Long-Term Debt $618,867 $661,549 $581,707 =====================================================================================
(a) Certain assets of Local Communications Operations are pledged as security for Mortgage Bonds, Rural Utilities Service debt and other debt. (b) 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. (c) 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% of face value. In 1995, the Company redeemed the remaining $69.8 million of its 9% debentures due January 1, 2020. This redemption was accomplished through an open market purchase at a price of 106% of face value. As a result of the transaction, the Company recorded an extraordinary loss of $3.2 million, net of applicable income taxes of $1.7 million. (d) In May 1993, the Company completed an offering of $85.0 million 9% Senior Subordinated Notes. The Notes, which will mature on May 15, 2003 are redeemable in whole or in part on or after May 15, 1998. The net proceeds of $84.3 million were used to repay the outstanding 11.875% Senior Subordinated Notes and to reduce the amount outstanding under the short term Revolving Credit Facility. The early retirement of the 11.875% Notes resulted in an extraordinary loss of $7.5 million, net of the related taxes of $4.0 million. 34 In April 1994, the Company acquired $5.0 million of the 9% Senior Subordinated Notes at the Company's approximate book value. On September 26, 1995, the Company completed a tender offer for the $80.0 million of outstanding 9% Senior Subordinated Notes due May 15, 2003. Approximately $76.8 million was tendered by the bondholders at a price of 109% of face value. The early retirement resulted in an extraordinary loss of $5.8 million, net of applicable income taxes of $3.7 million. (e) In March 1995, the Company completed an offering of $40.0 million 7.51% Medium-Term Notes. The Notes, which will mature on March 27, 2002 are not redeemable prior to maturity. The net proceeds of $39.8 million were used to repay a portion of the loans outstanding under the Revolving Credit Agreement. (f) The Company has a $250.0 million commercial paper program which is fully backed by a committed Revolving Credit Agreement. The Revolving Credit Agreement was entered into in August 1995 with a group of 11 commercial banks and expires August 2000. The agreement is unsecured and has commitment fees of .08% per year on the entire commitment. Interest on amounts drawn down is based upon the London Interbank Offered Rate (LIBOR) plus .17%. At December 31, 1995, the Company had outstanding $167.3 million in commercial paper issuances. Commercial paper is classified as long term debt as the Company intends to refinance the debt on a short term basis either through continued short-term borrowing or available credit facilities with unused commitments extending beyond one year. In December 1994, Rochester Telephone Corporation (Rochester Telephone) entered into a Revolving Credit Agreement with seven commercial banks as part of the implementation of the Open Market Plan. The agreement established a secured $160.0 million line of credit. The Revolving Credit Agreement was amended at the end of the first quarter 1995, reducing the available line of credit to $100 million and removing the security interest on the assets of Rochester Telephone. The agreement carries commitment fees of .07% annually on the entire commitment. Interest on amounts drawn down are based on either the prime rate, LIBOR plus .13%, or a competitive bid rate. On December 31, 1995, Rochester Telephone had drawn down $20.3 million under this facility at 6.11%. Borrowings under the Revolving Credit Agreement are classified as long term debt as Rochester Telephone intends to refinance the debt on a short term basis either through continued short term borrowing or available credit facilities with unused commitments extending beyond one year. (g) In accordance with 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 $689.9 million, as compared to the carrying value of $637.4 million. At December 31, 1995, aggregate debt maturities were:
- ------------------------------------------------------------------------------------------------------------- In thousands of dollars 1996 1997 1998 1999 2000 - ------------------------------------------------------------------------------------------------------------- $ 14,871 $ 8,128 $ 6,181 $26,086 $276,932 - -------------------------------------------------------------------------------------------------------------
9. Income Taxes The provision for income taxes consists of the following:
- ------------------------------------------------------------------------------------------------------ In thousands of dollars 1995 1994 1993 - ------------------------------------------------------------------------------------------------------ Federal: Current $103,689 $105,189 $64,939 Deferred (17,721) (9,120) 398 - ------------------------------------------------------------------------------------------------------ 85,968 96,069 65,337 - ------------------------------------------------------------------------------------------------------ State: Current 16,498 13,116 7,307 Deferred (1,570) (107) 865 - ------------------------------------------------------------------------------------------------------ 14,928 13,009 8,172 - ------------------------------------------------------------------------------------------------------ Total income taxes $100,896 $109,078 $73,509 ======================================================================================================
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 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Federal income tax expense at statutory rate $ 85,982 35.0% $ 103,716 35.0% $ 70,754 35.0% State income tax (net of federal benefit) 9,703 4.0 8,456 2.9 5,312 2.6 Accelerated depreciation 2,725 1.1 2,699 .9 2,656 1.3 Investment tax credit (1,430) (.6) (1,964) (.7) (2,044) (1.0) Utilization of net operating loss carryforward (3,431) (1.4) (3,431) (1.2) (3,431) (1.7) Acquisition related charges 5,789 2.4 -- -- -- -- Goodwill amortization 3,698 1.5 2,346 .8 2,770 1.4 Miscellaneous (2,140) (.9) (2,744) (.9) (2,508) (1.2) - ------------------------------------------------------------------------------------------------------------------------------------ Total income taxes $ 100,896 41.1% $ 109,078 36.8% $ 73,509 36.4%
35 Deferred tax (assets) liabilities are comprised of the following at December 31:
- ---------------------------------------------------------------------------------------------------------------------------- In thousands of dollars 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- Accelerated depreciation $ 81,687 $ 151,069 $ 153,910 Investment tax credit -- 5,354 6,828 Other 18,297 11,799 10,533 - ---------------------------------------------------------------------------------------------------------------------------- Gross deferred tax liabilities 99,984 168,222 171,271 - ---------------------------------------------------------------------------------------------------------------------------- Basis adjustment-purchased telephone companies (29,232) (31,851) (42,741) Employee benefits obligation (4,562) (12,955) (5,415) Deferred compensation (2,903) (2,864) (2,548) Net operating loss carryforward (42,312) (42,000) (44,700) Acquisition related charges (29,213) -- -- Bad debt expense (11,801) (4,657) (3,557) Other (28,235) (9,890) (6,307) - ---------------------------------------------------------------------------------------------------------------------------- Gross deferred tax assets (148,258) (104,217) (105,268) Valuation allowance for deferred tax assets 20,330 28,500 34,900 - ---------------------------------------------------------------------------------------------------------------------------- Total deferred tax assets (127,928) (75,717) (70,368) - ---------------------------------------------------------------------------------------------------------------------------- Net Deferred Tax (Assets) Liabilities $ (27,944) $ 92,505 $ 100,903 ============================================================================================================================
Certain of the Company's acquired subsidiaries have tax net operating losses, alternative tax net operating losses and investment tax credit ("ITC") carryforwards which can be utilized annually to offset stand alone future taxable income. Under the provisions of Internal Revenue Code Section 382, the utilization of carryforwards is presently limited to approximately $15.0 million per year through 2002. This annual limitation, coupled with the 15 year carryforward limitation, results in a maximum cumulative NOL and ITC carryforward which may be utilized of approximately $113.0 million as of December 31, 1995. The Company has established valuation allowances primarily for net operating loss carryforwards. Because it is difficult to predict the realization of the NOL benefit beyond a period of three years, the Company has established valuation allowances of $20.3 million, $28.5 million, and $34.9 million, as of December 31, 1995, 1994 and 1993, respectively. 10. Service Pensions and Benefits The Company has contributory and noncontributory plans providing for service pensions and certain death benefits for a substantial number of employees. The Company's provisions for service pensions and certain death benefits are remitted, at least annually, to the trustees. 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 Sheets.
- ---------------------------------------------------------------------------------------------------------------------------- Plans for Plans for which assets which exceed accumulated December 31, 1995 accumulated benefits In thousands of dollars benefits exceed assets Total - ---------------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $ 367,765 $ 19,984 $ 387,749 Accumulated benefit obligation $ 381,528 $ 22,335 $ 403,863 ============================================================================================================================ Plan assets at fair value, primarily fixed income securities and common stock $ 437,151 $ 8,234 $ 445,385 Projected benefit obligation (384,199) (25,364) (409,563) - ---------------------------------------------------------------------------------------------------------------------------- Funded status 52,952 (17,130) 35,822 Unrecognized net (gain) loss (19,194) 4,337 (14,857) Unrecognized net transition (asset) obligation (3,909) 36 (3,873) Unrecognized prior service cost 12,533 3,783 16,316 Adjustment required to recognize minimum liability -- (5,246) (5,246) - ---------------------------------------------------------------------------------------------------------------------------- Pension asset (liability) reflected in Consolidated Balance Sheet $ 42,382 $(14,220) $ 28,162 ============================================================================================================================
36
- ---------------------------------------------------------------------------------------------------------------------------- Plans for Plans for which assets which exceed accumulated December 31, 1994 accumulated benefits In thousands 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) obligation (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 thousands 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 ============================================================================================================================
The net periodic pension cost consists of the following:
- ---------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, In thousands of dollars 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- Service cost $ 5,616 $ 7,934 $ 7,758 Interest cost on projected benefit obligation 28,868 25,565 23,932 Actual (return) loss on plan assets (89,195) 2,229 (40,484) Net amortization and deferral 52,744 (37,863) 7,623 - ---------------------------------------------------------------------------------------------------------------------------- Net periodic pension benefit (1,967) (2,135) (1,171) Benefit due to regulatory agency actions (1,307) (1,743) (1,537) Amount expensed due to curtailment 2,907 -- -- - ---------------------------------------------------------------------------------------------------------------------------- Net periodic pension benefit $ (367) $ (3,878) $ (2,708) ============================================================================================================================
The projected benefit obligation at December 31, 1995, 1994 and 1993 was determined using an assumed weighted average discount rate of 7.5%, 8.5% and 7.25%, respectively, and an assumed weighted average rate of increase in future compensation levels of 5.0%, 5.5% and 5.0%, respectively. The weighted average expected long-term rate of return on plan assets was assumed to be 9.0% at December 31, 1995 and 1994 and 8.75% at December 31, 1993. 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 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 1995, 1994 and 1993, the Company funded $3.0 million, $1.0 million and $.2 million, respectively, for employees' service pensions and certain death benefits. In addition to the net pension expense in 1995, the Company recognized a net curtailment loss of $2.6 million reflecting the freezing of defined benefit plans sponsored by Frontier Corporation for non-bargaining unit employees as of December 31, 1996. 37 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, 1995, 1994 and 1993 amounted to $10.3 million, $7.1 million and $4.4 million, respectively, and consist primarily of fixed income securities and common stock. During 1995, 1994 and 1993, the Company's total cost for this plan was $1.9 million, $1.3 million and $1.0, respectively. The 1995 cost includes an additional $.3 million curtailment loss resulting from the freezing of the SMPP benefit plan effective December 31, 1996. The Company also sponsors a number of defined contribution plans. The most significant plan covers non-union employees, who make contributions 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 $6.8 million for 1995, $5.6 million for 1994, and $4.7 million for 1993. 11. Postretirement Benefits Other Than Pensions The Company provides health care, life insurance, and certain other retirement benefits for a substantial number of employees. 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. During the fourth quarter of 1995, the Company amended its health benefits plan to cap the cost absorbed by the Company for health care and life insurance costs for its non-bargaining unit employees who retire after December 31, 1996. All other benefits are discontinued. The effect of this amendment was to reduce the December 31, 1995 accumulated postretirement obligation by $8.1 million. The status of the plans is as follows:
- ---------------------------------------------------------------------------------------------------------------------------- In thousands of dollars 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation (APBO) attributable to: Retirees $ 73,032 $ 79,935 $ 63,749 Fully eligible plan participants 17,235 22,812 44,399 Other active plan participants 20,127 28,877 34,892 - ---------------------------------------------------------------------------------------------------------------------------- Total APBO 110,394 131,624 143,040 Plan assets at fair value 5,716 5,545 3,944 - ---------------------------------------------------------------------------------------------------------------------------- APBO in excess of plan assets 104,678 126,079 139,096 Unrecognized transition obligation (99,836) (109,730) (117,706) Unrecognized net prior service cost (1,790) (6,003) (1,458) Unrecognized net gain (loss) 30,110 15,502 (3,811) - ---------------------------------------------------------------------------------------------------------------------------- Accrued postretirement benefit obligation $ 33,162 $ 25,848 $ 16,121 ============================================================================================================================
The components of the estimated postretirement benefit cost are as follows:
- ---------------------------------------------------------------------------------------------------------------------------- In thousands of dollars December 31, 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- Service cost $ 947 $ 1,323 $ 2,746 Interest on APBO 8,614 9,666 10,046 Amortization of transition obligation 6,045 6,094 6,241 Return on plan assets (462) (385) (290) Amortization of prior service cost 392 383 -- Amortization of gains and losses (2,758) (704) -- - ---------------------------------------------------------------------------------------------------------------------------- Net postretirement benefit cost $ 12,778 $ 16,377 $ 18,743 ============================================================================================================================
To estimate these costs, health care costs were assumed to increase 10.5%, 11.2% and 12.0% in 1996, 1995 and 1994 respectively, with the rate of increase declining consistently to 5.0% by 2006 and thereafter. The weighted discount rate was assumed to be 7.5%, 8.5% and 7.25% and the rate of salary increase was assumed to be 5.0%, 5.5% and 5.0% at December 31, 1995, 1994 and 1993, respectively. The expected long-term rate of return on plan assets was 9.0% at December 31, 1995 and 1994 and 7.4% at December 31, 1993. If the health care cost trend rates were increased by one percentage point, the accumulated postretirement benefit health care obligation as of December 31, 1995 would increase by $10.2 million while the sum of the service and interest cost components of the net postretirement benefit health care cost for 1995 would increase by $1.0 million. 12. Stock Option Plans and Other Common Stock Transactions The Company has a stock option plan for its directors, executives and certain employees. The exercise price for all plans is the fair market value of the stock on the date of the grant of the stock option. The options expire ten years from the date of the grant. Options previously issued to ALC employees are vested in their entirety as of the August 16, 1995 merger date. The remaining options vest over a period from one to three years. The total number of shares which may be granted under the executive and employee plans is limited to one percent of the number of issued shares, including treasury shares, of the Company's common stock during any calendar year. The maximum number of shares which may be granted under the directors plan is 1,000,000 shares. 38 Information with respect to options under the above plans follows:
- -------------------------------------------------------------------------------- Option Price Shares Per Share - -------------------------------------------------------------------------------- Outstanding at January 1, 1993 7,370,456 $ 1.75-$15.69 Granted in 1993 3,519,038 $13.03-$19.75 Cancelled in 1993 (45,634) $ 1.75-$19.06 Exercised in 1993 (1,512,748) $ 1.75-$15.75 - -------------------------------------------------------------------------------- Outstanding at December 31, 1993 9,331,112 $ 1.75-$19.75 Granted in 1994 507,900 $14.82-$22.69 Cancelled in 1994 (150,464) $ 1.75-$22.69 Exercised in 1994 (713,025) $ 1.75-$19.75 - -------------------------------------------------------------------------------- Outstanding at December 31, 1994 8,975,523 $ 1.75-$22.69 Granted in 1995 2,020,315 $15.53-$27.13 Cancelled in 1995 (195,716) $ 2.25-$27.13 Exercised in 1995 (2,433,623) $ 1.75-$26.75 - -------------------------------------------------------------------------------- Outstanding at December 31, 1995 8,366,499 $ 1.75-$27.13 ================================================================================ Exercisable at December 31, 1995 6,231,994 $ 1.75-$27.13 ================================================================================
At December 31, 1995, 2,468,007 shares were available for future grant. Restricted Stock Plan During 1995, the Company issued restricted stock to certain key employees under its Management Stock Incentive Plan. The stock vests over a period of three years based upon performance of the Company's stock price and continued employment. During 1995, 200,000 shares were issued and outstanding under the plan. Shareowners' equity reflects unearned compensation for the unvested stock awarded. This amount is reduced and charged against operations, along with any changes in market prices, as the stock awards vest. Common Stock Warrants As of December 31, 1995, warrants for the purchase of 131,169 shares of common stock at $2.50 per share were outstanding. The warrants expire in June 1997. As of December 31, 1995, 1994 and 1993, 6,252,000, 828,000 and 9,205,000 warrants were exercised. The warrants were issued in connection with ALC's refinancings and the difference between the exercise price and the fair value of the warrants at the time of issuance was recorded as a discount on the related notes and an increase to capital in excess of par value. 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. 13. Preferred Stock
- ---------------------------------------------------------------------------------------------------------------------------- In thousands of dollars, except share data 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- Frontier Corporation--850,000 shares authorized; par value $100 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. 40,000 shares authorized; par value $100 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 6,240 6,320 6,400 Amount Outstanding $ 624 $ 632 $ 640 Frontier Communications of AuSable Valley, Inc. 4,000 shares authorized; par value $100 5.50% Series--redeemable at par Shares Outstanding 2,754 2,754 2,754 Amount Outstanding $ 276 $ 276 $ 276 - ---------------------------------------------------------------------------------------------------------------------------- Total Shares Outstanding 227,688 227,768 227,848 ============================================================================================================================ Total Amount Outstanding $ 22,769 $ 22,777 $ 22,785 ============================================================================================================================
39 At the special meeting in December 1994, Frontier 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. As of December 31, 1995, no shares of this class have been issued. On April 9, 1995, the Board of Directors adopted a Shareowners Rights Plan (the "Plan"). This Plan provides for a dividend distribution on each outstanding common share of a right to purchase one one-hundredth of a share of Series A Junior Participating Class A Preferred Stock. The rights are designed to protect shareowners in the event of an unsolicited attempt to acquire Frontier which the Board does not believe is fair to the shareowners interest. The rights become exercisable under certain circumstances to purchase Frontier common stock, or securities of an acquiring entity, at one-half market value. 14. Accounting Pronouncements Adopted The Company adopted FAS 116, "Accounting for Contributions Received and Contributions Made" for all of its consolidated subsidiaries effective September 30, 1995. FAS 116 requires that the Company reflect in current expenses an accrual for the cost of multi-year charitable contributions. The net impact of adopting FAS 116 resulted in a post tax charge of $1.5 million, net of taxes of $0.8 million. In 1992, the Financial Accounting Standards Board released FAS 112, "Employers' Accounting for Postemployment Benefits" which the Company implemented on January 1, 1994. FAS 112 requires that the projected future costs of providing postemployment (but preretirement) benefits, such as disability, prepension leave (salary continuation) and severance pay, be recognized as an expense as employees render service rather than when the benefits are paid. 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. 15. Commitments and Contingencies Operating Environment--During 1995, the Company evolved from a provider of local and long distance services in certain areas of the country to a nationwide provider of integrated communications services. As a result, the Company has formidable competitors of greater size and expects that there will be more entrants into the long distance business and its local markets. The Company also has larger customers than it had as a predominantly local exchange company. Legal Matters--The Company and a number of its subsidiaries are party to a number of judicial and administrative proceedings involving matters incidental to their business. The Company's management does not believe that any material liability will be imposed as a result of these matters. 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 $77.8 million in 1995, $68.7 million in 1994 and $66.2 million in 1993. Minimum annual rental commitments under noncancellable operating leases and license agreements in effect on December 31, 1995 were as follows:
- ------------------------------------------------------------------------- In thousands of dollars NonCancellable Leases Transmission/ -------------------------- License Years Buildings Equipment Agreements - ------------------------------------------------------------------------- 1996 $16,589 $10,675 $34,644 1997 15,524 5,843 25,429 1998 11,935 1,790 17,682 1999 7,124 58 5,187 2000 6,389 15 2,996 2001 and thereafter 15,645 -- 11,451 - ------------------------------------------------------------------------- Total $73,206 $18,381 $97,389 =========================================================================
Other Matters--It is anticipated that the Company will expend approximately $175.0 million for additions to property, plant and equipment during 1996. In connection with this construction program, the Company has made certain commitments for the purchase of materials and equipment. 16. Business Segment Information As of January 1995, the Company reports its operations in four segments: Long Distance Communications Services, Local Communications Services, Wireless Communications Services and Corporate Operations and Other. Prior to January 1995, the Company reported its operations in only two segments, Telephone Operations and Telecommunications Services. The change in the definition of the Company's segments has been made to better reflect the changing scope of the businesses in which the Company operates. All historical data have been restated accordingly to conform with the new presentation. Revenues, operating income, depreciation, construction and identifiable assets by business segment are set forth in the Business Segment Information on page 26. 40 17. Selected Quarterly Data (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------ Revenues Income Per Share ------------------------------------------------------------------------------------------------------- Earnings Before (In thousands of dollars, Operating Net Extraordinary Market Price except per share data) Consolidated Income Income Items and ------------- Revenues (Loss) (Loss) Cumulative Effect Earnings High Low - ------------------------------------------------------------------------------------------------------------------------------------ 1995 First Quarter/(1)/ $ 459,040 $ 87,281/(2)/ $ 51,650/(2)/ $ .32 $ .32 $23.38 $19.25 Second Quarter/(1)/ 506,920 96,314 53,069 .33 .33 $24.13 $19.63 Third Quarter 571,386 (7,681)/(3)/ (137,912)/(3)/ (.12)/(5)/ (.90)/(5)/ $28.63 $23.75 Fourth Quarter 606,345 108,316 55,276/(4)/ .36 .34 $30.00 $25.50 ----------------------------------------- Full Year $2,143,691 $284,230 $ 22,083 $ .89 $ .13 ========================================= - ------------------------------------------------------------------------------------------------------------------------------------ 1994 First Quarter $ 399,454 $ 75,967 $ 32,962/(6)/ $ .25 $ .21 $22.44 $20.25 Second Quarter 416,767 79,686 52,909 .33 .33 $25.25 $20.81 Third Quarter 421,503 84,557 47,407 .29 .29 $24.75 $21.63 Fourth Quarter 429,821 85,416 46,779 .29 .29 $24.63 $20.50 ----------------------------------------- Full Year $1,667,545 $325,626 $ 180,057 $1.16 $1.12 ========================================= - ------------------------------------------------------------------------------------------------------------------------------------ 1993 First Quarter $ 333,939 $ 57,351 $ 27,432 $ .18 $ .18 $19.44 $17.32 Second Quarter 349,617 60,840 22,016/(7)/ .19 .14 $21.75 $18.25 Third Quarter 369,011 63,866 32,850 .21 .21 $24.38 $20.50 Fourth Quarter 384,881 69,580 38,856 .25 .25 $25.13 $21.69 ----------------------------------------- Full Year $1,437,448 $251,637 $ 121,154 $ .83 $ .78 ========================================= - ------------------------------------------------------------------------------------------------------------------------------------
(1) First and second quarter results for 1995 as previously reported did not include the pooling of interests with ALC Communications, Inc. Consolidated revenues for ALC were $177.8 million and $197.2 million for the first and second quarters, respectively. ALC's operating income and net income were $33.1 million and $20.0 million at March 31, 1995 and $33.9 million and $20.2 million at June 30, 1995. (2) Includes a pre-tax acquisition related charge of $4.8 million (post-tax charge of $3.1 million.) (3) Includes a pre-tax acquisition related charge of $109.5 million (post-tax charge of $75.7 million.) Includes post-tax extraordinary charges of $112.1 million resulting from the discontinuance of regulatory accounting, a post-tax extraordinary loss on retirement of debt of $5.8 million and a post-tax cumulative effect charge related to change in accounting principle of $1.5 million. (4) Includes a post-tax extraordinary loss on retirement of debt of $3.2 million. (5) Due to the net loss incurred, the earnings per share calculation excludes common stock equivalents. (6) Includes a post-tax cumulative effect charge related to change in accounting principle of $7.2 million. (7) Includes a post-tax extraordinary loss on retirement of debt of $7.5 million. 41 Condensed Six-Year Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------- In thousands of dollars, except per share data Years Ended December 31, 1995 1994 1993 1992 1991 1990 - ---------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME Revenues $2,143,691 $1,667,545 $1,437,448 $1,252,244 $1,120,375 $ 978,805 Costs and expenses 1,859,461 1,341,919 1,185,811 1,047,393 952,165 867,857 - ---------------------------------------------------------------------------------------------------------------------------------- Operating Income 284,230 325,626 251,637 204,851 168,210 110,948 Interest expense 54,660 51,312 58,022 68,243 64,722 57,324 Other income 16,094 22,018 8,538 3,511 29,473 12,048 Income taxes 100,896 109,078 73,509 33,094 52,774 32,585 - ---------------------------------------------------------------------------------------------------------------------------------- Income Before Extraordinary Items and Cumulative Effect of Changes in Accounting Principles 144,768 187,254 128,644 107,025 80,187 33,087 Extraordinary items (121,208) -- (7,490) (1,072) 6,387 -- Cumulative effect of changes in accounting principles (1,477) (7,197) -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Consolidated Net Income 22,083 180,057 121,154 105,953 86,574 33,087 Dividends on preferred stock 1,191 1,187 1,640 4,442 5,189 5,192 - ---------------------------------------------------------------------------------------------------------------------------------- Income Applicable to Common Stock $ 20,892 $ 178,870 $ 119,514 $ 101,511 $ 81,385 $ 27,895 ================================================================================================================================== Earnings Per Common Share: Primary $ .13 $ 1.12 $ .78 $ .74 $ .64 $ .27 Fully Diluted $ .13 $ 1.12 $ .78 $ .74 $ .64 $ .27 ================================================================================================================================== CONSOLIDATED BALANCE SHEET Current Assets $ 523,135 $ 673,826 $ 303,434 $ 302,122 $ 270,122 $ 235,523 Property, plant and equipment, net 881,309 1,034,442 1,080,135 1,085,760 1,075,584 916,018 Goodwill and customer base 550,081 222,442 215,962 187,278 197,201 113,399 Deferred and other assets 154,067 130,084 122,014 104,583 118,112 208,156 - ---------------------------------------------------------------------------------------------------------------------------------- Total Assets $2,108,592 $2,060,794 $1,721,545 $1,679,743 $1,661,019 $1,473,096 ================================================================================================================================== Current Liabilities $ 504,201 $ 305,698 $ 291,760 $ 344,962 $ 344,974 $ 281,413 Long-term debt 618,867 661,549 581,707 604,157 636,099 486,853 Deferred income taxes 15,644 98,217 104,232 104,588 113,973 148,491 Deferred employee benefits obligation 58,385 46,001 16,121 -- -- -- Redeemable preferred stock -- -- -- 9,659 62,434 57,766 Shareowners' Equity 911,495 949,329 727,725 616,377 503,539 385,174 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareowners' Equity $2,108,592 $2,060,794 $1,721,545 $1,679,743 $1,661,019 $1,359,697 ================================================================================================================================== CONSOLIDATED STATEMENTS OF CASH FLOWS Operating activities $ 326,024 $ 305,465 $ 292,233 $ 249,763 $ 186,771 $ 121,871 Investing activities (519,337) (89,705) (151,165) (137,540) (283,607) (130,533) Financing activities (134,547) 109,579 (177,401) (87,396) 116,579 (37,595) - ---------------------------------------------------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents $ (327,860) $ 325,339 $ (36,333) $ 24,827 $ 19,743 $ (46,257) ==================================================================================================================================
42 Financial and Operating Statistics for Six Years
- ---------------------------------------------------------------------------------------------------------------------------------- In thousands of dollars, except per share data Years Ended December 31, 1995 1994 1993 1992 1991 1990 - ---------------------------------------------------------------------------------------------------------------------------------- Current ratio 1.04 2.20 1.04 .88 .79 .84 Pretax interest coverage 1.9x 6.6x 4.3x 3.0x 3.2x 2.1x Total debt $ 633,738 $ 666,515 $ 586,669 $ 694,803 $ 737,629 $ 566,699 Debt ratio 41.0% 41.2% 44.6% 52.6% 56.6% 56.1% Common shareowners' equity $ 888,726 $ 926,552 $ 704,940 $ 593,564 $ 480,716 $ 362,343 Rate of return on average common equity/(1)/ 24.0% 21.9% 19.4% 18.9% 19.3% 7.8% ================================================================================================================================== Construction $ 162,575 $ 113,735 $ 123,842 137,066 119,082 114,840 Percent of funds generated internally 150% 216% 189% 145% 117% 67% ================================================================================================================================== Common shares outstanding end of year* 158,057 149,294 142,542 122,935 109,798 103,675 Average common shares outstanding* 161,669 160,353 153,230 136,180 127,627 104,310 Total number of common shareowners 26,637 24,608 22,840 22,520 21,376 19,640 Market price per common share: High $ 30.00 $ 25.25 $ 25.13 $ 17.88 $ 17.00 $ 20.75 Low $ 19.25 $ 20.25 $ 17.32 $ 14.57 $ 13.00 $ 12.32 End of year $ 30.00 $ 21.13 $ 22.57 $ 17.82 $ 16.07 $ 14.63 ================================================================================================================================== Dividends declared per common share $ .835 $ .815 $ .795 $ .775 $ .755 $ .735 Dividends paid per common share $ .830 $ .810 $ .790 $ .770 $ .750 $ .730 Dividend yield-end of year 2.8% 3.9% 3.6% 4.4% 4.8% 5.1% ================================================================================================================================== Percent to total revenues: Net Revenues: Long Distance Communications Services 69% 61% 55% 51% 51% 52% Local Communications Services 29% 37% 41% 45% 44% 43% Wireless Communications Services 1% 1% 2% 2% 2% 1% Other 1% 1% 2% 2% 3% 4% Operating Margin: Long Distance Communications Services 8% 16% 13% 10% 7% 1% Local Communications Services 30% 30% 27% 25% 26% 26% Wireless Communications Services 10% 5% 11% 19% 20% 16% Consolidated 13% 20% 18% 16% 15% 11% ================================================================================================================================== Access lines in service-Rochester 524,630 501,811 492,512 488,986 473,391 461,551 Access lines in service-Regionals 426,245 416,327 425,128 407,415 394,513 227,138 - ---------------------------------------------------------------------------------------------------------------------------------- Total access lines in service 950,875 918,138 917,640 896,401 867,904 688,689 ================================================================================================================================== Employees: Long Distance Communications Services 4,203 2,647 2,378 2,280 2,141 1,811 Local Communications Services 2,959 3,156 3,444 3,885 3,915 3,251 Other 675 369 259 296 316 543 - ---------------------------------------------------------------------------------------------------------------------------------- Total employees 7,837 6,172 6,081 6,461 6,372 5,605 ================================================================================================================================== Local Communications Services minutes of use: Carrier access minutes-interstate* 2,272,294 2,079,328 2,015,602 1,912,531 1,569,309 1,233,045 Carrier access minutes-intrastate* 1,759,425 1,763,871 1,664,262 1,439,983 1,173,685 901,376 - ---------------------------------------------------------------------------------------------------------------------------------- Total carrier access minutes* 4,031,719 3,843,199 3,679,864 3,352,514 2,742,994 2,134,421 ================================================================================================================================== Long Distance minutes of use 10,066,777 6,286,912 4,684,981 3,909,616 2,868,545 2,640,667 ==================================================================================================================================
*In thousands (1) Excluding nonrecurring charges. 43 EX-13.2 15 REPORT OF INDEPENDENT AUDITORS Exhibit 13.2 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders ALC Communications Corporation We have audited the consolidated balance sheets of ALC Communications Corporation and subsidiaries as of December 31, 1995, 1994 and 1993, and the related consolidated statements of operations, cash flows, and preferred stock and stockholders' equity for each of the three years in the period ended December 31, 1995 (not included herein). 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ALC Communications Corporation and subsidiaries at December 31, 1995, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP ERNST & YOUNG LLP January 17, 1996 EX-21 16 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF FRONTIER CORPORATION AS OF March 1, 1996 STATE OF BUSINESS NAME OF SUBSIDIARY INCORPORATION NAMES USED - ------------------ ------------- ---------- ALC Communications Corporation MI ALC Communications Corp.; (A subsidiary of Frontier ALC Corporation) Ameritel Management, Inc. Canada Ameritel Management, Inc. (A subsidiary of WCT (British Columbia) Communications, Inc.) Budget Call Long Distance, Inc. DE Budget Call Long (A subsidiary of Frontier Distance, Inc.; Budget Telecommunications Inc.) Call Business Telemanagement, Inc. CA Business Telemanagement, (A subsidiary of Ameritel Inc.; BTI Management, Inc.) Computer Calling Technologies, Inc. CA Computer Calling (A subsidiary of Frontier Technologies, Inc. Communications of the West, Inc.) ConferLink Corp. CO Conferlink Corp. (A subsidiary of ConferTech International, Inc.) ConferTech Australia Pty. Ltd. Australia ConferTech Australia (A subsidiary of ConferTech International, Inc.) ConferTech Canada, Inc. Canada ConferTech Canada, Inc. (A subsidiary of ConferTech (All provinces) International, Inc.) Confertech Holdings, Inc. CO Confertech Holdings, Inc. (A subsidiary of ConferTech International, Inc.) ConferTech International (UK), United ConferTech International Ltd. (A subsidiary of Kingdom (UK), Ltd. ConferTech International, Inc.) ConferTech International, Inc. CO ConferTech International, (A subsidiary of ALC Communications Inc. Corporation) DePue Communications, Inc. IL DePue Communications, (A subsidiary of Frontier Inc. Communications of DePue, Inc.) Dowdy Minnesota 10, Inc. FL Dowdy Minnesota 10, Inc. (A subsidiary of Frontier Cellular Holding Inc.) Enhanced Telemanagement, Inc. MN Enhanced Telemanagement; (A subsidiary of Frontier ETI; Frontier Telemanage- Telecommunications Inc.) ment Enterprise Marketing Services, PA Enterprise Marketing Inc. (A subsidiary of Frontier Services Communications of Pennsylvania, Inc.) Fairmount Cellular Inc. GA Fairmount Cellular Inc. (A subsidiary of Frontier Communications of Fairmount, Inc.) Frontel Communications Limited England Frontel Communications (A subsidiary of ALC Communications Ltd.; Frontel Corporation) Frontier Cellular Holding Inc. DE Frontier Cellular (A subsidiary of Frontier Corporation) Holding Inc.; FCHI Frontier Cellular of Alabama, Inc. AL Frontier Cellular (A subsidiary of Frontier Communications of the South, Inc.) Frontier Communications DE Frontier Communications International Inc. International Inc.; FCI; (A subsidiary of RCI Long Distance, Inc. Frontier Telecommunications Inc.) Frontier Communications of AL Frontier Communications Alabama, Inc. of Alabama, Inc. A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of NY Frontier Communications AuSable Valley, Inc. of AuSable Valley, Inc.; (A subsidiary of Frontier Frontier Corporation) Frontier Communications of PA Frontier Communications Breezewood, Inc. of Breezewood, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of PA Frontier Communications Canton, Inc. of Canton, Inc.; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of IL Frontier Communications DePue, Inc. of DePue, Inc.; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of GA Frontier Communications Fairmount, Inc. of Fairmount, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of GA Frontier Communications Georgia, Inc. of Georgia, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of the WI Frontier Communications Great Lakes, Inc. of the Great Lakes, Inc.; (A subsidiary of Frontier Schneider Communications; Telecommunications Inc.) Frontier Telemanagement Frontier Communications of IL Frontier Communications Illinois, Inc. of Illinois, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of IN Frontier Communications Indiana, Inc. of Indiana, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Telecommunications IA Frontier Communications of Iowa, Inc. of Iowa, Inc.; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications- WI Frontier Communications Lakeshore, Inc. -Lakeshore, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of IL Frontier Communications Lakeside, Inc. of Lakeside; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of PA Frontier Communications Lakewood, Inc. of Lakewood, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of AL Frontier Communications Lamar County, Inc. of Lamar County, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of MI Frontier Communications Michigan, Inc. of Michigan, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of the VA Frontier Communications Mid Atlantic, Inc. of the Mid Atlantic, (A subsidiary of Frontier Inc.; Mid Atlantic Telecommunications Inc.) Telecom Frontier Communications-Midland, IL Frontier Communications Inc. -Midland, Inc.; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications MN Frontier Communications of Minnesota, Inc. of Minnesota, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of MS Frontier Communications Mississippi, Inc. of Mississippi, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of WI Frontier Communications Mondovi, Inc. of Mondovi, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of IL Frontier Communications Mt. Pulaski, Inc. of Mt. Pulaski, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of DE Frontier Communications New England, Inc. of New England, Inc.; (A subsidiary of Long Distance North; LDN; Frontier Telecommunications Inc.) Frontier Frontier Communications - MN Frontier Communications North Central Region, Inc. North Central Region, (A subsidiary of Frontier Inc; American Sharecom; Telecommunications Inc.) ASI Frontier Communications of NY Frontier Communications New York, Inc. of New York, Inc.; (A subsidiary of Frontier Frontier Corporation) Frontier Communications of IL Frontier Communications Orion, Inc. of Orion, Inc.; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of PA Frontier Communications Oswayo River, Inc. of Oswayo River, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of PA Frontier Communications Pennsylvania, Inc. of Pennsylvania, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications-Prairie, IL Frontier Communications- Inc. Prairie, Inc.; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of DE Frontier Communications Rochester, Inc. of Rochester, Inc.; FCR (A subsidiary of Frontier Corporation) Frontier Communications-Schuyler, IL Frontier Communications Inc. -Schuyler, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of NY Frontier Communications Seneca-Gorham, Inc. of Seneca-Gorham, Inc.; (A subsidiary of Frontier Frontier Corporation) Frontier Communications of AL Frontier Communications the South, Inc. of the South, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications - WI Frontier Communications St. Croix, Inc. - St. Croix, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of NY Frontier Communications Sylvan Lake, Inc. of Sylvan Lake, Inc.; (A subsidiary of Frontier Frontier Corporation) Frontier Communications of IN Frontier Communications Thorntown, Inc. of Thorntown, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of WI Frontier Communications Viroqua, Inc. of Viroqua, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications of the CA Frontier Communications West, Inc. of the West, Inc.; West (A subsidiary of Frontier Coast Telecommunications, Telecommunications Inc.) Inc. Frontier Communications of WI Frontier Communications Wisconsin, Inc. of Wisconsin, Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Communications Services MI Frontier Communications Inc. (A subsidiary of ALC Services Inc.; Allnet Communications Corporation) Communication Services Frontier Information DE Frontier Information Technologies, Inc. Technologies, Inc.; (A subsidiary of Frontier FIT Corporation) Frontier InfoServices Inc. DE Frontier InfoServices (A subsidiary of Inc.; Visions Publishing Frontier Subsidiary Telco Inc.) Frontier Local Services Inc. MI Frontier Local Services (A subsidiary of ALC Inc.; Allnet Local Communications Corporation) Services Frontier Long Distance of DE Frontier Long Distance America, Inc. of America Inc; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Long Distance of NY Frontier Long Distance New York, Inc. of New York Inc.; (A subsidiary of Frontier Frontier Subsidiary Telco Inc.) Frontier Network Systems Inc. DE Frontier Network Systems (A subsidiary of Inc.; Rotelcom Network Frontier Telecommunications Inc.) Systems; Rotelcom Frontier Subsidiary Telco Inc. DE Frontier Subsidiary (A subsidiary of Telco Inc.; FSTI Frontier Corporation) Frontier Telecommunications Inc. DE Frontier Telecommuni- (A subsidiary of Frontier Corporation) cations, Inc.; FTI LinkUSA Corporation IA LinkUSA Corporation (A subsidiary of Frontier Telecommunications Inc.) Mid-South Cablevision MS Mid-South Cablevision Company, Inc. Company, Inc. (A subsidiary of Frontier Subsidiary Telco Inc.) MLD Minnesota 10, Inc. FL MLD Minnesota 10, Inc. (A subsidiary of Frontier Cellular Holding Inc.) Montel Communications, Inc. AL Montel Communications, (A subsidiary of Frontier Inc. Communications of Alabama, Inc.) New Richmond Cable WI New Richmond Cable Company, Inc. Company, Inc. (A subsidiary of Frontier Communications - St. Croix, Inc.) O. T. Cellular Telephone IL O. T. Cellular Company Telephone Company (A subsidiary of Frontier Communications of Orion, Inc.) RCI Long Distance Canada Ltd. Canada RCI Long Distance (A subsidiary of (Ont., Quebec) Canada Ltd. Frontier Telecommunications Inc.) Rochester Telephone Corp. NY Rochester Telephone (A subsidiary of Corp.; RTC Frontier Corporation) 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.) Schuyler Cellular, Inc. IL Schuyler Cellular, Inc. (A subsidiary of Frontier Communications - Schuyler, Inc.) Taconic Long Distance NY Taconic Long Distance Service Corp. Service Corp. (A subsidiary of Frontier Telecommunications Inc.) TDCI, Ltd. IN Thorntown Development (A subsidiary of Company, Inc.; TDCI, Frontier Communications of Ltd. Thorntown, Inc.) WCT Communications, Inc. CA WCT Communications, Inc. (A subsidiary of Frontier Telecommunications Inc.) EX-23.1 17 CONSENT OF INDEPENDENT ACCOUNTANT Exhibit 23.1 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. 33-57895 and 33-64307), Form S-4 (File No. 33-61047 and 33-91250) and in the Registration Statements on Forms S-8 (File Nos.33-67430, 33-54511, 33-67432, 33-54519, 33-67324, 33-51331, 33-51885, 33-52025, 33-59579 and 33-61855) of Frontier Corporation of our report dated January 22, 1996, appearing on page 25 of the Annual Report to Shareowners which is incorporated by reference 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 37 of this Form 10-K. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Rochester, New York March 25, 1996 EX-23.2 18 CONSENT OF INDEPENDENT ACCOUNTANT Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the reference to our firm under the caption "Experts" and to the incorporation by reference in the Registration Statement on Form S-3 (File No. 33-64307) and the related Prospectus of Frontier Corporation and to the incorporation by reference in the Prospectuses constituting part of the Registration Statement on Form S-3 (File No. 33-57895), Form S-4 (File Nos. 33-61047 and 33-91250) and in the Registration Statements on Form S-8 (File Nos. 33-67430, 33-67432, 33-67324, 33-51331, 33-51885, 33-52025, 33-54511, 33-54519, 33-59579 and 33-61855) of Frontier Corporation of our reports dated January 17, 1996 with respect to the consolidated financial statements and financial statement Schedule II of ALC Communications Corporation and subsidiaries which reports are included in the Annual Report on Form 10-K of Frontier Corporation for the year ended December 31, 1995 to be filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP ERNST & YOUNG LLP March 25, 1996 Detroit, Michigan EX-24 19 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY I, the undersigned, hereby constitute and appoint JOSEPHINE S. TRUBEK 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, 1995, 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 MARCH 18, 1996. /s/ Patricia C. Barron ---------------------------- Patricia C. Barron /s/ Ronald L. Bittner ---------------------------- Ronald L. Bittner /s/ Raul E. Cesan ---------------------------- Raul E. Cesan /s/ Brenda E. Edgerton ---------------------------- Brenda E. Edgerton ---------------------------- Jairo A. Estrada /s/ Daniel E. Gill ---------------------------- Daniel E. Gill /s/ Michael E. Faherty ---------------------------- Michael E. Faherty /s/ Alan C. Hasselwander ---------------------------- Alan C. Hasselwander /s/ Robert J. Holland, Jr. ---------------------------- Robert J. Holland, Jr. /s/ Douglas H. McCorkindale ---------------------------- Douglas H. McCorkindale ---------------------------- Marvin C. Moses /s/ Leo J. Thomas ---------------------------- Leo J. Thomas /s/ Richard J. Uhl ---------------------------- Richard J. Uhl EX-27 20 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FRONTIER CORPORATION'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000084567 FRONTIER CORPORATION 1,000 YEAR DEC-31-1995 DEC-31-1995 31,449 0 404,081 28,515 12,928 523,135 2,097,162 1,215,853 2,108,592 504,201 618,867 0 22,769 158,063 737,321 2,108,592 0 2,143,691 0 1,859,461 0 0 54,660 245,664 100,896 0 0 (128,208) (1,477) 22,083 0.13 0.13
EX-99 21 NOTICE & PROXY STATEMENT Exhibit 99 Frontier Proxy Statement Frontier Corporation Frontier Center 180 South Clinton Avenue Rochester, New York 14646-0700 Notice of Annual Meeting of Common Shareowners To be Held on April 24, 1996 Dear Shareowners: The Annual Meeting of Common Shareowners of Frontier Corporation (the "Company") will be held at the Ritz-Carlton Hotel, 15 Arlington Street, Boston, Massachusetts 02117, at 10:30 a.m. on April 24, 1996. The purposes of the meeting are: . To elect thirteen Directors; . To elect Price Waterhouse LLP as the Company's independent auditors for the fiscal year ending December 31, 1996; . To approve 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 amended Article II, Section 2, of the By-Laws to set the number of Directors constituting the entire Board at thirteen, effective January 22, 1996. The Board of Directors has fixed the close of business on March 6, 1996, 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. If you sign and return your proxy card without specifying your choices, it will be understood that you wish to have your shares voted in accordance with the Board of Directors' recommendations. You may revoke your proxy and vote in person if you decide to attend the meeting. An admission card will be required to gain entry to the meeting. If you are planning to attend the Annual Meeting, please check the box on the back of the proxy card. We will then send you your admission card which will include a map with directions to the meeting place. By Action of the Board of Directors, /s/ Josephine S. Trubek - -------------------------- Josephine S. Trubek Corporate Secretary Rochester, New York March 11, 1996 Table of Contents 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 6 Performance Graph 8 Compensation of Company Management 9 Summary Compensation Table 9 Option/SAR Grants in Last Fiscal Year 10 Individual Grants in 1995 Table 11 Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values Table 11 Long-Term Incentive Plans-Awards in Last Fiscal Year Table 12 Pension Plan Table 12 Compensation Committee Interlocks and Insider Participation in Compensation Decisions 13 Interest of Certain Persons in Matters to be Acted Upon 14 Indemnification of Certain Persons 14 Proposal 2 - Election of Independent Auditors 15 Proposal 3 - Employees' Stock Option Plan 15 Proposal 4 - Directors' Stock Incentive Plan 16 New Plan Benefits 18 Other Matters 18 Future Proposals of Shareowners 18 Proxy Statement 1996 Annual Meeting of Common Shareholders of Frontier Corporation - ------------------------------------------------------------------------------- Proxy Solicitation We are sending you this Proxy Statement and the enclosed proxy card in connection with the solicitation of proxies by the board of directors ("Board of Directors") of Frontier Corporation (the "Company"), a New York corporation, 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 24, 1996, at 10:30 a.m., local time at the Ritz-Carlton Hotel, 15 Arlington Street, Boston, Massachusetts 02117, or any later time, if adjourned, for the purposes stated in the Notice of Annual Meeting of Common Shareowners provided to you. The Company will bear the cost of proxy solicitation. In addition to the solicitation of proxies by mail, some officers and employees of the Company, without additional compensation, 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 $8,500, 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 6, 1996, 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 162,195,487 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 your proxy will be voted in accordance with the directions you specify on the proxy card. If your proxy does not specify a choice, your 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. You have the right to revoke your proxy by executing a 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 you to indicate if you wish 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. Auditors are elected by a majority of the votes cast. Abstentions are not counted in determining the votes cast in connection with the selection of auditors. Approval of the two proposals concerning employee and Director compensation plans (Proposals 3 and 4) requires that a majority of the outstanding shares entitled to vote on those proposals be voted in favor of them. Abstentions on either of the Plan proposals have the same effect as a vote against that proposal. The New York Stock Exchange allows brokerage firms holding shares for the benefit of their clients to 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 not discretionary items and brokers who receive no instructions from their clients may not vote on these proposals. If your broker does not vote your shares, those 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 YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL NOMINEES. Information about the Board of Directors Board of Directors The Board of Directors of the Company is currently composed of thirteen Directors. The Board of Directors nominates the thirteen persons named on pages 3 and 4 for election to the Board of Directors. All of the nominees are currently Directors of the Company whose terms expire coincident with the Annual Meeting. If elected, all nominees will serve until the Annual Meeting of Shareowners to be held in 1997 or until such time as their respective successors are elected. The Board of Directors held ten meetings during 1995. All of the Directors attended at least 75% of the total meetings of the Board and its committees which they were eligible to attend. This Proxy Statement and Form of Proxy are being first sent to Shareholders on March 11, 1996. 1 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 currently composed of Douglas H. McCorkindale, Chair; Raul E. Cesan, Brenda E. Edgerton and Richard J. Uhl. 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 three meetings in 1995. Committee on Management The present members of the Committee on Management are Daniel E. Gill, Chair; Patricia C. Barron, Michael E. Faherty and Douglas H. McCorkindale. This committee is responsible for determining the compensation, benefits and perquisites of all senior 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 six meetings in 1995. Committee on Directors The Committee on Directors focuses the Board's attention on corporate governance issues and serves as the nominating committee. The Committee currently consists of Patricia C. Barron, Chair; Jairo A. Estrada, Robert J. Holland, Jr., and Dr. Leo J. Thomas. The Committee is responsible for reviewing 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 four meetings in 1995. The Committee on Directors will consider nominations by shareowners. Such 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 1997 Annual Meeting of Common Shareowners must be received by November 1, 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, Douglas H. McCorkindale and Marvin C. Moses. 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 four times in 1995. Compensation of Directors Directors are paid an annual retainer and meeting fees. The annual retainer as set in 1995 is $15,000 and 500 shares of Frontier Corporation common stock. However, if shareowners approve Proposal 4, Amendment to Directors' Stock Incentive Plan, the annual retainer will consist of 1,200 shares of Frontier Corporation common stock and no cash. As stated on page 6, this change in compensation is intended to better align the interests of Directors with those of shareowners. The meeting fee is $1,500 for each Board and/or committee meeting attended. Under the 1995 compensation plan, each committee chair received an annual retainer in the amount of $4,000. However, if shareowners approve Proposal 4, Amendment to Directors' Stock Incentive Plan, the annual retainer for each committee chair will instead consist of 300 shares of Frontier Corporation common stock and no cash. New Directors also receive an additional one-time grant of 1,000 shares of Frontier Corporation common stock which they must hold during their tenure on the Board. Directors who are employees of the Company or its subsidiaries receive no annual retainer or meeting fees. Directors may elect to defer payment of their fees to future years. Pursuant to the Company's Directors' Stock Incentive 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 $19.8750 per share on April 26, 1995, with the exception of Mr. Holland who received a grant of options for 3,667 shares at an exercise price of $22.875 per share on June 1, 1995, and Messrs. Faherty and Uhl who each received a grant of options for 2,834 shares at an exercise price of $27.125 per share on August 16, 1995. Messrs. Faherty and Uhl also held options for ALC Communications Corporation common stock. In conjunction with the Company's acquisition of ALC on August 16, 1995, each ALC option became exercisable for two shares of Frontier Corporation common stock. Directors also receive 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 The principal occupation and business experience of each nominee for election at the Annual Meeting of Common Shareowners to be held on April 24, 1996 appears next to that person's photograph: - ------------------------------------------------------------------------------- [Photo Appears Here] Patricia C. Barron, 53, 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 Appears Here] Ronald L. Bittner, 54, is Chairman, President and Chief Executive Officer of the Company and has held this position since November 1995 and for the period of April 1993 to August 1995. From August 1995 to November 1995, he was Chairman and Chief Executive Officer of the Company. He served as the Company's President and Chief Executive Officer from February 1992 to April 1993, and was an Executive Vice President and President - Telecommunications Group from May 1988 to February 1992. He is also a Director of Dynatech Corp. He has been a Director of the Company since 1989. - ------------------------------------------------------------------------------- [Photo Appears Here] Raul E. Cesan, 48, is President, Schering-Plough Pharmaceuticals and Executive Vice President, 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 Laboratories - U.S. Pharmaceutical Operations. From September 1988 to September 1992, he was President, Schering-Plough International. He has been a Director of the Company since 1995. - ------------------------------------------------------------------------------- [Photo Appears Here] Brenda E. Edgerton, 46, 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. She has been a Director of the Company since 1993. - ------------------------------------------------------------------------------- [Photo Appears Here] Jairo A. Estrada, 48, is Past Chairman of the Board and Chief Executive Officer of Garden Way Incorporated, a company which manufactures outdoor power equipment. He held that position until December 1995. Mr. Estrada has been a Director of the Company since 1989. - ------------------------------------------------------------------------------- [Photo Appears Here] Michael E. Faherty, 61, is the principal of MICO, a general business consulting and contract executive firm since February 1977. In connection with this business, he has served, since 1994, as Chairman and Chief Executive Officer of ECCS, Inc., a provider of open systems-based networked computing solutions which incorporate ECCS's mass storage enhancement products. He also served from January 1992 to January 1994, as President and Chief Executive Officer of Shared Financial Systems, Inc., and was, from February 1989 to June 1992, President and/or Chairman of Intec Corp. He is a Director of Bantec, Inc. and of ECCS, Inc. Mr. Faherty has been a Director of the Company since 1995. - ------------------------------------------------------------------------------- [Photo Appears Here] Daniel E. Gill, 59, is Past Chairman and Chief Executive Officer of Bausch & Lomb Incorporated, a worldwide manufacturer and marketer of health care and optical products. Mr. Gill retired from that position in December 1995. He is a Director of Reebok International, Ltd. Mr. Gill has been a Director of the Company since 1981. - ------------------------------------------------------------------------------- [Photo Appears Here] Alan C. Hasselwander, 62, is Past Chairman of the Board of Rochester Telephone Corporation (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 Appears Here] Robert J. Holland, Jr., 55, is Chief Executive Officer of Ben and Jerry's Homemade, Inc., a manufacturer and marketer of premium ice cream, and has held this position since February 1995. From 1991 to 1995, he was Chairman and Chief Executive of Rokher-J, Inc., a business consulting firm, and from 1990 to 1991, he was Chairman, Gilreath Manufacturing, Inc. He is also a Director of Mutual Life Insurance Company of New York and Trumark Inc. Mr. Holland has been a Director of the Company since 1995. 3 - ------------------------------------------------------------------------------- [Photo Appears Here] Douglas H. McCorkindale, 56, 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 Appears Here] Marvin C. Moses, 51, is Vice Chairman and Chief Financial Officer of the Company and has held this position since November 1995. From August 1995 to November 1995, he was Executive Vice President and Chief Financial Officer for the Company. Mr. Moses was previously Executive Vice President and Chief Financial Officer of ALC Communications Corporation from October 1988 to August 1995. Frontier Corporation acquired that provider of long distance telecommunications services in 1995. Mr. Moses has been a Director of the Company since 1995. - ------------------------------------------------------------------------------- [Photo Appears Here] Dr. Leo J. Thomas, 59, is Executive Vice President of Eastman Kodak Company, a manufacturer of imaging 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. He is a Director of Eastman Kodak Company and of John Wiley & Sons, Inc. He has been a Director of the Company since 1984. - ------------------------------------------------------------------------------- [Photo Appears Here] Richard J. Uhl, 55, is President and a Director of Chicago Holdings, Inc., a privately owned company engaged in the management of several lease portfolios owned by it and its subsidiaries and in investments in operating companies. He has held these positions since 1985. Since July 1995, Mr. Uhl has also served as Chairman of the Board of Business Alliance Capital Corporation, an asset based lender to small and medium sized businesses. Since December 1987, Mr. Uhl also has been the President of Steiner Financial Corporation. He has been Chairman of the Board of Dealers Alliance Credit Corp. since November 1993 and a Director of First Merchant's Acceptance Corp. since May 1991. Both of these companies are purchasers and servicers of automobile finance contracts. He has been a Director of the Company since 1995. - ------------------------------------------------------------------------------- Stock Ownership of Management, Directors and Certain Beneficial Owners In 1993, the Committee on Directors established targets for the minimum amounts of the Company's common stock which Directors should own. These targets for stock ownership consider the length of a Director's tenure on the Board. By the end of 1995, each outside Director with at least five years' service on the Board was to 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. The stock ownership targets of Messrs. Bittner, Moses and Massaro are the beneficial ownership of Company common stock equal in value to four times his respective salary. Each other Company executive has a target of beneficial ownership of Company common stock, varying by salary grade, equal in value to one to three times his or her respective salary. Each corporate officer is expected to achieve his or her target by the later of January 1, 1999 or the fifth anniversary of his or her appointment as an executive officer. 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 22, 1996. No Director, officer or nominee owns more than 1% of the Company's outstanding shares of common stock. The group's aggregate holdings constitute less than 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 4,884 4,064 8,948 Ronald L. Bittner (3) 149,920 149,264 299,184 Raul E. Cesan 2,437 0 2,437 Brenda E. Edgerton 4,453 3,114 7,567 Jairo A. Estrada 15,034 4,664 19,698 Michael E. Faherty 2,181 82,500 84,681 Daniel E. Gill 5,605 4,664 10,269 Alan C. Hasselwander (4) 33,395 1,964 35,359 Robert J. Holland, Jr. 2,590 0 2,590 Douglas H. McCorkindale 4,748 4,664 9,412 Marvin C. Moses (5) 18,047 612,800 630,847 Dr. Leo J. Thomas 23,444 4,664 28,108 Richard J. Uhl 1,754 42,500 44,254 Named Executive Officers: Ronald L. Bittner (3) 149,920 149,264 299,184 Marvin C. Moses(5) 18,047 612,800 630,847 Jeremiah T. Carr 19,633 39,398 59,031 Dale M. Gregory (6) 35,237 43,264 78,501 Louis L. Massaro 35,984 36,398 72,382 William H. Oberlin 0 69,200 69,200 John M. Zrno 0 100,000 100,000 Directors and Executive Officers as a Group 359,346 1,203,122 1,562,468
4 (1) Includes all shares which each Director, nominee or officer directly, or 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. Amounts in this column include restricted stock. However, these amounts do not include shares which each such person has the right to acquire pursuant to options or other rights. (2) Includes all shares which such persons have the right to acquire within the sixty days following February 22, 1996, pursuant to options or other rights. These amounts do not include shares which such persons have the right to acquire more than sixty days after that date. (3) Includes 129 shares owned by Mr. Bittner's spouse and 313 shares owned by other members of Mr. Bittner's family. 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. (5) Includes 4,000 shares owned by Mr. Moses' children. Mr. Moses disclaims beneficial ownership of these shares. (6) Includes 1,268 shares held by various trusts for the benefit of Mr. Gregory's children. Mr. Gregory's spouse is a co-trustee of each of these trusts. Mr. Gregory 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
Number of Name and Address Shares of Percent of Beneficial Owner Common Stock of Class - ------------------- ------------ -------- FMR Corp.(1) 13,679,120 8.4% 82 Devonshire Street Boston, Massachusetts 02109 Steven C. Simon(2) 5,143,217 3.2% 1300 Nicolett Mall Minneapolis, Minnesota 55403 James J. Weinert(2) 3,424,633 2.1% 1300 Nicolett Mall Minneapolis, Minnesota 55403
(1) FMR Corp. ("FMR") filed with the Securities and Exchange Commission a Schedule 13G, dated February 14, 1996, stating that it beneficially owned in the aggregate 13,679,120 shares of the Company's common stock. As of February 22, 1996, this would represent approximately 8.4% of the Company's outstanding common stock. Of that amount, 11,327,390 shares were beneficially owned by FMR's wholly-owned subsidiary Fidelity Management & Research Company (acting as investment advisor) and 2,351,730 shares were beneficially owned by FMR's wholly-owned subsidiary 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 1,479,830 shares, sole dispositive power with respect to 13,679,120 shares, and no shared voting or shared dispositive power with respect to any shares. (2) Steven C. Simon and James J. Weinert have expressly affirmed that they together comprise a group in a Schedule 13D, dated March 17, 1995, filed with the Securities and Exchange Commission. Each holds sole voting and investment power with respect to his 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 1995 were complied with in a timely fashion. - ------------------------------------------------------------------------------- Report of Committee on Directors The Committee on Directors, which was created in 1993, focuses the Board's attention on corporate governance issues and serves as the nominating committee. Since its formation, the Committee initiated several actions designed to increase the independence of the Board and to further align the interests of Directors with the interests of shareowners. The Committee first reported its activities in last year's proxy statement. During 1995, the Committee continued its efforts to improve Frontier's corporate governance. The Committee reviewed the complete set of Governance Guidelines, originally created in 1994, and recommended certain changes. The Guidelines establish the standards for Board operation. At the recommendation of the Committee on Directors, the Board approved the standards. The Governance Guidelines set the size of the Board to be between 9 and 14 members who are each elected for a one year term. Attendance is expected to be 100 percent of meetings with a minimum of 75 percent. The minimum number of Board meetings held each year is five and, for each Committee, is two. The Governance Guidelines require that the Board be composed of primarily outside directors, and all committees except the Executive Committee are composed entirely of independent outside directors. Retirement age is 70. If a Director's primary job changes, the Governance Guidelines require that the Director submit a resignation which the Committee then recommends to the Board whether or not to accept. Retirement is considered a job change in the context of this provision. The Committee monitored the stock ownership of the members of the Board and reports that all current outside Board members have met their stock ownership targets. In addition, the Committee re-evaluated the targets and set new stock ownership targets commencing in 1996 at a multiple of four times the annual compensation of a director. 5 The Committee reviewed Board member compensation and determined that a major shift was desirable to more closely align the Directors' interests with those of the shareowners. Thus, the Committee set the 1996 compensation package to require, subject to shareowner approval, that the full retainer for each Board member and the full retainer for each Chair of a committee be paid entirely in the form of shares of Frontier common stock. The Committee utilized a formal system of evaluation of each Director in its consideration of the slate of nominees submitted to shareowners for a vote at the annual meeting of shareowners. Your Committee on Directors will continue to review annually the Governance standards and recommend improvements to the full Board of Directors. The full Board of Directors considers the Governance Guidelines annually. Respectfully submitted, The Committee on Directors Patricia C. Barron (Chair) Jairo A. Estrada Robert J. Holland, Jr. Dr. Leo J. Thomas January 22, 1996 - ------------------------------------------------------------------------------- Report of Committee on Management Compensation Philosophy and Policy We believe that a compensation program should offer performance-based compensation to its employees and reward employees whose results 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 Incentive 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 compensates the individual executive officers based on the Company's consolidated performance and the individual's contribution. The program is designed to be competitive with compensation programs offered by comparable employers. 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 and related industries, is used to determine what a comparable firm would consider an appropriate performance-based compensation package for its executives. The analysis includes information from a self-constructed group of forty publicly-traded companies in the telephone, long distance, cable television, cellular and information technology industries. This group includes most of the companies reported in the Standard and Poor's Telephone Index and the Standard and Poor's Long Distance Index, together with additional companies. The Company's policy is to benchmark compensation levels at the median of the comparative companies and to reward results based on performance. On a comparative basis, the base salary of the Company's CEO and its other executives, on average, would be considered within the third quartile. 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. This analysis included the companies in the self-constructed group of forty 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 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 the bonus plan for those involved in line operations below the executive officer level. All participants are subject to a discretionary adjustment, either positive or negative, based on individual performance. 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 1995 was an equally weighted earnings per share and cash flow target established by this Committee of the Board of Directors as an incentive to improve the financial performance of the firm and thus improve long-term stock performance. Performance objectives and associated payouts were established at the beginning of the year and were subsequently modified in September to reflect the financial structure and objectives of the Company following the completion of the Company's acquisition of ALC Communications Corporation and other significant acquisition and merger activity. The objectives are identified as threshold, standard and premier targets with standard performance yielding payouts at the median level competitively. No award will be paid unless threshold performance is achieved for both components. 6 For 1995, both earnings per share and cash flow results were between the standard and premier levels. All the Company's senior executives are eligible to 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 targets, a mechanical application of the formula (which for Mr. Bittner was 105.0%, times his actual salary) and an additional discretionary adjustment based on his individual performance. Long-Term Incentive Plan The Company's long-term incentive plan, the Performance Unit Plan ("PUP"), was originally designed to motivate executives to improve shareowner value over longer periods of time than one year. In the Committee's judgment, the long-term incentive plan was not totally successful in linking employee performance with increased shareowner value. The Committee determined that stock-based compensation programs provide a better incentive to link an executive's goals to those of a shareowner. Therefore, beginning in 1994, PUP was discontinued and the Committee used stock-based plans to better align employee interests with the long-term interests of shareowners. No new PUP grants were issued in either 1994 or 1995, and the payouts for the 1993 -1995 cycle represent the conclusion of this Plan. Executives received PUP payouts based on equally weighted measures of the Company's stock appreciation over the past three years as compared to a group of sixteen telecommunications firms and as compared to the Standard and Poor's 500 Index. Cycle payouts are a product of the Company's stock price at the end of the cycle, corporate performance against the selected measures, and the number of units granted to an executive for the cycle. The final PUP awards for Mr. Bittner and the other executive officers were based upon performance achieved at 120% of the target levels. Stock Incentive Plan This Committee believes that stock-based plans are an important component of executive compensation programs because they tie long-term compensation directly to the interests of shareowners. The Company's Management Stock Incentive Plan is designed to align executive compensation with the long-term performance of the Company's stock. Stock options issued in 1995 do not expire until 2005, and the exercise price is the value of the stock on the day the option was granted. 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 on previously set objectives and (b) his or her expected future contribution to the long-term strategic goals and objectives of the Company. No relative weights are attributed to either of these factors. All executive officers of the Company received options in 1995 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. Restricted stock awards issued in 1995 expire on December 31, 1998, and require that both passage of time and performance criteria be satisfied for vesting of shares to occur. An executive must continue to be employed by the Company and specified stock price levels must also be achieved by certain dates for vesting to occur. No greater than one-third of an executive's award can be paid in either 1996 or 1997. On the grant date the Company's stock price was $27.1250 per share. The stock price performance vesting criteria for the first one-third of the grant is the achievement of at least a $31.00 stock price for twenty business days in a thirty business day period. Subsequent thirds will vest upon the achievement of stock prices of $36.00 and $41.00 and the passage of time. Messrs. Carr, Massaro and Gregory, and selected other key senior managers received restricted stock awards based upon their expected future contributions to the long-term strategic goals and objectives of the Company as recommended by the chief executive officer and as assessed by Committee members. Upon this Committee's recommendation, the full Board awarded Mr. Bittner restricted stock based upon these factors as well. Other Actions The Company took action in 1995 to redesign a competitive, standardized benefit package for all non-bargaining unit employees. To align executive benefits, this Committee modified several of the executive benefit plans. The Supplemental Management Pension Plan ("SMPP") is frozen as of December 31, 1996. Changes have been made affecting service and age factors impacting retirement. The final benefit calculation will be enhanced by 20% to offset partially the loss of future benefit accruals as a result of freezing the Plan. Senior management as well as all executive officers are covered by SMPP. The Supplemental Executive Retirement Plan ("SERP") is frozen as of December 31, 1999. This date was selected to retain the Company's senior executives during the period of transition following mergers and acquisitions in 1995, and to avoid creating an incentive for senior executives to retire prematurely. No change in retirement parameters nor enhancement of benefits is provided, nor will new participants be included in the Plan beyond December 31, 1995. All executive officers are covered by SERP. See Pension Plans, page 12. 7 The Committee believes that stock-based programs provide the best long-term incentives, are excellent motivators and better align the efforts of employees 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. The Committee approved the Employees' Stock Option Plan for presentation to shareowners for approval (see pages 15 and 16). This broad-based plan provides eligibility for stock option grants to non-executive employees of the Company. Options will be issued at fair market value on the day of grant, will vest upon the second anniversary of the grant date, and will expire on the tenth anniversary of the grant date. The Committee believes that the introduction of this program will better align the interests of all Company employees with the interests of shareowners. This becomes much more important as the Company continues its accelerated transition into a fully competitive telecommunications marketplace. 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 Management Stock Incentive Plan, specifically as it relates to performance-based restricted stock, is designed to comply with Section 162(m) requirements. The Committee favors a pay-for- performance compensation program 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 Michael E. Faherty Douglas H. McCorkindale January 22, 1996 - ------------------------------------------------------------------------------- Performance Graph The following graph charts the Company's cumulative total shareowner return performance against the Standard and Poor's Telephone Index, the Standard and Poor's Long Distance Index and the Standard and Poor's 500 Index. The Long Distance Index has been added this year because long distance is a more significant component of the Company's business following its August 1995 acquisition of ALC Communications Corporation. The other indices have been presented in past years. 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 and the Standard and Poor's Long Distance Index are weighted by the stock market capitalization of the companies within each of these peer groups. [GRAPH APPEARS HERE] COMPARISON OF FIVE YEAR CUMULATIVE RETURN AMONG FRONTIER, S&P TELEPHONE INDEX, S&P 500 INDEX AND S&P LONG DISTANCE INDEX
Measurement period S&P TELEPHONE S&P 500 S&P LONG DISTANCE (Fiscal year Covered) FRONTIER INDEX INDEX INDEX - --------------------- -------- ------------- ------- ----------------- Measurement PT - 12/31/90 $100 $100 $100 $100 FYE 12/31/91 $116 $107 $130 $134 FYE 12/31/92 $135 $118 $140 $177 FYE 12/31/93 $177 $136 $155 $198 FYE 12/31/94 $172 $126 $157 $180 FYE 12/31/95 $254 $190 $215 $242
8 - ------------------------------------------------------------------------------- Compensation of Company Management We have included the following tables and other information to help you understand the compensation of the Company's executives. These tables reflect the components of compensation paid the executive officers of Frontier Corporation. Specifically, these include salary, bonus, stock options and a long-term incentive plan. The Company does not provide its executives with stock appreciation rights. The Report of the Committee on Management of the Board of Directors appears on pages 6 to 8 of this Proxy Statement. This Report discusses the factors taken into consideration in setting Mr. Bittner's compensation and the compensation of the other executive officers. A Performance Graph showing the performance of the Company's stock as compared to the Standard and Poor's 500 Index, the Standard and Poor's Telephone Index, and the Standard and Poor's Long Distance Index appears on page 8 of this Proxy Statement. Summary Compensation Table The following table provides a summary of compensation paid to the CEO and the other four most highly compensated executive officers of the Company for services rendered to the Company and its subsidiaries over the past three fiscal years. The indicated titles are those currently held by each named executive officer. The table also includes information concerning two additional persons who were executive officers of the Company during 1995.
Long Term Compensation ----------------------- Annual Compensation Awards Payouts ------------------------------------------ ----------- ------- Other Securities Annual Underlying All Other Name Compen- Options/ LTIP Compen- and Principal Salary Bonus sation SARs Payouts sation Position Year ($) ($) ($)(3) (#) ($)(4) ($)(5) - ------------------------ ---- -------- -------- -------- ---------- -------- ----------- R. L. Bittner 1995 $575,000 $660,000 $ 0 502,000 $222,850 $ 42,703 Chairman, President and 1994 $408,333 $349,471 $ 0 88,800 $204,164 $ 41,369 CEO Frontier Corporation 1993 $360,000 $407,500 $ 0 46,000 $230,121 $ 26,856 M. C. Moses(1) 1995 $272,917 $293,500 $ 0 100,000 $ 0 $ 1,065 Vice Chairman and 1994 $246,562 $250,000 $1,761 0 $ 0 $ 750 Chief Financial Officer 1993 $245,417 $210,000 $ 0 480,000 $ 0 $ 600 Frontier Corporation J. T. Carr 1995 $258,033 $208,466 $ 0 86,400 $ 67,182 $ 8,152 Senior Vice President 1994 $200,275 $132,500 $8,330 22,000 $ 67,856 $ 10,508 Frontier Corporation 1993 $176,350 $ 87,750 $ 0 12,000 $ 80,702 $ 8,934 and Chairman Rochester Telephone Corp. D. M. Gregory 1995 $274,467 $193,315 $4,541 86,400 $ 71,545 $ 19,749 Senior Vice President 1994 $219,542 $131,600 $3,799 26,400 $ 65,556 $ 17,306 Frontier Corporation and 1993 $186,567 $131,625 $ 0 13,200 $ 69,753 $ 29,963 President-Carrier Services L. L. Massaro 1995 $241,375 $219,199 $ 0 126,400 $ 68,127 $ 17,234 Executive Vice 1994 $189,442 $111,700 $ 0 22,000 $ 70,385 $ 16,600 President and Chief 1993 $174,800 $131,625 $ 0 9,000 $ 95,662 $ 11,721 Administrative Officer Frontier Corporation W. H. Oberlin(2) 1995 $258,333 $264,475 $ 0 100,000 $ 0 $1,161,065 former President 1994 $246,562 $250,000 $5,668 0 $ 0 $ 750 Frontier Corporation 1993 $245,417 $210,000 $ 0 480,000 $ 0 $ 600 J. M. Zrno(2) 1995 $270,833 $285,075 $6,269 0 $ 0 $1,274,064 former Vice Chairman 1994 $321,524 $325,000 $4,673 0 $ 0 $ 750 Frontier Corporation 1993 $319,041 $273,000 $2,650 600,000 $ 0 $ 600
9 (1) Mr. Moses was named Vice Chairman effective November 20, 1995. The compensation indicated for 1995 and prior years includes compensation relating to his position as an executive officer of ALC Communications Corporation, which was acquired by the Company effective August 16, 1995. As a result of that acquisition, each option for a share of ALC common stock became exercisable for two shares of Frontier common stock. The number of securities underlying options granted in 1993 has been adjusted in this Table to reflect the effect of the acquisition. (See also footnote 3 to the Table of Aggregated Option/SAR Exercises in Last Fiscal Year and Year-End Option/SAR Values at page 11.) (2) Messrs. Oberlin and Zrno were named to the indicated positions with the Company effective August 16, 1995, pursuant to the agreement for the acquisition of ALC Communications Corporation by the Company. The compensation indicated for 1995 and prior years includes compensation relating to their positions as executive officers of ALC Communications Corporation. The number of securities underlying options granted in 1993 has been adjusted in this Table to reflect the effect of the acquisition. Mr. Zrno retired from Frontier Corporation effective October 31, 1995. Mr. Oberlin resigned from Frontier Corporation effective November 20, 1995, and consequently the 100,000 options granted in 1995 and reflected in this Table will never vest. (See also footnote 3 to the Table of Aggregated Option/SAR Exercises in Last Fiscal Year and Year-End Option/SAR Values at page 11.) (3) The amounts reported in this column for 1995 include $4,541 paid to Mr. Gregory and $6,269 paid to Mr. Zrno to offset income tax liabilities incurred by each of them. (4) As described in more detail in the Report of Committee on Management at page 7 of this Proxy Statement, 1995 Performance Unit Plan awards are based upon performance achieved at 120% of the target levels. This represents the final payout under this plan. (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 1995, the dollar value of term life insurance coverage premiums paid by the Company for the benefit of the named executive officers was $1,476 for Mr. Bittner, $1,402 for Mr. Carr, $1,476 for Mr. Gregory, $1,476 for Mr. Massaro, $65 for Mr. Moses, $65 for Mr. Oberlin and $65 for Mr. Zrno. The Company's 1995 contributions on behalf of the named executive officers to the tax-qualified 401(k) and nonqualified defined contribution plans, respectively, were as follows: $5,368 and $35,859 for Mr. Bittner; $6,750 and $0 for Mr. Carr; $6,126 and $12,147 for Mr. Gregory; $5,430 and $10,328 for Mr. Massaro; $1,000 and $0 for Mr. Moses; $1,000 and $0 for Mr. Oberlin and $1,000 and $0 for Mr. Zrno. For Messrs. Oberlin and Zrno, "All Other Compensation" includes amounts accrued in 1995 as a result of their decision to terminate employment following a change in control of ALC Communications Corporation. These amounts will be paid out over 24 month periods. The sum of $1,160,000 was accrued for Mr. Oberlin and the sum of $1,272,999 was accrued for Mr. Zrno. The following companion tables to the Summary Compensation Table list the stock options granted during the 1995 fiscal year to the named executive officers, their stock held at the end of 1995, long-term incentive plan restricted stock awards granted during 1995, and the estimated retirement benefits which would be paid to them at age 65. Option/SAR Grants in Last Fiscal Year The following Individual Grants table includes two columns designated as "Potential Realized Value." The calculations in those columns are based on hypothetical growth assumptions, proposed by the Securities and Exchange Commission, of 5% and 10% for stock price appreciation for the option term. There is no way to anticipate what the actual growth rate of the Company's stock price will be. 10 Individual Grants in 1995
Number of Potential Realized Value Securities % of Total at Assumed Annual Rates Underlying Options/SARs of Stock Price Appreciation Options/SARs Granted to Exercise or for Option Term Granted(1) Employees in Base Price Expiration ---------------------------- Name (#) Fiscal Year ($/Share) Date 5% ($) 10% ($) - ---- ------------ ------------ ----------- ---------- ----------- ----------- R. L. Bittner 102,000 5.09% $21.875 3/13/05 $1,403,221 $ 3,556,038 400,000 19.97% $27.125 8/16/05 $6,823,507 $17,292,106 M. C. Moses 100,000 4.99% $27.125 8/16/05 $1,705,877 $ 4,323,026 J. T. Carr 26,400 1.32% $21.875 3/13/05 $ 363,187 $ 920,386 60,000 3.00% $27.125 8/16/05 $1,023,526 $ 2,593,816 D. M. Gregory 26,400 1.32% $21.875 3/13/05 $ 363,187 $ 920,386 60,000 3.00% $27.125 8/16/05 $1,023,526 $ 2,593,816 L. L. Massaro 26,400 1.32% $21.875 3/13/05 $ 363,187 $ 920,386 100,000 4.99% $27.125 8/16/05 $1,705,877 $ 4,323,026 W. H. Oberlin 100,000 4.99% $27.125 8/16/05 $1,705,877 $ 4,323,026 J. M. Zrno 0 0.00% N/A N/A N/A N/A
(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 March 13, 1995 and August 16, 1995. 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 Management Stock Incentive Plan, all options become immediately vested and exercisable. Mr. Oberlin has left the Company and consequently the 100,000 options reflected in this Table will never vest. Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values
Number of Securities Value of Unexercised In- Underlying Unexercised the-Money Options/SARs Shares Options/SARs at FY End at FY End(2) Acquired Value --------------------------- --------------------------- On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ----------- -------- ----------- ------------- ----------- ------------- Name (#) ($)(1) (#) (#) ($) ($) - ---- ----------- -------- ----------- ------------- ----------- ------------- R. L. Bittner 0 N/A 76,264 576,536 $ 816,344 $2,650,381 M. C. Moses(3) 0 N/A 1,500,000 100,000 $37,005,806 $ 287,500 J. T. Carr 0 N/A 20,732 105,068 $ 226,864 $ 555,611 D. M. Gregory 0 N/A 22,998 108,402 $ 263,384 $ 585,041 L. L. Massaro 0 N/A 18,732 144,068 $ 204,989 $ 659,673 W. H. Oberlin (3) 0 N/A 1,569,200 100,000 $38,960,706 $ 0 J. M. Zrno (3) 0 N/A 1,600,000 0 $38,452,976 N/A
(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 common stock at December 31, 1995, (closing price of $30.00) less the per share option exercise price, multiplied by the number of exercisable/unexercisable options. (3) ALC Communications Corporation merged with a subsidiary of Frontier Corporation effective August 16, 1995. As a result of the merger, all options in ALC Communications Corporation shares previously granted to Messrs. Moses, Oberlin and Zrno became immediately vested and each option for an ALC share became exercisable for two shares of Frontier Corporation common stock. This exchange ratio is consistent with the exchange ratio of the underlying merger. The exercisable stock options reported for Messrs. Moses, Oberlin and Zrno include options for ALC shares which were previously granted by ALC Communications Corporation. All options for ALC common stock were originally granted with an exercise price equal to market price on the date of grant. These options retain their original expiration dates. Mr. Oberlin has left the Company and consequently the 100,000 options reflected in this Table in the "Unexercisable" column will never vest and for that reason their value is reflected as zero. 11 Long-Term Incentive Plans - Awards in Last Fiscal Year
Number of Performances or Shares, Units Other Period Until or Other Maturation or Name Rights (#) Payout - ---- ------------- ------------------ R.L. Bittner 100,000 (1) M.C. Moses 0 J.T. Carr 10,000 (1) D.M. Gregory 10,000 (1) L.L. Massaro 20,000 (1) W.H. Oberlin 0 J.M. Zrno 0
(1) Messrs. Bittner, Carr, Gregory and Massaro each were awarded shares of restricted stock on August 16, 1995, under the Management Stock Incentive Plan which is a long-term incentive plan. Vesting is subject to performance criteria as well as the passage of time and continued employment. No greater than one-third of the award can be paid in either 1996 or 1997. The first third will vest upon achievement of at least a $31.00 stock price for twenty business days in a thirty business day period. The remaining two-thirds will vest upon the achievement of stock prices of $36.00 and $41.00 and the passage of time. Unvested restricted share awards expire on December 31, 1998. Recipients of restricted shares have full voting rights on the shares and are entitled to receive accumulated dividends when the shares vest. In the event of a "change in control" as defined by the Management Stock Incentive Plan, all restricted shares become immediately vested and exercisable. 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. Both the Company's Management Pension Plan and the SMPP have been amended and will be frozen effective December 31, 1996. Benefit calculations under both pension plans were increased by 20% for all plan participants who will have five or more years of service under the Plans by December 31, 1996. Additionally, early retirement requirements were reduced by three years of service and three years of age as final enhancements to both plans. Pension Plan Table
Years of Service/ Remuneration (15) (20) (25) (30) (35) - ----------------- -------- ------- ------- ------- ------- $ 350,000 95,368 127,157 158,946 190,735 222,524 400,000 109,228 145,637 182,046 218,455 254,864 450,000 123,088 164,117 205,146 246,175 287,204 500,000 136,948 182,597 228,246 273,895 319,544 550,000 150,808 201,077 251,346 301,615 351,884 600,000 164,668 219,557 274,446 329,335 384,224 650,000 178,528 238,037 297,546 357,055 416,564 700,000 192,388 256,517 320,646 384,775 448,904 750,000 206,248 274,997 343,746 412,495 481,244 800,000 220,108 293,477 366,846 440,215 513,584 850,000 233,968 311,957 389,946 467,935 545,924 900,000 247,828 330,437 413,046 495,655 578,264 950,000 261,688 348,917 436,146 523,375 610,604 1,000,000 275,548 367,397 459,246 551,095 642,944 1,050,000 289,408 385,877 482,346 578,815 675,284 1,100,000 303,268 444,357 505,446 606,535 707,624
12 Mr. Bittner, Mr. Moses, Mr. Carr, Mr. Gregory and Mr. Massaro 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 page 14 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 one additional executive officer and six other executives. 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. Effective December 31, 1999, the SERP will be frozen with no enhancements. For the purpose of the Management Pension Plan, annual compensation includes all taxable W-2 compensation plus deferred compensation. For the purpose of SMPP and the SERP, 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-33; Mr. Carr- 26; Mr. Gregory-17; and Mr. Massaro-27. Messrs. Moses, Oberlin and Zrno have no years of employment for purposes of these Plans. However, the Company has agreed to bridge Mr. Moses's prior service with telecommunications companies provided he remains employed by Frontier Corporation. Effective September 1, 1997, the Company will credit Mr. Moses nine years and three months toward pension eligibility, and two years thereafter, the Company will credit him his remaining nine years and three months experience. The Company has also 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. Mr. Zrno and Mr. Oberlin will receive no payments from the SERP as they have left the Company and because they have no years of employment for the purpose of any of the Company's plans. Neither Mr. Massaro nor Mr. Gregory has yet reached the age of 50 years. Assuming they retired as of the current date, Mr. Massaro would receive a full pension and Mr. Gregory would receive a deferred pension based upon the amount reflected in the Pension Plan Table, and neither would receive any additional benefit under the SERP. Mr. Bittner has reached the age of 50 years and has accrued at least 30 years of service credit. If he retired as of the current date, he would receive a full pension based on the amount reflected in the Pension Plan Table and no SERP benefit because the amount he would receive under the current pension formula would exceed any SERP benefit. Since Mr. Carr has reached the age of 50 years and has 26 years of service credit, he is entitled to a full pension based on the amount reflected in the Pension Plan Table. Assuming annual compensation at his January 31, 1996 level, if Mr. Carr were to retire, he would additionally receive an annual SERP benefit of $23,945. Although Mr. Moses has reached the age of 50 years, he does not currently have enough years of service with the Company to qualify for any pension or SERP benefit. - ------------------------------------------------------------------------------- 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. Faherty, Mr. McCorkindale and Mr. Gill (Chair). None of these persons were, during 1995 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 1995, he participated in those deliberations of the Company'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 1995 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. 13 Employment Contracts On August 16, 1995, the Company entered into three year employment agreements, with provisions for annual renewals, with Mr. Bittner, Mr. Carr, Mr. Gregory, and Mr. Massaro. Each agreement provides for specific compensation, duties and terms and conditions of employment. Each agreement also 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 certain circumstances, the employee will be entitled to all accrued compensation, a pro rata bonus, a cash severance payment (as determined under the agreement), the cash value of certain retirement amounts (as determined under the agreement) and continuation for three years of certain health and life insurance benefits. 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 (also as defined in the agreement). Frontier Corporation acquired ALC Communications Corporation ("ALC") on August 16, 1995. Under the terms of the acquisition agreement, Messrs. Faherty, Uhl and Moses became Directors of the Company. In late 1988, ALC entered into employment agreements with Messrs. Zrno and Oberlin. These agreements were subsequently amended several times. As of the effective date of the acquisition, each employment agreement was amended again to provide for a specific base salary, term of employment and position with Frontier Corporation, and qualified the employee to participate in Frontier Corporation's executive retirement and pension plans. Mr. Zrno's employment agreement had a base salary of $300,000 which was increased to $325,000 and an expiration date of January 7, 1997, while Mr. Oberlin's agreement had an expiration date of January 1, 2000, and an annual base salary of $350,000. Both agreements also contained certain non-compete provisions. Mr. Oberlin's agreement also granted him 100,000 options in Frontier Corporation common stock and the right to earn 200,000 additional options, if certain performance goals are met and he remained employed by Frontier. The acquisition of ALC by Frontier qualified as a "Change-in-Control Event" under the employment agreements of Messrs. Zrno and Oberlin. Accordingly, each officer was entitled to terminate voluntarily his employment at any time within 12 months after the acquisition date and receive the same severance package as if his employment were terminated without cause. Specifically, this benefit would be the salary and benefits which he would have been entitled to receive for a period of two years had his employment not terminated, plus an amount of compensation equivalent to the sum of his incentive compensation awards for the immediately preceding two fiscal years. The employment agreements also provided that any ALC stock options previously granted to that officer would immediately vest upon his termination of employment and remain exercisable for shares of Frontier Corporation common stock for at least the 12 months following the termination of his employment. Mr. Zrno elected to terminate his employment effective October 31, 1995, and Mr. Oberlin chose to terminate his employment effective November 20, 1995. These events triggered the payments due them under the Change-in-Control provisions. Frontier Corporation has accrued for these payments which are reflected in the "All Other Compensation" column of the Summary Compensation Table located at page 9 of this proxy statement. Effective November 20, 1995, the Company entered into a restated employment agreement with Mr. Moses. That agreement, which continues through December 31, 1999, provides for specific compensation, duties and position with Frontier Corporation and qualifies Mr. Moses to participate in the Company's executive retirement and pension plans. That agreement contains customary terms regarding the reimbursement of employee expenses and the indemnification of officer acts, as well as typical covenants regarding certain confidential matters. It also contains certain non-compete provisions and reaffirmed a prior grant to Mr. Moses of 100,000 options in Frontier Corporation common stock and the right to earn 200,000 options, if certain performance goals are met and he remains employed by Frontier. The Company may terminate Mr. Moses' employment with or without cause, and Mr. Moses may also terminate his employment with or without cause. Depending upon the circumstances and date of Mr. Moses' employment termination, the Company may be required to pay Mr. Moses certain benefits. - ------------------------------------------------------------------------------- Interest of Certain Persons In Matters to be Acted Upon As disclosed at Proposal 3, Employees' Stock Option Plan, at pages 15 and 16, the executive officers of the Company would not be entitled to participate in that Plan. They would continue to participate in the Management Stock Incentive Plan which was previously approved by shareowners. As disclosed at Proposal 4, Directors' Stock Incentive Plan, at pages 16 and 17, the nominees for Director would be entitled to participate in that Plan. The New Plan Benefits Table at page 18 of this Proxy Statement reflects the benefits each group would receive under the Plans which are the subject of these Proposals. - ------------------------------------------------------------------------------- Indemnification of Certain Persons As authorized by New York State Law, the Company and its subsidiaries have purchased insurance from the Chubb Group, the National Union Fire Insurance Company of Pittsburgh, PA, and Gulf Insurance Company, 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 14 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 21, 1995 for a period of one year. During 1995, the Company paid $594,907 for this insurance and the renewal policy costs will be negotiated in March, 1996. - ------------------------------------------------------------------------------- Proposal 2-Election of Independent Auditors YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL. 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, 1996. 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 you 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. - ------------------------------------------------------------------------------- Proposals Regarding Employee and Director Compensation Plans The Company is requesting your approval of a new employee compensation plan and an amendment and modification to an existing Director compensation plan. These are designed to incent employees and Directors to act in the best interests of shareowners by increasing their ownership of Company common stock. These proposals are included on pages 15 through 17 of this Proxy Statement as Proposals 3 and 4. Specifically, in the case of Proposal 3, shareowner approval is requested to establish a new plan that will increase the group of employees eligible to receive stock compensation. A total of 8,000,000 shares over a 10 year period would be available for grant under this new plan. In the case of Proposal 4, shareowner approval is requested to increase the number of shares of Frontier common stock granted, in lieu of cash, to Directors of the Company and its subsidiaries annually for service on the Board. 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. You can receive a copy of these Plans by calling the Shareowner Line, 1-800-836-0342. Alternatively, you may direct a written request for copies of the Plans to the Corporate Secretary at the Company's office at Frontier Center, 180 South Clinton Avenue, Rochester, New York 14646. We must receive your oral or written request by April 18, 1995, in order for you to receive the copy in advance of the meeting. Copies of each of these Plans will also be available at the meeting. - ------------------------------------------------------------------------------- Proposal 3-Employees' Stock Option Plan YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL. Summary of Proposed Action As discussed in the Report of the Committee on Management at page 6 of this Proxy Statement, the Committee has adopted the Employees' Stock Option Plan (the "Plan"), subject to shareowners' approval. The purpose of the proposed action is to provide a broad-based stock option plan available to employees other than senior executives. This action will require the affirmative vote of a majority of the outstanding shares eligible to vote on this proposal. Your Board of Directors believes that all employees should be encouraged to own shares of the Company's stock in order to align employees' interests better with shareowners. As the telecommunications industry becomes more competitive, the speed of change in the industry requires employees to become more entrepreneurial and customer focused. The nature of the Company's business has grown and changed dramatically over the past several years. Currently, nearly 70% of the Company's revenue is generated from the provision of long distance service, an already very competitive market. It is necessary for the Company to maintain a competitive compensation program in order to attract and retain high performance employees critical to the future success of the Company. Stock options, even in limited numbers per employee, will provide an important link between the employee's performance, compensation and increased value for shareowners. Your Board of Directors asks that you approve this broad- based employee stock option plan that will allow the Company to incent and reward non-senior executive employees with stock options. Summary of Plan Provisions The Company's Employees' Stock Option Plan will be a new, broad-based plan. All employees of the Company and its subsidiaries, other than senior executives, generally will be eligible to participate. Participation of bargaining unit employees would be subject to the collective bargaining process. Options may be granted under the Plan during a 10 year period following shareowner approval of the Plan. 15 Plan Administration; Eligibility. A Stock Option Committee (the "Committee"), which currently would be composed of members of the Company's senior management team, has discretion to select, from among the persons eligible for awards, the employees to whom awards will be granted and to determine the specific terms of each award, subject to the provisions of the Plan. Stock Options. The Plan permits the granting of Non-Qualified Stock Options ("NQSOs"). The exercise price under each option is the fair market value of the common stock on the day 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 on the second anniversary of the date of the grant. Options expire automatically if not exercised within ten (10) years following the date of grant. Shares Available. The aggregate number of shares of the Company's common stock available for award under this Plan during the 10 year life of the Plan will not exceed eight million (8,000,000) shares. If an award expires, terminates or is canceled 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 stock 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 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 stock options granted under the Plan. The grant of an option will create no Federal income tax consequences for an optionee or the Company. 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. - ------------------------------------------------------------------------------- Proposal 4-Directors' Stock Incentive Plan YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL. Summary of Proposed Action Increased common share ownership in the Company by non-employee Directors of the Company and its subsidiaries will more closely align their interests to those of our general shareowner population. Based on management's recommendation, your Board of Directors has recommended a modification and restatement of the Directors' Stock Incentive Plan to increase the annual stock grants to non- employee Directors of the Company and its subsidiaries so that their retainers will be paid entirely in Company common stock. Currently eleven persons are non- employee Directors of Frontier Corporation and five persons are non-employee Directors of Frontier Corporation subsidiaries. This action requires the affirmative vote of a majority of the outstanding shares eligible to vote on this proposal. Summary of Current 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. Modified and renamed the Directors' Stock Incentive Plan, the Plan currently authorizes 1,000,000 shares to be available for grants. This authorization is sufficient to support the proposed new action. The Plan currently provides for the automatic annual grant to non-employee Directors of Frontier Corporation of non-qualified stock options to purchase 4,000 shares of the Company's common stock, and the automatic annual grant to non-employee Directors of Frontier Corporation subsidiaries of non-qualified stock options to purchase 3,000 shares of the Company's common stock. Additionally, the Plan also currently provides for an annual grant of 500 shares to non-employee Frontier Corporation Directors. Grants are made each year on the date of the Annual Meeting electing Directors to the Board. Any new non-employee Director also receives a one time grant of 1,000 shares which may not be transferred while the Director remains on the Board. Non-employee 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 and are awarded a pro rata portion of 500 shares. All eleven current non-employee Frontier Corporation Directors and five Rochester Telephone Corp. Directors currently participate in this Plan. 16 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 will 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. 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. Currently the eligible participants are persons who are non-employee Directors of Frontier Corporation and its subsidiaries. The restated Plan will not change the composition of the eligible group. Stock Grants. The Board of Directors of Frontier Corporation believes it would further the purpose of aligning the interests of the Directors of the Company and its shareowners if the annual retainers paid to the non-employee Directors were paid in the form of shares of Frontier common stock rather than in cash. Upon the recommendation of the Committee on Directors, the Board of Directors voted, subject to the approval of shareowners, to change the form of payment of the annual retainers for non-employee Directors from a combination of cash and stock to all stock. To achieve this, the Directors' Stock Incentive Plan must be changed in the following manner: 1. Annual Frontier Board Retainer will be 1,200 shares of Frontier common stock; after 1996 the retainer will be the greater of 1,200 shares or the number of shares of common stock having a fair market value equal to the annual cash Board Retainer. 2. Annual Frontier Committee Chair Retainer will be 300 additional shares of Frontier common stock; after 1996 the retainer will be the greater of 300 shares or the number of shares of common stock having a fair market value equal to the annual cash Committee Chair Retainer. 3. Subsidiary annual retainers will be paid in Frontier common stock having an aggregate fair market value on the date of grant equal to the amount of the Retainer. Other provisions of the Plan, such as the grant of stock options and new Director shares, would remain unchanged. 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 NQSO will create no Federal tax consequences for the optionee or the Company. Upon exercising, 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 by an optionee through exercise of 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. New Plan Benefits 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 number of units. The Directors and nominees will benefit from approval of the Plan in which they participate. 17 New Plan Benefits
Employees' Directors' Stock Option Stock Incentive Plan(1) Plan(2) Name and Position (#) (#) - ----------------- ---------------- --------------- R. L. Bittner N/A N/A Chairman, President and CEO Frontier Corporation M. C. Moses N/A N/A Vice Chairman and Chief Financial Officer Frontier Corporation J. T. Carr N/A N/A Senior Vice President Frontier Corporation and Chairman Rochester Telephone Corp. D. M. Gregory N/A N/A Senior Vice President Frontier Corporation and President - Carrier Services L. L. Massaro N/A N/A Executive Vice President and Chief Administrative Officer Frontier Corporation W. H. Oberlin N/A N/A former President Frontier Corporation J. M. Zrno N/A N/A former Vice Chairman Frontier Corporation Executive Group N/A N/A Non-Executive N/A 83,700 Director Group Non-Executive Discretionary(3) N/A Officer Employee Group
(1) Executive Officers and Directors are not eligible to participate in the Employees' Stock Option Plan. (2) All amounts are 1996 projections. This Plan is available only to Directors of the Company and its subsidiaries who are not employees of the Company or any of its subsidiaries or affiliates. (3) The number of stock options which would be granted to the eligible employees is undeterminable at this time as any such grants are at the discretion of the Stock Option Committee. - ------------------------------------------------------------------------------- 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, the holders of the proxies will act in accordance with their best judgment. In the event a nominee is unable to serve, the proxies will vote upon a substituted nominee. - ------------------------------------------------------------------------------- Future Proposals of Shareowners In order to be eligible for inclusion in the proxy materials for the Company's 1997 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 13, 1996. 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. However, if a shareowner complies with the requirements to have a proposal included in the proxy materials, he or she is deemed to have complied with this advance notice procedure. 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 11, 1996 18 Frontier Without Limits, Within Reach. Frontier Corporation Frontier Center 180 South Clinton Avenue Rochester, NY 14646-0700 Frontier [LOGO] Proxy For Common Shares CORPORATION I authorize each of Ronald L. Bittner and/or Josephine S. Trubek, or substitutes selected by them, to vote all shares of Frontier Corporation which I am entitled to vote at the Annual Meeting of Shareowners on April 24, 1996, or at any adjournment thereof, as specified below: The Board of Directors recommends a vote FOR Proposals 1 through 4: 1. NOMINEES FOR DIRECTORS: Patricia C. Barron, Ronald L. Bittner, Raul E. Cesan, Brenda E. Edgerton, Jairo A. Estrada, Michael E. Faherty, Daniel E. Gill, Alan C. Hasselwander, Robert J. Holland, Jr., Douglas H. McCorkindale, Marvin C. Moses, Dr. Leo J. Thomas, and Richard J. Uhl. [ ] VOTE FOR all nominees listed above, except for the following (if any): ------------------------------------------ [ ] VOTE WITHHELD from ALL nominees FOR AGAINST ABSTAIN 2. Election of Price Waterhouse LLP as Auditors [ ] [ ] [ ] FOR AGAINST ABSTAIN 3. Approval of the Employees' Stock [ ] [ ] [ ] Option Plan FOR AGAINST ABSTAIN 4. Approval of the Directors' [ ] [ ] [ ] Stock Incentive Plan Amendment 5. To vote in favor of any substituted director if a nominee is unable to serve and to act in their discretion upon such other matters which may properly come before the meeting, or which are incident to the conduct of the meeting, or which the Board of Directors does not know, at the time of this solicitation, will be presented at the meeting. CONTINUED, and to be signed and dated, on REVERSE SIDE THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTION TO THE CONTRARY IS INDICATED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF ALL NOMINEES AND AUDITORS AND IN FAVOR OF THE BENEFIT PLAN PROPOSALS, NUMBERS 3 AND 4. [ ] Yes, I plan to attend the 1996 Annual Meeting. Dated , 1996 ---------------- ------------------------------------------- ------------------------------------------- (Please sign exactly as name appears below) -----END PRIVACY-ENHANCED MESSAGE-----