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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) February 13, 1995
Frontier Corporation
(Exact name of registrant as specified in its charter)
New York 1-4166 16-0613330
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
180 South Clinton Avenue
Rochester, New York 14646
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(716) 777-1000
Item 2 Acquisition or Disposition of Assets
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As previously announced, on November 8, 1994, the Registrant
and WCT Communications, Inc. ("WCT") reached a definitive agreement
on the terms of the Registrant's acquisition of WCT. Under the
definitive agreement, all WCT shareowners will receive $6.50 per
share pursuant to a cash merger, with the exception of Richard
Frockt, WCT's chairman and 24 percent shareholder, who has
separately agreed to sell his shares to Frontier Corporation for
$6.00 per share in cash immediately prior to the merger. Mr.
Frockt and Christopher Edgecomb, a 7% shareholder and director of
WCT and its former Executive Vice President, 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 $96 million. WCT Communications, Inc.
is an interexchange carrier based on Santa Barbara, California that
operates long distance and telemanagement businesses in California
and other western states. WCT's interexchange operations, which
generated $102 million of revenues in its fiscal year ended June
30, 1994, will be merged into Frontier Communications International
Inc.'s operation. The transaction will be accounted for as a
purchase, is subject to regulatory approval, and is expected to
close in the first quarter of 1995.
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In November 1994, the Registrant 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 Registrant 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, is subject to regulatory approval and the
completion of appropriate due diligence. The transaction is
expected to close in the first quarter of 1995.
The Registrant has elected to file by this Report on Form 8-K
its 1994 Consolidated Financial Statements, Management's Discussion
and Analysis and information regarding certain legal proceedings.
These financial statements specifically include the following:
Frontier Corporation
--------------------
Management's Discussion of Results of Operations and
Analysis of Financial Condition
Report of Independent Accountants
Business Segment Information
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Shareowners' Equity
Notes to Consolidated Financial Statements
Also filed by this Report on Form 8-K are the Audited Financial
Statements for American Sharecom, Inc. as of October 31, 1994 and
1993 and July 31, 1993. In addition, filed by this report on Form
8-K are Unaudited Combined Pro Forma Consolidated Financial
Statements and the Notes to Unaudited Pro Forma Combined Financial
Statements for Frontier Corporation, WCT Communications, Inc. and
American Sharecom, Inc.
Item 7 Financial Statements and Exhibits
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(a) Financial Statements of Business to be Acquired - American
Sharecom, Inc.
Report of Independent Auditors
Consolidated Statements of Financial Position: October 31,
1994 and July 31, 1993
Consolidated Statements of Operations: Year Ended October 31,
1994, Three Month Period Ended October 31, 1993 and Year Ended
July 31, 1993
Consolidated Statement of Changes in Shareholders' Equity:
Year Ended October 31, 1994, Three Month Period Ended
October 31, 1993 and Year Ended July 31, 1993
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Consolidated Statements of Cash Flows: Year Ended October 31,
1994, Three Month Period Ended October 31, 1993 and Year Ended
July 31, 1993
Notes To Consolidated Financial Statements: October 31, 1994
and July 31, 1993
(b) Unaudited Pro Forma Combined Financial Information
Frontier Corporation, WCT Communications, Inc. and American
Sharecom, Inc. - Unaudited Pro Forma Combined Balance Sheet:
December 31, 1994
Frontier Corporation and WCT Communications, Inc. - Unaudited
Pro Forma Combined Statement of Income (Frontier Corporation
Pro Forma): Year Ended December 31, 1994
Frontier Corporation Pro Forma and American Sharecom, Inc. -
Unaudited Pro Forma Combined Statement of Income: Year Ended
December 31, 1994
Frontier Corporation and American Sharecom, Inc. - Unaudited
Pro Forma Combined Satement of Income: Years Ended December
31, 1993 and 1992
Frontier Corporation - Notes to Unaudited Pro Forma Combined
Financial Statements
(c) Exhibits
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3-1 Bylaws of Frontier Corporation
3-2 Amendment to Certificate of Incorporation
3-3 Amendment to Certificate of Incorporation
23-1 Consent of Accountants (Price Waterhouse)
23-2 Consent of Accountants (Ernst & Young)
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf of the undersigned hereunto duly authorized.
Frontier Corporation
(Registrant)
Dated: February 13, 1995 By: /s/ Louis L. Massaro
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Louis L. Massaro
Corporate Vice President and
Chief Financial Officer
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Management's Discussion of Results of Operations and
Analysis of Financial Condition
DESCRIPTION OF BUSINESS
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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
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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
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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
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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
postemployment 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 retroactively adjusted to
reflect the split, unless specifically indicated otherwise.
Corporate Name Change and Restructuring
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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.
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
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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:
(1) Rochester Telephone Corp., a new regulated
telephone and network transport company which holds
virtually all of the local service assets used in the
Rochester, New York market. Rochester Telephone offers
retail local telephone service and also markets
wholesale network services and other services to other
retail providers of telecommunication services in the
Rochester market,
(2) Frontier Communications of Rochester, Inc.,
a new retail provider of telecommunication services to
residential and business customers located in the
Rochester, New York market,
(3) 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,
(4) 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
(5) 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
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lines of business without obtaining the approval of the PSC,
subject only to the same exceptions as any other holding
company operating in New York State. As a result, the
Company should be able to respond more quickly to customer
needs and new opportunities.
The establishment of Frontier Communications of
Rochester Inc. allows us to provide integrated
communications services to customers. Frontier
Communications of Rochester will buy network access from
Rochester Telephone Corp. or other carriers, and package
these services with its own and others' product lines such
as long distance, wireless, data services and voice mail.
Initially, Frontier Communications of Rochester's customer
base includes Centrex and digital private line customers
previously serviced by the former Rochester local operating
company. Beginning on January 1, 1995, Frontier
Communications of Rochester and other competitors were
authorized to compete for local service customers from
Rochester Telephone Corp.'s current customer base. Frontier
Communications of Rochester intends to create value by
becoming the single point of contact for sales and service
for its customers. Its competitive strength will be the
ability to create market-demanded packages of
telecommunications products and services, and to provide a
single bill for all of these services. While its services
will initially be limited to customers in the Rochester, New
York market, Frontier Communications anticipates that it
may offer its services elsewhere.
Certain Considerations Related to the Open Market Plan
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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
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potentially cause a decrease in the Company's revenues
and profitability. The Company believes, however, that
usage of its network following implementation of the
Open Market Plan will increase, and that new revenue
will offset, to some extent, the loss of revenues from
end-user customers. Increased competition may also
lead to additional price 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
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prohibited unless Rochester Telephone Corp.'s directors
certify that such dividends will neither impair
Rochester Telephone Corp.'s service quality nor its
ability to finance its short and long term capital
needs on reasonable terms while maintaining an S&P debt
rating target of "A". Other financial covenants exist
to ensure that Rochester Telephone Corp. will have the
financial strength to provide quality service. The
Company believes that these conditions will not affect
the opportunities for either Frontier Corporation or
Rochester Telephone Corp.
(d) Holding Company Structure. The Company no longer
directly owns any material assets other than its
interest in the capital stock of its subsidiaries. As
noted above, dividends from Rochester Telephone Corp.
to Frontier Corporation are subject to the financial
covenants of the Open Market Plan.
(e) Potential Diversification Risk. The Company is
now able to make acquisitions and investments, enter
into new lines of business and geographic areas, issue
equity securities and incur long-term indebtedness
without PSC approval, subject to certain exceptions.
The Company may pursue opportunities with both greater
potential profits and greater business risk than it
could pursue as a telephone company subject to the
authority of the PSC. There can be no assurance that
any expansion of the Company's business will be
successful. However, it is the current intention of
the Company to engage only in telecommunications-
related businesses.
(f) Other Considerations. (i) Although the royalty
order discussed below, under Regulatory Matters,
remains in litigation, the Open Market Plan Agreement
precludes the PSC from seeking royalties for the next
seven years. After that, subject to the outcome of the
pending litigation, the PSC may be able to assert its
authority to do so. (ii) Because Rochester Telephone
Corp. and Frontier Communications of Rochester will, at
least initially, be competing for the same customers,
there may be some duplication of sales and service
expenses in the consolidated company. Over time, this
duplication is expected to reach minimal levels.
INDUSTRY OUTLOOK AND STRATEGIES
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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
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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 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 network
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
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services solutions. We have evaluated the potential
benefits of Personal Communication Services (PCS), which is
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 communications
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
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Consolidated
Consolidated revenues and sales were $985.5 million in
1994, a $79.0 million, or 8.7 percent, increase over 1993.
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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 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
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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.
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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
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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.
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
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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.
<PAGE>
<PAGE>16
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
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.
<PAGE>
<PAGE>17
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
<PAGE>
<PAGE>18
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 of our only
telephone property in North Dakota in May 1994. In 1993, we
<PAGE>
<PAGE>19
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 $8.8 million over 1992's net other expenses.
This was due to administrative expenses associated with the
Company's reorganization petition with the New York State
Public Service Commission, debt refinancing expenses, and
acquisition costs.
Income Taxes
- ------------
The effective federal tax rate in 1994 was 34.4
percent, compared to 35.4 percent in 1993 and 34.2 percent
in 1992. (See Note 9 to the Consolidated Financial
Statements.)
FINANCIAL CONDITION
- -------------------
Management's overall objective is to maximize
shareowner value. While increasing net income is an
important component of the process, management believes that
the primary source of value over the long term is cash
generation over and above investment requirements. Key
management decisions are made based on the value added to
<PAGE>
<PAGE>20
our shareowners' investment. Corporate performance,
strategies, capital projects and acquisitions are evaluated
and measured using cash flow analysis and investments are
expected to provide a return that exceeds the risk-adjusted
cost of capital of the Company, or specific business unit,
as appropriate.
There are a number of key financial metrics that can be
used to monitor management's performance. While several of
these metrics provide information on the Company's financial
condition at a specific time, others, such as shareowner
return, are somewhat dependent on the overall financial
markets and are often more useful when viewed over an
extended period of time.
Key Financial Data
($'s in millions, except per share data)
1994 1993 1992
- -----------------------------------------------------
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 $ 2.57 $17.82
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
<PAGE>
<PAGE>21
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.
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
<PAGE>
<PAGE>22
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.
<PAGE>
<PAGE>23
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 $96 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 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,
<PAGE>
<PAGE>24
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
<PAGE>
<PAGE>25
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.
<PAGE>
<PAGE>26
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.
<PAGE>
<PAGE>27
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 Postretirement Benefits
Other than Pensions."
PRICE WATERHOUSE LLP
January 16, 1995
1900 Chase Square
Rochester, NY 14604
<PAGE>
<PAGE>28
<TABLE>
Business Segment Information
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
- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>29
<TABLE>
Business Segment Information cont.
In thousands of dollars
Years ended December 31, 1994 1993 1992
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------------
(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.
</TABLE>
<PAGE>
<PAGE>30
<TABLE>
Consolidated Statement of Income
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
- --------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>31
<TABLE>
Consolidated Statement of Income cont.
In thousands of dollars,except per
share data Years ended December 31, 1994 1993 1992
- --------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>32
<TABLE>
Consolidated Balance Sheet
In thousands of dollars,except per
share data Years ended 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
- -----------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>33
<TABLE>
Consolidated Balance Sheet cont.
In thousands of dollars December 31, 1994 1993 1992
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
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
==============================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>34
<TABLE>
Consolidated Statement of Cash Flows
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 - -
</TABLE>
<PAGE>
<PAGE>35
<TABLE>
Consolidated Statement of Cash Flows cont.
In thousands of dollars
Years ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
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
============================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>36
<TABLE>
Consolidated Statement of Shareowners' Equity
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
- --------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>37
<TABLE>
Consolidated Statement of Shareowners' Equity cont.
In thousands of dollars, except share data 1994 1993 1992
- --------------------------------------------------------------------------
<S> <C> <C> <C>
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
==========================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE>38
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.
<PAGE>
<PAGE>39
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:
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
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.
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
<PAGE>
<PAGE>40
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
<PAGE>
<PAGE>41
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.
<PAGE>
<PAGE>42
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).
<PAGE>
<PAGE>43
<TABLE>
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 2,580 1,409 1,079 1,303 1,086 847
Taxes
- -------------------------------------------------------------------------------------------------
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 Subscribers 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
(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.
</TABLE>
<PAGE>
<PAGE>44
4. Other Income (Expense), Net
The major components included in this caption are as
follows (amounts in thousands):
Income (Expense)
1994 1993 1992
- -----------------------------------------------------------
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)
- -----------------------------------------------------------
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
<PAGE>
<PAGE>45
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:
In thousands of dollars 1994 1993 1992
- -----------------------------------------------------------
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
7. Notes Payable and Lines of Credit
At December 31, the Company had outstanding notes
payable as follows:
In thousands of dollars Amount Interest Rate
- --------------------------------------------------------
1992 $ 6,194 4.00% - 9.00%
1993 $ 303 6.00% - 9.00%
1994 $ 106 9.00%
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.
<PAGE>
<PAGE>46
<TABLE>
8. Long-Term Debt
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
- --------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>47
<TABLE>
8. Long-Term Debt
In thousands of dollars
At December 31, 1994 1993 1992
- ---------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------
(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.
<PAGE>
<PAGE>48
(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:
In thousands of
dollars 1995 1996 1997 1998 1999
-----------------------------------------------------
$4,525 $4,663 $4,511 $4,408 $124,500
-----------------------------------------------------
<PAGE>
<PAGE>49
9. Income Taxes
The provision for income taxes consists of the following:
In thousands of dollars 1994 1993 1992
- ----------------------------------------------------------
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
- ----------------------------------------------------------
The reconciliation of the federal statutory income tax rate
with the effective income tax rate reflected in the
financial statements is as follows:
<PAGE>
<PAGE>50
</TABLE>
<TABLE>
In thousands of
dollars 1994 1993 1992
- -----------------------------------------------------------
<S> <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:
In thousands of dollars 1994 1993 1992
- --------------------------------------------------------------
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
- -------------------------------------------------------------
<PAGE>
<PAGE>51
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
- -------------------------------------------------------------
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.
<PAGE>
<PAGE>52
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.
Plans for Plans for
which assets which
exceed accumulated
December 31, 1994 accumulated benefits
In thousand of dollars benefits exceed assets Total
- ---------------------------------------------------------
Actuarial present value
of benefit obligations:
Vested benefit
obligation $294,140 $ 15,494 $309,634
Accumulated benefit
obligation $308,432 $ 17,223 $325,655
- ---------------------------------------------------------
Plan assets at fair value,
primarily fixed income
securities and
common stock $373,446 $ 6,641 $380,087
Projected benefit
obligation (326,858) (20,774) (347,632)
- ---------------------------------------------------------
Funded status 46,588 (14,133) 32,455
Unrecognized net
(gain)/loss (23,244) 2,980 (20,264)
Unrecognized net
transition asset (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
=========================================================
<PAGE>
<PAGE>53
Plans for Plans for
which assets which
exceed accumulated
December 31, 1993 accumulated benefits
In thousand of dollars benefits exceed assets Total
- ---------------------------------------------------------
Actuarial present value
of benefit obligations:
Vested benefit
obligation $280,941 $2,626 $283,567
Accumulated benefit
obligation $304,359 $2,657 $307,016
- ---------------------------------------------------------
Plan assets at fair value,
primarily fixed income
securities and
common stock $395,698 $2,143 $397,841
Projected benefit
obligation (350,946) (3,119) (354,065)
- ---------------------------------------------------------
Funded status 44,752 (976) 43,776
Unrecognized net
(gain)/loss (29,311) 582 (28,729)
Unrecognized net
transition asset (5,291) (151) (5,442)
Unrecognized prior
service cost 9,018 209 9,227
- ---------------------------------------------------------
Pension asset (liability)
reflected in Consolidated
Balance Sheet $ 19,168 $ (336) $ 18,832
=========================================================
<PAGE>
<PAGE>54
Plans for Plans for
which assets which
exceed accumulated
December 31, 1992 accumulated benefits
In thousand of dollars benefits exceed assets Total
- ---------------------------------------------------------
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
=========================================================
<PAGE>
<PAGE>55
The net periodic pension cost consists of the following:
In thousands of dollars
Year Ended December 31, 1994 1993 1992
- ----------------------------------------------------------
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
==========================================================
<PAGE>
<PAGE>56
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
contributions through payroll deduction. The Company
matches up to 75 percent of that contribution up to 6
<PAGE>
<PAGE>57
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.
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:
<PAGE>
<PAGE>58
In thousands of dollars
December 31, 1994 1993
- ----------------------------------------------------------
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
- ----------------------------------------------------------
The components of the estimated postretirement benefit
cost are as follows:
In thousands of dollars
December 31, 1994 1993
- ----------------------------------------------------------
Service cost $ 1,323 $ 2,746
Interest on accumulated
postretirement 9,666 10,046
benefit obligation
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
- ----------------------------------------------------------
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.
<PAGE>
<PAGE>59
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.
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
<PAGE>
<PAGE>60
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:
Option Price
Shares Per Share Aggregate
- ----------------------------------------------------------
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
- ----------------------------------------------------------
At December 31, 1994, 129,069 shares were exercisable and
2,283,482 shares were available for future grant.
<PAGE>
<PAGE>61
<TABLE>
15. Preferred Stock (Cumulative)-Par Value $100
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>
<PAGE>
<PAGE>62
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:
In thousands of dollars
Non-Cancellable Leases License
Years Buildings Equipment Agreements
- ------------------------------------------------------------
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
==========================================================
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
<PAGE>
<PAGE>63
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.
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.
<PAGE>
<PAGE>64
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 definitively agreed 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, all WCT shareowners will receive $6.50 per share
pursuant to a cash merger, with the exception of Richard
Frockt, WCT's chairman and 24 percent shareholder, who has
separately agreed to sell his shares to Frontier Corporation
for $6.00 per share in cash immediately prior to the merger.
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 $96 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
<PAGE>
<PAGE>65
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 the first quarter of 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 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.
In thousands of dollars, except per share data
Pro Forma (Unaudited)
1994 1993 1992
- --------------------------------------------------------
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
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.
<PAGE>
<PAGE>66
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 __ of this report.
<PAGE>
<PAGE>67
<TABLE>
20. Interim Data (Unaudited)
Selected quarterly data follow:
Revenues and Sales Income Per Share
----------------------- ------------- -------------------------------
Earnings
Before
Extraor-
(In thousands of Tele- dinary
dollars, communi Items and Market Price
except per ication Tel. Oper. Net Cum.
share data) Svcs Opers Total Income Income Effect Erngs 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
=============================================
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>68
<TABLE>
20. Interim Data (Unaudited) cont.
Selected quarterly data follow:
Revenues and Sales Income Per Share
----------------------- ------------- -------------------------------
Earnings
Before
Extraor-
(In thousands of Tele- dinary
dollars, communi Items and Market Price
except per ication Tel. Oper. Net Cum.
share data) Svcs Opers Total Income Income Effect Erngs High Low
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
=============================================
- -------------------------------------------------------------------------------------------------
(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).
</TABLE>
<PAGE>
<PAGE>69
Consolidated Financial Statements
American Sharecom, Inc.
Year ended October 31, 1994,
Three Month Period ended October 31, 1993
and Year ended July 31, 1993
<PAGE>
<PAGE>70
American Sharecom, Inc.
Consolidated Financial Statements
Year ended October 31, 1994,
Three Month Period ended October 31, 1993
and Year ended July 31, 1993
Contents
Report of Independent Auditors 1
Audited Consolidated Financial Statements
Consolidated Statements of Financial Position 2
Consolidated Statements of Operations 4
Consolidated Statement of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
<PAGE>
<PAGE>71
Report of Independent Auditors
Board of Directors
American Sharecom, Inc.
We have audited the accompanying consolidated statements of financial
position of American Sharecom, Inc. and subsidiaries as of October 31,
1994 and 1993 and July 31, 1993, and the related consolidated statements
of operations, changes in shareholders' equity and cash flows for the
year ended October 31, 1994. the three month period ended October 31,
1993, and the year ended July 31, 1993. These financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Sharecom, Inc. and subsidiaries at October 31, 1994 and 1993
and July 31, 1993, and the consolidated results of their operations and
their cash flows for the year ended October 31, 1994, the three month
period ended October 31, 1993, and the year ended July 31, 1993, in
conformity with generally accepted accounting principles.
As discussed in Note 7 to the financial statements, during 1992 certain
former shareholders of the Company have exercised their rights under
Minnesota law to challenge the amount they received for their shares.
The ultimate outcome cannot be determined at this time.
/s/ Ernst & Young LLP
January 4, 1995 -------------------------
ERNST & YOUNG LLP
<PAGE>
<PAGE>72
American Sharecom, Inc.
Consolidated Statements of Financial Position
October 31, July 31,
1994 1993 1993
-------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,070,924 $ 1,030,140 $ -
Accounts receivable, less
allowance
(October 31, 1994--$860,247;
October 31, 1993--$591,987;
July 31,1993--$568,566) 14,166,398 14,493,648 11,779,845
Receivable--shareholders
(Note 3) - 382,165 1,257,430
Other current assets 1,076,067 1,117,781 123,457
-------------------------------------
Total current assets 16,313,389 17,023,734 13,160,732
Goodwill (net) (Note 2) 907,578 904,849 932,717
Purchased customer base
(net) (Note 2) 2,928,075 5,525,827 2,238,928
Non-compete agreements
(net) (Note 2) 300,556 1,238,889 1,497,223
Equipment and fixtures, net
of accumulated depreciation
(October 31, 1994-$11,301,178;
October 31, 1993-$9,599,157;
July 31, 1993--$9,160,294) 5,627,276 4,532,071 4,489,541
-------------------------------------
Total assets $26,076,874 $29,225,370 $22,319,141
=====================================
-2-
<PAGE>
<PAGE>73
American Sharecom, Inc.
Consolidated Statements of Financial Position (cont'd.)
October 31, July 31,
1994 1993 1993
--------------------------------------
Liabilities and shareholders' equity
Current liabilities:
Checks in transit $ - $ - $ 542,616
Accounts payable 5,225,858 8,094,681 6,558,119
Income taxes payable 605,943 1,497,765 1,919,223
Dissenting shareholders
liability (Note 7) 5,397,499 - -
Utility taxes and other
accrued liabilities (Note 5) 5,476,987 7,136,824 6,500,023
--------------------------------------
Total current liabilities 16,706,287 16,729,270 15,519,981
Line of credit - 4,000,000 1,798,000
Commitments and contingencies
(Note 7)
Shareholders' equity:
Common Stock--$.01 par value:
Authorized shares--10,000,000
Issued and outstanding
shares--100,000 1,000 1,000 1,000
Additional paid-in capital 359,042 359,042 359,042
Retained earnings 9,010,545 8,136,058 4,641,118
--------------------------------------
Total shareholders' equity 9,370,587 8,496,100 5,001,160
--------------------------------------
Total liabilities and
shareholders' equity $26,076,874 $29,225,370 $22,319,141
======================================
See accompanying notes.
-3-
<PAGE>
<PAGE>74
American Sharecom, Inc.
Consolidated Statements of Operations
Three Month
Year ended Period ended Year ended
October 31, October 31, July 31,
1994 1993 1993
---------------------------------------
Net sales $120,789,934 $27,953,173 $88,745,459
Cost of sales 76,947,080 17,548,959 58,771,506
---------------------------------------
43,842,854 10,404,214 29,973,953
Operating expenses:
Selling 8,509,846 1,908,899 6,388,866
General and administrative 16,545,679 3,847,062 14,559,290
---------------------------------------
25,055,525 5,755,961 20,948,156
---------------------------------------
18,787,329 4,648,253 9,025,797
Interest income 363,655 59,636 329,212
Interest expense (619,562) (42,949) (164,444)
---------------------------------------
Income before income taxes 18,531,422 4,664,940 9,190,565
Income taxes (Note 9) 745,000 170,000 4,846,000
---------------------------------------
Net income 17,786,422 4,494,940 4,344,565
=======================================
Net income per share $177.86 $44.95 $43.45
Unaudited pro forma information
(assuming full C corporation
tax expense (Note 9)):
Net income $11,119,422 $2,798,940 $5,271,565
Net income per share $111.19 $27.99 $52.72
Weighted average number
of shares 100,000 100,000 100,000
See accompanying notes -4-
<PAGE>
<PAGE>75
AMERICAN SHARECOM, INC.
Consolidated Statement of Changes in Shareholders' Equity
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
---------------------------------------
Balance August 1, 1992 100,000 $1,000 $ 359,042 $ 296,553
Net Income - - - 4,344,565
---------------------------------------
Balance July 31, 1993 100,000 1,000 359,042 4,641,118
Shareholders' distributions
for the three months ended
October 31, 1993 - - - (1,000,000)
Net income - - - 4,494,940
---------------------------------------
Balance October 31, 1993 100,000 1,000 359,042 8,136,058
Shareholders' distributions
for the year ended
October 31, 1994 - - - (12,293,436)
Dissenting shareholders'
settlement (Note 7) - - - (4,618,499)
Net income - - - 17,786,422
---------------------------------------
Balance October 31, 1994 100,000 $1,000 $359,042 $9,010,545
=======================================
See accompanying notes.
-5-
<PAGE>
<PAGE>76
AMERICAN SHARECOM, INC.
Consolidated Statements of Cash Flows
Three Month
Year ended Period ended Year ended
October 31, October 31, July 31,
1994 1993 1993
----------------------------------------
Operating Activities
Net Income $17,786,422 $ 4,494,940 $ 4,344,565
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 5,262,424 1,437,799 4,137,830
Write down of purchased
customer base (Note 2) - - 840,078
Gain on sale of fixed assets (71,365) - -
Reversal of utility tax
accrual (Note 5) (921,977) - (900,000)
Provision for interest and legal
fees related to dissenting
shareholders (Note 7) 779,000 - -
Provision for deferred income
taxes (Note 9) - - (238,000)
Reversal of deferred tax
asset (Note 9) - - 927,000
Changes in operating assets
and liabilities:
Accounts receivable 327,250 (1,013,803) (1,634,657)
Other current assets 423,879 (119,059) (1,079,809)
Accounts payable and
accrued liabilities (4,498,506) 1,209,290 (1,873,131)
----------------------------------------
Net cash provided by operating
activities 19,087,127 6,009,167 4,523,876
-6-
<PAGE>
<PAGE>77
AMERICAN SHARECOM, INC.
Consolidated Statements of Cash Flows (cont'd)
Three Month
Year ended Period ended Year ended
October 31, October 31, July 31,
1994 1993 1993
---------------------------------------
Investing activities
Proceeds from sale of fixed assets 78,298 - -
Acquisitions - (5,700,000) -
Purchases of equipment
and fixtures (2,831,205) (481,027) (2,493,089)
----------------------------------------
Net cash used in investing
activities (2,752,907) (6,181,027) (2,493,089)
Financing activities
Proceeds from line of credit 13,036,000 10,658,000 30,384,000
Payments on line of credit (17,036,000) (8,456,000) (30,247,000)
Payments on debt and capital
lease obligations - - (2,292,315)
Distributions to shareholders (12,293,436) (1,000,000) -
----------------------------------------
Net cash (used in) provided by
financing activities (16,293,436) 1,202,000 (2,155,315)
----------------------------------------
Increase (decrease) in cash
and cash equivalents 40,784 1,030,140 (124,528)
Cash and cash equivalents at
beginning of period 1,030,140 - 124,528
----------------------------------------
Cash and cash equivalents at
end of period $ 1,070,924 $1,030,140 $ -
========================================
Supplemental disclosure of cash
flow information:
Acquisition made in exchange
for accounts receivable $ - $ - $ 487,000
========================================
<PAGE>
<PAGE>78
American Sharecom, Inc.
Notes to Consolidated Financial Statements
October 31, 1994
1. Business Activity
American Sharecom, Inc. (the Company) is a regional provider of 24-hour
long distance and related telephone services. The Company purchases
intercity circuits from AT&T and other common carriers at bulk rates and
markets the service through the use of computerized call-routing
systems. Rates charged for the Company's services are currently designed
to be substantially lower than those for AT&T's direct long distance
dialing service, and comparable to those of other nationwide common
carriers.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accounts of the Company and its subsidiaries are included in the
consolidated financial statements. All significant intercompany accounts
and transactions have been eliminated.
Fiscal Year
In calendar year 1993, the Company changed fiscal year end to October 31
from July 31.
Cash Equivalents
The Company considers cash equivalents to be investments with remaining
maturities of three months or less at the time of acquisition.
Income Taxes
In the year ended July 31, 1993, the Company accounted for income taxes
on the deferred method. Effective August 1, 1993, the Company filed an
<PAGE>
<PAGE>79
election for Subchapter S status with the Internal Revenue Service
whereby the income of the Company will be taxed at the shareholder
level. Operating loss carryforwards recorded prior to the Subchapter S
election will not be available to reduce taxable income earned after the
election and deferred taxes were charged to earnings in the current
year. The Company has elected to continue paying income tax to one state
at the corporate level. Beginning with the three month period ended
October 31, 1993, the Company accounted for the income taxes related to
that state on the liability method.
Equipment and Fixtures
Equipment and fixtures are stated at purchase cost or, for leased
equipment, at the lesser of the present value of the minimum lease
payments or the fair value of the leased equipment at the beginning of
the lease term. The Company provides for depreciation using the
straight-line method over estimated useful lives of three to ten years.
Assets recorded under capital leases are amortized over the lease term;
amortization is included with depreciation. Maintenance, repairs and
minor renewals are expensed as incurred.
Intangible Assets
Intangible assets are evaluated periodically and, if conditions warrant,
an impairment allowance is provided.
Goodwill is amortized on the straight-line basis over twenty years with
accumulated amortization through October 31, 1994, October 31, 1993 and
July 31, 1993 of $914,789, $757,948 and $730,080, respectively.
Purchased customer base and non-compete agreements are amortized on the
straight-line basis over the life of those agreements which are two to
five years. Accumulated amortization of purchased customer base through
October 31, 1994, October 31, 1993 and July 31, 1993 is $10,031,709,
$7,962,319 and $7,249,217, respectively. During the fiscal year ended
July 31, 1993, the Company wrote down unamortized purchased customer
base by approximately $840,000 to reflect the deterioration of customer
lists purchased in prior years. Accumulated amortization of non-compete
<PAGE>
<PAGE>80
agreements through October 31, 1994, October 31, 1993 and July 31, 1993
is $3,439,444, $2,261,111 and $2,002,777, respectively.
Per Share Data
Net income per share is computed by dividing the net income by the
weighted average number of common shares outstanding during the period.
Shares issuable upon the exercise of stock options are excluded as the
impact would be immaterial.
Reclassifications
Certain reclassifications have been made to the July 31, 1993 statements
to conform to the presentation for the October 31, 1993 and 1994
statements.
3. Notes Receivable--Shareholders
Notes receivable from shareholders are unsecured, bear interest at rates
from 4.32% to 6.25% and were fully paid by October 1994.
4. Leases and Commitments
The Company leases office space for its headquarters and regional
marketing centers under operating leases expiring during the next four
years. Major leases contain two to three year renewal options. The
minimum annual rentals relating to this office space are included below.
These minimum annual rentals are subject to increases each year for real
estate taxes and lessor operating expense increases. Total rental
expense for the year ended October 31, 1994, the three month period
ended October 31, 1993 and the year ended July 31, 1993 was $839,000,
$178,000 and $818,000, respectively.
<PAGE>
<PAGE>81
Future minimum lease payments payable by the Company are as follows:
Operating Leases
----------------
1995 $ 432,000
1996 270,000
1997 146,000
1998 15,000
----------
$ 863,000
==========
The Company exercised its option to purchase equipment under capital
leases during the year ended July 31, 1993. The equipment purchased had
an original cost of $2,032,769.
5. Utility Taxes
The Company accrues for various state and municipal utility taxes. These
accruals totaled approximately $2.7 million and $3.6 million as of
October 31, 1994 and 1993, respectively, and $3.6 million as of July 31,
1993, and are included within "utility taxes and other accrued
liabilities". These taxes are based on a variety of factors including
certain of the Company's revenues, customers' usage or charges and other
criteria. The Company has paid a portion of these taxes related to
certain municipalities and has begun communications with other
municipalities regarding the applicability and computational
interpretation of these taxes. The Company's policy is to accrue an
estimate of all such taxes for financial reporting purposes to the
maximum extent imposed as interpreted by such taxing authorities.
Adjustments to these accrued amounts which may result from tax
abatements, interpretations and redefinement of such tax statutes or
other changes will be reflected in the period in which such changes
occur. In the year ended October 31 1994, the Company determined that
approximately $920,000 of utility tax accruals would not be collected by
various municipalities. This amount was reversed from the utility tax
accrual and reflected as a decrease to general and administrative
<PAGE>
<PAGE>82
expenses in the statement of operations. In the year ended July 31,
1993, the Company reached a favorable agreement with a jurisdiction over
disputed utility taxes. As a result, the Company reversed $900,000 of
utility tax accruals and reflected the amount as a decrease to cost of
sales in the statement of operations.
6. Line of Credit
On February 2, 1989, the Company entered into a term revolving credit
agreement with Norwest Bank Minnesota, National Association. Under the
agreement, the Company could borrow up to $10,000,000 based upon defined
levels of accounts receivable less any outstanding letters of credit.
The amount borrowed is subject to an interest rate of 0% to 2.5% above
prime. Borrowings under the revolving credit arrangement at October 31,
1994, October 31, 1993 and July 31, 1993 are $-0-, $4,000,000 and
$1,798,000, respectively. All borrowings are collateralized by the
Common Stock of the Company held by the two owners and officers of the
Company.
The Company paid interest costs of $64,000, $43,000 and $148,000 for the
year ended October 31, 1994, the three month period ended October 31,
1993 and the year ended July 31, 1993, respectively. The weighted
average interest rate on these borrowings was 6.7%, 5.4% and 6.2% for
the year ended October 31, 1994, the three month period ended October
31, 1993 and the year ended July 31, 1993, respectively.
7. Shareholders' Equity
After receiving approval from the shareholders of both companies,
Sharecom Holdings, Inc., whose stock was owned by two officers of
American Sharecom, Inc., was merged into the Company during May 1992.
All outstanding shares and options of American Sharecom, Inc. not owned
by Holdings or the two officers were converted into the right to receive
$17,695 in cash, less the exercise price of the option, if applicable.
In reviewing the merger prior to submitting it to the shareholders for
approval, the Company's Board of Directors considered, among other
things, an independent valuation study of the Company, and a separate
fairness opinion.
<PAGE>
<PAGE>83
Prior to the merger, the two officers contributed their 86 shares of
Company Common Stock to Holdings in exchange for 100,000 shares of
Holdings Common Stock, which upon completion of the merger, were
converted into 100,000 shares of Company Common Stock. The two officers'
outstanding options to purchase Company Common Stock were unaffected by
the merger.
Former holders of 57 shares of Company Common Stock (dissenters) have
exercised their rights under Minnesota law to challenge the amount they
received for their shares; they have also requested the court to nullify
certain stock options previously granted to the two officers. In
November 1994, the Minnesota District Court directed the Company to pay
an additional $4,618,500 to the dissenters plus interest and legal fees.
The Company has recorded a $5.3 million contingent liability as of
October 31, 1994. Both the Company and the dissenters have appealed the
District Court decision to the Minnesota Appellate Court.
8. Acquisitions
On August 13, 1993, the Company purchased assets and entered into non-
compete agreements with Execuline of the Northwest, Inc. and Northwest
Network Communications, Inc., resellers of long distance telephone
services, with combined annual sales of approximately $8,000,000.
During the year ended July 31, 1993, the Company acquired the assets of
one California reseller with annual revenues of approximately
$1,500,000.
The acquisitions have been accounted for under the purchase method and
the results of operations of the acquired companies have been included
in the consolidated statements of operations since the dates of
acquisition.
9. Income Taxes
The Company has elected as of August 1, 1993 to be taxed as a Subchapter
S corporation under the Internal Revenue Code whereby the shareholders
will include the Company's income in their own taxable incomes.
<PAGE>
<PAGE>84
Accordingly, existing deferred tax assets of $927,000 as of July 31,
1993 were reversed and included as additional income tax expense in the
year ended July 31, 1993. As the Company has elected to continue paying
income tax to one state at the corporate level, income tax expense as
related to this state is still recorded. Income taxes payable are for
taxes payable for years open under the statute of limitations prior to
the S corporation election and for tax owed to the one state.
Had the Company continued operating as a C corporation rather than
electing S corporation status beginning August 1, 1993, the Company
would have recorded income tax expense of $7,412,000 rather than
$745,000 in the year ended October 31, 1994 and $1,866,000 rather than
$170,000 in the three month period ended October 31, 1993. In the year
ended July 31, 1993, deferred income taxes of $927,000 would not have
been reversed and the Company would have recorded an income tax expense
of $3,919,000 rather than $4,846,000.
The components of income tax expense are as follows:
Three Month
Year ended Period ended Year ended
October 31, October 31, July 31,
1994 1993 1993
-------------------------------------
Taxes on income:
Current:
Federal $ - $ - $3,464,000
State 745,000 170,000 693,000
-------------------------------------
745,000 170,000 4,157,000
Deferred:
Federal - - (200,000)
State - - (38,000)
-------------------------------------
- - (238,000)
Reversal of deferred income
taxes resulting from S
corporation election - - 927,000
-------------------------------------
Net tax expense $745,000 $170,000 $4,846,000
=====================================
<PAGE>
<PAGE>85
Net deferred income tax expense for the year ended July 31, 1993
consisted of the following:
Amortization $(198,000)
Bad debts 119,000
Legal expense accrual (149,000)
Other (10,000)
-----------
$(238,000)
===========
The difference between total tax expense and the amount computed by
applying the statutory federal income tax rate to income before income
taxes for the year ended July 31, 1993 was as follows:
Taxes at the statutory rate of 34% $3,125,000
State taxes, net of federal benefit 433,000
Intangible asset amortization not allowed
for taxes 344,000
Reversal of deferred taxes upon S corporation
election 927,000
Other 17,000
----------
$4,846,000
==========
Income taxes paid were $1,645,092 in the year ended October 31, 1994,
$627,000 in the three month period ended October 31, 1993 and $3,468,001
in the year ended July 31, 1993.
10. Stock Options and Warrants
All options related to the Company's Incentive Stock Option Plan were
canceled by the Company in fiscal 1994. There were options to purchase
748 shares of Common Stock outstanding and exercisable as of July 31,
1993 and October 31, 1993 with exercise prices ranging from $1,500 to
$10,000 per share. During the year ended July 31, 1993, an option was
granted to purchase 35 shares at a price of $173 per share and no
options were exercised or canceled.
<PAGE>
<PAGE>86
11. Deferred Compensation Plan
During fiscal year 1987, the Company established a deferred compensation
plan under Section 401(k) of the Internal Revenue Code for employees who
meet certain eligibility requirements. Employees may defer 1% to 15% of
their pre-tax income up to $9,240. The Company matches 50% of the
employee's deferral on the first 8% of compensation deferred. Company
expenses under the plan in the year ended October 31, 1994, the three
month period ended October 31, 1993 and the year ended July 31, 1993
were $137,520, $25,252 and $95,992, respectively.
12. Credit Risk
The Company is subject to credit risk on its accounts receivable which
are primarily with business customers and resellers located in the
midwest and western regions of the United States. The Company performs
credit investigations to minimize credit risk. Management believes it
has made adequate provision for uncollectible accounts receivable.
13. Subsequent Events
On November 29, 1994, the Company and its shareholders entered into a
Stock Acquisition Agreement with Rochester Telephone Corporation
(Rochester), in which Rochester will acquire all of the issued and
outstanding shares of the Company in exchange for 8,710,000 shares of
common stock of Rochester. The Rochester shares will be allocated to the
shareholders of the Company based upon their respective ownership of the
Company's stock prior to the close. The agreement is subject to the
approval of the Federal Communications Commissions and state utility
regulatory commissions and is expected to be closed in the first quarter
of calendar 1995.
On December 8, 1994, the Company purchased assets and entered into a
non-compete agreement with Central Office Telephone Company, Inc., a
reseller of long distance telephone services, with annual sales of
approximately $2,400,000.
<PAGE>
<PAGE>87
Unaudited Pro Forma Combined Financial Statements
For Frontier Corporation, WCT Communications, Inc.
and American Sharecom, Inc.
The unaudited pro forma combined financial statements are
presented to reflect the estimated impact on Frontier
Corporation's (Frontier), formerly Rochester Telephone
Corporation, financial statements of the proposed Frontier
transactions as follows:
- - The acquisition of WCT Communications, Inc. (WCT) at a
purchase price of approximately $99 million, including
acquisition expenses. The transaction will be accounted for
using the purchase method of accounting.
- - The acquisition of American Sharecom, Inc. (ASI) for an
estimated 8.7 million Frontier common shares. The
transaction will be accounted for using the pooling of
interests method.
Frontier has other pending business acquisitions and
dispositions expected to consummate in 1995 which individually
and in the aggregate are not significant to its consolidated
financial statements. As such, pro forma data on these
transactions are not presented.
The unaudited pro forma combined statements of income and
balance sheet reflect the acquisitions of WCT and ASI. As
required by Regulation S-X Article 11-02, the unaudited pro
forma combined statements of income first assume the
combination of WCT, which is expected to be accounted for under
the purchase method of accounting, as of the beginning of the
most recent fiscal year (December 31, 1994). The unaudited pro
forma combined statement of income for WCT uses the most recent
12 month period ended September 30, 1994. These pro forma
results then assume the combination of ASI, which is expected
to be accounted for using the pooling of interests method, as
of the beginning of the three most recent fiscal years
(December 31, 1994, 1993 and 1992) to arrive at the unaudited
pro forma combined statements of income for Frontier
Corporation, including WCT and ASI. The unaudited pro forma
combined statements of income use ASI's results of operations
for the most recent fiscal years ended October 31, 1994, and
July 31, 1993 and 1992.
The unaudited pro forma combined balance sheet assumes the
acquisitions had occurred on December 31, 1994, combining the
balance sheet for Frontier as of December 31, 1994, with WCT as
of September 30, 1994, and ASI as of October 31, 1994.
<PAGE>
<PAGE>88
The unaudited pro forma combined financial statements give
effect only to the adjustments set forth in the accompanying
notes and do not reflect any synergies anticipated by
Frontier's management as a result of these acquisitions. The
unaudited pro forma data is presented for informational
purposes only and is not necessarily indicative of the results
of operations or financial position which would have been
achieved had the transactions been completed as of the
beginning of the earliest period presented, nor is it
necessarily indicative of Frontier's future results of
operations or financial position.
The unaudited pro forma combined financial statements should be
read in conjunction with the historical financial statements of
Frontier and ASI included in this filing. WCT's historical
financial statements are not required to be presented in this
filing under Regulation S-X Article 3-05 as WCT does not
qualify as a significant subsidiary as defined in Regulation S-X
Article 1-02(v).
<PAGE>
<PAGE>89
<TABLE>
FRONTIER CORPORATION, WCT COMMUNICATIONS, INC. AND AMERICAN SHARECOM, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1994
(In thousands of dollars)
<CAPTION>
Frontier WCT ASI
12/31/94 9/30/94 10/31/94 Pro Forma Pro Forma
Historical Historical Historical Adjustments Combined
<S> <C> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $317,137 $99 $1,071 ($98,746)(a) $219,561
Short-term investments 9,047 0 0 0 9,047
Accounts receivable 168,542 32,317 14,166 0 215,025
Material and supplies 8,585 0 0 0 8,585
Prepayments and other 25,196 5,789 1,076 0 32,061
---------- ---------- ---------- ---------- ----------
Total Current Assets 528,507 38,205 16,313 (98,746) 484,279
---------- ---------- ---------- ---------- ----------
Property, Plant and Equipment:
Telephone plant in service 1,554,856 0 0 0 1,554,856
Telephone plant under construction 36,130 0 0 0 36,130
---------- ---------- ---------- ---------- ----------
1,590,986 0 0 0 1,590,986
Less - Accumulated depreciation 713,869 0 0 0 713,869
---------- ---------- ---------- ---------- ----------
Net Telephone Plant 877,117 0 0 0 877,117
---------- ---------- ---------- ---------- ----------
Telecommunication property 168,691 30,855 16,928 0 216,474
Less - Accumulated depreciation 75,944 0 11,301 0 87,245
---------- ---------- ---------- ---------- ----------
Net Telecommunication Property 92,747 30,855 5,627 0 129,229
---------- ---------- ---------- ---------- ----------
Goodwill 139,572 613 908 70,028 (a) 211,121
Deferred and Other Assets 123,008 7,012 3,229 12,415 (a) 145,664
---------- ---------- ---------- ---------- ----------
Total Assets $1,760,951 $76,685 $26,077 ($16,303) $1,847,410
========== ========== ========== ========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY:
Current Liabilities:
Accounts payable $142,968 $30,362 $16,100 $0 $189,430
Notes payable 106 13,058 0 0 13,164
Advance billings 12,719 0 0 0 12,719
Dividends payable 15,487 0 0 0 15,487
Long-term debt due within one year 4,525 4,376 0 0 8,901
Taxes accrued 13,495 0 606 0 14,101
Interest accrued 12,305 0 0 0 12,305
---------- ---------- ---------- ---------- ----------
Total Current Liabilities 201,605 47,796 16,706 0 266,107
---------- ---------- ---------- ---------- ----------
Long-Term Debt 578,600 12,382 0 0 590,982
Deferred Income Taxes 111,369 0 0 (927)(b) 110,442
Deferred Employee Benefits Obligation 46,001 204 0 0 46,205
Minority Interests 252 0 0 0 252
Shareowners' Equity:
Common Stock 73,161 22,769 1 (14,060)(a)(b) 81,871
Capital in excess of par value 266,378 0 359 (8,709)(a)(b) 258,028
Retained earnings 460,808 (6,466) 9,011 7,393 (a)(b) 470,746
---------- ---------- ---------- ---------- ----------
Common Shareowners' Equity 800,347 16,303 9,371 (15,376) 810,645
Preferred Stock 22,777 0 0 0 22,777
---------- ---------- ---------- ---------- ----------
Total Shareowners' Equity 823,124 16,303 9,371 (15,376) 833,422
---------- ---------- ---------- ---------- ----------
Total Liabilities and Shareowners' Equity $1,760,951 $76,685 $26,077 ($16,303) $1,847,410
========== ========== ========== ========== ==========
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
</TABLE>
<PAGE>
<PAGE>90
<TABLE>
FRONTIER CORPORATION AND WCT COMMUNICATIONS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
(In thousands of dollars, except per share data)
<CAPTION>
Frontier WCT
Year Ended Year Ended
12/31/94 9/30/94 Pro Forma Pro Forma
Historical Historical Adjustments Combined
<S> <C> <C> <C> <C>
REVENUES & SALES:
Telephone Operations $609,678 $0 $0 $609,678
Telecommunication Services 375,814 118,022 0 493,836
---------- ---------- ---------- ----------
Total Revenues and Sales 985,492 118,022 0 1,103,514
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Operating expenses 579,326 117,042 5,284 (a) 701,652
Cost of goods sold 18,850 0 0 18,850
Depreciation 117,324 3,262 0 120,586
Taxes other than income taxes 46,728 199 0 46,927
---------- ---------- ---------- ----------
Total Costs and Expenses 762,228 120,503 5,284 888,015
---------- ---------- ---------- ----------
Operating Income 223,264 (2,481) (5,284) 215,499
Interest expense 43,594 3,072 6,912 (a) 53,578
Other income and expense:
Allowance for funds used during construction 1,096 0 0 1,096
Gain on sale of assets/subsidiaries 10,063 0 0 10,063
Other income (expense), net (17,052) 144 0 (16,908)
---------- ---------- ---------- ----------
Income Before Taxes 173,777 (5,409) (12,196) 156,172
Income taxes 63,843 (1,873) (2,419)(a) 59,551
---------- ---------- ---------- ----------
Consolidated Net Income From Continuing Ops 109,934 (3,536) (9,777) 96,621
Dividends on preferred stock 1,186 0 0 1,186
---------- ---------- ---------- ----------
Income Applicable to Common Stock $108,748 ($3,536) ($9,777) $95,435
========== ========== ========== ==========
EARNINGS PER COMMON SHARE
Frontier Pro Forma
Historical Combined
Primary:
Income applicable to common stock $108,748 $95,435
Average common shares outstanding 72,575 72,575
---------- ----------
Earnings Per Common Share - Primary $1.50 $1.32
========== ==========
Fully Diluted:
Adjusted income applicable to common stock $109,108 $95,795
Adjusted average common shares outstanding 72,822 72,822
---------- ----------
Earnings Per Common Share - Fully Diluted $1.50 $1.32
========== ==========
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
</TABLE>
<PAGE>
<PAGE>91
<TABLE>
FRONTIER CORPORATION PRO FORMA AND AMERICAN SHARECOM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
(In thousands of dollars, except per share data)
<CAPTION>
Frontier/WCT
Pro Forma ASI
Year Ended Year Ended
12/31/94 10/31/94 Pro Forma Pro Forma
Historical Historical Adjustments Combined
<S> <C> <C> <C> <C>
REVENUES & SALES:
Telephone Operations $609,678 $0 $0 $609,678
Telecommunication Services 493,836 120,790 0 614,626
---------- ---------- ---------- ----------
Total Revenues and Sales 1,103,514 120,790 0 1,224,304
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Operating expenses 701,652 99,858 0 801,510
Cost of goods sold 18,850 0 0 18,850
Depreciation 120,586 1,857 0 122,443
Taxes other than income taxes 46,927 288 0 47,215
---------- ---------- ---------- ----------
Total Costs and Expenses 888,015 102,003 0 990,018
---------- ---------- ---------- ----------
Operating Income 215,499 18,787 0 234,286
Interest expense 53,578 620 0 54,198
Other income and expense:
Allowance for funds used during construction 1,096 0 0 1,096
Gain on sale of assets 10,063 0 0 10,063
Other income (expense), net (16,908) 364 0 (16,544)
---------- ---------- ---------- ----------
Income Before Taxes 156,172 18,531 0 174,703
Income taxes 59,551 745 6,667 (b) 66,963
---------- ---------- ---------- ----------
Consolidated Net Income From Continuing Ops 96,621 17,786 (6,667) 107,740
Dividends on preferred stock 1,186 0 0 1,186
---------- ---------- ---------- ----------
Income Applicable to Common Stock $95,435 $17,786 ($6,667) $106,554
========== ========== ========== ==========
EARNINGS PER COMMON SHARE
Frontier
Pro Forma Pro Forma
Historical Combined
Primary:
Income applicable to common stock $95,435 $106,554
Average common shares outstanding 72,575 81,285
---------- ----------
Earnings Per Common Share - Primary $1.32 $1.31
========== ==========
Fully Diluted:
Adjusted income applicable to common stock $95,795 $106,914
Adjusted average common shares outstanding 72,822 81,532
---------- ----------
Earnings Per Common Share - Fully Diluted $1.32 $1.31
========== ==========
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
</TABLE>
<PAGE>
<PAGE>92
<TABLE>
FRONTIER CORPORATION AND AMERICAN SHARECOM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1993
(In thousands of dollars, except per share data)
<CAPTION>
Frontier ASI
Year Ended Year Ended
12/31/93 7/31/93 Pro Forma Pro Forma
Historical Historical Adjustments Combined
<S> <C> <C> <C> <C>
REVENUES & SALES:
Telephone Operations $593,871 $0 $0 $593,871
Telecommunication Services 312,579 88,745 0 401,324
---------- ---------- ---------- ----------
Total Revenues and Sales 906,450 88,745 0 995,195
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Operating expenses 525,488 77,802 0 603,290
Cost of goods sold 20,819 0 0 20,819
Depreciation 114,811 1,587 0 116,398
Taxes other than income taxes 47,087 330 0 47,417
Software write-off 3,300 0 0 3,300
---------- ---------- ---------- ----------
Total Costs and Expenses 711,505 79,719 0 791,224
---------- ---------- ---------- ----------
Operating Income 194,945 9,026 0 203,971
Interest expense 46,550 164 0 46,714
Other income and expense:
Allowance for funds used during construction 1,330 0 0 1,330
Gain on sale of assets 4,449 0 0 4,449
Other income (expense), net (21,222) 329 0 (20,893)
---------- ---------- ---------- ----------
Income Before Taxes 132,952 9,191 0 142,143
Income taxes 50,232 4,846 (927)(b) 54,151
---------- ---------- ---------- ----------
Consolidated Net Income From Continuing Ops 82,720 4,345 927 87,992
Dividends on preferred stock 1,187 0 0 1,187
---------- ---------- ---------- ----------
Income Applicable to Common Stock $81,533 $4,345 $927 $86,805
========== ========== ========== ==========
EARNINGS PER COMMON SHARE
Frontier Pro Forma
Historical Combined
Primary:
Income applicable to common stock $81,533 $86,805
Average common shares outstanding 67,454 76,164
---------- ----------
Earnings Per Common Share - Primary $1.21 $1.14
========== ==========
Fully Diluted:
Adjusted income applicable to common stock $81,892 $87,164
Adjusted average common shares outstanding 67,972 76,682
---------- ----------
Earnings Per Common Share - Fully Diluted $1.20 $1.14
========== ==========
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
</TABLE>
<PAGE>
<PAGE>93
<TABLE>
FRONTIER CORPORATION AND AMERICAN SHARECOM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1992
(In thousands of dollars, except per share data)
<CAPTION>
Frontier ASI
Year Ended Year Ended
12/31/92 7/31/92 Pro Forma Pro Forma
Historical Historical Adjustments Combined
<S> <C> <C> <C> <C>
REVENUES & SALES:
Telephone Operations $567,272 $0 $0 $567,272
Telecommunication Services 236,777 62,238 0 299,015
---------- ---------- ---------- ----------
Total Revenues and Sales 804,049 62,238 0 866,287
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Operating expenses 448,422 55,759 0 504,181
Cost of goods sold 21,634 0 0 21,634
Depreciation 114,027 1,446 0 115,473
Taxes other than income taxes 44,832 260 0 45,092
---------- ---------- ---------- ----------
Total Costs and Expenses 628,915 57,465 0 686,380
---------- ---------- ---------- ----------
Operating Income 175,134 4,773 0 179,907
Interest expense 50,066 222 0 50,288
Other income and expense:
Allowance for funds used during construction 1,309 0 0 1,309
Other income (expense), net (14,347) 255 0 (14,092)
---------- ---------- ---------- ----------
Income Before Taxes 112,030 4,806 0 116,836
Income taxes 41,527 2,006 0 43,533
---------- ---------- ---------- ----------
Consolidated Net Income From Continuing Ops 70,503 2,800 0 73,303
Dividends on preferred stock 1,188 0 0 1,188
---------- ---------- ---------- ----------
Income Applicable to Common Stock $69,315 $2,800 $0 $72,115
========== ========== ========== ==========
EARNINGS PER COMMON SHARE
Frontier Pro Forma
Historical Combined
Primary:
Income applicable to common stock $69,315 $72,115
Average common shares outstanding 66,638 75,348
---------- ----------
Earnings Per Common Share - Primary $1.04 $0.96
========== ==========
Fully Diluted:
Adjusted income applicable to common stock $69,685 $72,485
Adjusted average common shares outstanding 67,166 75,876
---------- ----------
Earnings Per Common Share - Fully Diluted $1.04 $0.96
========== ==========
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
</TABLE>
<PAGE>
<PAGE>94
FRONTIER CORPORATION
Notes to Unaudited Pro Forma Combined Financial Statements
Note 1 - Basis of Presentation:
The unaudited pro forma combined statements of income and
balance sheet reflect the acquisitions of WCT and ASI. As
required by Regulation S-X Article 11-02, the unaudited pro
forma combined statements of income first assume the
combination of WCT, which is expected to be accounted for under
the purchase method of accounting, as of the beginning of the
most recent fiscal year (December 31, 1994). The unaudited pro
forma combined statement of income for WCT uses the most recent
12 month period ended September 30, 1994. These pro forma
results then assume the combination of ASI, which is expected
to be accounted for using the pooling of interests method, as
of the beginning of the three most recent fiscal years
(December 31, 1994, 1993 and 1992) to arrive at the unaudited
pro forma combined statements of income for Frontier
Corporation, including WCT and ASI. The unaudited pro forma
combined statements of income use ASI's results of operations
for the most recent fiscal years ended October 31, 1994, and
July 31, 1993 and 1992.
The unaudited pro forma combined balance sheet assumes the
acquisitions had occurred on December 31, 1994, combining the
balance sheet for Frontier as of December 31, 1994, with WCT as
of September 30, 1994, and ASI as of October 31, 1994.
Frontier's management believes that the assumptions used in
preparing the unaudited pro forma combined financial statements
provide a reasonable basis for presenting all of the significant
effects of its transactions, that the pro forma adjustments
give appropriate effect to those assumptions and that the pro
forma adjustments are properly applied in the unaudited pro
forma financial statements.
Note 2 - Pro Forma Adjustments:
Unaudited pro forma adjustments consist of the following:
a. Acquisition of WCT Communications, Inc.:
Frontier will exchange approximately $99 million in cash,
including acquisition expenses, in return for the stock of
WCT Communications, Inc. The transaction will be accounted
for using the purchase method of accounting.
The purchase price is allocated to the net assets acquired
using the assumption that the net book basis of the long
term assets is reflective of their fair value. The fair
value of the purchased customer base is calculated using a
discounted cash flow of estimated revenues and expenses
based on historical data from WCT and current industry
projections. The purchased customer base is amortized over
5 years. Goodwill is calculated as the difference between
the purchase price and the fair value of the net assets
acquired and is amortized over 25 years.
<PAGE>
<PAGE>95
The pro forma adjustment to operating expenses in the
statement of income for the year ended December 31, 1994,
represents the amortization of goodwill and purchased
customer base. As Frontier did not have enough cash and
cash equivalents as of January 1, 1994, to complete the
transaction without incurring additional debt, the pro
forma adjustment to interest expense in the statement of
income for the year ended December 31, 1994, reflects the
assumed issuance of approximately $99 million in debt
securities at Frontier's effective borrowing rate of 7% as
of January 1, 1994.
Frontier's statutory tax rate of 35% is used to calculate
the tax effect of the unaudited pro forma combined
statement of income adjustments, excluding the impact of
nondeductible goodwill and purchased customer base.
b. Acquisition of American Sharecom, Inc.:
Frontier will exchange an estimated 8.7 million common
shares in return for the stock of American Sharecom, Inc.
The pro forma adjustment to the balance sheet reflects the
issuance of these shares. The pro forma earnings per share
calculation for all periods ASI is presented include the
8.7 million common shares as outstanding for the entire
period. The transaction will be accounted for using the
pooling of interests method.
ASI elected as of August 1, 1993, to be taxed as a
Subchapter S corporation under the Internal Revenue Code
whereby the shareholders will include the company's income
in their personal taxable income. Accordingly, existing
deferred tax assets of $927,000 as of July 31, 1993, were
released into income tax expense in the year ended July 31,
1993. The pro forma adjustment to income taxes in the
statement of income for the year ended December 31, 1993,
reverse the release of the deferred tax assets and
normalize the income taxes calculated. The pro forma
adjustment for the balance sheet reinstates the deferred
tax assets previously released.
As ASI has elected to continue paying income tax to one
state at the corporate level, income tax expense as related
to this state is still recorded. The pro forma adjustment
to income taxes in the statement of income for the year
ended December 31, 1994, represents the additional income
tax provision using a 40% effective tax rate, which ASI
would have recorded had it not elected to be taxed as a
Subchapter S corporation.
<PAGE>1
FRONTIER CORPORATION
By-Laws
As Revised Effective March 21, 1983
(And as amended 7/16/84, 11/19/84, 2/17/86, 2/16/87,
4/22/87, 11/20/89, 2/19/90, 11/19/90, 4/24/91,
4/29/92, 4/21/93, 4/27/94, 9/19/94, 1/1/95)
ARTICLE I
SHAREHOLDERS
Section 1 - Annual Meeting.
An annual meeting of shareholders for the election of
Directors and the transaction of other business shall be held at
such time on any day in the month of April in each year or on
such other date as shall be fixed by the Board of Directors.
Section 2 - Special Meetings.
Special Meetings of the shareholders may be called by the
Board of Directors. Such meeting shall be held at such time as
may be fixed in the notice of meeting.
Section 3 - Place of Meeting.
Meetings of shareholders shall be held at such place, within
or without the State of New York, as may be fixed in the notice
of meeting.
Section 4 - Notice of Meeting.
Notice of each meeting of shareholders shall be in writing
and shall state the place, date and hour of the meeting and the
purpose or purposes for which the meeting is called.
A copy of the notice of any meeting shall be given,
personally, or by mail, not less than ten or more than fifty days
before the date of the meeting, to each shareholder entitled to
vote at such meeting. If mailed, such notice is given when
deposited in the United States mail, with postage thereon
prepaid, directed to the shareholder at the shareholder's address
as it appears on the record of shareholders, or, if the
shareholder shall have filed with the Secretary of the
Corporation a written request that notices be mailed to some
other address, then directed to the shareholder at such other
address.
Section 5 - Inspectors of Election.
The Board of Directors, in advance of any shareholders'
meeting, may appoint one or more inspectors to act at the meeting
or any adjournment thereof. If inspectors are not so appointed,
the person presiding at a shareholders' meeting may, and on the
request of any shareholder entitled to vote at such meeting
shall, appoint two inspectors. Each inspector, before entering
upon the discharge of the inspector's duties, shall take and sign
an oath faithfully to execute the duties of inspector at such
meeting with strict impartiality and according to the best of the
inspector's ability.
The inspectors shall determine the number of shares
outstanding and the voting power of each, the shares represented
at the meeting, the existence of a quorum, and the validity and
effect of proxies, and shall receive votes, ballots or consents,
hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes,
ballots or consents, determine the result, and do such acts as
are proper to conduct the election or vote with fairness to all
shareholders. On request of the person presiding at the meeting
or any shareholder entitled to vote at such meeting, the
inspectors shall make a report in writing of any challenge,
question or matter determined by them and execute a certificate
of any fact found by them. Any report or certificate made by
them shall be prima facie evidence of the facts stated and of the
vote as certified by them.
Section 6 - List of Shareholders at Meeting.
A list of shareholders as of the record date, certified by
the Secretary or any Assistant Secretary or by the Transfer
Agent, if any, shall be produced at the meeting of shareholders
upon the request of any shareholder at such meeting or prior
thereto. If the right to vote at any meeting is challenged, the
inspectors of election, or person presiding at such meeting,
shall require such list of shareholders to be produced as
evidence of the right of the persons challenged to vote at such
meeting, and all persons who appear from such list to be
shareholders entitled to vote at such meeting may vote at such
meeting.
Section 7 - Qualification of Voters.
Every shareholder of record of common stock of the
Corporation shall be entitled at every meeting of shareholders to
one vote for every share of common stock held by the shareholder
in the shareholder's name on the record of shareholders, subject,
however, to the voting rights granted to the holders of
Cumulative Preferred Stock of the Corporation upon default in
dividends thereon.
Section 8 - Quorum of Shareholders.
The holders of a majority of the shares entitled to vote at
such meeting shall constitute a quorum at a meeting of
shareholders for the transaction of any business, provided that
when a specified item of business is required to be voted on by a
class or series, voting as a class, the holders of a majority of
the shares of such class or series shall constitute a quorum for
the transaction of such specified item of business.
The shareholders present, in person or by proxy, and
entitled to vote may, by a majority of votes cast, adjourn the
meeting despite the absence of a quorum.
Section 9 - Vote of Shareholders.
Directors shall, except as otherwise required by law, or by
the certificate of incorporation as permitted by law, be elected
by a plurality of the votes cast at a meeting of shareholders by
the holders of shares entitled to vote in the election.
Whenever any corporate action, other than the election of
Directors, is to be taken by vote of the shareholders, it shall,
except as otherwise required by law, or by the certificate of
incorporation as permitted by law, be authorized by a majority of
the votes cast at a meeting of shareholders by the holders of
shares entitled to vote thereon.
Section 10 - Proxies.
Every shareholder entitled to vote at a meeting of
shareholders or to express consent or dissent without a meeting
may authorize another person or persons to act for that
shareholder by proxy. Every proxy must be signed by the
shareholder or the shareholder's attorney-in-fact. No proxy
shall be valid after the expiration of eleven months from the
date thereof unless otherwise provided in the proxy. Every proxy
shall be revocable at the pleasure of the shareholder executing
it except in those cases where an irrevocable proxy permitted by
statute has been given.
Section 11 - Fixing Record Date.
For the purpose of determining the shareholders entitled to
notice of or to vote at any meeting of shareholders or any
adjournment thereof, or to express consent or dissent from any
proposal without a meeting, or for the purpose of determining
shareholders entitled to receive payment of any dividend or the
allotment of any rights, or for the purpose of any other action,
the Board of Directors may fix, in advance, a date as the record
date for any such determination of shareholders. Such date shall
not be more than fifty nor less than ten days before the date of
such meeting, nor more than fifty days prior to any other action.
Section 12 - Order of Business.*
The order of business at each meeting of shareholders shall
be as determined by the chairman of the meeting. The chairman of
the meeting shall have the right and authority to prescribe such
rules, regulations and procedures and to do all such acts and
things as are necessary or desirable for the proper conduct of
the meeting, including, without limitation, the establishment of
procedures for the maintenance of order and safety, limitations
on the time allotted to questions or comments on the affairs of
the Corporation, restrictions on entry to such meeting after the
time prescribed for the commencement thereof, and the opening and
closing of the voting polls.
At any special meeting of shareholders, only such business
may be transacted which is related to the purpose or purposes set
forth in the notice of such meeting.
At any annual meeting of shareholders, only such business
(other than the nomination or election of directors) shall be
conducted as shall have been brought before the annual meeting
(i) by or at the direction of the chairman of the meeting or (ii)
by any shareholder who is a holder of record at the time of the
giving of the notice provided for in this Section 12, who is or
will be entitled to vote at the meeting and who complies with the
procedures set forth in this Section 12.
For business (other than the nomination or election of
directors) properly to be brought before an annual meeting by a
shareholder, the shareholder must have given timely notice
thereof in proper written form to the Secretary. To be timely, a
shareholder's notice must be addressed to the Secretary and
delivered to or mailed and received at the principal executive
offices of the Corporation not less than 60 days nor more than 90
days prior to the anniversary date of the immediately preceding
annual meeting; provided, however, that in the event that the
date of the annual meeting is more than 30 days earlier or more
than 60 days later than such anniversary date, notice by the
shareholder to be timely must be so delivered or received not
earlier than the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day
prior to such annual meeting or the 10th day following the day on
which public announcement of the date of such meeting is first
made. To be in proper written form, a shareholder's notice to the
Secretary shall set forth in writing as to each matter the
shareholder proposes to bring before the annual meeting: (i) a
brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business
at the annual meeting; (ii) the name and address, as they appear
on the Corporation's books, of the shareholder proposing such
business; (iii) the class and number of shares of the Corporation
which are beneficially owned by the shareholder; (iv) a
representation that the shareholder is or will be entitled to
vote at such annual meeting and intends to appear in person (or
send a qualified representative) or by proxy to present such
proposal at the meeting; and (v) any material interest of the
shareholder in such business. The foregoing notice requirements
shall be deemed satisfied by a shareholder if the shareholder has
notified the Corporation of his or her intention to present a
proposal at an annual meeting and such shareholder's proposal has
been included in a proxy statement that has been prepared by
management of the Corporation to solicit proxies for such annual
meeting; provided, however, that if such shareholder does not
appear in person (or send a qualified representative) or by proxy
to present such proposal at such annual meeting, the Corporation
need not present such proposal for a vote at such meeting,
notwithstanding that proxies in respect of such vote may have
been received by the Corporation. Notwithstanding anything in the
By-Laws to the contrary, no business shall be conducted at any
annual meeting except in accordance with the procedures set forth
in this Section 12. The chairman of an annual meeting shall, if
the facts warrant, determine that business was not properly
brought before the annual meeting in accordance with the
provisions of this Section 12 and, if he should so determine, he
shall so declare to the annual meeting and any such business not
properly brought before the annual meeting shall not be
transacted and any proposal contemplated by such business shall
be void.
ARTICLE II
BOARD OF DIRECTORS
Section 1 - Power of Board and Qualification of Directors.
The business of the Corporation shall be managed under the
direction of its Board of Directors, each of whom shall be at
least twenty-one years of age.
Section 2 - Number of Directors.*
At the annual meeting of shareholders, the shareholders
shall elect nine directors.
Section 3 - Election, Term and Qualifications of Directors.
At each annual meeting of shareholders, Directors shall be
elected to hold office until the next annual meeting and until
their successors have been elected and qualified. No person
shall be eligible for election or reelection to the Board of
Directors after reaching seventy years of age, or in the case of
a retired Chairman of the Board of Directors or a retired
President of the Corporation, after reaching sixty-seven years of
age. The term of any Director who is also an Officer of the
Corporation or any subsidiary of the Corporation, other than the
Chairman of the Board or the President of the Corporation, shall
end on the date of termination from active employment and such
officer shall thereafter be ineligible for reelection to the
Board of Directors.
Section 4 - Quorum of the Board: Action by the Board.
One-third of the entire Board of Directors shall constitute
a quorum for the transaction of business, and the vote of a
majority of the Directors present at the time of such vote, if a
quorum is then present, shall be the act of the Board.
Section 5 - Action Without a Meeting.
Any action required or permitted to be taken by the Board or
any committee thereof may be taken without a meeting if all
members of the Board or of the committee consent in writing to
the adoption of the resolution authorizing the action. The
resolution and the written consents thereto by the members of the
Board or committee shall be filed with the minutes of the
proceedings of the Board or committee.
Section 6 - Participation in Board Meetings by Conference
Telephone
Any one or more members of the Board of Directors or any
committee thereof may participate in a meeting of such Board or
committee by means of a conference telephone or similar
communications equipment allowing all persons participating in
the meeting to hear each other at the same time. Participation
by such means shall constitute presence in person at a meeting.
Section 7 - Meetings of the Board.
An annual meeting of the Board of Directors shall be held in
each year directly after adjournment of the annual shareholders'
meeting. Regular meetings of the Board shall be held at such
times as may from time to time be fixed by resolution of the
Board. Special meetings of the Board may be held at any time
upon the call of the Chairman of the Board of Directors, if such
there be, the President or any two Directors.
Meetings of the Board of Directors shall be held at such
place, within or without the State of New York, as from time to
time may be fixed by resolution of the Board for annual and
regular meetings and in the notice of meeting for special
meetings. If no place is so fixed, meetings of the Board shall
be held at the office of the Corporation in Rochester, New York.
No notice need be given of annual or regular meetings of the
Board of Directors. Notice of each special meeting of the Board
shall be given by oral, telegraphic or written notice, duly given
or sent or mailed to each Director not less than one (1) day
before such meeting.
Section 8 - Resignation.
Any Director may resign at any time by giving written notice
to the Chairman of the Board of Directors, if such there be, to
the President or to the Secretary. Such resignation shall take
effect at the time specified in such written notice, or if no
time be specified, then on delivery. Unless otherwise specified
in the written notice, the acceptance of such resignation by the
Board of Directors shall not be needed to make it effective.
<PAGE>
Section 9 - Newly Created Directorships and Vacancies.
Newly created directorships resulting from an increase in
the number of directors and vacancies occurring in the Board of
Directors may be filled by vote of the Board. If the number of
the directors then in office is less than a quorum, such newly
created directorships and vacancies may be filled by vote of a
majority of the directors then in office. A director elected to
fill a vacancy shall be elected to hold office for the unexpired
term of such director's predecessor.
Section 10 - Executive and Other Committees of Directors.*
The Board of Directors, by resolution, adopted by a majority
of the entire Board, shall designate from among its members an
Executive Committee consisting of three or more Directors, a
majority of whom are outside directors.
The Executive Committee shall have all the authority of the
Board, except that it shall not have authority as to the
following matters:
(1) The submission to shareholders of any action that needs
shareholders' approval;
(2) The filling of vacancies in the Board or in any
committee;
(3) The amendment or repeal of the By-Laws, or the adoption
of new By-Laws;
(4) The amendment or repeal of any resolution of the Board
which, by its terms, shall not be so amendable or
repealable;
(5) The fixing of compensation of the directors for serving
on the Board or on any Committee;
(6) The fixing or amendment of the compensation, benefits
and perquisites of the chief executive officer.
The Board of Directors, by resolution by a majority of the
entire Board, may designate from among its members an Audit
Committee consisting of three or more outside directors. The
Audit Committee shall, among other things, review the scope of
audit activities, review with management significant issues
concerning litigation, contingencies or other material matters
which may result in either potential liability of the Company or
significant exposure to the Company, review significant matters
of corporate ethics, review security methods and procedures,
review the financial reports and notes, and make reports and
recommendations with respect to audit activities, findings, and
reports of the independent public accountants and the internal
audit staff of the Company.
The Board of Directors, by resolution adopted by a majority
of the entire Board, may designate from among its members a
Committee on Directors consisting of three or more outside
directors. The Committee on Directors shall, among other things,
review performance of incumbent directors, act as a nominating
committee, and consider and report to the entire Board of
Directors on all matters relating to the selection,
qualification, compensation and duties of the members of the
Board of Directors and any committees of the Board of Directors.
The Board of Directors, by resolution adopted by a majority
of the entire Board, may designate from among its members a
Committee on Management consisting of three or more outside
directors. The Committee on Management shall, among other
things, fix or amend the compensation, benefits and perquisites
of all executive officers of the Company and recommend such for
the chief executive officer, select and administer executive
compensation plans and employee benefit plans which have Company
stock as an investment option, review succession planning for the
Company and review with management significant human resources
issues.
The Board of Directors, by resolution adopted by a majority
of the entire Board, may designate from among its members other
committees each consisting of three or more directors.
Unless a greater proportion is required by the resolution
designating a committee of the Board of Directors, a quorum for
the transaction of business of a committee shall consist of (a) a
majority of the entire authorized number of members of the
Executive Committee or (b) one-third of the entire authorized
number of members of any other committee of the Board of
Directors, but in no event fewer than two persons. The vote of a
majority of the members of a committee present at the time of the
vote concerning the transaction of business of that committee or
of any specified item of business of that committee if a quorum
is present at such time, shall be the act of such committee.
Any committee may fix the time and place of holding its
regular meetings and, if so fixed, no notice of such regular
meeting shall be necessary. Special meetings of any committee
may be called at any time by the Chairman of the Board of
Directors, if such there be, by the chief executive officer, by
the President, by the Chairperson of that committee, or by any
two members of that committee. Notice of each special meeting of
any committee shall be given by oral, telegraphic or written
notice, including notice via facsimile machine, duly given or
sent or mailed to each member of that committee not less than one
day before such meeting.
Section 11 - Compensation of Directors.
The Board of Directors shall have authority to fix the
compensation of directors for services in any capacity.
Section 12 - Indemnification.*
(a) Generally.
To the full extent authorized or permitted by law, the
Corporation shall indemnify any person ("indemnified Person")
made, or threatened to be made, a party to any action or
proceeding, whether civil, at law, in equity, criminal,
administrative, investigative or otherwise, including any action
by or in the right of the Corporation, by reason of the fact that
he, his testator or intestate, ("Responsible Person"), whether
before or after adoption of this Section 12, (1) is or was a
director or officer of the Corporation, or (2), if a director or
officer of the Corporation, is serving or served, in any
capacity, at the request of the Corporation, any other
corporation, or any partnership, joint venture, trust, employee
benefit plan or other enterprise, or (3), if not a director or
officer of the Corporation, is serving or served, at the request
of the Corporation, as a director or officer of any other
corporation or any partnership, joint venture, trust, employee
benefit plan or other enterprise, against all judgments, fines,
penalties, amounts paid in settlement (provided the Corporation
shall have given its prior consent to such settlement, which
consent shall not be unreasonably withheld by it) and reasonable
expenses, including attorneys' fees, incurred by such Indemnified
Person with respect to any such threatened or actual action or
proceeding, and any appeal therein, provided only that (x) acts
of the Responsible Person which were material to the cause of
action so adjudicated or otherwise disposed of were not (i)
committed in bad faith or (ii) were not the result of active and
deliberate dishonesty, and (y) the Responsible Person did not
personally gain in fact a financial profit or other advantage to
which he was not legally entitled.
(b) Advancement of Expenses.
All expenses reasonably incurred by an Indemnified Person in
connection with a threatened or actual action or proceeding with
respect to which such person is or may be entitled to
indemnification under this Section 12 shall be advanced or
promptly reimbursed by the Corporation to him in advance of the
final disposition of such action or proceeding, upon receipt of
an undertaking by him or on his behalf to repay the amount of
such advances, if any, as to which he is ultimately found not to
be entitled to indemnification or, where indemnification is
granted, to the extent such advances exceed the indemnification
to which he is entitled. Such person shall cooperate in good
faith with any request by the Corporation that common counsel be
used by the parties to an action or proceeding who are similarly
situated unless to do so would be inappropriate due to an actual
or potential conflict of interest.
(c) Procedure for Indemnification.
(1) Not later than thirty (30) days following final
disposition of an action or proceeding with respect to which the
Corporation has received written request by an Indemnified Person
for indemnification pursuant to this Section 12, if such
indemnification has not been ordered by a court, the Board of
Directors shall meet and find whether the Responsible Person met
the standard of conduct set forth in paragraph (a) of this
Section 12, and, if it finds that he did, or to the extent it so
finds, shall authorize such indemnification.
(2) Such standard shall be found to have been met unless (a)
a judgment or other final adjudication adverse to the Indemnified
Person establishes that subparagraphs (x) or (y) of paragraph (a)
of this Section 12 were violated, or (b) if the action or
proceeding was disposed of other than by judgment or other final
adjudication, the Board finds in good faith that, if it had been
disposed of by judgment or other final adjudication, such
judgment or other final adjudication would have been adverse to
the Indemnified Person and would have established a violation of
subparagraphs (x) or (y) of paragraph (a) of this Section 12.
(3) If indemnification is denied, in whole or part, because
of an adverse finding by the Board in the absence of a judgment
or other final adjudication, or because the Board believes the
expenses for which indemnification is requested to be
unreasonable, such action by the Board shall in no way affect the
right of the Indemnified Person to make application therefor in
any court having jurisdiction thereof, and in such action or
proceeding the issue shall be whether the Responsible Person met
the standard of conduct set forth in paragraph (a) of this
Section 12, or whether the expenses were reasonable, as the case
may be (not whether the finding of the Board with respect thereto
was correct) and the determination of such issue shall not be
affected by the Board's finding. If the judgment or other final
adjudication in such action or proceeding establishes that the
Responsible Person met the standard set forth in paragraph (a) of
this Section 12, or that the disallowed expenses were reasonable,
or to the extent that it does, the Board shall then find such
standard to have been met or the expenses to be reasonable, and
shall grant such indemnification, and shall also grant to the
Indemnified Person indemnification of the expenses incurred by
him in connection with the action or proceeding resulting in the
judgment or other final adjudication that such standard of
conduct was met, or if pursuant to such court determination such
person is entitled to less than the full amount of
indemnification denied by the Corporation, the portion of such
expenses proportionate to the amount of such indemnification so
awarded.
(4) A finding by the Board pursuant to this paragraph (c)
that the standard of conduct set forth in paragraph (a) of this
Section 12 has been met shall mean a finding of the Board or
shareholders as provided by law.
(d) Contractual Article.
This Section 12 shall be deemed to constitute a contract
between the Corporation and each person who is a Responsible
Person at any time while this Section 12 is in effect. No repeal
or amendment of this Section 12, insofar as it reduces the extent
of the indemnification of any person who could be a Responsible
Person shall without his written consent be effective as to such
person with respect to any event, act or omission occurring or
allegedly occurring prior to (1) the date of such repeal or
amendment if on that date he is not serving in any capacity for
which he could be a Responsible Person, or (2) the thirtieth
(30th) day following delivery to him of written notice of such
repeal or amendment as to any capacity in which he is serving on
the date of such repeal or amendment, other than as a director or
officer of the Corporation, for which he could be a Responsible
Person, or (3) the later of the thirtieth (30th) day following
delivery to him of such notice or the end of the term of office
(for whatever reason) he is serving as director or officer of the
Corporation when such repeal or amendment is adopted, with
respect to being a Responsible Person in that capacity. No
amendment of the Business Corporation Law shall, insofar as it
reduces the permissible extent of the right of indemnification of
a Responsible Person under this Section 12, be effective as to
such person with respect to any event, act or omission occurring
or allegedly occurring prior to the effective date of such
amendment irrespective of the date of any claim or legal action
in respect thereto. This Section 12 shall be binding on any
successor to the Corporation, including any corporation or other
entity which acquires all or substantially all of the
Corporation's assets.
(e) Non-exclusivity.
The indemnification provided by this Section 12 shall not be
deemed exclusive of any other rights to which any person covered
hereby may be entitled other than pursuant to this Section 12.
The Corporation is authorized to enter into agreements with any
such person or persons providing them rights to indemnification
or advancement of expenses in addition to the provisions therefor
in this Section 12 to the full extent permitted by law.
Section 13 - Notification of Nominations.*
Subject to the rights of the holders of any class or series
of stock having a preference over the Common Stock as to
dividends or upon liquidation, nominations for the election of
Directors may be made by the Board of Directors or by any
shareholder who is a shareholder of record at the time of the
giving of the notice of nomination provided for in this Section
13 and who is entitled to vote for the election of Directors. Any
shareholder of record who is or will be entitled to vote for the
election of Directors at a meeting may nominate persons for
election as Directors only if timely written notice of such
shareholder's intent to make such nomination is given to the
Secretary. To be timely, a shareholder's notice must be addressed
to the Secretary and delivered to or mailed and received at the
principal executive offices of the Corporation (i) with respect
to an election to be held at an annual meeting of shareholders,
not less than 60 days nor more than 90 days prior to the
anniversary date of the immediately preceding annual meeting;
provided, however, that in the event that the date of the annual
meeting is more than 30 days earlier or more than 60 days later
than such anniversary date, notice by the shareholder to be
timely must be so delivered or received not earlier than the 90th
day prior to such annual meeting and not later than the close of
business on the later of the 60th day prior to such annual
meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made and (ii)
with respect to an election to be held at a special meeting of
shareholders for the election of Directors, not earlier than the
90th day prior to such special meeting and not later than the
close of business on the later of the 60th day prior to such
special meeting or the 10th day following the day on which public
announcement is first made of the date of the special meeting and
of the nominees to be elected at such meeting. Each such notice
shall set forth: (a) the name and address, as they appear on the
Corporation's books, of the shareholder who intends to make the
nomination, and the name and address of the person or persons to
be nominated; (b) the class and number of shares of the
Corporation which are beneficially owned by the shareholder: (c)
a representation that the shareholder is or will be entitled to
vote at the meeting and intends to appear in person (or send a
qualified representative) or by proxy at the meeting to nominate
the person or persons specified in the notice; (d) a description
of all arrangements or understandings between the shareholder and
such nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are
to be made by the shareholder; (e) such other information
regarding each nominee proposed by such shareholder as would have
been required to be included in a proxy statement filed pursuant
to the proxy rules of the Securities and Exchange Commission had
each nominee been nominated, or intended to be nominated, by the
Board of Directors; and (f) the consent of each nominee to serve
as a Director of the Corporation if so elected. The chairman of
the meeting may refuse to acknowledge the nomination of any
person not made after compliance with the foregoing procedure.
Only such persons who are nominated in accordance with the
procedures set forth in this Section 13 shall be eligible to
serve as Directors of the Corporation and any purported
nomination or purported election not made in accordance with the
procedures set forth in this Section 13 shall be void.
ARTICLE III
OFFICERS
Section 1 - Officers.
The Board of Directors, as soon as may be practicable after
the annual election of directors, may elect a Chairman of the
Board of Directors and shall elect a President, one or more Vice
Presidents (one or more of whom may be designated Executive Vice
President), a Secretary and a Treasurer, and such other officers
as it may determine. Any two or more offices may be held by the
same person, except the office of President and Secretary.
Section 2 - Term of Office and Removal.
Each officer shall hold office for the term for which each
officer is elected or appointed, and until a successor has been
elected or appointed and qualified.
<PAGE>
Section 3 - Powers and Duties.
The officers of the Corporation shall each have such powers
and authority and perform such duties in the management of the
Corporation as set forth in these By-Laws and as from time to
time prescribed by the Board of Directors. To the extent not set
forth in these By-Laws or so prescribed by the Board of
Directors, they shall each have such powers and authority and
perform such duties in the management of the Corporation, subject
to the control of the Board, as generally pertain to their
respective offices.
In addition to the powers and authority above, each officer
has the powers and duties set out below.
(a) Chairman of the Board of Directors
The Chairman of the Board of Directors, if such there be,
shall preside at all meetings of the Board. The Chairman of
the Board of Directors may be the chief executive officer of
the Corporation, and if so designated, may preside at all
meetings of shareholders.
(b) President
The President shall be the chief operating officer and shall
have responsibility for the general management of the
business of the Corporation, subject only to the supervision
of the Board of Directors, the Executive Committee and the
Chairman of the Board of Directors, as chief executive
officer, if such there be. If there is no Chairman of the
Board of Directors or if the Chairman of the Board of
Directors is not the chief executive officer, then the
President shall be the chief executive officer of the
Corporation. The President may preside at all meetings of
shareholders, when present, and at meetings of the Board of
Directors in the absence of the Chairman of the Board, if
such there be.
(c) Executive Vice President
The Executive Vice President or the Executive Vice
Presidents, if such there be, shall assist the President in
the management of the Corporation and, as may be designated
by the Board of Directors, in the event of the death,
resignation, removal, disability or absence of the
President, an Executive Vice President shall possess the
powers and perform the duties of the President for the
period of such disability or absence or until the Board of
Directors elects a President.
(d) Vice President
Each Vice President shall assist the President in the
management of the Corporation and, in the absence or
incapacity of the President and Executive Vice Presidents,
and in order as fixed by the Board, possess the powers and
perform the duties of the President for the period of such
absence or incapacity, and shall possess such other powers
and perform such other duties as the Board of Directors may
prescribe.
(e) Secretary
The Secretary shall issue notices of all meetings of
shareholders and directors where notices of such meetings
are required by law or these By-Laws, and shall keep the
minutes of such meetings. The Secretary shall sign such
instruments and attest such documents as require signature
or attestation and affix the corporate seal thereto where
appropriate and shall possess such other powers and perform
such other duties as usually pertain to the office or as the
Board of Directors may prescribe.
(f) Treasurer
The Treasurer shall have general charge of, and be
responsible for, the fiscal affairs of the Corporation and
shall sign all instruments and documents as require such
signature, and shall possess such other powers and perform
such other duties as usually pertain to the office or as the
Board of Directors may prescribe.
(g) Assistant Officers
Any Assistant Officer elected by the Board of Directors
shall assist the designated officer and shall possess that
officer's powers and perform that officer's duties as
designated by that officer, and shall possess such other
powers and perform such other duties as the Board of
Directors may prescribe.
Section 4 - Records.
The Corporation shall keep (a) correct and complete books
and records of account; (b) minutes of the proceedings of the
shareholders, Board of Directors and any committees of the Board;
and (c) a current list of the directors and officers and their
residence addresses.
The Corporation shall also keep at its office in the State
of New York or at the office of its transfer agent or registrar
in the State of New York, if any, a record containing the names
and addresses of all shareholders, the number and class of shares
held by each and the dates when they respectively became the
owners of record thereof.
Section 5 - Checks and Similar Instruments.
All checks and drafts on the Corporation's bank accounts and
all bills of exchange and promissory notes and all acceptances,
obligations and other instruments, for the payment of money,
shall be signed by facsimile or otherwise on behalf of the
Corporation by such officer or officers or agent or agents as
shall be thereunto authorized from time to time by the Board of
Directors.
Section 6 - Voting Shares Held by the Corporation.
Either the President or the Secretary may vote shares of
stock held by the Corporation in other corporations and may
execute proxies for and on behalf of the Corporation for such
purpose.
ARTICLE IV
SHARE CERTIFICATES AND LOSS THEREOF - TRANSFER OF SHARES
Section 1 - Form of Share Certificate.
The shares of the Corporation shall be represented by
certificates, in such forms as the Board of Directors may from
time to time prescribe, signed by the Chairman of the Board if
such there be, or the President or a Vice President, and the
Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, and may be sealed with the seal of the
Corporation or a facsimile thereof. The signatures of the
officers upon a certificate may be facsimiles if the certificate
is countersigned by a transfer agent or registered by a registrar
other than the Corporation or its employee. In case any officer
who has signed or whose facsimile signature has been placed upon
a certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Corporation with
the same effect as if such person were such officer at the date
of issue.
Section 2 - Lost, Stolen or Destroyed Share Certificates.
No certificate or certificates for shares of the Corporation
shall be issued in place of any certificate alleged to have been
lost, stolen or destroyed, except upon production of such
evidence of the loss, theft or destruction, and upon such
indemnification and payment of costs of the Corporation and its
agents to such extent and in such manner as the Board of
Directors may from time to time prescribe. The Board of
Directors, in its discretion, and as a condition precedent to the
issuance of any new certificate, may require the owner of any
certificate alleged to have been lost, stolen or destroyed to
furnish the Corporation with a bond, in such sum and with such
surety or sureties as it may direct, as indemnity against any
claim that may be made against the Corporation in respect of such
lost, stolen or destroyed certificate.
Section 3 - Transfer of Shares.
Shares of the Corporation shall be transferable on the books
of the Corporation by the registered holder thereof in person or
by the registered holder's duly authorized attorney, by delivery
for cancellation of a certificate or certificates for the same
number of shares, with proper endorsement consisting of either a
written assignment of the certificate or a power of attorney to
sell, assign or transfer the same or the shares represented
thereby, signed by the person appearing by the certificate to be
the owner of the shares represented thereby, either written
thereon or attached thereto, with such proof of the authenticity
of the signature as the Corporation or its agents may reasonably
require. Such endorsement may be either in blank or to a
specified person, and shall have affixed thereto all stock
transfer stamps required by law.
*Except as otherwise provided by law, not more than twenty
percent of the aggregate number of shares of stock of the
Corporation outstanding in any class or series shall at any time
be owned of record or beneficially or voted by or for the account
of aliens (as defined below). Shares of stock shall not be
transferable on the books of the Corporation to any alien if, as
a result of such transfer, the aggregate number of shares of
stock in any class or series owned by or for the account of
aliens shall be twenty percent or more of the number of shares of
stock then outstanding in such class or series. The Board of
Directors may make such rules and regulations as it shall deem
necessary or appropriate so that accurate records may be kept of
the shares of stock of the Corporation owned of record or
beneficially or voted by or for the account of aliens or to
otherwise enforce the provisions of this Section 3.
As used in this Section 3, the word "alien" shall mean the
following and their representatives: any individual not a citizen
of the United States of America; a partnership, unless a majority
of the partners are non-aliens and a majority interest in the
partnership profits is held by nonaliens; a foreign government; a
corporation, joint-stock company or association organized under
the laws of a foreign country; any other corporation of which any
officer or more than one-fourth of the directors are aliens, or
of which more than one-fourth of any class or series of stock is
owned of record or voted by or for the account of aliens; and any
other corporation, joint-stock company or association controlled
directly or indirectly by one or more of the above.
ARTICLE V
OTHER MATTERS
Section 1 - Corporate Seal.
The corporate seal shall have inscribed thereon the name of
the Corporation and such other appropriate legend as the Board of
Directors may from time to time determine. In lieu of the
corporate seal, when so authorized by the Board, a facsimile
thereof may be affixed or impressed or reproduced in any other
manner.
Section 2 - Amendments.
By-Laws of the Corporation may be amended, repealed or
adopted by vote of the holders of the shares at the time entitled
to vote in the election of any directors. By-Laws may also be
amended, repealed, or adopted by the Board of Directors, but any
By-Law adopted by the Board may be amended or repealed by the
shareholders entitled to vote thereon as hereinabove provided.
If any By-Law regulating an impending election of directors
is adopted, amended or repealed by the Board of Directors, there
shall be set forth in the notice of the next meeting of
shareholders for the election of directors the By-Law so adopted,
amended or repealed, together with a concise statement of the
changes made.
<PAGE>
EXHIBIT 3-2
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION OF
ROCHESTER TELEPHONE CORPORATION
Under Section 805 of the Business Corporation Law
IT IS HEREBY CERTIFIED THAT:
(1) The name of the corporation is:
ROCHESTER TELEPHONE CORPORATION
(2) The Certificate of Incorporation was filed at the Department
of State of the State of New York on the 25th day of February,
1920.
(3) The Certificate of Incorporation is hereby amended to effect
a change in corporate name:
Paragraph One 91) of the Certificate is hereby amended to
read:
The name of the corporation is:
FRONTIER CORPORATION
(4) The amendment to the Certificate of Incorporation was
authorized by a vote of the Board of Directors, followed by a
vote of the holders of a majority of all outstanding shares
entitled to vote thereon at a meeting of shareholders.
IN WITNESS WHEREOF, this certificate has been subscribed this
21st day of December 1994 by the undersigned, who affirm that the
statements made herein are true under the penalties of perjury.
/s/ John K. Purcell /s/ Josephine S. Trubek
- ----------------------- -------------------------
John K. Purcell, Corporate Josephine S. Trubek,
Vice President Corporate Secretary
<PAGE>1
EXHIBIT 3-3
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION OF
FRONTIER CORPORATION
Under Section 805 of the Business Corporation Law
The undersigned, being a corporate vice president and the
corporate secretary of Frontier Corporation, do hereby certify
and set forth:
(1) The name of the corporation is Frontier Corporation.
The name under which the corporation was formed is Rochester
Telephone Corporation.
(2) The Certificate of Incorporation was filed at the
Department of State of the State of New York on the 25th day of
February, 1920. A Restated Certificate of Incorporation was
filed in the Department of State on April 2, 1968.
(3) The Restated Certificate of Incorporation of the
Corporation, as amended heretofore, is further amended to effect
the following amendments authorized by the Business Corporation
Law:
(a) To reorganize the Corporation from a telephone
corporation under the Transportation Corporations Law to a
business corporation under the Business Corporation Law,
and, in that connection, to (i) broaden the purposes clause
with a provision specifying as the purposes of the
Corporation those purposes permitted to any business
corporation under the Business Corporation Law and (ii)
delete the existing description of the territory in which
the Corporation operates as a telephone corporation in the
Rochester, New York area;
(b) To increase the number of authorized shares of
common stock;
(c) To authorize a new class of preferred stock;
(d) To permit the Corporation to redeem shares of its
common stock to the extent necessary, in the judgment of the
Board of Directors, to prevent the loss or secure the
renewal or reinstatement of any license or franchise from
any governmental agency held by the Corporation or any of
its subsidiaries, which license or franchise is conditioned
upon some or all of the holders of the stock of the
Corporation possessing prescribed qualifications; and
(4) To effect the change described in subparagraph 3(a)(ii)
above, Article SECOND of the Certificate of Incorporation as
amended, is hereby deleted.
(5) To effect the change described in subparagraph 3(a)(i)
above, Articles SEVENTH and EIGHTH are deleted in their entirety
and a new Article SECOND is hereby added to read as follows:
SECOND: The purposes for which the Corporation is
formed are: To engage in any lawful act or activity
for which corporations may be organized under the
Business Corporation Law of the State of New York,
except that the Corporation is not organized to engage
in any act or activity requiring the consent or
approval of any official, department, board, agency or
other body of the State of New York without first
obtaining such consent or approval.
(6) The following articles of the Certificate of
Incorporation are renumbered as follows:
Article TENTH is renumbered ELEVENTH
Article NINTH is renumbered TENTH
Article SIXTH is renumbered NINTH
Article FIFTH is renumbered EIGHTH
(7) To effect the changes described in subparagraphs 3(b)
and (c), Articles THIRD and FOURTH of the Certificate of
Incorporation, as amended, are hereby deleted and new Articles
THIRD, FOURTH, FIFTH, SIXTH and SEVENTH are hereby added to read
in their entirety as follows:
THIRD: The total number of shares which the
Corporation shall have authority to issue is (i) Three Hundred
Million (300,000,000) shares of Common Stock of the par value of
One Dollar ($1.00) per share, (ii) Four Million (4,000,000)
shares of Class A Preferred Stock of the par value of One Hundred
Dollars ($100.00) per share and (iii) Eight Hundred Fifty
Thousand (850,000) shares of Cumulative Preferred Stock of the
par value of One Hundred Dollars ($100.00) per share (the Class A
Preferred Stock and the Cumulative Preferred Stock referred to
collectively herein as the "Preferred Stock").
Subject to any exclusive voting rights which may vest in
holders of Preferred Stock under the provision of any series of
Preferred Stock established by the Board of Directors pursuant to
authority herein provided, and except as otherwise provided by
law, the shares of Common Stock shall entitle the holders thereof
to one vote for each share upon all matters upon which
shareowners have the right to vote.
No holders of shares of the Corporation of any class or
series, now or hereafter authorized, shall have any preemptive
rights to subscribe for or purchase any part of any issue, sale
or offering of any shares of the Corporation of any class or
series, now or hereafter authorized, or of any options, warrants
or rights to subscribe for or purchase any such shares, or of any
securities convertible into, or carrying options, warrants or
rights to subscribe for or purchase, any such shares, regardless
of whether such issue, sale or offering is for cash, property,
services or otherwise.
FOURTH: Subject to the limitations and in the manner
provided by law and subject to the terms of this Certificate,
shares of Class A Preferred Stock may be issued from time to time
in series and the Board of Directors is hereby authorized to
establish and designate series, to fix the number of shares
constituting each series, and to fix the designations and the
relative rights, preferences and limitations of the shares of
each series and the variations in the relative rights,
preferences and limitations as between series, and to increase
and to decrease the number of shares constituting each series.
Subject to the limitations and in the manner provided by law and
subject to the terms of this Certificate, the authority of the
Board of Directors with respect to each series shall include but
shall not be limited to the authority to determine the following:
(i) the designation of such series;
(ii) the number of shares initially constituting such
series;
(iii) the increase, and the decrease to a number not less
than the number of the outstanding shares of such series, of
the number of shares constituting such series theretofore
fixed;
(iv) the rate or rates and the times at which dividends on
the shares of such series shall be paid and whether or not
such dividends shall be cumulative and, if such dividends
shall be cumulative, the date or dates from and after which
they shall accumulate; provided, however, that, if the
stated dividends are not paid in full, the shares of all
series of Class A Preferred Stock shall share ratably in the
payment of dividends, including accumulations, if any, in
accordance with the sums which would be payable on such
shares if all dividends were declared and paid in full; and
provided, further, that dividends or other distributions
shall not be declared or paid on any shares of Class A
Preferred Stock unless the current quarterly dividend upon
all the Cumulative Preferred Stock then outstanding,
together with all accumulations thereon, shall have been
paid or declared and set apart for payment in accordance
with the requirements of subdivision (B) of Article FIFTH;
(v) whether or not the shares of such series shall be
redeemable and, if such shares shall be redeemable, the
terms and conditions of such redemption, including but not
limited to the date or dates upon or after which such shares
shall be redeemable and the amount per share which shall be
payable upon such redemption, which amount may vary under
different conditions and at different redemption dates;
provided, that, unless the current quarterly dividend upon
all the Cumulative Preferred Stock then outstanding,
together with all accumulations thereon, shall have been
paid or declared and set apart for payment in accordance
with the requirements of subdivision (B) of Article FIFTH,
the Corporation or any of its subsidiaries shall not redeem,
purchase or otherwise acquire shares of Class A Preferred
Stock (except by conversion into or exchange for, or out of
the net cash proceeds from the concurrent sale of, stock of
the Company ranking junior to the Cumulative Preferred Stock
as to dividends);
(vi) the amount payable on the shares of such series in the
event of the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; provided,
however, that (1) before any assets of the Corporation shall
be distributed among or paid over to the holders of Class A
Preferred Stock, each holder of Cumulative Preferred Stock
then outstanding shall be entitled to be paid the amount
described in subdivision (C) of Article FIFTH, and (2) the
holders of shares of Class A Preferred Stock shall be
entitled to be paid, or to have set apart for payment, not
less than $100.00 per share before the holders of shares of
Common Stock or the holders of any other class of stock
ranking junior to the Class A Preferred Stock as to rights
on liquidation shall be entitled to be paid any amount or to
have any amount set apart for payment; provided, further,
that, if the amounts payable on liquidation are not paid in
full, the shares of all series of the Class A Preferred
Stock shall share ratably in any distribution of assets
other than by way of dividends in accordance with the sums
which would be payable in such distribution if all sums
payable were discharged in full. A liquidation, dissolution
or winding up of the Corporation, as such terms are used in
this clause (vi), shall not be deemed to be occasioned by or
to include any consolidation or merger of the Corporation
with or into any other corporation or corporations or a
sale, lease or conveyance of all or a part of its assets;
(vii) whether or not the shares of such series shall have
voting rights, in addition to the voting rights provided by
law and, if such shares shall have such voting rights, the
terms and conditions thereof, including but not limited to
the right of the holders of such shares to vote as a
separate class either alone or with the holders of shares of
one or more other series or class of stock and the right to
have more than one vote per share;
(viii) whether or not a sinking fund shall be provided for
the redemption of the shares of such series and, if such a
sinking fund shall be provided, the terms and conditions
thereof;
(ix) whether or not the shares of such series shall be
convertible into, or exchangeable for, shares of stock of
any other class or any other series of this class or any
other securities or assets, and, if so, the terms and
conditions of conversion or exchange, including but not
limited to any provision for the adjustment of the rate or
rates or the price or prices of conversion or exchange; and
(x) any other relative rights, preferences and limitations.
If any shares of Class A Preferred Stock shall be
issued then, for purposes of clause (ii)(a) of subdivision
(F) of Article FIFTH, such shares shall be deemed to have
been authorized in connection with any prior authorization
of shares of Class A Preferred Stock, notwithstanding any
subsequent action by the Corporation's Board of Directors in
connection with the issuance of such shares or the filing of
any certificate required by law in connection with such
issuance.
FIFTH: The respective rights, preferences and
limitations of the shares of Cumulative Preferred Stock are
set forth in the following subdivisions designated (A) to
(F) inclusive which are hereinafter referred to as
subdivisions of this Article FIFTH.
(Note: The words "preferential rights" whenever used in
this Certificate with respect to the Cumulative
Preferred Stock herein authorized or any preferred
stock of any class or series hereafter authorized by
any certificate filed pursuant to law, shall for the
sake of brevity and convenience, mean and include the
words "relative rights, preferences and limitations of
the shares of each class" as used in the Business
Corporation Law.)
(A) The shares of Cumulative Preferred Stock shall be
issuable from time to time in one or more series. The Board
of Directors is hereby authorized to fix, from time to time
before issuance, the preferential rights of the shares of
each series of such Cumulative Preferred Stock, to the
extent that such preferential rights are not herein
expressly prescribed, determined and set forth. The
preferential rights of shares of different series shall be
identical, except that there may be variations, as
hereinafter provided, in respect of the dividend rates,
dates of payment of dividends and dates from which they are
cumulative, redemption prices, sinking fund requirements and
conversion and other rights. All shares of any one series
will be alike in every particular and all shares of
Cumulative Preferred Stock will rank equally. There shall
be no discrimination as between different series of
Cumulative Preferred Stock in the declaration and payment of
dividends on the basis of the rates appertaining thereto;
and if at any time there shall be outstanding Cumulative
Preferred Stock of several series bearing different rates of
dividends and dividends are to be declared on such stock at
less than the full rates appertaining thereto, the shares of
all such series shall share ratably in the payment of such
dividends including accumulations, if any, in accordance
with the sums which would be payable on said shares if all
dividends were declared and paid in full.
The Board of Directors is authorized to fix from time
to time before issuance of each series of Cumulative
Preferred Stock, but subject to the provisions of this
Certificate covering all series of Cumulative Preferred
Stock, the following: (a) the designation and number of
shares of such series; (b) the dividend rate of such series;
(c) the dates of payment of dividends on shares of such
series and the dates from which they are cumulative; (d) the
redemption price or prices for shares of such series; (e)
the amount of the sinking fund or redemption or purchase
fund or account, if any, to be applied to the purchase or
redemption of shares of such series and the manner of its
application; and (f) whether or not the shares of such
series shall be made convertible into shares of any other
class or classes or of any other series of the same class of
stock of the Corporation, and if made so convertible the
conversion price or prices and the provisions, if any, for
the adjustment thereof and any other relative,
participating, optional or other special rights (including
rights to purchase stock or obligations of the Corporation)
and powers and qualifications, limitations or restrictions
thereof of shares of such series.
(B) Dividends. The holders of the Cumulative
Preferred Stock of any series shall be entitled to receive,
when and as declared by the Board of Directors, but only out
of funds legally available for the payment thereof, fixed
yearly preferred dividends at the annual rate appertaining
to such series, and no more, payable in lawful money of the
United States of America quarterly on the first days of
January, April, July and October in each year, or on such
other dates as may be determined by the Board of Directors,
before any dividends shall be paid upon or set apart for any
junior stock (which term as used herein shall mean Common
Stock, Class A Preferred Stock and any other class of stock
of the Corporation which shall rank junior to the Cumulative
Preferred Stock). Dividends on the Cumulative Preferred
Stock shall be cumulative, so that if dividends on all
outstanding shares of Cumulative Preferred Stock at the
respective annual dividend rates appertaining thereto shall
not have been paid for all past quarterly dividend periods,
and the full dividends thereon at such rates for the current
quarterly dividend period shall not have been paid, or
declared and set apart for payment, the deficiency shall be
fully paid or dividends equal thereto declared and set apart
for payment at such rates, but without interest thereon,
before any dividend shall be paid upon any junior stock.
After the payment or declaration and setting apart for
payment, for or in any calendar year, of the current
quarterly dividend upon all the Cumulative Preferred Stock
then outstanding, together with all accumulations as herein
provided, the Corporation may declare and pay, but only out
of funds legally available for the payment thereof,
dividends on any class of junior stock, in accordance with
the rights of such junior stock and respective classes
thereof, in such amounts and at such time or times as the
Board of Directors may determine.
(C) Liquidation. The Cumulative Preferred Stock shall
be preferred as to both earnings and assets, and in the
event of any voluntary liquidation, dissolution or winding
up of the Corporation, or of any distribution of assets by
way of return of capital to its stockholders (other than
redemption of Cumulative Preferred Stock in accordance with
the provisions hereinafter set forth), each holder of
Cumulative Preferred Stock shall be entitled, before any
assets of the Corporation shall be distributed among or paid
over to the holders of any junior stock, to be paid, from
the assets of the Corporation available for distribution
among its stockholders, an amount equal to the redemption
price or prices current at the date of such payment as
hereinafter provided (plus an amount equivalent to accrued
and unpaid dividends, whether or not earned) on the
respective shares of Cumulative Preferred Stock held by him.
In the event of any involuntary liquidation, dissolution or
winding up of the Corporation, or of any involuntary
distribution of assets by way of return of capital to its
stockholders, each holder of the Cumulative Preferred Stock
shall be entitled, before any assets of the Corporation
shall be distributed among or paid over to the holders of
any junior stock, to be paid, out of the assets of the
Corporation available for distribution among its
stockholders, an amount equal to the par value of the
respective shares of Cumulative Preferred Stock held by him,
plus an amount equivalent to accrued and unpaid dividends,
whether or not earned. If, in either of the foregoing
events, there shall not be sufficient assets to make the
full payment herein required, the outstanding shares of all
series of Cumulative Preferred Stock shall share ratably in
the distribution of assets in accordance with the sums which
would be paid on such distribution if all sums payable were
discharged in full. If the appropriate payment herein
required shall have been made to the holders of the
Cumulative Preferred Stock, the holders of the Cumulative
Preferred Stock shall not be entitled to participate further
in the distribution of the assets of the Corporation and
after such payment and distribution to the holders of the
Cumulative Preferred Stock, the remaining assets of the
Corporation shall be distributed among the holders of the
junior stock according to their respective rights and
preferences and pro rata in accordance with the number of
shares respectively held by such holders.
(D) (a) Redemption of Cumulative Preferred Stock.
Subject to the provisions of subsection (i) of this
subdivision (D), the Corporation, at the option of the Board
of Directors, expressed in a resolution adopted by said
Board, may redeem, at any time or times and from time to
time, all or any part of the shares of Cumulative Preferred
Stock or all or any part of any one or more series of such
Cumulative Preferred Stock outstanding, by paying the par
value thereof plus an amount in the case of each such share
of Cumulative Preferred Stock to be redeemed computed at the
annual dividend rate for the series in question from the
date from which dividends on such share became cumulative to
the date fixed for such redemption, less the aggregate of
dividends theretofore or on such redemption date paid
thereon, plus such premium, if any, as shall have been fixed
in accordance with the provisions of subdivision (A) of this
Article FIFTH prior to the issuance thereof. Notice of
every such redemption shall be given by publication,
published at least once in each of two (2) calendar weeks in
a daily newspaper (which term shall mean and include a
newspaper published in morning editions or evening editions
or both, and whether or not it shall be published in Sunday
editions or on holidays) printed in the English language and
published and of general circulation in the Borough of
Manhattan, the City and State of New York, the first
publication to be at least thirty (30) days and not more
than sixty (60) days prior to the date fixed for such
redemption. At least thirty (30) days' and not more than
sixty (60) days' previous notice of every such redemption
shall also be mailed to the holders of record of the
Cumulative Preferred Stock to be redeemed, at their
respective addresses as the same shall appear on the books
of the Corporation; but no failure to mail such notice nor
any defect therein or in the mailing thereof shall affect
the validity of the proceedings for the redemption of any
shares of such Cumulative Preferred Stock so to be redeemed.
The Board of Directors shall have full power and authority,
subject to the limitations and provisions herein contained,
to prescribe the manner in which and the terms and
conditions upon which any shares of any series of the
Cumulative Preferred Stock shall be redeemed from time to
time. If such notice of redemption shall have been duly
given by publication, and if on or before the redemption
date specified in such notice all funds necessary for such
redemption shall have been set aside so as to be available
therefor, then, notwithstanding that any certificate for the
shares of such Cumulative Preferred Stock so called for
redemption shall not have been surrendered for cancellation,
the shares represented thereby shall from and after the date
fixed for redemption no longer be deemed outstanding, the
right to receive dividends thereon shall cease to accrue
from and after the date of redemption so fixed, and all
rights with respect to such shares of Cumulative Preferred
Stock so called for redemption shall forthwith on such
redemption date cease and terminate, except only the right
of the holders thereof to receive the amount payable upon
redemption thereof, but without interest; provided, however,
that the Corporation may, after giving the first notice by
publication of any such redemption or upon furnishing the
depositary hereinafter mentioned with irrevocable authority
to publish such notice of redemption on behalf of the
Corporation and prior to the redemption date specified in
such notice, deposit in trust, for the account of the
holders of such Cumulative Preferred Stock to be redeemed,
with a bank or trust company in good standing, organized
under the laws of the United States of America, or of the
State of New York, doing business in the City of Rochester,
New York, or in the Borough of Manhattan, the City and State
of New York, and having a capital, undivided profits and
surplus aggregating at least $5,000,000, all funds necessary
for such redemption, and upon such deposit all shares of
such Cumulative Preferred Stock with respect to which such
deposit shall have been made shall no longer be deemed to be
outstanding, and all rights with respect to such shares of
such Cumulative Preferred Stock shall forthwith upon such
deposit in trust cease and terminate, except (1) the right
of the holders thereof to receive the amount payable upon
the redemption thereof, but without interest, or (2) the
right of the holders of any Cumulative Preferred Stock,
which may be convertible into shares of stock of the
Corporation of any class or classes, or other securities, to
convert such Cumulative Preferred Stock called for
redemption within the time or up to a date specified in the
terms of such convertible stock or as may be stated in any
certificate filed pursuant to law creating such convertible
stock. If less than all the Cumulative Preferred Stock of
any series shall be redeemed, the stock to be redeemed shall
be selected by lot in such manner as the Board of Directors
may determine, by a bank or trust company appointed for that
purpose by said Board, which, unless otherwise directed by
said Board, shall be the bank or trust company with which
the funds necessary for such redemption are to be deposited.
(i) Unless all dividends accrued to the dividend
date next preceding such redemption date
shall be paid on all Cumulative Preferred
Stock then outstanding, the Corporation shall
not have the right to redeem less than all of
the Cumulative Preferred Stock outstanding at
the time of giving the notice of such
redemption.
(b) Purchase of Cumulative Preferred Stock. In
the event that at any time the Corporation shall be in
default in the payment of dividends on the Cumulative
Preferred Stock then so long as such default shall continue,
the Corporation shall not purchase or otherwise acquire for
a consideration any shares of the Cumulative Preferred Stock
unless such purchase or acquisition shall be pursuant to
tenders, called for on at least 20 days' previous notice by
mail to the holders of record (at the time of mailing such
notice) of the Cumulative Preferred Stock at their
respective addresses as the same shall appear on the books
of the Corporation. The shares of stock to be purchased,
pursuant to such tenders, shall be purchased at the lowest
prices specified in such tenders, not exceeding, however,
the redemption prices then in effect or then current, and
the notice shall specify the method (whether by lot, or
otherwise) of determining the stock to be purchased in the
event that stock shall be tendered at the same price,
whether the lowest or other price.
(E) Increase of Authorized Stock. The Corporation,
subject to the provisions of subsection (ii) of subdivision
(F) of this Article FIFTH, may from time to time increase
the authorized amount of the Cumulative Preferred Stock and
may also from time to time create other classes of preferred
stock with different preferential rights.
(F) Voting Rights. The holders of the Cumulative
Preferred Stock shall not be entitled to any voting rights
whatsoever, except as specifically required by statute or as
hereinafter expressly provided.
(i) Voting rights upon default in dividends. In
the event that, at any time, or from time to time, four
full quarterly dividends (whether consecutive or not)
on the Cumulative Preferred Stock then outstanding, at
the dividend rate appertaining thereto shall be in
arrears, the holders of such Cumulative Preferred Stock
shall have the right, voting separately as a class, to
elect the smallest number of directors then necessary
to constitute a majority of the full Board, and in such
event the holders of stock of any other class or
classes then entitled to vote for directors shall have
the right, voting separately as a class, to elect only
the remaining directors.
If and whenever the right of the holders of
Cumulative Preferred Stock to elect directors hereunder
shall accrue, the terms of office of all persons who
may be directors of the Corporation at such time shall
terminate upon the election of their successors. Such
election may be held at a special meeting of all
stockholders of the Corporation which shall be convened
at any time after the accrual of such right, upon
notice similar to that provided in the Bylaws of the
Corporation for calling the annual meeting of the
stockholders, at the written request of the holders of
record of at least 10% of the number of shares of
Cumulative Preferred Stock then outstanding, for which
purpose any holder of record of Cumulative Preferred
Stock shall have access to the stock books of the
Corporation. In the event of the failure of the
Secretary or other proper officer of the Corporation to
give such notice within 10 days after receipt of such
request, then such meeting may be called on like notice
given by the holders of at least 10% of the Cumulative
Preferred Stock then outstanding. If for any reason
such special meeting shall not be held prior to the
next annual meeting, then notice of such annual meeting
shall be given to the holders of the Cumulative
Preferred Stock then outstanding in the manner provided
in the Bylaws, and at such meeting the holders of
Cumulative Preferred Stock and the holders of any other
class or classes of stock then entitled to vote for
directors shall elect the number of directors for which
they are then respectively entitled to vote under the
provisions hereof, unless previously thereto all such
defaults in dividends shall have been made good. In
the event that the holders of the Cumulative Preferred
Stock then outstanding shall not exercise their right
to elect directors at such annual meeting then the
holders of the other class or classes of stock then
entitled to vote for the election of directors shall
have the right to elect at such meeting the entire
membership of the Board of Directors, and such
directors so elected shall constitute the entire Board
of Directors until such time as part thereof shall be
retired and replaced by directors elected, as herein
provided, by the holders of Cumulative Preferred Stock
then outstanding.
To entitle the holders of Cumulative Preferred
Stock to vote for the election of directors hereunder
at any meeting, there shall be present at such meeting
in person or by proxy the holders of not less than a
majority of the shares of Cumulative Preferred Stock
then outstanding, but the holders of less than a
majority of such shares may adjourn such meeting for a
period or periods not exceeding four weeks in the
aggregate. In order to validate an election of
directors by the holders of Cumulative Preferred Stock
as herein provided, such election shall be by a vote of
at least a plurality of the shares of Cumulative
Preferred Stock then outstanding present at such
meeting in person or by proxy.
In the event that any meeting at which the holders
of Cumulative Preferred Stock shall have the right to
elect directors to replace directors theretofore
elected by holders of any other class or classes of
stock shall be attended by the holders of at least a
majority of the Cumulative Preferred Stock then
outstanding, but not by the holders of at least a
majority of the other class or classes of stock then
entitled to vote for directors, such holders of
Cumulative Preferred Stock shall nevertheless be
entitled to proceed with the election of directors in
place of directors theretofore elected as hereinabove
provided, such retiring directors (if and so far as the
necessary vacancies shall not be provided by voluntary
resignations) to be determined by lot from the Board of
Directors theretofore elected as aforesaid, not
including, however, directors then holding the office
of Chairman of the Board of Directors or President of
the Corporation, and the remaining directors (i.e.,
those not resigning or selected by lot as aforesaid)
theretofore elected by the holders of the other class
or classes of stock shall continue to hold office until
their successors shall have been duly elected as herein
provided.
Whenever by reason of the resignation, death or
removal of any director or directors or any increase in
the number of directors, the number of directors in
office who have been elected by the holders of stock
voting as a class shall become less than the total
number then subject to election by such class, the
vacancy or vacancies so resulting may be filled by the
affirmative vote of the directors, if any, at the time
in office who were elected by the vote of such class,
although less than a quorum, or by vote of such class
at a special meeting thereof (if there are then no
directors in office who were elected by the vote of
such class) which shall be called at any time at the
request of the holders of record of at least 10% of the
outstanding shares of such class, for which purpose
such holders shall have access to the stock books of
the Corporation.
If at any time the right of the holders of the
Cumulative Preferred Stock to elect directors hereunder
shall accrue as aforesaid, and the holders of such
stock shall not exercise such right at any meeting
(whether annual or otherwise) at which directors may be
elected, such failure to exercise such right shall not
be construed as a waiver thereof, but the holders of
such stock may, so long as the default in dividends
aforesaid shall exist, exercise the right given them
hereunder in the manner aforesaid at any annual meeting
or at any special meeting called as hereinabove
provided or at any adjournment of either thereof.
The right of the holders of Cumulative Preferred
Stock to elect directors, as hereinabove provided,
shall continue until all accrued dividends on the
Cumulative Preferred Stock at the full dividend rates
thereto appertaining shall have been paid, or declared
and set apart for payment, at which time such right
shall cease.
If and whenever the right of the holders of
Cumulative Preferred Stock to elect directors as
hereinabove provided shall terminate, then the terms of
office of all persons who may be directors of the
Corporation at such time shall terminate upon the
election of their successors. Such election may be
held at a special meeting of the holders of the class
or classes of stock then entitled to vote for
directors, which meeting may be convened at any time
after the termination of such right, upon notice
similar to that provided in the Bylaws of the
Corporation for the annual meeting of stockholders, at
the written request of the holders of record of at
least 10% of such stock then outstanding. In the event
of the failure of the Secretary or other proper officer
of the Corporation to give such notice within 10 days
after receipt of such request, such meeting may be
called on like notice by the holders of record of at
least 10% of such stock, for which purpose any holder
of record of such stock shall have access to the stock
books of the Corporation. If for any reason such
special meeting be not held prior to the next annual
meeting, then at such meeting the holders of the class
or classes of stock then outstanding and entitled to
vote for the election of directors shall elect all of
the members of the Board.
(ii) Authorization or Issue of Additional
Preferred Stock. The Corporation may from time to time
increase the authorized amount of Cumulative Preferred
Stock and may also from time to time create other
classes of preferred stock with different preferential
rights but only in accordance with the provisions
hereinafter set forth, so long as any shares of
Cumulative Preferred Stock shall be outstanding.
(a) Authorization. The authorized amount of
Cumulative Preferred Stock shall not be increased
beyond the 850,000 shares authorized by this
Certificate, and no class of stock having
preferential rights which are equal to those of
the Cumulative Preferred Stock, and no obligations
or shares of stock of any class convertible into
or evidencing the right to purchase any class of
stock having such preferential rights shall be
authorized by any certificate hereafter filed
pursuant to law, except upon the affirmative vote
of the holders of record of at least a majority of
the shares of Cumulative Preferred Stock then
outstanding voting separately as a class. No
class of stock having any preferential rights
which are in any way superior to those of the
Cumulative Preferred Stock and no obligations or
shares of stock of any class convertible into or
evidencing the right to purchase any class of
stock having such superior preferential rights,
shall be authorized except upon the affirmative
vote of the holders of record of at least
two-thirds of the then outstanding shares of
Cumulative Preferred Stock voting separately as a
class.
(b) Issue. No shares of Cumulative
Preferred Stock authorized by this Certificate in
excess of the number of shares of the first series
thereof, nor any shares of stock or obligations
authorized pursuant to any of the provisions of
the preceding subparagraph (a), shall be issued
except upon compliance with the earnings
requirements hereinafter set forth, unless such
compliance shall have been waived by the
affirmative vote of the holders of record of at
least a majority of the shares of Cumulative
Preferred Stock then outstanding voting separately
as a class. In the event that any vote of the
holders of Cumulative Preferred Stock shall be
required to authorize any waiver under this
subparagraph (b), such vote shall be taken at a
meeting of the holders of the Cumulative Preferred
Stock only, upon notice as hereinafter required.
(c) Earnings Requirements. The earnings
requirements herein referred to are as follows, to
wit the gross earnings of the Corporation for a
period of 12 consecutive calendar months within
the 15 calendar months immediately preceding the
issue of stock or obligations referred to in
subparagraphs (a) and (b) above shall have been at
least equal to one and one-half (1 1/2) times the
sum of the annual interest requirements on all
funded indebtedness and other borrowings of the
Corporation to be outstanding on the date of the
proposed issue and the annual dividend
requirements on the Cumulative Preferred Stock
then outstanding and on any other class of stock
then outstanding having preferential rights equal
or superior to those of the Cumulative Preferred
Stock and the annual dividend requirements on the
stock to be issued. "Gross earnings" for any
period for the purposes of this subparagraph (c)
shall be computed by adding to the net income
(determined as hereinafter provided) of the
Corporation for said period the amount deducted
for interest on all funded indebtedness and other
borrowings of the Corporation in determining such
net income. "Net income" for any period for the
purposes of this subparagraph (c) shall be
determined in accordance with accepted accounting
principles, not inconsistent, however, with the
requirements of public regulatory authorities
having jurisdiction in the premises, and in
determining such net income for any period, there
shall be deducted, in addition to other items of
expense, the amount charged to income for said
period on the books of the Corporation for taxes
and provision for depreciation. The Board of
Directors may make adjustments by way of increase
or decrease in such net income to give effect to
changes therein resulting from acquisition of
properties or any redemption, acquisition,
purchase, sale or exchange of stock or obligations
by the Corporation, whether prior to the issue of
any stock or obligations then to be issued, or in
connection with such issue. In computing net
income for the purposes of this subparagraph (c),
adjustments shall be made so as to eliminate
profits or losses from the sale or other
disposition of capital assets and from
appreciation or depreciation in value of capital
assets and increases or decreases in book value
resulting from reappraisal (if any) at higher or
lower figures.
(iii) Alteration of Terms of Cumulative
Preferred Stock, etc. The Corporation shall not,
except when authorized by the vote of the holders of
record of at least two-thirds of the then outstanding
shares of Cumulative Preferred Stock voting separately
as a class (1) alter or abolish any preferential right
of any outstanding shares of such stock affecting the
holders of such shares adversely, or (2) create, alter
or abolish any provisions or right in respect of the
redemption of any outstanding shares of such stock
affecting the holders of such shares adversely, or (3)
abolish any voting right of the holders of shares of
such stock or limit their voting rights, except as the
same may be limited by the voting rights given to new
shares of any class authorized by any certificate filed
pursuant to law. Such vote, however, shall not affect
the right of any holder of shares of Cumulative
Preferred Stock not voting in favor of the
authorization of any of the foregoing transactions
(designated (1), (2) and (3)) to have such shares
appraised and paid for as contemplated by the
provisions of any then applicable provisions of the
statutes of the State of New York.
SIXTH: The designation of each series of Cumulative
Preferred Stock of the Corporation, and a statement of the
variations in the relative rights, preferences and
limitations as between series to the extent not set forth in
Article FIFTH of this Certificate, as fixed by the Board of
Directors of the Corporation before issuance of each such
series, are as follows:
(a) An initial series of Sixty Thousand (60,000)
shares of the Cumulative Preferred Stock of the
Corporation, which shares are designated "Cumulative
Preferred Stock, 5% Series" (herein called the "initial
series").
The rate of dividends payable upon the initial
series shall be 5% of the par value thereof per annum,
payable quarterly on the first days of January, April,
July and October in each year.
The Corporation may redeem all or any part of the
initial series at any time or times and from time to
time, on the terms and conditions with respect thereto
set forth in subdivision (D) of Article FIFTH of this
Certificate, by paying, in the case of each such share
to be redeemed, the par value thereof plus an amount
computed at the annual dividend rate of 5% of said par
value from the date from which said dividends on such
share became cumulative to the date fixed for
redemption, less the aggregate of such dividends
theretofore or on such redemption date paid thereon,
plus a premium of $1 per share.
(b) A second series of Forty Thousand (40,000)
shares of the Cumulative Preferred Stock of the
Corporation, which shares are designated "Cumulative
Preferred Stock, Second 5% Series" (herein called the
"second series").
The rate of dividends payable upon the second
series shall be 5% of the par value thereof per annum,
payable quarterly on the first days of January, April,
July and October in each year.
The Corporation may redeem all or any part of the
second series at any time or times and from time to
time, on the terms and conditions with respect thereto
set forth in subdivision (D) of Article FIFTH of this
Certificate, by paying, in the case of each such share
to be redeemed, the par value thereof plus an amount
computed at the annual dividend rate of 5% of said par
value from the date from which said dividends on such
share became cumulative to the date fixed for such
redemption, less the aggregate of such dividends
theretofore or on such redemption date paid thereon,
plus a premium of $2 per share if the redemption date
shall be prior to July 1, 1971 and of $1 per share if
the redemption date shall be on or subsequent to July
1, 1971.
(c) A third series of Fifty Thousand (50,000)
shares of the Cumulative Preferred Stock of the
Corporation, which shares are designated "Cumulative
Preferred Stock, 5.65% Series" (herein called the
"third series").
The rate of dividends payable upon the third
series shall be 5.65% of the par value thereof per
annum, payable quarterly on the first days of January,
April, July and October in each year.
The Corporation may redeem all or any part of the
third series at any time or times and from time to
time, on the terms and conditions with respect thereto
set forth in subdivision (D) of Article FIFTH of this
Certificate, by paying, in the case of each such share
to be redeemed, the par value thereof plus an amount
computed at the annual dividend rate of 5.65% of said
par value from the date from which said dividends on
such share became cumulative to the date fixed for such
redemption, less the aggregate of such dividends
theretofore or on such redemption date paid thereon,
plus a premium of $7 per share if the redemption date
shall be on or prior to October 1, 1971; of $5 per
share if the redemption date shall be subsequent to
October 1, 1971 but on or prior to October 1, 1976; of
$3 per share if the redemption date shall be subsequent
to October 1, 1976 but on or prior to October 1, 1981;
and of $1 per share if the redemption date shall be
subsequent to October 1, 1981.
(d) A fourth series of Fifty Thousand (50,000)
shares of the Cumulative Preferred Stock of the
Corporation, which shares are designated "Cumulative
Preferred Stock, 4.60% Series" (herein called the
"fourth series").
The rate of dividends payable upon the fourth
series shall be 4.60% of the par value thereof per
annum, payable quarterly on the first days of January,
April, July and October in each year.
The Corporation may redeem all or any part of the
fourth series at any time or times and from time to
time, on the terms and conditions with respect thereto
set forth in subdivision (D) of Article FIFTH of this
Certificate, by paying, in the case of each such share
to be redeemed, the par value thereof plus an amount
computed at the annual dividend rate of 4.60% of said
par value from the date from which said dividends on
such share became cumulative to the date fixed for such
redemption, less the aggregate of such dividends
theretofore or on such redemption date paid thereon,
plus a premium of $5.00 per share if the redemption
date shall be on or prior to September 30, 1968; of
$3.50 per share if the redemption date shall be
subsequent to September 30, 1968 but on or prior to
September 30, 1973; of $2.50 per share if the
redemption date shall be subsequent to September 30,
1973 but on or prior to September 30, 1978; and of
$1.00 per share if the redemption date shall be
subsequent to September 30, 1978; provided, however,
that, prior to October 1, 1968, shares of the fourth
series shall not be redeemed, directly or indirectly,
by the application of borrowed funds or the proceeds of
the issue of any stock ranking prior to or on a parity
with the fourth series if such borrowed funds have an
interest cost, or such shares have a dividend cost, to
the Corporation of less than 4.60% per annum.
(e) A fifth series of fifteen thousand (15,000)
shares of the Cumulative Preferred Stock of the
Corporation, which shares are designated "Convertible
Preferred Stock 5% Series" (herein called the "fifth
series").
The rate of dividends payable upon the fifth
series shall be 5% of the par value thereof per annum
payable quarterly on the first days of January, April,
July and October in each year.
The Corporation may redeem all or any part of the
fifth series at any time or times and from time to
time, on or after April 1, 1979, on the terms and
conditions with respect thereto set forth in
subdivision E of Paragraph Third of this certificate,
by paying, in the case of each share to be redeemed,
the par value thereof plus an amount computed at the
annual dividend rate of 5% of said par value from the
date from which said dividends on such share became
cumulative to the date fixed for such redemption, less
the aggregate of such dividends theretofore or on such
redemption date paid thereon, plus a premium of $5 per
share if the redemption date shall be on or prior to
April 1, 1981; of $3 per share if the redemption date
shall be subsequent to April 1, 1982, but on or prior
to April 1, 1983; of $1 per share if the redemption
date shall be subsequent to April 1, 1983, but on or
prior to April 1, 1984; and no premium if the
redemption date shall be subsequent to April 1, 1984.
The conversion rights of shares of the fifth
series shall be as follows:
(i) Shares of the fifth series may at any time
after the date of issue, at the option of the
holder, be converted into Common Stock of the
Corporation (as such shares may be constituted on
the conversion date) at the rate of four (4)
shares of Common Stock for each share of the fifth
series, subject to adjustment as provided herein;
provided that, as to any shares of the fifth
series which shall have been called for
redemption, the conversion right shall terminate
at the close of business on the business day prior
to the date fixed for redemption unless default
shall be made in the payment of the redemption
price plus accrued and unpaid dividends.
(ii) The holder of a share or shares of the fifth
series may exercise the conversion rights as to
any thereof by delivering to the Corporation
during regular business hours, or at the office of
any transfer agent of the Corporation for the
fifth series, if any, or at such other place as
may be designated by the Corporation, the
certificate or certificates for the shares to be
converted, duly endorsed or assigned in blank to
the Corporation (if required by it), accompanied
by written notice stating that the holder elects
to convert such shares and stating the name or
names (with address) in which the certificate or
certificates for Common Stock are to be issued.
Conversion shall be deemed to have been effected
on the date when such delivery is made, and such
date is referred to herein as the "conversion
date". As promptly as practicable thereafter, the
Corporation shall issue and deliver to or upon the
written order of such holder, at such office or
other place designated by the Corporation, a
certificate or certificates for the number of full
shares of Common Stock to which he is entitled and
a check, cash, scrip certificate or other
adjustment in respect of any fraction of a share
as provided in paragraph (e)(iv) below. The
person in whose name the certificates for Common
Stock are to be issued shall be deemed to have
become a holder of Common Stock of record at the
close of business on the conversion date unless
the transfer books of the Corporation are closed
on that date, in which event he shall be deemed to
have become a holder of Common Stock of record at
the opening of business on the next succeeding
date on which the transfer books are open, but the
conversion rate shall be that in effect on the
conversion date.
(iii) No payment or adjustment shall be made for
dividends accrued on any shares of the fifth
series converted or for dividends on any shares of
Common Stock issuable on conversion, but until all
dividends accrued and unpaid on the fifth series
up to the quarterly dividend payment date next
preceding the conversion date shall have been paid
to the holder of the shares of the fifth series
converted or to his assigns, or declared and set
apart for such payment, in full, no dividend shall
be paid or set apart for payment or declared on
the Common Stock or on any other class of stock of
the Corporation ranking as to dividends
subordinate to the fifth series and no payment
shall be made with respect to any purchase or
acquisition of, or to any sinking fund with
respect to, any class of stock of the Corporation
ranking as to dividends or distribution of assets
on a parity with or subordinate to the fifth
series.
(iv) The Corporation shall not be required to
issue any fraction of a share upon conversion of
any share or shares of the fifth series. If more
than one share of the fifth series shall be
surrendered for conversion at one time by the same
holder, the number of full shares of Common Stock
issuable upon conversion thereof shall be computed
on the basis of the total number of shares of the
fifth series so surrendered. If any fractional
interest in a share of Common Stock would be
deliverable upon conversion, the Corporation shall
make an adjustment therefore in cash unless its
Board of Directors shall have determined to adjust
fractional interests by issuance of scrip
certificates or in some other manner. Adjustment
in cash shall be made on the basis of the current
market value of one share of Common Stock, which
shall be taken to be the last sale price, regular
way, of the Corporation's Common Stock on the New
York Stock Exchange on the last trading day before
the conversion date, or, if there is no reported
sale on that day, the average of the closing bid
and asked quotations, regular way, on that
Exchange on that day or, if the Common Stock is
not listed or admitted to trading on such
Exchange, on the principal national securities
exchange on which the Common Stock is listed or
admitted to trading, or if it is not listed or
admitted to trading on any national securities
exchanges, the average of the closing bid and
asked prices in the over-the-counter market on
that date as furnished by any securities broker or
dealer selected from time to time by the
Corporation for that purpose.
(v) The issuance of Common Stock on conversion of
the fifth series shall be without charge to the
converting holder of the fifth series for any fee,
expense or tax which may be payable in respect of
any transfer involved in the issuance and delivery
of shares in any name other than that of the
holder of record on the books of the Corporation
of the shares of the fifth series converted, and
the Corporation shall not, in any such case, be
required to issue or deliver any certificate for
shares of Common Stock unless and until the person
requesting the issuance thereof shall have paid to
the Corporation the amount of such fee, expense or
tax or shall have established to the satisfaction
of the Corporation that such fee, expense or tax
has been paid.
(vi) The conversion rate provided in paragraph
(e)(i) shall be subject to the following
adjustments, which shall be made to the nearest
one-hundredth of a share of Common Stock or, if
none, to the next lower one-hundredth:
(A) In case the Corporation shall
declare a dividend on its Common Stock in
shares of its capital stock, subdivide its
outstanding shares of Common Stock, combine
its outstanding shares of Common Stock into a
smaller number of shares, or issue by
reclassification of its Common Stock
(including any such reclassification in
connection with a consolidation or merger in
which the Corporation is the continuing
corporation) any shares of its capital stock,
the conversion rate in effect at the time of
the record date for such dividend or of the
effective date of such subdivision,
combination or reclassification shall be
proportionately adjusted so that the holder
of any of the fifth series surrendered for
conversion after such time shall be entitled
to receive the kind and amount of shares
which he would have owned or have been
entitled to receive had the fifth series been
converted immediately prior to such time.
Such adjustment shall be made successively
whenever any event listed above shall occur.
(B) In case the Corporation shall fix a
record date for the issuance of rights or
warrants to all holders of its Common Stock
entitling them (for a period expiring within
45 days after such record date) to subscribe
for or purchase shares of Common Stock at a
price per share less than the Current Market
Price (as defined below) on such record date,
the number of shares of Common Stock into
which each share of the fifth series shall be
convertible after such record date shall be
determined by multiplying the number of
shares of Common Stock into which such share
of the fifth series was convertible
immediately prior to such record date by a
fraction, of which the numerator shall be the
sum of the total number of shares of Common
Stock outstanding immediately prior to such
record date and the number of additional
shares of Common Stock to be offered for
subscription or purchase, and of which the
denominator shall be the sum of the total
number of shares of Common Stock outstanding
immediately prior to such record date and the
number of shares of Common Stock which the
aggregate offering price (without deduction
for expenses or commissions of any kind) of
the total number of shares so to be offered
would purchase at such Current Market Price.
Such adjustment shall be made successively
whenever such a record date is fixed; and in
the event that such rights or warrants are
not so issued, the conversion rate shall
again be adjusted to be the conversion rate
which would then be in effect if such record
date had not been fixed.
(C) In case the Corporation shall fix a
record date for the making of a distribution
to all holders of its Common Stock (including
any such distribution made in connection with
a consolidation or merger in which the
Corporation is the continuing corporation) of
evidences of its indebtedness or assets
(excluding dividends paid in, or
distributions of, its capital stock, or cash
paid out of earned surplus) or subscription
rights or warrants (excluding those referred
to in subparagraph (vi)(B)), then in each
such case the number of shares of Common
Stock into which each share of the fifth
series shall be convertible after such record
date shall be determined by multiplying the
number of shares of Common Stock into which
such share of the fifth series was
convertible immediately prior to such record
date by a fraction, of which the numerator
shall be the Current Market Price on such
record date, and of which the denominator
shall be the Current Market Price on such
record date less the fair market value (as
determined by the Board of Directors of the
Corporation, whose determination shall be
conclusive, and described in a certificate of
an officer of the Corporation filed in the
Corporation's records) of the portion of the
assets or evidences of indebtedness so to be
distributed or of such subscription rights or
warrants applicable to one share of Common
Stock. Such adjustment shall be made
successively whenever such a record date is
fixed; and in the event that such
distribution is not so made, the conversion
rate shall again be adjusted to be the
conversion rate which would then be in effect
if such record date had not been fixed.
(D) For the purpose of any computation
under subparagraphs (vi)(B) and (vi)(C)
above, the "Current Market Price" on any
record date shall be deemed to be the average
of the daily closing prices per share of
Common Stock for the 30 consecutive business
days commencing 45 business days before such
date. The closing price for each day shall
be the last sale price, regular way, or, in
case no such sale takes place on such day,
the average of the closing bid and asked
prices, regular way, in either case on the
New York Stock Exchange, or, if the Common
Stock is not listed or admitted to trading on
such Exchange, on the principal national
securities exchange on which the Common Stock
is listed or admitted to trading, or if it is
not listed or admitted to trading on any
national securities exchange, the average of
the closing bid and asked prices in the
over-the-counter market on that date as
furnished by any securities broker or dealer
selected from time to time by the Corporation
for that purpose. The closing price
determined as stated above is herein called
the "closing price".
(E) No adjustment in the conversion
rate shall be required unless such adjustment
would require an increase or decrease in such
rate of at least one-twentieth of a share;
provided, however, that any adjustments which
by reason of this subparagraph (E) are not
required to be made shall be carried forward
and taken into account in any subsequent
adjustment. All calculations under this
paragraph (e)(vi) shall be made to the
nearest cent or to the nearest one-hundredth
of a share, as the case may be.
(F) In the event that at any time, as a
result of an adjustment made pursuant to
subparagraph (vi)(A) above, the holder of any
of the fifth series thereafter surrendered
for conversion shall become entitled to
receive any shares of the Corporation other
than shares of its Common Stock, thereafter
the number of such other shares so receivable
upon conversion of any of the fifth series
shall be subject to adjustment from time to
time in a manner and on terms as nearly
equivalent as practicable to the provisions
with respect to the Common Stock contained in
this paragraph (e)(vi).
No adjustment of the conversion rate
provided in subparagraph (e)(i) shall be made
by reason of the issuance of Common Stock for
cash except as provided in subparagraph
(e)(vi)(B), or by reason of the issuance of
Common Stock for property or services;
provided, that no such issuance of Common
Stock for cash, property, or services shall
be made unless the Board of Directors shall
first have made a determination that
consideration to be received with respect to
any such issuance of Common Stock is fair and
reasonable under the particular
circumstances. Whenever the conversion rate
is adjusted pursuant to this paragraph
(e)(vi), advice of such adjusted conversion
rate shall be sent to the holders of the
fifth series at or about the time of the next
dividend payment on such fifth series.
(vii) In case of any reclassification or change of
the outstanding shares of Common Stock of the
Corporation (except a split or combination of
shares) or in case of any consolidation or merger
to which the Corporation is a party (except a
merger in which the Corporation is the surviving
corporation and which does not result in an
reclassification of or change in the outstanding
Common Stock of the Corporation except a split or
combination of shares) or in case of any sale or
conveyance to another corporation of all or
substantially all of the property of the
Corporation or by the successor or purchasing
corporation so that the holder of each share of
the fifth series then outstanding shall thereafter
have the right to convert such share into the kind
and amount of stock and other securities and
property receivable upon such reclassification,
change, consolidation, merger, sale or conveyance
by a holder of the number of shares of Common
Stock of the Corporation into which such share of
the fifth series might have been converted
immediately prior thereto, and that there shall be
subsequent adjustments of the conversion rate
which shall be equivalent, as nearly as
practicable, to the adjustments provided for in
paragraph (e)(vi) above. The provisions of this
paragraph (e)(vii) shall similarly apply to
successive reclassifications, changes,
consolidations, mergers, sales or conveyances.
(viii) Shares of Common Stock issued on conversion
of shares of the fifth series shall be issued as
fully paid shares and shall be non-assessable by
the Corporation. The Corporation shall at all
times reserve and keep available, free from
preemptive rights for the purpose of effecting the
conversion of the fifth series, such number of its
duly authorized shares of Common Stock as shall be
sufficient to effect the conversion of all
outstanding shares of the fifth series.
(ix) Shares of the fifth series converted as
provided herein shall be cancelled, shall no
longer be deemed outstanding, and shall revert to
the status of authorized, unissued Preferred Stock
of the Corporation, and the Board of Directors
shall have authority to issue such Preferred Stock
with such relative rights, preferences and
privileges as it may fix and as if such stock had
not been issued as a part of the initial series of
the Preferred Stock.
(8) To effect the change in subparagraph 3(d) above, a new
Article SEVENTH is hereby added to read in its entirety as
follows:
SEVENTH: (A) Notwithstanding any other provision of
this Certificate, outstanding shares of Common Stock held by
Disqualified Holders (as hereinafter defined in subdivision
(ii) of Paragraph (B) of this Article SEVENTH) shall always
be subject to redemption by the Corporation to the extent
necessary, in the judgment of the Board of Directors, to
prevent the loss or secure the renewal or reinstatement of
any license or franchise from any governmental agency held
by the Corporation or any of its Subsidiaries (as
hereinafter defined in subdivision (v) of Paragraph (B) of
this Article SEVENTH) to conduct any portion of the business
of the Corporation or any of its Subsidiaries, which license
or franchise is conditioned upon some or all of the holders
of the stock of the Corporation possessing prescribed
qualifications. The terms and conditions of such redemption
shall be as follows, subject in any case to any additional
or different rights of a particular Disqualified Holder or
of the Corporation pursuant to any contract or agreement
between such Disqualified Holder and the Corporation:
(i) the redemption price of the shares to be
redeemed pursuant to this Article SEVENTH shall be
equal to the Current Market Value (as hereinafter
defined in subdivision (i) of Paragraph (B) of this
Article SEVENTH) of such shares; provided that such
redemption price as to any Disqualified Holder who
purchased such shares after November 18, 1994, and
within one year of the Redemption Date (as hereinafter
defined in subdivision (iii) of paragraph (B) of this
Article SEVENTH) shall not (unless otherwise determined
by the Board of Directors) exceed the purchase price
paid by such Disqualified Holder for such shares;
(ii) the redemption price of such shares may
be paid in cash, Redemption Securities (as hereinafter
defined in subdivision (iv) of Paragraph (B) of this
Article SEVENTH) or any combination thereof;
(iii) if less than all of the shares held by
Disqualified Holders are to be redeemed, the shares to
be redeemed shall be selected in such manner as shall
be determined by the Board of Directors, which may
include selection first of the most recently purchased
shares thereof, selection by lot or selection in any
other manner determined by the Board of Directors to be
equitable;
(iv) at least ten days' written notice of the
Redemption Date shall be given to the record holders of
the shares selected to be redeemed (unless waived in
writing by any such holder), provided that the
Redemption Date may be the date on which written notice
shall be given to record holders if the cash or
Redemption Securities necessary to effect the
redemption shall have been deposited in trust for the
benefit of such record holders and subject to immediate
withdrawal by them upon surrender of the stock
certificates for their shares to be redeemed;
(v) on the Redemption Date, unless the
Corporation shall have defaulted in paying or setting
aside for payment the cash or Redemption Securities
payable upon such redemption, any and all rights of
Disqualified Holders in respect of shares so redeemed
(including without limitation any rights to vote or
participate in dividends), shall cease and terminate,
and from and after such Redemption Date such
Disqualified Holders shall be entitled only to receive
the cash or Redemption Securities payable upon
redemption of the shares so redeemed; and
(vi) such other terms and conditions as the
Board of Directors shall determine.
(B) For purposes of this Article SEVENTH:
(i) "Current Market Value" of a share of Common
Stock shall mean the average of the daily closing
prices for such a share for the 20 consecutive trading
days commencing on the 22nd trading day prior to the
date on which notice of redemption shall be given
pursuant to subdivision (iv) of paragraph (A) of this
Article SEVENTH (or, if such notice shall have been
waived, the date that is ten days prior to the
Redemption Date). The closing price for each day shall
be the closing price on the New York Stock Exchange
Composite Tape, or, if the Common Stock is not quoted
on such Composite Tape, on the New York Stock Exchange,
Inc., or if such stock is not listed on such exchange,
on the principal United States registered securities
exchange on which such stock is listed, or if such
stock is not listed on any such exchange, the average
of the closing bid and asked prices as reported by the
electronic inter-dealer quotation system operated by
NASDAQ, Inc. or a similar source selected from time to
time by the Corporation for the purpose, or if no such
prices or quotations are available, the fair market
value on the applicable day as determined by the Board
of Directors in good faith.
(ii) "Disqualified Holder" shall mean any holder
of shares of Common Stock of the Corporation whose
continued holding of such stock, either individually or
taken together with the holding of shares of stock of
the Corporation by any other holder or holders of
shares of stock of the Corporation, may result, in the
judgment of the board of directors, in the loss of, or
the failure to secure the renewal or reinstatement of,
any license or franchise from any governmental agency
held by the Corporation or any of its Subsidiaries to
conduct any portion of the business of the Corporation
or any of its Subsidiaries.
(iii) "Redemption Date" shall mean the date
fixed by the Board of Directors for the redemption of
any shares of stock of the Corporation pursuant to this
Article SEVENTH.
(iv) "Redemption Securities" shall mean any
debt or equity securities of the Corporation, any of
its Subsidiaries or any other corporation, or any
combination thereof, having such terms and conditions
as shall be approved by the Board of Directors and
which, together with any cash to be paid as part of the
redemption price, in the opinion of any nationally
recognized investment banking firm selected by the
Board of Directors (which may be a firm which provides
other investment banking, brokerage or other services
to the Corporation), has a value, at the time notice of
redemption is given pursuant to subdivision (iv) of
paragraph (A) of this Article SEVENTH (or, if such
notice shall have been waived, the date that is ten
days prior to the Redemption Date), at least equal to
the price required to be paid pursuant to subdivision
(i) of paragraph (A) of this Article SEVENTH (assuming,
in the case of Redemption Securities to be publicly
traded, such Redemption Securities were fully
distributed and subject only to normal trading
activity).
(v) "Subsidiary" shall mean any corporation or
other entity of which at least a majority of the voting
power of the voting equity securities or equity
interest is owned, directly or indirectly, by the
Corporation.
(9) This Amendment to the Certificate of Incorporation of
Rochester Telephone Corporation was authorized, pursuant to
section 803(a) of the Business Corporation Law, by a resolution
adopted by the Board of Directors of the Corporation at a meeting
thereof duly called and held, followed by the affirmative votes
of the holders of the requisite percentage of the outstanding
shares of Common Stock of the Corporation, cast in person or by
proxy, at the Special Meeting of Shareowners held on December 19,
1994, and, in addition, with respect to the authorization of a
new class of preferred stock, by the affirmative votes of the
holders of the requisite percentage of the outstanding shares of
the Cumulative Preferred Stock, cast in person or by proxy, at a
Special Meeting of Cumulative Preferred Shareowners held on
December 19, 1994. The aforementioned Special Meetings were held
upon notice, pursuant to Section 605 of the Business Corporation
Law, to every shareholder of record entitled to vote thereon, and
neither the Restated Certificate of Incorporation, as amended,
nor any other Certificate filed pursuant to law require a larger
proportion of votes.
<PAGE>
IN WITNESS WHEREOF, this Certificate has been
subscribed this 20th day of December, 1994 by the undersigned,
who affirm that the statements made herein are true under the
penalties of perjury.
/s/ John K. Purcell /s/ Josephine S. Trubek
____________________________ __________________________
John K. Purcell Josephine S. Trubek
Corporate Vice President Corporate Secretary
EXHIBIT 23-1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Prospectuses constituting part of the Registration Statements on
Forms S-3 (File Nos. 33-40824, 33-69420 and 33-61784), Form S-4
(File No. 33-61992) and Forms S-8 (File Nos. 33-67430, 33-67432,
33-67324, 33-51331, 33-51885, 33-52025, 33-54511 and 33-54519) of
Frontier Corporation of our report dated January 16, 1995 which
appears in the current report on Form 8-K of Frontier Corporation
dated February 13, 1995.
/s/ Price Waterhouse, LLP
PRICE WATERHOUSE, LLP
Rochester, New York
EXHIBIT 23-2
CONSENT OF ERNST & YOUNG LLP
We hereby consent to the incorporation by reference in the
Registration Statements (Form S-3 Nos. 33-40824, 33-69420 and
33-61784); Form S-4 No. 33-61992); and Form S-8 Nos. 33-67430,
33-67432, 33-67324, 33-51331, 33-51885, 33-52025, 33-54511 and
33-54519) of Frontier Corporation and in the related Prospectuses
of our report dated January 4, 1995, with respect to the
consolidated financial statements of American Sharecom, Inc.
included in this Current Report (Form 8-K) filed on February 13,
1995 with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Minneapolis, Minnesota
February 10, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FRONTIER CORPORATION'S FINANCIAL STATEMENTS FOR THE
YEAR ENDED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000084567
<NAME> FRONTIER CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 317,137
<SECURITIES> 9,047
<RECEIVABLES> 168,542
<ALLOWANCES> 0
<INVENTORY> 8,585
<CURRENT-ASSETS> 528,507
<PP&E> 1,759,677
<DEPRECIATION> 789,813
<TOTAL-ASSETS> 1,760,951
<CURRENT-LIABILITIES> 201,605
<BONDS> 578,600
<COMMON> 73,161
0
22,777
<OTHER-SE> 727,186
<TOTAL-LIABILITY-AND-EQUITY> 1,760,951
<SALES> 0
<TOTAL-REVENUES> 985,492
<CGS> 18,850
<TOTAL-COSTS> 762,228
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,594
<INCOME-PRETAX> 173,777
<INCOME-TAX> 63,843
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (7,197)
<CHANGES> 0
<NET-INCOME> 102,737
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.40
</TABLE>
