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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number 1-4166
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FRONTIER CORPORATION
(Exact name of Registrant as specified in its charter)
New York 16-0613330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 South Clinton Avenue Rochester, New York 14646-0700
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (716) 777-1000
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Class Name of each exchange on which registered
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Common Stock, par value $1.00 per share New York Stock Exchange
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Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. X
---
The aggregate market value of the voting stock held by non-
affiliates of the registrant as of March 14, 1997 is $3,511,039,053.
The number of shares outstanding of Frontier Corporation's common
stock (Par Value $1.00 per share) as of the close of March 14, 1997
is 164,130,495 shares.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's 1996 Annual Report to Shareowners including
Management's Discussion of Results of Operations and Analysis of Financial
Condition, Consolidated Financial Statements and Notes to Consolidated
Financial Statements, as presented in Exhibit No. 13.1 of this Form 10-K,
are incorporated by reference in Parts II and IV hereof.
(2) Portions of the Notice of Annual Meeting and Proxy Statement issued by
the registrant in connection with its Annual Meeting of Shareowners to be
held May 2, 1997, as presented in Exhibit No. 99 of this Form 10-K, are
incorporated by reference in Parts II, III and IV hereof.
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PART I
ITEM 1. BUSINESS
Frontier Corporation ("Frontier" or the "Company") is a diversified
telecommunications firm with headquarters in Rochester, New York. The Company
was incorporated in 1920 under the laws of New York State to take over and unify
the properties of a predecessor company and certain properties of the New York
Telephone Company which were located in the same general territory. The
Company's principal lines of business are long distance and local communications
services. The Long Distance Communications Services segment provides
telecommunications services to customers throughout the United States, Canada
and Great Britain. The Local Communications Services segment consists of 34
local telephone companies which serve, as of December 31, 1996, approximately
976,000 access lines in thirteen states. The Corporate Operations and Other
segment includes expenses traditionally associated with a holding company and
the revenues and expenses of the Company's majority owned wireless properties
and Frontier Network Systems. Frontier Network Systems markets and installs
telecommunications systems and equipment. The Company also owns a 50% interest
in a joint venture with Bell Atlantic/Nynex Mobile in upstate New York and
Pennsylvania that is managed by the Company and is accounted for using the
equity method of accounting. This method of accounting results in the Company's
proportionate share of earnings from the joint venture being reflected as equity
income rather than being reported as a part of the Corporate Operations and
Other segment.
Prior to 1995, Local Communications Services provided the majority of the
Company's revenue and income. In 1982, the Company made the strategic decision
to enter the long distance business. The geographic reach of the Company's long
distance operations has grown, and is now nationwide in scope, largely as a
result of merger and acquisition activity which occurred in 1995. Revenues in
1996 from the long distance business and local communications services represent
73% and 25% respectively, of the Company's total business. The Company, based on
revenues, is currently the fifth largest domestic provider of long distance
services.
On October 21, 1996, the Company announced that it had joined with Qwest
Communications as a partner in the construction of a $2 billion nationwide
fiber optic network. When complete, this will be the largest single fiber build
in United States history. The Company has agreed to invest almost $500 million
through 1998 to complete the project. The multi-ring Synchronous Optical Network
("SONET") architecture increases transmission speed and network reliability and
is expected to decrease the Company's network transmission costs once installed.
When complete in mid-1998, the SONET network will interconnect nearly 100
cities, encompass more than 13,000 route miles and provide coast-to-coast
connectivity.
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A key growth strategy for the Company is to provide integrated
communications services for its customers. These integrated services include
long distance, wireless and local telephone service as well as selected products
and services that the Company will market to customers as a single source
provider. Frontier is committed to growth through expansion of its existing
businesses, the development of value-added products and services and selected
acquisitions.
Long Distance Communications Services 1995 Acquisition
Program
The Company complemented its internal growth in the long distance
business with a number of strategic acquisitions and a merger in 1995 that
approximately doubled the size of the business. A listing of these acquisitions
and the merger is included below.
<TABLE>
<CAPTION>
1995
Acquisition
Company Name Date
- -----------------------------------------------------------
<S> <C>
Confertech International, Inc. March
American Sharecom, Inc. March
WCT Communications, Inc. May
Enhanced TeleManagement, Inc. July
SCI and Link USA Corporation* August
ALC Communications Corporation (merger) August
Link-VTC, Inc. November
</TABLE>
*The Company acquired SCI's 80.8% interest in LinkUSA Corporation in
August 1995 and subsequently purchased the remaining 19.2% interest in
February 1996.
Long Distance Communications Services
General
Frontier provides long distance telecommunications services primarily to
commercial and, to a lesser extent, residential subscribers. It also completes
subscriber calls to all directly dialable locations worldwide. Frontier is one
of the few nationwide switch based carriers of long distance services and in
1995 commenced operations from offices in Great Britain.
The Company operates its own switches, develops and implements its own
products, monitors and deploys its transmission facilities and prepares and
designs its own billing and reporting systems. The Company focuses primarily on
commercial accounts. In this segment, calling volume consists primarily of calls
made during normal business hours, which command peak-hour pricing. The
Company's residential subscribers tend to make most of
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their calls in the evening and on weekends, when business usage is lowest.
Neither commercial nor residential subscribers' access to the Company's service
is limited as to the time of day or day of week.
Products and Services
The Company provides a variety of long distance products and services to
commercial and residential subscribers nationwide. The bulk of the Company's
revenue is derived from outbound and inbound long distance services which are
generally marketed under the Frontier name. Many of the Company's products,
however, differ from those of certain competitors due to the level of value-
added services the Company offers and the flexibility of product pricing to
maintain competitiveness.
The variety of products offered are categorized by the Company based upon
certain primary characteristics: pricing, value-added services, reporting, 800
services and ALEC services.
Pricing-All of the Company's customers are identified by their telephone
number, dedicated trunk or validated access code. Customers subscribe to various
products which determine the price per minute that they pay on their outbound or
inbound long distance calls. Rates typically vary by the volume of usage, the
distance of the calls, the time of day that calls are made, the region that
originates the call and whether or not the product is being provided on a
promotional basis.
Value-added Services-The Company's value-added services are aimed
primarily at the business subscriber, although the Company also offers products
for residential customers. Value-added services include: Call Delivery, a
message delivery service which enables a customer to send a prerecorded message
to a number; VoiceQuote, an interactive stock quotation service; InfoReach,
numerous audio/text programs such as news and weather; a voice mail service;
Option USA, a service to provide calls to the U.S. from selected international
locations and three different teleconferencing services.
The Company provides a full spectrum of facsimile services including
Broadcast FAX, which allows the customer to send or fax documents to multiple
locations at the same time; fax on demand, which allows the customer to make a
fax document available to people who call an 800 number; fax mail, which allows
a customer to receive facsimile messages in a fax mailbox and pick them up at a
later date; PC software, which allows the customer to manage facsimile lists and
documents from a PC and special international pricing to accommodate short
duration facsimile traffic.
Reporting Services-The Company offers a variety of billing options and
media aimed primarily at business customers. When a new commercial
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account is opened, the customer is offered the opportunity to custom design the
format of its reports. The Company also offers customers graphic reports of
traffic patterns on a nationwide basis by state, within state by area of
dominant influence ("ADI") and within ADI by zip code. The Company believes this
service is useful to certain customers for direct response advertising and
customer service applications. The Company also offers its proprietary personal
computer reporting service which allows customers to design their own reports,
prepare separate itemized bills, do mark-up reporting and generate numerous
other customer reports.
800 Services-These services include area code blocking and routing; time
of day routing; Home Connection 800, a fractional 800 service which allows
residential customers to access 800 service utilizing a 4 digit security
Personal Identification Number ("PIN"); Multi-Point 800 service, which allows
customers to use accounting codes on an 800 number or route a single 800 number
to numerous locations simultaneously; Follow-Me 800, which allows customers to
change call routing and TargetLine 800, which routes calls to the closest
location a customer identifies and provides custom prompts based upon a customer
specific database.
ALEC Services-The Company provides competitive local telephone service
bundled with the Company's other long distance services through its Alternative
Local Exchange Services ("ALEC") product offering. The ALEC offering is provided
either using the Company's local switching equipment in locations where it is
available or on a resale basis. The Company began providing ALEC services in the
New York City area late in 1996 and expects to enter additional markets with
this product in 1997.
Transmission
The Company endeavors to have sufficient switching capacity, local access
circuits and long distance circuits at and between its network switching centers
to permit subscribers to obtain access to the switching centers and its long
distance circuits on a basis which exceeds industry standards regarding clarity,
busy signals or delays.
The network currently utilizes fiber optic and digital microwave
transmission circuits to complete long distance calls. With the exception of
digital microwave systems located in California, New York and Pennsylvania for
which the Company holds Federal Communications Commission ("FCC") licenses and
several short fiber optic systems, such facilities have been leased on a fixed
price basis under primarily short-term contracts. While the Company still has a
handful of longer term lease contracts, these contracts have annual "mark-to-
market", "circuit portability", and "commitment buy-out" clauses. These
provisions function to keep the price the Company pays at or near current market
rates. An important aspect of the Company's
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operation is planning the mix of the types of circuits and transmission capacity
to be used for each network switching center so that calls are completed on a
basis which is cost effective for the Company without compromising prompt
service and high quality to subscribers. The Company's SONET based fiber optic
network build, started in October 1996, will reduce the number of transmission
facilities leased and provide for a more dependable and cost-effective
transmission system.
The Company's network switching centers house equipment with varying
capacities to meet the anticipated needs of the service origination region(s)
served by the center. The equipment used by the Company is, for the most part,
designed to permit expansion to its capacity by the addition of standard
components. If the maximum capacity of the equipment in any center is reached,
the Company replaces it with higher capacity switching equipment and attempts to
move the replaced unit to a network switching center in a different service
origination region. The Company is dependent upon local telephone companies for
installing local access circuits and providing related service when establishing
a network switching center. International service is primarily provided through
participation in the International Carrier Group ("ICG") with another major long
distance company. The ICG in turn contracts with other long distance companies
to provide high quality international service at competitive rates.
It is anticipated that the network build scheduled for completion in 1998
will lower the Company's current cost structure and expand the Company's
transmission capabilities. However, the Company cannot definitively project the
change in its cost structure nor assure that the network will enhance Frontier's
ability to grow and successfully compete for new business.
Major Customer
The Long Distance Communications Services' growth has been impacted by a
major customer whose revenue represented 21% and 14% of long distance revenues
in 1996 and 1995, respectively. Pursuant to contract, this customer had been
provided volume discounts by the Company as its 1-plus traffic grew at an
accelerated pace over the past two years. During 1995, the Company was notified
that this customer would be installing its own long distance switching capacity
and diversifying its traffic distribution to one or more additional carriers.
Effective June 1996, this customer entered into a revised three year agreement
with the Company, eliminating the customer's existing minimum monthly commitment
for 1-plus service in exchange for an extension of the exclusivity for the
Company to carry the customer's higher margin enhanced service traffic. The
migration of the major carrier customer's 1-plus traffic was substantially
complete as of December 31, 1996. As a result of the loss of this customer's 1-
plus traffic,
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revenue from this carrier comprised approximately 10% of Frontier's long
distance revenue in the fourth quarter of 1996 as compared to 23% in the third
quarter. The loss of this customer's 1-plus traffic contributed to the reduction
in operating income in the fourth quarter.
Seasonality
The Company's long distance revenue is subject to certain limited
seasonal variations. Because most of the long distance revenue is generated by
commercial customers, the Company traditionally experiences decreases in long
distance usage and revenue from its commercial customers during vacation and
holiday periods. The effect of commercial seasonality is evidenced by lower
sequential traffic growth in the fourth quarter for these customers.
Local Communications Services
As of December 31, 1996, Rochester Telephone Corp. and the Company's 33
other local exchange companies together served approximately 976,000 access
lines in 13 states. The local exchange carriers provide local, toll, access and
resale services; sell, install and maintain customer premises equipment and
provide directory services.
As of September 30, 1995, the Company discontinued the application of
Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting for the
Effects of Certain Types of Regulation" for its local communications companies.
The Company discontinued the use of FAS 71 based upon changes in regulation and
increasingly rapid advancements in telecommunications technology and other
factors creating competitive markets served by the Company.
Since the beginning of 1988, the Company has invested over $790 million
in upgrading its Local Communications Services' business and over $480 million
for the acquisition of independent telephone companies. Over this period, the
Company installed advanced digital switching platforms throughout all of its
switching network, making the Company one of the few in the industry to be
served by an all digital network for its local exchange companies.
Frontier has achieved substantial cost reductions through the elimination
of duplicative services and procedures and the consolidation of administrative
functions. The Company believes that additional cost reductions are obtainable.
These reductions will be partially driven by technological changes and will be
necessary to further improve the competitive position of its Local
Communications Services' business. The
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Company intends to vigorously pursue additional gains in productivity
through reengineering while simultaneously improving customer service.
In March 1995, the Company sold the Ontonagon County Telephone Company
and the Midway Telephone Company, both located in the Upper Peninsula of
Michigan. In May 1994, the Company sold its Minot Telephone Company property
located in Minot, North Dakota. In each case, the telephone properties no longer
fit the strategic purposes of the Company.
Of the 976,000 access lines in service on December 31, 1996, 687,000 were
residential lines and 289,000 were business lines. Long distance network service
to and from points outside of the telephone companies' operating territories is
provided by interconnection with the facilities of interexchange carriers.
Frontier is pursuing several alternatives to provide expanded broadband
capabilities to its customers. To date, the Company has installed over 13,000
miles of fiber optic facilities (over 650 sheath miles) in the Rochester, New
York area to provide its customers with enhanced capacity and to position the
Company to offer new products. Throughout its Local Communications Services'
operations, Frontier has over 27,000 miles of fiber optic facilities in place.
The Company provides expanded broadband services to select customers, including
video-distance learning arrangements for educational institutions.
The Company operates 71 central office and remote switching centers in
Rochester, New York, and a total of 266 central office and remote switching
centers in its other telephone territories. During late 1995, management
committed to a major switch consolidation plan at its Rochester Telephone Corp.
and Frontier Communications of New York subsidiaries. The three-year plan to
consolidate host switches and reduce this number by over 60% is projected to
improve network efficiency and reduce the cost of maintenance and software
upgrades. As of December 1996, the project is progressing as scheduled and two
host switches have been consolidated. The Company anticipates that the project
will be substantially complete by July 1998.
In connection with its integration strategy, the Company has developed a
program known as "Frontier Long Distance", where its local exchange companies
resell Frontier's long distance services. The Company believes that many
customers prefer the convenience of obtaining their long distance service
through their local telephone company and receiving a single bill. Frontier Long
Distance is currently offered in the product lines at fifteen of the Company's
local telephone exchange companies. The results of Frontier Long Distance
operations are included as part of the Long Distance Communications Services'
segment.
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Technological innovation and regulatory change are accelerating the pace
of competition for both local exchange and long distance services. New
competitors now have the ability to provide basic local telephone service in
some markets, including Rochester, New York. To benefit from these technological
advances and broaden the scope and quality of its own product and service
offerings, the Company has increased fiber and digital switching capacity
throughout its networks and has pursued regulatory alternatives such as the Open
Market Plan, which is described in more detail below. Currently, the Company
continues to be the primary provider of basic local telephone service in
Rochester, New York and may be considered the only provider of basic local
exchange service in most of the other geographic areas where it has telephone
properties.
Legislative and Regulatory Matters
The competitive evolution of the telecommunications industry has resulted
in a more fluid regulatory framework. In general, state regulatory agencies
exercise authority over the prices charged for the provision of local telephone
service and for intrastate long distance service and over the quality of service
provided, the issuance of securities, the construction of facilities and other
matters. Each of Frontier's local telephone service companies is regulated by
the public utility regulatory agency of the state in which that company provides
local telephone service and by the FCC. The Company's long distance business is
also subject to FCC and state jurisdiction.
(a) Telecommunications Act of 1996. On February 8, 1996, President Clinton
signed into law the Telecommunications Act of 1996 (the "Act"). The Act
substantially revised the Communications Act of 1934. The Act has particular
relevance to the Company in three areas. First, the Act creates a duty on the
part of the Company to interconnect its networks with those of its competitors
and, in particular, creates a duty on the part of the Company's local exchange
operations to negotiate in good faith the terms and conditions of such
interconnection.
Second, the Act contains a number of provisions that reduce barriers to
entry and promote competition in a variety of telecommunications markets,
including both long distance and local exchange operations. As a part of this
increased emphasis on competition, the Act provides a framework under which the
Regional Bell Operating Companies ("RBOCs") may enter the interexchange
communications business from which they were barred under the terms of the 1982
AT&T Consent Decree. Under the framework of the Act, a RBOC may provide long
distance services in the states where it provides telephone service upon proving
to the relevant state regulatory authority and to the FCC that: (a) it faces
competition for local telephone service from at least one facilities-based
competitor; and (b) that it satisfies a fourteen point checklist that would
purport to show that the RBOC's local exchange
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operations are open to competition. The Act establishes deadlines within which
both the state regulatory agency and the FCC must act upon applications filed by
a RBOC to enter the long distance business. The RBOCs can provide long distance
services immediately in states where they do not qualify as the incumbent local
exchange carrier, and also, with certain restrictions, can provide long distance
service in connection with cellular, video and other defined incidental
services.
Third, although the Act generally prohibits long distance companies from
marketing their services jointly with the local telephone services provided by a
RBOC (at least until that RBOC is permitted to enter the long distance
business), it contains an exception for companies that serve less than five
percent of the nation's presubscribed access lines, such as Frontier. Thus, the
Act permits Frontier to continue to market its long distance services jointly
with local telephone services whether those local services are provided by
Frontier directly or are provided by a RBOC or non-affiliated company.
The FCC has initiated three major proceedings, among others, to implement
the Act. First, the Commission adopted regulations implementing the unbundling,
interconnection and resale obligations of the Act. The Commission's order has
been appealed to the United States Court of Appeals for the Eighth Circuit and
that Court has stayed the pricing provisions of the order. A decision from the
Court is expected in the next few months.
Second, the FCC has also issued proposed rules addressing the Act's
universal service provisions. A final decision from the Commission is expected
in May 1997.
Finally, the Commission has issued a notice of proposed rulemaking in
which it is proposing changes to its rules governing the assessment and
collection of interstate access charges assessed by local exchange carriers.
The Company is evaluating its options in light of the pendency of these
three proceedings, but cannot predict the outcome of the ongoing judicial and
administrative proceedings.
(b) State Proceedings -- General. A number of states in which the Company has
local or long distance operations are conducting proceedings related to the
ground rules under which carriers may operate in an increasingly competitive
environment. The issues that the regulatory agencies are examining include
unbundling of network elements, interconnection obligations, dialing parity for
intra-LATA (or short-haul) toll traffic, number portability, resale of local
exchange service and universal service. The Act has begun to have an effect on
the timing and outcome of proceedings in many states, as state commissions have
begun to review their actions in light of the Act. The Company cannot, at
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this time, predict how these proceedings will ultimately be resolved, nor when
decisions will be forthcoming.
(c) Open Market Plan. The Rochester, New York local communications' subsidiary
completed its second full year of operations under the Open Market Plan in 1996.
The Open Market Plan promotes telecommunications competition in the Rochester,
New York marketplace by providing for (1) interconnection of competing local
networks including reciprocal compensation for terminating traffic, (2) equal
access to network databases, (3) access to local telephone numbers, (4) service
provider telephone number portability, and (5) certain wholesale discounts to
resellers of local services. The inherent risk associated with opening the
Rochester market to competition is that some customers are able to purchase
services from competitors, which may reduce the number of retail customers and
potentially cause a decrease in the revenues and profitability for Rochester
Telephone. However, results since implementation of the Open Market Plan
indicate that a stimulation of demand in the use of the network and new product
revenue may offset the losses from customer migration. Increased competition may
also lead to additional price decreases for services, adversely impacting
Rochester Telephone's margins. An additional positive feature of the Open Market
Plan provides that Rochester Telephone can retain additional earnings achieved
through operating efficiencies. Previously these earnings would have been shared
with customers.
During the seven year period of the Open Market Plan, rate reductions of
$21 million will be implemented for Rochester area consumers, including $11.5
million of which occurred in 1995 and an additional $2.5 million which commenced
in January 1996. Rate reductions of $1.5 million will occur in 1997. Rates
charged for basic residential and business telephone service may not be
increased during the seven year period of the Plan. The Company is allowed to
raise prices on certain enhanced products such as caller ID and call forwarding.
Price increases on enhanced products partially offset the rate reductions
required under the Plan during 1996.
AT&T Communications of New York filed a complaint with the New York State
Public Service Commission ("NYSPSC") for reconsideration of the Open Market Plan
on October 3, 1995. The complaint sought a change in the wholesale discount, a
change in the minutes of use surcharge and also changes in a number of
operational and support activities. Some of these issues are also being
considered in other states in other unrelated local competition proceedings. On
July 18, 1996, the NYSPSC issued an order establishing a temporary wholesale
discount of 13.5% for services and eliminating the minutes of use surcharge. On
November 27, 1996, the NYSPSC set permanent wholesale discounts retroactive to
July 24, 1996, of 17.0% for resellers that use the Company's operator services
and 19.6% for resellers that provide their own operator services. The Company
believes
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that, currently, all resellers in this market use the Company's operator
services.
Under the Telecommunications Act of 1996 and a statewide proceeding, the
NYSPSC is also considering the prices that local exchange companies in New York
may charge for "unbundled" service elements such as links (the wire from the
switch to the customers premises), ports (the portion of the switch that
terminates the link) and switch usage features. The Company is actively
participating in this proceeding and expects the NYSPSC to issue a decision on
service elements in 1997.
Management believes there are significant market and business
opportunities associated with the Company's Open Market Plan. However, there are
also uncertainties associated with the Plan. In the Company's opinion, the most
significant risks relate to increased competition in the Rochester, New York
market, the risk inherent in the Rate Stabilization Plan and the potential
diversification risk.
There can be no assurance that the changing regulatory environment will
not have a negative impact on the Company.
Competition
The telecommunications industry has experienced a significant increase in
competition in recent years. Factors such as technological advancement and a
more fluid regulatory framework have made it easier for new entrants to commence
operations. Frontier is intent on taking advantage of the various business
opportunities which competition provides in the markets where it operates. The
Company is addressing competition by focusing on improved customer satisfaction,
developing and offering new products and services, providing integrated
communications services and by reducing its cost base and becoming more
efficient.
(a) Long Distance Communications Services. Competition in this line of business
is based upon pricing, customer service, network and service quality and value-
added services. The Company views the long distance industry as a three tiered
industry which is dominated on a volume basis by the nation's four largest long
distance providers: American Telephone and Telegraph Company ("AT&T"), MCI
Telecommunications Corporation ("MCI"), Sprint Communications, Inc. ("Sprint")
and Worldcom, Inc. ("Worldcom"). AT&T, MCI, Sprint and Worldcom generate more
than 85% of the nation's domestic and international long distance revenue, which
is in excess of $75 billion annually. Frontier is positioned at the top of the
second tier with two other companies each with annual revenues believed to be
more than $1 billion. The third tier consists of more than 300 companies with
annual revenues of less than $1 billion each, the majority below $50 million
each. The Company
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targets small- and medium-sized commercial customers and seeks to provide a
level of focus and attention to customer service that compares favorably with
what its larger competitors offer to large commercial customers. Frontier is one
of the few long distance companies with the ability to offer high quality
integrated local and long distance services to small- and medium-size commercial
customers on a nationwide basis. A number of the Company's competitors are
primarily regional in nature, limited by the size of their transmission systems
or dependent on other parties for their billing services and only offer basic
long distance services.
The Company recognizes the need to grow to be able to compete effectively
in the changing telecommunications industry and to avail itself of greater
economies of scale and scope in its transport and local access facilities and in
its back office operations. The Company's acquisitions have expanded it to a
national scope enhancing the Company's ability to compete effectively. The
Company's growth and investment in additional network facilities in 1995 and
1996 and the construction of a fiber optic network scheduled for completion in
1998 are also designed to provide for a competitive cost structure.
(b) Local Communications Services. The market for equipment connected to common
carrier networks is now fully competitive. The Company faces many competitors in
the provision of equipment and facilities used in connection with its local
exchange networks. The market for the provision of local services itself is now
competitive in Rochester, New York as a result of the Open Market Plan, and the
Telecommunications Act of 1996 is likely to result in significantly greater
competition in other markets. The Open Market Plan enables customers to choose
their local telephone service company and will potentially provide them a
broader selection of products, services and prices. The Open Market Plan gives
the Company greater flexibility to broaden the scope and quality of its own
competitive offerings. In the Rochester market, competitors who have entered the
local exchange market include Time Warner Communications ("Time Warner"), MFS
Telecom, Inc. ("MFS") and AT&T. MFS and Time Warner are alternative facilities
based local exchange providers in Rochester. AT&T is remarketing local exchange
service in the Rochester, New York marketplace as a reseller of RTC's services,
as is Frontier's subsidiary, FCR. The Company believes that it holds more than
96% of the retail market share as of December 31, 1996, which is relatively
consistent with the prior year. No significant ALECs are believed to be active
in any of the Company's other telephone properties.
Long distance companies largely access their end user customers through
interconnection with local telephone companies. These long distance companies
pay access fees to the local telephone companies for this service. The provision
of access services in Rochester and elsewhere is considered to
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be competitive, and the Company has responded with price changes that meet the
demands in its individual market areas.
Environmental and Other Matters
Except for site specific issues, environmental issues tend to impact
members of the telecommunications industry in consistent ways. The Environmental
Protection Agency ("EPA") and other agencies regulate a number of chemicals and
other substances that may be present in facilities used in the provision of
telecommunications service. These include preservatives in some wood poles,
asbestos in certain underground duct systems and lead in some cable sheathing.
Some components of the Company's network may include one or more of these
substances. The Company believes that in their present uses, any such facilities
of the Company pose no significant environmental or health risk derived from EPA
regulated substances. If EPA regulation of any such substance is increased, or
if any facilities are disturbed or modified in such a way as to require removal,
special handling, storage and disposal may be required for any such facilities
removed from use. At this time the Company is not subject to any environmental
litigation that requires disclosure, except as set out in Item 3, Legal
Proceedings.
Employees and Labor Relations
As of December 31, 1996, the Company had 7,900 employees, of which 2,701
were employees of Local Communications Services, 4,376 were employees of Long
Distance Communications Services, and 823 were employees of other operations. At
the Rochester, New York Operating Company, 689 clerical and service workers were
represented by the Rochester Telephone Workers Association ("RTWA") and 619
craft and clerical employees were represented by the Communications Workers of
America ("CWA"), Local 1170.
On January 31, 1996, the CWA Local 1170 contract expired. The contract
negotiations are currently at an impasse and the Rochester company has
implemented the terms of its final offer as of April 9, 1996. The Union filed
unfair labor practice charges with the National Labor Relations Board ("NLRB").
In June, Frontier received a favorable determination after review within the
Agency, rejecting all unfair labor practice claims that could have affected the
declaration of impasse. The Union appealed these decisions within the NLRB. On
December 2, 1996 the Office of the General Counsel of the NLRB in Washington,
D.C. affirmed the dismissal of three of the four unfair labor practice charges.
The fourth charge was returned to the Regional Office in Buffalo, New York for
an administrative hearing. This hearing is scheduled to commence in May 1997.
14
<PAGE>
On December 11, 1996, the Company and the CWA National reached a tentative
agreement on a new three year contract. However, on January 27, 1997, the
membership of Local 1170 voted against the agreement. The CWA has recently
requested that the parties return to the bargaining table. At the present time
the terms and conditions of employment, as implemented on April 9, 1996, remain
in place.
The International Brotherhood of Electrical Workers ("IBEW") currently
represents 180 employees at three of the Company's New York communications
subsidiaries. These subsidiaries are Frontier Communications of New York,
Frontier Communications of Sylvan Lake and Frontier Communications of AuSable
Valley. The contracts between employees of Frontier Communications of New York
and Frontier Communications of Sylvan Lake and the IBEW expired February 13,
1997, and November 9, 1996, respectively. The employees of these respective
companies are currently working under the terms of each expired contract. The
contract between employees of Frontier Communications of AuSable Valley and the
IBEW expires May 10, 1998.
The Company cannot predict the final outcome of these matters at this
time and there can be no assurance that there will not be a material impact on
the results of operations. There can be no assurance that as contracts with the
Company's other labor unions expire, successful bargaining of new contract terms
will occur.
Risk Factors
The Company is subject to several risk factors that should be considered
by current shareowners and prospective investors. This Report on Form 10-K and
the documents incorporated by reference include forward-looking statements as
described under the Private Securities Litigation Reform Act of 1995. Actual
results may differ materially from those identified in forward looking
statements. Forward looking statements are identified by such words as
"expects", "anticipates", "believes", "intends", "plans" and variations of such
words and similar expressions.
Changes in Rates of Growth of the Economy and the
Overall Industry
To some extent, the Company's revenue and earnings per share growth are
related to the overall economy and to the telecommunications industry in
general. Factors that may influence the Company's performance within the
telecommunications industry include product pricing and development, integration
of services, the effects of competition and the expansion of the business. The
performance of the economy and the telecommunications industry could cause the
Company's actual results to vary significantly.
15
<PAGE>
Competition Risk
Technological innovation and regulatory changes are accelerating the pace
of competition for telecommunications services. As a result, the Company faces
intensified competition in all aspects of providing telecommunications services.
There are significant uncertainties surrounding the introduction of new
products and services and the capital expenditures that will be required by the
Company to remain in a competitive position. In addition, there are
uncertainties surrounding the impact on competition as a result of the enactment
of the Telecommunications Act of 1996.
Acquisition Integration
The primary growth strategy of the Company over the last few years has
been through its long distance acquisition program and internal growth. This
growth strategy involves certain operational and financial risks. The
operational risks include the possibility that implementation of an acquisition
does not provide the economies of scale or synergies anticipated by management.
Successful integration and expansion of the Company's network as a result of the
acquisitions is dependent on management's ability to anticipate market growth,
install facilities, consolidate databases, obtain rights of way and negotiate
leases economically and efficiently. The integration of a growing employee base
and the elimination of redundant operations and facilities has required and will
continue to require significant management resources. Although management's
plans are to minimize the risks associated with acquisitions, there can be no
assurance that acquired businesses will be assimilated effectively into the
Company.
Contingent Liabilities
The Company and a number of its subsidiaries are continuously involved in
various judicial and administrative proceedings involving matters incidental to
the business. Unless otherwise stated specifically, the Company believes that
the probable outcome of any of these matters, or the combination of all of the
matters, will not have a material adverse effect on the Company's consolidated
results of operations or financial statements. However, there can be no
assurance that the resolution of these matters will not be contrary to
management's expectations.
ITEM 2. PROPERTIES
The Company's Long Distance Communications Services segment owns property
which includes: fiber optic and copper cable, switching equipment, microwave
equipment, real estate and miscellaneous office and
16
<PAGE>
work equipment. The Company's long distance segment also leases facilities or
transmission capacity from other carriers.
The Company's Local Communications Services segment owns telephone
properties in their respective operating territories which include: connecting
lines between customers' premises and the central offices; central office
switching equipment; buildings, land and miscellaneous property and customer
premise equipment. The central office switching equipment includes digital
switches and peripheral equipment. The connecting lines include aerial and
underground cable, conduit, poles, wires and microwave equipment. These
facilities are located on public streets and highways or on privately owned
land. The Company has permission to use these lands pursuant to local
governmental consent or lease, permit, easement or other agreement.
The Company owns or leases the land and buildings in which its central
offices, warehouse space, office and traffic headquarters are located. Frontier
Corporation's headquarters are located in a leased seven story building at 180
South Clinton Avenue, Rochester, New York. The lease expires in 2003 and is
renewable for two successive ten year periods.
ITEM 3. LEGAL PROCEEDINGS
On June 11, 1992, a group of corporate plaintiffs consisting of Cooper
Industries, Inc.; Keystone Consolidated Industries, Inc.; The Monarch Machine
Tool Company; Niagara Mohawk Corporation and Overhead Door Corporation commenced
an action in the United States District Court for the Northern District of New
York seeking contribution from fifteen corporate defendants, including Rotelcom
Inc., a wholly-owned subsidiary of the registrant held through intervening
subsidiaries (now named Frontier Network Systems, Inc. or FNS). The plaintiffs
seek environmental "response costs" in the approximate amount of $1.5 million
incurred by the plaintiffs pursuant to a consent decree entered into by
plaintiffs with the United States Environmental Protection Agency (the "EPA").
Two additional defendants were named in 1994. In addition to FNS, the current
defendants are: Agway, Inc.; BMC Industries, Inc.; Borg-Warner Corporation; Elf
Atochem North America, Inc.; Mack Trucks, Inc.; Motor Transportation Services,
Inc.; Pall Trinity Micro Corporation; The Raymond Corporation; Redding-Hunter,
Inc.; Smith Corona Corporation; Sola Basic Industries, Inc.; Wilson Sporting
Goods Company; Phillip A. Rosen; Harvey M. Rosen; City of Cortland and New York
State Electric & Gas Corporation.
The consent decree concerned the clean-up of an environmental Superfund
site located in Cortland, New York. It is alleged that the corporate defendants
disposed of hazardous substances at the site and are therefore liable under the
Comprehensive Environmental Response,
17
<PAGE>
Compensation and Liability Act ("CERCLA"). The Company is anticipating that a
final Record of Decision ("ROD") will be issued by the EPA and will prescribe
the remediation requirements for the site. The aggregate amount of remediation
costs to be incurred by the plaintiffs will be based on the requirements of the
ROD. The total cost of remediation at the site is uncertain, although estimates
have ranged from $25 million to $100 million. There has been no allocation of
liability as among or between the plaintiffs or defendants. The extent to which
plaintiffs can recover any of these costs from the defendants, including FNS,
will be determined at trial. The litigation has been delayed by the bankruptcy
filing of one of the defendants. FNS has been vigorously defending this lawsuit.
The Company believes that it will ultimately be successful, but it is unable to
predict the outcome with any certainty at this time.
Since February 1994, hundreds of plaintiffs, all of who are former ASI
shareholders, have filed and amended several and various complaints in Hennepin
County (Minnesota) District Court. Included among the defendants are ASI, its
former principal shareowners, Steven Simon and James Weinert, and Frontier.
These suits allege generally that Simon and Weinert, with and through ASI,
embarked upon a scheme to gain control of ASI and acquire all of its stock
through common law fraud, breach of fiduciary duty and certain violations of the
Minnesota Business Corporation Act. This Act requires shareowners in a closely
held corporation to act fairly toward one another and refrain from
misappropriation. Another action by a few former ASI shareholders who dissented
from the cashout merger that finally took ASI private is pending in federal
court in Minnesota. The federal lawsuit asserts RICO claims in addition to state
common law and statutory violations. The claims against Frontier maintain that
Frontier controls the disposition of the restricted Frontier stock which was
issued to Simon and Weinert in connection with the acquisition of ASI and that
such stock should be held in trust for the benefit of the plaintiffs. Recently,
the owners of over half of the stock who have made claims have entered into a
settlement in principle with Simon and Weinert. That settlement is now being
submitted to the individual plaintiffs for their review and acceptance. Closure
of the agreement is expected in 1997. If the settlements are accepted, the
lawsuits of these plaintiffs shall be dismissed.
Although it is too early to determine the outcome of the suits that have
not settled, Frontier, ASI and the other defendants each are contesting the
claims. To date, no other settlements have been reached. In connection with the
acquisition of ASI by Frontier, Simon and Weinert agreed to indemnify the
Company for these claims.
On April 10 and 11, 1995, three lawsuits were commenced against ALC
Communications Corporation ("ALC") as a result of its announced merger with the
Company. In two of those actions, each filed in the Court of
18
<PAGE>
Chancery of the State of Delaware, in and for New Castle County by Martin Mayers
and Mordecai Cohen, respectively, Frontier was named as a defendant, although it
has not yet been served with process. The lawsuits purport to be class actions
brought on behalf of all ALC stockholders against ALC and its directors. Among
other things, the complaints sought to enjoin the business combination and/or to
obtain an award of damages. On June 9, 1995, the Delaware Court entered an order
consolidating the three cases for all purposes. Under the terms of that order,
Mayers v. Irwin, et al., C.A. No. 14196 is designated as the consolidated
complaint and the defendants are required to respond to the consolidated
complaint. On July 10, 1995, ALC and its directors answered the consolidated
complaint. On February 28, 1997, the parties stipulated to a dismissal of these
actions without prejudice and the Court entered an order formally dismissing all
charges against Frontier, ALC and the ALC directors.
The Regulatory Matters discussion in management's discussion of
business in Part 1, Item 1, is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None
19
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED SECURITY MATTERS
The Company's Common Stock is traded on the New York Stock Exchange
(Symbol - FRO). A stock split in the form of a 100 per cent stock dividend was
effected during 1994. The information in the table below is adjusted to reflect
the effects of that stock split. The historical information has been restated
accordingly for the pooling acquisitions of ALC and ASI. The specific
information required by this item is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Quarter High Low High Low High Low
------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Highest and lowest
market prices for the 1st $33.25 $28.25 $23.38 $19.25 $22.44 $20.25
stock by quarter: 2nd 33.38 27.75 24.13 19.63 25.25 20.81
3rd 31.25 25.88 28.63 23.75 24.75 21.63
4th 31.88 19.88 30.00 25.50 24.63 20.50
<S> <C> <C> <C> <C>
Common stock 1st $.2125 $.2075 $.2025
dividends declared 2nd $.2125 .2075 .2025
per share: 3rd $.2125 .2075 .2025
4th $.2175 .2125 .2075
------ ------ ------
Total Dividends per Year $.8550 $.8350 $ .8150
Number of Shareowners (at December 31)
Individuals 29,697 26,184 24,128
Brokers, nominees and institutions 509 453 480
--- --- ---
Total Shareowners 30,206 26,637 24,608
</TABLE>
On March 14, 1997, the closing price for the Company's stock was
$21.50 per share as published in the Wall Street Journal.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item should be read in conjunction with
the consolidated financial statements and related notes included in Item 14
contained herein, and is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Revenues...................... $2,575,569 $2,143,691 $1,667,545 $1,437,448 $1,252,244
Income from Continuing Operations
(before Extraordinary Items and
Cumulative Effect of Changes in
Accounting Principles).......... $ 217,944 $ 144,768 $ 187,254 $ 128,644 $ 107,025
Consolidated Net Income.......... $ 209,926 $ 22,083 $ 180,057 $ 121,154 $ 105,953
Earnings per Common Share:
Income before Extraordinary
Items and Cumulative Effect of
Changes in Accounting Principle $ 1.32 $ .89 $ 1.16 $ .83 $ .75
Extraordinary Items.............. --- $ (.75) --- $ (.05) $ (.01)
Cumulative Effect of Changes
in Accounting Principles........ $ (.05) $ (.01) $ (.04) --- ---
Earnings per Common Share-Primary $ 1.27 $ .13 $ 1.12 $ .78 $ .74
Earnings per Common Share-Fully
Diluted......................... $ 1.27 $ .13 $ 1.12 $ .78 $ .74
Cash Dividends Declared per
Common Share.................... $0.855 $0.835 $0.815 $0 .795 $0.775
Total Assets..................... $2,221,520 $2,108,592 $2,060,794 $1,721,545 $1,679,743
Long-Term Debt................... $ 675,043 $ 618,867 $ 661,549 $ 581,707 $ 604,157
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS
AND ANALYSIS OF FINANCIAL CONDITION
The information required by this item is presented in pages 14 through 20 of the
Company's 1996 Annual Report to Shareowners which is Exhibit 13 to this Form 10-
K, and is incorporated by reference into this Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, together with the report thereon
of Price Waterhouse LLP, dated January 27, 1997, is presented on pages 21
through 37 of the Company's 1996 Annual Report to Shareowners, which is Exhibit
13 to this Form 10-K and is incorporated by reference into this Item 8.
21
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information required by this item for the Directors of Frontier
Corporation is presented on pages 3 through 5 of the definitive proxy statement
provided to shareowners on or about March 24, 1997 in connection with the Annual
Meeting of Shareowners to be held May 2, 1997, which is Exhibit 99 to this Form
10-K and is incorporated by reference into this Item 10. Exhibit 99 consists of
the Notice of Annual Meeting and the Company's Proxy Statement for the May 2,
1997 Annual Meeting of Shareowners.
Executive Officers
Certain information is set forth below regarding the Executive Officers
of the Company as of March 14, 1997. Each Officer serves for a period of one
year or until a successor is elected.
<TABLE>
<CAPTION>
Other Positions Held
Name Position and During the Past
(Age) Offices Held Five Years
------ ------------ -------------------------------------
<S> <C> <C>
Robert L. Barrett (55) Executive Vice From May 1995 to March 1996 he was
President and Executive Vice President and Chief
President of Technology Officer of Banc One
Network Systems & Corporation1. From May 1991
Services since to May 1995 he was President
March 1996 and Chief Operating Officer of
Banc One Services Corporation/1/.
Kevin J. Bennis (43) Executive Vice From December 1994 to March 1996
President and he was President and Chief Executive
President of Frontier Officer of the Integrated Client
Communications Services Division of MCI2. From
since March 1996 February 1994 to December 1994 he
was President and Chief Operating
Officer of MCI/BANAMEX/2/. From
July 1992 to February 1994 he was
Senior Vice President of Business
Marketing of MCI. From July 1988
to July 1992 he was Vice President
of Sales-Northeast Division of MCI.
Ronald L. Bittner (55) Chairman, President From August 1995 to November 1995
and Chief Executive he was Chairman and Chief Executive
Officer since Officer. From February 1992 to April
November 1995 and 1993, he was President and Chief
for the period Executive Officer.
April 1993 to
August 1995
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C>
Jeremiah T. Carr (54) Executive Vice From May 1995 to January 1997 he
President since was Senior Vice President.
January 1997 From January 1995 to May 1995
and Chairman - he was President and
Rochester Chief Executive Officer of
Telephone Corp. Rochester Telephone Corp.,
and President Telephone Group.
From November 1993 to December
1994 he was Corporate Vice President
and President - Telephone Group.
From February 1992 to November
1993 he was Corporate Vice President
and President Telephone Operations.
Joseph Enis (52) Treasurer since From June 1994 to December 1994
January 1995 he was Director of Finance. From
1992 to June 1994 he was Treasurer of
National Service Industries/3/. From
1984 to 1992 he was Treasurer of
Cyclops Industries/4/.
Dale M. Gregory (48) Senior Vice President From January 1995 to May 1995 he
since May 1995 in was President - Frontier
charge of the Communications Group. From
Network & November 1993 to December 1994 he
Operations Area was Corporate Vice President and
from June 1995 to and the President -
October 1996 and Telecommunications Group.
the Corporate From February 1993 to November
Development Group 1993 he was Corporate Vice
since October 1996. President and President-Network
Systems and Services. From February
1992 to February 1993 he was
Corporate Vice President and
President-Telecommunications
Services.
Louis L. Massaro (50) Executive Vice From August 1995 to May 1996
President, Chief he was Executive Vice President
Administrative and Chief Administrative Officer.
Officer and From December 1994 to August 1995
Chief Financial he was Corporate Vice President.
Officer since May From February 1993 to December
1996 1994, he was Corporate Vice President
and Treasurer. From September 1991
to February 1993 he was Corporate
Vice President and President-
Rochester Operations.
Richard A. Smith (46) Controller From June 1994 to March 1995 he was
since April 1995 President - Frontier Information
Technologies, Inc. From February
1993 to June 1994 he was Senior Vice
President - Midwest Region of
Frontier's Telephone Group. From
1990 to February 1993 he was Vice
President - Midwest Telephone
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C>
Operations of Frontier's Telephone
Group.
Josephine S. Trubek (54) Corporate Secretary From January 1990 to April 1993 she
since April 1993 was General Counsel and Secretary.
</TABLE>
/1/ Banc One is one of the 10 largest bank holding companies in the U.S. Banc
One Services Corporation is a subsidiary of Banc One.
/2/ MCI is the 2nd largest provider of long distance services in the United
States. MCI/BANAMEX is an MCI joint venture in Mexico.
/3/ National Service Industries is a public company with businesses in lighting,
textile rentals and specialty chemicals.
/4/ Cyclops Industries is a public manufacturer of specialty steels and
curtainwall systems.
PART III
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is presented on page 2 of the
Company's Proxy Statement (which was provided to shareowners on or about March
24, 1997 in connection with the Annual Meeting of Shareowners to be held on May
2, 1997) under the caption "Compensation of Directors" and on pages 6 through 13
under the captions "Report of Committee on Management", "Performance Graph",
"Compensation of Company Management", and "Compensation Committee Interlocks and
Insider Participation in Compensation Decisions", and is incorporated by
reference into this Item 11. The Company's Proxy Statement is found at Exhibit
99 to this Form 10-K. Exhibit 99 consists of the Notice of Annual Meeting and
the Company's Proxy Statement for the May 2, 1997 Annual Meeting of Shareowners.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item is presented in the "Management and
Directors Stock Ownership Table as of February 1, 1997 " and the "Stock
Ownership of Certain Beneficial Owners Table as of February 1, 1997 " under the
caption "Stock Ownership of Management, Directors and Certain Beneficial Owners"
on pages 4 through 5 of the definitive Proxy Statement for the Annual Meeting of
Shareowners to be held May 2, 1997, and is incorporated by reference into this
Item 12.
24
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is presented under the sub-caption
"Employment Contracts" on page 13 of the Definitive Proxy Statement for the
Annual Meeting of Shareowners to be held May 2, 1997 and is incorporated by
reference into this Item 13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS
ON FORM 8-K
(a) 1. Index to Financial Statements
Page*
Report of Management 21
Report of Audit Committee 21
Report of Independent Accountants 21
Business Segment Information 22
Consolidated Statements of Income 23
Consolidated Balance Sheets 24
Consolidated Statements of Cash Flows 25
Consolidated Statements of Shareowners' Equity 26
Notes to Consolidated Financial Statements 27-37
Report of Ernst & Young LLP 38**
*Pages 21 through 37 are incorporated by reference from the indicated pages
of the 1996 Annual Report to Shareowners.
**Set forth herein.
2. Financial Statement Schedule for the years ended December 31, 1996,
1995 and 1994:
Report of Independent Accountants on Financial Statement Schedule
Report of Ernst & Young LLP on Financial Statement Schedule
Valuation and Qualifying Accounts and Reserves - Schedule II
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
25
<PAGE>
3. See Exhibit Index for list of exhibits filed with this
report.
The Registrant hereby agrees to furnish the Commission a copy of each of
the Indentures or other instruments defining the rights of security holders of
the long-term debt securities of the Registrant and any of its subsidiaries for
which consolidated or unconsolidated financial statements are required to be
filed.
(b) Reports on Form 8-K
The Company filed the following three reports during the quarter ended
December 31, 1996:
SEC Filing Date Item No. Financial Statements
--------------- -------- --------------------
October 22, 1996 5 None
November 19, 1996 5 None
December 17, 1996 5 None
The Company filed the following report subsequent to the quarter ended
December 31, 1996 through March 27, 1997.
March 27, 1997 5 None
(c) Refer to Item 14 (a) (3) above for Exhibits required by Item 601 of
Regulation S-K.
(d) Schedules other than set forth in response to Item 14 (a) (2) above for
which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Shareowners of
Frontier Corporation
Our audits of the consolidated financial statements referred to in our report
dated January 27, 1997 appearing on page 21 of the 1996 Annual Report to
Shareowners of Frontier Corporation (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item
14(a)(2) of this Form 10-K. We did not audit the Financial Statement Schedule of
ALC Communications Corporation, a wholly owned subsidiary, which statement
reflects valuation and qualifying accounts and reserves of $40,078,000 and
$32,692,000 at December 31, 1995 and 1994, respectively. That Financial
Statement Schedule was audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for ALC Communications Corporation, is based solely on the
report of the other auditors. In our opinion, based on our audits and the report
of other auditors, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Rochester, New York
January 27, 1997
27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
ALC Communications Corporation
We have audited the financial statements of ALC Communications Corporation (ALC)
as of December 31, 1995 and 1994 and for the years then ended, and have issued
our report thereon dated January 17, 1996. Our audits also included Schedule II
of ALC (not presented separately herein) which is included in the related
schedule of Frontier Corporation in its Annual Report on Form 10-K for the year
ended December 31, 1995. This financial statement schedule is the responsibility
of ALC management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule of ALC referred to above, when
considered in relation to the ALC basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
Ernst & Young LLP
Detroit, Michigan
January 17, 1996
28
<PAGE>
FRONTIER CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES FOR THE YEAR ENDED DECEMBER 31, 1996
(Table 1 of 3)
In thousands of dollars
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to
beginning costs and other Balance at
Description of year expenses accounts Deductions end of year
----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Reserve for uncollectible
accounts $28,515 $74,452 $5,183/(1)/ $77,239/(2)/ $30,911
======= ======= ====== ======= =======
Deferred tax asset valuation
allowance $23,887 $0 $0 $4,426 $19,461
======= ======= ====== ======= =======
Acquisition related
reserves $83,149 $0 $0 $42,353 $40,796/(3)/
======= ======= ====== ======= =======
</TABLE>
/(1)/ Primarily recoveries of uncollectible accounts.
/(2)/ Uncollectible accounts written off.
/(3)/ Included primarily in "Property, plant, and equipment" in the Consolidated
Balance Sheets.
29
<PAGE>
FRONTIER CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES FOR THE YEAR ENDED DECEMBER 31, 1995
(Table 2 of 3)
In thousands of dollars
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to
beginning costs and other Balance at
Description of year expenses accounts Deductions end of year
----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Reserve for uncollectible
accounts $11,407 $36,655 $24,986/(1)/ $44,533/(2)/ $28,515
======= ======= ======= ======= =======
Deferred tax asset
valuation allowance $28,500 $0 $7,950/(3)/ $12,563 $23,887
======= ======= ======= ======= =======
Acquisition related
reserves $0 $114,239 $0 $31,090 $83,149/(4)/
======= ======= ======= ======= =======
</TABLE>
/(1)/ Primarily recoveries of uncollectible accounts and balances added through
acquisitions.
/(2)/ Uncollectible accounts written off.
/(3)/ Balances added through acquisitions.
/(4)/ Included primarily in "Other liabilities" and "Property, plant and
equipment" in the Consolidated Balance Sheets.
FRONTIER CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES FOR THE YEAR ENDED DECEMBER 31, 1994
(Table 3 of 3)
In thousands of dollars
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to
beginning costs and other Balance at
Description of year expenses accounts Deductions end of year
----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Reserve for uncollectible
accounts $9,832 $29,526 $11,084/(1)/ $39,035/(2)/ $11,407
======= ======= ======= ======= =======
Deferred tax asset valuation
allowance $34,900 $0 $0 $6,400 $28,500
======= ======= ======= ======= =======
</TABLE>
/(1)/ Primarily recoveries of uncollectible accounts.
/(2)/ Uncollectible accounts written off.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRONTIER CORPORATION
(Registrant)
By: /s/ Ronald L. Bittner
-------------------------------
Ronald L. Bittner
Chairman, President and
Chief Executive Officer
Date: March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Ronald L. Bittner By: /s/ Louis L. Massaro
- ------------------------------------- -------------------------------------
Ronald L. Bittner Louis L. Massaro
Chairman, President and Executive Vice President,
Chief Executive Officer and Chief Financial Officer and Chief
Director Administrative Officer
(principal financial officer)
Date: March 21, 1997 March 21, 1997
By: /s/ Richard A. Smith
- -------------------------------------
Richard A. Smith
Controller
(principal accounting officer)
Date: March 21, 1997
* *
- ------------------------------------- ------------------------------------
Patricia C. Barron Raul E. Cesan
Date: March 21, 1997 March 21, 1997
* *
- ------------------------------------- -------------------------------------
Brenda E. Edgerton Jairo A. Estrada
Date: March 21, 1997 March 21, 1997
* *
- ------------------------------------- -------------------------------------
Michael E. Faherty Daniel E. Gill
Date: March 21, 1997 March 21, 1997
* *
- ------------------------------------- -------------------------------------
Alan C. Hasselwander Robert J. Holland, Jr.
Date: March 21, 1997 March 21, 1997
* *
- ------------------------------------- -------------------------------------
Douglas H. McCorkindale Leo J. Thomas
Date: March 21, 1997 March 21, 1997
*
- -------------------------------------
Richard J. Uhl
Date: March 21, 1997
*By: /s/ Josephine S. Trubek Manually signed powers of attorney
---------------------------- for each Director are attached
Josephine S. Trubek hereto and filed herewith pursuant
Attorney-in-Fact to Regulation S-K Item 601(b)24 as
Exhibit 24.
31
<PAGE>
FRONTIER CORPORATION
EXHIBIT INDEX
Exhibit
Number Exhibit Description Reference
- ------- ------------------- ---------
3.1 Restated Certificate of Incorporated by reference
Incorporation dated to Exhibit 3-1 to Form 10-K
January 24, 1995 for the year ended
December 31, 1995
3.2 Amendment to Restated Incorporated by reference
Certificate of Incorporation to Exhibit 3-2 to Form 10-K
dated April 9, 1995 for the year ended
December 31, 1995
3.3 By-Laws Filed herewith
4.1 Copy of Indenture between Incorporated by reference
the Company and Manufacturers to Exhibit 4-12 to Form
Hanover Trust Company, 10-K for the year ended
Trustee, dated September 1, December 31, 1986
1986
4.2 Copy of First Supplemental Incorporated by reference
Indenture to said Indenture, to Exhibit 4(b) to
made by the Company to Registration Statement
Manufacturers Hanover Trust 33-32035
Company, Trustee, dated
December 1, 1989
4.3 Copy of 10.46% Non Negotiable Incorporated by reference
Convertible Debenture due to Exhibit 4-14 to Form
October 27, 2008 from the 10-K for the year ended
Company to The Walters Trust December 31, 1988
4.4 Copy of 9% Debenture due Incorporated by reference
August 15, 2021 to Exhibit 4-16 to Form
10-K for the year ended
December 31, 1991
4.5 Copy of Indenture between the Incorporated by reference
Company and Chase Manhattan to Exhibit 4-5 to Form
Bank, N.A. dated August 9, 10-K for the year ended
1995 December 31, 1995
32
<PAGE>
FRONTIER CORPORATION
EXHIBIT INDEX
Exhibit
Number Exhibit Description Reference
- ------- ------------------- ---------
10.1 Copy of Joint Venture Incorporated by reference
Agreement dated March 9, 1993 to Exhibit 10-13 to Form
by and between Rochester Tel 10-K for the year ended
Cellular Holding Corporation December 31, 1992
and New York Cellular
Geographic Service Area, Inc.
together with Exhibit A
thereto
10.2 Copy of the Plan for the Incorporated by reference
Deferral of Directors Fees to Exhibit 10-34 to Form
10-K for the year ended
December 31, 1994
10.3 Copy of the Directors' Incorporated by reference
Common Stock Deferred to Exhibit 10-36 to Form
Growth Plan 10-K for the year ended
December 31, 1994
10.4 Copy of the Restated Management Incorporated by reference
Pension Plan to Exhibit 10-20 to Form
10-K for the year ended
December 31, 1995
10.5 Copy of Executive Bonus Plan Filed herewith
10.6 Copy of the Management Stock Incorporated by reference
Incentive Plan dated to Exhibit 10-23 to Form
April 26, 1995 10-K for the year ended
December 31, 1995
10.7 Form of management contracts Filed herewith
as amended with each of Messrs.
Bittner, Massaro, Carr and Gregory
10.8 Executive contract with supporting Incorporated by reference
offer letter for Mr. Barrett to Exhibit 10-25 to Form
10-Q for the quarter ended
March 31, 1996
33
<PAGE>
FRONTIER CORPORATION
EXHIBIT INDEX
Exhibit
Number Exhibit Description Reference
- ------- ------------------- ---------
10.9 Executive contract with supporting Incorporated by reference
offer letter and note for Mr. Bennis to Exhibit 10-26 to Form
10-Q for the quarter ended
March 31, 1996
10.10 Restated Directors Incorporated by reference
Stock Incentive Plan to Exhibit 10-27 to Form
dated April 24, 1996 10-Q for the quarter ended
March 31, 1996
10.11 IRU Agreement between Qwest Filed herewith
Communications Corp. and
Frontier Communications
International, Inc. dated
October 18, 1996.(CONFIDENTIAL
TREATMENT REQUESTED
FOR CERTAIN PORTIONS
OF THIS EXHIBIT)
10.12 Copy of the Restated Supplemental Filed herewith
Management Pension Plan
10.13 Copy of the Restated Supplemental Filed herewith
Retirement Savings Plan
10.14 Employee Stock Option Plan Incorporated by reference
to Exhibit 10-28 to Form
10-Q for the quarter ended
March 31, 1996
11 Computation of Fully Diluted Filed herewith
Earnings Per Share
13.1 Specified portions (pages 14 Filed herewith
through 37) of the Company's
Annual Report to shareholders
for the year ended December 31, 1996
34
<PAGE>
FRONTIER CORPORATION
EXHIBIT INDEX
Exhibit
Number Exhibit Description Reference
- ------- ------------------- ---------
13.2 Report of Ernst & Young LLP Filed herewith
21 Subsidiaries of Frontier Filed herewith
Corporation
23.1 Consent of Independent Filed herewith
Accountants - Price Waterhouse LLP
23.2 Consent of Independent Filed herewith
Accountants - Ernst & Young LLP
24 Power of Attorney for a Filed herewith
majority of Directors naming
Josephine S. Trubek attorney-in-fact
27 Financial Data Schedule Filed herewith
99 Proxy Statement for the Filed herewith
Annual Meeting of Shareowners
to be held May 2, 1997
35
<PAGE>
EXHIBIT 3.3
FRONTIER CORPORATION
By-Laws
As Revised Effective March 21, 1983
(And as amended 7/16/84, 11/19/84, 2/17/86, 2/16/87,
4/22/87, 11/20/89, 2/19/90, 11/19/90, 4/24/91,
4/29/92, 4/21/93, 4/27/94, 9/19/94, 1/1/95, 4/26/95, 8/16/95
1/22/96, 4/30/96)
ARTICLE I
SHAREHOLDERS
Section 1 - Annual Meeting.
- ---------------------------
An annual meeting of shareholders for the election of Directors and the
transaction of other business shall be held at such time on any day in the month
of April in each year or on such other date as shall be fixed by the Board of
Directors.
Section 2 - Special Meetings.
- -----------------------------
Special Meetings of the shareholders may be called by the Board of
Directors. Such meeting shall be held at such time as may be fixed in the
notice of meeting.
Section 3 - Place of Meeting.
- -----------------------------
Meetings of shareholders shall be held at such place, within or without
the State of New York, as may be fixed in the notice of meeting.
Section 4 - Notice of Meeting.
- ------------------------------
Notice of each meeting of shareholders shall be in writing and shall state
the place, date and hour of the meeting and the purpose or purposes for which
the meeting is called.
A copy of the notice of any meeting shall be given, personally, or by
mail, not less than ten or more than fifty days before the date of the meeting,
to each shareholder entitled to vote at such meeting. If mailed, such notice is
given when deposited in the United States mail, with postage thereon prepaid,
directed to the shareholder at the shareholder's address as it appears on the
record of shareholders, or, if the shareholder shall have filed with the
Secretary of the Corporation a written request that notices be mailed to some
other address, then directed to the shareholder at such other address.
3/21/83
<PAGE>
(2)
Section 5 - Inspectors of Election.
- -----------------------------------
The Board of Directors, in advance of any shareholders' meeting, may
appoint one or more inspectors to act at the meeting or any adjournment thereof.
If inspectors are not so appointed, the person presiding at a shareholders'
meeting may, and on the request of any shareholder entitled to vote at such
meeting shall, appoint two inspectors. Each inspector, before entering upon the
discharge of the inspector's duties, shall take and sign an oath faithfully to
execute the duties of inspector at such meeting with strict impartiality and
according to the best of the inspector's ability.
The inspectors shall determine the number of shares outstanding and the
voting power of each, the shares represented at the meeting, the existence of a
quorum, and the validity and effect of proxies, and shall receive votes, ballots
or consents, hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes, ballots or
consents, determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all shareholders. On request of the person
presiding at the meeting or any shareholder entitled to vote at such meeting,
the inspectors shall make a report in writing of any challenge, question or
matter determined by them and execute a certificate of any fact found by them.
Any report or certificate made by them shall be prima facie evidence of the
----- -----
facts stated and of the vote as certified by them.
Section 6 - List of Shareholders at Meeting.
- --------------------------------------------
A list of shareholders as of the record date, certified by the Secretary
or any Assistant Secretary or by the Transfer Agent, if any, shall be produced
at the meeting of shareholders upon the request of any shareholder at such
meeting or prior thereto. If the right to vote at any meeting is challenged,
the inspectors of election, or person presiding at such meeting, shall require
such list of shareholders to be produced as evidence of the right of the persons
challenged to vote at such meeting, and all persons who appear from such list to
be shareholders entitled to vote at such meeting may vote at such meeting.
3/21/83
<PAGE>
(3)
Section 7 - Qualification of Voters.
- ------------------------------------
Every shareholder of record of common stock of the Corporation shall be
entitled at every meeting of shareholders to one vote for every share of common
stock held by the shareholder in the shareholder's name on the record of
shareholders, subject, however, to the voting rights granted to the holders of
Cumulative Preferred Stock of the Corporation upon default in dividends thereon.
Section 8 - Quorum of Shareholders.
- -----------------------------------
The holders of a majority of the shares entitled to vote at such meeting
shall constitute a quorum at a meeting of shareholders for the transaction of
any business, provided that when a specified item of business is required to be
voted on by a class or series, voting as a class, the holders of a majority of
the shares of such class or series shall constitute a quorum for the transaction
of such specified item of business.
The shareholders present, in person or by proxy, and entitled to vote
may, by a majority of votes cast, adjourn the meeting despite the absence of a
quorum.
Section 9 - Vote of Shareholders.
- ---------------------------------
Directors shall, except as otherwise required by law, or by the
certificate of incorporation as permitted by law, be elected by a plurality of
the votes cast at a meeting of shareholders by the holders of shares entitled to
vote in the election.
Whenever any corporate action, other than the election of Directors, is to
be taken by vote of the shareholders, it shall, except as otherwise required by
law, or by the certificate of incorporation as permitted by law, be authorized
by a majority of the votes cast at a meeting of shareholders by the holders of
shares entitled to vote thereon.
Section 10 - Proxies.
- ---------------------
Every shareholder entitled to vote at a meeting of shareholders or to
express consent or dissent without a meeting may authorize another person or
persons to act for that shareholder by proxy. Every proxy must be signed by the
shareholder or the shareholder's attorney-in-fact. No proxy shall be valid after
the
3/21/83
<PAGE>
(4)
expiration of eleven months from the date thereof unless otherwise provided in
the proxy. Every proxy shall be revocable at the pleasure of the shareholder
executing it except in those cases where an irrevocable proxy permitted by
statute has been given.
Section 11 - Fixing Record Date.
- --------------------------------
For the purpose of determining the shareholders entitled to notice of or
to vote at any meeting of shareholders or any adjournment thereof, or to express
consent or dissent from any proposal without a meeting, or for the purpose of
determining shareholders entitled to receive payment of any dividend or the
allotment of any rights, or for the purpose of any other action, the Board of
Directors may fix, in advance, a date as the record date for any such
determination of shareholders. Such date shall not be more than fifty nor less
than ten days before the date of such meeting, nor more than fifty days prior to
any other action.
Section 12 - Order of Business.*
- --------------------------------
The order of business at each meeting of shareholders shall be as
determined by the chairman of the meeting. The chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts and things as are necessary or desirable for the proper
conduct of the meeting, including, without limitation, the establishment of
procedures for the maintenance of order and safety, limitations on the time
allotted to questions or comments on the affairs of the Corporation,
restrictions on entry to such meeting after the time prescribed for the
commencement thereof, and the opening and closing of the voting polls.
At any special meeting of shareholders, only such business may be
transacted which is related to the purpose or purposes set forth in the notice
of such meeting.
At any annual meeting of shareholders, only such business (other than the
nomination or election of directors) shall be conducted as shall have been
brought before the annual meeting (i) by or at the direction of the chairman of
the meeting or (ii) by any shareholder who is a holder of record at the time of
the giving of the notice provided for in this Section 12, who is or will be
entitled to vote at the meeting and who complies with the procedures set forth
in this Section 12.
3/21/83
*Revised 9/19/94
<PAGE>
(5)
For business (other than the nomination or election of directors) properly
to be brought before an annual meeting by a shareholder, the shareholder must
have given timely notice thereof in proper written form to the Secretary. To be
timely, a shareholder's notice must be addressed to the Secretary and delivered
to or mailed and received at the principal executive offices of the Corporation
not less than 60 days nor more than 90 days prior to the anniversary date of the
immediately preceding annual meeting; provided, however, that in the event that
-------- -------
the date of the annual meeting is more than 30 days earlier or more than 60 days
later than such anniversary date, notice by the shareholder to be timely must be
so delivered or received not earlier than the 90th day prior to such annual
meeting and not later than the close of business on the later of the 60th day
prior to such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made. To be in proper written
form, a shareholder's notice to the Secretary shall set forth in writing as to
each matter the shareholder proposes to bring before the annual meeting: (i) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting; (ii)
the name and address, as they appear on the Corporation's books, of the
shareholder proposing such business; (iii) the class and number of shares of the
Corporation which are beneficially owned by the shareholder; (iv) a
representation that the shareholder is or will be entitled to vote at such
annual meeting and intends to appear in person (or send a qualified
representative) or by proxy to present such proposal at the meeting; and (v) any
material interest of the shareholder in such business. The foregoing notice
requirements shall be deemed satisfied by a shareholder if the shareholder has
notified the Corporation of his or her intention to present a proposal at an
annual meeting and such shareholder's proposal has been included in a proxy
statement that has been prepared by management of the Corporation to solicit
proxies for such annual meeting; provided, however, that if such shareholder
-------- -------
does not appear in person (or send a qualified representative) or by proxy to
present such proposal at such annual meeting, the Corporation need not present
such proposal for a vote at such meeting, notwithstanding that proxies in
respect of such vote may have been received by the Corporation. Notwithstanding
anything in the By-Laws to the contrary, no business shall be conducted at any
annual meeting except in accordance with the procedures set forth in this
Section 12. The chairman of an annual meeting shall, if the facts warrant,
determine that business was not properly brought before the annual meeting in
accordance with the provisions of this
3/21/83
<PAGE>
(6)
Section 12 and, if he should so determine, he shall so declare to the annual
meeting and any such business not properly brought before the annual meeting
shall not be transacted and any proposal contemplated by such business shall be
void.
ARTICLE II
BOARD OF DIRECTORS
Section 1 - Power of Board and Qualification of Directors.
- ----------------------------------------------------------
The business of the Corporation shall be managed under the direction of
its Board of Directors, each of whom shall be at least twenty-one years of age.
Section 2 - Number of Directors.*
- ---------------------------------
At the annual meeting of shareholders, the shareholders shall elect twelve
directors.
Section 3 - Election, Term and Qualifications of Directors.
- -----------------------------------------------------------
At each annual meeting of shareholders, Directors shall be elected to hold
office until the next annual meeting and until their successors have been
elected and qualified. No person shall be eligible for election or reelection
to the Board of Directors after reaching seventy years of age, or in the case of
a retired Chairman of the Board of Directors or a retired President of the
Corporation, after reaching sixty-seven years of age. The term of any Director
who is also an Officer of the Corporation or any subsidiary of the Corporation,
other than the Chairman of the Board or the President of the Corporation, shall
end on the date of termination from active employment and such officer shall
thereafter be ineligible for reelection to the Board of Directors.
Section 4 - Quorum of the Board: Action by the Board.
- -----------------------------------------------------
One-third of the entire Board of Directors shall constitute a quorum for
the transaction of business, and the vote of a majority
3/21/83
*Revised 7/16/84, 2/17/86, 11/20/89, 2/19/90, 11/19/90, 4/24/91, 4/27/94,
1/1/95, 4/26/95, 8/16/95, 1/22/96, 4/30/96
<PAGE>
(7)
of the Directors present at the time of such vote, if a quorum is then present,
shall be the act of the Board.
Section 5 - Action Without a Meeting.
- -------------------------------------
Any action required or permitted to be taken by the Board or any committee
thereof may be taken without a meeting if all members of the Board or of the
committee consent in writing to the adoption of the resolution authorizing the
action. The resolution and the written consents thereto by the members of the
Board or committee shall be filed with the minutes of the proceedings of the
Board or committee.
Section 6 - Participation in Board Meetings by Conference Telephone.
- --------------------------------------------------------------------
Any one or more members of the Board of Directors or any committee thereof
may participate in a meeting of such Board or committee by means of a conference
telephone or similar communications equipment allowing all persons participating
in the meeting to hear each other at the same time. Participation by such means
shall constitute presence in person at a meeting.
Section 7 - Meetings of the Board.
- ----------------------------------
An annual meeting of the Board of Directors shall be held in each year
directly after adjournment of the annual shareholders' meeting. Regular
meetings of the Board shall be held at such times as may from time to time be
fixed by resolution of the Board. Special meetings of the Board may be held at
any time upon the call of the Chairman of the Board of Directors, if such there
be, the President or any two Directors.
Meetings of the Board of Directors shall be held at such place, within or
without the State of New York, as from time to time may be fixed by resolution
of the Board for annual and regular meetings and in the notice of meeting for
special meetings. If no place is so fixed, meetings of the Board shall be held
at the office of the Corporation in Rochester, New York.
No notice need be given of annual or regular meetings of the Board of
Directors. Notice of each special meeting of the Board shall be given by oral,
telegraphic or written notice, duly given or sent or mailed to each Director not
less than one (1) day before such meeting.
3/21/83
<PAGE>
(8)
Section 8 - Resignation.
- ------------------------
Any Director may resign at any time by giving written notice to the
Chairman of the Board of Directors, if such there be, to the President or to the
Secretary. Such resignation shall take effect at the time specified in such
written notice, or if no time be specified, then on delivery. Unless otherwise
specified in the written notice, the acceptance of such resignation by the Board
of Directors shall not be needed to make it effective.
Section 9 - Newly Created Directorships and Vacancies.
- ------------------------------------------------------
Newly created directorships resulting from an increase in the number of
directors and vacancies occurring in the Board of Directors may be filled by
vote of the Board. If the number of the directors then in office is less than a
quorum, such newly created directorships and vacancies may be filled by vote of
a majority of the directors then in office. A director elected to fill a
vacancy shall be elected to hold office for the unexpired term of such
director's predecessor.
Section 10 - Executive and Other Committees of Directors.*
- ----------------------------------------------------------
The Board of Directors, by resolution, adopted by a majority of the entire
Board, shall designate from among its members an Executive Committee consisting
of three or more Directors, a majority of whom are outside directors.
The Executive Committee shall have all the authority of the Board, except
that it shall not have authority as to the following matters:
(1)The submission to shareholders of any action that needs shareholders'
approval;
(2)The filling of vacancies in the Board or in any committee;
(3)The amendment or repeal of the By-Laws, or the adoption of new By-Laws;
(4)The amendment or repeal of any resolution of the Board which, by its
terms, shall not be so amendable or repealable;
(5)The fixing of compensation of the directors for serving on the Board or
on any Committee;
3/21/83
*Revised 11/19/84, 4/22/87, 4/29/92, 4/21/93, 8/16/95
<PAGE>
(9)
(6)The fixing or amendment of the compensation, benefits and perquisites
of the chief executive officer.
The Board of Directors, by resolution by a majority of the entire Board,
may designate from among its members an Audit Committee consisting of three or
more outside directors. The Audit Committee shall, among other things, review
the scope of audit activities, review with management significant issues
concerning litigation, contingencies or other material matters which may result
in either potential liability of the Company or significant exposure to the
Company, review significant matters of corporate ethics, review security methods
and procedures, review the financial reports and notes, and make reports and
recommendations with respect to audit activities, findings, and reports of the
independent public accountants and the internal audit staff of the Company.
The Board of Directors, by resolution adopted by a majority of the entire
Board, may designate from among its members a Committee on Directors consisting
of three or more outside directors. The Committee on Directors shall, among
other things, review performance of incumbent directors, act as a nominating
committee, and consider and report to the entire Board of Directors on all
matters relating to the selection, qualification, compensation and duties of the
members of the Board of Directors and any committees of the Board of Directors.
The Board of Directors, by resolution adopted by a majority of the entire
Board, may designate from among its members a Committee on Management consisting
of three or more outside directors. The Committee on Management shall, among
other things, fix or amend the compensation, benefits and perquisites of all
executive officers of the Company and recommend such for the chief executive
officer, select and administer executive compensation plans and employee benefit
plans which have Company stock as an investment option, review succession
planning for the Company and review with management significant human resources
issues. The compensation, benefits and perquisites of the chief executive
officer shall be set by the outside directors of the full Board upon the
recommendation of the Committee on Management.
The Board of Directors, by resolution adopted by a majority of the entire
Board, may designate from among its members other committees each consisting of
three or more directors.
Unless a greater proportion is required by the resolution designating a
committee of the Board of Directors, a quorum for the
3/21/83
<PAGE>
(10)
transaction of business of a committee shall consist of (a) a majority of the
entire authorized number of members of the Executive Committee or (b) one-third
of the entire authorized number of members of any other committee of the Board
of Directors, but in no event fewer than two persons. The vote of a majority of
the members of a committee present at the time of the vote concerning the
transaction of business of that committee or of any specified item of business
of that committee if a quorum is present at such time, shall be the act of such
committee.
Any committee may fix the time and place of holding its regular meetings
and, if so fixed, no notice of such regular meeting shall be necessary. Special
meetings of any committee may be called at any time by the Chairman of the Board
of Directors, if such there be, by the chief executive officer, by the
President, by the Chairperson of that committee, or by any two members of that
committee. Notice of each special meeting of any committee shall be given by
oral, telegraphic or written notice, including notice via facsimile machine,
duly given or sent or mailed to each member of that committee not less than one
day before such meeting.
Section 11 - Compensation of Directors.
- ---------------------------------------
The Board of Directors shall have authority to fix the compensation of
directors for services in any capacity.
Section 12 - Indemnification.*
- ------------------------------
(a) Generally.
----------
To the full extent authorized or permitted by law, the Corporation shall
indemnify any person ("indemnified Person") made, or threatened to be made, a
party to any action or proceeding, whether civil, at law, in equity, criminal,
administrative, investigative or otherwise, including any action
by or in the right of the Corporation, by reason of the fact that he, his
testator or intestate, ("Responsible Person"), whether before or after adoption
of this Section 12, (1) is or was a director or officer of the Corporation, or
(2), if a director or officer of the Corporation, is serving or served, in any
capacity, at the request of the Corporation, any other corporation, or any
partnership, joint venture, trust, employee benefit plan or other enterprise, or
(3), if not a director or officer of the Corporation, is serving or served, at
the request of the
3/21/83
*Revised 2/16/87
<PAGE>
(11)
Corporation, as a director or officer of any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
against all judgments, fines, penalties, amounts paid in settlement (provided
the Corporation shall have given its prior consent to such settlement, which
consent shall not be unreasonably withheld by it) and reasonable expenses,
including attorneys' fees, incurred by such Indemnified Person with respect to
any such threatened or actual action or proceeding, and any appeal therein,
provided only that (x) acts of the Responsible Person which were material to the
cause of action so adjudicated or otherwise disposed of were not (i) committed
in bad faith or (ii) were not the result of active and deliberate dishonesty,
and (y) the Responsible Person did not personally gain in fact a financial
profit or other advantage to which he was not legally entitled.
(b) Advancement of Expenses.
------------------------
All expenses reasonably incurred by an Indemnified Person in connection
with a threatened or actual action or proceeding with respect to which such
person is or may be entitled to indemnification under this Section 12 shall be
advanced or promptly reimbursed by the Corporation to him in advance of the
final disposition of such action or proceeding, upon receipt of an undertaking
by him or on his behalf to repay the amount of such advances, if any, as to
which he is ultimately found not to be entitled to indemnification or, where
indemnification is granted, to the extent such advances exceed the
indemnification to which he is entitled. Such person shall cooperate in good
faith with any request by the Corporation that common counsel be used by the
parties to an action or proceeding who are similarly situated unless to do so
would be inappropriate due to an actual or potential conflict of interest.
(c) Procedure for Indemnification.
------------------------------
(1) Not later than thirty (30) days following final disposition of an
action or proceeding with respect to which the Corporation has received written
request by an Indemnified Person for indemnification pursuant to this Section
12, if such indemnification has not been ordered by a court, the Board of
Directors shall meet and find whether the Responsible Person met the standard of
conduct set forth in paragraph (a) of this Section 12, and, if it finds that he
did, or to the extent it so finds, shall authorize such indemnification.
3/21/83
<PAGE>
(12)
(2) Such standard shall be found to have been met unless (a) a judgment or
other final adjudication adverse to the Indemnified Person establishes that
subparagraphs (x) or (y) of paragraph (a) of this Section 12 were violated, or
(b) if the action or proceeding was disposed of other than by judgment or other
final adjudication, the Board finds in good faith that, if it had been disposed
of by judgment or other final adjudication, such judgment or other final
adjudication would have been adverse to the Indemnified Person and would have
established a violation of subparagraphs (x) or (y) of paragraph (a) of this
Section 12.
(3) If indemnification is denied, in whole or part, because of an adverse
finding by the Board in the absence of a judgment or other final adjudication,
or because the Board believes the expenses for which indemnification is
requested to be unreasonable, such action by the Board shall in no way affect
the right of the Indemnified Person to make application therefor in any court
having jurisdiction thereof, and in such action or proceeding the issue shall be
whether the Responsible Person met the standard of conduct
set forth in paragraph (a) of this Section 12, or whether the expenses were
reasonable, as the case may be (not whether the finding of the Board with
respect thereto was correct) and the determination of such issue shall not be
affected by the Board's finding. If the judgment or other final adjudication in
such action or proceeding establishes that the Responsible Person met the
standard set forth in paragraph (a) of this Section 12, or that the disallowed
expenses were reasonable, or to the extent that it does, the Board shall then
find such standard to have been met or the expenses to be reasonable, and shall
grant such indemnification, and shall also grant to the Indemnified Person
indemnification of the expenses incurred by him in connection with the action or
proceeding resulting in the judgment or other final adjudication that such
standard of conduct was met, or if pursuant to such court determination such
person is entitled to less than the full amount of indemnification denied by the
Corporation, the portion of such expenses proportionate to the amount of such
indemnification so awarded.
(4) A finding by the Board pursuant to this paragraph (c) that the
standard of conduct set forth in paragraph (a) of this Section 12 has been met
shall mean a finding of the Board or shareholders as provided by law.
(d) Contractual Article.
--------------------
This Section 12 shall be deemed to constitute a contract between the
Corporation and each person who is a Responsible Person
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<PAGE>
(13)
at any time while this Section 12 is in effect. No repeal or amendment of this
Section 12, insofar as it reduces the extent of the indemnification of any
person who could be a Responsible Person shall without his written consent be
effective as to such person with respect to any event, act or omission occurring
or allegedly occurring prior to (1) the date of such repeal or amendment if on
that date he is not serving in any capacity for which he could be a Responsible
Person, or (2) the thirtieth (30th) day following delivery to him of written
notice of such repeal or amendment as to any capacity in which he is serving on
the date of such repeal or amendment, other than as a director or officer of the
Corporation, for which he could be a Responsible Person, or (3) the later of the
thirtieth (30th) day following delivery to him of such notice or the end of the
term of office (for whatever reason) he is serving as director or officer of the
Corporation when such repeal or amendment is adopted, with respect to being a
Responsible Person in that capacity. No amendment of the Business Corporation
Law shall, insofar as it reduces the permissible extent of the right of
indemnification of a Responsible Person under this Section 12, be effective as
to such person with respect to any event, act or omission occurring or allegedly
occurring prior to the effective date of such amendment irrespective of the date
of any claim or legal action in respect thereto. This Section 12 shall be
binding on any successor to the Corporation, including any corporation or other
entity which acquires all or substantially all of the Corporation's assets.
(e) Non-exclusivity.
----------------
The indemnification provided by this Section 12 shall not be deemed
exclusive of any other rights to which any person covered hereby may be entitled
other than pursuant to this Section 12. The Corporation is authorized to enter
into agreements with any such person or persons providing them rights to
indemnification or advancement of expenses in addition to the provisions
therefor in this Section 12 to the full extent permitted by law.
Section 13 - Notification of Nominations.*
---------------------------
Subject to the rights of the holders of any class or series of stock
having a preference over the Common Stock as to dividends or upon liquidation,
nominations for the election of Directors may be made by the Board of Directors
or by any shareholder who is a
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*Revised 9/19/94
<PAGE>
(14)
shareholder of record at the time of the giving of the notice of nomination
provided for in this Section 13 and who is entitled to vote for the election of
Directors. Any shareholder of record who is or will be entitled to vote for the
election of Directors at a meeting may nominate persons for election as
Directors only if timely written notice of such shareholder's intent to make
such nomination is given to the Secretary. To be timely, a shareholder's notice
must be addressed to the Secretary and delivered to or mailed and received at
the principal executive offices of the Corporation (i) with respect to an
election to be held at an annual meeting of shareholders, not less than 60 days
nor more than 90 days prior to the anniversary date of the immediately preceding
annual meeting; provided, however, that in the event that the date of the annual
-------- -------
meeting is more than 30 days earlier or more than 60 days later than such
anniversary date, notice by the shareholder to be timely must be so delivered or
received not earlier than the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day prior to such
annual meeting or the 10th day following the day on which public announcement of
the date of such meeting is first made and (ii) with respect to an election to
be held at a special meeting of shareholders for the election of Directors, not
earlier than the 90th day prior to such special meeting and not later than the
close of business on the later of the 60th day prior to such special meeting or
the 10th day following the day on which public announcement is first made of the
date of the special meeting and of the nominees to be elected at such meeting.
Each such notice shall set forth: (a) the name and address, as they appear on
the Corporation's books, of the shareholder who intends to make the nomination,
and the name and address of the person or persons to be nominated; (b) the class
and number of shares of the Corporation which are beneficially owned by the
shareholder: (c) a representation that the shareholder is or will be entitled to
vote at the meeting and intends to appear in person (or send a qualified
representative) or by proxy at the meeting to nominate the person or persons
specified in the notice; (d) a description of all arrangements or understandings
between the shareholder and such nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the shareholder; (e) such other information regarding each nominee
proposed by such shareholder as would have been required to be included in a
proxy statement filed pursuant to the proxy rules of the Securities and Exchange
Commission had each nominee been nominated, or intended to be nominated, by the
Board of Directors; and (f) the consent of each nominee to serve as a Director
of the
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<PAGE>
(15)
Corporation if so elected. The chairman of the meeting may refuse to acknowledge
the nomination of any person not made after compliance with the foregoing
procedure. Only such persons who are nominated in accordance with the procedures
set forth in this Section 13 shall be eligible to serve as Directors of the
Corporation and any purported nomination or purported election not made in
accordance with the procedures set forth in this Section 13 shall be void.
ARTICLE III
OFFICERS
Section 1 - Officers.
- ---------------------
The Board of Directors, as soon as may be practicable after the annual
election of directors, may elect a Chairman of the Board of Directors and shall
elect a President, one or more Vice Presidents (one or more of whom may be
designated Executive Vice President), a Secretary and a Treasurer, and such
other officers as it may determine. Any two or more offices may be held by the
same person, except the office of President and Secretary.
Section 2 - Term of Office and Removal.
- ---------------------------------------
Each officer shall hold office for the term for which each officer is
elected or appointed, and until a successor has been elected or appointed and
qualified.
Section 3 - Powers and Duties.
- ------------------------------
The officers of the Corporation shall each have such powers and authority
and perform such duties in the management of the Corporation as set forth in
these By-Laws and as from time to time prescribed by the Board of Directors. To
the extent not set forth in these By-Laws or so prescribed by the Board of
Directors, they shall each have such powers and authority and perform such
duties in the management of the Corporation, subject to the control of the
Board, as generally pertain to their respective offices.
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<PAGE>
(16)
In addition to the powers and authority above, each officer has the powers
and duties set out below.
(a) Chairman of the Board of Directors
----------------------------------
The Chairman of the Board of Directors, if such there be, shall preside at
all meetings of the Board. The Chairman of the Board of Directors may be
the chief executive officer of the Corporation, and if so designated, may
preside at all meetings of shareholders.
(b) President
---------
The President shall be the chief operating officer and shall have
responsibility for the general management of the business of the
Corporation, subject only to the supervision of the Board of Directors,
the Executive Committee and the Chairman of the Board of Directors, as
chief executive officer, if such there be. If there is no Chairman of the
Board of Directors or if the Chairman of the Board of Directors is not the
chief executive officer, then the President shall be the chief executive
officer of the Corporation. The President may preside at all meetings of
shareholders, when present, and at meetings of the Board of Directors in
the absence of the Chairman of the Board, if such there be.
(c) Executive Vice President
------------------------
The Executive Vice President or the Executive Vice Presidents, if such
there be, shall assist the President in the management of the Corporation
and, as may be designated by the Board of Directors, in the event of the
death, resignation, removal, disability or absence of the President, an
Executive Vice President shall possess the powers and perform the duties
of the President for the period of such disability or absence or until the
Board of Directors elects a President.
(d) Vice President
--------------
Each Vice President shall assist the President in the management of the
Corporation and, in the absence or incapacity of the President and
Executive Vice Presidents,
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<PAGE>
(17)
and in order as fixed by the Board, possess the powers and perform the duties of
the President for the period of such absence or incapacity, and shall possess
such other powers and perform such other duties as the Board of Directors may
prescribe.
(e) Secretary
---------
The Secretary shall issue notices of all meetings of shareholders and
directors where notices of such meetings are required by law or these By-
Laws, and shall keep the minutes of such meetings. The Secretary shall
sign such instruments and attest such documents as require signature or
attestation and affix the corporate seal thereto where appropriate and
shall possess such other powers and perform such other duties as usually
pertain to the office or as the Board of Directors may prescribe.
(f) Treasurer
---------
The Treasurer shall have general charge of, and be responsible for, the
fiscal affairs of the Corporation and shall sign all instruments and
documents as require such signature, and shall possess such other powers
and perform such other duties as usually pertain to the office or as the
Board of Directors may prescribe.
(g) Assistant Officers
------------------
Any Assistant Officer elected by the Board of Directors shall assist the
designated officer and shall possess that officer's powers and perform
that officer's duties as designated by that officer, and shall possess
such other powers and perform such other duties as the Board of Directors
may prescribe.
Section 4 - Records.
- --------------------
The Corporation shall keep (a) correct and complete books and records of
account; (b) minutes of the proceedings of the shareholders, Board of Directors
and any committees of the Board; and (c) a current list of the directors and
officers and their residence addresses.
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<PAGE>
(18)
The Corporation shall also keep at its office in the State of New York or
at the office of its transfer agent or registrar in the State of New York, if
any, a record containing the names and addresses of all shareholders, the number
and class of shares held by each and the dates when they respectively became the
owners of record thereof.
Section 5 - Checks and Similar Instruments.
- -------------------------------------------
All checks and drafts on the Corporation's bank accounts and all bills of
exchange and promissory notes and all acceptances, obligations and other
instruments, for the payment of money, shall be signed by facsimile or otherwise
on behalf of the Corporation by such officer or officers or agent or agents as
shall be thereunto authorized from time to time by the Board of Directors.
Section 6 - Voting Shares Held by the Corporation.
- --------------------------------------------------
Either the President or the Secretary may vote shares of stock held by the
Corporation in other corporations and may execute proxies for and on behalf of
the Corporation for such purpose.
ARTICLE IV
SHARE CERTIFICATES AND LOSS THEREOF - TRANSFER OF SHARES
Section 1 - Form of Share Certificate.
- --------------------------------------
The shares of the Corporation shall be represented by certificates, in
such forms as the Board of Directors may from time to time prescribe, signed by
the Chairman of the Board if such there be, or the President or a Vice
President, and the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, and may be sealed with the seal of the Corporation or a
facsimile thereof. The signatures of the officers upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent or registered
by a registrar other than the Corporation or its employee. In case any officer
who
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<PAGE>
(19)
has signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer before such certificate is issued, it may be
issued by the Corporation with the same effect as if such person were such
officer at the date of issue.
Section 2 - Lost, Stolen or Destroyed Share Certificates.
- ---------------------------------------------------------
No certificate or certificates for shares of the Corporation shall be
issued in place of any certificate alleged to have been lost, stolen or
destroyed, except upon production of such evidence of the loss, theft or
destruction, and upon such indemnification and payment of costs of the
Corporation and its agents to such extent and in such manner as the Board of
Directors may from time to time prescribe. The Board of Directors, in its
discretion, and as a condition precedent to the issuance of any new certificate,
Smay require the owner of any certificate alleged to have been lost, stolen or
destroyed to furnish the Corporation with a bond, in such sum and with such
surety or sureties as it may direct, as indemnity against any claim that may be
made against the Corporation in respect of such lost, stolen or destroyed
certificate.
Section 3 - Transfer of Shares.
- -------------------------------
Shares of the Corporation shall be transferable on the books of the
Corporation by the registered holder thereof in person or by the registered
holder's duly authorized attorney, by delivery for cancellation of a certificate
or certificates for the same number of shares, with proper endorsement
consisting of either a written assignment of the certificate or a power of
attorney to sell, assign or transfer the same or the shares represented thereby,
signed by the person appearing by the certificate to be the owner of the shares
represented thereby, either written thereon or attached thereto, with such proof
of the authenticity of the signature as the Corporation or its agents may
reasonably require. Such endorsement may be either in blank or to a specified
person, and shall have affixed thereto all stock transfer stamps required by
law.
*Except as otherwise provided by law, not more than twenty percent of the
aggregate number of shares of stock of the Corporation outstanding in any class
or series shall at any time be owned of record or beneficially or voted by or
for the account of aliens (as defined below). Shares of stock shall not be
transferable on the books of the Corporation to any alien if, as a
3/21/83
*Revised 9/19/94
<PAGE>
(20)
result of such transfer, the aggregate number of shares of stock in any class or
series owned by or for the account of aliens shall be twenty percent or more of
the number of shares of stock then outstanding in such class or series. The
Board of Directors may make such rules and regulations as it shall deem
necessary or appropriate so that accurate records may be kept of the shares of
stock of the Corporation owned of record or beneficially or voted by or for the
account of aliens or to otherwise enforce the provisions of this Section 3.
As used in this Section 3, the word "alien" shall mean the following and
their representatives: any individual not a citizen of the United States of
America; a partnership, unless a majority of the partners are non-aliens and a
majority interest in the partnership profits is held by nonaliens; a foreign
government; a corporation, joint-stock company or association organized under
the laws of a foreign country; any other corporation of which any officer or
more than one-fourth of the directors are aliens, or of which more than one-
fourth of any class or series of stock is owned of record or voted by or for the
account of aliens; and any other corporation, joint-stock company or association
controlled directly or indirectly by one or more of the above.
ARTICLE V
OTHER MATTERS
Section 1 - Corporate Seal.
- ---------------------------
The corporate seal shall have inscribed thereon the name of the
Corporation and such other appropriate legend as the Board of Directors may from
time to time determine. In lieu of the corporate seal, when so authorized by
the Board, a facsimile thereof may be affixed or impressed or reproduced in any
other manner.
Section 2 - Amendments.
- -----------------------
By-Laws of the Corporation may be amended, repealed or adopted by vote of
the holders of the shares at the time entitled to vote in the election of any
directors. By-Laws may also be
3/21/83
<PAGE>
(21)
amended, repealed, or adopted by the Board of Directors, but any By-Law adopted
by the Board may be amended or repealed by the shareholders entitled to vote
thereon as hereinabove provided.
If any By-Law regulating an impending election of directors is adopted,
amended or repealed by the Board of Directors, there shall be set forth in the
notice of the next meeting of shareholders for the election of directors the By-
Law so adopted, amended or repealed, together with a concise statement of the
changes made.
3/21/83
<PAGE>
EXHIBIT 10.5
Description of 1996 Executive Bonus Plan
Annual Incentive Plan (Bonus)
The Company's annual incentive plan is a bonus plan designed to provide
performance-based compensation awards to executives for achievement during the
past year. For executive officers, annual incentive awards are a function of
individual performance and consolidated corporate results. Business unit
performance is also a component of the annual incentive plan for those involved
in line operations below the executive officer level. All participants are
subject to a discretionary adjustment, either positive or negative, based on
individual performance. The specified qualitative and quantitative criteria
employed by the Committee in determining annual incentive awards vary
individually and from year to year. These criteria, or targets, are established
as a means of measuring executive performance. The corporate target for 1996
was an equally weighted earnings per share and cash flow target established by
this Committee of the Board of Directors as an incentive to improve the
financial performance of the firm and thus improve long-term stock performance.
Performance objectives and associated payouts were established at the beginning
of the year. The objectives are identified as threshold, standard and premier
targets with standard performance yielding payouts at the median level
competitively. Actual 1996 corporate performance was below the threshold level
and, accordingly, there was no bonus payout, either for Mr. Bittner or for the
other executives.
<PAGE>
EXHIBIT 10.7
FORM OF MANAGEMENT CONTRACTS AS AMENDED WITH EACH OF MESSRS.
BITTNER, MASSARO, CARR AND GREGORY
August 16, 1995
- --------------------
Frontier Corporation
180 South Clinton Avenue
Rochester, New York 14646-0700
Dear Mr. :
---------------
The Board of Directors (the "Board") of Frontier Corporation, on behalf of
Frontier and its subsidiaries and affiliates (together, the "Company") has
determined that it is in the best interests of the Company and its shareowners
to be able to avail itself of your continued dedication and service to the
Company in the immediate future and in case of Change of Control, as defined
later in this letter agreement ("Agreement"). It is therefore the intent of
this Agreement to encourage your complete dedication to the Company by providing
you with compensation and benefits arrangements while you fulfill your duties
now and during the pendency of a Change of Control, should such an event occur,
which provide you with a measure of security commensurate with your importance
to the Company.
Therefore, upon your signature on a counterpart of this Agreement, the following
terms and conditions shall become effective as of August 16, 1995 and shall
supersede any prior agreements between the Company and you related to the
subject matter hereof. However, this Agreement does not supersede any stock
option agreements, restricted stock grant agreements or agreements related to
the bridging of your prior service with other employers for pension service
credit purposes which may exist as of August 16, 1995 between the Company and
you, all of which shall remain in full force and effect.
1. Employment.
1
<PAGE>
1.1 Term. The Company shall employ you in a senior executive
management capacity as the Company, with your consent, may from time to time
designate. This Agreement shall become effective as of August 16, 1995 and
shall continue until December 31, 1998, unless earlier terminated or extended in
accordance with its terms. Beginning on January 1, 1998 and on each anniversary
of that date thereafter, the term of this Agreement (the "Term") shall
automatically be extended for one additional year unless either the Company or
you has given written notice to the other no later than September 30 of the
preceding year that the giver of the notice does not elect to extend the Term.
Even if the Company has given you such a notice, if a Change of Control has
occurred during the Term and you have met your obligations in the next paragraph
of this Section 1.1, the Term will be automatically extended and this Agreement
will remain in full force and effect until the last day of the 36th month
following the month in which the Change of Control occurs. You acknowledge that,
except as set forth in this Agreement, your employment is "at will".
If, during the Term, a person (as that term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) commences any action that, if consummated, would result in a Change of
Control of the Company, or if any person publicly announces an intention or
proposal to commence any such action, you agree that you will not leave the
Company's employ (other than as a result of death, Disability or Retirement) and
will render the services contemplated in this Agreement for the reasonable
duration of the Company's defense against such action and until such action has
been abandoned or terminated or a Change in Control has occurred.
Any termination of your employment during the Term for reasons other
than your death shall be evidenced by a written Notice of Termination, which
shall specify the provision of this Agreement relied upon for such termination
and describe with reasonable detail the facts and circumstances claimed by the
sender of such Notice of Termination to provide the basis for termination. Any
such Notice of Termination shall also specify the effective date of termination
(the "Termination Date"). If you die during the Term the Termination Date shall
be the date of your death.
2
<PAGE>
1.2 Duties. You shall perform all duties incidental to your
position with the Company, or as may be assigned to you by the Chief Executive
Officer of the Company or the Board. You agree to use your best efforts in the
business of the Company and to devote your full time attention and energy to the
business of the Company. You agree not to work, either on a part-time or
independent contracting or consulting basis, with or without compensation, for
any other business or enterprise during the Term without the Company's prior
consent. Such consent shall not be unreasonably withheld in the case of service
on the boards of directors of other corporations and community organizations.
1.3 Base Compensation. The Company shall pay you as base
compensation an annual salary of $___,___, in installments in accordance with
the Company's policies from time to time in effect, until January 1, 1996.
Thereafter, your annual salary may be adjusted by the Company consistent with
the Company's results and your performance during the prior year. However,
unless the annual salaries of all senior executives of the Company are reduced
across-the-board, your annual salary in any year shall not be less than your
annual salary during the prior year.
1.4 Incentive Compensation. The Company shall establish and review
with you from time to time the performance goals ("Performance Goals") for the
Company and you individually, and a methodology for calculating the amount of
incentive compensation to be paid upon achievement of such Performance Goals.
Incentive compensation shall be payable to you at such time or times as are
established under the Company's policies (including the Company's Executive
Compensation Program) in effect from time to time.
1.5 Benefits; Perquisites. You shall be entitled to receive the
retirement and welfare benefits and perquisites provided by the Company under
its Executive Compensation program in effect from time to time for executives at
the Executive Vice President level.
1.6 Expenses. You shall be reimbursed for any reasonable expenses
you incur in connection with your employment during the Term, upon presentation
to the Company of an itemized account and receipts of such expenses as required
by the Company's policies from time to time in effect.
3
<PAGE>
2. Developments and Intellectual Property. You acknowledge that all
developments, including but not limited to trade secrets (including strategies,
business plans and customer lists), discoveries, improvements, ideas and
writings which either directly or indirectly relate to or may be useful in the
business of the Company (the "Developments") which you, either alone or in
conjunction with any other person or persons, shall conceive, make, develop,
acquire or acquire knowledge of during the Term are the sole and exclusive
property of the Company. You will cooperate with the Company's reasonable
requests to obtain or maintain rights or protections under United States or
foreign law with respect to all Developments. The Company will reimburse you
for all reasonable expenses incurred by you in order to comply with this
provision of this Agreement, regardless of when such expenses may be incurred.
3. Confidential Information. You acknowledge that by reason of your
employment by the Company, especially as a senior executive thereof, you will in
the future have (and you have had prior to August 16, 1995), access to
information of the Company that the Company deems to be confidential and/or
proprietary, including but not limited to, information about the Company's
strategies, plans, products and services, methods of operation, employees,
sales, profits, expenses, customer lists and the relationships between the
Company and its customers, suppliers and others who have business dealings with
the Company. You covenant and agree that during the Term and thereafter, you
will not disclose any such information to any person without the prior written
authorization of the Chief Executive Officer of the Company or the Board.
4. Non-Competition.
4.1 Covenant. In consideration of the benefits provided to you
under this Agreement, which you acknowledge are independent consideration, you
covenant and agree that during the Restricted Period (as defined below), you
will not, directly or indirectly, without the Company's prior consent: (i) own,
manage, operate, finance, join, control or participate in the ownership or
control of, or be associated as an officer, director, executive, partner or
principal, agent, representative,
4
<PAGE>
consultant or otherwise with, or use or permit your name to be used in
connection with, any enterprise that directly or indirectly competes (as defined
below) with the business of the Company in a Restricted Area (as defined below);
or (ii) offer or provide employment to, or solicit, interfere with or attempt to
entice away from the Company any individual who either is employed by the
Company at the time of such offer, employment, solicitation, interference or
enticement or has been so employed by the Company within 12 months prior to such
offer, employment, solicitation, interference or enticement. This Section shall
not be construed to prohibit the ownership by you of not more than 1% of any
class of securities of any corporation which competes with the Company and which
has a class of securities registered pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act").
4.2 Definitions.
4.2.1 "Competes" means the production, marketing or selling of any
product or service of any person or entity other than the Company which
resembles or competes with a product or service produced, marketed or sold by
the Company (or to your knowledge was under development by the Company) during
the period of your employment by the Company (whether under this Agreement or
otherwise).
4.2.2 "Restricted Area" means:
(a) The Standard Metropolitan Statistical Area (or the equivalent)
in which any office, place of employment, business address or POP maintained by
the Company is located; or
(b) Any state of the United States, any province of Canada or any
foreign country from which the Company or any of its material subsidiaries or
affiliates derives 5% or more of its annual net income.
4.2.3 "Restricted Period" means:
(a) The period of your employment by the Company (whether under this
Agreement or otherwise), if your employment
5
<PAGE>
is terminated because of your death or Disability;
(b) The period of your employment by the Company (whether under this
Agreement or otherwise) and 24 months thereafter, if your employment is
terminated because of your Retirement, or by the Company for Cause or without
Cause (and not by the Company following Change of Control);
(c) The period of your employment by the Company (whether under this
Agreement or otherwise) and, if this Agreement is still in effect at the
Termination Date, the number of months remaining in the Term at the Termination
Date or 12 months, whichever is longer (but in no event more than 24 months), if
you terminate your employment voluntarily (and not for Good Reason); or
(d) The period of your employment by the Company under this
Agreement, if your employment is terminated by you for Good Reason or by the
Company following Change of Control.
4.3 Savings Clause. If any of the provisions of this Section 4 are
ever determined by a court to exceed the time, geographic scope or other
limitations permitted by applicable law in any jurisdiction, then such excessive
provisions shall be deemed reduced, in such jurisdiction only, to the maximum
time, geographic scope or other limitation permitted in such jurisdiction.
5. Equitable Relief. You acknowledge that the restrictions
contained in Sections 2, 3 and 4 of this Agreement are, in view of the nature of
the business of the Company, reasonable and necessary to protect the legitimate
interests of the Company, and that any violation of the provisions of those
Sections will result in irreparable injury to the Company. You also acknowledge
that the Company shall be entitled to preliminary and permanent injunctive
relief, without the necessity of proving actual damages, and to an equitable
accounting of all earnings, profits and other benefits arising from such
violation. These rights shall be cumulative and in addition to any other rights
or remedies to which the Company may be entitled. You agree to submit to the
jurisdiction of any New York State court located in Monroe County or the United
States
6
<PAGE>
District Court for the Western District of New York or of the state court or the
federal court located in or presiding over the county in which the Company has
its corporate headquarters at the applicable time in any action, suit or
proceeding brought by the Company to enforce its rights under Sections 2, 3
and/or 4 of this Agreement.
6. Company's Obligations upon Termination. The sole obligations of
the Company upon the termination of your employment prior to the failure of
either you or the Company to extend the Term in accordance with Section 1.1 of
this Agreement are as set forth in this Section 6. Any and all amounts to be
paid to you in connection with your termination shall be paid in a lump sum
promptly after the Termination Date, but not more than 30 days thereafter.
6.1 Termination upon Disability or Death. If your employment with
the Company ends by reason of your death or Disability (as defined later in this
Agreement), the Company shall pay you all amounts earned or accrued through the
Termination Date but not paid as of the Termination Date, including:
6.1.1 Base compensation;
6.1.2 Reimbursement for reasonable and necessary expenses incurred
by you on behalf of the Company during the Term;
6.1.3 Pay for earned but unused vacation and floating holidays;
6.1.4 All compensation you previously deferred (if any) to the
extent not yet paid; and
6.1.5 An amount equal to your "Pro Rata Bonus". Your Pro Rata Bonus
shall be determined by multiplying the "Bonus Amount" (as defined below) by a
fraction, the numerator of which is the number of days in the fiscal year
through the Termination Date and the denominator of which is 365. The term
"Bonus Amount" means: (i) a bonus calculated using the performance
7
<PAGE>
metrics of the Company's results and your individual performance for the fiscal
year ended prior to the year in which the Termination Date occurs, applied to
the payouts set forth under the incentive compensation program in effect for the
year in which the Termination Date occurs; or (ii) if the Termination Date
occurs after the end of a fiscal year but before any bonus related thereto was
paid, the bonus you would have received for that fiscal year.
The amounts described in Sections 6.1.1 through 6.1.4, inclusive, are
called elsewhere in this Agreement, collectively, the "Accrued Compensation".
Except as otherwise provided in this Section 6.1, your entitlement to any other
compensation or benefits shall be determined in accordance with the Company's
employee benefit plans and other applicable programs and practices then in
effect.
6.2 Termination Without Cause. If the Company terminates your
employment without Cause (as defined later in this Agreement), the Company shall
pay you:
6.2.1 All Accrued Compensation;
6.2.2 A Pro Rata Bonus (as defined in Section 6.1.5 above);
and
6.2.3 Severance ("Severance") equal to: (a) twice the sum of
(i) the annual base compensation you would have received for the entire fiscal
year in which the Termination Date occurs plus (ii) the Bonus Amount plus
(iii) $ (being the agreed cash equivalent of the annual value of the
---------
perquisites provided to you under the Company's Executive Compensation Program)
plus (iv) the Company contributions which would have been made on your behalf to
the 401(k) retirement savings plan maintained by the Company (b) reduced by the
present value (determined as provided in Section 280G(d)(4) of the Internal
Revenue Code of 1986 as amended (the "Code")) of any other amount of severance
relating to salary or bonus continuation to be received by you upon termination
of your employment under any severance plan, policy or arrangement of the
Company.
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<PAGE>
In addition, the Company shall continue to provide to you and your
family at the Company's expense, for 24 months following the Termination Date,
the life insurance, disability, medical, dental, vision and hospitalization
benefits provided to you and your family immediately prior to the Termination
Date.
Lastly, the Company shall credit you with an additional 24 months of
service and age for the purposes of determining the level of your retirement
benefits under any qualified or nonqualified defined benefit pension,
supplemental or excess retirement plan maintained by the Company in which you
are a covered employee (the "Retirement Plans").
Except as otherwise provided in this Section 6.2, your entitlement to
any other compensation or benefits shall be determined in accordance with the
Company's employee benefit plans and other applicable programs and practices
then in effect.
6.3 Termination for Cause or Voluntary Termination. If your
employment is terminated for Cause (as defined later in this Agreement), or if
you voluntarily terminate your employment other than for Good Reason, the
Company shall pay you all Accrued Compensation. Except as otherwise provided in
this Section 6.3, your entitlement to any other compensation or benefits shall
be determined in accordance with the Company's employee benefit plans and other
applicable programs and practices then in effect.
6.4 Termination for Good Reason or by Company Following Change of
Control. If you terminate your employment for Good Reason or the Company
terminates your employment following a Change of Control, the Company shall pay
you:
6.4.1 All Accrued Compensation;
6.4.2 A Pro Rata Bonus;
6.4.3 Severance equal to: (a) three times the sum of (i)
the annual base compensation you would have received for the entire fiscal year
in which the Termination Date occurs plus (ii) the Bonus Amount plus (iii)
$ (being the agreed cash equivalent of the annual value of the
-------
perquisites provided to you under the Company's Executive Compensation Program)
plus (iv) the
9
<PAGE>
Company contributions which would have been made on your behalf to the 401(k)
retirement savings plan maintained by the Company (b) reduced by the present
value (determined as provided in Section 280G(d)(4) of the Code or any other
amount of severance relating to salary or bonus continuation to be received by
you upon termination of your employment under any severance plan, policy or
arrangement of the Company;
6.4.4 An amount equal to your "Supplemental Retirement Amount".
Your Supplemental Retirement Amount shall be equal to the difference between (a)
the benefit payable under the Retirement Plans which you would have received had
your employment continued for 36 months following the Termination Date and (b)
your actual benefit paid or payable, if any, under the Retirement Plans. Your
Supplemental Retirement Amount will be determined in accordance with the
procedures set forth in an Addendum to this Agreement, which is made a part
hereof (the "Addendum"); and
6.4.5 An amount equal to your "SERP Payment". Your SERP Payment
shall satisfy the Company's obligations to you under the supplemental or excess
retirement plan or plans maintained by the Company for its executive employees
(the "SERP") and shall be the actuarial equivalent (using the Actuarial
Assumptions, as defined in the Addendum) of your benefit accrued under the SERP
through the Termination Date. If all or a part of the SERP Payment is funded
through a trust of which you are a beneficiary, the SERP Payment shall be paid
from such trust to the extent of such funding.
In addition, the Company shall continue to provide to you and your family at the
Company's expense, for 36 months following the Termination Date, the life
insurance, disability, medical, dental, vision and hospitalization benefits
provided to you and your family immediately prior to the Termination Date.
The Company shall reimburse you for all reasonable legal fees and expenses which
you may incur following a Change of Control as a result of the Company's
attempts to contest the validity or enforceability of this Agreement or your
attempts to obtain or enforce any right or benefit provided to you under this
Agreement, unless a court determines your actions to be frivolous.
10
<PAGE>
Except as otherwise provided in this Section 6.4, your entitlement to any other
compensation or benefits shall be determined in accordance with the Company's
employee benefit plans and other applicable programs and practices then in
effect.
7. Gross-Up Payment. Notwithstanding anything else in this
Agreement, if it is found that any or all of the payments made to you, including
but not limited to payments made by the Company, or under any plan or
arrangement maintained by the Company, to you or for your benefit (other than
any additional payments required under this Section 7) (the "Payments") would be
subject to the excise tax imposed by Section 4999 of the Code or you incur any
interest or penalties with respect to such excise tax (such excise tax, together
with any such interest and penalties, collectively the "Excise Tax"), then you
are entitled to receive an additional payment (a "Gross-Up Payment") in an
amount such that, after you pay all taxes (including any interest or penalties
imposed with respect to such taxes), including, without limitation, any income
taxes (and any interest and penalties imposed with respect thereto) and Excise
Tax imposed upon the Gross-Up Payment, you will retain an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments. The procedures for
the calculation and contesting of any claim that such Excise Tax is due are set
forth in the Addendum.
8. No Obligation to Mitigate Damages. You are not required to
mitigate damages or the amount of any payment provided for under this Agreement
by seeking other employment or otherwise, and the amounts to be paid to you
under Section 6 of this Agreement shall not be reduced by any compensation you
may earn from other sources. However, if, during any period that you would
otherwise be entitled to receive any payments or benefits under this Agreement,
you breach your obligations under Section 2, 3 or 4 of this Agreement, the
Company may immediately terminate any and all payments and the provision of
benefits (to the extent permitted by law and the terms of the benefit plans
maintained by the Company from time to time) hereunder.
9. Successor to Company. The Company will require any successor or
assignee to all or substantially all of the business and/or assets of the
Company, whether by merger, sale of assets
11
<PAGE>
or otherwise, by agreement in form and substance reasonably satisfactory to you,
to assume and agree to perform the Company's obligations under this Agreement in
the same manner and to the same extent that the Company would be required to
perform them if such succession or assignment had not taken place. Such
agreement of assumption must be express, absolute and unconditional. If the
Company fails to obtain such an agreement within three business days prior to
the effective date of such succession or assignment, you shall be entitled to
terminate your employment under this Agreement for Good Reason.
10. Survival. Notwithstanding the expiration or termination of this
Agreement, except as otherwise specifically provided herein, your obligations
under Sections 2, 3 and 4 of this Agreement and the obligations of the Company
under this Agreement shall survive and remain in full force and effect. This
Agreement shall inure to the benefit of, and be enforceable by, your personal
and legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If you die while any amounts are still
payable to you, all such amounts, unless otherwise provided in this Agreement,
shall be paid in accordance with the terms of this Agreement to your devisee(s),
legatee(s) or other designee(s) or, if there is no such designee(s), to your
estate.
11. Definitions. Whenever used in this Agreement, the following
terms shall have the meanings below:
11.1 "Cause" means:
11.1.1 You have willfully and continually failed to substantially
perform your duties (other than due to an incapacity resulting from physical or
mental illness or due to any actual or anticipated failure after you have given
a Notice of Termination for Good Reason) after a written demand for substantial
performance is delivered to you by the Chief Executive Officer or the Board
which specifically identifies the manner in which it is believed that you have
not substantially performed your duties; or
12
<PAGE>
11.1.2 You have willfully engaged in conduct which is demonstrably
and materially injurious to the Company (monetarily or otherwise); or
11.1.3 You have willfully engaged in conduct which is illegal or in
violation of the Company's Code of Ethics; or
11.1.4 You have been convicted of a felony; or
11.1.5 You have violated the provisions of Section 2 and/or Section
3 and/or Section 4 of this Agreement
and, in any of the events described in Sections 11.1.1 through 11.1.5 above, the
Board adopts a resolution finding that in the good faith opinion of the Board
you were culpable for the conduct set forth in any of Sections 11.1.1 through
11.1.5 and specifying the particulars thereof in detail. For the purposes of
this Agreement, no act or failure to act on your part shall be considered
willful unless done, or omitted to be done, by you not in good faith and without
reasonable belief that your action or omission was in the best interests of the
Company. Any such resolution of the Board must receive the affirmative vote of
not less than three-quarters of the entire membership of the Board at a meeting
of the Board called and held for the purpose of considering the issue, and you
must receive reasonable notice of the meeting and have an opportunity, with your
counsel, to present your case to the Board.
11.2 "Change of Control" means:
11.2.1 The consummation of a consolidation or merger of the Company
in which the Company is not the continuing or surviving corporation or pursuant
to which the shares of the Company's common, voting equity are to be converted
into cash, securities or other property. For the purposes of this Agreement, a
consolidation or merger with a corporation which was a wholly-owned direct or
indirect subsidiary of the Company immediately before the consolidation or
merger is not a Change of Control; or
13
<PAGE>
11.2.2 The sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially all of
the Company's assets; or
11.2.3 The approval by the Company's shareowners of any plan or
proposal for the liquidation or dissolution of the Company; or
11.2.4 Any person, as that term is used in Section 13(d) and 14(d)
of the Exchange Act (other than the Company, any trustee or other fiduciary
holding securities of the Company under an employee benefit plan of the Company,
a direct or indirect wholly-owned subsidiary of the Company or any other company
owned, directly or indirectly, by the shareowners of the Company in
substantially the same proportions as their ownership of the Company's common,
voting equity), is or becomes the beneficial owner (within the meaning of Rule
13d-3 under the Exchange Act), directly or indirectly, of 30% or more of the
Company's then outstanding common, voting equity; or
11.2.5 During any period of two consecutive years, individuals who
at the beginning of such period constitute the Board, including for this purpose
any new director (other than a director designated by a person who has entered
into an agreement with the Company to effect a transaction described in this
Section 11.2.5) whose election or nomination for election by the Company's
shareowners was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period or whose
election or nomination for election was previously so approved (the "Incumbent
Board"), cease for any reason to constitute a majority of the Board.
11.3 "Disability" means:
11.3.1 Your absence from your duties with the Company on a full-time
basis for 180 consecutive business days as a result of incapacity due to mental
or physical illness; or
11.3.2 A physical or mental condition which prevents you from
satisfactorily performing your duties with the Company and such incapacity or
condition is determined to be total and
14
<PAGE>
permanent by a physician selected by the Company or its insurers and reasonably
acceptable to you and/or your legal representative.
11.4 "Good Reason" means:
11.4.1 Without your express written consent, after a Change of
Control, the assignment to you of duties with the Company or with a person, as
that term is used in Section 13(d) and 14(d) of the Exchange Act, in control of
the Company materially diminished from the duties assigned to you immediately
prior to a Change of Control; or
11.4.2 Without your express written consent, after a Change of
Control, any reduction by the Company or any person, as that term is used in
Section 13(d) and 14(d) of the Exchange Act, in control of the Company in your
annual base compensation or annual bonus at Standard (or equivalent) rating from
the amounts of such compensation and/or bonus in effect immediately before and
during the fiscal year in which the Change of Control occurred (except that this
Section 11.4.2 shall not apply to across-the-board salary or bonus reductions
similarly affecting all executives of the Company and all executives of any
person in control of the Company); or
11.4.3 Without your express written consent, after a Change of
Control, the failure by the Company or any person, as that term is used in
Section 13(d) and 14(d) of the Exchange Act, in control of the Company to
increase your annual base compensation or annual bonus at Standard (or
equivalent) rating at the times and in comparable amounts as they are increased
for similarly situated senior executive officers of the Company and of any
person, as that term is used in Section 13(d) and 14(d) of the Exchange Act, in
control of the Company; or
11.4.4 Without your express written consent, after a Change of
Control, the failure by the Company or by any person, as that term is used in
Section 13(d) and 14(d) of the Exchange Act, in control of the Company to
continue in effect any benefit or incentive plan or arrangement (except any
benefit plan or arrangement which expires by its own terms then in effect upon
the occurrence of a Change of Control) in which you are
15
<PAGE>
participating at the time of the Change of Control, unless a replacement plan or
arrangement with at least substantially similar terms is provided to you; or
11.4.5 Without your express written consent, after a Change of
Control, the taking of any action by the Company or by any person, as that term
is used in Section 13(d) and 14(d) of the Exchange Act, in control of the
Company which would adversely affect your participation in or materially reduce
your benefits under any benefit plan or arrangement or deprive you of any other
material benefit (including any miscellaneous benefit which is not represented
and protected by a written plan document or trust) enjoyed by you at the time of
a Change of Control; or
11.4.6 You terminate your employment (other than because of your
death, Disability or Retirement) by giving the Company a Notice of Termination
with a Termination Date not later than the first anniversary of the Change of
Control; or
11.4.7 Any failure by the Company to comply with any of its material
obligations under this Agreement, after you have given notice of such failure to
the Company and the Company has not cured such failure promptly after its
receipt of such notice.
11.5 "Retirement" means a voluntary or involuntary termination of
your employment after age 65 or any voluntary termination at age 65 or earlier
that entitles you to receive a normal or early retirement service pension under
the Retirement Plans (or any successor or substitute plan or plans the Company
puts into effect prior to a Change in Control).
12. Notice. All notices and other communications required or
permitted under this Agreement shall be in writing and shall be deemed given
when mailed by certified mail, return receipt requested, or by nationally
recognized overnight courier, receipt requested, when addressed to you at your
official business address when employed by the Company or at your home address
as reflected in the Company's records from time to time and when addressed to
the Company at its corporate headquarters, to the attention of the Board, with a
required copy to the Company's Corporate Counsel.
16
<PAGE>
13. Amendment and Assignment. This Agreement cannot be changed,
modified or terminated except in a writing. You may not assign your duties with
the Company to any other person.
14. Severability. If any provision of this Agreement or the
application of this Agreement to anyone or under any circumstances is determined
by a court to be invalid or unenforceable in any jurisdiction, such invalidity
or unenforceability shall not affect any other provisions or applications of
this Agreement which can be effective without the invalid or unenforceable
provision or application, and such invalidity or unenforceability shall not
invalidate or render unenforceable such provision in any other jurisdiction.
15. Remedies Cumulative; No Waiver. No remedy conferred on you or
on the Company by this Agreement is intended to be exclusive of any other
remedy, and each and every remedy shall be cumulative and shall be in addition
to any other remedy given under this Agreement or now or later existing at law
or in equity. No delay or omission by you or by the Company in exercising any
right, remedy or power under this Agreement or existing at law or inequity shall
be construed as a waiver of such right, remedy or power, and any such right,
remedy or power may be exercised by you or the Company from time to time and as
often as is expedient or necessary.
16. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to any applicable conflicts of laws.
17. Counterparts. This Agreement may be signed by you and on behalf
of the Company in one or more counterparts, each of which shall be one original
but all of which together will constitute one and the same instrument.
If this Agreement correctly sets forth our agreement on its subject matter,
please sign and return to me the enclosed copy of this Agreement. Please keep
the other copy for your records.
Sincerely,
FRONTIER CORPORATION
17
<PAGE>
By:
-----------------------
Agreed to on
----------------------
- ------------------------------
18
<PAGE>
ADDENDUM TO LETTER AGREEMENT DATED AUGUST 16, 1995
The following provisions shall apply to the determination of the
Supplemental Retirement Amount in accordance with Section 6.4.4 of the
Agreement.
1. The Supplemental Retirement Amount shall be determined using the
actuarial equivalent of the benefit payable under the Retirement Plans which you
would have received had your employment continued for 36 months following the
Termination Date and, using the Actuarial Assumptions (as defined below) of your
actual benefit paid or payable, if any, under the Retirement Plans. The
actuarial equivalent shall be determined by using the actuarial assumptions
applied by the Company during the 90 day period immediately prior to a Change of
Control in connection with the Retirement Plans (the "Actuarial Assumptions").
2. The calculation of your Supplemental Retirement Amount shall also
be based on the assumptions that your annual base and incentive compensation
would have remained the same over those 36 months, all accrued benefits under
the Retirement Plans are fully vested and the benefit accrual formulas are those
provided for in the Retirement Plans during the 90 day period immediately prior
to a Change of Control.
3. If all or a part of your Supplemental Retirement Amount is derived
under a supplemental or excess retirement plan maintained by the Company for its
executive employees (a "SERP"), then the amount of your Supplemental Retirement
Amount which is derived from the SERP shall be paid from any trust of which you
are a beneficiary to the extent of funding actuarially available in that trust
to pay your Supplemental Retirement Amount.
The following provisions shall apply to the calculation and procedures
relating to the Gross-Up Payment in accordance with Section 7 of the Agreement.
1. The Company's independent auditors in the fiscal year in which the
Change of Control occurs (the "Accounting Firm") shall determine whether and
when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the
assumptions to be used in making such determination. The Accounting Firm shall
19
<PAGE>
provide detailed supporting calculations, together with a written opinion with
respect to the accuracy of such calculations, to you and the Company within 15
business days of the receipt of a written request from either you or the
Company. If the Accounting Firm is serving (or has served within the three years
preceding the Change in Control) as accountant or auditor for the person in
control of the Company following the Change of Control or any affiliate thereof,
you may appoint another nationally recognized accounting firm to make the
determinations required in connection with the Gross-Up Payment and the
substitute accounting firm shall then be referred to as the Accounting Firm).
The Company shall pay you any Gross-Up Payment, determined in accordance with
this Addendum, within five days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that you will not be liable for
any Excise Tax, it shall furnish you with a written opinion that your failure to
report the Excise Tax on the applicable federal income tax return would not
result in the imposition of a negligence or similar penalty. Any determination
by the Accounting Firm shall be binding upon you and the Company.
2. If there is uncertainty about how Section 4999 is to be applied
when the Accounting Firm makes its initial determination, and as a result the
Gross-Up Payment made to you by the Company is determined (after following the
procedures set forth in this Addendum) to be less than it should have been made
(an "Underpayment"), and you are thereafter required to pay any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment and any such
Underpayment shall be promptly paid by the Company to you or for your benefit.
3. You shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the Company to pay
you the Gross-Up Payment. Your notice shall be given as soon as practicable but
no later than ten business days after you have been informed in writing of such
claim and shall apprise the Company of the nature of such claim and the date on
which such claim is requested to be paid. You shall not pay such claim prior to
the expiration of the 30 day period following the date on which you gave such
notice to the Company (or any shorter period, if the taxes claimed are due
sooner). If the Company notifies you in writing prior to the expiration of such
period that it desires to contest such claim, you shall:
20
<PAGE>
(a) give the Company any information reasonably requested by it relating to such
claim, (b) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company, (c) cooperate with the Company
in good faith in order effectively to contest such claim, and (d) permit the
Company to participate in any proceedings relating to such claim.
4. The Company shall control all proceedings taken in connection with
such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in connection with the claim and may, at its sole option, either
direct you to pay the tax claimed and sue for a refund or contest the claim in
any permissible manner, and you agree to prosecute the contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts as the Company shall determine.
5. Any extension by the Company of the statute of limitations relating
to payment of taxes for the taxable year for which such contested amount is
claimed to be due shall be limited solely to such contested amount. The
Company's control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable under this Agreement and you shall be
entitled to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
6. If the Company directs you to pay such claim and sue for a refund,
the Company shall advance the amount of such payment to you, on an interest-free
basis, and shall indemnify and hold you harmless, on an after-tax basis, from
any Excise Tax or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance.
7. If you receive a refund of any amount advanced to you by the
Company, you will promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If the Company advanced
21
<PAGE>
to you any amounts and a determination is made that you will not be entitled to
any refund with respect to such claim and the Company does not notify you in
writing of its intent to contest such denial of refund prior to the expiration
of 30 days after such determination, then such advance shall be forgiven and you
will not be required to be repay it. The amount of such advance shall offset the
amount of the Gross-Up Payment required to be paid.
8. The Company shall pay all fees and expenses of the Accounting Firm.
The Company shall bear and pay directly all costs and expenses (including
additional interest and penalties) incurred in connection with such contest and
shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax
or income tax (including interest and penalties with respect thereto) imposed as
a result of such representation and payment of costs and expenses.
22
<PAGE>
Exhibit 10.11
CONFIDENTIAL AND PROPRIETARY EXECUTION FORM
- ---------------------------- --------------
- --------------------------------------------------------------------------------
IRU AGREEMENT
DATED AS OF OCTOBER 18, 1996
BY AND BETWEEN
QWEST COMMUNICATIONS CORPORATION ("QWEST")
AND
FRONTIER COMMUNICATIONS INTERNATIONAL INC. ("FRONTIER")
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
RECITALS........................................................ 1
ARTICLE I. GRANT OF IRU IN QWEST SYSTEM........................ 1
ARTICLE II. CONSIDERATION FOR GRANT............................ 7
ARTICLE III. CONSTRUCTION OF THE QWEST SYSTEM.................. 11
ARTICLE IV. ACCEPTANCE AND TESTING OF FRONTIER FIBERS.......... 13
ARTICLE V. DOCUMENTATION....................................... 14
ARTICLE VI. TERM............................................... 14
ARTICLE VII. NETWORK ACCESS; REGENERATION FACILITIES........... 16
ARTICLE VIII. OPERATIONS....................................... 19
ARTICLE IX. MAINTENANCE AND REPAIR OF THE QWEST SYSTEM......... 20
ARTICLE X. PERMITS; UNDERLYING RIGHTS; RELOCATION.............. 20
ARTICLE XI. USE OF QWEST SYSTEM................................ 23
ARTICLE XII. INDEMNIFICATION................................... 26
ARTICLE XIII. LIMITATION OF LIABILITY.......................... 28
ARTICLE XIV. INSURANCE......................................... 28
ARTICLE XV. TAXES, FEES AND OTHER GOVERNMENTAL IMPOSITIONS..... 30
ARTICLE XVI. NOTICE............................................ 34
ARTICLE XVII. CONFIDENTIALITY.................................. 36
ARTICLE XVIII. DEFAULT......................................... 37
ARTICLE XIX. TERMINATION....................................... 42
ARTICLE XX. FORCE MAJEURE...................................... 42
<PAGE>
ARTICLE XXI. DISPUTE RESOLUTION................................ 43
ARTICLE XXII. WAIVER........................................... 45
ARTICLE XXIII. GOVERNING LAW................................... 45
ARTICLE XXIV. RULES OF CONSTRUCTION............................ 46
ARTICLE XXV. ASSIGNMENT AND DARK FIBER TRANSFERS............... 46
ARTICLE XXVI. REPRESENTATIONS, WARRANTIES AND ACKNOWLEDGMENTS.. 50
ARTICLE XXVII. ENTIRE AGREEMENT; AMENDMENT..................... 52
ARTICLE XXVIII. NO PERSONAL LIABILITY.......................... 52
ARTICLE XXIX. RELATIONSHIP OF THE PARTIES...................... 53
ARTICLE XXX. LATE PAYMENTS..................................... 53
ARTICLE XXXI. SEVERABILITY..................................... 53
ARTICLE XXXII. COUNTERPARTS.................................... 53
ARTICLE XXXIII. CERTAIN DEFINITIONS............................ 54
<PAGE>
EXHIBITS
Exhibit A: QWEST System Description
Exhibit A-1: QWEST System Description and Delivery Dates
Exhibit A-2: General Route Map
Exhibit A-3: Basic and Optional Detailed Route Maps
Exhibit A-4: Designated Endpoint and Intermediate Point Cities
Exhibit B: IRU Fee Payment Schedule
Exhibit C: Construction Specifications
Exhibit D: Fiber Cable Splicing, Testing, and Acceptance Procedures
Exhibit E: Fiber Specifications
Exhibit E-1: Fiber Deployment Diagram
Exhibit F: Specifications for Regeneration Facilities
Exhibit G: Regeneration Facility Sites
Exhibit G-1: Temporary Space within Certain QWEST Facilities
Exhibit H: QWEST System Maintenance Specifications and Procedures
Exhibit I: Form of Surety Bond
Exhibit J: Underlying Rights and Underlying Rights Requirements
Exhibit K: Form of Frontier Corporation Guaranty
Exhibit L: Form of Anschutz Guaranty
<PAGE>
IRU AGREEMENT
THIS IRU AGREEMENT (this "Agreement") is made and entered into as of
October 18, 1996, by and between QWEST COMMUNICATIONS CORPORATION, a Delaware
corporation ("QWEST"), and FRONTIER COMMUNICATIONS INTERNATIONAL INC. a Delaware
corporation ("FRONTIER").
RECITALS
--------
A. QWEST is planning to construct a continuous fiberoptic communication
system, contiguous from end to end, as described in Exhibit A hereto as the
"Basic Route," and between each of the city pairs identified in Exhibit A-1
hereto under the caption "Basic Route" (the fiberoptic communication system
between each such city pair being referred to as a "Basic Segment"), and may
elect to construct a continuation of such fiberoptic communication system along
the routes described in Exhibit A hereto as the "Option 1 Route," "Option 1A
Route" and the "Option 2 Route" (collectively, the "Optional Routes"), and
between each of the city pairs identified in Exhibit A-1 hereto under the
captions "Option 1 Route," "Option 1A Route" and "Option 2 Route" (the
fiberoptic communication system between each such city pair being referred to as
an "Optional Segment") (the Basic Segments, together with such of the Optional
Segments, if any, that QWEST elects to construct hereunder, being referred to
herein collectively as the "QWEST System").
B. FRONTIER desires to be granted the right to use (or, if and to the
extent provided in Section 1.5 hereof, to own) certain optical fibers in the
QWEST System.
C. QWEST desires to grant FRONTIER an exclusive, indefeasible right to use
(or, if and to the extent provided in Section 1.5 hereof, to convey title to)
certain fibers and associated property in the QWEST System, all upon the terms
and conditions set forth below.
Accordingly, in consideration of the mutual promises set forth below, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereby agree as follows:
ARTICLE I.
GRANT OF IRU IN QWEST SYSTEM
----------------------------
1.1 (a) Effective as of the effective date described in Section 6.1
below, for each particular Segment (as defined below in this Section 1.1)
delivered by QWEST to FRONTIER hereunder and with respect to which an Acceptance
Date (as defined in Section 4.2 below) has occurred, QWEST hereby grants to
FRONTIER, and FRONTIER hereby purchases from QWEST, (i) an exclusive,
Indefeasible Right of Use (as defined in Section 33.1(f)) (or, if and to the
extent provided in Section 1.5 hereof, ownership) in, for the purposes described
herein,
<PAGE>
twenty-four (24) * "Dark Fibers" (as defined in Section 33.1(c)) to be
specifically identified, in the QWEST System (A) in the Basic Segments and along
the Basic Route more specifically described in the maps included in Exhibit A-3
hereto; and (B) if, pursuant to Section 1.3, QWEST elects, in its discretion, to
construct either of Option Route 1 or Option Route 1A, and/or Option Route 2, or
FRONTIER elects, in its discretion, to require QWEST to construct Option Route
1, in any case as identified in Exhibit A (and along the Option 1, Option 1A and
Option 2 Routes more specifically described in the maps included in Exhibit A-3
hereto), in the Optional Segments included in any such Optional Routes so
elected to be constructed, and (ii) an associated and non-exclusive Indefeasible
Right of Use, for the purposes described herein, in the tangible and intangible
property needed for the use of such Dark Fibers as Dark Fibers, including, but
not limited to, the associated conduit, QWEST's rights in all "Underlying
Rights" (as defined in Section 10.1) and, to the extent provided in Article VII
herein, associated Regeneration Facilities (as defined in Section 7.2), but in
any event excluding any electronic or optronic equipment (collectively, the
"Associated Property"), for the Term (as defined in Section 6.1) respecting such
Basic Segment or Optional Segment, and all on the terms and subject to the
covenants and conditions set forth herein (collectively, the "IRUs"). The Dark
Fibers subject to the IRUs are referred to collectively as the "FRONTIER
Fibers." The Basic Segments, together with such of the Optional Segments, if
any, that QWEST elects or is required to construct pursuant to Section 1.3 are
referred to herein collectively as the "Segments." The Basic Route, together
with such of the Optional Routes, if any, that QWEST elects or is required to
construct pursuant to Section 1.3 are referred to herein collectively as the
"System Route."
(b) The parties acknowledge and agree that the specific route of any
Segment that has not been finally designed or engineered, or with respect to
which a right-of-way agreement has not been obtained as of the date hereof is
subject to final determination by QWEST, based on specific engineering, right-
of-way, permitting, authorization and other requirements; provided, however,
------------------
that (i) any such Segment route, as finally determined, must include all of the
- ----
endpoint and intermediate point cities identified in Exhibit A-4 and all of the
junction points identified in the System Route maps included in Exhibit A; (ii)
no deviation in the route of any Segment as set forth in the maps included in
Exhibit A-3 shall result in a Material Deviation (as defined below) in the
System Route as set forth in Exhibit A, and (iii) once the final route of any
Segment has been so determined, QWEST shall deliver to FRONTIER corresponding
revisions to the relevant maps included in Exhibit A hereto. As used herein,
the term "Material Deviation" shall mean a deviation in the general route of a
Segment (A) that modifies the System Route architecture in a manner that breaks
a ring, creates a spur or breaks the contiguous nature of Segments; (B) that
modifies the route of the System Route through any city, identified in Exhibit
A-3 as being the location of a FRONTIER POP site, from the detailed route map
shown in Exhibit A-3 for such city in a manner that materially changes the
proximity of such POP site to the System Route right-of-way (provided that, if
-------------
any such detailed city map shows that the POP site is in direct proximity to the
System Route right-of-way, any route modification which does not provide such
direct proximity shall be considered a material change in proximity);
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
(C) that modifies the route of the System Route through any city, as set forth
in the detailed route map for such city set forth in Exhibit A-3, such that the
location of the route at any point would be moved more than 1,200 feet in any
direction, without the prior written approval of FRONTIER (such approval not to
be unreasonably withheld or delayed); or (D) that modifies any parallel route
shown within any city that is the subject of a detailed map included in Exhibit
A-3 such that the distance between such parallel routes is less than 1,200 feet
outside metropolitan areas and less than two city blocks within metropolitan
areas.
(c) If any deviation(s) in the routes of Segments (i) comprising the Basic
Route and Option Route 1 cause(s) the aggregate route miles as reflected in
Exhibit A estimated for the Basic Route and Option Route 1 taken together to
increase by more than * percent (*%) of such aggregate estimate or (ii)
comprising Option Route 1A and/or Option Route 2 cause(s) the route miles as
reflected in Exhibit A estimated for Option 1A and/or Option Route 2 taken
separately to increase by more than * percent (*%) of such estimate, then in
each case under the foregoing clause (i) and clause (ii) such mileage shall be
solely at QWEST's cost and expense and any route mileage in excess of the
applicable * percent (*%) increase as aforesaid shall not be included in the
route mileage for purposes of determining or redetermining the IRU Fee as
defined and described in Section 2.1 below.
1.2 With respect to Segments 12A, 12B, 12C, 12D and 16, the parties
acknowledge that (i) QWEST has represented that the conduit and Cable comprising
such Segments have been constructed and installed as of the date hereof, and
that only the regeneration and other technical facilities required to be
provided with respect to each such Segment pursuant to Article VII remains to be
constructed and installed, (ii) FRONTIER desires to use the FRONTIER Fibers in
the Cable comprising each such Segment pending delivery of such facilities, and
(iii) the Cable comprising such Segments currently is routed through such
facilities of QWEST. Accordingly, with respect to Segments 12A, 12B, 12C, 12D
and 16, the parties agree that notwithstanding any provisions of this Agreement
to the contrary:
(a) Promptly following execution of this Agreement, the Fiber Acceptance
Testing procedures set forth in Article IV shall take place with respect to each
such Segment, as the FRONTIER Fibers currently are routed through the QWEST
facilities and, upon satisfactory completion thereof with respect to each such
Segment in accordance with Article IV, the Acceptance Date with respect to such
Segment shall occur. Upon such Acceptance Date, payment of an additional *% of
the IRU Fee with respect to such Segment shall be due and payable by FRONTIER.
(b) Upon receipt of such payment, the IRUs with respect to the relevant
Segment, other than the IRU in the Associated Property required to be delivered
pursuant to Section 7.2, shall become effective. Thereupon, FRONTIER may
temporarily install in the space within certain QWEST facilities described in
Exhibit G-1 hereto, such electronic, optronic and other
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
equipment as shall be necessary to operate the FRONTIER Fibers in such Segment;
provided that such installation is done consistent with QWEST's co-location
- -------------
policies and procedures substantially as set forth in the form of co-location
agreement, a copy of which has been provided to and accepted by FRONTIER.
(c) The Associated Property required to be delivered pursuant to Section
7.2 shall be delivered in accordance with the requirements of Section 3.2 with
respect to each such Segment. The parties agree to cause their respective
appropriate technical personnel to discuss and agree, in good faith, upon the
procedures by which, upon such delivery, (i) the FRONTIER Fibers comprising such
Segments shall be rerouted, at QWEST's cost and expense, in the Regeneration
Facilities (or POPs or terminal facilities) required to be provided pursuant to
Article VII, and (ii) tested, at QWEST's cost and expense, to confirm that, as
rerouted, the FRONTIER Fibers continue to operate in conformity with the Fiber
Acceptance Testing specifications set forth in Exhibit D and the procedures set
forth in Article IV.
(d) Upon the delivery of such Associated Property, the rerouting of the
FRONTIER Fibers therein, and the confirmed testing described in Section
1.3(c)(ii), the remaining * percent (*%) of the IRU Fee with respect to each
such Segment shall be due and payable by FRONTIER. Upon receipt of such
payment, the IRU with respect to such Associated Property for such Segment shall
become effective.
1.3 (a) Until 5:00 p.m. Eastern Standard (or Daylight, as applicable)
Time on the date that is * (*) days after the date hereof (the "Option
Period") (i) QWEST shall have the right to elect to construct and (ii) FRONTIER
shall have the right to elect to require QWEST to construct, Option Route 1.
Either party desiring to exercise such right shall notify the other in writing
by such time and date whether or not it will construct or require the
construction of Option Route 1. Failure of QWEST to notify FRONTIER of QWEST's
election as to Option Route 1 as provided herein shall be deemed an election by
QWEST not to undertake to construct Option Route 1, and failure of FRONTIER to
notify QWEST of FRONTIER's election as to Option Route 1 as provided herein
shall be deemed an election by FRONTIER not to require that QWEST construct
Option Route 1. If neither QWEST nor FRONTIER timely exercises its right to
construct or require the construction of Option Route 1 as provided herein,
then, until 5:00 p.m. Eastern Standard (or Daylight, as applicable) Time on the
day that is five (5) days following the last day of the Option Period, QWEST
shall have the right to elect to construct Option Route 1A. QWEST shall notify
FRONTIER in writing by such time and date whether or not it will construct
Option Route 1A. Failure of QWEST to notify FRONTIER of QWEST's election as to
Option Route 1A as provided herein shall be deemed an election by QWEST not to
construct Option Route 1A.
(b) QWEST shall have until 5:00 p.m. Eastern Standard (or Daylight, as
applicable) Time on the last day of the Option Period to elect whether or not it
will construct Option Route 2 as provided herein. QWEST shall notify FRONTIER
in writing by such time and date whether
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
or not it will construct Option Route 2 as provided herein. Failure of QWEST to
timely notify FRONTIER of QWEST's election as to Option Route 2 as provided
herein shall be deemed an election by QWEST not to undertake to construct Option
Route 2 as provided herein.
(c) The election or deemed election by QWEST not to construct any of the
Optional Routes as provided herein shall not affect its obligations or rights
with respect to the other Optional Routes or any of the Basic Segments and, from
and after any such election or deemed election, neither party shall have any
further rights or obligations with respect to such Optional Route hereunder.
(d) From the date hereof until the expiration of the parties' rights under
this Section 1.3, FRONTIER shall not enter into any agreement (oral or written)
or initiate discussions or negotiations with any third party with respect to its
acquisition of an alternative Dark Fiber system along the same or similar routes
as any of the Optional Routes, and FRONTIER shall not engage in discussions with
any third party who may initiate the same without prior notice to QWEST of the
identity of such third party given promptly after such initiation by such third
party and prior to FRONTIER's engaging in such discussions with such third
party, and if FRONTIER engages in such discussions as aforesaid then FRONTIER
shall keep QWEST informed generally of the material proposed terms and material
changes to such terms with respect to such discussions relating to an
acquisition by such third party of an alternative Dark Fiber system along the
same or similar routes as any of the Optional Routes. If QWEST timely exercises
its option hereunder to construct any of the Optional Routes or if FRONTIER
timely exercises its right to require the construction of Option Route 1, in any
such case as provided herein, then FRONTIER and QWEST shall be obligated to
observe and perform their respective obligations hereunder with respect to such
Optional Route, all on the terms and subject to the conditions set forth herein.
1.4 (a) (i) *
(ii) *
(iii) *
(b) FRONTIER shall have an option (the "Sacramento/Seattle Fiber Option"),
exercisable until 5:00 p.m. Eastern Standard (or Daylight, as applicable) Time
on the date that is * (*) days after the date hereof, to elect to increase the
number of Dark Fibers subject to the IRU in the Segments between the cities of
Sacramento, California and Seattle, Washington identified in Exhibit A (the
"Sacramento/Seattle Segments") from twenty-four (24) to forty-eight (48) Dark
Fibers (such additional twenty-four (24) Dark Fibers being referred to as the
"Optional Sacramento/Seattle Dark Fibers"), by delivering written notice of such
election to QWEST by such time and date. If FRONTIER timely exercises the
Sacramento/Seattle Fiber Option, the IRU Fee with respect to the
Sacramento/Seattle Segments shall be redetermined as described in
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
Section 2.1(e) below. * Failure of FRONTIER to timely notify QWEST
of FRONTIER's election to exercise the Sacramento/Seattle Fiber Option as
provided herein shall be deemed an election by FRONTIER not to exercise the
Sacramento/Seattle Fiber Option. The election or deemed election of FRONTIER
not to exercise the Sacramento/Seattle Fiber Option shall not affect either
party's rights or obligations with respect to the twenty-four (24) Dark Fibers
in the Sacramento/Seattle Segments to be provided hereunder and, from and after
any such election or deemed election, neither party shall have any further
rights or obligations with respect to the Optional Sacramento/Seattle Dark
Fibers hereunder.
1.5 Notwithstanding anything contained herein to the contrary: (a) if and
to the extent allowed by the Underlying Right(s) for a particular Segment, and
(b) if the Underlying Right(s) with respect to such Segment do not and will not
impose upon QWEST any additional fees, costs or charges as a result thereof
(unless FRONTIER shall pay the same or make arrangements satisfactory to QWEST
to assure such payment), QWEST shall, upon the request of FRONTIER and on a
Segment-by-Segment basis on or before the Acceptance Date with respect to such
Segment: (i) grant a non-exclusive sub-easement, sub-right of way, or sub-
underlying right (collectively a "Sub-Easement") to FRONTIER providing rights
(but, subject to the foregoing clause (b) of this Section 1.5 above, at no
additional cost to or monetary obligations of FRONTIER) to FRONTIER similar to
the rights held by QWEST under the relevant Underlying Right(s), and (ii)
transfer title to the Frontier Fibers to FRONTIER free and clear of all liens as
provided in Section 11.4 hereof, and (iii) continue the grant of the IRU in the
Associated Property. Nothing in this Section 1.5 shall relieve QWEST or
FRONTIER of its (nor, except and only to the extent of the change in the nature
of the property interest of FRONTIER in the FRONTIER Fibers or a Sub-Easement,
or the case may be, diminish, enlarge or otherwise affect its) rights, duties
and obligations set forth in this Agreement and if any Sub-Easement shall
terminate or FRONTIER shall be otherwise prohibited from owning title to the
Frontier Fibers, QWEST shall retain, maintain or replace the relevant Underlying
Right in accordance with and pursuant to Article X, title to such Frontier
Fibers shall revert and be reconveyed to QWEST and FRONTIER shall have and
retain the IRU in such Frontier Fibers under and subject to the terms and
conditions of this Agreement. If a Sub-Easement is granted or title to the
FRONTIER Fibers transferred to FRONTIER in accordance with the foregoing
provisions of this Section 1.5, then such Sub-Easement shall terminate and such
title shall revert and be reconveyed to QWEST at the expiration or termination
of the Term respecting the applicable Segment as provided in and pursuant to
Article VI hereof.
ARTICLE II.
CONSIDERATION FOR GRANT
-----------------------
2.1 In consideration of the grant of the IRUs hereunder by QWEST to
FRONTIER, FRONTIER agrees to pay to QWEST an IRU fee determined based on the
QWEST System route
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
mileage (and allocated among the Segments based on Segment route mileage) as
follows (the "IRU Fee"):
(a) Initially, the IRU Fee shall be determined based on the following per-
route-mile pricing:
(i) $* per route mile for all Segments other than those (A) between
the cities of Cleveland and Boston, as identified in Exhibit A, (B) between the
City of Albany, New York and the location at 60 Hudson Street in New York City,
as identified in Exhibit A, and (C) between the cities of Philadelphia and New
York City, as identified in Exhibit A; and
(ii) $* per route mile for all Segments identified in clause
(a)(i)(A) above conditioned upon FRONTIER making available to QWEST at least
twenty-four (24) non-zero dispersion shifted Dark Fibers between Boston and 60
Hudson Street at a price not to exceed $ * (failing which condition the IRU
Fee shall be $* per route mile for such Segments identified in clause (a)(i)(A))
and clause (a)(i)(B) above; and
(iii) $ * per route mile (unless the parties mutually agree on a
lesser amount) for all Segments identified in clause (a)(i)(C) above.
(b) *
(i) *
(ii) *
(c) *
(i) *
(ii) *
(d) *
(i) *
(ii) *
(iii) *
(iv) *
(e) If FRONTIER timely elects to exercise the Sacramento/Seattle Dark Fiber
Option as permitted pursuant to Section 1.4(b), the IRU Fee with respect to the
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
Sacramento/Seattle Segments (and only such Segments) shall be redetermined based
on a price of $* per route mile.
(f) The IRU Fee shall (except as provided in Sections 1.2, 2.4 and 2.5) be
payable with respect to each Segment according to the payment schedule set forth
in Exhibit B.
2.2 (a) In addition to the IRU Fee payable under Section 2.1, if and to
the extent that the actual cost to QWEST (including freight and taxes) of the
fiberoptic cable that includes the FRONTIER Fibers to be incorporated in any
Segment is more than $*/fiber foot, FRONTIER shall reimburse QWEST for the total
amount of such cost difference attributable to the FRONTIER Fibers incorporated
in such Segment (including slack); provided that QWEST shall give FRONTIER at
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least ten (10) days prior written notice before executing and submitting to a
vendor a firm commitment for any such fiberoptic cable. If and to the extent
that the actual cost to QWEST (including freight and taxes) of the fiberoptic
cable that includes the FRONTIER Fibers to be incorporated in an Segment is less
than $*/fiber foot, FRONTIER shall receive a credit against amounts subsequently
payable by FRONTIER hereunder equal to the total amount of such cost difference
attributable to the FRONTIER Fibers incorporated in such Segment (including
slack).
(b) In the event that FRONTIER receives a bona fide quote from a fiberoptic
cable vendor to provide the same fiberoptic cable that QWEST would acquire to
install in a Segment hereunder in accordance with the QWEST System design and
the fiber deployment plan and fiber specification requirements provided herein,
at a price (including the business terms, handling charges and similar
incidental charges) lower than * the best price available to QWEST for
such fiberoptic cable, FRONTIER shall notify QWEST in writing thereof,
identifying the vendor, the quoted price, and the type and quantity of
fiberoptic cable subject to such quote (each, a "Fiber Quote Notice"), such that
QWEST may attempt to acquire such fiberoptic cable at such price from such
vendor. If QWEST is able to acquire fiberoptic cable from the vendor and at the
price set forth in a Fiber Quote Notice for inclusion in a Segment or Segments
delivered hereunder, FRONTIER shall receive a credit against amounts
subsequently payable by FRONTIER hereunder equal to * percent (*%) of the
difference between the best price available to QWEST for such fiberoptic cable
and the price obtained from such vendor pursuant to the Fiber Quote Notice (the
"Fiber Savings Credit") for the entire fiberoptic cable so acquired by QWEST for
inclusion in such Segment or Segments. If QWEST is unable, for any reason, to
acquire fiberoptic cable from the vendor identified in the Fiber Quote Notice or
any other vendor at the price set forth in the Fiber Quote Notice then the
foregoing provisions of this paragraph (b) shall have no further force and
effect and QWEST shall acquire fiberoptic cable through its own sources, subject
to paragraph (a) of this Section 2.2.
(c) Notwithstanding the foregoing provisions of paragraphs (a) and (b) of
this Section 2.2, no such reimbursement or credit shall be required with respect
to any fiberoptic cable including FRONTIER Fibers that, as of the date hereof,
has already been installed or
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
delivered to QWEST for installation in the QWEST System or is subject to a
binding purchase order for delivery to QWEST for installation in the QWEST
System. The amount of any such reimbursement or credit shall be invoiced or
credited, as appropriate, to FRONTIER at the time the fiberoptic cable
incorporating such FRONTIER Fibers is invoiced to QWEST. FRONTIER and QWEST
agree to reasonably consult and cooperate with each other in order to obtain the
lowest possible price for fiberoptic cable to be included in a Segment.
FRONTIER also shall pay directly or reimburse QWEST for all other costs, fees
and expenses which are expressly provided to be paid, in whole or in part, by
FRONTIER under this Agreement. FRONTIER shall have the right to review and
audit, at its cost, all such costs, fees and expenses.
2.3 QWEST will fax or send by overnight delivery each invoice for payments
to be made by FRONTIER hereunder. FRONTIER shall pay such invoiced amounts,
less any reasonably disputed amounts, for receipt by QWEST within fifteen (15)
days after receipt of such invoice by FRONTIER with respect to payments of the
IRU Fee and within thirty (30) days after receipt of such invoice by FRONTIER
for any other amounts owed to QWEST hereunder; provided that FRONTIER shall
-------------
provide written notice describing in detail the basis for any disputed amounts;
and provided further that any disputed amounts that are resolved in favor of
---------------------
QWEST shall be due for payment based on the original invoice date. All payments
to be made by FRONTIER hereunder of the IRU Fee and of any other amounts in
excess of $100,000 shall be made by wire transfer of immediately available funds
to the account or accounts as QWEST shall notify FRONTIER in writing from time
to time. Payments of all other amounts by FRONTIER hereunder may be made by
check payable to QWEST. QWEST agrees to provide FRONTIER from time to time,
upon request, with QWEST's estimate of the next invoice date for a portion of
the IRU Fee and the estimated amount of such IRU Fee payment; provided that
-------------
failure to provide any such notice shall not in any way alter or impair
FRONTIER's payment obligations hereunder.
2.4 QWEST and FRONTIER acknowledge and agree that with respect to Segment
23, notwithstanding the fact that Segment 23 has already been constructed and
installed, delivery of Segment 23 shall occur in two installments of twelve (12)
Dark Fibers each as indicated in Exhibit A, and payment of the IRU Fee therefor
(other than the initial *% due upon execution of this Agreement), shall be
deferred until each such deferred installment delivery date as set forth in
Exhibit B. QWEST and FRONTIER further acknowledge and agree that with respect
to Segments 24A, 24B, 24C, 24D, 24E and 25, once constructed and installed,
delivery of each such Segment likewise shall occur in two installments of twelve
(12) Dark Fibers each as indicated in Exhibit A, and payment of the IRU Fee
therefor shall be made as set forth in Exhibit B.
2.5 QWEST and FRONTIER acknowledge and agree that with respect to Segments
5, 6, 9A, 9B, 10A and 10B, notwithstanding the payment schedule set forth in
Exhibit B and the fact that the conduit in such Segments has already been
constructed and
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
installed, FRONTIER shall be required to pay with respect to each of those
Segments: (a) *% of the IRU Fee upon execution of this Agreement, (b) *% of the
IRU Fee when (i) QWEST has commenced the placement of the Cable in the Segment,
and (ii) all such Cable and other materials necessary to complete such placement
within a reasonable time are on hand or scheduled for timely delivery in
connection with such placement, and (c) the balance of the IRU Fee in accordance
with the provisions of Exhibit B.
2.6 All of FRONTIER's payment obligations under this Agreement shall be
guaranteed by Frontier Corporation pursuant to a Guaranty in the form of Exhibit
K hereto, to be executed and delivered by Frontier Corporation as a condition to
the effectiveness hereof and the performance by QWEST of its obligations
hereunder.
ARTICLE III.
CONSTRUCTION OF THE QWEST SYSTEM
--------------------------------
3.1 QWEST shall, at QWEST's sole cost and expense, be responsible for and
shall effect the design, engineering, installation, and construction of those
portions of the QWEST System not already constructed as of the date hereof in
accordance with the System Route (as it may be modified pursuant to Section 1.1)
and in conformity with (i) the construction specifications set forth in Exhibit
C, (ii) industry standards and practices, and (iii) applicable Underlying Rights
Requirements (as defined in Section 11.1). Such responsibilities shall include,
without limitation, preparation of construction drawings, bills of materials,
materials specifications and materials requisitions. Except for the existing
fibers on Segments 11A, 11B, 12A, 12B, 12C and 12D (which are Corning SMF-DS)
and any alternative fibers approved pursuant to the following sentence, all
fiber included in the FRONTIER Fibers shall be Corning SMF-LS non-zero
dispersion-shifted or Lucent Technologies True Wave and shall meet or exceed the
applicable fiber specifications set forth in Exhibit E. QWEST may use
alternative types of fiber equivalent to either of the aforementioned fibers;
provided that (i) prior to any such use, QWEST meets with FRONTIER (and FRONTIER
- -------- ----
hereby agrees to so meet) to, cooperatively and in good faith, jointly evaluate
the use of any such fiber and (ii) thereafter, FRONTIER approves the use of such
fiber, which approval shall not be unreasonably withheld or delayed. QWEST
agrees that, to the extent possible in light of the fiber already incorporated
in Segments that have been constructed, in whole or in part, prior to the date
hereof and the availability and cost of the fiber of a particular type and
manufacture hereafter, fiber utilized with respect to the loops, rings and
regions of the QWEST System shall be of the same type and manufacture, as
depicted in the fiber deployment diagram set forth in Exhibit E-1 hereto,
indicating the type of fiber QWEST currently plans to use in each such Segment.
Any deviation from the planned fiber use set forth in the diagram must be
approved by FRONTIER, which approval shall not be unreasonably withheld or
delayed.
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
3.2 Subject to extension for delays described in Article XX, QWEST shall
complete at QWEST's sole cost and expense, all construction, installation, and
satisfactory Fiber Acceptance Testing (as defined in Section 4.1) of each of the
Segments, including the provision of such Regeneration Facilities on such
Segment as are required to be provided pursuant to Section 7.2(a), by the
applicable "Estimated Delivery Date" (as defined in Section 33.1(d)) respecting
such Segment.
3.3 Except as may be provided herein, QWEST shall, at QWEST's sole cost
and expense, procure all materials to be incorporated in and to become a
permanent part of the QWEST System, including, without limitation, the
Regeneration Facilities required to be provided pursuant to Section 7.2(a).
3.4 QWEST shall, at QWEST's sole cost and expense, obtain all Underlying
Rights and other rights, licenses, permits and authorizations as required
pursuant to Article X hereof.
3.5 In support of QWEST's obligation to construct the QWEST System
hereunder, QWEST will provide, as a condition to FRONTIER's obligations
hereunder, either (i) so long as the Surety Bond has not been delivered as
provided in clause (ii) below, a guaranty up to a maximum aggregate amount of $
* by Anschutz Company in favor of FRONTIER of the payment obligations of QWEST
under this Agreement pursuant to a Guaranty in the form of Exhibit L or (ii) six
(6) surety bonds in favor of FRONTIER, each substantially in the form of and by
the surety companies identified on Exhibit I hereto or such other companies
rated "A" or better by Best's Key Rating Guide, which, in the aggregate, shall
provide a total aggregate payment value of not less than $ * (collectively,
the "Surety Bond"), in each case clause (i) and (ii) over the entire
construction period for all Segments to be delivered hereunder.
3.6 QWEST shall perform, at QWEST's sole cost and expense, substantially
in accordance with industry standards and practices and as deemed necessary or
appropriate in QWEST's reasonable business judgment, all supervisory and
inspection services relating to the construction of the QWEST System, including,
without limitation, performing construction inspections to assure that all
construction shall be in material compliance with the specifications, drawings,
Underlying Rights, provisions of this Agreement, and applicable governmental
codes. During the course of construction of each Segment, QWEST shall prepare
and provide to FRONTIER construction schedule and progress reports every two
weeks. FRONTIER shall have the right, but not the obligation, to inspect the
construction of each Segment, including the installation, splicing and testing
of the FRONTIER Fiber incorporated therein, during the course and at the time of
the relevant design, construction and installation period. No inspection or
failure to inspect by FRONTIER shall impair or invalidate any rights and
remedies of FRONTIER under this Agreement or modify, amend or otherwise affect
any of the representations, warranties, covenants or agreements of QWEST under
this Agreement.
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
3.7 Upon FRONTIER's written request, QWEST shall make available for
inspection by FRONTIER, at QWEST's offices, copies of all information,
documents, agreements, reports, permits, drawings and specifications generated,
obtained or acquired by QWEST in performing its duties pursuant to this Article
III that are material to grant of the IRUs to FRONTIER, including, without
limitation, the Underlying Rights, subject only to the conditions that (i) the
terms of each such document or the legal restrictions applicable to such
information or document permits disclosure; provided that QWEST will use its
-------------
best efforts (without requiring the expenditure of money) to obtain a waiver of
any existing confidentiality and/or non-disclosure restrictions, and to exempt
FRONTIER from subsequent confidentiality and/or non-disclosure restrictions,
that would restrict QWEST's ability to make such documents and/or information
available to FRONTIER for inspection; (ii) notwithstanding the existence or non-
existence of such restrictions and/or waivers, QWEST may, in its sole
discretion, redact portions of such documents it deems proprietary business
terms prior to FRONTIER's inspection. No inspection or failure to inspect by
FRONTIER shall impair or invalidate any rights and remedies of FRONTIER under
this Agreement or modify, amend or otherwise affect any of the representations,
warranties, covenants or agreements of QWEST under this Agreement.
3.8 QWEST shall use reasonable efforts to construct all of Segment 13C of
the Basic Route within the territorial confines of the United States, using its
reasonable efforts and reasonably cooperating with FRONTIER to determine a
construction method, including a powerline build or other alternative, in each
case that would be reasonably cost effective within the overall QWEST System
design. If, notwithstanding such efforts and cooperation, no such alternative
construction method is mutually agreed upon, then QWEST may construct the
portion of such Segment as shown in Exhibit A-2 in Mexico.
ARTICLE IV.
ACCEPTANCE AND TESTING OF FRONTIER FIBERS
-----------------------------------------
4.1 QWEST shall test all FRONTIER Fibers in accordance with the procedures
specified in Exhibit D ("Fiber Acceptance Testing") to verify that the FRONTIER
Fibers are installed and operating in accordance with the specifications
described in Exhibit D. Fiber Acceptance Testing shall progress span by span
along each Segment as cable splicing progresses, so that test results may be
reviewed in a timely manner. QWEST shall provide FRONTIER at least five (5)
days advance notice of the date and time of each Fiber Acceptance Testing such
that FRONTIER shall have the right, but not the obligation, to have a person or
persons present to observe QWEST's Fiber Acceptance Testing. When QWEST has
determined that the results of the Fiber Acceptance Testing with respect to a
particular span show that the FRONTIER Fibers so tested are installed and
operating in conformity with the applicable specifications set forth in Exhibit
D, QWEST shall promptly provide FRONTIER with a copy of such test results.
4.2 When QWEST reasonably determines in good faith that the FRONTIER
Fibers
<PAGE>
with respect to an entire Segment are installed and operating in conformity with
the applicable specifications set forth in Exhibit D, QWEST shall promptly
provide written notice of same to FRONTIER (a "Completion Notice"). FRONTIER
shall, within thirty (30) days of receipt of the Completion Notice, either
reject the Completion Notice specifying, in good faith, the defect or failure in
such Fiber Acceptance Testing or give QWEST written notice of acceptance of such
Fiber Acceptance Testing (the period from the date of FRONTIER's receipt of the
Completion Notice to the date of QWEST's receipt of FRONTIER's notice of
rejection or acceptance being referred to herein as the "FRONTIER Review
Period"). In the event FRONTIER rejects the Completion Notice, QWEST shall
promptly, and not later than seven days, and at no cost to FRONTIER, commence to
remedy the defect or failure. Thereafter QWEST shall again give FRONTIER a
Completion Notice with respect to such FRONTIER Fibers. The foregoing procedure
shall apply again and successively thereafter for a total of two attempts to
remedy the defect or failure. If QWEST fails to adequately remedy or complete
the defect or failure after two attempts, FRONTIER shall have the right to
proceed promptly and in an economically efficient manner to cure such defects or
failures at QWEST's cost and expense, which shall be paid by QWEST to FRONTIER
upon demand, or at the election of FRONTIER, offset from any IRU Fee payable by
FRONTIER to QWEST with respect to such Segment or any other Segment. No
acceptance of, or failure by FRONTIER to reject, the Completion Notice shall be
deemed to be a waiver of any rights or remedies of FRONTIER under this
Agreement; provided that, any failure by FRONTIER to timely reject as set forth
-------------
above shall operate as a constructive acceptance for purposes of this Agreement.
The date when FRONTIER accepts or is deemed to have accepted a Completion Notice
or cures such defects at QWEST's cost and expense as provided above with respect
to a Segment is herein defined as the "Acceptance Date".
ARTICLE V.
DOCUMENTATION
-------------
5.1 QWEST shall provide FRONTIER with a copy of all Underlying Right
Requirements (as defined in Section 11.1) applicable to each Segment promptly
following the grant to QWEST of the Underlying Right pursuant to which such
Underlying Right Requirements are imposed and, in any event, on or before the
date of completion of conduit installation in such Segment (as defined in
Exhibit B, paragraph 6(ii)).
5.2 Not later than ninety (90) days after the Acceptance Date for each
Segment, QWEST shall provide FRONTIER with the following documentation:
(a) As-built drawings for such Segment in accordance with the requirements
described in Exhibit C ("As-Builts").
(b) Technical specifications of the optical fiber cable and associated
splices and other equipment placed in that Segment.
<PAGE>
5.3 As a condition to, and effective upon receipt of, each IRU Fee payment
installment that is due upon QWEST's achievement of a construction,
installation, testing or acceptance milestone as set forth in Exhibit B, QWEST
shall deliver to FRONTIER a lien waiver with respect to liens in favor of QWEST
arising out of QWEST's services in accomplishing such milestone. Promptly
following QWEST's receipt of each such payment, QWEST shall use reasonable
efforts to obtain (and in any event on or before the Acceptance Date with
respect to the relevant Segment shall obtain) from each subcontractor that
provided services in accomplishing such milestone a lien waiver with respect to
liens arising out of such services and, upon receipt, deliver a copy of each
such lien waiver to FRONTIER.
ARTICLE VI.
TERM
----
6.1 Except to the extent expressly modified by Section 1.2 with respect to
the Segments identified therein, the grant of the IRUs hereunder with respect to
each Segment shall become effective on the first day when both (i) the
Acceptance Date with respect to that Segment has occurred and (ii) QWEST has
received payment in full of the IRU Fee with respect to such Segment in
accordance with Exhibit B, and, subject to the provisions of Article X, such
grant shall terminate at the end of the economically useful life of the FRONTIER
Fibers, as reasonably determined by FRONTIER pursuant to Section 6.2 below. The
period of each such grant respecting each such Segment and IRU is herein defined
as the "Term".
6.2 In the event that FRONTIER, at any time, reasonably determines that
the FRONTIER Fibers comprising any Segment have reached the end of their
economically useful life and desires to not retain the IRU in such Segment,
FRONTIER shall have the right to abandon the IRU with respect to such Segment by
written notice to QWEST. If, at any time during or after the last year of the
Minimum Period (as defined in Section 10.2(ii) below), with respect to any
Segment, FRONTIER fails to use any of the FRONTIER Fibers comprising such
Segment for any period of thirty (30) consecutive days (except to the extent
that such non-use is as a result of any of the events described in Article XX or
as a result of QWEST System maintenance, restoration, relocation, or
reconfiguration or as a result of the failure of QWEST to observe and perform
the terms of this Agreement), QWEST shall have the right to request FRONTIER to
acknowledge that the FRONTIER Fibers comprising such Segment have reached the
end of their economic life and, accordingly, has abandoned the FRONTIER Fibers
comprising such Segment (which acknowledgment shall not be unreasonably withheld
or delayed). Upon any such notice of abandonment or acknowledgment, the Term
shall expire with respect to such Segment and all rights to the use of such
Segment shall revert to QWEST without reimbursement of any fees or other
payments previously made with respect thereto, and from and after such time
FRONTIER shall have no further rights or obligations hereunder with respect to
such Segment (subject to the provisions of Article XIX).
<PAGE>
6.3 It is understood and agreed as between the parties that the grant of
the IRUs hereunder shall be treated for accounting and federal and all
applicable state and local tax purposes as the sale and purchase of the FRONTIER
Fibers and a corresponding interest in QWEST's rights in the Associated Property
subject thereto, and that on and after the Acceptance Date with respect to each
Segment, FRONTIER shall be treated as the owner of the FRONTIER Fibers and an
interest in QWEST's rights in the Associated Property comprising such Segment
for such purposes. The parties agree to file their respective income tax
returns, property tax returns, and other returns and reports for their
respective Impositions (as such term is defined in Section 33.1(e)) on such
basis and, except as otherwise required by law, not to take any positions
inconsistent therewith. QWEST shall retain legal title to the entire QWEST
System (except if and to the extent provided in Section 1.5), including the
FRONTIER Fibers and Associated Property subject to the IRUs hereunder. Each
party agrees to indemnify the other with respect to any late filing penalties,
interest or fees incurred as a result of such party's failure to provide the
other with such information solely in such party's possession or control that
may be necessary in order to timely make any such filing.
6.4 This Agreement shall become effective on the date hereof and shall
terminate on the date when, after completion and delivery of all Segments
required to be delivered hereunder, all the Terms of all such Segments shall
have expired; provided that, those provisions of this Agreement which, by their
-------------
express terms, are intended to survive such termination, shall survive.
ARTICLE VII.
NETWORK ACCESS; REGENERATION FACILITIES
---------------------------------------
7.1 (a) QWEST shall provide FRONTIER with access to, and FRONTIER shall
have the right to connect, at FRONTIER's sole cost and expense, its
telecommunications system with, the FRONTIER Fibers at various network access
points on the QWEST System right-of-way in each of the endpoint cities and
intermediate point cities along the route of each Segment and at such additional
locations along the QWEST System right-of-way as may be requested by FRONTIER
(each such access point being referred to as a "Connecting Point"). The
specific locations of each such Connecting Point shall be as mutually reasonably
agreed upon by the parties in good faith, subject to the Underlying Rights
Requirements and QWEST obtaining other required permits, authorizations and
approvals (which QWEST agrees to use its best efforts to obtain). Any such
connection will be performed by QWEST, at FRONTIER's sole cost and expense, in
accordance with QWEST's applicable specifications and operating procedures.
FRONTIER shall pay QWEST's Costs for each such connection within thirty (30)
days of the date of FRONTIER's receipt of QWEST's invoice therefor. In order to
schedule a connection of this type, FRONTIER shall request and coordinate such
work not less than ninety (90) days in advance of the date the connection is
requested to be completed. Such work will be restricted to a Planned System
Work Period ("PSWP"), as defined in Section 33.1(i), unless otherwise agreed to
in writing for specific projects. Subject to all applicable Underlying Rights
Requirements, FRONTIER shall also be provided reasonable access by QWEST to any
Connecting Point at all
<PAGE>
times. FRONTIER shall have no limitations on the types of electronics or
technologies employed to utilize the FRONTIER Fibers, subject to mutually
agreeable safety procedures and so long as such electronics or technologies do
not interfere with the use of or present a risk of damage to any portion of the
QWEST System.
(b) QWEST may route the FRONTIER Fibers through QWEST's separate terminal,
endlink, POP or Regeneration Facilities at its sole discretion so long as such
routing does not have a material adverse effect on the security, the safety or
FRONTIER's use of the FRONTIER Fibers or Associated Property hereunder and QWEST
is responsible for all costs and expenses associated therewith.
7.2 (a) The IRU Fee includes QWEST's provision to FRONTIER for its use as
permitted hereunder of * regeneration site facilities along the Basic
Route, and * regeneration site facilities along the Optional Routes *
to be located at approximately sixty (60) mile intervals along the QWEST System
right-of-way, in each case consisting of and providing space of approximately
* square feet and amenities (except for the operating costs associated
therewith expressly required to be paid by FRONTIER pursuant to Section 8.2), as
described in Exhibit F ("Regeneration Facilities"). The parties acknowledge
that (i) the locations of such Regeneration Facilities shall be coincident with
the locations of QWEST's own Regeneration Facilities (and located at
approximately 60-mile intervals), the locations of which QWEST shall notify
FRONTIER with sufficient time (no less than ten working days) for FRONTIER to
request a different location for any given facility, in which case the parties
shall mutually agree on a mutually acceptable location for such facility, and
(ii) Exhibit G sets forth the estimated number of such Regeneration Facilities
by Segment, with the locations of such Regeneration Facilities being subject to
final determination of the route of the applicable Segment, space and power
availability and all applicable Underlying Rights Requirements. In addition,
QWEST shall provide to FRONTIER at FRONTIER's Prorated Cost (as defined below in
this paragraph (a)) POP or terminal facilities of approximately * square
feet along the QWEST System right-of-way at such locations as may be mutually
determined by FRONTIER and QWEST, subject to space and power availability and
Underlying Rights Requirements * subject to space and power
availability and underlying Rights Requirements. FRONTIER's occupancy of and
access to all such Regeneration Facility Sites (or POP or terminal facilities)
shall include separate, secured, 24-hour-per-day building access. Any
Regeneration Facilities (or POP or terminal facilities) provided by QWEST to
FRONTIER * with respect to any of the Basic Route and the applicable
Optional Routes shall be at FRONTIER's Prorated Cost. For purposes of the
foregoing two sentences, FRONTIER's Prorated Cost for Regeneration Facilities
means $ * per facility and for POP or terminal facilities means $ * per
facility, subject to any adjustment (lower or higher) pursuant to Section 7.2(b)
below.
(b) QWEST heretofore has requested (or promptly after execution of this
Agreement will request) vendors to submit bids (collectively, the "Initial
Bids") that cover all or
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
substantially all of the proposed Basic Segments of the QWEST System (plus the
Optional Routes as and when included in any bid requests by QWEST) for the
building items listed below (collectively, the "Building Items"). QWEST has
delivered (or promptly after receipt thereof will deliver) to FRONTIER copies of
such Initial Bids. If the aggregate cost of the Building Items taking the
lowest quoted cost per Building Item (subject to the last sentence of this
paragraph) under any of the Initial Bids (the "Initial Bid Aggregate Cost") is
equal to or less than the aggregate estimated cost for the Building Items set
forth in the table below (the "Estimated Aggregate Cost"), then for 10 business
days thereafter, or if the Initial Bid Aggregate Cost is more than the Estimated
Aggregate Cost, then for 20 business days thereafter, FRONTIER may solicit from
the same or other vendors bids that cover all or substantially all of the Basic
Segments of the QWEST System (plus the Optional Routes as and when included in
any bid requests by QWEST) covering any of the Building Items (the "FRONTIER
Solicited Bids"). Without regard to what Building Items QWEST actually purchases
in connection with construction of the QWEST System, the lowest quoted cost per
Building Item obtained under any of the Initial Bids and the Frontier Solicited
Bids (subject to the last sentence of this paragraph) shall then be used in
place of the cost set forth in the table below for the respective Building Item,
and the allocated percentage of the total cost (which excludes freight and
taxes) attributable to FRONTIER as set forth in the table below shall be applied
accordingly to the recalculated cost. The aggregate FRONTIER allocation set
forth in the table below shall be recalculated, and the Prorated Cost for
Regeneration Facilities of $ * per facility and the Prorated Cost of POPs (and
terminal facilities) of $ * per facility shall be increased or decreased, as
appropriate, by the difference between such recalculated aggregate FRONTIER
allocation and $ * . In determining whether a quote represents the "lowest
quoted cost" for any particular Building Item, (i) such quote must meet all of
QWEST's terms and specifications with respect to the applicable Building Item
and (ii) QWEST shall take into account whether and to what extent such quote is
contingent upon any other quote for one or more other Building Items.
For purposes of this Section 7.2(b), the building items in Regeneration
Facilities and/or POPs or terminal facilities, their respective total cost, the
Estimated Aggregate Cost of them and the allocated FRONTIER percentage with
respect to them are as follows:
<TABLE>
<CAPTION>
Allocation Frontier
Building Items Total Cost of Item Percentage Allocation
--------------- ------------------ ---------- ----------
<S> <C> <C> <C>
Equipment building, $ * *
12' x 30'0.0 *
80 kW skid-mounted diesel generator
(Regeneration Facility) *
* *
</TABLE>
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
100 kW skid-mounted diesel generator
(POP) * * *
Two 5 ton wall mounted HVAC units
* * *
Battery Plant, 1,200 Amp @ 48 VDC
each for 400A of rectifiers
a. Power distribution * * *
b. Rectifiers * * *
c. Batteries (4 hr. reserve,
dual 875 AH strings) * * *
Estimated Aggregate Cost $ * *
=== =
</TABLE>
(c) Payment by FRONTIER of its Prorated Cost, adjusted to give effect to
any adjustments (lower or higher) pursuant to Section 7.2(b), for any POP or
terminal facilities shall be paid to QWEST upon commencement of the construction
of the Segment of which they are a part. Payment by FRONTIER of its Prorated
Cost adjusted to give effect to any adjustments (lower or higher) pursuant to
Section 7.2(b), for Regeneration Facilities * shall be paid to QWEST upon
commencement of the construction of the Segment of which they are a part * .
The foregoing amounts paid by FRONTIER shall be finally trued up, with QWEST
reimbursing FRONTIER for any excess and FRONTIER paying QWEST for any
deficiency, on (or as soon as thereafter as practicable) the last Acceptance
Date with respect to the Basic Segments, the last Acceptance Date with respect
to Segments in Option Route 1 or 1-A, and the last Acceptance Date with respect
to Segments in Option Route 2, in each case (i) based on the actual number of
Regeneration Facilities actually provided by QWEST * or POPs (or terminal
facilities) with respect to the Basic Route and the applicable Optional Route
and (ii) adjusted to give effect to any adjustments (lower or higher) in the
FRONTIER's Prorated Cost to which FRONTIER may be entitled under Section 7.2(b)
above.
ARTICLE VIII.
OPERATIONS
----------
8.1 Each party shall have full and complete control and responsibility
for determining any network and service configuration or designs, routing
configurations, regrooming, rearrangement or consolidation of channels or
circuits and all related functions with regard to the
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
use of that party's Dark Fiber.
8.2 FRONTIER shall reimburse QWEST for FRONTIER's proportionate share
of all operating costs incurred by QWEST in connection with the Regeneration
Facilities (or alternatively requested POP or terminal facilities) provided
pursuant to Section 7.2(a), including its proportionate share of any monthly
lease costs for any such facilities and/or underlying property that QWEST leases
(including, to the extent included in such lease costs, base rent, maintenance,
insurance, security and taxes), maintenance of such facilities, and all power
and utility fees and charges. FRONTIER's proportionate share of such operating
costs, including a proportionate share of common area costs, shall be the ratio
that the floor space provided to FRONTIER in any such facility (including a
proportionate share of the common area) bears to (i) in the case of lease costs,
the total space in such facility, and (ii) in the case of all other costs
(including common area costs), the total utilized space in such facility. QWEST
shall submit invoices to FRONTIER on an annual basis for FRONTIER's pro rata
share of such operating costs during the preceding twelve months. FRONTIER's
reimbursement obligations for insurance and taxes pursuant to this Section 8.2
shall in no event be duplicative of FRONTIER's payment obligations for insurance
or taxes, respectively, as provided in Article XIV and XV hereof, and in no
event shall relieve QWEST of its payment obligations for insurance costs or
taxes, respectively, as provided in Article XIV and XV hereof.
8.3 FRONTIER acknowledges and agrees that, except to the extent
expressly provided pursuant to Sections 1.2 and 7.2, QWEST is not supplying nor
is QWEST obligated to supply to FRONTIER any optronics or electronics or optical
or electrical equipment or other facilities, including without limitation,
generators, batteries, air conditioners, fire protection and monitoring and
testing equipment, all of which are the sole responsibility of FRONTIER, nor is
QWEST responsible for performing any work other than as specified in this
Agreement.
8.4 Upon not less than one hundred twenty (120) days' written notice
from QWEST to FRONTIER, QWEST may, subject to FRONTIER's prior written approval
(which approval shall not be unreasonably delayed or withheld) substitute for
the FRONTIER Fibers on the QWEST System, or any Segment or Segments comprising a
portion of said QWEST System, an equal number of alternative fibers along the
same or an alternative route; provided that in any such event, such substitution
-------------
(i) shall be in accordance with FRONTIER's applicable specifications and
operating procedures, (ii) shall be effected at the sole cost of QWEST,
including, without limitation, all disconnect and reconnect costs, fees and
expenses, (iii) shall be constructed and tested in accordance with the
specifications and drawings set forth in Exhibits C and D and Section 4.2, and
incorporate fiber meeting the specifications set forth in Exhibit E, and (iv)
shall not interrupt or adversely affect the use, operation or performance of
FRONTIER's network or business, or change any Connecting Points or endpoints of
any Segment or change the location of any Regeneration Facilities (or POPs or
terminal facilities) used by FRONTIER hereunder or any other FRONTIER POP, node
or switch facilities, all as determined by FRONTIER, in its sole discretion; and
provided further that QWEST shall give FRONTIER written notice prior to QWEST's
- ---------------------
placing any order for fiber for such alternative route segment or
<PAGE>
segments if the number of fibers to be placed in such alternative route segment
or segments exceeds the number of fibers in the Segment or Segments to be so
relocated, and FRONTIER shall have a period of thirty (30) days from receipt of
such notice to commit, by written notice to QWEST, to acquire an IRU in an
additional number of Dark Fibers (i.e., in excess of the number of FRONTIER
Fibers to be so substituted) (subject to the availability of adequate conduit
capacity) for a per-fiber IRU fee * .
ARTICLE IX.
MAINTENANCE AND REPAIR OF THE QWEST SYSTEM
------------------------------------------
9.1 From and after the Acceptance Date with respect to each Segment,
the maintenance of the QWEST System comprising such Segment shall be provided in
accordance with the maintenance requirements and procedures set forth in Exhibit
H hereto.
ARTICLE X.
PERMITS; UNDERLYING RIGHTS; RELOCATION
--------------------------------------
10.1 QWEST covenants and agrees that it shall obtain, during the
course of construction of, and in any event on or before the completion of
conduit installation with respect to, each Segment of conduit to be delivered
hereunder all Underlying Rights (as defined below) and such other rights,
licenses, permits, authorizations, and approvals (including, without limitation,
any necessary local, state, federal or tribal authorizations and environmental
permits) that are necessary in order to permit QWEST to construct, install and
maintain the conduit and the FRONTIER Fibers to be encompassed in such Segment
in accordance with the terms and conditions hereof. QWEST further covenants and
agrees that it shall obtain, during the course of construction of and in any
event on or before the Acceptance Date with respect to each Segment to be
delivered hereunder, any and all rights-of way, easements, licenses and other
agreements relating to the grant of rights and interests in and/or access to the
real property underlying the QWEST System (collectively, the "Underlying
Rights") and such other rights, licenses, permits, authorizations, and approvals
(including without limitation, any necessary local, state, federal or tribal
authorizations and environmental permits) that are necessary in order to permit
QWEST to grant the IRUs, and otherwise to perform its obligations hereunder, in
accordance with the terms and conditions hereof, and to (and all of which
Underlying Rights shall) permit FRONTIER to use the FRONTIER Fibers and
Associated Property as provided and permitted hereunder and in accordance with
the terms and conditions hereof. QWEST shall use its best efforts to cause the
terms of each such Underlying Right to provide FRONTIER with notice of any
default on the part of QWEST and to permit FRONTIER to cure, on behalf of QWEST,
any such default by QWEST and, thereafter, to continue the use of such
Underlying Right in accordance with QWEST's rights and interests thereunder and,
if FRONTIER at any time cures such default by QWEST, QWEST shall reimburse
FRONTIER for any and all amounts reasonably paid by
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
FRONTIER promptly upon demand.
10.2 QWEST further covenants and agrees that, with respect to each
Underlying Right that is necessary in order to continue and maintain the IRUs
granted hereunder, and to permit FRONTIER to exercise its rights to use the
FRONTIER Fibers and Associated Property, in each case in accordance with the
terms and conditions hereof:
(i) QWEST shall, for a period of * years from the date hereof (or until
the earlier to occur of (A) the expiration of the economically useful life of
the FRONTIER Fibers, as determined pursuant to Section 6.2, or (B) the
expiration or termination of the term of a particular Underlying Right, so long
as any such termination is not effected as a result of any failure of QWEST (not
caused as a result of FRONTIER's failure to observe and perform its obligations
hereunder) to observe and perform its duties, obligations and responsibilities
under such Underlying Right or under this Agreement, including under this
Article X), observe and perform each and every of its obligations under each
document, agreement or instrument granting or conveying to QWEST such an
Underlying Right if the failure to observe and perform any such obligation or
obligations would permit the grantor of such Underlying Right to terminate such
Underlying Right prior to its stated expiration date, or would otherwise
materially, adversely impair or affect FRONTIER's ability to use the FRONTIER
Fibers and Associated Property, or exercise its rights with respect thereto, as
provided and permitted hereunder; and
(ii) QWEST shall either require that the initial stated term of each such
Underlying Right be for a period that does not expire, in accordance with its
ordinary terms, prior to the last day of the Minimum Period (as hereinafter
defined with respect to each Segment) or, if the initial stated term of any such
Underlying Right expires, in accordance with its ordinary terms, on a date
earlier than the last day of the Minimum Period, QWEST shall at its cost
exercise any renewal rights thereunder, or otherwise acquire such extensions,
additions and/or replacements as may be necessary, in order to cause the stated
term thereof to be continued until a date that is not earlier than the last day
of the Minimum Period. The "Minimum Period" shall be, with respect to each
Segment, the period from the date on which construction of such Segment
commences until the * anniversary of such date; and
(iii) From and after the last day of the Minimum Period, QWEST
shall use its best efforts (without being required to expend commercially
unreasonably amounts therefor) to obtain such extensions and/or renewals as may
be necessary in order to cause the stated term of each such Underlying Right to
be continued for an additional period or periods of, in the aggregate, *
years following the Minimum Period or until the earlier expiration of the
economically useful life of the FRONTIER Fibers, as determined pursuant to
Section 6.2; provided that QWEST shall not be required to expend, as
-------------
consideration for any such renewal or extension, more than the fair market rate
payable at such time for similar rights and terms except
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
to the extent that FRONTIER agrees at its option to pay directly or reimburse
QWEST for any amounts required to be paid in excess of such fair market rate to
renew or extend such an Underlying Right; and
(iv) Throughout the term of each such Underlying Right, QWEST shall at its
reasonable cost and expense defend and protect QWEST's rights in and interests
under the Underlying Rights against interfering or infringing rights, interests
or claims of third parties.
10.3 Upon the expiration or termination of any Underlying Right that
is necessary in order to grant, continue or maintain an IRU granted hereunder in
accordance with the terms and conditions hereof, so long as QWEST shall have
fully observed and performed its obligations under this Article X with respect
thereto, the Term of the IRUs hereunder with respect to any Segment or Segments
affected thereby shall automatically expire upon such expiration or termination.
10.4 If, after the Acceptance Date with respect to a Segment, QWEST is
required by a third party with legal authority to so require (including, without
limitation, the grantor of an Underlying Right, but only to the extent that such
relocation is not required as a result of a failure by QWEST to observe and
perform its obligations under such Underlying Right or this Agreement), or if
FRONTIER agrees, to relocate any portion of such Segment including any of the
facilities used or required in providing the IRUs in such Segment hereunder,
QWEST shall proceed with such relocation, including, but not limited to, the
right, in good faith, to reasonably determine the extent of, the timing of, and
methods to be used for such relocation; provided that (i) the route of any such
-------------
relocation shall be subject to the good faith agreement of the parties with a
bona fide interest therein, (ii) FRONTIER shall be kept fully informed of all
other determinations made by QWEST in connection with such relocation, and (iii)
any such relocation shall be constructed and tested in accordance with the
specifications and drawings set forth in Exhibits C and D, and incorporate fiber
meeting the specifications set forth in Exhibit E. FRONTIER shall reimburse
QWEST for its proportionate share of the Costs of such relocation of the portion
of the Segment so relocated, reduced by such amount, if any, of the portion of
such Costs as are reimbursed to QWEST by the party requiring such relocation, as
follows: (i) if the affected portion of the Segment includes any conduit other
than the conduit housing the FRONTIER Fibers for which QWEST is responsible for
relocation costs, the total Costs of relocation of the conduits (i.e.,
relocation of the conduits only without regard to whether the conduits contain
fibers) shall be allocated based on the overall number of conduits relocated;
(ii) such Costs allocated to the conduit carrying the FRONTIER Fibers plus the
Costs specifically associated with the relocation of the fiber (i.e., relocation
of the fiber only without regard to relocation of conduit) shall be further
allocated to FRONTIER based on FRONTIER's proportionate share of (A) all Costs
of fiber acquisitions, splicing and testing, prorated based on the total fiber
count in the affected Cable, as so relocated, and (B) all other Costs associated
with the relocation of the conduit housing the affected Cable, prorated based on
the total number of owners (including QWEST) and holders of IRUs or equivalent
interests (including long-term lessees) (each, an "Interest Holder") in the
affected Cable, as so relocated. FRONTIER shall
<PAGE>
have the right to review and audit all Costs incurred in connection with such
relocation. QWEST shall deliver to FRONTIER updated As-Builts with respect to
the relocated Segment not later than sixty (60) days following the completion of
such relocation. Any condemnation or taking under the power of eminent domain
of all or any portion of a Segment shall be deemed a relocation required by a
third party with legal authority to so require, and such affected Segment, or
portion thereof, shall be relocated in accordance with this Section 10.4 and any
condemnation proceeds received by QWEST shall be applied to such relocation as
provided above.
10.5 QWEST acknowledges that FRONTIER has previously committed to
acquire a certain number of miles of right-of-way from ConRail (the "ConRail
ROW"). If determined practical by QWEST in its reasonable business judgment,
and provided that the cost and other terms and conditions of acquiring and
utilizing part or all of the ConRail ROW are not greater or more restrictive and
do not provide lesser rights than any other Underlying Right which QWEST may be
hereafter required to acquire in constructing the QWEST System, QWEST shall
cooperate with FRONTIER and acquire and utilize the ConRail ROW, or applicable
portions thereof, in satisfaction of the FRONTIER commitment to ConRail. In
such event, the IRU Fee payable hereunder with respect to any Segment on the
ConRail ROW shall be adjusted as agreed by the parties.
ARTICLE XI.
USE OF QWEST SYSTEM
-------------------
11.1 The requirements, restrictions, and/or limitations upon
FRONTIER's right to use the FRONTIER Fibers and Associated Property as provided
and permitted under this Agreement imposed under, and associated safety,
operational and other rules and regulations imposed in connection with, the
Underlying Rights are referred to collectively as the "Underlying Rights
Requirements." QWEST represents and warrants that, it has made available to
FRONTIER for its review and inspection a copy of certain documents, agreements,
or instruments pursuant to which QWEST has been granted an Underlying Right as
of the date hereof (the "Existing Underlying Rights"), and certain associated
safety, operational and other rules and regulations imposed in connection with
the exercise of its rights thereunder (all of which are identified on Exhibit J
hereto). FRONTIER hereby accepts the Existing Underlying Rights and the
Underlying Rights Requirements associated therewith. QWEST represents that it
is not in default under any of the Existing Underlying Rights that would permit
the grantor of such Underlying Right to terminate such Underlying Right prior to
its stated expiration date, or would otherwise materially, adversely impair or
affect FRONTIER's ability to use the FRONTIER Fibers and Associated Property, or
exercise its rights with respect thereto, as provided and permitted hereunder,
and, to the best of its knowledge, none of the grantors are in default under the
Existing Underlying Rights. With respect to each Underlying Right (other than
the Existing Underlying Rights) obtained after the date hereof by QWEST (or an
Underlying Right existing on the date hereof under any document, agreement or
instrument delivered after the date hereof) in carrying out its obligations
hereunder from the same type of grantor as a grantor of any
<PAGE>
Existing Underlying Right, QWEST represents and warrants that the terms and
conditions thereof, and rules and regulations imposed in connection therewith,
shall not impose materially more onerous limitations and restrictions on the
rights of FRONTIER to use the FRONTIER Fibers and Associated Property as
permitted and provided hereunder than those imposed by such type of grantor
under and in connection with the Existing Underlying Rights and Underlying
Rights Requirements associated therewith. To the extent that any such
Underlying Right documents, agreements or instruments were or hereafter are
provided in a redacted format to protect confidential and proprietary business
terms, QWEST represents and warrants that no language or information so redacted
constitutes an Underlying Rights Requirement nor otherwise imposes material
requirements, restrictions and/or limitations upon FRONTIER's right to use the
FRONTIER Fibers and Associated Property as provided and permitted hereunder.
QWEST represents to FRONTIER that the map heretofore provided to FRONTIER
delineating the general location of rights of way, easements and other rights
held by QWEST under the principal agreements evidencing the Existing Underlying
Rights is a true and complete depiction, in all material respects, with respect
to the general location of such Existing Underlying Rights that relate to the
FRONTIER Fibers to be installed along the QWEST System as contemplated by this
Agreement.
11.2 FRONTIER represents, warrants and covenants that it will use the
FRONTIER Fibers and Associated Property in compliance with (i) all applicable
government codes, ordinances, laws, rules, regulations and/or restrictions, and
(ii) subject to QWEST's obligations under Section 11.1, the Underlying Rights
Requirements.
11.3 In addition to the other rights provided hereunder, but subject
to the provisions of Article VII, the IRUs granted hereunder shall include the
right at FRONTIER's cost to install additional equipment, or replace existing
equipment, in the facility space provided to FRONTIER pursuant to Article VII,
subject to the Underlying Rights Requirements.
11.4 QWEST agrees and acknowledges that it has no right to use the
FRONTIER Fibers during the Term hereof, and that, from and after the effective
date of the grant of each IRU hereunder, QWEST shall keep the FRONTIER Fibers,
the Associated Property and the IRUs granted hereunder (other than any
Associated Property (excluding any Associated Property that may be covered by
the Pre-Existing Cal-Fiber Lien as to which QWEST agrees to use its best efforts
to provide a nondisturbance agreement substantially to the effect described in
the next sentence) as to which QWEST shall have provided to FRONTIER a
nondisturbance agreement substantially to the effect as described in the next
sentence) free from (i) any liens of any third party attributable to QWEST, and
(ii) any rights or claims of any third party attributable to QWEST, as and to
the extent required pursuant to Article X hereof. In addition, QWEST agrees
that, from and after the execution of this Agreement and until the effective
date of the grant of each IRU hereunder with respect to any Segment, it shall
obtain from any entity in favor of which QWEST in its discretion shall have
granted a security interest or lien on all or part of such
<PAGE>
Segment (excluding the Pre-Existing Cal-Fiber Lien) a written nondisturbance
agreement substantially to the effect that such lienholder acknowledges
FRONTIER's rights and interests in and to the FRONTIER Fibers, the Associated
Property and the IRU's hereunder and agrees that the same shall not be
diminished, disturbed, impaired or interfered with by such lienholder.
11.5 Subject to the provisions of Article XXV and this Article XI,
FRONTIER may use the FRONTIER Fibers, the Associated Property and the IRUs for
any lawful telecommunications purpose. For purposes of this Section 11.5
"telecommunications" shall have the meaning as used and interpreted in 47 U.S.C.
' 153(2)(43). FRONTIER agrees and acknowledges that it has no right to use any
of the fibers, other than the FRONTIER Fibers, included in the Cable or
otherwise incorporated in the QWEST System, and that FRONTIER shall keep any and
all of the QWEST System, other than the IRU in the FRONTIER Fibers or in the
Associated Property, free from any liens, rights or claims of any third party
attributable to FRONTIER.
11.6 FRONTIER and QWEST shall promptly notify each other of any
matters pertaining to, or the occurrence (or impending occurrence) of, any event
which could give rise to any damage or impending damage to or loss of the QWEST
System that are known to such party. Without limiting the generality of the
foregoing, QWEST shall promptly forward to FRONTIER a copy of any notice of
default received by QWEST with respect to its obligations under any Underlying
Right if such default is not promptly cured by QWEST.
11.7 FRONTIER shall not use the FRONTIER Fibers in a way which
physically interferes in any way with or adversely affects the use of the fibers
or cable of any other person using the QWEST System, it being expressly
acknowledged that the QWEST System includes or will include other participants,
including QWEST and other owners and holders of Dark Fiber IRUs and
telecommunication system operations. QWEST shall not use any other fibers in
the QWEST System in a way which physically interferes with or adversely affects
the use of the FRONTIER Fibers, and shall obtain a similar agreement from any
person that acquires the right to use fibers in the QWEST System after the date
hereof.
11.8 FRONTIER and QWEST each agree to cooperate with and support the
other in complying with any requirements applicable to their respective rights
and obligations hereunder by any governmental or regulatory agency or authority.
11.9 QWEST agrees, so long as any such action would not violate the
terms of any Underlying Right, upon request of FRONTIER, to execute, file and/or
record such documents or instruments as FRONTIER shall deem reasonably necessary
or appropriate to evidence or safeguard the IRUs granted to FRONTIER hereunder.
FRONTIER agrees to reimburse QWEST for all reasonable costs and out-of-pocket
expenses (including, without limitation, reasonable fees and expenses of legal
counsel) incurred by QWEST in fulfilling its obligations under this Section
11.9.
<PAGE>
ARTICLE XII.
INDEMNIFICATION
---------------
12.1 Subject to the provisions of Articles XIII and XVIII, QWEST
hereby releases and agrees to indemnify, defend, protect and hold harmless
FRONTIER and its employees, officers and directors, from and against, and
assumes liability for:
(a) Any injury, loss or damage to any person (including FRONTIER), tangible
property or facilities of any person or entity (including reasonable attorneys'
fees and costs) to the extent arising out of or resulting from the acts or
omissions, negligent or otherwise, of QWEST, its officers, employees, servants,
affiliates, agents, contractors, licensees, invitees or vendors arising out of
or in connection with a default (other than a default caused by a failure of
FRONTIER to perform or comply with its obligations hereunder) by QWEST in the
performance of its obligations or breach of its representations under this
Agreement (including, without limitation, any default by QWEST in the
performance of its obligations under Article X with respect to the Underlying
Rights and under Article XI with respect to its use of the QWEST System); and
(b) Any claims, liabilities or damages, including reasonable attorneys'
fees and costs, arising out of any violation by QWEST of any regulation, rule,
statute or court order of any local, state or federal governmental agency, court
or body in connection with the performance of its obligations under this
Agreement.
12.2 Subject to the provisions of Articles XIII and XVIII, FRONTIER
hereby releases and agrees to indemnify, defend, protect and hold harmless
QWEST, and its employees, officers and directors, from and against, and assumes
liability for:
(a) Any injury, loss or damage to any person (including QWEST), tangible
property or facilities of any person or entity (including reasonable attorneys'
fees and costs) to the extent arising out of or resulting from the acts or
omissions, negligent or otherwise, of FRONTIER, its officers, employees,
servants, affiliates, agents, contractors, licensees, invitees or vendors
arising out of or in connection with a default (other than a default caused by a
failure of QWEST to perform or comply with its obligations hereunder) by
FRONTIER in the performance of its obligations or breach of its representations
under this Agreement (including, without limitation, any default by FRONTIER in
the performance of its obligations under Article XI with respect to its use of
the QWEST System); and
(b) Any claims, liabilities or damages, including reasonable attorneys'
fees and costs, arising out of any violation by FRONTIER of any regulation,
rule, statute or court order of any local, state or federal governmental agency,
court or body in connection with its use of the IRUs and/or the FRONTIER Fibers
and Associated Property hereunder.
<PAGE>
12.3 The parties agree to promptly provide each other with notice of
any lawsuit, judicial, administrative or other dispute resolution action or
proceeding, or claim of which it becomes aware and which it believes may result
in an indemnification obligation hereunder (each, an "Action"); provided that
-------------
the failure to provide any such notice shall not affect the indemnifying party's
indemnification obligation unless the indemnifying party is actually prejudiced
by the failure to receive such notice. After receipt of any such notice, if the
indemnifying party shall acknowledge in writing to the indemnified party that
the indemnifying party shall be obligated under the terms of this indemnity
hereunder in connection with such Action, then the indemnifying party shall be
entitled, if it so elects (i) to take control of the defense and investigation
of such Action, (ii) to employ and engage attorneys of its own choice to handle
and defend the same, at the indemnifying party's cost, risk and expense unless
the named parties to such action or proceeding include both the indemnifying
party and the indemnified party and the indemnified party has been advised in
writing by counsel that there may be one or more legal defenses available to
such indemnified party that are different from or additional to those available
to the indemnifying party, in which case the indemnified party shall also have
the right to employ its own counsel in any such case with the reasonable fees
and expenses of such counsel being borne by the indemnifying party, and (iii) to
compromise or settle such Action, which compromise or settlement shall be made
only with the written consent of the indemnified party, such consent not to be
unreasonably withheld. Notwithstanding anything in this Section 12.3 to the
contrary, (i) if there is a reasonable probability that an indemnifiable claim
may materially adversely affect the indemnified party, other than as a result of
money damages or other money payments, the indemnified party shall have the
right to participate in such defense, compromise or settlement and the
indemnifying party shall not, without the indemnified party's written consent
(which consent shall not be unreasonably withheld), settle or compromise any
indemnifiable claim or consent to entry of any judgment in respect thereof
unless such settlement, compromise or consent includes as an unconditional term
thereof the giving by the claimant or the plaintiff to the indemnified party a
release from all liability in respect of such indemnifiable claim.
12.4 The parties hereby expressly recognize and agree that each
party's said obligation to indemnify, defend, protect and save the other
harmless is not a material obligation to the continuing performance of the
parties' other obligations, if any, hereunder. In the event that a party shall
fail for any reason to so indemnify, defend, protect and save the other
harmless, the injured party hereby expressly recognizes that its sole remedy in
such event shall be the right to bring legal proceedings against the other party
for its damages as a result of the other party's said failure to indemnify,
defend, protect and save harmless. The obligations of the parties under this
Article XII shall survive the expiration or termination of this Agreement.
12.5 Nothing contained herein shall operate as a limitation on the
right of either party hereto to bring an action for damages against any third
party, including indirect, special or consequential damages, based on any acts
or omissions of such third party as such acts or
<PAGE>
omissions may affect the construction, operation or use of the FRONTIER Fibers
or the QWEST System; provided, however, that each party hereto shall assign such
-----------------
rights or claims, execute such documents and do whatever else may be reasonably
necessary to enable the other party to pursue any such action against such third
party.
ARTICLE XIII.
LIMITATION OF LIABILITY
-----------------------
13.1 Notwithstanding any provision of this Agreement to the contrary,
except to the extent caused by its own willful misconduct, neither party shall
be liable to the other party for any special, incidental, indirect, punitive or
consequential damages, whether foreseeable or not, arising out of, or in
connection with such party's failure to perform its respective obligations or
breach of its respective representations hereunder, including, but not limited
to, loss of profits or revenue (whether arising out of transmission
interruptions or problems, any interruption or degradation of service or
otherwise), cost of capital, or claims of customers, in each case whether
occasioned by any construction, reconstruction, relocation, repair or
maintenance performed by, or failed to be performed by, the other party or any
other cause whatsoever, including breach of contract, breach of warranty,
negligence, or strict liability, all claims with respect to which such special,
incidental, indirect, punitive or consequential damages are hereby specifically
waived. Nothing contained herein shall be construed to prohibit or reduce the
payment by QWEST of the amounts described in Section 18.2 and which the parties
acknowledge are the sole rights and remedies of FRONTIER to the extent provided
in Section 18.2(e).
ARTICLE XIV.
INSURANCE
---------
14.1 During the construction period with respect to any Segment, and
until the Acceptance Date with respect thereto, QWEST shall procure and maintain
in force the following insurance coverage from companies lawfully approved to do
business in the state where the construction will be performed:
(a) not less than $5,000,000 combined single-limit liability insurance, on
an occurrence basis, for personal injury and property damage, including, without
limitation, injury or damage arising from the operation of vehicles or equipment
and liability for completed operations;
(b) workers' compensation insurance in amounts required by applicable law
and employers' liability insurance with a limit of at least $1,000,000 per
occurrence;
(c) automobile liability insurance covering death or injury to any person
or persons, or damage to property arising from the operation of vehicles or
equipment, with limits of not less than $2,000,000 per occurrence; and
<PAGE>
(d) any other insurance coverages required pursuant to QWEST's right-of-way
agreements with railroads or other third parties.
QWEST shall require its subcontractors who are engaged in connection with
the construction of the QWEST System to maintain insurance in the types and
amounts as would be obtained by a prudent person to provide adequate protection
against loss. In all circumstances, QWEST shall require its subcontractors to
carry a minimum of $1,000,000 in commercial general liability; and
(e) FRONTIER shall be listed as an additional insured on all policies set
forth above, except workers' compensation. QWEST shall provide to FRONTIER a
certificate of insurance evidencing such insurance coverage. Evidence of
insurance furnished shall contain a clause stating FRONTIER "shall be notified
in writing at least thirty (30) days prior to any cancellation of, or any
material change or new exclusions in the policy."
14.2 Following the Acceptance Date with respect to each Segment, and
throughout the remaining term of the IRU with respect to such Segment, each
party shall procure and maintain in force, at its own expense:
(a) not less than $5,000,000 combined single limit liability insurance, on
an occurrence basis, for personal injury and property damage, including, without
limitation, injury or damage arising from the operation of vehicles or equipment
and liability for completed operations;
(b) workers' compensation insurance in amounts required by applicable law
and employers' liability insurance with a limit of at least $1,000,000 per
occurrence;
(c) automobile liability insurance covering death or injury to any person
or persons, or damage to property arising from the operation of vehicles or
equipment, with limits of not less than $2,000,000 per occurrence; and
(d) any other insurance coverages specifically required of such party
pursuant to QWEST's right-of-way agreements with railroads or other third
parties.
14.3 Both parties expressly acknowledge that a party shall be deemed
to be in compliance with the provisions of this Article if it maintains an
approved self insurance program providing for a retention of up to $1,000,000.
If either party provides any of the foregoing coverages on a claims-made basis,
such policy or policies shall be for at least a three-year extended reporting or
discovery period. Unless otherwise agreed, FRONTIER's and QWEST's insurance
policies shall be obtained and maintained with companies rated "A" or better by
Best's Key Rating Guide and each party shall provide the other with an insurance
certificate confirming compliance with this requirement for each policy
providing such required coverage.
<PAGE>
14.4 In the event either party fails to obtain the required insurance
or to obtain the required certificates from any contractor and a claim is made
or suffered, such party shall indemnify and hold harmless the other party from
any and all claims for which the required insurance would have provided
coverage. Further, in the event of any such failure which continues after seven
(7) days' written notice thereof by the other party, such other party may, but
shall not be obligated to, obtain such insurance and will have the right to be
reimbursed for the cost of such insurance by the party failing to obtain such
insurance.
14.5 In the event coverage is denied or reimbursement of a properly
presented claim is disputed by the carrier for insurance provided above, the
party carrying such coverage shall make good-faith efforts to pursue such claim
with its carrier.
14.6 FRONTIER and QWEST shall each obtain from the insurance companies
providing the coverages required by this Agreement the permission of such
insurers to allow such party to waive all rights of subrogation and such party
does hereby waive all rights of said insurance companies to subrogation against
the other party, its parent corporation, affiliates, subsidiaries, assignees,
officers, directors, and employees or any other party entitled to indemnity
under this Agreement.
ARTICLE XV.
TAXES, FEES AND OTHER GOVERNMENTAL IMPOSITIONS
----------------------------------------------
15.1 The parties acknowledge and agree that it is their mutual
objective and intent to (i) minimize, to the extent feasible, the aggregate
Impositions (as defined in Section 33.1(e)) payable with respect to the QWEST
System and (ii) share such Impositions according to their respective interests
in the QWEST System , and that they will cooperate with each other and
coordinate their mutual efforts to achieve such objectives in accordance with
the provisions of this Article XV.
15.2 QWEST shall be responsible for and shall timely pay any and all
Impositions with respect to the construction or operation of the QWEST System
which Impositions are (i) imposed or assessed prior to the Acceptance Date, (ii)
imposed or assessed with respect to events which occurred or property rights or
obligations of QWEST which existed prior to the acceptance date; or (iii)
imposed or assessed (regardless of the time) with respect to the QWEST System in
exchange for the approval of construction in the original agreement which
resulted in the granting of an Underlying Right. Notwithstanding the foregoing
obligations, QWEST shall have the right to challenge any such Impositions so
long as the challenge of such Impositions does not materially, adversely affect
the title, rights or property to be delivered to FRONTIER pursuant hereto.
15.3 Except as to Impositions described in paragraphs (ii) and (iii)
of Section 15.2, following the Acceptance Date, QWEST shall timely pay any and
all Impositions imposed upon or with respect to the QWEST System to the extent
such Impositions may not feasibly be
<PAGE>
separately assessed or imposed upon or against the respective ownership
interests of QWEST and FRONTIER in the QWEST System; provided that, upon receipt
-------------
of a notice of any such Imposition, QWEST shall promptly notify FRONTIER of such
Imposition and following payment of such Imposition by QWEST, FRONTIER shall
promptly reimburse QWEST for its proportionate share of such Imposition, which
share shall be determined (i) to the extent possible, based upon the manner and
methodology used by the particular authority imposing such Impositions (e.g., on
the cost of the relative property interests, historic or projected revenue
derived therefrom, or any combination thereof) and, if based upon projected
revenue or gross receipts, then based on the relative number of FRONTIER Fibers
in the affected portion of the QWEST System compared to the total number of
fibers in the affected portion of the QWEST System during the relevant tax
period which are subject to an indefeasible right of use or are otherwise in
use; or (ii) if the same cannot be so determined, then based upon FRONTIER's
proportionate share of the total fiber count in the affected portion of the
QWEST System. QWEST shall provide FRONTIER with reasonable supporting
documentation for Impositions for which QWEST seeks reimbursement. If QWEST's
assessed value, for property tax purposes, is based on its entire operation in
any state (i.e., central assessment), QWEST and FRONTIER shall work together in
good faith to allocate a proper portion of said assessment to the QWEST System
and FRONTIER's ownership interest in the QWEST System. Any reimbursement made
under this Section 15.3 shall be in an amount equal to the Impositions required
to be paid by QWEST in respect of the receipt or accrual of such reimbursement
less the net present value (computed at a 10% discount rate) of the tax benefit
(e.g. from the deduction, depreciation or amortization of such payment or
accrual of the Imposition) to which QWEST may be entitled with respect to the
payment or accrual of the Impositions which have been reimbursed. Hereafter,
such additional amount or amounts shall be referred to as the "Gross-up Amount."
Such Gross-up Amount shall not include any tax on the amount of the Gross-up
Amount itself. QWEST shall, upon request, provide FRONTIER with documentation
in support of any Gross-up Amount so as to ensure that both parties are made
whole in a manner that is consistent with the mutual objectives set forth in
section 15.1 of the Agreement. If such Gross-up Amount exceeds $50,000,
FRONTIER may elect to engage the services of an independent consultant, at
FRONTIER's sole cost and expense, to review QWEST's computation of such Gross-up
Amount. Any independent consultant selected by FRONTIER shall be subject to
approval by QWEST, which such approval shall not be unreasonably withheld, and
such independent consultant shall be subject to confidentiality restrictions as
may be determined in QWEST's sole discretion. Further, if, after review of such
documentation or otherwise, in the event the parties are unable to agree upon
the amount of the Gross-up Amount, such dispute shall be resolved pursuant to
Article XXI of the Agreement.
15.4 Upon notice of the assertion or proposed assertion of any
imposition described in Section 15.3 (including Impositions that trigger a
Gross-up Amount) QWEST shall promptly and in good faith consult with FRONTIER
concerning the underlying facts and whether to contest or continue to contest
such assertion or proposed assertion. Notwithstanding any provision herein to
the contrary, QWEST shall have the right to contest any Imposition described in
Section 15.3, above, (including Impositions which trigger a Gross-up Amount).
Such contest may be pursued by any lawful means including by non-payment of such
Imposition provided such non-payment
<PAGE>
does not materially, adversely affect the title, rights or property to be
delivered to FRONTIER pursuant hereto). The out-of-pocket costs and expenses
(including reasonable attorneys' fees) incurred by QWEST in any such contest
shall be shared by QWEST and FRONTIER in the same proportion as to which the
parties shared in any such Imposition, as it was originally assessed. Any
refunds or credits resulting from a contest brought pursuant to this Section
15.4 shall be divided between QWEST and FRONTIER in the same proportion as to
which such refunded or credited Impositions were borne by QWEST and FRONTIER.
In any such event, QWEST shall provide timely notice of such challenge to
FRONTIER. If QWEST chooses to proceed with such challenge after receipt of a
written objection to the challenge from FRONTIER, QWEST shall conduct such
challenge at its own costs and expense, provided that FRONTIER shall not receive
-------------
the benefit of any refund or credit, if any, obtained as a result of a
successful challenge. Further, where QWEST does not contest an Imposition,
FRONTIER shall have the right, after notice to QWEST, to contest such Imposition
as long as such contest does not materially, adversely affect the title property
or rights of QWEST. The out-of-pocket costs and expenses (including reasonable
attorney's fees) incurred by FRONTIER in any such contest shall be shared by
FRONTIER and QWEST in the same proportion as to which the parties shared in such
Imposition, as it was originally assessed. Any refunds or credits resulting
from a contest shall be divided between FRONTIER and QWEST in the same
proportion as to which such refunded or credited Imposition was borne by
FRONTIER and QWEST. If FRONTIER chooses to proceed with such contest after
receipt of written objection to the challenge from QWEST, FRONTIER shall conduct
such challenge at its own costs and expense, provided that QWEST shall not
receive the benefit of any refund or credit, if any, obtained as a result of a
successful challenge. Provided, however, that notwithstanding anything to the
contrary in this Article 15, QWEST shall have complete authority over and
discretion to control (including the authority to dismiss or not pursue) any
contests relating to Impositions based upon the computation of QWEST's taxable
income under the Federal Internal Revenue Code or state income or franchise tax
laws (hereinafter "Net Income Based Impositions"). FRONTIER shall, however, be
consulted on the conduct and status of such contest. QWEST shall have no
obligation to disclose to FRONTIER its income or franchise tax returns and
records except as to the discrete portion of such return or record that directly
relates to the computation and payment of such Net Income Based Impositions.
Provided further, however, that in the event QWEST shall determine in its own
discretion not to pursue a contest of any Net Income Based Imposition as to
which FRONTIER has requested a contest pursuant to the provisions described
above in this Section 15.4, then FRONTIER shall have no obligation to provide
any reimbursement for such amount if FRONTIER shall have obtained and provided
to QWEST an opinion of nationally recognized legal counsel confirming that a
meritorious defense exists to such Net Income Based Imposition.
15.5 Except as to Impositions described in paragraph (iii) of Section
15.2, following the Acceptance Date QWEST and FRONTIER, respectively, shall be
separately responsible for any and all Impositions (i) expressly or implicitly
imposed upon, based upon, or otherwise measured by the gross receipts, gross
income, net receipts or net income received by or accrued to such party due to
its respective ownership or use of the QWEST System and/or the
<PAGE>
FRONTIER Fibers, or (ii) which have been separately assessed or imposed upon the
respective ownership interest of such party in the QWEST System and/or the
FRONTIER Fibers. If the FRONTIER Fibers are the only fibers located in the
Cable from the point where the Cable leaves the QWEST System right-of-way to a
FRONTIER POP, FRONTIER shall be solely responsible for any and all Impositions
imposed on or with respect to such portion of the QWEST System.
15.6 Notwithstanding any provision herein to the contrary, FRONTIER
shall have the right to protest by appropriate proceedings any Imposition
described in Section 15.5, above. In such event, FRONTIER shall indemnify and
hold QWEST harmless from any expense, legal action or cost, including reasonable
attorneys' fees, resulting from FRONTIER's exercise of its rights hereunder. In
the event of any refund, rebate, reduction or abatement to FRONTIER of any such
Imposition imposed upon and/or paid by FRONTIER, FRONTIER shall be entitled to
receive the entire benefit of such refund, rebate, reduction or abatement
attributable to FRONTIER's use of the QWEST System. In the event FRONTIER has
exhausted all its rights of appeal in protesting any Imposition and has failed
to obtain the relief sought in such proceedings or appeals ("Finally Determined
Taxes and Fees"), FRONTIER and QWEST may jointly agree (with the consent and
participation of the other Interest Holders in the affected portion of the QWEST
System) to relocate a portion of the QWEST System so as to bypass the
jurisdiction which had imposed or assessed such Finally Determined Taxes and
Fees with the total Costs thereof to be shared proportionately as follows: (i)
if the affected portion of the QWEST System includes any conduit other than the
conduit in which the FRONTIER Fibers are located, the total Costs of relocation
of the conduits (i.e., relocation of the conduits only without regard to whether
the conduits contain fibers) shall be allocated based on the overall number of
conduits in the QWEST System which are relocated; and (ii) such Costs allocated
to the conduit carrying the FRONTIER Fibers plus the Costs specifically
associated with the relocation of the fiber (i.e., relocation of the fiber only
without regard to relocation of conduit) to be further allocated to FRONTIER
based upon FRONTIER's proportionate share of (A) all Costs of fiber
acquisitions, splicing and testing, prorated based on the total fiber count in
the Cable, as so relocated; and (B) all other Costs associated with the
relocation of the conduit housing the affected Cable, prorated based upon the
total number of Interest Holders in the affected Cable, as so relocated. QWEST
shall deliver to FRONTIER updated As-Builts with respect to the relocated QWEST
System not later than sixty (60) days following the completion of such
relocation. If FRONTIER and QWEST do not determine to relocate the affected
portion of the QWEST System, FRONTIER shall have the right to terminate its use
of the FRONTIER Fibers in the affected portion of the QWEST System. Such
termination shall be effective on the date specified by FRONTIER in a notice of
termination, which date shall be at least ninety (90) days after the notice.
Upon such termination, the IRU in the affected portion of the QWEST System shall
immediately terminate, and the FRONTIER Fibers in the affected portion of the
QWEST System shall thereupon revert to QWEST without reimbursement of any of the
IRU Fee or other payments previously made with respect thereto.
15.7 Notwithstanding the provisions of Section 15.6, with respect to
any Impositions relating to the QWEST System which are imposed upon both QWEST
and FRONTIER (or both
<PAGE>
of their respective interests therein), QWEST, at its option and at its own
expense, shall have the right to direct and manage any such contest; subject,
however, to reasonable and appropriate consultation with FRONTIER which hereby
agrees to cooperate with QWEST in any such contest. The right of QWEST to
contest any Imposition pursuant to this Section 15.7 shall be contingent upon
reasonable and appropriate assurances that any such contest will not adversely
affect the title, property or rights of FRONTIER hereunder.
15.8 QWEST and FRONTIER agree to cooperate fully in the preparation of
any returns or reports relating to the Impositions. QWEST and FRONTIER further
acknowledge and agree that the provisions of this Article XV are intended to
allocate the Impositions expected to be assessed against or imposed upon the
parties with respect to the QWEST System based upon the procedures and methods
of computation by which Impositions generally have been assessed and imposed to
date, and that material changes in the procedures and methods of computation by
which such assessments are assessed and imposed could significantly alter the
fundamental economic assumptions underlying the transactions hereunder to the
parties. Accordingly, the parties agree that, if in the future the procedures or
methods of computation by which Impositions are assessed or imposed against the
parties change materially from the procedures or methods of computation by which
they are imposed as of the date hereof, the parties will negotiate in good faith
an amendment to the provisions of this Article XV in order to preserve, to the
extent reasonably possible, the economic intent and effect of this Article XV as
of the date hereof.
ARTICLE XVI.
NOTICE
------
16.1 Unless otherwise provided herein, all notices and communications
concerning this Agreement shall be addressed to the other party as follows:
If to QWEST: QWEST Communications Corporation
ATTENTION: President
555 Seventeenth Street
Denver, Colorado 80202
Telephone No.: (303) 291-1400
Facsimile No.: (303) 291-1724
with a copy to: QWEST Communications Corporation
ATTENTION: General Counsel
555 Seventeenth Street
Denver, Colorado 80202
Telephone No.: (303) 291-1400
Facsimile No.: (303) 291-1724
<PAGE>
and a copy to: Martha Dugan Rehm, Esq.
Holme Roberts & Owen LLP
1700 Lincoln, Suite 4100
Denver, Colorado 80206
Telephone No.: (303) 861-7000
Facsimile No.: (303) 866-0200
If to FRONTIER: FRONTIER Communications International Inc.
ATTENTION: Director, Network Development
180 South Clinton Avenue
Rochester, New York 14646
Telephone No.: (716) 777-6848
Facsimile No.: (716) 777-6770
with a copy to: Frontier Corporation
ATTENTION: Vice President,
Network Planning and Development
180 South Clinton Avenue
Rochester, New York 14646
Telephone No.: (716) 777-8018
Facsimile No.: (716) 232-8154
and a copy to: Frontier Corporation
ATTENTION: Vice President,
Legal and Regulation
180 South Clinton Avenue
Rochester, New York 14646
Telephone No.: (716) 777-6105
Facsimile No.: (716) 546-7823
or at such other address as either party may designated from time to time in
writing to the other party.
16.2 Unless otherwise provided herein, notices shall be hand
delivered, sent by registered or certified U.S. mail, postage prepaid, or by
commercial overnight delivery service, or transmitted by facsimile, and shall be
deemed served or delivered to the addressee or its office when received at the
address for notice specified above when hand delivered, upon confirmation of
sending when sent by fax, on the day after being sent when sent by overnight
delivery service, or three (3) days after deposit in the mail when sent by U.S.
mail.
16.3 All invoices concerning payment obligations due to QWEST pursuant
to this Agreement shall be addressed to FRONTIER as follows:
<PAGE>
Frontier Corporation
ATTENTION: Treasurer
180 South Clinton Avenue
Rochester, New York 14646
Telephone No.: (716) 777-7130
Facsimile No.: (716) 325-7633
with a copy to: Frontier Corporation
ATTENTION: Director, Network Development
180 South Clinton Avenue
Rochester, New York 14646
Telephone No.: (716) 777-6848
Facsimile No.: (716) 777-6770
ARTICLE XVII.
CONFIDENTIALITY
---------------
17.1 QWEST and FRONTIER hereby agree that if either party provides
(or, prior to the execution hereof, has provided) confidential or proprietary
information to the other party ("Proprietary Information"), such Proprietary
Information shall be held in confidence, and the receiving party shall afford
such Proprietary Information the same care and protection as it affords
generally to its own confidential and proprietary information (which in any case
shall be not less than reasonable care) in order to avoid disclosure to or
unauthorized use by any third party. The parties acknowledge and agree that
this Agreement, including all of the terms, conditions and provisions hereof,
and all drafts hereof, constitutes Proprietary Information. In addition, all
information disclosed by either party to the other in connection with or
pursuant to this Agreement, including prior to the date hereof, shall be deemed
to be Proprietary Information. All Proprietary Information, unless otherwise
specified in writing, shall remain the property of the disclosing party, shall
be used by the receiving party only for the intended purpose, and such written
Proprietary Information, including all copies thereof, shall be returned to the
disclosing party or destroyed after the receiving party's need for it has
expired or upon the request of the disclosing party. Proprietary Information
shall not be reproduced except to the extent necessary to accomplish the purpose
and intent of this Agreement, or as otherwise may be permitted in writing by the
disclosing party.
17.2 The foregoing provisions of Section 17.1 shall not apply to any
Proprietary Information which (i) becomes publicly available other than through
the recipient; (ii) is required to be disclosed by a governmental or judicial
law, order, rule or regulation; (iii) is independently developed by the
disclosing party; (iv) becomes available to the disclosing party without
restriction from a third party; or (v) becomes relevant to the settlement of any
dispute or enforcement of either party's rights under this Agreement in
accordance with the provisions of
<PAGE>
this Agreement, in which case appropriate protective measures shall be taken to
preserve the confidentiality of such Proprietary Information as fully as
possible within the confines of such settlement or enforcement process. If any
Proprietary Information is required to be disclosed pursuant to the foregoing
clause (ii), the party required to make such disclosure shall promptly inform
the other party of the requirements of such disclosure.
17.3 Notwithstanding Sections 17.1 and 17.2 of this Article, either
party may disclose Proprietary Information to its employees, agents, and legal,
financial, and accounting advisors and providers (including its lenders and
other financiers) to the extent necessary or appropriate in connection with the
negotiation and/or performance of this Agreement or its obtaining of financing,
provided that each such party is notified of the confidential and proprietary
- -------------
nature of such Proprietary Information and is subject to or agrees to be bound
by similar restrictions on its use and disclosure. In addition, notwithstanding
Sections 17.1 and 17.2 of this Article, FRONTIER may disclose this Agreement and
its terms, conditions and provisions to the Permitted System Acquiror and/or the
Permitted Sacramento/Seattle Acquiror (each as defined in Section 25.3(b)),
provided that (i) such Permitted System Acquiror and/or Permitted
- -------------
Sacramento/Seattle Acquiror, prior to any such disclosure, shall have been
notified of the confidential and proprietary nature of this Agreement and its
terms, conditions and provisions and shall have entered into a written
confidentiality agreement with substantially similar (and in no event less
restrictive than the) terms of the Confidentiality Agreement between QWEST and
FRONTIER dated February 15, 1995, (ii) copies of all or any portion of this
Agreement (including Exhibits) may not be furnished to the Permitted System
Acquiror and/or the Permitted Sacramento/Seattle Acquiror without the prior
written consent of QWEST (not unreasonably withheld or delayed) of the proposed
form of disclosure thereof (redacted or otherwise), and (iii) copies of all or
any portion of any Underlying Right may not be furnished without the prior
written consent of QWEST (not unreasonably withheld or delayed).
17.4 The provisions of this Article XVII shall survive expiration or
termination of this Agreement.
ARTICLE XVIII.
DEFAULT
-------
18.1 With respect to all payments required to be made by FRONTIER
hereunder, including, without limitation, payment of the IRU Fee and all other
amounts payable by FRONTIER hereunder, in the event FRONTIER shall fail to make
a payment by the date due and payable hereunder, from and after such date, (i)
such unpaid amount shall bear interest until paid at a rate equal to the rate
set forth in Article XXX and (ii) if such payment is due with respect to a
Segment on or prior to the Acceptance Date of such Segment, the Estimated
Delivery Date for such Segment shall be extended by a number of days equal to
the number of days that elapse from the date such payment is due until paid. In
the event any amount or amounts due and payable hereunder remain unpaid for a
period of eighty (80) days after written notice from QWEST to FRONTIER, and the
amount thereof is not in bona fide dispute, then QWEST may,
<PAGE>
in its sole and absolute discretion and in addition to its other rights and
remedies hereunder, after ten (10) days prior written notice to FRONTIER and the
failure of FRONTIER to pay such amount within such ten-day period, terminate any
and all of its obligations hereunder with respect to any Segment or Segments as
to which the Acceptance Date has not yet occurred or the grant of the IRU with
respect to which has not yet become effective, and to apply any and all amounts
previously paid by FRONTIER hereunder with respect to such Segment or Segments
toward the payment of any other amounts then or thereafter payable by FRONTIER
hereunder. With respect to all of its other obligations hereunder, in the event
FRONTIER shall fail to perform a non-payment obligation and such failure shall
continue for a period of thirty (30) days after QWEST shall have given FRONTIER
written notice of such failure, FRONTIER shall be in default hereunder unless
FRONTIER shall have cured such failure or such failure is otherwise waived in
writing by QWEST within such thirty (30) days; provided, however, that where
-----------------
such failure cannot reasonably be cured within such 30-day period, if FRONTIER
shall proceed promptly to cure the same and prosecute such cure with due
diligence, the time for curing such failure shall be extended for such period of
time as may be necessary to complete such cure; and provided further that if
----------------
FRONTIER certifies in good faith to QWEST in writing that a non-payment failure
has been cured, such failure shall be deemed to be cured unless QWEST otherwise
notifies FRONTIER in writing within fifteen (15) days of receipt of such notice
from FRONTIER. FRONTIER shall be in default hereunder (i) automatically upon
the making by FRONTIER or Frontier Corporation of a general assignment for the
benefit of its creditors, the filing by FRONTIER or Frontier Corporation of a
voluntary petition in bankruptcy or the filing by FRONTIER or Frontier
Corporation of any petition or answer seeking, consenting to, or acquiescing in
reorganization, arrangement, adjustment, composition, liquidation, dissolution,
or similar relief; (ii) one hundred twenty (120) days after the filing of an
involuntary petition in bankruptcy or other insolvency protection against
FRONTIER or Frontier Corporation which is not dismissed within such one hundred
twenty (120) days, or (iii) upon any default by Frontier Corporation under the
Guaranty, which default is not cured within the relevant cure period, if any,
provided with respect thereto under the Guaranty. Except as otherwise provided
in this Section 18.1, upon any default by FRONTIER, after written notice thereof
from QWEST, QWEST may (i) take such action as it determines, in its sole
discretion, to be necessary to correct the default and, subject to Section 13.1,
recover from FRONTIER its reasonable costs incurred in correcting such default,
and (ii) pursue any legal remedies it may have under applicable law or
principles of equity relating to such default, including specific performance.
Notwithstanding any other provision of this Agreement, QWEST acknowledges and
agrees that QWEST shall have no right to terminate the IRU or any of the rights
and interests of FRONTIER hereunder with respect to any Segment for which the
IRU Fee relating thereto has been fully paid.
18.2 (a) With respect to its obligation to complete the construction,
installation, and satisfactory Fiber Acceptance Testing of the FRONTIER Fibers
comprising a particular Segment by the Estimated Delivery Date with respect to
such Segment pursuant to Section 3.2, the parties acknowledge and agree that it
is in their mutual best interest to work together in a cooperative effort to
determine whether and to what extent any event or occurrence that is reasonably
likely to cause a delay in the delivery of a Segment hereunder, as a result of
any force
<PAGE>
majeure event or other occurrence described in Article XX or otherwise, can be
terminated, resolved or avoided, and to cause the construction, installation and
delivery of the Segment to be completed in the most expeditious and practical
manner feasible under the circumstances. Accordingly, within three (3) months
following its discovery of an event or occurrence that QWEST reasonably believes
is likely to cause (i) an extension of the Estimated Delivery Date of one
hundred twenty (120) days or more pursuant to Article XX or (ii) a Delivery
Default (as defined pursuant to Section 18.2(d) below), QWEST shall give written
notice to FRONTIER of such event or occurrence. Thereupon, each of QWEST and
FRONTIER (i) will designate a senior executive officer with decision-making
authority and familiarity with this Agreement and the relevant issue hereunder,
and (ii) may designate one technical representative and one financial
representative, to participate in the following resolution efforts. Each of
such designees shall participate in such meetings, promptly scheduled at
mutually agreed upon times and places, as may be necessary or appropriate to
discuss in good faith the status of construction of the affected Segment, the
reason or reasons for the anticipated Estimated Delivery Date extension or
Delivery Default, various possible and practical means by which the event(s) or
occurrence(s) causing such anticipated Estimated Delivery Date extension or
Delivery Default might be terminated, avoided or resolved, including, without
limitation, possible modifications to the route, selection of right-of-way, or
manner of construction of the affected Segment, and (iii) use their best efforts
to settle upon and implement a procedure by which such event(s) or occurrence(s)
may be terminated, avoided or resolved and the construction, installation and
delivery of the affected Segment completed in an expeditious and economically
practical and feasible manner under the circumstances. The parties acknowledge
and agree that, because the QWEST System includes or will include other
participants, including owners and holders of Dark Fiber IRUs and
telecommunication system operations, such meetings may, and likely will, involve
designees and representatives of such other participants, and the resolution of
any matters so acted upon will require the cooperative efforts of, and have to
be structured, to the extent feasible, in an effort to meet the needs of all
such participants. The parties hereto further acknowledge and agree that no
failure of the parties hereto to resolve, or to agree upon a manner in which
they might resolve, any issue addressed hereunder shall impair, adversely affect
or invalidate any of their respective rights, claims or remedies under this
Agreement.
(b) If, notwithstanding the efforts of the parties pursuant to Section
18.2(a):
(i) (A) a force majeure event or occurrence described in Article XX
causing an anticipated Estimated Delivery Date extension has not been
terminated, avoided or resolved by the date that is twelve (12) months following
QWEST's discovery of such event or occurrence, and
(B) there is no "Reasonably Apparent Probability" (either as mutually
determined by QWEST and FRONTIER or, if QWEST and FRONTIER are unable to make
such a mutual determination, as determined by an independent third party
mutually selected by QWEST and FRONTIER and familiar with large-scale fiberoptic
system constructions projects or, if QWEST and FRONTIER are unable to make such
a mutual selection, each of QWEST and
<PAGE>
FRONTIER shall designate such an independent third party, the two of which shall
designate such an independent third party to make such determination) that the
Acceptance Date with respect to any such affected Segment will occur within (1)
twelve (12) months following the Estimated Delivery Date (without extension for
any delay pursuant to Article XX) with respect to any Segment designated as a
"priority" Segment on Exhibit A-1, or (2) eighteen (18) months following the
Estimated Delivery Date (without extension for any delay pursuant to Article XX)
with respect to any other Segment (such date with respect to each Segment being
referred to as the "Outside Force Majeure Date"); or
(ii) notwithstanding a determination pursuant to the foregoing clause (i)
that there was a Reasonably Apparent Probability that the Acceptance Date with
respect to the affected Segment would occur by the applicable Outside Force
Majeure Date, nonetheless the event or occurrence described in Article XX
causing such delay is continuing on such applicable Outside Force Majeure Date;
or
(iii) notwithstanding such a determination that there was a Reasonably
Apparent Probability that the Acceptance Date with respect to the affected
Segment would occur by the applicable Outside Force Majeure Date, nonetheless,
on the applicable Outside Force Majeure Date, although the event or occurrence
described in Article XX has been terminated, avoided or resolved and QWEST has
resumed its construction, installation, splicing, and/or testing efforts, QWEST
is unable to demonstrate to FRONTIER's reasonable satisfaction that the
Acceptance Date for such Segment will occur, in all reasonable probability, by
the date that is six (6) months following such Outside Force Majeure Date,
then, in any such event described in foregoing clauses (i), (ii), and (iii),
FRONTIER may elect, in its sole discretion, by written notice to QWEST, to
delete such Segment from the System Route otherwise to be delivered pursuant to
this Agreement, and recover from QWEST (1) the amount of the IRU Fee previously
paid by FRONTIER hereunder with respect to such Segment, plus (2) interest at
the prime rate interest published by The Wall Street Journal as the base rate on
-----------------------
corporate loans posted by a substantial percentage of the nation's largest banks
on such date, plus (3) an amount equal to ten percent (10%) of the IRU Fee for
such Segment, as determined or redetermined pursuant to Section 2.1 (with such
aggregate amount payable to FRONTIER promptly following QWEST's receipt of such
election notice or, at the election of FRONTIER, offset against the unpaid
amount of the IRU Fee payable hereunder with respect to any other Segment or
Segments). Upon any such election and payment (or offset), neither party shall
have any further rights or obligations with respect to such Segment hereunder.
(c) If, notwithstanding the efforts of the parties pursuant to Section
18.2(a):
(i) (A) an event or occurrence causing an anticipated Delivery Default
(as defined in Section 18.2(d) below) has not been terminated, avoided, resolved
or waived by the date that is twelve (12) months following QWEST's discovery of
such event or occurrence; and
<PAGE>
(B) there is no Reasonably Apparent Probability that the Acceptance Date
with respect to any such affected Segment will occur within (x) twelve (12)
months following the Estimated Delivery Date with respect to each Segment
designated as a "priority" Segment on Exhibit A-1, or (y) eighteen (18) months
following the Estimated Delivery Date with respect to any other Segment (such
dates being referred to collectively as the "Outside Delivery Default Date"); or
(ii) notwithstanding a determination pursuant to the foregoing clause (i)
that there was a Reasonably Apparent Probability that the Acceptance Date with
respect to the affected Segment would occur by the applicable Outside Delivery
Default Date, nonetheless, on the applicable Outside Delivery Default Date, the
Acceptance Date for such Segment has not occurred;
then, in any such event described in the foregoing clauses (i) and (ii),
FRONTIER may elect, in its sole discretion, by written notice to QWEST, to
delete such Segment from the System Route otherwise to be delivered pursuant to
this Agreement, and recover from QWEST (1) the amount of the IRU Fee previously
paid by FRONTIER hereunder with respect to such Segment, plus (2) interest
thereon at the rate of interest applicable to late payments set forth in Article
XXX, plus (3) an amount equal to fifty percent (50%) of the IRU Fee for such
Segment, as determined or redetermined pursuant to Section 2.1, but without
reduction of such IRU fee under Section 18.2(d) (with such aggregate amount
payable to FRONTIER promptly following QWEST's receipt of such election notice
or, at the election of FRONTIER, offset against the unpaid amount of the IRU Fee
payable hereunder with respect to any other Segment or Segments). Upon any such
election and payment (or offset), neither party shall have any further rights or
obligations with respect to such Segment hereunder.
(d) In addition to the specific rights and remedies provided pursuant to
the foregoing paragraphs (b) and (c) in connection with delays and anticipated
delays in the delivery of Segments hereunder, QWEST shall be in default under
this Agreement if the Acceptance Date with respect to any Segment has not
occurred within one hundred twenty (120) days after the Estimated Delivery Date
(a "Delivery Default"). From the date of any such Delivery Default, and until
the Acceptance Date with respect to such Segment occurs, the IRU Fee with
respect to such Segment, as determined or redetermined pursuant to Section 2.1
hereof, shall be reduced by an amount equal to *% of such IRU Fee for each
thirty (30) days (or a pro rata percentage of *% for any period of less than
thirty (30) days) that elapse between such date of Delivery Default and the
Acceptance Date.
(e) The rights and remedies set forth in the foregoing Sections 18.2(c) and
18.2(d) shall be the sole remedies available to FRONTIER with respect to any
failure by QWEST to construct, install, and conduct satisfactory Fiber
Acceptance Testing with respect to the FRONTIER Fibers comprising any Segment by
the relevant Estimated Delivery Date (it being expressly acknowledged and agreed
that the rights provided to FRONTIER pursuant to
* Confidential Treatment Applied For
<PAGE>
Section 18.2(b) are provided only as an accommodation in the event of lengthy
force majeure delays pursuant to Article XX, and that the events described in
Section 18.2(b) do not constitute defaults hereunder). With respect to all of
QWEST's other obligations hereunder, in the event that QWEST shall fail to
perform an obligation and such failure shall continue for a period of thirty
(30) days after FRONTIER shall have given QWEST written notice of such failure,
QWEST shall be in default hereunder unless QWEST shall have cured such failure
or such failure is otherwise waived in writing by FRONTIER within such thirty
(30) days; provided however, that where such failure cannot reasonably be cured
----------------
within such 30-day period, if QWEST shall proceed promptly to cure the same and
prosecute such cure with due diligence, the time for curing such failure shall
be extended for such period of time as may be necessary to complete such cure;
and provided further, that if QWEST certifies in good faith to FRONTIER in
----------------
writing that failure has been cured, such failure shall be deemed to be cured
unless FRONTIER otherwise notifies QWEST in writing within fifteen (15) days of
receipt of such notice from QWEST. QWEST shall be in default hereunder
automatically upon the making by QWEST of a general assignment for the benefit
of its creditors, the filing by QWEST of a voluntary petition in bankruptcy or
the filing by QWEST of any petition or answer seeking, consenting to, or
acquiescing in reorganization, arrangement, adjustment, composition,
liquidation, dissolution, or similar relief, or (ii) one hundred twenty (120)
days after the involuntary filing of a petition in bankruptcy or other
insolvency protection against QWEST which is not dismissed within such 120-day
period. Except as otherwise provided in this Section 18.2, upon any default by
QWEST, after notice thereof from FRONTIER, FRONTIER may (i) take such action as
it determines, in its sole discretion, to be necessary to correct the default,
and, subject to Section 13.1, recover from QWEST its reasonable costs in
correcting such default, and (ii) pursue any legal remedies it may have under
applicable law or principles of equity relating to such default including
specific performance.
ARTICLE XIX.
TERMINATION
-----------
19.1 This Agreement automatically shall terminate with respect to a
Segment upon the expiration or termination of the Term of the IRU respecting
such Segment pursuant to Article VI or Section 18.2 hereof.
19.2 Upon the expiration or termination of this Agreement with respect
to a Segment, the IRU in such Segment shall immediately terminate and all rights
of FRONTIER to use the QWEST System, the FRONTIER Fibers, the Associated
Property or any part thereof relating to such Segment, shall cease and QWEST
shall owe FRONTIER no additional duties or consideration with respect to such
Segment. Promptly thereupon, FRONTIER shall remove all of FRONTIER's
electronics, equipment, separate Regeneration Facilities (as provided pursuant
to Section 7.2) and other associated FRONTIER property from such Segment and any
related QWEST facilities at its sole cost under QWEST's supervision (which
supervision shall be without cost to FRONTIER).
<PAGE>
19.3 Notwithstanding the foregoing, no termination or expiration of
this Agreement shall affect the rights or obligations of any party hereto (i)
with respect to any then existing defaults or the obligation to make any payment
hereunder for services rendered prior to the date of termination or expiration
or (ii) pursuant to Article XII, Article XIII, Article XV or Article XVII
herein, which shall survive the expiration or termination hereof.
ARTICLE XX.
FORCE MAJEURE
-------------
20.1 Neither party shall be in default under this Agreement if and to
the extent that any failure or delay in such party's performance of one or more
of its obligations hereunder is caused by any of the following conditions, and
such party's performance of such obligation or obligations shall be excused and
extended for and during the period of any such delay: act of God; fire; flood;
fiber, Cable, or other material failures, shortages or unavailability or other
delay in delivery not resulting from the responsible party's failure to timely
place orders therefor (it being expressly acknowledged that the Cable that is
being acquired for and installed in the QWEST System and that will include the
FRONTIER Fibers must include higher fiber counts than that necessary solely for
the FRONTIER Fibers in order to permit completion of the entire QWEST System);
lack of or delay in transportation; government codes, ordinances, laws, rules,
regulations or restrictions (collectively, "Regulations"); war or civil
disorder; strikes or other labor disputes; failure of a third party to grant or
recognize an Underlying Right, or any other cause beyond the reasonable control
of such party; provided that any delay caused by the failure of a third party to
-------------
grant an Underlying Right shall constitute a force majeure delay hereunder only
to the extent that such delay does not extend beyond a period of six months
(such that the Estimated Delivery Date with respect to any Segment affected by
such delay shall be extended only up to a period of six months of any such
delay, and shall not be further extended if such delay extends beyond a period
of six months). The party claiming relief under this Article shall notify the
other in writing of the existence of the event relied on and the cessation or
termination of said event.
ARTICLE XXI
DISPUTE RESOLUTION
------------------
21.1 Except as provided in Sections 18.1 and 18.2, if the parties are
unable to resolve any disagreement or dispute arising under or related to this
Agreement, including without limitation, the failure to agree upon any item
requiring a mutual agreement of the parties hereunder, they shall resolve the
disagreement or dispute as follows:
(a) Officers. Either party may refer the matter to the Chief Executive
--------
Officers or the Chief Operating Officers (the "Officers") of the parties by
giving the other party written notice (a "Notice"). Within fifteen (15) days
after delivery of a Notice, the Officers of both parties shall meet at a
mutually acceptable time and place to exchange relevant information and to
attempt to resolve the dispute.
<PAGE>
(b) Negotiation. If the matter has not been resolved within thirty (30)
-----------
days after delivery of such Notice, or if the Officers fail to meet within
fifteen (15) days after delivery of such Notice, either party may initiate
mediation and, if applicable, arbitration in accordance with the procedure set
forth in subsections (c) and (d) below. All negotiations conducted by the
Officers pursuant to this clause are confidential and shall be treated as
compromise and settlement negotiations for purposes of the Federal Rules of
Evidence and State Rules of Evidence.
(c) Mediation. In the event a dispute exists between the parties and the
---------
respective Officers are unable to resolve the dispute, the parties agree to
participate in a non-binding mediation procedure as follows:
(i) A mediator will be selected by having counsel for each party agree on a
single person to act as mediator. The parties' counsel as well as the Officers
of each party and not more than two other participants from each party will
appear before the mediator at a time and place determined by the mediator, but
not more than sixty (60) days after delivery of a Notice. The fees of the
mediator and other costs of mediation will be shared equally by the parties.
(ii) Each party's counsel will have forty-five (45) minutes to present a
review of the issue and argument before the mediator. After each counsel's
presentation, the other counsel may present specific counter-arguments not to
exceed ten (10) minutes. The 45-minute and 10-minute periods will be exclusive
of the time required to answer questions from the mediator or attendees.
(iii) After both presentations, the Officers may ask questions of the other
side. At the conclusion of both presentations and the question periods, the
Officers and their counsels will meet together to attempt to resolve the
dispute. The length of the meeting will be as agreed between the parties. Either
party may abandon the procedure at the end of the presentations and question
periods if they feel it is not productive to go further. The mediation procedure
is not binding on either party.
(iv) The duties of the mediator are to be sure that the above set-out time
periods are adhered to and to ask questions so as to clarify the issues and
understandings of the parties. The mediator may also offer possible resolutions
of the issues but has no duty to do so.
(d) Arbitration. If the matter is not resolved after applying the
-----------
mediation procedures set forth above, or if either party refuses to take part in
the mediation process, the parties hereby agree to submit all controversies,
claims and matters of difference that are unresolved to arbitration in Chicago,
Illinois, according to the commercial rules and practices of the American
Arbitration Association ("AAA") from time to time in force, and in accordance
with the following provisions of this subsection (d), and unless otherwise
agreed by the parties and subject to the rights of the parties as provided in
Section 18.1 and Section 18.2 hereof (including the right not to continue to
perform under this Agreement), they shall continue to perform under this
Agreement during arbitration.
<PAGE>
(i) Arbitration discovery shall be conducted in accordance with the Federal
Rules of Civil Procedure, with any disputes over the scope of discovery to be
determined by the arbitrators, it being intended that the arbitrators shall
allow limited, reasonable discovery prior to any hearing on the merits.
(ii) Arbitration hereunder shall be by three independent and impartial
arbitrators. Each of the parties shall appoint one arbitrator within thirty
(30) days after initiation of arbitration and the two arbitrators so appointed
shall select a third arbitrator within forty-five (45) days after initiation of
arbitration. In the event that the parties or the arbitrators fail to select
arbitrators as required above, the AAA shall select such arbitrators.
(iii) The AAA shall have the authority to disqualify any arbitrator who it
determines not to be independent and impartial. The arbitrators shall be
entitled to a fee commensurate with their fees for professional services
requiring similar time and effort.
(iv) The arbitrators shall conduct a hearing no later than sixty (60) days
after initiation of the matter to arbitration, and a decision shall be rendered
by the arbitrators within thirty (30) days of the hearing. At the hearing, the
parties shall present such evidence and witnesses as they may choose, with or
without counsel. Adherence to formal rules of evidence shall not be required
but the arbitration panel shall consider any evidence and testimony that it
determines to be relevant, in accordance with procedures that it determines to
be appropriate. The arbitration determination shall be in writing and shall
specify the factual and legal bases for the determination. The arbitrators may
award legal or equitable relief, including but not limited to specific
performance.
(v) The parties agree that this submission and agreement to arbitrate shall
be governed by and specifically enforceable in accordance with the laws of the
State of Illinois. Arbitration may proceed in the absence of any party if prior
written notice of the proceedings has been given to such party. The parties
agree to abide by all decisions and determinations rendered in such proceedings.
Such decisions and determinations shall be final and binding on all parties.
All decisions and determinations may be filed with the clerk of one or more
courts, state, federal or foreign having jurisdiction over the party against
whom it is rendered or its property, as a basis of judgment.
(vi) The arbitrators' fees and other costs of the arbitration shall be
borne by the party against whom the award is rendered, except as the arbitration
panel may otherwise provide in its written opinion.
ARTICLE XXII.
WAIVER
------
<PAGE>
22.1 The failure of either party hereto to enforce any of the
provisions of this Agreement, or the waiver thereof in any instance, shall not
be construed as a general waiver or relinquishment on its part of any such
provision, but the same shall nevertheless be and remain in full force and
effect.
ARTICLE XXIII.
GOVERNING LAW
-------------
23.1 This Agreement shall be governed by and construed in accordance
with the domestic laws of the State of Illinois, without reference to its choice
of law principles. Any litigation based hereon, or arising out of or in
connection with a default by either party in the performance of its obligations
hereunder, shall be brought and maintained exclusively in the courts of the
State of Illinois or in the United States District Court for the Northern
District of Illinois, and each party hereby irrevocable submits to the
jurisdiction of such courts for the purpose of any such litigation and
irrevocably agrees to be bound by any judgment rendered thereby in connection
with such litigation.
ARTICLE XXIV.
RULES OF CONSTRUCTION
---------------------
24.1 The captions or headings in this Agreement are strictly for
convenience and shall not be considered in interpreting this Agreement or as
amplifying or limiting any of its content. Words in this Agreement which import
the singular connotation shall be interpreted as plural, and words which import
the plural connotation shall be interpreted as singular, as the identity of the
parties or objects referred to may require.
24.2 Unless expressly defined herein, words having well known
technical or trade meanings shall be so construed. All listing of items shall
not be taken to be exclusive, but shall include other items, whether similar or
dissimilar to those listed, as the context reasonably requires.
24.3 Except as set forth to the contrary herein, any right or remedy
of FRONTIER or QWEST shall be cumulative and without prejudice to any other
right or remedy, whether contained herein or not.
24.4 Except as expressly provided in Section 28.1, nothing in this
Agreement is intended to provide any legal rights to anyone not an executing
party of this Agreement.
24.5 This Agreement has been fully negotiated between and jointly
drafted by the parties.
<PAGE>
24.6 All actions, activities, consents, approvals and other
undertakings of the parties in this Agreement shall be performed in a reasonable
and timely manner, it being expressly acknowledged and understood that time is
of the essence in the performance of obligations required to be performed by a
date expressly specified herein. Except as specifically set forth herein, for
the purpose of this Agreement the standards and practices of performance within
the telecommunications industry in the relevant market shall be the measure of a
party's performance.
ARTICLE XXV.
ASSIGNMENT AND DARK FIBER TRANSFERS
-----------------------------------
25.1 Except as provided below, QWEST shall not assign, encumber or
otherwise transfer this Agreement or all or any portion of its rights or
obligations hereunder to any other party without the prior written consent of
FRONTIER, which consent will not be unreasonably withheld or delayed.
Notwithstanding the foregoing, QWEST shall have the right, without FRONTIER's
consent, to (i) subcontract any of its construction or maintenance obligations
hereunder, or (ii) assign or otherwise transfer this Agreement in whole or in
part (A) as collateral to any institutional lender to QWEST (or institutional
lender to any permitted transferee or assignee of QWEST) subject to the prior
rights and obligations of the parties hereunder, (B) to any parent, subsidiary
or affiliate of QWEST, (C) to any person, firm or corporation which shall
control, be under the control of or be under common control with QWEST, or (D)
any corporation or other entity into which QWEST may be merged or consolidated
or which purchases all or substantially all of the stock or assets of QWEST, or
(E) any partnership, joint venture or other business entity of which QWEST or
any wholly owned subsidiary of QWEST HOLDING CORPORATION owns at least 50
percent of the equity interests thereof and which cannot make major decisions
without the consent of QWEST (or subsidiary of QWEST HOLDING CORPORATION);
provided that the assignee or transferee in any such circumstance shall continue
- -------------
to be subject to all of the provisions of this Agreement, including without
limitation, this Section 25.1 (except that any lender referred to in clause (A)
above shall not incur any obligations under this Agreement nor shall it be
restricted from exercising any right of enforcement or foreclosure with respect
to any related security interest or lien, so long as the purchaser in
foreclosure is subject to the provisions of this Agreement, including, without
limitation, this Section 25.1); and provided further that promptly following any
---------------------
such assignment or transfer, QWEST shall give FRONTIER written notice
identifying the assignee or transferee. In the event of any permitted partial
assignment of any rights hereunder, QWEST shall remain the sole point of contact
with FRONTIER. No permitted partial or complete assignment shall release or
discharge QWEST from its duties and obligations hereunder.
25.2 Except as provided in this Section 25.2 and the following Section
25.3, FRONTIER shall not assign, encumber or otherwise transfer this Agreement
or all or any of portion of its rights or obligations hereunder to any other
party without the prior written consent of QWEST, which consent will not be
unreasonably withheld or delayed. Subject to the
<PAGE>
provisions of Section 25.3 (which provision shall be binding upon any permitted
assignee or transferee hereunder), FRONTIER shall have the right, without
QWEST's consent, to assign or otherwise transfer this Agreement in whole or in
part (i) as collateral to any institutional lender to FRONTIER (or institutional
lender to any permitted transferee or assignee of FRONTIER) subject to the prior
rights and obligations of the parties hereunder, (ii) to any parent, subsidiary
or affiliate of FRONTIER, (iii) to any person, firm or corporation which shall
control, be under the control of or be under common control with FRONTIER, or
(iv) any other entity into which FRONTIER may be merged or consolidated or which
purchases all or substantially all of the stock or assets of FRONTIER or (v) any
partnership, joint venture or other business entity of which FRONTIER or any
wholly owned subsidiary of FRONTIER CORPORATION owns at least 50 percent of the
equity interests thereof and which cannot make major decisions without the
consent of FRONTIER CORPORATION (or subsidiary of FRONTIER CORPORATION);
provided that no assignment or other transfer under this clause (v) shall be
permitted hereunder if its purpose or effect would constitute, directly or
indirectly, a Restricted Transaction (as defined in Section 25.3(a)) or
otherwise violate the provisions of Section 25.3(a); provided that the assignee
-------------
or transferee in any such circumstance shall continue to be subject to all of
the provisions of this Agreement, including without limitation this Section 25.2
and the following Section 25.3 (except that any lender referred to in clause (i)
above shall not incur any obligations under this Agreement, nor shall it be
restricted from exercising any right of enforcement or foreclosure with respect
to any related security interest or lien, so long as the purchaser in
foreclosure is subject to the provisions of this Agreement, including, without
limitation, this Section 25.2 and the following Section 25.3); and provided
--------
further that in any of circumstances described in clauses (ii), (iii) or (iv)
- ------------
all of the payment obligations of FRONTIER hereunder for the remainder of the
Term shall be fully guaranteed by Frontier Corporation or shall be paid in full
as a condition to such transfer or assignment; and provided further that
---------------------
promptly following any such assignment or transfer, FRONTIER shall give QWEST
written notice identifying the assignee or transferee. In the event of any
permitted partial assignment of any rights hereunder, FRONTIER shall remain the
sole party and point of contact with QWEST hereunder. No permitted partial or
complete assignment shall release or discharge FRONTIER or Frontier Corporation
from its duties and obligations hereunder.
25.3 (a) *
(b) *
(c) Notwithstanding the provisions of Section 25.3(a), from the
date hereof until the date that is thirty (30) days after the date hereof,
FRONTIER may make a Permitted Transfer in up to twelve (12) of the Dark Fibers
to be subject to the IRU in Segment 23 hereunder to a that particular third
party separately identified by FRONTIER to, and approved by, QWEST as of the
date hereof for this purpose (the "Permitted Segment 23 Acquiror");
provided that the Permitted Segment 23 Acquiror shall be an Interest Holder as
- -------------
defined in Section 10.4 hereof and shall be subject to all of the obligations,
limitations and requirements
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
otherwise applicable to FRONTIER under this Agreement, including, without
limitation, Article XXV, with respect to the Dark Fibers so transferred and
FRONTIER shall provide to QWEST written evidence, reasonably acceptable to
QWEST, thereof; and provided further that the amount payable by the Permitted
---------------------
Segment 23 Acquiror to FRONTIER in consideration of any such Permitted Transfer
shall not be less than $ * per route mile. No such Permitted Transfer shall
relieve FRONTIER from any of its obligations hereunder, or Frontier Corporation
from any of its obligations under the Guaranty, and FRONTIER shall continue to
be the sole party and point of contact with QWEST hereunder.
25.4 QWEST and FRONTIER recognize that QWEST may desire to obtain tax-
deferred exchange treatment pursuant to Section 1031 of the Internal Revenue
Code, as amended, with respect to certain of the Dark Fibers and Associated
Property in which the IRUs are to be granted hereunder and which are used or
held for use by QWEST in its business as of the date hereof (the "Existing
Properties"), and FRONTIER agrees to reasonably cooperate as provided herein in
obtaining such treatment (at no cost or expense to FRONTIER). Accordingly,
notwithstanding any provision contained in this Agreement to the contrary, QWEST
may, at its sole option, on or prior to the Acceptance Date for any relevant
Segment, appoint a third party (the "Intermediary") as agent for QWEST with
respect to the transfer of the Existing Properties to FRONTIER, and assign its
rights under this Agreement (insofar as they relate to the Existing Properties)
to such Intermediary. If QWEST so elects to appoint an Intermediary, QWEST
shall notify FRONTIER, in writing, on or prior to the Acceptance Date with
respect to the relevant Segment, and shall provide FRONTIER with copies of all
agreements between QWEST and the Intermediary. If QWEST appoints an
Intermediary, QWEST shall transfer the Existing Properties or such portion
thereof as designated by QWEST to the Intermediary, and FRONTIER shall pay the
IRU Fee with respect to the Existing Properties (as designated by QWEST) to the
Intermediary; provided that QWEST agrees that such transfer shall be expressly
-------------
subject to this Agreement, and that QWEST shall remain liable for performance
under this Agreement to the same extent as if it had not appointed an
Intermediary; provided that in such event QWEST shall indemnify and hold
-------------
harmless FRONTIER from and against any and all loss, damage, cost or expense
suffered, sustained or incurred by FRONTIER in connection with any such
cooperation and/or payment of such IRU Fee to such Intermediary.
25.5 This Agreement and each of the parties' respective rights and
obligations under this Agreement, shall be binding upon and shall inure to the
benefit of the parties hereto and each of their respective permitted successors
and assigns.
ARTICLE XXVI.
REPRESENTATIONS, WARRANTIES AND ACKNOWLEDGMENTS
-----------------------------------------------
26.1 Each party represents and warrants that:
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
(a) it has the full right and authority to enter into, execute, deliver and
perform its obligations under this Agreement;
(b) this Agreement constitutes a legal, valid and binding obligation
enforceable against such party in accordance with its terms, subject to
bankruptcy, insolvency, creditors' rights and general equitable principles; and
(c) its execution of and performance under this Agreement shall not violate
any applicable existing regulations, rules, statutes or court orders of any
local, state or federal government agency, court or body.
26.2 QWEST represents and warrants that the Segments of the QWEST
System that it has heretofore constructed or will construct pursuant hereto have
been or shall be designed, engineered, installed, and constructed in compliance
with the terms and provisions of this Agreement and in material compliance with
any and all applicable building, construction and safety codes for such
construction and installation, as well as any and all other applicable
governmental laws, codes, ordinances, statutes and regulations.
26.3 With respect to each of the Segments that has been constructed
prior to the date hereof, QWEST represents and warrants that such Segment, when
constructed, generally was constructed substantially in accordance with the
specifications set forth in Exhibit C hereto, and QWEST has no actual knowledge
on the date hereof of any material deviation in the construction of such Segment
from such specifications. If, within twelve (12) months from the respective
Acceptance Date for each of the Segments referred to in this Section 26.3 ,
there is an event or occurrence that is caused by a material deviation in the
construction or installation of any of such Segments from such specifications,
and which has a material adverse affect on the operation or performance of the
FRONTIER Fibers in such Segment, then, promptly following receipt of written
notice thereof from FRONTIER, QWEST, at its sole cost and expense, shall
undertake to repair the affected portion of such Segment to the relevant
specifications.
26.4 QWEST represents and warrants that the Segments of the QWEST
System that it constructs pursuant hereto shall be constructed in all material
respects in accordance with the specifications set forth in Exhibit C hereto;
provided that FRONTIER's sole rights and remedies with respect to any failure to
- -------------
so construct shall be (i) to inspect the construction, installation and
splicing, and participate in the acceptance testing, of the FRONTIER Fibers
incorporated in each such Segment, during the course and at the time of the
relevant construction, installation and testing periods for each Segment, as
provided in Articles III and IV, (ii) if, during the course of such
construction, installation and testing any material deviation from the
specifications set forth in Exhibit C is discovered, the construction or
installation of the affected portion of the Segment shall be repaired to such
specification by QWEST at QWEST's sole cost and expense, and (iii) if, at any
time prior to the date that is twelve (12) months after the Acceptance Date,
FRONTIER shall notify QWEST in writing of its discovery of a material deviation
from the specifications set forth in Exhibit C with respect to any such Segment
(which notice shall be
<PAGE>
given within thirty (30) days of such discovery) the construction or
installation of the affected portion of such Segment shall be repaired to such
specification by QWEST at QWEST's sole cost and expense. For purposes hereof,
"material deviation" means a deviation which is reasonably likely to have a
material adverse affect on the operation or performance of the FRONTIER Fibers
affected thereby.
26.5 EXCEPT AS SET FORTH IN THE FOREGOING PARAGRAPHS 26.2, 26.3 AND
26.4, AND EXCEPT AS MAY BE SET FORTH SPECIFICALLY AND EXPRESSLY ELSEWHERE IN
THIS AGREEMENT, QWEST MAKES NO WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE
FRONTIER FIBERS OR THE SEGMENTS DELIVERABLE HEREUNDER, INCLUDING ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSE, AND ALL SUCH WARRANTIES ARE
HEREBY EXPRESSLY DISCLAIMED.
26.7 The parties acknowledge and agree that on and after the relevant
Acceptance Date FRONTIER's sole rights and remedies with respect to any defect
in or failure of the FRONTIER Fibers to perform in accordance with the
applicable vendor's or manufacturer's specifications with respect to the
FRONTIER Fibers shall be limited to the particular vendor's or manufacturer's
warranty with respect thereto, which warranty, to the extent permitted by the
terms thereof, shall be assigned to FRONTIER upon its request. In the event any
maintenance or repairs to the QWEST System are required as a result of a breach
of any warranty made by any manufacturers, contractors or vendors, unless
FRONTIER shall elect to pursue such remedies itself, QWEST shall pursue all
remedies against such manufacturers, contractors or vendors on behalf of
FRONTIER, and QWEST shall reimburse FRONTIER's costs for any maintenance
FRONTIER has incurred as a result of any such breach of warranty to the extent
the manufacturer, contractor or vendor has paid such costs.
26.8 QWEST and FRONTIER acknowledge and agree:
(a) that each grant of the IRU in the Frontier Fibers and Associated
Property for a Segment hereunder (each herein called a "Grant") will be treated
by each of them, vis-a-vis the other, as of and after the relevant effective
date thereof as described in Section 6.1, an executed grant to FRONTIER of an
interest in real property with respect to such Segment; and
(b) that, from and after the effective date of a Grant with respect to a
Segment, no material obligation of either QWEST or FRONTIER will remain to be
performed with respect to such Grant or Segment; and
(c) that, with respect to each such Grant, this Agreement is not intended
as an executory contract or unexpired lease subject to assumption, rejection, or
assignment by the trustee in bankruptcy of any party to this Agreement,
including, without limitation, assumption, rejection, or assignment under
Bankruptcy Code Section 365.
<PAGE>
ARTICLE XXVII.
ENTIRE AGREEMENT; AMENDMENT
---------------------------
27.1 This Agreement, together with any Confidentiality Agreement
entered into in connection herewith and the letter identifying the Permitted
System Acquiror and the Sacramento/Seattle Acquiror as contemplated by Section
25.3(b) hereof and the Permitted Segment 23 Acquiror as contemplated by Section
25.3(c) and the letter dated October 16, 1996 regarding certain state and local
tax matters constitutes the entire and final agreement and understanding between
the parties with respect to the subject matter hereof and supersedes all prior
agreements relating to the subject matter hereof, which are of no further force
or effect. The Exhibits referred to herein are integral parts hereof and are
hereby made a part of this Agreement. To the extent that any of the provisions
of any Exhibit hereto are inconsistent with the express terms of this Agreement,
the terms of this Agreement shall prevail. This Agreement may only be modified
or supplemented by an instrument in writing executed by a duly authorized
representative of each party and delivered to the party relying on the writing.
ARTICLE XXVIII.
NO PERSONAL LIABILITY
---------------------
28.1 Each action or claim against any party arising under or relating
to this Agreement shall be made only against such party as a corporation, and
any liability relating thereto shall be enforceable only against the corporate
assets of such party. No party shall seek to pierce the corporate veil or
otherwise seek to impose any liability relating to, or arising from, this
Agreement against any shareholder, employee, officer or director of the other
party. Each of such persons is an intended beneficiary of the mutual promises
set forth in this Article and shall be entitled to enforce the obligations of
this Article.
ARTICLE XXIX.
RELATIONSHIP OF THE PARTIES
---------------------------
29.1 The relationship between FRONTIER and QWEST shall not be that of
partners, agents, or joint venturers for one another, and nothing contained in
this Agreement shall be deemed to constitute a partnership or agency agreement
between them for any purposes, including, but not limited to federal income tax
purposes. FRONTIER and QWEST, in performing any of their obligations hereunder,
shall be independent contractors or independent parties and shall discharge
their contractual obligations at their own risk subject, however, to the terms
and conditions hereof.
ARTICLE XXX.
LATE PAYMENTS
-------------
<PAGE>
30.1 In the event a party shall fail to make any payment under this
Agreement when due, such amounts shall accrue interest, from the date such
payment is due until paid, including accrued interest compounded monthly, at an
annual rate equal to * of the prime rate of interest published by The Wall
Street Journal as the base rate on corporate loans posted by a substantial
percentage of the nation's largest banks on the date any such payment is due or,
if lower, the highest percentage allowed by law.
ARTICLE XXXI.
SEVERABILITY
------------
31.1 If any term, covenant or condition contained herein shall, to any
extent, be invalid or unenforceable in any respect under the laws governing this
Agreement, the remainder of this Agreement shall not be affected thereby, and
each term, covenant or condition of this Agreement shall be valid and
enforceable to the fullest extent permitted by law.
ARTICLE XXXII.
COUNTERPARTS
------------
32.1 This Agreement may be executed in one or more counterparts, all
of which taken together shall constitute one and the same instrument.
ARTICLE XXXIII.
CERTAIN DEFINITIONS
-------------------
33.1 The following terms shall have the stated definitions in this
Agreement.
(a) "Cable" means the fiberoptic cable and the fibers contained therein,
and associated splicing connections, splice boxes, and vaults to be installed by
QWEST as part of the QWEST System.
(b) "Costs" means actual, direct costs paid or payable in accordance with
the established accounting procedures generally used by QWEST and which it
utilizes in billing third parties for reimbursable projects which costs shall
include, without limitation, the following: (i) internal labor costs, including
wages and salaries, and benefits and overhead allocable to such labor costs
(with the overhead allocation percentage equal to thirty percent (30%)), and
(ii) other direct costs and out-of-pocket expenses on a pass-through basis
(e.g., equipment, materials, supplies, contract services, etc.).
(c) "Dark Fiber" means fiber provided without electronics or optronics, and
which is not "lit" or activated; provided that such fiber may be used in any
-------------
manner and for any purpose permitted under Article XI.
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
(d) "Estimated Delivery Date" means, with respect to each Segment of the
QWEST System to be delivered hereunder, the date set forth in Exhibit A hereto
with respect to such Segment, as any such date may be extended for and during
(A) the period of any delay described in Article XX and/or (B) the period of any
payment default pursuant to Section 18.1 with respect to any Segment and/or (C)
the aggregate number of days of the FRONTIER Review Period or Periods (in the
event of multiple remedy attempts) under Section 4.2 with respect to such
Segment.
(e) "Impositions" means all taxes, fees, levies, imposts, duties, charges
or withholdings of any nature (including, without limitation, gross receipts
taxes and franchise, license and permit fees), together with any penalties,
fines or interest thereon (except for penalties or interest imposed as a direct
result of acts or failures to act on the part of QWEST) arising out of the
transactions contemplated by this Agreement and/or imposed upon the QWEST System
by any federal, state or local government or other public taxing authority.
(f) "Indefeasible Right of Use" or "IRU" means (i) an exclusive,
indefeasible right of use, for the purposes described herein, in the FRONTIER
Fibers, as granted in Article II, and (ii) an associated non-exclusive,
indefeasible right of use, for the purposes described herein, in the Associated
Property; provided that the IRUs granted hereunder do not provide FRONTIER with
-------------
any ownership interest in or other rights to physical access to, control of,
modification of, encumbrance in any manner of, or other use of the QWEST System
except as expressly set forth herein.
(g) "Pre-Existing Cal-Fiber Lien" means any and all security interests and
liens in favor of NTFC Capital Corporation (and its successors and assigns)
securing up to $28,000,000 principal amount plus accrued interest of
indebtedness of QWEST under the Term Loan Agreement dated as of June 16, 1994
between QWEST (then known as Southern Pacific Telecommunications Company) and
NTFC Capital Corporation, as the same may be amended from time to time, on the
collateral described therein, such collateral generally being described as the
Cal-Fiber telecommunications system located between One Wilshire Building, 624
South Grand Avenue, Los Angeles, California and 101 Roseville Street, Roseville,
California.
(h) "POP" means the FRONTIER point of presence at locations along the QWEST
System route.
(i) "PSWP" means Planned System Work Period, which is a prearranged period
of time reserved for performing certain work on the QWEST System that may
potentially impact traffic. Generally, this will be restricted to weekends,
avoiding the first and last weekend of each month and high-traffic weekends.
The PSWP shall be agreed upon pursuant to Exhibit H.
(j) "QWEST System" shall have the meaning ascribed thereto in Recital A.
<PAGE>
(k) When used herein in connection with a covenant of a party to this
Agreement "best efforts" shall not obligate such party, unless otherwise
specifically required by the operative covenant, to make unreimbursed
expenditures (other than costs or expenditures that would have been required of
such party in the absence of the requirements of such covenant) that are
material in amount, in light of the circumstances to which the requirement to
use best efforts applies.
In confirmation of their consent and agreement to the terms and conditions
contained in this IRU Agreement and intending to be legally bound hereby, the
parties have executed this IRU Agreement as of the date first above written.
"QWEST":
QWEST COMMUNICATIONS CORPORATION, a
Delaware corporation
By: /s/ Robert S. Woodruff
____________________________________________________
Name: Robert S. Woodruff
Title: Executive Vice President
"FRONTIER":
FRONTIER COMMUNICATIONS INTERNATIONAL INC., a
Delaware corporation
By: /s/ Robert L. Barrett
____________________________________________________
Name: Robert L. Barrett
Title: Executive Vice President
<PAGE>
Frontier - Exhibit A-1
System Description and Delivery Dates
<TABLE>
<CAPTION>
Estimated Estimated
Segment System Route Delivery
No. Segment (Priority Segments in Italics) Miles Date
- -------------------------------------------------------------------------------------------------------------------
Basic Route
- ------------------------------------------------
<S> <C> <C> <C>
1A Chicago - Detroit 305 1/31/98
1B Detroit - Cleveland 165 2/15/98
1C Cleveland - Pittsburgh 162 3/1/98
1D Pittsburgh - Philadelphia 356 3/31/98
1E Philadelphia - Washington, D.C. 138 4/30/98
Chicago - Detroit - Cleveland -
Washington, DC TOTAL 1,126 4/30/98
2A Cleveland - Columbus 133 8/31/97
2B Columbus - Cincinnati 125 8/31/97
Cleveland - Cincinnati TOTAL 258 8/31/97
4 Indianapolis - Chicago 215 12/31/97
5 Indianapolis - St. Louis 248 7/31/97
6 St. Louis - Kansas City 297 7/1/97
7 Kansas City - Topeka 75 7/31/97
8 Denver - Topeka 565 7/31/97
9A Denver - Grand Junction 271 7/31/97
9B Grand Junction - Salt Lake City 295 7/31/97
Denver - Salt Lake City TOTAL 566 7/31/97
10A Salt Lake City - Reno 575 7/31/97
10B Reno - Roseville 136 7/31/97
Salt Lake - Roseville TOTAL 711 7/31/97
11A Roseville - Oakland 111 4/30/97
11B Oakland - San Jose 43 4/30/97
Roseville - San Jose TOTAL 154 4/30/97
12A San Jose - Salinas 71 7/1/97
12B Salinas - San Luis Obispo 132 7/1/97
12C San Luis Obispo - Santa Barbara 119 7/1/97
12D Santa Barbara - Los Angeles 107 7/1/97
San Jose - Los Angeles TOTAL 429 7/1/97
</TABLE>
A-1 - 1
<PAGE>
Frontier - Exhibit A-1
System Description and Delivery Dates
<TABLE>
<CAPTION>
Estimated Estimated
Segment System Route Delivery
No. Segment (Priority Segments in Italics) Miles Date
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
13A Los Angeles - Anaheim 32 7/1/97
13B Anaheim - San Diego 132 8/31/97
13C San Diego - Yuma 235 12/31/97
13D Yuma - Phoenix 187 1/31/98
Los Angeles - San Diego - Phoenix TOTAL 586 1/31/98
14A Phoenix - Tucson 123 2/28/98
14B Tucson - El Paso 310 3/31/98
Phoenix - Tucson - El Paso TOTAL 433 3/31/98
15A El Paso - San Antonio 586 5/31/98
15B San Antonio - Austin 85 1/31/98
15C Austin - Houston 221 12/31/97
El Paso - San Antonio - Houston TOTAL 892 5/31/98
16 Houston - Dallas 269 4/30/97
17A Dallas - Oklahoma City 264 1/31/98
17B Oklahoma City - Tulsa 119 1/31/98
17C Tulsa - Kansas City 256 1/31/98
Dallas - Kansas TOTAL 639 1/31/98
18 Cincinnati - Indianapolis 117 7/1/97
23 Denver - El Paso TOTAL 746* 3/31/98
24A Sacramento - Chico 98* 1/31/98
24B Chico - Redding 75* 1/31/98
24C Redding - Medford 177* 1/31/98
24D Medford - Eugene 206* 1/31/98
24E Eugene - Portland 123* 1/31/98
Sacramento - Portland TOTAL 679* 1/31/98
25 Portland - Seattle 182* 1/31/98
</TABLE>
* Dates shown for segments indicated are for first 12 fibers; second 12 are due
12 months later
A-1 - 2
<PAGE>
Frontier - Exhibit A-1
System Description and Delivery Dates
<TABLE>
<CAPTION>
Estimated Estimated
Segment System Route Delivery
No. Segment (Priority Segments in Italics) Miles Date
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
27 San Jose - San Francisco 56 4/30/97
28A Boston - Albany 208 12/31/97
28B Albany - Buffalo 298 12/31/97
28C Buffalo - Cleveland 197 12/31/97
Boston - Cleveland TOTAL 703 12/31/97
29 Albany - New York City 157 5/31/98
30 New York City - Philadelphia 95 5/31/98
BASIC ROUTE 10,198 5/31/98
<CAPTION>
OPTION 1 Route
- ------------------------------------------------
<S> <C> <C> <C>
22A Chicago - Cedar Rapids 255 3/31/98
22B Cedar Rapids - Des Moines 120 4/30/98
22C Des Moines - Omaha 140 4/30/98
22D Omaha - Topeka 224 6/30/98
TOTAL - Chicago - Topeka, OPTION 1 739 6/30/98
BASIC ROUTE & OPTION 1 SUB TOTAL 10,937 6/30/98
<CAPTION>
OPTION 1A Route (assuming that Option 1 is not exercised)
- ------------------------------------------------
<S> <C> <C> <C>
21A Chicago - Milwaukee 84 10/31/98
21B Milwaukee - Green Bay 118 10/31/98
21C Green Bay - Minneapolis 295 10/31/98
21D Minneapolis - Des Moines 281 10/31/98
22C Des Moines - Omaha 140 10/31/98
22D Omaha - Topeka 224 10/31/98
TOTAL - Chicago - Des Moines, OPTION 1A 1,142 10/31/98
BASIC ROUTE & OPTION 1A SUB TOTAL 11,340 10/31/98
</TABLE>
A-1 - 3
<PAGE>
Frontier - Exhibit A-1
System Description and Delivery Dates
<TABLE>
<CAPTION>
Estimated Estimated
Segment System Route Delivery
No. Segment (Priority Segments in Italics) Miles Date
- -------------------------------------------------------------------------------------------------------------------
OPTION 2 Route
- ------------------------------------------------
<S> <C> <C> <C>
3 Cincinnati - Louisville 107 7/30/98
19A Louisville - Nashville 189 9/30/98
19B Nashville - Chattanooga 147 10/31/98
19C Chattanooga - Atlanta 137 10/31/98
Louisville - Nashville - Atlanta TOTAL 473 10/31/98
20A Atlanta - Charlotte 261 10/31/98
20B Charlotte - Raleigh 174 8/31/98
20C Raleigh - Richmond 301 10/31/98
20D Richmond - Washington, DC 110 10/31/98
Atlanta - Raleigh - Washington TOTAL 846 10/31/98
OPTION 2 TOTAL 1,426 10/31/98
TOTAL (BASIC, OPTION 1 & OPTION 2 ROUTES) 12,363 10/31/98
TOTAL (BASIC, OPTION 1A & OPTION 2 ROUTES) 12,766 10/31/98
</TABLE>
A-1 - 4
<PAGE>
EXHIBIT A-2
[MAP APPEARS HERE]
Exhibit A-2 is a map of the United States with the heading "General Route Map"
showing state lines and routes of the fiber optic network upon completion. The
legend shows that a red line is the Base Route, a blue line is Route 1, an
orange line is Route 1A, a green line is Route 2, and one inch equals 225 miles.
The Base Route travels east to west through Massachusetts, Connecticut, New
York, Pennsylvania, New Jersey, Maryland, Michigan, Ohio, Indiana, Illinois,
Missouri, Kansas, Colorado, Utah and Nevada to California. The Base Route also
travels north to south through Washington, Oregon, California, Arizona, New
Mexico, Texas and Oklahoma. Route 1 travels east to west through Illinois,
Iowa, Nebraska and Kansas. Route 1A travels east to west through Illinois,
Wisconsin, Minnesota and Iowa. Route 2 travels east to west through Maryland,
Virginia, North Carolina, South Carolina, Georgia, Tennessee, Kentucky and Ohio.
<PAGE>
EXHIBIT A-3
BASIC AND OPTIONAL DETAILED ROUTE MAPS
** CONFIDENTIAL TREATED HAS BEEN REQUESTED FOR THIS MATERIAL **
<PAGE>
Exhibit A-4
Designated Endpoint and Intermediate Cities
<TABLE>
<CAPTION>
CITY ST LATA LATA NAME CITY ST LATA LATA NAME
- ----------------- -- ---- --------------- -------------- -- ---- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Phoenix AZ 666 Phoenix Youngstown OH 322 Youngstown
Tucson AZ 668 Tucson Oklahoma City OK 536 Oklahoma City
Yuma AZ 666 Phoenix Tulsa OK 538 Tulsa
Anaheim CA 730 Los Angeles Eugene OR 670 Eugene
Chico CA 724 Chico Medford OR 670 Eugene
Los Angeles CA 730 Los Angeles Portland OR 672 Portland
Oakland CA 722 San Francisco Salem OR 672 Portland
Redding CA 724 Chico Harrisburg PA 226 Capitol, PA
Roseville CA 726 Sacramento Philadelphia PA 228 Philadelphia
Sacramento CA 726 Sacramento Pittsburgh PA 234 Pittsburgh
Salinas CA 736 Monterey Austin TX 558 Austin
San Diego CA 732 San Diego Bryan TX 570 Hearne
San Francisco CA 722 San Francisco Dallas TX 552 Dallas
San Jose CA 722 San Francisco El Paso TX 540 El Paso
San Luis Obispo CA 740 San Luis Obispo Ft. Worth TX 552 Dallas
Santa Barbara CA 730 Los Angeles Houston TX 560 Houston
Colorado Springs CO 658 Colorado Spr. Mexia TX 556 Waco
Denver CO 656 Denver San Antonio TX 566 San Antonio
Grand Junction CO 656 Denver Provo UT 660 Utah
Pueblo CO 658 Colorado Spr. Salt Lake City UT 660 Salt Lake City
Washington DC 236 Washington DC Seattle WA 674 Seattle
Chicago IL 358 Chicago OPTION 1
Indianapolis IN 336 Indianapolis Des Moines IA 632 Des Moines
South Bend IN 332 South Bend Cedar Rapids IA 635 Cedar Rapids
Topeka KS 534 Topeka Lincoln NE 958 Lincoln
Boston MA 128 East Mass Omaha NE 644 Omaha
Baltimore MD 238 Baltimore
Battle Creek MI 348 Grand Rapids OPTION 1A
Detroit MI 340 Detroit Des Moines IA 632 Des Moines
Kansas City MO 524 Kansas City Minneapolis MN 628 Minneapolis
St. Louis MO 520 St. Louis Owatonna MN 620 Rochester
Newark NJ 224 North Jersey Lincoln NE 958 Lincoln
Trenton NJ 222 Delaware Valley Omaha NE 644 Omaha
Albuquerque NM 664 New Mexico Eau Claire WI 352 Northwest WI
Santa Fe NM 664 New Mexico Green Bay WI 350 Northeast WI
Reno NV 720 Reno Milwaukee WI 356 Southeast WI
Albany NY 134 Albany OPTION 2
Buffalo NY 140 Buffalo Atlanta GA 438 Atlanta
New York NY 132 New York Metro Bowling Green KY 464 Owensboro
Poughkeepsie NY 133 Poughkeepsie Louisville KY 462 Louisville
Rochester NY 974 Rochester Charlotte NC 422 Charlotte
Syracuse NY 136 Syracuse Greensboro NC 424 Greensboro
Utica NY 136 Syracuse Raleigh NC 426 Raleigh
</TABLE>
A-4-1
<PAGE>
Exhibit A-4
Designated Endpoint and Intermediate Cities
<TABLE>
<CAPTION>
CITY ST LATA LATA NAME CITY ST LATA LATA NAME
- -------------- -- ---- -------------- -------------- -- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
White Plains NY 132 New York Metro Rocky Mount NC 951 Rocky Mount
Akron OH 325 Akron Greenville SC 430 Greenville
Cincinnati OH 922 Cincinnati Chattanooga TN 472 Chattanooga
Cleveland OH 320 Cleveland Nashville TN 470 Nashville
Columbus OH 324 Columbus Fredericksburg VA 246 Culpeper
Dayton OH 328 Dayton Portsmouth VA 252 Norfolk
Toledo OH 326 Toledo Richmond VA 248 Richmond
</TABLE>
<PAGE>
EXHIBIT B
IRU Fee Payment Schedule
------------------------
1. Except as provided in paragraphs 2, 3 and 4 below, the IRU Fee for each
Segment shall be paid in accordance with the following schedule:
(i) *% upon execution of the IRU Agreement
(ii) *% upon commencement of construction of such Segment
(iii) *% upon completion of conduit installation of such Segment
(iv) *% upon completion of fiber cable placement in such Segment
(v) *% upon completion of fiber splicing and completion of civil
construction in such Segment
(vi) *% on the Acceptance Date for such Segment
2. The IRU Fee for Segment 23 shall be paid in accordance with the following
schedule:
(i) *% upon execution of the IRU Agreement
(ii) *% upon the Acceptance Date for the first 12 Dark Fibers delivered in
accordance with Exhibit A
(iii) *% upon the Acceptance Date for the second 12 Dark Fibers delivered
in accordance with Exhibit A
3. The IRU Fee for Segments 24A, 24B, 24C, 24D, 24E and 25 shall be paid in
accordance with the following schedule:
(i) *% upon execution of the IRU Agreement
(ii) *% upon commencement of construction of such Segment
(iii) *% upon completion of conduit installation of such Segment
(iv) *% upon completion of fiber cable placement in such Segment
(v) *% upon completion of fiber splicing and completion of civil
construction in such Segment
* Confidential Treatment Applied For
B-1
<PAGE>
(vi) *% on the Acceptance Date for the first 12 Dark Fibers delivered in
accordance with Exhibit A
(vii) *% on the Acceptance Date for the second 12 Dark Fibers delivered in
accordance with Exhibit A
4. Notwithstanding anything to the contrary contained in this Exhibit B or the
IRU Agreement, no part of the IRU Fee for a Segment shall be payable by Frontier
(other than the *% of the IRU Fee due upon execution of the IRU Agreement),
unless such Segment, when completed as planned, would be connected (whether
through one or more other completed Segment or Segments scheduled for
contemporaneous completion) or contiguous to one of the following cities where
Frontier maintains a switch site: Los Angeles, California; San Francisco,
California; Seattle, Washington; Denver, Colorado; Dallas, Texas; Atlanta,
Georgia; Kansas City, Missouri; Chicago, Illinois; Milwaukee, Wisconsin;
Detroit, Michigan; Cleveland, Ohio; Washington, D.C., Philadelphia,
Pennsylvania; New York City; Boston, Massachusetts; and Rochester, New York.
5. Upon any election by FRONTIER pursuant to Section 1.4 that results in a
redetermination of the IRU Fee pursuant to Section 2.1, (i) if such
redetermination results in an increase in the IRU Fee with respect to any
Segment, the increased amount with respect to that Segment shall be paid by
FRONTIER to QWEST upon such election, in accordance with paragraph 1 above of
the foregoing payment schedule, and (ii) if such redetermination results in a
decrease in the IRU Fee with respect to any Segment, the amount representing the
difference between the original IRU fee and the redetermined decreased IRU fee
(the "Decrease") with respect to that Segment either (A) shall be credited
------
against the subsequent IRU Fee payment or payments to be made by FRONTIER in
accordance with the percentages set forth in paragraph 1 of the foregoing
payment schedule with respect to such Segment or other Segments to be delivered
hereunder or, (B) if amounts shall have previously been paid by FRONTIER with
--
respect to such Segment, at FRONTIER's election, shall be refunded to FRONTIER
by QWEST.
6. For purposes of determining the occurrence of the construction milestones
triggering payment obligations hereunder, the following shall apply:
(i) Commencement of construction of a Segment shall mean the establishment
of a field office followed promptly by mobilization of either in-house
crews or the subcontract of a construction manager.
(ii) Completion of conduit installation shall mean the completion of
installation of the conduit system for the Segment, with handholds and
manholes, ready for Cable pulling.
(iii) Completion of fiber cable placement shall mean the fiber cable is
either pulled into the conduit or completely installed in aerial
installation, but without splicing. In the event of aerial
construction, the IRU Fee installment otherwise due upon
* Confidential Treatment Applied For
B-2
<PAGE>
completion of conduit installation shall be due and payable at the
same time as the installment due upon completion of fiber cable
placement.
(iv) Completion of fiber splicing and civil construction shall mean all
fibers are spliced and ready for testing and civil facilities are
ready for the customer to occupy and install their equipment
(v) Acceptance Date shall have the meaning established in the IRU
Agreement.
B-3
<PAGE>
EXHIBIT C
Construction Specifications
---------------------------
1.0 General.
-------
The intent of this document is to outline the specifications for
construction of a fiber optic cable system. In all cases, the standards
contained in this document or the standards of the federal, state, local or
private agency having jurisdiction, whichever is stricter, shall be
followed.
2.0 Material.
--------
Steel or PVC conduit shall be minimum schedule * wall thickness.
Any exposed steel conduit, brackets or hardware (i.e., bridge attachments)
shall be hot-dipped galvanized after fabrication.
Handholes shall have a minimum * loading rating or * with * to * inches
of cover.
Manholes shall have a minimum * loading rating.
Innerducts used shall be * or *.
Buried cable warning tape shall be 3 inches wide and display "Warning:
Buried Fiber Optic Cable," name and logo, and local and emergency One Call
"800" numbers repeated every 24 inches.
Warning signs will display universal "Do Not Dig" symbol, "Warning: Buried
Fiber Optic Cable," company name and logo, and local and emergency One Call
"800" numbers.
Fiber optic cable shall be single armored.
3.0 Minimum Depths.
--------------
Minimum cover required in the placement of conduit shall be 42 inches,
except in the following instances:
(a) The minimum cover in borrow ditches adjacent to roads, highways,
railroads, and interstate highways is * inches below the cleanout line or
existing grade, whichever is greater.
* Confidential Treatment Applied For
<PAGE>
(b) The minimum cover across streams, river washes and other waterways is
60 inches below the cleanout line or existing grade, whichever is greater.
Steel conduit will be placed at all such crossings unless the crossing is
directional bored.
(c) At locations where conduit crosses other subsurface utilities or other
structures, the conduit shall be installed to provide a minimum of * inches
of vertical clearance and applicable minimum depth can be maintained;
otherwise the conduit will be installed under the existing utility or other
structure. If, however, * inches cannot be obtained, the cable shall be
encased in steel pipe rather than conduit. No fiber optic cable shall be
buried without being surrounded by conduit or steel pipe.
(d) In rock, the conduit shall be placed to provide a minimum of * inches
below the surface of the solid rock, or provide a minimum of * inches of
total cover, whichever requires the least rock excavation. PVC or HDPE
conduit will be backfilled with 6 inches of select materials (padding) in
rock areas.
(e) In the case of the use/conversion of existing steel pipelines or
salvaged conduit systems, the existing depth shall be considered adequate.
4.0 Buried Cable Warning Tape.
-------------------------
All conduit will be installed with buried cable warning tape except where
existing steel pipelines or salvaged conduit systems are used. The warning
tape shall generally be placed at a depth of 12 inches below grade and
directly above the conduit.
5.0 Conduit Construction.
--------------------
Conduits may be placed by means of trenching, plowing, jack and bore, or
directional bore. Conduits will generally be placed on a level grade
parallel to the surface, with only gradual changes in grade elevation.
Steel conduit will be joined with threaded collars, Zap-Lok or welding.
All paved city, state, federal and interstate highways and railroad
crossings will be encased in steel conduit. If the crossing is at grade,
steel is not required if the cable is placed with * feet of cover or more,
and the crossing is directional bored.
All crossings of major streams, rivers, bays and navigable waterways will
be placed in HDPE, PVC or steel conduit.
At all foreign utility/underground obstacle crossings, split/solid steel
conduit will be placed and will extend at least 5 feet beyond the outer
limits of the obstacle in both directions.
All jack and bores will use steel conduit.
All directional bores will use HDPE or steel conduit.
* Confidential Treatment Applied For
C-2
<PAGE>
Any cable placed in rock will be placed in HDPE, PVC or steel conduit.
Any cable placed in swamp or wetland areas will be placed in HDPE, PVC or
steel conduit.
All conduits placed on bridges will be steel.
All conduits placed on bridges shall have expansion joints placed at each
structural (bridge) expansion joint or at least every 150 feet, whichever
is the shorter distance.
6.0 Innerduct Installation.
----------------------
Innerduct(s) shall be installed in all steel conduits. No cable will be
placed directly in any split/solid steel conduit without innerduct.
Innerduct(s) shall extend beyond the end of all conduits a minimum of 18
inches.
7.0 Cable Installation.
------------------
The fiber optic cable shall be installed using a powered pulling winch and
hydraulic-powered assist pulling wheels. The maximum pulling force to be
applied to the fiber optic cable shall be 600 pounds.
Bends of small radii (less than 20 times the outside diameter of the cable)
and twists that may damage the cable shall be avoided during cable
placement.
The cable shall be lubricated and placed in accordance with the cable
manufacturer specifications.
A pulling swivel break-away rated at 600 pounds shall be used at all times.
All splices will be contained in a handhole or manhole.
A minimum of * meters of slack cable will be left in all intermediate
handholes or manholes.
A minimum of * meters of slack cable will be left in all splice locations.
A minimum of * meters of slack cable will be left in all facility locations
(i.e., POP sites, switch sites, regens or CEVs).
8.0 Manholes and Handholes.
----------------------
Manholes shall be placed in traveled surface streets and shall have locking
lids.
* Confidential Treatment Applied For
C-3
<PAGE>
Handholes shall be placed in all other areas and be installed with a
minimum of 18 inches of soil covering the lid.
9.0 EMS Markers.
-----------
EMS markers shall be placed 6 inches directly above the lid of all buried
handholes and assist points. EMS markers fabricated into the lids of
handholes are acceptable.
10.0 Cable Markers (Warning Signs).
-----------------------------
Cable markers (with the same information as buried cable warning tape)
shall be installed at all changes in cable running line direction, splices,
waterways, subsurface utilities, handholes and at both sides of street,
highway, bridge or railroad crossings. At no time shall any markers be
spaced more than 500 feet apart in metro areas and 1,000 feet apart in non-
metro areas. Markers shall be positioned so that they can be seen from the
location of the cable and generally set facing perpendicular to the cable
running line.
11.0 Compliance.
----------
All work will be done in strict accordance with federal, state, local and
applicable private rules and laws regarding safety and environmental
issues, including those set forth by OSHA and the EPA. In addition, all
work and the resulting fiber system will comply with the current
requirements of all governing entities (FCC, NEC, DEC, and other national,
state, and local codes).
12.0 As Built Drawings.
-----------------
As-built drawings will contain a minimum of the following:
1) Information showing the location of running line, relative to
permanent landmarks, including but not limited to, railroad mileposts,
boundary crossings and utility crossings.
2) Splice locations
3) Manhole and handhole locations
4) Conduit information (type, length, expansion joints, etc.)
5) Cable information (manufacturer, type of fiber, type of cable,
fiber assignments, final cable lengths)
6) Notation of all deviations from specifications (depth, etc.)
7) ROW detail (type, centerline distances, boundaries, waterways,
road crossings, known utilities and obstacles)
8) Cable marker locations and stationing
C-4
<PAGE>
9) Regeneration locations and floorplans to include FDP assignments
(also labeled on site)
Drawings will be updated with actual field data during and after
construction.
Metro areas scale shall not exceed 1 inch = 200 feet.
Rural areas scale shall not exceed 1 inch = 500 feet.
As-builts will be provided within * days after acceptance, in both hard
copy and electronic format (Auto-CAD version 13.0 or later). Updates to
the as-builts will be provided within * days of completion of change, like
a relocation project.
13.0 Aerial Construction.
-------------------
Subject to prior approval by both parties (which approval shall not be
unreasonably withheld), aerial construction methods will only be used when
buried construction techniques are impractical due to environmental
conditions, schedule or economic considerations, right of way issues, or
code restrictions. The parties acknowledge that aerial construction on
utility towers (not utility poles) using optical groundwire or all
dielectric self-support methods may be used without FRONTIER approval,
provided QWEST agrees to give FRONTIER reasonable prior notice of its
decision to use such aerial methods.
Aerial design standards and construction techniques will conform with
industry-accepted practices for aerial fiber optic cable systems. All
aerial plant must comply with applicable national (NEC, NESC, etc.), state,
and local codes.
The fiber optic cable placed on an aerial system shall be armored and
designed for aerial applications.
The cable will be placed in accordance with manufacturer specifications.
Cable tension will be monitored during placement. Cable rollers will be
placed at a maximum interval of 35 feet. Cable expansion loops will be
placed at every pole. Cable identification/warning tags will be placed at
every pole. All cable splices will be buried in handholes or manholes.
Cable sheath to suspension strand bonds and grounding will be performed at
the first and last pole of the system and at 0.25 mile intervals.
Fiber optic cable at all riser poles will be protected with galvanized
steel U-guard from 12 inches below grade to a point 24 inches below the
suspension strand. Conduit sweeps will be used to transition from the U-
guard to either a handhole or manhole.
All aerial plant will be designed and constructed with 10M EHS (Class A
galvanized) suspension strand unless otherwise dictated by the pole owners
or field conditions. The
* Confidential Treatment Applied For
C-5
<PAGE>
fiber optic cable will be doubled lashed to the suspension strand using 45
mil stainless lashing wire.
Span length shall account for storm loading (wind and ice) in accordance
with zones outlined in NESC code. Sags and tensions will be calculated in
accordance with industry accepted practices and account for strand size,
span length, ambient temperature at placement, and loading. The suspension
strand will be tensioned with a strand dynamometer. A catenary suspension
system may be used if the system exceeds maximum span length
specifications.
Prior to attachment to any existing pole line, the system will be inspected
for compliance with applicable codes and standards, as well as the physical
condition of the poles and existing hardware. Any make-ready work will be
reviewed with the pole owner and specifically addressed prior to
construction.
If a pole line need be constructed, the preferred poles will be Class 4 (40
feet) and Class 5 (35 feet). Use of the preferred poles will make it
unnecessary to calculate pole loading (horizontal, vertical, and bending
moments) in most field conditions. Some unusual conditions may require the
use of a stronger class pole. Depth of placement will be dictated by soil
conditions, slope of terrain, and length of pole. Poles will be guyed in
accordance with industry-accepted standards. All pole attachment hardware
will be galvanized steel.
Aerial cable will be placed below power attachments and above all other
attachments unless otherwise dictated by the pole owner. Pole contact
clearances and locations will be dictated by current NESC code and the
presence of existing attachments; however, the following minimum objective
clearances will apply:
a) Power line - 40 inches (below)
b) Non-current carrying power line - 30 inches
c) Telephone, CATV, and other signal lines - 12 inches (above)
Vertical clearances for crossings or parallel lines will be dictated by
current NESC code; however, the objective clearance for most objects
(roads, alleys, etc.) is 18 feet (at 100 degrees F) with the exception of
railroad tracks and waterways which have an objective of 27 feet (at 100
degrees F).
14.0 Approval of Deviations From Specifications.
------------------------------------------
Qwest will seek the approval of FRONTIER, which approval shall not be
unreasonably withheld or delayed, prior to undertaking any construction
which will deviate from the Construction Specifications set forth in this
Exhibit C.
C-6
<PAGE>
EXHIBIT D
Fiber Cable Splicing, Testing and Acceptance Procedures
-------------------------------------------------------
1. All splices will be performed with an industry-accepted fusion splicing
machine. Qwest will perform two stages of testing during the construction of a
new fiber cable route. Initially, OTDR tests will be taken from one direction.
As soon as fiber connectivity has been achieved to both regen sites, Qwest will
verify and record the continuity of all fibers. Qwest will take and record
power level readings on all fibers in both directions. Qwest will bi-
directional OTDR test all fibers.
2. During the initial construction, it is only possible to measure the
fiber from one direction. Because of this, splices will be qualified during
initial construction with an OTDR from only one direction. The profile
alignment system or light injection detection system on the fusion splicer may
be used to qualify splices as long as a close correlation to OTDR data is
established. The pigtails will also be qualified at this stage using an OTDR
and a minimum 1 km launch reel. All measurements at this stage in construction
will be taken at 1550 nm.
3. After Qwest has provided end-to-end connectivity on the fibers, bi-
directional span testing will be done. These measurements must be made after
the splice manhole or handhole is closed in order to check for macro-bending
problems. Continuity tests will be done to verify that no fibers have been
"frogged" or crossed in any of the splice points. Once the pigtails have been
spliced, loss measurements will be recorded using an industry-accepted laser
source and a power meter. OTDR traces will be taken and splice loss
measurements will be recorded. Qwest will also store OTDR traces on diskette
and on data sheets. Laser Precision format will be used on all traces. Qwest
will provide three copies of all data sheets and tables, and one set of
diskettes with all traces.
a. The power loss measurements shall be made at 1550 nm, and
performed bi-directionally.
b. OTDR traces shall be taken in both directions at 1550 nm.
4. The splicing standards are as follows:
a. The loss value of the pigtail connector and its associated splice
will not exceed 0.50 dB. This value does not include the insertion loss from
its connection to the FDP. For values greater than this, the splice will be
broken and respliced until an acceptable loss value is achieved. If, after five
attempts, Qwest is not able to produce a loss value less than 0.50 dB, the
splice will be marked as Out-of-Spec ("OOS") on the data sheet. Each splicing
attempt shall be documented on the data sheet.
b. During initial uni-directional OTDR testing, the objective for
each splice is a loss of 0.15 dB or less. If, after three attempts, Qwest is
not able to produce a loss value of less than 0.15 dB, then 0.25 dB will be
acceptable. If, after two additional attempts, a value of less than 0.25 dB is
not achievable, then the splice will be marked as OOS on the data sheet. Each
splicing attempt shall be documented on the data sheet.
<PAGE>
c. During end-to-end testing of a span (a span shall be FDP to FDP),
the objective for each splice is a bi-directional average loss of 0.15 dB or
less.
d. The standard for each fiber within a span shall be an average bi-
directional loss of 0.10 dB or less for each splice. For example, if a given
span has 10 splices, each fiber shall have total bi-directional loss (due to the
10 splices) of 1.0 dB or less. Each individual splice may have a bi-directional
loss of 0.15 dB or less, but the average bi-directional splice loss across the
span must be 0.10 dB or less.
5. The entire fiber optic cable system shall be properly protected from
foreign voltage and grounded with an industry-accepted system. The current
system in use by Qwest is depicted in the attached schematic-DWG No. SAH-1
(typical for Surge Arrestor HH Placement).
6. Customer fiber assignments will be consecutive in count and in a
separate buffer tube (or ribbon or fiber bundles) from others. The maximum
number of fibers within a single buffer tube (or ribbon or fiber bundles) shall
be 12.
7. The fibers shall be terminated to the FDP with Ultra FC-PC connectors,
unless another type of connector is specified. The pigtails shall be
manufactured with the same glass as the backbone cable to minimize splice loss.
D-2
<PAGE>
EXHIBIT E
FIBER SPECIFICATIONS
[This exhibit contains product specification information that is largely set
forth in graphic format.]
<PAGE>
EXHIBIT E-1
[MAP APPEARS HERE]
Exhibit E-1 is a map of the United States with the heading "Fiber Deployment
Diagram" showing state lines and routes of the fiber optic network upon
completion. The legend shows that a tan line represents Fiber not designated, a
solid blue line is LS Fiber (Existing), a broken blue line is LS Fiber
(Planned), a broken red line is Lucent TWF (Planned), a solid turquoise line is
DS Fiber (Existing), and one inch equals 225 miles. The Fiber Not Designated
Route travels east to west through Massachusetts, Connecticut, New York,
Pennsylvania, New Jersey, Maryland, Virginia, North Carolina, South Carolina,
Georgia, Tennessee, Kentucky, Ohio, Indiana, Illinois, Wisconsin, Minnesota,
Iowa, Missouri, Kansas, Oklahoma, Texas, New Mexico, Arizona, California,
Washington and Oregon. The LS Fiber (Existing) travels north to south through
Texas, and also north to south through Colorado and New Mexico. The DS Fiber
(Existing) travels north to south through California. The Lucent TWF (Planned)
travels east to west through Ohio, Indiana, Illinois, Missouri, Kansas,
Colorado, Utah, and Nevada.
E-1
<PAGE>
EXHIBIT F
Specifications for Regeneration Facilities
------------------------------------------
Qwest will install modular, prefabricated, conditioned space along the
right of way to house regeneration and other electronic equipment (supplied by
Customer) necessary for the operation of the Qwest System.
Regeneration site facilities consist of * square feet of caged space in
such facilities with separate, lockable secured, 24-hour access. The buildings
will be * feet wide by approximately * feet interior length to provide such
square footage. Also included is access to * amps of DC power provided from a
common source backed up by a standby generator as described below. To the
extent provided in the Agreement, any additional space and/or power required may
be made available, with Frontier responsible for QWEST's incremental cost.
Following are the general specifications of the buildings and support equipment.
Standard production, metal-framed buildings with steel substructure or
concrete; bullet resistant to 30-06 slugs from 15 feet; walls and ceilings R-19
insulated.
Security-type weatherproof exterior light fixtures, equipped with motion
sensors.
Building is equipped with Marvair Compact II or equivalent redundant HVAC
units.
The building platform comes equipped with an external * kw backup generator
designed to provide power during emergency periods. The generator fuel tanks
will have a minimum * gallon capacity. As part of the normal maintenance, the
generator will be exercised twice monthly, running on a load bank for a minimum
of * .
Fire extinguishers are provided one inside main door, and one located near
the HVAC systems.
A fire suppression system (FM-200) will be in place, as the main overall
fire protection coverage.
The building will have an earth ground termination bar (safety green wire
ground) terminated to building steel and/or driven ground rod.
The building will be equipped with A/C duplex isolated outlets for testing
and miscellaneous equipment. Such outlets shall be national electronic code and
placed every 6 feet around perimeter walls.
The building will have sufficient lighting.
Two properly sized cable racks will be installed, one from the DC power
source and one from the FDP. Qwest will run properly sized cables from the
common DC power plant to the Frontier-supplied fuse panel in the Frontier space.
DC power in the amount of * amps shall be provided based upon a one (1) for
N rectifier format (i.e., * amp units or * amp units). A battery plant capable
----
of handling the load for a minimum of four (4) hours to ensure uninteruptable
power will be installed in the building. At remote regeneration locations QWEST
will also provide a battery plant designed to provide at least eight *, and * at
all other locations, in both cases with sufficient generator fuel to provide *
backup in the event of a power outage. The battery plant shall incorporate load
disconnect protection and batteries capable of recharging in 12 hours. The
battery plant shall also include dual battery strings with battery disconnects
for maintenance purposes.
Power will be monitored twenty-four (24) hours per day, seven (7) days a
week.
Each party's fibers will be terminated in a separate bulkhead module within
the QWEST fiber distribution panel.
Upon execution of the IRU Agreement, the parties will finalize the
locations of the regeneration facilities in accordance with Section 7.2 of the
IRU Agreement.
* CONFIDENTIAL TREATMENT APPLIED FOR
<PAGE>
Exhibit G
Regeneration Facility Sites
<TABLE>
<CAPTION>
Estimated Points
Segment Route of Amplifier
No. Segment Miles Presence Sites
<S> <C> <C> <C> <C>
Base System
1A Chicago to Detroit
Chicago to South Bend 86 2 1
South Bend to Battle Creek 95 1 1
Battle Creek to Detroit 124 1 2
1B Detroit to Cleveland
Detroit to Toledo 60 1 0
Toledo to Cleveland 105 1 1
1C Cleveland to Pittsburgh
Cleveland to Akron 42 1 0
Akron to Youngstown 60 1 0
Youngstown to Pittsburgh 60 1 0
1D Pittsburgh to Philadelphia
Pittsburgh to Harrisburg 238 1 3
Harrisburg to Philadelphia 118 1 1
1E Philadelphia to Washington
Philadelphia to Baltimore 107 1 1
Baltimore to Washington 31 1 0
2A Cleveland to Columbus 133 1 2
2B Columbus to Cincinnati
Columbus to Dayton 60 1 0
Dayton to Cincinnati 65 1 0
4 Indianapolis to Chicago 215 1 3
5 Indianapolis to St. Louis 248 1 4
6 St. Louis to Kansas City 297 1 4
7 Kansas City to Topeka 75 1 0
</TABLE>
1
<PAGE>
Exhibit G
Regeneration Facility Sites
<TABLE>
<CAPTION>
Estimated Points
Segment Route of Amplifier
No. Segment Miles Presence Sites
<S> <C> <C> <C> <C>
8 Topeka to Denver 565 1 9
9A Denver to Grand Junction 271 1 4
9B Grand Junction to Salt Lake City
Grand Junction to Provo 265 1 4
Provo to Salt Lake City 30 1 0
10A Salt Lake City to Reno 575 1 9
10B Reno to Roseville 136 1 2
11A Roseville to Oakland
Roseville to Sacramento 19 1 0
Sacramento to Oakland 92 1 1
11B Oakland to San Jose 43 1 0
12A San Jose to Salinas 71 1 0
12B Salinas to San Luis Obispo 132 1 2
12C San Luis Obispo to Santa Barbara 119 1 1
12D Santa Barbara to Los Angeles 107 1 1
13A Los Angeles to Anaheim 32 1 0
13B Anaheim to San Diego 132 1 2
13C San Diego to Yuma 235 1 3
13D Yuma to Phoenix 187 1 3
14A Phoenix to Tucson 123 1 1
14B Tucson to El Paso 310 1 5
</TABLE>
2
<PAGE>
Exhibit G
Regeneration Facility Sites
<TABLE>
<CAPTION>
Estimated Points
Segment Route of Amplifier
No. Segment Miles Presence Sites
<S> <C> <C> <C> <C>
15A El Paso to San Antonio 586 1 9
15B San Antonio to Austin 85 1 1
15C Austin to Houston 221 1 3
16 Houston to Dallas
Houston to Bryan 90 1 1
Bryan to Mexia 90 1 1
Mexia to Dallas 89 1 1
17A Dallas to Oklahoma City
Dallas to Ft. Worth 60 1 0
Ft. Worth to Oklahoma City 204 1 3
17B Oklahoma City to Tulsa 119 1 1
17C Tulsa to Kansas City 256 1 4
18 Cincinnati to Indianapolis 117 0 1
23 Denver to El Paso
Denver to Colorado Springs 76 1 0
Colorado Springs to Pueblo 45 1 0
Pueblo to Lamy 288 1 4
Lamy to Albuquerque 67 1 0
Albuquerque to El Paso 252 0 3
Lamy to Santa Fe 18 1 0
24A Sacramento to Chico 98 1 1
24B Chico to Redding 75 1 0
24C Redding to Medford 177 1 2
</TABLE>
3
<PAGE>
Exhibit G
Regeneration Facility Sites
<TABLE>
<CAPTION>
Estimated Points
Segment Route of Amplifier
No. Segment Miles Presence Sites
<S> <C> <C> <C> <C>
24D Medford to Eugene 206 1 3
24E Eugene to Portland
Eugene to Salem 69 1 0
Salem to Portland 54 1 0
25 Portland to Seattle 182 1 2
27 San Jose to San Francisco 56 1 0
28A Boston to Albany 208 2 3
28B Albany to Buffalo
Albany to Utica 101 1 1
Utica to Syracuse 51 1 0
Syracuse to Rochester 86 1 1
Rochester to Buffalo 60 1 0
28C Buffalo to Cleveland 197 0 3
29 Albany to New York City
Albany to Poughkeepsie 74 1 1
Poughkeepsie to White Plains 58 1 0
White Plains to New York City 25 1 0
30 New York City to Philadelphia
New York City to Newark 13 1 0
Newark to Trenton 48 1 0
Trenton to Philadelphia 34 0 0
Sub Total Base System 10,198 73 119
</TABLE>
4
<PAGE>
Exhibit G
Regeneration Facility Sites
<TABLE>
<CAPTION>
Estimated Points
Segment Route of Amplifier
No. Segment Miles Presence Sites
<S> <C> <C> <C> <C>
Option 1
22A Chicago to Cedar Rapids 255 1 3
22B Cedar Rapids to Des Moines 120 1 1
22C Des Moines to Omaha 140 1 2
22D Omaha to Topeka
Omaha to Lincoln 80 1 1
Lincoln to Topeka 144 0 2
Sub Total Option 1 739 4 9
Option 1A
21A Chicago to Milwaukee 84 1 1
21B Milwaukee to Green Bay 118 1 1
21C Green Bay to Minneapolis
Green Bay to Eau Claire 190 1 3
Eau Claire to Minneapolis 105 1 1
21D Minneapolis to Des Moines
Minneapolis to Owatonna 104 1 1
Owatonna to Des Moines 177 1 3
22C Des Moines to Omaha 140 1 2
22D Omaha to Topeka
Omaha to Lincoln 80 1 1
Lincoln to Topeka 144 0 2
Sub Total Option 1A 1,142 8 15
</TABLE>
5
<PAGE>
Exhibit G
Regeneration Facility Sites
<TABLE>
<CAPTION>
Estimated Points
Segment Route of Amplifier
No. Segment Miles Presence Sites
<S> <C> <C> <C> <C>
Option 2
3 Cincinnati to Louisville 107 1 1
19A Louisville to Nashville
Louisville to Bowling Green 115 1 1
Bowling Green to Nashville 74 1 0
19B Nashville to Chattanooga 147 1 2
19C Chattanooga to Atlanta 137 1 2
20A Atlanta to Charlotte
Atlanta to Greenville 155 1 2
Greenville to Charlotte 106 1 1
20B Charlotte to Raleigh
Charlotte to Greensboro 94 1 1
Greensboro to Raleigh 80 1 1
20C Raleigh to Richmond
Raleigh to Rocky Mount 69 1 0
Rocky Mount to Portsmouth 114 1 1
Portsmouth to Richmond 118 1 1
20C Richmond to Washington
Richmond to Fredericksburg 57 1 0
Fredericksburg to Washington 53 0 0
Sub Total Option 2 1,426 13 13
Total (Base System) 10,198 73 119
Total (Base and Option 1) 10,937 77 128
Total (Base and Option 1A) 11,340 81 134
Total (Base, Option 1 and Option 2) 12,363 90 141
Total (Base, Option 1A and Option 2) 12,766 94 147
</TABLE>
6
<PAGE>
EXHIBIT G-1
TEMPORARY SPACE WITHIN CERTAIN QWEST FACILITIES
[This exhibit consists of floor plans in graphic format.]
<PAGE>
EXHIBIT H
Qwest System Maintenance Specifications and Procedures
------------------------------------------------------
Any party responsible for providing maintenance of the Qwest System
hereunder shall be referred to herein as the "Service Provider." The party
receiving maintenance services from the Service Provider hereunder shall be
referred to herein as the "Service Recipient". All other capitalized terms not
otherwise defined herein shall have their respective meanings as set forth in
the IRU Agreement of which this Exhibit forms a part.
1. Maintenance.
-----------
(a) Scheduled Maintenance. Routine maintenance and repair of the
---------------------
Qwest System described in this section ("Scheduled Maintenance") shall be
performed by or under the direction of Service Provider, at Service Provider's
reasonable discretion or at Service Recipient's request. Scheduled Maintenance
shall commence with respect to each Segment upon the effective date of the grant
of the IRU therein, as provided in the IRU Agreement. Scheduled Maintenance
shall include the following activities:
(i) Patrol of Qwest System route on a regularly scheduled basis,
which will be weekly unless hyrail access is necessary in which case it will be
quarterly;
(ii) Maintenance of a "Call-Before-You-Dig" program and all
required and related cable locates;
(iii) Maintenance of sign posts along the Qwest System
right-of-way with the number of the local "Call Before You Dig" organization
and the 800 number for Qwest's "Call Before You Dig" program; and
(iv) Assignment of fiber maintenance technicians to locations
along the route of the Qwest System at approximately *-mile intervals
dependent upon terrain and accessibility.
(b) Unscheduled Maintenance. Non-routine maintenance and repair of
-----------------------
the Qwest System which is not included as Scheduled Maintenance ("Unscheduled
Maintenance"), shall be performed by or under the direction of Service Provider.
Unscheduled Maintenance shall commence with respect to each Segment upon the
effective date of the grant of the IRU therein, as provided in the IRU
Agreement. Unscheduled Maintenance shall consist of:
(i) "Emergency Unscheduled Maintenance" in response to an alarm
identification by Service Provider's Operations Center, notification by Service
Recipient or notification by any third party of any failure, interruption or
impairment in the operation of the
*Confidential Treatment Applied For
<PAGE>
Qwest System, or any event imminently likely to cause the failure, interruption
or impairment in the operation of the Qwest System.
(ii) "Non-Emergency Unscheduled Maintenance" in response to any
potential service-affecting situation to prevent any failure, interruption or
impairment in the operation of the Qwest System.
Service Recipient shall immediately report the need for Unscheduled
Maintenance to Service Provider in accordance with procedures promulgated by
Service Provider from time to time. Service Provider will log the time of
Service Recipient's report, verify the problem and will dispatch personnel
immediately to take corrective action.
2. Operations Center.
-----------------
Service Provider shall operate and maintain a Operations Center ("OC")
staffed twenty-four (24) hours a day, seven (7) days a week by trained and
qualified personnel. Service Provider's maintenance employees shall be
available for dispatch twenty-four (24) hours a day, seven (7) days a week.
Service Provider shall have its first maintenance employee at the site requiring
Emergency Unscheduled Maintenance activity within * after the time
Service Provider becomes aware of an event requiring Emergency Unscheduled
Maintenance, unless delayed by circumstances beyond the reasonable control of
Service Provider. Service Provider shall maintain a toll-free telephone number
to contact personnel at the OC. Service Provider's OC personnel shall dispatch
maintenance and repair personnel along the system to handle and repair problems
detected in the Qwest System, (i) through the Service Recipient's remote
surveillance equipment and upon notification by Service Recipient to Service
Provider, or (ii) upon notification by a third party.
3. Cooperation and Coordination.
----------------------------
(a) Service Recipient shall utilize an Operations Escalation List, as
updated from time to time, to report and seek immediate initial redress of
exceptions noted in the performance of Service Provider in meeting maintenance
service objectives.
Service Recipient will, as necessary, arrange for unescorted access
for Service Provider to all sites of the Qwest System, subject to applicable
contractual, underlying real property and other third-party limitations and
restrictions.
(c) In performing its services hereunder, Service Provider shall take
workmanlike care to prevent impairment to the signal continuity and performance
of the Qwest System. The precautions to be taken by Service Provider shall
include notification to Service Recipient. In addition, Service Provider shall
reasonably cooperate with Service Recipient in sharing information and analyzing
the disturbances regarding the cable and/or fibers. In the event that any
Scheduled or Unscheduled Maintenance hereunder requires a traffic roll or
reconfiguration involving cable, fiber, electronic equipment, or regeneration or
other facilities of the Service Recipient, then Service Recipient shall, at
Service Provider's reasonable request,
*Confidential Treatment Applied For
<PAGE>
make such personnel of Service Recipient available as may be necessary in order
to accomplish such maintenance, which personnel shall coordinate and cooperate
with Service Provider in performing such maintenance as required of Service
Provider hereunder.
(d) Service Provider shall notify Service Recipient at least ten (10)
business days prior to the date in connection with any PSWP of any Scheduled
Maintenance and as soon as possible after becoming aware of the need for
Unscheduled Maintenance. Service Recipient shall have the right to be present
during the performance of any Scheduled Maintenance or Unscheduled Maintenance
so long as this requirement does not interfere with Service Provider's ability
to perform its obligations under this Agreement. In the event that Scheduled
Maintenance is canceled or delayed for whatever reason as previously notified,
Service Provider shall notify Service Recipient at Service Provider's earliest
opportunity, and will comply with the provisions of the previous sentence to
reschedule any delayed activity.
4. Facilities.
----------
(a) Service Provider shall maintain the Qwest System in a manner which
will permit Service Recipient's use, in accordance with the terms and conditions
of the IRU Agreement, of the IRU, the Frontier Fibers and the Associated
Property required to be provided under the terms of the IRU Agreement.
Except to the extent otherwise expressly provided in the IRU
Agreement, Service Recipient will be solely responsible for providing and paying
for any and all maintenance of all electronic, optronic and other equipment,
materials and facilities used by Service Recipient in connection with the
operation of the Dark Fibers, none of which is included in the maintenance
services to be provided hereunder.
5. Cable/Fibers.
------------
(a) Service Provider shall perform appropriate Scheduled Maintenance
on the Cable contained in the Qwest System in accordance with Service Provider's
then current preventative maintenance procedures as agreed to by Service
Recipient, which shall not substantially deviate from standard industry
practice.
Service Provider shall have qualified representatives on site any time
Service Provider has reasonable advance knowledge that another person or entity
is engaging in construction activities or otherwise digging within five (5) feet
of the Cable.
(c) Service Provider shall maintain sufficient capability to
teleconference with Service Recipient during an Emergency Unscheduled
Maintenance in order to provide regular communication during the repair process.
When correcting or repairing Cable discontinuity or damage, including but not
limited to in the event of Emergency Unscheduled Maintenance, Service Provider
shall use reasonable efforts to repair traffic-affecting discontinuity within
four (4) hours after the Service Provider maintenance employee's arrival at the
problem site. In order to accomplish such objective, it is acknowledged that
the repairs so effected may be temporary in nature. In such event, within
twenty-four (24) hours after completion of any such Emergency
H-3
<PAGE>
Unscheduled Maintenance, Service Provider shall commence its planning for
permanent repair, and thereafter promptly shall notify Service Recipient of such
plans, and shall implement such permanent repair within an appropriate time
thereafter. Restoration of open fibers on fiber strands not immediately required
for service shall be completed on a mutually agreed-upon schedule. If the fiber
is required for immediate service, the repair shall be scheduled for the next
available Planned Service Work Period (PSWP).
(d) In performing repairs, Service Provider shall comply with the
splicing specifications as set forth in Exhibit D. Service Provider shall
provide to Service Recipient any modifications to these specifications as may be
necessary or appropriate in any particular instance for Service Recipient's
approval, which approval shall not be unreasonably withheld.
(e) Service Provider's representatives that are responsible for
initial restoration of a cut Cable shall carry on their vehicles the typically
appropriate equipment that would enable a temporary splice, with the objective
of restoring operating capability in as little time as possible. Service
Provider shall maintain and supply an inventory of spare Cable in storage
facilities supplied and maintained by Service Provider at strategic locations to
facilitate timely restoration.
6. Planned Service Work Period (PSWP).
----------------------------------
Scheduled Maintenance which is reasonably expected to produce any
signal discontinuity must be coordinated between the parties. Generally, this
work should be scheduled after midnight and before 6:00 a.m. local time. Major
system work such as fiber rolls and hot cuts will be scheduled for PSWP
weekends. A calendar showing approved PSWP will be agreed upon in the last
quarter of every year for the year to come. The intent is to avoid jeopardy
work on the first and last weekends of the month and high-traffic holidays.
7. Restoration.
-----------
(a) Service Provider shall respond to any interruption of service or a
failure of the Dark Fibers to operate in accordance with the specifications set
forth in Exhibit D (in any event, an "Outage") as quickly as possible (allowing
for delays caused by circumstances beyond the reasonable control of Service
Provider) in accordance with the procedures set forth herein.
When restoring a cut Cable in the Qwest System, the parties agree to
work together to restore all traffic as quickly as possible. Service Provider,
promptly upon arriving on the site of the cut, shall determine the course of
action to be taken to restore the Cable and shall begin restoration efforts.
Service Provider shall splice fibers tube by tube or ribbon by ribbon or fiber
bundle by fiber bundle, rotating between tubes or ribbons operated by the
separate Interest Holders (as defined in paragraph 9(a)), including Service
Recipient, in accordance with the following described priority and rotation
mechanics; provided that, lit fibers in all buffer tubes or ribbons or fiber
--------------
bundles shall have priority over any dark fibers in order to allow transmission
systems to come back on line; and provided further that, Service Provider will
---------------------
continue such restoration efforts until all lit fibers in all buffer tubes or
ribbons are spliced and all traffic
H-4
<PAGE>
restored. In general, priority among Interest Holders affected by a cut shall be
determined on a rotating restoration-by-restoration and Segment-by-Segment
basis, to provide fair and equitable restoration priority to all Interest
Holders, subject only to such restoration priority to which Qwest is
contractually obligated prior to the date of the Agreement. Service Provider
shall use all reasonable efforts to implement a Qwest System-wide rotation
mechanism on a Segment-by-Segment basis so that the initial rotation order of
the Interest Holders in each Segment is varied (from earlier to later in the
order), such that as restorations occur, each Interest Holder has approximately
equivalent rotation order positions across the Qwest System. Additional
participants in the Qwest System that become Interest Holders after the date
hereof shall be added to the restoration rotation mechanism.
(c) The goal of emergency restoration splicing shall be to restore
service as quickly as possible. This may require the use of some type of
mechanical splice, such as the "3M Fiber Lock" to complete the temporary
restoration. Permanent restorations will take place as soon as possible after
the temporary splice is complete.
8. Subcontracting.
--------------
Service Provider may subcontract any of the maintenance services
hereunder; provided that Service Provider shall require the subcontractor(s) to
perform in accordance with the requirement and procedures set forth herein. The
use of any such subcontractor shall not relieve Service Provider of any of its
obligations hereunder.
9. Fees and Costs.
---------------
(a) Scheduled Maintenance Fees. The fees payable for any and all
--------------------------
Scheduled Maintenance hereunder shall be determined in accordance with the
following provisions. During any time after the Acceptance Date for any Segment
but subject to paragraph 10 below, Qwest shall be the Service Provider and
provide Scheduled Maintenance at a cost not to exceed $ * per route mile per
year, subject to the CPI adjustment described below (the "Qwest Fixed Fee") and
Unscheduled Maintenance as provided in subparagraph 9 below. The Scheduled
Maintenance fee payable by Service Recipient shall be equal to a pro rata share
of Qwest's Costs, based first upon the number of conduits so maintained by Qwest
and included in such Costs and second upon the number of Interest Holders (as
defined in Section 10.4 of the Agreement) in the portion of the Qwest System so
maintained by Qwest and included in such Costs; provided however, the total fee
shall in no event exceed the amount of the Qwest Fixed Fee as adjusted by the
CPI-U Adjustment.
A quarter of the first such Scheduled Maintenance fee with respect to each
Segment will be due and payable thirty (30) days after the Acceptance Date with
respect to such Segment. Thereafter, one quarter of such fee shall be due
quarterly. All fees shall be paid by Service Recipient within thirty (30) days
of receipt of invoice therefor. The Qwest Fixed Fee, if applicable, may be
adjusted annually, in Qwest's sole discretion, beginning with the first
anniversary date of the execution date of this Agreement, for increases in the
United States Bureau of Labor Statistics, CPI-U All Services Index (unadjusted),
as originally published. Said
* CONFIDENTIAL TREATMENT APPLIED FOR
H-5
<PAGE>
adjustment shall be hereinafter referred to as "CPI-U Adjustment". Such fee, as
adjusted by the CPI-U Adjustment, shall be equal to the product of the fee
specified herein multiplied by the fraction (i) whose numerator is the CPI-U All
Services for March of the previous calendar year for which the adjustment to the
fee is being made, and (ii) whose denominator is the CPI-U All Services for
March of the preceding year. The adjusted fee shall remain in effect until the
next annual fee is due, when a new adjusted fee fixed pursuant to this provision
shall become effective. In no event shall the amount of the fee as adjusted
pursuant to this provision be less than the amount of fee in effect for the
immediately-preceding year. The parties agree that the Index for March 1995 is
defined as 151.4. In the event that the Bureau of Labor Statistics (or any
successor organization) changes the current base of the CPI-U from 1982-84 =
100, the calculation of a fee under this provision shall be adjusted to ensure
that Qwest receives the same amount as it would have had, had the base not been
changed. In the event the Bureau of Labor Statistics or any successor
organization no longer publishes the CPI-U, Qwest, subject to Service
Recipient's agreement (which shall not be unreasonably withheld), designate the
statistical index it deems most appropriate for calculation of adjustments to a
fee and, from the date the CPI-U ceased to be published, such index shall be
used to make adjustments in a fee under this provision.
On and after the second anniversary of the execution of the Agreement, if
either of FRONTIER or QWEST determines that the Scheduled and Unscheduled
Maintenance to be provided hereunder should be put out to competitive bid
process, then such party shall notify the other of such determination, and
thereafter may obtain at least three bids in writing from national or regional
maintenance providers of sound business and financial reputation to perform the
Scheduled and Unscheduled Maintenance hereunder. Bids for maintenance services
must be for both Scheduled and Unscheduled Maintenance and must be for portions
of the QWEST System covering at least 1,000 contiguous route miles to provide
for the most competitive bidding and the best overall maintenance practices at
the lowest possible cost to Service Recipient. If a majority of the Interest
Holders agree on acceptable bids, QWEST shall be entitled to elect either to
continue to provide the Scheduled and Unscheduled Maintenance, or to subcontract
the Scheduled and Unscheduled Maintenance obligations hereunder to the lowest
such acceptable bidder, in either of which cases the Scheduled Maintenance fee
payable by Service Recipient shall be equal to a pro rata share, based first
upon the number of conduits maintained by QWEST and included in such Costs and
second upon the Interest Holders in the portion of the QWEST System covered by
the bid, of the sum of the lowest acceptable bid price plus a 10% G&A overhead
allowance with QWEST in any such case retaining such overhead allowance.
(b) Unscheduled Maintenance Fees. If the aggregate amount of the
----------------------------
Costs of Unscheduled Maintenance required as a result of any single event or
multiple, closely-related events is less than * ($*), such Costs shall be borne
by Service Provider. For any other Unscheduled Maintenance, the Costs thereof
shall be allocated among the various Interest Holders in the conduit, cable
and/or fibers affected thereby as follows: (i) Costs of Unscheduled Maintenance
solely to or affecting a conduit or cable which houses fibers of a single
Interest Holder shall be borne 100% by such Interest Holder; (ii) Costs of
Unscheduled Maintenance to or affecting a conduit which houses multiple
innerduct conduits, not including such Costs attributable to the repair or
replacement of fiber therein, shall be borne proportionately by the
*Confidential Treatment Applied For
H-6
<PAGE>
Interest Holders in each of the affected innerduct conduits based on the ratio
that such affected conduit bears to the total number of affected innerduct
conduits, and (iii) Costs of Unscheduled Maintenance attributable to the repair
or replacement of fiber, including the acquisition, installation, inspection,
testing and splicing thereof, shall be borne proportionately by the Interest
Holders in the affected fiber, based on the ratio that the number of affected
fibers subject to the interest of each such Interest Holder bears to the total
number of affected fibers. All such Costs which are allocated to Service
Recipient pursuant to the foregoing provisions shall be the responsibility of
and paid by Service Recipient within thirty (30) days after its receipt from
Service Provider of an invoice therefor.
(c) Costs. "Costs" means the actual, direct costs paid or payable in
-----
accordance with the established accounting procedures generally used by each
party, as the case may be, and which it utilizes in billing third parties for
reimbursable projects, which costs shall include, without limitation, the
following: (i) labor costs, including wages and salaries, and benefits and
overhead allocable to such labor costs (overhead allocation percentage shall not
exceed the lesser of (x) the percentage Service Provider typically allocates to
its internal projects or (y) thirty percent (30%), and (ii) other direct costs
and out-of-pocket expenses on a pass-through basis (e.g., equipment, materials,
supplies, contract services, etc.).
10. Term.
----
Service Provider's obligation to perform maintenance on the relevant
portion of the Qwest System shall be for an initial term expiring *, and unless
a different Service Provider is selected by the Interest Holders under a
mutually agreed selection process, then Qwest shall be the Service Provider.
Thereafter, Qwest shall have no obligation to provide Scheduled or Unscheduled
Maintenance hereunder, but shall be entitled to participate in any process
selected by the Interest Holders as a potential Service Provider.
*Confidential Treatment Applied For
H-7
<PAGE>
EXHIBIT I
Form of Surety Bond
AIU Insurance Company
American Fidelity Company
American Home Assurance Company
Granite State Insurance Company
Illinois National Insurance Company
The Insurance Company of the State of Pennsylvania
National Union Fire Insurance Company of Pittsburgh, Pa.
New Hampshire Insurance Company
Worldwide Bonding
AMERICAN INTERNATIONAL COMPANIES
Principal Bond Office
70 Pine Street, New York, N.Y. 10270
CONTRACT BOND
KNOW ALL MEN BY THESE PRESENTS:
That ---------------, as Principal, and ---------, as Surety, are held and
firmly bound unto -------, as Obligee, in the sum of ----- Dollars($-----), for
the payment of which sum, well and truly to be made, the Principal and Surety
bind themselves, their heirs, executors, administrators, successors and assigns,
jointly and severally, firmly by these presents.
WHEREAS, The principal has entered into a written contract dated ---------- with
the Obligee for ---------- which contract is by reference made a part hereof.
NOW, THEREFORE, THE CONDITION OF THE ABOVE OBLIGATION IS SUCH, That if the above
bounden Principal shall well and truly keep, do and perform, each and every, all
and singular, the matters and things in said contract set forth and specified to
be by the said Principal kept, done and performed at the time and in the manner
in said contract specified, and shall pay over, make good and reimburse to the
above named Obligee, all loss and damage which said Obligee may sustain by
reason of failure or default on the part of said Principal, then this obligation
shall be void; otherwise, it shall remain in full force and effect.
Signed, sealed and dated ----------
- ----------
(Principal) (Seal)
- -----------
(Witness)
By----------
<PAGE>
(Title)
- ----------
(Surety)
Bond No. ----------
By----------
Attorney in Fact
<PAGE>
OPERATIVE SURETY LANGUAGE:
NOW, THEREFORE, THE CONDITION OF THE ABOVE OBLIGATION IS SUCH, that if the above
bounden Principal shall well and truly keep, do and perform, each and every, all
and singular, the matters and things in said contract set forth and specified to
be by the said Principal kept, done and performed at the time and in the manner
in said contract specified, and shall pay over, make good and reimburse to the
above named Obligee, those amounts to which Obligee may be entitled under said
contract (including without limitation, Section 18.2 thereof) by reason of
failure or default on the part of said Principal, then this obligation shall be
void; otherwise, it shall remain in full force and effect.
<PAGE>
EXHIBIT J
UNDERLYING RIGHTS AND
---------------------
UNDERLYING RIGHTS REQUIREMENTS
------------------------------
Note: Prior to April 6, 1995 Qwest Communications Corporation was known as
"Southern Pacific Telecommunications Company," and the documents listed
below that predate April 6, 1995 are in that former name.
Pueblo Easements:
Easement Agreement dated October 25, 1995 between the Pueblo of Santa Ana and
Qwest Communications Corporation.
Easement Agreement dated February 2, 1996 between the Pueblo of Santo Domingo
and Qwest Communications Corporation.
Easement Agreement dated February 26, 1996 between the Pueblo of San Felipe and
Qwest Communications Corporation.
Easement Agreement dated April 12, 1996 between the Pueblo of Isleta and Qwest
Communications Corporation.
Easement Agreement dated June 6, 1996 between the Pueblo of Sandia and Qwest
Communications Corporation.
SPTCo Easement:
Easement Agreement dated September 30, 1991 between Southern Pacific
Transportation Company, as Grantor, and Southern Pacific Telecommunications
Company, as Grantee.
Fifth Amendment to Easement Agreement dated August 9, 1996 between Southern
Pacific Transportation Company, as Grantor, and Qwest Communications
Corporation, as Grantee.
D&RGW Easement:
Easement Agreement dated September 30, 1991 between Denver and Rio Grande
Western Railroad Company, as Grantor, and Southern Pacific Telecommunications
Company, as Grantee.
First Amendment to Easement Agreement dated July 14, 1993 between Denver and Rio
Grande Western Railroad Company, as Grantor, and Southern Pacific
Telecommunications Company, as Grantee.
<PAGE>
Second Amendment to Easement Agreement dated May 1, 1995 between Denver and Rio
Grande Western Railroad Company, as Grantor, and Southern Pacific
Telecommunications Company, as Grantee.
SSW Easement:
Easement Agreement dated September 30, 1991 between St. Louis Southwestern
Railway, as Grantor, and Southern Pacific Telecommunications Company, as
Grantee.
Second Amendment to Easement Agreement dated November 16, 1994 between St. Louis
Southwestern Railway, as Grantor, and Southern Pacific Telecommunications
Company, as Grantee.
ATSF Easement
Master Rail Corridor Fiber Optic Agreement dated December 5, 1994 between The
Atchison, Topeka and Santa Fe Railway Company, as Grantor, and Southern Pacific
Telecommunications Company, as Grantee.
CSX Easement:
Fiber Optic Placement Agreement dated as of March 1, 1995 between CSX
Transportation, Inc., as Grantor, and Southern Pacific Telecommunications
Company, as Grantee.
Letter Agreement dated as of March 1, 1995 between CSX Transportation, Inc., as
Grantor, and Southern Pacific Telecommunications Company, as Grantee.
DART Easement:
Fiber Optics Agreement dated as of February 3, 1994 between Dallas Area Rapid
Transit, as Grantor, and Southern Pacific Telecommunications Company, as
Grantee.
First Amendment to Fiber Optics Agreement dated as of November 13, 1995 between
Dallas Area Rapid Transit, as Grantor, and Southern Pacific Telecommunications
Company, as Grantee.
Fiber Optics Easement dated as of December 21, 1994 between Dallas Area Rapid
Transit, as Grantor, and Southern Pacific Telecommunications Company, as
Grantee.
MTA Easement:
(SPTCo Easement Agreement dated September 30, 1991 was assigned as part of sale
of route.)
Amendment to Easement Agreement dated January 13, 1995 between the Los Angeles
County Metropolitan Transportation Authority, as Grantor, and Southern Pacific
Telecommunications Company, as Grantee.
J-2
<PAGE>
First Severance Agreement and Amendment to Easement Agreement dated June 23,
1995 between Los Angeles County Metropolitan Transportation Authority and
Southern Pacific Telecommunications Company.
Public Easements:
License Agreement dated March 2, 1993 between the Utah Department of
Transportation and Southern Pacific Telecommunications Company.
Agreement dated March 17, 1992 between The Moffat Tunnel Improvement District
and Southern Pacific Telecommunications Company.
License Agreement dated September 11, 1995 between the City and County of
Denver, Board of Water Commissioners and SP Construction Services (covering the
Highline Canal Property).
License Agreement dated August 30, 1995 between the City and County of Denver,
Board of Water Commissioners and SP Construction Services (covering Conduit
Number 55).
License Agreement dated August 30, 1995 between the City and County of Denver,
Board of Water Commissioners and SP Construction Services (covering Conduit
Number 96).
License Agreement No. 95-01-25 dated July 24, 1995 between the City of Aurora,
Director of Utilities and Qwest Communications Corporation.
License Agreement dated August 18, 1995 between the City of Aurora, Director of
Utilities and Qwest Communications Corporation.
Arapahoe County Street Cut and R.O.W. Use Permit Nos. SC5212, SC5213, SC5193,
SC5191, SC5190, SC5194, SC5195, and SC5192 issued to Southern Pacific
Telecommunications Company by Arapahoe County.
Utility Permit Nos. 596067, 595099, 95-145, 95-147, and 95-149 issued to
Southern Pacific Telecommunications Company by the Colorado Department of
Transportation.
Permit for Right-of-Way Use and/or Construction Permit No. 1095 1262 E issued by
SP Construction Services by Douglas County.
Utility Permit Nos. 7528, 7526, and 7525 issued to Qwest Communications
Corporation by the Colorado Department of Transportation.
Permit dated March 3, 1995 issued to SP Telecom Construction Services by the
Huerfano County Road and Bridge Department.
Permit for Construction and Installation of Communication Facilities in Public
Rights of Way (Permit No. TFI-95-002) dated February 21, 1995 issued to
Southern Pacific Telecommunications Company by Las Animas County.
J-3
<PAGE>
Contractor License No. 70 dated May 9, 1995 issued to Southern Pacific
Telecommunications by the Town of Aguilar.
Permit dated April 28, 1995 issued to Southern Pacific Telecommunications
Company by the Town of Aguilar.
Right-of-Way 2983, Book 29, dated March 22, 1995 between the State of Colorado,
State Board of Land Commissioners, as Grantor, and Qwest Communications
Corporation, as Grantee.
Letter dated April 25, 1995 from the City of Trinidad, authorizing SP Telecom to
proceed with construction on the North Linden Avenue Communication Conduits.
Ordinance No. 950310 issued by the City of Kansas City, Missouri, granting
Southern Pacific Telecommunications Company and MCI Telecommunications
Corporation the right to install and maintain underground telecommunication
lines.
Missouri Highway and Transportation Commission Permit Nos. 6-95-00288, 6-95-
00286, 6-95-00287, 4-95-00682, 4-95-00681, 4-95-00683, and 4-95-00662 and
Excavation Permit(s) Receipts.
Private Easements:
Easement dated November 21, 1995 between American Federation of Human Rights, as
Grantor and Qwest Communications Corporation, as Grantee.
Easement dated September 26, 1995 between Ray W. Harness and Dorothy Elaine
Harness, as Grantors and Qwest Communications Corporation, as Grantee.
Easement dated December 4, 1995 between James G. Armstrong and Bessie M.
Armstrong, as Grantors and Qwest Communications Corporation, as Grantee.
Easement dated March 29, 1995 between Louis P. Vezzani and Evelyn M. Vezzani, as
Grantors and Qwest Communications Corporation, as Grantee.
Easement dated March 29, 1995 between Walsenburg Sand and Gravel Company, as
Grantor and Qwest Communications Corporation, as Grantee.
Easement dated March 29, 1995 between Joe Mario Amedei, as Grantor and Qwest
Communications Corporation, as Grantee.
Easement dated March 30, 1995 between Lindo P. Vezzani and Sharron L. Vezzani,
as Grantors and Qwest Communications Corporation, as Grantee.
J-4
<PAGE>
Easement dated May 19, 1995 between Ludvik Propane Gas, as Grantor and Qwest
Communications Corporation, as Grantee.
Easement dated March 30, 1995 between Samuel J. Capps, as Grantor and Qwest
Communications Corporation, as Grantee.
Easement dated April 17, 1995 between John James Fatur, as Grantor and Qwest
Communications Corporation, as Grantee.
Easement dated May 15, 1995 between Mark Bracco and Vicki Lynn Graham, as
Grantors and Qwest Communications Corporation, as Grantee.
Easement between Pamela L. Breitbarth (2/19/96), Virginia A. Buczek (4/17/95),
Ross A. Swanson (7/17/95), James R. Coressel (4/16/95) and Imogene Coressel
(4/16/95), as Grantors and Qwest Communications Corporation, as Grantee.
Easement dated March 30, 1995 between Bud Adams and Janna Adams, as Grantors,
and Qwest Communications Corporation, as Grantee.
Easement dated March 31, 1995 between Trinidad Properties, Inc. and MYBI
Partnership, as Grantors, and Qwest Communications Corporation, as Grantee.
Easement dated June 6, 1995 between Rose Wirth, as Grantor, and Qwest
Communications Corporation, as Grantee.
Easement dated May 5, 1995 between Harold A. Winter and Viola A. Winter, as
Grantors, and Qwest Communications Corporation, as Grantee.
Easement dated May 18, 1995 between Ayuda Me Dios, as Grantor, and Qwest
Communications Corporation, as Grantee.
Easement dated April 19, 1995 between Gabriel Saliba and Mary J. Saliba, as
Grantors, and Qwest Communications Corporation, as Grantee.
Easement dated June 1, 1995 between Interstate Underground Warehouse and
Industrial Park, Inc., as Grantor, and Qwest Communications Corporation, as
Grantee.
Easement dated May 26, 1995 between Delbert Rustman and Juanita Rustman, as
Grantors, and Qwest Communications Corporation, as Grantee.
Easement dated August 28, 1996 between Red Creek Ranch, Inc., as Grantor and
Qwest Communications, as Grantee (Pueblo, CO).
Miscellaneous Easements
Grant of Right of Way and Easement dated December 20, 1961 between J. A.
Humphrey and A. Pollard Simons, as Grantors, and American Liberty Pipe Line
Company, as Grantee.
J-5
<PAGE>
Amendment to Right-of-Way Agreement dated April 19, 1994 between Haynes/LICO
Properties II, as Grantor, and Southern Pacific Telecommunications Company, as
Grantee.
Amendment to Right of Way Grant dated January 31, 1996 between Prestonwood Golf
Club Corporation, as Grantor, and Qwest Communications Corporation, as Grantee.
Miscellaneous Documents:
SP Construction Services Safety Manual
Railroad Safety-Rules Governing Contractors Working on Railroads
Railroad Rules and Instructions for Maintenance of Way and Engineering and
Operating Manuals for Southern Pacific Lines
The Atchison, Topeka and Santa Fe Railway Company Manual
J-6
<PAGE>
EXHIBIT K
GUARANTY
--------
This GUARANTY, dated as of October 18, 1996, is from FRONTIER CORPORATION,
a New York corporation (hereafter called "Guarantor"), to and for the benefit of
QWEST COMMUNICATIONS CORPORATION, a Delaware corporation (hereafter called
"QWEST").
Recital
-------
FRONTIER COMMUNICATIONS INTERNATIONAL INC. (hereafter called "FCI"), a
wholly-owned subsidiary of Guarantor, entered into a IRU Agreement dated as of
October 18, 1996, by and between QWEST and FCI (the "Agreement"). QWEST would
not have entered into the Agreement except for the request of Guarantor and the
execution and delivery of this Guaranty.
Agreement
---------
NOW, THEREFORE, as a material inducement to QWEST to enter into the
Agreement with FCI and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Guarantor and QWEST hereby
agree as follows:
1. Guaranty. Guarantor hereby unconditionally and irrevocably guaranties
--------
to QWEST the full and punctual payment of all IRU fees payable by FCI pursuant
to the Agreement as set forth in Article II of the Agreement and on the IRU Fee
Payment Schedule attached to the Agreement, and the full and punctual payment of
all other amounts payable by FCI under the Agreement, including the payment of
any interest and all costs and expenses, including reasonable attorneys' fees,
incurred by QWEST in collecting payment or enforcing this Guaranty, pursuant to
the terms of the Agreement (the payment and other obligations are collectively
referred to as the "Obligations").
2. Unconditional Obligations. Guarantor understands and agrees that this
-------------------------
Guaranty is direct, immediate, absolute, continuing, unconditional and
unlimited, and is a guaranty of payment and not of collection. If FCI shall
fail to pay or perform any of the Obligations, Guarantor shall pay, forthwith
upon demand, to QWEST or to QWEST's designated agent, any and all such amounts
as may be due and owning from FCI to QWEST.
3. Guarantor's Waivers. Guarantor waives:
-------------------
(a) notice of the creation or extension of any Obligation by FCI;
(b) notice that FCI has taken or omitted to take any action under the
Agreement or any other instrument relating thereto or relating to any
Obligation;
<PAGE>
(c) notice of acceptance of this Guaranty;
(d) demand, presentation for payment and notice of demand, nonpayment
or nonperformance;
(e) any and all right to participate in any security held by QWEST now
or in the future;
(f) the right to require QWEST to (i) proceed against FCI, (ii)
proceed against or exhaust any security which QWEST now holds or may hold in the
future from FCI; (iii) pursue any other right or remedy available to QWEST, or
(iv) have the property of FCI first applied to the discharge of the Obligations;
and
(g) any defense by reason of bankruptcy, reorganization, discharge by
the filing of bankruptcy or discharge in bankruptcy of FCI;
Guarantor further agrees that the Guaranty will not be discharged and shall
remain in full force and effect until full payment and performance of all
Obligations of FCI and the liabilities of Guarantor hereunder.
4. Guarantor's Representations and Warrants. Guarantor represents and
----------------------------------------
warrants that:
(a) any financial information provided by Guarantor to QWEST was
prepared in accordance with generally accepted accounting principles and
accurately and fairly represents the financial condition on the date stated and
understands QWEST is relying on such information; and
(b) Guarantor has a financial interest in FCI.
5. Consent. Guarantor understands and consents that from time to time,
-------
and without further notice to or consent of Guarantor, QWEST may take any or all
of the following actions without releasing, discharging or in any way affecting
the obligations of Guarantor under this Guaranty:
(a) extend, renew, modify, compromise, settle, or release the
Obligations;
(b) any modification or amendment of or supplement to the Agreement;
(c) release or compromise any liability of any party or parties with
respect to the Obligations; or
(d) exercise or refrain from exercising any right or remedy of QWEST
under the Agreement.
<PAGE>
6. Assignment. Guarantor understands and agrees that any assignment of
----------
the Agreement, or any rights or obligations accruing thereunder, shall in no way
affect Guarantor's obligations under this Guaranty.
7. Delay in Enforcement. Guarantor understands and agrees that any
--------------------
failure or delay of QWEST to enforce any of its rights under the Agreement or
this Guaranty shall in no way affect Guarantor's obligations under this
Guaranty.
8. Notices. Notices to Guarantor are not required under this Guaranty.
-------
However, if notice is delivered, unless otherwise provided herein, it shall be
hand delivered, sent by registered or certified U.S. mail, postage prepaid, or
by commercial overnight delivery service, or transmitted by facsimile, and shall
be deemed served or delivered to Guarantor when received at the address set
forth after the signature line below, upon confirmation of sending when sent by
fax, on the day after being sent when sent by overnight delivery service, or
three (3) days after deposit in the mail when sent by U.S. mail.
9. Severability. In case any provision of this Guaranty shall be invalid,
------------
illegal or unenforceable, such provision shall be severable from the rest of
this Guaranty and the validity, legality or enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
10. Applicable Law and Jurisdiction. This Guaranty and the rights and
-------------------------------
obligations of the parties hereto shall be governed by and construed and
enforced in accordance with the laws of the state of New York. Guarantor agrees
that the exclusive venue for any actions related to this Guaranty shall be the
Federal District Court for the New York or in the alternative the courts of
Monroe County, New York.
11. Amendments. No amendment, modification or alteration of this Guaranty
----------
shall be effective unless in writing and signed by the parties hereto or their
respective successors or assigns.
12. Successors and Assigns. This Guaranty shall be binding upon and shall
----------------------
inure to the benefit of the successors and assigns of the parties hereto.
13. Attorneys' Fees. If any action shall be instituted by either QWEST or
---------------
Guarantor for the enforcement or interpretation of any of its rights, remedies
or obligations in or under this Guaranty, the prevailing party shall be entitled
to recover from the losing party all costs incurred by the prevailing party in
such action and any appeal therefrom, including reasonable attorneys' fees and
court costs to be fixed by the court therein.
THIS GUARANTY IS FREELY AND VOLUNTARILY GIVEN WITHOUT ANY DURESS OR
COERCION AND AFTER GUARANTOR HAS EITHER CONSULTED WITH COUNSEL, OR HAS BEEN
GIVEN AN OPPORTUNITY TO DO SO, AND GUARANTOR HAS CAREFULLY AND COMPLETELY READ
ALL OF THE TERMS AND PROVISIONS OF THE AGREEMENT AND THIS GUARANTY.
K-3
<PAGE>
IN WITNESS WHEREOF, this Guaranty has been executed as of the date first
above written.
GUARANTOR:
FRONTIER CORPORATION, a New York
corporation
/s/ Robert L. Barrett
___________________________________
By: Robert L. Barrett
Title: Executive Vice President
Guarantor's Address:
180 South Clinton Avenue
Rochester, New York 14646
Attn.: Vice President
__________________________________
Network Planning and Development
K-4
<PAGE>
EXHIBIT L
GUARANTY
--------
This GUARANTY, dated as of October 18, 1996, is from ANSCHUTZ COMPANY, a
Delaware corporation (hereafter called "Guarantor"), to and for the benefit of
FRONTIER COMMUNICATIONS INTERNATIONAL INC., a Delaware corporation (hereafter
called "FCI").
Recital
-------
QWEST COMMUNICATIONS CORPORATION (hereafter called "QWEST"), a wholly-owned
subsidiary of Guarantor, entered into a IRU Agreement dated as of October 18,
1996, by and between QWEST and FCI (the "Agreement"). FCI would not have
entered into the Agreement except for the request of Guarantor and the execution
and delivery of this Guaranty.
Agreement
---------
NOW, THEREFORE, as a material inducement to FCI to enter into the Agreement
with QWEST and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Guarantor and FCI hereby agree as
follows:
1. Guaranty. Guarantor hereby unconditionally and irrevocably guaranties
--------
to FCI the full and punctual payment of all amounts payable by QWEST to FCI
under the Agreement, including, without limitation, Section 18.2 thereof (such
payment obligations are collectively referred to as the "Obligations").
2. Unconditional Obligations. Guarantor understands and agrees that this
-------------------------
Guaranty is direct, immediate, absolute, continuing, unconditional and unlimited
(except as provided in Section 14), and is a guaranty of payment and not of
collection. If QWEST shall fail to pay or perform any of the Obligations,
Guarantor shall pay, forthwith upon demand, to FCI or to FCI's designated agent,
any and all such amounts as may be due and owning from QWEST to FCI.
3. Guarantor's Waivers. Guarantor waives:
-------------------
(a) notice of the creation or extension of any Obligation by QWEST;
(b) notice that QWEST has taken or omitted to take any action under
the Agreement or any other instrument relating thereto or relating to any
Obligation;
(c) notice of acceptance of this Guaranty;
<PAGE>
(d) demand, presentation for payment and notice of demand, nonpayment
or nonperformance;
(e) any and all right to participate in any security held by FCI now
or in the future;
(f) the right to require FCI to (i) proceed against QWEST, (ii)
proceed against or exhaust any security which FCI now holds or may hold in the
future from QWEST; (iii) pursue any other right or remedy available to FCI, or
(iv) have the property of QWEST first applied to the discharge of the
Obligations; and
(g) any defense by reason of bankruptcy, reorganization, discharge by
the filing of bankruptcy or discharge in bankruptcy of QWEST.
Guarantor further agrees that the Guaranty will not be discharged and shall
remain in full force and effect until the earlier to occur of (a) full payment
and performance of all Obligations of QWEST and the liabilities of Guarantor
hereunder, or (b) substitution of the Surety Bond (as defined in and pursuant to
Section 3.5 of the Agreement), in which case this Guaranty shall terminate as
provided in Section 15 hereof.
4. Guarantor's Representations and Warrants. Guarantor represents and
----------------------------------------
warrants that Guarantor has a financial interest in QWEST.
5. Consent. Guarantor understands and consents that from time to time,
-------
and without further notice to or consent of Guarantor, FCI may take any or all
of the following actions without releasing, discharging or in any way affecting
the obligations of Guarantor under this Guaranty:
(a) extend, renew, modify, compromise, settle, or release the
Obligations;
(b) any modification or amendment of or supplement to the Agreement;
(c) release or compromise any liability of any party or parties with
respect to the Obligations; or
(d) exercise or refrain from exercising any right or remedy of FCI
under the Agreement.
6. Assignment. Guarantor understands and agrees that any assignment of
----------
the Agreement, or any rights or obligations accruing thereunder, shall in no way
affect Guarantor's obligations under this Guaranty.
7. Delay in Enforcement. Guarantor understands and agrees that any
--------------------
failure or delay of FCI to enforce any of its rights under the Agreement or this
Guaranty shall in no way affect Guarantor's obligations under this Guaranty.
<PAGE>
8. Notices. Notices to Guarantor are not required under this Guaranty.
-------
However, if notice is delivered, unless otherwise provided herein, it shall be
hand delivered, sent by registered or certified U.S. mail, postage prepaid, or
by commercial overnight delivery service, or transmitted by facsimile, and shall
be deemed served or delivered to Guarantor when received at the address set
forth after the signature line below, upon confirmation of sending when sent by
fax, on the day after being sent when sent by overnight delivery service, or
three (3) days after deposit in the mail when sent by U.S. mail.
9. Severability. In case any provision of this Guaranty shall be invalid,
------------
illegal or unenforceable, such provision shall be severable from the rest of
this Guaranty and the validity, legality or enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
10. Applicable Law and Jurisdiction. This Guaranty and the rights and
-------------------------------
obligations of the parties hereto shall be governed by and construed and
enforced in accordance with the laws of the state of Colorado. Guarantor agrees
that the exclusive venue for any actions related to this Guaranty shall be the
federal district court of Colorado.
11. Amendments. No amendment, modification or alteration of this Guaranty
----------
shall be effective unless in writing and signed by the parties hereto or their
respective successors or assigns.
12. Successors and Assigns. This Guaranty shall be binding upon and shall
----------------------
inure to the benefit of the successors and assigns of the parties hereto.
13. Attorneys' Fees. If any action shall be instituted by either FCI or
---------------
Guarantor for the enforcement or interpretation of any of its rights, remedies
or obligations in or under this Guaranty, the prevailing party shall be entitled
to recover from the losing party all costs incurred by the prevailing party in
such action and any appeal therefrom, including reasonable attorneys' fees and
court costs to be fixed by the court therein.
14. Limited Maximum Liability. Notwithstanding anything contained herein
-------------------------
to the contrary, the liability of Guarantor for the payment of the Obligations
shall be limited to the aggregate sum of $175,000,000.
15. Termination. Notwithstanding anything contained herein to the
-----------
contrary, this Guaranty and the Obligations of Guarantor hereunder shall
terminate and be of no further force and effect automatically and without
further action on the part of any person upon delivery of the Surety Bond (as
defined in and pursuant to Section 3.5 of the Agreement) to FRONTIER. Upon such
termination, FRONTIER shall return to Guarantor the original of this Guaranty
marked Discharged and Terminated.
THIS GUARANTY IS FREELY AND VOLUNTARILY GIVEN WITHOUT ANY DURESS OR
COERCION AND AFTER GUARANTOR HAS EITHER CONSULTED
L-3
<PAGE>
WITH COUNSEL, OR HAS BEEN GIVEN AN OPPORTUNITY TO DO SO, AND GUARANTOR HAS
CAREFULLY AND COMPLETELY READ ALL OF THE TERMS AND PROVISIONS OF THE AGREEMENT
AND THIS GUARANTY.
IN WITNESS WHEREOF, this Guaranty has been executed as of the date first
above written.
GUARANTOR:
ANSCHUTZ COMPANY, a Delaware corporation
/s/ Craig D. Slater
_________________________________________
By: Craig D. Slater
Title: Vice President
Guarantor's Address:
2400 Anaconda Tower
555 Seventeenth Street
Denver, Colorado 80202
Attn.: President
L-4
<PAGE>
EXHIBIT 10.12
[1/1/96 Restatement]
FRONTIER CORPORATION
SUPPLEMENTAL MANAGEMENT PENSION PLAN
FRONTIER CORPORATION hereby amends, restates, renames and continues,
effective January 1, 1996, (except for those provisions specifying a different
effective date), the Rochester Telephone Corporation Supplemental Management
Pension Plan for the benefit of employees who are eligible to participate. The
Plan is renamed as the Frontier Corporation Supplemental Management Pension Plan
to reflect Frontier's being the successor to Rochester Telephone Corporation.
ARTICLE ONE
Definitions
-----------
1.1 "Board" means the Board of Directors of Frontier Corporation or any
committee of the Board of Directors authorized to act on behalf of the
Board. Any such Board committee shall be composed of at least three
members of the Board of Directors. As used in this Plan the term
"Board-appointed committee" means any other committee appointed by the
Board which need not be comprised of at least three Board members but
may include or consist entirely of management personnel who are not
members of the Board.
1.2 "Change in Control" means the occurrence of any of the following
events:
a. there shall be consummated
i. any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or
pursuant to which any shares of the Company's common stock
are to be converted into cash, securities or
<PAGE>
-2-
other property, provided that the consolidation or merger is
not with a corporation which was a wholly-owned subsidiary
of the Company immediately before the consolidation or
merger; or
ii. any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company; or
b. the shareholders of the Company approve any plan or proposal for
the liquidation or dissolution of the Company; or
c. any person (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), shall become the beneficial owner (within the meaning of
Rule 13d-3 under the Exchange Act), directly or indirectly, of
30% or more of the Company's then outstanding common stock,
provided that such person shall not be a wholly-owned subsidiary
of the Company immediately before it becomes such 30% beneficial
owner; or
d. individuals who constitute the Board on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election, or nomination for
election by the Company's shareholders, was approved by a vote of
at least three quarters of the directors comprising the Incumbent
Board (either by a specific vote or by approval of the proxy
statement of the Company in which such person is named as a
nominee for director, without objection to such nomination) shall
be, for purposes of this clause (d), considered as though such
person were a member of the Incumbent Board.
<PAGE>
-3-
1.3 "Committee" means a Board-appointed committee delegated authority with
respect to the management of the Plan or of any assets set aside for
the purpose of assisting any Participating Company meet its
obligations to pay Plan benefits.
1.4 "Company" means Frontier Corporation.
1.5 "Effective Date" means January 1, 1984. The effective date of this
restatement is January 1, 1996, except that provisions having a
different specific effective date shall be effective as of such date.
1.6 "Funded Plan" means the Company's Management Pension Plan. To reflect
a change in this plan's name, effective January 1, 1997, Funded Plan
means the Company's Pension Plan for Non-Bargaining Employees.
1.7 "Normal Retirement Date" and "Early Retirement Date" have the same
meanings given these terms in the Funded Plan.
1.8 "Participant" means any employee that meets the eligibility
requirements under Article Three of the Plan.
1.9 "Participating Company" means the Company and all employers affiliated
with the Company as determined in accordance with the definition of
"affiliated company" under the Funded Plan.
1.10 "Plan" means this Frontier Corporation Supplemental Management Pension
Plan.
<PAGE>
-3-
ARTICLE TWO
Purpose of Plan
---------------
2.1 The purpose of this Plan is to attract and retain a highly-motivated
executive workforce by providing to eligible employees retirement
benefits in excess of those permitted under the Funded Plan. The Plan
is intended to constitute an unfunded plan of deferred compensation
for a select group of management or highly-compensated employees as
provided for in Title I of ERISA.
ARTICLE THREE
Eligibility
-----------
3.1 An employee of a Participating Company is eligible to participate in
this Plan if he or she is a participant in the Funded Plan but his or
her Funded Plan benefits are reduced on account of compensation or
benefit limits imposed by Code Sections 401(a)(17) or 415.
Notwithstanding the foregoing, no employee in the preceding categories
shall be eligible to participate unless such employee (1) is a
management employee; (2) has an accrued benefit under the Funded Plan;
(3) has been approved for plan participation by the Committee; and (4)
is a "highly compensated employee" as this term is defined from time
to time under Section 414(q) of the Internal Revenue Code.
An otherwise eligible employee who, without the consent of the
Board, engages in any activity inimical to the interests of any
Participating Company within three years (five years in the case of an
executive officer or Vice President 2 of the Company) of retirement
shall cease being eligible to receive any further benefits after
commencing such activity, provided that upon a Change in Control this
sentence shall have no effect. For purposes of the foregoing, the
term "inimical" shall include but not be limited to the following
activities: engaging directly or
<PAGE>
-5-
indirectly in the performance of services for any telecommunications
business or any other business concern that offers services or
products which compete with those offered by any company within the
Frontier Group of companies or with any partnership in which the
Company has a 50 percent or greater interest in profits or capital
(collectively referred to below as "Frontier"), making disparaging
remarks publicly about Frontier, disclosing confidential business
information concerning Frontier, soliciting any person to leave the
employ of Frontier, engaging in any activity of a nature similar to
the foregoing activities or engaging in any other activity that the
Committee may from time to time determine in its sole discretion to be
inimical to the interests of Frontier.
ARTICLE FOUR
Benefits
--------
4.1 The normal benefit payable to a Participant on his or her Normal or
Early Retirement Date shall be a straight life annuity equal to the
aggregate amount he or she would be entitled to receive under the
Funded Plan if the Funded Plan's benefit formula had the modifications
indicated below, less the amount the Participant is actually entitled
to receive under the Funded Plan without such modifications. The
modifications referred to are as follows:
(a) the term compensation means a Participant's total base salary or
wages, cash bonuses and commissions earned during a year, even if
such amounts are deferred to a subsequent year, but without
regard to the limits of Code Section 401(a)(17). Deferred
compensation taken into account in the year earned shall not
thereafter be taken into account in the year of receipt.
(b) if in the discretion of the Committee, upon the recommendation of
the Chief Executive Officer, the factors so warrant, the service
factor shall take
<PAGE>
-6-
into account the Participant's service with any prior employer,
provided that after a Change in Control the Committee may not
change a prior decision to allow a Participant's service factor
to take into account service with another company. In the event
the Committee credits a Participant with service with another
employer under this subsection (c), the benefit payable under
this Section shall be reduced by any comparable benefit the
Participant is entitled to receive from such other employer which
is based on the service credited under this Section 4.1.
(c) for a Participant who is an officer, the service factor shall
include the amount of any service for which payment is made to
such Employee under a change in control executive contract
between the Participant and the Company.
(d) if the benefit formula under the Funded Plan is not calculated in
the form of a straight life annuity, it shall be converted to a
straight life annuity using the actuarial assumptions set forth
in the Funded Plan.
(e) the limitations under Code Section 415 shall not apply to the
benefit payable under this Plan.
Except for the foregoing modifications, the benefit calculation under
this Section shall be made in the same manner as it would be made
under the Funded Plan, including application of any pertinent
reductions for early retirement and the use of the same definitions
that appear in the Funded Plan.
Notwithstanding the foregoing, the benefits provided above in this
Section 4.1 shall be frozen as of December 31, 1996, subject to the
following terms and conditions:
<PAGE>
-7-
(f) no person not already a Plan Participant on December 31, 1995
shall be eligible to receive a benefit under this Section.
(g) all accrued benefits under this Section are frozen as of December
31, 1996 and no further benefits shall accrue under this Section
after this date.
(h) service after December 31, 1996 shall not be taken into
consideration for benefit accrual purposes but shall be taken
into account for purposes of determining eligibility to receive a
benefit.
(i) all accrued benefits for Participants hired prior to January 1,
1995 are fully vested.
(j) each Participant on the active payroll (or on the inactive
payroll but receiving benefits under the Company's long term
disability benefit plan) on August 16, 1995 who has at least five
years of service on this date shall have his or her benefit under
this Section which is determined at the earlier of December 31,
1996 or termination of employment increased by 20 percent.
(k) for each Participant entitled to the 20 percent enhancement
described above, the eligibility requirements for determining the
Participant's entitlement to receive early or normal retirement
benefits shall be reduced as follows:
. the 30 years of service requirement for a normal retirement
benefit is reduced to 27 years
. the age 55 plus 20 years of service requirement for an
unreduced early retirement benefit is reduced to 52 years
plus 17 years of service
. the age 50 plus 25 years of service requirement for a
reduced early retirement
<PAGE>
-8-
benefit is reduced to 47 years plus 22 years of service.
4.2 Subject to the conditions set forth below, a Participant holding the
position of Vice President 1 or higher who terminates employment on or
after reaching age 50 with at least five years of service shall be
entitled to receive the higher of the Section 4.1 benefit or a benefit
equal to (a) minus (b) below where
(a) equals the sum of (1) for each of the Participant's first
15 years of service, 2.5 percent times his or her average
annual compensation during the three consecutive years of
service with the Company that produce the highest such
average plus (2) for each of the next 15 years of service
1.5 percent times his or her average annual compensation
during the three consecutive years of service with the
Company that produce the highest such average, provided
that in no event shall the amount under this subsection (a)
exceed 60 percent of the Participant's highest three years'
average compensation; minus
(b) equals the sum of the straight life annuity benefit payable
under Section 4.1 of this
<PAGE>
-9-
Plan and the straight life annuity benefit payable under
the Funded Plan.
The normal form of benefit payable under this Section 4.2 is a
straight life annuity commencing as of the Participant's date of
retirement and shall not be subject to actuarial reduction even if the
benefit payable from the Funded Plan is subject to such reduction.
Notwithstanding the foregoing, the benefits provided by this
Section 4.2 shall be frozen as of December 31, 1999, subject to the
following terms and conditions:
. No person not already a Participant on December 31, 1995 and
accruing benefits under this Section 4.2 shall be eligible to
receive a benefit under this Section.
. All accrued benefits under this Section 4.2 are frozen as of
December 31, 1999 and no further benefits shall accrue under this
Section after this date.
. All Participants accruing benefits under this Section 4.2 of
the Plan on or before January 1, 1996 shall have their benefits
which are earned as of December 31, 1999 become 100 percent
vested on that December 31, 1999 provided they remain a
Participant in this Section 4.2 on that date.
4.3 The Company shall pay the benefits due under this Plan commencing
within 30 days of retirement, disability, death or any other event
that entitles a Participant or beneficiary to receive benefits under
the Funded Plan.
4.4 The benefit payable under this Plan shall be either a life annuity or
a contingent survivor annuity depending on the form elected by the
Participant on forms supplied by the Committee. Any such election
shall first be made by a Participant prior to the accrual of
<PAGE>
-10-
benefits under this Plan. A Participant may change his or her initial
election by written notification to the Committee provided that no
subsequent election shall be effective unless made at least 36 months
prior to the date that benefit payments first become payable. In the
event no timely election is made or a timely election is not possible
at the time benefits become payable (e.g., due to the death of a
----
contingent annuitant or a change in marital status), the benefit to a
single Participant will be paid in the form of a life annuity and the
benefit to a married Participant will be paid in the form of a joint
and 50 percent spousal survivor annuity. Notwithstanding the
foregoing, the Committee in its sole discretion may elect to pay the
entire benefit in a lump sum payment. The amount of the actual benefit
paid from this Plan shall be the straight life annuity calculated
under Section 4.1 (or Section 4.2 if applicable) adjusted as
appropriate by using the actuarial assumptions used in the Funded Plan
if a different form of benefit is paid.
4.5 If a Participant dies while still employed by a Participating Company
and after becoming entitled to receive a vested benefit, the
Participant's spouse, if surviving, shall be entitled to a monthly
lifetime benefit equal to one-half of the benefit the Participant
would have received under Section 4.1 (or Section 4.2 if applicable)
had he or she elected a 50 percent contingent annuitant annuity and
retired on the first day of the month on or before the date of death.
In the discretion of the Committee, the value of this benefit may be
paid out in a lump sum or in another alternative form of benefit it
may elect.
4.6 The benefits payable to a Participant under this Plan shall be paid by
the Participating Company that employs the Participant out of its
general assets and shall not be otherwise funded. Although the
Company does not intend, as of the effective date, to set aside any
specific assets to meet its obligation to pay benefits under this
Plan, the Company may, in its discretion, set aside assets for meeting
its obligations,
<PAGE>
-11-
including, but not limited to, the establishment of a rabbi or other
grantor trust. In the event such fund or trust is established, each
Participating Company shall be responsible for making contributions to
provide for the benefits of its own Participants.
No Participant shall have any property rights in any such fund or
trust or in any other assets held by a Participating Company. The
right of a Participant or his or her spouse or beneficiary to receive
any of the benefits provided by this Plan shall be an unsecured claim
against the general assets of a Participating Company.
ARTICLE FIVE
Administration
--------------
5.1 This Plan shall be administered by the Committee in accordance with
its terms and purposes.
5.2 Since this Plan is intended to operate in conjunction with the Funded
Plan, any questions concerning the calculation of benefits that arise
but are not specifically addressed by this Plan shall be determined to
the extent relevant and appropriate by reference to the Funded Plan's
provisions. In addition, the terms used in this Plan shall have the
same meaning as the same terms used in the Funded Plan. To the extent
the Funded Plan does not address, or it addresses imperfectly, an
issue raised with respect to benefit entitlement or benefit levels
under this Plan, the Committee has the sole discretion to resolve any
matter that may come before it.
5.3 The Committee shall determine the benefits due each Participant from
this and the Funded Plan and shall cause them to be paid by the Funded
Plan or a Participating Company accordingly.
5.4 The Committee shall inform each Participant of any benefit elections
which the Participant may possess and
<PAGE>
-12-
shall record such choices along with such other information as may be
necessary to administer the Plan.
5.5 The Committee has sole discretion to determine eligibility to
participate in this Plan, to determine the eligibility for and the
amount of benefits, to interpret the Plan and to take any other action
it deems appropriate to administer this Plan. The decisions made by
and the actions taken by the Committee shall be final and conclusive
on all persons.
Members of the Committee shall not be subject to individual liability
with respect to their actions under this Plan. Notwithstanding the
foregoing, the Company shall indemnify each member of the Committee
who may incur financial liability for actions or failures to act with
respect to the member's Committee responsibilities.
ARTICLE SIX
Amendment and Termination
-------------------------
6.1 While the Company intends to maintain this Plan in conjunction with
the Funded Plan for as long as necessary, the Board reserves the right
to amend or terminate it at any time for whatever reasons it may deem
appropriate.
6.2 Notwithstanding the preceding Section, however, the Company hereby
makes a contractual commitment on behalf of itself and the other
Participating Companies, as well as its and their successors, to pay,
or to require the other Participating Companies or the successors to
pay, the benefits accrued under this Plan to the extent it or the
other Participating Companies or the successors are financially
capable of meeting such obligation.
6.3 The terms of this Plan cannot be amended, waived or otherwise modified
by any other plan, contract or agreement that addresses an employee's
or former
<PAGE>
-13-
employee's terms and conditions of employment or the termination of
such employment.
ARTICLE SEVEN
Miscellaneous
-------------
7.1 Nothing contained in this Plan shall be construed as a contract of
employment between a Participating Company and an employee, or as a
right of any employee to be continued in the employment of a
Participating Company, or as a limitation of the right of a
Participating Company to discharge any of its employees with or
without cause.
7.2 The rights of a Participant under this Plan shall not be transferable,
voluntarily or involuntarily, other than by will or the laws of
descent and distribution and are exercisable during the Participant's
lifetime only by the Participant or the Participant's guardian or
legal representative.
7.3 This Plan shall be interpreted and enforced in accordance with the
laws of the State of New York.
IN WITNESS WHEREOF, the Company has caused this restated Plan document
to be executed by its duly authorized officer this 19th day of December, 1996.
FRONTIER CORPORATION
By: /s/ Josephine S. Trubek
Josephine S. Trubek
Corporate Secretary
<PAGE>
EXHIBIT 10.13
[1/1/96 Restatement]
FRONTIER CORPORATION
SUPPLEMENTAL RETIREMENT SAVINGS PLAN
FRONTIER CORPORATION hereby amends, restates and continues, effective
January 1, 1996, its Supplemental Retirement Savings Plan to permit eligible
Employees to defer a portion of their compensation under this Plan as a
supplement to contributions made to the Frontier Group Employees' Retirement
Savings Plan.
ARTICLE ONE
Definitions
-----------
1.1 "Board" means the Board of Directors of Frontier Corporation or any
committee of the Board of Directors authorized to act on behalf of the
Board. Any such Board committee shall be composed of at least three
members of the Board of Directors. As used in this Plan the term
"Board-appointed committee" means any other committee appointed by the
Board which need not be comprised of at least three Board members but
may include or consist entirely of management personnel who are not
members of the Board.
1.2 "Code" means the Internal Revenue Code of 1986, as amended, and
regulations issued thereunder.
1.3 "Committee" means a Board-appointed committee delegated authority with
respect to the management of the Plan or any assets set aside for the
purpose of assisting any Participating Company meet its obligations to
pay Plan benefits.
1.4 "Company" means Frontier Corporation.
1.5 "Compensation" means compensation as defined in ERSP but without
regard to the limitations prescribed in Code Section 401(a)(17).
1.6 "Effective Date" means January 1, 1988. The effective date of this
restatement is January 1, 1996.
<PAGE>
-2-
1.7 "Employee" means any management or highly compensated employee of a
Participating Company who is eligible to participate in ERSP but whose
contributions to ERSP are limited by the Code.
1.8 "ERSP" means the Frontier Group Employees' Retirement Savings Plan as
amended from time to time.
1.9 "Participating Company" means the Company and any affiliated company
participating in ERSP whose employees are eligible to participate in
this Plan.
1.10 "Plan" means this Frontier Corporation Supplemental Retirement Savings
Plan.
1.11 "Plan Year" means the calendar year.
1.12 "Trustee" means Marine Midland Bank, N.A.
ARTICLE TWO
Purpose of Plan
---------------
2.1 The purpose of this Plan is to afford eligible Employees the
opportunity to defer into this Plan the contributions that otherwise
would have been permitted into ERSP but for certain contribution or
compensation limits imposed by the Internal Revenue Code and for the
Participating Companies to contribute additional amounts on behalf of
these Employees.
ARTICLE THREE
Eligibility
-----------
3.1 Every Employee eligible to participate in ERSP shall be entitled to
participate in this Plan provided that (a) such Employee's
contributions to ERSP have been capped by one or more of the Code's
contribution or compensation limits, (b) such Employee belongs to a
select group of management or highly-compensated employees as provided
for in Title I of ERISA, and (c) such Employee is a "highly
compensated employee" as this term is defined from time to time under
Code Section 414(q).
<PAGE>
-3-
ARTICLE FOUR
Contributions
-------------
4.1 Employee Contributions. An eligible Employee may contribute to this
----------------------
Plan in a Plan Year any amount up to the maximum percentage of his or
her Compensation permitted under ERSP for the Year without taking into
account ERSP's compensation or dollar contribution limits required
under Code Sections 401(a)(17) or 415, reduced by the Employee's
maximum permissible salary reduction contributions to ERSP for the
Plan Year. All Employee contributions shall be made by salary
reduction as determined under Section 4.3.
4.2 Participating Company Contributions.
-----------------------------------
(a) Matching Contributions. If any portion of an eligible Employee's
----------------------
contributions under Section 4.1 consists of amounts that would have
been matched by a Participating Company under ERSP but for a Code
limitation on contributions, the Participating Company will make
matching contributions under this Plan with respect to such amounts at
the same level and under the same terms as specified in ERSP. Any
limitation on matching contributions that are not attributable to Code
limitations (e.g., ERSP's cap on the maximum Participating Company
----
match) shall apply to contributions made under this Plan. If an
eligible Employee contributes to both this Plan and ERSP, the
Participating Company's total matching contributions under both plans
shall not exceed the total matching contributions the Participating
Company would have made if all of the Employee's contributions were
made to ERSP, assuming that all of the eligible Employee's
Compensation were taken into account.
(b) Fixed Contributions. A Participating Company shall contribute on
-------------------
behalf of each of its eligible Employees an amount equal to 0.5
percent of the Employee's payroll period Compensation as it would have
made to ERSP on the Employee's behalf were it not for Code limitations
imposed on such ERSP contributions less the amounts it actually
contributed to ERSP taking into account the Code limitations.
(c) Discretionary Contributions. Each year a Participating Company
---------------------------
shall contribute a discretionary contribution on behalf of each of its
eligible Employees in an amount it would have made to
<PAGE>
-4-
ERSP but for Code limits on ERSP's discretionary contributions less
the amount of discretionary contributions it actually contributed to
ERSP on behalf of an eligible Employee.
In addition, a Participating Company may contribute on behalf of each
of its eligible Employees a lump sum supplemental contribution
intended to bring the level of aggregate Participating Company
contributions under ERSP and this Plan to the level that had been
contributed by the Participating Company on the Employee's behalf
under a predecessor plan to ERSP.
4.3 Deferral Election for Employee Contributions. An eligible Employee
--------------------------------------------
may defer compensation under this Plan only by making a written
election with his or her Participating Company before the beginning of
the calendar year for which the deferrals will be effective. Such
written election shall include (a) the amount to be deferred; (b) the
time as of which the deferral is to commence; and (c) the form that
benefit payments from the Plan will take. The terms of this election
shall be irrevocable except that a new election form may be filed with
respect to future deferrals under such terms as the eligible Employee
may elect and except that the form of benefit payments may be changed
consistent with Section 6.1.
4.4 Coordination of Deferrals with ERSP. No contributions may be
-----------------------------------
allocated to an Employee's account in this Plan for a Plan Year unless
the Employee has first contributed to ERSP for the Plan Year the
maximum amount he or she is entitled to contribute to ERSP. In order
to satisfy the various contribution limits and antidiscrimination
tests applicable to ERSP, the Committee may, in its sole discretion,
require some or all of the eligible Employees in this Plan to make all
salary reduction contributions for both plans initially to this Plan
as follows: prior to the beginning of a Plan Year an affected
Employee shall make two deferral elections, one for his or her total
salary reductions for the Plan Year, all of which shall initially be
contributed to this Plan and the second for the contributions to ERSP
in an amount equal to the greater of the statutorily permissible
amount or the total salary reduction contributions for the Plan Year.
All of such contributions plus all of a Participating Company's
matching contributions shall remain in this Plan through the end of
the Plan Year. By the January 31 following the end of the Plan Year
<PAGE>
-5-
the Committee shall complete all of the required testing under ERSP.
By the March 31 following the Plan Year end the Committee shall, as
elected by the Employee, either (1) transfer from this Plan all
contributions (including matching contributions but not earnings on
any contributions) that may be contributed to ERSP for the Plan Year
or (2) distribute such amount to the Employee in cash. The amounts
not transferred out of this Plan in accordance with the preceding
sentence shall be retained in this Plan and paid out in accordance
with the Employee's deferral election.
ARTICLE FIVE
Investment of Contributions
---------------------------
5.1 Investment of Deferred Amounts. The Participating Company of an
------------------------------
eligible Employee shall have the ultimate obligation to pay out all
deferred amounts plus the earnings thereon in accordance with the
terms of this Plan. The Trustee shall be empowered to invest such
amounts and any earnings thereon in such investments (not to include
securities of the Trustee) as may be designated by the Committee.
All Participating Company contributions and the earnings on them that
would have been invested in Frontier Corporation common stock under
ERSP shall be invested in Frontier Corporation common stock until the
fifth anniversary of the date of investment (the "Restricted Stock").
At the expiration of the five year period, the Restricted Stock in an
eligible Employee's account shall lose its investment restriction and
may be invested, along with all other amounts in his or her account,
among all investments made available from time to time by the
Committee. For this purpose, an eligible Employee may express a
preference to the Committee on how he or she would prefer to have his
or her accounts invested among the investment choices made available
from time to time by the Committee. An eligible Employee may also
elect a preference for changing the investment of his or her account
as frequently as the Committee in its sole discretion may permit. All
such preferences shall be made pursuant to such procedures as the
Committee shall adopt.
In order to meet its obligations under this Plan, the Company may
appoint a Trustee and direct such Trustee
<PAGE>
-6-
to establish individual investment accounts for each eligible
Employee. The Trustee shall be empowered to invest such accounts and
any earnings thereon in such investments (not to include securities of
the Trustee) as may be designated by the Committee. In the event a
Trustee is appointed to invest eligible Employee accounts, the
Committee shall be responsible for directing how the accounts are to
be invested, taking into account Employee preferences. If no Trustee
is appointed, the Committee shall establish bookkeeping accounts and
credit earnings to such accounts in accordance with such investment
benchmarks as may be established from time to time.
5.2 Rollover of Other Deferred Compensation Accounts. The Committee in
------------------------------------------------
its sole discretion may direct the transfer of amounts deferred by an
eligible Employee under another unfunded deferred compensation plan of
a Participating Company to the eligible Employee's account under this
Plan. Such transfer shall be made for the purpose of commonly
investing the deferred amounts under a single trust agreement. Any
such transfer of assets shall be permitted only to the extent that the
assets are of a type in which the Trustee can invest under this Plan.
No transfer of assets shall change the terms of any deferred
compensation election made by the eligible Employee with respect to
such transferred assets. However, to the extent consistent with any
election on the other unfunded deferred compensation arrangement's
election form, the terms of this Plan and its associated trust
agreement shall govern such transferred amounts.
5.3 Limitations on Assignment of Benefits. The Company's purpose in
-------------------------------------
creating separate participant accounts is to provide comfort to
eligible Employees that the deferred amounts will be available to pay
benefits when due. However, each eligible Employee's account under
the trust shall be subject to the claims of his or her Participating
Company's creditors in the event of the Participating Company's
insolvency or bankruptcy as provided in the trust agreement.
Notwithstanding the foregoing, the benefits payable under this Plan
shall not revert to a Participating Company or be subject to the
Participating Company's creditors prior to insolvency or bankruptcy,
nor shall they be subject in any way to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance, charge, garnishment,
execution or levy of any kind by the eligible Employee, his or her
beneficiary or the creditors of either, including any
<PAGE>
-7-
such liability as may arise from the eligible Employee's bankruptcy.
5.4 Unfunded Nature of Plan. Notwithstanding any investment arrangements
-----------------------
that may be established, it is intended that this Plan shall be
treated as an unfunded plan of deferred compensation as this term is
used in Title I of ERISA and it shall be administered accordingly.
ARTICLE SIX
Benefits
--------
6.1 Timing and Form of Benefit Payments. The amounts accumulated in an
-----------------------------------
eligible Employee's account shall be paid in full or shall commence
within 30 days of termination of employment. Account balances may be
made in cash or in property in either a lump sum or in monthly
installment payments of substantially equal amounts for a specified
number of years not in excess of twenty. The election of the form of
payment shall be made initially at the time of the deferral election
as specified in Section 4.3. The form of payment may be changed by an
Employee's written election to the Committee at any time up to 36
months prior to termination of employment. Any change made within 36
months of an Employee's termination date shall be disregarded by the
Committee.
6.2 Death Benefits. In the event of an eligible Employee's death, his or
--------------
her account balance shall be payable to his or her designated
beneficiary which may be a natural person, a trust or an estate. An
eligible Employee shall designate his or her beneficiary in writing on
a form acceptable to the Committee. The eligible Employee may specify
the form of payment to be made to the designated beneficiary. If no
election is made, the payment shall be made in a lump sum amount. If
the Employee makes the designation, the form of payment may be any
form that would have been available to the eligible Employee under
Section 6.1 had the eligible Employee lived and been eligible to
receive benefits. The filing of any beneficiary designation form
shall have the effect of automatically revoking any beneficiary
designation form filed previously. The consent of a previously-
designated beneficiary shall not be a prerequisite for an eligible
Employee to file a new beneficiary designation form.
<PAGE>
-8-
All death benefits shall commence or be made in full as soon as
administratively practicable following the date of the eligible
Employee's death. If a beneficiary is not validly designated, or is
not living or cannot be found at the date of payment, any amount
payable pursuant to this Plan shall be paid to the spouse of the
eligible Employee if living at the time of payment, otherwise in equal
shares to such children of the eligible Employee as may be living at
the time of payment; provided, however, that if there is no surviving
spouse or child at the time of payment, such payment shall be made to
the estate of the eligible Employee. All payments made under the
preceding sentence shall be made in a lump sum amount.
6.3 Hardship Withdrawals. Notwithstanding the payment terms set forth in
--------------------
an eligible Employee's deferral election, benefits may be paid earlier
in the case of an unforeseeable emergency. For this purpose, an
unforeseeable emergency means an unanticipated emergency that is
caused by an event beyond the control of the eligible Employee or the
Employee's beneficiary and that would result in severe financial
hardship to the affected individual if early withdrawal were not
permitted. The amount that may be paid under this section is limited
to the amount necessary to meet the emergency.
6.4 Source of Benefit Payments. Subject to the claims of a Participating
--------------------------
Company's creditors, the Trustee shall pay benefits in accordance with
the Committee's directions. If the Trustee holds insufficient funds
to pay the deferred amounts, adjusted for the earnings (and losses) on
them, each Participating Company shall have the obligation to pay such
amounts to its eligible Employees. Such payments shall be made from
the general assets of the Participating Company.
<PAGE>
-9-
ARTICLE SEVEN
Administration and Procedures
-----------------------------
7.1 Plan Administration. The Board, Trustee, and the committees
-------------------
established to administer the Plan possess certain specified powers,
duties, responsibilities and obligations under the Plan and Trust. It
is intended under this Plan that each be solely responsible for the
proper exercise of its own functions and that each shall not be
responsible for any act or failure to act of another.
7.2 Establishment of Accounts. The Committee shall establish and maintain
-------------------------
individual accounts for each eligible Employee, which accounts shall
record all activities with respect to the accounts, including
contributions, adjustments for earnings (and losses), and withdrawals.
The Committee shall determine the benefits due each Employee from this
Plan and shall direct them to be paid by a Participating Company or
the Trustee accordingly.
7.3 Decisions of Committee. The decisions made by, and the actions taken
----------------------
by, the Committee in the administration of this Plan shall be final
and conclusive on all persons. Except for their wilful misfeasance,
bad faith, gross negligence or reckless disregard of their duties, the
members of the Committee shall not be subject to individual liability
with respect to this Plan.
7.4 Committee Communications. The Committee shall inform each Employee of
------------------------
any deferral, investment and beneficiary elections which the Employee
may possess and shall record such choices along with such other
information as may be necessary to administer the Plan.
ARTICLE EIGHT
Amendment and Termination
-------------------------
8.1 Company's Authority. While it intends to maintain this Plan in
-------------------
conjunction with ERSP for as long as necessary to achieve its
purposes, the Company reserves the right to amend or to terminate the
Plan at any time for whatever reason it may deem appropriate. No Plan
amendment shall accelerate the
<PAGE>
-10-
payment of amounts previously deferred or provide for additional
benefits.
8.2 Participating Company Obligations for Benefits. Notwithstanding the
----------------------------------------------
preceding Section, the Participating Companies hereby make a
contractual commitment to pay to their respective Employees
the benefits accrued under this Plan to the extent they are
financially capable of meeting such obligations.
ARTICLE NINE
Miscellaneous
-------------
9.1 Relationship to Employment. Nothing contained in this Plan shall be
--------------------------
construed as a contract of employment between a Participating Company
and an Employee, or as a right of any Employee to be continued in the
employment of a Participating Company, or as a limitation on the right
of a Participating Company to discharge any of its Employees, with or
without cause.
9.2 Coordination with ERSP. If questions concerning the interpretation or
----------------------
administration of this Plan arise that are not governed by the terms
set forth in this document, or that are governed by this Plan but are
ambiguous, the terms of ERSP will govern to the extent they are
consistent with the terms and purposes of this Plan.
9.3 Governing Law. This Plan shall be interpreted and enforced in
-------------
accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the Company has caused this Plan document to be
executed by its duly authorized officer this 19th day of December 1996.
FRONTIER CORPORATION
By: /s/ Josephine S. Trubek
Josephine S. Trubek
Corporate Secretary
<PAGE>
EXHIBIT 11
FRONTIER CORPORATION
CONSOLIDATED COMPUTATION OF NET INCOME PER AVERAGE SHARE
OF COMMON STOCK ON A FULLY DILUTED BASIS
<TABLE>
<CAPTION>
In thousands, except per share data Years Ended December 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income applicable to common stock $208,744 $ 20,892 $178,870 $119,514 $101,511
Add: Interest on convertible debentures (1) 554 - 554 553 561
------------------------------------------------
$209,298 $ 20,892 $179,424 $120,067 $102,072
------------------------------------------------
Less: Increase in related federal
income taxes (1) 194 - 194 194 191
------------------------------------------------
Adjusted income applicable to common
stock $209,104 $ 20,892 $179,230 $119,873 $101,881
------------------------------------------------
Average common shares outstanding
(excluding common stock equivalents) 162,577 152,077 148,170 134,093 112,519
Adjustments for:
Convertible debentures (1) 503 - 502 502 528
Stock Options 1,488 9,592 12,183 19,137 23,661
------------------------------------------------
Adjusted common shares assuming
conversion of outstanding convertible
debentures and stock options at the
beginning of each period. 164,568 161,669 160,855 153,732 136,708
------------------------------------------------
Net income per average share of
common stock on a fully diluted basis $1.27 $.13 $1.12 $.78 $.74
</TABLE>
(1) Convertible debentures are anti-dilutive in 1995.
<PAGE>
Exhibit 13.1
Contents
Management's Discussion of
Results of Operations and Analysis
of Financial Condition 14
Report of Independent Accountants 21
Report of Management 21
Report of Audit Committee 21
Business Segment Information 22
Consolidated Statements of Income 23
Consolidated Balance Sheets 24
Consolidated Statements of Cash Flows 25
Consolidated Statements of
Shareowners' Equity 26
Notes to Consolidated Financial
Statements 27
Condensed Six-Year Financial
Statements 38
Financial and Operating Statistics
For Six Years 39
Financial Review
Frontier Corporation accomplished a great deal in 1996. Revenue grew over 20
percent, to nearly $2.6 billion. Earnings per share, excluding nonrecurring
charges, increased more than 11 percent over the prior year, and operating
income improved over 10 percent.
For the 37th consecutive year, the company raised the dividend on its common
stock. Frontier's financial condition as of December 31, 1996, was excellent and
leaves Frontier well-positioned to grow and to meet the challenges of increased
competition.
[GRAPH OF DIVIDENDS PAID PER COMMON SHARE APPEARS HERE]
[GRAPH OF CONSOLIDATED OPERATING INCOME APPEARS HERE]
[GRAPH OF DEBT RATIO APPEARS HERE]
[GRAPH OF SOURCES OF 1996 REVENUE APPEARS HERE]
13
<PAGE>
Management's Discussion of Results of Operations
and Analysis of Financial Condition
THE INFORMATION PRESENTED IN THIS MANAGEMENT'S DISCUSSION OF RESULTS OF
OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION SHOULD BE READ IN CONJUNCTION
WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES OF FRONTIER
CORPORATION ("THE COMPANY" OR "FRONTIER") FOR THE THREE YEARS ENDED DECEMBER 31,
1996. ALL HISTORICAL FINANCIAL DATA PRESENTED HAVE BEEN RESTATED FOR 1995
POOLING OF INTERESTS TRANSACTIONS. THE MATTERS DISCUSSED THROUGHOUT THIS
ANNUAL REPORT, EXCEPT FOR HISTORICAL FINANCIAL RESULTS CONTAINED HEREIN, MAY BE
FORWARD LOOKING IN NATURE OR "FORWARD LOOKING STATEMENTS." ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THE FORECASTS OR PROJECTIONS PRESENTED. FORWARD LOOKING
STATEMENTS ARE IDENTIFIED BY SUCH WORDS AS "EXPECTS," "ANTICIPATES," "BELIEVES,"
"INTENDS," "PLANS" AND VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS. THE
COMPANY BELIEVES ITS PRIMARY RISK FACTORS INCLUDE, BUT ARE NOT LIMITED TO:
CHANGES IN THE OVERALL ECONOMY, THE NATURE AND PACE OF TECHNOLOGICAL CHANGE, THE
NUMBER AND SIZE OF COMPETITORS IN FRONTIER'S MARKETS, CHANGES IN LAW AND
REGULATORY POLICY, AND THE MIX OF PRODUCTS AND SERVICES OFFERED IN THE COMPANY'S
TARGET MARKETS. ANY FORWARD LOOKING STATEMENTS IN THE 1996 ANNUAL REPORT SHOULD
BE EVALUATED IN LIGHT OF THESE IMPORTANT RISK FACTORS.
Strategic Developments
This year was a period of transition and positioning for Frontier. The Company
continues to make the transformation from a provider of local and long distance
services to a nationwide provider of integrated communications services. The
Federal Telecommunications Act of 1996 (the "Act") will accelerate the
deregulation of the telecommunications industry and will also allow and
encourage additional competitors to enter Frontier's businesses. The Act
provides the Company greater flexibility and speed to enter into new markets and
expand its customer base with bundled telecommunications products that few of
Frontier's larger competitors offer or currently have the regulatory freedom to
pursue. Throughout 1996, the Company commenced strategic initiatives to better
position itself in an increasingly competitive marketplace. A few of the most
notable initiatives follow:
The strategic purchases of and mergers with long distance companies that
occurred during 1995, were largely integrated in 1996. The anticipated operating
synergies resulting from the restructuring of the long distance operations have
been achieved and are reflected in the results of operations for the year.
Frontier announced in October 1996 that it had joined Qwest Communications
as a partner in the construction of a $2 billion nationwide fiber optic network,
which when complete, will be the largest single fiber build in United States
history. The Company will invest almost $500 million through 1998 to complete
the project. Construction began in October 1996. The multi-ring Synchronous
Optical Network ("SONET") architecture increases speed and reliability and is
expected to reduce the Company's network transmission costs beginning in
mid-year 1997. When complete in 1998, it is planned that Frontier's network will
interconnect nearly 100 cities, encompass more than 13,000 route miles and
provide coast-to-coast SONET connectivity. The Company expects to finance the
project primarily with cash from operations and short to medium-term debt.
The Company began its first offering of competitive local telephone service
as an Alternative Local Exchange Carrier (A-LEC) in the fourth quarter of 1996.
As an A-LEC, Frontier is providing local service, combined with a complete range
of long distance and wireless products, in the New York City area. The Company
is utilizing its own switch in conjunction with a local resale agreement with
Nynex. Providing local telephone services as an A-LEC is an efficient method of
entering large markets and capitalizes on the Company's experience as a provider
of bundled telecommunication services. The Company plans to enter other new
markets either as a facilities based local carrier or as a reseller of local
telecommunications services in 1997.
The Rochester, New York local telephone operation successfully completed its
second year under the Open Market Plan. The Open Market Plan promotes
telecommunications competition and preceded the Telecommunications Act of 1996.
The Company's retail and wholesale market share remained stable versus the prior
year, despite the increased discount rates offered to resellers during 1996. The
Company believes it will continue to succeed in this market and other
competitive markets providing a bundled telecommunication product on one bill.
The Company's goal is to continue to develop its products and customer base
and build larger customer clusters in target segments and geographic markets,
with the overall objective of expanding its operations across line-of-business
boundaries.
Consolidated Results of Operations
Consolidated revenues were $2.6 billion in 1996, a $431.9 million, or 20.1%,
increase over 1995. Revenues in 1995 increased $476.1 million or 28.6% over
1994. Normalized for purchase acquisitions, revenues increased 11.8% and 17.2%
in 1996 and 1995, respectively. The 1996 revenue increase is attributed to
growth in traffic, increased sales and marketing efforts and the promotion of
new products and features in the long distance and local telephone segments. The
decline in the normalized revenue growth rate in 1996 as compared to 1995 is
principally due to the migration of the 1-plus basic long distance service of
the Company's major carrier customer from the Frontier network in the fourth
quarter of 1996 and lower traffic growth in other sales channels. The normalized
revenue growth rate of 17.2% for 1995 is positively impacted by the major
carrier customer's business doubling in size over 1994. Normalized for certain
nonrecurring events, costs and expenses were $2.1 billion, $1.7 billion, and
$1.3 billion in 1996, 1995 and 1994, respectively. This resulted in operating
income increases of 10.3% and 22.3% in 1996 and 1995, respectively. Operating
margins were 17.1%, 18.6% and 19.5% during 1996, 1995 and 1994, respectively.
The decline in operating income growth and the level of margins for 1994 through
1996 is primarily a result of the increasing share of the Company's total
business represented by long distance, which operates at a lower margin than the
local communications segment. The decline was also influenced by the impact of
14
<PAGE>
the high growth through the fourth quarter of 1996 of the Company's major long
distance carrier customer, which occurred at comparatively lower margins than
the rest of the Company's business. Pursuant to contract, the Company provided
this customer with volume discounts as its traffic grew at an accelerated pace
over the past two years. A full discussion of the impact of this customer on the
Company's performance is on page 17. Additionally, selling, general and
administrative costs ("SG&A") increased in the long distance segment in the last
quarter of 1996 primarily as the result of an increase in sales distribution
channels and a brand advertising program that was implemented. These costs are
expected to positively impact revenue and operating income in 1997.
The Company recorded a $16 million charge in the fourth quarter of 1996 to
reflect the resolution of an international traffic dispute with connecting
carriers. This charge, which is not material to each of the other quarterly
results reported in 1996, reduced reported EPS in the fourth quarter by
approximately $.06. International long distance service is a part of the
Company's overall product set. Frontier primarily resells the international long
distance services of other long distance carriers. The Company is exploring
alternatives to resale which could result in the lowering of its cost structure
for international traffic in the future.
Earnings per share were $1.27, $.13 and $1.12 for the years ended 1996, 1995
and 1994, respectively. Excluding the impact of the nonrecurring adjustments
discussed below, net income amounted to $247.1 million, $218.7 million and
$180.1 million in 1996, 1995 and 1994, respectively. Earnings per share,
excluding these adjustments, were $1.50, $1.35 and $1.12 for the three years,
increases of 11.1% and 20.5%, respectively.
Nonrecurring Adjustments
Consolidated operating results for the years 1994 through 1996 were impacted by
a number of nonrecurring adjustments. Net income for these years, normalized for
nonrecurring adjustments, is summarized in the chart below and succeeding
narrative.
<TABLE>
<CAPTION>
- ------------------------------------------------- --------------- ------------
(All dollars, except per share
amounts, are in thousands) 1996 1995 1994
- ------------------------------------------------- --------------- ------------
<S> <C> <C> <C>
Income applicable to
common stock $ 208,744 $ 20,892 $178,870
- ------------------------------------------------- --------------- ------------
Adjustments, net of taxes:
Acquisition related and other 30,363 78,764 --
Gain on sale of assets (3,029) (4,826) (7,109)
Loss on early retirement of debt -- 9,060 --
Discontinuance of regulatory
accounting -- 112,148 --
Adoption of new accounting
standards 8,018 1,477 7,197
Work stoppage preparation costs 1,861 -- --
- ------------------------------------------------- --------------- ------------
Total adjustments 37,213 196,623 88
- ------------------------------------------------- --------------- ------------
Income applicable to common
stock, after adjustments $ 245,957 $ 217,515 $178,958
================================================= =============== ============
Earnings per share $ 1.27 $ .13 $ 1.12
- ------------------------------------------------- --------------- ------------
Adjustments:
Acquisition related and other .19 .49 --
Gain on sale of assets (.02) (.03) (.04)
Loss on early retirement of debt -- .06 --
Discontinuance of regulatory
accounting -- .69 --
Adoption of new accounting
standards .05 .01 .04
Work stoppage preparation costs .01 -- --
- ------------------------------------------------- --------------- ------------
Total adjustments .23 1.22 --
- ------------------------------------------------- --------------- ------------
Earnings per share,
after adjustments $ 1.50 $ 1.35 $ 1.12
================================================= =============== ============
</TABLE>
1. Acquisition Related and Other
Frontier's operating results for 1996 include a $30.4 million charge, net of a
tax benefit of $18.4 million, resulting from the curtailment of certain company
pension plans and a one-time charge associated with the Company's conference
calling product line. The pension curtailment comprises $17.3 million of the
total post-tax charge and is a result of the Company's efforts to standardize
pension benefits. The one-time charge associated with the Company's conference
calling product line ($13.1 million, after tax) primarily reflects an adjustment
to write-off nonrecoverable product development costs relating to proprietary
software.
The Company's 1995 operating results reflect an acquisition related charge
of $78.8 million, net of an income tax benefit of $35.4 million, that is
associated with the integration of the Company's 1995 acquisitions as well as
the ALC Communications Corporation ("ALC") merger related transaction costs. The
remaining reserve balance at December 31, 1996 of $28.2 million is primarily for
redundant facilities currently being decommissioned.
2. Gain on Sale of Assets
Gain on sale of assets reflects the sales of the Company's minority investment
in a Canadian long distance company in 1996 ($5.0 million pre-tax gain, $3.0
million after taxes), the sale of Ontonagon County Telephone Company in 1995
($4.8 million non-taxable gain) and Minot Telephone in 1994 ($11.3 million pre-
tax gain, $7.1 million after taxes).
3. Early Retirement of Debt
In 1995, the Company redeemed, through a tender offer, $76.8 million of ALC's 9%
Senior Subordinated Notes for $83.5 million. The early retirement resulted in an
extraordinary loss including issuance costs, of $5.8 million, net of applicable
income taxes of $3.7 million. In 1995, the Company redeemed its outstanding 9%
debentures scheduled to mature in 2020. The Company recorded an extraordinary
loss of $3.2 million, net of applicable income taxes of $1.7 million.
4. Discontinuance of Regulatory Accounting
As a result of changes in regulation and increasing competition in the
telecommunications industry, the Company discontinued the use of Statement of
Financial Accounting Standards ("FAS") No. 71, "Accounting for the Effects of
Certain Types of Regulation" as of September 30, 1995 for its local
communications companies. This non-cash, extraordinary write-off totaled $112.1
million, net of applicable income taxes of $68.4 million. The write-off was
primarily related to the reduction in the recorded values of long lived
telephone plant assets.
5. Adoption of New Accounting Standards
Results in 1996 reflect a $12.4 million pre-tax charge for the adoption of FAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The assets held for disposal consist principally of
telephone switching equipment in the Local Communications segment
as a result of the central office switch consolidation project.
Frontier adopted FAS 116, "Accounting for Contributions Received and Made,"
in September of 1995. FAS 116 requires that companies reflect an accrual in
current expenses for the cost of multi-year charitable contributions. The
cumulative effect of adopting FAS 116 in 1995 was a charge of $1.5 million, net
of applicable income taxes of $0.8 million.
15
<PAGE>
As of January 1, 1994, the Company adopted FAS 112, "Employers' Accounting
for Postemployment Benefits," related to the accounting for certain employee
benefits costs. The cumulative effect of adopting FAS 112 was an after-tax
charge of $7.2 million, net of applicable income taxes of $3.9 million.
6. Work Stoppage Preparation Costs
During the first quarter of 1996, operating costs increased $2.8 million
(pre-tax) at the Company's largest telephone subsidiary due to higher labor and
related expenses in connection with a union contract negotiation. See page 18
for further discussion of the status of contract negotiations with this union
and the impact on the Company's reported results.
Telecommunications Act of 1996
The Telecommunications Act of 1996 was enacted on February 8, 1996. This
landmark legislation establishes a framework for increased competition in the
local and long distance segments of the Company's business. The Company views
this legislation as favorable to its operations. Currently, Frontier companies
are providing local service, or negotiating with carriers for interconnection
and resale agreements to permit entry into new markets. The Telecommunications
Act incorporates many aspects of the Open Market Plan initiated by the Company
in Rochester, New York in 1993 and implemented in 1995. The Company believes its
experience in providing integrated services and its background with the
Rochester, New York Open Market Plan provides it with a competitive advantage.
On August 8, 1996, the Federal Communications Commission ("FCC") released a
First Report and Order (the "First Report and Order") in a core rulemaking
proceeding to implement the Telecommunications Act of 1996. That First Report
and Order established guidelines to promote local competition affecting the
Company and all other competitors in local telecommunications markets. The FCC's
action is subject to reconsideration and to appellate review. On September 27,
1996, the U.S. Court of Appeals for the Eighth Circuit granted a stay of a
significant portion of the First Report and Order, and an appeal of that stay to
the Supreme Court was denied. A decision by the appeals court is pending. The
Act also requires the FCC to restructure the manner in which universal service
operates, and the Commission is currently considering the recommendation of a
Federal-State Joint Board released on November 8, 1996. On December 24, 1996,
the FCC released a Notice of Proposed Rulemaking requesting comment on how the
FCC should change the manner in which it regulates interstate access charges.
The Company is considering its options in light of these proceedings.
Competitive Response to the Telecommunications
Act of 1996
In the short time since the enactment of the Telecommunications Act of 1996, a
number of fundamental changes in the business have occurred or are likely to
take place. During 1996, many companies in the industry have announced or
completed corporate consolidations or other transactions. As a result, a number
of these competitors may be larger in size and may possess financial resources
substantially greater than Frontier's. Notwithstanding these business
transactions, much of the first year of implementation of the Act has related to
activities that have not yet caused significant marketplace impacts. These
activities include regulatory activity on both the federal and state levels to
implement the new law, and to put in place mechanisms to govern and to deal with
new business relationships. They also include governmental activities designed
to open new areas of the radio spectrum, and to permit technological development
of new services and improvements in established services.
As new technological and business opportunities emerge, the pace of
innovation and business activity will accelerate. New business relationships are
developing and can be expected to continue. They are partially the result of
provisions in the law that require new forms of pricing agreements between
facilities-based carriers and resellers, new interconnection agreements, and
arrangements that replace long-standing tariff filing mechanisms. They are also
the result of strategic activities designed to address the evolving marketplace.
The new law promotes broader competition among incumbent companies in
traditional telecommunications lines of business and across such lines of
business.
As a result of these events, the way in which individual companies do
business is changing. Companies that have operated in traditionally independent
lines of business must evaluate methods to build integrated products that
incorporate services and capabilities that come from other areas. In the long
distance line of business, Frontier anticipated that public policy would
continue to evolve in favor of greater competition. As a result, the Company has
been positioning itself to confront a marketplace with numerous new competitors
in each of its business channels, requiring the development of capabilities
necessary to compete aggressively and successfully against all of the
competitors in its target channels.
Part of this activity has involved an analysis of the merits of owning
additional amounts of facilities in the long distance area. Ownership of
facilities can provide a number of benefits, including the advantages of lower
unit costs, new strategic pricing opportunities, opportunities to deploy new
services, and the ability to offer services that are unique. Another part of
this activity is improved marketing. Frontier expects that brand awareness and
product development will be an important part of successful marketing in the
future telecommunications marketplace. Frontier committed significant resources
in 1996 to diversifying its product line and increasing its brand awareness, as
well as develop and strengthen its sales force.
Frontier anticipates that, in a few years, a majority of small and medium
sized businesses will buy their telecommunications services in "bundles."
Markets will be fundamentally open, and many of today's most fundamental
structural boundaries and subsidies will be eliminated. As the nature of the
business evolves due to technology and changing regulation, Frontier is
positioned to take advantage of these trends.
Rochester, New York Open Market Plan
The Rochester, New York local communications' subsidiary completed its second
full year of operations under the Open Market Plan in 1996. The Open Market Plan
promotes telecommunications competition in the Rochester, New York marketplace
by providing for (1) interconnection of competing local networks including
reciprocal compensation for terminating traffic, (2) equal access to network
databases, (3) access to local telephone numbers, (4) service provider telephone
number portability, and (5) certain wholesale discounts to resellers of local
services. The inherent risk associated with opening the Rochester market to
competition is that some customers are able to purchase services from
competitors, which may reduce the number of retail customers and potentially
cause a decrease in the revenues and profitability for Rochester Telephone.
However, results since implementation of the Open Market Plan indicate that a
stimulation of demand in the use of the network and new product revenue may
offset the losses from customer migration. Increased competition may also lead
to additional price decreases for services, adversely
16
<PAGE>
impacting Rochester Telephone's margins. An additional positive feature of the
Open Market Plan provides that Rochester Telephone can retain additional
earnings achieved through operating efficiencies. Previously these earnings
would have been shared with customers.
During the seven year period of the Open Market Plan, rate reductions of $21
million will be implemented for Rochester area consumers, including $11.5
million of which occurred in 1995 and an additional $2.5 million which commenced
in January 1996. Rate reductions of $1.5 million will occur in 1997. Rates
charged for basic residential and business telephone service may not be
increased during the seven year period of the Plan. The Company is allowed to
raise prices on certain enhanced products such as caller ID and call forwarding.
Price increases on enhanced products partially offset the rate reductions
required under the Plan during 1996.
AT&T Communications of New York filed a complaint with the New York State
Public Service Commission ("NYSPSC") for reconsideration of the Open Market Plan
on October 3, 1995. The complaint sought a change in the wholesale discount, a
change in the minutes of use surcharge and also changes in a number of
operational and support activities. Some of these issues are also being
considered in other states in other unrelated local competition proceedings. On
July 18, 1996, the NYSPSC issued an order establishing a temporary wholesale
discount of 13.5% for services and eliminating the minutes of use surcharge. On
November 27, 1996, the NYSPSC set permanent wholesale discounts retroactive to
July 24, 1996, of 17.0% for resellers that use the Company's operator services
and 19.6% for resellers that provide their own operator services. The Company
believes that, currently, all resellers in this market use the Company's
operator services.
Under the Telecommunications Act of 1996 and a statewide proceeding, the
NYSPSC is also considering the prices that local exchange companies in New York
may charge for "unbundled" service elements such as links (the wire from the
switch to the customers premises), ports (the portion of the switch that
terminates the link) and switch usage features. The Company is actively
participating in this proceeding and expects the NYSPSC to issue a decision on
service elements in 1997.
Results of Segment Operations
Frontier simplified its business segment reporting at the beginning of 1996 to
reflect the predominance of its two major operating segments, long distance and
local communications services. The Company currently reports its operating
results in three segments: Long Distance Communications Services, Local
Communications Services and Corporate Operations and Other. The Company's
majority interests in two wireless properties, which were previously reported as
a Wireless Communications Services segment, have been consolidated under
Corporate Operations and Other.
Each of Frontier's segment results are reviewed below.
Long Distance Communications Services
During 1996 the Company substantially completed the integration of the assets
and operations of ALC and its six additional long distance acquisitions of 1995.
The restructuring process resulted in the elimination of redundant facilities
and staffing. Results for the segment partially reflect operating efficiencies
gained as a result of the assimilation of the long distance companies acquired
and the consolidation of the long distance switch network. These operating
efficiencies were offset by increased SG&A charges during the fourth quarter
associated with advertising campaigns and sales and marketing support for new
revenue initiatives.
Revenues were $1.9 billion, $1.5 billion, and $1.0 billion in 1996, 1995 and
1994, respectively, representing a 27.6% increase in 1996 and a 46.5% increase
in 1995. Revenues increased 17.9% and 25.5% in 1996 and 1995, respectively, when
normalized for purchase acquisitions. Traffic growth, increased sales and
marketing efforts and increased sales of enhanced services were the primary
drivers of the revenue growth for 1996 as compared to 1995. The decrease in the
normalized revenue growth rate percentage from 1995 to 1996 is largely due to
the migration of the 1-plus basic long distance service of the Company's major
carrier customer from the Frontier network in the fourth quarter of 1996 and
lower traffic growth in other sales channels. The increase in revenue from 1994
to 1995 was caused by increased traffic volumes due to internal growth, the
growth of the Company's major carrier customer and purchase acquisitions.
[GRAPH OF LONG DISTANCE MINUTES OF USE APPEARS HERE]
Revenue for all years includes the major carrier customer whose revenue
represented 21% and 14% of long distance revenues in 1996 and 1995,
respectively. Pursuant to contact, this customer had been provided volume
discounts by the Company as its 1-plus traffic grew at an accelerated pace over
the past two years. During 1995, the Company was notified that this customer
would be installing its own long distance switching capacity and diversifying
its traffic distribution to one or more additional carriers. Effective June
1996, this customer entered into a revised three year agreement with the
Company, eliminating the customer's existing minimum monthly commitment for 1-
plus service in exchange for an extension of the exclusivity for the Company to
carry the customer's higher margin enhanced service traffic. The migration of
the major carrier customer's 1-plus traffic was substantially complete as of
December 31, 1996. As a result of the loss of this customer's 1-plus traffic
from Frontier, revenue from this carrier comprised approximately 10% of
Frontier's long distance revenue in the fourth quarter of 1996 as compared to
23% in the third quarter. The loss of this customer's 1-plus traffic contributed
to a decrease in operating income in the fourth quarter as lower overall traffic
levels resulted in a higher level of fixed network costs than required by the
remaining volume of business carried by the Company during the quarter.
Costs and expenses for the long distance operation were $1.7 billion, $1.3
billion and $.9 billion in 1996, 1995 and 1994, respectively, excluding
nonrecurring charges. The increase in costs and expenses in 1996 as compared to
1995 is primarily due to increased traffic resulting in higher cost of access.
In addition, SG&A expenses increased in the last half of 1996 as the Company
began to position itself for new revenue opportunities in 1997 and beyond. The
increase in costs from 1994 to 1995 was caused by increased traffic volumes due
to internal growth, the Company's major carrier customer and purchase
acquisitions.
Cost of access as a percentage of revenues was 63% in 1996, 58% in 1995 and
56% in 1994. The higher cost of access percentages reported for all periods is
primarily due to the increased discounts provided to the Company's major
17
<PAGE>
carrier customer pursuant to contract as traffic levels grew at an accelerated
rate. Also, as this customer removed its traffic in the fourth quarter of 1996,
there was a higher proportion of fixed network costs than would have been
required for the volume of minutes actually carried by the Company's network
during that period. The Company has implemented actions designed to lower its
cost of access and improve the cost efficiency of its network.
SG&A as a percentage of revenues was 20.7% in 1996, 23.1% in 1995 and 24.0%
in 1994. These reductions as a percentage of revenues are principally due to
increasing revenues without corresponding cost increases from 1994 through the
first half of 1996. Total headcount increased in the sales and marketing areas
in the last half of 1996. The increase is intended to accelerate revenue growth
in 1997 from the Company's small business customers, to permit the Company to
move "up market" by selling Frontier services to larger customers and to
generate sales of newer services, such as prepaid calling cards and facilities
based local services. Depreciation and amortization increased by $21.7 million
and $20.2 million due primarily to the impact of the purchase acquisitions in
1996 and 1995, respectively.
Operating income, excluding nonrecurring charges, rose 9.6% and 30.6% in
1996 and 1995, respectively. Operating margin was 12.2% in 1996, 14.2% in 1995
and 15.9% in 1994. The timing of the additional expenses to support 1997 revenue
growth and the increases in cost of access as a percentage of revenue had a
negative impact on 1996 operating margin. The Company anticipates improved
operating margins during 1997 as higher revenue levels are achieved, excess
fixed costs are removed from its network and additional operating efficiencies
are introduced. Additionally, construction of the national fiber optic network
is expected to reduce the Company's cost structure. Frontier anticipates that
savings will be realized as the various segments of the network are completed
during 1997 and 1998.
Local Communications Services
Local Communications Services includes Frontier's local telephone operations in
Rochester, New York and the Regional Operations, which are comprised of 33
telephone subsidiaries in 13 states. Also included with the Rochester, New York
operation are the local service revenues and associated expenses generated by
Frontier Communications of Rochester, a competitive telecommunications company
formed on January 1, 1995, that provides an array of services on a retail basis
in the Rochester marketplace. Consequently, the Local Communications Services
segment includes both wholesale and retail local service associated with the
Rochester, New York market.
[GRAPH OF LOCAL OPERATIONS OPERATING MARGIN APPEARS HERE]
In addition to consistent profitability and strong cash flows, the local
communications companies have been successful in marketing and selling
integrated services to their customers. Revenues for 1996 were $643.0 million,
an increase of $21.3 million or 3.4%. Revenues for 1995 increased 2.0% over the
prior year, or 3.5% adjusting for the sales of Ontonagon County Telephone
Company in March 1995, and Minot Telephone Company in May 1994. Revenue growth
in 1996 was driven in part by the introduction of new products and features and
a higher demand for services in the open market environment. See a discussion of
the Open Market Plan for the Rochester, New York market on pages 16-17. Total
access lines increased 2.8% and minutes of use increased 6.7% in 1996 over the
prior year. Revenue growth in 1996 in the Rochester, New York market was 3.1%,
consistent with the rate of growth in 1995. In general, prices being charged
both to customers and to long distance companies for access service usage have
declined over the past three years. This is due not only to regulatory
requirements, but also to increased competition in the Company's largest
markets. Prices charged to customers and access prices charged to long distance
companies may continue to decline as competition increases and regulatory
controls are relaxed.
Costs and expenses for the local communications segment, excluding
nonrecurring charges, were $424.5 million in 1996, an increase of $1.1 million,
which was relatively flat as compared to 1995. The Company continued the
centralization of certain administrative functions in 1996, resulting in lower
operating costs. Lower administrative costs were offset by increased costs for
the Rochester, New York telephone operation as a result of higher expenses
associated with union contract negotiations. These costs, which were incurred in
connection with contract negotiations with Communications Workers of America,
Local 1170, were necessary to ensure continued high standards of customer
service in the event of a work stoppage. The contract negotiations are currently
at an impasse and the Rochester company implemented the terms of its final offer
as of April 9, 1996. The Union filed unfair labor practice complaints with the
National Labor Relations Board (the "NLRB"). In June, Frontier received a
favorable determination after review within the agency which rejects all unfair
labor practice claims that could have impacted the declaration of impasse. The
Union appealed these decisions within the NLRB and on December 2, 1996, the
agency remanded the matter back to its regional office to hold a hearing on the
declaration of impasse, while upholding the other actions and dismissing those
other unfair labor practice charges. The remanded matter will go back to hearing
in mid-1997.
Costs and expenses decreased $6.0 million in 1995 as compared to 1994. This
decrease was due to the sales of Ontonagon County Telephone in 1995 and Minot
Telephone in 1994, ongoing cost controls, and was partially offset by increased
selling and marketing costs.
Operating margins for the Local Communications segment continue to improve.
Operating margins, excluding nonrecurring items, were 34.0% in 1996, 31.9% in
1995 and 29.6% in 1994. This improvement is reflective of the continuing
improvement in operating efficiencies coupled with consistent revenue growth.
During late 1995, management committed to a major switch consolidation plan
at its Rochester Telephone Corp. and Frontier Communications of New York
subsidiaries. The three-year plan to consolidate host switches and reduce the
number by over 60% is projected to improve network efficiency and reduce the
cost of maintenance and software upgrades. As of December 1996, the project is
progressing as scheduled and two host switches have been consolidated. The
Company anticipates that the project will be substantially complete by July
1998.
18
<PAGE>
Corporate Operations and Other
Corporate Operations comprise the expenses traditionally associated with a
holding company, including executive expenses, corporate finance and treasury,
investor relations, corporate communications, corporate planning, legal services
and business development. The Other category includes the Company's majority
ownership interest in certain wireless operations and Frontier Network Systems
("FNS"). FNS markets and installs telecommunications systems and equipment.
Wireless operations include the Alabama RSAs No. 4 and No. 6, in which the
Company has a 69.5% interest and Minnesota RSA No. 10, in which the Company
acquired a 100% interest in March 1995. This later acquisition was accounted for
as a purchase transaction. Results for all years, before nonrecurring charges,
were relatively consistent.
In October 1996, the Company signed a definitive agreement to sell its 69.5%
interest in the Alabama RSAs No. 4 and No. 6. The Company expects to recognize a
gain on the sale of its interest in this partnership during the first quarter of
1997.
Other Income Statement Items
Interest Expense
Interest expense was $43.2 million in 1996, a decrease of $10.4 million or 19.4%
from 1995. The Company realized reduced interest expense in 1996 primarily as a
result of refinancing approximately $140 million of long term debt during the
third and fourth quarters of 1995. The Company also utilized excess cash to pay
down debt throughout the year, resulting in a lower average outstanding debt
balance in 1996 than in 1995. Interest expense was higher in 1995 than 1994 due
to increased borrowings required to complete the Company's long distance
purchase acquisitions.
Equity Earnings from Unconsolidated Wireless Interests
Frontier Cellular is a 50% interest in a joint venture with Bell Atlantic/Nynex
Mobile in upstate New York and Penn-sylvania that is managed by the Company and
is accounted for using the equity method of accounting. This method of
accounting results in the Company's proportionate share of earnings being
reflected in a single line item below operating income. Frontier Cellular is the
Company's largest unconsolidated wireless interest.
Equity earnings from the Company's interests in wireless partnerships were
$9.0 million in 1996, $3.7 million in 1995 and $3.2 million in 1994. The
increase in equity earnings during 1996 is attributable to growth in customer
base, increased usage and long distance revenue generated from the wireless
partnerships' offering of long distance services as a reseller. In addition, a
portion of the growth is attributable to the expansion of Frontier Cellular into
other areas of New York and Pennsylvania. The customer base grew approximately
46% and revenues increased 61% over 1995. Equity earnings from Frontier Cellular
in 1995 were lower than expected because of significant customer acquisition
costs. Prior to July 1994, the Company's revenues and expenses associated with
its Rochester and Utica-Rome cellular partnerships in New York State, which were
contributed to Frontier Cellular, had been fully consolidated.
Income Taxes
The effective tax rate in 1996 was 39.6%, versus 41.1% in 1995 and 36.8% in
1994. The effective tax rate in 1996 is lower than 1995 due to the nondeductible
transaction costs from the Company's 1995 long distance merger and acquisitions.
The 1995 effective tax rate increase over 1994 is due to additional amounts of
nondeductible goodwill amortization and nondeductible transaction costs from the
Company's long distance merger and other acquisitions.
Financial Condition
Review of Cash Flow Activity
Cash provided from operations in 1996 amounted to $395.7 million as compared to
$357.1 million in 1995, normalized for $31.1 million of cash paid for
acquisition related charges, and $305.5 million in 1994. Cash from operations is
driven by the Company's expanded revenue base in long distance and the strong
operating returns produced by the local communications services segment. In
1996, the accounts receivable and accounts payable balances were less than the
prior year due to lower traffic levels in the fourth quarter caused by the loss
of 1-plus service provided to the Company's major carrier customer. In addition,
the Company launched several marketing programs in the second half of the year
designed to stimulate revenue growth in 1997. The 1995 accounts receivable
balance increased over the prior year primarily because of the significant
revenue growth in long distance. The Company was negatively impacted in 1995 by
one time payments of accounts payable related to purchase acquisitions of $29.3
million. In 1994, cash from operations was offset in part by increased working
capital requirements and the taxes associated with the gain on the sale of the
Minot property in North Dakota in May 1994. The gross cash proceeds from this
sale appear in the "Cash Flows from Investing Activities" section of the
Consolidated Statements of Cash Flows.
Earnings before interest, taxes, depreciation and amortization ("EBITDA") is
a common measurement of a company's ability to generate operating cash flow.
EBITDA should be used as a supplement to, not in place of, cash from operating
activities. The Company's EBITDA was $629.5 million, $568.2 million and $478.9
million, excluding unusual items, in 1996, 1995 and 1994, respectively.
Cash used for investing activities was $333.9 million, $519.3 million and
$89.7 million in 1996, 1995 and 1994, respectively. Capital expenditures
continue to be the largest recurring use of the Company's investing funds.
Capital spending amounted to $309.2 million, $163.7 million and $112.2 million
in 1996, 1995 and 1994, respectively. The increase in the 1996 capital program
was due to the long distance network expansion required to meet customer traffic
demands, continued product enhancements and initial construction costs for the
fiber optic network build. The Company's cash purchase acquisitions of $349.5
million were the largest use of investing activities in 1995. Cash used for
investing activities in 1994 was offset by the excess cash generated from the
sale of Minot Telephone of $55.7 million.
Cash flows from financing activities amounted to an outflow of $62.2 million
in 1996, compared with outflows of $134.5 million in 1995 and inflows of $109.6
million in 1994. The Company's largest recurring financing activities are the
common and preferred dividend payments which totaled $138.7 million, $82.8
million and $59.3 million in 1996, 1995 and 1994, respectively. The large
increase in the 1996 dividend payments was caused by an increase in the number
of shares outstanding as a result of the issuance of 69.2 million common shares
on August 16, 1995 for the ALC merger. The Company's commercial paper borrowings
increased at the end of 1996 due to the capital program and an outlay of over
$60 million for the fiber optic network build, causing a net debt increase of
$48 million. During 1995, the Company made $4.9 million of scheduled debt
repayments and also refinanced $274.4 million of its long- term debt
instruments. The refinancings included repayment of $76.8 million of ALC's 9%
Senior subordinated debt, the
19
<PAGE>
retirement of $69.8 million of 9% debentures due in 2020, the repayment of
Rochester Telephone Corp.'s revolver of $100.0 million in conjunction with this
subsidiary's medium term note offering and the repayment of $27.8 million of
debt from the long distance acquisitions. These early retirements were financed
with excess cash and commercial paper borrowings. The 1994 financing activities
included $104.0 million in proceeds from the Company's equity offering in
February 1994 and the net proceeds of $70.9 million of debt as a part of the
Company's Open Market Plan reorganization and the retirement of certain high
cost debt earlier in the year.
[GRAPH OF EARNINGS BEFORE INTEREST APPEARS HERE]
Liquidity and Capital Resources
The Company has a number of financing vehicles in place to ensure adequate
liquidity in meeting its anticipated cash needs. The Company has commercial
paper programs totaling $450 million which are fully backed by committed
revolving credit agreements. In May 1996, Frontier Corporation's $250 million
revolving credit agreement was amended to increase the available line of credit
to $350 million. The Company, through its subsidiary, Rochester Telephone Corp.,
also has a $100 million revolving line of credit. At December 31, 1996, total
borrowings and amounts available under these lines of credit were $248.6 million
and $201.4 million, respectively. In addition, the Company has a $500 million
universal shelf registration statement, filed with the SEC in November 1995,
which allows for the issuance of a combination of debt, common, preferred stock
or warrant securities. Proceeds may be used for general corporate purposes
including, but not limited to, financing and growth activities. As of December
31, 1996, no securities have been issued pursuant to this registration. The
Company's working capital was $51.1 million, $18.9 million and $368.1 million at
December 31, 1996, 1995 and 1994, respectively. The changes in the 1995 and 1994
working capital are due to the Company's acquisition program.
At December 31, 1996, aggregate debt maturities amounted to $6.3 million for
1997, $8.8 million for 1998 and $30.3 million for 1999. Despite the Company's
1995 acquisition program, the debt to total capital ratio at December 31, 1996
improved to 39.1%, as compared to 41.0% in the prior year and 41.2% in 1994.
Pre-tax interest coverage, which measures the Company's ability to adequately
cover its financing costs, was 9.1 times in 1996 versus 7.6 times in 1995 and
6.7 times in 1994 (excluding nonrecurring charges for all years).
The Company continues to carry long-term credit ratings of "A" from Standard
& Poor's, Duff and Phelps and Fitch, and "A3" from Moody's. The rating agencies
downgraded the Company as a result of its merger with ALC in August 1995. In
spite of the combined entity's strengthened financial position, the rating
agencies cited concern with the shift in the Company's business risk associated
with an increasing dependence on the more competitive long distance business.
These ratings remained in effect at December 31, 1996.
Total gross expenditures for property, plant and equipment in 1997 are
anticipated to be approximately $590 million, which includes over $250 million
for the Company's fiber optic network. Absent the expenditures associated with
the fiber optic network, the 1997 capital program represents an increase of
approximately $90 million over 1996, largely due to international network
investments over high density routes to lower transport costs, system
development costs to enhance the billing platform, network growth and the
switching costs associated with the Company's Alternative Local Exchange Carrier
(A-LEC) integrated product offering. The Company anticipates financing its
capital program with a combination of internally generated cash from operations
and external financing.
In November 1996, the Company's Board of Directors increased the quarterly
dividend paid on common stock to $0.2175 cents per share, payable February 3,
1997, to shareowners of record on January 15, 1997. This 2.4% increase raises
the annualized common stock dividend to $0.87 per share. This represents the
37th consecutive annual increase in the Frontier dividend.
New Accounting Pronouncements
Effective January 1, 1996, the Company adopted FAS 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of." FAS 121 requires that
certain long-lived assets and identifiable intangibles be written down to fair
value whenever an impairment review indicates that the carrying value cannot be
recovered on an undiscounted cash flow basis. The statement also requires that
certain long-lived assets and identifiable intangibles to be disposed of be
reported at fair value less selling costs. The Company's adoption of this
standard resulted in a non-cash charge of $8.0 million (net of a tax benefit of
$4.4 million) and is reported as a cumulative effect of a change in accounting
principle. The charge represents the cumulative adjustment required by FAS 121
to remeasure the carrying amount of certain assets held for disposal as of
January 1, 1996. These assets held for disposal consist principally of telephone
switching equipment in the Company's Local Communications Services segment as a
result of management's commitment, in late 1995, to a central office switch
consolidation project primarily at the Rochester Telephone Corp. and Frontier
Communications of New York subsidiaries.
Effective January 1, 1996, the Company adopted the provisions of FAS 123,
"Accounting for Stock-Based Compensation." FAS 123 establishes accounting and
reporting for stock-based employee compensation plans. Those plans include all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock. This statement defines a
fair value based method of accounting for an employee stock option or similar
equity instrument, but also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25 ("APB 25") "Accounting for Stock Issued to
Employees." The Company elected to continue to follow the provisions of APB 25
and has provided the pro forma disclosures required by FAS 123.
20
<PAGE>
Report of Independent [LOGO APPEARS HERE]
Accountants
To the Board of Directors and Shareowners
of Frontier Corporation
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of income, shareowners' equity and cash flows present fairly, in all material
respects, the financial position of Frontier Corporation and its subsidiaries at
December 31, 1996, 1995 and 1994, and the results of their operations and their
cash flows for the years then ended in confor- mity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's manage- ment; our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of ALC Communications Corporation, a wholly owned subsidiary, which
statements reflect total assets of $432,146,000 and $284,725,000 at December 31,
1995 and 1994, respectively, and total revenues of $852,057,000 and $567,824,000
for the years ended December 31, 1995 and 1994, respectively. Those statements
were audited by other auditors whose report thereon has been furnished to us,
and our opinion expressed herein, insofar as it relates to the amounts included
for ALC Communications Corporation for the years ended December 31, 1995 and
1994, is based solely on the report of the other auditors. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for the
opinion expressed above.
As discussed in Note 13 to the financial statements, during the first
quarter of 1996 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of."
As discussed in Note 13 to the financial statements, during the third
quarter of 1995 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 116, "Accounting for Contributions Received and
Contributions Made."
As discussed in Note 5 to the financial statements, during the third quarter
of 1995 the Company discontinued accounting for the operations of its local
communications subsidiaries in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation."
As discussed in Note 13 to the financial statements, during the first
quarter of 1994 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 112 "Employers' Accounting for Postemployment
Benefits."
/s/ Price Waterhouse LLP
Price Waterhouse LLP
January 27, 1997
Rochester, New York
Report of Management
The integrity and objectivity of the accompanying financial information is the
responsibility of the management of Frontier Corporation.
The financial statements report on management's accountability for corporate
operations and assets. To this end manage- ment maintains a highly developed
system of internal controls and procedures designed to provide reasonable
assurance that the Company's assets are protected and that all transactions are
accounted for in conformity with generally accepted accounting principles. The
system includes documented policies and guidelines, augmented by a comprehensive
program of internal and independent audits conducted to monitor overall accuracy
of financial information and compliance with established procedures.
Price Waterhouse LLP, an independent accounting firm, provides an objective
assessment of the degree to which manage- ment meets its responsibility for
financial reporting. They regularly evaluate the system of internal accounting
controls and perform such tests and other procedures they consider necessary to
express an opinion that the financial statements present fairly the financial
position of the Company.
/s/ Louis L. Massaro
Louis L. Massaro
Executive Vice President and Chief Financial Officer
Frontier Corporation
Report of Audit Committee
The Audit Committee of the Board of Directors is comprised of four independent
directors who are not officers or employees of the corporation. The committee
oversees the Company's financial reporting process on behalf of the Board of
Directors. The Audit Committee recommends to the Board of Directors the
independent accountants for election by the shareowners. The committee also
meets regularly with management and the independent accountants and internal
auditors to review accounting, auditing, internal accounting controls, pending
litigation and financial reporting matters. As a matter of policy, the internal
auditors and independent accountants have unrestricted access to the Audit
Committee.
/s/ Jairo A. Estrada
Jairo A. Estrada
Chairman, Audit Committee
Frontier Corporation Board of Directors
21
<PAGE>
Business Segment Information
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Long Distance Communications Services Revenues $ 1,888,259 $ 1,480,313 $ 1,010,425
Operating Income:
Operating Income Before Acquisition Related and Other Charges $ 230,658 $ 210,462 $ 161,107
Acquisition Related and Other Charges (20,823) (91,448) --
- ------------------------------------------------------------------------------------- ----------- -----------
Total Operating Income $ 209,835 $ 119,014 $ 161,107
Depreciation and Amortization $ 83,322 $ 61,593 $ 39,290
Capital Expenditures $ 186,906 $ 68,265 $ 41,668
Identifiable Assets $ 1,044,173 $ 934,318 $ 465,335
===================================================================================== =========== ===========
Local Communications Services
Revenues:
Rochester, New York Operations $ 325,166 $ 315,273 $ 305,734
Regional Operations 317,847 306,452 303,944
- ------------------------------------------------------------------------------------- ----------- -----------
Total Revenues $ 643,013 $ 621,725 $ 609,678
Operating Income:
Operating Income Before Acquisition Related and Other Charges:
Rochester, New York Operations $ 81,604 $ 80,991 $ 76,655
Regional Operations 134,034 117,290 103,595
Acquisition Related and Other Charges:
Rochester, New York Operations (17,340) (1,589) --
Regional Operations (5,760) (8,660) --
- ------------------------------------------------------------------------------------- ----------- -----------
Total Operating Income $ 192,538 $ 188,032 $ 180,250
Depreciation and Amortization:
Rochester, New York Operations $ 54,771 $ 55,698 $ 59,098
Regional Operations 47,579 48,721 49,490
- ------------------------------------------------------------------------------------- ----------- -----------
Total Depreciation and Amortization $ 102,350 $ 104,419 $ 108,588
Capital Expenditures $ 101,342 $ 73,766 $ 60,711
Identifiable Assets $ 941,629 $ 964,154 $ 1,183,982
===================================================================================== =========== ===========
Corporate Operations and Other
Revenues $ 44,297 $ 41,653 $ 47,442
Operating Loss:
Operating Loss Before Acquisition Related and Other Charges $ (9,589) $ (10,274) $ (15,731)
Acquisition Related and Other Charges (4,900) (12,542) --
- ------------------------------------------------------------------------------------- ----------- -----------
Total Operating Loss $ (14,489) $ (22,816) $ (15,731)
Depreciation and Amortization $ 4,274 $ 3,697 $ 5,445
Capital Expenditures $ 22,554 $ 20,544 $ 11,356
Identifiable Assets $ 235,718 $ 210,120 $ 411,477
===================================================================================== =========== ===========
Consolidated
Revenues $ 2,575,569 $ 2,143,691 $ 1,667,545
Operating Income:
Operating Income Before Acquisition Related and Other Charges $ 436,707 $ 398,469 $ 325,626
Acquisition Related and Other Charges (48,823) (114,239) --
- ------------------------------------------------------------------------------------- ----------- -----------
Total Operating Income $ 387,884 $ 284,230 $ 325,626
Depreciation and Amortization $ 189,946 $ 169,709 $ 153,323
Capital Expenditures $ 310,802 $ 162,575 $ 113,735
Identifiable Assets $ 2,221,520 $ 2,108,592 $ 2,060,794
===================================================================================== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
22
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------ ----------------- ------------------
In thousands of dollars, except per share data Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------ ----------------- ------------------
<S> <C> <C> <C>
Revenues $ 2,575,569 $ 2,143,691 $ 1,667,545
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Costs and Expenses
Operating expenses 1,898,889 1,527,050 1,139,587
Depreciation and amortization 189,946 169,709 153,323
Taxes other than income taxes 50,027 48,463 49,009
Acquisition related and other charges 48,823 114,239 --
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Total Costs and Expenses 2,187,685 1,859,461 1,341,919
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Operating Income 387,884 284,230 325,626
Interest expense 43,175 53,557 50,216
Other income and expense:
Gain on sale of assets 4,976 4,826 10,063
Equity earnings from unconsolidated wireless interests 9,011 3,676 3,185
Interest income 2,344 9,673 8,364
Other expense 500 3,184 690
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Income Before Taxes, Extraordinary Items and
Cumulative Effect of Changes in Accounting Principles 360,540 245,664 296,332
Income taxes 142,596 100,896 109,078
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Income Before Extraordinary Items and Cumulative
Effect of Changes in Accounting Principles 217,944 144,768 187,254
Extraordinary items -- (121,208) --
Cumulative effect of changes in accounting principles (8,018) (1,477) (7,197)
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Consolidated Net Income 209,926 22,083 180,057
Dividends on preferred stock 1,182 1,191 1,187
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Income Applicable to Common Stock $ 208,744 $ 20,892 $ 178,870
========================================================================================== ================= ==================
Earnings Per Common Share
Income before extraordinary items and cumulative
effect of changes in accounting principles $ 1.32 $ .89 $ 1.16
Extraordinary items -- (.75) --
Cumulative effect of changes in accounting principles (.05) (.01) (.04)
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Earnings Per Common Share $ 1.27 $ .13 $ 1.12
========================================================================================== ================= ==================
Average Common Shares Outstanding (in thousands) 164,013 161,669 160,353
========================================================================================== ================= ==================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
23
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------ ----------------- ------------------
In thousands of dollars, except share data December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------ ----------------- ------------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 30,948 $ 31,449 $ 359,309
Short-term investments -- -- 9,047
Accounts receivable, (less allowance for uncollectibles
of $30,911, $28,515 and $11,407, respectively) 364,256 404,081 263,815
Materials and supplies 13,198 12,928 8,586
Deferred income taxes 30,349 43,588 5,712
Prepayments and other 30,483 31,089 27,357
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Total Current Assets 469,234 523,135 673,826
Property, plant and equipment, net 971,259 881,309 1,034,442
Goodwill and customer base 535,979 550,081 222,442
Deferred and other assets 245,048 154,067 130,084
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Total Assets $2,221,520 $ 2,108,592 $ 2,060,794
========================================================================================== ================= ==================
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Accounts payable $ 322,325 $ 381,680 $ 243,421
Dividends payable 35,966 33,247 15,487
Debt due within one year 6,253 14,871 4,966
Taxes accrued 34,963 26,842 28,070
Other liabilities 18,596 47,561 13,754
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Total Current Liabilities 418,103 504,201 305,698
Long-term debt 675,043 618,867 661,549
Deferred income taxes 2,542 15,644 98,217
Deferred employee benefits obligation 65,479 58,385 46,001
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Total Liabilities 1,161,167 1,197,097 1,111,465
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Shareowners' Equity
Preferred stock 22,611 22,769 22,777
Common stock, par value $1.00, authorized 300,000,000 shares;
163,731,733 shares, 158,063,387 shares and 149,294,195 shares
issued in 1996, 1995, and 1994 163,732 158,063 149,294
Capital in excess of par value 500,196 420,172 379,404
Retained earnings 385,350 317,149 397,854
- ------------------------------------------------------------------------------------------ ----------------- ------------------
1,071,889 918,153 949,329
Less--
Treasury stock, 6,375 shares in 1996 and 1995, at cost 147 147 --
Unearned compensation-restricted stock plan 11,389 6,511 --
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Total Shareowners' Equity 1,060,353 911,495 949,329
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Total Liabilities and Shareowners' Equity $2,221,520 $ 2,108,592 $ 2,060,794
========================================================================================== ================= ==================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars Years Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 209,926 $ 22,083 $ 180,057
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary items -- 194,932 --
Cumulative effect of changes in accounting principles 12,396 2,272 11,072
Acquisition related and other charges 48,823 114,239 --
Depreciation and amortization 189,946 169,709 153,323
Gain on sale of assets (4,976) (4,826) (10,063)
Equity earnings from unconsolidated wireless interests (9,011) (3,676) (3,185)
Other, net 92 1,326 511
Changes in operating assets and liabilities, exclusive
of impacts of purchase acquisitions:
Decrease (increase) in accounts receivable 36,549 (99,127) (37,691)
(Increase) decrease in material and supplies (1,302) (1,470) 1,824
(Increase) decrease in prepayments and other current assets (2,077) 6,480 (2,434)
Increase in deferred and other assets (20,903) (32,482) (17,478)
(Decrease) increase in accounts payable (79,134) 30,585 32,544
Increase (decrease) in taxes accrued and other current liabilities 1,042 8,663 (746)
Increase in deferred employee benefits obligation 6,608 9,947 6,958
Increase (decrease) in deferred income taxes 7,682 (92,631) (9,227)
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Total adjustments 185,735 303,941 125,408
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Net cash provided by operating activities 395,661 326,024 305,465
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Investing Activities
Expenditures for property, plant and equipment (246,533) (163,740) (112,162)
Deposit for capital projects (62,694) -- --
Decrease (increase) in short-term investments -- 6,225 (11,386)
Investment in cellular partnerships (29,422) (12,090) (3,939)
Proceeds from asset sales 13,841 -- 56,698
Purchase of companies, net of cash acquired (9,118) (349,536) (18,546)
Other investing activities -- (196) (370)
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Net cash used in investing activities (333,926) (519,337) (89,705)
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Financing Activities
Proceeds from issuance of long-term debt 58,037 207,962 135,412
Repayments of debt (14,878) (279,329) (64,747)
Dividends paid (138,697) (82,801) (59,388)
Treasury stock, net -- (10,041) 2,302
Issuance of common stock 33,407 31,957 107,244
Distribution to shareowners of pooled company -- (2,287) (11,236)
Other financing activities (105) (8) (8)
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Net cash (used in) provided by financing activities (62,236) (134,547) 109,579
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Net (Decrease) Increase in Cash and Cash Equivalents (501) (327,860) 325,339
Cash and Cash Equivalents at Beginning of Year 31,449 359,309 33,970
- ------------------------------------------------------------------------------------------ ----------------- ------------------
Cash and Cash Equivalents at End of Year $ 30,948 $ 31,449 $ 359,309
========================================================================================== ================= ==================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
25
<PAGE>
Consolidated Statements of Shareowners' Equity
<TABLE>
<CAPTION>
- ------------------------------------------------- ---------- ---------- ---------- ---------- -------- ----------
In thousands of dollars
- ------------------------------------------------- ---------- ---------- ---------- ---------- -------- ----------
Capital In
Preferred Common Excess of Retained Treasury Unearned
Stock Stock Par Earnings Stock Compensation Total
- ------------------------------------------------- ---------- ---------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ 22,785 $ 108,630 $ 308,649 $ 289,852 $ (2,191) $ 727,725
Net income 180,057 180,057
Redemptions (8) (8)
Equity offering 2,549 101,565 104,114
Stock split 36,574 (36,574) 0
Exercise of stock options 713 894 1,607
Exercise of warrants 828 1,242 2,070
Tax benefit from exercise
of stock options 4,062 4,062
Distribution to shareowners
of pooled company (11,236) (11,236)
Common and preferred
dividends (60,819) (60,819)
Other (434) 2,191 1,757
- ------------------------------------------------- ---------- ---------- ---------- --------- -------- ----------
Balance, December 31, 1994 $ 22,777 $ 149,294 $ 379,404 $ 397,854 $ 0 $ 949,329
Net income 22,083 22,083
Redemptions (8) (8)
Retirements (117) (3,142) (3,259)
Exercise of stock options 2,434 15,780 18,214
Exercise of warrants 6,252 8,095 14,347
Restricted stock plan activity, net 200 7,000 $ (6,511) 689
Tax benefit from exercise
of stock options 15,252 15,252
Distribution to shareowners
of pooled company (2,287) (2,287)
Common and preferred
dividends (100,501) (100,501)
Purchases for acquisitions (20,041) (20,041)
Issuances 19,894
Other (2,217) (2,217)
- ------------------------------------------------- ---------- ---------- ---------- --------- -------- ----------
Balance, December 31, 1995 $ 22,769 $ 158,063 $ 420,172 $ 317,149 $ (147) $ (6,511) $ 911,495
Net income 209,926 209,926
Redemptions (158) 53 (105)
Exercise of stock options 5,482 27,355 32,837
Exercise of warrants 87 131 218
Restricted stock plan activity, net 100 4,089 (4,878) (689)
Tax benefit from exercise
of stock options 48,531 48,531
Common and preferred
dividends (141,416) (141,416)
Other (135) (309) (444)
- ------------------------------------------------- ---------- ---------- ---------- --------- -------- ----------
Balance, December 31, 1996 $ 22,611 $ 163,732 $ 500,196 $ 385,350 $ (147) $(11,389) $1,060,353
================================================= ========== ========== ========== ========= ======== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
26
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Consolidation--The consolidated financial information includes the accounts of
Frontier Corporation and its majority-owned subsidiaries (the "Company" or
"Frontier") after elimination of all significant intercompany transactions.
Investments in entities in which the Company does not have a controlling
interest are accounted for using the equity method.
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Materials and Supplies--Materials and supplies are stated at the lower of
cost or market, based on weighted average unit cost.
Property, Plant and Equipment--The investment in property, plant and
equipment is recorded at cost. Improvements that significantly add to productive
capacity or extend useful life are capitalized, while maintenance and repairs
are expensed as incurred. The Company's provision for depreciation of property,
plant and equipment is based on the straight-line method using estimated service
lives of the various classes of plant. The range of service lives for furniture
and fixtures is 5 to 20 years, network equipment is 3 to 20 years, local and
toll service lines is 12 to 25 years and for station equipment is 10 to 21
years.
The cost of depreciable telephone property units retired, plus removal
costs, less salvage is charged to accumulated depreciation. When non-telephone
property, plant and equipment is retired or sold, the resulting gain or loss is
recognized currently as an element of other income.
Goodwill and Customer Base--The excess of the cost of companies purchased
over the net assets acquired is being amortized on a straight-line basis over 20
to 40 years. The purchase price of customer bases acquired is being amortized on
a straight-line basis over principally 5 to 7 years. Accumulated amortization is
$106.5 million, $64.0 million and $47.9 million at the end of 1996, 1995 and
1994, respectively.
Impairment of Long-Lived Assets--In the event that facts and circumstances
indicate that the carrying amount of a long-lived asset may be impaired an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the assets' carrying amount to determine if a write-down to market
value or discounted cash flow is required.
Accounts Payable--Accounts payable includes trade accounts payable and an
estimated accrual for long distance cost of access. Subsequently, the cost of
access accrual is adjusted based on invoices received from local exchange
carriers and others.
Fair Value of Financial Instruments--Cash and cash equivalents are valued at
their carrying amounts, which are reasonable estimates of fair value. The fair
value of long-term debt is estimated using rates currently available to the
Company for debt with similar terms and maturities. The fair value of all other
financial instruments approximates cost as stated.
Federal Income Taxes--Deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when those differences are expected to reverse. Income tax benefits of
tax deductions related to common stock transactions with the Company's stock
option plans are recorded directly to capital in excess of par value.
The Company provides a valuation allowance for its deferred tax assets when
it is more likely than not that some portion or all of the deferred tax assets
will not be realized.
Stock Split--In November 1993, the Board of Directors approved a 2-for-1
split of the common stock of the Company effected in the form of a 100 percent
stock dividend with no change in the par value. The split was approved by the
New York State Public Service Commission ("NYSPSC") and common shares were
distributed in 1994. Historical share and per share data have been retroactively
adjusted to reflect the split.
Revenue Recognition--Customers are billed as of monthly cycle dates. Revenue
is recognized as service is provided net of an estimate for uncollectible
accounts.
Earnings Per Share--Earnings applicable to each share of common stock and
common stock equivalent are based on the weighted average number of shares
outstanding during each year. Common stock equivalents are primarily stock
options assumed to be exercised for the purposes of the computation.
Cash Flows--For purposes of the Statements of Cash Flows, the Company
considers all highly liquid investments with an original maturity of three
months or less to be cash equivalents.
Cash flows from financing activities include $33.4 million of cash proceeds
from stock options and warrants exercised during 1996. The resultant tax benefit
realized from the exercise of stock options of $48.5 million is reflected as an
adjustment to capital in excess of par value and taxes accrued.
Actual interest paid was $49.6 million in 1996, $57.9 million in 1995 and
$56.1 million in 1994. Actual income taxes paid were $69.7 million in 1996,
$108.6 million in 1995 and $107.9 million in 1994. Interest costs associated
with the construction of capital assets, including the nationwide fiber optic
network project, are capitalized. Total amounts capitalized during 1996, 1995
and 1994 were $6.2 million, $1.2 million and $1.3 million, respectively.
Reclassifications--Certain prior year amounts have been reclassified to
conform to current year presentation.
2. Pooling of Interests Transactions
On August 16, 1995, the shareowners of the Company and ALC Communications
Corporation ("ALC") approved a merger of the two companies. ALC, through its
subsidiary Allnet Communication Services, Inc. (renamed Frontier Communications
Services, Inc.), provided long distance products and services primarily to small
and medium-sized business customers and carrier customers nationwide. Under the
terms of the merger agreement, the Company exchanged two shares of its common
stock for each of ALC's common shares. The total shares issued by the Company to
effect the merger were 69.2 million. At the time of the merger, ALC had 3.9
million stock options and 3.3 million stock warrants outstanding providing on
exercise for the purchase of an equal number of its shares. After the merger,
each of these options and warrants, consistent with the 2 for 1 exchange ratio
at the time of the merger, continues to be exercisable for two shares of the
Company's stock. The transaction has been accounted for as a pooling of
interests and the consolidated financial statements have been restated for all
periods prior to the merger to include the accounts and operations of ALC.
On March 17, 1995, the Company acquired American Sharecom, Inc. ("ASI"), a
long distance company headquartered in Minneapolis, Minnesota. ASI's sales
operations are concentrated in the Midwest, Northwest and California. The
Company
27
<PAGE>
acquired all of the outstanding shares of ASI in exchange for approximately 8.7
million shares of Frontier common stock. Subsequent to the acquisition, 117,336
shares of Frontier common stock were returned to the Company in settlement of a
pre-acquisition liability and retired. The transaction has been accounted for as
a pooling of interests and the consolidated financial statements have been
restated for all periods prior to the acquisition to include the accounts and
operations of ASI.
Combined and separate results of Forntier Corporation, ALC and ASI during
the periods preceding the merger were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Frontier
In millions Corporation ALC ASI Combined
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Seven months ended July 31, 1995:
(unaudited)
Revenues $678.4 $443.8 $ 20.2 $1,142.4
Net income $ 71.2 $ 46.7 $ 2.1 $ 120.0
===============================================================================================
December 31, 1994:
Revenues $977.1 $567.8 $122.6 $1,667.5
Net income $102.7 $ 64.3 $ 13.1 $ 180.1
===============================================================================================
</TABLE>
3. Purchase Acquisitions and Divestitures
Purchase Acquisitions
In March 1996, the Company acquired a 55 percent interest in the New York RSA
No. 3 Cellular Partnership ("RSA No. 3"). RSA No. 3 is a provider of cellular
mobile telephone service in the New York State Rural Service Area No. 3. RSA No.
3 encompasses much of the Southern Tier Area of New York State. The Company
contributed its interest in RSA No. 3 to its joint venture with Bell
Atlantic/Nynex Mobile which is managed by Frontier Cellular (Note 14). The
operating results are reported using the equity method of accounting. The
Company paid $25.3 million in cash for its interest in RSA No. 3.
In November 1995, the Company acquired Link-VTC, Inc. ("Link-VTC"), a
Boulder, Colorado based telecommunications company specializing in
videoconferencing services. The Company paid $13.4 million in cash for Link-VTC,
including a payment of $4.3 million made in June 1996 as a settlement of the
original earn-out agreement.
In August 1995, Frontier acquired Schneider Communications, Inc. ("SCI") and
SCI's 80.8 percent interest in LinkUSA Corporation ("LinkUSA") for $130 million
in cash. SCI provides telecommunications services in the Midwest. LinkUSA
develops software applications for telecommunications companies.
On February 2, 1996, the Company acquired the remaining 19.2 percent interest in
LinkUSA for $2.3 million in cash.
In May 1995, the Company purchased WCT Communications, Inc. WCT is a
facilities-based long distance carrier providing commercial and residential
services in 45 states. The Company paid approximately $80 million in cash for
all of the outstanding shares of WCT.
The Company paid $95 million in cash for several other purchase acquisitions
which were completed in 1995 and are included in the unaudited pro forma
results. These purchase acquisitions were Minnesota Southern Cellular Telephone
Company (March 1995), ConferTech International, Inc. (March 1995) and Enhanced
TeleManagement, Inc. (July 1995).
The following unaudited pro forma results of operations for the twelve month
periods ended December 31, 1995 and 1994, present information as if the purchase
acquisitions had occurred at the beginning of the periods presented. The pro
forma results of operations are provided for information purposes only. They are
based upon historical information which has been restated to reflect the pooling
of interests with ALC and ASI, and do not necessarily reflect the actual results
that would have occurred nor are they necessarily indicative of future results
of operations of the combined companies.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
In thousands of dollars, except per share data (unaudited) 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $2,273,348 $1,949,551
Income before extraordinary items and cumulative effect
of changes in accounting principles $ 130,388 $ 157,756
Net Income $ 7,703 $ 150,559
Earnings Per Common Share:
Earnings before extraordinary items and cumulative effect
of changes in accounting principles $ .81 $ .98
Earnings Per Common Share $ .05 $ .93
======================================================================================================================
</TABLE>
Divestitures
In March 1995, the Company sold Ontonagon County Telephone Company in Michigan
and its subsidiary, Midway Telephone Company. The sale resulted from the
Company's plans to expand in areas other than Michigan's Upper Peninsula. The
sale resulted in a non-taxable gain of $4.8 million, or $.03 per share.
In May 1994, the Company completed the sale of Minot Telephone Company in
Minot, North Dakota. Minot Telephone was the Company's only holding in North
Dakota and the Company had reassessed its prospects for expansion in North
Dakota. The sale resulted in a $7.1 million after tax gain, or $.04 per share.
4. Acquisition Related and Other Charges
In November 1996, the Company recorded a $48.8 million pre-tax charge. This
charge included $28.0 million for the curtailment of certain company pension
plans and a $20.8 million charge to write-off unrecoverable product development
costs for its conference calling product line.
The Company's 1995 operating results reflect acquisition related charges of
$114.2 million associated with the integration of a number of long distance
companies acquired during the year, including the August 1995 merger with ALC.
The integration of the acquired companies with the existing Frontier businesses
resulted in instances of redundant facilities, equipment and staffing. The
acquisition related charges include
28
<PAGE>
investment banker, legal fees and other direct costs resulting from the merger
with ALC and the ASI transaction. Through a combination of attrition and force
reductions, the Company has reduced its number of employees in the long distance
and administrative areas. As of December 31, 1996, 433 employees have been paid
$14.8 million in severance benefits which were charged to the reserve. The
remaining reserve balance of $28.2 million is primarily for redundant facilities
currently being decommissioned.
5. Discontinuance of Regulatory Accounting Principles
The Company determined in 1995 that Financial Accounting Standards Board
Statement No. 71 ("FAS 71"), "Accounting for the Effects of Certain Types of
Regulation," was no longer applicable based upon changes in regulation,
increasingly rapid advancements in telecommunications technology and other
factors creating competitive markets.
As a result of the discontinuance of FAS 71, the Company recorded a non-cash
extraordinary charge of $112.1 million, net of an income tax benefit of $68.4
million as of September 30, 1995. The components of the extraordinary charge
follow:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
In millions of dollars Pre-Tax After-Tax
- ------------------------------------------------------------------------------
<S> <C> <C>
Increase to the accumulated
depreciation balance $(185.6) $(115.4)
Elimination of other net
regulatory liabilities 5.1 3.3
- ------------------------------------------------------------------------------
$(180.5) $(112.1)
==============================================================================
</TABLE>
The adjustment of $185.6 million to net telephone plant was necessary because
estimated useful lives and depreciation methods historically prescribed by
regulators did not keep pace with the technological changes in the Company and
differed significantly from those used by unregulated entities. The discon-
tinuance of FAS 71 also required the Company to eliminate for financial
reporting the effects of any actions of regulators that had been recognized as
regulatory assets and liabilities pursuant to FAS 71.
6. Property, Plant and Equipment
Major classes of property, plant, and equipment are summarized below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
In thousands of dollars 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land and buildings $ 115,485 $ 106,745 $ 103,235
Local and toll services lines 795,855 761,044 752,366
Central office equipment 580,217 587,814 584,434
Station equipment 38,770 32,183 33,926
Switching and network facilities 386,293 330,567 234,433
Office equipment, vehicles and tools 233,601 201,718 170,094
Plant under construction 126,140 77,091 36,130
Less: Accumulated depreciation 1,305,102 1,215,853 880,176
- -----------------------------------------------------------------------------------------------------
$ 971,259 $ 881,309 $1,034,442
=====================================================================================================
</TABLE>
Depreciation expense was $146.6 million, $139.2 million and $132.9 million
for the years ending December 31, 1996, 1995 and 1994, respectively.
7. Long-Term Debt
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars At December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Frontier Communications of Minnesota, Inc.
Senior Notes, 7.61%, due February 1, 2003 $ 35,000 $ 35,000 $ 35,000
Rural Utilities Service Debt,
2%-9% due 1994 to 2026 64,654 69,878 77,045
- --------------------------------------------------------------------------------------------------------------------------------
99,654(a) 104,878 112,045
- --------------------------------------------------------------------------------------------------------------------------------
Debentures
10.46% convertible, due October 27, 2008 5,300(b) 5,300 5,300
9%, due January 1, 2020 -- -- (c) 69,785
9%, due August 15, 2021 100,000 100,000 100,000
- --------------------------------------------------------------------------------------------------------------------------------
105,300 105,300 175,085
- --------------------------------------------------------------------------------------------------------------------------------
9% Senior Subordinated Notes, due 2003 3,180 3,233(d) 80,000
Medium term notes, 7.51%-9.3%, due 2000 to 2004 219,000 219,000(e) 179,000
Revolving Credit Agreements 248,570(f) 187,601 120,000
Capitalized lease obligations and other debt 8,444 17,376 3,971
- --------------------------------------------------------------------------------------------------------------------------------
Subtotal 684,148(g) 637,388 670,101
Less: Discount on long-term debt 2,852 3,650 3,586
Current portion of long-term debt 6,253 14,871 4,966
- --------------------------------------------------------------------------------------------------------------------------------
Total long-term debt $675,043 $618,867 $661,549
================================================================================================================================
</TABLE>
(a) Certain assets of Local Communications Services segment are pledged as
security.
(b) The debenture is convertible into common stock at any time after October 26,
1998 at $10.5375 per share. A total of 502,966 shares of common stock are
reserved for such conversion.
29
<PAGE>
footnotes continued from page 29
(c) The Company redeemed the debentures in November 1995 in a transaction that
resulted in an extraordinary loss of $3.2 million, net of applicable taxes of
$1.7 million in 1995.
(d) The Company completed a tender offer for the $80.0 million of outstanding
notes in September 1995 and redeemed approximately $76.8 million. This
redemption resulted in an extraordinary loss of $5.8 million, net of applicable
taxes of $3.7 million in 1995.
(e) In March 1995 in conjunction with the implementation of the Open Market
Plan, the Company, through its Rochester Telephone Corp. subsidiary, completed
an offering of $40.0 million of 7.51% Medium-Term Notes, maturing March 2002.
(f) The Company has credit facilities totaling $450.0 million which are
available through commercial paper borrowings or through draws under Revolving
Credit Agreements. At December 31, 1996, the Company had outstanding $248.6
million in commercial paper issuances. Commercial paper is classified as
long-term debt as the Company intends to refinance the debt through continued
short-term borrowing or available credit facilities with unused commitments
extending beyond one year.
Frontier Corporation's Revolving Credit Agreement was entered into in August
1995 with a group of 10 commercial banks and expires August 2000. The Agreement
was amended in May 1996 to increase the available line of credit from $250.0
million to $350.0 million. The Agreement is unsecured and has commitment fees of
.08 percent per year on the entire commitment, with interest on amounts drawn
down based upon the London Interbank Offered Rate ("LIBOR") plus .17 percent.
The Company, through its subsidiary Rochester Telephone Corp., entered into
a Revolving Credit Agreement with six commercial banks in December 1994. The
Agreement established a secured $160.0 million line of credit which was amended
in 1995 to remove the security interest on the assets of Rochester Telephone
Corp. and reduce the available line of credit to $100.0 million. The agreement
carries commitment fees of .07 percent per year on the entire commitment, with
interest on amounts drawn down based on either the prime rate, LIBOR plus .13
percent, or a competitive bid rate.
The Company also has a $500.0 million universal shelf which was filed with
the Securities Exchange Commission in November 1995. This filing allows for the
issuance of a combination of debt, common, preferred stock or warrant
securities. No securities have been issued as of December 31, 1996.
(g) In accordance with FAS 107, "Disclosures about Fair Value of Financial
Instruments," the Company estimates that the fair value of the debt, based on
rates currently available to the Company for debt with similar terms and
remaining maturities, is $718.2 million, as compared to the carrying value of
$684.1 million.
At December 31, 1996, aggregate debt maturities were:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1997 1998 1999 2000 2001
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6,253 $8,770 $30,262 $319,927 $74,734
=======================================================================================================================
</TABLE>
8. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
In thousands of dollars 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $114,302 $103,689 $105,189
Deferred 6,136 (17,721) (9,120)
- --------------------------------------------------------------------------------------------------
120,438 85,968 96,069
- --------------------------------------------------------------------------------------------------
State:
Current 19,757 16,498 13,116
Deferred 2,401 (1,570) (107)
- --------------------------------------------------------------------------------------------------
22,158 14,928 13,009
- --------------------------------------------------------------------------------------------------
Total income taxes $142,596 $100,896 $109,078
==================================================================================================
</TABLE>
The reconciliation of the federal statutory income tax rate with the
effective income tax rate reflected in the financial statements is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax expense at statutory rate 35.0% 35.0% 35.0%
State income tax (net of federal benefit) 4.0 4.0 2.9
Accelerated depreciation -- 1.1 .9
Investment tax credit -- (.6) (.7)
Utilization of net operating loss carryforward (.9) (1.4) (1.2)
Acquisition related charges -- 2.4 --
Goodwill amortization 1.2 1.5 .8
Other .3 (.9) (.9)
- ------------------------------------------------------------------------------------------------------------------------
Total income tax 39.6% 41.1% 36.8%
========================================================================================================================
</TABLE>
30
<PAGE>
Deferred tax (assets) liabilities are comprised of the following at December
31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------- ------------------- -------------------
In thousands of dollars 1996 1995 1994
- ------------------------------------------------------------------------- ------------------- -------------------
<S> <C> <C> <C>
Accelerated depreciation $ 87,768 $ 81,687 $ 151,069
Other 22,915 18,297 17,153
- ------------------------------------------------------------------------- ------------------- -------------------
Gross deferred tax liabilities 110,683 99,984 168,222
- ------------------------------------------------------------------------- ------------------- -------------------
Basis adjustment-purchased telephone companies(25,477) (25,477) (29,232) (31,851)
Employee benefits obligation (11,136) (4,562) (12,955)
Net operating loss carryforwards (44,906) (45,844) (42,000)
Acquisition related charges (27,630) (29,213) --
Bad debt expense (10,970) (11,801) (4,657)
Other (37,832) (31,163) (12,754)
- ------------------------------------------------------------------------- ------------------- -------------------
Gross deferred tax assets (157,951) (151,815) (104,217)
Valuation allowance 19,461 23,887 28,500
- ------------------------------------------------------------------------- ------------------- -------------------
Total deferred tax assets (138,490) (127,928) (75,717)
- ------------------------------------------------------------------------- ------------------- -------------------
Net deferred tax (assets) liabilities $ (27,807) $ (27,944) $ 92,505
========================================================================= =================== ===================
</TABLE>
Certain of the Company's acquired subsidiaries have tax net operating losses
and alternative tax net operating loss carryforwards ("NOLs") which can be
utilized annually to offset separate company future taxable income. Under the
provisions of Internal Revenue Code Section 382, the utilization of
carryforwards is presently limited. The Company's NOLs begin to expire in 2004.
As a result of the annual limitation and the difficulty in predicting their
utilization beyond a period of three years, the Company has established
valuation allowances for the NOL carryforwards. Because certain of the NOL
carryforwards were acquired in purchase acquisitions and the related valuation
allowance was recorded using purchase accounting, $7.0 million of this valuation
allowance, if subsequently recognized, would be allocated to reduce goodwill.
9. Service Pensions and Benefits
The Company has contributory and noncontributory plans providing for service
pensions and certain death benefits for substantially all employees. The
Company's provisions for service pensions and certain death benefits are
remitted, at least annually, to the trustees.
The majority of the Company's pension plans have plan assets that exceed
accumulated benefit obligations. There are certain plans, however, with
accumulated benefit obligations which exceed plan assets. The following tables
summarize the funded status of the Company's pension plans and the related
amounts that are primarily included in "Deferred and other assets" in the
Consolidated Balance Sheets.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------- ----------------------- ---------------
Plans for which Plans for which
December 31, 1996 assets exceed accumulated benefits
In thousands of dollars accumulated benefits exceed assets Total
- ----------------------------------------------------------------------------------------- ----------------------- ---------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 403,077 $ 12,693 $415,770
Accumulated benefit obligation $ 423,055 $ 13,758 $436,813
========================================================================================= ======================= ===============
Plan assets at fair value, primarily fixed income
securities and common stock $ 493,894 $ -- $493,894
Projected benefit obligation (423,055) (14,899) (437,954)
- ----------------------------------------------------------------------------------------- ------------------------ --------------
Funded status 70,839 (14,899) 55,940
Unrecognized net (gain) loss (55,604) 3,250 (52,354)
Unrecognized net transition asset (2,837) -- (2,837)
Unrecognized prior service cost 11,097 -- 11,097
Adjustment required to recognize minimum liability (2,109) (2,109)
- ----------------------------------------------------------------------------------------- ----------------------- ---------------
Pension asset (liability) reflected in Consolidated Balance Sheet $ 23,495 $(13,758) $ 9,737
========================================================================================= ======================= ===============
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------- ---------------------- -----------------
Plans for which Plans for which
December 31, 1995 assets exceed accumulated benefits
In thousands of dollars accumulated benefits exceed assets Total
- ----------------------------------------------------------------------------------------- ---------------------- -----------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $367,765 $ 19,984 $387,749
Accumulated benefit obligation $381,528 $ 22,335 $403,863
========================================================================================= ====================== =================
Plan assets at fair value, primarily fixed income
securities and common stock $437,151 $ 8,234 $445,385
Projected benefit obligation (384,199) (25,364) (409,563)
- ----------------------------------------------------------------------------------------- ---------------------- -----------------
Funded status 52,952 (17,130) 35,822
Unrecognized net (gain) loss (19,194) 4,337 (14,857)
Unrecognized net transition (asset) obligation (3,909) 36 (3,873)
Unrecognized prior service cost 12,533 3,783 16,316
Adjustment required to recognize minimum liability -- (5,246) (5,246)
- ----------------------------------------------------------------------------------------- ---------------------- -----------------
Pension asset (liability) reflected in Consolidated Balance Sheet $ 42,382 $ (14,220) $ 28,162
========================================================================================= ====================== =================
<CAPTION>
- ----------------------------------------------------------------------------------------- ---------------------- --------------
Plans for which Plans for which
December 31, 1994 assets exceed accumulated benefits
In thousands of dollars accumulated benefits exceed assets Total
- ----------------------------------------------------------------------------------------- ---------------------- --------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $294,140 $ 15,494 $309,634
Accumulated benefit obligation $308,432 $ 17,223 $325,655
========================================================================================= ====================== ================
Plan assets at fair value, primarily fixed income
securities and common stock $373,446 $ 6,641 $380,087
Projected benefit obligation (326,858) (20,774) (347,632)
- ----------------------------------------------------------------------------------------- ---------------------- --------------
Funded status 46,588 (14,133) 32,455
Unrecognized net (gain) loss (23,244) 2,980 (20,264)
Unrecognized net transition (asset) obligation (3,935) 18 (3,917)
Unrecognized prior service cost 6,563 5,240 11,803
Adjustment required to recognize minimum liability -- (4,728) (4,728)
- ----------------------------------------------------------------------------------------- ---------------------- --------------
Pension asset (liability) reflected in Consolidated Balance Sheet $ 25,972 $ (10,623) $ 15,349
========================================================================================= ====================== ================
<CAPTION>
The net periodic pension cost consists of the following:
- ----------------------------------------------------------------------------------------- ---------------------- --------------
Years Ended December 31, 1996 1995 1994
In thousands of dollars
- ----------------------------------------------------------------------------------------- ---------------------- --------------
<S> <C> <C> <C>
Service cost $ 6,487 $ 5,616 $ 7,934
Interest cost on projected benefit obligation 30,100 28,868 25,565
Actual (return) loss on plan assets (63,807) (89,195) 2,229
Net amortization and deferral 25,723 51,437 (39,606)
Amount expensed due to curtailment 28,000 2,907 --
- ----------------------------------------------------------------------------------------- ---------------------- --------------
Net periodic pension cost (benefit) $ 26,503 $ (367) $ (3,878)
========================================================================================= ====================== ================
<CAPTION>
The following rates and assumptions were used to calculate the projected benefit obligation:
- ----------------------------------------------------------------------------------------- ---------------------- --------------
Years Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------- ---------------------- --------------
<S> <C> <C> <C>
Weighted average discount rate 7.5% 7.5% 8.5%
Rate of salary increase 5.0% 5.0% 5.5%
Expected return on plan assets 9.0% 9.0% 9.0%
========================================================================================= ====================== ================
</TABLE>
The Company's funding policy is to make contributions for pension benefits
based on actuarial computations which reflect the long-term nature of the
pension plan. However, under FAS 87, "Employers' Accounting for Pensions," the
development of the projected benefit obligation essentially is computed for
financial reporting purposes and may differ from the actuarial determination for
funding due to varying assumptions and methods of computation.
In 1996, the Company recognized a curtailment loss of $28.0 million
reflecting the enhancement and freezing of defined benefit plans sponsored by
Frontier Corporation, primarily for certain bargaining unit employees. Pension
expense in 1995 included a net curtailment loss of $2.9 million reflecting the
enhancement and freezing of defined benefit plans sponsored by Frontier
Corporation for non-bargaining unit employees as of December 31, 1996.
32
<PAGE>
The Company also sponsors a number of defined contribution plans. The most
significant plan covers non-bargaining employees, who can elect to make
contributions through payroll deduction. Effective January 1, 1996, the Company
provides a contribution of .5 percent of gross compensation in common stock for
every employee eligible to participate in the plan. The Company also provides
100% matching contributions in its common stock up to three percent of gross
compensation, and may, at the discretion of the Management Benefit Committee,
provide additional matching contributions based upon Frontier's financial
results. In 1995 and 1994, the Company provided matching contributions in its
common stock up to 75 percent of participants' contributions up to six percent
of gross compensation. The total cost recognized for all defined contribution
plans was $8.4 million for 1996, $6.8 million for 1995 and $5.6 million for
1994.
10. Postretirement Benefits Other Than Pensions
The Company provides health care and life insurance benefits to most employees.
Plan assets consist principally of life insurance policies and money market
instruments. In adopting FAS 106, the Company elected to defer the recognition
of the accrued obligation of $125 million over a period of twenty years. During
1996, the Company amended its health benefits care plan to cap the cost absorbed
by the Company for health care and life insurance for its bargaining unit
employees who retire after December 31, 1996. The effect of this amendment was
to reduce the December 31, 1996 accumulated postretirement obligation by $11.2
million. Additionally, during 1996, special termination benefits were offered to
certain employees with 25 years of service or more who were already entitled to
reduced or full retirement benefits and who voluntarily terminated their
employment with the Company prior to December 31, 1996. During the fourth
quarter of 1995, the Company amended its health benefits plan to cap the cost
absorbed by the Company for health care and life insurance for its
non-bargaining unit employees who retire after December 31, 1996. The effect of
this amendment was to reduce the December 31, 1995 accumulated postretirement
obligation by $8.1 million.
The status of the plans is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------- --------------- ---------------
In thousands of dollars December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------- --------------- ---------------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation (APBO) attributable to:
Retirees $ 78,398 $ 73,032 $ 79,935
Fully eligible plan participants 15,206 17,235 22,812
Other active plan participants 10,669 20,127 28,877
- --------------------------------------------------------------------------------------------------- --------------- ---------------
Total APBO $104,273 $110,394 $ 131,624
Plan assets at fair value 5,322 5,716 5,545
- --------------------------------------------------------------------------------------------------- --------------- ---------------
APBO in excess of plan assets 98,951 104,678 126,079
Unrecognized transition obligation (84,764) (99,836) (109,730)
Unrecognized net prior service cost (90) (1,790) (6,003)
Unrecognized net gain 24,235 30,110 15,502
- --------------------------------------------------------------------------------------------------- --------------- ---------------
Accrued postretirement benefit obligation $ 38,332 $ 33,162 $ 25,848
=================================================================================================== =============== ===============
<CAPTION>
The components of the estimated postretirement benefit cost are as follows:
- --------------------------------------------------------------------------------------------------- --------------- ---------------
In thousands of dollars December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------- --------------- ---------------
<S> <C> <C> <C>
Service cost $ 642 $ 947 $ 1,323
Interest on accumulated postretirement benefit obligation 7,735 8,614 9,666
Amortization of transition obligation 5,512 6,045 6,094
Return on plan assets (457) (462) (385)
Amortization of prior service cost 69 392 383
Amortization of gains and losses (2,024) (2,758) (704)
Special termination benefit 360
- --------------------------------------------------------------------------------------------------- --------------- ---------------
Net postretirement benefit cost $11,837 $12,778 $16,377
=================================================================================================== =============== ===============
<CAPTION>
The following assumptions were used to value the postretirement benefit obligation:
- -------------------------------------------------------------------------------------------------- --------------- ----------------
Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------- --------------- ----------------
<S> <C> <C> <C>
Weighted average discount rate 7.5% 7.5% 8.5%
Expected return on plan assets 9.0% 9.0% 9.0%
Rate of salary increase 5.0% 5.0% 5.5%
Assumed rate of increase in cost of covered health care benefits 7.1% 10.5% 11.2%
================================================================================================== =============== ===============
</TABLE>
Health care costs were assumed to decline consistently to 5.0% by 2006 and
thereafter. If the health care cost trend rates were increased by one percentage
point, the accumulated postretirement benefit health care obligation as of
December 31, 1996 would increase by $7.3 million while the sum of the service
and interest cost components of the net postretirement benefit health care cost
for 1996 would increase by $.7 million.
33
<PAGE>
11. Stock Option Plans and Other Common Stock Transactions
The Company has stock option plans for its directors, executives and certain
employees. The exercise price for all plans is the fair market value of the
stock on the date of the grant. The options expire ten years from the date of
the grant. The options vest over a period from one to three years. Options
previously issued to ALC employees are vested in their entirety as of the August
16, 1995 merger date. The maximum number of shares which may be granted under
the executive plan is limited to one percent of the number of issued shares,
including treasury shares, of the Company's common stock during any calendar
year. The maximum number of shares which may be granted under the employee plan
is a total of 8,000,000 shares over a 10 year period. The maximum number of
shares which may be granted under the directors plan is 1,000,000 shares.
Information with respect to options under the above plans follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------- ----------------------
Weighted Average
Shares Exercise Price
- ----------------------------------------------------------------------------------- ----------------------
<S> <C> <C>
Outstanding at January 1, 1994 9,331,112 $ 6.33
Granted in 1994 507,900 $ 20.42
Cancelled in 1994 (150,464) $ 11.35
Exercised in 1994 (713,025) $ 2.25
- ----------------------------------------------------------------------------------- ----------------------
Outstanding at December 31, 1994 8,975,523 $ 7.37
Granted in 1995 2,020,315 $ 25.27
Cancelled in 1995 (195,716) $ 23.53
Exercised in 1995 (2,433,623) $ 7.48
- ----------------------------------------------------------------------------------- ----------------------
Outstanding at December 31, 1995 8,366,499 $ 11.28
Granted in 1996 3,067,500 $ 30.95
Cancelled in 1996 (784,289) $ 28.77
Exercised in 1996 (5,481,681) $ 5.99
- ----------------------------------------------------------------------------------- ----------------------
Outstanding at December 31, 1996 5,168,029 $ 25.91
=================================================================================== ======================
</TABLE>
At December 31, 1996, 9,194,770 shares were available for future grant.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its plans. Accordingly, no compensation expense would be recognized for its
stock-based compensation plans other than for restricted stock awards.
During 1996 the Company adopted the disclosure requirements of FAS 123,
"Accounting for Stock-Based Compensation." In accordance with FAS 123, the
Company has elected not to recognize compensation cost related to stock options
with exercise prices equal to the market price at the date of issuance. If the
Company had elected to recognize compensation cost based on the fair value of
the options at grant date as prescribed by FAS 123, net income and earnings per
share would have been reduced by $5 million and $1 million, or $.03 and $.01 per
share, for years ended December 31, 1996 and 1995, respectively. The weighted
average fair value of options granted during 1996 and 1995 were $8.58 and $7.42
respectively, determined by the Black-Scholes option valuation model. The
following assumptions were used in the model: expected volatility of 28.4
percent, expected dividend yield of 3.0 percent, and risk-free interest rates
ranging from 5.5 percent to 7.0 percent. Due to the difference in vesting
requirements in each of the plans, the expected lives of the options range from
5 to 7 years. Forfeitures are recognized as they occur.
<TABLE>
<CAPTION>
Options Outstanding
- ----------------------- ----------------------- ----------------------- -----------------------
Weighted
Range Of Number Average Remaining Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price
- ----------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
$ 1--$ 3 261,787 4.89 $ 2.29
$12--$20 561,036 6.71 16.22
$21--$32 4,345,206 8.94 28.59
======================= ======================= ======================= =======================
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
- ----------------------- ----------------------- -----------------------
Range Of Number Weighted Average
Exercise Prices Exercisable Exercise Price
- ----------------------- ----------------------- -----------------------
<S> <C> <C>
$1--$ 3 261,787 $ 2.29
$12--$20 504,700 15.91
$21--$32 657,676 24.16
======================= ======================= =======================
</TABLE>
34
<PAGE>
Restricted Stock Plan
The Company has 300,000 shares of common stock outstanding as of December 31,
1996 under its Management Stock Incentive Plan. The stock issued under this plan
("Restricted Stock") is subject to the achievement of certain performance goals,
the passage of time and continued employment restrictions. Participants in the
plan may earn, without cost to them, Frontier common stock over three years.
Shareowners' equity reflects unearned compensation for the unvested stock
awarded. During 1996, the Company did not recognize compensation expense for the
restricted stock plan as the market price of the common stock at December 31,
1996 was significantly below the vesting prices.
Common Stock Warrants
As of December 31, 1996, warrants for the purchase of 44,000 shares of common
stock at $2.50 per share were outstanding. The warrants expire in June 1997. As
of December 31, 1996, 1995 and 1994, 87,000, 6,252,000 and 828,000 warrants were
exercised. The warrants were issued in connection with ALC's refinancings and
the difference between the exercise price and the fair value of the warrants at
the time of issuance was recorded as a discount on the related notes and an
increase to capital in excess of par value.
Stock Offering
In February 1994, the Company sold 5.4 million shares of its common stock at $42
per share in a public offering. As part of the offering, 2.5 million new primary
shares were issued and sold directly by the Company and 2.9 million shares were
sold by C FON Corporation, a subsidiary of Sprint Corporation. All share and per
share data is prior to the 2-for-1 stock split which occurred in April 1994.
12. Preferred Stock
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------- ---------------------- ----------------------
In thousands of dollars, except share data 1996 1995 1994
- -------------------------------------------------------------------------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Frontier Corporation--850,000 shares authorized; par value $100
5.00% Series--redeemable at $101 per share
Shares outstanding 100,000 100,000 100,000
Amount outstanding $10,000 $10,000 $10,000
5.65% Series--redeemable at $101 per share
Shares outstanding 50,000 50,000 50,000
Amount outstanding $ 5,000 $ 5,000 $ 5,000
4.60% Series--redeemable at $101 per share
Shares outstanding 48,500 50,000 50,000
Amount outstanding $ 4,850 $ 5,000 $ 5,000
Frontier Communications of New York, Inc.
40,000 shares authorized; par value $100
5.875% Series A--redeemable at par
Shares outstanding 18,694 18,694 18,694
Amount outstanding $ 1,869 $ 1,869 $ 1,869
7.80% Series B--redeemable at $100.80-$105.00 per share
Shares outstanding 6,160 6,240 6,320
Amount outstanding $ 616 $ 624 $ 632
Frontier Communications of AuSable Valley, Inc.
4,000 shares authorized; par value $100
5.50% Series--redeemable at par
Shares outstanding 2,754 2,754 2,754
Amount outstanding $ 276 $ 276 $ 276
- -------------------------------------------------------------------------------------- ---------------------- ----------------------
Total shares outstanding 226,108 227,688 227,768
====================================================================================== ====================== ======================
Total amount outstanding $22,611 $22,769 $22,777
====================================================================================== ====================== ======================
</TABLE>
At the special meeting in December 1994, Frontier shareowners authorized
four million shares of a new class of preferred stock, having a value of $100.00
per share and designated as Class A Preferred Stock. This class of stock will
rank junior to the cumulative preferred stock as to dividends and distributions,
and upon the liquidation, dissolution or winding up of the Company. As of
December 31, 1996, no shares of this class have been issued.
On April 9, 1995, the Board of Directors adopted a Shareowners Rights Plan
(the "Plan"). This Plan provides for a dividend distribution on each outstanding
common share of a right to purchase one one-hundredth of a share of Series A
Junior Participating Class A Preferred Stock. The rights are designed to protect
shareowners in the event of an unsolicited attempt to acquire Frontier which the
Board does not believe is fair to the shareowners interest. The rights become
exercisable under certain circumstances to purchase Frontier common stock at
one-half market value.
35
<PAGE>
13. Accounting Pronouncements Adopted
Effective January 1, 1996, the Company adopted FAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
FAS 121 requires that certain long-lived assets and identifiable intangibles be
written down to fair value whenever an impairment review indicates that the
carrying value cannot be recovered on an undiscounted cash flow basis. The
statement also requires that certain long-lived assets and identifiable
intangibles to be disposed of be reported at fair value less selling costs. The
Company's adoption of this standard resulted in a non-cash charge of $8.0
million (net of a tax benefit of $4.4 million) and is reported as a cumulative
effect of a change in accounting principle. The charge represents the cumulative
adjustment required by FAS 121 to remeasure the carrying amount of certain
assets held for disposal as of January 1, 1996. These assets held for disposal
consist principally of telephone switching equipment in the Company's Local
Communications Services segment as a result of management's commitment, in late
1995, to a central office switch consolidation project primarily at the
Rochester Telephone Corp. and Frontier Communications of New York subsidiaries.
The Company adopted FAS 116, "Accounting for Contributions Received and
Contributions Made" for all of its consolidated subsidiaries effective
September 30, 1995. FAS 116 requires that the Company reflect in current
expenses an accrual for the cost of multi-year charitable contributions. The net
impact of adopting FAS 116 resulted in a post-tax charge of $1.5 million, net of
taxes of $0.8 million.
The Company adopted FAS 112, "Employers' Accounting for Postemployment
Benefits" effective January 1, 1994. FAS 112 requires that the projected future
costs of providing postemployment, but pre-retirement, benefits, such as
disability, pre- pension leave (salary continuation) and severance pay, be
recognized as an expense as employees render service rather than when the
benefits are paid. The Company recognized the obligation for postemployment
benefits through a cumulative effect charge to net income of $7.2 million, net
of taxes of $3.9 million.
14. Investment in Cellular Partnerships
In July 1994, Frontier Corporation and Nynex Corporation combined certain of
their respective cellular interests to form Frontier Cellular, a cellular super
system joint venture in upstate and western New York State. Currently, Frontier
Cellular includes cellular markets throughout New York State and northern
Pennsylvania. The structure of the transaction is a 50/50 joint venture
partnership, with Frontier as the managing partner. Financial results for the
joint venture have been reported on the equity method of accounting, reflecting
Frontier's proportionate share of the joint venture's earnings in the "Other
income and expense" section of the Consolidated Statements of Income.
Previously, revenues and expenses for these New York State wireless properties
had been consolidated. During 1995, Nynex Corporation contributed its cellular
interests in the partnership into a combined partnership with Bell Atlantic
Corporation. The partnership investment balances of $58.6 million in 1996, $33.8
million in 1995 and $23.5 million in 1994 are included in "Deferred and other
assets" in the Consolidated Balance Sheets.
15. Major Customer
The Company's 1996 revenues include the impact of a major carrier customer whose
revenues comprise approximately 16% of consolidated revenues for the year.
16. Commitments and Contingencies
Operating Environment--The Company has evolved from a provider of local and long
distance services in certain areas of the country to a nationwide provider of
integrated communications services. As a result, the Company has formidable
competitors of greater size and expects that, over-time and due to the lifting
of regulatory restrictions, there will be more entrants into the long distance
business and its local markets.
Legal Matters--The Company and a number of its subsidiaries in the normal
course of business are party to a number of judicial, regulatory and
administrative proceedings involving matters incidental to their business. The
Company's management does not believe that any material liability will be
imposed as a result of these matters.
Leases and License Agreements--The Company leases buildings, land, office
space, fiber optic network, computer hardware and other equipment, and has
license agreements for rights-of-way for the construction and operation of a
fiber optic communications system. Total rental expense amounted to $164.6
million in 1996, $77.8 million in 1995 and $68.7 million in 1994.
Minimum annual rental commitments under non-cancellable operating leases and
license agreements in effect on December 31, 1996 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
In thousands of dollars
- ---------------------------------------- --------------- -----------------
License
Years Buildings Equipment Agreements
- ---------------------------------------- --------------- -----------------
<S> <C> <C> <C>
1997 $ 21,062 $ 9,623 $ 83,859
1998 17,745 4,786 71,536
1999 13,701 2,355 37,818
2000 11,832 1,489 20,892
2001 10,259 47 13,392
2002 and thereafter 32,320 -- 7,826
- ---------------------------------------- --------------- -----------------
Total $106,919 $18,300 $235,323
======================================== =============== =================
</TABLE>
Sale of Cellular Interest--On October 23, 1996, the Company announced that a
definitive agreement had been signed with Alltel to sell its 69.5% equity
interest in the South Alabama Cellular Communications Partnership. The
partnership provides cellular service to customers in Alabama RSA No. 4 and
Alabama RSA No. 6. The Company anticipates that this transaction, which is
subject to board of directors and regulatory approval, will be finalized in
early 1997. The Company expects to recognize a gain as a result of this
transaction.
Other Matters--In connection with the Company's capital program, certain
commitments have been made for the purchase of material and equipment. In
October 1996, construction began on a nationwide fiber optic network. Frontier
will be investing approximately $500 million in this project over the next two
year period. At December 31, 1996, the Company made a $62 million deposit
payment for this project that is included in the "Deferred and other" caption in
the Consolidated Balance Sheets. The network expansion will increase 1997
capital expenditures by over $250 million to a combined level of approximately
$590 million.
36
<PAGE>
17. Business Segment Information
As of January 1996, Frontier simplified its business segment reporting to
reflect the predominance of its two major operating segments, long distance and
local communications services. The Company now reports its operating results in
three segments: Long Distance Communications Services, Local Communications
Services and Corporate Operations and Other. The Company's majority interest in
two wireless properties, which were previously reported as a Wireless
Communications Segment, have been consolidated under Corporate Operations and
Other. The change in the definition of the Company's segments has been made to
better reflect the changing scope of the businesses in which Frontier operates.
Revenues and sales, operating income, depreciation, construction and
identifiable assets by business segment are set forth in the Business Segment
Information on page 22.
<TABLE>
<CAPTION>
18. Quarterly Data (Unaudited)
- ---------------------------------------- ---------------------------------- -------------------------------------------------------
Revenues Income Per Share
-------------- ---------------------------------- -------------------------------------------------------
(In thousands of dollars, Earnings Before
except per share data) Operating Net Extraordinary Market Price
Consolidated Income Income Items and ------------------
Revenues (Loss) (Loss) Cumulative Effect Earnings High Low
- ---------------------------------------- ---------------------------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 First Quarter $ 655,149 $111,852 $ 57,123/(1)/ $ .40 $ .35 $33.25 $28.25
Second Quarter 670,279 122,701 69,206 .42 .42 $33.38 $27.75
Third Quarter 669,069 129,218 73,777 .45 .45 $31.25 $25.88
Fourth Quarter 581,072 24,113/(2)/ 9,820/(2)/ .06 .06 $31.88 $19.88
------------ ---------------------------------- -------------------------------------------------------
Full Year $2,575,569 $387,884 $209,926 $1.32/(3)/ $1.27/(3)/
============ ================================== =======================================================
- ---------------------------------------- ---------------------------------- -------------------------------------------------------
1995 First Quarter/(1)/ $ 459,040 $ 87,281/(4)/ $ 51,650/(4)/ $ .32 $ .32 $23.38 $19.25
Second Quarter/(1)/ 506,920 96,314 53,069 .33 .33 $24.13 $19.63
Third Quarter 571,386 (7,681)/(5)/ (37,912)/(5)/ (.12)/(6)/ (.90)/(6)/ $28.63 $23.75
Fourth Quarter 606,345 108,316 55,276 .36 .34 $30.00 $25.50
------------ ---------------------------------- -------------------------------------------------------
Full Year $2,143,691 $284,230 $ 22,083 $ .89 $ .13
============ ================================== =======================================================
- ---------------------------------------- ---------------------------------- -------------------------------------------------------
1994 First Quarter $ 399,454 $ 75,967 $ 32,962/(7)/ $ .25 $ .21 $22.44 $20.25
Second Quarter 416,767 79,686 52,909 .33 .33 $25.25 $20.81
Third Quarter 421,503 84,557 47,407 .29 .29 $24.75 $21.63
Fourth Quarter 429,821 85,416 46,779 .29 .29 $24.63 $20.50
------------ ---------------------------------- -------------------------------------------------------
Full Year $1,667,545 $325,626 $180,057 $1.16 $1.12
============ ================================== =======================================================
</TABLE>
(1) Includes a post-tax cumulative effect charge related to change in accounting
principle of $8.0 million.
(2) Includes a pre-tax charge of $65.2 million as a result of the following:
$28.0 million representing a one-time charge for the curtailment of certain
company pension plans; $20.8 million is the result of a nonrecurring charge
relating to the Company's conference calling product line and $16.4 million
reflecting the resolution of billing disputes with connecting carriers. The
$16.4 million charge relating to the carrier billing disputes recorded in the
fourth quarter of 1996 does not result in the material misstatement of the
earlier quarters of 1996.
(3) As a result of rounding, the total of the four quarters' earnings does not
equal the earnings per share for the year.
(4) Includes a pre-tax acquisition related charge of $4.8 million (post-tax
charge of $3.1 million).
(5) Includes pre-tax acquisition related charge of $109.5 million (post-tax
charge of $75.7 million). Includes post-tax extraordinary charges of $112.1
million resulting from the discontinuance of regulatory accounting, a post-tax
extraordinary loss on retirement of debt of $5.8 million and a post-tax
cumulative effect charge related to change in accounting principle of $1.5
million.
(6) Due to the net loss incurred, the earnings per share calculation excludes
common stock equivalents.
(7) Includes a post-tax cumulative effect charge related to change in accounting
principle of $7.2 million.
37
<PAGE>
Condensed Six-Year Financial Statements
<TABLE>
<CAPTION>
- -------------------------------------------------------- -------------- -------------- -------------- -------------- --------------
In thousands of dollars, except per share data
Years Ended December 31, 1996 1995 1994 1993 1992 1991
- -------------------------------------------------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME
Revenues $2,575,569 $2,143,691 $1,667,545 $1,437,448 $1,252,244 $1,120,375
Costs and expenses 2,187,685 1,859,461 1,341,919 1,185,811 1,047,393 952,165
- -------------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Operating Income 387,884 284,230 325,626 251,637 204,851 168,210
Interest expense 43,175 53,557 50,216 56,691 66,933 63,154
Other income 15,831 14,991 20,922 7,207 2,201 27,905
Income taxes 142,596 100,896 109,078 73,509 33,094 52,774
- -------------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Income Before Extraordinary Items
and Cumulative Effect of Changes
in Accounting Principles 217,944 144,768 187,254 128,644 107,025 80,187
Extraordinary items -- (121,208) -- (7,490) (1,072) 6,387
Cumulative effects of changes
in accounting principles (8,018) (1,477) (7,197) -- -- --
- -------------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Consolidated Net Income 209,926 22,083 180,057 121,154 105,953 86,574
Dividends on preferred stock 1,182 1,191 1,187 1,640 4,442 5,189
- -------------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Income Applicable to Common Stock $ 208,744 $ 20,892 $ 178,870 $ 119,514 $ 101,511 $ 81,385
======================================================== ============== ============== ============== ============== =============
Earnings Per Common Share:
Primary $ 1.27 $ .13 $ 1.12 $ .78 $ .74 $ .64
Fully Diluted $ 1.27 $ .13 $ 1.12 $ .78 $ .74 $ .64
- -------------------------------------------------------- -------------- -------------- -------------- -------------- --------------
CONSOLIDATED BALANCE SHEETS
Current assets $ 469,234 $ 523,135 $ 673,826 $ 303,434 $ 302,122 $ 270,122
Property, plant and equipment, net 971,259 881,309 1,034,442 1,080,135 1,085,760 1,075,584
Goodwill and customer base 535,979 550,081 222,442 215,962 187,278 197,201
Deferred and other assets 245,048 154,067 130,084 122,014 104,583 118,112
- -------------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Total Assets $2,221,520 $2,108,592 $2,060,794 $1,721,545 $1,679,743 $1,661,019
======================================================== ============== ============== ============== ============== =============
Current liabilities $ 418,103 $ 504,201 $ 305,698 $ 291,760 $ 344,962 $ 344,974
Long-term debt 675,043 618,867 661,549 581,707 604,157 636,099
Deferred income taxes 2,542 15,644 98,217 104,232 104,588 113,973
Deferred employee benefits obligation 65,479 58,385 46,001 16,121 -- --
Redeemable preferred stock -- -- -- -- 9,659 62,434
Shareowners' equity 1,060,353 911,495 949,329 727,725 616,377 503,539
- -------------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Total Liabilities and Shareowners' Equity $2,221,520 $2,108,592 $2,060,794 $1,721,545 $1,679,743 $1,661,019
======================================================== ============== ============== ============== ============== =============
CONSOLIDATED STATEMENTS
OF CASH FLOWS
Operating activities $ 395,661 $ 326,024 $ 305,465 $ 292,233 $ 249,763 $ 186,771
Investing activities (333,926) (519,337) (89,705) (151,165) (137,540) (283,607)
Financing activities (62,236) (134,547) 109,579 (177,401) (87,396) 116,579
- -------------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Net (Decrease) Increase in Cash and
Cash Equivalents $ (501) $ (327,860) $ 325,339 $ (36,333) $ 24,827 $ 19,743
======================================================== ============== ============== ============== ============== =============
</TABLE>
38
<PAGE>
Financial and Operating Statistics for Six Years
<TABLE>
<CAPTION>
- ----------------------------------------------------------- -------------- ------------- ------------- ------------- --------------
Dollars in thousands, except per share data
Years ended December 31, 1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------- -------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Current ratio 1.12 1.04 2.20 1.04 .88 .79
Pre-tax interest coverage 8.1x 1.9x 6.5x 4.3x 3.0x 3.2x
Total debt $ 681,296 $633,738 $666,515 $586,669 $694,803 $737,629
Debt ratio 39.1% 41.0% 41.2% 44.6% 52.6% 56.6%
Common shareowners' equity $1,037,742 $888,726 $926,552 $704,940 $593,564 $480,716
Rate of return on average common equity/(1)/ 25.5% 24.0% 21.9% 19.4% 18.9% 19.3%
=========================================================== ============== ============= ============= ============= ==============
Construction $ 310,802 $162,575 $113,735 $123,842 $137,066 $119,082
Percent of funds generated internally 83% 150% 216% 189% 145% 117%
=========================================================== ============== ============= ============= ============= ==============
Common shares outstanding end of year* 163,725 158,057 149,294 142,542 122,935 109,798
Average common shares outstanding* 164,013 161,669 160,353 153,230 136,180 127,627
Total number of common shareowners 30,206 26,637 24,608 22,840 22,520 21,376
Market price per common share:
High $ 33.38 $ 30.00 $ 25.25 $ 25.13 $ 17.88 $ 17.00
Low $ 19.88 $ 19.25 $ 20.25 $ 17.32 $ 14.57 $ 13.00
End of year $ 22.63 $ 30.00 $ 21.13 $ 22.57 $ 17.82 $ 16.07
=========================================================== ============== ============= ============= ============= ==============
Dividends declared per common share $ .855 $ .835 $ .815 $ .795 $ .775 $ .755
Dividends paid per common share $ .850 $ .830 $ .810 $ .790 $ .770 $ .750
Dividend yield-end of year 3.8% 2.8% 3.9% 3.6% 4.4% 4.8%
=========================================================== ============== ============= ============= ============= ==============
Percent to total revenues:
Net Revenues:
Long Distance Communications Services 73% 69% 61% 55% 51% 51%
Local Communications Services 25% 29% 37% 41% 45% 45%
Other 2% 2% 2% 4% 4% 4%
Operating Margin:/(1)/
Long Distance Communications Services 12% 14% 16% 13% 10% 7%
Local Communications Services 34% 32% 30% 27% 25% 26%
Consolidated 17% 17% 20% 18% 16% 15%
=========================================================== ============== ============= ============= ============= ==============
Access lines in service--Rochester 532,189 524,630 501,811 492,512 488,986 473,391
Access lines in service--Regionals 443,453 426,245 416,327 425,128 407,415 394,513
- ----------------------------------------------------------- -------------- ------------- ------------- ------------- -------------
Total access lines in service 975,642 950,875 918,138 917,640 896,401 867,904
=========================================================== ============== ============= ============= ============= ==============
Employees:
Long Distance Communications Services 4,376 4,203 2,647 2,378 2,280 2,141
Local Communications Services 2,701 2,959 3,156 3,444 3,885 3,915
Other 823 675 369 259 296 316
- ----------------------------------------------------------- -------------- ------------- ------------- ------------- --------------
Total employees 7,900 7,837 6,172 6,081 6,461 6,372
=========================================================== ============== ============= ============= ============= ==============
Local Communications Services minutes of use:
Carrier access minutes-interstate* 2,421,787 2,272,294 2,079,328 2,015,602 1,912,531 1,569,309
Carrier access minutes-intrastate* 1,877,249 1,759,425 1,763,871 1,664,262 1,439,983 1,173,685
- ----------------------------------------------------------- -------------- ------------- ------------- ------------- -------------
Total carrier access minutes* 4,299,036 4,031,719 3,843,199 3,679,864 3,352,514 2,742,994
=========================================================== ============== ============= ============= ============= ==============
Long Distance minutes of use* 13,695,536 10,066,777 6,286,912 4,684,981 3,909,616 2,868,545
=========================================================== ============== ============= ============= ============= ==============
</TABLE>
*In thousands
(1) Excluding nonrecurring charges.
39
<PAGE>
Exhibit 13.2
REPORT OF INDEPENDENT AUDITORS
Board of Directors
ALC Communications Corporation
We have audited the consolidated balance sheets of ALC Communications
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, cash flows, and preferred stock and
stockholders' equity for the years then ended (not included herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ALC
Communications Corporation and subsidiaries at December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Detroit, Michigan
January 17, 1996
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF FRONTIER CORPORATION
AS OF MARCH 1, 1997
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
- ------------------ ------------- --------------------
<S> <C> <C>
ALC Communications Corporation DE ALC Communications Corp.;
(A subsidiary of Frontier ALC
Corporation)
Ameritel Management, Inc. Canada Ameritel Management, Inc.
(A subsidiary of Frontier (British Columbia)
Communications of the West, Inc.)
Budget Call Long Distance, Inc. DE Budget Call Long
(A subsidiary of Frontier Distance, Inc.; Budget
Communications International Inc.) Call
Business Telemanagement, Inc. CA Business Telemanagement,
(A subsidiary of Ameritel Inc.
Management, Inc.)
Computer Calling Technologies, Inc. DE Computer Calling
(A subsidiary of Frontier Technologies, Inc.
Communications of the West, Inc.)
ConferLink Corp. CO Conferlink Corp.
(A subsidiary of ConferTech
International, Inc.)
ConferTech Australia Pty. Ltd. Australia ConferTech Australia
(A subsidiary of ConferTech
International, Inc.)
ConferTech Canada, Inc. Canada ConferTech Canada, Inc.
(A subsidiary of ConferTech (All provinces)
International, Inc.)
ConferTech International, Inc. CO ConferTech International,
(A subsidiary of ALC Communications Inc.
Corporation)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
- ------------------ ------------- --------------------
<S> <C> <C>
DePue Communications, Inc. IL DePue Communications,
(A subsidiary of Frontier Inc.
Communications of DePue, Inc.)
Dowdy Minnesota 10, Inc. FL Dowdy Minnesota 10, Inc.
(A subsidiary of Frontier Cellular
Holding Inc.)
Enhanced Telemanagement, Inc. MN Enhanced Telemanagement;
(A subsidiary of ALC ETI; Frontier Telemanage-
Communications Corporation) ment
Fairmount Cellular Inc. GA Fairmount Cellular Inc.
(A subsidiary of Frontier
Communications of Fairmount, Inc.)
Frontel Communications Limited England Frontel Communications
(A subsidiary of ALC Communications Ltd.; Frontel
Corporation)
Frontel Newco
(A subsidiary of Frontel Communications Ltd) England Frontel Newco
Frontier Cellular Holding Inc. DE Frontier Cellular
(A subsidiary of Frontier Corporation) Holding Inc.; FCHI
Frontier Cellular of Alabama, Inc. AL Frontier Cellular
(A subsidiary of Frontier
Communications of the South, Inc.)
Frontier Communications DE Frontier Communications
International Inc. International Inc.; FCI;
(A subsidiary of RCI Long Distance, Inc.
ALC Communications Corporation)
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
- ------------------ ------------- --------------------
<S> <C> <C>
Frontier Communications of AL Frontier Communications
Alabama, Inc. of Alabama, Inc.
A subsidiary of Frontier Subsidiary
Telco Inc.)
Frontier Communications of NY Frontier Communications
AuSable Valley, Inc. of AuSable Valley, Inc.;
(A subsidiary of Frontier
Frontier Corporation)
Frontier Communications of PA Frontier Communications
Breezewood, Inc. of Breezewood, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of PA Frontier Communications
Canton, Inc. of Canton, Inc.; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of IL Frontier Communications
DePue, Inc. of DePue, Inc.; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of GA Frontier Communications
Fairmount, Inc. of Fairmount, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of GA Frontier Communications
Georgia, Inc. of Georgia, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
- ------------------ ------------- --------------------
<S> <C> <C>
Frontier Communications of IL Frontier Communications
Illinois, Inc. of Illinois, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of IN Frontier Communications
Indiana, Inc. of Indiana, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of IA Frontier Communications
Iowa, Inc. of Iowa, Inc.; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of DE Frontier Communications of Israel
Israel, Inc.
(A subsidiary of
Frontier Corporation)
Frontier Communications- WI Frontier Communications
Lakeshore, Inc. -Lakeshore, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of IL Frontier Communications
Lakeside, Inc. of Lakeside; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of PA Frontier Communications
Lakewood, Inc. of Lakewood, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
- ------------------ ------------- --------------------
<S> <C> <C>
Frontier Communications of AL Frontier Communications
Lamar County, Inc. of Lamar County, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of MI Frontier Communications
Michigan, Inc. of Michigan, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of the VA Frontier Communications Mid Atlantic,
of the Mid Atlantic,Inc. Inc.; Mid Atlantic Telecom
(A subsidiary of ALC
Communications Corporation)
Frontier Communications-Midland, IL Frontier Communications
Inc. -Midland, Inc.; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications MN Frontier Communications
of Minnesota, Inc. of Minnesota, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of MS Frontier Communications
Mississippi, Inc. of Mississippi, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of WI Frontier Communications
Mondovi, Inc. of Mondovi, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
- ------------------ ------------- --------------------
<S> <C> <C>
Frontier Communications of IL Frontier Communications
Mt. Pulaski, Inc. of Mt. Pulaski, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of DE Frontier Communications
New England, Inc. of New England, Inc.;
(A subsidiary of ALC Long Distance North; LDN;
Communications Corporation) Frontier
Frontier Communications - MN Frontier Communications
North Central Region, Inc. North Central Region,
(A subsidiary of ALC Inc; American Sharecom;
Communications Corporation) ASI
Frontier Communications of NY Frontier Communications
New York, Inc. of New York, Inc.;
(A subsidiary of Frontier
Frontier Corporation)
Frontier Communications of IL Frontier Communications
Orion, Inc. of Orion, Inc.; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of PA Frontier Communications
Oswayo River, Inc. of Oswayo River, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of PA Frontier Communications
Pennsylvania, Inc. of Pennsylvania, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
- ------------------ ------------- --------------------
<S> <C> <C>
Frontier Communications-Prairie, IL Frontier Communications-
Inc. Prairie, Inc.; Frontier
(A subsidiary of
Frontier Subsidiary Telco Inc.)
Frontier Communications of DE Frontier Communications Rochester, of
Rochester, Inc. Inc.; FCR
(A subsidiary of Frontier
Corporation)
Frontier Communications-Schuyler, IL Frontier Communications
Inc. -Schuyler, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of NY Frontier Communications
Seneca-Gorham, Inc. of Seneca-Gorham, Inc.;
(A subsidiary of Frontier
Frontier Corporation)
Frontier Communications of AL Frontier Communications
the South, Inc. of the South, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications - WI Frontier Communications
St. Croix, Inc. - St. Croix, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of NY Frontier Communications
Sylvan Lake, Inc. of Sylvan Lake, Inc.;
(A subsidiary of Frontier
Frontier Corporation)
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
- ------------------ ------------- --------------------
<S> <C> <C>
Frontier Communications of IN Frontier Communications
Thorntown, Inc. of Thorntown, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of WI Frontier Communications
Viroqua, Inc. of Viroqua, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications of the CA Frontier Communications
West, Inc. of the West, Inc.; West
(A subsidiary of ALC Coast Telecommunications,
Communications Corporation) Inc.
Frontier Communications of WI Frontier Communications
Wisconsin, Inc. of Wisconsin, Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Communications Services MI Frontier Communications
Inc. (A subsidiary of ALC Services Inc.; Allnet
Communications Corporation) Communication Services
Frontier Information DE Frontier Information
Technologies, Inc. Technologies, Inc.;
(A subsidiary of Frontier FIT
Corporation)
Frontier InfoServices Inc. DE Frontier InfoServices
(A subsidiary of Inc.; Visions Publishing
Frontier Subsidiary Telco Inc.)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
- ------------------ ------------- --------------------
<S> <C> <C>
Frontier Local Services Inc. MI Frontier Local Services
(A subsidiary of ALC Inc.; Allnet Local
Communications Corporation) Services
Frontier Long Distance of DE Frontier Long Distance
America, Inc. of America Inc;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Long Distance of DE Frontier Long Distance
New York, Inc. of New York Inc.;
(A subsidiary of Frontier
Frontier Subsidiary Telco Inc.)
Frontier Network Systems Inc. DE Frontier Network Systems
(A subsidiary of Inc.; Rotelcom Network
ALC Communications Corporation) Systems; Rotelcom
Frontier Subsidiary Telco Inc. DE Frontier Subsidiary
(A subsidiary of Telco Inc.; FSTI
Frontier Corporation)
Frontier Telemanagement Inc. WI Frontier Telemanagement
(A subsidiary of ALC
Communications Corporation)
LinkUSA Corporation IA LinkUSA Corporation
(A subsidiary of ALC
Communications Corporation)
Mid-South Cablevision MS Mid-South Cablevision
Company, Inc. Company, Inc.
(A subsidiary of
Frontier Subsidiary Telco Inc.)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
- ------------------ ------------- --------------------
<S> <C> <C>
MLD Minnesota 10, Inc. FL MLD Minnesota 10, Inc.
(A subsidiary of Frontier
Cellular Holding Inc.)
New Richmond Cable WI New Richmond Cable
Company, Inc. Company, Inc.
(A subsidiary of Frontier
Communications - St. Croix, Inc.)
New York RSA 3 Funding Corporation NY New York RSA 3 Funding
(A subsidiary of RTMC Holding, Inc.
O. T. Cellular Telephone IL O. T. Cellular
Company Telephone Company
(A subsidiary of
Frontier Communications of
Orion, Inc.)
RCI Long Distance Canada Ltd. Canada RCI Long Distance
(A subsidiary of ALC (Ont., Quebec) Canada Ltd.
Communications Corporation)
R.G. Data Incorporated NY R.G. Data
(A subsidiary Frontier Corporation)
Rochester Telephone Corp. NY Rochester Telephone
(A subsidiary of Corp.; RTC
Frontier Corporation)
RTMC Holding, Inc. DE RTMC Holding, Inc.
(A subsidiary of
Frontier Cellular Holding Inc.)
Schuyler Cellular, Inc. IL Schuyler Cellular, Inc.
(A subsidiary of Frontier
Communications - Schuyler, Inc.)
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
- ------------------ ------------- --------------------
<S> <C> <C>
Suntel Communications Corp. Ltd. Israel Suntel
(A subsidiary of Frontier
Communications of Israel, Inc.)
TDCI, Ltd. IN Thorntown Development
(A subsidiary of Company, Inc.; TDCI,
Frontier Communications of Ltd.
Thorntown, Inc.)
</TABLE>
11
<PAGE>
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Forms S-3 (File Nos. 33-
57895, 33-64307 and 333-23229), Forms S-4 (File Nos. 33-61047 and 33-91250) and
in the Registration Statements on Forms S-8 (File Nos. 33-67430, 33-54511, 33-
67432, 33-54519, 33-67324, 33-51331, 33-51885, 33-52025, 33-59579, 33-61855 and
333-04803) of Frontier Corporation of our report dated January 27, 1997
appearing on page 21 of the Annual Report to Shareowners which is incorporated
by reference in the Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears on page 27 of this Form 10-K.
PRICE WATERHOUSE LLP
Rochester, New York
March 27, 1997
<PAGE>
Exhibit 23.2
Consent of Independent Accountants
We consent to the reference to our firm under the caption "Experts" and to the
incorporation by reference in the Registration Statement on Form S-3 (File Nos.
33-64307 and 333-23229) and the related Prospectus of Frontier Corporation and
to the incorporation by reference in the Prospectuses constituting part of the
Registration Statements on Form S-3 (File No. 33-57895), Form S-4 (File Nos.
33-61047 and 33-91250) and in the Registration Statements on Form S-8 (File Nos.
33-67430, 33-67432, 33-67324, 33-51331, 33-51885, 33-52025, 33-54511, 33-54519,
33-59579, 33-61855 and 333-04803 of Frontier Corporation of our reports dated
January 17, 1996 with respect to the consolidated financial statements and
financial statement schedule II of ALC Communications Corporation and
subsidiaries which reports are included in the Annual Report on Form 10-K of
Frontier Corporation for the year ended December 31, 1996 to be filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
March 26, 1997
Detroit, Michigan
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
I, the undersigned, hereby constitute and appoint either JOSEPHINE S.
TRUBEK and/or LOUIS L. MASSARO as my true and lawful agent and attorney-in-fact
to act with full power and authority and in my name, place and stead as I,
myself, could act for the sole purpose of executing the Form 10-K of Frontier
Corporation for the year ended December 31, 1996, pursuant to Instruction
D(2)(a) of the Form 10-K and in accordance with Regulation S-K Item 601(b)(24)
of the Securities Act of 1933 and the Securities Exchange Act of 1934, and with
full and unqualified authority to delegate such power to any person or persons
as my attorney-in-fact shall select.
IN WITNESS WHEREOF, THIS INSTRUMENT HAS BEEN SIGNED AND DELIVERED BY THE
UNDERSIGNED AS OF MARCH 21, 1997.
_____________________________
Patricia C. Barron
/s/ Ronald L. Bittner
_____________________________
Ronald L. Bittner
/s/ Raul E. Cesan
_____________________________
Raul E. Cesan
_____________________________
Brenda E. Edgerton
/s/ Jairo A. Estrada
_____________________________
Jairo A. Estrada
_____________________________
Daniel E. Gill
/s/ Michael E. Faherty
_____________________________
Michael E. Faherty
_____________________________
Alan C. Hasselwander
/s/ Robert J. Holland, Jr
_____________________________
Robert J. Holland, Jr.
/s/ Douglas H. McCorkindale
_____________________________
Douglas H. McCorkindale
/s/ Leo J. Thomas
_____________________________
Leo J. Thomas
_____________________________
Richard J. Uhl
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FRONTIER
CORPORATION'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000084567
<NAME> FRONTIER CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 30,948
<SECURITIES> 0
<RECEIVABLES> 395,167
<ALLOWANCES> 30,911
<INVENTORY> 13,198
<CURRENT-ASSETS> 469,234
<PP&E> 2,276,361
<DEPRECIATION> 1,305,102
<TOTAL-ASSETS> 2,221,520
<CURRENT-LIABILITIES> 418,103
<BONDS> 675,043
0
22,611
<COMMON> 163,732
<OTHER-SE> 874,010
<TOTAL-LIABILITY-AND-EQUITY> 2,221,520
<SALES> 0
<TOTAL-REVENUES> 2,575,569
<CGS> 54,776
<TOTAL-COSTS> 2,187,685
<OTHER-EXPENSES> 500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,175
<INCOME-PRETAX> 360,540
<INCOME-TAX> 142,596
<INCOME-CONTINUING> 217,944
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (8,018)
<NET-INCOME> 209,926
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.27
</TABLE>
<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
FRONTIER CORPORATION
(Name of Registrant as Specified In Its Charter)
FRONTIER CORPORATION
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:*
(4) Proposed maximum aggregate value of transaction:
- -------------
* Set forth the amount on which the filing is calculated and state how it
was determined.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
[LOGO OF FRONTIER APPEARS HERE]
NOTICE OF ANNUAL MEETING OF
COMMON SHAREOWNERS
TO BE HELD ON MAY 2, 1997
Frontier Corporation
Frontier Center
180 South Clinton Avenue
Rochester, New York 14646-0700
Proxy
Statement
Dear Shareowners:
The Annual Meeting of Common Shareowners of Frontier Corporation (the Company")
will be held at the Westin Hotel, Tabor Center Denver, 1672 Lawrence Street,
Denver, Colorado 80202 at 10:30 a.m., local time, on May 2, 1997. The purposes
of the meeting are:
. To elect twelve Directors;
. To elect Price Waterhouse LLP as the Company's public accountants for the
fiscal year ending December 31, 1997;
. To act upon a shareowner proposal concerning executive change in control
arrangements; and
. To transact such other business, if any, as may properly come before the
meeting or any adjournments thereof.
The Board of Directors amended Article II, Section 2, of the By-Laws to set the
number of Directors constituting the entire Board at twelve, effective April 30,
1996.
The Board of Directors has fixed the close of business on March 14, 1997, as the
record date for the determination of shareowners entitled to notice of and to
vote at the meeting.
Your vote is very important. Please sign and date the enclosed proxy card and
return it promptly in the enclosed return envelope, whether or not you expect to
attend the meeting. If you sign and return your proxy card without specifying
your choices, it will be understood that you wish to have your shares voted in
accordance with the Board of Directors' recommendations. You may revoke your
proxy and vote in person if you decide to attend the meeting.
An admission card will be required to gain entry to the meeting. If you are
planning to attend the Annual Meeting, please check the box on the back of the
proxy card. We will then send you your admission card. A map which indicates the
meeting place appears on the back cover of the proxy statement.
By Action of the Board of Directors,
/s/ Josephine S. Trubek
Josephine S. Trubek
Corporate Secretary
Rochester, New York
March 24, 1997
<PAGE>
Table of Contents
Proxy Statement
Proxy Solicitation 1
Voting at the Annual Meeting 1
Proposal 1 Election of Directors 1
Information about the Board of Directors 1
Nominees for Director 2
Stock Ownership of Management, Directors
and Certain Beneficial Owners 4
Section 16(a) Beneficial Ownership
Reporting Compliance 5
Report of Committee on Directors 5
Report of Committee on Management 6
Performance Graph 8
Compensation of Company Management 9
Summary Compensation Table 9
Option/SAR Grants in Last Fiscal Year 10
Individual Grants in 1996 Table 10
Aggregated Option/SAR Exercises in
Last Fiscal Year and Fiscal Year End
Option/SAR Values Table 11
Long-Term Incentive Plans-Awards in
Last Fiscal Year Table 11
Pension Plan Table 12
Compensation Committee Interlocks and
Insider Participation in Compensation Decisions 13
Indemnification of Certain Persons 13
Proposal 2 Election of Public Accountants 14
Proposal 3 Shareowner Proposal Regarding
Executive Change in Control Arrangements 14
Other Matters 15
Future Proposals of Shareowners 15
<PAGE>
Proxy Statement
1997 Annual Meeting of Common Shareowners
of Frontier Corporation
Proxy Solicitation
The board of directors ("Board of Directors") of Frontier Corporation (the
"Company"), a New York corporation, is soliciting proxies for use at the annual
meeting of holders of the Company's $1.00 par value common stock. We are sending
you this Proxy Statement and the enclosed proxy card in connection with the
Board's solicitation so that you may vote your shares. The meeting (the "Annual
Meeting") will be held on May 2, 1997, at 10:30 a.m., local time at the Westin
Hotel, Tabor Center Denver, 1672 Lawrence Street, Denver, Colorado 80202, or any
later time, if adjourned, for the purposes stated in the Notice of Annual
Meeting of Common Shareowners provided to you.
The Company will pay the cost of proxy solicitation. In addition to the
solicitation of proxies by mail, some officers and employees of the Company,
without additional compensation, may contact you personally or by telephone,
facsimile, telegraph or cable, to solicit your proxy. The Company will also
request brokerage houses, nominees, custodians and fiduciaries to forward
soliciting materials to the beneficial owners of stock held of record and will
reimburse such persons for forwarding such materials. In addition, the Company
has retained Georgeson & Co., Inc., New York, New York, to aid in the
solicitation of proxies at a fee not to exceed $7,500, plus reimbursement for
out-of-pocket expenses incurred by that firm on behalf of the Company.
The principal executive offices of the Company are located at 180 South
Clinton Avenue, Rochester, New York 14646, and its telephone number is (716)
777-1000.
Voting at the Annual Meeting
The close of business on March 14, 1997, is the Record Date for determination of
the shareowners entitled to notice of, and to vote at, the Annual Meeting. On
that date there were 164,130,495 shares of the Company's $1.00 par value common
stock outstanding and entitled to vote at the meeting. Each shareowner may cast
one vote for each share of common stock held as of the Record Date.
Each proxy which is properly executed and returned in the enclosed return
envelope will be voted at the Annual Meeting. Shares represented by your proxy
will be voted in accordance with the directions you specify on the proxy card.
If your proxy does not specify a choice, your shares will be voted for the
election of the Directors nominated in the proxy; in favor of the election of
Price Waterhouse LLP as public accountants; and against the shareowner proposal.
You have the right to revoke your proxy by executing a proxy bearing a later
date, by attending the meeting and voting in person, or by otherwise notifying
the Company prior to the meeting.
The proxy card contains spaces for you to indicate if you wish to abstain on
one or more of the proposals or to withhold authority to vote for one or more
nominees for Director. Directors are elected by a plurality of the votes cast.
Votes withheld in connection with the election of one or more of the nominees
for Director will not be counted as votes cast in connection with that nominee's
election. Public accountants are elected by a majority of the votes cast.
Approval of the shareowner proposal requires a majority of the votes cast as
well. Abstentions are not counted in determining the votes cast in connection
with the selection of public accountants or approval of the shareowner proposal.
The New York Stock Exchange allows brokerage firms holding shares for the
benefit of their clients to vote in their discretion on behalf of their clients
with respect to "discretionary items" if the clients have not furnished voting
instructions within ten days of the shareowner meeting. The election of
Directors and public accountants are discretionary items with respect to which
brokerage firms may vote. The shareowner proposal is not a discretionary item
and brokers who receive no instructions from their clients may not vote on this
proposal. If your broker does not vote your shares, those broker "non-votes"
will not be considered as votes cast with respect to the shareowner proposal.
- --------------------------------------------------------------------------------
Proposal 1 - Election of Directors
YOUR BOARD OF DIRECTORS RECOMMENDS
A VOTE "FOR" ALL NOMINEES.
Information about the Board of Directors
- --------------------------------------------------------------------------------
Board of Directors
The Board of Directors of the Company currently consists of twelve persons. The
Board of Directors nominates the twelve persons named on pages 3 and 4 for
election to the Board of Directors. All of these people are currently Directors
of the Company, and their terms of office all expire on the date of the Annual
Meeting. If elected, all of them will serve until the Annual Meeting of
Shareowners to be held in 1998 or until such time as their respective successors
are elected.
The Board of Directors held six meetings during 1996. All of the Directors
attended at least 75% of the total meetings of the Board and its committees
which they were eligible to attend.
This Proxy Statement and Form of Proxy are being first sent to Shareowners on
March 24, 1997.
1
<PAGE>
Committees of the Board of Directors
The Board of Directors conducts its business through meetings of the Board and
through the activities of its committees. The standing committees of the Board
are the Audit Committee, the Committee on Management, the Committee on Directors
and the Executive Committee.
Audit Committee
The Audit Committee of the Board is currently composed of Jairo A. Estrada,
Chair; Raul E. Cesan, Brenda E. Edgerton and Richard J. Uhl. This committee
reviews the scope of audit activities and the financial reports of the Company,
and reviews with management significant and material matters which may result in
either potential liability to the Company or significant exposure to the
Company. The Committee also makes reports and recommendations with respect to
audit activities, findings, and reports of the independent public accountants
and the internal audit staff of the Company. The Audit Committee held four
meetings in 1996.
Committee on Management
The present members of the Committee on Management are Daniel E. Gill, Chair;
Michael E. Faherty and Dr. Leo J. Thomas. This committee is responsible for
determining the compensation, benefits and perquisites of all senior executive
officers of the Company, with the exception of the Chief Executive Officer, and
for recommending the compensation, benefits and perquisites of the Chief
Executive Officer to the full Board after an evaluation of his performance. This
committee also develops and administers executive compensation plans and reviews
succession planning for the Company and other significant human resources
issues. The Committee on Management held five meetings in 1996.
Committee on Directors
The Committee on Directors serves as the nominating committee and also is
responsible for corporate governance issues. The Committee currently consists of
Patricia C. Barron, Chair; Robert Holland, Jr., Douglas H. McCorkindale and Dr.
Leo J. Thomas. The Committee reviews all matters relating to the selection,
qualification, evaluation, and compensation of members of the Board of Directors
and all nominees to the Board. The Committee on Directors held four meetings in
1996.
The Committee on Directors will consider nominations by shareowners. Such
suggestions should include sufficient biographical information so that the
Committee can appropriately assess a nominee's qualifications. This information
would include, at a minimum, the nominee's name and address, business and other
experience relevant to serving as a member of Frontier's Board of Directors, and
a listing of any other Boards on which the nominee may be a member. All
submissions should be sent by a letter addressed to the Corporate Secretary,
Frontier Corporation, 180 South Clinton Avenue, Rochester, New York 14646-0700.
Suggestions in connection with the 1998 Annual Meeting of Common Shareowners
must be received by October 31, 1997 in order to receive consideration.
Executive Committee
The present members of the Executive Committee are Douglas H. McCorkindale,
Chair; Patricia C. Barron, Ronald L. Bittner, Jairo A. Estrada, Daniel E. Gill
and Alan C. Hasselwander. The Executive Committee possesses all of the powers of
the Board of Directors except those which, by law or the Company's By-Laws,
cannot be delegated to it. The Executive Committee met four times in 1996.
Compensation of Directors
Directors are paid an annual retainer and meeting fees. The annual retainer
consists of 1,200 shares of Frontier Corporation common stock. The meeting fee
is $1,500 for each Board and/or committee meeting attended. The annual retainer
for each committee chair consists of 300 shares of Frontier Corporation common
stock. New Directors also receive an additional one-time grant of 1,000 shares
of Frontier Corporation common stock which they must hold during their tenure on
the Board. Directors who are employees of the Company or its subsidiaries
receive no annual retainer or meeting fees. Directors may elect to defer payment
of their fees to future years.
Pursuant to the Company's Directors' Stock Incentive Plan, Directors annually
receive an option to purchase 4,000 shares of the Company's common stock. These
options expire ten years after issuance, and the exercise price is the closing
price of the stock on the day the option was issued. Each outside Director
received a grant of options for 4,000 shares at an exercise price of $30.25 per
share on April 24, 1996.
Directors also receive cellular telephone equipment and service and other
nominal in-kind items.
- --------------------------------------------------------------------------------
Nominees for Director
The Board believes that all of the persons it has nominated will be available
and willing to serve as Directors. If any nominee is unable to serve, the shares
represented by all valid proxies will be voted for the election of such
substitute as the Board may recommend or the Board may fill the vacancy at a
later date after selecting an appropriate person.
The principal occupation and business experience of each nominee for election
at the Annual Meeting of Common Shareowners to be held on May 2, 1997 appears
next to that person's photograph.
2
<PAGE>
[PHOTO OF PATRICIA C. BARRON APPEARS HERE]
Patricia C. Barron, 54, is President, Xerox Engineering Systems, Xerox
Corporation, a manufacturer of office systems and equipment, and has held this
position since February 1994. From March 1992 until February 1994, she was
President, Office Documents Products Division, Xerox Corporation. From 1979 to
March 1992, she was a Vice President of Xerox Corporation. She is a Director of
Quaker Chemical Corporation and of Reynolds Metals Company. She has been a
Director of the Company since 1990.
[PHOTO OF RONALD L. BITTNER APPEARS HERE]
Ronald L. Bittner, 55, is Chairman and Chief Executive Officer of the Company
and has held this position since April 1993. He also served as the Company's
President and Chief Executive Officer from February 1992 to April 1993, and was
an Executive Vice President and President Telecommunications Group from May 1988
to February 1992. He is a Director of Dynatech Corp. and of LG&E Energy Corp. He
has been a Director of the Company since 1989.
[PHOTO OF RAUL E. CESAN APPEARS HERE]
Raul E. Cesan, 49, is President, Schering-Plough Pharmaceuticals and Executive
Vice President, Schering-Plough Corporation, a worldwide manufacturer and
marketer of pharmaceutical and health care products and has held this position
since September 1994. From September 1992 through September 1994, he was
President, Schering Laboratories - U.S. Pharmaceutical Operations. From
September 1988 to September 1992, he was President, Schering-Plough
International. He has been a Director of the Company since 1995.
[PHOTO OF BRENDA E. EDGERTON APPEARS HERE]
Brenda E. Edgerton, 47, is Vice President - Business Development, Campbell Soup
Company, a manufacturer of prepared convenience foods and has held this position
since May 1996. From May 1994 to May 1996, she held the position Vice President,
Finance - U.S. Soup, and from August 1989 through April 1994, she was Vice
President and Treasurer, Campbell Soup Company. She has been a Director of the
Company since 1993.
[PHOTO OF JAIRO A. ESTRADA APPEARS HERE]
Jairo A. Estrada, 49, is a private investor. Until December 1995 he was Chairman
of the Board and Chief Executive Officer of Garden Way Incorporated, a company
which manufactures outdoor power equipment. Mr. Estrada has been a Director of
the Company since 1989.
[PHOTO OF MICHAEL E. FAHERTY APPEARS HERE]
Michael E. Faherty, 61, is the principal of MICO, a general business consulting
and contract executive firm since February 1977. In connection with this
business, he has served, since 1994, as Chairman of ECCS, Inc., a provider of
open systems-based networked computing solutions which incorporate ECCS' mass
storage enhancement products. From 1994 until June 1996, he also served as ECCS'
Chief Executive Officer. From January 1992 to January 1994, he also was
President and Chief Executive Officer of Shared Financial Systems, Inc., and
was, from February 1989 to June 1992, President and/or Chairman of Intec Corp.
Subsequent to February 1977 and prior to 1989, he had served as either Chief
Executive or Chief Operating Officer for varying periods of time of Information
Magnetics, Cable & Wireless North America, Digital Sound Corporation, and Banc
Tec, Inc. He is a Director of Banc Tec, Inc., and of ECCS, Inc. Mr. Faherty has
been a Director of the Company since 1995.
[PHOTO OF DANIEL E. GILL APPEARS HERE]
Daniel E. Gill, 60, is Past Chairman and Chief Executive Officer of Bausch &
Lomb Incorporated, a worldwide manufacturer and marketer of health care and
optical products. Mr. Gill retired from that position in December 1995. Mr. Gill
has been a Director of the Company since 1981.
[PHOTO OF ALAN C. HASSELWANDER APPEARS HERE]
Alan C. Hasselwander, 63, is Past Chairman of the Board of Rochester Telephone
Corporation (now Frontier Corporation). From February 1992 to April 1992, he was
Chairman of the Company. From July 1984 to February 1992, he was President and
Chief Executive Officer of the Company. He has been a Director of the Company
since 1984.
[PHOTO OF ROBERT HOLLAND APPEARS HERE]
Robert Holland, Jr., 56, is the former Chief Executive Officer of Ben and
Jerry's Homemade, Inc., a manufacturer and marketer of premium ice cream. He
held that position from February 1995 until October 1996. From 1991 to 1995, he
was Chairman and Chief Executive of Rokher-J, Inc., a business consulting firm,
and from 1990 to 1991, he was Chairman of Gilreath Manufacturing, Inc. He is
also a Director of Mutual Life Insurance Company of New York, Trumark Inc., and
A.C. Nielsen Co. Mr. Holland has been a Director of the Company since 1995.
3
<PAGE>
[PHOTO OF DOUGLAS H. MCCORKINDALE APPEARS HERE]
Douglas H. McCorkindale, 57, is Vice Chairman and Chief Financial and
Administrative Officer of Gannett Co., Inc., a nationwide diversified
communications company. He is a Director of Gannett Co., Inc., Continental
Airlines, and a director or trustee of a number of investment companies in the
family of Prudential Mutual Funds. He has been a Director of the Company since
1980.
[PHOTO OF DR. LEO J. THOMAS APPEARS HERE]
Dr. Leo J. Thomas, 60, retired in May 1996, from Eastman Kodak Company, a
manufacturer of imaging products. From September 1994 to May 1996, he held the
position Executive Vice President. From September 1991 to September 1994, he was
Group Vice President, Eastman Kodak Company. He is a Director of John Wiley &
Sons, Inc. He has been a Director of the Company since 1984.
[PHOTO OF RICHARD J. UHL APPEARS HERE]
Richard J. Uhl, 56, is President and a Director of Chicago Holdings, Inc., a
privately owned company engaged in the management of several lease portfolios
owned by it and its subsidiaries and in investments in operating companies. He
has held these positions since 1985. Since July 1995, Mr. Uhl has also served as
Chairman of the Board of Business Alliance Capital Corporation, an asset based
lender to small and medium sized businesses. Since December 1987, Mr. Uhl also
has been the President of Steiner Financial Corporation. He has been Chairman of
the Board of DACC Liquidation Corp. (formerly known as Dealers Alliance Credit
Corp.) since November 1993 and a Director of First Merchant's Acceptance Corp.,
since May 1991. Both of these companies are purchasers and servicers of
automobile finance contracts. He has been a Director of the Company since 1995.
- --------------------------------------------------------------------------------
Stock Ownership of Management, Directors
and Certain Beneficial Owners
In 1993, the Committee on Directors first established targets for the minimum
amounts of the Company's common stock which Directors should own. These targets
for stock ownership consider the length of a Director's tenure on the Board. The
current target for each outside Director with at least five years of service on
the Board is the beneficial ownership of at least 6,800 shares of the Company's
common stock. All Directors with five years service on the Board have met this
target.
Executive officers of the Company are also encouraged to own shares of the
Company. The recommended stock ownership level is based on each officer's
position in the organization and is a multiple of salary. Mr. Bittner and each
Executive Vice President has a stock ownership target which is the beneficial
ownership of Company common stock equal in value to four times his respective
salary. Each other Company executive has a target of beneficial ownership of
Company common stock, varying by salary grade, equal in value to one to three
times his or her respective salary. Each corporate officer is expected to
achieve his or her target by the later of January 1, 1999 or the fifth
anniversary of his or her appointment as an executive officer.
The following table sets forth the number of shares of the Company's common
stock beneficially owned by each Director and nominee, by each of the named
executive officers, and by Directors and officers of the Company as a group as
of February 1, 1997. No Director, officer or nominee beneficially owns more than
1% of the Company's outstanding shares of common stock. The group's aggregate
holdings constitute less than 1% of the Company's issued and outstanding common
stock.
<PAGE>
<TABLE>
<CAPTION>
Management and Directors Stock Ownership Table
as of February 1, 1997
- --------------------------------------------------------------------------------
Total
Common Stock Beneficial
Name Stock(1) Options(2) Ownership
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Directors and Nominees:
Patricia C. Barron 7,175 7,399 14,574
Ronald L. Bittner(3) 153,165 346,199 499,364
Raul E. Cesan 4,211 1,333 5,544
Brenda E. Edgerton 6,365 6,449 12,814
Jairo A. Estrada 17,409 7,999 25,408
Michael E. Faherty 4,079 88,444 92,523
Daniel E. Gill 7,987 7,999 15,986
Alan C. Hasselwander(4) 35,256 5,265 40,521
Robert Holland, Jr. 4,431 1,222 5,653
Douglas H. McCorkindale 6,974 7,999 14,973
Dr. Leo J. Thomas 25,821 7,999 33,820
Richard J. Uhl 2,954 48,444 51,398
Named Executive
Officers:
Ronald L. Bittner(3) 153,165 346,199 499,364
Robert L. Barrett 52,183 66,666 118,849
Kevin J. Bennis 54,815 66,666 121,481
Jeremiah T. Carr 20,636 75,532 96,168
Dale M. Gregory(5) 36,487 80,866 117,353
Louis L. Massaro 38,468 85,865 124,333
Directors and Executive
Officers as a Group
(17 persons) 478,416 912,346 1,390,762
- --------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
(Footnotes to Management and Directors Stock
Ownership Table)
(1) Includes all shares which each Director, nominee or officer directly, or
through any contract, arrangement, understanding, relationship or otherwise, has
or shares the power to vote or to direct the voting of such shares or to dispose
or to direct the disposition of such shares. Amounts in this column include
restricted stock. However, these amounts do not include shares which each such
person has the right to acquire pursuant to options or other rights.
(2) Includes all shares which such persons have the right to acquire within the
sixty days following February 1, 1997, pursuant to options or other rights.
These amounts do not include shares which such persons have the right to acquire
more than sixty days after that date.
(3) Includes 319 shares owned by members of Mr. Bittner's family. Mr. Bittner
disclaims beneficial ownership of these shares.
(4) Includes 1,400 shares owned by Mr. Hasselwander's spouse. Mr. Hasselwander
disclaims beneficial ownership of these shares.
(5) Includes 1,295 shares held by various trusts for the benefit of Mr.
Gregory's children. Mr. Gregory's spouse is a co-trustee of each of these
trusts. Mr. Gregory disclaims beneficial ownership of these shares.
Set forth below is the name, address and stock ownership of each person or group
of persons known by the Company to own beneficially more than 5% of the
outstanding shares of common stock.
<TABLE>
<CAPTION>
Stock Ownership of Certain Beneficial Owners
as of February 1, 1997
- -------------------------------------------------------------------------------
Number of
Name and Address Shares of Percent of
of Beneficial Owner Common Stock Class
- -------------------------------------------------------------------------------
<S> <C> <C>
Delaware Management
Holdings, Inc. (1) 12,544,909 7.66%
2005 Market Street
Philadelphia, Pennsylvania 19103
Steven C. Simon (2) 5,105,244 3.1%
1300 Nicolett Mall
Minneapolis, Minnesota 55403
James J. Weinert (2) 3,384,112 2.0%
1300 Nicolett Mall
Minneapolis, Minnesota 55403
</TABLE>
- -------------------------------------------------------------------------------
(1) Delaware Management Holdings, Inc., filed with the Securities and Exchange
Commission a Schedule 13G, dated December 31, 1996, stating that it beneficially
owned in the aggregate 12,544,909 shares of the Company's common stock in its
capacity as the parent holding company of Delaware Management Company, Inc. In
its Schedule 13G filing, Delaware Management Holdings, Inc., also disclosed that
with respect to the shares it beneficially owns, it has sole voting power with
respect to 858,880 shares, shared voting power with respect to no shares, sole
dispositive power with respect to 12,106,809 shares, and shared voting and
shared dispositive power with respect to 438,100 shares.
(2) Steven C. Simon and James J. Weinert have expressly affirmed that they
together comprise a group in a Schedule 13D, dated March 17, 1995, filed with
the Securities and Exchange Commission. Each holds sole voting and investment
power with respect to his shares.
- --------------------------------------------------------------------------------
Section 16(a) Beneficial Ownership
Reporting Compliance
The Company's Directors, executive officers and shareowners holding in excess of
10% of the common stock are required to file reports with the Securities and
Exchange Commission and the New York Stock Exchange, with copies to the Company,
concerning ownership of and transactions in the Company's common stock. Based
solely on those reports furnished to the Company and related information, the
Company believes that all such filing requirements for 1996 were complied with
in a timely fashion.
- --------------------------------------------------------------------------------
Report of Committee on Directors
Frontier believes that good corporate governance supports good financial
performance and serves the best interests of the shareowners. As part of its
efforts to encourage high standards of corporate governance, Frontier formed the
Committee on Directors in 1993 to focus the Board's attention on corporate
governance issues and to serve as the nominating committee. Since its formation,
the Committee initiated several actions designed to increase the independence of
the Board and to further align the interests of Directors with the interests of
shareowners. Many of these actions were reported in the 1995 and 1996 proxy
statements. During 1996, the Committee continued its efforts to improve
Frontier's corporate governance.
The Committee reviewed the complete set of existing Governance Guidelines and
recommended certain changes. The guidelines establish the framework and
standards for Board operation. The guidelines are described generally here.
The Governance Guidelines set the size of the Board to be between 9 and 14
members who are each elected for a one-year term. Attendance is expected to be
100 percent with a minimum of 75 percent of meetings. The minimum number of
Board meetings held each year is 5 and, for each Committee, is 2.
5
<PAGE>
The Governance Guidelines require that the Board be composed of primarily
outside Directors and all Committees, except the Executive Committee, are
composed of independent outside Directors. Retirement age is 70. If a Director's
primary job changes, the Governance Guidelines require that the Director submit
a resignation to the Committee on Directors which then recommends whether or not
to accept it. Retirement is considered a job change in the context of this
provision.
The Committee monitors the stock ownership of the members of the Board and
reports that all current outside Board members have met their respective stock
ownership target. The stock ownership target is set as a multiple of four times
the average annual compensation of a Director.
The Committee reviewed Board member compensation and determined that a major
shift was desirable to more closely align the Directors' interests with those of
the shareowners. Thus, the Committee set the 1996 compensation package to
require that the full retainer for each Board member and each Chair of a
Committee be paid in the form of shares of Frontier common stock. The
shareowners approved this plan at the April 24, 1996 Annual Meeting of
shareowners. This plan remains in effect for 1997.
In 1995, the Committee utilized a formal system of evaluation of each Director
in its process of nomination of the slate of nominees submitted to shareowners
for a vote at the Annual Meeting of Shareowners. This year the Committee
introduced a full peer evaluation process which provided feedback to the
individual Directors and to the Board as a whole with respect to strengths of
the Board and areas for improvement.
Your Committee on Directors will continue to review annually the governance
standards and recommend improvements to the full Board of Directors.
Respectfully submitted,
The Committee on Directors
Patricia C. Barron (Chair)
Robert Holland, Jr.
Douglas H. McCorkindale
Dr. Leo J. Thomas
January 27, 1997
- --------------------------------------------------------------------------------
Report of Committee on Management
Compensation Philosophy and Policy
We believe that a compensation program should offer performance-based
compensation to its employees and reward employees whose results enable the
Company to achieve its vision. The executive compensation program is designed to
measure and enhance executive performance.
The Company's executive compensation program has three components:
. Base Salary
. Annual Incentive Plan (Bonus)
. Stock Incentive Plan
These components are designed to provide incentives and motivate key executives
whose efforts and job performance will enhance the strategic well-being of the
Company and maximize value to its shareowners. The program is also structured to
attract and retain the highest caliber executives.
The executive compensation program compensates the individual executive
officers based on the Company's consolidated performance and the individual's
contribution. The program is designed to be competitive with compensation
programs offered by comparable employers.
The Company retains William M. Mercer, Inc. to review its executive
compensation program on an annual basis. Information from this consulting firm,
as well as public information concerning salaries paid by companies in the
telecommunications and related industries, is used to determine what a
comparable firm would consider an appropriate performance-based compensation
package for its executives.
The analysis includes information from a self-constructed peer group of thirty
publicly-traded companies in the telephone, long distance, cable television, and
cellular and information technology industries. This group includes most of the
companies reported in the Standard and Poor's Telephone Index and all of the
companies reported in the Standard and Poor's Long Distance Index, together with
additional companies. The Company's policy is to benchmark senior executive
compensation levels within the third quartile of the comparative companies and
to reward results based on performance. On a comparative basis, the base salary
of the Company's CEO and its other executives, on average, would be considered
within the third quartile of this group of peer companies.
6
<PAGE>
Base Salary
The salaries of the executive officers, including Mr. Bittner, were determined
based on the executive's performance and an analysis of base salaries paid
executive officers having similar responsibilities in other companies. This
analysis included the companies in the self-constructed peer group of thirty
publicly-traded companies, together with additional companies from other
industries with similar revenues and/or asset values. The base salaries of the
executive officer positions, including that of the Chief Executive Officer, were
set in 1995 and are commensurate with the positions' responsibilities. The
salaries of persons who became executive officers subsequent to 1995 generally
reflect this salary structure as well. This Committee continues to review
executive salary levels in order to ensure they remain competitive.
In addition to benchmarking comparative companies' salaries, Mr. Bittner's
salary level was based upon a subjective assessment of his individual
performance and responsibilities as well as overall corporate performance
as measured by actual earnings per share and cash flow versus pre-established
targets, strategic goals, and growth of the business. The other executive
officers have similar measurements, but specific factors are more closely linked
to individual responsibilities. No relative weights are attributed to any
specific measurement factors.
Annual Incentive Plan (Bonus)
The Company's annual incentive plan is a bonus plan designed to provide
performance-based compensation awards to executives for achievement during the
past year. For executive officers, annual incentive awards are a function of
individual performance and consolidated corporate results. Business unit
performance is also a component of the annual incentive plan for those involved
in line operations below the executive officer level. All participants are
subject to a discretionary adjustment, either positive or negative, based on
individual performance. The specified qualitative and quantitative criteria
employed by the Committee in determining annual incentive awards vary
individually and from year to year. These criteria, or targets, are established
as a means of measuring executive performance. The corporate target for 1996 was
an equally weighted earnings per share and cash flow target established by this
Committee of the Board of Directors as an incentive to improve the financial
performance of the firm and thus improve long-term stock performance.
Performance objectives and associated payouts were established at the beginning
of the year. The objectives are identified as threshold, standard and premier
targets with standard performance yielding payouts at the median level
competitively. Actual 1996 corporate performance was below the threshold level
and, accordingly, there was no bonus payout, either for Mr. Bittner or for the
other executives.
Stock Incentive Plan
This Committee believes that stock-based plans are an important component of
executive compensation programs because they tie long-term compensation directly
to the interests of shareowners. The Company's Management Stock Incentive Plan
is designed to align executive compensation with the long-term performance of
the Company's stock. Stock options issued in 1996 do not expire until 2006, and
the exercise price is the closing price of the stock on the day the option was
granted. This Committee makes a subjective determination of the specific stock
option grant to be awarded to each executive officer. The factors considered by
the Committee in making this determination are:
(a) the executive officer's past performance on previously set objectives;
(b) his or her expected future contribution to the long-term strategic goals and
objectives of the Company; and
(c) industry practices.
No relative weights are attributed to any of these factors. All executive
officers of the Company received options in 1996 based on their position in the
Company, their contribution to the achievement of the Company's long-term
objectives as assessed by Committee members based on their experience with the
executive officers, and upon the recommendation of the chief executive officer.
Upon this Committee's recommendation, the full Board awarded Mr. Bittner options
based upon these factors.
Two Executive Vice Presidents joined Frontier in March 1996 and received stock
option grants and restricted stock awards at that time based upon their expected
future contributions to the long-term strategic goals and objectives of the
Company as recommended by the chief executive officer and as assessed by
Committee members. Restricted stock awards issued to them in 1996 expire on
December 31, 1999, and require that both passage of time and performance
criteria be satisfied for vesting of shares to occur. Each executive must
continue to be employed by the Company and specified stock price levels must
also be achieved by certain dates for vesting to occur. No greater than one-
third of an executive's award can be paid in either 1997 or 1998. On the grant
date the Company's stock price was $30.8750 per share. The stock price
performance vesting criteria for the first one-third of the grant is the
achievement of at least a $36.00 stock price for twenty business days in a
thirty business day period. Subsequent thirds will vest upon the achievement,
for the same minimum duration, of stock prices of $41.00 and $46.00 and the
passage of time.
7
<PAGE>
Other Actions
The Committee believes that stock-based programs provide the best long-term
incentives, are excellent motivators and better align the efforts of employees
with the objectives of the shareowners. The Committee had previously established
stock ownership guidelines for the Company's executives. These guidelines are
described elsewhere in the Company's Proxy Statement.
Section 162(m) of the Internal Revenue Code limits the tax deduction to $1
million for compensation paid to the five highest paid executive officers unless
certain requirements are met. The Management Stock Incentive Plan, specifically
as it relates to performance-based restricted stock, is designed to comply with
Section 162(m) requirements. The Committee favors a pay-for-performance
compensation program and intends to continue to review executive compensation
plans in consideration of the regulation.
No member of this Committee is a former or current officer or employee of the
Company or any of its subsidiaries.
Respectfully submitted,
The Committee on Management
Daniel E. Gill (Chair)
Michael E. Faherty
Dr. Leo J. Thomas
January 27, 1997
- --------------------------------------------------------------------------------
Performance Graph
The following graph charts the Company's cumulative total shareowner return
performance against the Standard and Poor's Telephone Index, the Standard and
Poor's Long Distance Index and the Standard and Poor's 500 Index. A variety of
factors may be used in order to assess a corporation's performance. This
Performance Graph, which reflects the Company's total return against the
selected peer group, reflects one such method. The performance of the Standard
and Poor's Telephone Index and the Standard and Poor's Long Distance Index are
weighted by the stock market capitalization of the companies within each of
these peer groups.
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
0 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Frontier Corporation $100 $117 $151 $150 $211 $167
S&P Telephone Index $100 $104 $114 $105 $158 $159
S&P 500 Index $100 $108 $119 $121 $166 $202
S&P Long Distance Index $100 $128 $143 $127 $172 $172
</TABLE>
8
<PAGE>
Compensation of Company Management
We have included the following tables and other information to help you
understand the compensation of the Company's executives. These tables reflect
the components of compensation paid the executive officers of Frontier
Corporation. Specifically, these include salary, bonus, stock options and a
long-term incentive plan. The Company does not provide its executives with stock
appreciation rights.
The Report of the Committee on Management of the Board of Directors appears on
pages 6 through 8 of this Proxy Statement. This Report discusses the factors
taken into consideration in setting Mr. Bittner's compensation and the
compensation of the other executive officers. A Performance Graph showing the
performance of the Company's stock as compared to the Standard and Poor's 500
Index, the Standard and Poor's Telephone Index, and the Standard and Poor's Long
Distance Index appears on page 8 of this Proxy Statement.
Summary Compensation Table
The following table provides a summary of compensation paid to the CEO and the
other five most highly compensated executive officers of the Company for
services rendered to the Company and its subsidiaries over the past three fiscal
years. The indicated titles are those currently held by each named executive
officer.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Long Term
Compensation
- -----------------------------------------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
- -----------------------------------------------------------------------------------------------------
Other Securities
Annual Underlying All Other
Name Compen- Options/ LTIP Compen-
and Principal Salary Bonus sation SARs Payouts sation
Position Year ($) ($) ($)/(2)/ (#) ($)/(3)/ ($)/(4)/
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
R. L. Bittner 1996 $700,000 $0 $0 175,000 N/A $11,276
Chairman and CEO 1995 $575,000 $660,000 $0 502,000 $222,850 $42,703
Frontier Corporation 1994 $408,333 $349,471 $0 88,800 $204,164 $41,369
R. L. Barrett /(1)/ 1996 $231,250 $0 $84,670 200,000 N/A $246,528
Executive Vice President 1995 N/A N/A N/A N/A N/A N/A
Frontier Corporation and 1994 N/A N/A N/A N/A N/A N/A
President--Network
Systems and Services
K. J. Bennis (1) 1996 $250,520 $0 $30,737 200,000 N/A $ 4,948
Executive Vice President 1995 N/A N/A N/A N/A N/A N/A
Frontier Corporation and 1994 N/A N/A N/A N/A N/A N/A
President--Frontier
Communications
J. T. Carr 1996 $270,000 $0 $0 100,000 N/A $ 5,226
Executive Vice President 1995 $258,033 $208,466 $0 86,400 $ 67,182 $ 8,152
Frontier Corporation and 1994 $200,275 $132,500 $ 8,330 22,000 $ 67,856 $ 10,508
Chairman Rochester
Telephone Corp.
D. M. Gregory 1996 $283,000 $0 $0 100,000 N/A $ 6,858
Senior Vice President 1995 $274,467 $193,315 $ 4,541 86,400 $ 71,545 $ 19,749
Frontier Corporation and 1994 $219,542 $131,600 $ 3,799 26,400 $ 65,556 $ 17,306
Vice President--
Business Development
L. L. Massaro 1996 $285,000 $0 $0 100,000 N/A $ 6,997
Executive Vice President 1995 $241,375 $219,199 $0 126,400 $ 68,127 $ 17,234
and Chief Financial and 1994 $189,442 $111,700 $0 22,000 $ 70,385 $ 16,600
Administrative Officer
Frontier Corporation
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
(Footnotes to Summary Compensation Table)
(1) Mr. Barrett and Mr. Bennis were each named an Executive Vice President
effective March 26, 1996. Prior to that date, neither had received any
remuneration for services to Frontier Corporation or any of its subsidiaries.
See also Long-Term Incentive Plans - Awards in Last Fiscal Year Table at page
11.
(2) The amounts reported in this column for 1996 include $84,670 paid to Mr.
Barrett to offset income tax liabilities incurred by him and $15,886 of personal
travel services paid on behalf of Mr. Bennis pursuant to his employment
agreement with the Company.
(3) The Performance Unit Plan was discontinued in 1994. The 1995 Performance
Unit Plan awards were the final payouts under that plan. In 1995, certain of the
named executives received awards of restricted stock for which vesting is
subject to performance criteria as well as the passage of time and continued
employment. Specifically, Mr. Bittner was awarded 100,000 restricted shares, Mr.
Massaro was awarded 20,000 restricted shares, and Messrs. Carr and Gregory were
each awarded 10,000 restricted shares. None of these restricted shares have yet
vested. In 1996, Mr. Barrett and Mr. Bennis also were each awarded 50,000
restricted shares under this plan. None of these restricted shares have yet
vested.
(4) "All Other Compensation" includes imputed income from term life insurance
coverage and the Company's contributions to both the tax-qualified 401(k) and
nonqualified defined contribution plans. For 1996, the dollar value of term life
insurance coverage premiums paid by the Company for the benefit of the named
executive officers was $1,476 for Mr. Bittner, $1,107 for Mr. Barrett, $729 for
Mr. Bennis, $1,476 for Mr. Carr, $1,476 for Mr. Gregory and $1,476 for Mr.
Massaro. The Company's 1996 contributions on behalf of the named executive
officers to the tax-qualified 401(k) and nonqualified defined contribution
plans, respectively, were as follows: $3,750 and $6,050 for Mr. Bittner; $3,750
and $375 for Mr. Barrett; $3,750 and $469 for Mr. Bennis; $3,750 and $0 for Mr.
Carr; $3,750 and $1,632 for Mr. Gregory and $3,750 and $1,771 for Mr. Massaro.
For Mr. Barrett, "All Other Compensation" also includes a special signing bonus
of $80,000 and the reimbursement of relocation expenses in the amount of
$161,296.
The following companion tables to the Summary Compensation Table list the stock
options granted during the 1996 fiscal year to the named executive officers,
their stock option exercises in 1996 and the aggregate options they held at the
end of 1996, long-term incentive plan restricted stock awards granted during
1996, and the estimated retirement benefits which would be paid to them at age
65.
Option/SAR Grants in Last Fiscal Year
The following table of Individual Grants includes two columns designated as
"Potential Realized Value." The calculations in those columns are based on
hypothetical growth assumptions, proposed by the Securities and Exchange
Commission, of 5% and 10% for stock price appreciation for the option term.
There is no way to anticipate what the actual growth rate of the Company's stock
price will be.
Individual Grants in 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Potential Realized Value
Securities % of Total at Assumed Annual Rates
Underlying Options/SARs of Stock Price Appreciation
Options/SARs Granted to Exercise or for Option Term
Granted Employees in Base Price Expiration -----------------------------
Name (#)/(1)/ Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
R. L. Bittner 175,000 5.83% $31.625 5/01/06 $3,480,539 $8,820,368
R. L. Barrett 200,000 6.66% $30.875 3/26/06 $3,883,424 $9,841,360
K. J. Bennis 200,000 6.66% $30.875 3/26/06 $3,883,424 $9,841,360
J. T. Carr 100,000 3.33% $31.625 5/01/06 $1,988,879 $5,040,211
D. M. Gregory 100,000 3.33% $31.625 5/01/06 $1,988,879 $5,040,211
L. L. Massaro 100,000 3.33% $31.625 5/01/06 $1,988,879 $5,040,211
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The option grants have the following material terms: exercise price is the
market price (based on the closing price of the Company's common stock on the
New York Stock Exchange) on the date of the option grant; 1/3 of the options
granted may be exercised commencing one year following the grant date, a second
1/3 may be exercised commencing two years following the grant date, and the
remaining 1/3 may be exercised commencing three years following the grant date.
The option grant date for Messrs. Barrett and Bennis was March 26, 1996, and the
option grant date for Messrs. Bittner, Carr, Gregory and Massaro was May 1,
1996. Options may not be transferred other than by will or the laws of descent
and distribution. An option may be exercised upon written notice to the Company
accompanied by payment in full for the shares being acquired. In the event of a
"change in control" as defined by the Management Stock Incentive Plan, all
options become immediately vested and exercisable.
10
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
<TABLE>
<CAPTION>
- ----------------------------- ------------ ----------------------------- -----------------------------
Number of Securities Value of Unexercised In-
Underlying Unexercised the-Money Options/SARs
Shares Options/SARs at FY End at FY End/(2)/
Acquired Value --------------------------- ----------- ----------------
On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------- ------------ -------------- -------------- ------------- ----------------
Name (#) ($)/(1)/ (#) (#) ($) ($)
- ----------------------------- ------------ -------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
R. L. Bittner 0 N/A 288,531 539,269 $368,415 $85,023
R. L. Barrett 0 N/A 0 200,000 $0 $0
K. J. Bennis 0 N/A 0 200,000 $0 $0
J. T. Carr 0 N/A 60,864 164,936 $103,340 $21,635
D. M. Gregory 0 N/A 64,998 166,402 $111,065 $23,360
L. L. Massaro 0 N/A 71,197 191,603 $ 92,652 $21,635
- ----------------------------- ------------ -------------- -------------- ------------- ----------------
</TABLE>
(1) Aggregate market value of the shares acquired or covered by the option less
the aggregate exercise price.
(2) Options are valued at the market value of Frontier Corporation common stock
at December 31, 1996, (closing price of $22.625) less the per share option
exercise price, multiplied by the number of exercisable/unexercisable options.
Long-Term Incentive Plans - Awards in Last Fiscal Year
<TABLE>
<CAPTION>
------------------------------- --------------------
Number of Performances or
Shares, Units Other Period Until
or Other Maturation or
Name Rights (#) Payout
------------------------------- --------------------
<S> <C> <C>
R. L. Bittner 0
R. L. Barrett 50,000 (1)
K. J. Bennis 50,000 (1)
J. T. Carr 0
D. M. Gregory 0
L. L. Massaro 0
------------------------------- --------------------
</TABLE>
(1) Messrs. Barrett and Bennis each were awarded shares of restricted stock on
March 26, 1996, under the Management Stock Incentive Plan which is a long-term
incentive plan. Vesting is subject to performance criteria as well as the
passage of time and continued employment. No greater than one-third of the award
can be paid in either 1997 or 1998. The first third will vest upon achievement
of at least a $36.00 stock price for twenty business days in a thirty business
day period. The remaining two-thirds will vest upon the achievement of stock
prices of $41.00 and $46.00 for twenty business days in a thirty business day
period. Unvested restricted share awards expire on December 31, 1999. Recipients
of restricted shares have full voting rights on the shares and are entitled to
receive accumulated dividends when the shares vest. In the event of a "change in
control" as defined by the Management Stock Incentive Plan, all restricted
shares become immediately vested.
Pension Plans
The following table shows the estimated annual benefits payable upon retirement
at age 65 to individuals in specified remuneration and years of service
classifications. Furthermore, the amounts set forth are neither subject to any
deduction for Social Security benefits or any other offsets nor adjusted to
reflect maximum allowable benefits under the Internal Revenue Code.
Certain of the Company's officers are participants in the Company's Management
Pension Plan as supplemented by a Supplemental Management Pension Plan ("SMPP").
Of those listed in the Summary Compensation Table, Messrs. Bittner, Carr,
Gregory and Massaro participate in these Plans. The annual aggregate pension
benefit for an officer under these Plans is based upon several factors and is
largely determined by the number of years of employment multiplied by a
percentage of the officer's three consecutive years of highest average annual
compensation preceding retirement.
Both the Company's Management Pension Plan and the SMPP have been amended and
were frozen effective December 31, 1996. Benefit calculations under both pension
plans were increased by 20% for all plan participants who had five or more years
of service under the Plans by December 31, 1996. Additionally, early retirement
requirements were reduced by three years of service and three years of age as
final enhancements to both plans.
11
<PAGE>
Pension Plan Table
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Years of Service/
Remuneration (15) (20) (25) (30) (35)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$250,000 67,648 90,197 112,746 135,295 157,844
300,000 81,508 108,677 135,846 163,015 190,184
350,000 95,368 127,157 158,946 190,735 222,524
400,000 109,228 145,637 182,046 218,455 254,864
450,000 123,088 164,117 205,146 246,175 287,204
500,000 136,948 182,597 228,246 273,895 319,544
550,000 150,808 201,077 251,346 301,615 351,884
600,000 164,668 219,557 274,446 329,335 384,224
650,000 178,528 238,037 297,546 357,055 416,564
700,000 192,388 256,517 320,646 384,775 448,904
750,000 206,248 274,997 343,746 412,495 481,244
800,000 220,108 293,477 366,846 440,215 513,584
850,000 233,968 311,957 389,946 467,935 545,924
900,000 247,828 330,437 413,046 495,655 578,264
950,000 261,688 348,917 436,146 523,375 610,604
1,000,000 275,548 367,397 459,246 551,095 642,944
1,050,000 289,408 385,877 482,346 578,815 675,284
1,100,000 303,268 404,357 505,446 606,535 707,624
- ------------------------------------------------------------------------------------------------
</TABLE>
Messrs. Bittner, Barrett, Bennis, Carr, Gregory and Massaro each have
executive contracts which may pay a benefit in the event of a "Change in
Control" of the Company. These contracts are explained in detail on page 13 of
this Proxy Statement. With the exception of Messrs. Barrett and Bennis, each of
them also participates in the Company's Pension Plan. Under SMPP, the service
factor would include, subject to certain limitations, the amount of service for
which payment is made to each of them under their respective executive contract.
The SMPP also provides that in the event of a Change in Control of the
Company, the Board may not terminate a participant's benefit and the Employees'
Benefit Committee may not change prior decisions regarding a participant's
service factor.
Effective January 1, 1994, the Company established a Supplemental Executive
Retirement Plan ("SERP") which covers Messrs. Bittner, Carr, Gregory and Massaro
plus four other current executives. The Plan has an accrual and vesting schedule
based on years of service and age. A maximum benefit of 60% of final
compensation will be paid to an executive retiring at age 50 or older with 30 or
more years of service. Payments made under the Company's Management Pension Plan
and the Supplemental Management Pension Plan are included in determining the
ultimate benefit payable under the SERP. However, in order to qualify for the
SERP benefit, a covered executive must be at least 50 years of age. Executive
officers who are not at least 50 years old when they retire would only receive
the retirement benefits set forth in the above Pension Plan Table and would
receive no SERP benefit. Effective December 31, 1999, the SERP will be frozen
with no enhancements.
For the purpose of the Management Pension Plan, annual compensation includes
all taxable W-2 compensation plus deferred compensation. For the purpose of SMPP
and the SERP, annual compensation is the same as that given in the Salary and
Bonus columns of the Summary Compensation Table for the named executive
officers. The number of years of employment of such individuals for the purposes
of these Plans currently are as follows: Mr. Bittner-34; Mr. Carr-27; Mr.
Gregory-24; and Mr. Massaro-28. Messrs. Barrett and Bennis are not covered by
these Plans, have no years of employment for purposes of these Plans, and will
receive no benefits under these Plans.
Mr. Gregory has not yet reached the age of 50 years. Assuming he retired as of
the current date, Mr. Gregory would receive a deferred pension based upon the
amount reflected in the Pension Plan Table, and would receive no additional
benefit under the SERP. Since Messrs. Bittner,
12
<PAGE>
Carr and Massaro have each attained the age of 50 years and have respectively
34, 27 and 28 years of service credit, each is entitled to a full pension based
on the amount reflected in the Pension Plan Table. If Mr. Bittner retired as of
the current date, he would receive no SERP benefit because the amount he would
receive under the current formula would exceed any SERP benefit. Assuming
compensation at their respective January 31, 1997 level, if Mr. Carr were to
retire, he would additionally receive an annual SERP benefit of $24,180; and if
Mr. Massaro were to retire, he would receive an annual SERP benefit of $23,724.
Employment Contracts
Effective August 16, 1995, the Company entered into three year employment
agreements, with provisions for annual renewals, with Messrs. Bittner, Carr,
Gregory, and Massaro. Effective March 26, 1996, the Company also entered into
three year employment agreements, with provisions for annual renewals, with
Messrs. Barrett and Bennis. Each of these agreements provides for specific
compensation, duties and terms and conditions of employment. Each agreement also
provides that, in the event of a change in control (as defined in the agreement)
which is followed within three (3) years by termination of employment under
certain circumstances, the employee will be entitled to all accrued
compensation, a pro rata bonus, a cash severance payment (as determined under
the agreement), the cash value of certain retirement amounts (if applicable and
as determined under the agreement) and continuation for three years of certain
health and life insurance benefits. Additionally, in the event any of these
amounts are determined to trigger an Excise Tax (as defined in the agreement),
the employee may also be entitled to a Gross-Up Payment (also as defined in the
agreement).
Robert Barrett and Kevin Bennis each became an employee of Frontier
Corporation effective March 26, 1996, and received normal and customary
inducements to enter into an employment arrangement with the Company. These
included temporary housing, relocation support, stock option grants and
restricted stock awards. Frequently, such inducements may also include special
signing bonuses or forgivable loans. Mr. Barrett received a one-time signing
bonus in the amount of $80,000. Effective April 1, 1996, Frontier Corporation
loaned Mr. Bennis the sum of $250,000 for a term of three years, with interest
at the applicable federal rate in effect for the month of April 1996. One-third
of the principal and all of the accrued interest is to be forgiven on each of
the first three anniversaries of the loan. Forgiveness is conditioned upon Mr.
Bennis' continued employment with the Company. Should Mr. Bennis leave Frontier
Corporation for any reason before the end of the three year period, the balance
remaining and interest thereon at the prime rate plus 1% will become immediately
due and payable. In March 1997, the Company made a personal loan to Mr. Bittner
in the sum of $300,000 for a term of five years, with interest at the applicable
federal rate. Mr. Bittner is obligated to repay one-fifth of the principal and
all of the accrued interest annually on the anniversary of the loan.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The members of the Committee on Management at the end of the last completed
fiscal year were Mr. Faherty, Mr. Gill (Chair) and Dr. Thomas. None of these
persons were, during 1996 or previously, an officer or employee of the Company
or any of its subsidiaries.
The full Board of Directors accepted the recommendation of the Committee on
Management concerning Mr. Bittner's compensation. Mr. Hasselwander is a former
officer of the Company and, during 1996, he participated in those deliberations
of the Company's Board of Directors in which the Board accepted the Committee on
Management's recommendations concerning executive officer compensation. Mr.
Hasselwander is not a member of the Committee on Management. No executive
officer of the Company has, during 1996 or previously, served as a director or
member of the compensation committee of any other entity that has an executive
officer who serves or has served either as a member of the Committee on
Management or as a member of the Board of Directors of Frontier Corporation.
Indemnification of Certain Persons
As authorized by New York State Law, the Company and its subsidiaries have
purchased insurance from the Chubb Group, Gulf Insurance Company, and Reliance
National, insuring the Company and its subsidiaries against amounts they may pay
as a result of indemnifying their officers and Directors for certain liabilities
such officers and Directors might incur. These insurance policies also insure
all officers and Directors of the Company and its affiliates for additional
liabilities against which such officers and Directors may not be indemnified by
the Company and its affiliates. The insurance was renewed on May 21, 1996 for a
period of one year. During 1996, the Company paid $510,407 for this insurance.
13
<PAGE>
Proposal 2-Election of Public Accountants
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
The Company's public accountants are Price Waterhouse LLP. At the Annual
Meeting, the shareowners will consider and vote upon a proposal to elect public
accountants for the Company's fiscal year ending December 31, 1997. The Audit
Committee of the Board of Directors has recommended that Price Waterhouse LLP be
re-elected as public accountants for that year. No member of the Audit Committee
is an officer or employee of the Company. The Board of Directors unanimously
recommends that you vote FOR this proposal. Proxies solicited by the Board of
Directors will be voted FOR the foregoing proposal unless otherwise indicated.
Approval of this proposal will require the affirmative vote of a majority of the
votes cast at the Annual Meeting by the holders of the common stock outstanding.
Representatives of Price Waterhouse LLP will be present at the Annual Meeting
to make a statement, if they wish, and to respond to appropriate questions from
shareowners.
Proposal 3-Shareowner Proposal Regarding Executive Change in Control
Arrangements
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" THIS PROPOSAL.
Proxies solicited by the Board of Directors will be voted AGAINST the following
proposal unless otherwise indicated. Approval of this proposal will require the
affirmative vote of a majority of the votes cast at the Annual Meeting by the
holders of the common stock outstanding.
Local 1170, Communications Workers of America, 1451 Lake Avenue, Rochester, New
York 14615, advises that it holds 9,299 shares of the Company's common stock,
and that it intends to present the following proposal for consideration and
action at the Annual Meeting. Local 1170 primarily represents certain network
installation and repair employees of one of the Company's subsidiaries.
Resolution Proposed by Shareowner
RESOLVED, that Frontier Corporation Board of Directors should adopt a policy
against making any future compensation awards to the officers and directors of
this Corporation, which are contingent on a change of control of the
corporation, unless such compensation awards are submitted to a vote of the
shareholders and approved by a majority of the votes cast.
Statement of Support by Proponent Local 1170, Communications Workers of America
Golden Parachutes are lucrative compensation awards, which are provided to
senior executives. They are made contingent on a change of control, usually
through a merger or acquisition of the corporation, and are often awarded
without the approval of shareholders.
In our view, a conflict of interest is created when executives are awarded
special compensation that is to be paid only in the event of a future merger or
acquisition. Such awards provide management with a personal financial incentive
to perform their duties in a way that might be detrimental to shareholder
interests.
Management's first priority should be to maximize shareholder value. However,
actions that might temporarily diminish or restrain the growth of shareholder
value may make the company look more attractive as the potential target of a
merger or acquisition. In the alternative, management may be tempted to support
a merger or acquisition proposal without seeking a better deal for shareholders.
Under these circumstances, it does not seem prudent to give senior managers
lucrative compensation awards, but only in the event that their jobs are
terminated as a result of a merger or acquisition. A shareholder vote would
allow the owners of the Frontier Corporation to decide for themselves whether
golden parachutes are in their best interests.
Statement in Opposition by Board of Directors
Your Board of Directors believes that aligning the executive team's interests
with your interests is one of the most effective ways to enhance shareowner
value. The Company's benefit plans and shareownership targets, described
elsewhere in this Proxy Statement, promote this unity of interest by encouraging
members of your Board and the senior management to own Company common stock and
by incenting management to perform in the shareowners' interest.
We believe that change in control arrangements do not create a conflict of
interest as suggested by the Proponent. Rather, change in control arrangements
encourage management to assess takeover bids or tender offers objectively and
with less concern with how they may be personally affected. Often, senior
management lose their positions following a change in control. The real
possibility of losing one's regular source of income may conflict with an
executive's objective evaluation of potential business combinations and
arrangements which could result in a change in control. Your Board believes
change in control arrangements are in your best interest because they encourage
both continuity and cooperation of management during a period of uncertainty and
provide management a minimal level of financial security in the event of a
potential job loss, thereby eliminating a potential conflict of interest and
allowing them to focus solely on the best interests of shareowners.
14
<PAGE>
Only one Director is an employee of the Company, and only non-employee
Directors may approve change in control executive contracts. We believe that the
normal scope of our responsibilities includes approving executive compensation
arrangements and obtaining and retaining effective management. Additionally, we
firmly believe that requiring shareowner approval of these arrangements is not
in your best interests. The requirement suggested by the Proponent disadvantages
you because it would result in substantial delays in adopting new arrangements
and would severely limit your Board's flexibility. In fulfilling our
responsibility to you, we believe your interests are best served if your Board
has the power to react quickly to changing economic and business conditions.
Other Matters
As of the date of this Proxy Statement, the Board of Directors does not intend
to present any matter for action at the Annual Meeting other than those set
forth in the Notice of Annual Meeting. If any other matters properly come before
the meeting, the holders of the proxies will act in accordance with their best
judgment. In the event a nominee is unable to serve, the proxies will vote upon
a substituted nominee.
An admission ticket will be required to enter the Annual Meeting. Please use
the form attached to your proxy card to request your ticket. Ticket requests
after April 18, 1997 should be made by calling the Shareowner Line, 1-800-836-
0342. If you hold your shares through your broker or otherwise are not a record
holder, you may be asked to show evidence of your share position in order to
enter the Annual Meeting.
Future Proposals of Shareowners
In order to be eligible for inclusion in the proxy materials for the Company's
1998 Annual Meeting of Shareowners, any shareowner proposal to take action at
such meeting must be received at the Company's principal executive offices by
November 24, 1997. Any such proposal should be addressed to 180 South Clinton
Avenue, Rochester, New York 14646, Attention: Josephine S. Trubek, Corporate
Secretary.
In addition, the Company's By-Laws establish an advance notice procedure with
regard to certain matters, including shareowner proposals not included in the
Company's proxy statement, to be brought before an annual meeting of
shareowners. In general, in order to bring a matter before the meeting, notice
must be received by the Corporate Secretary of the Company not less than 60 days
nor more than 90 days prior to the anniversary of the immediately preceding
annual meeting and must contain specified information concerning the matters to
be brought before such meeting and concerning the shareowner proposing such
matters. If the date of the annual meeting is more than 30 days earlier or more
than 60 days later than the anniversary date, notice must be received not
earlier than the 90th day prior to such annual meeting and not later than the
close of business on the later of the 60th day prior to such annual meeting or
the 10th day following the day on which the public announcement of the date of
such meeting is first made. However, if a shareowner complies with the
requirements to have a proposal included in the proxy materials, he or she is
deemed to have complied with this advance notice procedure. If a shareowner who
has notified the Company of his or her intention to present a proposal at an
annual meeting does not appear or send a qualified representative to present
that proposal at the meeting, the Company need not present the proposal for a
vote at the meeting. In order to provide an admission card, we do ask that if a
proposal is to be presented by a qualified representative, the shareowner advise
us of the identity of the person who will be presenting the proposal.
March 24, 1997
15
<PAGE>
[LOGO OF FRONTIER CORPORATION APPEARS HERE]
Frontier Corporation
Frontier Center
180 South Clinton Avenue
Rochester, New York 14646-0700
[MAP OF DOWNTOWN DENVER, COLORADO APPEARS HERE]
[MAP OF THE WESTIN HOTEL APPEARS HERE]
The Westin Hotel*
1672 Lawrence Street
303-572-9100
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS. THE SHARES REPRESENTED BY THIS PROXY WILL BE
VOTED AS DIRECTED. IF NO DIRECTION TO THE CONTRARY IS
INDICATED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF
ALL NOMINEES AND PUBLIC ACCOUNTANTS AND AGAINST THE
SHAREOWNER PROPOSAL, NUMBER 3.
[_] Yes, I plan to attend the 1997 Annual Meeting.
Dated_______________, 1997
(Please sign exactly as name appears below)
_______________________________________
(Cut along dotted line)
- ---------------------------------------------------------------
Ticket Request
Use this Form to request your admission ticket if you plan to attend the
Annual Meeting of Shareowners at 10:30 a.m., local time, on Friday, May 2,
1997, at the Westin Hotel, Tabor Center in Denver, Colorado. Complete the form
by typing or printing your name and address. If your request is received by
April 18, 1997, an admission ticket will be mailed to you. All other admission
tickets will be provided beginning at 9:30 a.m. at the registration desk for the
meeting. (Doors to the meeting will not open before 9:30 a.m.) The envelope
provided for the return of your proxy card should also be used to return this
form. Alternatively, tickets may be requested by calling the Shareowner Line,
1-800-836-0342. If you hold your shares through your broker or otherwise are
not a record holder, we may require you to show evidence of your share position
before you will be allowed into the Annual Meeting.
NOTE: If your shares are not registered in your own name, please advise the
shareowner of record (i.e., your bank, broker, trustee, etc.) that you wish to
attend the meeting. The registered owner must provide you with evidence of your
stock ownership so that you may gain admittance to the meeting.
I plan to attend the meeting.
(Please print or type)
Name______________________________________________________________
Street____________________________________________________________
City______________________________________________________________
State_____________________________Zip Code________________________
<PAGE>
Frontier (LOGO) Proxy For Common Shares
CORPORATION
I authorize each of Ronald L. Bittner and/or Josephine S. Trubek, or
substitutes selected by them, to vote all shares of Frontier Corporation
which I am entitled to vote at the Annual Meeting of Shareowners on May 2,
1997, or at any adjournment thereof, as specified below:
The Board of Directors recommends a vote FOR Proposals 1 and 2 and
AGAINST Proposal 3:
1. NOMINEES FOR DIRECTORS: Patricia C. Barron, Ronald L. Bittner,
Raul E. Cesan, Brenda E. Edgerton, Jairo A. Estrada, Michael E.
Faherty, Daniel E. Gill, Alan C. Hasselwander, Robert Holland, Jr.,
Douglas H. McCorkindale, Dr. Leo J. Thomas, and Richard J. Uhl
[_] VOTE FOR all nominees listed above, except for the following (if
any):
________________________________________________________________________
[_] VOTE WITHHELD from ALL nominees
FOR AGAINST ABSTAIN
2. Election of Price Waterhouse LLP as [_] [_] [_]
Public Accountants
FOR AGAINST ABSTAIN
3. Approval of the Shareowner Proposal [_] [_] [_]
Regarding Executive Change in Control
Arrangements
4. To vote in favor of any substituted director if a nominee is unable to serve
and to act in their discretion upon such other matters which may properly
come before the meeting, or which are incident to the conduct of the meeting,
or which the Board of Directors does not know, at the time of this
solicitation, will be presented at the meeting.
CONTINUED, and to be signed and dated, on REVERSE SIDE
