SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 0-14567
ACC CORP.
400 WEST AVENUE
ROCHESTER, NEW YORK 14611
716-987-3000
Incorporated under the Employer Identification
Laws of the State of Delaware Number 16-1175232
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS: Class A Common Stock, par value $.015 per share
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Company was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of all Class A Common Stock held by non-affiliates
as of March 1, 1996= $200,586,192.
8,039,401 shares of $.015 par value Class A Common Stock were issued and
outstanding as of March 1, 1996.
The Index of Exhibits filed with this Report begins at page __.
<PAGE>
PART I
ITEM 1. BUSINESS.
CERTAIN OF THE INFORMATION CONTAINED IN THIS FORM 10-K, INCLUDING THE
DISCUSSION WHICH FOLLOWS IN THIS ITEM 1 OF THE COMPANY'S PLANS AND
STRATEGIES FOR ITS BUSINESS AND RELATED FINANCING, AND THE MANAGEMENT'S
DISCUSSION AND ANALYSIS FOUND IN ITEM 7 OF THIS REPORT, CONTAIN FORWARD-
LOOKING STATEMENTS. FOR A DISCUSSION OF IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS,
PLEASE CAREFULLY REVIEW THE DISCUSSION OF RISK FACTORS CONTAINED IN THIS
ITEM 1, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS REPORT AND IN
THE COMPANY'S PERIODIC REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE "SEC" OR "COMMISSION").
ACC Corp. 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 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 offering of 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 its ownership of switches reduces its 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
$15,000 of monthly usage, selected residential customers and colleges and
universities. The Company believes that, in addition to being price-driven,
these customers tend to be focused on customer service, more likely to rely
on a single carrier for their telecommunications needs and less likely to
change carriers than larger commercial customers. The diversity of ACC's
targeted customer base enhances network utilization by combining business-
driven workday traffic with night and weekend off-peak traffic from student
and residential customers. The Company strives to be more cost effective,
flexible, innovative and responsive to the needs of its customers than the
major carriers, which principally focus their direct sales efforts on large
commercial accounts and residential customers.
The Company was originally incorporated in New York in 1982 under the
name A. C. Teleconnect Corp. and was reincorporated in Delaware in 1987
under the name ACC Corp. As used herein, unless the context otherwise
requires, the ''Company'' and ''ACC'' refer to ACC Corp. and its
subsidiaries, including ACC Long Distance Corp. (''ACC U.S.''), ACC
TelEnterprises Ltd., the Company's 70% owned Canadian subsidiary (''ACC
Canada''), and ACC Long Distance UK Limited (''ACC U.K.''). The Company's
principal executive offices are located at 400 West Avenue, Rochester, New
York 14611 and its telephone number at that address is (716) 987-3000.
In this Report, references to ''dollar'' and ''$'' are to United
States dollars, references to ''Cdn. $'' are to Canadian dollars,
references to ''<pound-sterling>'' are to British 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.
For certain financial information concerning the Company's foreign and
domestic operations, see Note 9 to the Consolidated Financial Statements in
Item 8 of this Report.
INDUSTRY OVERVIEW
The global telecommunications industry has dramatically changed during
the past several years, beginning in the U.S. with AT&T Corp.'s ("AT&T")
divestiture of its 22 regional operating companies ("RBOCs") in 1984 and
culminating with the recently enacted amendments to the U.S. Communications
Act of 1934 (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 Telecommunications PLC ("British Telecom"). As a
result of the AT&T divestiture and the recent legislative changes in the
U.S. and fundamental 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
Federal Communications Commission ("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 Telecommunications Corporation ("MCI") and
Sprint Corp. ("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.) ("WorldCom"), 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 Communications Inc. ("Unitel"), Sprint Canada (a
subsidiary of Call-Net Telecommunications Inc.) 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
<pound-sterling>1.4 billion, <pound-sterling>2.1 billion and
<pound-sterling>2.2 billion, respectively, in revenues during the 12 months
ended March 31, 1995, accordingly to estimates from The Office of
Telecommunications ("Oftel"), the U.K. telecommunications regulatory
authority. 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 Communications Ltd. ("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 an emerging market of licensed public
telephone operators, such as Energis Communications Ltd., (''Energis'') and
switched-based resellers such as ACC U.K., AT&T, WorldCom, 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 or "competitive access providers" ("CAPs") such as
Teleport or MFS Communications Co., Inc. ("MFS"), 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 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 its
ownership of switches reduces its 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. 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 Local Access and Transport Areas
("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 have issued rulings which favored competition and promoted
the opening of markets to new entrants. These rulings have 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 Canadian Radio-television and
Telecommunications Commission ("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 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 and upgrade its
existing 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 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 the Risk Factor discussion of "Increasing Domestic and
International Competition'' in this Item 1 below.
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'')
through 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 <pound-sterling>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 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 130 contracts with colleges and universities in its three
geographic regions, of which approximately 100 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
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 PSTN at both ends between the U.S. and Canada, the U.S.
and the 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,
as described below. The 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:
<PAGE>
<TABLE>
<CAPTION>
CUSTOMER ACCOUNTS AS
OF DECEMBER 31,
1995 1994
United UNITED 1995 UNITED UNITED 1994
STATES Canada KINGDOM TOTAL STATES Canada KINGDOM TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial 10,858 22,685 11,938 45,481 9,397 16,940 794 27,131
Residential 20,909 100,239 14,825 135,973 19,979 53,103 517 73,599
Student 81,950 29,580 17,831 129,361 59,213 33,492 9,556 102,261
Total 113,717 152,504 44,594 310,815 88,589 103,535 10,867 202,991
</TABLE>
During each of the last three years, no customer accounted for 10%
or more of the Company's total revenue.
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.''
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, a number of which 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 certain
European countries on a wholesale basis. In October 1995, the Company
entered into a co-marketing arrangement with London Electric 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.
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 auto dialing equipment, indirect access code
dialing or least cost routing software integrated in the customer's
telephone equipment.
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 a consultant and a vendor 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
overruns in the implementation of the new information systems or that the
new systems will be appropriate for the Company. See the Risk Factor
discussion of "Dependence on Effective Information Systems'' in this Item 1
below.
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 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%, 7% 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
the Risk Factor discussions of "Potential Adverse Effects of Regulation"
and "Increasing Domestic and International Competition'' and the discussion
of ''Regulation" all in this Item 1 below.
Competition in the long distance industry is based upon pricing,
customer service, network quality, value-added services and customer
relationships. 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 principally from calls originated in New York and
Massachusetts). 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 Company ("New York Telephone"),
Frontier Corp., AT&T, Citizens Telephone Co., MFS, 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 Corporation ("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 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 Decree (the "AT&T
Divestiture Decree") (and similar antitrust restrictions on the GTE
Operating Companies) 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 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
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 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. Under the Telecommunications Act of 1996, the Company
may become subject to many of the same obligations to which the RBOCs and
other telecommunications providers are subject in their provision of local
exchange services, such as resale, dialing parity and reciprocal
compensation.
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 ''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. Relevant state public
service commissions ("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 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.
Under the Telecommunications Act of 1996, incumbent local exchange
companies such as New York Telephone and Frontier must allow the
resale of both bundled local exchange services (known as "loops") as well
as unbundled local exchange "elements" (known as "links" and "ports"). The
NYPSC is currently conducting a proceeding to establish rates for those
services under pricing formulas set forth in the new federal legislation.
The Company generally intends to provide local service through the resale
of unbundled links rather than through the resale of bundled loops.
Accordingly, the outcome of the NYPSC proceeding, including decisions
regarding the pricing of bundled loops and unbundled links, could affect
the Company's competitive standing as a local service provider in relation
to larger companies, such as AT&T and MCI, which may initially enter the
local service market through resale of bundled loops.
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. In addition to
the proceedings referred to below, the CRTC continues to take steps toward
increased competition, including proceedings relating to the convergence
between telecommunications and broadcasting.
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.
In December 1991, the CRTC permitted the resale on a
joint-use basis of the international private line services of
Teleglobe Canada to provide interconnected voice services.
Resellers are subject to charges levied by
Teleglobe Canada for the use of its facilities and contribution charges
payable to Teleglobe Canada and remitted to the telephone companies. In
September 1993, the CRTC allowed Teleglobe Canada to restructure its
overseas MTS to allow domestic service providers (including resellers) who
commit to a minimum level of usage to interconnect with Teleglobe Canada's
international network at its gateways for the purpose of providing outbound
direct-dial telephone service. Overseas inbound traffic would be allocated
to Stentor and other domestic service providers (including resellers) in
proportion to their outbound market shares.
In February 1996, the CRTC introduced a regime of price regulation
for Teleglobe Canada's services to
be in effect from April 1996 to December 1999, barring any exceptional
changes to Teleglobe Canada's operating environment. Under this regime,
Teleglobe Canada must reduce prices on an annual basis for its telephone
and Globeaccess VPN Services, and must adhere to a price ceiling for most
of its regulated non-telephone services. These rate reductions will have
the effect of reducing the price the Company can charge its customers.
The Canadian federal government is currently conducting a review to determine
whether to extend Teleglobe Canada's status as the monopoly
transmission facilities-based provider of Canada-overseas
telecommunications services beyond March 1997.
In June 1992, the CRTC effectively removed the monopoly rights of
certain Stentor member companies 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 December 1993, the CRTC gave permission to Bell Canada to file
proposed tariffs for local rates for business customers--including
resellers--which would make rates dependent on the number of outgoing calls
made. Outgoing calls exceeding a threshold would be charged on a per-
minute basis. The threshold would not apply to the customer's incoming
traffic. The threshold would vary by rate group bands to take into account
usage differences. Bell Canada has recently filed proposed tariffs which
would give business customers the option of choosing local measured service
or flat rate service.
As contemplated in the CRTC's June 1992 decision, initial
implementation of single carrier 800 number portability occurred in Canada
in January 1994 and 800 number multi-carrier selection capability has
recently been approved on an interim basis.
In April 1994, the CRTC initiated a proceeding to consider whether
there should be a balloting process to permit customers to select a long
distance service provider. In June 1995, the CRTC rejected the proposal
for a balloting process. However, in August 1994, it directed the major
telephone companies to include a customer bill insert from the CRTC during
the fall of 1994 providing a message about equal access and the
customers' ability to select an alternate toll service provider.
In July 1994, the CRTC modified the rules governing the consideration
of new toll services to be offered by telephone companies and of rate
reductions for their existing services to require the telephone companies
to show that the revenues (or the average revenue per minute) for each
service equal or exceed the sum of causal costs and contribution amounts
for the service.
In November 1994, the CRTC varied certain elements of its Phase III
costing procedures. These procedures are used to enable the CRTC to
identify the costs and revenues of the dominant telephone companies
associated with various categories of their services, in order, among other
things, to identify the extent and nature of any cross-subsidies which may
exist among those categories. The net effect of these Phase III changes
was to lower contribution payments.
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
bottleneck services (i.e., essential services which competitors are
required to obtain from Stentor members) 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 bottleneck services
and would be 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 forbear 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 and
certain telephone company services); (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.
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, based on existing and anticipated regulations and rulings,
its Canadian contribution charges will increase by up to approximately
Cdn. $2 million in 1997 over 1995 levels, which the Company will seek to
offset with increased volume efficiencies.
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 the
Risk Factors discussion of "Dependence on Transmission Facilities-Based
Carriers and Suppliers'' in this Item 1 below.
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 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).
Oftel has imposed mandatory price reductions on British Telecom which
are expected to continue through at least 1997 and this has had, and may
have, the effect of reducing the prices the Company can charge its
customers in order to remain competitive.
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. The DTI has, to date, designated the U.K., the U.S.,
Canada, Australia, Sweden, New Zealand and Finland for international simple
resale traffic. The designation of a country by the DTI implies that the
DTI has determined that the designated country has an equivalent regulatory
framework that would permit the receipt of terminating traffic. In some
cases, legislative approval of the extension of the ISR License by the
designated country may be required. The Company presently utilizes the
license primarily for traffic between the U.K., the U.S. and 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
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 the Risk Factor discussion of "Substantial
Indebtedness; Need for Additional Capital'' in this Item 1 below and
''Management's Discussion and Analysis of Financial Condition and Results
of Operations'' in Item 7 of this Report.
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.
RISK FACTORS
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. The 1995 net loss of
$5.4 million resulted primarily from the expansion of operations in the
U.K. (approximately $6.8 million), increased net interest expense
associated
with additional borrowings (approximately $4.9 million), increased
depreciation and amortization from the addition of equipment and costs
associated with the expansion of local service in New York State
(approximately $1.6 million) and management restructuring costs
(approximately $1.3 million), offset by positive operating income from
the U.S. and Canadian long distance subsidiaries of approximately
$9.0 million. The 1994 net loss of $11.3 million resulted primarily from
operating losses due to expansion in the U.K. (approximately $5.6 million),
the recording of the valuation allowance against deferred tax benefits
(approximately $3.0 million), implementation of equal access in Canada
(approximately $2.2 million) and operating losses due to expansion in local
telephone service in the U.S. (approximately $0.9 million). 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. In addition, to the extent that these and other long
distance carriers are less creditworthy, such sales may represent a higher
credit risk to the Company. See the Risk Factor discussion below of
"Risks Associated With Acquisitions, Investments and Strategic Alliances''
in this Item 1 and ''Management's Discussion and Analysis of Financial
Condition and Results of Operations'' in Item 7 of this Report.
SUBSTANTIAL INDEBTEDNESS; 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 each
of its last five fiscal years, the Company has experienced a working
capital deficit. During 1995, the Company's income from operations plus
depreciation and amortization ("EBITDA") minus capital expenditures and
changes in working capital was $(7.0) million. The Company is highly
leveraged.
The Company's leverage may adversely affect its ability to raise additional
capital. 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 the
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 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 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 its 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'' in Item 7 of this Report.
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,
Bell Canada and 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 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 in or termination of 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 from the 22 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 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 the Risk
Factor discussion of "Potential Adverse Effects of Regulation'' below and
the discussion of "Regulation'' above in this Item 1. The Company currently
acquires switches used in its North American operations from one vendor.
The Company purchases switches from such vendor for its convenience and
switches of comparable quality may be obtained from several alternative
suppliers. However, 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.
POTENTIAL ADVERSE EFFECTS OF REGULATION
Legislation that substantially revises 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 and
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 FCC and relevant state 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, 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.
The Company currently competes with the RBOCs and other local exchange
carriers in the provision of ''short haul'' toll calls completed within a
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 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 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 the discussion "Business-Regulation'' above in this Item 1.
INCREASING DOMESTIC AND INTERNATIONAL 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%, 7% 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 existing 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, AT&T, MCI and Sprint in the U.S.; Bell
Canada, BC Telecom, Inc., Unitel and Sprint Canada (a subsidiary of Call-
Net Telecommunications Inc.) in Canada; and British Telecom, Mercury, AT&T
and WorldCom in the U.K. 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 upstate New York, the Company
competes with New York Telephone, Frontier Corp., Citizens Telephone Co.,
MFS and Time Warner Cable and others, including cellular and other wireless
providers. 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, 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 both the local service and long distance
telecommunications markets. 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''
in Item 7 of this Report and the discussion ''Business-Competition'' above
in this Item 1.
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.
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 in 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 collecting accounts
receivable, political risks, fluctuations in currency exchange rates,
foreign exchange controls which restrict or prohibit repatriation of funds,
technology export and import restrictions or prohibitions, delays from
customs 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. A vendor of the
Company's software, which formerly was an affiliate of the Company, has a
unique knowledge of certain of the Company's 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 the discussion ''Business-Information Systems''
above in this Item 1.
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. As of the date of this Report, 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 discussed above under "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.
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 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
the discussion ''Business-Acquisitions, Investments and Strategic
Alliances'' above in this Item 1.
TECHNOLOGICAL CHANGES MAY ADVERSELY AFFECT COMPETITIVENESS AND FINANCIAL
RESULTS
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.
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, and the Company
anticipates that it will not pay any dividends on Class A Common Stock
in the foreseeable future.
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. See
the Risk Factor discussion above under ''Substantial Indebtedness; Need for
Additional Capital'' and ''Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital
Resources'' in Item 7 of this Report.
HOLDING COMPANY STRUCTURE; RELIANCE ON SUBSIDIARIES FOR DIVIDENDS
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 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 may continue
to be highly volatile. See the discussion under Item 5 of this Report,
"Market for Registrant's Common Equity and Related Shareholder Matters."
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.
RISKS ASSOCIATED WITH DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Company uses various financial
instruments, including derivative financial instruments, to hedge its
foreign exchange and interest rate risks. The Company does not use
derivative financial instruments for speculative purposes. By their
nature, all such instruments involve risk, including the risk of
nonperformance by counterparties, and the Company's maximum potential loss
may exceed the amount recognized on the Company's balance sheet.
Accordingly, losses relating to derivative financial instruments could have
a material adverse effect upon the Company's business, financial condition
and results of operations. See ''Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 of this Report.
ITEM 2. PROPERTIES.
The Company's principal executive offices are located at 400 West
Avenue, Rochester, New York in corporate office space leased through June
2004. It also leases office space for its Canadian headquarters in
Toronto, Canada, and for its U.K. headquarters in London, England, as well
as office space at various other locations. For additional information
regarding these leases, see Notes 8 and 10 to the Company's Consolidated
Financial Statements contained herein.
The Company has eight switching centers worldwide. The Company's
switching equipment for the Rochester call origination area is located at
its headquarters at 400 West Avenue, Rochester, New York with additional
switching equipment located in Syracuse, New York, in Toronto, Ontario,
Montreal, Quebec, and Vancouver, British Columbia, and in London and
Manchester, England, all of which sites are leased. Branch sales offices
are leased by the Company at various locations in the northeastern U.S.,
Canada and the U.K. The Company also leases equipment and space located at
various sites in its service areas.
The Company's financing arrangements are secured by substantially all
of the Company's assets. The Company's secured lenders would be entitled
to foreclose upon those assets and to be repaid from the proceeds of the
liquidation of those assets in the event of a default under the financing
arrangements.
ITEM 3. LEGAL PROCEEDINGS.
There were no material legal proceedings pending at December 31, 1995
involving the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
The Company's Class A Common Stock is quoted on The Nasdaq Stock
Market's National Market System 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:
Cash
Dividends
COMMON STOCK PRICE Declared
HIGH LOW PER SHARE
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
March 25, 1996) $ 30 1/4 $22 1/4 ---
On March 1, 1996, the closing price for the Company's Class A Common
Stock in trading on The Nasdaq Stock Market was $28.50 per share, as
published in The Wall Street Journal. As of March 1, 1996, the Company had
approximately 456 holders of record of its 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 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 the Risk Factor discussions of "Holding Company
Structure; Reliance on Subsidiaries for Dividends" in Item 1 of this Report
and Note 5 of the Notes to the Company's Consolidated Financial Statements
contained in Item 8 of this Report.
ITEM 6. SELECTED FINANCIAL 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 public
accountants, are included elsewhere in this Report. The following data
should be read in conjunction with, and are 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 in Items 8 and 7 of this Report, respectively.
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C> <C> <C> <C> <C>
1995 (1) 1994 1993 1992 1991
(Dollars in thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Toll revenue $ 175,269 $ 118,331 $ 100,646 $ 78,988 $ 49,563
Leased lines and other 13,597 8,113 5,300 2,692 1,563
Total revenue 188,866 126,444 105,946 81,680 51,126
Network costs 114,841 79,438 70,286 52,314 32,343
Gross profit 74,025 47,006 35,660 29,366 18,783
Other operating expenses:
Depreciation and amortization 11,614 8,932 5,832 3,919 2,764
Selling expenses 21,617 14,497 8,726 3,350 2,295
General and administrative 39,248 29,731 20,081 16,309 10,278
Management restructuring 1,328 - - - -
Equal access charges (2) - 2,160 - - -
Asset write-down (3) - - 12,807 - -
Total other operating expenses 73,807 55,320 47,446 23,578 15,337
Income (loss) from operations 218 (8,314) (11,786) 5,788 3,446
Other income (expense):
Interest income 198 124 205 276 39
Interest expense (5,131) (2,023) (420) (197) (240)
Terminated merger costs - (200) - - -
Gain on sale of subsidiary stock - - 9,344 - -
Foreign exchange gain (loss) (110) 169 (1,094) - -
Total other income (expense) (5,043) (1,930) 8,035 79 (201)
Income (loss) from continuing operations
before provision for (benefit from)
income taxes and minority interest (4,825) (10,244) (3,751) 5,867 3,245
Provision for (benefit from) income taxes 396 3,456 (3,743) 2,267 1,155
Minority interest in loss (earnings) of
consolidated subsidiary (133) 2,371 1,661 - -
Income (loss) from continuing operations (5,354) (11,329) 1,653 3,600 2,090
Loss from discontinued operations (net of income
tax benefit of $616 in 1991, $878 in 1992 and $667
in 1993) - - (1,309) (1,660) (1,197)
Gain on disposal of discontinued operations
(net of income tax provision of $8,350 in 1993) - - 11,531 - -
Net income (loss) $ (5,354) $(11,329) $ 11,875 $ 1,940 $ 893
Net income (loss) per common and common
equivalent share applicable to common stock
from continuing operations (4) $ (.76) $ (1.60) $ .24 $ .52 $ .36
Discontinued operations - - (.18) (.24) (.21)
Gain on disposal of discontinued operations - - 1.64 - -
Net income (loss) per common and
common equivalent share (4) $ (.76) $ (1.60) $ 1.70 $ .28 $ .15
Weighted average number of common shares 7,789,886 7,068,481 7,024,925 6,882,033 5,801,769
(TABLE CONTINUED, AND FOOTNOTES APPEAR, ON NEXT PAGE)
CONSOLIDATED BALANCE SHEET DATA (5):
Cash and cash equivalents $ 518 $ 1,021 $ 1,467 $ 353 $ 327
Current assets 45,726 28,045 22,476 16,251 11,120
Current liabilities 56,074 32,016 23,191 27,889 12,577
Net working capital (deficit) (10,348) (3,971) (715) (11,638) (1,457)
Property, plant and equipment, net 56,691 44,081 27,077 21,951 15,794
Total assets 123,984 84,448 61,718 45,450 29,292
Short-term debt, including current maturities of
long term debt 4,885 1,613 2,424 11,525 3,071
Long-term debt, excluding current maturities 28,050 29,914 1,795 12,747 6,111
Redeemable preferred stock 9,448 - - - -
Shareholders' equity 26,407 19,086 31,506 22,711 21,670
OTHER FINANCIAL DATA:
Class A Common Stock cash dividends
declared(6) $ 243 $ 831 $ 4,233 $ 735 $ 628
Cash dividends declared per share of Class A
Common Stock(6) $ .03 $ .12 $ .62 $ .11 $ .11
</TABLE>
(1) Includes the results of operations of Metrowide Communications
from August 1, 1995, the date of acquisition.
(2) Represents $2,160 of charges incurred in 1994 in
connection with enhancement of the Company's network to prepare for
equal access for its Canadian customers.
See ''Management's Discussion and Analysis of Financial Condition
and Results of Operations-1995 Compared With 1994''
in Item 7 of this Report.
(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'' in Item 7 of this Report.
(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) Balance sheet data from discontinued operations is excluded.
(6) The Company's financing arrangements restrict the payment of
dividends on the Class A Common Stock. The Company anticipates
that it will not pay such dividends in the foreseeable future.
See Item 5, "Market for Registrant's Common Equity and Related
Shaerholder Matters" above in this Report.
<PAGE>
ITEM 7. 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
THE DISCUSSION OF ''RISK FACTORS'' IN ITEM 1 OF THIS REPORT AND THE COMPANY'S
PERIODIC REPORTS FILED WITH THE SEC.
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 1995, 1994 and 1993:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
AMOUNT Percent AMOUNT Percent AMOUNT Percent
(Dollars and minutes in thousands)
TOTAL REVENUE:
<S> <C> <C> <C> <C> <C> <C>
United States $ 65,975 34.9% $ 54,599 43.2% $ 45,150 42.6%
Canada 84,421 44.7 67,728 53.6 60,643 57.2
United Kingdom 38,470 20.4 4,117 3.2 153 .2
Total $188,866 100.0% $126,444 100.0% $ 105,946 100.0%
BILLABLE MINUTES OF USE:
United States 486,618 41.2% 445,619 50.5% 378,778 55.5%
Canada 522,764 44.2 422,149 47.8 304,295 44.5
United Kingdom 172,281 14.6 15,225 1.7 - -
Total 1,181,663 100.0% 882,993 100.0% 683,073 100.0%
</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 1995, 1994 and
1993:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Toll Revenue Per Billable Minute:
United States $.126 $.115 $.115
Canada .146 .149 .187
United Kingdom .220 .268 -
NETWORK COST PER BILLABLE MINUTE:
United States $.075 $.070 $.070
Canada .100 .108 .143
United Kingdom .149 .177 -
</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.
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 the Risk Factor discussions of "Potential Adverse
Effects of Regulation'' and "Increasing Domestic and International
Competition" in Item 1 of this Report.
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, based on existing
and anticipated regulations and rulings, its Canadian contribution
charges will increase by up to approximately Cdn. $2 million in 1997
over 1995 levels, which the Company will seek to offset with
increased volume efficiencies. 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'' in Item 1 of
this Report. 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 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 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%, 7% 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" in Item 1 of
this Report.
<PAGE>
RESULTS OF OPERATIONS
The following table presents, for the three years ended December
31, 1995, certain statement of operations data expressed as a
percentage of total revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995(1) 1994 1993
<S> <C> <C> <C>
Revenue:
Toll revenue 92.8% 93.6% 95.0%
Leased lines and other 7.2 6.4 5.0
Total revenue 100.0 100.0 100.0
Network costs 60.8 62.8 66.3
Gross profit 39.2 37.2 33.7
Other operating expenses:
Depreciation and amortization 6.1 7.1 5.5
Selling expenses 11.4 11.5 8.2
General and administrative 20.8 23.5 19.0
Management restructuring 0.7 - -
Equal access charges - 1.7 -
Asset write-down - - 12.1
Total other operating expenses 39.0 43.8 44.8
Income (loss) from operations .2 (6.6) (11.1)
Total other income (expense) (2.7) (1.5) 7.6
Loss from continuing operations before provision for (benefit from) income
taxes and minority interest (2.5) (8.1) (3.5)
Provision for (benefit from) income taxes 0.2 2.7 (3.5)
Minority interest in (earnings) loss of consolidated subsidiary (0.1) 1.9 1.6
Income (loss) from continuing operations (2.8)% (8.9)% 1.6%
</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 primarily a result of increased revenue attributable
to other U.S. carriers (approximately $5.8 million),
commercial (approximately $33.8 million), residential
(approximately $3.6 million) and student (approximately
$10.5 million) 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 of customer accounts from
approximately 104,000 to 153,000), 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 revenues per minute on a consolidated
basis 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 from
approximately 11,000 to 45,000), 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%.
During 1995, customer accounts increased from 88,589 to
113,717 in the U.S.; from 103,535 to 152,504 in Canada;
and from 10,867 to 44,594 in the U.K. See the discussion
under "Business-Sales and Marketing" in Item 1 above in
this Report.
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 (approximately $2.9
million from the date of acquisition through year end),
local service revenue (approximately $1.5 million)
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 contribution charges in Canada and increased
volume efficiencies in the U.K. Contribution charges
represented 5.2% of revenue in 1995 as compared to 10.1%
in 1994. These efficiencies were partially offset by
reduced margins in the U.S. due to increased carrier
traffic.
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 of
approximately $0.4 million 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 (approximately $1.7
million) and the U.K. (approximately $5.6 million).
General and administrative expenses for 1995 were $39.2
million compared with $29.7 million in 1994. Expressed as
a percentage of revenue, general and administrative
expenses were 20.8% for 1995, compared to 23.5% in 1994.
The increase in general and administrative
expenses was primarily attributable to a $9.5 million
increase in personnel and customer service costs
associated with the growth of the Company's
customer bases and geographic expansion in each country.
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.
The Company also incurred in 1995 non-recurring
costs of $1.3 million related to management
restructuring. These costs consisted of a $0.8
million payment in consideration of a non-compete
agreement with the Chairman of the Board which was
negotiated and agreed to in connection with his
resignation as Chief Executive Officer. The remaining
$0.5 million related to severance expenses relating to
three other members of executive management, the terms of
which were negotiated at the time of the executives'
departures based on their existing agreements with the
Company. In connection with the departure of one
executive, the vesting schedule for options to purchase
16,150 shares of Class A Common Stock (out of the options
to purchase a total of 33,600 shares which had been
granted to the executive) were accelerated to allow him to
exercise the options.
During the third quarter of
1994, the Company initiated the process of enhancing its
network to prepare for equal access for its Canadian
customers. "Equal access" allows customers to place a
call over the Company's network simply by dialing "1"
plus the area code and telephone number. Before equal
access was available, the Company needed to install a
"dialer" on its customers' premises or require the
customer to dial an access code before placing a long
distance call.
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.
This network enhancement, the
costs of which are non-recurring, will enable the Company
to offer a broader range of services to Canadian
customers and increase customer convenience in using
the Company's telecommunications services.
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
weighted
average borrowings on revolving lines of credit
(approximately $3.1 million) 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 (approximately $0.3 million)
related to the Company's lines of credit which were
refinanced in July 1995, debt service costs
associated with 12% subordinated notes issued in May 1995
(approximately $0.4 million), and contingent interest
associated with the Credit Facility (approximately
$0.3 million). 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.
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.
The Company's net loss for 1995 was $5.4 million,
compared to $11.3 million in 1994. The 1995 net loss
resulted primarily from the expansion of operations in
the U.K. (approximately $6.8 million), increased net
interest expense associated with additional
borrowings (approximately $4.9 million), increased
depreciation and amortization from the addition of
equipment and costs associated with the expansion of local
service in New York State (approximately $1.6 million)
and management restructuring costs (approximately
$1.3 million), offset by positive operating income from
the U.S. and Canadian long distance subsidiaries of
approximately $9.0 million.
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. For a discussion of the
Company's affinity programs, see the discussion under
"Business-Sales and Marketing" in Item 1 of this Report.
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%. During 1994, customer
accounts increased from 50,287 to 88,589 in the U.S.;
from 45,615 to 103,535 in Canada; and from 2,000 to
10,867 in the U.K.
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 in Canada
through economies of scale and a more favorable mix of
traffic from increased residential and student usage
during off peak hours, which combined to decrease network
costs by 4.4% of total consolidated revenue.
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 (approximately $19.3 million) 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 (approximately $5.2 million) and increased on-
site equipment at universities in the U.S. (approximately
$2.9 million).
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
attributable in part to the aggressive expansion of the
Company's marketing territory into Western Canada,
including the expansion following the installation of a
switch in Vancouver, British Columbia and the opening of
sales offices in Calgary, Alberta and Winnipeg, Manitoba
(approximately $0.3 million) and the start-up of a
nationwide marketing campaign in the U.K. during the
second half of 1994 (approximately $0.5 million). 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 (approximately $5.1 million)
and customer service costs (approximately $0.6 million)
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.
The Company's net loss for 1994 was $11.3 million
compared to net income of $11.9 million in 1993. The
1994 net loss resulted primarily from operating losses
due to expansion in the U.K. (approximately $5.6
million), the recording of the valuation allowance
against deferred tax benefits (approximately $3.0
million), implementation of equal access in Canada
(approximately $2.2 million) and operating losses due to
expansion in local telephone service in the U.S.
(approximately $0.9 million). The 1993 net income was
primarily attributable to the gain on the sale of the
Company's cellular assets.
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). The proceeds from the 1995 issuances
of Class A Common Stock and notes were used to reduce
indebtedness and for working capital and capital
expenditures. In July 1995, the Company entered into the
five-year $35.0 million Credit Facility.
Net cash flows generated by operations was $1.1 million
and $4.0 million during 1994 and 1995, respectively. The
increase of approximately $2.9 million in the cash flow
provided by operating activities during 1995 versus 1994
was primarily attributable to the improved financial
performance of ACC Canada during 1995 in comparison to
1994 and an increase in accounts receivable resulting
from the expansion in the Company's customer base and
related revenues which was partially offset by a decline
in other receivables. If additional competition were to
result in significant price reductions that are not
offset by reductions in network costs, net cash flows
from operations would be materially adversely affected.
Net cash flows used in investing activities was $21.0
million and $15.3 million during 1994 and 1995,
respectively. The decrease of approximately $5.7 million
in net cash flow used in investing activities during 1995
versus 1994 was principally attributable to a decrease in
capital expenditures incurred by the Company, which was
partially offset by the use of cash flow in connection
with the Metrowide Communications acquisition.
Accounts receivable increased by $18.5 million
during 1995 as a result of the expansion of the Company's
customer base due to sales and marketing efforts, the
Metrowide Communications acquisition and a customer base
acquisition. Sales to customers in Canada and the U.K.
in 1995 represented approximately 65.1% of total revenues,
as opposed to 56.8% in 1994. Account balances from the
Company's customers in Canada and the U.K. are typically
outstanding longer than those in the U.S. market. In
addition, the Company acquired approximately $0.9 million
of Canadian accounts receivable in 1995 without a
corresponding increase in revenues as a result of the
Metrowide Communications acquisition. The Company's
sales to other carriers (which typically pay more slowly
than other customers of the Company) also increased
during 1995. Accounts receivable, expressed as a
percentage of total revenue, increased to 20.6% for 1995
from 16.2% in 1994.
The acquisition of Metrowide Communications was
accounted for as a purchase and resulted in the
allocation of approximately $5.0 million to goodwill,
which will be amortized over five years from the date of
acquisition. Accounts payable decreased by $3.2 million
during 1995, principally as a result of the payment of an
accrued payable which existed at December 31, 1994
relating to a capital project completed during 1995.
Accrued network costs increased by $17.7 million during
1995, principally as a result of the incurrence of costs
relating to the leasing and usage of transmission facilities
in order to accommodate actual and potential future
growth in the Company's customer base, particularly in
the U.K. Accrued network costs also increased due to
delays in billing by British Telecom in the U.K.
Other accrued expenses increased by $6.4 million during
1995. This increase was primarily related to an increase
in accrued taxes of approximately $2.6 million, an increase
in accrued commissions, compensation and benefits of
approximately $1.3 million, an increase in accruals relating
to customers and service providers of approximately
$0.8 million, and an increase in recurring general business
accruals of approximately $1.7 million.
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 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. 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 ($0.6 million has been accrued
through March 1, 1996).
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.
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 $2.5
million per quarter commencing on July 1, 1997 and by
$2.9 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, as
required by the terms of 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 6.25% 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 $1.1 million
(after the February 1996 payment)
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.
In the normal course of business, the Company uses
various financial instruments, including derivative
financial instruments, for purposes other than trading.
These instruments include letters of credit, guarantees
of debt, interest rate swap agreements and foreign
currency exchange contracts relating to intercompany
payables of foreign subsidiaries. The Company does not
use derivative financial instruments for speculative
purposes. Foreign currency exchange contracts are used
to mitigate foreign currency exposure and are intended to
protect the U.S. dollar value of certain currency
positions and future foreign currency transactions. The
aggregate fair value, based on published market exchange
rates, of the Company's foreign currency contracts at
December 31, 1995 was $24.5 million. Interest rate swap
agreements are used to reduce the Company's exposure to
risks associated with interest rate fluctuations. The
Company was party to interest rate swap agreements at
December 31, 1995 which had the effect of converting
interest in respect of $11.5 million principal amount of
the Credit Facility to a fixed rate. As is customary for
these types of instruments, collateral is generally not
required to support these financial instruments.
By their nature, all such instruments involve risk,
including the risk of nonperformance by counterparties,
and the Company's maximum potential loss may exceed the
amount recognized on the Company's balance sheet.
However, at December 31, 1995, in management's opinion
there was no significant risk of loss in the event of
nonperformance of the counterparties to these financial
instruments. The Company controls its exposure to
counterparty credit risk through monitoring procedures
and by entering into multiple contracts, and management
believes that reserves for losses are adequate. Based
upon the Company's knowledge of the financial position of
the counterparties to its existing derivative
instruments, the Company believes that it does not have
any significant exposure to any individual counterparty
or any major concentration of credit risk related to any
such financial instruments.
The Company believes that, under its present
business plan, the net proceeds from a public offering of
up to 2,012,500 shares of its Class A Common Stock for
which the Company has filed a Registration Statement on
Form S-3 with the SEC, 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'' in Item 1 of
this Report. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
SUPPLEMENTAL INFORMATION: SELECTED QUARTERLY FINANCIAL
DATA
The following table sets 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.
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
1995 1994
MAR. 31 June 30 Sep. 30 Dec. 31 Mar. 31 June 30 Sep. 30 Dec. 31
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $39,708 $41,633 $45,911 $61,607 $32,335 $28,807 $28,409 $36,893
Gross profit 14,963 15,319 17,806 25,929 11,970 9,933 10,660 14,443
Depreciation and
amortization 2,532 2,863 3,011 3,212 1,960 2,107 2,259 2,640
Income (loss) from
operations (446) (855) (364) 1,876 955 (1,808) (6,005) (1,490)
Total other income
(expense) (948) (1,473) (1,354) (1,265) (277) (243) (706) (670)
Net income (loss) $ (1,654) $ (2,250) $(1,849) $ 395 $ 346 $ (1,024) $ (8,456) $ (2,195)
Net income (loss) per
common and common
equivalent share $ (0.23) $ (0.29) $ (0.24) $ (0.00) $ 0.05 $ (0.15) $ (1.20) $ (0.30)
</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" in
Item 1 of this Report.
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 enhancing its
network to prepare for the introduction of equal
access for its Canadian customers. The
acquisition of Metrowide Communications and the
management restructuring charges in 1995, and
the Canadian equal access costs in 1994, affect
the comparability of the quarterly financial
data set forth above. See "Management's
Discussion and Analysis, Results of
Operations-1995 Compared With 1994-Other
Charges" above in Item 7 of this Report.
<PAGE>
FINANCIAL STATEMENTS
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.
Rochester, New York /s/ARTHUR ANDERSEN LLP
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)
<PAGE>
<TABLE>
<CAPTION>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
1995 1994
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 518 $ 1,021
Restricted cash --- 272
Accounts receivable, net of allowance for doubtful accounts of $1,035
in 1994 and $2,085 in 1995 38,978 20,499
Other receivables 3,965 5,433
Prepaid expenses and other assets 2,265 820
Total current assets 45,726 28,045
Property, plant and equipment:
At cost 83,623 62,618
Less-accumulated depreciation and amortization (26,932) (18,537)
56,691 44,081
Other assets:
Restricted cash --- 157
Goodwill and customer base, net 14,072 6,884
Deferred installation costs, net 3,310 1,639
Other 4,185 3,642
21,567 12,322
Total assets $ 123,984 $ 84,448
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these balance sheets.
<PAGE>
<TABLE>
<CAPTION>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
December 31, DECEMBER 31,
1995 1994
<S> <C> <C>
Current liabilities:
Notes payable $ 1,966 $ -
Current maturities of long-term debt 2,919 1,613
Accounts payable 7,340 10,498
Accrued network costs 28,192 10,443
Other accrued expenses 15,657 9,254
Dividends payable - 208
Total current liabilities 56,074 32,016
Deferred income taxes 2,577 2,170
Long-term debt 28,050 29,914
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 1,428 1,262
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 129 115
Class B Common Stock, $.015 par value, Authorized-25,000,000 shares;
Issued-no shares - -
Capital in excess of par value 32,911 20,070
Cumulative translation adjustment (950) (1,013)
Retained earnings (deficit) (4,073) 1,524
28,017 20,696
Less-
Treasury stock, at cost (726,589 shares) (1,610) (1,610)
Total shareholders' equity 26,407 19,086
Total liabilities and shareholders' equity $ 123,984 $ 84,448
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
<PAGE>
<TABLE>
<CAPTION>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
<S> <C> <C> <C>
Revenue:
Toll revenue $175,269 $118,331 $100,646
Leased lines and other 13,597 8,113 5,300
Total revenue 188,866 126,444 105,946
Network costs 114,841 79,438 70,286
Gross profit 74,025 47,006 35,660
Other Operating Expenses:
Depreciation and amortization 11,614 8,932 5,832
Selling expenses 21,617 14,497 8,726
General and administrative 39,248 29,731 20,081
Management restructuring 1,328 - -
Equal access costs - 2,160 -
Asset write-down - - 12,807
Total other operating expenses 73,807 55,320 47,446
Income (loss) from operations 218 (8,314) (11,786)
Other Income (Expense):
Interest income 198 124 205
Interest expense (5,131) (2,023) (420)
Terminated merger costs - (200) -
Gain on sale of subsidiary stock - - 9,344
Foreign exchange gain (loss) (110) 169 (1,094)
Total other income (expense) (5,043) (1,930) 8,035
Loss from continuing operations before provision for (benefit from) income
taxes and minority interest (4,825) (10,244) (3,751)
Provision for (benefit from) income taxes 396 3,456 (3,743)
Minority interest in (earnings) loss of consolidated subsidiary (133) 2,371 1,661
Income (loss) from continuing operations (5,354) (11,329) 1,653
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) (5,354) (11,329) 11,875
Less Series A Preferred Stock dividend (401) - -
Less Series A Preferred Stock accretion (139) - -
Income (loss) applicable to Common Stock $ (5,894) $ (11,329) $11,875
Net income (loss) per common and common equivalent share applicable to
Common Stock from continuing operations $ (.76) $ (1.60) $ 0.24
Discontinued operations - - (.18)
Gain on disposal of discontinued operations - - 1.64
Net Income (Loss) per Common and Common Equivalent Share $ (0.76) $ (1.60) $ 1.70
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
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)
CAPITAL
IN EXCESS CUMULATIVE RETAINED
OF PAR TRANSLATION EARNINGS Treasury
COMMON STOCK VALUE ADJUSTMENT (DEFICIT) STOCK Total
SHARES Amount
<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) $19,086
Stock options exercised 33,525 1 479 - - - 480
Sale of stock 825,000 12 11,084 - - - 11,096
Employee stock purchase plan
shares issued 23,633 - 297 - - - 297
Stock warrants exercised 82,500 1 1,187 - - - 1,188
Stock warrants issued - - 200 - - - 200
Accretion of Series A Preferred
Stock - - (139) - - - (139)
Series A Preferred Stock dividends - - (401) - - - (401)
Acceleration of stock option vesting
due to termination - - 134 - - - 134
Dividends ($.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.
<PAGE>
<TABLE>
<CAPTION>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (5,354) $(11,329) $11,875
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 11,614 8,932 5,832
Deferred income taxes 609 3,906 (3,826)
Minority interest in earnings (loss) of consolidated subsidiary 133 (2,371) (1,661)
Gain on sale of subsidiary stock - - (9,344)
Unrealized foreign exchange loss 180 150 109
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)
Asset write-down - - 12,807
(Increase) decrease in assets:
Accounts receivable, net (17,437) (5,019) (3,184)
Other receivables 1,782 (3,621) (666)
Prepaid expenses and other assets (1,057) 1,030 (1,798)
Deferred installation costs (2,983) (1,147) (1,037)
Other 846 (2,206) (961)
Increase (decrease) in liabilities:
Accounts payable (7,013) 7,784 (607)
Accrued network costs 17,824 1,754 738
Other accrued expenses 4,560 3,230 (3,068)
Net cash provided by (used in) operating activities of:
Continuing operations 3,967 1,093 (13,137)
Discontinued operations - - 1,309
Net cash provided by (used in) operating activities 3,967 1,093 (11,828)
Cash flows from investing activities:
Cash received from sale of discontinued operations - 2,538 41,000
Capital expenditures, net (12,424) (20,682) (17,594)
Payments on notes receivable - - 244
Payment for purchase of subsidiary, net of cash acquired (2,313) - -
Acquisition of customer base (557) (2,861) (2,786)
Net cash provided by (used in) investing activities (15,294) (21,005) 20,864
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings under lines of credit 113,602 72,156 34,658
Repayments under lines of credit (119,204) (47,054) (43,194)
Repayment of long-term debt, other than lines of credit (3,078) (1,591) (10,286)
Repurchase of minority interest - (226) -
Proceeds from issuance of common stock 13,261 189 15,815
Proceeds from issuance of convertible debt 10,000 - -
Financing costs (2,876) - -
Dividends paid (451) (4,241) (816)
Net cash provided by (used in) financing activities 11,254 19,233 (3,823)
Effect of exchange rate changes on cash (430) 233 (20)
Net increase (decrease) in cash from continuing operations (503) (446) 5,193
Cash used in discontinued operations - - (4,080)
Cash and cash equivalents at beginning of year 1,021 1,467 354
Cash and cash equivalents at end of year $ 518 $ 1,021 $ 1,467
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4,146 $ 1,656 $ 1,847
Income taxes $ 203 $ 280 $ 8,633
Supplemental schedule of noncash investing and financing activities:
Equipment purchased through capital leases $ 7,389 $ 3,077 $ 390
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.
<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%
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. TOLL 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. OTHER RECEIVABLES:
Other receivables consist of operating receivables
primarily related to the financing of university projects
(approximating
$3,039,000 and 2,920,000 at December 31, 1995 and 1994,
respectively). Other components include taxes receivable
(approximating $650,000 at December 31, 1995 and
approximately $1,791,000 at December 31, 1994) and other
nominal, miscellaneous receivables (approximating
$276,000 and $722,000 at December 31, 1995 and 1994,
respectively).
E. PROPERTY, PLANT AND EQUIPMENT:
The Company's property, plant and equipment consisted
of the following at December 31, 1994 and 1995 (dollars
in thousands):
1995 1994
Equipment $69,174 $53,700
Computer software and software licenses 6,869 4,648
Other 7,580 4,270
TOTAL $83,623 $62,618
Depreciation and amortization of property, plant and
equipment is computed using the straight-line method over
the following estimated useful lives:
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
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):
1995 1994
Cost $13,935 $7,360
Less-accumulated amortization (4,538) (3,482)
Total, net $ 9,397 $ 3,878
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.
F. 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.
G. 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.
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.
H. COMMON AND COMMON EQUIVALENT SHARES:
Primary earnings per common share are based on the
weighted average number of common shares outstanding
during the year and the assumed exercise of dilutive
stock options and warrants, less the number of treasury
shares assumed to be purchased from the proceeds using
the average market prices of the Company's Class A Common
Stock.
The weighted average number of common shares
outstanding for the fiscal years ended December 31, 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>
1995 1994 1993
<S> <C> <C> <C>
Income (loss) from continuing operations $ (5,354) $(11,329) $1,653
Income from discontinued operations - - 10,222
Net income (loss) (5,354) (11,329) 11,875
Less Series A Preferred Stock dividend (401) - -
Less Series A Preferred Stock accretion (139) - -
Income (loss) applicable to Common Stock $(5,894) $(11,329) $11,875
</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.
I. FOREIGN CURRENCY TRANSLATION:
Assets and liabilities of ACC TelEnterprises Ltd. and
ACC Long Distance UK Ltd., operating in Canada and the
United Kingdom, respectively, are translated into 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.
J. 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.
K. 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.
L. DERIVATIVE FINANCIAL INSTRUMENTS:
The Company uses derivative financial instruments to
reduce its exposure from market risks from changes in
foreign exchange rates and interest rates. The Company
does not hold or issue financial instruments for
speculative trading purposes. The derivative instruments
used are currency forward contracts and interest rate
swap agreements. These derivatives are non-leveraged and
involve little complexity.
The Company monitors and controls its risk in the
derivative transactions referred to above by periodically
assessing the cost of replacing, at market rates, those
contracts in the event of default by the counterparty.
The Company believes such risk to be remote. In
addition, before entering into derivative contracts, and
periodically during the life of the contracts, the
Company reviews the counterparty's financial condition.
The Company enters into contracts to buy and sell
foreign currencies in the future in order to protect the
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.
The Company uses interest rate swaps to effectively
convert variable rate obligations to a fixed rate basis.
The differentials to be received or paid under these
agreements is recognized as an adjustment to interest
expense related to the debt. Gains and losses on
terminations of interest rate swaps are recognized when
terminated in conjunction with the retirement of the
associated debt. The fair value of interest rate swap
agreements is estimated based on quotes from the market
makers of these instruments and represents the estimated
amounts that the Company would expect to receive or pay
to terminate these agreements. The Company's exposure
related to these interest rate swap agreements is limited
to fluctuations in the interest rate. At December 31,
1995, the estimated fair value of these interest rate
swaps was not material (see Note 3).
M. 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.
N. 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.
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 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, 1995 and 1994 (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Senior Credit Facility/Lines of Credit $20,973 $26,602
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 9,996 4,925
Notes payable to previous Metrowide owners, interest rates ranging from
7.5% 1,966 -
to 9%
$32,935 $31,527
Less current maturities (4,885) (1,613)
$28,050 $29,914
</TABLE>
<TABLE>
<CAPTION>
YEAR Amount
(dollars in thousands)
Maturities of debt, including capital lease obligations, are as follows at
December 31, 1995:
<S> <C> <C>
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
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:
Variable FIXED
NOTIONAL BALANCE Rate RATE
$2,000,000 5.938% 5.98%
$7,500,000 5.938% 6.25%
$2,000,000 5.938% 6.02%
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>
1995 1994 1993
<S> <C> <C> <C>
U.S. $ 1,510 $ 1,301 $ 6,177
Non-U.S. (6,335) (11,545) (9,928)
$(4,825) $(10,244) $(3,751)
</TABLE>
Provision for (benefit from) income taxes (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current:
U.S. $ 581 $ (867) -
Non-U.S. - - (410)
$ 581 $(867) ($410)
Deferred:
U.S. (185) 1,298 (865)
Non-U.S. - 3,025 (2,468)
(185) 4,323 (3,333)
$ 396 $3,456 ($3,743)
</TABLE>
Provision for (benefit from) deferred income taxes
(dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Difference between tax and book depreciation and amortization $772 $2,178 ($2,023)
Difference between tax and book basis of assets written down - - (1,298)
Valuation allowance 2,223 6,851 603
Software development costs (502) 502 -
Other temporary differences (103) 171 (12)
Net operating loss (2,575) (5,379) (603)
($ 185) $4,323 ($3,333)
</TABLE>
Reconciliation of U.S. statutory income tax rate to
effective income tax rate:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
U.S. statutory income tax rate (34.0%) (34.0%) (35.0%)
Non-deductible goodwill and customer base 2.7 1.2 20.3
Foreign income taxes, including valuation allowance 44.6 66.6 (2.4)
Gain on sale of subsidiary stock - - (87.2)
State tax benefit (2.4) - -
Other (2.7) - 4.5
Effective income tax rate 8.2% 33.8% (99.8%)
</TABLE>
Deferred income tax assets and liabilities reflect the
net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax
purposes. At December 31, 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.
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>
1995 1994
<S> <C> <C>
Deferred tax assets:
Depreciation and amortization-non-U.S. $1,122 $ 1,472
Other non-deductible reserves and accruals 647 40
Non-U.S. operating loss carryforwards 9,816 5,982
Less-valuation allowance for non-U.S. deferred tax assets (10,938) (7,454)
Net deferred tax assets 647 40
Deferred tax liabilities:
Depreciation and amortization (2,577) (2,170)
$(1,930) $(2,130)
</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.
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 LONG TERM INCENTIVE PLAN:
In October 1994, the Company's shareholders approved
an amendment to the Employee Long Term Incentive 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, and authorized the issuance of
stock incentive rights ("SIRs") thereunder. The exercise
price of the stock options must not be less than the
market value per share at the date of grant, and no
options shall be exercisable after ten years and one day
from the date of grant. Options generally become
exercisable on a pro-rata basis over a four-year period
beginning on the date of grant and 25% on each of the
three anniversary dates thereafter. SIRs represent the
right to receive shares of the Company's Class A Common
Stock without any cash payment to the Company,
conditioned only on continued employment with the Company
through a specified incentive period of at least three
years. At December 31, 1995, no SIRs had been awarded
under the plan.
<PAGE>
Changes in the status of the plan during 1995, 1994,
and 1993 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Options outstanding at beginning of year 785,250 464,125 531,000
Options granted 341,944 655,000 145,000
Options exercised (33,525) (102,375) (87,375)
Options forfeited (22,750) (231,500) (124,500)
Options outstanding at end of year 1,070,919 785,250 464,125
Number of options at end of year:
Exercisable 405,333 193,125 196,125
Available for grant 483,108 302,303 375,803
Range of prices:
Granted during year $13.75-17.25 $14.25-19.25 $15.00-19.75
Outstanding at end of year $ 2.83-19.75 $ 2.83-19.75 $ 2.83-19.75
Exercised during the year $ 9.67-18.75 $ 3.30-11.33 $ 2.83-10.92
</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.
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):
YEAR Amount
1996 $ 3,804
1997 3,734
1998 3,314
1999 4,458
2000 1,924
Thereafter 7,134
$24,368
Rent expense for the years ending December 31, 1995,
1994 and 1993 was approximately $1,965,000, $1,640,000, and
$1,369,000, respectively.
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 and continued vesting of options previously
granted under the Company's Employee Long Term Incentive
Plan for a period of up to one year in the event of
termination without cause or in the event of termination
after a change in control of the Company. At December 31,
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.
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.
9. GEOGRAPHIC AREA INFORMATION (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995:
<S> <C> <C> <C> <C> <C>
United UNITED
STATES Canada KINGDOM Eliminations Consolidated
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 $ 1,512 $ 456 $ (6,793) $ - $ (4,825)
income taxes
Identifiable assets at December 31, 1995 $105,995 $43,775 $31,593 $ (57,379) $ 123,984
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994:
<S> <C> <C> <C> <C> <C>
United UNITED
STATES Canada KINGDOM Eliminations Consolidated
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 $ 1,300 $( 5,742) $( 5,802) $ - $ (10,244)
income taxes
Identifiable assets at December 31, 1994 $119,021 $30,073 $10,422 $( 75,068) $ 84,448
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
<S> <C> <C> <C> <C> <C>
United UNITED
STATES Canada KINGDOM Eliminations Consolidated
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 $ 6,177 $( 8,150) $( 1,778) $ - $ (3,751)
income taxes
Identifiable assets at December 31, 1993 $142,821 $28,620 $ 1,832 $(111,555) $ 61,718
</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.
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 U.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.
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. Vested options to
purchase 20,000 shares of Class A Common Stock were
granted on January 19, 1996, pursuant to this plan,
subject to shareholder approval of the plan at the
Company's 1996 Annual Meeting.
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.
ITEM 9 . DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT.
The following sets forth information
concerning the Directors and executive officers
of the Company and its principal operating
subsidiaries as of March 1, 1996:
NAME AGE POSITION(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 39 Director
Willard Z. Estey 76 Director
Daniel D. Tessoni 48 Director
Robert M. Van Degna 51 Director
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.
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. and Preferred Networks, 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 the Principal Shareholders Table
in Item 12 below.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES
EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange
Act of 1934 requires the Company's executive
officers, Directors and other persons who own
more than ten percent of the Company's
securities (collectively, "reporting persons")
to file reports of their ownership of and
changes in ownership in their Company
shareholdings with both the SEC and The Nasdaq
Stock Market and to furnish the Company with
copies of all such forms (known as Forms 3, 4
and 5) filed. Based solely on its review of the
copies of such forms it received and on written
representations received from certain reporting
persons that they were not required to file a
Form 5 report with respect to 1995, the Company
believes that with respect to transactions
occurring in 1995, all Form 3, 4 and 5 filing
requirements applicable to its reporting persons
were complied with.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information
concerning the compensation and benefits paid by
the Company for all services rendered during
1995, 1994 and 1993 to five individuals: David
K. Laniak, who is and was, at December 31, 1995,
serving as the Company's Chief Executive
Officer, and Richard T. Aab, Arunas A. Chesonis,
Christopher Bantoft, and Steve M. Dubnik, who
were, as of December 31, 1995, the other four
most highly compensated executive officers of
the Company whose 1995 salary and bonus exceeded
$100,000 in amount (individually, a "Named
Executive" and collectively, the "Named
Executives"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long
Term
Compen-
sation
ANNUAL COMPENSATION
<S> <C> <C> <C> <C> <C> <C>
Awards
OTHER
Name ANNUAL SECURITIES ALL OTHER
and COMPEN- UNDERLYING COMPEN-
Principal SATION OPTIONS SATION
POSITION YEAR SALARY ($) BONUS ($) ($) (#) ($)
DAVID K. LANIAK, 1995 $70,384 $38,578 - 0- (2) 68,000(3) $599(4)
CHIEF EXECUTIVE OFFI- 1994 NA NA NA NA NA
CER (1) 1993 NA NA NA NA NA
RICHARD T. AAB, 1995 $284,615 $145,312 -- (2) 24,644(6) $760,145(7)
CHAIRMAN OF THE BOARD 1994 $315,962 $62,000 -- (2) -0- $6,985(8)
(5) 1993 $304,241 $330,000 -- (2) -0- $9,305(8)
(9)
ARUNAS A. CHESONIS, 1995 $191,124 $93,515 -- (2) 21,700(11) $4,773(12)
PRESIDENT AND 1994 $160,192 $32,000 -- (2) 50,000(13) $5,073(12)
CHIEF OPERATING 1993 $134,250 $44,000 -- (2) 30,000(14) $4,283(12)
OFFICER(10)
CHRISTOPHER BANTOFT, 1995 $144,925 $77,500 -- (2) 10,200(16) $14,492(17)
MANAGING DIRECTOR 1994 $134,430 $20,400 -- (2) 50,000(18) $9,017(19)
ACC LONG DISTANCE UK 1993 NA NA NA NA NA
LTD (15)
STEVE M. DUBNIK, 1995 $156,382 $54,675 --(2) 11,200(21) $34,003(22)
PRESIDENT AND CEO, 1994 $65,054 $22,900 --(2) 50,000(23) $14,245(24)
ACC TELENTERPRISES 1993 NA NA NA NA NA
LTD.
(20)
</TABLE>
______________________________
NA Indicates Not Applicable, because the
particular Named Executive was not an executive
officer of the Company during the year indicated.
(1) The Company has a two-year Employment
Agreement with Mr. Laniak that runs through
October 1997, under the terms of which he will
receive a base salary of $300,000 per year, plus
a bonus determined under the Company's Annual
Incentive Plan, plus other benefits given to the
Company's other executives. This agreement also
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.
(2) Under applicable SEC rules, the value of any
perquisites or other personal benefits provided
by the Company to any of the Named Executives
need not be separately detailed and described if
their aggregate value does not exceed the lesser
of $50,000 or 10% of that executive's total
salary and bonus for the year shown. For the
year indicated, the value of such personal
benefits, if any, provided by the Company to this
Named Executive did not exceed such thresholds.
(3) In connection with his becoming the Company's
new Chief Executive Officer, on October 5, 1995,
Mr. Laniak was granted incentive stock options
("ISOs") to purchase 17,391 shares of the
Company's Class A Common Stock at an exercise
price of $17.25 per share, exercisable over a
ten-year term, and non-qualified stock options
("NQSOs") to purchase 50,609 shares of Class A
Common Stock also at an exercise price of $17.25
per share and exercisable over a term of ten
years and one day, all under the Company's
Employee Long Term Incentive Plan ("LTI Plan").
The NQSOs granted are subject to the additional
vesting conditions that 50% of such options would
vest at such time as the closing price for the
Company's Class A Common Stock closed at or above
$21.56 per share for 15 consecutive trading days
(a 25% increase over their exercise price), with
the additional 50% of such options to vest at
such time as the closing price for the Company's
Class A Common Stock closed at or above $25.88
per share for 15 consecutive trading days (a 50%
increase over their exercise price).
(4) This amount represents additional group term
life insurance premiums paid on Mr. Laniak's
behalf during 1995.
(5) Effective October 6, 1995, Mr. Aab resigned
his position as the Company's Chief Executive
Officer. He remains its Chairman of the Board
and an employee of the Company, however. In
connection with this change, the Company entered
into both a Non-Competition Agreement and a
Salary Continuation and Deferred Compensation
Agreement with Mr. Aab. Under the terms of Mr.
Aab's Non-Competition Agreement, he will not
compete against the Company for three years
following any "event of termination" (as defined
in this Agreement) as an employee of the Company
and as its Chairman of the Board, for which he
received a lump-sum payment of $750,000 in 1995.
Under the terms of his Salary Continuation and
Deferred Compensation Agreement, Mr. Aab will
receive a salary of $200,000 per year, plus a
bonus determined under the Company's Annual
Incentive Plan, plus continuation of his current
benefits for as long as he remains the Chairman
of the Board and an employee of the Company. At
such time as he ever resigns or is terminated as
a Company employee and from serving as the
Chairman of the Board, except in a circumstance
involving a "termination for cause" as defined in
this Agreement, he will receive a payment of
$1,000,000, payable over a three year term
following the date of such termination or
resignation, with the payment of such amount
accelerated and paid in full within 30 days
following a change in control of the Company.
Mr. Aab would also receive such payment if, as a
condition precedent to, as a result of or within
one year following a change in control of the
Company, he were terminated for cause.
(6) On January 3, 1995, Mr. Aab was granted ISOs
to purchase 24,644 shares of the Company's Class
A Common Stock at an exercise price of $16.23 per
share, exercisable over a five-year term, under
the LTI Plan.
(7) Of this total, $750,000 represents the lump
sum payment made to Mr. Aab under his Non-
Competition Agreement discussed in note (5)
above, $4,413 represents the Company's 1995
contribution to Mr. Aab's account under its
401(k) Deferred Compensation and Retirement
Savings Plan ("401(k) Plan"), and $5,732
represents taxable group term and single policy
life insurance premiums paid by the Company on
Mr. Aab's behalf during 1995.
(8) The amounts shown represent the Company's
contributions under its 401(k) in the amount of:
$ 4,601 for 1994; and $4,497 for 1993; as well as
taxable group term and single policy life
insurance premiums paid on Mr. Aab's behalf in
the amount of: $2,384 in 1994; and $4,808 in
1993.
(9) Of this total, $155,000 represents Mr. Aab's
bonus paid in 1994 for services rendered in 1993,
and $175,000 represents the one-time award he was
paid in 1993 in connection with the sale of the
Company's cellular operations. In early 1993,
the Executive Compensation Committee of the Board
of Directors determined that certain Company
executives, including this Named Executive, were
eligible to receive a special one-time award in
1993 contingent upon the execution of a
definitive agreement to sell the cellular assets
of the Company's Danbury Cellular Telephone Co.
subsidiary. This award was paid in lieu of any
bonus for services rendered during 1992.
(10) The Company has entered into Employment
Continuation Incentive Agreements with Mr.
Chesonis, certain other executive officers of the
Company, and key Company personnel, which
agreements provide that if such employee is ever
terminated without cause or as the result of a
change in control of the Company as defined in
the agreement, then the employee shall be
entitled to receive his/her then current salary
and benefits and continued vesting of any options
previously granted under the Company's Employee
Long Term Incentive Plan for up to one year
following such termination. In addition, should
such employee be terminated without cause while
he/she is disabled, or in the event the employee
dies during the term of the agreement, any
unexercised stock options that he/she may hold on
the date of either such event shall automatically
become fully exercisable for one year following
such date, subject to the original term of the
relevant option grant(s). These agreements also
provide for each employee's agreement not to
compete with the Company so long as he/she is
receiving payments thereunder. These agreements
are for an indefinite term and subject to
termination twelve months following receipt of
the Company's notice of its intent to terminate
them.
(11) On January 3, 1995, Mr. Chesonis was granted
ISOs to purchase 21,700 shares of the Company's
Class A Common Stock at an exercise price of
$14.75 per share, exercisable over a ten-year
term, under the LTI Plan.
(12) The amounts shown represent the Company's
contributions under its 401(k) Plan in the amount
of: $4,410 for 1995; $4,806 for 1994; and $4,132
for 1993; as well as additional group term life
insurance premiums paid on Mr. Chesonis's behalf
in the amount of: $363 in 1995; $267 in 1994;
and $151 in 1993.
(13) On February 8, 1994, Mr. Chesonis was granted
ISOs to purchase 50,000 shares of the Company's
Class A Common Stock at an exercise price of
$19.25 per share, exercisable over a ten-year
term, under the LTI Plan. This award was
cancelled and regranted on August 11, 1994 at an
option exercise price of $14.25 per share.
(14) On September 7, 1993, Mr. Chesonis was
granted ISOs to purchase 30,000 shares of the
Company's Class A Common Stock at an exercise
price of $15.00 per share, exercisable over a
ten-year term, under the LTI Plan.
(15) The Company has an Employment Agreement with
Mr. Bantoft employing him as Managing Director of
ACC Long Distance UK Ltd. under the terms of
which he will receive a base salary of at least
<pound-sterling>85,000 per year, plus a bonus
determined under the Company's Annual Incentive
Plan, plus other benefits given to the Company's
other executives. This agreement also provides
for payment of his then current compensation and
benefits for a period of one year if, as a result
of or within one year following a change in
control of the Company, Mr. Bantoft's employment
is terminated without cause by the Company or the
acquiror or Mr. Bantoft voluntarily terminates
his employment as a result of certain events,
including a significant change in the nature or
scope of his duties or a reduction in his
compensation or benefits. The agreement also
requires Mr. Bantoft to maintain confidentiality
of the Company's trade secrets during its term
and indefinitely following termination of his
employment.
(16) On January 3, 1995, Mr. Bantoft was granted
ISOs to purchase 10,200 shares of the Company's
Class A Common Stock at an exercise price of
$14.75 per share, exercisable over a ten-year
term, under the LTI Plan.
(17) This amount represents U.K. pension payments
made on Mr. Bantoft's behalf during 1995.
(18) On January 4, 1994, Mr. Bantoft was granted
ISOs to purchase 10,000 shares of the Company's
Class A Common Stock at an exercise price of
$18.75 per share, on August 11, 1994, he was
granted ISOs to purchase 15,000 shares of the
Company's Class A Common Stock at an exercise
price of $14.25 per share, and on November 15,
1994, he was granted ISOs to purchase 25,000
shares of the Company's Class A Common Stock at
an exercise price of $17.25 per share, each
tranche exercisable over a ten-year term, under
the LTI Plan.
(19) This amount represents U.K. pension payments
made on Mr. Bantoft's behalf during 1994.
(20) The Company has an Employment Agreement with
Mr. Dubnik under the terms of which he will
receive a base salary of Cdn.$208,312 per year,
plus a bonus determined under the Company's
Annual Incentive Plan, plus other benefits given
to the Company's other executives. The agreement
also provides that if Mr. Dubnik is ever
terminated without cause or as the result of a
change in control of the Company as defined in
the agreement, then he will be entitled to
receive his/her then current salary and benefits
for one year following such termination. The
agreement also provides that Mr. Dubnik will not
solicit Company customers during and for one year
following the termination of his employment, that
he will not compete with the Company so long as
he is receiving payments thereunder, and that he
will maintain the confidentiality of the
Company's trade secrets during the term of the
agreement and indefinitely following termination
of his employment.
(21) On January 3, 1995, Mr. Dubnik was granted
ISOs to purchase 11,200 shares of the Company's
Class A Common Stock at an exercise price of
$14.75 per share, exercisable over a ten-year
term, under the LTI Plan.
(22) Of this total, $447 represents additional
group term life insurance premiums paid on Mr.
Dubnik's behalf, $3,556 represents the Company's
1995 contribution to his Canadian Registered
Retirement Savings Plan account, and $30,000
represents moving expense reimbursements paid to
Mr. Dubnik during 1995 in connection with his
relocation from the Washington, D.C. metropolitan
area to Toronto, Canada.
(23) On August 11, 1994, Mr. Dubnik was granted
ISOs to purchase 50,000 shares of the Company's
Class A Common Stock at an exercise price of
$14.25 per share, exercisable over a ten-year
term, under the LTI Plan.
(24) This amount represents moving expense
reimbursements paid to Mr. Dubnik during 1994 in
connection with his relocation from the
Washington, D.C. metropolitan area to Toronto,
Canada.
COMPENSATION PURSUANT TO PLANS
EMPLOYEE LONG TERM INCENTIVE PLAN. The
Company has an Employee Long Term Incentive Plan
(formerly known as the Employee Stock Option
Plan) (the "LTI Plan" or "Plan"), which it
instituted in February, 1982, to provide long-
term incentive benefits to key Company employees
as determined by the Executive Compensation
Committee of the Board of Directors (the
"Committee"). This Plan is administered by the
Committee, whose duties include selecting the
employees who will receive stock option grants
and/or awards of stock incentive rights ("SIRs")
thereunder, the number of SIRs to be awarded and
their vesting schedule, and the numbers and
exercise prices of the options granted to
optionees. In making its selections and
determinations, the Committee has substantial
flexibility and makes its judgments based largely
on the functions and responsibilities of the
particular employee, the employee's past and
potential contributions to the Company's
profitability and growth, and the value of the
employee's service to the Company. Options
granted under this Plan are either intended to
qualify as "incentive stock options" ("ISOs")
within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or are non-
qualified stock options ("NQSOs"). Options
granted under this Plan represent rights to
purchase shares of the Company's Class A Common
Stock within a fixed period of time and at a cash
price per share ("exercise price") specified by
the Committee on the date of grant. The exercise
price cannot be less than the fair market value
of a share of Class A Common Stock on the date of
award. Payment of the exercise price may be made
in cash or, with the Committee's approval, with
shares of the Company's Class A Common Stock
already owned by the optionee and valued at their
fair market value as of the exercise date.
Options are exercisable during the period fixed
by the Committee, except that no ISO may be
exercised more than ten years from the date of
grant, and no NQSO may be exercised more than ten
years and one day from the date of the grant.
Beginning in July 1995, the Committee is
also authorized, in its discretion, to award SIRs
under the Plan. SIRs are rights to receive
shares of the Company's Class A Common Stock
without any cash payment to the Company,
conditioned only on continued employment with the
Company throughout a specified incentive period
of at least three years. In general, the
recipient must remain employed by the Company for
the designated incentive period before receiving
the shares subject to the SIR award; earlier
termination of employment, except in the event of
death, permanent disability or normal retirement,
would result in the automatic cancellation of an
SIR. Should an SIR holder die, become
permanently disabled or retire during an SIR
incentive period, he/she, or his/her estate, as
the case may be, would receive a pro-rated number
of the shares underlying the SIR award based upon
the ratio that the number of months since the SIR
had been granted bore to the designated incentive
period, less any shares already issued in the
case of an SIR with a staggered vesting schedule.
During the incentive period, should the
Company declare any cash dividends on its Class A
Common Stock, the holder of an SIR would be
entitled to receive from the Company cash
"dividend equivalent" payments equal to any such
cash dividends that the holder would have
received had he/she owned the shares of Class A
Common Stock underlying his/her SIR. However,
the holder of an SIR would not have any other
rights with respect to the shares underlying an
SIR award, E.G., the right to vote or pledge such
shares, until such shares were actually issued to
the holder.
An employee can be awarded both SIRs and
stock options in any combinations that the
Committee may determine. In such an event, an
exercise of an option would not in any way affect
or cancel any SIRs an employee may have received,
nor would the earnout of shares under an SIR
award in any way affect or cancel any options
held by an employee.
<PAGE>
The following table shows information
concerning options granted under this Plan during
1995 to the five Named Executives:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS POTENTIAL REALIZABLE VALUE
OPTIONS GRANTED TO AT ASSUMED ANNUAL RATES OF
GRANTED EMPLOYEES EXERCISE STOCK PRICE APPRECIATION
# IN FISCAL PRICE EXPIRATION FOR OPTION TERM (1)
NAME YEAR ($/SHARE) DATE 0% 5% 10%
<S> <C> <C> <C> <C> <C> <C> <C>
DAVID K. 68,000(2) 19.9 $17.25 10/6/05 $-0- $737,693 $1,869,459
LANIAK
RICHARD T. 24,644(3) 7.2 $16.23 1/3/00 $-0- $110,504 $244,186
AAB
ARUNAS A. 21,700(4) 6.3 $14.75 1/3/05 $-0- $201,293 $510,117
CHESONIS
CHRISTOPHER 10,200(4) 3.0 $14.75 1/3/05 $-0- $94,656 $239,802
BANTOFT
STEVE M. 11,200(4) 3.3 $14.75 1/3/05 $-0- $103,936 $263,312
DUBNIK
</TABLE>
_________________________________
(1) These calculations show the potential gain
that would be realized if the options shown were
not exercised until the end of their full five-
or ten-year term, assuming the compound annual
rate of appreciation of the exercise prices
indicated (0%, 5%, and 10%) over the respective
terms of the options shown, net of the exercise
prices paid.
(2) These options were granted on October 5, 1995.
Of this total, 17,391 are ISOs and 50,609 are
NQSOs. The ISOs are for a term of ten years,
one-third of which first exercisable on April 5,
1996, and an additional one-third of which become
exercisable on the first and second anniversaries
of the grant date. The NQSOs are for a term of
ten years and one day, and are subject to the
additional vesting conditions that 50% of such
options will vest at such time as the closing
price for the Company's Class A Common Stock is
at or above $21.56 per share for 15 consecutive
trading days (a 25% increase over their exercise
price), with the additional 50% of such options
to vest at such time as the closing price for the
Company's Class A Common Stock is at or above
$25.88 per share for 15 consecutive trading days
(a 50% increase over their exercise price).
(3) These ISOs were granted on January 3, 1995,
for a term of five years, 25% of which first
became exercisable on July 4, 1995, and an
additional 25% of which become exercisable on the
first, second and third anniversaries of the
grant date.
(4) These ISOs were granted on January 3, 1995,
for a term of ten years, 25% of which first
became exercisable on July 4, 1995, and an
additional 25% of which become exercisable on the
first, second and third anniversaries of the
grant date.
The following table reflects information
concerning option exercises under this Plan by
the Named Executives during 1995, together with
information concerning the number and value of
all unexercised options held by each of the Named
Executives at year end 1995 under this Plan:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SHARES
ACQUIRED NUMBER OF SECURITIES VALUE OF UNEXERCISED
ON VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
EXERCISE REALIZED OPTIONS AT FY-END (#) FY-END ($) (1)
NAME (#) ($) EXERCISABLE/UNEXERCISABLE Exercisable/Unexercisable
<S> <C> <C> <C> <C>
DAVID K. LANIAK -0- $-0- -0-/68,000 $-0-/$395,080
RICHARD T. AAB -0- $-0- 6,161/18,483 $42,080/126,239
ARUNAS A. CHESONIS -0- $-0- 70,925/68,775 $945,970/$567,770
CHRISTOPHER BANTOFT -0- $-0- 15,050/45,150 $101,315/$303,946
STEVE M. DUBNIK -0- $-0- 15,300/45,900 $133,393/$400,179
</TABLE>
________________________________
(1) For each Named Executive, these values are
calculated by subtracting the per share option
exercise price for each block of options held on
December 31, 1995 from the closing price of the
Company's Class A Common Stock on that date
($23.06 on December 29, 1995), then multiplying
that figure by the number of options in that
block, then aggregating the resulting subtotals.
As of December 31, 1995, 483,108 shares of
the Company's Class A Common Stock were available
for grants under this Plan. As of that date,
there were 1,070,919 options outstanding, with a
weighted average exercise price of $14.04 per
share. The expiration dates of these option
grants range from May 22, 1999 through October 6,
2005. During 1995, no SIRs were awarded under
the Plan.
401(K) DEFERRED COMPENSATION AND RETIREMENT
SAVINGS PLAN. The Company has a 401(k) Deferred
Compensation and Retirement Savings Plan in which
employees with a minimum of six months continuous
service are eligible to participate.
Contributions to a participating employee's
401(k) account are made in accordance with the
regulations set forth under Section 401 of the
Internal Revenue Code of 1986, as amended. Under
this Plan, the Company may make matching
contributions to the account of a participating
employee up to an annual maximum of 50% of the
annual salary contributed in that year by that
employee, up to a maximum of 3% of that
employee's salary. The Company's contributions
vest at the rate of 20% per year of credited
service as defined in the plan and become fully
vested after five years of credited service.
EMPLOYEE STOCK PURCHASE PLAN. The Company
has an Employee Stock Purchase Plan ("Stock
Purchase Plan"), in which all employees who work
20 or more hours per week are eligible to
participate. Under this Plan, employees electing
to participate can, through payroll deductions,
purchase shares of the Company's Class A Common
Stock at 85% of market value on the date on which
the annual offering period under this Plan begins
or on the last business day of each calendar
quarter in which shares are automatically
purchased for a participant during an offering
period, whichever is lower. Participants cannot
defer more than 15% of their base pay into this
Plan, nor purchase more than $25,000 per year of
the Company's Class A Common Stock through this
Plan. As of December 31, 1995, participants had
purchased a total of 36,316 shares through this
Plan, at an average price during 1995 of $12.56
per share, leaving a total of 463,684 shares
available for future purchases under the Plan.
ANNUAL INCENTIVE PLAN. The Company has an
annual incentive plan, which it instituted in
1995, pursuant to which the annual cash bonuses
paid to the Company's senior management and key
personnel are determined. Under this plan, at
the beginning of a fiscal year, the Executive
Compensation Committee of the Board establishes
performance targets based upon the Company's
revenues, gross margin, operating expenses and
operating income for that fiscal year. At the
end of that year, the extent to which these
performance targets were met for the year
determines the bonuses, if any, to be paid for
that year.
OTHER COMPENSATION PLANS. The Company
provides additional group term life and
supplemental disability insurance coverage to its
officers. The additional group term life
insurance provides additional life insurance
protection to an officer in the amount of two and
one-half times his/her current salary. The
supplemental disability insurance provides
additional disability insurance protection to an
officer in an amount selected by the executive,
not to exceed, when combined with the coverage
provided by the Company's basic disability
insurance provided to all of its employees, 70%
of his/her current annual salary.
The Company also has a legal, medical and
financial planning reimbursement plan for its
senior executives pursuant to which it will
reimburse each of them generally up to $4,000 per
year (up to $12,000 per year for Mr. Aab) for
legal, accounting, financial planning and
uninsured medical expenses incurred by the
executive.
COMPENSATION OF DIRECTORS
Directors who are not also employees of the
Company are paid an annual retainer of $6,000,
plus a fee of $500 for each Board meeting
attended. Additionally, outside Directors who
serve on committees of the Board receive $300 per
committee meeting attended.
On January 19, 1996, subject to obtaining
shareholder approval at their 1996 Annual
Meeting, the Company's Board of Directors adopted
a Non-Employee Directors' Stock Option Plan (the
"Directors Stock Option Plan"), and Messrs.
Bennett, Estey, Tessoni and Van Degna each
received vested options to purchase 5,000 shares
of Class A Common Stock at an exercise price of
$23.00 per share pursuant to this Plan. Subject
to obtaining shareholder approval at the 1996
Annual Meeting, this plan provides for annual
grants of non-qualified stock options to purchase
5,000 shares of Class A Common Stock at an
exercise price equal to 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
this Plan is 250,000, subject to adjustment for
stock splits, stock dividends and the like.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
SECURITIES OWNED BY COMPANY MANAGEMENT
The following table sets forth, as of March
1, 1996, the number and percentage of outstanding
shares of Class A Common Stock beneficially owned
by each Director of the Company, by each of the
four Named Executives (in addition to Mr. Laniak)
named in the compensation tables that appear in
Item 11 above and by all Directors and executive
officers of the Company as a group. The Company
believes that each individual in this group has
sole investment and voting power with respect to
his or her shares subject to community property
laws where applicable and except as otherwise
noted:
<PAGE>
Name of Nominee for Director Shares Beneficially Owned
OR EXECUTIVE OFFICER NUMBER PERCENTAGE
Richard T. Aab 927,554 (1) 11.5
Hugh F. Bennett 3,000 (2) *
Arunas A. Chesonis 86,508 (3) 1.1
Willard Z. Estey -0- *
David K. Laniak 62,406 (4) *
Daniel D. Tessoni 22,500 (5) *
Robert M. Van Degna 725,000 (6) 8.3
Christopher Bantoft 20,100 (7) *
Steve M. Dubnik 20,100 (8) *
All Directors and Executive Officers
as a Group (14 persons, including
those named above) 1,955,917 (1) (2) 21.7
(3) (4)
(5) (6)
(7) (8)
(9)
__________________________________
* Indicates less than 1% of the Company's issued
and outstanding shares.
(1) This number includes 139,500 shares that are
owned by Melrich Associates, L.P., a family
partnership of which Mr. Aab is a general partner
and therefore shares investment and voting power
with respect to such shares, and options to
purchase 12,322 that are currently exercisable by
Mr. Aab. Does not include 29,722 shares issuable
upon the exercise of options that are not deemed
to be presently exercisable.
(2) 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 granted to him, subject to
shareholder approval, under the Non-Employee
Directors' Stock Option Plan.
(3) Includes 488 shares owned by Mr. Chesonis's
spouse, options to purchase 76,350 shares that
are currently exercisable by Mr. Chesonis, and
options to purchase 6,950 shares that are
currently exercisable by Mr. Chesonis's spouse.
Does not include 80,850 shares issuable upon the
exercise of options that are not deemed to be
presently exercisable by Mr. Chesonis nor 3,050
shares issuable upon the exercise of options that
are not deemed to be presently exercisable by Mr.
Chesonis's spouse.
(4) Includes options to purchase 56,406 shares
that are currently or will become exercisable by
Mr. Laniak within the next 60 days. Does not
include 37,694 shares issuable upon the exercise
of options that are not deemed to be presently
exercisable.
(5) 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 granted to him, subject to
shareholder approval, under the Non-Employee
Directors' Stock Option Plan.
(6) 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 March 1,
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
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. Mr. Van Degna is
the Chairman and Chief Executive Officer of Fleet
Venture Resources and the Chairman and 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 Fleet Equity
Partners and in the general partner of Chisholm.
(7) Includes options to purchase 20,100 shares
that are currently exercisable by Mr. Bantoft.
Does not include 49,900 shares issuable upon the
exercise of options that are not deemed to be
presently exercisable, nor 10,000 SIRs granted on
February 5, 1996.
(8) Includes options to purchase 18,100 shares
that are currently exercisable by Mr. Dubnik.
Does not include 53,700 shares issuable upon the
exercise of options that are not deemed to be
presently exercisable.
(9) Includes options to purchase a total of 39,400
shares that are or will become exercisable by
four executive officers of the Company, in
addition to those named above, within the next 60
days. Does not include a total of 162,575 shares
issuable upon the exercise of options that are
not deemed to be presently exercisable by five
executive officers of the Company, in addition to
those named above.
PRINCIPAL HOLDERS OF COMMON STOCK
The following table reflects the security
ownership of those persons who are known to the
Company to have been the beneficial owners of
more than 5% (401,970 shares) of the Company's
outstanding Class A Common Stock as of March 1,
1996:
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
Richard T. Aab 927,554 (1) 11.5
400 West Avenue
Rochester, New York 14611
Robert M. Van Degna 725,000 (2) 8.3
c/o Fleet Venture Resources, Inc.
111 Westminster Street
Providence, Rhode Island 02903
Fleet Venture Resources, Inc. 456,750 (3) 5.4
111 Westminster Street
Providence, Rhode Island 02903
Montgomery Asset Management, L.P. 445,760 (4) 5.5
600 Montgomery Street
San Francisco, California 94111
(1) This number includes 139,500 shares that are
owned by Melrich Associates, L.P., a family
partnership of which Mr. Aab is a general partner
and therefore shares investment and voting power
with respect to such shares, and options to
purchase 12,322 that are currently exercisable by
Mr. Aab. Does not include 29,722 shares issuable
upon the exercise of options that are not deemed
to be presently exercisable.
(2) 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 March 1,
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
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. Mr. Van Degna is
the Chairman and Chief Executive Officer of Fleet
Venture Resources and the Chairman and 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 Fleet Equity
Partners and in the general partner of Chisholm.
(3) Does not include shares beneficially owned
by Fleet Equity Partners or Chisholm (see note
(2) above).
(4) These shares are held for investment purposes
by Montgomery Asset Management, L.P., a
registered Investment Advisor, as reported in a
Schedule 13G that was filed with the SEC in
January 1996, a copy of which was received by the
Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.
To accommodate its need for increased space,
in June 1994, the Company moved its principal
executive offices to an industrial complex
located at 400 West Avenue, Rochester, New York,
which is owned by a real estate partnership in
which Richard T. Aab, the Company's Chairman and
former Chief Executive Officer, is a general
partner. For 1995, the Company paid a total of
approximately $600,000 in rent and maintenance
fees for this space to this partnership.
During 1994 and early 1995, the Company
initiated efforts to obtain new
telecommunications software programs from AMBIX
Systems Corp. ("AMBIX"), a software development
company. The Company's Chairman of the Board and
then Chief Executive Officer, Richard T. Aab, was
a controlling shareholder of AMBIX during such
period. In May of 1995, anticipating material
agreements with AMBIX and desiring to eliminate a
conflict of interest situation, all of the common
shares owned by Mr. Aab in AMBIX were placed in
escrow under the direction of a Special Committee
of the Company's Board of Directors with the
option of the Special Committee to authorize the
Company to accept the transfer and delivery of
the shares in exchange for the release or
indemnification of Mr. Aab of his personal
guarantee of certain obligations of AMBIX to its
lender and the substitution of the Company as the
guarantor of such obligations. 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 proposed transactions with
AMBIX.
On February 21, 1996, pursuant to the
approval of the Special Committee, a software
license agreement was entered into by and between
the Company and AMBIX Acquisition Corp., which is
the purchaser of AMBIX's intellectual property
and other assets and is an affiliate of AMBIX.
Immediately prior thereto, the shares of AMBIX
held in escrow were returned to AMBIX and the
related party nature of the Company's
relationship with AMBIX was thereby extinguished.
In connection with the return of Mr. Aab's shares
to AMBIX, the Company paid approximately $200,000
to AMBIX's lender to release Mr. Aab's personal
guarantee of certain obligations of AMBIX to its
lender. Such benefit to Mr. Aab was the only
consideration he received from the Company for
the return of his shares to AMBIX, and, to the
Company's knowledge, Mr. Aab did not receive any
additional consideration from AMBIX for the
return of his shares nor did he receive any cash
distributions from AMBIX during his ownership of
such shares.
For an aggregate consideration of $1.8
million (including the payment by the Company of
certain obligations of AMBIX to its lender) paid
to or for the benefit of AMBIX or AMBIX
Acquisition Corp., the Company in return has
received a perpetual right to use the newly
developed telecommunications software programs.
In making a business judgment as to the amount of
such consideration, the Special Committee
considered a number of factors including, among
other matters, the opinion of its independent
software consultants with respect to the
estimated cost of developing the major software
program covered by the license, the
recommendations of management of the Company who
were experienced with oversight responsibilities
for the development of software programs, and the
known benefit to the Company of the software
programs as demonstrated by their preliminary
testing and use by the Company. The Company does
not know the full costs incurred by AMBIX in
developing the software programs.
The software programs and the Company's
license to use them are considered by the Company
to be material and integral to its operations.
During 1995 the Company paid AMBIX $1.2 million,
of which approximately $700,000, 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 AMBIX $132,000, all
of which related to software development which
was expensed. The Company anticipates that it
will attempt to negotiate and enter into an
arrangement with AMBIX Acquisition Corp. to
provide maintenance and support for the software
programs. There can be no assurance that the
Company will negotiate or enter into any such
arrangements or regarding the terms thereof.
On May 22, 1995, Mr. Aab, the Company's Chairman of the Board and then
Chief Executive Officer, entered into a Participation Agreement with Fleet
Venture Resources, Inc., Fleet Equity Partners VI, L.P. and Chisholm
Partners II, L.P. (collectively, the "Fleet Investors") in connection with
the purchase by the Fleet Investors of $10 million in aggregate principal
amount of 12% convertible subordinated notes of the Company, which notes
were subsequently converted into 10,000 shares of Series A Preferred Stock.
The Participation Agreement requires Mr. Aab to notify the Fleet Investors
and the Company of certain proposed transfers of his Class A Common Stock
of the Company and, if any of the Fleet Investors elect to participate in
the proposed transaction, Mr. Aab is required to obtain the agreement of
the purchaser to acquire from any participating Fleet Investor, at the same
price and on the same terms offered to Mr. Aab, a pro rata portion of the
shares proposed to be purchased from Mr. Aab. The Participation Agreement
does not apply to certain transfers of shares by Mr. Aab, including
pursuant to a public offering registered under the Securities Act of 1933,
as amended (the "Act"), pursuant to Rule 144 adopted under the Act, certain
charitable transfers and transfers resulting from any foreclosure upon
shares which have been pledged, and the transfer restrictions are
extinguished if Mr. Aab ceases to be a director or employee of the Company
or if the Series A Preferred Stock and certain warrants issued to the Fleet
Investors are no longer outstanding.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS AND EXHIBITS.
(1) FINANCIAL STATEMENTS. (a) The
following Financial Statements of the Company and
the accountant's report thereon are included in
Part II of this Report above:
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31,
1995 and 1994
Consolidated Statements of Operations for
the years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Changes in
Shareholders' Equity for the years ended December
31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for
the years ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
(b) Financial Statements for ACC Corp.
Employee Stock Purchase Plan for Plan year ended
December 31, 1995:
Report of Independent Public Accountants
Statement of Financial Condition
Statement of Changes in Participants' Equity
Notes to Financial Statements
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Plan Administrator of the ACC Corp.
Employee Stock Purchase Plan:
We have audited the accompanying statements
of financial condition of the ACC Corp. Employee
Stock Purchase Plan (the "Plan") as of December
31, 1995 and 1994, and the related statements of
changes in participants' equity for the year
ended December 31, 1995 and for the period from
adoption (February 8, 1994) to December 31, 1994.
These financial statements are the responsibility
of the Plan'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 condition of the Plan as
of December 31, 1995 and 1994, and the results of
its changes in participants' equity for the year
ended December 31, 1995 and for the period from
adoption (February 8, 1994) to December 31,
1995, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Rochester, New York
February 23, 1996
<PAGE>
ACC Corp.
Employee Stock Purchase Plan
Statements of Financial Condition
December 31, 1995 and 1994
ASSETS: 1995 1994
Receivable from ACC Corp. $683 $557
TOTAL ASSETS $683 $557
LIABILITIES AND PARTICIPANTS' EQUITY:
Participants' equity $683 $557
TOTAL LIABILITIES AND PARTICIPANTS' EQUITY $683 $557
The accompanying notes to financial statements
are an integral part of these statements.
<PAGE>
ACC Corp.
Employee Stock Purchase Plan
Statements of Changes in Participants' Equity
For the Year Ended December 31, 1995 and
For the Period from Adoption (February 8, 1994)
to December 31, 1994
1995 1994
ADDITIONS:
Employee contributions $331,256 $155,651
DEDUCTIONS:
Stock purchased 296,023 151,600
Employee withdrawals 35,107 3,494
Total deductions 331,130 155,094
NET INCREASE IN PARTICIPANTS' EQUITY 126 557
PARTICIPANTS' EQUITY, BEGINNING
OF PERIOD 557 -
PARTICIPANTS' EQUITY, END OF PERIOD $683 $557
The accompanying notes to financial statements
are an integral part of these statements.
<PAGE>
ACC Corp.
Employee Stock Purchase Plan
Notes to Financial Statements
1. PLAN DESCRIPTION:
The ACC Corp. Employee Stock Purchase Plan
(the "Plan") was adopted by the Board of
Directors on February 8, 1994 and was ratified by
the shareholders on October 13, 1994. The first
offering period began July 1, 1994. Officers did
not participate until the ratification by the
shareholders occurred. The Plan was established
to provide employees with increased employment
and performance incentives and to enhance ACC
Corp.'s (the "Company") efforts to attract and
retain employees of outstanding ability. The
Plan permits eligible Company employees to make
periodic purchases of shares of the Company's
Class A Common Stock through payroll deductions
at prices below then-prevailing market prices.
As of December 31, 1995, 500,000 shares of the
Company's Class A Common Stock (which may be
treasury shares, authorized and unissued shares,
or a combination thereof at the Company's
discretion) are reserved for issuance under the
Plan. The Plan is administered by the Executive
Compensation Committee of the Board of Directors
of ACC Corp. (the "Committee"). None of the
members of the Committee is eligible to
participate in the Plan. Reference should be
made to the Plan for more complete information.
Any employee of the Company or any of its
subsidiaries who is employed at least 20 hours
per week is eligible to participate in the Plan.
Participants may enroll in the Plan prior to an
offering commencement date. Employees may
authorize payroll deductions of up to 15% of
their then-current straight-time earnings during
the term of an offering, which will be applied to
the purchase of shares under the Plan. These
payroll deductions will begin on that offering
commencement date and will end on the last
purchase date applicable to any offering in which
he/she holds any options to purchase shares of
the Company's Class A Common Stock, or if sooner,
on the effective date of his/her termination of
participation in the Plan. Newly hired employees
hired subsequent to an offering commencement date
may begin participation in the Plan at the
beginning of the next calendar quarter following
their date of hire.
Payroll deductions will be held by the
Company as part of its general funds for the
credit of the participants and will not accrue
interest pending the periodic purchase of shares
under the Plan. On the last business day of each
calendar quarter during the term of an offering,
a participant will automatically be deemed to
have exercised his/her options to purchase, at
the applicable purchase price, the maximum number
of full shares that can be purchased with the
amounts deducted from the participant's pay
during that quarter, together with any excess
funds from preceding quarters. The purchase
price at which shares may be purchased under the
Plan is 85% of the closing price of the Company's
Class A Common Stock in Nasdaq trading on either
a) the offering commencement date (or, in the
case of interim participation by newly hired
employees, the date on which they are permitted
to begin participation in that offering) or b)
the date on which shares are purchased through
the automatic exercise of an option to purchase
shares under the Plan, whichever is lower. The
maximum number of shares that a participant will
be permitted to purchase in any single offering
is subject to certain limitations, as set forth
in the plan document.
A participant may, at any time and for any
reason, withdraw from further participation in
any offering or from the Plan by giving written
notice. In such event, the participant's payroll
deductions which have been credited to his/her
plan account and not already expended to purchase
shares under the Plan will be refunded without
interest. No further payroll deductions will be
made from his/her pay during the term of that
offering. No withdrawing participant will be
permitted to re-commence his/her participation in
an offering, however, termination of
participation in an offering or in the Plan will
not have any effect upon subsequent eligibility
to participate in the Plan. A participant's
retirement, death or other termination of
employment will be treated as a permanent
withdrawal from participation. In the event of a
participant's death, his/her estate or designated
beneficiary shall have the right to elect, no
later than 60 days following his/her date of
death, to receive either the accumulated payroll
deductions in the deceased participant's plan
account or to exercise, on the next subsequent
purchase date, the deceased participant's options
to purchase the number of full shares of Class A
Common Stock that can be purchased with the
balance in the decedent's plan account as of
his/her date of death, together with the return
of any excess cash, without interest.
The Plan will expire on the first to occur
of the following: (1) the date as of which
participants purchase a number of shares equal to
or greater than the number of shares authorized
for issuance under the Plan; or (2) the date as
of which the Board of Directors of the Company or
the Committee terminates the Plan. In either
case, all funds accumulated in each participant's
plan account but not yet expended to purchase
shares will be refunded without interest. If the
Plan is terminated by reason of the exercise of
rights to purchase a greater number of shares
than are authorized for issuance under the Plan,
all remaining shares available for issuance will
be allocated to participants on a pro-rata basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The financial statements are prepared using
the accrual basis of accounting. The Company
pays all of the Plan's administrative expenses.
3. INCOME TAX STATUS:
The Plan is intended to qualify as an
employee stock purchase plan under Section 423 of
the Internal Revenue Code. In order for
favorable tax treatment to be available to the
participant, the participant cannot dispose of
any shares acquired under the Plan within two
years following the date the option to purchase
was granted, nor within one year following the
date the shares were actually purchased.
<PAGE>
4. STOCK PURCHASES:
Stock purchases by offering period are as
follows:
Purchase price Number of
Offering Period Valuation Date per share shares purchased
July 1, 1994 - July 1, 1994 $13.625 8,681
December 31, 1994 December 31,1994* $14.750 4,073
January 1, 1995 - December 31, 1994 $14.75 17,935
December 31, 1995 March 31, 1995* $16.75 70
June 30, 1995* $14.75 67
September 30, 1995* $16.50 51
July 1, 1995 - June 30, 1995 $14.75 5,164
December 31, 1995 September30, 1995* $16.50 275
*For those employees who began participation
during the offering period.
The valuation date is the date during the
offering period, as defined, on which the stock
price was the lowest, therefore becoming the base
for the calculation of shares to be purchased.
(2) FINANCIAL STATEMENT SCHEDULES.
The following Financial Statement Schedules and
the accountant's report thereon are included
herewith as follows:
Report of Independent Public
Accountants
II Consolidated Valuation and Qualifying
Accounts for the years ended December 31, 1995,
1994 and 1993
All other schedules are not submitted because
they are not applicable, not required or because
the required information is included in the
consolidated financial statements or notes
thereto.
(3) EXHIBITS. The following
constitutes the list of exhibits required to be
filed as a part of this Report pursuant to Item
601 of Regulation S-K:
<PAGE>
<TABLE>
<CAPTION>
LIST OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION LOCATION
<S> <C> <C>
3-1 First Restated Certificate of Incorporation of Incorporated by Reference to
ACC Corp. Exhibit 3 to the Company's
Quarterly Report on Form 10-Q
for its Quarter Ended
September 30, 1995
3-2 Certificate of Designations of 10,000 Shares Incorporated by Reference to
of Series A Preferred Stock, par value $1.00 Exhibit 4-1 to the Company's
per share, of ACC Corp. Quarterly Report on Form 10-Q
for its Quarter Ended
September 30, 1995
("September 30, 1995 10-Q")
3-3 Bylaws of ACC Corp., as amended through Incorporated by Reference to
December 13, 1995 Exhibit 3-1 to the Company's
Current Report on Form 8-K
filed on February 22, 1996
("February 22, 1996 8-K")
4-1 Form of ACC Corp. Class A Common Stock Incorporated by Reference to
Certificate Exhibit 4-1 to the Company's
Registration Statement on Form
S-2, No. 33-41588 declared
effective August 21, 1991
4-2 Form of Class A Common Stock Purchase Incorporated by Reference to
Warrant issued to Columbia Capital Corp., Exhibit 4-2 to the Company's
Dated as of July 21, 1995 September 30, 1995 10-Q
4-3 Form of Warrant to purchase 7,500 Shares of Incorporated by Reference to
Class A Common Stock dated October 30, 1995 Exhibit 99.4 to the Company's
February 22, 1996 8-K
10-1* Form of Employment Continuation Incorporated by Reference to
Incentive Agreement between ACC Exhibit 99.3 to the Company's
Corp. and certain of its Key Employees February 22, 1996 8-K
10-2* ACC Corp. Employee Long Term Incentive Incorporated by Reference to
Plan, as amended through February 5, 1996 Exhibit 4-1 to the Company's
Registration Statement on
Form S-8, No. 333-01219, effective
February 26, 1996
10-3 Form of ACC Corp. Indemnification Incorporated by Reference to
Agreement with its Directors and Exhibit 10-29 to the Company's
certain of its Executive Officers Report on Form 10-K for its year
ended December 31, 1987
10-4* ACC Corp. Employee Stock Purchase Incorporated by Reference to
Plan Exhibit 4-4 to the Company
Registration Statement on Form
S-8, No. 33-75558, effective
February 22, 1994
10-5* Employment Agreement between ACC Corp. Incorporated by Reference to
and David K. Laniak, dated October 6, 1995 Exhibit 10-2 to the Company's
September 30, 1995 10-Q
10-6* Salary Continuation and Deferred Compensation Incorporated by Reference to
Agreement between ACC Corp. and Richard T. Exhibit 10-3 to the Company's
Aab, dated October 6, 1995 September 30, 1995 10-Q
10-7* Non-Competition Agreement between ACC Corp. Incorporated by Reference to
and Richard T. Aab, dated October 6, 1995 Exhibit 10-4 to the Company's
September 30, 1995 10-Q
10-8* Release and Settlement Agreement between Incorporated by Reference to
the Company and Francis Coleman, dated Exhibit 99.2 to the Company's
December 29, 1995 February 22, 1996 8-K
10-9 Software License Agreement dated Incorporated by Reference to
March 30, 1995 by and between Exhibit 99.5 to the Company's
AMBIX Systems Corp. and the Company February 22, 1996 8-K
10-10 Software License Agreement dated Incorporated by Reference to
February 21, 1996 between Exhibit 99.6 to the Company's
AMBIX Acquisition Corp.and the Company February 22, 1996 8-K
10-11 Bill of Sale from AMBIX Systems Corp. to Incorporated by Reference to
the Company dated February 6, 1996 Exhibit 99.7 to the Company's
February 22, 1996 8-K
10-12 Letter Agreement dated April 27, 1995 Incorporated by Reference to
between the Special Committee of the Exhibit 99.8 to the Company's
Board of Directors of the Company February 22, 1996 8-K
and Richard T. Aab
10-13 Lease dated January 25, 1994 between the Incorporated by Reference to
Hague Corporation and the Company, Exhibit 99.9 to the Company's
as modified by a Lease Modification February 22, 1996 8-K
Agreement No. 1 dated May 31, 1994
and a Lease Modification Agreement
No. 2 dated May 31, 1994, relating to
the Company's leased premises located
at 400 West Avenue, Rochester, New York
10-14 Amended and Restated Lease Agreement Incorporated by Reference to
dated March 1, 1994 between ACC Long Exhibit 99.10 to the Company's
Distance Inc./Interurbains ACC Inc. and February 22, 1996 8-K
Coopers & Lybrand relating to the
leased premises located at 5343 Dundas Street
West, Etobicoke, Ontario, Canada
10-15 Underlease Agreement dated December 23, Incorporated by Reference to
1993 between ACC Long Distance UK Limited, Exhibit 99.11 to the Company's
IBM United Kingdom Limited, and the Company February 22, 1996 8-K
relating to the
leased premises located on the tenth floor
at The Chiswick Centre 414 Chiswick
High Road, London, England
10-16 Underlease Agreement dated June 6, 1995 between Incorporated by Reference to
ACC Long Distance UK Limited, IBM United Exhibit 99.12 to the Company's
Kingdom Limited, and the Company relating to February 22, 1996 8-K
the leased premises
located on the first floor at The Chiswick
Centre 414 Chiswick High Road,London, England
10-17 Supplemental Lease Agreement dated June 3, 1994 Incorporated by Reference to
between ACC Long Distance UK Limited,IBM Exhibit 99.13 to the Company's
United Kingdom Limited, and the Company February 22, 1996 8-K
relating to the leased premises located
on the ninth floor at The Chiswick Centre 414
Chiswick High Road, London, England
10-18 Credit Agreement, dated as of July 21,1995, Incorporated by Reference to
by and among ACC Corp. and certain Subsidiaries Exhibit 10-1 to the Company's
as Borrowers, ACC Corp. as Guarantor, and September 30, 1995 10-Q
First Union National
Bank of North Carolina, as Managing Agent
and Administrative Agent, and Shawmut Bank
Connecticut, N.A., as Managing Agent
10-19 Contingent Interest Agreement dated July 21, 1995 Incorporated by Reference to
in favor of First Union National Bank of North Exhibit 99.14 to the Company's
Carolina and Shawmut Bank of Connecticut, N.A. February 22, 1996 8-K
10-20 Leasehold Mortgage dated July 21, 1995 Incorporated by Reference to
between the Company and First Union National Exhibit 99.15 to the Company's
Bank of North Carolina relating to the leased February 22, 1996 8-K
premises located at 400 West Avenue,
Rochester, New York
10-21 Leasehold Mortgage dated July 21, 1995 Incorporated by Reference to
between the Company and First Union National Exhibit 99.16 to the Company's
Bank of North Carolina relating to the leased February 22, 1996 8-K
premises located at Suite 206, State Tower
Building, 109 South Warren Street, Syracuse, New York
10-22 Leasehold Mortgage dated July 21, 1995 Incorporated by Reference to
between the Company and First Union National Exhibit 99.17 to the Company's
Bank of North Carolina relating to the leased February 22, 1996 8-K
premises located at Suite 2200, Suite 204
and Suite 205, State Tower Building, 109 South
Warren Street, Syracuse, New York
10-23 Mortgage of Leasehold Interest dated July 21, Incorporated by Reference to
1995 between the Company and ACC Long Exhibit 99.18 to the Company's
Distance Inc./Interurbains ACC Inc. relating to February 22, 1996 8-K
the leased premises located at 5343 Dundas Street
West, Etobicoke, Ontario, Canada
10-24 Pledge Agreement dated July 21, 1995 by Incorporated by Reference to
the Company in favor of First Union National Exhibit 99.19 to the Company's
Bank of North Carolina February 22, 1996 8-K
10-25 Pledge Agreement dated July 21, 1995 Incorporated by Reference to
by ACC National Long Distance Corp. Exhibit 99.20 to the Company's
in favor of First Union National Bank of February 22, 1996 8-K
North Carolina
10-26 Security Agreement dated July 21, 1995 Incorporated by Reference to
between the Company, certain Domestic Exhibit 99.21 to the Company's
Subsidiaries of the Company and First Union February 22, 1996 8-K
National Bank of North Carolina
10-27 Trademark Security Agreement dated Incorporated by Reference to
July 21, 1995 between the Company and Exhibit 99.22 to the Company's
First Union National Bank of North Carolina February 22, 1996 8-K
10-28 License Agreement dated July 1, 1993 Incorporated by Reference to
between Hudson's Bay Company and Exhibit 99.23 to the Company's
ACC Long Distance Inc. February 22, 1996 8-K
10-29* Employment Agreement between Filed herewith; see Exhibit Index
Christopher Bantoft and ACC Long Distance
UK Ltd. dated November 16, 1993, as amended
10-30* Employment Agreement between Filed herewith; see Exhibit Index
Steve M. Dubnik and ACC TelEnterprises Ltd.
dated August 4, 1994
10-31* ACC Corp. Non-Employee Directors' Incorporated by Reference to
Stock Option Plan Exhibit 99.1 to the Company's
February 22, 1996 8-K
11 Statement re: Computation of Per See Note 1 to the Notes to
share Earnings the Consolidated Financial Statements filed
herewith
21 Subsidiaries of ACC Corp. Filed herewith; see Exhibit Index
23 Accountant's Consent re: Incorporation Filed herewith; see Exhibit Index
by Reference
27 Financial Data Schedule Filed only with EDGAR filing,
per Reg. S-K, Rule 601(c)(1)(v)
</TABLE>
* Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Report pursuant to
Item 14(c) of this Report.
(b) REPORTS ON FORM 8-K. On October 27, 1995, the Company filed
a Report on Form 8-K (which was amended on December 8, 1995) to
report, under the heading of Item 2, Acquisition or Disposition of Assets,
on the August 14, 1995 acquisition by the Company's 70% owned Canadian
subsidiary, ACC TelEnterprises Ltd., of four affiliated privately-held
Canadian corporations operating under the business name of Metrowide
Communications. No financial statements were required to be filed with
this Report.
(c) EXHIBITS. See Exhibit Index.
(d) FINANCIAL STATEMENT SCHEDULES. Are attached, along with
the report of the independent public accountants thereon,
as follows:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ACC Corp.:
We have audited in accordance with generally
accepted auditing standards the financial
statements included in this Form 10-K, and have
issued our report thereon 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). Our audit was made for the
purpose of forming an opinion on those statements
taken as a whole. The schedules listed in the
accompanying index are the responsibility of the
Company's management and are presented for
purposes of complying with the Securities and
Exchange Commission's rules and are not part of
the basic financial statements. These schedules
have been subjected to the auditing procedures
applied in the audit of the basic financial
statements and, in our opinion, fairly state in
all material respects the financial data
required to be set forth therein in relation to
the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Rochester, New York
March 29, 1996
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
ACC CORP AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1995, 1994, 1993
(000's)
Balance Charged Net Balance
at to Costs Charged Accounts at
Beginning and to Other Written End of
OF PERIOD EXPENSES ACCOUNTS OFF PERIOD
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts $1,035 $3,284 - ($2,234) $ 2,085
Valuation allowance for
deferred tax assets $7,454 $2,223 $1,261(1) - $10,938
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts $1,008 $2,345 - ($2,318) $ 1,035
Valuation allowance for deferred tax assets $ 603 $6,851 - - $ 7,454
YEAR ENDED DECEMBER 31, 1993
Allowance for doubtful accounts $774 $1,141 - ($907) $ 1,008
Valuation allowance for deferred tax assets - $ 603 - - $ 603
</TABLE>
________________________________
(1) Represents valuation allowance associated with loss carryforwards of
Metrowide Communications which was purchased by ACC Canada on August 1, 1995.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ACC CORP.
Dated: March 29, 1996 By:/s/ David K. Laniak
David K. Laniak,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons, on behalf of
the Company and in the capacities and on the dates indicated.
Dated: March 29, 1996 By:/s/ David K. Laniak
David K. Laniak,
Chief Executive Officer
and a Director
Dated: March __, 1996 By:____________________________________
Richard T. Aab,
Chairman of the Board and a Director
Dated: March 29, 1996 By:/s/ Michael R. Daley
Michael R. Daley,
Executive Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
Dated: March 29, 1996 By: /s/ Hugh F. Bennett
Hugh F. Bennett, Director
Dated: March 29, 1996 By: /s/ Arunas A. Chesonis
Arunas A. Chesonis, President and
Chief Operating Officer and a Director
Dated: March __, 1996 By:___________________________________
Willard Z. Estey, Director
Dated: March 29, 1996 By: /s/ Daniel D. Tessoni
Daniel D. Tessoni, Director
Dated: March 29, 1996 By: /s/ Robert M. Van Degna
Robert M. Van Degna, Director
<PAGE>
<TABLE>
<CAPTION>
LIST OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION LOCATION
<S> <C> <C>
3-1 First Restated Certificate of Incorporation of Incorporated by Reference to
ACC Corp. Exhibit 3 to the Company's
Quarterly Report on Form 10-Q
for its Quarter Ended September 30, 1995
3-2 Certificate of Designations of 10,000 Shares Incorporated by Reference to
of Series A Preferred Stock, par value $1.00 Exhibit 4-1 to the Company's
per share, of ACC Corp. Quarterly Report on Form 10-Q
for its Quarter Ended September 30, 1995
("September 30, 1995 10-Q")
3-3 Bylaws of ACC Corp., as amended through Incorporated by Reference to
December 13, 1995 Exhibit 3-1 to the Company's
Current Report on Form 8-K
filed on February 22, 1996
("February 22, 1996 8-K")
4-1 Form of ACC Corp. Class A Common Stock Incorporated by Reference to
Certificate Exhibit 4-1 to the Company's Registration
Statement on Form S-2, No. 33-41588
declared effective August 21, 1991
4-2 Form of Class A Common Stock Purchase Incorporated by Reference to
Warrant issued to Columbia Capital Corp., Exhibit 4-2 to the Company's
Dated as of July 21, 1995 September 30, 1995 10-Q
4-3 Form of Warrant to purchase 7,500 Shares of Incorporated by Reference to
Class A Common Stock dated October 30, 1995 Exhibit 99.4 to the Company's
February 22, 1996 8-K
10-1 Form of Employment Continuation Incorporated by Reference to
Incentive Agreement between ACC Exhibit 99.3 to the Company's
Corp. and certain of its Key Employees February 22, 1996 8-K
10-2 ACC Corp. Employee Long Term Incentive Incorporated by Reference to
Plan, as amended through February 5, 1996 Exhibit 4-1 to the Company's
Registration Statement on Form S-8,
No. 333-01219, effective February 26, 1996
10-3 Form of ACC Corp. Indemnification Incorporated by Reference to
Agreement with its Directors and Exhibit 10-29 to the Company's
certain of its Executive Officers Report on Form 10-K for its year
ended December 31, 1987
10-4 ACC Corp. Employee Stock Purchase Incorporated by Reference to
Plan Exhibit 4-4 to the Company
Registration Statement on Form
S-8, No. 33-75558, effective
February 22, 1994
10-5 Employment Agreement between ACC Corp. Incorporated by Reference to
and David K. Laniak, dated October 6, 1995 Exhibit 10-2 to the Company's
September 30, 1995 10-Q
10-6 Salary Continuation and Deferred Compensation Incorporated by Reference to
Agreement between ACC Corp. and Richard T. Exhibit 10-3 to the Company's
Aab, dated October 6, 1995 September 30, 1995 10-Q
10-7 Non-Competition Agreement between ACC Corp. Incorporated by Reference to
and Richard T. Aab, dated October 6, 1995 Exhibit 10-4 to the Company's
September 30, 1995 10-Q
10-8 Release and Settlement Agreement between Incorporated by Reference to
the Company and Francis Coleman, dated Exhibit 99.2 to the Company's
December 29, 1995 February 22, 1996 8-K
10-9 Software License Agreement dated Incorporated by Reference to
March 30, 1995 by and between Exhibit 99.5 to the Company's
AMBIX Systems Corp. and the Company February 22, 1996 8-K
10-10 Software License Agreement dated Incorporated by Reference to
February 21, 1996 between Exhibit 99.6 to the Company's
AMBIX Acquisition Corp. and the Company February 22, 1996 8-K
10-11 Bill of Sale from AMBIX Systems Corp. to Incorporated by Reference to
the Company dated February 6, 1996 Exhibit 99.7 to the Company's
February 22, 1996 8-K
10-12 Letter Agreement dated April 27, 1995 Incorporated by Reference to
between the Special Committee of the Exhibit 99.8 to the Company's
Board of Directors of the Company February 22, 1996 8-K
and Richard T. Aab
10-13 Lease dated January 25, 1994 between the Incorporated by Reference to
Hague Corporation and the Company, Exhibit 99.9 to the Company's
as modified by a Lease Modification February 22, 1996 8-K
Agreement No. 1 dated May 31, 1994
and a Lease Modification Agreement
No. 2 dated May 31, 1994, relating to
the Company's leased premises located
at 400 West Avenue, Rochester, New York
10-14 Amended and Restated Lease Agreement Incorporated by Reference to
dated March 1, 1994 between ACC Long Exhibit 99.10 to the Company's
Distance Inc./Interurbains ACC Inc. and February 22, 1996 8-K
Coopers & Lybrand relating to the leased
premises located at 5343 Dundas Street West,
Etobicoke, Ontario, Canada
10-15 Underlease Agreement dated December 23, Incorporated by Reference
to 1993 between ACC Long Distance UK Limited, Exhibit 99.11 to the
Company's IBM United Kingdom Limited, and the Company February 22, 1996 8-K
relating to the leased premises located on the
tenth floor at The Chiswick Centre 414 Chiswick
High Road, London, England
10-16 Underlease Agreement dated June 6, 1995 between Incorporated by Reference to
ACC Long Distance UK Limited, IBM United Exhibit 99.12 to the Company's
Kingdom Limited, and the Company relating to February 22, 1996 8-K
the leased premises located on the first floor at
The Chiswick Centre 414 Chiswick High Road,
London, England
10-17 Supplemental Lease Agreement dated June 3, 1994 Incorporated by Reference to
between ACC Long Distance UK Limited, IBM Exhibit 99.13 to the Company's
United Kingdom Limited, and the Company February 22, 1996 8-K
relating to the leased premises located on the
ninth floor at The Chiswick Centre 414 Chiswick
High Road, London, England
10-18 Credit Agreement, dated as of July 21, 1995, Incorporated by Reference to
by and among ACC Corp. and certain Subsidiaries Exhibit 10-1 to the Company's
as Borrowers, ACC Corp. as Guarantor, and September 30, 1995 10-Q
First Union National Bank of North Carolina,
as Managing Agent and Administrative Agent,
and Shawmut Bank Connecticut, N.A., as
Managing Agent
10-19 Contingent Interest Agreement dated July 21, 1995 Incorporated by Reference to
in favor of First Union National Bank of North Exhibit 99.14 to the Company's
Carolina and Shawmut Bank of Connecticut, N.A. February 22, 1996 8-K
10-20 Leasehold Mortgage dated July 21, 1995 Incorporated by Reference to
between the Company and First Union National Exhibit 99.15 to the Company's
Bank of North Carolina relating to the leased February 22, 1996 8-K
premises located at 400 West Avenue,
Rochester, New York
10-21 Leasehold Mortgage dated July 21, 1995 Incorporated by Reference to
between the Company and First Union National Exhibit 99.16 to the Company's
Bank of North Carolina relating to the leased February 22, 1996 8-K
premises located at Suite 206, State Tower
Building, 109 South Warren Street,
Syracuse, New York
10-22 Leasehold Mortgage dated July 21, 1995 Incorporated by Reference to
between the Company and First Union National Exhibit 99.17 to the Company's
Bank of North Carolina relating to the leased February 22, 1996 8-K
premises located at Suite 2200, Suite 204
and Suite 205, State Tower Building,
109 South Warren Street, Syracuse, New York
10-23 Mortgage of Leasehold Interest dated July 21, Incorporated by Reference to
1995 between the Company and ACC Long Exhibit 99.18 to the Company's
Distance Inc./Interurbains ACC Inc. relating to February 22, 1996 8-K
the leased premises located at 5343 Dundas Street
West, Etobicoke, Ontario, Canada
10-24 Pledge Agreement dated July 21, 1995 by Incorporated by Reference to
the Company in favor of First Union National Exhibit 99.19 to the Company's
Bank of North Carolina February 22, 1996 8-K
10-25 Pledge Agreement dated July 21, 1995 Incorporated by Reference to
by ACC National Long Distance Corp. Exhibit 99.20 to the Company's
in favor of First Union National Bank of February 22, 1996 8-K
North Carolina
10-26 Security Agreement dated July 21, 1995 Incorporated by Reference to
between the Company, certain Domestic Exhibit 99.21 to the Company's
Subsidiaries of the Company and First Union February 22, 1996 8-K
National Bank of North Carolina
10-27 Trademark Security Agreement dated Incorporated by Reference to
July 21, 1995 between the Company and Exhibit 99.22 to the Company's
First Union National Bank of North Carolina February 22, 1996 8-K
10-28 License Agreement dated July 1, 1993 Incorporated by Reference to
between Hudson's Bay Company and Exhibit 99.23 to the Company's
ACC Long Distance Inc. February 22, 1996 8-K
10-29 Employment Agreement between Filed herewith
Christopher Bantoft and ACC Long
Distance UK Ltd. dated November
16, 1993, as amended
10-30 Employment Agreement between Filed herewith
Steve M. Dubnik and ACC TelEnterprises Ltd.
dated August 4, 1994
10-31 ACC Corp. Non-Employee Directors' Incorporated by Reference to
Stock Option Plan Exhibit 99.1 to the Company's
February 22, 1996 8-K
11 Statement re: Computation of Per See Note 1 to the Notes to
Share Earnings the Consolidated Financial
Statements filed herewith
21 Subsidiaries of ACC Corp. Filed herewith
23 Accountant's Consent re: Incorporation Filed herewith
by Reference
27 Financial Data Schedule Filed only with EDGAR
filing, per Reg. S-K,
Rule 601(c)(1)(v)
</TABLE>
EXHIBIT 10-29
THIS AGREEMENT is made the 16th day of November, 1993
BETWEEN:
(1) ACC LONG DISTANCE UK LIMITED a company incorporated in England and
Wales with registered number 2671855 and whose registered office is at
Ground Floor, 2/3 Cursitor Street, London EC4A 1NE (the "Company");
and
(2) CHRISTOPHER BANTOFT of Titcheners, Cotmandene, Dorking, Surrey RH4 2BN
(the "Executive")
NOW IT IS HEREBY AGREED that the Company shall employ the Executive and The
Executive shall serve the Company as Managing Director, or in such other
capacity as may from time to time be mutually agreed, upon and subject to
the following terms and conditions:
1 Interpretation
1.1 In this Agreement unless the context otherwise admits the following
expressions shall have the meaning ascribed to them as follows:
"the Board" means the Board of Directors as constituted from time to
time of the Company and "subsidiary" and "holding company" means a
subsidiary of holding company as defined by Section 736 of the
Companies Act 1984 for the time being of the Company (and
"subsidiaries" and "holding companies" shall be construed
accordingly);
"associated company" means any holding company or subsidiary of the
Company or any other subsidiary of such holding company;
"Business Day" means any weekday, save for Saturdays and bank holidays
on which banks are open for business in the City of London.
1.2 Any reference to a statutory provision shall be deemed to include a
reference to any statutory modification or re-enactment of the same.
2 Commencement and Duration
2.1 The Executive's employment with the Company shall commence no later
than three months from the date of this Agreement. No previous
employment of the Executive shall be treated as being continuous with
the Executive's employment by the Company.
2.2 The commencement date of the Executive's employment with the Company
shall be of the essence of this Agreement and in the event that the
Executive shall not have commenced employment with the Company after
the expiry of three months from the date of this Agreement, the
Company shall be entitled to withdraw its offer of employment to the
Executive and terminate this Agreement forthwith, in which case the
Executive shall have no claim whatsoever against the Company.
2.3 Subject to termination as hereinafter provided, the employment of the
Executive shall continue from year to year provided that the Company
may terminate the employment at any time during the first twelve
months' employment by giving to the Executive six months' written
notice to terminate this Agreement and the Executive may terminate his
employment at any time by giving to the Company three months written
notice to terminate this Agreement.
2.4 After the first twelve months of the Executive's employment the
Company may terminate the employment of the Executive at any time by
giving to the Executive 12 months written notice to terminate this
Agreement and the Executive may terminate his employment at any time
by giving to the Company three months written notice to terminate this
Agreement.
2.5 In the event that the Company serves notice to terminate this
Agreement on the Executive, any subsequent notice of termination from
the Executive to the Company which is served during the Company's
notice period shall be of no effect.
2.6 The Executive warrants to the Company that he is not restricted in any
way from commencing and continuing employment with the Company on and
after the date hereof. The Executive shall indemnify and keep
indemnified the Company against any and all damages, losses, costs and
expenses (including the costs of any legal proceedings to which the
Company may be made party to) arising from the Executive being in
breach of the warranty contained in this sub-clause.
3 REMUNERATION
3.1 As at the date hereof, the Executive shall be entitled to a base
salary at the rate of <pound-sterling>85,000 per annum (which shall
accrue from day to day) payable by equal monthly installments in
arrears on the last day of every month.
3.2 The first of such payments shall be made on the last day of the month
in which the Executive's employment commences and shall be a pro rata
amount in respect of the period from the date hereof to the last day
of such month.
3.3 The Executive's base salary shall be reviewed by the Board in each
year in line with the Company's policy on remuneration review.
3.4 The Company shall be entitled to deduct from the Executive's salary or
from any other payments due to the Executive any amount which the
Company is required by law to deduct (including without limitation any
amount of PAYE or national insurance).
4. BONUS
4.1 The Company may at the Board's discretion, and in line with the
Company's policy, as adapted and changed from time to time by the
Board in its sole discretion, for the payment of the bonuses, pay the
Executive an annual bonus. The maximum achievable bonus during the
first year of the Executive's employment will be 25% of the
Executive's base salary for that period and will be calculated with
reference to annual sales and financial targets to be stipulated by
the Board in its sole discretion. Thereafter, half the amount of the
bonus payable (if any) to the Executive shall be calculated with
reference to the performance of the Company in the twelve month period
applicable to the calculation of the bonus and half of the amount of
the bonus payable (if any) to the Executive shall be calculated with
reference to the performance of the Executive in such twelve months
period, such performance to be measured against criteria set from time
to time by the Board in its sole discretion.
4.2 For the avoidance of doubt, the calculation of any bonus payable to
the Executive for the first and subsequent years of the Executive's
employment with the Company shall be calculated with reference to the
Company's then current financial year. Any payment of bonus in the
first year of the Executive's employment will be pro rated as
necessary. All payments of bonus in respect of the applicable
financial year will be paid at such time as the audited accounts for
that period have been approved by the Board.
4.3 If the Executive's employment is terminated for whatever reason during
any financial year of the Company, the Executive shall be entitled to
a bonus payment calculated on a pro rata basis up until the date of
termination PROVIDED ALWAYS THAT any bonus shall be payable only in
the event that the Executive shall have met with the performance
criteria as set from time to time by the Board for the payment of
bonuses and PROVIDED FURTHER THAT if the Executive is given payment of
his salary entitlement in lieu of any notice period, the Executive
shall not be entitled to any payment of bonus in respect of any period
after the date such payment in lieu of notice is made.
5. STOCK OPTION
5.1 The Directors of ACC Corp., the company's holding company, may in
their absolute discretion grant to the Executive within twelve months
of the date hereof any option to subscribe for up to 10,000 ACC Corp.
common stock of US $.015 each on the terms and conditions of the ACC
Corp. Employee Stock Option Plan ("the Plan") at the date of the grant
of the option, and as required by the Plan, the exercise price per
common stock under the option shall be the closing price for ACC Corp.
common stock as quoted on the US NASDAQ System National Market List
("NASDAQ") for the business day immediately preceding the date of the
grant of the option to the Executive.
5.2 In the event that the Directors of ACC Corp. decide to grant to the
Executive the stock piton in 5.1 above, the Executive shall comply and
shall continue to comply with all of the requirements of the federal
securities laws of the United States of America which are relevant to
the grant of the stock option to the Executive. the Executive
acknowledges that he has been supplied with a copy of the memorandum
dated 13 January 1993 from Underberg & Kessler to the Board of
Directors and Officers of ACC Corp. and its subsidiaries, or any
subsequent memorandum, containing details of the requirements of the
federal securities laws relating to the directors and officers of a
publicly held corporation and is fully aware of such requirements.
5.3 If at the expiry of the period of twelve months from the date hereof
the Executive has not been granted the option referred to in clause
5.1 above solely because either the Directors of ACC Corp. have
elected not to grant such options or the Executive is ineligible to
receive grants under the Plan the Company shall (provided that the
Executive is still in the employment of the Company on the date of the
relevant anniversary) on the first, second, third and fourth
anniversaries of the date hereof pay to the Executive in United State
Dollars the amount (if any) by which the aggregate closing price of
(2500) ACC Corp. common stock as quoted by NASDAQ on the relevant
anniversary (or if the date of such anniversary is not a business day,
the next following business day) exceeds the aggregate closing price
of (2500) ACC Corp. commons stock as quoted on NASDAQ the day
preceding the date hereof (being US $20.75).
6. DEVOTION OF WHOLE TIME TO THE COMPANY'S BUSINESS AND REPORTING
STRUCTURE
6.1 During his employment by the company the Executive shall, unless
prevented by ill-health or holiday:
6.1.1perform such reasonable duties and exercise such powers,
authorities and directions as the Board may form time to time
reasonably assign or vest in him in connection with the business
of the Company and any one or more of the Company's subsidiaries
or associated companies;
6.1.2attend at meetings of the senior management of the Company;
6.1.3devote his whole time and attention during normal working hours
to the business of the Company and such other time as may be
necessary for the performance of his duties hereunder;
6.1.4do all in his power to promote, develop and extend the business
of the Company;
6.1.5conform to and comply with the reasonable directions and
regulations made by the Board or any other authorized person;
6.1.6not, without the previous consent in writing of a Director of the
company duly authorized by resolution of the Board, engage or be
concerned or interested in any other business of a similar nature
to or competitive with that carried on by the Company or any of
its subsidiaries or associated companies;
PROVIDED always that nothing in this clause shall preclude the
Executive from holding, or being otherwise interested in any shares or
other securities of any company which are for the time being quoted on
any recognized Stock Exchange, so long as the interest of the
Executive therein does not without prior written consent of the Board
extend to more than 3% of the aggregate amount of the quoted
securities of any class in respect of any company.
6.2 During the employment of the Executive by the Company:
6.2.1the Executive may be required, on a temporary basis, to work at
such place or places in Great Britain and overseas as may be
determined by the Company from time to time and undertake such
travel overseas as may reasonably be required. In the event of
the Company requiring the Executive to relocate as aforesaid, the
Company shall either give to the Executive three months' prior
written notice thereof or, in the absence of such notice, the
Company shall pay any school fees incurred by the Executive
during any period of relocation PROVIDED ALWAYS THAT the
Executive shall take all necessary steps to mitigate the amount
of any fees payable. The Company's obligation to pay school fees
shall be in respect only of the Executive's children under the
age of 18 years who are receiving full-time education at school
level and this obligation shall not extend to the payment of fees
for higher education; and
6.2.2the Company shall be a liberty from time to time to appoint any
other person or persons to the position in which the Executive is
employed jointly with the Executive and to assign to him or them
duties and responsibilities identical to or similar with those
placed upon the Executive hereunder.
6.3 The Executive shall report to such person who from time to time may be
the Chairman of the Company and/or such other person who may be
designated from time to time by ACC Corp.
7 PENSION SCHEME
The Executive shall during his employment with the Company continue to
be a member of the existing personal pension scheme he operates for
his benefit (or any scheme set up in place of it) and the Company will
pay contributions due to the scheme equal to ten percent per annum of
the Executive's base salary (from time to time). The contributions
payable by the Company to the Executive under this Clause 7 shall be
pad each month save that the Company shall be entitled to vary the
frequency of payments if such monthly payments are inconsistent with
any Company pension scheme which may be introduced from time to time.
No contracting-out certificate is in force in connection with this
employment.
8 HEALTH CARE
The Company shall pay the premiums in resect of private (BUPA or
equivalent) medical expenses insurance effected on behalf of the
Executive and the Executive's spouse and such other members of the
executive's family as is in accordance with ACC Corp. policy.
9. LIFE COVER
The Executive shall during his employment with the Company be a member
of the death-in-service benefit scheme maintained by the Company in
respect of the Executive (or any scheme set up in its place).
10. MOTOR CAR
10.1 The Company shall provide a leased motor car to a maximum purchase
value of <pound-sterling>30,000 for the Executive to assist the
Executive to carry out his duties under this Agreement.
10.2 Such motor car may be changed from time to time in accordance with the
Company's car policy.
10.3 The Company shall pay the cost of insurance, testing, taxing,
repairing, and maintaining the motor car in accordance with the
Company's car policy from time to time.
10.4 The Executive shall be permitted to use the motor car for his own
private purposes including use on holiday, subject to such rules as my
be introduced by the Company from time to time.
10.5 The Company shall pay to the Executive each month a petrol allowance
of <pound-sterling>100 which sum shall be added to the Executive's
base salary. For the avoidance of doubt, the petrol allowance will
not form part of the Executive's base salary.
10.6 The Executive shall take good care of the motor car and procure that
the provisions and conditions of any policy of insurance relating
thereto are observed in all respects, and shall comply with all
regulations of the Company relating to the company cars.
10.7 The Executive shall pay all income tax payable by the Executive by
reason of the provision of the motor care and the payment by the
Company of running expenses of the car pursuant to this clause. The
Company shall be entitled to make such deductions form the Executive's
salary as may be required for payment of any such income tax.
10.8 In the event that the Executive is convicted of any alcohol or drugs
related motoring offense which gives rise to an increase in insurance
premiums payable by the Company in respect of the motor car, the
Executive shall reimburse to the Company the amount of such increase.
11. EXPENSES
The Company shall pay or procure to be paid to the Executive all
reasonable travelling hotel and other out-of-pocket expenses wholly
exclusively and necessarily incurred by him in the proper performance
of his duties under this Agreement. any such payment shall be subject
to this providing the Company with satisfactory vouchers or other
evidence of actual payment of the said expenses. for the avoidance of
doubt, no expenses will be paid to the Executive in respect of petrol
for private mileage and for mileage between the Executive's place of
abode for the time being and the Company's offices at which the
Executive is usually based. All other business mileage will be fully
reimbursed.
12. ABSENCE THROUGH ILLNESS
12.1 In the case of illness of the Executive or other cause substantially
incapacitating him from properly performing his duties, the Executive
shall, subject to clause 12.2, and to the production of such
satisfactory medical evidence as the Board my reasonably require,
continue to be paid his full salary and benefits during such absence.
12.2 If such absence shall aggregate in all sixteen weeks in any fifty-two
consecutive weeks, the Company may terminate the employment of the
Executive forthwith by notice given within twenty-eight days of the
end of the last of such sixteen weeks. On termination pursuant to
this clause 12.2, the Company shall pay to the Executive a sum equal
to three months salary from the date of such termination.
12.3 The amounts payable by the Company to the Executive under this clause
will be reduced by the amount of any Statutory Sick Pay payable to the
Executive.
13. HOLIDAYS
13.1 The Executive shall (in addition to the usual public and bank
holidays) be entitled to twenty-five days paid holiday in each
calendar year to be taken at a time or times mutually agreed with the
Company. The Executive's entitlement to holiday during the first year
of employment shall be pro-rated as necessary.
13.2 The Executive shall not be entitle without the consent of the Board to
carry forward tot any subsequent year any period of holiday to which
he was entitled in the previous year but which he did not take during
such previous year.
14. CONFIDENTIALITY
14.1 The Executive shall not either during his employment hereunder or at
any time after its termination:
14.1.1disclose to any person or persons (except to those authorized by
the Company to know)
14.1.2use for his own purposes or for any purposes other than
those of the Company; or
14.1.3through any failure to exercise all due care and diligence
cause any unauthorized disclosure of
any private, confidential or secret information of the Company
(including in particular lists or details of customers of the
Company or relating to the working of any process of invention
carried on or used by the Company or any invention of the
company) or which he has obtained by virtue of his appointment or
in respect of which the Company is bound by an obligations of
confidence to a third party. These restrictions shall cease to
apply to information or knowledge which may (otherwise than
through the default of the Executive) become available to the
public generally.
14.2 The provisions of clause 14.1 shall apply mutatis mutandis in relation
to the private, confidential or secret information of any subsidiary
or associated company of the Company which the Executive may have
received or obtained during his appointment and the Executive shall
upon request enter into an enforceable agreement with any such company
to the like effect.
14.3 All notes, memoranda, records and writing made by the Executive
relating to the business of the Company or any subsidiary or
associated company of the company shall be and remain the property of
the company such subsidiary or associated company to whose business
they relate and shall be delivered by him to the company to which they
belong forthwith upon request.
15. SUMMARY TERMINATION
The employment of the Executive hereunder may be determined forthwith
by the Company without payment in lieu of notice if the Executive:
15.1 is guilty of any gross default or gross misconduct in connection with
or affecting the business of the company or any of its subsidiaries or
associated companies of which he may be for the time being a director;
or
15.2 is in material breach of any of the provisions of this Agreement
unless the breach is capable of remedy and is not remedied within 7
days of notice by the company requiring remedy; or
15.3 commits an act of bankruptcy, becomes insolvent, or takes advantage of
any statute for the time being in force for insolvent debtors, or
takes or suffers any similar analogous action on account of debt.
16. RECONSTRUCTION
If the employment of the Executive is terminated by reason of the
liquidation of the Company for the purpose of reconstruction or
amalgamation, the Executive shall be offered employment with any
concern or undertaking resulting from such reconstruction or
amalgamation on terms and conditions no less favorable than the terms
of this Agreement. the Executive shall in such circumstances have no
claim against the Company in respect of the termination of his
employment.
17. EFFECT OF TERMINATION
17.1 The Termination of the Executive's employment in accordance with the
terms of this Agreement howsoever occasioned shall not prejudice any
claim which either party may have against the other in respect of any
antecedent breach of any provision of this Agreement, nor shall it
prejudice the continuance in force of any provision which, is
expressly or by implication, intended to come into, or continue in
force on or after such termination.
17.2 Upon the termination for whatever reason of the Executive's employment
hereunder, the Executive shall thereafter, upon the request of the
company:
17.2.1resign without claim for compensation from office of the company
and such other offices held by him in the Company or any of its
subsidiaries or associated companies as may be so requested. In
the event of the Executive's failure to do so forthwith upon
request, the Company is hereby irrevocably authorized to appoint
some person in his name and on his behalf to sign and deliver
such resignation or resignations to the Company and to each
subsidiary or associated company of the Company of which the
Executive is at the material time an officer;
17.2.2hand over to the Company or as it may direct and without
retaining copies of the same all documents books records
correspondence and other papers of whatsoever nature relating to
the business of the Company and any of its subsidiaries or
associated companies and any keys and other property whatsoever
of the Company and any of its subsidiaries or associated
companies which may then be or ought to be in his possession.
18. PAY IN LIEU OF NOTICE
On serving notice for any reason to terminate this Agreement the
Company shall instead of giving the Executive the appropriate period
of notice be entitled (at its sole discretion) to pay to the Executive
his salary and full contractual benefits (at the rate then current)
for the appropriate period of notice of such termination.
19. LEAVE OF ABSENCE
On serving notice for any reason to terminate this Agreement the
Company may (at its sole discretion) require the Executive to take
paid leave of absence equal in length of time to the Executive's
entitlement to notice of such termination.
19.2 Whilst on such leave of absence the Executive shall not, without the
prior written consent of the Company or at the Company's request,
contact any employee, customer or supplier of the Company.
20. GRIEVANCE AND DISCIPLINARY PROCEDURES
There is not formal disciplinary procedure applicable to this
employment. Should the Executive have a purported grievance this
shall be taken up at first instance with the Chairman of the Board and
both the Executive and the Chairman will use their respective best
endeavors to seek a satisfactory resolution thereof.
21. SEVERABILITY
Each and every provision in this Agreement shall be read as a separate
and distinct undertaking and the invalidity, illegality or
unenforceability of any part of this Agreement shall not affect the
validity, legality or enforceability of the remainder.
22. WAIVER
No waiver by the Company of any of its rights hereunder shall be
deemed a continuing waiver of any rights hereunder.
23. ASSIGNMENT
The Company shall be entitled to assign its rights under this
Agreement to any of its subsidiaries by whom the Executive shall for
the time being be employed on behalf of which he shall at any time
work and the Executive agrees to accept any such assignment.
24. NOTICES
Any notice to be given under this Agreement shall be sufficiently
served:
24.1 In the case of the Executive by being delivered either personally to
him or sent by registered post or recorded delivery to his usual or
last known residential address in Great Britain; and
24.2 In the case of the Company by being personally delivered at or sent by
registered post or recorded delivery addressed to its registered
office.
25. CLAUSE HEADINGS
Clause Headings are incorporated in this Agreement for ease of
reference only and shall not affect its interpretation.
26. GOVERNING LAW
This Agreement shall be subject to English Law and the parties hereto
hereby agree to submit to the non-exclusive jurisdiction of the
English Courts.
27. PREVIOUS AGREEMENTS
27.1 This Agreement supersedes all existing agreements, contacts,
representations, and understandings for the employment of the
Executive by the Company.
27.2 The Executive hereby acknowledges that as at the date of execution of
this Agreement he has no outstanding claims of any kind against the
Company or any associated company.
AS WITNESS the hands of the parties hereto the day and year first above
written.
Signed by )
for and on behalf of )
ACC LONG DISTANCE UK LIMITED)/s/ Richard E. Sayers
in the presence of: )
/s/Marcia Benwitz
Signed by CHRISTOPHER )
BANTOFT in the presence of: )/s/ C. Bantoft
/s/ Roger Brown
SUPPLEMENTARY CONTRACT OF EMPLOYMENT
This Agreement is made the 7th day of July, 1995.
BETWEEN:
1 . ACC LONG DISTANCE UK LTD a company incorporated in England
and Wales with registered number 2671855 and whose registered
office is at Ground Floor, 2-3 Cursitor, London EC4A 1 NE ("the
Company"); and
2. ACC CORP, a Delaware Corporation with its principal executive offices
at 39 State Street, Rochester, New York 14614, USA ("ACC Corp"); and
3. CHRIS BANTOFT of Titcheners, Cotmandene, Dorking, Surrey RH4 2BH ("the
Executive").
WHEREAS:
A. This Agreement is supplemental to a contract of employment made the
16th day of November 1993 ("the Contact of Employment") between the
Company and the Executive whereby the Company has undertaken to employ
the Executive on the terms and conditions contained in the Contract of
Employment.
B. ACC Corp agrees to guarantee the due performance by the Company of the
Contract of Employment, as amended by this Agreement, in the manner
hereinafter appearing.
NOW IT IS HEREBY AGREED AS FOLLOWS:
1 . In consideration of the Executive continuing his employment with the
Company, the Company and ACC Corp hereby agree that the Contract
of Employment is amended and modified in the manner hereinafter
appearing.
2. TERMINATION OF THE EXECUTIVE'S EMPLOYMENT IN THE EVENT OF A CHANGE IN
CONTROL
2.1 If, as a condition precedent to, as a result of, or within one year
following a Change In Control of the Company or ACC Corp. (i) the
Executive's employment with the Company is terminated by the Company
or the Acquiring Entity (other than for breach of contract), or
(ii)the Executive resigns his employment with the Company or with the
Acquiring Entity within one month of the occurrence of either of the
following events:
2.1.1A significant adverse change in the nature or scope of the
Executive's employment duties or authority or a reduction in the
Executive's total compensation/remuneration and benefits as the
same existed immediately prior to the Change In Control to which
the Executive has not consented in writing; or
2.1.2A reasonable determination is made by the Executive that, as
a result of the Change In Control of the Company or ACC Corp, as
the case may be, and any change in circumstances thereafter
significantly affecting his position, he is unable to exercise
the authority, power, functions or duties that he had so
exercised immediately prior to such Change in Control,
then immediately upon such termination or resignation, the Executive
shall be entitled to receive from the Company his total annual
salary/remuneration and other benefits as were in effect immediately
prior to any such Change In Control (less such sums as the Company is
obliged to deduct by way of PAYE or other taxation) for a period of
one year following the date of termination by way of payment as
compensation for loss of office or employment in full and final
settlement or by way of a redundancy payment if such termination or
resignation is considered a redundancy situation by the Company and
the Executive.
2.2 "CHANGE IN CONTROL" shall mean a change in control of the Company or
ACC Corp, as the case may be, by means of a party acquiring a
controlling interest in the Company or ACC Corp whether by acquisition,
disposition or merger or any analogous procedures or any other means
whatsoever. For the purpose of this Clause 2.2 there shall be deemed
to be an acquisition of a controlling interest in the Company or ACC
Corp if a person, firm or company obtains de facto control of the
Company or ACC Corp aggregating for this purpose all interests and
rights of that person, firm or company and all its connected persons
(as defined in Section 839 of the Income and Corporation Taxes Act
1988).
2.3 "ACQUIRING ENTITY" shall mean any third party that, as a result of a
Change In Control, either directly or indirectly has a controlling
interest (as defined above) over the Company or ACC Corp.
3. GUARANTEE
3.1 In consideration of the Executive continuing his employment with the
Company and in consideration of the sum of El paid by the Executive to
ACC Corp (receipt of which is acknowledged), ACC Corp irrevocably
guarantees to the Executive the due performance by the Company of each
and all the obligations, duties and undertakings of the Company under
and pursuant to the Contract of Employment and this Agreement when and
if such obligations, duties and undertakings shall -become due and
performable according to the terms of the Contract of Employment and
this Agreement.
3.2 ACC Corp hereby authorizes the Company and the Executive to make any
addendum or variation to the Contract of Employment, the due and
punctual performance of which addendum and or variation shall be
likewise guaranteed by ACC Corp in accordance with the terms of this
Agreement. The obligations of ACC Corp hereunder shall in no way be
affected by any variation or addendum to the Contract of Employment.
3.3The liability of ACC Corp under this guarantee shall not be affected by
the grant of any time or indulgence by the Executive to the Company.
4. GOVERNING LAW
This Agreement shall be subject to English law and the parties hereby
agree to submit to the exclusive jurisdiction of the English Courts.
5. PREVIOUS AGREEMENT
Save for the amendments and modifications made to the Contract of
Employment as set out in this Agreement, the Contract of Employment
shall remain in full force and effect.
AS WITNESS the hands of the parties hereto the day and year first above
written.
Signed by
For and Behalf of
ACC LONG DISTANCE UK LIMITED /s/ David K. Laniak
In the presence of:
/s/ Laurie J. Peath
Signed by
For and behalf of
ACC CORP /s/ Arunas A. Chesonis
In the presence of:
/s/Laurie J. Peath
Signed by CHRIS BANTOFT /s/ C. Bantoft
In the presence of:
EXHIBIT 10-30
EMPLOYMENT CONTINUATION INCENTIVE AGREEMENT
AGREEMENT made by and between ACC TelEnterprises Ltd., 5343 Dundas
Street West, Toronto, Ontario ("Company"), and Steve M. Dubnik
("Incumbent").
WHEREAS, Incumbent is commencing employment as President and Chief
Executive Officer of the Company and any Canadian subsidiary or affiliate
of the Company, beginning July 11, 1994;
AND WHEREAS, the business environment in which the Company operates is
an extremely competitive and constantly changing one;
AND WHEREAS, in view of this business environment, the Company
desires, through this agreement, to provide such measure of security to the
Incumbent as an incentive to him to remain a key member of the management
of the Company;
NOW, THEREFORE, in consideration of the mutual promises herein
contained, and other good and valuable consideration, the receipt and
sufficient of which is hereby acknowledged, the parties hereto agree as
follows:
1. POSITION AND DUTIES. Incumbent will be employed in the position
of President and Chief Executive Officer of the Company and have the usual
duties and responsibilities associated with that position and any
additional duties commensurate with the position as assigned by the Company
from time to time. These additional duties may also include similar
responsibilities with certain corporations affiliated with the Company from
time to time. Incumbent will continue to devote his full working time and
attention to all of these duties and responsibilities.
2. SALARY AND BONUSES. Incumbent will receive an annual salary at
the rate of $208,312.00 (Canadian) less applicable statutory deductions,
payable in arrears, in
substantially equal installments every two weeks. During the Term of this
Agreement, Incumbent's base salary shall not be reduced, nor shall
Incumbent's Company-provided benefits be reduced, except as part of a
Company-wide reduction of salaries or of such benefits for all Company
executives. In addition, Incumbent will be entitled to participate in the
bonus plan as approved by the Board of Directors of the Company.
3. BENEFITS AND STOCK OPTIONS. Incumbent will be entitled to
participate in all employment benefit plans made available by the Company
to its executive employees, as amended from time to time, and to any
retirement saving contribution plan which may be established by the
Company.
Incumbent will be entitled to participate in a Stock Option Program to
be approved by the Board of Directors.
4. Vacation Incumbent will be entitled to four weeks vacation with
pay to be taken at a time or times to be mutually agreed.
5. NON-SOLICITATION. Incumbent shall not during his employment and
for a period of one year subsequent to the termination of his employment,
directly or indirectly, as principal, partner, associate, employee or
otherwise, on his own or on behalf of another:
(a) Request or influence any employee of the Company to terminate or
resign his employment; and
(b) Solicit or attempt to solicit the business of any client or
customer with whom the employee dealt during the one year (1)
period immediately preceding his termination of employment for
the purpose of promoting, distributing, selling or in any way
dealing- with long distance telecommunications services ("Company
business").
6. COVENANT NOT TO COMPETE Incumbent hereby covenants and agrees
that while employed by the Company during the term of this agreement and
thereafter, for so long as he is receiving payments under this agreement:
(a) He will not, for himself or on behalf of any other person, firm,
partnership or corporation call upon any customer of the Company
for the purpose of soliciting or providing such customer any
products or services which are the same as or similar to those
provided to customers by the Company. For purposes of this
agreement, customers of the Company has include but not be
limited to all customers contacted or solicited by the Company or
the Incumbent within twelve months prior to any termination of
this agreement.
(b) Incumbent will not, for himself or on behalf of any other person,
firm, partnership or corporation directly or indirectly seek to
persuade any director, officer or employee of the Company to
discontinue that individual status or employment with the Company
in order to become employed in any activity similar to or
competitive with the business of the Company, nor will the
Incumbent's solicitor retain any such person for such purpose.
It shall not be a breach or threat of breach of sub-paragraph
6(b) or (c) of this agreement for Incumbent to explore or seek
employment, including employment with a business of a type
described in sub-paragraph 6(c), for himself.
(c) Incumbent will not directly or indirectly, alone or as an
employee, independent contractor of any type, partner, officer or
director, creditor, substantial stockholder (5% or greater) or
holder of any option or right to become a substantial stockholder
in any entity or organization, engage within the States of the
United States, or Canada, or anywhere else in the world in which
the Company at any time during the Term of this Agreement shall
be conducting business, in any business pertaining to the sale,
distribution, manufacture, marketing, production or provision of
products or services similar to or in competition with any
products or services produced, designed, manufactured, sold,
distributed or rendered, as the case may be, by the Company; nor
for the same period of time within the same areas and under the
same conditions as previously set forth, shall the Incumbent
advance creditor, lend money, furnish quarters or give advice,
directly or indirectly, to any person, corporation or business
entity of any kind (other than the Company) which is engaged in
any such business or operation, nor shall he directly or
indirectly ship or cause to be shipped or have any part in the
shipping of such products to any point within said areas for the
purposes of resale; provided, however, that nothing contained in
this paragraph shall prevent the Incumbent from investing in
corporate securities which are traded on a recognized stock
exchange.
(d) If any of the restrictions or competitive activities contained in
this Paragraph 6 shall for any reason be held by a court of
competent jurisdiction to be excessively broad as to duration,
geographical scope, activity or subject, such restrictions shall
be construed so as to thereafter be limited or reduced to be
enforceable to the extent compatible with applicable law as it
shall then exist; it being, understood that by the execution of
this Agreement the parties hereto regard such restrictions as
reasonable and compatible with their respective rights and
expectations.
7. CONFIDENTIALITY. In performing his duties and responsibilities,
Incumbent will acquire wide experience and knowledge with respect to the
Company's business, the manner in which such business is conducted and the
business of any past, present or potential customer or vendor of the
Company.
Incumbent therefore agrees that he will not knowingly, either during
his employment or thereafter, disclose to any unauthorized person or entity
any confidential information relating to Company business or Company
affairs, or business or affairs of any past, present or potential customer
or vendor of the Company. For the purposes of this clause, confidential
information includes, but is not limited to, a formula, patterns, model,
instructions, notes, data, reports, documents, files, compilation, program,
device method, technique, process, know-how, intellectual property, trade
secrets, business plan, customer list, pricing information, cost data,
profit margins, financial data, employee list, marketing plan, or sales
proposal, that derives independent economic value, actual or potential,
from not being generally known to and not being readily ascertainable by
proper means by other persons who can obtain advantage from its use or
disclosure. This includes not only what has been learned by or revealed to
him, but also such information developed by him while employed by the
Company (collectively, the "confidential information").
Notwithstanding anything contained herein to the contrary, Incumbent
shall not be responsible or liable hereunder for the disclosure of
confidential information if:
(a) the confidential information enters the public domain other than
through a breach of this Agreement; or
(b)(b)the confidential information is publicly disclosed in compliance
with any applicable law or regulation.
Incumbent further agrees that all models, instructions, drawings,
notes, reports, files, memoranda or other writings, made by him or which
may come into his possession while employed by the Company, and which
relate in any way to or embody any secret or confidential activity of the
Company, shall be the exclusive property of the Company and shall be kept
on the Company's premises except when required elsewhere in connection with
any activity of the Company.
8. INVENTIONS All inventions, discoveries or improvements concerning
any matter or thing which is directly or indirectly related to Company
business, which Incumbent may make, conceive or reduce to practice while
employed by the Company, whether during or after working hours and whether
alone or with others, are the property of the Company, to which the same
are hereby assigned; and Incumbent hereby undertakes to make promptly a
full disclosure thereof to the Company, and to co-operate and assist the
Company, without charge, during the period of his employment and
thereafter, as may be required, including the execution of all documents to
enable the Company to apply in its name for Letters Patent in all countries
of the world so that the Company can consummate its rights under this
Paragraph.
9. TERMINATION The Company may terminate this Agreement and
Incumbent's employment hereunder as follows:
(a) At any time, for just cause without notice or payment in lieu
thereof, which cause shall include, but not be restricted to, the
disclosure of confidential information contrary to Paragraph 7 of
the Agreement.
(b) In the event that Incumbent's employment by the Company is
terminated by the Company without just cause, Incumbent shall be
entitled to receive his then current salary inclusive of all
benefits in effect at such time of termination, for twelve (12)
months following the effective date of such termination. Such
payment shall be made on the Company's normal payroll schedule.
(c) Incumbent will provide the Company with a minimum of two (2)
weeks notice of resignation, which notice the Company may waive
in whole or in part at its full discretion.
(d) Notwithstanding anything contained herein to the contrary, in the
event of a Change of Control of the Company, as defined in
paragraph 9(d)(i) herein, and subsequent termination of Incumbent
within a twelve (12) month period following such Change in
Control, either (1) by the Company without just cause or (2) by
Incumbent for Good Reason, as defined in paragraph 9(d)(ii)
herein, for the period of twelve (12) months immediately
following the effective date of such termination Incumbent shall
be entitled to receive a total aggregate amount equal to twelve
times his then current salary inclusive of all benefits in effect
at that time, for the twelve (12) months following the effective
date. Such payment shall be made on the Company's normal payroll
schedule, and, to the maximum extent not precluded by applicable
law, are inclusive of his entitlement to termination pay and
severance under statute.
For the purpose of this Agreement:
(i) a "Change in Control" of the Company shall mean the
acquisition of issued and outstanding shares carrying more
than @ percent (50%) of the votes attaching to shares of the
Company or of ACC Corp. or the acquisition of all of the
assets and undertaking of the Company or of ACC Corp. by any
corporation, partnership, joint venture, person or group of
persons acting together, other than the controlling
shareholder of the Company as of the date hereof or any
corporation, partnership, joint venture or other person
controlled as to more than fifty percent (50%) by such
controlling shareholder, and
(ii) termination by Incumbent for "Good Reason" shall mean:
(1) a material reduction or diminution in the level of
Incumbent's responsibility as President;
(2) a material reduction in Incumbent's compensation level; or
(3) the failure of the Company to maintain substantially similar
employment terms after the Change in Control.
(iii)benefits shall mean any and all employee benefits, both
taxable and non-taxable, (including but not limited to,
life, health, and dental insurance, automobile allowance or
leased automobile, cellular car phone, officer's
reimbursement fund, relocation reimbursement fund, long
distance calling allowance, payment of professional
associations fees, RSSP plan and matching contributions,
etc.) and/or the dollar value of any such employee benefits.
(e) Notwithstanding anything contained herein to the contrary,
Incumbent shall no longer be entitled to receive his then current
salary and benefits following the effective date of his
termination pursuant to paragraph 9(b) or paragraph 9(d) should
he, at any time during the 12 month period following his
termination under paragraph 9(b), or twelve 12 month period
following his termination under paragraph 9(d) as the case may
be, be in breach of any paragraph of paragraphs 5, 6, 7 and 8 of
this Agreement.
10. SEVERABILITY. If the time, area or scope referred to in any
provision of this Agreement shall be considered invalid or unenforceable by
any court, such provision shall be deemed to be reduced to apply to the
maximum time, area or scope permitted by law or, if not subject to such
reduction, such provision shall be deemed severed therefrom with all other
provisions of this Agreement remaining in full force and effect.
11. PRIOR AGREEMENTS AND OBLIGATIONS. Incumbent represents that his
performance of all terms and conditions of the Agreement, and his
employment hereunder, do not and shall not breach any fiduciary or other
duty or any covenant, agreement or understanding, including any agreement
or duty relating to confidential information, knowledge or data acquired by
him in confidence or otherwise prior to his employment by the Company,
except as disclosed in offer of employment dated July 6, 1994 between
Incumbent and the Company (attached hereto as Schedule "A" to this
agreement), or induce the Company to use any confidential information,
knowledge or data belonging to any previous employer or others with whom he
was in a contractual relationship or to whom he owed a duty of
confidentiality.
Incumbent agrees that this Agreement covenants and agrees that if he
violates this representation and/or covenant not to breach any fiduciary or
other duty or any covenant, agreement or understanding, including any
agreement or duty relating to confidential information, knowledge or data,
as set out above, Incumbent shall save harmless and indemnify the Company
from any liability it incurs as a result of any action, claim, complaint
and demand of every nature or kind arising out of any such breach,
including payment of its reasonable costs and expenses including legal fees
incurred in connection therewith. Notwithstanding anything contained to
the contrary in this Article 1 1, Incumbent shall be exempt from all
covenants, agreements, representations and liabilities herein relating to
Incumbent's previous employment with RCI Long Distance and its affiliates.
If any conflict arises therefrom the undertakings contained in the offer of
employment dated July 6, 1994 shall apply.
12. SUCCESSORS OR ASSIGNEES Incumbent agrees that this Agreement may
be assigned by the Company at any time without notice to any parent,
subsidiary, affiliate or successor in interest to its general business
operation and all the covenants and obligations of the employee shall enure
to the benefit of any successor or assignee. Incumbent acknowledges that
this Agreement is personal to him and shall not be assignable by him but
shall enure to the benefit of his estate in the event of his death.
13. SURVIVAL. The obligations contained in Paragraphs 5, 6, 7 and 8
of the Agreement survive the termination of the Agreement and Incumbent's
employment thereunder.
14. INJUNCTIVE RELIEF. Incumbent agrees that the covenants contained
in Paragraphs 5, 6, 7 and 8 of the Agreement are reasonable and necessary
for the protection of the Company's legitimate interests and, therefore,
waives any defense to the strict enforcement by the Company or its
affiliates or subsidiaries provided the Company seeks enforcement of the
covenant(s) within two (2) years notice of any breach thereof. In
addition, without intending to limit the remedies available to the Company,
Incumbent acknowledges that a breach of any of the covenants contained in
Paragraphs 5, 6, 7 and 8 of the Agreement may result in material
irreparable injury to the Company or its affiliates or subsidiaries for
which there is no adequate remedy at law, that it will not be possible to
measure damages for such injuries precisely and that, in the event of such
a breach or threat thereof, the Company shall be entitled to obtain any and
all of a temporary restraining order and a preliminary or permanent
injunction restraining you from engaging in activities prohibited by
Paragraphs 5, 6, 7 and 8 or such other relief as may be required to enforce
specifically any of the covenants set out therein. In addition, the
Company will be entitled to all of its reasonable legal costs and expenses,
including legal fees, in enforcing its rights under these provisions.
15. GOVERNING LAW. This Agreement will be governed by and interpreted
in accordance with the laws of the Province of Ontario and each of the
parties irrevocably attorns to the jurisdiction of the Courts of the
Province of Ontario.
16. ADVICE OF COUNSEL. Incumbent has received a copy of this
Agreement, and having had the opportunity to review the Agreement with
legal counsel of his choice, has read, understands and hereby accepts its
terms and conditions.
IN WITNESS WHEREOF, the parties have executed this 4th day of August,
1994.
/s/ Barry K. Singer /s/ Steve M. Dubnik
Witness ______________________
Steve M. Dubnik
ACC TelEnterprises Ltd.Per: /s/ Richard E. Sayers
EXHIBIT 21
SUBSIDIARIES OF ACC CORP.
STATE, PROVINCE OR COUNTRY OF
NAME INCORPORATION
ACC Credit Corp. Delaware
ACC Global Corp. Delaware
ACC Local Fiber Corp. New York
ACC Long Distance Corp. New York
ACC Long Distance Corp.* Delaware
ACC Long Distance of Arizona Corp.* Delaware
ACC Long Distance of California Corp.* Delaware
ACC Long Distance of Connecticut Corp.* Delaware
ACC Long Distance of Florida Corp.* Delaware
ACC Long Distance of Georgia Corp.* Delaware
ACC Long Distance of Illinois Corp. Delaware
ACC Long Distance of Indiana Corp.* Delaware
ACC Long Distance of Maine Corp.* Delaware
ACC Long Distance of Maryland Corp.* Delaware
ACC Long Distance of Massachusetts
Corp.* Delaware
ACC Long Distance of Michigan Corp.* Delaware
ACC Long Distance of New Hampshire
Corp.* New Hampshire
ACC Long Distance of New Jersey Corp.* Delaware
ACC Long Distance of Ohio Corp. Delaware
ACC Long Distance of Pennsylvania Corp. Delaware
ACC Long Distance of Rhode Island Corp.* Delaware
ACC Long Distance of Vermont Corp.* Delaware
ACC Long Distance of Washington Corp.* Delaware
ACC Long Distance Inc.** Ontario, Canada
ACC Long Distance UK Ltd. United Kingdom
ACC Long Distance Sales Corp.* Delaware
ACC National Long Distance Corp. Delaware
ACC National Telecom Corp. Delaware
ACC Network Corp. New York
ACC Radio Corp. New York
ACC Service Corp. Delaware
ACC TelEnterprises Ltd. Ontario, Canada
Danbury Cellular Telephone Co. Connecticut
Metrowide Communications Inc.** Ontario, Canada
ACC Long Distance France S.A.R.L. France
ACC Long Distance of Australia PTY Ltd. Australia
(dissolution pending)
ACC Cellular Corp. (not organized;
dissolution pending) Delaware
ACC Denmark A/S Denmark
Cel Tel Corp. (dissolution pending) Delaware
United Bluegrass Cellular Corp.
(dissolution pending) Delaware
Network Consultants (a general partnership;
dissolution pending) New York
________________________________________________
* A subsidiary of ACC National Long Distance Corp.
** A subsidiary of ACC TelEnterprises Ltd.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K into the Company's
previously filed Registration Statements on Form S-8, No.333-01219,
No.33-30817, No.33-36546, No.33-52174, No.33-87056 and No.33-75558.
/s/ ARTHUR ANDERSEN LLP
Rochester, New York
March 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED 1995 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000783233
<NAME> ACC CORP.
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
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<RECEIVABLES> 41,063
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<COMMON> 129
9,448
0
<OTHER-SE> 26,278
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