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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number 1-4166
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FRONTIER CORPORATION
(Exact name of Registrant as specified in its charter)
New York 16-0613330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 South Clinton Avenue Rochester, New York 14646-0700
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (716) 777-1000
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Class Name of each exchange on which registered
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Common Stock, par value $1.00 per share New York Stock Exchange
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Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 2, 1998 is $4,720,311,991. The number of shares
outstanding of Frontier Corporation's common stock (Par Value $1.00 per share)
as of the close of March 2, 1998 is 170,961,366 shares.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's 1997 Annual Report to Shareowners including
Management's Discussion of Results of Operations and Analysis of Financial
Condition, Consolidated Financial Statements and Notes to Consolidated
Financial Statements, as presented in Exhibit No. 13.1 of this Form 10-K,
are incorporated by reference in Parts II and IV hereof.
(2) Portions of the Notice of Annual Meeting and Proxy Statement issued by the
registrant in connection with its Annual Meeting of Shareowners to be held
April 29, 1998, as presented in Exhibit No. 99 of this Form 10-K, are
incorporated by reference in Parts II, III and IV hereof.
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PART I
ITEM 1. BUSINESS
General
Frontier Corporation ("Frontier" or the "Company") offers integrated
communications services to more than two million business, carrier and targeted
residential customers nationwide, in Canada and in the United Kingdom. The
Company was incorporated in 1920 under the laws of New York State to take over
and unify the properties of a predecessor company and certain properties of the
New York Telephone Company which were located in the same general territory.
Frontier is headquartered in Rochester, New York. Through its Long Distance
Communications Services segment, the Company is the nation's fifth largest long
distance company. This segment provides domestic and international voice, data
and video communications service to primarily small to mid-size business
customers and targeted consumer markets. The Company's Local Communications
Services segment consists of 34 local telephone companies which as of December
31, 1997, serve nearly one million access lines in thirteen states and is the
eleventh largest local exchange provider in the United States. The Corporate
Operations and Other segment includes 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 includes Frontier Network Systems
("FNS"). FNS markets and installs telecommunications systems and equipment.
This segment also includes wireless operations from Minnesota RSA No. 10 and the
Company's 69.5% interest in Alabama RSA No. 4 and No. 6. The Alabama interest
was sold in January 1997. The Company also owns a 50% interest in a joint
venture with Bell Atlantic in upstate New York and Pennsylvania that is managed
by the Company, and is accounted for using the equity method of accounting.
This method of accounting results in the Company's proportionate share of
earnings being reflected in the "Other income and expense" section of the
Consolidated Statements of Income.
Prior to 1995, Local Communications Services provided the majority of the
Company's revenue and income. The Company complemented its internal growth in
the long distance business with a number of strategic acquisitions and a merger
in 1995 that approximately doubled the size of the business. A listing of these
acquisitions and the merger is as follows:
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1995
Acquisition
Company Name Month
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ConferTech International, Inc. March
American Sharecom, Inc. March
WCT Communications, Inc. May
Enhanced TeleManagement, Inc. July
Schneider Communications, Inc. ("SCI") and LinkUSA Corporation* August
ALC Communications Corporation (merger) August
Link-VTC, Inc. November
*The Company acquired SCI's 80.8% interest in LinkUSA Corporation in August
1995 and subsequently purchased the remaining 19.2% interest in February 1996.
As a result of the Company's strategic decision to expand the long distance
business, revenue from this segment represented 70%, 73% and 69% of
consolidated revenue for 1997, 1996 and 1995, respectively.
Company Strategy
The Company's strategy is to be the premier provider of integrated
telecommunications solutions in its target markets. The Company will market
itself to customers as a single source provider of integrated communications
services, which can include long distance, local, cellular, paging, data,
Internet and enhanced services. Frontier is committed to growth through
expansion of its existing businesses and relationships, the development of
value-added products and services and through strategic acquisitions. Frontier
anticipates that public policy will continue to evolve in favor of greater
competition and, as a result, the Company has been positioning itself to compete
aggressively in a marketplace with numerous new competitors.
In the fourth quarter of 1996, the Company announced that it had joined with
Qwest Communications as a partner in the construction of a nationwide fiber
optic network. Completion of the nationwide network, which is anticipated
within the next year, will provide the Company with the infrastructure necessary
to meet the increasing demands for bandwidth and connectivity. When complete,
this will be the largest single fiber build in United States history. The
Company agreed to invest approximately $450 million through 1999 to complete the
project. The multi-ring Synchronous Optical Network ("SONET") architecture
increases transmission speed and network reliability and is expected to decrease
the Company's network transmission costs once installed. The SONET network
will interconnect nearly 100 cities, encompass more than 13,000 route miles and
provide coast-
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to-coast connectivity. As of the end of 1997, construction of the nationwide
network is progressing on schedule. The Company is also installing Nortel DMS-
500 switches strategically across the country that will connect to the SONET
network. These switches will provide the Company with the ability to offer
combined local and long distance telecommunications to its customers through a
single, cost-effective switching platform and will enable Frontier to accelerate
offerings of Competitive Local Exchange Carrier ("CLEC") services. CLEC services
are currently available in 15 states, providing the Company with the ability to
offer integrated local and long distance telephone service to approximately 40%
of the United States population. The Company's objective is to have the
capability to offer local services in 30 to 35 states, covering 65% to 70% of
the population of the United States by the end of 1998. In the fourth quarter of
1997, the Company introduced a nationwide frame relay product. This data service
product will complement the Company's voice services business. In addition, the
acquisition of GlobalCenter, Inc., ("GlobalCenter") announced by the Company in
January 1998 and completed in February 1998, will further enhance Frontier's
data product capability. The combined technology of the SONET network, DMS-500
switches, frame relay and enhanced data services comprises a substantial part of
the infrastructure to position Frontier to be an integrated services provider on
a nationwide basis. As the nature and boundaries of telecommunications evolve as
a result of changing regulation and technology, the Company believes it is well
situated to take advantage of these trends.
Legislative and Regulatory Matters
The competitive evolution of the telecommunications industry has resulted
in changing regulatory framework. In general, state regulatory agencies
exercise authority over the prices charged for the provision of local telephone
and intrastate long distance services and over the quality of service provided,
the issuance of securities, the construction of facilities and other matters.
Each of Frontier's local telephone service companies is regulated by the public
utility regulatory agency of the state in which that company provides local
telephone service and by the Federal Communications Commission ("FCC"). To a
lesser extent, the Company's long distance business is also subject to FCC and
state jurisdiction.
(a) Telecommunications Act of 1996. The Telecommunications Act of 1996
("Telecommunications Act") was enacted on February 8, 1996. This landmark
legislation significantly modified the Communications Act of 1934 and
established a framework for increased competition in the local and long distance
segments of the Company's business. The Company views this legislation as
favorable to its operations because Frontier has been able to enter new markets
to provide local service as a CLEC, as well as derive other benefits from the
elimination of barriers to competition. In addition to its established local
telephone and long distance base, Frontier companies have
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been authorized to provide competitive local services in 21 states as of
December 31, 1997 and has commenced operations in 15 of these states. The
Telecommunications Act incorporated many aspects of the Open Market Plan
initiated by the Company in Rochester, New York in 1993 and implemented in 1995.
Rochester, New York is the location of the Company's largest telephone
operation. The Company believes its experience in providing integrated services
and its experience with the Rochester, New York Open Market Plan provides it
with a competitive advantage.
On August 8, 1996, the FCC released a First Report and Order (the "First
Report and Order") in a core rulemaking proceeding to implement the
Telecommunications Act. The First Report and Order established guidelines to
promote local competition, affecting the Company and all other competitors in
local telecommunications markets. On July 18, 1997, the U.S. Circuit Court of
Appeals for the Eighth Circuit reversed portions of the First Report and Order
that provided for pricing based primarily on forward looking, rather than
historical costs, and that would have provided the FCC with substantially more
authority over the compliance by local telephone companies with provisions of
the Telecommunications Act. On January 22, 1998, the same court issued a
mandate compelling adherence to the decision. The FCC's action is subject to
reconsideration and to further appellate review. On January 23, 1998, the U.S.
Supreme Court agreed to review this case. The case will be heard in late 1998 or
early 1999.
The Act also requires the FCC to restructure the manner in which universal
service support payments are established and distributed. On May 7, 1997, the
Commission substantially adopted the recommendation of a Federal-State Joint
Board released on November 8, 1996 with respect to universal service. The FCC's
order increased the amount of financial support to be dedicated to universal
service programs. The Commission has released numerous subsequent orders that
have modified its original decisions, including two which have recalculated the
amount of support to be collected in 1998. These actions are subject to
reconsideration and appeal.
On May 16, 1997, the Commission adopted an order that substantially
modified the structure by which local exchange carriers are compensated for
access to and use of their networks. This order was implemented effective
January 1, 1998. In general, this order encouraged the recovery in fixed
charges of some costs that had previously been recovered by local telephone
companies in usage-based charges. Competitors have reacted in different and
widely varying ways to this order. The Company believes that its response is
competitive and that it was not disadvantaged by the order. Both of these
orders are subject to the possibility of Commission modification in light of
market impacts and are pending judicial review proceedings.
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On October 9, 1997, the FCC ordered carriers that receive "dial around"
calls from payphones (certain calls sent without coins, such as 800 or other
calls with special access codes) to compensate payphone owners at the rate of
28.4 cents per completed call. The per-call compensation rate became effective
retroactive to October 7, 1997. The FCC is still considering how it will
address the payphone operator compensation issue for the preceding eleven month
period. The Company intends to pursue challenges to this FCC order along with
other carriers. However, the Company has also taken action to assess a
surcharge to recover the amount of the compensation ordered and related costs.
This is consistent with the action taken by most other long distance providers
that handle similar calls through payphones. The Company cannot predict the
ultimate outcome of any of these FCC proceedings.
On December 31, 1997, a judge of the United States District Court for the
Northern District of Texas issued an opinion that found certain sections of the
Telecommunications Act that imposed conditions on entry by some of the Bell
Operating Companies into certain lines of business, including the long distance
business, to be unconstitutional. A number of additional parties asked the
Court to stay its decision pending further judicial review. On February 12,
1998, the court granted a stay of the December 31, 1997 ruling until an appeal
is heard. This decision, if ultimately upheld, will likely have significant
impact on the domestic long distance business. However, the Company has
evaluated issues related to the Bell Operating Companies' provision of long
distance services, and believes that it is well-positioned to offer services to,
and also to compete against them in the Company's target markets.
(b) State Proceedings -- General. A number of states in which the Company has
local or long distance operations are conducting proceedings related to the
ground rules under which carriers may operate in an increasingly competitive
environment. The issues that the regulatory agencies are examining include
unbundling of local network elements, local interconnection obligations, dialing
parity for intra-LATA (or short-haul) toll traffic, local number portability,
resale of local exchange service and universal service. The Telecommunications
Act has begun to have an effect on the timing and outcome of proceedings in many
states, as state commissions have begun to make decisions and to review their
prior actions in light of the Telecommunications Act. The Company cannot, at
this time, predict how these proceedings will ultimately be resolved, nor when
decisions will be forthcoming.
(c) Open Market Plan. The Company began its fourth 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
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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 the Company. Increased
competition may also lead to additional price decreases for services, adversely
impacting the Company's margins. 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 of some retail customers. An
additional positive feature of the Open Market Plan provides that the Company
can retain additional earnings achieved through operating efficiencies.
Previously, these earnings would have been shared with customers. After three
years of operating in a competitive marketplace, the Rochester local exchange
carrier retains a market share of approximately 98% of wholesale and
approximately 95% of retail local service access lines in the Rochester, New
York operating territory.
During the seven year period of the Open Market Plan, rate reductions of
$21.0 million (the "Rate Stabilization Plan") will be implemented for Rochester
area consumers, including $15.0 million of which occurred through 1997, and an
additional $1.5 million which commenced in January 1998. 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.
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 Open Market 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.
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, Frontier Telephone of Rochester, Inc. ("FTR") to Frontier if (i)
FTR'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
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under the Open Market Plan. Dividend payments to Frontier also require the
Company's directors to certify that such dividends will not impair FTR's service
quality or 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, FTR failed to achieve the service quality levels required by the
Open Market Plan. On December 19, 1996, pursuant to the Open Market Plan, FTR
requested the New York State Public Service Commission ("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 FTR's
control. In April 1997, FTR 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 has resulted in a temporary
restriction on the flow of cash dividends from FTR to Frontier and a refund to
FTR's customers of $.9 million. Reserves sufficient to cover the refund were
established in 1996. On October 22, 1997, the NYSPSC adopted an order requiring
FTR to issue refunds of approximately $2.60 per customer. These refunds have
been completed at December 31, 1997.
The temporary restriction of dividend payments to Frontier will remain in
place until the NYSPSC is satisfied that FTR's 1997 service levels demonstrate
that FTR has rectified the service deficiency. The NYSPSC is currently
examining service level data for the period 1993-1997 and may reopen the
calculation of service levels for these years. Based on the level of customer
complaints to the NYSPSC in 1996 and 1997, FTR will be required to refund
approximately $150,000 in early 1998. Reserves sufficient to cover this refund
were established in 1997.
Competition
The telecommunications industry continues to experience significant changes in
the competitive landscape. Factors such as industry consolidation,
technological advancement, growth in Internet and data applications and changing
regulatory framework have created economies of scale for some companies and
niche opportunities for others. Frontier is intent on taking advantage of the
various business opportunities which competition provides in the markets where
it operates as well as in new markets. The Company is addressing competition by
focusing on its core business and the markets it serves, divesting non-strategic
operations, creating advantages through its infrastructure and sales and
customer care philosophies, and by continuing to reduce its cost base to become
more efficient.
(a) Long Distance Communications Services. Competition in this line of
business is generally based upon pricing, customer service, network
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efficiencies and reliability, service quality and enhanced service offerings.
Frontier views the long distance industry in three tiers. The industry is
dominated on a revenue basis by the first tier which is made up of the nation's
four largest long distance providers: American Telephone and Telegraph Company
("AT&T"), MCI Telecommunications Corporation ("MCI"), Sprint Communications,
Inc. ("Sprint") and WorldCom, Inc. ("WorldCom"). AT&T, MCI, Sprint and WorldCom
generate more than 85% of the nation's domestic and international long distance
revenue. WorldCom has announced its intent to acquire MCI in 1998. If completed,
this merger would create the country's second largest long distance carrier with
annual revenue exceeding $25 billion. Frontier is positioned at the top of the
second tier with two other companies each with annual revenues believed to be
more than $1 billion. The third tier consists of more than 300 companies with
annual revenues of less than $1 billion each, the majority below $50 million
each. The Company targets small to mid-sized business customers and seeks to
provide a level of focus and attention to customer service that compares
favorably with what its larger competitors offer to large commercial customers.
Frontier believes that it is one of a small number of long distance companies
with the ability to offer high quality integrated local and long distance
services to small to mid-size business customers on a nationwide basis. A number
of the Company's competitors are primarily regional in nature, limited by the
size of their transmission systems, dependent on other parties for their billing
services, or offer only basic long distance services.
The Regional Bell Operating Companies ("RBOC") are continuing to take actions
to meet the Telecommunications Act's "checklist" for entry into the long
distance market. To date, several applications for entry have been rejected by
the FCC. Other applications are pending before regulatory agencies.
The Company recognizes that a benefit of continuing growth is that it will be
able to compete effectively in the changing telecommunications industry and
avail itself of greater economies of scale and scope in its transport and local
access facilities and in its back office operations.
(b) Local Communications Services. The Company faces many competitors in the
provision of equipment and facilities used in connection with its local exchange
networks, as this market has been competitive for many years. The market for
the provision of local services itself is now competitive in Rochester, New York
as a result of the Open Market Plan, and the Telecommunications Act is likely to
result in significantly greater competition in other markets. In the Rochester
market, several competitors have entered the local exchange business initially
as "resellers" of the Company's service as the Open Market Plan enables
customers to choose their service provider. Frontier's own subsidiary, Frontier
Communications of Rochester ("FCR"), operates in this fashion. Several
companies operating as
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competitive facilities-based local exchange providers are also active in the
Rochester marketplace. The Company believes that it holds approximately 95% of
the retail market share there as of December 31, 1997, which is relatively
consistent with the prior year. CLEC activity is believed to be minimal in the
Company's other telephone properties.
Long distance companies largely access their end user customers through
interconnection with local exchange companies. These long distance companies pay
access fees to the local exchange companies for this service. The provision of
access services in Rochester by FTR and elsewhere is considered to be
competitive, and the Company has responded with price changes that meet the
demands in its individual market areas.
Long Distance Communications Services
General
The Company is the nation's fifth largest long distance company. The long
distance segment provides domestic and international voice, data and video
communications service primarily to small to mid-size business customers,
carrier customers and targeted consumer markets. Results for this segment also
include CLEC services. CLEC services are currently available in 15 states,
providing the Company with the ability to offer integrated local and long
distance telephone service to approximately 40% of the United States population.
The acquisition of GlobalCenter is expected to assist the Company in responding
to changes in the nature of calling, expanded use of the Internet and growth of
data transmission.
The Company operates its own switches, develops and implements its own
products, monitors and deploys its transmission facilities and prepares and
designs its own billing and reporting systems. The Company focuses primarily on
commercial accounts and certain targeted consumer markets. In this segment,
calling volume consists primarily of calls made during normal business hours,
which command peak-hour pricing. The Company's residential subscribers tend to
make most of their calls in the evening and on weekends, when business usage is
lowest.
Products and Services
The Company provides a variety of integrated telecommunications products and
services to commercial and residential subscribers nationwide designed to meet
the customer's total communications needs. The bulk of the Company's revenue is
derived from outbound and inbound long distance services which are generally
marketed under the Frontier name. Many of the Company's integrated products,
however, differ from those of competitors due
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to the level of value-added services the Company offers and the flexibility of
product pricing to maintain competitiveness.
The variety of products and services developed and offered are based upon
market driven requirements of the customer including an expectation that
services can be integrated. They include: value-added services, pricing,
reporting, 800 services, CLEC and data services.
Value-added Services-The Company's value-added services are aimed primarily at
the business subscriber, although the Company also offers products for
residential customers. Value-added services provide cost-effective solutions
for both simple and complex communications applications and include calling
cards, teleconferencing, broadcast fax, voice mail and cellular and paging
services.
The calling card is a personal communication tool that can provide access to
teleconferencing, voice mail, information services such as stock quotes and
weather information, Flexible Call Routing of toll free service, Call Delivery
for immediate or future message delivery, Directory Assistance and Travel
Connections to hotel, car and airline reservation systems. Using a calling
card, customers can call to any domestic and most international locations from
the U.S. or numerous international locations. In addition, the calling card
product enables customers to dial 100 frequently called numbers using their own
toll free number and a four-digit preprogrammed PIN.
Frontier Teleconferencing provides a way for three or more people at different
locations to participate in a joint discussion. Several options are available:
800 Meet-Me, Dial-Out or Dial-In via a Frontier calling card. Broadcast Fax
enables the user to fax a single document to multiple locations at the same time
and is designed for the larger fax user who regularly sends information to an
established list.
Voice Mail Plus with Fax Mail provides an efficient means of always being
accessible (through the use of outcall or pager notification) and never missing
important calls. With an individual toll-free number, a customer can: save,
delete or forward fax and voice messages to other Voice Mail Plus users or
change greetings all on one call. Customers can also store a fax or
automatically print it at a designated fax machine.
The Company offers cellular and paging services to both commercial and
residential customers on a single invoice to complement the customer's long
distance services. Cellular services are offered in 189 markets through
strategic partnerships with major cellular carriers. The Company believes this
multi-market coverage offers significant value to customers with multiple
locations and high mobility needs. Expansion into additional
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markets and new digital technologies is being pursued for future development.
The Company also offers nationwide numeric paging through personal toll free
numbers. When coupled with the Flexible Call Routing feature, nationwide paging
creates a robust travel application. Local paging service is also available in
selected local franchise markets.
The Company's toll free services are offered primarily to business customers
on a single invoice, although several residential products are available. In
addition to basic 800/888 toll-free applications, the Company offers MultiPoint,
which allows customers to terminate calls in different locations based on the
four-digit Personal Identification Number (PIN) the caller enters; GlobalPoint
international service, which completes calls originating in over 40 countries;
and Flex Connect 800, a fractional service which allows multiple residential
customers to reach different terminating locations utilizing a four-digit
security PIN. The Company also provides a robust line of routing features such
as Flexible Call Routing, which allows customers to change where calls terminate
based on their need; routing and blocking enhancements determined by the area
code, area code and exchange or full ten-digit telephone number of the caller;
time of day and day of week routing; and percent call allocation.
Toll free services also include Interactive Voice Response (IVR) services,
including TargetLine, a call prompter that routes callers either by menu options
or prompting them to enter digits for extension routing; InstaLink, a dealer
locator routing callers based upon their area code and exchange or zip code; and
PassPort, a network based host interface IVR solution.
Pricing-Customers subscribe to various products which determine the price per
minute that they pay on their outbound or inbound long distance calls. Rates
typically vary by the volume of usage, the distance of the calls, the time of
day that calls are made, the region that originates the call and whether or not
the product is being provided on a promotional basis.
Reporting Services-The Company offers a variety of billing options and media
aimed primarily at business customers. When a new commercial account is opened,
the customer is offered the opportunity to custom design the format of its
reports. The Company also offers customers graphic reports of traffic patterns
on a nationwide basis by state, within state by area of dominant influence
("ADI") and within ADI by zip code. The Company believes these services are
useful to certain customers for direct response advertising and customer service
applications. The Company also offers its proprietary personal computer
reporting service, known as expressview, which allows customers to design their
own reports, prepare separate
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itemized bills, do mark-up reporting and generate numerous other customer
reports.
800 Services-These services include area code blocking and routing; time of
day routing; Home Connection 800, a fractional 800 service which allows
residential customers to access 800 service utilizing a four-digit security PIN;
Multi-Point 800 service, which allows customers to use accounting codes on an
800 number or route a single 800 number to numerous locations simultaneously;
Follow-Me 800, which allows customers to change call routing and TargetLine 800,
which routes calls to the closest location a customer identifies and provides
custom prompts based upon a customer specific database.
CLEC Services-The Company provides competitive local telephone service bundled
with the Company's other long distance services through its CLEC product
offering. The CLEC offering is provided either using the Company's local
switching equipment in locations where it is available or on a resale basis. As
of December 31, 1997, the Company was providing local services as a CLEC,
combined with a complete range of long distance products in 15 states across the
country. As of the end of 1997, Frontier was serving in excess of 100,000
access lines ("ANIs"), nationwide, predominantly through resale, in markets
where it is not the incumbent local exchange carrier. The Company has switches
in New York, Minneapolis and Boston and has plans to install approximately 10
additional switches in 1998. The switches are being placed in cities located on
or near the Company's fiber optic network, which will provide Frontier with the
opportunity to expand its offerings of facilities based local and long distance
services into additional markets and insure maximum efficiency and cost
effectiveness. Frontier's objective for 1998 is to have the capability to offer
local services in 30 to 35 states, covering 65% to 70% of the population of the
United States.
Data Services-The Company's data services products target small to mid-sized
businesses. Data services currently include analog and digital private lines,
frame relay and dial-up Internet. In February 1998, the Company acquired
GlobalCenter, a provider of Internet, data and digital distribution services.
The acquisition of GlobalCenter will accelerate Frontier's ability to provide
data services. During 1998, Frontier is planning to expand its current data
services product set to include four additional categories of data services:
Network, Managed, Applications and Integration Services. Network Services are
the means to transport data from one location to another. It provides the
customer with the cost efficiencies of a public Internet network and the
security of a private network. Product offerings within this service category
include dedicated private lines, Integrated Services Digital Network ("ISDN"),
frame relay, dial-up and dedicated Internet. Managed Services provide
administrative, maintenance and problem management of the customer's data
network and ensures
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successful delivery of this data. Applications Services are outsourced
applications hosted by the service provider and integrated into both public and
private networks which enable the customer to access the application at all
times. Product offerings within this category include content management,
integrated messaging, web site hosting and media distribution. Integration
Services are a combination of consulting services and professional expertise
aimed at providing customers with the design and implementation of customized
data services.
Transmission
The Company endeavors to have sufficient switching capacity, local access
circuits, and long distance circuits at and between its network switching
centers to permit subscribers to obtain access to the switching centers and its
long distance circuits on a basis which exceeds industry standards regarding
clarity, busy signals or delays.
The network currently utilizes a variety of transmission circuits to complete
long distance calls. The Company's SONET based fiber optic network build,
started in October 1996, will reduce the number of transmission facilities
leased and provide for a more dependable and cost-effective transmission system.
Currently, fiber optic facilities have been completed in Texas, California,
Nevada, Utah, Colorado, Kansas, Missouri, Ohio, Pennsylvania, New York, Illinois
and Wisconsin. Completion of the SONET network is expected by year end 1998.
In addition to the fiber optic transmission circuits, the network is comprised
of digital microwave systems located in California, New York and Pennsylvania
for which the Company holds FCC licenses, and facilities that have been leased
on a fixed price basis under primarily short-term contracts. While the Company
still has a number of longer term lease contracts, these contracts have annual
"mark-to-market", "circuit portability", and "commitment buy-out" clauses.
These provisions function to keep the price the Company pays at or near current
market rates. An important aspect of the Company's operation is planning the
mix of the types of circuits and transmission capacity to be used for each
network switching center so that calls are completed on a basis which is cost
effective for the Company without compromising prompt service and high quality
to subscribers.
The Company's network switching centers house equipment with varying
capacities to meet the anticipated needs of the service origination region(s)
served by the center. The equipment used by the Company is, for the most part,
designed to permit expansion of its capacity by the addition of standard
components. If the maximum capacity of the equipment in any center is reached,
the Company replaces it with higher capacity switching equipment and attempts to
move the replaced unit to a network switching
13
<PAGE>
center in a different service origination region. The Company is dependent upon
local telephone companies for installing local access circuits and providing
related service when establishing a network switching center. International
service is provided through both Company owned direct circuits and through
contracts with several international long distance companies to provide high
quality international service at competitive rates.
It is anticipated that the network build scheduled now underway will lower the
Company's current cost structure and expand the Company's transmission
capabilities. However, the Company cannot definitively project the change in
its cost structure nor assure that the network will be fully completed as
scheduled or enhance Frontier's ability to grow and successfully compete for new
business.
Major Customer
The Long Distance Communications Services' growth has been impacted by a
major customer whose revenue represented 6%, 21% and 14% of long distance
revenues in 1997, 1996 and 1995, respectively. In 1996, the Company re-
negotiated its contract with this main customer as the customer was planning to
install its own long distance switching capacity and diversify its traffic
distribution to one or more additional carriers. The migration of the major
carrier customer's one-plus traffic was substantially complete as of December
31, 1996. The loss of this customer's one-plus traffic contributed to the
reduction in long distance operating income in 1997 and 1996.
Seasonality
The Company's long distance revenue is subject to certain limited seasonal
variations. Because most of the long distance revenue is generated by
commercial customers, the Company traditionally experiences decreases in long
distance usage and revenue from its commercial customers during vacation and
holiday periods. The effect of commercial seasonality is evidenced by lower
sequential traffic growth in the fourth quarter for these customers.
Local Communications Services
The Company's Local Communications Services segment comprises the eleventh
largest local exchange service provider in the United States. This segment
consists of 34 regulated telephone operating subsidiaries in 13 states, serving
approximately one million access lines. The local exchange carriers provide
local, toll, access and resale services, sell, install and maintain customer
premises equipment and provide directory services.
14
<PAGE>
Since the beginning of 1988, the Company has invested nearly $900 million in
upgrading its Local Communications Services' business. Over this period, the
Company installed advanced digital switching platforms throughout all of its
switching network, making the Company one of a small number in the industry to
be served by an all digital network for its local exchange companies.
Frontier has achieved substantial cost reductions through the elimination of
duplicative services and procedures and the consolidation of administrative
functions. The Company believes that additional cost reductions may be
obtainable from advance switching platforms and outside plant delivery systems.
The Company intends to pursue additional gains in productivity by investing in
these technologies where feasible, and through reengineering customer service
processes.
Of the 998,000 access lines in service on December 31, 1997, 701,000 were
residential lines and 297,000 were business lines. Long distance network
service to and from points outside of the telephone companies' operating
territories is provided by interconnection with the facilities of interexchange
carriers.
Frontier is pursuing several alternatives to provide expanded broadband
capabilities to its customers. To date, the Company has installed over 22,500
miles of fiber optic facilities (over 775 sheath miles) in the Rochester, New
York area to provide its customers with enhanced capacity and to position the
Company to offer new products. Throughout its Local Communications Services'
operations, Frontier has over 36,500 miles of fiber optic facilities in place.
The Company provides expanded broadband services to select customers, including
video-distance learning arrangements for educational institutions, and access to
SONET based fiber optic rings for major business customers. In addition, over
32,000 customers subscribe to Frontier's full-service Internet product.
The Company operates 60 central office and remote switching centers in
Rochester, New York, and a total of 266 central office and remote switching
centers in its other telephone territories. During late 1995, management
committed to a major switch consolidation plan at its FTR and Frontier
Communications of New York subsidiaries. The three-year plan to consolidate
host switches and reduce this number by over 60% is projected to improve network
efficiency and reduce the cost of maintenance and software upgrades. As of
December 1997, the project is progressing as scheduled and ten host switches
have been consolidated, representing nearly 80% of the total that will be
consolidated. The Company anticipates that the project will be substantially
complete by July 1998.
15
<PAGE>
In connection with its integration strategy, the Company has developed a
program known as "Frontier Long Distance", where its local exchange companies
resell Frontier's long distance services. The Company believes that many
customers prefer the convenience of obtaining their long distance service
through their local telephone company and receiving a single bill. Frontier
Long Distance is currently offered in the product lines at most of the Company's
local telephone exchange companies. The results of "Frontier Long Distance"
are included as part of the Long Distance Communications Services segment.
Environmental and Other Matters
Except for site specific issues, environmental issues tend to impact members
of the telecommunications industry in consistent ways. The Environmental
Protection Agency ("EPA") and other agencies regulate a number of chemicals and
other substances that may be present in facilities used in the provision of
telecommunications service. These include preservatives in some wood poles,
asbestos in certain underground duct systems and lead in some cable sheathing.
Some components of the Company's network may include one or more of these
substances. The Company believes that in their present uses, any such
facilities of the Company pose no significant environmental or health risk
derived from EPA regulated substances. If EPA regulation of any such substance
is increased, or if any facilities are disturbed or modified in such a way as to
require removal, special handling, storage and disposal may be required for any
such facilities removed from use. At this time the Company is not subject to
any environmental litigation that requires disclosure, except as set out in Item
3, Legal Proceedings.
Year 2000 Issues
The Company has developed a plan to ensure that all of its key computer
systems will be Year 2000 compliant in advance of December 31, 1999. The plan
encompasses all operating properties as well as corporate headquarters. It also
includes review and revision, where necessary, of computer applications that
directly connect elements of the company's business with customers, suppliers
and service providers.
Implementation of the plan began in 1997 and will continue through 1999. It
involves capital expenditures for new software and hardware, as well as spending
to modify existing software. In most cases, these systems purchases and
modifications will not only provide for Year 2000 compliance, but will also
enhance the Company's operations. Many of the changes would have been made in
any event, although perhaps on a different timetable.
16
<PAGE>
The Company does not believe it will face Year 2000 systems problems that
could materially impact operations or financial results. Costs of achieving Year
2000 compliance have not been and are not expected to be material to the
Company's financial condition or results of operations.
Employees and Labor Relations
As of December 31, 1997, the Company had 7,444 employees, of which 2,523 were
employees of Local Communications Services, 3,858 were employees of Long
Distance Communications Services, and 1,063 were employees of other operations.
At the Rochester, New York Operating Company, 560 clerical and service workers
were represented by the Rochester Telephone Workers Association ("RTWA") and 651
craft and clerical employees were represented by the Communications Workers of
America, Local 1170 ("CWA Local"). The union labor contracts are normally
negotiated in three year cycles.
Under the current three-year contract between the Company and the RTWA,
effective August 10, 1997, bargaining unit employees will receive a 2.0% general
increase on August 16, 1998 and August 15, 1999. On February 12, 1995, February
18, 1996 and February 16, 1997 they received a 1.0% general increase.
On January 31, 1996, the CWA Local contract expired. The contract
negotiations reached an impasse, and the Company implemented the terms of its
final offer as of April 9, 1996. Members of the CWA Local ratified a tentative
agreement with the Company 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
subsequently reached and ratified by CWA Local membership are not material. The
new agreement provides several operational improvements and will result in a
more consistent alignment of benefits with the rest of Frontier. The CWA Local
continues to appeal one issue with the National Labor Relations Board related to
the declaration of impasse. Hearings on this issue were completed in June, and
a decision is anticipated by the second quarter of 1998. This decision may be
appealed by either the CWA Local or the Company. The Company cannot predict the
final outcome of these matters at this time. The agreement ratified on April 29,
1997 is scheduled to expire in January, 1999.
The International Brotherhood of Electrical Workers ("IBEW") currently
represents 180 employees at three of the Company's New York communications
subsidiaries. These subsidiaries are Frontier Communications of New York,
Frontier Communications of Sylvan Lake and Frontier Communications of AuSable
Valley. The contracts between employees of Frontier Communications of New York
and Frontier Communications of Sylvan Lake and the IBEW
17
<PAGE>
expired February 13, 1997, and November 9, 1996, respectively. Settlements were
reached in December 1997. The contract between employees of Frontier
Communications of AuSable Valley and the IBEW expires May 10, 1998.
The Company cannot predict the final outcome of these matters at this time and
there can be no assurance that there will not be a material impact on the
results of operations. There can be no assurance that as contracts with the
Company's other labor unions expire, successful bargaining of new contract terms
will occur.
Risk Factors
The Company is subject to several risk factors that should be considered by
current shareowners and prospective investors. This Report on Form 10-K and the
documents incorporated by reference include forward looking statements as
described under the Private Securities Litigation Reform Act of 1995. Actual
results may differ materially from those identified in forward looking
statements. Forward looking statements are identified by such words as
"expects", "anticipates", "believes", "intends", "plans" and variations of such
words and similar expressions.
Changes in Rates of Growth of the Economy and the
Overall Industry
To some extent, the Company's revenue and earnings per share growth are
related to the overall economy and to the telecommunications industry in
general. Factors that may influence the Company's performance within the
telecommunications industry include product pricing and development, integration
of services, the effects of competition and the expansion of the business. The
performance of the economy and the telecommunications industry could cause the
Company's actual results to vary significantly.
Competition Risk
Technological innovation and regulatory changes are accelerating the pace
of competition for telecommunications services. As a result, the Company faces
intensified competition in all aspects of providing telecommunications services.
There are significant uncertainties surrounding the introduction of new
products and services and the capital expenditures that will be required by the
Company to remain in a competitive position. In addition, there are
uncertainties surrounding the impact on competition as a result of the enactment
of the Telecommunications Act.
18
<PAGE>
Acquisition Integration
A growth strategy of the Company over the last few years has been through
its long distance acquisition program and internal growth. This growth strategy
involves certain operational and financial risks. The operational risks include
the possibility that implementation of an acquisition does not provide the
economies of scale or synergies anticipated by management. Successful
integration and expansion of the Company's network as a result of the
acquisitions is dependent on management's ability to anticipate market growth,
install facilities, consolidate databases, obtain rights of way and negotiate
leases economically and efficiently. The integration of a growing employee base
and the elimination of redundant operations and facilities has required and will
continue to require significant management resources. Although management's
plans are to minimize the risks associated with acquisitions, there can be no
assurance that acquired businesses will be assimilated effectively into the
Company.
Contingent Liabilities
The Company and a number of its subsidiaries are continuously involved in
various judicial and administrative proceedings involving matters incidental to
the business. Unless otherwise stated specifically, the Company believes that
the probable outcome of any of these matters, or the combination of all of the
matters, will not have a material adverse effect on the Company's consolidated
results of operations or financial position. However, there can be no assurance
that the resolution of these matters will not be contrary to management's
expectations.
ITEM 2. PROPERTIES
The Company's Long Distance Communications Services segment owns property
which includes: fiber optic and copper cable, switching equipment, microwave
equipment, real estate and miscellaneous office and work equipment. The
Company's long distance segment also leases facilities or transmission capacity
from other carriers.
The Company's Local Communications Services segment owns telephone properties
in their respective operating territories which include: connecting lines
between customers' premises and the central offices; central office switching
equipment; buildings, land and miscellaneous property and customer premise
equipment. The central office switching equipment includes digital switches and
peripheral equipment. The connecting lines include aerial and underground
cable, conduit, poles, wires and microwave equipment. These facilities are
located on public streets and highways or on privately owned land. The Company
has permission to use these lands
19
<PAGE>
pursuant to local governmental consent or lease, permit, franchise, easement or
other agreement.
The Company owns or leases the land and buildings in which its central
offices, warehouse space, office and traffic headquarters are located. Frontier
Corporation's headquarters are located in a leased seven story building at 180
South Clinton Avenue, Rochester, New York. The lease expires in 2003 and is
renewable for two successive ten year periods.
ITEM 3. LEGAL PROCEEDINGS
On June 11, 1992, a group of corporate plaintiffs consisting of Cooper
Industries, Inc.; Keystone Consolidated Industries, Inc.; The Monarch Machine
Tool Company; Niagara Mohawk Corporation and Overhead Door Corporation commenced
an action in the United States District Court for the Northern District of New
York seeking contribution from fifteen corporate defendants, including Rotelcom
Inc., a wholly-owned subsidiary of the registrant held through intervening
subsidiaries (now named Frontier Network Systems Inc. or FNS). The plaintiffs
seek environmental "response costs" in the approximate amount of $1.5 million
incurred by the plaintiffs pursuant to a consent decree entered into by
plaintiffs with the United States Environmental Protection Agency (the "EPA").
Two additional defendants were named in 1994. In addition to FNS, the current
defendants are: Agway, Inc.; BMC Industries, Inc.; Borg-Warner Corporation; Elf
Atochem North America, Inc.; Mack Trucks, Inc.; Motor Transportation Services,
Inc.; Pall Trinity Micro Corporation; The Raymond Corporation; Redding-Hunter,
Inc.; Smith Corona Corporation; Sola Basic Industries, Inc.; Wilson Sporting
Goods Company; Phillip A. Rosen; Harvey M. Rosen; City of Cortland and New York
State Electric & Gas Corporation.
The consent decree concerned the clean-up of an environmental Superfund
site located in Cortland, New York. It is alleged that the corporate defendants
disposed of hazardous substances at the site and are therefore liable under the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA").
On November 21, 1997, the EPA issued a Proposed Remedial Action Plan" ("PRAP").
In the PRAP, the EPA outlined four alternative plans for remediating the site.
Total cost estimates for those alternatives range from $.5 million to $20
million. The alternative preferred by the EPA has an estimated cost of $3
million. The Company is presently evaluating the PRAP and will be consulting
with the other defendants about a joint response to plaintiffs. 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 or through negotiation
among the parties.
20
<PAGE>
Since February 1994, a significant number of former American Sharecom, Inc.
("ASI") shareholders have filed and amended several and various complaints in
Hennepin County (Minnesota) District Court. Included among the defendants are
ASI, its former principal shareowners, Steven Simon and James Weinert, and
Frontier. These suits allege generally that Simon and Weinert, with and through
ASI, embarked upon a scheme to gain control of ASI and acquire all of its stock
through common law fraud, breach of fiduciary duty and certain violations of the
Minnesota Business Corporation Act. This Act requires shareowners in a closely
held corporation to act fairly toward one another and refrain from
misappropriation. Another action by a few former ASI shareholders who dissented
from the cashout merger that finally took ASI private is pending in federal
court in Minnesota. The federal lawsuit asserts RICO claims in addition to
state common law and statutory violations. The claims against Frontier maintain
only 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.
At this time Simon and Weinert have negotiated settlements with the majority of
former ASI shareholders who had asserted claims.
Although it is too early to determine the outcome of the remaining 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 and defend 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"
21
<PAGE>
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 Regulatory Matters discussion in management's discussion of business in
Part 1, Item 1, is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY MATTERS
The Company's Common Stock is traded on the New York Stock Exchange (Symbol
- - FRO).The specific information required by this item is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------
Quarter High Low High Low High Low
------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Highest and lowest
market prices for the 1st $23.25 $ 17.75 $33.25 $ 28.25 $23.38 $ 19.25
stock by quarter: 2nd 20.50 15.38 33.38 27.75 24.13 19.63
3rd 24.19 19.00 31.25 25.88 28.63 23.75
4th 25.00 20.00 31.88 19.88 30.00 25.50
Common stock 1st $ .2175 $ .2125 $ .2075
dividends declared 2nd $ .2175 $ .2125 .2075
per share: 3rd $ .2175 $ .2125 .2075
4th $ .2225 $ .2175 .2125
------- ------- -------
Total Dividends per Year $.8750 $ .8550 $ .8350
Number of Shareowners (at December 31)
Individuals 28,432 29,697 26,184
Brokers, nominees and institutions 522 509 453
------- ------- -------
Total Shareowners 28,954 30,206 26,637
</TABLE>
22
<PAGE>
On March 2, 1998, the closing price for the Company's stock was $27.75 per
share as published in the Wall Street Journal.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item should be read in conjunction with
the consolidated financial statements and related notes included in Item 14
contained herein. Historical earnings per share have been restated to conform
with the provisions of Financial Accounting Standards Board Statement No. 128,
and is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues............................... $2,352,886 $2,575,569 $2,143,691 $1,667,545 $1,437,448
Income from Continuing Operations
(before Extraordinary Items and
Cumulative Effect of Changes in
Accounting Principles)................ $ 54,562 $ 217,944 $ 144,768 $ 187,254 $ 128,644
Consolidated Net Income................ $ 54,562 $ 209,926 $ 22,083 $ 180,057 $ 121,154
Basic Earnings per Common Share:
Income before Extraordinary Items and
Cumulative effect of Changes in
Accounting Principles................. $ .33 $ 1.34 $ .95 $ 1.25 $ .94
Extraordinary items.................... --- --- (.80) --- (.05)
Cumulative Effect of Changes
in Accounting Principles.............. --- (.05) (.01) (.04) ---
Earnings per Common Share-Basic........ $ .33 $ 1.29 $ .14 $ 1.21 $ .89
Diluted Earnings per Common Share:
Income before Extraordinary Items and
Cumulative effect of Changes in
Accounting Principles................. $ .33 $ 1.32 $ .89 $ 1.15 $ .83
Extraordinary items.................... --- --- (.75) --- (.05)
Cumulative Effect of Changes
in Accounting Principles.............. --- (.05) (.01) (.04) ---
Earnings per Common Share-Diluted...... $ .33 $ 1.27 $ .13 $ 1.11 $ .78
Cash Dividends Declared per
Common Share.......................... $ 0.875 $ 0.855 $ 0.835 $ 0.815 $ 0 .795
Total Assets........................... $2,475,150 $2,221,520 $2,108,592 $2,060,794 $1,721,545
Long-Term Debt......................... $ 930,467 $ 675,043 $ 618,867 $ 661,549 $ 581,707
</TABLE>
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS AND ANALYSIS OF
FINANCIAL CONDITION
The information required by this item is presented in pages 13 through
24 of the Company's 1997 Annual Report to Shareowners which is Exhibit 13.1 to
this Form 10-K, and is incorporated by reference into this Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, together with the report thereon of
Price Waterhouse LLP, dated January 26, 1998, is presented on pages 25 through
45 of the Company's 1997 Annual Report to Shareowners, which is Exhibit 13.1 to
this Form 10-K and is incorporated by reference into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information required by this item for the Directors of Frontier
Corporation is presented on pages 1 through 4 of the definitive proxy statement
provided to shareowners on or about March 13, 1998 in connection with the Annual
Meeting of Shareowners to be held April 29, 1998, which is Exhibit 99 to this
Form 10-K and is incorporated by reference into this Item 10. Exhibit 99
consists of the Notice of Annual Meeting and the Company's Proxy Statement for
the April 29, 1998 Annual Meeting of Shareowners.
Executive Officers
Certain information is set forth below regarding the Executive Officers of the
Company as of March 16, 1998. Each Officer serves for a period of one year or
until a successor is elected.
<TABLE>
<CAPTION>
Other Positions Held
Name Position and During the Past
(Age) Offices Held Five Years
----- ------------ --------------------
<S> <C> <C>
Robert L. Barrett (56) Executive Vice From May 1995 to March 1996 he was
President and Executive Vice President and Chief
President of Technology Officer of Banc One
Network Systems & Corporation/1/. From May 1991
Services since to May 1995 he was President
March 1996 and Chief Operating Officer of
Banc One Services Corporation./1/
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C>
David R. Carey (44) Senior Vice From December 1995 to March
President, 1997 he was Chief Executive
Marketing Officer and President of LG&E
since Natural Inc. From January 1994
October 1997 to December 1995 he was Senior
Vice President - Operations of
Louisville Gas & Electric Co./2/ From
December 1991 to December 1993 he was
Vice President and General Manager of
Louisville Gas & Electric Co.
Jeremiah T. Carr (54) Executive Vice From May 1995 to January 1997 he
President was Senior Vice President.
and President - From January 1995 to May 1995
Frontier Operations he was President and
since January 1997 Chief Executive Officer of
Rochester Telephone Corp.,
and President Telephone Group.
From November 1993 to December
1994 he was Corporate Vice President
and President - Telephone Group.
From February 1992 to November
1993 he was Corporate Vice President
and President Telephone Operations.
Joseph P. Clayton (48) Chief Executive From June 1997 to August 1997 he
Officer and was President and Chief Operating
President since Officer. From April 1988 to December
August 1997 1996 he was Executive Vice President-
Marketing & Sales--Americas & Asia
of Thomson Consumer Electronics./3/
James G. Dole (39) Senior Vice From June 1996 to October 1997 he
President and was Vice President and Controller.
Controller since From January 1995 to June 1996 he
October 1997 was Vice President - Business
Development. From November 1993
to January 1995 he was Corporate
Strategic Planning Director. From
September 1992 to November 1993 he
was Corporate Business Planning
Director.
Joseph Enis (53) Treasurer since From June 1994 to December 1994
January 1995 he was Director of Finance. From
1992 to June 1994 he was Treasurer of
National Service Industries./4/ From
1984 to 1992 he was Treasurer of
Cyclops Industries./5/
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C>
Douglas T. Hickey (42) Senior Vice From July 1996 to February 1998
President and he was a Director and CEO of
President - Frontier GlobalCenter, Inc. From December
GlobalCenter since 1994 to July 1996 he was President
February 1998 of MFS Datanet, Inc., a subsidiary of
MFS Communications Company, Inc./6/
From October 1992 to November 1994
he was General Manager of North
American Sales and Field Operations
of Ardis company, a subsidiary of
Motorola, Inc./7/
Louis L. Massaro (51) Executive Vice From August 1995 to May 1996
President, Chief he was Executive Vice President
Financial Officer and Chief Administrative Officer.
and Chief From December 1994 to August 1995
Administrative he was Corporate Vice President.
Officer since May From February 1993 to December
1996 (retired 1994, he was Corporate Vice President
February 26, 1998) and Treasurer. From September 1991
to February 1993 he was Corporate
Vice President and President-
Rochester Operations.
Martin T. McCue (47) Senior Vice Since July 1997 he serves as
President and General Counsel to the Company.
General Counsel From July 1997 to January 1998 he
since January 1998 was Vice President and General
Counsel. From January 1995 to
July 1997 he was Corporate Vice
President - Legal, Planning and
Regulatory. From April 1994 to
January 1995 he was Corporate Vice
President - Planning & Legal. From
December 1993 to April 1994 he was
Corporate Vice President - Planning.
From 1986 to December 1993 he was
Vice President and General Counsel
of the United States Telephone
Association.
Donna L. Reeves-Collins (37) Senior Vice From September 1996 to October
President and 1997 she was President - Western
President - Region Long Distance Sales. From
Frontier Sales since December 1994 to September 1996 she
October 1997 was President and Chief Operating
Officer of Upstate Cellular Network (a
joint venture). From September 1993
to December 1994 she was Vice
President-Consumer Service Long
Distance. From August 1991 to
September 1993 she was Manager -
Human Resources.
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C>
Josephine S. Trubek (55) Corporate Secretary From January 1990 to April 1993 she
since April 1993 was General Counsel and Secretary.
</TABLE>
/1/ Banc One is one of the 10 largest bank holding companies in the U.S. Banc
One Services Corporation is a subsidiary of Banc One.
/2/ Louisville Gas & Electric Co. is a public utility corporation.
/3/ Thomson Consumer Electronics is a manufacturer of consumer electronics.
/4/ National Service Industries is a public company with businesses in lighting,
textile rentals and specialty chemicals.
/5/ Cyclops Industries is a public manufacturer of specialty steels and
curtainwall systems.
/6/ MFS Communications Company, Inc. is a provider of communications services.
/7/ Motorola, Inc. is a provider of wireless communications, semiconductors, and
advanced electronic systems, components and services.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is presented on pages 3 through 4 of
the Company's Proxy Statement (which was provided to shareowners on or about
March 12, 1998 in connection with the Annual Meeting of Shareowners to be held
on April 29, 1998) under the caption "Compensation of Directors" and on pages 6
through 14 under the captions "Report of Committee on Management," "Performance
Graph," "Compensation of Company Management," and "Compensation Committee
Interlocks and Insider Participation in Compensation Decisions," and is
incorporated by reference into this Item 11. The Company's Proxy Statement is
found at Exhibit 99 to this Form 10-K. Exhibit 99 consists of the Notice of
Annual Meeting and the Company's Proxy Statement for the April 29, 1998 Annual
Meeting of Shareowners.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is presented in the "Management and
Directors Stock Ownership Table as of February 10, 1998" and the "Stock
Ownership of Certain Beneficial Owners Table as of December 31, 1997" under the
caption "Stock Ownership of Management, Directors and Certain Beneficial Owners"
on pages 4 through 5 of the definitive Proxy Statement for the Annual Meeting of
Shareowners to be held April 29, 1998, and is incorporated by reference into
this Item 12.
27
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is presented under the sub-caption
"Employment Contracts" on pages 13 through 14 of the Definitive Proxy Statement
for the Annual Meeting of Shareowners to be held April 29, 1998 and is
incorporated by reference into this Item 13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. Index to Financial Statements
Page*
-----
Report of Management 25
Report of Audit Committee 25
Report of Independent Accountants 25
Business Segment Information 26
Consolidated Statements of Income 27
Consolidated Balance Sheets 28
Consolidated Statements of Cash Flows 29
Consolidated Statements of Shareowners' Equity 30
Notes to Consolidated Financial Statements 31-45
Report of Ernst & Young LLP 46**
*Pages 25 through 45 are incorporated by reference from the
indicated pages of the 1997 Annual Report to Shareowners.
**Set forth herein.
2. Financial Statement Schedule for the years ended December 31,
1997, 1996 and 1995:
Report of Independent Accountants on Financial Statement Schedule
Report of Ernst & Young LLP on Financial Statement Schedule
Valuation and Qualifying Accounts and Reserves - Schedule II
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.
28
<PAGE>
3. See Exhibit Index for list of exhibits filed with this report.
The Registrant hereby agrees to furnish the Commission a copy of each of
the Indentures or other instruments defining the rights of security
holders of the long-term debt securities of the Registrant and any of
its subsidiaries for which consolidated or unconsolidated financial
statements are required to be filed.
(b) Reports on Form 8-K
The Company filed the following report during the quarter ended December
31, 1997:
SEC Filing Date Item No. Financial Statements
--------------- -------- --------------------
October 14, 1997 5 None
The Company filed the following report(s) subsequent to the quarter ended
December 31, 1997 through March 27, 1998:
SEC Filing Date Item No. Financial Statements
--------------- -------- --------------------
January 30, 1998 5 None
March 2, 1998 5 None
(c) Refer to Item 14(a)(3) above for Exhibits required by Item 601 of
Regulation S-K.
(d) Schedules other than set forth in response to Item 14(a)(2) above for which
provision is made in the applicable accounting regulations of the Securities
and Exchange Commission are not required under the related instructions or
are inapplicable, and therefore have been omitted.
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Shareowners of
Frontier Corporation
Our audits of the consolidated financial statements referred to in our report
dated January 26, 1998 appearing on page 25 of the 1997 Annual Report to
Shareowners of Frontier Corporation (which report and consolidated
financial statements are incorporated by reference in this Annual Report on
Form 10-K) also included an audit of the Financial Statement Schedule
listed in Item 14(a)(2) of this Form 10-K. We did not audit the Financial
Statement Schedule of ALC Communications Corporation, a wholly owned
subsidiary, which statement reflects valuation and qualifying accounts and
reserves of $40,078,000 at December 31, 1995. That Financial Statement Schedule
was audited by other auditors whose report thereon has been furnished to us,
and our opinion expressed herein, insofar as it relates to the amounts included
for ALC Communications Corporation, is based solely on the report of the other
auditors. In our opinion, based on our audits and the report of other
auditors, this Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/Price Waterhouse LLP
- -----------------------
PRICE WATERHOUSE LLP
January 26, 1998
Rochester, New York
30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
ALC Communications Corporation
We have audited the financial statements of ALC Communications Corporation (ALC)
as of December 31, 1995 and for the year then ended, and have issued our report
thereon dated January 17, 1996. Our audits also included Schedule II of ALC
(not presented separately herein) which is included in the related schedule of
Frontier Corporation in its Annual Report on Form 10-K for the year ended
December 31, 1995. This financial statement schedule is the responsibility of
ALC management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule of ALC referred to above, when
considered in relation to the ALC basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/Ernst & Young LLP
- --------------------
Ernst & Young LLP
January 17, 1996
Detroit, Michigan
31
<PAGE>
FRONTIER CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES FOR THE YEAR ENDED DECEMBER 31, 1997
(Table 1 of 3)
In thousands of dollars
<TABLE>
<CAPTION>
Additions
----------------------
Balance at Charged to Charged to
beginning costs and other Balance at
Description of year expenses accounts Deductions end of year
----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Reserve for uncollectible
accounts $30,911 $51,720 $3,488/(1)/ $63,390/(2)/ $22,729
======= ======= ====== ======= =======
Deferred tax asset valuation
allowance $19,461 $0 $0 $ 3,688 $15,773
======= == == ======= =======
Acquisition related reserves $40,796 $0 $0 $36,598 $ 4,198/(3)/
======= == == ======= =======
Restructuring reserves $0 $43,000 $0 $26,800 $16,200/(4)/
== ======= == ======= =======
</TABLE>
/(1)/ Primarily recoveries of uncollectible accounts.
/(2)/ Uncollectible accounts written off.
/(3)/ Included primarily in "Property, plant, and equipment" in the Consolidated
Balance Sheets.
/(4)/ Included primarily in "Other liabilities" in the Consolidated Balance
Sheets.
32
<PAGE>
FRONTIER CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES FOR THE YEAR ENDED DECEMBER 31, 1996
(Table 2 of 3)
In thousands of dollars
<TABLE>
<CAPTION>
Additions
----------------------
Balance at Charged to Charged to
beginning costs and other Balance at
Description of year expenses accounts Deductions end of year
----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Reserve for uncollectible
accounts $28,515 $74,452 $5,183/(1)/ $77,239/(2)/ $30,911
======= ======= ====== ======= =======
Deferred tax asset valuation
allowance $23,887 $0 $0 $ 4,426 $19,461
======= == == ======= =======
Acquisition related reserves $83,149 $0 $0 $42,353 $40,796/(3)/
======= == == ======= =======
</TABLE>
/(1)/ Primarily recoveries of uncollectible accounts.
/(2)/ Uncollectible accounts written off.
/(3)/ Included primarily in "Property, plant, and equipment" in the Consolidated
Balance Sheets.
FRONTIER CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES FOR THE YEAR ENDED DECEMBER 31, 1995
(Table 3 of 3)
In thousands of dollars
<TABLE>
<CAPTION>
Additions
----------------------
Balance at Charged to Charged to
beginning costs and other Balance at
Description of year expenses accounts Deductions end of year
----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Reserve for uncollectible
accounts $11,407 $ 36,655 $24,986/(1)/ $44,533/(2)/ $28,515
======= ======== ======= ======= =======
Deferred tax asset valuation
allowance $28,500 $0 $ 7,950/(3)/ $12,563 $23,887
======= == ======= ======= =======
Acquisition related reserves $0 $114,239 $0 $31,090 $83,149/(4)/
== ======== == ======= =======
</TABLE>
/(1)/ Primarily recoveries of uncollectible accounts.
/(2)/ Uncollectible accounts written off.
/(3)/ Balances added through acquisitions.
/(4)/ Includes primarily in "Other liabilities" and "Property, plant and
equipment" in the Consolidated Balance Sheets.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/ Joseph P. Clayton
---------------------------
Joseph P. Clayton
Chief Executive Officer
and President
Date: March 23, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Joseph P. Clayton By: /s/ James G. Dole
--------------------------- ---------------------------
Joseph P. Clayton James G. Dole
Chief Executive Officer, Senior Vice President and
President and Director Controller
Date: March 23, 1998 (principal financial and
accounting officer)
Date: March 23, 1998
* *
- ------------------------------- -------------------------------
Patricia C. Barron Raul E. Cesan
Date: March 23, 1998 Date: March 23, 1998
* *
- ------------------------------- -------------------------------
Brenda E. Edgerton Jairo A. Estrada
Date: March 23, 1998 Date: March 23, 1998
* *
- ------------------------------- -------------------------------
Michael E. Faherty Daniel E. Gill
Date: March 23, 1998 Date: March 23, 1998
* *
- ------------------------------- -------------------------------
Alan C. Hasselwander Robert J. Holland, Jr.
Date: March 23, 1998 Date: March 23, 1998
* *
- ------------------------------- -------------------------------
Douglas H. McCorkindale Leo J. Thomas
Date: March 23, 1998 Date: March 23, 1998
*By: /s/ James G. Dole Manually signed powers of attorney for
--------------------------- each Director are attached hereto and
James G. Dole filed herewith pursuant to Regulation
Attorney-in-Fact S-K Item 601(b)24 as Exhibit 24.
34
<PAGE>
FRONTIER CORPORATION
EXHIBIT INDEX
Exhibit
Number Exhibit Description Reference
- ------- ------------------- ---------
3.1 Restated Certificate of Incorporated by reference
Incorporation dated to Exhibit 3.1 to Form 10-K
January 24, 1995 for the year ended
December 31, 1995
3.2 Amendment to Restated Incorporated by reference
Certificate of Incorporation to Exhibit 3.2 to Form 10-K
dated April 9, 1995 for the year ended
December 31, 1995
3.3 By-Laws Filed herewith
4.1 Copy of Indenture between Incorporated by reference
the Company and Manufacturers to Exhibit 4.12 to Form
Hanover Trust Company, 10-K for the year ended
Trustee, dated September 1, December 31, 1986
1986
4.2 Copy of First Supplemental Incorporated by reference
Indenture to said Indenture, to Exhibit 4(b) to
made by the Company to Registration Statement
Manufacturers Hanover Trust 33-32035
Company, Trustee, dated
December 1, 1989
4.3 Copy of 10.46% Non Negotiable Incorporated by reference
Convertible Debenture due to Exhibit 4.14 to Form
October 27, 2008 from the 10-K for the year ended
Company to The Walters Trust December 31, 1988
4.4 Copy of 9% Debenture due Incorporated by reference
August 15, 2021 to Exhibit 4.16 to Form
10-K for the year ended
December 31, 1991
4.5 Copy of Indenture between the Incorporated by reference
Company and Chase Manhattan to Exhibit 4.5 to Form
Bank, N.A. dated August 9, 10-K for the year ended
1995 December 31, 1995
4.6 Copy of Indenture, dated May 21, Incorporated by reference
1997 between the Company and to Exhibit 4.1 to Form 8-K
Chase Manhattan Bank, NA as filed May 23, 1997.
Trustee
35
<PAGE>
4.7 Copy of Supplemental Indenture between Filed herewith
the Company and Chase Manhattan Bank,
NA as Trustee
10.1 Copy of Joint Venture Incorporated by reference
Agreement dated March 9, 1993 to Exhibit 10.13 to Form
by and between Rochester Tel 10-K for the year ended
Cellular Holding Corporation December 31, 1992
and New York Cellular
Geographic Service Area, Inc.
together with Exhibit A
thereto
10.2 Copy of the Plan for the Incorporated by reference
Deferral of Directors Fees to Exhibit 10.34 to Form
10-K for the year ended
December 31, 1994
10.3 Copy of the Directors' Incorporated by reference
Common Stock Deferred to Exhibit 10.36 to Form
Growth Plan 10-K for the year ended
December 31, 1994
10.4 Copy of the Management Stock Incorporated by reference
Incentive Plan dated to Exhibit 10.23 to Form
April 26, 1995 10-K for the year ended
December 31, 1995
10.5 Executive contract with supporting Incorporated by reference
offer letter for Mr. Barrett to Exhibit 10.25 to Form
10-Q for the quarter ended
March 31, 1996
10.6 Executive contract with supporting Incorporated by reference
offer letter and note for Mr. Bennis to Exhibit 10.26 to Form
10-Q for the quarter ended
March 31, 1996
10.7 Restated Directors Incorporated by reference
Stock Incentive Plan to Exhibit 10.27 to Form
dated April 24, 1996 10-Q for the quarter ended
March 31, 1996
10.8 Employee Stock Option Plan Incorporated by reference
to Exhibit 10.28 to Form
10-Q for the quarter ended
March 31, 1996
10.9 IRU Agreement between Qwest Incorporated by reference
Communications Corp. and to Exhibit 10.11 to Form
Frontier Communications International 10-K for the year ended
Inc. dated October 18, 1996. December 31, 1996
(CONFIDENTIAL TREATMENT
REQUESTED FOR CERTAIN PORTIONS
OF THIS EXHIBIT)
36
<PAGE>
10.10 Copy of the Restated Supplemental Incorporated by reference
Management Pension Plan to Exhibit 10.12 to Form
10-K for the year ended
December 31, 1996.
10.11 Copy of the Restated Supplemental Incorporated by reference
Retirement Savings Plan to Exhibit 10.13 to Form
10-K for the year ended
December 31, 1996
10.12 Form of management contracts Incorporated by reference
as amended with each of Messrs. to Exhibit 10.7 to Form
Bittner, Massaro, Carr and Gregory 10-K for the year ended
December 31, 1996
10.13 Promissory Note for Mr. Bittner Incorporated by reference
to Exhibit 10.18 to Form
10-Q for the quarter ended
March 31, 1997
10.14 Medical Expense Reimbursement Incorporated by reference
for Mr. Bittner to Exhibit 10.19 to Form
10-Q for the quarter ended
March 31, 1997
10.15 Management contract with Mr. Clayton Incorporated by reference
to Exhibit 10.20 to Form
10-Q for the quarter ended
June 30, 1997
10.16 Form of management contracts with Incorporated by reference
Ms. Reeves-Collins and Mr. Carey to Exhibit 10.21 to Form
10-Q for the quarter ended
September 30, 1997
10.17 Amendment No. 1 to the Management Incorporated by reference
Stock Incentive Plan to Exhibit 10.22 to Form
10-Q for the quarter ended
September 30, 1997
10.18 Letter agreement regarding severance Incorporated by reference
with Mr. Bennis to Exhibit 10.25 to Form
10-Q for the quarter ended
September 30, 1997
10.19 Letter agreement regarding severance Incorporated by reference
with Mr. Gregory to Exhibit 10.26 to Form
10-Q for the quarter ended
September 30, 1997
10.20 Copy of 1997 Executive Compensation Filed herewith
Program
10.21 Amendment No. 1 to Supplemental Filed herewith
Management Pension Plan
10.22 Executive contract with Mr. Clayton, Filed herewith
effective January 1, 1998
37
<PAGE>
10.23 Management contract and promissory note Filed herewith
with Mr. Hickey, effective January 14, 1998
10.24 Service Continuation Agreement with Filed herewith
collateral documentation with Mr. Massaro,
effective December 29, 1997
10.25 Management contract with Mr. McCue, Filed herewith
effective January 1, 1998
11 Computation of Diluted Filed herewith
Earnings Per Share
13.1 Specified portions (pages 13 Filed herewith
through 45 of the Company's
Annual Report to shareowners
for the year ended December 31, 1997)
13.2 Report of Ernst & Young LLP Filed herewith
21 Subsidiaries of Frontier Filed herewith
Corporation
23.1 Consent of Independent Filed herewith
Accountants - Price Waterhouse LLP
23.2 Consent of Independent Filed herewith
Accountants - Ernst & Young LLP
24 Power of Attorney for a Filed herewith
majority of Directors naming
James G. Dole attorney-in-fact
27 Financial Data Schedule Filed herewith
99 Proxy Statement for the Filed herewith
Annual Meeting of Shareowners
38
<PAGE>
EXHIBIT 3.3
FRONTIER CORPORATION
By-Laws
As Revised Effective March 21, 1983
(And as amended 7/16/84, 11/19/84, 2/17/86, 2/16/87,
4/22/87, 11/20/89, 2/19/90, 11/19/90, 4/24/91,
4/29/92, 4/21/93, 4/27/94, 9/19/94, 1/1/95, 4/26/95, 8/16/95
1/22/96, 4/30/96, 6/16/97, 9/15/97, 3/1/98)
ARTICLE I
SHAREHOLDERS
Section 1 - Annual Meeting.
- ---------------------------
An annual meeting of shareholders for the election of Directors and the
transaction of other business shall be held at such time on any day in the month
of April in each year or on such other date as shall be fixed by the Board of
Directors.
Section 2 - Special Meetings.
- -----------------------------
Special Meetings of the shareholders may be called by the Board of
Directors. Such meeting shall be held at such time as may be fixed in the
notice of meeting.
Section 3 - Place of Meeting.
- -----------------------------
Meetings of shareholders shall be held at such place, within or without
the State of New York, as may be fixed in the notice of meeting.
Section 4 - Notice of Meeting.
- ------------------------------
Notice of each meeting of shareholders shall be in writing and shall state
the place, date and hour of the meeting and the purpose or purposes for which
the meeting is called.
A copy of the notice of any meeting shall be given, personally, or by mail, not
less than ten or more than fifty days before the date of the meeting, to each
shareholder entitled to vote at such meeting. If mailed, such notice is given
when deposited in the United States mail, with postage thereon prepaid, directed
to the shareholder at the shareholder's address as it appears on the record of
shareholders, or, if the shareholder shall have filed with the Secretary of the
Corporation a written request that notices be mailed to some other address,
then directed to the shareholder at such other address.
3/21/83
<PAGE>
(2)
Section 5 - Inspectors of Election.
- -----------------------------------
The Board of Directors, in advance of any shareholders' meeting, may
appoint one or more inspectors to act at the meeting or any adjournment thereof.
If inspectors are not so appointed, the person presiding at a shareholders'
meeting may, and on the request of any shareholder entitled to vote at such
meeting shall, appoint two inspectors. Each inspector, before entering upon the
discharge of the inspector's duties, shall take and sign an oath faithfully to
execute the duties of inspector at such meeting with strict impartiality and
according to the best of the inspector's ability.
The inspectors shall determine the number of shares outstanding and the
voting power of each, the shares represented at the meeting, the existence of a
quorum, and the validity and effect of proxies, and shall receive votes, ballots
or consents, hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes, ballots or
consents, determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all shareholders. On request of the person
presiding at the meeting or any shareholder entitled to vote at such meeting,
the inspectors shall make a report in writing of any challenge, question or
matter determined by them and execute a certificate of any fact found by them.
Any report or certificate made by them shall be prima facie evidence of the
----- -----
facts stated and of the vote as certified by them.
Section 6 - List of Shareholders at Meeting.
- --------------------------------------------
A list of shareholders as of the record date, certified by the Secretary
or any Assistant Secretary or by the Transfer Agent, if any, shall be produced
at the meeting of shareholders upon the request of any shareholder at such
meeting or prior thereto. If the right to vote at any meeting is challenged,
the inspectors of election, or person presiding at such meeting, shall require
such list of shareholders to be produced as evidence of the right of the persons
challenged to vote at such meeting, and all persons who appear from such list to
be shareholders entitled to vote at such meeting may vote at such meeting.
3/21/83
<PAGE>
(3)
Section 7 - Qualification of Voters.
- ------------------------------------
Every shareholder of record of common stock of the Corporation shall be
entitled at every meeting of shareholders to one vote for every share of common
stock held by the shareholder in the shareholder's name on the record of
shareholders, subject, however, to the voting rights granted to the holders of
Cumulative Preferred Stock of the Corporation upon default in dividends thereon.
Section 8 - Quorum of Shareholders.
- -----------------------------------
The holders of a majority of the shares entitled to vote at such meeting
shall constitute a quorum at a meeting of shareholders for the transaction of
any business, provided that when a specified item of business is required to be
voted on by a class or series, voting as a class, the holders of a majority of
the shares of such class or series shall constitute a quorum for the transaction
of such specified item of business.
The shareholders present, in person or by proxy, and entitled to vote
may, by a majority of votes cast, adjourn the meeting despite the absence of a
quorum.
Section 9 - Vote of Shareholders.
- ---------------------------------
Directors shall, except as otherwise required by law, or by the
certificate of incorporation as permitted by law, be elected by a plurality of
the votes cast at a meeting of shareholders by the holders of shares entitled to
vote in the election.
Whenever any corporate action, other than the election of Directors, is to
be taken by vote of the shareholders, it shall, except as otherwise required by
law, or by the certificate of incorporation as permitted by law, be authorized
by a majority of the votes cast at a meeting of shareholders by the holders of
shares entitled to vote thereon.
Section 10 - Proxies.*
- ----------------------
Every shareholder entitled to vote at a meeting of shareholders or to
express consent or dissent without a meeting may authorize another person or
persons to act for that shareholder by proxy. Any proxy may be transmitted,
authorized or executed in any manner permitted by the New York Business
Corporation Law. No proxy shall be valid after the expiration of eleven months
from
3/21/83
*revised 3/1/98
<PAGE>
(4)
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 sixty nor less
than ten days before the date of such meeting, nor more than sixty days prior to
any other action.
Section 12 - Order of Business.*
- --------------------------------
The order of business at each meeting of shareholders shall be as
determined by the chairman of the meeting. The chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts and things as are necessary or desirable for the proper
conduct of the meeting, including, without limitation, the establishment of
procedures for the maintenance of order and safety, limitations on the time
allotted to questions or comments on the affairs of the Corporation,
restrictions on entry to such meeting after the time prescribed for the
commencement thereof, and the opening and closing of the voting polls.
At any special meeting of shareholders, only such business may be
transacted which is related to the purpose or purposes set forth in the notice
of such meeting.
At any annual meeting of shareholders, only such business (other than the
nomination or election of directors) shall be conducted as shall have been
brought before the annual meeting (i) by or at the direction of the chairman of
the meeting or (ii) by any shareholder who is a holder of record at the time of
the giving of the notice provided for in this Section 12, who is or will be
entitled to vote at the meeting and who complies with the procedures set forth
in this Section 12.
3/21/83
*Revised 9/19/94
**Revised 3/1/98
<PAGE>
(5)
For business (other than the nomination or election of directors) properly
to be brought before an annual meeting by a shareholder, the shareholder must
have given timely notice thereof in proper written form to the Secretary. To be
timely, a shareholder's notice must be addressed to the Secretary and delivered
to or mailed and received at the principal executive offices of the Corporation
not less than 60 days nor more than 90 days prior to the anniversary date of the
immediately preceding annual meeting; provided, however, that in the event that
-------- -------
the date of the annual meeting is more than 30 days earlier or more than 60 days
later than such anniversary date, notice by the shareholder to be timely must be
so delivered or received not earlier than the 90th day prior to such annual
meeting and not later than the close of business on the later of the 60th day
prior to such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made. To be in proper written
form, a shareholder's notice to the Secretary shall set forth in writing as to
each matter the shareholder proposes to bring before the annual meeting: (i) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting; (ii)
the name and address, as they appear on the Corporation's books, of the
shareholder proposing such business; (iii) the class and number of shares of the
Corporation which are beneficially owned by the shareholder; (iv) a
representation that the shareholder is or will be entitled to vote at such
annual meeting and intends to appear in person (or send a qualified
representative) or by proxy to present such proposal at the meeting; and (v) any
material interest of the shareholder in such business. The foregoing notice
requirements shall be deemed satisfied by a shareholder if the shareholder has
notified the Corporation of his or her intention to present a proposal at an
annual meeting and such shareholder's proposal has been included in a proxy
statement that has been prepared by management of the Corporation to solicit
proxies for such annual meeting; provided, however, that if such shareholder
-------- -------
does not appear in person (or send a qualified representative) or by proxy to
present such proposal at such annual meeting, the Corporation need not present
such proposal for a vote at such meeting, notwithstanding that proxies in
respect of such vote may have been received by the Corporation. Notwithstanding
anything in the By-Laws to the contrary, no business shall be conducted at any
annual meeting except in accordance with the procedures set forth in this
Section 12. The chairman of an annual meeting shall, if the facts warrant,
determine that business was not properly brought before the annual meeting in
accordance with the provisions of this
3/21/83
<PAGE>
(6)
Section 12 and, if he should so determine, he shall so declare to the annual
meeting and any such business not properly brought before the annual meeting
shall not be transacted and any proposal contemplated by such business shall be
void.
ARTICLE II
BOARD OF DIRECTORS
Section 1 - Power of Board and Qualification of Directors.
- ----------------------------------------------------------
The business of the Corporation shall be managed under the direction of
its Board of Directors, each of whom shall be at least twenty-one years of age.
Section 2 - Number of Directors.*
- ---------------------------------
At the annual meeting of shareholders, the shareholders shall elect twelve
directors.
Section 3 - Election, Term and Qualifications of Directors.
- -----------------------------------------------------------
At each annual meeting of shareholders, Directors shall be elected to hold
office until the next annual meeting and until their successors have been
elected and qualified. No person shall be eligible for election or reelection
to the Board of Directors after reaching seventy years of age, or in the case of
a retired Chairman of the Board of Directors or a retired President of the
Corporation, after reaching sixty-seven years of age. The term of any Director
who is also an Officer of the Corporation or any subsidiary of the Corporation,
other than the Chairman of the Board or the President of the Corporation, shall
end on the date of termination from active employment and such officer shall
thereafter be ineligible for reelection to the Board of Directors.
Section 4 - Quorum of the Board: Action by the Board.
- -----------------------------------------------------
One-third of the entire Board of Directors shall constitute a quorum for
the transaction of business, and the vote of a majority
3/21/83
*Revised 7/16/84, 2/17/86, 11/20/89, 2/19/90, 11/19/90, 4/24/91, 4/27/94,
1/1/95, 4/26/95, 8/16/95, 1/22/96, 4/30/96, 6/16/97, 9/15/97
<PAGE>
(7)
of the Directors present at the time of such vote, if a quorum is then present,
shall be the act of the Board.
Section 5 - Action Without a Meeting.
- -------------------------------------
Any action required or permitted to be taken by the Board or any committee
thereof may be taken without a meeting if all members of the Board or of the
committee consent in writing to the adoption of the resolution authorizing the
action. The resolution and the written consents thereto by the members of the
Board or committee shall be filed with the minutes of the proceedings of the
Board or committee.
Section 6 - Participation in Board Meetings by Conference Telephone.
- --------------------------------------------------------------------
Any one or more members of the Board of Directors or any committee thereof
may participate in a meeting of such Board or committee by means of a conference
telephone or similar communications equipment allowing all persons participating
in the meeting to hear each other at the same time. Participation by such means
shall constitute presence in person at a meeting.
Section 7 - Meetings of the Board.
- ----------------------------------
An annual meeting of the Board of Directors shall be held in each year
directly after adjournment of the annual shareholders' meeting. Regular
meetings of the Board shall be held at such times as may from time to time be
fixed by resolution of the Board. Special meetings of the Board may be held at
any time upon the call of the Chairman of the Board of Directors, if such there
be, the President or any two Directors.
Meetings of the Board of Directors shall be held at such place, within or
without the State of New York, as from time to time may be fixed by resolution
of the Board for annual and regular meetings and in the notice of meeting for
special meetings. If no place is so fixed, meetings of the Board shall be held
at the office of the Corporation in Rochester, New York.
No notice need be given of annual or regular meetings of the Board of
Directors. Notice of each special meeting of the Board shall be given by oral,
telegraphic or written notice, duly given or sent or mailed to each Director not
less than one (1) day before such meeting.
3/21/83
<PAGE>
(8)
Section 8 - Resignation.
- ------------------------
Any Director may resign at any time by giving written notice to the
Chairman of the Board of Directors, if such there be, to the President or to the
Secretary. Such resignation shall take effect at the time specified in such
written notice, or if no time be specified, then on delivery. Unless otherwise
specified in the written notice, the acceptance of such resignation by the Board
of Directors shall not be needed to make it effective.
Section 9 - Newly Created Directorships and Vacancies.
- ------------------------------------------------------
Newly created directorships resulting from an increase in the number of
directors and vacancies occurring in the Board of Directors may be filled by
vote of the Board. If the number of the directors then in office is less than a
quorum, such newly created directorships and vacancies may be filled by vote of
a majority of the directors then in office. A director elected to fill a
vacancy shall be elected to hold office for the unexpired term of such
director's predecessor.
Section 10 - Executive and Other Committees of Directors.*
- ----------------------------------------------------------
The Board of Directors, by resolution, adopted by a majority of the entire
Board, shall designate from among its members an Executive Committee consisting
of three or more Directors, a majority of whom are outside directors.
The Executive Committee shall have all the authority of the Board, except
that it shall not have authority as to the following matters:
(1)The submission to shareholders of any action that needs shareholders'
approval;
(2)The filling of vacancies in the Board or in any committee;
(3)The amendment or repeal of the By-Laws, or the adoption of new By-Laws;
(4)The amendment or repeal of any resolution of the Board which, by its
terms, shall not be so amendable or repealable;
(5)The fixing of compensation of the directors for serving on the Board or
on any Committee;
3/21/83
*Revised 11/19/84, 4/22/87, 4/29/92, 4/21/93, 8/16/95
<PAGE>
(9)
(6)The fixing or amendment of the compensation, benefits and perquisites
of the chief executive officer.
The Board of Directors, by resolution by a majority of the entire Board,
may designate from among its members an Audit Committee consisting of three or
more outside directors. The Audit Committee shall, among other things, review
the scope of audit activities, review with management significant issues
concerning litigation, contingencies or other material matters which may result
in either potential liability of the Company or significant exposure to the
Company, review significant matters of corporate ethics, review security methods
and procedures, review the financial reports and notes, and make reports and
recommendations with respect to audit activities, findings, and reports of the
independent public accountants and the internal audit staff of the Company.
The Board of Directors, by resolution adopted by a majority of the entire
Board, may designate from among its members a Committee on Directors consisting
of three or more outside directors. The Committee on Directors shall, among
other things, review performance of incumbent directors, act as a nominating
committee, and consider and report to the entire Board of Directors on all
matters relating to the selection, qualification, compensation and duties of the
members of the Board of Directors and any committees of the Board of Directors.
The Board of Directors, by resolution adopted by a majority of the entire
Board, may designate from among its members a Committee on Management consisting
of three or more outside directors. The Committee on Management shall, among
other things, fix or amend the compensation, benefits and perquisites of all
executive officers of the Company and recommend such for the chief executive
officer, select and administer executive compensation plans and employee benefit
plans which have Company stock as an investment option, review succession
planning for the Company and review with management significant human resources
issues. The compensation, benefits and perquisites of the chief executive
officer shall be set by the outside directors of the full Board upon the
recommendation of the Committee on Management.
The Board of Directors, by resolution adopted by a majority of the entire
Board, may designate from among its members other committees each consisting of
three or more directors.
Unless a greater proportion is required by the resolution designating a
committee of the Board of Directors, a quorum for the
3/21/83
<PAGE>
(10)
transaction of business of a committee shall consist of (a) a majority of the
entire authorized number of members of the Executive Committee or (b) one-third
of the entire authorized number of members of any other committee of the Board
of Directors, but in no event fewer than two persons. The vote of a majority of
the members of a committee present at the time of the vote concerning the
transaction of business of that committee or of any specified item of business
of that committee if a quorum is present at such time, shall be the act of such
committee.
Any committee may fix the time and place of holding its regular meetings
and, if so fixed, no notice of such regular meeting shall be necessary. Special
meetings of any committee may be called at any time by the Chairman of the Board
of Directors, if such there be, by the chief executive officer, by the
President, by the Chairperson of that committee, or by any two members of that
committee. Notice of each special meeting of any committee shall be given by
oral, telegraphic or written notice, including notice via facsimile machine,
duly given or sent or mailed to each member of that committee not less than one
day before such meeting.
Section 11 - Compensation of Directors.
- ---------------------------------------
The Board of Directors shall have authority to fix the compensation of
directors for services in any capacity.
Section 12 - Indemnification.*
- ------------------------------
(a) Generally.
----------
To the full extent authorized or permitted by law, the Corporation shall
indemnify any person ("indemnified Person") made, or threatened to be made, a
party to any action or proceeding, whether civil, at law, in equity, criminal,
administrative, investigative or otherwise, including any action by or in the
right of the Corporation, by reason of the fact that he, his testator or
intestate, ("Responsible Person"), whether before or after adoption of this
Section 12, (1) is or was a director or officer of the Corporation, or (2), if a
director or officer of the Corporation, is serving or served, in any capacity,
at the request of the Corporation, any other corporation, or any partnership,
joint venture, trust, employee benefit plan or other enterprise, or (3), if not
a director or officer of the Corporation, is serving or served, at the request
of the
3/21/83
*Revised 2/16/87
<PAGE>
(11)
Corporation, as a director or officer of any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
against all judgments, fines, penalties, amounts paid in settlement (provided
the Corporation shall have given its prior consent to such settlement, which
consent shall not be unreasonably withheld by it) and reasonable expenses,
including attorneys' fees, incurred by such Indemnified Person with respect to
any such threatened or actual action or proceeding, and any appeal therein,
provided only that (x) acts of the Responsible Person which were material to the
cause of action so adjudicated or otherwise disposed of were not (i) committed
in bad faith or (ii) were not the result of active and deliberate dishonesty,
and (y) the Responsible Person did not personally gain in fact a financial
profit or other advantage to which he was not legally entitled.
(b) Advancement of Expenses.
------------------------
All expenses reasonably incurred by an Indemnified Person in connection
with a threatened or actual action or proceeding with respect to which such
person is or may be entitled to indemnification under this Section 12 shall be
advanced or promptly reimbursed by the Corporation to him in advance of the
final disposition of such action or proceeding, upon receipt of an undertaking
by him or on his behalf to repay the amount of such advances, if any, as to
which he is ultimately found not to be entitled to indemnification or, where
indemnification is granted, to the extent such advances exceed the
indemnification to which he is entitled. Such person shall cooperate in good
faith with any request by the Corporation that common counsel be used by the
parties to an action or proceeding who are similarly situated unless to do so
would be inappropriate due to an actual or potential conflict of interest.
(c) Procedure for Indemnification.
------------------------------
(1) Not later than thirty (30) days following final disposition of an
action or proceeding with respect to which the Corporation has received written
request by an Indemnified Person for indemnification pursuant to this Section
12, if such indemnification has not been ordered by a court, the Board of
Directors shall meet and find whether the Responsible Person met the standard of
conduct set forth in paragraph (a) of this Section 12, and, if it finds that he
did, or to the extent it so finds, shall authorize such indemnification.
3/21/83
<PAGE>
(12)
(2) Such standard shall be found to have been met unless (a) a judgment or
other final adjudication adverse to the Indemnified Person establishes that
subparagraphs (x) or (y) of paragraph (a) of this Section 12 were violated, or
(b) if the action or proceeding was disposed of other than by judgment or other
final adjudication, the Board finds in good faith that, if it had been disposed
of by judgment or other final adjudication, such judgment or other final
adjudication would have been adverse to the Indemnified Person and would have
established a violation of subparagraphs (x) or (y) of paragraph (a) of this
Section 12.
(3) If indemnification is denied, in whole or part, because of an adverse
finding by the Board in the absence of a judgment or other final adjudication,
or because the Board believes the expenses for which indemnification is
requested to be unreasonable, such action by the Board shall in no way affect
the right of the Indemnified Person to make application therefor in any court
having jurisdiction thereof, and in such action or proceeding the issue shall be
whether the Responsible Person met the standard of conduct set forth in
paragraph (a) of this Section 12, or whether the expenses were reasonable, as
the case may be (not whether the finding of the Board with respect thereto was
correct) and the determination of such issue shall not be affected by the
Board's finding. If the judgment or other final adjudication in such action or
proceeding establishes that the Responsible Person met the standard set forth in
paragraph (a) of this Section 12, or that the disallowed expenses were
reasonable, or to the extent that it does, the Board shall then find such
standard to have been met or the expenses to be reasonable, and shall grant such
indemnification, and shall also grant to the Indemnified Person indemnification
of the expenses incurred by him in connection with the action or proceeding
resulting in the judgment or other final adjudication that such standard of
conduct was met, or if pursuant to such court determination such person is
entitled to less than the full amount of indemnification denied by the
Corporation, the portion of such expenses proportionate to the amount of such
indemnification so awarded.
(4) A finding by the Board pursuant to this paragraph (c) that the
standard of conduct set forth in paragraph (a) of this Section 12 has been met
shall mean a finding of the Board or shareholders as provided by law.
(d) Contractual Article.
--------------------
This Section 12 shall be deemed to constitute a contract between the
Corporation and each person who is a Responsible Person
3/21/83
<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
3/21/83
*Revised 9/19/94
<PAGE>
(14)
shareholder of record at the time of the giving of the notice of nomination
provided for in this Section 13 and who is entitled to vote for the election of
Directors. Any shareholder of record who is or will be entitled to vote for the
election of Directors at a meeting may nominate persons for election as
Directors only if timely written notice of such shareholder's intent to make
such nomination is given to the Secretary. To be timely, a shareholder's notice
must be addressed to the Secretary and delivered to or mailed and received at
the principal executive offices of the Corporation (i) with respect to an
election to be held at an annual meeting of shareholders, not less than 60 days
nor more than 90 days prior to the anniversary date of the immediately preceding
annual meeting; provided, however, that in the event that the date of the annual
-------- -------
meeting is more than 30 days earlier or more than 60 days later than such
anniversary date, notice by the shareholder to be timely must be so delivered or
received not earlier than the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day prior to such
annual meeting or the 10th day following the day on which public announcement of
the date of such meeting is first made and (ii) with respect to an election to
be held at a special meeting of shareholders for the election of Directors, not
earlier than the 90th day prior to such special meeting and not later than the
close of business on the later of the 60th day prior to such special meeting or
the 10th day following the day on which public announcement is first made of the
date of the special meeting and of the nominees to be elected at such meeting.
Each such notice shall set forth: (a) the name and address, as they appear on
the Corporation's books, of the shareholder who intends to make the nomination,
and the name and address of the person or persons to be nominated; (b) the class
and number of shares of the Corporation which are beneficially owned by the
shareholder: (c) a representation that the shareholder is or will be entitled to
vote at the meeting and intends to appear in person (or send a qualified
representative) or by proxy at the meeting to nominate the person or persons
specified in the notice; (d) a description of all arrangements or understandings
between the shareholder and such nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the shareholder; (e) such other information regarding each nominee
proposed by such shareholder as would have been required to be included in a
proxy statement filed pursuant to the proxy rules of the Securities and Exchange
Commission had each nominee been nominated, or intended to be nominated, by the
Board of Directors; and (f) the consent of each nominee to serve as a Director
of the
3/21/83
<PAGE>
(15)
Corporation if so elected. The chairman of the meeting may refuse to acknowledge
the nomination of any person not made after compliance with the foregoing
procedure. Only such persons who are nominated in accordance with the procedures
set forth in this Section 13 shall be eligible to serve as Directors of the
Corporation and any purported nomination or purported election not made in
accordance with the procedures set forth in this Section 13 shall be void.
ARTICLE III
OFFICERS
Section 1 - Officers.
- ---------------------
The Board of Directors, as soon as may be practicable after the annual
election of directors, may elect a Chairman of the Board of Directors and shall
elect a President, one or more Vice Presidents (one or more of whom may be
designated Executive Vice President), a Secretary and a Treasurer, and such
other officers as it may determine. Any two or more offices may be held by the
same person, except the office of President and Secretary.
Section 2 - Term of Office and Removal.
- ---------------------------------------
Each officer shall hold office for the term for which each officer is
elected or appointed, and until a successor has been elected or appointed and
qualified.
Section 3 - Powers and Duties.
- ------------------------------
The officers of the Corporation shall each have such powers and authority
and perform such duties in the management of the Corporation as set forth in
these By-Laws and as from time to time prescribed by the Board of Directors. To
the extent not set forth in these By-Laws or so prescribed by the Board of
Directors, they shall each have such powers and authority and perform such
duties in the management of the Corporation, subject to the control of the
Board, as generally pertain to their respective offices.
3/21/83
<PAGE>
(16)
In addition to the powers and authority above, each officer has the powers
and duties set out below.
(a) Chairman of the Board of Directors
----------------------------------
The Chairman of the Board of Directors, if such there be, shall preside at
all meetings of the Board. The Chairman of the Board of Directors may be
the chief executive officer of the Corporation, and if so designated, may
preside at all meetings of shareholders.
(b) President
---------
The President shall be the chief operating officer and shall have
responsibility for the general management of the business of the
Corporation, subject only to the supervision of the Board of Directors,
the Executive Committee and the Chairman of the Board of Directors, as
chief executive officer, if such there be. If there is no Chairman of the
Board of Directors or if the Chairman of the Board of Directors is not the
chief executive officer, then the President shall be the chief executive
officer of the Corporation. The President may preside at all meetings of
shareholders, when present, and at meetings of the Board of Directors in
the absence of the Chairman of the Board, if such there be.
(c) Executive Vice President
------------------------
The Executive Vice President or the Executive Vice Presidents, if such
there be, shall assist the President in the management of the Corporation
and, as may be designated by the Board of Directors, in the event of the
death, resignation, removal, disability or absence of the President, an
Executive Vice President shall possess the powers and perform the duties
of the President for the period of such disability or absence or until the
Board of Directors elects a President.
(d) Vice President
--------------
Each Vice President shall assist the President in the management of the
Corporation and, in the absence or incapacity of the President and
Executive Vice Presidents,
3/21/83
<PAGE>
(17)
and in order as fixed by the Board, possess the powers and perform the duties of
the President for the period of such absence or incapacity, and shall possess
such other powers and perform such other duties as the Board of Directors may
prescribe.
(e) Secretary
---------
The Secretary shall issue notices of all meetings of shareholders and
directors where notices of such meetings are required by law or these By-
Laws, and shall keep the minutes of such meetings. The Secretary shall
sign such instruments and attest such documents as require signature or
attestation and affix the corporate seal thereto where appropriate and
shall possess such other powers and perform such other duties as usually
pertain to the office or as the Board of Directors may prescribe.
(f) Treasurer
---------
The Treasurer shall have general charge of, and be responsible for, the
fiscal affairs of the Corporation and shall sign all instruments and
documents as require such signature, and shall possess such other powers
and perform such other duties as usually pertain to the office or as the
Board of Directors may prescribe.
(g) Assistant Officers
------------------
Any Assistant Officer elected by the Board of Directors shall assist the
designated officer and shall possess that officer's powers and perform
that officer's duties as designated by that officer, and shall possess
such other powers and perform such other duties as the Board of Directors
may prescribe.
Section 4 - Records.
- --------------------
The Corporation shall keep (a) correct and complete books and records of
account; (b) minutes of the proceedings of the shareholders, Board of Directors
and any committees of the Board; and (c) a current list of the directors and
officers and their residence addresses.
3/21/83
<PAGE>
(18)
The Corporation shall also keep at its office in the State of New York or
at the office of its transfer agent or registrar in the State of New York, if
any, a record containing the names and addresses of all shareholders, the number
and class of shares held by each and the dates when they respectively became the
owners of record thereof.
Section 5 - Checks and Similar Instruments.
- -------------------------------------------
All checks and drafts on the Corporation's bank accounts and all bills of
exchange and promissory notes and all acceptances, obligations and other
instruments, for the payment of money, shall be signed by facsimile or otherwise
on behalf of the Corporation by such officer or officers or agent or agents as
shall be thereunto authorized from time to time by the Board of Directors.
Section 6 - Voting Shares Held by the Corporation.
- --------------------------------------------------
Either the President or the Secretary may vote shares of stock held by the
Corporation in other corporations and may execute proxies for and on behalf of
the Corporation for such purpose.
ARTICLE IV
SHARE CERTIFICATES AND LOSS THEREOF - TRANSFER OF SHARES
Section 1 - Form of Share Certificate.
- --------------------------------------
The shares of the Corporation shall be represented by certificates, in
such forms as the Board of Directors may from time to time prescribe, signed by
the Chairman of the Board if such there be, or the President or a Vice
President, and the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, and may be sealed with the seal of the Corporation or a
facsimile thereof. The signatures of the officers upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent or registered
by a registrar other than the Corporation or its employee. In case any officer
who
3/21/83
<PAGE>
(19)
has signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer before such certificate is issued, it may be
issued by the Corporation with the same effect as if such person were such
officer at the date of issue.
Section 2 - Lost, Stolen or Destroyed Share Certificates.
- ---------------------------------------------------------
No certificate or certificates for shares of the Corporation shall be
issued in place of any certificate alleged to have been lost, stolen or
destroyed, except upon production of such evidence of the loss, theft or
destruction, and upon such indemnification and payment of costs of the
Corporation and its agents to such extent and in such manner as the Board of
Directors may from time to time prescribe. The Board of Directors, in its
discretion, and as a condition precedent to the issuance of any new certificate,
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
3/21/83
*Revised 9/19/94
<PAGE>
(20)
result of such transfer, the aggregate number of shares of stock in any class or
series owned by or for the account of aliens shall be twenty percent or more of
the number of shares of stock then outstanding in such class or series. The
Board of Directors may make such rules and regulations as it shall deem
necessary or appropriate so that accurate records may be kept of the shares of
stock of the Corporation owned of record or beneficially or voted by or for the
account of aliens or to otherwise enforce the provisions of this Section 3.
As used in this Section 3, the word "alien" shall mean the following and
their representatives: any individual not a citizen of the United States of
America; a partnership, unless a majority of the partners are non-aliens and a
majority interest in the partnership profits is held by nonaliens; a foreign
government; a corporation, joint-stock company or association organized under
the laws of a foreign country; any other corporation of which any officer or
more than one-fourth of the directors are aliens, or of which more than one-
fourth of any class or series of stock is owned of record or voted by or for the
account of aliens; and any other corporation, joint-stock company or association
controlled directly or indirectly by one or more of the above.
ARTICLE V
OTHER MATTERS
Section 1 - Corporate Seal.
- ---------------------------
The corporate seal shall have inscribed thereon the name of the
Corporation and such other appropriate legend as the Board of Directors may from
time to time determine. In lieu of the corporate seal, when so authorized by
the Board, a facsimile thereof may be affixed or impressed or reproduced in any
other manner.
Section 2 - Amendments.
- -----------------------
By-Laws of the Corporation may be amended, repealed or adopted by vote of
the holders of the shares at the time entitled to vote in the election of any
directors. By-Laws may also be
3/21/83
<PAGE>
(21)
amended, repealed, or adopted by the Board of Directors, but any By-Law adopted
by the Board may be amended or repealed by the shareholders entitled to vote
thereon as hereinabove provided.
If any By-Law regulating an impending election of directors is adopted,
amended or repealed by the Board of Directors, there shall be set forth in the
notice of the next meeting of shareholders for the election of directors the By-
Law so adopted, amended or repealed, together with a concise statement of the
changes made.
3/21/83
<PAGE>
- -------------------------------------------------------------------------------
Exhibit 4.7
FRONTIER CORPORATION, AS ISSUER
AND
THE CHASE MANHATTAN BANK
AS TRUSTEE
________
FIRST SUPPLEMENTAL INDENTURE
DATED AS OF DECEMBER 8, 1997
________
$100,000,000 6.25% NOTES DUE DECEMBER 15, 2009
________
SUPPLEMENT TO INDENTURE,
DATED AS OF MAY 21, 1997, BETWEEN
FRONTIER CORPORATION AND
THE CHASE MANHATTAN BANK
- -------------------------------------------------------------------------------
<PAGE>
FIRST SUPPLEMENTAL INDENTURE, dated as of December 8, 1997, between
FRONTIER CORPORATION, a New York corporation, (the "Issuer"), having its
principal offices at 180 South Clinton, Rochester, New York 14646 and THE CHASE
MANHATTAN BANK, a New York banking corporation, as trustee (the "Trustee")
having its Corporate Trust Office at 450 West 33rd Street, New York, New York
10001.
RECITALS
WHEREAS, the Issuer executed and delivered its Indenture (the "Original
Indenture"), dated as of May 21, 1997, to the Trustee to issue from time to time
for its lawful purposes debt securities evidencing its unsecured and
unsubordinated indebtedness.
WHEREAS, the Original Indenture provides that by means of a supplemental
indenture, the Issuer may create one or more series of its debt securities and
establish the form and terms and conditions thereof.
WHEREAS, the Issuer intends by this Supplemental Indenture to (i) create a
series of debt securities, in an aggregate principal amount not to exceed
$100,000,000, entitled "Frontier Corporation 6.25% Notes due December 15, 2009"
(the "Notes"); and (ii) establish the form and the terms and conditions of such
Notes.
WHEREAS, the Board of Directors of the Issuer has authorized the issuance
of the Notes.
WHEREAS, the consent of Holders to the execution and delivery of this
Supplemental Indenture is not required, and all other actions required to be
taken under the Original Indenture with respect to this Supplemental Indenture
have been taken.
NOW, THEREFORE IT IS AGREED:
ARTICLE ONE
Definitions, Creation, Form and Terms and Conditions of the Debt Securities
SECTION 1.01 Definitions. Capitalized terms used in this Supplemental
------------
Indenture and not otherwise defined shall have the meanings ascribed to them in
the Original Indenture. In addition, the following terms shall have the
following meanings to be equally applicable to both the singular and the plural
forms of the terms defined:
"Indenture" means the Original Indenture as supplemented by this First
Supplemental Indenture.
<PAGE>
"Notes" means the Issuer's 6.25% Notes due December 15, 2009, a form of
which is attached hereto as Exhibit A.
SECTION 1.02 Creation of the Debt Securities. In accordance with Section
-------------------------------
301 of the Original Indenture, the Issuer hereby creates the Notes as a separate
series of its debt securities issued pursuant to the Indenture. The Notes
shall be issued in an aggregate principal amount not to exceed $100,000,000.
SECTION 1.03 Form of the Debt Securities. Each Note will be issued in
---------------------------
certificated form, without coupons, registered in the name of the Holder
thereof. The Notes shall be in the form of Exhibit A attached hereto.
SECTION 1.04 Terms and Conditions of the Debt Securities. The Notes
-------------------------------------------
shall be governed by all the terms and conditions of the Original Indenture, as
supplemented by this First Supplemental Indenture, and in particular, the
following provisions shall be terms of the Notes:
(a) Optional Redemption. The Notes not be redeemed by the Issuer prior to
-------------------
the maturity date of such Notes.
(b) Applicability of Defeasance or Covenant Defeasance. The provision of
--------------------------------------------------
Article 14 of the Original Indenture shall apply to the Notes.
(c) Put and Call Options. Pursuant to the terms of that certain
--------------------
Confirmation dated December 8, 1997, and all agreements, provisions and
definitions incorporated by reference therein (the "Trust Call Option"), between
The Chase Manhattan Bank as Trustee of Frontier Pass-Through Asset Trust 1997-1,
a trust formed under the laws of the State of New York (the "Trustee"), and
Union Bank of Switzerland, London Branch (the "Callholder"), upon delivery of
irrevocable notice by the Callholder to the Trustee on or before December 1,
1999 (or if that day is not a Business Day, the preceding Business Day), the
Callholder has the right to purchase the Notes from the Trustee on December 15,
1999 (the "Settlement Date") (or, if that day is not a Business Day, on the
first following day that is a Business Day), for a purchase price equal to 100%
of the aggregate face amount thereof (the "Call Price"). Pursuant to that
certain Trust Agreement (the "Trust Agreement") dated as of December 3, 1997,
between the Issuer and the Trustee, the Trustee has the obligation to require
the Issuer to repurchase all of the Notes (the "Put Option") at a purchase price
equal to 100% of the aggregate face amount thereof on the Settlement Date, if
(i) the Trustee has not received irrevocable notice from the Callholder on or
before December 1, 1999, that the Callholder intends to exercise the Trust Call
Option, or (ii) the Callholder fails to make payment of the Call Price on the
Business Day prior to the Settlement Date. Notwithstanding the foregoing, the
Trust Agreement may be amended under certain circumstances to provide that the
Trustee will not exercise the Put Option and to provide for such other changes
to the Trust Agreement as may be consequential thereto. In the event that the
Trust Call Option is exercised, then under the terms of the Confirmation between
the Issuer and the Callholder dated December 8, 1997 (the "Company Call
Option"), the Issuer has the right and option, upon delivery by it of
irrevocable notice to the Callholder during the period from December 1, 1999 to
and including December 5, 1999 (or the first following day that is a
2
<PAGE>
Business Day), to purchase from the Callholder all of the Callholder's right,
title, and interest and obligations in, to and under the Trust Call Option in
consideration for a payment to the Callholder on the Settlement Date (or, if
that day is not a Business Day, the first following day that is a Business Day)
in an amount calculated pursuant to the terms of the Company Call Option.
(d) Restrictions on Liens. If at any time the Issuer or any of its
---------------------
subsidiaries mortgages, pledges or otherwise subjects to or permits to exist any
Lien (as defined below) on the whole or any part of any property or assets now
owned or hereafter acquired by it, except as hereinafter provided, the Issuer
will (or will cause such subsidiary to) secure the outstanding Notes, and, if
the Issuer elects, any other obligations of the Issuer ranking on a parity with
the Notes, equally and ratably with the indebtedness or obligations secured by
such mortgage, pledge or other Lien, for as long as any such indebtedness or
obligation is so secured. The foregoing covenant does not apply to (a) the
creation, extension, renewal or refunding of purchase-money mortgages or liens,
(b) landlords' liens, (c) Liens with respect to the sale or financing of
accounts or chattel paper, (d) Liens to which any property or asset acquired by
the Issuer or such subsidiary is subject as of the date of its acquisition, (e)
the making of any deposit or pledge to secure public or statutory obligations or
with any governmental agency at any time required by law in order to qualify the
Issuer or such subsidiary to conduct its business or any part thereof or in
order to entitle it to maintain self-insurance or to obtain the benefits of any
law relating to worker's compensation, unemployment insurance, old age pensions
or other social security, or with any court, board, commission, or governmental
agency as security incident to the proper conduct of any proceeding before it,
or (f) other Liens not otherwise permitted securing obligations in an aggregate
amount not to exceed Twenty-Five Million and 00/100 Dollars ($25,000,000.00).
For purposes hereof, "Lien" means any lien, mortgage, pledge, security interest,
charge, or encumbrance of any kind (including any conditional sale or title
retention agreement or any lease in the nature thereof, any capital lease
obligation and any sale and lease back transaction) and any agreement to give or
refrain from any lien, mortgage, pledge, security interest, charge, or other
encumbrance of any kind.
ARTICLE TWO
Trustee
SECTION 2.01 Trustee. The Trustee shall not be responsible in any manner
-------
whatsoever for or in respect of the validity or sufficiency of this Supplemental
Indenture or the due execution thereof by the Issuer. The recitals of fact
contained herein shall be taken as the statements solely of the Issuer, and the
Trustee assumes no responsibility for the correctness thereof.
ARTICLE THREE
Miscellaneous Provisions
SECTION 3.01 Ratification of Original Indenture. This Supplemental
----------------------------------
Indenture is executed and shall be construed as an indenture supplemental to the
Original Indenture, and as supplemented and modified hereby, the Original
Indenture is in all respects ratified
3
<PAGE>
and confirmed, and the Original Indenture and this Supplemental Indenture shall
be read, taken and construed as one and the same instrument.
SECTION 3.02 Effect of Headings. The Article and Section headings herein
------------------
are for convenience only and shall not affect the construction hereof.
SECTION 3.03 Successors and Assigns. All covenants and agreements in this
----------------------
Supplemental Indenture by the Issuer shall bind its successors and assigns,
whether so expressed or not.
SECTION 3.04 Separability Clause. In case any one or more of the
-------------------
provisions contained in this Supplemental Indenture shall for any reason be held
to be invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
SECTION 3.05 Governing Law. This Supplemental Indenture shall be governed
-------------
by and construed in accordance with the laws of the State of New York. This
Supplemental Indenture is subject to the provisions of the Trust Indenture Act
of 1939, as amended, that are required to be part of this Supplemental Indenture
and shall, to the extent applicable, be governed by such provisions.
SECTION 3.06 Counterparts. This Supplemental Indenture may be executed in
------------
any number of counterparts, and each of such counterparts shall for all purposes
be deemed to be an original, but all such counterparts shall together constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the date first above written.
FRONTIER CORPORATION, as Issuer
By: /S/ Louis L. Massaro
---------------------------------------
Name: Louis L. Massaro
Title: Exec. Vice President and
Chief Financial Officer
Attest:
/s/ Joseph Enis
- -------------------------------------------
Name: Joseph Enis
Title: Treasurer
4
<PAGE>
THE CHASE MANHATTAN BANK,
as Trustee
By: /s/ R. Lorenzen
-----------------------------------------
Name: R. Lorenzen
Title: Senior Trust Officer
Attest:
/s/ L. O'Brien
- --------------------------------------------
Name: L. O'Brien
Title: Senior Trust Officer
5
<PAGE>
Exhibit 10-20
Frontier Corporation
--------------------
Executive Compensation Program
------------------------------
1997
----
June, 1997
<PAGE>
Compensation Philosophy
- -----------------------
The philosophy of Frontier Corporation's Compensation Program is to offer
performance-based compensation to attract, retain and motivate key employees who
are best positioned to achieve the goals of the Corporation and maximize value
to its shareowners. The compensation program encompasses the following
elements:
. Base Salary
. Annual Bonus
. Long-Term Incentive Plan
. Benefits
The Executive Compensation Program is the responsibility of the Committee
on Management of the Frontier Board of Directors. The Program is reviewed
annually for competitiveness.
The following is a brief summary of the complete Executive Compensation
Program currently in place and available to senior management of Frontier
Corporation. The Company reserves the right to change any and all aspects of
the plans included in this Program as it sees fit, from time to time. The
benefits and perquisites addressed herein supplement the general management
fringe benefits provided by the Company.
Salary Plan
- -----------
Nine non-sales and 3 sales compensation levels are delineated within the
Program. Salary ranges for 1997 are as follows:
TITLE RANGE
----- -----
CEO $526,000 - 914,000
Vice Chairman $285,000 - 500,000
COO $285,000 - 500,000
Executive Vice President $209,000 - 363,000
Senior Vice President $183,000 - 320,000
Vice President 1 $159,000 - 278,000
Vice President 2 $118,000 - 207,000
Senior Director $ 90,000 - 158,000
Director $ 74,000 - 130,000
Executive VP Sales $159,000 - 278,000
Senior VP Sales $118,000 - 207,000
VP Sales $ 82,000 - 155,000
2
<PAGE>
Short-Term Incentive Plan (annual bonus)
- ----------------------------------------
The Short-Term Incentive Plan (STI) is designed to provide a superior
reward to outstanding performers. Actual bonus awards are a function of
corporate financial performance and customer and employee results during the
preceding calendar year. For Senior Vice Presidents and above, the corporate
component comprises 100% of the measurement. For those below Senior Vice
President, performance is measured against customer and employee objectives as
well as the corporate financial targets.
The corporate measurement is:
50% earnings per share
50% revenue
The Open Market Plan agreement with the New York State Public Service
Commission stipulates that employees of Rochester Telephone must be compensated
on objectives associated with its performance, not those of the consolidated
Frontier Corporation. The Upstate Cellular Network (UCN) is a partnership
between Frontier and Bell Atlantic/NYNEX which governs its financial targets.
As such, those Rochester Telephone and UCN employees participating in the
Executive Compensation program will be measured on their respective business
unit financial objectives.
STI pay out opportunities are as follows:
<TABLE>
<CAPTION>
Threshold Standard Premier
---------- --------- --------
<S> <C> <C> <C>
CEO 50.0% 100.0% 175.0%
Vice Chairman* 30.0% 60.0% 105.0%
COO 40.0% 80.0% 140.0%
Executive Vice President 27.5% 55.0% 96.5%
Senior Vice President 25.0% 50.0% 87.5%
Vice President 1 22.5% 45.0% 79.0%
Vice President 2 17.5% 35.0% 61.5%
Senior Director 15.0% 30.0% 52.5%
Director 12.5% 25.0% 44.0%
Executive VP Sales 22.5% 45.0% 79.0%
Senior VP Sales** 10.0% 20.0% 35.0%
</TABLE>
* Vacant position for which range has not been updated for current market
** Also participates in sales incentive plan
3
<PAGE>
Threshold, standard and premier corporate performance objectives are
approved by the Committee on Management annually. If threshold performance for
either the earnings per share or revenue objective is not attained, no bonus
will be paid.
The Committee has established the following objectives for 1997:
<TABLE>
<CAPTION>
Threshold Standard Premier
--------- -------- --------
<S> <C> <C> <C>
Earnings per share $ 1.50 $ 1.67 $ 1.80
Revenue (Millions) $2,525.0 $2,693.0 $2,822.0
</TABLE>
The final bonus calculation may include a discretionary component to
reflect individual circumstances for those at Vice President 2 and above.
Discretion may account for up to + or - 25%. The final bonus award, after
application of the discretionary factor, may not exceed the premier percent
presented above.
For those at senior director level and below, a semi-annual bonus plan has
been established for 1997. Details of this program are contained in separate
correspondence provided to the general employee body.
Bonus payments are made in the first quarter following the end of the year
for which the award is earned. Payment is usually made in a lump sum; however,
an eligible employee may defer payment of all or part of the bonus to a
subsequent year.
The election to defer a bonus must be made prior to the beginning of the
year in which the bonus is earned. The Company will establish an account or a
fund for maintaining a deferred bonus and will credit interest to the deferred
bonus at the rate established from time to time for interest paid on Frontier's
telephone customers' deposits. The deferred bonus plus the earnings associated
with it will be paid to the employee as specified in the deferral election.
Long Term Incentive
- -------------------
Frontier Corporation provides long term incentives through two plans; the
Management Stock Inventive Plan and the Employees' Stock Option Plan. Stock
Options are available in both Plans while the Management Plan also provides for
the granting of restricted stock. The intent of both Plans is to align
employees' actions and performance with the goals and objectives of shareowners.
4
<PAGE>
. Management Stock Incentive Plan
All Executive Group participants are eligible for grants under this
Plan.
Restricted Stock is available as a component of compensation.
The Plan offers flexibility such that grants may vest with passage of
time, performance parameters or a combination of both. Performance
parameters may include, but not be limited to, one or more of the
following.
- total shareowner return
- earnings per share growth
- cash flow growth
- return on equity
It is expected that restricted stock will be used selectively among the
executive group.
Under the Management Stock Incentive Plan either Incentive Stock
Options or Non-Qualified Stock Options may be granted.
The closing New York Stock Exchange price of Frontier common stock on the
grant date becomes the exercise price at which the stock may be purchased.
Option grants are valid for up to ten years and are exerciseable as
follows:
1. Up to 1/3 of the granted options can be exercised one year
following the date of the grant,
2. A second 1/3 can be exercised beginning on the second
anniversary of the grant, and
3. The final 1/3 can be exercised beginning on the third anniversary.
. Employees' Stock Option Plan
Executive group employees below the level of Senior Vice President
are eligible for grants under this Plan.
All options granted under this plan will be non-qualified stock options.
The closing New York Stock Exchange price of Frontier common stock on the
grant date becomes the exercise price at which the stock may be purchased.
Option grants are valid for up to ten
5
<PAGE>
years and are fully (100%) vested and become exerciseable on the second
anniversary of the grant date.
Executive Stock Ownership
- -------------------------
Frontier is increasingly emphasizing the importance of employee stock
ownership. Stock ownership supports the company's objective of effective
teamwork at all levels and aligns employee goals with those of shareowners.
Stock ownership guidelines have been established for executives to be attained
over a five-year period, by the later of January 1, 1999 or 5 years after
joining Frontier. The targets are as follows:
Position Times Annual Salary
-------- -------------------
CEO 4.0
Vice Chairman 4.0
COO 4.0
Executive Vice President 4.0
Senior Vice President 3.0
Vice President 1 2.5
Vice President 2 2.0
Senior Director 1.0
Director 1.0
Executive VP Sales 2.5
Senior VP Sales 2.0
VP Sales 1.0
Executive Benefit Plans
- -----------------------
Frontier provides an array of health care, retirement, paid time off,
holiday and sickness benefits to its employees. The Executive group shares in
this program plus other programs, as appropriate, to offer a comprehensive and
competitive compensation package.
Frontier has recognized the impact of legislation and various tax rulings
on executive management and has created a package of benefit arrangements to
protect its executives from some of the consequences. These and other
supplemental benefits are highlighted below. Some differentiation of benefits
exists among levels in the Program.
6
<PAGE>
. Supplemental Retirement Savings Plan (SRSP)
This plan provides for the continuance of 401(k) deferred compensation
[Employees' Retirement Savings Plan (ERSP)] for highly compensated
employees who exceed the statutory annual IRS limit for qualified plans
($9,500 in 1997).
Company policy provides all employees the option to contribute up to 16% of
their annual base salaries and annual bonuses into the ERSP program. SRSP
is a non-qualified plan that allows those higher salaried executives to
participate in a deferred retirement savings plan beyond the statutory
limit up to the maximum 16% ceiling. A non-qualified plan is defined as an
unfunded benefit plan in accordance with the Internal Revenue code. As
such, the corporation is the ultimate payer of benefits and all accounts
are subject to claims of the Company's creditors.
The plan is administered by Marine Midland Bank, N.A., as its Trustee,
which establishes individual accounts for each participant. Contributions
to the plan can be fully invested in, or split between any of six funds
(money market, S&P 500 Index, Putnam Income, Putnam Voyager, Putnam Global
Growth and Frontier stock) that are currently offered. Company
contributions, which follow the same schedule as under ERSP, are invested
in Frontier stock. Funds will be distributed upon termination of
employment.
. Supplemental Management Pension Plan (SMPP)
This non-qualified plan allows payment above the government restriction
applicable to qualified pension plans. If any qualified employee's age 65
pension exceeds the limit under the Management Pension Plan (MPP), $125,000
in 1997, the difference will be provided through corporate assets or from a
trust established by the Company for this purpose. SMPP was frozen as of
December 31, 1996. To participate under this plan, an individual must have
been a Frontier employee prior to January 1, 1995 and be a participant in a
qualified defined benefit pension plan.
7
<PAGE>
. Supplemental Executive Retirement Program (SERP)
This non-qualified program provides an enhanced retirement benefit to those
at Vice President 1 level and above. The plan has an accrual and vesting
schedule based on years of service and age. The maximum benefit of 60% of
final compensation (highest consecutive three-year average salary plus
bonus) less any amounts paid through the regular MPP and regular SMPP
formulas, will be paid to an executive retiring at age 50 or older with 30
or more years of service
Accrual: 2.5% for each of the first 15 years
1.5% for each of the next 15 years
0.0% beyond 30 years
Vesting: 0% first 5 years
100% for year 6 and beyond
Participants must be age 50 or over to receive this benefit. SERP will be
frozen as of December 31, 1999. No new participants were admitted after
December 31, 1995. SERP participants who retire between January 1, 1997 and
December 31, 1999 are eligible for enhanced medical and life insurance
coverage consistent with that offered through 1996.
. Life Insurance
Life insurance for the executive group follows the program provided non-
bargaining unit employees through the Tel Flex Program. The Company
provides $10,000 of insurance and the employee is able to purchase
additional coverage in various increments up to a total of $990,000 of
coverage. At retirement an executive may elect to continue coverage at
his/her expense up to age 65.
8
<PAGE>
. Financial Planning Services
The Company offers executives the ability to engage an independent
financial consultant to assist with their personal financial planning. The
AYCO Corporation has been retained and is available to all executives
holding the position of Senior Vice President or higher. For those
executives wishing to select another consultant, costs associated with this
service will be reimbursed as follows:
- maximum of $11,265 per year, in year one
- a maximum of $6,755 per year thereafter, until
- a maximum of $11,265 in the year preceding retirement
Financial planning services for other executives are available as a
component of Flexible Perquisites.
. Automobile/Club Membership
All executives who hold the position of Senior Vice President or above have
access to vehicles which are provided and maintained by the Company. The
Company pays for parking at the Corporate Headquarters location. These
officers are also reimbursed for membership in two clubs of his/her choice.
. Telecommunication Services
Executives who hold the position of Senior Vice President or higher receive
cellular phones and free cellular services. These individuals also receive
totally free usage (business and personal) of Frontier Long Distance credit
cards and local residential telephone service. Executives who were at
senior director and above prior to January 1, 1996 receive this benefit and
are "grandfathered" under the plan.
9
<PAGE>
. Flexible Perquisites
This plan allows executives to choose from a menu of perquisites which
includes:
- Automobile procurement allowance via purchase, financing or lease;
operating costs are not covered by this program.
- legal or financial counseling; tax preparation.
- club membership and dues for luncheon or country clubs (maximum, two
clubs); club initiation fees and usage charges are not covered by this
program.
- home computer and accessories.
- personal excess liability insurance.
- supplemental life insurance
- telecommunications services
The menu dollar limit is:
CEO* $40,000
Vice Chairman* 30,000
COO* 30,000
Executive Vice President* 18,000
Senior Vice President* 15,000
VP 1, Executive VP Sales 12,000
VP 2 8,000
Senior VP Sales, VP Sales 5,000
Senior Director 5,000
Director 2,500
*Eligible alternatively for Discrete Plan Benefits listed above.
Additionally, anyone in a lower salary level already under an alternate or
discrete benefit plan, as of December 31, 1995, is "grandfathered" on these
plan benefits. If, for business reasons, the Company elects to provide a
vehicle to an executive, the menu dollar limit will be reduced accordingly.
10
<PAGE>
Payments under this plan are automatically applied to the individual's
semi-monthly pay check under a separate designation of "exec perq".
. Paid Time Off
Executives are eligible for six holidays plus paid time off (PTO) to be
used for sickness, personal and vacation needs. Annual PTO days are based
on the following schedule:
<TABLE>
<CAPTION>
Annual days off based on years of service
0-5 5-14 15-24 25 & Above
--- ---- ----- ----------
<S> <C> <C> <C> <C>
CEO, Vice Chairman
COO, EVP, SVP 39 39 39 39
VP 1, Executive VP Sales
VP 2, Senior VP Sales, VP Sales 34 34 34 34
Senior Director 29 29 29 34
Director 24 24 29 34
</TABLE>
. Annual Physical Exam
All executive group employees are eligible for, and strongly encouraged to
have, an annual company paid physical exam. Invoices should be paid by the
employee and receipts submitted to the benefit office for reimbursement.
Payment will be made in a subsequent paycheck and is not taxable.
11
<PAGE>
Exhibit 10.21
FRONTIER CORPORATION
SUPPLEMENTAL MANAGEMENT PENSION PLAN
Amendment No. 1 to 1996 Restatement
Pursuant to Article Six, the Plan is amended as follows:
1. Section 4.1(k) is amended, effective January 1, 1996, to clarify that
the five years of service requirement specified in Section 4.1(j) does not apply
to the 3 + 3 enhancement by deleting the current introductory clause of Section
4.1(k) and substituting in its place the following:
for each Participant on the active payroll (or on the inactive payroll
but receiving benefits under the Company's long term disability
benefit plan) on August 16, 1995, the eligibility requirements for
determining the Participant's entitlement to receive early or normal
retirement benefits shall be reduced as follows:
2. Section 4.4 is amended by deleting the fourth sentence thereof and
substituting in its place the following:
In the event no timely election is made or a timely election is not
possible at the time benefits become payable (e.g., due to the death
of a contingent annuitant or a change in marital status), the benefit
to a single Participant will be paid in the form of a life annuity and
the benefit to a married Participant not otherwise eligible to accrue
a benefit under Section 4.2 (refer to Section 4.7 for these
Participants) will be paid in the form of a joint and 50 percent
spousal survivor annuity. For purposes of this paragraph the survivor
annuity shall provide that in the event the contingent annuitant
predeceases the Participant, the Participant's benefit shall revert to
the amount determined prior to the reduction for contingent annuitant
benefits.
3. Section 4.5 is amended by deleting the first sentence thereof and
substituting in its place the following:
If a Participant not otherwise eligible to accrue a benefit under
Section 4.2 (refer to Section 4.7 for these Participants) dies while
still employed
-1-
<PAGE>
by a Participating Company and after becoming entitled to receive a
vested benefit, the Participant's spouse, if surviving, shall be
entitled to a monthly lifetime benefit equal to one-half of the
benefit the Participant would have received under Section 4.1 had he
or she elected a 50 percent contingent survivor annuity and retired on
the first day of the month on or before the date of death.
4. Article Four is amended, effective as of August 20, 1997, by adding the
following new Section 4.7 to the end thereof:
4.7 Notwithstanding the normal benefit payment provisions of Sections 4.4
and 4.5, any Plan benefit payable to a Participant eligible to accrue
a benefit under Section 4.2 on and after December 31, 1995 shall be
subject to the following additional provisions:
. in addition to other forms of payment available to Participants
generally, benefits to married Participants may, with the
Committee's approval, be paid in the form of a joint and 100
percent spousal survivor annuity. Under this form of benefit the
surviving spouse shall receive, upon the death of the Participant,
a benefit equal to 100 percent of the benefit paid to the
Participant while both were living. The amount of this benefit
shall be the straight life annuity calculated under Section 4.2
(without taking into account the offset of the benefit payable from
the Funded Plan) reduced pursuant to the actuarial assumptions used
in the Funded Plan, provided that the straight life annuity shall
not be reduced by more than 20 percent, and then offset by the
benefit payable from the Funded Plan. For these purposes, if the
Participant's contingent annuitant predeceases the Participant, the
benefit thereafter payable to the Participant shall revert to the
amount to which the Participant is entitled prior to reduction for
the optional form of payment.
. in the event a married Participant dies prior to the commencement
of benefits, the surviving spouse's benefit shall, with the
Committee's approval, be 100 percent (in lieu of the 50% under
Section 4.5) of the benefit the Participant would have received had
the Participant elected the joint and 100 percent spousal survivor
annuity and retired on the first day of the month on or before the
date of death.
. if a married Participant fails to elect a form of benefit, or if
the elected form of benefit is not appropriate as of the date of
death, the benefit shall be paid in the form of a joint and 100
percent spousal survivor annuity. For these purposes, if the
Participant's contingent annuitant predeceases the Participant, the
benefit thereafter payable to the Participant shall revert to the
amount to which the Participant is entitled prior to reduction for
the optional form of payment.
. In the discretion of the Committee, the value of the benefits
payable under this Section 4.7 may be paid out in a lump sum or in
another alternative form of benefit the Committee may elect.
-2-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this amendment to be executed by
its duly authorized officer this 20th day of August, 1997.
FRONTIER CORPORATION
By: /s/ Josephine S. Trubek
----------------------------------------
Josephine S. Trubek
Corporate Secretary
-3-
<PAGE>
Frontier Corporation
Exhibit 10.22
LOGO FRONTIER 180 South Clinton
Rochester, NY 14646
January 1, 1998
Mr. Joseph P. Clayton
20 Windham Hill
Mendon, New York 14506
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 a 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 continue to employ you in a senior
----
executive position as President and Chief Executive Officer, or in such
comparable management capacity as the Company may from time to time designate.
This Agreement shall become effective as of January 1, 1998, and shall have an
initial term ("Term") of three (3) years. This Agreement shall continue from
year to year thereafter, unless earlier terminated or extended in accordance
with its terms. As a new Agreement, this Agreement supersedes the Letter
Agreement and all related correspondence entered into with you as of June 9,
1997, in their entirety. 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
<PAGE>
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 chief executive officer and 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 Board or its designee. You agree to use your best efforts in the business
of the Company and to devote your full time attention and energy to the business
of the Company. You agree not to work, either on a part-time or independent
contracting or consulting basis, with or without compensation, for any other
business or enterprise during the Term without the Company's prior consent.
Such consent shall not be unreasonably withheld in the case of service on the
boards of directors of other corporations and community organizations.
1.3 Base Compensation. The Company shall pay you as base compensation
-----------------
at an annual salary rate of $725,000, in installments in accordance with the
Company's policies from time to time in effect, effective as of January 1, 1998.
Your salary will be reviewed annually and may be adjusted by the Company from
time to time during the Term, 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 senior 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 Board or its designee. 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.
Separately, you will be provided with 200,000 options for common shares of
the Company, and rights to 200,000 restricted shares of the Company, which shall
be made available to you under one or more of the plans currently in effect and
in which you may participate, which options and rights to shares will be awarded
on a grant date early in 1998, normally in February. One third of the options
will vest on each of the first three anniversary dates of the grant date, under
the terms of the applicable plan. One third of these restricted shares will
vest on each of the first three anniversaries of the grant date,
2
<PAGE>
provided that the performance of the Company as reflected in its common share
price meets the criteria established in the applicable plan. In the event of a
Change of Control of the Company while you are in the employ of the Company, the
rights to such restricted shares shall vest in their entirety on the date of
such Change of Control.
In addition, you will be provided with rights to an additional 100,000
restricted shares of the Company, which shall be made available to you under one
or more of the plans currently in effect and in which you may participate, which
rights will be awarded on a grant date early in 1998, normally in February.
These rights shall be earned upon the occurrence of both: (a) the full passage
of five (5) years, provided you have continued throughout such period as an
employee of the Company and are otherwise qualified under the applicable plan;
and (b) at least one of the following events: (i) by the first anniversary of
the grant date, the performance of the Company as measured by appreciation in
its common share price, has improved at least fifteen percent (15%) from the
grant date, such improvement to be measured by attainment and maintenance of the
target share price for twenty (20) days in a thirty (30) consecutive day trading
period, as reflected by the closing price published in The Wall Street Journal
(the achievement of the required share price over such period constituting the
"Measurement Criteria"), and the grant otherwise meets the terms of the plan; or
(ii) on the eighteen month anniversary of the grant date, such performance has
improved at least twenty percent (20%) under the Measurement Criteria, and the
grant otherwise meets the terms of the plan; or (iii) on the second anniversary
of the grant date, such performance has improved at least twenty-five percent
(25%) under the Measurement Criteria, and the grant otherwise meets the terms of
the plan. If such rights to restricted shares are earned, they shall be
distributable to you at the time you reach age 55; provided, however, that at
the time of the grant, you shall have the opportunity to elect to defer
distribution of all or a portion of such restricted shares for a period of up to
ten years from the time you reach age 55. Notwithstanding the conditions set
out in this paragraph, in the event of a Change of Control of the Company within
five years of the grant date and while you are in the employ of the Company,
such rights to shares shall be deemed earned and distributable in their entirety
on the date of such Change of Control. If the rights are not earned as of the
fifth anniversary of the grant date, they shall expire.
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
Executive 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
3
<PAGE>
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 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 management, sales and marketing, 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
<PAGE>
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);
(c) The period of your employment by the Company (whether under
this Agreement or otherwise) and, if this Agreement is still in effect
at the Termination Date, the number of months remaining in the Term at
the Termination Date or 12 months, whichever is longer (but in no
event more than 24 months), if you terminate your employment
voluntarily (and not for Good Reason); or
(d) The period of your employment by the Company under this
Agreement, if your employment is terminated by you for Good Reason or
by the Company 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").
5
<PAGE>
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, or as
6
<PAGE>
referenced in Section 1. Except for amounts payable in connection with any plan
of the Company which are payable over time or according to an established
framework or schedule, 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 for each period for which a bonus is payable to
employees under the short term incentive compensation program then in
effect and for which you have not yet been paid: (i) a bonus at the level
actually achieved by the Company for the fiscal year if you worked for the
Company for the full fiscal year; and (ii)(a) a bonus established under the
applicable plan using the level actually achieved for such prorated portion
of the fiscal year in which the Termination Date occurs as relates to your
actual employment, using such measurements as are used generally by the
Company for monitoring employee bonus qualification; or (b) if you leave at
a time in which the performance of the Company is not measured generally by
the Company for employee bonus purposes, then the bonus at standard level
for the number of full months of the fiscal year that you worked for the
Company.
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
<PAGE>
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)
$40,000 (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 of such amounts identified in subpart (a)
as are "parachute payments" within the meaning of Section 280G(b)(2) of the
Internal Revenue Code of 1986 (the "Code") in the event of a change of
control of the Company, determined in accordance with Section 280G(d)(4) of
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.
7.4 Termination by Company Following Change of Control or Termination for
---------------------------------------------------------------------
Good Reason. If the Company terminates your employment following a Change of
- -----------
Control, or you terminate your employment for Good Reason, 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)
$40,000 (being the agreed cash equivalent of the annual value of the
perquisites provided to you
8
<PAGE>
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 of such amounts identified in subsection (a) as are
"parachute payments" within the meaning of Section 280G(b)(2) of the Code
in the event of a change of control of the Company, determined in
accordance with 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") or any income you receive in the
form of restricted stock of the Company or options of the Company, 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
9
<PAGE>
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, 4 and 5 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 Board
or a designee of 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
10
<PAGE>
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
11
<PAGE>
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
12
<PAGE>
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,
13
<PAGE>
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/ Douglas McCorkindale
------------------------
Chair of the Executive Committee
Agreed to on 1/28/98
-------
/s/ Joseph P. Clayton
------------------------
Joseph P. Clayton
14
<PAGE>
ADDENDUM TO LETTER AGREEMENT DATED AS OF JANUARY 1, 1998
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.
15
<PAGE>
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.
16
<PAGE>
Exhibit 10.23
EMPLOYMENT AND NON-COMPETE AGREEMENT
------------------------------------
THIS EMPLOYMENT AND NON-COMPETE AGREEMENT is made as of the 14 day of
----
January, 1998 (the "Effective Date"), by and among GLOBALCENTER, INC., a
California corporation ("Company") and Douglas T. Hickey
------------------------------
("Executive").
WHEREAS, Company wishes to retain the services of Executive as provided in
this Agreement for a period of time during which it anticipates significant
change in the market in which the Company competes, and in the direction and
evolution of Company,
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements herein contained, Company and Executive have agreed as
follows:
1. Terms of Employment.
-------------------
1.1 Employment. Company agrees to continue to employ Executive, and
----------
Executive agrees to continue to serve Company, on the terms and conditions set
forth herein.
1.2 Position and Duties. Executive shall have such powers and duties
-------------------
normally associated with the position with Company of its President and shall
have such other powers and duties commensurate with such position as may from
time to time be prescribed by the board of directors of Company, or by such
executives of Company or any parent of Company as may have authority to do so.
Executive shall devote his full time, attention and energy to and use his best
efforts in the business and affairs of Company and its affiliates. Executive's
duties are, without limitation, to be responsible for the profitable and
successful growth and operation of the Company. Executive shall not work,
including on either a part-time or independent contracting, or in a paid or
unpaid advisory capacity, for any other business or enterprise during the Term
without Company's prior written consent. Provided such activity is not
inconsistent with his responsibilities as an employee of the Company, Executive
may serve on boards or committees of civic, educational, or charitable
organizations, or in other capacities with such organizations, and may serve on
boards or committees of other organizations that do not compete with the
Company. Service on other boards or committees may be permitted only upon
consent of the chief executive officer of the Company.
1.3 Term. The term of this Agreement ("Term") shall be three (3) years
----
after the Effective Date, unless earlier terminated or extended. The provisions
of Section 5 shall have a separate duration of three (3) years, as described
therein. Except as set forth in this Agreement, Executive's employment is "at
will".
2. Compensation.
------------
2.1 Base Salary. Executive's Base Salary shall be $300,000 until
-----------
February 1, 1999, unless otherwise increased by agreement of the parties.
Executive's Base Salary may be modified thereafter by Company in accordance with
the compensation program that is in effect for Company, and as such program may
be modified from time to time. Should Company become affiliated with or be
acquired by another entity, Executive shall participate in the compensation
program applicable to such other entity, but the Base Salary shall not be
<PAGE>
reduced during the Term. Executive's Base Salary shall accrue and be payable in
accordance with Company's normal payroll policies.
2.2 Performance Bonus. Executive shall be eligible to receive an annual
-----------------
performance bonus of up to $138,700 until a change of control of Company, and
thereafter, such bonus eligibility shall change to be in a range of 25% (at
threshold level) to 87.5% (at premier level) of salary, with a bonus opportunity
at standard level of 50% of the amount stated in the first line of Section 2.1
for calendar year 1998, which is within the range of bonus amounts that are
payable to other employees at the same SVP level as Executive, for meeting the
applicable corporate and individual performance criteria established in writing
by Company for such period.
Any performance bonus to be earned by Executive in 1999 and thereafter
shall be established in the normal course of business in anticipation of
achievement of such goals and objectives as are set by the Company and modified
from time to time thereafter.
2.3 Expenses. During the term of Executive's employment hereunder,
--------
Executive shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred in performing services hereunder, provided that Executive
properly accounts for such expenses in accordance with Company policy.
2.4 Compensation and Benefit Programs of Company. While employed
--------------------------------------------
hereunder, Executive shall be eligible to participate in the benefit programs
and plans maintained by Company for the benefit of such group or groups of
management employees of which Executive is a member (or any successor programs
implemented by Company from time to time.) Any options or loans are addressed
separately.
2.5 Place of Performance. Executive is to perform his duties at such
--------------------
place or places as Company directs. For the three (3) year period set out in
Section 1.3, absent other mutually agreeable arrangement, or temporary
assignments consistent with industry or Company practices, Executive shall
perform his duties at the current Company location in Sunnyvale.
3. Termination of Employment.
-------------------------
3.1 Death. Executive's employment hereunder shall terminate upon his
-----
death.
3.2 Disability. Executive's employment hereunder shall terminate in the
----------
event he suffers a Disability as hereinafter defined.
3.3 By Company. Company may terminate Executive's employment hereunder
----------
at any time with or without Cause but subject to the provisions of this
Agreement, including without limitation the provisions of Section 5, which shall
survive any termination of Executive's employment, except where Executive and
Company specifically agree to waive such provisions, and as such may be
permitted by this Agreement.
2
<PAGE>
3.4 By Executive. Executive may terminate his employment hereunder at
------------
any time for any reason, but subject to such provisions of this Agreement,
including without limitation the provisions of Section 5, which shall survive
any termination of Executive's employment, except where Executive and Company
specifically agree to waive such provisions, and as such may be permitted by
this Agreement.
3.5 Notice of Termination, Payments. Any termination of Executive's
-------------------------------
employment hereunder (other than by death) shall be communicated by 10 working
days' advance written Notice of Termination by the terminating party to the
other party to this Agreement; provided that no advance Notice of Termination
for Cause by Company is required. Unless otherwise provided in Section 4, any
amounts owed by Company to Executive pursuant to Section 4 shall be paid on the
Date of Termination. Payments shall be made available to Executive only so long
as he is in compliance with the provisions of Section 5, as such may be
applicable at the time.
4. Payments in the Event of Termination of Employment.
--------------------------------------------------
4.1 Payments in the Event of Termination by Company for Cause or Voluntary
----------------------------------------------------------------------
Termination by Executive Other Than for Good Reason. If Executive's employment
- ---------------------------------------------------
hereunder is terminated by Company for Cause or Executive voluntarily terminates
his employment other than for Good Reason, Company shall pay Executive his
accrued and unpaid Base Salary and Incentive Compensation (excepting any bonus
amounts whatsoever) through the Date of Termination on the Date of Termination
or as soon thereafter as is practicable. Executive also shall receive any
payments or other rights of continuation or benefits Executive may otherwise be
entitled to receive pursuant to any employee benefit or compensation plan or
life insurance policy maintained by Company at the time or times provided
therein, as such plans or policies may be modified from time to time.
4.2 Payments in the Event of Any Other Termination of Employment. If
------------------------------------------------------------
Executive's employment hereunder is terminated by Company during the Term other
than for Cause, or if Executive dies or should terminate his employment for Good
Reason, or if employment is terminated as a result of Disability, Company shall
pay Executive his accrued and unpaid Base Salary and Incentive Compensation
(excepting any bonus amounts whatsoever) through the Date of Termination on the
Date of Termination or as soon thereafter as is practicable. Executive also
shall obtain any payments or other rights of continuation or benefits Executive
may be entitled to receive pursuant to any employee benefit or compensation plan
or life insurance policy maintained by the Company, as such plans or policies
may be modified from time to time. In the event Executive's employment is
terminated as a result of his death, such payments shall go to Executive's
estate.
On the condition that Executive agrees to remain available in the event
Company requires information or cooperation with respect to any disputes or
litigation, and only so long as Executive complies with the provisions of
Section 5 that are applicable at the time, Executive or his estate shall be
entitled in each case under this Section to receive payment of the full amount
that would have been paid to him as Base Salary (but no Incentive Compensation
or bonus, except for the one-time payment established below in satisfaction of
any previously established commission component of Base Salary) for the
remainder of the Term, either: (a) as such payments become due, or (b) on or
promptly after
3
<PAGE>
the Date of Termination, at Company's election. The Company shall seek to
provide reasonable advance notice and cooperation with respect to scheduling in
relation to disputes or litigation, and shall reimburse Executive for the
reasonable expenses incurred by Executive in relation to such disputes or
litigation. If there is any commission component of Base Salary, Executive shall
be paid the present value of five months of commissions at Executive's average
monthly commission level for the prior two quarters, taking into account
attrition at a representative rate, within one month after the end of the first
full quarter following the Termination Date, or such earlier time as Company
elects, in full satisfaction of all commission obligations. Company agrees to
continue for Executive those employee health and welfare benefits (life
insurance disability, medical, dental, vision and hospitalization) as are in
effect on the date of termination, for one (1) year after the date that
termination of employment occurs, except in the event of Executive's death, in
which case no continuation of benefits shall occur except what is provided in
any applicable plans. If Executive dies, any condition related to disputes or
litigation shall be deemed waived. No other payments shall be payable to
Executive or his estate.
Any payment due to Executive under this section for Disability shall be
reduced by the amount of such payments as are otherwise payable to him under a
plan or plans of the Company by virtue of such Disability. Executive shall not
be required to mitigate the amount of any payment provided for in this Section
4.2 by seeking other employment or otherwise, and no such payment shall be
offset or reduced as a result of Executive obtaining new employment.
5. Confidentiality, Non-Competition and Non-Solicitation.
-----------------------------------------------------
5.1 Confidentiality of Developments and Intellectual Property. Executive
---------------------------------------------------------
acknowledges that all developments, including but not limited to trade secrets
(including strategies, business plans and customer lists), discoveries,
improvements, ideas and writings which relate to or are useful in the business
of the Company or any affiliated entity (the "Developments") which Executive
shall develop, acquire or acquire knowledge of during the Term are the sole and
exclusive property of the Company. Executive shall not, without the prior
written consent of Company, divulge, disclose or make accessible to any other
person, firm, partnership or corporation or other entity any Confidential
Information pertaining to the business of Company except in the performance of
his duties under this Agreement or when required to do so by a court of
competent jurisdiction, by any governmental agency having supervisory authority
over the business of Company, or by any administrative body or legislative
exercising its jurisdiction.
For purposes of this Section 5.1, "Confidential Information" shall mean
non-public information of Company or its affiliates, or the Company's (or an
affiliate's) financial data, strategic business plans, product development (or
other proprietary product data including the Developments), customer lists,
marketing plans and other proprietary information (and other material covered in
the Company's separate agreement concerning inventions, confidential information
and intellectual property where Executive has executed such agreement), except
for specific items which have become publicly available information other than
through a breach by Executive of any fiduciary duty or any confidentiality
agreement. Executive specifically represents and acknowledges that the
Confidential Information and the manner in which such Confidential Information
is used by Company
4
<PAGE>
provides Company with a substantial part of its competitive advantage and if
disclosed to others, would materially harm Company's ability to compete.
Upon termination of this Agreement, Executive shall promptly return to
Company all Confidential Information and any other tangible product or document
which has been produced by, received by or otherwise submitted to Executive
during the Term and shall not retain any copies thereof. This confidentiality
covenant has no geographical restriction but shall expire without further action
of either party five (5) years from the last day on which Executive works for
Company.
5.2 Non-Competition
---------------
(a) Covenant. Executive and Company acknowledge that Executive has a
--------
special expertise in the Internet and information transport areas, that the
market area in which Executive may compete with Company is without geographic
boundaries, given the growth of, and advances in telecommunications and the
specific business of Company, and that in Executive's employment with the
Company, he 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, as well as those of Company's partners and affiliates.
Executive specifically represents and acknowledges that he is a partial owner of
shares in the Company and that his activities on behalf of Company have
significantly contributed to the development of the Company's goodwill.
In consideration of the benefits provided under this Agreement, which are
acknowledged to be independent consideration, Executive covenants and agrees
that, for the duration of the Term (whether or not it may be reduced), and for a
period of three (3) years from the date of this Agreement, whether or not
Executive's employment with Company or any affiliate of Company ceases earlier
than the Term stated in Section 1.3, he will not, directly or indirectly,
without the Company's prior consent (or in the event that Company should be
subject to a change of control, to the prior consent of the controlling
shareowner of Company) own, manage, operate, 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 his name to be used in connection with, any enterprise that
competes (including marketing, promotion, distribution or sale of any product,
service, or functional capability of any person or entity other than the Company
or an affiliate of the Company whose products the Company provides or refers to
customers) with any Internet business of the Company or any telecommunications
business of the Company that involves the offering or provision of local
exchange service or any form of long distance (interexchange, interLATA)
service, or with such offering or provision of local exchange or long distance
service by an affiliate of the Company with whom Company bundles or jointly
sells its products and services, at any point in the United States of America
within 100 miles of where the Company has a business, sales or customer service
office, or, whether such competition is directly or via telecommunications, in a
state which is a source to the Company of more than five percent (5%) of its
revenues or five percent (5%) of its Internet customers, or where it offers,
sells or provides customer support for any services that are sold by or jointly
marketed through Company.
5
<PAGE>
This Section shall not be construed to prohibit the ownership of not more
than 2.5% in any corporation which competes with the Company, or such additional
ownership of securities of a corporation as may be permitted after March 15,
1998 by the chief executive officer of any parent of Company.
(b) Savings Clause. Executive acknowledges that because there is a wide
--------------
market in which he can use his skills for enterprises that do not directly or
indirectly compete with the business of the Company, he will not be unreasonably
limited in his ability to work. Executive and the Company agree that this
covenant not to compete is a reasonable covenant under the circumstances and is
supported by the consideration stated above, and further agree that if any of
the provisions of this Section 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 Executive agrees to the enforcement of the
remainder of the covenant as so amended.
5.3. Non-Solicitation. Executive covenants and agree that for a period
----------------
of three (3) years from the date of this Agreement, whether or not Executive's
employment with Company or any affiliate of Company ceases earlier than the Term
stated in Section 1.3, he will not, directly or indirectly, or through
employees, agents, recruiters, independent contractors or others, without the
Company's prior consent (or in the event that Company should be subject to a
change of control, to the prior consent of the controlling shareowner of
Company) and without regard to the activity or activities in which Executive is
engaging, whether it is within or without the information services industry,
Executive will not: (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 any partner or affiliate, or to undertake activities that would
be adverse to the interests of Company or any affiliate, where such person is
employed by the Company or any affiliate, or, where the law permits, is in an
independent contractor relationship in which a majority of their time is spent
on Company/affiliate-related activities, or is a supplier of services to the
Company or any affiliate who would thereafter become unavailable to provide such
services to such entity, or who has been in such an employment or independent
contractor relationship within the twelve (12) months prior to the first contact
by Executive; or (b) solicit from, convert, attempt to convert, divert business
from, or attempt to divert business from any of the Company's customers or those
customers of any affiliate, whether such activity is intended to benefit
Executive or any other person or entity, and whether or not such activity is
successful. This section shall not be deemed to prohibit newspaper
advertisements or similar general invitations to seek employment, provided there
are no additional activities directed toward specific employees covered under
subpart (a) of this subsection.
5.4. Equitable and Other Relief.
--------------------------
(a) Executive acknowledges that the restrictions contained in the Sections
governing Developments and Intellectual Property, Confidential Information, Non-
Competition and Non-Solicitation are, in view of the nature of the business of
the Company, and Executive's position with it, reasonable and necessary to
protect the legitimate interests
6
<PAGE>
of the Company and its affiliates, and that any violation of the provisions of
those Sections will result in irreparable injury to the Company and its
affiliates for which there would be no adequate remedy at law.
Executive also acknowledges 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. Executive agrees to submit to the jurisdiction of a state court
located in the jurisdiction of the Company's headquarters, or that of such
affiliated entity that may seek relief under this section, at the applicable
time in any action, suit or proceeding brought by the Company or the affiliated
entity, or both, to enforce its rights under the Sections identified above, and
that any separate claim Executive has shall not constitute a defense to the
enforcement of the covenants and agreements in those Sections.
(b) Executive shall indemnify the Company and its affiliates (the
Indemnified Parties") and hold the Indemnified Parties harmless from any and all
judgments or awards rendered by a court in favor of Company or an affiliate of
Company as a result of a Breach, and reasonable attorneys' and experts' fees
incurred by Company or an affiliate of Company in enforcing its rights under
this Section 5.
(c) The indemnification provided in this Section 5 shall not be the
exclusive remedy available to Company or its affiliates for any breach of this
Agreement by Executive.
6. Successors and Assigns. This Agreement and all rights of Executive
----------------------
hereunder shall inure to the benefit of and be enforceable by, Executive's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devises and legatees. The rights and obligations of the Company
under this Agreement shall inure to the benefit of and shall be binding upon its
successors and assigns, and any entity that may take a controlling interest in
the Company.
7. Withholding. All payments required to be made by the Company hereunder
-----------
shall be subject to the withholding of such amounts as are required to be
withheld pursuant to any applicable law or regulation.
8. Certain Defined Terms. As used herein, the following terms have the
---------------------
following meanings:
"Agreement" shall mean this Employment and Non-Compete Agreement, as the
---------
same may be amended, supplemented or otherwise modified from time to time.
"Base Salary" shall mean the annual salary of the Executive in effect from
-----------
time to time under Section 2.1, excluding any incentive compensation or one-time
payments, except where a governing commission arrangement applies to an active
sales executive and is described with specificity in Section 2.1, and prior to
any withholdings or deductions, which salary shall accrue ratably and be payable
in accord with Company's policies in effect from time to time.
7
<PAGE>
"Cause" shall mean, with respect to termination of Executive's employment
-----
hereunder: any of (i) the repeated failure to substantially perform the duties
assigned to him after he has been advised in writing of the fact and nature of
such non-performance, and given an opportunity to cure it; (ii) activity
undertaken willfully, that fails to reflect reasonable business judgment and
that is materially injurious to the Company; (iii) activity undertaken willfully
and that is in violation of the Company's written policies related to ethics, as
such ethics policies may be modified in writing from time to time; (iv) an act
or acts of personal dishonesty by Executive which results in a not insubstantial
personal enrichment of Executive at the expense of Company or any affiliate of
Company; (v) an act or acts or personal dishonesty by Executive which causes
substantial injury to the business, operations or reputation of Company or any
affiliate; (vi) a written determination by the Company that Executive has
engaged in activity that could be the subject of a charge against Executive that
involves a felony, high misdemeanor or a crime involving moral turpitude and
which detrimentally affects the Company; or (vii) violation of the provisions of
this Agreement set out in Section 5.
"Date of Termination" shall mean, with respect to Executive, the date of
-------------------
termination of Executive's employment hereunder after the notice period provided
by Section 3.5, to the extent applicable.
"Disability" shall mean a physical or a mental condition which prevents
----------
Executive from performance of his duties hereunder, if Executive or Company
establishes by medical evidence that such condition will be permanent and
continuous during the remainder of Executive's life or, at the discretion of
Company, if such condition is documented by a physician acceptable to Company to
be sufficiently severe that it will certainly extend beyond four (4) years from
the date of this Agreement.
"Good Reason" shall mean, with respect to Executive, any one or more of the
-----------
following: (i) the material reduction in Executive's authority and
responsibility except: (a) with Executive's consent, or (b) with a showing that
Executive has failed to meet the responsibilities of his position under
circumstances that would constitute Cause for termination by Company; (ii) a
reduction in Executive's Base Salary or executive benefits during the period set
out in Section 1.3 except where such reduction is unrelated to Company-specific
performance objectives and occurs for all executives at the same level within
the Company or its parent; or (iii) a failure by Company to comply with any
material provision of this Agreement which failure has not been cured within ten
(10) days after receipt of written notice from Executive specifying the alleged
noncompliance, or such minimum reasonable additional time in the event cure is
impossible within ten (10) days. In order for Executive's termination of his
employment to be considered for Good Reason, Executive shall provide a Notice of
Termination for Good Reason within one (1) month after the event giving rise to
such Good Reason, and in the event a cure period expires without resolving the
basis for the Notice, Executive shall provide notice of such fact and the basis
for his final action. Without prejudice to either party, Executive shall
comply with any request of Company not to appear for work or to contact
employees during all or any part of the time after Executive's Notice of
Termination for Good Reason is delivered to Company.
"Notice of Termination" shall mean a written statement specifying the Date
---------------------
of Termination, which notice shall (i) indicate the specific termination
provision (if any) in this Agreement applicable to the termination; and (ii) set
forth in reasonable detail the facts claimed to provide a basis for termination
of Executive's employment.
8
<PAGE>
9. Miscellaneous. No provision of this Agreement may be modified, waived
-------------
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by Executive and by the highest ranking executive of Company or
an executive to be designated by Company (or in the event that Company should be
subject to a change of control, to the prior consent of the controlling
shareowner of Company.) No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. There shall
be no right of set-off, recoupment or counterclaim, in respect of any claim,
debt or obligation, against any payments to Executive, his dependents,
beneficiaries or estate provided for in this Agreement.
10. Validity. The invalidity or unenforceability of any provision or
--------
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect. The validity, interpretation, construction and performance of this
Agreement shall be governed in accord with the law of the state in which the
headquarters of the Company is located, or if there is a change of control of
the Company, of the state where the headquarters of the parent of Company is
located, with such change of applicable law to be effective on such change of
control, and without regard to principles of conflicts of laws.
11. No Limitation. Under no circumstances shall payment to Executive of
-------------
any amount required to be paid under any provision hereof, or provision to
Executive of any other benefit or compensation required to be provided under any
provision hereof, limit or reduce any other obligation of Company, to make any
payment or provide any benefit to Executive pursuant to any other provision
hereof, except that Executive shall not be entitled to receive any benefits
under any severance plan or program maintained by either Company in addition to
the payments to be made to Executive pursuant to Section 2 and 4 of this
Agreement.
12. Notices. All notices and other communications given or made pursuant
-------
to this Agreement shall be in writing and personally delivered or sent by a
nationally recognized overnight courier, including the applicable United States
Postal Service overnight service, or by telecopy, to the parties at the
following addresses:
If to Executive: Douglas T. Hickey
1850 Wharf Road
Capitola, CA 95010
If to Company: GlobalCenter, Inc.
1154 E. Arques Avenue
Sunnyvale, CA 94086 Attn: President or CFO
with a required copy to counsel for Company's parent in New York or elsewhere,
or in lieu thereof, to counsel for Company
or to such other person or address as any party shall specify by notice in
writing to the other. All such notices, requests, demands, waivers and
communications shall be deemed to have been received by the relevant party on
the date of personal delivery to such party's address, addressed to the
attention of the appropriate person specified above, on the business day
following the date on which such notice was sent by overnight courier to such
party's address,
9
<PAGE>
addressed to the attention of the appropriate person specified above or, if such
notice is sent by telecopy or hand delivered, on the date that delivery is
initiated, if a receipt of such telecopy or hand delivery is obtained or
acknowledged by the recipient.
13. Entire Agreement. This Agreement supersedes all related provisions
----------------
set out in any prior employment agreement between Executive and Company. This
instrument contains the entire agreement of the parties and supersedes all other
employment agreements between the parties. This Agreement may not be changed
orally, but only by an agreement in writing signed by the party against whom
enforcement of any waiver, change, modification, extension, or discharge is
sought, in accord with Section 9. If Executive's employment continues beyond
the expiration of the Term, the provisions of Section 5 shall continue in full
force and effect, but the other provisions of this Agreement do not renew
automatically.
IN WITNESS WHEREOF, Executive and Company have caused this Agreement to be
signed as of the Effective Date first stated above.
EXECUTIVE COMPANY
GLOBALCENTER, INC.
/s/ Douglas T. Hickey By: /s/ Douglas T. Hickey
--------------------- ---------------------
Printed: Douglas T. Hickey Name: Douglas T. Hickey
--------------------- ---------------------
Its: President
10
<PAGE>
PROMISSORY NOTE
$150,000 February 27, 1998
FOR VALUE RECEIVED, the receipt and sufficiency of which is
acknowledged Douglas T. Hickey, residing at 1850 Wharf Road, Capitola,
California 95010 ("Maker") promises to pay to the order of Frontier Corporation,
at its office and principal place of business at 180 South Clinton Avenue,
Rochester, New York 14646 ("Payee"), the principal amount of One Hundred Fifty
Thousand Dollars ($150,000).
On the condition that Maker remains a full time employee of Payee or
one of its subsidiaries or affiliates, then, on the third anniversary of this
Note, i.e., February 27, 2001, the principal amount of this Note plus any
----
interest shall be deemed paid in full. Until such date, no payments shall be
required to be made to Payee by Maker, so long as Maker remains in the employ of
Payee or one of its wholly-owned subsidiaries or affiliates.
If Maker ceases to be employed by Payee or any of its wholly-owned
subsidiaries or affiliates, for any reason except for termination of employment
without cause, the principal amount of this Note then outstanding, plus interest
thereon calculated at a rate equal to the prime rate then charged by The Chase
Manhattan Bank, N.A., plus one percent, shall become immediately due and payable
without notice, presentation or demand of any kind, all of which are hereby
waived by Maker. Maker agrees that Payee shall be entitled to set off such sums
as may be required to pay the principal amount of this Note, plus any interest,
against any amounts payable to or on behalf of Maker by Payee or any wholly-
owned subsidiary or affiliate of Payee, to the extent not prohibited by
applicable law or regulation.
If Maker ceases to be employed by Payee or any of its wholly-owned
subsidiaries or affiliates as a result of an employment termination without
cause by Payee or its wholly-owned subsidiary or affiliate (in either case, with
the approval of Payee) prior to the date that the principal amount of this Note
would otherwise be deemed paid, then the principal amount of this Note plus all
accrued interest will be deemed forgiven in full as of the date that the
employment termination becomes effective, and Payee shall have no further claim
against Maker.
No failure or delay on the part of Payee in the exercise of any power
or right in this Note shall operate as a waiver thereof, and no exercise or
waiver of any single power or right, or the partial exercise thereof, shall
affect Payee's rights with respect to any and all other rights and powers.
Maker waives presentment and demand for payment, notice of dishonor,
protest and notice of protest of this Note.
The provisions of this Note shall inure to the benefit of and extend
to Payee or any holder hereof or any assigns of Payee.
11
<PAGE>
-2-
Any notice given pursuant to this Note shall be in writing and shall
be deemed to have been given when: (a) delivered by hand; or (b) deposited for
certified or registered mail delivery in the United States mail with postage
prepaid; or (c) sent through a recognized overnight service including but not
limited to the United States Postal Service; and in the event of (b) or (c),
addressed to the party for whom it is intended at the address for such party set
forth above, or in the case of Maker, to such other residence address as the
employer of Maker may have on its records as Maker's last known residence
address.
This Note shall be governed by and construed under the laws of the
State of New York, without reference to and regardless of the application of any
of its principles of conflicts of law.
In the event that this Note is placed in the hands of an attorney for
the collection hereof, Maker agrees to pay all reasonable costs of collection,
including reasonable attorneys' fees.
IN WITNESS WHEREOF, Maker has executed and issued this Note on the day and year
first set forth above.
/s/ Douglas T. Hickey
---------------------
Douglas T. Hickey
STATE OF ___________________ )
COUNTY OF _________________ ) ss.:
On the _______ day of ________________________, 1998, before me
personally came Douglas T. Hickey, to me known and known to me to be the same
person described in and who executed the foregoing instrument, and he duly
acknowledged to me that he executed the same.
----------------------------------
Notary Public
12
<PAGE>
Exhibit 10.24
SERVICE CONTINUATION AGREEMENT
------------------------------
This Service Continuation Agreement ("Agreement") is effective as of
December 29, 1997 by and between Frontier Corporation ("Frontier"), a New York
corporation with its principal offices at 180 South Clinton Avenue, Rochester,
New York 14646 ("Frontier Center"), and Louis L. Massaro, of 19 Mile Post Lane,
Pittsford, New York, 14534 ("Massaro").
WHEREAS, Frontier and Massaro are parties to a certain employment and change
of control agreement ("Employment Agreement") entered into as of August 16,
1995; and
WHEREAS, Massaro has valuable specific knowledge of the operations of
Frontier, and Frontier seeks to maintain the availability of Massaro, during a
period in which Massaro's knowledge is expected to be of special value to
Frontier, and
WHEREAS, Massaro and Frontier are willing to establish arrangements to
maintain the availability to Frontier of Massaro's knowledge and information,
and agree that this Agreement accurately reflects such arrangements,
NOW, THEREFORE, in consideration of the promises and mutual agreements
hereinafter set forth, the parties hereto agree as follows:
ARTICLE I. EMPLOYMENT CONTINUATION AND POSTEMPLOYMENT
AVAILABILITY.
1. Employment Continuation. Massaro and Frontier agree that Massaro
-----------------------
shall continue to perform services as an employee and senior executive of
Frontier between the date of this Agreement (the "Effective Date") and the close
of business on February 28, 1998, the date on which Massaro has indicated his
intent to retire, or such other date as shall be mutually agreed upon by
Frontier and Massaro (the date upon which Massaro actually retires to be
referred to herein as the "Retirement Date"). The period from the Effective
Date through and including the Retirement Date shall constitute the "Retention
Term". Massaro's existing Employment Agreement shall terminate on the
Retirement Date, except such provisions as may otherwise be addressed herein.
Effective on the first day after the Retirement Date, Massaro resigns any
position he may hold as an officer or director of Frontier or of any subsidiary
or affiliate of Frontier, and from which he has not previously resigned.
2. Postemployment Consulting. For a period commencing the day after the
-------------------------
Retirement Date and ending February 28, 1999, Frontier agrees to retain the
services of Massaro as a consultant to Frontier, and Massaro agrees to provide
consulting services ("Services") to Frontier, under the terms and conditions
stated herein. The period from the end of the Retention Term through and
including February 28, 1999 shall constitute the "Consulting Term".
1
<PAGE>
ARTICLE II. EMPLOYEE RETENTION PROVISIONS
1. Employee Services. Massaro agrees to continue to perform the duties
-----------------
and obligations required of him in his current role as an employee and senior
executive of Frontier through the end of the Retention Term, and as provided for
in the Employment Agreement, it is the intent of this Agreement to continue to
encourage his complete dedication to Frontier during the Retention Term so as to
assure Frontier of continuity in its relationships with customers and employees.
Except as set forth in this Agreement and the Employment Agreement, Massaro's
employment continues to be "at will" through the end of the Retention Term.
2. Base Compensation and Cash Transition Incentive. Frontier agrees to
-----------------------------------------------
modify Massaro's base compensation under the Employment Agreement, and shall pay
Massaro, effective November 1, 1997 and through the end of the Retention Term,
at a base compensation rate of Three Hundred Twenty-Five Thousand Dollars
($325,000) per annum, in installments in accordance with Frontier's policies
that are in effect during such period. In addition, Frontier agrees to pay to
Massaro, prior to the end of the fourth quarter of 1997, as a one-time
transition incentive, the sum of One Hundred Thousand Dollars ($100,000). This
transition incentive shall not be deemed a part of Massaro's base compensation
but shall be taken into account for purposes of Massaro's pension benefit
calculation.
3. Stock Transition Incentive. Frontier has elected to grant to Massaro
--------------------------
one hundred thousand (100,000) options to purchase common stock of Frontier, at
a price set as of November 17, 1997, which options are granted under the
Frontier Management Stock Incentive Plan, and which shall have the three-year
vesting schedule and other terms and conditions established under that Plan.
To accept the grant, Massaro agrees to execute an option agreement in its
prevailing form. Such options shall continue to vest according to the
applicable plan vesting schedule during the stated period, including such part
of the period that occurs after Massaro's retirement, subject to termination
under the conditions stated in the option agreement. Such options will
accelerate in the event of a Change of Control according to the provisions of
the applicable plan. In the event Massaro violates the non-competition
provision of such option agreement between the execution date of this Agreement
and February 28, 1999, inclusive, all options granted under this Section and
that are not exercised as of the date such violation is claimed may be
terminated by Frontier pursuant to the provisions of the option agreement,
subject to the procedures set out in Section 8 of Article IV of this Agreement.
4. Retirement Credit. Frontier agrees to credit Massaro with an
-----------------
additional 24 months of service for the purposes of determining the level of his
retirement benefits under such defined benefit retirement or pension plans as
are maintained by Frontier and under which Massaro may be a covered employee.
Massaro will be eligible for regular retirement benefits, including medical
benefits, under the applicable provisions of such employee retiree and/or
executive retiree programs as are applicable to Massaro. No new benefit is
intended to be created from the additional retirement credit. Applicable
payments will commence on the fifteenth day of the first full calendar month
after Massaro retires. Massaro also will be provided with the option to choose
a 100% joint and survivor benefit related thereto.
Massaro also shall be entitled to select COBRA coverage that is made
available generally to departing employees and which will remain available for a
period of eighteen (18) months. In addition, but in lieu of the additional
life insurance, disability, medical, dental, vision
2
<PAGE>
and hospitalization benefits that would be provided for an additional 24 months
after the end of employment under the Employment Agreement, Massaro also may
elect to receive a one-time cash payment of Twenty-Five Thousand Dollars
($25,000), which shall not be deemed a part of Massaro's base compensation, nor
be taken into account with respect to the calculation of any benefits.
In the event Massaro should die or become disabled within the terms of any
benefit plan during the Retention Term, Massaro shall be deemed to have retired
one day prior to his death or disability, and he, or his estate or spouse, as
may be designated by Massaro, shall receive the full benefits available to them
in such capacity, from such circumstance. Any existing options and restricted
stock currently held by Massaro and which are provided under a plan that
provides for vesting into retirement will continue to vest into Massaro's
retirement to the extent provided in the applicable plan.
5. Provisions Related to Non-Competition, Non-Solicitation and Protection
----------------------------------------------------------------------
of Frontier Confidential Information. Massaro agrees to continue to honor
- ------------------------------------
fully the provisions of the Employment Agreement with respect to his access to
and use of Frontier information, to non-competition with Frontier, and to non-
solicitation of Frontier customers and employees, as such provisions,
incorporated herein by reference, are modified or clarified by this Agreement.
Massaro further agrees that, in consideration of the additional and
expanded benefits provided him under this Agreement, the Restricted Period, as
defined in the Employment Agreement, shall be restated as 24 months for purposes
of Section 4.1(ii) of the Agreement (non-solicitation) and of this Agreement,
and shall terminate February 29, 2000. Frontier and Massaro agree that the
Restricted Period, as defined in the Employment Agreement, shall be reduced to
12 months for purposes of Section 4.1(i) of the Agreement (non-competition) and
of this Agreement, and shall terminate February 28, 1999. Solicitation,
competitive activity or disclosure of information that is not in violation of
this Agreement or the Employment Agreement, as modified herein, will not be
deemed to be inimical to Frontier within the terms of any other plan or
agreement involving Massaro. Frontier agrees that it will waive, as to Massaro,
such part of the time limit of any non-compete provision of any option agreement
or restricted stock agreement or supplemental pension plan currently in place
with or affecting Massaro to the extent that such provision would extend beyond
the 12 month period of section 4.1(i) and (ii) of the Employment Agreement. All
such non-compete and non-solicitation provisions applicable to Massaro shall
terminate upon a Change of Control, consistent with the Employment Agreement, if
such Change of Control occurs earlier. Massaro reiterates and confirms the
continued applicability of Sections 4.3 and 5 of the Employment Agreement. In
the absence of any earlier termination of such provisions, if Massaro complies
with the non-compete and non-solicitation provisions of the Employment
Agreement, as they are modified here, through and including February 28, 1999,
for the purposes of Section 4.1(i) and February 29, 2000, for the purposes of
Section 4.1(ii), his responsibilities with respect to such provisions shall be
deemed fully satisfied.
6. Payments After Retirement. Provided that Massaro remains in
-------------------------
compliance with the terms and conditions of this Agreement, Frontier and Massaro
agree that, promptly after the end of the Retention Term, or his death or
disability, as defined by the applicable benefit plans, whichever is earlier,
Massaro (or his estate, as applicable) shall be paid: (a) such compensation as
has and will accrue through the end of the Retention Term and which has not been
paid to Massaro by such date, including compensation for banked and unused
vacation time identified
3
<PAGE>
below; and (b) the sum of Seven Hundred Ten Thousand Dollars ($710,000) promptly
after Massaro's retirement; both of which shall be subject to applicable
withholdings. Such payment is in lieu of all sums that are or may be due to
Massaro under section 6 of the Employment Agreement and any other obligation of
Frontier or expectation of Massaro not otherwise addressed specifically by this
Agreement. In the event of a Change of Control, and Massaro receives payments
that would qualify as "parachute payments" under Section 280G(b)(2) of the
Internal Revenue Code of 1986, as amended (the "Code"), the amount calculated
under this Agreement may be reduced by the present value (determined as provided
in Section 280G(d)(4) of the Code) of any other amount of severance relating to
salary or bonus continuation to be received by Massaro upon termination of
employment under any Frontier severance plan, policy or arrangement, if such
provision is triggered by any event(s) after the Effective Date, but Massaro
shall continue to have the benefit of the "gross-up" provision of the Employment
Agreement for such Change of Control as stated in section 7 of the Employment
Agreement and the Addendum to the Employment Agreement.
The Change of Control provisions set out in Sections 6 and 11 of the
Employment Agreement between Frontier and Massaro remain in full force and
effect through the end of the Retention Term. No sums will be payable to
Massaro under this Article or the Employment Agreement for any Change of Control
event within the terms of the Employment Agreement that first occurs after the
end of the Retention Term other than such amounts as may be payable under
Section 7 of the Employment Agreement.
If an event constituting a Change of Control within the terms of the
Employment Agreement should occur before the end of the Retention Term, and
Massaro's employment is terminated: (a) for Good Reason as defined in the
Employment Agreement prior to the end of the Retention Term, or (b) by Frontier
following Change of Control but prior to the end of the Retention Term, then in
either event Massaro shall be entitled to the appropriate payments set out in
Section 6.4 of the Employment Agreement, rather than any payment under this
Section. Payment shall be made to Massaro under either Section 6.4 of the
Employment Agreement or this Section, but not both, whether or not a Change of
Control should occur with respect to Frontier.
In the event that Massaro's employment is terminated by Frontier without
Cause prior to March 1, 1998, or prior to such later Retirement Date as the
parties agree upon in writing: (a) Massaro shall be entitled to receive all
payments to which he would otherwise become entitled under this Article II had
he not been terminated without Cause, and (b) Massaro shall become entitled to
such additional payments under Article III as he would have become entitled had
he not been terminated without Cause.
7. Other Benefits and Perquisites. Frontier shall pay to Massaro the
------------------------------
value of any vacation time that has been banked under any preexisting Frontier
program, and any vacation time that is unused as of the Retirement Date.
Massaro agrees that, for 1998, until the end of the Retention Term, he shall be
entitled to such proportion of the total annual vacation/PTO time that would
have been available to him for all of 1998 as equals the proportion of days that
actually occur through the Retirement Date to the total number of days in 1998,
rounded up to the nearest vacation/PTO day.
Massaro and Frontier agree that title to the leased auto which is currently
made available to Massaro by Frontier will be obtained by Frontier and the auto
will be transferred to
4
<PAGE>
him, AS IS, including the existing installed cellular telephone. This transfer
will result in imputed income to Massaro.
Certain other executive perquisites made available to Massaro, such as
payments or reimbursements related to club memberships, telecommunications
services, and financial counseling, will terminate at the end of the Retention
Term, except that Frontier will continue Massaro's current financial planning
arrangements through the completion of Massaro's tax filings in 1999 for
calendar year 1998, and will permit Massaro to keep the Frontier telephone
system, facsimile and modem that are currently installed in his home.
ARTICLE III. POSTEMPLOYMENT CONSULTING SERVICE PROVISIONS.
1. Services. After his retirement, Massaro shall provide the Services
--------
to Frontier from time to time as they are reasonably requested during the
Consulting Term, on any matters on which Frontier seeks assistance, including
matters with which Massaro had direct experience as an employee, had received
information or had considered in an employment or executive capacity while at
Frontier, and including consultation and advice on the operations, finances,
strategies, plans and capabilities of Frontier. Massaro shall make himself
available on reasonable notice to assist Frontier to improve the ongoing conduct
of the business, to evaluate potential transactions, to resolve customer and
other controversies, and to represent Frontier from time to time in discussions
with third parties. It is not anticipated that Massaro's Services will be
required on a full time basis; however, there may be one or more periods in
which Massaro may be requested to undertake Services that could require full day
commitments.
Massaro may undertake other engagements during the Consulting Term, provided
such engagements are not prohibited under any other provision of this Agreement;
and provided further, that Frontier work is given priority (and first priority
on reasonable request of Frontier), and such engagements neither interfere with
nor are inconsistent with his duties hereunder.
In performing the Services, Massaro shall comply with applicable local,
county, state and federal laws, ordinances and regulations, and with the
applicable ethics and safety practices and policies of Frontier.
2. Frontier Support. Frontier shall provide reasonable support at
----------------
Frontier Center (or such alternative Frontier or other site as the parties deem
appropriate) as is reasonably requested from time to time by Massaro, so as to
allow Massaro to complete the Services, including reasonable office space,
reasonable secretarial support, and assistance in making travel and other
arrangements to perform the Services.
3. Modification in the Consulting Term. The Consulting Term commences
-----------------------------------
on the day after the Retirement Date, and ends on February 28, 1999. Should
Massaro seek substantial relief from the non-compete provisions of the
Employment Agreement and this Agreement, and should Frontier agree to such
relief, the Consulting Term and the Price may be reduced accordingly by mutual
agreement as a condition of such relief so that a different Price (or no Price)
is paid after the substantially reduced non-compete provision becomes effective.
Should Massaro seek relief from the non-compete provisions of the Employment
Agreement and this Agreement that the parties agree is not substantial, no
adjustment in the Price shall be made.
5
<PAGE>
Massaro may seek modification or substantial relief from the non-compete
provision of the Employment Agreement, as modified by this Agreement, by
forwarding a letter requesting such relief to the Chief Executive Officer of
Frontier, with a copy to the General Counsel of Frontier. Such letter shall
fully and accurately identify the nature of the relief sought and the reason for
seeking such relief. Frontier will seek in good faith to respond promptly,
within 15 business days.
This Agreement may be renewed in a writing executed by Massaro and the Chief
Executive Officer of Frontier, for such additional Term and upon such terms and
conditions as Frontier and Massaro agree is appropriate, not exceeding one (1)
year at any time, but this Agreement does not renew automatically.
If a Change of Control event occurs prior to Massaro's Retirement Date, and
Massaro is eligible for payments under Section 6.4 of the Employment Agreement,
those provisions of this Agreement that call for the provision of postemployment
Services shall be void and of no effect, and no consulting relationship shall be
initiated between Frontier and Massaro. Thereafter, and upon his retirement,
Massaro shall be under no obligation to perform the Services, and Frontier shall
be under no obligation to pay Massaro any compensation for such Services. If
the Employment Agreement and this Agreement are unclear about the application of
their terms to a particular Change of Control situation, the parties shall
confer promptly and shall seek a resolution that is appropriate to the
circumstances.
4. Price. Frontier shall pay Massaro a total price ("Price") for the
-----
Services performed during the Consulting Term of Three Hundred Fifty-Five
Thousand Dollars ($355,000.00), to be allocated over the number of months
between the end of the Retention Term and the end of the Consulting Term as
established by Section 3 of this Article III. An allocated portion of the Price
shall be paid, without any deductions or withholdings, periodically but no less
often than every third month during the Consulting Term.
Frontier shall reimburse Massaro for such reasonable business expenses as
are incurred by Massaro in the performance of the Services, such as travel and
lodging expense, telephone and mail expense, duplication and printing services,
and premiums for any insurance procured by Massaro and required by Frontier,
provided that all such expenses are authorized by Frontier and appropriate
documentation is provided to Frontier to substantiate each expense item.
If, on the Retirement Date, Frontier is in active, continuing discussions
with another entity for the purpose of executing a written agreement to
consummate a transaction that would constitute a Change of Control event within
the terms of Sections 11.2.1 through 11.2.4, inclusive, of the Employment
Agreement, or if another entity has made an unsolicited offer prior to the
Retirement Date to complete a transaction that would constitute a Change of
Control event within the terms of Section 11.2.1 through 11.2.4, inclusive, of
the Employment Agreement, then in either event, if the Retention Term is not
extended, Massaro agrees to include as part of the Services all such timely
knowledge, judgment, personal involvement, counseling and allegiance to Frontier
as is requested by the Chief Executive Officer of Frontier at any and all points
through the completion of all activity related to the Change of Control event.
If such discussions or activity result within one hundred twenty (120) days of
Massaro's Retirement Date in a definitive agreement for a Change of Control of
Frontier, the Price paid to Massaro shall be increased to reflect the
difference between the amount paid to Massaro under
6
<PAGE>
Article II, Section 6(b), less $60,000, on one hand, and that specific amount
that would have been payable to Massaro as a multiple of his salary under
Section 6.4.3 of the Employment Agreement had a Change of Control event been
completed during the Retention Term, using the base compensation set out in
Article II, Section 2 of this Agreement, on the other, but not to exceed such
base compensation that would have been paid over one year. If such activity
occurs prior to the Retirement Date and does not result within one hundred
twenty (120) days of Massaro's Retirement Date in a definitive agreement for a
Change of Control of Frontier, and Massaro has nevertheless remained available
to provide, on request, all of the additional Services for use by Frontier at
its discretion, and assistance is requested by the Chief Executive Officer of
Frontier, the Price paid to Massaro shall be increased to reflect the difference
between the amount paid to Massaro under Article II, Section 6(b) of this
Agreement, less $60,000, on one hand, and that specific amount that would have
been payable to Massaro as a multiple of his salary under Section 6.4.3 of the
Employment Agreement had a Change of Control event been completed during the
Retention Term, using the base compensation set out in Article II, Section 2 of
this Agreement, on the other, but not to exceed such base compensation that
would have been paid over one year. If such discussions with another entity
commence or become active and continuing at any time after the Retirement Date,
or there is an unsolicited offer to complete a transaction initiated at any time
after the Retirement Date, but in either case before the end of the Consulting
Term, then if Massaro remains available to provide as part of the Services all
such timely knowledge, judgment, personal involvement, counseling and allegiance
to Frontier as is requested by the Chief Executive Officer of Frontier at any
and all points through the completion of all activity related to the Change of
Control event, and if such assistance is requested by the Chief Executive
Officer of Frontier, the Price shall be increased by mutual agreement up to a
point that reflects the difference between the amount paid to Massaro under
Article II, Section 6(b) of this Agreement, less $60,000, on one hand, and that
specific amount that would have been payable to Massaro as a multiple of his
salary under Section 6.4.3 of the Employment Agreement had a Change of Control
event been completed during the Retention Term, using the base compensation set
out in Article II, Section 2 of this Agreement, on the other, but taking into
account the extent to which Massaro's assistance is required, in any event not
to exceed such base compensation as would have been paid over one year. It is
understood that, if Massaro has become employed with another firm at any time
after the Retirement Date under circumstances not in violation of his non-
compete provisions (other than in consulting work which would not interfere with
the provision of the Services), then Frontier, in its sole discretion, may or
may not elect to utilize the additional Services Massaro may otherwise be
willing to provide, notwithstanding what is set out above. The Price may
continue to be subject to the provisions of Section 280G(d)(4) of the Code.
If a Change of Control is completed during the Consulting Term, the
remaining amount of the Price payable for the Consulting Term and that remains
unpaid under this Agreement shall be accelerated and paid within a reasonable
time not to exceed thirty (30) days after such completion, and the Consulting
Term shall be deemed completed as of the effective date of the Change of
Control. This Agreement anticipates that Massaro shall not be required to
provide Services to Frontier or to any successor to Frontier after a Change of
Control is completed. In the event of a Change of Control during the Consulting
Term, Frontier shall be entitled to take such action as is required of it by the
Code with respect to Section 280(G), but Massaro shall continue to have such
benefit of the "gross-up" provision as would have been available under Section 7
of the Employment Agreement for such Change of Control.
7
<PAGE>
5. Independent Contractor. It is understood that in performing the
----------------------
Services, Massaro is an independent contractor and has no authority to act for
Frontier or to bind Frontier to any contract or in any manner, except as
provided herein, without the prior written approval of Frontier. In dealing
with persons who may not otherwise be aware of Massaro's retirement from
Frontier, and for whom such knowledge may be materially significant, Massaro
will seek to provide such notice of his status as he reasonably deems
appropriate in the circumstances.
Massaro shall be responsible for all taxes and other assessments that are
required to be paid on any amounts received by Massaro related to the provision
of Services during the Consulting Term.
6. Events of Termination. Article III of this Agreement shall
---------------------
terminate upon the death of Massaro, with no further obligation on the part of
either party, except that Frontier shall pro rate any amount payable for
Services during that quarter, and pay to Massaro's spouse or estate, as Massaro
may have elected, that portion that would be payable for the period during which
Massaro was available to work.
Frontier may terminate Article III of this Agreement otherwise, with no
further obligation to pay Massaro, upon: (a) any material default or breach by
Massaro in the terms and conditions set forth in this Agreement which continues
without cure after written notice from Frontier to correct such a default or
breach and such other steps as are outlined in Article IV, Section 8, or (b) a
showing that, during the Consulting Term, Massaro has: (i) intentionally
committed any act(s) or made any public statement(s) that may reasonably be
viewed as wrongful, illegal or otherwise significantly adverse to the reputation
or image of Frontier; or (ii) intentionally taken actions that promote the
interests of a competitor of Frontier or its affiliates without prior written
approval of Frontier.
In the event Frontier terminates the Agreement during the Consulting Term
for material default or breach, Massaro shall be paid such prorated amount as
relates to the time until notice of breach or termination is given, subject to
the completion of (or failure to utilize) any steps established by Article IV,
Section 8, where applicable. In the event Frontier lawfully terminates the
Agreement during the Consulting Term for any other reason, no further payment is
to be made to Massaro.
Termination of this Agreement by Frontier for breach during the Consulting
Term shall not release Massaro from his obligations related to non-solicitation,
non-competition and maintenance of confidential Frontier information through the
period established by Section 5 of Article II of this Agreement, and Frontier
shall be entitled to take or refuse to take any and all such action as is
permitted by law to protect such interests hereunder. In the event a Change of
Control of Frontier is culminated, Massaro's non-competition and non-
solicitation covenants shall terminate in accordance with the Employment
Agreement.
Except where there has been active, continuing discussion related to a
Change of Control of Frontier, or an unsolicited offer that could lead to a
Change of Control of Frontier, and Massaro provides the Services contemplated by
Section 4 of this Article III related to such events, or is providing such
Services, Massaro may terminate Article III of this Agreement and end the
Consulting Term on thirty (30) days' notice to Frontier, subject to the
provisions of Section 5 of Article II of this Agreement, to the extent such
remain in force. Should Massaro provide such notice to Frontier, Frontier may
elect to terminate the Consulting Term at a time
8
<PAGE>
within the thirty (30) day period, rather than at the end of such period, on
notice to Massaro prior to such termination date, provided Massaro is paid the
remainder of the Price, but no right to additional payment related to a Change
of Control shall subsequently accrue. Any election by Frontier to terminate
Article III of this Agreement earlier than the thirty (30) day period set out in
Massaro's notice shall not be deemed to terminate section 5 of Article II if
such section otherwise remains in effect. If Massaro is engaged in Services
that, in Frontier's reasonable judgment, cannot be completed before the end of
the thirty (30) day termination period, the parties shall establish such
additional minimum time as is appropriate either to complete the Services or to
provide a transition to another person. Massaro shall be paid such prorated
amount of the Price as may be payable to the date termination becomes effective.
7. Confidentiality. To the extent any non-public information, records
---------------
or other documents, related in any way to Frontier or to an entity with whom
Frontier has or is considering a business relationship, are made available to
Massaro in connection with the Retention Term or the Consulting Term, or
Frontier or such entity identifies information, records or documents as
confidential (in each case, "Confidential Information"), Massaro shall treat all
such information, records or other documents as confidential and proprietary to
Frontier. Massaro shall not directly or indirectly use, disseminate, copy or
disclose in any manner, the Confidential Information or any other non-public
knowledge relating to Frontier which may become known to Massaro during the
Retention Term or the Consulting Term. This provision shall survive the
expiration or earlier termination of this Agreement, and shall be in force for a
period of two (2) years after the end of the Consulting Term, as stated here or
as extended, notwithstanding any provision of the Employment Agreement to the
contrary.
8. Insurance. As required by law, or upon request of Frontier, Massaro
---------
shall procure and carry, and maintain in full force and effect during the
Consulting Term adequate insurance coverage, including: (a) workers'
compensation coverage at or above the minimum statutory limits, if it is
required of Massaro by law; (b) comprehensive general liability coverage; and
(c) comprehensive automobile liability for any owned, hired and non-owned
vehicles of Massaro covering the period(s) such vehicle is used in providing the
Services. If Frontier itself maintains such insurance, the coverage may be
procured through Frontier, including inclusion as an additional insured on a
Frontier policy. Frontier will offer Massaro reasonable assistance in procuring
insurance required to provide the Services. Massaro shall allocate the costs of
such insurance among himself, Frontier and any other consulting clients, based
on a reasonable factor or factors acceptable to Frontier. The reasonable costs
of such insurance costs as are allocated to Frontier shall be reimbursed to
Massaro by Frontier.
All such coverage shall be issued by insurance companies licensed to do
business in New York. Massaro agrees to look first to his insurance for
payment or reimbursement of any claims or occurrences that are covered by such
insurance, and in the absence of such insurance, shall not make any claims
against Frontier for damages, liability or loss against which he reasonably
could have been insured.
9. Assignment and Subcontracting. No part of his performance of the
-----------------------------
Services may be assigned and no part of his duties hereunder may be delegated by
Massaro. Any purported assignment or delegation without the express written
consent of the Chief Executive Officer of Frontier shall be void. Should
Frontier consent to any assignment or delegation, Massaro shall remain
responsible for performance of the obligations hereunder.
9
<PAGE>
Massaro may not subcontract any part of the Services to be performed during
the Consulting Term without the prior written approval of the Chief Executive
Officer of Frontier.
10. Additions To Or Deletions From Work. Frontier reserves the right to
-----------------------------------
increase or decrease the scope of Services to be performed by Massaro hereunder,
provided Massaro agrees as to any increase in such scope. No diminution of the
scope of Services shall affect the Price, absent Massaro's consent.
12. Limitation of Liability. Neither party shall be liable to the other
-----------------------
for any indirect, incidental, special or consequential damages (including,
without limitation, loss of revenues or profits) arising during the Consulting
Term.
ARTICLE IV. PROVISIONS APPLICABLE TO BOTH EMPLOYEE RETENTION
AND POSTEMPLOYMENT CONSULTING SERVICES.
1. Modification. This Agreement shall not be modified, waived or
------------
supplemented except by written agreement signed by authorized representatives of
both parties, including where stated, the Chief Executive Officer of Frontier.
2. Waiver. Failure on the part of either party to enforce any provision
------
of this Agreement, or the waiver thereof, in any instance, shall not be
construed as a general waiver or relinquishment on its part of any such
provision, but the same shall nevertheless be and remain in full force and
effect.
3. Severability. If any provision of this Agreement shall be held to be
------------
invalid, illegal or unenforceable, the validity, legality, and enforceability of
the remaining provisions shall in no way be affected or impaired thereby.
4. New York Law. This Agreement shall be governed by and construed
------------
under New York state law.
5. Survival. This Agreement shall inure to the benefit of Frontier, and
--------
to all of its subsidiaries and other affiliates. Such of Frontier's rights and
obligations as would continue under this Agreement shall pass by operation of
law to any assignee or any successor in interest to Frontier. Massaro's rights
and obligations under this Agreement shall not pass to any person or entity,
other than such rights as would pass by this Agreement or the Employment
Agreement to Massaro's spouse or estate. Frontier's rights under this Agreement
shall survive the Agreement's termination or expiration.
6. Survival of Other Agreements. The provisions of this Agreement
----------------------------
supersede the provisions of the Employment Agreement to the extent the duties
and responsibilities of the parties are addressed herein, or as is required by
necessary inference, with all other provisions of the Employment Agreement
remaining in effect.
7. Cooperation After Retirement and After End of Consulting Term.
-------------------------------------------------------------
Massaro agrees that he will accept service of process designed to elicit his
testimony with respect to any litigation about which he may have knowledge, and
that he will be available on reasonable notice under this Agreement with respect
to similar matters in arbitration. Frontier shall pay for
10
<PAGE>
the reasonable costs of travel and related expenses if Massaro is to appear in
court or to testify. To the extent that Massaro requires counsel in providing
testimony, Frontier will afford Massaro the services of its counsel, or where
such shared counsel is inappropriate in the circumstances, will pay for or
reimburse the reasonable costs of separate counsel for Massaro. Frontier will
use its best efforts to seek arrangements that are minimally intrusive on
Massaro's schedule and that address any conflicting work obligations and other
considerations after the end of the Consulting Term.
8. Resolution of Issues Related to Claimed Violations of Non-Compete
-----------------------------------------------------------------
Provisions or Other Actions of Massaro That May Result In Denial of Benefits.
- ----------------------------------------------------------------------------
Except with respect to circumstances in which Frontier concludes that it is
appropriate to seek equitable relief, in the event Frontier claims there has
been a breach of the non-compete provisions of this Agreement, or Frontier
otherwise seeks to terminate any payment(s) to Massaro under this Agreement, it
shall provide at least fifteen (15) calendar days prior written notice before
acting, and a statement of the basis for such claim or action. Massaro may: (a)
contest such claim or action by notifying Frontier before the expiration of such
period; or (b) advise Frontier before the expiration of such period that he will
cure such breach or resolve the claim within an additional fifteen (15) calendar
days thereafter; or (c) advise Frontier before the expiration of such period
that, in the absence of any ability to cure the breach or resolve the claim
fully, he will take such action as is necessary to initiate meaningful action to
effect such cure or resolution; or (d) complete more than one of options (a)-
(c). Massaro shall advise Frontier promptly as to the progress and completion
of any curative activity he takes.
If Massaro contests the claim or action, he may seek an opportunity to
discuss the issue with an appropriate Frontier executive, which request shall be
included in his response to Frontier. The parties shall meet within seven (7)
days after the request is received. In the event the parties are unable to
resolve such dispute within seven (7) days after such meeting, either party may
seek arbitration to determine the applicable facts, using an arbitrator selected
from the Center for Dispute Resolution who is acceptable to both parties. All
costs of arbitration, including the fees of the arbitrator, shall be shared
equally by the parties.
Consistent with contract law, Massaro shall take such action as is necessary
in the interim to mitigate the impact on Frontier of the claimed breach pending
its resolution; however, the dates available to Massaro for curative action
shall be extended while the discussion and arbitration period is underway.
Payment of sums due under the first and third paragraph of Section 4 of Article
III may be suspended at Frontier's election pending discussion and completion of
the claim resolution process.
9. Confidentiality. Frontier and Massaro agree to use their best
---------------
efforts to keep confidential the existence, terms and conditions of this
Agreement and the fact of Massaro's intent to retire, until such time as
Frontier and Massaro agree that a retirement announcement will be made, and such
announcement is in fact made. Individual exceptions may be made with the
concurrence of Frontier and Massaro that are not inconsistent with law or
disclosure obligations of either party. Massaro agrees that he will not
disclose these items to any person other than his legal and/or financial
advisor(s) and immediate family, unless compelled by law to do so. If a person
not a party to this Agreement requests or demands, by subpoena or otherwise,
that Massaro disclose or produce this Agreement or any terms or conditions
thereof, Massaro agrees to notify Frontier and provide Frontier with reasonable
time to respond before taking any action or making any disclosure.
11
<PAGE>
Frontier will make those disclosures required of it, including filing of
this document with the Securities and Exchange Commission at the appropriate
time, at which point the parties will no longer be required to maintain the
confidentiality of this Agreement. In the event that Massaro seeks to make a
third party aware of the existence, or any terms and conditions of this
Agreement or the fact of Massaro's retirement prior to the time of public
disclosure, he shall first seek authorization of Frontier, which shall not be
unreasonably withheld, and which may include a request that the third party
agree to maintain such information in confidence until public disclosure.
10. Successors to Frontier; Massaro Representatives and Survivors.
-------------------------------------------------------------
Frontier shall require any successor or assignee to all or substantially all of
its business and/or assets, whether by merger, sale of assets or otherwise, to
assume and agree to perform Frontier's obligations under this Agreement in the
same manner and to the same extent that Frontier would be required to perform
them if such succession or assignment had not taken place. Massaro agrees that
all of Frontier's rights under the Agreement that would survive shall pass by
operation of law to such successor or assignee.
This Agreement shall inure to the benefit of, and be enforceable by
Massaro's personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. Should Massaro die
while any amounts are still payable to him, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
Massaro's devisee(s), legatee(s) or other designee(s) or, in the absence of such
designee(s), to his estate.
11. Notice. Unless otherwise specifically stated herein, Massaro and
------
Frontier agree that the same notice provisions apply to this Agreement as are
set out in the Employment Agreement. All notices and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed given when mailed by Express or similar mail or certified mail, return
receipt requested, or by nationally recognized overnight courier, receipt
requested, when addressed to a party at his or her official business address
when employed by Frontier, or at Massaro's home address as reflected in the
Frontier's records from time to time and when addressed to Frontier at its
corporate headquarters, to the attention of Frontier's Chief Executive Officer,
with a copy to the Company's General Counsel.
Questions by Massaro to Frontier about implementation of this Agreement
shall be directed to Ken Schirmuhly at 716-777-6028.
12. Counterparts. This Agreement may be signed by Massaro and on behalf
------------
of Frontier in one or more counterparts, each of which shall be recognized as an
original.
13. Waivers Related to Statutory and Other Rights When Employment Status
--------------------------------------------------------------------
Is To Change. Massaro specifically represents and warrants that he has read
- ------------
all of the following disclosure, and agrees to the provisions of the following
paragraphs specifically:
Massaro releases Frontier from any claims, actions or causes of action
asserted or which could have been asserted under the Age Discrimination in
Employment Act of 1967, as amended, Title VIII of the Civil Rights Act of 1964,
the New York Human Rights Law, the Employee Retirement Income Security Act, and
the Americans with Disabilities Act, as any
12
<PAGE>
have been amended, and any claims, actions or causes of action for wrongful
discharge, unjust dismissal, constructive discharge, breach of any written, oral
or implied promise or agreement related to employment, salary, severance
payments, benefits, other compensation, or attorneys' fees or costs related to
employment or compensation which accrued or could have been made prior to the
execution of this Agreement.
In executing this Agreement, Massaro agrees that he has been given the
opportunity to have at least 45 days in which to consider signing this Agreement
and the release set out just above, even though he may execute it within that
time. Massaro acknowledges and agrees that he has had the opportunity to
consult with an attorney of his choice concerning this Agreement. Massaro
agrees that he has carefully read and fully understood all provisions, and is
entering into this Agreement voluntarily. Massaro represents that, in
negotiating and executing this Agreement, he has not relied upon any
representation or statement, written or oral, not set forth in this Agreement
and that this Agreement, with the Employment Agreement, constitutes the entire
agreement between Frontier and Massaro.
Massaro acknowledges that he has had the right to revoke this Agreement
within 7 days of signing it, and it will not become effective until the 7 day
period has expired. If Massaro receives any compensation in connection with
this Agreement within this 7 day period, he agrees to return such compensation
to Frontier immediately after any revocation.
14. Insider Status. Massaro specifically recognizes that he is and will
--------------
remain for a period of time a Section 16 "insider" for purposes of federal
securities laws and regulations, that there are related obligations related to
the securities laws, and that there are significant obligations with respect to
holding Section 16 status that shall continue for a period of six months (and
such additional period as Frontier's Office of the Secretary shall advise
Massaro) after Massaro's retirement. Massaro specifically agrees that he will
comply with all state and federal securities laws and regulations that may apply
to him, including the rules applicable to Section 16 status. Massaro shall
execute such affiliate letters as are requested of him with respect to
transactions of Frontier until Massaro's affiliate status ceases, such letters
to be in a form consistent with the affiliate conditions applicable to him.
Frontier requires and Massaro agrees that this provision is not waivable, and
that any action intended to be taken by Massaro that may be required or
prohibited as a result of his continued insider status shall be addressed
beforehand with counsel for Frontier.
WHEREFORE, the parties have read, understand and agree to the terms set
forth above, and are willing to be bound thereby, as of the Effective Date set
forth above.
FRONTIER CORPORATION LOUIS L. MASSARO
By: /s/ Joseph P. Clayton /s/ Louis L. Massaro
--------------------- --------------------
Name: Joseph P. Clayton Louis L. Massaro
Title: Chief Executive Officer
Date: 1/23/98 Date: 1/23/98
------- -------
13
<PAGE>
Frontier Corporation
LOGO Martin T. McCue 180 South Clinton Avenue
frontier Vice President and Rochester, NY 14646
General Counsel 716-777-8497
716-546-7823 fax
December 29, 1997
Louis L. Massaro
19 Mile Post Lane
Pittsford, New York 14534
Dear Mr. Massaro,
This side letter is intended to address a contingency with respect to the
date of your retirement.
Section 1 of Article I and Section 1 of Article IV of the Retention and
Consulting Agreement between you and Frontier together provide that your
Retirement Date may be modified by mutual agreement in writing. We have already
addressed a circumstance in which we would agree to move the Retirement Date up
a short time. Section 4 of Article III also provides that Frontier and you may
or may not extend the Retention Term in the event that another entity has made
an unsolicited offer prior to the Retirement Date to complete a transaction that
would constitute a Change of Control event within the terms of Section 11.2.1
through 11.2.4, inclusive, of your Employment Agreement.
To address this issue and to protect shareowner interests, you and Frontier
agree that if there is an unsolicited offer that is made for Frontier and
remains pending on February 28, 1998, or such other mutually agreed Retirement
Date, and the chief executive officer of Frontier, after such consultation as he
determines is necessary, deems it a bona fide offer that must be addressed
seriously by the Company, the chief executive officer of Frontier will permit
you to continue as an employee for a period to be defined jointly, consistent
with the Retention and Consulting Agreement, for the specific purpose of
assisting the chief executive officer in responding to the offer and in such
action as he and the board determine is appropriate to protect shareowner
interests. Assuming that such offer leads, after active and continuing
discussions, to a change of control, you would be entitled to such additional
benefits as you might be otherwise be entitled to as an employee.
If this is consistent with your understanding, please place your signature
in the space below your name at the end of this letter.
Very truly yours
/s/ Martin T. McCue
-------------------
Martin T. McCue
Agreed:
/s/ Louis L. Massaro
- --------------------
Louis L. Massaro
cc: J. P. Clayton
J. F. Sansone
K. P. Schirmuhly
<PAGE>
ASSIGNMENT
----------
This Assignment ("Assignment"), of a portion of a certain Service
Continuation Agreement ("Agreement") dated as of December 29, 1997 by and
between Frontier Corporation ("Frontier"), a New York corporation with its
principal offices at 180 South Clinton Avenue, Rochester, New York 14646
("Frontier Center"), and Louis L. Massaro, of 19 Mile Post Lane, Pittsford, New
York, 14534 ("Massaro"), is made this 26th day of February, 1998 (the "Effective
Date") from Massaro to L. L. Massaro Associates, Inc. ("LLM"), a New York
limited liability corporation, with the express consent of Frontier.
In consideration of the promises and mutual agreements hereinafter set
forth, Massaro, LLM, and Frontier agree as follows:
1. Under Article III of the Agreement between Massaro and Frontier,
Frontier agreed to retain the services of Massaro as a consultant to Frontier,
and Massaro agreed to provide postemployment consulting services ("Services") to
Frontier, under the applicable terms and conditions of the Agreement. The
period from Massaro's retirement at the close of business of Frontier on
Thursday, February 26, 1998 through and including February 28, 1999 constitutes
the "Consulting Term".
2. Massaro has agreed in Article II of the Agreement to certain non-
solicitation and non-competition covenants, and has made commitments related to
the continued protection of Frontier proprietary information, as defined in that
Agreement (together, the "Protective Covenants"). The Protective Covenants will
continue to run during all or some portion of the Consulting Term, as such
periods are established by the Agreement.
3. Frontier agrees to permit Massaro to assign that portion of the
Agreement that anticipates the provision of the Services from Massaro to LLM
upon the following terms and conditions:
a. LLM shall continue during the Consulting Term to be owned or
controlled by Massaro as a shareowner, and LLM shall assure that any Services to
be performed for Frontier under the Agreement shall be performed only by
individuals affiliated with LLM who have been approved in writing by Frontier's
Chief Executive Officer or General Counsel.
b. LLM shall fully perform all of the Services defined in and
contemplated by the Agreement to the same extent and with the same conditions as
Frontier would have been entitled to receive such Services from Massaro under
the Agreement.
c. LLM and Massaro shall each comply fully with the terms and
conditions of Article III of the Agreement, those portions of Article IV as are
applicable to the performance of the Services, and the Protective Covenants, and
with such applicable laws and regulations as are contemplated by the Agreement.
LLM shall do nothing as a corporation that is prohibited of, or not permitted to
be done by Massaro under the Agreement. To assure that Frontier is fully
protected with respect to the Protective Covenants and other applicable terms
and conditions of the Agreement, any breach or failure on the part of Massaro
with respect to the Protective Covenants of the Agreement
-1-
<PAGE>
shall be deemed a breach or failure on the part of LLM, and any breach or
failure with respect to the Protective Covenants on the part of LLM with respect
to the Agreement shall be deemed a failure on the part of Massaro.
d. Frontier shall cooperate with LLM to provide for reasonable
treatment of taxes and assessments with respect to the Agreement and payments
for the Services, but LLM shall remain primarily responsible at all times for
the payment of taxes or assessments due to any jurisdiction by it or Massaro, or
on its or his behalf.
e. There shall be no change in the Agreement with respect to the
events of termination as they are defined and described therein, including
termination of the Agreement upon the death of Massaro, but all other provisions
related to events of termination, cure and dispute resolution shall apply
equally to LLM and Massaro.
f. LLM and Massaro (and any authorized affiliated individual) shall
maintain the confidentiality of Frontier Confidential Information as
contemplated by the Agreement.
g. The Chief Executive Officer of Frontier consents to this
Assignment under Article III, Section 9 of the Agreement. Massaro and LLM each
agree that no further assignment or subcontracting of any aspect of performance
under the Agreement is contemplated by this Assignment.
h. This Assignment shall be governed by New York law.
WHEREFORE, the parties have read, understand and agree to the terms set
forth above, and are willing to be bound thereby, as of the Effective Date set
forth above.
FRONTIER CORPORATION LOUIS L. MASSARO
By: /s/ Martin T. McCue /s/ Louis L. Massaro
------------------- --------------------
Name: Martin T. McCue Louis L. Massaro
Title: Vice President
Date: 2/26/98 Date: 2/26/98
------- -------
L. L. MASSARO ASSOCIATES, INC.
By: /s/ Louis L. Massaro
--------------------
Name: Louis L. Massaro
Title: President
Date: 2/26/98
-------
-2-
<PAGE>
Exhibit 10.25
Frontier Corporation
LOGO
frontier Joseph P. Clayton 180 South Clinton Avenue
President and CEO Rochester, NY 14646
716-777-4900
716-325-7639 fax
January 1, 1998
Mr. Martin T. McCue
14 Fall Meadow Drive
Pittsford, New York 14534
Dear Martin:
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 a "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 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 an executive position as
----
Senior Vice President and General Counsel at the Senior Vice President level, or
in such comparable management capacity as the Company may from time to time
designate. This Agreement shall become effective as of January 1, 1998. This
Agreement shall continue from year to year thereafter, unless earlier terminated
or extended in accordance with 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), you 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 you will actively promote
the Company's interest during such period.
<PAGE>
Any termination of your employment during the Term for reasons other than
your death shall be evidenced by a written notice ("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, except as otherwise provided
herein.
1.2 Present and Future Duties. Your role in the Company shall be that
-------------------------
of its principal legal officer, with authority related to all internal and
external legal work done on behalf of the Company and its subsidiaries and
affiliates, and related responsibility for the regulatory work and government
relations of the Company, as such regulatory and government relations work is
currently allocated to you. You shall perform all duties required of or
incidental to your position with the Company, or as may be assigned to you. You
agree to use your best efforts in the business of the Company and to devote your
full time attention and energy to the business of the Company. You agree not to
work, either on a part-time or independent contracting or consulting basis, with
or without compensation, for any other business or enterprise during the Term
without the Company's prior consent. Such consent shall not be unreasonably
withheld in the case of service on the boards of directors of other corporations
and community organizations.
1.3 Base Compensation. The Company shall pay you as base compensation
-----------------
at an annual salary rate of $240,000, in installments in accordance with the
Company's policies from time to time in effect. Thereafter, your annual salary
may be further 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 Senior
Vice President 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
<PAGE>
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 in law, 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
<PAGE>
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 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);
(c) The period of your employment by the Company (whether under
this Agreement or otherwise) and, if this Agreement is still in effect
at the Termination Date, the number of months remaining in the Term at
the Termination Date or 12 months, whichever is longer (but in no
event more than 24 months), if you terminate your employment
voluntarily (and not for Good Reason); or
(d) The period of your employment by the Company under this
Agreement, if your employment is terminated by you for Good Reason or
by the Company 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
<PAGE>
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.
<PAGE>
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. Under any provision of this Section 7 (other than
your election to voluntarily terminate your employment or a final decision
related to termination for Cause, as defined in Section 12.1) if your employment
shall end, you shall receive full and immediate credit for: (a) the number of
years of age required to reach age 50 (if any), and (b) completion of any
remaining service bridging (or any additional years of service as are remaining
for you to have completed), to retire as of the date your employment ends and to
gain immediately a full and unreduced pension from the Company under the
appropriate benefit plans in which you participate, plus full participation
immediately in such other benefit plans as you would have been entitled to
participate in had you remained an employee through normal retirement. In the
event you should die or become disabled within the terms of any benefit plan
during the Term, you shall be deemed to have retired one day prior to your death
or disability, and you, or your estate or spouse, as you may have designated,
shall receive the full benefits available to them in such capacity, from such
circumstance. Any existing options and restricted stock you hold and that are
provided under a plan that provides for vesting into retirement will continue to
vest into your retirement to the extent provided in the applicable plan.
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 for each period for which a bonus is payable to
employees under the short term incentive compensation program then in
effect and for which you have not yet been paid: (i) a bonus at the level
actually achieved by the Company for the fiscal year if you worked for the
Company for the full fiscal year; and (ii)(a) a bonus established under the
applicable plan using the level actually achieved for such prorated portion
of the fiscal year in which the Termination Date occurs as relates to your
actual employment, using such measurements as are used generally by the
Company for monitoring employee bonus qualification; or (b) if you leave at
a time
<PAGE>
in which the performance of the Company is not measured generally by the
Company for employee bonus purposes, then the bonus at standard level for
the number of full months of the fiscal year that you worked for the
Company.
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 and not in
anticipation of a Change of Control), 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)
$15,000 (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 of such amounts identified in subpart (a)
as are "parachute payments" within the meaning of Section 280G(b)(2) of the
Internal Revenue Code of 1986, as amended (the "Code") in the event of a
change of control of the Company, determined in accordance with Section
280G(d)(4) of 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 and not in
anticipation of a Change of Control), 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
<PAGE>
determined in accordance with the Company's employee benefit plans and other
applicable programs and practices then in effect.
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 in anticipation of or 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)
$15,000 (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 of such amounts identified in subsection
(a) as are "parachute payments" within the meaning of Section 280G(b)(2) of
the Code in the event of a change of control of the Company, determined in
accordance with 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") or any income you receive in the
form of restricted stock of the Company or options of the Company, 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
<PAGE>
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, 4 and/or 5 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, 4 and/or 5 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
<PAGE>
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 a material provision 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 or its minutes reflect a 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
<PAGE>
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
<PAGE>
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 highest ranking legal executive or officer.
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
<PAGE>
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/ Joseph P. Clayton
---------------------
Joseph P. Clayton
Chief Executive Officer
Agreed to this 27th date of February, 1998, to be effective as of January 1,
1998:
/s/ Martin T. McCue
-------------------
Martin T. McCue
<PAGE>
ADDENDUM TO LETTER AGREEMENT DATED AS OF JANUARY 1, 1998
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.
<PAGE>
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>
EXHIBIT 11
FRONTIER CORPORATION
CONSOLIDATED COMPUTATION OF NET INCOME PER AVERAGE SHARE
OF COMMON STOCK ON A DILUTED BASIS
<TABLE>
<CAPTION>
In thousands, except per share data Years Ended December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income applicable to common stock $ 53,543 $208,744 $20,892 $178,870 $119,514
Add: Interest on convertible debentures (1) -- 554 -- 554 553
--------------------------------------------------------------
$ 53,543 $209,298 $20,892 $179,424 $120,067
Less: Increase in related federal
income taxes (1) -- 194 -- 194 194
--------------------------------------------------------------
Adjusted income applicable to common stock $ 53,543 $209,104 $20,892 $179,230 $119,873
==============================================================
Average common shares outstanding
(excluding common stock equivalents) 163,530 162,301 152,069 148,170 134,093
Adjustments for:
Convertible debentures (1) -- 503 -- 503 503
Stock Options 446 1,712 9,592 12,183 19,137
--------------------------------------------------------------
Adjusted common shares assuming
conversion of outstanding convertible
debentures and stock options at the 163,976 164,516 161,661 160,856 153,733
beginning of each period ==============================================================
Net income per average share of
common stock on a diluted basis $ .33 $ 1.27 $ .13 $ 1.11 $ .78
</TABLE>
(1) Convertible debentures are anti-dilutive in 1997 and 1995.
<PAGE>
Exhibit 13
Management's Discussion of Results of Operations
and Analysis of Financial Condition
The information presented in this Management's Discussion of Results of
Operations and Analysis of Financial Condition should be read in conjunction
with the consolidated financial statements and accompanying notes of Frontier
Corporation (the "Company" or "Frontier") for the three years ended December
31, 1997. The matters discussed throughout this annual report, except for
historical financial results contained herein, may be forward-looking in nature
or "forward-looking statements." Actual results may differ materially from the
forecasts or projections presented. Forward-looking statements are identified
by such words as "expects," "anticipates," "believes," "intends," "plans" and
variations of such words and similar expressions. The Company believes its
primary risk factors include, but are not limited to: changes in the overall
economy, the nature and pace of technological change, the number and size of
competitors in Frontier's markets, changes in law and regulatory policy, and
the mix of products and services offered in the Company's markets. Any
forward-looking statements in the 1997 annual report should be evaluated in
light of these important risk factors. For additional disclosure regarding risk
factors refer to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
Description of the Business
Frontier Corporation provides integrated communications services to business,
carrier and targeted residential customers nationwide, in Canada and the United
Kingdom. Following is a description of the Company's principal lines of
business:
Long Distance Communications Services
Through its Long Distance Communications Services segment, the Company is the
nation's fifth largest long distance company. This segment provides domestic
and international voice, data and video communications service to primarily
small to mid-size business customers, carrier customers and targeted consumer
markets. Results for this segment also include competitive local exchange
carrier ("CLEC") services, currently available in 15 states, providing Frontier
with the ability to offer integrated local and long distance telephone service
to approximately 40% of the United States population.
Local Communications Services
The Company's Local Communications Services operation is the eleventh largest
local exchange service provider in the United States. This segment consists of
34 regulated telephone operating subsidiaries in 13 states, serving
approximately one million access lines. The Rochester, New York local
communications subsidiary, now called Frontier Telephone of Rochester, Inc., led
the telecommunications industry by being the first to open its local market to
competition in 1995 under the Open Market Plan. After three years of operating
in a competitive marketplace, the Rochester local exchange carrier retains a
market share of approximately 98% of wholesale, and approximately 95% of retail
local service access lines in the Rochester, New York operating territory.
Corporate Operations and Other
Corporate Operations is comprised of 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 includes Frontier Network Systems
("FNS"). FNS markets and installs telecommunications systems and equipment. This
segment also includes wireless operations from Minnesota RSA No. 10 and the
Company's 69.5% interest in Alabama RSA No. 4 and No. 6. The Alabama interest
was sold in January 1997.
13
<PAGE>
Telecommunications Law
The Telecommunications Act of 1996 was enacted on February 8, 1996. This
landmark legislation significantly modified the Communications Act of 1934 and
established a framework for increased competition in the local and long distance
segments of the Company's business. The Company views this legislation as
favorable to its operations because Frontier has been able to enter new markets
to provide local service as a CLEC, as well as derive other benefits from the
elimination of barriers to competition. In addition to its established local
telephone and long distance base, Frontier companies have been authorized to
provide competitive local services in 21 states as of December 31, 1997. The
Telecommunications Act incorporated many aspects of the Open Market Plan
initiated by the Company in Rochester, New York in 1993 and implemented in 1995.
The Company believes its experience in providing integrated services and its
experience with the Rochester, New York Open Market Plan provides it with a
competitive advantage.
On August 8, 1996, the Federal Communications Commission ("FCC") released a
First Report and Order (the "First Report and Order") in a core rulemaking
proceeding to implement the Telecommunications Act of 1996. The First Report and
Order established guidelines to promote local competition affecting the Company
and all other competitors in local telecommunications markets. On July 18, 1997,
the U.S. Circuit Court of Appeals for the Eighth Circuit reversed portions of
the First Report and Order that provided for pricing based primarily on forward-
looking, rather than historical costs, which would have provided the FCC with
substantially more authority over the compliance by local telephone companies
with provisions of the Telecommunications Act. On January 22, 1998, the same
court issued a mandate compelling adherence to the decision. The FCC and court
decisions are subject to reconsideration and to further appellate review. On
January 23, 1998, the U.S. Supreme Court agreed to review this case. The case
will be heard in late 1998 or early 1999.
The Act also requires the FCC to restructure the manner in which universal
service support payments are established and distributed. On May 7, 1997, the
Commission substantially adopted the recommendation of a Federal-State Joint
Board released on November 8, 1996 with respect to universal service. The FCC's
order increased the amount of support to be dedicated to universal service
programs. The Commission has released numerous subsequent orders that have
modified its original decisions, including one which slightly reduced the
amount of support to be collected in 1998. These actions are subject to
reconsideration and appeal. On May 16, 1997, the Commission adopted an order
that substantially modified the structure by which local exchange carriers are
compensated for access to and use of their networks. This order was implemented
effective January 1, 1998. In general, this order encouraged the recovery of
some costs that had previously been recovered in usage-based charges to be
recovered in fixed charges. Competitors have reacted in different and widely
varying ways to this order. The Company believes that its response is
competitive and that it was not disadvantaged by the order. Both of these
orders are subject to the possibility of Commission modification in light of
market impacts and to pending judicial review proceedings.
On October 9, 1997, the FCC ordered carriers that receive "dial around" calls
from payphones (certain calls sent without coins, such as 800 or other calls
with special access codes) to compensate payphone owners at the rate of 28.4
cents per completed call. The per-call compensation rate became effective
retroactive to October 7, 1997. The FCC is still considering how it will address
the payphone operator compensation issue for a preceding eleven month period.
The Company intends to pursue challenges to the FCC order with other selected
carriers. However, the Company has also taken action to assess a surcharge to
recover the amount of the compensation ordered and related costs. This is
consistent with the action taken by most other long distance providers that
handle similar calls through payphones. The Company cannot predict the ultimate
outcome of any of these proceedings.
On December 31, 1997, a judge in the United States District Court for the
Northern District of Texas issued an opinion that found certain sections of the
Telecommunications Act that imposed conditions on entry by some of the Bell
Operating Companies into certain lines of business, including the long distance
business, to be unconstitutional. A number of additional parties have asked the
Court to stay its decision pending further judicial review. On February 12,
1998, the court granted
14
<PAGE>
a stay of the December 31, 1997 ruling until an appeal is heard. The court's
original decision, if upheld, will likely have significant impact on the
domestic long distance business. However, the Company has evaluated issues
related to the Bell Operating Companies' provision of long distance services,
and believes that it is well-positioned to offer services to, as well as compete
against them in the Company's target markets.
Competitive Response To Changes in Telecommunications Law
Since the enactment of the Telecommunications Act of 1996, a number of
fundamental changes in the business have occurred. During 1996 and 1997, many
companies in the industry announced or completed corporate consolidations or
other acquisitions, partnerships or organizational transactions. As a result, a
number of these competitors may be larger in size and may possess financial
resources substantially greater than Frontier's. This trend toward consolidation
is expected to continue. There is ongoing regulatory activity at both the
federal and state levels to implement the Telecommunications Act, and to put in
place mechanisms to govern and to deal with new business relationships. These
activities include governmental efforts designed to open new areas of the radio
spectrum and to permit technological development of new services and
improvements in established services. Many of these decisions are now in the
process of judicial review.
As new technological and business opportunities emerge, the pace of innovation
and business activity will likely accelerate. New business relationships are
developing and this can be expected to continue. These relationships are
partially the result of provisions in the law that require new forms of pricing
agreements between facilities based carriers and resellers, new interconnection
agreements, and arrangements that replace long-standing tariff filing
mechanisms. Many interconnection and resale agreements have been entered into
between incumbent local exchange carriers and other firms. However, in the
regions served by the Bell Operating Companies, there continue to be large
segments of customers who cannot obtain basic local services from competitors of
the incumbent Bell Operating Company. The new law promotes broader competition
among incumbent companies in traditional telecommunications lines of business
and across such lines of business. While such competition is growing, the local
telephone market has not yet achieved the level of competition anticipated at
the time of enactment of the Telecommunications Act.
Frontier anticipated that public policy would continue to evolve in favor of
greater competition. As a result, the Company has been positioning itself to
confront a marketplace with numerous new competitors in each of its targeted
business segments requiring the development of sales, marketing, new products,
provisioning, customer service, billing and information technology capabilities
that are necessary to compete aggressively and successfully.
Part of this activity has involved an analysis of the merits of owning
additional amounts of long distance facilities. Ownership of facilities can
provide a number of benefits, including the advantages of lower unit costs, new
strategic pricing opportunities, and the ability to offer new or unique
services. Completion of the nationwide SONET network, which is anticipated
within the next year, will provide the Company with the infrastructure
necessary to meet the increasing demands for bandwidth and connectivity. The
SONET network will also provide relatively unlimited capacity, reduced costs
and unparalleled reliability. Frontier is also installing Nortel DMS-500
switching systems in strategic locations across the country that will connect
to the SONET network. These switches will provide Frontier the ability to offer
combined local and long distance telecommunications services to its customers
through a single, cost-effective switching platform and will enable Frontier to
accelerate offerings of its CLEC services. In the fourth quarter of 1997,
Frontier introduced a nationwide frame relay product. This product will
complement the Company's voice services business with a portfolio of additional
data services products. In addition, the acquisition of GlobalCenter, Inc.
("GlobalCenter"), announced in January 1998, will further enhance Frontier's
data product capability. The combined technology of the SONET network, DMS-500
switches, frame relay and enhanced data service comprises a substantial part of
the infrastructure that will allow Frontier to become a nationwide, facilities
based provider of local, long distance and data services.
15
<PAGE>
The Company's customer base has been segmented to provide better focus for its
sales efforts. Frontier is targeting four major customer segments: small to mid-
size business customers, where Frontier will also offer customized products for
vertical industry segments; carrier customers, which will include long distance
resellers as well as Internet Service Providers ("ISPs"), CLECs and
international telecommunications companies; and selected consumer segments.
Marketing efforts have been centralized. Frontier anticipates that brand
awareness and product development will be an important part of successful
marketing in the future telecommunications marketplace. The Company has
committed resources in 1998 to diversify and improve its product lines and
increase brand awareness.
The Company's resources are being increasingly directed to strategic assets and
operations, and additional management disciplines and performance measurements
are being implemented to leverage the Company's strengths. As the nature and
boundaries of telecommunications evolve as a result of technology and changing
regulation, the Company believes it is well positioned to take advantage of
these trends.
Strategic Developments
In the fourth quarter of 1997, the Company announced a restructuring plan
designed to focus the Company on its core business. The restructuring plan
included exiting certain non-strategic businesses; phasing out low margin,
price-sensitive long distance consumer products; and targeted actions to reduce
costs. In connection with these actions, a post-tax charge of $54.7 million was
recorded in the fourth quarter of 1997, primarily associated with a workforce
reduction, program cancellations, the exiting of certain product lines and
miscellaneous asset and lease impairments. As of December 31, 1997, the Company
has reduced its workforce by approximately 700 positions or 8.0%. These cost
cutting measures are expected to be partially offset in the short-term by
investments in sales and customer service, an acceleration of competitive local
service expansion and increased product development costs. Frontier is
redeploying its resources to respond more quickly to opportunities to provide
superior product offerings and customer service in its core business.
The Company's strategy has been defined and actions have been taken to move
toward the goal of becoming a market-driven business. During the fourth quarter
of 1997, the Company began to divest certain nonstrategic assets, which when
completed, will allow the redirection of resources into more strategic assets
and operations. The sale of a portion of its retail prepaid calling card
business to SmarTalk Teleservices Inc. was completed in December and a
definitive agreement to sell the Minnesota facilities-based cellular business
has been signed. This latter transaction is expected to close in the second
quarter of 1998, and the Company expects to recognize a gain on the sale at that
time.
Construction of the nationwide fiber optic network, which commenced in the
fourth quarter of 1996, is progressing on schedule. The Company's service
capacity and network reliability is increasing significantly as the fiber optic
network is put into service. The Company's reliance on other carriers to
complete customer calls is also changing. When essentially complete at the end
of 1998, the fiber optic network will interconnect nearly 100 cities, encompass
more than 13,000 route miles and provide coast-to-coast SONET connectivity. The
Company is installing Nortel DMS-500 switches strategically across the fiber
network. The DMS-500 switches provide the Company with the ability to offer
combined local and long distance telecommunication services utilizing a single,
cost effective switching platform. The combined technology of the fiber optic
network and the DMS-500 switches will enable the Company to expand its ability
to provide integrated local and long distance services nationwide. In the fourth
quarter of 1997, the Company also introduced a nationwide frame relay product.
This product will complement the Company's voice services business with a
portfolio of additional data services products. This technology will make
Frontier a nationwide facilities based provider of integrated local, long
distance and data services.
On January 15, 1998, the Company announced a definitive agreement to acquire
GlobalCenter, a provider of Internet, data and digital distribution services,
located in Sunnyvale, California. Frontier will issue approximately 7.3 million
shares of common stock in exchange for all of the outstanding equity of
GlobalCenter. The acquisition of GlobalCenter will accelerate Frontier's ability
to provide data products and result in synergies. The synergies will be achieved
in part through network cost
16
<PAGE>
savings that will result as Frontier's fiber optic network will be able to cost
effectively accommodate the bandwidth requirements of GlobalCenter's digital
and data distribution services. Synergies will also result from leveraging
GlobalCenter's data services product set across the Frontier sales and
distribution organization. This transaction is expected to close in early 1998,
and the Company anticipates that it will be accounted for as a pooling of
interests.
Consolidated Results of Operations
Consolidated revenues were $2.4 billion in 1997, a $222.7 million, or 8.6%,
decrease from 1996. Revenues in 1996 increased $431.9 million or 20.1% over
1995. The decrease in 1997 revenue is primarily attributed to the migration of
the Company's largest long distance carrier customer's one-plus traffic from
the Frontier network, a process that was essentially completed by the end of
1996. Normalized for certain nonrecurring adjustments, costs and expenses were
$2.1 billion in 1997 and 1996 and $1.7 billion in 1995. This resulted in an
operating income decrease of 33.6% in 1997 and an increase of 10.3% in 1996.
Operating margins were 12.4%, 17.1% and 18.6% during 1997, 1996 and 1995,
respectively. The negative trend in operating income and operating margins for
1995 through 1997 is attributable to the migration of the Company's largest
long distance carrier customer discussed above as well as a higher level of
primarily network expenses in the Long Distance segment. Expenses in the Long
Distance segment were adversely affected by increased cost of access driven by
the growth and mix of international traffic, increased costs related to the
public payphone compensation order and operating losses attributed to the
prepaid calling card business. Selling, General and Administrative ("SG&A")
costs in the Long Distance segment have also increased as compared to prior
years as a result of the costs associated with sales and marketing to support
new revenue initiatives and distribution channels.
Diluted earnings per share were $.33, $1.27 and $.13 for the years ended 1997,
1996 and 1995, respectively. Excluding the impact of the nonrecurring
adjustments discussed below, normalized net income amounted to $160.8 million,
$247.1 million and $218.7 million in 1997, 1996 and 1995, respectively. Diluted
earnings per share, normalized for nonrecurring adjustments, were $.97, $1.50
and $1.35 for the three years, representing a decrease of 35.3% and an increase
of 11.1%, respectively.
Nonrecurring Adjustments
Consolidated operating results for the years 1995 through 1997 were impacted by
a number of nonrecurring adjustments. Net income for these years, normalized for
nonrecurring adjustments, is summarized in the chart below and succeeding
narrative.
<TABLE>
<CAPTION>
(In thousands of dollars, except per share data) 1997 1996 1995
<S> <C> <C> <C>
Income applicable to common stock $ 53,543 $208,744 $ 20,892
Adjustments, net of taxes:
Other charges 117,464 30,363 78,764
Gain on sale of assets (11,243) (3,029) (4,826)
Loss on early retirement of debt -- -- 9,060
Discontinuance of regulatory accounting -- -- 112,148
Adoption of new accounting standards -- 8,018 1,477
Work stoppage preparation costs -- 1,861 --
Total adjustments $106,221 $ 37,213 $196,623
Normalized income applicable
to common stock $159,764 $245,957 $217,515
Diluted earnings per share $ 0.33 $ 1.27 $ 0.13
Total adjustments 0.64 0.23 1.22
Normalized earnings per share $ 0.97 $ 1.50 $ 1.35
</TABLE>
1. Other Charges
During the first quarter of 1997, the Company recorded a $62.8 million charge,
net of a tax benefit of $33.8 million, relating to the write-off of certain
leased 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.
17
<PAGE>
In the fourth quarter of 1997, Frontier recorded a $54.7 million charge, net of
a tax benefit of $32.1 million. This charge was primarily associated with a
restructuring and refocusing of the business which included a workforce
reduction, program cancellations, the exiting of certain product lines and
miscellaneous asset and lease impairments.
Operating results for 1996 include a $30.4 million charge, net of a tax benefit
of $18.4 million, resulting from the curtailment of certain company pension
plans and a one-time charge associated with the Company's conference calling
product line. The pension curtailment comprises $17.3 million of the total post-
tax charge and is a result of the Company's efforts to standardize pension
benefits. The one-time charge associated with the Company's conference calling
product line ($13.1 million, post-tax) primarily reflects an adjustment to
write-off nonrecoverable product development costs relating to proprietary
software.
The Company's 1995 operating results reflect an acquisition related charge of
$78.8 million, net of a tax benefit of $35.4 million, that is associated with
the integration of the Company's 1995 acquisitions as well as the ALC
Communications Corporation ("ALC") merger related transaction costs.
2. Gain on Sale of Assets
Gain on sale of assets in 1997 reflects the sale of the Company's 69.5% equity
interest in the South Alabama Cellular Communications Partnership which resulted
in an post-tax gain of $11.2 million ($18.8 million pre-tax). In 1996, Frontier
sold its minority investment in a Canadian long distance company ($5.0 million
pre-tax gain, $3.0 million post-tax) and in 1995, the Company sold Ontonagon
County Telephone Company ($4.8 million non-taxable gain). Each of these
businesses was considered to be a nonstrategic asset at the time of the sale.
3. Early Retirement of Debt
In 1995, the Company redeemed, through a tender offer, $76.8 million of ALC's
9.0% Senior Subordinated Notes for $83.5 million. The early retirement resulted
in an extraordinary loss including issuance cost of $5.8 million, net of
income taxes of $3.7 million. In 1995, the Company redeemed its outstanding 9.0%
debentures scheduled to mature in 2020. The Company recorded an extraordinary
loss of $3.2 million, net of applicable income taxes of $1.7 million.
4. Discontinuance of Regulatory Accounting
As a result of changes in regulation and increasing competition in the
telecommunications industry, the Company discontinued the use of Statement of
Financial Accounting Standards ("FAS") No. 71, "Accounting for the Effects of
Certain Types of Regulation" as of September 30, 1995 for its local
communications companies. This non-cash, extraordinary write-off totaled $112.1
million, net of applicable income taxes of $68.4 million. The write-off was
primarily related to the reduction in the recorded values of long-lived
telephone plant assets.
5. Adoption of New Accounting Standards
Results in 1996 reflect an $8.0 million charge, net of a tax benefit of $4.3
million, for the adoption of FAS 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of." The assets held for
disposal consist principally of telephone switching equipment in the Local
Communications segment as a result of a central office switch consolidation
project in Frontier's New York markets.
Frontier adopted FAS 116, "Accounting for Contributions Received and Made," in
September of 1995. FAS 116 requires that companies reflect an accrual in current
expenses for the cost of multi-year charitable contributions. The cumulative
effect of adopting FAS 116 in 1995 was a charge of $1.5 million, net of
applicable income taxes of $0.8 million.
6. Work Stoppage Preparation Costs
During the first quarter of 1996, operating costs increased $1.9 million, net of
applicable income taxes of $.9 million, at the Company's largest telephone
subsidiary due to higher labor and related expenses in connection with a union
contract negotiation that was substantively settled during 1997.
18
<PAGE>
[Graph Depicting the 1997 Long Distance Growth Rate]
Results of Segment Operations
Long Distance Communications Services
Revenues were $1.6 billion, $1.9 billion, and $1.5 billion in 1997, 1996 and
1995, respectively, representing a 12.9% decrease in 1997 and a 27.6% increase
in 1996. The decrease in the revenue growth percentage from 1996 to 1997 is
attributable primarily to the migration of the one-plus long distance traffic of
the Company's largest carrier customer from the Frontier network. The migration
was substantially completed in the fourth quarter of 1996. Normalized for the
effect of this major carrier customer's one-plus traffic and the Company's 1995
purchase acquisitions, revenue grew approximately 4% in 1997 and 14% in 1996.
Traffic, excluding the Company's major customer's one-plus traffic and the
Company's 1995 purchase acquisitions, increased approximately 5% and 4%,
respectively, in 1997 and 1996. Both the revenue and traffic normalized growth
rates have shown sequential improvement throughout 1997. Revenue grew
approximately 7% in the fourth quarter of 1997 as compared to nearly 2% in the
first quarter. Traffic increased 9% and 3%, respectively for the same periods
during 1997. The 1997 variance between revenue growth and traffic growth was
primarily due to changes in the Company's carrier customer base and the
transition to a higher mix of dedicated services versus switched services. Both
carrier and dedicated traffic typically are at lower revenue per minute rates.
In addition, the introduction of new products at promotional prices contributed
to the variance. Increased sales and marketing efforts, growth in carrier market
traffic, as well as higher levels of sales of enhanced services, were the
primary drivers of the variance between revenue growth and traffic growth for
1996 as compared to 1995.
In 1996, the Company renegotiated its contract with its largest carrier customer
as the customer was planning to install its own long distance switching capacity
and diversify its traffic distribution to one or more additional carriers.
Revenue from this carrier comprised approximately 6% of Frontier's long distance
revenue in 1997 as contrasted with 21% and 14% in 1996 and 1995, respectively.
The loss of this customer's one-plus traffic contributed to lower operating
income in 1997 due to lower overall traffic levels resulting in a higher level
of fixed network costs than required by the remaining volume of business carried
by the Company. Due to 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. In March 1997,
the Company recorded a post-tax charge of $62.8 million or $0.38 per share,
primarily related to the write-off of certain leased network costs no longer
necessary to support long distance traffic volumes. The Company's fixed network
cost structure is expected to be further reduced through the completion of the
Company's new SONET based fiber optic network and through the further
integration and consolidation of network facilities.
Costs and expenses for the long distance operation were $1.6 billion, $1.7
billion and $1.3 billion in 1997, 1996 and 1995, respectively, excluding
nonrecurring charges. As a percentage of revenue, total costs and expenses
increased 8.7% in 1997 and 2.0% in 1996. The increase in costs as a percentage
of revenue in 1997 is driven by higher cost of access and increased SG&A
expenses as a result of costs incurred for sales and marketing support
associated with new revenue and marketing initiatives. The increase in costs and
expenses in 1996 as compared to 1995 is primarily due to higher cost of access.
Cost of access as a percentage of revenues was 64.2% in 1997, 62.6% in 1996 and
58.5% in 1995. The higher cost of access percentages reported for 1997 and 1996
were driven by the growth and mix of international traffic and a higher
proportion of fixed network costs than would have been required for the volume
of minutes actually carried by the Company's network during these periods. Cost
of access in 1997 was also impacted by increased costs related to the public
payphone compensation order. In September 1996, an FCC ruling established a "per
call compensation plan" that provides payphone service providers with
compensation for calls completed using their payphones. The FCC substantially
increased these charges in October 1997. The Company has begun assessing a
surcharge to its payphone users in order to recover the amount of compensation
and related costs ordered by the FCC. Construction of the fiber optic network
and the continuing network integration efforts are expected to reduce future
network costs as well as provide new
19
<PAGE>
revenue opportunities for Frontier. As of December 31, 1997, over 70% of the
planned network segments are under construction. Frontier anticipates that the
fiber optic network will be substantially complete by the end of 1998.
SG&A as a percentage of revenues was 26.7% in 1997, 20.7% in 1996 and 23.1% in
1995. The 1997 increase as a percentage of revenues is principally due to the
decrease in revenues without corresponding proportional cost decreases. During
the last half of 1996 and continuing through 1997, the Company has intensified
its investment in the sales and marketing areas with the intent of providing the
Company with the resources necessary to expand into new markets, attract and
retain new customers and provide superior customer service. The investment
strategy is designed to accelerate revenue growth in 1998 and beyond.
Depreciation and amortization increased by $16.7 million and $20.2 million in
1997 and 1996, respectively, due primarily to the impact of the 1995 purchase
acquisitions and the Company's capital program.
Operating income for long distance, excluding nonrecurring charges, decreased
75.0% in 1997 and increased 9.6% in 1996. Operating margin was 3.5% in 1997,
12.2% in 1996 and 14.2% in 1995. The Company anticipates improved operating
margins during 1998 as higher revenue levels are achieved, excess fixed costs
are removed from its network, the fiber optic network is completed and as
additional operating efficiencies are introduced. The growth in revenue is
expected to be driven by expanded sales in the Company's targeted markets and
the introduction of new products and services, and maintained with superior
customer service. During 1997, the Company introduced a new bundled services
product, "Frontier Independence," which replaced the Company's "Clear Value"
product. 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 calling card services
agreement with US West began contributing to operating results in the second
quarter of 1997. Results included in the second half of the year demonstrate
growth in revenue from this agreement. The agreement provides 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.
The expansion of the Company's competitive local service offerings continued
aggressively throughout 1997. At year end 1997, Frontier was providing local
service as a CLEC, combined with a complete range of long distance products, in
15 states across the country. As of the end of 1997, Frontier was serving in
excess of 100,000 ANIs, or access lines, nationwide, predominantly through
resale, in markets where it is not the incumbent local exchange carrier.
Currently, the Company is authorized to offer local services in locations
serving 40% of the population in the United States. The Company has switches in
New York, Minneapolis and Boston and plans to install up to 10 additional
switches in 1998. The switches are being placed in cities that are located on
the Company's fiber optic network, which will provide Frontier with the
opportunity to expand its offerings of facilities based local and long distance
services into additional markets and insure maximum efficiency and cost
effectiveness. Frontier's objective is to have the capability to offer local
services in 30 to 35 states, covering 65% to 70% of the population in the United
States by the end of 1998.
The Company's acquisition of GlobalCenter will accelerate the Company's data
product capability. The Company will realize synergies from this transaction in
the form of network cost savings, as the new fiber optic network will be able to
accommodate the bandwidth requirements of data products. In addition, during the
fourth quarter of 1997, Frontier introduced a nationwide frame relay product.
These new product offerings, together with the other elements of the Company's
network infrastructure, provide the framework for Frontier to become a
nationwide facilities based provider of local, long distance and data services.
Local Communications Services
In addition to consistent profitability and strong cash flows, the local
communications companies have been successful in marketing and selling
integrated services to their customers. Local Communications' revenues were
$667.1 million in 1997 and $643.0 million in 1996, representing increases of
3.7% and 3.4%, respectively over the prior years. Revenue growth in all years
was driven by the
20
<PAGE>
introduction of new products and features and a higher demand for services.
Revenue growth in 1997 was also 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
a $1.5 million annual rate reduction as stipulated by the Open Market Plan for
the Company's subsidiary, Frontier Telephone of Rochester, Inc. ("FTR"). Total
access lines increased 2.3% and 3.0% and minutes of use increased 5.3% and 6.7%
in 1997 and 1996, respectively.
Costs and expenses for the local communications segment, excluding nonrecurring
charges, were $424.6 million in 1997, relatively consistent with 1996 and 1995.
Operating margins, excluding nonrecurring items, were 36.3% in 1997, 34.0% in
1996 and 31.9% in 1995. This positive trend is reflective of the continuing
improvement in operating efficiencies coupled with consistent revenue growth.
Contributing to the achievement of consistent year-over-year expense levels is
the impact of continuing centralization of the administrative functions for all
of the local telephone companies. During 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 Communications
Workers of America ("CWA" or "Union"), were necessary to ensure continued high
standards of customer service levels in the event of a work stoppage or
slowdown. The contract negotiations reached 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 Frontier Telephone of Rochester,
Inc. (formerly 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 subsequently reached and ratified by CWA membership are not material.
The new agreement provides 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 the first quarter 1998. This
decision may be appealed by either the Union or the Company. At this time, the
Company cannot predict the outcome of this matter. The agreement ratified on
April 29, 1997 is scheduled to expire at the end of 1998.
[GRAPH DEPICTING LOCAL OPERATIONS OPERATING MARGINS]
Local Operations Operating Margins
(excluding nonrecurring items)
1992 25%
1993 27%
1994 30%
1995 32%
1996 34%
1997 36%
During late 1995, management committed to a major switch consolidation plan at
its Frontier Telephone of Rochester, Inc. and Frontier Communications of New
York subsidiaries. The three-year plan to consolidate and reduce the number of
host switches by over 60% is projected to improve network efficiency and reduce
the cost of maintenance and software upgrades. As of December 1997, the project
is progressing as scheduled and 10 host switches have been consolidated,
representing nearly 80% of the total switches that will be consolidated. The
Company anticipates that the project will be substantially complete by July
1998.
The Rochester, New York local communications subsidiary completed its third year
of operations under the Open Market Plan in December 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 Open Market Plan has undergone some modifications in light of the
Telecommunications Act and other regulatory action of the NYSPSC. The Company
believes that it has successfully maintained its competitiveness in the
Rochester marketplace, as the Company's subsidiary still provides approximately
98% of the services in the wholesale market and approximately 95% of retail
local services in the market.
Corporate Operations and Other
This segment includes the operations of Frontier Network Systems ("FNS"), the
wireless operations from Minnesota RSA No. 10 and, through January 1997, the
Company's 69.5% interest in the South Alabama Cellular Communications
Partnership ("Alabama RSAs No. 4 and No. 6"). The sale of the Company's interest
in Alabama RSAs No. 4 and No. 6 was finalized January 31, 1997.
21
<PAGE>
In December 1997, the Company signed a definitive agreement to sell Minnesota
RSA No. 10 (Minnesota Southern Cellular Telephone Company). The transaction is
expected to close by the second quarter of 1998, and the Company expects to
recognize a gain on the sale. The sale of wireless properties results from the
Company's strategic decision to divest non-core assets. Wireless products, as a
part of Frontier's integrated services, are to be offered to Frontier customers
nationwide on a resale basis.
In February 1997, the Company completed its purchase of R.G. Data Incorporated
(renamed "Frontier Network Systems Corp." or "FNSC"). FNSC 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 FNSC. The treasury shares
were acquired through open market purchases. This transaction was accounted for
as a purchase. FNSC's operations are consolidated with FNS for reporting
purposes.
Results for this segment are relatively consistent for all years presented.
Other Income Statement Items
Interest Expense
Interest expense was $47.6 million in 1997, an increase of $4.4 million, or
10.2%, over 1996. The overall increase in interest expense is the result of
higher levels of debt outstanding primarily attributable to the Company's
capital program. The amount of interest expense capitalized increased $7.2
million and $5.0 million in 1997 and 1996, respectively, also as a result of
increased capital spending. The Company realized reduced interest expense in
1996 as compared to 1995 primarily as a result of refinancing approximately
$140.0 million of long term debt during the third and fourth quarters of 1995.
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 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 were $12.0
million in 1997, $9.0 million in 1996, and $3.7 million in 1995. The increase in
equity earnings during 1997 and 1996 is attributable to increased customers and
usage as well as improved operating efficiencies as compared to 1996.
Income Taxes
The effective tax rate was 44.7% in 1997 versus 39.6% in 1996 and 41.1% in 1995.
The increase in the effective tax rate for 1997 and in 1995 is attributable to
the nonrecurring charges recorded by the Company. The effective tax rate
normalized for these charges is consistent for all periods.
Financial Condition
Review of Cash Flow Activity
Cash provided from operations in 1997 amounted to $259.9 million as compared to
$395.7 million in 1996 and $357.1 million in 1995, normalized for $31.1 million
of cash paid for acquisition related charges. The decrease in cash flow from
operations is largely attributable to the effect of the nonrecurring adjustments
recorded during 1997 and by the lower revenues and higher operating expenses in
the long distance segment.
Earnings before interest, taxes, depreciation and amortization ("EBITDA") is a
common measurement of a company's ability to generate operating cash flow.
EBITDA should be used as a supplement to, not in place of, cash from operating
activities. The Company's EBITDA was $498.5 million, $629.5 million and $568.2
million, excluding nonrecurring items, in 1997, 1996 and 1995, respectively.
Cash used for investing activities was $282.4 million, $333.9 million and $519.3
million in 1997, 1996 and 1995, respectively. Capital expenditures continue to
be the largest recurring use of the Company's investing funds. Capital spending
amounted to $354.8 million, $309.2 million and $163.7
22
<PAGE>
million in 1997, 1996 and 1995, respectively. The Company's total capital
investment for 1997 was $445.0 million, including $92.9 million accrued for the
Company's new fiber optic network. The $92.9 million obligation at December 31,
1997 is a non-cash transaction that is treated as debt in the Company's capital
structure. The amount will be refinanced with long-term debt in 1998 when
payment is made to the company constructing the network for Frontier. The
increase in the 1997 capital program was due to long distance switch
enhancements, continued product enhancements and construction costs for the
fiber optic network build. Cash utilized in 1997 for investing activities was
partially funded by the proceeds received from the sale of the Company's equity
interest in the South Alabama Cellular Communications Partnership, which closed
in the first quarter of 1997, and the sale of a portion of the Company's retail
prepaid calling card business which closed in December 1997. The Company's cash
purchase acquisitions of $349.5 million were the most significant investing
activities in 1995.
Cash flows from financing activities amounted to an inflow of $16.3 million in
1997, compared with outflows of $62.2 million and $134.5 million in 1996 and
1995, respectively. The net inflow of cash is the result of increased borrowings
during 1997 driven by the Company's capital program. The Company's largest
recurring financing activities are the payment of common and preferred dividends
which totaled $143.6 million, $138.7 million and $82.8 million in 1997, 1996 and
1995, respectively. The large increase in the 1996 dividend payments was caused
by an increase in the number of shares outstanding as a result of the issuance
of 69.2 million common shares on August 16, 1995 for the ALC merger. During
1995, the Company made $4.9 million of scheduled debt repayments and also
refinanced $274.4 million of its long term debt instruments. The refinancings
included repayment of $76.8 million of ALC's 9.0% Senior subordinated debt, the
retirement of $69.8 million of 9.0% debentures due in 2020, the repayment of
Frontier Telephone of Rochester, Inc.'s revolving line of credit facility of
$100.0 million in conjunction with this subsidiary's medium-term note offering
and the repayment of $27.8 million of debt from the long distance acquisitions.
These early retirements were financed with excess cash and commercial paper
borrowings.
[GRAPH DEPICTING THE COMPANY'S 1997 CREDIT RATINGS REPORT]
1997 Credit Ratings Report
Standard & Poor's A
Moody's A3
Fitch A
Duff & Phelps A-
Liquidity and Capital Resources
The Company has a number of financing vehicles in place to ensure adequate
liquidity in meeting its anticipated cash needs. The Company has commercial
paper programs totaling $400.0 million which are fully backed by committed
revolving credit agreements. In May 1996, Frontier Corporation's $250.0 million
revolving credit agreement was amended to increase the available line of credit
to $350.0 million. The Company, through its subsidiary, Frontier Telephone of
Rochester, Inc., also has a $50.0 million revolving line of credit. At December
31, 1997, total borrowings and amounts available under these lines of credit
were $21.7 million and $378.3 million, respectively. In addition, the Company
has a $500.0 million universal shelf registration statement, filed with the
Securities and Exchange Commission ("SEC") in November 1995, which allows for
the issuance of a combination of debt, common stock, preferred stock or warrant
securities. In May 1997, the Company completed a $300.0 million offering of
7.25% Notes which mature in 2004 under the shelf registration. In December 1997,
the Company issued $100.0 million 6.25% Pass-Through Asset Trust Securities
("PATS") due in 1999. The PATS securities were sold pursuant to Rule 144A under
the Securities Act and not under the shelf registration. Proceeds from these
offerings were used to finance a portion of the nationwide fiber optic network
and to pay down commercial paper borrowings. In December 1997, the Company
entered into an interest rate hedge agreement that effectively converts $200.0
million of the 7.25% fixed-rate Notes due May 2004 into a floating rate based on
an index rate plus 2.88%. The agreement expires in May 2004 and caps the
floating rate the Company pays at 7.25% through November 1999 and 9.00% through
May 2004.
At December 31, 1997, aggregate debt maturities amounted to $5.3 million for
1998, $105.4 million for 1999 and $208.1 million for 2000. The debt to total
capital ratio at December 31, 1997 increased to 49.1%, as compared to 39.1% in
the prior year and 41.0% in 1995. Pre-tax interest coverage, which measures the
Company's ability to cover its financing costs, was 5.1 times in 1997 versus 9.2
times in 1996 and 7.5 times in 1995 (excluding nonrecurring charges for all
years).
23
<PAGE>
In May 1997, Duff and Phelps revised its rating on the Company's long-term debt
from "A" to "A-", reflecting concern about the recent performance of the
Company's long distance operations, increased capital spending levels and rising
uncertainty in the long distance business. Standard & Poor's affirmed its "A"
rating of the Company, although it revised its rating "outlook" from stable to
negative. Rating outlooks serve as an assessment of long-term trends or risks,
normally for periods covering one to three years, that have less certain credit
implications, and are not necessarily a precursor to future rating changes.
Moody's and Fitch affirmed their ratings of "A3" and "A", respectively. The
Company does not anticipate that the revised rating or rating "outlook" will
have a material impact on the future cost of borrowing.
Total gross expenditures for property, plant and equipment in 1998 are
anticipated to be approximately $500 million, which includes over $170 million
for the Company's fiber optic network. Absent the expenditures associated with
the fiber optic network, the 1998 capital program represents an increase of
approximately $80 million over 1997, largely due to network growth, switching
platform consolidations, increased data facilities and the switching costs
associated with the Company's CLEC integrated product offering. The Company
anticipates financing its capital program through a combination of internally
generated cash from operations and external borrowings.
The Company has and will continue to make certain investments in its software
systems and applications to ensure the Company is Year 2000 compliant. The
financial impact has not been and is not anticipated to be material to the
financial position, results of operations, liquidity or capital resources in any
given year.
In December 1997, the Company's Board of Directors increased the quarterly
dividend paid on common stock to $0.2225 per share, payable February 2, 1998, to
shareowners of record on January 15, 1998. This 2.3% increase raises the
annualized common stock dividend to $0.89 per share. This represents the 38th
consecutive annual increase in Frontier's common stock dividend.
[PIE CHART DEPICTING PROPOSED 1998 CAPITAL SPENDING]
Proposed 1998 Capital Spending
35% SONET Network
26% Long Distance
26% Local Telephone
7% CLEC
6% Other
New Accounting Pronouncements
The Company adopted FAS 128, "Earnings Per Share," effective December 31, 1997.
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.
The impact on EPS resulting from the adoption of FAS 128 was not material.
The Financial Accounting Standards Board ("FASB") issued 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. The Company will adopt FAS 130 in the first quarter of 1998. Adoption of
this standard is not expected to have a material impact on Frontier.
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 during 1998. The Company has not yet fully evaluated
the disclosures that will be required by this statement.
24
<PAGE>
Report of Independent
Accountants LOGO FRONTIER CORPORATION
To the Board of Directors and
Shareowners of Frontier Corporation
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of income, shareowners' equity and cash flows present fairly, in all material
respects, the financial position of Frontier Corporation and its subsidiaries at
December 31, 1997, 1996 and 1995, and the results of their operations and their
cash flows for the years then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of ALC Communications Corporation, a wholly owned subsidiary, which
statements reflect total assets of $432,146,000 at December 31, 1995 and total
revenues of $852,057,000 for the year ended December 31, 1995. Those statements
were audited by other auditors whose report thereon has been furnished to us,
and our opinion expressed herein, insofar as it relates to the amounts included
for ALC Communications Corporation for the year ended December 31, 1995, is
based solely on the report of the other auditors. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for the opinion expressed above.
As discussed in Note 13 to the financial statements, during the first quarter
of 1996 the Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed Of."
As discussed in Note 13 to the financial statements, during the third quarter
of 1995 the Company adopted the provisions of Statement of Financial Accounting
Standards No. 116, "Accounting for Contributions Received and Contributions
Made."
As discussed in Note 12 to the financial statements, during the third quarter
of 1995 the Company discontinued accounting for the operations of its local
communications subsidiaries in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation."
/s/ Price Waterhouse LLP
Price Waterhouse LLP
January 26, 1998
Rochester, New York
Report of Management
The integrity and objectivity of the accompanying financial information is the
responsibility of the management of Frontier Corporation.
The financial statements report on management's accountability for corporate
operations and assets. To this end management maintains a highly developed
system of internal controls and procedures designed to provide reasonable
assurance that the Company's assets are protected and that all transactions are
accounted for in conformity with generally accepted accounting principles. The
system includes documented policies and guidelines, augmented by a comprehensive
program of internal and independent audits conducted to monitor overall accuracy
of financial information and compliance with established procedures.
Price Waterhouse LLP, an independent accounting firm, provides an objective
assessment of the degree to which management meets its responsibility for
financial reporting. They regularly evaluate the system of internal accounting
controls and perform such tests and other procedures they consider necessary to
express an opinion that the financial statements present fairly the financial
position of the Company.
/s/ Louis L. Massaro
Louis L. Massaro
Executive Vice President and Chief Financial Officer
Frontier Corporation
February 23, 1998
Report of Audit Committee
The Audit Committee of the Board of Directors is comprised of three independent
directors who are not officers or employees of the corporation. The committee
oversees the Company's financial reporting process on behalf of the Board of
Directors. The Audit Committee recommends to the Board of Directors the
independent accountants for election by the shareowners. The committee also
meets regularly with management, the independent accountants and internal
auditors to review accounting, auditing, internal accounting controls, pending
litigation and financial reporting matters. As a matter of policy, the internal
auditors and independent accountants have unrestricted access to the Audit
Committee.
/s/ Jairo A. Estrada
Jairo A. Estrada
Chairman, Audit Committee
Frontier Corporation
25
<PAGE>
Business Segment Information
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
In thousands of dollars Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Long Distance Communications Services
Revenues $1,644,577 $1,888,259 $1,480,313
Costs and Expenses 1,586,832 1,657,601 1,269,851
- ---------------------------------------------------------------------------------------------------------
Operating Income (Loss):
Operating Income Before Other Charges $ 57,745 $ 230,658 $ 210,462
Other Charges (175,856) (20,823) (91,448)
- ---------------------------------------------------------------------------------------------------------
Total Operating Income (Loss) $ (118,111) $ 209,835 $ 119,014
Depreciation and Amortization $ 92,973 $ 83,322 $ 61,593
Capital Expenditures $ 308,926 $ 186,906 $ 68,265
Identifiable Assets $1,301,284 $1,044,173 $ 934,318
- ---------------------------------------------------------------------------------------------------------
Local Communications Services
Revenues $ 667,078 $ 643,013 $ 621,725
Costs and Expenses 424,607 427,375 423,444
- ---------------------------------------------------------------------------------------------------------
Operating Income:
Operating Income Before Other Charges $ 242,471 $ 215,638 $ 198,281
Other Charges (4,174) (23,100) (10,249)
- ---------------------------------------------------------------------------------------------------------
Total Operating Income $ 238,297 $ 192,538 $ 188,032
Depreciation and Amortization $ 110,104 $ 102,350 $ 104,419
Capital Expenditures $ 108,782 $ 101,342 $ 73,766
Identifiable Assets $ 931,438 $ 941,629 $ 964,154
- ---------------------------------------------------------------------------------------------------------
Corporate Operations and Other
Revenues $ 41,231 $ 44,297 $ 41,653
Costs and Expenses 49,595 53,886 51,927
- ---------------------------------------------------------------------------------------------------------
Operating Loss:
Operating Loss Before Other Charges $ (8,364) $ (9,589) $ (10,274)
Other Charges (3,354) (4,900) (12,542)
- ---------------------------------------------------------------------------------------------------------
Total Operating Loss $ (11,718) $ (14,489) $ (22,816)
Depreciation and Amortization $ 3,584 $ 4,274 $ 3,697
Capital Expenditures $ 27,305 $ 22,554 $ 20,544
Identifiable Assets $ 242,428 $ 235,718 $ 210,120
- ---------------------------------------------------------------------------------------------------------
Consolidated
Revenues $2,352,886 $2,575,569 $2,143,691
Costs and Expenses 2,061,034 2,138,862 1,745,222
- ---------------------------------------------------------------------------------------------------------
Operating Income:
Operating Income Before Other Charges $ 291,852 $ 436,707 $ 398,469
Other Charges (183,384) (48,823) (114,239)
- ---------------------------------------------------------------------------------------------------------
Total Operating Income $ 108,468 $ 387,884 $ 284,230
Depreciation and Amortization $ 206,661 $ 189,946 $ 169,709
Capital Expenditures $ 445,013 $ 310,802 $ 162,575
Identifiable Assets $2,475,150 $2,221,520 $2,108,592
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
26
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
In thousands of dollars, except per share data Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $2,352,886 $2,575,569 $2,143,691
- -------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Operating expenses 1,798,139 1,898,889 1,527,050
Depreciation and amortization 206,661 189,946 169,709
Taxes other than income taxes 56,234 50,027 48,463
Other charges 183,384 48,823 114,239
- -------------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 2,244,418 2,187,685 1,859,461
- -------------------------------------------------------------------------------------------------------------------
Operating Income 108,468 387,884 284,230
Interest expense 47,576 43,175 53,557
Other income and expense:
Gain on sale of assets 18,765 4,976 4,826
Equity earnings from unconsolidated wireless interests 12,019 9,011 3,676
Interest income 3,397 2,344 9,673
Other income (expense) 3,627 (500) (3,184)
- -------------------------------------------------------------------------------------------------------------------
Income Before Taxes, Extraordinary Items and
Cumulative Effect of Changes in Accounting Principles 98,700 360,540 245,664
Income taxes 44,138 142,596 100,896
- -------------------------------------------------------------------------------------------------------------------
Income Before Extraordinary Items and Cumulative
Effect of Changes in Accounting Principles 54,562 217,944 144,768
Extraordinary items -- -- (121,208)
Cumulative effect of changes in accounting principles -- (8,018) (1,477)
- -------------------------------------------------------------------------------------------------------------------
Consolidated Net Income 54,562 209,926 22,083
Dividends on preferred stock 1,019 1,182 1,191
- -------------------------------------------------------------------------------------------------------------------
Income Applicable to Common Stock $ 53,543 $ 208,744 $ 20,892
- -------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Common Share
Income before extraordinary items and cumulative
effect of changes in accounting principles $ .33 $ 1.34 $ .95
Extraordinary items -- -- (.80)
Cumulative effect of changes in accounting principles -- (.05) (.01)
- -------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Common Share $ .33 $ 1.29 $ .14
- -------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Common Share
Income before extraordinary items and cumulative
effect of changes in accounting principles $ .33 $ 1.32 $ .89
Extraordinary items -- -- (.75)
Cumulative effect of changes in accounting principles -- (.05) (.01)
- -------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Common Share $ .33 $ 1.27 $ .13
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
27
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
In thousands of dollars, except share data December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 24,735 $ 30,948 $ 31,449
Accounts receivable (less allowance for uncollectibles
of $22,729, $30,911 and $28,515, respectively) 376,983 364,256 404,081
Materials and supplies 11,883 13,198 12,928
Deferred income taxes 33,948 30,349 43,588
Prepayments and other 36,611 30,483 31,089
- --------------------------------------------------------------------------------------------------------------------
Total Current Assets 484,160 469,234 523,135
Property, plant and equipment, net 1,037,808 971,259 881,309
Goodwill and customer base, net 508,985 535,979 550,081
Deferred and other assets 444,197 245,048 154,067
- --------------------------------------------------------------------------------------------------------------------
Total Assets $2,475,150 $2,221,520 $2,108,592
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Accounts payable $ 328,109 $ 322,325 $ 381,680
Dividends payable 36,798 35,966 33,247
Debt due within one year 5,334 6,253 14,871
Taxes accrued 14,486 34,963 26,842
Other liabilities 90,108 18,596 47,561
- --------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 474,835 418,103 504,201
Long-term debt 930,467 675,043 618,867
Deferred income taxes 10,927 2,542 15,644
Deferred employee benefits obligation 88,562 65,479 58,385
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities 1,504,791 1,161,167 1,197,097
- --------------------------------------------------------------------------------------------------------------------
Shareowners' Equity
Preferred stock 20,126 22,611 22,769
Common stock, par value $1.00, authorized 300,000,000 shares;
164,106,330 shares, 163,731,733 shares and 158,063,387
shares issued in 1997, 1996 and 1995 164,106 163,732 158,063
Capital in excess of par value 504,674 500,196 420,172
Retained earnings 295,629 385,350 317,149
- --------------------------------------------------------------------------------------------------------------------
984,535 1,071,889 918,153
Less-
Treasury stock, 10,849 shares in 1997 and 6,375 shares in 1996
and 1995, at cost 231 147 147
Unearned compensation-restricted stock plan 13,945 11,389 6,511
- --------------------------------------------------------------------------------------------------------------------
Total Shareowners' Equity 970,359 1,060,353 911,495
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $2,475,150 $2,221,520 $2,108,592
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
28
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
In thousands of dollars Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 54,562 $ 209,926 $ 22,083
- -------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Other charges 183,384 48,823 114,239
Cumulative effect of changes in accounting principles -- 12,396 2,272
Extraordinary items -- -- 194,932
Depreciation and amortization 206,661 189,946 169,709
Gain on sale of assets (18,765) (4,976) (4,826)
Equity earnings from unconsolidated wireless interests (12,019) (9,011) (3,676)
Other, net 1,471 92 1,326
Changes in operating assets and liabilities, exclusive
of impacts of dispositions and acquisitions:
(Increase) decrease in accounts receivable (23,947) 36,549 (99,127)
Increase in material and supplies (1,110) (1,302) (1,470)
(Increase) decrease in prepayments and other
current assets (6,582) (2,077) 6,480
Increase in deferred and other assets (21,710) (20,903) (32,482)
(Decrease) increase in accounts payable (7,074) (79,134) 30,585
(Decrease) increase in taxes accrued and other
current liabilities (121,709) 1,042 8,663
Increase in deferred employee benefits obligation 21,920 6,608 9,947
Increase (decrease) in deferred income taxes 4,786 7,682 (92,631)
- -------------------------------------------------------------------------------------------------------------------------
Total adjustments 205,306 185,735 303,941
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 259,868 395,661 326,024
- -------------------------------------------------------------------------------------------------------------------------
Investing Activities
Expenditures for property, plant and equipment (276,723) (246,533) (163,740)
Deposits for capital projects (78,109) (62,694) --
Proceeds from asset sales 67,889 13,841 --
Investment in cellular partnerships 4,524 (29,422) (12,090)
Purchase of companies, net of cash acquired -- (9,118) (349,536)
Other investing activities -- -- 6,029
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (282,419) (333,926) (519,337)
- -------------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 399,815 58,037 207,962
Repayments of debt (235,871) (14,878) (279,329)
Dividends paid (143,638) (138,697) (82,801)
Treasury stock, net (2,468) -- (10,041)
Issuance of common stock 998 33,407 31,957
Other financing activities (2,498) (105) (2,295)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 16,338 (62,236) (134,547)
- -------------------------------------------------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents (6,213) (501) (327,860)
Cash and Cash Equivalents at Beginning of Year 30,948 31,449 359,309
- -------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 24,735 $ 30,948 $ 31,449
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
29
<PAGE>
Consolidated Statements of Shareowners' Equity
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Capital In
Preferred Common Excess of Retained Treasury Unearned
In thousands of dollars Stock Stock Par Earnings Stock Compensation Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $22,777 $149,294 $379,404 $ 397,854 $ -- $ -- $ 949,329
Net income 22,083 22,083
Redemptions (8) (8)
Retirements (117) (3,142) (3,259)
Exercise of stock options 2,434 15,780 18,214
Exercise of warrants 6,252 8,095 14,347
Restricted stock plan activity, net 200 7,000 (6,511) 689
Tax benefit from exercise of
stock options 15,252 15,252
Common and preferred dividends (100,501) (100,501)
Other (2,217) (2,287) (147) (4,651)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $22,769 $158,063 $420,172 $ 317,149 $ (147) $ (6,511) $ 911,495
Net income 209,926 209,926
Redemptions (158) 53 (105)
Exercise of stock options 5,482 27,355 32,837
Exercise of warrants 87 131 218
Restricted stock plan activity, net 100 4,089 (4,878) (689)
Tax benefit from exercise of
stock options 48,531 48,531
Common and preferred dividends (141,416) (141,416)
Other (135) (309) (444)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $22,611 $163,732 $500,196 $ 385,350 $ (147) $(11,389) $1,060,353
Net income 54,562 54,562
Redemptions (2,485) (13) (2,498)
Exercise of stock options 119 756 875
Exercise of warrants 44 65 109
Restricted stock plan activity, net 190 3,933 (2,556) 1,567
Tax benefit from exercise of
stock options 982 982
Common and preferred dividends (144,470) (144,470)
Purchases for acquisition (2,468) (2,468)
Issuances for acquisition 2,384 2,384
Other 21 (1,245) 187 (1,037)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $20,126 $164,106 $504,674 $ 295,629 $ (231) $(13,945) $ 970,359
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
30
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Consolidation--The consolidated financial information includes the accounts of
Frontier Corporation and its majority-owned subsidiaries (the "Company" or
"Frontier") after elimination of all significant intercompany transactions.
Investments in entities in which the Company does not have a controlling
interest are accounted for using the equity method.
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Materials and Supplies--Materials and supplies are stated at the lower of cost
or market, based on weighted average unit cost.
Property, Plant and Equipment--The investment in property, plant and equipment
is recorded at cost. Improvements that significantly add to productive capacity
or extend useful life are capitalized, while maintenance and repairs are
expensed as incurred. The Company's provision for depreciation of property,
plant and equipment is based on the straight-line method using estimated service
lives of the various classes of plant. The range of service lives for local and
fiber service lines is 12 to 25 years, central office equipment and switching
facilities is 3 to 20 years, station equipment is 10 to 21 years and for office
equipment and other is 5 to 20 years.
The cost of depreciable telephone property units (assets of the Local
Communications segment) retired, plus removal costs, less salvage is charged to
accumulated depreciation. When non-telephone property, plant and equipment is
retired or sold, the resulting gain or loss is recognized currently as an
element of other income.
Goodwill and Customer Base--The excess of the cost of companies purchased over
the net assets acquired is amortized using a straight-line basis over 20 to 40
years. The purchase price of customer bases acquired is amortized using a
straight-line basis over principally 5 to 7 years. Accumulated amortization is
$131.6 million, $106.5 million and $64.0 million at the end of 1997, 1996, and
1995, respectively.
Investment in Cellular Partnerships--Financial results for the Company's
cellular joint venture with Bell Atlantic Corporation have been reported using
the equity method of accounting. Accordingly, Frontier's 50% share of the joint
venture's earnings is reflected in the "Other income and expense" section of the
Consolidated Statements of Income. The partnership investment balances of $69.3
million in 1997, $58.6 million in 1996 and $33.8 million in 1995 are included in
"Deferred and other assets" in the Consolidated Balance Sheets.
Impairment of Long-Lived Assets--In the event that facts and circumstances
indicate that the carrying amount of a long-lived asset may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow is required.
Accounts Payable--Accounts payable includes trade accounts payable and an
estimated accrual for long distance cost of access.
Fair Value of Financial Instruments--Cash and cash equivalents are valued at
their carrying amounts, which are reasonable estimates of fair value. The fair
value of long-term debt is estimated using rates currently available to the
Company for debt with similar terms and maturities. The fair value of all other
financial instruments approximates cost as stated.
31
<PAGE>
Federal Income Taxes--Deferred tax assets and liabilities are determined based
on differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that are
anticipated to be in effect when those differences are expected to reverse.
Income tax benefits of tax deductions related to common stock transactions with
the Company's stock option plans are recorded directly to capital in excess of
par value.
The Company provides a valuation allowance for its deferred tax assets when it
is more likely than not that some portion or all of the deferred tax assets will
not be realized.
Revenue Recognition--Customers are billed as of monthly cycle dates. Revenue
is recognized as service is provided net of an estimate for uncollectible
accounts.
Earnings Per Share--Earnings applicable to each share of common stock and
common stock equivalent are based on the weighted average number of shares
outstanding during each year. Common stock equivalents are primarily stock
options assumed to be exercised for the purposes of the computation. Effective
December 31, 1997, earnings per share is calculated following the provisions of
Financial Accounting Standards Board Statement No. 128, "Earnings Per Share"
("FAS 128"). Historical earnings per share have been restated to conform with
the provisions of FAS 128.
Cash Flows--For purposes of the Statements of Cash Flows, the Company
considers all highly liquid investments with an original maturity of three
months or less to be cash equivalents.
Cash flows from financing activities include $1.0 million, $33.4 million and
$32.0 million of cash proceeds from stock options and warrants exercised during
1997, 1996 and 1995, respectively. The resultant tax benefit realized from the
exercise of stock options of $1.0 million, $48.5 million, and $15.3 million for
1997, 1996 and 1995 is reflected as an adjustment to capital in excess of par
value and taxes accrued.
Actual interest paid was $58.9 million in 1997, $49.6 million in 1996 and
$57.9 million in 1995. Actual income taxes paid were $61.3 million in 1997,
$69.7 million in 1996 and $108.6 million in 1995. Interest costs associated with
the construction of capital assets, including the nationwide fiber optic network
project, are capitalized. Total amounts capitalized during 1997, 1996 and 1995
were $13.4 million, $6.2 million, and $1.2 million, respectively.
2. Acquisitions, Merger and Divestitures
Acquisitions and Merger
In February 1997, the Company completed its purchase of R.G. Data Incorporated
(renamed "Frontier Data Systems Corp." or "FNSC"), 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 FNSC. The treasury shares were acquired
through open market purchases. This transaction was accounted for as a purchase.
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, which
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, 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.
In August 1995, the Company merged with ALC Communications Corporation
("ALC"). Under the terms of the merger agreement, the Company exchanged two
shares of its common stock for each of ALC's common shares. The total shares
issued by the Company to effect the
32
<PAGE>
merger were 69.2 million. The transaction was accounted for as a pooling of
interests, and the consolidated financial statements have been restated for all
periods prior to the merger to include the accounts and operations of ALC.
In March 1995, the Company acquired American Sharecom, Inc. ("ASI") in a
transaction that was accounted for as a pooling of interests. The Company
acquired all of the outstanding shares of ASI for approximately 8.7 million
shares of Frontier common stock. The consolidated financial statements have been
restated for all periods prior to the acquisition to include the accounts and
operations of ASI.
In 1995, the Company paid $318.4 million in cash for several acquisitions that
were accounted for as purchases. These purchase acquisitions were Minnesota
Southern Cellular Telephone Company, ConferTech International, Inc., WCT
Communications, Inc., Enhanced Telemanagement, Schneider Communications, Inc.
("SCI") and SCI's 80.8 percent interest in LinkUSA Corporation and Link-VTC,
Inc. In February 1996, the Company acquired the remaining 19.2 percent interest
in LinkUSA Corporation for $2.3 million in cash and in June 1996 made a payment
of $4.3 million to Link-VTC, Inc. in settlement of the original earnout
agreement.
Divestitures
On December 9, 1997, the Company completed the sale of a portion of its retail
prepaid calling card business to SmarTalk Teleservices Inc. ("SmarTalk") for
$36.6 million ($35.0 in cash and $1.6 million in SmarTalk's common stock). The
net proceeds from this sale will be offset by costs necessary to phase out the
remainder of the Company's prepaid business.
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 a pre-tax gain of $18.8 million.
In March 1995, the Company sold Ontonagon County Telephone Company in Michigan
and its subsidiary, Midway Telephone Company. The sale resulted from the
Company's plans to expand in areas other than Michigan's Upper Peninsula. The
sale resulted in a non-taxable gain of $4.8 million.
3. Other Charges
In October 1997, the Company recorded a pre-tax charge of $86.8 million
consisting of a restructuring charge of $43.0 million and a provision for
asset and lease impairments of $43.8 million. The restructuring charge is
primarily associated with a workforce reduction, program cancellations and the
exiting of certain product lines. The provision for the workforce reduction of
approximately $16.5 million includes severance and related termination benefits
for approximately 700 positions. As of December 31, 1997, substantially all of
these positions have been eliminated. Severance and related termination benefits
of $12.6 million were paid during the year. The remaining reserve of $3.9
million at year end represents termination benefits to be paid to these
individuals during 1998. The remaining restructuring reserve balance of $16.2
million at December 31, 1997, which primarily relates to program and contract
cancellation activities, is adequate to cover the exit activities. The provision
for asset and lease impairments primarily relates to long term assets and
certain lease obligations the Company is in the process of disposing of, or
exiting.
In March 1997, the Company recorded a $96.6 million pre-tax charge primarily
related to the write-off of certain leased 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.
33
<PAGE>
In November 1996, the Company recorded a $48.8 million pre-tax charge. This
charge included $28.0 million for the curtailment of certain company pension
plans and a $20.8 million charge primarily to write-off unrecoverable product
development costs for its conference calling product line.
The Company's 1995 operating results reflect pre-tax acquisition related
charges of $114.2 million associated with the integration of a number of long
distance companies acquired during the year, including the August 1995 merger
with ALC. The integration of the acquired companies with the existing Frontier
businesses resulted in instances of redundant facilities, equipment and
staffing. The acquisition related charges included investment banker, legal fees
and other direct costs resulting from the merger with ALC and the ASI
transaction. Through a combination of attrition and force reductions, the
Company reduced its number of employees in the long distance and administrative
areas by 433 employees. Substantially all of the employees were terminated in
1996 resulting in severance benefit payments of $14.8 million.
4. Property, Plant and Equipment
Major classes of property, plant, and equipment are summarized below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
In thousands of dollars December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land and buildings $ 115,876 $ 115,485 $ 106,745
Local and fiber service lines 817,393 795,855 761,044
Central office equipment 614,021 580,217 587,814
Station equipment 40,608 38,770 32,183
Switching facilities 403,097 386,293 330,567
Office equipment and other 263,873 233,601 201,718
Plant under construction 171,756 126,140 77,091
Less: Accumulated Depreciation 1,388,816 1,305,102 1,215,853
- ----------------------------------------------------------------------------------------
$1,037,808 $ 971,259 $ 881,309
- ----------------------------------------------------------------------------------------
</TABLE>
Depreciation expense was $165.2 million, $146.6 million, and $139.2 million
for the years ending December 31, 1997, 1996 and 1995, respectively.
5. Long-Term Debt
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
In thousands of dollars December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Frontier Communications of Minnesota, Inc.
Senior Notes, 7.61%, due 2003 $ 35,000 $ 35,000 $ 35,000
Rural Utilities Service Debt,
2.0%-9.0% due 1995 to 2026 53,239 64,654 69,878
- ---------------------------------------------------------------------------------------------------
88,239/(a)/ 99,654 104,878
- ---------------------------------------------------------------------------------------------------
Debentures
10.46% convertible, due 2008 5,300/(b)/ 5,300 5,300
9.0%, due 2020 -- -- --/(c)/
9.0%, due 2021 100,000 100,000 100,000
- ---------------------------------------------------------------------------------------------------
105,300 105,300 105,300
- ---------------------------------------------------------------------------------------------------
9.0% Senior Subordinated Notes, due 2003 3,061 3,180 3,233/(d)/
Medium-Term Notes, 7.51% - 9.3%,
due 2000 to 2004 219,000 219,000 219,000
7.25% Notes, due 2004 300,000/(e)/ -- --
6.25% Putable Notes,
("PATS"), due 1999 100,000/(f)/ -- --
Revolving Credit Agreements 21,705/(g)/ 248,570 187,601
Capitalized lease obligations 5,697 8,444 17,376
Other debt 92,888/(h)/ -- --
- ---------------------------------------------------------------------------------------------------
Sub-total 935,890/(i)/ 684,148 637,388
Less: Discount on long-term debt, net of premium 89 2,852 3,650
Current portion of long-term debt 5,334 6,253 14,871
- ---------------------------------------------------------------------------------------------------
Total Long-Term Debt $930,467 $675,043 $618,867
- ---------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
(a) Certain assets of the Local Communications Services segment are pledged as
security.
(b) The debenture is convertible into common stock at any time after October 26,
1998 at $10.5375 per share. A total of 502,966 shares of common stock are
reserved for such conversion.
(c) The Company redeemed the debentures in November 1995 in a transaction that
resulted in an extraordinary loss of $3.2 million, net of applicable taxes of
$1.7 million.
(d) The Company completed a tender offer for the $80.0 million of outstanding
notes in September 1995 and redeemed approximately $76.8 million. This
redemption resulted in an extraordinary loss of $5.8 million, net of applicable
taxes of $3.7 million.
(e) In December 1997, the Company entered into an interest rate hedge agreement
that effectively converts $200.0 million of the Company's 7.25% fixed-rate notes
due May 2004 into a floating rate based on a "basket" London Interbank Offered
Rate ("LIBOR") rate plus 2.88%. The agreement expires in May 2004 and caps the
floating rate the Company pays at 7.25% through November 1999 and 9.0% through
May 2004. Interest expense and the related cashflows under the agreement are
accounted for on an accrual basis. The Company periodically enters into such
agreements to balance its floating rate and fixed rate obligations to insulate
against interest rate risk and maximize savings.
(f) The Company issued $100.0 million face value of Pass Through Asset Trust
Securities ("PATS") in December, 1997. These notes have an initial maturity of
two years, at which time the notes will be either put back to the Company for
redemption or effectively remarketed by the trust as 10 year debt, depending on
the interest rate environment at that time.
(g) The Company has credit facilities totaling $400.0 million which are
available through commercial paper borrowings or through draws under Revolving
Credit Agreements. At December 31, 1997, the Company had outstanding $21.7
million in commercial paper issuances. Commercial paper is classified as long-
term debt as the Company intends to refinance the debt through continued short-
term borrowing or available credit facilities with unused commitments extending
beyond one year.
Frontier Corporation's Revolving Credit Agreement was entered into in August
1995 with a group of ten commercial banks. The Agreement was amended in May 1996
to increase the available line of credit from $250.0 million to $350.0 million.
The Agreement is unsecured, expires August 2000, and has commitment fees of .08
percent per year on the entire commitment, with interest on amounts drawn down
based upon the LIBOR plus .17 percent.
The Company, through its subsidiary, Frontier Telephone of Rochester, Inc.
(formerly Rochester Telephone Corp.), entered into a Revolving Credit Agreement
with six commercial banks in December 1994. The Agreement, amended in 1997,
reduced the available line of credit to $50.0 million. The agreement is
unsecured, expires December 1999, and carries commitment fees of .07 percent per
year on the entire commitment, with interest on amounts drawn down based on
either the prime rate, LIBOR plus .13 percent, or a competitive bid rate.
The Company also had a $500.0 million universal shelf which was filed with the
Securities Exchange Commission in November 1995. This filing allows for the
issuance of a combination of debt, common stock, preferred stock or warrant
securities. The $300.0 million, 7.25% Notes issued in 1997 were from the shelf
registration.
(h) The Company is obligated to pay $92.9 million related to its fiber optic
network build. This amount is classified as long-term as the Company intends to
finance this obligation through available credit facilities and unused
commitments extending beyond one year.
(i) In accordance with FAS 107, "Disclosures about Fair Value of Financial
Instruments," the Company estimates that the fair value of the debt, based on
rates currently available to the Company for debt with similar terms and
remaining maturities, is $982.7 million, as compared to the carrying value of
$935.9 million.
At December 31, 1997, aggregate debt maturities were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
In thousands of dollars 1998 1999 2000 2001 2002
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5,334 $105,410 $208,113 $74,481 $ 43,202
- ------------------------------------------------------------------------------------
</TABLE>
6. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
In thousands of dollars Years Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 24,139 $114,302 $103,689
Deferred 11,101 6,136 (17,721)
- ----------------------------------------------------------------------------------------
35,240 120,438 85,968
- ----------------------------------------------------------------------------------------
State:
Current 11,234 19,757 16,498
Deferred (2,336) 2,401 (1,570)
- ----------------------------------------------------------------------------------------
8,898 22,158 14,928
- ----------------------------------------------------------------------------------------
Total income taxes $ 44,138 $142,596 $100,896
- ----------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
The reconciliation of the federal statutory income tax rate with the effective
income tax rate reflected in the financial statements is as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Federal income tax expense at statutory rate 35.0% 35.0% 35.0%
State income tax (net of federal benefit) 5.9 4.0 4.0
Utilization of net operating loss carryforward (3.5) (.9) (1.4)
Acquisition related and other charges -- -- 2.4
Goodwill amortization 4.5 1.2 1.5
Other 2.8 .3 (.4)
- --------------------------------------------------------------------------------------------------------------------------
Total income tax 44.7% 39.6% 41.1%
</TABLE>
Deferred tax (assets) liabilities are comprised of the following at December
31:
<TABLE>
<CAPTION>
In thousands of dollars 1997 1996 1995
<S> <C> <C> <C>
Accelerated depreciation $ 111,669 $ 87,768 $ 81,687
Other 23,918 22,915 18,297
- --------------------------------------------------------------------------------------------------------------------------
Gross deferred tax liabilities 135,587 110,683 99,984
- --------------------------------------------------------------------------------------------------------------------------
Basis adjustment--purchased telephone companies (23,120) (25,477) (29,232)
Employee benefits obligation (13,509) (11,136) (4,562)
Net operating loss carryforwards (50,885) (44,906) (45,844)
Acquisition related and other charges (46,944) (27,630) (29,213)
Bad debt expense (4,026) (10,970) (11,801)
Other (35,897) (37,832) (31,163)
- --------------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets (174,381) (157,951) (151,815)
Valuation allowance 15,773 19,461 23,887
- --------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets (158,608) (138,490) (127,928)
- --------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ (23,021) $ (27,807) $ (27,944)
</TABLE>
Certain of the Company's acquired subsidiaries have tax net operating losses
and alternative tax net operating loss carryforwards ("NOLs") which can be
utilized annually to offset separate company future taxable income. Under the
provisions of Internal Revenue Code Section 382, the utilization of
carryforwards is presently limited. The Company's NOLs begin to expire in 2004.
As a result of the annual limitation and the difficulty in predicting their
utilization beyond a period of three years, the Company has established
valuation allowances for the NOL carryforwards. Because certain of the NOL
carryforwards were acquired in purchase acquisitions and the related valuation
allowance was recorded using purchase accounting, $7.0 million of this valuation
allowance, if subsequently recognized, would be allocated to reduce goodwill.
7. Service Pensions and Benefits
The Company has contributory and noncontributory plans providing for service
pensions and certain death benefits for substantially all employees. In 1996 and
1995, defined benefit plans sponsored by the Company were frozen. On an annual
basis, contributions are remitted to the trustees to ensure proper funding of
the plans.
The majority of the Company's pension plans have plan assets that exceed
accumulated benefit obligations. There are certain plans, however, with
accumulated benefit obligations which exceed plan assets. The following tables
summarize the funded status of the Company's pension plans and the related
amounts that are primarily included in "Deferred and other assets" in the
Consolidated Balance Sheets.
36
<PAGE>
<TABLE>
<CAPTION>
Plans for Plans for
which assets which
exceed accumulated
December 31, 1997 accumulated benefits
In thousands of dollars benefits exceed assets Total
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 442,647 $ 23,605 $ 466,252
Accumulated benefit obligation $ 463,059 $ 24,138 $ 487,197
- -------------------------------------------------------------------------------------------
Plan assets at fair value, primarily fixed
income securities and common stock $ 550,866 $ -- $ 550,866
Projected benefit obligation (463,059) (24,643) (487,702)
- -------------------------------------------------------------------------------------------
Funded status $ 87,807 $(24,643) $ 63,164
Unrecognized net (gain) loss (62,443) 4,827 (57,616)
Unrecognized net transition asset (1,801) -- (1,801)
Unrecognized prior service cost 10,290 266 10,556
Adjustment required to recognize
minimum liability -- (4,588) (4,588)
- -------------------------------------------------------------------------------------------
Pension asset (liability) reflected
in Consolidated Balance Sheet $ 33,853 $(24,138) $ 9,715
</TABLE>
<TABLE>
<CAPTION>
Plans for Plans for
which assets which
exceed accumulated
December 31, 1996 accumulated benefits
In thousands of dollars benefits exceed assets Total
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 403,077 $ 12,693 $ 415,770
Accumulated benefit obligation $ 423,055 $ 13,758 $ 436,813
- -------------------------------------------------------------------------------------------
Plan assets at fair value, primarily fixed
income securities and common stock $ 493,894 $ -- $ 493,894
Projected benefit obligation (423,055) (14,899) (437,954)
- -------------------------------------------------------------------------------------------
Funded status $ 70,839 $(14,899) $ 55,940
Unrecognized net (gain) loss (55,604) 3,250 (52,354)
Unrecognized net transition asset (2,837) -- (2,837)
Unrecognized prior service cost 11,097 -- 11,097
Adjustment required to recognize
minimum liability -- (2,109) (2,109)
- -------------------------------------------------------------------------------------------
Pension asset (liability) reflected
in Consolidated Balance Sheet $ 23,495 $(13,758) $ 9,737
</TABLE>
<TABLE>
<CAPTION>
Plans for Plans for
which assets which
exceed accumulated
December 31, 1995 accumulated benefits
In thousands of dollars benefits exceed assets Total
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 367,765 $ 19,984 $ 387,749
Accumulated benefit obligation $ 381,528 $ 22,335 $ 403,863
- -------------------------------------------------------------------------------------------
Plan assets at fair value, primarily fixed
income securities and common stock $ 437,151 $ 8,234 $ 445,385
Projected benefit obligation (384,199) (25,364) (409,563)
- -------------------------------------------------------------------------------------------
Funded status $ 52,952 $(17,130) $ 35,822
Unrecognized net (gain) loss (19,194) 4,337 (14,857)
Unrecognized net transition (asset) obligation (3,909) 36 (3,873)
Unrecognized prior service cost 12,533 3,783 16,316
Adjustment required to recognize
minimum liability -- (5,246) (5,246)
- -------------------------------------------------------------------------------------------
Pension asset (liability) reflected
in Consolidated Balance Sheet $ 42,382 $(14,220) $ 28,162
</TABLE>
37
<PAGE>
The net periodic pension cost consists of the following:
<TABLE>
<CAPTION>
In thousands of dollars Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Service cost $ 1,551 $ 6,487 $ 5,616
Interest cost on projected benefit obligation 32,983 30,100 28,868
Actual return on plan assets (83,775) (63,807) (89,195)
Net amortization and deferral 40,715 25,723 51,437
Amount expensed due to curtailment 6,943 28,000 2,907
- -----------------------------------------------------------------------------------------------------
Net periodic pension (benefit) cost $ (1,583) $ 26,503 $ (367)
</TABLE>
The following rates and assumptions were used to calculate the
projected benefit obligation:
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Weighted average discount rate 7.0% 7.5% 7.5%
Rate of salary increase 5.0% 5.0% 5.0%
Expected return on plan assets 9.5% 9.0% 9.0%
</TABLE>
The Company's funding policy is to make contributions for pension benefits
based on actuarial computations which reflect the long-term nature of the
pension plan. However, under FAS 87, "Employers' Accounting for Pensions," the
development of the projected benefit obligation essentially is computed for
financial reporting purposes and may differ from the actuarial determination
for funding due to varying assumptions and methods of computation. The Company
changed its assumptions used in 1997 for the weighted average discount rate and
the expected return on plan assets. These changes in assumptions did not have a
material effect on the 1997 pension expense.
In 1997, the Company recognized a curtailment loss of $6.9 million related to
the restructuring of the workforce. In 1996, the Company recognized a
curtailment loss of $28.0 million reflecting the enhancement and freezing of
defined benefit plans sponsored by Frontier Corporation, primarily for certain
bargaining unit employees. Pension expense in 1995 included a net curtailment
loss of $2.9 million reflecting the enhancement and freezing of defined benefit
plans sponsored by Frontier Corporation for non-bargaining unit employees as of
December 31, 1996.
The Company also sponsors a number of defined contribution plans. The most
significant plan covers non-bargaining employees, who can elect to make
contributions through payroll deduction. Effective January 1, 1996, the Company
provides a contribution of .5 percent of gross compensation in common stock for
every employee eligible to participate in the plan. The common stock used for
matching contributions is purchased in the open market by the plans' trustee.
The Company also provides 100% matching contributions in its common stock up to
three percent of gross compensation, and may, at the discretion of the
Management Benefit Committee, provide additional matching contributions based
upon Frontier's financial results. In 1995, the Company provided matching
contributions in its common stock up to 75 percent of participants'
contributions up to six percent of gross compensation. The total cost recognized
for all defined contribution plans was $8.8 million for 1997, $8.4 million for
1996 and $6.8 million for 1995.
8. Postretirement Benefits Other Than Pensions
The Company provides health care and life insurance benefits to most employees.
Plan assets consist principally of life insurance policies and money market
instruments. In adopting FAS 106, "Employers' Accounting for Postretirement
Benefits other than Pensions," the Company elected to defer the recognition of
the accrued obligation of $125.0 million over a period of twenty years. During
1996, the Company amended its health care benefits plan to cap the cost absorbed
by the Company for health care and life insurance for its bargaining unit
employees who retire after December 31, 1996.
38
<PAGE>
The effect of this amendment was to reduce the December 31, 1996 accumulated
postretirement obligation by $11.2 million. Additionally, during 1996, special
termination benefits were offered to certain employees with 25 years of service
or more who were already entitled to reduced or full retirement benefits and
who voluntarily terminated their employment with the Company prior to December
31, 1996. During the fourth quarter of 1995, the Company amended its health
benefits plan to cap the cost absorbed by the Company for health care and life
insurance for its non-bargaining unit employees who retire after December 31,
1996. The effect of this amendment was to reduce the December 31, 1995
accumulated postretirement obligation by $8.1 million.
The status of the plans is as follows:
<TABLE>
<CAPTION>
In thousands of dollars December 31, 1997 1996 1995
<S> <C> <C> <C>
Accumulated postretirement benefit
obligation (APBO) attributable to:
Retirees $ 97,591 $ 78,398 $ 73,032
Fully eligible plan participants 11,117 15,206 17,235
Other active plan participants 9,879 10,669 20,127
- --------------------------------------------------------------------------------------------------------
Total APBO $118,587 $104,273 $110,394
Plan assets at fair value 5,039 5,322 5,716
- --------------------------------------------------------------------------------------------------------
APBO in excess of plan assets $113,548 $ 98,951 $104,678
Unrecognized transition obligation (78,586) (84,764) (99,836)
Unrecognized net prior service cost (1,262) (90) (1,790)
Unrecognized net gain 8,958 24,235 30,110
- --------------------------------------------------------------------------------------------------------
Accrued postretirement benefit obligation $ 42,658 $ 38,332 $ 33,162
</TABLE>
The components of the estimated postretirement benefit cost are as
follows:
<TABLE>
<CAPTION>
In thousands of dollars Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Service cost $ 755 $ 642 $ 947
Interest on accumulated
postretirement benefit obligation 7,734 7,735 8,614
Amortization of transition obligation 5,276 5,512 6,045
Return on plan assets (476) (457) (462)
Amortization of prior service cost 217 69 392
Amortization of gains and losses (1,891) (2,024) (2,758)
Special termination benefit 360 --
- --------------------------------------------------------------------------------------------------------
Net postretirement benefit cost $ 11,615 $ 11,837 $ 12,778
</TABLE>
The following assumptions were used to value the postretirement
benefit obligation:
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Weighted average discount rate 7.0% 7.5% 7.5%
Expected return on plan assets 9.5% 9.0% 9.0%
Rate of salary increase 5.0% 5.0% 5.0%
Assumed rate of increase in cost
of covered health care benefits 6.6% 7.1% 10.5%
</TABLE>
Increases in health care costs were assumed to decline consistently to a rate
of 5.0% by 2006 and remain at that level thereafter. If the health care cost
trend rates were increased by one percentage point, the accumulated
postretirement benefit health care obligation as of December 31, 1997 would
increase by $8.6 million while the sum of the service and interest cost
components of the net postretirement benefit health care cost for 1997 would
increase by $.6 million.
The Company changed its assumptions used in 1997 for the weighted average
discount rate and the expected return on plan assets. These changes in
assumptions did not have a material effect on the 1997 postretirement expense.
39
<PAGE>
9. Earnings Per Share
The Company adopted the provisions of FAS 128, "Earnings Per Share" effective
December 31, 1997. This statement simplifies the standards for computing
earnings per share previously found in Accounting Principles Board ("APB")
Opinion No. 15, "Earnings Per Share", and makes them comparable to international
earnings per share ("EPS") standards. 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. Historical earnings per share have been restated to conform
with the provisions of FAS 128.
<TABLE>
<CAPTION>
In thousands of dollars, except per share data
Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Basic Earnings Per Share
Income Applicable to Common Stock $ 53,543 $208,744 $ 20,892
Average Common Shares Outstanding 163,530 162,301 152,069
Basic Earnings Per Common Share $ 0.33 $ 1.29 $ 0.14
- -----------------------------------------------------------------------------
Diluted Earnings Per Share
Income Applicable to Common Stock $ 53,543 $208,744 $ 20,892
Interest Expense on Convertible Debentures(1) -- 360 --
- -----------------------------------------------------------------------------
$ 53,543 $209,104 $ 20,892
- -----------------------------------------------------------------------------
Average Common Shares Outstanding 163,530 162,301 152,069
Options and Warrants 446 1,712 9,592
Convertible Debentures(1) -- 503 --
- -----------------------------------------------------------------------------
163,976 164,516 161,661
- -----------------------------------------------------------------------------
Diluted Earnings Per Common Share $ 0.33 $ 1.27 $ 0.13
</TABLE>
(1) Convertible debentures are anti-dilutive in 1997 and 1995.
10. Stock Option Plans and Other Common Stock Transactions
The Company has stock option plans for its directors, executives and certain
employees. The exercise price for all plans is the fair market value of the
stock on the date of the grant. The options expire ten years from the date of
the grant. The options vest over a period from one to three years. The maximum
number of shares which may be granted under the executive plan is limited to one
percent of the number of issued shares, including treasury shares, of the
Company's common stock during any calendar year. The maximum number of shares
which may be granted under the employee plan is a total of 8,000,000 shares over
a 10 year period. The maximum number of shares which may be granted under the
directors plan is 1,000,000 shares.
Information with respect to options under the above plans follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding at January 1, 1995 8,975,523 $ 7.37
Granted in 1995 2,020,315 $25.27
Cancelled in 1995 (195,716) $23.53
Exercised in 1995 (2,433,623) $ 7.48
- -----------------------------------------------------------------
Outstanding at December 31, 1995 8,366,499 $11.28
Granted in 1996 3,067,500 $30.95
Cancelled in 1996 (784,289) $28.77
Exercised in 1996 (5,481,681) $ 5.99
- -----------------------------------------------------------------
Outstanding at December 31, 1996 5,168,029 $25.91
Granted in 1997 3,581,900 $21.59
Cancelled in 1997 (1,379,642) $26.24
Exercised in 1997 (118,907) $ 7.31
- -----------------------------------------------------------------
Outstanding at December 31, 1997 7,251,380 $24.02
</TABLE>
At December 31, 1997, 7,567,247 shares were available for future grant.
40
<PAGE>
The Company applies APB 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its plans. Accordingly, no
compensation expense would be recognized for its stock-based compensation plans
other than for restricted stock awards.
During 1996 the Company adopted the disclosure requirements of FAS 123,
"Accounting for Stock-Based Compensation." In accordance with FAS 123, the
Company has elected not to recognize compensation cost related to stock options
with exercise prices equal to the market price at the date of issuance. If the
Company had elected to recognize compensation cost based on the fair value of
the options at grant date as prescribed by FAS 123, the following results would
have occurred using the Black-Scholes option valuation model:
<TABLE>
<CAPTION>
In thousands of dollars, except per share data
Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Post-Tax Compensation Cost $11,919 $ 5,320 $ 1,086
Pro Forma Net Income $42,643 $204,606 $20,997
Pro Forma Basic EPS $ 0.26 $ 1.26 $ 0.13
Pro Forma Diluted EPS $ 0.26 $ 1.24 $ 0.12
Fair Value of Options Granted $ 6.23 $ 8.58 $ 7.42
Volatility 33.2% 28.4% 28.4%
Dividend Yield 3.5% 3.0% 3.0%
Risk-Free Interest Rates 5.7% to 6.7% 5.5% to 7.0% 5.5% to 7.0%
</TABLE>
Due to the difference in vesting requirements in each of the plans, the
expected lives of the options range from 5 to 7 years. Forfeitures are
recognized as they occur.
Options Outstanding
<TABLE>
<CAPTION>
Weighted
Average Weighted
Range Of Remaining Average
Exercise Contractual Exercise
Prices Outstanding Life Price
<S> <C> <C> <C>
$ 1-$ 3 193,434 3.87 $ 2.28
$12-$20 1,068,520 7.69 $17.91
$21-$32 5,989,426 8.41 $25.78
</TABLE>
Options Exercisable
<TABLE>
<CAPTION>
Weighted
Range Of Average
Exercise Exercise
Prices Outstanding Price
<S> <C> <C>
$ 1-$ 3 193,434 $ 2.28
$12-$20 466,898 $16.45
$21-$32 1,589,124 $26.12
</TABLE>
Restricted Stock Plan
The Company has 490,000 shares of common stock outstanding as of December 31,
1997 under its Management Stock Incentive Plan. The stock issued under this plan
("Restricted Stock") is subject to the achievement of certain performance goals,
the passage of time and continued employment restrictions. Participants in the
plan may earn, without cost to them, Frontier common stock over three years.
Shareowners' equity reflects unearned compensation for the unvested stock
awarded. During 1997, the Company recognized related compensation expense of
$1.6 million. The Company did not recognize compensation expense for restricted
stock granted prior to 1997 as the market price of the common stock was
significantly below the vesting prices.
41
<PAGE>
11. Preferred Stock
<TABLE>
<CAPTION>
In thousands of dollars, except share data
December 31, 1997 1996 1995
<S> <C> <C> <C>
Frontier Corporation-850,000 shares authorized;
par value $100
5.00% Series-redeemable at $101 per share
Shares outstanding 100,000 100,000 100,000
Amount outstanding $ 10,000 $ 10,000 $ 10,000
5.65% Series-redeemable at $101 per share
Shares outstanding 50,000 50,000 50,000
Amount outstanding $ 5,000 $ 5,000 $ 5,000
4.60% Series-redeemable at $101 per share
Shares outstanding 48,500 48,500 50,000
Amount outstanding $ 4,850 $ 4,850 $ 5,000
Frontier Communications of New York, Inc.
40,000 shares authorized; par value $100
5.875% Series A-redeemable at par
Shares outstanding -- 18,694 18,694
Amount outstanding $ -- $ 1,869 $ 1,869
7.80% Series B-redeemable at $100.80-$105.00
per share
Shares outstanding -- 6,160 6,240
Amount outstanding $ -- $ 616 $ 624
Frontier Communications of AuSable Valley, Inc.
4,000 shares authorized; par value $100
5.50% Series-redeemable at par
Shares outstanding 2,754 2,754 2,754
Amount outstanding $ 276 $ 276 $ 276
- -------------------------------------------------------------------------------
Total shares outstanding 201,254 226,108 227,688
Total amount outstanding $ 20,126 $ 22,611 $ 22,769
</TABLE>
Effective January 1, 1997, the Company redeemed all of the outstanding
preferred stock of its wholly owned subsidiary, Frontier Communications of New
York, Inc. at approximately par value.
At the special meeting in December 1994, Frontier shareowners authorized
4,000,000 shares of a new class of preferred stock, having a par value of
$100.00 per share and designated as Class A Preferred Stock. This class of stock
will rank junior to the cumulative preferred stock as to dividends and
distributions, and upon the liquidation, dissolution or winding up of the
Company. As of December 31, 1997, no shares of this class have been issued.
On April 9, 1995, the Board of Directors adopted a Shareowners Rights Plan
(the "Plan"). This Plan provides for a dividend distribution on each outstanding
common share of a right to purchase one one-hundredth of a share of Series A
Junior Participating Class A Preferred Stock. The rights are designed to protect
shareowners in the event of an unsolicited offer or initiative to acquire
Frontier which the Board does not believe is fair to shareowners. The rights
become exercisable under certain circumstances to purchase Frontier common stock
at one-half market value.
12. Discontinuance of Regulatory Accounting
The Company determined in 1995 that FAS 71, "Accounting for the Effects of
Certain Types of Regulation," was no longer applicable based upon changes in
regulation, increasingly rapid advancements in telecommunications technology and
other factors creating competitive markets.
As a result of the discontinuance of FAS 71, the Company recorded a non-cash
extraordinary charge of $112.1 million, net of an income tax benefit of $68.4
million as of September 30, 1995.
42
<PAGE>
The components of the extraordinary charge follow:
<TABLE>
<CAPTION>
Millions of Dollars
Pre-Tax After-Tax
<S> <C> <C>
Increase to the accumulated depreciation balance $(185.6) $(115.4)
Elimination of other net regulatory liabilities 5.1 3.3
- ---------------------------------------------------------------------------
$(180.5) $(112.1)
</TABLE>
The adjustment of $185.6 million to net telephone plant was necessary because
estimated useful lives and depreciation methods historically prescribed by
regulators did not keep pace with the technological changes in the Company and
differed significantly from those used by unregulated entities. The
discontinuance of FAS 71 also required the Company to eliminate for financial
reporting the effects of any actions of regulators that had been recognized as
regulatory assets and liabilities pursuant to FAS 71.
13. Other Accounting Pronouncements Adopted
Effective January 1, 1996, the Company adopted FAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
FAS 121 requires that certain long-lived assets and identifiable intangibles be
written down to fair value whenever an impairment review indicates that the
carrying value cannot be recovered on an undiscounted cash flow basis. The
statement also requires that certain long-lived assets and identifiable
intangibles to be disposed of be reported at fair value less selling costs. The
Company's adoption of this standard resulted in a non-cash charge of $8.0
million (net of a tax benefit of $4.4 million) and is reported as a cumulative
effect of a change in accounting principle. The charge represents the cumulative
adjustment required by FAS 121 to remeasure the carrying amount of certain
assets held for disposal as of January 1, 1996. These assets held for disposal
consist principally of telephone switching equipment in the Company's Local
Communications Services segment as a result of management's commitment, in late
1995, to a central office switch consolidation project primarily at Frontier
Telephone of Rochester and Frontier Communications of New York subsidiaries.
The Company adopted FAS 116, "Accounting for Contributions Received and
Contributions Made" for all of its consolidated subsidiaries effective September
30, 1995. FAS 116 requires that the Company reflect in current expenses an
accrual for the cost of multi-year charitable contributions. The net impact of
adopting FAS 116 resulted in a post- tax charge of $1.5 million, net of taxes of
$0.8 million.
14. Major Customer
The Company's revenues include the impact of a major carrier customer whose
revenues comprise approximately 4%, 16% and 10% of consolidated revenues in
1997, 1996 and 1995 respectively.
43
<PAGE>
15. Commitments, Contingencies and Other Matters
Operating Environment-The Company has evolved from being a provider of local and
long distance services in certain areas of the country to being a nationwide
provider of integrated communications services. As a result, the Company has
formidable competitors of greater size and expects that, over time and due to
the lifting of regulatory restrictions, there will be more entrants into the
long distance business and its local markets.
Legal Matters-The Company and a number of its subsidiaries in the normal
course of business are party to a number of judicial, regulatory and
administrative proceedings. The Company's management does not believe that any
material liability will be imposed as a result of any of these matters.
Leases and License Agreements-The Company leases buildings, land, office
space, fiber optic network, computer hardware and other equipment, and has
license agreements for rights-of-way for the construction and operation of a
fiber optic communications system. Total rental expense amounted to $156.0
million in 1997, $164.6 million in 1996 and $77.8 million in 1995.
Minimum annual rental commitments under non-cancelable operating leases and
license agreements in effect on December 31, 1997 were as follows:
<TABLE>
<CAPTION>
In thousands of dollars
License
Years Buildings Equipment Agreements
<S> <C> <C> <C>
1998 $ 18,717 $2,122 $ 78,725
1999 15,917 1,438 54,592
2000 14,781 1,168 20,333
2001 13,419 224 12,656
2002 12,576 63 2,156
2003 and thereafter 28,473 -- 1,431
- ---------------------------------------------------------------------------
Total $103,883 $5,015 $169,893
</TABLE>
Acquisition of GlobalCenter--On January 15, 1998, the Company announced that
it had signed a definitive agreement to acquire GlobalCenter, Inc.
("GlobalCenter"), located in Sunnyvale, California. GlobalCenter is a provider
of Internet, data and digital distribution services. Frontier will issue
approximately 7.3 million shares of its common stock to acquire all the
outstanding equity of GlobalCenter. The transaction, which is expected to be
accounted for as a pooling of interests, is anticipated to close in early 1998.
Sale of Minnesota Southern Cellular Telephone Company--On December 18, 1997,
the Company announced that a definitive agreement had been signed with Hickory
Tech Corporation to sell Minnesota Southern Cellular Telephone. The transaction,
which is subject to regulatory approvals, is expected to close by the second
quarter of 1998. The Company anticipates that a gain will be recognized as a
result of this transaction.
Other Matters--In connection with the Company's capital program, certain
commitments have been made for the purchase of material and equipment. In
October 1996, construction began on a nationwide fiber optic network. Frontier
will be investing approximately $450.0 million in this project. As of December
31, 1997, the Company has invested approximately $260.0 million in this project
which is primarily included in the "Deferred and other assets" caption in the
Consolidated Balance Sheets. The network expansion will increase 1998 capital
expenditures by over $170.0 million. Total capital expenditures for 1998 are
estimated to be $500.0 million.
44
<PAGE>
16. Business Segment Information
As of January 1996, Frontier simplified its business segment reporting to
reflect the predominance of its two major operating segments: long distance and
local communications services. The Company now reports its operating results in
three segments: Long Distance Communications Services, Local Communications
Services and Corporate Operations and Other. The Company's majority interest in
certain wireless properties, which were previously reported as a Wireless
Communications Segment, have been consolidated under Corporate Operations and
Other. The change in the definition of the Company's segments has been made to
better reflect the changing scope of the businesses in which Frontier operates.
Revenues, operating income, depreciation, construction and identifiable assets
by business segment are set forth in the Business Segment Information on page
26.
17. Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
1997 Quarter
In thousands of dollars, Full
except per share data 1st 2nd 3rd 4th Year
<S> <C> <C> <C> <C> <C>
Revenues $ 573,411 $584,712 $601,570 $ 593,193 $2,352,886
Operating Income (Loss) $(26,300)(1) $ 77,080 $ 72,363 $(14,675)(2) $ 108,468
Consolidated Net Income (Loss) $(13,561)(1) $ 42,444 $ 40,104 $(14,425)(2) $ 54,562
Earnings (Loss) per share:
Basic $ (.08) $ .26 $ .24 $ (.09) $ .33
Diluted $ (.08)(3) $ .26 $ .24 $ (.09)(3) $ .33
Market Price:
High $ 23.25 $ 20.50 $ 24.19 $ 25.00
Low $ 17.75 $ 15.38 $ 19.00 $ 20.00
- -------------------------------------------------------------------------------------------------
<CAPTION>
1996 Quarter
In thousands of dollars, Full
except per share data 1st 2nd 3rd 4th Year
<S> <C> <C> <C> <C> <C>
Revenues $ 655,149 $670,279 $669,069 $ 581,072 $2,575,569
Operating Income $ 111,852 $122,701 $129,218 $ 24,113(5) $ 387,884
Consolidated Net Income $ 57,123(4) $ 69,206 $ 73,777 $ 9,820(5) $ 209,926
Earnings per share
before cumulative effect:
Basic $ .41 $ .42 $ .45 $ .06 $ 1.34
Diluted $ .40 $ .42 $ .45 $ .06 $ 1.32(6)
Earnings per share:
Basic $ .36 $ .42 $ .45 $ .06 $ 1.29
Diluted $ .36 $ .42 $ .45 $ .06 $ 1.27(6)
Market Price:
High $ 33.25 $ 33.38 $ 31.25 $ 31.88
Low $ 28.25 $ 27.75 $ 25.88 $ 19.88
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes a pre-tax charge of $96.6 million primarily related to the write-
off of certain leased network costs no longer necessary to support long
distance traffic volumes.
(2) Includes a pre-tax charge of $86.8 million primarily related to a
restructuring charge of $43.0 million and a provision for asset and lease
impairment of $43.8 million.
(3) Due to the net loss incurred, the earnings per share calculation excludes
common stock equivalents.
(4) Includes a post-tax cumulative effect charge related to change in
accounting principle of $8.0 million.
(5) Includes a pre-tax charge of $48.8 million as a result of the following:
$28.0 million representing a one-time charge for the curtailment of certain
company pension plans; $20.8 million is the result of a nonrecurring charge
relating to the Company's conference calling product line.
(6) As a result of rounding, the total of the four quarters' earnings does not
equal the earnings per share for the year.
45
<PAGE>
EXHIBIT 13.2
REPORT OF INDEPENDENT AUDITORS
Board of Directors
ALC Communications Corporation
We have audited the consolidated balance sheets of ALC Communications
Corporation, and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, cash flows, and preferred stock and
stockholders' equity for the years then ended (not included herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ALC
Communications Corporation and subsidiaries at December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Detroit, Michigan
January 17, 1996
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF FRONTIER CORPORATION
AS OF MARCH 1, 1998
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ALC Communications Corporation DE ALC Communications Corp.;
(A subsidiary of ALC
Frontier Corporation)
Ameritel Management, Inc. Canada Ameritel Management, Inc.
(A subsidiary of Frontier (British Columbia)
Communications of the West, Inc.)
Budget Call Long Distance, Inc. DE Budget Call Long Distance, Inc.;
(A subsidiary of Frontier Budget Call
Communications International Inc.)
Business Telemanagement, Inc. CA Business Telemanagement, Inc.
(A subsidiary of Ameritel
Management, Inc.)
DePue Communications, Inc. IL DePue Communications, Inc.
(A subsidiary of Frontier
Communications of DePue, Inc.)
Dowdy Minnesota 10, Inc. FL Dowdy Minnesota 10, Inc.
(A subsidiary of Frontier
Cellular Holding Inc.)
Enhanced Telemanagement, Inc. MN Enhanced Telemanagement; ETI;
(A subsidiary of ALC Frontier Telemanagement
Communications Corporation)
Fairmount Cellular Inc. GA Fairmount Cellular Inc.
(A subsidiary of Frontier
Communications of Fairmount, Inc.)
Frontel Communications Limited England Frontel Communications Ltd.;
(A subsidiary of ALC Frontel
Communications Corporation)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
<S> <C> <C>
Frontel Newco Limited England Frontel Newco
(A subsidiary of Frontel
Communications Ltd.)
Frontier Advanced Services Technologies Inc. IA FAST Inc., LinkUSA Corporation
(A subsidiary of ALC
Communications Corporation)
Frontier Billing Corp. MI Frontier Billing
(A subsidiary of ALC
Communications Corporation)
Frontier Cable of Indiana, Inc. IN Frontier Cable of Indiana, TDCI Ltd.
(A subsidiary of Frontier
Communications of Thorntown, Inc.)
Frontier Cable of Mississippi, Inc. MS Frontier Cable of Mississippi;
(A subsidiary of Frontier Mid-South Cablevision Company, Inc.
Subsidiary Telco Inc.)
Frontier Cable of Wisconsin, Inc. WI Frontier Cable of Wisconsin;
(A subsidiary of Frontier New Richmond Cable Company, Inc.
Communications - St. Croix, Inc.)
Frontier Cellular Holding Inc. DE Frontier Cellular Holding Inc.;
(A subsidiary of Frontier Corporation) FCHI
Frontier Cellular of Alabama, Inc. AL Frontier Cellular
(A subsidiary of Frontier
Communications of the South, Inc.)
Frontier Communications International Inc. DE Frontier Communications
(A subsidiary of ALC International Inc.; FCI;
Communications Corporation) RCI Long Distance, Inc.
Frontier Communications of AL Frontier Communications
Alabama, Inc. of Alabama, Inc.; Frontier
(A subsidiary of Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications of NY Frontier Communications of
AuSable Valley, Inc. AuSable Valley, Inc.;
(A subsidiary of Frontier Communications
Frontier Corporation)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
<S> <C> <C>
Frontier Communications of PA Frontier Communications of
Breezewood, Inc. Breezewood, Inc.;
(A subsidiary of Frontier Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications of PA Frontier Communications of
Canton, Inc. Canton, Inc.; Frontier Communications
(A subsidiary of Frontier
Subsidiary Telco Inc.)
Frontier Communications of IL Frontier Communications of
DePue, Inc. DePue, Inc.; Frontier Communications
(A subsidiary of Frontier
Subsidiary Telco Inc.)
Frontier Communications of GA Frontier Communications of
Fairmount, Inc. Fairmount, Inc.; Frontier
(A subsidiary of Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications of GA Frontier Communications of
Georgia, Inc. Georgia, Inc.; Frontier Communications
(A subsidiary of Frontier
Subsidiary Telco Inc.)
Frontier Communications of IL Frontier Communications of
Illinois, Inc. Illinois, Inc.; Frontier Communications
(A subsidiary of Frontier
Subsidiary Telco Inc.)
Frontier Communications of IN Frontier Communications of
Indiana, Inc. Indiana, Inc.; Frontier Communications
(A subsidiary of Frontier
Subsidiary Telco Inc.)
Frontier Communications of IA Frontier Communications of
Iowa, Inc. Iowa, Inc.; Frontier Communications
(A subsidiary of Frontier
Subsidiary Telco Inc.)
Frontier Communications of DE Frontier Communications of Israel
Israel, Inc.
(A subsidiary of
Frontier Corporation)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
<S> <C> <C>
Frontier Communications of IL Frontier Communications of
Lakeside, Inc. Lakeside, Inc.;
(A subsidiary of Frontier Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications of PA Frontier Communications of
Lakewood, Inc. Lakewood, Inc.;
(A subsidiary of Frontier Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications of AL Frontier Communications of
Lamar County, Inc. Lamar County, Inc.;
(A subsidiary of Frontier Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications of MI Frontier Communications of
Michigan, Inc. Michigan, Inc.;
(A subsidiary of Frontier Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications of the VA Frontier Communications Mid Atlantic,
(A subsidiary of ALC Inc.; Mid Atlantic Telecom
Communications Corporation)
Frontier Communications-Midland, Inc. IL Frontier Communications
(A subsidiary of Frontier -Midland, Inc.;
Subsidiary Telco Inc.) Frontier Communications
Frontier Communications MN Frontier Communications of
of Minnesota, Inc. Minnesota, Inc.;
(A subsidiary of Frontier Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications of MS Frontier Communications of
Mississippi, Inc. Mississippi, Inc.;
(A subsidiary of Frontier Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications of WI Frontier Communications of
Mondovi, Inc. Mondovi, Inc.;
(A subsidiary of Frontier Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications of IL Frontier Communications of
Mt. Pulaski, Inc. Mt. Pulaski, Inc.;
(A subsidiary of Frontier Frontier Communications
Subsidiary Telco Inc.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
<S> <C> <C>
Frontier Communications of DE Frontier Communications of
New England, Inc. New England, Inc.;
(A subsidiary of ALC Long Distance North; LDN;
Communications Corporation)
Frontier Communications - MN Frontier Communications
North Central Region, Inc. North Central Region,
(A subsidiary of ALC Inc.; American Sharecom; ASI
Communications Corporation)
Frontier Communications of NY Frontier Communications of
New York, Inc. New York, Inc.;
(A subsidiary of Frontier Communications
Frontier Corporation)
Frontier Communications of IL Frontier Communications of
Orion, Inc. Orion, Inc.;
(A subsidiary of Frontier Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications of PA Frontier Communications of
Oswayo River, Inc. Oswayo River, Inc.;
(A subsidiary of Frontier Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications of PA Frontier Communications of
Pennsylvania, Inc. Pennsylvania, Inc.;
(A subsidiary of Frontier Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications-Prairie, Inc. IL Frontier Communications-
(A subsidiary of Frontier Prairie, Inc.;
Subsidiary Telco Inc.) Frontier Communications
Frontier Communications of DE Frontier Communications of
Rochester, Inc. Rochester, Inc.; FCR
(A subsidiary of
Frontier Corporation)
Frontier Communications-Schuyler, Inc. IL Frontier Communications
(A subsidiary of Frontier -Schuyler, Inc.;
Subsidiary Telco Inc.) Frontier Communications
Frontier Communications of NY Frontier Communications of
Seneca-Gorham, Inc. Seneca-Gorham, Inc.;
(A subsidiary of Frontier Communications
Frontier Corporation)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
<S> <C> <C>
Frontier Communications of AL Frontier Communications of
the South, Inc. the South, Inc.;
(A subsidiary of Frontier Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications - WI Frontier Communications
St. Croix, Inc. - St. Croix, Inc.;
(A subsidiary of Frontier Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications of NY Frontier Communications of
Sylvan Lake, Inc. Sylvan Lake, Inc.;
(A subsidiary of Frontier Communications
Frontier Corporation)
Frontier Communications of IN Frontier Communications of
Thorntown, Inc. Thorntown, Inc.;
(A subsidiary of Frontier Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications of WI Frontier Communications of
Viroqua, Inc. Viroqua, Inc.;
(A subsidiary of Frontier Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications of the CA Frontier Communications of
West, Inc. the West, Inc.; West Coast
(A subsidiary of ALC Telecommunications, Inc.; WCT
Communications Corporation)
Frontier Communications of WI Frontier Communications of
Wisconsin, Inc. Wisconsin, Inc.;
(A subsidiary of Frontier Frontier Communications
Subsidiary Telco Inc.)
Frontier Communications Services Inc. MI Frontier Communications
(A subsidiary of ALC Services Inc.; Allnet Communications
Corporation) Communication Services
Frontier ConferTech Inc. CO Frontier ConferTech Inc.; ConferTech
(A subsidiary of ALC Communications Inc.
Corporation)
Frontier ConferTech Canada Inc. Canada Frontier ConferTech Canada Inc.
(A subsidiary of Frontier
ConferTech Inc.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
<S> <C> <C>
Frontier GlobalCenter Inc. DE Frontier GlobalCenter Inc.;
(A subsidiary of Frontier Corporation) GlobalCenter Inc.
Frontier Information Technologies Inc. DE Frontier Information Technologies
(A subsidiary of Frontier Corporation) Inc.; FIT
Frontier InfoServices Inc. DE Frontier InfoServices Inc.;
(A subsidiary of Frontier Visions Publishing
Subsidiary Telco Inc.)
Frontier Local Services Inc. MI Frontier Local Services Inc.;
(A subsidiary of ALC Allnet Local Services
Communications Corporation)
Frontier Long Distance of DE Frontier Long Distance of
America, Inc. America Inc.
(A subsidiary of Frontier
Subsidiary Telco Inc.)
Frontier Network Systems Corp. NY Frontier Network Systems; RG Data;
(A subsidiary of ALC Rotelcom
Communications Corporation)
Frontier Subsidiary Telco Inc. DE Frontier Subsidiary Telco Inc.;
(A subsidiary of FSTI
Frontier Corporation)
Frontier Telemanagement Inc. WI Frontier Telemanagement
(A subsidiary of ALC
Communications Corporation)
Frontier Telephone of Rochester, Inc. NY Frontier Telephone, Rochester
(A subsidiary of Telephone Corp.; FTR
Frontier Corporation)
Frontier VTC Inc. CO Frontier Link VTC; Frontier
(A subsidiary of Frontier Videoconferencing
Confertech Inc.)
GCIS, Inc. DE GCIS, Inc.
(A subsidiary of Frontier
GlobalCenter Inc.)
I-Systems, Inc. DE I-Systems, Inc.
(A subsidiary of Frontier
GlobalCenter Inc.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAMES USED
<S> <C> <C>
MLD Minnesota 10, Inc. FL MLD Minnesota 10, Inc.
(A subsidiary of Frontier
Cellular Holding Inc.)
O. T. Cellular Telephone Company IL O. T. Cellular Telephone
(A subsidiary of Frontier Company
Communications of Orion, Inc.)
RCI Long Distance Canada Ltd. Canada RCI Long Distance Canada Ltd.
(A subsidiary of ALC (Ontario, Quebec)
Communications Corporation)
RTMC Holding, Inc. DE RTMC Holding, Inc.
(A subsidiary of Frontier
Cellular Holding Inc.)
Schuyler Cellular, Inc. IL Schuyler Cellular, Inc.
(A subsidiary of Frontier Communications -
Schuyler, Inc.)
Voyager Networks, Inc. DE Voyager Networks, Inc.
(A subsidiary of Frontier
GlobalCenter Inc.)
</TABLE>
<PAGE>
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Forms S-3 (File Nos.
33-64307 and 333-23229), Form S-4 (File No. 33-91250) and in the Registration
Statements on Forms S-8 (File Nos. 33-67430, 33-54511, 33-67432, 33-54519,
33-67324, 33-51331, 33-51885, 33-52025, 33-59579, 33-61855 and 333-04803 of
Frontier Corporation of our report dated January 26, 1998, appearing on page 25
of the 1997 Annual Report to Shareowners which is incorporated by reference in
the Annual Report on Form 10-K. We also consent to the incorporation by
reference of our report on the Financial Statement Schedule, which appears on
page 30 of this Form 10-K.
PRICE WATERHOUSE LLP
Rochester, New York
March 24, 1998
<PAGE>
EXHIBIT 23.2
Consent of Independent Accountants
We consent to the reference to our firm under the caption "Experts" and to the
incorporation by reference in the Registration Statement on Form S-3 (File Nos.
33-64307 and 333-23229) and the related Prospectus of Frontier Corporation and
to the incorporation by reference in the Prospectuses constituting part of the
Registration Statement on Form S-4 (File Nos. 33-91250) and in the Registration
Statements on Form S-8 (File Nos. 33-67430, 33-67432, 33-67324, 33-51331, 33-
51885, 33-52025, 33-54511, 33-54519, 33-59579, 33-61855 and 333-04803) of
Frontier Corporation of our reports dated January 17, 1996 with respect to the
consolidated financial statements and financial statement schedule II of ALC
Communications Corporation and subsidiaries which reports are included in the
Annual Report on Form 10-K of Frontier Corporation for the year ended December
31, 1997 to be filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Detroit, Michigan
March 24, 1998
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
I, the undersigned, hereby constitute and appoint JOSEPHINE S. TRUBEK
and/or JAMES G. DOLE as my true and lawful agent and attorney-in-fact to act
with full power and authority and in my name, place and stead as I, myself,
could act for the sole purpose of executing the Form 10-K of Frontier
Corporation for the year ended December 31, 1997, pursuant to Instruction
D(2)(a) of the Form 10-K and in accordance with Regulation S-K Item 601(b)(24)
of the Securities Act of 1933 and the Securities Exchange Act of 1934, and with
full and unqualified authority to delegate such power to any person or persons
as my attorney-in-fact shall select.
IN WITNESS WHEREOF, THIS INSTRUMENT HAS BEEN SIGNED AND DELIVERED BY THE
UNDERSIGNED AS OF MARCH 23, 1998.
/s/ Patricia C. Barron /s/ Raul E. Cesan
- ----------------------------- --------------------------------
Patricia C. Barron Raul E. Cesan
/s/ Brenda E. Edgerton /s/ Jairo A. Estrada
- ----------------------------- --------------------------------
Brenda E. Edgerton Jairo A. Estrada
/s/ Michael E. Faherty /s/ Daniel E. Gill
- ----------------------------- --------------------------------
Michael E. Faherty Daniel E. Gill
/s/ Alan C. Hasselwander /s/ Robert J. Holland, Jr.
- ----------------------------- --------------------------------
Alan C. Hasselwander Robert J. Holland, Jr.
/s/ Douglas H. McCorkindale /s/ Leo J. Thomas
- ----------------------------- --------------------------------
Douglas H. McCorkindale Leo J. Thomas
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FRONTIER
CORPORTION'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 24,735
<SECURITIES> 0
<RECEIVABLES> 399,712
<ALLOWANCES> 22,729
<INVENTORY> 11,883
<CURRENT-ASSETS> 484,160
<PP&E> 2,426,624
<DEPRECIATION> 1,388,816
<TOTAL-ASSETS> 2,475,150
<CURRENT-LIABILITIES> 474,835
<BONDS> 930,467
0
20,126
<COMMON> 164,106
<OTHER-SE> 786,127
<TOTAL-LIABILITY-AND-EQUITY> 2,475,150
<SALES> 0
<TOTAL-REVENUES> 2,352,886
<CGS> 0
<TOTAL-COSTS> 2,244,418
<OTHER-EXPENSES> (37,808)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,576
<INCOME-PRETAX> 98,700
<INCOME-TAX> 44,138
<INCOME-CONTINUING> 54,562
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,562
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
<PAGE>
Exhibit 99
[LOGO OF FRONTIER CORPORATION/SM/]
Frontier Corporation
Frontier Center
180 South Clinton Avenue
Rochester, New York 14646-0700
Proxy Statement
- ------------------------------
NOTICE OF ANNUAL MEETING
OF COMMON SHAREOWNERS
TO BE HELD ON APRIL 29, 1998
Dear Shareowners:
You are cordially invited to attend the Annual Meeting of Common Shareowners of
Frontier Corporation (the "Company") which is scheduled for 10:30 a.m., local
time, on April 29, 1998. We will meet at the Westin Southfield-Detroit Hotel,
1500 Town Center, Southfield, Michigan.
We plan to present to you the following items for your approval:
(1) The election of ten Directors;
(2) The ratification of Price Waterhouse LLP as the Company's public
accountant for the fiscal year ending December 31, 1998; and
(3) Any other matters that may properly come before the meeting or any
adjournments of the meeting.
Consistent with recent changes in New York law, effective March 1, 1998, the
Board of Directors amended Article I, Section 11, of the By-Laws to permit
fixing a record date not more than 60 days prior to a meeting, and amended
Article I, Section 10, to clarify that proxies may be transmitted, authorized
or executed in any manner permitted by the Business Corporation Law. The Board
of Directors amended Article II, Section 2, of the By-Laws to set the number of
Directors constituting the entire Board at ten, effective April 29, 1998.
Owners of Common Stock of record at the close of business on March 2, 1998, are
entitled to notice of and to vote at the meeting. The meeting will be sign
language interpreted for the hearing impaired.
A copy of this proxy statement and the Company's Annual Report are also
available on the Company's web site which can be reached at:
http://www.frontiercorp.com
Your vote is very important. Please either vote electronically or sign and date
the enclosed proxy card and return it promptly in the enclosed return envelope,
whether or not you expect to attend the meeting. If you do not specify your
choices when you vote, it will be understood that you wish to have your shares
voted in accordance with the Board of Directors' recommendations. You may
revoke your proxy and vote in person if you decide to attend the meeting.
An admission card will be required to gain entry to the meeting. If you are
planning to attend the Annual Meeting, please check the appropriate box on the
proxy card. We will then send to you your admission card. A map identifying the
location of the meeting place appears on the back cover of the proxy statement.
We hope to see you at the meeting on April 29, 1998.
By Action of the Board of Directors,
/s/ Josephine S. Trubek
Josephine S. Trubek
Corporate Secretary
Rochester, New York
March 12, 1998
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Proxy Statement
<S> <C>
Proxy Solicitation 1
Voting at the Annual Meeting 1
Proposal 1 - Election of Directors 1
Nominees for Director 1
Information about the Board of Directors 3
Stock Ownership of Management, Directors
and Certain Beneficial Owners 4
Section 16(a) Beneficial Ownership
Reporting Compliance 5
Report of Committee on Directors 5
Report of Committee on Management 6
Performance Graph 8
Compensation of Company Management 9
Summary Compensation Table 9
Option/SAR Grants in Last Fiscal Year 10
Individual Grants in 1997 Table 10
Aggregated Option/SAR Exercises in
Last Fiscal Year and Fiscal Year-End
Option/SAR Values Table 11
Long-Term Incentive Plans-Awards in
Last Fiscal Year Table 11
Pension Plan Table 12
Employment Contracts 13
Indebtedness of Management 14
Business Transactions and Relationships 14
Compensation Committee Interlocks and
Insider Participation in Compensation
Decisions 14
Indemnification of Certain Persons 14
Proposal 2 - Ratification of Public 15
Accountant
1999 Meeting-Future Proposals of 15
Shareowners
Other Matters 15
</TABLE>
<PAGE>
Proxy Statement
1998 Annual Meeting of Common Shareowners
of Frontier Corporation
- --------------------------------------------------------------------------------
Proxy Solicitation
The board of directors ("Board of Directors") of Frontier Corporation (the
"Company"), a New York corporation, is soliciting proxies for use at the annual
meeting of holders of the Company's $1.00 par value common stock (the "Annual
Meeting"). The meeting will be held on April 29, 1998, at 10:30 a.m., local
time at the Westin Southfield-Detroit Hotel, 1500 Town Center, Southfield,
Michigan 48075, or any later time, if adjourned, for the purposes stated in the
Notice of Annual Meeting of Common Shareowners provided to you. We are sending
you this Proxy Statement and the enclosed proxy card and alternative electronic
voting instructions in connection with the Board's solicitation so that you may
vote your shares.
The Company will pay the cost of proxy solicitation. In addition to the
solicitation of proxies by mail, some officers and employees of the Company,
without additional compensation, may contact you personally or by telephone,
facsimile, telegraph or cable, to solicit your proxy. The Company will also
request brokerage houses, nominees, custodians and fiduciaries to forward
soliciting materials to the beneficial owners of stock held of record and will
reimburse such persons for forwarding such materials. In addition, the Company
has retained Innisfree M&A Incorporated, New York, New York, to aid in the
solicitation of proxies at a fee of $6,000 plus reimbursement for out-of-pocket
expenses incurred by that firm on behalf of the Company.
The principal executive offices of the Company are located at 180 South
Clinton Avenue, Rochester, New York 14646. The main telephone number is
(716) 777-1000.
Voting at the Annual Meeting
The close of business on March 2, 1998, is the Record Date for determination of
the shareowners entitled to notice of, and to vote at, the Annual Meeting. On
that date there were 170,961,366 shares of the Company's $1.00 par value common
stock outstanding and entitled to vote at the meeting. You are entitled to cast
one vote for each share held as of the Record Date on matters properly brought
before the meeting.
Each proxy which is properly executed and returned in the enclosed return
envelope or is properly voted electronically will be voted at the Annual
Meeting. Shares represented by your proxy will be voted in accordance with the
directions you specify on the proxy card or that you specify electronically. If
your proxy does not specify a choice, your shares will be voted for the
election of the Directors nominated in the proxy and in favor of ratification of
the election of Price Waterhouse LLP as public accountant. You have the right to
revoke your proxy by executing a proxy bearing a later date, by attending the
meeting and voting in person, or by otherwise notifying the Company prior to the
meeting.
Both the hard-copy proxy card and the electronic voting proxy card contain
spaces for you to indicate if you wish to abstain on the proposal or to
withhold authority to vote for one or more nominees for Director. Directors are
elected by a plurality of the votes cast. Votes withheld in connection with the
election of one or more of the nominees for Director will not be counted as
votes cast in connection with that nominee's election. The public accountant is
ratified by a majority of the votes cast. Abstentions are not counted in
determining the votes cast in connection with the ratification of the public
accountant.
The New York Stock Exchange allows brokerage firms holding shares for the
benefit of their clients to vote in their discretion on behalf of their clients
with respect to "discretionary items" if the clients have not furnished voting
instructions within ten days of the shareowner meeting. The election of
Directors and the ratification of the public accountant are discretionary items
with respect to which brokerage firms may vote.
- --------------------------------------------------------------------------------
Proposal 1 - Election of Directors
YOUR BOARD OF DIRECTORS RECOMMENDS
A VOTE "FOR" ALL NOMINEES.
- --------------------------------------------------------------------------------
Nominees for Director
The Board of Directors nominates the ten persons named on pages 2 and 3 for
election to the Board of Directors. All of these people are currently Directors
of the Company, and their terms of office all expire on the date of the Annual
Meeting. If elected, each will serve until the Annual Meeting of Shareowners to
be held in 1999 or until such time as his or her respective successor is
elected. The Board believes that all of the persons it has nominated will be
available and willing to serve as Directors. The accompanying proxy will be
voted for the election of these nominees, unless authority to vote for one or
more nominees is withheld. If any nominee is unable to serve, the shares
represented by all valid proxies will be voted for the election of any
substitute nominee designated by the Board or its Executive Committee, or the
Board may fill the vacancy at a later date after selecting an appropriate
person.
The principal occupation and business experience of each nominee for election
at the Annual Meeting of Common Shareowners to be held on April 29, 1998
appears next to that person's photograph.
This Proxy Statement and Form of Proxy are being first sent to Shareowners on
March 12, 1998.
1
<PAGE>
- --------------------------------------------------------------------------------
[PHOTO OF PATRICIA C. BARRON]
Patricia C. Barron, 55, is Corporate Vice President, Business Operations
Support, Xerox Corporation, a manufacturer of office systems and equipment, and
has held this position since May 1997. From February 1994 until May 1997, she
was President, Xerox Engineering Systems. From March 1992 until February 1994,
she was President, Office Documents Products Division, Xerox Corporation. She is
a Director of Aramark Corporation, Quaker Chemical Corporation, Reynolds Metals
Company, and Teleflex Corporation. She has been a Director of the Company since
1990.
- --------------------------------------------------------------------------------
[PHOTO OF RAUL E. CESAN]
Raul E. Cesan, 50, is President, Schering-Plough Pharmaceuticals and Executive
Vice President, Schering-Plough Corporation, a worldwide manufacturer and
marketer of pharmaceutical and health care products and has held this position
since September 1994. From September 1992 through September 1994, he was
President, Schering Laboratories - U.S. Pharmaceutical Operations. From
September 1988 to September 1992, he was President, Schering-Plough
International. He has been a Director of the Company since 1995.
- --------------------------------------------------------------------------------
[PHOTO OF JOSEPH P. CLAYTON]
Joseph P. Clayton, 48, is Chief Executive Officer and President of the Company
and has held this position since August 1997. He also served as the Company's
President and Chief Operating Officer from June 1997 to August 1997. From March
1992 until December 1996 he was Executive Vice President, Marketing and Sales -
Americas and Asia, Thomson Consumer Electronics, a worldwide leader in the
consumer electronics industry. He has been a Director of the Company since 1997.
- --------------------------------------------------------------------------------
[PHOTO OF BRENDA E. EDGERTON]
Brenda E. Edgerton, 48, is Vice President - Business Development, Campbell Soup
Company, a manufacturer of prepared convenience foods and has held this position
since May 1996. From May 1994 to May 1996, she held the position Vice President,
Finance - U.S. Soup, and from August 1989 through April 1994, she was Vice
President and Treasurer, Campbell Soup Company. She has been a Director of the
Company since 1993.
- --------------------------------------------------------------------------------
[PHOTO OF JAIRO A. ESTRADA]
Jairo A. Estrada, 50, is President and Chief Executive Officer of EMRALD
Enterprises, a private investment firm. He has served in this capacity since
June 1996. Until December 1995, he was Chairman of the Board and Chief
Executive Officer of Garden Way Incorporated, a company which manufactures
outdoor power equipment, as well as Chairman of the Board of Stairmaster, which
manufactures exercise equipment. He is Chairman of the Board of Mercer
Management, Inc., and a member of the Board of Flow Management Technologies,
Inc., and of the Essential Nutrition Company. Mr. Estrada has been a Director
of the Company since 1989.
- --------------------------------------------------------------------------------
[PHOTO OF MICHAEL E. FAHERTY]
Michael E. Faherty, 62, is an active investor in publicly traded securities and
in various venture capital and other private businesses. He is also the
principal of MICO, a general business consulting and contract executive firm.
In connection with this business, he has served as an executive for various
companies. Since 1994, he has served as Chairman of ECCS, Inc., a provider of
open systems-based networked computing solutions which incorporate ECCS's mass
storage enhancement products. From 1994 until June 1996, he was also ECCS's
Chief Executive Officer. From January 1992 to January 1994, he was President
and Chief Executive Officer of Shared Financial Systems, Inc. He has also
served for varying periods of time as President and/or Chairman of Intec Corp.,
and either Chief Executive or Chief Operating Officer of Information Magnetics,
Cable & Wireless North America, Digital Sound Corporation, and Banc Tec, Inc.
He is a Director of Banc Tec, Inc., and of ECCS, Inc. Mr. Faherty has been a
Director of the Company since 1995.
- --------------------------------------------------------------------------------
[PHOTO OF ALAN C. HASSELWANDER]
Alan C. Hasselwander, 64, is Past Chairman of the Board of Rochester Telephone
Corporation (now Frontier Corporation). From February 1992 to April 1992, he was
Chairman of the Company. From July 1984 to February 1992, he was President and
Chief Executive Officer of the Company. He has been a Director of the Company
since 1984.
- --------------------------------------------------------------------------------
[PHOTO OF ROBERT HOLLAND, JR.]
Robert Holland, Jr., 57, is the Chief Executive Officer of Workplace
Integrators, an office furniture distributor, and has held that position since
June 1997. From February 1995 until October 1996, he was Chief Executive
Officer of Ben and Jerry's Homemade, Inc., a manufacturer and marketer of
premium ice cream. From 1991 to 1995, he was Chairman and Chief Executive
Officer of Rokher-J, Inc., a business consulting firm, and from 1990 to 1991,
he was Chairman of Gilreath
2
<PAGE>
Manufacturing, Inc. He is also a Director of Mutual Life Insurance Company of
New York, Olin Corporation, Tricon Global Restaurants, Inc., Trumark Inc., and
A.C. Nielsen Co. Mr. Holland has been a Director of the Company since 1995.
- --------------------------------------------------------------------------------
[PHOTO OF DOUGLAS H. MCCORKINDALE]
Douglas H. McCorkindale, 58, is Vice Chairman and President of Gannett Co.,
Inc., a nationwide diversified communications company and has held that
position since September 1997. Prior to that he held the position of Vice
Chairman and Chief Financial and Administrative Officer. He is a Director of
Gannett Co., Inc., Continental Airlines, and a director or trustee of a number
of investment companies in the family of Prudential Mutual Funds. He has been a
Director of the Company since 1980.
- --------------------------------------------------------------------------------
[PHOTO OF DR. LEO J. THOMAS]
Dr. Leo J. Thomas, 61, retired in May 1996, from Eastman Kodak Company, a
manufacturer of imaging products. From September 1994 to May 1996, he held the
position of Executive Vice President and from September 1991 to September 1994,
he was Group Vice President, Eastman Kodak Company. He is a Director of John
Wiley & Sons, Inc. He has been a Director of the Company since 1984.
- --------------------------------------------------------------------------------
Information About The Board Of Directors
Board of Directors
The Board of Directors of the Company currently consists of eleven persons and
held sixteen meetings during 1997. All of the Directors attended at least 75% of
the total meetings of the Board and its committees which they were eligible to
attend.
Committees of the Board of Directors
The Board of Directors conducts its business through meetings of the Board and
through the activities of its committees. The standing committees of the Board
are the Audit Committee, the Committee on Management, the Committee on
Directors and the Executive Committee.
Audit Committee
The Audit Committee of the Board is currently composed of Jairo A. Estrada,
Chair; Brenda E. Edgerton and Daniel E. Gill. This committee reviews the scope
of audit activities and the financial reports of the Company, and reviews with
management significant and material matters which may result in either potential
liability to the Company or significant exposure to the Company. The Committee
also makes reports and recommendations with respect to audit activities,
findings, and reports of the independent public accountant and the internal
audit staff of the Company. The Audit Committee held six meetings in 1997.
Committee on Management
The present members of the Committee on Management are Dr. Leo J. Thomas, Chair;
Raul E. Cesan and Michael E. Faherty. This committee is responsible for
determining the compensation, benefits and perquisites of all senior executive
officers of the Company, with the exception of the Chief Executive Officer, and
for recommending the compensation, benefits and perquisites of the Chief
Executive Officer to the full Board after an evaluation of his performance. This
committee also develops and administers executive compensation plans and reviews
succession planning for the Company and other significant human resources
issues. The Committee on Management held twelve meetings in 1997.
Committee on Directors
The Committee on Directors serves as the nominating committee and is responsible
for corporate governance issues. The Committee currently consists of Patricia C.
Barron, Chair; Brenda E. Edgerton, Robert Holland, Jr., and Douglas H.
McCorkindale. The Committee reviews all matters relating to the selection,
qualification, evaluation, and compensation of members of the Board of Directors
and all nominees to the Board. The Committee on Directors held six meetings in
1997.
The Committee on Directors will consider nominations by shareowners. Such
suggestions should include sufficient biographical information so that the
Committee can appropriately assess a nominee's qualifications. This information
would include, at a minimum, the nominee's name and address, business and other
experience relevant to serving as a member of Frontier's Board of Directors, and
a listing of any other Boards on which the nominee may be a member. All
submissions should be sent by a letter addressed to the Corporate Secretary,
Frontier Corporation, 180 South Clinton Avenue, Rochester, New York 14646-0700.
Suggestions in connection with the 1999 Annual Meeting of Common Shareowners
must be received by October 30, 1998 in order to receive consideration.
Executive Committee
The present members of the Executive Committee are Douglas H. McCorkindale,
Chair; Patricia C. Barron, Joseph P. Clayton, Jairo A. Estrada, Alan C.
Hasselwander and Dr. Leo J. Thomas. The Chair of the Executive Committee serves
as the lead outside director. The Executive Committee possesses all of the
powers of the Board of Directors except those which, by law or the Company's By-
Laws, cannot be delegated to it. The Executive Committee met five times in 1997.
Compensation of Directors
Directors are paid an annual retainer and meeting fees. The annual retainer
consists of 1,200 shares of Frontier Corporation common stock. The meeting fee
is $1,500 for each Board and/or committee meeting attended. The annual retainer
for each committee chair consists of an additional 300 shares of Frontier
Corporation common stock. New Directors also receive an additional one-time
grant of 1,000 shares of Frontier Corporation common stock which they must hold
during their tenure on the Board. The lead director receives additional
compensation
3
<PAGE>
equal to the cash value of 1,200 shares of the Company's common stock. Mr.
McCorkindale served as lead director in 1997. It is currently expected that he
will continue to serve in this capacity in 1998. Directors who are employees of
the Company or its subsidiaries receive no annual retainer or meeting fees.
Directors may elect to defer payment of their fees to future years.
Pursuant to the Company's Directors' Stock Incentive Plan, Directors annually
receive an option to purchase 4,000 shares of the Company's common stock. These
options expire ten years after issuance, and the exercise price is the closing
price of the stock on the day the option was issued. Each outside Director
received a grant of options for 4,000 shares at an exercise price of $16.375 per
share on May 2, 1997.
Directors also receive cellular telephone equipment and service and other
nominal in-kind items.
- --------------------------------------------------------------------------------
Stock Ownership of Management, Directors
and Certain Beneficial Owners
In 1993, the Committee on Directors first established targets for the minimum
amounts of the Company's common stock which Directors should own. These targets
for stock ownership consider the length of a Director's tenure on the Board. The
1997 target for Directors with at least five years' service on the Board was the
beneficial ownership of approximately 6,800 shares of the Company's common
stock. All Directors with at least five years of service on the Board have met
that target. The new target beginning in 1998 for each outside Director is the
beneficial ownership of at least 12,000 shares of the Company's common stock.
Executive officers of the Company are also encouraged to own shares of the
Company. The recommended stock ownership level is based on each officer's
position in the organization and is a multiple of salary. Mr. Clayton and each
Executive Vice President has a stock ownership target which is the beneficial
ownership of Company common stock equal in value to four times his or her
respective salary. Each other Company executive has a target of beneficial
ownership of Company common stock, varying by salary grade, equal in value to
one to three times his or her respective salary. Each corporate officer is
expected to achieve his or her target by the later of January 1, 1999 or the
fifth anniversary of his or her appointment as an executive officer.
The following table sets forth the number of shares of the Company's common
stock beneficially owned by each Director and nominee, by each of the named
executive officers other than Mr. Bittner, and by Directors and officers of the
Company as a group as of February 10, 1998. Mr. Bittner is not included in the
following table because he died August 31, 1997; any shares beneficially owned
by him at the date of his death are now beneficially owned by his estate or
heirs. No Director, officer or nominee beneficially owns more than 1% of the
Company's outstanding shares of common stock. The group's aggregate holdings
constitute less than 1% of the Company's issued and outstanding common stock.
Management and Directors Stock Ownership Table
as of February 10, 1998
<TABLE>
<CAPTION>
Total
Common Stock Beneficial
Name Stock(1) Options(2) Ownership
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Directors and Nominees:
Patricia C. Barron 10,847 11,399 22,246
Raul E. Cesan 6,976 3,999 10,975
Joseph P. Clayton 309,163 0 309,163
Brenda E. Edgerton 9,395 10,449 19,844
Jairo A. Estrada 21,145 11,999 31,144
Michael E. Faherty 15,808 95,722 111,530
Daniel E. Gill 11,682 11,999 23,681
Alan C. Hasselwander(3) 38,027 9,265 47,292
Robert Holland, Jr. 7,319 3,777 11,096
Douglas H. McCorkindale 11,720 11,999 23,719
Dr. Leo J. Thomas 31,334 11,999 43,333
Named Executive
Officers:
Robert L. Barrett 108,688 149,999 258,687
Joseph P. Clayton 309,163 0 309,163
Jeremiah T. Carr 75,227 155,799 231,026
Louis L. Massaro 94,747 179,465 274,212
Donna L. Reeves-Collins 5,687 28,066 33,753
Directors and Executive
Officers as a Group
(18 persons) 781,031 793,401 1,574,432
- --------------------------------------------------------------------------------
</TABLE>
(Footnotes to Management and Directors Stock
Ownership Table)
(1) Includes all shares which each Director, nominee or officer directly, or
through any contract, arrangement, understanding, relationship or otherwise, has
or shares the power to vote or to direct the voting of such shares or to dispose
or to direct the disposition of such shares. Amounts in this column include both
vested and unvested restricted stock granted to selected executive officers.
(Please see Summary Compensation Table footnote 3 at page 10.) However, these
amounts do not include shares which each such person has the right to acquire
pursuant to options or other rights.
(2) Includes all shares which such persons have the right to acquire within the
sixty days following February 10, 1998, pursuant to options or other rights.
These amounts do not include shares which such persons have the right to acquire
more than sixty days after that date.
(3) Includes 1,400 shares owned by Mr. Hasselwander's spouse. Mr. Hasselwander
disclaims beneficial ownership of these shares.
4
<PAGE>
Set forth below is the name, address and stock ownership of the only person or
group of persons known by the Company to own beneficially more than 5% of the
outstanding shares of common stock.
Stock Ownership of Certain Beneficial Owners
as of December 31, 1997
<TABLE>
<CAPTION>
Number of
Name and Address Shares of Percent of
of Beneficial Owner Common Stock Class
- --------------------------------------------------------------------------------
<S> <C> <C>
Delaware Management
Holdings, Inc. (1) 12,929,159 7.88%
2005 Market Street
Philadelphia, Pennsylvania 19103
- --------------------------------------------------------------------------------
</TABLE>
(1) Delaware Management Holdings, Inc., filed with the Securities and Exchange
Commission a Schedule 13G, dated February 9, 1998, stating that it beneficially
owned in the aggregate 12,929,159 shares of the Company's common stock in its
capacity as the parent holding company of Delaware Management Company, Inc. In
its Schedule 13G filing, Delaware Management Holdings, Inc., also disclosed that
with respect to the shares it beneficially owns, it has sole voting power with
respect to 8,839,300 shares, shared voting power with respect to 0 shares, sole
dispositive power with respect to 12,267,459 shares, and shared dispositive
power with respect to 661,700 shares.
- --------------------------------------------------------------------------------
Section 16(a) Beneficial Ownership
Reporting Compliance
The Company's Directors, executive officers and shareowners holding in excess of
10% of the common stock are required to file reports with the Securities and
Exchange Commission and the New York Stock Exchange, with copies to the Company,
concerning ownership of and transactions in the Company's common stock. Based
solely on those reports furnished to the Company and related information, the
Company believes that all such filing requirements for 1997 were complied with
in a timely fashion.
- --------------------------------------------------------------------------------
Report of Committee on Directors
The Company believes that good corporate governance supports the financial
performance of the Company and serves the best interests of the shareowners.
Your Board formed the Committee on Directors in 1993 to focus the Board's
attention on corporate governance and to serve as the nominating committee.
Since then, the Committee initiated several actions designed to increase the
independence of the Board and to enhance the alignment of Directors' interests
with those of shareowners. Many of these actions were already reported to you in
prior proxy statements. During 1997, the Committee continued its efforts to
improve the Company's corporate governance.
The Board adopted a set of Governance Guidelines in 1994. The Guidelines
establish the framework and standards for Board operation, are reviewed annually
and are described generally here.
The Governance Guidelines set the size of the Board to be between 9 and 14
members, each of whom is elected for a one-year term. We expect 100 percent
attendance with a minimum permitted attendance of 75 percent of the meetings.
The minimum number of Board meetings held each year is 5 and, for each
Committee, is 2.
The Board is composed of primarily outside Directors and all Committees,
except the Executive Committee, are composed entirely of independent outside
Directors. A majority of the Executive Committee are independent outside
Directors. Retirement age is 70. If a Director's primary job changes, he or she
submits a resignation to the Committee on Directors which, after consideration,
recommends whether or not to accept it. Retirement is considered a job change in
the context of this provision. The Chair of the Executive Committee serves as
the lead outside director. In recognition of the additional responsibilities of
the lead director function, this Committee recommended that in 1997, and again
in 1998, the lead director receive additional compensation in an amount equal to
the cash value of 1,200 shares of the Company's common stock. This additional
compensation was approved by the full Board of Directors.
The Committee monitors the stock ownership of the members of the Board and
reports that all current outside Board members have met their respective stock
ownership target in effect at the end of 1997. At the end of 1997, the Committee
reviewed the stock ownership target. Rather than continuing the target of four
times the average annual compensation of a Director, the Committee increased the
target to be reached over a period of five years to 12,000 shares, effective
January 1, 1998.
In 1996, the Committee reviewed Board member compensation and determined that
a major shift was desirable to more closely align the Directors' interests with
those of the shareowners. Thus, the Committee recommended that beginning with
the 1996 compensation package, the full retainer paid to each Board member and
each Chair of a Committee would be in the form of shares of Frontier common
stock. The Board approved this plan, and subsequently the shareowners approved
this plan at the April 24, 1996 Annual Meeting of shareowners. This plan
remains in effect for 1998.
In 1995, the Committee utilized a formal system of evaluation of each Director
in its process of nomination of the slate of nominees submitted to shareowners
for a vote at the Annual Meeting of Shareowners. In 1996, the Committee
introduced a full peer evaluation process which provided feedback to the
individual Directors and to the Board as a whole with respect to strengths of
the Board and areas for improvement. This peer evaluation process will be
followed on a two-year cycle. In alternate years, the Board evaluates its
effectiveness as a whole in a number of areas of the Board's responsibility
including the protection of shareowners' interests, CEO performance, strategic
planning and management succession.
5
<PAGE>
Your Committee on Directors will continue to review annually the governance
standards and recommend improvements in governance to the full Board of
Directors. A complete copy of the Governance Guidelines is available from the
Corporate Secretary.
Respectfully submitted,
The Committee on Directors
Patricia C. Barron (Chair)
Brenda E. Edgerton
Robert Holland, Jr.
Douglas H. McCorkindale
January 26, 1998
- --------------------------------------------------------------------------------
Report of Committee on Management
Compensation Philosophy and Policy
The Committee on Management believes that it is imperative for Frontier to offer
an aggressive, competitive compensation program to motivate employees to build
wealth for shareowners. The executive compensation program is designed to reward
employees whose results enable the Company to achieve its vision. The components
of the program are:
. Base Salary
. Annual Incentive Plan (Bonus)
. Stock Incentive Plan
The executive compensation program is structured to attract and retain the
highest caliber executives who are compensated based on the Company's
consolidated performance and the individual's contribution. The program is
designed to be competitive with compensation programs offered by comparable
employers. The Company retained William M. Mercer, Inc. to review its executive
compensation program on an annual basis. Information from this consulting firm,
other independent studies and public information concerning salary, bonus and
long-term incentive payments paid by companies in the telecommunications and
related industries are used by this Committee to determine an appropriate
compensation package for the Company's executives.
The analysis includes information from a peer group of twenty-eight companies
in the telephone, long distance, cable television, cellular and information
technology industries. This group includes most of the companies reported in the
Standard & Poor's Telephone Index and all of the companies reported in the
Standard & Poor's Long Distance Index, together with additional companies. The
Company's policy is to establish benchmarks at the median and 75th percentile of
the comparative companies and to reward results based on performance. On a
comparative basis, the base salary of the Company's CEO and its other
executives, on average, would be considered within the third quartile of this
group of peer companies.
Significant Actions During The Year
In early 1997, Mr. Bittner, then CEO, was diagnosed and treated for a malignant
brain tumor. At the time, the severity of his condition and his ability to
continue to execute the duties of his office were uncertain. Therefore, this
Committee immediately took two actions. First, action was taken to stabilize
the senior executive team during Mr. Bittner's illness. For key senior
executives, this Committee approved stock option grants and grants of
restricted stock with vesting tied to stock price performance targets and
passage of time. Restricted stock awards expire on February 28, 2000. Each
executive must continue to be employed by the Company and specified stock price
targets must be achieved by certain dates for vesting to occur. Executives who
leave the Company for any reason other than retirement, death or disability
forfeit all unvested awards. No greater than one-third of an executive's award
can be paid in either 1998 or 1999. On the grant date the Company's stock price
was $21.875 per share. The stock price performance vesting criteria for the
first one-third of the grant is the achievement of at least a $24.00 stock
price for twenty business days in a thirty business day period. Subsequent
thirds will vest upon achievement, for the same minimum duration, of stock
prices of $26.00 and $29.00, and the passage of time.
Coincident with these actions, a search was begun to identify a Chief
Operating Officer (COO). A candidate was sought who could step in and run the
day-to-day operations and who also possessed the capabilities to move up to the
CEO position. In June, Mr. Clayton was hired to fulfill this role. In August,
shortly preceding Mr. Bittner's death, Mr. Clayton was appointed CEO.
During 1997, Mr. Massaro indicated a desire to retire. In order to allow
adequate time to identify and appoint his successor and to provide an orderly
transition of his duties, the Company and Mr. Massaro entered into a Service
Continuation Agreement. This agreement defines the term of his employment and
the consulting services to be provided to Frontier during the first year
following his retirement.
In October, Mr. Clayton restructured the executive group to better focus the
Company on critical goals for 1998 and beyond. Mr. Bennis, formerly Executive
Vice President, resigned and Mr. Gregory, formerly Senior Vice President,
retired. At that time Ms. Reeves-Collins was promoted to Senior Vice President
responsible for sales and David Carey, an additional Senior Vice President
responsible for marketing, was hired.
In January 1998, the Committee negotiated, with the Board's approval, a new
employment agreement with Mr. Clayton to reflect his duties as Chief Executive
Officer. The term of the agreement is for three years and defines the elements
of his compensation.
6
<PAGE>
Base Salary
The salaries of the executive officers are based on the executive's performance
and an analysis of base salaries paid executive officers having similar
responsibilities in other companies. This analysis included the companies in the
peer group of twenty-eight publicly-traded companies together with additional
companies from other industries with similar revenues and/or asset values. Mr.
Clayton's base salary was set when he was hired in June 1997 and was based on
his responsibilities as Chief Operating Officer as well as his capabilities to
assume the role of Chief Executive Officer. No adjustment was made to his salary
either upon assuming the chief executive role or later in 1997. The base
salaries of the other executive officer positions, other than that of the Chief
Executive Officer, were set during 1997 and are commensurate with the respective
position's responsibilities. This Committee continues to review executive salary
levels in order to ensure competitiveness.
In addition to benchmarking comparative companies' salaries, salary levels for
the executives were based upon a subjective assessment of each individual's
performance and responsibilities as well as overall corporate performance as
measured by actual earnings per share and revenue versus pre-established
targets, strategic goals and business and individual performance. No relative
weights are attributed to any specific measurement factors.
Annual Incentive Plan (Bonus)
The Company's annual incentive plan is a bonus plan designed to provide
performance-based compensation awards to executives for achievement during the
past year. For executive officers, annual incentive awards are a function of
individual performance and consolidated corporate results. Business unit
performance is also a component of the annual incentive plan for certain of
those employees involved in line operations below the executive officer level.
All participants are subject to a discretionary adjustment, either positive or
negative, based on individual performance. The specified qualitative and
quantitative criteria employed by the Committee in determining annual incentive
awards vary individually and from year to year. These criteria, or targets, are
established as a means of measuring executive performance. The corporate target
for 1997 was an equally weighted earnings per share and revenue target
established by this Committee as an incentive to improve the financial
performance of the firm and thus improve long-term stock performance.
Performance objectives and associated payout opportunities were established at
the beginning of the year for executive officers other than Mr. Clayton. The
objectives are identified as threshold, standard and premier targets with
standard performance yielding payouts at the median level competitively. Actual
1997 corporate performance was below the threshold level, and accordingly, there
was no bonus payout for those executives. Mr. Clayton joined Frontier in June
1997, and as part of his initial compensation package, he was guaranteed an
incentive bonus of $300,000 for 1997. In conjunction with his appointment as
Chief Executive Officer in August 1997, the guarantee amount was increased to
$350,000. Payment of this amount was made in early 1998. No guarantee exists for
1998 or beyond.
Stock Incentive Plan
This Committee believes that stock-based plans are an important component of
executive compensation programs because they tie long-term compensation directly
to the interests of shareowners. The Company's Management Stock Incentive Plan
is designed to align executive compensation with long-term performance of the
Company's stock. Stock options issued in 1997 do not expire until 2007, and the
exercise price is the closing price of the stock on the day the option was
granted. This Committee makes a subjective determination of the specific stock
option grant to be awarded to each executive officer. The factors considered by
the Committee in making this determination are:
(a) the executive officer's past performance on previously set objectives;
(b) his or her expected future contribution to the long-term strategic goals and
objectives of the Company; and
(c) industry practices.
No relative weights are attributed to any of these factors. All executive
officers of the Company received options in 1997 based on their position in the
Company, their contribution to the achievement of the Company's long-term
objectives as assessed by Committee members based on their experience with the
executive officers, and upon the recommendation of the Chief Executive Officer.
Upon the recommendation of this Committee, Mr. Bittner received stock option
grants based upon these factors as well. Mr. Clayton and other executive
officers who joined Frontier during 1997 received stock option grants based upon
their expected future contributions to the long-term strategic goals and
objectives of the Company as assessed by Committee members.
Restricted stock awards were granted to incent and retain certain of the named
executive officers. The awards were issued to them based upon their expected
contribution to the achievement of the Company's long-term objectives as
assessed by Committee members based on their experience with the executive
officers, and upon recommendation of Mr. Bittner, the then Chief Executive
Officer. Restricted stock awards issued to them in 1997 carry the terms and
conditions as presented under "Significant Actions During The Year" on page 6.
Upon the recommendation of this Committee, the Board of Directors awarded Mr.
Bittner restricted stock under these terms as well. Under the terms of the
Management Stock Incentive Plan, should these performance targets be achieved
prior to the restricted stock expiration on February 28, 2000, a pro rata
portion of the shares will be awarded to Mr. Bittner's estate. The performance
target associated with the first one-third of the overall grant was met on
January 21, 1998 and vested on February 4, 1998. Mr. Bittner's estate will
receive its pro rata distribution of 19,444 shares during February 1998.
Other Actions
The Committee believes that stock-based programs provide the best long-term
incentives, are excellent motivators and better align the efforts of employees
with the objectives of the shareowners. The Committee had previously established
stock ownership guidelines for the Company's executives. These guidelines are
described elsewhere in this proxy statement.
7
<PAGE>
Section 162(m) of the Internal Revenue Code limits the tax deduction to
$1 million per person for compensation paid to the five highest paid executive
officers unless certain requirements are met. The Management Stock Incentive
Plan, specifically as it relates to performance-based restricted stock, is
designed to comply with Section 162(m) requirements. The Committee favors a
pay-for-performance compensation program and intends to continue to review
executive compensation plans in consideration of the regulation.
No member of this Committee is a former or current officer or employee of the
Company or any of its subsidiaries.
Respectfully submitted,
The Committee on Management
Dr. Leo J. Thomas (Chair)
Raul E. Cesan
Michael E. Faherty
January 26, 1998
- --------------------------------------------------------------------------------
Performance Graph
The following graph charts the Company's cumulative total shareowner return
performance against the Standard & Poor's Telephone Index, the Standard &
Poor's Long Distance Index and the Standard & Poor's 500 Index. A variety of
factors may be used in order to assess a corporation's performance. This
Performance Graph, which reflects the Company's total return against the
selected peer group, reflects one such method. The performance of the Standard
& Poor's Telephone Index and the Standard & Poor's Long Distance Index are
weighted by the stock market capitalization of the companies within each of
these peer groups. These same comparisons have been presented in the last two
proxy statements.
[GRAPH APPEARS HERE]
FIVE YEAR CUMULATIVE RETURNS
0 1993 1994 1995 1996 1997
- -------------------------------------------------------------------------------
(circle) Frontier Corporation $100.00 $128.57 $127.44 $180.06 $142.24 $154.88
(square) S&P 500 $100.00 $110.10 $126.82 $174.54 $212.95 $285.42
(diamond) S&P Long Distance $100.00 $111.53 $111.41 $150.78 $151.17 $212.23
(delta) S&P Telephone $100.00 $110.24 $101.48 $152.25 $153.24 $212.24
- -------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
Compensation of Company Management
We have included the following tables and other information to help you
understand the compensation of the Company's executives. These tables reflect
the components of compensation paid the executive officers of Frontier
Corporation. Specifically, these include salary, bonus, stock options and a
long-term incentive plan. The Company does not provide its executives with stock
appreciation rights.
The Report of the Committee on Management of the Board of Directors appears on
pages 6 through 8 of this Proxy Statement. This Report discusses the factors
taken into consideration in setting Mr. Bittner's and Mr. Clayton's compensation
and the compensation of the other executive officers. A Performance Graph
showing the performance of the Company's stock as compared to the Standard &
Poor's 500 Index, the Standard & Poor's Telephone Index, and the Standard &
Poor's Long Distance Index appears on page 8 of this Proxy Statement.
Summary Compensation Table
The following table provides a summary of compensation paid to the former CEO,
the current CEO and the other four most highly compensated executive officers
of the Company for services rendered to the Company and/or its subsidiaries
over the past three fiscal years. The indicated titles are those held by each
named executive officer as of February 10, 1998.
<TABLE>
<CAPTION>
Long Term
Compensation
- ---------------------------------------------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
- --------------------------------------------------------------------------------------------------------------
Other Securities
Annual Underlying All Other
Name Compen- Options/ LTIP Compen-
and Principal Salary Bonus sation SARs Payouts sation
Position Year ($) ($) ($)(2) (#) ($)(3) ($)(4)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
R. L. Bittner 1997 $508,333 $ 0 $ 0 50,000 N/A $580,853
Former Chairman and CEO 1996 $700,000 $ 0 $ 0 175,000 N/A $ 11,276
Frontier Corporation 1995 $575,000 $660,000 $ 0 502,000 $222,850 $ 42,703
J. P. Clayton (1) 1997 $364,583 $350,000 $ 0 500,000 N/A $475,535
CEO and President 1996 N/A N/A N/A N/A N/A N/A
Frontier Corporation 1995 N/A N/A N/A N/A N/A N/A
R. L. Barrett (1) 1997 $322,500 $ 0 $ 0 50,000 N/A $ 4,638
Executive Vice President 1996 $231,250 $ 0 $84,670 200,000 N/A $246,528
Frontier Corporation and 1995 N/A N/A N/A N/A N/A N/A
President--Network
Systems and Services
J. T. Carr 1997 $319,084 $ 0 $ 0 50,000 N/A $ 3,825
Executive Vice President 1996 $270,000 $ 0 $ 0 100,000 N/A $ 5,226
Frontier Corporation and 1995 $258,033 $208,466 $ 0 86,400 $ 67,182 $ 8,152
President--Frontier
Operations
L. L. Massaro (1) 1997 $406,248 $ 0 $ 0 150,000 N/A $ 5,064
Executive Vice President 1996 $285,000 $ 0 $ 0 100,000 N/A $ 6,997
and Chief Financial and 1995 $241,375 $219,199 $ 0 126,400 $ 68,127 $ 17,234
Administrative Officer
Frontier Corporation
D. L. Reeves-Collins (1) 1997 $262,841 $ 65,520 $18,205 70,500 N/A $334,203
Senior Vice President 1996 $146,035 $ 67,388 $ 0 25,000 N/A $ 42,868
and President--Frontier Sales 1995 $110,300 $ 81,270 $ 0 15,000 $ 33,882 $ 3,750
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Footnotes to Summary Compensation Table)
(1) Mr. Clayton became an employee on June 9, 1997 and was named President and
Chief Operating Officer effective June 16, 1997 and Mr. Barrett was named
Executive Vice President effective March 26, 1996. Prior to those dates, neither
had received any remuneration for services to Frontier Corporation or any of its
subsidiaries. See also Long-Term Incentive Plans - Awards in Last Fiscal Year
Table at page 11. The amount reflected as 1997 salary for Mr. Massaro includes a
payment of $100,000 in connection with his Service Continuation Agreement. The
amount reflected as 1997 salary for Ms. Reeves-Collins includes a cost-of-living
adjustment of $84,706 paid to her in connection with her relocation, at that
time, to California in her position as Frontier Corporation's Vice-President-
Western Region. The amounts shown as bonus for Ms. Reeves-Collins in 1996 and in
1997 reflect commissions paid to her in connection with her prior sales
management positions with Frontier's long distance business unit.
9
<PAGE>
(2) The amount reported in this column for 1996 includes $84,670 paid to Mr.
Barrett to offset income tax liabilities incurred by him. The amount reported in
this column for 1997 includes $18,205 paid to Ms. Reeves-Collins to offset
income tax liabilities incurred by her in 1996 and 1997.
(3) The Performance Unit Plan was discontinued in 1994. The 1995 Performance
Unit Plan awards were the final payouts under that plan. In 1995, certain of the
named executives received awards of restricted stock for which vesting is
subject to performance criteria as well as the passage of time and continued
employment. Specifically, Mr. Bittner was awarded 100,000 restricted shares, Mr.
Massaro was awarded 20,000 restricted shares, and Mr. Carr was awarded 10,000
restricted shares. In 1996, Mr. Barrett was awarded 50,000 restricted shares
under this plan. In 1997 Mr. Bittner was awarded 100,000 additional restricted
shares and Messrs. Barrett, Carr and Massaro were each awarded 50,000 additional
restricted shares. The first one-third of the restricted share grants issued in
1997 vested on February 4, 1998. No other restricted share grants have vested.
(4) "All Other Compensation" includes imputed income from term life insurance
coverage and the Company's contributions to both the tax-qualified 401(k) and
nonqualified defined contribution plans. For 1997, the dollar value of term life
insurance coverage premiums paid by the Company for the benefit of the named
executive officers was $25 for Mr. Bittner, $25 for Mr. Barrett, $13 for Mr.
Clayton, $25 for Mr. Carr, $25 for Mr. Massaro and $25 for Ms. Reeves-Collins.
The Company's 1997 contributions on behalf of the named executive officers to
the tax-qualified 401(k) and nonqualified defined contribution plans,
respectively, were as follows: $2,717 and $4,148 for Mr. Bittner; $2,675 and
$1,938 for Mr. Barrett; $0 and $4,823 for Mr. Clayton; $3,800 and $0 for Mr.
Carr; $2,581 and $2,458 for Mr. Massaro and $3,009 and $1,501 for Ms.
Reeves-Collins. For Mr. Clayton and Ms. Reeves-Collins, "All Other Compensation"
also includes the reimbursement of relocation fees in the respective amounts of
$470,699 and $329,668. For Mr. Bittner, who died on August 31, 1997, "All Other
Compensation" includes forgiven loan principal and interest in the amount of
$309,344 and a payment to his estate in the amount of $264,619 representing 86
days of banked vacation.
The following companion tables to the Summary Compensation Table list the stock
options granted during the 1997 fiscal year to the named executive officers,
their stock option exercises in 1997 and the aggregate options they held at the
end of 1997, long-term incentive plan restricted stock awards granted during
1997, and the estimated retirement benefits which would be paid to them at age
65.
Option/SAR Grants in Last Fiscal Year
The following table of Individual Grants includes a column designated as "Grant
Date Present Value." The calculations in this column are based on the
Black/Scholes Present Value Pricing Methodology. This is used to determine the
theoretical value of a stock option. The parameters used in this model are the
exercise or strike price, the term of the option or term to expiration, the
underlying stock price, the weekly volatility of the stock, the prevailing
interest rate, and the stock's dividend rate.
Individual Grants in 1997
<TABLE>
<CAPTION>
% of Total
Number of Options/SARs
Securities Underlying Granted to
Options/SARs Employees in Exercise or Expiration
Granted Fiscal Year Base Price Date Grant Date Value
Grant Date
Name (#)(1) ($/Share) Present Value ($)(4)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
R. L. Bittner(3) 50,000 1.42% $21.8750 2/04/07 $ 377,700
J. P. Clayton(3) 500,000 14.21% $19.4375 6/09/07 $3,194,500
R. L. Barrett(3) 50,000 1.42% $21.8750 2/04/07 $ 377,700
J. T. Carr(3) 50,000 1.42% $21.8750 2/04/07 $ 377,700
L. L. Massaro(3) 50,000 1.42% $21.8750 2/04/07 $ 377,700
100,000 2.84% $23.3125 11/17/07 $ 753,900
D. L. Reeves-Collins(2) (3) 20,500 0.58% $21.8750 2/04/07 $ 154,851
50,000 1.42% $23.5625 10/13/07 $ 372,300
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The options granted under the Management Stock Incentive Plan have the
following material terms: exercise price is the market price (based on the
closing price of the Company's common stock on the New York Stock Exchange) on
the date of the option grant; 1/3 of the options granted may be exercised
commencing one year following the grant date, a second 1/3 may be exercised
commencing two years following the grant date, and the remaining 1/3 may be
exercised commencing three years following the grant date. Options may not be
transferred other than by will or the laws of descent and distribution. An
option may be exercised upon written notice to the Company accompanied by
payment in full for the shares being acquired. In the event of a "change in
control" as defined by the Management Stock Incentive Plan, all options become
immediately vested and exercisable.
10
<PAGE>
(2) The Options granted Ms. Reeves-Collins on February 4, 1997, were pursuant to
the Employees' Stock Option Plan and have the following material terms: exercise
price is the market price (based on the closing price of the Company's common
stock on the New York Stock Exchange) on the date of the option grant; all of
the options granted may be exercised commencing two years following the grant
date; options may not be transferred other than by will or the laws of descent
and distribution. An option may be exercised upon written notice to the Company
accompanied by payment in full for the shares being acquired. In the event of a
"change in control" as defined by the Employees' Stock Option Plan, all options
become immediately vested and exercisable.
(3) Options were granted to Mr. Clayton on June 9, 1997, at an exercise price
equal to Frontier Corporation's closing stock price on that date of $19.4375 per
share. Options were granted to all other named executive officers on February 4,
1997, at an exercise price equal to Frontier's closing stock price on that date
of $21.8750 per share. Ms. Reeves-Collins received an additional grant of
options on October 13, 1997, at an exercise price equal to Frontier's closing
stock price on that date of $23.5625. Mr. Massaro received an additional grant
of options effective November 17, 1997, at an exercise price equal to Frontier's
closing stock price on that date of $23.3125.
(4) The Black/Scholes pricing model is a methodology by which to determine the
theoretical value of a stock option. The parameter assumptions used in the model
are as follows:
<TABLE>
<CAPTION>
Expected Dividend
Grant Exercise Option Underlying Risk Free Weekly Yield
Date Price Term Stock Price Rate Volatility (Weekly)
<S> <C> <C> <C> <C> <C> <C>
2/4/97 $21.8750 10 yrs. $21.8750 6.420% .309 3.215%
6/9/97 $19.4375 10 yrs. $19.4375 6.490% .322 3.694%
10/13/97 $23.5625 10 yrs. $23.5625 6.070% .322 3.694%
11/17/97 $23.3125 10 yrs. $23.3125 6.170% .329 3.754%
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Unexercised Underlying In-the-Money Options/SARs
Shares Options/SARs at FY End at FY End(2)
Acquired Value -----------------------------------------------------------
On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($)(1) (#) (#) ($) ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
R. L. Bittner 0 N/A 543,799 334,001 $727,675 $ 178,500
J. P. Clayton 0 N/A 0 500,000 $ 0 $2,281,250
R. L. Barrett 0 N/A 66,666 183,334 $ 0 $ 106,250
J. T. Carr 0 N/A 130,333 145,467 $196,475 $ 124,950
L. L. Massaro 0 N/A 153,999 258,801 $181,663 $ 193,700
D. L. Reeves-Collins 0 N/A 46,400 70,550 $ 43,150 $ 65,438
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Aggregate market value of the shares acquired or covered by the option less
the aggregate exercise price.
(2) Options are valued at the market value of Frontier Corporation common stock
at December 31, 1997, (closing price of $24.00) less the per share option
exercise price, multiplied by the number of exercisable/unexercisable options.
Long-Term Incentive Plans - Awards in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Performances or
Shares, Units Other Period Until
or Other Maturation or
Name Rights (#) Payout
- -----------------------------------------------------------------------
<S> <C> <C>
R. L. Bittner 100,000 (1)
J. P. Clayton 0
R. L. Barrett 50,000 (1)
J. T. Carr 50,000 (1)
L. L. Massaro 50,000 (1)
D. L. Reeves-Collins 0
- -----------------------------------------------------------------------
</TABLE>
(1) Messrs. Bittner, Barrett, Carr and Massaro each were awarded shares of
restricted stock on February 4, 1997, under the Management Stock Incentive Plan
which is a long-term incentive plan. Vesting is subject to performance criteria
as well as the passage of time and continued employment. No greater than one-
third of the award can be paid in either 1998 or 1999. The first third vested
February 4, 1998, upon achievement of at least a $24.00 stock price for twenty
business days in a thirty business day period. The remaining two-thirds will
vest upon the achievement of stock prices of $26.00 and $29.00 for twenty
11
<PAGE>
business days in a thirty business day period. Unvested restricted share awards
expire on February 28, 2000. Recipients of restricted shares have full voting
rights on the shares and are entitled to receive accumulated dividends when the
shares vest. In the event of death, disability, or retirement, individuals (or
their estates) will be entitled to a distribution of restricted shares upon the
achievement of the vesting criteria, prorated to reflect their periods of active
participation during the grant term. In the event of a "change in control" as
defined by the Management Stock Incentive Plan, all restricted shares become
immediately vested.
Pension Plans
The following table shows the estimated annual benefits payable upon retirement
at age 65 to individuals in specified remuneration and years of service
classifications. Furthermore, the amounts set forth are neither subject to any
deduction for Social Security benefits or any other offsets nor adjusted to
reflect maximum allowable benefits under the Internal Revenue Code.
Certain of the Company's officers are participants in the Company's Pension
Plan for Non-Bargaining Employees (The "Management Pension Plan") as
supplemented by a Supplemental Management Pension Plan ("SMPP"). Of those listed
in the Summary Compensation Table, Messrs. Bittner, Carr, and Massaro and Ms.
Reeves-Collins participate in these Plans. The annual aggregate pension benefit
for an officer under these Plans is based upon several factors and is largely
determined by the number of years of employment multiplied by a percentage of
the officer's three consecutive years of highest average annual compensation
preceding retirement.
Both the Company's Management Pension Plan and the SMPP have been amended and
were frozen effective December 31, 1996. Benefit calculations under both pension
plans were increased by 20% for all plan participants who had five or more years
of service under the Plans by December 31, 1996. Additionally, early retirement
requirements were reduced by three years of service and three years of age as
final enhancements to both plans.
Pension Plan Table
<TABLE>
<CAPTION>
Years of Service/
Remuneration (15) (20) (25) (30) (35)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$250,000 67,648 90,197 112,746 135,295 157,844
300,000 81,508 108,677 135,846 163,015 190,184
350,000 95,368 127,157 158,946 190,735 222,524
400,000 109,228 145,637 182,046 218,455 254,864
450,000 123,088 164,117 205,146 246,175 287,204
500,000 136,948 182,597 228,246 273,895 319,544
550,000 150,808 201,077 251,346 301,615 351,884
600,000 164,668 219,557 274,446 329,335 384,224
650,000 178,528 238,037 297,546 357,055 416,564
700,000 192,388 256,517 320,646 384,775 448,904
750,000 206,248 274,997 343,746 412,495 481,244
800,000 220,108 293,477 366,846 440,215 513,584
850,000 233,968 311,957 389,946 467,935 545,924
900,000 247,828 330,437 413,046 495,655 578,264
950,000 261,688 348,917 436,146 523,375 610,604
1,000,000 275,548 367,397 459,246 551,095 642,944
1,050,000 289,408 385,877 482,346 578,815 675,284
1,100,000 303,268 404,357 505,446 606,535 707,624
- -----------------------------------------------------------------------------
</TABLE>
Messrs. Clayton, Barrett, Carr, and Massaro and Ms. Reeves-Collins each have
executive contracts which may pay a benefit in the event of a "Change in
Control" of the Company. As an executive officer, Mr. Bittner also had such a
contract. These contracts are explained in detail on page 13 of this Proxy
Statement. With the exception of Messrs. Clayton and Barrett, each of them also
participates in the Company's Pension Plan. Under SMPP, the service factor would
include, subject to certain limitations, the amount of service for which payment
is made to each of them under their respective executive contract.
The SMPP also provides that in the event of a Change in Control of the
Company, the Board may not terminate a participant's benefit and the Employees'
Benefit Committee may not change prior decisions regarding a participant's
service factor.
Effective January 1, 1994, the Company established a Supplemental Executive
Retirement Plan ("SERP") which covers Messrs. Carr and Massaro plus three other
current executives and also covered Mr. Bittner during his lifetime. The Plan
has an accrual and vesting schedule based on years of service and age. A maximum
benefit of 60% of final compensation will be paid to an executive retiring at
age 50 or older with 30 or more years of service. Payments made under the
Company's Management Pension Plan and the Supplemental Management Pension Plan
are included in determining the ultimate benefit payable under the SERP.
However, in order to qualify for the SERP benefit, a covered executive must be
at least 50 years of age. Executive officers who are not at least 50 years old
when they retire would only receive the retirement benefits set forth in the
above Pension Plan Table and would receive no SERP benefit.
12
<PAGE>
Effective December 31, 1999, the SERP will be frozen with no enhancements.
Neither Messrs. Clayton and Barrett nor Ms. Reeves-Collins are covered by the
SERP.
For the purpose of the Management Pension Plan, annual compensation includes
all taxable W-2 compensation plus deferred compensation. For the purpose of SMPP
and the SERP, annual compensation is the same as that given in the Salary and
Bonus columns of the Summary Compensation Table for the named executive
officers. The number of years of employment of such individuals for the purposes
of these Plans currently are as follows: Mr. Carr - 28, Ms. Reeves-Collins - 14
and Mr. Massaro - 30. Messrs. Clayton and Barrett are not covered by these
Plans, have no years of employment for purposes of these Plans, and will receive
no benefits under these Plans. At Mr. Bittner's death on August 31, 1997, he had
35 years of service for purposes of these Plans.
Ms. Reeves-Collins has not yet attained the age and years of service criteria
to be retirement eligible. If her employment ended as of the current date, Ms.
Reeves-Collins would receive a deferred pension based upon the amount reflected
in the Pension Plan Table. Since Messrs. Carr and Massaro have each attained the
age of 50 years and have respectively 28 and 30 years of service credit, each is
entitled to a full pension based on the amount reflected in the Pension Plan
Table. Assuming compensation at his January 31, 1998 level, if Mr. Carr were to
retire, he would additionally receive an annual SERP benefit of $35,938. Mr.
Massaro retired effective February 26, 1998, and will receive an annual SERP
benefit of $52,548. Mr. Bittner participated in all of the above plans, but is
now deceased. Under the terms of the Plans, his surviving spouse is entitled to
receive an amount equal to what his benefit would have been had he retired as of
his date of death.
Employment Contracts
The Company has entered into employment agreements with certain of its executive
officers. Effective August 16, 1995, the Company entered into three-year
employment agreements, with provisions for annual renewals, with Messrs.
Bittner, Carr and Massaro. Effective March 26, 1996, the Company also entered
into a three-year employment agreement, with a provision for annual renewals,
with Mr. Barrett. Additionally, the Company entered into a similar agreement on
October 13, 1997, with Ms. Reeves-Collins. Each of these agreements provides for
specific compensation, duties and terms and conditions of employment. Each
agreement also provides that, in the event of a change in control (as defined in
the agreement) which is followed within three (3) years by termination of
employment under certain circumstances, the employee will be entitled to all
accrued compensation, a pro rata bonus, a cash severance payment (as determined
under the agreement), the cash value of certain retirement amounts (if
applicable and as determined under the agreement) and continuation for three
years of certain health and life insurance benefits. Additionally, in the event
any of these amounts are determined to trigger an Excise Tax (as defined in the
agreement), the employee may also be entitled to a Gross-Up Payment (also as
defined in the agreement).
Effective January 1, 1998, the Company entered into an employment agreement
with Mr. Clayton. Mr. Clayton's agreement has a three-year term with annual
renewals and specifies the duties of his employment. It also provides for an
annual base compensation of $725,000, a short-term incentive as established
under the Company's Executive Compensation Program, a grant of 200,000 stock
options, and the grant of a total of 300,000 restricted shares with vesting tied
to specific performance criteria linked to an increase in the Company's stock
price and the passage of time. Of this grant, 200,000 restricted shares will
vest over three years, assuming achievement of certain specific stock price
appreciation targets. The performance criteria for the remaining 100,000
restricted shares is a specific stock price appreciation target to be achieved
over 12, 18 or 24 months. Assuming achievement of these stock price appreciation
targets, the 100,000 restricted shares will vest five years following the grant
date. Mr. Clayton's employment agreement also contains termination and change-
in-control provisions substantially similar to the agreements of the other named
executive officers. This agreement superseded a prior agreement which was
effective June 9, 1997, addressed Mr. Clayton's responsibilities as President
and anticipated that he would eventually assume the position of Chief Executive
Officer.
During 1997, Mr. Massaro indicated a desire to retire. The Company and Mr.
Massaro agreed that it was in the best interests of Frontier to ensure an
orderly transition of his duties and responsibilities. The Company wished also
to avail itself of Mr. Massaro's expertise for a period of time following his
retirement. Mr. Massaro retired from the Company on February 26, 1998. Effective
December 29, 1997, the Company and Mr. Massaro entered into a Service
Continuation Agreement which governed Mr. Massaro's compensation, duties,
employment responsibilities and post-employment consulting obligations through
his retirement date and ending February 28, 1999. In consideration for his
continued services through the end of the retention term of the Service
Continuation Agreement, Mr. Massaro received a cash transition incentive in the
amount of $100,000, a retention payment in the amount of $710,000 at retirement,
a stock transition incentive consisting of 100,000 stock options granted
effective November 17, 1997 and vesting over three years, and credit for an
additional 24 months of service for purposes of determining retirement benefits.
Following the date of his retirement, Mr. Massaro is obligated to render
continued services for a period of one year to the Company in the capacity of a
consultant in those areas in which he had involvement and expertise while an
executive officer of Frontier. Mr. Massaro will receive a consulting payment of
$355,000 plus reimbursement of necessary business-related expenses during the
consulting period. The Service Continuation Agreement also provides that Mr.
Massaro would receive title to his Company automobile, cellular telephone and
similar telecommunications equipment which the Company had made available for
his personal use, the value of banked vacation time, the cash value of certain
medical and insurance benefits, and financial planning for a period of two
years. The agreement specifies certain other executive
13
<PAGE>
perquisites which terminate upon his retirement. The agreement restricts Mr.
Massaro's ability to engage in certain activities deemed to be in competition
with Frontier Corporation for a specific period of time. In the event of a
change in control during the term of the Service Continuation Agreement, the
consulting payments due Mr. Massaro accelerate and become immediately payable.
- --------------------------------------------------------------------------------
Indebtness of Management
Effective April 1, 1996, Frontier Corporation loaned Kevin Bennis the sum of
$250,000 for a term of three years, with interest at the applicable federal rate
in effect for the month of April 1996, as an inducement for him to enter the
employ of Frontier Corporation. One-third of the principal and all of the
accrued interest was to be forgiven on each of the first three anniversaries of
the loan. Forgiveness was conditioned upon Mr. Bennis's continued employment
with the Company. Upon his leaving the employ of Frontier Corporation for any
reason before the end of the three-year period, the balance remaining and
interest thereon at the prime rate plus 1% would become immediately due and
payable.
Mr. Bennis left Frontier Corporation on October 13, 1997 and $167,000 remained
outstanding on this loan. In connection with the termination of his employment,
the Company agreed that it would forgive the loan balance at the end of two
years, contingent upon Mr. Bennis's satisfactory compliance with the terms of
his separation agreement. Until then, the loan remains payable and may be called
by the Company at any time. The other major terms of Mr. Bennis's separation
agreement are described in more detail below at "Business Transactions and
Relationships".
In March 1997, the Company made a personal loan to Mr. Bittner in the sum of
$300,000 for a term of five years, with interest at the then applicable federal
rate. Mr. Bittner was obligated to repay one-fifth of the principal and all of
the accrued interest annually on the anniversary of the loan. However, Mr.
Bittner died prior to the first anniversary of the loan. In September 1997, the
Company forgave the loan balance and all associated interest.
- --------------------------------------------------------------------------------
Business Transactions and Relationships
Alan Hasselwander and the Company entered into a consulting arrangement under
which he serves as Chair of the North American Numbering Council ("NANC"). The
NANC advises the Federal Communications Commission ("FCC") on telecommunications
industry numbering issues, including implementation of the FCC's number
portability rules. Mr. Hasselwander's consulting agreement provides that he will
perform services on a per diem basis and is reimbursed for necessary expenses.
During 1997, Mr. Hasselwander received $122,000, plus reimbursement for
expenses, under this consulting arrangement. The Company anticipates that Mr.
Hasselwander will continue to render services during 1998 pursuant to this
consulting arrangement but is, at this time, unable to anticipate the amount
which it will pay for any future services.
Dale Gregory retired from the Company effective October 13, 1997, and Kevin
Bennis resigned effective that same date. Each was an executive officer of the
Company. In connection with Mr. Gregory's retirement and Mr. Bennis's
resignation, each of them entered into an individual separation agreement with
the Company under which each received a severance payment equal to twice his own
annual base compensation, perquisite cash equivalent, and 401(k) plan
contributions. Because there was no general bonus payout for executives, no
payment for bonus was included in these severance amounts. In addition, the
Company agreed to continue for each of them certain medical and life insurance
benefits for a period of 24 months after termination. Mr. Gregory's and Mr.
Bennis's respective separation agreements restrict their ability to engage in
certain activities deemed to be in competition with Frontier Corporation for a
specific period of time. Mr. Gregory's separation agreement also provided for
completion of the previously authorized bridging of his pension eligibility so
that he would be eligible immediately to receive a full pension. As discussed in
more detail above at "Indebtedness of Management", Mr. Bennis's separation
agreement also provided for forgiveness of his outstanding loan balance.
- --------------------------------------------------------------------------------
Compensation Committee Interlocks and Insider
Participation in Compensation Decisions
The Committee on Management serves as the compensation committee. The members of
the Committee on Management at the end of the last completed fiscal year were
Mr. Cesan, Mr. Faherty and Dr. Thomas (Chair). None of these persons were,
during 1997 or previously, an officer or employee of the Company or any of its
subsidiaries.
The full Board of Directors accepted the recommendation of the Committee on
Management concerning Mr. Bittner's compensation and Mr. Clayton's compensation.
Mr. Hasselwander is a former officer of the Company and, during 1997, he
participated in those deliberations of the Company's Board of Directors in which
the Board accepted the Committee on Management's recommendations concerning
executive officer compensation. Mr. Hasselwander is not a member of the
Committee on Management. No executive officer of the Company has, during 1997 or
previously, served as a director or member of the compensation committee of any
other entity that has an executive officer who serves or has served either as a
member of the Committee on Management or as a member of the Board of Directors
of Frontier Corporation.
- --------------------------------------------------------------------------------
Indemnification of Certain Persons
The Company and its subsidiaries indemnify their Directors and officers against
certain liabilities they may incur. As authorized by New York State Law, the
Company and its subsidiaries have purchased insurance from the Chubb Group, Gulf
Insurance Company, and Reliance National, insuring the Company and its
subsidiaries against amounts they may pay as a result of indemnifying their
officers and
14
<PAGE>
Directors. These insurance policies also insure all officers and Directors of
the Company and its affiliates for additional liabilities against which the
Company and its affiliates may not provide indemnification. The insurance was
renewed on May 21, 1997 for a period of one year. During 1997, the Company paid
$510,400 for this insurance and the renewal policy costs will be negotiated in
Spring, 1998.
- --------------------------------------------------------------------------------
Proposal 2-Ratification of Public Accountant
YOUR BOARD OF DIRECTORS RECOMMENDS
A VOTE "FOR" THIS PROPOSAL.
The Company's public accountant is Price Waterhouse LLP. At the Annual Meeting,
the shareowners will consider and vote upon a proposal to ratify the public
accountant for the Company's fiscal year ending December 31, 1998. The Audit
Committee of the Board of Directors has recommended that shareowners ratify the
re-election of Price Waterhouse LLP as public accountant for that year. No
member of the Audit Committee is an officer or employee of the Company. The
Board of Directors unanimously recommends that you vote FOR this proposal.
Proxies solicited by the Board of Directors will be voted FOR the foregoing
proposal unless otherwise indicated. Approval of this proposal will require the
affirmative vote of a majority of the votes cast at the Annual Meeting by the
holders of the common stock outstanding.
Representatives of Price Waterhouse LLP will be present at the Annual Meeting
to make a statement, if they wish, and to respond to appropriate questions from
shareowners.
- --------------------------------------------------------------------------------
1999 Meeting--Future Proposals of Shareowners
In order to be eligible for inclusion in the proxy materials for the Company's
1999 Annual Meeting of Common Shareowners, any shareowner proposal to take
action at such meeting must be received at the Company's principal executive
offices by November 12, 1998. Any such proposal should be addressed to 180 South
Clinton Avenue, Rochester, New York 14646, Attention: Josephine S. Trubek,
Corporate Secretary.
In addition, the Company's By-Laws establish an advance notice procedure with
regard to certain matters, including shareowner proposals not included in the
Company's proxy statement, to be brought before an annual meeting of
shareowners. In general, in order to bring a matter before the meeting, notice
must be received by the Corporate Secretary of the Company not less than 60 days
nor more than 90 days prior to the anniversary of the immediately preceding
annual meeting.
The notice must contain information as specified in the By-Laws concerning the
matters to be brought before such meeting and concerning the shareowner
proposing such matters. If the date of the annual meeting is more than 30 days
earlier or more than 60 days later than the anniversary date, notice must be
received not earlier than the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day prior to such
annual meeting or the 10th day following the day on which the public
announcement of the date of such meeting is first made. However, if a shareowner
complies with the requirements to have a proposal included in the proxy
materials, he or she is deemed to have complied with this advance notice
procedure. If a shareowner who has notified the Company of his or her intention
to present a proposal at an annual meeting does not appear or send a qualified
representative to present that proposal at the meeting, the Company need not
present the proposal for a vote at the meeting. In order to provide an admission
card, we do ask that if a proposal is to be presented by a qualified
representative, the shareowner advise us of the identity of the person who will
be presenting the proposal.
- --------------------------------------------------------------------------------
Other Matters
As of the date of this Proxy Statement, the Board of Directors does not intend
to present any matter for action at the Annual Meeting other than those set
forth in the Notice of Annual Meeting. If any other matters properly come before
the meeting, the holders of the proxies will act in accordance with their best
judgment. In the event a nominee is unable to serve, the proxies will vote upon
a substituted nominee.
An admission ticket will be required to enter the Annual Meeting. Please use
the form attached to your proxy card to request your ticket. Ticket requests
after April 10, 1998 should be made by calling the Shareowner Line: 1-800-836-
0342. If you hold your shares through your broker or otherwise are not a record
holder, you may be asked to show evidence of your share position in order to
enter the Annual Meeting.
March 12, 1998
15
<PAGE>
[LOGO OF FRONTIER CORPORATION/SM/]
Frontier Corporation
Frontier Center
180 South Clinton Avenue
Rochester, New York 14646-0700
[MAP APPEARS HERE]
<PAGE>
(Cut along dotted line)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Ticket Request
If you plan to attend the Annual Meeting of Shareowners at 10:30 a.m., local
time, on Wednesday, April 29, 1998, at the Westin Southfield-Detroit Hotel, 1500
Town Center in Southfield, Michigan, use this Form to request your admission
ticket. Complete the form by typing or printing your name and address. If your
request is received by April 10, 1998, an admission ticket will be mailed to
you. All other admission tickets will be provided beginning at 9:30 a.m. at the
registration desk for the meeting. (Doors to the meeting will not open before
9:30 a.m.) The envelope provided for the return of your proxy card should also
be used to return this form. Alternatively, tickets may be requested by calling
the Shareowner Line, 1-800-836-0342. If you hold your shares through your broker
or otherwise are not a record holder, we may require you to show evidence of
your share position before you will be allowed into the Annual Meeting.
NOTE: IF YOUR SHARES ARE NOT REGISTERED IN YOUR OWN NAME, PLEASE ADVISE THE
SHAREOWNER OF RECORD (I.E., YOUR BANK, BROKER, TRUSTEE, ETC.) THAT YOU WISH TO
ATTEND THE MEETING. THE REGISTERED OWNER MUST PROVIDE YOU WITH EVIDENCE OF YOUR
STOCK OWNERSHIP SO THAT YOU MAY GAIN ADMITTANCE TO THE MEETING.
I plan to attend the meeting.
(Please print or type)
Name
- --------------------------------------------------------------------------------
Street
- --------------------------------------------------------------------------------
City
- --------------------------------------------------------------------------------
State Zip Code
- --------------------------------------------------------------------------------
DETACH HERE
PROXY
[Logo of Frontier Corporation]
I authorize each of Joseph P. Clayton and/or Josephine S. Trubek, or
substitutes selected by them, to vote all shares of Frontier Corporation which I
am entitled to vote at the Annual Meeting of Shareowners on April 29, 1998, or
at any adjournment thereof, as specified below.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. THE SHARES
REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTION TO THE
CONTRARY IS INDICATED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF ALL NOMINEES
AND THE RATIFICATION OF THE PUBLIC ACCOUNTANT.
CONTINUED, AND TO BE SIGNED AND DATED, ON REVERSE SIDE SEE REVERSE
SIDE
<PAGE>
[Logo of Frontier Corporation]
180 SOUTH CLINTON AVENUE
ROCHESTER, NY 14646
VOTE VIA TELEPHONE OR THE INTERNET -- IT'S QUICK, EASY AND IMMEDIATE
Your telephone or Internet vote authorizes the named proxies to vote your shares
in the same manner as if you marked, signed and returned your proxy card. Please
note all votes cast via the telephone or the Internet must be cast prior to 5
p.m. EDT, April 28, 1998. If you wish to change your address or notify the
company that you plan to attend the meeting, please mark the boxes below and
return your proxy by mail or call the Shareowner Line at 1-800-836-0342 to
request an admission ticket.
TELEPHONE VOTING:
. THERE IS NO CHARGE FOR THIS CALL.
. On a Touch Tone Telephone call TOLL FREE 1-888-807-7699 24 hours per day - 7
days a week.
. You will be asked to enter the Control Number which is located above your
name and address below.
________________________________________________________________________________
OPTION #1: To vote AS THE BOARD OF DIRECTORS RECOMMENDS, press 1.
________________________________________________________________________________
YOUR VOTE WILL BE CONFIRMED AND CAST AS YOU DIRECTED. END OF CALL.
________________________________________________________________________________
OPTION #2: If you choose to vote ON EACH PROPOSAL SEPARATELY, press 2. You will
hear these instructions:
________________________________________________________________________________
Proposal 1: To vote FOR ALL nominees, press 1; to WITHHOLD YOUR VOTE FROM ALL
nominees, press 2; To vote FOR EACH NOMINEE SEPARATELY, press 3.
Please listen to the instructions to cast your votes.
Proposal 2: To vote AS THE BOARD OF DIRECTORS RECOMMENDS, press 1; to vote
AGAINST, press 2; to ABSTAIN, press 3.
YOUR VOTE WILL BE CONFIRMED AND CAST AS YOU DIRECTED. END OF CALL
INTERNET VOTING:
. AS WITH ALL INTERNET ACCESS, USAGE OR SERVER FEES MUST BE PAID BY THE USER.
Visit our Internet voting site at HTTP://WWW.EQUISERVE.COM/PROXY/ and follow the
instructions on your screen. These instructions are similar to those above for
telephone voting.
________________________________________________________________________________
If you vote via telephone or the Internet, it is not necessary to return your
proxy by mail. THANK YOU FOR VOTING.
________________________________________________________________________________
DETACH HERE
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE.
________________________________________________________________________________
THE BOARD OF DIRECTORS RECOMMEND A VOTE "FOR" PROPOSALS 1 AND 2.
________________________________________________________________________________
1. NOMINEES FOR DIRECTORS: Patricia C. Barron, Joseph P. Clayton, Raul E. Cesan,
Brenda E. Edgerton, Jairo A. Estrada, Michael E. Faherty,
Alan C. Hasselwander, Robert Holland, Jr., Douglas H. McCorkindale,
and Dr. Leo J. Thomas
WITHHELD
FOR FROM
ALL [_] ALL [_]
NOMINEES NOMINEES
[_] ______________________________________
For all nominees except as noted above
2. Ratification of Price Waterhouse LLP as the Public Accountant.
FOR AGAINST ABSTAIN
[_] [_] [_]
________________________________________________________________________________
3. To vote in favor of any substituted director if a nominee is unable to
serve and to act in their discretion upon such other matters which may properly
come before the meeting, or which are incident to the conduct of the meeting, or
which the Board of Directors does not know, at the time of this solicitation,
will be presented at the meeting.
MARK HERE MARK HERE
FOR ADDRESS IF YOU PLAN
CHANGE AND [_] TO ATTEND [_]
NOTE AT LEFT THE MEETING
(Please sign exactly as name appears at left)
Signature:____________________________________ Date:________
Signature:____________________________________ Date:________
