<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Rochester Telephone Corporation
(Name of Registrant as Specified In Its Charter)
Rochester Telephone Corporation
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
[_] $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:
--------------------------------------------------------------------
[X] 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:
$125
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(2) Form, Schedule or Registration Statement No.:
Schedule 14A (File No. 1-4166)
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(3) Filing Party:
Rochester Telephone Corporation
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(4) Date Filed:
August 19, 1994
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- - --------------------------------------------------------------------------------
Rochester Tel Center
Rochester, New York 14646-0700
Ronald L. Bittner
Chairman, President & CEO
(LOGO OF ROCHESTER TELEPHONE CORPORATION)
November 18, 1994
Dear Shareowners:
On behalf of your Board of Directors and management, I am pleased to invite
you to attend a Special Meeting of Common Shareowners to be held on Monday,
December 19, 1994, at 9:30 a.m., at The Pierre Hotel, Two East 61st Street, New
York, New York 10021.
At this meeting you will be asked to consider a proposal relating to the
Company's "Open Market Plan", which is designed to enable the Company to better
respond to the rapidly evolving competitive environment. The details of this
plan, including the formation of a holding company and related amendments to
the Company's Restated Certificate of Incorporation, are presented under
Proposal 1 of the attached Proxy Statement. You are also being asked to approve
four other amendments to the Company's Restated Certificate of Incorporation
which would increase the Company's authorized common stock, authorize a new
class of preferred stock, permit the redemption of shares of common stock to
prevent the loss of a governmental license and change the name of the Company
to Frontier Corporation. Please refer to Proposals 2, 3, 4 and 5 of the Proxy
Statement.
Competition is changing the telecommunication industry forever. We are
rapidly moving into an era in which communications firms will provide a full
range of services to all customers, both residential and business. It is a time
for the leaders to lead, and the followers to follow. I believe you know by now
which role we intend to play.
In recognition of this changing environment, the Company has taken a
proactive approach to the way we are structured, and the way we plan to deliver
and integrate services in the Rochester marketplace. As part of the Open Market
Plan, the Company will be reorganized into an unregulated parent holding
company. In that connection, the Company itself will no longer directly conduct
its telephone operations in the Rochester, New York market. Instead, these
operations will be conducted by two new wholly-owned subsidiaries of the
Company. One subsidiary will be a regulated provider of retail services to the
Company's existing customers and will also sell and market wholesale network
services to retailers of telecommunication services. The other subsidiary will
be a lightly regulated retail provider of telecommunication services to
residential and business customers. To implement this reorganization, the
Company will contribute the assets relating to these operations (representing
approximately 37% of the Company's consolidated operating assets) to these two
wholly-owned subsidiaries.
The Open Market Plan/Holding Company Proposal and the amendments to the
Company's Restated Certificate of Incorporation are quite complicated. For that
reason, we have provided a summary of these proposals beginning on page 3 of
the Proxy Statement. I urge you to read this summary, as well as the remainder
of the Proxy Statement which contains a detailed explanation of each proposal.
If you approve this plan, we believe that local telephone customers in
Rochester, New York will enjoy virtually unprecedented freedom of choice
regarding their communications needs and that the Company's employees will be
associated with a progressive, leading-edge company. Although we cannot
guarantee you that the Open Market Plan will be advantageous to shareowners, we
believe that the Company will benefit from the enhanced flexibility and new
opportunities for profitable returns which it provides. This, in turn, should
benefit shareowners.
Your Board of Directors and management believe that each of these proposals
is in the best interests of our customers, employees and owners, and recommend
that you vote for them.
Thank you for your continued support.
Cordially,
/s/ RONALD L. BITTNER
Ronald L. Bittner
Chairman, President and
Chief Executive Officer
P.S. It is not necessary for you to attend the meeting in New York City, but
your vote is very important. Please sign, date and return the enclosed proxy
card in the envelope provided.
<PAGE>
(LOGO OF ROCHESTER TELEPHONE CORPORATION)
NOTICE OF SPECIAL MEETING OF COMMON SHAREOWNERS
To be Held on December 19, 1994
Dear Shareowners:
A Special Meeting of Common Shareowners of Rochester Telephone Corporation
(the "Company") will be held at The Pierre Hotel, Two East 61st Street, New
York, New York 10021, at 9:30 a.m., on December 19, 1994, to consider and act
on five proposals (the "Proposals"). Proposal 1--The Open Market Plan/Holding
Company relates to the Joint Stipulation and Agreement, dated as of May 16,
1994, among the Company, on behalf of itself and certain affiliates, the Staff
of the New York State Department of Public Service and certain intervening
parties, as it may be amended from time to time (the "Open Market Plan
Agreement"), and also contemplates certain amendments to the Restated
Certificate of Incorporation, as amended, of the Company (the "Current
Certificate"). If Proposal 1 is approved, the Company will be reorganized into
a parent holding company which will be entitled, among other actions, to issue
securities and effect certain acquisitions without the approval of the New York
State Public Service Commission. The four other Proposals relate to additional
amendments to the Current Certificate, including an amendment which would
change the name of the Company to "Frontier Corporation".
The five Proposals that you are being asked to consider and act on are
summarized as follows:
1. The Open Market Plan/Holding Company Proposal. To approve the Open
Market Plan Agreement and the performance by the Company of all
transactions and acts on the part of the Company described in the Open
Market Plan Agreement, including the contribution of certain assets and
liabilities by the Company to two wholly-owned subsidiaries of the Company,
and to adopt certain amendments to the Current Certificate related to the
Open Market Plan Agreement in order to (a) reorganize the Company from a
regulated "telephone corporation" under the New York Transportation
Corporations Law to an unregulated "business corporation" under the New
York Business Corporation Law (the "Business Corporation Law"), (b) broaden
the "purposes" clause contained in the Current Certificate with a provision
specifying as the purposes of the Company those purposes permitted to any
business corporation under the Business Corporation Law and (c) delete the
existing description of the territory in which the Company operates as a
local exchange telephone corporation in the Rochester area;
2. The Common Stock Amendment. To adopt an amendment to the Current
Certificate to increase the number of authorized shares of common stock
from 100,000,000 to 300,000,000 shares;
3. The Preferred Stock Amendment. To adopt an amendment to the Current
Certificate to authorize 4,000,000 shares of a new class of preferred stock
which would be designated as Class A Preferred Stock;
4. The Redemption Provision Amendment. To adopt an amendment to the
Current Certificate to permit the redemption of shares of the Company's
common stock to the extent necessary to prevent the loss of any license or
franchise from any governmental entity held by the Company or any of its
subsidiaries; and
5. The Name Change Amendment. To adopt an amendment to the Current
Certificate to change the name of the Company to "Frontier Corporation".
<PAGE>
The Board of Directors has fixed the close of business on November 4, 1994,
as the record date for the determination of shareowners entitled to notice of
and to vote at the meeting or any adjournment thereof.
The approval of each of the first four Proposals is contingent on the
approval of all of such Proposals. Unless each of Proposal 1, Proposal 2,
Proposal 3 and Proposal 4 is approved by the shareowners at the meeting, none
of the actions described in the attached Proxy Statement with respect to such
Proposals will be taken by the Company. Consequently, approval by shareowners
of each of Proposal 1, Proposal 2, Proposal 3 and Proposal 4 is required to
implement the Company's "Open Market Plan". The approval of the Proposal to
change the Company's name to "Frontier Corporation", however, is not contingent
on the approval of any other Proposal. Accordingly, if the shareowners approve
Proposal 5, the Name Change Amendment will be approved regardless of the
outcome of the vote on the other Proposals.
The affirmative vote of a majority of the votes entitled to be cast by the
holders of all of the outstanding shares of common stock is required to approve
each of the Proposals. In addition, authorization of the Class A Preferred
Stock contemplated by Proposal 3 also requires the approval of the holders of
the Company's outstanding shares of preferred stock. Authorization of the other
Proposals, however, is not contingent on the approval of the preferred
shareowners. The Board of Directors reserves the right, however, not to
implement any Proposal if it believes that such action is in the best interests
of the Company and its shareowners. In addition, the Board of Directors
reserves the right to amend any provisions of the Open Market Plan Agreement in
accordance with its terms and without shareowners approval, subject to
applicable law, before or after shareowner approval. Shareowners are not
entitled to appraisal rights with respect to the Proposals.
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 ARE PLANNING TO ATTEND THE MEETING, PLEASE CHECK THE BOX ON THE BACK
OF THE PROXY CARD.
By Action of the Board of Directors,
/s/ JOSEPHINE S. TRUBEK
Josephine S. Trubek
Corporate Secretary
Rochester, New York
November 18, 1994
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INTRODUCTION........................................................... 1
Proxy Solicitation.................................................. 1
Voting at the Special Meeting....................................... 1
Revocability of Proxies............................................. 2
SUMMARY................................................................ 3
The Special Meeting................................................. 3
Proposal 1--The Open Market Plan/Holding Company.................... 4
Proposal 2--The Common Stock Amendment.............................. 10
Proposal 3--The Preferred Stock Amendment........................... 10
Proposal 4--The Redemption Provision Amendment...................... 10
Proposal 5--The Name Change Amendment............................... 10
Price of Common Stock............................................... 10
PROPOSAL 1--THE OPEN MARKET PLAN/HOLDING COMPANY....................... 11
Background of the Open Market Plan.................................. 11
Recommendations of the Board of Directors; Reasons for the Open
Market Plan........................................................ 14
Certain Considerations.............................................. 15
Regulatory Approvals................................................ 19
The Open Market Plan Amendments..................................... 19
The Open Market Plan Agreement...................................... 20
Restructuring of the Company.................................... 20
Service Offerings by R-Net...................................... 21
Service Offerings by R-Com...................................... 21
Transfer of Competitive Services from R-Net to R-Com............ 22
Directories..................................................... 22
Restrictions on R-Net's Independence; Financial Covenants....... 22
Rate Stabilization Plan......................................... 22
Termination of the Rate Stabilization Plan...................... 23
Royalty Dispute................................................. 23
Restrictions on Affiliate Transactions.......................... 23
R-Net's Relationship with Other Carriers........................ 24
Reservation of PSC Authority.................................... 24
Certain Federal Income Tax Consequences............................. 25
Accounting Treatment................................................ 25
PROPOSALS 2 AND 3--THE COMMON STOCK AMENDMENT AND THE PREFERRED STOCK
AMENDMENT............................................................. 25
Reasons for and Effects of the Common Stock Amendment and the
Preferred Stock Amendment.......................................... 26
The Common Stock Amendment.......................................... 27
The Preferred Stock Amendment....................................... 27
Existing Provisions in the Current Certificate and By-Laws That May
Be Considered Anti-Takeover Provisions............................ 29
PROPOSAL 4--THE REDEMPTION PROVISION AMENDMENT......................... 29
Reasons for and Effects of the Redemption Provision Amendment....... 30
Description of the Redemption Provision Amendment................... 30
PROPOSAL 5--THE NAME CHANGE AMENDMENT.................................. 32
SECURITY OWNERSHIP..................................................... 33
OTHERS MATTERS AND FUTURE PROPOSALS OF SHAREOWNERS..................... 34
INCORPORATION OF DOCUMENTS BY REFERENCE................................ 34
INDEX OF DEFINED TERMS................................................. 35
APPENDICES
Appendix 1--Form of Restated Certificate of Incorporation........... I-1
Appendix 2--Joint Stipulation and Agreement......................... II-1
Appendix 3--Current Corporate Structure of the Company.............. III-1
Appendix 4--Contemplated Corporate Structure of the Company Upon
Implementation of the Open Market Plan............................ IV-1
Appendix 5--Rate Reductions and Rates............................... V-1
</TABLE>
<PAGE>
PROXY STATEMENT
SPECIAL MEETING OF COMMON SHAREOWNERS
OF
ROCHESTER TELEPHONE CORPORATION
December 19, 1994
INTRODUCTION
Proxy Solicitation
This Proxy Statement is being sent to you in connection with the solicitation
of proxies by the board of directors (the "Board of Directors") of Rochester
Telephone Corporation, a New York corporation (the "Company"), for use at the
special meeting of holders of the Company's $1.00 par value Common Stock (the
"Common Stock"). This meeting (the "Special Meeting") will be held on December
19, 1994, at 9:30 a.m., local time at The Pierre Hotel, Two East 61st Street,
New York, New York 10021, or at any later time, if adjourned, for the purposes
set forth in the Notice of Special Meeting of Common Shareowners also provided
to you. This Proxy Statement and proxy card are first being mailed on or about
November 18, 1994, to shareowners of record at the close of business on
November 4, 1994, the record date for the Special Meeting.
The cost of the solicitation of proxies will be borne by the Company. In
addition to the solicitation of proxies by mail, certain of the officers and
employees of the Company, without extra compensation, may solicit proxies
personally or by telephone, facsimile, or cable. The Company will also request
brokerage houses, nominees, custodians, and fiduciaries to forward soliciting
materials to the beneficial owners of stock held of record and will reimburse
such persons for forwarding such materials. In addition, the Company has
retained Georgeson & Co. Inc., New York, New York, to aid in the solicitation
of proxies at a fee of $10,000, 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 Special Meeting
Vote Required. Under the New York Business Corporation Law (the "Business
Corporation Law"), the adoption of amendments to the Restated Certificate of
Incorporation, as amended, of the Company (the "Current Certificate") as
proposed by each of the proposals set forth in the Notice of Special Meeting of
Common Shareowners (the "Proposals") requires the affirmative vote of a
majority of the votes entitled to be cast by the holders of all of the
outstanding shares of the Common Stock.
None of the actions described in the Proposals can be voted upon unless there
is a quorum present. A quorum will exist if there is present, in person or by
properly executed proxy, holders of a majority of the shares entitled to vote
on the Proposals. All shares of Common Stock represented by a properly signed,
dated and returned proxy will be treated as present at the Special Meeting for
purposes of determining a quorum, without regard to whether the proxy is marked
as casting a vote or abstaining. Proxies relating to "street name" shares that
are voted by brokers will be counted as shares present for purposes of
determining the presence of a quorum, but will not be treated as shares having
voted at the Special Meeting on any proposal as to which authority to vote is
withheld by the broker. The affirmative vote of a majority of the votes
entitled
1
<PAGE>
to be cast by the holders of all the outstanding shares of Common Stock is
required to approve each of the Proposals. Accordingly, abstentions and broker
non-votes will have the same effect as votes against the Proposals. The
approval of each of the first four Proposals is contingent on the approval of
all four Proposals. Unless each of Proposal 1, Proposal 2, Proposal 3 and
Proposal 4 is approved by the shareowners at the Special Meeting, none of such
Proposals will be effected by the Company. Consequently, approval of each of
Proposal 1, Proposal 2, Proposal 3 and Proposal 4 is required to implement the
Company's "Open Market Plan". The approval of the Proposal to change the
Company's name to "Frontier Corporation", however, is not contingent on the
approval of any other Proposal. Accordingly, if the shareowners approve
Proposal 5, the Name Change Amendment will be approved regardless of the
outcome of the vote on the other Proposals. In addition, authorization of the
Class A Preferred Stock contemplated by Proposal 3 also requires the approval
of the holders of the Company's outstanding shares of Cumulative Preferred
Stock. Authorization of the other Proposals, however, is not contingent on the
approval of the preferred shareowners.
Record Date; Voting Rights. Shareowners of record at the close of business on
November 4, 1994 (the "Record Date") (other than holders of the Company's
$100.00 par value Cumulative Preferred Stock (the "Cumulative Preferred
Stock")) are entitled to vote at the Special Meeting or any adjournment
thereof. As of the close of business on the Record Date, there were 73,160,833
shares of Common Stock outstanding and entitled to vote at the Special Meeting.
The holders of Common Stock vote as a single class with regard to all matters
to be voted on at the Special Meeting. On all of the Proposals each shareowner
may cast one vote for each share of Common Stock owned by that shareowner.
The Company's directors and executive officers (who currently hold shares of
Common Stock representing less than 1% of the outstanding Common Stock) have
indicated that they intend to vote in favor of the Proposals.
Shareowners are not entitled to appraisal rights under New York law with
respect to any of the Proposals.
Revocability of Proxies
Shares of Common Stock represented by properly executed proxies received
prior to or at the Special Meeting will be voted in accordance with the
instructions indicated on the proxies unless such proxies have been revoked. If
no instructions are indicated on a properly executed proxy, the shares will be
voted FOR the Proposals.
Any proxy given on the enclosed proxy card or otherwise may be revoked by the
person giving it at any time before it is voted, either (1) by delivering to
the Corporate Secretary of the Company, at 180 South Clinton Avenue, Rochester,
New York 14646, on or before 5:00 p.m. on the business day prior to the Special
Meeting or at the Special Meeting itself, a written notice revoking the proxy
or a properly executed proxy relating to the same shares that is dated after
the earlier given proxy, or (2) by attending the Special Meeting and voting in
person. Attendance at the Special Meeting will not in itself constitute the
revocation of a proxy.
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SUMMARY
The following is a brief summary (the "Summary") of the information in this
Proxy Statement. The Summary is not intended to be complete and is qualified in
its entirety by more detailed information contained elsewhere in this Proxy
Statement and in the Appendices to this Proxy Statement. Shareowners are urged
to read this Proxy Statement and the Appendices to this Proxy Statement in
their entirety.
The Special Meeting
Proxy Solicitation.--This Proxy Statement is being sent to you in connection
with the solicitation of proxies by the board of directors (the "Board of
Directors") of Rochester Telephone Corporation, a New York corporation (the
"Company"), for use at the Special Meeting of Common Shareowners of the Company
(the "Special Meeting") to be held on December 19, 1994, at 9:30 a.m., local
time at The Pierre Hotel, Two East 61st Street, New York, New York, or at any
later time, if adjourned.
The Proposals.--At the Special Meeting, holders of the Company's $1.00 par
value Common Stock (the "Common Stock") will consider and act on five proposals
(the "Proposals").
Proposal 1--The Open Market Plan/Holding Company relates to an agreement,
dated as of May 16, 1994, among the Company, the Staff of the New York State
Department of Public Service (the "Staff") and certain intervening parties, as
it may be amended from time to time (the "Open Market Plan Agreement"). The
Open Market Plan Agreement contemplates the formation of a holding company and
certain related amendments to the Restated Certificate of Incorporation, as
amended, of the Company (the "Current Certificate").
Proposal 2--The Common Stock Amendment relates to an amendment to the Current
Certificate to increase the number of authorized shares of Common Stock from
100,000,000 to 300,000,000 shares (the "Common Stock Amendment").
Proposal 3--The Preferred Stock Amendment relates to an amendment to the
Current Certificate to authorize 4,000,000 shares of a new class of preferred
stock which would be designated as Class A Preferred Stock (the "Preferred
Stock Amendment").
Proposal 4--The Redemption Provision Amendment relates to an amendment to the
Current Certificate to permit the redemption of shares of Common Stock to the
extent necessary to prevent the loss of any governmental license or franchise
held by the Company or any of its subsidiaries (the "Redemption Provision
Amendment").
Proposal 5--The Name Change Amendment relates to an amendment to change the
name of the Company to "Frontier Corporation" (the "Name Change Amendment").
Vote Required. The affirmative vote of a majority of the votes entitled to be
cast by the holders of all of the outstanding shares of the Common Stock is
required to approve each of the Proposals. If no instructions are indicated on
a properly executed proxy card, the shares covered by such proxy card will be
voted FOR the Proposals. The approval of each of the first four Proposals is
contingent on the approval of all of such Proposals. Unless each of Proposal 1,
Proposal 2, Proposal 3 and Proposal 4 is approved by the shareowners at the
Special Meeting, none of such Proposals will be effected by the Company.
Consequently, approval of each of Proposal 1, Proposal 2, Proposal 3 and
Proposal 4 is required to implement the Company's "Open Market Plan". The
approval of the Proposal to change the Company's name to "Frontier
Corporation", however, is not contingent on the approval of any other Proposal.
Accordingly, if the shareowners approve
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<PAGE>
Proposal 5, the Name Change Amendment will be approved regardless of the
outcome of the vote on the other Proposals. In addition, authorization of the
Class A Preferred Stock contemplated by Proposal 3 also requires the approval
of the holders of the Company's outstanding shares of preferred stock.
Authorization of the other Proposals, however, is not contingent on the
approval of the preferred shareowners.
Record Date. The record date for the Special Meeting is November 4, 1994.
Proposal 1--The Open Market Plan/Holding Company
Background of the Open Market Plan
Over the past decade the Company has evolved from being primarily a provider
of local exchange and access services in the Rochester, New York market (the
"Rochester Market") to become a diversified telecommunication company. The
Company now provides (1) local telephone services inside and outside New York
State and (2) long distance, wireless and other telecommunication services.
This evolution has been a product of the Company's strategy to become a leading
provider of integrated telecommunication products and services to its
customers. The Company intends to pursue continued growth through expansion of
its existing businesses, development of value-added products and selected
acquisitions.
The Company, in addition to expanding its scale, also seeks to respond to
customers' needs for simple, integrated, communications solutions. The Company
believes that its ability to do this is constrained by its current corporate
structure which, among other things, subjects it to more extensive and
burdensome regulation than its competitors. The New York State Public Service
Commission (the "PSC"), which is part of the New York State Department of
Public Service, regulates the rates charged by providers of local exchange
services in New York State and the ability of such providers to make
acquisitions or investments, to enter into certain new lines of business or
geographic areas, to issue equity securities and to incur long-term
indebtedness. Accordingly, while the nature and scope of the Company's business
has changed substantially over the past ten years, the PSC continues to
regulate not only the Company's local exchange services in the Rochester Market
but also, the Company's other businesses through its regulation of the
Company's ability to finance or expand those businesses. This disadvantages the
Company in the marketplace because many of the Company's competitors are
structured as holding companies whose financing, diversification and expansion
activities are subject to comparatively less regulation. Although the Company
has been able to diversify by negotiating interim arrangements with the PSC,
the Company believes that this has been a difficult, costly and uncertain
process.
Accordingly, on May 16, 1994, the Company, the Staff and certain intervening
parties entered into the Open Market Plan Agreement to implement a plan (the
"Open Market Plan") to enable the Company to respond to the changing
competitive environment.
As required by the Open Market Plan Agreement, the PSC issued an order (the
"PSC Order") approving the Open Market Plan Agreement on November 10, 1994. The
PSC Order clarified and supplemented certain terms of the Open Market Plan
Agreement. The Company does not, however, believe that the PSC Order changed,
in any material respect, the terms of the Open Market Plan Agreement. The
Company expects that the Open Market Plan will become effective on January 1,
1995 (the "Effective Date"), subject to shareowner approval of the Proposals
presented to shareowners at this Special Meeting.
The Open Market Plan Agreement
Restructuring of the Company
The Open Market Plan Agreement provides that the Company will be reorganized
into an unregulated parent holding company, which will directly or indirectly
own all of the stock of:
1. R-Net, a regulated telephone and network transport corporation to be
formed immediately prior to the Effective Date, which will offer retail
services to existing customers as well as sell and market wholesale network
services and other services to retailers of telecommunication services in
the Rochester Market;
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<PAGE>
2. R-Com, a corporation to be formed immediately prior to the Effective
Date, which will be a lightly regulated retail provider of
telecommunication services to residential and business customers located,
initially, in the Rochester Market;
3. Distributed Solutions, Inc., an existing unregulated subsidiary of the
Company, which will provide computer, billing and other information
processing services to the Company's affiliates and to third parties
("DSI"); and
4. the Company's other existing subsidiaries, including those that
provide local exchange services outside the Rochester Market as well as
telecommunication equipment and services in the Rochester Market and other
markets.
Upon implementation of the Open Market Plan, the Company, which currently
conducts a majority of its operations through subsidiaries, will be converted
into a holding company in all respects because it will no longer hold any
assets other than the stock of its subsidiaries, including R-Net and R-Com. The
resulting holding company will be organized as a New York business corporation
which will be entitled, among other actions, to issue securities and effect
acquisitions or enter new lines of business without obtaining the approval of
the PSC, subject to certain exceptions. As a result, the Company should be able
to respond more quickly to customer needs and new opportunities. See "PROPOSAL
1--THE OPEN MARKET PLAN/HOLDING COMPANY--The Open Market Plan Agreement--
Restructuring of the Company."
As a provider of local exchange services in the Rochester Market, R-Net will
be subject to regulation by the PSC. As described below, the Open Market Plan
Agreement provides the basis for PSC regulation of R-Net's service offerings,
R-Net's rates, transactions between R-Net and its affiliates and R-Net's
relationship with other carriers. Similarly, AuSable Valley Telephone Company,
Inc., Highland Telephone Company, Seneca-Gorham Telephone Corporation and
Sylvan Lake Telephone Company, Inc., the Company's other subsidiaries which
currently provide local exchange services in New York State (the "Other NY
Telcos"), are also subject to PSC regulation. Unlike R-Net and the Other NY
Telcos, however, R-Com will be lightly regulated as a local service resale
operator in the same manner as similarly situated providers. Neither the rates
charged by R-Com nor its rate of return will be regulated, although R-Com will
be required to file tariffs containing its rates with the PSC. In addition,
local service resale operators are subject to certain PSC billing and
collection rules, although to a lesser extent than facilities-based providers
of local exchange services.
The Company expects that the businesses to be transferred by it pursuant to
the Open Market Plan to R-Net and R-Com, its wholly-owned subsidiaries, will
represent approximately 28% and 4%, respectively, of the Company's consolidated
revenues as of the Effective Date, and 37% and less than 1%, respectively, of
the Company's consolidated operating assets as of such date. DSI's revenues and
operating assets represent less than 1% of the Company's consolidated revenues
and consolidated operating assets.
Service Offerings by R-Net
R-Net will use the "Rochester Telephone" name and, subject to the ongoing
authority of the PSC, provide the retail service offerings in the Rochester
Market currently provided by the Company with the exception of the services
that are now considered to be competitive by the PSC. These competitive
services, consisting principally of Centrex, private line service and voice
mail, will be provided by R-Com. In addition, to the extent reasonable and upon
request, R-Net will unbundle and offer the services or network elements
available from its network facilities, on a tariff basis, for wholesale
purchase by R-Com, by other carriers certified by the PSC to offer telephone
service or by other bona fide service providers. R-Net will continue (1) to
provide retail services until such services are considered competitive by the
PSC, at which time they may be transferred to R-Com, and (2) to offer White and
Yellow pages directories for the Rochester Market. See "PROPOSAL 1--THE OPEN
MARKET PLAN/HOLDING COMPANY--The Open Market Plan Agreement--Service Offerings
by R-Net" and "--Directories".
5
<PAGE>
Service Offerings by R-Com
R-Com will provide integrated communications services by means of buying
network access from R-Net or other carriers and packaging these services with
R-Com's own and others' product lines such as voice mail, data services, long
distance and wireless. Initially, however, R-Com's customer base will be only
those customers for the retail services transferred to R-Com on the Effective
Date, consisting principally of Centrex, private line services and voice mail.
Customers purchasing any services other than those transferred to R-Com
initially will be served by R-Net.
Thereafter, R-Com and the other providers may compete for customers from R-
Net's customer base through direct marketing efforts. R-Com may compete for new
customers or for R-Net's customers by reselling services purchased from R-Net
or from another vendor or by selling services provided through R-Com's own
facilities. In the future, R-Com will receive R-Net's customer base with
respect to other services that are deemed to be competitive by the PSC and are
transferred to R-Com as described under "PROPOSAL 1 --THE OPEN MARKET
PLAN/HOLDING COMPANY--The Open Market Plan Agreement--Transfer of Competitive
Services from R-Net to R-Com" or are developed by R-Com. While R-Com's services
will initially be limited to customers in the Rochester Market, the Company
anticipates that R-Com may eventually offer its services outside the Rochester
Market. See "PROPOSAL 1--THE OPEN MARKET PLAN/HOLDING COMPANY--The Open Market
Plan Agreement--Service Offerings by R-Com".
Rate Stabilization Plan
The Open Market Plan Agreement provides for a total of $21 million in rate
reductions for R-Net (the "Rate Stabilization Plan") over a seven year period
beginning January 1, 1995, subject to termination by either the Company or the
PSC after five years (the "Rate Period"). The Rate Stabilization Plan also
precludes R-Net from increasing basic residential and business telephone
service rates during the Rate Period. In consideration of the rate reductions,
the Rate Stabilization Plan subjects R-Net's local exchange services to price-
cap regulation rather than incentive earnings regulation to which the Company's
local exchange services in the Rochester Market are currently subject. While
the Rate Stabilization Plan requires R-Net to reduce its rates during the Rate
Period, the Company cannot predict the effect of the Rate Stabilization Plan on
the Company's results of operations because such effect is also dependent on
the extent of usage of R-Net's network and on R-Net's costs. The rates provided
in the Rate Stabilization Plan were designed to permit R-Net to recover its
costs and to earn a reasonable rate of return, calculated using the methodology
utilized by the PSC to set the rate of return earned by providers of local
exchange services in New York State. There is no assurance, however, that R-Net
will recover its costs or earn a reasonable rate of return.
During the Rate Period, depreciation of R-Net's assets will be increased by
an aggregate of $17 million. R-Net can decide when to increase the depreciation
provided that, by the end of the first year, the amount shall be at least $5
million and, by the end of the fifth year, the cumulative amount shall be at
least $15 million. See "PROPOSAL 1--THE OPEN MARKET PLAN/HOLDING COMPANY--
Background of the Open Market Plan", "--Certain Considerations" and "--The Open
Market Plan Agreement--Rate Stabilization Plan".
Termination of the Rate Stabilization Plan
Although the Rate Stabilization Plan is scheduled to expire on December 31,
2001, it may be terminated by either R-Net or the PSC upon the filing of a rate
proceeding seeking permanent or temporary rates to be effective on January 1,
2000. Even if the Rate Stabilization Plan is terminated, however, the other
terms of the Open Market Plan Agreement will remain in effect unless
specifically modified by the PSC, except that the PSC may not modify any of the
provisions relating to the restructuring of the Company into an unregulated
holding company. See "PROPOSAL 1--THE OPEN MARKET PLAN/HOLDING COMPANY--The
Open Market Plan Agreement--Termination of the Rate Stabilization Plan."
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Royalty Dispute
The Open Market Plan Agreement addresses issues arising out of the PSC order
issued on July 6, 1993 (the "Royalty Order"), imposing an annual royalty on the
Company in the amount of 2% of the total capitalization of the Company's
unregulated operations. The PSC justified its decision in the Royalty Order on,
among other reasons, the benefit to the Company's unregulated operations from
their use of the Rochester Telephone name and reputation. Under the Open Market
Plan Agreement, the PSC will not impute a royalty on either the Company or R-
Net during the Rate Period or for any prior period, subject to limited
exceptions. Upon the termination of the Rate Period, however, the PSC may
impute a royalty for the period beginning on the termination date, subject to
the outcome of any litigation regarding the royalty. The Company can continue
to pursue the litigation it instituted to challenge the Royalty Order. The
Company has filed a motion with the New York State Court of Appeals seeking
leave to appeal a decision of the Appellate Division of the New York State
Supreme Court which ruled that the Royalty Order was valid. See "PROPOSAL 1--
THE OPEN MARKET PLAN/HOLDING COMPANY--Background of the Open Market Plan", "--
Certain Considerations" and "--The Open Market Plan Agreement--Royalty
Dispute".
Restrictions on Affiliate Transactions
The Open Market Plan Agreement provides that any transaction between R-Net
and the Company, or between R-Net and any of its affiliates, will be conducted
at arm's length. Transactions between R-Net and its affiliates are generally
limited to tariffed purchases and sales subject to certain exceptions. See
"PROPOSAL 1--THE OPEN MARKET PLAN/HOLDING COMPANY--The Open Market Plan
Agreement--Restrictions on Affiliate Transactions".
R-Net's Relationship with Other Carriers
The Open Market Plan Agreement contains certain provisions to ensure that
similarly situated third party carriers can use R-Net's network on a
nondiscriminatory basis. All competing providers of local exchange services
will have the same access to R-Net's network functionalities, services and data
bases, upon the same terms and conditions as R-Net provides such
functionalities and data bases to any affiliate or other entity. Moreover, R-
Net is precluded from providing a competitive information advantage to any
affiliate, including R-Com.
Upon implementation of the Open Market Plan, customers' current telephone
numbers will remain the same, no matter which telephone reseller is chosen. If
a customer changes network carriers, however, the customer's telephone number
will be retained only at the election of the competing carrier. See
"PROPOSAL 1--THE OPEN MARKET PLAN/HOLDING COMPANY--The Open Market Plan
Agreement--R-Net's Relationship with Other Carriers".
The Open Market Plan Amendments
As part of Proposal 1--The Open Market Plan/Holding Company and in order to
effect the restructuring of the Company into a parent holding company as
contemplated by the Open Market Plan, the shareowners are being asked to
approve amendments to the Current Certificate (the "Open Market Plan
Amendments") which will:
1. reorganize the Company from a regulated "telephone corporation" under
the New York Transportation Corporations Law to an unregulated "business
corporation" under the New York Business Corporation Law (the "Business
Corporation Law");
2. broaden the "purposes" clause contained in the Current Certificate
with a provision specifying as the purposes of the Company those purposes
permitted to any business corporation under the Business Corporation Law;
and
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3. delete the existing description of the territory in which the Company
operates as a local exchange telephone corporation in the Rochester area.
As a result of these amendments to the Current Certificate and the amendments
to the Current Certificate contemplated by the other Proposals, the Company's
Certificate of Incorporation will be amended and restated substantially as set
forth in the composite form of Restated Certificate of Incorporation of the
Company (the "Restated Certificate") appearing as Appendix 1 to this Proxy
Statement. See "PROPOSAL 1--THE OPEN MARKET PLAN/HOLDING COMPANY--The Open
Market Plan Amendments".
Recommendations of the Board of Directors; Reasons for the Open Market Plan
The Board of Directors has unanimously approved the Open Market Plan
Agreement, including the transactions contemplated thereby, and the Open Market
Plan Amendments (collectively, the "Open Market Plan/Holding Company
Proposal"). The Board of Directors has determined that the Open Market
Plan/Holding Company Proposal is in the best interests of the Company and its
shareowners. The Board of Directors reserves the right, however, to amend any
provisions of the Open Market Plan Agreement in accordance with its terms and
without shareowner approval subject to applicable law before or after such
approval. The reasons considered material by the Board of Directors in
approving the Open Market Plan/Holding Company Proposal are summarized under
"PROPOSAL 1--THE OPEN MARKET PLAN/HOLDING COMPANY--Recommendations of the Board
of Directors; Reasons for the Open Market Plan" and are listed below. Although
the Board of Directors recognizes that there are potential adverse consequences
associated with the Open Market Plan as set forth below under "Certain
Considerations", the Board of Directors nonetheless believes that, overall, the
Open Market Plan is in the best interests of the Company and its shareowners.
1. The potential regulatory and operational benefits to the Company from
its restructuring to an unregulated holding company.
2. The application to R-Net of price-cap regulation rather than incentive
regulation which will enable R-Net to retain the benefit of all
productivity and revenue gains during the applicable periods since R-Net's
rate of return will not be regulated.
3. The potential increase in the usage of the existing network in the
Rochester Market.
4. The benefits to customers and related growth opportunities from R-Com
serving as a single source of telecommunication services through the
packaging of network services purchased from R- Net and other network
providers.
5. The Rate Stabilization Plan which will provide greater certainty with
respect to the applicable regulation of R-Net's rates during the Rate
Period.
6. The settlement of the royalty proceeding during the Rate Period.
7. The Board of Directors' belief that the Company will be better
positioned to pursue its current businesses and long-term strategic
direction than it would in the absence of the Open Market Plan.
In view of the wide variety of factors considered by the Board of Directors
in connection with its evaluation of the Open Market Plan/Holding Company
Proposal, the Board of Directors did not find it practicable to, and did not,
quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination with respect to the advisability of
the Open Market Plan/Holding Company Proposal.
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Certain Considerations
While the Board of Directors believes the Open Market Plan/Holding Company
Proposal is in the best interests of the Company and its shareowners, there is
no assurance that the Open Market Plan will be advantageous to shareowners.
Shareowners should consider the possible effects of the Open Market Plan
described under "PROPOSAL 1--THE OPEN MARKET PLAN/HOLDING COMPANY--Certain
Considerations" when evaluating the Open Market Plan/Holding Company Proposal,
including:
1. The Open Market Plan is designed to remove barriers to and may hasten
local telephone service competition in the Rochester Market, although the
Company believes the changes resulting from the Open Market Plan will
better equip the Company to compete effectively in an environment that is
becoming increasingly more competitive.
2. The Rate Stabilization Plan provides for a total of $21 million in
rate reductions for R-Net over the Rate Period and provides that the rates
charged by R-Net for basic residential and business telephone service may
not be increased for any reason during the Rate Period.
3. While R-Net will be a wholly-owned subsidiary of the Company, the
Company's ability to control the management and operations of R-Net will be
restricted by various provisions of the Open Market Plan Agreement,
including those relating to the composition of the board of directors of R-
Net, the compensation of R-Net's officers and employees, prohibitions on
dividend payments from R-Net to the Company in specified circumstances,
limitations on the ownership of the Company's stock by R-Net's officers and
senior management employees, prohibitions on the use of R-Net's assets to
secure the indebtedness of the Company or any affiliate, and restrictions
on pricing and on transactions between R-Net and its affiliates.
4. Upon reorganization of the Company as contemplated by the Open Market
Plan Agreement, the Company will no longer directly own any material assets
other than its interest in the capital stock of its subsidiaries, including
R-Net and R-Com.
5. On the Effective Date, the PSC will cease to regulate the Company's
ability to finance or expand its businesses outside of New York State.
Accordingly, the Company may be able to pursue opportunities with both
greater potential profits and greater business risk than it could currently
pursue as a telephone company subject to the authority of the PSC. While
the pursuit of such opportunities may conceivably result in increased
volatility of the Company's securities, it may also result in potentially
greater returns to the Company and its shareowners, although there is no
assurance of greater returns.
6. While the PSC has agreed that no royalty will be imposed by the PSC
against the Company or R-Net during the Rate Period or for any prior
period, subject to limited exceptions, the PSC may seek royalties pursuant
to the Royalty Order, as it may be modified as a result of judicial appeal,
subsequent to the termination of the Rate Period.
7. To the extent R-Net provides certain services to the same retail
customers who may be served by R-Com for other services in accordance with
the terms of the Open Market Plan Agreement, the Company will, in the
aggregate, incur certain sales and service related expenses that are
duplicated by both R-Net and R-Com.
8. R-Net and its affiliates will incur certain costs in furnishing
various periodic reports to the Staff and the PSC to demonstrate compliance
with the terms of the Open Market Plan Agreement, although these additional
costs will be offset to the extent the Company is no longer required to
seek PSC approval with respect to its unregulated operations upon
reorganization to a holding company structure.
In view of the wide variety of factors considered by the Board of Directors
in connection with its evaluation of the Open Market Plan/Holding Company
Proposal, the Board of Directors did not find it practicable to, and did not,
quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination with respect to the advisability of
the Open Market Plan/Holding Company Proposal.
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Proposal 2--The Common Stock Amendment
The Company is proposing the adoption of the Common Stock Amendment to
increase the number of authorized shares of Common Stock from 100,000,000 to
300,000,000 shares. The Board of Directors believes that the Common Stock
Amendment is in the best interests of the Company and its shareowners because
this amendment will provide the Company with greater flexibility to raise
capital and to structure acquisition transactions. See "PROPOSALS 2 AND 3--THE
COMMON STOCK AMENDMENT AND THE PREFERRED STOCK AMENDMENT".
Proposal 3--The Preferred Stock Amendment
The Company is proposing the adoption of the Preferred Stock Amendment to
authorize 4,000,000 shares of a new class of preferred stock which would be
designated as Class A Preferred Stock and which will rank junior to the
Cumulative Preferred Stock as to dividends or distributions, and upon the
liquidation, dissolution or winding up of the Company. The Board of Directors
believes that the Preferred Stock Amendment is in the best interests of the
Company and its shareowners because this amendment will provide the Company
with greater flexibility to raise capital and to structure acquisition
transactions. See "PROPOSALS 2 AND 3--THE COMMON STOCK AMENDMENT AND THE
PREFERRED STOCK AMENDMENT".
Proposal 4--The Redemption Provision Amendment
The Company is proposing the adoption of the Redemption Provision Amendment
to allow the Company to redeem outstanding shares of Common Stock to the extent
necessary to prevent the loss or secure the renewal or reinstatement of any
license or franchise from any governmental agency held by the Company or any of
its subsidiaries. The Board of Directors believes that the Redemption Provision
Amendment is in the best interests of the Company and its shareowners because
this amendment will provide the Board of Directors with additional flexibility
to protect the Company's governmental licenses and franchises. See "PROPOSAL
4--THE REDEMPTION PROVISION AMENDMENT".
Proposal 5--The Name Change Amendment
The Company is proposing the adoption of the Name Change Amendment to change
the name of the Company to "Frontier Corporation". The Board of Directors
believes that the Rochester Tel company name should be changed to one that is
more reflective of the Company's strategic direction, geographies served and
businesses operated. Moreover, once the Company converts to a holding company
structure as part of the Open Market Plan, the Open Market Plan Agreement
prohibits the Company or any other entity (other than R-Net) from using the
"Rochester Telephone" name, except on a transitional basis relating to the
implementation of the Open Market Plan. See "PROPOSAL 5--THE NAME CHANGE
AMENDMENT".
Price of Common Stock
On May 16, 1994, the last trading day before the Company announced the
signing of the Open Market Plan Agreement, the high and low sales prices of the
Common Stock as reported on the New York Stock Exchange Composite Tape were
$21.00 and $20.875, respectively.
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PROPOSAL 1--THE OPEN MARKET PLAN/HOLDING COMPANY
Background of the Open Market Plan
Over the past decade the Company has evolved from being primarily a provider
of local exchange and access services in the Rochester, New York market (the
"Rochester Market") to become a diversified telecommunication company engaging
in both (1) local telephone services inside and outside New York State and (2)
long distance, wireless and other telecommunication services. Presently, only
approximately one-third of the Company's revenues are derived from local
exchange and access services in the Rochester Market compared with more than
one-half as recently as 1988. This evolution has been a product of the
Company's strategy to become a leading provider of integrated telecommunication
products and services to its customers on a broader basis, combining
significant capabilities in local telephone, long distance and wireless
communications. The Company intends to pursue continued growth through
expansion of its existing businesses, development of value-added products and
selected acquisitions. The Company seeks greater size because the competitive
trend requires telecommunication providers to possess greater resources and
capital to compete successfully in today's marketplace.
The Company, in addition to expanding its scale, also seeks to respond to
customers' needs for simple, integrated, communications solutions. The Company
believes that its ability to do this is constrained by its current corporate
structure which, among other things, subjects it to more extensive and
burdensome regulation than its competitors. The New York State Public Service
Commission (the "PSC"), which is part of the New York State Department of
Public Service, regulates the rates charged by providers of local exchange
services in New York State and the ability of such providers to make
acquisitions or investments, to enter into certain new lines of business or
geographic areas, to issue equity securities and to incur long-term
indebtedness. Accordingly, while the nature and scope of the Company's business
has changed substantially over the past ten years, the PSC continues to
regulate not only the Company's local exchange services in the Rochester Market
but also, directly or indirectly, all of the Company's other businesses through
its regulation of the Company's ability to finance or expand those businesses.
This disadvantages the Company in the marketplace because many of the Company's
competitors are structured as holding companies whose financing,
diversification and expansion activities are subject to comparatively less
regulation. Although the Company has been able to diversify by negotiating
interim arrangements with the PSC, the Company believes that this has been a
difficult, costly and uncertain process.
Accordingly, on February 3, 1993, the Company filed a petition (the
"Petition") with the PSC for approval of a proposed restructuring (the "Open
Market Plan") to seek a solution that would address these concerns. Under the
Open Market Plan, the Company's local exchange operations in the Rochester
Market would be divided into two companies--a wholesale provider of local
network services ("R-Net") and a retail provider of diversified
telecommunication services ("R-Com"). In addition, the Company, which currently
conducts a majority of its operations through subsidiaries, would be converted
into a holding company in all respects because it will no longer hold any
assets other than the stock of its subsidiaries, including R-Net and R-Com.
The Petition contemplated that R-Net's business and operations would continue
to be subject to the same degree of regulation and that R-Net would sell basic
network services (such as access to the network, transport between offices and
switching) and unbundled network elements to R-Com and any other local
telecommunication companies seeking to purchase them. These retail companies
would then package these and other services for resale to local customers.
Under the Petition, R-Com would be free to be a full service provider that
could elect to offer an increasing selection of integrated telecommunication
services and elements, including local, long distance, cellular and,
potentially, video and other value-added offerings. R-Com would also be able to
package the network elements purchased from R-Net and other network providers
into services such as flat rate service, measured rate service, Centrex and
ISDN.
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The Open Market Plan was originally designed to enable customers in the
Rochester Market to choose their local telephone service provider through a
balloting process. Although certain competitors have announced an intention to
provide basic local exchange services in the Rochester Market, the Company
believes that it is currently the only provider of such services to all
segments of the market on a common carrier basis. The Company's decision to be
the first local exchange carrier in the nation that would provide for full open
local competition reflects a recognition that (1) competition in local exchange
and toll services is being facilitated by changing technology and a trend among
regulators to adopt pro-competitive policies and (2) there are currently other
entities which have the ability to provide dial tone and other local exchange
services in the Rochester Market.
The holding company structure contemplated under the Open Market Plan
provides financial flexibility for the Company to continue the acquisition and
diversification efforts necessary for long-term growth. The holding company
will be able to pursue and finance acquisitions, divestitures and partnership
opportunities quickly and effectively without the need to obtain PSC approval,
except under circumstances where the holding company acquires or sells an
entity regulated by the PSC. Moreover, subsidiaries of the Company engaging in
nonregulated businesses will be able to compete on the same basis as their
nonregulated competitors without being impeded by the Company's regulated
operations. The Company has sought the increased flexibility and reduced
regulatory burdens of a holding company structure for many years. Indeed, in
1976 shareowners approved a proposal to form a holding company. The PSC
rejected the Company's previous proposals to reorganize as a holding company
principally because it was unwilling to reduce the extent to which it regulates
the Company. In connection with its review of the Company's proposal to open
the Rochester Market to competition, however, the PSC was willing to reconsider
its prior rejection of the Company's requests to reorganize into a holding
company.
Subsequent to the filing of the Petition, the PSC sought to review the
Company's existing local service rates in the Rochester Market, which were last
formally reviewed in 1989. Following the approval by the PSC of preliminary
agreements between the Company and the Staff of the New York State Department
of Public Service (the "Staff") with respect to certain rate reductions which
ultimately were included in the rate stabilization plan incorporated into the
Open Market Plan Agreement, the Staff was willing to consider the Open Market
Plan, including the application by the Company to convert to a holding company.
As permitted under New York law, certain interested parties (including
representatives of the Communications Workers of America (the "CWA") and
certain current and potential competitors of the Company (the "Intervenors"))
joined the Staff and the Company in administrative proceedings regarding the
Open Market Plan. In addition to the CWA, the other Intervenors were: ACC
Corporation; Albany Telephone Company; AT&T Communications of New York, Inc.;
Buffalo Telephone Company; Cable Television Association of New York, Inc.;
Department of the Army; Genesee Telephone Company; ICS/Executone Telecom, Inc.;
LDDS Communications, Inc.; MCI Telecommunications Corporation; New York
Commission on Cable Television; New York Newspaper Publishers Association; New
York State Consumer Protection Board; New York State Department of Economic
Development; New York State Telephone Association; Ogden Telephone Company;
Public Utility Law Project of New York, Inc.; Sprint Communications Company,
L.P.; Teleport Communications New York; and Time Warner Communications.
Simultaneously, the Staff and the Intervenors also sought to resolve issues
arising out of a PSC order issued on July 6, 1993 (the "Royalty Order")
imposing an annual royalty on the Company in the amount of 2% of the total
capitalization of the Company's unregulated operations. The PSC justified its
decision in the Royalty Order on, among other reasons, the potential benefit to
the Company's unregulated operations from their use of the Rochester Telephone
name and reputation. Following the issuance of the Royalty Order, the Company
instituted litigation to seek judicial review of the Royalty Order. As part of
the negotiations regarding the Open Market Plan, the Company and the Staff
reached agreement concerning the royalty issue which, in general, provides that
no royalty will be imposed during the period that the rate stabilization plan
remains in effect. Further, the Company may continue its litigation challenging
the Royalty Order. On June 30, 1994, the Appellate Division of the New York
State Supreme Court ruled that the Royalty Order was valid. The Company has
filed a motion with the New York State Court of Appeals seeking leave to appeal
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the decision of the Appellate Division. The appeal will not, however, affect
the Open Market Plan. See "Certain Considerations" and "The Open Market Plan
Agreement--Royalty Dispute" below.
As a result of negotiations among the Company, the Staff and the Intervenors,
a Joint Stipulation and Open Market Plan Agreement (the "Open Market Plan
Agreement") was entered into on May 16, 1994 among the Company, on behalf of
itself and certain affiliates, the Staff, the CWA and Time Warner
Communications ("Time Warner"). Subsequent to the date of the Open Market Plan
Agreement, the following additional Intervenors also became signatories to the
Open Market Plan Agreement: New York State Department of Economic Development;
New York State Telephone Association; and Public Utility Law Project of New
York, Inc. These five Intervenors were active participants in the negotiations
regarding the Open Market Plan. Their decision to become parties to the Open
Market Plan Agreement demonstrates their support for the Open Market Plan.
The Open Market Plan Agreement sets forth the framework for implementation of
the Open Market Plan. The negotiations regarding the Open Market Plan Agreement
generally focused on specific concerns raised by the Staff and certain
Intervenors about potential R-Net discrimination in favor of R-Net's affiliates
and about deregulation of any currently regulated services absent a PSC finding
that adequate competition existed with respect to these services. In
particular, the Staff was concerned that R-Com would have an advantage over
third party resellers to the extent R-Com were permitted to resell and package
local exchange services purchased from R-Net. In that connection, the Staff was
also concerned the Company's common ownership of R-Net and R-Com might provide
R-Net with an incentive to favor R-Com over third party resellers. To address
these concerns, the Company's officers, acting under their delegated authority
from the Board of Directors, negotiated changes from the proposal initially
filed by the Company. As a result of these negotiations, the Open Market Plan
contemplated by the Open Market Plan Agreement differs from the Company's
initially filed proposal by (1) imposing upon R-Net and its affiliates a number
of procedural and substantive protections related to transactions between R-Net
and affiliates and non-affiliates alike, (2) requiring R-Net to continue to
offer retail services until the PSC is satisfied that there are sufficient
competitive choices for those services in the market, (3) limiting the
customers transferred from the Company to R-Com upon implementation of the Open
Market Plan to those customers who purchase high capacity private lines,
Centrex, voice mail and certain other identified services, (4) requiring Yellow
Pages to be transferred to R-Net rather than to R-Com and (5) providing for
conditions to ensure the financial strength of R-Net. The Open Market Plan
Agreement also differs from the terms of the Open Market Plan originally filed
by the Company by not providing that customers select their local telephone
service provider through a balloting process. Instead, it contemplates that
market entrants, including R-Com, would compete for customers. While initially
R-Net will serve more customers and R-Com will serve fewer customers than was
proposed in the Petition, this will entail less initial risk to the Company as
a whole since R-Net will retain substantially all of the Company's existing
customers at the time the Open Market Plan is implemented. Because proposals to
convert the Company to a holding company were considered by the Board of
Directors over a number of years, the Board of Directors did not consider any
alternatives to the Open Market Plan when it finally approved the Open Market
Plan.
In addition to implementing the Open Market Plan, the Open Market Plan
Agreement also expands upon the Company's preliminary rate agreement with the
PSC to incorporate a plan (the "Rate Stabilization Plan") which provides for
aggregate rate reductions of $21 million for R-Net over a seven year period
beginning on January 1, 1995, subject to termination of the Rate Stabilization
Plan by either the Company or the PSC after five years (the "Rate Period"). The
Rate Stabilization Plan also precludes R-Net from increasing basic residential
and business rates during the Rate Period. In exchange for the rate reductions,
the Rate Stabilization Plan subjects R-Net's local exchange services to price-
cap regulation rather than the form of incentive regulation to which the
Company's local exchange services in the Rochester Market are currently
subject. Under incentive regulation, rates are initially established for a
specified period based on an authorized rate of return on equity, and are
subject to an obligation of the Company to share with customers a portion of
earnings in excess of the rate of return. Although incentive regulation is
designed to encourage
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cost efficiencies by permitting the Company to share in profits beyond a
specified rate, the PSC in the past has recalibrated the rates retroactively
and not permitted the Company and its shareowners to benefit fully from cost
reductions. Although the Rate Stabilization Plan fixes R-Net's prices during
the Rate Period, those prices will not be subject to any rate of return
limitation. Therefore R-Net will retain all earnings during the Rate Period,
subject to certain early termination adjustments, and will consequently have
the opportunity to earn a higher rate of return than is allowed by the current
regulatory structure. See "Certain Considerations" and "The Open Market Plan
Agreement--Rate Stabilization Plan" below.
PSC approval of the Open Market Plan Agreement is a condition to the
implementation of the Open Market Plan. The PSC issued an order (the "PSC
Order") approving the Open Market Plan Agreement on November 10, 1994. The PSC
Order clarified and supplemented certain terms of the Open Market Plan
Agreement. The Company does not believe, however, that the PSC Order changed,
in any material respect, the terms of the Open Market Plan Agreement. The
Company filed a copy of the PSC Order as an exhibit to the Company's Form 8-K
dated November 10, 1994, and the PSC Order is incorporated herein by reference.
The Company expects the effective date of the Open Market Plan (the
"Effective Date") will occur on January 1, 1995, subject to shareowner approval
of the Proposals being considered by shareowners at this Special Meeting.
Recommendations of the Board of Directors; Reasons for the Open Market Plan
The Board of Directors has unanimously approved the Open Market Plan
Agreement and the performance by the Company of all transactions and acts on
the part of the Company described in the Open Market Plan Agreement (the "Open
Market Plan Transactions"), including the contribution of certain assets and
liabilities by the Company to two wholly-owned subsidiaries of the Company. It
has also unanimously approved amendments to the Current Certificate relating to
the reorganization of the Company into a parent holding company as contemplated
by the Open Market Plan (the "Open Market Plan Amendments").
A summary of the reasons considered material by the Board of Directors in
approving the Open Market Plan Agreement, the Open Market Plan Transactions and
the Open Market Plan Amendments (collectively, the "Open Market Plan/Holding
Company Proposal") is set forth below. Although the Board of Directors
recognizes that there are potential adverse consequences associated with the
Open Market Plan as set forth below under "Certain Considerations", the Board
of Directors nonetheless believes that, overall, the Open Market Plan is in the
best interests of the Company and its shareowners.
1. Regulatory and Operational Benefits. The potential regulatory and
operational benefits to the Company from its restructuring from a telephone
operating corporation which currently conducts all of its operations (other
than local exchange and access services in the Rochester Market) through
subsidiaries to an unregulated holding company, consisting of (a) the
Company increasing its flexibility to make acquisitions or investments, to
enter into new lines of business or geographic areas, to issue equity
securities or to incur long-term indebtedness without, subject to certain
exceptions, being required to obtain the approval of the PSC, and (b) the
Company enhancing its ability to compete in nonregulated businesses on a
level playing field with other companies engaged in the same businesses
without impairing or being limited by the Company's regulated operations.
2. Price-Cap Regulation of R-Net. R-Net will be subject to price-cap
regulation rather than incentive regulation which will enable R-Net to
retain the benefit of all productivity and revenue gains during the
applicable periods since R-Net's rate of return will not be regulated.
3. Network Usage. Usage of the existing network in the Rochester Market
may increase as a result of (a) service improvements which may be
stimulated by the development of a resale market for network services and
(b) rate reductions, including those which are required by the Rate
Stabilization Plan and those which may result from competition for network
services. This increased usage may lead to (1) additional revenues, (2) an
increased likelihood that innovative services and improvements to the
network will be developed by R-Net or suggested by third parties and (3) a
further reduction in the Company's rates which may forestall the
installation of additional competing networks.
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4. Integration of Telecommunication Services. The benefits to customers
and related growth opportunities from R-Com serving as a single source of
telecommunication services through the packaging of network services
purchased from R-Net and other network providers.
5. Rate Stabilization Plan. The Rate Stabilization Plan described below
under "Certain Considerations" and "The Open Market Plan Agreement--Rate
Stabilization Plan" which will provide greater certainty with respect to
the applicable regulation of R-Net's rates during the Rate Period because
it eliminates the risk that the PSC will recalibrate rates retroactively so
as not to allow R-Net to benefit further from cost reductions.
6. Royalty Proceeding Settled. The settlement of the royalty proceeding,
described below under "Certain Considerations" and "The Open Market Plan
Agreement--Royalty Dispute", which settlement generally provides that the
PSC will not impose an annual royalty on the Company or R-Net during the
Rate Period or for any prior period.
7. Strategic Direction. The Board of Directors' belief that the Company
will be better positioned to pursue its current businesses and long-term
strategic direction than it would in the absence of the Open Market Plan.
In view of the wide variety of factors considered by the Board of Directors
in connection with its evaluation of the Open Market Plan/Holding Company
Proposal, the Board of Directors did not find it practicable to, and did not,
quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination with respect to the advisability of
the Open Market Plan/Holding Company Proposal.
THE BOARD OF DIRECTORS BELIEVES THAT THE OPEN MARKET PLAN AGREEMENT, THE OPEN
MARKET PLAN TRANSACTIONS AND THE OPEN MARKET PLAN AMENDMENTS ARE IN THE BEST
INTERESTS OF THE COMPANY AND ITS SHAREOWNERS. IT HAS UNANIMOUSLY APPROVED THE
OPEN MARKET PLAN AGREEMENT, THE OPEN MARKET PLAN TRANSACTIONS AND THE OPEN
MARKET PLAN AMENDMENTS, AND IT UNANIMOUSLY RECOMMENDS THAT THE SHAREOWNERS OF
THE COMPANY VOTE "FOR" APPROVAL OF THE OPEN MARKET PLAN AGREEMENT, THE OPEN
MARKET PLAN TRANSACTIONS AND THE OPEN MARKET PLAN AMENDMENTS, DESIGNATED AS
PROPOSAL 1 ON YOUR PROXY CARD.
The Board of Directors reserves the right (1) to amend any provisions of the
Open Market Plan Agreement in accordance with its terms and without shareowner
approval, subject to applicable law, before or after shareowner approval and
(2) to terminate the Open Market Plan Agreement in accordance with its terms
notwithstanding shareowner approval. In addition, approval of the Open Market
Plan/Holding Company Proposal by the affirmative vote of a majority of the
votes entitled to be cast by the holders of all the outstanding shares of
Common Stock shall be deemed also to constitute approval of a resolution
authorizing the Board of Directors, at any time prior to the filing of the
Restated Certificate with the New York Secretary of State, to abandon the Open
Market Plan Amendments without further action by the shareowners, in connection
with the termination of the Open Market Plan Agreement or otherwise,
notwithstanding approval of the Open Market Plan/Holding Company Proposal by
the shareowners. The Open Market Plan Amendments are summarized below under
"The Open Market Plan Amendments".
Certain Considerations
While the Board of Directors believes that approval of the Open Market
Plan/Holding Company Proposal is advisable and in the best interests of the
Company and its shareowners, there is no assurance that the Open Market Plan
will be advantageous to shareowners. In forming its belief that, overall, the
Open Market Plan is in the best interests of the Company and its shareowners,
the Board of Directors considered the possible effects of the Open Market Plan
described below. Shareowners should consider these possible effects when
evaluating the Open Market Plan/Holding Company Proposal.
1. Increased Competition in Rochester Market. The Open Market Plan is
designed to remove barriers to and may hasten local telephone competition
in the Rochester Market because the terms of
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the Open Market Plan Agreement provide for (a) the full interconnection of
competing local networks, including reciprocal compensation for terminating
traffic, (b) equal access to network databases, (c) access to local
telephone numbers and (d) telephone number portability. Indeed, Time Warner
Communications and other potential competitors of the Company have already
announced an intention to provide basic local exchange services in the
Rochester Market. The inherent risk associated with opening the Rochester
Market to competition is that some customers will purchase services from
competitors, which would reduce the number of customers of the Company and
potentially cause a decrease in the Company's revenues and profitability.
The Company believes, however, that usage of its network following
implementation of the Open Market Plan will increase, thereby offsetting,
to some extent, the loss of revenues from end-user customers. Increased
competition may also result in price decreases which are not offset by cost
reductions. The Company believes, however, that R-Net and R-Com will be
able to compete profitably in the Rochester Market following implementation
of the Open Market Plan, especially because (1) the Open Market Plan will
enable the Company to broaden the scope and quality of its competitive
offerings and (2) price-cap regulation will not require R-Net to rebate
earnings achieved through operating efficiencies that previously would have
been shared with customers. See "The Open Market Plan Agreement--Rate
Stabilization Plan". Moreover, the Company believes that local exchange
services in the Rochester Market are already subject to competition from
alternative transmission media which provide access services to long
distance companies. The Company believes that this trend will continue
whether or not the Open Market Plan is implemented. Accordingly, the
Company believes that the Open Market Plan allows it to anticipate the
inevitable erosion of its market share in local exchange services on terms
that the Company believes will be in the best interests of its customers,
employees and shareowners.
2. Risks of Rate Stabilization Plan. While the price-cap regulation
incorporated in the Open Market Plan Agreement will provide certain
benefits to the Company, the terms of the Open Market Plan Agreement will
pose certain economic risks to the Company. The Rate Stabilization Plan
incorporated in the Open Market Plan Agreement provides for a total of $21
million in rate reductions for R-Net over the Rate Period. During the Rate
Period, the rates charged by R-Net for basic residential and business
telephone service may not be increased for any reason. Accordingly, R-Net's
rate of return may be less than the return permitted in current rate
proceedings by the PSC to other providers of local exchange services in New
York State. See "The Open Market Plan Agreement--Rate Stabilization Plan".
While the Rate Stabilization Plan requires R-Net to reduce its rates during
the Rate Period, the Company cannot predict the effect of the Rate
Stabilization Plan on the Company's results of operations because such
effect is also dependent on the extent of usage of R-Net's network and on
R-Net's costs. The rates provided in the Rate Stabilization Plan were
designed to permit R-Net to recover its costs and to earn a reasonable rate
of return, calculated using the methodology utilized by the PSC to set the
rate of return earned by providers of local exchange services in New York
State. There is no assurance, however, that R-Net will recover its costs or
earn a reasonable rate of return.
3. Restraints on the Company's Control of R-Net, Including Dividend
Restrictions. AlthoughR-Net will be a wholly-owned subsidiary of the
Company, the Company's ability to control the management and operations of
R-Net will be restricted by various provisions of the Open Market Plan
Agreement, including requirements that:
(a) the members of the board of directors of R-Net will consist of a
majority of persons who are neither officers or employees of R-Net nor
directors, officers or employees of the Company or any of its
affiliates ("Outside Directors"), whose nomination, following the
initial selection of directors by the Company, will be the
responsibility of a committee of Outside Directors;
(b) only one of R-Net's directors may simultaneously serve as a
director, officer or employee of the Company or any of its affiliates
other than R-Net;
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(c) the members of the audit committee of the board of directors of
R-Net will all be Outside Directors;
(d) the annual compensation (including cash, bonuses and options to
purchase the Company's stock) of officers and employees of R-Net will
be based solely on the service quality and profitability of R-Net;
(e) the officers and senior management employees of R-Net, together
with certain of their family members, may not own in the aggregate in
excess of 10% of the outstanding shares of the Company's stock,
including ownership through stock options and R-Net's savings plan;
(f) the person holding the position of legal counsel to R-Net will be
responsible for the provision of legal services to R-Net only; and
(g) transactions between R-Net and its affiliates will be subject to
pricing and other restrictions under the Open Market Plan Agreement.
In addition, the Open Market Plan Agreement also contains the following
financial covenants which are intended to ensure that R-Net will not lack
the financial strength to provide quality service:
(a) dividends will not be paid by R-Net to the Company if (i) R-Net's
senior debt has been downgraded to "BBB" by Standard & Poor's ("S&P")
or the equivalent rating by other rating agencies or is placed on
credit watch for such a downgrade or (ii) a service quality penalty is
imposed under the Open Market Plan Agreement;
(b) dividends also will not be paid unless R-Net's directors certify
that such dividends will neither impair R-Net's service quality nor its
ability to finance its short and long term capital needs on reasonable
terms while maintaining an S&P debt rating target of "A";
(c) the assets of R-Net may only be pledged for the debt obligations
of R-Net;
(d) R-Net will initially have at least $40 million of public long-
term debt, which, at the election of the Company and subject to PSC
approval, will either be (i) issued by R-Net within 90 days of the
Effective Date, provided that the effective cost of such debt to
customers shall not exceed 8% or (ii) issued by the Company prior to
the Effective Date and assigned to R-Net as soon as practicable
thereafter, provided, that, in either case, such debt will be rated at
least "A" by S&P and at least "A2" by Moody's Investor Services;
(e) any initial intercompany debt owed by R-Net to the Company must
consist of components such that, in the aggregate, the interest rate
and maturity shall match the terms of the public debt issued by the
Company prior to the Effective Date for the rendition of public service
in the Company's pre-restructuring service territory;
(f) the ratio of R-Net's long-term debt to total capital may not
exceed 40.37% on the Effective Date; and
(g) R-Net will endeavor to maintain sufficient public debt to support
continuation of separate debt ratings from three major rating agencies.
See "The Open Market Plan Agreement--Restrictions on R-Net's Independence;
Financial Covenants". While a majority of the members of the Board of
Directors of R-Net will be Outside Directors, the approval of the Company,
as the sole shareowner of R-Net, will be required under New York law in
order for R-Net to make certain extraordinary transactions, amendments of
the R-Net Certificate of Incorporation and certain amendments of the R-Net
By-Laws. In addition, under the R-Net Certificate of Incorporation,
approval of the Company, as the sole shareowner of R-Net, will also be
required for
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(1) the adoption of any operating or capital budgets or financing plans or,
to the extent not provided for in a budget or plan approved by the
shareowners, the making or incurrence of any investments, capital
expenditures, indebtedness or off-balance sheet liabilities, in each case
in excess of $10 million in the aggregate in any fiscal year of R-Net, (2)
the execution of material contracts or (3) the appointment of R-Net
officers.
4. Holding Company Structure. Upon reorganization of the Company as
contemplated by the Open Market Plan Agreement, the Company will no longer
directly own any material assets other than its interest in the capital
stock of its subsidiaries, including R-Net and R-Com. In addition, as
described above, dividends from R-Net to the Company are subject to
restrictions under the Open Market Plan Agreement.
5. Potential Diversification Risk. On the Effective Date, the PSC will
cease to regulate the Company's ability to finance or expand its businesses
outside of New York State. The Company will therefore be able to make
acquisitions and investments, enter into new lines of business and
geographic areas, issue equity securities and incur long-term indebtedness
without PSC approval, subject to certain exceptions. As a result, the
Company will have greater flexibility to finance and expand its existing
businesses. Thus, upon implementation of the Open Market Plan, the Company
may be able to pursue opportunities with both greater potential profits and
greater business risk than it could currently pursue as a telephone company
subject to the authority of the PSC. While the pursuit of such
opportunities may conceivably result in increased volatility of the
Company's securities, it may also result in potentially greater returns to
the Company and its shareowners, although there is no assurance of greater
returns. There can be no assurance that any expansion of the Company's
business will be successful or, if unsuccessful, that it will not have a
direct or indirect adverse effect on the Company as a whole. It is the
current intention of the Company to engage only in telecommunication-
related businesses.
6. Royalty Dispute. While the PSC has agreed that no royalty will be
imposed by the PSC against the Company or R-Net during the Rate Period or
for any prior period, subject to limited exceptions, the PSC will not be
precluded from seeking any royalties pursuant to the Royalty Order, as it
may be modified as a result of judicial appeal, subsequent to the
expiration of the Rate Period. The Company estimated the effect of the
Royalty Order, if imposed in 1994, to be in the range of $2.0 million per
year. Under the Open Market Plan Agreement, however, the Company is
permitted to continue its litigation challenging the Royalty Order. The
Company has filed a motion with the New York State Court of Appeals seeking
leave to appeal a decision of the Appellate Division of the New York State
Supreme Court which held that the Royalty Order was valid. See "The Open
Market Plan Agreement--Royalty Dispute".
7. Overlap of Retail Services. The Open Market Plan ultimately agreed to
by the Staff, in contrast to the proposal initially filed by the Company in
the Petition, will not completely divide the Company's telephone operations
in the Rochester Market between a wholesale provider of local network
services and a retail provider of diversified telecommunication services.
Rather, upon implementation of the Open Market Plan, R-Com will have the
Company's existing customer base for only a limited number of competitive
retail services consisting of Centrex and high capacity private lines and
certain currently nonregulated services (e.g., customer premises
equipment). R-Net, while offering wholesale services to R-Com and other
telecommunication companies, will be required to provide on a retail basis
those telecommunication services which the PSC does not yet deem
competitive. To the extent R-Net provides certain services to the same
retail customers who may be served by R-Com for other services, the Company
will, in the aggregate, incur certain sales and service related expenses
that are duplicated by both R-Net and R-Com. The Company expects, however,
that as more services presently offered by R-Net become competitive, the
PSC will approve the termination of the provision of those services by R-
Net in favor of service by R-Com, which will result in a reduction in R-
Net's retail related expenses. In addition, R-Com can compete for R-Net
customers to the same extent as any other competitor.
8. Compliance Costs. Under the Open Market Plan Agreement, R-Net and its
affiliates will be obligated to furnish various periodic reports to the
Staff and the PSC to demonstrate compliance with
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the terms of the Open Market Plan Agreement, including terms designed to
ensure the fairness of transactions between R-Net and its affiliates and
the absence of discrimination of R-Net against non-affiliates. Although the
Company is currently subject to PSC reporting requirements, the obligations
under the Open Market Plan Agreement will represent an incremental cost to
the Company, but the Company does not believe such costs will be material
to the Company as a whole. These additional ongoing costs will, however, be
offset to the extent the Company is no longer required to seek PSC approval
for unregulated operations upon reorganization to a holding company
structure.
In view of the wide variety of factors considered by the Board of Directors
in connection with its evaluation of the Open Market Plan/Holding Company
Proposal, the Board of Directors did not find it practicable to, and did not,
quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination with respect to the advisability of
the Open Market Plan/Holding Company Proposal.
Regulatory Approvals
PSC approval of the Open Market Plan Agreement is a condition to the
implementation of the Open Market Plan. The PSC issued an order approving the
Open Market Plan Agreement on November 10, 1994. The PSC Order clarified and
supplemented certain terms of the Open Market Plan Agreement. The Company does
not believe, however, that the PSC Order changed, in any material respect, the
terms of the Open Market Plan Agreement.
Although approval by the Federal Communications Commission (the "FCC") is not
required to effect the Open Market Plan, the Company has sought waivers from
certain of the FCC's rules to permit greater flexibility with respect to R-
Net's tariff and billing procedures. In addition, the Company intends to apply
to the FCC for approval of the transfer of certain common carrier radio
licenses from one of its subsidiaries to R-Net in connection with the Company's
restructuring. Although the FCC may not act on these waivers and license
transfers prior to the Effective Date, the failure to obtain these waivers and
license transfers will not have a material adverse effect on R-Net or the
Company. The Company believes that the FCC will grant the requested waivers and
approve the transfer of the radio licenses to R-Net.
The Open Market Plan Amendments
As part of the Open Market Plan/Holding Company Proposal and in order to
effect the restructuring of the Company into a parent holding company, the
Board of Directors has unanimously approved the Open Market Plan Amendments
which will (1) reorganize the Company from a regulated "telephone corporation"
under the New York Transportation Corporations Law (the "Transportation
Corporations Law") to an unregulated "business corporation" under the Business
Corporation Law, (2) broaden the "purposes" clause contained in the Current
Certificate with a provision specifying as the purposes of the Company those
purposes permitted to any business corporation under the Business Corporation
Law and (3) delete the existing description of the territory in which the
Company operates as a local exchange telephone corporation in the Rochester
area.
As a result of the amendments to the Current Certificate contemplated by the
Open Market Plan/Holding Company Proposal and the other Proposals, the
Company's Certificate of Incorporation will be amended and restated
substantially as set forth in the composite form of the Restated Certificate of
Incorporation of the Company (the "Restated Certificate") appearing as Appendix
1 to this Proxy Statement. Implementation of the Open Market Plan is
conditioned upon the approval by the shareowners of the Open Market
Plan/Holding Company Proposal (including the Open Market Plan Amendments) as
well as approval by the shareowners of the Common Stock Amendment (as defined
below), the Preferred Stock Amendment (as defined below) and the Redemption
Provision Amendment (as defined below), and the filing of the Restated
Certificate with the New York Secretary of State. If the Open Market
Plan/Holding Company Proposal and each of these other Proposals are adopted by
the shareowners, the Open Market Plan Amendments will become effective upon the
filing of the Restated Certificate with the New York Secretary of State. The
Company intends to file the Restated Certificate on or prior to the Effective
Date.
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The Open Market Plan Agreement
The following is a summary of certain provisions of the Open Market Plan
Agreement, which appears as Appendix 2 to this Proxy Statement and is
incorporated herein by reference. This summary is qualified in its entirety by
reference to the Open Market Plan Agreement.
Restructuring of the Company
The Company is currently a telephone operating corporation organized under
the Transportation Corporations Law and is regulated by the PSC. The Open
Market Plan Agreement provides that the Company, which currently conducts all
of its operations (other than local exchange and access services in the
Rochester Market) through subsidiaries, will be reorganized into an unregulated
parent holding company which will not own any assets other than the stock of:
1. R-Net, a telephone and network transport corporation to be formed
immediately prior to the Effective Date, which will be regulated by the
PSC, will use the name "Rochester Telephone" (see "PROPOSAL 5--THE NAME
CHANGE AMENDMENT"), and will offer retail services to existing customers as
well as sell and market wholesale network services and other services to
retailers of telecommunication services in the Rochester Market;
2. R-Com, a corporation to be formed immediately prior to the Effective
Date, which will be a lightly regulated retail provider of
telecommunication services to residential and business customers located,
initially, in the Rochester Market;
3. Distributed Solutions, Inc., an existing unregulated subsidiary of the
Company, which will provide computer, billing and other information
processing services to the Company's affiliates and to third parties
("DSI"); and
4. the Company's other existing subsidiaries, including those that
provide local exchange services outside the Rochester Market as well as
telecommunication equipment and services in the Rochester Market and other
markets.
The resulting holding company, which will be organized as a New York business
corporation, will be entitled, among other actions, to issue securities and
effect acquisitions or enter new lines of business without obtaining the
approval of the PSC, subject to certain exceptions. The corporate structure of
the Company as of the date hereof and as contemplated upon the effectiveness of
the Open Market Plan is illustrated on Appendices 3 and 4 to this Proxy
Statement, respectively.
To restructure the Company, on the Effective Date, the Company will transfer
its assets and liabilities relating to its telephone operations in the
Rochester Market as follows:
1. to R-Net, (a) the Company's public utility franchises and customer
base, subject to limited exceptions as provided in the Open Market Plan
Agreement, (b) the Company's trademarks relating to the "Rochester
Telephone" name and (c) all of the Company's business, including its
assets, accounts, personnel and liabilities, other than those assets,
accounts, personnel and liabilities that are transferred to R-Com, DSI or
other subsidiaries or those which are necessary for the Company to provide
certain holding company services, consisting of corporate management,
legal, tax, corporate finance, corporate planning, business development,
treasury, investor relations, and internal audit; and
2. to R-Com, all of the stand-alone assets and personnel necessary to
serve customers who acquire the following services from the Company: (a)
Centrex; (b) private line service, where the customer is taking high
capacity service (1.544 megabits per second and above) or a combination of
high capacity and lower capacity service; and (c) voice mail, subject to R-
Com and the Staff reaching agreement on a price to be paid by R-Com to R-
Net for the voice mail assets as provided under the Open Market Plan
Agreement.
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In addition, the Company may also elect to transfer the following services
(the "Additional R-Com Services") to R-Com on the Effective Date: (a) terminal
equipment sales, services and leasing; (b) packet switching (network
concentrator which performs protocol conversion functions); (c) construction,
removal and maintenance on customer premises of customer-owned fiber optic
equipment; (d) audiotext equipment; (e) operator services for RCI Long
Distance, Inc.; (f) home video text equipment; (g) sales, services and leasing
of digital data equipment at customer premises; (h) facsimile services for
hotel guests; (i) enhanced facsimile services such as fax on demand, guaranteed
fax and broadcast fax; (j) equipment relating to Signalling System 7 Services;
(k) telephone answering service; and (l) advanced communications services
related to Centrex.
The transfer of assets and liabilities by the Company to R-Net and R-Com
represents one of the transactions contemplated by the Open Market Plan
Agreement. Although shareowners are being asked to approve such transfer by
virtue of their approval of the Open Market Plan Transactions, approval of such
transfer by shareowners or by any other holder of securities of the Company is
not required either under New York law or under the terms of the Open Market
Plan Agreement or of any other contract or agreement to which the Company is a
party.
Service Offerings by R-Net
R-Net will, subject to the ongoing authority of the PSC, provide the retail
service offerings in the Rochester Market provided by the Company as of the
date of the Open Market Plan Agreement with the exception of the services that
are now considered to be competitive by the PSC. These competitive services,
consisting principally of Centrex, private line service and voice mail, will be
provided by R-Com. In addition, to such extent as may be reasonably practical
and upon a bona fide request, R-Net will unbundle and offer the services or
network elements available from its network facilities, on a tariff basis, for
wholesale purchase by R-Com, by other carriers certified by the PSC to offer
telephone service or by other bona fide service providers. If R-Net declines to
make the service or network elements available, it must indicate its reasons
for that decision. Either R-Net or the requesting party may refer any dispute
to the PSC. As described in more detail below, R-Net will also (1) provide
retail services until such services are considered competitive by the PSC, at
which time they may be transferred to R-Com, and (2) offer White and Yellow
pages directories for the Rochester Market.
The Open Market Plan Agreement contemplates that as R-Net modifies and
expands its network, other services or network elements will be available for
resale by R-Com and by other certified carriers and other bona fide service
providers. R-Net will give notice to all certified carriers and bona fide
service providers at the same time, at least three months in advance (if
possible), of the availability of any new service or network elements.
Service Offerings by R-Com
R-Com is designed to operate as a retail provider of integrated
communications services, buying network access from R-Net or other carriers and
packaging these services with R-Com's own and others' product lines such as
voice mail, data services, long distance and wireless. Neither the rates
charged by R-Com nor its rate of return will be regulated, although R-Com will
be required to file tariffs containing its rates with the PSC. R-Com will be
permitted to sell, on a bundled basis, services and/or network elements that it
purchases from R-Net along with competitive services, provided, however, that
the bundled price shall be at least equal to the sum of R-Net's tariff price to
R-Com for such services and/or elements plus R-Com's incremental cost of the
competitive services.
Initially, however, R-Com's customer base will be only those customers for
the retail services transferred to R-Com on the Effective Date, consisting of
Centrex, private line services, voice mail and any Additional R-Com Services.
Customers purchasing any services other than those transferred to R-Com will be
served by R-Net.
Thereafter, R-Com and other providers may compete for customers from R-Net's
customer base through direct marketing efforts. R-Com may compete for new
customers or for R-Net's customers by reselling
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services purchased from R-Net or from another vendor or by selling services
provided through R-Com's own facilities. In the future, R-Com will receive R-
Net's customer base with respect to additional services that are deemed to be
competitive by the PSC and are transferred to R-Com as described under
"Transfer of Competitive Services from R-Net to R-Com" below or are developed
by R-Com. While R-Com's services will initially be limited to customers in the
Rochester Market, the Company anticipates that R-Com may also eventually offer
its services outside the Rochester Market.
Transfer of Competitive Services from R-Net to R-Com
At any time that R-Net or any interested person or entity believes that the
market for a particular regulated good or service is competitive, it may apply
to the PSC for authorization for R-Net to cease offering that good or service
at retail and for R-Com to begin providing that good or service. The PSC may
approve the proposed transfer if it finds that the transfer will be consistent
with the public interest. Any proceeding to consider the transfer of a good or
service from R-Net to R-Com will also provide a forum for the PSC to set a
transfer price. If R-Com disagrees with the transfer price set in the
proceeding, it can elect not to accept the transfer. Under such circumstances,
R-Net will continue to provide the good or service R-Com declined to accept.
Directories
R-Net will offer White and Yellow page directories for the Rochester Market.
R-Net will include, at no charge and on a non-discriminatory basis, (1) in its
residential and business White pages, the listing of all customers purchasing
basic telephone services within the Rochester Market (except those who choose
not to have their listing published) and (2) in its Yellow pages, the listing
of all business customers served within the Rochester Market, in each case no
matter which carrier serves those customers. R-Net may not transfer these
directory operations to any of its affiliates, including R-Com, absent PSC
approval. Nonetheless, an R-Net affiliate may provide these directory
operations if any R-Net data and/or databases used by the affiliate to provide
such directories are available to all other providers on the same terms and
conditions, under tariff. R-Net may petition the PSC for permission to transfer
its Yellow page operations, or any portion thereof, to a third party upon such
terms and conditions as the PSC may at that time impose. In the future, both R-
Net and R-Com may offer electronic directory services.
Restrictions on R-Net's Independence; Financial Covenants
The Staff's concerns about the ability of R-Net to potentially discriminate
in favor of its affiliates in the provision of network facilities and about
ensuring that R-Net will not lack the financial strength to provide quality
service, together with the Staff's mandate to promote the public interest, led
the Staff to recommend the requirements in the Open Market Plan Agreement
described above under "Certain Considerations".
Rate Stabilization Plan
The Open Market Plan Agreement provides for a rate stabilization plan for R-
Net containing aggregate rate reductions of $21 million over a seven year
period, subject to termination by either party after five years as described
below. R-Net's annual rates will be reduced by $11 million on January 1, 1995,
which includes the $9.5 million in revenue requirement reductions for 1994
which the Company had already accepted under preliminary agreements with the
PSC. This will be followed by an additional rate reduction of $2.5 million on
January 1, 1996 and by $1.5 million each succeeding January 1 through and
including January 1, 2001, assuming, in each case, that the Effective Date
occurs on or prior to January 1, 1995 and that the Rate Stabilization Plan has
not been terminated as described below. Any new regulated service to be offered
by R-Net will continue to be subject to tariff review by the PSC. During the
Rate Period, R-Net may not defer additional costs or benefits incurred (except
with the permission of the PSC) nor may it file for any rate relief to be
effective during the Rate Period.
The Rate Stabilization Plan precludes R-Net from increasing basic residential
and business telephone service rates during the Rate Period. The rate
reductions will eliminate the touchtone charge for residential customers by the
end of 1994 and for business customers by the end of 1996. The balance of the
rate decreases will reduce usage charges, including local measured service
during peak periods and long distance carrier
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access charges. Discretionary and competitive services may, however, be priced
within flexible pricing ranges established prior to the Effective Date in the
Company's tariff. Aggregate additional revenues generated from price increases
to existing discretionary service rates may not, however, exceed $2 million per
year during the term of the Open Market Plan Agreement. A schedule of the rate
reductions and corresponding rates is attached as Appendix 5 to this Proxy
Statement.
In exchange for the rate reductions, the PSC will neither regulate R-Net's
rate of return during the Rate Period nor otherwise link R-Net's earnings to
any specified rate of return. Consequently, although R-Net's maximum rates will
be fixed during the Rate Period in accordance with a schedule that provides for
$21 million of rate reductions, R-Net will retain all earnings during the Rate
Period, subject to certain early termination adjustments.
During the Rate Period, depreciation of R-Net's assets will be increased by
an aggregate of $17 million. The timing of the increased depreciation will be
at R-Net's discretion except that, by the end of the first year, the amount
shall be at least $5 million and, by the end of the fifth year, the cumulative
amount shall be at least $15 million.
Termination of the Rate Stabilization Plan
Although the Rate Stabilization Plan is scheduled to expire on December 31,
2001, it may be terminated by either R-Net or the PSC upon the filing of a rate
proceeding seeking permanent or temporary rates to be effective on January 1,
2000. In the event that R-Net terminates the Rate Stabilization Plan, it will
create a deferred account in the amount of $4.5 million plus associated
carrying charges for disposition for the benefit of R-Net's customers by the
PSC. In the event that either R-Net or the PSC terminates the Rate
Stabilization Plan, R-Net will ensure that the $17 million of increased
depreciation described above is credited in full by December 31, 1999. If the
Rate Stabilization Plan has not been terminated effective as of January 1,
2000, R-Net's maximum rates will continue to remain in effect until January 1,
2002 as provided in the Rate Stabilization Plan. Even if the Rate Stabilization
Plan is terminated, however, the other terms of the Open Market Plan Agreement
will remain in effect unless specifically modified by the PSC, except that the
PSC may not modify any of the provisions relating to the restructuring of the
Company into an unregulated holding company.
Royalty Dispute
Under the Open Market Plan Agreement, the PSC, which previously issued the
Royalty Order, will not impute a royalty on either the Company or R-Net during
the Rate Period or for any prior period, subject to limited exceptions. Upon
the termination of the Rate Period, however, the PSC may impute a royalty for
the period beginning on the termination date, subject to the outcome of any
litigation regarding the royalty. If the PSC seeks to impute a prospective
royalty, it may consider the investments made by the Company in deregulated
telecommunication companies in existence on the termination date,
notwithstanding when those investments were first made. The Company is not,
however, precluded by the terms of the Open Market Plan Agreement from pursuing
the litigation it instituted to challenge the Royalty Order. On June 30, 1994,
the Appellate Division of the New York State Supreme Court ruled that the
Royalty Order was valid. The Company has filed a motion with the New York State
Court of Appeals seeking leave to appeal this decision on various grounds and
has also filed a notice of appeal on constitutional grounds.
Restrictions on Affiliate Transactions
The Open Market Plan Agreement, consistent with the Staff's objective of
preventing R-Net from favoring the Company to the disadvantage of R-Net's or
the Company's competitors, provides that any transaction between R-Net and the
Company, or between R-Net and any of its affiliates, will be conducted at arm's
length. Transactions between R-Net and its affiliates are generally limited to
tariffed purchases and sales subject to the exception that R-Net may engage in
non-tariffed purchases from its affiliates if:
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1. the transactions involve goods or services relating to the Company's
telephone operations in the Rochester Market that were, prior to the
Effective Date, provided to the Company on a non-tariffed basis; and
2. the aggregate of such transactions does not exceed $4 million per year
(plus the Company's actual 1993 allocated costs for mutually beneficial
services and for services provided within the Company that will become
holding company services to be provided by the Company after the Effective
Date) for all of R-Net's non-tariffed affiliate transactions except
transactions with DSI.
R-Net's annual non-tariffed transactions with DSI may not exceed the
Company's actual 1993 information services expenses. The Open Market Plan
Agreement also imposes similar restrictions on transactions between the New
York regulated telephone companies controlled by the Company (other than R-Net)
and the Company and its affiliates. These restrictions are not dissimilar from
restrictions that the Staff has sought in connection with agreements with other
holding companies that have an interest in New York telephone corporations.
R-Net's Relationship with Other Carriers
The Open Market Plan Agreement contains certain provisions to ensure that
third party carriers can use R-Net's network on a nondiscriminatory basis. The
Open Market Plan Agreement requires R-Net to interconnect its local network
with networks of certificated carriers so as to allow completely transparent
calling among customers of different providers. In that connection, all
competing providers of local exchange services will have the same access to R-
Net's network functionalities, services and data bases, upon the same terms and
conditions as R-Net provides such functionalities and data bases to any
affiliate or other entity.
R-Net will pay and receive reciprocal compensation for the exchange of local
message traffic between it and other carriers offering simultaneous local two-
way service over their own networks within the Rochester Market. The amount of
this reciprocal compensation will, other than with respect to local traffic,
equal R-Net's then applicable intrastate access charges. If a certificated
carrier and R-Net are interconnected as contemplated by the Open Market Plan
Agreement, to the extent that the exchange of local traffic is "in balance",
each terminating carrier will be compensated for the termination of that
traffic on its network at R-Net's tariff rate for local switching, but each
terminating carrier will be responsible for the provision of and payment for
any local transport that is required for completion of calls. The traffic will
be deemed to be "in balance" if the percentage difference between R-Net's
originating minutes of local use that terminate on another certificated
carrier's network and R-Net's terminating minutes of local use that originate
on that carrier's network is equal to or less than 10% of the smaller of the
two values.
Customers' current local telephone numbers will remain the same if the
customer retains the same residence, no matter which telephone reseller that
customer may choose. In that connection, all certificated facilities-based
local exchange carriers offering switched services will be equally entitled to
the assignment of NXX central office codes and inclusion in the Local Exchange
Routing Guide as independent carriers. If a customer changes network carriers,
however, the customer's telephone number will be retained only at the election
of the competing carrier. R-Net has agreed to implement full number portability
(including the ability for a telephone number to be retained by a customer who
moves anywhere within the Rochester Market) when it is technically feasible,
commercially available and economically practical.
Reservation of PSC Authority
The Open Market Plan Agreement provides that the PSC reserves the authority
to modify the Open Market Plan Agreement (except as to the restructuring of the
Company into an unregulated holding company) if, in the opinion of the PSC,
unforeseen circumstances have such a substantial impact upon R-Net's financial
performance as to render the Open Market Plan Agreement unreasonable,
unnecessary or insufficient for the provision of safe and adequate service. In
addition, the PSC Order explicitly recognized the PSC's continuing authority to
implement further revisions with regard to competitive pricing as it finds
necessary and justified.
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Certain Federal Income Tax Consequences
The transactions contemplated by the Open Market Plan Agreement, including
the restructuring of the Company as contemplated thereby, will have no federal
income tax effect to the Company or its shareowners.
Accounting Treatment
Management anticipates that the implementation of the Open Market Plan will
have no material effect on the consolidated accounts of the Company. The assets
and liabilities to be transferred on the Effective Date by the Company to R-Net
or R-Com will be recorded on their respective books at the then book value of
such assets and liabilities. The Company's ownership of all the capital stock
of each of these subsidiaries will be accounted for on the Company's books at
the net book value of the assets and liabilities transferred to each
subsidiary. Management anticipates that R-Net will adhere to the provisions of
Financial Accounting Standards Board Statement No. 71, "Accounting for the
Effects of Certain Types of Regulation".
Representatives of Price Waterhouse, the Company's independent accountants,
will be present at the Special Meeting to make a statement, if they wish, and
to respond to appropriate questions from shareowners.
PROPOSALS 2 AND 3--THE COMMON STOCK AMENDMENT AND THE PREFERRED STOCK AMENDMENT
The Board of Directors has unanimously approved and declared advisable
amendments to the Current Certificate (1) to increase the number of authorized
shares of Common Stock from One Hundred Million (100,000,000) shares of Common
Stock to Three Hundred Million (300,000,000) shares of Common Stock (the
"Common Stock Amendment") and (2) to authorize Four Million (4,000,000) shares
of a new class of preferred stock (the "Class A Preferred Stock") of the par
value of $100.00 per share which would be designated as Class A Preferred Stock
(the "Preferred Stock Amendment"). The Class A Preferred Stock will rank junior
to the Cumulative Preferred Stock as to dividends or distributions, and upon
the liquidation, dissolution or winding up of the Company. The Board of
Directors recommends that the shareowners approve both the Common Stock
Amendment and the Preferred Stock Amendment.
The shareowners are being asked to approve the Common Stock Amendment and the
Preferred Stock Amendment substantially in the form included in the Restated
Certificate appearing as Appendix 1 to this Proxy Statement. Implementation of
the Open Market Plan is conditioned upon the approval by the shareowners of the
Open Market Plan/Holding Company Proposal, the Common Stock Amendment, the
Preferred Stock Amendment and the Redemption Provision Amendment, and the
filing of the Restated Certificate with the New York Secretary of State. If the
Common Stock Amendment, the Preferred Stock Amendment and each of the other
Proposals are adopted by the shareowners, the Common Stock Amendment and the
Preferred Stock Amendment will become effective upon the filing of the Restated
Certificate with the New York Secretary of State. The Company intends to file
the Restated Certificate on or prior to the Effective Date.
Approval of the Common Stock Amendment or the Preferred Stock Amendment by
the affirmative vote of a majority of the votes entitled to be cast by the
holders of all the outstanding shares of Common Stock shall be deemed also to
constitute approval of a resolution authorizing the Board of Directors, at any
time prior to the filing of the Restated Certificate with the New York
Secretary of State, to abandon such proposed amendment without further action
by the shareowners, in connection with the termination of the Open Market Plan
Agreement or otherwise, notwithstanding approval of such amendment by the
shareowners. The following is a summary of the Common Stock Amendment and the
Preferred Stock Amendment which summary is qualified in its entirety by
reference to the Restated Certificate.
As required by the terms of the outstanding Cumulative Preferred Stock
contained in the Current Certificate (which terms would not be changed by the
adoption of the Preferred Stock Amendment), the Company is separately
soliciting the approval of the holders of such stock for the authorization of
the
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Preferred Stock Amendment. If such holders do not approve the authorization of
the Class A Preferred Stock, the Class A Preferred Stock shall not be
authorized. Because the Open Market Plan/Holding Company Proposal, the Common
Stock Amendment, the Redemption Provision Amendment and the Name Change
Amendment are not contingent on the holders of the Cumulative Preferred Stock
approving the authorization of the Class A Preferred Stock, such Proposals will
not be affected if such holders do not approve the authorization of the Class A
Preferred Stock.
Reasons for and Effects of the Common Stock Amendment and the Preferred Stock
Amendment
The Board of Directors believes that the current number of shares of capital
stock available for issuance is not sufficient to meet the Company's future
needs. Of the 100,000,000 authorized shares of Common Stock, approximately 73
million shares are currently outstanding and of the 850,000 authorized shares
of Cumulative Preferred Stock, 200,000 shares are currently outstanding. The
decision of the Board of Directors to seek greater flexibility to issue shares
of capital stock is consistent with the ability of the Company to issue shares
without PSC approval if the Open Market Plan/Holding Company Proposal is
approved. The Company believes that it is in the best interests of the Company
and its shareowners to authorize additional shares of capital stock, thereby
providing the Board of Directors with the flexibility to authorize the issuance
of shares for financing the Company's businesses, acquiring other businesses
and forming strategic partnerships and alliances. The Board of Directors
believes that this flexibility is particularly important because the Company's
financial flexibility and growth potential will be enhanced upon implementation
of the Open Market Plan. In addition, the increased number of authorized shares
of Common Stock may be used for stock dividends, stock splits, director and
employee stock option plans and other employee benefit plans.
The adoption of the Common Stock Amendment or the Preferred Stock Amendment
will not result in the issuance of any shares of Common Stock or Class A
Preferred Stock. Approval of the Common Stock Amendment or the Preferred Stock
Amendment, however, will permit the Board of Directors to issue additional
shares of Common Stock or Class A Preferred Stock, respectively, without
further approval of shareowners and upon such terms and at such times as it may
determine unless shareowner approval is required by the Restated Certificate or
by applicable law or stock exchange requirements. Although the Company is
continually reviewing various transactions that could result in the issuance of
shares of the Company's capital stock, the Board of Directors has no present
plans to issue additional shares of capital stock except for shares of Common
Stock as may be required in connection with (1) the exercise of existing
outstanding stock options, (2) the conversion of outstanding convertible
securities, (3) the acquisition by the Company of Minnesota Cellular Telephone
Company or (4) other acquisitions which may be publicly announced after the
date of this Proxy Statement. Holders of the Company's securities have no
preemptive rights to subscribe to the Company's securities.
The additional flexibility described below that would be afforded to the
Company by the ability to issue the Class A Preferred Stock could render a
change in control of the Company more difficult if the Board of Directors
causes such shares to be issued. In the event of a proposed merger, tender
offer or other attempt to gain control of the Company which the Board of
Directors does not approve, it would be possible for the Board of Directors to
authorize the issuance of a series of the Class A Preferred Stock with rights
and preferences which could impede the completion of such transaction. The
Board of Directors could authorize holders of the Class A Preferred Stock to
vote, either separately as a class or with the holders of Common Stock, on any
merger, sale or exchange of assets by the Company or other extraordinary
corporate transactions. Since the issuance of the Class A Preferred Stock could
be used to dilute the stock ownership of a person or entity seeking to obtain
control of the Company, shares of the Class A Preferred Stock could be
privately placed with purchasers who might ally themselves with the Board of
Directors to oppose a hostile takeover bid.
The issuance of additional shares of Common Stock could also be used to
discourage an unsolicited takeover proposal which the Board of Directors
believes is not in the best interests of the shareowners. For example, shares
of Common Stock could be privately placed with purchasers who would be likely
to support the Board of Directors in opposing a hostile takeover bid. Although
the Board of Directors is required to
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make any determination to issue such stock based on its judgment as to the best
interests of the shareowners of the Company, the Board of Directors could act
in a manner that would discourage an acquisition attempt or other transaction
that some, or a majority, of the shareowners nevertheless might believe to be
in their best interests or in which shareowners might receive a premium for
their stock over the then market price of their stock. In addition, the
issuance of such shares might make it more difficult or discourage attempts to
remove incumbent management. Moreover, the issuance of such shares might have a
dilutive effect on earnings per share and on the voting rights of the existing
shareowners. The Board of Directors does not at present intend to seek
shareowner approval prior to any issuance of authorized capital stock, unless
otherwise required by law, the Restated Certificate or the requirements of any
applicable stock exchange.
The Common Stock Amendment
As of November 4, 1994, there were 73,160,833 shares of Common Stock
outstanding. An additional 2,984,187 shares of Common Stock were reserved for
issuance under the Company's employee stock option plans and 251,483 shares for
conversion of the Company's 10.46% Convertible Debentures due 2008. The number
of outstanding shares of Common Stock was recently increased by approximately
36.6 million shares as a result of the Company's 2-for-1 stock split paid on
April 29, 1994. As a result of the stock split, the number of authorized,
unissued and unreserved shares of Common Stock has been significantly reduced
to fewer than 27 million shares. Accordingly, the Company could not engage in
one or more transactions requiring the issuance of an aggregate number of
shares of Common Stock greater than 27 million without obtaining shareowner
approval for the authorization of the excess at the time. This constraint may
reduce the Company's flexibility to continue the acquisition and
diversification efforts necessary for long-term growth.
The Preferred Stock Amendment
If the Preferred Stock Amendment is approved, the Class A Preferred Stock
could be issued by the Board of Directors, from time to time, without the
necessity of further action or authorization by the Company's shareowners
(unless required by the Restated Certificate or by applicable law or stock
exchange requirements), in one or more series and with such designations,
relative rights, preferences and limitations as the Board of Directors may, in
its discretion, determine (subject to applicable law and to the rights of the
holders of Cumulative Preferred Stock described below), including, but not
limited to, the relative rights, preferences and limitations among series of
Class A Preferred Stock, and:
1. the designation of such series and the number of shares to constitute
such series;
2. the dividends, if any, for such series, provided, however, that
dividends or other distributions shall not be declared or paid on any
shares of Class A Preferred Stock unless (a) dividends have been paid for
all past quarterly dividend periods on all outstanding shares of Cumulative
Preferred Stock at their respective annual dividend rates and (b) full
dividends on all outstanding shares of Cumulative Preferred Stock for the
current quarterly dividend period shall have been paid, or declared and set
apart for payment;
3. the right, if any, of the Company to redeem shares of such series and
the terms and conditions of such redemption;
4. the amount which the holders of the shares of such series shall be
entitled to receive in case of a liquidation, dissolution or winding up of
the Company, provided, however, that such holders (a) shall not be entitled
to receive any amount unless the holders of the Cumulative Preferred Stock
shall have been paid the Liquidation Preference (as defined below) and (b)
shall be entitled to receive not less than $100.00 per share before the
holders of shares of Common Stock or any other class of stock ranking
junior to the Preferred Stock shall be entitled to receive any amount;
5. the voting rights, if any, of shares of such series;
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6. the sinking fund provisions, if any, of shares of such series, and the
terms and conditions thereof; and
7. the conversion or exchange privileges, if any, of shares of such
series, and the terms and conditions of conversion or exchange.
Although many of the foregoing terms could have been provided for by the
Board of Directors in connection with the issuance of shares of presently
authorized Cumulative Preferred Stock, the provisions in the Current
Certificate relating to the Cumulative Preferred Stock (which provisions will
remain in effect after the filing of the Restated Certificate) limit the
flexibility of the Board of Directors to designate the terms of Cumulative
Preferred Stock in a number of respects. For instance, all series of Cumulative
Preferred Stock must share ratably:
1. in dividends based on their respective dividend rates, which dividends
must be cumulative; and
2. in the distribution of the Company's assets upon a liquidation of the
Company based on their respective redemption prices plus accrued and unpaid
dividends, in the case of a voluntary liquidation, or based on their
respective par values plus accrued and unpaid dividends, in the case of an
involuntary liquidation (the "Liquidation Preference").
All series of Cumulative Preferred Stock are also redeemable in accordance
with the notice and other redemption provisions set forth in the Current
Certificate for an amount equal to the sum of their respective par values,
accrued and unpaid dividends, and any premium which shall have been fixed by
the Board of Directors prior to the issuance of such series. In addition, the
holders of any series of Cumulative Preferred Stock are generally not entitled
to voting rights except (1) as provided by law, (2) in connection with the
issuance of securities of the Company and (3) to elect a majority of the Board
of Directors if four quarterly dividends on the Cumulative Preferred Stock are
in arrears.
In connection with the issuance of securities, the affirmative vote of a
specified percentage of the holders of the Cumulative Preferred Stock is
required to:
1. increase the authorized amount of the Cumulative Preferred Stock;
2. authorize a class of stock having preferential rights equal or
superior to the Cumulative Preferred Stock; or
3. issue any shares of Cumulative Preferred Stock or any shares of stock
having preferential rights equal or superior to the Cumulative Preferred
Stock without compliance with certain requirements as to earnings.
The Class A Preferred Stock would provide the Board of Directors with greater
flexibility than does the Cumulative Preferred Stock to fix, for a particular
series of stock, terms relating to dividend, liquidation and voting rights and
to the redemption of shares.
The actual effect of the authorization of the Class A Preferred Stock upon
the rights of holders of Common Stock cannot be stated until the Board of
Directors determines the respective rights of the holders of one or more series
of the Class A Preferred Stock. Such effects, however, might include:
1. restrictions on dividends on Common Stock if dividends on the Class A
Preferred Stock are in arrears;
2. dilution of the voting power of the Common Stock; and
3. the holders of Common Stock not being entitled to share in the
Company's assets upon liquidation until satisfaction of any liquidation
preference granted to the Class A Preferred Stock.
The terms of the currently authorized Cumulative Preferred Stock could have
certain similar effects upon the rights of the holders of Common Stock. As
described above, the terms of the Cumulative Preferred Stock
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restrict dividends on Common Stock if cumulative dividends on the Cumulative
Preferred Stock are in arrears and provide for a liquidation preference for the
holders of Cumulative Preferred Stock. Under the Current Certificate, however,
holders of Common Stock have exclusive voting rights, subject to the limited
voting rights of holders of Cumulative Preferred Stock described above, and
therefore the issuance of Cumulative Preferred Stock would not generally be
dilutive to the holders of Common Stock.
Existing Provisions in the Current Certificate and By-Laws That May Be
Considered Anti-Takeover Provisions
Under the Current Certificate, a special meeting of shareowners may be called
only by the Board of Directors. This provision makes it more difficult for
shareowners to take actions opposed by the Board of Directors. In addition, the
By-Laws provide that shareowners seeking to bring business before a meeting of
shareowners or to nominate candidates for election as directors must provide
timely written notice thereof to the Company. To be timely, a shareowner's
notice must generally be received by the Corporate Secretary of the Company at
the principal executive offices of the Company (1) with respect to an annual
meeting, not less than 60 days nor more than 90 days prior to the anniversary
of the immediately preceding annual meeting; provided, however, that if the
date of the annual meeting is more than 30 days earlier or more than 60 days
later than such 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 public announcement of the date of such meeting is
first made, and (2) with respect to a special meeting of shareowners 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 of the date of such meeting is first made. The By-Laws also
specify certain requirements for a shareowner's notice to be in proper written
form. These By-Law provisions are not applicable to proposals and nominations
by the Board of Directors. By regulating proposals and nominations from the
floor at any meeting of shareowners, the advance notice requirements afford
management the opportunity to consider the appropriateness of any proposals and
the qualifications of any non-management nominees and, to the extent deemed
necessary or desirable by management, to inform the shareowners about the
appropriateness or qualifications in the Company's proxy statement for the
meeting.
Other than the amendments to the Certificate which would be effected by the
filing of the Restated Certificate, management does not presently intend to
propose for shareowner approval any other amendments to the Restated
Certificate which may discourage tender offers or takeover attempts.
THE BOARD OF DIRECTORS BELIEVES THAT THE COMMON STOCK AMENDMENT AND THE
PREFERRED STOCK AMENDMENT ARE IN THE BEST INTERESTS OF THE COMPANY AND ITS
SHAREOWNERS AND HAS UNANIMOUSLY APPROVED THESE AMENDMENTS AND UNANIMOUSLY
RECOMMENDS THAT THE SHAREOWNERS OF THE COMPANY VOTE "FOR" APPROVAL OF THE
COMMON STOCK AMENDMENT, DESIGNATED AS PROPOSAL 2 ON YOUR PROXY CARD, AND "FOR"
APPROVAL OF THE PREFERRED STOCK AMENDMENT, DESIGNATED AS PROPOSAL 3 ON YOUR
PROXY CARD.
PROPOSAL 4--THE REDEMPTION PROVISION AMENDMENT
The Board of Directors has unanimously approved and declared advisable
amendments (the "Redemption Provision Amendment") to the Current Certificate to
allow the Company to redeem outstanding shares of Common Stock to the extent
necessary to prevent the loss or secure the renewal or reinstatement of any
license or franchise from any governmental agency held by the Company or any of
its subsidiaries. The Board of Directors recommends that the shareowners
approve the Redemption Provision Amendment.
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The shareowners are being asked to approve the Redemption Provision Amendment
substantially in the form included in the Restated Certificate appearing as
Appendix 1 to this Proxy Statement. Implementation of the Open Market Plan is
conditioned upon the approval by the shareowners of the Open Market
Plan/Holding Company Proposal, the Common Stock Amendment, the Preferred Stock
Amendment and the Redemption Provision Amendment, and the filing of the
Restated Certificate with the New York Secretary of State. If the Redemption
Provision Amendment and each of these other Proposals are adopted by the
shareowners, the Redemption Provision Amendment will become effective upon the
filing of the Restated Certificate with the New York Secretary of State. The
Company intends to file the Restated Certificate on or prior to the Effective
Date.
Approval of the Redemption Provision Amendment by the affirmative vote of a
majority of the votes entitled to be cast by the holders of all the outstanding
shares of Common Stock shall be deemed also to constitute approval of a
resolution authorizing the Board of Directors, at any time prior to the filing
of the Restated Certificate with the New York Secretary of State, to abandon
such proposed amendments without further action by the shareowners, in
connection with the termination of the Open Market Plan Agreement or otherwise,
notwithstanding approval of the Redemption Provision Amendment by the
shareowners. The following is a summary of the Redemption Provision Amendment
which summary is qualified in its entirety by reference to the Restated
Certificate.
Reasons for and Effects of the Redemption Provision Amendment
The Redemption Provision Amendment is being proposed in order to assure that
the Company will be able to comply with the foreign ownership provisions
contained in Section 310(b) of the Communications Act of 1934, as amended, or
any successor thereto ("Section 310(b)"). The Redemption Provision Amendment
could be used, however, in other circumstances if necessary to prevent the loss
of any governmental license or franchise. Section 310(b) currently provides
that, absent an FCC order expressly permitting a higher level of foreign
ownership, if more than 25% of the Company's capital stock is owned of record
or voted by Non-U.S. Persons or Entities (as defined below) then the FCC may
revoke certain licenses, some of which may be material to the business of the
Company and its subsidiaries. If at any time following the filing of the
Restated Certificate with the New York Secretary of State the percentage of the
Company's outstanding capital stock owned by Non-U.S. Persons or Entities were
to exceed 25% or such greater percentage as may be set forth in an FCC order,
under the Redemption Provision Amendment the Company could redeem shares of the
Company's capital stock held by Non-U.S. Persons or Entities in the manner and
at the redemption prices described below. As used herein, "Non-U.S. Persons or
Entities" generally means any foreign government or the representative thereof,
any person who is not a citizen of the United States or the representative of
any such person or any corporation organized under the laws of any foreign
country. Other than FCC licenses, the Company is not aware of any governmental
license or franchise now possessed by it or any of its subsidiaries which
prescribes particular eligibility requirements for the Company's shareowners
and which would give rise to the right of redemption under this provision. To
the extent the Redemption Provision Amendment were used to redeem shares of
Common Stock held by a Disqualified Holder (as defined below) who was seeking
to acquire control of the Company, the Redemption Provision Amendment could
impede a change of control of the Company by such Disqualified Holder.
Description of the Redemption Provision Amendment
If adopted, the Redemption Provision Amendment will provide that outstanding
shares of Common Stock held by Disqualified Holders may be redeemed by the
Company to the extent necessary, in the judgment of the Board of Directors, to
prevent the loss or secure the renewal or reinstatement of any license or
franchise from any governmental agency held by the Company or any of its
subsidiaries to conduct any portion of the business of the Company or any of
its subsidiaries if that license or franchise is conditioned upon some or all
of the holders of the stock of the Company possessing prescribed
qualifications. "Disqualified Holder" is defined in the Restated Certificate to
mean any holder of shares of Common Stock of the Company whose
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continued holding of such stock, either individually or taken together with the
holding of shares of stock of the Company by any other holder or holders of
shares of stock of the Company, may, in the judgment of the Board of Directors,
result in the loss of, or the failure to secure the renewal or reinstatement
of, any license or franchise from any governmental agency held by the Company
or any of its subsidiaries to conduct any portion of the business of the
Company or any of its subsidiaries.
Subject to any additional or different rights of a particular Disqualified
Holder or of the Company under any contract or arrangement between such
Disqualified Holder and the Company,
1. the redemption price of any shares so redeemed will equal the then
current market value of such shares (based on the average of the daily
closing prices over the twenty day trading period commencing on the twenty-
second trading day prior to the date on which notice of redemption is given
or, if such notice has been waived, the date that is ten days prior to the
applicable redemption date), provided that the redemption price payable to
any Disqualified Holder who purchased such shares after November 18, 1994
and within one year of the redemption date will not (unless otherwise
determined by the Board of Directors) exceed the purchase price paid by
such Disqualified Holder for such shares;
2. the redemption price may be paid in cash, debt or equity securities of
the Company or any other corporation or any combination thereof
("Redemption Securities");
3. any Redemption Securities will have such terms and conditions which,
together with any cash to be paid as part of the redemption price, in the
opinion of any nationally recognized investment banking firm selected by
the Board of Directors, has a value, at the time notice of redemption is
given (or, if such notice has been waived, the date that is ten days prior
to the applicable redemption date), at least equal to the applicable
redemption price; and
4. if less than all the shares held by Disqualified Holders are to be
redeemed, the shares to be redeemed will be selected in a manner determined
by the Board of Directors which may include selection first of the most
recently purchased shares, selection by lot or selection in any other
manner determined by the Board of Directors to be equitable.
At least ten days' written notice of the redemption date must be given to the
record holders of the shares selected to be redeemed (unless waived in writing
by any such record holder). The redemption date, however, may be the date on
which written notice is given to record holders if the cash or Redemption
Securities necessary to effect the redemption shall have been deposited in
trust for the benefit of such record holders and subject to immediate
withdrawal by them upon surrender of the stock certificates for their shares to
be redeemed.
The adoption of the Redemption Provision Amendment will not require the Board
of Directors to redeem stock even if the failure to effect such redemption
would result in a loss of a governmental license or franchise. If a license or
franchise would be lost because of the ineligibility of any of the Company's
shareowners in connection with a change of control of the Company or otherwise,
the Board of Directors would consider, among other things, the importance of
the license or franchise to the Company's business and the amount and value of
any stock required to be redeemed to avoid such loss in determining whether to
effect redemption under the foregoing provisions as well as such other factors
that the Board of Directors believed should properly be considered.
THE BOARD OF DIRECTORS BELIEVES THAT THE REDEMPTION PROVISION AMENDMENT IS IN
THE BEST INTERESTS OF THE COMPANY AND ITS SHAREOWNERS AND HAS UNANIMOUSLY
APPROVED THE REDEMPTION PROVISION AMENDMENT AND UNANIMOUSLY RECOMMENDS THAT THE
SHAREOWNERS OF THE COMPANY VOTE "FOR" APPROVAL OF THE REDEMPTION PROVISION
AMENDMENT, DESIGNATED AS PROPOSAL 4 ON YOUR PROXY CARD.
31
<PAGE>
PROPOSAL 5--THE NAME CHANGE AMENDMENT
The Board of Directors has unanimously approved an amendment (the "Name
Change Amendment") to the Current Certificate to change the name of the Company
to "Frontier Corporation" and recommends that the shareowners approve the Name
Change Amendment.
The shareowners are being asked to approve the Name Change Amendment
substantially in the form included in the Restated Certificate appearing as
Appendix 1 to this Proxy Statement. Implementation of the Open Market Plan is
conditioned upon the approval by the shareowners of the Open Market
Plan/Holding Company Proposal, the Common Stock Amendment, the Preferred Stock
Amendment and the Redemption Provision Amendment, and the filing of the
Restated Certificate with the New York Secretary of State. Adoption of the Name
Change Amendment is not conditioned upon the approval by shareowners of any
other Proposal. If the Name Change Amendment and the other Proposals are
adopted by the shareowners, the Name Change Amendment will become effective
upon the filing of the Restated Certificate with the New York Secretary of
State. The Company intends to file the Restated Certificate on or prior to the
Effective Date. If the Name Change Amendment is approved by the shareowners but
any of the other Proposals is not approved by the shareowners, the Company
intends to file a restated certificate of incorporation which will restate the
Current Certificate, without implementing any of the amendments described in
this Proxy Statement other than the change of the Company's name to "Frontier
Corporation". In such circumstances, the Company intends to file such restated
certificate of incorporation with the New York Secretary of State as soon as
practicable following the Special Meeting.
Approval of the Name Change Amendment by the affirmative vote of a majority
of the votes entitled to be cast by the holders of all the outstanding shares
of Common Stock shall be deemed also to constitute approval of a resolution
authorizing the Board of Directors, at any time prior to the filing of the
Restated Certificate with the New York Secretary of State, to abandon such
proposed amendment without further action by the shareowners, in connection
with the termination of the Open Market Plan Agreement or otherwise,
notwithstanding approval of the Name Change Amendment by the shareowners.
The Board of Directors believes that the Rochester Tel company name should be
changed to one more reflective of the Company's strategic direction,
geographies served and businesses operated. Moreover, once the Company converts
to a holding company structure as part of the Open Market Plan, under the terms
of the Open Market Plan Agreement, neither the Company nor any other entity
(other than R-Net) may use the "Rochester Telephone" name, except on a
transitional basis relating to the implementation of the Open Market Plan.
The Board of Directors has proposed the name "Frontier Corporation" as the
new name of the Company for the following reasons:
1. The Company's business has expanded well beyond the Rochester Market
to serve over 1.5 million customers in more than 20 states, and is likely
to expand further.
2. While the Company still has active telephone operations, it has
diversified into related activities, such as business systems, long
distance and wireless, and will seek to diversify into other areas, which
may include cable television and video ventures.
3. To meet strategic goals, the Company will reposition itself to its
various constituencies. The Frontier name is consistent with and supports
the Company in its effort to project itself as (a) a provider of reliable,
state-of-the-art network services and (b) a provider of a wide array of
communications and information services to residential and business
customers. The Board of Directors also believes that the Frontier name will
improve the perception of the Company in the financial markets.
Renaming the Company will enable the Company to move beyond the boundaries of
the telephone category, and to look toward the limitless possibilities of the
future for its customers, shareowners and employees.
THE BOARD OF DIRECTORS BELIEVES THAT THE NAME CHANGE AMENDMENT IS IN THE BEST
INTERESTS OF THE COMPANY AND ITS SHAREOWNERS AND HAS UNANIMOUSLY APPROVED THE
NAME CHANGE AMENDMENT AND UNANIMOUSLY RECOMMENDS THAT THE SHAREOWNERS OF THE
COMPANY VOTE "FOR" APPROVAL OF THE NAME CHANGE AMENDMENT, DESIGNATED AS
PROPOSAL 5 ON YOUR PROXY CARD.
32
<PAGE>
SECURITY OWNERSHIP
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.
Security Ownership of Certain Beneficial Owners
<TABLE>
<CAPTION>
Name and Address
of Beneficial Owner Common Stock Percent of Class
- - -------------------- ------------- ----------------
<S> <C> <C>
Fidelity Management and 5,619,000 (1) 7.7% (1)
Research Co.
82 Devonshire Street
Boston, Massachusetts 02109
</TABLE>
- - --------
(1) Fidelity Management and Research Co. has filed with the Securities and
Exchange Commission a Form 13F stating that it beneficially owned in the
aggregate 5,619,000 shares as of June 30, 1994 or approximately 7.7% of
the shares of Common Stock outstanding as of November 1, 1994.
The following table sets forth the number of shares of the Common Stock
beneficially owned by each director, by each of the named executive officers,
and by directors and officers of the Company as a group as of November 1,
1994. No director or officer owns more than 1% of the outstanding shares of
Common Stock.
Management Security Ownership Table
<TABLE>
<CAPTION>
Total
Common Stock Beneficial
Name Stock(1) Options(2) Ownership
- - ---- -------- ---------- ----------
<S> <C> <C> <C>
Directors:
Patricia C. Barron .............................. 1,069 1,998 3,067
Ronald L. Bittner(3) ............................ 39,683 25,998 65,681
John R. Block ................................... 1,472 1,998 3,470
Harlan D. Calkins ............................... 1,817 1,998 3,815
Brenda E. Edgerton .............................. 1,954 816 2,770
Jairo A. Estrada ................................ 11,770 1,998 13,768
Daniel E. Gill .................................. 2,437 1,998 4,435
Alan C. Hasselwander(4) ......................... 34,915 -0- 34,915
Douglas H. McCorkindale ......................... 4,000 1,998 5,998
Richard P. Miller, Jr. .......................... 1,066 1,332 2,398
Dr. Leo J. Thomas ............................... 20,100 1,998 22,098
Michael T. Tomaino .............................. 2,633 666 3,299
Named Executive Officers:
Ronald L. Bittner(3) ............................ 39,683 25,998 65,681
Dale M. Gregory ................................. 14,314 8,000 22,314
Louis L. Massaro ................................ 9,400 6,600 16,000
Frederick R. Pestorius(5) ....................... 5,297 6,600 11,897
John K. Purcell ................................. 7,571 7,000 14,571
</TABLE>
- - --------
As of November 1, 1994, all directors and officers as a group, an aggregate
of nineteen persons, beneficially owned 186,448 shares of Common Stock and, as
a group, had within the following sixty days the right to acquire an
additional 83,996 shares which were subject to outstanding stock options. The
group's total aggregate holdings of 270,444 beneficially owned shares
constitutes less than 1% of the issued and outstanding Common Stock as of that
date.
(1) Includes all shares which each director or officer directly, through any
contract, arrangement, understanding, relationship or otherwise, has or
shares the power to vote or to direct the voting of such shares or to
dispose or to direct the disposition of such shares. However, these
amounts do not include shares which each director or officer 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 following 60 days pursuant to options or other rights. These amounts
do not include shares which such persons have the right to acquire more
than sixty days in the future.
(3) Includes 123 shares owned by the parents of Mr. Bittner's spouse. Mr.
Bittner disclaims beneficial ownership of these shares.
(4) Includes 1,400 shares owned by the spouse of Mr. Hasselwander. Mr.
Hasselwander disclaims beneficial ownership of these shares.
(5) Mr. Pestorius retired as an executive officer of the Company as of July 1,
1994.
33
<PAGE>
OTHER MATTERS AND FUTURE PROPOSALS OF SHAREOWNERS
As of the date of this Proxy Statement, the Board of Directors does not
intend to present any matter for action at the Special Meeting other than as
set forth in the Notice of Special Meeting of Common Shareowners. If any other
matters properly come before the meeting, it is intended that the holders of
the proxies will act in accordance with their best judgment, unless authority
to do so is withheld in the proxy.
In order to be eligible for inclusion in the proxy materials for the
Company's 1995 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 23, 1994. 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, 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
such 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 public announcement of the date of such meeting is first made.
If a shareowner who has notified the Company of his or her intention to present
a proposal at an annual meeting does not appear or send a qualified
representative to present that proposal at such meeting, the Company need not
present the proposal for a vote at such meeting.
INCORPORATION OF DOCUMENTS BY REFERENCE
This Proxy Statement incorporates by reference the financial statements,
supplementary financial information and management's discussion and analysis of
financial condition and results of operations regarding the Company included in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1993, as amended, and its Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 1994, June 30, 1994 and September 30, 1994. This Proxy
Statement also incorporates by reference the Company's Current Report on Form
8-K dated November 10, 1994 and any Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K filed by the Company before the date of the Special
Meeting.
Any statement contained in a document incorporated by reference in this Proxy
Statement will be deemed to be modified or superseded for purposes of this
Proxy Statement to the extent that a statement contained in this Proxy
Statement or in any other subsequently filed document which is also
incorporated by reference in this Proxy Statement modifies or supersedes such
statement. Any statement so modified or superseded will not be deemed, except
as modified or superseded, to constitute a part of this Proxy Statement.
The Company will provide, without charge, to each person to whom this Proxy
Statement is delivered, upon written or oral request of such person, by first
class mail or other equally prompt means within one business day of receipt of
such request, a copy of any and all information that has been incorporated by
reference in the Proxy Statement (not including the exhibits to the information
that is incorporated by reference unless such exhibits are specifically
incorporated by reference to the information that this Proxy Statement
incorporates). Written requests should be addressed to the Corporate Secretary,
Rochester Telephone Corporation, 180 South Clinton Avenue, Rochester, New York
14646. Oral requests may be made by telephone to the following number: (800)
836-0342.
November 18, 1994
34
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Additional R-Com Services.................................................. 21
Board of Directors......................................................... 1
Business Corporation Law................................................... 1
Class A Preferred Stock.................................................... 25
Common Stock............................................................... 1
Common Stock Amendment..................................................... 25
Company.................................................................... 1
Cumulative Preferred Stock................................................. 2
Current Certificate........................................................ 1
CWA........................................................................ 12
Disqualified Holder........................................................ 30
DSI........................................................................ 20
Effective Date............................................................. 14
FCC........................................................................ 19
Intervenors................................................................ 12
Liquidation Preference..................................................... 28
Name Change Amendment...................................................... 32
Non-U.S. Persons or Entities............................................... 30
Open Market Plan........................................................... 11
Open Market Plan Agreement................................................. 13
Open Market Plan Amendments................................................ 14
Open Market Plan/Holding Company Proposal.................................. 14
Open Market Plan Transactions.............................................. 14
Outside Directors.......................................................... 16
Petition................................................................... 11
Preferred Stock Amendment.................................................. 25
Proposals.................................................................. 1
PSC........................................................................ 11
PSC Order.................................................................. 14
R-Com...................................................................... 11
R-Net...................................................................... 11
Rate Period................................................................ 13
Rate Stabilization Plan.................................................... 13
Record Date................................................................ 2
Redemption Provision Amendment............................................. 29
Redemption Securities...................................................... 31
Restated Certificate....................................................... 19
Rochester Market........................................................... 11
Royalty Order.............................................................. 12
S&P........................................................................ 17
Section 310(b)............................................................. 30
Special Meeting............................................................ 1
Staff...................................................................... 12
Time Warner................................................................ 13
Transportation Corporations Law............................................ 19
</TABLE>
35
<PAGE>
APPENDIX 1
FORM OF
RESTATED CERTIFICATE OF INCORPORATION
OF
FRONTIER CORPORATION
Under Section 807 of the Business Corporation Law
We, the undersigned, JOHN K. PURCELL, and JOSEPHINE S. TRUBEK, being
respectively a Corporate Vice President and the Corporate Secretary of Frontier
Corporation, do hereby CERTIFY that:
1. The name of the Corporation is "Frontier Corporation". The name under
which the Corporation was incorporated is "ROCHESTER TELEPHONE CORPORATION".
2. The Certificate of Incorporation of the Corporation was filed in the
Department of State of the State of New York on February 25, 1920. A Restated
Certificate of Incorporation was filed in the Department of State of the State
of New York on April 2, 1968.
3. The Restated Certificate of Incorporation of the Corporation, as amended
heretofore, is hereby further amended to effect the following amendments
authorized by the Business Corporation Law:
(a) To reorganize the Corporation from a telephone corporation under the
Transportation Corporations Law to a business corporation under the
Business Corporation Law, and, in that connection, to (i) broaden the
purposes clause with a provision specifying as the purposes of the
Corporation those purposes permitted to any business corporation under the
Business Corporation Law and (ii) delete the existing description of the
territory in which the Corporation operates as a telephone corporation in
the Rochester, New York area;
(b) To increase the number of authorized shares of common stock;
(c) To authorize a new class of preferred stock;
(d) To permit the Corporation to redeem shares of its common stock to the
extent necessary, in the judgment of the Board of Directors, to prevent the
loss or secure the renewal or reinstatement of any license or franchise
from any governmental agency held by the Corporation or any of its
subsidiaries, which license or franchise is conditioned upon some or all of
the holders of the stock of the Corporation possessing prescribed
qualifications; and
(e) To change the name of the Corporation to "Frontier Corporation".
4. The text of the Restated Certificate of Incorporation is hereby restated,
as amended, to read as set forth in full below:
FIRST: The name of the Corporation is "Frontier Corporation".
SECOND: The purposes for which the Corporation is formed are: To engage in
any lawful act or activity for which corporations may be organized under the
Business Corporation Law of the State of New York, except that the Corporation
is not organized to engage in any act or activity requiring the consent or
approval of any official, department, board, agency or other body of the State
of New York without first obtaining such consent or approval.
I-1
<PAGE>
THIRD: The total number of shares which the Corporation shall have authority
to issue is (i) Three Hundred Million (300,000,000) shares of Common Stock of
the par value of One Dollar ($1.00) per share, (ii) Four Million (4,000,000)
shares of Class A Preferred Stock of the par value of One Hundred Dollars
($100.00) per share and (iii) Eight Hundred Fifty Thousand (850,000) shares of
Cumulative Preferred Stock of the par value of One Hundred Dollars ($100.00)
per share (the Class A Preferred Stock and the Cumulative Preferred Stock
referred to collectively herein as the "Preferred Stock").
Subject to any exclusive voting rights which may vest in holders of Preferred
Stock under the provision of any series of Preferred Stock established by the
Board of Directors pursuant to authority herein provided, and except as
otherwise provided by law, the shares of Common Stock shall entitle the holders
thereof to one vote for each share upon all matters upon which shareowners have
the right to vote.
No holders of shares of the Corporation of any class or series, now or
hereafter authorized, shall have any preemptive rights to subscribe for or
purchase any part of any issue, sale or offering of any shares of the
Corporation of any class or series, now or hereafter authorized, or of any
options, warrants or rights to subscribe for or purchase any such shares, or of
any securities convertible into, or carrying options, warrants or rights to
subscribe for or purchase, any such shares, regardless of whether such issue,
sale or offering is for cash, property, services or otherwise.
FOURTH: Subject to the limitations and in the manner provided by law and
subject to the terms of this Certificate, shares of Class A Preferred Stock may
be issued from time to time in series and the Board of Directors is hereby
authorized to establish and designate series, to fix the number of shares
constituting each series, and to fix the designations and the relative rights,
preferences and limitations of the shares of each series and the variations in
the relative rights, preferences and limitations as between series, and to
increase and to decrease the number of shares constituting each series. Subject
to the limitations and in the manner provided by law and subject to the terms
of this Certificate, the authority of the Board of Directors with respect to
each series shall include but shall not be limited to the authority to
determine the following:
(i) the designation of such series;
(ii) the number of shares initially constituting such series;
(iii) the increase, and the decrease to a number not less than the number
of the outstanding shares of such series, of the number of shares
constituting such series theretofore fixed;
(iv) the rate or rates and the times at which dividends on the shares of
such series shall be paid and whether or not such dividends shall be
cumulative and, if such dividends shall be cumulative, the date or dates
from and after which they shall accumulate; provided, however, that, if the
stated dividends are not paid in full, the shares of all series of Class A
Preferred Stock shall share ratably in the payment of dividends, including
accumulations, if any, in accordance with the sums which would be payable
on such shares if all dividends were declared and paid in full; and
provided, further, that dividends or other distributions shall not be
declared or paid on any shares of Class A Preferred Stock unless the
current quarterly dividend upon all the Cumulative Preferred Stock then
outstanding, together with all accumulations thereon, shall have been paid
or declared and set apart for payment in accordance with the requirements
of subdivision (B) of Article FIFTH;
(v) whether or not the shares of such series shall be redeemable and, if
such shares shall be redeemable, the terms and conditions of such
redemption, including but not limited to the date or dates upon or after
which such shares shall be redeemable and the amount per share which shall
be payable upon such redemption, which amount may vary under different
conditions and at different redemption dates; provided, that, unless the
current quarterly dividend upon all the Cumulative Preferred Stock then
outstanding, together with all accumulations thereon, shall have been paid
or declared and set apart for payment in accordance with the requirements
of subdivision (B) of Article FIFTH, the Corporation or
I-2
<PAGE>
any of its subsidiaries shall not redeem, purchase or otherwise acquire
shares of Class A Preferred Stock (except by conversion into or exchange
for, or out of the net cash proceeds from the concurrent sale of, stock of
the Company ranking junior to the Cumulative Preferred Stock as to
dividends);
(vi) the amount payable on the shares of such series in the event of the
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; provided, however, that (1) before any assets of the
Corporation shall be distributed among or paid over to the holders of Class
A Preferred Stock, each holder of Cumulative Preferred Stock then
outstanding shall be entitled to be paid the amount described in
subdivision (C) of Article FIFTH, and (2) the holders of shares of Class A
Preferred Stock shall be entitled to be paid, or to have set apart for
payment, not less than $100.00 per share before the holders of shares of
Common Stock or the holders of any other class of stock ranking junior to
the Class A Preferred Stock as to rights on liquidation shall be entitled
to be paid any amount or to have any amount set apart for payment;
provided, further, that, if the amounts payable on liquidation are not paid
in full, the shares of all series of the Class A Preferred Stock shall
share ratably in any distribution of assets other than by way of dividends
in accordance with the sums which would be payable in such distribution if
all sums payable were discharged in full. A liquidation, dissolution or
winding up of the Corporation, as such terms are used in this clause (vi),
shall not be deemed to be occasioned by or to include any consolidation or
merger of the Corporation with or into any other corporation or
corporations or a sale, lease or conveyance of all or a part of its assets;
(vii) whether or not the shares of such series shall have voting rights,
in addition to the voting rights provided by law and, if such shares shall
have such voting rights, the terms and conditions thereof, including but
not limited to the right of the holders of such shares to vote as a
separate class either alone or with the holders of shares of one or more
other series or class of stock and the right to have more than one vote per
share;
(viii) whether or not a sinking fund shall be provided for the redemption
of the shares of such series and, if such a sinking fund shall be provided,
the terms and conditions thereof;
(ix) whether or not the shares of such series shall be convertible into,
or exchangeable for, shares of stock of any other class or any other series
of this class or any other securities or assets, and, if so, the terms and
conditions of conversion or exchange, including but not limited to any
provision for the adjustment of the rate or rates or the price or prices of
conversion or exchange; and
(x) any other relative rights, preferences and limitations.
If any shares of Class A Preferred Stock shall be issued then, for purposes
of clause (ii)(a) of subdivision (F) of Article FIFTH, such shares shall be
deemed to have been authorized in connection with any prior authorization of
shares of Class A Preferred Stock, notwithstanding any subsequent action by the
Corporation's Board of Directors in connection with the issuance of such shares
or the filing of any certificate required by law in connection with such
issuance.
FIFTH: The respective rights, preferences and limitations of the shares of
Cumulative Preferred Stock are set forth in the following subdivisions
designated (A) to (F) inclusive which are hereinafter referred to as
subdivisions of this Article FIFTH.
(Note: The words "preferential rights" whenever used in this Certificate
with respect to the Cumulative Preferred Stock herein authorized or any
preferred stock of any class or series hereafter authorized by any
certificate filed pursuant to law, shall for the sake of brevity and
convenience, mean and include the words "relative rights, preferences and
limitations of the shares of each class" as used in the Business
Corporation Law.)
(A) The shares of Cumulative Preferred Stock shall be issuable from time to
time in one or more series. The Board of Directors is hereby authorized to fix,
from time to time before issuance, the preferential rights of the shares of
each series of such Cumulative Preferred Stock, to the extent that such
preferential rights are not herein expressly prescribed, determined and set
forth. The preferential rights of shares of different series shall be
identical, except that there may be variations, as hereinafter provided, in
respect of the dividend rates,
I-3
<PAGE>
dates of payment of dividends and dates from which they are cumulative,
redemption prices, sinking fund requirements and conversion and other rights.
All shares of any one series will be alike in every particular and all shares
of Cumulative Preferred Stock will rank equally. There shall be no
discrimination as between different series of Cumulative Preferred Stock in the
declaration and payment of dividends on the basis of the rates appertaining
thereto; and if at any time there shall be outstanding Cumulative Preferred
Stock of several series bearing different rates of dividends and dividends are
to be declared on such stock at less than the full rates appertaining thereto,
the shares of all such series shall share ratably in the payment of such
dividends including accumulations, if any, in accordance with the sums which
would be payable on said shares if all dividends were declared and paid in
full.
The Board of Directors is authorized to fix from time to time before issuance
of each series of Cumulative Preferred Stock, but subject to the provisions of
this Certificate covering all series of Cumulative Preferred Stock, the
following: (a) the designation and number of shares of such series; (b) the
dividend rate of such series; (c) the dates of payment of dividends on shares
of such series and the dates from which they are cumulative; (d) the redemption
price or prices for shares of such series; (e) the amount of the sinking fund
or redemption or purchase fund or account, if any, to be applied to the
purchase or redemption of shares of such series and the manner of its
application; and (f) whether or not the shares of such series shall be made
convertible into shares of any other class or classes or of any other series of
the same class of stock of the Corporation, and if made so convertible the
conversion price or prices and the provisions, if any, for the adjustment
thereof and any other relative, participating, optional or other special rights
(including rights to purchase stock or obligations of the Corporation) and
powers and qualifications, limitations or restrictions thereof of shares of
such series.
(B) Dividends. The holders of the Cumulative Preferred Stock of any series
shall be entitled to receive, when and as declared by the Board of Directors,
but only out of funds legally available for the payment thereof, fixed yearly
preferred dividends at the annual rate appertaining to such series, and no
more, payable in lawful money of the United States of America quarterly on the
first days of January, April, July and October in each year, or on such other
dates as may be determined by the Board of Directors, before any dividends
shall be paid upon or set apart for any junior stock (which term as used herein
shall mean Common Stock, Class A Preferred Stock and any other class of stock
of the Corporation which shall rank junior to the Cumulative Preferred Stock).
Dividends on the Cumulative Preferred Stock shall be cumulative, so that if
dividends on all outstanding shares of Cumulative Preferred Stock at the
respective annual dividend rates appertaining thereto shall not have been paid
for all past quarterly dividend periods, and the full dividends thereon at such
rates for the current quarterly dividend period shall not have been paid, or
declared and set apart for payment, the deficiency shall be fully paid or
dividends equal thereto declared and set apart for payment at such rates, but
without interest thereon, before any dividend shall be paid upon any junior
stock.
After the payment or declaration and setting apart for payment, for or in any
calendar year, of the current quarterly dividend upon all the Cumulative
Preferred Stock then outstanding, together with all accumulations as herein
provided, the Corporation may declare and pay, but only out of funds legally
available for the payment thereof, dividends on any class of junior stock, in
accordance with the rights of such junior stock and respective classes thereof,
in such amounts and at such time or times as the Board of Directors may
determine.
(C) Liquidation. The Cumulative Preferred Stock shall be preferred as to both
earnings and assets, and in the event of any voluntary liquidation, dissolution
or winding up of the Corporation, or of any distribution of assets by way of
return of capital to its stockholders (other than redemption of Cumulative
Preferred Stock in accordance with the provisions hereinafter set forth), each
holder of Cumulative Preferred Stock shall be entitled, before any assets of
the Corporation shall be distributed among or paid over to the holders of any
junior stock, to be paid, from the assets of the Corporation available for
distribution among its stockholders, an amount equal to the redemption price or
prices current at the date of such payment as hereinafter provided (plus an
amount equivalent to accrued and unpaid dividends, whether or not earned) on
the respective shares of Cumulative Preferred Stock held by him. In the event
of any involuntary liquidation,
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dissolution or winding up of the Corporation, or of any involuntary
distribution of assets by way of return of capital to its stockholders, each
holder of the Cumulative Preferred Stock shall be entitled, before any assets
of the Corporation shall be distributed among or paid over to the holders of
any junior stock, to be paid, out of the assets of the Corporation available
for distribution among its stockholders, an amount equal to the par value of
the respective shares of Cumulative Preferred Stock held by him, plus an amount
equivalent to accrued and unpaid dividends, whether or not earned. If, in
either of the foregoing events, there shall not be sufficient assets to make
the full payment herein required, the outstanding shares of all series of
Cumulative Preferred Stock shall share ratably in the distribution of assets in
accordance with the sums which would be paid on such distribution if all sums
payable were discharged in full. If the appropriate payment herein required
shall have been made to the holders of the Cumulative Preferred Stock, the
holders of the Cumulative Preferred Stock shall not be entitled to participate
further in the distribution of the assets of the Corporation and after such
payment and distribution to the holders of the Cumulative Preferred Stock, the
remaining assets of the Corporation shall be distributed among the holders of
the junior stock according to their respective rights and preferences and pro
rata in accordance with the number of shares respectively held by such holders.
(D) (a) Redemption of Cumulative Preferred Stock. Subject to the provisions
of subsection (i) of this subdivision (D), the Corporation, at the option of
the Board of Directors, expressed in a resolution adopted by said Board, may
redeem, at any time or times and from time to time, all or any part of the
shares of Cumulative Preferred Stock or all or any part of any one or more
series of such Cumulative Preferred Stock outstanding, by paying the par value
thereof plus an amount in the case of each such share of Cumulative Preferred
Stock to be redeemed computed at the annual dividend rate for the series in
question from the date from which dividends on such share became cumulative to
the date fixed for such redemption, less the aggregate of dividends theretofore
or on such redemption date paid thereon, plus such premium, if any, as shall
have been fixed in accordance with the provisions of subdivision (A) of this
Article FIFTH prior to the issuance thereof. Notice of every such redemption
shall be given by publication, published at least once in each of two (2)
calendar weeks in a daily newspaper (which term shall mean and include a
newspaper published in morning editions or evening editions or both, and
whether or not it shall be published in Sunday editions or on holidays) printed
in the English language and published and of general circulation in the Borough
of Manhattan, the City and State of New York, the first publication to be at
least thirty (30) days and not more than sixty (60) days prior to the date
fixed for such redemption. At least thirty (30) days' and not more than sixty
(60) days' previous notice of every such redemption shall also be mailed to the
holders of record of the Cumulative Preferred Stock to be redeemed, at their
respective addresses as the same shall appear on the books of the Corporation;
but no failure to mail such notice nor any defect therein or in the mailing
thereof shall affect the validity of the proceedings for the redemption of any
shares of such Cumulative Preferred Stock so to be redeemed. The Board of
Directors shall have full power and authority, subject to the limitations and
provisions herein contained, to prescribe the manner in which and the terms and
conditions upon which any shares of any series of the Cumulative Preferred
Stock shall be redeemed from time to time. If such notice of redemption shall
have been duly given by publication, and if on or before the redemption date
specified in such notice all funds necessary for such redemption shall have
been set aside so as to be available therefor, then, notwithstanding that any
certificate for the shares of such Cumulative Preferred Stock so called for
redemption shall not have been surrendered for cancellation, the shares
represented thereby shall from and after the date fixed for redemption no
longer be deemed outstanding, the right to receive dividends thereon shall
cease to accrue from and after the date of redemption so fixed, and all rights
with respect to such shares of Cumulative Preferred Stock so called for
redemption shall forthwith on such redemption date cease and terminate, except
only the right of the holders thereof to receive the amount payable upon
redemption thereof, but without interest; provided, however, that the
Corporation may, after giving the first notice by publication of any such
redemption or upon furnishing the depositary hereinafter mentioned with
irrevocable authority to publish such notice of redemption on behalf of the
Corporation and prior to the redemption date specified in such notice, deposit
in trust, for the account of the holders of such Cumulative Preferred Stock to
be redeemed, with a bank or trust company in good standing, organized under the
laws of the United States of America, or of the State of New York, doing
business in the City of Rochester,
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New York, or in the Borough of Manhattan, the City and State of New York, and
having a capital, undivided profits and surplus aggregating at least
$5,000,000, all funds necessary for such redemption, and upon such deposit all
shares of such Cumulative Preferred Stock with respect to which such deposit
shall have been made shall no longer be deemed to be outstanding, and all
rights with respect to such shares of such Cumulative Preferred Stock shall
forthwith upon such deposit in trust cease and terminate, except (1) the right
of the holders thereof to receive the amount payable upon the redemption
thereof, but without interest, or (2) the right of the holders of any
Cumulative Preferred Stock, which may be convertible into shares of stock of
the Corporation of any class or classes, or other securities, to convert such
Cumulative Preferred Stock called for redemption within the time or up to a
date specified in the terms of such convertible stock or as may be stated in
any certificate filed pursuant to law creating such convertible stock. If less
than all the Cumulative Preferred Stock of any series shall be redeemed, the
stock to be redeemed shall be selected by lot in such manner as the Board of
Directors may determine, by a bank or trust company appointed for that purpose
by said Board, which, unless otherwise directed by said Board, shall be the
bank or trust company with which the funds necessary for such redemption are to
be deposited.
(i) Unless all dividends accrued to the dividend date next preceding such
redemption date shall be paid on all Cumulative Preferred Stock then
outstanding, the Corporation shall not have the right to redeem less than
all of the Cumulative Preferred Stock outstanding at the time of giving the
notice of such redemption.
(b) Purchase of Cumulative Preferred Stock. In the event that at any time the
Corporation shall be in default in the payment of dividends on the Cumulative
Preferred Stock then so long as such default shall continue, the Corporation
shall not purchase or otherwise acquire for a consideration any shares of the
Cumulative Preferred Stock unless such purchase or acquisition shall be
pursuant to tenders, called for on at least 20 days' previous notice by mail to
the holders of record (at the time of mailing such notice) of the Cumulative
Preferred Stock at their respective addresses as the same shall appear on the
books of the Corporation. The shares of stock to be purchased, pursuant to such
tenders, shall be purchased at the lowest prices specified in such tenders, not
exceeding, however, the redemption prices then in effect or then current, and
the notice shall specify the method (whether by lot, or otherwise) of
determining the stock to be purchased in the event that stock shall be tendered
at the same price, whether the lowest or other price.
(E) Increase of Authorized Stock. The Corporation, subject to the provisions
of subsection (ii) of subdivision (F) of this Article FIFTH, may from time to
time increase the authorized amount of the Cumulative Preferred Stock and may
also from time to time create other classes of preferred stock with different
preferential rights.
(F) Voting Rights. The holders of the Cumulative Preferred Stock shall not be
entitled to any voting rights whatsoever, except as specifically required by
statute or as hereinafter expressly provided.
(i) Voting rights upon default in dividends. In the event that, at any
time, or from time to time, four full quarterly dividends (whether
consecutive or not) on the Cumulative Preferred Stock then outstanding, at
the dividend rate appertaining thereto shall be in arrears, the holders of
such Cumulative Preferred Stock shall have the right, voting separately as
a class, to elect the smallest number of directors then necessary to
constitute a majority of the full Board, and in such event the holders of
stock of any other class or classes then entitled to vote for directors
shall have the right, voting separately as a class, to elect only the
remaining directors.
If and whenever the right of the holders of Cumulative Preferred Stock to
elect directors hereunder shall accrue, the terms of office of all persons
who may be directors of the Corporation at such time shall terminate upon
the election of their successors. Such election may be held at a special
meeting of all stockholders of the Corporation which shall be convened at
any time after the accrual of such right, upon notice similar to that
provided in the Bylaws of the Corporation for calling the annual meeting of
the stockholders, at the written request of the holders of record of at
least 10% of the number of shares of Cumulative Preferred Stock then
outstanding, for which purpose any holder of record of Cumulative
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Preferred Stock shall have access to the stock books of the Corporation. In
the event of the failure of the Secretary or other proper officer of the
Corporation to give such notice within 10 days after receipt of such
request, then such meeting may be called on like notice given by the
holders of at least 10% of the Cumulative Preferred Stock then outstanding.
If for any reason such special meeting shall not be held prior to the next
annual meeting, then notice of such annual meeting shall be given to the
holders of the Cumulative Preferred Stock then outstanding in the manner
provided in the Bylaws, and at such meeting the holders of Cumulative
Preferred Stock and the holders of any other class or classes of stock then
entitled to vote for directors shall elect the number of directors for
which they are then respectively entitled to vote under the provisions
hereof, unless previously thereto all such defaults in dividends shall have
been made good. In the event that the holders of the Cumulative Preferred
Stock then outstanding shall not exercise their right to elect directors at
such annual meeting then the holders of the other class or classes of stock
then entitled to vote for the election of directors shall have the right to
elect at such meeting the entire membership of the Board of Directors, and
such directors so elected shall constitute the entire Board of Directors
until such time as part thereof shall be retired and replaced by directors
elected, as herein provided, by the holders of Cumulative Preferred Stock
then outstanding.
To entitle the holders of Cumulative Preferred Stock to vote for the
election of directors hereunder at any meeting, there shall be present at
such meeting in person or by proxy the holders of not less than a majority
of the shares of Cumulative Preferred Stock then outstanding, but the
holders of less than a majority of such shares may adjourn such meeting for
a period or periods not exceeding four weeks in the aggregate. In order to
validate an election of directors by the holders of Cumulative Preferred
Stock as herein provided, such election shall be by a vote of at least a
plurality of the shares of Cumulative Preferred Stock then outstanding
present at such meeting in person or by proxy.
In the event that any meeting at which the holders of Cumulative
Preferred Stock shall have the right to elect directors to replace
directors theretofore elected by holders of any other class or classes of
stock shall be attended by the holders of at least a majority of the
Cumulative Preferred Stock then outstanding, but not by the holders of at
least a majority of the other class or classes of stock then entitled to
vote for directors, such holders of Cumulative Preferred Stock shall
nevertheless be entitled to proceed with the election of directors in place
of directors theretofore elected as hereinabove provided, such retiring
directors (if and so far as the necessary vacancies shall not be provided
by voluntary resignations) to be determined by lot from the Board of
Directors theretofore elected as aforesaid, not including, however,
directors then holding the office of Chairman of the Board of Directors or
President of the Corporation, and the remaining directors (i.e., those not
resigning or selected by lot as aforesaid) theretofore elected by the
holders of the other class or classes of stock shall continue to hold
office until their successors shall have been duly elected as herein
provided.
Whenever by reason of the resignation, death or removal of any director
or directors or any increase in the number of directors, the number of
directors in office who have been elected by the holders of stock voting as
a class shall become less than the total number then subject to election by
such class, the vacancy or vacancies so resulting may be filled by the
affirmative vote of the directors, if any, at the time in office who were
elected by the vote of such class, although less than a quorum, or by vote
of such class at a special meeting thereof (if there are then no directors
in office who were elected by the vote of such class) which shall be called
at any time at the request of the holders of record of at least 10% of the
outstanding shares of such class, for which purpose such holders shall have
access to the stock books of the Corporation.
If at any time the right of the holders of the Cumulative Preferred Stock
to elect directors hereunder shall accrue as aforesaid, and the holders of
such stock shall not exercise such right at any meeting (whether annual or
otherwise) at which directors may be elected, such failure to exercise such
right shall not be construed as a waiver thereof, but the holders of such
stock may, so long as the default in dividends aforesaid shall exist,
exercise the right given them hereunder in the manner aforesaid at any
annual meeting or at any special meeting called as hereinabove provided or
at any adjournment of either thereof.
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The right of the holders of Cumulative Preferred Stock to elect
directors, as hereinabove provided, shall continue until all accrued
dividends on the Cumulative Preferred Stock at the full dividend rates
thereto appertaining shall have been paid, or declared and set apart for
payment, at which time such right shall cease.
If and whenever the right of the holders of Cumulative Preferred Stock to
elect directors as hereinabove provided shall terminate, then the terms of
office of all persons who may be directors of the Corporation at such time
shall terminate upon the election of their successors. Such election may be
held at a special meeting of the holders of the class or classes of stock
then entitled to vote for directors, which meeting may be convened at any
time after the termination of such right, upon notice similar to that
provided in the Bylaws of the Corporation for the annual meeting of
stockholders, at the written request of the holders of record of at least
10% of such stock then outstanding. In the event of the failure of the
Secretary or other proper officer of the Corporation to give such notice
within 10 days after receipt of such request, such meeting may be called on
like notice by the holders of record of at least 10% of such stock, for
which purpose any holder of record of such stock shall have access to the
stock books of the Corporation. If for any reason such special meeting be
not held prior to the next annual meeting, then at such meeting the holders
of the class or classes of stock then outstanding and entitled to vote for
the election of directors shall elect all of the members of the Board.
(ii) Authorization or Issue of Additional Preferred Stock. The
Corporation may from time to time increase the authorized amount of
Cumulative Preferred Stock and may also from time to time create other
classes of preferred stock with different preferential rights but only in
accordance with the provisions hereinafter set forth, so long as any shares
of Cumulative Preferred Stock shall be outstanding.
(a) Authorization. The authorized amount of Cumulative Preferred
Stock shall not be increased beyond the 850,000 shares authorized by
this Certificate, and no class of stock having preferential rights
which are equal to those of the Cumulative Preferred Stock, and no
obligations or shares of stock of any class convertible into or
evidencing the right to purchase any class of stock having such
preferential rights shall be authorized by any certificate hereafter
filed pursuant to law, except upon the affirmative vote of the holders
of record of at least a majority of the shares of Cumulative Preferred
Stock then outstanding voting separately as a class. No class of stock
having any preferential rights which are in any way superior to those
of the Cumulative Preferred Stock and no obligations or shares of stock
of any class convertible into or evidencing the right to purchase any
class of stock having such superior preferential rights, shall be
authorized except upon the affirmative vote of the holders of record of
at least two-thirds of the then outstanding shares of Cumulative
Preferred Stock voting separately as a class.
(b) Issue. No shares of Cumulative Preferred Stock authorized by this
Certificate in excess of the number of shares of the first series
thereof, nor any shares of stock or obligations authorized pursuant to
any of the provisions of the preceding subparagraph (a), shall be
issued except upon compliance with the earnings requirements
hereinafter set forth, unless such compliance shall have been waived by
the affirmative vote of the holders of record of at least a majority of
the shares of Cumulative Preferred Stock then outstanding voting
separately as a class. In the event that any vote of the holders of
Cumulative Preferred Stock shall be required to authorize any waiver
under this subparagraph (b), such vote shall be taken at a meeting of
the holders of the Cumulative Preferred Stock only, upon notice as
hereinafter required.
(c) Earnings Requirements. The earnings requirements herein referred
to are as follows, to wit, the gross earnings of the Corporation for a
period of 12 consecutive calendar months within the 15 calendar months
immediately preceding the issue of stock or obligations referred to in
subparagraphs (a) and (b) above shall have been at least equal to one
and one-half (1 1/2) times the sum of the annual interest requirements
on all funded indebtedness and other borrowings of the
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Corporation to be outstanding on the date of the proposed issue and the
annual dividend requirements on the Cumulative Preferred Stock then
outstanding and on any other class of stock then outstanding having
preferential rights equal or superior to those of the Cumulative
Preferred Stock and the annual dividend requirements on the stock to be
issued. "Gross earnings" for any period for the purposes of this
subparagraph (c) shall be computed by adding to the net income
(determined as hereinafter provided) of the Corporation for said period
the amount deducted for interest on all funded indebtedness and other
borrowings of the Corporation in determining such net income. "Net
income" for any period for the purposes of this subparagraph (c) shall
be determined in accordance with accepted accounting principles, not
inconsistent, however, with the requirements of public regulatory
authorities having jurisdiction in the premises, and in determining
such net income for any period, there shall be deducted, in addition to
other items of expense, the amount charged to income for said period on
the books of the Corporation for taxes and provision for depreciation.
The Board of Directors may make adjustments by way of increase or
decrease in such net income to give effect to changes therein resulting
from acquisition of properties or any redemption, acquisition,
purchase, sale or exchange of stock or obligations by the Corporation,
whether prior to the issue of any stock or obligations then to be
issued, or in connection with such issue. In computing net income for
the purposes of this subparagraph (c), adjustments shall be made so as
to eliminate profits or losses from the sale or other disposition of
capital assets and from appreciation or depreciation in value of
capital assets and increases or decreases in book value resulting from
reappraisal (if any) at higher or lower figures.
(iii) Alteration of Terms of Cumulative Preferred Stock, etc. The
Corporation shall not, except when authorized by the vote of the holders of
record of at least two-thirds of the then outstanding shares of Cumulative
Preferred Stock voting separately as a class (1) alter or abolish any
preferential right of any outstanding shares of such stock affecting the
holders of such shares adversely, or (2) create, alter or abolish any
provisions or right in respect of the redemption of any outstanding shares
of such stock affecting the holders of such shares adversely, or (3)
abolish any voting right of the holders of shares of such stock or limit
their voting rights, except as the same may be limited by the voting rights
given to new shares of any class authorized by any certificate filed
pursuant to law. Such vote, however, shall not affect the right of any
holder of shares of Cumulative Preferred Stock not voting in favor of the
authorization of any of the foregoing transactions (designated (1), (2) and
(3)) to have such shares appraised and paid for as contemplated by the
provisions of any then applicable provisions of the statutes of the State
of New York.
SIXTH: The designation of each series of Cumulative Preferred Stock of the
Corporation, and a statement of the variations in the relative rights,
preferences and limitations as between series to the extent not set forth in
Article FIFTH of this Certificate, as fixed by the Board of Directors of the
Corporation before issuance of each such series, are as follows:
(a) An initial series of Sixty Thousand (60,000) shares of the Cumulative
Preferred Stock of the Corporation, which shares are designated "Cumulative
Preferred Stock, 5% Series" (herein called the "initial series").
The rate of dividends payable upon the initial series shall be 5% of the par
value thereof per annum, payable quarterly on the first days of January, April,
July and October in each year.
The Corporation may redeem all or any part of the initial series at any time
or times and from time to time, on the terms and conditions with respect
thereto set forth in subdivision (D) of Article FIFTH of this Certificate, by
paying, in the case of each such share to be redeemed, the par value thereof
plus an amount computed at the annual dividend rate of 5% of said par value
from the date from which said dividends on such share became cumulative to the
date fixed for redemption, less the aggregate of such dividends theretofore or
on such redemption date paid thereon, plus a premium of $1 per share.
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(b) A second series of Forty Thousand (40,000) shares of the Cumulative
Preferred Stock of the Corporation, which shares are designated "Cumulative
Preferred Stock, Second 5% Series" (herein called the "second series").
The rate of dividends payable upon the second series shall be 5% of the par
value thereof per annum, payable quarterly on the first days of January, April,
July and October in each year.
The Corporation may redeem all or any part of the second series at any time
or times and from time to time, on the terms and conditions with respect
thereto set forth in subdivision (D) of Article FIFTH of this Certificate, by
paying, in the case of each such share to be redeemed, the par value thereof
plus an amount computed at the annual dividend rate of 5% of said par value
from the date from which said dividends on such share became cumulative to the
date fixed for such redemption, less the aggregate of such dividends
theretofore or on such redemption date paid thereon, plus a premium of $2 per
share if the redemption date shall be prior to July 1, 1971 and of $1 per share
if the redemption date shall be on or subsequent to July 1, 1971.
(c) A third series of Fifty Thousand (50,000) shares of the Cumulative
Preferred Stock of the Corporation, which shares are designated "Cumulative
Preferred Stock, 5.65% Series" (herein called the "third series").
The rate of dividends payable upon the third series shall be 5.65% of the par
value thereof per annum, payable quarterly on the first days of January, April,
July and October in each year.
The Corporation may redeem all or any part of the third series at any time or
times and from time to time, on the terms and conditions with respect thereto
set forth in subdivision (D) of Article FIFTH of this Certificate, by paying,
in the case of each such share to be redeemed, the par value thereof plus an
amount computed at the annual dividend rate of 5.65% of said par value from the
date from which said dividends on such share became cumulative to the date
fixed for such redemption, less the aggregate of such dividends theretofore or
on such redemption date paid thereon, plus a premium of $7 per share if the
redemption date shall be on or prior to October 1, 1971; of $5 per share if the
redemption date shall be subsequent to October 1, 1971 but on or prior to
October 1, 1976; of $3 per share if the redemption date shall be subsequent to
October 1, 1976 but on or prior to October 1, 1981; and of $1 per share if the
redemption date shall be subsequent to October 1, 1981.
(d) A fourth series of Fifty Thousand (50,000) shares of the Cumulative
Preferred Stock of the Corporation, which shares are designated "Cumulative
Preferred Stock, 4.60% Series" (herein called the "fourth series").
The rate of dividends payable upon the fourth series shall be 4.60% of the
par value thereof per annum, payable quarterly on the first days of January,
April, July and October in each year.
The Corporation may redeem all or any part of the fourth series at any time
or times and from time to time, on the terms and conditions with respect
thereto set forth in subdivision (D) of Article FIFTH of this Certificate, by
paying, in the case of each such share to be redeemed, the par value thereof
plus an amount computed at the annual dividend rate of 4.60% of said par value
from the date from which said dividends on such share became cumulative to the
date fixed for such redemption, less the aggregate of such dividends
theretofore or on such redemption date paid thereon, plus a premium of $5.00
per share if the redemption date shall be on or prior to September 30, 1968; of
$3.50 per share if the redemption date shall be subsequent to September 30,
1968 but on or prior to September 30, 1973; of $2.50 per share if the
redemption date shall be subsequent to September 30, 1973 but on or prior to
September 30, 1978; and of $1.00 per share if the redemption date shall be
subsequent to September 30, 1978; provided, however, that, prior to October 1,
1968, shares of the fourth series shall not be redeemed, directly or
indirectly, by the application of borrowed funds or the proceeds of the issue
of any stock ranking prior to or on a parity with the fourth series if such
borrowed
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funds have an interest cost, or such shares have a dividend cost, to the
Corporation of less than 4.60% per annum.
(e) A fifth series of fifteen thousand (15,000) shares of the Cumulative
Preferred Stock of the Corporation, which shares are designated "Convertible
Preferred Stock 5% Series" (herein called the "fifth series").
The rate of dividends payable upon the fifth series shall be 5% of the par
value thereof per annum payable quarterly on the first days of January, April,
July and October in each year.
The Corporation may redeem all or any part of the fifth series at any time or
times and from time to time, on or after April 1, 1979, on the terms and
conditions with respect thereto set forth in subdivision E of Paragraph Third
of this certificate, by paying, in the case of each share to be redeemed, the
par value thereof plus an amount computed at the annual dividend rate of 5% of
said par value from the date from which said dividends on such share became
cumulative to the date fixed for such redemption, less the aggregate of such
dividends theretofore or on such redemption date paid thereon, plus a premium
of $5 per share if the redemption date shall be on or prior to April 1, 1981;
of $3 per share if the redemption date shall be subsequent to April 1, 1982,
but on or prior to April 1, 1983; of $1 per share if the redemption date shall
be subsequent to April 1, 1983, but on or prior to April 1, 1984; and no
premium if the redemption date shall be subsequent to April 1, 1984.
The conversion rights of shares of the fifth series shall be as follows:
(i) Shares of the fifth series may at any time after the date of issue,
at the option of the holder, be converted into Common Stock of the
Corporation (as such shares may be constituted on the conversion date) at
the rate of four (4) shares of Common Stock for each share of the fifth
series, subject to adjustment as provided herein; provided that, as to any
shares of the fifth series which shall have been called for redemption, the
conversion right shall terminate at the close of business on the business
day prior to the date fixed for redemption unless default shall be made in
the payment of the redemption price plus accrued and unpaid dividends.
(ii) The holder of a share or shares of the fifth series may exercise the
conversion rights as to any thereof by delivering to the Corporation during
regular business hours, or at the office of any transfer agent of the
Corporation for the fifth series, if any, or at such other place as may be
designated by the Corporation, the certificate or certificates for the
shares to be converted, duly endorsed or assigned in blank to the
Corporation (if required by it), accompanied by written notice stating that
the holder elects to convert such shares and stating the name or names
(with address) in which the certificate or certificates for Common Stock
are to be issued. Conversion shall be deemed to have been effected on the
date when such delivery is made, and such date is referred to herein as the
"conversion date". As promptly as practicable thereafter, the Corporation
shall issue and deliver to or upon the written order of such holder, at
such office or other place designated by the Corporation, a certificate or
certificates for the number of full shares of Common Stock to which he is
entitled and a check, cash, scrip certificate or other adjustment in
respect of any fraction of a share as provided in paragraph (e)(iv) below.
The person in whose name the certificates for Common Stock are to be issued
shall be deemed to have become a holder of Common Stock of record at the
close of business on the conversion date unless the transfer books of the
Corporation are closed on that date, in which event he shall be deemed to
have become a holder of Common Stock of record at the opening of business
on the next succeeding date on which the transfer books are open, but the
conversion rate shall be that in effect on the conversion date.
(iii) No payment or adjustment shall be made for dividends accrued on any
shares of the fifth series converted or for dividends on any shares of
Common Stock issuable on conversion, but until all dividends accrued and
unpaid on the fifth series up to the quarterly dividend payment date next
preceding the conversion date shall have been paid to the holder of the
shares of the fifth series converted
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or to his assigns, or declared and set apart for such payment, in full, no
dividend shall be paid or set apart for payment or declared on the Common
Stock or on any other class of stock of the Corporation ranking as to
dividends subordinate to the fifth series and no payment shall be made with
respect to any purchase or acquisition of, or to any sinking fund with
respect to, any class of stock of the Corporation ranking as to dividends
or distribution of assets on a parity with or subordinate to the fifth
series.
(iv) The Corporation shall not be required to issue any fraction of a
share upon conversion of any share or shares of the fifth series. If more
than one share of the fifth series shall be surrendered for conversion at
one time by the same holder, the number of full shares of Common Stock
issuable upon conversion thereof shall be computed on the basis of the
total number of shares of the fifth series so surrendered. If any
fractional interest in a share of Common Stock would be deliverable upon
conversion, the Corporation shall make an adjustment therefore in cash
unless its Board of Directors shall have determined to adjust fractional
interests by issuance of scrip certificates or in some other manner.
Adjustment in cash shall be made on the basis of the current market value
of one share of Common Stock, which shall be taken to be the last sale
price, regular way, of the Corporation's Common Stock on the New York Stock
Exchange on the last trading day before the conversion date, or, if there
is no reported sale on that day, the average of the closing bid and asked
quotations, regular way, on that Exchange on that day or, if the Common
Stock is not listed or admitted to trading on such Exchange, on the
principal national securities exchange on which the Common Stock is listed
or admitted to trading, or if it is not listed or admitted to trading on
any national securities exchanges, the average of the closing bid and asked
prices in the over-the-counter market on that date as furnished by any
securities broker or dealer selected from time to time by the Corporation
for that purpose.
(v) The issuance of Common Stock on conversion of the fifth series shall
be without charge to the converting holder of the fifth series for any fee,
expense or tax which may be payable in respect of any transfer involved in
the issuance and delivery of shares in any name other than that of the
holder of record on the books of the Corporation of the shares of the fifth
series converted, and the Corporation shall not, in any such case, be
required to issue or deliver any certificate for shares of Common Stock
unless and until the person requesting the issuance thereof shall have paid
to the Corporation the amount of such fee, expense or tax or shall have
established to the satisfaction of the Corporation that such fee, expense
or tax has been paid.
(vi) The conversion rate provided in paragraph (e)(i) shall be subject to
the following adjustments, which shall be made to the nearest one-hundredth
of a share of Common Stock or, if none, to the next lower one-hundredth:
(A) In case the Corporation shall declare a dividend on its Common
Stock in shares of its capital stock, subdivide its outstanding shares
of Common Stock, combine its outstanding shares of Common Stock into a
smaller number of shares, or issue by reclassification of its Common
Stock (including any such reclassification in connection with a
consolidation or merger in which the Corporation is the continuing
corporation) any shares of its capital stock, the conversion rate in
effect at the time of the record date for such dividend or of the
effective date of such subdivision, combination or reclassification
shall be proportionately adjusted so that the holder of any of the
fifth series surrendered for conversion after such time shall be
entitled to receive the kind and amount of shares which he would have
owned or have been entitled to receive had the fifth series been
converted immediately prior to such time. Such adjustment shall be made
successively whenever any event listed above shall occur.
(B) In case the Corporation shall fix a record date for the issuance
of rights or warrants to all holders of its Common Stock entitling them
(for a period expiring within 45 days after such record date) to
subscribe for or purchase shares of Common Stock at a price per share
less than the Current Market Price (as defined below) on such record
date, the number of shares of Common Stock into which each share of the
fifth series shall be convertible after such record date shall be
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determined by multiplying the number of shares of Common Stock into
which such share of the fifth series was convertible immediately prior
to such record date by a fraction, of which the numerator shall be the
sum of the total number of shares of Common Stock outstanding
immediately prior to such record date and the number of additional
shares of Common Stock to be offered for subscription or purchase, and
of which the denominator shall be the sum of the total number of shares
of Common Stock outstanding immediately prior to such record date and
the number of shares of Common Stock which the aggregate offering price
(without deduction for expenses or commissions of any kind) of the
total number of shares so to be offered would purchase at such Current
Market Price. Such adjustment shall be made successively whenever such
a record date is fixed; and in the event that such rights or warrants
are not so issued, the conversion rate shall again be adjusted to be
the conversion rate which would then be in effect if such record date
had not been fixed.
(C) In case the Corporation shall fix a record date for the making of
a distribution to all holders of its Common Stock (including any such
distribution made in connection with a consolidation or merger in which
the Corporation is the continuing corporation) of evidences of its
indebtedness or assets (excluding dividends paid in, or distributions
of, its capital stock, or cash paid out of earned surplus) or
subscription rights or warrants (excluding those referred to in
subparagraph (vi)(B)), then in each such case the number of shares of
Common Stock into which each share of the fifth series shall be
convertible after such record date shall be determined by multiplying
the number of shares of Common Stock into which such share of the fifth
series was convertible immediately prior to such record date by a
fraction, of which the numerator shall be the Current Market Price on
such record date, and of which the denominator shall be the Current
Market Price on such record date less the fair market value (as
determined by the Board of Directors of the Corporation, whose
determination shall be conclusive, and described in a certificate of an
officer of the Corporation filed in the Corporation's records) of the
portion of the assets or evidences of indebtedness so to be distributed
or of such subscription rights or warrants applicable to one share of
Common Stock. Such adjustment shall be made successively whenever such
a record date is fixed; and in the event that such distribution is not
so made, the conversion rate shall again be adjusted to be the
conversion rate which would then be in effect if such record date had
not been fixed.
(D) For the purpose of any computation under subparagraphs (vi)(B)
and (vi)(C) above, the "Current Market Price" on any record date shall
be deemed to be the average of the daily closing prices per share of
Common Stock for the 30 consecutive business days commencing 45
business days before such date. The closing price for each day shall be
the last sale price, regular way, or, in case no such sale takes place
on such day, the average of the closing bid and asked prices, regular
way, in either case on the New York Stock Exchange, or, if the Common
Stock is not listed or admitted to trading on such Exchange, on the
principal national securities exchange on which the Common Stock is
listed or admitted to trading, or if it is not listed or admitted to
trading on any national securities exchange, the average of the closing
bid and asked prices in the over-the-counter market on that date as
furnished by any securities broker or dealer selected from time to time
by the Corporation for that purpose. The closing price determined as
stated above is herein called the "closing price".
(E) No adjustment in the conversion rate shall be required unless
such adjustment would require an increase or decrease in such rate of
at least one-twentieth of a share; provided, however, that any
adjustments which by reason of this subparagraph (E) are not required
to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this paragraph (e)(vi)
shall be made to the nearest cent or to the nearest one-hundredth of a
share, as the case may be.
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(F) In the event that at any time, as a result of an adjustment made
pursuant to subparagraph (vi)(A.) above, the holder of any of the fifth
series thereafter surrendered for conversion shall become entitled to
receive any shares of the Corporation other than shares of its Common
Stock, thereafter the number of such other shares so receivable upon
conversion of any of the fifth series shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock
contained in this paragraph (e)(vi).
No adjustment of the conversion rate provided in subparagraph (e)(i)
shall be made by reason of the issuance of Common Stock for cash except
as provided in subparagraph (e)(vi)(B), or by reason of the issuance of
Common Stock for property or services; provided, that no such issuance
of Common Stock for cash, property, or services shall be made unless
the Board of Directors shall first have made a determination that
consideration to be received with respect to any such issuance of
Common Stock is fair and reasonable under the particular circumstances.
Whenever the conversion rate is adjusted pursuant to this paragraph
(e)(vi), advice of such adjusted conversion rate shall be sent to the
holders of the fifth series at or about the time of the next dividend
payment on such fifth series.
(vii) In case of any reclassification or change of the outstanding shares
of Common Stock of the Corporation (except a split or combination of
shares) or in case of any consolidation or merger to which the Corporation
is a party (except a merger in which the Corporation is the surviving
corporation and which does not result in a reclassification of or change in
the outstanding Common Stock of the Corporation except a split or
combination of shares) or in case of any sale or conveyance to another
corporation of all or substantially all of the property of the Corporation
or by the successor or purchasing corporation so that the holder of each
share of the fifth series then outstanding shall thereafter have the right
to convert such share into the kind and amount of stock and other
securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock of the Corporation into which such share of the
fifth series might have been converted immediately prior thereto, and that
there shall be subsequent adjustments of the conversion rate which shall be
equivalent, as nearly as practicable, to the adjustments provided for in
paragraph (e)(vi) above. The provisions of this paragraph (e)(vii) shall
similarly apply to successive reclassifications, changes, consolidations,
mergers, sales or conveyances.
(viii) Shares of Common Stock issued on conversion of shares of the fifth
series shall be issued as fully paid shares and shall be non-assessable by
the Corporation. The Corporation shall at all times reserve and keep
available, free from preemptive rights for the purpose of effecting the
conversion of the fifth series, such number of its duly authorized shares
of Common Stock as shall be sufficient to effect the conversion of all
outstanding shares of the fifth series.
(ix) Shares of the fifth series converted as provided herein shall be
cancelled, shall no longer be deemed outstanding, and shall revert to the
status of authorized, unissued Preferred Stock of the Corporation, and the
Board of Directors shall have authority to issue such Preferred Stock with
such relative rights, preferences and privileges as it may fix and as if
such stock had not been issued as a part of the initial series of the
Preferred Stock.
SEVENTH: (A) Notwithstanding any other provision of this Certificate,
outstanding shares of Common Stock held by Disqualified Holders (as hereinafter
defined in subdivision (ii) of Paragraph (B) of this Article SEVENTH) shall
always be subject to redemption by the Corporation to the extent necessary, in
the judgment of the Board of Directors, to prevent the loss or secure the
renewal or reinstatement of any license or franchise from any governmental
agency held by the Corporation or any of its Subsidiaries (as hereinafter
defined in subdivision (v) of Paragraph (B) of this Article SEVENTH) to conduct
any portion of the business of the Corporation or any of its Subsidiaries,
which license or franchise is conditioned upon some or all of the holders of
the stock of the Corporation possessing prescribed qualifications. The terms
and conditions of such redemption shall be as follows, subject in any case to
any additional or different rights of a
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particular Disqualified Holder or of the Corporation pursuant to any contract
or agreement between such Disqualified Holder and the Corporation:
(i) the redemption price of the shares to be redeemed pursuant to this
Article SEVENTH shall be equal to the Current Market Value (as hereinafter
defined in subdivision (i) of Paragraph (B) of this Article SEVENTH) of
such shares; provided that such redemption price as to any Disqualified
Holder who purchased such shares after November 18, 1994, and within one
year of the Redemption Date (as hereinafter defined in subdivision (iii) of
paragraph (B) of this Article SEVENTH) shall not (unless otherwise
determined by the Board of Directors) exceed the purchase price paid by
such Disqualified Holder for such shares;
(ii) the redemption price of such shares may be paid in cash, Redemption
Securities (as hereinafter defined in subdivision (iv) of Paragraph (B) of
this Article SEVENTH) or any combination thereof;
(iii) if less than all of the shares held by Disqualified Holders are to
be redeemed, the shares to be redeemed shall be selected in such manner as
shall be determined by the Board of Directors, which may include selection
first of the most recently purchased shares thereof, selection by lot or
selection in any other manner determined by the Board of Directors to be
equitable;
(iv) at least ten days' written notice of the Redemption Date shall be
given to the record holders of the shares selected to be redeemed (unless
waived in writing by any such holder), provided that the Redemption Date
may be the date on which written notice shall be given to record holders if
the cash or Redemption Securities necessary to effect the redemption shall
have been deposited in trust for the benefit of such record holders and
subject to immediate withdrawal by them upon surrender of the stock
certificates for their shares to be redeemed;
(v) on the Redemption Date, unless the Corporation shall have defaulted
in paying or setting aside for payment the cash or Redemption Securities
payable upon such redemption, any and all rights of Disqualified Holders in
respect of shares so redeemed (including without limitation any rights to
vote or participate in dividends), shall cease and terminate, and from and
after such Redemption Date such Disqualified Holders shall be entitled only
to receive the cash or Redemption Securities payable upon redemption of the
shares so redeemed; and
(vi) such other terms and conditions as the Board of Directors shall
determine.
(B) For purposes of this Article SEVENTH:
(i) "Current Market Value" of a share of Common Stock shall mean the
average of the daily closing prices for such a share for the 20 consecutive
trading days commencing on the 22nd trading day prior to the date on which
notice of redemption shall be given pursuant to subdivision (iv) of
paragraph (A) of this Article SEVENTH (or, if such notice shall have been
waived, the date that is ten days prior to the Redemption Date). The
closing price for each day shall be the closing price on the New York Stock
Exchange Composite Tape, or, if the Common Stock is not quoted on such
Composite Tape, on the New York Stock Exchange, Inc., or if such stock is
not listed on such exchange, on the principal United States registered
securities exchange on which such stock is listed, or if such stock is not
listed on any such exchange, the average of the closing bid and asked
prices as reported by the electronic inter-dealer quotation system operated
by NASDAQ, Inc. or a similar source selected from time to time by the
Corporation for the purpose, or if no such prices or quotations are
available, the fair market value on the applicable day as determined by the
Board of Directors in good faith.
(ii) "Disqualified Holder" shall mean any holder of shares of Common
Stock of the Corporation whose continued holding of such stock, either
individually or taken together with the holding of shares of stock of the
Corporation by any other holder or holders of shares of stock of the
Corporation, may
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result, in the judgment of the board of directors, in the loss of, or the
failure to secure the renewal or reinstatement of, any license or franchise
from any governmental agency held by the Corporation or any of its
Subsidiaries to conduct any portion of the business of the Corporation or
any of its Subsidiaries.
(iii) "Redemption Date" shall mean the date fixed by the Board of
Directors for the redemption of any shares of stock of the Corporation
pursuant to this Article SEVENTH.
(iv) "Redemption Securities" shall mean any debt or equity securities of
the Corporation, any of its Subsidiaries or any other corporation, or any
combination thereof, having such terms and conditions as shall be approved
by the Board of Directors and which, together with any cash to be paid as
part of the redemption price, in the opinion of any nationally recognized
investment banking firm selected by the Board of Directors (which may be a
firm which provides other investment banking, brokerage or other services
to the Corporation), has a value, at the time notice of redemption is given
pursuant to subdivision (iv) of paragraph (A) of this Article SEVENTH (or,
if such notice shall have been waived, the date that is ten days prior to
the Redemption Date), at least equal to the price required to be paid
pursuant to subdivision (i) of paragraph (A) of this Article SEVENTH
(assuming, in the case of Redemption Securities to be publicly traded, such
Redemption Securities were fully distributed and subject only to normal
trading activity).
(v) "Subsidiary" shall mean any corporation or other entity of which at
least a majority of the voting power of the voting equity securities or
equity interest is owned, directly or indirectly, by the Corporation.
EIGHTH: The term of existence of the Corporation shall be perpetual.
NINTH: The number of directors of the Corporation shall be not less than nine
(9).
TENTH: The office of the Corporation in the State of New York is located in
the County of Monroe. The Secretary of State of the State of New York is hereby
designated as an agent of the Corporation upon whom all process in any action
or proceeding against the Corporation may be served within the State of New
York. The address to which the Secretary of State shall mail a copy of any
process which may be served upon him is 180 South Clinton Avenue, Rochester,
New York 14646-0700, Attention: Corporate Secretary.
ELEVENTH: No director of the Corporation shall be personally liable to the
Corporation or its shareowners for damages for any breach of duty as a director
unless the elimination or limitation of liability is expressly prohibited by
the New York Business Corporation Law as currently in effect or as it may be
amended. No amendment, modification or repeal of this Article shall adversely
affect any right or protection of any director that exists at the time of such
change.
5. This Restatement of the Certificate of Incorporation of the Corporation
was authorized by a resolution adopted by the Board of Directors of the
Corporation at a meeting thereof duly called and held, followed by the
affirmative votes of the holders of the requisite percentage of the outstanding
shares of Common Stock of the Corporation, cast in person or by proxy, at the
Special Meeting of Shareowners held on December 19, 1994, and, in addition,
with respect to the authorization of a new class of preferred stock, by the
affirmative votes of the holders of the requisite percentage of the outstanding
shares of the Cumulative Preferred Stock, cast in person or by proxy, at a
Special Meeting of Cumulative Preferred Shareowners held on December 19, 1994.
The aforementioned Special Meetings were held upon notice, pursuant to Section
605 of the Business Corporation Law, to every shareowner of record entitled to
vote thereon, and neither the Restated Certificate of Incorporation, as
amended, nor any other Certificate filed pursuant to law require a larger
proportion of votes.
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In Witness Whereof, the undersigned have executed and subscribed this
Restated Certificate of Incorporation this day of 1994.
---------------------------------
John K. Purcell
Corporate Vice President
---------------------------------
Josephine S. Trubek
Corporate Secretary
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APPENDIX 2
STATE OF NEW YORK
PUBLIC SERVICE COMMISSION
Petition of Rochester Telephone Corporation for Approval of
Proposed Restructuring Plan
Case 93-C-0103
Petition of Rochester Telephone Corporation for Approval of a
New Multi Year Rate Stability Agreement
Case 93-C-0033
----------------
JOINT STIPULATION AND AGREEMENT
The Parties hereto submit this Joint Stipulation and Agreement ("Agreement")
for approval by the New York Public Service Commission ("Commission"). The
Agreement provides the framework for the restructuring of Rochester Telephone
Corporation ("RTC") into an unregulated parent holding company ("R-HC"), a
telephone company regulated by the Commission as a transportation corporation
under New York law ("R-Net"), and a lightly regulated retail provider of
competitive telephone goods and services ("R-Com"), and at the same time
provides for decreases in consumer rates and the maintenance of high quality
service./1/ It establishes a new multi-year rate stability plan. The Agreement
further provides for the unbundling of the network elements of RTC and makes
them available to competitive carriers. The signatories believe that the
proposal described in the Agreement, if adopted by the Commission, will place
New York State at the vanguard in the development of a seamless interconnected
communications infrastructure, while ensuring that consumers within the RTC
service territory will continue to enjoy reliable, reasonably priced telephone
service. This is accomplished by significant rate decreases and additional
depreciation reserve credits and strong incentives for R-Net to maintain high
quality service and a commitment to do so. We urge the Commission's prompt and
favorable review.
Definition:
"Affiliate" means an entity that directly, or indirectly through one or more
intermediaries, controls, is controlled by or is under common control with the
entity specified, and includes subsidiaries of R-Net and R-HC. For purposes of
this Agreement, the term "control" (including the terms "controlling", "have a
controlling interest in", "controlled by" or "under common control with") of
an entity means (i) the owning or holding, directly or indirectly, of 5% or
more of the voting capital stock of such entity or (ii) possessing, directly
or indirectly, the power to influence, to direct, or cause the direction of,
the actions, management and policies of such entity, whether by contract or
otherwise, including whether or not such power is based upon stockholding.
I. Restructuring of RTC
A. R-HC
1. Holding Company Formed
On the effective date of the Open Market Plan ("OMP"), RTC shall be
reconstituted as R-HC, and in advance thereof shall seek authorization from
the Secretary of State to operate under New York law governing business
corporations as an unregulated parent holding company and, except to the
extent provided for in law and in this Agreement, to succeed to all
ownership interests and liabilities of RTC. Attached as Appendix 1 is a
draft Certificate of Incorporation of R-HC.
- - ------
/1/The new company names in this Agreement are for identification purposes
only.
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2. Transfer of Assets, Accounts, Personnel and Liabilities
On the effective date of the OMP, R-HC shall retain so much of the
assets, accounts, personnel and liabilities of RTC, as are necessary to
perform, at R-HC, the functions and responsibilities enumerated in Appendix
2 to this Agreement. The proceeds of RTC common stock authorized to be
sold, in Cases 93-C-1110 and 93-C-0970, shall be transferred to R-HC.
3. Wholly-Owned Subsidiaries
On the effective date of the OMP, R-Net and R-Com shall be established as
direct or indirect wholly-owned subsidiaries of R-HC with the assets,
liabilities, rights and obligations set forth herein. On the effective date
of the OMP, R-Net will provide a description of the actual corporate
structure of R-HC and its Affiliates to the Staff ("Staff") of the
Department of Public Service ("DPS").
4. Corporate Books and Records
(a) The corporate books, records, and Board minutes of R-HC will be made
available within New York State, and the Commission and Staff shall, upon
oral or written request, be provided prompt access to those books and
records.
(b) In addition, the Commission and Staff shall, upon oral or written
request, be provided prompt access to the books and records of Affiliates
of the New York regulated telephone companies (e.g., R-Net, Highland
Telephone, Sylvan Lake Telephone, Seneca-Gorham Telephone, and AuSable
Valley Telephone ["NY Telcos"]) that are controlled by R-HC, where the
Affiliate whose books and records are sought has either a direct or
indirect relationship with a NY Telco. Staff shall have the right to audit
without notice the books and records of R-Net, R-HC and R-Net's Affiliates
with respect to any transfer of funds subject to the cash management
agreement referred to in paragraph I.A.14.
If R-HC does not have a controlling interest in an entity that has direct
or indirect transactions with R-Net or other NY Telcos, upon oral or written
request, Staff shall be permitted to review and copy any financial reports
or records (including but not limited to income statements, balance sheets
and statements of cash flows) that R-HC has in its possession or that R-HC
has access to for such entity. The procedures of 16 N.Y.C.R.R. Subpart 6-1
will be followed, if applicable.
In addition, upon request, Staff shall be permitted to review all
financial reports, as defined above, of Affiliates of R-HC that do not have
apparent direct or indirect transactions with R-Net or other NY Telcos. For
entities that R-HC does not have a controlling interest in, Staff will be
permitted to review and copy any financial reports or records that R-HC has
in its possession or that R-HC has access to, subject to the procedures of
16 N.Y.C.R.R. Subpart 6-1.
For the purposes of this paragraph I.A.4.b., any information in the
possession or control of an entity over which R-HC has, directly or
indirectly, the power to direct, or cause the direction of the actions,
management and policies, shall be deemed to be in the possession and control
of R-HC and shall be made available as provided in this paragraph I.A.4.b.
Where it is not apparent that an Affiliate has either a direct or indirect
relationship with a NY Telco but Staff has a reasonable basis for believing
that the relationship between that Affiliate and R-HC or any other Affiliate
(including the NY Telcos) may affect the revenues, expenses or investments
of the NY Telco, Staff shall have the burden of demonstrating its reasonable
basis to the Commission. The NY Telco and R-HC will be afforded a reasonable
opportunity to respond. If the Commission finds that there is a reasonable
basis for believing that the relationship between that Affiliate and R-HC or
any other Affiliate (including NY Telcos) may affect the revenues, expenses
or investments of the NY Telco, upon oral or written notice, Staff shall be
provided prompt access to the books and records of the Affiliate(s)
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in question. Nothing in this Agreement shall limit or modify R-Net's or any
other NY Telco's obligations to provide information to the Commission or
Staff to establish R-Net's or the other NY Telco's compliance with the
Commission's affiliate transaction rules and with the provisions of this
Agreement.
In discharge of the requirements of this paragraph, neither R-HC nor any
of its non-regulated Affiliates will be required to develop records or
reports that are not prepared in the ordinary course of business or required
by the terms of this Agreement.
Nothing in this Agreement shall be construed to abridge the Commission's
authority under the Public Service Law ("PSL") with respect to access to
corporate books and records.
5. Use of RTC Name
Except in connection with the customer education and outreach activities
described in paragraph IV.A. below, the RTC name shall not be assigned to
or used by any entity other than R-Net. The RTC name includes any name or
identifying logo or trademark used by RTC prior to restructuring.
Incidental use of the RTC name for the temporary continuation of existing
signs, letterhead and business cards shall be permitted on an interim
basis, but in no event to exceed three months, as more specifically
provided below:
(a) There shall be no use of the RTC name by or on behalf of R-Com or any
New York State nonregulated Affiliate except for Rochester Tel Mobile
Communications;
(b) Use of the RTC name by R-HC shall cease within three months of the
effective date of the OMP but, at no time and in no case, shall the RTC
name be used by or on behalf of R-HC or other nonregulated Affiliates for
the marketing of telecommunications services;
(c) Use of the RTC name by DSI shall cease thirty days after the later of
Commission approval of this Agreement or RTC shareowner approval of the
corporate restructuring; and
(d) Use of the RTC name by non-New York State Affiliates other than local
exchange telephone companies shall cease within three months of the
effective date of the OMP.
B. R-Net
1. R-Net Formed
On the effective date of the OMP, the public utility franchises currently
held by RTC shall be transferred to R-Net, which shall in advance seek
authorization from the Secretary of State to operate as a transportation
corporation under New York law in accordance with its certificate of
incorporation attached hereto as Appendix 3, and RTC shall cease, on that
date, to be a telephone corporation under the provisions of the PSL. R-Net
shall succeed to all of RTC's regulatory rights, duties and
responsibilities as a telephone corporation, except as provided herein.
2. Issuance of Securities
On the effective date of the OMP, R-Net is authorized to issue common
stock and to transfer shares of such common stock to R-HC in exchange for
the transfer of the assets, accounts, personnel and telephone operations of
RTC as provided for in paragraphs I.B.3. and I.B.4.
RTC's best current estimate of R-Net's actual capital structure at
inception (after the debt issuance(s) discussed below) is shown in Appendix
4. In no event shall the initial ratio of R-Net's long-term debt to total
capital exceed the 40.37% ratio contained in Appendix 4. In addition, the
amount of public long-term debt shall be no less than $40 million.
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R-Net's initial capitalization shall include sufficient public debt to
obtain an initial debt rating of that public debt of "A" or above from
Standard and Poor's ("S&P") and "A2" or above from Moody's Investor
Services ("Moody's"). The remainder of R-Net's debt may be composed of debt
payable to R-HC, provided that R-Net's initial non-public debt shall
consist of components such that, in the aggregate, the interest rate and
maturity shall be the same as the terms of the public debt currently
outstanding that RTC issued, prior to the effective date of the OMP, for
the rendition of public service in RTC's pre-restructuring service
territory.
R-Net shall obtain its initial public debt in one of two ways:
(a) RTC shall issue, subject to Commission approval, and prior to the
effective date of the OMP, public debt assignable to R-Net. This debt shall
be assigned to R-Net as soon as practicable; or
(b) R-Net shall issue, subject to Commission approval, public debt within
90 days of the effective date of the OMP. The effective cost of this public
debt (i.e., including all issuance and other expenses) to customers shall
not exceed 8.00%.
3. Transfer of Assets and Personnel
On the effective date of the OMP, there shall be transferred to R-Net
from RTC, all of the business of the latter, including its assets,
accounts, personnel and liabilities with the exception of the assets,
accounts, personnel and liabilities retained by R-HC pursuant to paragraph
I.A.2. above, or transferred to either R-Com or Distributed Solutions, Inc.
("DSI"), pursuant to paragraphs I.C.3. and I.E. below. The items so
transferred to R-Net shall be reflected on its books in the amounts that
they had been reflected on the books of RTC immediately prior to the
transfer. Within 30 days of the effective date of the OMP, R-Net shall
provide to Staff, and to the active parties in this proceeding, an
enumeration by functional group of the assets, accounts, personnel and
liabilities transferred to R-Net. R-Net shall establish the position of
legal counsel and the incumbent of that position shall be responsible for
the provision of legal services to R-Net only.
4. Transfer of Telephone Operations
On the effective date of the OMP, RTC shall cease providing regulated
telephone service and, that responsibility, together with the customer
base, shall be transferred to R-Net, except as provided below.
5. Responsibility to Offer Service
(a) With the exception of those services enumerated in paragraph
I.C.3.a., as that listing may be expanded as provided in paragraph I.B.7.,
R-Net will succeed to the responsibilities of RTC with respect to the
services now offered by the latter. Accordingly, except with respect to the
services included within paragraph I.C.3., or as otherwise provided in this
document, R-Net will, subject to the Commission's on-going authority,
provide at retail the service offerings currently provided by RTC.
Additionally, R-Net shall, to the extent provided in its initial tariff,
and, in the future, to such extent as may be reasonably practical upon a
bona fide request, unbundle the services or network elements available from
its network facilities, and those services will be available in the
existing service territory of RTC, on a tariff basis, for purchase by R-Com
and by other carriers certified by the Commission to offer telephone
service ("certified carriers") or by other bona fide service providers.
Nothing in this Agreement prohibits a certified carrier or other bona fide
service provider from seeking Commission authorization requiring that R-
Net, in its existing territory, further unbundle network services and/or
elements. If R-Net declines to make the service or network elements
available, it shall indicate its reasons. Either R-Net or the requesting
party may refer any dispute to the Committee on Standards and Cooperative
Practices, as described in paragraph III.A. below, prior to bringing the
dispute to the Commission. This does not preclude any party from
petitioning the Commission directly for the establishment of a task force
to address the issue, as provided for in the Order Instituting Procedures
for the Creation of ONA Task Forces, issued and effective March 29, 1989.
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R-Net will succeed to the obligations currently imposed upon or accepted
by RTC to allow the physical collocation of facilities of other telephone
carriers at installations operated by R-Net.
(b) With the exceptions of those services enumerated in paragraph
I.C.3.a., as such enumeration may in the future be expanded as provided in
paragraph I.B.7., a retail customer within the existing service territory
of RTC may at any time transfer from any other certified carrier to R-Net
for the provision of any service then offered by R-Net at retail. The first
time a customer transfers back to R-Net, provided that the transfer back is
within a period of three years from the effective date of the OMP, R-Net
shall not impose an order processing charge or other non-recurring charge
except that the customer will, pursuant to tariff, be assessed any
applicable charges only for any required field work, and except that R-Net
may require deposits or payments of balances due for previously supplied R-
Net services, as provided by R-Net's tariffs and Commission regulations.
(c) Directories: R-Net will continue to offer White and Yellow page
directories for the R-Net service territory, including electronic Yellow
and White pages ("Electronic Directories") should R-Net begin offering that
service for its service territory. No other R-HC Affiliate may provide
White and Yellow pages, including Electronic Directories, in R-Net's
service territory absent Commission approval of the transfer of assets
and/or service. Notwithstanding the foregoing, if White or Yellow page
assets and services are not transferred, an R-Net Affiliate may provide
White and Yellow pages and Electronic Directories in R-Net's service
territory provided that any R-Net data and/or data bases used by the
Affiliate to provide such services are available to all other providers on
the same terms and conditions, pursuant to tariff. R-Net may petition the
Commission for permission to transfer its Yellow page or Electronic
Directories operations, or any portion thereof, to another entity upon such
terms and conditions as the Commission may at that time impose. Only R-Net
or its agent may market White pages, Yellow pages and Electronic
Directories as the official directory of R-Net or RTC. In the event an
Affiliate and R-Net are both providing directories, R-HC, its Affiliates
and R-Net shall not market, provide, sell or advertise each others'
directories, including but not limited to White pages, Yellow pages,
Electronic Directories or directories in any other medium, in R-Net's
service territory, except as permitted by the Commission.
6. Notice of Additional Service Offerings and Network Elements
(a) It is anticipated that, as R-Net modifies and expands its network,
other services or network elements will be available for resale by R-Com
and by other certified carriers and bona fide service providers. R-Net
will, to the extent practicable, provide at least three months' notice of
the availability of any new service or network elements to all certified
carriers and bona fide service providers at the same time.
(b) Annually, R-Net shall file with the Commission its Capital Program
Filing pursuant to 16 N.Y.C.R.R. Section 644.3. To the extent that any
certified carrier or bona fide service provider is desirous of purchasing a
network function or service that is neither then currently offered by R-Net
nor contemplated in its Capital Program Filing to be available, the
certified carrier or bona fide service provider shall submit a request for
the service or network function to R-Net. Within sixty days from the
receipt of such request, R-Net shall advise whether and when the service or
network function will be available on a tariff basis. If R-Net declines to
make the service or network function available, it shall indicate its
reasons and, at the option of the requesting certified carrier or bona fide
service provider, refer any dispute to the technical committee established
pursuant to paragraph III.A. below. This does not preclude any party from
petitioning the Commission directly for the establishment of a task force
to address the issue, as provided for in the Order Instituting Procedures
for the Creation of ONA Task Forces, issued and effective March 29, 1989.
R-Net shall keep a record of all requests for service or network functions,
to be available upon request. Whenever capital expenditures are made to
accommodate the request of a single or limited group of customers,
certified carriers or bona fide service
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providers for a specific network function or service, R-Net shall, by
contract or tariff, impose upon such customer(s), certified carrier(s) or
bona fide service provider(s), a termination charge sufficient to reimburse
R-Net for its unrecovered investment in the event that the customer(s),
certified carrier(s) or bona fide service provider(s) terminate service
before the capital expenditures are fully recovered.
7. Transfer of Goods and Service Offerings and Stand-Alone Assets
At any time that R-Net or any interested person or entity believes that
the market for a particular regulated good or service is competitive, it
may apply to the Commission for authorization for R-Net to cease offering
that good or service at retail and for R-Com to begin providing that good
or service. If subsequently authorized by the Commission, and R-Com agrees
to the transfer price set in that proceeding, R-Com will begin providing
that good or service consistent with the requirements and conditions of the
Commission's Order in that proceeding. The Commission may approve the
proposed transfer if it finds that the transfer will be consistent with the
public interest. If R-Com finds the transfer price set in that proceeding
to be unacceptable, R-Net shall retain the good or service and continue to
provide it at retail as well as at wholesale. Any assets transferred to R-
Com shall be removed from the system of accounts of R-Net and, thereafter,
R-Net shall no longer offer that good or service at retail. If the good or
service that is transferred is provided through facilities that are
integral both to network operations and to the provision of that good or
service at retail, those facilities shall remain owned by R-Net and such
transferred good or service shall be offered by R-Net to R-Com, any other
certified carriers or any other bona fide service providers on an unbundled
tariff basis.
8. Board of Directors
A majority of the membership of the Board of Directors of R-Net shall be
outside directors, i.e., they may not be officers or employees of R-Net,
nor may they be directors, officers or employees of R-HC or of any
Affiliate of R-HC. Only one of R-Net's Directors may simultaneously serve
as a Director, Officer or employee of R-HC or any of R-HC's Affiliates
other than R-Net. Following the selection of the initial Board of
Directors, the nomination of outside R-Net directors will be the
responsibility of an R-Net Committee on Directors, all of the members of
which shall be outside directors.
9. Compensation and Responsibilities of Officers and Employees
Annual compensation (including cash, bonuses and stock options) of
officers and employees of R-Net shall be based on the service and
profitability of R-Net only. Any stock option program adopted for R-Net
officers and employees shall be in R-HC stock provided, however, at no time
may the officers and senior management employees/2/ of R-Net, their spouses
and unemancipated children, own shares of, or options in, the stock of R-HC
that collectively exceed ten percent of the outstanding shares of R-HC. The
annual allocation of individual options, purchases of shares on the open
market and purchases through R-Net's 401(K) plan shall be included within
the cap. R-Net shall annually require its officers and senior management
employees to certify the number of shares owned by them, their spouses and
unemancipated children, and R-Net will provide the Commission annually with
the total stock ownership interest of that group in the stock of R-HC.
Annually, R-Net's management employees at or above the Manager level
shall certify in writing their general familiarity with the Commission's
requirements regarding affiliate transactions, including the requirements
of this Agreement, and shall affirm that their subordinates who have reason
to make judgments about the jurisdictional nature of their work are
familiar with the Commission's affiliate transaction requirements.
- - ------
/2/"Senior management employees" of R-Net means R-Net's President, all R-Net
employees reporting directly to the President ("Directly Reporting Employees")
and all other R-Net employees reporting directly to Directly Reporting
Employees.
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10. Dividend Certification
(a) At least annually, but also following any circumstance that could
reasonably be expected to affect adversely R-Net's debt ratings, including
but not limited to, a downgrading of the debt ratings of R-HC, R-Net will
review with the Director of the Department of Public Service Office of
Accounting and Finance its activities and plans relating to the attraction
of capital and, in addition, review R-Net's dividend and financial
experience over the past fiscal year and its plans and projections for the
coming fiscal year.
(b) As a condition of any decision by R-Net to pay dividends on R-Net's
common stock, the directors of R-Net shall certify quarterly that the
payment of such dividends will neither impair R-Net's service quality nor
its ability to finance its short and long term capital needs at reasonable
terms while maintaining a debt rating target of "A" (for S&P, or the
equivalent for other rating agencies).
(c) If R-Net's service quality deteriorates to the point where the
penalty in Appendix 5, page 2, condition 2(a) applies, the directors of R-
Net shall not authorize any additional payment of dividends on common stock
until it shall first have rectified the service deficiency or deficiencies
triggering the penalty as defined in Appendix 5 to the satisfaction of the
Director of the Communications Division of the Department of Public
Service.
(d) In addition to the foregoing, at any time during the term of this
Agreement:
(i) if R-HC or R-Net experiences a downgrading of its senior debt, or
is placed on a credit watch for a possible downgrading of its senior
debt, the affected company's management will immediately notify and
meet with the Director of the Office of Accounting and Finance of DPS
to explain its evaluation of the present and future status of R-Net's
credit worthiness, including a review of R-Net's dividend and financial
experience for the prior year and its financial plans, including its
forecasted capital requirement for the coming fiscal year and R-Net's
plan for meeting its capital requirements; or
(ii) if R-Net experiences any downgrading of its senior debt to a
rating of "A-" (for S&P, or the equivalent for other rating agencies)
or below, or is placed on a credit watch for a possible downgrading to
"A-" (for S&P, or the equivalent for other rating agencies) or below,
R-Net management shall immediately notify the Director of the Office of
Accounting and Finance of DPS and, within thirty days, provide the
Director with a written explanation as to the implications of such a
downgrading or credit watch for the present and future credit
worthiness of R-Net and provide the Director with R-Net's plans for the
improvement of its debt rating and for satisfying its forecasted
capital requirements; or
(iii) if R-Net experiences a downgrading of its senior debt to "BBB"
(for S&P, or the equivalent for other rating agencies) or below, or is
placed on a credit watch for a possible downgrading to "BBB" (for S&P,
or the equivalent for other rating agencies) or below, R-Net will
immediately discontinue payment of dividends to R-HC until either the
Commission approves such payment, or its senior debt rating rises above
"BBB" (for S&P, or the equivalent for other rating agencies) or the
credit watch for a possible downgrading to "BBB" (for S&P, or the
equivalent for other rating agencies) or below, is withdrawn.
11. Pledge of Assets
The assets of R-Net shall only be pledged for the debt obligations of R-
Net. Pursuant to PSL Sections 101, 106 and 107, or any other provision of
the PSL, R-Net will seek Commission approval as required by these sections
for issuing securities, making loans and using revenues. Any secured debt
transferred from RTC to R-Net must have as collateral only R-Net assets. R-
Net shall not make any loans to R-HC or any R-HC Affiliate for which the
assets of an R-HC Affiliate, different than the loan recipient, are
pledged.
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12. Debt Rating
R-Net shall obtain, as soon as possible, a separate rating for its public
debt securities from three major rating agencies including, at a minimum,
from S&P's and Moody's, and shall maintain sufficient public debt at R-Net
to support continuation of separate debt ratings on that public debt. If R-
Net is unable to secure a separate public debt rating from three rating
agencies, it shall provide evidence of its efforts to do so and justify its
inability to secure three separate ratings.
13. Service Quality
R-Net shall, in the case of service offerings it provides and for the
duration of the rate plan period specified in paragraph II.A.4., maintain
service quality at the levels described in Appendix 5 to this Agreement. If
R-Net fails to achieve the required service levels, a Service Quality
Penalty of up to one half of one percent of total local service and
intraLATA toll revenues, calculated in accordance with Appendix 5, will be
credited, with carrying charges, for the benefit of all local service
customers, subject to disposition by the Commission. On January 20, 1996,
and each January 20 thereafter, R-Net shall submit to the Directors of the
Communications and Consumer Services Divisions of DPS a statement of
service quality which clearly describes R-Net's performance based on the
standards described in Appendix 5 and a calculation of any necessary
penalty. If the first year following the effective date of the OMP is less
than a full calendar year, the calculation and any penalty required by this
paragraph shall be apportioned accordingly. Nothing herein changes the
obligations of R-Net to provide monthly service quality data as required in
16 N.Y.C.R.R. Part 603.
14. Funds Transfers and Cash Management Agreement
Upon the formation of R-HC, R-Net and the other NY Telcos may participate
in a cash management program that, in all material respects, is the same as
the model agreement outlined in Appendix 6 to this Agreement, until such
time as the Commission determines that the terms and/or transactions of
such program are not in the public interest. However, such participation
shall only be permitted to the extent that:
(a) All fund transfers, including but not limited to, advances, short-
term loans, deposits, or any other instruments representing short-term fund
transfers, between any NY Telco and any Affiliate, including between R-Net
and any other NY Telco or R-HC, and excluding those that are required for
transactions governed under the affiliate transactions rules (discussed in
paragraph I.B.15. of this Agreement) and those that constitute dividends
from R-Net, or any other NY Telco, to R-HC, shall be made in accordance
with the terms of this cash management agreement.
(b) The sum of the balances of R-Net's long-term debt, cumulative net
fund transfers between R-Net and its Affiliates (including R-HC), short-
term debt, customer deposit balances, preferred stock balances, or any
other evidence of R-Net's indebtedness, shall not at any point in time
during the term of this Agreement, in the aggregate, exceed 45% of R-Net's
"Total Capital" (defined for the purposes of this Agreement as the sum of
all the previously named components, plus common equity).
(c) The sum of net fund transfers between R-Net and its Affiliates
(including R-HC), R-Net's short-term debt, and any other evidence of R-
Net's indebtedness for a period of twelve months or less shall not at any
point in time during the term of this Agreement exceed 5% of R-Net's Total
Capital. Similarly, the sum of net transfers between any other NY Telco and
its Affiliates (including R-HC), the NY Telco's short-term debt, and any
other evidence of the NY Telco's indebtedness for a period of twelve months
or less shall not at any point in time during the term of this Agreement
exceed 5% of the NY Telco's Total Capital.
(d) Staff shall have the right to audit without notice the books and
records of R-Net, R-HC, its Affiliates and the NY Telcos with respect to
these transfers of funds. Upon audit, if Staff determines
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that the amount of transfers exceeds the caps specified in this Agreement,
the entity receiving the funds must, within twenty-four hours, transfer any
funds in excess of the caps, plus interest, to R-Net or the NY Telco. Such
interest shall be calculated from the date on which such transfer, which
exceeded the caps, occurred.
15. Affiliate Transactions
(a) R-Net shall conduct its operations consistent with New York law and
Commission regulations and policy to avoid any subsidization of either R-HC
or an Affiliate. Any transactions between R-Net and R-HC, or between R-Net
and any of its Affiliates, shall be conducted at arm's length. Any common
expenses shall be allocated on a fair and reasonable basis in accordance
with applicable Commission accounting standards and requirements. The
parties intend that transactions with Affiliates not provided by tariff or
written contract shall be held to a minimum, and subject to the caps
provided below.
(b) If R-HC or any Affiliate seeks to acquire a New York telephone
corporation authorized to provide local exchange service subject to the PSL
(an "Acquisition"), in its petition for approval from the Commission, the
petitioner shall either consent to the treatment of the Acquisition as a NY
Telco subject to this Agreement, or shall provide justification why the
Acquisition should not be so treated. The Commission's determination
therein shall be binding. Applicable limits on affiliate transactions of
Acquisitions treated as NY Telcos shall be established considering the
level of affiliate transactions during their first full year of operations
after acquisition, subject to Commission approval.
(c) Except as provided in this paragraph, transactions between R-Net and
its Affiliates and between R-Net and R-HC and its Affiliates shall be
limited to purchases and sales made pursuant to tariff. Notwithstanding the
above, R-Net may continue to engage in non-tariffed purchases from R-HC and
R-HC's Affiliates provided that the transactions involve goods or services
that were, prior to the effective date of the OMP, provided to RTC on a
non-tariff basis and provided further that the total volume of such
transactions on an annual basis does not exceed $4 million dollars (plus
RTC's actual 1993 allocated costs for mutually beneficial services and for
services currently provided within RTC that become R-HC services) for all
of R-Net's non-tariffed affiliate transactions except with DSI, and no more
than actual 1993 RTC Information Services expenses for all of R-Net's non-
tariffed transactions with DSI.
(d) Except as provided in this paragraph, transactions between the NY
Telcos, other than R-Net, and R-HC and R-HC's Affiliates shall be limited
to purchases and sales made pursuant to tariff. Notwithstanding the above,
the NY Telcos, excluding R-Net, may continue to engage in non-tariffed
purchases from R-HC and R-HC's Affiliates provided that the total volume of
such transactions on an annual basis (including allocations and contracts)
does not exceed the 1993 dollar level of each NY Telco's transactions with
the NY Telco's Affiliates and provided further that the dollar level of
each NY Telco's transactions with DSI shall not exceed the dollar level of
comparable services provided to it by the NY Telco's Affiliates and
internally in 1993.
(e) R-Net's, Highland's, Sylvan Lake's, Seneca-Gorham's, AuSable Valley's
and any other NY Telco's non-tariffed transactions with each other and any
other Affiliate shall be made pursuant to signed written contracts
negotiated at arm's length. For example, if R-HC or an Affiliate provides
office or other space to R-Net, Highland, Sylvan Lake, Seneca-Gorham or
AuSable Valley, it shall be subject to a written lease or sublease.
To the extent that costs associated with affiliate transactions are to be
allocated, R-Net, Highland, Sylvan Lake, Seneca-Gorham and AuSable Valley
shall, on the effective date of the OMP, file such allocation procedures
with the Commission, which may modify or disapprove the allocation
procedures to the extent required by the public interest. If at any time
during the period of this Agreement, Staff is concerned about any
allocation of an affiliate cost to a NY Telco, it shall advise that NY
Telco and, if
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Staff and the affected NY Telco cannot agree, the NY Telco shall have a
reasonable opportunity to support continuation of the allocation before the
Commission. If the Commission concludes that the allocation no longer is
appropriate, the allocation of that particular expense shall be based on
actual time expended (or such other basis as specified by the Commission)
until the Commission thereafter determines that time (or other basis) no
longer is necessary.
(f) Should R-Net, Highland, Sylvan Lake, Seneca-Gorham, AuSable Valley or
any other NY Telco wish to engage in any affiliate transaction beyond the
caps provided for above, it shall file with the Commission, at least thirty
days prior to the transaction (unless exceptional circumstances require
that the transaction occur sooner), a description of the goods or services
involved, their dollar value, and a statement explaining why an affiliate
transaction is appropriate. With respect to any such transaction, if Staff
does not agree that the transaction is to the NY Telco's customers'
benefit, the affected NY Telco may continue with the transaction, but in
such event the affected NY Telco shall petition the Commission for
approval. After appropriate notice and hearing, the Commission may make
such ratemaking adjustments and/or require such immediate changes in the
contract or transaction, including, but not limited to, cessation of the
contract or transaction and/or return of any of the NY Telco's assets
and/or data provided pursuant to the transaction, as it finds appropriate;
however, for any NY Telco then under a rate stability plan no further
adjustment to rates will be made for the period of the plan.
(g) At the end of the rate period provided for in this Agreement, or in
conjunction with a rate case or show cause proceeding, whichever is
earlier, R-Net, Highland, Sylvan Lake, Seneca-Gorham, AuSable Valley and
any other NY Telco shall bear the burden of demonstrating that continuation
of its affiliate transactions then in place is in the public interest. As
part of such presentations, each shall demonstrate that the charges it pays
to Affiliates are in the best interest of its customers.
(h) With respect to their affiliate transactions with DSI, one year prior
to the termination of this Agreement, or in conjunction with a rate case or
show cause proceeding, whichever is earlier, R-Net, Highland, Sylvan Lake,
Seneca-Gorham, AuSable Valley and any other NY Telco shall file with the
Commission a proposal to continue to use DSI as a vendor if they intend to
maintain the relationship in the future. That proposal shall be supported
by studies, testimony, or other evidence demonstrating that continued use
of DSI as a vendor is in the best interest of the NY Telcos' customers.
(i) If at any time prior to the end of this Agreement, Staff believes
that continuation of the relationship between R-Net, or any other NY Telco,
and DSI is no longer in the best interest of that NY Telco's customers, the
NY Telco in question shall bear the burden of demonstrating that
continuation of that relationship is in the public interest and the
following procedure shall apply:
(1) Staff will communicate its concerns to R-Net, Highland, Sylvan
Lake, Seneca-Gorham or AuSable Valley or any other NY Telco and offer
management a reasonable time to review and address Staff's concerns.
(2) If the NY Telco fails to respond satisfactorily to Staff's
concerns within three months of Staff's request, Staff may recommend to
the Commission that it initiate a show cause proceeding.
(3) If the Commission, following a show cause proceeding, determines
that continuation of the NY Telco's relationship with DSI is not in the
best interest of that NY Telco's customers, the affected NY Telco shall
terminate its relationship with DSI and shall be obliged to obtain the
services previously obtained from DSI from the most reasonable
alternative, subject to Commission approval.
(j) In the event that DSI no longer provides computer, billing, or other
services to R-Net, any contract or arrangement with any Affiliate to
provide similar services shall continue the provisions of this Agreement
governing R-Net's relationship with DSI.
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(k) Nothing in this Agreement shall be construed to abridge the
Commission's authority pursuant to the PSL with respect to affiliates.
16. Network Functionalities, Services and Data Bases
R-Net's network functionalities, services, data and data bases shall not
be transferred to, managed by, or controlled by, any Affiliate without
Commission approval.
C. R-Com
1. R-Com Formed
By the effective date of the OMP, R-Com shall seek authorization from the
Secretary of State to be formed in accordance with the draft certificate of
incorporation attached hereto as Appendix 7. RTC will separately apply to
the Commission on R-Com's behalf for a certificate of public convenience
and necessity authorizing R-Com to provide any form of regulated telephone
services, including facilities-based and resale services, in the State of
New York. The application may request waivers of the Commission's
regulations on the same basis as then applicable to comparable reseller or
facilities-based carriers. With respect to its local service resale
operations, R-Com shall be regulated in the same manner as similarly
situated providers, and as determined by the Commission in the Competition
II proceeding (Case 94-C-0095) or in subsequent proceedings.
2. Issuance of Shares
On the effective date of the OMP, R-Com is authorized to issue common
stock and to transfer shares of such common stock to R-HC in exchange for
the transfer of assets, accounts, personnel and telephone operations of
RTC, as provided for in paragraph I.C.3. below.
3. Transfer of Assets, Personnel and Telephone Operations
(a) On the effective date of the OMP, there shall be transferred to R-Com
from RTC, all of the stand-alone assets, necessary personnel, and customers
then acquiring these services from RTC, in order to permit R-Com to offer
at retail, the following goods or services:
(i) Centrex;
(ii) Private Line Service, where the customer is taking high capacity
service (1.544 megabits per second and above) or a combination of high
capacity and lower capacity service.
Any physical assets associated with Centrex or Private Line services that
are transferred to R-Com shall be transferred at the greater of net book or
market value; and
(iii) Voice Mail (subject to an acceptable transfer price as set
forth below).
If voice mail service is to be transferred to R-Com, then for the purpose
of determining the transfer price and value of any associated assets of
voice mail service only, and not for any precedential purpose, as soon as
this Agreement is approved by the Commission, RTC and Staff shall each
prepare a valuation, both of which are to be based on the higher of book or
market value at the end of the fifth year following the effective date of
the OMP, and shall endeavor to agree on a valuation price. If RTC and Staff
are unable to agree, they shall mutually select an independent person or
entity, whose valuation shall be binding, to prepare a valuation on the
same basis. If R-Com agrees with the independent valuation, it shall make
payment of the agreed-upon valuation to R-Net at the end of the fifth year.
R-Net shall book any such payment as a reduction to rate base.
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If R-Com is unwilling to accept the transfer of voice mail service at the
selected valuation price, R-Net's voice mail service shall be put up for
public bid at no less than the present value of the established valuation
price. If there is no bid at a level at or greater than the valuation, the
service and underlying assets shall remain at R-Net. Any further
consideration of the transfer of voice mail service from R-Net to R-Com or
any other prospective purchaser shall result in a new valuation of the
transfer price.
Subject to the terms of this Agreement, the transfer of voice mail to R-
Com or another entity shall take place as soon after the effective date of
the OMP as is practicable. Any payment received by R-Net from R-Com for the
transfer and associated carrying costs shall not be reflected in R-Net's
rates earlier than upon the termination of the rate period provided for in
this Agreement. If the assets are purchased by an entity other than R-Com,
the amount by which the sale price exceeds the net investment in such
assets shall be deferred by R-Net, together with carrying costs, to be
disposed of following the rate period in the best interest of R-Net's
customers, as directed by the Commission.
(b) With respect to any service or customer base that remains at R-Net,
R-Com is free to compete for those customers by reselling services
purchased from R-Net or from another vendor or by selling services provided
through R-Com's own facilities.
(c) R-Com is free to offer for sale, on a bundled basis, tariffed
services and/or tariffed network elements that it purchases from R-Net
along with competitive services, provided, however, the bundled price shall
be at least equal to the sum of R-Net's tariff price to R-Com for the
tariffed services and/or tariffed network elements plus R-Com's incremental
cost of the competitive services. Any carrier that competes with R-Com
within the service territory of R-Net may challenge R-Com's compliance with
the price requirements of this paragraph before the Commission, provided
that it makes a prima facie showing that the price charged by R-Com is in
violation of the requirements of this paragraph including, as part of that
submission, cost or other relevant information. R-Com shall be provided an
opportunity to refute that submission.
D. Non-regulated and Regulated Services
R-Net will file a Cost Allocation Manual ("CAM") no later than the effective
date of the OMP, which will reflect the changes to RTC's current CAM that are
discussed below.
1. Non-regulated Services
The following services listed in Section V of RTC's CAM will be
considered non-regulated for the purposes of this Agreement, and may be
transferred to R-COM upon the effective date of the OMP:
(a) Terminal equipment sales, services, and leases;
(b) Packet Switching--network concentrator which performs protocol
conversion functions;
(c) Fiber Optic Facilities--construction, removal and maintenance on
customer premises of customer-owned fiber optic equipment;
(d) Audiotext Equipment Only--local network functionalities will be
regulated and tariffed by R-Net;
(e) RCI Operator Services--personnel performing operator services
for RCI under contract will be transferred to either R-Com or
RCI;
(f) Home Video Text--equipment used to interact with host computer
of Prodigy Service Company to allow the provision of home video
text service;
(g) Data Terminal Equipment--sales, services and leases of digital
data equipment at customer premises;
(h) Facsimile Services--store and forward platform which permits
hotel guests to receive facsimile messages in hotel rooms;
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(i) Enhanced Fax Services--enhanced services such as fax on demand,
guaranteed fax and broadcast fax; and
(j) ITN/RSTP--equipment necessary to provide Signalling System 7
Services to Independent Telecommunications Network, Inc., which
then provides these to other local exchange companies.
To the extent services which were funded by customers are transferred to R-
Com, they shall be transferred at the greater of net book or market value.
2. Regulated Services
The following services will be considered regulated services, and may be
retained and tariffed by R-Net or the assets associated with these services
transferred to R-Com at the greater of market or net book value upon the
effective date of the OMP:
(a) Telephone Answering Service--answering and screening of calls,
teleconferencing service;
(b) Voice Mail Service, subject to the terms set forth in paragraph
I.C.3.a.iii; and
(c) Advanced Communications Services--application processor used to
provide additional services to Centrex customers.
R-Net shall notify Staff no later than the effective date of the OMP which of
the above services will be transferred to R-Com, and which have been retained
by R-Net.
E. DSI
1. Transfer of Assets and Value
The assets transferred to DSI shall be valued at the higher of net book
or market value at the time of transfer.
2. Use of R-Net Data and/or Databases
DSI shall have access to data and/or databases of R-Net to the extent
necessary to permit it to provide computer, billing and other services that
it contracts with R-Net to provide to R-Net. The data and/or databases so
provided to DSI shall remain the property of R-Net, which shall ensure that
the data and/or databases are used consistently with the Commission's
Privacy Requirements (i.e., the Commission's regulations and orders with
respect to Customer Proprietary Network Information, non-listed or non-
published service, Call I.D. and other Custom Local Area Signalling
Services ("CLASS"), Automatic Number Identification, the Privacy Principles
and similar rules, orders and principles that the Commission may adopt).
All agreements between R-Net or any other NY Telco and DSI shall be by
written contract. Any contract between DSI and either R-Net or R-Com or any
other NY Telco shall be filed for information purposes with the Commission.
Nothing in this paragraph shall modify the requirements specified in
paragraph I.B.15 (Affiliate Transactions). R-Net and any other NY Telco
shall include in any contract with DSI the terms and restrictions provided
in this paragraph.
3. Development of New Products or Services by DSI; General Availability
Neither R-Net nor any other NY Telco shall itself fund the costs of DSI
developing new products and services not requested by R-Net or that NY
Telco. However, nothing prevents DSI from including reasonable development
costs in its prices for any product or service not requested to be
developed by, but sold to, R-Net or the NY Telco, consistent with the
Commission's affiliate transaction rules, affiliate contract rules and this
Agreement. Any product or service so developed by DSI, or currently
provided by DSI to RTC, which product or service will be provided by DSI to
R-Net, shall be made available to Affiliates and non-Affiliates on the same
terms and conditions provided, however, that the sales price to Affiliates
shall be consistent with the Commission's and this Agreement's rules on
affiliate contracts and transactions and the terms of this Agreement. Any
agreement between the NY Telcos and DSI shall include the terms of this
Agreement.
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4. Products or Services Developed at the Cost of R-Net or Any Other NY Telco
R-Net or any other NY Telco may request that DSI develop a particular
product or service and, if so, R-Net or the other NY Telco may be required
to finance the cost of that development, but any product or service so
developed shall remain the property of R-Net or the other requesting NY
Telco. If DSI wishes to market the product or service, or portions thereof,
to others, it must negotiate a suitable arrangement to ensure that R-Net or
the other NY Telco retains ownership and is paid an appropriate license or
royalty fee. Any contract between R-Net or the NY Telcos and DSI shall
explicitly provide that any service or product developed at the request of
R-Net or the NY Telco by DSI shall remain the property of R-Net or the NY
Telco to the extent of R-Net's or the NY Telco's interest and shall be
negotiated at arm's length. Any such arrangement shall be filed with the
Commission for information. This paragraph is not intended to modify any
requirements provided for in paragraph I.B.15. (Affiliate Transactions).
II. Rates, Revenue Requirements and Rate Design
A. R-Net's rates shall be reduced by $11.0 million effective on January 1,
1995, and by $2.5 million on January 1, 1996, and by $1.5 million each
succeeding January 1 through and including January 1, 2001.
B. Subject to the reductions specified in paragraph II.A. and the exception
for discretionary services in this paragraph II.B., and subject to the
possibility of earlier termination of this Agreement as provided for in
paragraph VI below, R-Net's rates in effect on the effective date of the OMP
may not be increased through December 31, 2001, but, in R-Net's discretion,
may be reduced further to not less than incremental cost. Discretionary and
competitive services may be priced within flexible pricing ranges established
prior to the effective date of the OMP in RTC's tariff P.S.C. No. 40, Section
19. However, aggregate revenues generated from price increases to existing
discretionary service rates, which are delineated in Appendix 8, shall not
exceed $2 million per year for each year of the term of this Agreement. Any
new regulated service developed by R-Net will be subject to tariff review by
the Commission. The price or range of prices from the effective date of the
tariff shall not be increased during the term of the rate plan of this
Agreement. For the duration of the rate period provided in this Agreement,
subject to the possibility of earlier termination as provided for in paragraph
VI below, R-Net shall not defer additional costs or benefits/3/ incurred
during the period of this Agreement nor may it file for any rate relief to be
effective during this period.
C. The reductions provided for in paragraph II.A. shall be apportioned in
the following fashion:
<TABLE>
<CAPTION>
Each year
1995 '96 '97 '98-'01
------- ------ ------ ---------
<S> <C> <C> <C> <C>
Elimination of charges for Residential
Touchtone................................. $5.00MM
Elimination of charges for Business
Touchtone................................. $0.16MM $2.5MM $1.5MM
Lifeline/4/ ............................... $0.45MM
Usage (including LMS, cellular reciprocal
compensation and access).................. $5.40MM $1.5MM
</TABLE>
A schedule of these rate reductions and corresponding rates is attached as
Appendix 9. There will be a rate differential to recognize the margin between
wholesale and retail rates. This margin will partially reflect the costs
avoided by R-Net due to the provision by resellers of their own customer
service, marketing and other services.
D. Over the term of this Agreement a total of $17 million shall be credited
to R-Net's depreciation reserve. The timing of those credits shall be at the
discretion of R-Net except that, by the end of the first year, the amount
credited shall be at least $5 million and, by the end of the fifth year, the
cumulative amount
- - ------
/3/Nothing in this Agreement prevents R-Net from seeking waivers of the
Commission's accounting requirements during the term of this Agreement.
/4/R-Net agrees to implement the lifeline objectives agreed to in the
Settlement Agreement approved by the Commission in this proceeding in Opinion
No. 94-5 (issued and effective February 19, 1994) by conducting a public
involvement program and implementing a tape-to-tape match by no later than the
date of implementation of the OMP. If a tape-to-tape match is not possible by
the date of implementation of the OMP, R-Net shall seek an extension from the
Director of the DPS Consumer Services Division, but in no event shall the
program be completed later than January 1, 1996.
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credited shall be at least $15 million, unless this Agreement is terminated as
provided for in paragraph VI, in which event any remaining portion of the $17
million amount will be credited as provided for in paragraph VI. These
depreciation reserve adjustments shall not effect a reduction in rates beyond
that specified in paragraph II.A. for the duration of the rate plan period
provided for in this Agreement.
E. $9.5 million in revenue reductions for 1994 and any sharing amounts owed
RTC customers for 1994 shall be credited to R-Net's depreciation reserve. The
$17 million credit to depreciation reserve provided for in paragraph II.D.,
above, includes the obligation to refund to customers any amount related to
depreciation for 1993.
F. All outstanding revenue requirement issues including depreciation,
accumulated deferred sharing amounts, the impact of the Generic Financing
proceeding (Case 91-M-0509) on RTC's 1994 revenue requirement reduction, and
the royalty issue that is the subject of an Article 78 proceeding (Rochester
Telephone Corp. v. Public Service Comm'n, A.D. No. 69820 (3d Dep't)), are
resolved without further adjustment, except, with respect to the royalty issue,
as provided below. Except as already reflected in this Agreement, neither RTC
(which will be R-HC) nor R-Net shall have imputed a royalty, as described in
Case 87-C-8959, Order and Opinion Concerning Royalty, Issued and Effective July
6, 1993, by the Commission for the period covered by this Agreement, or for any
prior period, except as set forth in paragraphs I.E.4. Upon the termination of
the rate plan period, nothing prevents the Commission, subject to the outcome
of the Article 78 proceeding referred to above, from imputing a royalty for the
period beginning on the termination date. Nothing in this Agreement is intended
to prohibit R-Net or any Affiliate from bringing an Article 78 proceeding at or
after the end of this Agreement. In imputing that prospective royalty, the
Commission may consider the investments in existence on the termination date,
notwithstanding when those investments were first made. For the rate plan
period, R-Net shall book its depreciation accruals at or above RTC's current
depreciation rates including depreciation amortizations.
G. All intraLATA access obtained by carriers from R-Net shall be purchased by
carriers at the rates set forth in R-Net's access tariff. R-Net's retail rates
for intraLATA toll shall be in conformity with the Commission's decisions in
Case 28425.
III. Inter-Carrier Issues
A. Committee on Standards and Cooperative Practices
RTC, on behalf of R-Net, shall form, upon the filing of this Agreement with
the Commission, a Committee on Standards and Cooperative Practices comprised of
carriers who are, or indicate that they intend to become, certified to provide
telephone service in the current service territory of RTC. The membership of
the Committee shall be revised periodically to afford participation to those
certified carriers who are in fact providing service to customers in the
service territory of R-Net. In addition, a representative of Staff and at least
one representative of residential customers shall be members of the Committee.
The objective of the Committee will be to develop technical standards and
cooperative practices to facilitate the seamless interconnection of all
facilities-based providers serving in the R-Net service territory and to
further the development of a competitive market for facilities-based and
reseller services in the R-Net service territory. The Committee will take into
consideration the special technical requirements of the disabled community and
other customers with special needs. It is intended that the Committee shall
provide a forum for complaints, lodged against R-Net by other carriers, to be
resolved in a cooperative and expeditious manner. Nothing in this Agreement
shall preclude carriers from bringing complaints directly to the Commission.
Annually, R-Net shall prepare and file with the Commission a report summarizing
the activities of the Committee and the results of its efforts including, in an
appendix to that report, separate comments prepared by any other member of the
Committee.
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<PAGE>
B. Notice of New Services, Impartial Dissemination of Information and Privacy
R-Net shall not provide a competitive information advantage to any Affiliate,
including R-Com. Accordingly, as provided in paragraph I.B.6.a., R-Net must
provide equal and contemporaneous notice of new service offerings to all
carriers.
Neither R-Net, R-Com nor DSI will release to Affiliates or to any other
person or entity competitively sensitive information, defined below, regarding
any customer without permission of that customer, nor will they release any
information in violation of the Commission's Privacy Requirements as described
in paragraph I.E.2., regardless of whether it contains competitively sensitive
information. Notwithstanding the above, R-Net, R-Com and DSI may release such
information to a regulatory authority of competent jurisdiction pursuant to its
rules. R-Net, R-Com and DSI may release such information to a court if ordered
to do so. R-Net, R-Com and DSI will notify the attorney(s) for each customer,
or the customer, whose sensitive information is sought by a court, as soon as
is reasonably practicable. As used in the first sentence of this paragraph,
"competitively sensitive information" shall include, but not be limited to,
customer information, traffic information, network configuration or other
comparable data, but shall not include any customer's listing information. Any
contract between R-Net or its Affiliates and DSI shall include these provisions
and restrictions.
R-Net and DSI may sell or transfer to an Affiliate any information of
competitive significance only if it is available for sale or transfer to
unaffiliated firms on equal or better terms and conditions, and if the sale or
transfer is consistent with the Commission's Privacy Requirements as described
above in paragraph I.E.2. Nothing in this paragraph shall prevent R-Net or DSI
from engaging, under contract and subject to the rules regarding affiliate
transactions, an Affiliate to perform an R-Net or DSI function, and
transferring information of competitive significance in the fulfillment of that
contract. As used in the preceding sentence, "information of competitive
significance" shall include, but not be limited to, any information that any
competitor of an Affiliate of R-Net or DSI could reasonably consider useful in
increasing either its sales or profits, but shall not include information
relating to customer listings in either White or Yellow page directories and
Electronic Directories. Nothing in this paragraph shall prevent DSI from
developing proprietary software under contract for a customer, including R-Net,
so long as the only competitively sensitive information used is that of that
customer. Any contract between R-Net or its Affiliates and DSI shall include
these provisions and restrictions.
R-Net shall include in its residential and business White pages, at no charge
and on a non-discriminatory basis, the listing of all customers (excluding
customers taking nonpublished service from R-Net or another carrier) served
within the pre-restructuring RTC service territory, regardless of the carrier
then providing the service at wholesale or retail post-restructuring. All
carriers shall provide listing information for White pages and directory
assistance, without charge, to R-Net and shall be responsible for the accuracy
of this information. In addition, R-Net shall include in its Yellow pages, at
no charge and on a non-discriminatory basis, the listing of all business
customers served within the pre-restructuring service territory of RTC,
regardless of the carrier providing the service at wholesale or retail post-
restructuring.
R-Net shall not discriminate against competitive carriers and their customers
in the provision of Yellow and White page directories.
C. IntraLATA Service
Certified carriers will not be required to offer local exchange service as a
condition to offering intraLATA service.
D. Right of Interconnection
R-Net shall interconnect its local network with networks of certified
carriers. This network integration shall allow for completely transparent
calling among customers of different providers. To the extent it is
II-16
<PAGE>
within R-Net's control, end users subscribing to R-Net's exchange service shall
be able to reach any customer served by another provider.
Within the technical and physical constraints of existing network facilities,
and in a manner consistent with accepted industry practice, certified carriers
that establish networks for the exchange of local traffic within the service
territory of R-Net shall have the right to interconnect with the network
facilities of R-Net at particular central offices or tandems of their choice
provided that R-Net is accorded reciprocal interconnection rights to the
network of the requesting party. The owner or operator of the network to which
such interconnections are made shall be responsible for the cost of
modifications necessary to accommodate such interconnections unless
extraordinary expenditures are required, in which case the requesting party
will be responsible for the portion of the added cost attributable to its
special requirements. Whether or not the requesting party is required to pay
for network modifications as provided above, it shall pay the costs of any
collocation as provided for in Commission policy.
All certified providers of local exchange services and bona fide service
providers in R-Net's service territory shall have non-discriminatory access to
R-Net's bottleneck network functionalities, services, and data bases
(including, but not limited to, intercept, directory assistance, 911, E-911 and
SS7-related data bases and services).
Nothing in this paragraph III.D. shall abridge any rights and
responsibilities provided for in 16 N.Y.C.R.R. 605 (Common Carrier Rules) and
in the Commission's Opinion and Order Resolving ONA Issues and Adopting a
Statement of ONA Principles (issued and effective Sept. 11, 1989).
E. Reciprocal Compensation
R-Net shall pay and receive reciprocal compensation for the exchange of local
message traffic between it and other carriers offering simultaneous local two-
way service within the pre-restructure RTC service territory (e.g., including
cellular but excluding paging), and both the charge that R-Net shall pay and
the payment that it shall receive, shall be equal to R-Net's then-applicable
access charges. The intrastate Carrier Common Line Charge shall not be
applicable to the exchange of local traffic.
Where a certified carrier and R-Net are interconnected for the exchange of
local traffic, and where such interconnection takes place pursuant to paragraph
III.D. above, and R-Net is accorded reciprocal interconnection rights, to the
extent that the exchange of local traffic is in balance as defined below, then
the terminating carrier shall itself be compensated for the termination of that
traffic on its network at R-Net's tariff rate for local switching, but the
terminating carrier shall be responsible for any local transport that is
required for completion of the call. For purposes of this paragraph III.E.,
local traffic is traffic that originates and terminates within the pre-
restructure RTC service territory.
R-Net and any other certified carrier exchanging local traffic shall be
required to measure, on a monthly basis, both the originating and terminating
minutes of local usage on their respective networks. Network traffic will be
considered out of balance unless and until the minutes of local traffic
exchanged between the two carriers are approximately equal, as defined below.
To the extent that the percentage difference in R-Net's originating minutes of
local use that terminate on another certified carrier's network and R-Net's
terminating minutes of local use that originate on that carrier's network is
equal to or less than 10% of the smaller of the two values (minutes of use),
the traffic will be considered in balance.
Recognizing the technical constraints of cellular carriers and other
potential market entrants, where it is not technically possible for R-Net to
interconnect directly to each of another carrier's end offices, R-Net will pay
transport charges for traffic that it terminates on such carrier's network
until such time as that carrier interconnects, through its own facilities or a
third carrier's facilities, directly to an R-Net end-office.
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<PAGE>
F. Number Portability
All certified facilities-based switched local exchange carriers shall be
equally entitled to the assignment of NXX central office codes and inclusion in
the Local Exchange Routing Guide as independent carriers. R-Net will offer the
following two forms of limited number portability:
(1) A customer changing resellers without a change of underlying R-Net
facilities will retain the R-Net telephone number; and
(2) A customer changing networks but remaining within the same central
office boundaries will retain the R-Net number at the election of the new
network carrier. R-Net will forward calls to the other network carrier by
using either call forwarding or Direct Inward Dialing or other suitable
arrangements at R-Net's option.
The other network carrier will be obligated to arrange for adequate
connections between the R-Net central office formerly serving the customer and
the other network. Where the call originates on the R-Net network, but is
terminated on the other carrier's network, R-Net will compensate the other
network carrier based upon applicable access charges except the intrastate
carrier common line charge.
To compensate R-Net for its additional switching costs, R-Net will establish
a monthly surcharge on all working numbers provided by R-Net, payable by the
carrier providing end user service on that number. R-Net shall absorb, without
additional end user charges, the surcharge applicable to the numbers on which
it provides service directly to end users, and the surcharge applicable to
numbers serving other carriers' end users will be billed to those carriers. The
surcharge shall be computed annually and the amount to be recovered shall be
the per-minute incremental cost of switching ("Switching Costs") multiplied by
the number of minutes of traffic forwarded to another carrier pursuant to this
number portability arrangement.
R-Net will absorb the first cumulative $1 million of Switching Costs as
computed immediately above regardless of how such switching costs would have
been allocated by the surcharge. Once R-Net has absorbed such cumulative $1
million of Switching Costs, R-Net will thereafter recover on a prospective
basis, all Switching Costs incurred in the provision of number portability via
the surcharge, computed as provided above. The technical specifications of such
interconnections will be referred to the Committee on Standards and Cooperative
Practices.
In conjunction with the Committee on Standards and Cooperative Practices, R-
Net will also investigate the cost and desirability of full number portability
through an Advanced Intelligent Network database hookup. R-Net agrees to
implement full number portability when it is technically feasible, commercially
available, and economically practical. R-Net agrees that R-Net does not have to
manage the databases associated with full number portability provided all
carriers receive full and equal access. R-Net does not, by this Agreement,
commit to fund those databases.
Nothing precludes an end user customer or a carrier from raising any issue
with respect to number portability with the Committee on Standards and
Cooperative Practices or the Commission.
G. Network Data
In order to avoid charges for R-Net's business office services, a carrier
taking service from R-Net must arrange for direct access into R-Net's customer
records, order entry and repair record databases. R-Net will partition these
databases to ensure that each carrier has access only to its own customers'
information. R-Net will offer, pursuant to tariff, terminals to access R-Net's
above databases, including training in their use, to any certified carrier and
will include the Commission's Privacy Requirements, as described in paragraph
I.E.2., in these tariffs. There will also be a tariffed charge for database
access and maintenance.
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<PAGE>
H. Residential Services
Any certified carrier desirous of purchasing bundled residential flat rate
("FR") or measured rate ("MR") service from R-Net will be required, as a
condition of receiving such service, to provide to R-Net, and to the
Commission, a certification that it will only resell such service, or its
constituent elements, to customers who qualify for the purchase of such service
at retail from R-Net. If, notwithstanding such certification, the carrier shall
have resold FR and MR service, or its constituent elements, in violation of
this provision, at the election of R-Net, and subject to the approval of the
Director of the Communications Division of the DPS that a penalty is
appropriate, that carrier thereafter shall forfeit its entitlement to purchase
such services from R-Net and all of its residential services shall be repriced
at the applicable business rates retroactive for three months, based on average
volumes of calling.
On a quarterly basis, a representative sample of residential service
purchased by resellers will be reviewed by R-Net to establish the authenticity
of these residential end users, and the result of this sampling shall be
provided to the Director of the Communications Division of the DPS.
Residential end user customers will have the following rate choices from R-
Net:
1. Bundled flat rate service or
2. Bundled link/port for metered service, with usage charged on a per
message basis.
Residential end user customers currently receiving MR 50 or MR 80 service
from RTC may continue to receive that service from R-Net. However, no new
customers for these services will be added after the effective date of the OMP.
Resellers will be permitted to purchase the following residential services:
(a) a bundled link/port for measured service, with usage charged on a per-
minute basis; (b) a bundled flat rate service, only where usage in excess of
750 minutes per month will be charged on a per-minute basis; or (c) an
unbundled link (at cost), port (at cost), with usage charged on a per-minute
basis.
To the extent that R-Net, in its next rate filing, seeks recovery for new
network investment, it shall include in any filing, facts sufficient for the
parties and the Commission to conclude that its filing does not include any
costs associated with the improper resale of flat rate residential service.
I. Payphone Demarcation Point
R-Net shall establish a procedure for identifying the demarcation point of
each installed payphone and such demarcation point shall be at the same
location, in the case of new installations, notwithstanding whether the
provider of service is R-Net or a competitor. Whenever R-Net provides for the
installation of a new payphone, or does maintenance work on an existing
payphone installation, it shall install an interface at the location determined
pursuant to this paragraph that shall serve as the demarcation point.
J. Diffusion of Technology
The parties recognize the importance of the widespread availability of the
telecommunications infrastructure to economic development and enhancing the
quality of life for all New Yorkers. R-Net and R-Com expect to be successful
competitors and therefore will need to develop aggressively new services and
markets and encourage the widespread diffusion of telecommunications
technologies. Some physically challenged consumers, consumers in the
economically disadvantaged regions of the service territories of R-Net and R-
Com and in rural areas, may be underserved. They, too, should receive the
benefits of this technology. Toward that end, R-Net and R-Com shall consider
the needs of these communities as they make decisions to bring new services
into their service territories.
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<PAGE>
IV. Customer Outreach and Marketing Activities
A. RTC recognizes its responsibility to inform the affected public of the
changes occurring as a result of this Agreement. In this regard, RTC shall
develop, in consultation with Staff, a customer education and outreach program
to advise customers within RTC's pre-restructuring service territory of the
implications of the reorganization of RTC as proposed in this Agreement and of
the customer choices that will be made available as a result of that
reorganization and the introduction of the OMP. RTC shall submit its customer
outreach plan to the Director of the Consumer Services Division of the DPS
within two months of the signing of this Agreement.
B. R-Net shall, following public input, develop a set of principles for its
marketing activities consistent with the Commission's Privacy Requirements, as
described in paragraph I.E.2., and shall communicate those principles to its
employees. R-Net shall provide those principles to the Director of the Consumer
Services Division of the DPS by no later than January 1, 1996.
V. Relationship to Competition II Proceeding
The parties understand that this Agreement may be modified by the resolution
of the pending Competition II proceeding (Case 94-C-0095), or in a subsequent
proceeding initiated by the Commission, if the Commission makes a finding
therein that the public interest requires modification of a provision of this
Agreement.
VI. Term of Agreement
The parties intend that the rates provided for in this Agreement shall remain
in effect from January 1, 1995, through and including December 31, 2001, except
as provided below. R-Net's rates may be changed, effective January 1, 2000, as
a result of a rate proceeding filed by R-Net or a proceeding initiated by the
Commission, seeking permanent or temporary rates to be effective on January 1,
2000. If the Commission's proceeding is pending on January 1, 2000, R-Net's
rates shall be made temporary effective January 1, 2000, for an amount of $4.5
million, pending resolution of the Commission's proceeding. In the event that
R-Net terminates this Agreement with such a rate filing, it shall create a
deferred account in the amount of $4.5 million, plus associated carrying
charges, for disposition by the Commission for the benefit of R-Net's
customers. In the event of termination by R-Net or by the Commission, R-Net
shall ensure that the entire $17 million credit to the depreciation reserve,
set forth in paragraph II.D. above, is completed by December 31, 1999. If R-
Net's rates are not modified to be effective as of January 1, 2000, R-Net's
rates shall remain in effect until January 1, 2002, except as provided for in
paragraph XI.
All other terms of this Agreement continue to remain in effect unless
specifically modified by the Commission, except, however, nothing in this
Agreement will be construed to confer upon the Commission any authority to
reverse its authorization for the reorganization of RTC as an unregulated
holding company.
VII. R-Net and NY Telco Monitoring
Staff will submit a report to the Commission on an annual basis analyzing R-
Net's performance under this Agreement. This report will include a summary of
R-Net's financial data, service quality measurements, pricing changes, new
services introduced during the period, service penetration levels, including
Lifeline connections, Staff's evaluation of the degree of competition in the
service territory, and information necessary to assure R-Net's compliance with
the terms of this Agreement.
R-Net and the other NY Telcos will submit to the Director of the
Communications Division of the DPS, on or before April 1 of each year of the
plan, a report containing the specific information listed on Appendix 10 for
the preceding calendar year, as well as any other information R-Net and Staff
consider relevant to the
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Department's reviews. The reports will be signed by managers of R-Net and the
other NY Telcos attesting to the accuracy of the data submitted. The procedures
of 16 N.Y.C.R.R. Subpart 6-1 shall be followed, if applicable.
VIII. Further Information
The parties agree that the information contained in Appendix 11 will be
provided to Staff in the time frame agreed to. In the event the information is
not provided on a timely basis, the parties will jointly seek an extension of
the hearing and/or briefing schedule. In addition, RTC will file tariffs for
"business office interexchange carrier services" and "audio teleconferencing
service", as described in RTC's CAM, Section V by June 7, 1994.
IX. Enforcement
Upon approval by the Commission, the terms and conditions of this Agreement
shall be deemed a Commission order. Any violation of the requirements of this
Agreement will be subject to the enforcement process and remedies for
violations of Commission orders.
X. Entire Agreement
The terms and provisions of this Agreement are submitted in their entirety to
the Commission for its approval; this Agreement represents a single fully-
integrated statement of the negotiated positions of the parties and is not
offered to the Commission for approval on a piecemeal basis. To the extent that
this Agreement conflicts with any previous RTC agreement, this Agreement
controls, except as provided herein. The parties agree to be bound by the terms
of this Agreement only in the event that it is approved in full by the
Commission. The parties further agree that none of the provisions of this
Agreement and none of the positions taken herein may be referred to or relied
upon in any fashion as precedent or otherwise in any other proceeding before
this Commission or any other regulatory agency or court, except as necessary to
carry out the terms of this Agreement or with the consent of the parties
hereto. The corporate restructuring is subject to the approval of the Board of
Directors and the shareowners of RTC. The approval of the Board of Directors
shall be communicated to the Commission prior to the Commission's action on
this Agreement.
XI. Reservation of Commission Authority
The parties understand that the Commission reserves the authority to modify
this Agreement if unforeseen circumstances in the opinion of the Commission
have such a substantial impact upon R-Net's financial performance as to render
this Agreement unreasonable, unnecessary or insufficient for the provision of
safe and adequate service.
XII. Counterparts
This Agreement may be executed in multiple counterparts, each of which shall
be deemed an original Agreement.
II-21
<PAGE>
In Witness Whereof, the parties have duly executed this Agreement, as of the
date first here and above written.
STAFF OF THE NEW YORK STATE DEPARTMENT OF PUBLIC SERVICE
/s/ Penny Rubin
By: _______________________
Title: Staff Counsel
Date: May 13, 1994
COMMUNICATIONS WORKERS OF AMERICA, AFL-CIO
/s/ Jan J. Pierce
By: _______________________
Title: Vice President
Date: May 13, 1994
NEW YORK STATE DEPARTMENT OF ECONOMIC DEVELOPMENT
/s/ Alan J. Taddiken
By: _______________________
Title: Director of Policy
Date: July 25, 1994
NEW YORK STATE TELEPHONE ASSOCIATION, INC.
/s/ Robert W. Zinnecker
By: _______________________
Title: President
Date: July 27, 1994
ROCHESTER TELEPHONE CORPORATION, on behalf of itself, R-Net, R-Com, Distributed
Solutions, Inc., AuSable Valley Telephone Company, Inc., Highland Telephone
Company, Seneca-Gorham Telephone Corporation and Sylvan Lake Telephone Company,
Inc.
/s/ John K. Purcell
By: _______________________
Title: Corporate Vice President
Date: May 13, 1994
TIME WARNER COMMUNICATIONS
/s/ Paul B. Jones
By: _______________________
Title: Senior Vice President--
Regulatory and Public
Affairs
Date: May 16, 1994
PUBLIC UTILITY LAW PROJECT OF NEW YORK, INC.
/s/ Michael L. Haase
By: _______________________
Title: Staff Attorney (Not
Admitted in New York)
Date: August 1, 1994
II-22
<PAGE>
APPENDIX 3
CURRENT CORPORATE STRUCTURE OF THE COMPANY
[GRAPHIC APPEARS HERE]
III-1
<PAGE>
APPENDIX 4
CONTEMPLATED CORPORATE STRUCTURE OF THE COMPANY
UPON IMPLEMENTATION OF THE OPEN MARKET PLAN
[GRAPHIC APPEARS HERE]
IV-1
<PAGE>
APPENDIX 5
SCHEDULE OF RATE REDUCTIONS AND RATES
Schedule of Rate Reductions
<TABLE>
<CAPTION>
Total
1/1/95 1/1/96 1/1/97 1/1/98 1/1/99 1/1/00 1/1/01 Reductions
----------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Res. Touchtone.......... $ 4,962,500 $0 $0 $0 $0 $0 $0 $ 4,962,500
Bus. Touchtone.......... $ 156,460 $2,500,000 $1,500,040 $0 $0 $0 $0 $ 4,156,500
Lifeline................ $ 450,000 $0 $0 $0 $0 $0 $0 $ 450,000
LMS..................... $ 1,819,762 $0 $0 $1,466,882 $1,500,316 $1,441,391 $1,088,327 $ 7,316,678
Access.................. $ 2,829,625 $0 $0 $ 31,358 $0 $ 52,263 $ 386,747 $ 3,299,993
Cellular................ $ 781,653 $0 $0 $ 2,048 $0 $ 3,414 $ 25,258 $ 812,373
----------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Total................... $11,000,000 $2,500,000 $1,500,040 $1,500,288 $1,500,316 $1,497,068 $1,500,332 $20,998,044
Schedule of Rates
<CAPTION>
Current 1/1/95 1/1/96 1/1/97 1/1/98 1/1/99 1/1/00 1/1/01
----------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Res. Touchtone.......... $1.4800 $0.0000 $0.0000 $0.0000 $0.0000 $0.0000 $0.0000 $0.0000
Bus. Touchtone.......... $3.8700 $3.7200 $1.4000 $0.0000 $0.0000 $0.0000 $0.0000 $0.0000
LMS Peak 1 min.......... $0.0750 $0.0630 $0.0630 $0.0630 $0.0540 $0.0470 $0.0420 $0.0380
LMS Peak 2 min.......... $0.0750 $0.0700 $0.0700 $0.0700 $0.0670 $0.0620 $0.0500 $0.0484
LMS Peak 3 min.......... $0.0750 $0.0750 $0.0750 $0.0750 $0.0730 $0.0700 $0.0700 $0.0660
LMS Peak add. min....... $0.0220 $0.0220 $0.0220 $0.0220 $0.0220 $0.0220 $0.0220 $0.0220
LMS Off-Peak 1 min...... $0.0500 $0.0500 $0.0500 $0.0500 $0.0500 $0.0470 $0.0420 $0.0380
LMS Off-Peak 2 min...... $0.0500 $0.0500 $0.0500 $0.0500 $0.0500 $0.0500 $0.0500 $0.0484
LMS Off-Peak 3 min...... $0.0500 $0.0500 $0.0500 $0.0500 $0.0500 $0.0500 $0.0500 $0.0500
LMS Off-Peak add. min... $0.0140 $0.0140 $0.0140 $0.0140 $0.0140 $0.0140 $0.0140 $0.0140
Access LS............... $0.01629 $0.01105 $0.01105 $0.01105 $0.01102 $0.01102 $0.01097 $0.01060
Access LT............... $0.0129 $0.01105 $0.01105 $0.01105 $0.01102 $0.01102 $0.01097 $0.01060
</TABLE>
V-1
<PAGE>
Graphic Appendix List
Page No. Description
-------- -----------
III-1 CURRENT CORPORATE STRUCTURE OF THE COMPANY
IV-1 CONTEMPLATED CORPORATE STRUCTURE OF THE
COMPANY UPON IMPLEMENTATION OF THE OPEN
MARKET PLAN
<PAGE>
(LOGO OF ROCHESTER TELEPHONE CORPORATION)
Proxy For Common Shares
P R O X Y
I authorize Ronald L. Bittner and/or Josephine S. Trubek, or their
substitutes, to vote all shares of Rochester Telephone Corporation which
I am entitled to vote at the Special Meeting of Common Shareowners on
December 19, 1994, or at any adjournment thereof, as specified on the
reverse side, 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, and which the Board of Directors does not know, at the
time of this solicitation, will be presented at the meeting.
THIS PROXY IS SOLICIATED ON BEHALF OF THE BOARD OF DIRECTORS. THE
SHARES PRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTION
TO THE CONTRARY IS INDICATED, IT WILL BE VOTED IN FAVOR OF EACH OF THE
PROPOSALS SPECIFIED ON THE REVERSE SIDE AND IN THE DISCRETION OF THE PROXIES
WITH RESPECT TO SUCH OTHER MATTERS AS MAY PROPERLY BE BROUGHT BEFORE
THE MEETING AND AT ANY ADJOURNMENT THEREOF.
SEE REVERSE
CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
<PAGE>
Please mark
votes as in
[X] this example.
Approval of each of the first four Proposals is contingent on the approval of
all such Proposals. Unless each of the first four Proposals is approved by
shareowners, none of the actions contemplated by such Proposals will be taken by
the Company. Approval of the Proposal to change the Company's name to ``Frontier
Corporation'', however, is not contingent on approval of any other Proposal.
1. Approval of the Open Market Plan Agreement, the transactions contemplated
thereby, and related amendments to the Company's Restated Certificate of
Incorporation (the ``Certificate'').
For Against Abstain
[_] [_] [_]
2. Approval of a Certificate amendment to increase the number of authorized
shares of common stock from 100,000,000 to 300,000,000 shares.
For Against Abstain
[_] [_] [_]
3. Approval of a Certificate amendment to authorize 4,000,000 shares of
a new class of preferred stock.
For Against Abstain
[_] [_] [_]
4. Approval of a Certificate amendment to permit the redemption of shares
of common stock to the extent necessary to prevent the loss of any governmental
license or franchise held by the Company or any of its subsidiaries.
For Against Abstain
[_] [_] [_]
5. Approval of a Certificate amendment to change the name of the Company
to ``Frontier Corporation''.
For Against Abstain
[_] [_] [_]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR PROPOSALS 1 THROUGH 5.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT
[_]
MARK HERE IF YOU PLAN TO ATTEND THE MEETING
[_]
The undersigned hereby acknowledges recept of the Notice of Special Meeting
of Common Shareowners and Proxy Statement.
Please sign exactly as name appears hereon. When signing as attorney, executor,
administrator, trustee, guardian or officer of a corporation, please give
your full title as such. For joint accounts each joint owner should sign.
Signature: Date:
- - -------------------------------------------------------------------------------
Signature: Date:
- - -------------------------------------------------------------------------------
<PAGE>
Report of Independent Accountants
- - ---------------------------------
To the Shareowners of
Rochester Telephone Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareowners' equity and cash flows present
fairly, in all material respects, the financial position of Rochester Telephone
Corporation and its subsidiaries at December 31, 1993, 1992 and 1991, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 11 to the financial statements, during the first quarter
of 1993 the Company adopted the provisions of Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions."
/s/ Price Waterhouse LLP
Price Waterhouse
January 17, 1994
1900 Chase Square
Rochester, New York 14604
