-----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, FaoovxtwBq55jMUEcoJIMrwLdtn5BxlVAOxg+zxwzbGefL8GEdoJ+pMU2RVJd0G2 Yx0+cL+QY8pIH2PFIV8HWw== 0000950132-97-000235.txt : 19970329 0000950132-97-000235.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950132-97-000235 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 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: 97566164 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-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 Commission File Number 1-4166 ------------ FRONTIER 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 14, 1997 is $3,511,039,053. The number of shares outstanding of Frontier Corporation's common stock (Par Value $1.00 per share) as of the close of March 14, 1997 is 164,130,495 shares. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the registrant's 1996 Annual Report to Shareowners including Management's Discussion of Results of Operations and Analysis of Financial Condition, Consolidated Financial Statements and Notes to Consolidated Financial Statements, as presented in Exhibit No. 13.1 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 May 2, 1997, 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 ("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 and local communications services. The Long Distance Communications Services segment provides telecommunications services to customers throughout the United States, Canada and Great Britain. The Local Communications Services segment consists of 34 local telephone companies which serve, as of December 31, 1996, approximately 976,000 access lines in thirteen states. The Corporate Operations and Other segment includes expenses traditionally associated with a holding company and the revenues and expenses of the Company's majority owned wireless properties and Frontier Network Systems. Frontier Network Systems markets and installs telecommunications systems and equipment. The Company also owns a 50% interest in a joint venture with Bell Atlantic/Nynex Mobile in upstate New York and Pennsylvania that is managed by the Company and is accounted for using the equity method of accounting. This method of accounting results in the Company's proportionate share of earnings from the joint venture being reflected as equity income rather than being reported as a part of the Corporate Operations and Other segment. Prior to 1995, Local Communications Services provided the majority of the Company's revenue and income. In 1982, the Company made the strategic decision to enter the long distance business. The geographic reach of the Company's long distance operations has grown, and is now nationwide in scope, largely as a result of merger and acquisition activity which occurred in 1995. Revenues in 1996 from the long distance business and local communications services represent 73% and 25% respectively, of the Company's total business. The Company, based on revenues, is currently the fifth largest domestic provider of long distance services. On October 21, 1996, the Company announced that it had joined with Qwest Communications as a partner in the construction of a $2 billion nationwide fiber optic network. When complete, this will be the largest single fiber build in United States history. The Company has agreed to invest almost $500 million through 1998 to complete the project. The multi-ring Synchronous Optical Network ("SONET") architecture increases transmission speed and network reliability and is expected to decrease the Company's network transmission costs once installed. When complete in mid-1998, the SONET network will interconnect nearly 100 cities, encompass more than 13,000 route miles and provide coast-to-coast connectivity. 2 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 market 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. Long Distance Communications Services 1995 Acquisition Program The Company complemented its internal growth in the long distance business with a number of strategic acquisitions and a merger in 1995 that approximately doubled the size of the business. A listing of these acquisitions and the merger is included below.
1995 Acquisition Company Name Date - ----------------------------------------------------------- Confertech International, Inc. March American Sharecom, Inc. March WCT Communications, Inc. May Enhanced TeleManagement, Inc. July SCI and Link USA Corporation* August ALC Communications Corporation (merger) August Link-VTC, Inc. November
*The Company acquired SCI's 80.8% interest in LinkUSA Corporation in August 1995 and subsequently purchased the remaining 19.2% interest in February 1996. Long Distance Communications Services General Frontier provides long distance telecommunications services primarily to commercial and, to a lesser extent, residential subscribers. It also completes subscriber calls to all directly dialable locations worldwide. Frontier is one of the few nationwide switch based carriers of long distance services and in 1995 commenced operations from offices 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 primarily on commercial accounts. In this segment, calling volume consists primarily of calls made during normal business hours, which command peak-hour pricing. The Company's residential subscribers tend to make most of 3 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, 800 services and ALEC services. Pricing-All of the Company's customers are identified by their telephone number, dedicated trunk or validated access code. Customers subscribe to various products which 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 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 4 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 advertising 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-These services include area code blocking and routing; time of day routing; Home Connection 800, a fractional 800 service which allows residential customers to access 800 service utilizing a 4 digit security Personal Identification Number ("PIN"); Multi-Point 800 service, 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 and TargetLine 800, which routes calls to the closest location a customer identifies and provides custom prompts based upon a customer specific database. ALEC Services-The Company provides competitive local telephone service bundled with the Company's other long distance services through its Alternative Local Exchange Services ("ALEC") product offering. The ALEC offering is provided either using the Company's local switching equipment in locations where it is available or on a resale basis. The Company began providing ALEC services in the New York City area late in 1996 and expects to enter additional markets with this product in 1997. 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 currently 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 Federal Communications Commission ("FCC") licenses and several short fiber optic systems, such facilities have been leased on a fixed price basis under primarily short-term contracts. While the Company still has a handful of longer term lease contracts, these contracts have annual "mark-to- market", "circuit portability", and "commitment buy-out" clauses. These provisions function to keep the price the Company pays at or near current market rates. An important aspect of the Company's 5 operation is planning the mix of the types of circuits and transmission capacity to be 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 SONET based fiber optic network build, started in October 1996, will reduce the number of transmission facilities leased and provide for a more dependable and cost-effective transmission system. The Company's network switching centers house equipment with varying capacities 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 primarily 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 to provide high quality international service at competitive rates. It is anticipated that the network build scheduled for completion in 1998 will lower the Company's current cost structure and expand the Company's transmission capabilities. However, the Company cannot definitively project the change in its cost structure nor assure that the network will enhance Frontier's ability to grow and successfully compete for new business. Major Customer The Long Distance Communications Services' growth has been impacted by a major customer whose revenue represented 21% and 14% of long distance revenues in 1996 and 1995, respectively. Pursuant to contract, this customer had been provided volume discounts by the Company as its 1-plus traffic grew at an accelerated pace over the past two years. During 1995, the Company was notified that this customer would be installing its own long distance switching capacity and diversifying its traffic distribution to one or more additional carriers. Effective June 1996, this customer entered into a revised three year agreement with the Company, eliminating the customer's existing minimum monthly commitment for 1-plus service in exchange for an extension of the exclusivity for the Company to carry the customer's higher margin enhanced service traffic. The migration of the major carrier customer's 1-plus traffic was substantially complete as of December 31, 1996. As a result of the loss of this customer's 1- plus traffic, 6 revenue from this carrier comprised approximately 10% of Frontier's long distance revenue in the fourth quarter of 1996 as compared to 23% in the third quarter. The loss of this customer's 1-plus traffic contributed to the reduction in operating income in the fourth quarter. Seasonality The Company's long distance revenue is subject to certain limited seasonal variations. Because most of the long distance revenue is generated by commercial customers, the Company traditionally experiences decreases in long distance usage and revenue from its commercial customers during vacation and holiday periods. The effect of commercial seasonality is evidenced by lower sequential traffic growth in the fourth quarter for these customers. Local Communications Services As of December 31, 1996, Rochester Telephone Corp. and the Company's 33 other local exchange companies together served approximately 976,000 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. 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 creating competitive markets served by the Company. Since the beginning of 1988, the Company has invested over $790 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 all of its switching network, making the Company one of the few in the industry to be served by an all digital network for its local exchange companies. Frontier has achieved substantial cost reductions through the elimination of duplicative services and procedures and the consolidation of administrative functions. The Company believes that additional cost reductions are obtainable. 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 7 Company intends to vigorously pursue additional gains in productivity through reengineering while simultaneously improving customer service. 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 May 1994, the Company sold its Minot Telephone Company property located in Minot, North Dakota. In each case, the telephone properties no longer fit the strategic purposes of the Company. Of the 976,000 access lines in service on December 31, 1996, 687,000 were residential lines and 289,000 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. Frontier is pursuing several alternatives to provide expanded broadband capabilities to its customers. To date, the Company has installed over 13,000 miles of fiber optic facilities (over 650 sheath miles) in the Rochester, New York area to provide its customers with enhanced capacity and to position the Company to offer new products. Throughout its Local Communications Services' operations, Frontier has over 27,000 miles of fiber optic facilities in place. The Company provides expanded broadband services to select customers, including video-distance learning arrangements for educational institutions. 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. During late 1995, management committed to a major switch consolidation plan at its Rochester Telephone Corp. and Frontier Communications of New York subsidiaries. The three-year plan to consolidate host switches and reduce this number by over 60% is projected to improve network efficiency and reduce the cost of maintenance and software upgrades. As of December 1996, the project is progressing as scheduled and two host switches have been consolidated. The Company anticipates that the project will be substantially complete by July 1998. 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. 8 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. Legislative and Regulatory Matters The competitive evolution of the telecommunications industry has resulted in a more fluid regulatory framework. 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 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 Company's long distance business is also subject to FCC and state jurisdiction. (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. 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 increased emphasis on competition, the Act provides a framework under which the Regional Bell Operating Companies ("RBOCs") 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 RBOC may provide long distance services in the states where it provides telephone service upon proving to the relevant 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 RBOC's local exchange 9 operations are open to competition. The Act establishes deadlines within which both the state regulatory agency and the FCC must act upon applications filed by a RBOC to enter the long distance business. The RBOCs can provide long distance services immediately in states where they do not qualify as the incumbent local exchange carrier, and also, with certain restrictions, can provide long distance service in connection with cellular, video and other defined incidental services. Third, although the Act generally prohibits long distance companies from marketing their services jointly with the local telephone services provided by a RBOC (at least until that RBOC 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 Frontier. Thus, the Act permits Frontier to continue to market its long distance services jointly with local telephone services whether those local services are provided by Frontier directly or are provided by a RBOC or non-affiliated company. The FCC has initiated three major proceedings, among others, to implement the Act. First, the Commission adopted regulations implementing the unbundling, interconnection and resale obligations of the Act. The Commission's order has been appealed to the United States Court of Appeals for the Eighth Circuit and that Court has stayed the pricing provisions of the order. A decision from the Court is expected in the next few months. Second, the FCC has also issued proposed rules addressing the Act's universal service provisions. A final decision from the Commission is expected in May 1997. Finally, the Commission has issued a notice of proposed rulemaking in which it is proposing changes to its rules governing the assessment and collection of interstate access charges assessed by local exchange carriers. The Company is evaluating its options in light of the pendency of these three proceedings, but cannot predict the outcome of the ongoing judicial and administrative proceedings. (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. The issues that the regulatory agencies are examining include unbundling of network elements, interconnection obligations, 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 10 this time, predict how these proceedings will ultimately be resolved, nor when decisions will be forthcoming. (c) Open Market Plan. The Rochester, New York local communications' subsidiary completed its second full year of operations under the Open Market Plan in 1996. The Open Market Plan promotes telecommunications competition in the Rochester, New York marketplace by providing for (1) interconnection of competing local networks including reciprocal compensation for terminating traffic, (2) equal access to network databases, (3) access to local telephone numbers, (4) service provider telephone number portability, and (5) certain wholesale discounts to resellers of local services. The inherent risk associated with opening the Rochester market to competition is that some customers are able to purchase services from competitors, which may reduce the number of retail customers and potentially cause a decrease in the revenues and profitability for Rochester Telephone. However, results since implementation of the Open Market Plan indicate that a stimulation of demand in the use of the network and new product revenue may offset the losses from customer migration. Increased competition may also lead to additional price decreases for services, adversely impacting Rochester Telephone's margins. An additional positive feature of the Open Market Plan provides that Rochester Telephone can retain additional earnings achieved through operating efficiencies. Previously these earnings would have been shared with customers. During the seven year period of the Open Market Plan, rate reductions of $21 million will be implemented for Rochester area consumers, including $11.5 million of which occurred in 1995 and an additional $2.5 million which commenced in January 1996. Rate reductions of $1.5 million will occur in 1997. Rates charged for basic residential and business telephone service may not be increased during the seven year period of the Plan. The Company is allowed to raise prices on certain enhanced products such as caller ID and call forwarding. Price increases on enhanced products partially offset the rate reductions required under the Plan during 1996. AT&T Communications of New York filed a complaint with the New York State Public Service Commission ("NYSPSC") for reconsideration of the Open Market Plan on October 3, 1995. The complaint sought a change in the wholesale discount, a change in the minutes of use surcharge and also changes in a number of operational and support activities. Some of these issues are also being considered in other states in other unrelated local competition proceedings. On July 18, 1996, the NYSPSC issued an order establishing a temporary wholesale discount of 13.5% for services and eliminating the minutes of use surcharge. On November 27, 1996, the NYSPSC set permanent wholesale discounts retroactive to July 24, 1996, of 17.0% for resellers that use the Company's operator services and 19.6% for resellers that provide their own operator services. The Company believes 11 that, currently, all resellers in this market use the Company's operator services. Under the Telecommunications Act of 1996 and a statewide proceeding, the NYSPSC is also considering the prices that local exchange companies in New York may charge for "unbundled" service elements such as links (the wire from the switch to the customers premises), ports (the portion of the switch that terminates the link) and switch usage features. The Company is actively participating in this proceeding and expects the NYSPSC to issue a decision on service elements in 1997. Management believes there are significant market and business opportunities associated with the Company's Open Market Plan. However, there are also uncertainties associated with the Plan. In the Company's opinion, the most significant risks relate to increased competition in the Rochester, New York market, the risk inherent in the Rate Stabilization Plan and the potential diversification risk. There can be no assurance that the changing regulatory environment will not have a negative impact on the Company. 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 made it easier for new entrants to commence operations. Frontier is intent on taking advantage of the various business opportunities which competition provides in the markets where it operates. The Company is 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 in this line of business 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 four largest long distance providers: American Telephone and Telegraph Company ("AT&T"), MCI Telecommunications Corporation ("MCI"), Sprint Communications, Inc. ("Sprint") and Worldcom, Inc. ("Worldcom"). AT&T, MCI, Sprint and Worldcom generate more than 85% of the nation's domestic and international long distance revenue, which is in excess of $75 billion annually. Frontier is positioned at the top of the second tier with two other companies each with annual revenues believed to be more than $1 billion. The third tier consists of more than 300 companies with annual revenues of less than $1 billion each, the majority below $50 million each. The Company 12 targets small- and medium-sized commercial customers and seeks to provide a level of focus and attention to customer service that compares favorably with what its larger competitors offer to large commercial customers. Frontier is one of the few long distance companies with the ability to offer high quality integrated local and long distance 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 only offer basic long distance services. 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 facilities and in its back office operations. The Company's acquisitions have expanded it to a national scope enhancing the Company's ability to compete effectively. The Company's growth and investment in additional network facilities in 1995 and 1996 and the construction of a fiber optic network scheduled for completion in 1998 are also designed to provide for a competitive cost structure. (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 Telecommunications Act of 1996 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. The Open Market Plan gives the Company greater flexibility to broaden the scope and quality of its own competitive offerings. In the Rochester market, competitors who have entered the local exchange market include Time Warner Communications ("Time Warner"), MFS Telecom, Inc. ("MFS") and AT&T. MFS and Time Warner are alternative facilities based local exchange providers in Rochester. AT&T is 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 believes that it holds more than 96% of the retail market share as of December 31, 1996, which is relatively consistent with the prior year. No significant ALECs are believed to be active in any of the Company's other telephone properties. 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 in Rochester and elsewhere is considered to 13 be competitive, and the Company has responded with price changes that meet the demands in its individual market areas. 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 other 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 derived 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, 1996, the Company had 7,900 employees, of which 2,701 were employees of Local Communications Services, 4,376 were employees of Long Distance Communications Services, and 823 were employees of other operations. At the Rochester, New York Operating Company, 689 clerical and service workers were represented by the Rochester Telephone Workers Association ("RTWA") and 619 craft and clerical employees were represented by the Communications Workers of America ("CWA"), Local 1170. On January 31, 1996, the CWA Local 1170 contract expired. The contract negotiations are currently at an impasse and the Rochester company has implemented the terms of its final offer as of April 9, 1996. The Union filed unfair labor practice charges with the National Labor Relations Board ("NLRB"). In June, Frontier received a favorable determination after review within the Agency, rejecting all unfair labor practice claims that could have affected the declaration of impasse. The Union appealed these decisions within the NLRB. On December 2, 1996 the Office of the General Counsel of the NLRB in Washington, D.C. affirmed the dismissal of three of the four unfair labor practice charges. The fourth charge was returned to the Regional Office in Buffalo, New York for an administrative hearing. This hearing is scheduled to commence in May 1997. 14 On December 11, 1996, the Company and the CWA National reached a tentative agreement on a new three year contract. However, on January 27, 1997, the membership of Local 1170 voted against the agreement. The CWA has recently requested that the parties return to the bargaining table. At the present time the terms and conditions of employment, as implemented on April 9, 1996, remain in place. The International Brotherhood of Electrical Workers ("IBEW") currently represents 180 employees at three of the Company's New York communications subsidiaries. These subsidiaries are Frontier Communications of New York, Frontier Communications of Sylvan Lake and Frontier Communications of AuSable Valley. The contracts between employees of Frontier Communications of New York and Frontier Communications of Sylvan Lake and the IBEW expired February 13, 1997, and November 9, 1996, respectively. The employees of these respective companies are currently working under the terms of each expired contract. The contract between employees of Frontier Communications of AuSable Valley and the IBEW expires May 10, 1998. The Company cannot predict the final outcome of these matters at this time and there can be no assurance that there will not be a material impact on the results of operations. There can be no assurance that as contracts with the Company's other labor unions expire, successful bargaining of new contract terms will occur. Risk Factors The Company is subject to several risk factors that should be considered by current shareowners and prospective investors. This Report on Form 10-K and the documents incorporated by reference include forward-looking statements as described under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those identified in forward looking statements. Forward looking statements are identified by such words as "expects", "anticipates", "believes", "intends", "plans" and variations of such words and similar expressions. Changes in Rates of Growth of the Economy and the Overall Industry To some extent, the Company's revenue and earnings per share growth are related to the overall economy and to the telecommunications industry in general. Factors that may influence the Company's performance within the telecommunications industry include product pricing and development, integration of services, the effects of competition and the expansion of the business. The performance of the economy and the telecommunications industry could cause the Company's actual results to vary significantly. 15 Competition Risk Technological innovation and regulatory changes are accelerating the pace of competition for telecommunications services. As a result, the Company faces intensified competition in all aspects of providing telecommunications services. There are significant uncertainties surrounding the introduction of new products and services and the capital expenditures that will be required by the Company to remain in a competitive position. In addition, there are uncertainties surrounding the impact on competition as a result of the enactment of the Telecommunications Act of 1996. Acquisition Integration The primary growth strategy of the Company over the last few years has been through its long distance acquisition program and internal growth. This growth strategy involves certain operational and financial risks. The operational risks include the possibility that implementation of an acquisition does not provide the economies of scale or synergies anticipated by management. Successful integration and expansion of the Company's network as a result of the acquisitions is dependent on management's ability to anticipate market growth, install facilities, consolidate databases, obtain rights of way and negotiate leases economically and efficiently. The integration of a growing employee base and the elimination of redundant operations and facilities has required and will continue to require significant management resources. Although management's plans are to minimize the risks associated with acquisitions, there can be no assurance that acquired businesses will be assimilated effectively into the Company. Contingent Liabilities The Company and a number of its subsidiaries are continuously involved in various judicial and administrative proceedings involving matters incidental to the business. Unless otherwise stated specifically, the Company believes that the probable outcome of any of these matters, or the combination of all of the matters, will not have a material adverse effect on the Company's consolidated results of operations or financial statements. However, there can be no assurance that the resolution of these matters will not be contrary to management's expectations. ITEM 2. PROPERTIES The Company's Long Distance Communications Services segment owns property which includes: fiber optic and copper cable, switching equipment, microwave equipment, real estate and miscellaneous office and 16 work equipment. The Company's long distance segment also leases facilities or transmission capacity from other carriers. The Company's Local Communications Services segment owns telephone properties in their respective operating territories which include: connecting lines between customers' premises and the central offices; central office switching equipment; buildings, land and miscellaneous property and customer premise equipment. The central office switching equipment includes digital switches and peripheral 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 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. 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, 17 Compensation and Liability Act ("CERCLA"). The Company is anticipating that a final Record of Decision ("ROD") will be issued by the EPA and will prescribe the remediation requirements for the site. The aggregate amount of remediation costs to be incurred by the plaintiffs will be based on the requirements of the ROD. The total cost of remediation at the site is uncertain, although estimates have ranged from $25 million to $100 million. There has been no allocation of liability as among or between the plaintiffs or defendants. The extent to which plaintiffs can recover any of these costs from the defendants, including FNS, will be determined at trial. The litigation has been delayed by the bankruptcy filing of one of the defendants. FNS has been vigorously defending this lawsuit. The Company believes that it will ultimately be successful, but it is unable to predict the outcome with any certainty at this time. Since February 1994, hundreds of plaintiffs, all of who are former ASI shareholders, have filed and amended several and various complaints in Hennepin County (Minnesota) District Court. Included among the defendants are ASI, its former principal shareowners, Steven Simon and James Weinert, and Frontier. These suits allege generally that Simon and Weinert, with and through ASI, embarked upon a scheme to gain control of ASI and acquire all of its stock through common law fraud, breach of fiduciary duty and certain violations of the Minnesota Business Corporation Act. This Act requires shareowners in a closely held corporation to act fairly toward one another and refrain from misappropriation. Another action by a few former ASI shareholders who dissented from the cashout merger that finally took ASI private is pending in federal court in Minnesota. The federal lawsuit asserts RICO claims in addition to state common law and statutory violations. The claims against Frontier maintain that Frontier controls the disposition of the restricted Frontier stock which was issued to Simon and Weinert in connection with the acquisition of ASI and that such stock should be held in trust for the benefit of the plaintiffs. Recently, the owners of over half of the stock who have made claims have entered into a settlement in principle with Simon and Weinert. That settlement is now being submitted to the individual plaintiffs for their review and acceptance. Closure of the agreement is expected in 1997. If the settlements are accepted, the lawsuits of these plaintiffs shall be dismissed. Although it is too early to determine the outcome of the suits that have not settled, Frontier, ASI and the other defendants each are contesting the claims. To date, no other settlements have 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 Communications Corporation ("ALC") as a result of its announced merger with the Company. In two of those actions, each filed in the Court of 18 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. On February 28, 1997, the parties stipulated to a dismissal of these actions without prejudice and the Court entered an order formally dismissing all charges against Frontier, ALC and the ALC directors. The Regulatory Matters discussion in management's discussion of business in Part 1, Item 1, is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 19 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 pooling acquisitions of ALC and ASI. The specific information required by this item is as follows:
1996 1995 1994 ---- ---- ---- Quarter High Low High Low High Low ------- ---- --- ---- --- ---- --- Highest and lowest market prices for the 1st $33.25 $28.25 $23.38 $19.25 $22.44 $20.25 stock by quarter: 2nd 33.38 27.75 24.13 19.63 25.25 20.81 3rd 31.25 25.88 28.63 23.75 24.75 21.63 4th 31.88 19.88 30.00 25.50 24.63 20.50 Common stock 1st $.2125 $.2075 $.2025 dividends declared 2nd $.2125 .2075 .2025 per share: 3rd $.2125 .2075 .2025 4th $.2175 .2125 .2075 ------ ------ ------ Total Dividends per Year $.8550 $.8350 $ .8150 Number of Shareowners (at December 31) Individuals 29,697 26,184 24,128 Brokers, nominees and institutions 509 453 480 --- --- --- Total Shareowners 30,206 26,637 24,608
On March 14, 1997, the closing price for the Company's stock was $21.50 per share as published in the Wall Street Journal. 20 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):
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Net Revenues...................... $2,575,569 $2,143,691 $1,667,545 $1,437,448 $1,252,244 Income from Continuing Operations (before Extraordinary Items and Cumulative Effect of Changes in Accounting Principles).......... $ 217,944 $ 144,768 $ 187,254 $ 128,644 $ 107,025 Consolidated Net Income.......... $ 209,926 $ 22,083 $ 180,057 $ 121,154 $ 105,953 Earnings per Common Share: Income before Extraordinary Items and Cumulative Effect of Changes in Accounting Principle $ 1.32 $ .89 $ 1.16 $ .83 $ .75 Extraordinary Items.............. --- $ (.75) --- $ (.05) $ (.01) Cumulative Effect of Changes in Accounting Principles........ $ (.05) $ (.01) $ (.04) --- --- Earnings per Common Share-Primary $ 1.27 $ .13 $ 1.12 $ .78 $ .74 Earnings per Common Share-Fully Diluted......................... $ 1.27 $ .13 $ 1.12 $ .78 $ .74 Cash Dividends Declared per Common Share.................... $0.855 $0.835 $0.815 $0 .795 $0.775 Total Assets..................... $2,221,520 $2,108,592 $2,060,794 $1,721,545 $1,679,743 Long-Term Debt................... $ 675,043 $ 618,867 $ 661,549 $ 581,707 $ 604,157
ITEM 7. MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION The information required by this item is presented in pages 14 through 20 of the Company's 1996 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 27, 1997, is presented on pages 21 through 37 of the Company's 1996 Annual Report to Shareowners, which is Exhibit 13 to this Form 10-K and is incorporated by reference into this Item 8. 21 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 through 5 of the definitive proxy statement provided to shareowners on or about March 24, 1997 in connection with the Annual Meeting of Shareowners to be held May 2, 1997, 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 Annual Meeting and the Company's Proxy Statement for the May 2, 1997 Annual Meeting of Shareowners. Executive Officers Certain information is set forth below regarding the Executive Officers of the Company as of March 14, 1997. 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 (55) 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 & Corporation1. From May 1991 Services since to May 1995 he was President March 1996 and Chief Operating Officer of Banc One Services Corporation/1/. Kevin J. Bennis (43) 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 MCI2. 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 Business Marketing of MCI. From July 1988 to July 1992 he was Vice President of Sales-Northeast Division of MCI. Ronald L. Bittner (55) 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. April 1993 to August 1995
22 Jeremiah T. Carr (54) Executive Vice From May 1995 to January 1997 he President since was Senior Vice President. January 1997 From January 1995 to May 1995 and Chairman - he was President and Rochester Chief Executive Officer of Telephone Corp. Rochester Telephone Corp., and President Telephone Group. 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. Joseph Enis (52) 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/. Dale M. Gregory (48) Senior Vice President From January 1995 to May 1995 he since May 1995 in was President - Frontier charge of the Communications Group. From Network & November 1993 to December 1994 he Operations Area was Corporate Vice President and from June 1995 to and the President - October 1996 and Telecommunications Group. the Corporate From February 1993 to November Development Group 1993 he was Corporate Vice since October 1996. President and President-Network Systems and Services. From February 1992 to February 1993 he was Corporate Vice President and President-Telecommunications Services. Louis L. Massaro (50) Executive Vice From August 1995 to May 1996 President, Chief he was Executive Vice President Administrative and Chief Administrative Officer. Officer and From December 1994 to August 1995 Chief Financial he was Corporate Vice President. Officer since May From February 1993 to December 1996 1994, he was Corporate Vice President and Treasurer. From September 1991 to February 1993 he was Corporate Vice President and President- Rochester Operations. Richard A. Smith (46) 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
23 Operations of Frontier's Telephone Group. Josephine S. Trubek (54) 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. 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 24, 1997 in connection with the Annual Meeting of Shareowners to be held on May 2, 1997) under the caption "Compensation of Directors" and on pages 6 through 13 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 Annual Meeting and the Company's Proxy Statement for the May 2, 1997 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 as of February 1, 1997 " and the "Stock Ownership of Certain Beneficial Owners Table as of February 1, 1997 " 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 May 2, 1997, and is incorporated by reference into this Item 12. 24 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is presented under the sub-caption "Employment Contracts" on page 13 of the Definitive Proxy Statement for the Annual Meeting of Shareowners to be held May 2, 1997 and is incorporated by reference into this Item 13. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) 1. Index to Financial Statements Page* Report of Management 21 Report of Audit Committee 21 Report of Independent Accountants 21 Business Segment Information 22 Consolidated Statements of Income 23 Consolidated Balance Sheets 24 Consolidated Statements of Cash Flows 25 Consolidated Statements of Shareowners' Equity 26 Notes to Consolidated Financial Statements 27-37 Report of Ernst & Young LLP 38** *Pages 21 through 37 are incorporated by reference from the indicated pages of the 1996 Annual Report to Shareowners. **Set forth herein. 2. Financial Statement Schedule for the years ended December 31, 1996, 1995 and 1994: 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. 25 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, 1996: SEC Filing Date Item No. Financial Statements --------------- -------- -------------------- October 22, 1996 5 None November 19, 1996 5 None December 17, 1996 5 None The Company filed the following report subsequent to the quarter ended December 31, 1996 through March 27, 1997. March 27, 1997 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. 26 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareowners of Frontier Corporation Our audits of the consolidated financial statements referred to in our report dated January 27, 1997 appearing on page 21 of the 1996 Annual Report to Shareowners of Frontier Corporation (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 and $32,692,000 at December 31, 1995 and 1994, 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, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP Rochester, New York January 27, 1997 27 REPORT OF INDEPENDENT AUDITORS Board of Directors ALC Communications Corporation We have audited the financial statements of ALC Communications Corporation (ALC) as of December 31, 1995 and 1994 and for the years then ended, 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. Ernst & Young LLP Detroit, Michigan January 17, 1996 28 FRONTIER CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED DECEMBER 31, 1996 (Table 1 of 3) In thousands of dollars
Additions ----------------------- Balance at Charged to Charged to beginning costs and other Balance at Description of year expenses accounts Deductions end of year ----------- ---------- ---------- ---------- ---------- ----------- Reserve for uncollectible accounts $28,515 $74,452 $5,183/(1)/ $77,239/(2)/ $30,911 ======= ======= ====== ======= ======= Deferred tax asset valuation allowance $23,887 $0 $0 $4,426 $19,461 ======= ======= ====== ======= ======= Acquisition related reserves $83,149 $0 $0 $42,353 $40,796/(3)/ ======= ======= ====== ======= =======
/(1)/ Primarily recoveries of uncollectible accounts. /(2)/ Uncollectible accounts written off. /(3)/ Included primarily in "Property, plant, and equipment" in the Consolidated Balance Sheets. 29 FRONTIER CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED DECEMBER 31, 1995 (Table 2 of 3) In thousands of dollars
Additions ----------------------- Balance at Charged to Charged to beginning costs 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)/ $12,563 $23,887 ======= ======= ======= ======= ======= 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 3 of 3) In thousands of dollars
Additions ----------------------- Balance at Charged to Charged to beginning costs 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. 30 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 21, 1997 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/ Louis L. Massaro - ------------------------------------- ------------------------------------- Ronald L. Bittner Louis L. Massaro Chairman, President and Executive Vice President, Chief Executive Officer and Chief Financial Officer and Chief Director Administrative Officer (principal financial officer) Date: March 21, 1997 March 21, 1997 By: /s/ Richard A. Smith - ------------------------------------- Richard A. Smith Controller (principal accounting officer) Date: March 21, 1997 * * - ------------------------------------- ------------------------------------ Patricia C. Barron Raul E. Cesan Date: March 21, 1997 March 21, 1997 * * - ------------------------------------- ------------------------------------- Brenda E. Edgerton Jairo A. Estrada Date: March 21, 1997 March 21, 1997 * * - ------------------------------------- ------------------------------------- Michael E. Faherty Daniel E. Gill Date: March 21, 1997 March 21, 1997 * * - ------------------------------------- ------------------------------------- Alan C. Hasselwander Robert J. Holland, Jr. Date: March 21, 1997 March 21, 1997 * * - ------------------------------------- ------------------------------------- Douglas H. McCorkindale Leo J. Thomas Date: March 21, 1997 March 21, 1997 * - ------------------------------------- Richard J. Uhl Date: March 21, 1997 *By: /s/ Josephine S. Trubek Manually signed powers of attorney ---------------------------- for each Director are attached Josephine S. Trubek hereto and filed herewith pursuant Attorney-in-Fact to Regulation S-K Item 601(b)24 as Exhibit 24. 31 FRONTIER CORPORATION EXHIBIT INDEX Exhibit Number Exhibit Description Reference - ------- ------------------- --------- 3.1 Restated Certificate of Incorporated by reference Incorporation dated to Exhibit 3-1 to Form 10-K January 24, 1995 for the year ended December 31, 1995 3.2 Amendment to Restated Incorporated by reference Certificate of Incorporation to Exhibit 3-2 to Form 10-K dated April 9, 1995 for the year ended December 31, 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 Incorporated by reference Company and Chase Manhattan to Exhibit 4-5 to Form Bank, N.A. dated August 9, 10-K for the year ended 1995 December 31, 1995 32 FRONTIER CORPORATION EXHIBIT INDEX Exhibit Number Exhibit Description Reference - ------- ------------------- --------- 10.1 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 10.2 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 10.3 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 10.4 Copy of the Restated Management Incorporated by reference Pension Plan to Exhibit 10-20 to Form 10-K for the year ended December 31, 1995 10.5 Copy of Executive Bonus Plan Filed herewith 10.6 Copy of the Management Stock Incorporated by reference Incentive Plan dated to Exhibit 10-23 to Form April 26, 1995 10-K for the year ended December 31, 1995 10.7 Form of management contracts Filed herewith as amended with each of Messrs. Bittner, Massaro, Carr and Gregory 10.8 Executive contract with supporting Incorporated by reference offer letter for Mr. Barrett to Exhibit 10-25 to Form 10-Q for the quarter ended March 31, 1996 33 FRONTIER CORPORATION EXHIBIT INDEX Exhibit Number Exhibit Description Reference - ------- ------------------- --------- 10.9 Executive contract with supporting Incorporated by reference offer letter and note for Mr. Bennis to Exhibit 10-26 to Form 10-Q for the quarter ended March 31, 1996 10.10 Restated Directors Incorporated by reference Stock Incentive Plan to Exhibit 10-27 to Form dated April 24, 1996 10-Q for the quarter ended March 31, 1996 10.11 IRU Agreement between Qwest Filed herewith Communications Corp. and Frontier Communications International, Inc. dated October 18, 1996.(CONFIDENTIAL TREATMENT REQUESTED FOR CERTAIN PORTIONS OF THIS EXHIBIT) 10.12 Copy of the Restated Supplemental Filed herewith Management Pension Plan 10.13 Copy of the Restated Supplemental Filed herewith Retirement Savings Plan 10.14 Employee Stock Option Plan Incorporated by reference to Exhibit 10-28 to Form 10-Q for the quarter ended March 31, 1996 11 Computation of Fully Diluted Filed herewith Earnings Per Share 13.1 Specified portions (pages 14 Filed herewith through 37) of the Company's Annual Report to shareholders for the year ended December 31, 1996 34 FRONTIER CORPORATION EXHIBIT INDEX Exhibit Number Exhibit Description Reference - ------- ------------------- --------- 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 May 2, 1997 35 EX-3.3 2 BY-LAWS EXHIBIT 3.3 FRONTIER CORPORATION By-Laws As Revised Effective March 21, 1983 (And as amended 7/16/84, 11/19/84, 2/17/86, 2/16/87, 4/22/87, 11/20/89, 2/19/90, 11/19/90, 4/24/91, 4/29/92, 4/21/93, 4/27/94, 9/19/94, 1/1/95, 4/26/95, 8/16/95 1/22/96, 4/30/96) ARTICLE I SHAREHOLDERS Section 1 - Annual Meeting. - --------------------------- An annual meeting of shareholders for the election of Directors and the transaction of other business shall be held at such time on any day in the month of April in each year or on such other date as shall be fixed by the Board of Directors. Section 2 - Special Meetings. - ----------------------------- Special Meetings of the shareholders may be called by the Board of Directors. Such meeting shall be held at such time as may be fixed in the notice of meeting. Section 3 - Place of Meeting. - ----------------------------- Meetings of shareholders shall be held at such place, within or without the State of New York, as may be fixed in the notice of meeting. Section 4 - Notice of Meeting. - ------------------------------ Notice of each meeting of shareholders shall be in writing and shall state the place, date and hour of the meeting and the purpose or purposes for which the meeting is called. A copy of the notice of any meeting shall be given, personally, or by mail, not less than ten or more than fifty days before the date of the meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice is given when deposited in the United States mail, with postage thereon prepaid, directed to the shareholder at the shareholder's address as it appears on the record of shareholders, or, if the shareholder shall have filed with the Secretary of the Corporation a written request that notices be mailed to some other address, then directed to the shareholder at such other address. 3/21/83 (2) Section 5 - Inspectors of Election. - ----------------------------------- The Board of Directors, in advance of any shareholders' meeting, may appoint one or more inspectors to act at the meeting or any adjournment thereof. If inspectors are not so appointed, the person presiding at a shareholders' meeting may, and on the request of any shareholder entitled to vote at such meeting shall, appoint two inspectors. Each inspector, before entering upon the discharge of the inspector's duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of the inspector's ability. The inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting or any shareholder entitled to vote at such meeting, the inspectors shall make a report in writing of any challenge, question or matter determined by them and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the ----- ----- facts stated and of the vote as certified by them. Section 6 - List of Shareholders at Meeting. - -------------------------------------------- A list of shareholders as of the record date, certified by the Secretary or any Assistant Secretary or by the Transfer Agent, if any, shall be produced at the meeting of shareholders upon the request of any shareholder at such meeting or prior thereto. If the right to vote at any meeting is challenged, the inspectors of election, or person presiding at such meeting, shall require such list of shareholders to be produced as evidence of the right of the persons challenged to vote at such meeting, and all persons who appear from such list to be shareholders entitled to vote at such meeting may vote at such meeting. 3/21/83 (3) Section 7 - Qualification of Voters. - ------------------------------------ Every shareholder of record of common stock of the Corporation shall be entitled at every meeting of shareholders to one vote for every share of common stock held by the shareholder in the shareholder's name on the record of shareholders, subject, however, to the voting rights granted to the holders of Cumulative Preferred Stock of the Corporation upon default in dividends thereon. Section 8 - Quorum of Shareholders. - ----------------------------------- The holders of a majority of the shares entitled to vote at such meeting shall constitute a quorum at a meeting of shareholders for the transaction of any business, provided that when a specified item of business is required to be voted on by a class or series, voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum for the transaction of such specified item of business. The shareholders present, in person or by proxy, and entitled to vote may, by a majority of votes cast, adjourn the meeting despite the absence of a quorum. Section 9 - Vote of Shareholders. - --------------------------------- Directors shall, except as otherwise required by law, or by the certificate of incorporation as permitted by law, be elected by a plurality of the votes cast at a meeting of shareholders by the holders of shares entitled to vote in the election. Whenever any corporate action, other than the election of Directors, is to be taken by vote of the shareholders, it shall, except as otherwise required by law, or by the certificate of incorporation as permitted by law, be authorized by a majority of the votes cast at a meeting of shareholders by the holders of shares entitled to vote thereon. Section 10 - Proxies. - --------------------- Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent without a meeting may authorize another person or persons to act for that shareholder by proxy. Every proxy must be signed by the shareholder or the shareholder's attorney-in-fact. No proxy shall be valid after the 3/21/83 (4) expiration of eleven months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it except in those cases where an irrevocable proxy permitted by statute has been given. Section 11 - Fixing Record Date. - -------------------------------- For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board of Directors may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than fifty nor less than ten days before the date of such meeting, nor more than fifty days prior to any other action. Section 12 - Order of Business.* - -------------------------------- The order of business at each meeting of shareholders shall be as determined by the chairman of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof, and the opening and closing of the voting polls. At any special meeting of shareholders, only such business may be transacted which is related to the purpose or purposes set forth in the notice of such meeting. At any annual meeting of shareholders, only such business (other than the nomination or election of directors) shall be conducted as shall have been brought before the annual meeting (i) by or at the direction of the chairman of the meeting or (ii) by any shareholder who is a holder of record at the time of the giving of the notice provided for in this Section 12, who is or will be entitled to vote at the meeting and who complies with the procedures set forth in this Section 12. 3/21/83 *Revised 9/19/94 (5) For business (other than the nomination or election of directors) properly to be brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in proper written form to the Secretary. To be timely, a shareholder's notice must be addressed to the Secretary and delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting; provided, however, that in the event that -------- ------- the date of the annual meeting is more than 30 days earlier or more than 60 days later than such anniversary date, notice by the shareholder to be timely must be so delivered or received not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. To be in proper written form, a shareholder's notice to the Secretary shall set forth in writing as to each matter the shareholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business; (iii) the class and number of shares of the Corporation which are beneficially owned by the shareholder; (iv) a representation that the shareholder is or will be entitled to vote at such annual meeting and intends to appear in person (or send a qualified representative) or by proxy to present such proposal at the meeting; and (v) any material interest of the shareholder in such business. The foregoing notice requirements shall be deemed satisfied by a shareholder if the shareholder has notified the Corporation of his or her intention to present a proposal at an annual meeting and such shareholder's proposal has been included in a proxy statement that has been prepared by management of the Corporation to solicit proxies for such annual meeting; provided, however, that if such shareholder -------- ------- does not appear in person (or send a qualified representative) or by proxy to present such proposal at such annual meeting, the Corporation need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the Corporation. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 12. The chairman of an annual meeting shall, if the facts warrant, determine that business was not properly brought before the annual meeting in accordance with the provisions of this 3/21/83 (6) Section 12 and, if he should so determine, he shall so declare to the annual meeting and any such business not properly brought before the annual meeting shall not be transacted and any proposal contemplated by such business shall be void. ARTICLE II BOARD OF DIRECTORS Section 1 - Power of Board and Qualification of Directors. - ---------------------------------------------------------- The business of the Corporation shall be managed under the direction of its Board of Directors, each of whom shall be at least twenty-one years of age. Section 2 - Number of Directors.* - --------------------------------- At the annual meeting of shareholders, the shareholders shall elect twelve directors. Section 3 - Election, Term and Qualifications of Directors. - ----------------------------------------------------------- At each annual meeting of shareholders, Directors shall be elected to hold office until the next annual meeting and until their successors have been elected and qualified. No person shall be eligible for election or reelection to the Board of Directors after reaching seventy years of age, or in the case of a retired Chairman of the Board of Directors or a retired President of the Corporation, after reaching sixty-seven years of age. The term of any Director who is also an Officer of the Corporation or any subsidiary of the Corporation, other than the Chairman of the Board or the President of the Corporation, shall end on the date of termination from active employment and such officer shall thereafter be ineligible for reelection to the Board of Directors. Section 4 - Quorum of the Board: Action by the Board. - ----------------------------------------------------- One-third of the entire Board of Directors shall constitute a quorum for the transaction of business, and the vote of a majority 3/21/83 *Revised 7/16/84, 2/17/86, 11/20/89, 2/19/90, 11/19/90, 4/24/91, 4/27/94, 1/1/95, 4/26/95, 8/16/95, 1/22/96, 4/30/96 (7) of the Directors present at the time of such vote, if a quorum is then present, shall be the act of the Board. Section 5 - Action Without a Meeting. - ------------------------------------- Any action required or permitted to be taken by the Board or any committee thereof may be taken without a meeting if all members of the Board or of the committee consent in writing to the adoption of the resolution authorizing the action. The resolution and the written consents thereto by the members of the Board or committee shall be filed with the minutes of the proceedings of the Board or committee. Section 6 - Participation in Board Meetings by Conference Telephone. - -------------------------------------------------------------------- Any one or more members of the Board of Directors or any committee thereof may participate in a meeting of such Board or committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Section 7 - Meetings of the Board. - ---------------------------------- An annual meeting of the Board of Directors shall be held in each year directly after adjournment of the annual shareholders' meeting. Regular meetings of the Board shall be held at such times as may from time to time be fixed by resolution of the Board. Special meetings of the Board may be held at any time upon the call of the Chairman of the Board of Directors, if such there be, the President or any two Directors. Meetings of the Board of Directors shall be held at such place, within or without the State of New York, as from time to time may be fixed by resolution of the Board for annual and regular meetings and in the notice of meeting for special meetings. If no place is so fixed, meetings of the Board shall be held at the office of the Corporation in Rochester, New York. No notice need be given of annual or regular meetings of the Board of Directors. Notice of each special meeting of the Board shall be given by oral, telegraphic or written notice, duly given or sent or mailed to each Director not less than one (1) day before such meeting. 3/21/83 (8) Section 8 - Resignation. - ------------------------ Any Director may resign at any time by giving written notice to the Chairman of the Board of Directors, if such there be, to the President or to the Secretary. Such resignation shall take effect at the time specified in such written notice, or if no time be specified, then on delivery. Unless otherwise specified in the written notice, the acceptance of such resignation by the Board of Directors shall not be needed to make it effective. Section 9 - Newly Created Directorships and Vacancies. - ------------------------------------------------------ Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board of Directors may be filled by vote of the Board. If the number of the directors then in office is less than a quorum, such newly created directorships and vacancies may be filled by vote of a majority of the directors then in office. A director elected to fill a vacancy shall be elected to hold office for the unexpired term of such director's predecessor. Section 10 - Executive and Other Committees of Directors.* - ---------------------------------------------------------- The Board of Directors, by resolution, adopted by a majority of the entire Board, shall designate from among its members an Executive Committee consisting of three or more Directors, a majority of whom are outside directors. The Executive Committee shall have all the authority of the Board, except that it shall not have authority as to the following matters: (1)The submission to shareholders of any action that needs shareholders' approval; (2)The filling of vacancies in the Board or in any committee; (3)The amendment or repeal of the By-Laws, or the adoption of new By-Laws; (4)The amendment or repeal of any resolution of the Board which, by its terms, shall not be so amendable or repealable; (5)The fixing of compensation of the directors for serving on the Board or on any Committee; 3/21/83 *Revised 11/19/84, 4/22/87, 4/29/92, 4/21/93, 8/16/95 (9) (6)The fixing or amendment of the compensation, benefits and perquisites of the chief executive officer. The Board of Directors, by resolution by a majority of the entire Board, may designate from among its members an Audit Committee consisting of three or more outside directors. The Audit Committee shall, among other things, review the scope of audit activities, review with management significant issues concerning litigation, contingencies or other material matters which may result in either potential liability of the Company or significant exposure to the Company, review significant matters of corporate ethics, review security methods and procedures, review the financial reports and notes, and make reports and recommendations with respect to audit activities, findings, and reports of the independent public accountants and the internal audit staff of the Company. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from among its members a Committee on Directors consisting of three or more outside directors. The Committee on Directors shall, among other things, review performance of incumbent directors, act as a nominating committee, and consider and report to the entire Board of Directors on all matters relating to the selection, qualification, compensation and duties of the members of the Board of Directors and any committees of the Board of Directors. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from among its members a Committee on Management consisting of three or more outside directors. The Committee on Management shall, among other things, fix or amend the compensation, benefits and perquisites of all executive officers of the Company and recommend such for the chief executive officer, select and administer executive compensation plans and employee benefit plans which have Company stock as an investment option, review succession planning for the Company and review with management significant human resources issues. The compensation, benefits and perquisites of the chief executive officer shall be set by the outside directors of the full Board upon the recommendation of the Committee on Management. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from among its members other committees each consisting of three or more directors. Unless a greater proportion is required by the resolution designating a committee of the Board of Directors, a quorum for the 3/21/83 (10) transaction of business of a committee shall consist of (a) a majority of the entire authorized number of members of the Executive Committee or (b) one-third of the entire authorized number of members of any other committee of the Board of Directors, but in no event fewer than two persons. The vote of a majority of the members of a committee present at the time of the vote concerning the transaction of business of that committee or of any specified item of business of that committee if a quorum is present at such time, shall be the act of such committee. Any committee may fix the time and place of holding its regular meetings and, if so fixed, no notice of such regular meeting shall be necessary. Special meetings of any committee may be called at any time by the Chairman of the Board of Directors, if such there be, by the chief executive officer, by the President, by the Chairperson of that committee, or by any two members of that committee. Notice of each special meeting of any committee shall be given by oral, telegraphic or written notice, including notice via facsimile machine, duly given or sent or mailed to each member of that committee not less than one day before such meeting. Section 11 - Compensation of Directors. - --------------------------------------- The Board of Directors shall have authority to fix the compensation of directors for services in any capacity. Section 12 - Indemnification.* - ------------------------------ (a) Generally. ---------- To the full extent authorized or permitted by law, the Corporation shall indemnify any person ("indemnified Person") made, or threatened to be made, a party to any action or proceeding, whether civil, at law, in equity, criminal, administrative, investigative or otherwise, including any action by or in the right of the Corporation, by reason of the fact that he, his testator or intestate, ("Responsible Person"), whether before or after adoption of this Section 12, (1) is or was a director or officer of the Corporation, or (2), if a director or officer of the Corporation, is serving or served, in any capacity, at the request of the Corporation, any other corporation, or any partnership, joint venture, trust, employee benefit plan or other enterprise, or (3), if not a director or officer of the Corporation, is serving or served, at the request of the 3/21/83 *Revised 2/16/87 (11) Corporation, as a director or officer of any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, against all judgments, fines, penalties, amounts paid in settlement (provided the Corporation shall have given its prior consent to such settlement, which consent shall not be unreasonably withheld by it) and reasonable expenses, including attorneys' fees, incurred by such Indemnified Person with respect to any such threatened or actual action or proceeding, and any appeal therein, provided only that (x) acts of the Responsible Person which were material to the cause of action so adjudicated or otherwise disposed of were not (i) committed in bad faith or (ii) were not the result of active and deliberate dishonesty, and (y) the Responsible Person did not personally gain in fact a financial profit or other advantage to which he was not legally entitled. (b) Advancement of Expenses. ------------------------ All expenses reasonably incurred by an Indemnified Person in connection with a threatened or actual action or proceeding with respect to which such person is or may be entitled to indemnification under this Section 12 shall be advanced or promptly reimbursed by the Corporation to him in advance of the final disposition of such action or proceeding, upon receipt of an undertaking by him or on his behalf to repay the amount of such advances, if any, as to which he is ultimately found not to be entitled to indemnification or, where indemnification is granted, to the extent such advances exceed the indemnification to which he is entitled. Such person shall cooperate in good faith with any request by the Corporation that common counsel be used by the parties to an action or proceeding who are similarly situated unless to do so would be inappropriate due to an actual or potential conflict of interest. (c) Procedure for Indemnification. ------------------------------ (1) Not later than thirty (30) days following final disposition of an action or proceeding with respect to which the Corporation has received written request by an Indemnified Person for indemnification pursuant to this Section 12, if such indemnification has not been ordered by a court, the Board of Directors shall meet and find whether the Responsible Person met the standard of conduct set forth in paragraph (a) of this Section 12, and, if it finds that he did, or to the extent it so finds, shall authorize such indemnification. 3/21/83 (12) (2) Such standard shall be found to have been met unless (a) a judgment or other final adjudication adverse to the Indemnified Person establishes that subparagraphs (x) or (y) of paragraph (a) of this Section 12 were violated, or (b) if the action or proceeding was disposed of other than by judgment or other final adjudication, the Board finds in good faith that, if it had been disposed of by judgment or other final adjudication, such judgment or other final adjudication would have been adverse to the Indemnified Person and would have established a violation of subparagraphs (x) or (y) of paragraph (a) of this Section 12. (3) If indemnification is denied, in whole or part, because of an adverse finding by the Board in the absence of a judgment or other final adjudication, or because the Board believes the expenses for which indemnification is requested to be unreasonable, such action by the Board shall in no way affect the right of the Indemnified Person to make application therefor in any court having jurisdiction thereof, and in such action or proceeding the issue shall be whether the Responsible Person met the standard of conduct set forth in paragraph (a) of this Section 12, or whether the expenses were reasonable, as the case may be (not whether the finding of the Board with respect thereto was correct) and the determination of such issue shall not be affected by the Board's finding. If the judgment or other final adjudication in such action or proceeding establishes that the Responsible Person met the standard set forth in paragraph (a) of this Section 12, or that the disallowed expenses were reasonable, or to the extent that it does, the Board shall then find such standard to have been met or the expenses to be reasonable, and shall grant such indemnification, and shall also grant to the Indemnified Person indemnification of the expenses incurred by him in connection with the action or proceeding resulting in the judgment or other final adjudication that such standard of conduct was met, or if pursuant to such court determination such person is entitled to less than the full amount of indemnification denied by the Corporation, the portion of such expenses proportionate to the amount of such indemnification so awarded. (4) A finding by the Board pursuant to this paragraph (c) that the standard of conduct set forth in paragraph (a) of this Section 12 has been met shall mean a finding of the Board or shareholders as provided by law. (d) Contractual Article. -------------------- This Section 12 shall be deemed to constitute a contract between the Corporation and each person who is a Responsible Person 3/21/83 (13) at any time while this Section 12 is in effect. No repeal or amendment of this Section 12, insofar as it reduces the extent of the indemnification of any person who could be a Responsible Person shall without his written consent be effective as to such person with respect to any event, act or omission occurring or allegedly occurring prior to (1) the date of such repeal or amendment if on that date he is not serving in any capacity for which he could be a Responsible Person, or (2) the thirtieth (30th) day following delivery to him of written notice of such repeal or amendment as to any capacity in which he is serving on the date of such repeal or amendment, other than as a director or officer of the Corporation, for which he could be a Responsible Person, or (3) the later of the thirtieth (30th) day following delivery to him of such notice or the end of the term of office (for whatever reason) he is serving as director or officer of the Corporation when such repeal or amendment is adopted, with respect to being a Responsible Person in that capacity. No amendment of the Business Corporation Law shall, insofar as it reduces the permissible extent of the right of indemnification of a Responsible Person under this Section 12, be effective as to such person with respect to any event, act or omission occurring or allegedly occurring prior to the effective date of such amendment irrespective of the date of any claim or legal action in respect thereto. This Section 12 shall be binding on any successor to the Corporation, including any corporation or other entity which acquires all or substantially all of the Corporation's assets. (e) Non-exclusivity. ---------------- The indemnification provided by this Section 12 shall not be deemed exclusive of any other rights to which any person covered hereby may be entitled other than pursuant to this Section 12. The Corporation is authorized to enter into agreements with any such person or persons providing them rights to indemnification or advancement of expenses in addition to the provisions therefor in this Section 12 to the full extent permitted by law. Section 13 - Notification of Nominations.* --------------------------- Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, nominations for the election of Directors may be made by the Board of Directors or by any shareholder who is a 3/21/83 *Revised 9/19/94 (14) shareholder of record at the time of the giving of the notice of nomination provided for in this Section 13 and who is entitled to vote for the election of Directors. Any shareholder of record who is or will be entitled to vote for the election of Directors at a meeting may nominate persons for election as Directors only if timely written notice of such shareholder's intent to make such nomination is given to the Secretary. To be timely, a shareholder's notice must be addressed to the Secretary and delivered to or mailed and received at the principal executive offices of the Corporation (i) with respect to an election to be held at an annual meeting of shareholders, not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting; provided, however, that in the event that the date of the annual -------- ------- meeting is more than 30 days earlier or more than 60 days later than such anniversary date, notice by the shareholder to be timely must be so delivered or received not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made and (ii) with respect to an election to be held at a special meeting of shareholders for the election of Directors, not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees to be elected at such meeting. Each such notice shall set forth: (a) the name and address, as they appear on the Corporation's books, of the shareholder who intends to make the nomination, and the name and address of the person or persons to be nominated; (b) the class and number of shares of the Corporation which are beneficially owned by the shareholder: (c) a representation that the shareholder is or will be entitled to vote at the meeting and intends to appear in person (or send a qualified representative) or by proxy at the meeting to nominate the person or persons specified in the notice; (d) a description of all arrangements or understandings between the shareholder and such nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (e) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors; and (f) the consent of each nominee to serve as a Director of the 3/21/83 (15) Corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made after compliance with the foregoing procedure. Only such persons who are nominated in accordance with the procedures set forth in this Section 13 shall be eligible to serve as Directors of the Corporation and any purported nomination or purported election not made in accordance with the procedures set forth in this Section 13 shall be void. ARTICLE III OFFICERS Section 1 - Officers. - --------------------- The Board of Directors, as soon as may be practicable after the annual election of directors, may elect a Chairman of the Board of Directors and shall elect a President, one or more Vice Presidents (one or more of whom may be designated Executive Vice President), a Secretary and a Treasurer, and such other officers as it may determine. Any two or more offices may be held by the same person, except the office of President and Secretary. Section 2 - Term of Office and Removal. - --------------------------------------- Each officer shall hold office for the term for which each officer is elected or appointed, and until a successor has been elected or appointed and qualified. Section 3 - Powers and Duties. - ------------------------------ The officers of the Corporation shall each have such powers and authority and perform such duties in the management of the Corporation as set forth in these By-Laws and as from time to time prescribed by the Board of Directors. To the extent not set forth in these By-Laws or so prescribed by the Board of Directors, they shall each have such powers and authority and perform such duties in the management of the Corporation, subject to the control of the Board, as generally pertain to their respective offices. 3/21/83 (16) In addition to the powers and authority above, each officer has the powers and duties set out below. (a) Chairman of the Board of Directors ---------------------------------- The Chairman of the Board of Directors, if such there be, shall preside at all meetings of the Board. The Chairman of the Board of Directors may be the chief executive officer of the Corporation, and if so designated, may preside at all meetings of shareholders. (b) President --------- The President shall be the chief operating officer and shall have responsibility for the general management of the business of the Corporation, subject only to the supervision of the Board of Directors, the Executive Committee and the Chairman of the Board of Directors, as chief executive officer, if such there be. If there is no Chairman of the Board of Directors or if the Chairman of the Board of Directors is not the chief executive officer, then the President shall be the chief executive officer of the Corporation. The President may preside at all meetings of shareholders, when present, and at meetings of the Board of Directors in the absence of the Chairman of the Board, if such there be. (c) Executive Vice President ------------------------ The Executive Vice President or the Executive Vice Presidents, if such there be, shall assist the President in the management of the Corporation and, as may be designated by the Board of Directors, in the event of the death, resignation, removal, disability or absence of the President, an Executive Vice President shall possess the powers and perform the duties of the President for the period of such disability or absence or until the Board of Directors elects a President. (d) Vice President -------------- Each Vice President shall assist the President in the management of the Corporation and, in the absence or incapacity of the President and Executive Vice Presidents, 3/21/83 (17) and in order as fixed by the Board, possess the powers and perform the duties of the President for the period of such absence or incapacity, and shall possess such other powers and perform such other duties as the Board of Directors may prescribe. (e) Secretary --------- The Secretary shall issue notices of all meetings of shareholders and directors where notices of such meetings are required by law or these By- Laws, and shall keep the minutes of such meetings. The Secretary shall sign such instruments and attest such documents as require signature or attestation and affix the corporate seal thereto where appropriate and shall possess such other powers and perform such other duties as usually pertain to the office or as the Board of Directors may prescribe. (f) Treasurer --------- The Treasurer shall have general charge of, and be responsible for, the fiscal affairs of the Corporation and shall sign all instruments and documents as require such signature, and shall possess such other powers and perform such other duties as usually pertain to the office or as the Board of Directors may prescribe. (g) Assistant Officers ------------------ Any Assistant Officer elected by the Board of Directors shall assist the designated officer and shall possess that officer's powers and perform that officer's duties as designated by that officer, and shall possess such other powers and perform such other duties as the Board of Directors may prescribe. Section 4 - Records. - -------------------- The Corporation shall keep (a) correct and complete books and records of account; (b) minutes of the proceedings of the shareholders, Board of Directors and any committees of the Board; and (c) a current list of the directors and officers and their residence addresses. 3/21/83 (18) The Corporation shall also keep at its office in the State of New York or at the office of its transfer agent or registrar in the State of New York, if any, a record containing the names and addresses of all shareholders, the number and class of shares held by each and the dates when they respectively became the owners of record thereof. Section 5 - Checks and Similar Instruments. - ------------------------------------------- All checks and drafts on the Corporation's bank accounts and all bills of exchange and promissory notes and all acceptances, obligations and other instruments, for the payment of money, shall be signed by facsimile or otherwise on behalf of the Corporation by such officer or officers or agent or agents as shall be thereunto authorized from time to time by the Board of Directors. Section 6 - Voting Shares Held by the Corporation. - -------------------------------------------------- Either the President or the Secretary may vote shares of stock held by the Corporation in other corporations and may execute proxies for and on behalf of the Corporation for such purpose. ARTICLE IV SHARE CERTIFICATES AND LOSS THEREOF - TRANSFER OF SHARES Section 1 - Form of Share Certificate. - -------------------------------------- The shares of the Corporation shall be represented by certificates, in such forms as the Board of Directors may from time to time prescribe, signed by the Chairman of the Board if such there be, or the President or a Vice President, and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and may be sealed with the seal of the Corporation or a facsimile thereof. The signatures of the officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation or its employee. In case any officer who 3/21/83 (19) has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer at the date of issue. Section 2 - Lost, Stolen or Destroyed Share Certificates. - --------------------------------------------------------- No certificate or certificates for shares of the Corporation shall be issued in place of any certificate alleged to have been lost, stolen or destroyed, except upon production of such evidence of the loss, theft or destruction, and upon such indemnification and payment of costs of the Corporation and its agents to such extent and in such manner as the Board of Directors may from time to time prescribe. The Board of Directors, in its discretion, and as a condition precedent to the issuance of any new certificate, Smay require the owner of any certificate alleged to have been lost, stolen or destroyed to furnish the Corporation with a bond, in such sum and with such surety or sureties as it may direct, as indemnity against any claim that may be made against the Corporation in respect of such lost, stolen or destroyed certificate. Section 3 - Transfer of Shares. - ------------------------------- Shares of the Corporation shall be transferable on the books of the Corporation by the registered holder thereof in person or by the registered holder's duly authorized attorney, by delivery for cancellation of a certificate or certificates for the same number of shares, with proper endorsement consisting of either a written assignment of the certificate or a power of attorney to sell, assign or transfer the same or the shares represented thereby, signed by the person appearing by the certificate to be the owner of the shares represented thereby, either written thereon or attached thereto, with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require. Such endorsement may be either in blank or to a specified person, and shall have affixed thereto all stock transfer stamps required by law. *Except as otherwise provided by law, not more than twenty percent of the aggregate number of shares of stock of the Corporation outstanding in any class or series shall at any time be owned of record or beneficially or voted by or for the account of aliens (as defined below). Shares of stock shall not be transferable on the books of the Corporation to any alien if, as a 3/21/83 *Revised 9/19/94 (20) result of such transfer, the aggregate number of shares of stock in any class or series owned by or for the account of aliens shall be twenty percent or more of the number of shares of stock then outstanding in such class or series. The Board of Directors may make such rules and regulations as it shall deem necessary or appropriate so that accurate records may be kept of the shares of stock of the Corporation owned of record or beneficially or voted by or for the account of aliens or to otherwise enforce the provisions of this Section 3. As used in this Section 3, the word "alien" shall mean the following and their representatives: any individual not a citizen of the United States of America; a partnership, unless a majority of the partners are non-aliens and a majority interest in the partnership profits is held by nonaliens; a foreign government; a corporation, joint-stock company or association organized under the laws of a foreign country; any other corporation of which any officer or more than one-fourth of the directors are aliens, or of which more than one- fourth of any class or series of stock is owned of record or voted by or for the account of aliens; and any other corporation, joint-stock company or association controlled directly or indirectly by one or more of the above. ARTICLE V OTHER MATTERS Section 1 - Corporate Seal. - --------------------------- The corporate seal shall have inscribed thereon the name of the Corporation and such other appropriate legend as the Board of Directors may from time to time determine. In lieu of the corporate seal, when so authorized by the Board, a facsimile thereof may be affixed or impressed or reproduced in any other manner. Section 2 - Amendments. - ----------------------- By-Laws of the Corporation may be amended, repealed or adopted by vote of the holders of the shares at the time entitled to vote in the election of any directors. By-Laws may also be 3/21/83 (21) amended, repealed, or adopted by the Board of Directors, but any By-Law adopted by the Board may be amended or repealed by the shareholders entitled to vote thereon as hereinabove provided. If any By-Law regulating an impending election of directors is adopted, amended or repealed by the Board of Directors, there shall be set forth in the notice of the next meeting of shareholders for the election of directors the By- Law so adopted, amended or repealed, together with a concise statement of the changes made. 3/21/83 EX-10.5 3 COPY OF EXECUTIVE BONUS PLAN EXHIBIT 10.5 Description of 1996 Executive Bonus Plan Annual Incentive Plan (Bonus) The Company's annual incentive plan is a bonus plan designed to provide performance-based compensation awards to executives for achievement during the past year. For executive officers, annual incentive awards are a function of individual performance and consolidated corporate results. Business unit performance is also a component of the annual incentive 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 annual incentive 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 1996 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. The objectives are identified as threshold, standard and premier targets with standard performance yielding payouts at the median level competitively. Actual 1996 corporate performance was below the threshold level and, accordingly, there was no bonus payout, either for Mr. Bittner or for the other executives. EX-10.7 4 FORM OF MANAGEMENT CONTRACTS AS AMENDED EXHIBIT 10.7 FORM OF MANAGEMENT CONTRACTS AS AMENDED WITH EACH OF MESSRS. BITTNER, MASSARO, CARR AND GREGORY August 16, 1995 - -------------------- Frontier Corporation 180 South Clinton Avenue Rochester, New York 14646-0700 Dear Mr. : --------------- 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 1.1 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. 2 1.2 Duties. You shall perform all duties incidental to your position with the Company, or as may be assigned to you by the Chief Executive Officer of the Company or the Board. You agree to use your best efforts in the business of the Company and to devote your full time attention and energy to the business of the Company. You agree not to work, either on a part-time or independent contracting or consulting basis, with or without compensation, for any other business or enterprise during the Term without the Company's prior consent. Such consent shall not be unreasonably withheld in the case of service on the boards of directors of other corporations and community organizations. 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 Executive Vice President 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. 3 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 Chief Executive Officer of the Company or 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, 4 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 5 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 6 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 7 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. 8 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 9 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. 10 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 required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, and the amounts to be paid to you under Section 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 11 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 Chief Executive Officer or the Board which specifically identifies the manner in which it is believed that you have not substantially performed your duties; or 12 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 13 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 14 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 15 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. 16 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 17 By: ----------------------- Agreed to on ---------------------- - ------------------------------ 18 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 19 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: 20 (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 21 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. 22 EX-10.11 5 IRU AGREEMENT BETWEEN QWEST AND FRONTIER Exhibit 10.11 CONFIDENTIAL AND PROPRIETARY EXECUTION FORM - ---------------------------- -------------- - -------------------------------------------------------------------------------- IRU AGREEMENT DATED AS OF OCTOBER 18, 1996 BY AND BETWEEN QWEST COMMUNICATIONS CORPORATION ("QWEST") AND FRONTIER COMMUNICATIONS INTERNATIONAL INC. ("FRONTIER") - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page ---- RECITALS........................................................ 1 ARTICLE I. GRANT OF IRU IN QWEST SYSTEM........................ 1 ARTICLE II. CONSIDERATION FOR GRANT............................ 7 ARTICLE III. CONSTRUCTION OF THE QWEST SYSTEM.................. 11 ARTICLE IV. ACCEPTANCE AND TESTING OF FRONTIER FIBERS.......... 13 ARTICLE V. DOCUMENTATION....................................... 14 ARTICLE VI. TERM............................................... 14 ARTICLE VII. NETWORK ACCESS; REGENERATION FACILITIES........... 16 ARTICLE VIII. OPERATIONS....................................... 19 ARTICLE IX. MAINTENANCE AND REPAIR OF THE QWEST SYSTEM......... 20 ARTICLE X. PERMITS; UNDERLYING RIGHTS; RELOCATION.............. 20 ARTICLE XI. USE OF QWEST SYSTEM................................ 23 ARTICLE XII. INDEMNIFICATION................................... 26 ARTICLE XIII. LIMITATION OF LIABILITY.......................... 28 ARTICLE XIV. INSURANCE......................................... 28 ARTICLE XV. TAXES, FEES AND OTHER GOVERNMENTAL IMPOSITIONS..... 30 ARTICLE XVI. NOTICE............................................ 34 ARTICLE XVII. CONFIDENTIALITY.................................. 36 ARTICLE XVIII. DEFAULT......................................... 37 ARTICLE XIX. TERMINATION....................................... 42 ARTICLE XX. FORCE MAJEURE...................................... 42 ARTICLE XXI. DISPUTE RESOLUTION................................ 43 ARTICLE XXII. WAIVER........................................... 45 ARTICLE XXIII. GOVERNING LAW................................... 45 ARTICLE XXIV. RULES OF CONSTRUCTION............................ 46 ARTICLE XXV. ASSIGNMENT AND DARK FIBER TRANSFERS............... 46 ARTICLE XXVI. REPRESENTATIONS, WARRANTIES AND ACKNOWLEDGMENTS.. 50 ARTICLE XXVII. ENTIRE AGREEMENT; AMENDMENT..................... 52 ARTICLE XXVIII. NO PERSONAL LIABILITY.......................... 52 ARTICLE XXIX. RELATIONSHIP OF THE PARTIES...................... 53 ARTICLE XXX. LATE PAYMENTS..................................... 53 ARTICLE XXXI. SEVERABILITY..................................... 53 ARTICLE XXXII. COUNTERPARTS.................................... 53 ARTICLE XXXIII. CERTAIN DEFINITIONS............................ 54 EXHIBITS Exhibit A: QWEST System Description Exhibit A-1: QWEST System Description and Delivery Dates Exhibit A-2: General Route Map Exhibit A-3: Basic and Optional Detailed Route Maps Exhibit A-4: Designated Endpoint and Intermediate Point Cities Exhibit B: IRU Fee Payment Schedule Exhibit C: Construction Specifications Exhibit D: Fiber Cable Splicing, Testing, and Acceptance Procedures Exhibit E: Fiber Specifications Exhibit E-1: Fiber Deployment Diagram Exhibit F: Specifications for Regeneration Facilities Exhibit G: Regeneration Facility Sites Exhibit G-1: Temporary Space within Certain QWEST Facilities Exhibit H: QWEST System Maintenance Specifications and Procedures Exhibit I: Form of Surety Bond Exhibit J: Underlying Rights and Underlying Rights Requirements Exhibit K: Form of Frontier Corporation Guaranty Exhibit L: Form of Anschutz Guaranty IRU AGREEMENT THIS IRU AGREEMENT (this "Agreement") is made and entered into as of October 18, 1996, by and between QWEST COMMUNICATIONS CORPORATION, a Delaware corporation ("QWEST"), and FRONTIER COMMUNICATIONS INTERNATIONAL INC. a Delaware corporation ("FRONTIER"). RECITALS -------- A. QWEST is planning to construct a continuous fiberoptic communication system, contiguous from end to end, as described in Exhibit A hereto as the "Basic Route," and between each of the city pairs identified in Exhibit A-1 hereto under the caption "Basic Route" (the fiberoptic communication system between each such city pair being referred to as a "Basic Segment"), and may elect to construct a continuation of such fiberoptic communication system along the routes described in Exhibit A hereto as the "Option 1 Route," "Option 1A Route" and the "Option 2 Route" (collectively, the "Optional Routes"), and between each of the city pairs identified in Exhibit A-1 hereto under the captions "Option 1 Route," "Option 1A Route" and "Option 2 Route" (the fiberoptic communication system between each such city pair being referred to as an "Optional Segment") (the Basic Segments, together with such of the Optional Segments, if any, that QWEST elects to construct hereunder, being referred to herein collectively as the "QWEST System"). B. FRONTIER desires to be granted the right to use (or, if and to the extent provided in Section 1.5 hereof, to own) certain optical fibers in the QWEST System. C. QWEST desires to grant FRONTIER an exclusive, indefeasible right to use (or, if and to the extent provided in Section 1.5 hereof, to convey title to) certain fibers and associated property in the QWEST System, all upon the terms and conditions set forth below. Accordingly, in consideration of the mutual promises set forth below, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I. GRANT OF IRU IN QWEST SYSTEM ---------------------------- 1.1 (a) Effective as of the effective date described in Section 6.1 below, for each particular Segment (as defined below in this Section 1.1) delivered by QWEST to FRONTIER hereunder and with respect to which an Acceptance Date (as defined in Section 4.2 below) has occurred, QWEST hereby grants to FRONTIER, and FRONTIER hereby purchases from QWEST, (i) an exclusive, Indefeasible Right of Use (as defined in Section 33.1(f)) (or, if and to the extent provided in Section 1.5 hereof, ownership) in, for the purposes described herein, twenty-four (24) * "Dark Fibers" (as defined in Section 33.1(c)) to be specifically identified, in the QWEST System (A) in the Basic Segments and along the Basic Route more specifically described in the maps included in Exhibit A-3 hereto; and (B) if, pursuant to Section 1.3, QWEST elects, in its discretion, to construct either of Option Route 1 or Option Route 1A, and/or Option Route 2, or FRONTIER elects, in its discretion, to require QWEST to construct Option Route 1, in any case as identified in Exhibit A (and along the Option 1, Option 1A and Option 2 Routes more specifically described in the maps included in Exhibit A-3 hereto), in the Optional Segments included in any such Optional Routes so elected to be constructed, and (ii) an associated and non-exclusive Indefeasible Right of Use, for the purposes described herein, in the tangible and intangible property needed for the use of such Dark Fibers as Dark Fibers, including, but not limited to, the associated conduit, QWEST's rights in all "Underlying Rights" (as defined in Section 10.1) and, to the extent provided in Article VII herein, associated Regeneration Facilities (as defined in Section 7.2), but in any event excluding any electronic or optronic equipment (collectively, the "Associated Property"), for the Term (as defined in Section 6.1) respecting such Basic Segment or Optional Segment, and all on the terms and subject to the covenants and conditions set forth herein (collectively, the "IRUs"). The Dark Fibers subject to the IRUs are referred to collectively as the "FRONTIER Fibers." The Basic Segments, together with such of the Optional Segments, if any, that QWEST elects or is required to construct pursuant to Section 1.3 are referred to herein collectively as the "Segments." The Basic Route, together with such of the Optional Routes, if any, that QWEST elects or is required to construct pursuant to Section 1.3 are referred to herein collectively as the "System Route." (b) The parties acknowledge and agree that the specific route of any Segment that has not been finally designed or engineered, or with respect to which a right-of-way agreement has not been obtained as of the date hereof is subject to final determination by QWEST, based on specific engineering, right- of-way, permitting, authorization and other requirements; provided, however, ------------------ that (i) any such Segment route, as finally determined, must include all of the - ---- endpoint and intermediate point cities identified in Exhibit A-4 and all of the junction points identified in the System Route maps included in Exhibit A; (ii) no deviation in the route of any Segment as set forth in the maps included in Exhibit A-3 shall result in a Material Deviation (as defined below) in the System Route as set forth in Exhibit A, and (iii) once the final route of any Segment has been so determined, QWEST shall deliver to FRONTIER corresponding revisions to the relevant maps included in Exhibit A hereto. As used herein, the term "Material Deviation" shall mean a deviation in the general route of a Segment (A) that modifies the System Route architecture in a manner that breaks a ring, creates a spur or breaks the contiguous nature of Segments; (B) that modifies the route of the System Route through any city, identified in Exhibit A-3 as being the location of a FRONTIER POP site, from the detailed route map shown in Exhibit A-3 for such city in a manner that materially changes the proximity of such POP site to the System Route right-of-way (provided that, if ------------- any such detailed city map shows that the POP site is in direct proximity to the System Route right-of-way, any route modification which does not provide such direct proximity shall be considered a material change in proximity); * CONFIDENTIAL TREATMENT APPLIED FOR (C) that modifies the route of the System Route through any city, as set forth in the detailed route map for such city set forth in Exhibit A-3, such that the location of the route at any point would be moved more than 1,200 feet in any direction, without the prior written approval of FRONTIER (such approval not to be unreasonably withheld or delayed); or (D) that modifies any parallel route shown within any city that is the subject of a detailed map included in Exhibit A-3 such that the distance between such parallel routes is less than 1,200 feet outside metropolitan areas and less than two city blocks within metropolitan areas. (c) If any deviation(s) in the routes of Segments (i) comprising the Basic Route and Option Route 1 cause(s) the aggregate route miles as reflected in Exhibit A estimated for the Basic Route and Option Route 1 taken together to increase by more than * percent (*%) of such aggregate estimate or (ii) comprising Option Route 1A and/or Option Route 2 cause(s) the route miles as reflected in Exhibit A estimated for Option 1A and/or Option Route 2 taken separately to increase by more than * percent (*%) of such estimate, then in each case under the foregoing clause (i) and clause (ii) such mileage shall be solely at QWEST's cost and expense and any route mileage in excess of the applicable * percent (*%) increase as aforesaid shall not be included in the route mileage for purposes of determining or redetermining the IRU Fee as defined and described in Section 2.1 below. 1.2 With respect to Segments 12A, 12B, 12C, 12D and 16, the parties acknowledge that (i) QWEST has represented that the conduit and Cable comprising such Segments have been constructed and installed as of the date hereof, and that only the regeneration and other technical facilities required to be provided with respect to each such Segment pursuant to Article VII remains to be constructed and installed, (ii) FRONTIER desires to use the FRONTIER Fibers in the Cable comprising each such Segment pending delivery of such facilities, and (iii) the Cable comprising such Segments currently is routed through such facilities of QWEST. Accordingly, with respect to Segments 12A, 12B, 12C, 12D and 16, the parties agree that notwithstanding any provisions of this Agreement to the contrary: (a) Promptly following execution of this Agreement, the Fiber Acceptance Testing procedures set forth in Article IV shall take place with respect to each such Segment, as the FRONTIER Fibers currently are routed through the QWEST facilities and, upon satisfactory completion thereof with respect to each such Segment in accordance with Article IV, the Acceptance Date with respect to such Segment shall occur. Upon such Acceptance Date, payment of an additional *% of the IRU Fee with respect to such Segment shall be due and payable by FRONTIER. (b) Upon receipt of such payment, the IRUs with respect to the relevant Segment, other than the IRU in the Associated Property required to be delivered pursuant to Section 7.2, shall become effective. Thereupon, FRONTIER may temporarily install in the space within certain QWEST facilities described in Exhibit G-1 hereto, such electronic, optronic and other * CONFIDENTIAL TREATMENT APPLIED FOR equipment as shall be necessary to operate the FRONTIER Fibers in such Segment; provided that such installation is done consistent with QWEST's co-location - ------------- policies and procedures substantially as set forth in the form of co-location agreement, a copy of which has been provided to and accepted by FRONTIER. (c) The Associated Property required to be delivered pursuant to Section 7.2 shall be delivered in accordance with the requirements of Section 3.2 with respect to each such Segment. The parties agree to cause their respective appropriate technical personnel to discuss and agree, in good faith, upon the procedures by which, upon such delivery, (i) the FRONTIER Fibers comprising such Segments shall be rerouted, at QWEST's cost and expense, in the Regeneration Facilities (or POPs or terminal facilities) required to be provided pursuant to Article VII, and (ii) tested, at QWEST's cost and expense, to confirm that, as rerouted, the FRONTIER Fibers continue to operate in conformity with the Fiber Acceptance Testing specifications set forth in Exhibit D and the procedures set forth in Article IV. (d) Upon the delivery of such Associated Property, the rerouting of the FRONTIER Fibers therein, and the confirmed testing described in Section 1.3(c)(ii), the remaining * percent (*%) of the IRU Fee with respect to each such Segment shall be due and payable by FRONTIER. Upon receipt of such payment, the IRU with respect to such Associated Property for such Segment shall become effective. 1.3 (a) Until 5:00 p.m. Eastern Standard (or Daylight, as applicable) Time on the date that is * (*) days after the date hereof (the "Option Period") (i) QWEST shall have the right to elect to construct and (ii) FRONTIER shall have the right to elect to require QWEST to construct, Option Route 1. Either party desiring to exercise such right shall notify the other in writing by such time and date whether or not it will construct or require the construction of Option Route 1. Failure of QWEST to notify FRONTIER of QWEST's election as to Option Route 1 as provided herein shall be deemed an election by QWEST not to undertake to construct Option Route 1, and failure of FRONTIER to notify QWEST of FRONTIER's election as to Option Route 1 as provided herein shall be deemed an election by FRONTIER not to require that QWEST construct Option Route 1. If neither QWEST nor FRONTIER timely exercises its right to construct or require the construction of Option Route 1 as provided herein, then, until 5:00 p.m. Eastern Standard (or Daylight, as applicable) Time on the day that is five (5) days following the last day of the Option Period, QWEST shall have the right to elect to construct Option Route 1A. QWEST shall notify FRONTIER in writing by such time and date whether or not it will construct Option Route 1A. Failure of QWEST to notify FRONTIER of QWEST's election as to Option Route 1A as provided herein shall be deemed an election by QWEST not to construct Option Route 1A. (b) QWEST shall have until 5:00 p.m. Eastern Standard (or Daylight, as applicable) Time on the last day of the Option Period to elect whether or not it will construct Option Route 2 as provided herein. QWEST shall notify FRONTIER in writing by such time and date whether * CONFIDENTIAL TREATMENT APPLIED FOR or not it will construct Option Route 2 as provided herein. Failure of QWEST to timely notify FRONTIER of QWEST's election as to Option Route 2 as provided herein shall be deemed an election by QWEST not to undertake to construct Option Route 2 as provided herein. (c) The election or deemed election by QWEST not to construct any of the Optional Routes as provided herein shall not affect its obligations or rights with respect to the other Optional Routes or any of the Basic Segments and, from and after any such election or deemed election, neither party shall have any further rights or obligations with respect to such Optional Route hereunder. (d) From the date hereof until the expiration of the parties' rights under this Section 1.3, FRONTIER shall not enter into any agreement (oral or written) or initiate discussions or negotiations with any third party with respect to its acquisition of an alternative Dark Fiber system along the same or similar routes as any of the Optional Routes, and FRONTIER shall not engage in discussions with any third party who may initiate the same without prior notice to QWEST of the identity of such third party given promptly after such initiation by such third party and prior to FRONTIER's engaging in such discussions with such third party, and if FRONTIER engages in such discussions as aforesaid then FRONTIER shall keep QWEST informed generally of the material proposed terms and material changes to such terms with respect to such discussions relating to an acquisition by such third party of an alternative Dark Fiber system along the same or similar routes as any of the Optional Routes. If QWEST timely exercises its option hereunder to construct any of the Optional Routes or if FRONTIER timely exercises its right to require the construction of Option Route 1, in any such case as provided herein, then FRONTIER and QWEST shall be obligated to observe and perform their respective obligations hereunder with respect to such Optional Route, all on the terms and subject to the conditions set forth herein. 1.4 (a) (i) * (ii) * (iii) * (b) FRONTIER shall have an option (the "Sacramento/Seattle Fiber Option"), exercisable until 5:00 p.m. Eastern Standard (or Daylight, as applicable) Time on the date that is * (*) days after the date hereof, to elect to increase the number of Dark Fibers subject to the IRU in the Segments between the cities of Sacramento, California and Seattle, Washington identified in Exhibit A (the "Sacramento/Seattle Segments") from twenty-four (24) to forty-eight (48) Dark Fibers (such additional twenty-four (24) Dark Fibers being referred to as the "Optional Sacramento/Seattle Dark Fibers"), by delivering written notice of such election to QWEST by such time and date. If FRONTIER timely exercises the Sacramento/Seattle Fiber Option, the IRU Fee with respect to the Sacramento/Seattle Segments shall be redetermined as described in * CONFIDENTIAL TREATMENT APPLIED FOR Section 2.1(e) below. * Failure of FRONTIER to timely notify QWEST of FRONTIER's election to exercise the Sacramento/Seattle Fiber Option as provided herein shall be deemed an election by FRONTIER not to exercise the Sacramento/Seattle Fiber Option. The election or deemed election of FRONTIER not to exercise the Sacramento/Seattle Fiber Option shall not affect either party's rights or obligations with respect to the twenty-four (24) Dark Fibers in the Sacramento/Seattle Segments to be provided hereunder and, from and after any such election or deemed election, neither party shall have any further rights or obligations with respect to the Optional Sacramento/Seattle Dark Fibers hereunder. 1.5 Notwithstanding anything contained herein to the contrary: (a) if and to the extent allowed by the Underlying Right(s) for a particular Segment, and (b) if the Underlying Right(s) with respect to such Segment do not and will not impose upon QWEST any additional fees, costs or charges as a result thereof (unless FRONTIER shall pay the same or make arrangements satisfactory to QWEST to assure such payment), QWEST shall, upon the request of FRONTIER and on a Segment-by-Segment basis on or before the Acceptance Date with respect to such Segment: (i) grant a non-exclusive sub-easement, sub-right of way, or sub- underlying right (collectively a "Sub-Easement") to FRONTIER providing rights (but, subject to the foregoing clause (b) of this Section 1.5 above, at no additional cost to or monetary obligations of FRONTIER) to FRONTIER similar to the rights held by QWEST under the relevant Underlying Right(s), and (ii) transfer title to the Frontier Fibers to FRONTIER free and clear of all liens as provided in Section 11.4 hereof, and (iii) continue the grant of the IRU in the Associated Property. Nothing in this Section 1.5 shall relieve QWEST or FRONTIER of its (nor, except and only to the extent of the change in the nature of the property interest of FRONTIER in the FRONTIER Fibers or a Sub-Easement, or the case may be, diminish, enlarge or otherwise affect its) rights, duties and obligations set forth in this Agreement and if any Sub-Easement shall terminate or FRONTIER shall be otherwise prohibited from owning title to the Frontier Fibers, QWEST shall retain, maintain or replace the relevant Underlying Right in accordance with and pursuant to Article X, title to such Frontier Fibers shall revert and be reconveyed to QWEST and FRONTIER shall have and retain the IRU in such Frontier Fibers under and subject to the terms and conditions of this Agreement. If a Sub-Easement is granted or title to the FRONTIER Fibers transferred to FRONTIER in accordance with the foregoing provisions of this Section 1.5, then such Sub-Easement shall terminate and such title shall revert and be reconveyed to QWEST at the expiration or termination of the Term respecting the applicable Segment as provided in and pursuant to Article VI hereof. ARTICLE II. CONSIDERATION FOR GRANT ----------------------- 2.1 In consideration of the grant of the IRUs hereunder by QWEST to FRONTIER, FRONTIER agrees to pay to QWEST an IRU fee determined based on the QWEST System route * CONFIDENTIAL TREATMENT APPLIED FOR mileage (and allocated among the Segments based on Segment route mileage) as follows (the "IRU Fee"): (a) Initially, the IRU Fee shall be determined based on the following per- route-mile pricing: (i) $* per route mile for all Segments other than those (A) between the cities of Cleveland and Boston, as identified in Exhibit A, (B) between the City of Albany, New York and the location at 60 Hudson Street in New York City, as identified in Exhibit A, and (C) between the cities of Philadelphia and New York City, as identified in Exhibit A; and (ii) $* per route mile for all Segments identified in clause (a)(i)(A) above conditioned upon FRONTIER making available to QWEST at least twenty-four (24) non-zero dispersion shifted Dark Fibers between Boston and 60 Hudson Street at a price not to exceed $ * (failing which condition the IRU Fee shall be $* per route mile for such Segments identified in clause (a)(i)(A)) and clause (a)(i)(B) above; and (iii) $ * per route mile (unless the parties mutually agree on a lesser amount) for all Segments identified in clause (a)(i)(C) above. (b) * (i) * (ii) * (c) * (i) * (ii) * (d) * (i) * (ii) * (iii) * (iv) * (e) If FRONTIER timely elects to exercise the Sacramento/Seattle Dark Fiber Option as permitted pursuant to Section 1.4(b), the IRU Fee with respect to the * CONFIDENTIAL TREATMENT APPLIED FOR Sacramento/Seattle Segments (and only such Segments) shall be redetermined based on a price of $* per route mile. (f) The IRU Fee shall (except as provided in Sections 1.2, 2.4 and 2.5) be payable with respect to each Segment according to the payment schedule set forth in Exhibit B. 2.2 (a) In addition to the IRU Fee payable under Section 2.1, if and to the extent that the actual cost to QWEST (including freight and taxes) of the fiberoptic cable that includes the FRONTIER Fibers to be incorporated in any Segment is more than $*/fiber foot, FRONTIER shall reimburse QWEST for the total amount of such cost difference attributable to the FRONTIER Fibers incorporated in such Segment (including slack); provided that QWEST shall give FRONTIER at ------------- least ten (10) days prior written notice before executing and submitting to a vendor a firm commitment for any such fiberoptic cable. If and to the extent that the actual cost to QWEST (including freight and taxes) of the fiberoptic cable that includes the FRONTIER Fibers to be incorporated in an Segment is less than $*/fiber foot, FRONTIER shall receive a credit against amounts subsequently payable by FRONTIER hereunder equal to the total amount of such cost difference attributable to the FRONTIER Fibers incorporated in such Segment (including slack). (b) In the event that FRONTIER receives a bona fide quote from a fiberoptic cable vendor to provide the same fiberoptic cable that QWEST would acquire to install in a Segment hereunder in accordance with the QWEST System design and the fiber deployment plan and fiber specification requirements provided herein, at a price (including the business terms, handling charges and similar incidental charges) lower than * the best price available to QWEST for such fiberoptic cable, FRONTIER shall notify QWEST in writing thereof, identifying the vendor, the quoted price, and the type and quantity of fiberoptic cable subject to such quote (each, a "Fiber Quote Notice"), such that QWEST may attempt to acquire such fiberoptic cable at such price from such vendor. If QWEST is able to acquire fiberoptic cable from the vendor and at the price set forth in a Fiber Quote Notice for inclusion in a Segment or Segments delivered hereunder, FRONTIER shall receive a credit against amounts subsequently payable by FRONTIER hereunder equal to * percent (*%) of the difference between the best price available to QWEST for such fiberoptic cable and the price obtained from such vendor pursuant to the Fiber Quote Notice (the "Fiber Savings Credit") for the entire fiberoptic cable so acquired by QWEST for inclusion in such Segment or Segments. If QWEST is unable, for any reason, to acquire fiberoptic cable from the vendor identified in the Fiber Quote Notice or any other vendor at the price set forth in the Fiber Quote Notice then the foregoing provisions of this paragraph (b) shall have no further force and effect and QWEST shall acquire fiberoptic cable through its own sources, subject to paragraph (a) of this Section 2.2. (c) Notwithstanding the foregoing provisions of paragraphs (a) and (b) of this Section 2.2, no such reimbursement or credit shall be required with respect to any fiberoptic cable including FRONTIER Fibers that, as of the date hereof, has already been installed or * CONFIDENTIAL TREATMENT APPLIED FOR delivered to QWEST for installation in the QWEST System or is subject to a binding purchase order for delivery to QWEST for installation in the QWEST System. The amount of any such reimbursement or credit shall be invoiced or credited, as appropriate, to FRONTIER at the time the fiberoptic cable incorporating such FRONTIER Fibers is invoiced to QWEST. FRONTIER and QWEST agree to reasonably consult and cooperate with each other in order to obtain the lowest possible price for fiberoptic cable to be included in a Segment. FRONTIER also shall pay directly or reimburse QWEST for all other costs, fees and expenses which are expressly provided to be paid, in whole or in part, by FRONTIER under this Agreement. FRONTIER shall have the right to review and audit, at its cost, all such costs, fees and expenses. 2.3 QWEST will fax or send by overnight delivery each invoice for payments to be made by FRONTIER hereunder. FRONTIER shall pay such invoiced amounts, less any reasonably disputed amounts, for receipt by QWEST within fifteen (15) days after receipt of such invoice by FRONTIER with respect to payments of the IRU Fee and within thirty (30) days after receipt of such invoice by FRONTIER for any other amounts owed to QWEST hereunder; provided that FRONTIER shall ------------- provide written notice describing in detail the basis for any disputed amounts; and provided further that any disputed amounts that are resolved in favor of --------------------- QWEST shall be due for payment based on the original invoice date. All payments to be made by FRONTIER hereunder of the IRU Fee and of any other amounts in excess of $100,000 shall be made by wire transfer of immediately available funds to the account or accounts as QWEST shall notify FRONTIER in writing from time to time. Payments of all other amounts by FRONTIER hereunder may be made by check payable to QWEST. QWEST agrees to provide FRONTIER from time to time, upon request, with QWEST's estimate of the next invoice date for a portion of the IRU Fee and the estimated amount of such IRU Fee payment; provided that ------------- failure to provide any such notice shall not in any way alter or impair FRONTIER's payment obligations hereunder. 2.4 QWEST and FRONTIER acknowledge and agree that with respect to Segment 23, notwithstanding the fact that Segment 23 has already been constructed and installed, delivery of Segment 23 shall occur in two installments of twelve (12) Dark Fibers each as indicated in Exhibit A, and payment of the IRU Fee therefor (other than the initial *% due upon execution of this Agreement), shall be deferred until each such deferred installment delivery date as set forth in Exhibit B. QWEST and FRONTIER further acknowledge and agree that with respect to Segments 24A, 24B, 24C, 24D, 24E and 25, once constructed and installed, delivery of each such Segment likewise shall occur in two installments of twelve (12) Dark Fibers each as indicated in Exhibit A, and payment of the IRU Fee therefor shall be made as set forth in Exhibit B. 2.5 QWEST and FRONTIER acknowledge and agree that with respect to Segments 5, 6, 9A, 9B, 10A and 10B, notwithstanding the payment schedule set forth in Exhibit B and the fact that the conduit in such Segments has already been constructed and * CONFIDENTIAL TREATMENT APPLIED FOR installed, FRONTIER shall be required to pay with respect to each of those Segments: (a) *% of the IRU Fee upon execution of this Agreement, (b) *% of the IRU Fee when (i) QWEST has commenced the placement of the Cable in the Segment, and (ii) all such Cable and other materials necessary to complete such placement within a reasonable time are on hand or scheduled for timely delivery in connection with such placement, and (c) the balance of the IRU Fee in accordance with the provisions of Exhibit B. 2.6 All of FRONTIER's payment obligations under this Agreement shall be guaranteed by Frontier Corporation pursuant to a Guaranty in the form of Exhibit K hereto, to be executed and delivered by Frontier Corporation as a condition to the effectiveness hereof and the performance by QWEST of its obligations hereunder. ARTICLE III. CONSTRUCTION OF THE QWEST SYSTEM -------------------------------- 3.1 QWEST shall, at QWEST's sole cost and expense, be responsible for and shall effect the design, engineering, installation, and construction of those portions of the QWEST System not already constructed as of the date hereof in accordance with the System Route (as it may be modified pursuant to Section 1.1) and in conformity with (i) the construction specifications set forth in Exhibit C, (ii) industry standards and practices, and (iii) applicable Underlying Rights Requirements (as defined in Section 11.1). Such responsibilities shall include, without limitation, preparation of construction drawings, bills of materials, materials specifications and materials requisitions. Except for the existing fibers on Segments 11A, 11B, 12A, 12B, 12C and 12D (which are Corning SMF-DS) and any alternative fibers approved pursuant to the following sentence, all fiber included in the FRONTIER Fibers shall be Corning SMF-LS non-zero dispersion-shifted or Lucent Technologies True Wave and shall meet or exceed the applicable fiber specifications set forth in Exhibit E. QWEST may use alternative types of fiber equivalent to either of the aforementioned fibers; provided that (i) prior to any such use, QWEST meets with FRONTIER (and FRONTIER - -------- ---- hereby agrees to so meet) to, cooperatively and in good faith, jointly evaluate the use of any such fiber and (ii) thereafter, FRONTIER approves the use of such fiber, which approval shall not be unreasonably withheld or delayed. QWEST agrees that, to the extent possible in light of the fiber already incorporated in Segments that have been constructed, in whole or in part, prior to the date hereof and the availability and cost of the fiber of a particular type and manufacture hereafter, fiber utilized with respect to the loops, rings and regions of the QWEST System shall be of the same type and manufacture, as depicted in the fiber deployment diagram set forth in Exhibit E-1 hereto, indicating the type of fiber QWEST currently plans to use in each such Segment. Any deviation from the planned fiber use set forth in the diagram must be approved by FRONTIER, which approval shall not be unreasonably withheld or delayed. * CONFIDENTIAL TREATMENT APPLIED FOR 3.2 Subject to extension for delays described in Article XX, QWEST shall complete at QWEST's sole cost and expense, all construction, installation, and satisfactory Fiber Acceptance Testing (as defined in Section 4.1) of each of the Segments, including the provision of such Regeneration Facilities on such Segment as are required to be provided pursuant to Section 7.2(a), by the applicable "Estimated Delivery Date" (as defined in Section 33.1(d)) respecting such Segment. 3.3 Except as may be provided herein, QWEST shall, at QWEST's sole cost and expense, procure all materials to be incorporated in and to become a permanent part of the QWEST System, including, without limitation, the Regeneration Facilities required to be provided pursuant to Section 7.2(a). 3.4 QWEST shall, at QWEST's sole cost and expense, obtain all Underlying Rights and other rights, licenses, permits and authorizations as required pursuant to Article X hereof. 3.5 In support of QWEST's obligation to construct the QWEST System hereunder, QWEST will provide, as a condition to FRONTIER's obligations hereunder, either (i) so long as the Surety Bond has not been delivered as provided in clause (ii) below, a guaranty up to a maximum aggregate amount of $ * by Anschutz Company in favor of FRONTIER of the payment obligations of QWEST under this Agreement pursuant to a Guaranty in the form of Exhibit L or (ii) six (6) surety bonds in favor of FRONTIER, each substantially in the form of and by the surety companies identified on Exhibit I hereto or such other companies rated "A" or better by Best's Key Rating Guide, which, in the aggregate, shall provide a total aggregate payment value of not less than $ * (collectively, the "Surety Bond"), in each case clause (i) and (ii) over the entire construction period for all Segments to be delivered hereunder. 3.6 QWEST shall perform, at QWEST's sole cost and expense, substantially in accordance with industry standards and practices and as deemed necessary or appropriate in QWEST's reasonable business judgment, all supervisory and inspection services relating to the construction of the QWEST System, including, without limitation, performing construction inspections to assure that all construction shall be in material compliance with the specifications, drawings, Underlying Rights, provisions of this Agreement, and applicable governmental codes. During the course of construction of each Segment, QWEST shall prepare and provide to FRONTIER construction schedule and progress reports every two weeks. FRONTIER shall have the right, but not the obligation, to inspect the construction of each Segment, including the installation, splicing and testing of the FRONTIER Fiber incorporated therein, during the course and at the time of the relevant design, construction and installation period. No inspection or failure to inspect by FRONTIER shall impair or invalidate any rights and remedies of FRONTIER under this Agreement or modify, amend or otherwise affect any of the representations, warranties, covenants or agreements of QWEST under this Agreement. * CONFIDENTIAL TREATMENT APPLIED FOR 3.7 Upon FRONTIER's written request, QWEST shall make available for inspection by FRONTIER, at QWEST's offices, copies of all information, documents, agreements, reports, permits, drawings and specifications generated, obtained or acquired by QWEST in performing its duties pursuant to this Article III that are material to grant of the IRUs to FRONTIER, including, without limitation, the Underlying Rights, subject only to the conditions that (i) the terms of each such document or the legal restrictions applicable to such information or document permits disclosure; provided that QWEST will use its ------------- best efforts (without requiring the expenditure of money) to obtain a waiver of any existing confidentiality and/or non-disclosure restrictions, and to exempt FRONTIER from subsequent confidentiality and/or non-disclosure restrictions, that would restrict QWEST's ability to make such documents and/or information available to FRONTIER for inspection; (ii) notwithstanding the existence or non- existence of such restrictions and/or waivers, QWEST may, in its sole discretion, redact portions of such documents it deems proprietary business terms prior to FRONTIER's inspection. No inspection or failure to inspect by FRONTIER shall impair or invalidate any rights and remedies of FRONTIER under this Agreement or modify, amend or otherwise affect any of the representations, warranties, covenants or agreements of QWEST under this Agreement. 3.8 QWEST shall use reasonable efforts to construct all of Segment 13C of the Basic Route within the territorial confines of the United States, using its reasonable efforts and reasonably cooperating with FRONTIER to determine a construction method, including a powerline build or other alternative, in each case that would be reasonably cost effective within the overall QWEST System design. If, notwithstanding such efforts and cooperation, no such alternative construction method is mutually agreed upon, then QWEST may construct the portion of such Segment as shown in Exhibit A-2 in Mexico. ARTICLE IV. ACCEPTANCE AND TESTING OF FRONTIER FIBERS ----------------------------------------- 4.1 QWEST shall test all FRONTIER Fibers in accordance with the procedures specified in Exhibit D ("Fiber Acceptance Testing") to verify that the FRONTIER Fibers are installed and operating in accordance with the specifications described in Exhibit D. Fiber Acceptance Testing shall progress span by span along each Segment as cable splicing progresses, so that test results may be reviewed in a timely manner. QWEST shall provide FRONTIER at least five (5) days advance notice of the date and time of each Fiber Acceptance Testing such that FRONTIER shall have the right, but not the obligation, to have a person or persons present to observe QWEST's Fiber Acceptance Testing. When QWEST has determined that the results of the Fiber Acceptance Testing with respect to a particular span show that the FRONTIER Fibers so tested are installed and operating in conformity with the applicable specifications set forth in Exhibit D, QWEST shall promptly provide FRONTIER with a copy of such test results. 4.2 When QWEST reasonably determines in good faith that the FRONTIER Fibers with respect to an entire Segment are installed and operating in conformity with the applicable specifications set forth in Exhibit D, QWEST shall promptly provide written notice of same to FRONTIER (a "Completion Notice"). FRONTIER shall, within thirty (30) days of receipt of the Completion Notice, either reject the Completion Notice specifying, in good faith, the defect or failure in such Fiber Acceptance Testing or give QWEST written notice of acceptance of such Fiber Acceptance Testing (the period from the date of FRONTIER's receipt of the Completion Notice to the date of QWEST's receipt of FRONTIER's notice of rejection or acceptance being referred to herein as the "FRONTIER Review Period"). In the event FRONTIER rejects the Completion Notice, QWEST shall promptly, and not later than seven days, and at no cost to FRONTIER, commence to remedy the defect or failure. Thereafter QWEST shall again give FRONTIER a Completion Notice with respect to such FRONTIER Fibers. The foregoing procedure shall apply again and successively thereafter for a total of two attempts to remedy the defect or failure. If QWEST fails to adequately remedy or complete the defect or failure after two attempts, FRONTIER shall have the right to proceed promptly and in an economically efficient manner to cure such defects or failures at QWEST's cost and expense, which shall be paid by QWEST to FRONTIER upon demand, or at the election of FRONTIER, offset from any IRU Fee payable by FRONTIER to QWEST with respect to such Segment or any other Segment. No acceptance of, or failure by FRONTIER to reject, the Completion Notice shall be deemed to be a waiver of any rights or remedies of FRONTIER under this Agreement; provided that, any failure by FRONTIER to timely reject as set forth ------------- above shall operate as a constructive acceptance for purposes of this Agreement. The date when FRONTIER accepts or is deemed to have accepted a Completion Notice or cures such defects at QWEST's cost and expense as provided above with respect to a Segment is herein defined as the "Acceptance Date". ARTICLE V. DOCUMENTATION ------------- 5.1 QWEST shall provide FRONTIER with a copy of all Underlying Right Requirements (as defined in Section 11.1) applicable to each Segment promptly following the grant to QWEST of the Underlying Right pursuant to which such Underlying Right Requirements are imposed and, in any event, on or before the date of completion of conduit installation in such Segment (as defined in Exhibit B, paragraph 6(ii)). 5.2 Not later than ninety (90) days after the Acceptance Date for each Segment, QWEST shall provide FRONTIER with the following documentation: (a) As-built drawings for such Segment in accordance with the requirements described in Exhibit C ("As-Builts"). (b) Technical specifications of the optical fiber cable and associated splices and other equipment placed in that Segment. 5.3 As a condition to, and effective upon receipt of, each IRU Fee payment installment that is due upon QWEST's achievement of a construction, installation, testing or acceptance milestone as set forth in Exhibit B, QWEST shall deliver to FRONTIER a lien waiver with respect to liens in favor of QWEST arising out of QWEST's services in accomplishing such milestone. Promptly following QWEST's receipt of each such payment, QWEST shall use reasonable efforts to obtain (and in any event on or before the Acceptance Date with respect to the relevant Segment shall obtain) from each subcontractor that provided services in accomplishing such milestone a lien waiver with respect to liens arising out of such services and, upon receipt, deliver a copy of each such lien waiver to FRONTIER. ARTICLE VI. TERM ---- 6.1 Except to the extent expressly modified by Section 1.2 with respect to the Segments identified therein, the grant of the IRUs hereunder with respect to each Segment shall become effective on the first day when both (i) the Acceptance Date with respect to that Segment has occurred and (ii) QWEST has received payment in full of the IRU Fee with respect to such Segment in accordance with Exhibit B, and, subject to the provisions of Article X, such grant shall terminate at the end of the economically useful life of the FRONTIER Fibers, as reasonably determined by FRONTIER pursuant to Section 6.2 below. The period of each such grant respecting each such Segment and IRU is herein defined as the "Term". 6.2 In the event that FRONTIER, at any time, reasonably determines that the FRONTIER Fibers comprising any Segment have reached the end of their economically useful life and desires to not retain the IRU in such Segment, FRONTIER shall have the right to abandon the IRU with respect to such Segment by written notice to QWEST. If, at any time during or after the last year of the Minimum Period (as defined in Section 10.2(ii) below), with respect to any Segment, FRONTIER fails to use any of the FRONTIER Fibers comprising such Segment for any period of thirty (30) consecutive days (except to the extent that such non-use is as a result of any of the events described in Article XX or as a result of QWEST System maintenance, restoration, relocation, or reconfiguration or as a result of the failure of QWEST to observe and perform the terms of this Agreement), QWEST shall have the right to request FRONTIER to acknowledge that the FRONTIER Fibers comprising such Segment have reached the end of their economic life and, accordingly, has abandoned the FRONTIER Fibers comprising such Segment (which acknowledgment shall not be unreasonably withheld or delayed). Upon any such notice of abandonment or acknowledgment, the Term shall expire with respect to such Segment and all rights to the use of such Segment shall revert to QWEST without reimbursement of any fees or other payments previously made with respect thereto, and from and after such time FRONTIER shall have no further rights or obligations hereunder with respect to such Segment (subject to the provisions of Article XIX). 6.3 It is understood and agreed as between the parties that the grant of the IRUs hereunder shall be treated for accounting and federal and all applicable state and local tax purposes as the sale and purchase of the FRONTIER Fibers and a corresponding interest in QWEST's rights in the Associated Property subject thereto, and that on and after the Acceptance Date with respect to each Segment, FRONTIER shall be treated as the owner of the FRONTIER Fibers and an interest in QWEST's rights in the Associated Property comprising such Segment for such purposes. The parties agree to file their respective income tax returns, property tax returns, and other returns and reports for their respective Impositions (as such term is defined in Section 33.1(e)) on such basis and, except as otherwise required by law, not to take any positions inconsistent therewith. QWEST shall retain legal title to the entire QWEST System (except if and to the extent provided in Section 1.5), including the FRONTIER Fibers and Associated Property subject to the IRUs hereunder. Each party agrees to indemnify the other with respect to any late filing penalties, interest or fees incurred as a result of such party's failure to provide the other with such information solely in such party's possession or control that may be necessary in order to timely make any such filing. 6.4 This Agreement shall become effective on the date hereof and shall terminate on the date when, after completion and delivery of all Segments required to be delivered hereunder, all the Terms of all such Segments shall have expired; provided that, those provisions of this Agreement which, by their ------------- express terms, are intended to survive such termination, shall survive. ARTICLE VII. NETWORK ACCESS; REGENERATION FACILITIES --------------------------------------- 7.1 (a) QWEST shall provide FRONTIER with access to, and FRONTIER shall have the right to connect, at FRONTIER's sole cost and expense, its telecommunications system with, the FRONTIER Fibers at various network access points on the QWEST System right-of-way in each of the endpoint cities and intermediate point cities along the route of each Segment and at such additional locations along the QWEST System right-of-way as may be requested by FRONTIER (each such access point being referred to as a "Connecting Point"). The specific locations of each such Connecting Point shall be as mutually reasonably agreed upon by the parties in good faith, subject to the Underlying Rights Requirements and QWEST obtaining other required permits, authorizations and approvals (which QWEST agrees to use its best efforts to obtain). Any such connection will be performed by QWEST, at FRONTIER's sole cost and expense, in accordance with QWEST's applicable specifications and operating procedures. FRONTIER shall pay QWEST's Costs for each such connection within thirty (30) days of the date of FRONTIER's receipt of QWEST's invoice therefor. In order to schedule a connection of this type, FRONTIER shall request and coordinate such work not less than ninety (90) days in advance of the date the connection is requested to be completed. Such work will be restricted to a Planned System Work Period ("PSWP"), as defined in Section 33.1(i), unless otherwise agreed to in writing for specific projects. Subject to all applicable Underlying Rights Requirements, FRONTIER shall also be provided reasonable access by QWEST to any Connecting Point at all times. FRONTIER shall have no limitations on the types of electronics or technologies employed to utilize the FRONTIER Fibers, subject to mutually agreeable safety procedures and so long as such electronics or technologies do not interfere with the use of or present a risk of damage to any portion of the QWEST System. (b) QWEST may route the FRONTIER Fibers through QWEST's separate terminal, endlink, POP or Regeneration Facilities at its sole discretion so long as such routing does not have a material adverse effect on the security, the safety or FRONTIER's use of the FRONTIER Fibers or Associated Property hereunder and QWEST is responsible for all costs and expenses associated therewith. 7.2 (a) The IRU Fee includes QWEST's provision to FRONTIER for its use as permitted hereunder of * regeneration site facilities along the Basic Route, and * regeneration site facilities along the Optional Routes * to be located at approximately sixty (60) mile intervals along the QWEST System right-of-way, in each case consisting of and providing space of approximately * square feet and amenities (except for the operating costs associated therewith expressly required to be paid by FRONTIER pursuant to Section 8.2), as described in Exhibit F ("Regeneration Facilities"). The parties acknowledge that (i) the locations of such Regeneration Facilities shall be coincident with the locations of QWEST's own Regeneration Facilities (and located at approximately 60-mile intervals), the locations of which QWEST shall notify FRONTIER with sufficient time (no less than ten working days) for FRONTIER to request a different location for any given facility, in which case the parties shall mutually agree on a mutually acceptable location for such facility, and (ii) Exhibit G sets forth the estimated number of such Regeneration Facilities by Segment, with the locations of such Regeneration Facilities being subject to final determination of the route of the applicable Segment, space and power availability and all applicable Underlying Rights Requirements. In addition, QWEST shall provide to FRONTIER at FRONTIER's Prorated Cost (as defined below in this paragraph (a)) POP or terminal facilities of approximately * square feet along the QWEST System right-of-way at such locations as may be mutually determined by FRONTIER and QWEST, subject to space and power availability and Underlying Rights Requirements * subject to space and power availability and underlying Rights Requirements. FRONTIER's occupancy of and access to all such Regeneration Facility Sites (or POP or terminal facilities) shall include separate, secured, 24-hour-per-day building access. Any Regeneration Facilities (or POP or terminal facilities) provided by QWEST to FRONTIER * with respect to any of the Basic Route and the applicable Optional Routes shall be at FRONTIER's Prorated Cost. For purposes of the foregoing two sentences, FRONTIER's Prorated Cost for Regeneration Facilities means $ * per facility and for POP or terminal facilities means $ * per facility, subject to any adjustment (lower or higher) pursuant to Section 7.2(b) below. (b) QWEST heretofore has requested (or promptly after execution of this Agreement will request) vendors to submit bids (collectively, the "Initial Bids") that cover all or * CONFIDENTIAL TREATMENT APPLIED FOR substantially all of the proposed Basic Segments of the QWEST System (plus the Optional Routes as and when included in any bid requests by QWEST) for the building items listed below (collectively, the "Building Items"). QWEST has delivered (or promptly after receipt thereof will deliver) to FRONTIER copies of such Initial Bids. If the aggregate cost of the Building Items taking the lowest quoted cost per Building Item (subject to the last sentence of this paragraph) under any of the Initial Bids (the "Initial Bid Aggregate Cost") is equal to or less than the aggregate estimated cost for the Building Items set forth in the table below (the "Estimated Aggregate Cost"), then for 10 business days thereafter, or if the Initial Bid Aggregate Cost is more than the Estimated Aggregate Cost, then for 20 business days thereafter, FRONTIER may solicit from the same or other vendors bids that cover all or substantially all of the Basic Segments of the QWEST System (plus the Optional Routes as and when included in any bid requests by QWEST) covering any of the Building Items (the "FRONTIER Solicited Bids"). Without regard to what Building Items QWEST actually purchases in connection with construction of the QWEST System, the lowest quoted cost per Building Item obtained under any of the Initial Bids and the Frontier Solicited Bids (subject to the last sentence of this paragraph) shall then be used in place of the cost set forth in the table below for the respective Building Item, and the allocated percentage of the total cost (which excludes freight and taxes) attributable to FRONTIER as set forth in the table below shall be applied accordingly to the recalculated cost. The aggregate FRONTIER allocation set forth in the table below shall be recalculated, and the Prorated Cost for Regeneration Facilities of $ * per facility and the Prorated Cost of POPs (and terminal facilities) of $ * per facility shall be increased or decreased, as appropriate, by the difference between such recalculated aggregate FRONTIER allocation and $ * . In determining whether a quote represents the "lowest quoted cost" for any particular Building Item, (i) such quote must meet all of QWEST's terms and specifications with respect to the applicable Building Item and (ii) QWEST shall take into account whether and to what extent such quote is contingent upon any other quote for one or more other Building Items. For purposes of this Section 7.2(b), the building items in Regeneration Facilities and/or POPs or terminal facilities, their respective total cost, the Estimated Aggregate Cost of them and the allocated FRONTIER percentage with respect to them are as follows:
Allocation Frontier Building Items Total Cost of Item Percentage Allocation --------------- ------------------ ---------- ---------- Equipment building, $ * * 12' x 30'0.0 * 80 kW skid-mounted diesel generator (Regeneration Facility) * * *
* CONFIDENTIAL TREATMENT APPLIED FOR
100 kW skid-mounted diesel generator (POP) * * * Two 5 ton wall mounted HVAC units * * * Battery Plant, 1,200 Amp @ 48 VDC each for 400A of rectifiers a. Power distribution * * * b. Rectifiers * * * c. Batteries (4 hr. reserve, dual 875 AH strings) * * * Estimated Aggregate Cost $ * * === =
(c) Payment by FRONTIER of its Prorated Cost, adjusted to give effect to any adjustments (lower or higher) pursuant to Section 7.2(b), for any POP or terminal facilities shall be paid to QWEST upon commencement of the construction of the Segment of which they are a part. Payment by FRONTIER of its Prorated Cost adjusted to give effect to any adjustments (lower or higher) pursuant to Section 7.2(b), for Regeneration Facilities * shall be paid to QWEST upon commencement of the construction of the Segment of which they are a part * . The foregoing amounts paid by FRONTIER shall be finally trued up, with QWEST reimbursing FRONTIER for any excess and FRONTIER paying QWEST for any deficiency, on (or as soon as thereafter as practicable) the last Acceptance Date with respect to the Basic Segments, the last Acceptance Date with respect to Segments in Option Route 1 or 1-A, and the last Acceptance Date with respect to Segments in Option Route 2, in each case (i) based on the actual number of Regeneration Facilities actually provided by QWEST * or POPs (or terminal facilities) with respect to the Basic Route and the applicable Optional Route and (ii) adjusted to give effect to any adjustments (lower or higher) in the FRONTIER's Prorated Cost to which FRONTIER may be entitled under Section 7.2(b) above. ARTICLE VIII. OPERATIONS ---------- 8.1 Each party shall have full and complete control and responsibility for determining any network and service configuration or designs, routing configurations, regrooming, rearrangement or consolidation of channels or circuits and all related functions with regard to the * CONFIDENTIAL TREATMENT APPLIED FOR use of that party's Dark Fiber. 8.2 FRONTIER shall reimburse QWEST for FRONTIER's proportionate share of all operating costs incurred by QWEST in connection with the Regeneration Facilities (or alternatively requested POP or terminal facilities) provided pursuant to Section 7.2(a), including its proportionate share of any monthly lease costs for any such facilities and/or underlying property that QWEST leases (including, to the extent included in such lease costs, base rent, maintenance, insurance, security and taxes), maintenance of such facilities, and all power and utility fees and charges. FRONTIER's proportionate share of such operating costs, including a proportionate share of common area costs, shall be the ratio that the floor space provided to FRONTIER in any such facility (including a proportionate share of the common area) bears to (i) in the case of lease costs, the total space in such facility, and (ii) in the case of all other costs (including common area costs), the total utilized space in such facility. QWEST shall submit invoices to FRONTIER on an annual basis for FRONTIER's pro rata share of such operating costs during the preceding twelve months. FRONTIER's reimbursement obligations for insurance and taxes pursuant to this Section 8.2 shall in no event be duplicative of FRONTIER's payment obligations for insurance or taxes, respectively, as provided in Article XIV and XV hereof, and in no event shall relieve QWEST of its payment obligations for insurance costs or taxes, respectively, as provided in Article XIV and XV hereof. 8.3 FRONTIER acknowledges and agrees that, except to the extent expressly provided pursuant to Sections 1.2 and 7.2, QWEST is not supplying nor is QWEST obligated to supply to FRONTIER any optronics or electronics or optical or electrical equipment or other facilities, including without limitation, generators, batteries, air conditioners, fire protection and monitoring and testing equipment, all of which are the sole responsibility of FRONTIER, nor is QWEST responsible for performing any work other than as specified in this Agreement. 8.4 Upon not less than one hundred twenty (120) days' written notice from QWEST to FRONTIER, QWEST may, subject to FRONTIER's prior written approval (which approval shall not be unreasonably delayed or withheld) substitute for the FRONTIER Fibers on the QWEST System, or any Segment or Segments comprising a portion of said QWEST System, an equal number of alternative fibers along the same or an alternative route; provided that in any such event, such substitution ------------- (i) shall be in accordance with FRONTIER's applicable specifications and operating procedures, (ii) shall be effected at the sole cost of QWEST, including, without limitation, all disconnect and reconnect costs, fees and expenses, (iii) shall be constructed and tested in accordance with the specifications and drawings set forth in Exhibits C and D and Section 4.2, and incorporate fiber meeting the specifications set forth in Exhibit E, and (iv) shall not interrupt or adversely affect the use, operation or performance of FRONTIER's network or business, or change any Connecting Points or endpoints of any Segment or change the location of any Regeneration Facilities (or POPs or terminal facilities) used by FRONTIER hereunder or any other FRONTIER POP, node or switch facilities, all as determined by FRONTIER, in its sole discretion; and provided further that QWEST shall give FRONTIER written notice prior to QWEST's - --------------------- placing any order for fiber for such alternative route segment or segments if the number of fibers to be placed in such alternative route segment or segments exceeds the number of fibers in the Segment or Segments to be so relocated, and FRONTIER shall have a period of thirty (30) days from receipt of such notice to commit, by written notice to QWEST, to acquire an IRU in an additional number of Dark Fibers (i.e., in excess of the number of FRONTIER Fibers to be so substituted) (subject to the availability of adequate conduit capacity) for a per-fiber IRU fee * . ARTICLE IX. MAINTENANCE AND REPAIR OF THE QWEST SYSTEM ------------------------------------------ 9.1 From and after the Acceptance Date with respect to each Segment, the maintenance of the QWEST System comprising such Segment shall be provided in accordance with the maintenance requirements and procedures set forth in Exhibit H hereto. ARTICLE X. PERMITS; UNDERLYING RIGHTS; RELOCATION -------------------------------------- 10.1 QWEST covenants and agrees that it shall obtain, during the course of construction of, and in any event on or before the completion of conduit installation with respect to, each Segment of conduit to be delivered hereunder all Underlying Rights (as defined below) and such other rights, licenses, permits, authorizations, and approvals (including, without limitation, any necessary local, state, federal or tribal authorizations and environmental permits) that are necessary in order to permit QWEST to construct, install and maintain the conduit and the FRONTIER Fibers to be encompassed in such Segment in accordance with the terms and conditions hereof. QWEST further covenants and agrees that it shall obtain, during the course of construction of and in any event on or before the Acceptance Date with respect to each Segment to be delivered hereunder, any and all rights-of way, easements, licenses and other agreements relating to the grant of rights and interests in and/or access to the real property underlying the QWEST System (collectively, the "Underlying Rights") and such other rights, licenses, permits, authorizations, and approvals (including without limitation, any necessary local, state, federal or tribal authorizations and environmental permits) that are necessary in order to permit QWEST to grant the IRUs, and otherwise to perform its obligations hereunder, in accordance with the terms and conditions hereof, and to (and all of which Underlying Rights shall) permit FRONTIER to use the FRONTIER Fibers and Associated Property as provided and permitted hereunder and in accordance with the terms and conditions hereof. QWEST shall use its best efforts to cause the terms of each such Underlying Right to provide FRONTIER with notice of any default on the part of QWEST and to permit FRONTIER to cure, on behalf of QWEST, any such default by QWEST and, thereafter, to continue the use of such Underlying Right in accordance with QWEST's rights and interests thereunder and, if FRONTIER at any time cures such default by QWEST, QWEST shall reimburse FRONTIER for any and all amounts reasonably paid by * CONFIDENTIAL TREATMENT APPLIED FOR FRONTIER promptly upon demand. 10.2 QWEST further covenants and agrees that, with respect to each Underlying Right that is necessary in order to continue and maintain the IRUs granted hereunder, and to permit FRONTIER to exercise its rights to use the FRONTIER Fibers and Associated Property, in each case in accordance with the terms and conditions hereof: (i) QWEST shall, for a period of * years from the date hereof (or until the earlier to occur of (A) the expiration of the economically useful life of the FRONTIER Fibers, as determined pursuant to Section 6.2, or (B) the expiration or termination of the term of a particular Underlying Right, so long as any such termination is not effected as a result of any failure of QWEST (not caused as a result of FRONTIER's failure to observe and perform its obligations hereunder) to observe and perform its duties, obligations and responsibilities under such Underlying Right or under this Agreement, including under this Article X), observe and perform each and every of its obligations under each document, agreement or instrument granting or conveying to QWEST such an Underlying Right if the failure to observe and perform any such obligation or obligations would permit the grantor of such Underlying Right to terminate such Underlying Right prior to its stated expiration date, or would otherwise materially, adversely impair or affect FRONTIER's ability to use the FRONTIER Fibers and Associated Property, or exercise its rights with respect thereto, as provided and permitted hereunder; and (ii) QWEST shall either require that the initial stated term of each such Underlying Right be for a period that does not expire, in accordance with its ordinary terms, prior to the last day of the Minimum Period (as hereinafter defined with respect to each Segment) or, if the initial stated term of any such Underlying Right expires, in accordance with its ordinary terms, on a date earlier than the last day of the Minimum Period, QWEST shall at its cost exercise any renewal rights thereunder, or otherwise acquire such extensions, additions and/or replacements as may be necessary, in order to cause the stated term thereof to be continued until a date that is not earlier than the last day of the Minimum Period. The "Minimum Period" shall be, with respect to each Segment, the period from the date on which construction of such Segment commences until the * anniversary of such date; and (iii) From and after the last day of the Minimum Period, QWEST shall use its best efforts (without being required to expend commercially unreasonably amounts therefor) to obtain such extensions and/or renewals as may be necessary in order to cause the stated term of each such Underlying Right to be continued for an additional period or periods of, in the aggregate, * years following the Minimum Period or until the earlier expiration of the economically useful life of the FRONTIER Fibers, as determined pursuant to Section 6.2; provided that QWEST shall not be required to expend, as ------------- consideration for any such renewal or extension, more than the fair market rate payable at such time for similar rights and terms except * CONFIDENTIAL TREATMENT APPLIED FOR to the extent that FRONTIER agrees at its option to pay directly or reimburse QWEST for any amounts required to be paid in excess of such fair market rate to renew or extend such an Underlying Right; and (iv) Throughout the term of each such Underlying Right, QWEST shall at its reasonable cost and expense defend and protect QWEST's rights in and interests under the Underlying Rights against interfering or infringing rights, interests or claims of third parties. 10.3 Upon the expiration or termination of any Underlying Right that is necessary in order to grant, continue or maintain an IRU granted hereunder in accordance with the terms and conditions hereof, so long as QWEST shall have fully observed and performed its obligations under this Article X with respect thereto, the Term of the IRUs hereunder with respect to any Segment or Segments affected thereby shall automatically expire upon such expiration or termination. 10.4 If, after the Acceptance Date with respect to a Segment, QWEST is required by a third party with legal authority to so require (including, without limitation, the grantor of an Underlying Right, but only to the extent that such relocation is not required as a result of a failure by QWEST to observe and perform its obligations under such Underlying Right or this Agreement), or if FRONTIER agrees, to relocate any portion of such Segment including any of the facilities used or required in providing the IRUs in such Segment hereunder, QWEST shall proceed with such relocation, including, but not limited to, the right, in good faith, to reasonably determine the extent of, the timing of, and methods to be used for such relocation; provided that (i) the route of any such ------------- relocation shall be subject to the good faith agreement of the parties with a bona fide interest therein, (ii) FRONTIER shall be kept fully informed of all other determinations made by QWEST in connection with such relocation, and (iii) any such relocation shall be constructed and tested in accordance with the specifications and drawings set forth in Exhibits C and D, and incorporate fiber meeting the specifications set forth in Exhibit E. FRONTIER shall reimburse QWEST for its proportionate share of the Costs of such relocation of the portion of the Segment so relocated, reduced by such amount, if any, of the portion of such Costs as are reimbursed to QWEST by the party requiring such relocation, as follows: (i) if the affected portion of the Segment includes any conduit other than the conduit housing the FRONTIER Fibers for which QWEST is responsible for relocation costs, the total Costs of relocation of the conduits (i.e., relocation of the conduits only without regard to whether the conduits contain fibers) shall be allocated based on the overall number of conduits relocated; (ii) such Costs allocated to the conduit carrying the FRONTIER Fibers plus the Costs specifically associated with the relocation of the fiber (i.e., relocation of the fiber only without regard to relocation of conduit) shall be further allocated to FRONTIER based on FRONTIER's proportionate share of (A) all Costs of fiber acquisitions, splicing and testing, prorated based on the total fiber count in the affected Cable, as so relocated, and (B) all other Costs associated with the relocation of the conduit housing the affected Cable, prorated based on the total number of owners (including QWEST) and holders of IRUs or equivalent interests (including long-term lessees) (each, an "Interest Holder") in the affected Cable, as so relocated. FRONTIER shall have the right to review and audit all Costs incurred in connection with such relocation. QWEST shall deliver to FRONTIER updated As-Builts with respect to the relocated Segment not later than sixty (60) days following the completion of such relocation. Any condemnation or taking under the power of eminent domain of all or any portion of a Segment shall be deemed a relocation required by a third party with legal authority to so require, and such affected Segment, or portion thereof, shall be relocated in accordance with this Section 10.4 and any condemnation proceeds received by QWEST shall be applied to such relocation as provided above. 10.5 QWEST acknowledges that FRONTIER has previously committed to acquire a certain number of miles of right-of-way from ConRail (the "ConRail ROW"). If determined practical by QWEST in its reasonable business judgment, and provided that the cost and other terms and conditions of acquiring and utilizing part or all of the ConRail ROW are not greater or more restrictive and do not provide lesser rights than any other Underlying Right which QWEST may be hereafter required to acquire in constructing the QWEST System, QWEST shall cooperate with FRONTIER and acquire and utilize the ConRail ROW, or applicable portions thereof, in satisfaction of the FRONTIER commitment to ConRail. In such event, the IRU Fee payable hereunder with respect to any Segment on the ConRail ROW shall be adjusted as agreed by the parties. ARTICLE XI. USE OF QWEST SYSTEM ------------------- 11.1 The requirements, restrictions, and/or limitations upon FRONTIER's right to use the FRONTIER Fibers and Associated Property as provided and permitted under this Agreement imposed under, and associated safety, operational and other rules and regulations imposed in connection with, the Underlying Rights are referred to collectively as the "Underlying Rights Requirements." QWEST represents and warrants that, it has made available to FRONTIER for its review and inspection a copy of certain documents, agreements, or instruments pursuant to which QWEST has been granted an Underlying Right as of the date hereof (the "Existing Underlying Rights"), and certain associated safety, operational and other rules and regulations imposed in connection with the exercise of its rights thereunder (all of which are identified on Exhibit J hereto). FRONTIER hereby accepts the Existing Underlying Rights and the Underlying Rights Requirements associated therewith. QWEST represents that it is not in default under any of the Existing Underlying Rights that would permit the grantor of such Underlying Right to terminate such Underlying Right prior to its stated expiration date, or would otherwise materially, adversely impair or affect FRONTIER's ability to use the FRONTIER Fibers and Associated Property, or exercise its rights with respect thereto, as provided and permitted hereunder, and, to the best of its knowledge, none of the grantors are in default under the Existing Underlying Rights. With respect to each Underlying Right (other than the Existing Underlying Rights) obtained after the date hereof by QWEST (or an Underlying Right existing on the date hereof under any document, agreement or instrument delivered after the date hereof) in carrying out its obligations hereunder from the same type of grantor as a grantor of any Existing Underlying Right, QWEST represents and warrants that the terms and conditions thereof, and rules and regulations imposed in connection therewith, shall not impose materially more onerous limitations and restrictions on the rights of FRONTIER to use the FRONTIER Fibers and Associated Property as permitted and provided hereunder than those imposed by such type of grantor under and in connection with the Existing Underlying Rights and Underlying Rights Requirements associated therewith. To the extent that any such Underlying Right documents, agreements or instruments were or hereafter are provided in a redacted format to protect confidential and proprietary business terms, QWEST represents and warrants that no language or information so redacted constitutes an Underlying Rights Requirement nor otherwise imposes material requirements, restrictions and/or limitations upon FRONTIER's right to use the FRONTIER Fibers and Associated Property as provided and permitted hereunder. QWEST represents to FRONTIER that the map heretofore provided to FRONTIER delineating the general location of rights of way, easements and other rights held by QWEST under the principal agreements evidencing the Existing Underlying Rights is a true and complete depiction, in all material respects, with respect to the general location of such Existing Underlying Rights that relate to the FRONTIER Fibers to be installed along the QWEST System as contemplated by this Agreement. 11.2 FRONTIER represents, warrants and covenants that it will use the FRONTIER Fibers and Associated Property in compliance with (i) all applicable government codes, ordinances, laws, rules, regulations and/or restrictions, and (ii) subject to QWEST's obligations under Section 11.1, the Underlying Rights Requirements. 11.3 In addition to the other rights provided hereunder, but subject to the provisions of Article VII, the IRUs granted hereunder shall include the right at FRONTIER's cost to install additional equipment, or replace existing equipment, in the facility space provided to FRONTIER pursuant to Article VII, subject to the Underlying Rights Requirements. 11.4 QWEST agrees and acknowledges that it has no right to use the FRONTIER Fibers during the Term hereof, and that, from and after the effective date of the grant of each IRU hereunder, QWEST shall keep the FRONTIER Fibers, the Associated Property and the IRUs granted hereunder (other than any Associated Property (excluding any Associated Property that may be covered by the Pre-Existing Cal-Fiber Lien as to which QWEST agrees to use its best efforts to provide a nondisturbance agreement substantially to the effect described in the next sentence) as to which QWEST shall have provided to FRONTIER a nondisturbance agreement substantially to the effect as described in the next sentence) free from (i) any liens of any third party attributable to QWEST, and (ii) any rights or claims of any third party attributable to QWEST, as and to the extent required pursuant to Article X hereof. In addition, QWEST agrees that, from and after the execution of this Agreement and until the effective date of the grant of each IRU hereunder with respect to any Segment, it shall obtain from any entity in favor of which QWEST in its discretion shall have granted a security interest or lien on all or part of such Segment (excluding the Pre-Existing Cal-Fiber Lien) a written nondisturbance agreement substantially to the effect that such lienholder acknowledges FRONTIER's rights and interests in and to the FRONTIER Fibers, the Associated Property and the IRU's hereunder and agrees that the same shall not be diminished, disturbed, impaired or interfered with by such lienholder. 11.5 Subject to the provisions of Article XXV and this Article XI, FRONTIER may use the FRONTIER Fibers, the Associated Property and the IRUs for any lawful telecommunications purpose. For purposes of this Section 11.5 "telecommunications" shall have the meaning as used and interpreted in 47 U.S.C. ' 153(2)(43). FRONTIER agrees and acknowledges that it has no right to use any of the fibers, other than the FRONTIER Fibers, included in the Cable or otherwise incorporated in the QWEST System, and that FRONTIER shall keep any and all of the QWEST System, other than the IRU in the FRONTIER Fibers or in the Associated Property, free from any liens, rights or claims of any third party attributable to FRONTIER. 11.6 FRONTIER and QWEST shall promptly notify each other of any matters pertaining to, or the occurrence (or impending occurrence) of, any event which could give rise to any damage or impending damage to or loss of the QWEST System that are known to such party. Without limiting the generality of the foregoing, QWEST shall promptly forward to FRONTIER a copy of any notice of default received by QWEST with respect to its obligations under any Underlying Right if such default is not promptly cured by QWEST. 11.7 FRONTIER shall not use the FRONTIER Fibers in a way which physically interferes in any way with or adversely affects the use of the fibers or cable of any other person using the QWEST System, it being expressly acknowledged that the QWEST System includes or will include other participants, including QWEST and other owners and holders of Dark Fiber IRUs and telecommunication system operations. QWEST shall not use any other fibers in the QWEST System in a way which physically interferes with or adversely affects the use of the FRONTIER Fibers, and shall obtain a similar agreement from any person that acquires the right to use fibers in the QWEST System after the date hereof. 11.8 FRONTIER and QWEST each agree to cooperate with and support the other in complying with any requirements applicable to their respective rights and obligations hereunder by any governmental or regulatory agency or authority. 11.9 QWEST agrees, so long as any such action would not violate the terms of any Underlying Right, upon request of FRONTIER, to execute, file and/or record such documents or instruments as FRONTIER shall deem reasonably necessary or appropriate to evidence or safeguard the IRUs granted to FRONTIER hereunder. FRONTIER agrees to reimburse QWEST for all reasonable costs and out-of-pocket expenses (including, without limitation, reasonable fees and expenses of legal counsel) incurred by QWEST in fulfilling its obligations under this Section 11.9. ARTICLE XII. INDEMNIFICATION --------------- 12.1 Subject to the provisions of Articles XIII and XVIII, QWEST hereby releases and agrees to indemnify, defend, protect and hold harmless FRONTIER and its employees, officers and directors, from and against, and assumes liability for: (a) Any injury, loss or damage to any person (including FRONTIER), tangible property or facilities of any person or entity (including reasonable attorneys' fees and costs) to the extent arising out of or resulting from the acts or omissions, negligent or otherwise, of QWEST, its officers, employees, servants, affiliates, agents, contractors, licensees, invitees or vendors arising out of or in connection with a default (other than a default caused by a failure of FRONTIER to perform or comply with its obligations hereunder) by QWEST in the performance of its obligations or breach of its representations under this Agreement (including, without limitation, any default by QWEST in the performance of its obligations under Article X with respect to the Underlying Rights and under Article XI with respect to its use of the QWEST System); and (b) Any claims, liabilities or damages, including reasonable attorneys' fees and costs, arising out of any violation by QWEST of any regulation, rule, statute or court order of any local, state or federal governmental agency, court or body in connection with the performance of its obligations under this Agreement. 12.2 Subject to the provisions of Articles XIII and XVIII, FRONTIER hereby releases and agrees to indemnify, defend, protect and hold harmless QWEST, and its employees, officers and directors, from and against, and assumes liability for: (a) Any injury, loss or damage to any person (including QWEST), tangible property or facilities of any person or entity (including reasonable attorneys' fees and costs) to the extent arising out of or resulting from the acts or omissions, negligent or otherwise, of FRONTIER, its officers, employees, servants, affiliates, agents, contractors, licensees, invitees or vendors arising out of or in connection with a default (other than a default caused by a failure of QWEST to perform or comply with its obligations hereunder) by FRONTIER in the performance of its obligations or breach of its representations under this Agreement (including, without limitation, any default by FRONTIER in the performance of its obligations under Article XI with respect to its use of the QWEST System); and (b) Any claims, liabilities or damages, including reasonable attorneys' fees and costs, arising out of any violation by FRONTIER of any regulation, rule, statute or court order of any local, state or federal governmental agency, court or body in connection with its use of the IRUs and/or the FRONTIER Fibers and Associated Property hereunder. 12.3 The parties agree to promptly provide each other with notice of any lawsuit, judicial, administrative or other dispute resolution action or proceeding, or claim of which it becomes aware and which it believes may result in an indemnification obligation hereunder (each, an "Action"); provided that ------------- the failure to provide any such notice shall not affect the indemnifying party's indemnification obligation unless the indemnifying party is actually prejudiced by the failure to receive such notice. After receipt of any such notice, if the indemnifying party shall acknowledge in writing to the indemnified party that the indemnifying party shall be obligated under the terms of this indemnity hereunder in connection with such Action, then the indemnifying party shall be entitled, if it so elects (i) to take control of the defense and investigation of such Action, (ii) to employ and engage attorneys of its own choice to handle and defend the same, at the indemnifying party's cost, risk and expense unless the named parties to such action or proceeding include both the indemnifying party and the indemnified party and the indemnified party has been advised in writing by counsel that there may be one or more legal defenses available to such indemnified party that are different from or additional to those available to the indemnifying party, in which case the indemnified party shall also have the right to employ its own counsel in any such case with the reasonable fees and expenses of such counsel being borne by the indemnifying party, and (iii) to compromise or settle such Action, which compromise or settlement shall be made only with the written consent of the indemnified party, such consent not to be unreasonably withheld. Notwithstanding anything in this Section 12.3 to the contrary, (i) if there is a reasonable probability that an indemnifiable claim may materially adversely affect the indemnified party, other than as a result of money damages or other money payments, the indemnified party shall have the right to participate in such defense, compromise or settlement and the indemnifying party shall not, without the indemnified party's written consent (which consent shall not be unreasonably withheld), settle or compromise any indemnifiable claim or consent to entry of any judgment in respect thereof unless such settlement, compromise or consent includes as an unconditional term thereof the giving by the claimant or the plaintiff to the indemnified party a release from all liability in respect of such indemnifiable claim. 12.4 The parties hereby expressly recognize and agree that each party's said obligation to indemnify, defend, protect and save the other harmless is not a material obligation to the continuing performance of the parties' other obligations, if any, hereunder. In the event that a party shall fail for any reason to so indemnify, defend, protect and save the other harmless, the injured party hereby expressly recognizes that its sole remedy in such event shall be the right to bring legal proceedings against the other party for its damages as a result of the other party's said failure to indemnify, defend, protect and save harmless. The obligations of the parties under this Article XII shall survive the expiration or termination of this Agreement. 12.5 Nothing contained herein shall operate as a limitation on the right of either party hereto to bring an action for damages against any third party, including indirect, special or consequential damages, based on any acts or omissions of such third party as such acts or omissions may affect the construction, operation or use of the FRONTIER Fibers or the QWEST System; provided, however, that each party hereto shall assign such ----------------- rights or claims, execute such documents and do whatever else may be reasonably necessary to enable the other party to pursue any such action against such third party. ARTICLE XIII. LIMITATION OF LIABILITY ----------------------- 13.1 Notwithstanding any provision of this Agreement to the contrary, except to the extent caused by its own willful misconduct, neither party shall be liable to the other party for any special, incidental, indirect, punitive or consequential damages, whether foreseeable or not, arising out of, or in connection with such party's failure to perform its respective obligations or breach of its respective representations hereunder, including, but not limited to, loss of profits or revenue (whether arising out of transmission interruptions or problems, any interruption or degradation of service or otherwise), cost of capital, or claims of customers, in each case whether occasioned by any construction, reconstruction, relocation, repair or maintenance performed by, or failed to be performed by, the other party or any other cause whatsoever, including breach of contract, breach of warranty, negligence, or strict liability, all claims with respect to which such special, incidental, indirect, punitive or consequential damages are hereby specifically waived. Nothing contained herein shall be construed to prohibit or reduce the payment by QWEST of the amounts described in Section 18.2 and which the parties acknowledge are the sole rights and remedies of FRONTIER to the extent provided in Section 18.2(e). ARTICLE XIV. INSURANCE --------- 14.1 During the construction period with respect to any Segment, and until the Acceptance Date with respect thereto, QWEST shall procure and maintain in force the following insurance coverage from companies lawfully approved to do business in the state where the construction will be performed: (a) not less than $5,000,000 combined single-limit liability insurance, on an occurrence basis, for personal injury and property damage, including, without limitation, injury or damage arising from the operation of vehicles or equipment and liability for completed operations; (b) workers' compensation insurance in amounts required by applicable law and employers' liability insurance with a limit of at least $1,000,000 per occurrence; (c) automobile liability insurance covering death or injury to any person or persons, or damage to property arising from the operation of vehicles or equipment, with limits of not less than $2,000,000 per occurrence; and (d) any other insurance coverages required pursuant to QWEST's right-of-way agreements with railroads or other third parties. QWEST shall require its subcontractors who are engaged in connection with the construction of the QWEST System to maintain insurance in the types and amounts as would be obtained by a prudent person to provide adequate protection against loss. In all circumstances, QWEST shall require its subcontractors to carry a minimum of $1,000,000 in commercial general liability; and (e) FRONTIER shall be listed as an additional insured on all policies set forth above, except workers' compensation. QWEST shall provide to FRONTIER a certificate of insurance evidencing such insurance coverage. Evidence of insurance furnished shall contain a clause stating FRONTIER "shall be notified in writing at least thirty (30) days prior to any cancellation of, or any material change or new exclusions in the policy." 14.2 Following the Acceptance Date with respect to each Segment, and throughout the remaining term of the IRU with respect to such Segment, each party shall procure and maintain in force, at its own expense: (a) not less than $5,000,000 combined single limit liability insurance, on an occurrence basis, for personal injury and property damage, including, without limitation, injury or damage arising from the operation of vehicles or equipment and liability for completed operations; (b) workers' compensation insurance in amounts required by applicable law and employers' liability insurance with a limit of at least $1,000,000 per occurrence; (c) automobile liability insurance covering death or injury to any person or persons, or damage to property arising from the operation of vehicles or equipment, with limits of not less than $2,000,000 per occurrence; and (d) any other insurance coverages specifically required of such party pursuant to QWEST's right-of-way agreements with railroads or other third parties. 14.3 Both parties expressly acknowledge that a party shall be deemed to be in compliance with the provisions of this Article if it maintains an approved self insurance program providing for a retention of up to $1,000,000. If either party provides any of the foregoing coverages on a claims-made basis, such policy or policies shall be for at least a three-year extended reporting or discovery period. Unless otherwise agreed, FRONTIER's and QWEST's insurance policies shall be obtained and maintained with companies rated "A" or better by Best's Key Rating Guide and each party shall provide the other with an insurance certificate confirming compliance with this requirement for each policy providing such required coverage. 14.4 In the event either party fails to obtain the required insurance or to obtain the required certificates from any contractor and a claim is made or suffered, such party shall indemnify and hold harmless the other party from any and all claims for which the required insurance would have provided coverage. Further, in the event of any such failure which continues after seven (7) days' written notice thereof by the other party, such other party may, but shall not be obligated to, obtain such insurance and will have the right to be reimbursed for the cost of such insurance by the party failing to obtain such insurance. 14.5 In the event coverage is denied or reimbursement of a properly presented claim is disputed by the carrier for insurance provided above, the party carrying such coverage shall make good-faith efforts to pursue such claim with its carrier. 14.6 FRONTIER and QWEST shall each obtain from the insurance companies providing the coverages required by this Agreement the permission of such insurers to allow such party to waive all rights of subrogation and such party does hereby waive all rights of said insurance companies to subrogation against the other party, its parent corporation, affiliates, subsidiaries, assignees, officers, directors, and employees or any other party entitled to indemnity under this Agreement. ARTICLE XV. TAXES, FEES AND OTHER GOVERNMENTAL IMPOSITIONS ---------------------------------------------- 15.1 The parties acknowledge and agree that it is their mutual objective and intent to (i) minimize, to the extent feasible, the aggregate Impositions (as defined in Section 33.1(e)) payable with respect to the QWEST System and (ii) share such Impositions according to their respective interests in the QWEST System , and that they will cooperate with each other and coordinate their mutual efforts to achieve such objectives in accordance with the provisions of this Article XV. 15.2 QWEST shall be responsible for and shall timely pay any and all Impositions with respect to the construction or operation of the QWEST System which Impositions are (i) imposed or assessed prior to the Acceptance Date, (ii) imposed or assessed with respect to events which occurred or property rights or obligations of QWEST which existed prior to the acceptance date; or (iii) imposed or assessed (regardless of the time) with respect to the QWEST System in exchange for the approval of construction in the original agreement which resulted in the granting of an Underlying Right. Notwithstanding the foregoing obligations, QWEST shall have the right to challenge any such Impositions so long as the challenge of such Impositions does not materially, adversely affect the title, rights or property to be delivered to FRONTIER pursuant hereto. 15.3 Except as to Impositions described in paragraphs (ii) and (iii) of Section 15.2, following the Acceptance Date, QWEST shall timely pay any and all Impositions imposed upon or with respect to the QWEST System to the extent such Impositions may not feasibly be separately assessed or imposed upon or against the respective ownership interests of QWEST and FRONTIER in the QWEST System; provided that, upon receipt ------------- of a notice of any such Imposition, QWEST shall promptly notify FRONTIER of such Imposition and following payment of such Imposition by QWEST, FRONTIER shall promptly reimburse QWEST for its proportionate share of such Imposition, which share shall be determined (i) to the extent possible, based upon the manner and methodology used by the particular authority imposing such Impositions (e.g., on the cost of the relative property interests, historic or projected revenue derived therefrom, or any combination thereof) and, if based upon projected revenue or gross receipts, then based on the relative number of FRONTIER Fibers in the affected portion of the QWEST System compared to the total number of fibers in the affected portion of the QWEST System during the relevant tax period which are subject to an indefeasible right of use or are otherwise in use; or (ii) if the same cannot be so determined, then based upon FRONTIER's proportionate share of the total fiber count in the affected portion of the QWEST System. QWEST shall provide FRONTIER with reasonable supporting documentation for Impositions for which QWEST seeks reimbursement. If QWEST's assessed value, for property tax purposes, is based on its entire operation in any state (i.e., central assessment), QWEST and FRONTIER shall work together in good faith to allocate a proper portion of said assessment to the QWEST System and FRONTIER's ownership interest in the QWEST System. Any reimbursement made under this Section 15.3 shall be in an amount equal to the Impositions required to be paid by QWEST in respect of the receipt or accrual of such reimbursement less the net present value (computed at a 10% discount rate) of the tax benefit (e.g. from the deduction, depreciation or amortization of such payment or accrual of the Imposition) to which QWEST may be entitled with respect to the payment or accrual of the Impositions which have been reimbursed. Hereafter, such additional amount or amounts shall be referred to as the "Gross-up Amount." Such Gross-up Amount shall not include any tax on the amount of the Gross-up Amount itself. QWEST shall, upon request, provide FRONTIER with documentation in support of any Gross-up Amount so as to ensure that both parties are made whole in a manner that is consistent with the mutual objectives set forth in section 15.1 of the Agreement. If such Gross-up Amount exceeds $50,000, FRONTIER may elect to engage the services of an independent consultant, at FRONTIER's sole cost and expense, to review QWEST's computation of such Gross-up Amount. Any independent consultant selected by FRONTIER shall be subject to approval by QWEST, which such approval shall not be unreasonably withheld, and such independent consultant shall be subject to confidentiality restrictions as may be determined in QWEST's sole discretion. Further, if, after review of such documentation or otherwise, in the event the parties are unable to agree upon the amount of the Gross-up Amount, such dispute shall be resolved pursuant to Article XXI of the Agreement. 15.4 Upon notice of the assertion or proposed assertion of any imposition described in Section 15.3 (including Impositions that trigger a Gross-up Amount) QWEST shall promptly and in good faith consult with FRONTIER concerning the underlying facts and whether to contest or continue to contest such assertion or proposed assertion. Notwithstanding any provision herein to the contrary, QWEST shall have the right to contest any Imposition described in Section 15.3, above, (including Impositions which trigger a Gross-up Amount). Such contest may be pursued by any lawful means including by non-payment of such Imposition provided such non-payment does not materially, adversely affect the title, rights or property to be delivered to FRONTIER pursuant hereto). The out-of-pocket costs and expenses (including reasonable attorneys' fees) incurred by QWEST in any such contest shall be shared by QWEST and FRONTIER in the same proportion as to which the parties shared in any such Imposition, as it was originally assessed. Any refunds or credits resulting from a contest brought pursuant to this Section 15.4 shall be divided between QWEST and FRONTIER in the same proportion as to which such refunded or credited Impositions were borne by QWEST and FRONTIER. In any such event, QWEST shall provide timely notice of such challenge to FRONTIER. If QWEST chooses to proceed with such challenge after receipt of a written objection to the challenge from FRONTIER, QWEST shall conduct such challenge at its own costs and expense, provided that FRONTIER shall not receive ------------- the benefit of any refund or credit, if any, obtained as a result of a successful challenge. Further, where QWEST does not contest an Imposition, FRONTIER shall have the right, after notice to QWEST, to contest such Imposition as long as such contest does not materially, adversely affect the title property or rights of QWEST. The out-of-pocket costs and expenses (including reasonable attorney's fees) incurred by FRONTIER in any such contest shall be shared by FRONTIER and QWEST in the same proportion as to which the parties shared in such Imposition, as it was originally assessed. Any refunds or credits resulting from a contest shall be divided between FRONTIER and QWEST in the same proportion as to which such refunded or credited Imposition was borne by FRONTIER and QWEST. If FRONTIER chooses to proceed with such contest after receipt of written objection to the challenge from QWEST, FRONTIER shall conduct such challenge at its own costs and expense, provided that QWEST shall not receive the benefit of any refund or credit, if any, obtained as a result of a successful challenge. Provided, however, that notwithstanding anything to the contrary in this Article 15, QWEST shall have complete authority over and discretion to control (including the authority to dismiss or not pursue) any contests relating to Impositions based upon the computation of QWEST's taxable income under the Federal Internal Revenue Code or state income or franchise tax laws (hereinafter "Net Income Based Impositions"). FRONTIER shall, however, be consulted on the conduct and status of such contest. QWEST shall have no obligation to disclose to FRONTIER its income or franchise tax returns and records except as to the discrete portion of such return or record that directly relates to the computation and payment of such Net Income Based Impositions. Provided further, however, that in the event QWEST shall determine in its own discretion not to pursue a contest of any Net Income Based Imposition as to which FRONTIER has requested a contest pursuant to the provisions described above in this Section 15.4, then FRONTIER shall have no obligation to provide any reimbursement for such amount if FRONTIER shall have obtained and provided to QWEST an opinion of nationally recognized legal counsel confirming that a meritorious defense exists to such Net Income Based Imposition. 15.5 Except as to Impositions described in paragraph (iii) of Section 15.2, following the Acceptance Date QWEST and FRONTIER, respectively, shall be separately responsible for any and all Impositions (i) expressly or implicitly imposed upon, based upon, or otherwise measured by the gross receipts, gross income, net receipts or net income received by or accrued to such party due to its respective ownership or use of the QWEST System and/or the FRONTIER Fibers, or (ii) which have been separately assessed or imposed upon the respective ownership interest of such party in the QWEST System and/or the FRONTIER Fibers. If the FRONTIER Fibers are the only fibers located in the Cable from the point where the Cable leaves the QWEST System right-of-way to a FRONTIER POP, FRONTIER shall be solely responsible for any and all Impositions imposed on or with respect to such portion of the QWEST System. 15.6 Notwithstanding any provision herein to the contrary, FRONTIER shall have the right to protest by appropriate proceedings any Imposition described in Section 15.5, above. In such event, FRONTIER shall indemnify and hold QWEST harmless from any expense, legal action or cost, including reasonable attorneys' fees, resulting from FRONTIER's exercise of its rights hereunder. In the event of any refund, rebate, reduction or abatement to FRONTIER of any such Imposition imposed upon and/or paid by FRONTIER, FRONTIER shall be entitled to receive the entire benefit of such refund, rebate, reduction or abatement attributable to FRONTIER's use of the QWEST System. In the event FRONTIER has exhausted all its rights of appeal in protesting any Imposition and has failed to obtain the relief sought in such proceedings or appeals ("Finally Determined Taxes and Fees"), FRONTIER and QWEST may jointly agree (with the consent and participation of the other Interest Holders in the affected portion of the QWEST System) to relocate a portion of the QWEST System so as to bypass the jurisdiction which had imposed or assessed such Finally Determined Taxes and Fees with the total Costs thereof to be shared proportionately as follows: (i) if the affected portion of the QWEST System includes any conduit other than the conduit in which the FRONTIER Fibers are located, the total Costs of relocation of the conduits (i.e., relocation of the conduits only without regard to whether the conduits contain fibers) shall be allocated based on the overall number of conduits in the QWEST System which are relocated; and (ii) such Costs allocated to the conduit carrying the FRONTIER Fibers plus the Costs specifically associated with the relocation of the fiber (i.e., relocation of the fiber only without regard to relocation of conduit) to be further allocated to FRONTIER based upon FRONTIER's proportionate share of (A) all Costs of fiber acquisitions, splicing and testing, prorated based on the total fiber count in the Cable, as so relocated; and (B) all other Costs associated with the relocation of the conduit housing the affected Cable, prorated based upon the total number of Interest Holders in the affected Cable, as so relocated. QWEST shall deliver to FRONTIER updated As-Builts with respect to the relocated QWEST System not later than sixty (60) days following the completion of such relocation. If FRONTIER and QWEST do not determine to relocate the affected portion of the QWEST System, FRONTIER shall have the right to terminate its use of the FRONTIER Fibers in the affected portion of the QWEST System. Such termination shall be effective on the date specified by FRONTIER in a notice of termination, which date shall be at least ninety (90) days after the notice. Upon such termination, the IRU in the affected portion of the QWEST System shall immediately terminate, and the FRONTIER Fibers in the affected portion of the QWEST System shall thereupon revert to QWEST without reimbursement of any of the IRU Fee or other payments previously made with respect thereto. 15.7 Notwithstanding the provisions of Section 15.6, with respect to any Impositions relating to the QWEST System which are imposed upon both QWEST and FRONTIER (or both of their respective interests therein), QWEST, at its option and at its own expense, shall have the right to direct and manage any such contest; subject, however, to reasonable and appropriate consultation with FRONTIER which hereby agrees to cooperate with QWEST in any such contest. The right of QWEST to contest any Imposition pursuant to this Section 15.7 shall be contingent upon reasonable and appropriate assurances that any such contest will not adversely affect the title, property or rights of FRONTIER hereunder. 15.8 QWEST and FRONTIER agree to cooperate fully in the preparation of any returns or reports relating to the Impositions. QWEST and FRONTIER further acknowledge and agree that the provisions of this Article XV are intended to allocate the Impositions expected to be assessed against or imposed upon the parties with respect to the QWEST System based upon the procedures and methods of computation by which Impositions generally have been assessed and imposed to date, and that material changes in the procedures and methods of computation by which such assessments are assessed and imposed could significantly alter the fundamental economic assumptions underlying the transactions hereunder to the parties. Accordingly, the parties agree that, if in the future the procedures or methods of computation by which Impositions are assessed or imposed against the parties change materially from the procedures or methods of computation by which they are imposed as of the date hereof, the parties will negotiate in good faith an amendment to the provisions of this Article XV in order to preserve, to the extent reasonably possible, the economic intent and effect of this Article XV as of the date hereof. ARTICLE XVI. NOTICE ------ 16.1 Unless otherwise provided herein, all notices and communications concerning this Agreement shall be addressed to the other party as follows: If to QWEST: QWEST Communications Corporation ATTENTION: President 555 Seventeenth Street Denver, Colorado 80202 Telephone No.: (303) 291-1400 Facsimile No.: (303) 291-1724 with a copy to: QWEST Communications Corporation ATTENTION: General Counsel 555 Seventeenth Street Denver, Colorado 80202 Telephone No.: (303) 291-1400 Facsimile No.: (303) 291-1724 and a copy to: Martha Dugan Rehm, Esq. Holme Roberts & Owen LLP 1700 Lincoln, Suite 4100 Denver, Colorado 80206 Telephone No.: (303) 861-7000 Facsimile No.: (303) 866-0200 If to FRONTIER: FRONTIER Communications International Inc. ATTENTION: Director, Network Development 180 South Clinton Avenue Rochester, New York 14646 Telephone No.: (716) 777-6848 Facsimile No.: (716) 777-6770 with a copy to: Frontier Corporation ATTENTION: Vice President, Network Planning and Development 180 South Clinton Avenue Rochester, New York 14646 Telephone No.: (716) 777-8018 Facsimile No.: (716) 232-8154 and a copy to: Frontier Corporation ATTENTION: Vice President, Legal and Regulation 180 South Clinton Avenue Rochester, New York 14646 Telephone No.: (716) 777-6105 Facsimile No.: (716) 546-7823 or at such other address as either party may designated from time to time in writing to the other party. 16.2 Unless otherwise provided herein, notices shall be hand delivered, sent by registered or certified U.S. mail, postage prepaid, or by commercial overnight delivery service, or transmitted by facsimile, and shall be deemed served or delivered to the addressee or its office when received at the address for notice specified above when hand delivered, upon confirmation of sending when sent by fax, on the day after being sent when sent by overnight delivery service, or three (3) days after deposit in the mail when sent by U.S. mail. 16.3 All invoices concerning payment obligations due to QWEST pursuant to this Agreement shall be addressed to FRONTIER as follows: Frontier Corporation ATTENTION: Treasurer 180 South Clinton Avenue Rochester, New York 14646 Telephone No.: (716) 777-7130 Facsimile No.: (716) 325-7633 with a copy to: Frontier Corporation ATTENTION: Director, Network Development 180 South Clinton Avenue Rochester, New York 14646 Telephone No.: (716) 777-6848 Facsimile No.: (716) 777-6770 ARTICLE XVII. CONFIDENTIALITY --------------- 17.1 QWEST and FRONTIER hereby agree that if either party provides (or, prior to the execution hereof, has provided) confidential or proprietary information to the other party ("Proprietary Information"), such Proprietary Information shall be held in confidence, and the receiving party shall afford such Proprietary Information the same care and protection as it affords generally to its own confidential and proprietary information (which in any case shall be not less than reasonable care) in order to avoid disclosure to or unauthorized use by any third party. The parties acknowledge and agree that this Agreement, including all of the terms, conditions and provisions hereof, and all drafts hereof, constitutes Proprietary Information. In addition, all information disclosed by either party to the other in connection with or pursuant to this Agreement, including prior to the date hereof, shall be deemed to be Proprietary Information. All Proprietary Information, unless otherwise specified in writing, shall remain the property of the disclosing party, shall be used by the receiving party only for the intended purpose, and such written Proprietary Information, including all copies thereof, shall be returned to the disclosing party or destroyed after the receiving party's need for it has expired or upon the request of the disclosing party. Proprietary Information shall not be reproduced except to the extent necessary to accomplish the purpose and intent of this Agreement, or as otherwise may be permitted in writing by the disclosing party. 17.2 The foregoing provisions of Section 17.1 shall not apply to any Proprietary Information which (i) becomes publicly available other than through the recipient; (ii) is required to be disclosed by a governmental or judicial law, order, rule or regulation; (iii) is independently developed by the disclosing party; (iv) becomes available to the disclosing party without restriction from a third party; or (v) becomes relevant to the settlement of any dispute or enforcement of either party's rights under this Agreement in accordance with the provisions of this Agreement, in which case appropriate protective measures shall be taken to preserve the confidentiality of such Proprietary Information as fully as possible within the confines of such settlement or enforcement process. If any Proprietary Information is required to be disclosed pursuant to the foregoing clause (ii), the party required to make such disclosure shall promptly inform the other party of the requirements of such disclosure. 17.3 Notwithstanding Sections 17.1 and 17.2 of this Article, either party may disclose Proprietary Information to its employees, agents, and legal, financial, and accounting advisors and providers (including its lenders and other financiers) to the extent necessary or appropriate in connection with the negotiation and/or performance of this Agreement or its obtaining of financing, provided that each such party is notified of the confidential and proprietary - ------------- nature of such Proprietary Information and is subject to or agrees to be bound by similar restrictions on its use and disclosure. In addition, notwithstanding Sections 17.1 and 17.2 of this Article, FRONTIER may disclose this Agreement and its terms, conditions and provisions to the Permitted System Acquiror and/or the Permitted Sacramento/Seattle Acquiror (each as defined in Section 25.3(b)), provided that (i) such Permitted System Acquiror and/or Permitted - ------------- Sacramento/Seattle Acquiror, prior to any such disclosure, shall have been notified of the confidential and proprietary nature of this Agreement and its terms, conditions and provisions and shall have entered into a written confidentiality agreement with substantially similar (and in no event less restrictive than the) terms of the Confidentiality Agreement between QWEST and FRONTIER dated February 15, 1995, (ii) copies of all or any portion of this Agreement (including Exhibits) may not be furnished to the Permitted System Acquiror and/or the Permitted Sacramento/Seattle Acquiror without the prior written consent of QWEST (not unreasonably withheld or delayed) of the proposed form of disclosure thereof (redacted or otherwise), and (iii) copies of all or any portion of any Underlying Right may not be furnished without the prior written consent of QWEST (not unreasonably withheld or delayed). 17.4 The provisions of this Article XVII shall survive expiration or termination of this Agreement. ARTICLE XVIII. DEFAULT ------- 18.1 With respect to all payments required to be made by FRONTIER hereunder, including, without limitation, payment of the IRU Fee and all other amounts payable by FRONTIER hereunder, in the event FRONTIER shall fail to make a payment by the date due and payable hereunder, from and after such date, (i) such unpaid amount shall bear interest until paid at a rate equal to the rate set forth in Article XXX and (ii) if such payment is due with respect to a Segment on or prior to the Acceptance Date of such Segment, the Estimated Delivery Date for such Segment shall be extended by a number of days equal to the number of days that elapse from the date such payment is due until paid. In the event any amount or amounts due and payable hereunder remain unpaid for a period of eighty (80) days after written notice from QWEST to FRONTIER, and the amount thereof is not in bona fide dispute, then QWEST may, in its sole and absolute discretion and in addition to its other rights and remedies hereunder, after ten (10) days prior written notice to FRONTIER and the failure of FRONTIER to pay such amount within such ten-day period, terminate any and all of its obligations hereunder with respect to any Segment or Segments as to which the Acceptance Date has not yet occurred or the grant of the IRU with respect to which has not yet become effective, and to apply any and all amounts previously paid by FRONTIER hereunder with respect to such Segment or Segments toward the payment of any other amounts then or thereafter payable by FRONTIER hereunder. With respect to all of its other obligations hereunder, in the event FRONTIER shall fail to perform a non-payment obligation and such failure shall continue for a period of thirty (30) days after QWEST shall have given FRONTIER written notice of such failure, FRONTIER shall be in default hereunder unless FRONTIER shall have cured such failure or such failure is otherwise waived in writing by QWEST within such thirty (30) days; provided, however, that where ----------------- such failure cannot reasonably be cured within such 30-day period, if FRONTIER shall proceed promptly to cure the same and prosecute such cure with due diligence, the time for curing such failure shall be extended for such period of time as may be necessary to complete such cure; and provided further that if ---------------- FRONTIER certifies in good faith to QWEST in writing that a non-payment failure has been cured, such failure shall be deemed to be cured unless QWEST otherwise notifies FRONTIER in writing within fifteen (15) days of receipt of such notice from FRONTIER. FRONTIER shall be in default hereunder (i) automatically upon the making by FRONTIER or Frontier Corporation of a general assignment for the benefit of its creditors, the filing by FRONTIER or Frontier Corporation of a voluntary petition in bankruptcy or the filing by FRONTIER or Frontier Corporation of any petition or answer seeking, consenting to, or acquiescing in reorganization, arrangement, adjustment, composition, liquidation, dissolution, or similar relief; (ii) one hundred twenty (120) days after the filing of an involuntary petition in bankruptcy or other insolvency protection against FRONTIER or Frontier Corporation which is not dismissed within such one hundred twenty (120) days, or (iii) upon any default by Frontier Corporation under the Guaranty, which default is not cured within the relevant cure period, if any, provided with respect thereto under the Guaranty. Except as otherwise provided in this Section 18.1, upon any default by FRONTIER, after written notice thereof from QWEST, QWEST may (i) take such action as it determines, in its sole discretion, to be necessary to correct the default and, subject to Section 13.1, recover from FRONTIER its reasonable costs incurred in correcting such default, and (ii) pursue any legal remedies it may have under applicable law or principles of equity relating to such default, including specific performance. Notwithstanding any other provision of this Agreement, QWEST acknowledges and agrees that QWEST shall have no right to terminate the IRU or any of the rights and interests of FRONTIER hereunder with respect to any Segment for which the IRU Fee relating thereto has been fully paid. 18.2 (a) With respect to its obligation to complete the construction, installation, and satisfactory Fiber Acceptance Testing of the FRONTIER Fibers comprising a particular Segment by the Estimated Delivery Date with respect to such Segment pursuant to Section 3.2, the parties acknowledge and agree that it is in their mutual best interest to work together in a cooperative effort to determine whether and to what extent any event or occurrence that is reasonably likely to cause a delay in the delivery of a Segment hereunder, as a result of any force majeure event or other occurrence described in Article XX or otherwise, can be terminated, resolved or avoided, and to cause the construction, installation and delivery of the Segment to be completed in the most expeditious and practical manner feasible under the circumstances. Accordingly, within three (3) months following its discovery of an event or occurrence that QWEST reasonably believes is likely to cause (i) an extension of the Estimated Delivery Date of one hundred twenty (120) days or more pursuant to Article XX or (ii) a Delivery Default (as defined pursuant to Section 18.2(d) below), QWEST shall give written notice to FRONTIER of such event or occurrence. Thereupon, each of QWEST and FRONTIER (i) will designate a senior executive officer with decision-making authority and familiarity with this Agreement and the relevant issue hereunder, and (ii) may designate one technical representative and one financial representative, to participate in the following resolution efforts. Each of such designees shall participate in such meetings, promptly scheduled at mutually agreed upon times and places, as may be necessary or appropriate to discuss in good faith the status of construction of the affected Segment, the reason or reasons for the anticipated Estimated Delivery Date extension or Delivery Default, various possible and practical means by which the event(s) or occurrence(s) causing such anticipated Estimated Delivery Date extension or Delivery Default might be terminated, avoided or resolved, including, without limitation, possible modifications to the route, selection of right-of-way, or manner of construction of the affected Segment, and (iii) use their best efforts to settle upon and implement a procedure by which such event(s) or occurrence(s) may be terminated, avoided or resolved and the construction, installation and delivery of the affected Segment completed in an expeditious and economically practical and feasible manner under the circumstances. The parties acknowledge and agree that, because the QWEST System includes or will include other participants, including owners and holders of Dark Fiber IRUs and telecommunication system operations, such meetings may, and likely will, involve designees and representatives of such other participants, and the resolution of any matters so acted upon will require the cooperative efforts of, and have to be structured, to the extent feasible, in an effort to meet the needs of all such participants. The parties hereto further acknowledge and agree that no failure of the parties hereto to resolve, or to agree upon a manner in which they might resolve, any issue addressed hereunder shall impair, adversely affect or invalidate any of their respective rights, claims or remedies under this Agreement. (b) If, notwithstanding the efforts of the parties pursuant to Section 18.2(a): (i) (A) a force majeure event or occurrence described in Article XX causing an anticipated Estimated Delivery Date extension has not been terminated, avoided or resolved by the date that is twelve (12) months following QWEST's discovery of such event or occurrence, and (B) there is no "Reasonably Apparent Probability" (either as mutually determined by QWEST and FRONTIER or, if QWEST and FRONTIER are unable to make such a mutual determination, as determined by an independent third party mutually selected by QWEST and FRONTIER and familiar with large-scale fiberoptic system constructions projects or, if QWEST and FRONTIER are unable to make such a mutual selection, each of QWEST and FRONTIER shall designate such an independent third party, the two of which shall designate such an independent third party to make such determination) that the Acceptance Date with respect to any such affected Segment will occur within (1) twelve (12) months following the Estimated Delivery Date (without extension for any delay pursuant to Article XX) with respect to any Segment designated as a "priority" Segment on Exhibit A-1, or (2) eighteen (18) months following the Estimated Delivery Date (without extension for any delay pursuant to Article XX) with respect to any other Segment (such date with respect to each Segment being referred to as the "Outside Force Majeure Date"); or (ii) notwithstanding a determination pursuant to the foregoing clause (i) that there was a Reasonably Apparent Probability that the Acceptance Date with respect to the affected Segment would occur by the applicable Outside Force Majeure Date, nonetheless the event or occurrence described in Article XX causing such delay is continuing on such applicable Outside Force Majeure Date; or (iii) notwithstanding such a determination that there was a Reasonably Apparent Probability that the Acceptance Date with respect to the affected Segment would occur by the applicable Outside Force Majeure Date, nonetheless, on the applicable Outside Force Majeure Date, although the event or occurrence described in Article XX has been terminated, avoided or resolved and QWEST has resumed its construction, installation, splicing, and/or testing efforts, QWEST is unable to demonstrate to FRONTIER's reasonable satisfaction that the Acceptance Date for such Segment will occur, in all reasonable probability, by the date that is six (6) months following such Outside Force Majeure Date, then, in any such event described in foregoing clauses (i), (ii), and (iii), FRONTIER may elect, in its sole discretion, by written notice to QWEST, to delete such Segment from the System Route otherwise to be delivered pursuant to this Agreement, and recover from QWEST (1) the amount of the IRU Fee previously paid by FRONTIER hereunder with respect to such Segment, plus (2) interest at the prime rate interest published by The Wall Street Journal as the base rate on ----------------------- corporate loans posted by a substantial percentage of the nation's largest banks on such date, plus (3) an amount equal to ten percent (10%) of the IRU Fee for such Segment, as determined or redetermined pursuant to Section 2.1 (with such aggregate amount payable to FRONTIER promptly following QWEST's receipt of such election notice or, at the election of FRONTIER, offset against the unpaid amount of the IRU Fee payable hereunder with respect to any other Segment or Segments). Upon any such election and payment (or offset), neither party shall have any further rights or obligations with respect to such Segment hereunder. (c) If, notwithstanding the efforts of the parties pursuant to Section 18.2(a): (i) (A) an event or occurrence causing an anticipated Delivery Default (as defined in Section 18.2(d) below) has not been terminated, avoided, resolved or waived by the date that is twelve (12) months following QWEST's discovery of such event or occurrence; and (B) there is no Reasonably Apparent Probability that the Acceptance Date with respect to any such affected Segment will occur within (x) twelve (12) months following the Estimated Delivery Date with respect to each Segment designated as a "priority" Segment on Exhibit A-1, or (y) eighteen (18) months following the Estimated Delivery Date with respect to any other Segment (such dates being referred to collectively as the "Outside Delivery Default Date"); or (ii) notwithstanding a determination pursuant to the foregoing clause (i) that there was a Reasonably Apparent Probability that the Acceptance Date with respect to the affected Segment would occur by the applicable Outside Delivery Default Date, nonetheless, on the applicable Outside Delivery Default Date, the Acceptance Date for such Segment has not occurred; then, in any such event described in the foregoing clauses (i) and (ii), FRONTIER may elect, in its sole discretion, by written notice to QWEST, to delete such Segment from the System Route otherwise to be delivered pursuant to this Agreement, and recover from QWEST (1) the amount of the IRU Fee previously paid by FRONTIER hereunder with respect to such Segment, plus (2) interest thereon at the rate of interest applicable to late payments set forth in Article XXX, plus (3) an amount equal to fifty percent (50%) of the IRU Fee for such Segment, as determined or redetermined pursuant to Section 2.1, but without reduction of such IRU fee under Section 18.2(d) (with such aggregate amount payable to FRONTIER promptly following QWEST's receipt of such election notice or, at the election of FRONTIER, offset against the unpaid amount of the IRU Fee payable hereunder with respect to any other Segment or Segments). Upon any such election and payment (or offset), neither party shall have any further rights or obligations with respect to such Segment hereunder. (d) In addition to the specific rights and remedies provided pursuant to the foregoing paragraphs (b) and (c) in connection with delays and anticipated delays in the delivery of Segments hereunder, QWEST shall be in default under this Agreement if the Acceptance Date with respect to any Segment has not occurred within one hundred twenty (120) days after the Estimated Delivery Date (a "Delivery Default"). From the date of any such Delivery Default, and until the Acceptance Date with respect to such Segment occurs, the IRU Fee with respect to such Segment, as determined or redetermined pursuant to Section 2.1 hereof, shall be reduced by an amount equal to *% of such IRU Fee for each thirty (30) days (or a pro rata percentage of *% for any period of less than thirty (30) days) that elapse between such date of Delivery Default and the Acceptance Date. (e) The rights and remedies set forth in the foregoing Sections 18.2(c) and 18.2(d) shall be the sole remedies available to FRONTIER with respect to any failure by QWEST to construct, install, and conduct satisfactory Fiber Acceptance Testing with respect to the FRONTIER Fibers comprising any Segment by the relevant Estimated Delivery Date (it being expressly acknowledged and agreed that the rights provided to FRONTIER pursuant to * Confidential Treatment Applied For Section 18.2(b) are provided only as an accommodation in the event of lengthy force majeure delays pursuant to Article XX, and that the events described in Section 18.2(b) do not constitute defaults hereunder). With respect to all of QWEST's other obligations hereunder, in the event that QWEST shall fail to perform an obligation and such failure shall continue for a period of thirty (30) days after FRONTIER shall have given QWEST written notice of such failure, QWEST shall be in default hereunder unless QWEST shall have cured such failure or such failure is otherwise waived in writing by FRONTIER within such thirty (30) days; provided however, that where such failure cannot reasonably be cured ---------------- within such 30-day period, if QWEST shall proceed promptly to cure the same and prosecute such cure with due diligence, the time for curing such failure shall be extended for such period of time as may be necessary to complete such cure; and provided further, that if QWEST certifies in good faith to FRONTIER in ---------------- writing that failure has been cured, such failure shall be deemed to be cured unless FRONTIER otherwise notifies QWEST in writing within fifteen (15) days of receipt of such notice from QWEST. QWEST shall be in default hereunder automatically upon the making by QWEST of a general assignment for the benefit of its creditors, the filing by QWEST of a voluntary petition in bankruptcy or the filing by QWEST of any petition or answer seeking, consenting to, or acquiescing in reorganization, arrangement, adjustment, composition, liquidation, dissolution, or similar relief, or (ii) one hundred twenty (120) days after the involuntary filing of a petition in bankruptcy or other insolvency protection against QWEST which is not dismissed within such 120-day period. Except as otherwise provided in this Section 18.2, upon any default by QWEST, after notice thereof from FRONTIER, FRONTIER may (i) take such action as it determines, in its sole discretion, to be necessary to correct the default, and, subject to Section 13.1, recover from QWEST its reasonable costs in correcting such default, and (ii) pursue any legal remedies it may have under applicable law or principles of equity relating to such default including specific performance. ARTICLE XIX. TERMINATION ----------- 19.1 This Agreement automatically shall terminate with respect to a Segment upon the expiration or termination of the Term of the IRU respecting such Segment pursuant to Article VI or Section 18.2 hereof. 19.2 Upon the expiration or termination of this Agreement with respect to a Segment, the IRU in such Segment shall immediately terminate and all rights of FRONTIER to use the QWEST System, the FRONTIER Fibers, the Associated Property or any part thereof relating to such Segment, shall cease and QWEST shall owe FRONTIER no additional duties or consideration with respect to such Segment. Promptly thereupon, FRONTIER shall remove all of FRONTIER's electronics, equipment, separate Regeneration Facilities (as provided pursuant to Section 7.2) and other associated FRONTIER property from such Segment and any related QWEST facilities at its sole cost under QWEST's supervision (which supervision shall be without cost to FRONTIER). 19.3 Notwithstanding the foregoing, no termination or expiration of this Agreement shall affect the rights or obligations of any party hereto (i) with respect to any then existing defaults or the obligation to make any payment hereunder for services rendered prior to the date of termination or expiration or (ii) pursuant to Article XII, Article XIII, Article XV or Article XVII herein, which shall survive the expiration or termination hereof. ARTICLE XX. FORCE MAJEURE ------------- 20.1 Neither party shall be in default under this Agreement if and to the extent that any failure or delay in such party's performance of one or more of its obligations hereunder is caused by any of the following conditions, and such party's performance of such obligation or obligations shall be excused and extended for and during the period of any such delay: act of God; fire; flood; fiber, Cable, or other material failures, shortages or unavailability or other delay in delivery not resulting from the responsible party's failure to timely place orders therefor (it being expressly acknowledged that the Cable that is being acquired for and installed in the QWEST System and that will include the FRONTIER Fibers must include higher fiber counts than that necessary solely for the FRONTIER Fibers in order to permit completion of the entire QWEST System); lack of or delay in transportation; government codes, ordinances, laws, rules, regulations or restrictions (collectively, "Regulations"); war or civil disorder; strikes or other labor disputes; failure of a third party to grant or recognize an Underlying Right, or any other cause beyond the reasonable control of such party; provided that any delay caused by the failure of a third party to ------------- grant an Underlying Right shall constitute a force majeure delay hereunder only to the extent that such delay does not extend beyond a period of six months (such that the Estimated Delivery Date with respect to any Segment affected by such delay shall be extended only up to a period of six months of any such delay, and shall not be further extended if such delay extends beyond a period of six months). The party claiming relief under this Article shall notify the other in writing of the existence of the event relied on and the cessation or termination of said event. ARTICLE XXI DISPUTE RESOLUTION ------------------ 21.1 Except as provided in Sections 18.1 and 18.2, if the parties are unable to resolve any disagreement or dispute arising under or related to this Agreement, including without limitation, the failure to agree upon any item requiring a mutual agreement of the parties hereunder, they shall resolve the disagreement or dispute as follows: (a) Officers. Either party may refer the matter to the Chief Executive -------- Officers or the Chief Operating Officers (the "Officers") of the parties by giving the other party written notice (a "Notice"). Within fifteen (15) days after delivery of a Notice, the Officers of both parties shall meet at a mutually acceptable time and place to exchange relevant information and to attempt to resolve the dispute. (b) Negotiation. If the matter has not been resolved within thirty (30) ----------- days after delivery of such Notice, or if the Officers fail to meet within fifteen (15) days after delivery of such Notice, either party may initiate mediation and, if applicable, arbitration in accordance with the procedure set forth in subsections (c) and (d) below. All negotiations conducted by the Officers pursuant to this clause are confidential and shall be treated as compromise and settlement negotiations for purposes of the Federal Rules of Evidence and State Rules of Evidence. (c) Mediation. In the event a dispute exists between the parties and the --------- respective Officers are unable to resolve the dispute, the parties agree to participate in a non-binding mediation procedure as follows: (i) A mediator will be selected by having counsel for each party agree on a single person to act as mediator. The parties' counsel as well as the Officers of each party and not more than two other participants from each party will appear before the mediator at a time and place determined by the mediator, but not more than sixty (60) days after delivery of a Notice. The fees of the mediator and other costs of mediation will be shared equally by the parties. (ii) Each party's counsel will have forty-five (45) minutes to present a review of the issue and argument before the mediator. After each counsel's presentation, the other counsel may present specific counter-arguments not to exceed ten (10) minutes. The 45-minute and 10-minute periods will be exclusive of the time required to answer questions from the mediator or attendees. (iii) After both presentations, the Officers may ask questions of the other side. At the conclusion of both presentations and the question periods, the Officers and their counsels will meet together to attempt to resolve the dispute. The length of the meeting will be as agreed between the parties. Either party may abandon the procedure at the end of the presentations and question periods if they feel it is not productive to go further. The mediation procedure is not binding on either party. (iv) The duties of the mediator are to be sure that the above set-out time periods are adhered to and to ask questions so as to clarify the issues and understandings of the parties. The mediator may also offer possible resolutions of the issues but has no duty to do so. (d) Arbitration. If the matter is not resolved after applying the ----------- mediation procedures set forth above, or if either party refuses to take part in the mediation process, the parties hereby agree to submit all controversies, claims and matters of difference that are unresolved to arbitration in Chicago, Illinois, according to the commercial rules and practices of the American Arbitration Association ("AAA") from time to time in force, and in accordance with the following provisions of this subsection (d), and unless otherwise agreed by the parties and subject to the rights of the parties as provided in Section 18.1 and Section 18.2 hereof (including the right not to continue to perform under this Agreement), they shall continue to perform under this Agreement during arbitration. (i) Arbitration discovery shall be conducted in accordance with the Federal Rules of Civil Procedure, with any disputes over the scope of discovery to be determined by the arbitrators, it being intended that the arbitrators shall allow limited, reasonable discovery prior to any hearing on the merits. (ii) Arbitration hereunder shall be by three independent and impartial arbitrators. Each of the parties shall appoint one arbitrator within thirty (30) days after initiation of arbitration and the two arbitrators so appointed shall select a third arbitrator within forty-five (45) days after initiation of arbitration. In the event that the parties or the arbitrators fail to select arbitrators as required above, the AAA shall select such arbitrators. (iii) The AAA shall have the authority to disqualify any arbitrator who it determines not to be independent and impartial. The arbitrators shall be entitled to a fee commensurate with their fees for professional services requiring similar time and effort. (iv) The arbitrators shall conduct a hearing no later than sixty (60) days after initiation of the matter to arbitration, and a decision shall be rendered by the arbitrators within thirty (30) days of the hearing. At the hearing, the parties shall present such evidence and witnesses as they may choose, with or without counsel. Adherence to formal rules of evidence shall not be required but the arbitration panel shall consider any evidence and testimony that it determines to be relevant, in accordance with procedures that it determines to be appropriate. The arbitration determination shall be in writing and shall specify the factual and legal bases for the determination. The arbitrators may award legal or equitable relief, including but not limited to specific performance. (v) The parties agree that this submission and agreement to arbitrate shall be governed by and specifically enforceable in accordance with the laws of the State of Illinois. Arbitration may proceed in the absence of any party if prior written notice of the proceedings has been given to such party. The parties agree to abide by all decisions and determinations rendered in such proceedings. Such decisions and determinations shall be final and binding on all parties. All decisions and determinations may be filed with the clerk of one or more courts, state, federal or foreign having jurisdiction over the party against whom it is rendered or its property, as a basis of judgment. (vi) The arbitrators' fees and other costs of the arbitration shall be borne by the party against whom the award is rendered, except as the arbitration panel may otherwise provide in its written opinion. ARTICLE XXII. WAIVER ------ 22.1 The failure of either party hereto to enforce any of the provisions of this Agreement, or the waiver thereof in any instance, shall not be construed as a general waiver or relinquishment on its part of any such provision, but the same shall nevertheless be and remain in full force and effect. ARTICLE XXIII. GOVERNING LAW ------------- 23.1 This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Illinois, without reference to its choice of law principles. Any litigation based hereon, or arising out of or in connection with a default by either party in the performance of its obligations hereunder, shall be brought and maintained exclusively in the courts of the State of Illinois or in the United States District Court for the Northern District of Illinois, and each party hereby irrevocable submits to the jurisdiction of such courts for the purpose of any such litigation and irrevocably agrees to be bound by any judgment rendered thereby in connection with such litigation. ARTICLE XXIV. RULES OF CONSTRUCTION --------------------- 24.1 The captions or headings in this Agreement are strictly for convenience and shall not be considered in interpreting this Agreement or as amplifying or limiting any of its content. Words in this Agreement which import the singular connotation shall be interpreted as plural, and words which import the plural connotation shall be interpreted as singular, as the identity of the parties or objects referred to may require. 24.2 Unless expressly defined herein, words having well known technical or trade meanings shall be so construed. All listing of items shall not be taken to be exclusive, but shall include other items, whether similar or dissimilar to those listed, as the context reasonably requires. 24.3 Except as set forth to the contrary herein, any right or remedy of FRONTIER or QWEST shall be cumulative and without prejudice to any other right or remedy, whether contained herein or not. 24.4 Except as expressly provided in Section 28.1, nothing in this Agreement is intended to provide any legal rights to anyone not an executing party of this Agreement. 24.5 This Agreement has been fully negotiated between and jointly drafted by the parties. 24.6 All actions, activities, consents, approvals and other undertakings of the parties in this Agreement shall be performed in a reasonable and timely manner, it being expressly acknowledged and understood that time is of the essence in the performance of obligations required to be performed by a date expressly specified herein. Except as specifically set forth herein, for the purpose of this Agreement the standards and practices of performance within the telecommunications industry in the relevant market shall be the measure of a party's performance. ARTICLE XXV. ASSIGNMENT AND DARK FIBER TRANSFERS ----------------------------------- 25.1 Except as provided below, QWEST shall not assign, encumber or otherwise transfer this Agreement or all or any portion of its rights or obligations hereunder to any other party without the prior written consent of FRONTIER, which consent will not be unreasonably withheld or delayed. Notwithstanding the foregoing, QWEST shall have the right, without FRONTIER's consent, to (i) subcontract any of its construction or maintenance obligations hereunder, or (ii) assign or otherwise transfer this Agreement in whole or in part (A) as collateral to any institutional lender to QWEST (or institutional lender to any permitted transferee or assignee of QWEST) subject to the prior rights and obligations of the parties hereunder, (B) to any parent, subsidiary or affiliate of QWEST, (C) to any person, firm or corporation which shall control, be under the control of or be under common control with QWEST, or (D) any corporation or other entity into which QWEST may be merged or consolidated or which purchases all or substantially all of the stock or assets of QWEST, or (E) any partnership, joint venture or other business entity of which QWEST or any wholly owned subsidiary of QWEST HOLDING CORPORATION owns at least 50 percent of the equity interests thereof and which cannot make major decisions without the consent of QWEST (or subsidiary of QWEST HOLDING CORPORATION); provided that the assignee or transferee in any such circumstance shall continue - ------------- to be subject to all of the provisions of this Agreement, including without limitation, this Section 25.1 (except that any lender referred to in clause (A) above shall not incur any obligations under this Agreement nor shall it be restricted from exercising any right of enforcement or foreclosure with respect to any related security interest or lien, so long as the purchaser in foreclosure is subject to the provisions of this Agreement, including, without limitation, this Section 25.1); and provided further that promptly following any --------------------- such assignment or transfer, QWEST shall give FRONTIER written notice identifying the assignee or transferee. In the event of any permitted partial assignment of any rights hereunder, QWEST shall remain the sole point of contact with FRONTIER. No permitted partial or complete assignment shall release or discharge QWEST from its duties and obligations hereunder. 25.2 Except as provided in this Section 25.2 and the following Section 25.3, FRONTIER shall not assign, encumber or otherwise transfer this Agreement or all or any of portion of its rights or obligations hereunder to any other party without the prior written consent of QWEST, which consent will not be unreasonably withheld or delayed. Subject to the provisions of Section 25.3 (which provision shall be binding upon any permitted assignee or transferee hereunder), FRONTIER shall have the right, without QWEST's consent, to assign or otherwise transfer this Agreement in whole or in part (i) as collateral to any institutional lender to FRONTIER (or institutional lender to any permitted transferee or assignee of FRONTIER) subject to the prior rights and obligations of the parties hereunder, (ii) to any parent, subsidiary or affiliate of FRONTIER, (iii) to any person, firm or corporation which shall control, be under the control of or be under common control with FRONTIER, or (iv) any other entity into which FRONTIER may be merged or consolidated or which purchases all or substantially all of the stock or assets of FRONTIER or (v) any partnership, joint venture or other business entity of which FRONTIER or any wholly owned subsidiary of FRONTIER CORPORATION owns at least 50 percent of the equity interests thereof and which cannot make major decisions without the consent of FRONTIER CORPORATION (or subsidiary of FRONTIER CORPORATION); provided that no assignment or other transfer under this clause (v) shall be permitted hereunder if its purpose or effect would constitute, directly or indirectly, a Restricted Transaction (as defined in Section 25.3(a)) or otherwise violate the provisions of Section 25.3(a); provided that the assignee ------------- or transferee in any such circumstance shall continue to be subject to all of the provisions of this Agreement, including without limitation this Section 25.2 and the following Section 25.3 (except that any lender referred to in clause (i) above shall not incur any obligations under this Agreement, nor shall it be restricted from exercising any right of enforcement or foreclosure with respect to any related security interest or lien, so long as the purchaser in foreclosure is subject to the provisions of this Agreement, including, without limitation, this Section 25.2 and the following Section 25.3); and provided -------- further that in any of circumstances described in clauses (ii), (iii) or (iv) - ------------ all of the payment obligations of FRONTIER hereunder for the remainder of the Term shall be fully guaranteed by Frontier Corporation or shall be paid in full as a condition to such transfer or assignment; and provided further that --------------------- promptly following any such assignment or transfer, FRONTIER shall give QWEST written notice identifying the assignee or transferee. In the event of any permitted partial assignment of any rights hereunder, FRONTIER shall remain the sole party and point of contact with QWEST hereunder. No permitted partial or complete assignment shall release or discharge FRONTIER or Frontier Corporation from its duties and obligations hereunder. 25.3 (a) * (b) * (c) Notwithstanding the provisions of Section 25.3(a), from the date hereof until the date that is thirty (30) days after the date hereof, FRONTIER may make a Permitted Transfer in up to twelve (12) of the Dark Fibers to be subject to the IRU in Segment 23 hereunder to a that particular third party separately identified by FRONTIER to, and approved by, QWEST as of the date hereof for this purpose (the "Permitted Segment 23 Acquiror"); provided that the Permitted Segment 23 Acquiror shall be an Interest Holder as - ------------- defined in Section 10.4 hereof and shall be subject to all of the obligations, limitations and requirements * CONFIDENTIAL TREATMENT APPLIED FOR otherwise applicable to FRONTIER under this Agreement, including, without limitation, Article XXV, with respect to the Dark Fibers so transferred and FRONTIER shall provide to QWEST written evidence, reasonably acceptable to QWEST, thereof; and provided further that the amount payable by the Permitted --------------------- Segment 23 Acquiror to FRONTIER in consideration of any such Permitted Transfer shall not be less than $ * per route mile. No such Permitted Transfer shall relieve FRONTIER from any of its obligations hereunder, or Frontier Corporation from any of its obligations under the Guaranty, and FRONTIER shall continue to be the sole party and point of contact with QWEST hereunder. 25.4 QWEST and FRONTIER recognize that QWEST may desire to obtain tax- deferred exchange treatment pursuant to Section 1031 of the Internal Revenue Code, as amended, with respect to certain of the Dark Fibers and Associated Property in which the IRUs are to be granted hereunder and which are used or held for use by QWEST in its business as of the date hereof (the "Existing Properties"), and FRONTIER agrees to reasonably cooperate as provided herein in obtaining such treatment (at no cost or expense to FRONTIER). Accordingly, notwithstanding any provision contained in this Agreement to the contrary, QWEST may, at its sole option, on or prior to the Acceptance Date for any relevant Segment, appoint a third party (the "Intermediary") as agent for QWEST with respect to the transfer of the Existing Properties to FRONTIER, and assign its rights under this Agreement (insofar as they relate to the Existing Properties) to such Intermediary. If QWEST so elects to appoint an Intermediary, QWEST shall notify FRONTIER, in writing, on or prior to the Acceptance Date with respect to the relevant Segment, and shall provide FRONTIER with copies of all agreements between QWEST and the Intermediary. If QWEST appoints an Intermediary, QWEST shall transfer the Existing Properties or such portion thereof as designated by QWEST to the Intermediary, and FRONTIER shall pay the IRU Fee with respect to the Existing Properties (as designated by QWEST) to the Intermediary; provided that QWEST agrees that such transfer shall be expressly ------------- subject to this Agreement, and that QWEST shall remain liable for performance under this Agreement to the same extent as if it had not appointed an Intermediary; provided that in such event QWEST shall indemnify and hold ------------- harmless FRONTIER from and against any and all loss, damage, cost or expense suffered, sustained or incurred by FRONTIER in connection with any such cooperation and/or payment of such IRU Fee to such Intermediary. 25.5 This Agreement and each of the parties' respective rights and obligations under this Agreement, shall be binding upon and shall inure to the benefit of the parties hereto and each of their respective permitted successors and assigns. ARTICLE XXVI. REPRESENTATIONS, WARRANTIES AND ACKNOWLEDGMENTS ----------------------------------------------- 26.1 Each party represents and warrants that: * CONFIDENTIAL TREATMENT APPLIED FOR (a) it has the full right and authority to enter into, execute, deliver and perform its obligations under this Agreement; (b) this Agreement constitutes a legal, valid and binding obligation enforceable against such party in accordance with its terms, subject to bankruptcy, insolvency, creditors' rights and general equitable principles; and (c) its execution of and performance under this Agreement shall not violate any applicable existing regulations, rules, statutes or court orders of any local, state or federal government agency, court or body. 26.2 QWEST represents and warrants that the Segments of the QWEST System that it has heretofore constructed or will construct pursuant hereto have been or shall be designed, engineered, installed, and constructed in compliance with the terms and provisions of this Agreement and in material compliance with any and all applicable building, construction and safety codes for such construction and installation, as well as any and all other applicable governmental laws, codes, ordinances, statutes and regulations. 26.3 With respect to each of the Segments that has been constructed prior to the date hereof, QWEST represents and warrants that such Segment, when constructed, generally was constructed substantially in accordance with the specifications set forth in Exhibit C hereto, and QWEST has no actual knowledge on the date hereof of any material deviation in the construction of such Segment from such specifications. If, within twelve (12) months from the respective Acceptance Date for each of the Segments referred to in this Section 26.3 , there is an event or occurrence that is caused by a material deviation in the construction or installation of any of such Segments from such specifications, and which has a material adverse affect on the operation or performance of the FRONTIER Fibers in such Segment, then, promptly following receipt of written notice thereof from FRONTIER, QWEST, at its sole cost and expense, shall undertake to repair the affected portion of such Segment to the relevant specifications. 26.4 QWEST represents and warrants that the Segments of the QWEST System that it constructs pursuant hereto shall be constructed in all material respects in accordance with the specifications set forth in Exhibit C hereto; provided that FRONTIER's sole rights and remedies with respect to any failure to - ------------- so construct shall be (i) to inspect the construction, installation and splicing, and participate in the acceptance testing, of the FRONTIER Fibers incorporated in each such Segment, during the course and at the time of the relevant construction, installation and testing periods for each Segment, as provided in Articles III and IV, (ii) if, during the course of such construction, installation and testing any material deviation from the specifications set forth in Exhibit C is discovered, the construction or installation of the affected portion of the Segment shall be repaired to such specification by QWEST at QWEST's sole cost and expense, and (iii) if, at any time prior to the date that is twelve (12) months after the Acceptance Date, FRONTIER shall notify QWEST in writing of its discovery of a material deviation from the specifications set forth in Exhibit C with respect to any such Segment (which notice shall be given within thirty (30) days of such discovery) the construction or installation of the affected portion of such Segment shall be repaired to such specification by QWEST at QWEST's sole cost and expense. For purposes hereof, "material deviation" means a deviation which is reasonably likely to have a material adverse affect on the operation or performance of the FRONTIER Fibers affected thereby. 26.5 EXCEPT AS SET FORTH IN THE FOREGOING PARAGRAPHS 26.2, 26.3 AND 26.4, AND EXCEPT AS MAY BE SET FORTH SPECIFICALLY AND EXPRESSLY ELSEWHERE IN THIS AGREEMENT, QWEST MAKES NO WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE FRONTIER FIBERS OR THE SEGMENTS DELIVERABLE HEREUNDER, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSE, AND ALL SUCH WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED. 26.7 The parties acknowledge and agree that on and after the relevant Acceptance Date FRONTIER's sole rights and remedies with respect to any defect in or failure of the FRONTIER Fibers to perform in accordance with the applicable vendor's or manufacturer's specifications with respect to the FRONTIER Fibers shall be limited to the particular vendor's or manufacturer's warranty with respect thereto, which warranty, to the extent permitted by the terms thereof, shall be assigned to FRONTIER upon its request. In the event any maintenance or repairs to the QWEST System are required as a result of a breach of any warranty made by any manufacturers, contractors or vendors, unless FRONTIER shall elect to pursue such remedies itself, QWEST shall pursue all remedies against such manufacturers, contractors or vendors on behalf of FRONTIER, and QWEST shall reimburse FRONTIER's costs for any maintenance FRONTIER has incurred as a result of any such breach of warranty to the extent the manufacturer, contractor or vendor has paid such costs. 26.8 QWEST and FRONTIER acknowledge and agree: (a) that each grant of the IRU in the Frontier Fibers and Associated Property for a Segment hereunder (each herein called a "Grant") will be treated by each of them, vis-a-vis the other, as of and after the relevant effective date thereof as described in Section 6.1, an executed grant to FRONTIER of an interest in real property with respect to such Segment; and (b) that, from and after the effective date of a Grant with respect to a Segment, no material obligation of either QWEST or FRONTIER will remain to be performed with respect to such Grant or Segment; and (c) that, with respect to each such Grant, this Agreement is not intended as an executory contract or unexpired lease subject to assumption, rejection, or assignment by the trustee in bankruptcy of any party to this Agreement, including, without limitation, assumption, rejection, or assignment under Bankruptcy Code Section 365. ARTICLE XXVII. ENTIRE AGREEMENT; AMENDMENT --------------------------- 27.1 This Agreement, together with any Confidentiality Agreement entered into in connection herewith and the letter identifying the Permitted System Acquiror and the Sacramento/Seattle Acquiror as contemplated by Section 25.3(b) hereof and the Permitted Segment 23 Acquiror as contemplated by Section 25.3(c) and the letter dated October 16, 1996 regarding certain state and local tax matters constitutes the entire and final agreement and understanding between the parties with respect to the subject matter hereof and supersedes all prior agreements relating to the subject matter hereof, which are of no further force or effect. The Exhibits referred to herein are integral parts hereof and are hereby made a part of this Agreement. To the extent that any of the provisions of any Exhibit hereto are inconsistent with the express terms of this Agreement, the terms of this Agreement shall prevail. This Agreement may only be modified or supplemented by an instrument in writing executed by a duly authorized representative of each party and delivered to the party relying on the writing. ARTICLE XXVIII. NO PERSONAL LIABILITY --------------------- 28.1 Each action or claim against any party arising under or relating to this Agreement shall be made only against such party as a corporation, and any liability relating thereto shall be enforceable only against the corporate assets of such party. No party shall seek to pierce the corporate veil or otherwise seek to impose any liability relating to, or arising from, this Agreement against any shareholder, employee, officer or director of the other party. Each of such persons is an intended beneficiary of the mutual promises set forth in this Article and shall be entitled to enforce the obligations of this Article. ARTICLE XXIX. RELATIONSHIP OF THE PARTIES --------------------------- 29.1 The relationship between FRONTIER and QWEST shall not be that of partners, agents, or joint venturers for one another, and nothing contained in this Agreement shall be deemed to constitute a partnership or agency agreement between them for any purposes, including, but not limited to federal income tax purposes. FRONTIER and QWEST, in performing any of their obligations hereunder, shall be independent contractors or independent parties and shall discharge their contractual obligations at their own risk subject, however, to the terms and conditions hereof. ARTICLE XXX. LATE PAYMENTS ------------- 30.1 In the event a party shall fail to make any payment under this Agreement when due, such amounts shall accrue interest, from the date such payment is due until paid, including accrued interest compounded monthly, at an annual rate equal to * of the prime rate of interest published by The Wall Street Journal as the base rate on corporate loans posted by a substantial percentage of the nation's largest banks on the date any such payment is due or, if lower, the highest percentage allowed by law. ARTICLE XXXI. SEVERABILITY ------------ 31.1 If any term, covenant or condition contained herein shall, to any extent, be invalid or unenforceable in any respect under the laws governing this Agreement, the remainder of this Agreement shall not be affected thereby, and each term, covenant or condition of this Agreement shall be valid and enforceable to the fullest extent permitted by law. ARTICLE XXXII. COUNTERPARTS ------------ 32.1 This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. ARTICLE XXXIII. CERTAIN DEFINITIONS ------------------- 33.1 The following terms shall have the stated definitions in this Agreement. (a) "Cable" means the fiberoptic cable and the fibers contained therein, and associated splicing connections, splice boxes, and vaults to be installed by QWEST as part of the QWEST System. (b) "Costs" means actual, direct costs paid or payable in accordance with the established accounting procedures generally used by QWEST and which it utilizes in billing third parties for reimbursable projects which costs shall include, without limitation, the following: (i) internal labor costs, including wages and salaries, and benefits and overhead allocable to such labor costs (with the overhead allocation percentage equal to thirty percent (30%)), and (ii) other direct costs and out-of-pocket expenses on a pass-through basis (e.g., equipment, materials, supplies, contract services, etc.). (c) "Dark Fiber" means fiber provided without electronics or optronics, and which is not "lit" or activated; provided that such fiber may be used in any ------------- manner and for any purpose permitted under Article XI. * CONFIDENTIAL TREATMENT APPLIED FOR (d) "Estimated Delivery Date" means, with respect to each Segment of the QWEST System to be delivered hereunder, the date set forth in Exhibit A hereto with respect to such Segment, as any such date may be extended for and during (A) the period of any delay described in Article XX and/or (B) the period of any payment default pursuant to Section 18.1 with respect to any Segment and/or (C) the aggregate number of days of the FRONTIER Review Period or Periods (in the event of multiple remedy attempts) under Section 4.2 with respect to such Segment. (e) "Impositions" means all taxes, fees, levies, imposts, duties, charges or withholdings of any nature (including, without limitation, gross receipts taxes and franchise, license and permit fees), together with any penalties, fines or interest thereon (except for penalties or interest imposed as a direct result of acts or failures to act on the part of QWEST) arising out of the transactions contemplated by this Agreement and/or imposed upon the QWEST System by any federal, state or local government or other public taxing authority. (f) "Indefeasible Right of Use" or "IRU" means (i) an exclusive, indefeasible right of use, for the purposes described herein, in the FRONTIER Fibers, as granted in Article II, and (ii) an associated non-exclusive, indefeasible right of use, for the purposes described herein, in the Associated Property; provided that the IRUs granted hereunder do not provide FRONTIER with ------------- any ownership interest in or other rights to physical access to, control of, modification of, encumbrance in any manner of, or other use of the QWEST System except as expressly set forth herein. (g) "Pre-Existing Cal-Fiber Lien" means any and all security interests and liens in favor of NTFC Capital Corporation (and its successors and assigns) securing up to $28,000,000 principal amount plus accrued interest of indebtedness of QWEST under the Term Loan Agreement dated as of June 16, 1994 between QWEST (then known as Southern Pacific Telecommunications Company) and NTFC Capital Corporation, as the same may be amended from time to time, on the collateral described therein, such collateral generally being described as the Cal-Fiber telecommunications system located between One Wilshire Building, 624 South Grand Avenue, Los Angeles, California and 101 Roseville Street, Roseville, California. (h) "POP" means the FRONTIER point of presence at locations along the QWEST System route. (i) "PSWP" means Planned System Work Period, which is a prearranged period of time reserved for performing certain work on the QWEST System that may potentially impact traffic. Generally, this will be restricted to weekends, avoiding the first and last weekend of each month and high-traffic weekends. The PSWP shall be agreed upon pursuant to Exhibit H. (j) "QWEST System" shall have the meaning ascribed thereto in Recital A. (k) When used herein in connection with a covenant of a party to this Agreement "best efforts" shall not obligate such party, unless otherwise specifically required by the operative covenant, to make unreimbursed expenditures (other than costs or expenditures that would have been required of such party in the absence of the requirements of such covenant) that are material in amount, in light of the circumstances to which the requirement to use best efforts applies. In confirmation of their consent and agreement to the terms and conditions contained in this IRU Agreement and intending to be legally bound hereby, the parties have executed this IRU Agreement as of the date first above written. "QWEST": QWEST COMMUNICATIONS CORPORATION, a Delaware corporation By: /s/ Robert S. Woodruff ____________________________________________________ Name: Robert S. Woodruff Title: Executive Vice President "FRONTIER": FRONTIER COMMUNICATIONS INTERNATIONAL INC., a Delaware corporation By: /s/ Robert L. Barrett ____________________________________________________ Name: Robert L. Barrett Title: Executive Vice President Frontier - Exhibit A-1 System Description and Delivery Dates
Estimated Estimated Segment System Route Delivery No. Segment (Priority Segments in Italics) Miles Date - ------------------------------------------------------------------------------------------------------------------- Basic Route - ------------------------------------------------ 1A Chicago - Detroit 305 1/31/98 1B Detroit - Cleveland 165 2/15/98 1C Cleveland - Pittsburgh 162 3/1/98 1D Pittsburgh - Philadelphia 356 3/31/98 1E Philadelphia - Washington, D.C. 138 4/30/98 Chicago - Detroit - Cleveland - Washington, DC TOTAL 1,126 4/30/98 2A Cleveland - Columbus 133 8/31/97 2B Columbus - Cincinnati 125 8/31/97 Cleveland - Cincinnati TOTAL 258 8/31/97 4 Indianapolis - Chicago 215 12/31/97 5 Indianapolis - St. Louis 248 7/31/97 6 St. Louis - Kansas City 297 7/1/97 7 Kansas City - Topeka 75 7/31/97 8 Denver - Topeka 565 7/31/97 9A Denver - Grand Junction 271 7/31/97 9B Grand Junction - Salt Lake City 295 7/31/97 Denver - Salt Lake City TOTAL 566 7/31/97 10A Salt Lake City - Reno 575 7/31/97 10B Reno - Roseville 136 7/31/97 Salt Lake - Roseville TOTAL 711 7/31/97 11A Roseville - Oakland 111 4/30/97 11B Oakland - San Jose 43 4/30/97 Roseville - San Jose TOTAL 154 4/30/97 12A San Jose - Salinas 71 7/1/97 12B Salinas - San Luis Obispo 132 7/1/97 12C San Luis Obispo - Santa Barbara 119 7/1/97 12D Santa Barbara - Los Angeles 107 7/1/97 San Jose - Los Angeles TOTAL 429 7/1/97
A-1 - 1 Frontier - Exhibit A-1 System Description and Delivery Dates
Estimated Estimated Segment System Route Delivery No. Segment (Priority Segments in Italics) Miles Date - ------------------------------------------------------------------------------------------------------------------- 13A Los Angeles - Anaheim 32 7/1/97 13B Anaheim - San Diego 132 8/31/97 13C San Diego - Yuma 235 12/31/97 13D Yuma - Phoenix 187 1/31/98 Los Angeles - San Diego - Phoenix TOTAL 586 1/31/98 14A Phoenix - Tucson 123 2/28/98 14B Tucson - El Paso 310 3/31/98 Phoenix - Tucson - El Paso TOTAL 433 3/31/98 15A El Paso - San Antonio 586 5/31/98 15B San Antonio - Austin 85 1/31/98 15C Austin - Houston 221 12/31/97 El Paso - San Antonio - Houston TOTAL 892 5/31/98 16 Houston - Dallas 269 4/30/97 17A Dallas - Oklahoma City 264 1/31/98 17B Oklahoma City - Tulsa 119 1/31/98 17C Tulsa - Kansas City 256 1/31/98 Dallas - Kansas TOTAL 639 1/31/98 18 Cincinnati - Indianapolis 117 7/1/97 23 Denver - El Paso TOTAL 746* 3/31/98 24A Sacramento - Chico 98* 1/31/98 24B Chico - Redding 75* 1/31/98 24C Redding - Medford 177* 1/31/98 24D Medford - Eugene 206* 1/31/98 24E Eugene - Portland 123* 1/31/98 Sacramento - Portland TOTAL 679* 1/31/98 25 Portland - Seattle 182* 1/31/98
* Dates shown for segments indicated are for first 12 fibers; second 12 are due 12 months later A-1 - 2 Frontier - Exhibit A-1 System Description and Delivery Dates
Estimated Estimated Segment System Route Delivery No. Segment (Priority Segments in Italics) Miles Date - ------------------------------------------------------------------------------------------------------------------- 27 San Jose - San Francisco 56 4/30/97 28A Boston - Albany 208 12/31/97 28B Albany - Buffalo 298 12/31/97 28C Buffalo - Cleveland 197 12/31/97 Boston - Cleveland TOTAL 703 12/31/97 29 Albany - New York City 157 5/31/98 30 New York City - Philadelphia 95 5/31/98 BASIC ROUTE 10,198 5/31/98 OPTION 1 Route - ------------------------------------------------ 22A Chicago - Cedar Rapids 255 3/31/98 22B Cedar Rapids - Des Moines 120 4/30/98 22C Des Moines - Omaha 140 4/30/98 22D Omaha - Topeka 224 6/30/98 TOTAL - Chicago - Topeka, OPTION 1 739 6/30/98 BASIC ROUTE & OPTION 1 SUB TOTAL 10,937 6/30/98 OPTION 1A Route (assuming that Option 1 is not exercised) - ------------------------------------------------ 21A Chicago - Milwaukee 84 10/31/98 21B Milwaukee - Green Bay 118 10/31/98 21C Green Bay - Minneapolis 295 10/31/98 21D Minneapolis - Des Moines 281 10/31/98 22C Des Moines - Omaha 140 10/31/98 22D Omaha - Topeka 224 10/31/98 TOTAL - Chicago - Des Moines, OPTION 1A 1,142 10/31/98 BASIC ROUTE & OPTION 1A SUB TOTAL 11,340 10/31/98
A-1 - 3 Frontier - Exhibit A-1 System Description and Delivery Dates
Estimated Estimated Segment System Route Delivery No. Segment (Priority Segments in Italics) Miles Date - ------------------------------------------------------------------------------------------------------------------- OPTION 2 Route - ------------------------------------------------ 3 Cincinnati - Louisville 107 7/30/98 19A Louisville - Nashville 189 9/30/98 19B Nashville - Chattanooga 147 10/31/98 19C Chattanooga - Atlanta 137 10/31/98 Louisville - Nashville - Atlanta TOTAL 473 10/31/98 20A Atlanta - Charlotte 261 10/31/98 20B Charlotte - Raleigh 174 8/31/98 20C Raleigh - Richmond 301 10/31/98 20D Richmond - Washington, DC 110 10/31/98 Atlanta - Raleigh - Washington TOTAL 846 10/31/98 OPTION 2 TOTAL 1,426 10/31/98 TOTAL (BASIC, OPTION 1 & OPTION 2 ROUTES) 12,363 10/31/98 TOTAL (BASIC, OPTION 1A & OPTION 2 ROUTES) 12,766 10/31/98
A-1 - 4 EXHIBIT A-2 [MAP APPEARS HERE] Exhibit A-2 is a map of the United States with the heading "General Route Map" showing state lines and routes of the fiber optic network upon completion. The legend shows that a red line is the Base Route, a blue line is Route 1, an orange line is Route 1A, a green line is Route 2, and one inch equals 225 miles. The Base Route travels east to west through Massachusetts, Connecticut, New York, Pennsylvania, New Jersey, Maryland, Michigan, Ohio, Indiana, Illinois, Missouri, Kansas, Colorado, Utah and Nevada to California. The Base Route also travels north to south through Washington, Oregon, California, Arizona, New Mexico, Texas and Oklahoma. Route 1 travels east to west through Illinois, Iowa, Nebraska and Kansas. Route 1A travels east to west through Illinois, Wisconsin, Minnesota and Iowa. Route 2 travels east to west through Maryland, Virginia, North Carolina, South Carolina, Georgia, Tennessee, Kentucky and Ohio. EXHIBIT A-3 BASIC AND OPTIONAL DETAILED ROUTE MAPS ** CONFIDENTIAL TREATED HAS BEEN REQUESTED FOR THIS MATERIAL ** Exhibit A-4 Designated Endpoint and Intermediate Cities
CITY ST LATA LATA NAME CITY ST LATA LATA NAME - ----------------- -- ---- --------------- -------------- -- ---- -------------- Phoenix AZ 666 Phoenix Youngstown OH 322 Youngstown Tucson AZ 668 Tucson Oklahoma City OK 536 Oklahoma City Yuma AZ 666 Phoenix Tulsa OK 538 Tulsa Anaheim CA 730 Los Angeles Eugene OR 670 Eugene Chico CA 724 Chico Medford OR 670 Eugene Los Angeles CA 730 Los Angeles Portland OR 672 Portland Oakland CA 722 San Francisco Salem OR 672 Portland Redding CA 724 Chico Harrisburg PA 226 Capitol, PA Roseville CA 726 Sacramento Philadelphia PA 228 Philadelphia Sacramento CA 726 Sacramento Pittsburgh PA 234 Pittsburgh Salinas CA 736 Monterey Austin TX 558 Austin San Diego CA 732 San Diego Bryan TX 570 Hearne San Francisco CA 722 San Francisco Dallas TX 552 Dallas San Jose CA 722 San Francisco El Paso TX 540 El Paso San Luis Obispo CA 740 San Luis Obispo Ft. Worth TX 552 Dallas Santa Barbara CA 730 Los Angeles Houston TX 560 Houston Colorado Springs CO 658 Colorado Spr. Mexia TX 556 Waco Denver CO 656 Denver San Antonio TX 566 San Antonio Grand Junction CO 656 Denver Provo UT 660 Utah Pueblo CO 658 Colorado Spr. Salt Lake City UT 660 Salt Lake City Washington DC 236 Washington DC Seattle WA 674 Seattle Chicago IL 358 Chicago OPTION 1 Indianapolis IN 336 Indianapolis Des Moines IA 632 Des Moines South Bend IN 332 South Bend Cedar Rapids IA 635 Cedar Rapids Topeka KS 534 Topeka Lincoln NE 958 Lincoln Boston MA 128 East Mass Omaha NE 644 Omaha Baltimore MD 238 Baltimore Battle Creek MI 348 Grand Rapids OPTION 1A Detroit MI 340 Detroit Des Moines IA 632 Des Moines Kansas City MO 524 Kansas City Minneapolis MN 628 Minneapolis St. Louis MO 520 St. Louis Owatonna MN 620 Rochester Newark NJ 224 North Jersey Lincoln NE 958 Lincoln Trenton NJ 222 Delaware Valley Omaha NE 644 Omaha Albuquerque NM 664 New Mexico Eau Claire WI 352 Northwest WI Santa Fe NM 664 New Mexico Green Bay WI 350 Northeast WI Reno NV 720 Reno Milwaukee WI 356 Southeast WI Albany NY 134 Albany OPTION 2 Buffalo NY 140 Buffalo Atlanta GA 438 Atlanta New York NY 132 New York Metro Bowling Green KY 464 Owensboro Poughkeepsie NY 133 Poughkeepsie Louisville KY 462 Louisville Rochester NY 974 Rochester Charlotte NC 422 Charlotte Syracuse NY 136 Syracuse Greensboro NC 424 Greensboro Utica NY 136 Syracuse Raleigh NC 426 Raleigh
A-4-1 Exhibit A-4 Designated Endpoint and Intermediate Cities
CITY ST LATA LATA NAME CITY ST LATA LATA NAME - -------------- -- ---- -------------- -------------- -- ---- ----------- White Plains NY 132 New York Metro Rocky Mount NC 951 Rocky Mount Akron OH 325 Akron Greenville SC 430 Greenville Cincinnati OH 922 Cincinnati Chattanooga TN 472 Chattanooga Cleveland OH 320 Cleveland Nashville TN 470 Nashville Columbus OH 324 Columbus Fredericksburg VA 246 Culpeper Dayton OH 328 Dayton Portsmouth VA 252 Norfolk Toledo OH 326 Toledo Richmond VA 248 Richmond
EXHIBIT B IRU Fee Payment Schedule ------------------------ 1. Except as provided in paragraphs 2, 3 and 4 below, the IRU Fee for each Segment shall be paid in accordance with the following schedule: (i) *% upon execution of the IRU Agreement (ii) *% upon commencement of construction of such Segment (iii) *% upon completion of conduit installation of such Segment (iv) *% upon completion of fiber cable placement in such Segment (v) *% upon completion of fiber splicing and completion of civil construction in such Segment (vi) *% on the Acceptance Date for such Segment 2. The IRU Fee for Segment 23 shall be paid in accordance with the following schedule: (i) *% upon execution of the IRU Agreement (ii) *% upon the Acceptance Date for the first 12 Dark Fibers delivered in accordance with Exhibit A (iii) *% upon the Acceptance Date for the second 12 Dark Fibers delivered in accordance with Exhibit A 3. The IRU Fee for Segments 24A, 24B, 24C, 24D, 24E and 25 shall be paid in accordance with the following schedule: (i) *% upon execution of the IRU Agreement (ii) *% upon commencement of construction of such Segment (iii) *% upon completion of conduit installation of such Segment (iv) *% upon completion of fiber cable placement in such Segment (v) *% upon completion of fiber splicing and completion of civil construction in such Segment * Confidential Treatment Applied For B-1 (vi) *% on the Acceptance Date for the first 12 Dark Fibers delivered in accordance with Exhibit A (vii) *% on the Acceptance Date for the second 12 Dark Fibers delivered in accordance with Exhibit A 4. Notwithstanding anything to the contrary contained in this Exhibit B or the IRU Agreement, no part of the IRU Fee for a Segment shall be payable by Frontier (other than the *% of the IRU Fee due upon execution of the IRU Agreement), unless such Segment, when completed as planned, would be connected (whether through one or more other completed Segment or Segments scheduled for contemporaneous completion) or contiguous to one of the following cities where Frontier maintains a switch site: Los Angeles, California; San Francisco, California; Seattle, Washington; Denver, Colorado; Dallas, Texas; Atlanta, Georgia; Kansas City, Missouri; Chicago, Illinois; Milwaukee, Wisconsin; Detroit, Michigan; Cleveland, Ohio; Washington, D.C., Philadelphia, Pennsylvania; New York City; Boston, Massachusetts; and Rochester, New York. 5. Upon any election by FRONTIER pursuant to Section 1.4 that results in a redetermination of the IRU Fee pursuant to Section 2.1, (i) if such redetermination results in an increase in the IRU Fee with respect to any Segment, the increased amount with respect to that Segment shall be paid by FRONTIER to QWEST upon such election, in accordance with paragraph 1 above of the foregoing payment schedule, and (ii) if such redetermination results in a decrease in the IRU Fee with respect to any Segment, the amount representing the difference between the original IRU fee and the redetermined decreased IRU fee (the "Decrease") with respect to that Segment either (A) shall be credited ------ against the subsequent IRU Fee payment or payments to be made by FRONTIER in accordance with the percentages set forth in paragraph 1 of the foregoing payment schedule with respect to such Segment or other Segments to be delivered hereunder or, (B) if amounts shall have previously been paid by FRONTIER with -- respect to such Segment, at FRONTIER's election, shall be refunded to FRONTIER by QWEST. 6. For purposes of determining the occurrence of the construction milestones triggering payment obligations hereunder, the following shall apply: (i) Commencement of construction of a Segment shall mean the establishment of a field office followed promptly by mobilization of either in-house crews or the subcontract of a construction manager. (ii) Completion of conduit installation shall mean the completion of installation of the conduit system for the Segment, with handholds and manholes, ready for Cable pulling. (iii) Completion of fiber cable placement shall mean the fiber cable is either pulled into the conduit or completely installed in aerial installation, but without splicing. In the event of aerial construction, the IRU Fee installment otherwise due upon * Confidential Treatment Applied For B-2 completion of conduit installation shall be due and payable at the same time as the installment due upon completion of fiber cable placement. (iv) Completion of fiber splicing and civil construction shall mean all fibers are spliced and ready for testing and civil facilities are ready for the customer to occupy and install their equipment (v) Acceptance Date shall have the meaning established in the IRU Agreement. B-3 EXHIBIT C Construction Specifications --------------------------- 1.0 General. ------- The intent of this document is to outline the specifications for construction of a fiber optic cable system. In all cases, the standards contained in this document or the standards of the federal, state, local or private agency having jurisdiction, whichever is stricter, shall be followed. 2.0 Material. -------- Steel or PVC conduit shall be minimum schedule * wall thickness. Any exposed steel conduit, brackets or hardware (i.e., bridge attachments) shall be hot-dipped galvanized after fabrication. Handholes shall have a minimum * loading rating or * with * to * inches of cover. Manholes shall have a minimum * loading rating. Innerducts used shall be * or *. Buried cable warning tape shall be 3 inches wide and display "Warning: Buried Fiber Optic Cable," name and logo, and local and emergency One Call "800" numbers repeated every 24 inches. Warning signs will display universal "Do Not Dig" symbol, "Warning: Buried Fiber Optic Cable," company name and logo, and local and emergency One Call "800" numbers. Fiber optic cable shall be single armored. 3.0 Minimum Depths. -------------- Minimum cover required in the placement of conduit shall be 42 inches, except in the following instances: (a) The minimum cover in borrow ditches adjacent to roads, highways, railroads, and interstate highways is * inches below the cleanout line or existing grade, whichever is greater. * Confidential Treatment Applied For (b) The minimum cover across streams, river washes and other waterways is 60 inches below the cleanout line or existing grade, whichever is greater. Steel conduit will be placed at all such crossings unless the crossing is directional bored. (c) At locations where conduit crosses other subsurface utilities or other structures, the conduit shall be installed to provide a minimum of * inches of vertical clearance and applicable minimum depth can be maintained; otherwise the conduit will be installed under the existing utility or other structure. If, however, * inches cannot be obtained, the cable shall be encased in steel pipe rather than conduit. No fiber optic cable shall be buried without being surrounded by conduit or steel pipe. (d) In rock, the conduit shall be placed to provide a minimum of * inches below the surface of the solid rock, or provide a minimum of * inches of total cover, whichever requires the least rock excavation. PVC or HDPE conduit will be backfilled with 6 inches of select materials (padding) in rock areas. (e) In the case of the use/conversion of existing steel pipelines or salvaged conduit systems, the existing depth shall be considered adequate. 4.0 Buried Cable Warning Tape. ------------------------- All conduit will be installed with buried cable warning tape except where existing steel pipelines or salvaged conduit systems are used. The warning tape shall generally be placed at a depth of 12 inches below grade and directly above the conduit. 5.0 Conduit Construction. -------------------- Conduits may be placed by means of trenching, plowing, jack and bore, or directional bore. Conduits will generally be placed on a level grade parallel to the surface, with only gradual changes in grade elevation. Steel conduit will be joined with threaded collars, Zap-Lok or welding. All paved city, state, federal and interstate highways and railroad crossings will be encased in steel conduit. If the crossing is at grade, steel is not required if the cable is placed with * feet of cover or more, and the crossing is directional bored. All crossings of major streams, rivers, bays and navigable waterways will be placed in HDPE, PVC or steel conduit. At all foreign utility/underground obstacle crossings, split/solid steel conduit will be placed and will extend at least 5 feet beyond the outer limits of the obstacle in both directions. All jack and bores will use steel conduit. All directional bores will use HDPE or steel conduit. * Confidential Treatment Applied For C-2 Any cable placed in rock will be placed in HDPE, PVC or steel conduit. Any cable placed in swamp or wetland areas will be placed in HDPE, PVC or steel conduit. All conduits placed on bridges will be steel. All conduits placed on bridges shall have expansion joints placed at each structural (bridge) expansion joint or at least every 150 feet, whichever is the shorter distance. 6.0 Innerduct Installation. ---------------------- Innerduct(s) shall be installed in all steel conduits. No cable will be placed directly in any split/solid steel conduit without innerduct. Innerduct(s) shall extend beyond the end of all conduits a minimum of 18 inches. 7.0 Cable Installation. ------------------ The fiber optic cable shall be installed using a powered pulling winch and hydraulic-powered assist pulling wheels. The maximum pulling force to be applied to the fiber optic cable shall be 600 pounds. Bends of small radii (less than 20 times the outside diameter of the cable) and twists that may damage the cable shall be avoided during cable placement. The cable shall be lubricated and placed in accordance with the cable manufacturer specifications. A pulling swivel break-away rated at 600 pounds shall be used at all times. All splices will be contained in a handhole or manhole. A minimum of * meters of slack cable will be left in all intermediate handholes or manholes. A minimum of * meters of slack cable will be left in all splice locations. A minimum of * meters of slack cable will be left in all facility locations (i.e., POP sites, switch sites, regens or CEVs). 8.0 Manholes and Handholes. ---------------------- Manholes shall be placed in traveled surface streets and shall have locking lids. * Confidential Treatment Applied For C-3 Handholes shall be placed in all other areas and be installed with a minimum of 18 inches of soil covering the lid. 9.0 EMS Markers. ----------- EMS markers shall be placed 6 inches directly above the lid of all buried handholes and assist points. EMS markers fabricated into the lids of handholes are acceptable. 10.0 Cable Markers (Warning Signs). ----------------------------- Cable markers (with the same information as buried cable warning tape) shall be installed at all changes in cable running line direction, splices, waterways, subsurface utilities, handholes and at both sides of street, highway, bridge or railroad crossings. At no time shall any markers be spaced more than 500 feet apart in metro areas and 1,000 feet apart in non- metro areas. Markers shall be positioned so that they can be seen from the location of the cable and generally set facing perpendicular to the cable running line. 11.0 Compliance. ---------- All work will be done in strict accordance with federal, state, local and applicable private rules and laws regarding safety and environmental issues, including those set forth by OSHA and the EPA. In addition, all work and the resulting fiber system will comply with the current requirements of all governing entities (FCC, NEC, DEC, and other national, state, and local codes). 12.0 As Built Drawings. ----------------- As-built drawings will contain a minimum of the following: 1) Information showing the location of running line, relative to permanent landmarks, including but not limited to, railroad mileposts, boundary crossings and utility crossings. 2) Splice locations 3) Manhole and handhole locations 4) Conduit information (type, length, expansion joints, etc.) 5) Cable information (manufacturer, type of fiber, type of cable, fiber assignments, final cable lengths) 6) Notation of all deviations from specifications (depth, etc.) 7) ROW detail (type, centerline distances, boundaries, waterways, road crossings, known utilities and obstacles) 8) Cable marker locations and stationing C-4 9) Regeneration locations and floorplans to include FDP assignments (also labeled on site) Drawings will be updated with actual field data during and after construction. Metro areas scale shall not exceed 1 inch = 200 feet. Rural areas scale shall not exceed 1 inch = 500 feet. As-builts will be provided within * days after acceptance, in both hard copy and electronic format (Auto-CAD version 13.0 or later). Updates to the as-builts will be provided within * days of completion of change, like a relocation project. 13.0 Aerial Construction. ------------------- Subject to prior approval by both parties (which approval shall not be unreasonably withheld), aerial construction methods will only be used when buried construction techniques are impractical due to environmental conditions, schedule or economic considerations, right of way issues, or code restrictions. The parties acknowledge that aerial construction on utility towers (not utility poles) using optical groundwire or all dielectric self-support methods may be used without FRONTIER approval, provided QWEST agrees to give FRONTIER reasonable prior notice of its decision to use such aerial methods. Aerial design standards and construction techniques will conform with industry-accepted practices for aerial fiber optic cable systems. All aerial plant must comply with applicable national (NEC, NESC, etc.), state, and local codes. The fiber optic cable placed on an aerial system shall be armored and designed for aerial applications. The cable will be placed in accordance with manufacturer specifications. Cable tension will be monitored during placement. Cable rollers will be placed at a maximum interval of 35 feet. Cable expansion loops will be placed at every pole. Cable identification/warning tags will be placed at every pole. All cable splices will be buried in handholes or manholes. Cable sheath to suspension strand bonds and grounding will be performed at the first and last pole of the system and at 0.25 mile intervals. Fiber optic cable at all riser poles will be protected with galvanized steel U-guard from 12 inches below grade to a point 24 inches below the suspension strand. Conduit sweeps will be used to transition from the U- guard to either a handhole or manhole. All aerial plant will be designed and constructed with 10M EHS (Class A galvanized) suspension strand unless otherwise dictated by the pole owners or field conditions. The * Confidential Treatment Applied For C-5 fiber optic cable will be doubled lashed to the suspension strand using 45 mil stainless lashing wire. Span length shall account for storm loading (wind and ice) in accordance with zones outlined in NESC code. Sags and tensions will be calculated in accordance with industry accepted practices and account for strand size, span length, ambient temperature at placement, and loading. The suspension strand will be tensioned with a strand dynamometer. A catenary suspension system may be used if the system exceeds maximum span length specifications. Prior to attachment to any existing pole line, the system will be inspected for compliance with applicable codes and standards, as well as the physical condition of the poles and existing hardware. Any make-ready work will be reviewed with the pole owner and specifically addressed prior to construction. If a pole line need be constructed, the preferred poles will be Class 4 (40 feet) and Class 5 (35 feet). Use of the preferred poles will make it unnecessary to calculate pole loading (horizontal, vertical, and bending moments) in most field conditions. Some unusual conditions may require the use of a stronger class pole. Depth of placement will be dictated by soil conditions, slope of terrain, and length of pole. Poles will be guyed in accordance with industry-accepted standards. All pole attachment hardware will be galvanized steel. Aerial cable will be placed below power attachments and above all other attachments unless otherwise dictated by the pole owner. Pole contact clearances and locations will be dictated by current NESC code and the presence of existing attachments; however, the following minimum objective clearances will apply: a) Power line - 40 inches (below) b) Non-current carrying power line - 30 inches c) Telephone, CATV, and other signal lines - 12 inches (above) Vertical clearances for crossings or parallel lines will be dictated by current NESC code; however, the objective clearance for most objects (roads, alleys, etc.) is 18 feet (at 100 degrees F) with the exception of railroad tracks and waterways which have an objective of 27 feet (at 100 degrees F). 14.0 Approval of Deviations From Specifications. ------------------------------------------ Qwest will seek the approval of FRONTIER, which approval shall not be unreasonably withheld or delayed, prior to undertaking any construction which will deviate from the Construction Specifications set forth in this Exhibit C. C-6 EXHIBIT D Fiber Cable Splicing, Testing and Acceptance Procedures ------------------------------------------------------- 1. All splices will be performed with an industry-accepted fusion splicing machine. Qwest will perform two stages of testing during the construction of a new fiber cable route. Initially, OTDR tests will be taken from one direction. As soon as fiber connectivity has been achieved to both regen sites, Qwest will verify and record the continuity of all fibers. Qwest will take and record power level readings on all fibers in both directions. Qwest will bi- directional OTDR test all fibers. 2. During the initial construction, it is only possible to measure the fiber from one direction. Because of this, splices will be qualified during initial construction with an OTDR from only one direction. The profile alignment system or light injection detection system on the fusion splicer may be used to qualify splices as long as a close correlation to OTDR data is established. The pigtails will also be qualified at this stage using an OTDR and a minimum 1 km launch reel. All measurements at this stage in construction will be taken at 1550 nm. 3. After Qwest has provided end-to-end connectivity on the fibers, bi- directional span testing will be done. These measurements must be made after the splice manhole or handhole is closed in order to check for macro-bending problems. Continuity tests will be done to verify that no fibers have been "frogged" or crossed in any of the splice points. Once the pigtails have been spliced, loss measurements will be recorded using an industry-accepted laser source and a power meter. OTDR traces will be taken and splice loss measurements will be recorded. Qwest will also store OTDR traces on diskette and on data sheets. Laser Precision format will be used on all traces. Qwest will provide three copies of all data sheets and tables, and one set of diskettes with all traces. a. The power loss measurements shall be made at 1550 nm, and performed bi-directionally. b. OTDR traces shall be taken in both directions at 1550 nm. 4. The splicing standards are as follows: a. The loss value of the pigtail connector and its associated splice will not exceed 0.50 dB. This value does not include the insertion loss from its connection to the FDP. For values greater than this, the splice will be broken and respliced until an acceptable loss value is achieved. If, after five attempts, Qwest is not able to produce a loss value less than 0.50 dB, the splice will be marked as Out-of-Spec ("OOS") on the data sheet. Each splicing attempt shall be documented on the data sheet. b. During initial uni-directional OTDR testing, the objective for each splice is a loss of 0.15 dB or less. If, after three attempts, Qwest is not able to produce a loss value of less than 0.15 dB, then 0.25 dB will be acceptable. If, after two additional attempts, a value of less than 0.25 dB is not achievable, then the splice will be marked as OOS on the data sheet. Each splicing attempt shall be documented on the data sheet. c. During end-to-end testing of a span (a span shall be FDP to FDP), the objective for each splice is a bi-directional average loss of 0.15 dB or less. d. The standard for each fiber within a span shall be an average bi- directional loss of 0.10 dB or less for each splice. For example, if a given span has 10 splices, each fiber shall have total bi-directional loss (due to the 10 splices) of 1.0 dB or less. Each individual splice may have a bi-directional loss of 0.15 dB or less, but the average bi-directional splice loss across the span must be 0.10 dB or less. 5. The entire fiber optic cable system shall be properly protected from foreign voltage and grounded with an industry-accepted system. The current system in use by Qwest is depicted in the attached schematic-DWG No. SAH-1 (typical for Surge Arrestor HH Placement). 6. Customer fiber assignments will be consecutive in count and in a separate buffer tube (or ribbon or fiber bundles) from others. The maximum number of fibers within a single buffer tube (or ribbon or fiber bundles) shall be 12. 7. The fibers shall be terminated to the FDP with Ultra FC-PC connectors, unless another type of connector is specified. The pigtails shall be manufactured with the same glass as the backbone cable to minimize splice loss. D-2 EXHIBIT E FIBER SPECIFICATIONS [This exhibit contains product specification information that is largely set forth in graphic format.] EXHIBIT E-1 [MAP APPEARS HERE] Exhibit E-1 is a map of the United States with the heading "Fiber Deployment Diagram" showing state lines and routes of the fiber optic network upon completion. The legend shows that a tan line represents Fiber not designated, a solid blue line is LS Fiber (Existing), a broken blue line is LS Fiber (Planned), a broken red line is Lucent TWF (Planned), a solid turquoise line is DS Fiber (Existing), and one inch equals 225 miles. The Fiber Not Designated Route travels east to west through Massachusetts, Connecticut, New York, Pennsylvania, New Jersey, Maryland, Virginia, North Carolina, South Carolina, Georgia, Tennessee, Kentucky, Ohio, Indiana, Illinois, Wisconsin, Minnesota, Iowa, Missouri, Kansas, Oklahoma, Texas, New Mexico, Arizona, California, Washington and Oregon. The LS Fiber (Existing) travels north to south through Texas, and also north to south through Colorado and New Mexico. The DS Fiber (Existing) travels north to south through California. The Lucent TWF (Planned) travels east to west through Ohio, Indiana, Illinois, Missouri, Kansas, Colorado, Utah, and Nevada. E-1 EXHIBIT F Specifications for Regeneration Facilities ------------------------------------------ Qwest will install modular, prefabricated, conditioned space along the right of way to house regeneration and other electronic equipment (supplied by Customer) necessary for the operation of the Qwest System. Regeneration site facilities consist of * square feet of caged space in such facilities with separate, lockable secured, 24-hour access. The buildings will be * feet wide by approximately * feet interior length to provide such square footage. Also included is access to * amps of DC power provided from a common source backed up by a standby generator as described below. To the extent provided in the Agreement, any additional space and/or power required may be made available, with Frontier responsible for QWEST's incremental cost. Following are the general specifications of the buildings and support equipment. Standard production, metal-framed buildings with steel substructure or concrete; bullet resistant to 30-06 slugs from 15 feet; walls and ceilings R-19 insulated. Security-type weatherproof exterior light fixtures, equipped with motion sensors. Building is equipped with Marvair Compact II or equivalent redundant HVAC units. The building platform comes equipped with an external * kw backup generator designed to provide power during emergency periods. The generator fuel tanks will have a minimum * gallon capacity. As part of the normal maintenance, the generator will be exercised twice monthly, running on a load bank for a minimum of * . Fire extinguishers are provided one inside main door, and one located near the HVAC systems. A fire suppression system (FM-200) will be in place, as the main overall fire protection coverage. The building will have an earth ground termination bar (safety green wire ground) terminated to building steel and/or driven ground rod. The building will be equipped with A/C duplex isolated outlets for testing and miscellaneous equipment. Such outlets shall be national electronic code and placed every 6 feet around perimeter walls. The building will have sufficient lighting. Two properly sized cable racks will be installed, one from the DC power source and one from the FDP. Qwest will run properly sized cables from the common DC power plant to the Frontier-supplied fuse panel in the Frontier space. DC power in the amount of * amps shall be provided based upon a one (1) for N rectifier format (i.e., * amp units or * amp units). A battery plant capable ---- of handling the load for a minimum of four (4) hours to ensure uninteruptable power will be installed in the building. At remote regeneration locations QWEST will also provide a battery plant designed to provide at least eight *, and * at all other locations, in both cases with sufficient generator fuel to provide * backup in the event of a power outage. The battery plant shall incorporate load disconnect protection and batteries capable of recharging in 12 hours. The battery plant shall also include dual battery strings with battery disconnects for maintenance purposes. Power will be monitored twenty-four (24) hours per day, seven (7) days a week. Each party's fibers will be terminated in a separate bulkhead module within the QWEST fiber distribution panel. Upon execution of the IRU Agreement, the parties will finalize the locations of the regeneration facilities in accordance with Section 7.2 of the IRU Agreement. * CONFIDENTIAL TREATMENT APPLIED FOR Exhibit G Regeneration Facility Sites
Estimated Points Segment Route of Amplifier No. Segment Miles Presence Sites Base System 1A Chicago to Detroit Chicago to South Bend 86 2 1 South Bend to Battle Creek 95 1 1 Battle Creek to Detroit 124 1 2 1B Detroit to Cleveland Detroit to Toledo 60 1 0 Toledo to Cleveland 105 1 1 1C Cleveland to Pittsburgh Cleveland to Akron 42 1 0 Akron to Youngstown 60 1 0 Youngstown to Pittsburgh 60 1 0 1D Pittsburgh to Philadelphia Pittsburgh to Harrisburg 238 1 3 Harrisburg to Philadelphia 118 1 1 1E Philadelphia to Washington Philadelphia to Baltimore 107 1 1 Baltimore to Washington 31 1 0 2A Cleveland to Columbus 133 1 2 2B Columbus to Cincinnati Columbus to Dayton 60 1 0 Dayton to Cincinnati 65 1 0 4 Indianapolis to Chicago 215 1 3 5 Indianapolis to St. Louis 248 1 4 6 St. Louis to Kansas City 297 1 4 7 Kansas City to Topeka 75 1 0
1 Exhibit G Regeneration Facility Sites
Estimated Points Segment Route of Amplifier No. Segment Miles Presence Sites 8 Topeka to Denver 565 1 9 9A Denver to Grand Junction 271 1 4 9B Grand Junction to Salt Lake City Grand Junction to Provo 265 1 4 Provo to Salt Lake City 30 1 0 10A Salt Lake City to Reno 575 1 9 10B Reno to Roseville 136 1 2 11A Roseville to Oakland Roseville to Sacramento 19 1 0 Sacramento to Oakland 92 1 1 11B Oakland to San Jose 43 1 0 12A San Jose to Salinas 71 1 0 12B Salinas to San Luis Obispo 132 1 2 12C San Luis Obispo to Santa Barbara 119 1 1 12D Santa Barbara to Los Angeles 107 1 1 13A Los Angeles to Anaheim 32 1 0 13B Anaheim to San Diego 132 1 2 13C San Diego to Yuma 235 1 3 13D Yuma to Phoenix 187 1 3 14A Phoenix to Tucson 123 1 1 14B Tucson to El Paso 310 1 5
2 Exhibit G Regeneration Facility Sites
Estimated Points Segment Route of Amplifier No. Segment Miles Presence Sites 15A El Paso to San Antonio 586 1 9 15B San Antonio to Austin 85 1 1 15C Austin to Houston 221 1 3 16 Houston to Dallas Houston to Bryan 90 1 1 Bryan to Mexia 90 1 1 Mexia to Dallas 89 1 1 17A Dallas to Oklahoma City Dallas to Ft. Worth 60 1 0 Ft. Worth to Oklahoma City 204 1 3 17B Oklahoma City to Tulsa 119 1 1 17C Tulsa to Kansas City 256 1 4 18 Cincinnati to Indianapolis 117 0 1 23 Denver to El Paso Denver to Colorado Springs 76 1 0 Colorado Springs to Pueblo 45 1 0 Pueblo to Lamy 288 1 4 Lamy to Albuquerque 67 1 0 Albuquerque to El Paso 252 0 3 Lamy to Santa Fe 18 1 0 24A Sacramento to Chico 98 1 1 24B Chico to Redding 75 1 0 24C Redding to Medford 177 1 2
3 Exhibit G Regeneration Facility Sites
Estimated Points Segment Route of Amplifier No. Segment Miles Presence Sites 24D Medford to Eugene 206 1 3 24E Eugene to Portland Eugene to Salem 69 1 0 Salem to Portland 54 1 0 25 Portland to Seattle 182 1 2 27 San Jose to San Francisco 56 1 0 28A Boston to Albany 208 2 3 28B Albany to Buffalo Albany to Utica 101 1 1 Utica to Syracuse 51 1 0 Syracuse to Rochester 86 1 1 Rochester to Buffalo 60 1 0 28C Buffalo to Cleveland 197 0 3 29 Albany to New York City Albany to Poughkeepsie 74 1 1 Poughkeepsie to White Plains 58 1 0 White Plains to New York City 25 1 0 30 New York City to Philadelphia New York City to Newark 13 1 0 Newark to Trenton 48 1 0 Trenton to Philadelphia 34 0 0 Sub Total Base System 10,198 73 119
4 Exhibit G Regeneration Facility Sites
Estimated Points Segment Route of Amplifier No. Segment Miles Presence Sites Option 1 22A Chicago to Cedar Rapids 255 1 3 22B Cedar Rapids to Des Moines 120 1 1 22C Des Moines to Omaha 140 1 2 22D Omaha to Topeka Omaha to Lincoln 80 1 1 Lincoln to Topeka 144 0 2 Sub Total Option 1 739 4 9 Option 1A 21A Chicago to Milwaukee 84 1 1 21B Milwaukee to Green Bay 118 1 1 21C Green Bay to Minneapolis Green Bay to Eau Claire 190 1 3 Eau Claire to Minneapolis 105 1 1 21D Minneapolis to Des Moines Minneapolis to Owatonna 104 1 1 Owatonna to Des Moines 177 1 3 22C Des Moines to Omaha 140 1 2 22D Omaha to Topeka Omaha to Lincoln 80 1 1 Lincoln to Topeka 144 0 2 Sub Total Option 1A 1,142 8 15
5 Exhibit G Regeneration Facility Sites
Estimated Points Segment Route of Amplifier No. Segment Miles Presence Sites Option 2 3 Cincinnati to Louisville 107 1 1 19A Louisville to Nashville Louisville to Bowling Green 115 1 1 Bowling Green to Nashville 74 1 0 19B Nashville to Chattanooga 147 1 2 19C Chattanooga to Atlanta 137 1 2 20A Atlanta to Charlotte Atlanta to Greenville 155 1 2 Greenville to Charlotte 106 1 1 20B Charlotte to Raleigh Charlotte to Greensboro 94 1 1 Greensboro to Raleigh 80 1 1 20C Raleigh to Richmond Raleigh to Rocky Mount 69 1 0 Rocky Mount to Portsmouth 114 1 1 Portsmouth to Richmond 118 1 1 20C Richmond to Washington Richmond to Fredericksburg 57 1 0 Fredericksburg to Washington 53 0 0 Sub Total Option 2 1,426 13 13 Total (Base System) 10,198 73 119 Total (Base and Option 1) 10,937 77 128 Total (Base and Option 1A) 11,340 81 134 Total (Base, Option 1 and Option 2) 12,363 90 141 Total (Base, Option 1A and Option 2) 12,766 94 147
6 EXHIBIT G-1 TEMPORARY SPACE WITHIN CERTAIN QWEST FACILITIES [This exhibit consists of floor plans in graphic format.] EXHIBIT H Qwest System Maintenance Specifications and Procedures ------------------------------------------------------ Any party responsible for providing maintenance of the Qwest System hereunder shall be referred to herein as the "Service Provider." The party receiving maintenance services from the Service Provider hereunder shall be referred to herein as the "Service Recipient". All other capitalized terms not otherwise defined herein shall have their respective meanings as set forth in the IRU Agreement of which this Exhibit forms a part. 1. Maintenance. ----------- (a) Scheduled Maintenance. Routine maintenance and repair of the --------------------- Qwest System described in this section ("Scheduled Maintenance") shall be performed by or under the direction of Service Provider, at Service Provider's reasonable discretion or at Service Recipient's request. Scheduled Maintenance shall commence with respect to each Segment upon the effective date of the grant of the IRU therein, as provided in the IRU Agreement. Scheduled Maintenance shall include the following activities: (i) Patrol of Qwest System route on a regularly scheduled basis, which will be weekly unless hyrail access is necessary in which case it will be quarterly; (ii) Maintenance of a "Call-Before-You-Dig" program and all required and related cable locates; (iii) Maintenance of sign posts along the Qwest System right-of-way with the number of the local "Call Before You Dig" organization and the 800 number for Qwest's "Call Before You Dig" program; and (iv) Assignment of fiber maintenance technicians to locations along the route of the Qwest System at approximately *-mile intervals dependent upon terrain and accessibility. (b) Unscheduled Maintenance. Non-routine maintenance and repair of ----------------------- the Qwest System which is not included as Scheduled Maintenance ("Unscheduled Maintenance"), shall be performed by or under the direction of Service Provider. Unscheduled Maintenance shall commence with respect to each Segment upon the effective date of the grant of the IRU therein, as provided in the IRU Agreement. Unscheduled Maintenance shall consist of: (i) "Emergency Unscheduled Maintenance" in response to an alarm identification by Service Provider's Operations Center, notification by Service Recipient or notification by any third party of any failure, interruption or impairment in the operation of the *Confidential Treatment Applied For Qwest System, or any event imminently likely to cause the failure, interruption or impairment in the operation of the Qwest System. (ii) "Non-Emergency Unscheduled Maintenance" in response to any potential service-affecting situation to prevent any failure, interruption or impairment in the operation of the Qwest System. Service Recipient shall immediately report the need for Unscheduled Maintenance to Service Provider in accordance with procedures promulgated by Service Provider from time to time. Service Provider will log the time of Service Recipient's report, verify the problem and will dispatch personnel immediately to take corrective action. 2. Operations Center. ----------------- Service Provider shall operate and maintain a Operations Center ("OC") staffed twenty-four (24) hours a day, seven (7) days a week by trained and qualified personnel. Service Provider's maintenance employees shall be available for dispatch twenty-four (24) hours a day, seven (7) days a week. Service Provider shall have its first maintenance employee at the site requiring Emergency Unscheduled Maintenance activity within * after the time Service Provider becomes aware of an event requiring Emergency Unscheduled Maintenance, unless delayed by circumstances beyond the reasonable control of Service Provider. Service Provider shall maintain a toll-free telephone number to contact personnel at the OC. Service Provider's OC personnel shall dispatch maintenance and repair personnel along the system to handle and repair problems detected in the Qwest System, (i) through the Service Recipient's remote surveillance equipment and upon notification by Service Recipient to Service Provider, or (ii) upon notification by a third party. 3. Cooperation and Coordination. ---------------------------- (a) Service Recipient shall utilize an Operations Escalation List, as updated from time to time, to report and seek immediate initial redress of exceptions noted in the performance of Service Provider in meeting maintenance service objectives. Service Recipient will, as necessary, arrange for unescorted access for Service Provider to all sites of the Qwest System, subject to applicable contractual, underlying real property and other third-party limitations and restrictions. (c) In performing its services hereunder, Service Provider shall take workmanlike care to prevent impairment to the signal continuity and performance of the Qwest System. The precautions to be taken by Service Provider shall include notification to Service Recipient. In addition, Service Provider shall reasonably cooperate with Service Recipient in sharing information and analyzing the disturbances regarding the cable and/or fibers. In the event that any Scheduled or Unscheduled Maintenance hereunder requires a traffic roll or reconfiguration involving cable, fiber, electronic equipment, or regeneration or other facilities of the Service Recipient, then Service Recipient shall, at Service Provider's reasonable request, *Confidential Treatment Applied For make such personnel of Service Recipient available as may be necessary in order to accomplish such maintenance, which personnel shall coordinate and cooperate with Service Provider in performing such maintenance as required of Service Provider hereunder. (d) Service Provider shall notify Service Recipient at least ten (10) business days prior to the date in connection with any PSWP of any Scheduled Maintenance and as soon as possible after becoming aware of the need for Unscheduled Maintenance. Service Recipient shall have the right to be present during the performance of any Scheduled Maintenance or Unscheduled Maintenance so long as this requirement does not interfere with Service Provider's ability to perform its obligations under this Agreement. In the event that Scheduled Maintenance is canceled or delayed for whatever reason as previously notified, Service Provider shall notify Service Recipient at Service Provider's earliest opportunity, and will comply with the provisions of the previous sentence to reschedule any delayed activity. 4. Facilities. ---------- (a) Service Provider shall maintain the Qwest System in a manner which will permit Service Recipient's use, in accordance with the terms and conditions of the IRU Agreement, of the IRU, the Frontier Fibers and the Associated Property required to be provided under the terms of the IRU Agreement. Except to the extent otherwise expressly provided in the IRU Agreement, Service Recipient will be solely responsible for providing and paying for any and all maintenance of all electronic, optronic and other equipment, materials and facilities used by Service Recipient in connection with the operation of the Dark Fibers, none of which is included in the maintenance services to be provided hereunder. 5. Cable/Fibers. ------------ (a) Service Provider shall perform appropriate Scheduled Maintenance on the Cable contained in the Qwest System in accordance with Service Provider's then current preventative maintenance procedures as agreed to by Service Recipient, which shall not substantially deviate from standard industry practice. Service Provider shall have qualified representatives on site any time Service Provider has reasonable advance knowledge that another person or entity is engaging in construction activities or otherwise digging within five (5) feet of the Cable. (c) Service Provider shall maintain sufficient capability to teleconference with Service Recipient during an Emergency Unscheduled Maintenance in order to provide regular communication during the repair process. When correcting or repairing Cable discontinuity or damage, including but not limited to in the event of Emergency Unscheduled Maintenance, Service Provider shall use reasonable efforts to repair traffic-affecting discontinuity within four (4) hours after the Service Provider maintenance employee's arrival at the problem site. In order to accomplish such objective, it is acknowledged that the repairs so effected may be temporary in nature. In such event, within twenty-four (24) hours after completion of any such Emergency H-3 Unscheduled Maintenance, Service Provider shall commence its planning for permanent repair, and thereafter promptly shall notify Service Recipient of such plans, and shall implement such permanent repair within an appropriate time thereafter. Restoration of open fibers on fiber strands not immediately required for service shall be completed on a mutually agreed-upon schedule. If the fiber is required for immediate service, the repair shall be scheduled for the next available Planned Service Work Period (PSWP). (d) In performing repairs, Service Provider shall comply with the splicing specifications as set forth in Exhibit D. Service Provider shall provide to Service Recipient any modifications to these specifications as may be necessary or appropriate in any particular instance for Service Recipient's approval, which approval shall not be unreasonably withheld. (e) Service Provider's representatives that are responsible for initial restoration of a cut Cable shall carry on their vehicles the typically appropriate equipment that would enable a temporary splice, with the objective of restoring operating capability in as little time as possible. Service Provider shall maintain and supply an inventory of spare Cable in storage facilities supplied and maintained by Service Provider at strategic locations to facilitate timely restoration. 6. Planned Service Work Period (PSWP). ---------------------------------- Scheduled Maintenance which is reasonably expected to produce any signal discontinuity must be coordinated between the parties. Generally, this work should be scheduled after midnight and before 6:00 a.m. local time. Major system work such as fiber rolls and hot cuts will be scheduled for PSWP weekends. A calendar showing approved PSWP will be agreed upon in the last quarter of every year for the year to come. The intent is to avoid jeopardy work on the first and last weekends of the month and high-traffic holidays. 7. Restoration. ----------- (a) Service Provider shall respond to any interruption of service or a failure of the Dark Fibers to operate in accordance with the specifications set forth in Exhibit D (in any event, an "Outage") as quickly as possible (allowing for delays caused by circumstances beyond the reasonable control of Service Provider) in accordance with the procedures set forth herein. When restoring a cut Cable in the Qwest System, the parties agree to work together to restore all traffic as quickly as possible. Service Provider, promptly upon arriving on the site of the cut, shall determine the course of action to be taken to restore the Cable and shall begin restoration efforts. Service Provider shall splice fibers tube by tube or ribbon by ribbon or fiber bundle by fiber bundle, rotating between tubes or ribbons operated by the separate Interest Holders (as defined in paragraph 9(a)), including Service Recipient, in accordance with the following described priority and rotation mechanics; provided that, lit fibers in all buffer tubes or ribbons or fiber -------------- bundles shall have priority over any dark fibers in order to allow transmission systems to come back on line; and provided further that, Service Provider will --------------------- continue such restoration efforts until all lit fibers in all buffer tubes or ribbons are spliced and all traffic H-4 restored. In general, priority among Interest Holders affected by a cut shall be determined on a rotating restoration-by-restoration and Segment-by-Segment basis, to provide fair and equitable restoration priority to all Interest Holders, subject only to such restoration priority to which Qwest is contractually obligated prior to the date of the Agreement. Service Provider shall use all reasonable efforts to implement a Qwest System-wide rotation mechanism on a Segment-by-Segment basis so that the initial rotation order of the Interest Holders in each Segment is varied (from earlier to later in the order), such that as restorations occur, each Interest Holder has approximately equivalent rotation order positions across the Qwest System. Additional participants in the Qwest System that become Interest Holders after the date hereof shall be added to the restoration rotation mechanism. (c) The goal of emergency restoration splicing shall be to restore service as quickly as possible. This may require the use of some type of mechanical splice, such as the "3M Fiber Lock" to complete the temporary restoration. Permanent restorations will take place as soon as possible after the temporary splice is complete. 8. Subcontracting. -------------- Service Provider may subcontract any of the maintenance services hereunder; provided that Service Provider shall require the subcontractor(s) to perform in accordance with the requirement and procedures set forth herein. The use of any such subcontractor shall not relieve Service Provider of any of its obligations hereunder. 9. Fees and Costs. --------------- (a) Scheduled Maintenance Fees. The fees payable for any and all -------------------------- Scheduled Maintenance hereunder shall be determined in accordance with the following provisions. During any time after the Acceptance Date for any Segment but subject to paragraph 10 below, Qwest shall be the Service Provider and provide Scheduled Maintenance at a cost not to exceed $ * per route mile per year, subject to the CPI adjustment described below (the "Qwest Fixed Fee") and Unscheduled Maintenance as provided in subparagraph 9 below. The Scheduled Maintenance fee payable by Service Recipient shall be equal to a pro rata share of Qwest's Costs, based first upon the number of conduits so maintained by Qwest and included in such Costs and second upon the number of Interest Holders (as defined in Section 10.4 of the Agreement) in the portion of the Qwest System so maintained by Qwest and included in such Costs; provided however, the total fee shall in no event exceed the amount of the Qwest Fixed Fee as adjusted by the CPI-U Adjustment. A quarter of the first such Scheduled Maintenance fee with respect to each Segment will be due and payable thirty (30) days after the Acceptance Date with respect to such Segment. Thereafter, one quarter of such fee shall be due quarterly. All fees shall be paid by Service Recipient within thirty (30) days of receipt of invoice therefor. The Qwest Fixed Fee, if applicable, may be adjusted annually, in Qwest's sole discretion, beginning with the first anniversary date of the execution date of this Agreement, for increases in the United States Bureau of Labor Statistics, CPI-U All Services Index (unadjusted), as originally published. Said * CONFIDENTIAL TREATMENT APPLIED FOR H-5 adjustment shall be hereinafter referred to as "CPI-U Adjustment". Such fee, as adjusted by the CPI-U Adjustment, shall be equal to the product of the fee specified herein multiplied by the fraction (i) whose numerator is the CPI-U All Services for March of the previous calendar year for which the adjustment to the fee is being made, and (ii) whose denominator is the CPI-U All Services for March of the preceding year. The adjusted fee shall remain in effect until the next annual fee is due, when a new adjusted fee fixed pursuant to this provision shall become effective. In no event shall the amount of the fee as adjusted pursuant to this provision be less than the amount of fee in effect for the immediately-preceding year. The parties agree that the Index for March 1995 is defined as 151.4. In the event that the Bureau of Labor Statistics (or any successor organization) changes the current base of the CPI-U from 1982-84 = 100, the calculation of a fee under this provision shall be adjusted to ensure that Qwest receives the same amount as it would have had, had the base not been changed. In the event the Bureau of Labor Statistics or any successor organization no longer publishes the CPI-U, Qwest, subject to Service Recipient's agreement (which shall not be unreasonably withheld), designate the statistical index it deems most appropriate for calculation of adjustments to a fee and, from the date the CPI-U ceased to be published, such index shall be used to make adjustments in a fee under this provision. On and after the second anniversary of the execution of the Agreement, if either of FRONTIER or QWEST determines that the Scheduled and Unscheduled Maintenance to be provided hereunder should be put out to competitive bid process, then such party shall notify the other of such determination, and thereafter may obtain at least three bids in writing from national or regional maintenance providers of sound business and financial reputation to perform the Scheduled and Unscheduled Maintenance hereunder. Bids for maintenance services must be for both Scheduled and Unscheduled Maintenance and must be for portions of the QWEST System covering at least 1,000 contiguous route miles to provide for the most competitive bidding and the best overall maintenance practices at the lowest possible cost to Service Recipient. If a majority of the Interest Holders agree on acceptable bids, QWEST shall be entitled to elect either to continue to provide the Scheduled and Unscheduled Maintenance, or to subcontract the Scheduled and Unscheduled Maintenance obligations hereunder to the lowest such acceptable bidder, in either of which cases the Scheduled Maintenance fee payable by Service Recipient shall be equal to a pro rata share, based first upon the number of conduits maintained by QWEST and included in such Costs and second upon the Interest Holders in the portion of the QWEST System covered by the bid, of the sum of the lowest acceptable bid price plus a 10% G&A overhead allowance with QWEST in any such case retaining such overhead allowance. (b) Unscheduled Maintenance Fees. If the aggregate amount of the ---------------------------- Costs of Unscheduled Maintenance required as a result of any single event or multiple, closely-related events is less than * ($*), such Costs shall be borne by Service Provider. For any other Unscheduled Maintenance, the Costs thereof shall be allocated among the various Interest Holders in the conduit, cable and/or fibers affected thereby as follows: (i) Costs of Unscheduled Maintenance solely to or affecting a conduit or cable which houses fibers of a single Interest Holder shall be borne 100% by such Interest Holder; (ii) Costs of Unscheduled Maintenance to or affecting a conduit which houses multiple innerduct conduits, not including such Costs attributable to the repair or replacement of fiber therein, shall be borne proportionately by the *Confidential Treatment Applied For H-6 Interest Holders in each of the affected innerduct conduits based on the ratio that such affected conduit bears to the total number of affected innerduct conduits, and (iii) Costs of Unscheduled Maintenance attributable to the repair or replacement of fiber, including the acquisition, installation, inspection, testing and splicing thereof, shall be borne proportionately by the Interest Holders in the affected fiber, based on the ratio that the number of affected fibers subject to the interest of each such Interest Holder bears to the total number of affected fibers. All such Costs which are allocated to Service Recipient pursuant to the foregoing provisions shall be the responsibility of and paid by Service Recipient within thirty (30) days after its receipt from Service Provider of an invoice therefor. (c) Costs. "Costs" means the actual, direct costs paid or payable in ----- accordance with the established accounting procedures generally used by each party, as the case may be, and which it utilizes in billing third parties for reimbursable projects, which costs shall include, without limitation, the following: (i) labor costs, including wages and salaries, and benefits and overhead allocable to such labor costs (overhead allocation percentage shall not exceed the lesser of (x) the percentage Service Provider typically allocates to its internal projects or (y) thirty percent (30%), and (ii) other direct costs and out-of-pocket expenses on a pass-through basis (e.g., equipment, materials, supplies, contract services, etc.). 10. Term. ---- Service Provider's obligation to perform maintenance on the relevant portion of the Qwest System shall be for an initial term expiring *, and unless a different Service Provider is selected by the Interest Holders under a mutually agreed selection process, then Qwest shall be the Service Provider. Thereafter, Qwest shall have no obligation to provide Scheduled or Unscheduled Maintenance hereunder, but shall be entitled to participate in any process selected by the Interest Holders as a potential Service Provider. *Confidential Treatment Applied For H-7 EXHIBIT I Form of Surety Bond AIU Insurance Company American Fidelity Company American Home Assurance Company Granite State Insurance Company Illinois National Insurance Company The Insurance Company of the State of Pennsylvania National Union Fire Insurance Company of Pittsburgh, Pa. New Hampshire Insurance Company Worldwide Bonding AMERICAN INTERNATIONAL COMPANIES Principal Bond Office 70 Pine Street, New York, N.Y. 10270 CONTRACT BOND KNOW ALL MEN BY THESE PRESENTS: That ---------------, as Principal, and ---------, as Surety, are held and firmly bound unto -------, as Obligee, in the sum of ----- Dollars($-----), for the payment of which sum, well and truly to be made, the Principal and Surety bind themselves, their heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these presents. WHEREAS, The principal has entered into a written contract dated ---------- with the Obligee for ---------- which contract is by reference made a part hereof. NOW, THEREFORE, THE CONDITION OF THE ABOVE OBLIGATION IS SUCH, That if the above bounden Principal shall well and truly keep, do and perform, each and every, all and singular, the matters and things in said contract set forth and specified to be by the said Principal kept, done and performed at the time and in the manner in said contract specified, and shall pay over, make good and reimburse to the above named Obligee, all loss and damage which said Obligee may sustain by reason of failure or default on the part of said Principal, then this obligation shall be void; otherwise, it shall remain in full force and effect. Signed, sealed and dated ---------- - ---------- (Principal) (Seal) - ----------- (Witness) By---------- (Title) - ---------- (Surety) Bond No. ---------- By---------- Attorney in Fact OPERATIVE SURETY LANGUAGE: NOW, THEREFORE, THE CONDITION OF THE ABOVE OBLIGATION IS SUCH, that if the above bounden Principal shall well and truly keep, do and perform, each and every, all and singular, the matters and things in said contract set forth and specified to be by the said Principal kept, done and performed at the time and in the manner in said contract specified, and shall pay over, make good and reimburse to the above named Obligee, those amounts to which Obligee may be entitled under said contract (including without limitation, Section 18.2 thereof) by reason of failure or default on the part of said Principal, then this obligation shall be void; otherwise, it shall remain in full force and effect. EXHIBIT J UNDERLYING RIGHTS AND --------------------- UNDERLYING RIGHTS REQUIREMENTS ------------------------------ Note: Prior to April 6, 1995 Qwest Communications Corporation was known as "Southern Pacific Telecommunications Company," and the documents listed below that predate April 6, 1995 are in that former name. Pueblo Easements: Easement Agreement dated October 25, 1995 between the Pueblo of Santa Ana and Qwest Communications Corporation. Easement Agreement dated February 2, 1996 between the Pueblo of Santo Domingo and Qwest Communications Corporation. Easement Agreement dated February 26, 1996 between the Pueblo of San Felipe and Qwest Communications Corporation. Easement Agreement dated April 12, 1996 between the Pueblo of Isleta and Qwest Communications Corporation. Easement Agreement dated June 6, 1996 between the Pueblo of Sandia and Qwest Communications Corporation. SPTCo Easement: Easement Agreement dated September 30, 1991 between Southern Pacific Transportation Company, as Grantor, and Southern Pacific Telecommunications Company, as Grantee. Fifth Amendment to Easement Agreement dated August 9, 1996 between Southern Pacific Transportation Company, as Grantor, and Qwest Communications Corporation, as Grantee. D&RGW Easement: Easement Agreement dated September 30, 1991 between Denver and Rio Grande Western Railroad Company, as Grantor, and Southern Pacific Telecommunications Company, as Grantee. First Amendment to Easement Agreement dated July 14, 1993 between Denver and Rio Grande Western Railroad Company, as Grantor, and Southern Pacific Telecommunications Company, as Grantee. Second Amendment to Easement Agreement dated May 1, 1995 between Denver and Rio Grande Western Railroad Company, as Grantor, and Southern Pacific Telecommunications Company, as Grantee. SSW Easement: Easement Agreement dated September 30, 1991 between St. Louis Southwestern Railway, as Grantor, and Southern Pacific Telecommunications Company, as Grantee. Second Amendment to Easement Agreement dated November 16, 1994 between St. Louis Southwestern Railway, as Grantor, and Southern Pacific Telecommunications Company, as Grantee. ATSF Easement Master Rail Corridor Fiber Optic Agreement dated December 5, 1994 between The Atchison, Topeka and Santa Fe Railway Company, as Grantor, and Southern Pacific Telecommunications Company, as Grantee. CSX Easement: Fiber Optic Placement Agreement dated as of March 1, 1995 between CSX Transportation, Inc., as Grantor, and Southern Pacific Telecommunications Company, as Grantee. Letter Agreement dated as of March 1, 1995 between CSX Transportation, Inc., as Grantor, and Southern Pacific Telecommunications Company, as Grantee. DART Easement: Fiber Optics Agreement dated as of February 3, 1994 between Dallas Area Rapid Transit, as Grantor, and Southern Pacific Telecommunications Company, as Grantee. First Amendment to Fiber Optics Agreement dated as of November 13, 1995 between Dallas Area Rapid Transit, as Grantor, and Southern Pacific Telecommunications Company, as Grantee. Fiber Optics Easement dated as of December 21, 1994 between Dallas Area Rapid Transit, as Grantor, and Southern Pacific Telecommunications Company, as Grantee. MTA Easement: (SPTCo Easement Agreement dated September 30, 1991 was assigned as part of sale of route.) Amendment to Easement Agreement dated January 13, 1995 between the Los Angeles County Metropolitan Transportation Authority, as Grantor, and Southern Pacific Telecommunications Company, as Grantee. J-2 First Severance Agreement and Amendment to Easement Agreement dated June 23, 1995 between Los Angeles County Metropolitan Transportation Authority and Southern Pacific Telecommunications Company. Public Easements: License Agreement dated March 2, 1993 between the Utah Department of Transportation and Southern Pacific Telecommunications Company. Agreement dated March 17, 1992 between The Moffat Tunnel Improvement District and Southern Pacific Telecommunications Company. License Agreement dated September 11, 1995 between the City and County of Denver, Board of Water Commissioners and SP Construction Services (covering the Highline Canal Property). License Agreement dated August 30, 1995 between the City and County of Denver, Board of Water Commissioners and SP Construction Services (covering Conduit Number 55). License Agreement dated August 30, 1995 between the City and County of Denver, Board of Water Commissioners and SP Construction Services (covering Conduit Number 96). License Agreement No. 95-01-25 dated July 24, 1995 between the City of Aurora, Director of Utilities and Qwest Communications Corporation. License Agreement dated August 18, 1995 between the City of Aurora, Director of Utilities and Qwest Communications Corporation. Arapahoe County Street Cut and R.O.W. Use Permit Nos. SC5212, SC5213, SC5193, SC5191, SC5190, SC5194, SC5195, and SC5192 issued to Southern Pacific Telecommunications Company by Arapahoe County. Utility Permit Nos. 596067, 595099, 95-145, 95-147, and 95-149 issued to Southern Pacific Telecommunications Company by the Colorado Department of Transportation. Permit for Right-of-Way Use and/or Construction Permit No. 1095 1262 E issued by SP Construction Services by Douglas County. Utility Permit Nos. 7528, 7526, and 7525 issued to Qwest Communications Corporation by the Colorado Department of Transportation. Permit dated March 3, 1995 issued to SP Telecom Construction Services by the Huerfano County Road and Bridge Department. Permit for Construction and Installation of Communication Facilities in Public Rights of Way (Permit No. TFI-95-002) dated February 21, 1995 issued to Southern Pacific Telecommunications Company by Las Animas County. J-3 Contractor License No. 70 dated May 9, 1995 issued to Southern Pacific Telecommunications by the Town of Aguilar. Permit dated April 28, 1995 issued to Southern Pacific Telecommunications Company by the Town of Aguilar. Right-of-Way 2983, Book 29, dated March 22, 1995 between the State of Colorado, State Board of Land Commissioners, as Grantor, and Qwest Communications Corporation, as Grantee. Letter dated April 25, 1995 from the City of Trinidad, authorizing SP Telecom to proceed with construction on the North Linden Avenue Communication Conduits. Ordinance No. 950310 issued by the City of Kansas City, Missouri, granting Southern Pacific Telecommunications Company and MCI Telecommunications Corporation the right to install and maintain underground telecommunication lines. Missouri Highway and Transportation Commission Permit Nos. 6-95-00288, 6-95- 00286, 6-95-00287, 4-95-00682, 4-95-00681, 4-95-00683, and 4-95-00662 and Excavation Permit(s) Receipts. Private Easements: Easement dated November 21, 1995 between American Federation of Human Rights, as Grantor and Qwest Communications Corporation, as Grantee. Easement dated September 26, 1995 between Ray W. Harness and Dorothy Elaine Harness, as Grantors and Qwest Communications Corporation, as Grantee. Easement dated December 4, 1995 between James G. Armstrong and Bessie M. Armstrong, as Grantors and Qwest Communications Corporation, as Grantee. Easement dated March 29, 1995 between Louis P. Vezzani and Evelyn M. Vezzani, as Grantors and Qwest Communications Corporation, as Grantee. Easement dated March 29, 1995 between Walsenburg Sand and Gravel Company, as Grantor and Qwest Communications Corporation, as Grantee. Easement dated March 29, 1995 between Joe Mario Amedei, as Grantor and Qwest Communications Corporation, as Grantee. Easement dated March 30, 1995 between Lindo P. Vezzani and Sharron L. Vezzani, as Grantors and Qwest Communications Corporation, as Grantee. J-4 Easement dated May 19, 1995 between Ludvik Propane Gas, as Grantor and Qwest Communications Corporation, as Grantee. Easement dated March 30, 1995 between Samuel J. Capps, as Grantor and Qwest Communications Corporation, as Grantee. Easement dated April 17, 1995 between John James Fatur, as Grantor and Qwest Communications Corporation, as Grantee. Easement dated May 15, 1995 between Mark Bracco and Vicki Lynn Graham, as Grantors and Qwest Communications Corporation, as Grantee. Easement between Pamela L. Breitbarth (2/19/96), Virginia A. Buczek (4/17/95), Ross A. Swanson (7/17/95), James R. Coressel (4/16/95) and Imogene Coressel (4/16/95), as Grantors and Qwest Communications Corporation, as Grantee. Easement dated March 30, 1995 between Bud Adams and Janna Adams, as Grantors, and Qwest Communications Corporation, as Grantee. Easement dated March 31, 1995 between Trinidad Properties, Inc. and MYBI Partnership, as Grantors, and Qwest Communications Corporation, as Grantee. Easement dated June 6, 1995 between Rose Wirth, as Grantor, and Qwest Communications Corporation, as Grantee. Easement dated May 5, 1995 between Harold A. Winter and Viola A. Winter, as Grantors, and Qwest Communications Corporation, as Grantee. Easement dated May 18, 1995 between Ayuda Me Dios, as Grantor, and Qwest Communications Corporation, as Grantee. Easement dated April 19, 1995 between Gabriel Saliba and Mary J. Saliba, as Grantors, and Qwest Communications Corporation, as Grantee. Easement dated June 1, 1995 between Interstate Underground Warehouse and Industrial Park, Inc., as Grantor, and Qwest Communications Corporation, as Grantee. Easement dated May 26, 1995 between Delbert Rustman and Juanita Rustman, as Grantors, and Qwest Communications Corporation, as Grantee. Easement dated August 28, 1996 between Red Creek Ranch, Inc., as Grantor and Qwest Communications, as Grantee (Pueblo, CO). Miscellaneous Easements Grant of Right of Way and Easement dated December 20, 1961 between J. A. Humphrey and A. Pollard Simons, as Grantors, and American Liberty Pipe Line Company, as Grantee. J-5 Amendment to Right-of-Way Agreement dated April 19, 1994 between Haynes/LICO Properties II, as Grantor, and Southern Pacific Telecommunications Company, as Grantee. Amendment to Right of Way Grant dated January 31, 1996 between Prestonwood Golf Club Corporation, as Grantor, and Qwest Communications Corporation, as Grantee. Miscellaneous Documents: SP Construction Services Safety Manual Railroad Safety-Rules Governing Contractors Working on Railroads Railroad Rules and Instructions for Maintenance of Way and Engineering and Operating Manuals for Southern Pacific Lines The Atchison, Topeka and Santa Fe Railway Company Manual J-6 EXHIBIT K GUARANTY -------- This GUARANTY, dated as of October 18, 1996, is from FRONTIER CORPORATION, a New York corporation (hereafter called "Guarantor"), to and for the benefit of QWEST COMMUNICATIONS CORPORATION, a Delaware corporation (hereafter called "QWEST"). Recital ------- FRONTIER COMMUNICATIONS INTERNATIONAL INC. (hereafter called "FCI"), a wholly-owned subsidiary of Guarantor, entered into a IRU Agreement dated as of October 18, 1996, by and between QWEST and FCI (the "Agreement"). QWEST would not have entered into the Agreement except for the request of Guarantor and the execution and delivery of this Guaranty. Agreement --------- NOW, THEREFORE, as a material inducement to QWEST to enter into the Agreement with FCI and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor and QWEST hereby agree as follows: 1. Guaranty. Guarantor hereby unconditionally and irrevocably guaranties -------- to QWEST the full and punctual payment of all IRU fees payable by FCI pursuant to the Agreement as set forth in Article II of the Agreement and on the IRU Fee Payment Schedule attached to the Agreement, and the full and punctual payment of all other amounts payable by FCI under the Agreement, including the payment of any interest and all costs and expenses, including reasonable attorneys' fees, incurred by QWEST in collecting payment or enforcing this Guaranty, pursuant to the terms of the Agreement (the payment and other obligations are collectively referred to as the "Obligations"). 2. Unconditional Obligations. Guarantor understands and agrees that this ------------------------- Guaranty is direct, immediate, absolute, continuing, unconditional and unlimited, and is a guaranty of payment and not of collection. If FCI shall fail to pay or perform any of the Obligations, Guarantor shall pay, forthwith upon demand, to QWEST or to QWEST's designated agent, any and all such amounts as may be due and owning from FCI to QWEST. 3. Guarantor's Waivers. Guarantor waives: ------------------- (a) notice of the creation or extension of any Obligation by FCI; (b) notice that FCI has taken or omitted to take any action under the Agreement or any other instrument relating thereto or relating to any Obligation; (c) notice of acceptance of this Guaranty; (d) demand, presentation for payment and notice of demand, nonpayment or nonperformance; (e) any and all right to participate in any security held by QWEST now or in the future; (f) the right to require QWEST to (i) proceed against FCI, (ii) proceed against or exhaust any security which QWEST now holds or may hold in the future from FCI; (iii) pursue any other right or remedy available to QWEST, or (iv) have the property of FCI first applied to the discharge of the Obligations; and (g) any defense by reason of bankruptcy, reorganization, discharge by the filing of bankruptcy or discharge in bankruptcy of FCI; Guarantor further agrees that the Guaranty will not be discharged and shall remain in full force and effect until full payment and performance of all Obligations of FCI and the liabilities of Guarantor hereunder. 4. Guarantor's Representations and Warrants. Guarantor represents and ---------------------------------------- warrants that: (a) any financial information provided by Guarantor to QWEST was prepared in accordance with generally accepted accounting principles and accurately and fairly represents the financial condition on the date stated and understands QWEST is relying on such information; and (b) Guarantor has a financial interest in FCI. 5. Consent. Guarantor understands and consents that from time to time, ------- and without further notice to or consent of Guarantor, QWEST may take any or all of the following actions without releasing, discharging or in any way affecting the obligations of Guarantor under this Guaranty: (a) extend, renew, modify, compromise, settle, or release the Obligations; (b) any modification or amendment of or supplement to the Agreement; (c) release or compromise any liability of any party or parties with respect to the Obligations; or (d) exercise or refrain from exercising any right or remedy of QWEST under the Agreement. 6. Assignment. Guarantor understands and agrees that any assignment of ---------- the Agreement, or any rights or obligations accruing thereunder, shall in no way affect Guarantor's obligations under this Guaranty. 7. Delay in Enforcement. Guarantor understands and agrees that any -------------------- failure or delay of QWEST to enforce any of its rights under the Agreement or this Guaranty shall in no way affect Guarantor's obligations under this Guaranty. 8. Notices. Notices to Guarantor are not required under this Guaranty. ------- However, if notice is delivered, unless otherwise provided herein, it shall be hand delivered, sent by registered or certified U.S. mail, postage prepaid, or by commercial overnight delivery service, or transmitted by facsimile, and shall be deemed served or delivered to Guarantor when received at the address set forth after the signature line below, upon confirmation of sending when sent by fax, on the day after being sent when sent by overnight delivery service, or three (3) days after deposit in the mail when sent by U.S. mail. 9. Severability. In case any provision of this Guaranty shall be invalid, ------------ illegal or unenforceable, such provision shall be severable from the rest of this Guaranty and the validity, legality or enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 10. Applicable Law and Jurisdiction. This Guaranty and the rights and ------------------------------- obligations of the parties hereto shall be governed by and construed and enforced in accordance with the laws of the state of New York. Guarantor agrees that the exclusive venue for any actions related to this Guaranty shall be the Federal District Court for the New York or in the alternative the courts of Monroe County, New York. 11. Amendments. No amendment, modification or alteration of this Guaranty ---------- shall be effective unless in writing and signed by the parties hereto or their respective successors or assigns. 12. Successors and Assigns. This Guaranty shall be binding upon and shall ---------------------- inure to the benefit of the successors and assigns of the parties hereto. 13. Attorneys' Fees. If any action shall be instituted by either QWEST or --------------- Guarantor for the enforcement or interpretation of any of its rights, remedies or obligations in or under this Guaranty, the prevailing party shall be entitled to recover from the losing party all costs incurred by the prevailing party in such action and any appeal therefrom, including reasonable attorneys' fees and court costs to be fixed by the court therein. THIS GUARANTY IS FREELY AND VOLUNTARILY GIVEN WITHOUT ANY DURESS OR COERCION AND AFTER GUARANTOR HAS EITHER CONSULTED WITH COUNSEL, OR HAS BEEN GIVEN AN OPPORTUNITY TO DO SO, AND GUARANTOR HAS CAREFULLY AND COMPLETELY READ ALL OF THE TERMS AND PROVISIONS OF THE AGREEMENT AND THIS GUARANTY. K-3 IN WITNESS WHEREOF, this Guaranty has been executed as of the date first above written. GUARANTOR: FRONTIER CORPORATION, a New York corporation /s/ Robert L. Barrett ___________________________________ By: Robert L. Barrett Title: Executive Vice President Guarantor's Address: 180 South Clinton Avenue Rochester, New York 14646 Attn.: Vice President __________________________________ Network Planning and Development K-4 EXHIBIT L GUARANTY -------- This GUARANTY, dated as of October 18, 1996, is from ANSCHUTZ COMPANY, a Delaware corporation (hereafter called "Guarantor"), to and for the benefit of FRONTIER COMMUNICATIONS INTERNATIONAL INC., a Delaware corporation (hereafter called "FCI"). Recital ------- QWEST COMMUNICATIONS CORPORATION (hereafter called "QWEST"), a wholly-owned subsidiary of Guarantor, entered into a IRU Agreement dated as of October 18, 1996, by and between QWEST and FCI (the "Agreement"). FCI would not have entered into the Agreement except for the request of Guarantor and the execution and delivery of this Guaranty. Agreement --------- NOW, THEREFORE, as a material inducement to FCI to enter into the Agreement with QWEST and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor and FCI hereby agree as follows: 1. Guaranty. Guarantor hereby unconditionally and irrevocably guaranties -------- to FCI the full and punctual payment of all amounts payable by QWEST to FCI under the Agreement, including, without limitation, Section 18.2 thereof (such payment obligations are collectively referred to as the "Obligations"). 2. Unconditional Obligations. Guarantor understands and agrees that this ------------------------- Guaranty is direct, immediate, absolute, continuing, unconditional and unlimited (except as provided in Section 14), and is a guaranty of payment and not of collection. If QWEST shall fail to pay or perform any of the Obligations, Guarantor shall pay, forthwith upon demand, to FCI or to FCI's designated agent, any and all such amounts as may be due and owning from QWEST to FCI. 3. Guarantor's Waivers. Guarantor waives: ------------------- (a) notice of the creation or extension of any Obligation by QWEST; (b) notice that QWEST has taken or omitted to take any action under the Agreement or any other instrument relating thereto or relating to any Obligation; (c) notice of acceptance of this Guaranty; (d) demand, presentation for payment and notice of demand, nonpayment or nonperformance; (e) any and all right to participate in any security held by FCI now or in the future; (f) the right to require FCI to (i) proceed against QWEST, (ii) proceed against or exhaust any security which FCI now holds or may hold in the future from QWEST; (iii) pursue any other right or remedy available to FCI, or (iv) have the property of QWEST first applied to the discharge of the Obligations; and (g) any defense by reason of bankruptcy, reorganization, discharge by the filing of bankruptcy or discharge in bankruptcy of QWEST. Guarantor further agrees that the Guaranty will not be discharged and shall remain in full force and effect until the earlier to occur of (a) full payment and performance of all Obligations of QWEST and the liabilities of Guarantor hereunder, or (b) substitution of the Surety Bond (as defined in and pursuant to Section 3.5 of the Agreement), in which case this Guaranty shall terminate as provided in Section 15 hereof. 4. Guarantor's Representations and Warrants. Guarantor represents and ---------------------------------------- warrants that Guarantor has a financial interest in QWEST. 5. Consent. Guarantor understands and consents that from time to time, ------- and without further notice to or consent of Guarantor, FCI may take any or all of the following actions without releasing, discharging or in any way affecting the obligations of Guarantor under this Guaranty: (a) extend, renew, modify, compromise, settle, or release the Obligations; (b) any modification or amendment of or supplement to the Agreement; (c) release or compromise any liability of any party or parties with respect to the Obligations; or (d) exercise or refrain from exercising any right or remedy of FCI under the Agreement. 6. Assignment. Guarantor understands and agrees that any assignment of ---------- the Agreement, or any rights or obligations accruing thereunder, shall in no way affect Guarantor's obligations under this Guaranty. 7. Delay in Enforcement. Guarantor understands and agrees that any -------------------- failure or delay of FCI to enforce any of its rights under the Agreement or this Guaranty shall in no way affect Guarantor's obligations under this Guaranty. 8. Notices. Notices to Guarantor are not required under this Guaranty. ------- However, if notice is delivered, unless otherwise provided herein, it shall be hand delivered, sent by registered or certified U.S. mail, postage prepaid, or by commercial overnight delivery service, or transmitted by facsimile, and shall be deemed served or delivered to Guarantor when received at the address set forth after the signature line below, upon confirmation of sending when sent by fax, on the day after being sent when sent by overnight delivery service, or three (3) days after deposit in the mail when sent by U.S. mail. 9. Severability. In case any provision of this Guaranty shall be invalid, ------------ illegal or unenforceable, such provision shall be severable from the rest of this Guaranty and the validity, legality or enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 10. Applicable Law and Jurisdiction. This Guaranty and the rights and ------------------------------- obligations of the parties hereto shall be governed by and construed and enforced in accordance with the laws of the state of Colorado. Guarantor agrees that the exclusive venue for any actions related to this Guaranty shall be the federal district court of Colorado. 11. Amendments. No amendment, modification or alteration of this Guaranty ---------- shall be effective unless in writing and signed by the parties hereto or their respective successors or assigns. 12. Successors and Assigns. This Guaranty shall be binding upon and shall ---------------------- inure to the benefit of the successors and assigns of the parties hereto. 13. Attorneys' Fees. If any action shall be instituted by either FCI or --------------- Guarantor for the enforcement or interpretation of any of its rights, remedies or obligations in or under this Guaranty, the prevailing party shall be entitled to recover from the losing party all costs incurred by the prevailing party in such action and any appeal therefrom, including reasonable attorneys' fees and court costs to be fixed by the court therein. 14. Limited Maximum Liability. Notwithstanding anything contained herein ------------------------- to the contrary, the liability of Guarantor for the payment of the Obligations shall be limited to the aggregate sum of $175,000,000. 15. Termination. Notwithstanding anything contained herein to the ----------- contrary, this Guaranty and the Obligations of Guarantor hereunder shall terminate and be of no further force and effect automatically and without further action on the part of any person upon delivery of the Surety Bond (as defined in and pursuant to Section 3.5 of the Agreement) to FRONTIER. Upon such termination, FRONTIER shall return to Guarantor the original of this Guaranty marked Discharged and Terminated. THIS GUARANTY IS FREELY AND VOLUNTARILY GIVEN WITHOUT ANY DURESS OR COERCION AND AFTER GUARANTOR HAS EITHER CONSULTED L-3 WITH COUNSEL, OR HAS BEEN GIVEN AN OPPORTUNITY TO DO SO, AND GUARANTOR HAS CAREFULLY AND COMPLETELY READ ALL OF THE TERMS AND PROVISIONS OF THE AGREEMENT AND THIS GUARANTY. IN WITNESS WHEREOF, this Guaranty has been executed as of the date first above written. GUARANTOR: ANSCHUTZ COMPANY, a Delaware corporation /s/ Craig D. Slater _________________________________________ By: Craig D. Slater Title: Vice President Guarantor's Address: 2400 Anaconda Tower 555 Seventeenth Street Denver, Colorado 80202 Attn.: President L-4 EX-10.12 6 RESTATED SUPPLEMENTAL MANAGEMENT PENSION PLAN EXHIBIT 10.12 [1/1/96 Restatement] FRONTIER CORPORATION SUPPLEMENTAL MANAGEMENT PENSION PLAN FRONTIER CORPORATION hereby amends, restates, renames and continues, effective January 1, 1996, (except for those provisions specifying a different effective date), the Rochester Telephone Corporation Supplemental Management Pension Plan for the benefit of employees who are eligible to participate. The Plan is renamed as the Frontier Corporation Supplemental Management Pension Plan to reflect Frontier's being the successor to Rochester Telephone Corporation. ARTICLE ONE Definitions ----------- 1.1 "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. 1.2 "Change in Control" means the occurrence of any of the following events: a. 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 -2- 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 b. the shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; or c. 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 d. 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 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. -3- 1.3 "Committee" means a Board-appointed committee delegated authority with respect to the management of the Plan or of any assets set aside for the purpose of assisting any Participating Company meet its obligations to pay Plan benefits. 1.4 "Company" means Frontier Corporation. 1.5 "Effective Date" means January 1, 1984. The effective date of this restatement is January 1, 1996, except that provisions having a different specific effective date shall be effective as of such date. 1.6 "Funded Plan" means the Company's Management Pension Plan. To reflect a change in this plan's name, effective January 1, 1997, Funded Plan means the Company's Pension Plan for Non-Bargaining Employees. 1.7 "Normal Retirement Date" and "Early Retirement Date" have the same meanings given these terms in the Funded Plan. 1.8 "Participant" means any employee that meets the eligibility requirements under Article Three of the Plan. 1.9 "Participating Company" means the Company and all employers affiliated with the Company as determined in accordance with the definition of "affiliated company" under the Funded Plan. 1.10 "Plan" means this Frontier Corporation Supplemental Management Pension Plan. -3- ARTICLE TWO Purpose of Plan --------------- 2.1 The purpose of this Plan is to attract and retain a highly-motivated executive workforce by providing to eligible employees retirement benefits in excess of those permitted under the Funded Plan. The Plan is intended to constitute an unfunded plan of deferred compensation for a select group of management or highly-compensated employees as provided for in Title I of ERISA. ARTICLE THREE Eligibility ----------- 3.1 An employee of a Participating Company is eligible to participate in this Plan if he or she is a participant in the Funded Plan but his or her Funded Plan benefits are reduced on account of compensation or benefit limits imposed by Code Sections 401(a)(17) or 415. Notwithstanding the foregoing, no employee in the preceding categories shall be eligible to participate unless such employee (1) is a management employee; (2) has an accrued benefit under the Funded Plan; (3) has been approved for plan participation by the Committee; and (4) is a "highly compensated employee" as this term is defined from time to time under Section 414(q) of the Internal Revenue Code. An otherwise eligible employee who, without the consent of the Board, engages in any activity inimical to the interests of any Participating Company within three years (five years in the case of an executive officer or Vice President 2 of the Company) of retirement shall cease being eligible to receive any further benefits after commencing such activity, provided that upon a Change in Control this sentence shall have no effect. For purposes of the foregoing, the term "inimical" shall include but not be limited to the following activities: engaging directly or -5- indirectly in the performance of services for any telecommunications business or any other business concern that offers services or products which compete with those offered by any company within the Frontier Group of companies or with any partnership in which the Company has a 50 percent or greater interest in profits or capital (collectively referred to below as "Frontier"), making disparaging remarks publicly about Frontier, disclosing confidential business information concerning Frontier, soliciting any person to leave the employ of Frontier, engaging in any activity of a nature similar to the foregoing activities or engaging in any other activity that the Committee may from time to time determine in its sole discretion to be inimical to the interests of Frontier. ARTICLE FOUR Benefits -------- 4.1 The normal benefit payable to a Participant on his or her Normal or Early Retirement Date shall be a straight life annuity equal to the aggregate amount he or she would be entitled to receive under the Funded Plan if the Funded Plan's benefit formula had the modifications indicated below, less the amount the Participant is actually entitled to receive under the Funded Plan without such modifications. The modifications referred to are as follows: (a) the term compensation means a Participant's total base salary or wages, cash bonuses and commissions earned during a year, even if such amounts are deferred to a subsequent year, but without regard to the limits of Code Section 401(a)(17). Deferred compensation taken into account in the year earned shall not thereafter be taken into account in the year of receipt. (b) if in the discretion of the Committee, upon the recommendation of the Chief Executive Officer, the factors so warrant, the service factor shall take -6- into account the Participant's service with any prior employer, provided that after a Change in Control the Committee may not change a prior decision to allow a Participant's service factor to take into account service with another company. In the event the Committee credits a Participant with service with another employer under this subsection (c), the benefit payable under this Section shall be reduced by any comparable benefit the Participant is entitled to receive from such other employer which is based on the service credited under this Section 4.1. (c) for a Participant who is an officer, the service factor shall include the amount of any service for which payment is made to such Employee under a change in control executive contract between the Participant and the Company. (d) if the benefit formula under the Funded Plan is not calculated in the form of a straight life annuity, it shall be converted to a straight life annuity using the actuarial assumptions set forth in the Funded Plan. (e) the limitations under Code Section 415 shall not apply to the benefit payable under this Plan. Except for the foregoing modifications, the benefit calculation under this Section shall be made in the same manner as it would be made under the Funded Plan, including application of any pertinent reductions for early retirement and the use of the same definitions that appear in the Funded Plan. Notwithstanding the foregoing, the benefits provided above in this Section 4.1 shall be frozen as of December 31, 1996, subject to the following terms and conditions: -7- (f) no person not already a Plan Participant on December 31, 1995 shall be eligible to receive a benefit under this Section. (g) all accrued benefits under this Section are frozen as of December 31, 1996 and no further benefits shall accrue under this Section after this date. (h) service after December 31, 1996 shall not be taken into consideration for benefit accrual purposes but shall be taken into account for purposes of determining eligibility to receive a benefit. (i) all accrued benefits for Participants hired prior to January 1, 1995 are fully vested. (j) each Participant on the active payroll (or on the inactive payroll but receiving benefits under the Company's long term disability benefit plan) on August 16, 1995 who has at least five years of service on this date shall have his or her benefit under this Section which is determined at the earlier of December 31, 1996 or termination of employment increased by 20 percent. (k) for each Participant entitled to the 20 percent enhancement described above, the eligibility requirements for determining the Participant's entitlement to receive early or normal retirement benefits shall be reduced as follows: . the 30 years of service requirement for a normal retirement benefit is reduced to 27 years . the age 55 plus 20 years of service requirement for an unreduced early retirement benefit is reduced to 52 years plus 17 years of service . the age 50 plus 25 years of service requirement for a reduced early retirement -8- benefit is reduced to 47 years plus 22 years of service. 4.2 Subject to the conditions set forth below, a Participant holding the position of Vice President 1 or higher who terminates employment on or after reaching age 50 with at least five years of service shall be entitled to receive the higher of the Section 4.1 benefit or a benefit equal to (a) minus (b) below where (a) equals the sum of (1) for each of the Participant's first 15 years of service, 2.5 percent times his or her 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 or her 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 Participant's highest three years' average compensation; minus (b) equals the sum of the straight life annuity benefit payable under Section 4.1 of this -9- 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 Participant'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. Notwithstanding the foregoing, the benefits provided by this Section 4.2 shall be frozen as of December 31, 1999, subject to the following terms and conditions: . No person not already a Participant on December 31, 1995 and accruing benefits under this Section 4.2 shall be eligible to receive a benefit under this Section. . All accrued benefits under this Section 4.2 are frozen as of December 31, 1999 and no further benefits shall accrue under this Section after this date. . All Participants accruing benefits under this Section 4.2 of the Plan on or before January 1, 1996 shall have their benefits which are earned as of December 31, 1999 become 100 percent vested on that December 31, 1999 provided they remain a Participant in this Section 4.2 on that date. 4.3 The Company shall pay the benefits due under this Plan commencing within 30 days of retirement, disability, death or any other event that entitles a Participant or beneficiary to receive benefits under the Funded Plan. 4.4 The benefit payable under this Plan shall be either a life annuity or a contingent survivor annuity depending on the form elected by the Participant on forms supplied by the Committee. Any such election shall first be made by a Participant prior to the accrual of -10- benefits under this Plan. A Participant may change his or her initial election by written notification to the Committee provided that no subsequent election shall be effective unless made at least 36 months prior to the date that benefit payments first become payable. In the event no timely election is made or a timely election is not possible at the time benefits become payable (e.g., due to the death of a ---- contingent annuitant or a change in marital status), the benefit to a single Participant will be paid in the form of a life annuity and the benefit to a married Participant will be paid in the form of a joint and 50 percent spousal survivor annuity. Notwithstanding the foregoing, the Committee in its sole discretion may elect to pay the entire benefit in a lump sum payment. The amount of the actual benefit paid from this Plan shall be the straight life annuity calculated under Section 4.1 (or Section 4.2 if applicable) adjusted as appropriate by using the actuarial assumptions used in the Funded Plan if a different form of benefit is paid. 4.5 If a Participant dies while still employed by a Participating Company and after becoming entitled to receive a vested benefit, the Participant's spouse, if surviving, shall be entitled to a monthly lifetime benefit equal to one-half of the benefit the Participant would have received under Section 4.1 (or Section 4.2 if applicable) had he or she elected a 50 percent contingent annuitant annuity and retired on the first day of the month on or before the date of death. In the discretion of the Committee, the value of this benefit may be paid out in a lump sum or in another alternative form of benefit it may elect. 4.6 The benefits payable to a Participant under this Plan shall be paid by the Participating Company that employs the Participant out of its general assets and shall not be otherwise funded. Although the Company does not intend, as of the effective date, to set aside any specific assets to meet its obligation to pay benefits under this Plan, the Company may, in its discretion, set aside assets for meeting its obligations, -11- including, but not limited to, the establishment of a rabbi or other grantor trust. In the event such fund or trust is established, each Participating Company shall be responsible for making contributions to provide for the benefits of its own Participants. No Participant shall have any property rights in any such fund or trust or in any other assets held by a Participating Company. The right of a Participant or his or her spouse or beneficiary to receive any of the benefits provided by this Plan shall be an unsecured claim against the general assets of a Participating Company. ARTICLE FIVE Administration -------------- 5.1 This Plan shall be administered by the Committee in accordance with its terms and purposes. 5.2 Since this Plan is intended to operate in conjunction with the Funded Plan, any questions concerning the calculation of benefits that arise but are not specifically addressed by this Plan shall be determined to the extent relevant and appropriate by reference to the Funded Plan's provisions. In addition, the terms used in this Plan shall have the same meaning as the same terms used in the Funded Plan. To the extent the Funded Plan does not address, or it addresses imperfectly, an issue raised with respect to benefit entitlement or benefit levels under this Plan, the Committee has the sole discretion to resolve any matter that may come before it. 5.3 The Committee shall determine the benefits due each Participant from this and the Funded Plan and shall cause them to be paid by the Funded Plan or a Participating Company accordingly. 5.4 The Committee shall inform each Participant of any benefit elections which the Participant may possess and -12- shall record such choices along with such other information as may be necessary to administer the Plan. 5.5 The Committee has sole discretion to determine eligibility to participate in this Plan, to determine the eligibility for and the amount of benefits, to interpret the Plan and to take any other action it deems appropriate to administer this Plan. The decisions made by and the actions taken by the Committee shall be final and conclusive on all persons. Members of the Committee shall not be subject to individual liability with respect to their actions under this Plan. Notwithstanding the foregoing, the Company shall indemnify each member of the Committee who may incur financial liability for actions or failures to act with respect to the member's Committee responsibilities. ARTICLE SIX Amendment and Termination ------------------------- 6.1 While the Company intends to maintain this Plan in conjunction with the Funded Plan for as long as necessary, the Board reserves the right to amend or terminate it at any time for whatever reasons it may deem appropriate. 6.2 Notwithstanding the preceding Section, however, the Company hereby makes a contractual commitment on behalf of itself and the other Participating Companies, as well as its and their successors, to pay, or to require the other Participating Companies or the successors to pay, the benefits accrued under this Plan to the extent it or the other Participating Companies or the successors are financially capable of meeting such obligation. 6.3 The terms of this Plan cannot be amended, waived or otherwise modified by any other plan, contract or agreement that addresses an employee's or former -13- employee's terms and conditions of employment or the termination of such employment. ARTICLE SEVEN Miscellaneous ------------- 7.1 Nothing contained in this Plan shall be construed as a contract of employment between a Participating Company and an employee, or as a right of any employee to be continued in the employment of a Participating Company, or as a limitation of the right of a Participating Company to discharge any of its employees with or without cause. 7.2 The rights of a Participant under this Plan shall not be transferable, voluntarily or involuntarily, other than by will or the laws of descent and distribution and are exercisable during the Participant's lifetime only by the Participant or the Participant's guardian or legal representative. 7.3 This Plan shall be interpreted and enforced in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the Company has caused this restated Plan document to be executed by its duly authorized officer this 19th day of December, 1996. FRONTIER CORPORATION By: /s/ Josephine S. Trubek Josephine S. Trubek Corporate Secretary EX-10.13 7 RESTATED SUPPLEMENTAL RETIREMENT SAVINGS PLAN EXHIBIT 10.13 [1/1/96 Restatement] FRONTIER CORPORATION SUPPLEMENTAL RETIREMENT SAVINGS PLAN FRONTIER CORPORATION hereby amends, restates and continues, effective January 1, 1996, its Supplemental Retirement Savings Plan to permit eligible Employees to defer a portion of their compensation under this Plan as a supplement to contributions made to the Frontier Group Employees' Retirement Savings Plan. ARTICLE ONE Definitions ----------- 1.1 "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. 1.2 "Code" means the Internal Revenue Code of 1986, as amended, and regulations issued thereunder. 1.3 "Committee" means a Board-appointed committee delegated authority with respect to the management of the Plan or any assets set aside for the purpose of assisting any Participating Company meet its obligations to pay Plan benefits. 1.4 "Company" means Frontier Corporation. 1.5 "Compensation" means compensation as defined in ERSP but without regard to the limitations prescribed in Code Section 401(a)(17). 1.6 "Effective Date" means January 1, 1988. The effective date of this restatement is January 1, 1996. -2- 1.7 "Employee" means any management or highly compensated employee of a Participating Company who is eligible to participate in ERSP but whose contributions to ERSP are limited by the Code. 1.8 "ERSP" means the Frontier Group Employees' Retirement Savings Plan as amended from time to time. 1.9 "Participating Company" means the Company and any affiliated company participating in ERSP whose employees are eligible to participate in this Plan. 1.10 "Plan" means this Frontier Corporation Supplemental Retirement Savings Plan. 1.11 "Plan Year" means the calendar year. 1.12 "Trustee" means Marine Midland Bank, N.A. ARTICLE TWO Purpose of Plan --------------- 2.1 The purpose of this Plan is to afford eligible Employees the opportunity to defer into this Plan the contributions that otherwise would have been permitted into ERSP but for certain contribution or compensation limits imposed by the Internal Revenue Code and for the Participating Companies to contribute additional amounts on behalf of these Employees. ARTICLE THREE Eligibility ----------- 3.1 Every Employee eligible to participate in ERSP shall be entitled to participate in this Plan provided that (a) such Employee's contributions to ERSP have been capped by one or more of the Code's contribution or compensation limits, (b) such Employee belongs to a select group of management or highly-compensated employees as provided for in Title I of ERISA, and (c) such Employee is a "highly compensated employee" as this term is defined from time to time under Code Section 414(q). -3- ARTICLE FOUR Contributions ------------- 4.1 Employee Contributions. An eligible Employee may contribute to this ---------------------- Plan in a Plan Year any amount up to the maximum percentage of his or her Compensation permitted under ERSP for the Year without taking into account ERSP's compensation or dollar contribution limits required under Code Sections 401(a)(17) or 415, reduced by the Employee's maximum permissible salary reduction contributions to ERSP for the Plan Year. All Employee contributions shall be made by salary reduction as determined under Section 4.3. 4.2 Participating Company Contributions. ----------------------------------- (a) Matching Contributions. If any portion of an eligible Employee's ---------------------- contributions under Section 4.1 consists of amounts that would have been matched by a Participating Company under ERSP but for a Code limitation on contributions, the Participating Company will make matching contributions under this Plan with respect to such amounts at the same level and under the same terms as specified in ERSP. Any limitation on matching contributions that are not attributable to Code limitations (e.g., ERSP's cap on the maximum Participating Company ---- match) shall apply to contributions made under this Plan. If an eligible Employee contributes to both this Plan and ERSP, the Participating Company's total matching contributions under both plans shall not exceed the total matching contributions the Participating Company would have made if all of the Employee's contributions were made to ERSP, assuming that all of the eligible Employee's Compensation were taken into account. (b) Fixed Contributions. A Participating Company shall contribute on ------------------- behalf of each of its eligible Employees an amount equal to 0.5 percent of the Employee's payroll period Compensation as it would have made to ERSP on the Employee's behalf were it not for Code limitations imposed on such ERSP contributions less the amounts it actually contributed to ERSP taking into account the Code limitations. (c) Discretionary Contributions. Each year a Participating Company --------------------------- shall contribute a discretionary contribution on behalf of each of its eligible Employees in an amount it would have made to -4- ERSP but for Code limits on ERSP's discretionary contributions less the amount of discretionary contributions it actually contributed to ERSP on behalf of an eligible Employee. In addition, a Participating Company may contribute on behalf of each of its eligible Employees a lump sum supplemental contribution intended to bring the level of aggregate Participating Company contributions under ERSP and this Plan to the level that had been contributed by the Participating Company on the Employee's behalf under a predecessor plan to ERSP. 4.3 Deferral Election for Employee Contributions. An eligible Employee -------------------------------------------- may defer compensation under this Plan only by making a written election with his or her Participating Company before the beginning of the calendar year for which the deferrals will be effective. Such written election shall include (a) the amount to be deferred; (b) the time as of which the deferral is to commence; and (c) the form that benefit payments from the Plan will take. The terms of this election shall be irrevocable except that a new election form may be filed with respect to future deferrals under such terms as the eligible Employee may elect and except that the form of benefit payments may be changed consistent with Section 6.1. 4.4 Coordination of Deferrals with ERSP. No contributions may be ----------------------------------- allocated to an Employee's account in this Plan for a Plan Year unless the Employee has first contributed to ERSP for the Plan Year the maximum amount he or she is entitled to contribute to ERSP. In order to satisfy the various contribution limits and antidiscrimination tests applicable to ERSP, the Committee may, in its sole discretion, require some or all of the eligible Employees in this Plan to make all salary reduction contributions for both plans initially to this Plan as follows: prior to the beginning of a Plan Year an affected Employee shall make two deferral elections, one for his or her total salary reductions for the Plan Year, all of which shall initially be contributed to this Plan and the second for the contributions to ERSP in an amount equal to the greater of the statutorily permissible amount or the total salary reduction contributions for the Plan Year. All of such contributions plus all of a Participating Company's matching contributions shall remain in this Plan through the end of the Plan Year. By the January 31 following the end of the Plan Year -5- the Committee shall complete all of the required testing under ERSP. By the March 31 following the Plan Year end the Committee shall, as elected by the Employee, either (1) transfer from this Plan all contributions (including matching contributions but not earnings on any contributions) that may be contributed to ERSP for the Plan Year or (2) distribute such amount to the Employee in cash. The amounts not transferred out of this Plan in accordance with the preceding sentence shall be retained in this Plan and paid out in accordance with the Employee's deferral election. ARTICLE FIVE Investment of Contributions --------------------------- 5.1 Investment of Deferred Amounts. The Participating Company of an ------------------------------ eligible Employee shall have the ultimate obligation to pay out all deferred amounts plus the earnings thereon in accordance with the terms of this Plan. The Trustee shall be empowered to invest such amounts and any earnings thereon in such investments (not to include securities of the Trustee) as may be designated by the Committee. All Participating Company contributions and the earnings on them that would have been invested in Frontier Corporation common stock under ERSP shall be invested in Frontier Corporation common stock until the fifth anniversary of the date of investment (the "Restricted Stock"). At the expiration of the five year period, the Restricted Stock in an eligible Employee's account shall lose its investment restriction and may be invested, along with all other amounts in his or her account, among all investments made available from time to time by the Committee. For this purpose, an eligible Employee may express a preference to the Committee on how he or she would prefer to have his or her accounts invested among the investment choices made available from time to time by the Committee. An eligible Employee may also elect a preference for changing the investment of his or her account as frequently as the Committee in its sole discretion may permit. All such preferences shall be made pursuant to such procedures as the Committee shall adopt. In order to meet its obligations under this Plan, the Company may appoint a Trustee and direct such Trustee -6- to establish individual investment accounts for each eligible Employee. The Trustee shall be empowered to invest such accounts and any earnings thereon in such investments (not to include securities of the Trustee) as may be designated by the Committee. In the event a Trustee is appointed to invest eligible Employee accounts, the Committee shall be responsible for directing how the accounts are to be invested, taking into account Employee preferences. If no Trustee is appointed, the Committee shall establish bookkeeping accounts and credit earnings to such accounts in accordance with such investment benchmarks as may be established from time to time. 5.2 Rollover of Other Deferred Compensation Accounts. The Committee in ------------------------------------------------ its sole discretion may direct the transfer of amounts deferred by an eligible Employee under another unfunded deferred compensation plan of a Participating Company to the eligible Employee's account under this Plan. Such transfer shall be made for the purpose of commonly investing the deferred amounts under a single trust agreement. Any such transfer of assets shall be permitted only to the extent that the assets are of a type in which the Trustee can invest under this Plan. No transfer of assets shall change the terms of any deferred compensation election made by the eligible Employee with respect to such transferred assets. However, to the extent consistent with any election on the other unfunded deferred compensation arrangement's election form, the terms of this Plan and its associated trust agreement shall govern such transferred amounts. 5.3 Limitations on Assignment of Benefits. The Company's purpose in ------------------------------------- creating separate participant accounts is to provide comfort to eligible Employees that the deferred amounts will be available to pay benefits when due. However, each eligible Employee's account under the trust shall be subject to the claims of his or her Participating Company's creditors in the event of the Participating Company's insolvency or bankruptcy as provided in the trust agreement. Notwithstanding the foregoing, the benefits payable under this Plan shall not revert to a Participating Company or be subject to the Participating Company's creditors prior to insolvency or bankruptcy, nor shall they be subject in any way to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution or levy of any kind by the eligible Employee, his or her beneficiary or the creditors of either, including any -7- such liability as may arise from the eligible Employee's bankruptcy. 5.4 Unfunded Nature of Plan. Notwithstanding any investment arrangements ----------------------- that may be established, it is intended that this Plan shall be treated as an unfunded plan of deferred compensation as this term is used in Title I of ERISA and it shall be administered accordingly. ARTICLE SIX Benefits -------- 6.1 Timing and Form of Benefit Payments. The amounts accumulated in an ----------------------------------- eligible Employee's account shall be paid in full or shall commence within 30 days of termination of employment. Account balances may be made in cash or in property in either a lump sum or in monthly installment payments of substantially equal amounts for a specified number of years not in excess of twenty. The election of the form of payment shall be made initially at the time of the deferral election as specified in Section 4.3. The form of payment may be changed by an Employee's written election to the Committee at any time up to 36 months prior to termination of employment. Any change made within 36 months of an Employee's termination date shall be disregarded by the Committee. 6.2 Death Benefits. In the event of an eligible Employee's death, his or -------------- her account balance shall be payable to his or her designated beneficiary which may be a natural person, a trust or an estate. An eligible Employee shall designate his or her beneficiary in writing on a form acceptable to the Committee. The eligible Employee may specify the form of payment to be made to the designated beneficiary. If no election is made, the payment shall be made in a lump sum amount. If the Employee makes the designation, the form of payment may be any form that would have been available to the eligible Employee under Section 6.1 had the eligible Employee lived and been eligible to receive benefits. The filing of any beneficiary designation form shall have the effect of automatically revoking any beneficiary designation form filed previously. The consent of a previously- designated beneficiary shall not be a prerequisite for an eligible Employee to file a new beneficiary designation form. -8- All death benefits shall commence or be made in full as soon as administratively practicable following the date of the eligible Employee's death. If a beneficiary is not validly designated, or is not living or cannot be found at the date of payment, any amount payable pursuant to this Plan shall be paid to the spouse of the eligible Employee if living at the time of payment, otherwise in equal shares to such children of the eligible Employee as may be living at the time of payment; provided, however, that if there is no surviving spouse or child at the time of payment, such payment shall be made to the estate of the eligible Employee. All payments made under the preceding sentence shall be made in a lump sum amount. 6.3 Hardship Withdrawals. Notwithstanding the payment terms set forth in -------------------- an eligible Employee's deferral election, benefits may be paid earlier in the case of an unforeseeable emergency. For this purpose, an unforeseeable emergency means an unanticipated emergency that is caused by an event beyond the control of the eligible Employee or the Employee's beneficiary and that would result in severe financial hardship to the affected individual if early withdrawal were not permitted. The amount that may be paid under this section is limited to the amount necessary to meet the emergency. 6.4 Source of Benefit Payments. Subject to the claims of a Participating -------------------------- Company's creditors, the Trustee shall pay benefits in accordance with the Committee's directions. If the Trustee holds insufficient funds to pay the deferred amounts, adjusted for the earnings (and losses) on them, each Participating Company shall have the obligation to pay such amounts to its eligible Employees. Such payments shall be made from the general assets of the Participating Company. -9- ARTICLE SEVEN Administration and Procedures ----------------------------- 7.1 Plan Administration. The Board, Trustee, 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. 7.2 Establishment of Accounts. The Committee shall establish and maintain ------------------------- individual accounts for each eligible Employee, which accounts shall record all activities with respect to the accounts, including contributions, adjustments for earnings (and losses), and withdrawals. The Committee shall determine the benefits due each Employee from this Plan and shall direct them to be paid by a Participating Company or the Trustee accordingly. 7.3 Decisions of Committee. The decisions made by, and the actions taken ---------------------- by, the Committee in the administration of this Plan shall be final and conclusive on all persons. Except for their wilful misfeasance, bad faith, gross negligence or reckless disregard of their duties, the members of the Committee shall not be subject to individual liability with respect to this Plan. 7.4 Committee Communications. The Committee shall inform each Employee of ------------------------ any deferral, investment and beneficiary elections which the Employee may possess and shall record such choices along with such other information as may be necessary to administer the Plan. ARTICLE EIGHT Amendment and Termination ------------------------- 8.1 Company's Authority. While it intends to maintain this Plan in ------------------- conjunction with ERSP for as long as necessary to achieve its purposes, the Company reserves the right to amend or to terminate the Plan at any time for whatever reason it may deem appropriate. No Plan amendment shall accelerate the -10- payment of amounts previously deferred or provide for additional benefits. 8.2 Participating Company Obligations for Benefits. Notwithstanding the ---------------------------------------------- preceding Section, the Participating Companies hereby make a contractual commitment to pay to their respective Employees the benefits accrued under this Plan to the extent they are financially capable of meeting such obligations. ARTICLE NINE Miscellaneous ------------- 9.1 Relationship to Employment. Nothing contained in this Plan shall be -------------------------- construed as a contract of employment between a Participating Company and an Employee, or as a right of any Employee to be continued in the employment of a Participating Company, or as a limitation on the right of a Participating Company to discharge any of its Employees, with or without cause. 9.2 Coordination with ERSP. If questions concerning the interpretation or ---------------------- administration of this Plan arise that are not governed by the terms set forth in this document, or that are governed by this Plan but are ambiguous, the terms of ERSP will govern to the extent they are consistent with the terms and purposes of this Plan. 9.3 Governing Law. This Plan shall be interpreted and enforced in ------------- accordance with the laws of the State of New York. IN WITNESS WHEREOF, the Company has caused this Plan document to be executed by its duly authorized officer this 19th day of December 1996. FRONTIER CORPORATION By: /s/ Josephine S. Trubek Josephine S. Trubek Corporate Secretary EX-11 8 COMPUTATION OF EARNINGS 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 Years Ended December 31, ------------------------------------------------ 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Income applicable to common stock $208,744 $ 20,892 $178,870 $119,514 $101,511 Add: Interest on convertible debentures (1) 554 - 554 553 561 ------------------------------------------------ $209,298 $ 20,892 $179,424 $120,067 $102,072 ------------------------------------------------ Less: Increase in related federal income taxes (1) 194 - 194 194 191 ------------------------------------------------ Adjusted income applicable to common stock $209,104 $ 20,892 $179,230 $119,873 $101,881 ------------------------------------------------ Average common shares outstanding (excluding common stock equivalents) 162,577 152,077 148,170 134,093 112,519 Adjustments for: Convertible debentures (1) 503 - 502 502 528 Stock Options 1,488 9,592 12,183 19,137 23,661 ------------------------------------------------ Adjusted common shares assuming conversion of outstanding convertible debentures and stock options at the beginning of each period. 164,568 161,669 160,855 153,732 136,708 ------------------------------------------------ Net income per average share of common stock on a fully diluted basis $1.27 $.13 $1.12 $.78 $.74
(1) Convertible debentures are anti-dilutive in 1995. EX-13.1 9 SPECIFIED PORTIONS OF THE ANNUAL REPORT Exhibit 13.1 Contents Management's Discussion of Results of Operations and Analysis of Financial Condition 14 Report of Independent Accountants 21 Report of Management 21 Report of Audit Committee 21 Business Segment Information 22 Consolidated Statements of Income 23 Consolidated Balance Sheets 24 Consolidated Statements of Cash Flows 25 Consolidated Statements of Shareowners' Equity 26 Notes to Consolidated Financial Statements 27 Condensed Six-Year Financial Statements 38 Financial and Operating Statistics For Six Years 39 Financial Review Frontier Corporation accomplished a great deal in 1996. Revenue grew over 20 percent, to nearly $2.6 billion. Earnings per share, excluding nonrecurring charges, increased more than 11 percent over the prior year, and operating income improved over 10 percent. For the 37th consecutive year, the company raised the dividend on its common stock. Frontier's financial condition as of December 31, 1996, was excellent and leaves Frontier well-positioned to grow and to meet the challenges of increased competition. [GRAPH OF DIVIDENDS PAID PER COMMON SHARE APPEARS HERE] [GRAPH OF CONSOLIDATED OPERATING INCOME APPEARS HERE] [GRAPH OF DEBT RATIO APPEARS HERE] [GRAPH OF SOURCES OF 1996 REVENUE APPEARS HERE] 13 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, 1996. ALL HISTORICAL FINANCIAL DATA PRESENTED HAVE BEEN RESTATED FOR 1995 POOLING OF INTERESTS TRANSACTIONS. THE MATTERS DISCUSSED THROUGHOUT THIS ANNUAL REPORT, EXCEPT FOR HISTORICAL FINANCIAL RESULTS CONTAINED HEREIN, MAY BE FORWARD LOOKING IN NATURE OR "FORWARD LOOKING STATEMENTS." ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE FORECASTS OR PROJECTIONS PRESENTED. FORWARD LOOKING STATEMENTS ARE IDENTIFIED BY SUCH WORDS AS "EXPECTS," "ANTICIPATES," "BELIEVES," "INTENDS," "PLANS" AND VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS. THE COMPANY BELIEVES ITS PRIMARY RISK FACTORS INCLUDE, BUT ARE NOT LIMITED TO: CHANGES IN THE OVERALL ECONOMY, THE NATURE AND PACE OF TECHNOLOGICAL CHANGE, THE NUMBER AND SIZE OF COMPETITORS IN FRONTIER'S MARKETS, CHANGES IN LAW AND REGULATORY POLICY, AND THE MIX OF PRODUCTS AND SERVICES OFFERED IN THE COMPANY'S TARGET MARKETS. ANY FORWARD LOOKING STATEMENTS IN THE 1996 ANNUAL REPORT SHOULD BE EVALUATED IN LIGHT OF THESE IMPORTANT RISK FACTORS. Strategic Developments This year was a period of transition and positioning for Frontier. The Company continues to make the transformation from a provider of local and long distance services to a nationwide provider of integrated communications services. The Federal Telecommunications Act of 1996 (the "Act") will accelerate the deregulation of the telecommunications industry and will also allow and encourage additional competitors to enter Frontier's businesses. The Act provides the Company greater flexibility and speed to enter into new markets and expand its customer base with bundled telecommunications products that few of Frontier's larger competitors offer or currently have the regulatory freedom to pursue. Throughout 1996, the Company commenced strategic initiatives to better position itself in an increasingly competitive marketplace. A few of the most notable initiatives follow: The strategic purchases of and mergers with long distance companies that occurred during 1995, were largely integrated in 1996. The anticipated operating synergies resulting from the restructuring of the long distance operations have been achieved and are reflected in the results of operations for the year. Frontier announced in October 1996 that it had joined Qwest Communications as a partner in the construction of a $2 billion nationwide fiber optic network, which when complete, will be the largest single fiber build in United States history. The Company will invest almost $500 million through 1998 to complete the project. Construction began in October 1996. The multi-ring Synchronous Optical Network ("SONET") architecture increases speed and reliability and is expected to reduce the Company's network transmission costs beginning in mid-year 1997. When complete in 1998, it is planned that Frontier's network will interconnect nearly 100 cities, encompass more than 13,000 route miles and provide coast-to-coast SONET connectivity. The Company expects to finance the project primarily with cash from operations and short to medium-term debt. The Company began its first offering of competitive local telephone service as an Alternative Local Exchange Carrier (A-LEC) in the fourth quarter of 1996. As an A-LEC, Frontier is providing local service, combined with a complete range of long distance and wireless products, in the New York City area. The Company is utilizing its own switch in conjunction with a local resale agreement with Nynex. Providing local telephone services as an A-LEC is an efficient method of entering large markets and capitalizes on the Company's experience as a provider of bundled telecommunication services. The Company plans to enter other new markets either as a facilities based local carrier or as a reseller of local telecommunications services in 1997. The Rochester, New York local telephone operation successfully completed its second year under the Open Market Plan. The Open Market Plan promotes telecommunications competition and preceded the Telecommunications Act of 1996. The Company's retail and wholesale market share remained stable versus the prior year, despite the increased discount rates offered to resellers during 1996. The Company believes it will continue to succeed in this market and other competitive markets providing a bundled telecommunication product on one bill. The Company's goal is to continue to develop its products and customer base and build larger customer clusters in target segments and geographic markets, with the overall objective of expanding its operations across line-of-business boundaries. Consolidated Results of Operations Consolidated revenues were $2.6 billion in 1996, a $431.9 million, or 20.1%, increase over 1995. Revenues in 1995 increased $476.1 million or 28.6% over 1994. Normalized for purchase acquisitions, revenues increased 11.8% and 17.2% in 1996 and 1995, respectively. The 1996 revenue increase is attributed to growth in traffic, increased sales and marketing efforts and the promotion of new products and features in the long distance and local telephone segments. The decline in the normalized revenue growth rate in 1996 as compared to 1995 is principally due to the migration of the 1-plus basic long distance service of the Company's major carrier customer from the Frontier network in the fourth quarter of 1996 and lower traffic growth in other sales channels. The normalized revenue growth rate of 17.2% for 1995 is positively impacted by the major carrier customer's business doubling in size over 1994. Normalized for certain nonrecurring events, costs and expenses were $2.1 billion, $1.7 billion, and $1.3 billion in 1996, 1995 and 1994, respectively. This resulted in operating income increases of 10.3% and 22.3% in 1996 and 1995, respectively. Operating margins were 17.1%, 18.6% and 19.5% during 1996, 1995 and 1994, respectively. The decline in operating income growth and the level of margins for 1994 through 1996 is primarily a result of the increasing share of the Company's total business represented by long distance, which operates at a lower margin than the local communications segment. The decline was also influenced by the impact of 14 the high growth through the fourth quarter of 1996 of the Company's major long distance carrier customer, which occurred at comparatively lower margins than the rest of the Company's business. Pursuant to contract, the Company provided this customer with volume discounts as its traffic grew at an accelerated pace over the past two years. A full discussion of the impact of this customer on the Company's performance is on page 17. Additionally, selling, general and administrative costs ("SG&A") increased in the long distance segment in the last quarter of 1996 primarily as the result of an increase in sales distribution channels and a brand advertising program that was implemented. These costs are expected to positively impact revenue and operating income in 1997. The Company recorded a $16 million charge in the fourth quarter of 1996 to reflect the resolution of an international traffic dispute with connecting carriers. This charge, which is not material to each of the other quarterly results reported in 1996, reduced reported EPS in the fourth quarter by approximately $.06. International long distance service is a part of the Company's overall product set. Frontier primarily resells the international long distance services of other long distance carriers. The Company is exploring alternatives to resale which could result in the lowering of its cost structure for international traffic in the future. Earnings per share were $1.27, $.13 and $1.12 for the years ended 1996, 1995 and 1994, respectively. Excluding the impact of the nonrecurring adjustments discussed below, net income amounted to $247.1 million, $218.7 million and $180.1 million in 1996, 1995 and 1994, respectively. Earnings per share, excluding these adjustments, were $1.50, $1.35 and $1.12 for the three years, increases of 11.1% and 20.5%, respectively. Nonrecurring Adjustments Consolidated operating results for the years 1994 through 1996 were impacted by a number of nonrecurring adjustments. Net income for these years, normalized for nonrecurring adjustments, is summarized in the chart below and succeeding narrative.
- ------------------------------------------------- --------------- ------------ (All dollars, except per share amounts, are in thousands) 1996 1995 1994 - ------------------------------------------------- --------------- ------------ Income applicable to common stock $ 208,744 $ 20,892 $178,870 - ------------------------------------------------- --------------- ------------ Adjustments, net of taxes: Acquisition related and other 30,363 78,764 -- Gain on sale of assets (3,029) (4,826) (7,109) Loss on early retirement of debt -- 9,060 -- Discontinuance of regulatory accounting -- 112,148 -- Adoption of new accounting standards 8,018 1,477 7,197 Work stoppage preparation costs 1,861 -- -- - ------------------------------------------------- --------------- ------------ Total adjustments 37,213 196,623 88 - ------------------------------------------------- --------------- ------------ Income applicable to common stock, after adjustments $ 245,957 $ 217,515 $178,958 ================================================= =============== ============ Earnings per share $ 1.27 $ .13 $ 1.12 - ------------------------------------------------- --------------- ------------ Adjustments: Acquisition related and other .19 .49 -- Gain on sale of assets (.02) (.03) (.04) Loss on early retirement of debt -- .06 -- Discontinuance of regulatory accounting -- .69 -- Adoption of new accounting standards .05 .01 .04 Work stoppage preparation costs .01 -- -- - ------------------------------------------------- --------------- ------------ Total adjustments .23 1.22 -- - ------------------------------------------------- --------------- ------------ Earnings per share, after adjustments $ 1.50 $ 1.35 $ 1.12 ================================================= =============== ============
1. Acquisition Related and Other Frontier's operating results for 1996 include a $30.4 million charge, net of a tax benefit of $18.4 million, resulting from the curtailment of certain company pension plans and a one-time charge associated with the Company's conference calling product line. The pension curtailment comprises $17.3 million of the total post-tax charge and is a result of the Company's efforts to standardize pension benefits. The one-time charge associated with the Company's conference calling product line ($13.1 million, after tax) primarily reflects an adjustment to write-off nonrecoverable product development costs relating to proprietary software. The Company's 1995 operating results reflect an acquisition related charge of $78.8 million, net of an income tax benefit of $35.4 million, that is associated with the integration of the Company's 1995 acquisitions as well as the ALC Communications Corporation ("ALC") merger related transaction costs. The remaining reserve balance at December 31, 1996 of $28.2 million is primarily for redundant facilities currently being decommissioned. 2. Gain on Sale of Assets Gain on sale of assets reflects the sales of the Company's minority investment in a Canadian long distance company in 1996 ($5.0 million pre-tax gain, $3.0 million after taxes), the sale of Ontonagon County Telephone Company in 1995 ($4.8 million non-taxable gain) and Minot Telephone in 1994 ($11.3 million pre- tax gain, $7.1 million after taxes). 3. Early Retirement of Debt In 1995, the Company redeemed, through a tender offer, $76.8 million of ALC's 9% Senior Subordinated Notes for $83.5 million. The early retirement resulted in an extraordinary loss including issuance costs, of $5.8 million, net of applicable income taxes of $3.7 million. In 1995, the Company redeemed 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. 4. Discontinuance of Regulatory Accounting As a result of changes in regulation and increasing competition in the telecommunications industry, the Company discontinued the use of Statement of Financial Accounting Standards ("FAS") No. 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. 5. Adoption of New Accounting Standards Results in 1996 reflect a $12.4 million pre-tax charge for the adoption of FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The assets held for disposal consist principally of telephone switching equipment in the Local Communications segment as a result of the central office switch consolidation project. Frontier adopted FAS 116, "Accounting for Contributions Received and Made," in September of 1995. FAS 116 requires that companies reflect an accrual in current expenses for the cost of multi-year charitable contributions. The cumulative effect of adopting FAS 116 in 1995 was a charge of $1.5 million, net of applicable income taxes of $0.8 million. 15 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. 6. Work Stoppage Preparation Costs During the first quarter of 1996, operating costs increased $2.8 million (pre-tax) at the Company's largest telephone subsidiary due to higher labor and related expenses in connection with a union contract negotiation. See page 18 for further discussion of the status of contract negotiations with this union and the impact on the Company's reported results. Telecommunications Act of 1996 The Telecommunications Act of 1996 was enacted on February 8, 1996. This landmark legislation establishes a framework for increased competition in the local and long distance segments of the Company's business. The Company views this legislation as favorable to its operations. Currently, Frontier companies are providing local service, or negotiating with carriers for interconnection and resale agreements to permit entry into new markets. The Telecommunications Act incorporates many aspects of the Open Market Plan initiated by the Company in Rochester, New York in 1993 and implemented in 1995. The Company believes its experience in providing integrated services and its background with the Rochester, New York Open Market Plan provides it with a competitive advantage. On August 8, 1996, the Federal Communications Commission ("FCC") released a First Report and Order (the "First Report and Order") in a core rulemaking proceeding to implement the Telecommunications Act of 1996. That First Report and Order established guidelines to promote local competition affecting the Company and all other competitors in local telecommunications markets. The FCC's action is subject to reconsideration and to appellate review. On September 27, 1996, the U.S. Court of Appeals for the Eighth Circuit granted a stay of a significant portion of the First Report and Order, and an appeal of that stay to the Supreme Court was denied. A decision by the appeals court is pending. The Act also requires the FCC to restructure the manner in which universal service operates, and the Commission is currently considering the recommendation of a Federal-State Joint Board released on November 8, 1996. On December 24, 1996, the FCC released a Notice of Proposed Rulemaking requesting comment on how the FCC should change the manner in which it regulates interstate access charges. The Company is considering its options in light of these proceedings. Competitive Response to the Telecommunications Act of 1996 In the short time since the enactment of the Telecommunications Act of 1996, a number of fundamental changes in the business have occurred or are likely to take place. During 1996, many companies in the industry have announced or completed corporate consolidations or other transactions. As a result, a number of these competitors may be larger in size and may possess financial resources substantially greater than Frontier's. Notwithstanding these business transactions, much of the first year of implementation of the Act has related to activities that have not yet caused significant marketplace impacts. These activities include regulatory activity on both the federal and state levels to implement the new law, and to put in place mechanisms to govern and to deal with new business relationships. They also include governmental activities designed to open new areas of the radio spectrum, and to permit technological development of new services and improvements in established services. As new technological and business opportunities emerge, the pace of innovation and business activity will accelerate. New business relationships are developing and can be expected to continue. They are partially the result of provisions in the law that require new forms of pricing agreements between facilities-based carriers and resellers, new interconnection agreements, and arrangements that replace long-standing tariff filing mechanisms. They are also the result of strategic activities designed to address the evolving marketplace. The new law promotes broader competition among incumbent companies in traditional telecommunications lines of business and across such lines of business. As a result of these events, the way in which individual companies do business is changing. Companies that have operated in traditionally independent lines of business must evaluate methods to build integrated products that incorporate services and capabilities that come from other areas. In the long distance line of business, Frontier anticipated that public policy would continue to evolve in favor of greater competition. As a result, the Company has been positioning itself to confront a marketplace with numerous new competitors in each of its business channels, requiring the development of capabilities necessary to compete aggressively and successfully against all of the competitors in its target channels. Part of this activity has involved an analysis of the merits of owning additional amounts of facilities in the long distance area. Ownership of facilities can provide a number of benefits, including the advantages of lower unit costs, new strategic pricing opportunities, opportunities to deploy new services, and the ability to offer services that are unique. Another part of this activity is improved marketing. Frontier expects that brand awareness and product development will be an important part of successful marketing in the future telecommunications marketplace. Frontier committed significant resources in 1996 to diversifying its product line and increasing its brand awareness, as well as develop and strengthen its sales force. Frontier anticipates that, in a few years, a majority of small and medium sized businesses will buy their telecommunications services in "bundles." Markets will be fundamentally open, and many of today's most fundamental structural boundaries and subsidies will be eliminated. As the nature of the business evolves due to technology and changing regulation, Frontier is positioned to take advantage of these trends. Rochester, New York Open Market Plan The Rochester, New York local communications' subsidiary completed its second full year of operations under the Open Market Plan in 1996. The Open Market Plan promotes telecommunications competition in the Rochester, New York marketplace by providing for (1) interconnection of competing local networks including reciprocal compensation for terminating traffic, (2) equal access to network databases, (3) access to local telephone numbers, (4) service provider telephone number portability, and (5) certain wholesale discounts to resellers of local services. The inherent risk associated with opening the Rochester market to competition is that some customers are able to purchase services from competitors, which may reduce the number of retail customers and potentially cause a decrease in the revenues and profitability for Rochester Telephone. However, results since implementation of the Open Market Plan indicate that a stimulation of demand in the use of the network and new product revenue may offset the losses from customer migration. Increased competition may also lead to additional price decreases for services, adversely 16 impacting Rochester Telephone's margins. An additional positive feature of the Open Market Plan provides that Rochester Telephone can retain additional earnings achieved through operating efficiencies. Previously these earnings would have been shared with customers. During the seven year period of the Open Market Plan, rate reductions of $21 million will be implemented for Rochester area consumers, including $11.5 million of which occurred in 1995 and an additional $2.5 million which commenced in January 1996. Rate reductions of $1.5 million will occur in 1997. Rates charged for basic residential and business telephone service may not be increased during the seven year period of the Plan. The Company is allowed to raise prices on certain enhanced products such as caller ID and call forwarding. Price increases on enhanced products partially offset the rate reductions required under the Plan during 1996. AT&T Communications of New York filed a complaint with the New York State Public Service Commission ("NYSPSC") for reconsideration of the Open Market Plan on October 3, 1995. The complaint sought a change in the wholesale discount, a change in the minutes of use surcharge and also changes in a number of operational and support activities. Some of these issues are also being considered in other states in other unrelated local competition proceedings. On July 18, 1996, the NYSPSC issued an order establishing a temporary wholesale discount of 13.5% for services and eliminating the minutes of use surcharge. On November 27, 1996, the NYSPSC set permanent wholesale discounts retroactive to July 24, 1996, of 17.0% for resellers that use the Company's operator services and 19.6% for resellers that provide their own operator services. The Company believes that, currently, all resellers in this market use the Company's operator services. Under the Telecommunications Act of 1996 and a statewide proceeding, the NYSPSC is also considering the prices that local exchange companies in New York may charge for "unbundled" service elements such as links (the wire from the switch to the customers premises), ports (the portion of the switch that terminates the link) and switch usage features. The Company is actively participating in this proceeding and expects the NYSPSC to issue a decision on service elements in 1997. Results of Segment Operations Frontier simplified its business segment reporting at the beginning of 1996 to reflect the predominance of its two major operating segments, long distance and local communications services. The Company currently reports its operating results in three segments: Long Distance Communications Services, Local Communications Services and Corporate Operations and Other. The Company's majority interests in two wireless properties, which were previously reported as a Wireless Communications Services segment, have been consolidated under Corporate Operations and Other. Each of Frontier's segment results are reviewed below. Long Distance Communications Services During 1996 the Company substantially completed the integration of the assets and operations of ALC and its six additional long distance acquisitions of 1995. The restructuring process resulted in the elimination of redundant facilities and staffing. Results for the segment partially reflect operating efficiencies gained as a result of the assimilation of the long distance companies acquired and the consolidation of the long distance switch network. These operating efficiencies were offset by increased SG&A charges during the fourth quarter associated with advertising campaigns and sales and marketing support for new revenue initiatives. Revenues were $1.9 billion, $1.5 billion, and $1.0 billion in 1996, 1995 and 1994, respectively, representing a 27.6% increase in 1996 and a 46.5% increase in 1995. Revenues increased 17.9% and 25.5% in 1996 and 1995, respectively, when normalized for purchase acquisitions. Traffic growth, increased sales and marketing efforts and increased sales of enhanced services were the primary drivers of the revenue growth for 1996 as compared to 1995. The decrease in the normalized revenue growth rate percentage from 1995 to 1996 is largely due to the migration of the 1-plus basic long distance service of the Company's major carrier customer from the Frontier network in the fourth quarter of 1996 and lower traffic growth in other sales channels. The increase in revenue from 1994 to 1995 was caused by increased traffic volumes due to internal growth, the growth of the Company's major carrier customer and purchase acquisitions. [GRAPH OF LONG DISTANCE MINUTES OF USE APPEARS HERE] Revenue for all years includes the major carrier customer whose revenue represented 21% and 14% of long distance revenues in 1996 and 1995, respectively. Pursuant to contact, this customer had been provided volume discounts by the Company as its 1-plus traffic grew at an accelerated pace over the past two years. During 1995, the Company was notified that this customer would be installing its own long distance switching capacity and diversifying its traffic distribution to one or more additional carriers. Effective June 1996, this customer entered into a revised three year agreement with the Company, eliminating the customer's existing minimum monthly commitment for 1- plus service in exchange for an extension of the exclusivity for the Company to carry the customer's higher margin enhanced service traffic. The migration of the major carrier customer's 1-plus traffic was substantially complete as of December 31, 1996. As a result of the loss of this customer's 1-plus traffic from Frontier, revenue from this carrier comprised approximately 10% of Frontier's long distance revenue in the fourth quarter of 1996 as compared to 23% in the third quarter. The loss of this customer's 1-plus traffic contributed to a decrease in operating income in the fourth quarter as lower overall traffic levels resulted in a higher level of fixed network costs than required by the remaining volume of business carried by the Company during the quarter. Costs and expenses for the long distance operation were $1.7 billion, $1.3 billion and $.9 billion in 1996, 1995 and 1994, respectively, excluding nonrecurring charges. The increase in costs and expenses in 1996 as compared to 1995 is primarily due to increased traffic resulting in higher cost of access. In addition, SG&A expenses increased in the last half of 1996 as the Company began to position itself for new revenue opportunities in 1997 and beyond. The increase in costs from 1994 to 1995 was caused by increased traffic volumes due to internal growth, the Company's major carrier customer and purchase acquisitions. Cost of access as a percentage of revenues was 63% in 1996, 58% in 1995 and 56% in 1994. The higher cost of access percentages reported for all periods is primarily due to the increased discounts provided to the Company's major 17 carrier customer pursuant to contract as traffic levels grew at an accelerated rate. Also, as this customer removed its traffic in the fourth quarter of 1996, there was a higher proportion of fixed network costs than would have been required for the volume of minutes actually carried by the Company's network during that period. The Company has implemented actions designed to lower its cost of access and improve the cost efficiency of its network. SG&A as a percentage of revenues was 20.7% in 1996, 23.1% in 1995 and 24.0% in 1994. These reductions as a percentage of revenues are principally due to increasing revenues without corresponding cost increases from 1994 through the first half of 1996. Total headcount increased in the sales and marketing areas in the last half of 1996. The increase is intended to accelerate revenue growth in 1997 from the Company's small business customers, to permit the Company to move "up market" by selling Frontier services to larger customers and to generate sales of newer services, such as prepaid calling cards and facilities based local services. Depreciation and amortization increased by $21.7 million and $20.2 million due primarily to the impact of the purchase acquisitions in 1996 and 1995, respectively. Operating income, excluding nonrecurring charges, rose 9.6% and 30.6% in 1996 and 1995, respectively. Operating margin was 12.2% in 1996, 14.2% in 1995 and 15.9% in 1994. The timing of the additional expenses to support 1997 revenue growth and the increases in cost of access as a percentage of revenue had a negative impact on 1996 operating margin. The Company anticipates improved operating margins during 1997 as higher revenue levels are achieved, excess fixed costs are removed from its network and additional operating efficiencies are introduced. Additionally, construction of the national fiber optic network is expected to reduce the Company's cost structure. Frontier anticipates that savings will be realized as the various segments of the network are completed during 1997 and 1998. Local Communications Services Local Communications Services includes Frontier's local telephone operations in Rochester, New York and the Regional Operations, which are comprised of 33 telephone subsidiaries in 13 states. Also included with the Rochester, New York operation are the local service revenues and associated expenses generated by Frontier Communications of Rochester, a competitive telecommunications company formed on January 1, 1995, that provides an array of services on a retail basis in the Rochester marketplace. Consequently, the Local Communications Services segment includes both wholesale and retail local service associated with the Rochester, New York market. [GRAPH OF LOCAL OPERATIONS OPERATING MARGIN APPEARS HERE] In addition to consistent profitability and strong cash flows, the local communications companies have been successful in marketing and selling integrated services to their customers. Revenues for 1996 were $643.0 million, an increase of $21.3 million or 3.4%. Revenues for 1995 increased 2.0% over the prior year, or 3.5% adjusting for the sales of Ontonagon County Telephone Company in March 1995, and Minot Telephone Company in May 1994. Revenue growth in 1996 was driven in part by the introduction of new products and features and a higher demand for services in the open market environment. See a discussion of the Open Market Plan for the Rochester, New York market on pages 16-17. Total access lines increased 2.8% and minutes of use increased 6.7% in 1996 over the prior year. Revenue growth in 1996 in the Rochester, New York market was 3.1%, consistent with the rate of growth in 1995. In general, prices being charged both to customers and to long distance companies for access service usage have declined over the past three years. This is due not only to regulatory requirements, but also to increased competition in the Company's largest markets. Prices charged to customers and access prices charged to long distance companies may continue to decline as competition increases and regulatory controls are relaxed. Costs and expenses for the local communications segment, excluding nonrecurring charges, were $424.5 million in 1996, an increase of $1.1 million, which was relatively flat as compared to 1995. The Company continued the centralization of certain administrative functions in 1996, resulting in lower operating costs. Lower administrative costs were offset by increased costs for the Rochester, New York telephone operation as a result of higher expenses associated with union contract negotiations. These costs, which were incurred in connection with contract negotiations with Communications Workers of America, Local 1170, were necessary to ensure continued high standards of customer service in the event of a work stoppage. The contract negotiations are currently at an impasse and the Rochester company implemented the terms of its final offer as of April 9, 1996. The Union filed unfair labor practice complaints with the National Labor Relations Board (the "NLRB"). In June, Frontier received a favorable determination after review within the agency which rejects all unfair labor practice claims that could have impacted the declaration of impasse. The Union appealed these decisions within the NLRB and on December 2, 1996, the agency remanded the matter back to its regional office to hold a hearing on the declaration of impasse, while upholding the other actions and dismissing those other unfair labor practice charges. The remanded matter will go back to hearing in mid-1997. Costs and expenses decreased $6.0 million in 1995 as compared to 1994. This decrease was due to the sales of Ontonagon County Telephone in 1995 and Minot Telephone in 1994, ongoing cost controls, and was partially offset by increased selling and marketing costs. Operating margins for the Local Communications segment continue to improve. Operating margins, excluding nonrecurring items, were 34.0% in 1996, 31.9% in 1995 and 29.6% in 1994. This improvement is reflective of the continuing improvement in operating efficiencies coupled with consistent revenue growth. During late 1995, management committed to a major switch consolidation plan at its Rochester Telephone Corp. and Frontier Communications of New York subsidiaries. The three-year plan to consolidate host switches and reduce the number by over 60% is projected to improve network efficiency and reduce the cost of maintenance and software upgrades. As of December 1996, the project is progressing as scheduled and two host switches have been consolidated. The Company anticipates that the project will be substantially complete by July 1998. 18 Corporate Operations and Other Corporate Operations comprise the expenses traditionally associated with a holding company, including executive expenses, corporate finance and treasury, investor relations, corporate communications, corporate planning, legal services and business development. The Other category includes the Company's majority ownership interest in certain wireless operations and Frontier Network Systems ("FNS"). FNS markets and installs telecommunications systems and equipment. Wireless operations include the Alabama RSAs No. 4 and No. 6, in which the Company has a 69.5% interest and Minnesota RSA No. 10, in which the Company acquired a 100% interest in March 1995. This later acquisition was accounted for as a purchase transaction. Results for all years, before nonrecurring charges, were relatively consistent. In October 1996, the Company signed a definitive agreement to sell its 69.5% interest in the Alabama RSAs No. 4 and No. 6. The Company expects to recognize a gain on the sale of its interest in this partnership during the first quarter of 1997. Other Income Statement Items Interest Expense Interest expense was $43.2 million in 1996, a decrease of $10.4 million or 19.4% from 1995. The Company realized reduced interest expense in 1996 primarily as a result of refinancing approximately $140 million of long term debt during the third and fourth quarters of 1995. The Company also utilized excess cash to pay down debt throughout the year, resulting in a lower average outstanding debt balance in 1996 than in 1995. Interest expense was higher in 1995 than 1994 due to increased borrowings required to complete the Company's long distance purchase acquisitions. Equity Earnings from Unconsolidated Wireless Interests Frontier Cellular is a 50% interest in a joint venture with Bell Atlantic/Nynex Mobile in upstate New York and Penn-sylvania that is managed by the Company and is accounted for using the equity method of accounting. This method of accounting results in the Company's proportionate share of earnings being reflected in a single line item below operating income. Frontier Cellular is the Company's largest unconsolidated wireless interest. Equity earnings from the Company's interests in wireless partnerships were $9.0 million in 1996, $3.7 million in 1995 and $3.2 million in 1994. The increase in equity earnings during 1996 is attributable to growth in customer base, increased usage and long distance revenue generated from the wireless partnerships' offering of long distance services as a reseller. In addition, a portion of the growth is attributable to the expansion of Frontier Cellular into other areas of New York and Pennsylvania. The customer base grew approximately 46% and revenues increased 61% over 1995. Equity earnings from Frontier Cellular in 1995 were lower than expected because of significant customer acquisition costs. Prior to July 1994, the Company's revenues and expenses associated with its Rochester and Utica-Rome cellular partnerships in New York State, which were contributed to Frontier Cellular, had been fully consolidated. Income Taxes The effective tax rate in 1996 was 39.6%, versus 41.1% in 1995 and 36.8% in 1994. The effective tax rate in 1996 is lower than 1995 due to the nondeductible transaction costs from the Company's 1995 long distance merger and acquisitions. The 1995 effective tax rate increase over 1994 is 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 Cash provided from operations in 1996 amounted to $395.7 million as compared to $357.1 million in 1995, normalized for $31.1 million of cash paid for acquisition related charges, and $305.5 million in 1994. Cash from operations is driven by the Company's expanded revenue base in long distance and the strong operating returns produced by the local communications services segment. In 1996, the accounts receivable and accounts payable balances were less than the prior year due to lower traffic levels in the fourth quarter caused by the loss of 1-plus service provided to the Company's major carrier customer. In addition, the Company launched several marketing programs in the second half of the year designed to stimulate revenue growth in 1997. The 1995 accounts receivable balance increased over the prior year 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. The gross cash proceeds from this sale appear in the "Cash Flows from Investing Activities" section of the Consolidated Statements of Cash Flows. Earnings before interest, taxes, depreciation and amortization ("EBITDA") is a common measurement of a company's ability to generate operating cash flow. EBITDA should be used as a supplement to, not in place of, cash from operating activities. The Company's EBITDA was $629.5 million, $568.2 million and $478.9 million, excluding unusual items, in 1996, 1995 and 1994, respectively. Cash used for investing activities was $333.9 million, $519.3 million and $89.7 million in 1996, 1995 and 1994, respectively. Capital expenditures continue to be the largest recurring use of the Company's investing funds. Capital spending amounted to $309.2 million, $163.7 million and $112.2 million in 1996, 1995 and 1994, respectively. The increase in the 1996 capital program was due to the long distance network expansion required to meet customer traffic demands, continued product enhancements and initial construction costs for the fiber optic network build. 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. Cash flows from financing activities amounted to an outflow of $62.2 million in 1996, compared with outflows of $134.5 million in 1995 and inflows of $109.6 million in 1994. The Company's largest recurring financing activities are the common and preferred dividend payments which totaled $138.7 million, $82.8 million and $59.3 million in 1996, 1995 and 1994, respectively. The large increase in the 1996 dividend payments was caused by an increase in the number of shares outstanding as a result of the issuance of 69.2 million common shares on August 16, 1995 for the ALC merger. The Company's commercial paper borrowings increased at the end of 1996 due to the capital program and an outlay of over $60 million for the fiber optic network build, causing a net debt increase of $48 million. 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 $76.8 million of ALC's 9% Senior subordinated debt, the 19 retirement of $69.8 million of 9% debentures due in 2020, the repayment of Rochester Telephone Corp.'s revolver of $100.0 million in conjunction with this subsidiary's medium term note offering and the repayment of $27.8 million of debt from the long distance acquisitions. These early retirements were financed with excess cash and commercial paper borrowings. The 1994 financing activities included $104.0 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 and the retirement of certain high cost debt earlier in the year. [GRAPH OF EARNINGS BEFORE INTEREST APPEARS HERE] Liquidity and Capital Resources The Company has a number of financing vehicles in place to ensure adequate liquidity in meeting its anticipated cash needs. The Company has commercial paper programs totaling $450 million which are fully backed by committed revolving credit agreements. In May 1996, Frontier Corporation's $250 million revolving credit agreement was amended to increase the available line of credit to $350 million. The Company, through its subsidiary, Rochester Telephone Corp., also has a $100 million revolving line of credit. At December 31, 1996, total borrowings and amounts available under these lines of credit were $248.6 million and $201.4 million, respectively. In addition, the Company has a $500 million universal shelf registration statement, filed with the SEC in November 1995, which allows for the issuance of a combination of debt, common, preferred stock or warrant securities. Proceeds may be used for general corporate purposes including, but not limited to, financing and growth activities. As of December 31, 1996, no securities have been issued pursuant to this registration. The Company's working capital was $51.1 million, $18.9 million and $368.1 million at December 31, 1996, 1995 and 1994, respectively. The changes in the 1995 and 1994 working capital are due to the Company's acquisition program. At December 31, 1996, aggregate debt maturities amounted to $6.3 million for 1997, $8.8 million for 1998 and $30.3 million for 1999. Despite the Company's 1995 acquisition program, the debt to total capital ratio at December 31, 1996 improved to 39.1%, as compared to 41.0% in the prior year and 41.2% in 1994. Pre-tax interest coverage, which measures the Company's ability to adequately cover its financing costs, was 9.1 times in 1996 versus 7.6 times in 1995 and 6.7 times in 1994 (excluding nonrecurring charges for all years). The Company continues to carry long-term credit ratings of "A" from Standard & Poor's, Duff and Phelps and Fitch, and "A3" from Moody's. The rating agencies downgraded the Company as a result of its merger with ALC in August 1995. In spite of the combined entity's strengthened financial position, the rating agencies cited concern with the shift in the Company's business risk associated with an increasing dependence on the more competitive long distance business. These ratings remained in effect at December 31, 1996. Total gross expenditures for property, plant and equipment in 1997 are anticipated to be approximately $590 million, which includes over $250 million for the Company's fiber optic network. Absent the expenditures associated with the fiber optic network, the 1997 capital program represents an increase of approximately $90 million over 1996, largely due to international network investments over high density routes to lower transport costs, system development costs to enhance the billing platform, network growth and the switching costs associated with the Company's Alternative Local Exchange Carrier (A-LEC) integrated product offering. The Company anticipates financing its capital program with a combination of internally generated cash from operations and external financing. In November 1996, the Company's Board of Directors increased the quarterly dividend paid on common stock to $0.2175 cents per share, payable February 3, 1997, to shareowners of record on January 15, 1997. This 2.4% increase raises the annualized common stock dividend to $0.87 per share. This represents the 37th consecutive annual increase in the Frontier dividend. New Accounting Pronouncements Effective January 1, 1996, the Company adopted FAS 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of." FAS 121 requires that certain long-lived assets and identifiable intangibles be written down to fair value whenever an impairment review indicates that the carrying value cannot be recovered on an undiscounted cash flow basis. The statement also requires that certain long-lived assets and identifiable intangibles to be disposed of be reported at fair value less selling costs. The Company's adoption of this standard resulted in a non-cash charge of $8.0 million (net of a tax benefit of $4.4 million) and is reported as a cumulative effect of a change in accounting principle. The charge represents the cumulative adjustment required by FAS 121 to remeasure the carrying amount of certain assets held for disposal as of January 1, 1996. These assets held for disposal consist principally of telephone switching equipment in the Company's Local Communications Services segment as a result of management's commitment, in late 1995, to a central office switch consolidation project primarily at the Rochester Telephone Corp. and Frontier Communications of New York subsidiaries. Effective January 1, 1996, the Company adopted the provisions of FAS 123, "Accounting for Stock-Based Compensation." FAS 123 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." The Company elected to continue to follow the provisions of APB 25 and has provided the pro forma disclosures required by FAS 123. 20 Report of Independent [LOGO APPEARS HERE] Accountants To the Board of Directors and 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, 1996, 1995 and 1994, and the results of their operations and their cash flows for the years then ended in confor- mity with generally accepted accounting principles. These financial statements are the responsibility of the Company's manage- ment; 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 and $284,725,000 at December 31, 1995 and 1994, respectively, and total revenues of $852,057,000 and $567,824,000 for the years ended December 31, 1995 and 1994, 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 for the years ended December 31, 1995 and 1994, 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 13 to the financial statements, during the first quarter of 1996 the Company adopted the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." As discussed in Note 13 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 13 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 27, 1997 Rochester, New York 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 manage- ment 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 manage- ment meets its responsibility for financial reporting. They regularly evaluate the system of internal accounting controls and perform such tests and other procedures they consider necessary to express an opinion that the financial statements present fairly the financial position of the Company. /s/ Louis L. Massaro Louis L. Massaro Executive Vice President and Chief Financial Officer Frontier Corporation 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/ Jairo A. Estrada Jairo A. Estrada Chairman, Audit Committee Frontier Corporation Board of Directors 21 Business Segment Information
- ------------------------------------------------------------------------------------------------------------------------------ In thousands of dollars Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Long Distance Communications Services Revenues $ 1,888,259 $ 1,480,313 $ 1,010,425 Operating Income: Operating Income Before Acquisition Related and Other Charges $ 230,658 $ 210,462 $ 161,107 Acquisition Related and Other Charges (20,823) (91,448) -- - ------------------------------------------------------------------------------------- ----------- ----------- Total Operating Income $ 209,835 $ 119,014 $ 161,107 Depreciation and Amortization $ 83,322 $ 61,593 $ 39,290 Capital Expenditures $ 186,906 $ 68,265 $ 41,668 Identifiable Assets $ 1,044,173 $ 934,318 $ 465,335 ===================================================================================== =========== =========== Local Communications Services Revenues: Rochester, New York Operations $ 325,166 $ 315,273 $ 305,734 Regional Operations 317,847 306,452 303,944 - ------------------------------------------------------------------------------------- ----------- ----------- Total Revenues $ 643,013 $ 621,725 $ 609,678 Operating Income: Operating Income Before Acquisition Related and Other Charges: Rochester, New York Operations $ 81,604 $ 80,991 $ 76,655 Regional Operations 134,034 117,290 103,595 Acquisition Related and Other Charges: Rochester, New York Operations (17,340) (1,589) -- Regional Operations (5,760) (8,660) -- - ------------------------------------------------------------------------------------- ----------- ----------- Total Operating Income $ 192,538 $ 188,032 $ 180,250 Depreciation and Amortization: Rochester, New York Operations $ 54,771 $ 55,698 $ 59,098 Regional Operations 47,579 48,721 49,490 - ------------------------------------------------------------------------------------- ----------- ----------- Total Depreciation and Amortization $ 102,350 $ 104,419 $ 108,588 Capital Expenditures $ 101,342 $ 73,766 $ 60,711 Identifiable Assets $ 941,629 $ 964,154 $ 1,183,982 ===================================================================================== =========== =========== Corporate Operations and Other Revenues $ 44,297 $ 41,653 $ 47,442 Operating Loss: Operating Loss Before Acquisition Related and Other Charges $ (9,589) $ (10,274) $ (15,731) Acquisition Related and Other Charges (4,900) (12,542) -- - ------------------------------------------------------------------------------------- ----------- ----------- Total Operating Loss $ (14,489) $ (22,816) $ (15,731) Depreciation and Amortization $ 4,274 $ 3,697 $ 5,445 Capital Expenditures $ 22,554 $ 20,544 $ 11,356 Identifiable Assets $ 235,718 $ 210,120 $ 411,477 ===================================================================================== =========== =========== Consolidated Revenues $ 2,575,569 $ 2,143,691 $ 1,667,545 Operating Income: Operating Income Before Acquisition Related and Other Charges $ 436,707 $ 398,469 $ 325,626 Acquisition Related and Other Charges (48,823) (114,239) -- - ------------------------------------------------------------------------------------- ----------- ----------- Total Operating Income $ 387,884 $ 284,230 $ 325,626 Depreciation and Amortization $ 189,946 $ 169,709 $ 153,323 Capital Expenditures $ 310,802 $ 162,575 $ 113,735 Identifiable Assets $ 2,221,520 $ 2,108,592 $ 2,060,794 ===================================================================================== =========== ===========
See accompanying Notes to Consolidated Financial Statements. 22 Consolidated Statements of Income
- ------------------------------------------------------------------------------------------ ----------------- ------------------ In thousands of dollars, except per share data Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------ ----------------- ------------------ Revenues $ 2,575,569 $ 2,143,691 $ 1,667,545 - ------------------------------------------------------------------------------------------ ----------------- ------------------ Costs and Expenses Operating expenses 1,898,889 1,527,050 1,139,587 Depreciation and amortization 189,946 169,709 153,323 Taxes other than income taxes 50,027 48,463 49,009 Acquisition related and other charges 48,823 114,239 -- - ------------------------------------------------------------------------------------------ ----------------- ------------------ Total Costs and Expenses 2,187,685 1,859,461 1,341,919 - ------------------------------------------------------------------------------------------ ----------------- ------------------ Operating Income 387,884 284,230 325,626 Interest expense 43,175 53,557 50,216 Other income and expense: Gain on sale of assets 4,976 4,826 10,063 Equity earnings from unconsolidated wireless interests 9,011 3,676 3,185 Interest income 2,344 9,673 8,364 Other expense 500 3,184 690 - ------------------------------------------------------------------------------------------ ----------------- ------------------ Income Before Taxes, Extraordinary Items and Cumulative Effect of Changes in Accounting Principles 360,540 245,664 296,332 Income taxes 142,596 100,896 109,078 - ------------------------------------------------------------------------------------------ ----------------- ------------------ Income Before Extraordinary Items and Cumulative Effect of Changes in Accounting Principles 217,944 144,768 187,254 Extraordinary items -- (121,208) -- Cumulative effect of changes in accounting principles (8,018) (1,477) (7,197) - ------------------------------------------------------------------------------------------ ----------------- ------------------ Consolidated Net Income 209,926 22,083 180,057 Dividends on preferred stock 1,182 1,191 1,187 - ------------------------------------------------------------------------------------------ ----------------- ------------------ Income Applicable to Common Stock $ 208,744 $ 20,892 $ 178,870 ========================================================================================== ================= ================== Earnings Per Common Share Income before extraordinary items and cumulative effect of changes in accounting principles $ 1.32 $ .89 $ 1.16 Extraordinary items -- (.75) -- Cumulative effect of changes in accounting principles (.05) (.01) (.04) - ------------------------------------------------------------------------------------------ ----------------- ------------------ Earnings Per Common Share $ 1.27 $ .13 $ 1.12 ========================================================================================== ================= ================== Average Common Shares Outstanding (in thousands) 164,013 161,669 160,353 ========================================================================================== ================= ==================
See accompanying Notes to Consolidated Financial Statements. 23 Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------ ----------------- ------------------ In thousands of dollars, except share data December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------ ----------------- ------------------ ASSETS Current Assets Cash and cash equivalents $ 30,948 $ 31,449 $ 359,309 Short-term investments -- -- 9,047 Accounts receivable, (less allowance for uncollectibles of $30,911, $28,515 and $11,407, respectively) 364,256 404,081 263,815 Materials and supplies 13,198 12,928 8,586 Deferred income taxes 30,349 43,588 5,712 Prepayments and other 30,483 31,089 27,357 - ------------------------------------------------------------------------------------------ ----------------- ------------------ Total Current Assets 469,234 523,135 673,826 Property, plant and equipment, net 971,259 881,309 1,034,442 Goodwill and customer base 535,979 550,081 222,442 Deferred and other assets 245,048 154,067 130,084 - ------------------------------------------------------------------------------------------ ----------------- ------------------ Total Assets $2,221,520 $ 2,108,592 $ 2,060,794 ========================================================================================== ================= ================== LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities Accounts payable $ 322,325 $ 381,680 $ 243,421 Dividends payable 35,966 33,247 15,487 Debt due within one year 6,253 14,871 4,966 Taxes accrued 34,963 26,842 28,070 Other liabilities 18,596 47,561 13,754 - ------------------------------------------------------------------------------------------ ----------------- ------------------ Total Current Liabilities 418,103 504,201 305,698 Long-term debt 675,043 618,867 661,549 Deferred income taxes 2,542 15,644 98,217 Deferred employee benefits obligation 65,479 58,385 46,001 - ------------------------------------------------------------------------------------------ ----------------- ------------------ Total Liabilities 1,161,167 1,197,097 1,111,465 - ------------------------------------------------------------------------------------------ ----------------- ------------------ Shareowners' Equity Preferred stock 22,611 22,769 22,777 Common stock, par value $1.00, authorized 300,000,000 shares; 163,731,733 shares, 158,063,387 shares and 149,294,195 shares issued in 1996, 1995, and 1994 163,732 158,063 149,294 Capital in excess of par value 500,196 420,172 379,404 Retained earnings 385,350 317,149 397,854 - ------------------------------------------------------------------------------------------ ----------------- ------------------ 1,071,889 918,153 949,329 Less-- Treasury stock, 6,375 shares in 1996 and 1995, at cost 147 147 -- Unearned compensation-restricted stock plan 11,389 6,511 -- - ------------------------------------------------------------------------------------------ ----------------- ------------------ Total Shareowners' Equity 1,060,353 911,495 949,329 - ------------------------------------------------------------------------------------------ ----------------- ------------------ Total Liabilities and Shareowners' Equity $2,221,520 $ 2,108,592 $ 2,060,794 ========================================================================================== ================= ==================
See accompanying Notes to Consolidated Financial Statements. 24 Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------------------------------------------------------- In thousands of dollars Years Ended December 31, 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 209,926 $ 22,083 $ 180,057 - ------------------------------------------------------------------------------------------ ----------------- ------------------ Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary items -- 194,932 -- Cumulative effect of changes in accounting principles 12,396 2,272 11,072 Acquisition related and other charges 48,823 114,239 -- Depreciation and amortization 189,946 169,709 153,323 Gain on sale of assets (4,976) (4,826) (10,063) Equity earnings from unconsolidated wireless interests (9,011) (3,676) (3,185) Other, net 92 1,326 511 Changes in operating assets and liabilities, exclusive of impacts of purchase acquisitions: Decrease (increase) in accounts receivable 36,549 (99,127) (37,691) (Increase) decrease in material and supplies (1,302) (1,470) 1,824 (Increase) decrease in prepayments and other current assets (2,077) 6,480 (2,434) Increase in deferred and other assets (20,903) (32,482) (17,478) (Decrease) increase in accounts payable (79,134) 30,585 32,544 Increase (decrease) in taxes accrued and other current liabilities 1,042 8,663 (746) Increase in deferred employee benefits obligation 6,608 9,947 6,958 Increase (decrease) in deferred income taxes 7,682 (92,631) (9,227) - ------------------------------------------------------------------------------------------ ----------------- ------------------ Total adjustments 185,735 303,941 125,408 - ------------------------------------------------------------------------------------------ ----------------- ------------------ Net cash provided by operating activities 395,661 326,024 305,465 - ------------------------------------------------------------------------------------------ ----------------- ------------------ Investing Activities Expenditures for property, plant and equipment (246,533) (163,740) (112,162) Deposit for capital projects (62,694) -- -- Decrease (increase) in short-term investments -- 6,225 (11,386) Investment in cellular partnerships (29,422) (12,090) (3,939) Proceeds from asset sales 13,841 -- 56,698 Purchase of companies, net of cash acquired (9,118) (349,536) (18,546) Other investing activities -- (196) (370) - ------------------------------------------------------------------------------------------ ----------------- ------------------ Net cash used in investing activities (333,926) (519,337) (89,705) - ------------------------------------------------------------------------------------------ ----------------- ------------------ Financing Activities Proceeds from issuance of long-term debt 58,037 207,962 135,412 Repayments of debt (14,878) (279,329) (64,747) Dividends paid (138,697) (82,801) (59,388) Treasury stock, net -- (10,041) 2,302 Issuance of common stock 33,407 31,957 107,244 Distribution to shareowners of pooled company -- (2,287) (11,236) Other financing activities (105) (8) (8) - ------------------------------------------------------------------------------------------ ----------------- ------------------ Net cash (used in) provided by financing activities (62,236) (134,547) 109,579 - ------------------------------------------------------------------------------------------ ----------------- ------------------ Net (Decrease) Increase in Cash and Cash Equivalents (501) (327,860) 325,339 Cash and Cash Equivalents at Beginning of Year 31,449 359,309 33,970 - ------------------------------------------------------------------------------------------ ----------------- ------------------ Cash and Cash Equivalents at End of Year $ 30,948 $ 31,449 $ 359,309 ========================================================================================== ================= ==================
See accompanying Notes to Consolidated Financial Statements. 25 Consolidated Statements of Shareowners' Equity
- ------------------------------------------------- ---------- ---------- ---------- ---------- -------- ---------- In thousands of dollars - ------------------------------------------------- ---------- ---------- ---------- ---------- -------- ---------- Capital In Preferred Common Excess of Retained Treasury Unearned Stock Stock Par Earnings Stock Compensation Total - ------------------------------------------------- ---------- ---------- ---------- --------- -------- ---------- Balance, January 1, 1994 $ 22,785 $ 108,630 $ 308,649 $ 289,852 $ (2,191) $ 727,725 Net income 180,057 180,057 Redemptions (8) (8) Equity offering 2,549 101,565 104,114 Stock split 36,574 (36,574) 0 Exercise of stock options 713 894 1,607 Exercise of warrants 828 1,242 2,070 Tax benefit from exercise of stock options 4,062 4,062 Distribution to shareowners of pooled company (11,236) (11,236) Common and preferred dividends (60,819) (60,819) Other (434) 2,191 1,757 - ------------------------------------------------- ---------- ---------- ---------- --------- -------- ---------- Balance, December 31, 1994 $ 22,777 $ 149,294 $ 379,404 $ 397,854 $ 0 $ 949,329 Net income 22,083 22,083 Redemptions (8) (8) Retirements (117) (3,142) (3,259) Exercise of stock options 2,434 15,780 18,214 Exercise of warrants 6,252 8,095 14,347 Restricted stock plan activity, net 200 7,000 $ (6,511) 689 Tax benefit from exercise of stock options 15,252 15,252 Distribution to shareowners of pooled company (2,287) (2,287) Common and preferred dividends (100,501) (100,501) Purchases for acquisitions (20,041) (20,041) Issuances 19,894 Other (2,217) (2,217) - ------------------------------------------------- ---------- ---------- ---------- --------- -------- ---------- Balance, December 31, 1995 $ 22,769 $ 158,063 $ 420,172 $ 317,149 $ (147) $ (6,511) $ 911,495 Net income 209,926 209,926 Redemptions (158) 53 (105) Exercise of stock options 5,482 27,355 32,837 Exercise of warrants 87 131 218 Restricted stock plan activity, net 100 4,089 (4,878) (689) Tax benefit from exercise of stock options 48,531 48,531 Common and preferred dividends (141,416) (141,416) Other (135) (309) (444) - ------------------------------------------------- ---------- ---------- ---------- --------- -------- ---------- Balance, December 31, 1996 $ 22,611 $ 163,732 $ 500,196 $ 385,350 $ (147) $(11,389) $1,060,353 ================================================= ========== ========== ========== ========= ======== ==========
See accompanying Notes to Consolidated Financial Statements. 26 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. Investments in entities in which the Company does not have a controlling interest are accounted for using the equity method. Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 3 to 20 years, local and toll service lines is 12 to 25 years and for station equipment is 10 to 21 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 acquired is being amortized on a straight-line basis over principally 5 to 7 years. Accumulated amortization is $106.5 million, $64.0 million and $47.9 million at the end of 1996, 1995 and 1994, respectively. Impairment of Long-Lived Assets--In the event that facts and circumstances indicate that the carrying amount of a long-lived asset may be impaired an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset is compared to the assets' carrying amount to determine if a write-down to market value or discounted cash flow is required. Accounts Payable--Accounts payable includes trade accounts payable and an estimated accrual for long distance cost of access. Subsequently, the cost of access 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 par value. The split was approved by the New York State Public Service Commission ("NYSPSC") and common shares were distributed in 1994. Historical share and per share data have been retroactively adjusted to reflect the split. Revenue Recognition--Customers are billed as of monthly cycle dates. Revenue is recognized as service is provided net of an estimate for uncollectible accounts. 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 Statements of Cash Flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash flows from financing activities include $33.4 million of cash proceeds from stock options and warrants exercised during 1996. The resultant tax benefit realized from the exercise of stock options of $48.5 million is reflected as an adjustment to capital in excess of par value and taxes accrued. Actual interest paid was $49.6 million in 1996, $57.9 million in 1995 and $56.1 million in 1994. Actual income taxes paid were $69.7 million in 1996, $108.6 million in 1995 and $107.9 million in 1994. Interest costs associated with the construction of capital assets, including the nationwide fiber optic network project, are capitalized. Total amounts capitalized during 1996, 1995 and 1994 were $6.2 million, $1.2 million and $1.3 million, respectively. Reclassifications--Certain prior year amounts have been reclassified to conform to current year presentation. 2. Pooling of Interests 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.), provided 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. After the merger, each of these options and warrants, consistent with the 2 for 1 exchange ratio at the time of the merger, continues to be exercisable 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 27 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. Combined and separate results of Forntier Corporation, ALC and ASI during the periods preceding the merger were as follows:
- ----------------------------------------------------------------------------------------------- Frontier In millions Corporation ALC ASI Combined - ----------------------------------------------------------------------------------------------- Seven months ended July 31, 1995: (unaudited) Revenues $678.4 $443.8 $ 20.2 $1,142.4 Net income $ 71.2 $ 46.7 $ 2.1 $ 120.0 =============================================================================================== December 31, 1994: Revenues $977.1 $567.8 $122.6 $1,667.5 Net income $102.7 $ 64.3 $ 13.1 $ 180.1 ===============================================================================================
3. Purchase Acquisitions and Divestitures Purchase Acquisitions In March 1996, the Company acquired a 55 percent interest in the New York RSA No. 3 Cellular Partnership ("RSA No. 3"). RSA No. 3 is a provider of cellular mobile telephone service in the New York State Rural Service Area No. 3. RSA No. 3 encompasses much of the Southern Tier Area of New York State. The Company contributed its interest in RSA No. 3 to its joint venture with Bell Atlantic/Nynex Mobile which is managed by Frontier Cellular (Note 14). The operating results are reported using the equity method of accounting. The Company paid $25.3 million in cash for its interest in RSA No. 3. In November 1995, the Company acquired Link-VTC, Inc. ("Link-VTC"), a Boulder, Colorado based telecommunications company specializing in videoconferencing services. The Company paid $13.4 million in cash for Link-VTC, including a payment of $4.3 million made in June 1996 as a settlement of the original earn-out agreement. In August 1995, Frontier acquired Schneider Communications, Inc. ("SCI") and SCI's 80.8 percent interest in LinkUSA Corporation ("LinkUSA") for $130 million in cash. SCI provides telecommunications services in the Midwest. LinkUSA develops software applications for telecommunications companies. On February 2, 1996, the Company acquired the remaining 19.2 percent interest in LinkUSA for $2.3 million in cash. 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. The Company paid $95 million in cash for several other purchase acquisitions which were completed in 1995 and are included in the unaudited pro forma results. These purchase acquisitions were Minnesota Southern Cellular Telephone Company (March 1995), ConferTech International, Inc. (March 1995) and Enhanced TeleManagement, Inc. (July 1995). 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.
- ---------------------------------------------------------------------------------------------------------------------- In thousands of dollars, except per share data (unaudited) 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 ======================================================================================================================
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 In November 1996, the Company recorded a $48.8 million pre-tax charge. This charge included $28.0 million for the curtailment of certain company pension plans and a $20.8 million charge to write-off unrecoverable product development costs for its conference calling product line. The Company's 1995 operating results reflect acquisition related charges of $114.2 million associated with the integration of a number of long distance companies acquired during the year, including the August 1995 merger with ALC. The integration of the acquired companies with the existing Frontier businesses resulted in instances of redundant facilities, equipment and staffing. The acquisition related charges include 28 investment banker, legal fees and other direct costs resulting from the merger with ALC and the ASI transaction. Through a combination of attrition and force reductions, the Company has reduced its number of employees in the long distance and administrative areas. As of December 31, 1996, 433 employees have been paid $14.8 million in severance benefits which were charged to the reserve. The remaining reserve balance of $28.2 million is primarily for redundant facilities currently being decommissioned. 5. Discontinuance of Regulatory Accounting Principles The Company determined in 1995 that Financial Accounting Standards Board Statement No. 71 ("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. 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 of dollars 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 pace with the technological changes in the Company and differed significantly from those used by unregulated entities. The discon- tinuance 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. 6. Property, Plant and Equipment Major classes of property, plant, and equipment are summarized below:
- ----------------------------------------------------------------------------------------------------- In thousands of dollars 1996 1995 1994 - ----------------------------------------------------------------------------------------------------- Land and buildings $ 115,485 $ 106,745 $ 103,235 Local and toll services lines 795,855 761,044 752,366 Central office equipment 580,217 587,814 584,434 Station equipment 38,770 32,183 33,926 Switching and network facilities 386,293 330,567 234,433 Office equipment, vehicles and tools 233,601 201,718 170,094 Plant under construction 126,140 77,091 36,130 Less: Accumulated depreciation 1,305,102 1,215,853 880,176 - ----------------------------------------------------------------------------------------------------- $ 971,259 $ 881,309 $1,034,442 =====================================================================================================
Depreciation expense was $146.6 million, $139.2 million and $132.9 million for the years ending December 31, 1996, 1995 and 1994, respectively. 7. Long-Term Debt
- -------------------------------------------------------------------------------------------------------------------------------- In thousands of dollars At December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- 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 64,654 69,878 77,045 - -------------------------------------------------------------------------------------------------------------------------------- 99,654(a) 104,878 112,045 - -------------------------------------------------------------------------------------------------------------------------------- Debentures 10.46% convertible, due October 27, 2008 5,300(b) 5,300 5,300 9%, due January 1, 2020 -- -- (c) 69,785 9%, due August 15, 2021 100,000 100,000 100,000 - -------------------------------------------------------------------------------------------------------------------------------- 105,300 105,300 175,085 - -------------------------------------------------------------------------------------------------------------------------------- 9% Senior Subordinated Notes, due 2003 3,180 3,233(d) 80,000 Medium term notes, 7.51%-9.3%, due 2000 to 2004 219,000 219,000(e) 179,000 Revolving Credit Agreements 248,570(f) 187,601 120,000 Capitalized lease obligations and other debt 8,444 17,376 3,971 - -------------------------------------------------------------------------------------------------------------------------------- Subtotal 684,148(g) 637,388 670,101 Less: Discount on long-term debt 2,852 3,650 3,586 Current portion of long-term debt 6,253 14,871 4,966 - -------------------------------------------------------------------------------------------------------------------------------- Total long-term debt $675,043 $618,867 $661,549 ================================================================================================================================
(a) Certain assets of Local Communications Services segment are pledged as security. (b) The debenture is convertible into common stock at any time after October 26, 1998 at $10.5375 per share. A total of 502,966 shares of common stock are reserved for such conversion. 29 footnotes continued from page 29 (c) The Company redeemed the debentures in November 1995 in a transaction that resulted in an extraordinary loss of $3.2 million, net of applicable taxes of $1.7 million in 1995. (d) The Company completed a tender offer for the $80.0 million of outstanding notes in September 1995 and redeemed approximately $76.8 million. This redemption resulted in an extraordinary loss of $5.8 million, net of applicable taxes of $3.7 million in 1995. (e) In March 1995 in conjunction with the implementation of the Open Market Plan, the Company, through its Rochester Telephone Corp. subsidiary, completed an offering of $40.0 million of 7.51% Medium-Term Notes, maturing March 2002. (f) The Company has credit facilities totaling $450.0 million which are available through commercial paper borrowings or through draws under Revolving Credit Agreements. At December 31, 1996, the Company had outstanding $248.6 million in commercial paper issuances. Commercial paper is classified as long-term debt as the Company intends to refinance the debt through continued short-term borrowing or available credit facilities with unused commitments extending beyond one year. Frontier Corporation's Revolving Credit Agreement was entered into in August 1995 with a group of 10 commercial banks and expires August 2000. The Agreement was amended in May 1996 to increase the available line of credit from $250.0 million to $350.0 million. The Agreement is unsecured and has commitment fees of .08 percent per year on the entire commitment, with interest on amounts drawn down based upon the London Interbank Offered Rate ("LIBOR") plus .17 percent. The Company, through its subsidiary Rochester Telephone Corp., entered into a Revolving Credit Agreement with six commercial banks in December 1994. The Agreement established a secured $160.0 million line of credit which was amended in 1995 to remove the security interest on the assets of Rochester Telephone Corp. and reduce the available line of credit to $100.0 million. The agreement carries commitment fees of .07 percent per year on the entire commitment, with interest on amounts drawn down based on either the prime rate, LIBOR plus .13 percent, or a competitive bid rate. The Company also has a $500.0 million universal shelf which was filed with the Securities Exchange Commission in November 1995. This filing allows for the issuance of a combination of debt, common, preferred stock or warrant securities. No securities have been issued as of December 31, 1996. (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 $718.2 million, as compared to the carrying value of $684.1 million. At December 31, 1996, aggregate debt maturities were:
- ----------------------------------------------------------------------------------------------------------------------- In thousands of dollars 1997 1998 1999 2000 2001 - ----------------------------------------------------------------------------------------------------------------------- $6,253 $8,770 $30,262 $319,927 $74,734 =======================================================================================================================
8. Income Taxes The provision for income taxes consists of the following:
- -------------------------------------------------------------------------------------------------- In thousands of dollars 1996 1995 1994 - -------------------------------------------------------------------------------------------------- Federal: Current $114,302 $103,689 $105,189 Deferred 6,136 (17,721) (9,120) - -------------------------------------------------------------------------------------------------- 120,438 85,968 96,069 - -------------------------------------------------------------------------------------------------- State: Current 19,757 16,498 13,116 Deferred 2,401 (1,570) (107) - -------------------------------------------------------------------------------------------------- 22,158 14,928 13,009 - -------------------------------------------------------------------------------------------------- Total income taxes $142,596 $100,896 $109,078 ==================================================================================================
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 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------- Federal income tax expense at statutory rate 35.0% 35.0% 35.0% State income tax (net of federal benefit) 4.0 4.0 2.9 Accelerated depreciation -- 1.1 .9 Investment tax credit -- (.6) (.7) Utilization of net operating loss carryforward (.9) (1.4) (1.2) Acquisition related charges -- 2.4 -- Goodwill amortization 1.2 1.5 .8 Other .3 (.9) (.9) - ------------------------------------------------------------------------------------------------------------------------ Total income tax 39.6% 41.1% 36.8% ========================================================================================================================
30 Deferred tax (assets) liabilities are comprised of the following at December 31:
- ------------------------------------------------------------------------- ------------------- ------------------- In thousands of dollars 1996 1995 1994 - ------------------------------------------------------------------------- ------------------- ------------------- Accelerated depreciation $ 87,768 $ 81,687 $ 151,069 Other 22,915 18,297 17,153 - ------------------------------------------------------------------------- ------------------- ------------------- Gross deferred tax liabilities 110,683 99,984 168,222 - ------------------------------------------------------------------------- ------------------- ------------------- Basis adjustment-purchased telephone companies(25,477) (25,477) (29,232) (31,851) Employee benefits obligation (11,136) (4,562) (12,955) Net operating loss carryforwards (44,906) (45,844) (42,000) Acquisition related charges (27,630) (29,213) -- Bad debt expense (10,970) (11,801) (4,657) Other (37,832) (31,163) (12,754) - ------------------------------------------------------------------------- ------------------- ------------------- Gross deferred tax assets (157,951) (151,815) (104,217) Valuation allowance 19,461 23,887 28,500 - ------------------------------------------------------------------------- ------------------- ------------------- Total deferred tax assets (138,490) (127,928) (75,717) - ------------------------------------------------------------------------- ------------------- ------------------- Net deferred tax (assets) liabilities $ (27,807) $ (27,944) $ 92,505 ========================================================================= =================== ===================
Certain of the Company's acquired subsidiaries have tax net operating losses and alternative tax net operating loss carryforwards ("NOLs") which can be utilized annually to offset separate company future taxable income. Under the provisions of Internal Revenue Code Section 382, the utilization of carryforwards is presently limited. The Company's NOLs begin to expire in 2004. As a result of the annual limitation and the difficulty in predicting their utilization beyond a period of three years, the Company has established valuation allowances for the NOL carryforwards. Because certain of the NOL carryforwards were acquired in purchase acquisitions and the related valuation allowance was recorded using purchase accounting, $7.0 million of this valuation allowance, if subsequently recognized, would be allocated to reduce goodwill. 9. Service Pensions and Benefits The Company has contributory and noncontributory plans providing for service pensions and certain death benefits for substantially all 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 primarily included in "Deferred and other assets" in the Consolidated Balance Sheets.
- ----------------------------------------------------------------------------------------- ----------------------- --------------- Plans for which Plans for which December 31, 1996 assets exceed accumulated benefits In thousands of dollars accumulated benefits exceed assets Total - ----------------------------------------------------------------------------------------- ----------------------- --------------- Actuarial present value of benefit obligations: Vested benefit obligation $ 403,077 $ 12,693 $415,770 Accumulated benefit obligation $ 423,055 $ 13,758 $436,813 ========================================================================================= ======================= =============== Plan assets at fair value, primarily fixed income securities and common stock $ 493,894 $ -- $493,894 Projected benefit obligation (423,055) (14,899) (437,954) - ----------------------------------------------------------------------------------------- ------------------------ -------------- Funded status 70,839 (14,899) 55,940 Unrecognized net (gain) loss (55,604) 3,250 (52,354) Unrecognized net transition asset (2,837) -- (2,837) Unrecognized prior service cost 11,097 -- 11,097 Adjustment required to recognize minimum liability (2,109) (2,109) - ----------------------------------------------------------------------------------------- ----------------------- --------------- Pension asset (liability) reflected in Consolidated Balance Sheet $ 23,495 $(13,758) $ 9,737 ========================================================================================= ======================= ===============
31
- ----------------------------------------------------------------------------------------- ---------------------- ----------------- Plans for which Plans for which December 31, 1995 assets exceed accumulated benefits In thousands of dollars accumulated 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 ========================================================================================= ====================== ================= - ----------------------------------------------------------------------------------------- ---------------------- -------------- Plans for which Plans for which December 31, 1994 assets exceed accumulated benefits In thousands of dollars accumulated 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 ========================================================================================= ====================== ================ The net periodic pension cost consists of the following: - ----------------------------------------------------------------------------------------- ---------------------- -------------- Years Ended December 31, 1996 1995 1994 In thousands of dollars - ----------------------------------------------------------------------------------------- ---------------------- -------------- Service cost $ 6,487 $ 5,616 $ 7,934 Interest cost on projected benefit obligation 30,100 28,868 25,565 Actual (return) loss on plan assets (63,807) (89,195) 2,229 Net amortization and deferral 25,723 51,437 (39,606) Amount expensed due to curtailment 28,000 2,907 -- - ----------------------------------------------------------------------------------------- ---------------------- -------------- Net periodic pension cost (benefit) $ 26,503 $ (367) $ (3,878) ========================================================================================= ====================== ================ The following rates and assumptions were used to calculate the projected benefit obligation: - ----------------------------------------------------------------------------------------- ---------------------- -------------- Years Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------- ---------------------- -------------- Weighted average discount rate 7.5% 7.5% 8.5% Rate of salary increase 5.0% 5.0% 5.5% Expected return on plan assets 9.0% 9.0% 9.0% ========================================================================================= ====================== ================
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. In 1996, the Company recognized a curtailment loss of $28.0 million reflecting the enhancement and freezing of defined benefit plans sponsored by Frontier Corporation, primarily for certain bargaining unit employees. Pension expense in 1995 included a net curtailment loss of $2.9 million reflecting the enhancement and freezing of defined benefit plans sponsored by Frontier Corporation for non-bargaining unit employees as of December 31, 1996. 32 The Company also sponsors a number of defined contribution plans. The most significant plan covers non-bargaining employees, who can elect to make contributions through payroll deduction. Effective January 1, 1996, the Company provides a contribution of .5 percent of gross compensation in common stock for every employee eligible to participate in the plan. The Company also provides 100% matching contributions in its common stock up to three percent of gross compensation, and may, at the discretion of the Management Benefit Committee, provide additional matching contributions based upon Frontier's financial results. In 1995 and 1994, the Company provided matching contributions in its common stock up to 75 percent of participants' contributions up to six percent of gross compensation. The total cost recognized for all defined contribution plans was $8.4 million for 1996, $6.8 million for 1995 and $5.6 million for 1994. 10. Postretirement Benefits Other Than Pensions The Company provides health care and life insurance benefits to most 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 1996, the Company amended its health benefits care plan to cap the cost absorbed by the Company for health care and life insurance for its bargaining unit employees who retire after December 31, 1996. The effect of this amendment was to reduce the December 31, 1996 accumulated postretirement obligation by $11.2 million. Additionally, during 1996, special termination benefits were offered to certain employees with 25 years of service or more who were already entitled to reduced or full retirement benefits and who voluntarily terminated their employment with the Company prior to December 31, 1996. 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 for its non-bargaining unit employees who retire after December 31, 1996. 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 December 31, 1996 1995 1994 - --------------------------------------------------------------------------------------------------- --------------- --------------- Accumulated postretirement benefit obligation (APBO) attributable to: Retirees $ 78,398 $ 73,032 $ 79,935 Fully eligible plan participants 15,206 17,235 22,812 Other active plan participants 10,669 20,127 28,877 - --------------------------------------------------------------------------------------------------- --------------- --------------- Total APBO $104,273 $110,394 $ 131,624 Plan assets at fair value 5,322 5,716 5,545 - --------------------------------------------------------------------------------------------------- --------------- --------------- APBO in excess of plan assets 98,951 104,678 126,079 Unrecognized transition obligation (84,764) (99,836) (109,730) Unrecognized net prior service cost (90) (1,790) (6,003) Unrecognized net gain 24,235 30,110 15,502 - --------------------------------------------------------------------------------------------------- --------------- --------------- Accrued postretirement benefit obligation $ 38,332 $ 33,162 $ 25,848 =================================================================================================== =============== =============== The components of the estimated postretirement benefit cost are as follows: - --------------------------------------------------------------------------------------------------- --------------- --------------- In thousands of dollars December 31, 1996 1995 1994 - --------------------------------------------------------------------------------------------------- --------------- --------------- Service cost $ 642 $ 947 $ 1,323 Interest on accumulated postretirement benefit obligation 7,735 8,614 9,666 Amortization of transition obligation 5,512 6,045 6,094 Return on plan assets (457) (462) (385) Amortization of prior service cost 69 392 383 Amortization of gains and losses (2,024) (2,758) (704) Special termination benefit 360 - --------------------------------------------------------------------------------------------------- --------------- --------------- Net postretirement benefit cost $11,837 $12,778 $16,377 =================================================================================================== =============== =============== The following assumptions were used to value the postretirement benefit obligation: - -------------------------------------------------------------------------------------------------- --------------- ---------------- Years Ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------------- --------------- ---------------- Weighted average discount rate 7.5% 7.5% 8.5% Expected return on plan assets 9.0% 9.0% 9.0% Rate of salary increase 5.0% 5.0% 5.5% Assumed rate of increase in cost of covered health care benefits 7.1% 10.5% 11.2% ================================================================================================== =============== ===============
Health care costs were assumed to decline consistently to 5.0% by 2006 and thereafter. If the health care cost trend rates were increased by one percentage point, the accumulated postretirement benefit health care obligation as of December 31, 1996 would increase by $7.3 million while the sum of the service and interest cost components of the net postretirement benefit health care cost for 1996 would increase by $.7 million. 33 11. Stock Option Plans and Other Common Stock Transactions The Company has stock option plans 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. The options expire ten years from the date of the grant. The options vest over a period from one to three years. Options previously issued to ALC employees are vested in their entirety as of the August 16, 1995 merger date. The maximum number of shares which may be granted under the executive plan 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 employee plan is a total of 8,000,000 shares over a 10 year period. The maximum number of shares which may be granted under the directors plan is 1,000,000 shares. Information with respect to options under the above plans follows:
- ----------------------------------------------------------------------------------- ---------------------- Weighted Average Shares Exercise Price - ----------------------------------------------------------------------------------- ---------------------- Outstanding at January 1, 1994 9,331,112 $ 6.33 Granted in 1994 507,900 $ 20.42 Cancelled in 1994 (150,464) $ 11.35 Exercised in 1994 (713,025) $ 2.25 - ----------------------------------------------------------------------------------- ---------------------- Outstanding at December 31, 1994 8,975,523 $ 7.37 Granted in 1995 2,020,315 $ 25.27 Cancelled in 1995 (195,716) $ 23.53 Exercised in 1995 (2,433,623) $ 7.48 - ----------------------------------------------------------------------------------- ---------------------- Outstanding at December 31, 1995 8,366,499 $ 11.28 Granted in 1996 3,067,500 $ 30.95 Cancelled in 1996 (784,289) $ 28.77 Exercised in 1996 (5,481,681) $ 5.99 - ----------------------------------------------------------------------------------- ---------------------- Outstanding at December 31, 1996 5,168,029 $ 25.91 =================================================================================== ======================
At December 31, 1996, 9,194,770 shares were available for future grant. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans. Accordingly, no compensation expense would be recognized for its stock-based compensation plans other than for restricted stock awards. During 1996 the Company adopted the disclosure requirements of FAS 123, "Accounting for Stock-Based Compensation." In accordance with FAS 123, the Company has elected not to recognize compensation cost related to stock options with exercise prices equal to the market price at the date of issuance. If the Company had elected to recognize compensation cost based on the fair value of the options at grant date as prescribed by FAS 123, net income and earnings per share would have been reduced by $5 million and $1 million, or $.03 and $.01 per share, for years ended December 31, 1996 and 1995, respectively. The weighted average fair value of options granted during 1996 and 1995 were $8.58 and $7.42 respectively, determined by the Black-Scholes option valuation model. The following assumptions were used in the model: expected volatility of 28.4 percent, expected dividend yield of 3.0 percent, and risk-free interest rates ranging from 5.5 percent to 7.0 percent. Due to the difference in vesting requirements in each of the plans, the expected lives of the options range from 5 to 7 years. Forfeitures are recognized as they occur.
Options Outstanding - ----------------------- ----------------------- ----------------------- ----------------------- Weighted Range Of Number Average Remaining Weighted Average Exercise Prices Outstanding Contractual Life Exercise Price - ----------------------- ----------------------- ----------------------- ----------------------- $ 1--$ 3 261,787 4.89 $ 2.29 $12--$20 561,036 6.71 16.22 $21--$32 4,345,206 8.94 28.59 ======================= ======================= ======================= =======================
Options Exercisable - ----------------------- ----------------------- ----------------------- Range Of Number Weighted Average Exercise Prices Exercisable Exercise Price - ----------------------- ----------------------- ----------------------- $1--$ 3 261,787 $ 2.29 $12--$20 504,700 15.91 $21--$32 657,676 24.16 ======================= ======================= =======================
34 Restricted Stock Plan The Company has 300,000 shares of common stock outstanding as of December 31, 1996 under its Management Stock Incentive Plan. The stock issued under this plan ("Restricted Stock") is subject to the achievement of certain performance goals, the passage of time and continued employment restrictions. Participants in the plan may earn, without cost to them, Frontier common stock over three years. Shareowners' equity reflects unearned compensation for the unvested stock awarded. During 1996, the Company did not recognize compensation expense for the restricted stock plan as the market price of the common stock at December 31, 1996 was significantly below the vesting prices. Common Stock Warrants As of December 31, 1996, warrants for the purchase of 44,000 shares of common stock at $2.50 per share were outstanding. The warrants expire in June 1997. As of December 31, 1996, 1995 and 1994, 87,000, 6,252,000 and 828,000 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 which occurred in April 1994. 12. Preferred Stock
- -------------------------------------------------------------------------------------- ---------------------- ---------------------- In thousands of dollars, except share data 1996 1995 1994 - -------------------------------------------------------------------------------------- ---------------------- ---------------------- 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 48,500 50,000 50,000 Amount outstanding $ 4,850 $ 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 6,160 6,240 6,320 Amount outstanding $ 616 $ 624 $ 632 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 226,108 227,688 227,768 ====================================================================================== ====================== ====================== Total amount outstanding $22,611 $22,769 $22,777 ====================================================================================== ====================== ======================
At the special meeting in December 1994, Frontier shareowners authorized four 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, 1996, 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 at one-half market value. 35 13. Accounting Pronouncements Adopted Effective January 1, 1996, the Company adopted FAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," FAS 121 requires that certain long-lived assets and identifiable intangibles be written down to fair value whenever an impairment review indicates that the carrying value cannot be recovered on an undiscounted cash flow basis. The statement also requires that certain long-lived assets and identifiable intangibles to be disposed of be reported at fair value less selling costs. The Company's adoption of this standard resulted in a non-cash charge of $8.0 million (net of a tax benefit of $4.4 million) and is reported as a cumulative effect of a change in accounting principle. The charge represents the cumulative adjustment required by FAS 121 to remeasure the carrying amount of certain assets held for disposal as of January 1, 1996. These assets held for disposal consist principally of telephone switching equipment in the Company's Local Communications Services segment as a result of management's commitment, in late 1995, to a central office switch consolidation project primarily at the Rochester Telephone Corp. and Frontier Communications of New York subsidiaries. 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. The Company adopted FAS 112, "Employers' Accounting for Postemployment Benefits" effective January 1, 1994. FAS 112 requires that the projected future costs of providing postemployment, but pre-retirement, benefits, such as disability, pre- pension leave (salary continuation) and severance pay, be recognized as an expense as employees render service rather than when the benefits are paid. The Company 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. 14. Investment in Cellular Partnerships In July 1994, Frontier Corporation and Nynex Corporation combined certain of their respective cellular interests to form Frontier Cellular, a cellular super system joint venture in upstate and western New York State. Currently, Frontier Cellular includes cellular markets throughout New York State and northern Pennsylvania. 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 Statements of Income. Previously, revenues and expenses for these New York State wireless properties had been consolidated. During 1995, Nynex Corporation contributed its cellular interests in the partnership into a combined partnership with Bell Atlantic Corporation. The partnership investment balances of $58.6 million in 1996, $33.8 million in 1995 and $23.5 million in 1994 are included in "Deferred and other assets" in the Consolidated Balance Sheets. 15. Major Customer The Company's 1996 revenues include the impact of a major carrier customer whose revenues comprise approximately 16% of consolidated revenues for the year. 16. Commitments and Contingencies Operating Environment--The Company has 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, over-time and due to the lifting of regulatory restrictions, there will be more entrants into the long distance business and its local markets. Legal Matters--The Company and a number of its subsidiaries in the normal course of business are party to a number of judicial, regulatory 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 $164.6 million in 1996, $77.8 million in 1995 and $68.7 million in 1994. Minimum annual rental commitments under non-cancellable operating leases and license agreements in effect on December 31, 1996 were as follows:
- ---------------------------------------------------------------------------- In thousands of dollars - ---------------------------------------- --------------- ----------------- License Years Buildings Equipment Agreements - ---------------------------------------- --------------- ----------------- 1997 $ 21,062 $ 9,623 $ 83,859 1998 17,745 4,786 71,536 1999 13,701 2,355 37,818 2000 11,832 1,489 20,892 2001 10,259 47 13,392 2002 and thereafter 32,320 -- 7,826 - ---------------------------------------- --------------- ----------------- Total $106,919 $18,300 $235,323 ======================================== =============== =================
Sale of Cellular Interest--On October 23, 1996, the Company announced that a definitive agreement had been signed with Alltel to sell its 69.5% equity interest in the South Alabama Cellular Communications Partnership. The partnership provides cellular service to customers in Alabama RSA No. 4 and Alabama RSA No. 6. The Company anticipates that this transaction, which is subject to board of directors and regulatory approval, will be finalized in early 1997. The Company expects to recognize a gain as a result of this transaction. Other Matters--In connection with the Company's capital program, certain commitments have been made for the purchase of material and equipment. In October 1996, construction began on a nationwide fiber optic network. Frontier will be investing approximately $500 million in this project over the next two year period. At December 31, 1996, the Company made a $62 million deposit payment for this project that is included in the "Deferred and other" caption in the Consolidated Balance Sheets. The network expansion will increase 1997 capital expenditures by over $250 million to a combined level of approximately $590 million. 36 17. Business Segment Information As of January 1996, Frontier simplified its business segment reporting to reflect the predominance of its two major operating segments, long distance and local communications services. The Company now reports its operating results in three segments: Long Distance Communications Services, Local Communications Services and Corporate Operations and Other. The Company's majority interest in two wireless properties, which were previously reported as a Wireless Communications Segment, have been consolidated under Corporate Operations and Other. The change in the definition of the Company's segments has been made to better reflect the changing scope of the businesses in which Frontier operates. Revenues and sales, operating income, depreciation, construction and identifiable assets by business segment are set forth in the Business Segment Information on page 22.
18. Quarterly Data (Unaudited) - ---------------------------------------- ---------------------------------- ------------------------------------------------------- Revenues Income Per Share -------------- ---------------------------------- ------------------------------------------------------- (In thousands of dollars, Earnings Before except per share data) Operating Net Extraordinary Market Price Consolidated Income Income Items and ------------------ Revenues (Loss) (Loss) Cumulative Effect Earnings High Low - ---------------------------------------- ---------------------------------- ------------------------------------------------------- 1996 First Quarter $ 655,149 $111,852 $ 57,123/(1)/ $ .40 $ .35 $33.25 $28.25 Second Quarter 670,279 122,701 69,206 .42 .42 $33.38 $27.75 Third Quarter 669,069 129,218 73,777 .45 .45 $31.25 $25.88 Fourth Quarter 581,072 24,113/(2)/ 9,820/(2)/ .06 .06 $31.88 $19.88 ------------ ---------------------------------- ------------------------------------------------------- Full Year $2,575,569 $387,884 $209,926 $1.32/(3)/ $1.27/(3)/ ============ ================================== ======================================================= - ---------------------------------------- ---------------------------------- ------------------------------------------------------- 1995 First Quarter/(1)/ $ 459,040 $ 87,281/(4)/ $ 51,650/(4)/ $ .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)/(5)/ (37,912)/(5)/ (.12)/(6)/ (.90)/(6)/ $28.63 $23.75 Fourth Quarter 606,345 108,316 55,276 .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/(7)/ $ .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 ============ ================================== =======================================================
(1) Includes a post-tax cumulative effect charge related to change in accounting principle of $8.0 million. (2) Includes a pre-tax charge of $65.2 million as a result of the following: $28.0 million representing a one-time charge for the curtailment of certain company pension plans; $20.8 million is the result of a nonrecurring charge relating to the Company's conference calling product line and $16.4 million reflecting the resolution of billing disputes with connecting carriers. The $16.4 million charge relating to the carrier billing disputes recorded in the fourth quarter of 1996 does not result in the material misstatement of the earlier quarters of 1996. (3) As a result of rounding, the total of the four quarters' earnings does not equal the earnings per share for the year. (4) Includes a pre-tax acquisition related charge of $4.8 million (post-tax charge of $3.1 million). (5) Includes 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. (6) Due to the net loss incurred, the earnings per share calculation excludes common stock equivalents. (7) Includes a post-tax cumulative effect charge related to change in accounting principle of $7.2 million. 37 Condensed Six-Year Financial Statements
- -------------------------------------------------------- -------------- -------------- -------------- -------------- -------------- In thousands of dollars, except per share data Years Ended December 31, 1996 1995 1994 1993 1992 1991 - -------------------------------------------------------- -------------- -------------- -------------- -------------- -------------- CONSOLIDATED STATEMENTS OF INCOME Revenues $2,575,569 $2,143,691 $1,667,545 $1,437,448 $1,252,244 $1,120,375 Costs and expenses 2,187,685 1,859,461 1,341,919 1,185,811 1,047,393 952,165 - -------------------------------------------------------- -------------- -------------- -------------- -------------- -------------- Operating Income 387,884 284,230 325,626 251,637 204,851 168,210 Interest expense 43,175 53,557 50,216 56,691 66,933 63,154 Other income 15,831 14,991 20,922 7,207 2,201 27,905 Income taxes 142,596 100,896 109,078 73,509 33,094 52,774 - -------------------------------------------------------- -------------- -------------- -------------- -------------- -------------- Income Before Extraordinary Items and Cumulative Effect of Changes in Accounting Principles 217,944 144,768 187,254 128,644 107,025 80,187 Extraordinary items -- (121,208) -- (7,490) (1,072) 6,387 Cumulative effects of changes in accounting principles (8,018) (1,477) (7,197) -- -- -- - -------------------------------------------------------- -------------- -------------- -------------- -------------- -------------- Consolidated Net Income 209,926 22,083 180,057 121,154 105,953 86,574 Dividends on preferred stock 1,182 1,191 1,187 1,640 4,442 5,189 - -------------------------------------------------------- -------------- -------------- -------------- -------------- -------------- Income Applicable to Common Stock $ 208,744 $ 20,892 $ 178,870 $ 119,514 $ 101,511 $ 81,385 ======================================================== ============== ============== ============== ============== ============= Earnings Per Common Share: Primary $ 1.27 $ .13 $ 1.12 $ .78 $ .74 $ .64 Fully Diluted $ 1.27 $ .13 $ 1.12 $ .78 $ .74 $ .64 - -------------------------------------------------------- -------------- -------------- -------------- -------------- -------------- CONSOLIDATED BALANCE SHEETS Current assets $ 469,234 $ 523,135 $ 673,826 $ 303,434 $ 302,122 $ 270,122 Property, plant and equipment, net 971,259 881,309 1,034,442 1,080,135 1,085,760 1,075,584 Goodwill and customer base 535,979 550,081 222,442 215,962 187,278 197,201 Deferred and other assets 245,048 154,067 130,084 122,014 104,583 118,112 - -------------------------------------------------------- -------------- -------------- -------------- -------------- -------------- Total Assets $2,221,520 $2,108,592 $2,060,794 $1,721,545 $1,679,743 $1,661,019 ======================================================== ============== ============== ============== ============== ============= Current liabilities $ 418,103 $ 504,201 $ 305,698 $ 291,760 $ 344,962 $ 344,974 Long-term debt 675,043 618,867 661,549 581,707 604,157 636,099 Deferred income taxes 2,542 15,644 98,217 104,232 104,588 113,973 Deferred employee benefits obligation 65,479 58,385 46,001 16,121 -- -- Redeemable preferred stock -- -- -- -- 9,659 62,434 Shareowners' equity 1,060,353 911,495 949,329 727,725 616,377 503,539 - -------------------------------------------------------- -------------- -------------- -------------- -------------- -------------- Total Liabilities and Shareowners' Equity $2,221,520 $2,108,592 $2,060,794 $1,721,545 $1,679,743 $1,661,019 ======================================================== ============== ============== ============== ============== ============= CONSOLIDATED STATEMENTS OF CASH FLOWS Operating activities $ 395,661 $ 326,024 $ 305,465 $ 292,233 $ 249,763 $ 186,771 Investing activities (333,926) (519,337) (89,705) (151,165) (137,540) (283,607) Financing activities (62,236) (134,547) 109,579 (177,401) (87,396) 116,579 - -------------------------------------------------------- -------------- -------------- -------------- -------------- -------------- Net (Decrease) Increase in Cash and Cash Equivalents $ (501) $ (327,860) $ 325,339 $ (36,333) $ 24,827 $ 19,743 ======================================================== ============== ============== ============== ============== =============
38 Financial and Operating Statistics for Six Years
- ----------------------------------------------------------- -------------- ------------- ------------- ------------- -------------- Dollars in thousands, except per share data Years ended December 31, 1996 1995 1994 1993 1992 1991 - ----------------------------------------------------------- -------------- ------------- ------------- ------------- -------------- Current ratio 1.12 1.04 2.20 1.04 .88 .79 Pre-tax interest coverage 8.1x 1.9x 6.5x 4.3x 3.0x 3.2x Total debt $ 681,296 $633,738 $666,515 $586,669 $694,803 $737,629 Debt ratio 39.1% 41.0% 41.2% 44.6% 52.6% 56.6% Common shareowners' equity $1,037,742 $888,726 $926,552 $704,940 $593,564 $480,716 Rate of return on average common equity/(1)/ 25.5% 24.0% 21.9% 19.4% 18.9% 19.3% =========================================================== ============== ============= ============= ============= ============== Construction $ 310,802 $162,575 $113,735 $123,842 $137,066 $119,082 Percent of funds generated internally 83% 150% 216% 189% 145% 117% =========================================================== ============== ============= ============= ============= ============== Common shares outstanding end of year* 163,725 158,057 149,294 142,542 122,935 109,798 Average common shares outstanding* 164,013 161,669 160,353 153,230 136,180 127,627 Total number of common shareowners 30,206 26,637 24,608 22,840 22,520 21,376 Market price per common share: High $ 33.38 $ 30.00 $ 25.25 $ 25.13 $ 17.88 $ 17.00 Low $ 19.88 $ 19.25 $ 20.25 $ 17.32 $ 14.57 $ 13.00 End of year $ 22.63 $ 30.00 $ 21.13 $ 22.57 $ 17.82 $ 16.07 =========================================================== ============== ============= ============= ============= ============== Dividends declared per common share $ .855 $ .835 $ .815 $ .795 $ .775 $ .755 Dividends paid per common share $ .850 $ .830 $ .810 $ .790 $ .770 $ .750 Dividend yield-end of year 3.8% 2.8% 3.9% 3.6% 4.4% 4.8% =========================================================== ============== ============= ============= ============= ============== Percent to total revenues: Net Revenues: Long Distance Communications Services 73% 69% 61% 55% 51% 51% Local Communications Services 25% 29% 37% 41% 45% 45% Other 2% 2% 2% 4% 4% 4% Operating Margin:/(1)/ Long Distance Communications Services 12% 14% 16% 13% 10% 7% Local Communications Services 34% 32% 30% 27% 25% 26% Consolidated 17% 17% 20% 18% 16% 15% =========================================================== ============== ============= ============= ============= ============== Access lines in service--Rochester 532,189 524,630 501,811 492,512 488,986 473,391 Access lines in service--Regionals 443,453 426,245 416,327 425,128 407,415 394,513 - ----------------------------------------------------------- -------------- ------------- ------------- ------------- ------------- Total access lines in service 975,642 950,875 918,138 917,640 896,401 867,904 =========================================================== ============== ============= ============= ============= ============== Employees: Long Distance Communications Services 4,376 4,203 2,647 2,378 2,280 2,141 Local Communications Services 2,701 2,959 3,156 3,444 3,885 3,915 Other 823 675 369 259 296 316 - ----------------------------------------------------------- -------------- ------------- ------------- ------------- -------------- Total employees 7,900 7,837 6,172 6,081 6,461 6,372 =========================================================== ============== ============= ============= ============= ============== Local Communications Services minutes of use: Carrier access minutes-interstate* 2,421,787 2,272,294 2,079,328 2,015,602 1,912,531 1,569,309 Carrier access minutes-intrastate* 1,877,249 1,759,425 1,763,871 1,664,262 1,439,983 1,173,685 - ----------------------------------------------------------- -------------- ------------- ------------- ------------- ------------- Total carrier access minutes* 4,299,036 4,031,719 3,843,199 3,679,864 3,352,514 2,742,994 =========================================================== ============== ============= ============= ============= ============== Long Distance minutes of use* 13,695,536 10,066,777 6,286,912 4,684,981 3,909,616 2,868,545 =========================================================== ============== ============= ============= ============= ==============
*In thousands (1) Excluding nonrecurring charges. 39 EX-13.2 10 REPORT OF ERNST & YOUNG Exhibit 13.2 REPORT OF INDEPENDENT AUDITORS Board of Directors ALC Communications Corporation We have audited the consolidated balance sheets of ALC Communications Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, cash flows, and preferred stock and stockholders' equity for the years then ended (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 and 1994, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Detroit, Michigan January 17, 1996 EX-21 11 SUBSIDIARIES OF FRONTIER EXHIBIT 21 SUBSIDIARIES OF FRONTIER CORPORATION AS OF MARCH 1, 1997
STATE OF NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED - ------------------ ------------- -------------------- ALC Communications Corporation DE ALC Communications Corp.; (A subsidiary of Frontier ALC Corporation) Ameritel Management, Inc. Canada Ameritel Management, Inc. (A subsidiary of Frontier (British Columbia) Communications of the West, Inc.) Budget Call Long Distance, Inc. DE Budget Call Long (A subsidiary of Frontier Distance, Inc.; Budget Communications International Inc.) Call Business Telemanagement, Inc. CA Business Telemanagement, (A subsidiary of Ameritel Inc. Management, Inc.) Computer Calling Technologies, Inc. DE 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 International, Inc. CO ConferTech International, (A subsidiary of ALC Communications Inc. Corporation)
STATE OF NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED - ------------------ ------------- -------------------- 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 ALC ETI; Frontier Telemanage- Communications Corporation) ment 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) Frontel Newco (A subsidiary of Frontel Communications Ltd) England Frontel Newco 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. ALC Communications Corporation)
2
STATE OF NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED - ------------------ ------------- -------------------- 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.)
3
STATE OF NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED - ------------------ ------------- -------------------- 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 Communications of IA Frontier Communications Iowa, Inc. of Iowa, Inc.; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of DE Frontier Communications of Israel Israel, Inc. (A subsidiary of Frontier Corporation) 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.)
4
STATE OF NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED - ------------------ ------------- -------------------- 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, of the Mid Atlantic,Inc. Inc.; Mid Atlantic Telecom (A subsidiary of ALC Communications Corporation) 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.)
5
STATE OF NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED - ------------------ ------------- -------------------- 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 ALC Long Distance North; LDN; Communications Corporation) Frontier Frontier Communications - MN Frontier Communications North Central Region, Inc. North Central Region, (A subsidiary of ALC Inc; American Sharecom; Communications Corporation) 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.)
6
STATE OF NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED - ------------------ ------------- -------------------- Frontier Communications-Prairie, IL Frontier Communications- Inc. Prairie, Inc.; Frontier (A subsidiary of Frontier Subsidiary Telco Inc.) Frontier Communications of DE Frontier Communications Rochester, of Rochester, Inc. 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)
7
STATE OF NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED - ------------------ ------------- -------------------- 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 ALC Coast Telecommunications, Communications Corporation) 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.)
8
STATE OF NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED - ------------------ ------------- -------------------- 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 DE 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 ALC Communications Corporation) Systems; Rotelcom Frontier Subsidiary Telco Inc. DE Frontier Subsidiary (A subsidiary of Telco Inc.; FSTI Frontier Corporation) Frontier Telemanagement Inc. WI Frontier Telemanagement (A subsidiary of ALC Communications Corporation) LinkUSA Corporation IA LinkUSA Corporation (A subsidiary of ALC Communications Corporation) Mid-South Cablevision MS Mid-South Cablevision Company, Inc. Company, Inc. (A subsidiary of Frontier Subsidiary Telco Inc.)
9
STATE OF NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED - ------------------ ------------- -------------------- MLD Minnesota 10, Inc. FL MLD Minnesota 10, Inc. (A subsidiary of Frontier Cellular Holding Inc.) New Richmond Cable WI New Richmond Cable Company, Inc. Company, Inc. (A subsidiary of Frontier Communications - St. Croix, Inc.) New York RSA 3 Funding Corporation NY New York RSA 3 Funding (A subsidiary of RTMC Holding, 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 ALC (Ont., Quebec) Canada Ltd. Communications Corporation) R.G. Data Incorporated NY R.G. Data (A subsidiary Frontier Corporation) Rochester Telephone Corp. NY Rochester Telephone (A subsidiary of Corp.; RTC 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.)
10
STATE OF NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED - ------------------ ------------- -------------------- Suntel Communications Corp. Ltd. Israel Suntel (A subsidiary of Frontier Communications of Israel, Inc.) TDCI, Ltd. IN Thorntown Development (A subsidiary of Company, Inc.; TDCI, Frontier Communications of Ltd. Thorntown, Inc.)
11 EX-23.1 12 CONSENT OF PRICE WATERHOUSE LLP 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, 33-64307 and 333-23229), Forms S-4 (File Nos. 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, 33-61855 and 333-04803) of Frontier Corporation of our report dated January 27, 1997 appearing on page 21 of the Annual Report to Shareowners which is incorporated by reference in the 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 27 of this Form 10-K. PRICE WATERHOUSE LLP Rochester, New York March 27, 1997 EX-23.2 13 CONSENT OF ERNST & YOUNG LLP 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 Nos. 33-64307 and 333-23229) and the related Prospectus of Frontier Corporation and to the incorporation by reference in the Prospectuses constituting part of the Registration Statements 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, 33-61855 and 333-04803 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, 1996 to be filed with the Securities and Exchange Commission. ERNST & YOUNG LLP March 26, 1997 Detroit, Michigan EX-24 14 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY I, the undersigned, hereby constitute and appoint either JOSEPHINE S. TRUBEK and/or LOUIS L. MASSARO as my true and lawful agent and attorney-in-fact to act with full power and authority and in my name, place and stead as I, myself, could act for the sole purpose of executing the Form 10-K of Frontier Corporation for the year ended December 31, 1996, 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 21, 1997. _____________________________ Patricia C. Barron /s/ Ronald L. Bittner _____________________________ Ronald L. Bittner /s/ Raul E. Cesan _____________________________ Raul E. Cesan _____________________________ Brenda E. Edgerton /s/ Jairo A. Estrada _____________________________ Jairo A. Estrada _____________________________ Daniel E. Gill /s/ Michael E. Faherty _____________________________ Michael E. Faherty _____________________________ Alan C. Hasselwander /s/ Robert J. Holland, Jr _____________________________ Robert J. Holland, Jr. /s/ Douglas H. McCorkindale _____________________________ Douglas H. McCorkindale /s/ Leo J. Thomas _____________________________ Leo J. Thomas _____________________________ Richard J. Uhl EX-27 15 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FRONTIER CORPORATION'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 0000084567 FRONTIER CORPORATION 1,000 YEAR DEC-31-1996 DEC-31-1996 30,948 0 395,167 30,911 13,198 469,234 2,276,361 1,305,102 2,221,520 418,103 675,043 0 22,611 163,732 874,010 2,221,520 0 2,575,569 54,776 2,187,685 500 0 43,175 360,540 142,596 217,944 0 0 (8,018) 209,926 1.27 1.27
EX-99 16 PROXY STATEMENT SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [_] Check the appropriate box: [_] Preliminary Proxy Statement [_] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [_] Definitive Additional Materials [_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12 FRONTIER CORPORATION (Name of Registrant as Specified In Its Charter) FRONTIER CORPORATION (Name of Person(s) Filing Proxy Statement) Payment of Filing Fee (check the appropriate box): [X] No fee required. [_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). [_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11:* (4) Proposed maximum aggregate value of transaction: - ------------- * Set forth the amount on which the filing is calculated and state how it was determined. [_] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount previously paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: [LOGO OF FRONTIER APPEARS HERE] NOTICE OF ANNUAL MEETING OF COMMON SHAREOWNERS TO BE HELD ON MAY 2, 1997 Frontier Corporation Frontier Center 180 South Clinton Avenue Rochester, New York 14646-0700 Proxy Statement Dear Shareowners: The Annual Meeting of Common Shareowners of Frontier Corporation (the Company") will be held at the Westin Hotel, Tabor Center Denver, 1672 Lawrence Street, Denver, Colorado 80202 at 10:30 a.m., local time, on May 2, 1997. The purposes of the meeting are: . To elect twelve Directors; . To elect Price Waterhouse LLP as the Company's public accountants for the fiscal year ending December 31, 1997; . To act upon a shareowner proposal concerning executive change in control arrangements; 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 twelve, effective April 30, 1996. The Board of Directors has fixed the close of business on March 14, 1997, 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. A map which indicates the meeting place appears on the back cover of the proxy statement. By Action of the Board of Directors, /s/ Josephine S. Trubek Josephine S. Trubek Corporate Secretary Rochester, New York March 24, 1997 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 Section 16(a) Beneficial Ownership Reporting Compliance 5 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 1996 Table 10 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 11 Pension Plan Table 12 Compensation Committee Interlocks and Insider Participation in Compensation Decisions 13 Indemnification of Certain Persons 13 Proposal 2 Election of Public Accountants 14 Proposal 3 Shareowner Proposal Regarding Executive Change in Control Arrangements 14 Other Matters 15 Future Proposals of Shareowners 15 Proxy Statement 1997 Annual Meeting of Common Shareowners of Frontier Corporation Proxy Solicitation The board of directors ("Board of Directors") of Frontier Corporation (the "Company"), a New York corporation, is soliciting proxies for use at the annual meeting of holders of the Company's $1.00 par value common stock. We are sending you this Proxy Statement and the enclosed proxy card in connection with the Board's solicitation so that you may vote your shares. The meeting (the "Annual Meeting") will be held on May 2, 1997, at 10:30 a.m., local time at the Westin Hotel, Tabor Center Denver, 1672 Lawrence Street, Denver, Colorado 80202, 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 pay 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 contact you personally or by telephone, facsimile, telegraph or cable, to solicit your proxy. The Company will also request brokerage houses, nominees, custodians and fiduciaries to forward soliciting materials to the beneficial owners of stock held of record and will reimburse such persons for forwarding such materials. In addition, the Company has retained Georgeson & Co., Inc., New York, New York, to aid in the solicitation of proxies at a fee not to exceed $7,500, plus reimbursement for out-of-pocket expenses incurred by that firm on behalf of the Company. The principal executive offices of the Company are located at 180 South Clinton Avenue, Rochester, New York 14646, and its telephone number is (716) 777-1000. Voting at the Annual Meeting The close of business on March 14, 1997, is the Record Date for determination of the shareowners entitled to notice of, and to vote at, the Annual Meeting. On that date there were 164,130,495 shares of the Company's $1.00 par value common stock outstanding and entitled to vote at the meeting. Each shareowner may 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 public accountants; and against the shareowner proposal. 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. Public accountants are elected by a majority of the votes cast. Approval of the shareowner proposal requires a majority of the votes cast as well. Abstentions are not counted in determining the votes cast in connection with the selection of public accountants or approval of the shareowner 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 public accountants are discretionary items with respect to which brokerage firms may vote. The shareowner proposal is not a discretionary item and brokers who receive no instructions from their clients may not vote on this proposal. If your broker does not vote your shares, those broker "non-votes" will not be considered as votes cast with respect to the shareowner proposal. - -------------------------------------------------------------------------------- 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 currently consists of twelve persons. The Board of Directors nominates the twelve persons named on pages 3 and 4 for election to the Board of Directors. All of these people are currently Directors of the Company, and their terms of office all expire on the date of the Annual Meeting. If elected, all of them will serve until the Annual Meeting of Shareowners to be held in 1998 or until such time as their respective successors are elected. The Board of Directors held six meetings during 1996. 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 Shareowners on March 24, 1997. 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 Jairo A. Estrada, 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 four meetings in 1996. Committee on Management The present members of the Committee on Management are Daniel E. Gill, Chair; Michael E. Faherty and Dr. Leo J. Thomas. 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 after an evaluation of his performance. 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 five meetings in 1996. Committee on Directors The Committee on Directors serves as the nominating committee and also is responsible for corporate governance issues. The Committee currently consists of Patricia C. Barron, Chair; Robert Holland, Jr., Douglas H. McCorkindale and Dr. Leo J. Thomas. The Committee reviews 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 1996. The Committee on Directors will consider nominations by shareowners. Such suggestions 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 relevant to serving as a member of Frontier's Board of Directors, 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 1998 Annual Meeting of Common Shareowners must be received by October 31, 1997 in order to receive consideration. Executive Committee The present members of the Executive Committee are Douglas H. McCorkindale, Chair; Patricia C. Barron, Ronald L. Bittner, Jairo A. Estrada, Daniel E. Gill and Alan C. Hasselwander. 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 1996. Compensation of Directors Directors are paid an annual retainer and meeting fees. The annual retainer consists of 1,200 shares of Frontier Corporation common stock. The meeting fee is $1,500 for each Board and/or committee meeting attended. The annual retainer for each committee chair consists of 300 shares of Frontier Corporation common stock. 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 closing price 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 $30.25 per share on April 24, 1996. Directors also receive cellular telephone equipment and service and other nominal in-kind items. - -------------------------------------------------------------------------------- Nominees for Director The Board believes that all of the persons it has nominated 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 person. The principal occupation and business experience of each nominee for election at the Annual Meeting of Common Shareowners to be held on May 2, 1997 appears next to that person's photograph. 2 [PHOTO OF PATRICIA C. BARRON APPEARS HERE] Patricia C. Barron, 54, is President, Xerox Engineering Systems, Xerox Corporation, a manufacturer of office systems and equipment, and has held this position since February 1994. From March 1992 until February 1994, she was President, Office Documents Products Division, Xerox Corporation. From 1979 to March 1992, she was a Vice President of Xerox Corporation. She is a Director of Quaker Chemical Corporation and of Reynolds Metals Company. She has been a Director of the Company since 1990. [PHOTO OF RONALD L. BITTNER APPEARS HERE] Ronald L. Bittner, 55, is Chairman and Chief Executive Officer of the Company and has held this position since April 1993. He also 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 a Director of Dynatech Corp. and of LG&E Energy Corp. He has been a Director of the Company since 1989. [PHOTO OF RAUL E. CESAN APPEARS HERE] Raul E. Cesan, 49, 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 OF BRENDA E. EDGERTON APPEARS HERE] Brenda E. Edgerton, 47, is Vice President - Business Development, Campbell Soup Company, a manufacturer of prepared convenience foods and has held this position since May 1996. From May 1994 to May 1996, she held the position Vice President, Finance - U.S. Soup, and 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 OF JAIRO A. ESTRADA APPEARS HERE] Jairo A. Estrada, 49, is a private investor. Until December 1995 he was Chairman of the Board and Chief Executive Officer of Garden Way Incorporated, a company which manufactures outdoor power equipment. Mr. Estrada has been a Director of the Company since 1989. [PHOTO OF MICHAEL E. FAHERTY 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 of ECCS, Inc., a provider of open systems-based networked computing solutions which incorporate ECCS' mass storage enhancement products. From 1994 until June 1996, he also served as ECCS' Chief Executive Officer. From January 1992 to January 1994, he also was 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. Subsequent to February 1977 and prior to 1989, he had served as either Chief Executive or Chief Operating Officer for varying periods of time of Information Magnetics, Cable & Wireless North America, Digital Sound Corporation, and Banc Tec, Inc. He is a Director of Banc Tec, Inc., and of ECCS, Inc. Mr. Faherty has been a Director of the Company since 1995. [PHOTO OF DANIEL E. GILL APPEARS HERE] Daniel E. Gill, 60, 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. Mr. Gill has been a Director of the Company since 1981. [PHOTO OF ALAN C. HASSELWANDER APPEARS HERE] Alan C. Hasselwander, 63, 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 OF ROBERT HOLLAND APPEARS HERE] Robert Holland, Jr., 56, is the former Chief Executive Officer of Ben and Jerry's Homemade, Inc., a manufacturer and marketer of premium ice cream. He held that position from February 1995 until October 1996. 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 of Gilreath Manufacturing, Inc. He is also a Director of Mutual Life Insurance Company of New York, Trumark Inc., and A.C. Nielsen Co. Mr. Holland has been a Director of the Company since 1995. 3 [PHOTO OF DOUGLAS H. MCCORKINDALE APPEARS HERE] Douglas H. McCorkindale, 57, 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 a director or trustee of a number of investment companies in the family of Prudential Mutual Funds. He has been a Director of the Company since 1980. [PHOTO OF DR. LEO J. THOMAS APPEARS HERE] Dr. Leo J. Thomas, 60, retired in May 1996, from Eastman Kodak Company, a manufacturer of imaging products. From September 1994 to May 1996, he held the position Executive Vice President. From September 1991 to September 1994, he was Group Vice President, Eastman Kodak Company. He is a Director of John Wiley & Sons, Inc. He has been a Director of the Company since 1984. [PHOTO OF RICHARD J. UHL APPEARS HERE] Richard J. Uhl, 56, 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 DACC Liquidation Corp. (formerly known as 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 first 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. The current target for each outside Director with at least five years of service on the Board is the beneficial ownership of at least 6,800 shares of the Company's common stock. All Directors with five years service on the Board have met this target. Executive officers of the Company are also encouraged to own shares of the Company. The recommended stock ownership level is based on each officer's position in the organization and is a multiple of salary. Mr. Bittner and each Executive Vice President has a stock ownership target which is 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 1, 1997. No Director, officer or nominee beneficially 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 as of February 1, 1997 - -------------------------------------------------------------------------------- Total Common Stock Beneficial Name Stock(1) Options(2) Ownership - -------------------------------------------------------------------------------- Directors and Nominees: Patricia C. Barron 7,175 7,399 14,574 Ronald L. Bittner(3) 153,165 346,199 499,364 Raul E. Cesan 4,211 1,333 5,544 Brenda E. Edgerton 6,365 6,449 12,814 Jairo A. Estrada 17,409 7,999 25,408 Michael E. Faherty 4,079 88,444 92,523 Daniel E. Gill 7,987 7,999 15,986 Alan C. Hasselwander(4) 35,256 5,265 40,521 Robert Holland, Jr. 4,431 1,222 5,653 Douglas H. McCorkindale 6,974 7,999 14,973 Dr. Leo J. Thomas 25,821 7,999 33,820 Richard J. Uhl 2,954 48,444 51,398 Named Executive Officers: Ronald L. Bittner(3) 153,165 346,199 499,364 Robert L. Barrett 52,183 66,666 118,849 Kevin J. Bennis 54,815 66,666 121,481 Jeremiah T. Carr 20,636 75,532 96,168 Dale M. Gregory(5) 36,487 80,866 117,353 Louis L. Massaro 38,468 85,865 124,333 Directors and Executive Officers as a Group (17 persons) 478,416 912,346 1,390,762 - --------------------------------------------------------------------------------
4 (Footnotes to Management and Directors Stock Ownership Table) (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 1, 1997, 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 319 shares owned by 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 1,295 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 as of February 1, 1997 - ------------------------------------------------------------------------------- Number of Name and Address Shares of Percent of of Beneficial Owner Common Stock Class - ------------------------------------------------------------------------------- Delaware Management Holdings, Inc. (1) 12,544,909 7.66% 2005 Market Street Philadelphia, Pennsylvania 19103 Steven C. Simon (2) 5,105,244 3.1% 1300 Nicolett Mall Minneapolis, Minnesota 55403 James J. Weinert (2) 3,384,112 2.0% 1300 Nicolett Mall Minneapolis, Minnesota 55403
- ------------------------------------------------------------------------------- (1) Delaware Management Holdings, Inc., filed with the Securities and Exchange Commission a Schedule 13G, dated December 31, 1996, stating that it beneficially owned in the aggregate 12,544,909 shares of the Company's common stock in its capacity as the parent holding company of Delaware Management Company, Inc. In its Schedule 13G filing, Delaware Management Holdings, Inc., also disclosed that with respect to the shares it beneficially owns, it has sole voting power with respect to 858,880 shares, shared voting power with respect to no shares, sole dispositive power with respect to 12,106,809 shares, and shared voting and shared dispositive power with respect to 438,100 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. - -------------------------------------------------------------------------------- Section 16(a) Beneficial Ownership Reporting Compliance 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 1996 were complied with in a timely fashion. - -------------------------------------------------------------------------------- Report of Committee on Directors Frontier believes that good corporate governance supports good financial performance and serves the best interests of the shareowners. As part of its efforts to encourage high standards of corporate governance, Frontier formed the Committee on Directors in 1993 to focus the Board's attention on corporate governance issues and to serve 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. Many of these actions were reported in the 1995 and 1996 proxy statements. During 1996, the Committee continued its efforts to improve Frontier's corporate governance. The Committee reviewed the complete set of existing Governance Guidelines and recommended certain changes. The guidelines establish the framework and standards for Board operation. The guidelines are described generally here. 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 with a minimum of 75 percent of meetings. The minimum number of Board meetings held each year is 5 and, for each Committee, is 2. 5 The Governance Guidelines require that the Board be composed of primarily outside Directors and all Committees, except the Executive Committee, are composed 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 to the Committee on Directors which then recommends whether or not to accept it. Retirement is considered a job change in the context of this provision. The Committee monitors the stock ownership of the members of the Board and reports that all current outside Board members have met their respective stock ownership target. The stock ownership target is set as a multiple of four times the average annual compensation of a Director. 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 that the full retainer for each Board member and each Chair of a Committee be paid in the form of shares of Frontier common stock. The shareowners approved this plan at the April 24, 1996 Annual Meeting of shareowners. This plan remains in effect for 1997. In 1995, the Committee utilized a formal system of evaluation of each Director in its process of nomination of the slate of nominees submitted to shareowners for a vote at the Annual Meeting of Shareowners. This year the Committee introduced a full peer evaluation process which provided feedback to the individual Directors and to the Board as a whole with respect to strengths of the Board and areas for improvement. Your Committee on Directors will continue to review annually the governance standards and recommend improvements to the full Board of Directors. Respectfully submitted, The Committee on Directors Patricia C. Barron (Chair) Robert Holland, Jr. Douglas H. McCorkindale Dr. Leo J. Thomas January 27, 1997 - -------------------------------------------------------------------------------- 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 three components: . Base Salary . Annual Incentive Plan (Bonus) . 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 peer group of thirty publicly-traded companies in the telephone, long distance, cable television, and cellular and information technology industries. This group includes most of the companies reported in the Standard and Poor's Telephone Index and all of the companies reported in the Standard and Poor's Long Distance Index, together with additional companies. The Company's policy is to benchmark senior executive compensation levels within the third quartile 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 of this group of peer companies. 6 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 peer group of thirty publicly-traded companies, together with additional companies from other industries with similar revenues and/or asset values. The base salaries of the executive officer positions, including that of the Chief Executive Officer, were set in 1995 and are commensurate with the positions' responsibilities. The salaries of persons who became executive officers subsequent to 1995 generally reflect this salary structure as well. This Committee continues to review executive salary levels in order to ensure they remain competitive. In addition to benchmarking comparative companies' salaries, Mr. Bittner's salary level was 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 Incentive Plan (Bonus) The Company's annual incentive plan is a bonus plan designed to provide performance-based compensation awards to executives for achievement during the past year. For executive officers, annual incentive awards are a function of individual performance and consolidated corporate results. Business unit performance is also a component of the annual incentive 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 annual incentive 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 1996 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. The objectives are identified as threshold, standard and premier targets with standard performance yielding payouts at the median level competitively. Actual 1996 corporate performance was below the threshold level and, accordingly, there was no bonus payout, either for Mr. Bittner or for the other executives. 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 1996 do not expire until 2006, and the exercise price is the closing price 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; (b) his or her expected future contribution to the long-term strategic goals and objectives of the Company; and (c) industry practices. No relative weights are attributed to any of these factors. All executive officers of the Company received options in 1996 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. Two Executive Vice Presidents joined Frontier in March 1996 and received stock option grants and restricted stock awards at that time 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. Restricted stock awards issued to them in 1996 expire on December 31, 1999, and require that both passage of time and performance criteria be satisfied for vesting of shares to occur. Each 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 1997 or 1998. On the grant date the Company's stock price was $30.8750 per share. The stock price performance vesting criteria for the first one-third of the grant is the achievement of at least a $36.00 stock price for twenty business days in a thirty business day period. Subsequent thirds will vest upon the achievement, for the same minimum duration, of stock prices of $41.00 and $46.00 and the passage of time. 7 Other Actions 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 had previously established stock ownership guidelines for the Company's executives. These guidelines are described elsewhere in the Company's Proxy Statement. 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 regulation. No member of this Committee is a former or current officer or employee of the Company or any of its subsidiaries. Respectfully submitted, The Committee on Management Daniel E. Gill (Chair) Michael E. Faherty Dr. Leo J. Thomas January 27, 1997 - -------------------------------------------------------------------------------- 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. 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. [PERFORMANCE GRAPH APPEARS HERE]
0 1992 1993 1994 1995 1996 Frontier Corporation $100 $117 $151 $150 $211 $167 S&P Telephone Index $100 $104 $114 $105 $158 $159 S&P 500 Index $100 $108 $119 $121 $166 $202 S&P Long Distance Index $100 $128 $143 $127 $172 $172
8 Compensation of Company Management We have included the following tables and other information to help you understand the compensation of the Company's executives. These tables reflect the components of compensation paid the executive officers of Frontier Corporation. Specifically, these include salary, bonus, stock options and a long-term incentive plan. The Company does not provide its executives with stock appreciation rights. The Report of the Committee on Management of the Board of Directors appears on pages 6 through 8 of this Proxy Statement. This Report discusses the factors taken into consideration in setting Mr. Bittner's compensation and the compensation of the other executive officers. A Performance Graph showing the performance of the Company's stock as compared to the Standard and Poor's 500 Index, the Standard and Poor's Telephone Index, and the Standard and Poor's Long Distance Index appears on page 8 of this Proxy Statement. Summary Compensation Table The following table provides a summary of compensation paid to the CEO and the other five most highly compensated executive officers of the Company for services rendered to the Company and its subsidiaries over the past three fiscal years. The indicated titles are those currently held by each named executive officer.
- ----------------------------------------------------------------------------------------------------------------------- Long Term Compensation - ----------------------------------------------------------------------------------------------------------------------- Annual Compensation Awards Payouts - ----------------------------------------------------------------------------------------------------- Other Securities Annual Underlying All Other Name Compen- Options/ LTIP Compen- and Principal Salary Bonus sation SARs Payouts sation Position Year ($) ($) ($)/(2)/ (#) ($)/(3)/ ($)/(4)/ - ----------------------------------------------------------------------------------------------------------------------- R. L. Bittner 1996 $700,000 $0 $0 175,000 N/A $11,276 Chairman and CEO 1995 $575,000 $660,000 $0 502,000 $222,850 $42,703 Frontier Corporation 1994 $408,333 $349,471 $0 88,800 $204,164 $41,369 R. L. Barrett /(1)/ 1996 $231,250 $0 $84,670 200,000 N/A $246,528 Executive Vice President 1995 N/A N/A N/A N/A N/A N/A Frontier Corporation and 1994 N/A N/A N/A N/A N/A N/A President--Network Systems and Services K. J. Bennis (1) 1996 $250,520 $0 $30,737 200,000 N/A $ 4,948 Executive Vice President 1995 N/A N/A N/A N/A N/A N/A Frontier Corporation and 1994 N/A N/A N/A N/A N/A N/A President--Frontier Communications J. T. Carr 1996 $270,000 $0 $0 100,000 N/A $ 5,226 Executive Vice President 1995 $258,033 $208,466 $0 86,400 $ 67,182 $ 8,152 Frontier Corporation and 1994 $200,275 $132,500 $ 8,330 22,000 $ 67,856 $ 10,508 Chairman Rochester Telephone Corp. D. M. Gregory 1996 $283,000 $0 $0 100,000 N/A $ 6,858 Senior Vice President 1995 $274,467 $193,315 $ 4,541 86,400 $ 71,545 $ 19,749 Frontier Corporation and 1994 $219,542 $131,600 $ 3,799 26,400 $ 65,556 $ 17,306 Vice President-- Business Development L. L. Massaro 1996 $285,000 $0 $0 100,000 N/A $ 6,997 Executive Vice President 1995 $241,375 $219,199 $0 126,400 $ 68,127 $ 17,234 and Chief Financial and 1994 $189,442 $111,700 $0 22,000 $ 70,385 $ 16,600 Administrative Officer Frontier Corporation - -----------------------------------------------------------------------------------------------------------------------
9 (Footnotes to Summary Compensation Table) (1) Mr. Barrett and Mr. Bennis were each named an Executive Vice President effective March 26, 1996. Prior to that date, neither had received any remuneration for services to Frontier Corporation or any of its subsidiaries. See also Long-Term Incentive Plans - Awards in Last Fiscal Year Table at page 11. (2) The amounts reported in this column for 1996 include $84,670 paid to Mr. Barrett to offset income tax liabilities incurred by him and $15,886 of personal travel services paid on behalf of Mr. Bennis pursuant to his employment agreement with the Company. (3) The Performance Unit Plan was discontinued in 1994. The 1995 Performance Unit Plan awards were the final payouts under that plan. In 1995, certain of the named executives received awards of restricted stock for which vesting is subject to performance criteria as well as the passage of time and continued employment. Specifically, Mr. Bittner was awarded 100,000 restricted shares, Mr. Massaro was awarded 20,000 restricted shares, and Messrs. Carr and Gregory were each awarded 10,000 restricted shares. None of these restricted shares have yet vested. In 1996, Mr. Barrett and Mr. Bennis also were each awarded 50,000 restricted shares under this plan. None of these restricted shares have yet vested. (4) "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 1996, 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, $1,107 for Mr. Barrett, $729 for Mr. Bennis, $1,476 for Mr. Carr, $1,476 for Mr. Gregory and $1,476 for Mr. Massaro. The Company's 1996 contributions on behalf of the named executive officers to the tax-qualified 401(k) and nonqualified defined contribution plans, respectively, were as follows: $3,750 and $6,050 for Mr. Bittner; $3,750 and $375 for Mr. Barrett; $3,750 and $469 for Mr. Bennis; $3,750 and $0 for Mr. Carr; $3,750 and $1,632 for Mr. Gregory and $3,750 and $1,771 for Mr. Massaro. For Mr. Barrett, "All Other Compensation" also includes a special signing bonus of $80,000 and the reimbursement of relocation expenses in the amount of $161,296. The following companion tables to the Summary Compensation Table list the stock options granted during the 1996 fiscal year to the named executive officers, their stock option exercises in 1996 and the aggregate options they held at the end of 1996, long-term incentive plan restricted stock awards granted during 1996, and the estimated retirement benefits which would be paid to them at age 65. Option/SAR Grants in Last Fiscal Year The following table of Individual Grants includes two columns designated as "Potential Realized Value." The calculations in those columns are based on hypothetical growth assumptions, proposed by the Securities and Exchange Commission, of 5% and 10% for stock price appreciation for the option term. There is no way to anticipate what the actual growth rate of the Company's stock price will be. Individual Grants in 1996
- ------------------------------------------------------------------------------------------------------------------------------------ Number of Potential Realized Value Securities % of Total at Assumed Annual Rates Underlying Options/SARs of Stock Price Appreciation Options/SARs Granted to Exercise or for Option Term Granted Employees in Base Price Expiration ----------------------------- Name (#)/(1)/ Fiscal Year ($/Share) Date 5% ($) 10% ($) - ------------------------------------------------------------------------------------------------------------------------------------ R. L. Bittner 175,000 5.83% $31.625 5/01/06 $3,480,539 $8,820,368 R. L. Barrett 200,000 6.66% $30.875 3/26/06 $3,883,424 $9,841,360 K. J. Bennis 200,000 6.66% $30.875 3/26/06 $3,883,424 $9,841,360 J. T. Carr 100,000 3.33% $31.625 5/01/06 $1,988,879 $5,040,211 D. M. Gregory 100,000 3.33% $31.625 5/01/06 $1,988,879 $5,040,211 L. L. Massaro 100,000 3.33% $31.625 5/01/06 $1,988,879 $5,040,211 - ------------------------------------------------------------------------------------------------------------------------------------
(1) The option grants have the following material terms: exercise price is the market price (based on the closing price of the Company's common stock on the New York Stock Exchange) on the date of the option grant; 1/3 of the options granted may be exercised commencing one year following the grant date, a second 1/3 may be exercised commencing two years following the grant date, and the remaining 1/3 may be exercised commencing three years following the grant date. The option grant date for Messrs. Barrett and Bennis was March 26, 1996, and the option grant date for Messrs. Bittner, Carr, Gregory and Massaro was May 1, 1996. Options may not be transferred other than by will or the laws of descent and distribution. An option may be exercised upon written notice to the Company accompanied by payment in full for the shares being acquired. In the event of a "change in control" as defined by the Management Stock Incentive Plan, all options become immediately vested and exercisable. 10 Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values
- ----------------------------- ------------ ----------------------------- ----------------------------- Number of Securities Value of Unexercised In- Underlying Unexercised the-Money Options/SARs Shares Options/SARs at FY End at FY End/(2)/ Acquired Value --------------------------- ----------- ---------------- On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ----------------------------- ------------ -------------- -------------- ------------- ---------------- Name (#) ($)/(1)/ (#) (#) ($) ($) - ----------------------------- ------------ -------------- -------------- ------------- ---------------- R. L. Bittner 0 N/A 288,531 539,269 $368,415 $85,023 R. L. Barrett 0 N/A 0 200,000 $0 $0 K. J. Bennis 0 N/A 0 200,000 $0 $0 J. T. Carr 0 N/A 60,864 164,936 $103,340 $21,635 D. M. Gregory 0 N/A 64,998 166,402 $111,065 $23,360 L. L. Massaro 0 N/A 71,197 191,603 $ 92,652 $21,635 - ----------------------------- ------------ -------------- -------------- ------------- ----------------
(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, 1996, (closing price of $22.625) less the per share option exercise price, multiplied by the number of exercisable/unexercisable options. 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 0 R. L. Barrett 50,000 (1) K. J. Bennis 50,000 (1) J. T. Carr 0 D. M. Gregory 0 L. L. Massaro 0 ------------------------------- --------------------
(1) Messrs. Barrett and Bennis each were awarded shares of restricted stock on March 26, 1996, 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 1997 or 1998. The first third will vest upon achievement of at least a $36.00 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 $41.00 and $46.00 for twenty business days in a thirty business day period. Unvested restricted share awards expire on December 31, 1999. 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. 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. 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. Certain of the Company's officers are participants in the Company's Management Pension Plan as supplemented by a Supplemental Management Pension Plan ("SMPP"). Of those listed in the Summary Compensation Table, Messrs. Bittner, Carr, Gregory and Massaro participate in these Plans. 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 were frozen effective December 31, 1996. Benefit calculations under both pension plans were increased by 20% for all plan participants who had 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. 11 Pension Plan Table
- ------------------------------------------------------------------------------------------------ Years of Service/ Remuneration (15) (20) (25) (30) (35) - ------------------------------------------------------------------------------------------------ $250,000 67,648 90,197 112,746 135,295 157,844 300,000 81,508 108,677 135,846 163,015 190,184 350,000 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 1,100,000 303,268 404,357 505,446 606,535 707,624 - ------------------------------------------------------------------------------------------------
Messrs. Bittner, Barrett, Bennis, Carr, Gregory and 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 13 of this Proxy Statement. With the exception of Messrs. Barrett and Bennis, each of them also participates in the Company's Pension Plan. Under SMPP, the service factor would include, subject to certain limitations, the amount of service for which payment is made to each of them under their respective 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 Messrs. Bittner, Carr, Gregory and Massaro plus four other current 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-34; Mr. Carr-27; Mr. Gregory-24; and Mr. Massaro-28. Messrs. Barrett and Bennis are not covered by these Plans, have no years of employment for purposes of these Plans, and will receive no benefits under these Plans. Mr. Gregory has not yet reached the age of 50 years. Assuming he retired as of the current date, Mr. Gregory would receive a deferred pension based upon the amount reflected in the Pension Plan Table, and would receive no additional benefit under the SERP. Since Messrs. Bittner, 12 Carr and Massaro have each attained the age of 50 years and have respectively 34, 27 and 28 years of service credit, each is entitled to a full pension based on the amount reflected in the Pension Plan Table. If Mr. Bittner retired as of the current date, he would receive no SERP benefit because the amount he would receive under the current formula would exceed any SERP benefit. Assuming compensation at their respective January 31, 1997 level, if Mr. Carr were to retire, he would additionally receive an annual SERP benefit of $24,180; and if Mr. Massaro were to retire, he would receive an annual SERP benefit of $23,724. Employment Contracts Effective August 16, 1995, the Company entered into three year employment agreements, with provisions for annual renewals, with Messrs. Bittner, Carr, Gregory, and Massaro. Effective March 26, 1996, the Company also entered into three year employment agreements, with provisions for annual renewals, with Messrs. Barrett and Bennis. Each of these agreements 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 (if applicable and 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). Robert Barrett and Kevin Bennis each became an employee of Frontier Corporation effective March 26, 1996, and received normal and customary inducements to enter into an employment arrangement with the Company. These included temporary housing, relocation support, stock option grants and restricted stock awards. Frequently, such inducements may also include special signing bonuses or forgivable loans. Mr. Barrett received a one-time signing bonus in the amount of $80,000. Effective April 1, 1996, Frontier Corporation loaned Mr. Bennis the sum of $250,000 for a term of three years, with interest at the applicable federal rate in effect for the month of April 1996. One-third of the principal and all of the accrued interest is to be forgiven on each of the first three anniversaries of the loan. Forgiveness is conditioned upon Mr. Bennis' continued employment with the Company. Should Mr. Bennis leave Frontier Corporation for any reason before the end of the three year period, the balance remaining and interest thereon at the prime rate plus 1% will become immediately due and payable. In March 1997, the Company made a personal loan to Mr. Bittner in the sum of $300,000 for a term of five years, with interest at the applicable federal rate. Mr. Bittner is obligated to repay one-fifth of the principal and all of the accrued interest annually on the anniversary of the loan. 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 Mr. Faherty, Mr. Gill (Chair) and Dr. Thomas. None of these persons were, during 1996 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 1996, 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 1996 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. Indemnification of Certain Persons As authorized by New York State Law, the Company and its subsidiaries have purchased insurance from the Chubb Group, Gulf Insurance Company, and Reliance National, insuring the Company and its subsidiaries against amounts they may pay as a result of indemnifying their officers and Directors for certain liabilities such officers and Directors might incur. These insurance policies also insure all officers and Directors of the Company and its affiliates for additional liabilities against which such officers and Directors may not be indemnified by the Company and its affiliates. The insurance was renewed on May 21, 1996 for a period of one year. During 1996, the Company paid $510,407 for this insurance. 13 Proposal 2-Election of Public Accountants YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL. The Company's public accountants are Price Waterhouse LLP. At the Annual Meeting, the shareowners will consider and vote upon a proposal to elect public accountants for the Company's fiscal year ending December 31, 1997. The Audit Committee of the Board of Directors has recommended that Price Waterhouse LLP be re-elected as public accountants 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. Proposal 3-Shareowner Proposal Regarding Executive Change in Control Arrangements YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" THIS PROPOSAL. Proxies solicited by the Board of Directors will be voted AGAINST the following 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. Local 1170, Communications Workers of America, 1451 Lake Avenue, Rochester, New York 14615, advises that it holds 9,299 shares of the Company's common stock, and that it intends to present the following proposal for consideration and action at the Annual Meeting. Local 1170 primarily represents certain network installation and repair employees of one of the Company's subsidiaries. Resolution Proposed by Shareowner RESOLVED, that Frontier Corporation Board of Directors should adopt a policy against making any future compensation awards to the officers and directors of this Corporation, which are contingent on a change of control of the corporation, unless such compensation awards are submitted to a vote of the shareholders and approved by a majority of the votes cast. Statement of Support by Proponent Local 1170, Communications Workers of America Golden Parachutes are lucrative compensation awards, which are provided to senior executives. They are made contingent on a change of control, usually through a merger or acquisition of the corporation, and are often awarded without the approval of shareholders. In our view, a conflict of interest is created when executives are awarded special compensation that is to be paid only in the event of a future merger or acquisition. Such awards provide management with a personal financial incentive to perform their duties in a way that might be detrimental to shareholder interests. Management's first priority should be to maximize shareholder value. However, actions that might temporarily diminish or restrain the growth of shareholder value may make the company look more attractive as the potential target of a merger or acquisition. In the alternative, management may be tempted to support a merger or acquisition proposal without seeking a better deal for shareholders. Under these circumstances, it does not seem prudent to give senior managers lucrative compensation awards, but only in the event that their jobs are terminated as a result of a merger or acquisition. A shareholder vote would allow the owners of the Frontier Corporation to decide for themselves whether golden parachutes are in their best interests. Statement in Opposition by Board of Directors Your Board of Directors believes that aligning the executive team's interests with your interests is one of the most effective ways to enhance shareowner value. The Company's benefit plans and shareownership targets, described elsewhere in this Proxy Statement, promote this unity of interest by encouraging members of your Board and the senior management to own Company common stock and by incenting management to perform in the shareowners' interest. We believe that change in control arrangements do not create a conflict of interest as suggested by the Proponent. Rather, change in control arrangements encourage management to assess takeover bids or tender offers objectively and with less concern with how they may be personally affected. Often, senior management lose their positions following a change in control. The real possibility of losing one's regular source of income may conflict with an executive's objective evaluation of potential business combinations and arrangements which could result in a change in control. Your Board believes change in control arrangements are in your best interest because they encourage both continuity and cooperation of management during a period of uncertainty and provide management a minimal level of financial security in the event of a potential job loss, thereby eliminating a potential conflict of interest and allowing them to focus solely on the best interests of shareowners. 14 Only one Director is an employee of the Company, and only non-employee Directors may approve change in control executive contracts. We believe that the normal scope of our responsibilities includes approving executive compensation arrangements and obtaining and retaining effective management. Additionally, we firmly believe that requiring shareowner approval of these arrangements is not in your best interests. The requirement suggested by the Proponent disadvantages you because it would result in substantial delays in adopting new arrangements and would severely limit your Board's flexibility. In fulfilling our responsibility to you, we believe your interests are best served if your Board has the power to react quickly to changing economic and business conditions. 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. An admission ticket will be required to enter the Annual Meeting. Please use the form attached to your proxy card to request your ticket. Ticket requests after April 18, 1997 should be made by calling the Shareowner Line, 1-800-836- 0342. If you hold your shares through your broker or otherwise are not a record holder, you may be asked to show evidence of your share position in order to enter the Annual Meeting. Future Proposals of Shareowners In order to be eligible for inclusion in the proxy materials for the Company's 1998 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 24, 1997. 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. In order to provide an admission card, we do ask that if a proposal is to be presented by a qualified representative, the shareowner advise us of the identity of the person who will be presenting the proposal. March 24, 1997 15 [LOGO OF FRONTIER CORPORATION APPEARS HERE] Frontier Corporation Frontier Center 180 South Clinton Avenue Rochester, New York 14646-0700 [MAP OF DOWNTOWN DENVER, COLORADO APPEARS HERE] [MAP OF THE WESTIN HOTEL APPEARS HERE] The Westin Hotel* 1672 Lawrence Street 303-572-9100 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 PUBLIC ACCOUNTANTS AND AGAINST THE SHAREOWNER PROPOSAL, NUMBER 3. [_] Yes, I plan to attend the 1997 Annual Meeting. Dated_______________, 1997 (Please sign exactly as name appears below) _______________________________________ (Cut along dotted line) - --------------------------------------------------------------- Ticket Request Use this Form to request your admission ticket if you plan to attend the Annual Meeting of Shareowners at 10:30 a.m., local time, on Friday, May 2, 1997, at the Westin Hotel, Tabor Center in Denver, Colorado. Complete the form by typing or printing your name and address. If your request is received by April 18, 1997, an admission ticket will be mailed to you. All other admission tickets will be provided beginning at 9:30 a.m. at the registration desk for the meeting. (Doors to the meeting will not open before 9:30 a.m.) The envelope provided for the return of your proxy card should also be used to return this form. Alternatively, tickets may be requested by calling the Shareowner Line, 1-800-836-0342. If you hold your shares through your broker or otherwise are not a record holder, we may require you to show evidence of your share position before you will be allowed into the Annual Meeting. NOTE: If your shares are not registered in your own name, please advise the shareowner of record (i.e., your bank, broker, trustee, etc.) that you wish to attend the meeting. The registered owner must provide you with evidence of your stock ownership so that you may gain admittance to the meeting. I plan to attend the meeting. (Please print or type) Name______________________________________________________________ Street____________________________________________________________ City______________________________________________________________ State_____________________________Zip Code________________________ 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 May 2, 1997, or at any adjournment thereof, as specified below: The Board of Directors recommends a vote FOR Proposals 1 and 2 and AGAINST Proposal 3: 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 Holland, Jr., Douglas H. McCorkindale, 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 [_] [_] [_] Public Accountants FOR AGAINST ABSTAIN 3. Approval of the Shareowner Proposal [_] [_] [_] Regarding Executive Change in Control Arrangements 4. 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 -----END PRIVACY-ENHANCED MESSAGE-----