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Frontier CEO
hails merger

Rochester Business Journal
August 18, 1995
The following speech was given by Frontier Corp. CEO Ronald Bittner at the special shareholders' meeting on Wednesday, Aug. 16. At the meeting, shareholders approved Frontier's merger with ALC Communications Corp.

When Frontier and ALC join forces, 70 percent of our business will come from long distance services. That compares to just 46 percent before the merger and just 23 percent five years ago. Clearly, it's a significant change in our business mix.

But as important, the combination will allow us to offer a full range of integrated communications services on a nationwide basis. We will have created one single and powerful firm, a company clearly focused on developing communications solutions for today's markets.

When I became CEO in 1992, I met with our senior management team and together we developed a mission and strategic direction for our firm. It started with a vision to become the premier firm in our industry; to reorganize with a holding company structure; to grow 4 to 5 times our size by the year 2000 and to create shareowner value through financial returns second to none. I'm proud to say we have made an excellent start on this path to premier.

We have reorganized as a new firm with a new name - Frontier. And we have created genuine shareowner value for our investors. And this year's expansion, culminating in the merger with ALC, is another milestone for us. We have invested our time carefully, searching for the finest business partners and each of these new companies brings us exceptional employee talent and a strong customer base.

We also see positive developments for Frontier with the advent of national telecommunications legislative reform. Congress is currently involved in an historic rewrite of the outdated communications act - one that will open up virtually every aspect of our industry. This would be the most significant change in our business since the breakup of the Bell System in 1984.

Both the Senate and the House have passed separate forms of this legislation. Most of the observers believe this legislation will move to a conclusion this fall. Whichever version becomes law, we are confident that Frontier will benefit through broader market opportunities. In fact, both versions of this proposed legislation reflect the essential principles set forth in Frontier's Open Market Plan initiated in Rochester earlier this year. With the Open Market Plan, Frontier led the way in creating a level

playing field for local service competition.

Regardless of legislative change, the overall market for long distance services currently remains very dynamic. By most accounts a $70-75 billion dollar a year business, long distance is one of the fastest growing segments of the telecommunications industry today. Nationally, long distance revenues and usage are growing around seven to nine percent a year. And that's just an average for the industry. The relative growth is typically much stronger for second tier companies such as Frontier.

The results at both Frontier and ALC bear this out. So far this year, revenues are up almost 35 percent at ALC. Frontier's revenue increases also lead the large carriers -- our revenues are up over 22 percent over last year.

The inherent value of companies like Frontier has not been overlooked by investment analysts in our industry. Here's a quote from a report by a brokerage firm in New York City, which recently initiated coverage of our size of long distance carriers.

"Part of the overall strong market growth is being quietly snatched from the Big 3 by the likes of aggressive... smaller... marketing driven companies such as ALC Communications...These smaller companies are finding niche markets that may not be effectively served by the large long distance companies, and are developing ways to fill the communications needs in those markets...We expect that the long distance industry as a whole will continue its strong growth...But the biggest beneficiaries of that growth will be the second tier players."

Capitalizing on developments in the long distance market - while migrating toward full service integration - will maintain Frontier's position as an innovator in the industry. Evolving an integrated services strategy provides us the growth opportunity we need to reach our target of serving at least six to eight million customers by the end of the decade.

How does the Frontier/ALC merger further serve that strategy?

First, the merger will create greater economies of size and scope. We will operate a company with more than $2 billion in revenues, two million customers and an extensive nationwide network. This will enable us to compete effectively in the quickly evolving telecommunications industry. We can avail ourselves of greater economies of scale and scope in transport, switching and local access, as well as our back office operations.

Over the last several months, we've prepared a plan to achieve better efficiencies with our combined network. This includes the elimination of duplicate switching and other services. We have cross-functional teams looking at everything from Human Resources to Information Systems. At the time of the merger announcement we had targeted operating synergies of $40 million in 1996 and $50 million in 1997. After months of planning the merger integration, we are confident these targets are within our reach.

Our increased size will also make it possible to take advantage of opportunities not available to either company separately. There are emerging opportunities for us in new technology, strategic partnerships, and product development.

Second, we will have a national presence and a more extensive platform from which to offer integrated services. Providing integrated solutions has long been the hallmark of both companies. ALC brings to the table demonstrated success in the long distance business, including the development of a flexible and highly dependable billing system.

In addition, ALC has already entered the cellular market through a resale operation. Frontier's own experience and success in the local exchange, cellular and long distance markets are excellent complements to ALC's recognized strengths. Together, we will be able to offer a broad range of services - long distance, local, wireless, equipment and broadband services - to an expanding base and broader array

of customers.

Frontier's experience in Rochester is a case in point. As you know, earlier this year we initiated our landmark "Open Market Plan," launching a competitive environment for local exchange services. In less than one year, we've seen AT&T, Citizens Telecom, and Time Warner enter the Rochester market.

However, as we expected, the overall local telecommunications market in Rochester, NY is growing even more robustly, with an annualized access line growth of over four percent - more than double that of 1994. Frontier Communications of Rochester is our integrated services provider and is successfully marketing a "solutions" package to the business market.

We recently entered the Syracuse, NY market with our Frontier Solutions package for small and medium-sized businesses. It's the first market in which we're reselling local service from a bell operating company and bundling it with other Frontier services. Metropolitan Minneapolis, where we currently offer local service, cellular and long distance, is another market we're targeting for the "solutions" approach.

Our merger with ALC will give us many more opportunities to roll out the "solutions" package in other parts of the country. There are common threads in our two firms that make this an ideal match. We are both growth-oriented companies with strong cash flows. Our management teams embrace a similar philosophy, making it a compatible cultural fit. We each have developed expertise in serving the small and mid-sized business market.

I've been extremely pleased with how well our teams are working in a concerted effort to hit the ground running. Our integration objectives are: to ensure a seamless and transparent transition for customers; to consolidate the two companies into one with a single vision and unified values; to maximize the best possible resources; and to improve the financial performance of the combined company by capitalizing on the synergies.

It's important to understand that we have been folding in a number of companies in addition to ALC: American Sharecom and ETI in Minneapolis, WCT in California, and Schneider in Wisconsin. Each one of these companies have well developed markets and each brings a set of skilled employees to our growing family of companies.

The new Frontier will align and simplify new product designs, consolidate and integrate network facilities to maximize operating efficiencies while at the same time minimizing expenses. We will also develop a universal product set supported by efficient sales and provisioning systems. And establish information service platforms which will facilitate our integrated solutions offerings.

The new Frontier will also be of such size and scope that international business partnerships will become increasingly attractive. World wide there is great interest in the U.S. telecom market and Frontier will be uniquely positioned to provide a national platform for companies entering the U.S.

At the same time, we will look for expansion opportunities abroad, particularly as the European union markets open up. With the phenomenal growth of our long distance business, some may ask what plans we have for our local exchange properties. Approximately 80 percent of our operating income - $98 million - was generated by the telephone properties during the first six months of this year.

In our regional properties we are now achieving operating margins in the upper 30 percent range. Another plus is that many of our telephone companies are located in rural areas, where competition has not yet fully developed, providing us the opportunity to sustain these high margins longer. The customers in these areas provide a loyal foundation upon which to build our solutions strategy - just as we are doing today in Rochester and, soon, Minneapolis.

The success of our visions long distance product is an example of the market power enjoyed by the local telephone companies. Thousands of our residential telephone customers have been eager to sign up for this product, where our long distance services are jointly marketed through the telephone companies.

We've achieved substantial penetration in several markets as a result of fulfilling customer preferences for unified billing and service... This is the essence of our integrated solutions strategy.

Wireless communications is also an important, although much smaller, facet of our mix. Cellular is now an $18 to $20 billion market in the U.S., And many industry observers estimate nearly 30 percent of the U.S. population will be regular consumers of wireless services within the next decade. We are extremely well positioned to take advantage of that growth - in Minnesota, Alabama, and New York - where we are the operating partner of a growing cellular supersystem. We also recognize that cellular and paging services will become an increasingly important component of a full-service telecommunications package.

Whether facilities-based or through resale, Frontier is committed to full telecommunications solution offerings for all appropriate customers. Moving forward to 1996, we remain clearly focused on our strategic objectives: to maximize value for shareowners, to delight our customers, and to maintain and foster a rewarding and challenging environment for our employees.

With your vote of confidence, and with the corresponding vote of the ALC shareowners, the "new" Frontier we introduced less than one year ago is today positioned for the next step in our evolution: To become a more focused and successful company; to exploit the opportunities opened by size and scope; and to take a strong lead in the fast-paced world of telecommunications.

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