ACC CORP
S-3, 1996-02-22
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
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<PAGE>

 
   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 22, 1996
 
                                                      REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                --------------
                                    FORM S-3
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                                --------------
                                   ACC CORP.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                                --------------
            DELAWARE                                   16-1175232
 (STATE OR OTHER JURISDICTION OF                    (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                    IDENTIFICATION NO.)
                                400 WEST AVENUE
                           ROCHESTER, NEW YORK 14611
                                 (716) 987-3000
         (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
            AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
 
                                MICHAEL R. DALEY
                            EXECUTIVE VICE PRESIDENT
                          AND CHIEF FINANCIAL OFFICER
                                   ACC CORP.
                                400 WEST AVENUE
                           ROCHESTER, NEW YORK 14611
                                 (716) 987-3000
           (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
                   INCLUDING AREA CODE, OF AGENT FOR SERVICE)
 
                                --------------
                                   COPIES TO:
     RICHARD F. LANGAN, JR.                         JERRY V. ELLIOTT
        JOHN C. PARTIGAN                           SHEARMAN & STERLING
 NIXON, HARGRAVE, DEVANS & DOYLE LLP              599 LEXINGTON AVENUE
       437 MADISON AVENUE                       NEW YORK, NEW YORK 10022
    NEW YORK, NEW YORK 10022                         (212) 848-4000
         (212) 940-3000     
                            
                                --------------
  APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALES TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
  If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
  If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
                                --------------
                        CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                           PROPOSED
                            NUMBER OF       PROPOSED       MAXIMUM
 TITLE OF EACH CLASS OF      SHARES         MAXIMUM       AGGREGATE     AMOUNT OF
    SECURITIES TO BE          TO BE      OFFERING PRICE OFFERING PRICE REGISTRATION
       REGISTERED         REGISTERED (1)  PER SHARE (2)       (2)          FEE
- -----------------------------------------------------------------------------------
 <S>                      <C>            <C>            <C>            <C>
 Class A Common Stock,
  par value $.015 per
  share................     2,012,500        $27.50      $55,343,750    $19,084.01
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Includes 262,500 shares the Underwriters may purchase from the Company to
    cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee
    pursuant to Rule 457(c) under the Securities Act of 1933 and based upon
    prices reported on the Nasdaq Stock Market on February 20, 1996.
                                --------------
  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
 
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A         +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE   +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY  +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT        +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR   +
+THE SOLICITATION OF AN OFFER TO BUY THE SECURITIES DESCRIBED HEREIN, NOR      +
+SHALL THERE BE ANY SALE OF SUCH SECURITIES IN ANY JURISDICTION IN WHICH SUCH  +
+OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR        +
+QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued February 22, 1996
 
                                1,750,000 Shares
                                     [LOGO] ACC(R)
 
                              CLASS A COMMON STOCK
 
                                  -----------
 
 ALL OF  THE  SHARES OF  CLASS A  COMMON STOCK,  PAR  VALUE $0.015  PER SHARE,
  OFFERED HEREBY  ARE BEING  SOLD BY ACC  CORP. THE CLASS  A COMMON  STOCK IS
   TRADED  ON THE NASDAQ STOCK MARKET  UNDER THE SYMBOL "ACCC." ON  FEBRUARY
     20, 1996, THE REPORTED LAST SALE PRICE OF THE CLASS A COMMON STOCK ON
      THE NASDAQ STOCK MARKET WAS $27.50 PER SHARE.
 
                                  -----------
 
     SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR INFORMATION THAT SHOULD BE
                      CONSIDERED BY PROSPECTIVE INVESTORS.
 
                                  -----------
 
THESE  SECURITIES HAVE NOT BEEN APPROVED  OR DISAPPROVED BY THE SECURITIES  AND
 EXCHANGE  COMMISSION  OR  ANY  STATE   SECURITIES  COMMISSION,  NOR  HAS  THE
  SECURITIES  AND  EXCHANGE COMMISSION  OR  ANY STATE  SECURITIES  COMMISSION
   PASSED   UPON  THE  ACCURACY   OR  ADEQUACY   OF  THIS   PROSPECTUS.  ANY
    REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
                                  -----------
 
                               PRICE $    A SHARE
 
                                  -----------
 
<TABLE>
<CAPTION>
                                                 PRICE   UNDERWRITING
                                                   TO   DISCOUNTS AND  PROCEEDS TO
                                                 PUBLIC COMMISSIONS(1) COMPANY(2)
                                                 ------ -------------- -----------
<S>                                              <C>    <C>            <C>
Per Share.......................................  $          $            $
Total(3)........................................ $          $            $
</TABLE>
- -----
  (1) The Company has agreed to indemnify the Underwriters against certain
      liabilities, including liabilities under the Securities Act of 1933. See
      "Underwriters."
  (2) Before deducting expenses payable by the Company estimated at $        .
  (3) The Company has granted the Underwriters an option, exercisable within 30
      days of the date hereof, to purchase up to an aggregate of 262,500
      additional Shares of Class A Common Stock at the price to public less
      underwriting discounts and commissions, for the purpose of covering over-
      allotments, if any. If the Underwriters exercise such option in full, the
      total price to public, underwriting discounts and commissions and
      proceeds to Company will be $        , $          and $        ,
      respectively. See "Underwriters."
 
                                  -----------
 
  The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters and subject to approval of certain legal matters by Shearman &
Sterling, counsel for the Underwriters. It is expected that delivery of the
Shares will be made on or about     , 1996 at the office of Morgan Stanley &
Co. Incorporated, New York, N.Y., against payment therefor in immediately
available funds.
 
                                  -----------
 
MORGAN STANLEY & CO.                                  WHEAT FIRST BUTCHER SINGER
        Incorporated
 
      , 1996
<PAGE>
 
[Graphic indicating location of ACC Corp.'s switches and certain leased
facilities appears here.]

                                       2
<PAGE>
 
  NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITY OTHER THAN THE SHARES OF CLASS A COMMON STOCK OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
 
                               ----------------
 
  NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY OR BY
ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF THE CLASS A COMMON
STOCK OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY JURISDICTION
WHERE ACTION FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES.
PERSONS INTO WHOSE POSSESSION THIS PROSPECTUS COMES ARE REQUIRED BY THE
COMPANY AND THE UNDERWRITERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY
RESTRICTIONS AS TO THE OFFERING OF THE CLASS A COMMON STOCK AND THE
DISTRIBUTION OF THIS PROSPECTUS.
 
                               ----------------
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                  PAGE
                                  ----
<S>                               <C>
Incorporation of Certain
 Documents by Reference.........    4
Prospectus Summary..............    5
Risk Factors....................    8
Use of Proceeds.................   17
Price Range of Class A Common
 Stock and Dividend Policy......   18
Capitalization..................   19
Selected Historical Consolidated
 Financial and Operations Data..   20
Management's Discussion and
 Analysis of Financial Condition
 and Results of Operations......   22
Business........................   31
</TABLE>
<TABLE>
<CAPTION>
                                   PAGE
                                   ----
<S>                                <C>
Management.......................   50
Principal Shareholders...........   52
Description of Capital Stock.....   53
Shares Eligible for Future Sale..   58
Certain United States Federal Tax
 Considerations for Non-U.S.
 Holders of Class A Common Stock.   60
Underwriters.....................   62
Legal Matters....................   63
Experts..........................   63
Available Information............   64
Index to Consolidated Financial
 Statements......................  F-1
</TABLE>
 
                               ----------------
 
  The Company intends to continue to furnish to its stockholders annual
reports containing audited consolidated financial statements and a report
thereon by the Company's independent public accountants and quarterly reports
containing unaudited condensed consolidated financial information for each of
the first three quarters of each fiscal year.
 
  In this Prospectus, references to "dollar" and "$" are to United States
dollars, references to "Cdn. $" are to Canadian dollars, references to
"(Pounds)" are to English pounds sterling, 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.
 
                               ----------------
 
  The Company was originally incorporated in New York in 1982 under the name
A. C. Teleconnect Corp. and was reincorporated in Delaware in 1987 under the
name ACC Corp. As used herein, unless the context otherwise requires, the
"Company" and "ACC" refer to ACC Corp. and its subsidiaries, including ACC
Long Distance Corp. ("ACC U.S."), ACC TelEnterprises Ltd., the Company's 70%
owned Canadian subsidiary ("ACC Canada"), and ACC Long Distance UK Ltd. ("ACC
U.K."). The Company's principal executive offices are located at 400 West
Avenue, Rochester, New York 14611 and its telephone number at that address is
(716) 987-3000.
 
                                       3
<PAGE>
 
                INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
 
  The following documents filed with the Securities and Exchange Commission
("Commission") pursuant to the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), are incorporated by reference in this Prospectus:
 
  (1) the Company's Annual Report on Form 10-K (as amended on April 27, 1995)
for the year ended December 31, 1994;
 
  (2) the Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1995, June 30, 1995 and September 30, 1995;
 
  (3) the Company's Current Reports on Form 8-K filed on April 13, 1995, June
22, 1995, October 27, 1995 (as amended on December 8, 1995) and February 22,
1996; and
 
  (4) the description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A (as amended on November 14, 1995).
 
  All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference herein and to be a part hereof from the respective
dates of the filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
 
  The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon written or oral request of any such person,
a copy of any and all of such documents (other than exhibits to such documents
which are not specifically incorporated by reference into such documents).
Requests for such copies should be directed to the Chief Financial Officer,
ACC Corp., 400 West Avenue, Rochester, New York 14611 (telephone number (716)
987-3000).
 
                               ----------------
 
  IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A
COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
 
  IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS
A COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER
THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITERS."
 
                                       4
<PAGE>
 
                               PROSPECTUS SUMMARY
 
  The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, including risk factors, and
consolidated financial statements, and notes thereto, appearing elsewhere or
incorporated by reference in this Prospectus. Unless otherwise indicated, the
information in this Prospectus assumes that the Underwriters' over-allotment
option is not exercised. Certain of the information contained in this summary
and elsewhere in this Prospectus, including under "Management's Discussion and
Analysis of Financial Condition and Results of Operations," including
information with respect to the Company's plans and strategy for its business
and related financing, are forward-looking statements. For a discussion of
important factors that could cause actual results to differ materially from the
forward-looking statements, see "Risk Factors" and the Company's periodic
reports incorporated by reference herein.
 
                                  THE COMPANY
 
  ACC is a switch-based provider of telecommunications services in the United
States, Canada and the United Kingdom. The Company primarily provides long
distance telecommunications services to a diversified customer base of
businesses, residential customers and educational institutions. As a result of
the Company's historical focus on providing long distance services in the
Northeastern United States and recent regulatory changes, ACC has begun to
provide local telephone service as a switch-based local exchange reseller in
upstate New York and as a reseller of local exchange services in Ontario,
Canada. ACC operates an advanced telecommunications network consisting of seven
long distance international and domestic switches located in the U.S., Canada
and the U.K., a local exchange switch located in the U.S., leased transmission
lines, and network management systems designed to optimize traffic routing.
 
  The Company's objective is to grow its long distance telecommunications
customer base in its existing markets and to establish itself in deregulating
Western European markets that have high density telecommunications traffic,
such as France and Germany, when the Company believes that business and
regulatory conditions warrant. The key elements of the Company's business
strategy are: (1) to broaden ACC's penetration of the U.S., Canadian and U.K.
telecommunications markets by expanding its long distance, local and other
service offerings and geographic reach; (2) to utilize ACC's operating
experience as an early entrant in deregulating markets in the U.S., Canada and
the U.K. to penetrate other deregulating telecommunications markets that have
high density telecommunications traffic; (3) to achieve economies of scale and
scope in the utilization of ACC's network; and (4) to seek acquisitions,
investments or strategic alliances involving assets or businesses that are
complementary to ACC's current operations.
 
  The Company's principal competitive strengths are: (1) ACC's sales and
marketing organization and the customized service ACC offers to its customers;
(2) ACC's ability to offer competitive prices which the Company believes
generally are lower than prices charged by the major carriers in each of its
markets; (3) ACC's position as an early entrant in the U.S., Canadian and U.K.
markets as an alternative carrier; (4) ACC's focus on more profitable
international telecommunications traffic between the U.S., Canada and the U.K.;
and (5) ACC's switched-based networking capabilities. The Company believes that
switch ownership reduces reliance on other carriers and enables the Company to
efficiently route telecommunications traffic over multiple leased transmission
lines and to control costs, call record data and customer information. The
availability of existing transmission capacity in its markets makes leasing of
transmission lines attractive to the Company and enables it to grow network
usage without having to incur the significant capital and operating costs
associated with the development and operation of a transmission line
infrastructure.
 
  ACC primarily targets business customers with approximately $500 to $15,000
of monthly usage, selected residential customers and colleges and universities.
The Company believes that, in addition to being price-driven, these customers
tend to be focused on customer service, more likely to rely on a single carrier
for their telecommunications needs and less likely to change carriers than
larger commercial customers. The diversity of ACC's targeted customer base
enhances network utilization by combining business-driven workday traffic with
night and weekend off-peak traffic from student and residential customers. The
Company strives to be more cost effective, flexible, innovative and responsive
to the needs of its customers than the major carriers, which principally focus
their direct sales efforts on large commercial accounts and residential
customers.
 
                                       5
<PAGE>
 
                                  THE OFFERING
 
<TABLE>
<S>                                            <C>
Class A Common Stock offered.................  1,750,000 shares
Class A Common Stock to be outstanding after
 the offering (1)............................  9,670,776 shares
Use of proceeds..............................  To repay bank indebtedness, fund capital
                                               expenditures and for working capital and
                                               other general corporate purposes, including
                                               possible acquisitions. See "Use of
                                               Proceeds."
Nasdaq Stock Market symbol...................  ACCC
</TABLE>
- --------
(1) Based on the number of shares outstanding on January 31, 1996. Does not
    include approximately (i) 1,485,394 shares of Class A Common Stock issuable
    upon the exercise of options and warrants outstanding as of January 31,
    1996 at a weighted average exercise price of $16.17 per share, (ii) 625,000
    shares of Class A Common Stock issuable upon the conversion of the Series A
    Preferred Stock outstanding as of January 31, 1996, which is convertible at
    $16.00 per share or (iii) 20,000 shares of Class A Common Stock issuable
    upon the exercise of additional options outstanding as of January 31, 1996
    at an exercise price of $23.00 per share, which are subject to approval of
    the Company's shareholders.
 
                      SUMMARY CONSOLIDATED FINANCIAL DATA
        (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER MINUTE AMOUNTS)
 
<TABLE>
<CAPTION>
                                        YEAR ENDED DECEMBER 31,
                           ---------------------------------------------------
                             1991      1992      1993       1994     1995 (1)
                           --------- --------- ---------  ---------  ---------
<S>                        <C>       <C>       <C>        <C>        <C>
CONSOLIDATED STATEMENT OF
 OPERATIONS DATA:
 Revenue:
  United States...........   $33,360   $39,278   $45,150    $54,599    $65,975
  Canada..................    17,766    42,402    60,643     67,728     84,421
  United Kingdom..........       --        --        153      4,117     38,470
                           --------- --------- ---------  ---------  ---------
    Total.................    51,126    81,680   105,946    126,444    188,866
 Gross profit:
  United States...........   $13,913   $15,587   $18,768    $23,568    $29,282
  Canada..................     4,870    13,779    17,046     22,010     32,025
  United Kingdom..........       --        --       (154)     1,428     12,718
                           --------- --------- ---------  ---------  ---------
    Total.................    18,783    29,366    35,660     47,006     74,025
 Income (loss) from
  operations (2)..........    $3,446    $5,788  $(11,786)   $(8,314)      $218
 Net income (loss) per
  common and common
  equivalent share
  applicable to common
  stock from continuing
  operations (3)..........      $.36      $.52      $.24     $(1.60)     $(.76)
 Weighted average number
  of common
  shares used in computing
  net
  income (loss) per common
  share................... 5,801,769 6,882,033 7,024,925  7,068,481  7,789,886
</TABLE>
 
                                       6
<PAGE>
 
 
<TABLE>
<CAPTION>
                                         YEAR ENDED DECEMBER 31,
                              ------------------------------------------------
                                1991     1992     1993      1994     1995 (1)
                              -------- -------- --------  --------  ----------
<S>                           <C>      <C>      <C>       <C>       <C>
OTHER FINANCIAL AND
 OPERATIONS DATA:
 EBITDA (4):
  United States.............. $  5,473 $  6,184 $  6,017  $  5,847  $    8,653
  Canada.....................      737    3,523    2,423      (203)      7,299
  United Kingdom.............      --       --    (1,587)   (5,026)     (4,120)
                              -------- -------- --------  --------  ----------
    Total....................    6,210    9,707    6,853       618      11,832
                              ======== ======== ========  ========  ==========
 Billable minutes of use (in
  thousands) (5).............  296,119  475,422  683,073   882,993   1,181,663
 Customer accounts at period
  end........................   25,846   50,318   98,400   202,991     310,815
 Revenue per billable minute
  of use.....................     $.17     $.17     $.16      $.14        $.16
 Network cost per billable
  minute of use..............     $.11     $.11     $.10      $.09        $.10
</TABLE>
 
<TABLE>
<CAPTION>
                                                          DECEMBER 31, 1995
                                                       ------------------------
                                                        ACTUAL  AS ADJUSTED (6)
                                                       -------- ---------------
<S>                                                    <C>      <C>
CONSOLIDATED BALANCE SHEET DATA:
 Cash and cash equivalents............................ $    518    $ 23,903
 Total assets.........................................  123,984     147,369
 Short-term debt, including current maturities of long
  term debt...........................................    4,885       4,885
 Long-term debt, excluding current maturities.........   28,050       7,077
 Redeemable preferred stock...........................    9,448       9,448
 Shareholders' equity.................................   26,407      70,765
</TABLE>
- --------
(1) Includes the results of operations of Metrowide Communications from August
    1, 1995, the date of acquisition.
(2) Reflects, in 1993, an asset write-down of $12,807. See "Management's
    Discussion and Analysis of Financial Condition and Results of Operations--
    1994 Compared With 1993."
(3) Includes (i) in 1993, a gain on sale of common stock of the Company's
    Canadian subsidiary of $1.33 per share and (ii) in 1995, a loss of $.07 per
    share related to redeemable preferred stock dividends and accretion.
(4) Represents income (loss) from operations plus depreciation and amortization
    and asset write-down ("EBITDA"). In 1993, the Company recorded an asset
    write-down of $12,807. See "Management's Discussion and Analysis of
    Financial Condition and Results of Operations--Results of Operations--1994
    Compared With 1993." The Company has included information concerning EBITDA
    herein because it understands that such information is used by certain
    investors as one measure of an issuer's operating performance and
    historical ability to service debt. EBITDA is not determined in accordance
    with generally accepted accounting principles, is not indicative of cash
    used (provided) by operating activities and should not be considered in
    isolation or as an alternative to, or more meaningful than, measures of
    performance determined in accordance with generally accepted accounting
    principles.
(5) Defined as billable voice long distance minutes of use.
(6) Adjusted to give effect to this offering at an assumed public offering
    price of $27.50 per share and the application of the estimated net proceeds
    therefrom. See "Use of Proceeds."
 
                                       7
<PAGE>
 
                                 RISK FACTORS
 
  Prospective purchasers of the Class A Common Stock should consider carefully
the following risk factors, as well as the other information contained or
incorporated by reference in this Prospectus, before purchasing shares of the
Class A Common Stock offered hereby.
 
RECENT LOSSES; POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
 
  Although the Company has recently experienced revenue growth on an annual
basis, it has incurred net losses and losses from continuing operations during
each of its last two fiscal years. There can be no assurance that revenue
growth will continue or that the Company will achieve profitability in the
future. The Company intends to focus in the near term on the expansion of its
service offerings, including its local telephone business, and geographic
markets, which may adversely affect cash flow and operating performance. As
each of the telecommunications markets in which the Company operates continues
to mature, growth in the Company's revenues and customer base is likely to
decrease over time.
 
  The Company's operating results have fluctuated in the past and may
fluctuate significantly in the future as a result of a variety of factors,
some of which are outside of the Company's control, including general economic
conditions, specific economic conditions in the telecommunications industry,
the effects of governmental regulation and regulatory changes, user demand,
capital expenditures and other costs relating to the expansion of operations,
the introduction of new services by the Company or its competitors, the mix of
services sold and the mix of channels through which those services are sold,
pricing changes and new service introductions by the Company and its
competitors and prices charged by suppliers. As a strategic response to a
changing competitive environment, the Company may elect from time to time to
make certain pricing, service or marketing decisions or enter into strategic
alliances, acquisitions or investments that could have a material adverse
effect on the Company's business, results of operations and cash flow. The
Company's sales to other long distance companies have been increasing. Because
these sales are at margins that are lower than those derived from most of the
Company's other revenues, this increase may reduce the Company's gross margins
as a percentage of revenue. See "--Risks Associated With Acquisitions,
Investments and Strategic Alliances" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
 
DEPENDENCE ON TRANSMISSION FACILITIES-BASED CARRIERS AND SUPPLIERS
 
  The Company does not own telecommunications transmission lines. Accordingly,
telephone calls made by the Company's customers are connected through
transmission lines that the Company leases under a variety of arrangements
with transmission facilities-based long distance carriers, some of which are
or may become competitors of the Company, including AT&T Corp. ("AT&T"), Bell
Canada and British Telecommunications PLC ("British Telecom"). Most inter-city
transmission lines used by the Company are leased on a monthly or longer-term
basis at rates that currently are less than the rates the Company charges its
customers for connecting calls through these lines. Accordingly, the Company
is vulnerable to changes in its lease arrangements, such as price increases
and service cancellations. ACC's ability to maintain and expand its business
is dependent upon whether the Company continues to maintain favorable
relationships with the transmission facilities-based carriers from which the
Company leases transmission lines, particularly in the U.K., where British
Telecom and Mercury Communications Ltd. ("Mercury") are the two principal,
dominant carriers. The Company's U.K. operations are highly dependent upon the
transmission lines leased from British Telecom. The Company generally
experiences delays in billings from British Telecom and needs to reconcile
billing discrepancies with British Telecom before making payment. Although the
Company believes that its relationships with carriers generally are
satisfactory, the deterioration or termination in the Company's relationships
with one or more of those carriers could have a material adverse effect upon
the Company's business, results of operations and financial condition. Certain
of the vendors from whom the Company leases transmission lines, including 22
regional operating companies ("RBOCs") and other local exchange carriers,
currently are subject to tariff controls and other price constraints which in
the future may be changed. Under recently enacted U.S. legislation,
constraints
 
                                       8
<PAGE>
 
on the operations of the RBOCs have been dramatically reduced, which will
bring additional competitors to the long distance market. In addition,
regulatory proposals are pending that may affect the prices charged by the
RBOCs and other local exchange carriers to the Company, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "--Regulation" and "Business--Regulation." The
Company currently acquires certain of its equipment from one vendor. A failure
by a supplier to deliver quality products on a timely basis, or the inability
to develop alternative sources if and as required, could result in delays
which could have a material adverse effect on the Company's business, results
of operations and financial condition.
 
REGULATION
 
  Legislation that substantially revises the U.S. Communications Act of 1934
(the "U.S. Communications Act") was signed into law on February 8, 1996. The
legislation provides specific guidelines under which the 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.
The legislation opens all 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 markets to
additional competition, particularly from the RBOCs, the Company's ability to
compete is likely to 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 the U.S., 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. Federal and state regulations and regulatory trends have had,
and in the future are likely to have, both positive and negative effects on
the Company and its ability to compete. The recent trend in both Federal and
state regulation of telecommunications service providers has been in the
direction of lessened regulation. In general, neither the FCC nor the relevant
state PSCs currently regulate the Company's long distance rates or profit
levels, but either or both may do so in the future. However, the general
recent trend toward lessened regulation has also given AT&T, the largest long
distance carrier in the U.S., increased pricing flexibility that has permitted
it to compete more effectively with smaller interexchange carriers, such as
the Company. There can be no assurance that changes in current or future
Federal or state regulations or future judicial changes would not have a
material adverse effect on the Company.
 
  In order to provide their services, interexchange carriers, including the
Company, must generally purchase "access" from local exchange carriers to
originate calls from and terminate calls in the local exchange telephone
networks. Access charges presently represent a significant portion of the
Company's network costs in all areas in which it operates. In the U.S., access
charges generally are regulated by the FCC and the relevant state PSCs. Under
the terms of the AT&T Divestiture Decree, a court order entered in 1982 which,
among other things, required AT&T to divest its 22 wholly-owned RBOCs from its
long distance division ("AT&T Divestiture Decree"), the RBOCs were required to
price the "local transport" portion of such access charges on an "equal price
per unit of traffic" basis. In November 1993, the FCC implemented new interim
rules governing local transport access charges while the FCC considers
permanent rules regarding new rate structures for transport pricing and
switched access competition. These interim rules have essentially maintained
the "equal price per unit of traffic" rule. However, under alternative access
charge rate structures being considered by the FCC, local exchange carriers
would be permitted to allow volume discounts in the pricing of access charges.
If these rate structures are adopted, access charges for AT&T and other large
interexchange carriers would decrease, and access charges for small
interexchange carriers would increase. While the outcome of these proceedings
is uncertain, should the FCC adopt permanent access charge rules along the
lines of the proposed structures it is currently considering, the Company
would be at a cost disadvantage with regard to access charges in comparison to
AT&T and larger interexchange carrier competitors.
 
 
                                       9
<PAGE>
 
  The Company currently competes with local exchange carriers in the provision
of "short haul" toll calls completed within a Local Access and Transport Area
("LATA"), and will in the future, under provisions of recently enacted federal
legislation, compete with such carriers in the long-haul, or inter-LATA, toll
business. To complete long-haul and short-haul toll calls, the Company must
purchase "access" from the local exchange carriers. The Company must generally
price its toll services at levels equal to or below the retail rates
established by the local exchange carriers for their own short-haul or long-
haul toll rates. To the extent that the local exchange carriers are able to
reduce the margin between the access costs to the Company and the retail toll
prices charged by local exchange carriers, either by increasing access costs
or lowering retail toll rates, or both, the Company will encounter adverse
pricing and cost pressures in competing against local exchange carriers in
both the short-haul and long-haul toll markets.
 
  In Canada, services provided by ACC Canada are subject to or affected by
certain regulations of the Canadian Radio-Television and Telecommunications
Commission (the "CRTC"). The CRTC annually reviews the "contribution charges"
(the equivalent of access charges in the U.S.) it has assessed against the
access lines leased by Canadian long distance resellers, including the
Company, from the local telephone companies in Canada. The Company expects
that, based on existing regulations and rulings, its Canadian contribution
charges will increase by approximately Cdn. $1.5 million in 1997 over 1995
levels. Additional increases in these contribution charges could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Canadian long distance telecommunications industry is
the subject of ongoing regulatory change. These regulations and regulatory
decisions have a direct and material effect on the ability of the Company to
conduct its business. The recent trend of such regulations has been to open
the market to commercial competition, generally to the Company's benefit.
There can be no assurance, however, that any future changes in or additions to
laws, regulations, government policy or administrative rulings will not have a
material adverse effect on the Company's business, results of operation and
financial condition.
 
  The telecommunications services provided by ACC U.K. are subject to and
affected by regulations introduced by the U.K. telecommunications regulatory
authority, The Office of Telecommunications ("Oftel"). Since the break up of
the U.K. telecommunications duopoly consisting of British Telecom and Mercury
in 1991, it has been the stated goal of Oftel to create a competitive
marketplace from which detailed regulation could eventually be withdrawn. The
regulatory regime currently being introduced by Oftel has a direct and
material effect on the ability of the Company to conduct its business.
Although the Company is optimistic about its ability to continue to compete
effectively in the U.K. market, there can be no assurance that future changes
in regulation and government will not have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business--Regulation."
 
COMPETITION
 
  The long distance telecommunications industry is highly competitive and is
significantly influenced by the marketing and pricing decisions of the larger
industry participants. The industry has relatively insignificant barriers to
entry, numerous entities competing for the same customers and high churn rates
(customer turnover), as customers frequently change long distance providers in
response to the offering of lower rates or promotional incentives by
competitors. In each of its markets, the Company competes primarily on the
basis of price and also on the basis of customer service and its ability to
provide a variety of telecommunications services. The Company expects
competition on the basis of price and service offerings to increase. Although
many of the Company's university customers are under multi-year contracts,
several of the Company's largest customers (primarily other long distance
carriers) are on month-to-month contracts and are particularly price
sensitive. Revenues from other resellers accounted for approximately 22%, 8%
and 9%, of the revenues of ACC U.S., ACC Canada and ACC U.K., respectively, in
1995, and are expected to account for a higher percentage in the future. With
respect to these customers, the Company competes almost exclusively on price.
 
  Many of the Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources and larger
networks than the Company, control transmission lines and have long-standing
relationships with the Company's target customers. These competitors include,
among others,
 
                                      10
<PAGE>
 
AT&T, MCI Telecommunications Corporation ("MCI") and Sprint Corp. ("Sprint")
in the U.S.; Bell Canada, BC Telecom, Inc., Unitel Communications Inc.
("Unitel") and Sprint Canada (a subsidiary of Call-Net Telecommunications
Inc.) in Canada; and British Telecom, Mercury and IDB WorldCom Services Inc.
in the U.K. AT&T and other U.S. carriers are also expected to enter the U.K.
market. The Company also competes with numerous other long distance providers,
some of which focus their efforts on the same business customers targeted by
the Company and selected residential customers and colleges and universities,
the Company's other target customers. In addition, through its local telephone
service business in New York, the Company competes with New York Telephone
Company ("New York Telephone"), Frontier Corp., Citizens Telephone Co., MFS
Communications Co., Inc. and Time Warner Cable and others, including cellular
and other wireless providers. Furthermore, the recently announced joint
venture between MCI and Microsoft Corporation ("Microsoft"), under which
Microsoft will promote MCI's services, the recently announced joint venture
among Sprint, Deutsche Telekom AG and France Telecom, and other strategic
alliances, could also increase competitive pressures upon the Company and have
a material adverse effect on the Company's business, results of operations and
financial condition.
 
  In addition to these competitive factors, recent and pending deregulation in
each of the Company's markets may encourage new entrants. For example, as a
result of legislation recently enacted in the U.S., RBOCs will be allowed to
enter the long distance market, AT&T, MCI and other long distance carriers
will be allowed to enter the local telephone services market, and any entity
(including cable television companies and utilities) will be allowed to enter
the telecommunications market. In addition, the FCC has, on several occasions
since 1984, approved or required price reductions by AT&T and, in October
1995, the FCC reclassified AT&T as a "non-dominant" carrier, which
substantially reduces the regulatory constraints on AT&T. As the Company
expands its geographic coverage, it will encounter increased competition.
Moreover, the Company believes that competition in non-U.S. markets is likely
to increase and become more similar to competition in the U.S. markets over
time as such non-U.S. markets continue to experience deregulatory influences.
Prices in the long distance industry have declined from time to time in recent
years and, as competition increases in Canada and the U.K., prices are likely
to continue to decrease. For example, Bell Canada substantially reduced its
rates during the first quarter of 1994. The Company's competitors may reduce
rates or offer incentives to existing and potential customers of the Company.
To maintain its competitive position, the Company believes that it must be
able to reduce its prices in order to meet reductions in rates, if any, by
others. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Competition."
 
  The Company has only limited experience in providing local telephone
services, having commenced providing such services in 1994, and, although the
Company believes the local business will enhance its ability to compete in the
long distance market, to date the Company has experienced an operating cash
flow deficit in the operation of that business in the U.S. on a stand-alone
basis. The Company's revenues from local telephone services in 1995 were $1.35
million. In order to attract local customers, the Company must offer
substantial discounts from the prices charged by local exchange carriers and
must compete with other alternative local companies that offer such discounts.
The local telephone service business requires significant initial investments
in capital equipment as well as significant initial promotional and selling
expenses. Larger, better capitalized alternative local providers, including
AT&T and Time Warner Cable, among others, will be better able to sustain
losses associated with discount pricing and initial investments and expenses.
There can be no assurance that the Company will achieve positive cash flow or
profitability in its local telephone service business.
 
NEED FOR ADDITIONAL CAPITAL
 
  The Company will need to continue to enhance and expand its operations in
order to maintain its competitive position, expand its service offerings and
geographic markets and continue to meet the increasing demands for service
quality, availability and competitive pricing. As of the end of its last five
fiscal years, the Company has experienced a working capital deficit. During
1995, the Company's EBITDA minus capital
 
                                      11
<PAGE>
 
expenditures and changes in working capital was $(7.0) million. In addition,
the Company's indebtedness requires significant repayments over the next five
years. The Company may need to raise additional capital from public or private
equity or debt sources in order to finance its anticipated growth, including
local service expansion, which is capital intensive, working capital needs,
debt service obligations, contemplated capital expenditures and the optional
redemption of the Series A Preferred Stock if it is not converted. In
addition, the Company may need to raise additional funds in order to take
advantage of unanticipated opportunities, including more rapid international
expansion or acquisitions of, investments in or strategic alliances with
companies that are complementary to the Company's current operations, or to
develop new products or otherwise respond to unanticipated competitive
pressures. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the Company's then current
shareholders would be reduced and, if such equity securities take the form of
Preferred Stock or Class B Common Stock, the holders of such Preferred Stock
or Class B Common Stock may have rights, preferences or privileges senior to
those of holders of Class A Common Stock. There can be no assurance that the
Company will be able to raise such capital on satisfactory terms or at all. If
the Company decides to raise additional funds through the incurrence of debt,
the Company would need to obtain the consent of its lenders under the Credit
Facility (as defined below) and would likely become subject to additional or
more restrictive financial covenants. In the event that the Company is unable
to obtain such additional capital or is unable to obtain such additional
capital on acceptable terms, the Company may be required to reduce the scope
of its presently anticipated expansion, which could materially adversely
affect the Company's business, results of operations and financial condition
and its ability to compete. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Liquidity and Capital Resources"
and "Description of Capital Stock."
 
RISKS OF GROWTH AND EXPANSION
 
  The Company plans to expand its service offerings and principal geographic
markets in the United States, Canada and the United Kingdom. In addition, the
Company may establish a presence in deregulating Western European markets that
have high density telecommunications traffic, such as France and Germany, when
the Company believes that business and regulatory conditions warrant. There
can be no assurance that the Company will be able to add service or expand its
markets at the rate presently planned by the Company or that the existing
regulatory barriers will be reduced or eliminated. The Company's rapid growth
has placed, and in the future may continue to place, a significant strain on
the Company's administrative, operational and financial resources and
increased demands on its systems and controls. As the Company increases its
service offerings and expands its targeted markets, there will be additional
demands on the Company's customer support, sales and marketing and
administrative resources and network infrastructure. There can be no assurance
that the Company's operating and financial control systems and infrastructure
will be adequate to maintain and effectively monitor future growth. The
failure to continue to upgrade the administrative, operating and financial
control systems or the emergence of unexpected expansion difficulties could
materially adversely affect the Company's business, results of operations and
financial condition.
 
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
 
  A key component of the Company's strategy is its planned expansion in
international markets. To date, the Company has only limited experience in
providing telecommunications service outside the United States and Canada.
There can be no assurance that the Company will be able to obtain the capital
it requires to finance its expansion in international markets on satisfactory
terms or at all. In many international markets, protective regulations and
long-standing relationships between potential customers of the Company and
their local providers create barriers to entry. Pursuit of international
growth opportunities may require significant investments for an extended
period before returns, if any, on such investments are realized. In addition,
there can be no assurance that the Company will be able to obtain the permits
and operating licenses required for it to operate, to hire and train employees
or to market, sell and deliver high quality services in these markets. In
addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent to doing business on
an international level, such as unexpected changes in regulatory requirements,
tariffs, customs, duties and other trade barriers, difficulties in staffing
and managing foreign operations, longer payment cycles, problems in
 
                                      12
<PAGE>
 
collecting accounts receivable, political risks, fluctuations in currency
exchange rates, foreign exchange controls which restrict or prohibit
repatriation of funds, technology exports and import restrictions or
prohibitions, delays from custom brokers or government agencies, seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world and potentially adverse tax consequences resulting
from operating in multiple jurisdictions with different tax laws, which could
materially adversely impact the success of the Company's international
operations. In many countries, the Company may need to enter into a joint
venture or other strategic relationship with one or more third parties in
order to successfully conduct its operations. As its revenues from its
Canadian and U.K. operations increase, an increasing portion of the Company's
revenues and expenses will be denominated in currencies other than U.S.
dollars, and changes in exchange rates may have a greater effect on the
Company's results of operations. There can be no assurance that such factors
will not have a material adverse effect on the Company's future operations
and, consequently, on the Company's business, results of operations and
financial condition. In addition, there can be no assurance that laws or
administrative practices relating to taxation, foreign exchange or other
matters of countries within which the Company operates will not change. Any
such change could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
 
  To complete its billing, the Company must record and process massive amounts
of data quickly and accurately. While the Company believes its management
information system is currently adequate, it has not grown as quickly as the
Company's business and substantial investments are needed. The Company has
made arrangements with a consultant and a vendor for the development of new
information systems and has budgeted approximately $6.0 million for this
purpose in 1996. The Company believes that the successful implementation and
integration of these new information systems is important to its continued
growth, its ability to monitor costs, to bill customers and to achieve
operating efficiencies, but there can be no assurance that the Company will
not encounter delays or cost-overruns or suffer adverse consequences in
implementing the systems. The principal vendor of the Company's software has a
unique knowledge of such software and the Company may be dependent on the
vendor for any modifications to the software. The Company believes that it
currently is the only customer of the vendor and, as a result, the vendor is
financially dependent on the Company. In addition, as the Company's suppliers
revise and upgrade their hardware, software and equipment technology, there
can be no assurance that the Company will not encounter difficulties in
integrating the new technology into the Company's business or that the new
systems will be appropriate for the Company's business. See "Business--
Information Systems."
 
RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
 
  As part of its business strategy, the Company expects to seek to develop
strategic alliances both domestically and internationally and to acquire
assets and businesses or make investments in companies that are complementary
to its current operations. The Company has no present commitments or
agreements with respect to any such strategic alliance, investment or
acquisition. Any such future strategic alliances, investments or acquisitions
would be accompanied by the risks commonly encountered in strategic alliances
with or acquisitions of or investments in companies. Such risks include, among
other things, the difficulty of assimilating the operations and personnel of
the companies, the potential disruption of the Company's ongoing business, the
inability of management to maximize the financial and strategic position of
the Company by the successful incorporation of licensed or acquired technology
and rights into the Company's service offerings, the maintenance of uniform
standards, controls, procedures and policies and the impairment of
relationships with employees and customers as a result of changes in
management. In addition, the Company has experienced higher attrition rates
with respect to customers obtained through acquisitions, and may continue to
experience higher attrition rates with respect to any customers resulting from
future acquisitions. Moreover, to the extent that any such acquisition,
investment or alliance involved a business located outside the United States,
the transaction would involve the risks associated with international
expansion. See "--Risks Associated with International Expansion." There can be
no assurance that the Company would be successful in overcoming these risks or
any other problems encountered with such strategic alliances, investments or
acquisitions.
 
 
                                      13
<PAGE>
 
  In addition, if the Company were to proceed with one or more significant
strategic alliances, acquisitions or investments in which the consideration
consists of cash, a substantial portion of the Company's available cash
(including proceeds of this offering) could be used to consummate the
strategic alliances, acquisitions or investments. If the Company were to
consummate one or more significant strategic alliances, acquisitions or
investments in which the consideration consists of stock, shareholders of the
Company could suffer a significant dilution of their interests in the Company.
Many of the businesses that might become attractive acquisition candidates for
the Company may have significant goodwill and intangible assets, and
acquisitions of these businesses, if accounted for as a purchase, would
typically result in substantial amortization charges to the Company. The
financial impact of acquisitions, investments and strategic alliances could
have a material adverse effect on the Company's business, financial condition
and results of operations and could cause substantial fluctuations in the
Company's quarterly and yearly operating results. See "Business--Acquisitions,
Investments and Strategic Alliances."
 
TECHNOLOGICAL CHANGES
 
  The telecommunications industry is characterized by rapid and significant
technological advancements and introductions of new products and services
utilizing new technologies. There can be no assurance that the Company will
maintain competitive services or that the Company will obtain appropriate new
technologies on a timely basis or on satisfactory terms.
 
DEPENDENCE ON KEY PERSONNEL
 
  The Company's success depends to a significant degree upon the continued
contributions of its management team and technical, marketing and sales
personnel. The Company's employees may voluntarily terminate their employment
with the Company at any time. Competition for qualified employees and
personnel in the telecommunications industry is intense and, from time to
time, there are a limited number of persons with knowledge of and experience
in particular sectors of the telecommunications industry. The Company's
success also will depend on its ability to attract and retain qualified
management, marketing, technical and sales executives and personnel. The
process of locating such personnel with the combination of skills and
attributes required to carry out the Company's strategies is often lengthy.
The loss of the services of key personnel, or the inability to attract
additional qualified personnel, could have a material adverse effect on the
Company's results of operations, development efforts and ability to expand.
There can be no assurance that the Company will be successful in attracting
and retaining such executives and personnel. Any such event could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management."
 
RISK ASSOCIATED WITH FINANCING ARRANGEMENTS; DIVIDEND RESTRICTIONS
 
  The Company's financing arrangements are secured by substantially all of the
Company's assets and require the Company to maintain certain financial ratios
and restrict the payment of dividends. These financial arrangements will
require the repayment of significant amounts and significant reductions in
borrowing capacity thereunder during the next five years. The Company's
secured lenders would be entitled to foreclose upon those assets in the event
of a default under the financing arrangements and to be repaid from the
proceeds of the liquidation of those assets before the assets would be
available for distribution to the Company's other creditors and shareholders
in the event that the Company is liquidated. In addition, the collateral
security arrangements under the Company's existing financing arrangements may
adversely affect the Company's ability to obtain additional borrowings or
other capital. The Company may need to raise additional capital from equity or
debt sources to finance its projected growth and capital expenditures
contemplated for periods after 1996. See "--Need for Additional Capital" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
 
HOLDING COMPANY STRUCTURE
 
  ACC Corp. is a holding company, the principal assets of which are its
operating subsidiaries in the U.S., Canada and the U.K. ACC Canada, a 70%
owned subsidiary of ACC Corp., is a public company listed on the Toronto Stock
Exchange and the Montreal Stock Exchange. The ability of ACC Canada to declare
and pay
 
                                      14
<PAGE>
 
dividends is restricted by the terms of the agreement under which the
Company's Series A Preferred Stock was issued. In addition, ACC Canada's
ability to make other payments to ACC Corp. and its other subsidiaries may be
dependent upon the taking of action by ACC Canada's Board of Directors,
applicable Canadian and provincial law and stock exchange regulations, in
addition to the availability of funds. At the present time, three of ACC
Canada's seven directors are representatives of ACC Corp. ACC Corp.'s
percentage ownership interest in ACC Canada may decrease over time as a result
of stock issuances or sales or, alternatively, may increase over time as a
result of stock purchases, investments or other transactions. ACC U.S., ACC
Canada, ACC U.K. and other operating subsidiaries of the Company are subject
to corporate law restrictions on their ability to pay dividends to ACC Corp.
There can be no assurance that ACC Corp. will be able to cause its operating
subsidiaries to declare and pay dividends or make other payments to ACC Corp.
when requested by ACC Corp. The failure to pay any such dividends or make any
such other payments could have a material adverse effect upon the Company's
business, financial condition and results of operations.
 
POTENTIAL VOLATILITY OF STOCK PRICE
 
  The market price of the Class A Common Stock has been, and following this
offering may continue to be, highly volatile. See "Price Range of Class A
Common Stock and Dividend Policy." Factors such as variations in the Company's
revenue, earnings and cash flow, the difference between the Company's actual
results and the results expected by investors and analysts and announcements
of new service offerings, marketing plans or price reductions by the Company
or its competitors could cause the market price of the Class A Common Stock to
fluctuate substantially. In addition, the stock markets recently have
experienced significant price and volume fluctuations that particularly have
affected telecommunications companies and resulted in changes in the market
prices of the stocks of many companies that have not been directly related to
the operating performance of those companies. Such market fluctuations may
materially adversely affect the market price of the Class A Common Stock.
 
ANTI-TAKEOVER PROVISIONS
 
  The Company's Board of Directors has the authority to issue up to 1,990,000
additional shares of Preferred Stock and 25,000,000 shares of Class B Common
Stock, and to determine the price, rights, preferences and privileges of those
shares without any further vote or action by the shareholders. The rights of
the holders of any Class A Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock or
Class B Common Stock that may be issued in the future. While the Company has
no present intention to issue any additional shares of Preferred Stock or
Class B Common Stock, any such issuance or the perception that such issuances
may occur could have the effect of making it more difficult for a third party
to acquire control of the Company. The issuance of Preferred Stock or Class B
Common Stock could also decrease the amount of earnings and assets available
for distribution to holders of Class A Common Stock or could adversely affect
the rights and powers, including voting rights, of holders of Class A Common
Stock. In addition, the Company is and, subject to certain conditions, will
continue to be, subject to the anti-takeover provisions of the Delaware
General Corporation Law, which could have the effect of delaying or preventing
a change of control of the Company. Furthermore, the Company's Series A
Preferred Stock is required to be redeemed and the Company's indebtedness
under the Credit Agreement is required to be repaid upon a change in control,
and certain contractual arrangements with executive officers and directors of
the Company may have the effect of delaying or preventing changes in control
or management of the Company. All of these factors could materially adversely
affect the market price of the Company's Class A Common Stock. See
"Description of Capital Stock--Certain Charter, By-law and Statutory
Provisions and Other Anti-takeover Considerations."
 
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
 
  Future sales of substantial numbers of shares of Class A Common Stock in the
public market, or the perception that such sales could occur, could adversely
affect the market price of the Class A Common Stock and make it more difficult
for the Company to raise funds through equity offerings in the future. Several
of the Company's principal shareholders hold a significant portion of the
Company's outstanding Class A Common Stock and a decision by one or more of
these shareholders to sell their shares could materially adversely affect the
market price of the Class A Common Stock. See "Principal Shareholders."
 
 
                                      15
<PAGE>
 
  Upon completion of this offering, the Company will have approximately
9,700,000 shares of Class A Common Stock outstanding, assuming (i) no exercise
of the Underwriters' over-allotment option and (ii) no exercise of options or
warrants outstanding as of January 31, 1996. Of the Class A Common Stock
outstanding upon completion of this offering, the 1,750,000 shares of Class A
Common Stock sold in this offering as well as approximately 4,200,000 shares
previously issued by the Company will be freely tradeable without restriction
or further registration under the Securities Act of 1933, as amended (the
"Securities Act"), except for any shares held by "affiliates" of the Company
or persons who have been affiliates within the preceding three months. The
remaining approximately 3,700,000 outstanding shares of Class A Common Stock
are currently eligible for sale under Rule 144 or Rule 144(k). Approximately
1,235,000 shares of Class A Common Stock or securities exercisable for or
convertible into Class A Common Stock held by directors, officers and certain
other shareholders are subject to 120-day lock-up agreements with the
Underwriters. See "Underwriters." The Commission has recently proposed
amendments to Rule 144 and Rule 144(k) that would shorten by one year the
applicable holding periods and could result in resales of restricted
securities sooner than would be the case under Rule 144 and Rule 144(k) as
currently in effect.
 
  The holders of 10,000 shares of Series A Preferred Stock (which as of
January 31, 1996 are convertible into 625,000 shares of Class A Common Stock)
and warrants to purchase 130,000 shares of Class A Common Stock are entitled
to certain registration rights with respect to such shares. In addition, the
Company registered on Form S-8 under the Securities Act approximately
2,163,000 shares of Class A Common Stock, and intends to register on Form S-8
an additional 500,000 shares of Class A Common Stock, issuable under certain
options issued to employees as well as shares of Class A Common Stock issued
or reserved for issuance under the Company's Employee Stock Purchase Plan.
Subject to obtaining shareholder approval, the Company has adopted a stock
option plan for non-employee directors and has granted options to purchase
20,000 shares thereunder. The Company intends to register on Form S-8 the
250,000 shares of Class A Common Stock issuable under options granted pursuant
to such plan. See "Description of Capital Stock," "Shares Eligible for Future
Sale" and "Underwriters."
 
                                      16
<PAGE>
 
                                USE OF PROCEEDS
 
  The net proceeds to the Company from the offering are estimated to be
approximately $44.4 million ($51.2 million if the Underwriters' over-allotment
option is exercised in full), after deduction of estimated underwriting
discounts and commissions and estimated offering expenses. The Company expects
to use the net proceeds of this offering to repay all of its existing
indebtedness under the Credit Facility ($19.0 million was outstanding as of
January 31, 1996), $10.0 million to finance capital expenditures and the
balance for working capital and general corporate purposes, including, as
described below, possible future investments, acquisitions or strategic
alliances.
 
  The Company expects to use the net proceeds of this offering to repay
borrowings under its revolving credit facility with First Union National Bank
of North Carolina and Fleet Bank of Connecticut (formerly Shawmut Bank
Connecticut, N.A.), as agents (the "Agents"), which expires on July 1, 2000
(the "Credit Facility"), and thereafter to reborrow all or a portion of such
funds as required for working capital and general corporate purposes,
including investments, acquisitions and strategic alliances. Borrowings under
the Credit Facility were used to repay previously existing lines of credit, to
finance the Company's acquisition of Metrowide Communications, to pay
licensing fees to a software development company relating to information
systems, and to provide working capital and funding for general corporate
purposes. The Credit Facility bears interest at a floating rate, the weighted
average of which was 8.4% during 1995. In addition, the Company is obligated
to pay the Agents a contingent interest payment in an amount ranging from
$0.75 million to $2.1 million based on the appreciation in market value of
140,000 shares of Class A Common Stock from $14.92 per share. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
 
  The Company also expects to use approximately $10.0 million of the net
proceeds of this offering to finance proposed capital expenditures, including
expansion and upgrading of the Company's eight switches, further development
and integration of its billing and information systems, and new product
offerings, including frame relay and Internet services. The remainder of the
net proceeds will be used for working capital and general corporate purposes.
The Company's 1996 budget for capital expenditures is approximately $26.0
million and, therefore, the amount of net offering proceeds actually expended
by the Company for the foregoing types of capital expenditures and for working
capital and general corporate purposes may vary significantly depending on a
number of factors, including future revenue growth, the amount of cash
generated by the Company's operations and the progress of the Company's
product and service development efforts. The Credit Facility currently would
not allow the Company to make $26.0 million of capital expenditures in 1996.
The Company is seeking an amendment to the Credit Facility to, among other
things, permit increased capital expenditures.
 
  Proceeds from this offering also could be used for possible future
investments, acquisitions or strategic alliances in companies that are
complementary to the Company's current operations. See "Risk Factors--Risks
Associated with Acquisitions, Investments and Strategic Alliances." While the
Company periodically evaluates investment, acquisition and strategic alliance
candidates, the Company has no present commitments or agreements with respect
to any such investment, acquisition or strategic alliance.
 
                                      17
<PAGE>
 
            PRICE RANGE OF CLASS A COMMON STOCK AND DIVIDEND POLICY
 
  The Class A Common Stock is quoted on the Nasdaq National Market System
("Nasdaq Stock Market") under the symbol "ACCC." The following table sets
forth, for the periods indicated, the high and low sale prices of the Class A
Common Stock, as reported by the Nasdaq Stock Market, and the cash dividends
declared per share of Class A Common Stock.
 
<TABLE>
<CAPTION>
                                             COMMON STOCK PRICE  CASH DIVIDENDS
                                             -------------------  DECLARED PER
                                               HIGH       LOW        SHARE
                                             --------- --------- --------------
      <S>                                    <C>       <C>       <C>
      1994:
        First Quarter....................... $26 1/4   $17           $0.03
        Second Quarter......................  24 1/4    13            0.03
        Third Quarter.......................  19 3/4    12 3/4        0.03
        Fourth Quarter......................  19        13 3/4        0.03
      1995:
        First Quarter....................... $19 1/4   $14           $0.03
        Second Quarter......................  17        13            0.03
        Third Quarter.......................  19 1/4    14 1/2         --
        Fourth Quarter......................  24 1/8    15 3/4         --
      1996:
        First Quarter (through February 20,
         1996).............................. $29 1/2   $22 1/4         --
</TABLE>
 
  For a recent last sale price reported on the Nasdaq Stock Market for the
Class A Common Stock see the cover page of this Prospectus. As of January 31,
1996, the Company had approximately 477 holders of record of the Class A
Common Stock.
 
  The Company ceased paying quarterly cash dividends on its Class A Common
Stock in 1995 to use its cash to invest in the growth of its business. The
Company anticipates that all future earnings, if any, generated from
operations will be retained by the Company to develop and expand its business.
Any future determination with respect to the payment of dividends on the Class
A Common Stock will be at the discretion of the Board of Directors and will
depend upon, among other things, the Company's operating results, financing
condition and capital requirements, the terms of then-existing indebtedness
and preferred stock, general business conditions, Delaware corporate law
limitations and such other factors as the Board of Directors deems relevant.
The terms of the Company's Credit Facility prohibit the payment of dividends
without the Agents' consent. In addition, the Company is prohibited, under the
terms of the Company's Series A Preferred Stock, from paying or declaring any
dividend upon the Company's Class A Common Stock unless the prior written
consent of the holders of a majority of the outstanding shares of Series A
Preferred Stock is obtained. The Company's holding company structure may
adversely affect the Company's ability to obtain payments when needed from ACC
Corp.'s operating subsidiaries. See "Risk Factors--Holding Company Structure"
and Note 5 of Notes to Consolidated Financial Statements.
 
                                      18
<PAGE>
 
                                CAPITALIZATION
 
  The following table sets forth the consolidated capitalization of the
Company as of December 31, 1995 and as adjusted for the sale of shares of
Class A Common Stock offered hereby (at an assumed price of $27.50 per share)
and the application of the estimated net proceeds therefrom as described under
"Use of Proceeds."
 
<TABLE>
<CAPTION>
                                                          DECEMBER 31, 1995
                                                       ------------------------
                                                       ACTUAL   AS ADJUSTED (1)
                                                       -------  ---------------
                                                       (DOLLARS IN THOUSANDS)
<S>                                                    <C>      <C>
Notes payable......................................... $ 1,966      $ 1,966
                                                       =======      =======
Current maturities of long-term debt.................. $ 2,919      $ 2,919
                                                       =======      =======
Long-term debt, including capital lease obligations
 and Credit Facility.................................. $28,050      $ 7,077
Series A Preferred Stock, $1.00 par value, $1,000
 liquidation value, cumulative, convertible; 10,000
 shares authorized, issued and outstanding, actual and
 as adjusted..........................................   9,448        9,448
Minority interest.....................................   1,428        1,428
Shareholders' equity:
  Preferred Stock, $1.00 par value; 1,990,000 shares
   authorized, actual and as adjusted; and no shares
   issued or outstanding, actual and as adjusted......     --           --
  Class A Common Stock $.015 par value; 50,000,000
   shares authorized, actual and as adjusted;
   8,617,259 shares issued and 7,890,670 shares
   outstanding, actual; and 10,367,259 shares issued
   and 9,640,670 shares outstanding, as
   adjusted (2).......................................     129          155
  Class B Common Stock, $.015 par value; 25,000,000
   shares authorized, actual and as adjusted; and no
   shares issued or outstanding, actual and as
   adjusted...........................................     --           --
  Capital in excess of par value......................  32,911       77,243
  Cumulative translation adjustment...................    (950)        (950)
  Retained earnings...................................  (4,073)      (4,073)
  Treasury stock, 726,589 shares of Class A Common
   Stock, actual and as adjusted......................  (1,610)      (1,610)
                                                       -------      -------
    Total shareholders' equity........................  26,407       70,765
                                                       -------      -------
      Total capitalization............................ $65,333      $88,718
                                                       =======      =======
</TABLE>
- --------
(1) Following completion of this offering, the Company intends to use a
    portion of the net proceeds received by it therefrom to repay all
    indebtedness outstanding under the Credit Facility and, thereafter, will
    reborrow funds under the Credit Facility as required to finance its
    working capital requirements and for general corporate purposes. At
    January 31, 1996, $19.0 million was outstanding under the Credit Facility.
    See "Use of Proceeds."
(2) Does not include approximately (i) 1,485,394 shares of Class A Common
    Stock issuable upon the exercise of options and warrants outstanding as of
    January 31, 1996 at a weighted average exercise price of $16.17 per share,
    (ii) 625,000 shares (as of January 31, 1996) of Class A Common Stock
    issuable upon the conversion of the Series A Preferred Stock outstanding,
    which is convertible at $16.00 per share or (iii) 20,000 shares of Class A
    Common Stock issuable upon the exercise of additional options outstanding
    as of January 31, 1996 at an exercise price of $23.00 per share, which are
    subject to approval of the Company's shareholders. See "Description of
    Capital Stock."
 
                                      19
<PAGE>
 
        SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATIONS DATA
 
  The following selected historical consolidated financial data for each of
the years presented have been derived from the Company's audited consolidated
financial statements. The consolidated financial statements of the Company as
of December 31, 1994 and 1995 and for each of the three years in the period
ended December 31, 1995, together with the notes thereto and related report of
Arthur Andersen LLP, independent accountants, are included elsewhere in this
Prospectus. The following data should be read in conjunction with, and is
qualified by, the consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere herein.
 
<TABLE>
<CAPTION>
                                       YEAR ENDED DECEMBER 31,
                          -----------------------------------------------------
                            1991       1992       1993       1994     1995 (1)
                          ---------  ---------  ---------  ---------  ---------
                           (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER
                                            MINUTE DATA)
<S>                       <C>        <C>        <C>        <C>        <C>
CONSOLIDATED STATEMENT
 OF OPERATIONS DATA:
Revenue:
  Toll revenue..........  $  49,563  $  78,988  $ 100,646  $ 118,331  $ 175,269
  Leased lines and
   other................      1,563      2,692      5,300      8,113     13,597
                          ---------  ---------  ---------  ---------  ---------
    Total revenue.......     51,126     81,680    105,946    126,444    188,866
Network costs...........     32,343     52,314     70,286     79,438    114,841
                          ---------  ---------  ---------  ---------  ---------
Gross profit............     18,783     29,366     35,660     47,006     74,025
Other operating
 expenses:
  Depreciation and
   amortization.........      2,764      3,919      5,832      8,932     11,614
  Selling expenses......      2,295      3,350      8,726     14,497     21,617
  General and
   administrative.......     10,278     16,309     20,081     29,731     40,576
  Other charges (2).....        --         --         --       2,160        --
  Asset write-down (3)..        --         --      12,807        --         --
                          ---------  ---------  ---------  ---------  ---------
    Total other
     operating expenses.     15,337     23,578     47,446     55,320     73,807
                          ---------  ---------  ---------  ---------  ---------
Income (loss) from
 operations.............      3,446      5,788    (11,786)    (8,314)       218
Other income (expense):
  Interest income.......         39        276        205        124        198
  Interest expense......       (240)      (197)      (420)    (2,023)    (5,131)
  Terminated merger
   costs................        --         --         --        (200)       --
  Gain on sale of
   subsidiary stock.....        --         --       9,344        --         --
  Foreign exchange gain
   (loss)...............        --         --      (1,094)       169       (110)
                          ---------  ---------  ---------  ---------  ---------
    Total other income         (201)        79      8,035     (1,930)    (5,043)
     (expense)..........  ---------  ---------  ---------  ---------  ---------
Income (loss) from
 continuing operations
 before provision for
 (benefit from) income
 taxes and minority
 interest...............      3,245      5,867     (3,751)   (10,244)    (4,825)
Provision for (benefit
 from) income taxes.....      1,155      2,267     (3,743)     3,456        396
Minority interest in
 loss (earnings) of
 consolidated
 subsidiary.............        --         --       1,661      2,371       (133)
                          ---------  ---------  ---------  ---------  ---------
Income (loss) from
 continuing operations..      2,090      3,600      1,653    (11,329)    (5,354)
Loss from discontinued
 operations (net of
 income tax benefit of
 $616 in 1991, $878 in
 1992 and $667 in 1993).     (1,197)    (1,660)    (1,309)       --         --
Gain on disposal of
 discontinued operations
 (net of income tax
 provision of $8,350 in
 1993)..................        --         --      11,531        --         --
                          ---------  ---------  ---------  ---------  ---------
Net income (loss).......  $     893  $   1,940  $  11,875  $ (11,329) $  (5,354)
                          =========  =========  =========  =========  =========
Net income (loss) per
 common and common
 equivalent share
 applicable to common
 stock
 from continuing opera-
  tions (4).............  $     .36  $     .52  $     .24  $   (1.60) $    (.76)
  Discontinued opera-
   tions................       (.21)      (.24)      (.18)       --         --
  Gain on disposal of
   discontinued
   operations...........        --         --        1.64        --         --
                          ---------  ---------  ---------  ---------  ---------
    Net income (loss)
     per common and
     common equivalent
     share (4)..........  $     .15  $     .28  $    1.70  $   (1.60) $    (.76)
                          =========  =========  =========  =========  =========
Weighted average number
 of common shares.......  5,801,769  6,882,033  7,024,925  7,068,481  7,789,886
                          =========  =========  =========  =========  =========
</TABLE>
 
                          (table continued, and footnotes appear, on next page)
 
                                      20
<PAGE>
 
(continued from previous page)
 
<TABLE>
<CAPTION>
                                          YEAR ENDED DECEMBER 31,
                                 ----------------------------------------------
                                  1991     1992      1993     1994    1995 (1)
                                 -------  -------  --------  -------  ---------
                                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE
                                            AND PER MINUTE DATA)
<S>                              <C>      <C>      <C>       <C>      <C>
OTHER FINANCIAL AND OPERATIONS
 DATA:
Net cash provided by (used in)
 operating activities..........  $ 3,141  $ 7,761  $(11,828) $ 1,093  $   3,967
                                 =======  =======  ========  =======  =========
EBITDA(5)
  United States................  $ 5,473  $ 6,184  $  6,017  $ 5,847  $   8,653
  Canada.......................      737    3,523     2,423     (203)     7,299
  United Kingdom...............      --       --     (1,587)  (5,026)    (4,120)
                                 -------  -------  --------  -------  ---------
    Total......................  $ 6,210  $ 9,707  $  6,853  $   618  $  11,832
                                 =======  =======  ========  =======  =========
Billable minutes of use (in
 thousands)(6).................  296,119  475,422   683,073  882,993  1,181,663
Customer accounts at period
 end...........................   25,846   50,318    98,400  202,991    310,815
Revenue per billable minute of
 use...........................  $   .17  $   .17  $    .16  $   .14  $     .16
Network cost per billable
 minute of use.................  $   .11  $   .11  $    .10  $   .09  $     .10
CONSOLIDATED BALANCE SHEET DATA
 (7):
Cash and cash equivalents......  $   327  $   353  $  1,467  $ 1,021  $     518
Current assets.................   11,120   16,251    22,476   28,045     45,726
Current liabilities............   12,577   27,889    23,191   32,016     56,074
Net working capital (deficit)..   (1,457) (11,638)     (715)  (3,971)   (10,348)
Property, plant and equipment,
 net...........................   15,794   21,951    27,077   44,081     56,691
Total assets...................   29,292   45,450    61,718   84,448    123,984
Short-term debt, including
 current maturities of long
 term debt ....................    3,071   11,525     2,424    1,613      4,885
Long-term debt, excluding
 current maturities............    6,111   12,747     1,795   29,914     28,050
Redeemable preferred stock.....      --       --        --       --       9,448
Shareholders' equity...........   21,670   22,711    31,506   19,086     26,407
</TABLE>
- --------
(1) Includes the results of operations of Metrowide Communications from August
    1, 1995, the date of acquisition.
 
(2) Represents $2.2 million of charges incurred in 1994 in connection with
    conversion of the Company's network to equal access for its Canadian
    customers. See "Management's Discussion and Analysis of Financial
    Condition and Results of Operations--1995 Compared With 1994."
 
(3) In 1993, the Company recorded an asset write-down of $12,807. See
    "Management's Discussion and Analysis of Financial Condition and Results
    of Operations--Results of Operations--1994 Compared With 1993."
 
(4) Includes (i) in 1993, a gain on sale of common stock of the Company's
    Canadian subsidiary of $1.33 per share and (ii) in 1995, a loss of $.07
    per share related to redeemable preferred stock dividends and accretion.
 
(5) Represents income (loss) from operations plus depreciation and
    amortization and asset write-down. In 1993, the Company recorded an asset
    write-down of $12,807. See "Management's Discussion and Analysis of
    Financial Condition and Results of Operations--Results of Operations--1994
    Compared With 1993." The Company has included information concerning
    EBITDA herein because it understands that such information is used by
    certain investors as one measure of an issuer's operating performance and
    historical ability to service debt. EBITDA is not determined in accordance
    with generally accepted accounting principles, is not indicative of cash
    used (provided) by operating activities and should not be considered in
    isolation or as an alternative to, or more meaningful than, measures of
    performance determined in accordance with generally accepted accounting
    principles.
 
(6) Defined as billable voice long distance minutes of use.
 
(7) Balance sheet data from discontinued operations is excluded.
 
                                      21
<PAGE>
 
                     MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
  The following discussion includes certain forward-looking statements. For a
discussion of important factors including, but not limited to continued
development of the Company's markets, actions of regulatory authorities and
competitors and dependence on management information systems, that could cause
actual results to differ materially from the forward-looking statements, see
"Risk Factors" and the Company's periodic reports incorporated herein by
reference.
 
GENERAL
 
  The Company's revenue is comprised of toll revenue and leased lines and
other revenue. Toll revenue consists of revenue derived from ACC's long
distance and operator-assisted services. Leased lines and other revenue
consists of revenue derived from the resale of local exchange services, data
line services, direct access lines and monthly subscription fees. Network
costs consist of expenses associated with the leasing of transmission lines,
access charges and certain variable costs associated with the Company's
network. The following table shows the total revenue (net of intercompany
revenue) and billable minutes of use attributable to the Company's U.S.,
Canadian and U.K. operations during each of 1993, 1994 and 1995:
 
<TABLE>
<CAPTION>
                                           YEAR ENDED DECEMBER 31,
                             ---------------------------------------------------
                                   1993             1994             1995
                             ---------------- ---------------- -----------------
                              AMOUNT  PERCENT  AMOUNT  PERCENT  AMOUNT   PERCENT
                             -------- ------- -------- ------- --------- -------
                                     (DOLLARS AND MINUTES IN THOUSANDS)
<S>                          <C>      <C>     <C>      <C>     <C>       <C>
TOTAL REVENUE:
United States............... $ 45,150   42.6% $ 54,599   43.2% $  65,975   34.9%
Canada......................   60,643   57.2    67,728   53.6     84,421   44.7
United Kingdom..............      153     .2     4,117    3.2     38,470   20.4
                             --------  -----  --------  -----  ---------  -----
  Total..................... $105,946  100.0% $126,444  100.0% $ 188,866  100.0%
                             ========  =====  ========  =====  =========  =====
BILLABLE MINUTES OF USE:
United States...............  378,778   55.5%  445,619   50.5%   486,618   41.2%
Canada......................  304,295   44.5   422,149   47.8    522,764   44.2
United Kingdom..............      --     --     15,225    1.7    172,281   14.6
                             --------  -----  --------  -----  ---------  -----
  Total.....................  683,073  100.0%  882,993  100.0% 1,181,663  100.0%
                             ========  =====  ========  =====  =========  =====
</TABLE>
 
  The following table presents certain information concerning toll revenue per
billable minute and network cost per billable minute attributable to the
Company's U.S., Canadian and U.K. operations during each of 1993, 1994 and
1995:
 
<TABLE>
<CAPTION>
                                                              1993  1994  1995
                                                              ----- ----- -----
<S>                                                           <C>   <C>   <C>
TOLL REVENUE PER BILLABLE MINUTE:
United States................................................ $.115 $.115 $.126
Canada.......................................................  .187  .149  .146
United Kingdom...............................................   --   .268  .220
NETWORK COST PER BILLABLE MINUTE:
United States................................................ $.070 $.070 $.075
Canada.......................................................  .143  .108  .100
United Kingdom...............................................   --   .177  .149
</TABLE>
 
  The Company believes that its historic revenue growth as well as its
historic network costs and results of operations for each of its U.S.,
Canadian and U.K. operations generally reflect the state of development of the
Company's operations, the Company's customer mix and the competitive and
deregulatory environment in each of those markets. The Company entered the
U.S., Canadian and U.K. telecommunications markets in 1982, 1985 and 1993,
respectively.
 
                                      22
<PAGE>
 
  Deregulatory influences have affected the telecommunications industry in the
U.S. since 1984 and the U.S. market has experienced considerable competition
for a number of years. The competitive influences on the pricing of ACC U.S.'s
services and network costs have been stabilizing during the past few years.
This may change in the future as a result of recent U.S. legislation that
further opens the market to competition, particularly from RBOCs. The Company
expects competition based on price and service offerings to increase. See
"Risk Factors--Regulation" and "Risk Factors--Competition."
 
  Because the deregulatory trend in Canada, which commenced in 1989, has
increased competition, ACC Canada experienced significant downward pressure on
the pricing of its services during 1994. The Company expects such downward
pressure to continue, although it is expected that the pricing pressure may
abate over time as the market matures. The impact of this pricing pressure on
revenues of ACC Canada is being offset, in part, by an increase in the
Canadian residential and student billable minutes of usage as a percentage of
total Canadian billable minutes of usage. Toll revenue per billable minute
attributable to residential and student customers in Canada generally exceeds
the toll revenue per billable minute attributable to commercial customers. The
Company expects that the net effect of changes to contribution charges will be
minimal in 1996 and will cause an increase of approximately Cdn $1.5 million
in the Company's 1997 network costs. However, additional reductions in
contribution rates may offset this increase. The Company also believes that
its network costs per billable minute in Canada may decrease during periods
after 1996 if there is an anticipated increase in long distance transmission
facilities available for lease from Canadian transmission facilities-based
carriers as a result of expected growth in the number and capacity of
transmission networks in that market. The foregoing forward-looking statements
are based upon expectations of actions that may be taken by third parties,
including Canadian regulatory authorities and transmission facilities-based
carriers. If such third parties do not act as expected, the Company's actual
results may differ materially from the foregoing discussion.
 
  The Company believes that, because deregulatory influences have only
recently begun to impact the U.K. telecommunications industry, the Company
will continue to experience a significant increase in revenue from that market
during the next few years. The foregoing belief is based upon expectations of
actions that may be taken by U.K. regulatory authorities and the Company's
competitors; if such third parties do not act as expected, the Company's
revenues in the U.K. might not increase. If ACC U.K. were to experience
increased revenues, the Company believes it should be able to enhance its
economies of scale and scope in the use of the fixed cost elements of its
network. Nevertheless, the deregulatory trend in that market is expected to
result in competitive pricing pressure on the Company's U.K. operations which
could adversely affect revenues and margins. Since the U.K. market for
transmission facilities is dominated by British Telecom and Mercury, the
downward pressure on prices for services offered by ACC U.K. may not be
accompanied by a corresponding reduction in ACC U.K.'s network costs and,
consequently, could adversely affect the Company's business, results of
operations and financial condition, particularly in the event revenue derived
from the Company's U.K. operations accounts for an increasing percentage of
the Company's total revenue. Moreover, the Company's U.K. operations are
highly dependent upon the transmission lines leased from British Telecom. See
"Risk Factors--Dependence on Transmission Facilities-Based Carriers and
Suppliers." As each of the telecommunications markets in which it operates
continues to mature, growth in its revenue and customer base in each such
market is likely to decrease over time.
 
  The Company believes that competition in non-U.S. markets is likely to
increase and become more like competition in the U.S. markets over time as
such non-U.S. markets continue to experience deregulatory influences. Prices
in the long distance industry have declined from time to time in recent years
and, as competition in Canada and the U.K. increases, prices are likely to
continue to decrease.
 
  Since the commencement of the Company's operations, the Company has
undertaken a program of developing and expanding its service offerings,
geographic focus and network. In connection with this development and
expansion, the Company has made significant investments in telecommunications
circuits, switches, equipment and software. These investments generally are
made significantly in advance of anticipated customer growth and resulting
revenue. The Company also has increased its sales and marketing, customer
support, network operations and field services commitments in anticipation of
the expansion of its customer base and targeted geographic markets. The
Company expects to continue to expand the breadth and scale of its
 
                                      23
<PAGE>
 
network and related sales and marketing, customer support and operations
activities. These expansion efforts are likely to cause the Company to incur
significant increases in expenses from time to time, in anticipation of
potential future growth in the Company's customer base and targeted geographic
markets.
 
  The Company's operating results have fluctuated in the past and they may
continue to fluctuate significantly in the future as a result of a variety of
factors, some of which are beyond the Company's control. The Company expects
to focus in the near term on building and increasing its customer base,
service offerings and targeted geographic markets, which will require it to
increase significantly its expenses for marketing, and development of its
network and new services and may adversely impact operating results from time
to time. The Company's sales to other long distance carriers have been
increasing. Revenues from other resellers accounted for approximately 22%, 8%
and 9% of the revenues of ACC U.S., ACC Canada and ACC U.K., respectively, in
1995, and are expected to account for a higher percentage in the future. With
respect to these customers, the Company competes almost exclusively on price,
does not have long term contracts and generates lower gross margins as a
percentage of revenue. See "Risk Factors--Recent Losses; Potential
Fluctuations in Operating Results."
 
RESULTS OF OPERATIONS
 
  The following table presents, for the three years ended December 31, 1995,
certain statement of income data expressed as a percentage of total revenue:
 
<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER
                                                                31,
                                                        -----------------------
                                                        1993   1994    1995 (1)
                                                        -----  -----   --------
<S>                                                     <C>    <C>     <C>
Revenue:
  Toll revenue.........................................  95.0%  93.6%    92.8%
  Leased lines and other...............................   5.0    6.4      7.2
                                                        -----  -----    -----
    Total revenue...................................... 100.0  100.0    100.0
Network costs..........................................  66.3   62.8     60.8
                                                        -----  -----    -----
Gross profit...........................................  33.7   37.2     39.2
Other operating expenses:
  Depreciation and amortization........................   5.5    7.1      6.1
  Selling expenses.....................................   8.2   11.5     11.4
  General and administrative...........................  19.0   23.5     21.5
  Other charges........................................   --     1.7      --
  Asset write-down.....................................  12.1    --       --
                                                        -----  -----    -----
    Total other operating expenses.....................  44.8   43.8     39.0
                                                        -----  -----    -----
Income (loss) from operations.......................... (11.1)  (6.6)      .2
Total other income (expense)...........................   7.6   (1.5)    (2.7)
Loss from continuing operations before provision for
 (benefit from) income taxes and minority interest.....  (3.5)  (8.1)    (2.5)
Provision for (benefit from) income taxes..............  (3.5)   2.7       .2
Minority interest in (earnings) loss of consolidated
 subsidiary............................................   1.6    1.9     (0.1)
                                                        -----  -----    -----
Income (loss) from continuing operations...............   1.6%  (8.9)%   (2.8)%
                                                        =====  =====    =====
</TABLE>
- --------
(1) Includes the results of operations of Metrowide Communications from August
    1, 1995, the date of acquisition.
 
1995 COMPARED WITH 1994
 
  Revenue. Total revenue for 1995 increased by 49.4% to $188.9 million from
$126.4 million in 1994, reflecting growth in both toll revenue and leased
lines and other revenue. Toll revenue for 1995 increased by 48.1% to $175.2
million from $118.3 million in 1994. In the United States, toll revenue
increased 19.3% as a result of a 9.2% increase in billable minutes of use and
a more favorable mix of toll services provided, offset slightly by a decrease
in prices per minute. The volume increases are a result of increased revenue
attributable to other carriers, large commercial customers and universities
and colleges, and an increased focus on small to medium-sized commercial
customers in the Company's service region. In Canada, toll revenue increased
20.9%, primarily as a result of a 23.8% increase in billable minutes
(primarily because of a 47.3% increase in the number
 
                                      24
<PAGE>
 
of customer accounts), offset by a slight decline in prices. The price
declines are a result of the price competition, particularly in Canada, in
1994 which decreased rates in the middle of that year. Since the end of 1994,
ACC's average revenues per minute have been increasing slightly as a result of
the increasing percentage of U.K. revenues and the Company's successful
introduction of higher price per minute products. In the United Kingdom, toll
revenue increased 830.7%, due to significant volume increases (including a
310% increase in the number of customer accounts), offset by lower prices that
resulted from entering the commercial and residential markets and from
competitive pricing pressure. Exchange rates did not have a material impact on
revenue in either the U.K. or in Canada. At December 31, 1995, the Company had
approximately 311,000 customer accounts compared to approximately 203,000
customer accounts at December 31, 1994, an increase of 53%.
 
  For 1995, leased lines and other revenue increased by 67.6% to $13.6 million
from $8.1 million in 1994. This increase was due to the Metrowide
Communications acquisition as of August 1, 1995, local service revenue
generated through the university program in the U.S. and the local exchange
operations in upstate New York, which generated nominal revenues in 1994.
 
  Network Costs. Network costs increased to $114.8 million for 1995, from
$79.4 million in 1994, due to the increase in billable long distance minutes.
However, network costs, expressed as a percentage of revenue, decreased to
60.8% for 1995 from 62.8% in 1994 due to reduced access charges and increased
volume efficiencies in Canada and volume efficiencies in the U.K.
 
  Other Operating Expenses. Depreciation and amortization expense increased to
$11.6 million for 1995 from $8.9 million in 1994. Expressed as a percentage of
revenue, these costs decreased to 6.1% in 1995 from 7.1% in 1994, reflecting
the increases in revenue realized during 1995. The $2.7 million increase in
depreciation and amortization expense was primarily attributable to assets
placed in service in the fourth quarter of 1994 and during 1995, particularly
equipment at U.S. university sites, switching centers in London and Manchester
in the U.K., and switch upgrades in Rochester, Syracuse, Vancouver and
Toronto. Amortization associated with the customer base and goodwill recorded
in the Metrowide Communications acquisition also contributed to the increase.
 
  Selling expenses for 1995 increased by 49.1% to $21.6 million compared with
$14.5 million in 1994. Expressed as a percentage of revenue, selling expenses
were 11.4% for 1995 compared to 11.5% for 1994. The $7.1 million increase in
selling expenses was primarily attributable to increased marketing costs and
sales commissions associated with the rapid growth of the Company's operations
in Canada and the U.K. General and administrative expenses for 1995 were $40.6
million compared with $29.7 million in 1994. Expressed as a percentage of
revenue, general and administrative expenses were 21.5% for 1995, compared to
23.5% in 1994. The $10.9 million increase in general and administrative
expenses was primarily attributable to increased personnel costs and customer
service costs associated with the growth of the Company's customer bases and
geographic expansion in each country. Included in the 1995 costs was $1.3
million related to management restructuring costs. These costs consisted of a
$0.8 million payment in consideration of a non-compete agreement with the
Chairman of the Board in connection with his resignation as Chief Executive
Officer and $0.5 million related to severance expenses relating to three other
members of executive management. Also included in general and administrative
expenses for 1995 was approximately $1.8 million related to the Company's
local service market sector in New York State.
 
  Other Charges. During the third quarter of 1994, the Company initiated the
process of converting its network to equal access for its Canadian customers.
Costs associated with this process 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. This process was completed during the
fourth quarter of 1994 at a total cost of $2.2 million, which has been
reflected as a charge to income from operations for 1994.
 
  Other Income (Expense). Net interest expense increased to $4.9 million for
1995 compared to $1.9 million in 1994, due primarily to the Company's
increased borrowings on revolving lines of credit related to financing of
university projects in the U.S., expansion of the U.K. and the local service
businesses during 1995, write-off of deferred financing costs related to the
Company's lines of credit which were refinanced in July 1995, and
 
                                      25
<PAGE>
 
debt service costs associated with 12% subordinated notes issued in May 1995.
On September 1, 1995, the subordinated notes were exchanged for Series A
Preferred Stock and, consequently, there will be no further interest expense
associated with the 12% subordinated notes. The Series A Preferred Stock
accrues dividends at the rate of 12% per annum. Upon any conversion of Series
A Preferred Stock, the accrued and unpaid dividends thereon will be
extinguished and no longer deemed payable. See "Description of Capital Stock."
 
  Foreign exchange gains and losses reflect changes in the value of Canadian
and British currencies relative to the U.S. dollar for amounts lent to foreign
subsidiaries. Foreign exchange rate changes resulted in a net loss of $0.1
million for 1995, compared to a $0.2 million gain in 1994. The Company
continues to hedge all foreign currency transactions in an attempt to minimize
the impact of transaction gains and losses on the income statement. The
Company does not engage in speculative foreign currency transactions.
 
  During 1994, the Company increased its income tax provision to provide for a
valuation allowance equal to 100% of the amount of the Company's foreign tax
benefits which had been recorded at December 31, 1993. No income tax benefits
have been recorded for the 1995 operating losses in Canada or the U.K. due to
the uncertainty of recognizing the income tax benefit of those losses in the
future.
 
  Minority interest in loss of consolidated subsidiary reflects the portion of
the Company's Canadian subsidiary's income or loss attributable to the
approximately 30% of that subsidiary's common stock that is publicly traded in
Canada. For 1995, minority interest in earnings of the consolidated subsidiary
was a loss of $0.1 million compared to a gain of $2.4 million in 1994.
 
  For the foregoing reasons, the Company's net loss for 1995 was $5.4 million,
compared to $11.3 million in 1994.
 
1994 COMPARED WITH 1993
 
  Revenue. Total revenue for 1994 increased by 19.3% to $126.4 million from
$105.9 million in 1993, reflecting growth in toll revenue and leased lines and
other revenue. Toll revenue for 1994 increased by 17.6% to $118.3 million from
$100.6 million in 1993. This increase was due to the continued expansion of
the Company's university program in the U.S., Canada, and the U.K., and growth
in both the commercial and residential customer bases in Canada through
affinity programs and expansion throughout Western Canada. At December 31,
1994, the Company had approximately 203,000 customer accounts compared to
approximately 98,000 customer accounts at December 31, 1993, an increase of
more than 100%.
 
  For 1994, leased lines and other revenue increased by 53.1% to $8.1 million
from $5.3 million in 1993. This increase was due to growth in data line sales
in Canada as well as increased local service revenue generated through the
university program in the U.S.
 
  Network Costs. Network costs increased to $79.4 million for 1994, from $70.3
million in 1993, due to the increase in billable long distance minutes.
Network costs, as a percentage of revenue, decreased to 62.8% for 1994 from
66.3% in 1993 due to the Company's more efficient utilization of its leased
facilities through economies of scale, reduced contribution rates in Canada,
and a more favorable mix of traffic from increased residential and student
usage during off peak hours.
 
  Other Operating Expenses. Depreciation and amortization expense increased to
$8.9 million for 1994, from $5.8 million in 1993. Expressed as a percentage of
revenue, these costs increased to 7.1% in 1994 from 5.5% in 1993, reflecting
the cost of investments in additional equipment in the U.S., Canada and the
U.K. incurred in advance of anticipated billable minute volume growth. The
$3.1 million increase in depreciation and amortization expense was primarily
attributable to assets placed in service in the fourth quarter of 1993 and the
first three quarters of 1994 related to the Company's continued expansion of
its network throughout Canada, the installation of additional switches and
increased on-site equipment at universities in the U.S.
 
  Selling expenses for 1994 increased by 66.1% to $14.5 million from $8.7
million in 1993. Expressed as a percentage of revenue, selling expenses were
11.5% for 1994 compared to 8.2% in 1993. This increase was primarily
attributable to the aggressive expansion of the Company's marketing territory
into Western Canada,
 
                                      26
<PAGE>
 
the expansion following the installation of a switch in Vancouver, British
Columbia, the opening of sales offices in Calgary, Alberta and Winnipeg,
Manitoba and the start-up of a nationwide marketing campaign in the U.K.
during the second half of 1994. During 1994, the Company added over 100,000
customers compared to approximately 46,000 added in 1993. The total costs of
the marketing effort related to these customers are reflected in the results
for the year while the revenue generated by the majority of these customers
(universities and students) did not begin until the end of the third quarter
corresponding to the beginning of the fall semester for most colleges and
universities. General and administrative expenses for 1994 increased by 48.1%
to $29.7 million from $20.1 million in 1993. Expressed as a percentage of
revenue, general and administrative expenses were 23.5% for 1994 compared to
19.0% in 1993. The increase was primarily attributable to increased personnel
costs and customer service costs associated with the growth of the Company's
customer bases in each country. Also included in general and administrative
expenses for 1994 was approximately $3.0 million in start-up costs related to
the Company's entry into the local service market sector in New York state
which occurred during the fourth quarter of 1994.
 
  During 1993, the Company recorded a non-cash expense of $12.8 million
related to the write-down of the carrying value of certain assets of its U.S.
and Canadian operations. This charge included approximately $5.1 million
relating to certain fixed assets, including equipment used in connection with
a microwave network deemed obsolete due to technological changes, $1.2 million
related to the goodwill and customer bases from U.S. acquisitions, $2.8
million pertaining to an acquired customer base and accounts receivable
relating to acquisitions made by ACC Canada and $3.8 million relating to
autodialing equipment of ACC Canada resulting from the anticipated
implementation by the CRTC of equal ease of access regulations in July 1994.
 
  Other Income (Expense). Net interest expense increased to $1.9 million for
1994 compared to $0.2 million in 1993, due primarily to the Company's
increased borrowings on lines of credit throughout 1994. During 1994, the
Company incurred terminated merger costs of $0.2 million resulting from a
transaction which was not completed. During 1993, the Company recognized gains
of $9.3 million from the sale of stock in its Canadian subsidiary and $10.2
million (net of provision for income taxes) from the sale of the Company's
cellular assets.
 
  Foreign exchange gains and losses reflect changes in the value of Canadian
and British currencies relative to the U.S. dollar for amounts lent to these
foreign subsidiaries. Foreign exchange rate changes resulted in a net gain of
$0.2 million for 1994, compared to a $1.1 million loss in 1993 due to the
Company's program of hedging against foreign currency exposures for
intercompany indebtedness which began at the end of 1993.
 
  During 1994, the Company increased its income tax provision to provide for a
valuation allowance equal to 100% of the amount of the Company's foreign tax
benefits which had been recorded at December 31, 1993. These benefits had been
accrued based on the Company's history of profitability in Canada. However,
given the magnitude of the Canadian subsidiary's losses in 1994, the Company
believed that a valuation allowance was necessary to reflect the uncertainty
of realizing the income tax benefits of those losses in the future.
 
  Minority interest in loss of consolidated subsidiary reflects the portion of
the Company's Canadian subsidiary's income or loss attributable to the
approximately 30% of that subsidiary's common stock that is publicly traded in
Canada. For 1994, minority interest in loss of consolidated subsidiary
increased to $2.4 million from $1.7 million in 1993 due to the increase in net
losses generated by ACC Canada in 1994 when compared to 1993.
 
  During the third quarter of 1993, the Company recognized a gain of $11.5
million, net of taxes, from the sale of the operating assets and liabilities
of its former cellular subsidiary, Danbury Cellular Telephone Co. The
operating loss from these discontinued operations was $1.3 million for 1993,
resulting in a net gain on the disposition of these operations of $10.2
million.
 
  For the foregoing reasons, the Company's net loss for 1994 was $11.3 million
compared to net income of $11.9 million in 1993.
 
                                      27
<PAGE>
 
QUARTERLY RESULTS
 
  The following tables set forth certain unaudited quarterly financial data
for the preceding eight quarters through the quarter ended December 31, 1995.
In the opinion of management, the unaudited information set forth below has
been prepared on the same basis as the audited information set forth elsewhere
herein and includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth herein. The
operating results for any quarter are not necessarily indicative of results
for any future period.
 
<TABLE>
<CAPTION>
                                                  QUARTER ENDED
                         ----------------------------------------------------------------------
                                      1994                                1995
                         ----------------------------------  ----------------------------------
                         MAR. 31  JUNE 30  SEP. 30  DEC. 31  MAR. 31  JUNE 30  SEP. 30  DEC. 31
                         -------  -------  -------  -------  -------  -------  -------  -------
                                             (DOLLARS IN THOUSANDS)
<S>                      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Revenue................. $32,335  $28,807  $28,409  $36,893  $39,708  $41,633  $45,911  $61,607
Gross profit............  11,970    9,933   10,660   14,443   14,963   15,319   17,806   25,929
Depreciation and
 amortization...........   1,960    2,107    2,259    2,640    2,532    2,863    3,011    3,212
Income (loss) from
 operations.............     955   (1,808)  (6,005)  (1,490)    (446)    (855)    (364)   1,876
Total other income
 (expense)..............    (277)    (243)    (706)    (670)    (948)  (1,473)  (1,354)  (1,265)
Net income (loss)....... $   346  $(1,024) $(8,456) $(2,195) $(1,654) $(2,250) $(1,849) $   395
</TABLE>
 
  The Company's quarterly operating results have fluctuated and will continue
to fluctuate from period to period depending upon factors such as the success
of the Company's efforts to expand its geographic and customer base, changes
in, and the timing of expenses relating to, the expansion of the Company's
network, regulatory and competitive factors, the development of new services
and sales and marketing and changes in pricing policies by the Company or its
competitors. In view of the significant historic growth of the Company's
operations, the Company believes that period-to-period comparisons of its
financial results should not be relied upon as an indication of future
performance and that the Company may experience significant period-to-period
fluctuations in operating results in the future. See "Risk Factors--Recent
Losses; Potential Fluctuations in Operating Results."
 
  Historically, a significant percentage of the Company's revenue has been
derived from university and college administrators and students, which caused
its business to be subject to seasonal variation. To the extent that the
Company continues to derive a significant percentage of its revenues from
university and college customers, the Company's results of operations could
remain susceptible to seasonal variation.
 
  During the third quarter of 1994, the Company initiated the process of
converting its network to equal access for its Canadian customers. See "--1995
Compared With 1994--Other Charges."
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company historically has satisfied its working capital requirements
through cash flow from operations, through borrowings and financings from
financial institutions, vendors and other third parties, and through the
issuance of securities. In addition, the Company used the proceeds from the
1993 sale of ACC Canada common stock and the 1993 sale of its cellular
operations to fund the expansion of its operations in Canada and the U.K.
During 1995, the Company raised $20.0 million, through the issuance of 825,000
shares of Class A Common Stock for $11.1 million (net of issuance expense) and
notes which were exchanged for 10,000 shares of Series A Preferred Stock for
$8.9 million (net of issuance expenses). In July 1995, the Company entered
into the five-year $35.0 million Credit Facility.
 
  The Company's principal need for working capital is to meet its selling,
general and administrative expenses as its business expands. In addition, the
Company's capital resources have been used for the Metrowide Communications
acquisition, capital expenditures, various customer base acquisitions and,
prior to the termination thereof during the second quarter of 1995, payments
of dividends to holders of its Class A Common
 
                                      28
<PAGE>
 
Stock. The Company has had a working capital deficit at the end of the last
several years and, at December 31, 1995, the Company had a working capital
deficit of approximately $10.3 million. This related to short term debt
associated with the Metrowide Communications acquisition and delays in
billings from, or the resolution of billing discussions with, vendors. The
Company has experienced delays from time to time in billings from carriers
from which it leases transmission lines. In addition, prior to making payment
to the carriers, the Company typically needs to resolve discrepancies between
the amount billed by the carriers and the Company's records concerning usage
of leased lines. The Company accrues an expense for the amount of its
estimated obligation to the carriers pending the resolution of such
discussions. During 1995, the Company's EBITDA minus capital expenditures and
changes in working capital was $(7.0) million.
 
  The Company anticipates that, during 1996, its capital expenditures will be
approximately $26.0 million for the expansion of its network, the acquisition,
upgrading and development of switches and other telecommunications equipment
as conditions warrant, the development, licensing and integration of its
management information system and other software, the development and
expansion of its service offerings and customer programs and other capital
expenditures. ACC expects that it will continue to make significant capital
expenditures during future periods. The Company's actual capital expenditures
and cash requirements will depend on numerous factors, including the nature of
future expansion (including the extent of local exchange services, which is
particularly capital intensive) and acquisition opportunities, economic
conditions, competition, regulatory developments, the availability of capital
and the ability to incur debt and make capital expenditures under the terms of
the Company's financing arrangements. The Credit Facility currently would not
allow the Company to make $26.0 million of capital expenditures in 1996. The
Company is seeking an amendment to the Credit Facility to, among other things,
permit increased capital expenditures. Prior to 1995, the Company had funded
capital expenditures through its credit facilities and other short term debt
arrangements, which were refinanced in 1995 with the Credit Facility.
 
  The Company is obligated to pay the lenders under the Credit Facility a
contingent interest payment based on the appreciation in market value of
140,000 shares of the Company's Class A Common Stock from $14.92 per share,
subject to a minimum of $0.75 million and a maximum of $2.1 million. The
payment is due upon the earlier of (i) January 21, 1997, (ii) any material
amendment to the Credit Facility, (iii) the signing of a letter of intent to
sell the Company or any material subsidiary, or (iv) the cessation of active
trading of the Company's Class A Common Stock on other than a temporary basis.
The Company is accruing this obligation over the 18-month period ending
January 21, 1997.
 
  Any holder of Series A Preferred Stock has the right to cause the Company to
redeem such Series A Preferred Stock upon the occurrence of certain events,
including the entry of a judgment against the Company or a default by the
Company under any obligation or agreement for which the amount involved
exceeds $500,000. See "Description of Capital Stock--Preferred Stock--Series A
Preferred Stock."
 
  As of January 31, 1996, the Company had approximately $0.9 million of cash
and cash equivalents and maintained the $35.0 million Credit Facility, subject
to availability under a borrowing base formula and certain other conditions
(including borrowing limits based on the Company's operating cash flow), under
which borrowings of approximately $19.0 million were outstanding,
approximately $13.0 million was available for borrowing and $3.0 million was
reserved for letters of credit. The maximum aggregate principal amount of the
Credit Facility is required to be reduced by $2.45 million per quarter
commencing on July 1, 1997 and by $2.91 million per quarter commencing on
January 1, 1999 until maturity on July 1, 2000. During 1995 the Company
entered into swap agreements with respect to $11.5 million of indebtedness
under the Credit Facility. The swap agreements expire at various times through
December 1998 and require the Company to pay interest at rates ranging from
5.98% to 6.02% per annum and permit the Company to receive interest at
variable rates. The Company also is obligated to pay, on demand commencing in
August of 1996, the remaining $0.9 million pursuant to a note issued in
connection with the Metrowide Communications acquisition. In addition, the
Company has $2.9 million, $2.6 million and $2.1 million of capital lease
obligations which mature during 1996, 1997 and 1998, respectively. The
Company's financing arrangements, which are secured by substantially all of
the Company's assets and the stock of certain subsidiaries, require the
Company to maintain certain financial ratios and prohibit the payment of
dividends.
 
                                      29
<PAGE>
 
  The Company believes that, under its present business plan, the net proceeds
from the sale by the Company of the Class A Common Stock offered hereby,
together with borrowings under the Credit Facility, vendor financing and cash
from operations will be sufficient to meet anticipated working capital and
capital expenditure requirements of its existing operations. The forward-
looking information contained in the previous sentence may be affected by a
number of factors, including the matters described in this paragraph and under
"Risk Factors." The Company may need to raise additional capital from public
or private equity or debt sources in order to finance its operations, capital
expenditures and growth for periods after 1996 and for the optional redemption
of Series A Preferred Stock if it is not converted. Moreover, the Company
believes that continued growth and expansion through acquisitions, investments
and strategic alliances is important to maintain a competitive position in the
market and, consequently, a principal element of the Company's business
strategy is to develop relationships with strategic partners and to acquire
assets or make investments in businesses that are complementary to its current
operations. The Company may need to raise additional funds in order to take
advantage of opportunities for acquisitions, investments and strategic
alliances or more rapid international expansion, to develop new products or to
respond to competitive pressures. If additional funds are raised through the
issuance of equity securities, the percentage ownership of the Company's then
current shareholders may be reduced and such equity securities may have
rights, preferences or privileges senior to those of holders of Class A Common
Stock. There can be no assurance that the Company will be able to raise such
capital on acceptable terms or at all. In the event that the Company is unable
to obtain additional capital or is unable to obtain additional capital on
acceptable terms, the Company may be required to reduce the scope of its
presently anticipated expansion opportunities and capital expenditures, which
could have a material adverse effect on its business, results of operations
and financial condition and could adversely impact its ability to compete.
 
  The Company may seek to develop relationships with strategic partners both
domestically and internationally and to acquire assets or make investments in
businesses that are complementary to its current operations. Such
acquisitions, strategic alliances or investments may require that the Company
obtain additional financing and, in some cases, the approval of the holders of
debt or preferred stock of the Company. The Company's ability to effect
acquisitions, strategic alliances or investments may be dependent upon its
ability to obtain such financing and, to the extent applicable, consents from
its debt or preferred stock holders.
 
SFAS NO. 123
 
  The Company is required to adopt SFAS No. 123, "Accounting for Stock-Based
Compensation" in 1996. This Statement encourages entities to adopt a fair
value based method of accounting for employee stock option plans (whereby
compensation cost is measured at the grant date based on the value of the
award and is recognized over the employee service period) rather than the
current intrinsic value based method of accounting (whereby compensation cost
is measured at the grant date as the difference between market value and the
price for the employee to acquire the stock). If the Company elects to
continue using the intrinsic value method of accounting, pro forma disclosures
of net income and earnings per share, as if the fair value based method of
accounting had been applied, will need to be disclosed. Management has not
decided if the Company will adopt the fair value based method of accounting
for the Company's stock option plans. The Company believes that adopting the
fair value basis of accounting could have a material impact on the financial
statements and such impact is dependent upon future stock option activity.
 
                                      30
<PAGE>
 
                                   BUSINESS
 
  ACC is a switch-based provider of telecommunications services in the United
States, Canada and the United Kingdom. The Company primarily provides long
distance telecommunications services to a diversified customer base of
businesses, residential customers and educational institutions. As a result of
the Company's historical focus on providing long distance services in the
Northeastern United States and recent regulatory changes, ACC has begun to
provide local telephone service as a switch-based local exchange reseller in
upstate New York and as a reseller of local exchange services in Ontario,
Canada. ACC operates an advanced telecommunications network consisting of
seven long distance international and domestic switches located in the U.S.,
Canada and the U.K., a local exchange switch located in the U.S., leased
transmission lines, and network management systems designed to optimize
traffic routing.
 
  The Company's objective is to grow its long distance telecommunications
customer base in its existing markets and to establish itself in deregulating
Western European markets that have high density telecommunications traffic,
such as France and Germany, when the Company believes that business and
regulatory conditions warrant. The key elements of the Company's business
strategy are: (1) to broaden ACC's penetration of the U.S., Canadian and U.K.
telecommunications markets by expanding its long distance, local and other
service offerings and geographic reach; (2) to utilize ACC's operating
experience as an early entrant in deregulating markets in the U.S., Canada and
the U.K. to penetrate other deregulating telecommunications markets that have
high density telecommunications traffic; (3) to achieve economies of scale and
scope in the utilization of ACC's network; and (4) to seek acquisitions,
investments or strategic alliances involving assets or businesses that are
complementary to ACC's current operations.
 
  The Company's principal competitive strengths are: (1) ACC's sales and
marketing organization and the customized service ACC offers to its customers;
(2) ACC's ability to offer competitive prices which the Company believes
generally are lower than prices charged by the major carriers in each of its
markets; (3) ACC's position as an early entrant in the U.S., Canadian and U.K.
markets as an alternative carrier; (4) ACC's focus on more profitable
international telecommunications traffic between the U.S., Canada and the
U.K.; and (5) ACC's switched-based networking capabilities. The Company
believes that switch ownership reduces reliance on other carriers and enables
the Company to efficiently route telecommunications traffic over multiple
leased transmission lines and to control costs, call record data and customer
information. The availability of existing transmission capacity in its markets
makes leasing of transmission lines attractive to the Company and enables it
to grow network usage without having to incur the significant capital and
operating costs associated with the development and operation of a
transmission line infrastructure.
 
  ACC primarily targets business customers with approximately $500 to $15,000
of monthly usage, selected residential customers and colleges and
universities. The Company believes that, in addition to being price-driven,
these customers tend to be focused on customer service, more likely to rely on
a single carrier for their telecommunications needs and less likely to change
carriers than larger commercial customers. The diversity of ACC's targeted
customer base enhances network utilization by combining business-driven
workday traffic with night and weekend off-peak traffic from student and
residential customers. The Company strives to be more cost effective,
flexible, innovative and responsive to the needs of its customers than the
major carriers, which principally focus their direct sales efforts on large
commercial accounts and residential customers.
 
INDUSTRY OVERVIEW
 
  The global telecommunications industry has dramatically changed during the
past several years, beginning in the U.S. with AT&T's divestiture of its 22
RBOCs in 1984 and culminating with the recently enacted amendments to the U.S.
Communications Act, and continuing in Canada, the U.K. and other countries
with various regulatory changes. Previously, the long distance
telecommunications industry in the U.S., Canada and the U.K. consisted of one
or a few large facilities-based carriers, such as AT&T, Bell Canada and
British Telecom. As a result of the AT&T divestiture and the recent
legislative changes in the U.S. and fundamental
 
                                      31
<PAGE>
 
regulatory changes in Canada and the U.K., coupled with technological and
network infrastructure developments which increased significantly the voice
and data telecommunications transmission capacity of dominant carriers, the
long distance industry has developed into a highly competitive one consisting
of numerous alternative long distance carriers in each of these countries. In
addition, since the AT&T divestiture in 1984, competition has heightened in
the local exchange market in the U.S. and Canada. The Company anticipates that
deregulatory and economic influences will promote the development of
competitive telecommunications markets in other countries.
 
  Long Distance Market. The U.S. long distance market has grown to
approximately $67 billion in annual revenues during 1994, according to FCC
estimates. AT&T has remained the largest long distance carrier in the U.S.
market, retaining slightly more than 55% of the market, with MCI and Sprint
increasing their respective market shares to approximately 17% and 10% of the
market during 1994. AT&T, MCI and Sprint constitute what generally is regarded
as the first tier in the U.S. long distance market. Large regional long
distance companies, some with national capabilities, such as Worldcom, Inc.
(formerly LDDS Metromedia Communications, Inc.), Cable & Wireless
Communications, Inc., Frontier Corp. and LCI International, constitute the
second tier of the industry. The remainder of the U.S. long distance market
share is comprised of several hundred smaller companies, including ACC U.S.,
known as third-tier carriers. In addition, recent U.S. legislation, which
removes certain long-standing restrictions on the ability of the RBOCs to
provide long distance services, will have a substantial impact on the long
distance market.
 
  Since 1990, competition has existed in the Canadian long distance market.
The Canadian long distance market is dominated by a consortium of facilities-
based local and long distance telephone companies (e.g., Bell Canada, BC Tel,
Maritime Tel) operating as the "Stentor" group of companies. A second group of
long distance providers, consisting principally of Unitel, Sprint Canada and
fONOROLA Inc., own and operate transmission lines through which they provide
long distance voice and data services in the Canadian markets. Other long
distance providers, including ACC Canada, generally lease transmission lines
through which they resell long distance services in the Canadian market.
 
  The international, national and local markets for voice telephone services
in the U.K. and Northern Ireland accounted for approximately (Pounds)1.4
billion, (Pounds)2.1 billion and (Pounds)2.2 billion, respectively, in
revenues during the 12 months ended March 31, 1995, accordingly to Oftel
estimates. In the U.K., British Telecom historically has dominated the
telecommunications market. British Telecom was the largest carrier during such
12 month period, with approximately 69%, 83% and 94% of the revenues from
international, national and local voice telephone services, respectively.
Mercury, which owns and operates interexchange transmission facilities, is the
second largest carrier of voice telecommunications in the U.K. The remainder
of the U.K. long distance market is comprised of emerging licensed public
telephone operators, such as Energis Communications Ltd., ("Energis") and
switched-based resellers such as ACC U.K., IDB Worldcom Services Inc., Esprit
Telecom of the U.K. Ltd. ("Esprit") and Sprint.
 
  Long distance carriers in the U.S., Canada and the U.K. can be categorized
by several distinctions. One distinction is between transmission facilities-
based companies and non-transmission facilities-based companies, or resellers.
Transmission facilities-based carriers, such as AT&T, Bell Canada and British
Telecom, own their own long distance interexchange or transmission facilities
and originate and terminate calls through local exchange systems.
Profitability for transmission facilities-based carriers is dependent not only
upon their ability to generate revenues but also upon their ability to manage
complex networking and transmission costs. All of the first- and most of the
second-tier long distance companies in the U.S. markets are transmission
facilities-based carriers and generally offer service nationwide. Most
transmission facilities-based carriers in the third tier of the market offer
their service only in a limited geographic area. Some transmission facilities-
based carriers contract with other transmission facilities-based carriers to
provide transmission where they have geographic gaps in their facilities.
Switched-based resellers, such as the Company, carry their long distance
traffic over transmission lines leased from transmission facilities-based
carriers, originate and terminate calls through local exchange systems, and
contract with transmission facilities-based carriers to provide transmission
of long distance traffic either on a fixed rate lease basis or a call volume
basis. Profitability for non-transmission
 
                                      32
<PAGE>
 
facilities-based carriers is dependent largely on their ability to generate
and retain sufficient revenue volume to negotiate attractive pricing with one
or more transmission facilities-based carriers.
 
  A second distinction among long distance companies is that of switch-based
versus switchless resellers. Switch-based resellers, such as the Company, have
one or more switches, which are computers that direct telecommunications
traffic to form a transmission path between a caller and the recipient of a
call. All transmission facilities-based carriers are switch-based carriers, as
are many non-transmission facilities-based carriers, including ACC. Switchless
resellers depend on one or more transmission facilities-based carriers or
switch-based resellers for transmission and switching facilities. The Company
believes that switch ownership reduces reliance on other carriers and enables
the Company to efficiently route telecommunications traffic over multiple
leased transmission lines and to control costs, call record data and customer
information. The availability of existing transmission capacity in its markets
makes leasing of transmission lines attractive to the Company and enables it
to grow network usage without having to incur the significant capital and
operating costs associated with the development and operation of a
transmission line infrastructure.
 
  Local Exchange Market. The U.S. local exchange market has given to
approximately $13 billion in annual revenues during 1994, according to FCC
estimates. In the U.S., the existing structure of the telecommunications
industry principally resulted from the AT&T divestiture. As part of the
divestiture, seven RBOCs were created to offer services in specified
geographic areas called LATAs. The RBOCs were separated from the long distance
provider, AT&T, resulting in the creation of distinct local exchange and long
distance markets. Since the AT&T divestiture, several factors have served to
promote competition in the local exchange market, including (i) the local
exchange carriers' monopoly position, which provided little incentive for the
local exchange companies to reduce prices, improve service or upgrade their
networks, and related regulations which required the local exchange carriers
to, among other things, lease transmission facilities to alternative carriers,
such as the Company, (ii) customer desire for an alternative to the local
exchange carriers, which developed in part as a result of competitive
activities in the long distance market and increasing demand for lower cost,
high quality, reliable services, and (iii) the advancement of fiber optic and
digital electronic technology, which combined the ability to transmit voice,
data and video at high speeds with increased capacity and reliability.
 
  During the past several years, regulators in some states and at the federal
level issued rulings which favored competition and promoted the opening of
markets to new entrants. These rulings allowed competitive access providers of
telecommunications services to offer a number of new services, including, in
certain states, a broad range of local exchange services. The Company believes
the trend toward increased competition and deregulation of the
telecommunications industry is continuing, and will be accelerated by the
recently enacted U.S. legislation.
 
  In Canada, similar factors promoting competition in the local exchange
market developed in response to regulatory developments in the Canadian long
distance telecommunications market and to technological advances in the
telecommunications industry. The CRTC has approved, in concept, the reduction
of the remaining restrictions on local exchange services in Canada and a
proceeding is being conducted to determine the appropriate timetable and terms
for implementation of its decision.
 
BUSINESS STRATEGY
 
  The Company was an early entrant as an alternative carrier in the U.S.,
Canada and the U.K. The Company's objective is to grow its telecommunications
customer base in its existing markets and to establish itself in other
deregulating Western European markets with high density telecommunications
traffic. The key elements of the Company's business strategy are to increase
penetration of existing markets, enter new markets, improve operating
efficiency, and pursue acquisitions, investments and strategic alliances.
 
  Increase Penetration of Existing Markets. ACC's consolidated revenue and
customer accounts have grown from $105.9 million and 98,400 to $188.9 million
and 310,815, respectively, over the three fiscal years ended December 31,
1995, although the Company expects its growth to decrease over time. The
Company plans to
 
                                      33
<PAGE>
 
increase further its revenue and customer base in the U.S., Canadian and U.K.
markets by expanding its service offerings and geographic reach. The expansion
of the Company's service offerings is designed to reduce the effects of price
per minute decreases for long distance service and to decrease the likelihood
that customers will change telecommunications carriers. Through this strategy,
the Company will seek to build a broad base of recurring revenues in the U.S.,
Canada and the U.K. The Company also intends to offer local telephone services
in selected additional U.S. and Canadian markets, initially in New York,
Massachusetts and Ontario, as well as additional data communications services
in the U.S. and Canada. The Company believes that offering local services will
enhance its ability to attract and retain long distance customers and reduce
the Company's access charges as a percentage of revenues. In addition, the
Company is conducting feasibility studies to identify the market potential and
regulatory environment for adding or expanding distribution of video
conferencing, paging, domestic and international call back, Internet access,
smart card, facsimile and frame relay services in certain of its targeted
markets, and plans to introduce certain of those services in selected markets
during 1996.
 
  Enter New Markets. The Company believes that its operating experience in
deregulating markets in the U.S., Canada and the U.K. and its experience as an
early entrant as an alternative carrier in those markets will assist ACC in
identifying opportunities in other deregulating countries with high density
telecommunications traffic. In particular, the Company believes that its
position in the U.S., Canadian and U.K. telecommunications markets and its
experience in providing international telecommunications service will assist
it in establishing a presence in France and Germany and other countries when
the Company believes that business and regulatory conditions warrant.
 
  Improve Operating Efficiency. The Company strives to achieve economies of
scale and scope in the use of its network, which consists of leased
transmission facilities, seven international and domestic switches, a local
exchange switch and information systems. In order to enhance the efficiency of
the fixed cost elements of its network, the Company seeks to increase its
traffic volume and balance business-driven workday traffic with night and
weekend off-peak traffic from student and residential customers. The Company
anticipates that competition among transmission facilities-based providers of
telecommunications services in the U.S. and Canadian markets will afford ACC
opportunities for reductions in the cost of leased line facilities. The
Company seeks to reduce its network cost per billable minute of use by more
than any reduction in revenue per billable minute. The Company also intends to
acquire additional switches to enhance its network in anticipation of growth
in the Company's customer base and provide additional telecommunications
services. The Company believes that its network switches enable the Company to
efficiently route telecommunications traffic over multiple transmission
facilities to reduce costs, control access to customer information and grow
network usage without a corresponding increase in support costs.
 
  Pursue Acquisitions, Investments and Strategic Alliances. As the Company
expands its service offerings and its network, the Company anticipates that it
will seek to develop strategic alliances both domestically and internationally
and to acquire assets and businesses or make investments in companies that are
complementary to the Company's current operations. The Company believes that
the pursuit of an active acquisition strategy is an important means toward
achieving growth and economies of scale and scope in its targeted markets.
Through acquisitions, the Company believes that it can further increase its
traffic volume to further improve the usage of the fixed cost elements of its
network.
 
SERVICES
 
  Commercial Long Distance Services. The Company offers its commercial
customers in the U.S. and Canada an array of customized services and has
developed a similar range of service offerings for commercial customers in the
U.K.
 
  In the U.S., although the Company historically has originated long distance
voice services principally in New York and Massachusetts, ACC is currently
authorized to originate long distance voice and data services in 44 states.
The Company's U.S. services include "1+" inter-LATA long distance service, and
private line service for which a customer is charged a fixed monthly rate for
transmission capacity that is reserved for that customer's
 
                                      34
<PAGE>
 
traffic. The Company's U.S. business services also include toll-free "800" or
"888" services. In addition, the Company currently provides intra-LATA service
in certain areas for customers who make a large number of intra-LATA calls.
The Company installs automatic dialing equipment to enable customers to place
such calls over the Company's network without having to dial an access code.
However, various states, including New York, are moving to implement "equal
access" for intra-LATA toll calls, such that, the Company's customers in such
jurisdictions will be able to use the Company's network on a "1 +" basis to
complete intra-LATA toll calls. The Company's ability to compete in the intra-
LATA toll market depends upon the margin which exists between the access
charges it must pay to the local exchange company for originating and
terminating intra-LATA calls, and the retail toll rates established by the
local exchange carriers for the local exchange carriers' own intra-LATA toll
service. The Company's commercial services generally are priced below the
rates charged by the major carriers for similar services and are competitive
with those of other carriers. See "Risk Factors--Competition."
 
  In Canada, ACC currently originates long distance voice and data services in
the Montreal, Toronto and Vancouver metropolitan areas as well as throughout
Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario and
Quebec. The Company offers its Canadian commercial customers both voice and
data telecommunications services. The Company's long distance voice services
are offered to its business customers in a nine-level discount structure
marketed under the name "Edge." Discounts are based on calling volume and call
destination and typically result in savings ranging from 10% to 20% when
compared to Stentor member rates. Calls to the U.S. are priced at a flat rate
regardless of the destination and international calls are priced at a
percentage discount to the rates charged by the Stentor group. The Company
also offers toll-free "800" services within Canada, as well as to and from the
U.S., and offers an ACC Travel Card providing substantial savings off Stentor
member "Calling Card" rates. ACC Canada has introduced a frame relay network
and Internet access services and now provides these services in all provinces
except Saskatchewan and Newfoundland.
 
  ACC originates long distance voice services throughout the U.K. The Company
presently offers its U.K. customers voice telecommunications services. These
services include indirect access (known as "ACCess 1601") to the public
switched telephone network ("PSTN") and the use of direct access lines to the
Company's network (known as "ACCess Direct") for higher-volume business users.
Because ACCess 1601 is a mass market service, the prices offered are built
around a standard price list with volume discounts for high-volume users.
ACCess Direct is generally cost effective only for customers making at least
(Pounds)5,000 per month in calls.
 
  The Company's U.S. and Canadian commercial customers are offered customized
services, such as comprehensive billing packages and its "Travel Service
Elite" domestic calling cards, which allow the customer to place long distance
calls at competitive rates from anywhere in the U.S. and Canada. The Company's
standard monthly statement includes a management summary report, a call detail
report recording every long distance call and facsimile call, and a pricing
breakdown by call destination. Optional calling pattern reports, which are
available at no extra cost, include call summaries by account code, area or
city code, LATA (for U.S. bound calls), international destination and time-of-
day. This information is available to customers in the form of hard copy,
magnetic tape or disk.
 
  In the U.S., the Company is conducting feasibility studies to identify the
market potential and regulatory environment for offering additional services,
including video conferencing, paging, international call back, Internet
access, facsimile and frame relay services, and expects to introduce Internet
access, enhanced travel cards and video conferencing in 1996. In Canada, the
Company plans to expand frame relay and Internet access services in 1996. In
the U.K., the Company is also considering additional service offerings,
including teleconferencing, voice mail, calling cards, call-back and smart
card services and plans to introduce Internet access and prepaid calling cards
in 1996.
 
  University Program. The Company's university program offers a variety of
telecommunications services to educational institutions ranging from long
distance service for administration and faculty, to integrated on-campus
services, including local and long distance service, voice mail, intercom
calling and operator services for
 
                                      35
<PAGE>
 
students, administrators and faculty. The Company's sales, marketing and
engineering professionals work directly with college and university
administrators to design and implement integrated solutions for providing and
managing telecommunications equipment and services to meet the current and
prospective communications needs of their institutions. As part of its
program, the Company often installs telecommunications equipment which,
depending upon the circumstances, may include a switch or private branch
exchange, voice mail, cabling and, in the U.K., pay telephones. Pay phone
usage in the U.K., particularly at universities, is more prevalent than in the
U.S. and Canada. To access this market directly, the Company has established a
pay phone division in the U.K., which supplies pay phones that will
automatically route calls from universities and other institutions over ACC
U.K.'s network.
 
  As of December 31, 1995, the Company had entered into a total of
approximately 140 contracts with colleges and universities in its three
geographic regions, of which approximately 75 were long-term agreements with
terms which generally range from three to 10 years in length. The Company
provided services to approximately 129,000 student accounts in the U.S.,
Canada and the U.K., as of December 31, 1995. The Company's long distance
rates in the U.S. for students generally are priced at a 10% discount from
those charged by the largest long distance carriers. The contracts in the U.S.
typically provide the Company with a right of first refusal to provide the
institution with any desired additional telecommunications services or
enhancements (based on market prices) during the term of the contract. The
Company's university contracts in Canada generally provide it with the
exclusive right, and in the U.K. the opportunity, to market to the school's
students, faculty and administration. Most of the Company's contracts in
Canada also provide for exclusive university support for marketing to alumni.
These arrangements allow the Company to market its services to these groups
through its affinity programs.
 
  The Company offers university customers in the U.S., Canada and the U.K.
certain customized services. The Company offers academic institutions a
comprehensive billing package to assist them in reviewing and controlling
their telecommunications costs. For its university student customers in the
U.S. and Canada, the Company provides a billing format that indicates during
each statement period the savings per call (in terms of the discount from the
largest long distance carrier's rates) realized during the billing period, and
for all university customers the Company provides a call detail report
recording every long distance call. In addition, for university student
customers, the Company provides individual bills for each user of the same
telephone in a dormitory room or suite so that each student in the dormitory
room or suite can be billed for the calls he or she made.
 
  Many of the Company's university customers in the U.S. are offered operator
services, which are available 24 hours per day, seven days per week. The
Company also offers its U.S. university customers its "Travel Service Elite"
domestic calling card. In addition, the Company sells a prepaid calling card
in the U.S., which allows customers to prepay for a predetermined number of
"units" representing long distance minutes. The rate at which the units are
used is determined by the destination of the calls made by the customer.
 
  The Company's sales group targets university customers in the U.S., Canada
and in the U.K. In the U.S. university market, the Company generally targets
small to medium size universities and colleges with full time enrollments in
the range of 1,000 to 5,000 students. In Canada, the Company has been able to
establish relationships with several large universities. The Company believes
that, while its marketing approach in Canada is similar to that in the U.S.,
its nationwide presence in Canada assists it in marketing to larger academic
institutions. In the U.K., the Company has been able to establish long-term
relationships with several large universities. The Company believes that,
while its marketing approach in the U.K. is similar to that in the U.S., it is
able to access larger educational institutions because of its nationwide
presence and because transmission facilities-based carriers have not focused
on this market. The Company believes that competition in the university market
is based on price, as well as the marketing of unique programs and customizing
of telecommunications services to the needs of the particular institution and
that its ability to adapt to customer needs has enhanced its development of
relationships with universities.
 
  Residential Long Distance Services. The Company offers its residential
customers in the U.S. and Canada a variety of long distance service plans and
is currently offering and developing similar plans for its residential
 
                                      36
<PAGE>
 
customers in the U.K. In the U.S., the Company's "Save Plus" program provides
customers with competitively priced long distance service. In addition, U.S.
customers are provided with a "Phone Home" long distance service through
which, by dialing an 800 number plus an access code, callers can call home at
competitive rates. In general, the Company's residential services are priced
below AT&T's premium rates for similar services. In Canada, the Company offers
three different residential service plans. The basic offering is a discount
plan, with call pricing discounted from the Stentor companies' tariffed rates
for similar services depending on the time of day and day of the week. The
Company also offers its "Sunset Savings Plan," which allows calling across
Canada and to the continental U.S. at a flat rate per minute. In the Toronto
metropolitan area, the Company offers "Extended Metro Toronto" calling, which
provides flat rate calling within areas adjacent to Toronto that are long
distance from each other. Customized billing services are also offered to the
Company's U.S. and Canadian residential customers. In the U.K., all
residential customers use the Company's ACCess 1601 service, which provides
savings of as much as 28% off the standard rates charged for residential
service by British Telecom or Mercury, but requires the customer to dial a
four digit access code before dialing the area code and number.
 
  International Long Distance Services. The Company offers international
products and services to both its existing customer base and to potential
customers in the U.S., Canada and the U.K. The Company's international simple
resale licenses (the "ISR Licenses") allow the Company to resell international
long distance service on leased international circuits connected to the PTSN
at both ends between the U.S. and U.K., Canada and the U.K., and certain other
countries. The Company believes it can compete effectively for international
traffic due to the ISR Licenses it has obtained for traffic between the U.S.,
Canada and the U .K. which allow it to price its services at cost-based rates
that are lower than the international settlement-based rates that would
otherwise apply to such traffic. However, numerous other carriers also have
international simple resale licenses. The Company has leased fixed cost
facilities between these countries and is developing services for customers
with high volumes of traffic between and among the U.S., Canada and the U.K.
 
  Local Exchange Services. Building on its experience in providing local
telephone service to various university customers, the Company took advantage
of recent regulatory developments in New York State and in 1994 began offering
local telephone service to commercial customers in upstate New York. As a
result of its August 1995 acquisition of Metrowide Communications, the Company
provides local telephone service as a reseller in Ontario, Canada. The Company
believes that it can strengthen its relationships with existing commercial,
university and college and residential customers in New York State and in
Ontario, Canada and can attract new customers by offering them local and long
distance services, thereby providing a single source for comprehensive
telecommunications services. Providing local telephone service will also
enable the Company to serve new local exchange customers even if they are
already under contract with a different interexchange carrier for long
distance service. Commencing in 1996, the Company plans to expand its local
telephone operations to selected other metropolitan areas in New York and
Massachusetts.
 
  The Company has only limited experience in providing local telephone
services, having commenced providing such services in 1994, and to date has
experienced an operating cash flow deficit in that business. In order to
attract local customers, the Company must offer substantial discounts from the
prices charged by local exchange carriers and must compete with other
alternative local companies that offer such discounts. Larger, better
capitalized alternative local providers, including AT&T and Time Warner Cable,
among others, will be better able to sustain losses associated with discount
pricing and initial investments and expenses. The local telephone service
business requires significant initial investments and expenses in capital
equipment, as well as significant initial promotional and selling expenses.
There can be no assurance that the Company will be able to lease transmission
facilities from local exchange carriers at wholesale rates that will allow the
Company to compete effectively with the local exchange carriers or other
alternative providers or that the Company will generate positive operating
margins or attain profitability in its local telephone service business.
 
SALES AND MARKETING
 
  The Company markets its services in the U.S., Canada and the U.K. through a
variety of channels, including ACC's internal sales forces, independent sales
agents, co-marketing arrangements and affinity programs. The
 
                                      37
<PAGE>
 
Company has a total of approximately 130 internal sales personnel and
approximately 200 independent sales agents serving its U.S., Canadian and U.K.
markets. Although it has not experienced significant turnover in recent
periods, a loss of a significant number of independent sales agents could have
a significant adverse effect on the Company's ability to generate additional
revenue. The Company maintains a number of sales offices in the Northeastern
U.S., Canada, and in London, Manchester and Cambridge, England. In addition,
with respect to its university and student customers in each country, the
Company has designated representatives to assist in customer enrollment,
dissemination of marketing information, complaint resolution and, in some
cases, collection of customer payments, with representatives located on some
campuses. The Company actively seeks new opportunities for business alliances
in the form of affinity programs and co-marketing arrangements to provide
access to alternative distribution channels.
 
  The following table indicates the approximate number of commercial,
residential and student customer accounts maintained by the Company as of
December 31, 1994 and 1995 in the U.S., Canada and the U.K., respectively:
 
<TABLE>
<CAPTION>
                              CUSTOMER ACCOUNTS AS OF DECEMBER 31,
                 --------------------------------------------------------------
                              1994                           1995
                 ------------------------------ -------------------------------
                 UNITED         UNITED   1994   UNITED          UNITED   1995
                 STATES CANADA  KINGDOM  TOTAL  STATES  CANADA  KINGDOM  TOTAL
                 ------ ------- ------- ------- ------- ------- ------- -------
<S>              <C>    <C>     <C>     <C>     <C>     <C>     <C>     <C>
Commercial......  9,397  16,940    794   27,131  10,858  22,685 11,938   45,481
Residential..... 19,979  53,103    517   73,599  20,909 100,239 14,825  135,973
Student......... 59,213  33,492  9,556  102,261  81,950  29,580 17,831  129,361
                 ------ ------- ------  ------- ------- ------- ------  -------
  Total......... 88,589 103,535 10,867  202,991 113,717 152,504 44,594  310,815
                 ====== ======= ======  ======= ======= ======= ======  =======
</TABLE>
 
  United States. The Company markets its services in the U.S. through ACC's
internal sales personnel and independent sales agents as well as through
attendance and representation at significant trade association meetings and
industry conferences of target customer groups. The Company's sales and
marketing efforts in the U.S. are targeted primarily at business customers
with $500 to $15,000 of monthly usage, selected residential customers and
universities and colleges. The Company also markets its services to other
resellers and rebillers. The Company plans to leverage its market base in New
York and Massachusetts into other New England states and Pennsylvania and to
eventually extend its marketing focus in other states. ACC has obtained
authorization to originate long distance voice services in 44 states. The
Company plans to expand its local telephone service operations to selected
other New York and Massachusetts metropolitan areas.
 
  Canada. The Company markets its long distance services in Canada through
internal sales personnel and independent sales agents, co-marketing
arrangements and affinity programs. The Company focuses its direct selling
efforts on medium-sized and large business customers. The Company also markets
its services to other resellers and rebillers. The Company uses independent
sales agents to target small to medium-sized business and residential
customers throughout Canada. These independent sales agents market the
Company's services under contracts that generally provide for the payment of
commissions based on the revenue generated from new customers obtained by the
representative. The use of an independent agent network allows the Company to
expand into additional markets without incurring the significant initial costs
associated with a direct sales force.
 
  In addition to marketing its residential services in Canada through
independent sales agents, the Company has developed several affinity programs
designed to attract residential customers within specific target groups, such
as clubs, alumni groups and buying groups. The use of affinity programs allows
the Company to target groups with a nationwide presence without engaging in
costly nationwide advertising campaigns. For example, ACC Canada has
established affinity programs with such groups as the Home Service Club of
Canada, the University of Toronto and the University of British Columbia. In
addition, the Company has developed a co-marketing arrangement with Hudson's
Bay Company (a large Canadian retailer) through which the Company's
telecommunications services are marketed under the name "The Bay Long Distance
Program."
 
                                      38
<PAGE>
 
  United Kingdom. In the U.K., the Company markets its services to business
and residential customers, as well as other telecommunications resellers,
through a multichannel distribution plan including its internal sales force,
independent sales agents, co-marketing arrangements and affinity programs.
 
  The Company generally utilizes its internal sales force in the U.K. to
target medium and large business customers which typically have enough volume
to warrant a direct access line to the Company's switch, thereby bypassing the
PSTN. The Company markets its services to small and medium-sized businesses
through independent sales agents. Telemarketers also are used to market
services to small business customers and residential customers and to generate
leads for the other members of the Company's internal sales force and
independent sales agents. ACC U.K. has established an internal marketing group
that is focused on selling its service to other telecommunications resellers
in the U.K. and other European countries on a wholesale basis. In October
1995, the Company entered into a co-marketing arrangement with London
Electricity PLC through which the electric utility offers long distance
telephone services to its London customers which are co-branded with ACC.
 
NETWORK
 
  In the U.S., Canada and the U.K., the Company utilizes a network of lines
leased under volume discount contracts with transmission facilities-based
carriers, much of which is fiber optic cable. To maximize efficient
utilization, the Company's network in each country is configured with two-way
transmission capability that combines over the same network the delivery of
both incoming and outgoing calls to and from the Company's switches. The
selection of any particular circuit for the transmission of a call is
controlled by routing software, located in the switches, that is designed to
cause the most efficient use of the Company's network. The Company evaluates
opportunities to install switches in selected markets where the volume of its
customer traffic makes such an investment economically viable. Utilization of
the Company's switches allows ACC to route customer calls over multiple
networks to reduce costs. As of December 31, 1995, the Company operated
switches for its call traffic in eight locations and maintained 19 additional
points of presence ("POPs") in the U.S., Canada and the U.K.
 
  Some of the Company's contracts with transmission facilities-based carriers
contain under-utilization provisions. These provisions require the Company to
pay fees to the transmission facilities-based carriers if the Company does not
meet minimum periodic usage requirements. The Company has not been assessed
with any underutilization charges in the past. However, there can be no
assurance that such charges would not be assessed in the future. Other
resellers generally contract with the Company on a month-to-month basis,
select the Company almost exclusively on the basis of price and are likely to
terminate their arrangements with the Company if they can obtain better
pricing terms elsewhere. The Company uses projected sales to other resellers
in evaluating the trade-offs between volume discounts and minimum utilization
rates it negotiates with transmission facilities-based carriers. If sales to
other resellers do not meet the Company's projected levels, the Company could
incur underutilization charges and be placed at a disadvantage in negotiating
future volume discounts.
 
  ACC generally utilizes redundant, highly automated advanced
telecommunications equipment in its network and has diverse alternate routes
available in cases of component or facility failure. Automatic traffic re-
routing enables the Company to provide a high level of reliability for its
customers. Computerized automatic network monitoring equipment facilitates
fast and accurate analysis and resolution of network problems. The Company
provides customer service and support, 24-hour network monitoring, trouble
reporting and response, service implementation coordination, billing
assistance and problem resolution.
 
  In the U.S., the Company maintains two long distance switches, one local
exchange switch and nine additional points of presence. These switches and
POPs provide an interface with the PSTN to service the Company's customers.
Lines leased from transmission facilities-based carriers link the Company's
U.S. POPs to its switches. ACC U.S. maintains a leased, direct trans-Atlantic
link with ACC U.K. that it established in 1994 following the Company's receipt
of its ISR License for U.K.-U.S. calls and international private line resale
authority in the U.S. The remaining term of the lease for the trans-Atlantic
link is 18 years.
 
 
                                      39
<PAGE>
 
  In Canada, the Company maintains switches in Toronto, Montreal and
Vancouver, together with seven POPs to provide an interface with the Canadian
PSTN. The Company also maintains frame relay nodes for switched data in
Toronto, Montreal, Vancouver and Calgary. The Company uses transmission lines
leased from transmission facilities-based carriers to link its Canadian POPs
to its switches. This network is also linked with the Company's switches in
the U.S. and the U.K. ACC Canada also maintains a leased, direct trans-
Atlantic link with ACC U.K. that it established in 1993 following the grant to
ACC U.K. of its ISR License. This transmission line enables ACC Canada to send
traffic to the U.K. at rates below those charged by Teleglobe Canada
("Teleglobe Canada"), the exclusive Canadian transmission facilities-based
carrier for international calls, other than those to and from the U.S. and
Mexico.
 
  In the U.K., the Company maintains switches in London and Manchester,
England. ACC U.K. maintains three additional POPs providing interfaces with
the PSTN in the U.K., which are linked to its switches through transmission
lines leased from the major transmission facilities-based carriers. This
network is also linked with the Company's switches in the U.S. and Canada.
Customers can access the Company's U.K. network through direct access lines or
by dial-up access using either auto dialing equipment or indirect access code
dialing.
 
  Network costs are the single largest expense incurred by the Company. The
Company strives to control its network costs and its dependence on other
carriers by leasing transmission lines on an economical basis. The Company
also has negotiated leases of private line circuits with carriers that operate
fiber optic transmission systems at rates independent of usage, particularly
on routes over which ACC carries high volumes of calls such as between the
U.S., Canada and the U.K. The Company attempts to maximize the efficient
utilization of its network in the U.S., Canada and the U.K. by marketing to
commercial and academic institution customers, who tend to use its services
most frequently on weekdays during normal business hours, and residential and
student customers, who use these services most often during night and weekend
off-peak hours.
 
INFORMATION SYSTEMS
 
  The Company believes that maintaining sophisticated and reliable billing and
customer services information systems that integrate billing, accounts
receivables and customer support is a core capability necessary to record and
process the data generated by a telecommunications service provider. While the
Company believes its management information system is currently adequate, it
has not grown as quickly as the Company's business and substantial investments
are needed. In order to meet this challenge, ACC has made arrangements with
consultants and vendors to develop new proprietary information systems which
ACC has licensed to integrate customer services, management information,
billing and financial reporting. The Company has budgeted approximately $6.0
million for these systems, which are expected to be installed during 1996. The
systems are designed to (i) enhance the Company's ability to monitor and
respond to the evolving needs of its customers by developing new and
customized services, (ii) improve least-cost routing of traffic on ACC's
international network, (iii) provide sophisticated billing information that
can be tailored to meet the requirements of its customer base, (iv) provide
high quality customer service, (v) detect and minimize fraud, (vi) verify
payables to suppliers of telecommunications transmission facilities and (vii)
integrate additions to its customer base. A variety of problems are often
encountered in connection with the implementation of new information systems.
There can be no assurance that the Company will not suffer adverse
consequences or cost over-runs in the implementation of the new information
systems or that the new systems will be appropriate for the Company. See "Risk
Factors--Dependence on Effective Information Systems."
 
COMPETITION
 
  The telecommunications industry is highly competitive and is significantly
influenced by the marketing and pricing decisions of the larger industry
participants. In each of its markets, the Company competes primarily on the
basis of price and also on the basis of customer service and its ability to
provide a broad array of telecommunications services. The industry has
relatively insignificant barriers to entry, numerous entities competing for
the same customers and a high average churn rate, as customers frequently
change long distance
 
                                      40
<PAGE>
 
providers in response to the offering of lower rates or promotional incentives
by competitors. Although many of the Company's customers are under multi-year
contracts, several of the Company's largest customers (primarily other long
distance carriers) are on month-to-month contracts and are particularly price
sensitive. Revenues from other resellers accounted for approximately 22%, 8%
and 9% of the revenues of ACC U.S., ACC Canada and ACC U.K., respectively, in
1995, and are expected to account for a higher percentage in the future. With
respect to these customers, the Company competes almost exclusively on price
and does not have long term contracts. The industry has experienced and will
continue to experience rapid regulatory and technological change. Many
competitors in each of the Company's markets are significantly larger than the
Company, have substantially greater resources than the Company, control
transmission lines and larger networks than the Company and have long-standing
relationships with the Company's target customers. There can be no assurance
that the Company will remain competitive in this environment. Regulatory
trends have had, and may have in the future, significant effects on
competition in the industry. As the Company expands its geographic coverage,
it will encounter increased competition. Moreover, the Company believes that
competition in non-U.S. markets is likely to increase and become more like
competition in the U.S. markets over time as such non-U.S. markets continue to
experience deregulatory influences. See "Risk Factors--Regulation," "Risk
Factors--Competition" and "--Regulation."
 
  Competition in the long distance industry is based upon pricing, customer
service, network quality and value-added services. The success of a non-
transmission facilities-based carrier such as the Company depends largely upon
the amount of traffic that it can commit to the transmission facilities-based
carrier and the resulting volume discount it can obtain. Subject to contract
restrictions and customer brand loyalty, resellers like the Company may
competitively bid their traffic among other national long distance carriers to
gain improvement in the cost of service. The relationship between resellers
and the larger transmission facilities-based carriers is twofold. First, a
reseller is a customer of the services provided by the transmission
facilities-based carriers, and that customer relationship is predicated
primarily upon the pricing strategies of the first tier companies. The
reseller and the transmission facilities-based carriers are also competitors.
The reseller will attract customers to the extent that its pricing for
customers is generally more favorable than the pricing offered the same size
customers by larger transmission facilities-based carriers. However,
transmission facilities-based carriers have been aggressive in developing
discount plans which have had the effect of reducing the rates they charge to
customers whose business is sought by the reseller. Thus, the business success
of a reseller is significantly tied to the pricing policies established by the
larger transmission facilities-based carriers. There can be no assurance that
favorable pricing policies will be continued by those larger transmission
facilities-based carriers.
 
  United States. In the U.S., the Company is authorized to originate long
distance service in 44 states (although it currently derives most of its U.S.
revenues from a limited number of states). The Company competes for customers,
transmission facilities and capital resources with numerous long distance
telecommunications carriers and/or resellers, some of which are substantially
larger, have substantially greater financial, technical and marketing
resources, and own or lease larger transmission systems than the Company. AT&T
is the largest supplier of long distance services in the U.S. inter-LATA
market. The Company also competes within its U.S. call origination areas with
other national long distance telephone carriers, such as MCI, Sprint and
regional companies which resell transmission services. In the intra-LATA
market, the Company also competes with the local exchange carriers servicing
those areas. In its local service areas in New York State, the Company
presently competes or in the future will compete with New York Telephone,
Frontier Corp., AT&T, Citizens Telephone Co., MFS Communications Co., Inc.,
Time Warner Cable and with cellular and other wireless carriers. These local
exchange carriers all have long-standing relationships with their customers
and have financial, personnel and technical resources substantially greater
than those of the Company. Furthermore, the recently announced joint venture
between MCI and Microsoft, under which Microsoft will promote MCI's services,
the recently announced joint venture among Sprint, Deutsche Telekom AG and
France Telecom, to be called Global One, and other strategic alliances could
increase competitive pressures upon the Company.
 
  In addition to these competitive factors, recent and pending deregulation in
each of the Company's markets may encourage new entrants. For example, as a
result of legislation recently enacted in the U.S., RBOCs will be
 
                                      41
<PAGE>
 
allowed to enter the long distance market, AT&T, MCI and other long distance
carriers and utilities will be allowed to enter the local telephone services
market and cable television companies will be allowed to enter the
telecommunications market. In addition, the FCC has, on several occasions
since 1984, approved or required price reductions by AT&T and, in October
1995, the FCC reclassified AT&T as a "non-dominant" carrier, which
substantially reduces the regulatory constraints on AT&T. The Company believes
that the principal competitive factors affecting its market share in the U.S.
are pricing, customer service and variety of services. By offering high
quality telecommunications services at competitive prices and by offering a
portfolio of value-added services including customized billing packages, call
management and call reporting services, together with personalized customer
service and support, the Company believes that it competes effectively with
other local and long distance telephone carriers and resellers in its service
areas. The Company's ability to continue to compete effectively will depend on
its continued ability to maintain high quality, market-driven services at
prices generally below those charged by its competitors.
 
  Canada. In Canada, the Company competes with facilities-based carriers,
other resellers and rebillers. The Company's principal transmission
facilities-based competitors are the Stentor group of companies, in
particular, Bell Canada, the dominant suppliers of long distance services in
Canada, Unitel, which provides certain facilities-based and long distance
services to business and residential customers, and Sprint Canada and fONOROLA
Inc., which provide certain transmission facilities-based services and also
acts as reseller of telecommunications services. The Company also competes
against CamNet, Inc., a reseller of telecommunications services. The Company
believes that, for some of its customers and potential customers, it has a
competitive advantage over other Canadian resellers as a result of its
operations in the U.S. and the U.K. In particular, the trans-Atlantic link
that it established in June 1993 between the U.K. and Canada allows ACC Canada
to sell traffic to the U.K. with a significantly lower cost structure than
many other resellers.
 
  United Kingdom. In the U.K. the Company competes with facilities-based
carriers and other resellers. The Company's principal competitors in the U.K.
are British Telecom, the dominant supplier of telecommunications services in
the U.K., and Mercury. The Company also faces competition from emerging
licensed public telephone operators (who are constructing their own
facilities-based networks) such as Energis, and from other resellers including
IDB WorldCom Services Inc., Esprit and Sprint. The Company believes its
services are competitive, in terms of price and quality, with the service
offerings of its U.K. competitors primarily because of its advanced network-
related hardware and software systems and the network configuration and
traffic management expertise employed by it in the U.K.
 
REGULATION
 
 United States
 
  The services which the Company's U.S. operating subsidiaries provide are
subject to varying degrees of federal, state and local regulation. The FCC
exercises jurisdiction over all facilities of, and services offered by,
telecommunications common carriers to the extent that they involve the
provision, origination or termination of jurisdictionally interstate or
international communications. The state regulatory commissions retain
jurisdiction over the same facilities and services to the extent they involve
origination or termination of jurisdictionally intrastate communications. In
addition, many regulations may be subject to judicial review, the result of
which the Company is unable to predict.
 
  Telecommunications Act of 1996. In February 1996, the "Telecommunications
Act of 1996" was enacted. The legislation is intended to introduce increased
competition in U.S. telecommunication markets. The legislation opens the local
services market by requiring local exchange carriers to permit interconnection
to their networks and by establishing local exchange carrier obligations with
respect to unbundled access, resale, number portability, dialing parity,
access to rights-of-way, mutual compensation and other matters. In addition,
the legislation codifies the local exchange carriers' equal access and
nondiscrimination obligations and preempts inconsistent state regulation. The
legislation also contains special provisions that eliminate the AT&T
Divestiture
 
                                      42
<PAGE>
 
Decree (and similar antitrust restrictions on the GTE Operating Companies
("GTOCs")) which restricts the RBOCs from providing long distance services.
These new provisions permit an RBOC to enter the "out-of-region" long distance
market immediately and the "in-region" long distance market if it satisfies
several procedural and substantive requirements, including showing that
facilities-based competition is present in its market and that it has entered
into interconnection agreements which satisfy a 14-point "checklist" of
competitive requirements. The Company is likely to face significant additional
competition, including from NYNEX Corp., the regional RBOC in the Company's
Northeastern U.S. service area, which may be among the first RBOCs permitted
to offer in-region long distance services. The new legislation provides for
certain safeguards to protect against anticompetitive abuse by the RBOCs, but
whether these safeguards will provide adequate protection to alternative
carriers, such as the Company, and the impact of anticompetitive conduct if
such conduct occurs, is unknown.
 
  Under the legislation, any entity, including long distance carriers such as
AT&T, cable television companies and utilities, may enter any
telecommunications market, subject to reasonable state consumer protection
regulations. The legislation also eliminates the statutory barrier which
prevented local telephone companies from providing video programming services
in their regions. The FCC may also forbear from regulating, in whole or in
part, certain types of carriers upon compliance with certain procedural
requirements. Such legislation, and the regulations that implement it will
subject the Company to increased competition and may have other, as yet
unknown, effects on the Company.
 
  Federal. The FCC has classified ACC U.S. as a non-dominant interexchange
carrier. Generally, the FCC has chosen not to exercise its statutory power to
closely regulate the charges or practices of non-dominant carriers.
Nevertheless, the FCC acts upon complaints against such carriers for failure
to comply with statutory obligations or with the FCC's rules, regulations and
policies. The FCC also has the power to impose more stringent regulatory
requirements on the Company and to change its regulatory classification. The
Company believes that, in the current regulatory environment, the FCC is
unlikely to do so.
 
  Until October 1995, AT&T was classified as a dominant carrier but AT&T
successfully petitioned the FCC for non-dominant status in the domestic
interstate and interexchange market. Therefore, certain pricing restrictions
that once applied to AT&T have been eliminated, which could result in
increased prices for services the Company purchases from AT&T and more
competitive retail prices offered by AT&T to customers. However, to date, the
Company has not found rate changes attributable to the price cap regulation of
AT&T and the local exchange carriers to have substantially adversely affected
its business. AT&T is, however, still classified as a dominant carrier for
international services. AT&T's application for reclassification as non-
dominant in the international market is currently pending.
 
  Both domestic and international non-dominant carriers must maintain tariffs
on file with the FCC. Prior to a recent court decision which reversed the
FCC's "forbearance policy" that had excused non-dominant interexchange
carriers from filing tariffs with the FCC, domestic non-dominant carriers were
permitted by the FCC to file tariffs with a "reasonable range of rates"
instead of the detailed schedules of individual charges required of dominant
carriers. However, the Company must now file tariffs containing detailed
actual rate schedules. In reliance on the FCC's past relaxed tariff filing
requirements for non-dominant domestic carriers, the Company and most of its
competitors did not maintain detailed rate schedules for domestic offerings in
their tariffs. AT&T has filed suit against three of its major competitors for
failing to file tariffs during the period preceding the court decision. Until
the two year statute of limitations expires, the Company could be held liable
for damages for its past failure to file tariffs containing actual rate
schedules. Recent legislative changes may, however, result in the FCC's
adopting a new forbearance policy, and the FCC is expected to institute a
rule-making proceeding to consider the merits of reinstating a forbearance
policy. There can be no assurance in this regard, however.
 
  In contrast to these recent developments affecting domestic long distance
service, the Company's U.S. subsidiaries have long been subject to
certification and tariff filing requirements for all international resale
 
                                      43
<PAGE>
 
operations. The Company's U.S. subsidiaries' international rates are not
subject to either rate-of-return or price cap regulation. The Company must
seek separate certification authority from the FCC to provide private line
service or to resell private line services between the U.S. and any foreign
country. The Company's ACC Global Corp. subsidiary has received authority from
the FCC to resell private lines on a switched service basis between the U.S.
and Canada, and was the first entity to file to obtain such authority between
the U.S. and the United Kingdom, which it received in September 1994.
 
  Among domestic local carriers, only the incumbent local exchange carriers
are currently classified as dominant carriers. Thus, the FCC regulates many of
the local exchange carriers' rates, charges and services to a greater degree
than the Company's, although FCC regulation of the local exchange carriers is
expected to decrease over time, particularly in light of recent U.S.
legislation.
 
  To date, the FCC has exercised its regulatory authority to supervise closely
the rates only of dominant carriers. However, the FCC has increasingly relaxed
its control in this area. For example, the FCC is in the process of repricing
local transport charges (the fee for the use of the local exchange carrier's
transmission facility connecting the local exchange carrier's central offices
and the interexchange carrier's access point). In addition, the local exchange
carriers have been afforded a degree of pricing flexibility in setting access
charges where adequate competition exists, and the FCC is considering certain
proposals which would relax further local exchange carriers access regulation.
Under interim rate structures adopted by the FCC, projected access charges for
AT&T, and possibly other large interexchange carriers, would decrease while
access charges for smaller interexchange carriers, including the Company,
would increase. While the outcome of these proceedings is uncertain, should
the FCC adopt permanent access charge rules along the lines of the interim
structures it has allowed to take effect, it could place the smaller
interexchange carriers, such as the Company, at a cost disadvantage, thereby
adversely affecting their ability to compete with AT&T and larger
interexchange carriers.
 
  The FCC had previously required local exchange carriers to allow
"collocation" of "competitive access providers" ("CAPs") in or near the
central office switching areas of the local exchange carriers, to enable such
CAPs to provide transport service between a local exchange carrier's central
office switch and an interexchange carrier's point-of-presence or end user
location. However, a 1995 decision of the Federal Court of Appeals struck down
the FCC's Order as beyond its statutory authority. The FCC has replaced the
requirement of "collocation" with a requirement of "virtual collocation",
which similarly expands the authority and ability of CAPs to provide competing
transport service. The recently enacted Telecommunications Act of 1996
provides the FCC with additional statutory authority to mandate collocation.
 
  In addition to its status as an access customer, the Company is now an
access provider in connection with its provision of local telephone service in
upstate New York. However, at present, the Company's provision of local
telephone service in New York State is not subject to most Federal access
rules and rate structure prescriptions applicable to the RBOCs and dominant
local exchange carriers.
 
 State
 
  The Company's intrastate long distance operations are subject to various
state laws and regulations including, in most jurisdictions, certification and
tariff filing requirements. The Company provides long distance service in all
or some portion of 40 states and has received the necessary certificate and
tariff approvals to provide intrastate long distance service in 44 states. All
states today allow some form of intrastate telecommunications competition.
However, some states restrict or condition the offering of intrastate/intra-
LATA long distance services by the Company and other interexchange carriers.
In the majority of those states that do permit interexchange carriers to offer
intra-LATA services, customers desiring to access those services are generally
required to dial special access codes, which puts the Company at a
disadvantage relative to the local exchange carrier's intrastate long distance
service, which generally requires no such access code dialing. Increasingly,
states are reexamining this policy and some states, such as New York, have
ordered that this disadvantage be removed. The Telecommunications Act of 1996
requires local exchange companies to adopt
 
                                      44
<PAGE>
 
"intra-LATA equal access" as a pre-condition for the local exchange carriers
entering into the inter-LATA long distance business. Accordingly, it is
expected that the dialing disparity for intra-LATA toll calls will be removed
in the future. The Company expects to have "equal access", with respect to
intra-LATA calls, for over 90% of its New York State subscribers by the end of
1996. Implementation in other states may take longer. PSCs also regulate
access charges and other pricing for telecommunications services within each
state. The RBOCs and other local exchange carriers have been seeking reduction
of state regulatory requirements, including greater pricing flexibility. This
could adversely affect the Company in several ways. The regulated prices for
intrastate access charges that the Company must pay could increase both
relative to the charges paid by the largest interexchange carriers, such as
AT&T, and in absolute terms as well. Additionally, the Company could face
increased price competition from the RBOCs and other local exchange carriers
for intra-LATA long distance services, which may also be increased by the
removal of former restrictions on long distance service offerings by the RBOCs
as a result of recently enacted legislation.
 
  New York State Regulation of Long Distance Service. Beginning in 1992, the
New York Public Service Commission ("NYPSC") commenced several proceedings to
investigate the manner in which local exchange carriers should be regulated.
In July 1995, the NYPSC ordered the acceptance of a Performance Regulation
Plan for New York Telephone. The terms of the plan, as ordered, included: (i)
a limitation on increases in basic local rates for the 5-year term of the
plan, (ii) implementation of intra-LATA equal access by no later than March
1996, (iii) reductions in the intrastate inter-LATA equal access charges which
the Company and other interexchange carriers pay over the next five years
totaling 33%, (iv) reductions in the intra-LATA toll rates charged to the end
user customer over the next five years totaling 21%, and (v) an intercarrier
compensation plan that reduced the rates paid by the competitive local
exchange carriers (including the Company's subsidiaries) by one-half. New York
Telephone does have some increased ability to restructure rates and to request
rate reductions, but all rate changes are still subject to NYPSC approval. New
York Telephone is also required to meet various service quality measurements,
and will be subject to financial penalties for failure to meet these
objectives.
 
  In a manner similar to the FCC, the NYPSC has adopted revised rules
governing the manner in which intrastate local transport elements of access
charges are to be priced. These revisions accompanied its decision ordering
local exchange carriers to permit "collocation" for intrastate special access
and switched access transport services. In general, where CAPs have
established interconnections at the switches of individual local exchange
carriers, the local exchange carriers will be given expanded authority to
enter into individually negotiated contracts with interexchange carriers for
transport service. At the same time, the access charges to other interexchange
carriers located at the same switching facilities generally will be lowered.
If insufficient competition is present at that switching facility, the pre-
existing intrastate "equal price per unit of traffic" rule will remain in
effect. While the presence of switch interconnections may actually lower the
price the Company may pay for local transport services, the ability of
carriers that handle large traffic volumes, such as AT&T, to negotiate flat
rate direct transport charges may result in the Company paying more per unit
of traffic than its competitors for local transport service.
 
  New York State Regulation of Local Telephone Service. The NYPSC has
determined that it will allow competition in the provision of local telephone
service in New York State, including "alternate access," private line services
and local switched services. The Company applied to the NYPSC for authority to
provide such services, and received certifications in early 1994 to offer
these services. The NYPSC has also authorized resale of local exchange
services, which may allow significant market entry by large toll carriers such
as AT&T and MCI.
 
  The Company's ability to offer competing local services profitably will
depend on a number of factors. For the Company to compete effectively against
New York Telephone, Frontier Corp. and other local exchange carriers in the
Company's upstate New York service areas, it must be able to interconnect with
the network of local exchange carriers in the markets in which it plans to
offer local services, obtain direct telephone number assignments and, in most
cases, negotiate with those local exchange carriers for certain services such
as leased
 
                                      45
<PAGE>
 
lines, directory assistance and operator services on commercially acceptable
terms. The order issued in the New York Telephone Performance Regulation Plan
(described above) established prices for interconnection and required New York
Telephone to tariff this service, making it generally available to all
competitors, including the Company. The actual monies paid by the Company to
New York Telephone for terminating the Company's traffic, and the monies
received by the Company from New York Telephone for terminating New York
Telephone traffic, are subject to NYPSC regulation and will depend upon the
Company's compliance with certain service obligations imposed by the NYPSC,
including the obligation to serve residential customers. The rates will also
affect the Company's competitive position in the intra-LATA toll market
relative to the local exchange carrier and major interexchange carriers such
as AT&T and MCI, which may offer intra-LATA toll services. The NYPSC has also
issued orders assuring local telephone service competitors access to number
resources, listing in the local exchange carrier's directory and the right to
reciprocal intercarrier compensation arrangements with the local exchange
carriers, and also establishing interim rules under which competitive
providers of local telephone service are entitled to comparable access to and
inclusion in local telephone routing guides and access to the customer
information of other carriers necessary for billing or other services. The
Company has obtained number assignments in 12 upstate New York markets and has
applications pending in 11 additional cities.
 
  The NYPSC has also adopted interim rules that would subject competitive
providers of local telephone service to a number of rules, service standards
and requirements not previously applicable to "nondominant" competitors such
as the Company. These rules include requirements involving "open network
architecture," provision of reasonable interconnection to competitors, and
compliance with the NYPSC's service quality standards and consumer protection
requirements. As part of its "open network architecture" obligations, the
Company could be required to allow collocation with its local toll switch upon
receipt of a bona fide request by an interexchange carrier or other carrier.
Compliance with these rules in connection with the Company's provision of
local telephone service may impose new and significant operating and
administrative burdens on the Company. This proceeding will also determine the
responsibilities of new local service providers with respect to subsidies
inherent in existing local exchange carrier rates.
 
  Local Telephone Service in Massachusetts. The Massachusetts Department of
Public Utilities ("DPU") has initiated a docket (currently in its briefing
stages) to determine the format for local competition in that state. The
format appears to be similar to the structure developing in New York State.
Pending the outcome of this proceeding, the DPU is allowing companies to apply
for certification as local exchange carriers and to begin operations under
interim agreements. The Company is in the process of applying for
certification.
 
  The Company's ability to construct and operate competitive local service
networks for both local private line and switched services will depend upon,
among other things, implementation of the structural market reforms discussed
above, favorable determinations with respect to obligations by the state and
federal regulators, and the satisfactory implementation of interconnection
with the local exchange carriers.
 
 Canada
 
  Long distance telecommunications services in Canada generally are subject to
regulation by the CRTC. As a result of significant regulatory changes during
the past several years, the historical monopolies for long distance service
granted to regional telephone companies in Canada have been terminated. This
has resulted in a significant increase in competition in the Canadian long
distance telecommunications industry.
 
  CRTC Decisions. In March 1990, the CRTC for the first time permitted non-
facilities-based carriers, such as ACC Canada, to aggregate the traffic of
customers on the same leased interexchange circuits in order to provide
discounted long distance voice services in the provinces of Ontario, Quebec
and British Columbia. In September 1990, the CRTC also authorized carriers in
addition to members of the Stentor consortium to interconnect their
transmission facilities with the Message Toll Service ("MTS") facilities of
Teleglobe Canada, for the purpose of allowing resellers, such as ACC Canada,
to resell international long distance MTS service. Prior to this decision,
Bell Canada and other members of Stentor were the exclusive long distance
carriers interconnected to Teleglobe Canada's MTS facilities.
 
                                      46
<PAGE>
 
  In June 1992, the CRTC effectively removed the monopoly rights of those
Stentor member companies that were parties to this proceeding with respect to
the provision of transmission facilities-based long distance voice services in
the territories in which they operate and opened the provision of these
services to substantial competition in all provinces of Canada other than
Alberta, Saskatchewan and Manitoba. Competition has subsequently been
introduced in Alberta and Manitoba, which are subject to CRTC regulation, and
Saskatchewan, which has not yet become subject to CRTC regulation. Among other
things, the CRTC also directed the telephone companies that were subject to
this decision to provide Unitel with "equal ease of access;" i.e., to allow
Unitel to directly connect its network to the telephone companies' toll and
end office switches to allow Unitel's customers to make long distance calls
without dialing extra digits. In July 1993, the CRTC ordered the same
telephone companies to provide resellers with equal ease of access upon
payment of contribution, network modification and ongoing access charges on
the same general basis as for transmission facilities-based carriers.
 
  At the same time, the CRTC also required telephone company competitors to
assume certain financial obligations, including the payment of "contribution
charges" designed to ensure that each long distance carrier bears a fair
proportion of the subsidy that long distance services have traditionally
contributed to the provision of local telephone service. As a result,
contribution charges payable by resellers were increased. These charges are
levied on resellers as a monthly charge on leased access lines. The charges
vary for each telephone company based on that company's estimated loss on
local services. Contribution charges were reduced by a discount which was
initially 25%, and which declines over time to zero in 1998. Resellers, whose
access lines were connected only to end offices on a non-equal access basis,
initially paid contribution charges of 65% of the equal access contribution
rates, rising over a five-year period to an 85% rate thereafter. The CRTC also
established a mechanism under which contribution rates will be re-examined on
a yearly basis. In March 1995, the CRTC decreased the contribution charges
required to be paid by alternate long distance service providers to the local
telephone companies, and made such decreases retroactive to January 1, 1994.
Contribution charges payable to Bell Canada were reduced by 23%, and those
payable to BC Tel by 13%.
 
  Transmission facilities-based competitors and resellers that obtained equal
ease of access also assumed approximately 30% of the estimated Cdn. $240
million cost required to modify the telephone companies' networks to
accommodate interconnection with competitors as well as a portion of the
ongoing costs of the telephone companies to provide such interconnection.
Initial modification charges are spread over a period of 10 years. These
charges and costs are payable on the basis of a specified charge per minute.
 
  In September 1994, the CRTC established substantial changes to Canadian
telecommunications regulation, including: (i) initiation of a program of rate
rebalancing, which would entail three annual increases of Cdn. $2 per month in
rates for local service, with corresponding decreases in rates for basic toll
service, and an indication from the CRTC that there would be no price changes
which would result in an overall price increase for North American basic toll
schedules combined; (ii) the telephone companies' monopoly local and access
services, including charges for bundled services provided to competitors (the
Utility segment), would remain in the regulated rate base, and the CRTC would
replace earnings regulation for the Utility segment with price caps effective
January 1, 1998; (iii) other services (the Competitive segment) would not be
subject to earnings regulation after January 1, 1995, after which a Carrier
Access Tariff would become effective, which would include charges for
contribution, start-up cost recovery and charges for bundled services
applicable to the telephone companies' and competitors' traffic based on a per
minute calculation, rather than the per trunk basis previously used to
calculate contribution charges; (iv) while the CRTC considered it premature to
forebear from regulating interexchange services, it considered that the
framework set forth in the decision may allow forbearance in the future (such
forbearance has subsequently occurred in the case of certain non-dominant
transmission facilities-based carriers); (v) the CRTC concluded that barriers
to entry should be reduced for the local service market, including basic local
telephone service and switched network alternatives, and has subsequently
initiated proceedings to implement unbundled tariffs, co-location of
facilities and local number portability; and (vi) the intention to consider
applying contribution charges to other services using switched access, not
only to long distance voice services.
 
 
                                      47
<PAGE>
 
  Changes to these matters that were announced in October 1995 were the
following: (i) rate rebalancing, with Cdn. $2 per month local rate increases
commencing in each of January 1996 and January 1997 and another unspecified
increase in 1998 (the contribution component of the Carrier Access Tariff is
to be reduced correspondingly, but a corresponding reduction of basic North
American long distance rates ordered by the CRTC was reversed by the Federal
Cabinet in December 1995); (ii) reductions in contribution charges effective
January 1, 1995, with contribution charges payable to Bell Canada reduced from
1994 levels by 16%, and those payable to BC Tel by 27%; (iii) changes to the
costing methodology of the telephone companies including (a) the establishment
of strict rules governing telephone company investments in competitive
services involving broadband technology, (b) the requirement that the
Competitive segment pay its fair share of joint costs incurred by both the
Utility and Competitive segments, and (c) a directive specifying that revenues
for many unbundled items must be allocated to the Utility segment thereby
reducing the local shortfall and therefore contribution charges; (iv)
directory operations of the telephone companies will continue to remain
integral to the Utility segment, meaning that revenues from directory
operations will continue to be assigned to the Utility segment to help reduce
the local shortfall and therefore contribution payments; and (v) Stentor's
request to increase the allowed rate of return of the Utility segment was
denied and the CRTC restated its intention to retain the fifty basis point
downward adjustment to the total company rate of return used to derive the
Utility segment rates of return for the telephone companies.
 
  In December 1995, the CRTC announced that the per trunk basis for
calculating contribution charges would be replaced by a per minute basis for
calculating contribution charges starting June 1, 1996. The off-peak
contribution rate will be one-half the peak rate, with the peak rate
applicable between 8 a.m. and 5 p.m., Monday through Friday. The Company
expects that the net effect of this change together with anticipated
contribution rate reductions will be minimal in 1996, and will cause an
increase of approximately Cdn. $1.5 million in the Company's 1997 network
costs. However, additional reductions in contribution rates may offset this
increase.
 
  The Company cannot predict the timing or the outcome of any of the pending
and ongoing proceedings described above, or the impact they may have on the
competitive position of ACC Canada.
 
  Telecommunications Act. In October 1993, the Telecommunications Act replaced
the Railway Act (Canada) as the principal telecommunications regulatory
statute in Canada. This Act provides that all federally-regulated
telecommunications common carriers as defined therein (essentially all
transmission facilities-based carriers) are under the regulatory jurisdiction
of the CRTC. It also gives the federal government the power to issue
directions to the CRTC on broad policy matters. The Act does not subject non-
facilities-based carriers, such as ACC Canada, to foreign ownership
restrictions, tariff filing requirements or other regulatory provisions
applicable to facilities-based carriers. However, to the extent that resellers
acquire their own facilities in order to better control the carriage and
routing of their traffic, certain provisions of this Act may be applicable to
them.
 
 United Kingdom
 
  Until 1981, British Telecom was the sole provider of public
telecommunications services throughout the U.K. This monopoly ended when, in
1981, the British government granted Mercury a license to run its own
telecommunications system under the British Telecommunications Act 1981. Both
British Telecom and Mercury are licensed under the subsequent
Telecommunications Act 1984 to run transmission facilities-based
telecommunications systems and provide telecommunications services. See "Risk
Factors--Dependence on Transmission Facilities-Based Carriers and Suppliers."
 
  In 1991, the British government established a "multi-operator" policy to
replace the duopoly that had existed between British Telecom and Mercury.
Under the multi-operator policy, the U.K. Department of Trade and Industry
(the "DTI") will recommend the grant of a license to operate a
telecommunications network to any applicant that the DTI believes has a
reasonable business plan and where there are no other overriding
considerations not to grant such license. All public telecommunications
operators and international simple resellers operate under individual licenses
granted by the Secretary of State for Trade and Industry pursuant to the
Telecommunications Act 1984. Any telecommunications system with compatible
equipment that is
 
                                      48
<PAGE>
 
authorized to be run under an individual license granted under this Act is
permitted to interconnect to British Telecom's network. Under the terms of
British Telecom's license, it is required to allow any such licensed operator
to interconnect its system to British Telecom's system, unless it is not
reasonably practicable to do so (e.g., due to incompatible equipment).
 
  ACC U.K. was granted an ISR License in September 1992 by the DTI and, for a
period of approximately 18 months thereafter, was involved in protracted
negotiations with British Telecom concerning the terms and conditions under
which it could interconnect its leased line network and switching equipment
with British Telecom's network. The ISR License allows the Company to offer
domestic and international long distance services via connections to the PSTN
of certain originating and terminating countries at favorable leased-line
rates, rather than per call international settlement rates. Over time, larger
carriers will be able to match the Company's rates because they also have, or
are expected to obtain, international simple resale licenses. Although the ISR
License applies to service between Australia, Canada, Finland, New Zealand,
Sweden, the United Kingdom and the United States, the Company presently
utilizes the license primarily for traffic between the U.K. and the U.S. or
Canada.
 
ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
 
  As the Company expands its service offerings, geographic focus and its
network, the Company anticipates that it will seek to acquire assets and
businesses of, make investments in or enter into strategic alliances with,
companies providing services complementary to ACC's existing business. The
Company believes that, as the global telecommunications marketplace becomes
increasingly competitive, expands and matures, such transactions will be
critical to maintaining a competitive position in the industry.
 
  The Company's ability to effect acquisitions and strategic alliances and
make investments may be dependent upon its ability to obtain additional
financing and, to the extent applicable, consents from the holders of debt and
preferred stock of the Company. While the Company may in the future pursue an
active strategic alliance, acquisition or investment policy, no specific
strategic alliances, acquisitions or investments are currently in negotiation
and the Company has no immediate plans to commence such negotiations. If the
Company were to proceed with one or more significant strategic alliances,
acquisitions or investments in which the consideration consists of cash, a
substantial portion of the Company's available cash (including proceeds of
this offering) could be used to consummate the acquisitions or investments. If
the Company were to consummate one or more significant strategic alliances,
acquisitions or investments in which the consideration consists of stock,
shareholders of the Company could suffer a significant dilution of their
interests in the Company.
 
  Many business acquisitions must be accounted for as purchases. Most of the
businesses that might become attractive acquisition candidates for the Company
are likely to have significant goodwill and intangible assets, and the
acquisitions of these businesses, if accounted for as a purchase, would
typically result in substantial amortization charges to the Company. In the
event the Company consummates additional acquisitions in the future that must
be accounted for as purchases, such acquisitions would likely increase the
Company's amortization expenses. In connection with acquisitions, investments
or strategic alliances, the Company could incur substantial expenses,
including the fees of financial advisors, attorneys and accountants, the
expenses of integrating the business of the acquired company or the strategic
alliance with the Company's business and any expenses associated with
registering shares of the Company's capital stock, if such shares are issued.
The financial impact of such acquisitions, investments or strategic alliances
could have a material adverse effect on the Company's business, financial
condition and results of operations and could cause substantial fluctuations
in the Company's quarterly and yearly operating results. See "Risk Factors--
Need for Additional Capital" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
 
EMPLOYEES
 
  As of December 31, 1995, the Company had 631 full-time employees worldwide.
Of this total, 222 employees were in the U.S., 266 were in Canada and 143 were
in the U.K. The Company has never experienced a work stoppage and its
employees are not represented by a labor union or covered by a collective
bargaining agreement. The Company considers its employee relations to be good.
 
                                      49
<PAGE>
 
                                  MANAGEMENT
 
  The following sets forth information concerning the directors and executive
officers of the Company and its principal operating subsidiaries as of January
31, 1996:
 
<TABLE>
<CAPTION>
                 NAME                 AGE              POSITION(S)
                 ----                 ---              ----------
 <C>                                  <C> <S>
 Richard T. Aab......................  46 Chairman of the Board of Directors
 David K. Laniak.....................  60 Chief Executive Officer, Director
 Arunas A. Chesonis..................  33 President and Chief Operating
                                           Officer, Director
 Michael R. Daley....................  34 Executive Vice President, Chief
                                           Financial Officer and Treasurer
 Steve M. Dubnik.....................  33 Chairman of the Board of Directors,
                                           President and Chief Executive
                                           Officer, ACC TelEnterprises Ltd.
 Michael L. LaFrance.................  36 President, ACC Long Distance Corp.
 Christopher Bantoft.................  48 Managing Director, ACC Long Distance
                                           UK Ltd.
 John J. Zimmer......................  37 Vice President--Finance
 George H. Murray....................  49 Vice President--Human Resources and
                                           Corporate Communications
 Sharon L. Barnes....................  29 Controller
 Hugh F. Bennett.....................  38 Director
 Willard Z. Estey....................  76 Director
 Daniel D. Tessoni...................  48 Director
 Robert M. Van Degna.................  51 Director
</TABLE>
 
  Richard T. Aab is a co-founder of the Company who has served as Chairman of
the Board of Directors since March 1983 and as a director since October 1982.
Mr. Aab also served as Chief Executive Officer from August 1983 through
October 1995, and as Chairman of the Board of Directors of ACC TelEnterprises
Ltd. from April 1993 through February 1994.
 
  David K. Laniak was elected the Company's Chief Executive Officer in October
1995. Mr. Laniak has been a director of the Company since February 1989. Prior
to joining the Company, Mr. Laniak was Executive Vice President and Chief
Operating Officer of Rochester Gas and Electric Corporation, Rochester, New
York, where he worked in a variety of positions for more than 30 years. Mr.
Laniak also has served since October 1995 and from May 1993 through July 1994
served as a director of ACC TelEnterprises Ltd.
 
  Arunas A. Chesonis was elected President and Chief Operating Officer of the
Company in April 1994. He previously served as President of the Company and of
its North American operations since April 1994, and as President of ACC Long
Distance Corp. from January 1989 through April 1994. From August 1990 through
March 1991, he also served as President of ACC TelEnterprises Ltd., and from
May 1987 through January 1989, Mr. Chesonis served as Senior Vice President of
Operations for ACC Long Distance Corp. Mr. Chesonis was elected a Director of
the Company in October 1994.
 
  Michael R. Daley was elected the Company's Executive Vice President and
Chief Financial Officer in February 1994, and has served as Treasurer of the
Company since March 1991. He previously served as the Company's Vice
President-Finance from August 1990 through February 1994, as Treasurer and
Controller from August 1990 through March 1991, as Controller from January
1989 through August 1990, and various other positions with the Company from
July 1985 through January 1989. Mr. Daley has served as a director of ACC
TelEnterprises Ltd. since October 1994.
 
  Steve M. Dubnik was elected the Chairman of the Board of Directors,
President and Chief Executive Officer of ACC TelEnterprises Ltd. in July 1994.
Previously, he served from 1992 through June 1994 as President, Mid-Atlantic
Region, of RCI Long Distance. For more than five years prior thereto, he
served in progressively senior positions with Rochester Telephone Corporation
(now Frontier Corp.) including assignments in engineering, operations,
information technology and sales.
 
                                      50
<PAGE>
 
  Michael L. LaFrance was elected the President of ACC  Long Distance Corp. in
April 1994. From May 1992 through May 1994, he served as Executive Vice
President and General Manager of Axcess USA Communications Corp., from June
1990 through May 1992, as Director of Regulatory Affairs and Administration of
LDDS Communications, Inc. and from February 1987 through June 1990, as Vice
President of Comtel-TMC Telecommunications. Since April 1994, Mr. LaFrance has
served as the President of ACC National Telecom Corp., the Company's local
service subsidiary.
 
  Christopher Bantoft was elected Managing Director of ACC Long Distance UK
Ltd. in February 1994. From 1986 through 1993, he served as Sales and
Marketing Director, Deputy Managing Director, and most recently as Managing
Director of Alcatel Business Systems Ltd., the U.K. affiliate of Alcatel, N.V.
 
  John J. Zimmer, a certified public accountant, was elected the Company's
Vice President-Finance in September 1994. He previously served as the
Company's Controller from March 1991 through September 1994. Prior to March
1991, he served as a staff accountant and then as a manager of accounting with
Arthur Andersen LLP.
 
  George H. Murray was elected the Company's Vice President-Human Resources
and Corporate Communications in August 1994. For more than five years prior to
his joining the Company, he served in various senior management positions with
First Federal Savings and Loan of Rochester, New York.
 
  Sharon L. Barnes, a certified public accountant, was elected the Company's
Controller in September 1994. Previously, she served as Accounting Manager
from April 1993 through September 1994. Prior to joining the Company in 1993,
she served for more than four years as a staff and senior accountant with
Arthur Andersen LLP.
 
  Hugh F. Bennett has been a director of the Company since June 1988. Since
March 1990, Mr. Bennett has been a Vice President, Director and Secretary-
Treasurer of Gagan, Bennett & Co., Inc., an investment banking firm.
 
  The Hon. Willard Z. Estey, C.C., Q.C., was elected a director of the Company
at its 1994 Annual Meeting. Mr. Estey is Counsel to the Toronto, Ontario law
firm of McCarthy, Tetrault. After serving as Chief Justice of Ontario, Mr.
Estey was a Justice of the Supreme Court of Canada from 1977 through 1988.
From 1988 through 1990, Mr. Estey was Deputy Chairman of Central Capital
Corporation, Toronto, Ontario. Since May 1993, Mr. Estey has also served as a
director of ACC TelEnterprises Ltd.
 
  Daniel D. Tessoni has been a director of the Company since May 1987. Mr.
Tessoni is an Associate Professor of Accounting at the College of Business of
the Rochester Institute of Technology, where he has taught since 1977. He
holds a Ph.D. degree, is a certified public accountant and is Treasurer of
several privately-held business concerns.
 
  Robert M. Van Degna has been a director of the Company since May 1995. Mr.
Van Degna is Managing Partner of Fleet Equity Partners, an investment firm
affiliated with Fleet Financial Group, Inc. and based in Providence, Rhode
Island. Mr Van Degna joined Fleet Financial Group in 1971 and held a variety
of lending and management positions until he organized Fleet Equity Partners
in 1982 and became its general partner. Mr. Van Degna currently serves on the
Board of Directors of Orion Network Systems, Inc. as well as several
privately-held companies. Mr.Van Degna was initially elected to the Company's
Board of Directors pursuant to the terms of the investment in the Company by
Fleet Venture Resources, Inc. and affiliated entities described under
"Principal Shareholders" and "Description of Capital Stock--Series A Preferred
Stock."
 
  For a description of certain employment arrangements which may have anti-
takeover effects, see "Description of Capital Stock--Certain Charter, By-law
and Statutory Provisions and Other Anti-takeover Considerations."
 
 
                                      51
<PAGE>
 
                            PRINCIPAL SHAREHOLDERS
 
  The following table sets forth certain information regarding beneficial
ownership of the Class A Common Stock as of January 31, 1996 and as adjusted
to reflect the sale of Class A Common Stock being offered hereby (i) by each
person known by the Company to beneficially own more than five percent of the
Class A Common Stock, (ii) by each director, (iii) by each executive officer
of the Company named in the Summary Compensation Table contained in the
Company's Proxy Statement dated June 12, 1995 and incorporated by reference
herein, and (iv) by all directors and executive officers as a group.
 
<TABLE>
<CAPTION>
                                    SHARES BENEFICIALLY     SHARES BENEFICIALLY
                                        OWNED PRIOR             OWNED AFTER
                                      TO OFFERING (1)          OFFERING (1)
                                    ----------------------- -----------------------
         BENEFICIAL OWNER             NUMBER     PERCENT      NUMBER     PERCENT
         ----------------           ------------ ---------- ------------ ----------
<S>                                 <C>          <C>        <C>          <C>
Richard T. Aab (2).................      931,904     11.8%       931,904      9.6%
  400 West Avenue
  Rochester, New York 14611
Robert M. Van Degna (3)............      725,000      9.2        725,000      7.5
  c/o Fleet Venture Resources, Inc.
  111 Westminster Street
  Providence, RI 02903
Fleet Venture Resources, Inc (4)...      456,750      5.8        456,750      4.7
  111 Westminster Street
Arunas A. Chesonis (5).............       90,883      1.1         90,883        *
Michael R. Daley (6)...............       46,021        *         46,021        *
David K. Laniak (7)................       43,626        *         43,626        *
Christopher Bantoft (8)............       22,550        *         22,550        *
Daniel D. Tessoni (9)..............       22,500        *         22,500        *
Hugh F. Bennett (10)...............        3,000        *          3,000        *
Willard Z. Estey (11)..............          --        --            --      --
All Directors and Executive
 Officers as a Group (14 persons,
 including those named above)(12)..    1,237,058     15.6      1,237,058    12.8
</TABLE>
- --------
  *Less than one percent.
 
 (1) Except as otherwise indicated, and subject to community property laws
     where applicable, the persons named in the table above have sole voting
     and investment power with respect to all shares of Class A Common Stock
     shown as owned by them.
 
 (2) Includes options to purchase 16,672 shares of Class A Common Stock that
     are or will become exercisable within the next 60 days. Excludes 15,000
     shares directly owned by Mr. Aab's wife and 1,500 shares that she
     controls as custodian for their minor children, as to which shares Mr.
     Aab disclaims beneficial ownership. Does not include 25,372 shares
     issuable upon the exercise of options which are not deemed to be
     presently exercisable.
 
 (3) Includes (i) 456,750 shares of Class A Common Stock beneficially owned by
     Fleet Venture Resources, Inc. ("Fleet Venture Resources"), of which
     393,750 shares are issuable upon the conversion of Series A Preferred
     Stock and 63,000 shares are issuable upon the exercise of warrants; (ii)
     195,750 shares of Class A Common Stock beneficially owned by Fleet Equity
     Partners VI, L.P. ("Fleet Equity Partners"), of which 168,750 shares are
     issuable upon the conversion of Series A Preferred Stock and 27,000
     shares are issuable upon the exercise of warrants; and (iii) 72,500
     shares of Class A Common Stock beneficially owned by Chisholm Partners
     II, L.P. ("Chisholm"), of which 62,500 shares are issuable upon the
     conversion of Series A Preferred Stock and 10,000 shares are issuable
     upon the exercise of warrants. As of January 31, 1996, the conversion
     price for the Series A Preferred Stock and the exercise price of such
     warrants was $16.00 per share. Does not include a total of 625,000 shares
     of Class A Common Stock
 
                                      52
<PAGE>
 
    issuable to Fleet Venture Resources, Fleet Equity Partners and Chisholm
    upon the exercise of warrants, which warrants would become exercisable
    upon an optional redemption of the Series A Preferred Stock by the Company
    or an option to purchase 5,000 shares of Class A Common Stock granted to
    him, subject to shareholder approval, under the non-employee directors'
    stock option plan. See "Description of Capital Stock--Warrants." Mr. Van
    Degna is the Chief Executive Officer of Fleet Venture Resources and the
    Chief Executive Officer or President of each general partner of Fleet
    Equity Partners and Chisholm. Mr. Van Degna disclaims beneficial ownership
    of the shares held by these entities, except for his limited partnership
    interest in the general partner of Chisholm.
 
 (4) Does not include shares beneficially owned by Fleet Equity Partners or
     Chisholm (see note (3) above).
 
 (5) Includes 488 shares owned by Mr. Chesonis's spouse, options to purchase
     80,725 shares that are or will become exercisable by Mr. Chesonis within
     the next 60 days and options to purchase 6,950 shares that are currently
     exercisable by Mr. Chesonis's spouse. Does not include 79,525 shares
     issuable upon the exercise of options which are not deemed to be
     presently exercisable.
 
 (6) Includes options to purchase 42,850 shares that are or will become
     exercisable within the next 60 days. Does not include 58,250 shares
     issuable upon the exercise of options which are not deemed to be
     presently exercisable.
 
 (7) Includes options to purchase 37,627 shares that are or will become
     exercisable within the next 60 days. Does not include 56,473 shares
     issuable upon the exercise of options which are not deemed to be
     presently exercisable.
 
 (8) Includes options to purchase 22,550 shares that are or will become
     exercisable within the next 60 days. Does not include 47,450 shares
     issuable upon the exercise of options which are not deemed to be
     presently exercisable or an option to purchase 5,000 shares of Class A
     Common Stock granted to him, subject to shareholder approval, under the
     non-employee directors' stock option plan.
 
 (9) Mr. Tessoni and his wife share investment and voting power with respect
     to all shares which he beneficially owns. Does not include an option to
     purchase 5,000 shares of Class A Common Stock granted to him, subject to
     shareholder approval, under the non-employee directors' stock option
     plan.
 
(10) Mr. Bennett shares investment and voting power with his wife with respect
     to 1,500 of these shares. Does not include an option to purchase 5,000
     shares of Class A Common Stock granted to him, subject to shareholder
     approval, under the non-employee directors' stock option plan.
 
(11) Does not include an option to purchase 5,000 shares of Class A Common
     Stock granted to Mr. Estey, subject to shareholder approval, under the
     non-employee directors' stock option plan.
 
(12) See notes (2), (3), (5), (6), (7), (8), (9), (10) and (11) above.
     Includes options to purchase a total of 68,425 shares that are currently
     or will become exercisable within the next 60 days by five executive
     officers of the Company, in addition to those named above.
 
                         DESCRIPTION OF CAPITAL STOCK
 
  The authorized capital stock of the Company consists of 50,000,000 shares of
Class A Common Stock, par value $0.015 per share, 25,000,000 shares of Class B
Common Stock, par value $0.015 per share, and 2,000,000 shares of Preferred
Stock, par value $1.00 per share. As of January 31, 1996, 7,920,776 shares of
Class A Common Stock were issued and outstanding and held by approximately 477
shareholders of record and 10,000 shares of Series A Preferred Stock were
issued and outstanding. No shares of Class B Common Stock have been issued by
the Company. In addition, as of January 31, 1996, there were outstanding
options to purchase an aggregate of up to approximately 1,347,894 shares of
Class A Common Stock, of which options with respect to 544,974 shares were
exercisable at a weighted average exercise price of approximately $14.01 per
share, and, exclusive of the 625,000 Springing Warrants (defined below),
warrants to purchase an aggregate of up to 137,500 shares of Class A Common
Stock also were outstanding and exercisable as of such date. Subject to
obtaining shareholder approval, the Company has adopted a stock option plan
for non-employee directors and has granted options to purchase 20,000 shares
thereunder at an exercise price of $23.00 per share.
 
                                      53
<PAGE>
 
CLASS A COMMON STOCK
 
  The holders of shares of Class A Common Stock are entitled to one vote per
share on all matters to be voted on by shareholders. Except as described
below, the Series A Preferred Stock votes together with the Class A Common
Stock. The holders of shares of Class A Common Stock are not entitled to
cumulate their votes in the election of directors and, as a consequence,
minority shareholders will not be able to elect directors on the basis of
their votes alone. Subject to the dividend preferences of the Series A
Preferred Stock and any dividend preferences that may be applicable to any
shares of Preferred Stock or Class B Common Stock issued in the future,
holders of shares of Class A Common Stock are entitled to receive ratably such
dividends as may be declared from time to time by the Board of Directors, in
its discretion, from any assets legally available therefor. The Credit
Facility and the Series A Preferred Stock prohibit the payment of dividends
and the Company does not intend to pay dividends on the Class A Common Stock
for the foreseeable future. See "Price Range of Class A Common Stock and
Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, holders of the Class A Common Stock are entitled to share ratably
in all assets remaining after payment of liabilities and the liquidation
preference of the Series A Preferred Stock and any liquidation preferences
that may be applicable to any shares of Preferred Stock or Class B Common
Stock issued in the future. The holders of Class A Common Stock are not
entitled to preemptive, subscription or conversion rights, and there are no
redemption or sinking fund provisions applicable to the Class A Common Stock.
The holders of Class A Common Stock are not subject to further calls or
assessments by the Company. All outstanding shares of Class A Common Stock are
validly issued, fully paid and non-assessable.
 
  The Class A Common Stock is quoted on the Nasdaq Stock Market under the
symbol "ACCC." The Company's transfer agent and registrar for its Class A
Common Stock is Society National Bank, Cleveland, Ohio.
 
CLASS B COMMON STOCK
 
  The Board of Directors has the authority to fix the rights, preferences,
privileges and restrictions of Class B Common Stock, including dividend
rights, conversion rights, terms of redemption, liquidation preferences and
sinking fund provisions, without any further vote or action by shareholders;
provided, however, that holders of Class B Common Stock shall not be entitled
to vote on any matters brought before the shareholders of the Company, shall
not be entitled to vote as a class upon any proposed increase or decrease in
the aggregate number of authorized shares of Class B Common Stock and shall be
subject to the rights, preferences and privileges of the Series A Preferred
Stock with respect to liquidation, dividends and redemptions and the rights,
preferences and privileges of any other series of Preferred Stock. The Class B
Common Stock was originally authorized for possible issuance to foreign
investors due to FCC limitations on foreign control of wireless communications
facilities.
 
PREFERRED STOCK
 
  The Board of Directors has the authority to issue shares of Preferred Stock
in one or more series and to fix the relative rights and preferences of the
shares, including voting powers, dividend rights, liquidation provisions,
redemption provisions, sinking fund provisions and conversion privileges,
without any further vote or action by the shareholders. As a result, the Board
of Directors could, without shareholder approval, issue shares of Preferred
Stock with voting, dividend, liquidation, conversion or other rights that
could adversely affect the holders of Class A Common Stock and that may have
the effect of delaying, deferring or preventing a change of control of the
Company. In addition, because the terms of such Preferred Stock may be fixed
by the Board of Directors without shareholder action, the Preferred Stock
could be designated and issued quickly in the event the Company requires
additional equity capital. Under certain circumstances, this could have the
effect of decreasing the market price of the Class A Common Stock.
 
SERIES A PREFERRED STOCK
 
  General. The Board has designated 10,000 shares of Preferred Stock as Series
A Preferred Stock. The holders of Series A Preferred Stock have the right to
vote, on all matters to be voted on by the Company's
 
                                      54
<PAGE>
 
shareholders, on an as-converted basis with the shares of Class A Common Stock
and also have the right to vote as a separate class to elect one director so
long as at least 3,300 shares of Series A Preferred Stock remain outstanding.
The holders of Series A Preferred Stock are entitled to receive a dividend
payable at the rate of 12% per annum, which shall be cumulative and compounded
if not paid. No dividends have been paid to date on the Series A Preferred
Stock. The Company is not permitted to pay any dividends on the Class A or
Class B Common Stock, and no shares of Class A or Class B Common Stock may be
redeemed or repurchased by the Company without the prior written consent of
the holders of a majority of the outstanding shares of Series A Preferred
Stock. Upon the liquidation, distribution of assets, dissolution or winding up
of the Company, a holder of Series A Preferred Stock shall be entitled to
receive, prior to the holders of Class A and Class B Common Stock, $1,000 per
share plus all accrued and unpaid dividends thereon.
 
  Conversion. At any time, any holder of Series A Preferred Stock may convert
all or any portion thereof into Class A Common Stock of the Company. As of
January 31, 1996, the shares of Series A Preferred Stock outstanding were
convertible into 625,000 shares of Class A Common Stock based on the
conversion price as of such date of $16.00 per share. The conversion price is
subject to certain antidilution adjustments, including (i) a ratchet
antidilution adjustment of the conversion price (a) if shares of Class A or
Class B Common Stock, or securities convertible into or exchangeable for Class
A or Class B Common Stock, are issued or sold (including, without limitation,
by way of consolidation, merger or sale of all or substantially all of the
Company's assets) for consideration which is less than the conversion price
then in effect, down to the aggregate consideration per share of Class A or
Class B Common Stock issued or sold pursuant to such transaction or issuable
upon the conversion or exchange of convertible or exchangeable securities
issued or sold pursuant to such transaction or (b) if options (other than
options or similar rights granted to employees or directors of the Company to
purchase an aggregate of up to 1,596,702 shares of Class A or Class B Common
Stock, subject to adjustment for stock splits, stock dividends,
recapitalizations and the like), warrants or similar rights to purchase Class
A or Class B Common Stock are issued having an exercise price less than the
conversion price then in effect, down to the aggregate consideration per share
of Class A or Class B Common Stock which would be paid upon the sale or grant
and exercise of such options, warrants or rights and (ii) upon stock splits,
stock dividends, recapitalizations and the like. The Series A Preferred Stock
will convert automatically into Class A Common Stock at any time after May 19,
1997 if (i) the daily trading volume of the Class A Common Stock in the public
market exceeds 5% of the number of shares of Class A Common Stock issuable
upon conversion of all shares of Series A Preferred Stock for a period of 45
consecutive trading days; (ii) the market price per share of Class A Common
Stock equals or exceeds the following levels (the "Target Prices"), subject to
adjustment for stock splits, stock dividends and the like, on any of the
following dates: $32.00 on May 22, 1997, $32.00 on May 22, 1998, $39.06 on May
22, 1999, $39.81 on May 22, 2000, $47.78 on May 22, 2001 and $57.33 on May 22,
2002, provided that, in the event that any measurement of the market price of
Class A Common Stock is to occur between any of the foregoing dates, the
Target Prices shall be prorated based upon the number of days elapsed from the
earlier date; and (iii) no holder of Series A Preferred Stock is subject to
any underwriters' lockup agreement with respect to the shares of Class A
Common Stock issuable upon the conversion thereof. Upon any conversion, the
accrued and unpaid dividends on the Series A Preferred Stock being converted
will be extinguished and no longer deemed payable. The dividend rate on the
Series A Preferred Stock will increase to 15%, and the conversion price then
in effect will be reduced by one-third, if certain defaults by the Company
occur, including the failure to make any redemption payment when due and the
Company's breach or failure to perform certain representations, warranties or
covenants set forth in the Certificate of Designations or the purchase
agreement under which the Series A Preferred Stock was issued ("Events of
Noncompliance").
 
  Redemption. The Company has the option to redeem the Series A Preferred
Stock at any time for $1,000 per share plus all accrued and unpaid dividends
thereon, and is required to redeem the Series A Preferred Stock on May 19,
2002 at a price per share equal to the greater of $1,000 or the market price
of the Class A Common into which such shares of Series A Preferred Stock are
convertible as of 4 p.m., New York time, on May 14, 2002. Any holder of Series
A Preferred Stock has the option to cause the Company to redeem his shares in
the case of a change of control, certain merger or consolidation transactions,
a sale of more than 50% of the Company's assets, an Event of Noncompliance or
the entry of a judgment against the Company or default by the
 
                                      55
<PAGE>
 
Company under any obligation or agreement for which the amount involved
exceeds $500,000. The Series A Preferred Stock is subject to immediate
redemption upon an assignment by the Company for the benefit of creditors or
voluntary or involuntary bankruptcy. Holders of Series A Preferred Stock have
preemptive rights to purchase on an as-converted basis a pro rata portion of
any Company issuance of Class A Common Stock or rights to purchase Class A
Common Stock, subject to certain exceptions, including the issuance of Class A
or Class B Common Stock pursuant to a public offering registered under the
Securities Act (which includes this offering), an acquisition of another
company or business, a strategic investment in the Company by other entities
in the telecommunications or other utilities business, stock options granted
to Company employees and stock issued in connection with the provision or
extension of senior debt financing to the Company or any of its subsidiaries.
 
WARRANTS
 
  As of January 31, 1996, warrants to purchase an aggregate of 100,000 shares
of Class A Common Stock at an exercise price of $16.00 per share (subject to
adjustment for stock splits, stock dividends and the like and other
antidilution adjustments, including a ratchet antidilution adjustment similar
to that described in the preceding section with respect to the Series A
Preferred Stock), a warrant to purchase 30,000 shares of Class A Common Stock
at an exercise price of $16.00 per share (subject to adjustment for stock
splits, stock dividends and the like), and a warrant to purchase 7,500 shares
of Class A Common Stock at an exercise price of $18.75 per share (subject to
adjustment for stock splits, stock dividends and the like), were outstanding
and exercisable. As of January 31, 1996, the Company also had outstanding
springing warrants (the "Springing Warrants") to purchase an aggregate of up
to 625,000 additional shares of Class A Common Stock at an exercise price of
$16.00 per share (assuming a conversion price of $16.00 per share as of the
redemption date), which warrants become exercisable upon and to the extent of
an optional redemption of the Series A Preferred Stock by the Company. The
exercise price and number of shares issuable under the Springing Warrants are
subject to adjustment for stock splits, stock dividends and the like and other
antidilution adjustments, including a ratchet antidilution adjustment similar
to that described in the preceding section with respect to the Series A
Preferred Stock.
 
REGISTRATION RIGHTS
 
  The holders of the Series A Preferred Stock (collectively, the "Holders")
are entitled to certain registration rights with respect to the shares of
Class A Common Stock issuable upon a conversion of the Series A Preferred
Stock, the exercise of the Springing Warrants and warrants to purchase up to
100,000 shares of Class A Common Stock (all such shares of Class A Common
Stock and certain other securities, the "Registrable Shares"). If the Company
proposes to register any of its securities under the Securities Act, the
Holders will be entitled to notice thereof and, subject to certain
restrictions, to include their Registrable Shares in such registration.
Holders of Registrable Shares may make up to two demands of the Company to
file a registration statement under the Securities Act, subject to certain
conditions and limitations and provided that any demand must be at an
aggregate offering price to the public of at least $7.5 million and no demand
may be made within 180 days after the effective date of a prior demand
registration. Furthermore, one or more Holders of Registrable Shares may
require the Company on up to five occasions to register their shares on Form
S-3 or similar short-form registration forms, subject to certain conditions
and limitations and provided that any such demand must be at an aggregate
offering price to the public of at least $5.0 million. A Holder's right to
include shares in an underwritten registration is subject to the right of the
underwriters to limit the number of shares included in the offering. Subject
to certain limitations, the Company is required to bear all registration,
legal (for no more than one independent legal counsel for all selling Holders)
and other expenses in connection with these registrations (other than
underwriting discounts and commissions) and must provide appropriate
indemnification.
 
  The holders of warrants for the purchase of up to 30,000 shares of Class A
Common Stock are entitled to make one demand of the Company to file a
registration statement under the Securities Act with respect to all of such
30,000 shares of Class A Common Stock, subject to certain conditions and
limitations, including the
 
                                      56
<PAGE>
 
Company's right to defer commencement of registration for up to 90 days if
such deferral is deemed necessary or appropriate by counsel to the Company.
The Company is required to bear all registration, legal and other expenses in
connection with the demand registration (other than underwriting discounts and
commissions and all legal and accounting fees of advisors for the selling
shareholders) and must provide appropriate indemnification.
 
CERTAIN CHARTER, BY-LAW AND STATUTORY PROVISIONS AND OTHER ANTI-TAKEOVER
CONSIDERATIONS
 
  The Company's Certificate of Incorporation requires the affirmative vote of
the holders of at least 80% of all outstanding shares of Class A Common Stock
to alter, amend, adopt any provision inconsistent with or repeal certain
provisions of the Certificate of Incorporation, including the ability of the
shareholders to amend the Company's By-laws, the prohibition on shareholder
action by written consent, the prohibition on the calling of special meetings
by shareholders, and limitations on the personal liability of the Company's
directors for breach of their fiduciary duty as directors. The Company's By-
laws also provide that the Company's shareholders can only alter, amend, adopt
or repeal any provision of the Company's By-laws by the affirmative vote of
the holders of at least 80% of all outstanding shares of Class A Common Stock.
So long as any shares of the Series A Preferred Stock remain outstanding, the
Company will not be able to take any of the following actions without
obtaining the prior written consent of the holders of a majority of the Series
A Preferred Stock: (i) declare dividends on any class of capital stock other
than the Series A Preferred Stock; (ii) redeem any capital stock other than
Series A Preferred Stock; (iii) make any amendment to the Company's
Certificate of Incorporation or By-laws that would include or make any changes
to any anti-takeover provisions in the Company's Certificate of Incorporation
or By-laws; (iv) make any amendment to the Company's Certificate of
Incorporation or By-laws that would have an adverse effect on or impair the
rights or relative priority of the Series A Preferred Stock; (v) make any
changes in the nature of the Company's business beyond the telecommunications
field; or (vi) engage in any transactions with affiliates (except for
transactions with subsidiaries and compensation and benefit matters approved
by the Executive Compensation Committee of the Company's Board or other
transactions approved by an independent committee of the Board).
 
  Under the Credit Facility, the lenders have the right to demand payment of
all loans outstanding upon a change in control of the Company, unless the
person or group of persons acquiring control are members of the Company's
current management. The Credit Facility also prohibits the Company from
engaging in certain merger or consolidation transactions, selling, leasing or
otherwise disposing of its property, business or assets other than the sale of
inventory in the ordinary course of business and certain other permitted
dispositions, or dissolving or liquidating the Company. In addition, any
holder of Series A Preferred Stock has the right, upon a change in control of
the Company, a sale of more than 50% of the assets of the Company or certain
mergers or consolidations, to require the Company to redeem all or any portion
of the Series A Preferred Stock owned by such holder at a price equal to the
greater of $1,000 per share or the market price or value (as of the
consummation of the transaction) of the Class A Common Stock into which such
shares of Series A Preferred Stock are convertible. It is possible that these
provisions may have the effect of delaying, deterring or preventing a change
in control of the Company. The Company's Employee Long Term Incentive Plan
provides that in the event of a change in control, as may be determined at the
discretion of the Compensation Committee of the Company, all options then
outstanding under such Plan shall automatically become exercisable in full.
 
  The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless prior
to the date the stockholder became an interested stockholder the board
approved either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder or unless one of two
exceptions to the prohibitions are satisfied: (i) upon consummation of the
transaction that resulted in such person becoming an interested stockholder,
the interested stockholder owned at least 85% of the Company's voting stock
outstanding at the time the transaction commenced (excluding, for purposes of
determining the number of shares outstanding, shares owned by certain
directors or certain employee stock plans) or (ii) on or after the date the
stockholder became an interested stockholder, the
 
                                      57
<PAGE>
 
business combination is approved by the board of directors and authorized by
the affirmative vote (and not by written consent) of at least two-thirds of
the outstanding voting stock excluding that stock owned by the interested
stockholder. A "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person who (other than the corporation and any
direct or indirect majority-owned subsidiary of the corporation), together
with affiliates and associates, owns (or, as an affiliate or associate, within
three years prior, did own) 15% or more of the corporation's outstanding
voting stock. It is possible that these provisions may have the effect of
delaying, deterring or preventing a change in control of the Company.
 
  The Company has entered into a salary continuation and deferred compensation
agreement dated October 6, 1995 with Mr. Aab which provides for a severance
payment of $1 million if, as a result of or within one year following a change
in control of the Company, Mr. Aab's employment is terminated with or without
cause by the Company or the acquiror, or Mr. Aab voluntarily terminates his
employment. The severance payment is payable in full within 30 days following
the change in control and is conditioned on Mr. Aab's agreement not to compete
with the Company during and for three years following termination of his
employment and to maintain confidentiality of trade secrets. The Company is
obligated to pay Mr. Aab the severance payment if his employment or his
position as Chairman of the Board of ACC Corp. terminates for any reason
(including his voluntary resignation) other than a termination by the Company
for cause, except that, if no change in control has occurred, the amount is
payable in three equal annual installments.
 
  The Company has entered into an employment agreement dated October 6, 1995
with Mr. Laniak for a term of two years. The agreement with Mr. Laniak
provides for payment of his then current compensation and benefits for the
remainder of the term of the agreement and vesting of all outstanding stock
options if, as a result of or within one year following a change in control of
the Company, Mr. Laniak's employment is terminated without cause by the
Company or the acquiror or Mr. Laniak voluntarily terminates his employment as
a result of certain events, including a significant change in the nature or
scope of his duties, relocation outside of the Rochester, New York area or a
reduction in his compensation or benefits. The severance payment to Mr. Laniak
is conditioned on his agreement not to compete with the Company during and for
one year following termination of his employment and to maintain
confidentiality of trade secrets.
 
  The Company has also entered into employment continuation and incentive
agreements with 27 officers and managers, which provide for continuation of
the employee's then current salary and benefits for up to 12 months following
termination if, as a result of or within one year following a change in
control of the Company, the Company or the acquiror terminates his employment
or the employee resigns due to a significant change in the nature or scope of
his duties or authority or a reduction in compensation. The agreements provide
for each employee's agreement not to compete with the Company so long as the
employee is receiving payments thereunder. It is possible that the agreements
described above may have the effect of delaying, deterring or preventing a
change in control or management of the Company.
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
  Upon completion of this offering, the Company will have approximately
9,670,776 outstanding shares of Class A Common Stock, assuming (i) no exercise
of the Underwriters' over-allotment option, and (ii) no exercise of options or
warrants outstanding. Upon the consummation of this offering, assuming no
exercise of options or warrants outstanding as of January 31, 1996 except as
stated above, the Company will have outstanding options exercisable for an
aggregate of approximately 1,347,894 shares of Class A Common Stock, of which
options with respect to 544,974 shares will then be exercisable at a weighted
average exercise price of $14.01 per share, warrants to purchase up to 762,500
shares of Class A Common Stock, of which warrants to purchase 137,500 shares
will then be exercisable, and 625,000 shares of Class A Common Stock which
will be issuable upon conversion of the Series A Preferred Stock.
 
                                      58
<PAGE>
 
  Of the Class A Common Stock outstanding upon completion of this offering,
the 1,750,000 shares of Class A Common Stock sold in this offering as well as
approximately 4,200,000 shares previously issued by the Company will be freely
tradeable without restriction or further registration under the Securities
Act, except for any shares held by "affiliates" of the Company, as that term
is defined under the Securities Act and the regulations promulgated thereunder
(an "Affiliate"), or persons who have been Affiliates within the preceding
three months. The remaining approximately 3,700,000 outstanding shares of
Class A Common Stock are currently eligible for sale under Rule 144 or Rule
144(k). Approximately 1,235,000 shares of Class A Common Stock or securities
exercisable for or convertible into Class A Common Stock are subject to 120-
day lock-up agreements with the Underwriters. For a description of certain
120-day lock-up agreements, see "Underwriters."
 
  In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially
owned "restricted securities" (defined generally in Rule 144 as unregistered
securities) for a period of at least two years from the later of the date such
restricted securities were acquired from the Company and the date they were
acquired from an Affiliate, is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of 1% of the then
outstanding shares of Class A Common Stock (approximately 96,708 shares
immediately after this offering) and the average weekly trading volume in the
Class A Common Stock during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain provisions relating to the number
and notice of sale and the availability of current public information about
the Company.
 
  Further, under Rule 144(k), if a period of at least three years has elapsed
between the later of the date restricted securities were acquired from the
Company and the date they were acquired from an Affiliate of the Company, a
holder of such restricted securities who is not an Affiliate at the time of
the sale and has not been an Affiliate for at least three months prior to the
sale would be entitled to sell the shares immediately without regard to the
volume and manner of sale limitations described above.
 
  The Commission has recently proposed amendments to Rule 144 and Rule 144(k)
that would permit resales of restricted securities under Rule 144 after a one-
year, rather than a two-year holding period, subject to compliance with the
other provisions of Rule 144, and would permit resale of restricted securities
by non-Affiliates under Rule 144(k) after two-year, rather than a three-year
holding period. Adoption of such amendments could result in resales of
restricted securities sooner than would be the case under Rule 144 and Rule
144(k) as currently in effect.
 
  In addition, the Company has registered on Forms S-8 under the Securities
Act a total of approximately 2,163,000 shares of Class A Common Stock, and
intends to register on Form S-8 an additional 500,000 shares of Class A Common
Stock, issuable under certain options issued to employees as well as shares of
Class A Common Stock issued or reserved for issuance pursuant to the Company's
Employee Stock Purchase Plan. Shares issued under the plans (other than shares
issued to Affiliates) generally may be sold immediately in the public market,
subject to vesting requirements and the lock-up agreements described above.
Subject to obtaining shareholder approval, the Company has adopted a stock
option plan for non-employee directors and has granted options to purchase
20,000 shares of Class A Common Stock thereunder. The Company intends to
register on Form S-8 the 250,000 shares of Class A Common Stock issuable under
such plan.
 
  The holders of the Series A Preferred Stock (which is convertible into
625,000 shares of Class A Common Stock based on the conversion price in effect
on January 31, 1996) and warrants to purchase 130,000 shares of Class A Common
Stock are entitled to certain registration rights with respect to their
shares. See "Description of Capital Stock--Registration Rights."
 
                                      59
<PAGE>
 
               CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
                 FOR NON-U.S. HOLDERS OF CLASS A COMMON STOCK
 
  The following discussion concerns the material United States federal income
and estate tax consequences of the ownership and disposition of shares of
Class A Common Stock applicable to Non-U.S. Holders of such shares of Class A
Common Stock. In general, a "Non-U.S. Holder" is any holder other than (i) a
citizen or resident, as specifically defined for U.S. federal income and
estate tax purposes, of the United States, (ii) a corporation, partnership or
any entity treated as a corporation or partnership for U.S. federal income tax
purposes created or organized in the United States or under the laws of the
United States or of any State thereof, or (iii) an estate or trust whose
income is includible in gross income for United States federal income tax
purposes regardless of its source. The discussion is based on current law,
which is subject to change retroactively or prospectively, and is for general
information only. The discussion does not address all aspects of United States
federal income and estate taxation and does not address any aspects of state,
local or foreign tax laws. The discussion does not consider any specific facts
or circumstances that may apply to a particular Non-U.S. Holder. Accordingly,
prospective investors are urged to consult their tax advisors regarding the
current and possible future United States federal, state, local and non-U.S.
income and other tax consequences of holding and disposing of shares of Class
A Common Stock.
 
  Dividends. In general, dividends paid to a Non-U.S. Holder will be subject
to United States withholding tax at a 30% rate (or a lower rate as may be
specified by an applicable tax treaty) unless the dividends are (i)
effectively connected with a trade or business carried on by the Non-U.S.
Holder within the United States, and (ii) if a tax treaty applies,
attributable to a United States permanent establishment maintained by the Non-
U.S. Holder. Dividends effectively connected with such a trade or business or,
if a tax treaty applies, attributable to such permanent establishment will
generally not be subject to withholding (if the Non-U.S. Holder files certain
forms annually with the payor of the dividend) but will generally be subject
to United States federal income tax on a net income basis at regular graduated
individual or corporate rates. In the case of a Non-U.S. Holder which is a
corporation, such effectively connected income also may be subject to the
branch profits tax (which is generally imposed on a foreign corporation on the
deemed repatriation from the United States of effectively connected earnings
and profits) at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. The branch profits tax may not apply if the
recipient is a qualified resident of certain countries with which the United
States has an income tax treaty.
 
  To determine the applicability of a tax treaty providing for a lower rate of
withholding, dividends paid to an address in a foreign country are presumed
under current Treasury Regulations to be paid to a resident of that country,
unless the payor has definite knowledge that such presumption is not warranted
or an applicable tax treaty (or United States Treasury Regulations thereunder)
requires some other method for determining a Non-U.S. Holder's residence.
Treasury Regulations proposed in 1984, if finally adopted, however, would
require Non-U.S. Holders to file certain forms to obtain the benefit of any
applicable tax treaty providing for a lower rate of withholding tax on
dividends. Such forms would be required to contain the holder's name and
address and, subject to a de minimis payment exception, an official statement
by the competent authority in the foreign country (as designated in the
applicable tax treaty) attesting to the holder's status as a resident thereof.
Under current regulations, the Company must report annually to the United
States Internal Revenue Service and to each Non-U.S. Holder the amount of
dividends paid to, and the tax withheld with respect to, each Non-U.S. Holder.
These reporting requirements apply regardless of whether withholding was
reduced or eliminated by an applicable tax treaty. Copies of these information
returns also may be made available under the provisions of a specific treaty
or agreement with the tax authorities of the country in which the Non-U.S.
Holder resides.
 
  Sale of Class A Common Stock. Generally, a Non-U.S. Holder will not be
subject to United States federal income tax on any gain realized upon the sale
or other disposition of such holder's shares of Class A Common Stock unless
(i) the gain is effectively connected with a trade or business carried on by
the Non-U.S. Holder within the United States and, if a tax treaty applies, the
gain is attributable to a permanent establishment maintained by the Non-U.S.
Holder in the United States; (ii) the Non-U.S. Holder is an individual who
holds the shares of Class A Common Stock as a capital asset and is present in
the United States for 183 days or more in the taxable year of the disposition,
and either (a) such Non-U.S. Holder has a "tax home" (as specifically defined
 
                                      60
<PAGE>
 
for U.S. federal income tax purposes) in the United States (unless the gain
from disposition is attributable to an office or other fixed place of business
maintained by such non-U.S. Holder in a foreign country and a foreign tax
equal to at least 10% of such gain has been paid to a foreign country), or (b)
the gain from the disposition is attributable to an office or other fixed
place of business maintained by such Non-U.S. Holder in the United States;
(iii) the Non-U.S. Holder is subject to tax pursuant to the provisions of U.S.
tax law applicable to certain United States expatriates, or (iv) the Company
is or has been during certain periods a "U.S. real property holding
corporation" for U.S. federal income tax purposes (which the Company does not
believe that it has been, currently is or is likely to become) and, assuming
that the Class A Common Stock is deemed for tax purposes to be "regularly
traded on an established securities market," the Non-U.S. holder held, at any
time during the five-year period ending on the date of disposition (or such
shorter period that such shares were held), directly or indirectly, more than
five percent of the Class A Common Stock.
 
  Estate Tax. Shares of Common stock owned or treated as owned by an
individual who is not a citizen or resident (as specially defined for United
States federal estate tax purposes) of the United States at the time of death
will be includible in the individual's gross estate for United States federal
estate tax purposes, unless an applicable tax treaty provides otherwise, and
may be subject to United States federal estate tax.
 
  Backup Withholding and Information Reporting. Under current United States
federal income tax law, backup withholding tax (which generally is a
withholding tax imposed at the rate of 31 percent on certain payments to
persons that fail to furnish the information required under the U.S.
information reporting requirements) and information reporting requirements
apply to payments of dividends (actual and constructive) made to certain non-
corporate United States persons. The United States back-up withholding tax and
information reporting requirements generally will not apply to dividends paid
on Class A Common Stock to a Non-U.S. Holder at an address outside the United
States that are either subject to the 30% withholding discussed above or that
are not so subject because a tax treaty applies that reduces or eliminates
such 30% withholding, unless the payer has knowledge that the payee is a U.S.
person. Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of Class A
Common Stock to beneficial owners that are not "exempt recipients" and that
fail to provide in the manner required certain identifying information.
 
  The payment of the proceeds from the disposition of shares of Class A Common
Stock to or through the United States office of a broker will be subject to
information reporting and backup withholding unless the holder, under
penalties of perjury, certifies, among other things, its status as a Non-U.S.
Holder, or otherwise establishes an exemption. Generally, the payment of the
proceeds from the disposition of shares of Class A Common Stock to or through
a non-U.S. office of a broker will not be subject to backup withholding and
will not be subject to information reporting. In the case of the payment of
proceeds from the disposition of shares of Class A Common Stock to or through
a non-U.S. office of a broker that is a U.S. person or a "U.S.-related
person," existing regulations require information reporting on the payment
unless the broker receives a statement from the owner, signed under penalties
of perjury, certifying, among other things, its status as a Non-U.S. Holder,
or the broker has documentary evidence in its files that the owner is a Non-
U.S. Holder and the broker has no actual knowledge to the contrary. For this
purpose, a "U.S.-related person" is (i) a "controlled foreign corporation" for
United States federal income tax purposes or (ii) a foreign person 50% or more
of whose gross income from all sources for the three-year period ending with
the close of its taxable year preceding the payment (or for such part of the
period that the broker has been in existence) is derived from activities that
are effectively connected with the conduct of a United States trade or
business. The backup withholding and information reporting rules are currently
under review by the Treasury Department and their application to the shares of
Class A Common Stock is subject to change. Non-U.S. Holders should consult
their tax advisors regarding the application of these rules to their
particular situations, the availability of an exemption therefrom and the
procedure for obtaining such an exemption, if available.
 
  Backup withholding is not an additional tax. Any amounts withheld from a
payment to a Non-U.S. Holder under the backup withholding rules will be
allowed as a credit against such holder's United States federal income tax
liability, if any, and may entitle such holder to a refund, provided that the
required information is furnished to the United States Internal Revenue
Service.
 
                                      61
<PAGE>
 
                                 UNDERWRITERS
 
  Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), the Underwriters named
below (the "Underwriters") have severally agreed to purchase, and the Company
has agreed to sell to them, severally, the respective number of shares of
Class A Common Stock set forth opposite the names of such Underwriters below:
 
<TABLE>
<CAPTION>
                                                                       NUMBER OF
   NAME                                                                 SHARES
   ----                                                                ---------
   <S>                                                                 <C>
   Morgan Stanley & Co. Incorporated..................................
   Wheat, First Securities, Inc. .....................................
                                                                        -------
         Total........................................................
                                                                        =======
</TABLE>
 
  The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Class A Common
Stock offered hereby are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The Underwriters are obligated
to take and pay for all of the shares of Class A Common Stock offered hereby
(other than those covered by the Underwriters' over-allotment option described
below) if any such shares are taken.
 
  The Underwriters initially propose to offer part of the shares of Class A
Common Stock directly to the public at the Price to Public set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $.   per share under the Price to Public. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $.   per share to other Underwriters or to certain dealers. After
the initial offering of the shares of Class A Common Stock, the offering price
and other selling terms may from time to time be varied by the Underwriters.
 
  Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to 262,500 additional shares of Class A Common
Stock at the Price to Public set forth on the cover page hereof, less
underwriting discounts and commissions. The Underwriters may exercise such
option to purchase solely for the purpose of covering over-allotments, if any,
made in connection with the offering of the shares of Class A Common Stock
hereby. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Class A Common Stock as the number set
forth next to such Underwriter's name in the preceding table bears to the
total number of shares of Class A Common Stock offered by the Underwriters
hereby.
 
  The Company has agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the Underwriters, it will not for a
period of 120 days after the date of this Prospectus (A) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, any shares of Class
A Common Stock or any securities convertible into or exercisable or
exchangeable for Class A Common Stock or (B) enter into any swap or other
agreement that transfers, in whole or in part, any of the economic
consequences of ownership of the Class A Common Stock, whether any such
transaction described in clause (A)
 
                                      62
<PAGE>
 
or (B) above is to be settled by delivery of Class A Common Stock or such
other securities, in cash or otherwise, other than (i) the shares to be sold
hereunder, (ii) any shares of Class A Common Stock issued by the Company upon
the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof and described in this Prospectus and (iii) any
options or similar securities issued pursuant to the Company's Employee Long-
Term Incentive Plan or Employee Stock Purchase Plan as such plans are in
effect on the date hereof. In addition, certain executive officers, directors,
Fleet Venture Resources, Fleet Equity Partners and Chisholm have agreed to the
same restrictions (subject to certain additional exceptions) with respect to
an aggregate of 1,235,000 shares of Class A Common Stock or securities
exercisable for or convertible into Class A Common Stock held by them for 120
days after the date hereof without the prior written consent of Morgan Stanley
& Co. Incorporated. See "Shares Eligible For Future Sale."
 
  Each of the Underwriters (i) has not offered or sold and will not offer or
sell any shares of Class A Common Stock to persons in the United Kingdom
except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purpose of their business or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995 (the
"Regulations"); (ii) has complied and will comply with all applicable
provisions of the Financial Services Act 1986 and the Regulations with respect
to anything done by it in relation to the shares of Class A Common Stock in,
from or otherwise involving the United Kingdom; and (iii) has only issued or
passed on and will only issue or pass on to any person in the United Kingdom
any document received by it in connection with the issue of the shares of
Class A Common Stock if that person is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1995 or is a person to whom such document may otherwise lawfully be issued or
passed on.
 
  In connection with the offering of Class A Common Stock hereby, the
Underwriters and selling group members may engage in passive market making
transactions in the Company's Class A Common Stock on the Nasdaq Stock Market
immediately prior to the commencement of the sale of shares in this offering,
in accordance with Rule 10b-6A under the Exchange Act. Passive market making
consists of displaying bids on the Nasdaq Stock Market limited by the bid
prices of market makers not connected with this offering and purchases limited
by such prices and effected in response to order flow. Net purchases by a
passive market maker on each day are limited in amount to 30% of the passive
market maker's average daily trading volume in the Class A Common Stock during
the period of the two full consecutive calendar months prior to the filing
with the Commission of the Registration Statement of which this Prospectus is
a part and must be discontinued when such limit is reached. Passive market
making may stabilize the market price of the Class A Common Stock at a level
above that which might otherwise prevail and, if commenced, may be
discontinued at any time.
 
  The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
 
                                 LEGAL MATTERS
 
  The validity of the issuance of the shares of Class A Common Stock offered
hereby will be passed upon for the Company by Nixon, Hargrave, Devans & Doyle
LLP, New York, New York. Certain legal matters in connection with the Class A
Common Stock offered hereby will be passed upon for the Underwriters by
Shearman & Sterling, New York, New York.
 
                                    EXPERTS
 
  The consolidated financial statements and schedules of the Company included
or incorporated by reference in this Prospectus and elsewhere in this
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
giving said reports.
 
                                      63
<PAGE>
 
                             AVAILABLE INFORMATION
 
  The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at its offices at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's
regional offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material can also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Reports and other information
concerning the Company may be inspected at the offices of the Nasdaq Stock
Market, 1735 K Street, N.W., Washington, D.C. 20006.
 
  The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the shares
of Class A Common Stock offered hereby. This Prospectus, which forms a part of
the Registration Statement, does not contain all of the information set forth
in the Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus as to the contents of any contract or other document are
not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by reference to
such contract or document. For further information regarding the Company and
the Class A Common Stock offered hereby, reference is hereby made to the
Registration Statement and the exhibits and schedules thereto which can be
obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates.
 
                                      64
<PAGE>
 
                           ACC CORP. AND SUBSIDIARIES
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
                               DECEMBER 31, 1995
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
   <S>                                                                      <C>
   Report of Independent Public Accountants................................ F-2
   Consolidated Balance Sheets............................................. F-3
   Consolidated Statements of Operations................................... F-5
   Consolidated Statements of Changes in Shareholders' Equity.............. F-6
   Consolidated Statements of Cash Flows................................... F-7
   Notes to Consolidated Financial Statements.............................. F-9
</TABLE>
 
                                      F-1
<PAGE>
 
                   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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
 
                                          Arthur Andersen LLP
 
Rochester, New York
February 6, 1996
 
(Except with respect to the
matters discussed in Notes 10 and 11.A.,
as to which the dates are February 20, 1996 and
February 8, 1996, respectively)
 
                                      F-2
<PAGE>
 
                           ACC CORP. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                             (AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                      DECEMBER 31, DECEMBER 31,
                                                          1994         1995
                                                      ------------ ------------
<S>                                                   <C>          <C>
Current assets:
  Cash and cash equivalents..........................   $  1,021     $    518
  Restricted cash....................................        272           --
  Accounts receivable, net of allowance for doubtful
   accounts of $1,035 in 1994 and $2,085 in 1995.....     20,499       38,978
  Other receivables..................................      5,433        3,965
  Prepaid expenses and other assets..................        820        2,265
                                                        --------     --------
    Total current assets.............................     28,045       45,726
                                                        --------     --------
Property, plant and equipment:
  At cost............................................     62,618       83,623
  Less-accumulated depreciation and amortization.....    (18,537)     (26,932)
                                                        --------     --------
                                                          44,081       56,691
                                                        --------     --------
Other assets:
  Restricted cash....................................        157           --
  Goodwill and customer base, net....................      6,884       14,072
  Deferred installation costs, net...................      1,639        3,310
  Other..............................................      3,642        4,185
                                                        --------     --------
                                                          12,322       21,567
                                                        --------     --------
    Total assets.....................................   $ 84,448     $123,984
                                                        ========     ========
</TABLE>
 
 
 
  The accompanying notes to consolidated financial statements are an integral
                         part of these balance sheets.
 
                                      F-3
<PAGE>
 
                           ACC CORP. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                   (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                       DECEMBER 31, DECEMBER 31,
                                                           1994         1995
                                                       ------------ ------------
<S>                                                    <C>          <C>
Current liabilities:
  Notes payable......................................    $    --      $  1,966
  Current maturities of long-term debt...............      1,613         2,919
  Accounts payable...................................     10,498         7,340
  Accrued network costs..............................     10,443        28,192
  Other accrued expenses.............................      9,254        15,657
  Dividends payable..................................        208            --
                                                         -------      --------
    Total current liabilities........................     32,016        56,074
                                                         -------      --------
Deferred income taxes................................      2,170         2,577
                                                         -------      --------
Long-term debt.......................................     29,914        28,050
                                                         -------      --------
Redeemable Series A Preferred Stock, $1.00 par value,
 $1,000 liquidation value, cumulative, convertible;
 Authorized--10,000 shares; Issued--10,000 shares....         --         9,448
                                                         -------      --------
Minority interest....................................      1,262         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-- 7,652,601 shares in
   1994 and 8,617,259 shares in 1995.................        115           129
  Class B Common Stock, $.015 par value, Authorized--
   25,000,000 shares; Issued--no shares..............         --            --
  Capital in excess of par value.....................     20,070        32,911
  Cumulative translation adjustment..................     (1,013)         (950)
  Retained earnings (deficit)........................      1,524        (4,073)
                                                         -------      --------
                                                          20,696        28,017
Less--
  Treasury stock, at cost (726,589 shares)...........     (1,610)       (1,610)
                                                         -------      --------
    Total shareholders' equity.......................     19,086        26,407
                                                         -------      --------
      Total liabilities and shareholders' equity.....    $84,448      $123,984
                                                         =======      ========
</TABLE>
 
 
  The accompanying notes to consolidated financial statements are an integral
                         part of these balance sheets.
 
                                      F-4
<PAGE>
 
                           ACC CORP. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
                 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                       FOR THE YEARS ENDED
                                                           DECEMBER 31,
                                                    ----------------------------
                                                      1993      1994      1995
                                                    --------  --------  --------
<S>                                                 <C>       <C>       <C>
Revenue:
  Toll revenue....................................  $100,646  $118,331  $175,269
  Leased lines and other..........................     5,300     8,113    13,597
                                                    --------  --------  --------
Total revenue.....................................   105,946   126,444   188,866
Network costs.....................................    70,286    79,438   114,841
                                                    --------  --------  --------
Gross profit......................................    35,660    47,006    74,025
Other Operating Expenses:
  Depreciation and amortization...................     5,832     8,932    11,614
  Selling expenses................................     8,726    14,497    21,617
  General and administrative......................    20,081    29,731    40,576
  Equal access costs..............................        --     2,160        --
  Asset write-down................................    12,807        --        --
                                                    --------  --------  --------
Total other operating expenses....................    47,446    55,320    73,807
                                                    --------  --------  --------
Income (loss) from operations.....................   (11,786)   (8,314)      218
Other Income (Expense):
  Interest income.................................       205       124       198
  Interest expense................................      (420)   (2,023)   (5,131)
  Terminated merger costs.........................        --      (200)       --
  Gain on sale of subsidiary stock................     9,344        --        --
  Foreign exchange gain (loss)....................    (1,094)      169      (110)
                                                    --------  --------  --------
Total other income (expense)......................     8,035    (1,930)   (5,043)
                                                    --------  --------  --------
Loss from continuing operations before provision
 for (benefit from) income taxes and minority
 interest.........................................    (3,751)  (10,244)   (4,825)
Provision for (benefit from) income taxes.........    (3,743)    3,456       396
Minority interest in (earnings) loss of
 consolidated subsidiary..........................     1,661     2,371      (133)
                                                    --------  --------  --------
Income (loss) from continuing operations..........     1,653   (11,329)   (5,354)
Loss from discontinued operations (net of income
 tax benefit of $667 in 1993).....................    (1,309)       --        --
Gain on disposal of discontinued operations (net
 of income tax provision of $8,350 in 1993).......    11,531        --        --
                                                    --------  --------  --------
Net Income (Loss).................................  $ 11,875  $(11,329) $ (5,354)
                                                    ========  ========  ========
Net income (loss) per common and common equivalent
 share applicable to common stock from continuing
 operations.......................................  $   0.24  $  (1.60) $   (.76)
  Discontinued operations.........................      (.18)       --        --
  Gain on disposal of discontinued operations.....      1.64        --        --
                                                    --------  --------  --------
    Net Income (Loss) per Common and Common
     Equivalent Share.............................  $   1.70  $  (1.60) $  (0.76)
                                                    ========  ========  ========
</TABLE>
 
  The accompanying notes to consolidated financial statements are an integral
                           part of these statements.
 
                                      F-5
<PAGE>
 
                           ACC CORP. AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 
             FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
            (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                           CAPITAL
                                             IN
                            COMMON STOCK   EXCESS   CUMULATIVE  RETAINED
                          ---------------- OF PAR   TRANSLATION EARNINGS  TREASURY
                           SHARES   AMOUNT  VALUE   ADJUSTMENT  (DEFICIT)  STOCK     TOTAL
                          --------- ------ -------  ----------- --------  --------  -------
<S>                       <C>       <C>    <C>      <C>         <C>       <C>       <C>
Balance, December 31,
 1992...................  7,450,120  $112  $18,798    $  (957)  $ 6,042   $(1,283)  $22,712
Stock options exercised.     87,352     1      759         --        --        --       760
Dividends ($.62 per
 common share)..........         --    --       --         --    (4,233)       --    (4,233)
Cumulative translation
 adjustment.............         --    --       --        392        --        --       392
  Net income............         --    --       --         --    11,875        --    11,875
                          ---------  ----  -------    -------   -------   -------   -------
Balance, December 31,
 1993...................  7,537,472  $113  $19,557    $  (565)  $13,684   $(1,283)  $31,506
Stock options exercised.    102,375     2      363         --        --        --       365
Employee stock purchase
 plan shares issued.....     12,754    --      150         --        --        --       150
Repurchase of shares to
 exercise options.......         --    --       --         --        --      (327)     (327)
Dividends ($.12 per
 common share)..........         --    --       --         --      (831)       --      (831)
Cumulative translation
 adjustment.............         --    --       --       (448)       --        --      (448)
  Net loss..............         --    --       --         --   (11,329)       --   (11,329)
                          ---------  ----  -------    -------   -------   -------   -------
Balance, December 31,
 1994...................  7,652,601  $115  $20,070    $(1,013)  $ 1,524   $(1,610)  $19,086
Stock options exercised.     33,525     1      479         --        --        --       480
Sale of stock...........    825,000    12   11,084         --        --        --    11,096
Employee stock purchase
 plan shares issued.....     23,633    --      297         --        --        --       297
Stock warrants
 exercised..............     82,500     1    1,187         --        --        --     1,188
Stock warrants issued...         --    --      200         --        --        --       200
Accretion of Series A
 Preferred Stock........         --    --     (139)        --        --        --      (139)
Series A Preferred Stock
 dividends..............         --    --     (401)        --        --        --      (401)
Acceleration of stock
 option vesting.........         --    --      134         --        --        --       134
Dividends ($.03 per
 common share)..........         --    --       --         --      (243)       --      (243)
Cumulative translation
 adjustment.............         --    --       --         63        --        --        63
  Net loss..............         --    --       --         --    (5,354)       --    (5,354)
                          ---------  ----  -------    -------   -------   -------   -------
Balance, December 31,
 1995...................  8,617,259  $129  $32,911    $  (950)  $(4,073)  $(1,610)  $26,407
                          =========  ====  =======    =======   =======   =======   =======
</TABLE>
 
  The accompanying notes to consolidated financial statements are an integral
                           part of these statements.
 
                                      F-6
<PAGE>
 
                           ACC CORP. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                             (AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                           FOR THE YEARS ENDED DECEMBER 31,
                                           -----------------------------------
                                              1993        1994         1995
                                           ----------  -----------  ----------
<S>                                        <C>         <C>          <C>
Cash flows from operating activities:
  Net income (loss)......................  $   11,875  $   (11,329) $   (5,354)
                                           ----------  -----------  ----------
Adjustments to reconcile net income
 (loss) to net cash provided by operating
 activities:
  Depreciation and amortization..........       5,832        8,932      11,614
  Deferred income taxes..................      (3,826)       3,906         609
  Minority interest in earnings (loss) of
   consolidated subsidiary...............      (1,661)      (2,371)        133
  Gain on sale of subsidiary stock.......      (9,344)          --          --
  Unrealized foreign exchange loss.......         109          150         180
  Amortization of deferred financing
   costs.................................          --           --         263
  Foreign exchange loss on repayment of
   intercompany debt.....................         760           --          --
  Gain on disposal of discontinued
   operations............................     (11,531)          --          --
  Current income taxes on gain...........      (7,575)          --          --
  Loss from discontinued operations......       1,309           --          --
  Asset write-down.......................      12,807           --          --
  (Increase) decrease in assets:
    Accounts receivable, net.............      (3,184)      (5,019)    (17,437)
    Other receivables....................        (666)      (3,621)      1,782
    Prepaid expenses and other assets....      (1,798)       1,030      (1,057)
    Deferred installation costs..........      (1,037)      (1,147)     (2,983)
    Other................................        (961)      (2,206)        846
  Increase (decrease) in liabilities:
    Accounts payable.....................        (607)       7,784      (7,013)
    Accrued network costs................         738        1,754      17,824
    Other accrued expenses...............      (3,068)       3,230       4,560
                                           ----------  -----------  ----------
      Total adjustments..................     (23,703)      12,422       9,321
                                           ----------  -----------  ----------
      Net cash provided by (used in)
       operating activities..............     (11,828)       1,093       3,967
                                           ----------  -----------  ----------
Cash flows from investing activities:
  Cash received from sale of discontinued
   operations............................      41,000        2,538          --
  Capital expenditures, net..............     (17,594)     (20,682)    (12,424)
  Payments on notes receivable...........         244           --          --
  Payment for purchase of subsidiary, net
   of cash acquired......................          --           --      (2,313)
  Acquisition of customer base...........      (2,786)      (2,861)       (557)
                                           ----------  -----------  ----------
      Net cash provided by (used in)
       investing activities..............      20,864      (21,005)    (15,294)
                                           ----------  -----------  ----------
</TABLE>
 
  The accompanying notes to consolidated financial statements are an integral
                           part of these statements.
 
                                      F-7
<PAGE>
 
                           ACC CORP. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                             (AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                            FOR THE YEARS ENDED DECEMBER 31,
                                            --------------------------------
                                              1993         1994        1995
                                           -----------  ----------  -----------
<S>                                        <C>          <C>         <C>
Cash flows from financing activities:
  Net (payments) borrowings under lines
   of credit.............................       (8,536)     25,102       (5,602)
  Repayment of long-term debt, other than
   lines of credit.......................      (10,286)     (1,591)      (3,078)
  Repurchase of minority interest........           --        (226)          --
  Proceeds from issuance of common stock.       15,815         189       13,261
  Proceeds from issuance of convertible
   debt..................................           --          --       10,000
  Financing costs........................           --          --       (2,876)
  Dividends paid.........................         (816)     (4,241)        (451)
                                           -----------  ----------  -----------
      Net cash provided by (used in)
       financing activities..............       (3,823)     19,233       11,254
                                           -----------  ----------  -----------
Effect of exchange rate changes on cash..          (20)        233         (430)
                                           -----------  ----------  -----------
Net increase (decrease) in cash from
 continuing operations...................        5,193        (446)        (503)
Cash used in discontinued operations.....       (4,080)         --           --
Cash and cash equivalents at beginning of
 year....................................          354       1,467        1,021
                                           -----------  ----------  -----------
Cash and cash equivalents at end of year.  $     1,467  $    1,021  $       518
                                           ===========  ==========  ===========
Supplemental disclosures of cash flow
 information:
Cash paid during the year for:
  Interest...............................  $     1,847  $    1,656  $     4,146
                                           ===========  ==========  ===========
  Income taxes...........................  $     8,633  $      280  $       203
                                           ===========  ==========  ===========
Supplemental schedule of noncash
 investing and financing activities:
  Equipment purchased through capital
   leases................................  $       390  $    3,077  $     7,389
                                           ===========  ==========  ===========
  Fair value of Metrowide assets
   acquired..............................           --          --  $    10,800
    Less-- cash paid at acquisition date.           --          --       (1,500)
    Less --short term notes payable......           --          --       (2,966)
                                           -----------  ----------  -----------
  Metrowide liabilities assumed..........           --          --  $     6,334
                                           ===========  ==========  ===========
  Other assets purchased with long-term
   debt..................................           --  $      540           --
                                           ===========  ==========  ===========
  Purchase of customer base with long-
   term debt.............................  $       942          --           --
                                           ===========  ==========  ===========
  Conversion of convertible debt to
   preferred stock.......................           --          --      $10,000
                                           ===========  ==========  ===========
</TABLE>
 
The accompanying notes to consolidated financial statements are an integral
part of these statements.
 
                                      F-8
<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.
(U.S.), ACC TelEnterprises Ltd. (Canada), ACC Long Distance UK Ltd., and ACC
National Telecom Corp. 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. SALE OF SUBSIDIARY STOCK:
 
  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 percent.
 
  The Company recognized a gain of $9.3 million after related expenses on this
transaction due to the increase in the carrying amount of the Company's
investment in ACC TelEnterprises Ltd. No deferred taxes have been provided for
on this gain as the Company has the ability to defer the recognition of
taxable income related to this transaction indefinitely.
 
  Minority interest represents the approximately 30 percent non-Company owned
shareholder interest in ACC TelEnterprises Ltd.'s equity primarily resulting
from the 1993 public offering. Assuming the sale of subsidiary stock occurred
on January 1, 1993, then, on a pro forma basis, the minority interest in loss
of the consolidated subsidiary would have been approximately $1.6 million for
the year ended December 31, 1993. This pro forma information has been prepared
for comparative purposes only. During 1994, the Company repurchased 58,300
shares of ACC TelEnterprises Ltd. stock for approximately $3.69 per share.
 
 C. REVENUE:
 
  The Company records as 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.
 
 D. PROPERTY, PLANT AND EQUIPMENT:
 
  The Company's property, plant and equipment consisted of the following at
December 31, 1994 and 1995 (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                                 1994    1995
                                                                ------- -------
   <S>                                                          <C>     <C>
   Equipment................................................... $53,700 $69,174
   Computer software and software licenses.....................   4,648   6,869
   Other.......................................................   4,270   7,580
                                                                ------- -------
   TOTAL....................................................... $62,618 $83,623
                                                                ======= =======
</TABLE>
 
                                      F-9
<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  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, 1994 and 1995 is as
follows (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                                 1994    1995
                                                                ------  -------
   <S>                                                          <C>     <C>
   Cost........................................................ $7,360  $13,935
   Less--accumulated amortization.............................. (3,482)  (4,538)
                                                                ------  -------
   Total, net.................................................. $3,878  $ 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.
 
 E. DEFERRED INSTALLATION COSTS:
 
  Costs incurred for the installation of local access lines are amortized on a
straight-line basis over a three-year period which represents the average
estimated useful life of these lines. Accumulated amortization of deferred
installation costs totaled approximately $3.3 million and $4.5 million at
December 31, 1994 and 1995, respectively.
 
 F. GOODWILL AND CUSTOMER BASE:
 
  All 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") in a business combination accounted for as a
purchase. Metrowide is based in Toronto, Canada, and provides local and long
distance services to Ontario, Canada based customers. 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.
$14.7 million (U.S. $10.8 million) including Cdn. $8.7 million (U.S. $6.3
million) of liabilities assumed, of which Cdn. $2.0 million (U.S. $1.5
million) was paid at the date of purchase, with the remaining Cdn. $4.0
million (U.S. $3.0 million) due in installments through August 1, 1996.
 
  Goodwill associated with the Metrowide purchase of Cdn. $7.0 million (U.S.
$5.0 million) is being amortized over 20 years, and customer base of Cdn. $4.2
million (U.S. $3.1 million) is being amortized over five years. Accumulated
amortization of goodwill approximated U.S. $108,000 at December 31, 1995.
 
  The Company amortizes acquired customer bases on a straight-line basis over
five to seven years. Accumulated amortization of customer base totaled $1.7
million and $3.1 million at December 31, 1994 and 1995, respectively.
 
                                     F-10
<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  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." This Statement requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable and
requires that an impairment loss be recognized based on the existence of
certain conditions. This Statement also requires that long-lived assets and
certain identifiable intangibles to be disposed of be reported at the lower of
their carrying amount or fair value less cost to sell.
 
  The effect of adopting SFAS No. 121 was immaterial to the consolidated
financial statements. The Company continually evaluates its intangible assets
in light of events and circumstances that may indicate that the remaining
estimated useful life may warrant revision or that the remaining value may not
be recoverable. When factors indicate that intangible assets should be
evaluated for possible impairment, the Company uses an estimate of the
undiscounted cash flow over the remaining life of the intangible asset in
measuring whether that asset is recoverable.
 
 G. 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, 1993, 1994, and 1995 were approximately 7.025 million
shares, 7.068 million shares and 7.789 million shares, respectively.
 
  Primary earnings per share were computed by adjusting net income (loss) for
dividends and accretion applicable to Series A Preferred Stock, as follows
(dollars in thousands):
 
<TABLE>
<CAPTION>
                                                      1993     1994     1995
                                                     ------- --------  -------
<S>                                                  <C>     <C>       <C>
Income (loss) from continuing operations............ $ 1,653 $(11,329) $(5,354)
Income from discontinued operations.................  10,222       --       --
                                                     ------- --------  -------
Net income (loss)...................................  11,875  (11,329)  (5,354)
Less Series A Preferred Stock dividend..............      --       --     (401)
Less Series A Preferred Stock accretion.............      --       --     (139)
                                                     ------- --------  -------
Income (loss) applicable to Common Stock............ $11,875 $(11,329) $(5,894)
                                                     ======= ========  =======
</TABLE>
 
  Fully diluted earnings per share are not presented for the year ended
December 31, 1995, because the effect of the assumed conversion of the Series
A Preferred Stock shares, which were authorized and issued during 1995, would
be anti-dilutive.
 
  All references to common and common equivalent shares have been
retroactively restated to reflect a February 4, 1993 three-for-two stock
dividend.
 
                                     F-11
<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 H. 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 U.S. dollars using the exchange rates in effect at the balance sheet
date. Results of operations are translated using the average exchange rates
prevailing throughout the period. The effects of exchange rate fluctuations on
translating foreign currency assets and liabilities into U.S. 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. In 1993, the Company recognized a
foreign exchange loss of approximately $0.8 million due to the repayment of
intercompany debt from its Canadian subsidiary. This debt had previously been
considered of a long-term investment nature and gains and losses had been
included in cumulative translation adjustment on the Company's balance sheet.
 
 I. INCOME TAXES:
 
  The Company adopted Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes" in 1993. 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. The
cumulative effect of this change was not material to the financial statements
of the Company.
 
 J. CASH EQUIVALENTS AND RESTRICTED CASH:
 
  The Company considers investments with a maturity of less than three months
to be cash equivalents.
 
  In connection with an agreement described in Note 8, the Company had placed
approximately $0.6 million in an escrow account. During 1994 and 1995,
approximately $0.2 million and $0.4 million, respectively, was paid to an
officer of the Company in accordance with the agreement. The $0.4 million was
reflected as "restricted cash" on the balance sheet at December 31, 1994.
 
 K. CURRENCY FORWARD CONTRACTS:
 
  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 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, 1995, the Company had foreign currency contracts outstanding
to sell forward the equivalent of Cdn. $37.9 million and 5.3 million pounds
sterling and to buy forward the U.S. dollar equivalent of Cdn. $10.0 million
and 2.7 million pounds sterling. These contracts mature throughout 1996.
 
  At December 31, 1994, the Company had foreign currency contracts outstanding
to sell forward the equivalent of Cdn. $19.0 million and 7.9 million pounds
sterling and to buy forward the U.S. dollar equivalent of 2.4 million pounds
sterling.
 
  The aggregate fair value, based on published market exchange rates, of
foreign currency contracts at December 31, 1994 and 1995, was $22.7 million
and $24.5 million, respectively.
 
 L. 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.
 
                                     F-12
<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 M. RECLASSIFICATIONS:
 
  Certain reclassifications have been made to previously reported balances for
1994 and 1993 to conform to the 1995 presentation.
 
2. OPERATING INFORMATION
 
  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 has begun
to provide local telephone service as a switch-based local exchange reseller
in upstate New York and as a reseller of local exchange services in Ontario,
Canada. ACC primarily targets business customers with approximately $500 to
$15,000 of monthly long distance usage, selected residential customers and
colleges and universities. For the year ended December 31, 1995, long distance
revenues account for approximately 93% of total Company revenues, while local
exchange revenues and data-line sales are 2% and 3%, respectively, of total
Company revenues. Geographic area information is included in Note 9.
 
  ACC operates an advanced telecommunications network consisting of seven long
distance international and domestic switches located in the United States,
Canada and the United Kingdom; a local exchange switch in the United States;
leased transmission lines; and network management systems designed to optimize
traffic routing.
 
  At December 31, 1995, approximately $14.8 million of the Company's
telecommunications equipment was located on 50 university, college, and
preparatory school campuses in the Northeastern United States and in the
United Kingdom. Each of these institutions has signed agreements, with terms
ranging from three to eleven years, for the provision of a variety of services
by the Company.
 
  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. 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
telecommunications services provided by ACC Long Distance U.K. Ltd. are
subject to and affected by regulations introduced by The Office of
Telecommunications, the U.K. telecommunications regulatory authority
("Oftel").
 
  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. (See
"Risk Factors" in the Company's recently filed Registration Statement on Form
S-3).
 
  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, 1995, approximately 14% of the
Company's billed accounts receivable balance was due from resellers.
 
  The Company has contracted with a vendor to purchase license rights to
certain software used in its operations. The Company believes that it is
currently the only customer of the vendor and, as a result, the vendor is
financially dependent on the Company. Any future modifications or enhancements
to such software are dependent on the continued viability of the vendor.
 
 A. DISCONTINUED OPERATIONS:
 
  In 1993, the Company recorded a gain of $11.5 million, or $1.64 per share,
net of a provision for income taxes of $8.4 million, related to the sale of
the operating assets and liabilities of its cellular subsidiary, Danbury
 
                                     F-13
<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cellular Telephone Co. The proceeds of the sale were approximately $43.0
million, of which $41.0 million was received in October, 1993 with the
remaining $2.0 million received in October, 1994. Revenue related to this
business segment for the nine months ended September 30, 1993 was $3.9
million. The results of the cellular business segment have been reported
separately as discontinued operations in the consolidated statements of
operations.
 
 B. ASSET WRITE-DOWN:
 
  In 1993, the Company recorded a non-cash pretax charge of $12.8 million
related to write-downs of certain assets of the Company's U.S. and Canadian
operations.
 
  The U.S. write-down of intangibles amounted to approximately $1.2 million.
The intangibles written off resulted from the acquisition of a number of
businesses since 1985. Changes in the Company's operations since those
companies were acquired, as well as an evaluation of the future undiscounted
cash flow from those acquisitions, led the Company to the conclusion that the
purchased intangibles no longer had value.
 
  The write-down of fixed assets in the U.S. totaled approximately $5.1
million which represented the excess of net book value over estimated
recoverable value for certain assets. These assets were written down due to
technological changes which made it uneconomical for the Company to continue
to use these assets in the production of revenue. Included in this amount was
approximately $3.0 million of equipment related to the Company's 180 mile
microwave network in New York State.
 
  The Canadian write-down included approximately $2.8 million for acquired
customer base and accounts receivable and $3.8 million for autodialing
equipment. The write-down of the customer base and accounts receivable was due
to the future undiscounted cash flow from those acquisitions being
significantly less than originally anticipated.
 
  The write-down of autodialing equipment reflected the excess of net book
value over estimated recoverable value for those assets as a direct effect of
the decision of the Canadian Radio-Television and Telecommunications
Commission on July 23, 1993, which resulted in the implementation, starting in
July, 1994, of equal access in Canada. These assets were fully depreciated at
December 31, 1994.
 
 C. 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 include 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.
 
3. DEBT, LINES OF CREDIT, AND FINANCING ARRANGEMENTS
 
 A. DEBT:
 
  The Company had the following debt outstanding as of December 31, 1994 and
1995 (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                                1994     1995
                                                               -------  -------
   <S>                                                         <C>      <C>
   Senior Credit Facility/Lines of Credit....................  $26,602  $20,973
   Capitalized lease obligations payable in total monthly
    installments of $250 including interest rates ranging
    from 8% to 21.5%, maturing through 2000, collateralized
    by related equipment.....................................    4,925    9,996
   Notes payable to previous Metrowide owners, interest rates
    ranging from 7.5% to 9%..................................       --    1,966
                                                               -------  -------
                                                               $31,527  $32,935
   Less current maturities...................................   (1,613)  (4,885)
                                                               -------  -------
                                                               $29,914  $28,050
                                                               =======  =======
</TABLE>
 
                                     F-14
<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
<TABLE>
<CAPTION>
                                                          YEAR    AMOUNT
                                                       ---------- -------
                                                          (DOLLARS IN
                                                           THOUSANDS)
   <S>                                                 <C>        <C>
   Maturities of debt, including capital lease
    obligations, are as follows at December 31, 1995:     1996    $ 4,885
                                                          1997      2,563
                                                          1998      5,712
                                                          1999     13,248
                                                          2000      6,527
                                                       Thereafter      --
                                                                  -------
                                                                  $32,935
                                                                  =======
</TABLE>
 
  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.
 
 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 30,000 shares of the Company's Class A Common Stock at an
exercise price of $16.00 per share. The warrants expire on January 21, 1999.
 
  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. Regarding a certain subjective
covenant related to transactions with affiliates (see Note 10), a waiver was
obtained covering such transactions through December 31, 1995. At December 31,
1995, the Company had available $8.7 million under this facility. The total
available facility will be reduced in quarterly increments of $2.450 million
from July 1, 1997 to October 1, 1998, $2.905 million from January 1, 1999 to
April 1, 2000 and by $2.870 million on maturity at July 1, 2000. 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 facility agreement. The weighted average interest rate
for borrowings during 1995 was 8.4%.
 
  Under the agreement, the Company is obligated to pay the financial
institutions 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. The contingent interest is due upon the earlier of the
occurrence of a triggering event, as defined, or 18 months after the closing
date.
 
  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 is required to
pay a fixed rate of
 
                                     F-15
<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. The interest rate swap agreements in effect as of December 31,
1995, are as follows:
 
<TABLE>
<CAPTION>
       NOTIONAL   VARIABLE FIXED
       BALANCE      RATE   RATE
       --------   -------- -----
      <S>         <C>      <C>
      $2,000,000   5.938%  5.98%
      $7,500,000   5.938%  6.25%
      $2,000,000   5.938%  6.02%
</TABLE>
 
  These agreements expire at various times through November, 1998.
 
  At December 31, 1995, the Company has issued letters of credit totaling $1.4
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, and therefore,
management is of the opinion that the fair value of these instruments is zero.
 
  As of December 31, 1994, the Company had available up to $30.0 million under
two separate bank-provided line of credit agreements. During 1995, the Company
obtained a commitment letter to extend its then existing lines of credit for a
period greater than twelve months. In accordance with SFAS No. 6,
"Classification of Short-Term Obligations Expected to be Refinanced," the
outstanding lines of credit borrowings at December 31, 1994 were classified as
long-term debt.
 
  Each agreement was an unsecured working capital line for up to $15.0 million
at the respective bank's prime rate. Outstanding principal under each line of
credit was due on demand. At December 31, 1994, the Company had available
approximately $3.1 million under one line of credit. The weighted average
interest rate for borrowings on this line during 1994 and 1995 was 7.4% and
8.9% respectively. At December 31, 1994, the Company had available $66,000
under the second line of credit. The weighted average interest rate for
borrowings on this line during 1994 and 1995 was 7.8% and 8.8%, respectively.
 
4. INCOME TAXES
 
  Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by SFAS
No. 109, "Accounting for Income Taxes." The cumulative effect of adopting this
Statement as of January 1, 1993 was immaterial to net income.
 
  The following is a summary of the U.S. and non-U.S. income (loss) from
continuing 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 U.S. statutory
income tax rate to the effective income tax rate.
 
  Income (loss) from continuing operations before provision for (benefit from)
income taxes and minority interest (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                      1993      1994     1995
                                                     -------  --------  -------
<S>                                                  <C>      <C>       <C>
U.S. ............................................... $ 6,177  $  1,301  $ 1,510
Non-U.S. ...........................................  (9,928)  (11,545)  (6,335)
                                                     -------  --------  -------
                                                     $(3,751) $(10,244) $(4,825)
                                                     =======  ========  =======
</TABLE>
 
                                     F-16
<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Provision for (benefit from) income taxes (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                          1993     1994   1995
                                                         -------  ------  -----
   <S>                                                   <C>      <C>     <C>
   Current:
   U.S.................................................. $   --   $ (867)  $581
   Non-U.S..............................................    (410)    --     --
                                                         -------  ------  -----
                                                         $  (410) $ (867)  $581
                                                         =======  ======  =====
   Deferred:
   U.S..................................................    (865)  1,298   (185)
   Non-U.S..............................................  (2,468)  3,025    --
                                                         -------  ------  -----
                                                          (3,333)  4,323   (185)
                                                         -------  ------  -----
                                                         $(3,743) $3,456  $ 396
                                                         =======  ======  =====
</TABLE>
 
  Provision for (benefit from) deferred income taxes (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                      1993     1994     1995
                                                     -------  -------  -------
   <S>                                               <C>      <C>      <C>
   Difference between tax and book depreciation and
    amortization...................................  $(2,023) $ 2,178  $   772
   Difference between tax and book basis of assets
    written down...................................   (1,298)     --       --
   Valuation allowance.............................      603    6,851    2,223
   Software development costs......................      --       502     (502)
   Other temporary differences.....................      (12)     171     (103)
   Net operating loss..............................     (603)  (5,379)  (2,575)
                                                     -------  -------  -------
                                                     $(3,333) $ 4,323  $  (185)
                                                     =======  =======  =======
</TABLE>
 
  Reconciliation of U.S. statutory income tax rate to effective income tax
rate:
 
<TABLE>
<CAPTION>
                            1993    1994    1995
                            -----   -----   -----
   <S>                      <C>     <C>     <C>
   U.S. statutory income
    tax rate............... (35.0%) (34.0%) (34.0%)
   Non-deductible goodwill
    and customer base......  20.3     1.2     2.7
   Foreign income taxes,
    including valuation
    allowance..............  (2.4)   66.6    44.6
   Gain on sale of
    subsidiary stock....... (87.2)    --      --
   State tax benefit.......   --      --     (2.4)
   Other...................   4.5     --     (2.7)
                            -----   -----   -----
   Effective income tax
    rate................... (99.8%)  33.8%    8.2%
                            =====   =====   =====
</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, 1995, the Company had unused tax benefits of approximately
$9.8 million related to non-U.S. net operating loss carryforwards totaling
$25.3 million for income tax purposes, of which $14.4 million have an
unlimited life, $2.6 million expire in 2000, $7.7 million expire in 2001, and
$0.6 million expire in 2002. In addition, the Company had $1.1 million of
deferred tax assets related to non-U.S. temporary differences. The valuation
allowance was increased by $3.5 million to approximately $10.9 million to
offset the related non-U.S. deferred tax assets due to the uncertainty of
realizing the benefit of the non-U.S. loss carryforwards.
 
                                     F-17
<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of December 31, (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                              1994      1995
                                                             -------  --------
   <S>                                                       <C>      <C>
   Deferred tax assets:
   Depreciation and amortization--non-U.S...................  $1,472  $  1,122
   Other non-deductible reserves and accruals...............      40       647
   Non-U.S. operating loss carryforwards....................   5,982     9,816
   Less--valuation allowance for non-U.S. deferred tax
    assets..................................................  (7,454)  (10,938)
                                                             -------  --------
   Net deferred tax assets..................................      40       647
   Deferred tax liabilities:
   Depreciation and amortization............................  (2,170)   (2,577)
                                                             -------  --------
                                                             $(2,130) $ (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 has a liquidation
value of $1,000 per share, and accrues cumulative dividends, compounded on the
accumulated and unpaid balance, as defined, at a rate of 12% annually. The
dividends shall accrue whether or not the dividends have been declared and
whether or not there are profits, surplus or other funds of the Company
legally available for the payment of dividends. The dividends are payable upon
redemption unless the Series A Preferred Stock is converted into Class A
Common Stock at an initial conversion price of $16.00 per share, or 625,000
shares, subject to certain adjustments and conditions. The conversion price
can fluctuate if the Company, among other actions, grants or sells options at
prices less than the conversion price of the Series A Preferred Stock, or
issues or sells convertible securities at a price per share less than the
conversion price of the Series A Preferred Stock.
 
  On the seventh anniversary of the private placement, all of the outstanding
shares of Series A Preferred Stock shall be redeemed in cash or in a
combination of cash and Class A Common Stock. Redemption may be made at the
price per share equal to the greater of (i) the liquidation value ($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 is
convertible. Optional redemptions of all or a portion of shares, as defined,
of the then outstanding shares are permitted at any time.
 
  All of the issued and outstanding Series A Preferred Stock will be
automatically converted into Class A Common Stock if, after the second
anniversary of the closing: (i) the daily trading volume of the Class A Common
Stock exceeds 5% of the number of shares of Class A Common Stock issuable upon
conversion of the Series A Preferred Stock for 45 consecutive trading days;
(ii) the holders of the Series A Preferred Stock are not subject to any
underwriters' lockup agreement restricting transferability of the shares of
Class A Common Stock issuable upon conversion of such Series A Preferred
Stock; and (iii) the average closing price of the Class A Common Stock for 15
consecutive trading days, through July 2002, equals or exceeds the price, as
defined, ranging from $32.00 to $57.33 per share.
 
  Noncompliance with the terms of the Series A Preferred Stock and the
agreement under which the Series A Preferred Stock was issued, can result
depending on the cause of the default in an increase of the dividend rate to
15 percent, a one-third reduction in the conversion price which existed prior
to the event of default, or immediate redemption at the liquidation value plus
accrued and unpaid dividends.
 
                                     F-18
<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Concurrent with the private placement, warrants to purchase 100,000 shares
of the Company's Class A Common Stock were issued at an initial exercise price
of $16.00 per share. These warrants expire in July 2002. In addition, the
Company issued warrants to purchase Class A Common Stock that will become
exercisable upon one or more optional repayments of the Series A Preferred
Stock at an exercise price of $16.00 per share, subject to adjustments, as
defined, and will permit each holder to acquire initially the same number of
shares of Class A Common Stock into which the Series A Preferred Stock is
convertible as of the relevant repayment date. These warrants expire in July
2002.
 
  The Series A Preferred Stock is senior to all classes and series of
preferred stock and Class A Common Stock as to the payment of dividends and
redemptions, and upon liquidation at liquidation value, senior to all other
classes of the Company's capital stock. In certain circumstances, the holders
of the Series A Preferred Stock will have preemptive rights to purchase, on an
as-converted basis, a pro rata portion of certain Class A Common Stock
issuances by the Company. The holders of the Series A Preferred Stock are
entitled to elect one director to the Company's Board of Directors, so long as
at least 33% of the Series A Preferred Stock is outstanding. The holders also
have the right to approve certain transactions, as defined, including the
payment of dividends and acquisition of shares of treasury stock.
 
  At December 31, 1995, the Series A Preferred Stock is reflected on the
accompanying balance sheet as redeemable preferred stock, and is shown
inclusive of cumulative unpaid dividends, and net of unamortized issuance
costs of approximately $1.1 million. The carrying value of the redeemable
preferred stock will be accreted to the liquidation value, as defined, over
the seven year term.
 
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.
 
 A. PRIVATE PLACEMENT:
 
  During 1995, the Company made an offshore sale of 825,000 shares of its
Class A Common Stock at an average price of $14.53 per share. The sale raised
net proceeds of $11.1 million, after deduction of fees and expenses of $0.9
million. In conjunction with this transaction, warrants to purchase 82,500
shares of Class A Common Stock at an exercise price of $14.40 per share were
issued. These warrants were exercised prior to December 31, 1995.
 
 B. EMPLOYEE STOCK OPTION PLAN:
 
  In October, 1994, the Company's shareholders approved an amendment to the
Employee Stock Option Plan whereby options to purchase an aggregate of
2,000,000 shares of Class A Common Stock may be granted to officers and key
employees of the Company. In July, 1995, shareholders of the Company approved
an additional 500,000 shares of Class A Common Stock to be reserved for
issuance under this plan. 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.
 
                                     F-19
<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Changes in the status of the stock option plan during 1993, 1994, and 1995
are summarized as follows:
 
<TABLE>
<CAPTION>
                                          1993          1994          1995
                                      ------------  ------------  ------------
   <S>                                <C>           <C>           <C>
   Options outstanding at beginning
   of year..........................       531,000       464,125       785,250
   Options granted..................       145,000       655,000       291,335
   Options exercised................       (87,375)     (102,375)      (33,525)
   Options forfeited................      (124,500)     (231,500)      (22,750)
                                      ------------  ------------  ------------
   Options outstanding at end of
   year.............................       464,125       785,250     1,020,310
                                      ============  ============  ============
   Number of options at end of year:
   Exercisable......................       196,125       193,125       405,333
   Available for grant..............       375,803       302,303       533,717
   Range of prices:
   Granted during year..............  $15.00-19.75  $14.25-19.25  $13.75-17.25
   Outstanding at end of year.......  $ 2.83-19.75  $ 2.83-19.75  $ 2.83-19.75
   Exercised during the year........  $ 2.83-10.92  $ 3.30-11.33  $ 9.67-18.75
</TABLE>
 
  The Company is required to adopt SFAS No. 123, "Accounting for Stock-Based
Compensation" in 1996. This Statement encourages entities to adopt a fair
value based method of accounting for employee stock option plans (whereby
compensation cost is measured at the grant date based on the value of the
award and is recognized over the employee service period) rather than the
current intrinsic value based method of accounting (whereby compensation cost
is measured at the grant date as the difference between market value and the
price for the employee to acquire the stock). If the Company elects to
continue using the intrinsic value method of accounting, pro forma disclosures
of net income and earnings per share, as if the fair value based method of
accounting had been applied, will need to be disclosed. Management has not
decided if the Company will adopt the fair value based method of accounting
for their stock option plans. The Company believes that adopting the fair
value basis of accounting could have a material impact on the financial
statements and such impact is dependent upon future stock option activity.
 
 C. 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
463,684 shares at December 31, 1995. There were 12,754 shares issued at an
average price of $11.89 per share during the year ended December 31, 1994 and
23,562 shares issued at an average price of $12.56 per share during the year
ended December 31, 1995. There have been no charges to income in connection
with this plan other than incidental expenses related to the issuance of
shares.
 
7. TREASURY STOCK
 
  In January, 1994, an officer of the Company exercised stock options to
acquire 99,000 shares of the Company's Class A Common Stock at $3.30 per share
by delivering to the Company 16,542 common shares at the then current market
price of $19.75 per share.
 
  The average cost of all treasury stock currently held by the Company is
$2.22 per share.
 
                                     F-20
<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
8. COMMITMENTS AND CONTINGENCIES
 
 A. OPERATING LEASES:
 
  The Company leases office space and other items under various agreements
expiring through 2004. At December 31, 1995, the minimum aggregate payments
under non-cancelable operating leases are summarized as follows (dollars in
thousands):
 
<TABLE>
<CAPTION>
         YEAR                                            AMOUNT
         ----                                            -------
         <S>                                             <C>
         1996........................................... $ 3,804
         1997...........................................   3,734
         1998...........................................   3,314
         1999...........................................   4,458
         2000...........................................   1,924
         Thereafter.....................................   7,134
                                                         -------
                                                         $24,368
                                                         =======
</TABLE>
 
 B. EMPLOYMENT AND OTHER AGREEMENTS:
 
  In October 1995, the Company's former Chief Executive Officer resigned his
position, but remains an employee and Chairman of the Company's Board of
Directors. A new Chief Executive Officer was hired. In conjunction with the
management changes, the Company entered into agreements with both executives.
The contract with the Chief Executive Officer has a two year term and 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, 1995, the
Company's maximum potential liability under this agreement was approximately
$660,000. The contract with the Chairman of the Board provides for an annual
base salary, including an annual bonus and other benefits, and also for a
payment of $1.0 million, payable over a three year term, in the event that he
resigns or is terminated without cause. Payments under this agreement are
accelerated and are due in full within 30 days following a change in control
of the Company. In consideration for a non-compete agreement, the Chairman of
the Board 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 for a period equal to the lesser of one year or until the
individual finds new employment, in the event of termination without cause or
in the event of termination after a change in control of the Company. The
agreements also provide for continued participation in the Employee Long Term
Incentive Plan for a period of either six months or one year after termination
of employment for any reason. At December 31, 1995, the Company's maximum
potential liability under these agreements totaled approximately $2.5 million.
 
  In connection with the sale of cellular assets, the Company entered into an
agreement with an officer. The agreement called for a fee of approximately
$0.6 million to be paid as a result of the closing of the sale of the
Company's cellular assets. This amount was placed in an escrow account at the
time of the sale. The agreement requires, among other things, that the officer
remain an employee of the Company through July 1, 1996. During 1994, the
officer had an outstanding loan from the Company in the amount of $0.2
million. Subsequent to December 31, 1994, the agreement was amended to
accelerate the vesting provisions and funds from the escrow account were used
to repay the loan.
 
                                     F-21
<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 C. PURCHASE COMMITMENT:
 
  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 eight 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 percent discount on certain monthly charges from this vendor.
 
 D. DEFINED CONTRIBUTION PLANS:
 
  The Company provides a defined contribution 401(k) plan to substantially all
U.S. employees. Amounts contributed to this plan by the Company were
approximately $137,000, $167,000, and $183,000 in 1993, 1994 and 1995,
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. $28,000, Cdn. $62,000 and
Cdn. $106,000 in 1993, 1994 and 1995, respectively.
 
 E. ANNUAL INCENTIVE PLAN:
 
  During 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
$619,000, $633,000 and $1.4 million for the years ended December 31, 1993,
1994 and 1995, respectively.
 
 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, 1995 will not have a material adverse effect on the
Company's financial condition or results of operations.
 
                                     F-22
<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
9. GEOGRAPHIC AREA INFORMATION (DOLLARS IN THOUSANDS)
 
YEAR ENDED DECEMBER 31, 1993:
 
<TABLE>
<CAPTION>
                            UNITED           UNITED
                            STATES  CANADA   KINGDOM  ELIMINATIONS CONSOLIDATED
                           -------- -------  -------  ------------ ------------
<S>                        <C>      <C>      <C>      <C>          <C>
Revenue from unaffiliated
customers................. $ 45,150 $60,643  $   153   $     --      $105,946
Intercompany revenue......    9,039   2,939      185     (12,163)         --
                           -------- -------  -------   ---------     --------
Total revenue............. $ 54,189 $63,582  $   338   $ (12,163)    $105,946
                           ======== =======  =======   =========     ========
Income (loss) from
 continuing operations
 before income taxes...... $  6,177 $(8,150) $(1,778)  $     --      $ (3,751)
                           ======== =======  =======   =========     ========
Identifiable assets at
December 31, 1993......... $142,821 $28,620  $ 1,832   $(111,555)    $ 61,718
                           ======== =======  =======   =========     ========
 
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
 continuing 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
                           ======== =======  =======   =========     ========
 
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
 continuing 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
                           ======== =======  =======   =========     ========
</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 of unaffiliated companies.
Income from continuing 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 actual time dedicated to each subsidiary by members of corporate
management and staff.
 
                                     F-23
<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
10. RELATED PARTY TRANSACTIONS
 
  In February 1994, the Company's Board of Directors approved a plan to move
the Company's headquarters to a new facility in Rochester, New York. The new
location is in a building owned by a partnership in which the Company's
Chairman of the Board has a fifty percent 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. 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
$0.2 million and $0.6 million during 1994 and 1995, respectively.
 
  During 1994 and early 1995, the Company initiated efforts to obtain new
telecommunications software programs from a software development company. The
Company's Chairman of the Board and former 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 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.
 
  Subsequent to December 31, 1995, 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, 1994 and 1995 relating to
this vendor were $0 and $44,000, respectively. For an aggregate consideration
of $1.8 million, the Company in return will receive a perpetual right to use
the newly developed telecommunications software programs. 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.
 
 
11. SUBSEQUENT EVENTS
 
 A. TELECOMMUNICATIONS LEGISLATION REVISIONS:
 
  Legislation that substantially revises the U.S. Communications Act of 1934
(the "U.S. Communications Act") was recently enacted by Congress and 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 markets to additional
competition, particularly from the RBOCs, the Company's ability to compete is
likely to 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.
 
                                     F-24
<PAGE>
 
                          ACC CORP. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 B. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN:
 
  On January 19, 1996, subject to shareholder approval, the Company's Board of
Directors adopted a Non-Employee Directors' Stock Option Plan (the Directors'
Stock Option Plan). The Directors' Stock Option Plan provides for grants of
options to purchase 5,000 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 250,000 shares, subject to adjustment for stock splits,
stock dividends and the like. Options to purchase 20,000 shares of Class A
Common Stock were granted in January 19, 1996, pursuant to this plan.
 
  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, at the discretion of the
respective director.
 
                                     F-25
<PAGE>
 
 
 
 
                                [Logo] ACC (R)
<PAGE>
 
                                    PART II
 
                    INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
  The following table is an itemized listing of expenses to be incurred by the
Company in connection with the issuance and distribution of the shares of
Class A Common Stock being registered hereby, other than underwriting
discounts and commissions. All amounts shown are estimates, except the SEC
registration fee and the NASD filing fee:
 
<TABLE>
   <S>                                                               <C>
   SEC Registration Fee............................................. $   19,084
   NASD Filing Fee..................................................      6,035
   Nasdaq Additional Listing Fee....................................      7,500
   Printing and Engraving Expenses..................................    200,000
   Legal Fees and Expenses..........................................    300,000
   Accounting Fees and Expenses.....................................    150,000
   Transfer Agent and Registrar Fees and Expenses...................      5,000
   Blue Sky Fees and Expenses.......................................     23,500
   Miscellaneous....................................................    288,881
                                                                     ----------
     Total.......................................................... $1,000,000
                                                                     ==========
</TABLE>
 
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
 
  Section 145 of the Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify any director or officer against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement, actually
and reasonably incurred in defense of any threatened, pending or completed
action, suit or proceeding whether civil, criminal or investigative (other
than an action by or in the right of the corporation) arising by reason of the
fact that he/she is or was an officer or director, if he/she acted in good
faith and in a manner he/she reasonably believed to be in or not opposed to
the best interests of the corporation and, with respect to any criminal action
or proceeding, it is determined that he/she had no reasonable cause to believe
his/her conduct was unlawful. Section 145 also provides that a corporation may
indemnify any such officer or director against expenses incurred in an action
by or in the right of the corporation if he/she acted in good faith and in a
manner he/she reasonably believed to be in or not opposed to the best
interests of the Company, except in respect of any matter as to which such
person is adjudged to be liable to the Company, unless allowed by the court in
which such action is brought. This statute requires indemnification of such
officers and Directors against expenses to the extent they may be successful
in defending any such action. The statute also permits purchase of liability
insurance by the Company on behalf of its officers and Directors.
 
  Article SEVEN, Section 2 of the Company's Certificate of Incorporation and
Article V of its By-laws (collectively its "charter documents") generally
provide for the mandatory indemnification of and advancement of litigation
expenses to the Company's Directors, officers and employees to the fullest
extent permitted by the DGCL against all liabilities, losses and expenses
incurred in connection with any action, suit or proceeding in which any of
them become involved by reason of their service rendered to the Company or, at
its request, to another entity; provided that it is determined, in connection
with any civil action, that the indemnitee acted in good faith and in a manner
that he/she reasonably believed to be in or not opposed to the Company's best
interests, and in connection with any criminal proceeding, that the indemnitee
had no reasonable cause to believe his/her conduct was unlawful. These
provisions of the Company's charter documents are not exclusive of any other
indemnification rights to which an indemnitee may be entitled, whether by
contract or otherwise. The Company may also purchase liability insurance on
behalf of its Directors and officers, whether or not it would have the
obligation or power to indemnify any of them under the terms of its charter
documents or the DGCL. The Company has acquired and maintains liability
insurance for the benefit of its Directors and officers for serving in such
capacities, and it also has entered into indemnification agreements with each
of its Directors and executive officers for serving in such capacities.
 
                                     II-1
<PAGE>
 
  Reference is made to the Underwriting Agreement filed as Exhibit 1.1 hereto
for provisions relating to the indemnification of the Underwriters and persons
who control the Underwriters within the meaning of Section 15 of the
Securities Act of 1933, and to indemnification of the Company by the
Underwriters.
 
  The Company has entered into indemnification agreements with each of its
directors and executive officers pursuant to which the Company has agreed to
indemnify, subject to the terms thereof, each of them to the full extent (i)
authorized or permitted by the DGCL as well as any other law authorizing or
permitting such indemnification adopted after the respective dates of such
agreements and (ii) to the fullest extent permitted by law against litigation
costs and liabilities incurred in connection with any threatened, pending or
completed action, suit, proceeding or investigation by reason of the fact that
such director or executive officer is, was or at any time becomes a director,
officer, employee or agent of the Company or is or was serving or at any time
serves at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise.
 
  See also the undertaking made with respect to indemnification matters
involving the Company's directors, officers and controlling persons, found in
Item 17 below.
 
ITEM 16. EXHIBITS.
 
  The following exhibits are filed herewith:
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER        DESCRIPTION OF EXHIBIT
 -------       ----------------------
<S>            <C>
           1.1 Form of Underwriting Agreement*
           4.1 Specimen of Class A Common Stock Certificate+
           4.2 First Restated Certificate of Incorporation of the Company++
           4.3 Certificate of Designations of 10,000 Shares of Series A Preferred Stock, par value
                $1.00 per share, of the Company+++
           4.4 By-laws of the Company, as amended++++
           5.1 Opinion of Nixon, Hargrave, Devans & Doyle LLP*
          23.1 Consent of Nixon, Hargrave, Devans & Doyle LLP (contained in the opinion filed as
                Exhibit 5)*
          23.2 Consent of Arthur Andersen LLP
          24.1 Powers of Attorney (contained in the signature page)
          27.1 Financial Data Schedule
</TABLE>
- --------
   * To be filed by Amendment.
   + Incorporated by reference from Exhibit 4-1 to the Company's Registration
     Statement on Form S-2 (Commission File No. 33-41588).
  ++ Incorporated by reference from Exhibit 3 to the Company's Quarterly
     Report on Form 10-Q for the quarter ended September 30, 1995 (Commission
     File No. 0-14567).
 +++ Incorporated by reference from Exhibit 4-1 to the Company's Quarterly
     Report on Form 10-Q for the quarter ended September 30, 1995 (Commission
     File No. 0-14567).
++++ Incorporated by reference from Exhibit 3.1 to the Company's Current
    Report on Form 8-K dated February 22, 1996 (Commission File No. 0-14567).
 
                                     II-2
<PAGE>
 
ITEM 17. UNDERTAKINGS.
 
  The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933 ("Securities Act"),
each filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 ("Exchange Act") (and,
where applicable, each filing of an employee benefit plan's Annual Report
pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
 
  Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in that Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any such
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
 
  The undersigned Registrant hereby further undertakes that:
 
    (1) For purposes of determining any liability under the Securities Act,
  the information omitted from the form of Prospectus filed as part of this
  Registration Statement in reliance upon Rule 430A and contained in a form
  of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
  497(h) under the Securities Act shall be deemed to be part of this
  Registration Statement as of the time it was declared effective.
 
    (2) For the purpose of determining any liability under the Securities
  Act, each post-effective amendment that contains a form of Prospectus shall
  be deemed to be a new Registration Statement relating to the securities
  offered therein, and the offering of such securities at that time shall be
  deemed to be the initial bona fide offering thereof.
 
                                     II-3
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Rochester, State of New York, on February 22, 1996.
 
                                          ACC CORP.
 
                                                    /s/ David K. Laniak
                                          By___________________________________
                                                      David K. Laniak
                                                  Chief Executive Officer
 
  KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes and appoints David K. Laniak, Michael R.
Daley and John J. Zimmer, and each of them, his true and lawful attorneys-in-
fact and agent, with full power of substitution, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or
necessary fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents or
any of them or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
 
  Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
 
<TABLE>
<CAPTION>
             SIGNATURE                           TITLE                    DATE
             ---------                           -----                    ----
 
<S>                                  <C>                           <C>
        /s/ David K. Laniak          Chief Executive Officer and   February 22, 1996
____________________________________  a Director (Principal
          David K. Laniak             Executive Officer)
 
         /s/ Richard T. Aab          Chairman of the Board and     February 22, 1996
____________________________________  Director
           Richard T. Aab
 
       /s/ Arunas A. Chesonis        President and Chief           February 22, 1996
____________________________________  Operating Officer, and
         Arunas A. Chesonis           Director
 
        /s/ Michael R. Daley         Executive Vice President and  February 22, 1996
____________________________________  Chief Financial Officer
          Michael R. Daley            (Principal Financial and
                                      Accounting Officer)
 
        /s/ Hugh F. Bennett          Director                      February 22, 1996
____________________________________
          Hugh F. Bennett
 
                                     Director                      February   , 1996
____________________________________
       Hon. Willard Z. Estey
 
       /s/ Daniel D. Tessoni         Director                      February 22, 1996
____________________________________
         Daniel D. Tessoni
 
      /s/ Robert M. Van Degna        Director                      February 22, 1996
____________________________________
        Robert M. Van Degna
 
</TABLE>
 
 
                                     II-4
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
 <C>         <S>                                                      <C>
  EXHIBIT                          DESCRIPTION                        LOCATION
   NUMBER                          -----------                        --------
  -------
     1.1     Form of Underwriting Agreement*
     4.1     Specimen of Class A Common Stock Certificate+
             First Restated Certificate of Incorporation of the
     4.2     Company++
     4.3     Certificate of Designations of 10,000 Shares of Series
              A Preferred Stock, par value $1.00 per share, of the
              Company+++
     4.4     By-laws of the Company, as amended++++
     5.1     Opinion of Nixon, Hargrave, Devans & Doyle LLP*
    23.1     Consent of Nixon, Hargrave, Devans & Doyle LLP
              (contained in the opinion filed as Exhibit 5)*
    23.2     Consent of Arthur Andersen LLP
    24.1     Powers of Attorney (contained in the signature page)
    27.1     Financial Data Schedule
</TABLE>
- --------
   * To be filed by Amendment.
   + Incorporated by reference from Exhibit 4-1 to the Company's Registration
     Statement on Form S-2 (Commission File No. 33-41588).
  ++ Incorporated by reference from Exhibit 3 to the Company's Quarterly
     Report on Form 10-Q for the quarter ended September 30, 1995 (Commission
     File No. 0-14567).
 +++ Incorporated by reference from Exhibit 4-1 to the Company's Quarterly
     Report on Form 10-Q for the quarter ended September 30, 1995 (Commission
     File No. 0-14567).
++++ Incorporated by reference from Exhibit 3.1 to the Company's Current
    Report on Form 8-K dated February 22, 1996 (Commission File No. 0-14567).
 

<PAGE>
 
                                                                   EXHIBIT 23.2
 
                    CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
 
  As independent public accountants, we hereby consent to the use of our
report dated February 6, 1996 (except with respect to the matters discussed in
Notes 10 and 11.A., as to which the dates are February 20, 1996 and February
8, 1996, respectively) (and to all references to our Firm) included in this
Form S-3 and its incorporation by reference into ACC Corp.'s previously filed
Registration Statements No. 33-30817, No. 33-36546, No. 33-52174, No. 33-
87056, and No. 33-75558.
 
                                          Arthur Andersen LLP
 
Rochester, New York,
 February 22, 1996

<TABLE> <S> <C>

<PAGE>

<ARTICLE> 5
<LEGEND>
  THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
  COMPANY'S FORM S-3 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
  FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
       
<S>                             <C>
<FISCAL-YEAR-END>                          DEC-31-1995
<PERIOD-START>                             JAN-01-1995
<PERIOD-END>                               DEC-31-1995
<PERIOD-TYPE>                   YEAR
<CASH>                                             518
<SECURITIES>                                         0
<RECEIVABLES>                                    41063
<ALLOWANCES>                                      2085
<INVENTORY>                                        292
<CURRENT-ASSETS>                                 45726
<PP&E>                                           83623
<DEPRECIATION>                                   26932
<TOTAL-ASSETS>                                  123984
<CURRENT-LIABILITIES>                            56074
<BONDS>                                          28050
                             9448
                                          0
<COMMON>                                           129
<OTHER-SE>                                       26278
<TOTAL-LIABILITY-AND-EQUITY>                    123984
<SALES>                                         175269
<TOTAL-REVENUES>                                188866
<CGS>                                           114841
<TOTAL-COSTS>                                    73807
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                  3284
<INTEREST-EXPENSE>                                4933
<INCOME-PRETAX>                                 (4825)
<INCOME-TAX>                                       396
<INCOME-CONTINUING>                             (5354)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                    (5354)
<EPS-PRIMARY>                                   (0.76)
<EPS-DILUTED>                                        0
        

</TABLE>


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