<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
[X] Definitive Proxy Statement RULE 14C-5(D)(2))
[X] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
Frontier Corporation
------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
<PAGE>
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
<PAGE>
<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 Tele-phone 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 resi- dential 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 competi-tors 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 profit-ability. 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 liti-gation, 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.
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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>
[LOGO OF FRONTIER CORPORATION GOES HERE]
Without limits, within reach.
FRONTIER CORPORATION
FRONTIER CENTER
180 SOUTH CLINTON AVE
ROCHESTER, NEW YORK 14646-0700
<PAGE>
[Logo of Frontier Corporation] Proxy For Common Shares
I authorize Ronald L. Bittner and/or Josephine S. Trubek, or their
substitutes, to vote all shares of Frontier Corporation which I am entitled
to vote at the Annual Meeting of Shareowners on April 26, 1995, or at any
adjournment thereof, as specified below:
The Board of Directors recommends a vote FOR Proposals 1 through 4:
1. NOMINEES FOR DIRECTORS: Patricia C. Barron, Ronald L. Bittner, Raul E.
Cesan, Brenda E. Edgerton, Jairo A. Estrada, Daniel E. Gill, Alan C.
Hasselwander, Douglas H. McCorkindale, and Dr. Leo J. Thomas
[ ] VOTE FOR all nominees listed above except for the following (if any):
- ------------------------------------------
[ ] VOTE WITHHELD from ALL nominees
FOR AGAINST ABSTAIN
2. Election of Price Waterhouse LLP as Auditors [ ] [ ] [ ]
FOR AGAINST ABSTAIN
3. Approval of the Management Stock [ ] [ ] [ ]
Incentive Plan
FOR AGAINST ABSTAIN
4. Approval of the Directors [ ] [ ] [ ]
Stock Incentive Plan
5. To act in their discretion upon such other matters which may properly come
before the meeting, or which are incident to the conduct of the meeting, and
which the Board of Directors does not know, at the time of this solicitation,
will be presented at the meeting.
CONTINUED, and to be signed, on REVERSE SIDE
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. THE SHARES
REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTION TO
THE CONTRARY IS INDICATED, IT WILL BE VOTED FOR THE ELECTION OF ALL NOMINEES
AND AUDITORS AND IN FAVOR OF THE BENEFIT PLAN PROPOSALS, ITEMS 3 AND 4.
[ ] Yes, I plan to attend the 1995 Annual Meeting.
Dated , 1995 -------------------------------------------
----------
-------------------------------------------
(Please sign exactly as name appears below)
<PAGE>
1
APPENDIX A
[2/14/95]
FRONTIER CORPORATION
MANAGEMENT STOCK INCENTIVE PLAN
1. BACKGROUND AND PURPOSE
On April 27, 1994, the shareholders of Rochester
Telephone Corporation approved the Restated Executive Stock
Option Plan. Frontier Corporation (the "Company"), as successor
to Rochester Telephone Corporation, hereby continues, amends,
restates and renames the Restated Executive Stock Option Plan as
the Frontier Corporation Management Stock Incentive Plan (the
"Plan"). The purpose of this restated Plan remains to enable the
Company to attract and retain key employees and provide them with
an incentive to maintain and enhance the Company's long-term
performance record. It is intended that this purpose will best
be achieved by granting eligible key employees incentive stock
options ("ISOs"), non-qualified stock options ("NQSOs") and
restricted stock grants, individually or in combination, under
this Plan pursuant to the rules set forth in Sections 83, 162(m),
421 and 422 of the Internal Revenue Code, as amended from time to
time.
2. ADMINISTRATION
The Plan shall be administered by the Company's
Committee on Management (the "Committee"). This Committee shall
consist of at least two members of the Company's Board of
Directors all of whom shall, unless the Board determines
otherwise, be "outside directors" as this term is defined in Code
Section 162(m) and regulations thereunder and none of whom during
the twelve months prior to commencement of service on the
Committee, or during such service, has been granted or awarded
any equity security or derivative security of the Company
pursuant to the Plan or, except as permitted by Rule 16b-3
(c)(2)(i), or any successor provision, promulgated pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange
<PAGE>
2
Act"), any other plan of the Company. Subject to the provisions
of the Plan, the Committee shall possess the authority, in its
discretion, (a) to determine the employees of the Company to
whom, and the time or times at which, ISOs and/or NQSOs (ISOs and
NQSOs are collectively referred to as "options") and restricted
stock grants (all three types of grants are collectively referred
to as "awards") shall be granted; (b) to determine at the time of
grant whether an award will be an ISO, a NQSO, a restricted stock
grant or a combination of these awards and the number of shares
to be subject to each award; (c) to prescribe the form of the
award agreements and any appropriate terms and conditions
applicable to the awards and to make any amendments to such
agreements or awards; (d) to interpret the Plan; (e) to make and
amend rules and regulations relating to the Plan; and (f) to make
all other determinations necessary or advisable for the
administration of the Plan. The Committee's determinations shall
be conclusive and binding. No member of the Committee shall be
liable for any action taken or decision made in good faith
relating to the Plan or any award granted hereunder.
3. ELIGIBLE EMPLOYEES
Awards may be granted under the Plan only to employees
of the Company and its subsidiaries (which shall include all
corporations of which at least fifty percent of the voting stock
is owned by the Company directly or through one or more
corporations at least fifty percent of the voting stock of which
is so owned) who hold a position of manager or higher and who
have the capability of making a substantial contribution to the
success of the Company.
4. SHARES AVAILABLE
The total number of shares of the Company's Common Stock
(par value of $1.00 per share) available in the aggregate for
awards under this Plan during any calendar year shall not exceed
one percent (1%) of the number of issued shares of the Company's
Common Stock, including treasury shares, determined as of the
first day of such calendar year (subject to substitution or
adjustment as provided in Section 10). In addition, not more
than 5 million shares of Common Stock shall be available for ISO
<PAGE>
3
awards during the term of the Plan. Finally, the aggregate
number of shares which may be issued under restricted stock
grants at any one time during the life of the Plan may not exceed
three percent (3%) of the number of issued shares, including
treasury shares, of the Company's Common Stock. Shares to be
granted may be authorized and unissued shares or may be treasury
shares.
The total number of shares with respect to which ISO and
NQSO awards in the aggregate may be granted to any one
participant may not exceed 500,000 per calendar year (subject to
substitution or adjustment as provided in Section 10). The total
number of shares with respect to which restricted stock awards
may be granted to any one participant shall not exceed 100,000
per calendar year (subject to substitution or adjustment as
provided in Section 10).
If an award expires, terminates or is cancelled without
being exercised or becoming vested, new awards may thereafter be
granted under the Plan covering such shares unless Rule 16b-3
provides otherwise. No award may be granted more than 10 years
after the effective date of the Plan.
5. TERMS AND CONDITIONS OF ISOS
Each ISO granted under the Plan shall be evidenced by an
ISO option agreement in such form as the Committee shall approve
from time to time, which agreement shall conform with this Plan
and contain the following terms and conditions:
(a) Exercise Price. The exercise price under each
option shall equal the fair market value of the Common Stock
at the time such option is granted, or, if there was no
trading in such stock on the date of such grant, the closing
price on the last preceding day on which there was such
trading. If an option is granted to an officer or employee
who at the time of grant owns stock possessing more than ten
percent of the total combined voting power of all classes of
stock of the Company (a "10-percent Shareholder"), the
purchase price shall be at least 110 percent of the fair
market value of the stock subject to the option.
<PAGE>
4
(b) Duration of Option. Each option by its terms
shall not be exercisable after the expiration of ten years
from the date such option is granted. In the case of an
option granted to a 10-percent Shareholder, the option by
its terms shall not be exercisable after the expiration of
five years from the date such option is granted.
(c) Options Nontransferable. Each option by its terms
shall not be transferable by the participant otherwise than
(i) by will or the laws of descent and distribution, (ii)
pursuant to a domestic relations order, or (iii) to the
extent permitted under the option agreement or
interpretation of the Committee, by gift to family members
or entities beneficially owned by family members or other
permitted transferees under Rule 16b-3 promulgated under the
Exchange Act, and shall be exercisable, during the
participant's lifetime, only by the participant, the
participant's guardian or the participant's legal
representative, the participant's transferee under a
domestic relations order or other permitted transferee under
this section. To the extent required for the option grant
and/or exercise to be exempt under Rule 16b-3, options (or
the shares of Common Stock underlying the options) must be
held by the participant for at least six months following
the date of grant.
(d) Exercise Terms. Each option granted under the Plan
shall become exercisable with respect to 33 1/3 percent of
the shares subject thereto on the first anniversary of the
date of grant and with respect to an additional 33 1/3
percent of such shares on each of the second and third
anniversaries of such date of grant. Options may be
partially exercised from time to time during the period
extending from the time they first become exercisable until
the tenth anniversary (fifth anniversary for a 10-percent
Shareholder) of the date of grant.
<PAGE>
5
No outstanding option may be exercised by any
person if the employee to whom the option is granted is, or
at any time after the date of grant has been, in
competition with the Company or an affiliated company,
including Upstate Cellular Network. The Committee has the
sole discretion to determine whether an employee's actions
constitute competition with the Company or an affiliated
company, including Upstate Cellular Network. The Committee
may impose such other terms and conditions on the exercise
of options as it deems appropriate to serve the purposes
for which this Plan has been established.
(e) Maximum Value of ISO Shares. No ISO shall be
granted to an employee under this Plan or any other ISO
plan of the Company or its subsidiaries to purchase shares
as to which the aggregate fair market value (determined as
of the date of grant) of the Common Stock which first
become exercisable by the employee in any calendar year
exceeds $100,000.
(f) Payment of Exercise Price. An option shall be
exercised upon written notice to the Company accompanied by
payment in full for the shares being acquired. The payment
shall be made in cash, by check or, if the option agreement
so permits, by delivery of shares of Common Stock of the
Company beneficially owned by the participant, duly
assigned to the Company with the assignment guaranteed by a
bank, trust company or member firm of the New York Stock
Exchange, or by a combination of the foregoing. Any such
shares so delivered shall be deemed to have a value per
share equal to the fair market value of the shares on such
date. For this purpose, fair market value shall equal the
closing price of the Company's Common Stock on the New York
Stock Exchange on the date the option is exercised, or, if
there was no trading in such stock on the date of such
exercise, the closing price on the last preceding day on
which there was such trading.
<PAGE>
6
6. TERMS AND CONDITIONS FOR NQSOS
Each NQSO granted under the Plan shall be evidenced by a
NQSO option agreement in such form as the Committee shall approve
from time to time, which agreement shall conform to this Plan and
contain the same terms and conditions as the ISO option agreement
except that the 10-percent Shareholder restrictions in Sections
5(a) and 5(b) and the maximum value of share rules of Section
5(e) shall not apply to NQSO grants. To the extent an option
initially designated as an ISO exceeds the value limit of
Section 5(e), it shall be deemed a NQSO and shall otherwise
remain in full force and effect.
7. TERMS AND CONDITIONS OF RESTRICTED STOCK GRANTS
The Committee may, evidenced by such written agreement
as the Committee shall from time to time prescribe, grant to an
eligible employee a specified number of shares of the Company's
Common Stock which shall vest only after the attainment of the
relevant restrictions described in Section 7(b) below
("restricted stock"). Such restricted stock shall have an
appropriate restrictive legend affixed thereto. A restricted
stock grant shall be neither an option nor a sale, but shall be
subject to the following conditions and restrictions:
(a) Restricted stock may not be sold or otherwise
transferred by the participant until ownership vests,
provided however, to the extent required for the
restricted stock grant to be exempt under Rule 16b-3,
the restricted stock must be held by the participant
for at least six months following the date of
vesting.
(b) Ownership shall vest only following satisfaction of
one or more of the following criteria as the
Committee may prescribe:
(1) the passage of three years, or such longer
period of time as the Committee in its
discretion may provide, from the date of grant.
<PAGE>
7
(2) the attainment of performance-based goals
established by the Committee as of the date of
grant. If the participant's compensation is
subject to the $1 million cap of Code Section
162(m), the Committee may establish such
performance goals based on one or more of the
following targets:
- total shareholder return
- earnings per share growth
- cash flow growth
- return on equity and/or
If the participant's compensation is not subject
to the $1 million cap of Code Section 162(m),
the Committee may establish the performance goal
on the basis of the preceding four targets or
any other target it may from time to time deem
appropriate in its discretion.
(3) any other conditions the Committee may
prescribe, including a non-compete requirement.
(c) Unless the Committee shall determine otherwise with
respect to participants whose compensation is not
governed by Code Section 162(m), the Committee shall
grant and administer all performance-based awards
under (b)(2) above with the intent of meeting the
criteria of Code Section 162(m) for performance-based
compensation. To this end, the outcome of all
targeted goals shall be substantially uncertain on
the date of grant; the goals shall be established no
later than 90 days following the commencement of
service to which the goals relate; the minimum period
for attaining each performance goal shall be one
year; and the Committee shall certify at the
conclusion of the performance period whether the
performance-based goals have been attained. Such
<PAGE>
8
certification may be made by noting the attainment of the
goals in the minutes of the Committee's meetings.
(d) Except as otherwise determined by the Committee, all
rights and title to restricted stock granted to a
participant under the Plan shall terminate and be
forfeited to the Company upon failure to fulfill all
conditions and restrictions applicable to such
restricted stock.
(e) Except for the restrictions set forth in this Plan
and those specified by the Committee in any
restricted stock agreement, a holder of restricted
stock shall possess all the rights of a holder of the
Company's Common Stock (including voting and dividend
rights); provided, however, that prior to vesting the
certificates representing such shares of restricted
stock (and the amount of any dividends issued with
respect thereto) shall be held by the Company for the
benefit of the participant and the participant shall
deliver to the Company a stock power executed in
blank covering such shares. As the shares vest,
certificates representing such shares shall be
released to the participant.
(f) All other provisions of the Plan not inconsistent
with this section shall apply to restricted stock or
the holder thereof, as appropriate, unless otherwise
determined by the Committee.
8. GENERAL RESTRICTION ON ISSUANCE OF STOCK CERTIFICATES
The Company shall not be required to deliver any
certificate upon the grant, vesting or exercise of any award or
option until it has been furnished with such opinion,
representation or other document as it may reasonably deem
necessary to insure compliance with any law or regulation of the
Securities and Exchange Commission or any other governmental
authority having jurisdiction under this Plan. Certificates
delivered upon such grant or exercise may bear a legend
restricting transfer absent such compliance. Each award shall be
<PAGE>
9
subject to the requirement that, if at any time the Committee
shall determine, in its discretion, that the listing,
registration or qualification of the shares subject to such award
upon any securities exchange or under any state or federal law,
or the consent or approval of any governmental regulatory body,
is necessary or desirable as a condition of, or in connection
with, the granting of such awards or the issue or purchase of
shares thereunder, such awards may not vest or be exercised in
whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Committee
in the exercise of its reasonable judgment.
9. IMPACT OF TERMINATION OF EMPLOYMENT
(a) Options
If the employment of a participant terminates by
reason of the participant's disability or death, any option may
be exercised, in the case of disability, by the participant or,
in the case of death, the participant's designated beneficiary
(or personal representative if there is no designated
beneficiary) at any time prior to the earlier of the expiration
date of the option or the expiration of three years after the
date of disability or death, but only if, and to the extent that
the participant was entitled to exercise the option at the date
of disability or death. If the employment of a participant
terminates at any time on or after the participant is entitled to
receive an early retirement service pension or a normal service
pension under Sections 5.1, 5.2, or 5.3 of the Management Pension
Plan, or the equivalent plan if the participant is not a
participant in the Management Pension Plan, the participant may
exercise any options pursuant to the terms of the option
agreement governing such options. Upon termination of the
participant's employment for any reason other than retirement,
disability or death, all options held by the participant, whether
vested or not, shall be forfeited. An option that remains
exercisable after the expiration of three months from termination
of employment shall be treated as a NQSO after three months even
if it would have been treated as an ISO if exercised within three
months of termination. Notwithstanding the foregoing, an option
<PAGE>
10
may not be exercised after retirement if the Committee reasonably
determines that the termination of employment of such participant
resulted from willful acts, or failure to act, by the participant
detrimental to the Company or any of its subsidiaries.
(b) Restricted Stock Grants
(i) Passage of Time Vesting. If a participant has
been awarded restricted stock whose vesting is conditioned solely
on the passage of time, any termination of employment for any
reason, shall result in the forfeiture of all restricted stock
awards that were not vested prior to the termination of
employment except as otherwise provided by the Committee.
(ii) Performance-Based Vesting. If a participant has
been awarded restricted stock whose vesting is based solely on
the attainment of performance-based goals or partly on the
attainment of performance-based goals and partly on the passage
of time, any termination of employment except death, disability
or retirement under Sections 5.1, 5.2 or 5.3 of the Management
Pension Plan shall result in the forfeiture of all restricted
stock awards that were not vested prior to the termination of
employment. A participant who terminates employment on account
of death, disability or retirement may, if the performance-based
criteria are eventually attained, be awarded (or, in the event of
death, the participant's designated beneficiary or personal
representative if there is no designated beneficiary shall be
awarded) up to a pro rata portion of the restricted shares based
on the participant's length of service as of his or her
termination of employment over the length of the award period
ending on the date the performance-based criteria are satisfied
(or the passage of time would have been satisfied, if later, for
an award based in part on performance goals and in part on the
passage of time). The Committee shall have the discretion
whether to grant a full pro rata portion of the restricted
shares, a lesser portion or no shares at all under this
subsection (b)(ii).
<PAGE>
11
(c) Acts Not Constituting Termination of Employment.
Unless otherwise determined by the Committee, an
authorized leave of absence shall not constitute a termination of
employment for purposes of this Plan. In addition, participants
who transfer employment within the Frontier Group of companies,
including Upstate Cellular Network, shall not be considered to
have terminated employment. Any such transferred participants
shall remain eligible to exercise previously granted options and
to vest in restricted stock awards in accordance with their terms
as if no termination occurred and shall be eligible to receive
additional awards pursuant to the terms of employment with their
new employer.
10. ADJUSTMENT OF SHARES
In the event of any change in the Common Stock of the
Company by reason of any stock dividend, stock split,
recapitalization, reorganization, merger, consolidation,
split-up, combination, or exchange of shares, or rights offering
to purchase Common Stock at a price substantially below fair
market value, or of any similar change affecting the Common
Stock, the number and kind of shares authorized under Section 4,
the number and kind of shares which thereafter are subject to an
award under the Plan and the number and kind of unexercised
options and unvested shares set forth in awards under outstanding
agreements and the price per share shall be adjusted
automatically consistent with such change to prevent substantial
dilution or enlargement of the rights granted to, or available
for, participants in the Plan.
11. WITHHOLDING TAXES
Whenever the Company proposes or is required to issue or
transfer shares of Common Stock under the Plan, or whenever
restricted stock vests, the Company shall have the right to
require the recipient to remit to the Company an amount
sufficient to satisfy any federal, state and/or local income and
employment withholding tax requirements prior to the delivery of
any certificate or certificates for such shares or to take any
<PAGE>
12
other appropriate action to satisfy such withholding
requirements. Notwithstanding the foregoing, subject to such
rules as the Committee may promulgate and compliance with any
requirements under Rule 16b-3, the recipient may satisfy such
obligation in whole or in part by electing to have the Company
withhold shares of Common Stock from the shares to which the
recipient is otherwise entitled.
12. NO EMPLOYMENT RIGHTS
The Plan and any awards granted under the Plan shall not
confer upon any participant any right with respect to continuance
as an employee of the Company or any subsidiary, nor shall they
interfere in any way with the right of the Company or any
subsidiary to terminate the participant's position as an employee
at any time.
13. RIGHTS AS A SHAREHOLDER
The recipient of any option under the Plan shall have no
rights as a shareholder with respect thereto unless and until
certificates for the underlying shares of Common Stock are issued
to the recipient. The recipient of a restricted stock grant
shall have all rights of a shareholder except as otherwise
limited by the terms of this Plan.
14. AMENDMENT AND DISCONTINUANCE
This Plan may be amended, modified or terminated by the
Committee or by the shareowners of the Company, except that the
Committee may not, without approval of the shareholders,
materially increase the benefits accruing to participants under
the Plan, increase the maximum number of shares as to which
awards may be granted under the Plan, change the basis for making
performance-based awards for participants whose compensation is
subject to Section 162(m), change the minimum exercise price of
options, change the class of eligible persons, extend the period
for which awards may be granted or exercised, or withdraw the
authority to administer the Plan from the Committee or a
committee of the Committee consisting solely of outside directors
unless the Board determines that inside directors may serve on
<PAGE>
13
the Committee. Notwithstanding the foregoing, to the extent
permitted by law, the Committee may amend the Plan without the
approval of shareholders, to the extent it deems necessary to
cause the Plan to comply with Securities and Exchange Commission
Rule 16b-3 or any successor rule, as it may be amended from time
to time. Except as required by law, no amendment, modification,
or termination of the Plan may, without the written consent of a
participant to whom any award shall theretofore have been
granted, adversely affect the rights of such participant under
such award.
15. CHANGE IN CONTROL
(a) Notwithstanding other provisions of the Plan, in
the event of a change in control of the Company (as defined in
subsection (c) below), all of a participant's restricted stock
awards shall become immediately vested to the same extent as if
all restrictions had been satisfied and all options shall become
immediately vested and exercisable, unless directed otherwise by
a resolution of the Committee adopted prior to and specifically
relating to the occurrence of such change in control.
(b) In the event of a change in control each
participant holding an exercisable option (i) shall have the
right at any time thereafter during the term of such option to
exercise the option in full notwithstanding any limitation or
restriction in any option agreement or in the Plan, and (ii) may,
subject to Committee approval and after written notice to the
Company within 60 days after the change in control, or, if the
participant is an officer subject to Section 16 of the Exchange
Act and to the extent required to exempt the transaction under
Rule 16b-3, during the period beginning on the third business day
and ending on the twelfth business day following the first
release for publication by the Company after such change of
control of a quarterly or annual summary statement of earnings,
which release occurs at least six months following grant of the
option, whichever period is longer, receive, in exchange for the
surrender of the option or any portion thereof to the extent the
option is then exercisable in accordance with clause (i), an
amount of cash equal to the difference between the fair market
value (as determined by the Committee) on the date of surrender
<PAGE>
14
of the Common Stock covered by the option or portion thereof
which is so surrendered and the option price of such Common Stock
under the option.
(c) For purposes of this section, "change in control"
means:
1) there shall be consummated
i. any consolidation or merger of the Company in
which the Company is not the continuing or
surviving corporation or pursuant to which any
shares of the Company's common stock are to be
converted into cash, securities or other property,
provided that the consolidation or merger is not
with a corporation which was a wholly-owned
subsidiary of the Company immediately before the
consolidation or merger; or
ii. any sale, lease, exchange or other transfer (in
one transaction or a series of related
transactions) of all, or substantially all, of the
assets of the Company; or
2) the shareholders of the Company approve any plan or
proposal for the liquidation or dissolution of the
Company; or
3) any person (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) shall become the beneficial
owner (within the meaning of Rule 13d-3 under the
Exchange Act), directly or indirectly, of 30% or more
of the Company's then outstanding common stock,
provided that such person shall not be a wholly-owned
subsidiary of the Company immediately before it becomes
such 30% beneficial owner; or
4) individuals who constitute the Company's Board of
Directors on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director
<PAGE>
15
subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by
a vote of at least three quarters of the directors
comprising the Incumbent Board (either by a specific vote or
by approval of the proxy statement of the Company in which
such person is named as a nominee for director, without
objection to such nomination) shall be, for purposes of this
clause (d), considered as though such person were a member
of the Incumbent Board.
16. EFFECTIVE DATE
The effective date of the Plan shall be the date this
restated Plan is approved by the affirmative vote of the owners
of a majority of the Company's outstanding shares of Common
Stock.
17. DEFINITIONS
Any terms or provisions used herein which are defined in
Sections 83, 162(m), 421, or 422 of the Internal Revenue Code as
amended, or the regulations thereunder or corresponding
provisions of subsequent laws and regulations in effect at the
time awards are made hereunder, shall have the meanings as
therein defined.
18. GOVERNING LAW
To the extent not inconsistent with the provisions of
the Internal Revenue Code that relate to awards, this Plan and
any award agreement adopted pursuant to it shall be construed
under the laws of the State of New York.
Dated: FRONTIER CORPORATION
By_____________________________
Josephine S. Trubek
Corporate Secretary
Date of Shareholder Approval: ________________
<PAGE>
1
APPENDIX B
[2/14/95]
FRONTIER CORPORATION
DIRECTORS STOCK INCENTIVE PLAN
The Rochester Telephone Corporation Directors Stock
Option Plan is hereby amended, restated and renamed as the
Frontier Corporation Directors Stock Incentive Plan (the "Plan")
to reflect the company's reorganization and the change in the
parent company's name to Frontier Corporation (the "Company"), to
authorize the award of stock grants in addition to stock options
and to expand eligibility to outside directors of the Company's
subsidiaries as follows:
1. PURPOSE
The purpose of the Plan is to enable the Company and
its subsidiaries to attract and retain outside directors and
provide them with an incentive to maintain and enhance the
Company's long-term performance record. It is intended that this
purpose will best be achieved by granting eligible directors
non-qualified stock options ("options") and/or stock grants
(collectively options and stock grants are referred to as
"awards") under this Plan pursuant to the rules set forth in
Section 83 of the Internal Revenue Code, as amended from time to
time.
2. ADMINISTRATION
The Plan shall be administered by the Company's Board
of Directors (the "Board"). Subject to the provisions of the
Plan, the Board shall possess the authority, in its discretion,
(a) to prescribe the form of the stock option and stock grant
agreements including any appropriate terms and conditions
applicable to these awards and to make any amendments to such
agreements or awards; (b) to interpret the Plan; (c) to make and
<PAGE>
2
amend rules and regulations relating to the Plan; and (d) to make
all other determinations necessary or advisable for the
administration of the Plan. The Board's determinations shall be
conclusive and binding. No member of the Board shall be liable
for any action taken or decision made in good faith relating to
the Plan or any award granted hereunder.
3. ELIGIBLE DIRECTORS
Members of the Board of Directors of the Company and
its subsidiaries who are not also employees of the Company or its
subsidiaries are eligible to participate in this Plan. Eligible
directors of the Company's Board are entitled to receive both
options and stock grants. Eligible directors of a subsidiary are
entitled to receive only options. Beneficial owners of more than
five percent of the Common Stock of the Company are not eligible
to receive any awards under this Plan.
4. SHARES AVAILABLE
An aggregate of 1,000,000 shares of the Common Stock
(par value $1.00 per share) of the Company (subject to
substitution or adjustment as provided in Section 9 hereof) shall
be available for the grant of awards under the Plan. Such shares
may be authorized and unissued shares. If an option expires,
terminates or is cancelled without being exercised, new options
may thereafter be granted covering such shares. No award may be
granted more than ten years after the effective date of the Plan.
5. TERMS AND CONDITIONS OF OPTIONS
Each option granted under the Plan shall be evidenced
by an option agreement in such form as the Board shall approve
from time to time, which agreement shall conform with this Plan
and contain the following terms and conditions:
(a) Number of Shares. At the date each year when new
members are elected to the Company's Board, each eligible
director who will be serving on the new Board (whether newly
elected or continuing as a carryover director) shall receive
an option to purchase 4000 shares of the Company's Common
<PAGE>
3
Stock. For an eligible director of a subsidiary's Board, the
option shall be for 3000 shares.
An eligible director who begins Board service on a date
other than the date when new members are normally elected to
the Board shall receive a pro rata grant to cover the
partial year remaining until the next Board election. The
number of shares subject to such option shall be 4000 (3000
in the case of a director of a subsidiary) multiplied by a
fraction the numerator of which is the number of full or
partial months in the period commencing on the first day of
the month following the new Board member's appointment and
ending on the next following date when new members are
elected to the Board and the denominator of which is 12.
Any fractional share shall be rounded up to the next highest
whole number of shares.
(b) Exercise Price. The exercise price under each
option shall equal the fair market value of the Common Stock
at the time such option is granted. For this purpose, fair
market value shall equal the closing price of the Company's
Common Stock on the New York Stock Exchange on the date an
option is granted, or, if there was no trading in such stock
on the date of such grant, the closing price on the last
preceding day on which there was such trading.
(c) Duration of Option. Each option by its terms
shall not be exercisable after the expiration of ten years
from the date such option is granted.
(d) Options Nontransferable. Each option by its terms
shall not be transferable by the participant otherwise than
by will or the laws of descent and distribution, and shall
be exercisable, during the participant's lifetime, only by
the participant, the participant's guardian or the
participant's legal representative.
(e) Exercise Terms. Each option granted under the
Plan shall become exercisable with respect to 33 1/3 percent
of the shares subject thereto on the first anniversary of
the date of grant and with respect to an additional 33 1/3
<PAGE>
4
percent of such shares on each of the second and third
anniversaries of such date of grant. Options may be
partially exercised from time to time during the period
extending from the time they first become exercisable until
the tenth anniversary of the date of grant.
(f) Payment of Exercise Price. An option shall be
exercised upon written notice to the Company accompanied by
payment in full for the shares being acquired. The payment
shall be made in cash, by check or, if the option agreement
so permits, by delivery of shares of Common Stock of the
Company registered in the name of the participant, duly
assigned to the Company with the assignment guaranteed by a
bank, trust company or member firm of the New York Stock
Exchange, or by a combination of the foregoing. Any such
shares so delivered shall be deemed to have a value per
share equal to the fair market value of the shares on such
date. For this purpose, fair market value shall equal the
closing price of the Company's Common Stock on the New York
Stock Exchange on the date the option is exercised, or, if
there was no trading in such stock on the date of such
exercise, the closing price on the last preceding day on
which there was such trading.
6. TERMS AND CONDITIONS OF STOCK GRANTS
Each stock grant awarded under the Plan shall be
evidenced by a stock grant agreement in such form as the Board
shall approve from time to time, which agreement shall conform
with the Plan and the following terms and conditions:
(a) Number of Shares. At the date each year when new
members are elected to the Company's Board, each eligible
director of the Company who will be serving on the new Board
(whether newly elected or continuing as a carryover
director) shall be granted 500 shares of the Company's
Common Stock.
An eligible director who begins Board service on a date
other than the date when new members are normally elected to
the Board shall receive a pro rata grant to cover the
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5
partial year remaining until the next Board election. The
number of shares subject to such grant shall be 500
multiplied by a fraction the numerator of which is the
number of full or partial months in the period commencing on
the first day of the month following the new Board member's
appointment and ending on the next following date when new
members are elected to the Board and the denominator of
which is 12. Any fractional share shall be rounded up to
the next highest whole number of shares.
Notwithstanding the foregoing two paragraphs of this
Section 6(a), an eligible director who begins his or her
first service on the Company's Board, whether such service
commences on the date of the Annual Meeting or on another
date, shall be granted 1000 shares of the Company's Common
Stock.
(b) Vesting. All shares shall be fully and
immediately vested at the date of grant.
(c) Restriction on Transferability. The 500 shares
(or the partial year pro rata portion of such shares)
granted annually to each eligible director are not subject
to any transfer restrictions under the terms of this Plan.
However, the 1,000 shares granted to a first time director
(including additional shares obtained through dividend
reinvestment) may not be sold, gifted or otherwise
transferred while the director remains on the Board of the
Company unless the Board in its sole and absolute discretion
determines otherwise.
(d) Custody of Share Certificates. Certificates for
all shares subject to the transferability restriction under
subsection (c) above shall be held by the Company for the
benefit of the director who shall deliver to the Company a
stock power executed in blank covering such shares. Except
for this custody restriction, the holder of a stock grant
shall possess all the rights of a holder of the Company's
Common Stock, including voting and dividend rights, provided
that all dividends shall be automatically reinvested in
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6
additional shares of Company Common Stock rather than paid
in cash.
(e) Miscellaneous. All other provisions of the Plan
not inconsistent with this Section 6 shall apply to stock
grants and the holder thereof unless otherwise determined by
the Board. Stock grants shall be considered as directors
fees for purposes of any plan of deferred compensation that
permits the deferral of directors fees.
7. GENERAL RESTRICTION ON ISSUANCE OF STOCK CERTIFICATES
The Company shall not be required to deliver any
certificate upon the grant of any award, the exercise of an
option or the satisfaction of any condition with respect to any
award until it has been furnished with such opinion,
representation or other document as it may reasonably deem
necessary to insure compliance with any law or regulation of the
Securities and Exchange Commission or any other governmental
authority having jurisdiction under this Plan. Certificates
delivered upon such grant, exercise or satisfaction of any
condition may bear a legend restricting transfer absent such
compliance. Each award shall be subject to the requirement that,
if at any time the Board shall determine, in its discretion, that
the listing, registration or qualification of the shares subject
to such award upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental
regulatory body, is necessary or desirable as a condition of, or
in connection with, the granting of such award or the issue or
purchase of shares thereunder, such award may not be granted or
exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Board of
Directors in the exercise of its reasonable judgment.
8. TERMINATION OF EMPLOYMENT
(a) Options. If a director dies, either before or
after termination as a director, resigns from the Board as a
result of a conflict of interest or is removed from the
Board for cause, any option may be exercised by the director
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7
or by the director's personal representative, as the case
may be, at any time prior to the earlier of the expiration
date of the option or the first anniversary of the
director's date of death, resignation or removal but only
if, and to the extent that, the director was entitled to
exercise the option at the date of death, resignation or
removal. If a director's employment as a director
terminates for any reason other than death, resignation due
to a conflict or removal for cause, option rights shall
continue to vest in accordance with the terms of the option
agreement without regard to the termination of employment
and may be exercised by the director pursuant to the terms
of that agreement.
(b) Stock Grants. Upon a director's termination of
employment as a director for any reason, all certificates
for shares of Common Stock held by the Company on account of
the restriction on the transfer of stock grants during
service on the Board shall be delivered to the director. In
the event termination of employment is caused by the
director's death such certificates shall be delivered to the
director's personal representative. All such deliveries of
certificates shall be made as soon as reasonably practicable
on or following the date a director terminates employment as
a director of the Company.
9. ADJUSTMENT OF SHARES
In the event of any change in the Common Stock of the
Company by reason of any stock dividend, stock split,
recapitalization, reorganization, merger, consolidation,
split-up, combination, or exchange of shares, or rights offering
to purchase Common Stock at a price substantially below fair
market value, or of any similar change affecting the Common
Stock, the number and kind of shares authorized under Section 4,
the number and kind of shares which thereafter are subject to an
award under the Plan and the number and kind of shares set forth
in options under outstanding agreements and the price per share
shall be adjusted automatically consistent with such change to
prevent substantial dilution or enlargement of the rights granted
to, or available for, participants in the Plan.
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8
10. NO EMPLOYMENT RIGHTS
The Plan and any awards granted under the Plan shall
not confer upon any director any right with respect to
continuance as a director of the Company or any subsidiary, nor
shall they interfere in any way with any right the Company or its
subsidiaries may have to terminate the director's position as a
director at any time.
11. RIGHTS AS A SHAREOWNER
The recipient of any option under the Plan shall have
no rights as a shareowner with respect thereto unless and until
certificates for shares of Common Stock are issued to the
recipient. The recipient of a stock grant shall have all rights
of a shareowner except for the nontransferability and dividend
reinvestment requirements.
12. AMENDMENT AND DISCONTINUANCE
This Plan may be amended, modified or terminated by the
shareowners of the Company or by the Company's Board of
Directors, provided that Plan provisions relating to the amount,
price and timing of awards may not be amended more than once
every six months other than to comport with changes in the
Internal Revenue Code or the regulations thereunder and provided
further that the Board may not, without approval of the
shareowners, materially increase the benefits accruing to
participants under the Plan, increase the maximum number of
shares as to which awards may be granted under the Plan, change
the minimum exercise price, change the class of eligible persons,
extend the period for which options may be granted or exercised,
or withdraw the authority to administer the Plan from the Board
or a Committee of the Board. Notwithstanding the foregoing, to
the extent permitted by law, the Board may amend the Plan without
the approval of shareowners, to the extent it deems necessary to
cause the Plan to comply with Securities and Exchange Commission
Rule 16b-3 or any successor rule, as it may be amended from time
to time. Except as required by law, no amendment, modification,
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9
or termination of the Plan may, without the written consent of a
director to whom any award shall theretofore have been granted,
adversely affect the rights of such director under such option.
13. CHANGE IN CONTROL
(a) Notwithstanding other provisions of the Plan, in
the event of a change in control of the Company (as defined in
subsection (c) below), all of a participant's options shall
become immediately vested and exercisable and all of a
participant's certificates held by the Company under a stock
grant shall be immediately delivered to the participant, unless
directed otherwise by a resolution of the Board adopted prior to
and specifically relating to the occurrence of such change in
control.
(b) In the event of a change in control each
participant holding an exercisable option (i) shall have the
right at any time thereafter during the term of such option to
exercise the option in full notwithstanding any limitation or
restriction in any option agreement or in the Plan, and (ii) may,
subject to Board approval and after written notice to the Company
within 60 days after the change in control, or during the period
beginning on the third business day and ending the twelfth
business day following the first release for publication by the
Company after such change of control of a quarterly or annual
summary statement of earnings, which release occurs at least six
months following grant of the option, whichever period is longer,
receive, in exchange for the surrender of the option or any
portion thereof to the extent the option is then exercisable in
accordance with clause (i), an amount of cash equal to the
difference between the fair market value (as determined by the
Board) on the date of surrender of the Common Stock covered by
the option or portion thereof which is so surrendered and the
option price of such Common Stock under the option.
(c) For purposes of this section "change in control"
means:
1) there shall be consummated
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10
i. any consolidation or merger of the Company in
which the Company is not the continuing or
surviving corporation or pursuant to which any
shares of the Company's common stock are to be
converted into cash, securities or other property,
provided that the consolidation or merger is not
with a corporation which was a wholly-owned
subsidiary of the Company immediately before the
consolidation or merger; or
ii. any sale, lease, exchange or other transfer (in
one transaction or a series of related
transactions) of all, or substantially all, of the
assets of the Company; or
2) the shareowners of the Company approve any plan or
proposal for the liquidation or dissolution of the
Company; or
3) any person (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), shall become the
beneficial owner (within the meaning of Rule 13d-3
under the Exchange Act), directly or indirectly, of 30%
or more of the Company's then outstanding common stock,
provided that such person shall not be a wholly-owned
subsidiary of the Company immediately before it becomes
such 30% beneficial owner; or
4) individuals who constitute the Board on the date hereof
(the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date
hereof whose election, or nomination for election by
the Company's shareowners, was approved by a vote of at
least three quarters of the directors comprising the
Incumbent Board (either by a specific vote or by
approval of the proxy statement of the Company in which
such person is named as a nominee for director, without
objection to such nomination) shall be, for purposes of
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11
this clause (d), considered as though such person were
a member of the Incumbent Board.
14. EFFECTIVE DATE
The effective date of this restated Plan is January 1,
1995.
15. DEFINITIONS
Any terms or provisions used herein which are defined
in Section 83 of the Internal Revenue Code as amended, or the
regulations thereunder or corresponding provisions of subsequent
laws and regulations in effect at the time options are made
hereunder, shall have the meanings as therein defined.
16. GOVERNING LAW
To the extent not inconsistent with the provisions of
the Internal Revenue Code that relate to non-qualified stock
options and stock grants, this Plan and any agreement adopted
pursuant to it shall be construed under the laws of the State of
New York.
Dated: FRONTIER CORPORATION
By___________________________
Josephine S. Trubek
Corporate Secretary
