<PAGE>
SECURITIES AND EXCHANGE COMMISSION
FORM 8-K/A
Current Report
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date of Report (Earliest Event) November 26, 1997
Teleport Communications Group Inc.
(Exact Name of Registrant as specified in its Charter)
Delaware 0-20913 13-3173139
- --------------------------------------------------------------------------------
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
437 Ridge Road, Executive Building 3, Dayton, New Jersey 08810
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (732) 392-2000
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
On November 26, 1997, Teleport Communications Group Inc. (the "Company"
or "TCG") filed a Current Report on Form 8-K with respect to the acquisition of
ACC Corp. and subsidiaries, including US WATS, Inc. ("the Acquisition"). Such
Form 8-K was filed without the financial statements and pro forma financial
information required by Item 310(c) and (d) of Regulation S-K, as it was
impractical to do so at that time. This Current Report on Form 8-K/A provides
such required information.
(a) Financial Statements of the Business Acquired.
Following, as Exhibit 99.1, are the audited consolidated balance sheets
of ACC Corp. as of December 31, 1996 and 1995 and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996 and the unaudited
balance sheet as of September 30, 1997 and the unaudited consolidated statements
of operations for the three-month and the nine-month periods ended September
30, 1997 and 1996 and the unaudited consolidated statements of cash flows for
the nine months ended September 30, 1997 and 1996.
(b) Pro Forma Financial Information
Following as Exhibit 99.2, is the pro forma unaudited condensed
consolidated balance sheet as of September 30, 1997, and the pro forma unaudited
condensed consolidated statements of operations for the years ended December 31,
1996 and 1995 and for the nine months ended September 30, 1997, giving effect to
the Acquisition.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf of the undersigned,
thereunto duly authorized.
TELEPORT COMMUNICATIONS GROUP INC.
Dated: February 9, 1998 By:/s/ Maria Terranova-Evans
----------------------------------
Name: Maria Terranova-Evans
Title: Vice President and Controller
<PAGE>
TELEPORT COMMUNICATIONS GROUP, INC.
EXHIBIT INDEX TO FORM 8-K/A
EXHIBIT
23 Consent of Arthur Andersen LLP relating to the financial statements of
ACC Corp.
99.1 Audited Financial Statements of ACC Corp.
99.2 Pro Forma Unaudited Condensed Consolidated Financial Statements
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
Form 8-K/A of our report dated January 24, 1997 incorporated by reference in
Registration Statement File No. 333-01219, No. 33-30817, No. 33-36546, No.
33-52174, No. 33-87056, No. 33-75558, No. 333-06831, No. 333-06833, and No.
333-12295. It should be noted that we have not audited any financial statements
of the company subsequent to December 31, 1996 or performed any audit procedures
subsequent to the date of our report.
/s/ Arthur Andersen LLP
Rochester, New York
February 9, 1998
<PAGE>
EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of ACC Corp.:
We have audited the accompanying consolidated balance sheets of ACC Corp. (a
Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ACC Corp. and subsidiaries as
of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Rochester, New York,
January 24, 1997
<PAGE>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN 000S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE:
Toll revenue............................. $ 282,497 $ 175,269 $ 118,331
Local service and other.................. 26,270 13,597 8,113
---------- ---------- ----------
Total revenue.......................... 308,767 188,866 126,444
Network costs............................ 193,599 114,841 79,438
---------- ---------- ----------
Gross profit........................... 115,168 74,025 47,006
OTHER OPERATING EXPENSES:
Depreciation and amortization............ 16,433 11,614 8,932
Selling expenses......................... 34,072 21,617 14,497
General and administrative............... 50,439 39,248 29,731
Management restructuring................. -- 1,328 --
Equal access costs....................... -- -- 2,160
---------- ---------- ----------
Total other operating expenses......... 100,944 73,807 55,320
---------- ---------- ----------
Income (loss) from operations............ 14,224 218 (8,314)
OTHER INCOME (EXPENSE):
Interest income.......................... 1,151 198 124
Interest expense......................... (5,025) (5,131) (2,023)
Terminated merger costs.................. -- -- (200)
Foreign exchange gain (loss)............. 509 (110) 169
---------- ---------- ----------
Total other income (expense)........... (3,365) (5,043) (1,930)
---------- ---------- ----------
Income (loss) from operations before
provision for income taxes and minority
interest.................................. 10,859 (4,825) (10,244)
Provision for income taxes................. 2,185 396 3,456
Minority interest in (earnings) loss of
consolidated subsidiary................... (909) (133) 2,371
---------- ---------- ----------
NET INCOME (LOSS).......................... 7,765 (5,354) (11,329)
Less Series A Preferred Stock dividend..... (972) (401) --
Less Series A Preferred Stock accretion.... (1,509) (139) --
---------- ---------- ----------
Net income (loss) applicable to Common
Stock..................................... $ 5,284 $ (5,894) $(11,329)
========== ========== ==========
Net income (loss) per common and common
equivalent share.......................... $ 0.34 $ (0.50) $ (1.07)
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
2
<PAGE>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 2,035 $ 518
Accounts receivable, net of allowance for doubtful
accounts of $3,795 in 1996 and $2,085 in 1995..... 51,474 38,978
Other receivables.................................. 3,792 3,965
Prepaid expenses and other assets.................. 4,632 2,265
-------- --------
Total Current Assets............................. 61,933 45,726
-------- --------
PROPERTY, PLANT, AND EQUIPMENT:
At cost............................................ 119,398 83,623
Less--accumulated depreciation and amortization.... (38,946) (26,932)
-------- --------
Total Property, Plant, and Equipment............. 80,452 56,691
-------- --------
OTHER ASSETS:
Goodwill and customer base, net.................... 50,629 14,072
Deferred installation costs, net................... 4,312 3,310
Other.............................................. 6,705 4,185
-------- --------
Total Other Assets............................... 61,646 21,567
-------- --------
Total Assets..................................... $204,031 $123,984
======== ========
CURRENT LIABILITIES:
Notes payable...................................... $ 730 $ 1,966
Current maturities of long-term debt............... 3,521 2,919
Accounts payable................................... 15,351 7,340
Accrued network costs.............................. 22,908 28,192
Other accrued expenses............................. 34,884 15,657
-------- --------
Total Current Liabilities........................ 77,394 56,074
-------- --------
Deferred income taxes................................ 2,767 2,577
-------- --------
Long-term debt....................................... 6,007 28,050
-------- --------
Redeemable Series A Preferred Stock, $1.00 par value,
$1,000 liquidation value, cumulative, convertible,
Authorized--10,000 shares; Issued--no shares in 1996
and 10,000 shares in 1995........................... -- 9,448
-------- --------
Minority interest.................................... -- 1,428
-------- --------
SHAREHOLDERS' EQUITY:
Preferred Stock, $1.00 par value, Authorized--
1,990,000 shares;
Issued--no shares................................. -- --
Class A Common Stock, $.015 par value, Authorized--
50,000,000 shares; Issued--17,684,361 in 1996 and
12,925,889 in 1995................................ 265 194
Class B Common Stock, $.015 par value, Authorized--
25,000,000 shares; Issued--no shares.............. -- --
Capital in excess of par value..................... 116,878 32,846
Cumulative translation adjustment.................. (1,362) (950)
Retained earnings (deficit)........................ 3,692 (4,073)
-------- --------
119,473 28,017
Less--Treasury stock, at cost (1,089,884 shares)... (1,610) (1,610)
-------- --------
Total Shareholders' Equity....................... 117,863 26,407
-------- --------
Total Liabilities and Shareholders' Equity....... $204,031 $123,984
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
3
<PAGE>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)........................ $ 7,765 $(5,354) $(11,329)
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Depreciation and amortization........... 16,433 11,614 8,932
Deferred income taxes................... 3,110 609 3,906
Minority interest in earnings (loss) of
consolidated subsidiary................ 909 133 (2,371)
Unrealized foreign exchange (gain)
loss................................... (758) 180 150
Amortization of deferred financing
costs.................................. 425 263 --
(Increase) Decrease in Assets:
Accounts receivable, net................ (11,212) (17,437) (5,019)
Other receivables....................... 1,955 1,782 (3,621)
Prepaid expenses and other assets....... (2,282) (1,057) 1,030
Deferred installation costs............. (2,631) (2,983) (1,147)
Other................................... (148) 846 (2,206)
Increase (Decrease) in Liabilities:
Accounts payable........................ 7,511 (7,013) 7,784
Accrued network costs................... (5,837) 17,824 1,754
Other accrued expenses.................. 9,008 4,560 3,230
---------- ----------- -----------
Net cash provided by operating
activities............................ 24,248 3,967 1,093
---------- ----------- -----------
Cash Flows from Investing Activities:
Cash received from sale of discontinued
operations............................. -- -- 2,538
Capital expenditures, net............... (33,030) (12,424) (20,682)
Repurchase of minority interest......... (32,092) -- (226)
Payment for purchase of subsidiary, net
of cash acquired....................... -- (2,313) --
Acquisition of customer base............ (2,620) (557) (2,861)
---------- ----------- -----------
Net cash used in investing activities.. (67,742) (15,294) (21,231)
---------- ----------- -----------
Cash Flows from Financing Activities:
Borrowings under lines of credit........ 26,375 113,602 72,156
Repayments under lines of credit........ (46,680) (119,204) (47,054)
Repayment of notes payable.............. (1,996) -- --
Repayment of long-term debt, other than
lines of credit........................ (3,704) (3,078) (1,591)
Proceeds from issuance of common stock.. 72,669 13,261 189
Proceeds from issuance of convertible
debt................................... -- 10,000 --
Financing costs......................... (495) (2,876) --
Dividends paid.......................... -- (451) (4,241)
---------- ----------- -----------
Net cash provided by financing
activities............................ 46,169 11,254 19,459
---------- ----------- -----------
Effect of exchange rate changes on cash.. (1,158) (430) 233
---------- ----------- -----------
Net increase (decrease) in cash.......... 1,517 (503) (446)
Cash and cash equivalents at beginning of
year.................................... 518 1,021 1,467
---------- ----------- -----------
Cash and cash equivalents at end of
year.................................... $ 2,035 $ 518 $ 1,021
========== =========== ===========
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the year for:
Interest................................ $ 2,840 $ 4,146 $ 1,656
========== =========== ===========
Income taxes............................ $ 1,808 $ 203 $ 280
========== =========== ===========
Supplemental Schedule of Noncash
Investing and Financing Activities:
Equipment purchased through capital
leases.................................. -- $ 7,389 $ 3,077
========== =========== ===========
Fair value of assets acquired............ $ 5,136 $ 10,800 --
Less--cash paid at acquisition date..... (3,001) (1,500) --
Less--short term notes payable.......... -- (2,966) --
---------- ----------- -----------
Liabilities assumed...................... $ 2,135 $ 6,334 --
========== =========== ===========
Other assets purchased with long-term
debt.................................... $ 2,775 -- $ 540
========== =========== ===========
Conversion of convertible debt to Series
A Preferred Stock....................... -- $ 10,000 --
========== =========== ===========
Conversion of Series A Preferred Stock to
Class A Common Stock, including
cumulative dividends and accretion...... $ 11,929 -- --
========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
4
<PAGE>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(AMOUNTS IN 000S, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CAPITAL IN CUMULATIVE RETAINED
CLASS A COMMON STOCK EXCESS OF TRANSLATION EARNINGS TREASURY
SHARES AMOUNT PAR VALUE ADJUSTMENT (DEFICIT) STOCK TOTAL
---------- ------------ ---------- ----------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 11,306,208 $170 $ 19,500 $ (565) $ 13,684 $(1,283) $ 31,506
Stock options
exercised.............. 153,563 2 363 -- -- -- 365
Employee stock purchase
plan shares issued..... 19,131 -- 150 -- -- -- 150
Repurchase of shares to
exercise options....... -- -- -- -- -- (327) (327)
Dividends ($.08 per
common share).......... -- -- -- -- (831) -- (831)
Cumulative translation
adjustment............. -- -- -- (448) -- -- (448)
Net loss................ -- -- -- -- (11,329) -- (11,329)
---------- ---- -------- ------- -------- ------- --------
Balance, December 31,
1994................... 11,478,902 $172 $ 20,013 $(1,013) $ 1,524 $(1,610) $ 19,086
Stock options
exercised.............. 50,287 1 479 -- -- -- 480
Sale of stock........... 1,237,500 18 11,078 -- -- -- 11,096
Employee stock purchase
plan shares issued..... 35,450 1 296 -- -- -- 297
Stock warrants
exercised.............. 123,750 2 1,186 -- -- -- 1,188
Stock warrants issued... -- -- 200 -- -- -- 200
Accretion of Series A
Preferred Stock........ -- -- (139) -- -- -- (139)
Series A Preferred Stock
dividends.............. -- -- (401) -- -- -- (401)
Acceleration of stock
option vesting due to
termination............ -- -- 134 -- -- -- 134
Dividends ($.02 per
common share).......... -- -- -- -- (243) -- (243)
Cumulative translation
adjustment............. -- -- -- 63 -- -- 63
Net loss................ -- -- -- -- (5,354) -- (5,354)
---------- ---- -------- ------- -------- ------- --------
Balance, December 31,
1995................... 12,925,889 $194 $ 32,846 $ (950) $(4,073) $(1,610) $ 26,407
Stock options
exercised.............. 587,881 9 4,712 -- -- -- 4,721
Class A Common Stock
offerings.............. 3,018,750 45 62,849 -- -- -- 62,894
Conversion of Series A
Preferred Stock........ 937,500 14 11,915 -- -- -- 11,929
Employee stock purchase
plan shares issued..... 19,341 -- 343 -- -- -- 343
Stock warrants
exercised.............. 195,000 3 2,077 -- -- -- 2,080
Increase in investment
in Canadian
subsidiary............. -- -- 1,254 -- -- -- 1,254
Disqualifying
dispositions........... -- -- 3,000 -- -- -- 3,000
Accretion of Series A
Preferred Stock........ -- -- (1,509) -- -- -- (1,509)
Series A Preferred Stock
dividends.............. -- -- (972) -- -- -- (972)
Acceleration of stock
option vesting due to
termination............ -- -- 206 -- -- -- 206
Stock incentive rights
issued................. -- -- 157 -- -- -- 157
Cumulative translation
adjustment............. -- -- -- (412) -- -- (412)
Net income.............. -- -- -- -- 7,765 -- 7,765
---------- ---- -------- ------- -------- ------- --------
Balance, December 31,
1996................... 17,684,361 $265 $116,878 $(1,362) $ 3,692 $(1,610) $117,863
========== ==== ======== ======= ======== ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
5
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation:
The consolidated financial statements include all accounts of ACC Corp. (a
Delaware corporation) and its direct and indirect subsidiaries ("the Company"
or "ACC"). Principal operating subsidiaries include: ACC Long Distance Corp.
and ACC National Telecom Corp. ("ACC US"), ACC TelEnterprises Ltd. ("ACC
Canada"), and ACC Long Distance UK Ltd. ("ACC UK"). All operating subsidiaries
are wholly-owned, with the exception of ACC TelEnterprises Ltd. (See B below).
All significant intercompany accounts and transactions have been eliminated.
The accompanying consolidated financial statements reflect the results of
operations of acquired companies since their respective acquisition dates.
B. Minority Interest:
On July 6, 1993, the Company's then wholly-owned Canadian subsidiary, ACC
TelEnterprises Ltd., completed an initial public offering of 2 million common
shares for Cdn. $11.00 per share. The Company received net proceeds of
approximately Cdn. $20.7 million after underwriters' fees and before other
direct costs of the offering of Cdn. $1.3 million. As a result of the
offering, ACC Corp.'s ownership was reduced to approximately 70%.
Minority interest represents the non-Company owned shareholder interest in
ACC TelEnterprises Ltd.'s equity primarily resulting from the 1993 public
offering. In the third quarter of 1996, the Company made a cash tender offer
of Cdn. $21.50 per share for the repurchase of the minority-held shares. In
September 1996, the tender offer was approved by the Boards of Directors of
both companies and, in the fourth quarter, approximately 1.9 million of the
outstanding shares, representing approximately 81.5% of the minority interest,
were tendered and purchased by the Company for Cdn. $40.4 million (US $29.5
million), increasing the Company's ownership in ACC Canada to 93.9% as of
December 31, 1996. As fewer than 90% of the publicly held shares were
deposited under the tender offer, the Company formed a subsidiary for the
purpose of acquiring the remaining minority interest of ACC Canada. Prior to
December 31, 1996, the shareholders of ACC Canada approved the amalgamation of
ACC Canada and the new subsidiary. The amalgamation was effective January 1,
1997 and the remaining minority interest shares of ACC Canada were replaced
with shares of the new subsidiary. Subsequent to December 31, these shares
were purchased by the new subsidiary at a price of Cdn. $21.50 per share (see
G below).
C. Revenue:
The Company records as long distance toll revenue the amount of
communications services rendered, as measured by the related minutes of toll
traffic processed or flat-rate services billed, after deducting an estimate of
the traffic or services which will neither be billed nor collected. Local
service and other revenue represents revenue derived from the provision of
local exchange services, including local dial tone, direct access lines, and
monthly subscription fees, as well as data services, and is recorded as the
services are provided and billed.
D. Other Receivables:
Other receivables at December 31, 1996 consist of receivables primarily
related to taxes receivable (approximately $1.8 million), the financing of
university projects (approximately $0.5 million), officer notes receivable
(approximately $0.4 million), and other individually nominal, miscellaneous
receivables (approximately $1.1 million). Other receivables at December 31,
1995 consisted of receivables related to
6
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
financing of university projects (approximately $3.0 million), taxes
receivable (approximately $0.7 million), and other individually nominal,
miscellaneous receivables (approximately $0.3 million).
E. Property, Plant, and Equipment:
The Company's property, plant, and equipment consisted of the following at
December 31, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Equipment.................................................. $ 90,257 $69,174
Computer software and software licenses.................... 12,682 6,869
Other...................................................... 16,459 7,580
-------- -------
Total.................................................... $119,398 $83,623
======== =======
</TABLE>
Depreciation and amortization of property, plant, and equipment is computed
using the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Leasehold improvements......................................... Life of lease
Equipment, including assets under capital leases............... 2 to 15 years
Computer software and software licenses........................ 5 to 7 years
Office equipment and fixtures.................................. 3 to 10 years
Vehicles....................................................... 3 years
</TABLE>
Equipment and computer software include assets financed under capital lease
obligations. A summary of these assets at December 31, 1996 and 1995 is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Cost....................................................... $14,336 $13,935
Less--accumulated amortization............................. (6,194) (4,538)
------- -------
Total, net................................................. $ 8,142 $ 9,397
======= =======
</TABLE>
Betterments, renewals, and extraordinary repairs that extend the life of the
asset are capitalized; other repairs and maintenance are expensed. The cost
and accumulated depreciation applicable to assets retired are removed from the
accounts and the gain or loss on disposition is recognized in income.
During 1995, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The effect of adopting SFAS No. 121 was
immaterial to the consolidated financial statements. The Company reviews long-
lived assets to be held and used, including related goodwill, for possible
impairment when events or changes in circumstances indicate that their
carrying amounts may not be recoverable. If such events or changes in
circumstances are present, a loss is recognized to the extent the carrying
value of the asset is in excess of the sum of the undiscounted cash flows
expected to result from the use of the asset and its eventual disposition.
F. Deferred Costs:
Costs incurred for the installation of direct access lines are amortized on
a straight-line basis over the estimated useful life of three to ten years.
Accumulated amortization of deferred installation costs totaled approximately
$6.4 million and $4.5 million at December 31, 1996 and 1995, respectively.
7
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
G. Goodwill and Customer Base:
Each of the Company's acquisitions have been accounted for as purchases and,
accordingly, the purchase prices were allocated to the assets and liabilities
of the acquired companies based on their fair values at the acquisition date.
As of August 1, 1995, ACC TelEnterprises Ltd. acquired Metrowide
Communications ("Metrowide"). Metrowide, based in Toronto, Canada, provides
local and long distance services to customers based in Ontario and Quebec,
Canada. The results of operations of Metrowide are included in the
accompanying financial statements since the date of acquisition. The total
cost of the acquisition was Cdn. $15.1 million (US $11.0 million) including
Cdn. $9.1 million (US $6.6 million) of liabilities assumed. All payments
related to the purchase price of the acquisition have been made as of December
31, 1996.
In May 1996, ACC Canada purchased certain assets and assumed certain
liabilities of Internet Canada Corp., a company based in Toronto, Canada,
which is engaged in the business of providing Internet access and website
design and development. The purchase price was Cdn. $5.2 million. All payments
related to the purchase price of the acquisition have been made as of December
31, 1996.
Goodwill of Cdn. $11.1 million (US $8.1 million) associated with the ACC
TelEnterprises Ltd. asset purchases is being amortized over 20 years.
Also in 1996, as described above, the Company repurchased a significant
portion of the minority interest in ACC TelEnterprises Ltd. The minority-held
shares were purchased for Cdn. $21.50 per share, which represented a premium
over the book value of the shares. The total amount paid in 1996 for this
acquisition was Cdn. $43.7 million (US $32.0 million). In 1997, the remaining
6.1% interest was acquired for Cdn. $9.0 million (US $6.6 million). The
resulting goodwill, approximately Cdn. $48.0 million (US $35.0 million), will
be amortized over a 40 year life.
The following unaudited pro forma summary gives effect to the acquisition of
Internet Canada Corp. and the acquisition of the minority interest of ACC
Canada as if they had occurred at the beginning of 1995, after giving effect
to certain pro forma adjustments, including elimination of the minority
interest in earnings of ACC Canada, amortization of the goodwill and customer
base acquired in the acquisitions, interest expense on the acquisition
financing, and related income tax effects. This unaudited pro forma financial
information is presented for informational purposes only and may not be
indicative of the results of operations as they would have been if the
acquisitions had occurred at the beginning of 1995, nor is it necessarily
indicative of the results of operations which may occur in the future.
Anticipated efficiencies from the combination of Internet Canada and ACC
Canada are not fully determinable and therefore have been excluded from the
amounts included in the pro forma summary below (in thousands, except per
share data).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Total revenue..................................... $ 308,767 $ 188,866
Income (loss) from operations..................... 13,175 (1,066)
Net income (loss)................................. 5,372 (8,659)
Share data:
Net income (loss)............................... $ 0.34 $ (0.74)
Net income (loss) applicable to common stock.... $ 0.18 $ (0.79)
Weighted average shares outstanding............. 15,641 11,685
</TABLE>
8
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accumulated amortization of all goodwill approximated US $0.5 million and
$0.1 million at December 31, 1996 and 1995, respectively. The Company
amortizes acquired customer bases on a straight-line basis over five to seven
years. Accumulated amortization of customer base totaled approximately $5.5
million and $3.1 million at December 31, 1996 and 1995, respectively.
H. Common and Common Equivalent Shares:
Primary earnings per common share are based on the weighted average number
of common shares outstanding during the year and the assumed exercise of
dilutive stock options and warrants, less the number of treasury shares
assumed to be purchased from the proceeds using the average market prices of
the Company's Class A Common Stock.
The weighted average number of common shares outstanding for the fiscal
years ended December 31, 1996, 1995, and 1994 were approximately 15.641
million shares, 11.685 million shares, and 10.603 million shares,
respectively.
Primary earnings per share were computed by adjusting net income (loss) for
dividends and accretion applicable to Series A Preferred Stock, prior to its
conversion into common shares in October 1996.
Fully diluted earnings per share are not presented for the years ended
December 31, 1996, 1995, or 1994 because the effect on earnings per share of
common stock equivalents and potentially dilutive securities would be anti-
dilutive.
All references to common and common equivalent shares have been
retroactively restated to reflect an August 8, 1996 three-for-two stock
dividend.
I. Foreign Currency Translation:
Assets and liabilities of ACC TelEnterprises Ltd. and ACC Long Distance UK
Ltd., operating in Canada and the United Kingdom, respectively, are translated
into US dollars using the exchange rates in effect at the balance sheet date.
Results of operations are translated using the exchange rate at the date of
the transaction. The effects of exchange rate fluctuations on translating
foreign currency assets and liabilities into US dollars are included as part
of the cumulative translation adjustment component of shareholders' equity,
while gains and losses resulting from foreign currency transactions are
included in net income.
J. Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Deferred income taxes reflect the future tax consequences of differences
between the tax bases of assets and liabilities and their financial reporting
amounts at each year-end.
K. Cash Equivalents:
The Company considers investments with a maturity of less than three months
to be cash equivalents.
L. Derivative Financial Instruments:
The Company uses derivative financial instruments to reduce its exposure to
market risks from changes in foreign exchange rates and interest rates. The
Company does not hold or issue financial instruments for speculative trading
purposes. The derivative instruments used are currency forward contracts and
interest rate swap agreements. These derivatives are non-leveraged and involve
little complexity.
9
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company monitors and controls its risk in the derivative transactions
referred to above by periodically assessing the cost of replacing, at market
rates, those contracts in the event of default by the counterparty. The
Company believes such risk to be remote. In addition, before entering into
derivative contracts, and periodically during the life of the contracts, the
Company reviews the counterparty's financial condition.
The Company enters into contracts to buy and sell foreign currencies in the
future in order to protect the US dollar value of certain currency positions
and future foreign currency transactions. The gains and losses on these
contracts are included in income in the period in which the exchange rates
change. The discounts and premiums on the forward contracts are amortized over
the life of the contracts.
At December 31, 1996, the Company had foreign currency contracts outstanding
to sell forward the US dollar equivalent of Cdn. $38.4 million and 14.5
million pounds sterling. These contracts mature throughout 1997.
At December 31, 1995, the Company had foreign currency contracts outstanding
to sell forward the US dollar equivalent of Cdn. $37.9 million and 5.3 million
pounds sterling and to buy forward the US dollar equivalent of Cdn. $10.0
million and 2.7 million pounds sterling.
The Company has entered into a cross-currency rate swap transaction with a
financial institution which hedges a portion of intercompany debt from the
Canadian subsidiary and also converts the variable rate of interest to a fixed
rate. The agreement, which commenced on December 31, 1996, has a two-year
term. Under the agreement, the Company pays a fixed rate of interest on a
Canadian dollar note and receives a variable rate of interest on a US dollar
receivable. The Company's obligation is Cdn. $33.5 million, and quarterly
interest payments at a rate of 6.98% are due, commencing on March 31, 1997.
The Company's receivable under this agreement is $25.0 million, and interest
is due quarterly at a rate of US prime, commencing on March 31, 1997. The net
of the receivable and the payable is reflected on the balance sheet at
December 31, 1996.
The Company may use interest rate swaps to effectively convert variable rate
obligations to a fixed rate basis. The differentials to be received or paid
under these agreements are recognized as an adjustment to interest expense
related to the debt. Gains and losses on terminations of interest rate swaps
are recognized when terminated in conjunction with the retirement of the
associated debt. The fair value of interest rate swap agreements is estimated
based on quotes from the market makers of these instruments and represents the
estimated amounts that the Company would expect to receive or pay to terminate
these agreements. The Company's exposure related to these interest rate swap
agreements is limited to fluctuations in the interest rate. At December 31,
1996, the Company was not a party to any interest rate swap agreements.
M. Financial Instruments:
The carrying amounts of cash and cash equivalents, trade receivables, other
current assets, accounts payable, and amounts included in accruals meeting the
definition of a financial instrument approximate fair value because of the
short-term maturity of these instruments. The carrying value and related
estimated fair values for the Company's remaining financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN 000S)
<S> <C> <C> <C> <C>
Off balance sheet financial
instruments:
Foreign exchange forward contracts.. $ -- $52,800 $ -- $24,500
Foreign currency swap agreement
receivable......................... 25,000 25,000 -- --
Foreign currency swap agreement
payable............................ 24,516 24,516 -- --
Lines of credit..................... 730 730 20,973 20,973
Long term debt, including current
portion............................ 9,528 9,528 11,962 11,962
Series A Preferred Stock............ -- -- 9,448 10,400
</TABLE>
10
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Based on borrowing rates currently available to the Company for loans and
lease agreements with similar terms and average maturities, the fair value of
its debt approximates its recorded value. Foreign currency contract
obligations are estimated by obtaining quotes from brokers. Letters of credit
and line of credit amounts are based on fees currently charged for similar
arrangements.
N. Stock-Based Compensation:
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits either recording the
estimated value of stock-based compensation over the applicable vesting period
or disclosing the unrecorded cost and the related effect on earnings per share
in the notes to the financial statements. In the current year, the Company has
elected to comply with the disclosure provisions of the statement. The effects
of SFAS 123 in the pro forma disclosures are not indicative of future amounts.
The statement does not apply to awards prior to 1995, and additional awards
are anticipated.
O. Use of Estimates:
The 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.
P. Reclassifications:
Certain reclassifications have been made to previously reported balances for
1995 and 1994 to conform to the 1996 presentation.
2. OPERATING INFORMATION
A. Description of Business
ACC is a switch-based provider of telecommunications services in the United
States, Canada, and the United Kingdom. The Company primarily offers long
distance telecommunications services to a diversified customer base of
businesses, residential customers, and educational institutions. ACC also
provides local telephone service as a switch-based provider of local exchange
services in upstate New York and as a reseller of local exchange Centrex
services in Ontario and Quebec, Canada. ACC primarily targets business
customers with both local service and long distance needs, selected
residential customers, and colleges and universities. For the year ended
December 31, 1996, long distance revenues accounted for approximately 91% of
total Company revenues, while local exchange revenues and data-line sales were
4% and 2%, respectively, of total Company revenues.
ACC operates a telecommunications network consisting of seven long distance
international and domestic switches located in the United States, Canada, and
the United Kingdom; three local exchange switches in the United States; leased
transmission lines; and network management systems designed to optimize
traffic routing. The Company also has plans to install three additional long
distance switches in Canada, the US and the UK and three additional local
exchange switches in the northeastern US.
At December 31, 1996, approximately $15.5 million of the Company's
telecommunications equipment was located on 55 university, college, and
preparatory school campuses in the northeastern United States and in the
United Kingdom. Each of these institutions has signed agreements, with
original terms ranging from three to eleven years, for the provision of a
variety of services by the Company.
11
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the United States, the Federal Communications Commission ("FCC") and
relevant state Public Service Commissions ("PSCs") have the authority to
regulate interstate and intrastate rates, respectively, ownership of
transmission facilities, and the terms and conditions under which the
Company's services are provided. Legislation that substantially revises the US
Communications Act of 1934 (the "US Communications Act") was signed into law
on February 8, 1996. The legislation provides specific guidelines under which
the regional operating companies ("RBOCs") can provide long distance services,
which will permit the RBOCs to compete with the Company in the provision of
domestic and international long distance services. Further, the legislation,
among other things, opens local service markets to competition from any entity
(including long distance carriers such as AT&T, cable television companies,
and utilities).
Because the legislation opens the Company's US markets to additional
competition, particularly from the RBOCs, the Company's ability to compete
could be adversely affected. Moreover, as a result of and to implement the
legislation, certain federal and other governmental regulations will be
amended or modified, and any such amendment or modification could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
In Canada, services provided by ACC TelEnterprises Ltd. are subject to or
affected by certain regulations of the Canadian Radio-television and
Telecommunications Commission (the "CRTC"). The CRTC is in the process of
examining the barriers to competition in the local telephone market and plans
to announce rules for local competition in 1997 for implementation in 1998.
These rules will enable ACC Canada to bundle services and provide customers
with local as well as long distance services in areas that are not presently
open to competition. The CRTC also mandated in 1996 that local phone companies
provide pay phones with swipe access for competitors' calling cards.
Implementation of these rules will enable ACC Canada to improve its
competitive position in the calling card market.
The telecommunications services provided by ACC Long Distance UK Ltd. are
subject to and affected by regulations introduced by The Office of
Telecommunications, the UK telecommunications regulatory authority ("Oftel").
In 1997, it is expected that Oftel will address the issues of number
portability for 800 numbers and equal access in the UK.
In addition to regulation, the Company is subject to various risks in
connection with the operation of its business. These risks include, among
others, dependence on transmission facilities-based carriers and suppliers,
price competition, and competition from larger industry participants.
Concentrations with respect to trade receivables are limited, except with
respect to resellers, due to the large number of customers comprising the
Company's customer base and their dispersion across many different industries
and geographic regions. At December 31, 1996, approximately 31% of the
Company's billed accounts receivable balance was due from resellers.
B. Equal Access Costs:
During 1994, the Company initiated the process of converting its network to
equal access for its Canadian customers. Costs associated with this process
were approximately $2.2 million and included maintaining duplicate network
facilities during transition, recontacting customers, and the administrative
expenses associated with accumulating the data necessary to convert the
Company's customer base to equal access.
12
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. DEBT, LINES OF CREDIT, AND FINANCING ARRANGEMENTS
A. Debt:
The Company had the following debt outstanding as of December 31, 1996 and
1995 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Senior credit facility.................................... $ -- $20,973
Working capital lines of credit........................... 730 --
Capitalized lease obligations payable in total monthly
installments of $369 including interest, with rates
ranging from 7.0% to 28.0%, maturing through 2000,
collateralized by related equipment...................... 9,528 9,996
Notes payable to previous Metrowide owners, interest rates
ranging from 7.5% to 9.0%................................ -- 1,966
------- -------
$10,258 $32,935
Less current maturities................................... (4,251) (4,885)
------- -------
$ 6,007 $28,050
======= =======
</TABLE>
Maturities of debt, including capital lease obligations, are as follows at
December 31, 1996:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
(DOLLARS IN
THOUSANDS)
<S> <C>
1997............................................................. $ 4,251
1998............................................................. 3,216
1999............................................................. 1,976
2000............................................................. 815
Thereafter....................................................... --
-------
$10,258
=======
</TABLE>
Subsequent to December 31, 1996, the Company made an early repayment, using
funds borrowed under the amended credit facility, of a capitalized lease
obligation which had total future payments, included in the above schedule, of
approximately $4.0 million.
B. Senior Credit Facility and Lines of Credit:
On July 21, 1995, the Company entered into an agreement for a $35.0 million
five year senior revolving credit facility with two financial institutions.
Borrowings are limited individually to $5.0 million for ACC Long Distance UK
Ltd. and $2.0 million for ACC National Telecom Corp., with total borrowings
for the Company limited to $35.0 million. Initial borrowings under the
agreement were used to pay down and terminate the Company's previously
existing lines of credit and to pay fees related to the transaction.
Subsequent borrowings have been, and will be, used to finance capital
expenditures and to provide working capital. Fees associated with obtaining
the financing are being amortized over the term of the agreement.
In conjunction with the closing, the Company issued to a financial advisor
warrants to purchase 45,000 shares of the Company's Class A Common Stock at an
exercise price of $10.67 per share. The warrants were exercised in October
1996.
13
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The agreement limits the amount that may be borrowed against this facility
based on the Company's operating cash flow. The agreement also contains
certain covenants including restrictions on the payment of dividends,
maintenance of a maximum leverage ratio, minimum debt service coverage ratio,
maximum fixed charge coverage ratio, and minimum net worth, all as defined
under the agreement and subjective covenants. At December 31, 1996, the
Company had available $32.4 million under this facility. Borrowings under the
facility are secured by certain of the Company's assets and will bear interest
at either the LIBOR rate or the base rate (base rate being the greater of the
prime interest rate or the federal funds rate plus 1/2%), with additional
percentage points added based on a ratio of debt to operating cash flow, as
defined in the agreement. The weighted average interest rate for borrowings
during 1996 was 7.8%.
Under the agreement, the Company is obligated to pay the financial
institution an aggregate contingent interest payment based on the minimum of
$750,000 or the appreciation in value of 140,000 shares of the Company's Class
A Common Stock over the 18-month period ending January 21, 1997, but not to
exceed $2.1 million. A payment of $2.1 million was made on January 15, 1997 in
conjunction with the amendment to the credit facility, and was reflected as an
accrued expense on the accompanying balance sheet at December 31, 1996.
In connection with the agreement, the Company must enter into hedging
agreements with respect to interest rate exposure. The agreements have certain
conditions regarding the interest rates, are subject to minimum aggregate
balances of $10.0 million, and must have durations of at least two years. The
Company entered into three interest rate swap agreements in 1995 to convert
the variable interest rate charged on $11.5 million of the outstanding credit
facility to a fixed rate. Under these agreements, the Company was required to
pay a fixed rate of interest on a notional principal balance. In return, the
Company receives a payment of an amount equal to the variable rate calculated
as of the beginning of the month. These three interest rate swap agreements
outstanding at December 31, 1995 were cancelled during 1996 when the
outstanding balance on the line of credit was repaid using proceeds from the
Class A Common Stock offering (see Note 6A). There were no interest rate swap
agreements in place at December 31, 1996.
At December 31, 1996, the Company had issued letters of credit totaling $2.6
million which reduce the available balance of the credit facility. The letters
of credit guarantee performance to third parties. Management does not expect
any material losses to result from these off-balance sheet instruments because
the Company will meet its obligations to the third parties.
On January 14, 1997, the Company signed an agreement with the same financial
institution to provide a $100.0 million credit facility to the Company which
will amend and restate the current $35.0 million facility discussed above. The
amended credit facility is syndicated among five financial institutions.
Borrowings can be made in US dollars, Canadian dollars, and British pounds,
and are limited individually to $30.0 million for ACC Canada, $20.0 million
for ACC UK, and $15.0 million for the local exchange business of the US
operation, with total borrowings for the Company limited to $100.0 million.
The amended facility will be used to finance capital expenditures, provide
working capital, and to provide capital for acquisitions. The amended facility
provides for financial covenants which are less restrictive than the existing
facility. The maximum aggregate principal amount of the amended facility is
required to be reduced by $8.0 million per quarter commencing on March 31,
1999 until December 31, 2000, and by $9.0 million per quarter commencing on
March 31, 2001 until maturity of the loan in January 2002.
C. Working Capital Lines of Credit:
The Company has two working capital lines of credit for daily cash
management. The first is a US $1.0 million facility, due on demand, with an
interest rate equal to US prime. Outstanding borrowings on this line at
14
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 31, 1996 totaled $730,000 and the weighted average interest expense
for the year ended December 31, 1996 was 8.25%. The second line is a Cdn. $1.0
million facility, due on demand, with an interest rate equal to Canadian prime
plus 1/2%. There were no outstanding borrowings on this line at December 31,
1996.
4. INCOME TAXES
The following is a summary of the US and non-US income (loss) from
operations before provision for (benefit from) income taxes and minority
interest, the components of the provision for (benefit from) income taxes and
deferred income taxes, and a reconciliation of the US statutory income tax
rate to the effective income tax rate.
Income (loss) from operations before provision for (benefit from) income
taxes and minority interest (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
US.............................................. $ 6,675 $ 1,510 $ 1,301
Non-US.......................................... 4,184 (6,335) (11,545)
------- ------- --------
$10,859 $(4,825) $(10,244)
======= ======= ========
Provision for (benefit from) income taxes (dollars in thousands):
<CAPTION>
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Current:
US............................................ $ 2,689 $ 581 $ (867)
Non-US........................................ -- -- --
------- ------- --------
$ 2,689 $ 581 $ (867)
------- ------- --------
Deferred:
US............................................ (504) (185) 1,298
Non-US........................................ -- -- 3,025
------- ------- --------
(504) (185) 4,323
------- ------- --------
$ 2,185 $ 396 $ 3,456
======= ======= ========
Provision for (benefit from) deferred income taxes (dollars in thousands):
<CAPTION>
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Difference between tax and book depreciation and
amortization................................... $ 526 $ 772 $ 2,178
Valuation allowance............................. 98 2,223 6,851
Contingent interest............................. (459) -- --
Severance costs................................. (568) -- --
Software development costs...................... -- (502) 502
Other temporary differences..................... (101) (103) 171
Net operating loss.............................. -- (2,575) (5,379)
------- ------- --------
$ (504) $ (185) $ 4,323
======= ======= ========
</TABLE>
15
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reconciliation of US statutory income tax rate to effective income tax rate:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
US statutory income tax
rate..................... 34.0% (34.0)% (34.0)%
Non-deductible goodwill
and customer base........ 2.6 2.7 1.2
Foreign income taxes,
including valuation
allowance................ (13.1) 44.6 66.6
State tax benefit......... -- (2.4) --
Other..................... (3.4) (2.7) --
----- ----- -----
Effective income tax
rate................... 20.1% 8.2% 33.8%
===== ===== =====
</TABLE>
Deferred income tax assets and liabilities reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
At December 31, 1996, the Company had unused tax benefits of approximately
$6.7 million related to non-US net operating loss carryforwards totaling $16.5
million for income tax purposes, of which $7.2 million have an unlimited life,
$2.8 million expire in 2000, $5.0 million expire in 2001, $0.9 million expire
in 2002, and $0.5 million expire in 2003. In addition, the Company had $1.0
million of deferred tax assets related to non-US temporary differences. The
valuation allowance was decreased by $3.3 million to approximately $7.7
million to reflect tax benefits recognized during 1996. The remaining
valuation allowance reflects the uncertainty of realizing the benefit of the
non-US loss carryforwards.
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of December 31, 1996 and 1995 (dollars
in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Depreciation and amortization--non-US................... $ 967 $ 1,122
Contingent interest..................................... 459 --
Severance costs......................................... 568 --
Other non-deductible reserves and accruals.............. 528 647
Non-US operating loss carryforwards..................... 6,702 9,816
Less--valuation allowance for non-US deferred tax
assets................................................. (7,669) (10,938)
------- -------
Net deferred tax assets............................... 1,555 647
Deferred tax liabilities:
Depreciation and amortization........................... (2,767) (2,577)
------- -------
$(1,212) $(1,930)
======= =======
</TABLE>
5. REDEEMABLE PREFERRED STOCK
On May 22, 1995, the Company completed a $10.0 million private placement of
12% subordinated convertible debt to a group of investors. The notes were
converted into 10,000 shares of cumulative, convertible Series A Preferred
Stock on September 1, 1995. The Series A Preferred Stock had a liquidation
value of $1,000 per share, and accrued cumulative dividends, compounded on the
accumulated and unpaid balance, as defined, at a rate of 12% annually. The
Series A Preferred Shares were converted into 937,500 shares of Class A Common
Stock at a conversion price of $10.67 per share in October 1996. Pursuant to
the terms of the Series A Preferred Stock, the cumulative dividends were
forfeited, due to conversion by the investors.
16
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Series A Preferred Stock contained terms of mandatory redemption, on the
seventh anniversary of the private placement, at a price per share equal to
the greater of (i) the liquidation value of $1,000 per share plus all accrued
and unpaid dividends; or (ii) the fair market value of the underlying Class A
Common Stock into which the Series A Preferred Stock was convertible.
Concurrent with the private placement, warrants to purchase 150,000 shares
of the Company's Class A Common Stock were issued at an initial exercise price
of $10.67 per share. These warrants were exercised in October, 1996. In
addition, the Company issued warrants to purchase Class A Common Stock that
were to become exercisable upon one or more optional repayments of the Series
A Preferred Stock at an exercise price of $10.67 per share, subject to
adjustments, as defined, and permitted each holder to acquire initially the
same number of shares of Class A Common Stock into which the Series A
Preferred Stock was convertible as of the relevant repayment date. These
warrants were extinguished in October 1996, as a result of the conversion of
the Series A Preferred shares.
The Series A Preferred Stock outstanding as of December 31, 1995 is
reflected on the accompanying balance sheet as redeemable preferred stock, and
is shown inclusive of cumulative unpaid dividends and accretion to liquidation
value, and net of unamortized issuance costs of approximately $1.1 million.
Upon conversion in October 1996, these costs were reclassified into the
appropriate equity accounts.
6. EQUITY
During 1995, the Company's shareholders approved an amendment to the
Company's Certificate of Incorporation that authorized the creation of
2,000,000 shares of Series A Preferred Stock, par value $1.00 per share;
authorized the creation of 25,000,000 shares of Class B non-voting Common
Stock, par value $.015 per share; and redesignated the 50,000,000 shares of
Common Stock, par value $.015 per share, that were previously authorized, for
issuance as 50,000,000 shares of Class A Common Stock.
On June 14, 1996, the Company's Board of Directors authorized a three-for-
two stock split, in the form of a stock dividend issued on August 8, 1996 of
the Company's Class A Common Stock to shareholders of record as of July 3,
1996. Share and per share amounts in the accompanying financial statements and
footnotes have been adjusted for the split.
A. Public Offerings:
In May 1996, the Company completed a public offering of 3,018,750 shares of
its Class A Common Stock at a price of $22.50 per share. The offering raised
net proceeds of $63.1 million, after deduction of fees and expenses of
approximately $4.8 million. The net proceeds were used to reduce all
indebtedness under the Company's credit facility, for working capital needs,
and for capital expenditures.
In October 1996, the Company completed a public offering of 1,194,722 shares
of its Class A Common Stock, on behalf of selling shareholders, at a price of
$45.00 per share. 937,500 of the shares resulted from the conversion to Class
A Common Stock of all of the outstanding Series A Preferred Stock (see Note
5). Additionally, outstanding warrants and options to purchase the Company's
Class A Common Stock were exercised by the holders and the underlying shares
of Class A Common Stock were sold. The Company received the exercise price of
the warrants and options, approximately $2.1 million, and incurred fees and
expenses of approximately $270,000.
B. Private Placement:
During 1995, the Company made an offshore sale of 1,237,000 shares of its
Class A Common Stock at an average price of $9.69 per share. The sale raised
net proceeds of $11.1 million after deduction of fees and
17
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
expenses of $0.9 million. In conjunction with this transaction, warrants to
purchase 123,750 shares of Class A Common Stock at an exercise price of $9.60
per share were issued. These warrants were exercised in 1995.
C. Stock-Based Compensation:
The Company has four stock-based compensation plans, which are described
below. The Company accounts for these plans under APB Opinion No. 25.
Accordingly, no compensation cost has been recognized for incentive stock
options, nonqualified stock options, and the employee stock purchase plan. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Net income (loss)
As reported............................................... $7,765 $(5,354)
Pro forma................................................. $4,869 $(6,251)
Net income (loss) per common and common equivalent share
As reported............................................... $ 0.34 $ (0.50)
Pro forma................................................. $ 0.15 $ (0.58)
</TABLE>
Fully diluted earnings per share are not presented because the effect is
anti-dilutive.
Compensation cost for stock incentive right agreements recognized in the
statement of operations for the year ended December 31, 1996 was approximately
$0.1 million. There were no stock incentive right agreements issued in 1995 or
1994. The Statement 123 method of accounting has not been applied to options
granted prior to January 1, 1995, so the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
Employee Long-Term Incentive Plan:
The Company has an Employee Long-Term Incentive Plan (the "Plan"), whereby
options to purchase shares of Class A Common Stock may be granted to officers
and key employees of the Company. In October 1994, the Company's shareholders
approved an amendment to the Plan which increased shares reserved for issuance
to 3,000,000 shares of Class A Common Stock. In July 1995, shareholders of the
Company approved an additional 750,000 shares of Class A Common Stock to be
reserved for issuance under this Plan, and authorized the issuance of stock
incentive rights ("SIRs") thereunder. In June 1996, the Company's shareholders
approved an additional 750,000 shares for issuance under the Plan, bringing
the total shares reserved for issuance to 4,500,000. The exercise price of the
stock options must not be less than the market value per share at the date of
grant, and no options shall be exercisable after ten years and one day from
the date of grant. Options generally become exercisable on a pro-rata basis
over a four-year period beginning on the date of grant and 25% on each of the
three anniversary dates thereafter. SIRs represent the right to receive shares
of the Company's Class A Common Stock without any cash payment to the Company,
conditioned only on continued employment with the Company through a specified
incentive period of at least three years. At December 31, 1996, SIRs for
30,000 shares had been awarded. 50% of the shares vest over a three-year
period which began on February 5, 1996, 25% vest over the four-year period
beginning February 5, 1996, and the remaining 25% vest over the five-year
period beginning February 5, 1996.
18
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For purposes of the pro forma disclosure above, the fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Dividend yield............................................... 0% 0%
Expected volatility.......................................... 43% 44%
Risk-free interest rate...................................... 5.6% 7.26%
Expected life................................................ 3 years 3 years
</TABLE>
Changes in the status of the Plan during 1996, 1995, and 1994 are summarized
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
SHARES WTD. AVG. SHARES WTD. AVG. SHARES WTD. AVG.
(000S) EX. PRICE (000S) EX. PRICE (000S) EX. PRICE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beg. of
year....................... 1,606 $ 8.81 1,178 $ 9.02 696 $ 6.56
Granted..................... 681 14.95 512 10.23 983 11.09
Exercised................... (588) 7.99 (50) 9.53 (154) 2.37
Forfeited................... (101) 8.72 (34) 10.42 (347) 12.73
----- ----- -----
Outstanding at end of year.. 1,598 13.97 1,606 8.81 1,178 9.02
===== ===== =====
Number of options at end of
year:
Exercisable............... 637 12.65 608 7.94 290 5.89
Available for grant....... 895 725 453
Weighted average fair
value of options
granted.................. $7.09 $3.69 N/A
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996 (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- --------------------------
NUMBER WGT. AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVG. EXERCISABLE WEIGHTED AVG.
EXER. PRICES AT 12/31/96 CONT. LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- ------------ ----------- ---------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0 to 9.50.............. 282 6.9 years $ 8.30 128 $ 9.18
$9.83 to 12.50.......... 724 7.7 10.72 390 10.94
$15.37.................. 435 9.0 15.37 80 15.37
$28.83.................. 102 9.5 28.83 25 28.83
$45.00 to 48.19......... 55 9.7 47.16 14 47.16
----- ---
$0 to 48.19............. 1,598 8.1 13.97 637 12.65
===== ===
</TABLE>
Employee Stock Purchase Plan:
In October 1994, the Company's shareholders approved an employee stock
purchase plan which allows eligible employees to purchase shares of the
Company's Class A Common Stock at 85% of market value on the date on which the
annual offering period begins, or the last business day of each calendar
quarter in which shares are purchased during the offering period, whichever is
lower. Class A Common Stock reserved for future employee purchases aggregated
676,087 shares at December 31, 1996. There were 19,131 shares issued at an
average price of $7.93 during the year ended December 31, 1994; 35,450 shares
issued at an average price of $8.37 per share during the year ended December
31, 1995; and 19,341 shares issued at an average price of $17.69 per share
during the year ended December 31, 1996. There have been no charges to income
in connection with this plan other than incidental expenses related to the
issuance of shares. The weighted average fair value of shares offered in 1996
and 1995 were $3.80 and $1.86, respectively.
19
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For purposes of the pro forma disclosure above, the fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Dividend yield............................................. 0% 0%
Expected volatility........................................ 19% 18%
Risk-free interest rate.................................... 5.77% 7.66%
Expected life.............................................. 3 months 3 months
</TABLE>
Non-Employee Directors' Stock Option Plan:
In June 1996, the Company's shareholders approved a Non-Employee Directors'
Stock Option Plan (the Directors' Stock Option Plan). The Directors' Stock
Option Plan provides for grants of options to purchase 7,500 shares of Class A
Common Stock at an exercise price of 100% of the fair market value of the
stock on the date of grant, which options vest at the first anniversary of the
date of grant. The maximum number of shares with respect to which options may
be granted under the Directors' Stock Option Plan is 375,000 shares, subject
to adjustment for stock splits, stock dividends, and the like.
Each option shall be exercisable for ten years and one day after its date of
grant. Any vested option is exercisable during the holder's term as a director
(in accordance with the option's terms) and remains exercisable for one year
following the date of termination as a director (unless the director is
removed for cause). Exercise of the options would involve payment in cash,
securities, or a combination of cash and securities.
For purposes of the pro forma disclosure above, the fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- ----
<S> <C> <C>
Dividend yield.................................................. 0% --
Expected volatility............................................. 44% --
Risk-free interest rate......................................... 5.39% --
Expected life................................................... 3 years --
</TABLE>
Changes in the status of the Directors' Stock Option Plan during 1996 are
summarized as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE
(000S) EXERCISE PRICE
-------------- ----------------
<S> <C> <C>
Outstanding at beginning of year............ -- --
Granted..................................... 60 $22.08
Exercised................................... -- --
Forfeited................................... -- --
--- ------
Outstanding at end of year.................. 60 $22.08
Number of options at end of year:
Exercisable............................... 60 $22.08
Available for grant....................... 315
Range of prices:
Granted during the year................... $15.33 - 28.83
Outstanding at end of year................ $15.33 - 28.83
Exercised during the year................. $ --
Weighted average fair value of options
granted.................................. $5.41
</TABLE>
20
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The table summarizing information about stock options outstanding, required
by SFAS 123, is not included, as the impact of the application of this
statement would not be material.
United Kingdom Sharesave Scheme:
In August 1996, the Executive Compensation Committee of the Board of
Directors approved the United Kingdom Sharesave Scheme whereby eligible
employees of ACC UK are entitled to purchase shares of the Company's Class A
Common Stock at an exercise price equal to 85% of market value on the date
that the purchase period begins. Employees contribute the purchase price
through monthly payroll deduction of a predetermined amount, not to exceed 250
pounds sterling, over a three year period, at the end of which the shares are
purchased. A total of 150,000 shares are reserved for issuance under this
plan, of which options for 17,160 shares at an exercise price of $32.08 were
granted in 1996. The weighted average fair value of options offered in 1996
was $14.29.
For purposes of the pro forma disclosure above, the fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- ----
<S> <C> <C>
Dividend yield.................................................. 0% --
Expected volatility............................................. 40.8% --
Risk-free interest rate......................................... 6.45% --
Expected life................................................... 3 years --
</TABLE>
7. TREASURY STOCK
In January 1994, an officer of the Company exercised stock options to
acquire 148,500 shares of the Company's Class A Common Stock at $2.20 per
share by delivering to the Company 24,813 common shares at the then current
market price of $13.17 per share.
The average cost of all treasury stock currently held by the Company is
$1.48 per share.
8. COMMITMENTS AND CONTINGENCIES
A. Operating Leases:
The Company leases office space and other items under various agreements
expiring through 2004. At December 31, 1996, the minimum aggregate payments
under non-cancelable operating leases are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -------
<S> <C>
1997................................................................. $ 3,927
1998................................................................. 4,089
1999................................................................. 3,970
2000................................................................. 3,455
2001................................................................. 3,294
Thereafter........................................................... 7,970
-------
$26,705
=======
</TABLE>
Rent expense for the years ending December 31, 1996, 1995, and 1994 was
approximately $4,006,000, $1,965,000, and $1,640,000, respectively.
21
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
B. Employment and Other Agreements:
The Company has an agreement with its chairman and chief executive officer,
which has a two year term expiring in October 1997 and which provides for
continuation of salary and benefits for the term of the agreement, in the
event of a change in control of the Company. At December 31, 1996, the
Company's maximum potential liability under this agreement was approximately
$300,000.
The Company had a contract with the former chairman which provided for an
annual base salary, including an annual bonus and other benefits during his
employment term, and also for a payment of $1.0 million, payable over a three
year term, in the event that he resigned or was terminated without cause.
During 1996, the chairman of the board resigned his position as chairman of
the Company. At December 31, 1996, under this agreement, the Company has
accrued the entire $1.0 million, and a payment of $0.3 million was made in
January 1997. In consideration for a non-compete agreement which has a three
year term beginning in January 1997, the former chairman received a payment of
$750,000, which was expensed in 1995.
The Company has entered into employee continuation incentive agreements with
certain other key management personnel. These agreements provide for continued
compensation and continued vesting of options previously granted under the
Company's Employee Long Term Incentive Plan for a period of up to one year in
the event of termination without cause or in the event of termination after a
change in control of the Company. At December 31, 1996, the Company's
estimated maximum potential liability under these agreements totaled
approximately $3.0 million.
C. Purchase Commitments:
At December 31, 1996, the Company had outstanding purchase commitments
totaling approximately $4.6 million related to the purchase of local exchange
switches for the US business and the purchase of a long distance switch for
the UK operation.
In 1993, ACC Long Distance Ltd., a subsidiary of ACC TelEnterprises Ltd.,
entered into an agreement with one of its vendors to lease long distance
facilities totaling a minimum of Cdn. $1.0 million per month for seven years.
The Company currently leases more than Cdn. $1.0 million per month of such
facilities from this vendor. This commitment allows the Company to receive up
to a 60% discount on certain monthly charges from this vendor.
D. Defined Contribution Plans:
The Company provides a defined contribution 401(k) plan to substantially all
US employees. Amounts contributed to this plan by the Company were
approximately $240,000, $183,000, and $167,000 in 1996, 1995, and 1994,
respectively. The Company's Canadian subsidiary provides a registered
retirement savings plan to substantially all Canadian employees. Amounts
contributed to this plan by the Company were Cdn. $186,000, Cdn. $106,000, and
Cdn. $62,000 in 1996, 1995, and 1994, respectively.
E. Annual Incentive Plan:
During 1996 and 1995, the Company's Board of Directors authorized incentive
bonuses based upon the Company's sales, gross margin, operating expenses, and
operating income. Prior to 1995, incentive bonuses were discretionary as
determined by the Company's management and approved by the Board of Directors.
The amounts included in operations for these incentive bonuses were
approximately $2.6 million, $1.4 million, and $0.6 million for the years ended
December 31, 1996, 1995, and 1994, respectively.
22
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
F. Legal Matters:
The Company is subject to litigation from time to time in the ordinary
course of business. Although the amount of any liability with respect to such
litigation cannot be determined, in the opinion of management, such liability
as of December 31, 1996 will not have a material adverse effect on the
Company's financial condition or results of operations.
9. GEOGRAPHIC AREA INFORMATION (DOLLARS IN THOUSANDS)
Year ended December 31, 1996:
<TABLE>
<CAPTION>
UNITED UNITED
STATES CANADA KINGDOM ELIMINATIONS CONSOLIDATED
-------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue from unaffiliated
customers............... $ 99,461 $117,168 $92,138 $ -- $308,767
Intercompany revenue..... 35,060 2,917 3,519 (41,496) --
-------- -------- ------- --------- --------
Total revenue............ $134,521 $120,085 $95,657 $ (41,496) $308,767
======== ======== ======= ========= ========
Income from operations
before income taxes..... $ 6,676 $ 3,452 $ 731 $ -- $ 10,859
======== ======== ======= ========= ========
Identifiable assets at
December 31, 1996....... $182,435 $ 94,165 $49,667 $(122,236) $204,031
======== ======== ======= ========= ========
Year ended December 31, 1995:
<CAPTION>
UNITED UNITED
STATES CANADA KINGDOM ELIMINATIONS CONSOLIDATED
-------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue from unaffiliated
customers............... $ 65,975 $ 84,421 $38,470 $ -- $188,866
Intercompany revenue..... 15,256 4,071 1,143 (20,470) --
-------- -------- ------- --------- --------
Total revenue............ $ 81,231 $ 88,492 $39,613 $ (20,470) $188,866
======== ======== ======= ========= ========
Income (loss) from
operations before income
taxes................... $ 1,512 $ 456 $(6,793) $ -- $ (4,825)
======== ======== ======= ========= ========
Identifiable assets at
December 31, 1995....... $105,995 $ 43,775 $31,593 $ (57,379) $123,984
======== ======== ======= ========= ========
Year ended December 31, 1994:
<CAPTION>
UNITED UNITED
STATES CANADA KINGDOM ELIMINATIONS CONSOLIDATED
-------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue from unaffiliated
customers............... $ 54,599 $ 67,728 $ 4,117 $ -- $126,444
Intercompany revenue..... 6,698 2,175 1,004 (9,877) --
-------- -------- ------- --------- --------
Total revenue............ $ 61,297 $ 69,903 $ 5,121 $ (9,877) $126,444
======== ======== ======= ========= ========
Income (loss) from
operations before income
taxes................... $ 1,300 $ (5,742) $(5,802) $ -- $(10,244)
======== ======== ======= ========= ========
Identifiable assets at
December 31, 1994....... $119,021 $ 30,073 $10,422 $ (75,068) $ 84,448
======== ======== ======= ========= ========
</TABLE>
Intercompany revenue is recognized when calls are originated in one country
and terminated in another country over the Company's leased network. This
revenue is recognized at rates similar to those charged by unaffiliated
companies. Income from operations before income taxes of the Canadian and
United Kingdom operations includes corporate charges for general corporate
expenses and interest.
Corporate general and administrative expenses are allocated to subsidiaries
based on time dedicated to each subsidiary by members of corporate management
and staff.
23
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. RELATED PARTY TRANSACTIONS
The Company's headquarters is in a building owned by a partnership in which
the Company's former chairman of the board has a 50% ownership interest. A
Special Committee of the Company's Board of Directors reviewed the lease to
ensure that the terms and conditions were commercially reasonable and fair to
the Company prior to approval of the plan in February 1994. Minimum monthly
lease payments for this space range from $44,000 to $60,000 over the ten-year
term of the lease, which began on May 1, 1994. The Company also pays a pro-
rata share of maintenance costs. Total rent and maintenance payments under
this lease were approximately $0.8 million, $0.6 million, and $0.2 million
during 1996, 1995, and 1994, respectively.
During 1994 and early 1995, the Company initiated efforts to obtain new
telecommunications software programs from a software development company. The
Company's former chairman of the board and chief executive officer was a
controlling shareholder of the software development company during such
period. In May 1995, anticipating material agreements with the software
development company, all of the common shares owned by the Company's former
chairman of the board were placed in escrow under the direction of a Special
Committee of the Company's Board of Directors. The Special Committee, its
outside consultants, and the Company's management then proceeded to review and
evaluate the software technology and the terms and conditions of the proposed
transactions.
In 1996, the Special Committee approved a software license agreement between
the Company and a newly formed company (the purchaser of the software
development company's intellectual property and other assets and an affiliate
of such company). Immediately prior to entering into the agreement, the shares
of the software development company held in escrow were returned to such
company and the related party nature of the Company's relationship with the
software development company was thereby extinguished. Total amounts accrued
at December 31, 1996, 1995, and 1994 relating to this vendor were $0, $44,000,
and $0, respectively. For an aggregate consideration of $1.8 million, paid in
1996, the Company received a perpetual right to use the telecommunications
software programs. Approximately $0.2 million was paid to the vendor in 1996
and was expensed prior to entering into the agreement. During 1995, the
Company paid the software development company $1.2 million, of which $772,000,
relating to the purchase of certain hardware and acquisition of certain
software licenses, was capitalized and recorded on the balance sheet as a
component of property, plant, and equipment and $500,000 relating to software
development was expensed. During 1994, the Company paid the software
development company $132,000, all of which related to software development,
which was expensed.
The Company has notes receivable from two officers which total $370,000.
These notes bear interest at a rate of 6.625% and are to be repaid in full on
demand, no later than March 31, 1997.
24
<PAGE>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Toll revenue............. $ 83,919 $ 70,226 $ 238,596 $ 206,362
Local service and other.. 11,205 7,059 28,681 17,865
----------- ----------- ----------- -----------
95,124 77,285 267,277 224,227
Network costs.............. 54,837 48,815 156,973 143,803
----------- ----------- ----------- -----------
Gross profit............... 40,287 28,470 110,304 80,424
Other operating expenses:
Depreciation and
amortization............ 5,922 4,266 16,401 12,061
Selling, general and
administrative.......... 27,791 20,995 76,091 58,977
----------- ----------- ----------- -----------
33,713 25,261 92,492 71,038
----------- ----------- ----------- -----------
Income from operations..... 6,574 3,209 17,812 9,386
Other income (expense):
Net Interest............. (601) (186) (1,941) (2,622)
Foreign exchange gain
(loss).................. 20 22 (168) 48
----------- ----------- ----------- -----------
(581) (164) (2,109) (2,574)
----------- ----------- ----------- -----------
Income before provision for
income
taxes and minority
interest.................. 5,993 3,045 15,703 6,812
Provision for income
taxes..................... 1,085 543 2,379 1,396
----------- ----------- ----------- -----------
Income before minority
interest.................. 4,908 2,502 13,324 5,416
Minority interest in
(earnings) of consolidated
subsidiary................ -- (303) -- (899)
----------- ----------- ----------- -----------
Net income................. 4,908 2,199 13,324 4,517
Less Series A preferred
stock dividend............ -- (334) -- (1,022)
Less Series A preferred
stock accretion........... -- (872) -- (1,496)
----------- ----------- ----------- -----------
Income applicable to common
stock..................... $ 4,908 $ 993 $ 13,324 $ 1,999
=========== =========== =========== ===========
Earnings per common and
common equivalent share... $ 0.28 $ 0.06 $ 0.76 $ 0.13
=========== =========== =========== ===========
Average number of common
and common and common
equivalent shares......... 17,736,192 16,694,546 17,494,614 14,984,299
=========== =========== =========== ===========
</TABLE>
25
<PAGE>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................... $ -- $ 2,035
Accounts receivable, net of allowance for doubtful
accounts of $3,533 in 1997 and $3,795 in 1996.... 69,539 51,474
Other receivables................................. 2,015 3,792
Prepaid expenses and other assets................. 7,908 4,632
-------- --------
TOTAL CURRENT ASSETS............................ 79,462 61,933
-------- --------
PROPERTY, PLANT, AND EQUIPMENT
At cost........................................... 153,758 119,398
Less--accumulated depreciation and amortization... (49,308) (38,946)
-------- --------
TOTAL PROPERTY, PLANT, AND EQUIPMENT............ 104,450 80,452
-------- --------
OTHER ASSETS:
Goodwill and customer base, net................... 75,874 50,629
Deferred installation costs, net.................. 5,277 4,312
Other............................................. 11,534 6,705
-------- --------
TOTAL OTHER ASSETS.............................. 92,685 61,646
-------- --------
TOTAL ASSETS.................................... $276,597 $204,031
======== ========
CURRENT LIABILITIES:
Notes payable..................................... $ 877 $ 730
Current maturities of long-term debt.............. 2,647 3,521
Accounts payable.................................. 8,341 15,351
Accrued network costs............................. 32,042 22,908
Other accrued expenses............................ 18,534 34,884
-------- --------
TOTAL CURRENT LIABILITIES....................... 62,441 77,394
-------- --------
Deferred income taxes............................. 3,398 2,767
-------- --------
Long-term debt.................................... 74,388 6,007
-------- --------
SHAREHOLDERS' EQUITY:
Preferred Stock, $1.00 par value,
Authorized--1,990,000 shares;
Issued--no shares................................ -- --
Class A Common Stock, $.015 par value
Authorized--50,000,000 shares;
Issued--18,074,541 in 1997 and 17,684,361 in
1996............................................ 271 265
Class B Common Stock, $.015 par value,
Authorized--25,000,000 shares;
Issued--no shares................................ -- --
Capital in excess of par value.................... 122,097 116,878
Cumulative translation adjustment................. (1,402) (1,362)
Retained earnings................................. 17,014 3,692
-------- --------
137,980 119,473
Less--
Treasury stock, at cost (1,089,884 shares in 1997
and 1996)....................................... (1,610) (1,610)
-------- --------
TOTAL SHAREHOLDERS' EQUITY...................... 136,370 117,863
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $276,597 $204,031
======== ========
</TABLE>
26
<PAGE>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 13,324 $ 4,517
-------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................. 16,401 12,061
Deferred income taxes..................................... 2,167 362
Minority interest in earnings of consolidated
subsidiary............................................... -- 899
Unrealized foreign exchange loss.......................... 17 (137)
Amortization of deferred financing costs.................. 457 316
(INCREASE) DECREASE IN ASSETS:
Accounts receivable, net................................. (14,622) (14,225)
Other receivables........................................ 684 1,653
Prepaid expenses and other assets........................ (3,084) (1,228)
Deferred installation costs.............................. (2,785) (1,943)
Other.................................................... (4,613) (390)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable......................................... (10,434) (371)
Accrued network costs.................................... 6,225 (2,326)
Other accrued expenses................................... (17,979) (780)
-------- --------
Net cash provided by (used in) operating activities..... (14,242) (1,592)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net................................. (34,469) (14,865)
Payment for purchase of subsidiaries, net of cash
acquired................................................. (22,245) --
Acquisition of customer base.............................. (1,305) (2,226)
-------- --------
Net cash used in investing activities................... (58,019) (17,091)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit and notes payable........ 148,507 19,500
Repayments under lines of credit and notes payable........ (76,230) (42,999)
Repayment of long-term debt, other than lines of credit... (8,096) (2,841)
Proceeds from issuance of common stock.................... 5,225 68,476
Financing costs........................................... (1,294) (441)
-------- --------
Net cash provided by financing activities............... 68,112 41,695
-------- --------
Effect of exchange rate changes on cash.................... 2,114 (408)
-------- --------
Net increase (decrease) in cash from operations............ (2,035) 22,604
Cash and cash equivalents at beginning of period........... 2,035 518
-------- --------
Cash and cash equivalents at end of period................. $ -- $ 23,122
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................. $ 1,630 $ 2,326
======== ========
Income taxes.............................................. $ 2,646 $ 1,033
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Fair Value of acquired companies assets acquired other
than cash................................................ $ 34,985 --
Fair value of acquired companies liabilities assumed...... 12,740 --
-------- --------
Net cash paid........................................... $ 22,245 $ --
======== ========
Equipment purchased through capital leases................ $ 1,490 $ 2,775
======== ========
</TABLE>
27
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. STATEMENT OF MANAGEMENT
The condensed financial statements of ACC Corp. and subsidiaries (the
"Company") included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. These condensed
financial statements be read in conjunction with the financial statements and
the notes thereto included in the Company's latest Annual Report on Form 10-K.
The interim financial statements contained herein reflect all adjustments of
a normal recurring nature which are, in the opinion of management, necessary
to a fair statement of the results of operations for the interim periods
presented.
As used herein, unless the context otherwise requires, the "Company" and
"ACC" refer to ACC Corp. and its subsidiaries, including its U.S. operating
subsidiaries ("ACC U.S."), ACC TelEnterprises Ltd. "ACC Canada"), ACC Long
Distance UK Ltd. ("ACC U.K."), and ACC Telecommunications GmbH ("ACC
Germany"). In this Form 10-Q, references to "dollar" and "$" are to United
States dollars, references to "Cdn. $" are to Canadian dollars, references to
"(Pounds)" are to English pounds sterling, references to "DM" are to German
Deutchmarks, the terms "United States" and "U.S." mean the United States of
America and, unless the context otherwise requires, its states, territories
and possessions and all areas subject to its jurisdiction, and the terms
"United Kingdom" and "U.K." mean England, Scotland and Wales. "North American
Operations" includes operations in the Unites States and Canada, while "Europe
Operations" includes operations in the United Kingdom and German operations.
2. FORM 10-K
Reference is made to the following footnotes included in the Company's 1996
Annual Report on Form 10-K:
Principles of Consolidation
Minority Interest
Revenue
Other Receivables
Property, Plant and Equipment
Deferred Costs
Goodwill and Customer Base
Common and Common Equivalent Shares
Foreign Currency Translation
Income Taxes
Cash Equivalents
Derivative Financial Instruments
Financial Instruments
Stock-Based Compensation
Use of Estimates
Reclassifications
Description of Business
Equal Access Costs
Debt
Senior Credit Facility and Lines of Credit
Working Capital Lines of Credit
Income Taxes
28
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Redeemable Preferred Stock
Public Offerings
Private Placement
Stock-Based Compensation
Employee Long-Term Incentive Plan
Employee Stock Purchase Plan
Non-Employee Directors' Stock Option Plan
United Kingdom Sharesave Scheme
Treasury Stock
Operating Leases
Employment and Other Agreements
Purchase Commitments
Defined Contribution Plans
Annual Incentive Plan
Legal Matters
Geographic Area Information
Related Party Transactions
3. NET INCOME PER SHARE
Net income per common and common equivalent share is computed on the basis
of the weighted average number of common and common equivalent shares
outstanding during the period and net income reduced by preferred dividends
and accreted costs. The average number of shares outstanding (1996 data
retroactively restated for a three-for-two stock split as of August 8, 1996)
is computed as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average Number Outstanding:
Common Shares..................... 16,858,307 15,315,633 16,747,143 13,767,380
Common Equivalent Shares.......... 877,885 1,378,913 747,471 1,216,919
---------- ---------- ---------- ----------
Total........................... 17,736,192 16,694,546 17,494,614 14,984,299
========== ========== ========== ==========
</TABLE>
Fully diluted income per share amounts are not presented for the prior
period because inclusion of these amounts would be anti-dilutive. Fully
diluted income per share amounts for the current period do not differ
materially from primary earnings per share amounts.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 128
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share,"
which is applicable to the Company beginning in the fourth quarter of 1997.
This statement, upon adoption, will require all prior-period earnings per
share ("EPS") date to be restated, to conform to the provisions of the
statement. The statement will eliminate the disclosure of primary earnings per
share which includes the dilutive effect of stock options, warrants and other
convertible securities ("Common Stock Equivalents") and instead requires
reporting of "basic" earnings per share, which will exclude Common Stock
Equivalents. Additionally, the statement changes the methodology for fully
diluted earnings per share. In the opinion of the Company's management, the
adoption of this new accounting standard will not have a material effect on
the reported earnings per share of the Company.
29
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
While the Statements prohibits early adoption, pro forma presentation of the
impact of the Statement for the reporting periods is illustrated below:
PRO FORMA EARNINGS PER SHARE COMPUTATION UNDER FAS 128
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 SEPTEMBER 30, 1997 AND 1996
-------------------------------------------------- ---------------------------------------------------
(AMOUNTS IN THOUSANDS EXCEPT (AMOUNTS IN THOUSANDS EXCEPT
SHARE AND PER SHARE AMOUNTS) SHARE AND PER SHARE AMOUNTS)
1997 1996 1997 1996
----------------------- ------------------------- ------------------------ -------------------------
PER PER PER PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
------ ---------- ----- ------- ---------- ----- ------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income...... $4,908 $ 2,199 $13,324 $ 4,517
Less: preferred
stock dividends
and preferred
stock
accretion...... -- (1,206) -- (2,518)
------ ------- ------- -------
Income available
to common
shareholders... $4,908 16,858,307 $ .29 $ 993 15,315,633 $.06 $13,324 16,747,143 $ .80 $ 1,999 13,767,380 $ .14
====== ========== ===== ======= ========== ==== ======= ========== ===== ======= ========== =====
DILUTED EPS
Add: Options and
warrants....... -- 877,885 (.01) -- 1,378,913 -- -- 747,471 (.04) -- 1,216,919 (.01)
------ ---------- ----- ------- ---------- ---- ------- ---------- ----- ------- ---------- -----
Income available
to common
shareholders... $4,908 17,736,192 $ .28 $ 993 16,694,546 $.06 $13,324 17,494,614 $ .76 $ 1,999 14,984,299 $ .13
====== ========== ===== ======= ========== ==== ======= ========== ===== ======= ========== =====
</TABLE>
Pro forma basic earnings per common share were computed by dividing net
income by weighted average number of shares of common stock outstanding during
the quarter. The pro forma dilutive effect of options and warrants reflects
application of the treasury stock method, utilizing average market prices
during the period, and excludes any assumed exercise that would have been
antidilutive. Assumed conversion of outstanding redeemable and convertible
preferred stock at September 30, 1996 was excluded from the above, as the
effect would have been antidilutive.
SFAS No. 130
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income", which is applicable to the Company
effective January 1, 1998. This Statement establishes standards for reporting
and display of comprehensive income and its components (revenue, expenses,
gains and losses) in a full set of general purpose financial statements.
Comprehensive income is defined as the change in the equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity during
a period (from net income and other sources) except those resulting from
investments by owners and distributions to owners. Management believes that
the adoption of this statement will not have a material effect on the
Company's consolidated results of operations or financial position.
SFAS No. 131
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which is applicable to the Company effective January 1, 1998. This Statement
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. The
30
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Statement requires disclosure of a measure of segment profit or loss, certain
specific revenue and expense items, and segment assets. It requires
reconciliations of total segment revenues, total segment profit or loss, total
segment assets, and other amounts disclosed for segments to corresponding
amounts in the enterprise's general purpose financial statements. It requires
that all public business enterprises report information about the revenues
derived from the enterprise's products or services, about the countries in
which the enterprise earns revenues and holds assets, and about major
customers regardless of whether that information is used in making operating
decisions. Management believes that the adoption of this statement will not
have a material effect on the Company's consolidated results of operations or
financial position.
5. SENIOR CREDIT FACILITY
Under the terms of the five-year senior revolving credit facility agreement
of July 21, 1995, the Company was obligated to pay the financial institution
an aggregate contingent interest payment based on the minimum of $750,000 or
the appreciation in value of 140,000 shares of the Company's Class A Common
Stock over the 18 month period ending January 21, 1997, but not to exceed $2.1
million. A payment of $2.1 million was made on January 15, 1997 in conjunction
with the amendment to the credit facility, and was reflected as an accrued
expense on the balance sheet at December 31, 1996.
On January 14, 1997, the Company signed an agreement with the same financial
institution to provide a $100 million credit facility to the Company which
amended and restated the previous $35 million credit facility. The amended
credit facility was syndicated among five financial institutions. Borrowings
can be made in U.S. dollars, Canadian dollars and British pounds, and are
limited individually to $30 million for ACC Canada, $20 million for ACC U.K.
and $15 million for the Company's local exchange business in the U.S., with
total borrowings for the Company limited to $100 million. The amended facility
will be used to finance capital expenditures, provide working capital and to
provide capital for acquisitions. The maximum aggregate principal amount of
the amended facility is required to be reduced by $8 million per quarter
commencing on March 31, 1999 until December 31, 2000, and by $9 million per
quarter commencing on March 31, 2001 until maturity of the loan in January
2002.
6. BUSINESS COMBINATIONS
During the third quarter of 1997, the Company consummated several business
combinations, all accounted for as purchases, as follows:
. ACC U.K. acquired United Telecom Ltd. ("UT"), a pre-paid calling card and
long distance services provider based in London U.K. The results of
operations of UT are reflected in the third quarter results of operations
effective July 1, 1997. UT reported annual revenues of (Pounds)2.8 million
(US$4.5 million) for the fiscal year ended April 30, 1997.
. ACC U.S. acquired VISTA International Communications Inc. ("VISTA"), a
privately held, switch-based long distance provider headquartered in Mount
Arlington, New Jersey. VISTA provides services to small-to-medium-sized
commercial customers in the Northeastern U.S., with concentrations primarily
in New Jersey and Pennsylvania. VISTA reported revenues of over $10 million
in 1996. The results of operations of VISTA are included in the accompanying
results of operations effective August 1, 1997.
. ACC Germany acquired all the interests of Telenational Communications
Deutschland Limited Partnership ("TNC") a privately held telecommunications
services provider headquartered in Hamburg, Germany. TNC is a supplier of
prepaid calling cards, and has developed affinity programs with large
commercial customers. TNC's 1997 annualized revenue is DM 9.2 million (U.S.
$5.0 million). The results of operations of TNC are included in the
accompanying results of operations effective July 1, 1997.
The aggregate amount paid for these three acquisitions was U.S. $21.0
million. The estimated fair value of assets acquired (including Goodwill and
customer base) was U.S. $31.8 million, and liabilities assumed was U.S.
31
<PAGE>
ACC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$10.8 million. Goodwill associated with these acquisitions was U.S. $28.6
million, and is being amortized from 20 to 40 years. Customer base intangibles
associated with these acquisitions was U.S. $1.1 million, and is being
amortized over 5 years. (Note: U.S. dollar equivalent amounts noted above are
estimated based on the relevant month-end exchange rate).
In October 1997, the Company signed a definitive merger agreement with US
WATS Inc. ("US WATS") a switch-based long distance provider headquartered in
Bala Cynwyd, Pennsylvania. Under the terms of the agreement, US WATS
shareholders will receive .077 shares of ACC Common Stock for each share of US
WATS Common Stock, subject to certain adjustments. The exchange ratio may
change in the event of a change in the per share price of ACC common stock
prior to closing and certain other contingencies. The transaction was valued
at $46 million (before assumption of liabilities) at the date of signing the
agreement, but may reach a maximum of $50.6 million based on the final
exchange ratio at closing and certain other contingencies. The transaction is
intended to be accounted for as a pooling, and is subject to final regulatory
and US WATS shareholder approvals and certain other contingencies. US WATS
provides switch-based long distance and other services to small-medium sized
business, switchless resellers and other carriers principally located
throughout the mid-Atlantic region. US WATS has annualized revenue of over $55
million.
On November 10, 1997, Tel-Save Holdings, Inc. ("Tel-Save") filed a Schedule
13D with the Securities and Exchange Commission in which Tel-Save indicated
that it had purchased more than 10 percent of the outstanding common stock of
US WATS. Tel-Save stated that it believes that such stock ownership will
enable Tel-Save to influence the outcome of the proposed merger and that Tel-
Save does not favor the merger. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Developments".
7. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to reduce its exposure to
market risks from changes in foreign exchange rates and interest rates. The
Company does not hold or issue financial instruments for speculative purposes.
The derivative instruments used are currency forward contracts and interest
rate swap agreements. These derivatives are non-leveraged and involve little
complexity.
The Company enters into contracts to buy and sell foreign currencies in the
future in order to protect the U.S. dollar value of certain currency positions
and future foreign currency transactions. The fair value method is used to
account for these instruments. Under the fair value method, changes in fair
value are recognized in the consolidated balance sheet as a component of other
accrued expenses, and in the consolidated income statement as foreign currency
gain or loss. For reporting purposes, the contractual assets or liabilities of
the foreign currency agreements are offset because the agreements provide for
a right of offset. Any premiums or discounts related to foreign currency
contracts are amortized over the life of the contracts.
The Company enters into cross-currency rate swaps to hedge intercompany debt
from certain subsidiaries. Under these agreements, the Company typically pays
a fixed rate of interest on a foreign dollar note, and receives a variable
rate of interest on a U.S. dollar receivable. The fair value method is used to
account for these instruments. Under the fair value method, the amounts
receivable and payable are carried at their fair value on the consolidated
balance sheet as a component of other receivables. Changes in the fair value
are recognized in the consolidated income statement as foreign currency gain
or loss. Interest due under the fixed contracts and interest receivable under
the variable contracts are recognized in the consolidated income statement as
a component of net interest expense.
32
<PAGE>
EXHIBIT 99.2
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma condensed consolidated financial
statements are based on the historical presentation of the consolidated
financial statements of TCG and ACC, and incorporate the effects of the merger
of U.S. Wats, Inc., a New York Corporation ("USW"), with and into a wholly-owned
subsidiary of ACC (the "USW Merger"). The Unaudited Pro Forma Statements of
Operations for the year ended December 31, 1996, and the nine months ended
September 30, 1997 give effect to the USW Merger and the merger of ACC with and
into a wholly-owned subsidiary of TCG (the "ACC Merger," and together with the
USW Merger, the "Mergers") as if they had occurred on January 1, 1996. The
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30,
1997, gives effect to the merger of U.S. Wats, Inc., a New York Corporation
("USW"), with and into a wholly-owned subsidiary of ACC (the "USW Merger") as if
they had occurred on September 30, 1997. The pro forma condensed consolidated
financial statements do not include the effects of certain other acquisitions by
TCG or TCG's 1997 Equity Offering. The unaudited pro forma consolidated
financial statements should be read in conjunction with the historical financial
statements, including notes thereto, of TCG included in TCG's Proxy
Statement/Prospectus filed on Form S-4 on February 9, 1998 and those of ACC
included herein.
The Acquisition is expected to be accounted for under the purchase method of
accounting. The US Wats Merger is expected to be accounted for under the pooling
of interests method of accounting. The use of the pooling of interest method of
accounting is contingent upon certain events, including the number of shares to
be tendered by the shareholders of US Wats. The total purchase price of ACC has
been allocated to tangible and intangible assets and liabilities based upon
management's preliminary estimate of their respective fair values with the
excess of cost over net assets acquired allocated to goodwill.
The unaudited pro forma condensed consolidated statements may not be
indicative of the results that actually would have occurred if the
transactions had been in effect on the dates indicated or which may be
obtained in the future. These combined pro forma statements do not reflect any
potential savings which may result from the combined operations of TCG, ACC
and US Wats and exclude merger and acquisition related expenses.
1
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (1)
AS OF SEPTEMBER 30, 1997
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
(8)
(2) (2) (3) ACC/USW (2) (4) TCG/ACC
ACC USW PRO FORMA PRO FORMA TCG PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS CONSOLIDATED HISTORICAL ADJUSTMENTS CONSOLIDATED
---------- ---------- ----------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ -- $ 730 $ -- $ 730 $ 181,446 $ -- $ 182,176
Marketable securities.. -- -- -- -- 150,205 -- 150,205
Accounts receivable:
Trade.................. 69,539 9,896 (237) 79,198 78,018 (21) 157,195
Related parties........ -- -- -- -- 6,350 -- 6,350
Miscellaneous.......... 2,015 -- -- 2,015 7,570 -- 9,585
-------- ------- ----- -------- ---------- -------- ----------
Accounts receivable-
net.................. 71,554 9,896 (237) 81,213 91,938 (21) 173,130
Prepaid and other
current assets........ 7,908 160 8,068 17,174 (1,057) 24,185
-------- ------- ----- -------- ---------- -------- ----------
Total current
assets.............. 79,462 10,786 (237) 90,011 440,763 (1,078) 529,696
-------- ------- ----- -------- ---------- -------- ----------
Fixed assets--at costs:
Communications
network............... 153,758 6,285 -- 160,043 1,704,045 1,057 1,865,145
Less accumulated
depreciation and
amortization.......... (49,308) (3,037) -- (52,345) (335,114) -- (387,459)
-------- ------- ----- -------- ---------- -------- ----------
Fixed assets--net...... 104,450 3,248 -- 107,698 1,368,931 1,057 1,477,686
Goodwill and other
intangibles--net
accumulated
amortization........... 75,874 -- -- 75,874 263,089 869,217 1,208,180
Other assets............ 16,811 212 -- 17,023 43,137 -- 60,160
-------- ------- ----- -------- ---------- -------- ----------
Total assets......... $276,597 $14,246 $(237) $290,606 $2,115,920 $869,196 $3,275,722
======== ======= ===== ======== ========== ======== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable and
accrued liabilities... $ 58,917 $11,387 $ 339 $ 70,643 $ 216,015 $ 4,979 $ 291,637
Note Payable........... 877 2,051 -- 2,928 -- -- 2,928
Current maturities of
long-term debt........ 2,647 -- -- 2,647 -- -- 2,647
Current portion of
capital lease
obligation............ -- 268 -- 268 27,114 -- 27,382
Short-term bank debt... -- -- -- -- 52,575 -- 52,575
Other current
liabilities........... -- 103 -- 103 7,068 -- 7,171
-------- ------- ----- -------- ---------- -------- ----------
Total current
liabilities......... 62,441 13,809 339 76,589 302,772 4,979 384,340
Capital lease
obligations............ -- 449 -- 449 22,864 -- 23,313
TCI note-
subordinated(9)........ -- -- -- -- 28,554 -- 28,554
Deferred income taxes... 3,398 -- -- 3,398 -- -- 3,398
Long-term debt.......... 74,388 -- -- 74,388 -- -- 74,388
Senior Notes............ -- -- -- -- 300,000 -- 300,000
Senior Discount Notes... -- -- -- -- 715,620 -- 715,620
Unamortized notes
costs.................. -- -- -- -- (23,734) -- (23,734)
Other liabilities....... -- -- -- -- 18,309 -- 18,309
-------- ------- ----- -------- ---------- -------- ----------
Total liabilities.... 140,227 14,258 339 154,824 1,364,385 4,979 1,524,188
Commitment and
contingencies
Redeemable preferred
stock.................. -- 330 -- 330 -- (330) --
Stockholders' equity
Common Stock, Class A.. 271 16 -- 287 428 (76) 639
Common Stock, Class B.. -- -- -- -- 1,308 -- 1,308
Additional paid--in
capital............... 122,097 2,684 -- 124,781 1,301,838 875,007 2,301,626
Unrealized gain on
marketable
securities............ -- -- -- -- 142 -- 142
Accumulated deficit.... 17,014 (3,042) (576) 13,396 (431,156) (13,396) (431,156)
Cumulative translation
adjustment............ (1,402) -- -- (1,402) -- 1,402 --
-------- ------- ----- -------- ---------- -------- ----------
137,980 (342) (576) 137,062 872,560 862,937 1,872,559
Less cost of Class B
Common Stock in
treasury.............. (1,610) -- -- (1,610) (121,025) 1,610 (121,025)
-------- ------- ----- -------- ---------- -------- ----------
Total stockholders'
equity.............. 136,370 (342) (576) 135,452 751,535 864,547 1,751,534
-------- ------- ----- -------- ---------- -------- ----------
Total liabilities and
stockholders' equity... $276,597 $14,246 $(237) $290,606 $2,115,920 $869,196 $3,275,722
======== ======= ===== ======== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (1)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
(2) (2) (5) ACC/USW (2) (6) TCG/ACC
ACC USW PRO FORMA PRO FORMA TCG PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS CONSOLIDATED(8) HISTORICAL ADJUSTMENTS CONSOLIDATED
---------- ---------- ----------- --------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Telecommunications
services.............. $267,277 $43,303 $(1,119) $309,461 $ 343,914 $ (86) $ 653,289
-------- ------- ------- -------- ----------- ---------- -----------
Total revenues......... 267,277 43,303 (1,119) 309,461 343,914 (86) 653,289
-------- ------- ------- -------- ----------- ---------- -----------
Expenses:
Operating.............. 156,973 31,720 (1,119) 187,574 200,030 1,844 389,448
Selling, general and
administrative........ 76,091 11,873 -- 87,964 117,279 (1,930) 203,313
Depreciation and
amortization.......... 16,401 756 -- 17,157 107,437 16,239 140,833
-------- ------- ------- -------- ----------- ---------- -----------
Total expenses......... 249,465 44,349 (1,119) 292,695 424,746 16,153 733,594
-------- ------- ------- -------- ----------- ---------- -----------
Operating income
(loss)................. 17,812 (1,046) -- 16,766 (80,832) (16,239) (80,305)
-------- ------- ------- -------- ----------- ---------- -----------
Interest income
(expense), net......... (1,941) (199) -- (2,140) (64,579) -- (66,719)
Foreign exchange gain
(loss)................. (168) -- -- (168) -- -- (168)
-------- ------- ------- -------- ----------- ---------- -----------
Income (loss) before
minority interest,
equity in losses of
unconsolidated
affiliates, income tax
provision and preferred
stock dividends and
accretion.............. 15,703 (1,245) -- 14,458 (145,411) (16,239) (147,192)
Equity in losses of
unconsolidated
affiliates............. -- -- -- -- (3,229) -- (3,229)
-------- ------- ------- -------- ----------- ---------- -----------
Income (loss) from
continuing operations
before income tax
provision and preferred
stock dividends and
accretion.............. 15,703 (1,245) -- 14,458 (148,640) (16,239) (150,421)
Income tax provision.... (2,379) -- -- (2,379) (1,504) -- (3,883)
-------- ------- ------- -------- ----------- ---------- -----------
Net income (loss) from
continuing operations
before preferred stock
dividends and
accretion.............. 13,324 (1,245) -- 12,079 (150,144) (16,239) (154,304)
Preferred stock
dividends and
accretion.............. -- (20) -- (20) -- 20 --
-------- ------- ------- -------- ----------- ---------- -----------
Net income (loss) from
continuing operations
after preferred stock
dividends and
accretion.............. $ 13,324 $(1,265) $ -- $ 12,059 $ (150,144) $ (16,219) $ (154,304)
======== ======= ======= ======== =========== ========== ===========
Net income (loss) from
continuing operations
after preferred stock
dividends and accretion
per common and common -- -- -- -- $ (0.92) -- $ (0.83)
equivalent share....... ======== ======= ======= ======== =========== ========== ===========
Weighted average number
of common and common
equivalent shares -- -- -- -- 164,053,559 21,065,923 185,119,482
outstanding(7)......... ======== ======= ======= ======== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (1)
FOR THE YEAR ENDED DECEMBER 31, 1996
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
(8)
(2) (2) (5) ACC/USW (2) (6) TCG/ACC
ACC USW PRO FORMA PRO FORMA TCG PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS CONSOLIDATED HISTORICAL ADJUSTMENTS CONSOLIDATED
---------- ---------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Telecommunications
services.............. $308,767 $40,304 $(1,077) $347,994 $ 244,864 $ (103) $ 592,755
Management and royalty
fee from affiliates... -- -- -- -- 22,805 -- 22,805
-------- ------- ------- -------- ----------- ----------- -----------
Total revenues......... 308,767 40,304 (1,077) 347,994 267,669 (103) 615,560
-------- ------- ------- -------- ----------- ----------- -----------
Expenses:
Operating.............. 193,599 26,802 (1,077) 219,324 157,591 5,040 381,955
Selling, general and
administrative........ 84,511 12,266 -- 96,777 85,025 (5,143) 176,659
Depreciation and
amortization.......... 16,433 930 -- 17,363 78,416 21,652 117,431
-------- ------- ------- -------- ----------- ----------- -----------
Total expenses......... 294,543 39,998 (1,077) 333,464 321,032 21,549 676,045
-------- ------- ------- -------- ----------- ----------- -----------
Operating income
(loss)................. 14,224 306 -- 14,530 (53,363) (21,652) (60,485)
-------- ------- ------- -------- ----------- ----------- -----------
Interest income
(expense), net......... (3,874) (210) -- (4,084) (43,414) -- (47,498)
Foreign exchange gain
(loss)................. 509 -- -- 509 -- -- 509
-------- ------- ------- -------- ----------- ----------- -----------
Income (loss) before
minority interest,
equity in losses of
unconsolidated
affiliates, income tax
provision and preferred
stock dividends and
accretion.............. 10,859 96 -- 10,955 (96,777) (21,652) (107,474)
Minority interest....... (909) -- -- (909) 3,520 -- 2,611
Equity in losses of
unconsolidated
affiliates............. -- -- -- -- (19,400) -- (19,400)
-------- ------- ------- -------- ----------- ----------- -----------
Income (loss) from
continuing operations
before income tax
provision and preferred
stock dividends and
accretion.............. 9,950 96 -- 10,046 (112,657) (21,652) (124,263)
Income tax provision.... (2,185) (7) -- (2,192) (2,193) -- (4,385)
-------- ------- ------- -------- ----------- ----------- -----------
Net income (loss) from
continuing operations
before preferred stock
dividends and
accretion.............. 7,765 89 -- 7,854 (114,850) (21,652) (128,648)
Preferred stock
dividends and
accretion.............. (2,481) (27) -- (2,508) -- 2,508 --
-------- ------- ------- -------- ----------- ----------- -----------
Net income (loss) from
continuing operations
after preferred stock
dividends and
accretions............. $ 5,284 $ 62 $ -- $ 5,346 $ (114,850) $ (19,144) $ (128,648)
======== ======= ======= ======== =========== =========== ===========
Net income (loss) from
continuing operations
after preferred stock
dividends and accretion
per common and common
equivalent share....... -- -- -- -- $ (1.00) $ (0.95)
======== ======= ======= ======== =========== ===========
Weighted average number
of common and common
equivalents shares
outstanding(7)......... -- -- -- -- 114,443,695 21,065,923 135,509,618
======== ======= ======= ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The unaudited pro forma financial data do not give effect to any
restructuring costs, nor any potential cost savings or other synergies
that could result from the ACC Merger. The pro forma data are not
necessarily indicative of the operating results or financial position
that would have occurred had the Mergers been consummated on the dates
indicated, nor necessarily indicative of future operating results or
financial position. The pro forma adjustments are based on available
information and upon certain assumptions that management believes are
reasonable under the circumstances.
(2) These columns represent historical results of operations and financial
position.
(3) Estimated adjustments that eliminate accounts receivable and accounts
payable and accrued liabilities are attributable to outstanding amounts
resulting from intercompany transactions between ACC and US Wats. Other
adjustments to accumulated deficit and accounts payable and accrued
liabilities reflect the after tax impact of the merger between ACC and US
Wats, Inc. (the "USW Merger") related costs which were reflected in the
results of operations as if the USW Merger had been consummated as of
January 1, 1994. Adjustments to the pro forma weighted average number of
common shares and related impact on net income (loss) per common and common
equivalent share applicable to common stock are based on the number of
shares that would have been outstanding had the USW Merger occurred on the
earliest date presented.
(4) Estimated adjustments that eliminate accounts receivable and accounts
payable are attributable to outstanding amounts resulting from intercompany
transactions between TCG and ACC. There is an adjustment to eliminate the
stockholders' equity of ACC and US Wats and record goodwill and the related
effect of the amortization of goodwill for the year ended December 31, 1996
and the nine months ended September 30, 1997. The fair value of the net
assets acquired, including the allocation of goodwill and other intangible
assets, is currently being reviewed by management. Certain items have been
reclassified from prepaid expenses on the consolidated balance of ACC to
fixed assets to conform with the TCG presentation.
(5) Estimated adjustments that eliminate the revenue, corresponding network
costs and intercompany profits that are attributable to intercompany
transactions between ACC and US Wats.
(6) Estimated adjustments that eliminate the revenue, corresponding network
costs and intercompany profits that are attributable to intercompany
transactions between TCG and ACC or US Wats. In addition, bad debt expense
for ACC and US Wats has been reclassified from selling, general and
administrative expense to operating expense to conform with TCG's
presentation. Amortization expense has been recorded relating to the
goodwill recorded for the Acquisition. An adjustment was made to reverse
the preferred stock dividends that were paid by US Wats.
(7) The weighted average number of common and common equivalent shares
outstanding reflects the issuance of approximately 21,000,000 shares of TCG
Class A Common Stock in exchange for the pro forma outstanding shares of
ACC, assuming an exchange ratio of 1.1111 to 1.0. The actual Exchange Ratio
(as defined in the Agreement and Plan of Merger by and among ACC, TCG
Merger Co., Inc. and TCG) will be determined prior to the closing of the
ACC Merger based on the average of the last reported sales price per share
of TCG Class A Common Stock as reported on Nasdaq for the ten consecutive
trading days immediately preceding the trading day immediately prior to the
closing date.
(8) Pursuant to the terms of the USW Merger Agreement, each issued and
outstanding share of US Wats Common Stock (other than Dissenting Shares)
will be converted into the right to receive a fraction of a share of ACC
Stock equal to the exchange ratio (as defined in the US Wats Merger
Agreement) in effect at closing. For the purpose of these pro forma
statements, an exchange ratio of 0.061 has been applied to all periods
presented, on a pro forma basis. The actual exchange ratio will be
determined prior to closing of the USW Merger based on (i) the volume-
weighted average closing market price per share of ACC Stock as reported by
Nasdaq over the 20 trading day period ending on the third full trading day
preceding the closing and (ii) the amount of Contingent Obligations (as
defined in the US Wats Merger Agreement).
(9) In December 1997, TCG repaid the TCI Subordinated Note in advance of its
maturity date and at a discount.
5
