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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
COMMISSION FILE NUMBER 1-4166
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FRONTIER CORPORATION
(PREVIOUSLY ROCHESTER TELEPHONE CORPORATION)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 16-0613330
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
180 SOUTH CLINTON AVENUE, 14646-0700
ROCHESTER, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(716) 777-7100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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<TABLE>
<CAPTION>
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
Common Stock, par value $1.00 per
share New York Stock Exchange
</TABLE>
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [X]
The aggregate market value of the stock held by non-affiliates of the
registrant as of March 7, 1995 is $1,577,641,731.00. The number of shares
outstanding of Frontier Corporation's common stock (Par Value $1.00 per share)
as of the close of March 7, 1995 is 72,723,675 shares.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's 1994 Financial Review including MD&A,
Consolidated Financial Statements and Notes to Financial Statements, as
presented in Exhibit No. 13 of this Form 10-K, are incorporated by reference
in Parts II and IV hereof.
(2) Portions of the Notice of Annual Meeting and Proxy Statement issued by the
registrant in connection with its Annual Meeting of Shareowners to be held
April 26, 1995, as presented in Exhibit No. 99 of this Form 10-K, are
incorporated by reference in Parts II, III and IV hereof.
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PART I
ITEM 1. BUSINESS
Frontier Corporation, formerly known as Rochester Telephone Corporation,
("Frontier" or the "Company") is a major U.S. diversified telecommunications
firm with headquarters in Rochester, New York. The Company was incorporated in
1920 under the laws of New York State to take over and unify the properties of a
predecessor company and certain properties of the New York Telephone Company
which were located in the same general territory. Currently, the Company's
principal lines of business are Telecommunication Services and Telephone
Operations. Telecommunication Services consists of a major regional long
distance company, cellular and paging operations, and equipment sales.
Telephone Operations consists of 36 local telephone companies which serve, as of
December 31, 1994, approximately 918,000 access lines in thirteen states.
Effective January 1, 1995, Frontier reorganized into a holding company
structure.
Historically, Telephone Operations has provided the majority of the
Company's revenues and income. However, an increasing percentage of Frontier's
revenues and income is being generated by the Company's long distance and
wireless operations. In 1982, the Company made the strategic decision to enter
the long distance business. It now provides long distance voice, video and data
communication services throughout the United States with its major marketing and
sales focus in New York State, New England, and the Mid-Atlantic and Midwest
regions. The Company first began providing cellular communications services in
the Rochester, New York metropolitan area in 1985. Today, it has ownership
interests in wireless communications operations in five states and manages
wireless operations serving over 4.4 million potential subscribers. The
geographic reach of the Company's long distance operations will soon expand
nationwide as a result of strategic acquisitions such as American Sharecom,
Inc., which closed in early 1995, and WCT Communications Inc., which is also
expected to close in 1995. Expansion through strategic acquisition and business
alliances remains a key growth vehicle for the Company.
Prior to 1988, the Company's Telephone Operations were heavily concentrated
in New York State. Since 1988, the Company has acquired 29 local telephone
companies and has significantly diversified its geographic base. The Company's
largest telephone operation is in Rochester, New York and serves approximately
502,000 access lines. The Company refers to the 35 telephone companies outside
of Rochester, New York as "Regional Telephone Operations". The latter group
includes approximately 416,000 access lines with an aggregate revenue level
nearly equal to that of the Rochester, New York operating company. As part of
the Company's reorganization into a holding company which was effected January
1, 1995, the assets and businesses of the Rochester, New York operating company
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were divided between two new subsidiaries, Frontier Communications of Rochester,
Inc. ("FCR") and Rochester Telephone Corp. ("RTC"). Because this division
occurred after the close of the 1994 fiscal year, references in this Form 10-K
will refer to the Company's operations prior to this division, unless otherwise
indicated.
A key growth strategy for the Company is to provide integrated
communications services for its customers. These integrated services include
long distance, wireless, and local telephone service as well as selected
products and services that the Company will remarket to customers as a single
source provider. Frontier is committed to growth through expansion of its
existing businesses, the development of value added products and services, and
selected acquisitions. Certain financial data relating to the Company's
business segments is presented under "Business Segment Information" in Exhibit
13 to this Form 10-K.
Frontier and NYNEX have formed a joint venture, the Upstate Cellular
Network (the "Supersystem"), to manage and operate certain of their cellular
properties located within New York State. This joint venture serves a territory
that includes approximately 3.5 million potential customers and includes the
cities of Buffalo, Syracuse, Rochester, Utica, and Watertown, New York. One of
Frontier's subsidiaries serves as managing partner of Upstate Cellular Network.
This is described in more detail under the caption "Wireless Communications", at
page 5, infra.
On February 15, 1994, the Company completed a public offering of its common
stock. A total of 2,549,000 new shares were issued in connection with this
offering. The public offering also included the sale of 2,885,000 shares that
were held by a subsidiary of Sprint Corporation. In April 1994, the Company
effected a stock split in the form of a 100% stock dividend.
The principal executive offices of the Company are located at 180 South
Clinton Avenue, Rochester, New York 14646-0700. The telephone number is (716)
777-1000.
Telecommunication Services
General
Frontier's Telecommunication Services segment is comprised of Network
Systems and Services, which provides long distance services, customer premises
equipment, and wireless services. The Company's major deregulated business is
long distance service. While regionally focused
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currently in the Northeast, Mid-Atlantic and Midwest states from a marketing and
sales perspective, customers of the Company's long distance business enjoy
nationwide and international connectivity. Telecommunication Services' revenues
have increased significantly over the past few years and have accounted for 38
percent of Frontier's total revenues for the year ended December 31, 1994. The
Company intends to expand Telecommunication Services by increasing its existing
commercial and residential customer base, continuing to develop new products,
and effecting selected acquisitions.
Long Distance Services
The Company provides long distance services primarily through a subsidiary,
Frontier Communications International, Inc. (previously RCI Long Distance, Inc.,
or "FCI"). FCI routes long distance traffic over its 100 percent digital
state-of-the-art network and resells services obtained from
other suppliers to route calls to areas where it does not have its own
facilities. FCI currently owns and operates eight switching sites. These are
located in Rochester, New York; New York City; Washington, D.C.; Atlanta,
Georgia; Chicago, Illinois; Philadelphia, Pennsylvania; Cleveland, Ohio; and
Burlington, Vermont. FCI's switched services include basic long distance or
measured toll service which is accessible through "l + dialing", 800 services, a
variety of long distance products targeted at specific consumer and business
segments, and value-added services such as travel cards, prepaid cards and
information services. In addition, FCI provides flexible billing services such
as multi-location billing, customized accounting codes and electronic billing
features.
FCI currently focuses its marketing efforts in New York State, New England
and the Mid-Atlantic, Southeast and Midwest regions. In these regions, FCI
markets its products through a direct sales force, direct marketing campaigns,
sales agents, and affiliated local exchange carriers. The majority of FCI's
revenues are derived from small to medium-sized business customers. FCI has
introduced a number of programs designed to attract new long distance
customers. For example, the "Budget Call" feature enables any telephone user
to dial an access code and complete a call through FCI's long distance network.
The cost of the call is invoiced by the customer's local telephone company.
The rates for such calls are typically 10 to 20 percent lower than the rates
charged by a major long distance carrier such as AT&T. At December 31, 1994,
Budget Call was available in nineteen states. This program is anticipated to
continue expanding through 1995.
As part of the Company's overall service integration strategy, FCI has
significantly increased residential usage through its "Visions Long Distance"
program (as described in "Telephone Operations-General" at page 8) where
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FCI's long distance services are marketed through Company-owned as well as non-
affiliated local exchange service providers. Through the Visions Long Distance
program, the Company has achieved substantial penetrations in several markets as
a result of customer preference for unified billing and service. Because
residential long distance calling volumes peak in the evenings, on weekends and
on holidays, when commercial traffic tends to be lowest, expanding the
residential business increases revenues with virtually no need to increase
existing switching and transmission facilities.
During 1994, FCI signed definitive agreements to acquire two long distance
companies. In November, it completed negotiations to acquire WCT
Communications, Inc., a long distance company based in Santa Barbara,
California, and announced that it had signed a definitive agreement to acquire
American Sharecom, Inc., headquartered in Minneapolis, Minnesota. When these
acquisitions are completed, the geographic reach of the Company's long distance
business will extend from coast to coast, and the Company is projected to become
the seventh largest long distance carrier in the nation. Both acquisitions are
intended to further implement FCI's strategy to expand its customer and market
base and are subject to regulatory approval. The Company intends to continue to
pursue additional acquisitions to provide greater economies of size and scale to
its operation and to enhance its customer and market reach.
The long distance industry is dominated on a volume basis by the nation's
three largest long distance providers, AT&T, MCI and Sprint, which generate an
aggregate of approximately 84 percent of the nation's long distance revenue of
approximately $61 billion. In each of its markets FCI competes with AT&T, MCI
and Sprint, as well as with other national and regional long distance companies,
for intercity communications transmission services such as 1+, dedicated access,
800 service and private line service. The primary bases for competition in the
long distance business are pricing, product offering, and service. One element
of service includes billing and customer information. FCI provides long
distance services at prices often below the three large carriers, but generally
above smaller third-tier carriers. In addition to basic long distance, 800
services, and private line services, FCI products include prepaid calling card
services and operator services. FCI's prepaid calling card product has many
features, is a market leader through its use of innovative technology, and is
designed to meet standard needs while at the same time offering enhanced audio-
text services to users. Although FCI does not currently offer some of the
enhanced voice or data services provided by the three large carriers (such as
frame relay and ATM), it is able to meet the needs of its targeted general
business and residential markets. The Company intends to compete aggressively
in the long distance business.
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Wireless Communications
Since 1985, the Company has provided cellular service in the Rochester
Metropolitan Statistical Area ("MSA"), which has a population of approximately
one million, in a partnership with ALLTEL Corporation. Frontier historically had
an 85 percent interest in this partnership. In June, 1994 the Company and NYNEX
Mobile formed a 50/50 joint venture and the Rochester MSA was contributed to the
Upstate Cellular Network ("UCN" or the "Supersystem"). A Frontier subsidiary is
the managing partner of that cellular "Supersystem" which provides service in
much of upstate New York. The Supersystem provides the Company a larger
geographic footprint than it would otherwise have. The greater concentration of
customers resulting from the Supersystem's formation will enable the Company to
take advantage of the efficiencies normally inherent with the economies of
scale. By combining marketing and service efforts and integrating networks, the
Company and NYNEX will be able to provide seamless cellular service to a
population of approximately 3.5 million potential subscribers in upstate New
York. The Company also manages a cellular system in Alabama with over 255,000
potential subscribers and has investments in wireless properties elsewhere in
New York State and in Georgia, Illinois and Iowa. Through its subsidiaries,
Frontier is a member of the MobiLink marketing alliance, a nationwide consortium
of wireless operators. Frontier intends to continue to pursue additional
investments in cellular or wireless operations with a preference for investment
in properties which are adjacent to existing Company-owned properties or where a
controlling interest can be obtained.
In September, 1994 the Company signed a definitive agreement to purchase
the Minnesota Cellular Telephone Company ("Minnesota Cellular") which owns the
business and assets of a cellular company serving Rural Service Area ("RSA")
Number 10 in Minnesota with a population of approximately 225,000 potential
subscribers. The transaction, expected to close in the first quarter 1995, is
anticipated to involve the issuance of the Company's Common Stock and is
contingent upon regulatory approval.
Despite intense price competition during the construction of its network in
the Rochester, New York market, the Company's cellular business has remained
profitable since its first full year of service. This business has consistently
increased its subscriber base while maintaining an efficient cost structure.
With the formation of the Supersystem, and the corresponding increase in
geographic scope of the Company's cellular reach, overall the Company's wireless
business has remained profitable. Nevertheless, price competition remains
strong within all the Company's properties.
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Cellular systems compete principally on the basis of network quality,
customer service, price and coverage area. Each market currently has two
cellular providers, and the Company's chief competition in each market is from
the other cellular licensee in that market. In some markets additional entities
resell cellular service and compete with the holders of cellular licenses. The
Company believes that its technological expertise, emphasis on customer service
and development of new products and services make it a strong competitor.
Several recent FCC initiatives indicate that the Company is likely to face
greater wireless competition in the future. The FCC has licensed specialized
mobile radio ("SMR") system operators to construct digital mobile communications
systems on existing SMR frequencies in many metropolitan areas throughout the
United States. Also, in September 1993, the FCC announced its decision to
allocate radio frequency spectrum for personal communications services ("PCS"),
a form of wireless communication using lower power and more cell sites than
current cellular service. The FCC's decision will permit the grant of seven new
licenses: two 30 MHz blocks, one 20 MHz block and up to four 10 MHz blocks. (By
comparison, the two cellular carriers in each market currently have 25 MHz of
spectrum each.) The bidding for the two 30 Mhz blocks will be completed by May
1995. The Company has committed resources to evaluating the expansion of
wireless communications to include PCS offerings, but has elected, thus far, not
to participate in the bidding for PCS licenses.
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Cellular Property Ownership Table
The Company owned or was under contract to purchase the following cellular
properties as of December 31, 1994:
<TABLE>
<CAPTION>
1994 Pending Pending
Estimated Ownership Adjusted Ownership Adjusted
Market Population Interest Population Interest Population
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<S> <C> <C> <C> <C> <C>
New York
Buffalo*........................................................... 1,187,000 50.0% 594,000 50.00% 594,000
Rochester*......................................................... 1,024,000 42.5% 435,000 42.50% 435,000
Syracuse*.......................................................... 673,000 27.5% 185,000 27.50% 185,000
Utica-Rome*........................................................ 315,000 50.0% 158,000 50.00% 158,000
RSA #1*............................................................ 262,000 20.0% 52,000 20.00% 52,000
Total UCN Core Markets............................................. 3,461,000 1,424,000 1,424,000
NY RSA #2.......................................................... 232,000 12.5% 29,000 18.75% 44,000
NY RSA #3*......................................................... 482,000 22.5% 109,000 22.50% 109,000
NY RSA #4.......................................................... 359,000 0.0% 0 27.00% 97,000
Binghamton......................................................... 306,000 24.0% 73,000 32.50% 99,000
Elmira............................................................. 95,000 0.0% 0 50.00% 48,000
Alabama
AL RSA #4*......................................................... 137,000 69.54% 95,000 69.54% 95,000
AL RSA #6*......................................................... 118,000 69.54% 82,000 69.54% 82,000
Managed Markets* 4,198,000 1,710,000 1,710,000
Pennsylvania
PA RSA #3, B2...................................................... 58,000 0.0% 0 13.89% 8,000
PA RSA #4, B2...................................................... 72,000 0.0% 0 16.67% 12,000
Minnesota
Minnesota RSA #10.................................................. 227,000 0.0% 0 100.00% 227,000
Minority Interests
Orange-Poughkeepsie NY 597,000 15.00% 89,000 15.00% 89,000
Des Moines IA MSA.................................................. 420,000 4.00% 17,000 4.00% 17,000
GA RSA #3.......................................................... 205,000 25.00% 51,000 25.00% 51,000
IL RSA #2.......................................................... 252,000 6.67% 17,000 6.67% 17,000
IL RSA #3.......................................................... 200,000 6.38% 13,000 6.38% 13,000
Total.............................................................. 7,221,000 1,999,000 2,432,000
</TABLE>
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* Company managed systems; NY RSA #2 is Company managed in 1995.
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For each market listed above, the number in the "Adjusted Population" column
represents an estimate of the Company's proportionate share of the number of
potential cellular customers in such market as of December 31, 1994 and is
calculated by multiplying the 1994 estimated population of such market by the
Company's ownership interest in the cellular system serving that market as of
such date. Similarly, the number in the "Pending Adjusted Population" column
represents an estimate of the Company's proportionate share of the number of
potential cellular customers in each such market as of December 31, 1994, and is
calculated by multiplying the 1994 estimated population of such market by the
Company's ownership interest in the cellular system serving that market,
assuming completion of the proposed or pending transaction.
Customer Premises Equipment
Frontier Network Systems Inc., ("FNS") (previously "Rotelcom Inc."), was
established in 1978. It markets and services a wide range of telecommunications
and data equipment for mid- to large-size business customers, and competes
directly with other interconnect vendors that market telephone systems to
businesses and other enterprises. FNS's product line includes: private branch
exchanges ("PBXs") from Siemens/ROLM and Northern Telecom; data communications
equipment from leading manufacturers including Dowty and Newbridge; and
videoconferencing equipment from PictureTel. Product lines purchased by FNS
from its two largest suppliers, Siemens/ROLM and Northern Telecom, account for
more than a majority of its purchases from suppliers. The Company believes
FNS's relationships with its various suppliers is good. All of FNS's customers
are in New York State. FNS is also a partner in Anixter-Rotelcom, a
telecommunications supply joint venture with Anixter Bros., Inc., which was
established in 1986 to combine Anixter Bros.' experience in computer-assisted,
just-in-time telecommunications inventory delivery systems with FNS's
interconnect (private telephone system) business and to provide just-in-time
inventory control for the Company's regional telephone companies.
Telephone Operations
General
As of December 31, 1994, the Rochester, New York operating company and the
35 other local exchange companies served approximately 918,000 access lines in
13 states. The local exchange carriers provide local, toll access
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and resale services; sell, install and maintain customer premises equipment; and
provide directory services.
Effective January 1, 1995, the Company reorganized into a holding company
structure. The assets of the Rochester local exchange company were transferred
to two wholly-owned subsidiary companies. Rochester Telephone Corp. is a
regulated telephone and network transportation corporation which offers retail
services to existing customers as well as sells and markets wholesale network
services and other services to retailers of telecommunications services in the
Rochester, New York market. Its rates are subject to price cap regulation.
Frontier Communications of Rochester, Inc., is a lightly regulated provider of
telecommunications services to residential and business customers located,
initially, in the Rochester, New York market. The Company has other existing
subsidiaries, including many which provide local exchange services outside the
Rochester, New York market.
Since the beginning of 1988, the Company has invested over $620 million in
upgrading its Telephone Operations business and over $480 million for the
acquisition of independent telephone companies. Over this period, the Company
installed advanced digital switching platforms throughout much of its switching
network. The Company's network in Rochester, New York is fully digital, making
Rochester one of the largest cities in the United States to be served by an all-
digital network. In aggregate, the 35 local exchange companies outside of
Rochester, New York have over 95 percent digital capability. This is
illustrated in the "Access Line Table" located below.
Frontier has achieved substantial cost reductions through the elimination
of duplicative services and procedures and the consolidation of administrative
functions. As of December 31, 1994, Telephone Operations had 34 employees per
ten thousand access lines. The Company has reduced the number of telephone
employees per ten thousand access lines by over 27 percent since 1990. The
Company believes that additional reductions in employee levels will be necessary
to further improve the competitive position of its Telephone Operations. The
Company intends to vigorously pursue additional gains in productivity through
reengineering while simultaneously improving customer service.
In May 1994, the Company sold its Minot Telephone Company property located
in Minot, North Dakota. In September 1994 it announced that a definitive
agreement had been reached to sell the Ontonagon County Telephone Company and
the Midway Telephone Company, both located in the Upper Peninsula of Michigan,
and completed the transaction in March
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1995. In each case, the telephone properties no longer fit the strategic
purposes of the Company.
Access Line Table
The Table below sets forth certain information with respect to access lines
as of December 31, 1994:
<TABLE>
<CAPTION>
Percent of Total
Company Access
Telephone Properties Access Lines at Percent
at December 31, 1994 Lines December 31, 1994 Digital
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<S> <C> <C> <C>
Rochester, NY....... 501,811 54.7% 100.0%
Other NY Companies.. 86,125 9.3% 100.0%
Total New York...... 587,936 64.0% 100.0%
Alabama(1).......... 28,833 3.1% 100.0%
Georgia............. 22,420 2.4% 100.0%
Illinois(1)......... 17,782 1.9% 100.0%
Indiana............. 4,605 0.5% 100.0%
Iowa................ 52,125 5.7% 87.0%
Michigan(1)......... 26,623 3.0% 100.0%
Minnesota........... 101,992 11.1% 92.0%
Mississippi......... 5,284 0.6% 100.0%
Pennsylvania........ 34,682 3.8% 100.0%
Wisconsin........... 35,856 3.9% 100.0%
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Total Other States.. 330,202 36.0% 95.5%
Consolidated
Access Lines..... 918,138 100.0% 98.4%
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</TABLE>
(1) These companies also have properties in one or more other states. (An
Alabama company has access lines in Florida, an Illinois company has access
lines in Iowa, and a Michigan company has access lines in Ohio).
The Company operates 71 central office and remote switching centers in
Rochester, New York, and a total of 275 central office and remote switching
centers in its other telephone territories. Of the 918,138 access lines in
service on December 31, 1994, 663,293 were residence lines and 254,835 were
business lines. Long distance network service to and from
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points outside of the telephone companies' operating territories is provided by
interconnection with the lines of interexchange carriers.
As part of the Company's continuing strategy to provide a greater selection
of value-added products, the Rochester, New York operating company has
introduced advanced services such as Caller ID, distinctive ringing, directory-
assisted call completion, and an enhanced voice mail platform. The Company is
introducing similar advanced services, where appropriate, at its other telephone
properties.
Frontier is pursuing several alternatives to provide expanded broadband
services to its customers. To date, the Company has installed over 10,000 miles
of fiber optic facilities (over 500 sheath miles) in the Rochester, New York
area to provide its customers with enhanced capacity and product capability.
Throughout its telephone operations, Frontier has over 24,000 miles of fiber
optic facilities in place. The Company also conducted marketing trials and
tests of new technologies such as a video on demand service utilizing a hybrid
fiber-optic/coaxial cable network. The Company marketed this technology to
selected customers in its Rochester, New York service area during 1994. The
Company provides expanded broadband services to select customers outside the
Rochester, New York service area. These include video-distance learning
arrangements at certain Midwest region telephone properties.
In connection with its integration strategy, the Company has developed a
new program known as "Visions Long Distance", where its local exchange companies
resell FCI's long distance services. The Company believes that many customers
prefer the convenience of obtaining their long distance service through their
local telephone company and receiving a single bill. Visions Long Distance was
introduced at nine local telephone exchange companies in 1993 and extended to
two additional subsidiaries in 1994. The results of Visions Long Distance
operations are included as part of the Telecommunication Services segment.
Technological innovation and regulatory change are accelerating the level
of competition in both local exchange and long distance services. New
competitors now have the ability to provide basic local telephone service in
some areas, including Rochester, New York. To benefit from these technological
advances and broaden the scope and quality of its own product and service
offerings, the Company has increased its fiber and digital switching capacity
throughout its networks and has pursued regulatory alternatives such as the Open
Market Plan, which is described in more detail below. Currently, the Company
may be considered the primary provider of basic local telephone service in its
Rochester, New York property and may be
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considered the only provider of basic local exchange service in the various
other geographic areas where it has telephone properties.
Open Market Plan
On February 3, 1993, the Company filed its Open Market Plan with the New
York State Public Service Commission ("NYSPSC"). The plan was approved by an
Order of the New York State Public Service Commission dated November 10, 1994,
was approved by the Company's shareowners on December 19, 1994, and was
implemented effective January 1, 1995. The Open Market Plan has formally opened
the Rochester, New York local exchange market to competition. Frontier was the
first communications company in the nation to propose such a plan for full open
local competition. The Open Market Plan enables customers to choose their local
telephone service provider and to select from a broad array of products,
services and prices. It also gives Frontier the flexibility to broaden the
scope and quality of its own competitive service offerings.
Under the Open Market Plan, the Company's Rochester, New York local
exchange operations were divided into two companies-a wholesale provider of
basic network services ("Rochester Telephone Corp." or "RTC") and a retail
provider of telecommunications services ("Frontier Communications of Rochester,
Inc." or "FCR"). RTC and FCR are subsidiaries of the Company, which has become
an unregulated parent holding company. The parent holding company structure
provides financial flexibility for the Company to continue the acquisition and
diversification efforts that are necessary for its long-term growth.
RTC is a regulated company which sells basic network services such as
access to the network, transport between offices, and switching services to FCR
and all other local telecommunications companies. These local
telecommunications companies, including FCR, may then package services for
resale to local customers. RTC also provides services directly to end users,
except for Centrex and high capacity private line services which it offers only
on a wholesale basis. Under the Open Market Plan Agreement, RTC is subject to
price cap regulation rather than rate of return regulation. This will enable the
Company to retain the benefit of all productivity and revenue gains since its
rate of return is subject to price cap regulation. Please see the Rate
Stabilization Plan and Open Market Plan discussions at pages 14 and 15.
FCR is an unregulated full service provider of a broad array of integrated
telecommunications services, including local, long distance, cellular and,
potentially, video and other value-added offerings. In addition,
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FCR is able to package the network elements purchased from RTC and other
network providers with services such as flat rate service, measured rate
service, Centrex and ISDN. The Company intends that FCR will eventually offer
products and services outside of the Rochester, New York market.
Regulatory Matters
Each of Frontier's local telephone service companies is regulated by the
public utility regulatory agency of the state in which that company provides
local telephone service. The respective states are listed on the Access Line
Table on page 10. The competitive evolution of the telecommunications industry
has resulted in a more fluid regulatory framework than was in place
historically. In general, state regulatory agencies exercise authority over the
prices charged for the provision of local telephone service and intrastate long
distance service, the quality of service provided, the issuance of securities,
the construction of facilities and other matters. Each of the Company's long
distance and wireless companies may be regulated to a limited extent by the
public utility regulatory agency of the state in which each is providing
service. The Company's long distance and wireless service providers are also
subject to FCC jurisdiction.
(a) Royalty Proceeding. In 1984, the NYSPSC initiated a proceeding to
investigate the issue of whether the Company's competitive subsidiaries should
pay a royalty to the Rochester, New York local telephone service provider
primarily for the alleged intangible benefits received from the use of the
Rochester Telephone name and reputation. Under the Open Market Plan Agreement,
the NYSPSC will not impute a royalty on either the Company or on Rochester
Telephone Corp. during the term of the Rate Stabilization Plan (the "Rate
Period") which was a component of the Open Market Plan or any prior period,
subject to certain limited exceptions. After the termination of the Rate
Period, however, the NYSPSC may impute a royalty for the period beginning on the
termination date, subject to the outcome of any litigation regarding the
royalty. The Company is continuing to pursue the litigation it instituted to
challenge the Royalty Order. This proceeding remains unresolved and is
discussed in more detail in Item 3, Legal Proceedings.
(b) Incentive Regulation. In January 1990, the NYSPSC approved an incentive
regulation agreement for the Rochester, New York operating company. This
agreement expired at the end of 1992, and the Company proposed a new incentive
regulation agreement in January 1993. An interim settlement was approved by the
NYSPSC in February 1994. The settlement reduced the Company's revenue
requirement in 1993 by $5 million and by an additional $4.5 million in 1994.
Each of these reductions was subject to adjustment for depreciation changes and
the outcome in the Generic Financing Proceeding, which is discussed on page 15.
These issues were
13
<PAGE>
settled in the Open Market Plan. The amount of allowable depreciation was the
subject of a contested proceeding before the NYSPSC, but that issue was also
resolved in the Open Market Plan Settlement. As part of the Open Market Plan
Settlement, Rochester Telephone Corp. ("RTC") agreed to share with ratepayers
fifty percent of earnings above a threshold rate of return. In addition, that
company's revenue requirement was reduced by $5 million in 1993 and $9.5 million
in 1994. The 1993 sharing amount was refunded through customer billing credits.
The 1994 revenue requirement reduction, plus interest, was credited to RTC's
depreciation reserve to alleviate a reserve deficiency rather than refunding
cash to ratepayers. There was no 1994 sharing amount.
(c) Rate Stabilization Plan. The Open Market Plan provides for a total of $21
million in rate reductions for Rochester Telephone Corp. (the "Rate
Stabilization Plan") over a seven year period beginning January 1, 1995, subject
to termination by either the Company or the NYSPSC after five years (the "Rate
Period"). The Rate Stabilization Plan also precludes RTC from increasing basic
residential and business telephone service rates during the rate period. In
consideration of the rate reductions, the Rate Stabilization Plan provides that
RTC's local exchange services be subject to price-cap regulation rather than
rate of return regulation. The rates provided in the Rate Stabilization Plan
are designed to permit RTC to recover its costs and to earn a reasonable rate of
return, calculated using a methodology utilized by the NYSPSC to set the rate of
return earned by providers of local exchange services in New York State.
(d) Ice Storm. In March 1991, Rochester, New York experienced a severe ice
storm which caused the Rochester, New York Operating Company to spend
approximately $9.7 million to repair and replace outside plant facilities and to
provide customers billing credits for service disruptions. The Rochester, New
York operating company filed a petition with the NYSPSC requesting that it be
allowed to defer and amortize the portion of those costs which were intrastate
expenses. In November 1991, the NYSPSC approved the deferral and amortization
of $5.2 million of the intrastate local service expenses over a forty-eight
month period beginning January 1, 1992 and the amortization of $1.6 million of
the intrastate long distance service expenses through June 1993. The Rochester,
New York Operating Company also filed a petition with the FCC requesting that it
be allowed to defer and amortize the portion of the ice storm expenses that were
allocated to or assigned the interstate jurisdiction. The FCC approved an order
effective January 23, 1992, which permitted the Company to begin the
amortization of $2.0 million of interstate expenses over an eighteen month
period. In order to recover the expenses, the FCC permitted the Rochester, New
York Operating Company to establish a temporary surcharge on interstate switched
access charges to be billed to interexchange carriers and a monthly increase in
the interstate customer
14
<PAGE>
access line charges applicable to Centrex and multiline business customers. All
recovery was completed by the end of the first quarter of 1994.
(e) FAS 106. The Company adopted Financial Accounting Standards Board
Statement 106 (FAS 106), "Employers' Accounting for Postretirement Benefits
Other Than Pensions." It had previously adopted FAS 87, "Employers' Accounting
for Pension Benefits." For the Rochester company, the accumulated
postretirement benefit obligation as of January 1, 1994 was approximately $89.8
million, and the projected pension benefit obligation was approximately $275.7
million. The Company elected to defer the recognition of the accrued Transition
Benefit Obligation over a period of twenty years. Each state regulatory agency
may treat these obligations differently in the rate-making process. On
September 7, 1993, the NYSPSC issued its Statement of Policy and Order
concerning postretirement benefit and pension accounting. Consistent with this
NYSPSC policy the Rochester, New York operating company included the FAS 106
costs in its incentive regulation settlement agreement discussed on page 13.
The FCC originally suspended the Company's petition to include the
incremental costs associated with adopting FAS 106 in its 1993 price cap filing.
The Company, along with all other local exchange carriers (LECs) subject to
price cap regulation, filed an appeal of the FCC's ruling with the United States
Court of Appeals. In the court's decision, dated July 12, 1994, the FCC's
original order was vacated and the FCC was remanded to reconsider the merits of
the LECs' request for exogenous cost treatment under the price cap rules. The
FCC has reopened its investigation of the carriers' filings. The Company is
evaluating its options in light of the Court's decision and cannot predict the
final outcome of the FCC's investigation.
(f) Open Market Plan. The Company filed a petition in February 1993 with the
NYSPSC in which the Company requested approval to reorganize the corporation.
This Open Market Plan, which was implemented effective January 1, 1995, is
discussed in more detail on pages 12 and 13.
(g) Frontier Communications of Minnesota (formerly Vista Telephone Company of
Minnesota). Frontier Communications of Minnesota filed with the Minnesota
Public Service Commission a request to increase rates in March 1993. A
stipulated settlement was executed by all parties and was submitted for approval
to the Minnesota Public Service Commission. In April 1994, the Minnesota Public
Service Commission granted the Company authority to increase annual revenues by
$4.4 million.
(h) Generic Financing Proceeding. In May 1993, the NYSPSC instituted a
Generic Financing Proceeding to review its financial policy guidelines and to
determine if there should be established a generic rate of return methodology
15
<PAGE>
for New York State local exchange companies. The Company favors a generic
methodology because it would streamline the ratemaking process, provide all
stakeholders a much greater sense of predictability, and create an environment
more conducive to long term planning. The Company supports the implementation
of a generic rate of return methodology, but it cannot, at this time, predict
the outcome of this proceeding. Because the Open Market Plan provides for "pure
price cap regulation" rather than rate of return regulation, the outcome of this
Generic Financing Proceeding will not apply to RTC during the Rate Period of the
Rate Stabilization Plan component of the Open Market Plan. However, Frontier's
other New York subsidiary telephone companies remain subject to rate of return
regulation.
(i) Frontier Communications of Iowa (formerly Vista Telephone Company of
Iowa). Frontier Communications of Iowa filed in August 1993 for a rate increase
in Iowa of approximately $4.5 million including a temporary increase of $4.1
million. In February 1994, the Iowa State Utilities Board issued an order
approving a proposed settlement of this case. Under the terms of that order,
the Board granted Vista Iowa an annual revenue increase of $2.9 million.
(j) Undergrounding Proceeding. The NYSPSC, in an order dated September 21,
1993, stated that the Company's New York local exchange service providers
should, for the next five years, accrue funds for the purposes of
"undergrounding" construction of distribution plant in "visually significant
areas." Any unspent amounts are to be carried over to the next year until
expensed. The amount of the accrual is determined in accordance with a NYSPSC
approved formula. The Company currently estimates the total amount of the
accrual to be approximately $408,000 for all of its New York local exchange
companies. The NYSPSC has also indicated that it intends to release an order
requiring a pilot program to underground some existing plant in certain areas.
The Company will consider its options to file for reconsideration or appeal if
and when the Order is issued. However, the Company cannot predict the outcome
at this time.
Competition
Traditionally, telecommunications industry businesses were considered
monopolies. This industry has experienced a significant increase in competition
in recent years. Factors such as technological advancement and a more fluid
regulatory framework have encouraged competition. Frontier is intent on meeting
and taking advantage of the various business opportunities which competition
provides in the markets where it operates. The Open Market Plan, described in
more detail at pages 12 and 13 is one way in which the Company is proactively
meeting competition. The
16
<PAGE>
Company is also addressing competition by focusing on improved customer
satisfaction, by developing and offering products and services, and by reducing
its cost base and becoming more efficient.
(a) Local Exchange Networks. Prior to 1968, the telephone industry alone
provided and maintained the telephones and lines of the public switched
telecommunications network. In that year, an FCC order declared unlawful
certain AT&T tariffs which prohibited customers from attaching their own
equipment to the telephone network. However, the telephone equipment provided
by telephone companies which remained in place on customers' premises remained
regulated. By a subsequent FCC order, effective January 1, 1983, telephone
companies were required to deregulate all new telephone equipment. Although
Frontier experiences different levels of network regulation throughout the
geographic territory of its telephone properties, in general the Company is
subject to numerous competitors in the provision of equipment and facilities
used in connection with the local exchange network. In the Rochester market
competitors who have stated they will enter or have actually entered the local
exchange market include Time Warner Communications and AT&T.
Since the deregulation of telephone equipment, sales of telephone equipment
have become commonplace throughout all geographic areas of the United States.
Frontier has responded to this competition through operation of its retail Phone
Centers for the direct sale of telephone sets, inside wire and telephone
outlets. The Phone Centers also perform as maintenance centers where customers
who lease equipment from the company can pick up or exchange telephones and
receive a credit on their bills if they bring in a telephone that needs repair.
In 1982, the Rochester, New York operating company formed its Consumer Equipment
Services division to maintain all company provided leased equipment as well as
maintain customer-owned equipment on a fee for service or contract basis. Many
of the Company's other local exchange companies also sell, lease and maintain
telephone sets and equipment.
Business consumer equipment needs are another segment of the
telecommunications network equipment market. Several of the Company's local
exchange companies market equipment and facilities directly to business
consumers. In addition, Frontier Network Systems, which was established in 1978
under the name Rotelcom Inc., markets and services a wide range of
telecommunications and data equipment for mid-to large-size business customers,
and competes directly with other interconnect vendors that offer for sale
telephone systems to businesses and other enterprises. FNS's product line
includes: private branch exchanges (PBX's) from ROLM, Siemens and Northern
Telecom; data communications equipment from leading manufacturers including
Dowty and Newbridge; and
17
<PAGE>
videoconferencing equipment from PictureTel. The majority of FNS's customers are
in New York State. FNS is also a partner in Anixter-Rotelcom, a joint
telecommunications supply venture with Anixter Bros., Inc.
Although competitive providers of local exchange basic service are not
expected to be active for the near future at the Company's smaller rural
properties, local exchange basic service competition is occurring today in the
Rochester, New York marketplace. For example, MFS Telecom, Inc. ("MFS") and
Time Warner Communications ("Time Warner") are alternative local exchange
service providers in Rochester. AT&T Communications ("AT&T") is also actively
remarketing local exchange service in the Rochester, New York marketplace as a
reseller of RTC's services, as is Frontier's subsidiary, Frontier Communications
of Rochester, Inc. ("FCR"). The Company is unaware of the exact revenues and
market share of the local exchange market that MFS, Time Warner, AT&T or FCR
account for in the Rochester, New York service area.
On February 3, 1993, Frontier filed a plan with the NYSPSC, to open the
local telephone market in the Rochester, New York service area to competition.
This plan enables customers to choose their local telephone service company and
will potentially provide them a broader selection of products, services and
prices. It will also give the Company greater flexibility to broaden the scope
and quality of its own competitive offerings. See the discussion on the Open
Market Plan on pages 12 and 13 and Regulatory Matters on pages 13 through 16.
Long distance companies largely access their end users through
interconnection with local telephone companies. Those long distance companies
pay access fees to the local telephone companies for this service. This is one
reason the Company derives at least ten percent of its consolidated gross
revenues from AT&T. The Company provides a number of other services to AT&T,
such as billing and collection.
Alternate Access Vendors are companies which provide alternative
transmission services and provide access services to local exchange and long
distance companies. Alternate Access Vendors compete with traditional local
exchange companies. Currently, MFS, AT&T and Time Warner are the primary
Alternate Access Vendors active in the Rochester, New York area and no
significant Alternate Access Vendors are believed to be active in any of the
Company's other properties.
(b) Interexchange Service. During the past two decades, rulings by the FCC
and associated court decisions have restructured the market for the provision of
interexchange telecommunications services and have opened up this market to
competition. The Company recognized an opportunity to compete
18
<PAGE>
in this market. In 1984, Frontier Communications International, Inc., ("FCI")
(previously RCI Long Distance) was launched and a digital switching and
transmission system was built throughout the Northeast. Today FCI operates in
New York, New England and the Mid-Atlantic and Midwest regions, an area which
accounts for nearly 25 percent of the nation's total interexchange revenues.
Through arrangements with other interexchange carriers, FCI provides
connectivity to the entire United States and to over 200 countries around the
world.
In addition to growing its customer base in its original operating
territory, FCI has expanded its network coverage and customer base through the
acquisition of long distance companies in the Northeast: RCI Long Distance New
England Inc., (previously operating as Long Distance North and now named
Frontier Communications of New England, Inc., January 1991) and Taconic Long
Distance Service Corp. (now named Frontier Communications of Taconic, Inc., July
1991), Mid Atlantic Telecom, Inc. (now named Frontier Communications of the Mid
Atlantic, September 1994), and Budget Call Long Distance, Inc. (June 1993). In
October 1994, the Company announced that it would purchase WCT Communications,
Inc., ("WCT") a long distance reseller headquartered in California with annual
revenues in excess of $100 million, and in November 1994, the Company announced
that it would acquire American Sharecom, Inc., ("ASI") headquartered in
Minnesota, with revenues of approximately $125 million. The ASI acquisition,
completed in March 1995, and the prospective WCT acquisition will extend the
geographic coverage nationwide and together are projected to make FCI the
seventh largest long distance carrier in the nation.
A number of companies, including AT&T, MCI, Sprint and smaller regional
long distance companies, compete with FCI and offer interexchange services such
as Wide Area Telephone Service ("WATS"), private line and switched message toll.
Given the competitive nature of the interexchange service industry, FCI is not
aware of its exact market share in any specific market. However FCI does not
believe that it holds a dominant market position in any market in which it
operates.
(c) Wireless. The Company is the managing partner of Upstate Cellular Network
("UCN"), which is a partnership with NYNEX Mobile. The partnership operates a
cellular system in central and western New York State. Frontier also manages,
through a subsidiary, an Alabama cellular partnership and has investments in
other cellular properties. Please see the Cellular Property Ownership Table at
page 7 for a listing of the various cellular properties which the Company
manages or in which it has investment interests.
19
<PAGE>
Cellular systems generally have at least one competitor in each market.
For example, in the Rochester, New York MSA the other cellular system is Genesee
Telephone Company ("GTC") which does business as Cellular One. In 1994
Southwestern Bell acquired a controlling interest in GTC. Additionally, Time
Warner Communications has recently begun to resell cellular service in the
Rochester, New York MSA. In the cellular industry, competitive characteristics
include the geographic coverage area, transmission clarity and the price of the
service offerings. The Company believes that the transmission quality of its
systems is generally comparable to or better than the quality of its competitor
in each market. The Company also competes through pricing packages which
provide certain benefits to customers. For example, one pricing package
provides significantly reduced roaming rates throughout most of Upstate New
York. In addition, the Company's strong geographical service coverage of much
of the upstate New York area makes the Company a strong competitor. This
coverage, which includes handheld level service in downtown Rochester and in
most of its major commuting areas, is believed to be comparable or superior to
the coverage of its competitors. Because the Company does not have information
regarding its competitors' customer bases, the Company is unable to calculate
any specific assessment of its market share in its various markets.
In addition to UCN, the Company has partnership interests in various other
MSAs and RSAs (Rural Service Areas.) Please see the "Cellular Property
Ownership Table" on page 7 for a list of the Company's cellular ownership
interests and the estimated population in each of the indicated cellular
markets. Although in the future the Company may divest itself of selected
cellular properties, the Company will continue to seek cellular service growth
and expansion. To this end, the Company in 1994 entered into a definitive
agreement for the purchase of a partnership which owns the business and assets
of a cellular provider serving Minnesota RSA #10. Please also see the discussion
of Upstate Partners on pages 2 and 5.
Environmental and Other Matters
Underground duct systems are often used to house telephone cable. Some of
the existing ducts are made of a material containing asbestos. This material
poses a potential removal and disposal problem if a realignment of the duct
system is necessary due to road construction or similar projects. The Company
is in the process of identifying the portions of the duct system that contain
this material so necessary action may be taken in a timely fashion to minimize
the cost of removal and disposal of such material. The asbestos presents no
known health risk as long as it remains buried and undisturbed. It cannot be
determined how much of the affected underground duct system will undergo future
reconstruction and, therefore, an estimate of
20
<PAGE>
the cost of asbestos removal and disposal cannot be made at this time. See Item
3. Legal Proceedings, for discussion of environmental litigation.
Employees and Labor Relations
As of December 31, 1994, the Company had 4,240 employees, of which 3,156
were employees of the various Telephone Operations businesses, and 1,084 were
employees of the various Telecommunication Services businesses. At the
Rochester, New York Operating Company, 663 clerical and service workers were
represented by the Rochester Telephone Workers Association (RTWA) and 726 craft
and clerical employees were represented by the Communications Workers of America
(CWA), Local 1170.
Under the current three-year contract between Rochester Telephone Corp.
and the RTWA, effective August 12, 1994 bargaining unit employees received a 2.0
percent general increase. On February 12, 1995 they will receive a 1.0 percent
general increase. The contract provides that they will receive the same amount
of increase on February 18, 1996 and February 16, 1997. The RTWA contract will
expire on August 12, 1997.
Under the current three-year contract between Rochester Telephone Corp. and
the CWA, effective January 1, 1994 bargaining unit employees received a wage
increase of up to 4.5 percent, and on January 1, 1995, those employees received
a wage increase of up to 4.25 percent plus a "Cost of Living Allowance" increase
based on 70 percent of the movement of the Consumer Price Index above 9.25
percent during the period from November 1992 to November 1994. The CWA contract
will expire on January 31, 1996.
The International Brotherhood of Electrical Workers (IBEW) represents 159
employees at Frontier Communications of New York (previously Highland), 16
employees at Frontier Communications of Sylvan Lake and 11 employees at Frontier
Communications of AuSable Valley. On May 25, 1993, Highland and the IBEW
entered into a contract which expires February 13, 1997, and provides for an
increase of 4 percent in September 1994, 4 percent in September 1995, and no
increase thereafter until the contract is renegotiated. On September 29, 1992,
Sylvan Lake and the IBEW entered into a three-year contract extension which
provides for an increase of 3.0 percent in year one, 3.5 percent in year two,
and 5.0 percent in year three of the contract. The current three-year contract
between AuSable Valley and the IBEW granted bargaining unit employees an average
wage increase of 3.6 percent effective May 1993, and also provides for an
average 3.4 percent wage increase in the final year of the contract. That
contract will expire May 10, 1995.
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<PAGE>
The IBEW also represents 22 employees of Frontier Communications of
Michigan (previously C, C & S Telco, Inc.) On October 9, 1994, they entered
into a three year contract which granted bargaining unit employees a 3.0 percent
increase in October 1994, a 3.0 percent increase in October 1995, a 2.5 percent
increase in October 1996 and a 2.25 percent increase in October 1997. That
contract will expire October 8, 1997. The IBEW additionally represents 7
employees at Frontier Communications of Illinois (previously Midland), 5
employees at Frontier Communications - Inland, 1 employee at Frontier
Communications - Lakeside, 1 employee at Frontier Communications -Prairie, and 4
employees at Frontier Communications of Mt. Pulaski. On November 1, 1994, each
of these companies entered into three-year contracts with the IBEW that provided
for a $.60 per hour wage increase on November 1, 1994, a $.55 per hour wage
increase on November 1, 1995, and a $.50 per hour wage increase on November 1,
1996.
The CWA, Local 7270, represents 172 employees at Frontier Communications of
Minnesota (previously Vista Minnesota). On June 21, 1993, Vista Minnesota and
the CWA entered into a three-year contract which provided for a wage increase of
3.0 percent in June 1994, and a minimum of 2 percent in June 1995, with an
opportunity to receive, also in June 1995, up to an additional 1.25 percent
based upon the performance of the Vista Minnesota telephone operation. The
contract expires June 21, 1996. The CWA, Local 7171, represents 93 employees at
Frontier Communications of Iowa (previously Vista Iowa). On May 1, 1993, Vista
Iowa and the CWA entered into a three-year contract which provides for wage
increases of 2.7 percent in May 1994, and a minimum of 2 percent in May 1995,
with an opportunity to receive, also in May 1995, up to an additional 1.25
percent based upon the performance of the Vista Iowa telephone operation. The
contract expires April 30, 1996.
ITEM 2. PROPERTIES
The Company's local exchange service providers own, in their respective
operating territories, telephone property which includes: connecting lines
between customers' premises and the central offices; central office switching
equipment; buildings, land and miscellaneous property; and customer premise
equipment.
The connecting lines include aerial and underground cable, conduit, poles
and wires, and microwave equipment. These facilities are located on public
streets and highways or on privately owned land. The Company has permission to
use these lands pursuant to governmental consent or lease, permit, easement, or
other agreement.
22
<PAGE>
The central office switching equipment includes electronic switches and
peripheral equipment.
The Company owns or leases the land and buildings in which its central
offices, warehouse space, office and traffic headquarters are located. Frontier
Corporation's headquarters are located in a leased seven story building at 180
South Clinton Avenue, Rochester, New York. The lease expires in 2003 and is
renewable for two successive ten year periods.
The Company's interexchange service providers own property in their
respective operating territories which includes: fiber optic cable, switching
equipment, microwave equipment, real estate and miscellaneous office and work
equipment. These providers also lease facilities or transmission capacity from
other carriers. The Company's wireless service providers own switching
equipment, cell site towers and other site equipment, and miscellaneous office
and work equipment.
ITEM 3. LEGAL PROCEEDINGS
On June 11, 1992, a group of corporate plaintiffs consisting of Cooper
Industries, Inc.; Keystone Consolidated Industries, Inc.; The Monarch Machine
Tool Company; Niagara Mohawk Corporation; and Overhead Door Corporation
commenced an action in the United States District Court for the Northern
District of New York seeking contribution from Rotelcom Inc., a wholly-owned
subsidiary of the registrant held through intervening subsidiaries (now named
Frontier Network Systems, Inc. or "FNS") and fourteen other corporate defendants
for environmental "response costs" in the approximate amount of $1.5 million
incurred by the plaintiffs pursuant to a consent decree entered into by
plaintiffs with the United States Environmental Protection Agency (the "EPA").
Two additional defendants were named in 1994. In addition to FNS, the current
defendants are: Agway, Inc.; BMC Industries, Inc.; Borg-Warner Corporation; Elf
Atochem North America, Inc.; Mack Trucks, Inc.; Motor Transportation Services,
Inc.; Pall Trinity Micro Corporation; The Raymond Corporation; Redding-Hunter,
Inc.; Smith Corona Corporation; Sola Basic Industries, Inc.; Wilson Sporting
Goods Company; Phillip A. Rosen; Harvey M. Rosen; City of Cortland; and New York
State Electric & Gas Corporation.
The consent decree concerned the clean-up of an environmental Superfund
site located in Cortland, New York. It is alleged that the corporate defendants
disposed of hazardous substances at the site and are therefore liable under the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA").
The Company anticipates that a final Record of Decision ("ROD") will be issued
by the EPA in March 1995
23
<PAGE>
and will prescribe the remediation requirements for the site. The aggregate
amount of remediation costs to be incurred by the plaintiffs will be based on
the requirements of the ROD. The total cost of remediation at the site is
uncertain, although estimates have recently ranged from $25 million and $100
million. There has been no allocation of liability as among or between the
plaintiffs or defendants. The extent to which plaintiffs can recover any of
these costs from the defendants, including FNS, will be determined at a trial
which is scheduled to begin in July 1995. The action is currently in discovery.
FNS has been vigorously defending this lawsuit. The Company believes that it
will ultimately be successful, but it is unable to predict the outcome with any
certainty at this time.
In its Opinion and Order in Case 87-C-8959, issued July 6, 1993, the New
York State Public Service Commission (NYSPSC), by a three-to-two vote, imposed a
royalty upon the Company in the amount of two percent of the total
capitalization of the Company's unregulated operations. The NYSPSC justified
the royalty on two grounds; first, that ratepayers are entitled to protection
from the potential for cost misallocations and increased risk that accompany
diversification of the Company's basic telephone business; and second, that the
Company's unregulated operations benefit from their use of the Rochester name
and reputation. The NYSPSC rejected the Company's statutory and constitutional
defenses and concluded that it possessed the authority under the Public Service
Law to impose a royalty and that its imposition is not unconstitutional. Based
upon an initial interpretation of the Order, the company estimates that its
potential effect is in the range of two million dollars per year. The royalty,
if implemented, would be an imputation against the Rochester, New York operating
Company's revenue requirement from regulated intrastate operations. The NYSPSC
ordered the Rochester, New York operating company to file, by August 5, 1993, an
accounting plan to account for the royalty amount, together with a plan for
returning such amount to ratepayers. Although the Rochester, New York operating
company requested the NYSPSC to waive this requirement, the NYSPSC denied this
request. In compliance with the order of the NYSPSC, on August 5, 1993, the
Rochester, New York operating company filed its plan.
On August 6, 1993, the Rochester, New York operating company filed with
Supreme Court, Albany County, its petition pursuant to Article 78 of the New
York Civil Practice Law and Rules seeking judicial review of the NYSPSC's
Opinion and Order. By order dated October 7, 1993, this proceeding was
transferred to the Appellate Division, Third Department. The Company filed its
Brief on December 16, 1993. Respondents' briefs were filed on February 28,
1994, and reply briefs were filed on March 16, 1994. Oral argument was held on
April 26, 1994. On June 30, 1994, the Appellate Division unanimously upheld the
NYPSC's Order. On July 29, 1994, the
24
<PAGE>
Company filed a Notice of Appeal and a Motion for Leave To Appeal with the New
York Court of Appeals. On December 8, 1994, the Court of Appeals accepted the
Company's appeal and denied the Motion for Leave To Appeal as unnecessary. The
Company filed its brief on February 6, 1995. Respondent's briefs are due on
March 23, 1995 and the Company's Reply Brief is due April 3, 1995. On February
27, 1995, the NYPSC moved to dismiss the appeal as moot as a result of the Open
Market Plan Settlement. The Company filed its opposition to that motion on
March 13, 1995, and the motion is now before the Court for decision. The
Company is vigorously contesting this case and is of the opinion that it will
ultimately prevail, but cannot predict the outcome with any certainty at this
time. This royalty issue has been settled for the Rochester, New York operating
company for the duration of the Rate Period of the Rate Stabilization Plan,
which is part of the Open Market Plan.
The Regulatory Matters discussion in management's discussion of Business in
Part 1, Item 1, on pages 13 through 16 is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(A) At the Special Meeting of Common Shareowners held on December 19, 1994, the
common shareowners voted upon five proposals. The results were as follows:
1. Approval of the Open Market Plan Agreement, the transactions contemplated
thereby, and related amendments to the Company's Restated Certificate of
Incorporation (the "Certificate").
<TABLE>
<S> <C>
For: 50,049,132.1750
Against: 1,018,424.4810
Abstain: 640,975.6730
Broker Non-Vote: 4,702,811.0000
</TABLE>
2. Approval of a Certificate amendment to increase the number of authorized
shares of common stock from 100,000,000 to 300,000,000.
<TABLE>
<S> <C>
For: 51,705,928.9710
Against: 4,179,853.0510
Abstain: 525,561.3070
Broker Non-Vote: -0-
</TABLE>
25
<PAGE>
3. Approval of a Certificate amendment to authorize 4,000,000 shares of a new
class of preferred stock.
<TABLE>
<S> <C>
For: 45,629,722.9470
Against: 5,288,386.5840
Abstain: 791,318.7980
Broker Non-Vote: 4,701,915.0000
</TABLE>
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.
<TABLE>
<S> <C>
For: 49,894,414.5340
Against: 1,164,518.0680
Abstain: 650,155.7270
Broker Non-Vote: 4,702,255.0000
</TABLE>
5. Approval of a Certificate amendment to change the name of the
Company to "Frontier Corporation".
<TABLE>
<S> <C>
For: 53,493,461.3200
Against: 2,149,815.7720
Abstain: 768,066.2370
Broker Non-Vote: -0-
</TABLE>
(B) At the Special Meeting of Preferred Shareowners held on December 19, 1994,
the preferred shareowners voted upon one proposal. The results were as
follows:
1. Approval of a Certificate amendment to authorize 4,000,000 shares of a new
class of preferred stock.
<TABLE>
<S> <C>
For: 138,001.0000
Against: 20,981.0000
Abstain: 1,661.0000
Broker Non-Vote: -0-
</TABLE>
26
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY
MATTERS
The Company's Common Stock is traded on the New York Stock Exchange (Symbol
- - FRO). A stock split in the form of a 100 per cent stock dividend was effected
during 1994. The information in the table below is adjusted to reflect the
effects of that stock split. The specific information required by this item is
as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
Quarter High Low High Low High Low
------- ------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Highest and lowest
market prices for the 1st $22.44 $20.25 $ 19.44 $17.32 $ 17.00 $ 15.07
stock by quarter: 2nd 25.25 20.81 21.75 18.25 16.88 14.57
3rd 24.75 21.63 24.38 20.50 16.44 15.13
4th 24.63 20.50 25.13 21.69 17.88 15.32
Common stock 1st $.2025 $.1975 $.1925
dividends declared 2nd .2025 .1975 .1925
per share: 3rd .2025 .1975 .1925
4th .2075 .2025 .1975
------ ------ ------
Total Dividends per Year $.8150 $.7950 $.7750
Number of Shareowners
(at December 31)
Individuals 2,291 20,338 19,731
Brokers, nominees
and institutions 383 421 400
------- ------- -------
Total Shareowners 22,674 20,759 20,131
</TABLE>
27
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item should be read in conjunction with
the consolidated financial statements and related notes included in Item 14
contained herein, and is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Revenues and Sales............................. $ 985,492 $ 906,450 $ 804,049 $ 713,559 $ 612,994
Income from Continuing Operations
(before Extraordinary Items and
Cumulative Effect of Change in
Accounting Principle)............................ $ 109,934 $ 82,720 $ 70,503 $ 75,289 $ 51,935
Consolidated Net Income............................ $ 102,737 $ 82,720 $ 69,431 $ 79,046 $ 51,935
Earnings per Common Share:
Income before Extraordinary
Items and cumulative effect of
change in accounting principle................... $ 1.50 $ 1.21 $ 1.04 $ 1.15 $ 0.86
Extraordinary Items................................ --- --- $ (0.02) $ 0.06 ---
Cumulative effect of change
in accounting principle......................... $ (0.10) --- --- --- ---
Earnings per Common Share-Primary $ 1.40 $ 1.21 $ 1.02 $ 1.21 $ 0.86
Earnings per Common Share-Fully
Diluted......................................... $ 1.40 $ 1.20 $ 1.02 $ 1.21 $ 0.85
Cash Dividends Declared per
Common Share...................................... $ 0.815 $ 0.795 $ 0 .775 $ 0.755 $ 0.735
Total Assets....................................... $1,760,951 $1,510,201 $1,513,897 $1,496,737 $1,198,858
Long-Term Debt..................................... $ 578,600 $ 492,555 $ 525,597 $ 591,232 $ 363,020
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS AND ANALYSIS OF
FINANCIAL CONDITION
The information required by this item is presented in pages 18 through 28 of
Exhibit No. 13 of this Form 10-K and is incorporated herein by reference.
Exhibit 13 consists of material located at pages 17 through 48 of the 1994
Financial Review which was provided to shareowners on or about March 13, 1995
and bound together with the proxy statement for the Annual Meeting of
Shareowners to be held April 26, 1995.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, together with the report thereon of
Price Waterhouse LLP, dated January 16, 1995, is presented on pages 28 through
46 of Exhibit No. 13 of this Form 10-K and is incorporated herein by reference.
Exhibit 13 consists of material located at pages 17 through 48 of the 1994
Financial Review which was provided to shareowners on or about March 13, 1995
and bound together with the proxy statement for the Annual Meeting of
Shareowners to be held April 26, 1995.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information required by this item for the Directors of Frontier
Corporation is presented on pages 3 and 4 of the definitive proxy statement
provided to shareowners on or about March 13, 1995 in connection with the Annual
Meeting of Shareowners to be held April 26, 1995, which is Exhibit 99 to this
Form 10-K and is incorporated by reference into this Item 10. Director John R.
Block is not standing for re-election. Exhibit 99 consists of the Notice of
Meeting plus material located at pages 1 through 16 of the Company's Proxy
Statement for the April 26, 1995 Annual Meeting of Shareowners and Financial
Review of the 1994 fiscal year.
Executive Officers
Certain information is set forth below regarding the Executive Officers of the
Company as of February 28, 1995. Each Officer serves for a period of one year
or until a successor is elected.
29
<PAGE>
<TABLE>
<CAPTION>
Other Positions Held
Name Position and During the Past
(Age) Offices Held Five Years
- ------ ------------- ----------------------------
<S> <C> <C>
Ronald L. Bittner (53) Chairman, President From February 1992 to April
and Chief Executive 1993 he was President and Chief
Officer since Executive Officer. From May
April 1993 1988 to February 1992 he was
Executive Vice President and
President-Telecommunication Group.
Jeremiah T. Carr (52) President and CEO - From November 1993 to December
Rochester Telephone 1994 he was Corporate Vice President
Corp. and President - and President - Telephone Group.
Rochester Telephone From February 1993 to November
Group since 1993 he was Corporate Vice President
January 1995 and President Telephone Operations.
From February 1992 to February 1993
he was President Rochester Telephone
Operations. From October 1991 to
February 1992 he was President of
Rotelcom. From January 1990 to
October 1991 he was Vice President
RCI and Corporate Vice President
General Manager-NYS, and President
Rotelcom. From 1988 to January 1990
he was Vice President of Consumer
Markets-RCI.
Dale M. Gregory (46) President - From November 1993 to December
Frontier 1994 he was Corporate Vice President
Communications and President - Telecommunication
Group since January Group. From February 1993 to
1995 November 1993 he was Corporate Vice
President and President-Network
Systems and Services. From February
1992 to February 1993 he was
Corporate Vice President and
President-Telecommunication
Services. From January 1991 to
February 1992 he was President-RCI
Network and Systems. From March
1991 to February 1992 he was also
President, Dale M. Gregory
Management Consultants, Inc. From
June 1988 to March 1991, he was
President and Chief Operating Officer,
Advanced Telecommunications
Corporation.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Other Positions Held
Name Position and During the Past
(Age) Offices Held Five Years
- ------ ------------- ----------------------------
<S> <C> <C>
Louis L. Massaro (48) Corporate Vice From February 1993 to December
President since 1994 he was Corporate Vice President
December 1994 and Treasurer. From September 1991
to February 1993 he was Corporate
Vice President and President-
Rochester Operations. From May
1988 to September 1991 he was
Vice President-Telecommunication
Group.
Martin T. McCue (44) Corporate From January 1994 to
Vice President November 1994 he was Vice
since December 1994 President/Corporate Planning and
Legal Services of Rochester Telephone
Corporation, and from April 1986 to
December 31, 1993 he was Vice
President and General Counsel of the
United States Telephone Association.
John K. Purcell (51) Corporate From February 1993 to November
Vice President 1993 he was Corporate Vice
since November 1993 President-Planning and
President-Wireless Operations. From
February 1992 to February 1993 he
was Corporate Vice President-
Development. From September 1991
to February 1992 he was Corporate
Vice President-Corporate Partnering
and Corporate Vice President and
President-Telephone Subsidiaries.
From May 1988 to September 1991 he
was Vice President-Telephone Group.
Janet F. Sansone (49) President - From November 1993 to December
Frontier Services 1994 she was Corporate Vice
Group since President - Human Resources and
December 1994 Corporate Services. From March 1993
to November 1993 she was Corporate
Vice President-Human Resources and
Excellence. From July 1991 to March
1993 she was Manager Management
and Human Resources Education,
General Electric Corporation. From
August 1989 to July 1991 she was
Manager Recruiting and University
Development, General Electric
Corporation.
Josephine S. Trubek (52) Corporate Secretary From January 1990 to April 1993 she
since April 1993 was General Counsel and Secretary.
From 1982 to January 1990 she was
Corporate Counsel and Assistant
Secretary.
</TABLE>
31
<PAGE>
As of March 31, 1992, Advanced Telecommunications Corporation was the fourth
largest interexchange service provider in the United States and its common stock
was traded on the National Market System.
General Electric is one of the largest and most diversified industrial companies
in the world. Its businesses include interests in a vast array of industrial
products, as well as technology, service and communication entities.
The United States Telephone Association is a leading trade association for the
telephone industry.
PART III
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is presented on page 2 of the Company's
Proxy Statement (which was provided to shareowners on or about March 13, 1995 in
connection with the Annual Meeting of Shareowners to be held on April 26, 1995)
under the caption "Compensation of Directors" and on pages 5 through 12 under
the captions "Report of Committee on Management", "Performance Graph",
"Compensation of Company Management", and "Compensation Committee Interlocks and
Insider Participation in Compensation Decisions" and is incorporated in this
report by reference. The Company's Proxy Statement is found at Exhibit 99 to
this Form 10-K. Exhibit 99 consists of the Notice of Meeting and material
located at pages 1 through 16 of the Company's Proxy Statement for the April
26,1995 Annual Meeting of Shareowners and Financial Review of the 1994 fiscal
year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is presented in the "Management and
Directors Stock Ownership Table" and the "Stock Ownership of Certain Beneficial
Owners Table" under the caption "Stock Ownership of Management, Directors and
Certain Beneficial Owners" on page 4 of the definitive Proxy Statement for the
Annual Meeting of Shareowners to be held April 26, 1995, and is incorporated in
this report by reference. The Company's Proxy Statement is found at Exhibit 99
to this Form 10-K. Exhibit 99 consists of the Notice of Meeting and material
located
32
<PAGE>
at pages 1 through 16 of the Company's Proxy Statement for the April 26, 1995
Annual Meeting of Shareowners and Financial Review of the 1994 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Index to Financial Statements
The financial statements and other information set forth below for
the years 1992 through 1994 together with the report thereon of
Price Waterhouse LLP dated January 16, 1995, as presented on pages
28 through 48 of Exhibit 13 of Form 10-K, are filed as part of this
report:
Report of Independent Accountants
Business Segment Information
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Shareowners' Equity
Notes to Consolidated Financial Statements
Report of Management
Report of Audit Committee Chairman
Condensed Six-Year Financial Statements
Financial and Operating Statistics
Exhibit 13 consists of material located at pages 17 through 48 of
the Company's Proxy Statement for the April 26, 1995 Annual Meeting
of Shareowners and Financial Review of the 1994 fiscal year.
2. Financial Statement Schedule for the years 1994, 1993 and 1992
33
<PAGE>
The financial statement schedule listed below should be read in
conjunction with the financial statements appearing on pages 29 through 30 of
Exhibit No. 13 of this Form 10-K. Financial statement schedules not included in
this Form 10-K Annual Report have been omitted because they are not applicable
or the required information is shown on the financial statements or the notes
thereto.
Report of Independent Accountants on Financial Statement Schedule
Valuation and Qualifying Accounts and Reserves - Schedule VIII
Exhibit 13 consists of material located at pages 17 through 48 of the
Company's Proxy Statement for the April 26, 1995 Annual Meeting of
Shareowners and Financial Review of the 1994 fiscal year.
3. See Exhibit Index for list of exhibits filed with this report.
(b) Reports on Form 8-K
The Company filed the following seven reports on Form 8-K during the quarter
ended December 31, 1994:
<TABLE>
<CAPTION>
Financial
SEC Filing Date Item No. Statements
- ------------------- -------- ----------
<S> <C> <C>
October 11, 1994 5 None
October 13, 1994 5 None
October 14, 1994 5 None
October 15, 1994 5 None
November 18, 1994 5 None
November 30, 1994 5 None
December 28, 1994 5 None
</TABLE>
34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Shareowners of
Frontier Corporation
Our audits of the consolidated financial statements referred to in our report
dated January 16, 1995, appearing on page 28 of Exhibit No. 13 (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the Financial Statement Schedule
listed in Item 14(a)(2) of this Form 10-K. In our opinion, this Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PRICE WATERHOUSE LLP
Rochester, New York
January 16, 1995
35
<PAGE>
FRONTIER CORPORATION
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR
ENDED DECEMBER 31, 1994
(Table 1 of 3)
<TABLE>
<CAPTION>
In thousands of dollars
Additions
-----------------------
Balance at Charged to Charged to Charged to
beginning costs and other Balance at
Description of year expenses accounts Deductions end of year
- ------------ ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Reserve for uncollectible $5,078 $13,948 $9,125/(1)/ $21,847/(2)/ $6,304
accounts ====== ======= =========== ============ ======
Reserve for inventory $1,663 $ 728 $ 0 $ 1,916/(3)/ $ 475
obsolescence ====== ======= =========== ============ ======
and shrinkage
Reserve for Insurance $ 184 $ 24 $ 10 $ 0 $ 218
====== ======= =========== ============ ======
</TABLE>
/(1)/ Primarily recoveries of uncollectible accounts.
/(2)/ Uncollectible accounts written off.
/(3)/ Primarily obsolete inventory written off.
36
<PAGE>
FRONTIER CORPORATION
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE
YEAR ENDED DECEMBER 31, 1993
(Table 2 of 3)
<TABLE>
<CAPTION>
In thousands of dollars
Additions
-----------------------
Balance at Charged to Charged to Charged to
beginning costs and other Balance at
Description of year expenses accounts Deductions end of year
- ------------ ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Reserve for uncollectible $2,455 $11,497 $8,531/(1)/ $17,405/(2)/ $5,078
accounts ====== ======= =========== ============ ======
Reserve for inventory
obsolescence $2,049 $1,542 $ (22) $ 1,906/(3)/ $1,663
and shrinkage ====== ======= =========== ============ ======
Reserve for Insurance $ 526 $ (65) $ 9 $ 286 $ 184
====== ======= =========== ============ ======
</TABLE>
/(1)/ Recoveries of uncollectible accounts.
/(2)/ Uncollectible accounts written off.
/(3)/ Obsolete inventory written off.
37
<PAGE>
FRONTIER CORPORATION
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEAR ENDED DECEMBER 31, 1992
(Table 3 of 3)
<TABLE>
<CAPTION>
In thousands of dollars
Additions
-----------------------
Balance at Charged to Charged to Charged to
beginning costs and other Balance at
Description of year expenses accounts Deductions end of year
- ------------ ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Reserve for uncollectible $3,144 $ 4,690 $5,238/(1)/ $10,617/(2)/ $2,455
accounts ====== ======= =========== ============ ======
Reserve for inventory $ 817 $ 2,310 $ (13) $ 1,065/(3)/ $2,049
obsolescence ====== ======= =========== ============ ======
and shrinkage
Reserve for Insurance $ 572 $ 54 $ __ $ 100/(4)/ $ 526
====== ======= =========== ============ ======
</TABLE>
/(1)/ Recoveries of uncollectible accounts.
/(2)/ Uncollectible accounts written off.
/(3)/ Obsolete inventory written off.
/(4)/ Payments to settle insurance cases.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRONTIER CORPORATION
(Registrant)
/s/ Ronald L. Bittner
By: ________________________________________________
Ronald L. Bittner
Chairman, President and
Chief Executive Officer
Date: March 28, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Ronald L. Bittner /s/ Louis L. Massaro
- ------------------------------ -------------------------------------
Ronald L. Bittner Louis L. Massaro
Chairman, President and Corporate Vice President-
Chief Executive Officer and Finance (Principal Financial and
Director Accounting Officer)
Date: March 28, 1995 March 28, 1995
- ------------------------------ -------------------------------------
Patricia C. Barron John R. Block
Date: March 28, 1995 March 28, 1995
* *
- ------------------------------ -------------------------------------
Brenda E. Edgerton Jairo A. Estrada
Date: March 28, 1995 March 28, 1995
* *
- ------------------------------ -------------------------------------
Daniel E. Gill Alan C. Hasselwander
Date: March 28, 1995 March 28, 1995
39
<PAGE>
*
- ------------------------------ -------------------------------------
Douglas H. McCorkindale Leo J. Thomas
Date: March 28, 1995 March 28, 1995
/s/ Louis L. Massaro
*By ___________________________________________ Manually signed powers
Louis L. Massaro of attorney for each
Attorney-in-Fact Director are attached
hereto and filed
herewith pursuant to
Regulation S-K Item
601(b)24 as Exhibit 24.
40
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<C> <S> <C>
Exhibit
Number Exhibit Reference
- ------- ------- ----------------------------------
3.1 Restated Certificate of Filed herewith.
Incorporation.
3.2 By-Laws. Filed herewith.
4.1 Agreement to furnish documents Filed herewith.
of subsidiaries.
4.2 Agreement to Furnish Copies of Filed herewith.
Debt Instruments.
4.3 Copy of Indenture between the Incorporated by reference to
Company and Manufacturers Exhibit 4-12 to Form 10-K for the
Hanover Trust Company, year ended December 31, 1986.
Trustee, dated as of September 1,
1986.
4.4 Copy of First Supplemental Incorporated by reference to
Indenture to said Indenture, Exhibit 4(b) to Registration
made by the Company to Statement No. 33-32035.
Manufacturers Hanover Trust
Company, as Trustee, dated as of
December 1, 1989.
4.5 Copy of 10.46% Non Negotiable Incorporated by reference to
Convertible Debenture due Exhibit 4-14 to Form 10-K for the
October 27, 2008 from the year ended December 31, 1988.
Company to The Walters Trust.
4.6 Copy of 9% Debenture due Incorporated by reference to
August 15, 2021. Exhibit 4-16 to Form 10-K for the
year ended December 31, 1991.
10.1 Copy of the Bonus Plan. Incorporated by reference to
Exhibit 10-7 to Form 10-K for the
year ended December 31, 1986.
10.2 Copy of the Long Term Disability Incorporated by reference to
Plan together with Amendment Exhibit 10-15 to Form 10-K for
No. 1 thereto. the year ended December 31,
1987.
10.3 Copy of the Restated Incorporated by reference to
Management Pension Plan and Exhibit 10-13 to Form 10-K for
Amendments Nos. 1-5 thereto. the year ended December 31,
1988.
10.4 Form of management contracts Incorporated by reference to
with each of Mr. Bittner, Mr. Exhibit 10-7 to Form 10-K for the
Gregory, Mr. Massaro and Mr. year ended December 31, 1993.
Purcell.
10.5 Copy of Amendments Nos. 6, 7, 8 Incorporated by reference to
and 9 to the Restated Exhibit 10-13 to Form 10-K for
Management Pension Plan. the year ended December 31,
1990.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
Exhibit
Number Exhibit Reference
- ------- ------- ----------------------------------
10.6 Copy of the Restated Supplement- Incorporated by reference to
al Management Pension Plan Exhibit 10-14 to Form 10-K for
and Amendments Nos. 1 and 2 the year ended December 31,
thereto. 1990.
10.7 Copy of the Restated Performance Incorporated by reference to
Unit Plan. Exhibit 10-15 to Form 10-K for
the year ended December 31,
1990.
10.8 Copy of Joint Venture Agreement Incorporated by reference to
dated as of March 9, 1993 by and Exhibit 10-13 to Form 10-K for
between Rochester Tel Cellular the year ended December 31,
Holding Corporation and New 1992.
York Cellular Geographic Service
Area, Inc. together with Exhibit A
thereto.
10.9 Copy of Definitive Agreement to Incorporated by reference to
Acquire American Sharecom, Inc., Exhibit 99 to the Registrant's
dated as of November 8, 1994, by Form 8-K dated March 22, 1995.
and between Frontier Corporation
and American Sharecom, Inc.
10.10 Copy of Amendments Nos. 10 and Incorporated by reference to
11 to the Restated Management Exhibit 10-19 to Form 10-K for
Pension Plan. the year ended December 31,
1991.
10.11 Copy of Amendments Nos. 12 and Incorporated by reference to
13 to the Restated Management Exhibit 10-16 to Form 10-K for
Pension Plan. the year ended December 31,
1992.
10.12 Copy of Amendment No. 1 to the Incorporated by reference to
Restated Performance Unit Plan. Exhibit 10-21 to Form 10-K for
the year ended December 31,
1991.
10.13 Copy of Amendment No. 2 to the Incorporated by reference to
Restated Performance Unit Plan. Exhibit 10-20 to Form 10-K for
the year ended December 31,
1992.
10.14 Copy of Amendment No. 3 to the Incorporated by reference to
Restated Supplemental Exhibit 10-22 to Form 10-K for
Management Pension Plan. the year ended December 31,
1991.
10.15 Copy of Amendment No. 4 to the Incorporated by reference to
Supplemental Management Exhibit 10-22 to Form 10-K for
Pension Plan. the year ended December 31,
1992.
10.16 Copy of the Restated Incorporated by reference to
Supplemental Retirement Exhibit 10-23 to Form 10-K for
Savings Plan and Amendment the year ended December 31,
No. 1 thereto. 1991.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
Exhibit
Number Exhibit Reference
- ------- ------- ----------------------------------
10.17 Copy of Amendment No. 2 to the Incorporated by reference to
Supplemental Retirement Exhibit 10-24 to Form 10-K for
Savings Plan. the year ended December 31,
1992.
10.18 Copy of the Employee Assistance Incorporated by reference to
Program. Exhibit 10-25 to Form 10-K for
the year ended December 31,
1992.
10.19 Copy of the Tel Flex Plan. Incorporated by reference to
Exhibit 10-26 to Form 10-K for
the year ended December 31,
1992.
10.20 Copy of the Directors Stock Incorporated by reference to
Option Plan. Exhibit 10-27 to Form 10-K for
the year ended December 31,
1992.
10.21 Copy of Amendment No. 1 to the Incorporated by reference to
Directors Stock Option Plan. Exhibit 10-42 to Form 10-Q for
the quarter ended March 31,
1994.
10.22 Copy of Amendment No. 3 to the Incorporated by reference to
Performance Unit Plan. Exhibit 10-30 to Form 10-Q for
the quarter ended March 31,
1993.
10.23 Copy of Amendments Nos. 14, 15 Incorporated by reference to
and 16 to the Restated Exhibits 10-31 and 10-32 to Form
Management Pension Plan. 10-Q for the quarter ended June
30, 1993.
10.24 Copy of Amendments Nos. 17 and Incorporated by reference to
18 to the Restated Management Exhibit 10-31 to Form 10-K for
Pension Plan. the year ended December 31,
1993.
10.25 Copy of Amendments Nos. 19 and Filed herewith.
20 to the Restated Management
Pension Plan.
10.26 Copy of Amendment No. 5 to the Incorporated by reference to
Supplemental Management Exhibit 10-33 to Form 10-Q for
Pension Plan. the quarter ended June 30, 1993.
10.27 Copy of Amendment No. 6 to the Incorporated by reference to
Supplemental Management Exhibit 10-33 to Form 10-K for
Pension Plan. the year ended December 31,
1993.
10.28 Copy of the Employees' Incorporated by reference to
Retirement Savings Plan. Exhibit 10-35 to Form 10-K for
the year ended December 31,
1993.
10.29 Copy of Amendment No. 1 to the Filed herewith.
Employees Retirement Savings
Plan.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
Exhibit
Number Exhibit Reference
- ------- ------- ----------------------------------
10.30 Copy of Amendment No. 3 to the Incorporated by reference to
Supplemental Retirement Exhibit 10-35 to Form 10-Q for
Savings Plan. the quarter ended June 30, 1993.
10.31 Copy of Amendment No. 4 to the Filed herewith.
Supplemental Retirement
Savings Plan.
10.32 Copy of Amendment No. 2 to the Incorporated by reference to
Long Term Disability Benefit Exhibit 10-36 to Form 10-Q for
Plan. the quarter ended June 30, 1993.
10.33 Copy of the Restated Executive Incorporated by reference to
Stock Option Plan. Exhibit 10-41 to Form 10-Q for
the quarter ended March 31,
1994.
10.34 Copy of the Plan for the Deferral Filed herewith.
of Directors Fees.
10.35 Copy of Amendment No. 3 to the Incorporated by reference to
Long Term Disability Benefit Exhibit 10-40 to Form 10-Q for
Plan. the quarter ended September 30,
1993.
10.36 Copy of the Directors' Common Filed herewith.
Stock Deferred Growth Plan.
11 Computation of Fully Diluted Filed herewith.
Earnings Per Share.
13 1994 Financial Review including Filed herewith.
MD&A, Consolidated Financial
Statements and Notes to
Financial Statements.
21 Subsidiaries of Frontier Filed herewith.
Corporation.
23 Consent of Independent Filed herewith.
Accountant as Experts.
24 Powers of Attorney for a majority Filed herewith.
of Directors naming Louis L.
Massaro attorney-in-fact.
27 Financial Data Schedule Filed herewith.
99 Proxy Statement for the Annual Filed herewith.
Meeting of Shareowners to be
held April 26, 1995.
</TABLE>
44
<PAGE>
EXHIBIT 3-1
RESTATED CERTIFICATE OF INCORPORATION
OF
FRONTIER CORPORATION
Under Section 807 of the Business Corporation Law
We, the undersigned, JOHN K. PURCELL, and JOSEPHINE S.
TRUBEK, being respectively a Corporate Vice President and the
Corporate Secretary of Frontier Corporation, do hereby CERTIFY
that:
1. The name of the Corporation is "FRONTIER CORPORATION".
2. The Certificate of Incorporation of the Corporation was
filed in the Department of State of the State of New York on
February 25, 1920. A Restated Certificate of Incorporation was
filed in the Department of state of the State of New York on
April 2, 1968.
3. The text of the Certificate of Incorporation, as
amended (or changed) heretofore, is hereby restated without
further amendment or change to read as herein set forth in full:
FIRST: The name of the Corporation is "Frontier
Corporation".
SECOND: The purposes for which the Corporation is
formed are: To engage in any lawful act or activity for which
corporations may be organized under the Business Corporation Law
of the State of New York, except that the Corporation is not
organized to engage in any act or activity requiring the consent
or approval of any official, department, board, agency or other
body of the State of New York without first obtaining such
consent or approval.
THIRD: The total number of shares which the
Corporation shall have authority to issue is (i) Three Hundred
Million (300,000,000) shares of Common Stock of the par value of
One Dollar ($1.00) per share, (ii) Four Million (4,000,000)
shares of Class A Preferred Stock of the par value of One Hundred
Dollars ($100.00) per share and (iii) Eight Hundred Fifty
Thousand (850,000) shares of Cumulative Preferred Stock of the
par value of One Hundred Dollars ($100.00) per share (the Class A
Preferred Stock and the Cumulative Preferred Stock referred to
collectively herein as the "Preferred Stock").
Subject to any exclusive voting rights which may vest
in holders of Preferred Stock under the provision of any series
of Preferred Stock established by the Board of Directors pursuant
to authority herein provided, and except as otherwise provided by
law, the shares of Common Stock shall entitle the holders thereof
to one vote for each share upon all matters upon which
shareowners have the right to vote.
No holders of shares of the Corporation of any class or
series, now or hereafter authorized, shall have any preemptive
<PAGE>
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;
<PAGE>
provided, that, unless the current quarterly dividend upon
all the Cumulative Preferred Stock then outstanding,
together with all accumulations thereon, shall have been
paid or declared and set apart for payment in accordance
with the requirements of subdivision (B) of Article FIFTH,
the Corporation or any of its subsidiaries shall not redeem,
purchase or otherwise acquire shares of Class A Preferred
Stock (except by conversion into or exchange for, or out of
the net cash proceeds from the concurrent sale of, stock of
the Company ranking junior to the Cumulative Preferred Stock
as to dividends);
(vi) the amount payable on the shares of such series in
the event of the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; provided,
however, that (1) before any assets of the Corporation shall
be distributed among or paid over to the holders of Class A
Preferred Stock, each holder of Cumulative Preferred Stock
then outstanding shall be entitled to be paid the amount
described in subdivision (C) of Article FIFTH, and (2) the
holders of shares of Class A Preferred Stock shall be
entitled to be paid, or to have set apart for payment, not
less than $100.00 per share before the holders of shares of
Common Stock or the holders of any other class of stock
ranking junior to the Class A Preferred Stock as to rights
on liquidation shall be entitled to be paid any amount or to
have any amount set apart for payment; provided, further,
that, if the amounts payable on liquidation are not paid in
full, the shares of all series of the Class A Preferred
Stock shall share ratably in any distribution of assets
other than by way of dividends in accordance with the sums
which would be payable in such distribution if all sums
payable were discharged in full. A liquidation, dissolution
or winding up of the Corporation, as such terms are used in
this clause (vi), shall not be deemed to be occasioned by or
to include any consolidation or merger of the Corporation
with or into any other corporation or corporations or a
sale, lease or conveyance of all or a part of its assets;
(vii) whether or not the shares of such series shall
have voting rights, in addition to the voting rights
provided by law and, if such shares shall have such voting
rights, the terms and conditions thereof, including but not
limited to the right of the holders of such shares to vote
as a separate class either alone or with the holders of
shares of one or more other series or class of stock and the
right to have more than one vote per share;
(viii) whether or not a sinking fund shall be provided
for the redemption of the shares of such series and, if such
a sinking fund shall be provided, the terms and conditions
thereof;
(ix) whether or not the shares of such series shall be
convertible into, or exchangeable for, shares of stock of
any other class or any other series of this class or any
other securities or assets, and, if so, the terms and
conditions of conversion or exchange, including but not
limited to any provision for the adjustment of the rate or
rates or the price or prices of conversion or exchange; and
<PAGE>
(x) any other relative rights, preferences and
limitations.
If any shares of Class A Preferred Stock shall be
issued then, for purposes of clause (ii)(a) of subdivision (F) of
Article FIFTH, such shares shall be deemed to have been
authorized in connection with any prior authorization of shares
of Class A Preferred Stock, notwithstanding any subsequent action
by the Corporation's Board of Directors in connection with the
issuance of such shares or the filing of any certificate required
by law in connection with such issuance.
FIFTH: The respective rights, preferences and
limitations of the shares of Cumulative Preferred Stock are set
forth in the following subdivisions designated (A) to (F)
inclusive which are hereinafter referred to as subdivisions of
this Article FIFTH.
(Note: The words "preferential rights" whenever used in
this Certificate with respect to the Cumulative
Preferred Stock herein authorized or any preferred
stock of any class or series hereafter authorized by
any certificate filed pursuant to law, shall for the
sake of brevity and convenience, mean and include the
words "relative rights, preferences and limitations of
the shares of each class" as used in the Business
Corporation Law.)
(A) The shares of Cumulative Preferred Stock shall be
issuable from time to time in one or more series. The Board of
Directors is hereby authorized to fix, from time to time before
issuance, the preferential rights of the shares of each series of
such Cumulative Preferred Stock, to the extent that such
preferential rights are not herein expressly prescribed,
determined and set forth. The preferential rights of shares of
different series shall be identical, except that there may be
variations, as hereinafter provided, in respect of the dividend
rates, dates of payment of dividends and dates from which they
are cumulative, redemption prices, sinking fund requirements and
conversion and other rights. All shares of any one series will
be alike in every particular and all shares of Cumulative
Preferred Stock will rank equally. There shall be no
discrimination as between different series of Cumulative
Preferred Stock in the declaration and payment of dividends on
the basis of the rates appertaining thereto; and if at any time
there shall be outstanding Cumulative Preferred Stock of several
series bearing different rates of dividends and dividends are to
be declared on such stock at less than the full rates
appertaining thereto, the shares of all such series shall share
ratably in the payment of such dividends including accumulations,
if any, in accordance with the sums which would be payable on
said shares if all dividends were declared and paid in full.
The Board of Directors is authorized to fix from time
to time before issuance of each series of Cumulative Preferred
Stock, but subject to the provisions of this Certificate covering
all series of Cumulative Preferred Stock, the following: (a) the
designation and number of shares of such series; (b) the dividend
rate of such series; (c) the dates of payment of dividends on
<PAGE>
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
<PAGE>
redemption price or prices current at the date of such payment as
hereinafter provided (plus an amount equivalent to accrued and
unpaid dividends, whether or not earned) on the respective shares
of Cumulative Preferred Stock held by him. In the event of any
involuntary liquidation, dissolution or winding up of the
Corporation, or of any involuntary distribution of assets by way
of return of capital to its stockholders, each holder of the
Cumulative Preferred Stock shall be entitled, before any assets
of the Corporation shall be distributed among or paid over to the
holders of any junior stock, to be paid, out of the assets of the
Corporation available for distribution among its stockholders, an
amount equal to the par value of the respective shares of
Cumulative Preferred Stock held by him, plus an amount equivalent
to accrued and unpaid dividends, whether or not earned. If, in
either of the foregoing events, there shall not be sufficient
assets to make the full payment herein required, the outstanding
shares of all series of Cumulative Preferred Stock shall share
ratably in the distribution of assets in accordance with the sums
which would be paid on such distribution if all sums payable were
discharged in full. If the appropriate payment herein required
shall have been made to the holders of the Cumulative Preferred
Stock, the holders of the Cumulative Preferred Stock shall not be
entitled to participate further in the distribution of the assets
of the Corporation and after such payment and distribution to the
holders of the Cumulative Preferred Stock, the remaining assets
of the Corporation shall be distributed among the holders of the
junior stock according to their respective rights and preferences
and pro rata in accordance with the number of shares respectively
held by such holders.
(D) (a) Redemption of Cumulative Preferred Stock.
Subject to the provisions of subsection (i) of this subdivision
(D), the Corporation, at the option of the Board of Directors,
expressed in a resolution adopted by said Board, may redeem, at
any time or times and from time to time, all or any part of the
shares of Cumulative Preferred Stock or all or any part of any
one or more series of such Cumulative Preferred Stock
outstanding, by paying the par value thereof plus an amount in
the case of each such share of Cumulative Preferred Stock to be
redeemed computed at the annual dividend rate for the series in
question from the date from which dividends on such share became
cumulative to the date fixed for such redemption, less the
aggregate of dividends theretofore or on such redemption date
paid thereon, plus such premium, if any, as shall have been fixed
in accordance with the provisions of subdivision (A) of this
Article FIFTH prior to the issuance thereof. Notice of every
such redemption shall be given by publication, published at least
once in each of two (2) calendar weeks in a daily newspaper
(which term shall mean and include a newspaper published in
morning editions or evening editions or both, and whether or not
it shall be published in Sunday editions or on holidays) printed
in the English language and published and of general circulation
in the Borough of Manhattan, the City and State of New York, the
first publication to be at least thirty (30) days and not more
than sixty (60) days prior to the date fixed for such redemption.
At least thirty (30) days' and not more than sixty (60) days'
previous notice of every such redemption shall also be mailed to
the holders of record of the Cumulative Preferred Stock to be
redeemed, at their respective addresses as the same shall appear
on the books of the Corporation; but no failure to mail such
<PAGE>
notice nor any defect therein or in the mailing thereof shall
affect the validity of the proceedings for the redemption of any
shares of such Cumulative Preferred Stock so to be redeemed. The
Board of Directors shall have full power and authority, subject
to the limitations and provisions herein contained, to prescribe
the manner in which and the terms and conditions upon which any
shares of any series of the Cumulative Preferred Stock shall be
redeemed from time to time. If such notice of redemption shall
have been duly given by publication, and if on or before the
redemption date specified in such notice all funds necessary for
such redemption shall have been set aside so as to be available
therefor, then, notwithstanding that any certificate for the
shares of such Cumulative Preferred Stock so called for
redemption shall not have been surrendered for cancellation, the
shares represented thereby shall from and after the date fixed
for redemption no longer be deemed outstanding, the right to
receive dividends thereon shall cease to accrue from and after
the date of redemption so fixed, and all rights with respect to
such shares of Cumulative Preferred Stock so called for
redemption shall forthwith on such redemption date cease and
terminate, except only the right of the holders thereof to
receive the amount payable upon redemption thereof, but without
interest; provided, however, that the Corporation may, after
giving the first notice by publication of any such redemption or
upon furnishing the depositary hereinafter mentioned with
irrevocable authority to publish such notice of redemption on
behalf of the Corporation and prior to the redemption date
specified in such notice, deposit in trust, for the account of
the holders of such Cumulative Preferred Stock to be redeemed,
with a bank or trust company in good standing, organized under
the laws of the United States of America, or of the State of New
York, doing business in the City of Rochester, New York, or in
the Borough of Manhattan, the City and State of New York, and
having a capital, undivided profits and surplus aggregating at
least $5,000,000, all funds necessary for such redemption, and
upon such deposit all shares of such Cumulative Preferred Stock
with respect to which such deposit shall have been made shall no
longer be deemed to be outstanding, and all rights with respect
to such shares of such Cumulative Preferred Stock shall forthwith
upon such deposit in trust cease and terminate, except (1) the
right of the holders thereof to receive the amount payable upon
the redemption thereof, but without interest, or (2) the right of
the holders of any Cumulative Preferred Stock, which may be
convertible into shares of stock of the Corporation of any class
or classes, or other securities, to convert such Cumulative
Preferred Stock called for redemption within the time or up to a
date specified in the terms of such convertible stock or as may
be stated in any certificate filed pursuant to law creating such
convertible stock. If less than all the Cumulative Preferred
Stock of any series shall be redeemed, the stock to be redeemed
shall be selected by lot in such manner as the Board of Directors
may determine, by a bank or trust company appointed for that
purpose by said Board, which, unless otherwise directed by said
Board, shall be the bank or trust company with which the funds
necessary for such redemption are to be deposited.
(i) Unless all dividends accrued to the dividend date
next preceding such redemption date shall be paid on all
Cumulative Preferred Stock then outstanding, the Corporation
shall not have the right to redeem less than all of the
<PAGE>
Cumulative Preferred Stock outstanding at the time of giving
the notice of such redemption.
(b) Purchase of Cumulative Preferred Stock. In the
event that at any time the Corporation shall be in default in the
payment of dividends on the Cumulative Preferred Stock then so
long as such default shall continue, the Corporation shall not
purchase or otherwise acquire for a consideration any shares of
the Cumulative Preferred Stock unless such purchase or
acquisition shall be pursuant to tenders, called for on at least
20 days' previous notice by mail to the holders of record (at the
time of mailing such notice) of the Cumulative Preferred Stock at
their respective addresses as the same shall appear on the books
of the Corporation. The shares of stock to be purchased,
pursuant to such tenders, shall be purchased at the lowest prices
specified in such tenders, not exceeding, however, the redemption
prices then in effect or then current, and the notice shall
specify the method (whether by lot, or otherwise) of determining
the stock to be purchased in the event that stock shall be
tendered at the same price, whether the lowest or other price.
(E) Increase of Authorized Stock. The Corporation,
subject to the provisions of subsection (ii) of subdivision (F)
of this Article FIFTH, may from time to time increase the
authorized amount of the Cumulative Preferred Stock and may also
from time to time create other classes of preferred stock with
different preferential rights.
(F) Voting Rights. The holders of the Cumulative
Preferred Stock shall not be entitled to any voting rights
whatsoever, except as specifically required by statute or as
hereinafter expressly provided.
(i) Voting rights upon default in dividends. In the
event that, at any time, or from time to time, four full
quarterly dividends (whether consecutive or not) on the
Cumulative Preferred Stock then outstanding, at the dividend
rate appertaining thereto shall be in arrears, the holders
of such Cumulative Preferred Stock shall have the right,
voting separately as a class, to elect the smallest number
of directors then necessary to constitute a majority of the
full Board, and in such event the holders of stock of any
other class or classes then entitled to vote for directors
shall have the right, voting separately as a class, to elect
only the remaining directors.
If and whenever the right of the holders of Cumulative
Preferred Stock to elect directors hereunder shall accrue,
the terms of office of all persons who may be directors of
the Corporation at such time shall terminate upon the
election of their successors. Such election may be held at
a special meeting of all stockholders of the Corporation
which shall be convened at any time after the accrual of
such right, upon notice similar to that provided in the
Bylaws of the Corporation for calling the annual meeting of
the stockholders, at the written request of the holders of
record of at least 10% of the number of shares of Cumulative
Preferred Stock then outstanding, for which purpose any
holder of record of Cumulative Preferred Stock shall have
access to the stock books of the Corporation. In the event
<PAGE>
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
<PAGE>
classes of stock shall continue to hold office until their
successors shall have been duly elected as herein provided.
Whenever by reason of the resignation, death or removal
of any director or directors or any increase in the number
of directors, the number of directors in office who have
been elected by the holders of stock voting as a class shall
become less than the total number then subject to election
by such class, the vacancy or vacancies so resulting may be
filled by the affirmative vote of the directors, if any, at
the time in office who were elected by the vote of such
class, although less than a quorum, or by vote of such class
at a special meeting thereof (if there are then no directors
in office who were elected by the vote of such class) which
shall be called at any time at the request of the holders of
record of at least 10% of the outstanding shares of such
class, for which purpose such holders shall have access to
the stock books of the Corporation.
If at any time the right of the holders of the
Cumulative Preferred Stock to elect directors hereunder
shall accrue as aforesaid, and the holders of such stock
shall not exercise such right at any meeting (whether annual
or otherwise) at which directors may be elected, such
failure to exercise such right shall not be construed as a
waiver thereof, but the holders of such stock may, so long
as the default in dividends aforesaid shall exist, exercise
the right given them hereunder in the manner aforesaid at
any annual meeting or at any special meeting called as
hereinabove provided or at any adjournment of either
thereof.
The right of the holders of Cumulative Preferred Stock
to elect directors, as hereinabove provided, shall continue
until all accrued dividends on the Cumulative Preferred
Stock at the full dividend rates thereto appertaining shall
have been paid, or declared and set apart for payment, at
which time such right shall cease.
If and whenever the right of the holders of Cumulative
Preferred Stock to elect directors as hereinabove provided
shall terminate, then the terms of office of all persons who
may be directors of the Corporation at such time shall
terminate upon the election of their successors. Such
election may be held at a special meeting of the holders of
the class or classes of stock then entitled to vote for
directors, which meeting may be convened at any time after
the termination of such right, upon notice similar to that
provided in the Bylaws of the Corporation for the annual
meeting of stockholders, at the written request of the
holders of record of at least 10% of such stock then
outstanding. In the event of the failure of the Secretary
or other proper officer of the Corporation to give such
notice within 10 days after receipt of such request, such
meeting may be called on like notice by the holders of
record of at least 10% of such stock, for which purpose any
holder of record of such stock shall have access to the
stock books of the Corporation. If for any reason such
special meeting be not held prior to the next annual
meeting, then at such meeting the holders of the class or
<PAGE>
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)
<PAGE>
above shall have been at least equal to one and
one-half (1 1/2) times the sum of the annual interest
requirements on all funded indebtedness and other
borrowings of the Corporation to be outstanding on the
date of the proposed issue and the annual dividend
requirements on the Cumulative Preferred Stock then
outstanding and on any other class of stock then
outstanding having preferential rights equal or
superior to those of the Cumulative Preferred Stock and
the annual dividend requirements on the stock to be
issued. "Gross earnings" for any period for the
purposes of this subparagraph (c) shall be computed by
adding to the net income (determined as hereinafter
provided) of the Corporation for said period the amount
deducted for interest on all funded indebtedness and
other borrowings of the Corporation in determining such
net income. "Net income" for any period for the
purposes of this subparagraph (c) shall be determined
in accordance with accepted accounting principles, not
inconsistent, however, with the requirements of public
regulatory authorities having jurisdiction in the
premises, and in determining such net income for any
period, there shall be deducted, in addition to other
items of expense, the amount charged to income for said
period on the books of the Corporation for taxes and
provision for depreciation. The Board of Directors may
make adjustments by way of increase or decrease in such
net income to give effect to changes therein resulting
from acquisition of properties or any redemption,
acquisition, purchase, sale or exchange of stock or
obligations by the Corporation, whether prior to the
issue of any stock or obligations then to be issued, or
in connection with such issue. In computing net income
for the purposes of this subparagraph (c), adjustments
shall be made so as to eliminate profits or losses from
the sale or other disposition of capital assets and
from appreciation or depreciation in value of capital
assets and increases or decreases in book value
resulting from reappraisal (if any) at higher or lower
figures.
(iii) Alteration of Terms of Cumulative Preferred
Stock, etc. The Corporation shall not, except when
authorized by the vote of the holders of record of at least
two-thirds of the then outstanding shares of Cumulative
Preferred Stock voting separately as a class (1) alter or
abolish any preferential right of any outstanding shares of
such stock affecting the holders of such shares adversely,
or (2) create, alter or abolish any provisions or right in
respect of the redemption of any outstanding shares of such
stock affecting the holders of such shares adversely, or (3)
abolish any voting right of the holders of shares of such
stock or limit their voting rights, except as the same may
be limited by the voting rights given to new shares of any
class authorized by any certificate filed pursuant to law.
Such vote, however, shall not affect the right of any holder
of shares of Cumulative Preferred Stock not voting in favor
of the authorization of any of the foregoing transactions
(designated (1), (2) and (3)) to have such shares appraised
and paid for as contemplated by the provisions of any then
<PAGE>
applicable provisions of the statutes of the State of New
York.
SIXTH: The designation of each series of Cumulative
Preferred Stock of the Corporation, and a statement of the
variations in the relative rights, preferences and limitations as
between series to the extent not set forth in Article FIFTH of
this Certificate, as fixed by the Board of Directors of the
Corporation before issuance of each such series, are as follows:
(a) An initial series of Sixty Thousand (60,000)
shares of the Cumulative Preferred Stock of the Corporation,
which shares are designated "Cumulative Preferred Stock, 5%
Series" (herein called the "initial series").
The rate of dividends payable upon the initial series
shall be 5% of the par value thereof per annum, payable
quarterly on the first days of January, April, July and
October in each year.
The Corporation may redeem all or any part of the
initial series at any time or times and from time to time,
on the terms and conditions with respect thereto set forth
in subdivision (D) of Article FIFTH of this Certificate, by
paying, in the case of each such share to be redeemed, the
par value thereof plus an amount computed at the annual
dividend rate of 5% of said par value from the date from
which said dividends on such share became cumulative to the
date fixed for redemption, less the aggregate of such
dividends theretofore or on such redemption date paid
thereon, plus a premium of $1 per share.
(b) A second series of Forty Thousand (40,000) shares
of the Cumulative Preferred Stock of the Corporation, which
shares are designated "Cumulative Preferred Stock, Second 5%
Series" (herein called the "second series").
The rate of dividends payable upon the second series
shall be 5% of the par value thereof per annum, payable
quarterly on the first days of January, April, July and
October in each year.
The Corporation may redeem all or any part of the
second series at any time or times and from time to time, on
the terms and conditions with respect thereto set forth in
subdivision (D) of Article FIFTH of this Certificate, by
paying, in the case of each such share to be redeemed, the
par value thereof plus an amount computed at the annual
dividend rate of 5% of said par value from the date from
which said dividends on such share became cumulative to the
date fixed for such redemption, less the aggregate of such
dividends theretofore or on such redemption date paid
thereon, plus a premium of $2 per share if the redemption
date shall be prior to July 1, 1971 and of $1 per share if
the redemption date shall be on or subsequent to July 1,
1971.
(c) A third series of Fifty Thousand (50,000) shares
of the Cumulative Preferred Stock of the Corporation, which
shares are designated "Cumulative Preferred Stock, 5.65%
<PAGE>
Series" (herein called the "third series").
The rate of dividends payable upon the third series
shall be 5.65% of the par value thereof per annum, payable
quarterly on the first days of January, April, July and
October in each year.
The Corporation may redeem all or any part of the third
series at any time or times and from time to time, on the
terms and conditions with respect thereto set forth in
subdivision (D) of Article FIFTH of this Certificate, by
paying, in the case of each such share to be redeemed, the
par value thereof plus an amount computed at the annual
dividend rate of 5.65% of said par value from the date from
which said dividends on such share became cumulative to the
date fixed for such redemption, less the aggregate of such
dividends theretofore or on such redemption date paid
thereon, plus a premium of $7 per share if the redemption
date shall be on or prior to October 1, 1971; of $5 per
share if the redemption date shall be subsequent to October
1, 1971 but on or prior to October 1, 1976; of $3 per share
if the redemption date shall be subsequent to October 1,
1976 but on or prior to October 1, 1981; and of $1 per share
if the redemption date shall be subsequent to October 1,
1981.
(d) A fourth series of Fifty Thousand (50,000) shares
of the Cumulative Preferred Stock of the Corporation, which
shares are designated "Cumulative Preferred Stock, 4.60%
Series" (herein called the "fourth series").
The rate of dividends payable upon the fourth series
shall be 4.60% of the par value thereof per annum, payable
quarterly on the first days of January, April, July and
October in each year.
The Corporation may redeem all or any part of the
fourth series at any time or times and from time to time, on
the terms and conditions with respect thereto set forth in
subdivision (D) of Article FIFTH of this Certificate, by
paying, in the case of each such share to be redeemed, the
par value thereof plus an amount computed at the annual
dividend rate of 4.60% of said par value from the date from
which said dividends on such share became cumulative to the
date fixed for such redemption, less the aggregate of such
dividends theretofore or on such redemption date paid
thereon, plus a premium of $5.00 per share if the redemption
date shall be on or prior to September 30, 1968; of $3.50
per share if the redemption date shall be subsequent to
September 30, 1968 but on or prior to September 30, 1973; of
$2.50 per share if the redemption date shall be subsequent
to September 30, 1973 but on or prior to September 30, 1978;
and of $1.00 per share if the redemption date shall be
subsequent to September 30, 1978; provided, however, that,
prior to October 1, 1968, shares of the fourth series shall
not be redeemed, directly or indirectly, by the application
of borrowed funds or the proceeds of the issue of any stock
ranking prior to or on a parity with the fourth series if
such borrowed funds have an interest cost, or such shares
have a dividend cost, to the Corporation of less than 4.60%
per annum.
<PAGE>
(e) A fifth series of fifteen thousand (15,000) shares
of the Cumulative Preferred Stock of the Corporation, which
shares are designated "Convertible Preferred Stock 5%
Series" (herein called the "fifth series").
The rate of dividends payable upon the fifth series
shall be 5% of the par value thereof per annum payable
quarterly on the first days of January, April, July and
October in each year.
The Corporation may redeem all or any part of the fifth
series at any time or times and from time to time, on or
after April 1, 1979, on the terms and conditions with
respect thereto set forth in subdivision (D) of Article
FIFTH of this certificate, by paying, in the case of each
share to be redeemed, the par value thereof plus an amount
computed at the annual dividend rate of 5% of said par value
from the date from which said dividends on such share became
cumulative to the date fixed for such redemption, less the
aggregate of such dividends theretofore or on such
redemption date paid thereon, plus a premium of $5 per share
if the redemption date shall be on or prior to April 1,
1981; of $3 per share if the redemption date shall be
subsequent to April 1, 1982, but on or prior to April 1,
1983; of $1 per share if the redemption date shall be
subsequent to April 1, 1983, but on or prior to April 1,
1984; and no premium if the redemption date shall be
subsequent to April 1, 1984.
The conversion rights of shares of the fifth series
shall be as follows:
(i Shares of the fifth series may at any time after
the date of issue, at the option of the holder, be converted
into Common Stock of the Corporation (as such shares may be
constituted on the conversion date) at the rate of four (4)
shares of Common Stock for each share of the fifth series,
subject to adjustment as provided herein; provided that, as
to any shares of the fifth series which shall have been
called for redemption, the conversion right shall terminate
at the close of business on the business day prior to the
date fixed for redemption unless default shall be made in
the payment of the redemption price plus accrued and unpaid
dividends.
(ii The holder of a share or shares of the fifth
series may exercise the conversion rights as to any thereof
by delivering to the Corporation during regular business
hours, or at the office of any transfer agent of the
Corporation for the fifth series, if any, or at such other
place as may be designated by the Corporation, the
certificate or certificates for the shares to be converted,
duly endorsed or assigned in blank to the Corporation (if
required by it), accompanied by written notice stating that
the holder elects to convert such shares and stating the
name or names (with address) in which the certificate or
certificates for Common Stock are to be issued. Conversion
shall be deemed to have been effected on the date when such
<PAGE>
delivery is made, and such date is referred to herein as the
"conversion date". As promptly as practicable thereafter,
the Corporation shall issue and deliver to or upon the
written order of such holder, at such office or other place
designated by the Corporation, a certificate or certificates
for the number of full shares of Common Stock to which he is
entitled and a check, cash, scrip certificate or other
adjustment in respect of any fraction of a share as provided
in paragraph (e)(iv) below. The person in whose name the
certificates for Common Stock are to be issued shall be
deemed to have become a holder of Common Stock of record at
the close of business on the conversion date unless the
transfer books of the Corporation are closed on that date,
in which event he shall be deemed to have become a holder of
Common Stock of record at the opening of business on the
next succeeding date on which the transfer books are open,
but the conversion rate shall be that in effect on the
conversion date.
(iii) No payment or adjustment shall be made for
dividends accrued on any shares of the fifth series
converted or for dividends on any shares of Common Stock
issuable on conversion, but until all dividends accrued and
unpaid on the fifth series up to the quarterly dividend
payment date next preceding the conversion date shall have
been paid to the holder of the shares of the fifth series
converted or to his assigns, or declared and set apart for
such payment, in full, no dividend shall be paid or set
apart for payment or declared on the Common Stock or on any
other class of stock of the Corporation ranking as to
dividends subordinate to the fifth series and no payment
shall be made with respect to any purchase or acquisition
of, or to any sinking fund with respect to, any class of
stock of the Corporation ranking as to dividends or
distribution of assets on a parity with or subordinate to
the fifth series.
(iv) The Corporation shall not be required to issue any
fraction of a share upon conversion of any share or shares
of the fifth series. If more than one share of the fifth
series shall be surrendered for conversion at one time by
the same holder, the number of full shares of Common Stock
issuable upon conversion thereof shall be computed on the
basis of the total number of shares of the fifth series so
surrendered. If any fractional interest in a share of
Common Stock would be deliverable upon conversion, the
Corporation shall make an adjustment therefore in cash
unless its Board of Directors shall have determined to
adjust fractional interests by issuance of scrip
certificates or in some other manner. Adjustment in cash
shall be made on the basis of the current market value of
one share of Common Stock, which shall be taken to be the
last sale price, regular way, of the Corporation's Common
Stock on the New York Stock Exchange on the last trading day
before the conversion date, or, if there is no reported sale
on that day, the average of the closing bid and asked
quotations, regular way, on that Exchange on that day or, if
the Common Stock is not listed or admitted to trading on
such Exchange, on the principal national securities exchange
on which the Common Stock is listed or admitted to trading,
<PAGE>
or if it is not listed or admitted to trading on any
national securities exchanges, the average of the closing
bid and asked prices in the over-the-counter market on that
date as furnished by any securities broker or dealer
selected from time to time by the Corporation for that
purpose.
(v) The issuance of Common Stock on conversion of the
fifth series shall be without charge to the converting
holder of the fifth series for any fee, expense or tax which
may be payable in respect of any transfer involved in the
issuance and delivery of shares in any name other than that
of the holder of record on the books of the Corporation of
the shares of the fifth series converted, and the
Corporation shall not, in any such case, be required to
issue or deliver any certificate for shares of Common Stock
unless and until the person requesting the issuance thereof
shall have paid to the Corporation the amount of such fee,
expense or tax or shall have established to the satisfaction
of the Corporation that such fee, expense or tax has been
paid.
(vi) The conversion rate provided in paragraph (e)(i)
shall be subject to the following adjustments, which shall
be made to the nearest one-hundredth of a share of Common
Stock or, if none, to the next lower one-hundredth:
(A) In case the Corporation shall declare a
dividend on its Common Stock in shares of its capital
stock, subdivide its outstanding shares of Common
Stock, combine its outstanding shares of Common Stock
into a smaller number of shares, or issue by
reclassification of its Common Stock (including any
such reclassification in connection with a
consolidation or merger in which the Corporation is the
continuing corporation) any shares of its capital
stock, the conversion rate in effect at the time of the
record date for such dividend or of the effective date
of such subdivision, combination or reclassification
shall be proportionately adjusted so that the holder of
any of the fifth series surrendered for conversion
after such time shall be entitled to receive the kind
and amount of shares which he would have owned or have
been entitled to receive had the fifth series been
converted immediately prior to such time. Such
adjustment shall be made successively whenever any
event listed above shall occur.
(B) In case the Corporation shall fix a record
date for the issuance of rights or warrants to all
holders of its Common Stock entitling them (for a
period expiring within 45 days after such record date)
to subscribe for or purchase shares of Common Stock at
a price per share less than the Current Market Price
(as defined below) on such record date, the number of
shares of Common Stock into which each share of the
fifth series shall be convertible after such record
date shall be determined by multiplying the number of
shares of Common Stock into which such share of the
fifth series was convertible immediately prior to such
<PAGE>
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
<PAGE>
asked prices, regular way, in either case on the New
York Stock Exchange, or, if the Common Stock is not
listed or admitted to trading on such Exchange, on the
principal national securities exchange on which the
Common Stock is listed or admitted to trading, or if it
is not listed or admitted to trading on any national
securities exchange, the average of the closing bid and
asked prices in the over-the-counter market on that
date as furnished by any securities broker or dealer
selected from time to time by the Corporation for that
purpose. The closing price determined as stated above
is herein called the "closing price".
(E) No adjustment in the conversion rate shall be
required unless such adjustment would require an
increase or decrease in such rate of at least
one-twentieth of a share; provided, however, that any
adjustments which by reason of this subparagraph (E)
are not required to be made shall be carried forward
and taken into account in any subsequent adjustment.
All calculations under this paragraph (e)(vi) shall be
made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be.
(F) In the event that at any time, as a result of
an adjustment made pursuant to subparagraph (vi)(A)
above, the holder of any of the fifth series thereafter
surrendered for conversion shall become entitled to
receive any shares of the Corporation other than shares
of its Common Stock, thereafter the number of such
other shares so receivable upon conversion of any of
the fifth series shall be subject to adjustment from
time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with
respect to the Common Stock contained in this paragraph
(e)(vi).
No adjustment of the conversion rate provided in
subparagraph (e)(i) shall be made by reason of the
issuance of Common Stock for cash except as provided in
subparagraph (e)(vi)(B), or by reason of the issuance
of Common Stock for property or services; provided,
that no such issuance of Common Stock for cash,
property, or services shall be made unless the Board of
Directors shall first have made a determination that
consideration to be received with respect to any such
issuance of Common Stock is fair and reasonable under
the particular circumstances. Whenever the conversion
rate is adjusted pursuant to this paragraph (e)(vi),
advice of such adjusted conversion rate shall be sent
to the holders of the fifth series at or about the time
of the next dividend payment on such fifth series.
(vii) In case of any reclassification or change of
the outstanding shares of Common Stock of the Corporation
(except a split or combination of shares) or in case of any
consolidation or merger to which the Corporation is a party
(except a merger in which the Corporation is the surviving
corporation and which does not result in a reclassification
of or change in the outstanding Common Stock of the
<PAGE>
Corporation except a split or combination of shares) or in
case of any sale or conveyance to another corporation of all
or substantially all of the property of the Corporation or
by the successor or purchasing corporation so that the
holder of each share of the fifth series then outstanding
shall thereafter have the right to convert such share into
the kind and amount of stock and other securities and
property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock of the Corporation into
which such share of the fifth series might have been
converted immediately prior thereto, and that there shall be
subsequent adjustments of the conversion rate which shall be
equivalent, as nearly as practicable, to the adjustments
provided for in paragraph (e)(vi) above. The provisions of
this paragraph (e)(vii) shall similarly apply to successive
reclassifications, changes, consolidations, mergers, sales
or conveyances.
(viii) Shares of Common Stock issued on conversion
of shares of the fifth series shall be issued as fully paid
shares and shall be non-assessable by the Corporation. The
Corporation shall at all times reserve and keep available,
free from preemptive rights for the purpose of effecting the
conversion of the fifth series, such number of its duly
authorized shares of Common Stock as shall be sufficient to
effect the conversion of all outstanding shares of the fifth
series.
(ix) Shares of the fifth series converted as provided
herein shall be cancelled, shall no longer be deemed
outstanding, and shall revert to the status of authorized,
unissued Preferred Stock of the Corporation, and the Board
of Directors shall have authority to issue such Preferred
Stock with such relative rights, preferences and privileges
as it may fix and as if such stock had not been issued as a
part of the initial series of the Preferred Stock.
SEVENTH: (A) Notwithstanding any other provision of
this Certificate, outstanding shares of Common Stock held by
Disqualified Holders (as hereinafter defined in subdivision (ii)
of Paragraph (B) of this Article SEVENTH) shall always be subject
to redemption by the Corporation to the extent necessary, in the
judgment of the Board of Directors, to prevent the loss or secure
the renewal or reinstatement of any license or franchise from any
governmental agency held by the Corporation or any of its
Subsidiaries (as hereinafter defined in subdivision (v) of
Paragraph (B) of this Article SEVENTH) to conduct any portion of
the business of the Corporation or any of its Subsidiaries, which
license or franchise is conditioned upon some or all of the
holders of the stock of the Corporation possessing prescribed
qualifications. The terms and conditions of such redemption
shall be as follows, subject in any case to any additional or
different rights of a particular Disqualified Holder or of the
Corporation pursuant to any contract or agreement between such
Disqualified Holder and the Corporation:
(i) the redemption price of the shares to be redeemed
pursuant to this Article SEVENTH shall be equal to the
Current Market Value (as hereinafter defined in subdivision
<PAGE>
(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.,
<PAGE>
or if such stock is not listed on such exchange, on the
principal United States registered securities exchange on
which such stock is listed, or if such stock is not listed
on any such exchange, the average of the closing bid and
asked prices as reported by the electronic inter-dealer
quotation system operated by NASDAQ, Inc. or a similar
source selected from time to time by the Corporation for the
purpose, or if no such prices or quotations are available,
the fair market value on the applicable day as determined by
the Board of Directors in good faith.
(ii) "Disqualified Holder" shall mean any holder of
shares of Common Stock of the Corporation whose continued
holding of such stock, either individually or taken together
with the holding of shares of stock of the Corporation by
any other holder or holders of shares of stock of the
Corporation, may result, in the judgment of the board of
directors, in the loss of, or the failure to secure the
renewal or reinstatement of, any license or franchise from
any governmental agency held by the Corporation or any of
its Subsidiaries to conduct any portion of the business of
the Corporation or any of its Subsidiaries.
(iii) "Redemption Date" shall mean the date fixed
by the Board of Directors for the redemption of any shares
of stock of the Corporation pursuant to this Article
SEVENTH.
(iv) "Redemption Securities" shall mean any debt or
equity securities of the Corporation, any of its
Subsidiaries or any other corporation, or any combination
thereof, having such terms and conditions as shall be
approved by the Board of Directors and which, together with
any cash to be paid as part of the redemption price, in the
opinion of any nationally recognized investment banking firm
selected by the Board of Directors (which may be a firm
which provides other investment banking, brokerage or other
services to the Corporation), has a value, at the time
notice of redemption is given pursuant to subdivision (iv)
of paragraph (A) of this Article SEVENTH (or, if such notice
shall have been waived, the date that is ten days prior to
the Redemption Date), at least equal to the price required
to be paid pursuant to subdivision (i) of paragraph (A) of
this Article SEVENTH (assuming, in the case of Redemption
Securities to be publicly traded, such Redemption Securities
were fully distributed and subject only to normal trading
activity).
(v) "Subsidiary" shall mean any corporation or other
entity of which at least a majority of the voting power of
the voting equity securities or equity interest is owned,
directly or indirectly, by the Corporation.
EIGHTH: The term of existence of the Corporation
shall be perpetual.
NINTH: The number of directors of the Corporation
shall be not less than nine (9).
TENTH: The office of the Corporation in the State of
<PAGE>
New York is located in the County of Monroe. The Secretary of
State of the State of New York is hereby designated as an agent
of the Corporation upon whom all process in any action or
proceeding against the Corporation may be served within the State
of New York. The address to which the Secretary of State shall
mail a copy of any process which may be served upon him is 180
South Clinton Avenue, Rochester, New York 14646-0700, Attention:
Secretary.
ELEVENTH: No director of the Corporation shall be
personally liable to the Corporation or its shareowners for
damages for any breach of duty as a director unless the
elimination or limitation of liability is expressly prohibited by
the New York Business Corporation Law as currently in effect or
as it may be amended. No amendment, modification or repeal of
this Article shall adversely affect any right or protection of
any director that exists at the time of such change.
This Restatement of the Certificate of Incorporation of the
Corporation was authorized by a resolution adopted by the Board
of Directors of the Corporation at a meeting thereof duly called
and held, followed by the affirmative votes of the holders of the
requisite percentage of the outstanding shares of Common Stock of
the Corporation, cast in person or by proxy, at the Special
Meeting of Shareowners held on December 19, 1994, and, in
addition, with respect to the authorization of a new class of
preferred stock, by the affirmative votes of the holders of the
requisite percentage of the outstanding shares of the Cumulative
Preferred Stock, cast in person or by proxy, at a Special Meeting
of Cumulative Preferred Shareowners held on December 19, 1994.
The aforementioned Special Meetings were held upon notice,
pursuant to Section 605 of the Business Corporation Law, to every
shareholder of record entitled to vote thereon, and neither the
Restated Certificate of Incorporation, as amended, nor any other
Certificate filed pursuant to law require a larger proportion of
votes.
IN WITNESS WHEREOF, this restated certificate has been
subscribed this 24th day of January, 1995 by the undersigned, who
affirm that the statements made herein are true under the
penalties of perjury.
/s/ John K. Purcell
______________________________
John K. Purcell
Corporate Vice President
/s/ Josephine S. Trubek
______________________________
Josephine S. Trubek
Corporate Secretary
<PAGE>
EXHIBIT 3-2
FRONTIER CORPORATION
By-Laws
ARTICLE I
SHAREHOLDERS
Section 1 - Annual Meeting.
An annual meeting of shareholders for the election of
Directors and the transaction of other business shall be held at
such time on any day in the month of April in each year or on
such other date as shall be fixed by the Board of Directors.
Section 2 - Special Meetings.
Special Meetings of the shareholders may be called by the
Board of Directors. Such meeting shall be held at such time as
may be fixed in the notice of meeting.
Section 3 - Place of Meeting.
Meetings of shareholders shall be held at such place, within
or without the State of New York, as may be fixed in the notice
of meeting.
Section 4 - Notice of Meeting.
Notice of each meeting of shareholders shall be in writing
and shall state the place, date and hour of the meeting and the
purpose or purposes for which the meeting is called.
A copy of the notice of any meeting shall be given,
personally, or by mail, not less than ten or more than fifty days
before the date of the meeting, to each shareholder entitled to
vote at such meeting. If mailed, such notice is given when
deposited in the United States mail, with postage thereon
prepaid, directed to the shareholder at the shareholder's address
as it appears on the record of shareholders, or, if the
shareholder shall have filed with the Secretary of the
Corporation a written request that notices be mailed to some
other address, then directed to the shareholder at such other
address.
Section 5 - Inspectors of Election.
The Board of Directors, in advance of any shareholders'
meeting, may appoint one or more inspectors to act at the meeting
or any adjournment thereof. If inspectors are not so appointed,
the person presiding at a shareholders' meeting may, and on the
request of any shareholder entitled to vote at such meeting
shall, appoint two inspectors. Each inspector, before entering
upon the discharge of the inspector's duties, shall take and sign
an oath faithfully to execute the duties of inspector at such
meeting with strict impartiality and according to the best of the
inspector's ability.
<PAGE>
The inspectors shall determine the number of shares
outstanding and the voting power of each, the shares represented
at the meeting, the existence of a quorum, and the validity and
effect of proxies, and shall receive votes, ballots or consents,
hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes,
ballots or consents, determine the result, and do such acts as
are proper to conduct the election or vote with fairness to all
shareholders. On request of the person presiding at the meeting
or any shareholder entitled to vote at such meeting, the
inspectors shall make a report in writing of any challenge,
question or matter determined by them and execute a certificate
of any fact found by them. Any report or certificate made by
them shall be prima facie evidence of the facts stated and of the
vote as certified by them.
Section 6 - List of Shareholders at Meeting.
A list of shareholders as of the record date, certified by
the Secretary or any Assistant Secretary or by the Transfer
Agent, if any, shall be produced at the meeting of shareholders
upon the request of any shareholder at such meeting or prior
thereto. If the right to vote at any meeting is challenged, the
inspectors of election, or person presiding at such meeting,
shall require such list of shareholders to be produced as
evidence of the right of the persons challenged to vote at such
meeting, and all persons who appear from such list to be
shareholders entitled to vote at such meeting may vote at such
meeting.
Section 7 - Qualification of Voters.
Every shareholder of record of common stock of the
Corporation shall be entitled at every meeting of shareholders to
one vote for every share of common stock held by the shareholder
in the shareholder's name on the record of shareholders, subject,
however, to the voting rights granted to the holders of
Cumulative Preferred Stock of the Corporation upon default in
dividends thereon.
Section 8 - Quorum of Shareholders.
The holders of a majority of the shares entitled to vote at
such meeting shall constitute a quorum at a meeting of
shareholders for the transaction of any business, provided that
when a specified item of business is required to be voted on by a
class or series, voting as a class, the holders of a majority of
the shares of such class or series shall constitute a quorum for
the transaction of such specified item of business.
The shareholders present, in person or by proxy, and
entitled to vote may, by a majority of votes cast, adjourn the
meeting despite the absence of a quorum.
Section 9 - Vote of Shareholders.
Directors shall, except as otherwise required by law, or by
the certificate of incorporation as permitted by law, be elected
<PAGE>
by a plurality of the votes cast at a meeting of shareholders by
the holders of shares entitled to vote in the election.
Whenever any corporate action, other than the election of
Directors, is to be taken by vote of the shareholders, it shall,
except as otherwise required by law, or by the certificate of
incorporation as permitted by law, be authorized by a majority of
the votes cast at a meeting of shareholders by the holders of
shares entitled to vote thereon.
Section 10 - Proxies.
Every shareholder entitled to vote at a meeting of
shareholders or to express consent or dissent without a meeting
may authorize another person or persons to act for that
shareholder by proxy. Every proxy must be signed by the
shareholder or the shareholder's attorney-in-fact. No proxy
shall be valid after the expiration of eleven months from the
date thereof unless otherwise provided in the proxy. Every proxy
shall be revocable at the pleasure of the shareholder executing
it except in those cases where an irrevocable proxy permitted by
statute has been given.
Section 11 - Fixing Record Date.
For the purpose of determining the shareholders entitled to
notice of or to vote at any meeting of shareholders or any
adjournment thereof, or to express consent or dissent from any
proposal without a meeting, or for the purpose of determining
shareholders entitled to receive payment of any dividend or the
allotment of any rights, or for the purpose of any other action,
the Board of Directors may fix, in advance, a date as the record
date for any such determination of shareholders. Such date shall
not be more than fifty nor less than ten days before the date of
such meeting, nor more than fifty days prior to any other action.
Section 12 - Order of Business.*
The order of business at each meeting of shareholders shall
be as determined by the chairman of the meeting. The chairman of
the meeting shall have the right and authority to prescribe such
rules, regulations and procedures and to do all such acts and
things as are necessary or desirable for the proper conduct of
the meeting, including, without limitation, the establishment of
procedures for the maintenance of order and safety, limitations
on the time allotted to questions or comments on the affairs of
the Corporation, restrictions on entry to such meeting after the
time prescribed for the commencement thereof, and the opening and
closing of the voting polls.
At any special meeting of shareholders, only such business
may be transacted which is related to the purpose or purposes set
forth in the notice of such meeting.
At any annual meeting of shareholders, only such business
(other than the nomination or election of directors) shall be
conducted as shall have been brought before the annual meeting
(i) by or at the direction of the chairman of the meeting or (ii)
by any shareholder who is a holder of record at the time of the
<PAGE>
giving of the notice provided for in this Section 12, who is or
will be entitled to vote at the meeting and who complies with the
procedures set forth in this Section 12.
For business (other than the nomination or election of
directors) properly to be brought before an annual meeting by a
shareholder, the shareholder must have given timely notice
thereof in proper written form to the Secretary. To be timely, a
shareholder's notice must be addressed to the Secretary and
delivered to or mailed and received at the principal executive
offices of the Corporation not less than 60 days nor more than 90
days prior to the anniversary date of the immediately preceding
annual meeting; provided, however, that in the event that the
date of the annual meeting is more than 30 days earlier or more
than 60 days later than such anniversary date, notice by the
shareholder to be timely must be so delivered or received not
earlier than the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day
prior to such annual meeting or the 10th day following the day on
which public announcement of the date of such meeting is first
made. To be in proper written form, a shareholder's notice to the
Secretary shall set forth in writing as to each matter the
shareholder proposes to bring before the annual meeting: (i) a
brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business
at the annual meeting; (ii) the name and address, as they appear
on the Corporation's books, of the shareholder proposing such
business; (iii) the class and number of shares of the Corporation
which are beneficially owned by the shareholder; (iv) a
representation that the shareholder is or will be entitled to
vote at such annual meeting and intends to appear in person (or
send a qualified representative) or by proxy to present such
proposal at the meeting; and (v) any material interest of the
shareholder in such business. The foregoing notice requirements
shall be deemed satisfied by a shareholder if the shareholder has
notified the Corporation of his or her intention to present a
proposal at an annual meeting and such shareholder's proposal has
been included in a proxy statement that has been prepared by
management of the Corporation to solicit proxies for such annual
meeting; provided, however, that if such shareholder does not
appear in person (or send a qualified representative) or by proxy
to present such proposal at such annual meeting, the Corporation
need not present such proposal for a vote at such meeting,
notwithstanding that proxies in respect of such vote may have
been received by the Corporation. Notwithstanding anything in the
By-Laws to the contrary, no business shall be conducted at any
annual meeting except in accordance with the procedures set forth
in this Section 12. The chairman of an annual meeting shall, if
the facts warrant, determine that business was not properly
brought before the annual meeting in accordance with the
provisions of this Section 12 and, if he should so determine, he
shall so declare to the annual meeting and any such business not
properly brought before the annual meeting shall not be
transacted and any proposal contemplated by such business shall
be void.
<PAGE>
ARTICLE II
BOARD OF DIRECTORS
Section 1 - Power of Board and Qualification of Directors.
The business of the Corporation shall be managed under the
direction of its Board of Directors, each of whom shall be at
least twenty-one years of age.
Section 2 - Number of Directors.*
At the annual meeting of shareholders, the shareholders
shall elect nine directors.
Section 3 - Election, Term and Qualifications of Directors.
At each annual meeting of shareholders, Directors shall be
elected to hold office until the next annual meeting and until
their successors have been elected and qualified. No person
shall be eligible for election or reelection to the Board of
Directors after reaching seventy years of age, or in the case of
a retired Chairman of the Board of Directors or a retired
President of the Corporation, after reaching sixty-seven years of
age. The term of any Director who is also an Officer of the
Corporation or any subsidiary of the Corporation, other than the
Chairman of the Board or the President of the Corporation, shall
end on the date of termination from active employment and such
officer shall thereafter be ineligible for reelection to the
Board of Directors.
Section 4 - Quorum of the Board: Action by the Board.
One-third of the entire Board of Directors shall constitute
a quorum for the transaction of business, and the vote of a
majority of the Directors present at the time of such vote, if a
quorum is then present, shall be the act of the Board.
Section 5 - Action Without a Meeting.
Any action required or permitted to be taken by the Board or
any committee thereof may be taken without a meeting if all
members of the Board or of the committee consent in writing to
the adoption of the resolution authorizing the action. The
resolution and the written consents thereto by the members of the
Board or committee shall be filed with the minutes of the
proceedings of the Board or committee.
Section 6 - Participation in Board Meetings by Conference
Telephone
Any one or more members of the Board of Directors or any
committee thereof may participate in a meeting of such Board or
committee by means of a conference telephone or similar
communications equipment allowing all persons participating in
the meeting to hear each other at the same time. Participation
by such means shall constitute presence in person at a meeting.
<PAGE>
Section 7 - Meetings of the Board.
An annual meeting of the Board of Directors shall be held in
each year directly after adjournment of the annual shareholders'
meeting. Regular meetings of the Board shall be held at such
times as may from time to time be fixed by resolution of the
Board. Special meetings of the Board may be held at any time
upon the call of the Chairman of the Board of Directors, if such
there be, the President or any two Directors.
Meetings of the Board of Directors shall be held at such
place, within or without the State of New York, as from time to
time may be fixed by resolution of the Board for annual and
regular meetings and in the notice of meeting for special
meetings. If no place is so fixed, meetings of the Board shall
be held at the office of the Corporation in Rochester, New York.
No notice need be given of annual or regular meetings of the
Board of Directors. Notice of each special meeting of the Board
shall be given by oral, telegraphic or written notice, duly given
or sent or mailed to each Director not less than one (1) day
before such meeting.
Section 8 - Resignation.
Any Director may resign at any time by giving written notice
to the Chairman of the Board of Directors, if such there be, to
the President or to the Secretary. Such resignation shall take
effect at the time specified in such written notice, or if no
time be specified, then on delivery. Unless otherwise specified
in the written notice, the acceptance of such resignation by the
Board of Directors shall not be needed to make it effective.
Section 9 - Newly Created Directorships and Vacancies.
Newly created directorships resulting from an increase in
the number of directors and vacancies occurring in the Board of
Directors may be filled by vote of the Board. If the number of
the directors then in office is less than a quorum, such newly
created directorships and vacancies may be filled by vote of a
majority of the directors then in office. A director elected to
fill a vacancy shall be elected to hold office for the unexpired
term of such director's predecessor.
Section 10 - Executive and Other Committees of Directors.*
The Board of Directors, by resolution, adopted by a majority
of the entire Board, shall designate from among its members an
Executive Committee consisting of three or more Directors, a
majority of whom are outside directors.
The Executive Committee shall have all the authority of the
Board, except that it shall not have authority as to the
following matters:
(1) The submission to shareholders of any action that needs
shareholders' approval;
(2) The filling of vacancies in the Board or in any
committee;
<PAGE>
(3) The amendment or repeal of the By-Laws, or the adoption
of new By-Laws;
(4) The amendment or repeal of any resolution of the Board
which, by its terms, shall not be so amendable or
repealable;
(5) The fixing of compensation of the directors for serving
on the Board or on any Committee;
(6) The fixing or amendment of the compensation, benefits
and perquisites of the chief executive officer.
The Board of Directors, by resolution by a majority of the
entire Board, may designate from among its members an Audit
Committee consisting of three or more outside directors. The
Audit Committee shall, among other things, review the scope of
audit activities, review with management significant issues
concerning litigation, contingencies or other material matters
which may result in either potential liability of the Company or
significant exposure to the Company, review significant matters
of corporate ethics, review security methods and procedures,
review the financial reports and notes, and make reports and
recommendations with respect to audit activities, findings, and
reports of the independent public accountants and the internal
audit staff of the Company.
The Board of Directors, by resolution adopted by a majority
of the entire Board, may designate from among its members a
Committee on Directors consisting of three or more outside
directors. The Committee on Directors shall, among other things,
review performance of incumbent directors, act as a nominating
committee, and consider and report to the entire Board of
Directors on all matters relating to the selection,
qualification, compensation and duties of the members of the
Board of Directors and any committees of the Board of Directors.
The Board of Directors, by resolution adopted by a majority
of the entire Board, may designate from among its members a
Committee on Management consisting of three or more outside
directors. The Committee on Management shall, among other
things, fix or amend the compensation, benefits and perquisites
of all executive officers of the Company and recommend such for
the chief executive officer, select and administer executive
compensation plans and employee benefit plans which have Company
stock as an investment option, review succession planning for the
Company and review with management significant human resources
issues.
The Board of Directors, by resolution adopted by a majority
of the entire Board, may designate from among its members other
committees each consisting of three or more directors.
Unless a greater proportion is required by the resolution
designating a committee of the Board of Directors, a quorum for
the transaction of business of a committee shall consist of (a) a
majority of the entire authorized number of members of the
Executive Committee or (b) one-third of the entire authorized
number of members of any other committee of the Board of
Directors, but in no event fewer than two persons. The vote of a
majority of the members of a committee present at the time of the
<PAGE>
vote concerning the transaction of business of that committee or
of any specified item of business of that committee if a quorum
is present at such time, shall be the act of such committee.
Any committee may fix the time and place of holding its
regular meetings and, if so fixed, no notice of such regular
meeting shall be necessary. Special meetings of any committee
may be called at any time by the Chairman of the Board of
Directors, if such there be, by the chief executive officer, by
the President, by the Chairperson of that committee, or by any
two members of that committee. Notice of each special meeting of
any committee shall be given by oral, telegraphic or written
notice, including notice via facsimile machine, duly given or
sent or mailed to each member of that committee not less than one
day before such meeting.
Section 11 - Compensation of Directors.
The Board of Directors shall have authority to fix the
compensation of directors for services in any capacity.
Section 12 - Indemnification.*
(a) Generally.
To the full extent authorized or permitted by law, the
Corporation shall indemnify any person ("indemnified Person")
made, or threatened to be made, a party to any action or
proceeding, whether civil, at law, in equity, criminal,
administrative, investigative or otherwise, including any action
by or in the right of the Corporation, by reason of the fact that
he, his testator or intestate, ("Responsible Person"), whether
before or after adoption of this Section 12, (1) is or was a
director or officer of the Corporation, or (2), if a director or
officer of the Corporation, is serving or served, in any
capacity, at the request of the Corporation, any other
corporation, or any partnership, joint venture, trust, employee
benefit plan or other enterprise, or (3), if not a director or
officer of the Corporation, is serving or served, at the request
of the Corporation, as a director or officer of any other
corporation or any partnership, joint venture, trust, employee
benefit plan or other enterprise, against all judgments, fines,
penalties, amounts paid in settlement (provided the Corporation
shall have given its prior consent to such settlement, which
consent shall not be unreasonably withheld by it) and reasonable
expenses, including attorneys' fees, incurred by such Indemnified
Person with respect to any such threatened or actual action or
proceeding, and any appeal therein, provided only that (x) acts
of the Responsible Person which were material to the cause of
action so adjudicated or otherwise disposed of were not (i)
committed in bad faith or (ii) were not the result of active and
deliberate dishonesty, and (y) the Responsible Person did not
personally gain in fact a financial profit or other advantage to
which he was not legally entitled.
(b) Advancement of Expenses.
All expenses reasonably incurred by an Indemnified Person in
connection with a threatened or actual action or proceeding with
respect to which such person is or may be entitled to
<PAGE>
indemnification under this Section 12 shall be advanced or
promptly reimbursed by the Corporation to him in advance of the
final disposition of such action or proceeding, upon receipt of
an undertaking by him or on his behalf to repay the amount of
such advances, if any, as to which he is ultimately found not to
be entitled to indemnification or, where indemnification is
granted, to the extent such advances exceed the indemnification
to which he is entitled. Such person shall cooperate in good
faith with any request by the Corporation that common counsel be
used by the parties to an action or proceeding who are similarly
situated unless to do so would be inappropriate due to an actual
or potential conflict of interest.
(c) Procedure for Indemnification.
(1) Not later than thirty (30) days following final
disposition of an action or proceeding with respect to which the
Corporation has received written request by an Indemnified Person
for indemnification pursuant to this Section 12, if such
indemnification has not been ordered by a court, the Board of
Directors shall meet and find whether the Responsible Person met
the standard of conduct set forth in paragraph (a) of this
Section 12, and, if it finds that he did, or to the extent it so
finds, shall authorize such indemnification.
(2) Such standard shall be found to have been met unless (a)
a judgment or other final adjudication adverse to the Indemnified
Person establishes that subparagraphs (x) or (y) of paragraph (a)
of this Section 12 were violated, or (b) if the action or
proceeding was disposed of other than by judgment or other final
adjudication, the Board finds in good faith that, if it had been
disposed of by judgment or other final adjudication, such
judgment
or other final adjudication would have been adverse to the
Indemnified Person and would have established a violation of
subparagraphs (x) or (y) of paragraph (a) of this Section 12.
(3) If indemnification is denied, in whole or part, because
of an adverse finding by the Board in the absence of a judgment
or other final adjudication, or because the Board believes the
expenses for which indemnification is requested to be
unreasonable, such action by the Board shall in no way affect the
right of the Indemnified Person to make application therefor in
any court having jurisdiction thereof, and in such action or
proceeding the issue shall be whether the Responsible Person met
the standard of conduct set forth in paragraph (a) of this
Section 12, or whether the expenses were reasonable, as the case
may be (not whether the finding of the Board with respect thereto
was correct) and the determination of such issue shall not be
affected by the Board's finding. If the judgment or other final
adjudication in such action or proceeding establishes that the
Responsible Person met the standard set forth in paragraph (a) of
this Section 12, or that the disallowed expenses were reasonable,
or to the extent that it does, the Board shall then find such
standard to have been met or the expenses to be reasonable, and
shall grant such indemnification, and shall also grant to the
Indemnified Person indemnification of the expenses incurred by
him in connection with the action or proceeding resulting in the
judgment or other final adjudication that such standard of
conduct was met, or if pursuant to such court determination such
<PAGE>
person is entitled to less than the full amount of
indemnification denied by the Corporation, the portion of such
expenses proportionate to the amount of such indemnification so
awarded.
(4) A finding by the Board pursuant to this paragraph (c)
that the standard of conduct set forth in paragraph (a) of this
Section 12 has been met shall mean a finding of the Board or
shareholders as provided by law.
(d) Contractual Article.
This Section 12 shall be deemed to constitute a contract
between the Corporation and each person who is a Responsible
Person at any time while this Section 12 is in effect. No repeal
or amendment of this Section 12, insofar as it reduces the extent
of the indemnification of any person who could be a Responsible
Person shall without his written consent be effective as to such
person with respect to any event, act or omission occurring or
allegedly occurring prior to (1) the date of such repeal or
amendment if on that date he is not serving in any capacity for
which he could be a Responsible Person, or (2) the thirtieth
(30th) day following delivery to him of written notice of such
repeal or amendment as to any capacity in which he is serving on
the date of such repeal or amendment, other than as a director or
officer of the Corporation, for which he could be a Responsible
Person, or (3) the later of the thirtieth (30th) day following
delivery to him of such notice or the end of the term of office
(for whatever reason) he is serving as director or officer of the
Corporation when such repeal or amendment is adopted, with
respect to being a Responsible Person in that capacity. No
amendment of the Business Corporation Law shall, insofar as it
reduces the permissible extent of the right of indemnification of
a Responsible Person under this Section 12, be effective as to
such person with respect to any event, act or omission occurring
or allegedly occurring prior to the effective date of such
amendment irrespective of the date of any claim or legal action
in respect thereto. This Section 12 shall be binding on any
successor to the Corporation, including any corporation or other
entity which acquires all or substantially all of the
Corporation's assets.
(e) Non-exclusivity.
The indemnification provided by this Section 12 shall not be
deemed exclusive of any other rights to which any person covered
hereby may be entitled other than pursuant to this Section 12.
The Corporation is authorized to enter into agreements with any
such person or persons providing them rights to indemnification
or advancement of expenses in addition to the provisions therefor
in this Section 12 to the full extent permitted by law.
Section 13 - Notification of Nominations.*
Subject to the rights of the holders of any class or series
of stock having a preference over the Common Stock as to
dividends or upon liquidation, nominations for the election of
Directors may be made by the Board of Directors or by any
shareholder who is a shareholder of record at the time of the
giving of the notice of nomination provided for in this Section
<PAGE>
13 and who is entitled to vote for the election of Directors. Any
shareholder of record who is or will be entitled to vote for the
election of Directors at a meeting may nominate persons for
election as Directors only if timely written notice of such
shareholder's intent to make such nomination is given to the
Secretary. To be timely, a shareholder's notice must be addressed
to the Secretary and delivered to or mailed and received at the
principal executive offices of the Corporation (i) with respect
to an election to be held at an annual meeting of shareholders,
not less than 60 days nor more than 90 days prior to the
anniversary date of the immediately preceding annual meeting;
provided, however, that in the event that the date of the annual
meeting is more than 30 days earlier or more than 60 days later
than such anniversary date, notice by the shareholder to be
timely must be so delivered or received not earlier than the 90th
day prior to such annual meeting and not later than the close of
business on the later of the 60th day prior to such annual
meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made and (ii)
with respect to an election to be held at a special meeting of
shareholders for the election of Directors, not earlier than the
90th day prior to such special meeting and not later than the
close of business on the later of the 60th day prior to such
special meeting or the 10th day following the day on which public
announcement is first made of the date of the special meeting and
of the nominees to be elected at such meeting. Each such notice
shall set forth: (a) the name and address, as they appear on the
Corporation's books, of the shareholder who intends to make the
nomination, and the name and address of the person or persons to
be nominated; (b) the class and number of shares of the
Corporation which are beneficially owned by the shareholder: (c)
a representation that the shareholder is or will be entitled to
vote at the meeting and intends to appear in person (or send a
qualified representative) or by proxy at the meeting to nominate
the person or persons specified in the notice; (d) a description
of all arrangements or understandings between the shareholder and
such nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are
to be made by the shareholder; (e) such other information
regarding each nominee proposed by such shareholder as would have
been required to be included in a proxy statement filed pursuant
to the proxy rules of the Securities and Exchange Commission had
each nominee been nominated, or intended to be nominated, by the
Board of Directors; and (f) the consent of each nominee to serve
as a Director of the Corporation if so elected. The chairman of
the meeting may refuse to acknowledge the nomination of any
person not made after compliance with the foregoing procedure.
Only such persons who are nominated in accordance with the
procedures set forth in this Section 13 shall be eligible to
serve as Directors of the Corporation and any purported
nomination or purported election not made in accordance with the
procedures set forth in this Section 13 shall be void.
<PAGE>
ARTICLE III
OFFICERS
Section 1 - Officers.
The Board of Directors, as soon as may be practicable after
the annual election of directors, may elect a Chairman of the
Board of Directors and shall elect a President, one or more Vice
Presidents (one or more of whom may be designated Executive Vice
President), a Secretary and a Treasurer, and such other officers
as it may determine. Any two or more offices may be held by the
same person, except the office of President and Secretary.
Section 2 - Term of Office and Removal.
Each officer shall hold office for the term for which each
officer is elected or appointed, and until a successor has been
elected or appointed and qualified.
Section 3 - Powers and Duties.
The officers of the Corporation shall each have such powers
and authority and perform such duties in the management of the
Corporation as set forth in these By-Laws and as from time to
time prescribed by the Board of Directors. To the extent not set
forth in these By-Laws or so prescribed by the Board of
Directors, they shall each have such powers and authority and
perform such duties in the management of the Corporation, subject
to the control of the Board, as generally pertain to their
respective offices.
In addition to the powers and authority above, each officer
has the powers and duties set out below.
(a) Chairman of the Board of Directors
The Chairman of the Board of Directors, if such there be,
shall preside at all meetings of the Board. The Chairman of
the Board of Directors may be the chief executive officer of
the Corporation, and if so designated, may preside at all
meetings of shareholders.
(b) President
The President shall be the chief operating officer and shall
have responsibility for the general management of the
business of the Corporation, subject only to the supervision
of the Board of Directors, the Executive Committee and the
Chairman of the Board of Directors, as chief executive
officer, if such there be. If there is no Chairman of the
Board of Directors or if the Chairman of the Board of
Directors is not the chief executive officer, then the
President shall be the chief executive officer of the
Corporation. The President may preside at all meetings of
shareholders, when present, and at meetings of the Board of
Directors in the absence of the Chairman of the Board, if
such there be.
(c) Executive Vice President
The Executive Vice President or the Executive Vice
Presidents, if such there be, shall assist the President in
the management of the Corporation and, as may be designated
<PAGE>
by the Board of Directors, in the event of the death,
resignation, removal, disability or absence of the
President, an Executive Vice President shall possess the
powers and perform the duties of the President for the
period of such disability or absence or until the Board of
Directors elects a President.
(d) Vice President
Each Vice President shall assist the President in the
management of the Corporation and, in the absence or
incapacity of the President and Executive Vice Presidents,
and in order as fixed by the Board, possess the powers and
perform the duties of the President for the period of such
absence or incapacity, and shall possess such other powers
and perform such other duties as the Board of Directors may
prescribe.
(e) Secretary
The Secretary shall issue notices of all meetings of
shareholders and directors where notices of such meetings
are required by law or these By-Laws, and shall keep the
minutes of such meetings. The Secretary shall sign such
instruments and attest such documents as require signature
or attestation and affix the corporate seal thereto where
appropriate and shall possess such other powers and perform
such other duties as usually pertain to the office or as the
Board of Directors may prescribe.
(f) Treasurer
The Treasurer shall have general charge of, and be
responsible for, the fiscal affairs of the Corporation and
shall sign all instruments and documents as require such
signature, and shall possess such other powers and perform
such other duties as usually pertain to the office or as the
Board of Directors may prescribe.
(g) Assistant Officers
Any Assistant Officer elected by the Board of Directors
shall assist the designated officer and shall possess that
officer's powers and perform that officer's duties as
designated by that officer, and shall possess such other
powers and perform such other duties as the Board of
Directors may prescribe.
Section 4 - Records.
The Corporation shall keep (a) correct and complete books
and records of account; (b) minutes of the proceedings of the
shareholders, Board of Directors and any committees of the Board;
and (c) a current list of the directors and officers and their
residence addresses.
The Corporation shall also keep at its office in the State
of New York or at the office of its transfer agent or registrar
in the State of New York, if any, a record containing the names
and addresses of all shareholders, the number and class of shares
<PAGE>
held by each and the dates when they respectively became the
owners of record thereof.
Section 5 - Checks and Similar Instruments.
All checks and drafts on the Corporation's bank accounts and
all bills of exchange and promissory notes and all acceptances,
obligations and other instruments, for the payment of money,
shall be signed by facsimile or otherwise on behalf of the
Corporation by such officer or officers or agent or agents as
shall be thereunto authorized from time to time by the Board of
Directors.
Section 6 - Voting Shares Held by the Corporation.
Either the President or the Secretary may vote shares of
stock held by the Corporation in other corporations and may
execute proxies for and on behalf of the Corporation for such
purpose.
ARTICLE IV
SHARE CERTIFICATES AND LOSS THEREOF - TRANSFER OF SHARES
Section 1 - Form of Share Certificate.
The shares of the Corporation shall be represented by
certificates, in such forms as the Board of Directors may from
time to time prescribe, signed by the Chairman of the Board if
such there be, or the President or a Vice President, and the
Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, and may be sealed with the seal of the
Corporation or a facsimile thereof. The signatures of the
officers upon a certificate may be facsimiles if the certificate
is countersigned by a transfer agent or registered by a registrar
other than the Corporation or its employee. In case any officer
who has signed or whose facsimile signature has been placed upon
a certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Corporation with
the same effect as if such person were such officer at the date
of issue.
Section 2 - Lost, Stolen or Destroyed Share Certificates.
No certificate or certificates for shares of the Corporation
shall be issued in place of any certificate alleged to have been
lost, stolen or destroyed, except upon production of such
evidence of the loss, theft or destruction, and upon such
indemnification and payment of costs of the Corporation and its
agents to such extent and in such manner as the Board of
Directors may from time to time prescribe. The Board of
Directors, in its discretion, and as a condition precedent to the
issuance of any new certificate, may require the owner of any
certificate alleged to have been lost, stolen or destroyed to
furnish the Corporation with a bond, in such sum and with such
surety or sureties as it may direct, as indemnity against any
claim that may be made against the Corporation in respect of such
lost, stolen or destroyed certificate.
<PAGE>
Section 3 - Transfer of Shares.
Shares of the Corporation shall be transferable on the books
of the Corporation by the registered holder thereof in person or
by the registered holder's duly authorized attorney, by delivery
for cancellation of a certificate or certificates for the same
number of shares, with proper endorsement consisting of either a
written assignment of the certificate or a power of attorney to
sell, assign or transfer the same or the shares represented
thereby, signed by the person appearing by the certificate to be
the owner of the shares represented thereby, either written
thereon or attached thereto, with such proof of the authenticity
of the signature as the Corporation or its agents may reasonably
require. Such endorsement may be either in blank or to a
specified person, and shall have affixed thereto all stock
transfer stamps required by law.
*Except as otherwise provided by law, not more than twenty
percent of the aggregate number of shares of stock of the
Corporation outstanding in any class or series shall at any time
be owned of record or beneficially or voted by or for the account
of aliens (as defined below). Shares of stock shall not be
transferable on the books of the Corporation to any alien if, as
a result of such transfer, the aggregate number of shares of
stock in any class or series owned by or for the account of
aliens shall be twenty percent or more of the number of shares of
stock then outstanding in such class or series. The Board of
Directors may make such rules and regulations as it shall deem
necessary or appropriate so that accurate records may be kept of
the shares of stock of the Corporation owned of record or
beneficially or voted by or for the account of aliens or to
otherwise enforce the provisions of this Section 3.
As used in this Section 3, the word "alien" shall mean the
following and their representatives: any individual not a citizen
of the United States of America; a partnership, unless a majority
of the partners are non-aliens and a majority interest in the
partnership profits is held by nonaliens; a foreign government; a
corporation, joint-stock company or association organized under
the laws of a foreign country; any other corporation of which any
officer or more than one-fourth of the directors are aliens, or
of which more than one-fourth of any class or series of stock is
owned of record or voted by or for the account of aliens; and any
other corporation, joint-stock company or association controlled
directly or indirectly by one or more of the above.
ARTICLE V
OTHER MATTERS
Section 1 - Corporate Seal.
The corporate seal shall have inscribed thereon the name of
the Corporation and such other appropriate legend as the Board of
Directors may from time to time determine. In lieu of the
corporate seal, when so authorized by the Board, a facsimile
thereof may be affixed or impressed or reproduced in any other
manner.
<PAGE>
Section 2 - Amendments.
By-Laws of the Corporation may be amended, repealed or
adopted by vote of the holders of the shares at the time entitled
to vote in the election of any directors. By-Laws may also be
amended, repealed, or adopted by the Board of Directors, but any
By-Law adopted by the Board may be amended or repealed by the
shareholders entitled to vote thereon as hereinabove provided.
If any By-Law regulating an impending election of directors
is adopted, amended or repealed by the Board of Directors, there
shall be set forth in the notice of the next meeting of
shareholders for the election of directors the By-Law so adopted,
amended or repealed, together with a concise statement of the
changes made.
<PAGE>
EXHIBIT 4-1
Frontier Corporation has not filed any instrument defining
the rights of holders of long-term debt of its subsidiaries
because the amounts authorized under any such instrument do not
exceed ten percent (10%) of the total assets of Frontier
Corporation and its subsidiaries on a consolidated basis.
Frontier Corporation agrees to furnish a copy of any such
instrument to the Securities and Exchange Commission upon its
request.
<PAGE>
EXHIBIT 4-2
Frontier Corporation hereby undertakes to provide to the
Securities and Exchange Commission, upon request, all of the
instruments defining the rights of holders of long term debt of
Frontier Corporation and its consolidated subsidiaries, pursuant
to Reg. Section 229.601(b)(4)(iii).
<PAGE>
EXHIBIT 10-25
ROCHESTER TELEPHONE CORPORATION
MANAGEMENT PENSION PLAN
Amendment No. 19 to the January 1, 1987 Restatement
Pursuant to Article XI, Section 2.37 is amended, effective
January 1, 1994, to clarify an ambiguity in the Plan's language
and to affirm prior administrative practice, by adding to the end
thereof the following:
For purposes of determining a Participant's Accrued Benefit,
of applying the Plan's benefit formula and of determining
the length of service needed for receiving an unreduced
benefit, the term Year of Service shall include only those
periods of time during which either (1) the Employer or an
Affiliated Company maintained this Plan or (2) service
credit is granted pursuant to the transfer policy in Section
4.3.
IN WITNESS WHEREOF, the Employer has caused its duly
authorized officer to execute this amendment on its behalf this
10th day of May, 1994.
ROCHESTER TELEPHONE CORPORATION
By /s/ Josephine S. Trubek
---------------------------
Josephine S. Trubek
Corporate Secretary
<PAGE>
EXHIBIT 10-25
ROCHESTER TELEPHONE CORPORATION
MANAGEMENT PENSION PLAN
Amendment No. 20 to the January 1, 1987 Restatement
Pursuant to Article XI, Section 1.11 is amended,
effective January 1, 1995, by deleting the current provision in
its entirety and substituting in its place the following:
"Compensation" means the total of an Employee's
annual base rate of pay (including any differentials
for acting assignments, team leader or shift
differential), bonuses and commissions paid by the
Employer during a Plan Year for services actually
rendered by the Employee to the Employer. For any
Employee who is participating in the Employer's
Employees' Retirement Savings Plan or Tel Flex Plan,
the term Compensation shall include amounts contributed
to such plans on behalf of the Employee pursuant to a
salary reduction agreement. Compensation does not
include contributions to this Plan or any other plan of
deferred compensation other than employee tax-deferred
contributions to the Employees' Retirement Savings
Plan, nor does it include any types of extra
remuneration (except the bonuses or commissions
included in the first sentence above) of whatever
nature or an Employee's compensation in excess of
$150,000 (adjusted for cost of living increases under
the Code) per year.
IN WITNESS WHEREOF, the Employer has caused its duly
authorized officer to execute this amendment on its behalf this
17th day of October, 1994.
ROCHESTER TELEPHONE CORPORATION
By /s/ Barbara J. LaVerdi
-----------------------------
Barbara J. LaVerdi
Assistant Secretary
<PAGE>
EXHIBIT 10-29
ROCHESTER TEL GROUP
EMPLOYEES' RETIREMENT SAVINGS PLAN
Amendment No. 1
Pursuant to Article XII the Plan is amended, effective
January 1, 1995, as follows:
1. Section 1.11 is amended by adding the following
parenthetical material following the word "wages" in the first
sentence thereof:
(including any differential associated with acting
assignments, team leader or shift differential)
2. Section 4.1 is amended by deleting the last
sentence thereof and substituting in its place the following:
All Participating Company contributions will be made in
cash.
3. Section 5.2 is amended by deleting the current
provision in its entirety and substituting in its place the
following:
5.2 Investment of Company Contributions. Except as
otherwise noted in Appendix B, all Participating
Company contributions and the earnings thereon
shall be invested initially in Company Stock. All
amounts required to be invested initially in
Company Stock shall remain in the Company Stock
fund until the fifth anniversary of the date of
investment (the "Restricted Period"). At the
expiration of the five year period the Restricted
Stock, including the reinvested earnings on the
initial contributions, in a Participant's Account
shall lose its investment restriction and may be
invested by the Participant, pursuant to Section
5.5 and any rules established thereunder, by the
Committee in any other fund option or left in the
Company Stock fund. Participating Company
contributions not required to be invested initially
in Company Stock may be invested in any fund
option, including Company Stock, under the Plan.
IN WITNESS WHEREOF, the Company has caused its duly
authorized officer to execute this Amendment on its behalf this
15th day of November, 1994.
ROCHESTER TELEPHONE CORPORATION
By /s/ Barbara J. LaVerdi
-----------------------------
Barbara J. LaVerdi
Assistant Secretary
<PAGE>
EXHIBIT 10-31
ROCHESTER TELEPHONE CORPORATION
SUPPLEMENTAL RETIREMENT SAVINGS PLAN
Amendment No. 4 to May 1, 1990 Restatement
Pursuant to Section 8.1, the Plan is hereby amended,
effective January 1, 1995, by deleting the first paragraph of
Section 5.1 and substituting in its place the following:
The Participating Company of an eligible Employee
shall have the ultimate obligation to pay out all
deferred amounts plus the earnings thereon in accordance
with the terms of this Plan. All Participating Company
matching contributions and the earnings on them shall be
invested in Rochester Telephone Corporation common stock
until the fifth anniversary of the date of investment
(the "Restricted Stock"). At the expiration of the five
year period, the Restricted Stock in an eligible
Employee's account shall lose its investment restriction
and may be invested by the Employee, along with all
other amounts in his or her account, among the
investment choices made available from time to time by
the Committee. An eligible Employee may also elect to
change the investment of his or her account as
frequently as the Committee in its sole discretion may
permit. All such elections shall be made pursuant to
such procedures as the Committee shall adopt.
IN WITNESS WHEREOF, the Company has caused its duly
authorized officer to execute this amendment on its behalf this
15th day of November, 1994.
ROCHESTER TELEPHONE CORPORATION
By /s/ Barbara J. LaVerdi
------------------------
Barbara J. LaVerdi
Assistant Secretary
<PAGE>
EXHIBIT 10-34
[12/5/94]
FRONTIER CORPORATION
PLAN FOR THE DEFERRAL OF DIRECTORS FEES
The Rochester Telephone Corporation Plan for the
Deferral of Directors Fees is hereby amended and renamed,
effective January 1, l995, as the Frontier Corporation Plan for
the Deferral of Directors Fees (the "Plan") to reflect the
company's reorganization and the change in the parent company's
name to Frontier Corporation (the "Company") and to expand
eligibility to outside directors of the Company's subsidiaries as
follows:
1. Purposes
The Plan has been established to assist outside
directors of the Company and its subsidiaries with their
individual tax and retirement income planning and to permit the
Company and its subsidiaries to remain competitive in attracting
and retaining their directors.
2. Plan Administrator
The Executive Committee of the Company's Board of
Directors shall be the Plan's administrator (the "Administrator").
The Administrator shall have the authority to adopt rules and
regulations for carrying out the Plan and to interpret, construe
and implement the provisions of this Plan, including eligibility
for benefits prior to any change in control of the Company.
3. Eligibility
Any director of the Company or of its subsidiaries who
is not an employee of the Company or of its subsidiaries may elect
to participate in this Plan.
4. Amount of Deferral
A participant may elect to defer receipt of all or a
specified portion of the fees otherwise payable to the participant
for serving on the Board of Directors or any Board committee of
the Company or of a subsidiary of the Company.
5. Time for Electing Deferral
Any election to defer directors fees must be made prior
to the beginning of the calendar year that such fees are to be
earned by the participant, provided that in the first year of
eligibility a deferral election for that year must be made within
30 days of commencing employment on the Board, and provided
further that any election with respect to investing in Company
Common Stock must be made irrevocably at least six months in
advance of such transaction. An election to commence a deferral
may be made at any time in accordance with the procedures set
<PAGE>
forth in section 6 and any election so made shall remain in effect
until the participant elects in writing to change his or her
election for future fees, but any such change with respect to
investment in Company Common Stock will not be effective until six
months after so elected.
6. Manner of Electing Deferral
A participant shall elect a deferral by giving written
notice to the Administrator in a form substantially the same as
the Election Form attached hereto. The notice shall include (1)
the amount to be deferred; (2) the time as of which deferral is to
commence; (3) if applicable, whether the deferrals will be
invested in Company Common Stock or in fixed income obligations;
(4) whether the deferred amounts plus the earnings thereon will be
paid within 30 days of termination from the Board or 30 days
following the end of year in which termination occurs; and (5) an
election of either a lump sum payment or the number of monthly
installments (not to exceed 60) for the payment of the deferred
amounts.
7. Participant Accounts
If a trust arrangement has been established, each
participant shall have a Participant Fixed Income Account or a
Participant Common Stock Account, or both (collectively, the
"Participant Account") to reflect his or her investment election
as specified on the Election Form. Amounts deferred into a
Participant Fixed Income Account shall be invested by the trustee
in money market instruments, Treasury bills or other short-term,
low-risk, highly-liquid forms of investments pursuant to the terms
of the trust agreement. Amounts deferred into a Participant
Common Stock Account shall be invested by the trustee in shares of
Company Common Stock (par value $1.00 per share). The trustee
shall purchase such shares on the open market at their fair market
value at the time of purchase. Cash dividends paid on shares
allocated to a Participant Common Stock Account shall be used to
purchase additional shares of Common Stock.
If no trust arrangement has been established, all
deferrals will be credited with simple interest on any unpaid
account balance at the rate fixed from time to time for the
payment of funds deposited with the Company by the customers.
The value of each Participant Account shall be adjusted
no less frequently than annually to reflect deferrals into the
account, payments from the account as hereinafter provided,
earnings on investments and changes in the market value of
investments.
All amounts credited to Participant Accounts shall be
fully vested at all times. Except for the possible claims of the
general creditors of the Company or of its subsidiaries, they
shall not be subject to forfeiture on account of any action by a
participant or by the Company or its subsidiaries, including
termination of service on the Board.
8. Transfer of Participant Accounts
A Participant may make a one-time election at any
<PAGE>
time to transfer all or a portion of the value of his or her
Participant Account from this Plan to the Company's Directors
Common Stock Deferred Growth Plan. In such event, future earnings
on the transferred amounts shall be based on the terms of the
Directors Common Stock Deferred Growth Plan and payment from that
plan shall be made in whatever medium (e.g., cash or property) may
be provided for the payment of benefits from that plan. However,
the timing, method of payment and all other elections selected by
the Participant on his or her Deferred Election Form under this
Plan shall remain irrevocable and shall continue to apply to the
transferred amounts.
No amounts held in the Directors Common Stock
Deferred Growth Plan may be transferred to this Plan, including
amounts previously transferred to such plan from this Plan
pursuant to this Section 8.
Notwithstanding the provisions of this Section 8 or
a participant's Election Form regarding the time for payment of
benefits, the Administrator may, in its sole discretion,
accelerate payments in the light of an unforeseeable emergency.
For this purpose, an unforeseeable emergency is an unanticipated
emergency that is caused by an event beyond the control of the
participant and that would result in severe financial hardship to
the participant if early withdrawal were not permitted. Any early
withdrawal pursuant to this Section 8 is limited to the amount
needed to meet the emergency.
9. Payment of Deferred Amounts
No withdrawal may be made from a Participant
Account except as provided in this section 8. Payments from an
Account shall either commence or be made in a lump sum within 30
days following termination from the Board or within 30 days
following the close of the year in which termination occurs in
accordance with a participant's election form.
Payments from a Participant Fixed Income Account
shall be made only in cash. Payments from a Participant Common
Stock Account shall be made only in whole shares of Common Stock
with any fractional share which is part of a lump sum payment or a
final installment made in cash. Each participant or beneficiary
shall execute any documents deemed necessary by the Administrator
to comply with any applicable securities laws.
Payments may be made in the form of either a lump
sum payment or monthly installments over a period of years not to
exceed five. Where payments are made in monthly installments, the
balance credited to a Participant Account shall continue to be
adjusted for earnings as provided in section 7.
If installment payments are elected, the first
installment shall equal the value of the Participant Account at
such time multiplied by a fraction, the numerator of which is one
and the denominator of which is the total number of monthly
installments to be made. All subsequent installments shall equal
the value of the Participant Account as of the last valuation date
preceding the installment which is to be paid multiplied by a
fraction, the numerator of which is one and the denominator of
which is the total number of installments elected minus the number
<PAGE>
of installments already paid.
In the event of a participant's death before he or
she has received all of the deferred payments to which he or she
is entitled hereunder, the remaining value of the Participant
Account shall be paid to the participant's estate in a lump sum no
later than 30 days following the end of the year in which the
participant died.
Notwithstanding a participant's election of
installment payments, the Company and its subsidiaries, in their
sole discretion, shall have a right to accelerate any such
payments or to make payment of the balance of a Participant
Account in a lump sum.
10. Participant's Rights Unsecured
The maintenance of individual Participant Accounts
is for bookkeeping purposes only. The Company and its
subsidiaries may, but are not obligated to, acquire or set aside
any particular assets for the discharge of their obligations, nor
is any participant to have any property rights in any particular
assets held by the Company or its subsidiaries, whether or not
held for the purpose of funding the obligations of the Company or
its subsidiaries under this Plan.
The right of any participant or his or her estate
to receive future installments under the provisions of this Plan
shall be an unsecured claim against the general assets of the
Company and its subsidiaries.
11. Change in Control
In the event of a Change in Control, as defined in
the trust agreement, amounts credited to Participant Accounts
shall be paid out in accordance with the terms of the trust
agreement and any participant elections. If no trust agreement is
in effect, change in control shall have the meaning given this
term in the Company's Supplemental Management Pension Plan and
benefits shall be paid in accordance with participant elections.
Notwithstanding the foregoing, shares of Common Stock purchased
with deferred fees shall not be paid out until six months after
the date of elction pursuant to which such purchase was made.
12. Statement of Account
Statements will be sent to participants no less
frequently than annually as to the value of their Participant
Accounts.
13. Assignability
No right to receive payments hereunder shall be
transferable or assignable by a participant, except by will or by
the laws of descent and distribution.
14. Amendment
This Plan may at any time or from time to time be
amended, modified or terminated by the Board of Directors of the
<PAGE>
Company. No amendment, modification or termination shall
accelerate payment of amounts previously deferred, provide for
additional benefits, or, without the consent of a participant,
adversely affect such participant's accruals in his or her
Participant Account.
15. Governing Law
This Plan and any participant elections hereunder
shall be interpreted and enforced in accordance with the laws of
the State of New York.
16. Effective Date
The effective date of this restated Plan shall be
January 1, 1995.
IN WITNESS WHEREOF, the Company's Board of
Directors has caused its duly authorized member to execute this
Plan document on its behalf this 19th day of December, 1994.
FRONTIER CORPORATION
By: /s/ Josephine S. Trubek
--------------------------
Josephine S. Trubek
Corporate Secretary
<PAGE>
EXHIBIT 10-36
[12/05/94]
FRONTIER CORPORATION
DIRECTORS COMMON STOCK DEFERRED GROWTH PLAN
The Rochester Telephone Corporation Directors
Common Stock Deferred Growth Plan is hereby amended and renamed,
effective January 1, 1995, as the Frontier Corporation Directors
Common Stock Deferred Growth Plan (the "Plan") to reflect the
company's reorganization and the change in the parent company's
name to Frontier Corporation (the "Company") and to expand
eligibility to outside directors of the Company's subsidiaries as
follows:
1. Purposes
The purposes of the Plan are to assist directors of
the Company and its subsidiaries with their individual tax and
retirement income planning, to permit the Company and its
subsidiaries to remain competitive in attracting and retaining
their directors and to authorize deferred fees to be invested in
Company securities.
2. Plan Administrator
The Committee on Directors of the Company's Board of
Directors shall be the Plan's administrator (the "Administrator").
The Administrator shall have the authority to adopt rules and
regulations for carrying out the Plan and to interpret, construe and
implement the provisions of this Plan, including eligibility for
benefits.
3. Eligibility
Any director of the Company or of its subsidiaries
who is not an employee of the Company or of its subsidiaries may
elect to participate in this Plan.
4. Amount of Deferral
A participant may elect to defer receipt of all or a
specified portion of the fees otherwise payable to the participant
for serving on the Board of Directors or any committee thereof of
the Company or of any subsidiary of the Company or of any subsidiary
of the Company.
5. Time for Electing Deferral
Any election to defer directors fees must be made
prior to the beginning of the calendar year that such fees are to be
earned by the participant, provided that in the first year of
eligibility a deferral election for that year must be made within 30
days of commencing employment on the Board. An election to commence
a deferral may be made at any time in accordance with the procedures
set forth in section 6 and any election so made shall remain in
<PAGE>
effect until the participant elects in writing to change his or her
election for future fees, but any such change with respect to an
investment in Company securities will not be effective until six
months after so elected.
6. Manner of Electing Deferral
A participant shall elect a deferral by giving
written notice to the Administrator in a form substantially the same
as the Election Form attached hereto. The notice shall include (1)
the amount to be deferred; (2) the time as of which the deferral is
to commence; and (3) whether the deferred amounts plus the earnings
thereon will be paid within 30 days of termination from the Board or
30 days following the end of year in which termination occurs.
7. Participant Accounts
If a trust arrangement has been established, each
participant shall have an account (the "Participant Account") to
reflect his or her investment election as specified on the Election
Form. Amounts deferred into a Participant Account shall be invested
by the trustee in such securities of the Company as shall be
specified by the Administrator. The trustee shall purchase such
securities on the open market at their fair market value at the time
of purchase. Earnings paid on securities allocated to a Participant
Account shall be used to purchase additional securities of the
Company. Funds allocated to a Participant Account that cannot be
invested in Company securities may be invested in any fund or funds
designated by the Administrator.
If no trust arrangement has been established, all
deferrals will be credited with simple interest on any unpaid
account balance at the rate fixed from time to time for the payment
of funds deposited with the Company by the customers.
The value of each Participant Account shall be
adjusted no less frequently than annually to reflect deferrals into
the account, payments from the account as hereinafter provided,
earnings on investments and changes in the market value of
investments.
All amounts credited to Participant Accounts shall be
fully vested at all times. Except for the possible claims of the
general creditors of the Company or of its subsidiaries, they shall
not be subject to forfeiture on account of any action by a
participant or by the Company or its subsidiaries, including
termination of service on the Board.
8. Transfer of Participant Accounts
A Participant may transfer to this Plan a participant
account held under the Company's Plan for the Deferral of Directors
Fees. In the event of any such transfer, the amounts will be
invested in accordance with the terms of this Plan and shall be paid
out in the medium provided for payments from this Plan. The
Participant's deferral election under the Plan for the Deferral of
Directors Fees shall otherwise remain irrevocable and shall govern
the time and method of payment of the transferred amounts.
No amounts held in this Plan, including amounts
<PAGE>
transferred to it pursuant to the foregoing paragraph may be
transferred from this Plan to the Plan for the Deferral of Directors
Fees.
9. Payment of Deferred Amounts
No withdrawal may be made from a Participant Account
except as provided in this section 9. Payments from an Account
shall be made in a lump sum within 30 days following termination
from the Board or within 30 days following the close of the year in
which termination occurs in accordance with a participant's Election
Form.
Payments from a Participant Account that has been
invested in Company securities shall be made only in whole shares of
such securities with any fractional share made in cash. Each
participant or beneficiary shall execute any documents deemed
necessary by the Administrator to comply with any applicable
securities laws.
Notwithstanding the provisions of this Section 9 or a
participant's Election Form regarding the time for payment of
benefits, the Administrator may, in its sole discretion, accelerate
payments in the light of an unforeseeable emergency. For this
purpose, an unforeseeable emergency is an unanticipated emergency
that is caused by an event beyond the control of the participant and
that would result in severe financial hardship to the participant if
early withdrawal were not permitted. Any early withdrawal pursuant
to this Section 9 is limited to the amount needed to meet the
emergency.
10. Participant's Rights Unsecured
The maintenance of individual Participant Accounts is
for bookkeeping purposes only. The Company and its subsidiaries
may, but are not obligated to, acquire or set aside any particular
assets for the discharge of their obligations, nor is any
participant to have any property rights in any particular assets
held by the Company or by its subsidiaries, whether or not held for
the purpose of funding the obligations of the Company and its
subsidiaries under this Plan.
The right of any participant or his or her estate to
receive future payments under the provisions of this Plan shall be
an unsecured claim against the general assets of the Company and its
subsidiaries.
11. Change in Control
In the event of a Change in Control, as defined in
the trust agreement, amounts credited to Participant Accounts shall
be paid out in accordance with the terms of the trust agreement and
any participant elections. If no trust agreement is in effect,
change in control shall have the meaning given this term in the
Company's Supplemental Management Pension Plan and benefits shall be
paid in accordance with participant elections. Notwithstanding the
foregoing, shares of Company securities purchased with deferred fees
shall not be paid out until six months after the date of election
pursuant to which such purchase was made.
<PAGE>
12. Statement of Account
Statements will be sent to participants no less
frequently than annually as to the value of their Participant
Accounts.
13. Assignability
No right to receive payments hereunder shall be
transferable or assignable by a participant, except by will or by
the laws of descent and distribution.
14. Amendment
This Plan may at any time or from time to time be
amended, modified or terminated by the Board of Directors of the
Company. No amendment, modification or termination shall accelerate
payment of amounts previously deferred, provide for additional
benefits, or, without the consent of a participant, adversely affect
such participant's accruals in his or her Participant Account.
15. Governing Law
This Plan and any participant elections hereunder
shall be interpreted and enforced in accordance with the laws of the
State of New York.
16. Effective Date
The effective date of this restated Plan is January
1, 1995.
IN WITNESS WHEREOF, the Company's Board of Directors
has caused its duly authorized member to execute this Plan document
on its behalf this 19th day of December, 1994.
FRONTIER CORPORATION
By: /s/ Josephine S. Trubek
-------------------------
Josephine S. Trubek
Corporate Secretary
<PAGE>
EXHIBIT 11
FRONTIER CORPORATION
CONSOLIDATED COMPUTATION OF NET INCOME PER AVERAGE SHARE
OF COMMON STOCK ON A FULLY DILUTED BASIS
In thousands, except per share data
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income applicable to
common stock $101,551 $81,533 $68,243 $77,857 $50,743
Add: Interest on
convertible debentures 554 553 561 562 594
--------------------------------------------
$102,105 $82,086 $68,804 $78,419 $51,337
Less: Increase in
related federal income
taxes 194 194 191 191 202
--------------------------------------------
Adjusted income applicable
to common stock $101,911 $81,892 $68,613 $78,228 $51,135
============================================
Average common shares
outstanding (excluding
common stock equivalents) 72,252 67,410 66,638 64,206 59,348
Adjustments for:
Convertible debentures 502 502 528 530 676
Stock Options 68 60 --- --- ---
--------------------------------------------
Adjusted common shares
assuming conversion of
outstanding convertible
debentures and stock
options at the beginning
of each period. (1) 72,822 67,972 67,166 64,736 60,024
===========================================
Net income per average
share of common stock
on a fully diluted basis $ 1.40 $ 1.20 $ 1.02 $ 1.21 $ .85
</TABLE>
(1) As set forth in Notes 8 and 14 of the Notes to Consolidated
Financial Statements.
<PAGE>
EXHIBIT 13
<TABLE>
<CAPTION>
Financial Review
<S> <C>
Management's Discussion of Results of Operations
and Analysis of Financial Condition 18
Report of Independent Accountants 28
Report of Management 28
Report of Audit Committee Chair 28
Business Segment Information 29
Consolidated Statement of Income 30
Consolidated Balance Sheet 31
Consolidated Statement of Cash Flows 32
Consolidated Statement of Shareowners' Equity 33
Notes to Consolidated Financial Statements 34
Condensed Six-Year Financial Statements 47
Financial and Operating Statistics 48
</TABLE>
The Corporation's 1994 Annual Report on Form
10-K, as filed with the Securities and Exchange
Commission, including financial statements and
schedules, is available without charge. Please
address a written request to "Corporate Secretary,"
Frontier Corporation, Frontier Center, 180 South
Clinton Avenue, Rochester, New York 14646-0700.
________________________________________
Financial Review Frontier Corporation 17
<PAGE>
MANAGEMENT'S DISCUSSION OF RESULTS OF
OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION
________________________________________________________________________________
DESCRIPTION OF BUSINESS
Frontier Corporation (formerly Rochester Telephone Corporation) is a diversified
telecommunications company, serving more than 1.5 million customers in 32 states
throughout the United States. Frontier Corporation's principal lines of business
are reported in two segments: Telecommunication Services and Telephone
Operations. Telecommunication Services includes Frontier's long distance
operations, cellular and paging operations, and telecommunications equipment
sales. Telephone Operations is comprised of 36 local telephone companies
providing service to over 900,000 access lines in the Northeast, Midwest and
South.
________________________________________________________________________________
1994 OVERVIEW
Frontier Corporation (the Company) completed a landmark year in 1994, both
financially and organizationally. Revenues increased 8.7 percent to just under
$1 billion, and operating income surpassed $200 million for the first time in
the Company's history. Earnings per share increased 23.9 percent in 1994 to
$1.50 per share, before the impact of a change in accounting for certain
employee benefits. Significantly, late in 1994, the Company secured state
regulatory and shareowner approval of an unprecedented plan to open the
Rochester, New York local service market to competition in return for local
service "price cap" regulation in the Rochester market and approval for the
formation of a holding company. The new regulatory plan for Rochester, New York
removes the limit on earnings that was present under "rate of return" regulation
for the duration of the plan. Finally, in recognition of the changing nature and
expanding geographic presence of the Company, our shareowners approved changing
the name of our company to Frontier Corporation.
FINANCIAL HIGHLIGHTS
The Company continued its recent pattern of substantial growth, driven mainly by
its competitive long distance business which had revenues of $334 million in
1994, an increase of $71.5 million, or 27.2 percent, over 1993. Overall,
Frontier Corporation's revenue mix continues to shift away from dependence upon
regulated revenue sources and more toward non-regulated revenue streams, with
the Telecommunication Services segment accounting for 38 percent of total
revenue in 1994. This compares to 29 percent in 1992. As a result of the
diversification efforts of the Company over the past several years, the
Rochester, New York operating telephone company accounted for only 31 percent of
total revenues in 1994, down from 46 percent in 1990.
Operating income for 1994 was $223.3 million, which represents an increase of
14.5 percent over 1993. Consolidated net income reached an all time high in 1994
at a level of $102.7 million, a 24.2 percent increase over 1993. The percentage
growth in net income was significantly higher than the corresponding percentage
growth in operating income due to the combined impact of lower borrowing costs,
higher investment income and the sale of our only regional telephone company in
North Dakota, which resulted in an $11.3 million pre-tax gain. Including a one-
time charge relating to a change in the method of accounting for certain post-
employment benefits, earnings per share were $1.40 for the year. Excluding both
the one-time charge for the accounting change and the gain from the sale of the
telephone company in North Dakota, earnings per share were also $1.40, an
increase of 15.7 percent over 1993.
The number of common shares outstanding in 1994 was impacted by two events. In
February 1994, the Company sold 5.4 million shares of its common stock at $42
per share in a public offering. As part of the offering, 2.5 million new primary
shares were issued and sold directly by the Company and 2.9 million shares were
sold by C FON Corporation, a subsidiary of Sprint Corporation. In April 1994,
the Company implemented a 2-for-1 split of the Company's common stock, effected
in the form of a 100 percent stock dividend with no change in the $1.00 per
share par value. All historical share and per share data have been retro-
actively adjusted to reflect the split, unless specifically indicated otherwise.
CORPORATE NAME CHANGE AND RESTRUCTURING
In December 1994, upon receiving shareowner approval, the Company reorganized as
a holding company and changed its name from Rochester Telephone Corporation to
Frontier Corporation. The new name reflects not only the pioneering heritage of
our past but also our willingness to embrace the challenges of the future. The
name also symbolizes the change from a company focused primarily in Rochester,
New York to a company that is expanding geographically and currently operates in
32 states.
________________________________________
18 Financial Review Frontier Corporation
<PAGE>
Also in December 1994, shareowners approved an unprecedented and landmark
restructuring plan, referred to as the Open Market Plan Agreement, between the
Company, the staff of the New York State Public Service Commission (PSC), and
certain other interested parties. This seven year Agreement, with an effective
date of January 1, 1995, was approved by the PSC on October 13, 1994 and allowed
the Company to permanently reorganize into a holding company structure. The
restructuring into a holding company allows the Company to pursue acquisitions
and diversification initiatives without many of the financial and regulatory
constraints present under its prior corporate status. Under the Agreement, the
Rochester, New York local exchange market has been opened to competition. The
Rochester, New York operating company, which formerly was subject to rate of
return regulation, will operate under "price" regulation for the life of the
agreement. This removes the limit on the Rochester operating company's earnings
that was present under rate of return regulation.
Frontier Corporation (formerly Rochester Telephone Corporation) now owns
directly or indirectly all of the stock of:
. Rochester Telephone Corp., a new regulated telephone and network transport
company which holds virtually all of the local service assets used in
Rochester, New York market. Rochester Telephone offers retail local telephone
service and also markets wholesale network services and other services to
other retail providers of telecommunication services in the Rochester market,
. Frontier Communications of Rochester, Inc., a new retail provider of
telecommunication services to residential and business customers located in
the Rochester, New York market,
. Frontier Information Technologies Inc. (formerly Distributed Solutions, Inc.,
or DSI), an existing subsidiary of the Company, providing computer, billing
and other information processing services primarily to the Company's
affiliates,
. Frontier Communications International Inc. (formerly RCI Long Distance, Inc.),
an existing subsidiary of the Company providing long distance
telecommunication services to business and residential customers, and
. the Company's other existing subsidiaries, including our wireless operations
and 35 companies which provide local telephone service outside the Rochester,
New York market, as well as companies that provide telecommunication equipment
and services in the Rochester market and other markets.
Renamed as Frontier Corporation after shareowner approval on December 19,
1994, the Company is entitled to issue securities and effect acquisitions or
expand existing lines of business without obtaining the approval of the PSC,
subject only to the same exceptions as any other holding company operating in
New York State. As a result, the Company should be able to respond more quickly
to customer needs and new opportunities.
The establishment of Frontier Communications of Rochester, Inc. allows us to
provide integrated communications services to customers. Frontier Communications
of Rochester will buy network access from Rochester Telephone Corp. or other
carriers, and package these services with its own and others' product lines such
as long distance, wireless, data services and voice mail. Initially, Frontier
Communications of Rochester's customer base includes Centrex and digital private
line customers previously serviced by the former Rochester local operating
company. Beginning on January 1, 1995, Frontier Communications of Rochester and
other competitors were authorized to compete for local service customers from
Rochester Telephone Corp.'s current customer base. Frontier Communications of
Rochester intends to create value by becoming the single point of contact for
sales and service for its customers. Its competitive strength will be the
ability to create market-demanded packages of telecommunications products and
services, and to provide a single bill for all of these services. While its
services will initially be limited to customers in the Rochester, New York
market, Frontier Communications anticipates that it may offer its services
elsewhere.
CERTAIN CONSIDERATIONS RELATED TO THE OPEN MARKET PLAN
Management believes there are significant market and business opportunities
associated with the Company's Open Market Plan. However, there are also
uncertainties associated with the Plan and the corporate restructuring. In our
opinion, these are the most significant:
(a) Increased Competition in the Rochester, New York Market. The Open Market
Plan is expected to hasten local telephone competition in the Rochester, New
York market by providing for (1) the full interconnection of competing local
networks including reciprocal compensation for terminating traffic, (2) equal
access to network databases, (3) access to local telephone numbers and (4)
telephone number portability. Some competitors have already announced an
intention to provide basic local exchange services in the Rochester market. The
inherent risk associated with opening the Rochester market to competition is
that some customers will purchase services from competitors, which would reduce
the number of customers of the Company and potentially cause a decrease in the
Company's revenues and profitability. The Company believes, however, that usage
of its network following implementation of the Open Market Plan will increase,
and that new revenue will offset, to some extent, the loss of revenues from end-
user customers. Increased competition may also lead to additional price
_________________________________________
Financial Review Frontier Corporation 19
<PAGE>
decreases for services of the Company, adversely impacting the Company's
margins. However, price cap regulation will not require Rochester Telephone
Corp. to rebate any additional earnings achieved through operating efficiencies
that previously would have been shared with customers. Moreover, services in the
Rochester, New York market are already subject to competition. This trend will
probably continue with or without the Open Market Plan. The Open Market Plan
allows the Company to anticipate the erosion of its market share in local
exchange services on terms that the Company believes will be in the best
interests of its customers, employees and shareowners.
(b) Risk of Rate Stabilization Plan. The Rate Stabilization Plan incorporated in
the Open Market Plan Agreement provides for a total of $21 million in rate
reductions for Rochester Telephone Corp. over the life of the Agreement. During
this time, the rates charged by Rochester Telephone Corp. for basic residential
and business telephone service may not be increased for any reason. But, since
Rochester Telephone Corp. will operate under a price cap environment with no
rate of return regulation, the Company will be able to retain the full value of
any cost savings it introduces over the life of the plan. Even though the rates
provided in the Rate Stabilization Plan were designed to permit the Company to
recover its costs and to earn a reasonable rate of return, there is no assurance
that this will occur. The effect on the Company's results of operations cannot
be predicted because of uncertainty about Rochester Telephone Corp.'s network
usage and its costs.
(c) Restraints on the Company's Control of Rochester Telephone Corp. The Open
Market Plan Agreement limits the number of inside directors on the Board of
Directors of Rochester Telephone Corp. and the ways in which its officers and
senior management employees are compensated. The Open Market Plan also prohibits
payment of dividends by Rochester Telephone Corp. to Frontier Corporation if (i)
Rochester Telephone Corp.'s senior debt has been downgraded to "BBB" by Standard
& Poor's ("S&P"), or the equivalent rating by other rating agencies or is placed
on credit watch for such a downgrade, or (ii) a service quality penalty is
imposed under the Open Market Plan Agreement. Dividends paid to the parent,
Frontier Corporation, also are prohibited unless Rochester Telephone Corp.'s
directors certify that such dividends will neither impair Rochester Telephone
Corp.'s service quality nor its ability to finance its short and long term
capital needs on reasonable terms while maintaining an S&P debt rating target of
"A". Other financial covenants exist to ensure that Rochester Telephone Corp.
will have the financial strength to provide quality service. The Company
believes that these conditions will not affect the opportunities for either
Frontier Corporation or Rochester Telephone Corp.
(d) Holding Company Structure. The Company no longer directly owns any material
assets other than its interest in the capital stock of its subsidiaries. As
noted above, dividends from Rochester Telephone Corp. to Frontier Corporation
are subject to the financial covenants of the Open Market Plan.
(e) Potential Diversification Risk. The Company is now able to make acquisitions
and investments, enter into new lines of business and geographic areas, issue
equity securities and incur long-term indebtedness without PSC approval, subject
to certain exceptions. The Company may pursue opportunities with both greater
potential profits and greater business risk than it could pursue as a telephone
company subject to the authority of the PSC. There can be no assurance that any
expansion of the Company's business will be successful. However, it is the
current intention of the Company to engage only in telecommunications-related
businesses.
(f) Other Considerations. (i) Although the royalty order discussed below, under
Regulatory Matters, remains in litigation, the Open Market Plan Agreement
precludes the PSC from seeking royalties for the next seven years. After that,
subject to the outcome of the pending litigation, the PSC may be able to assert
its authority to do so. (ii) Because Rochester Telephone Corp. and Frontier
Communications of Rochester will, at least initially, be competing for the same
customers, there may be some duplication of sales and service expenses in the
consolidated company. Over time, this duplication is expected to reach minimal
levels.
INDUSTRY OUTLOOK AND STRATEGIES
As evidenced by the revolutionary change occurring in the Company's Rochester,
New York market, the Company believes competition will increasingly be
recognized and promoted in public policy, and that consumers will increasingly
have opportunities to make real choices for their telecommunications needs. We
believe that regulation has created artificial distinctions among local, long
distance, wireless and cable services, and that convergence among these industry
segments is unavoidable. We expect the overall marketplace to expand as
customers increasingly rely on communications products and services to improve
productivity and profitability in their businesses, as well as to add
convenience and time to their personal lives. Our objective is to serve our
customers as their single source for integrated telecommunications solutions.
Frontier Corporation's Vision is to become the premier company in the
telecommunications industry by providing products, services and applications
that delight our customers, by being a team of qualified employees committed and
accountable to this Vision, and by delivering exceptional returns to
shareowners. Our goal is to expand our role as a "value creator"--that is, to
enhance the benefits that all of our stakeholders obtain from their ongoing
relationships with us. We realize that changes in the industry are occurring
rapidly and
_________________________________________
20 Financial Review Frontier Corporation
<PAGE>
that this will continue for the foreseeable future. We believe that Frontier
Corporation's strong operating performance and our marketing and regulatory
initiatives have firmly positioned the Company as a leader in our industry.
One important challenge for the Company over the remainder of the decade is to
increase significantly the size of our business. We want to grow. Such growth
will give us the opportunity to provide more services to more customers, while
taking advantage of size and scale economies. In 1994, the Company served
customers in 32 states. In 1995, we expect to become a truly national company by
serving customers in virtually every state in the union. Since 1990, the
Company's revenue has grown on average by 13.2 percent per year. Frontier
Corporation will continue to focus on expanding its existing customer and
revenue base.
We are proactively seeking acquisition opportunities and strategic alliances
that can enhance our overall net-work and service offerings. Acquisitions are a
function of both price and opportunity. Frontier is interested in acquisition
opportunities that will significantly add to shareowner value. The areas that we
believe have the strongest growth potential are long distance and wireless
communications. We acknowledge the increasing importance of video technology and
video services in the marketplace and are evaluating opportunities to
participate more actively in the video arena in the future. We also maintain our
interest in additional local exchange properties, particularly where we believe
there are synergistic opportunities with our existing operations, or where the
opportunity exists to add new concentrations of customers who are candidates for
Frontier integrated services solutions. We have evaluated the potential benefits
of Personal Communication Services (PCS), a short-range wireless service similar
to cellular. We want to find value-conscious ways to use additional wireless
spectrum to serve customers. Our current focus is on growing the Company in the
continental U.S., but we are reviewing many international opportunities as well,
as we expect our long-term growth will move us beyond domestic boundaries.
Consistent with this growth strategy, the Company announced several
acquisitions during 1994. In October, we announced our intent to acquire
California-based WCT Communications, Inc., a long distance company which has
annualized revenues in excess of $100 million. And in November, the Company
announced an agreement to acquire American Sharecom, Inc., a long distance
company headquartered in Minneapolis, Minnesota with annual revenues totaling
approximately $125 million. The combination of WCT and American Sharecom with
Frontier Communications International will bring Frontier's annual long distance
revenues to over $550 million, establish our coast-to-coast network and make
Frontier the seventh largest long distance company in the country. In July, the
Company agreed to purchase the Minnesota Cellular Telephone Company, a non-
wireline cellular telephone service provider whose territory is located in an
area south of Minneapolis. All of these pending acquisitions are expected to be
completed in early 1995.
In June 1994, we finalized the formation of the Upstate Cellular Network
(UCN), a wireless joint venture with NYNEX Corporation that is managed by
Frontier. The formation of this joint venture allowed Frontier to significantly
expand its presence in the wireless sector. Through the Upstate Cellular Network
and our majority ownership interests in several Rural Service Areas (RSA) in
Alabama and New York, the Company now manages cellular properties which have a
total coverage that reaches 4.2 million people.
Our pending acquisitions will further accelerate the transformation of the
Company from one with a predominant base in local telephony to one that is more
heavily focused on the long distance segment and on achieving communication
services integration. In 1995, we expect that a significant majority of our
total revenues will come from sources that no longer fall under traditional rate
of return regulation.
_______________________________________________________________________________
RESULTS OF OPERATIONS
CONSOLIDATED
Consolidated revenues and sales were $985.5 million in 1994, a $79.0 million, or
8.7 percent, increase over 1993. This performance followed a 12.7 percent
increase in 1993 over 1992. The primary factor in these increases has been the
rapid growth in the Company's long distance business, which has been driven by
both increased market penetration and acquisitions. Consolidated costs and
expenses were $762.2 million, $711.5 million, and $628.9 million in 1994, 1993
and 1992, respectively, reflecting 7.1 percent and 13.1 percent increases in
1994 and 1993. The Company continued to focus its efforts on cost containment,
process redesign and operating synergies during 1994, as reflected in the
improvement in consolidated operating margins from 21.8 percent in 1992 to 21.9
percent in 1993 and to 22.7 percent in 1994, excluding the impact of a $3.3
million software write-off in 1993.
Several one-time events have occurred during the past three years that have
impacted the comparability of the Company's results from operations. These items
are summarized below.
1. ACQUISITIONS/DIVESTITURES
In July 1994, the Company and NYNEX Corporation combined certain cellular
interests and formed a 50/50 joint venture to operate a cellular network in
upstate New York. Financial results of the joint venture have been reported by
the Company on the equity method of accounting, reflecting Frontier's
proportionate share of the joint venture's earnings in the "Other income and
expense" section on the Consolidated Statement
________________________________________
Financial Review Frontier Corporation 21
<PAGE>
Financial Review Frontier Corporation 21
of Income. Previously, the revenues and expenses of the Company's wireless
operations in New York had been consolidated. (See Note 3 to the Consolidated
Financial Statements.)
In May 1994, we sold our only telephone operating company in North Dakota,
Minot Telephone, for cash. Minot served approximately 27,000 access lines. The
transaction resulted in a pre-tax gain of $11.3 million.
In December 1993, the Company increased its cellular ownership from 50.6
percent to 69.6 percent in the South Alabama cellular partnership. This
transaction gave the Company the right to manage the two cellular properties,
Alabama RSA #4 and #6, which serve a territory with a population of
approximately 252,000. As a result of this increased ownership, we began
reporting the South Alabama cellular interests on a consolidated basis of
accounting in 1994, whereas previously this partnership had been accounted for
on the equity method.
In September 1993, Frontier Communications of the Mid Atlantic, Inc. (formerly
Mid Atlantic Telecom, Inc.) was acquired using 143,587 shares of treasury stock
(before the 1994 stock split). In June 1993, we acquired Budget Call Long
Distance, Inc. for $7.5 million in cash. Both transactions were accounted for as
purchase acquisitions.
Also in September 1993, the Company sold its interest in the S&A Telephone
Company in Kansas (approximately 800 access lines) and its related minority
cellular interest. In addition, the Company sold a substantial portion of its
investment in a Canadian long distance company in November 1993. These sales
resulted in pre-tax gains totaling $4.4 million.
In April 1993, we acquired a 70 percent ownership interest in the Utica-Rome
Cellular Partnership by issuing 702,737 shares of the Company's common stock
(before the 1994 stock split). We recorded this transaction using the purchase
method of accounting.
In August 1992, we acquired Frontier Communications of Georgia (formerly
Statesboro Telephone Company), a company with more than 15,000 access lines. A
total of 1.5 million shares of common stock were issued in the transaction
(before the 1994 stock split), which was accounted for as a pooling of
interests.
2. ACCOUNTING FOR POSTEMPLOYMENT BENEFITS
The Company changed its method of accounting for certain employee benefits in
1994. This change was necessitated by the Financial Accounting Standards Board,
the authoritative body for accounting rules. This new rule, referred to as
Financial Accounting Standards Board Statement No. 112 (FAS 112), "Employers'
Accounting for Postemployment Benefits," addresses the manner in which companies
must record expenses for postemployment benefits, including payments for
disability, pre-pension leave (salary continuation) and severance pay. FAS 112
requires that projected future costs of providing postemployment benefits be
recognized as an expense as employees render service rather than when the
benefits are paid. This accounting change is very similar to the change made in
1993 for postretirement benefits, which was addressed by FAS 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions." Adoption of FAS 112
required the Company to calculate, and record in 1994, the cumulative effect of
the change in accounting methodology for all years prior to 1994. The cumulative
effect of the change in accounting methodology for FAS 112 amounted to an after-
tax charge of $7.2 million, net of taxes of $3.9 million. As required by the
pronouncement, the Company reported this one-time charge as a special line item
on the Consolidated Statement of Income in 1994. This accounting change does not
have a material impact on the Company's cash flows or its earnings from
continuing operations.
3. TAX RATE CHANGE
The 1993 income tax provision includes the retroactive impact of the federal
income tax rate increase from 34 percent to 35 percent. The overall impact of
the tax rate change was approximately $2 million and includes approximately
$400,000 attributable to years prior to 1993. (See Note 9 to the Consolidated
Financial Statements.)
4. SOFTWARE WRITE-OFF
In 1993, the Company recorded a $3.3 million pre-tax charge to write-off certain
deferred costs associated with a project to redesign customer account records,
order flow and customer billing systems. (See Note 5 to the Consolidated
Financial Statements.)
5. FIRST MORTGAGE BOND REFINANCING
In 1992, the Company recorded an extraordinary, after-tax charge of $1.1 million
relating to costs incurred for the early extinguishment of its Series H, 9 1/2%
first mortgage bonds. The bonds were retired using internally generated cash and
the private placement of $35 million of debt at a telephone subsidiary. (See
Note 5 to the Consolidated Financial Statements.)
________________________________________________________________________________
TELECOMMUNICATION SERVICES
The Telecommunication Services segment is comprised of the Company's long
distance business, wireless operations (where the Company has sufficient
ownership to report on a consolidated basis), and equipment sales. This segment
is the fastest growing part of the Company, as evidenced by its increasing
contribution to our overall financial results. In 1994, revenues from
Telecommunication Services comprised 38 percent of total revenue, up from 29
percent only two years ago. Similarly, operating income from this business
segment accounted for 18 percent of the Company's total, as compared with 13
percent in 1992.
_________________________________________
22 Financial Review Frontier Corporation
<PAGE>
Telecommunication Services revenues include long distance usage and fixed
monthly fee revenues, wireless access and usage charges, and sales of
telecommunication systems and services. Principal expenses associated with these
revenues consist of costs for leasing of transmission facilities and the payment
of local access charges for our long distance business, charges for
interconnection of cellular and paging operations with telephone companies,
costs of cellular telephones and paging units sold, cost of telecommunications
equipment sold, and labor.
Revenues and expenses derived from our majority-owned cellular operations are
reflected in the consolidated financial statements. Our minority interests,
including the 50/50 joint venture with NYNEX in upstate New York that was formed
in July 1994, are accounted for using the equity method. This method of
accounting results in the Company's proportionate share of earnings (losses)
being reflected in a single line item below operating income on the Company's
Consolidated Statement of Income, entitled "Equity earnings (loss) from
unconsolidated wireless interests." Prior to the formation of the wireless joint
venture with NYNEX in July 1994, the revenues and expenses of our wireless
operations in upstate New York had been consolidated. (See Note 3 to the
Consolidated Financial Statements for additional information concerning our
wireless operations.)
Telecommunication Services sales were $375.8 million in 1994, up $63.2
million, or 20.2 percent, over 1993. This compares to an increase of $75.8
million, or 32.0 percent, the previous year. This growth in both years was
driven by our long distance operation, Frontier Communications International,
(formerly RCI Long Distance). Revenues in our Network Systems and Services line
of business, which includes long distance, rose 24.2 percent in 1994 due to
sales of services to additional customers, greater usage, growth in consumer
services, price changes and the impact of the acquisitions of Budget Call Long
Distance in July 1993 and Frontier Communications of the Mid Atlantic, Inc.
(formerly Mid Atlantic Telecom, Inc.) in September 1993. Another factor for the
growth in the long distance operation is our Visions Long Distance subsidiary,
which resells services from Frontier Communications International to customers
of a number of our local telephone subsidiaries under the brand name used by the
local telephone company.
Revenues from our Wireless Communications line of business decreased $5.0
million, or 16.8 percent, in 1994 because of the change in the method of
accounting for the upstate New York cellular operation in July 1994. Through the
first six months of 1994, the period prior to the adoption of equity accounting
for the Upstate Cellular partnership, the Company's wireless revenues had
increased 68.5 percent to $20.9 million from $12.4 million in 1993. In 1993,
wireless revenues rose $8.5 million, or 40.1 percent, over 1992. Despite the
change in the manner of reporting wireless operations, we are very committed to
this business as indicated by the growth of our proportionate share of wireless
revenues for properties we manage, which rose 30.2 percent in 1994, reaching
$35.6 million. Although prices were relatively stable for cellular service in
1994, new customers generated a lower average volume of calls resulting in a 7.2
percent decrease in average revenue per customer. This is consistent with
industry trends. The 40.1 percent increase in Wireless Communications revenues
in 1993 over 1992 was a result of the combination of the acquisition of the
Utica-Rome partnership in April 1993, price increases and a growing customer
base.
Costs and expenses for Telecommunication Services in 1994 totaled $335.8
million, reflecting an increase of 19.1 percent over 1993. The increase for 1993
versus 1992 was 31.9 percent. The increases in both years are primarily due to
the increased volume of long distance traffic carried by the Company and the
associated costs to originate and terminate the traffic on local telephone
company facilities, in addition to the impact of acquisitions completed during
1993. Marketing and selling expenses have also risen in line with sales. As a
percentage of sales, long distance costs of access continue to decrease as we
improve the efficiency of our network and as the charges from local telephone
companies and other access providers continue to decline. The increase in 1994
expenses was partially offset by the change in the method of reporting cellular
results for the upstate New York joint venture.
Operating margins for Telecommunication Services improved to 10.6 percent in
1994, following a margin of 9.8 percent in both 1992 and 1993. The gain in 1994
results is driven by better long distance margins which rose to 10.4 percent in
1994. Wireless operating margins were adversely affected by the accounting
change for cellular properties in New York.
________________________________________________________________________________
TELEPHONE OPERATIONS
Telephone Operations produced the majority of the Company's overall revenues and
income in 1994. This segment, which is comprised of our local exchange telephone
companies, continues to be very important to the Company. In addition to
providing strong cash and overall financial returns, the local companies serve a
large customer base that represents service integration sales opportunities. For
several years the Company complemented the internal growth of telephone revenues
with acquisitions in order to diversify its regulatory risks and increase the
size of its customer base. The Company has further refined this strategy by
disposing of certain telephone operating subsidiaries that no longer fit the
Company's overall expansion plans. Both the sale of Minot Telephone in North
Dakota in May 1994 and the pending divestiture of Ontonagon
_________________________________________
Financial Review Frontier Corporation 23
<PAGE>
Telephone in Michigan are results of the limited opportunity to expand the
Company's presence in the respective geographic areas. The Company remains
committed to the local telephone business and will consider additional
acquisitions of local telephone properties if they are consistent with the
Company's overall growth strategy. In 1994, Telephone Operations generated 62
percent of total revenues and 82 percent of operating income for the total
company. Comparatively, in 1992, Telephone Operations generated 71 percent of
total revenues and 87 percent of operating income.
Revenues for this segment are derived from local telephone service and access
fees from long distance companies, directory advertising, billing services and
other services such as sales of telephone equipment and voice mail. As a result
of recent regulatory reforms, traditional rate of return regulation is no longer
applicable to much of our telephone revenues. Increasingly, a more flexible form
of regulation called price, or price cap, regulation is replacing rate of return
regulation, focusing on price levels as opposed to earnings levels. Telephone
Operations expenses are mainly related to the development and maintenance of the
local exchange networks. Additional expenses include the costs associated with
customer service and billing.
Telephone Operations revenues increased $15.8 million to $609.7 million in
1994, representing an increase of 2.7 percent over 1993. For 1993 versus 1992,
revenues increased 4.7 percent to $593.9 million. Revenue growth resulted from
increases in access lines, higher feature revenue, and rate increases at our
regional telephone companies, offset partially by the sale of Minot Telephone in
North Dakota which was completed in May 1994. Access line growth was 3.0 percent
in 1994 and 2.3 percent in 1993, after adjusting for acquisitions and
divestitures. The average revenue per employee for Telephone Operations in 1994
was $193,181, an increase of 12 percent over the prior year. Growth in toll
revenues, primarily in network access service which represents fees charged to
long distance companies for the use of our network, also contributed to the
segment's revenue increase. Minutes of use related to long distance traffic
increased 9.5 percent in 1994 and 7.7 percent in 1993. In general, prices being
charged to long distance companies for access service usage have declined
slightly over the past two years in order to address the need of our local
telephone operating companies to remain competitive in their respective markets.
We expect that this price decline will continue as competition increases.
Telephone Operations revenues were reduced by $8.2 million in 1994 when compared
with 1993 as a result of the divestitures made during the past two years.
During 1994 and 1993, we continued to gain increased market penetration of
enhanced services such as custom calling features and advanced number
identification products like Caller ID. Revenue growth was also positively
impacted in both years by rate increases at our regional telephone companies
(see Regulatory Proceedings caption). Regulatory revenue reductions at our
Rochester, New York operating company partially offset these increases.
Costs and expenses for Telephone Operations decreased .7 percent in 1994 and
increased 3.5 percent in 1993. The divestitures in 1993 and 1994 accounted for a
reduction in expenses of $5.9 million in 1994. After adjusting for the impacts
from divestitures and the $3.3 million software write-off in 1993, costs and
expenses were flat in 1994 after increasing 2.7 percent between 1993 and 1992.
In 1994, the Company continued to achieve benefits from redesigning work
processes and combining administrative operations throughout the Telephone
Operations segment. In addition, an early retirement program in March 1994 and
lower employee benefits costs helped to contain expenses. Aside from the one-
time software write-off, the primary reasons for expense increases in 1993 were
higher wages and benefits, increased severance and other expenses associated
with streamlining operations to arrive at a reduced cost structure, and an
increase in right-to-use fees associated with network software upgrades.
Operating margins for Telephone Operations were 30.1 percent in 1994, 28.2
percent in 1993 (after adjusting for the software write-off) and 26.8 percent in
1992. The composite depreciation rate for this segment was 6.4 percent in 1994,
compared with 6.2 percent in 1993 and 6.4 percent in 1992. Through its
interaction with regulatory authorities, the Company continues to pursue better
alignment of depreciation rates with the economic lives of depreciable property.
A common measure of the efficiency for telephone companies is the number of
employees per 10,000 access lines. We continue to make efficiency improvements
as evidenced by the decrease in this metric from 43 in 1992 and 38 in 1993, to
34 in 1994, near the best in our industry.
________________________________________________________________________________
OTHER INCOME STATEMENT ITEMS
INTEREST EXPENSE
Interest expense decreased 6.4 percent in 1994 and 7.0 percent in 1993 due to
lower levels of debt outstanding throughout the year. In February 1994, we
retired $9.4 million of debt at our regional telephone subsidiaries. In December
1994, as a part of our Open Market Plan implementation, we issued $120 million
of debt and repurchased $30 million of outstanding debentures. These December
transactions did not have a significant impact on 1994's interest expense.
During 1993, we recalled a total of $115.4 million of debt.
GAIN ON SALE OF ASSETS
The gain on sales of assets in 1994 amounted to $10.1 million, a $5.6 million
increase when compared to 1993. The 1994 amount resulted mainly from the sale
_________________________________________
24 Financial Review Frontier Corporation
<PAGE>
of our only telephone property in North Dakota in May 1994. In 1993, we
recognized gains on sales of our only telephone property in Kansas, S&A
Telephone Company, and a portion of our minority investment in a Canadian long
distance company.
EQUITY EARNINGS (lOSS) FROM UNCONSOLIDATED
WIRELESS INTERESTS
Equity earnings from the Company's interests in wireless partnerships in 1994
were $3.2 million, an increase of $1.9 million over 1993. This increase was the
result of the change in accounting related to the formation of our 50/50 joint
venture in July 1994 with NYNEX Corporation in order to operate a unified
cellular network in upstate New York. Financial results for the joint venture
have been reported on the equity method of accounting, reflecting our
proportionate share of the joint venture's earnings. Previously, the Company's
revenues and expenses associated with its Rochester and Utica-Rome cellular
partnerships in New York State had been fully consolidated.
OTHER INCOME (EXPENSE), NET
In 1994, other income (expense), on a net basis, improved $2.3 million, or 10.1
percent, over 1993. This improvement is primarily related to higher interest
income associated with increased cash balances, offset in part by higher
business development and strategic planning activities and costs, and
administrative expenses associated with the Company's restructuring.
In 1993, net other expenses were $22.5 million, an increase of $8.8 million
over 1992's net other expenses. This was due to administrative expenses
associated with the Company's reorganization petition with the New York State
Public Service Commission, debt refinancing expenses, and acquisition costs.
INCOME TAXES
The effective federal tax rate in 1994 was 34.4 percent, compared to 35.4
percent in 1993 and 34.2 percent in 1992. (See Note 9 to the Consolidated
Financial Statements.)
________________________________________________________________________________
FINANCIAL CONDITION
Management's overall objective is to maximize shareowner value. While increasing
net income is an important component of the process, management believes that
the primary source of value over the long term is cash generation over and above
investment requirements. Key management decisions are made based on the value
added to our shareowners' investment. Corporate performance, strategies, capital
projects and acquisitions are evaluated and measured using cash flow analysis
and investments are expected to provide a return that exceeds the risk-adjusted
cost of capital of the Company, or specific business unit, as appropriate.
There are a number of key financial metrics that can be used to monitor
management's performance. While several of these metrics provide information on
the Company's financial condition at a specific time, others, such as shareowner
return, are somewhat dependent on the overall financial markets and are often
more useful when viewed over an extended period of time.
<TABLE>
<CAPTION>
KEY FINANCIAL DATA
- ----------------------------------------------------------------------
($'s in millions, except per share data) 1994 1993 1992
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Total debt $ 583 $ 497 $ 591
Total capital $1,406 $1,172 $1,213
Debt ratio 41.5% 42.4% 48.8%
Operating margin 22.7% 21.5% 21.8%
Pre-tax interest coverage 4.7x 3.9x 3.2x
Capital expenditures $ 89 $ 106 $ 124
Dividends declared per share $ .815 $ .795 $ .775
Dividends paid per share $ .810 $ .790 $ .770
Dividend yield 3.9% 3.6% 4.4%
Dividend payout ratio 57.9% 65.3% 75.1%
Total shareowner return (2.8%) 31.1% 15.7%
Year-end stock price $21.13 $22.57 $17.82
- ----------------------------------------------------------------------
</TABLE>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows from operations amounted to $212.5 million in 1994, a decrease of
$16.2 million from 1993. In 1993, cash from operations was $228.6 million, an
increase of $12.4 million over 1992. In 1994, higher net income and depreciation
and amortization was offset in part by increased working capital requirements
for our rapidly growing businesses. Cash from operations was negatively impacted
by taxes associated with the gain on the sale of the Minot property in North
Dakota in May 1994. The cash proceeds from this sale appears in the "Cash Flows
from Investing Activities" section of the Consolidated Statement of Cash Flows.
In 1993, the increase was the result of increases in net income, depreciation
and amortization coupled with a small impact from an increase in accounts
payable caused by the timing of purchases associated with the Company's capital
expenditures from 1992.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used for investing activities decreased $58.6 million in 1994, from $109.1
million to $50.5 million. In 1993, cash used for investing activities decreased
$12.4 million versus 1992. Capital expenditures continue to be the single-
largest recurring use of the Company's funds. In 1994, capital spending, net of
salvage, amounted to $87.0 million, a decrease of $15.1 million from 1993. An
increase in the Company's liquid investments that have maturities of greater
than three months but less than one year also resulted in a use of funds in
1994. Offsetting these cash outflows in 1994 were the proceeds from the sale of
our telephone property in North Dakota. The decline in 1993's investing
activities was caused by lower capital spending offset in part by an increased
usage of cash related to acquisitions.
_________________________________________
Financial Review Frontier Corporation 25
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities amounted to an inflow of $123.9 million in
1994, compared with outflows of $157.6 million in 1993 and $70.0 million in
1992. The increase for 1994 resulted from $106 million in proceeds from the
Company's equity offering in February 1994 and the net increase of $90 million
of debt in December 1994 as a part of the Company's reorganization, offset in
part by the payment of dividends to shareowners and the retirement of certain
high cost debt earlier in the year. The decreases for 1993 and 1992 resulted
from the retirement of long-term debt and the payment of dividends.
LIQUIDITY AND CAPITAL RESOURCES
The Company must generate adequate amounts of cash to meet both short-term and
long-term needs. The Company's liquidity is a function of our capital spending
program, debt service requirements, internal generation of funds and access to
securities markets.
Management has emphasized the importance of cash throughout the organization
by providing training and establishing cash measures that are critical in the
determination of performance-based compensation. The Company closely monitors
the components of its working capital in order to maximize cash flows. However,
the timing of purchases for capital additions has a significant impact on the
balance of accounts payable until refinanced or liquidated using internally
generated funds.
During 1994, we entered the capital markets on several occasions to finance
the growth of our businesses (including acquisitions and new product
development), as well as to retire certain high cost debt. In February 1994, new
shares of common stock were issued that netted proceeds of $106 million. In
August 1994, $125 million in committed credit facilities were negotiated with
five commercial banks to provide the Company with sources of funds for the
backup of its short-term commercial paper program, as well as for general
corporate purposes. At year end, the Company had not borrowed against these
facilities. In December 1994, a $160 million revolving credit facility with
seven banks was established in order to provide debt for the Rochester, New York
operating company as required under the Open Market Plan Agreement with the New
York State Public Service Commission. At year end, $120 million was borrowed
under this facility. A portion of the proceeds were used to retire other more
costly long-term debt.
At a special shareowners' meeting in December 1994, shareowners approved an
increase in the number of authorized shares of common stock from 100 million
shares to 300 million shares. Additionally, shareowners gave their approval to
authorize 4 million shares of a new class of preferred stock which have been
designated as Class A Preferred Stock. The Company proposed these changes so as
to provide greater flexibility to raise capital and to structure acquisition
transactions.
At December 31, 1994, aggregate debt maturities amounted to $4.5 million for
1995, $4.7 million for 1996 and $4.5 million for 1997. During 1994 the Company
met individually with its debt rating agencies to review the Company's financial
performance. In May 1994, Duff and Phelps upgraded the Company's senior
unsecured bond rating from A-to A. In January 1995, Standard and Poor's upgraded
its rating on the Company's senior unsecured debt from A to A+, Moody's upgraded
from A3 to A2 and Fitch upgraded from A to A+.
The financing requirements associated with the Company's network modernization
programs have remained relatively stable. We have in place a switching network
that is essentially 100 percent digital, while a significant amount of fiber has
been installed throughout our telephone and long distance operating territories.
Total gross expenditures for property, plant and equipment in 1995 are
anticipated to be $125 million. The total capital program represents an increase
of $36 million over 1994. The increase is largely driven by capital requirements
associated with the growth of our long distance and wireless operations and the
integration of our pending long distance acquisitions.
As discussed previously, the Company had three acquisitions pending at the end
of 1994, each of which will play an important strategic role in the growth of
the Company. Approximately 9.6 million new shares of common stock will be used
for the acquisition of American Sharecom, Inc. (ASI) and the Minnesota Cellular
properties which are anticipated to close early in 1995. As a result of the
transaction with ASI, the two largest shareowners of ASI (Steven C. Simon,
president, and James J. Weinert, vice president) are projected to become the
largest individual shareowners of Frontier Corporation. Once the deal is
consummated, they will hold a combined 10.6 percent of the outstanding common
shares of the Company. For the pending acquisition of WCT Communications, Inc.
in California, we plan to expend approximately $79.8 million in cash. It is
expected that acquisitions will continue to be a significant factor in the
growth of the Company, as will building alliances through partnering or forming
joint ventures. Any investment opportunity will have the ultimate goal of
improving shareowner value.
In December 1994, the Board of Directors increased the quarterly dividend paid
on common stock to 20.75 cents per share, payable February 1, 1995, to
shareowners of record on January 13, 1995. This 2.5 percent increase raises the
annualized common stock dividend to $0.83 per share. This represents the 35th
consecutive annual increase in our dividend.
________________________________________________________________________________
REGULATORY MATTERS
OPEN MARKET PLAN
At its public meeting on October 13, 1994, the New York State Public Service
Commission (PSC) unanimously approved the Company's Open Market Plan and
Corporate Restructuring (Open Market Plan) and subsequently issued a written
Order in November 1994. As previously discussed in more detail in the
_________________________________________
26 Financial Review Frontier Corporation
<PAGE>
section entitled "Corporate Name Change and Restructuring," the Open Market Plan
was approved by shareowners in December 1994 and became effective on January 1,
1995.
During the seven year period of the Open Market Plan Agreement, rate
reductions of $21 million will be implemented for Rochester area consumers and
rates charged for basic residential and business telephone service may not be
increased. Although these rates have been designed to permit Rochester Telephone
Corp. to recover its costs and to earn a reasonable rate of return, there is no
assurance that this will actually happen. Also, under the Open Market Plan
Agreement, Rochester Telephone Corp. will no longer be subject to rate of return
regulation and thus the company is able to retain any expense savings or any
additional revenue from the sale of increased services or usage. In addition, a
total of $17 million will be credited to the depreciation reserve over the seven
year life of the plan.
Although Rochester Telephone Corp. is a wholly-owned subsidiary of Frontier
Corporation, Frontier's ability to control the management and operations of
Rochester Telephone Corp. are partially restricted by various provisions of the
Open Market Plan. The Plan contains certain financial covenants that are
intended to insure that Rochester Telephone Corp. will not lack the financial
strength to provide quality service, including covenants relating to dividends
that may be paid to the parent company and the level of debt that may be
maintained at the subsidiary company.
During its seven year duration, the Open Market Plan Agreement resolves
certain financial questions that are linked to the royalty proceeding, a
contested proceeding that has been in litigation for several years. In 1984, the
PSC initiated a proceeding to investigate whether or not the Company's
unregulated subsidiaries should pay a royalty to the Rochester, New York
operating company for alleged intangible benefits received from the use of the
Rochester Telephone name and reputation. The proceeding was reopened in 1990. In
July 1993, the PSC imposed a royalty in the amount of two percent of the total
capitalization of Frontier Corporation's unregulated operations. Based upon an
initial interpretation of the PSC's Order, the Company estimated that the effect
of the Order was in the range of $2 million per year. The Company vigorously
disagreed with the PSC's determination and is pursuing judicial review of the
PSC's Opinion and Order. The Appellate Division, on June 30, 1994, confirmed the
PSC's Order and the Company appealed to the New York State Court of Appeals. On
December 8, 1994, the Court of Appeals accepted the Company's appeal. The case
is now being briefed before the Court of Appeals.
The Open Market Plan temporarily resolves the royalty issue in that the PSC
has agreed that the royalty will not be imposed by the PSC against the Company
or Rochester Telephone during the seven year period of the Plan, subject to
limited exceptions. However, the PSC is not precluded from seeking any royalties
pursuant to the Royalty Order, on a prospective basis only, as it may be
modified as a result of judicial appeal, subsequent to the expiration of the
Open Market Plan. Under the Open Market Plan, the Company is permitted to
continue its litigation challenging the Royalty Order, and it intends to pursue
the case to conclusion.
INCENTIVE REGULATION
Prior to the Open Market Plan Agreement which became effective in January 1995,
an incentive regulation agreement had been in effect for the Rochester, New York
operating company. As part of that agreement, Rochester Telephone Corp. agreed
to share with ratepayers 50 percent of earnings above a threshold rate of
return. In addition, the company's revenue requirement was reduced by $5 million
in 1993 and $9.5 million in 1994. The 1993 sharing amount was refunded through
customer billing credits. The 1994 revenue requirement reduction, plus interest,
was credited to the company's depreciation reserve to alleviate a reserve
deficiency rather than refunding cash to ratepayers. There was no 1994 sharing
amount.
RATE AWARDS
In 1994, two of the Company's telephone subsidiaries completed rate increase
proceedings with state regulatory agencies that were initiated in 1993. In
February 1994, the Iowa State Utilities Board approved a $2.9 million annual
revenue increase for Frontier Communications of Iowa (formerly Vista Telephone
Company of Iowa), effective retroactively to November 1993. In April 1994,
Frontier Communications of Minnesota (formerly Vista Telephone Company of
Minnesota) was granted the authority by the Minnesota Public Service Commission
to increase annual revenues by $4.4 million. Frontier Communications of
Minnesota had previously increased rates temporarily in May 1993.
REGULATORY ACCOUNTING
As discussed in Note 1 of the Notes to the Consolidated Financial Statements,
the Company's regulated telephone operations comply with the provisions of
Financial Accounting Standards Board Statement No. 71 (FAS 71), "Accounting for
the Effects of Certain Types of Regulation." FAS 71 requires regulated entities
to apply special accounting treatment to certain revenues and expenses that are
recoverable through rates (prices) to be set by regulators in future periods.
The applicability of FAS 71 is appropriate only if the Company expects that
rates will be designed to recover costs from customers. The Company periodically
reviews the criteria that would result in the discontinuance of FAS 71,
including changes in the level of competition or a significant change in the
manner in which rates are set by regulators. At this time, the Company believes
that FAS 71 continues to be appropriate. However, if in the future it determines
that FAS 71 is no longer applicable, the resulting impact to the Company's
Statement of Income could be a material, extraordinary non-cash charge to
earnings.
__________________________________________
Financial Review Frontier Corporations 27
<PAGE>
________________________________________________________________________________
OTHER ITEMS
The information presented in this Management's Discussion of Results of
Operations and Analysis of Financial Condition should be read in conjunction
with the Company's financial statements and accompanying Notes for the three
years ended December 31, 1994.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners of
Frontier Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareowners' equity and cash flows present
fairly, in all material respects, the financial position of Frontier Corporation
(formerly Rochester Telephone Corporation) and its subsidiaries at December 31,
1994, 1993 and 1992, and the results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 12 to the financial statements, during the first quarter
of 1994 the Company adopted the provisions of Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits."
As discussed in Note 11 to the financial statements, during the first quarter
of 1993 the Company adopted the provisions of Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Post-retirement Benefits Other
than Pensions."
/s/ Price Waterhouse LLP
January 16, 1995
1900 Chase Square
Rochester, NY 14604
________________________________________________________________________________
REPORT OF MANAGEMENT
The integrity and objectivity of the financial information presented in this
Annual Report is the responsibility of the management of Frontier Corporation.
The financial statements report on management's accountability for corporate
operations and assets. To this end management maintains a highly developed
system of internal controls and procedures designed to provide reasonable
assurance that the Company's assets are protected and that all transactions are
accounted for in conformity with generally accepted accounting principles. The
system includes documented policies and guidelines, augmented by a comprehensive
program of internal and independent audits conducted to monitor overall accuracy
of financial information and compliance with established procedures.
Price Waterhouse LLP, an independent accounting firm, provides an objective
assessment of the degree to which management meets its responsibility for
financial reporting. They regularly evaluate the system of internal accounting
controls and perform such tests and other procedures they consider necessary to
express an opinion that the financial statements present fairly the financial
position of the Company.
/s/Louis L. Massaro
Louis L. Massaro
Corporate Vice President--Finance
_______________________________________________________________________________
REPORT OF AUDIT COMMITTEE CHAIR
The Audit Committee of the Board of Directors is comprised of three independent
directors who are not officers or employees of the corporation. The committee
oversees the Company's financial reporting process on behalf of the Board of
Directors. The Audit Committee recommends to the Board of Directors the
independent accountants for election by the shareowners. The committee also
meets regularly with management and the independent accountants and internal
auditors to review accounting, auditing, internal accounting controls, pending
litigation and financial reporting matters.
As a matter of policy, the internal auditors and independent accountants have
unrestricted access to the Audit Committee.
/s/Douglas H. McCorkindale
Douglas H. McCorkindale
Chair, Audit Committee
_________________________________________
28 Financial Review Frontier Corporation
<PAGE>
BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
In thousands of dollars Years ended December 31, 1994 1993 1992
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TELEPHONE OPERATIONS
REVENUES
Local service $ 240,687 $ 231,676 $ 214,181
Network access service 230,938 220,196 203,768
Long distance network service 25,619 26,978 29,210
Directory advertising, billing services, and other 118,221 120,459 123,112
Less: Uncollectibles 5,787 5,438 2,999
- -----------------------------------------------------------------------------------------------
TOTAL REVENUES $ 609,678 $ 593,871 $ 567,272
===============================================================================================
OPERATING INCOME $ 183,259 $ 164,271 $ 152,032
===============================================================================================
DEPRECIATION $ 101,897 $ 99,995 $ 100,692
===============================================================================================
CONSTRUCTION $ 60,711 $ 89,823 $ 114,930
===============================================================================================
IDENTIFIABLE ASSETS(1) $1,655,379 $1,398,019 $1,416,630
===============================================================================================
TELECOMMUNICATION SERVICES
SALES
Network Systems and Services:
Non-Affiliate $ 350,769 $ 282,747 $ 215,633
Affiliate 8,032 6,036 1,511
Wireless Communications 24,623 29,586 21,113
Eliminations (7,610) (5,790) (1,480)
- -----------------------------------------------------------------------------------------------
TOTAL SALES $ 375,814 $ 312,579 $ 236,777
===============================================================================================
OPERATING INCOME
Network Systems and Services $ 38,624 $ 27,344 $ 18,918
Wireless Communications 1,307 3,256 4,110
Eliminations 74 74 74
- -----------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME $ 40,005 $ 30,674 $ 23,102
===============================================================================================
DEPRECIATION $ 15,427 $ 14,816 $ 13,335
===============================================================================================
CONSTRUCTION $ 27,904 $ 15,677 $ 8,941
===============================================================================================
IDENTIFIABLE ASSETS(1) $ 310,760 $ 281,701 $ 191,989
===============================================================================================
</TABLE>
(1) Includes intercompany accounts that are eliminated in consolidation of
$205,188, $169,519, and $94,722 in 1994, 1993 and 1992, respectively.
See accompanying Notes to Consolidated Financial Statements.
_________________________________________
Financial Review Frontier Corporation 29
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
In thousands of dollars, except per share data Years ended December 31, 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES AND SALES
Telephone Operations $609,678 $593,871 $567,272
Telecommunication Services 375,814 312,579 236,777
- --------------------------------------------------------------------------------------------------------------------
Total Revenues and Sales 985,492 906,450 804,049
- --------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Operating expenses 579,326 525,488 448,422
Cost of goods sold 18,850 20,819 21,634
Depreciation 117,324 114,811 114,027
Taxes other than income taxes 46,728 47,087 44,832
Software write-off -- 3,300 --
- --------------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 762,228 711,505 628,915
- --------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 223,264 194,945 175,134
Interest expense 43,594 46,550 50,066
Other income and expense:
Allowance for funds used during construction 1,096 1,330 1,309
Gain on sale of assets 10,063 4,449
Equity earnings (loss) from unconsolidated wireless interests 3,185 1,296 (661)
Other income (expense), net (20,237) (22,518) (13,686)
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES, EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 173,777 132,952 112,030
Income taxes 63,843 50,232 41,527
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 109,934 82,720 70,503
Extraordinary item, net of income taxes -- -- (1,072)
Cumulative effect of change in accounting principle for
postemployment benefits (7,197) -- --
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED NET INCOME 102,737 82,720 69,431
Dividends on preferred stock 1,186 1,187 1,188
- --------------------------------------------------------------------------------------------------------------------
INCOME APPLICABLE TO COMMON STOCK $101,551 $ 81,533 $ 68,243
====================================================================================+===============================
EARNINGS PER COMMON SHARE
Primary:
Income before extraordinary item and cumulative effect
of change in accounting principle $ 1.50 $ 1.21 $ 1.04
Extraordinary item -- -- (.02)
Cumulative effect of change in accounting principle (.10) -- --
- --------------------------------------------------------------------------------------------------------------------
Earnings Per Common Share--Primary $ 1.40 $ 1.21 $ 1.02
====================================================================================+===============================
Fully Diluted:
Income before extraordinary item and cumulative effect
of change in accounting principle $ 1.50 $ 1.20 $ 1.04
Extraordinary item -- -- (.02)
Cumulative effect of change in accounting principle (.10) -- --
- --------------------------------------------------------------------------------------------------------------------
Earnings Per Common Share--Fully Diluted $ 1.40 $ 1.20 $ 1.02
====================================================================================+===============================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
_________________________________________
30 Financial Review Frontier Corporation
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
In thousands of dollars December 31, 1994 1993 1992
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 317,137 $ 31,284 $ 69,347
Short-term investments 9,047 349 634
Accounts receivable 168,542 157,320 133,973
Material and supplies 8,585 11,208 15,892
Prepayments and other 25,196 21,583 21,821
- --------------------------------------------------------------------------------------------
Total Current Assets 528,507 221,744 241,667
- --------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Telephone plant in service 1,554,856 1,561,032 1,577,985
Telephone plant under construction 36,130 33,048 36,619
- --------------------------------------------------------------------------------------------
1,590,986 1,594,080 1,614,604
Less-Accumulated depreciation 713,869 652,578 657,682
- --------------------------------------------------------------------------------------------
Net Telephone Plant 877,117 941,502 956,922
- --------------------------------------------------------------------------------------------
Telecommunications property 168,691 153,954 140,476
Less-Accumulated depreciation 75,944 68,265 57,723
- --------------------------------------------------------------------------------------------
Net Telecommunications Property 92,747 85,689 82,753
- --------------------------------------------------------------------------------------------
GOODWILL 139,572 166,283 135,964
- --------------------------------------------------------------------------------------------
DEFERRED AND OTHER ASSETS 123,008 94,983 96,591
- --------------------------------------------------------------------------------------------
TOTAL ASSETS $1,760,951 $1,510,201 $1,513,897
============================================================================================
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 142,968 $ 147,152 $ 125,518
Notes payable 106 303 6,194
Advance billings 12,719 12,572 12,546
Dividends payable 15,487 14,058 13,462
Long-term debt due within one year 4,525 3,962 59,495
Taxes accrued 13,495 14,729 11,480
Interest accrued 12,305 13,583 16,434
- --------------------------------------------------------------------------------------------
Total Current Liabilities 201,605 206,359 245,129
- --------------------------------------------------------------------------------------------
LONG-TERM DEBT 578,600 492,555 525,597
- --------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 111,369 116,967 118,876
- --------------------------------------------------------------------------------------------
DEFERRED EMPLOYEE BENEFITS OBLIGATION 46,001 16,121 --
- --------------------------------------------------------------------------------------------
MINORITY INTERESTS 252 3,100 2,701
- --------------------------------------------------------------------------------------------
SHAREOWNERS' EQUITY
Common stock 73,161 34,025 33,319
Capital in excess of par value 266,378 201,591 174,226
Retained earnings 460,808 418,889 391,256
- --------------------------------------------------------------------------------------------
800,347 654,505 598,801
Less-Treasury stock, at cost -- 2,191 --
- --------------------------------------------------------------------------------------------
Common Shareowners' Equity 800,347 652,314 598,801
Preferred stock 22,777 22,785 22,793
- --------------------------------------------------------------------------------------------
Total Shareowners' Equity 823,124 675,099 621,594
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $1,760,951 $1,510,201 $1,513,897
============================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
_________________________________________
Financial Review Frontier Corporation 31
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
In thousands of dollars Years ended December 31, 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $102,737 $ 82,720 $ 69,431
- ------------------------------------------------------------------------------------------------------------------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and amortization 136,460 132,723 121,554
Gain on sale of assets (10,063) (4,449) --
Equity (earnings) loss from unconsolidated wireless interests (3,185) (1,296) 661
Extraordinary item -- -- 1,564
Cumulative effect of change in accounting principle 11,072 -- --
Minority interests 511 399 183
Changes in operating assets and liabilities, exclusive
of impacts of purchase acquisitions:
(Increase) in accounts receivable (15,082) (12,644) (12,822)
Decrease in material and supplies 1,824 4,728 3,253
Decrease in prepayments and other current assets 343 229 786
(Increase) in deferred and other assets (14,967) (2,423) (360)
Increase in accounts payable 9,073 11,516 26,509
Increase in advance billings 188 26 72
Increase (decrease) in accrued interest and taxes (5,089) 1,498 (3,182)
Increase in deferred employee benefits obligation 6,958 14,302 --
Increase (decrease) in deferred income taxes (8,325) 1,308 8,545
- ------------------------------------------------------------------------------------------------------------------------
Total Adjustments 109,718 145,917 146,763
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 212,455 228,637 216,194
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (87,042) (102,156) (123,847)
(Increase) decrease in investment securities (11,386) 8,610 2,980
Investment in cellular (3,939) (4,342) (665)
Proceeds from asset sales 866 1,006 --
Investment in nonaffiliated entities (713) (1,161) --
Purchase of companies (4,355) (11,343) --
Proceeds from sale of company 55,689 -- --
Other investing activities 343 264 --
- --------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Investing Activities (50,537) (109,122) (121,532)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in notes payable (197) (5,806) 184
Proceeds from long-term debt 120,485 35,500 980
Repayments of long-term debt (43,071) (130,063) (19,585)
Dividends paid (59,388) (54,492) (51,582)
(Purchase) issuance of treasury stock 2,302 (2,744) --
Issuance of common stock 103,812 35 --
Redemptions of preferred stock (8) (8) (10)
- -------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 123,935 (157,578) (70,013)
- -------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 285,853 (38,063) 24,649
Cash and Cash Equivalents at Beginning of Year 31,284 69,347 44,698
- -------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $317,137 $ 31,284 $ 69,347
=========================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
_________________________________________
32 Financial Review Frontier Corporation
<PAGE>
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
In thousands of dollars, except share data 1994 1993 1992
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK
300,000,000 shares authorized, par value $1.00
Balance, January 1 (shares issued 1994--34,024,532;
1993--33,318,943; 1992--33,323,165) $ 34,025 $ 33,319 $ 33,323
Equity offering (1994--2,549,087) 2,549 -- --
Stock split (1994--36,573,619 shares) 36,574 -- --
Retirement of treasury stock (1992--63 shares) -- -- --
Other subsidiary acquisitions (1993--697,623 shares;
1992--4,850 shares) -- 698 (5)
Exercise of stock options (1994--13,595 shares;
1993--1,109 shares) 13 1 --
Conversion of:
4 3/4% Convertible debentures (1993--6,857 shares;
1992--691 shares) -- 7 1
- -----------------------------------------------------------------------------------------
Balance, December 31 (shares issued 1994--73,160,833;
1993--34,024,532; 1992--33,318,943) 73,161 34,025 33,319
- -----------------------------------------------------------------------------------------
CAPITAL IN EXCESS OF PAR VALUE
Balance, January 1 201,591 174,226 174,358
Equity offering 101,565 -- --
Stock split (36,574) -- --
Stock issuance expenses (545) -- --
Issuance/retirement of treasury stock 111 -- (2)
Other subsidiary acquisitions/divestitures -- 27,259 (137)
Exercise of stock options 230 34 --
Conversion of:
4 3/4% Convertible debentures -- 72 7
- -----------------------------------------------------------------------------------------
Balance, December 31 266,378 201,591 174,226
- -----------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, January 1 418,889 391,256 373,949
Net income 102,737 82,720 69,431
Dividends declared in cash:
Preferred stock at required annual rates (1,186) (1,187) (1,188)
Common stock (59,632) (53,900) (50,936)
- -----------------------------------------------------------------------------------------
Balance, December 31 460,808 418,889 391,256
- -----------------------------------------------------------------------------------------
LESS-TREASURY STOCK, AT COST
Balance, January 1 (1994--56,413; 1992--63) 2,191 -- 2
Common shares repurchased for acquisitions
(1993--304,720) -- 12,572 --
Retirement of treasury stock (1992--63) -- -- (2)
Common shares reissued for acquisitions/equity offering
(1994--56,413; 1993--248,307) (2,191) (10,381) --
- -----------------------------------------------------------------------------------------
Balance, December 31 (1993--56,413 shares) -- 2,191 --
- -----------------------------------------------------------------------------------------
COMMON SHAREOWNERS' EQUITY 800,347 652,314 598,801
- -----------------------------------------------------------------------------------------
PREFERRED STOCK
Balance, January 1 (shares outstanding 1994--227,848;
1993--227,928; 1992--228,025) 22,785 22,793 22,803
Redemptions (8) (8) (10)
- -----------------------------------------------------------------------------------------
Balance, December 31 (shares outstanding 1994--227,768;
1993--227,848; 1992--227,928) 22,777 22,785 22,793
- -----------------------------------------------------------------------------------------
Total Shareowners' Equity $823,124 $675,099 $621,594
=========================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
_________________________________________________
Financial Review Frontier Corporation 33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Frontier
Corporation, formerly Rochester Telephone Corporation, and its affiliates (the
Company). Intercompany transactions have been eliminated except for intercompany
profit on regulated Company purchases (affiliate sales) from Telecommunication
Services. In the opinion of management, prices charged by Telecommunication
Services are comparable to prices the regulated companies would be required to
pay other suppliers.
BASIS OF ACCOUNTING
The accounting policies of Frontier Corporation and its affiliates are in
conformity with generally accepted accounting principles. In accordance with the
provisions of Financial Accounting Standards Board Statement No. 71 (FAS 71),
"Accounting for the Effects of Certain Types of Regulation," the Company
conforms to the accounting principles as prescribed by federal and various state
regulatory bodies, where applicable. The provisions of FAS 71 require, among
other things, that regulated enterprises reflect rate actions of regulators in
their financial statements, when appropriate. These rate actions can provide
reasonable assurance of the existence of an asset, reduce or eliminate the value
of an asset, or impose a liability on a regulated enterprise.
MATERIAL AND SUPPLIES
Material and supplies are stated at the lower of cost or market, based on
weighted average unit cost. The caption "Cost of Goods Sold" relates to certain
sales of Telecommunication Services equipment which amounted to $28.0 million,
$29.5 million and $32.2 million in 1994, 1993, and 1992, respectively.
TELEPHONE PLANT
Additions to and replacements of telephone plant are capitalized at original
cost, including the costs for benefits and supervision applicable to
construction labor. The cost of depreciable property units retired, plus removal
costs, less salvage is charged to accumulated depreciation. Replacements,
renewals and betterments of units of property are capitalized. Replacement of
items not considered units of property and all repairs and maintenance are
charged to operating expense.
TELECOMMUNICATION PROPERTY
Property is recorded at cost. Improvements that significantly add to productive
capacity or extend useful life are capitalized, while maintenance and repairs
are expensed. Upon retirement or disposal of assets, the cost and related
accumulated depreciation are removed from the accounts and the gain or loss, if
any, is reflected in earnings for the period.
DEPRECIATION
Depreciation is computed on the straight-line method using estimated service
lives of the various classes of plant. The range of service lives for property,
plant and equipment is as follows:
<TABLE>
- ------------------------------------------------------
<S> <C>
Furniture and fixtures 12 to 20 years
Central office, switches and
network equipment 10 to 20 years
Local and toll service lines 27 to 35 years
Station equipment 10 to 21 years
Buildings and building improvements 5 to 35 years
- ------------------------------------------------------
</TABLE>
GOODWILL
The excess of the cost of companies purchased over the net assets acquired is
being amortized on a straight-line basis over 25 to 40 years. Accumulated
amortization is $20.1 million, $15.6 million and $10.4 million at the end of
1994, 1993, and 1992, respectively. Management continually reviews the
appropriateness of the carrying value of the excess acquisition cost of its
subsidiaries and the related amortization periods.
SERVICE PENSIONS AND BENEFITS
The Company has contributory and noncontributory plans providing for service
pensions and certain death benefits for substantially all employees. The plans
also provide disability pensions and sickness, accident and death benefits
(resulting from accidents occurring during employment) for all employees, which
are paid and charged to current operating expense. The Company's provisions for
service pensions and certain death benefits are remitted, at least annually, to
the trustees. In addition to providing pension benefits, the Company provides
health care, life insurance, and certain other retirement benefits for many of
its employees.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents are valued at their carrying amounts, which are
reasonable estimates of fair value. The fair value of long-term debt is
estimated using rates currently available to the Company for debt with similar
terms and maturities. The fair value of all other financial instruments
approximates cost as stated.
_________________________________________________
34 Financial Review Frontier Corporation
<PAGE>
FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return.
Tax deferrals resulting from the elimination of gross profit on intercompany
sales in the consolidated tax return are amortized to offset income taxes to be
paid over the cost recovery periods of telephone plant.
Deferred income taxes are provided by the unregulated operations on items
recognized for financial reporting purposes in different periods than are
recognized for income tax purposes. Deferred income taxes are recorded by
regulated operations in compliance with the normalization provisions of current
tax law and regulatory orders. The major temporary differences reflected in the
deferred tax liability are depreciation and investment tax credits. Excess
deferred taxes applicable to Telephone Operations are amortized in compliance
with the normalization provisions of current tax law and regulatory orders. This
amortization is normalized over the same time period as the related asset
generating the deferral.
Deferred income taxes have not been provided by Telephone Operations for the
flow-through of temporary differences where the regulatory agencies permit only
income taxes actually paid to be recognized. At December 31, 1994, the
cumulative balance of tax reductions not previously offset by provisions for
deferred federal income taxes amounted to $42 million. Similarly, the cumulative
balance of tax reductions not previously offset by provision for deferred state
income taxes amounted to $19 million at December 31, 1994. A deferred tax
liability and a long-term deferred asset have been recorded to reflect the
impact applicable to these cumulative reductions and the future revenue to be
recovered when these taxes become payable.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
The Company includes in its telephone plant accounts an imputed cost of debt and
equity funds used for the construction of telephone plant and credits such
amounts to other income. The rates used in determining the allowance for funds
used during construction are based on the assumption that construction funds are
provided from sources of capital in the same proportion as each telephone
company's capital structure.
The rates used to calculate the allowance for funds used during construction
for companies in Telephone Operations during 1994 ranged from 6 percent to 10.68
percent.
EARNINGS PER SHARE
Primary earnings applicable to each share of common stock and common stock
equivalent are based on the weighted average number of shares outstanding during
each year. The average number of common shares outstanding for each period was:
72,575,206 in 1994, 67,453,438 in 1993 and 66,637,904 in 1992.
Computations of earnings per share on a fully diluted basis are determined by
increasing the average outstanding common shares for contingent issuances that
would reduce earnings per share. In computing the per share effect of the
assumed conversions, convertible debenture interest (net of income taxes) has
been added to income applicable to common stock. The number of common shares
used to compute earnings per share on a fully diluted basis for each period was:
72,821,707 in 1994, 67,972,016 in 1993 and 67,165,512 in 1992.
CASH FLOWS
For purposes of the Statement of Cash Flows, the Company considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents.
Actual interest paid was $44.9 million in 1994, $49.4 million in 1993 and
$48.4 million in 1992. Actual income taxes paid were $76.0 million in 1994,
$46.6 million in 1993 and $37.2 million in 1992.
STOCK SPLIT
In November 1993, the Board of Directors approved a 2-for-1 split of the common
stock of the Company effected in the form of a 100 percent stock dividend with
no change in the $1.00 per share par value. The New York State Public Service
Commission (PSC) approved the stock split in March 1994 and distribution of
certificates began on April 29, 1994. Historical share and per share data have
been retroactively adjusted to reflect the split where appropriate.
________________________________________________________________________________
2. ACQUISITIONS
In April 1993, the Company acquired 70 percent ownership of the Utica-Rome
Cellular Partnership using 702,737 shares of original issue common stock (prior
to the April 1994 stock split). The transaction was accounted for as a purchase
acquisition. In addition, the Telecommunication Services group acquired Budget
Call Long Distance, Inc. in June 1993 for $7.5 million in cash and acquired
Frontier Communications of the Mid Atlantic, Inc. (formerly Mid Atlantic
Telecom, Inc.) in September 1993 using 143,587 shares of treasury stock (prior
to the April 1994 stock split). Both transactions were accounted for as purchase
acquisitions.
In 1992, the Company acquired Frontier Communications of Georgia (formerly
Statesboro Telephone Company) and accounted for the acquisition as a pooling of
interests. Revenues and net income for the period January 1, 1992 to the
acquisition date for Frontier Communications of Georgia were $6.1 million and
$1.2 million, respectively. A total of 1.5 million shares of common stock (prior
to the April 1994 stock split) were exchanged for all of the outstanding stock
of Frontier Communications of Georgia.
_________________________________________________
Financial Review Frontier Corporation 35
<PAGE>
_______________________________________________________________________________
3. UPSTATE CELLULAR NETWORK
In March 1993, the Company signed a definitive agreement with a subsidiary of
NYNEX Corporation to form a cellular supersystem joint venture in upstate and
western New York State to provide cellular telephone customers with expanded
geographic coverage. The supersystem includes the cellular markets in Buffalo,
Rochester, Syracuse, Utica-Rome and New York Rural Service Area #1, which
includes Jefferson, St. Lawrence, and Lewis counties. The structure of the
transaction is a 50/50 joint venture partnership, with Frontier as the managing
partner. The Upstate Cellular Network (UCN) joint venture began operating on
July 1, 1994.
In accordance with generally accepted accounting principles (GAAP), revenues,
expenses and operating income in the Consolidated Statement of Income and
Business Segment Information reflect results of wireless operations for only the
affiliates in which the Company has an ownership interest of greater than 50
percent. The formation of UCN in July 1994 caused the Company to adopt the
equity method of accounting for the financial results of the UCN cellular
interests, reflecting only its proportionate share of earnings in the other
income and expense section of the Consolidated Statement of Income.
Consequently, the Consolidated Statement of Income and Business Segment
Information, beginning with third quarter 1994 results, no longer reflect the
revenues, expenses and operating income of the Company's New York State wireless
properties.
In order to provide more complete information about the Company's involvement
in Wireless Communications, the following table sets forth unaudited, summarized
financial data for this business segment. This table reflects both a full 100
percent consolidation and a proportionate share consolidation of entities in
which the Company has a significant ownership interest or acts as managing
partner. The proportionate results presented reflect the Company's ownership
percentage of cellular interests consolidated for financial reporting purposes
and the Company's ownership percentage of its significant unconsolidated
cellular interests (which are accounted for on the equity method for financial
reporting purposes).
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Total Properties Managed Frontier
Assuming 100% Ownership Proportionate Share (a)
------------------------------------ -----------------------------------
Dollars in thousands (Unaudited) 1994 1993 1992 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues--Wireless $67,125 $36,900 $25,943 $35,602 $27,352 $19,767
- -----------------------------------------------------------------------------------------------------------
Operating Expenses 38,203 21,361 14,903 20,074 15,319 10,826
Cost of Goods Sold 9,787 6,590 4,205 5,582 5,078 3,231
Depreciation 6,688 3,648 2,620 3,276 2,165 1,654
Taxes Other Than Income Taxes 2,580 1,409 1,079 1,303 1,086 847
- -----------------------------------------------------------------------------------------------------------
Total Costs and Expenses 57,258 33,008 22,807 30,235 23,648 16,558
- -----------------------------------------------------------------------------------------------------------
Operating Income--Wireless $ 9,867 $ 3,892 $ 3,136 $ 5,367 $ 3,704 $ 3,209
===========================================================================================================
Number of Customers 146,614 58,097 37,616 60,357 44,869 30,397
Total POPs 4,198,000 2,081,705 1,733,968 1,710,625 1,328,980 1,088,885
===========================================================================================================
</TABLE>
(a) At December 31, 1994, the Company's proportionate ownership interests in the
various partnerships it manages were: 50% of UCN (which includes 100% of
Buffalo, 100% of Utica-Rome, 85% of Rochester, 55% of Syracuse, 40% of NY RSA
#1, and 100% of PageCo), 70% of Alabama RSA #4 and #6, and 22.5% of NY RSA #3.
At December 31, 1993, the Company's proportionate ownership interests were 85%
of Rochester, 70% of Utica-Rome, 100% of PageCo, 70% of Alabama RSA #4 and #6,
and 22.5% of NY RSA #3. At December 31, 1992, the Company's proportionate
ownership interests were 85% of Rochester, 50% of Alabama RSA #4 and #6, 100% of
PageCo and 20% of NY RSA #3.
_________________________________________________
36 Financial Review Frontier Corporation
<PAGE>
_______________________________________________________________________________
4. OTHER INCOME (EXPENSE), NET
The major components included in this caption are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Income (Expense)
1994 1993 1992
- -----------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 6,676 $ 1,659 $ 2,257
Joint venture income 749 727 1,682
Goodwill amortization (3,078) (3,928) (3,692)
Corporate expenses (20,066) (14,707) (10,267)
Miscellaneous income
(expense), net (4,518) (6,269) (3,666)
- -----------------------------------------------------------------
Total $(20,237) $(22,518) $(13,686)
=================================================================
</TABLE>
________________________________________________________________________________
5. EXTRAORDINARY AND UNUSUAL ITEMS
In May 1994, the Company completed the sale of Minot Telephone Company in Minot,
North Dakota to a subsidiary of the Souris River Telecommunications Cooperative.
Minot Telephone was the Company's only holding in North Dakota and the Company
had reassessed its prospects for expansion in North Dakota. The sale of Minot
Telephone Company resulted in a $7.1 million after-tax gain, or $.10 per share.
As part of the Rochester, New York operating company's Settlement Agreement
with the PSC finalized in the third quarter of 1993, the Company agreed to
write-off one-half of the costs ($3.3 million) previously deferred as part of a
project to redesign customer account records, order flow and customer billing
systems. The costs were incurred from January 1990 to December 1992 and the
project was abandoned after it was determined that the cost to complete it was
substantially greater than initially estimated. The remaining one-half of the
costs previously deferred are being amortized to expense and recovered in rates.
This charge is reflected on the Consolidated Statement of Income in the caption
"Software write-off."
In December 1992, the Executive Committee of the Board of Directors approved
the refinancing of the $40 million Series H, 9 1/2 percent first mortgage bonds.
The Company recorded a charge of $1.1 million (net of taxes of $.5 million) in
1992 relating to the write-off of the call premium, the remaining initial
discount and associated expenses of the transaction. The bonds were retired in
January 1993 using internally generated cash and the private placement of $35
million of debt at a telephone subsidiary.
________________________________________________________________________________
6. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant, and equipment are summarized below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
In thousands of dollars 1994 1993 1992
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land and Buildings $103,235 $ 107,165 $ 105,928
Local and Toll Service Lines 752,366 743,028 718,866
Central Office Equipment 584,434 583,928 572,507
Station Equipment 33,926 34,740 96,549
Switching and Network Facilities 119,598 106,701 92,080
Furniture, Office, Equipment, Vehicles, Tools, etc. 129,988 139,424 132,531
Plant Under Construction 36,130 33,048 36,619
Less: Accumulated Depreciation 789,813 720,843 715,405
- ---------------------------------------------------------------------------------------
$969,864 $1,027,191 $1,039,675
=======================================================================================
</TABLE>
________________________________________________________________________________
7. NOTES PAYABLE AND LINES OF CREDIT
At December 31, the Company had outstanding notes payable as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------
In thousands of dollars Amount Interest Rate
- -------------------------------------------------
<S> <C> <C>
1992 $6,194 4.00%--9.00%
1993 $ 303 6.00%--9.00%
1994 $ 106 9.00%
- -------------------------------------------------
</TABLE>
Also at December 31, 1994, the Company had $165 million of unused bank lines
of credit, which were available for general corporate purposes. Of the $165
million, $125 million is available to provide support for commercial paper
borrowings. No compensating balances are required and the commitment fees are
.05 percent of the unused portion of the $125 million facility.
_________________________________________________
Financial Review Frontier Corporation 37
<PAGE>
________________________________________________________________________________
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
In thousands of dollars At December 31, 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Mortgage Bonds
Series E, 4 3/4%, due September 1, 1993 -- -- $ 12,000/(a)/
Series F, 4 1/2%, due May 1, 1994 -- -- 18,000/(a)/
Series G, 7 5/8%, due March 1, 2001 -- -- 30,000/(a)/
Series H, 9 1/2%, due March 1, 2005 -- -- 40,000/(b)/
Frontier Communications of Minnesota, Inc.(formerly Vista
Telephone Company of Minnesota) Senior Notes, 7.61%,
due February 1, 2003 $ 35,000 $ 35,000 --
Rural Electrification Administration debt, 2%--9% due 1993 to 2026 77,045 80,667 85,048
Other debt issued by affiliates, 7.5%--12 3/4% -- -- 15,840
- -----------------------------------------------------------------------------------------------------------------------
112,045/(c)/ 115,667 200,888
- -----------------------------------------------------------------------------------------------------------------------
DEBENTURES
4 3/4% Convertible, due March 1, 1994 -- -- 137/(d)/
10.46% Convertible, due October 27, 2008 5,300/(e)/ 5,300 5,300
9%, due January 1, 2020 69,785/(f)/ 100,000 100,000
9%, due August 15, 2021 100,000 100,000 100,000
- -----------------------------------------------------------------------------------------------------------------------
175,085 205,300 205,437
- -----------------------------------------------------------------------------------------------------------------------
Medium-Term Notes, 8.77%--9.30%,
due 2000 to 2004 179,000 179,000 179,000
Revolving Credit and Term Loan Agreements 120,000/(g)/ -- 3,200
- -----------------------------------------------------------------------------------------------------------------------
Sub-total 586,130/(h)/ 499,967 588,525
Less-Discount on long-term debt, net of premium 3,005 3,450 3,433
Current portion of long-term debt 4,525 3,962 59,495
- -----------------------------------------------------------------------------------------------------------------------
Total Long-Term Debt $578,600 $492,555 $525,597
=======================================================================================================================
</TABLE>
/(a)/ In July 1993, the Company redeemed all of its Series E, F and G First
Mortgage Bonds.
/(b)/ In December 1992, the Company entered into an agreement to repurchase its
Series H $40 million, 9 1/2%, First Mortgage Bonds on January 15, 1993. The
bonds were originally due March 1, 2005. As such, these bonds were
reclassified from long-term to short-term at December 31, 1992. (See Note 5.)
/(c)/ Certain assets of Telephone Operations are pledged as security for
Mortgage Bonds, Rural Electrification Administration debt and other debt.
/(d)/ In December 1992, the Company called its 4 3/4% convertible debentures. As
such, they were reclassified from long-term to short-term debt at December 31,
1992. The redemption of these debentures occurred in January 1993. Prior to
redemption, the debentures were convertible at any time into common stock at
$5.75 per share subject to certain adjustments. During 1993, $79,000 face value
of the debentures were converted into 13,714 shares of common stock and in 1992,
$8,000 face value of the debentures were converted into 1,382 shares.
/(e)/ The debenture is convertible into common stock at any time after October
26, 1998 for $10.5375 per share. A total of 502,966 shares of common stock are
reserved for such conversion.
/(f)/ In December 1994, the Company redeemed $30.2 million of its 9% debentures
due January 1, 2020. This redemption was consummated through an open market
purchase at a price of 99 percent of face value.
/(g)/ On December 19, 1994, the Company entered into a Revolving Credit
Agreement with seven commercial banks as part of its implementation of the Open
Market Plan Agreement. The agreement established a $160 million secured line of
credit until December 18, 1999. The debt is secured by the assets owned as of
January 1, 1995 by Rochester Telephone Corp. Commitment fees during the
revolving loan period are .08 percent per year on the outstanding commitment.
Interest on amounts drawn down are based on either the prime rate, the London
Interbank Offered Rate (LIBOR) plus .17 percent, or a competitive bid rate. On
December 29, 1994, the Company drew down $120 million under this facility at
LIBOR plus .17 percent, which resets monthly over the five year period of the
loan.
/(h)/ In accordance with Financial Accounting Standards Board Statement No. 107
(FAS 107), "Disclosures about Fair Value of Financial Instruments," the Company
estimates that the fair value of the debt, based on rates currently available to
the Company for debt with similar terms and remaining maturities, is $597.3
million.
At December 31, 1994, aggregate debt maturities were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
In thousands of dollars 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4,525 $4,663 $4,511 $4,408 $124,500
- -------------------------------------------------------------------------
</TABLE>
_________________________________________________
38 Financial Review Frontier Corporation
<PAGE>
________________________________________________________________________________
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
In thousands of dollars 1994 1993 1992
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $65,978 $45,013 $28,394
Deferred (8,353) 391 8,253
- ----------------------------------------------------------------------------------
57,625 45,404 36,647
- ----------------------------------------------------------------------------------
State:
Current 6,190 3,911 4,663
Deferred 28 917 217
- ----------------------------------------------------------------------------------
6,218 4,828 4,880
- ----------------------------------------------------------------------------------
Total income taxes $63,843 $50,232 $41,527
==================================================================================
</TABLE>
The reconciliation of the federal statutory income tax rate with the effective
income tax rate reflected in the financial statements is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
In thousands of dollars 1994 1993 1992
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax expense at
statutory rate $58,645 35.0% $44,844 35.0% $36,431 34.0%
Accelerated depreciation 2,699 1.6 2,656 2.0 2,415 2.3
Investment tax credit (1,964) (1.2) (2,044) (1.6) (2,223) (2.1)
Miscellaneous (1,755) (1.0) (52) -- 24 --
- ----------------------------------------------------------------------------------
Total federal income tax $57,625 34.4% $45,404 35.4% $36,647 34.2%
==================================================================================
</TABLE>
As a result of the Revenue Reconciliation Act of 1993, the 1993 income tax
provision includes the impact of the federal tax rate increase from 34 percent
to 35 percent. The impact amounts to approximately $2 million, of which
approximately $400,000 is attributable to prior years.
Deferred tax liabilities (assets) are comprised of the following at December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
In thousands of dollars 1994 1993 1992
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Accelerated depreciation $150,069 $153,910 $152,230
Investment tax credit 5,354 6,828 8,047
Miscellaneous 7,386 8,734 10,137
- ---------------------------------------------------------------------------------
Gross deferred tax liabilities 162,809 169,472 170,414
- ---------------------------------------------------------------------------------
Basis adjustment--purchased telephone companies (31,851) (42,741) (45,368)
Employee Benefits Obligation (12,955) (5,415) --
Deferred compensation (1,664) (1,648) (1,081)
Other (4,970) (2,701) (5,089)
- ---------------------------------------------------------------------------------
Gross deferred tax assets (51,440) (52,505) (51,538)
- ---------------------------------------------------------------------------------
Total Deferred Income Taxes $111,369 $116,967 $118,876
=================================================================================
</TABLE>
Gross profit on affiliate sales to telephone companies is deferred by
Telecommunication Services and is amortized to offset income taxes to be paid
over the cost recovery periods of the telephone plant. The amortization of gross
profit deferred in prior years exceeded current year deferrals by $332,000 in
1994, $558,000 in 1993 and $927,000 in 1992 resulting in deferred tax reversals
of $116,000, $195,000 and $315,000, respectively.
_________________________________________________
Financial Review Frontier Corporation 39
<PAGE>
________________________________________________________________________________
10. Service Pensions and Benefits
The Company provides retirement benefits for substantially all employees through
various contributory and non-contributory defined benefit pension plans.
Benefits, in general, are based on years-of-service and average salary.
The majority of the Company's pension plans have plan assets that exceed
accumulated benefit obligations. There are certain plans, however, with
accumulated benefit obligations which exceed plan assets. The following tables
summarize the funded status of the Company's pension plans and the related
amounts that are recognized in the Consolidated Balance Sheet.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Plans for Plans for
which assets which
exceed accumulated
December 31, 1994 accumulated benefits
In thousand of dollars benefits exceed assets Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 294,140 $ 15,494 $ 309,634
Accumulated benefit obligation $ 308,432 $ 17,223 $ 325,655
============================================================================================================
Plan assets at fair value,
primarily fixed income
securities and common stock $ 373,446 $ 6,641 $ 380,087
Projected benefit obligation (326,858) (20,774) (347,632)
- ------------------------------------------------------------------------------------------------------------
Funded status 46,588 (14,133) 32,455
Unrecognized net (gain)/loss (23,244) 2,980 (20,264)
Unrecognized net transition asset (3,935) 18 (3,917)
Unrecognized prior service cost 6,563 5,240 11,803
Adjustment required to recognize minimum liability -- (4,728) (4,728)
- ------------------------------------------------------------------------------------------------------------
Pension asset (liability) reflected in Consolidated Balance Sheet $ 25,972 $(10,623) $ 15,349
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Plans for Plans for
which assets which
exceed accumulated
December 31, 1993 accumulated benefits
In thousand of dollars benefits exceed assets Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 280,941 $ 2,626 $ 283,567
Accumulated benefit obligation $ 304,359 $ 2,657 $ 307,016
============================================================================================================
Plan assets at fair value,
primarily fixed income
securities and common stock $ 395,698 $ 2,143 $ 397,841
Projected benefit obligation (350,946) (3,119) (354,065)
- ------------------------------------------------------------------------------------------------------------
Funded status 44,752 (976) 43,776
Unrecognized net (gain)/loss (29,311) 582 (28,729)
Unrecognized net transition asset (5,291) (151) (5,442)
Unrecognized prior service cost 9,018 209 9,227
- ------------------------------------------------------------------------------------------------------------
Pension asset (liability) reflected in Consolidated Balance Sheet $ 19,168 $ (336) $ 18,832
============================================================================================================
</TABLE>
_________________________________________________
40 Financial Review Frontier Corporation
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Plans for Plans for
which assets which
exceed accumulated
December 31, 1992 accumulated benefits
In thousand of dollars benefits exceed assets Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 240,147 $ 3,160 $ 243,307
Accumulated benefit obligation $ 254,592 $ 3,301 $ 257,893
===================================================================================================================
Plan assets at fair value,
primarily fixed income
securities and common stock $ 367,841 $ 2,870 $ 370,711
Projected benefit obligation (312,169) (4,166) (316,335)
- -------------------------------------------------------------------------------------------------------------------
Funded status 55,672 (1,296) 54,376
Unrecognized net (gain)/loss (42,977) 405 (42,572)
Unrecognized net transition asset (4,732) (209) (4,941)
Unrecognized prior service cost 6,058 1,013 7,071
- -------------------------------------------------------------------------------------------------------------------
Pension asset (liability) reflected in Consolidated Balance Sheet $ 14,021 $ (87) $ 13,934
===================================================================================================================
</TABLE>
The net periodic pension cost consists of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
In thousands of dollars Years Ended December 31, 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 7,934 $ 7,758 $ 7,033
Interest cost on projected benefit obligation 25,565 23,932 23,123
Actual return on plan assets 2,229 (40,484) (24,860)
Net amortization and deferral (37,863) 7,623 (9,033)
- -------------------------------------------------------------------------------------------------------------------
Net periodic pension cost determined under FAS 87 (2,135) (1,171) (3,737)
Amount expensed due to regulatory agency actions (1,743) (1,537) 6,787
- -------------------------------------------------------------------------------------------------------------------
Net periodic pension cost (benefit) recognized $ (3,878) $ (2,708) $ 3,050
===================================================================================================================
</TABLE>
The projected benefit obligation at December 31, 1994 was determined using an
assumed weighted average discount rate of 8.5 percent and an assumed weighted
average rate of increase in future compensation levels of 5.5 percent. The
weighted average expected long-term rate of return on plan assets was assumed to
be 9.0 percent. The unrecognized net transition asset as of January 1, 1987 is
being amortized over the estimated remaining service lives of employees, ranging
from 12 to 26 years.
The Company's funding policy is to make contributions for pension benefits
based on actuarial computations which reflect the long-term nature of the
pension plan. However, under Financial Accounting Standards Board Statement No.
87 (FAS 87), "Employers' Accounting for Pensions," the development of the
projected benefit obligation essentially is computed for financial reporting
purposes and may differ from the actuarial determination for funding due to
varying assumptions and methods of computation.
During 1994, 1993 and 1992, the Company funded $ 1.0 million, $.2 million and
$4.8 million, respectively, for employees' service pensions and certain death
benefits.
On November 30, 1992, a voluntary pension incentive plan was offered to the
Rochester, New York operating company's employees who were pension-eligible and
retired on or before December 31, 1992. A 7.5 percent additional pension benefit
will supplement the normal pension benefit for up to five years or until age 65,
whichever is earlier. Accordingly, pension costs for the fourth quarter of 1992
included a one-time charge of $.8 million. Payments will be made from pension
plan assets.
The Company has established a rabbi trust separate from the pension plan
assets to provide funding for the benefits payable under its Supplemental
Management Pension Plan ("SMPP"). The SMPP is a defined benefit plan under which
the Company will pay supplemental pension benefits to key executives in addition
to amounts received under the Company's retirement plan. The trust is
irrevocable and assets contributed to the trust can only be used to pay such
benefits with certain exceptions. The assets held in trust at December 31, 1994
amounted to $7.1 million consisting of primarily fixed income securities and
common stock.
The Company also sponsors a number of defined contribution plans. The most
significant plan covers substantially all non-union employees, who make contri-
butions through payroll deduction. The Company matches up to 75 percent of that
contribution up to 6 percent of gross compensation. The total cost recognized
for all defined contribution plans was $4.8 million for 1994 and $4.1 million
for 1993.
_________________________________________
Financial Review Frontier Corporation 41
<PAGE>
- --------------------------------------------------------------------------------
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health care, life insurance, and certain other retirement
benefits for substantially all employees. Effective January 1, 1993, the Company
adopted Financial Accounting Standards Board Statement No. 106 (FAS 106),
"Employers' Accounting for Postretirement Benefits Other Than Pensions." FAS 106
requires that employers reflect in current expenses an accrual for the cost of
providing postretirement benefits to current and future retirees. Prior to 1993,
the Company recognized these costs as they were paid. Plan assets consist
principally of life insurance policies and money market instruments.
In adopting FAS 106, the Company elected to defer the recognition of the
accrued obligation of $125 million over a period of twenty years. For 1993, the
adoption of this standard resulted in additional operating expenses in the
amount of $7.8 million, net of a deferred income tax benefit of $4.1 million.
However, a substantial portion of this increase was offset by a change in
accounting for pensions for rate making purposes at the Rochester, New York
operating company. The change requires that the company amortize, over a ten
year period, the cumulative amount of pension funding from January 1, 1987 over
the amount of pension expense which would have been recognized through December
31, 1992 under FAS 87, reducing pension expense throughout the amortization
period. The net impact of adopting FAS 106 and recording the accounting change
for FAS 87 actually resulted in $3.8 million of additional operating expenses,
net of the income tax benefit, in 1993.
The funded status of the plans is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
In thousands of dollars December 31, 1994 1993
- -------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit
obligation (APBO) attributable to:
Retirees $ 79,935 $ 63,749
Fully eligible plan participants 22,812 44,399
Other active plan participants 28,877 34,892
- -------------------------------------------------------------------------
Total APBO 131,624 143,040
Plan assets at fair value 5,545 3,944
- -------------------------------------------------------------------------
APBO in excess of plan assets 126,079 139,096
Unrecognized transition obligation (109,730) (117,706)
Unrecognized net prior service cost (6,003) (1,458)
Unrecognized net gain (loss) 15,502 (3,811)
- -------------------------------------------------------------------------
Accrued postretirement
benefit obligation $ 25,848 $ 16,121
=========================================================================
</TABLE>
The components of the estimated postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
In thousands of dollars December 31, 1994 1993
- -------------------------------------------------------------------------
<S> <C> <C>
Service cost $ 1,323 $ 2,746
Interest on accumulated post-
retirement benefit obligation 9,666 10,046
Amortization of transition
obligation 6,094 6,241
Return on plan assets (385) (290)
Amortization of prior service cost 383 --
Amortization of gains and losses (704) --
- -------------------------------------------------------------------------
Net postretirement benefit cost $16,377 $18,743
=========================================================================
</TABLE>
To estimate these costs, health care costs were assumed to increase 11.2
percent in 1995 with the rate of increase declining consistently to 5.75 percent
by 2006 and thereafter. The weighted discount rate and salary increase rate were
assumed to be 8.5 percent and 5.5 percent, respectively. The expected long-term
rate of return on plan assets was 9.0 percent. If the health care cost trend
rates were increased by one percentage point, the accumulated postretirement
benefit health care obligation as of December 31, 1994 would increase by $14.7
million while the sum of the service and interest cost components of the net
postretirement benefit health care cost for 1994 would increase by $1.3 million.
- --------------------------------------------------------------------------------
12. POSTEMPLOYMENT BENEFITS
In 1992 the Financial Accounting Standards Board released Statement No. 112 (FAS
112), "Employers' Accounting for Postemployment Benefits" which was required to
be implemented by January 1, 1994. FAS 112 requires that the projected future
costs of providing postemployment, but pre-retirement, benefits, such as
disability, pre-pension leave (salary continuation) and severance pay, be
recognized as an expense as employees render service rather than when the
benefits are paid.
The Company adopted the provisions of FAS 112 effective January 1, 1994. The
Company recognized the obligation for postemployment benefits through a
cumulative effect charge to net income of $7.2 million, net of taxes of $3.9
million. The adoption of FAS 112 is not expected to significantly impact future
operating expense or the Company's cash flow.
- --------------------------------------------------------------------------------
13. STOCK OFFERING
In February 1994, the Company sold 5.4 million shares of its common stock at $42
per share in a public offering. As part of the offering, 2.5 million new primary
shares were issued and sold directly by the Company and 2.9 million shares were
sold by C FON Corporation, a subsidiary of Sprint Corporation. All share and per
share data is prior to the 2-for-1 stock split in April 1994.
_________________________________________
42 Financial Review Frontier Corporation
<PAGE>
- --------------------------------------------------------------------------------
14. STOCK OPTION PLANS
In 1992, the Company implemented a Directors Stock Option Plan and an Executive
Stock Option Plan ("Plans"). Under the original Plans, which were approved by
shareowners in 1990, the Company was authorized to issue a maximum of 400,000
shares of common stock over a ten-year period.
At the April 1994 Annual Meeting, shareowners approved amendments to both
Plans which increased the total number of option shares to 1.5 million. The
amendments also provided for automatic increases in the number of shares that
may be issued as a result of a stock split. Consequently, since the stock was
split subsequent to the 1994 Annual Meeting, there is currently a maximum of 3
million option shares available for issuance.
Under both plans, the exercise price is the fair market value of the stock on
the date of the grant of the stock option. One third of the options become
exercisable on the first year anniversary of the grant date. Another third
become exercisable on the second year anniversary and the final third become
exercisable on the third year anniversary of the grant date. The options expire
ten years after the date of grant.
Information with respect to options under the above plans follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Option Price
Shares Per Share Aggregate
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at August 1, 1992 -- --
Granted in 1992 96,400 $15.75--$15.69 $ 1,515,925
- ---------------------------------------------------------------------------
Outstanding at December 31, 1992 96,400 1,515,925
Granted in 1993 258,038 $19.75--$18.44 4,935,175
Cancelled in 1993 (9,500) $19.06--$15.75 (176,125)
Exercised in 1993 (2,218) $15.75--$15.69 (34,892)
- ---------------------------------------------------------------------------
Outstanding at December 31, 1993 342,720 6,240,083
Granted in 1994 408,400 $22.69--$21.19 8,826,975
Cancelled in 1994 (36,820) $22.69--$15.75 (737,529)
Exercised in 1994 (13,595) $19.75--$15.69 (243,385)
- ---------------------------------------------------------------------------
Outstanding at December 31, 1994 700,705 $14,086,144
===========================================================================
</TABLE>
At December 31, 1994, 129,069 shares were exercisable and 2,283,482 shares
were available for future grant.
____________________________________________________
Financial Review Frontier Corporation 43
<PAGE>
________________________________________________________________________________
15. PREFERRED STOCK (CUMULATIVE)-PAR VALUE $100
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
In thousands of dollars, except share data 1994 1993 1992
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Frontier Corporation--850,000 shares authorized
5.00% Series-redeemable at $101 per share
Shares Outstanding 100,000 100,000 100,000
Amount Outstanding $ 10,000 $ 10,000 $ 10,000
5.65% Series-redeemable at $101 per share
Shares Outstanding 50,000 50,000 50,000
Amount Outstanding $ 5,000 $ 5,000 $ 5,000
4.60% Series-redeemable at $101 per share
Shares Outstanding 50,000 50,000 50,000
Amount Outstanding $ 5,000 $ 5,000 $ 5,000
Frontier Communications of New York, Inc.
(formerly Highland Telephone Company)
--40,000 shares authorized
5.875% Series A-redeemable at par
Shares Outstanding 18,694 18,694 18,694
Amount Outstanding $ 1,869 $ 1,869 $ 1,869
7.80% Series B-redeemable at $100.80--$105.00 per share
Shares Outstanding 6,320 6,400 6,480
Amount Outstanding $ 632 $ 640 $ 648
Frontier Communications of AuSable Valley, Inc.
(formerly AuSable Valley Telephone Company, Inc.)
--4,000 shares authorized
5.50% Series-redeemable at par
Shares Outstanding 2,754 2,754 2,754
Amount Outstanding $ 276 $ 276 $ 276
- ----------------------------------------------------------------------------------------
Total Shares Outstanding 227,768 227,848 227,928
========================================================================================
Total Amount Outstanding $ 22,777 $ 22,785 $ 22,793
========================================================================================
</TABLE>
At the special meeting in December 1994, Frontier Corporation shareowners
authorized 4 million shares of a new class of preferred stock, having a value of
$100.00 per share and designated as Class A Preferred Stock. This class of stock
will rank junior to the cumulative preferred stock as to dividends and
distributions, and upon the liquidation, dissolution or winding up of the
Company.
________________________________________________________________________________
16. LEASES AND LICENSE AGREEMENTS
The Company leases buildings, land, office space, fiber optic network, computer
hardware and other equipment, and has license agreements for rights-of-way for
the construction and operation of a fiber optic communications system. Total
rental expense amounted to $17.8 million in 1994, $15.5 million in 1993 and
$16.4 million in 1992.
Minimum annual rental commitments under non-cancellable operating leases and
license agreements in effect on December 31, 1994 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
In thousands of dollars Non-Cancellable Leases License
----------------------
Years Buildings Equipment Agreements
<S> <C> <C> <C>
1995 $ 6,189 $ 5,080 $ 8,625
1996 5,869 4,544 8,853
1997 5,901 1,786 9,097
1998 5,578 333 9,326
1999 5,248 1 9,557
2000 and thereafter 20,128 0 21,128
- -------------------------------------------------------------
Total $48,913 $11,744 $66,586
=============================================================
</TABLE>
________________________________________________________________________________
17. OPEN MARKET PLAN AND CORPORATE RESTRUCTURING
Effective December 19, 1994, upon receiving shareowner approval, the Company
changed its name from Rochester Telephone Corporation to Frontier Corporation.
The new name reflects not only the pioneering heritage of our past but our
willingness to embrace the challenges of the future. The name also symbolizes
the change from a company focused in Rochester, New York to a company that is
expanding geographically and currently has customers in 32 states.
At its public meeting in October 1994, the New York State Public Service
Commission (PSC) unanimously approved the Company's Open Market Plan and
Corporate Restructuring (Open Market Plan) and subsequently issued a written
order in November 1994. This landmark decision resulted in opening up the
Rochester, New York local exchange market to competition and simultaneously
allowed the Company to form a holding Company. The Open Market Plan was approved
by shareowners in December 1994 and became operational on January 1, 1995.
________________________________________________
44 Financial Review Frontier Corporation
<PAGE>
As a result of the Open Market Plan, two new companies have been formed from
the operating assets of the former Rochester operating telephone company. One
company (Frontier Communications of Rochester, Inc.) is a competitive
telecommunications company which will provide an array of services on a retail
basis in the Rochester marketplace. This company has the flexibility to price
and introduce services as necessary to compete. The second company (Rochester
Telephone Corp.) is a network company which is regulated and will provide
services to the new competitive subsidiary company and all other
telecommunications providers on an equal basis. The network company also will
continue to provide services to individual retail customers. This configuration
has been established to better meet the current and emerging competition in the
marketplace.
For the seven-year period of the Open Market Plan, Rochester Telephone Corp.
will no longer be subject to rate of return regulation. In its place, the
company will be subject to price regulation. The local market for telephone
service in Rochester will be opened to full competition. Over the course of the
next seven years, rate reductions of $21 million will be implemented for
Rochester area consumers. In addition, a total of $17 million will be credited
to the depreciation reserve.
The Open Market Plan temporarily resolves certain financial questions that are
linked to the royalty proceeding, a contested proceeding that has been in
litigation since 1984. In particular, the PSC has agreed that a royalty will not
be imposed by the PSC against the Company or Rochester Telephone Corp. during
the seven year period of the Plan, subject to limited exceptions. However, the
PSC is not precluded from seeking any royalties pursuant to the Royalty Order,
on a prospective basis only, as it may be modified as a result of judicial
appeal, subsequent to the expiration of the Open Market Plan. Under the Open
Market Plan, the Company is permitted to continue its litigation challenging the
Royalty Order, and the Company intends to pursue it to conclusion.
The Company has also reorganized into a holding company structure as allowed
under the Open Market Plan Agreement. This structure provides additional
financing flexibility to continue the acquisition and diversification efforts
necessary for the long-term growth of the business. (See "Management's
Discussion and Analysis of Results of Operations and Financial Condition" for
additional information regarding the Open Market Plan.)
________________________________________________________________________________
18. COMMITMENTS AND CONTINGENCIES
It is anticipated that the Company will expend $125.0 million for additions to
property, plant, and equipment during 1995. In connection with this construction
program, the Company has made certain commitments for the purchase of material
and equipment.
In July 1994, the Company signed a definitive agreement to purchase the
Minnesota Cellular Telephone Company (MSCTC) in a tax-deferred stock-for-stock
transaction. MSCTC is the non-wireline cellular provider of service in Minnesota
Rural Service Area #10. The transaction is expected to close in the first
quarter of 1995, subject to regulatory approvals, and will be accounted for as a
pooling of interests.
In September 1994, the Company announced its intent to sell Ontonagon County
Telephone Company and its subsidiary, Midway Telephone, to Mid-South
Telecommunications. The pending sale is the result of the Company's plans to
expand in areas other than Michigan's Upper Peninsula. The sale is expected to
be completed in the first half of 1995, pending regulatory approvals.
On November 8, 1994, the Company signed a definitive agreement to acquire WCT
Communications, Inc., an interexchange carrier based in Santa Barbara,
California that operates long distance and telemanagement businesses in
California and other western states. Under the definitive agreement, as amended,
each public WCT shareowner will receive $5.875 per share pursuant to a cash
merger, with the exception of Richard Frockt, WCT's chairman and 24 percent
shareholder, who will receive $3.75 per share. Mr. Frockt and Christopher
Edgecomb, WCT's Executive Vice President and 7 percent shareholder, have agreed
to vote their shares in favor of the merger. The total cash consideration to be
paid by Frontier Corporation for all the outstanding shares of WCT will be
approximately $79.8 million. When the transaction is consummated, WCT's
interexchange operations, which generated $102 million of revenues in its fiscal
year ended June 30, 1994, will be merged into Frontier Corporation's long
distance operation, Frontier Communications International. The transaction will
be accounted for as a purchase acquisition and is subject to necessary
regulatory approvals. The expected closing date for the acquisition is in 1995.
In November 1994, the Company announced an agreement to acquire all of the
outstanding shares of American Sharecom, Inc. (ASI), a long distance company
headquartered in Minneapolis, Minnesota. ASI is one of the largest privately
owned long distance companies in the country with annual revenues of
approximately $125 million. ASI's sales operations are concentrated in the
Midwest, Northwest and California. Under the agreement, the Company will acquire
all of the outstanding shares of ASI in exchange for 8.7 million shares (valued
at $184 million at December 31, 1994) of Frontier common stock. The transaction
will be accounted for as a pooling of interests, subject to regulatory approval
and the completion of appropriate due diligence. The transaction is expected to
close in the first quarter of 1995.
The following pro forma summary reflects the results of operations of the
Company for its pending acquisitions of WCT and ASI. The pro forma results of
_________________________________________________
Financial Review Frontier Corporation 45
<PAGE>
operations include WCT for 1994 only as this acquisition will be accounted for
using the purchase method of accounting. The pro forma results of operations
include ASI for 1994, 1993 and 1992 as this acquisition will be accounted for
using the pooling of interests method of accounting. These pro forma results
have been prepared for comparative purposes only and are not necessarily
indicative of results that would have been achieved had the transactions been
consummated at the beginning of 1994 or of results which may occur in the
future.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
In thousands of dollars, Pro Forma (Unaudited)
except per share data 1994 1993 1992
- ----------------------------------------------------------
<S> <C> <C> <C>
Total Revenues and Sales $1,224,304 $995,195 $866,287
Consolidated Net Income 107,740 87,992 73,303
Earnings Per Common
Share-Primary $ 1.31 $ 1.14 $ .96
- ----------------------------------------------------------
</TABLE>
During 1994, the Company provided interconnection and billing and collection
services to AT&T which accounted for greater than ten percent of consolidated
gross revenues. There were no other individual customers that accounted for
greater than ten percent of consolidated gross revenues.
________________________________________________________________________________
19. BUSINESS SEGMENT INFORMATION
Revenues and sales, operating income, depreciation, construction and
identifiable assets by business segment are set forth in the Business Segment
Information included on page 29 of this report.
________________________________________________________________________________
20. Interim Data (Unaudited)
Selected quarterly data follow:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Revenues and Sales Income Per Share
-------------------------- -------------------- -------------------------------------------
Earnings
Before
Extraor-
Tele- dinary
communi- Items and Market Price
(In thousands of dollars, cation Telephone Operating Net Cumulative -------------------
except per share data) Services Operations Total Income Income Effect Earnings High Low
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994 First Quarter $ 90,814 $150,999 $241,813 $ 52,063 $ 15,205/(1)/ $ .32 $ .22 $22.44 $20.25
Second Quarter 96,922 154,905 251,827 56,033 34,896 .47 .47 $25.25 $20.81
Third Quarter 92,957 150,149 243,106 54,914 26,200 .35 .35 $24.75 $21.63
Fourth Quarter 95,121 153,625 248,746 60,254 26,436 .36 .36 $24.63 $20.50
-----------------------------------------------------
Full Year $375,814 $609,678 $985,492 $223,264 $102,737 $1.50 $1.40
=====================================================
- --------------------------------------------------------------------------------------------------------------------------------
1993 First Quarter $ 66,395 $144,574 $210,969 $ 44,364 $ 18,018 $ .27 $ .27 $19.44 $17.32
Second Quarter 74,549 148,303 222,852 48,949 19,830 .29 .29 $21.75 $18.25
Third Quarter 82,743 147,763 230,506 48,373 19,237 .28 .28 $24.38 $20.50
Fourth Quarter 88,892 153,231 242,123 53,259 25,635 .37 .37 $25.13 $21.69
-----------------------------------------------------
Full Year $312,579 $593,871 $906,450 $194,945 $ 82,720 $1.21 $1.21
=====================================================
- --------------------------------------------------------------------------------------------------------------------------------
1992 First Quarter $ 55,802 $137,708 $193,510 $ 40,412 $ 15,291 $ .23 $ .23 $17.00 $15.07
Second Quarter 57,801 140,677 198,478 43,176 16,518 .24 .24 $16.88 $14.57
Third Quarter 59,478 142,116 201,594 46,118 18,448 .27 .27 $16.44 $15.13
Fourth Quarter 63,696 146,771 210,467 45,428 19,174/(2)/ .30 .28 $17.88 $15.32
-----------------------------------------------------
Full Year $236,777 $567,272 $804,049 $175,134 $ 69,431 $1.04 $1.02
=====================================================
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ Includes cumulative effect charge related to change in accounting
principle of $7.2 million (see Note 12).
/(2)/ Includes extraordinary loss on retirement of debt of $1.1 million (see
Note 5).
__________________________________________________
46 Financial Review Frontier Corporation
<PAGE>
CONDENSED SIX-YEAR FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
In thousands of dollars, except per share data
Years ended December 31, 1994 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF INCOME
Revenues and sales $ 985,492 $ 906,450 $ 804,049 $ 713,559 $ 612,994 $ 590,345
Costs and expenses 762,228 711,505 628,915 565,191 493,665 474,867
- --------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 223,264 194,945 175,134 148,368 119,329 115,478
Interest expense 43,594 46,550 50,066 44,604 33,426 27,510
Other income and expense (5,893) (15,443) (13,038) 18,595 (3,198) (2,755)
Income taxes 63,843 50,232 41,527 47,070 30,770 27,827
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEMS
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 109,934 82,720 70,503 75,289 51,935 57,386
Extraordinary items -- -- (1,072) 3,757 -- 26,558
Cumulative effect of change in
accounting principle for post-
employment benefits (7,197) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED NET INCOME 102,737 82,720 69,431 79,046 51,935 83,944
dividends on preferred stock 1,186 1,187 1,188 1,189 1,192 1,195
- --------------------------------------------------------------------------------------------------------------------
INCOME APPLICABLE TO COMMON STOCK $ 101,551 $ 81,533 $ 68,243 $ 77,857 $ 50,743 $ 82,749
====================================================================================================================
EARNINGS PER COMMON SHARE:
Primary $1.40 $1.21 $1.02 $1.21 $.86 $1.43
Fully Diluted $1.40 $1.20 $1.02 $1.21 $.85 $1.42
===================================================================================================================
CONSOLIDATED BALANCE SHEET
Current Assets $ 528,507 $ 221,744 $ 241,667 $ 210,956 $ 180,175 $ 220,089
Property, Plant and Equipment-net 969,864 1,027,191 1,039,675 1,031,086 868,288 795,940
Goodwill 139,572 166,283 135,964 145,360 58,933 19,521
Deferred and Other Assets 123,008 94,983 96,591 109,335 91,462 86,597
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,760,951 $1,510,201 $1,513,897 $1,496,737 $1,198,858 $1,122,147
====================================================================================================================
Current Liabilities $ 201,605 $ 206,359 $ 245,129 $ 184,583 $ 197,861 $ 161,572
Long-Term Debt 578,600 492,555 525,597 591,232 363,020 354,302
Deferred income taxes 111,369 116,967 118,876 113,973 148,491 150,879
Deferred Employee Benefits Obligation 46,001 16,121 -- -- -- --
Minority interests 252 3,100 2,701 2,518 1,995 3
Shareowners' equity 823,124 675,099 621,594 604,431 487,491 455,391
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY $1,760,951 $1,510,201 $1,513,897 $1,496,737 $1,198,858 $1,122,147
====================================================================================================================
CONSOLIDATED STATEMENT OF
CASH FLOWS
Cash flows from operating activities $ 212,455 $ 228,637 $ 216,194 $ 163,648 $ 121,518 $ 100,503
Cash flows from investing activities (50,537) (109,122) (121,532) (270,354) (129,924) (72,051)
Cash flows from financing activities 123,935 (157,578) (70,013) 128,756 (39,933) 21,008
- --------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ 285,853 $ (38,063) $ 24,649 $ 22,050 $ (48,339) $ 49,460
====================================================================================================================
</TABLE>
____________________________________________________
Financial Review Frontier Corporation 47
<PAGE>
FINANCIAL AND OPERATING STATISTICS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share data
Years ended December 31, 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current ratio 2.62 1.07 .99 1.13 .90 1.36
Pre-tax interest coverage 4.7x 3.9x 3.2x 3.9x 3.5x 5.6x
Total debt $583,231 $496,820 $591,286 $609,526 $430,016 $389,894
Debt ratio 41.5% 42.4% 48.8% 50.2% 46.9% 46.1%
Common shareowners equity $800,347 $652,314 $598,801 $581,628 $464,680 $432,571
Rate of return on average common equity 14.0% 13.0% 11.6% 14.9% 11.3% 20.3%
====================================================================================================================================
Construction $ 88,615 $105,500 $123,871 $110,889 $109,219 $111,998
Percent of funds generated internally 173% 164% 135% 109% 63% 90%
====================================================================================================================================
Common shares outstanding--end of year* 73,161 67,936 66,638 66,646 60,684 58,146
Average common shares outstanding* 72,575 67,454 66,638 64,206 59,348 57,932
Total number of common shareowners 22,674 20,759 20,131 18,900 17,164 15,910
Market price per common share:
High $ 25.25 $ 25.13 $ 17.88 $ 17.00 $ 20.75 $ 22.88
Low $ 20.25 $ 17.32 $ 14.57 $ 13.00 $ 12.32 $ 12.85
End of year $ 21.13 $ 22.57 $ 17.82 $ 16.07 $ 14.63 $ 20.25
====================================================================================================================================
Dividends declared per common share $ .815 $ .795 $ .775 $ .755 $ .735 $ .715
Dividends paid per common share $ .810 $ .790 $ .770 $ .750 $ .730 $ .710
Dividend yield--end of year 3.9% 3.6% 4.4% 4.8% 5.1% 3.6%
====================================================================================================================================
Percent to total Telephone Operations revenues:
Local service 40% 39% 38% 37% 37% 36%
Network access service 38% 37% 36% 34% 31% 28%
Long distance network service 4% 5% 5% 7% 9% 12%
Miscellaneous/uncollectibles 18% 19% 21% 22% 23% 24%
Percent to total Telecommunication Services sales:
Network Services and Systems 94% 91% 91% 92% 94% 94%
Wireless Communications 6% 9% 9% 8% 6% 6%
Operating margin--Telephone Operations 30.1% 27.7% 26.8% 26.5% 26.3% 27.0%
Operating margin--Telecommunication Services 10.6% 9.8% 9.8% 7.7% 4.9% 5.5%
Composite depreciation rate--Telephone Operations 6.4% 6.2% 6.4% 6.3% 6.3% 5.8%
Composite depreciation rate--Telecommunication Services 9.6% 10.1% 9.6% 9.2% 7.7% 8.7%
====================================================================================================================================
Access lines in service--business 254,845 248,128 238,643 226,668 181,877 167,584
Access lines in service--residence 663,293 669,512 657,758 641,236 506,812 477,411
- ------------------------------------------------------------------------------------------------------------------------------------
Total access lines in service 918,138 917,640 896,401 867,904 688,689 644,995
====================================================================================================================================
Telephone Operations employees 3,156 3,444 3,885 3,915 3,251 3,020
Telecommunication Services employees 1,084 932 816 747 750 914
- ------------------------------------------------------------------------------------------------------------------------------------
Total employees 4,240 4,376 4,701 4,662 4,001 3,934
====================================================================================================================================
Carrier access minutes--interstate* 2,079,328 2,015,602 1,912,531 1,569,309 1,233,045 1,140,081
Carrier access minutes--intrastate* 1,763,871 1,664,262 1,439,983 1,173,685 901,376 783,151
- ------------------------------------------------------------------------------------------------------------------------------------
Total carrier access minutes* 3,843,199 3,679,864 3,352,514 2,742,994 2,134,421 1,923,232
====================================================================================================================================
</TABLE>
*In thousands
__________________________________________
48 Financial Review Fronntier Corporation
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF ROCHESTER TELEPHONE CORPORATION
AS OF March 15, 1995
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
- ------------------ ------------- -------------------
<S> <C> <C>
Frontier Communications of AL Monroeville Telephone
Alabama, Inc. Company, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of AL Lamar County Telephone
Lamar County, Inc. Company, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of AL Southland Telephone
the South, Inc. Company; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Montel Communications, Inc. AL Montel Communications,
(A subsidiary of Frontier Inc.
Communications of Alabama, Inc.)
Southland Rural Cellular AL Southland Rural
Company, Inc. Cellular Company, Inc.
(A subsidiary of Frontier
Communications of the South, Inc.)
RCI Long Distance Canada Ltd. Ontario, RCI Long Distance
(A subsidiary of Canada Canada Ltd.
Frontier Telecommunications Inc.)
Binghamton MSA Corp. DE Binghamton MSA Corp.
(A subsidiary of
Frontier Cellular Holding Inc.)
Budget Call Long Distance, DE Budget Call Long
Inc. Distance, Inc.
(A subsidiary of Frontier
Communications International Inc.)
Frontier Cellular DE Rochester Tel Cellular
Holding Inc. Holding Corporation;
(A subsidiary of Frontier RTCHC; FCHI
Telecommunications Holding Inc.
Frontier Communications DE RCI Long Distance,
International Inc. Inc.; Budget Call;
(A subsidiary of Mid Atlantic
Frontier Telecommunications Inc.) Telecom; Frontier
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Frontier Communications of DE RCI Long Distance New
New England, Inc. England, Inc.; Long
(A subsidiary of Distance North; LDN;
Frontier Telecommunications Inc.) Mid Atlantic Telecom;
Frontier
Frontier Communications of DE Frontier Communications
Rochester, Inc. F-Com
(A subsidiary of Frontier
Corporation)
Frontier Information DE Distributed Solutions;
Technologies, Inc. DSI; FIT
(A subsidiary of Frontier
Corporation)
Frontier InfoServices Inc. DE Visions Publishing
(A subsidiary of Inc.; Visions Inc.;
Frontier Subsidiary Telco Inc.) Frontier InfoServices
Frontier Long Distance of DE Visions Long Distance
America, Inc. America Inc; Breezewood
(A subsidiary of Tel Long Distance;
Frontier Subsidiary Telco Inc.) Canton Tel Long
Distance; Vista Tel
Long Distance; C,C&S
Tel Long Distance;
St. Croix Tel Long
Distance; Frontier
Frontier Network Systems Inc. DE Rotelcom Inc.; Anixter-
(A subsidiary of Rotelcom; Rotelcom
Frontier Telecommunications Inc.) Network Systems; SGT
Business Systems;
Frontier
Frontier Subsidiary DE Rochester Tel
Telco Inc. Subsidiary Telco, Inc.;
(A subsidiary of RTSTI; FSTI
Frontier Corporation)
Frontier Telecommunications DE Rochester Tel
Inc. Telecommunications
(A subsidiary of Frontier Corporation; RTTC; FTI
Telecommunications Holding Inc.)
Frontier Telecommunications DE Rochester Tel
Holding Inc. Telecommunications
(A subsidiary of Frontier Holding Corporation;
Corporation) RTTHC; FTHI
NY RSA 4 Inc. DE NY RSA 4 Inc.
(A subsidiary of
Frontier Cellular Holding Inc.)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
PAGECO, Inc. DE PAGECO, Inc.
(A subsidiary of
Frontier Cellular Holding Inc.)
Rochester Subsidiary DE Rochester Subsidiary
Twenty-Eight, Inc. Twenty-Eight, Inc.
(A subsidiary of Frontier
Telecommunications Inc.)
RTC Main Street, Inc. DE RTC Main Street, Inc.
(A subsidiary of
Frontier Corporation)
RTMC Holding, Inc. DE RTMC Holding, Inc.
(A subsidiary of
Frontier Cellular Holding Inc.)
Rochester Holding Corporation DE Rochester Holding
(A subsidiary of Corporation
Frontier Corporation)
Rochester Tel Mobile RSA 2, DE Rochester Tel Mobile
Inc. RSA 2, Inc.
(A subsidiary of
Frontier Cellular Holding Inc.)
Rochester Telephone DE RTMC, Inc.
Mobile Communications, Inc.
(A subsidiary of
Frontier Cellular Holding Inc.)
Rochester Tel Subsidiary DE Rochester Tel
Capital Services Inc. Subsidiary Capital
(A subsidiary of Services Inc.
Frontier Corporation)
Rochester Tel Subsidiary FL Rochester Tel
Twenty-Six, Inc. Subsidiary Twenty-Six,
(A subsidiary of Frontier Inc.
Telecommunications Holding Inc.)
Rochester Tel Subsidiary FL Rochester Tel
Twenty-Seven, Inc. Subsidiary Twenty-
(A subsidiary of Frontier Seven, Inc.
Telecommunications Holding Inc.)
Fairmount Cellular Inc. GA Fairmount Cellular Inc.
(A subsidiary of Frontier
Communications of Fairmount,Inc.)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Frontier Communications of GA Fairmount Telephone
Fairmount, Inc. Company, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of GA Statesboro Telephone
Georgia, Inc. Company; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Telecommunications IA Vista Telephone
of Iowa, Inc. Company of Iowa;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
DePue Communications, Inc. IL DePue Communications,
(A subsidiary of Frontier Inc.
Communications of DePue, Inc.)
Frontier Communications-Midland, IL Midland Telephone Midland,
Inc. Company; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications-Prairie, IL Prairie Telephone
Inc. Company; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications-Schuyler, IL Schuyler Telephone
Inc. Company; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of IL DePue Telephone Company
DePue, Inc. Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of IL Inland Telephone
Illinois, Inc. Company; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of IL Lakeside Telephone
Lakeside, Inc. Company; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of IL Mt. Pulaski Telephone
Mt. Pulaski, Inc. and Electric Company;
(A subsidiary of Mt. Pulaski Telephone
Frontier Subsidiary Telco Inc.) Company; Frontier
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Frontier Communications of IL Orion Telephone
Orion, Inc. Exchange Association;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
O. T. Cellular Telephone IL O. T. Cellular
Company Telephone Company
(A subsidiary of
Frontier Communications of
Orion, Inc.)
Schuyler Cellular, Inc. IL Schuyler Cellular, Inc.
(A subsidiary of Frontier
Communications - Schuyler, Inc.)
Frontier Communications of IN Citizens Telephone
Indiana, Inc. Company; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of IN Thorntown Telephone
Thorntown, Inc. Company; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
TDCI, Ltd. IN Thorntown Development
(A subsidiary of Company, Inc.; TDCI,
Frontier Communications of Ltd.
Thorntown, Inc.)
C, C & S Service Corp. MI C, C & S Service Corp.
(A subsidiary of
C, C & S Systems, Inc.)
C, C & S Systems, Inc. MI C, C & S Systems, Inc.
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of MI C, C & S Telco, Inc.;
Michigan, Inc. Frontier
(A subsidiary of
C, C, & S Systems, Inc.)
Frontier Communications MN Vista Telephone Company
of Minnesota, Inc. of Minnesota; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Telemanagement Inc. MN Visions Telemanagement
(A subsidiary of Services, Inc.;
Frontier Subsidiary Telco Inc.) Frontier Telemanagement
Frontier Communications of MS Mid-South Telephone
Mississippi, Inc. Company, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Mid-South Cablevision MS Mid-South Cablevision
Company, Inc. Company, Inc.
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of NY AuSable Valley
AuSable Valley, Inc. Telephone Company;
(A subsidiary of Frontier
Frontier Corporation)
Frontier Communications of NY Highland Telephone
New York, Inc. Company; Frontier
(A subsidiary of
Frontier Corporation)
Frontier Communications of NY Seneca-Gorham Telephone
Seneca-Gorham, Inc. Corporation; Frontier
(A subsidiary of
Frontier Corporation)
Frontier Communications of NY Sylvan Lake Telephone
Sylvan Lake, Inc. Company, Inc.; Frontier
(A subsidiary of
Frontier Corporation)
Frontier Long Distance of NY Visions Long Distance
New York, Inc. New York Inc.;
(A subsidiary of Highland Tel Long
Frontier Subsidiary Telco Inc.) Distance; Sylvan Lake
Tel Long Distance;
AuSable Valley Tel Long
Distance; Frontier
New York Independent Cellular NY NYICS
Systems, Inc. (Part of Utica-Rome
(A subsidiary of Cellular Partnership)
Frontier Cellular Holding Inc.)
Oneida County Cellular NY Oneida County Cellular
Systems, Inc. (Part of Utica-Rome
(A subsidiary of Cellular Partnership)
Frontier Cellular Holding Inc.)
Phoncom Inc. NY Phoncom Inc.
(A subsidiary of (Part of Utica-Rome
Frontier Cellular Holding Inc.) Cellular Partnership)
Rochester Telephone Corp. NY Rochester Telephone
(A subsidiary of Corp.; RTC
Frontier Corporation)
Taconic Long Distance NY Taconic Long Distance
Service Corp. Service Corp.
(A subsidiary of
Frontier Telecommunications Inc.)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Vernon Cellular Inc. NY Vernon Cellular Inc.
(A subsidiary of Part of the Utica-Rome
Frontier Cellular Holding Inc.) Cellular Partnership
Enterprise Marketing Services PA Enterprise Marketing
Inc. Services Inc.
(A subsidiary of Frontier
Communications of Pennsylvania, Inc.)
Frontier Communications of PA Breezewood Telephone
Breezewood, Inc. Company; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of PA Canton Telephone
Canton, Inc. Company; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of PA Lakewood Rural
Lakewood, Inc. Telephone Company;
(A subsidiary of Lakewood Telephone
Frontier Subsidiary Telco Inc.) Company; Frontier
Frontier Communications of PA Oswayo River Telephone
Oswayo River, Inc. Company; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of PA Enterprise Telephone
Pennsylvania, Inc. Company; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of VA Mid Atlantic Telecom, the
Mid Atlantic, Inc. Inc.; Frontier
(A subsidiary of Frontier
Telecommunications Inc.)
Frontier Communications- WI Lakeshore Telephone
Lakeshore, Inc. Company; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications - WI St. Croix Telephone
St. Croix, Inc. Company; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of WI Mondovi Telephone
Mondovi, Inc. Company; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Frontier Communications of WI Viroqua Telephone
Viroqua, Inc. Company; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of WI Urban Telephone
Wisconsin, Inc. Corporation; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
New Richmond Cable WI New Richmond Cable
Company, Inc. Company, Inc.
(A subsidiary of Frontier
Communications - St. Croix, Inc.)
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Prospectuses constituting part of the Registration Statements on
Forms S-3 (File Nos. 33-40824, 33-69420, 33-61784 and 33-57895),
Form S-4 (File No. 33-61992) and Forms S-8 (File Nos. 33-67430,
33-54511, 33-67432, 33-54519, 33-67324, 33-51331, 33-51885 and
33-52025) of Frontier Corporation of our report dated January 16,
1995, appearing on page 28 of Exhibit No. 13 which is
incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial
Statement Schedule, which appears on page 35 of this Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Rochester, New York
March 28, 1995
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
I, the undersigned, hereby constitute and appoint LOUIS L.
MASSARO as my true and lawful agent and attorney-in-fact to act
with full power and authority and in my name, place and stead as
I, myself, could act for the sole purpose of executing the Form
10-K of Frontier Corporation for the year ended December 31,
1994, pursuant to Instruction D(2)(a) of the Form 10-K and in
accordance with Regulation S-K Item 601(b)(24) of the Securities
Act of 1933 and the Securities Exchange Act of 1934, and with
full and unqualified authority to delegate such power to any
person or persons as my attorney-in-fact shall select.
IN WITNESS WHEREOF, this Instrument has been signed and
delivered by the undersigned as of February 13, 1995.
-------------------------------------------
Patricia C. Barron
/s/ Ronald L. Bittner
-------------------------------------------
Ronald L. Bittner
/s/ John R. Block
--------------------------------------------
John R. Block
/s/ Brenda E. Edgerton
--------------------------------------------
Brenda E. Edgerton
/s/ Jairo A. Estrada
--------------------------------------------
Jairo A. Estrada
/s/ Daniel E. Gill
--------------------------------------------
Daniel E. Gill
/s/ Alan C. Hasselwander
--------------------------------------------
Alan C. Hasselwander
/s/ Douglas H. McCorkindale
--------------------------------------------
Douglas H. McCorkindale
--------------------------------------------
Leo J. Thomas
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FRONTIER CORPORATION'S FINANCIAL STATEMENTS FOR THE
YEAR ENDED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000084567
<NAME> FRONTIER CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 317,137
<SECURITIES> 9,047
<RECEIVABLES> 168,542
<ALLOWANCES> 0
<INVENTORY> 8,585
<CURRENT-ASSETS> 528,507
<PP&E> 1,759,677
<DEPRECIATION> 789,813
<TOTAL-ASSETS> 1,760,951
<CURRENT-LIABILITIES> 201,605
<BONDS> 578,600
<COMMON> 73,161
0
22,777
<OTHER-SE> 727,186
<TOTAL-LIABILITY-AND-EQUITY> 1,760,951
<SALES> 0
<TOTAL-REVENUES> 985,492
<CGS> 18,850
<TOTAL-COSTS> 762,228
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,594
<INCOME-PRETAX> 173,777
<INCOME-TAX> 63,843
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (7,197)
<CHANGES> 0
<NET-INCOME> 102,737
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.40
</TABLE>
<PAGE>
EXHIBIT 99
PROXY STATEMENT
1994 FINANCIAL REVIEW
Including MD&A, Consolidated
Financial Statements and
Notes to Financial Statements
FRONTIER CORPORATION
Frontier Center
180 South Clinton Avenue
Rochester, New York 14646-0700
[LOGO OF FRONTIER CORPORATION GOES HERE]
NOTICE OF ANNUAL MEETING OF SHAREOWNERS
TO BE HELD ON APRIL 26, 1995
DEAR SHAREOWNERS:
The first Annual Meeting of Shareowners of Frontier Corporation (the "Company")
will be held at the National Press Club, 14th
and F Streets, N.W., Washington, D.C. 20045, at 10:00 a.m. on April 26, 1995,
for the following purposes:
. To elect nine Directors;
. To consider and act upon a proposal to elect Price Waterhouse
LLP as the Company's independent auditors for the fiscal year
ending December 31, 1995;
. To consider and act upon two proposals regarding employee
and director compensation plans; and
. To transact such other business, if any, as may properly come
before the meeting or any adjournments thereof.
The Board of Directors, on December 19, 1994, amended Article
II, Section 2, of the By-Laws to reduce the number of Directors
constituting the entire Board from twelve to nine, effective
January 1, 1995.
The Board of Directors has fixed the close of business on
March 7, 1995, as the record date for the determination of
shareowners entitled to notice of and to vote at the meeting.
YOUR VOTE IS VERY IMPORTANT. PLEASE SIGN AND DATE THE ENCLOSED PROXY CARD AND
RETURN IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE, WHETHER OR NOT YOU EXPECT TO
ATTEND THE MEETING. YOU MAY REVOKE YOUR PROXY AND VOTE IN PERSON IF YOU DECIDE
TO ATTEND THE MEETING.
IF YOU ARE PLANNING TO ATTEND THE ANNUAL MEETING, PLEASE
CHECK THE BOX ON THE BACK OF THE PROXY CARD.
By Action of the Board of Directors,
/s/ Josephine S. Trubek
Josephine S. Trubek
Corporate Secretary
Rochester, New York
March 13, 1995
<PAGE>
<TABLE>
<S> <C>
PROXY STATEMENT
Proxy Solicitation 1
Voting at the Annual Meeting 1
Proposal 1--Election of Directors 1
Information about the Board of Directors 1
Nominees for Director 2
Stock Ownership of Management, Directors and
Certain Beneficial Owners 4
Report of Committee on Directors 5
Report of Committee on Management 5
Performance Graph 7
Compensation of Company Management 8
Summary Compensation Table 8
Option/SAR Grants in Last Fiscal Year 9
Individual Grants in 1994 Table 9
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values Table 9
Pension Plan Table 10
Compensation Committee Interlocks and Insider
Participation in Compensation Decisions 11
Interest of Certain Persons in Matters to be
Acted Upon 12
Indemnification of Certain Persons 12
Proposal 2--Election of Independent Auditors 12
Proposal 3--Management Stock Incentive Plan 13
Proposal 4--Directors Stock Incentive Plan 14
New Plan Benefits Table 16
Other Matters 16
Future Proposals of Shareowners 16
FINANCIAL REVIEW
Management's Discussion of Results of Operations
and Analysis of Financial Condition 18
Report of Independent Accountants 28
Report of Management 28
Report of Audit Committee Chair 28
Business Segment Information 29
Consolidated Statement of Income 30
Consolidated Balance Sheet 31
Consolidated Statement of Cash Flows 32
Consolidated Statement of Shareowners' Equity 33
Notes to Consolidated Financial Statements 34
Condensed Six-Year Financial Statements 47
Financial and Operating Statistics 48
</TABLE>
<PAGE>
PROXY STATEMENT
1995 ANNUAL MEETING OF COMMON SHAREOWNERS
OF FRONTIER CORPORATION
________________________________________________________________________________
PROXY SOLICITATION
This Proxy Statement and the enclosed proxy card are being sent to you in
connection with the solicitation of proxies by the board of directors (Board of
Directors) of Frontier Corporation, a New York corporation, (the "Company"), for
use at the annual meeting of holders of the Company's $1.00 par value common
stock. This meeting (the "Annual Meeting") will be held on April 26, 1995, at
10:00 a.m., local time at the National Press Club, 14th and F Streets, N.W.,
Washington D.C., 20045 or any later time, if adjourned, for the purposes set
forth in the Notice of Annual Meeting of Common Shareowners also provided to
you.
The cost of the solicitation of proxies will be borne by the Company. In
addition to the solicitation of proxies by mail, certain of the officers and
employees of the Company, without extra remuneration, may solicit proxies
personally or by telephone, facsimile, telegraph or cable. The Company will also
request brokerage houses, nominees, custodians and fiduciaries to forward
soliciting materials to the beneficial owners of stock held of record and will
reimburse such persons for forwarding such materials. In addition, the Company
has retained Georgeson & Co., Inc., New York, New York, to aid in the
solicitation of proxies at a fee not to exceed $7,500, plus reimbursement for
out-of-pocket expenses incurred by that firm on behalf of the Company.
The principal executive offices of the Company are located at 180 South
Clinton Avenue, Rochester, New York 14646, and its telephone number is (716)
777-1000.
VOTING AT THE ANNUAL MEETING
The close of business on March 7, 1995, has been fixed as the record date for
the determination of the shareowners entitled to notice of, and to vote at, the
Annual Meeting. On that date there were 72,723,675 shares of the Company's $1.00
par value common stock outstanding and entitled to vote at the meeting. Each
shareowner is entitled to cast one vote for each share of common stock held as
of the Record Date.
Each proxy which is properly executed and returned in the enclosed return
envelope will be voted at the Annual Meeting. Shares represented by proxies will
be voted in accordance with the shareowner's directions as specified on the
proxy card. If any proxy does not specify a choice, the shares will be voted for
the election of the Directors nominated in the proxy; in favor of the election
of Price Waterhouse LLP as independent auditors; and in favor of each of the
proposals regarding employee and Director compensation plans. A shareowner
granting a proxy has the right to revoke it by a duly executed proxy bearing a
later date, by attending the meeting and voting in person, or by otherwise
notifying the Company prior to the meeting.
The proxy card contains spaces for the shareowner to indicate if he or she
wishes to abstain on one or more of the proposals or to withhold authority to
vote for one or more nominees for Director. Directors are elected by a plurality
of the votes cast. Votes withheld in connection with the election of one or more
of the nominees for Director will not be counted as votes cast in connection
with that nominee's election. The election of auditors requires the affirmative
vote of a majority of the votes cast. In accordance with New York law,
abstentions are not counted in determining the votes cast in connection with the
selection of auditors. Approval of the proposals with respect to employee and
Director compensation plans (Proposals 3 and 4) requires the affirmative vote of
a majority of the outstanding shares entitled to vote on those proposals;
abstentions on any of the Plan proposals have the same effect as a vote against
that proposal.
Under the rules of the New York Stock Exchange, brokerage firms holding shares
for the benefit of their clients may vote in their discretion on behalf of their
clients with respect to "discretionary items" if the clients have not furnished
voting instructions within ten days of the shareowner meeting. The election of
Directors and auditors are discretionary items with respect to which brokerage
firms may vote. The proposals relating to the employee and Director compensation
plans are also discretionary items and brokers who receive no instructions from
their clients have the discretion to vote on these proposals. Any broker "non-
votes" will not be considered as votes cast with respect to the employee and
Director compensation plan proposals but will have the same effect as a no vote
since the proposals require approval by a majority of the outstanding shares
entitled to vote.
________________________________________________________________________________
PROPOSAL 1-ELECTION OF DIRECTORS
Information about the Board of Directors
BOARD OF DIRECTORS
The Board of Directors of the Company is currently composed of nine Directors.
The Board of Directors nominates the nine persons named on page 3 for election
to the Board of Directors. Eight of the nominees are currently Directors of the
Company whose terms expire coincident with the Annual Meeting. Mr. Cesan is not
currently a Director of the Company. If elected, all
THIS PROXY STATEMENT AND FORM OF PROXY ARE BEING FIRST SENT TO SHAREOWNERS ON
MARCH 13, 1995.
<PAGE>
nominees will serve until the Annual Meeting of Shareowners to be held in 1996
or until such time as their respective successors are elected.
The Board of Directors held eight meetings during 1994. All of the Directors
attended at least 75% of the total meetings of the Board and its committees
which they were eligible to attend.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors conducts its business through meetings of the Board and
through the activities of its committees. The standing committees of the Board
are the Audit Committee, the Committee on Management, the Committee on Directors
and the Executive Committee.
AUDIT COMMITTEE
The Audit Committee of the Board is composed at present of Douglas H.
McCorkindale, Chair; John R. Block and Brenda E. Edgerton. This committee
reviews the scope of audit activities and the financial reports of the Company,
and reviews with management significant and material matters which may result in
either potential liability to the Company or significant exposure to the
Company. The Committee also makes reports and recommendations with respect to
audit activities, findings, and reports of the independent public accountants
and the internal audit staff of the Company. The Audit Committee held two
meetings in 1994.
COMMITTEE ON MANAGEMENT
The present members of the Committee on Management are Daniel E. Gill, Chair;
Patricia C. Barron and Douglas H. McCorkindale. This committee is responsible
for determining the compensation, benefits and perquisites of all executive
officers of the Company, with the exception of the Chief Executive Officer, and
for recommending the compensation, benefits and perquisites of the Chief
Executive Officer to the full Board. This committee also develops and
administers executive compensation plans and reviews succession planning for the
Company and other significant human resources issues. The Committee on
Management held three meetings in 1994.
COMMITTEE ON DIRECTORS
The Committee on Directors was created in 1993. It focuses the Board's attention
on corporate governance issues and serves as a nominating committee. The
Committee on Directors assists the Company in addressing a rapidly changing
industry through its efforts to attract and retain qualified Board members. It
is presently composed of Patricia C. Barron, Chair; Jairo A. Estrada and Dr. Leo
J. Thomas. This committee is responsible for all matters relating to the
selection, qualification, evaluation, and compensation of members of the Board
of Directors and all nominees to the Board. The Committee on Directors held five
meetings in 1994.
The Committee on Directors will consider nominations by shareowners. Such
shareowner submissions should include sufficient biographical information so
that the committee can appropriately assess a nominee's qualifications. This
information would include, at a minimum, the nominee's name and address,
business and other experience, and a listing of any other Boards on which the
nominee may be a member. All submissions should be sent by a letter addressed to
the Corporate Secretary, Frontier Corporation, 180 South Clinton Avenue,
Rochester, New York 14646-0700. Suggestions in connection with the 1996 Annual
Meeting of Common Shareowners must be received by February 26, 1996,
in order to receive consideration.
EXECUTIVE COMMITTEE
The present members of the Executive Committee are Jairo A. Estrada, Chair;
Patricia C. Barron, Ronald L. Bittner, Daniel E. Gill, Alan C. Hasselwander, and
Douglas H. McCorkindale. The Executive Committee possesses all of the powers of
the Board of Directors except those which, by law or the Company's By-Laws,
cannot be delegated to it. The Executive Committee met three times in 1994.
COMPENSATION OF DIRECTORS
The Company compensates its Directors through the payment of an annual retainer
and meeting fees. The annual retainer is $18,000; effective April 26, 1995, this
retainer will be increased to $25,000. However, if shareowners approve Proposal
4, Directors Stock Incentive Plan, the annual retainer will consist of $15,000
cash and 500 shares of Frontier Corporation common stock. Each Director also
receives a $1,500 fee for each Board and/or committee meeting attended. Each
committee chair receives an annual chairperson's retainer in the amount of
$3,000; effective April 26, 1995, this amount will be increased to $4,000.
Directors who are employees of the Company or its subsidiaries receive no
Director fees. Directors may elect to defer payment of their fees to future
years.
Pursuant to the Company's Directors' Stock Option Plan, Directors annually
receive an option to purchase 4,000 shares of the Company's common stock. These
options expire ten years after issuance, and the exercise price is the value of
the stock on the day the option was issued. Each outside Director received a
grant of options for 4,000 shares at an exercise price of $22.6875 per share on
April 27, 1994.
The Company also provides its Directors with cellular telephone equipment and
service and other nominal in-kind benefits.
________________________________________________________________________________
NOMINEES FOR DIRECTOR
The Board believes that all of the nominees will be available and willing to
serve as Directors. If any nominee is unable to serve, the shares represented by
all valid proxies will be voted for the election of such substitute as the Board
may recommend or the Board may fill the vacancy at a later date after selecting
an appropriate nominee.
_______________________________________
2 Proxy Statement Frontier Corporation
<PAGE>
The following sets forth information concerning the principal occupations and
business experience of the nominees for election at the Annual Meeting of Common
Shareowners to be held on April 26, 1995:
________________________________________________________________________________
[PHOTO OF PATRICIA C. BARRON GOES HERE]
Patricia C. Barron, 52, is President, Xerox Engineering Systems, Xerox
Corporation, a manufacturer of office systems and equipment, and has held this
position since February 1994. From March 1992 until February 1994 she was
President, Office Documents Products Division, Xerox Corporation. From 1979 to
March 1992 she was a Vice President of Xerox Corporation. She is a Director of
Quaker Chemical Corporation and of Reynolds Metals Company. She has been a
Director of the Company since 1990.
________________________________________________________________________________
[PHOTO OF RONALD L. BITTNER GOES HERE]
Ronald L. Bittner, 53, is Chairman, President and Chief Executive Officer of the
Company and has held this position since April 1993. From February 1992 to April
1993 he was President and Chief Executive Officer of the Company. From May 1988
to February 1992 he was Executive Vice President and President-
Telecommunications Group of the Company. He is also a Director of Rochester
Telephone Corp. He has been a Director of the Company since 1989.
________________________________________________________________________________
[PHOTO OF RAUL E. CESAN GOES HERE]
Raul E. Cesan, 47, is Executive Vice President and President, Pharmaceuticals,
Schering-Plough Corporation, a worldwide manufacturer and marketer of
pharmaceutical and health care products and has held this position since
September 1994. From September 1992 through September 1994, he was President,
Schering- Plough Laboratories-U.S. Pharmaceutical Operations, Schering-Plough
Corporation. From September 1988 to September 1992, he was President, Schering-
Plough International. He will be a Director of the Company for the first time.
________________________________________________________________________________
[PHOTO OF BRENDA E. EDGERTON GOES HERE]
Brenda E. Edgerton, 45, is Vice President, Finance-U.S. Soup, Campbell Soup
Company, a manufacturer of prepared convenience foods and has held this position
since May 1994. From August 1989 through April 1994 she was Vice President and
Treasurer, Campbell Soup Company. From April 1988 to August 1989 she served as
Deputy Treasurer of Campbell Soup Company. She has been a Director of the
Company since 1993.
________________________________________________________________________________
[PHOTO OF JAIRO A. ESTRADA GOES HERE]
Jairo A. Estrada, 47, is Chairman of the Board and Chief Executive Officer of
Garden Way Incorporated, a company which manufactures outdoor power equipment.
He is a Director of Garden Way Incorporated and of The Chase Manhattan
Corporation. He has been a Director of the Company since 1989.
________________________________________________________________________________
[PHOTO OF DANIEL E. GILL GOES HERE]
Daniel E. Gill, 58, is Chairman and Chief Executive Officer of Bausch
& Lomb Incorporated, a worldwide manufacturer and marketer of health care and
optical products. He is a Director of Bausch & Lomb and Reebok International,
Ltd. He has been a Director of the Company since 1981.
________________________________________________________________________________
[PHOTO OF ALAN C. HASSELWANDER GOES HERE]
Alan C. Hasselwander, 61, is Past Chairman of the Board of Rochester Tel (now
Frontier Corporation). From February 1992 to April 1992 he was Chairman of the
Company. From July 1984 to February 1992 he was President and Chief Executive
Officer of the Company. He has been a Director of the Company since 1984.
________________________________________________________________________________
[PHOTO OF DOUGLAS H. McCORKINDALE GOES HERE]
Douglas H. McCorkindale, 55, is Vice Chairman and Chief Financial and
Administrative Officer of Gannett Co., Inc., a nationwide diversified
communications company. He is a Director of Gannett Co., Inc., Continental
Airlines, and seven mutual funds in the Prudential Mutual Fund complex of funds.
He has been a Director of the Company since 1980.
________________________________________________________________________________
[PHOTO OF DR. LEO J. THOMAS GOES HERE]
Dr. Leo J. Thomas, 58, is Executive Vice President of Eastman Kodak Company, a
manufacturer of photographic and chemical products, and has held this position
since January 1995. From September 1994 to January 1995 he was Executive Vice
President and President, Imaging; and from September 1991 to September 1994 he
was Group Vice President and President, Imaging, Eastman Kodak Company. From
November 1989 to September 1991 he was Group Vice President and General Manager,
Health Group of Eastman Kodak Company. From September 1988 to September 1989 he
was Chairman of Sterling Drug, Inc., a subsidiary of Eastman Kodak. He is a
Director of Eastman Kodak Company and of John Wiley & Sons, Inc. He has been a
Director of the Company since 1984.
MANAGEMENT RECOMMENDS A VOTE "FOR" THE ELECTION OF ALL OF THE ABOVE NOMINEES FOR
DIRECTOR, DESIGNATED AS PROPOSAL 1 ON YOUR PROXY CARD. PROXIES SOLICITED BY THE
BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF THE DIRECTION THEREON TO
THE CONTRARY.
_______________________________________
Proxy Statement Frontier Corporation 3
<PAGE>
________________________________________________________________________________
STOCK OWNERSHIP OF MANAGEMENT,
DIRECTORS AND CERTAIN BENEFICIAL OWNERS
In 1993, the Committee on Directors established guidelines for the minimum
amounts of the Company's common stock which Directors should own. These
guidelines take into account a Director's tenure on the Board in determining
the level of stock ownership. By the end of 1995, each outside Director with at
least five years' service on the Board should own at least 4,000 shares of the
Company's common stock. Executive officers of the Company are also encouraged to
own shares of the Company. The recommended stock ownership level is based on
each officer's position in the organization and is a multiple of salary. Mr.
Bittner's stock ownership target, to be achieved by January 1, 1999, is the
beneficial ownership of Company common stock equal in value to four times his
salary. The stock ownership target for each of the Company's Corporate Vice
Presidents is beneficial ownership of Company common stock equal in value to two
times his or her respective salary. Each Corporate Vice President is encouraged
to achieve his or her target by January 1, 1999.
The following table sets forth the number of shares of the Company's common
stock beneficially owned by each Director and nominee, by each of the named
executive officers, and by Directors and officers of the Company as a group as
of February 28, 1995. No Director, officer or nominee owns more than 1% of the
Company's outstanding shares of common stock, nor do the group's aggregate
holdings exceed 1% of the Company's issued and outstanding common stock.
MANAGEMENT AND DIRECTORS STOCK OWNERSHIP TABLE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Total
Common Stock Beneficial
Name Stock/(1)/ Options/(2)/ Ownership
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Directors and Nominees:
Patricia C. Barron 1,497 3,996 5,493
Ronald L. Bittner/3/ 42,524 70,930 113,454
John R. Block 1,856 3,996 5,852
Raul E. Cesan 0 0 0
Brenda E. Edgerton 2,351 2,964 5,315
Jairo A. Estrada 12,333 3,996 16,329
Daniel E. Gill 2,888 3,996 6,884
Alan C. Hasselwander/4/ 35,220 1,332 36,552
Douglas H. McCorkindale 4,000 3,996 7,996
Dr. Leo J. Thomas 20,759 3,996 24,755
NAMED EXECUTIVE OFFICERS:
Ronald L. Bittner/3/ 42,524 70,930 113,454
Jeremiah T. Carr 7,374 18,932 26,306
Dale M. Gregory 15,933 21,198 37,131
Louis L. Massaro 10,829 16,932 27,761
John K. Purcell 7,787 19,998 27,785
Directors and Executive
Officers as a Group 188,423 196,522 384,945
</TABLE>
________________________________________________________________________________
(1) Includes all shares which each Director, nominee or officer directly,
through any contract, arrangement, understanding, relationship or otherwise, has
or shares the power to vote or to direct the voting of such shares or to dispose
or to direct the disposition of such shares. However, these amounts do not
include shares which each such person has the right to acquire pursuant to
options or other rights. Amounts in this column determine whether a Director or
executive officer has met his or her stock ownership target.
(2) Includes all shares which such persons have the right to acquire within the
following 60 days pursuant to options or other rights. These amounts do not
include shares which such persons have the right to acquire more than sixty days
in the future.
(3) Includes 123 shares owned by the parents of Mr. Bittner's spouse. Mr.
Bittner disclaims beneficial ownership of these shares.
(4) Includes 1,400 shares owned by Mr. Hasselwander's spouse. Mr. Hasselwander
disclaims beneficial ownership of these shares.
Set forth below is the name, address and stock ownership of each person or group
of persons known by the Company to own beneficially more than 5% of the
outstanding shares of common stock.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Name and Address Common Stock Percent
of Beneficial Owner of Class
<S> <C> <C>
- -------------------------------------------------------------------
FMR Corp. 5,610,260/(1)/ 7.7%
82 Devonshire Street
Boston, Massachusetts 02109
- -------------------------------------------------------------------
</TABLE>
(1) FMR Corp. ("FMR") filed with the Securities and Exchange Commission a
Schedule 13G, dated February 13, 1995, stating that it beneficially owned in the
aggregate 5,610,260 shares, or approximately 7.67% of the Company's common stock
outstanding as of December 31, 1994. Of that amount, 4,356,820 shares were
beneficially owned by FMR's wholly-owned subsidiary Fidelity Management &
Research Company (acting as investment advisor) and 1,253,440 shares were
beneficially owned by FMR's wholly-owned subisidary Fidelity Management Trust
Company (acting as investment manager). All these shares are also deemed
beneficially owned by Edward C. Johnson 3d, who is FMR's Chairman and who
is also a member of a controlling group with respect to FMR Corp. In its
Schedule 13G filing, FMR also disclosed that with respect to the shares it
beneficially owns, it has sole voting power with respect to 783,740 shares, sole
investment power with respect to 5,610,260 shares, and no shared voting or
shared investment power with respect to any shares.
The Company's Directors, executive officers and shareowners holding in excess
of 10% of the common stock are required to file reports with the Securities and
Exchange Commission and the New York Stock Exchange, with copies to the Company,
concerning ownership of and transactions in the Company's common stock. Based
solely on those reports furnished to the Company and related information, the
Company believes that all such filing requirements for 1994 were complied with
in a timely fashion.
_______________________________________
4 Proxy Statement Frontier Corporation
<PAGE>
________________________________________________________________________________
REPORT OF COMMITTEE ON DIRECTORS
The Committee on Directors was created in 1993. It focuses the Board's attention
on corporate governance issues and acts as a nominating committee. Since its
formation, the Committee has undertaken several initiatives which are designed
to increase the independence of the Board and to more closely align Directors
interests with those of shareowners. These activities include:
1. Approval of formal Board Governance Guidelines dealing with size and
composition of the Board, retirement, Committee structure, frequency of Board
and Committee meetings, expected attendance, compensation, and fiduciary
responsibility to shareowners. Each Committee, including the Executive
Committee, operates under a written Committee Charter adopted by the Committee.
The Board Governance Guidelines additionally provide that if a Director's
primary job changes, the Director must submit his or her resignation from the
Board. The Committee on Directors makes a recommendation to the full Board as to
whether or not to accept that resignation. The Guidelines consider retirement a
primary job change.
2. Approval of formal Directors' Stock Ownership Guidelines. Specific ownership
targets are based upon Directors' Board tenure. The targets are:
. Two years or less on the Board At least 1,000 shares
. More than two but less than
five years At least 2,000 shares
. Five or more years At least 4,000 shares
Each Director is encouraged to achieve his or her target by December 31, 1995.
3. Confidential surveys to assess the effectiveness of the Board.
4. Establishment of formal Selection Criteria and Performance Factors for use in
consideration of candidates for nomination or renomination to the Boards
of Frontier Corporation and its subsidiary Rochester Telephone Corp. The
Selection Criteria include an evaluation of the candidate's ability, relevant
experiences, business acumen and demonstrated management ability, independence,
and whether the individual would enhance the Board's diversity. The Performance
Factors are used to assess the performance of incumbent members of the Board.
These Factors include an understanding of the Company's business, the level of
attendance and participation in Board activities, an understanding of the
Company's strategic direction and the financial implications of decisions, the
contribution of diverse perspectives on issues important to the Company's
business, and knowledge about the Company's industry, technology and markets.
Your Committee on Directors supports and encourages an independent Board of
Directors which is accountable to the shareowners of Frontier Corporation. For
that reason, a majority of the Board is composed of outside Directors and all
Directors currently must stand for reelection annually. Of the nine incumbent
Directors, only Mr. Bittner and Mr. Hasselwander now or have ever been employees
of the Company. Furthermore, all members of the Audit Committee, the Committee
on Management and the Committee on Directors are independent Directors, and
Committee assignments and the position of Committee Chair rotate on a periodic
basis. There are five regular meetings of the Board including a multi-day annual
planning session. In addition, the outside Directors meet informally on a
periodic basis.
Respectfully submitted,
Patricia C. Barron (Chair)
Jairo A. Estrada
Dr. Leo J. Thomas
February 13, 1995
________________________________________________________________________________
Report of Committee on Management
COMPENSATION PHILOSOPHY AND POLICY
The philosophy of the Company's compensation program is to offer performance-
based compensation to its employees, while rewarding employees whose efforts
enable the Company to achieve its vision. The executive compensation program is
designed to measure and enhance executive performance.
The Company's executive compensation program has four components:
. Base Salary
. Annual Bonus
. Long-Term Incentive Plan
. Stock Option Plan
These components are designed to provide incentives and motivate key
executives whose efforts and job performance will enhance the strategic well-
being of the Company and maximize value to its shareowners. The program is also
structured to attract and retain the highest caliber executives.
The executive compensation program rewards performance consistent with the
Company's consolidated performance and the contribution of the individual
executive officers, including Mr. Bittner, toward that performance. It is also
competitive with compensation programs offered by comparable employers in this
industry.
The Company retains William M. Mercer, Inc., to review its executive
compensation program on an annual basis. Information from this consulting firm,
as well as public information concerning salaries paid by companies in the
telecommunications industry, is used to determine what a comparable
telecommunications firm would consider an appropriate performance-based
compensation package for its executives.
The analysis includes information from a self-constructed group of forty-two
publicly-traded companies in the telephone, long distance, cable television and
cellular industries. This group includes all companies reported in the Standard
and Poor's Telephone Index, together with thirty-three additional companies. On
a comparative basis, the base salary of the Company's CEO and its other
executives, on average, would be considered within the second quartile. The
Company's policy is to benchmark compensation levels at the median of
comparative companies and to reward results based on performance.
_______________________________________
Proxy Statement Frontier Corporation 5
<PAGE>
BASE SALARY
The salaries of the executive officers, including Mr. Bittner, were determined
based on the executive's performance and an analysis of base salaries paid
executive officers having similar responsibilities in other companies of similar
size, both within and outside the telecommunications industry. This analysis
included many of the companies in the self-constructed group of forty-two
publicly-traded companies, together with additional companies from other
industries with similar revenues and/or asset values. The level of Mr. Bittner's
base salary was also based upon a subjective assessment of his individual
performance and responsibilities as well as overall corporate performance as
measured by actual earnings per share and cash flow versus pre-established
targets; strategic goals and objectives for customer and employee satisfaction;
and growth of the business. The other executive officers have similar
measurements, but specific factors are more closely linked to individual
responsibilities. No relative weights are attributed to any specific measurement
factors.
ANNUAL BONUS
The Company's annual bonus plan is designed to provide performance-based
compensation awards to executives for achievement during the past year. For
executive officers, bonus awards are a function of individual performance and
consolidated corporate results. Business unit performance is also a component of
those involved in line operations below the executive officer level. The
specified qualitative and quantitative criteria employed by the Committee in
determining bonus awards vary individually and from year to year. These
criteria, or targets, are established as a means of measuring executive
performance. The corporate target for 1994 was an equally weighted earnings per
share and cash flow target established by this Committee of the Board of
Directors as an incentive to increase the Company's cash flow and thus improve
long-term stock performance. Performance objectives and associated payouts were
established at the beginning of the year and are identified as threshold,
standard and premier objectives with standard performance yielding payouts at
the median level competitively. No award will be paid unless threshold
performance is achieved for both components. For 1994, earnings per share
results were between the standard and premier levels while cash flow was between
the threshold and standard levels. The overall performance was slightly above
standard level for Mr. Bittner and at standard level for the other officers. All
the Company's senior executives participate in the bonus plan with payout awards
varying by salary grade. With respect to Mr. Bittner's participation, his annual
bonus was based upon achievement of the corporate target, a mechanical
application of the formula and an additional discretionary adjustment based on
his individual performance. Specifically, this mechanical application of the
plan was calculated by multiplying the corporate performance payout achieved,
which for Mr. Bittner was 63.2%, times the higher of his actual salary or the
market value of his position. For the 1994 awards, the Committee changed from
using the higher of actual salary or the midpoint of the salary range to the
higher of actual salary or the market value of the position. This was done to
better associate the bonus award to competitive positions in the marketplace.
LONG-TERM INCENTIVE PLAN
The Company's long-term incentive plan, the Performance Unit Plan (PUP), is
designed to motivate executives to improve shareowner value. The Plan focuses on
the Company's stock performance over three-year cycles. Executives receive Plan
payouts based equally on the Company's stock performance appreciation over the
past three years as compared to a group of sixteen telecommunications firms and
corporate performance against targets of various elements selected by this
Committee at the beginning of the cycle. These elements, cash return on gross
assets and stock performance measures, are intended to align executive
compensation with the return received by Frontier's shareowners. Cycle payouts
are a product of the Company's stock price at the end of the cycle, corporate
performance against the selected targets, and the number of units granted to an
executive for the cycle. Mr. Bittner's award was based upon performance achieved
at 134.6% of the target levels. The awards made to the other executive officers
were based upon performance achieved at 124.4% to 135.0% of the target levels.
Beginning in 1994 PUP was discontinued. No new grants were issued in 1994,
however, the remaining cycle, 1993-1995, will run to its conclusion.
STOCK OPTION PLAN
Stock option plans are an important component of executive compensation programs
because they are a compensation vehicle which ties long-term compensation
directly to furthering the interests of shareowners and to improving corporate
performance. The Company's Executive Stock Option Plan is designed to align
executive compensation with the long-term performance of the Company's stock.
Options issued in 1994 do not expire until 2004, and the exercise price is the
value of the option on the day the option was issued. Prior to the beginning of
each year, option grant ranges are established by salary grade with the
assistance of the William M. Mercer, Inc. consulting firm. This Committee makes
a subjective determination of the specific stock option grant to be awarded to
each executive officer.
The factors considered by the Committee in making this determination are:
(a) The executive officer's past performance of previously set objectives and
(b) His or her expected future contribution to the long-term strategic goals
and objectives of the Company.
_______________________________________
6 Proxy Statement Frontier Corporation
<PAGE>
No relative weights are attributed to either of these factors. All executive
officers of the Company received options in 1994 based on their position in the
Company, their contribution to the achievement of the Company's long-term
objectives as assessed by Committee members based on their experience with the
executive officers, and upon the recommendation of the chief executive officer.
Upon this Committee's recommendation, the full Board awarded Mr. Bittner options
based upon these factors as well.
OTHER ACTIONS
The Committee approved changes to the Restated Executive Stock Option Plan for
presentation to shareowners for approval. See Management Stock Incentive Plan,
page 13. The proposed changes are as follows:
1. Expansion of the plan to other key employees--
a group of approximately 150 managers across the Company. With this change
approximately 215 of a total of about 4,400 employees will be eligible for stock
compensation.
2. Introduction of restricted stock as an additional component of compensation.
It is expected that restricted stock will be used selectively to reward key
employees within the executive group. Vesting may occur based on continued
employment or in conjunction with pre-established performance parameters,
including, but not limited to, one or more of the following: total shareowner
return, earnings per share growth, cash flow growth and return on equity.
The Committee believes that stock-based programs are the best long-term
incentives, are excellent motivators and better align the efforts of management
with the objectives of the shareowners. The Committee has established stock
ownership guidelines for the Company's executives. These guidelines are a
multiple of salary. Mr. Bittner's target, to be achieved by January 1, 1999, is
the beneficial ownership of Company common stock equal in value to four times
his annual salary.
Section 162(m) of the Internal Revenue Code limits the tax deduction to $1
million for compensation paid to the five highest paid executive officers unless
certain requirements are met. The proposed changes to the Management Stock
Incentive Plan, specifically as they relate to performance-based restricted
stock, are designed to comply with Section 162(m) requirements. The Committee
favors pay-for-performance and intends to continue to review executive
compensation plans in consideration of the regulations.
No member of this Committee is a former or current officer or employee of
the Company or any of its subsidiaries.
Respectfully submitted,
Daniel E. Gill (Chair)
Patricia C. Barron
Douglas H. McCorkindale
February 13, 1995
________________________________________________________________________________
PERFORMANCE GRAPH
The following graph charts the Company's cumulative total shareowner return
performance against the Standard and Poor's Telephone Index as well as against
the Standard and Poor's 500 Index. A variety of factors may be used in order to
assess a corporation's performance. This Performance Graph, which reflects the
Company's total return against the selected peer group, reflects one such
method. The performance of the Standard and Poor's Telephone Index is weighted
by the stock market capitalization of the companies within that peer group.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG FRONTIER CORP. S&P TELEPHONE INDEX AND S&P 500 INDEX
------------- ------------- -------
FRONTIER CORP. S&P TELEPHONE S&P 500
Measurement period ------------- ------------- --------
(Fiscal Year Covered) Index Index
- --------------------- ------------- ------------- --------
<S> <C> <C> <C>
Measurement PT -
0 100 100 100
$ ----- $ ----- $ -----
12 31 90 75 95 97
FYE --/--/-- $ ----- $ ----- $ -----
12 31 90 87 102 126
FYE --/--/-- $ ----- $ ----- $ -----
12 31 92 102 112 136
FYE --/--/-- $ ----- $ ----- $ -----
12 31 93 134 129 149
FYE --/--/-- $ ----- $ ----- $ -----
12 31 94 130 120 151
FYE --/--/-- $ ----- $ ----- $ -----
</TABLE>
_______________________________________
Proxy Statement Frontier Corporation 7
<PAGE>
________________________________________________________________________________
COMPENSATION OF COMPANY
MANAGEMENT
The tables and other information set forth below are included to enable our
shareowners to better understand the compensation of the Company's executives.
These tables reflect the various forms of compensation paid the executive
officers of Frontier Corporation. Specifically, these include salary, bonus,
stock options and a long-term incentive plan. The Company does not provide its
executives with stock appreciation rights. Mr. Purcell was the only executive
officer who exercised any stock options during 1994.
The Report of the Committee on Management of the Board of Directors appears on
page 5 of this Proxy Statement. This Report discusses the factors taken into
consideration to set Mr. Bittner's compensation and the compensation of the
other executive officers. A Performance Graph showing the performance of the
Company's stock as compared to both the Standard and Poor's 500 Index and the
Standard and Poor's Telephone Index appears on page 7 of this Proxy Statement.
SUMMARY COMPENSATION TABLE
The following table provides a summary of compensation paid to the CEO and the
other four most highly compensated executive officers of the Company for
services rendered to the Company and its subsidiaries over the past three fiscal
years. The indicated titles are those currently held by each named executive
officer.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Long Term
Annual Compensation Compensation
- -------------------------------------------------------------------------------------------------
Awards Payouts
-------------------------
Other Securities
Annual Underlying All Other
Name and Compen- Options/ LTIP Compen-
Principal Salary Bonus sation SARs Payouts sation
Position Year ($) ($) ($) (3) (#) ($) (4) ($) (5)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
R. L. Bittner/1/ 1994 $408,333 $349,471 $ 0 88,800 $204,164 $41,369
Chairman, 1993 $360,000 $407,500 $ 0 46,000 $230,121 $26,856
President and CEO 1992 $292,750 $160,000 $ 0 16,000 $ 8,946 $14,901
J. T. Carr 1994 $200,275 $132,500 $8,330 22,000 $ 67,856 $10,508
President and CEO, 1993 $176,350 $ 87,750 $ 0 12,000 $ 80,702 $ 8,934
Rochester Telephone Corp. 1992 $156,900 $ 60,600 $ 0 5,400 $ 3,216 $34,029
and President, Frontier
Telephone Group
D. M. Gregory/2/ 1994 $219,542 $131,600 $3,799 26,400 $ 65,556 $17,306
President, Frontier 1993 $186,567 $131,625 $ 0 13,200 $ 69,753 $29,963
Communications Group 1992 $178,413 $ 67,200 $ 0 5,400 $ 0 $43,701
L. L. Massaro 1994 $189,442 $111,700 $ 0 22,000 $ 70,385 $16,600
Corporate Vice 1993 $174,800 $131,625 $ 0 9,000 $ 95,662 $11,721
President--Finance 1992 $165,100 $ 58,600 $ 0 5,400 $ 5,126 $19,247
J. K. Purcell 1994 $181,350 $ 98,000 $ 0 26,400 $ 70,223 $17,369
Corporate Vice 1993 $175,600 $131,625 $ 0 12,600 $ 98,589 $12,033
President 1992 $168,800 $ 63,100 $ 0 5,400 $ 5,135 $11,237
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Bittner was named President and Chief Executive Officer effective
February 16, 1992. The compensation indicated for 1992 includes
1992 compensation relating to his prior position as Executive Vice President of
the Company.
(2) Mr. Gregory became an employee and a Vice President of the Company effective
February 16, 1992. From July 1, 1991, until February 16, 1992, he rendered
consulting services as President of the Company's subsidiary RCI Network
Services, Inc. (RCINS) but during that period he was not an employee of the
company. (In October, 1994, the name of this company was changed to Frontier
Communications International Inc.) This table reflects payments made by the
Company and/or RCINS in 1992 to Dale M. Gregory Management Consultants, Inc.,
for these consulting services. The amount of these payments was $29,687.
(3) The amounts reported in this column for 1994 include $3,799 paid to Mr.
Gregory and $8,330 paid to Mr. Carr to offset income tax liabilities incurred by
each of them because each received additional income in recognition of certain
expenditures each made on behalf of the Company.
(4) As described in more detail in the Report of Committee on Management at page
5 of this Proxy Statement, 1994 Performance Unit Plan awards are based upon
performance achieved at 124.4% to 135.0% of the target levels.
(5) "All Other Compensation" includes imputed income from term life insurance
coverage and the Company's contributions to both the tax-qualified 401(k) and
nonqualified defined contribution plans. For 1994, imputed income from term life
insurance coverage was $4,656 for Mr. Bittner, $3,758 for Mr. Carr, $1,503 for
Mr. Gregory, $2,152 for Mr. Massaro and $3,285 for Mr. Purcell. The Company's
1994 contributions on behalf of the named executive officers to the tax-
qualified 401(k) and nonqualified defined contribution plans, respectively, were
as follows: $5,805 and $30,908 for Mr. Bittner; $6,750 and $0 for Mr. Carr;
$6,255 and $9,548 for Mr. Gregory; $6,274 and $8,174 for Mr. Massaro; and $6,262
and $7,822 for Mr. Purcell. For Mr. Gregory, "All Other Compensation" includes a
special payment in 1994 in the amount of $4,860. For Mr. Carr, "All Other
Compensation" includes a special payment in 1994 in the amount of $9,450. Each
of these special payments was a one time reimbursement of expenses incurred by
the named executive officer.
______________________________________
8 Proxy Statement Frontier Corporation
<PAGE>
The following companion tables to the Summary Compensation Table list the
stock options granted during the 1994 fiscal year to the named executive
officers, their stock option exercises in 1994 and the aggregate options they
held at the end of 1994, and the estimated retirement benefits which would be
paid to them at age 65.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following Individual Grants table includes two columns designated as
"Potential Realized Value." The calculations in those columns are based on
hypothetical growth assumptions, proposed by the Securities and Exchange
Commission, of 5% and 10% for stock price appreciation for the option term.
There is no way to anticipate what the actual growth rate of the Company's stock
price will be.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS IN 1994
- -----------------------------------------------------------------------------------------------------------------
Number of Potential Realized Value
Securities % of Total at Assumed Annual Rates
Underlying Options/SARs of Stock Price Appreciation
Options/SARs Granted to Exercise or for Option Term
Granted/(1)/ Employees in Base Price Expiration ---------------------------
Name (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
R. L. Bittner 71,000 32.07% $21.188 3/21/04 $ 946,054 $2,397,487
17,800 32.84% $22.688 4/27/04 $ 253,971 $ 643,613
J. T. Carr 17,600 7.95% $21.188 3/21/04 $ 234,515 $ 594,307
4,400 8.12% $22.688 4/27/04 $ 62,779 $ 159,095
D. M. Gregory 21,200 9.58% $21.188 3/21/04 $ 282,484 $ 715,869
5,200 9.59% $22.688 4/27/04 $ 74,194 $ 188,022
L. L. Massaro 17,600 7.95% $21.188 3/21/04 $ 234,515 $ 594,307
4,400 8.12% $22.688 4/27/04 $ 62,779 $ 159,095
J. K. Purcell 21,200 9.58% $21.188 3/21/04 $ 282,484 $ 715,869
5,200 9.59% $22.688 4/27/04 $ 74,194 $ 188,022
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The option grants have the following material terms: exercise price is the
market price (based on the closing price of the Company's common stock on the
New York Stock Exchange) on the date of the option grant; 1/3 of the
options granted may be exercised commencing one year following the grant date, a
second 1/3 may be exercised commencing two years following the grant date, and
the remaining 1/3 may be exercised commencing three years following the grant
date. The option grant dates were 3/21/94 and 4/27/94. Options may not be
transferred other than by will or the laws of descent and distribution. An
option may be exercised upon written notice to the Company accompanied by
payment in full for the shares being acquired. In the event of a "change in
control" as defined by the Executive Stock Option Plan, all options become
immediately vested and exercisable.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
- -------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised In-
Shares Underlying Unexercised the-Money Options/SARs
Acquired Value Options/SARs at FY End at FY End(2)
---------------------------- ----------------------------
On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------
Name (#) (#)(1) (#) (#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
R. L. Bittner 0 N/A 25,998 124,802 $89,618 $92,257
J. T. Carr 0 N/A 7,600 31,800 $27,600 $26,175
D. M. Gregory 0 N/A 8,000 37,000 $28,425 $27,825
L. L. Massaro 0 N/A 6,600 29,800 $25,538 $22,050
J. K. Purcell 800 $5,200 7,000 36,600 $23,713 $27,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Aggregate market value of the shares acquired or covered by the option less
the aggregate exercise price.
(2) Options are valued at the market value of Frontier Corporation (formerly
Rochester Telephone Corporation) common stock at December 31,
1994, (closing price of $21.125) less the per share option exercise price,
multiplied by the number of exercisable/unexercisable options.
______________________________________
Proxy Statement Frontier Corporation 9
<PAGE>
PENSION PLANS
The following table shows the estimated annual benefits payable upon retirement
at age 65 to individuals in specified remuneration and years of service
classifications. The amounts set forth in this table do not reflect early
retirement incentives which the Company had previously offered certain of its
management employees. Furthermore, the amounts set forth are neither subject to
any deduction for Social Security benefits or any other offsets nor adjusted to
reflect maximum allowable benefits under the Internal Revenue Code.
All of the Company's officers, including those listed in the Summary
Compensation Table, are participants in the Company's Management Pension Plan as
supplemented by a Supplemental Management Pension Plan (SMPP). The annual
aggregate pension benefit for an officer under these Plans is based upon several
factors and is largely determined by the number of years of employment
multiplied by a percentage of the officer's three consecutive years of highest
average annual compensation preceding retirement.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
- --------------------------------------------------------------------------------
Years of Service
- --------------------------------------------------------------------------------
Remuneration (15) (20) (25) (30) (35)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 150,000 33,273 44,364 55,455 66,546 77,637
175,000 39,048 52,064 65,080 78,096 91,112
200,000 44,823 59,764 74,705 89,646 104,587
225,000 50,598 67,464 84,330 101,196 118,062
250,000 56,373 75,164 93,955 112,746 131,537
300,000 67,923 90,564 113,205 135,846 158,487
350,000 79,473 105,964 132,455 158,946 185,437
400,000 91,023 121,364 151,705 182,046 212,387
450,000 102,573 136,764 170,955 205,146 239,337
500,000 114,123 152,164 190,205 228,246 266,287
550,000 125,673 167,564 209,455 251,346 293,237
600,000 137,223 182,964 228,705 274,446 320,187
650,000 148,773 198,384 247,955 297,546 347,187
700,000 160,323 213,764 267,205 320,646 374,087
750,000 171,873 229,164 286,455 343,746 401,037
800,000 183,423 244,564 305,705 366,846 427,987
850,000 194,973 259,964 324,955 389,946 454,937
900,000 206,523 275,364 344,205 413,046 481,887
950,000 218,073 290,764 363,455 436,146 508,837
1,000,000 229,623 306,164 383,705 459,246 535,787
1,050,000 241,173 321,564 401,955 482,346 562,737
1,100,000 252,723 336,964 421,205 505,446 589,687
1,150,000 264,273 352,364 440,455 528,546 616,637
1,200,000 275,823 367,764 459,705 551,646 643,587
1,250,000 287,373 383,164 478,955 574,746 670,537
1,300,000 298,923 398,564 498,205 597,846 697,487
1,350,000 310,473 413,964 517,455 620,946 724,437
1,400,000 322,023 429,364 536,705 644,046 751,387
1,450,000 333,573 444,764 555,955 667,146 778,337
- --------------------------------------------------------------------------------
</TABLE>
_________________________________
10 Proxy and Frontier Corporation
<PAGE>
Mr. Bittner, Mr. Gregory, Mr. Massaro, and Mr. Purcell each have executive
contracts which may pay a benefit in the event of a "Change in Control" of the
Company. These contracts are explained in detail on pages 11 and 12 of this
Proxy Statement. Each of them also participates in the Company's Pension Plan.
Under SMPP, their service factor would include, subject to certain limitations,
the amount of service for which payment is made to them under their executive
contract.
The SMPP also provides that in the event of a Change in Control of the
Company, the Board may not terminate a participant's benefit and the Employees'
Benefit Committee may not change prior decisions regarding a participant's
service factor.
Effective January 1, 1994, the Company established a Supplemental Executive
Retirement Plan (SERP) which covers all the officers named in the preceding
tables plus two additional executive officers. The Plan has an accrual and
vesting schedule based on years of service and age. A maximum benefit of 60% of
final compensation will be paid to an executive retiring at age 50 or older with
30 or more years of service. Payments made under the Company's Management
Pension Plan and the Supplemental Management Pension Plan are included in
determining the ultimate benefit payable under the SERP. However, in order to
qualify for the SERP benefit a covered executive must be at least 50 years of
age. Executive officers who are not at least 50 years old when they retire would
only receive the retirement benefits set forth in the above Pension Plan Table
and would receive no SERP benefit.
For the purposes of these Plans, annual compensation is the same as that given
in the Salary and Bonus columns of the Summary Compensation Table for the named
executive officers. The number of years of employment of such individuals for
the purposes of these Plans currently are as follows: Mr. Bittner-32; Mr. Carr-
26; Mr. Gregory-16; Mr. Massaro-26; and Mr. Purcell-30. Additionally, the
Company has agreed to bridge Mr. Gregory's prior service with other
telecommunications companies provided he remains employed by Frontier
Corporation until January 1, 1997. Effective that date, the Company will credit
Mr. Gregory his additional six years and six months experience in the
telecommunications industry.
Neither Mr. Massaro nor Mr. Gregory has yet reached the age of 50 years.
Assuming they retired as of the current date, each would receive only a reduced
pension based upon the amount reflected in the Pension Plan Table and neither
would receive any additional benefit under the SERP. Mr. Bittner and Mr. Purcell
have each reached the age of 50 years and have accrued at least 30 years of
service credit. If they retired as of the current date, each would receive a
full pension based on the amount reflected in the Pension Plan Table. In
addition, assuming annual compensation at the level each received as of February
28, 1995, under the SERP Mr. Bittner would receive his full pension plus an
estimated SERP benefit of $75,041; and Mr. Purcell would receive his full
pension plus an estimated SERP benefit of $40,511. Although Mr. Carr has reached
the age of 50 years, his 26 years of service credit entitles him to only a
reduced pension rather than a full pension. Assuming annual compensation at his
February 28, 1995 level, if Mr. Carr were to retire, he would receive a reduced
pension plus an annual SERP benefit of $56,651.
________________________________________________________________________________
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The members of the Committee on Management at the end of the last completed
fiscal year were Ms. Barron, Mr. McCorkindale and Mr. Gill (Chair). None of
these persons were, during 1994 or previously, an officer or employee of the
Company or any of its subsidiaries.
The full Board of Directors accepted the recommendation of the Committee on
Management concerning Mr. Bittner's compensation. Mr. Hasselwander is a former
officer of the Company and, during 1994, he participated in those deliberations
of the registrant's Board of Directors in which the Board accepted the Committee
on Management's recommendations concerning executive officer compensation. Mr.
Hasselwander is not a member of the Committee on Management. No executive
officer of the Company has, during 1994 or previously, served as a Director or
member of the Compensation Committee of any other entity that has an executive
officer who serves or has served either as a member of the Committee on
Management or as a member of the Board of Directors of Frontier Corporation.
EMPLOYMENT CONTRACTS
The Company has entered into agreements, for an indefinite term, with Mr.
Bittner, Mr. Gregory, Mr. Massaro and Mr. Purcell. Each agreement provides that,
in the event of a change in control (as defined in the agreement) which is
followed within three (3) years by termination of employment under circumstances
other than one of
_______________________________________
Proxy Statement Frontier Corporation 11
<PAGE>
the following: (i) death, (ii) retirement, (iii) disability, (iv) termination by
the Company for Cause (as defined in the agreement), or (v) Voluntary
Termination (as defined in the agreement), the employee will be entitled to (a)
continuation for three years of certain health and life insurance benefits, and
(b) a cash severance payment equal to three (3) times the aggregate annual
salary and bonus as determined under the agreement. Additionally, in the event
any of these amounts are determined to trigger an Excise Tax (as defined in the
agreement), the employee may also be entitled to a Gross-Up Payment (as defined
in the agreement). The employee is also entitled to the above benefits if after
a change in control the employee terminates his employment for Good Reason (as
defined in the agreement) or during a "window period" (also as defined in the
agreement). Mr. Bittner, Mr. Gregory, Mr. Massaro, and Mr. Purcell would each
receive their individual severance payments in a lump sum.
________________________________________________________________________________
Interest of Certain Persons in Matters
to be Acted Upon
As disclosed at Proposal 3, Management Stock Incentive Plan, at pages 13 and 14,
the executive officers of the Company would be entitled to participate in the
Plan. Likewise, as disclosed at Proposal 4, Directors Stock Incentive Plan, at
pages 14 and 15, the nominees for Director would be entitled to participate in
that Plan. The benefits each group would receive under these Plans is set forth
in the New Plan Benefits Table at page 16 of this Proxy Statement.
________________________________________________________________________________
Indemnification of Certain Persons
As authorized by New York State Law, the Company and its subsidiaries have
purchased insurance from the Chubb Group and from the National Union Fire
Insurance Company of Pittsburgh, PA, insuring such companies against amounts
they may pay as a result of indemnifying their officers and Directors for
certain liabilities such officers and Directors might incur. These insurance
policies also insure all officers and Directors of the Company and its
affiliates for additional liabilities against which such officers and Directors
may not be indemnified by the Company and its affiliates. The insurance was
renewed on May 7, 1994 for a period of one year. During 1994, the Company paid
$483,615 for this insurance and the renewal policy costs will be negotiated in
March, 1995.
________________________________________________________________________________
PROPOSAL 2-ELECTION OF INDEPENDENT AUDITORS
The Company's independent auditors are Price Waterhouse LLP. At the Annual
Meeting, the shareowners will consider and vote upon a proposal to elect
independent auditors for the Company's fiscal year ending December 31, 1995. The
Audit Committee of the Board of Directors has recommended that Price Waterhouse
LLP be re-elected as independent auditors for that year. No member of the Audit
Committee is an officer or employee of the Company. The Board of Directors
unanimously recommends that shareowners vote FOR this proposal. Proxies
solicited by the Board of Directors will be voted FOR the foregoing proposal
unless otherwise indicated. Approval of this proposal will require the
affirmative vote of a majority of the votes cast at the Annual Meeting by the
holders of the common stock outstanding.
Representatives of Price Waterhouse LLP will be present at the Annual Meeting
to make a statement, if they wish, and to respond to appropriate questions from
shareowners.
MANAGEMENT RECOMMENDS A VOTE "FOR" THE ELECTION OF PRICE WATERHOUSE LLP AS THE
COMPANY'S INDEPENDENT AUDITORS, DESIGNATED AS PROPOSAL 2 ON YOUR PROXY CARD.
PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF
THE DIRECTION THEREON TO THE CONTRARY.
________________________________________________________________________________
Proposals to Modify Employee and Director Compensation Plans
The Company is requesting shareowner approval of amendments and modifications to
existing employee and Director compensation plans. In general the modifications
are designed to increase the participants' ownership of Company common stock.
These proposals are included on pages 13 through 15 of this Proxy Statement as
Proposals 3 and 4. Specifically, in the case of Proposal 3, shareowner approval
is requested to increase the group of employees eligible to receive stock
compensation and to institute a restricted stock plan. In the case of Proposal
4, shareowner approval is requested to expand the group of persons eligible to
receive Directors stock options to include non-employee Directors of
subsidiaries of Frontier Corporation and to implement a stock grant plan. A
brief summary of the intent of each proposal is presented after the title of the
proposal. As required by the regulations of the Securities and Exchange
Commission, also included is a summary of the material provisions of each Plan.
________________________________________
12 Proxy Statement Frontier Corporation
<PAGE>
Copies of each of these Plans and any amendments to them will be available at
the meeting. They also will be sent to any shareowner upon written or oral
request. Shareowners should direct such requests to the Corporate Secretary at
the Company's office at Frontier Center, 180 South Clinton Avenue, Rochester,
New York 14646. Alternatively, shareowners may request this material by calling
the Shareowner Line, 1-800-836-0342.
________________________________________________________________________________
PROPOSAL 3-MANAGEMENT STOCK INCENTIVE PLAN
SUMMARY OF PROPOSED ACTION
As discussed in the Report of the Committee on Management at page 7 of this
Proxy Statement, the Committee has adopted the Management Stock Incentive Plan
(the "Plan"), subject to shareowners' approval, to enhance, restate and rename
the Restated Executive Stock Option Plan. The purpose of the proposed action is
to expand the group of key employees eligible to participate and add restricted
stock as a component of compensation. This action will require the affirmative
vote of a majority of the outstanding shares eligible to vote on this proposal.
SUMMARY OF PLAN PROVISIONS
The Company's Executive Stock Option Plan was originally adopted by the Board of
Directors on November 20, 1989 and approved by shareowners on April 25, 1990. A
restatement was approved by shareowners on April 27, 1994. The Restated
Executive Stock Option Plan currently covers approximately 65 employees who may
be granted either incentive stock options ("ISOs") or non-qualified stock
options ("NQSOs") or a combination of the two. Options with respect to 695,871
shares of common stock were outstanding, as of February 28, 1995, to 54
employees.
Plan Administration; Eligibility. A Committee of the Board of Directors (the
"Committee") has discretion to select, from among the persons eligible for
awards, the key employees to whom awards will be granted, to make any
combination of awards to participants, and to determine the specific terms of
each award, subject to the provisions of the restated and renamed Plan. Persons
eligible to participate in the Plan generally will be those employees, as
selected from time to time by the Committee, who are responsible for or who
contribute to the management, growth, or profitability of the Company. This
expanded group currently numbers approximately 215 managers and executives
across the Company.
Stock Options. The Plan permits the granting of both ISOs and NQSOs. The
exercise price under each option is not less than the fair market value of the
common stock at the time the option is granted. Options by their terms are not
transferable by the participant other than by will or the laws of descent and
distribution, by gift to family members or by the terms of a domestic relations
order. Options become exercisable with respect to 33 1/3% of the shares subject
to the option on the first anniversary of the date of the grant and with respect
to an additional 33 1/3% of such shares on the second and third anniversaries of
such grant. Options expire automatically if not exercised within ten (10) years
following the date of grant. The maximum value of common stock under which an
ISO granted under this Plan or any other Company plan which first becomes
exercisable in any calendar year cannot exceed $100,000.00.
Restricted Stock. Following shareowners' approval of the restated and renamed
Plan, the Committee may also award shares of common stock subject to such
conditions and restrictions as it may determine ("Restricted Stock"). These
conditions and restrictions may include the achievement of certain performance
goals and/or continued employment with the Company through a specified
restricted period. For grants not related to performance, the vesting period
will be a minimum of three years duration.
For participants whose pay is subject to the $1 million cap under Section
162(m) of the Internal Revenue Code, the Committee may select one or more of the
following performance targets:
. Total shareowner return
. Earnings per share growth
. Cash flow return
. Return on equity
Shares Available. The aggregate number of shares of the Company's common stock
available for award under this Plan during any calendar year will not exceed one
percent of the number of issued shares, including treasury shares, of the
Company's common stock. During the life of the Plan, a maximum of 5,000,000
shares may be issued in conjunction with ISOs. At any point during the life of
the Plan, the aggregate number of shares which may be issued as restricted stock
will not exceed three percent of the number of issued shares, including treasury
shares, of the Company's common stock.
The maximum individual annual grant levels for restricted stock and stock
options will not exceed 100,000 and 500,000 shares respectively.
If an award expires, terminates or is cancelled without being exercised, under
certain circumstances, new awards may thereafter be granted incorporating such
shares. No award will be granted more than 10 years after the Plan is approved
by shareowners.
Change in Control. In the event of a change in control of the Company, all of
a participant's restricted stock awards shall become immediately vested to the
same extent as if all restrictions had been satisfied and all options shall
become immediately exercisable, unless directed otherwise by resolution of the
Board adopted prior to and specifically relating to the occurrence of such
change in control. Each participant also has the right, exercised by written
notice to the Company
_______________________________________
Proxy Statement Frontier Corporation 13
<PAGE>
within sixty (60) days after the change in control, to receive, in exchange for
the surrender of an option or any portion thereof to the extent the option is
then exercisable, an amount of cash equal to the difference between the fair
market value (as determined by the Board) on the date of surrender of the Common
Stock covered by the option or portion thereof which is so surrendered and the
option price of such Common Stock under the option.
TAX CONSEQUENCES
The Company has been advised by counsel that under present law the following are
the Federal income tax consequences generally arising with respect to awards
granted under the Plan.
Stock Options. The grant of an option will create no tax consequences for an
optionee or the Company. The optionee will have no taxable income upon
exercising an ISO (except that the alternative minimum tax may apply), and the
Company will receive no deduction when an ISO is exercised. Upon exercising an
NQSO, the optionee must recognize ordinary income equal to the difference
between the exercise price and the fair market value of the stock on the date of
exercise. The Company will be entitled to a deduction for the same amount. The
treatment of an optionee's disposition of shares acquired through the exercise
of an option depends on how long the shares have been held and on whether such
shares were acquired by exercising an ISO or by exercising an NQSO. Generally
there will be no tax consequences to the Company in connection with the
disposition of shares acquired under an option except that the Company may be
entitled to a deduction in the case of the disposition of shares acquired under
an ISO before the applicable holding periods have been satisfied.
Restricted Stock. A recipient of Restricted Stock generally will be subject to
tax at ordinary income rates on the fair market value of the stock at the time
that the stock is no longer subject to forfeiture. However, a recipient who so
elects under Section 83(b) of the Internal Revenue Code, within 30 days of the
date of issuance of the Restricted Stock, will realize ordinary income on the
date of issuance equal to the fair market value of the shares of Restricted
Stock at that time (measured as if the shares were unrestricted and could be
sold immediately). If the shares subject to such election are forfeited, the
recipient will not be entitled to any deduction, refund or loss with respect to
the taxes paid on the forfeited shares. The Company will receive a tax deduction
equal to the amount includable as ordinary income to the recipient.
MANAGEMENT RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE MANAGEMENT STOCK
INCENTIVE PLAN, DESIGNATED AS PROPOSAL 3 ON YOUR PROXY CARD. PROXIES SOLICITED
BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF THE DIRECTION
THEREON TO THE CONTRARY.
________________________________________________________________________________
PROPOSAL 4-DIRECTORS STOCK
INCENTIVE PLAN
SUMMARY OF PROPOSED ACTION
Increased common share ownership in the Company by non-employee Directors of the
Company's subsidiaries will more closely align their interests to those of our
general shareowner population. Based on management's recommendation, the
Company's Board of Directors has recommended a modification to the Directors
Stock Option Plan to permit expansion of the group of eligible participants to
include non-employee Directors of the Company's subsidiaries and to authorize
the award of stock grants to Directors of the Company (but not Directors of its
subsidiaries). Currently eight persons are non-employee Directors of Frontier
Corporation and five persons are non-employee Directors of Frontier Corporation
subsidiaries. To reflect the expanded scope of the Plan, it will be renamed as
the Frontier Corporation Directors Stock Incentive Plan. This action requires
the affirmative vote of a majority of the outstanding shares eligible to vote on
this proposal.
SUMMARY OF PLAN PROVISIONS
The Directors Stock Option Plan was adopted by the Board of Directors on
November 20, 1989, approved by shareowners on April 25, 1990, and amended by
shareowners on April 27, 1994. The Plan currently authorizes 1,000,000 shares to
be available for grants. This authorization is sufficient to support the
proposed new actions. The Plan provides for the automatic annual grant to
Directors of Frontier Corporation of non-qualified options to purchase 4,000
shares of the Company's common stock. Grants are made each year on the date of
the Annual Meeting electing Directors to the Board. Board members who begin
service on the Board on a date other than the date of the Annual Meeting are
granted an option to purchase a pro rata portion of 4,000 shares. All eight
current non-employee Frontier Corporation Directors currently participate in
this Plan. The following is a summary of the material provisions of the amended,
restated and renamed Frontier Corporation Directors Stock Incentive Plan (the
"Plan").
Each option granted under the Plan is evidenced by an option agreement between
the individual Director and the Company. At the date each year that Directors
are elected to the Board, each Director so elected (whether newly elected or
continuing as a carryover Director) will receive an option to purchase a fixed
number of shares of the Company's common stock. The exercise price under each
option equals the fair market value of the common stock at the time the option
is granted. Options are not transferable by the participant other than by will
or the laws of descent and distribution. New options granted under the Plan may
become exercisable with respect to one-third of the option shares on the first
anniversary of the date of grant and with respect to an additional one-third of
such shares on the second and third anniversaries of the grant.
________________________________________
14 Proxy Statement Frontier Corporation
<PAGE>
Notwithstanding any of the provisions of the Plan, in the event of a change in
control of the Company, all of a participant's options are immediately vested
and exercisable, unless directed otherwise by resolution of the Board adopted
prior to and specifically relating to the change in control. In the event of a
change in control, each holder of an exercisable option shall also have the
right at any time thereafter during the term of such option to exercise the
option in full, notwithstanding any limitation or restriction in any option
agreement or in the Plan. Each participant shall also have the right, exercised
by written notice to the Company within sixty (60) days after the change in
control, to receive, in exchange for the surrender of the option or any portion
thereof to the extent the option is then exercisable, an amount of cash. This
amount of cash will be equal to the difference between the fair market value (as
determined by the Board) on the date of surrender of the common stock covered by
the option or portion thereof which is so surrendered and the option price of
such common stock under the option.
PLAN MODIFICATIONS
Eligibility. On January 1, 1995, five non-employee Directors began service on
the Board of Frontier Corporation's subsidiary, Rochester Telephone Corp. The
Frontier Corporation Board of Directors believes that it is advisable to
encourage the Directors of Frontier Corporation subsidiaries to own Frontier
Corporation common stock in order to more closely align their interests to the
interests of the shareowners of Frontier Corporation. Shareowner approval is
necessary to expand Plan participation to include the non-employee Directors of
Rochester Telephone Corp. Approval of this plan modification would provide that
the non-employee Directors of Rochester Telephone Corp. would receive, annually,
a non-qualified option to purchase 3,000 shares of Frontier Corporation common
stock. The terms of the option would be the same as discussed above for the
current Plan participants.
Stock Grants. The Board of Directors of Frontier Corporation believes it would
further the purpose of aligning the interests of non-employee Directors of the
Company and its shareowners if their non-employee Directors were granted shares
of Frontier common stock along with stock options. Accordingly, the restated
Plan provides that the first time a Director begins service on the Board, he or
she will be awarded 1,000 shares of Frontier Corporation common stock. All other
Directors will receive, on the date each year that Directors are elected to the
Company's Board (whether newly elected or continuing as a carryover Director), a
stock grant of 500 shares of the Company's common stock. A non-employee Director
who is a first-time Director and who begins service on a date other than the
date of the Annual Meeting will receive 1,000 shares plus a pro rata portion of
the 500 shares he or she would have been entitled to receive for a full year's
service. All shares obtained pursuant to stock grants will be fully and
immediately vested. However, a Director may not sell, gift or otherwise transfer
the 1,000 share initial grant while serving on the Company's Board unless the
Board agrees to lift the transfer restriction. Directors of subsidiaries are not
eligible to receive stock grants. No awards will be granted more than 10 years
after the Plan is approved by shareowners.
TAX CONSEQUENCES
The Company has been advised by counsel that under present law the following are
the Federal income tax consequences generally arising with respect to awards
granted under the Plan. The grant of an option will create no tax consequences
for the optionee or the Company. Upon exercising a non-qualified stock option
("NQSO"), the optionee must recognize ordinary income equal to the difference
between the exercise price and the fair market value of the stock on the date of
exercise. The Company will be entitled to a deduction for the same amount. The
treatment of an optionee's disposition of the shares acquired through exercise
of an NQSO depends on how long the shares have been held. Generally, there will
be no tax consequences to the Company in connection with the disposition of the
shares acquired through exercise on an NQSO.
A recipient of a stock grant will be subject to tax at ordinary income rates
on the fair market value of the stock at the time of the grant, provided that a
Director who has elected to defer receipt of directors fees shall recognize
income in accordance with the deferral election. The Company will be entitled to
take a tax deduction equal to the amount includable in the Director's income.
MANAGEMENT RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE DIRECTORS STOCK INCENTIVE
PLAN, DESIGNATED AS PROPOSAL 4 ON YOUR PROXY CARD. PROXIES SOLICITED BY THE
BOARD OF DIRECTORS WILL BE SO VOTED IN THE ABSENCE OF THE DIRECTION THEREON TO
THE CONTRARY.
As required by regulations of the Securities and Exchange Commission, the
following table shows the benefits under each of the Plans described in
Proposals 3 and 4. The table indicates the Plan benefits which may be received
by or allocated for the named executive officers, the executive officers as a
group, Directors who are not executive officers, and Company employees who are
not executive officers. The benefits are expressed in either dollar values or
number of units. The Directors, nominees and executive officers will benefit
from approval of the Plans in which they participate.
________________________________________
Proxy Statement Frontier Corporation 15
<PAGE>
<TABLE>
<CAPTION>
NEW PLAN BENEFITS
- --------------------------------------------------------------------------------
Management Directors
Stock Incentive Stock Incentive
Plan/(1)/ Plan/(2)/
- --------------------------------------------------------------------------------
Name and Position (#) (#)
- --------------------------------------------------------------------------------
<S> <C> <C>
R. L. Bittner 102,000 N/A
Chairman, President and CEO
J. T. Carr 26,400 N/A
President and CEO, Rochester
Telephone Corp. and President,
Frontier Telephone Group
D. M. Gregory 26,400 N/A
President, Frontier
Communications Group
L. L. Massaro 26,400 N/A
Corporate Vice President-
Finance
J. K. Purcell 11,000 N/A
Corporate Vice President
Executive Group 240,200 N/A
Non-Executive N/A 52,000
Director Group
Non-Executive Officer 180,600 N/A
Employee Group
</TABLE>
- --------------------------------------------------------------------------------
(1) All amounts are for stock options granted in 1995 to the persons currently
eligible for options under the Executive Stock Option Plan. The number of stock
options which would be granted to the expanded group of eligible employees
and/or the restricted stock shares, if any, which may be awarded, is
undeterminable at this time as any such grants are at the discretion of the
Committee on Management.
(2) All amounts are 1995 projections. This Plan is available only
to Directors who are not employees of the Company or any of
its affiliates.
________________________________________________________________________________
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors does not intend
to present any matter for action at the Annual Meeting other than those set
forth in the Notice of Annual Meeting. If any other matters properly come before
the meeting, it is intended that the holders of the proxies will act in
accordance with their best judgment.
________________________________________________________________________________
FUTURE PROPOSALS OF SHAREOWNERS
In order to be eligible for inclusion in the proxy materials for the Company's
1996 Annual Meeting of Shareowners, any shareowner proposal to take action at
such meeting must be received at the Company's principal executive offices by
November 22, 1995. Any such proposal should be addressed to 180 South Clinton
Avenue, Rochester, New York 14646, Attention: Josephine S. Trubek, Corporate
Secretary. In addition, the Company's By-Laws establish an advance notice
procedure with regard to certain matters, including shareowner proposals not
included in the Company's proxy statement, to be brought before an annual
meeting of shareowners.
In general, in order to bring a matter before the meeting, notice must be
received by the Corporate Secretary of the Company not less than 60 days nor
more than 90 days prior to the anniversary of the immediately preceding annual
meeting and must contain specified information concerning the matters to be
brought before such meeting and concerning the shareowner proposing such
matters. If the date of the annual meeting is more than 30 days earlier or more
than 60 days later than the anniversary date, notice must be received not
earlier than the 90th day prior to such annual meeting and not later than the
close of business on the later of the 60th day prior to such annual meeting or
the 10th day following the day on which the public announcement of the date of
such meeting is first made. If a shareowner who has notified the Company of his
or her intention to present a proposal at an annual meeting does not appear or
send a qualified representative to present that proposal at the meeting, the
Company need not present the proposal for a vote at the meeting.
March 13, 1995
_______________________________________
16 Proxy Statement Frontier Corporation
