<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
From the transition period from to
Commission file number 1-4166
FRONTIER CORPORATION
(Exact name of registrant as specified in its charter)
New York 16-0613330
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
180 South Clinton Avenue, Rochester, NY 14646-0700
(Address of principal executive offices) (Zip Code)
(716) 777-1000
(Registrant's telephone number, including area code)
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 for 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 the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest
practicable date.
$1.00 Par Value Common Stock 164,141,176 shares as of July 31, 1997
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FRONTIER CORPORATION
Form 10-Q
Index
Page Number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Business Segment Information for the
three months ended and for the six
months ended June 30, 1997 and
June 30, 1996 3
Consolidated Statements of Income
for the three months ended and for the
six months ended June 30, 1997 and
June 30, 1996 4
Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 5
Consolidated Statements of Cash Flows
for the six months ended June 30, 1997
and June 30, 1996 6
Notes to Consolidated Financial
Statements 7-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11-25
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 25-27
Item 4. Submission of Matters to a
Vote of Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 29
Signature 30
Index to Exhibits 31
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<TABLE>
FRONTIER CORPORATION
Business Segment Information
(Unaudited)
3 Months Ended June 30, 6 Months Ended June 30,
In thousands of dollars 1997 1996 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long Distance Communications
Services
Revenues $ 406,846 $ 497,756 $ 807,981 $ 983,858
Costs and Expenses 387,904 424,885 776,569 847,732
- ----------------------------------------------------------------------------------
Operating Income (Loss):
Operating Income Before Other
Charge $ 18,942 $ 72,871 $ 31,412 $ 136,126
Other Charge - - (96,600) -
- ----------------------------------------------------------------------------------
Total Operating Income (Loss) $ 18,942 $ 72,871 $ (65,188)$ 136,126
Depreciation and Amortization $ 21,676 $ 20,495 $ 44,044 $ 40,013
Capital Expenditures $ 35,956 $ 24,755 $ 91,886 $ 61,985
Identifiable Assets $ 1,163,612 $1,005,311 $1,163,612 $ 1,005,311
==================================================================================
Local Communications Services
Revenues $ 166,987 $ 161,383 $ 330,317 $ 319,825
Costs and Expenses 107,036 108,193 210,652 215,784
- ----------------------------------------------------------------------------------
Operating Income $ 59,951 $ 53,190 $ 119,665 $ 104,041
Depreciation and Amortization $ 27,375 $ 25,463 $ 54,660 $ 50,612
Capital Expenditures $ 28,208 $ 21,654 $ 43,564 $ 41,116
Identifiable Assets $ 897,082 $ 939,809 $ 897,082 $ 939,809
==================================================================================
Corporate Operations and Other
Revenues $ 10,879 $ 11,140 $ 19,825 $ 21,745
Costs and Expenses 12,692 14,500 23,522 27,359
- ----------------------------------------------------------------------------------
Operating Income (Loss) $ (1,813) $ (3,360) $ (3,697)$ (5,614)
Depreciation and Amortization $ 903 $ 1,068 $ 1,765 $ 2,089
Capital Expenditures $ 5,242 $ 5,877 $ 11,975 $ 11,185
Identifiable Assets $ 221,424 $ 238,904 $ 221,424 $ 238,904
==================================================================================
Consolidated
Revenues $ 584,712 $ 670,279 $1,158,123 $ 1,325,428
Costs and Expenses 507,632 547,578 1,010,743 1,090,875
- ----------------------------------------------------------------------------------
Operating Income:
Operating Income Before
Other Charge $ 77,080 $ 122,701 $ 147,380 $ 234,553
Other Charge - - (96,600) -
- ----------------------------------------------------------------------------------
Total Operating Income $ 77,080 $ 122,701 $ 50,780 $ 234,553
Depreciation and Amortization $ 49,954 $ 47,026 $ 100,469 $ 92,714
Capital Expenditures $ 69,406 $ 52,286 $ 147,425 $ 114,286
Identifiable Assets $ 2,282,118 $2,184,024 $2,282,118 $ 2,184,024
==================================================================================
See accompanying Notes to Consolidated Financial Statements
</TABLE>
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<TABLE>
FRONTIER CORPORATION
Consolidated Statements of Income
(Unaudited)
3 Months Ended June 30, 6 Months Ended June 30,
In thousands, except per share data 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $584,712 $670,279 $1,158,123 $1,325,428
- ----------------------------------------------------------------------------------------
Costs and Expenses
Operating expenses 442,228 487,882 882,131 973,710
Depreciation and amortization 49,954 47,026 100,469 92,714
Taxes other than income taxes 15,450 12,670 28,143 24,451
Other Charge - - 96,600 -
- ----------------------------------------------------------------------------------------
Total Costs and Expenses 507,632 547,578 1,107,343 1,090,875
- ----------------------------------------------------------------------------------------
Operating Income 77,080 122,701 50,780 234,553
Interest expense 11,648 11,818 22,158 23,456
Other income and expense:
Gain on sale of assets - - 18,765 4,976
Equity earnings from unconsolidated wireless
interests 2,783 1,685 4,272 3,140
Interest income 699 781 1,390 1,304
Other income (expense) 529 (262) 616 (989)
- ----------------------------------------------------------------------------------------
Income Before Taxes and Cumulative Effect of
Change in Accounting Principle 69,443 113,087 53,665 219,528
Income tax expense 26,999 43,881 24,782 85,181
- ----------------------------------------------------------------------------------------
Income Before Cumulative Effect of
Change in Accounting Principle 42,444 69,206 28,883 134,347
Cumulative effect of change in
accounting principle - - - (8,018)
- ----------------------------------------------------------------------------------------
Net Income 42,444 69,206 28,883 126,329
Dividends on preferred stock 258 296 511 589
- ----------------------------------------------------------------------------------------
Income Applicable to Common Stock $ 42,186 $68,910 $28,372 $125,740
========================================================================================
Dividends declared on common stock $ 35,656 $35,346 $71,309 $ 69,826
========================================================================================
Earnings Per Common Share
Income before cumulative effect of change in
accounting principle $ .26 $ .42 $ .17 $ .82
Cumulative effect of change in accounting
principle - - - (.05)
- ----------------------------------------------------------------------------------------
Earnings Per Common Share $ .26 $ .42 $ .17 $ .77
========================================================================================
Average Common Shares Outstanding (in thousands) 163,837 164,078 163,866 163,803
========================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
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FRONTIER CORPORATION
Consolidated Balance Sheets
June 30, December 31,
1997 1996
In thousands of dollars, except share data (Unaudited)
- ---------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 23,082 $ 30,948
Accounts receivable, (less allowance for
uncollectibles
of $22,921 and $30,911, respectively) 371,661 364,256
Materials and supplies 14,180 13,198
Deferred income taxes 29,377 30,349
Prepayments and other 33,171 30,483
- ---------------------------------------------------------------------------
Total Current Assets 471,471 469,234
Property, plant and equipment, net 959,997 971,259
Goodwill and customer base 522,206 535,979
Deferred income taxes 31,485 -
Deferred and other assets 296,959 245,048
- ---------------------------------------------------------------------------
Total Assets $2,282,118 $2,221,520
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Accounts payable $270,957 $ 322,325
Dividends payable 35,915 35,966
Debt due within one year 5,640 6,253
Taxes accrued 43,143 34,963
Other liabilities 62,064 18,596
- ---------------------------------------------------------------------------
Total Current Liabilities 417,719 418,103
Long-term debt 777,603 675,043
Deferred income taxes - 2,542
Deferred employee benefits obligation 69,733 65,479
- ---------------------------------------------------------------------------
Total Liabilities 1,265,055 1,161,167
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Shareowners' Equity
Preferred stock 20,125 22,611
Common stock, par value $1.00, authorized
300,000,000 shares; 164,151,350 shares
and 163,731,733 shares
issued in 1997 and 1996 164,151 163,732
Capital in excess of par value 508,926 500,196
Retained earnings 341,970 385,350
- ---------------------------------------------------------------------------
1,035,172 1,071,889
Less -
Treasury stock, 10,849 shares in 1997 and 6,375
shares in 1996, at cost 231 147
Unearned compensation - restricted stock plan 17,878 11,389
- ---------------------------------------------------------------------------
Total Shareowners' Equity 1,017,063 1,060,353
- ---------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $2,282,118 $2,221,520
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
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FRONTIER CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
6 Months Ended June 30,
In thousands of dollars 1997 1996
- ------------------------------------------------------------------------
Operating Activities
Net income $ 28,883 $126,329
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting
principle - 12,396
Other charge 96,600 -
Depreciation and amortization 100,469 92,714
Gain on sale of assets (18,765) (4,976)
Equity earnings from unconsolidated
wireless interests (4,272) (3,140)
Other, net 904 1,724
Changes in operating assets and liabilities, exclusive
of impacts of dispositions and acquisitions:
Increase in accounts receivable (10,707) (26,413)
Increase in materials and supplies (792) (3,310)
(Increase) decrease in prepayments and
other assets (2,660) 1,333
Increase in deferred and other assets (21,343) (23,613)
Decrease in accounts payable (55,290) (720)
(Decrease) increase in taxes accrued
and other liabilities (13,036) 59,054
Increase in deferred employee
benefits obligation 4,702 6,139
(Increase) decrease in deferred
income taxes (33,056) 7,590
- ------------------------------------------------------------------------
Total adjustments 42,754 118,778
- ------------------------------------------------------------------------
Net cash provided by operating activities 71,637 245,107
- ------------------------------------------------------------------------
Investing Activities
Expenditures for property, plant and equipment (106,692) (114,319)
Deposit for capital projects (38,893) -
Investment in cellular partnerships - (25,273)
Proceeds from asset sales 32,889 10,441
Other investing activities 3,258 (9,118)
- ------------------------------------------------------------------------
Net cash used in investing activities (109,438) (138,269)
- ------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 297,897 -
Repayments of debt (191,716) (70,717)
Dividends paid (71,871) (68,659)
Treasury stock, net (2,468) -
Issuance of common stock, net 592 29,556
Other financing activities (2,499) (8)
- ------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 29,935 (109,828)
- ------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents (7,866) (2,990)
Cash and Cash Equivalents at Beginning of Period 30,948 31,449
- ------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 23,082 $ 28,459
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
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FRONTIER CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Note 1: 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.
Certain prior year amounts have been reclassified to
conform to current year presentation.
Note 2 : Other Charge
In March 1997, the Company recorded a $96.6 million pre-
tax charge primarily related to the write-off of certain
network facilities no longer required as a result of the
migration of the Company's major carrier customer's one-
plus traffic volume to other networks and the Company's
overall network integration efforts. The Company is in the
process of decommissioning these redundant facilities and
the project is expected to be completed by the second
quarter of 1998. As of June 30, 1997, the remaining
reserve balance of $50.3 million is included in "Other
liabilities" in the Consolidated Balance Sheets.
Note 3: Purchase Acquisitions
In February 1997, the Company completed its purchase of
RG Data Incorporated ("RG Data"), a privately held upstate
New York based computer and data networking equipment and
services company. A total of 110,526 shares of Frontier
common stock held in treasury were reissued in exchange
for all of the shares of RG Data. The treasury shares
were acquired through open market purchases.
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's interest in RSA No.
3 is managed by Frontier Cellular, a 50/50 owned joint
venture with Bell Atlantic/NYNEX Mobile and 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.
Note 4 : Long - Lived Assets to Be Disposed Of
Effective January 1, 1996, the Company adopted Financial
Accounting Standards No. 121 ("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 in
the Consolidated Statements of Income 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 at its New York local
telephone subsidiaries.
Note 5 : Long-Term Debt
In May 1997, the Company completed a $300 million
offering of 7.25% Notes, maturing 2004. Proceeds from the
offering will be used to finance a portion of the cost of
constructing a nationwide fiber optic network. Pending
such use, proceeds from the offering were used to pay down
Frontier's commercial paper borrowings.
Effective June 30, 1997, the Company's subsidiary,
Rochester Telephone Corp., reduced its available line of
credit under its Revolving Credit Agreement from $100
million to $50 million.
Note 6: Gain on Sale of Assets
On January 31, 1997, the Company completed the sale of
its 69.5 % equity interest in the South Alabama Cellular
Communications Partnership. The sale resulted in an after-
tax gain of $11.2 million, or $.07 per share. In March
1996, Frontier sold its minority investment in a Canadian
long distance company for an after-tax gain of $3.0
million, or $.02 per share. The Company decided to
redeploy resources into more strategic assets as the
assets sold were not critical to the achievement of the
Company's overall business strategy.
Note 7: New Accounting Standards
The Company will adopt the provisions of Financial
Accounting Standards Board Statement No. 128, "Earnings
Per Share" ("FAS 128") effective December 31, 1997. This
statement is effective for financial statements issued for
periods ending after December 15, 1997; earlier
application is not permitted. This statement simplifies
the standards for computing earnings per share previously
found in Accounting Principles Board Opinion No. 15,
"Earnings Per Share", and makes them comparable to
international earnings per share ("EPS") standards. FAS
128 requires dual presentation of basic and diluted EPS on
the face of the income statement and requires a
reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of
the diluted EPS calculation. Basic EPS excludes the effect
of common stock equivalents and is computed by dividing
income available to common shareowners by the weighted
average of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could
result if securities or other contracts to issue common
stock were exercised or converted into common stock.
Proforma earnings per share computed in accordance with
FAS 128 is presented below for informational purposes
only.
Three months ended Six months ended
June 30, June 30,
1997 1996 1997 1996
- ---------------------------------------------------------------
Basic EPS
Earnings before cumulative
effect of change in accounting
principle $ .26 $ .42 $ .17 $ .83
Cumulative effect of change
in accounting principle - - - (.05)
- ----------------------------------------------------------------
Basic earnings per share $ .26 $ .42 $ .17 $ .78
================================================================
Diluted EPS
Earnings before cumulative
effect of change in accounting
principle $ .26 $ .42 $ .17 $ .82
Cumulative effect of change
in accounting principle - - - (.05)
- ----------------------------------------------------------------
Diluted earnings per share $ .26 $ .42 $ .17 $ .77
================================================================
Note 8: Cash Flows
For purposes of the Statement 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 includes $29.6
million of cash proceeds from stock options and warrants
exercised during the first half of 1996. The resultant
tax benefit realized from the exercise of stock options
during the first six months of 1996 of $43.8 million is
reflected as an adjustment to capital in excess of par
value and taxes accrued.
Actual interest paid was $25.9 million and $24.0 million
for the six month periods ended June 30, 1997, and June
30, 1996, respectively. Interest costs associated with
the construction of capitalized assets, including the
nationwide fiber optic network project, are capitalized.
Total amounts capitalized for the first six months of 1997
and 1996 were $5.5 million and $1.9 million, respectively.
In addition, actual income taxes paid were $54.1 million
for the six months ended June 30, 1997, and $23.7 million
for the six months ended June 30, 1996.
Note 9: Commitments and Contingencies
During 1997, it is anticipated that the Company will
expend approximately $525 million to $550 million for
additions to property, plant and equipment, including the
Company's fiber network expansion project. Construction
began on the nationwide fiber optic network in late 1996.
The fiber optic network is being constructed under an
agreement with Qwest Communications Corporation. Capital
expenditures related to the network expansion will
approximate $210 million for 1997. Since construction of
the nationwide fiber optic network began in 1996, capital
expenditures have totaled $107.1 million, $43.4 million of
which was incurred during the first six months of 1997.
In connection with the total capital program, the Company
has made certain commitments for the purchase of materials
and equipment.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Three Months Ended June 30, 1997 and 1996
The matters discussed throughout this Form 10-Q, 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 that
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 the Company's market, changes in law and regulatory
policy and the mix of products and services offered in the
Company's markets. Any forward looking statements in the
June 30, 1997 Form 10-Q should be evaluated in light of
these important risk factors.
DESCRIPTION OF BUSINESS
Frontier Corporation (the "Company" or "Frontier") is a
diversified telecommunications company, serving more than
2 million customers throughout the United States and in
several foreign countries. Frontier's principal lines of
business are long distance and local communications. The
Company's other lines of business include cellular and
paging operations and telecommunications equipment sales,
video and audio conferencing.
RESULTS OF OPERATIONS
Consolidated
Revenues for the second quarter of 1997 were $584.7
million, a decrease of $85.6 million or 12.8% over the
comparable period in 1996. Operating income was $77.1
million for the three months ended June 30, 1997 as
compared to $122.7 million in 1996. Operating results in
the second quarter of 1997 continue to be adversely
impacted by the previously announced migration of the
Company's largest carrier customer's one-plus traffic from
the Frontier network. Results for the second quarter of
1997 include approximately $7 million of one-plus revenue
from this customer as compared to revenue of approximately
$113 million in the same quarter in 1996. Consolidated
operating margins declined from 18.3% for the second
quarter of 1996 to 13.2% for the same period of 1997.
This decline is attributable to the previously discussed
decrease in revenue as well as increased expenses in the
long distance segment. Expenses were higher in the long
distance segment primarily due to incremental Selling,
General and Administrative ("SG&A") costs relating to
product development, promotion and distribution costs.
The incremental SG&A costs are expected to positively
impact revenue and operating income in future periods.
Business Segments
The Company reports its operating results in three
segments: Long Distance Communications Services, Local
Communications Services and Corporate Operations and
Other. A review of the 1997 and 1996 second quarter
results of each business segment follows.
Long Distance Communications Services
Long distance revenues totaled $406.8 million in the
second quarter of 1997, a decrease of $90.9 million or
18.3% as compared to the second quarter of 1996. The
decrease in long distance revenues is attributable to the
migration of the Company's largest customer's one-plus
traffic from the Frontier network. Normalized for the
effect of this major carrier customer's one-plus traffic,
revenue grew approximately 4% as compared to the prior
year quarter. Access minutes of use, excluding the
Company's major customer, increased approximately 3% in
the second quarter of 1997.
The decline in this segment's operating results is
largely attributable to the previously discussed migration
of the Company's largest customer's one-plus traffic.
Total revenue from this customer, including both one-plus
services and enhanced services, represented less than 6%
of the second quarter 1997 long distance revenue as
compared to approximately 26% for the same period in the
prior year. The Company anticipates replacing this
revenue with growth in existing customer bases and through
new initiatives, including the Company's new switched
services product, "Frontier Independence" and through
innovative agreements and contracts, such as Frontier's
credit card services agreement with US West. This
agreement is expected to generate in excess of $50 million
in incremental revenue for the Company over the 30 month
term of the agreement. The Company's new bundled product,
"Frontier Independence" (which replaces "Clear Value"), is
expected to enhance the Company's performance as a
competitive, single-source provider of telecommunications
services through a flexible pricing program that provides
customers with additional discounts if they purchase value
added services. In addition, during the second quarter of
1997, the Company announced plans to complete a national
frame relay network by the fourth quarter of 1997 to
complement the Company's core voice services business with
additional data services products.
Operating income for long distance was $18.9 million for
the second quarter of 1997. Operating margin as a
percent of revenue decreased from 14.6% in the second
quarter of 1996 to 4.7% for the current quarter. The
reduction in operating margin in the second quarter is
primarily due to lower revenue caused by the migration of
the Company's largest customer's one-plus traffic and the
incremental SG&A costs associated with sales and marketing
support for new revenue initiatives and distribution
channels. The sales and marketing investments driving the
incremental SG&A costs are expected to positively impact
revenue and operating results in future periods. Cost of
access represented 62% of total long distance revenue for
the second quarter of 1997, consistent with the same
period in 1996. Construction of the Company's fiber optic
network together with the integration of existing
facilities is expected to reduce network costs and provide
new revenue opportunities for Frontier. Construction of
the nationwide fiber optic network is on schedule and is
expected to be completed by year end 1998. In addition,
the Company has made significant progress in the
identification and decommissioning of certain network
facilities that are no longer required to support the
volume of business. The excess network facilities
primarily resulted from the migration of the Company's
major carrier customer's one-plus traffic. The cost
associated with the decommissioning were accrued for in
the first quarter of 1997.
Results for sequential quarters in 1997 for the Long
Distance segment reflect improvements in operating income
and operating margin. Operating income, excluding other
charges, increased $6.5 million or 51.9% in the second
quarter of 1997 as compared to the previous quarter.
Operating margins for the first and second quarters of
1997 were 3.1% and 4.7%, respectively. This positive
trend is attributed primarily to the reduction in network
access costs as a result of the Company's efforts in the
second quarter to consolidate and integrate the network.
The Company expanded its offerings of local service in
late 1996 and is competing aggressively with other
Alternative Local Exchange Carriers ("A-LECs"). Frontier
is now providing local service as an A-LEC, combined with
a complete range of long distance products, in 32 markets
across the country. The Company currently provides local
services as a facilities based A-LEC in New York City and
plans to provide facilities based A-LEC services in the
midwest by the end of 1997. The Company anticipates that
up to six additional switches will be installed by year
end 1997 and a similar number will be installed in 1998.
Nationwide, Frontier is serving in excess of 79,000 ANIs,
or access lines, predominantly through resale, in markets
where it is not the incumbent telephone company as of June
30, 1997.
Local Communications Services
Local Communications Services includes the Company's
local telephone operations, consisting of 34 telephone
operating subsidiaries in 13 states. Also included in
this segment are the local service revenues and associated
expenses generated from the efforts of Frontier
Communications of Rochester, Inc., 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 provided in the Rochester, New
York market. As a result of the Company's efforts to
consolidate operations within this segment in order to
become more efficient and improve operating results,
separate financial reporting of the Rochester, New York
operations from the Regional Telephone Companies is no
longer meaningful.
Revenues for Local Communications Services were $167.0
million in the three month period ended June 30, 1997, an
increase of $5.6 million or 3.5% over the comparable
period in 1996. The growth in this segment is driven by a
2.6% increase in access lines and a 5.7% increase in
minutes of use over the previous year. Revenue growth
during the second quarter of 1997 is also positively
influenced by increased demand for internet services. The
growth in revenue is partially offset by the elimination
of the surcharge on wholesale, flat rate local measured
service, as ordered by the New York State Public Service
Commission ("NYSPSC") in 1996, an increase in the discount
to wholesale providers from 5% to 17%, also ordered by the
NYSPSC and the $1.5 million annual rate reduction as
stipulated by the Open Market Plan.
Costs and expenses in the second quarter of 1997 for
Local Communications Services were $107.0 million, a
decrease of $1.2 million or 1.1%; relatively consistent
with the same period in the prior year.
Members of the Communications Workers of America ("CWA"
or "Union") Local 1170, ratified a tentative agreement
with Rochester Telephone Corp. on April 29, 1997. The
Rochester company had implemented the terms of its final
offer as of April 9, 1996 as contract negotiations were
then at an impasse. The differences between the Company's
final offer and the agreement that was subsequently
reached between the parties and ratified by the CWA
membership are not material. The new agreement will
provide several operational improvements and will result
in a more consistent alignment of benefits with the rest
of the Corporation. The Union continues to appeal one
issue related to the declaration of impasse with the
National Labor Relations Board. Hearings on this issue
were completed in June and a decision is anticipated by
the end of 1997. This decision may be appealed by either
the Union or the Company. At this time, the Company
cannot predict the outcome of this matter.
Operating income for the second quarter of 1997 was
$60.0 million, an increase of $6.8 million, or 12.7% over
the second quarter of 1996. Operating margins for the
three month period improved from 33.0% in 1996 to 35.9% in
1997, reflecting the continuing improvements in operating
efficiencies as a result of the centralization of
administrative functions within the Local Communications
segment.
During the fourth quarter of 1995, management committed
to a major switch consolidation plan at its New York
local telephone subsidiaries. The three-year plan to
consolidate host switches by over 60% is projected to
improve network efficiency and reduce the cost of
maintenance and software upgrades. As of June 1997, the
project is progressing as scheduled and six host switches
have been consolidated, representing approximately 50% of
the total switches to be consolidated. The Company
anticipates that this project will be substantially
complete by July 1998.
Corporate Operations and Other
Corporate Operations is comprised of the expenses
traditionally associated with a holding company, including
executive and board of directors expenses, corporate
finance and treasury, investor relations, corporate
planning, legal services and business development. The
Other category is comprised of the Company's majority
ownership interest in wireless operations and Frontier
Network Systems ("FNS"). Wireless operations for the
second quarter of 1997 includes Minnesota RSA No. 10, in
which the Company acquired a 100% interest in late March
1995. Results for the second quarter of 1996 include
Minnesota RSA No. 10, and the Company's 69.5% interest in
Alabama RSAs No. 4 and No. 6. The sale of the Company's
interest in Alabama RSAs No. 4 and No. 6 was finalized on
January 31, 1997.
Results of operations in the second quarter of 1997 were
consistent with the same quarter in the prior year. The
impact on operations resulting from the sale of the
Company's interest in Alabama RSA No. 4 and No. 6 is
substantially offset by the acquisition of RG Data
Incorporated ("RG Data"). RG Data's operations are
included with FNS for financial reporting purposes.
Other Income Statement Items
Interest Expense
Interest expense was $11.6 million in the second quarter
of 1997, a $.2 million decline as compared to the same
period in 1996. The overall decrease in interest expense
is attributable to $1.2 million additional capitalized
interest in the second quarter of 1997 as compared to the
prior year quarter, primarily related to the construction
of the Company's fiber optic network. The impact of
capitalized interest is partially offset by increased
gross interest expense in the second quarter of 1997
resulting from higher levels of outstanding debt.
Equity Earnings from Unconsolidated Wireless Interests
The Company's minority interests in wireless operations
and its 50% interest in the Frontier Cellular joint
venture with Bell Atlantic/NYNEX Mobile are accounted for
using the equity method. This method of accounting
results in the Company's proportionate share of earnings
being reflected in a single line item below operating
income.
Equity earnings from the Company's interests in wireless
partnerships in the quarter ending June 30, 1997 were $2.8
million, an increase of $1.1 million or 65.2% over the
same period in the prior year. The improvement in equity
earnings is driven by expense reductions and increased
operating efficiencies as compared to the prior year
quarter.
Income Taxes
The effective income tax rate for the second quarter of
1997 is 38.9%, consistent with the second quarter of 1996.
Six Months Ended June 30, 1997 and 1996
RESULTS OF OPERATIONS
Consolidated
Revenues for the six months ended June 30, 1997 were
$1.2 billion, a decrease of $167.3 million or 12.6% over
the comparable period in 1996. Operating income,
excluding nonrecurring charges, was $147.4 million for the
first two quarters of 1997 as compared to $237.4 million
in 1996. Consolidated operating margins, excluding
nonrecurring items, declined from 17.9% for the first
half of 1996 to 12.7% for the same period of 1997.
Operating results in the first half of 1997 were adversely
impacted by the overall decline in revenue in the long
distance segment. The decline in revenue and operating
income is largely attributed to the previously announced
migration of the Company's largest carrier customer's one-
plus traffic from the Frontier network. Selling, General
and Administrative ("SG&A") costs in the long distance
segment were higher largely due to an increase in product
development, promotion and distribution costs. The sales
and marketing investments that are driving the incremental
SG&A costs are expected to positively impact revenue and
operating income in future periods.
Operating results for 1997 and 1996 were affected by
certain one time events. In March 1997, Company recorded
a pre-tax charge of $96.6 million or $0.38 per share post-
tax, primarily related to the write-off of certain network
costs no longer necessary to support long distance traffic
volumes due largely to the migration of the Company's
major carrier customer's one-plus traffic. As a result of
the decline in long distance traffic, an evaluation of the
existing network was performed and facilities deemed no
longer necessary to support the Company's revenue and
traffic levels were identified. The Company is actively
pursuing a program to further improve its network cost
structure through the integration and consolidation of
facilities.
In the first quarter of 1997, the Company also completed
the sale of its 69.5% equity interest in the South Alabama
Cellular Communications Partnership. The sale resulted in
a pre-tax gain of $18.7 million.
The Company sold its minority investment in a Canadian
long distance company for a pre-tax gain of $5.0 million
during the quarter ended March 31, 1996.
Year-to-date results for 1996 include an $8.0 million
post-tax charge relating to the adoption of Statement of
Financial Accounting Standards No. 121 (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.
Business Segments
The Company reports its operating results in three
segments: Long Distance Communications Services, Local
Communications Services and Corporate Operations and
Other. A review of each business segment's results for
the first half of 1997 and 1996 follows.
Long Distance Communications Services
Long distance revenues totaled $808.0 million for the
first six months of 1997, as compared to $983.9 million in
the same period in 1996, a decrease of $175.9 million or
17.9%. The decrease in long distance revenues is
attributable to the migration of the Company's largest
customer's one-plus traffic from the Frontier network.
Normalized for the effect of this major carrier customer's
one-plus traffic, revenue grew approximately 2% for the
six month period ended June 30, 1997. Access minutes of
use, excluding the Company's major customer's one-plus
traffic, increased approximately 3% over the same period
in the prior year.
The decline in this segment's operating results is
largely attributable to the previously announced migration
of the Company's largest customer's one-plus traffic.
Total revenue from this customer, including both one-plus
services and enhanced services, represented less than 6%
of 1997 year to date long distance revenue as compared to
approximately 24% for the same period in the prior year.
The Company anticipates replacing this revenue with growth
in existing customer bases and through new initiatives.
During the second quarter of 1997, the Company introduced
a new bundled services product, "Frontier Independence",
(which replaces "Clear Value"). This new product is
expected to enhance the Company's performance as a
competitive, single-source provider of telecommunications
services through a flexible pricing program that provides
customers with additional discounts if they purchase value
added services. The Company's credit card services
agreement with US West began to contribute to the
segment's results in the second quarter. The agreement
allows US West the ability to offer calling card services
to its customers and is expected to generate in excess of
$50 million in incremental revenue for the Company over
the 30 month term of the agreement. During the second
quarter of 1997, the Company also announced plans to
complete a national frame relay network by the fourth
quarter of 1997 to complement the Company's core voice
services business with a portfolio of additional data
services products.
Operating income for long distance, excluding
nonrecurring charges, decreased 76.9% to $31.4 million for
the six months ended June 30, 1997. Operating margin as a
percent of revenue decreased from 13.8% in the first half
of 1996 to 3.9% for the current year. The reduction in
operating margin in 1997 is driven by the decrease in
revenue, primarily attributable to the migration of the
Company's largest customer's one-plus traffic, increased
network costs and the incremental SG&A costs associated
with sales and marketing support for new revenue
initiatives. Cost of access represented approximately 63%
of total long distance revenue for the first six months of
1997 as compared to approximately 62% for the same period
in 1996. The increase in the cost of access percentage to
revenue is driven by the fact that the Company's fixed
costs are currently being covered by a smaller revenue
base. Continuing network integration and the construction
of the Company's fiber optic network is expected to
reduce network costs and provide new revenue opportunities
for Frontier. Construction of the fiber optic network is
expected to be completed by year end 1998.
The Company expanded its offerings of local service
in late 1996 and is competing aggressively with other
Alternative Local Exchange Carriers ("A-LECs"). Frontier
is now providing local service as an A-LEC, combined with
a complete range of long distance products, in 32 markets
across the country. The Company currently provides
services as a facilities based A-LEC in New York City and
plans to provide facilities based A-LEC services in the
midwest by the end of 1997. The Company anticipates that
up to six additional switches will be installed by year
end 1997 and a similar number in 1998. Nationwide,
Frontier is serving in excess of 79,000 ANIs, or access
lines, predominantly through resale, in markets where it
is not the incumbent telephone company as of June 30,
1997.
Local Communications Services
Revenues for Local Communications Services were $330.3
million in the six month period ended June 30, 1997, an
increase of $10.5 million or 3.3% over the comparable
period in 1996. The growth in this segment is driven by a
2.6% increase in access lines and a 5.7% increase in
minutes of use over the previous year. Revenue growth
during the first half of 1997 is also influenced by the
provision of enhanced services, driven by increased demand
for internet services. Revenue growth is partially offset
by the elimination of the surcharge on wholesale, flat
rate local measured service, as ordered by the New York
State Public Service Commission ("NYSPSC") in 1996, an
increase in the discount to wholesale providers from 5% to
17%, also ordered by the NYSPSC and the $1.5 million
annual rate reduction as stipulated by the Open Market
Plan.
Local Communications Services costs and expenses for the
first half of 1997 were $210.7 million, representing a
decrease of $2.3 million or 1.1% over the same period in
1996, excluding certain one-time charges. During the
first six months of 1996, the Rochester telephone
operation experienced increased costs and expenses related
to higher labor expenses resulting from work stoppage
preparation costs. These expenses, which were incurred in
connection with contract negotiations with the CWA, were
necessary to ensure continued high standards of customer
service levels in the event of a work stoppage or
slowdown. The contract negotiations were at an impasse
and the Rochester company implemented the terms of its
final offer as of April 9, 1996. Members of the CWA Local
1170, ratified a tentative agreement with Rochester
Telephone Corp. on April 29, 1997 which contained
provisions that differed from the Company's final offer
implemented at the time of impasse. The differences
between the Company's final offer and the agreement that
was ratified are not material. The new agreement will
provide several operational improvements and will result
in a more consistent alignment of benefits with the rest
of the Corporation. The Union continues to appeal one
issue related to the declaration of impasse with the
National Labor Relations Board. Hearings on this issue
were completed in June and a decision is anticipated by
the end of 1997. This decision may be appealed by either
the Union or the Company. At this time, the Company
cannot predict the outcome of this matter. Contributing
to the overall decrease in expenses is the impact of
continuing centralization of the administrative functions
for all of the local telephone companies.
Operating income normalized for nonrecurring items was
$119.7 million, an increase of $12.8 million, or 11.9%,
over the same period in the prior year. Operating margins
for the six month period improved from 33.4% in 1996 to
36.2% in 1997, reflecting the continuing improvements in
operating efficiencies.
During late 1995, management committed to a major switch
consolidation plan at its New York local telephone
subsidiaries. The three-year plan to consolidate host
switches by over 60% is projected to improve network
efficiency and reduce the cost of maintenance and software
upgrades. As of June 1997, the project is progressing as
scheduled and six host switches have been consolidated,
representing approximately 50% of the total switches that
will be consolidated. The Company anticipates that this
project will be substantially complete by July 1998.
Corporate Operations and Other
Corporate Operations is comprised of the expenses
traditionally associated with a holding company,
including executive and board of directors expenses,
corporate finance and treasury, investor relations,
corporate planning, legal services and business
development. The Other category is comprised of the
Company's majority ownership interest in wireless
operations and Frontier Network Systems ("FNS"). Wireless
operations for the first six months of 1997 included
Minnesota RSA No. 10, in which the Company acquired a 100%
interest in late March 1995 and the Company's 69.5%
interest in Alabama RSAs No. 4 and No. 6 through January
1997. The sale of the Company's interest in Alabama RSAs
No. 4 and No. 6 was finalized January 31, 1997.
The Company completed its purchase of RG Data in
February 1997. RG Data was a privately held upstate New
York based computer and data networking equipment and
services company. A total of 110,526 shares of Frontier
common stock held in treasury were reissued in exchange
for all of the shares of RG Data. The treasury shares
were acquired through open market purchases. This
transaction was accounted for as a purchase. RG Data's
operations are consolidated with FNS for reporting
purposes.
Year-to-date revenues for this segment decreased $1.9
million, or 8.8%, and expenses decreased $3.8 million, or
14%, primarily as a result of the sale of the Company's
interest in Alabama RSAs No. 4 and No. 6, the acquisition
of RG Data and reduced costs and expenses for the Holding
Company.
Other Income Statement Items
Interest Expense
Interest expense was $22.2 million in the first six
months of 1997, a $1.3 million reduction from the same
period in 1996. The overall decline in interest expense is
driven by increased capitalized interest of $3.6 million
in the first six months of 1997 as compared to the same
period in 1996, primarily attributable to the fiber
network build project. The impact of capitalized interest
is offset in part by an increase in gross interest expense
in the first two quarters of 1997 resulting from higher
levels of debt outstanding.
Gain on Sale of Assets
In February 1997, the Company completed the sale of its
69.5% equity interest in the South Alabama Cellular
Communications Partnership. The sale resulted in an after-
tax gain of $11.2 million, or $.07 per share. During
March 1996, the Company recorded an after-tax gain of $3.0
million, or $.02 per share, related to the sale of its
minority interest in the stock of a Canadian long distance
company. The Company decided to redeploy resources into
more strategic assets as the assets sold were not critical
to the achievement of the Company's overall business
strategy.
Equity Earnings from Unconsolidated Wireless Interests
The Company's minority interests in wireless operations
and its 50% interest in the Frontier Cellular joint
venture with Bell Atlantic/NYNEX Mobile are accounted for
using the equity method. This method of accounting
results in the Company's proportionate share of earnings
being reflected in a single line item below operating
income.
Equity earnings from the Company's interests in wireless
partnerships in the first six months of 1997 were $4.3
million, an increase of $1.1 million or 36.1% over the
first six months of 1996. The improvement in equity
earnings is driven by expense reductions and increased
operating efficiencies as compared to the same period in
the prior year.
Income Taxes
The effective income tax rate for the first two quarters
of 1997, normalized for nonrecurring items, is 38.8 %,
consistent with the first half of 1996.
FINANCIAL CONDITION
Review of Cash Flow Activity
Earnings before interest, taxes, depreciation and
amortization ("EBITDA") is a common measurement of a
company's ability to generate cash flow from operations.
EBITDA should be used as a supplement to, and not in place
of, cash flow from operating activities. The Company's
EBITDA was $247.8 million and $327.3 million, excluding
nonrecurring charges, for the periods ending June 30, 1997
and 1996, respectively. The decrease in EBITDA is
primarily attributable to the decrease in revenue and
increased operating costs in the long distance segment.
Cash provided from operations for the first six months
of 1997 decreased $173.5 million or 70.8% as a result of
increased working capital requirements and the decrease
in revenue. The primary drivers of the changes in cash
from operations include an increase in deferred taxes of
approximately $30.0 million, relating to the one-time
charge recorded by the Company in the first quarter of
1997 and decreased accounts payable balances. The
decrease in accounts payable is a function of the timing
of payments to vendors.
Cash used for investing activities decreased $28.8
million or 20.9%, primarily due to the proceeds received
from the sale of the Company's equity interest in the
Southern Alabama Cellular Communications Partnership which
closed in the first quarter of 1997 ($32.9 million). This
decrease is offset by increases in capital expenditures
during the first six months of 1997 of $31.3 million or
27.3% and the purchase of an interest in a cellular
partnership in March 1996 ($25.3 million). The increase
in capital expenditures is principally due to the fiber
optic network build and continued product enhancements.
Cash provided from financing activities increased $139.8
million during the first six months of 1997 as compared to
the same period in 1996. This net inflow of cash is
driven by increased borrowings during the period,
primarily attributable to the Company's capital program.
Debt
The Company's total debt amounted to $783.2 million at
June 30, 1997, an increase of $101.9 million from December
31, 1996. This higher debt level is largely driven by the
Company's capital program, including the nationwide fiber
optic network. In May 1997, the Company completed a
$300.0 million offering of 7.25% Notes. Proceeds from the
offering will be used to finance a portion of the
Company's cost of its nationwide fiber build project.
Until such time as additional payments are required to be
made to Qwest Communications Corporation, the company
constructing the nationwide network, proceeds from the
offering were used to pay down a portion of the Company's
commercial paper borrowings. The net increase in
borrowings is offset by scheduled debt repayments of $3.0
million and by the $7.1 million of debt carried by the
Southern Alabama Partnership, which was sold in the first
quarter of 1997. This debt was assumed by the purchaser.
Debt Ratio and Interest Coverage
The Company's debt ratio (total debt as a percent of
total capitalization) was 43.5% at June 30, 1997, as
compared with 39.1% at December 31, 1996. Pre-tax
interest coverage, excluding nonrecurring charges, was 5.6
times for the six months ended June 30, 1997, as compared
with 9.5 times for the same period in 1996.
Capital Spending
Through June 1997, gross capital expenditures amounted
to approximately $147.4 million as compared to $114.3
million in the prior year. The Company plans to spend a
total of approximately $525 million to $550 million on its
capital program during the full year in 1997, including
approximately $210 million for the fiber optic network
project. Through June 1997, capital expenditures relating
to the fiber optic network totaled $43.4 million. The
Company anticipates financing its capital program with a
combination of internally generated cash from operations
and external financing.
Dividends
On June 16, 1997, the Board of Directors declared the
second quarter 1997 dividend of 21.75 cents per share on
the Company's common stock, payable August 1, 1997 to
shareowners of record on July 15, 1997.
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued
Financial Accounting Standard 130 ("FAS 130"), "Reporting
Comprehensive Income," effective for fiscal years
beginning after December 15, 1997. This statement
establishes standards for reporting and display of
comprehensive income and its components in a full-set of
general-purpose financial statements. Comprehensive
income is defined as "the change in equity of a company
during a period from transactions and other events and
circumstances from nonowner sources." It includes all
changes in equity during a period except those resulting
from investments by owners and distributions to owners.
Early application of this statement is permitted. If
comparative financial statements are provided for earlier
periods, reclassification to reflect the provisions of
this statement is required. The Company will adopt FAS
130 in the first quarter of 1998.
The FASB issued FAS 131, " Disclosures about Segments of
an Enterprise and Related Information," effective for
financial statements for periods beginning after December
15, 1997. This statement requires that public companies
report certain information about operating segments in
complete sets of financial statements of the company and
in condensed financial statements of interim periods
issued to shareholders. It also requires that public
companies report certain information about their products
and services, the geographic areas in which they operate,
and their major customers. In the initial year of
application, comparative information for earlier years is
to be restated. The Company will adopt FAS 131 in the
first quarter of 1998. The Company has not yet fully
evaluated the disclosures that will be required by this
FAS.
OTHER ITEMS
Open Market Plan
The Rochester, New York local communications' subsidiary
began its third year of operations under the Open Market
Plan in January 1997. 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, $2.5 million which occurred in 1996, and
a rate reduction of $1.5 million which commenced in
January 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 1997.
During the second quarter of 1997, the Federal
Communications Commission ("FCC") issued decisions that
are intended to implement provisions of the
Telecommunications Act of 1996. Of significance were
decisions that outlined changes in the structure of
universal service support and in the framework that
applies to certain interstate rates that are generally
characterized as access-related charges. In addition,
during the second quarter of 1997, a Federal appeals court
rejected parts of an earlier FCC order that set out
conditions governing the provisions of interconnection
services. A preliminary review of these orders suggests
they will not have a material impact on Frontier or any of
its business segments.
Under the Telecommunications Act of 1996 and a statewide
proceeding, the NYSPSC is 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.
Dividend Policy
The Open Market Plan prohibits the payment of dividends
by the Company's subsidiary, Rochester Telephone Corp.
("RTC"), to Frontier if (i) RTC's senior debt is
downgraded to "BBB" by Standard & Poor's ("S&P"), or the
equivalent rating by other rating agencies, or is placed
on credit watch for such a downgrade, or (ii) a service
quality penalty is imposed under the Open Market Plan.
Dividends paid to Frontier also are prohibited unless
RTC's directors certify that such dividends will neither
impair RTC's service quality nor its ability to finance
its short and long term capital needs on reasonable terms
while maintaining an S&P debt rating target of "A".
In 1996, RTC failed to achieve the service quality
levels required by the Open Market Plan. On December 19,
1996, pursuant to the Open Market Plan, RTC requested the
NYSPSC staff to exclude certain months from the
calculation used to measure service quality, due to
operating conditions considered by management to be
abnormal and beyond RTC's control. In April 1997, RTC
received notice from the NYSPSC that its request for a
waiver of certain conditions in the Open Market Plan
related to service quality results was denied. The
NYSPSC's ruling will result in a temporary restriction on
the flow of cash payments from the Rochester Telephone
subsidiary to Frontier and a refund to Rochester Telephone
customers of $.9 million. Reserves sufficient to cover the
refund were established in 1996. The Company has
presented a plan for disposition of the refund to the
NYSPSC. A decision is expected by the end of the year.
The temporary restriction of dividend payments from
Rochester Telephone to Frontier Corporation remains in
place, as RTC has not yet reached 1997 service quality
levels that are sufficiently adequate to justify its
removal.
Part II - Other Information
Item 1 - 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, 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 federal government and one or
more of the defendants have been in discussions intended
to facilitate settlement, but no recommendations have yet
been made. 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, a large number of plaintiffs, all
of whom 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 a
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 former owners of over half of the stock who
had made claims, 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. In connection
with the acquisition of ASI by Frontier, Simon and Weinert
agreed to indemnify the Company for these claims.
On April 10, 1997, Jeff Thompson filed a purported
class action on behalf of himself and all other similarly-
situated persons in Circuit Court for Marengo County
Alabama. Named as defendants are Frontier Corporation,
Frontier Subsidiary Telco, Inc. and Frontier
Communications of the South, Inc. ("defendants"). The
complaint also reserves the right to add additional
defendants and identifies all of Frontier's telephone
subsidiaries. Concomitant with filing the complaint,
plaintiff also filed an ex parte motion for conditional
class certification which the Court granted. It
conditionally certified a class consisting of "All persons
or entities in the United States who have been charged by
defendants or their subsidiaries or affiliates a fee for
`inside wire maintenance' without having given their
affirmative acceptance to a repair service contract;
specifically excluded from this class, however, are all
employees, agents, officers, directors and affiliates of
any of the Defendants and all persons or entities who have
pending and/or previously filed individual (non-class)
lawsuits against any of the defendants for the same claims
set forth in the Complaint."
In the complaint, plaintiff alleges that the Company
improperly marketed and sold deregulated inside wire
maintenance services to defendant subscribers pursuant to
a "negative option" or "default sale" approach from
January 1, 1987 to the present. Plaintiff alleges that
the defendants have never had enforceable contracts with
their customers for inside wire maintenance services, and
have defrauded their customers. Plaintiff requests a
refund of all moneys paid for inside wire maintenance
services. This case is similar to a number of cases filed
against other carriers with local telephone properties.
The Company believes that the inside wire programs in
place in its telephone properties have been implemented in
accordance with the law and any applicable regulatory
requirements. The liability, if any, is not expected to be
material. The Company is vigorously defending against this
suit, but cannot predict the outcome at this time.
The Open Market Plan discussion in the Management's
Discussion and Analysis of Financial Condition and Results
of Operations in Part I, Item 2 of this document is
incorporated herein by reference.
Item 4 - Submission of Matters to a Vote of Security
Holders
The Annual Meeting of Shareowners was held on May 2,
1997 for the purpose of electing a board of directors,
approving the appointment of auditors, and voting on the
proposals described below.
All of management's nominees for Directors as listed in
the proxy statement were elected with the following vote:
For Against
1. Patricia C. Barron 132,939,624 14,857,554
2. Ronald L. Bittner 130,688,397 17,108,781
3. Raul E. Cesan 132,994,515 14,802,663
4. Brenda E. Edgerton 132,982,164 14,815,014
5. Jairo A. Estrada 132,965,293 14,831,885
6. Michael E. Faherty 132,810,743 14,986,435
7. Daniel E. Gill 132,098,903 15,698,275
8. Alan C. Hasselwander 132,830,634 14,966,544
9. Robert J. Holland, Jr. 132,820,958 14,976,220
10. Douglas H. McCorkindale 133,000,674 14,796,504
11. Leo J. Thomas 133,009,481 14,787,697
12. Richard J. Uhl 132,970,538 14,826,640
The appointment of Price Waterhouse LLP as independent
auditor for the fiscal year 1997 was approved with the
following vote:
Broker
For Against Abstain Non-Votes
143,517,942 863,464 3,415,771 -
The shareowner proposal regarding executive change in
control arrangements was not approved with the following
vote:
Broker
For Against Abstain Non-Votes
35,756,566 90,833,242 5,539,826 15,667,544
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index
(b) Reports on Form 8-K filed during the period:
SEC Filing Date Item No. Financial Statements
March 23, 1997 7 Yes
March 27, 1997 5 No
April 10, 1997 5 No
June 10, 1997 5 No
The Company filed no reports on Form 8-K subsequent to
the quarter ended June 30, 1997.
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
FRONTIER CORPORATION
----------------------------------
(Registrant)
Dated: August 12, 1997 /s/Louis L. Massaro
By:--------------------------------
Louis L. Massaro
Executive Vice President and
Chief Financial/Administrative Officer
(principal accounting officer)
<PAGE>
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
3.1 Restated Certificate of Incorporation Incorporated by
reference to Exhibit
3.1 to Form 10-K for
the year ended
December 31, 1995.
3.2 Amendment to Restated Certificate of Incorporated by
Incorporation reference to Exhibit
3.2 to Form 10-K for
the year ended
December 31, 1995.
3.3 Bylaws Filed herewith
4.1 Indenture, dated as of May 21, 1997, between
the Registrant and Chase Manhattan Bank, as
Trustee Incorporated by
reference to Exhibit
4.1 to Form 8-K, filed
May 23, 1997
10.20 Management contract with Mr. Clayton Filed herewith
11 Statement re: Computation of Earnings Filed herewith
per Share of Common Stock on a
Fully Diluted Basis (Unaudited)
27 Financial Data Schedule Filed herewith
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, 6/16/97)
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.
<PAGE>
<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.
<PAGE>
<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
<PAGE>
<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.
<PAGE>
<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
<PAGE>
<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 thirteen 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
<PAGE>
<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.
<PAGE>
<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;
<PAGE>
<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
<PAGE>
<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
<PAGE>
<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.
<PAGE>
<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
<PAGE>
<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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(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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(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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(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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(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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(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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(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,
may require the owner of any certificate alleged to have been lost,
stolen or destroyed to furnish the Corporation with a bond, in such
sum and with such surety or sureties as it may direct, as indemnity
against any claim that may be made against the Corporation in
respect of such lost, stolen or destroyed certificate.
Section 3 - Transfer of Shares.
Shares of the Corporation shall be transferable on the books
of the Corporation by the registered holder thereof in person or by
the registered holder's duly authorized attorney, by delivery for
cancellation of a certificate or certificates for the same number
of shares, with proper endorsement consisting of either a written
assignment of the certificate or a power of attorney to sell,
assign or transfer the same or the shares represented thereby,
signed by the person appearing by the certificate to be the owner
of the shares represented thereby, either written thereon or
attached thereto, with such proof of the authenticity of the
signature as the Corporation or its agents may reasonably require.
Such endorsement may be either in blank or to a specified person,
and shall have affixed thereto all stock transfer stamps required
by law.
*Except as otherwise provided by law, not more than twenty
percent of the aggregate number of shares of stock of the
Corporation outstanding in any class or series shall at any time be
owned of record or beneficially or voted by or for the account of
aliens (as defined below). Shares of stock shall not be
transferable on the books of the Corporation to any alien if, as a
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<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
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<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.
June 9, 1997
Mr. Joseph P. Clayton
14280 Oakbrook Court
Carmel, Indiana 46033
Dear Mr. Clayton:
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 retain your services for the
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 assure 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, and to assure itself of continuity in its
relationship with customers and employees.
Therefore, upon your signature on a counterpart of this
Agreement, the following terms and conditions shall become
effective as stated below. However, this Agreement does not
supersede any stock option agreements or restricted stock grant
agreements between the Company and you, all of which shall remain
in full force and effect.
1. Employment.
1.1 Term. The Company shall employ you in a senior
executive position and you shall assume the title of President
and Chief Operating Officer on June 16, 1997, or in such
comparable management capacity as the Company may from time to
time designate. This Agreement shall become effective as of June
9, 1997, except that you shall become President and Chief
Operating Officer on June 16, 1997. This Agreement shall
continue until December 31, 1998, unless earlier terminated or
extended in accordance with its terms. Not later than November
1, 1998, the Company and you shall either: (a) affirmatively
elect to extend the term of this Agreement (the "Term") for one
additional year; or (b) commence negotiation of a new agreement
between the Company and you; or (c) pursuant to Section 1.2,
terminate the relationship in its entirety or to allow it to
expire according to its terms. 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 or Disability),
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, and will actively promote the
Company's interest during such period.
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.
1.2 Present and Future Duties. Your role in the Company
shall be that of its primary operating executive, responsible for
the successful operations of its business units. 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.
Assuming you have successfully performed the duties of
your position, it is anticipated that you will assume the
position of Chief Executive Officer of the Company on or before
July 1, 1998, but in no event later than January 1, 1999, subject
to Board review and concurrence. The Board may select the
effective date based on its evaluation of your performance, your
developmental needs, and its assessment of what will be most
beneficial to shareowners. If the Company fails to so act by
December 31, 1998, you or the Company may elect to terminate the
relationship in its entirety. If the Company terminates the
relationship or the Agreement ends according to its terms, the
termination shall be deemed as a Termination without Cause under
Section 7.2, except that Severance under Section 7.2.3 shall be
Two Million Dollars ($2,000,000). If you terminate the
relationship, the termination shall be deemed as a Termination
for Good Reason under Section 7.4, except that Severance under
Section 7.4.3 shall be Two Million Dollars ($2,000,000).
Upon your election to the position of Chief Executive
Officer of the Company, the Company agrees to negotiate an
employment agreement for a term of three (3) years on terms that
reflect your performance and new position, and that will be no
less advantageous to you.
1.3 Base Compensation. The Company shall pay you as base
compensation at an annual salary rate of $650,000, in
installments in accordance with the Company's policies from time
to time in effect, until January 1, 1998. 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 for you individually,
and a methodology for calculating the amount of incentive
compensation to be paid upon achievement of such Performance
Goals. Your eligibility for a corporate bonus will be calculated
on the same basis as other similarly situated executives. Your
incentive will be based on the success of the Company as
reflected in increased shareowner value, with such metrics to be
mutually agreed upon by you with the Chief Executive Officer of
the Company, and with the subsequent concurrence of the Board.
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 benefits and perquisites provided by the Company
under its Executive Compensation program in effect from time to
time for executives at the Chief Operating Officer level.
1.6 Expenses. You shall be reimbursed for any reasonable
expenses prudently incurred 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.
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 may now or will in the future have 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 target markets and customer
segments, strategies, plans, products and services, methods of
operation, employees, financial forecasts and results, sales,
profits, expenses, customer lists and the relationships between
the Company or a subsidiary and its customers, suppliers and
others who have business dealings with it. You covenant and
agree that during the Term and thereafter, without time or
geographic limitation, 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.
If your employment ends for any reason other than your
death, you agree to return promptly to Company all such
information and any other tangible product or document which has
been produced or received by, or otherwise submitted to you
during your employment, and no copies shall be retained by you or
made available to any other person or entity. This provision
includes but is not limited to information printed or stored on
paper, magnetic tape, floppy disks, hard drives or other computer
storage media.
4. Non-Competition.
4.1 Covenant. You and the Company acknowledge that you
have a special, unique and extraordinary expertise in
telecommunications, and also a special, unique and extraordinary
expertise in sales and sales administration, and that in your
employment with the Company, you will have continuing access to
information about the Company's target markets, strategies,
plans, product or service offerings, methods of operation,
financial and operating expectations and results, customer base,
sales, marketing and pricing strategies, most valued employees,
and customer and supplier relationships. 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,
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,
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 any
telecommunications business of the Company in a Restricted Area
(as defined below). You acknowledge that so long as you are able
to use your skills for enterprises that do not directly or
indirectly compete with the business of the Company, you will not
be unreasonably limited in your ability to work.
4.2 Definitions.
4.2.1 "Competes" means the production, marketing,
promotion, distribution or selling of any product,
capability, functionality or service of any person or entity
other than the Company which resembles or competes with a
product or service produced, marketed, promoted, distributed
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 employee or
independent contractor sales 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 subsidiaries or affiliates derives more
than $25 million in revenue.
4.2.3 "Restricted Period" means:
(a) The period of your employment by the Company
(whether under this Agreement or otherwise), if your
employment 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 by
the Company for Cause or without Cause (and not by the
Company following Change of Control), unless this
Agreement ends or is terminated under Section 1.2 in
which event the Restricted Period shall be 12 months;
(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 (unless this Agreement ends or
is terminated under Section 1.2 in which event the
Restricted Period shall be 12 months) or by the Company
on any basis following Change of Control.
4.2.4 Exception. 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").
4.3 Savings Clause. You and the Company specifically
agree that this covenant not to compete and its specific
limitations constitute a reasonable covenant under the
circumstances and is supported by the consideration stated above,
and further agree that if, in the opinion of any court of
competent jurisdiction, 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, and you agree to the enforcement of the remainder
of the covenant as so amended.
5. Non-Solicitation. You also covenant and agree that during
the Restricted Period set out in Section 4.2.3, and without
regard to the activity or activities in which you are engaging,
whether it is within or without the telecommunications industry,
you will not, directly or through employees, agents, recruiters,
independent contractors or others: (a) offer, promise, provide
or guarantee employment, work for compensation, business
opportunity or other means of financial gain, or solicit, invite
an inquiry on employment or other compensatory relationship,
respond to such inquiry with a promise or grant of an employment
or other compensatory relationship, or otherwise seek to
influence any person to leave the Company or to undertake
activities that would be adverse to the Company's interests,
where such person is employed by the Company or is in an
independent contractor relationship in which a majority of their
time is spent on Company-related activities, or is a supplier of
services to the Company who would thereafter become unavailable
to provide such services to the Company, or who has been in such
an employment or independent contractor relationship within the
12 months prior to your contact(s); or (b) solicit from, convert,
attempt to convert, divert business from, or attempt to divert
business from any of the Company's customers, customer accounts
or locations, whether such activity is intended to benefit you or
any other person or entity, and whether or not such activity is
successful.
6. Equitable Relief. You specifically acknowledge that the
restrictions contained in each of Sections 2, 3, 4 and 5 of this
Agreement are, in view of the nature of the business of the
Company, and your position with it, 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 for which there would be no
adequate remedy at law. 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 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, 3,4 and/or 5 of this Agreement, and that any separate
claim you have shall not constitute a defense to the enforcement
of the covenants and agreements in those paragraphs.
7. Company's Obligations upon Termination. The sole
obligations of the Company upon the termination of your
employment are as set forth in this Section 7. 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.
7.1 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:
7.1.1 Base compensation;
7.1.2 Reimbursement for reasonable and necessary
expenses incurred by you on behalf of the Company during the
Term;
7.1.3 Pay for earned but unused vacation and
floating holidays;
7.1.4 All compensation you previously deferred (if
any) to the extent not yet paid; and
7.1.5 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 the greater of: (i)
your standard bonus for the fiscal year (or such prorated
portion of the fiscal year as it relates to your actual
employment) 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) the bonus paid or payable to you with
respect to the fiscal year preceding the year in which the
Termination Date occurs.
The amounts described in Sections 7.1.1 through 7.1.4,
inclusive, are called elsewhere in this Agreement, collectively,
the "Accrued Compensation".
Except as otherwise provided in this Section 7.1, 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, including any
long term compensation benefits, then in effect.
7.2 Termination Without Cause. If the Company terminates
your employment without Cause (as defined later in this
Agreement), the Company shall pay you:
7.2.1 All Accrued Compensation;
7.2.2 A Pro Rata Bonus (as defined in Section 7.1.5
above); and
7.2.3 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) $30,000
(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")). The foregoing shall be in lieu 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.
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, medical, dental, vision
and hospitalization benefits provided to you and your family
immediately prior to the Termination Date.
Except as otherwise provided in this Section 7.2, 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.
7.3 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 7.3,
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.
7.3.1 You and Company acknowledge that at the
inception of this Agreement, the Company has agreed to pay
the reasonable costs of travel and temporary living expenses
in connection with this Agreement. You agree that, except
in connection with a Change of Control, within such
reasonable time period as you and Company agree, not to
exceed 270 days, you will move your residence to such place
as Company has its headquarters location, under the
Company's relocation program, plus such amounts as have been
agreed to reflect the price differential related to
improvements you have made to your residence in comparison
to its purchase price. You agree that, if you should decline
to make such move, or should fail to comply with Company's
request or directive, such refusal or failure shall be a
basis for Company to terminate your employment for Cause, at
its election. This subsection 7.3.1 shall cease to apply
upon a Change of Control.
7.4 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:
7.4.1 All Accrued Compensation;
7.4.2 A Pro Rata Bonus; and
7.4.3 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) $30,000 (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 Code). The foregoing severance
shall be in lieu 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.
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, 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, provided any actions you have taken are determined to
have been undertaken in good faith and upon a reasonable basis.
Except as otherwise provided in this Section 7.4, 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, including any
long term compensation benefits, then in effect.
8. 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 8) (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.
9. 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 7 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.
10. 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
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.
11. 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.
12. Definitions. Whenever used in this Agreement, the
following terms shall have the meanings below:
12.1 "Cause" means:
12.1.1 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
12.1.2 You have willfully engaged in conduct which is
demonstrably and materially injurious to the Company
(monetarily or otherwise), including but not limited to a
breach of fiduciary duty; or
12.1.3 You have willfully engaged in conduct which is
illegal or in violation of the Company's Code of Ethics; or
12.1.4 You have been convicted of a felony or a crime
involving moral turpitude; or
12.1.5 You have violated the provisions of Section 2
and/or Section 3 and/or Section 4 and/or Section 5 of this
Agreement
and, in any of the events described in Sections 12.1.1 through
12.1.5 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 12.1.1 through 12.1.5 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.
12.2 "Change of Control" means:
12.2.1 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
12.2.2 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
12.2.3 The approval by the Company's shareowners of
any plan or proposal for the liquidation or dissolution of
the Company; or
12.2.4 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
12.2.5 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 12.2.5) 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.
12.3 "Disability" means:
12.3.1 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
12.3.2 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 permanent by a physician selected by the Company
or its insurers and reasonably acceptable to you and/or your
legal representative.
12.4 "Good Reason" means:
12.4.1 Without your express written consent, after a
Change of Control, a significant reduction in title and
authority, or 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
12.4.2 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 12.4.2 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
12.4.3 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
12.4.4 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 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
12.4.5 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
12.4.6 You terminate your employment (other than
because of your death or Disability) by giving the Company a
Notice of Termination with a Termination Date not later than
the first anniversary of the Change of Control; or
12.4.7 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.
13. 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.
14. 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. The
Company may assign its obligations under this Agreement to one of
its principal subsidiaries for administrative purposes.
15. 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.
16. 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.
17. 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.
18. 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
By: /s/Ronald L. Bittner
--------------------
Ronald L. Bittner
Chairman and CEO
Agreed to on 6/9/97
--------------------
/s/Joseph P. Clayton
--------------------
Joseph P. Clayton
ADDENDUM TO LETTER AGREEMENT DATED JUNE 9, 1997
The following provisions shall apply to the calculation and
procedures relating to the Gross-Up Payment in accordance with
Section 8 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
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:
(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
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.
<PAGE>
June 9, 1997
Mr. Joseph P. Clayton
14280 Oakbrook Court
Carmel, Indiana 46033
Dear Mr. Clayton:
The purpose of this letter is to assure you that upon execution
of the agreement by which you will become an employee of Frontier
Corporation ("Frontier") and an officer of Frontier, Frontier
shall extend to you an agreement for 500,000 stock options in
Frontier, to be effective at the closing price of Frontier on the
date the agreement is executed.
It is also my purpose to assure you that you would be considered
for a restricted stock grant in the range of 50,000-100,000
shares, to be made in the first quarter of 1998, as well as being
considered for additional options at that time.
Very truly yours,
/s/Janet F. Sansone
- -------------------
Janet F. Sansone
6/9/97
/s/Joseph P. Clayton
<PAGE>
<TABLE>
Exhibit 11
Frontier Corporation
Computation of Earnings per Share of Common Stock
on a Fully Diluted Basis (Unaudited)
3 Months Ended 6 Months Ended
June 30, June 30,
(In thousands, except per share data) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income applicable to common stock $42,186 $68,909 $ 28,372 $125,740
Add: Interest on convertible debentures 139 139 277 277
- ---------------------------------------------------------------------------------
42,325 69,048 28,649 126,017
Less: Increase in related federal
income taxes 49 49 97 97
- ---------------------------------------------------------------------------------
Adjusted income applicable to
common stock $42,276 $68,999 $28,552 $125,920
=================================================================================
Average Common Shares Outstanding 163,492 162,873 163,579 161,525
(excluding common stock equivalents)
Adjustments for:
Convertible Debentures 503 503 503 503
Stock Options 297 1,307 370 2,364
- ---------------------------------------------------------------------------------
Adjusted common shares assuming
conversion of outstanding Convertible
Debentures and Stock
Options at beginning of each period 164,292 164,683 164,452 164,392
=================================================================================
Earnings per share of common stock on a
fully diluted basis $ .26 $ .42 $ .17 $ .77
=================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FRONTIER
CORPORATION'S FINANCIAL STATEMENTS FOR THE SIX MONTH PERIOD ENDED JUNE 30,
1997 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 23,082
<SECURITIES> 0
<RECEIVABLES> 394,582
<ALLOWANCES> 22,921
<INVENTORY> 14,180
<CURRENT-ASSETS> 471,471
<PP&E> 2,305,416
<DEPRECIATION> 1,345,419
<TOTAL-ASSETS> 2,282,118
<CURRENT-LIABILITIES> 417,719
<BONDS> 777,603
0
20,125
<COMMON> 164,151
<OTHER-SE> 832,787
<TOTAL-LIABILITY-AND-EQUITY> 2,282,118
<SALES> 0
<TOTAL-REVENUES> 1,158,123
<CGS> 33,224
<TOTAL-COSTS> 1,107,343
<OTHER-EXPENSES> (616)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,158
<INCOME-PRETAX> 53,665
<INCOME-TAX> 24,782
<INCOME-CONTINUING> 28,883
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,883
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
