<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 22, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ACC CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 4813 16-1175232
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification No.)
Incorporation or
Organization)
400 WEST AVENUE
ROCHESTER, NEW YORK 14611
(716) 987-3000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
STEVE M. DUBNIK
EXECUTIVE VICE PRESIDENT
ACC CORP.
400 WEST AVENUE
ROCHESTER, NEW YORK 14611
(716) 987-3000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
---------------
COPIES TO:
James A. Locke, III, Esq. John C. Stephen M. Goodman, Esq. Morgan,
Partigan, Esq. Nixon, Hargrave, Lewis & Bockius LLP 2000 One Logan
Devans & Doyle LLP Clinton Square Square Philadelphia, Pennsylvania
Post Office Box 1051 Rochester, New 19103 (215) 963-5086
York 14603-1051 (716) 263-1000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the merger (the "Merger") of a subsidiary of the Registrant with
and into US WATS, Inc. ("USW") pursuant to the Agreement and Plan of Merger
described in the enclosed Proxy Statement/Prospectus have been satisfied or
waived.
---------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH CLASS PROPOSED MAXIMUM
OF AMOUNT TO MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE BE REGISTERED OFFERING PRICE OFFERING PRICE REGISTRATION
REGISTERED (2) PER SHARE (3) (3) FEE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock,
$.015 par value (1) 1,870,000 $23.46 $43,867,747 $12,941
</TABLE>
- -------------------------------------------------------------------------------
(1) Each share of Class A Common Stock has an attached right to purchase
shares of preferred stock of the Registrant in certain circumstances
pursuant to the Registrant's Shareholder Rights Agreement.
(2) Based upon an estimate of the maximum number of shares of Class A Common
Stock of the Registrant issuable pursuant to the Merger.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) under the Securities Act of 1933 and based upon
the product of (i) $2.00 (the average of the high and low reported sale
prices of the USW Common Stock to be cancelled in the Merger as reported on
The Nasdaq Stock Market on January 19, 1998) times (ii) 21,933,737 (the
number of shares of USW Common Stock outstanding and reserved for issuance
upon the exercise of options and warrants to purchase USW Common Stock on
January 21, 1998).
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
US WATS, INC.
111 PRESIDENTIAL BLVD.
SUITE 114
BALA CYNWYD, PA 19004
, 1998
Dear Shareholder:
You are invited to attend a Special Meeting of Shareholders (the "Special
Meeting") of US WATS, Inc., a New York corporation ("USW"), to be held at
on , 1998 at .m., local time.
The purpose of the Special Meeting is to consider and vote upon the
Agreement and Plan of Merger, by and among ACC Corp., a Delaware corporation
("ACC"), ACC Acquisition-Blue Corp., a Delaware corporation wholly owned by
ACC ("Acquisition Sub"), and USW, dated as of October 28, 1997 ("Merger
Agreement"), the merger of Acquisition Sub with and into USW to be effected
thereby (the "Merger"), and all related transactions. If the Merger is
consummated, USW will survive the Merger as a wholly-owned subsidiary of ACC,
and the shares of common stock of USW, par value $.001 per share (the "USW
Common Stock"), that are issued and outstanding at the effective time of the
Merger, other than shares held by shareholders who perfect their statutory
dissenters' rights, will be converted automatically into the right to receive
a number of shares of the Class A Common Stock of ACC, par value $.015 per
share ("ACC Common Stock"), to be determined pursuant to the Merger Agreement.
Approval and adoption of the Merger Agreement and approval of the Merger
require the affirmative vote of holders of two-thirds of all outstanding
shares of USW Common Stock entitled to vote on the record date for the Special
Meeting (the "Record Date").
THE BOARD OF DIRECTORS OF USW HAS UNANIMOUSLY APPROVED AND ADOPTED THE
MERGER AGREEMENT AND APPROVED THE MERGER AND RECOMMENDS THAT YOU VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER. In
reaching its determination regarding the Merger Agreement and the Merger, the
Board considered, among other things, the opinion of Bengur Bryan & Co., Inc.
as to the fairness, from a financial point of view, of the consideration to be
received by the shareholders of USW pursuant to the Merger. The opinion of
Bengur Bryan & Co., Inc. is included as Exhibit D to the attached
Prospectus/Proxy Statement.
The Board of Directors has fixed the close of business on , 1998
as the Record Date for determination of shareholders entitled to notice of and
to vote at the Special Meeting.
In view of the importance of matters to be acted upon at the Special
Meeting, you are invited to personally attend the Special Meeting. Regardless
of whether you expect to be present in person at the Special Meeting, you are
encouraged to complete, date, sign and return the enclosed proxy in the
accompanying envelope, which requires no postage if mailed in the United
States, whether or not you intend to be present at the Special Meeting. Once
you have submitted a proxy, you may revoke it at any time prior to its
exercise at the Special Meeting by delivering a written notice to the
Secretary of USW that the proxy is being revoked, by submitting a properly
executed proxy bearing a later date than the proxy being revoked or by voting
in person at the Special Meeting.
Sincerely,
Aaron R. Brown
Chairman of the Board of Directors
STOCK CERTIFICATES SHOULD NOT BE SENT WITH THE ENCLOSED PROXY. IF THE MERGER
IS CONSUMMATED, SHAREHOLDERS WILL BE FURNISHED INSTRUCTIONS FOR EXCHANGING
THEIR USW COMMON STOCK FOR ACC COMMON STOCK.
<PAGE>
US WATS, INC.
111 PRESIDENTIAL BLVD.
SUITE 114
BALA CYNWYD, PA 19004
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1998
----------------
To the Shareholders of US WATS, Inc.:
Notice is hereby given that a Special Meeting of Shareholders of US WATS,
Inc., a New York corporation ("USW"), will be held at
, , 1998, at .m., local time,
for the following purposes:
(1) To consider and vote upon approval and adoption of the Agreement and
Plan of Merger by and among ACC Corp., a Delaware corporation, ("ACC"), ACC
Acquisition-Blue Corp., a Delaware corporation ("Acquisition Sub"), and USW
dated as of October 28, 1997 (the "Merger Agreement"), and approval of the
merger to be effected thereby (the "Merger"), pursuant to which (i)
Acquisition Sub will be merged with and into USW with USW surviving the Merger
and becoming a wholly-owned subsidiary of ACC and (ii) the shares of common
stock of USW, par value $.001 per share (the "USW Common Stock"), that are
issued and outstanding at the effective time of the Merger, other than shares
held by shareholders who perfect their statutory dissenters' rights, will be
converted automatically into the right to receive a number of shares of the
Class A Common Stock of ACC, par value $.015 per share (the "ACC Common
Stock"), to be determined pursuant to the Merger Agreement and all
transactions related thereto.
(2) To vote upon and authorize the adjournment of the Special Meeting to
allow for collection of additional shareholder votes to obtain a quorum or in
order to obtain more votes in favor of the Merger Agreement and the Merger, if
necessary.
(3) To vote upon such other business as may properly come before the Special
Meeting or any adjournment or postponement thereof.
The Merger Agreement and the Merger are more fully described in the
accompanying Proxy Statement/Prospectus and the Exhibits attached thereto.
Holders of USW Common Stock have the right to dissent from the Merger and
obtain payment for their shares by following the procedures prescribed in
Section 623 of the New York Business Corporation Law, which is attached as
Exhibit C to, and summarized under "The USW Special Meeting--Dissenters'
Rights" in, the accompanying Proxy Statement/Prospectus.
Only shareholders of record at the close of business on , 1998 are
entitled to notice of the Special Meeting and to vote at the Special Meeting
and any adjournment or postponement thereof. You are cordially invited to
attend the Special Meeting and vote your shares in person.
By Order of the Board of Directors,
Arthur Regan
Secretary
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROXY STATEMENT/PROSPECTUS SHALL NOT CONSTITUTE AN +
+OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY +
+SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR +
+SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE +
+SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 22, 1998
US WATS, INC.
PROXY STATEMENT FOR SPECIAL MEETING
OF SHAREHOLDERS TO BE HELD ON , 1998
ACC CORP.
PROSPECTUS FOR
UP TO SHARES OF ACC CLASS A COMMON STOCK
This Proxy Statement/Prospectus and the accompanying exhibits (this "Proxy
Statement/Prospectus") are being furnished to the shareholders of US WATS,
Inc., a New York corporation ("USW"), in connection with a special meeting of
shareholders of USW to be held on , 1998 and any adjournment or
postponement thereof (the "Special Meeting"). The close of business on
, 1998 (the "Record Date") is the record date for the Special
Meeting to determine the holders of common stock, par value $.001 per share, of
USW (the "USW Common Stock") entitled to notice of and to vote at the Special
Meeting. At the Special Meeting, holders of USW Common Stock will be asked to
approve and adopt the Agreement and Plan of Merger by and among ACC Corp., a
Delaware corporation ("ACC" or the "Company"), ACC Acquisition-Blue Corp., a
Delaware corporation wholly owned by ACC ("Acquisition Sub"), and USW, dated as
of October 28, 1997 (the "Merger Agreement"), and to approve the merger of
Acquisition Sub with and into USW, with USW surviving the merger as a wholly-
owned subsidiary of ACC (the "Merger"), and all transactions related thereto. A
copy of the Merger Agreement is attached to this Proxy Statement/Prospectus as
Exhibit A and incorporated herein by reference.
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED BY USW SHAREHOLDERS IN EVALUATING THE
PROPOSED MERGER TO BE VOTED ON AT THE SPECIAL MEETING AND THE ACQUISITION OF
THE ACC COMMON STOCK OFFERED HEREBY.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/ PROSPECTUS HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
USW SHAREHOLDERS ARE ADVISED TO OBTAIN CURRENT MARKET QUOTATIONS FOR ACC
COMMON STOCK. NO ASSURANCE CAN BE GIVEN CONCERNING THE MARKET PRICE FOR ACC
COMMON STOCK BEFORE OR AFTER THE DATE ON WHICH THE MERGER IS CONSUMMATED. THE
MARKET PRICE FOR ACC COMMON STOCK WILL FLUCTUATE BETWEEN THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS AND THE DATE ON WHICH THE MERGER IS CONSUMMATED AND
THEREAFTER.
-----------
The date of this Proxy Statement/Prospectus is , 1998.
<PAGE>
ACC Class A Common Stock, par value $.015 per share ("ACC Common Stock") is
traded on The Nasdaq National Market under the symbol "ACCC." The last
reported sale price of the ACC Common Stock as reported on The Nasdaq National
Market on , 1998 was per share. This Proxy
Statement/Prospectus was first mailed to the holders of USW Common Stock on or
about , 1998.
Any person giving a proxy in the form accompanying this Proxy
Statement/Prospectus has the power to revoke it at any time before its
exercise. The proxy may be revoked by filing with the Secretary of USW an
instrument of revocation or a duly executed proxy bearing a later date. The
proxy may also be revoked by affirmatively electing to vote in person while
attending the Special Meeting. However, a shareholder who attends the meeting
need not revoke the proxy and vote in person unless the shareholder wishes to
do so. All valid, unrevoked proxies will be voted at the Special Meeting in
accordance with the instructions given.
NO PERSON HAS BEEN AUTHORIZED BY ACC OR USW TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/ PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY EITHER ACC OR USW. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY OR AN
OFFER OR SOLICITATION TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SHARES OF ACC COMMON STOCK TO WHICH IT RELATES OR AN
OFFER OR SOLICITATION TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED HEREBY
SHALL, UNDER ANY CIRCUMSTANCES, IMPLY OR CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF ACC OR USW OR IN THE INFORMATION SET FORTH OR
INCORPORATED BY REFERENCE HEREIN SUBSEQUENT TO THE DATE HEREOF.
----------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 1
SUMMARY................................................................... 3
Business of ACC......................................................... 3
Recent Developments..................................................... 4
ACC Management Changes................................................ 4
TCG Merger Agreement.................................................. 4
The Proposed Merger of TCG and AT&T................................... 4
Business of USW......................................................... 5
The Proposed Merger..................................................... 5
Merger Consideration.................................................. 5
Treatment of USW Stock Options, USW Warrants and USW Preferred Stock.. 5
Effective Time........................................................ 6
Conditions to the Merger; Termination................................. 6
Non-Compete and Confidentiality Agreements............................ 6
Management and Operations of USW after the Merger..................... 7
Accounting Treatment.................................................... 7
Certain Federal Income Tax Consequences................................. 7
Restrictions on Resale of ACC Common Stock.............................. 7
Reasons for the Merger.................................................. 8
Opinion of USW Financial Advisor........................................ 9
Recommendation of the USW Board of Directors............................ 9
The Special Meeting..................................................... 9
Record Date; Outstanding Shares; Quorum................................. 9
Shareholder Voting and Tender Agreements................................ 10
Interests of Certain Persons in the Merger.............................. 10
Regulatory Filings and Approvals........................................ 10
Dissenters' Rights...................................................... 10
Comparison of Shareholder Rights........................................ 11
Risk Factors............................................................ 11
Market Price Information................................................ 11
Comparative Per Share Data.............................................. 13
Selected Pro Forma Consolidated Financial Information................... 13
Summary Historical Financial Data....................................... 14
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS................. 17
RISK FACTORS.............................................................. 18
Uncertainties as to Satisfaction of Conditions to Closing............... 18
Possibility of Taxability of the Merger................................. 18
The Effect of Stock Price Fluctuations and Other Adjustments on the Con-
sideration to be Received by the Holders of USW Common Stock in the
Merger................................................................. 18
Substantial Dilution of Ownership Interest in ACC of Current USW Share-
holders Resulting from the Proposed TCG Merger and TCG/AT&T Merger..... 19
Integration of ACC and USW.............................................. 19
Recent Losses; Potential Fluctuations in Operating Results.............. 20
Substantial Indebtedness; Need for Additional Capital................... 20
Contingent Liabilities.................................................. 21
Dependence on Transmission Facilities-Based Carriers.................... 21
Potential Adverse Effects of Regulation................................. 21
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Expansion of Local Exchange Business.................................... 24
Increasing Domestic and International Competition....................... 25
Risks of Growth and Expansion........................................... 26
Risks Associated with International Operations.......................... 26
Risks Associated with Acquisitions, Investments and Strategic Alliances. 27
Technological Changes May Adversely Affect Competitiveness and Financial
Results................................................................ 27
Risks Associated with Rapidly Changing Industry......................... 28
Dependence on Key Personnel............................................. 28
Risks Associated with Financing Arrangements; Dividend Restrictions..... 28
Holding Company Structure; Reliance on Subsidiaries for Dividends....... 28
Potential Volatility of Stock Price..................................... 29
Risks Associated with Derivative Financial Instruments.................. 29
Anti-takeover Provisions................................................ 29
THE MERGER................................................................ 30
General................................................................. 30
Background of the Merger................................................ 30
ACC's Reasons for the Merger............................................ 31
USW's Reasons for the Merger............................................ 31
Recommendation of the USW Board of Directors............................ 32
Bengur Bryan Fairness Opinion........................................... 32
Stock Trading History................................................. 33
Implied Multiple and Premium Analysis................................. 34
Comparable Public Company Analysis--USW............................... 34
Comparable Public Company Analysis--ACC............................... 34
Comparable Transaction Analysis....................................... 34
Premium Paid Analysis................................................. 35
Contribution Analysis................................................. 35
Pro Forma Analysis.................................................... 35
Certain U.S. Federal Income Tax Consequences............................ 35
Accounting Treatment.................................................... 38
Status Under Federal Securities Laws.................................... 38
THE USW SPECIAL MEETING................................................... 39
Purpose of the Special Meeting.......................................... 39
Date, Time and Place.................................................... 39
Record Date; Solicitation of Proxies; Revocability of Proxies........... 39
Vote Required........................................................... 40
Shareholder Voting and Tender Agreements................................ 40
Adjournment of the Special Meeting...................................... 40
Discretionary Authority................................................. 40
Dissenters' Rights...................................................... 41
INFORMATION CONCERNING ACC................................................ 42
General................................................................. 42
Industry Overview....................................................... 43
Long Distance Market.................................................. 43
Local Exchange Market................................................. 44
Business Strategy....................................................... 45
Increase Penetration of Existing Markets.............................. 45
Enter New Markets..................................................... 46
Improve Operating Efficiency.......................................... 46
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pursue Acquisitions, Investments and Strategic Alliances............... 46
Services................................................................. 46
Commercial Long Distance Services...................................... 46
University Program..................................................... 47
Residential Long Distance Services..................................... 48
International Long Distance Services................................... 49
Local Exchange Services................................................ 49
Sales and Marketing...................................................... 49
United States.......................................................... 50
Canada................................................................. 50
United Kingdom......................................................... 50
Network.................................................................. 50
Information Systems...................................................... 52
Competition.............................................................. 52
United States.......................................................... 53
Canada................................................................. 54
United Kingdom......................................................... 54
Regulation............................................................... 54
United States.......................................................... 54
Telecommunications Act of 1996 and the FCC's Interconnection Orders.... 54
Federal................................................................ 55
State.................................................................. 57
New York State Regulation of Long Distance Service..................... 58
New York State Regulation of Local Telephone Service................... 59
Local Telephone Service in Massachusetts............................... 60
Canada................................................................. 60
Long Distance Telephone Services....................................... 60
CRTC Decisions......................................................... 61
Local Telephone Services............................................... 64
Telecommunications Act................................................. 65
United Kingdom......................................................... 65
Acquisitions, Investments and Strategic Alliances........................ 65
Employees................................................................ 66
Properties............................................................... 66
Legal Proceedings........................................................ 67
RECENT DEVELOPMENTS........................................................ 68
ACC Management Changes................................................... 68
The TCG Merger........................................................... 68
TCG Merger............................................................. 68
TCG Merger Consideration............................................... 68
Exchange of Certificates; Exchange Agent............................... 68
Stock Options and Stock Incentive Rights............................... 69
Certificate of Incorporation and Bylaws of Surviving Corporation....... 69
Acquisition Proposals.................................................. 69
Representations and Warranties......................................... 70
Certain Covenants...................................................... 71
Conditions to Each Party's Obligations................................. 72
Conditions to Obligations of ACC....................................... 73
Conditions to Obligations of TCG....................................... 73
Indemnification........................................................ 73
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Termination; Termination Fees and Expenses............................ 74
Expenses.............................................................. 74
Amendment/Waiver...................................................... 74
Regulatory Approvals.................................................. 74
The Proposed Merger of TCG and AT&T..................................... 75
INFORMATION CONCERNING USW.............................................. 75
Business of USW....................................................... 75
General............................................................. 75
Corporate Strategy.................................................. 75
Services............................................................ 76
Switch and Network Facilities....................................... 76
Marketing........................................................... 76
Competition......................................................... 77
Employees........................................................... 78
Regulatory Matters.................................................. 78
Telecommunication Fraud............................................. 78
Properties.......................................................... 78
Legal Proceedings................................................... 79
USW Management........................................................ 79
Directors and Executive Officers.................................... 79
Compensation of Directors........................................... 80
Executive Compensation.............................................. 80
Employment Agreements............................................... 84
Security Ownership of Certain Beneficial Owners and Management.......... 84
Certain Relationships and Related Transactions.......................... 85
Loan Guarantees.....................................................
Indemnification Arrangements........................................
Sales Agency........................................................
Loans...............................................................
Committee Interlocks and Insider Participation Compensation............. 86
USW Selected Financial Data............................................. 86
USW Management's Discussion and Analysis of Financial Condition and Re-
sults of Operations.................................................... 89
General............................................................... 89
Results of Operations................................................. 89
Nine Months ended September 30, 1997 as Compared to Nine Months
ended September 30, 1996........................................... 89
Year ended December 31, 1996 as Compared to year ended December 31,
1995............................................................... 90
Year ended December 31, 1995 as Compared to year ended December 31,
1994............................................................... 91
Liquidity and Capital Resources....................................... 94
Changes in and Disagreements with USW Accountants on Accounting and Fi-
nancial Disclosure..................................................... 94
UNAUDITED ACC PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS........... 95
THE MERGER AGREEMENT...................................................... 101
Merger Consideration; Exchange of USW's Shares.......................... 101
Effective Time of Merger................................................ 103
Management and Operations After the Merger.............................. 103
Conditions to the Merger................................................ 103
Representations and Warranties..........................................
Exchange of Certificates; Fractional Shares............................. 104
Treatment of USW Stock Options, USW Warrants and USW Preferred Stock.... 105
Certain Other Agreements................................................ 105
Interests of Certain Persons in the Merger.............................. 105
Non-Compete and Confidentiality Agreements.............................. 106
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pooling Letters and Affiliate Agreements................................ 106
Indemnification......................................................... 106
Certain Regulatory Filings and Approvals................................ 107
Amendment; Waiver....................................................... 107
Termination............................................................. 107
EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS............................ 107
General................................................................. 107
Dividends............................................................... 108
Vote Required for Certain Transactions.................................. 108
Dissenters' Rights of Appraisal......................................... 108
Business Combination Statutes........................................... 109
Corporate Action by Written Consent Without a Shareholders' Meeting..... 109
Classification of the Board of Directors................................ 110
Number of Directors..................................................... 110
Issuance to Officers, Directors and Employees of Rights or Options to
Purchase Shares........................................................ 110
Loans to Directors...................................................... 110
Consideration for Shares................................................ 111
Inspection of Shareholders List......................................... 111
Indemnification of Officers and Directors............................... 111
Shareholder Rights Plan................................................. 111
LEGAL MATTERS............................................................. 114
EXPERTS................................................................... 114
INDEX TO USW CONSOLIDATED FINANCIAL STATEMENTS............................ F-1
</TABLE>
LIST OF EXHIBITS
EXHIBIT A -- Agreement and Plan of Merger
EXHIBIT B -- Form of Shareholder Voting and Tender Agreement
EXHIBIT C -- Section 623 of the New York Business Corporation Law
EXHIBIT D -- Bengur Bryan & Co., Inc. Fairness Opinion
v
<PAGE>
AVAILABLE INFORMATION
Each of ACC and USW is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). The reports,
proxy statements and other information filed by ACC and USW with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices located at 7 World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
also can be obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. ACC's Common
Stock and USW's Common Stock are traded on The Nasdaq Stock Market. Reports
and other information concerning ACC and USW can also be inspected at the
offices of the National Association of Securities Dealers, Inc., Market
Listing Section, 1735 K Street, N.W., Washington, D.C. 20006. In addition,
certain of the documents filed by ACC and USW with the Commission are
available through the Commission's Electronic Data Gathering and Retrieval
System ("EDGAR") at http://www.sec.gov.
ACC has filed with the Commission a Registration Statement on Form S-4 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"1933 Act"), with respect to the shares of ACC's Common Stock to be issued
pursuant to the Merger Agreement. This Proxy Statement/Prospectus does not
contain all the information set forth in the Registration Statement or the
exhibits thereto. As permitted by the rules and regulations of the Commission,
this Proxy Statement/Prospectus omits certain information contained or
incorporated by reference in the Registration Statement. The omitted portions
of the Registration Statement may be obtained through EDGAR at
http://www.sec.gov. Such additional information also may be obtained from the
Commission's principal office in Washington, D.C. Statements contained in this
Proxy Statement/Prospectus or in any document incorporated by reference in
this Proxy Statement/Prospectus as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement or such other document, each
such statement being qualified in all respects by such reference.
As used in this Proxy Statement/Prospectus, the term "ACC" or the "Company"
means ACC Corp. and its subsidiaries, and the term "USW" means US WATS, Inc.
and its subsidiaries. All information contained or incorporated by reference
in this Proxy Statement/Prospectus relating to USW was provided by the
management and Board of Directors of USW. ACC assumes no responsibility for
the accuracy of such information. All information contained or incorporated by
reference in this Proxy Statement/Prospectus relating to ACC was provided by
the management and Board of Directors of ACC. USW assumes no responsibility
for the accuracy of such information.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by ACC pursuant to the
1934 Act are incorporated herein by reference: (1) ACC's Annual Report on Form
10-K for the fiscal year ended December 31, 1996; (2) ACC's Quarterly Reports
on Form 10-Q for the quarters ended March 31, 1997, June 30, 1997 and
September 30, 1997; (3) ACC's Current Reports on Form 8-K dated October 3,
1997 and November 26, 1997; (4) the description of ACC's Preferred Stock
Purchase Rights contained in ACC's Registration Statement on Form 8-A dated
October 3, 1997 (as amended on Form 8-A/A dated December 10, 1997); and (5)
the description of ACC's Class A Common Stock contained in ACC's Registration
Statement on Form S-3 dated September 17, 1996 (File No. 333-12195).
The following documents filed with the Commission by USW pursuant to the
1934 Act are incorporated herein by reference: (1) USW's Annual Report on Form
10-K for the fiscal year ended December 31, 1996 (as amended on Forms 10-K/A
dated March 31, 1997, April 30, 1997, May 12, 1997 and January , 1998); (2)
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USW's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997,
June 30, 1997 and September 30, 1997; and (3) USW's Current Reports on Form 8-
K dated February 25, 1997, March 20, 1997, October 10, 1997, November 26, 1997
and December 10, 1997.
All documents filed by ACC and USW with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the 1934 Act after the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meeting shall be
deemed to be incorporated by reference into this Proxy Statement/Prospectus
and to be a part hereof from the date of filing of such documents. Any
statement contained in any document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes
of this Proxy Statement/Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as
modified or superseded, to constitute a part of this Proxy
Statement/Prospectus. Information appearing in this Proxy Statement/Prospectus
is qualified in its entirety by the information and financial statements
(including the notes thereto) appearing in the documents incorporated by
reference.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY INCORPORATED BY
REFERENCE INTO SUCH DOCUMENTS) ARE AVAILABLE TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER OF USW COMMON STOCK, TO WHOM THIS PROXY STATEMENT/PROSPECTUS
IS DELIVERED, UPON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE, DIRECTED TO US
WATS, INC., 111 PRESIDENTIAL BLVD., SUITE 114, BALA CYNWYD, PENNSYLVANIA
19004, ATTENTION: AARON R. BROWN (TELEPHONE NUMBER (610) 660-5589). IN ORDER
TO ENSURE TIMELY DELIVERY OF THE REQUESTED MATERIAL BEFORE THE SPECIAL
MEETING, ANY REQUEST SHOULD BE MADE PRIOR TO , 1998.
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SUMMARY
The following is a summary of certain important terms of the proposed Merger
and related information discussed elsewhere in this Proxy Statement/Prospectus.
This summary does not purport to be complete and is qualified in its entirety
by reference to the more detailed information included in this Proxy
Statement/Prospectus and the exhibits hereto, including, but not limited to,
the Merger Agreement set forth as Exhibit A hereto. Shareholders of USW are
urged to read this Proxy Statement/Prospectus and the exhibits hereto in their
entirety and to consider carefully the information set forth under the headings
"Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors."
BUSINESS OF ACC
ACC is a switch-based provider of telecommunications services in the United
States, Canada and the United Kingdom. ACC primarily provides long distance
telecommunications services to a diversified customer base of businesses,
residential customers and educational institutions. ACC also provides local
telephone service as a switch-based local exchange reseller in upstate New York
and Massachusetts and as a reseller of local exchange services in Ontario and
Quebec, Canada. ACC entered the German market during 1997 as a switchless
reseller of long distance telecommunications services and plans to become a
switch-based provider in Germany as business and regulatory conditions warrant.
ACC operates an advanced telecommunications network, consisting of nine long
distance international and domestic switches located in the U.S., Canada and
the U.K., six local exchange switches located in the U.S., leased transmission
lines, indefeasible rights of use in international submarine cables ("IRUs")
and network management systems designed to optimize traffic routing.
ACC's objective is to grow its telecommunications customer base in its
existing markets and to establish itself in deregulating Western European
markets that have high density telecommunications traffic when ACC believes
that business and regulatory conditions warrant. The key elements of ACC's
business strategy are: (1) to broaden ACC's penetration of the U.S., Canadian,
U.K. and German 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.
ACC'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. ACC believes that its ownership of
switches reduces its reliance on other carriers and enables ACC to efficiently
route telecommunications traffic over multiple leased transmission lines and
IRUs 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 ACC 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.
ACC 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. ACC 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.
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ACC 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. ACC'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. See "Information Concerning ACC."
RECENT DEVELOPMENTS
ACC Management Changes. On December 5, 1997, ACC announced that its Chairman
and Chief Executive Officer, David K. Laniak, 62, had died unexpectedly due to
health-related complications. As a result, ACC's Board of Directors named
Robert M. Van Degna, Chairman of the Board. Mr. Van Degna has served as an
outside director of ACC since 1995. ACC's Board of Directors also established
an Office of the Chief Executive to jointly perform the functions of Chief
Executive Officer, consisting of Christopher Bantoft, ACC's Executive Vice
President, Michael R. Daley, ACC's Executive Vice President and Chief Financial
Officer, and Steve M. Dubnik, ACC's Executive Vice President.
TCG Merger Agreement. On November 26, 1997, ACC entered into an Agreement and
Plan of Merger (the "TCG Merger Agreement"), pursuant to which a wholly-owned
subsidiary of Teleport Communications Group Inc., a Delaware corporation
("TCG"), would be merged with and into ACC and ACC would survive the merger as
a wholly-owned subsidiary of TCG (the "TCG Merger"). If the TCG Merger is
consummated, following the TCG Merger, all of the capital stock of the
surviving corporation will be owned by TCG. Shares of ACC Common Stock will be
exchanged for merger consideration and then cancelled, with the result that ACC
Common Stock will no longer be listed on The Nasdaq National Market.
Consummation of the TCG Merger is subject to closing conditions and shareholder
and regulatory approvals. It is unlikely that the proposed TCG Merger will
close before the consummation of the Merger with USW, due to the anticipated
timing of receipt of regulatory approvals and other closing conditions. No
assurance can be given that the TCG Merger will be consummated. See "Recent
Developments." The ownership interest of USW shareholders in the business of
ACC at the TCG Effective Time (as hereinafter defined) would be substantially
diluted as a result of consummation of the TCG Merger. See "Risk Factors--
Substantial Dilution of Ownership Interest in ACC of Current USW Shareholders
Resulting From the Proposed TCG Merger and TCG/AT&T Merger."
TCG is the largest competitive local exchange carrier in the United States
and offers a wide range of telecommunications services in major metropolitan
markets nationwide. TCG competes with incumbent local exchange carriers by
providing integrated telecommunications services, primarily over fiber optic
digital networks, to meet the voice, data, internet and video transmission
needs of its customers. TCG's customers are principally telecommunications-
intensive businesses, health care and educational institutions, governmental
agencies, long distance carriers and resellers, Internet service providers,
disaster recovery service providers, and wireless communications and financial
service companies.
The Proposed Merger of TCG and AT&T. On January 8, 1998, AT&T Corp. ("AT&T")
and TCG announced that they had entered into a definitive merger agreement (the
"AT&T Merger Agreement"), under which each share of TCG common stock would be
converted into the right to receive 0.943 of a share of common stock, par value
$1.00 per share, of AT&T. Under the AT&T Merger Agreement, a wholly-owned
subsidiary of AT&T would be merged with and into TCG and TCG would survive the
merger as a wholly-owned subsidiary of AT&T (the "TCG/AT&T Merger"). If the
TCG/AT&T Merger is consummated, following the TCG/AT&T Merger, all of the
capital stock of the surviving corporation will be owned by AT&T. Shares of TCG
common stock will be exchanged for merger consideration in the form of AT&T
common stock, and cash in lieu of any fractional shares, and then cancelled. As
a result, shares of TCG common stock will no longer be listed on The Nasdaq
National Market. Consummation of the TCG/AT&T Merger is subject to closing
conditions and shareholder and regulatory approvals. It is unlikely that the
proposed TCG/AT&T Merger will close before the consummation of the TCG Merger,
due to the anticipated timing of receipt of regulatory approvals and other
closing conditions. No assurance can be given that the TCG/AT&T Merger will be
consummated. Assuming that
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the Merger and the TCG Merger are both consummated, the ownership interest in
the business of TCG of USW shareholders would be substantially diluted as a
result of consummation of the TCG/AT&T Merger. See "Risk Factors--Substantial
Dilution of Ownership Interest in ACC of Current USW Shareholders Resulting
From the Proposed TCG Merger and TCG/AT&T Merger."
BUSINESS OF USW
USW is a switch-based interexchange carrier providing long distance telephone
communications services primarily to small and medium-sized business customers.
USW also provides inbound-800 long distance services, as well as other
telecommunications services such as travel cards (calling card), cellular,
paging, dedicated access, pre-paid calling cards (debit cards), international
callback and carrier termination services. USW uses its own switches and
facilities to originate, transport and terminate calls for customers generally
located between Boston, Massachusetts and Norfolk, Virginia and in California
(on-net area). Approximately 85% of the calls billed by USW each month are
processed through USW's own switches. For calls originating or terminating
outside USW's own network (off-net area), USW utilizes the services provided by
other long distance companies.
USW's revenues are derived primarily from the transport of outgoing and
incoming calls which are billed by USW to end-users at specified rates.
Transport costs of these calls are billed to USW from other carriers at
contractual rates. These carriers supply USW with call detail information which
enables USW to bill its customers depending upon USW's individual rates. The
combination of the efficiency of USW's networks and facilities, and the
purchase of long distance services in bulk from other carriers allows USW to
offer competitive rates to small and medium-sized businesses.
USW's principal executive offices are located at 111 Presidential Boulevard,
Suite 114, Bala Cynwyd, Pennsylvania 19004. USW's telephone number at that
location is (610) 660-0100.
THE PROPOSED MERGER
Merger Consideration. Pursuant to the Merger Agreement, Acquisition Sub will
merge with and into USW in accordance with the New York Business Corporation
Law ("NYBCL") and the Delaware General Corporation Law ("DGCL"), the separate
existence of Acquisition Sub will cease, and USW, as the surviving corporation
in the Merger, will become a wholly-owned subsidiary of ACC. Upon consummation
of the Merger, each issued and outstanding share of USW Common Stock (other
than shares ("Dissenting Shares") as to which dissenters' rights are perfected
under the NYBCL ("Dissenters' Rights")) will be converted into the right to
receive a fraction of a share of ACC Common Stock equal to the Exchange Ratio
(as hereinafter defined) in effect at closing. No fractional shares will be
issued in the Merger, and each holder of USW Common Stock will receive a cash
payment in lieu of such fractional shares equal to such fraction multiplied by
the Average Pre-Closing Trading Price (as hereinafter defined). The Exchange
Ratio will be determined at the closing of the Merger based on a number of
factors, including an average of the closing market prices per share of ACC
Common Stock prior to the closing, the number of shares of USW Common Stock
which are outstanding on a fully-diluted basis at the closing and the amount of
Contingent Obligations (as hereinafter defined) of USW which remain outstanding
at the closing. For a more detailed description of how the Exchange Ratio will
be determined, see "The Merger Agreement--Merger Consideration; Exchange of
USW's Shares," and "Risk Factors--The Effect of Stock Price Fluctuations and
Other Adjustments on the Consideration to be Received by the Holders of USW
Common Stock in the Merger."
Treatment of USW Stock Options, USW Warrants and USW Preferred Stock. At the
Effective Time (as hereinafter defined), all outstanding options to purchase
USW Common Stock, whether vested or unvested (the "USW Stock Options"), will be
assumed by ACC and will become options to purchase shares of ACC Common Stock
having substantially the same terms and conditions as the USW Stock Options,
except that the exercise
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price and number of shares of ACC Common Stock issuable upon exercise shall be
divided and multiplied, respectively, by the Exchange Ratio. At the Effective
Time, (i) each share of USW 9% Series Convertible Preferred Stock ("USW
Preferred Stock") which is issued and outstanding (other than Dissenting
Shares) will be converted pursuant to its terms into USW Common Stock and
immediately thereafter be converted into ACC Common Stock in accordance with
the Merger Agreement, and (ii) each outstanding warrant to acquire shares of
USW Common Stock (a "USW Warrant") will be treated as if it had been exercised
immediately prior to the Effective Time, and as if the exercise price had been
paid by subtracting that number of shares of USW Common Stock equal in value to
the aggregate exercise price of such USW Warrants, as determined using the
Exchange Ratio, from the number of shares of USW Common Stock issuable
thereunder. See "The Merger Agreement--Treatment of USW Stock Options, USW
Warrants and USW Preferred Stock."
Effective Time. The Merger will become effective on the latest of (i) the
date and time the New York Certificate of Merger is filed with the office of
the Secretary of State of the State of New York in accordance with the NYBCL,
(ii) the date and time the Delaware Certificate of Merger is filed with the
office of the Secretary of State of the State of Delaware in accordance with
the DGCL and (iii) such later time and date as may be specified in the New York
and Delaware Certificates of Merger. The date and time when the Merger will
become effective is referred to herein as the Effective Time. The Effective
Time is expected to occur promptly after the satisfaction or waiver of all of
the conditions to the Merger set forth in the Merger Agreement. See "The Merger
Agreement--Effective Time of Merger."
Conditions to the Merger; Termination. Consummation of the Merger is subject
to the fulfillment or waiver, at or prior to the Effective Time, of a number of
conditions described in the Merger Agreement, including without limitation: (a)
approval of the Merger by the requisite vote of the holders of USW Common
Stock, with no more than 10% of USW's shares being Dissenting Shares; (b) no
order, decree or injunction that would prevent consummation of the Merger; (c)
consent or approval by all required governmental agencies, including approvals
by the Federal Communications Commission ("FCC") and applicable state public
service commissions ("PSCs"); (d) delivery to ACC of the affiliate agreements,
the pooling letters and the Non-Compete Agreements (as hereinafter defined),
each duly approved and executed; (e) delivery of the Tax Opinions (as
hereinafter defined) and letters from each party's independent public
accountants addressed to their respective clients dated as of the Effective
Time, that the Merger, if consummated in accordance with the Merger Agreement,
will qualify for treatment as a "pooling of interests" for financial reporting
purposes in accordance with generally accepted accounting principles; (f)
completion by ACC's independent public accountants of certain agreed upon
procedures, including an examination of the work papers and other materials
prepared by USW's independent accountants in connection with their audit of
USW's financial statements; and (g) each party's material compliance with all
covenants, agreements and conditions as required by the Merger Agreement prior
to the closing of the Merger. Tel-Save, a holder of more than 10% of the issued
and outstanding shares of USW Common Stock, has publicly disclosed that it is
opposed to the Merger. If Tel-Save exercises its Dissenters' Rights as to its
shares, a condition to closing the Merger will not be satisfied. In addition,
Tel-Save and another USW shareholder holding more than 10% of the issued and
outstanding shares of USW Common Stock have not yet delivered pooling letters
and affiliate agreements to ACC. Furthermore, counsel to ACC and USW have
determined that because of circumstances arising after the execution of the
Merger Agreement, neither firm will be able to deliver to its respective client
the tax opinions in the form required by the Merger Agreement. If any of the
conditions to the Merger are not satisfied or waived by the party to which the
condition applies, such party will not be obligated to close the transaction.
See "The Merger Agreement--Conditions to the Merger" and "Risk Factors--
Uncertainties as to Satisfaction of Conditions to Closing."
Non-Compete and Confidentiality Agreements. Pursuant to the Merger Agreement,
at or prior to the Effective Time, Aaron R. Brown, Chairman of the Board of
USW, and Stephen J. Parker, President and Chief Executive Officer of USW, will
each enter into a Non-Competition and Non-Solicitation Agreement (a "Non-
Compete Agreement") with ACC. Each Non-Compete Agreement includes a covenant by
each such person not to compete or interfere with the business conducted by ACC
at the Effective Time for a stated period of time, subject to certain
exceptions. Each Non-Compete Agreement also contains terms restricting the
disclosure and
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use of confidential information with respect to the business, properties, and
personnel of USW and ACC. Delivery of the Non-Compete Agreements is a condition
to ACC's obligation to consummate the Merger. See "The Merger Agreement--Non-
Compete and Confidentiality Agreements."
Management and Operations of USW after the Merger. Pursuant to the Merger
Agreement, as of the Effective Time and until their successors are duly elected
or appointed and qualified, the members of the Board of Directors of USW, as
the surviving corporation, will be Arunas A. Chesonis, Michael R. Daley and
Steve M. Dubnik. Messrs. Daley and Dubnik are members of the Office of the
Chief Executive and Mr. Chesonis is the President of ACC. As of the Effective
Time, the officers of USW will be: Ms. Mae H. Squier-Dow, President; Mr.
Michael R. Daley, Treasurer; Mr. John J. Zimmer, Vice President; Mr. Daniel J.
Venuti, Vice President of Legal and Regulatory Affairs; Mr. Steven Mowers,
Controller; and Ms. Sarah Ayer-Gudell, Assistant Secretary. Ms. Squier-Dow is
the President of ACC Long Distance Corp.; Mr. Zimmer is the Vice President and
Treasurer of ACC; Mr. Venuti is the Vice President of Legal and Regulatory
Affairs of ACC Long Distance Corp.; Mr. Mowers is Controller of ACC Long
Distance Corp; and Ms. Ayer-Gudell is the Assistant Secretary of ACC. See "The
Merger Agreement--Management and Operations After the Merger."
ACCOUNTING TREATMENT
The Merger is intended to qualify for treatment as a "pooling of interests"
for accounting and financial reporting purposes. Under this method of
accounting, the recorded assets and liabilities of ACC and USW will be carried
forward to the combined organization at their recorded amounts; income of the
combined organization will include income of ACC and USW for the entire fiscal
year in which the Merger occurs; and the reported income of the separate
corporations for prior periods will be combined and restated as income of the
combined organization. Conditions to consummation of the Merger include that
(i) ACC and USW shall each have received a letter from their independent public
accountants addressed to their respective clients, dated as of the Effective
Time, that the Merger, if consummated in accordance with the Merger Agreement,
will qualify for treatment as a "pooling of interests" for financial reporting
purposes in accordance with generally accepted accounting principles and (ii)
that "affiliates" of USW have executed and delivered pooling letters agreeing
to certain restrictions on the transfer of their shares. See "The Merger--
Accounting Treatment."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
While ACC and USW intend that the Merger should, under current law,
constitute a tax-free reorganization under Section 368(a) of the Code, no
ruling has been sought from the Internal Revenue Service ("IRS") and no opinion
of counsel to such effect has been or will be obtained. If the TCG Merger and
the TCG/AT&T Merger are consummated, it is unclear whether the USW shareholders
will be deemed to have received AT&T shares for their USW Common Stock as a
result of the proposed TCG/AT&T Merger. If the IRS steps together the Merger,
the proposed TCG Merger and the proposed TCG/AT&T Merger, and determines that
in substance the USW shareholders are receiving AT&T stock rather than ACC
stock, the Merger would not qualify as a tax-free reorganization. If it were
ultimately determined that the Merger does not qualify as a tax-free
reorganization, all USW shareholders would be subject to tax on the USW Common
Stock surrendered in the Merger whether or not the ACC Common Stock received in
the Merger was sold or retained. AS A RESULT, USW SHAREHOLDERS SHOULD CONSULT
WITH THEIR OWN TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF THE MERGER. For a
further discussion of federal income tax consequences of the Merger, see "The
Merger--Certain U.S. Federal Income Tax Consequences." See also "The Merger
Agreement--Conditions to the Merger."
RESTRICTIONS ON RESALE OF ACC COMMON STOCK
The shares of ACC Common Stock issuable to shareholders of USW upon
consummation of the Merger will have been registered under the 1933 Act at the
Effective Time. Such shares will be freely transferable without restriction by
those USW stockholders who are not deemed to be "affiliates" of ACC or USW, as
that term is defined in the rules under the 1933 Act.
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Shares of ACC Common Stock received pursuant to the Merger by those
shareholders of USW who are deemed to be affiliates of USW or ACC may be resold
without registration under the 1933 Act only as permitted by Rule 145 under the
1933 Act or as otherwise permitted under the 1933 Act. It is a condition to
closing of the Merger that each affiliate of USW sign an affiliate letter
agreeing not to sell, pledge, transfer or otherwise dispose of any shares of
ACC Common Stock received pursuant to the Merger, except in compliance with
Rule 145 under the 1933 Act, or in a transaction that is otherwise exempt from
the registration requirements of the 1933 Act and in which an opinion of
counsel, satisfactory to ACC, has been provided to ACC to the effect that no
such registration is required in connection with the proposed transaction, or
in an offering that is registered under the 1933 Act. In addition, it is a
condition to closing of the Merger that each affiliate of USW sign a pooling
letter agreeing not to sell, transfer, pledge, distribute or otherwise dispose
of, or reduce such person's interest in or risk relating to any shares of ACC
Common Stock issued to such person in the Merger or otherwise beneficially
owned by such person, during the period beginning 30 days prior to the
Effective Time and ending on the day after ACC has published financial results
covering at least 30 days of post-Merger combined operations of ACC and USW.
See "The Merger--Status Under Federal Securities Laws" and "--Accounting
Treatment."
REASONS FOR THE MERGER
The Board of Directors of USW believes that the Merger will create a long
distance, "800" number, calling/debit card and paging and cellular business
that will be better positioned to compete effectively in the industry in which
both ACC and USW currently compete. The USW Board of Directors believes that
the Merger will provide opportunities to achieve benefits for their
shareholders and customers that might not otherwise be available.
The USW Board of Directors believes that after the Merger, the combined
company will have the technical resources, scale, geographic scope and
competencies to compete more effectively than USW alone, given the numerous
uncertainties and competitive pressures in the deregulated long distance
industry. ACC's domestic network is largely contiguous and complementary to
that of USW. ACC is implementing a state of the art convergent billing system
that is capable of processing large amounts of customer data. Furthermore,
after the Merger, the combined company will have significantly greater
financial resources, which will allow it to more effectively compete on a price
basis, in addition to competing on a quality basis, within USW's current
marketplace.
The USW Board of Directors believes that the combined company will also
benefit from synergies between ACC's European operations and USW's domestic
operations. As a result of ACC's European presence, the combined company will
be able to purchase European terminations for current USW domestic business,
carrier and international call-back customers at more favorable rates. In
addition, the USW Board of Directors believes that the products, services and
pricing offered by ACC to the current USW sales agents will enable the combined
company to retain and increase its sales agent network, which is USW's largest
sales channel.
The USW Board of Directors believes that the Merger is fair to, and in the
best interests of, USW and its shareholders. For the various reasons discussed
above, the USW Board of Directors approved the Merger Agreement and the
transactions contemplated thereby.
Numerous factors were taken into consideration by ACC in entering into the
Merger Agreement, including (1) the synergies which could potentially be
realized by combining the business of USW, with its domestic and international
long distance, "800" number, calling/debit card and paging and cellular
business in the mid-Atlantic region, with the business of ACC in contiguous
markets, (2) the opportunities for expansion of USW's emerging competitive
local exchange business in the mid-Atlantic region as a result of the greater
financial resources of ACC, (3) the marketing and technical expertise of USW's
management, employees and sales agent network, (4) ACC's knowledge of the
business, operations, properties, assets, financial condition and prospects of
USW and (5) current industry, economic and market conditions.
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The ACC Board of Directors believes that the Merger is fair to, and in the
best interests of, ACC and its shareholders. For the various reasons discussed
above, the ACC Board of Directors approved the Merger Agreement and the
transactions contemplated thereby.
OPINION OF USW FINANCIAL ADVISOR
USW retained Bengur Bryan & Co., Inc. ("Bengur Bryan") to render its opinion
as to the fairness, from a financial point of view, to the shareholders of USW
of the consideration to be received in the proposed Merger. Bengur Bryan
provided USW's Board with a fairness opinion letter dated as of October 27,
1997, the date of the USW Board of Directors meeting at which execution of the
Merger Agreement by USW was authorized and approved. The full text of the
opinion letter of Bengur Bryan, which sets forth certain assumptions made,
matters considered and limitations on the review performed, is attached as
Exhibit D. The opinion of Bengur Bryan was based upon market, economic and
other conditions as they existed and could be evaluated as of October 27, 1997
and therefore did not take into account any subsequent events, including the
proposed TCG Merger or TCG/AT&T Merger. Such opinion was not updated as of the
date hereof. See "The Merger--USW's Reasons for the Merger" and "--Bengur Bryan
Fairness Opinion."
RECOMMENDATION OF THE USW BOARD OF DIRECTORS
The USW Board of Directors believes that the terms of the Merger are fair to,
and in the best interests of, USW and its shareholders. THE USW BOARD OF
DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE MERGER AND
UNANIMOUSLY RECOMMENDS THAT HOLDERS OF USW COMMON STOCK VOTE IN FAVOR OF
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER. See
"The Merger--Background of the Merger," "--USW's Reasons for the Merger" and
"--Recommendation of the USW Board of Directors" and "The Merger Agreement--
Interests of Certain Persons in the Merger."
THE SPECIAL MEETING
The Special Meeting will be held on , 1998, at ., local time, at
the offices of . At such meeting, USW shareholders will be
asked to (i) approve and adopt the Merger Agreement and approve the Merger and
all transactions related thereto, (ii) authorize the adjournment of the Special
Meeting to allow for collection of additional shareholder votes to obtain a
quorum or in order to obtain more votes in favor of the Merger Agreement and
the Merger, if necessary, and (iii) to vote upon such other business as may
properly come before the Special Meeting or any adjournment or postponement
thereof. The USW Board of Directors knows of no business that will be presented
for consideration at the USW Special Meeting other than the matters described
in this Proxy Statement/Prospectus.
RECORD DATE; OUTSTANDING SHARES; QUORUM
The date for the determination of the holders of record of the USW Common
Stock entitled to notice of and to vote at the Special Meeting is
, 1998 (the "Record Date"). Accordingly, only holders of record
of shares of USW Common Stock as of the close of business on the Record Date
will be entitled to notice of and to vote at the Special Meeting. As of the
Record Date, there were outstanding shares of USW Common Stock
entitled to vote which were held by holders of record. Each holder of
record of shares of USW Common Stock on the Record Date is entitled to cast one
vote per share on each proposal properly submitted for the vote of USW's
shareholders, either in person or by properly executed proxy, at the Special
Meeting. The presence, in person or by properly executed proxy, of the holders
of a majority of the outstanding shares of USW Common Stock entitled to vote at
the Special Meeting is necessary to constitute a quorum at the Special Meeting.
9
<PAGE>
Pursuant to the NYBCL and the Certificate of Incorporation of USW, the Merger
Agreement, the Merger and the transactions related thereto must be approved by
the holders of two-thirds of the issued and outstanding shares of the USW
Common Stock entitled to vote at the Special Meeting. USW's shareholders who do
not approve the Merger, and who act appropriately to protect their rights, may
not prevent the Merger if it is approved by the requisite vote, but may have
dissenters' rights as described elsewhere in this Proxy Statement/Prospectus.
See "The USW Special Meeting--Dissenters' Rights." The proposal to adjourn the
Special Meeting to solicit additional proxies or votes requires the approval of
more votes cast in favor of than against the proposal.
SHAREHOLDER VOTING AND TENDER AGREEMENTS
Messrs. Brown and Parker and Murray Goldberg, directors of USW, have executed
and delivered agreements and irrevocable proxies to ACC (the "Shareholder
Tender Agreements") authorizing ACC to vote their shares of USW Common Stock in
favor of the Merger and any proposal or action which would, or could reasonably
be expected to, facilitate the Merger, and against any action or agreement
which would, or could reasonably be expected to, impede, interfere with, delay
or adversely affect the Merger. Pursuant to the Shareholder Tender Agreements,
approximately % of the total number of shares of USW Common Stock
outstanding on the Record Date) will be voted for the Merger and any proposal
or action which would, or could reasonably be expected to, facilitate the
Merger, and against any action or agreement which would, or could reasonably be
expected to, impede, interfere with, delay or adversely affect the Merger. See
"The USW Special Meeting--Shareholder Voting and Tender Agreements."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Directors and executive officers of USW beneficially own as of December 1,
1997 approximately 42.23% of the outstanding USW Common Stock and will receive
shares of ACC Common Stock in the Merger on the same basis as other
shareholders of USW. The Merger Agreement provides that each USW Warrant that
is outstanding at the Effective Time will be treated as if such USW Warrant had
been exercised immediately prior to the Effective Time, and as if the exercise
price had been paid by subtracting that number of shares of USW Common Stock
equal in value to the aggregate exercise price of such USW Warrants, as
determined using the Exchange Ratio from the number of shares of USW Common
Stock issuable thereunder. Messrs. Brown and Parker each hold USW Warrants to
purchase 569,000 shares of USW Common Stock. See "Information Concerning USW--
Security Ownership of Certain Beneficial Owners and Management" and "The Merger
Agreement--Interests of Certain Persons in the Merger" and "--Treatment of USW
Stock Options, USW Warrants and USW Preferred Stock." The USW Board of
Directors was aware of these interests when it considered and approved the
Merger and the Merger Agreement. See "The Merger Agreement--Interests of
Certain Persons in the Merger."
REGULATORY FILINGS AND APPROVALS
Consummation of the Merger is contingent upon the receipt of approvals from
the FCC and PSCs. ACC and USW have previously made the necessary filings with
these government agencies. The applicable waiting period under the Hart-Scott-
Rodino Act ("HSR Act") has expired. See "The Merger Agreement--Certain
Regulatory Filings and Approvals."
DISSENTERS' RIGHTS
As described in "The USW Special Meeting--Dissenters' Rights," holders of USW
Common Stock have the right to dissent from the Merger and to demand the fair
value of their shares from USW. Shareholders of USW generally have the right to
dissent from and have the fair value of their shares appraised in connection
10
<PAGE>
with certain mergers, sales of assets and other extraordinary transactions for
which shareholder approval is required. It is a condition to consummation of
the Merger that holders of not more than 10% of the outstanding shares of USW
Common Stock shall have exercised dissenters' rights with respect to the
Merger.
COMPARISON OF SHAREHOLDER RIGHTS
The rights of shareholders of USW are governed by the NYBCL and by USW's
Certificate of Incorporation, as amended, and Bylaws. Upon conversion of USW
Common Stock into ACC Common Stock, the rights of the former holders of USW
Common Stock who receive ACC Common Stock will be governed by the DGCL and by
the First Restated Certificate of Incorporation, as amended, of ACC (the "ACC
Certificate of Incorporation") and the ACC Bylaws. See "Effect of Merger on
Rights of Shareholders" for a summary of certain differences between the rights
of the holders of USW Common Stock and ACC Common Stock.
RISK FACTORS
Holders of USW Common Stock, in voting on the proposals contained herein,
should consider, among other factors, risks related to the following: (i)
uncertainties as to satisfaction of conditions to closing; (ii) the possibility
of taxability of the Merger; (iii) the effect of stock price fluctuations and
other adjustments on the consideration to be received by USW shareholders in
the Merger; (iv) substantial dilution of ownership interest in ACC of USW
shareholders resulting from the proposed TCG Merger and, assuming that the
proposed TCG Merger and TCG/AT&T Merger are consummated, substantial dilution
of ownership interest in TCG of USW shareholders resulting from the proposed
TCG/AT&T Merger; (v) integration of the companies; (vi) recent losses of ACC
and potential fluctuations in operating results; (vii) substantial indebtedness
of ACC and the need for additional capital; (viii) contingent liabilities; (ix)
dependence on transmission facilities-based carriers; (x) potential adverse
effect of regulation; (xi) intense competition; (xii) ACC's international
expansion strategy; (xiii) dependence upon key personnel; and (xiv) anti-
takeover provisions contained in ACC's Certificate of Incorporation and Bylaws.
See "Risk Factors."
MARKET PRICE INFORMATION
ACC's Common Stock is traded on The Nasdaq National Market under the symbol
"ACCC". The following table sets forth for the periods indicated the high and
low sale prices of ACC's Common Stock as reported during each quarterly period
in 1995, 1996 and 1997 on The Nasdaq National Market. The prices do not include
retail mark ups, mark downs or commissions.
<TABLE>
<CAPTION>
1995 HIGH LOW
---- ------ ------
<S> <C> <C>
First Quarter............................................... $12.83 $ 9.33
Second Quarter.............................................. $11.33 $ 8.67
Third Quarter............................................... $12.83 $ 9.67
Fourth Quarter.............................................. $16.08 $10.50
<CAPTION>
1996 HIGH LOW
---- ------ ------
<S> <C> <C>
First Quarter............................................... $20.17 $14.83
Second Quarter.............................................. $32.42 $18.58
Third Quarter............................................... $54.75 $29.50
Fourth Quarter.............................................. $47.75 $24.75
<CAPTION>
1997 HIGH LOW
---- ------ ------
<S> <C> <C>
First Quarter............................................... $36.25 $20.50
Second Quarter.............................................. $31.63 $14.25
Third Quarter............................................... $37.00 $28.50
Fourth Quarter.............................................. $52.87 $25.00
</TABLE>
11
<PAGE>
On October 27, 1997, the date immediately prior to the public announcement of
the transactions contemplated by the Merger Agreement, the last reported sale
price of the ACC Common Stock on The Nasdaq National Market was $29.62 per
share. The last reported sale price of the ACC Common Stock on The Nasdaq
National Market on , 1998, the latest practicable date before the
printing of this Proxy Statement/Prospectus, was $ per share. There were
approximately holders of record of ACC Common Stock as of ,
1998.
ACC has not recently declared or paid cash dividends on its Common Stock. ACC
currently intends to retain all of its earnings for use in its business and
does not anticipate paying, and does not anticipate that following the Merger
ACC will pay, any cash dividends in the foreseeable future. In addition, under
the terms of ACC's existing credit facilities, the payment of cash dividends is
prohibited without consent of the lender. See Note 3 of the Notes to ACC's
Consolidated Financial Statements incorporated herein by reference under
"Incorporation of Certain Documents by Reference."
USW Common Stock is listed on the SmallCap segment of The Nasdaq Stock Market
under the symbol "USWI". The following sets forth for the periods indicated the
high and low bid prices of USW Common Stock as reported during each quarterly
period in 1995, 1996 and 1997 on The Nasdaq Stock Market. The prices do not
include retail mark ups, mark downs or commissions.
<TABLE>
<CAPTION>
1995 HIGH LOW
---- ----- -----
<S> <C> <C>
First Quarter................................................. $1.12 $ .46
Second Quarter................................................ $1.21 $ .59
Third Quarter................................................. $2.34 $1.03
Fourth Quarter................................................ $1.96 $ .75
<CAPTION>
1996 HIGH LOW
---- ----- -----
<S> <C> <C>
First Quarter................................................. $1.00 $ .62
Second Quarter................................................ $1.37 $ .50
Third Quarter................................................. $1.37 $ .96
Fourth Quarter................................................ $1.37 $ .96
<CAPTION>
1997 HIGH LOW
---- ----- -----
<S> <C> <C>
First Quarter................................................. $1.46 $1.03
Second Quarter................................................ $1.65 $ .78
Third Quarter................................................. $2.06 $1.28
Fourth Quarter................................................ $2.40 $ .87
</TABLE>
On October 27, 1997, the date immediately prior to the announcement of the
transactions contemplated by the Merger Agreement, the last reported sale price
of USW Common Stock on The Nasdaq Stock Market was $1.37 per share. The last
reported sale price of USW Common Stock on The Nasdaq Stock Market on ,
1998, the latest practicable date before the printing of this Proxy
Statement/Prospectus, was $ per share. There were approximately
holders of record of USW Common Stock as of , 199 . USW has not paid any
dividends on its Common Stock. USW is required, however, to pay quarterly
dividends on its Preferred Stock at a rate of 9% or approximately $6,750 per
quarter. USW does not currently anticipate the payment of dividends on its
Common Stock.
ACC and USW believe that USW Common Stock presently trades on the basis of
the value of the ACC Common Stock expected to be issued in exchange for such
USW Common Stock, discounted for the uncertainties associated with such
transaction. USW shareholders are advised to obtain current market quotations
for ACC Common Stock and USW Common Stock. No assurance can be given as to the
market prices of ACC Common Stock and USW Common Stock at any time before the
Effective Time or as to the market price of ACC Common Stock at any time
thereafter. Following the Merger, all USW Common Stock will be owned by ACC
and, as a result, USW Common Stock will no longer be listed on The Nasdaq Stock
Market.
12
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth for ACC Common Stock and USW Common Stock, for
the periods indicated, selected historical per share data and the corresponding
pro forma and pro forma equivalent per share amounts, giving effect to the
proposed Merger. The data presented are based upon the consolidated financial
statements and related notes of each of ACC and USW either included or
incorporated by reference in this Proxy Statement/Prospectus. This information
should be read in conjunction with, and is qualified in its entirety by, the
historical financial statements and related notes thereto. These data are not
necessarily indicative of the results of the future operations of the combined
company or the actual results that would have occurred if the Merger had been
consummated prior to the periods indicated. See "Incorporation of Certain
Documents By Reference" and "Index to USW Consolidated Financial Statements."
<TABLE>
<CAPTION>
ACC/USW USW
PRO FORMA PRO FORMA
ACC USW COMBINED EQUIVALENT
HISTORICAL HISTORICAL (UNAUDITED) (UNAUDITED) (1)
---------- ---------- ----------- ---------------
<S> <C> <C> <C> <C>
BOOK VALUE PER COMMON SHARE
OUTSTANDING:
December 31, 1996
(unaudited)............... $7.10 $0.05 $6.61 $0.40
September 30, 1997
(unaudited)............... 8.03 (0.02) 7.43 0.45
CASH DIVIDENDS DECLARED PER
COMMON SHARE:
Year ended December 31,
1994...................... 0.08 - 0.07 -
Year ended December 31,
1995...................... 0.02 - 0.02 -
Year ended December 31,
1996...................... - - - -
Nine months ended September
30, 1997 (unaudited)...... - - - -
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS AFTER
PREFERRED STOCK DIVIDENDS
AND ACCRETION PER COMMON
AND COMMON EQUIVALENT
SHARE:
Year ended December 31,
1994...................... (1.07) (0.09) (1.13) (0.07)
Year ended December 31,
1995...................... (0.50) (0.02) (0.48) (0.03)
Year ended December 31,
1996...................... 0.34 0.00 0.32 0.02
Nine months ended September
30, 1997 (unaudited)...... 0.76 (0.08) 0.64 0.04
</TABLE>
- --------
(1) The USW pro forma equivalent represents the ACC/USW pro forma combined book
value, dividends and income (loss) per common share multiplied by an
assumed Exchange Ratio of 0.061 shares of ACC Common Stock for each share
of USW Common Stock so that the USW pro forma equivalent amounts represent
the respective values of one share of USW Common Stock. The actual Exchange
Ratio will be determined at the closing of the Merger based on (i) the
volume-weighted average closing market price per share of ACC Common Stock
as reported by the The Nasdaq National Market over the 20 trading day
period ending on the third full trading day preceding the closing and (ii)
the amount of Contingent Obligations (as hereinafter defined) of USW which
remain outstanding at the closing. See "Risk Factors-- The Effect of Stock
Price Fluctuations and Other Adjustments on the Consideration to be
Received by the Holders of USW Common Stock in the Merger," "Unaudited ACC
Pro Forma Condensed Combined Financial Statements" and "The Merger
Agreement--Merger Consideration; Exchange of USW's Shares."
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following selected unaudited pro forma financial information illustrates
the effect of the proposed Merger as if the Merger had occurred at the
beginning of the earliest period presented. The unaudited pro forma information
is not necessarily indicative of the results of operations or the financial
condition that would have been reported had the Merger been in effect during
those periods, or as of those dates, or that may be reported in the future. Pro
forma combined per share data of ACC and USW is based on an assumed Exchange
Ratio of 0.061. The actual Exchange Ratio will be determined at the closing of
the Merger. See "The Merger Agreement--Merger Consideration; Exchange of USW's
Shares." This information should be read in conjunction with,
13
<PAGE>
and is qualified in its entirety by, the consolidated financial statements of
each of ACC and USW, and the related notes thereto, incorporated by reference
or included herein, and the Pro Forma Condensed Combined Financial Statements
and the accompanying notes set forth elsewhere in this Proxy
Statement/Prospectus. See "Available Information," "Incorporation of Certain
Documents by Reference" and "Unaudited ACC Pro Forma Condensed Combined
Financial Statements."
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
---------------------- -----------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenue........... $ 347,994 $ 309,461
Net income from
continuing operations
after preferred stock
dividends and
accretion.............. $ 5,346 $ 12,059
Net income from
continuing operations
after preferred stock
dividends and accretion
per common and common
equivalent share....... $ 0.32 $ 0.64
OTHER FINANCIAL DATA:
Cash dividends declared
per common share....... -- --
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
---------------------- -----------------------
<S> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Total assets............ $ 215,753 $ 290,606
Long-term debt, exclud-
ing current maturities. $ 6,516 $ 74,837
Shareholders' equity.... $ 118,149 $ 135,452
</TABLE>
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents selected historical financial data of ACC and
USW. The historical data for each of the years in the five-year period ended
December 31, 1996 have been derived from the audited historical consolidated
financial statements of the respective companies. The selected financial data
for ACC and USW for the nine-month periods ended September 30, 1996 and 1997
have been obtained from unaudited consolidated financial statements and, in the
opinion of the respective managements of ACC and USW, include all adjustments
(of a normal and recurring nature) which are necessary to present fairly the
data for such periods.
These data should be read in conjunction with, and are qualified in their
entirety by, the consolidated financial statements of each of ACC and USW and
the related notes thereto, either included or incorporated by reference herein.
See "Available Information," "Incorporation of Certain Documents by Reference"
and "Index to USW Consolidated Financial Statements."
14
<PAGE>
ACC SUMMARY HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, (UNAUDITED)
--------------------------------------------- -----------------
SEPT.
SEPT. 30,
1992 1993 1994 1995 1996 30, 1996 1997(4)
------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Total revenue........... $81,680 $105,946 $126,444 $188,866 $308,767 $224,227 $267,277
Net income (loss) from
continuing
operations(1).......... $ 3,600 $ 1,653 $(11,329) $ (5,354) $ 7,765 $ 4,517 $ 13,324
Net income (loss) from
continuing
operations after Series
A
Preferred Stock
dividends and
accretion(1)........... $ 3,600 $ 1,653 $(11,329) $ (5,894) $ 5,284 $ 1,999 $ 13,324
Net income (loss) from
continuing operations
after Series A
Preferred Stock
dividends and accretion
per common and common
equivalent share(2).... $ 0.35 $ 0.16 $ (1.07) $ (0.50) $ 0.34 $ 0.13 $ 0.76
OTHER FINANCIAL DATA:
Cash dividends declared
per share of Class A
Common Stock(2)(3)..... $ 0.07 $ 0.40 $ 0.08 $ 0.02 $ -- $ -- $ --
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Total assets(5)......... $45,450 $ 61,718 $ 84,448 $123,984 $204,031 $173,066 $276,597
Long term debt,
excluding current
maturities............. $12,747 $ 1,795 $ 29,914 $ 28,050 $ 6,007 $ 6,884 $ 74,388
Redeemable preferred
stock.................. $ -- $ -- $ -- $ 9,448 $ -- $ 11,929 $ --
Shareholders' equity.... $22,711 $ 31,506 $ 19,086 $ 26,407 $117,863 $ 96,464 $136,370
</TABLE>
- --------
(1) Includes impact of $2,160,000 of charges incurred in 1994 in connection
with enhancement of the ACC network to prepare for equal access for its
Canadian customers. Also includes an asset write-down of $12,807,000 in
1993.
(2) On June 14, 1996, the ACC Board of Directors authorized a three-for-two
stock split in the form of a stock dividend issued on August 8, 1996 of the
ACC Class A Common Stock to shareholders of record as of July 3, 1996.
Share and per share amounts for all prior periods have been adjusted for
the stock split.
(3) The ACC financing arrangements restrict the payment of dividends on the ACC
Common Stock. ACC anticipates that it will not pay dividends in the
foreseeable future.
(4) Includes the results of operations of companies acquired by ACC during
1997: Transphone International Ltd. from June 1, 1997, United Telecom Ltd.
from July 1, 1997, VISTA International Inc. from August 1, 1997, and
Telenational Communications Deutschland Limited Partnership from July 1,
1997.
(5) Balance sheet data from discontinued operations is excluded.
15
<PAGE>
USW SUMMARY HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, (UNAUDITED)
----------------------------------------- ---------------
SEPT. SEPT.
30, 30,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenue........... $10,447 $20,521 $23,633 $27,755 $40,304 $28,576 $43,303
Net income (loss) (1)... $ 238 $ 424 $(1,247) $ (278) $ 89 $ 444 $(1,245)
Net income (loss) after
Preferred Stock
dividends.............. $ 238 $ 379 $(1,365) $ (345) $ 62 $ 424 $(1,265)
Net income (loss) after
Preferred Stock
dividends per common
and common equivalent
share.................. $ 0.02 $ 0.03 $ (0.09) $ (0.02) $ 0.00 $ 0.03 $ (0.08)
OTHER FINANCIAL DATA:
Cash declared dividends
per share of common
stock.................. $ -- $ -- $ -- $ -- $ -- $ -- $ --
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Total assets............ $ 4,439 $ 8,266 $ 9,553 $ 9,500 $11,992 $11,760 $14,246
Long term debt,
excluding current
maturities............. $ -- $ -- $ -- $ 601 $ 509 $ 552 $ 449
Redeemable preferred
stock.................. $ -- $ 1,500 $ 1,300 $ 300 $ 300 $ 300 $ 330
Common shareholders'
equity................. $ 629 $ 1,078 $ (83) $ 751 $ 862 $ 1,225 $ (342)
</TABLE>
- --------
(1) 1994 results include a reduction of network costs of $783,000 in connection
with the reversal of an account payable due to a former vendor.
1995 results reflect favorable resolution of USW's dispute with Colonial
Penn Group, Inc. and Colonial Penn Insurance, resulting in the reversal of
an account payable in the amount of approximately $2,880,000. However, this
benefit was substantially offset by the cost of unsuccessfully litigating
the resultant AT&T case on the basis of anti-trust. The costs of litigation
with AT&T incurred during 1995 approximated $850,000. These costs do not
include the additional expense of approximately $305,000 of related
expenses pertaining to the write-down of certain AT&T signal conversion
equipment and accounts receivable written-off, which were attributable to
AT&T services provided by USW. In addition, AT&T was awarded a counter
claim in the litigation in the amount of $669,000 pertaining to services
utilized in prior years. As a result of settlement of these matters, USW
recognized a net favorable impact of approximately $1,056,000 in 1995.
16
<PAGE>
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
Certain statements contained in "Risk Factors," "Information Concerning
ACC," "Information Concerning USW" and "The Merger--USW's Reasons for the
Merger" and "--Bengur Bryan Fairness Opinion," and certain statements
incorporated by reference from documents filed with the Commission by ACC and
USW, including any statements contained herein or incorporated by reference
herein regarding the development of ACC's and USW's businesses, the markets
for ACC's and USW's services and products, anticipated capital expenditures,
regulatory reform, the effects of ACC's proposed merger with TCG and TCG's
proposed merger with AT&T, and other statements contained or incorporated by
reference herein regarding matters that are not historical facts, are or may
constitute forward-looking statements (as such term is defined in the Private
Securities Litigation Reform Act of 1995). Because such statements are subject
to risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited to,
those discussed under "Risk Factors."
17
<PAGE>
RISK FACTORS
USW's shareholders should carefully consider the following factors, together
with the other information contained in this Proxy Statement/Prospectus, and
all other available information, in evaluating the Merger and ACC and its
business before completing and returning the proxy accompanying this Proxy
Statement/Prospectus. Certain of the factors discussed below relate to the
proposed merger of ACC and TCG and TCG's proposed merger with AT&T. It is
unlikely that the proposed TCG Merger or TCG/AT&T Merger will close before the
consummation of the Merger, due to the anticipated timing of receipt of
regulatory approvals and other closing conditions; there can be no assurance
that the TCG Merger or TCG/AT&T will be consummated. See "Recent
Developments". The factors set forth below are not intended to represent a
complete list of the general or specific risks related to the Merger or to
ACC, USW and/or the combined company.
UNCERTAINTIES AS TO SATISFACTION OF CONDITIONS TO CLOSING
Consummation of the Merger is subject to the satisfaction or waiver of
several conditions. Among these are the conditions that: (i) holders of not
more than 10% of the issued and outstanding shares of USW Common Stock
exercise Dissenters' Rights, (ii) ACC receive affiliate agreements and pooling
letters from all Affiliates of USW, and (iii) counsel to each of ACC and USW
deliver certain opinions as to the tax-free nature of the Merger. Tel-Save, a
holder of more than 10% of the issued and outstanding shares of USW Common
Stock, has publicly disclosed that it is opposed to the Merger. If Tel-Save
exercises its Dissenters' Rights as to its shares, a condition to closing will
not be satisfied. In addition, Tel-Save and another USW shareholder holding
more than 10% of the issued and outstanding shares of USW Common Stock have
not yet delivered executed pooling letters and affiliate agreements to ACC.
There can be no assurance that Tel-Save will not exercise its Dissenters'
Rights or that pooling letters and affiliate agreements will be delivered by
all persons required to do so. Furthermore, counsel to ACC and USW have
determined that because of circumstances arising after the execution of the
Merger Agreement, neither firm will be able to deliver to its respective
client the tax opinions in the form required by the Merger Agreement. If any
of the conditions to the Merger are not satisfied or waived by the party to
which the condition applies, such party will not be obligated to close the
transaction. There can be no assurance that the conditions will be satisfied
or waived and that the Merger will ultimately close. See "The Merger
Agreement--Conditions to the Merger."
POSSIBILITY OF TAXABILITY OF THE MERGER
While ACC and USW intend that the Merger should, under current law,
constitute a tax-free reorganization under Section 368(a) of the Code, no
ruling has been sought from the IRS and no opinion of counsel to such effect
has been or will be obtained. If the TCG Merger and the TCG/AT&T Merger are
consummated, it is unclear whether the USW shareholders will be deemed to have
received AT&T shares for their USW Common Stock as a result of the proposed
TCG/AT&T Merger. If the IRS steps together the Merger, the proposed TCG Merger
and the proposed TCG/AT&T Merger, and determines that in substance the USW
shareholders are receiving AT&T stock rather than ACC stock, the Merger would
not qualify as a tax-free reorganization. If it were ultimately determined
that the Merger does not qualify as a tax-free reorganization, all USW
shareholders would be subject to tax on the USW Common Stock surrendered in
the Merger whether or not the ACC Common Stock received in the Merger was sold
or retained. AS A RESULT, USW SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX
ADVISORS REGARDING THE TAX CONSEQUENCES OF THE MERGER. See "The Merger--
Certain U.S. Federal Income Tax Consequences."
THE EFFECT OF STOCK PRICE FLUCTUATIONS AND OTHER ADJUSTMENTS ON THE
CONSIDERATION TO BE RECEIVED BY THE HOLDERS OF USW COMMON STOCK IN THE MERGER
The Exchange Ratio has not yet been fixed and will be determined at the
Effective Time based on the market value of ACC Common Stock, the number of
shares of USW Common Stock outstanding on a fully diluted basis, the aggregate
exercise price of outstanding USW Stock Options and USW Warrants and the
amount of outstanding Contingent Obligations (as hereinafter defined) of USW
at the Effective Time. Thus, the dollar value
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of the ACC Common Stock to be received by holders of USW Common Stock in the
Merger will not be determined until the Effective Time, and may be
substantially less than the value of the ACC Common Stock as of the date of
the Bengur Bryan fairness opinion, the date of execution of the Merger
Agreement, the date hereof or the date on which USW shareholders vote on the
Merger. Since the Merger Agreement provides for a "collar" on the Exchange
Ratio, to the extent that the price of the ACC Common Stock used to calculate
the Exchange Ratio is less than approximately $27.00 per share, the Exchange
Ratio will not be increased to maintain the relative value to be received by
USW shareholders. The Bengur Bryan fairness opinion was not updated as of the
date hereof. Shareholders should also note that, due to possible delays in
receiving regulatory approvals or in satisfying other conditions to
consummation of the Merger, there may be a significant delay between the date
of the Special Meeting and the date of consummation of the Merger.
Accordingly, the market value of shares of ACC Common Stock that holders of
USW Common Stock will receive upon consummation of the Merger may vary
significantly from the market value of the shares of ACC Common Stock that
holders of USW Common Stock would receive if the Merger were consummated on
the date of this Proxy Statement/Prospectus or the date of the Special
Meeting. See "The Merger Agreement--Merger Consideration; Exchange of USW's
Shares."
Since the announcement of the proposed TCG Merger Agreement on November 26,
1997, the market price of ACC Common Stock has been subject to significant
fluctuation, and could vary significantly prior to the Effective Time. Such
variances could be due to a number of factors, including, without limitation,
changes in the business, operations and prospects of ACC or TCG, market
speculation with respect to other potential acquirors of ACC or TCG, market
assessments of the likelihood that the proposed TCG Merger or TCG/AT&T Merger
will be consummated and the timing thereof, the effect of any conditions or
restrictions imposed on or proposed with respect to the combined companies by
regulatory agencies in connection with or following consummation of the TCG
Merger or TCG/AT&T Merger, perceptions about market conditions in the
telecommunications industry and the effect of general economic conditions,
many of which are unrelated to ACC's operating performance. See "Recent
Developments."
SUBSTANTIAL DILUTION OF OWNERSHIP INTEREST IN ACC OF CURRENT USW SHAREHOLDERS
RESULTING FROM THE PROPOSED TCG MERGER AND TCG/AT&T MERGER
Consummation of the proposed TCG Merger, which, if consummated, is
anticipated to occur after the Merger is consummated, will result in
substantial dilution of the ownership interest of the current USW shareholders
in the business of ACC. Assuming that the proposed TCG Merger and TCG/AT&T
Merger are consummated, USW shareholders who continue to own shares of TCG
Common Stock will experience further substantial dilution of their ownership
interest in the business of TCG as a result of the proposed TCG/AT&T Merger.
INTEGRATION OF ACC AND USW
Achieving the anticipated benefits of the Merger will depend in part upon
whether the integration of the two companies' businesses is accomplished in an
efficient and effective manner, and there can be no assurance as to the extent
that this will occur, if at all. The combination of the two companies will
require, among other things, integration of the companies' respective
services, technologies, management information systems, distribution channels
and key personnel and the coordination of their sales, marketing and
development efforts. There can be no assurance that such integration will be
accomplished smoothly or successfully, if at all. If significant difficulties
are encountered in the integration of the existing products or technologies or
the development of new products and technologies, resources could be diverted
from new product development, and delays in new product introductions could
occur. There can be no assurance that the combined company will be able to
take full advantage of the combined sales forces' efforts. The integration of
operations and technologies following the Merger will require the dedication
of management and other personnel which may distract their attention from the
day-to-day business of the combined company, the development or acquisition of
new technologies, and the pursuit of other business acquisition opportunities.
Failure to successfully accomplish the integration and development of the two
companies' operations and technologies could have a material adverse
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effect on the combined company's business, financial condition and results of
operations. In addition, as commonly occurs with mergers of telecommunications
companies, during the pre-merger and integration phases, aggressive
competitors may undertake initiatives to attract customers through various
incentives which could have a material adverse effect on the business, results
of operations and financial conditions of ACC, USW and/or the combined
company.
RECENT LOSSES; POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
Although ACC has experienced revenue growth on an annual basis since 1990
and net income in 1996 and the first nine months of 1997, it incurred net
losses and losses from continuing operations during 1994 and 1995. There can
be no assurance that revenue growth will continue or that the Company will be
able to maintain its profitability and positive cash flow from operations. If
the Company cannot continue its revenue growth and maintain profitability and
positive cash flow from operations, it may not be able to meet its debt
service or working capital requirements. The Company intends to focus in the
near term on the expansion of its service offerings, including its local
telephone service and Internet services, and expanding its geographic markets,
including deregulating Western European markets. Such expansion, particularly
the establishment of new operations or acquisition of existing operations in
deregulating Western European markets, may adversely affect cash flow and
operating performance and these effects may be material, as was the case with
the Company's U.K. operations in 1994 and 1995. 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 by the Company or 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. Revenues from other resellers
accounted for approximately 12.7% of ACC's consolidated revenues in 1995,
25.2% of consolidated revenues in 1996 and 22% of consolidated revenues during
the first nine months of 1997. Carrier revenues during 1997 will be adversely
affected by the loss of wholesale traffic from a large Canadian long distance
carrier which accounted for approximately $13.4 million of revenue during
1996, most of which is expected to be non-recurring. Because sales to other
carriers are at margins that are lower than those derived from most of the
Company's other revenues, increases in carrier revenue as a percentage of
revenues have in the past reduced and may in the future reduce, the Company's
gross margins as a percentage of revenue. In addition, certain of its long
distance carrier customers may pose credit or collection risks. See the Risk
Factor discussion below of "Risks Associated With Acquisitions, Investments
and Strategic Alliances".
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 of its last five
fiscal years, the Company has experienced a working capital deficit. The
Company believes that, under its present business plan, cash from operations
and borrowings available under its credit facility will be sufficient to meet
its anticipated capital and capital expenditure requirements for the
foreseeable future. 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 and expansion into international
markets (both of which will be capital intensive), working capital needs, debt
service obligations, and, contemplated capital expenditures. In addition, the
Company may need to raise additional funds in order to take advantage of
unanticipated opportunities,
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including more rapid international expansion or acquisitions of, investments
in or strategic alliances with companies that are complementary to the
Company's current operations, or to develop new products or otherwise respond
to unanticipated competitive pressures. If additional funds are raised through
the issuance of equity securities, the percentage ownership of the Company's
then current shareholders would be reduced and, if such equity securities take
the form of Preferred Stock or Class B Common Stock, the holders of such
Preferred Stock or Class B Common Stock may have rights, preferences or
privileges senior to those of holders of Class A Common Stock. There can be no
assurance that the Company will be able to raise such capital on satisfactory
terms or at all. If the Company decides to raise additional funds through the
incurrence of debt, the Company would need to obtain the consent of its
lenders under the Company's 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 the Company's business, results of operations and
financial condition and its ability to compete.
CONTINGENT LIABILITIES
USW is currently a defendant in a civil lawsuit brought by a former
employee. Any liabilities resulting from such lawsuit will be assumed by the
combined company after the Merger. Although USW intends to defend such claim
vigorously, there can be no assurance that a favorable outcome will result in
the lawsuit. An unfavorable outcome to USW in the lawsuit may have a material
adverse effect on the business, results of operations or financial condition
of USW or the combined company. See "Information Concerning USW--Legal
Proceedings."
DEPENDENCE ON TRANSMISSION FACILITIES-BASED CARRIERS
The Company generally does not own telecommunications transmission lines
other than IRUs. 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 Telecommunications plc ("British Telecom"). Most inter-city
transmission lines used by the Company are leased at rates that currently are
less than the rates the Company charges its customers for connecting calls
through these lines. Accordingly, to the extent that the Company continues to
lease transmission lines, it will remain 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 maintaining favorable
relationships with the transmission facilities-based carriers from which the
Company leases transmission lines, particularly in the U.K., where British
Telecom and Cable and Wireless Communications Ltd. ("CWC") are the two
principal, dominant carriers. The Company's U.K. operations are highly
dependent upon the transmission lines leased from British Telecom. Although
the Company believes that its relationships with carriers generally are
satisfactory, the deterioration 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 the
22 former Bell System Operating Companies ("RBOCs") and other incumbent local
exchange carriers, currently are subject to tariff controls and other price
constraints which in the future may be changed. Under the 1996 amendments to
the U.S. Communications Act of 1934 (the "1996 Act"), constraints on the
operations of the RBOCs have been dramatically reduced, which will bring into
the long distance market additional competitors from whom the Company leases
transmission lines. In addition, certain regulatory issues are pending that
may affect the prices charged by the RBOCs and other incumbent 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
"Potential Adverse Effects of Regulation."
POTENTIAL ADVERSE EFFECTS OF REGULATION
The 1996 Act provides specific guidelines under which the RBOCs can provide
long distance services, which will permit the RBOCs to compete with the
Company in the provision of domestic and international long
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distance services. The legislation also opens all local service markets,
subject to limited exemptions for rural telephone companies, to competition
from any entity (including, for example, 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 may be subject to additional competition. Moreover, as a result of and
to implement the legislation, certain federal and state governmental
regulations will be adopted, amended or modified, and any such adoption,
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 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 long distance telecommunications service providers has
been in the direction of lessened regulation. Incumbent LECs have been
subjected to new regulations designed to encourage competition in the
provision of local exchange services, but incumbent LECs are also being
allowed increased freedom to enter new markets and increased pricing
flexibility. As a consequence, both AT&T and RBOCs will have more freedom to
maneuver when competing with smaller interexchange carriers. 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. In addition, the commitments made by the U.S. government in the
recently-completed World Trade Organization ("WTO") negotiations will allow
foreign-affiliated carriers previously prohibited from providing service in
the U.S. market to compete with the Company in the U.S. market. 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's business, results of operations and financial condition.
In order to provide their services, interexchange carriers, including the
Company, must generally purchase "access" from local exchange carriers
("LECs") 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.,
the FCC regulates interstate access and the states regulate intrastate access.
Pursuant to the 1996 Act, on May 16, 1997, the FCC issued an order to
implement certain reforms to its access charge rules (the "Access Charge
Reform Order"). The Access Charge Reform Order will require incumbent LECs to
substantially decrease over time the prices they charge for switched access,
and change how access charges are calculated. These changes are intended to
reduce access charges paid by interexchange carriers to LECs and shift certain
usage-based charges to flat-rated, monthly per-line charges. To the extent
that these rules begin to reduce charges to reflect the forward-looking cost
of providing access, the Company's competitive advantage in providing
customers with access services might decrease. In addition, the FCC has
determined that it will give incumbent LECs pricing flexibility with respect
to access charges. To the extent such pricing flexibility is granted before
substantial facilities-based competition develops, such flexibility could be
misused to the detriment of new entrants, including the Company. Until the FCC
adopts and releases rules detailing the extent and timing of such pricing
flexibility, the impact of these rules on the Company cannot be determined. In
its order, the FCC abolished the unitary rate structure option for tandem-
switched transport. This may have an adverse effect on smaller interexchange
carriers such as the Company because it may increase the costs of transport
which smaller interexchange carriers must purchase from LECs to reach end user
customers on the local exchange market.
On May 8, 1997, the FCC issued an order to implement the provisions of the
1996 Act relating to the preservation and advancement of universal telephone
service (the "Universal Service Order"). The Universal Service Order affirmed
the policy principles for universal telephone services set forth in the
Telecommunications Act, including quality service, affordable rates, access to
advanced services, access in rural and high-cost areas, equitable and non-
discriminatory contributions, specific and predictable support mechanisms, and
access to advanced telecommunications services for schools, health care
providers and libraries. The Universal Service Order added "competitive
neutrality" to the 1996 Act's universal service principles by providing that
universal service support mechanisms and rules should not unfairly advantage
or disadvantage one provider over another,
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nor unfairly favor or disfavor one technology over another. The Universal
Service Order also requires all telecommunications carriers providing
interstate telecommunications services, including the Company, to contribute
to universal service support. Such contributions will be assessed based on
intrastate, interstate and international end-user telecommunications revenues.
However, because the contribution factors are likely to vary quarterly, the
annualized impact on ACC cannot be estimated at this time.
Both the Universal Service and Access Charge Reform Orders are subject to
petitions seeking reconsideration by the FCC and direct appeals to U.S. Courts
of Appeals. Until the time when any such petitions or appeals are decided,
there can be no assurance of how the Universal Service and/or Access Charge
Reform Orders will be implemented or enforced, or what effect the Orders will
have on competition within the telecommunications industry, generally, or on
the competitive position of the Company, specifically.
The Company currently competes with the RBOCs and other local exchange
carriers such as the GTE Operating Companies ("GTOCs") in the provision of
"short haul" toll calls completed within a Local Access and Transport Area
("LATA"). Subject to a number of conditions, the 1996 Act established
conditions that would allow for the eventual elimination of many of the
restrictions which prohibited the RBOCs from providing long-haul, or inter-
LATA, toll service, and thus the Company will face additional competition in
this market. 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.
Under the 1996 Act, local exchange carriers must permit resale of their
bundled local services and all incumbent LECs must permit resale of their
bundled local services and unbundled network elements. Pricing principles for
those services were set forth in the 1996 Act, with states directed to approve
specific cost-based rates based on these principles. At the end of 1996, the
New York State PSC ("NYSPSC") replaced temporary wholesale discounts with
permanent wholesale discounts of 19.1% for New York Telephone (business and
residential) and 17% for Frontier Corp. (business and residential). Discounts
were made applicable to virtually all services provided to the public.
On April 1, 1997, the NYPSC adopted permanent rates for unbundled links and
certain other unbundled network elements for New York Telephone. The monthly
rate for unbundled links in designated areas of dense traffic (accounting for
approximately 70% of all loops in the state) is $12.49, plus a recurring $1.90
connection charge. The monthly rate in other areas of the state is $19.24,
plus a $1.90 recurring connection charge. Permanent unbundled link and
unbundled network element rates have not yet been established for Frontier
Corp. The permanent New York Telephone link rate is lower than the temporary
rates for New York Telephone's unbundled links; it is greater than the $10.10
rate for the comparable service New York Telephone offers to its own
residential customers, but below the rate of approximately $22 for the
comparable service New York Telephone offers to its business customers.
However, in order to utilize unbundled links, the Company must arrange for
physical or virtual collocation in New York Telephone's central offices, which
adds significant costs. As a result, the Company's marketing efforts are
primarily directed toward business customers (and certain concentrated
residential customers) which can be served through the Company's own
facilities, rather than through use of unbundled links obtained from New York
Telephone or Frontier Corp.
In Canada, the Canadian Radio-television and Telecommunications Commission
("CRTC") annually reviews the "contribution charges" (the equivalent of access
charges in the U.S.) assessed by the dominant carriers for the access lines
leased by Canadian long distance resellers, including the Company, from the
local telephone companies in Canada. Changes in these contribution charges
could have a material adverse effect on the Company's business, results of
operations and financial condition. On May 1, 1997, the CRTC issued several
rules intended to encourage increased competition in the telecommunications
and broadcast distribution (cable) industries. Generally, the rules describe
how new service providers can enter the local exchange market, how
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and when telephone companies can apply for broadcasting licenses, and the
details of a new methodology that will be used to regulate local telephone
rates. The rules governing entry in the local exchange market cover issues of
inter-connection, resale, subscriber listings, number portability, rate
rebalancing, local service subsidies, rate regulation, service obligations and
cable competition. While certain of the rules appear favorable to the Company,
the rules will likely increase competition in Canadian local exchange service
through new entrants. The Company is unable to predict the extent to which the
full implementation of the rules will have a material adverse effect on the
Company's business, results of operations or 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 regulatory changes 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 operations and financial
condition.
The telecommunications services provided by ACC U.K. are subject to and
affected by regulations introduced by the U.K. telecommunications regulatory
authority, The Office of Telecommunications ("Oftel"). Since the break up of
the U.K. telecommunications duopoly consisting of British Telecom and Mercury
Communications Ltd. (now known as "CWC") 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 presided over
by Oftel has a direct and material effect on the ability of the Company to
conduct its business. From the middle of 1997, Oftel has imposed a new price
cap on British Telecom's retail charges which, while only applying to four out
of five residential customers and to small (but not large) business customers,
may have the effect of reducing the prices the Company can charge its
customers. In addition, the new network charge control regime implemented in
October 1997 gives British Telecom much more freedom to set its own prices
(although subject to certain charge caps and other safeguards), and as such
increases the uncertainty with regard to the Company's network costs in the
U.K. market. 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.
EXPANSION OF LOCAL EXCHANGE BUSINESS
The Company anticipates that a significant portion of its growth in its U.S.
operations in the future will come from local exchange operations and
anticipates incurring approximately $13.7 million in capital expenditures
during 1997 relating to the installation of additional local exchange switches
in the northeastern United States. The Company has only limited experience in
providing local telephone services, having commenced providing such services
in 1994. The Company's revenues from local telephone and other services in
North America in 1995 and 1996 were $13.6 million and $26.3 million,
respectively, and $17.9 million and $28.7 million, respectively, for the first
nine months of 1996 and 1997. 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 service companies that
offer such discounts. The local service business requires significant initial
investments in capital equipment as well as significant initial promotional
and selling expenses. Larger, better capitalized local service providers,
including AT&T, among others, will be better able to sustain losses associated
with discount pricing and initial investments and expenses. Although the
Company's local service business generated a small operating profit in 1996,
it incurred operating losses in 1994 and 1995 and many companies that compete
with the Company's local service business are not profitable. There can be no
assurance that the Company will continue to achieve positive cash flow or
profitability in its local telephone service business. In addition, the FCC
and PSCs are considering regulatory changes in rate structures and access
charges which could materially adversely affect the ability of small
interexchange carriers, such as the Company, to compete in the provision of
local service. The Company's success in the local exchange market also
requires the negotiation and implementation of interconnection agreements with
incumbent local exchange carriers in the areas that the Company seeks to
serve, and there can be no assurance that these agreements will be concluded
in a timely manner. See "Potential Adverse Effects of Regulation."
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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, including the ability to
provide both intra- and inter-LATA toll service. 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. With respect to its reseller customers, the Company competes almost
exclusively on the basis of price.
Many of the Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources and larger
networks than the Company, control more transmission lines and have long-
standing relationships with the Company's target customers. These competitors
include, among others, AT&T, MCI Telecommunications Corporation ("MCI"), and
Sprint Corp. ("Sprint") in the U.S.; Bell Canada, BC Telecom, Inc., AT&T
Canada Long Distance Services Company ("AT&T Canada") and Sprint Canada (a
subsidiary of Call-Net Telecommunications Inc.) in Canada; and British
Telecom, CWC, AT&T, and WorldCom, Inc. ("Worldcom") in the U.K. Other U.S.
carriers also have entered and/or are 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 and Massachusetts, the Company competes
with New York Telephone Company ("New York Telephone"), Frontier Corp.,
Citizens Telephone Co., WorldCom and Time Warner and others, including
cellular and other wireless providers. Furthermore, corporate transactions
such as the merger of Bell Atlantic Corp. and NYNEX Corp., the proposed merger
of MCI and WorldCom, the joint venture between MCI and Microsoft Corporation
("Microsoft") under which Microsoft will promote MCI's services, the joint
venture among Sprint, Deutsche Telekom AG and France Telecom called Global
One, and additional mergers, acquisitions and strategic alliances which are
likely to occur, 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 the 1996 Act, an RBOC is allowed to originate long distance calls
outside of its region immediately and may enter the long distance markets in
states in which it is an incumbent LEC once it has received FCC approval to do
so. AT&T, MCI and other long distance carriers are allowed to enter the local
telephone services market, and any other entity (including cable television
companies and utilities) is 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
1995 and 1996, 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 U.S. markets over time
as such non-U.S. markets continue to experience deregulatory influences.
Implementation of the WTO accord reached in February 1997 is likely to
accelerate this trend in some markets. Prices in the long distance industry
have declined from time to time in recent years and are likely to continue to
decrease. For example, Bell Canada substantially reduced its rates during the
first quarter of 1994 and British Telecom substantially reduced its rates in
1996. The Company's competitors may reduce rates or offer incentives to
existing and potential customers of the Company. AT&T, in particular, has
experienced a decline in its market share in recent years and may make
aggressive pricing decisions in an effort to halt or reverse this decline. 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.
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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 intends to establish a presence in deregulating Western European
markets that have high density telecommunications traffic, when the Company
believes that business and regulatory conditions warrant. The Company has
entered the German market as a switchless reseller in anticipation of
deregulation in 1998, and has established a German subsidiary. The German
subsidiary signed an interconnect agreement with Deutsche Telekom ("DT") in
October 1997 with a view to establishing a German switch in 1998, although the
interconnect rates set by the German Regulatory Authority are subject to
retrospective change following a challenge by DT in the national courts.
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 to such expansion 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
Western European markets. In the WTO accord reached in February 1997, a number
of countries agreed to accelerate or initiate liberalization of their
telecommunications markets by allowing increased competition and foreign
ownership of telecommunications providers and by adopting measures to ensure
reasonable nondiscriminatory interconnection, effective competitive
safeguards, and an effective independent regulation. This agreement may,
therefore, expand the international opportunities available to the Company. To
date, the Company has no significant experience in providing
telecommunications service outside the United States, Canada and the U.K. The
Company is making preparations to enter the emerging German market in
anticipation of deregulation in 1998. There can be no assurance, however, 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. Where protective regulations are being eliminated, the pro-
competitive effect of this action could substantially increase the number of
entities competing with the Company. Pursuit of international growth
opportunities may require significant investments for an extended period
before returns, if any, on such investments are realized. The Company intends
to focus in the near term on the expansion of its service offerings, including
its local telephone business and Internet services, and expanding its
geographic markets to more locations in its existing markets, and when
conditions warrant, to deregulating Western European markets. Such expansion,
particularly the establishment of new operations or acquisition of existing
operations in deregulating international markets, may adversely affect cash
flow and operating performance and these effects may be material, as was the
case with the Company's U.K. operations in 1994 and 1995. 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, hire and train employees or to
market, sell and deliver high quality services in these international markets.
In addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent to doing business on
an international level, such as unexpected changes in regulatory requirements,
tariffs, customs, duties and other trade barriers, difficulties in staffing
and managing foreign operations, longer payment cycles, problems in 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
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consequences resulting from exposure to different tax regimes (including,
without limitation, high value added taxes) and 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. There are risks in participating in joint ventures, including the
risk that the other participant in the joint venture may at any time have
economic, business or legal interests that are inconsistent with those of the
joint venture or the Company. As its revenues from its Canadian and U.K.
operations increase and as it establishes operations in other countries, an
increasing portion of the Company's revenues will be denominated in currencies
other than U.S. dollars, although a significant portion of the Company's
interest expense may be denominated in U.S. dollars. Therefore, changes in
exchange rates (particularly a strengthening of the U.S. dollar) will 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.
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. Except for the Merger Agreement and the proposed
TCG Merger, the Company has no present commitments or agreements with respect
to any material strategic alliance, investment or acquisition. TCG, however,
has entered into a definitive merger agreement with AT&T. Any future ACC
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 difficulty of
successfully incorporating 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
in the past experienced higher attrition rates with respect to customers
obtained through acquisitions, and may again experience higher attrition rates
with respect to 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 Operations."
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.
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.
TECHNOLOGICAL CHANGES MAY ADVERSELY AFFECT COMPETITIVENESS AND FINANCIAL
RESULTS
The telecommunications industry is characterized by rapid and significant
technological change 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 or implement appropriate
new technologies on a timely basis or on satisfactory terms.
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RISKS ASSOCIATED WITH RAPIDLY CHANGING INDUSTRY
The international telecommunications industry is changing rapidly due to,
among other things, deregulation, privatization of dominant telecommunications
providers, technological improvements, expansion of telecommunications
infrastructure and the globalization of the world's economies and free trade.
There can be no assurance that one or more of these factors will not vary
unpredictably, which could have a material adverse effect on the Company.
There can also be no assurance, even if these factors turn out as anticipated,
that the Company will be able to implement its strategy or that its strategy
will be successful in this rapidly evolving market. There can be no assurance
that the Company will be able to compete effectively or adjust its
contemplated plan of development to meet changing market conditions.
Much of the Company's planned growth is predicated upon the deregulation of
telecommunications markets. There can be no assurance that such deregulation
will occur when or as anticipated, if at all, or that the Company will be able
to grow in the manner or at the rates currently contemplated.
As a result of existing excess international transmission capacity, the
marginal cost of carrying an additional international call is often very low
for carriers that own transmission lines. Industry observers have predicted
that these low marginal costs may result in significant pricing pressures and
that, within a few years after the end of this century, there may be little
difference in charges based on the distance a call is carried. A number of the
Company's competitors have introduced calling plans that provide for flat
rates on calls within the U.S. and Canada, regardless of time of day or
distance of the call. If this type of pricing were to become prevalent, it
could have a material adverse effect on the Company's business, financial
condition and results of operations.
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.
RISKS 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.
The Company's secured lenders would be entitled to foreclose upon those assets
in the event of a default under the financing arrangements and to be repaid
from the proceeds of the liquidation of those assets before the assets would
be available for distribution to the Company's other creditors and
shareholders in the event that the Company is liquidated. In addition, the
collateral security arrangements under the Company's existing financing
arrangements may adversely affect the Company's ability to obtain additional
borrowings or other capital. The Company may need to raise additional capital
from equity or debt sources to finance its projected growth and capital
expenditures contemplated for periods after 1997. See the Risk Factor
discussion above under "Substantial Indebtedness; Need for Additional
Capital".
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, the U.K. and Germany. ACC U.S.,
ACC Canada, ACC U.K., ACC Germany and other operating
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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 ACC Common Stock has been and may continue to be, highly
volatile. 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, "buy," "hold" and "sell" ratings by
securities 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 ACC Common Stock to fluctuate substantially. In addition,
in view of the proposed TCG Merger and TCG/AT&T Merger, the market price of
ACC Common Stock may be affected by changes in the stock prices of TCG and
AT&T. The stock markets recently have also 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 ACC 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.
ANTI-TAKEOVER PROVISIONS
ACC's Board of Directors has the authority to issue up to 1,990,000 shares
of Preferred Stock and 25,000,000 shares of Class B Common Stock, and to
determine the price, rights, preferences and privileges of those shares
without any further vote or action by the shareholders. The rights of the
holders of any ACC Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock or Class B
Common Stock that may be issued in the future. While the Company has no
present intention to issue any additional shares of Preferred Stock or Class B
Common Stock, any such issuance or the perception that such issuances may
occur could have the effect of making it more difficult for a third party to
acquire control of the Company. The issuance of Preferred Stock or Class B
Common Stock could also decrease the amount of earnings and assets available
for distribution to holders of ACC Common Stock or could adversely affect the
rights and powers, including voting rights, of holders of ACC Common Stock. In
addition, the Company is and, subject to certain conditions, will continue to
be, subject to the anti-takeover provisions of the DGCL, which could have the
effect of delaying or preventing a change of control of the Company.
Furthermore, upon a change of control, the Company's indebtedness under its
credit facility is required to be repaid and the salary continuation and
employment agreements with executive officers and directors of the Company
require certain payments to be made by the Company and provide for vesting of
stock options and stock incentive rights. In addition, ACC has adopted a
rights plan ("ACC Shareholder Rights Plan"), which will cause substantial
dilution to a person or group that attempts to acquire ACC on terms not
approved by the ACC Board of Directors. All of these provisions and the ACC
Shareholder Rights Plan could have the effect of delaying or preventing
changes in control or management of the Company. The TCG Merger Agreement also
contains provisions which restrict the ability of ACC to solicit or
participate in discussions concerning acquisition proposals with respect to
ACC and require ACC to pay to TCG a termination fee and expense reimbursements
under certain circumstances. These provisions could discourage or increase the
cost of an acquisition proposal with respect to ACC from a person other than
TCG. See "Recent Developments."
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THE MERGER
GENERAL
Pursuant to the Merger Agreement, Acquisition Sub will merge with and into
USW in accordance with the NYBCL and the DGCL, the separate existence of
Acquisition Sub will cease, and USW, as the surviving corporation in the
Merger, will become a wholly-owned subsidiary of ACC. See "The Merger
Agreement" for a summary of the terms and conditions of the Merger.
BACKGROUND OF THE MERGER
In January 1997, because of the financial condition of USW, the Board of
Directors of USW decided to explore the possibility of (i) entering into a
transaction pursuant to which USW would merge with or be acquired by another
company or (ii) raising additional capital through a private placement of its
capital stock. The Board of Directors directed management to explore possible
financing sources and merger opportunities.
On June 10, 1997, Steve M. Dubnik and Michael R. Daley, officers of ACC,
contacted Kevin M. O'Hare, David B. Hurwitz and Christopher Shannon, officers
of USW at such time, to discuss ACC's interest in a possible transaction. The
USW Board of Directors met on June 28, 1997 to review the possibility of
entering into a transaction with ACC and determined that, depending upon the
purchase price, the USW Board of Directors would consider such a transaction.
On July 29, 1997, David K. Laniak and Mr. Dubnik of ACC met with Messrs.
O'Hare and Shannon of USW and agreed to sign a non-disclosure agreement and to
exchange information to enable ACC to develop a proposed price range for a
transaction.
At a meeting of the USW Board of Directors on August 14, 1997, the Board of
Directors discussed several strategic alternatives, including entering into a
transaction with ACC. The Board determined that it would favor a sale of USW
for a price equal to a multiple of not less than 10 to 12 times USW's monthly
average revenues. The Board also determined that it would be advisable to
engage an investment banking firm to determine the fairness of any such
transaction. The Board also appointed a special purpose Finance and Business
Combination Committee (the "FBCC"), comprised of Messrs. Brown, Parker and
Regan, to explore possible financing or acquisition transactions.
The FBCC considered numerous issues in determining whether a sale or
business combination involving USW was in the best interests of its
shareholders, including challenges in (i) meeting the requirements of the
SmallCap segment of The Nasdaq Stock Market for continued listing of the USW
Common Stock, (ii) increasing the market value for USW's Common Stock, (iii)
increasing its size to meet relative pricing in the marketplace and (iv)
competing with competitive local access carriers who offer both local and long
distance services. The FBCC determined that, without such sale or business
combination, it would be advisable for USW to take significant strategic steps
in order to continue as an independent entity, including (i) raising working
capital, (ii) modernizing capital equipment, (iii) updating billing software,
(iv) hiring additional employees with technical expertise and (v) increasing
sales personnel. The FBCC acknowledged that equity financing would have the
effect of diluting shareholders as well as have long-term effects on earnings
per share and share price. The FBCC believed that changes resulting from a
newly deregulated marketplace would result in continuing price and marketing
pressures due to the economies of scale available to RBOCs and other
competitors. The FBCC also considered acquiring additional long distance
companies, but decided that no company in USW's region possessed the resources
which would allow for local access.
On August 27, 1997, during a telephone conference call with Messrs. O'Hare,
Shannon, Brown and Parker of USW, the parties discussed the structure of a
possible transaction and Mr. Dubnik discussed a price range for a possible
acquisition of USW of between $2.30 and $2.50 per share. The representatives
of USW requested additional information concerning ACC.
The members of the FBCC continued informal discussions with ACC through
September 12, 1997, at which time they advised the USW Board of Directors of
the proposed terms of a transaction in which ACC would purchase USW through a
merger transaction. On September 16, 1997, USW received a non-binding term
sheet
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from ACC, setting forth the terms of the proposed transaction between the
companies. On September 17, 1997, the FBCC engaged Bengur Bryan to review the
fairness of the proposed transaction. On September 22, 1997, USW received a
revised non-binding term sheet from ACC, which the FBCC rejected. On October
7, 1997, USW received another revised non-binding term sheet from ACC, which
the FBCC rejected. The FBCC continued its discussions with ACC and, on October
17, 1997, USW received another revised non-binding term sheet. The FBCC
informally polled the members of the USW Board of Directors, and determined,
based on such discussions, to proceed with the negotiation of a definitive
agreement with ACC.
During the same period, the FBCC continued to explore possible financing
transactions, and on September 29, 1997 and October 2, 1997, members of the
FBCC held discussions with third parties regarding the possibility of raising
additional capital. In addition, the FBCC entered into discussions with and
conducted due diligence on another possible candidate for a strategic
transaction. Prior to deciding to proceed with the negotiation of a definitive
agreement with ACC, the USW Board of Directors concluded that the terms of any
financing or strategic transaction with such other party would not be as
favorable to the shareholders of USW as the proposed transaction with ACC.
During the period between and including October 21, 1997 and October 28,
1997, USW and ACC engaged in negotiating and drafting definitive agreements,
and conducting due diligence regarding a merger transaction. On October 27,
1997, the USW Board of Directors met to consider the proposed Merger and
Merger Agreement. Upon receipt of an oral fairness opinion from Bengur Bryan,
which was substantially confirmed in writing by Bengur Bryan as of October 27,
1997, the USW Board of Directors approved the terms of the proposed Merger and
Merger Agreement. The ACC Board of Directors also approved the proposed Merger
and Merger Agreement on October 27, 1997.
On October 28, 1997, USW entered into the Merger Agreement with ACC and
Acquisition Sub.
ACC'S REASONS FOR THE MERGER
Numerous factors were taken into consideration by ACC in entering into the
Merger Agreement, including (1) the synergies which could potentially be
realized by combining the business of USW, with its domestic and international
long distance, "800" number, calling/debit card and paging and cellular
business in the mid-Atlantic region, with the business of ACC in contiguous
markets, (2) the opportunities for expansion of USW's emerging competitive
local exchange business in the mid-Atlantic region as a result of the greater
financial resources of ACC, (3) the marketing and technical expertise of USW's
management, employees and sales agent network, (4) ACC's knowledge of the
business, operations, properties, assets, financial condition and prospects of
USW and (5) current industry, economic and market conditions.
The ACC Board of Directors believes that the Merger is fair to, and in the
best interests of, ACC and its shareholders. For the various reasons discussed
above, the ACC Board of Directors approved the Merger Agreement and the
transactions contemplated thereby.
USW'S REASONS FOR THE MERGER
The Board of Directors of USW believes that the Merger will create a long
distance, "800" number, calling/debit card and paging and cellular business
that will be better positioned to compete effectively in the industry in which
both ACC and USW currently compete. The USW Board of Directors believes that
the Merger will provide opportunities to achieve benefits for the USW
shareholders and customers that might not otherwise be available.
The USW Board of Directors believes that after the Merger, the combined
company will have the technical resources, scale, geographic scope and
competencies to compete more effectively than USW alone, given the numerous
uncertainties and competitive pressures in the deregulated long distance
industry. ACC's domestic
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network is largely contiguous and complementary to that of USW. ACC is
implementing a state of the art convergent billing system that is capable of
processing large amounts of customer data. Furthermore, after the Merger, the
combined company will have significantly greater financial resources, which
will allow it to more effectively compete on a price basis, in addition to
competing on a quality basis, within USW's current marketplace.
The USW Board of Directors believes that the combined company will also
benefit from synergies between ACC's European operations and USW's domestic
operations. As a result of ACC's European presence, the combined company will
be able to purchase European terminations for current USW domestic business,
carrier and international call-back customers at more favorable rates.
In addition, the USW Board of Directors believes that the products, services
and pricing offered by ACC to the current USW agents will enable the combined
company to retain and increase its agents network, which is USW's largest
sales channel.
RECOMMENDATION OF THE USW BOARD OF DIRECTORS
THE USW BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
THE MERGER AND UNANIMOUSLY RECOMMENDS THAT HOLDERS OF SHARES OF USW COMMON
STOCK VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF
THE MERGER. In reaching its decision, USW's Board of Directors considered,
among other things, the following factors: (i) its knowledge of the business,
operations, properties, assets, financial condition and operating results of
USW; (ii) judgments as to USW's future prospects; (iii) presentation by USW's
management and by USW's financial advisor, Bengur Bryan, with respect to USW
and ACC; (iv) the opinion of Bengur Bryan as to the fairness from a financial
point of view of the consideration to be received by shareholders of USW in
the Merger; (v) the terms of the Merger Agreement which were the product of
extensive "arm's length" negotiations; (vi) the historical trading prices for
ACC Common Stock; (vii) the opportunity for USW shareholders to participate,
as holders of ACC Common Stock, in a larger, more diversified company of which
USW would become a significant part. The Board of Directors of USW also
believes that the Merger will allow the combined companies to enjoy synergies
in operations. The foregoing discussion of the information and factors
considered and given weight by the USW Board of Directors is not intended to
be exhaustive. In view of the variety of factors considered in connection with
its evaluation of the Merger, the USW Board of Directors did not find it
practicable to and did not quantify or otherwise assign relative weights to
the specific factors considered in reaching its determination. In addition,
individual members of the USW Board of Directors may have given different
weights to different factors.
THE USW BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
THE MERGER AND UNANIMOUSLY RECOMMENDS THAT HOLDERS OF SHARES OF USW COMMON
STOCK VOTE IN FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND
APPROVAL OF THE MERGER.
BENGUR BRYAN FAIRNESS OPINION
USW retained Bengur Bryan to act as its financial advisor and to render an
opinion to the Board of Directors of USW as to the fairness, from a financial
point of view, of the ACC Common Stock to be received by the holders of USW
Common Stock in the Merger.
On October 27, 1997, in connection with the evaluation of the proposal from
ACC, by the Board of Directors of USW, Bengur Bryan rendered its oral opinion,
which it substantially confirmed in writing as of October 27, 1997, that, as
of such date, and subject to certain assumptions, factors and limitations set
forth in such written opinion as described below, the ACC Common Stock to be
received by USW shareholders is fair to such shareholders from a financial
point of view.
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The full text of the written opinion of Bengur Bryan dated October 27, 1997,
which sets forth the assumptions made, matters considered and limitations on
the review undertaken in connection with the opinion, is attached hereto as
Exhibit D to this Prospectus/Proxy Statement and should be read in its
entirety for information with respect to procedures followed, assumptions made
and matters considered by Bengur Bryan in rendering such opinion. Bengur
Bryan's opinion was prepared for the USW Board of Directors and addresses only
the fairness of the exchange ratio to the holders of USW Common Stock. The
Bengur Bryan opinion does not constitute a recommendation to any USW
shareholder as to how such shareholder should vote with respect to the
proposed Merger. The summary of the opinion of Bengur Bryan set forth in this
Prospectus/Proxy Statement is qualified in its entirety by reference to the
full text of such opinion.
In connection with its opinion, Bengur Bryan has reviewed the Merger
Agreement and certain related documents and held discussions with certain
senior officers and other representatives and advisors of USW concerning the
businesses, operations and prospects of USW and ACC, Bengur Bryan examined
certain publicly available business and financial information relating to USW
and ACC as well as certain financial data and other data for USW and certain
financial information and other data related to ACC, which were provided to or
otherwise discussed with Bengur Bryan by the respective management of USW and
ACC. Bengur Bryan reviewed the financial terms of the Merger as set forth in
the Merger Agreement in relation to: (i) current and historical market prices
and trading volumes of USW Common Stock and ACC Common Stock; (ii) the
respective companies' financial and other operating data; and (iii) the
capitalization and financial condition of USW and ACC. Bengur Bryan also
considered, to the extent publicly available, the financial terms of certain
other similar transactions recently effected which Bengur Bryan considered
relevant in evaluating the Merger and analyzed certain financial, stock market
and other publicly available information relating to the businesses of other
companies whose operations Bengur Bryan considered relevant in evaluating
those of USW and ACC. Bengur Bryan's opinion is based on market, economic and
other conditions as they existed and could be evaluated as of the date of the
opinion letter.
In rendering its opinion, Bengur Bryan assumed and relied upon the accuracy
and completeness of the financial and other information reviewed by it and it
did not make or obtain independent verification of such information and
assumed no responsibility for independent verification of such information. In
addition, Bengur Bryan did not make an independent evaluation or appraisal of
the assets and liabilities of USW or ACC or any of their respective
subsidiaries. Bengur Bryan assumed that the Merger will be consummated in
accordance with the terms of the Merger Agreement, including among other
things, that the Merger will be accounted for as a pooling of interests under
generally accepted accounting principles and as a tax-free reorganization for
federal income tax purposes. Bengur Bryan also did not express any opinion as
to what the value of ACC Common Stock actually will be when issued to USW
shareholders pursuant to the Merger or the price at which ACC Common Stock
will trade subsequent to the Merger. Bengur Bryan's opinion is based on
market, economic and other conditions as they existed and could be evaluated
as of the date of the opinion letter. In connection with the preparation of
its opinion, Bengur Bryan was not authorized by USW or the Board of Directors
of USW to solicit, nor has Bengur Bryan solicited, third-party indications of
interest for the acquisition of all or any part of USW.
The following is a summary of the material financial analyses Bengur Bryan
used in connection with providing its written opinion to the Board of
Directors of USW on October 27, 1997. The summary of the analyses does not
purport to be a complete description of the analyses underlying Bengur Bryan's
opinion.
Stock Trading History. Bengur Bryan reviewed the performance of the trading
price and volume of USW Common Stock for the period from October 24, 1994
through October 24, 1997. This examination indicated that during this period,
the trading price of USW Common Stock ranged from $0.50 per share to $2.375
per share. Bengur Bryan also reviewed the performance of the trading price and
volume of ACC Common Stock for the period from October 24, 1994 through
October 24, 1997. This examination indicated that during this period, the
trading price of ACC Common Stock ranged from $9.00 per share to $53.50 per
share. In addition, this examination showed that during the 52-week period
ending October 24, 1997, the trading price of ACC Common Stock ranged from
$14.75 per share to $42.75 per share.
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Implied Multiple and Premium Analysis. Bengur Bryan calculated certain
valuation multiples implied by the terms of the Merger Agreement based on a
per share value for each share of USW Common Stock of $2.52. Bengur Bryan
calculated that the total equity value as a multiple of USW's latest twelve
months' ("LTM") net income was not meaningful since USW incurred a net loss
for the LTM. Bengur Bryan also calculated that the total enterprise value
(defined to be total equity value plus total debt less cash and cash
equivalents, also referred to as total market capitalization) as a multiple of
USW's LTM sales, and run rate of sales (defined as sales for the latest
reported quarter multiplied by four) was 0.99x and 0.80x, respectively, based
on a per share value of $2.52. USW's LTM earnings before interest and taxes
("EBIT") and LTM earnings before interest, taxes, depreciation and
amortization ("EBITDA") as a multiple of total enterprise value were not
considered meaningful since USW incurred a net operating loss for the LTM.
Bengur Bryan determined that the percentage premium implied by the terms of
the Merger Agreement, based on a per share value for each share of USW Common
Stock of $2.52 relative to the market price of USW Common Stock one day and
four weeks prior to the announcement of the Merger, was 84% and 26%,
respectively.
Comparable Public Company Analysis--USW. Bengur Bryan compared certain
financial and operating information for USW to the corresponding financial and
operating information of the following group of selected long-distance
telecommunications services companies (the "Comparable Companies"): Group Long
Distance, EqualNet Holding, Phoenix Networks, Inc., Network Long Distance and
Total-Tel USA Communications. Bengur Bryan analyzed, among other things, the
market price per share of common stock of each Comparable Company and USW as a
multiple of LTM earning per share ("EPS"), as well as the total enterprise
value as a multiple of LTM EBIT, LTM EBITDA, LTM sales, and run rate of sales.
Although a comparison of public companies having comparable operating
characteristics is customarily given primary emphasis in the analyses
supporting a fairness opinion, Bengur Bryan concluded that a comparison of LTM
EPS, LTM EBIT and LTM EBITDA to the Comparable Companies was not meaningful
given the magnitude of the operating losses of USW and the Comparable
Companies. However, Bengur Bryan noted an analysis of total enterprise value
as a multiple of LTM sales yielded a range of 0.42x to 2.43x with a mean of
1.06x; and an analysis of total enterprise value as a multiple of run rate of
sales yielded a range of 0.41x to 1.31x with a mean of 0.83x compared to USW
total enterprise value as a multiple of LTM sales and run rate of sales of
0.99x and 0.80x, respectively, based on the USW per share price of $2.52.
Comparable Public Company Analysis--ACC. Bengur Bryan compared certain
financial and operating information for ACC to the corresponding financial and
operating information of a group of selected long-distance telecommunications
services companies (the "Telecommunication Group"): General Communications,
Inc., Primus Telecommunications, Tel-Save Holdings, Inc., Telegroup, Inc.,
USLD Communications and IXC Communications, Inc. Bengur Bryan analyzed, among
other things, the market price per share of common stock of the
Telecommunication Group and ACC as a multiple of LTM EPS, as well as the total
enterprise value as a multiple of LTM EBIT, LTM EBITDA, LTM sales, and run
rate of sales. Although a comparison of public companies having comparable
operating characteristics is customarily given primary emphasis in the
analyses supporting a fairness opinion, Bengur Bryan concluded that a
comparison of LTM EPS, LTM EBIT and LTM EBITDA to the Telecommunication Group
was not meaningful given the magnitude of the operating losses of the
Telecommunication Group. Bengur Bryan noted that based on a $31.50 share price
for ACC, market price per share as a multiple of LTM EPS was 32.47x and total
enterprise value as a multiple of LTM EBIT and LTM EBITDA 24.95x and 13.01x,
respectively. Bengur Bryan noted an analysis of total enterprise value as a
multiple of LTM sales was 1.61 for ACC compared to a range of 0.86x to 5.93x
with a mean of 2.91x for the Telecommunication Group; an analysis of total
enterprise value as a multiple of run rate of sales was 1.58x for ACC,
compared to a range of 0.72x to 5.35x with a mean of 2.56x for the
Telecommunication Group.
Comparable Transaction Analysis. Bengur Bryan analyzed certain information
relating to the following selected comparable transactions in the long-
distance telecommunications industry (the "Comparable Transactions"): Network
Long Distance, Inc./National Telservice Inc. and Network Long Distance, Inc./
Eastern Telecom International. Such analysis indicated that for the Comparable
Transactions, total market capitalization
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as a multiple of LTM sales ranged from 1.10x to 1.47x with a mean of 1.28x,
and total market capitalization as a multiple of run rate of sales ranged from
1.02x to 1.16x with a mean of 1.09x. Bengur Bryan concluded that a comparison
of LTM net income, LTM EBIT and LTM EBITDA was not meaningful given the
magnitude of the operating losses of the companies in the Comparable
Transactions.
Premium Paid Analysis. Bengur Bryan analyzed the percentage premiums offered
in stock-for-stock mergers of $25 to $75 million in size from January 1, 1996
through October 24, 1997. Bengur Bryan calculated the premium offered relative
to the market price one day and four weeks prior to the announcement date of
each transaction. The analysis indicated that the mean percentage premium one
day and four weeks prior to announcement was 24% and 35%, respectively,
compared with premiums of 84% and 26%, respectively, for the Merger (based on
the per share market price one day and four weeks prior to announcement of the
Merger).
Contribution Analysis. Bengur Bryan analyzed and compared the respective
contribution to revenue, EBITDA, EBIT and net income of USW and ACC to the
combined companies for the twelve month period ended September 30, 1997. This
analysis did not take into account any synergies realizable by the combined
companies subsequent to the Merger. This analysis indicated that USW would
contribute approximately 13% to combined revenue, and would negatively affect
the combined EBITDA, the combined EBIT and the combined net income. According
to the terms of the Merger and assuming an Average Pre-Closing Trading Price
(as defined in the Merger Agreement) of $32.14 for ACC Common Stock, Bengur
Bryan calculated that existing shareholders of USW would own approximately 9%
of the combined companies.
Pro Forma Analysis. Bengur Bryan prepared pro forma analyses of the
financial impact of the Merger, assuming an initial Exchange Ratio of 0.79.
Based on such analyses, Bengur Bryan calculated that the proposed Merger would
be dilutive to ACC's LTM EPS assuming no annual operating synergies.
The preparation of the fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Bengur Bryan's opinion. In arriving at its fairness determination,
Bengur Bryan considered the results of all such analyses. No company or
transaction used in the above analyses as a comparison is identical to USW or
ACC or the Merger. The analyses were prepared solely for purposes of Bengur
Bryan's opinion provided to the Board of Directors of USW as to the fairness
of the Exchange Ratio to be received by the holders of USW Common Stock
pursuant to the Merger Agreement and do not purport to be appraisals or
necessarily reflect the prices at which businesses or securities actually may
be sold. In its analysis Bengur Bryan did not make any forecasts regarding the
future financial performance of USW, ACC and the Merger, although Bengur Bryan
considered management's judgements regarding the possible future performance
of their respective companies and the combined entity. Because such analyses
are inherently subject to substantial uncertainty, Bengur Bryan assumes no
responsibility regarding any future results from the Merger.
Bengur Bryan, as part of its investment banking business, engages in the
valuation of businesses in connection with mergers and acquisitions, private
placements and valuations for other purposes. Pursuant to a letter agreement
dated October 17, 1997 (the "Engagement Letter"), USW engaged Bengur Bryan to
provide investment banking services. Pursuant to the terms of the Engagement
Letter, USW has paid Bengur Bryan a $40,000 retainer fee and an additional
$125,000 upon rendering of the fairness opinion. Further, USW has agreed to
reimburse Bengur Bryan for its reasonable out-of-pocket expenses, including
attorney's fees and to indemnify Bengur Bryan against certain liabilities,
including certain liabilities under the federal securities laws. Bengur Bryan
acted as financial advisor to USW in connection with a private placement of
USW Common Stock which closed on November 26, 1997 and received a fee of
approximately $85,000 therefor.
CERTAIN U. S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations relevant to the exchange of shares of USW Common Stock for ACC
Common Stock and the assumption by ACC of the USW Options and the conversion
thereof into options to purchase ACC Common Stock ("Merger Options"). In
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particular, this discussion addresses the tax consequences of the Merger
generally applicable to holders of USW Common Stock and to the holders of USW
Options. This discussion does not deal with all federal income tax
considerations that may be relevant to particular holders of options to
purchase USW Common Stock and to holders of each outstanding option to acquire
USW Common Stock in light of particular circumstances, such as holders who do
not hold their shares of USW Common Stock as capital assets, foreign persons
or persons who acquired their shares in compensatory transactions. In
addition, the following discussion does not address the tax consequences of
transactions effected prior or subsequent to, or concurrently with, the Merger
(whether or not such transactions are undertaken in connection with the
Merger), including, without limitation, any transaction in which shares of USW
Common Stock are acquired or any shares of ACC Common Stock are disposed of.
Further, no foreign, state or local tax considerations are addressed herein.
ACCORDINGLY, HOLDERS OF USW COMMON STOCK AND HOLDERS OF EACH OUTSTANDING
OPTION TO ACQUIRE USW COMMON STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER.
Morgan, Lewis & Bockius LLP, counsel to USW, has delivered an opinion to the
effect that the following discussion fairly represents the tax consequences of
the Merger. The opinion is based on and is subject to certain qualifications
and assumptions as noted therein. USW shareholders should be aware that this
discussion is based upon counsel's interpretation of the Internal Revenue Code
(the "Code"), applicable Treasury Regulations, judicial authority and
administrative rulings and practices, all as of the date hereof. There can be
no assurance that future legislative, judicial or administrative changes or
interpretations will not adversely affect the accuracy of the statement and
conclusions set forth herein. Any such changes or interpretations could be
applied retroactively and could affect the tax consequences of the Merger.
USW, Acquisition Sub and ACC intend to treat the Merger as a tax-free
reorganization within the meaning of Section 368(a) of the Code for federal
income tax purposes. There is a strong argument that this treatment is proper;
however, while counsel to USW believes that the position taken by USW is
reasonable, it cannot provide an opinion as to whether USW would prevail if
the IRS were to challenge the treatment of the Merger as a reorganization. It
is unclear whether the USW shareholders will be deemed to have received AT&T
shares for their USW Common Stock as a result of the proposed AT&T Merger. If
the IRS steps together the Merger, the proposed TCG Merger and TCG/AT&T
Merger, and determines that the USW shareholders are receiving AT&T stock
rather than ACC stock, the Merger would not qualify as a tax-free
reorganization. If it were ultimately determined that the Merger does not
qualify as a tax-free reorganization, all USW shareholders would be subject to
tax on the USW Common Stock surrendered in the Merger whether or not the ACC
Common Stock received in the Merger was sold or retained. Accordingly, there
is a significant risk that the Merger will not be treated as a reorganization
within the meaning of the Code.
A successful IRS challenge to the tax-free reorganization treatment of the
Merger would result in the USW shareholders recognizing taxable gain or loss
with respect to each share of USW Common Stock surrendered equal to the
difference between the shareholder's basis in such share and the fair market
value, as of the Effective Time, of the ACC Common Stock received in exchange
therefor. In such event, a shareholder's basis in the ACC Common Stock so
received would equal its fair market value and the holding period for such
stock would begin the day after the Effective Time. If the Merger and the
proposed TCG Merger and TCG/AT&T Merger are not treated as a step transaction
by the IRS, each of ACC, Acquisition Sub and USW should be a party to the
reorganization within the meaning of Section 368(b) of the Code and no gain or
loss will be recognized by a shareholder of USW as a result of the Merger with
respect to the USW Common Stock converted solely into ACC Common Stock.
Subject to the limitations and qualifications referred to herein, the Merger's
treatment for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code will generally have the following
consequences for federal income tax purposes:
(a) no gain or loss will be recognized by holders of USW Common Stock
upon their receipt in the Merger solely of ACC Common Stock in exchange
therefor, except to the extent of cash paid in lieu of fractional shares as
discussed below;
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(b) the aggregate basis for tax purposes of the ACC Common Stock received
in the Merger will be the same as the aggregate basis of the USW Common
Stock surrendered in exchange therefor, except to the extent of cash paid
in lieu of fractional shares as discussed below; and
(c) the holding period of the ACC Common Stock received in the Merger
will include the period for which the USW Common Stock surrendered in
exchange therefor was held, provided that the USW Common Stock is held as a
capital asset as of the Effective Date.
Even if the Merger is treated for federal income tax purposes as a tax-free
reorganization, a recipient of ACC Common Stock could recognize gain to the
extent that such common stock was considered by the IRS to be received in
exchange for property or services (other than solely USW Common Stock). All or
a portion of such gain may be taxable as ordinary income. Gain could also have
to be recognized to the extent that a USW Common Stock holder was treated by
the IRS as receiving (directly or indirectly) consideration in addition to ACC
Common Stock in exchange for his or her USW Common Stock. Cash received by a
holder of USW Common Stock in lieu of a fractional interest in ACC Common
Stock will result in the recognition of gain or loss for federal income tax
purposes, measured by the difference between the amount of cash received and
the portion of the holder's basis allocable to such fractional share interest.
Such gain or loss will be capital gain or loss if USW Common Stock is held by
the holder as a capital asset as of the Effective Time.
Pursuant to Treasury Regulations promulgated under Section 368 of the Code,
a reorganization under Section 368 requires a continuing interest in the
enterprise on the part of the persons who, directly or indirectly, were the
owners of the enterprise prior to the reorganization. To satisfy the
continuity of interest requirement, USW shareholders must not, pursuant to a
plan or intent existing on or prior to the Effective Time, dispose of or
transfer so much of either (i) their USW Common Stock in anticipation of the
Merger or (ii) the ACC Common Stock to be received in the Merger (collectively
"Planned Dispositions"), such that USW shareholders, as a group, would no
longer have a significant equity interest in the USW business being conducted
by ACC after the Merger. USW shareholders will generally be regarded as having
a significant equity interest as long as the number of shares of ACC Common
Stock received in the Merger less the number of shares subject to Planned
Dispositions (if any) represents, in the aggregate, a substantial portion of
the entire consideration received by the USW shareholders in the Merger.
For the reasons stated above, the conversion incident to the Merger of the
USW Options granted in connection with the performance of services into the
Merger Options will not result in the recognition of income, gain or loss for
federal income tax purposes by the holders of the USW Options.
The holders of the USW Warrants are being advised by separate counsel as to
the federal income tax consequences of the conversion of the USW Warrants, and
no opinion or advice is being given in this Proxy Statement/Prospectus with
respect thereto.
Since the USW Preferred Stock is convertible into USW Common Stock by its
terms, the conversion of the USW Preferred Stock into ACC Common Stock in the
Merger will not result in recognition of income, gain or loss for federal
income tax purposes by the holders of USW Preferred Stock.
A successful IRS challenge to the tax-free reorganization treatment of the
Merger (as a result of a failure of the continuity of interest requirement or
otherwise) would result in the USW shareholders recognizing taxable gain or
loss with respect to each share of USW Common Stock surrendered equal to the
difference between the shareholder's basis in such share and the fair market
value, as of the Effective Time, of the ACC Common Stock received in exchange
therefor. In such event, a shareholder's basis in the ACC Common Stock so
received would equal its fair market value and the holding period for such
stock would begin the day after the Effective Time.
ACCOUNTING TREATMENT
The Merger is intended to qualify for treatment as a "pooling of interests"
for accounting and financial reporting purposes. Consummation of the Merger is
contingent upon ACC receiving a letter from ACC's independent public
accountants, Arthur Andersen LLP, and USW receiving a letter from USW's
independent
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public accountants, Deloitte & Touche LLP, dated as of the Effective Time, that
the Merger, if consummated in accordance with the Merger Agreement, will
qualify for treatment as a "pooling of interests" for financial reporting
purposes in accordance with generally accepted accounting principles. Under
this method of accounting, the recorded assets and liabilities of ACC and USW
will be carried forward to the combined organization at their recorded amounts;
income of the combined organization will include income of ACC and USW for the
entire fiscal year in which the Merger occurs; and the reported income of the
separate corporations for prior periods will be combined and restated as income
of the combined organization. Among the conditions to pooling of interests
accounting treatment of the Merger is the requirement that ACC issue ACC Common
Stock in exchange for at least 90% of the USW Common Stock outstanding on the
date the Merger is consummated.
Shareholders of USW that are "affiliates" (as defined in the rules under the
1933 Act) are required as a condition to closing to execute and deliver pooling
letters agreeing that they will not transfer any shares of ACC Common Stock
received in the Merger until ACC has published financial statements containing
at least 30 days of combined results of operations after the Effective Time.
Such restriction on transfer is necessary to account for the Merger as a
pooling of interests. See "--Status Under Federal Securities Laws."
STATUS UNDER FEDERAL SECURITIES LAWS
The ACC Common Stock to be issued to shareholders of USW pursuant to the
Merger Agreement has been registered under the 1933 Act, thereby allowing such
shares to be freely traded without registration by persons who will not be
"affiliates" of ACC after the Merger or who were not "affiliates" of USW on the
date of the Special Meeting. All directors and certain officers and
shareholders of USW may be deemed to have been "affiliates" of USW within the
meaning of such rules. Any such person may resell the ACC Common Stock received
by him or her in the Merger only if such shares are registered under the 1933
Act or an exemption from registration under the 1933 Act is available. Such
persons may be able to effect resales under the safe harbor provision of Rule
145 under the Act (or Rule 144 in the case of such persons who become
"affiliates" of ACC) or as otherwise permitted under the 1933 Act. Persons who
may be deemed affiliates of ACC or USW generally include individuals or
entities that control, are controlled by, or are under common control with,
such party, and may include certain officers and directors of such party as
well as principal shareholders of such party. It is recommended that any such
person obtain advice of securities counsel prior to effecting any resales.
The Merger Agreement requires, as a condition to closing, that "affiliates"
of USW have executed and delivered agreements agreeing to certain restrictions
on the transfer of their shares and agreeing that such person will not offer or
sell or otherwise dispose of any of the ACC Common Stock received in the Merger
(i) in violation of the 1933 Act or the rules and regulations thereunder and
(ii) in any event, until the time that financial results covering at least 30
days of post-Merger combined operations of ACC and USW have been published in
accordance with the accounting policies of the Commission relating to pooling
of interests. See "The Merger Agreement--Pooling Letters and Affiliate
Agreements."
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THE USW SPECIAL MEETING
PURPOSE OF THE SPECIAL MEETING
The Special Meeting of the Shareholders of USW is being called (i) to
consider and vote upon approval and adoption of the Merger Agreement and
approval of the Merger and all related transactions, pursuant to which (a)
Acquisition Sub will be merged with and into USW with USW surviving the Merger
and becoming a wholly-owned subsidiary of ACC and (b) each share of USW Common
Stock that is issued and outstanding at the Effective Time, other than
Dissenting Shares, will be converted into the right to receive a fraction of a
share of ACC Common Stock equal to the Exchange Ratio in effect at closing,
(ii) to authorize the adjournment of the Special Meeting to allow for
collection of additional shareholder votes to obtain a quorum or in order to
obtain more votes in favor of the Merger Agreement and the Merger, if
necessary, and (iii) to transact such other business as may properly come
before the Special Meeting or any adjournment or postponement thereof.
THE USW BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
UNANIMOUSLY RECOMMENDS THAT HOLDERS OF SHARES OF USW COMMON STOCK VOTE IN
FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE
MERGER.
DATE, TIME AND PLACE
The Special Meeting is scheduled to be held on , 1998, at the
offices of , , commencing at
.m., local time.
RECORD DATE; SOLICITATION OF PROXIES; REVOCABILITY OF PROXIES
The Board of Directors of USW has fixed the close of business on
, 1998 (the "Record Date") for the determination of shareholders entitled to
notice and to vote at the Special Meeting. Accordingly, only holders of USW
Common Stock of record on the books of USW at the close of business on the
Record Date are entitled to notice of and to vote at the Special Meeting and
any adjournments or postponements thereof. At the close of business of the
Record Date there were shares of USW Common Stock outstanding. Each
holder of record of shares of USW Common Stock on the Record Date is entitled
to cast one vote per share on each proposal properly submitted for the vote of
USW's shareholders, either in person or by properly executed proxy, at the
Special Meeting. The presence, in person or by properly executed proxy, of the
holders of a majority of the outstanding shares of USW Common Stock entitled
to vote at the Special Meeting, is necessary to constitute a quorum at the
Special Meeting.
Shares of USW Common Stock which are represented by properly executed
proxies, unless such proxies have previously been properly revoked, will be
voted in accordance with the instructions indicated in such proxies. If no
contrary instructions are indicated, such shares will be voted FOR approval
and adoption of the Merger Agreement and approval of the Merger, FOR
adjournment in order to collect more shareholder votes to obtain a quorum or
to obtain more votes in favor of the Merger Agreement and Merger, and in the
discretion of the proxy holder as to any other matter which may properly come
before the Special Meeting. A shareholder who has given a proxy may revoke it
at any time prior to its exercise at the Special Meeting by delivering a
written notice that the proxy is being revoked to Arthur Regan, the Secretary
of USW, at 111 Presidential Blvd., Suite 114, Bala Cynwyd, Pennsylvania 19004,
or by submitting a properly executed proxy bearing a later date than the proxy
being revoked, or by voting the USW Common Stock covered thereby in person at
the Special Meeting.
USW will bear the cost of the Special Meeting and of soliciting proxies
therefor, including the costs of the printing and mailing of this
Prospectus/Proxy Statement and related materials, and the reasonable expenses
incurred by brokerage houses, custodians, nominees and fiduciaries in
forwarding proxy material to the beneficial owners of shares of USW Common
Stock.
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USW SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
VOTE REQUIRED
Shareholder approval of the Merger Agreement and the Merger is required by
the NYBCL. Approval of the Merger Agreement and the Merger requires the
affirmative vote of the holders of two-thirds of the outstanding shares of USW
Common Stock. If a proxy is marked as "abstain" on the Merger Agreement and
Merger, or if instructions are given that no vote be cast on the Merger
Agreement and Merger, the shares represented by such proxy will not be voted
on the Merger Agreement and Merger. Abstentions and broker and other specified
non-votes on the Merger Agreement and Merger will have the same effect as
casting a vote against the Merger Agreement and Merger.
Certain directors of USW beneficially owned on the Record Date for the
Special Meeting approximately % of the total number of shares of USW
Common Stock outstanding on the Record Date. Such persons have authorized ACC
to vote their shares of USW Common Stock in favor of the Merger pursuant to
the Shareholder Voting and Tender Agreements. See "--Shareholder Tender
Agreements."
SHAREHOLDER VOTING AND TENDER AGREEMENTS
Certain directors of USW have executed and delivered agreements and
irrevocable proxies to ACC ("Shareholder Tender Agreements") authorizing ACC
to vote their shares of USW Common Stock in favor of the Merger and any
proposal or action which would, or could reasonably be expected to, facilitate
the Merger, and against any action or agreement which would, or could
reasonably be expected to, impede, interfere with, delay or adversely affect
the Merger. Pursuant to the Shareholder Tender Agreements, approximately %
of the total number of shares of USW Common Stock outstanding on the Record
Date will be voted for the Merger and any proposal or action which would, or
could reasonably be expected to, facilitate the Merger, and against any action
or agreement which would, or could reasonably be expected to, impede,
interfere with, delay or adversely affect the Merger. The Shareholder Tender
Agreement, among other things, prohibits the shareholder from selling,
offering to sell, or acquiring any USW Common Stock or other securities of USW
during the term of the Shareholder Tender Agreement, unless the prior written
consent of ACC is obtained. The Shareholder Tender Agreements terminate on the
date the Merger Agreement is terminated in accordance with its terms.
ADJOURNMENT OF THE SPECIAL MEETING
A vote (i) in person by a shareholder FOR adjournment of the Special Meeting
or (ii) for the second proposal on the proxy card of USW authorizing the named
proxies to vote the shares covered by such proxy to adjourn the Special
Meeting would allow for additional collection of shareholder votes to obtain a
quorum or in order to obtain more votes in favor of the Merger Agreement and
the Merger. Consequently, it is not likely to be in the interest of
shareholders who intend to vote against the Merger Agreement to vote in person
to adjourn the Special Meeting or to vote for the second proposal on the proxy
card.
The USW Board of Directors unanimously recommends that the USW shareholders
vote FOR any adjournment of the Special Meeting suggested by the Board in
order to solicit additional votes in order to obtain a quorum or to obtain
more votes in favor of the Merger Agreement, the Merger and related
transactions.
DISCRETIONARY AUTHORITY
The Notice of Special Meeting of Shareholders provides for transaction of
any business that properly comes before the meeting. The USW Board of
Directors has no knowledge, however, of any matters to be presented at the
Special Meeting other than those referred to in this Proxy
Statement/Prospectus. The enclosed proxy gives discretionary authority if any
other matters are properly presented.
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DISSENTERS' RIGHTS
Section 910 of the NYBCL sets forth the rights of shareholders of USW who
object to the Merger. Any shareholder of USW who does not vote in favor of the
Merger or who duly revokes his or her vote in favor of such proposal may, if
the Merger is consummated, has the right to seek to obtain payment in cash of
the fair value of his shares by strictly complying with the requirements of
Section 623 of the NYBCL ("Section 623").
The dissenting shareholder must file with USW, before the taking of the vote
on the Merger, a written objection including a statement of election to
dissent, such shareholder's name and residence address, the number of shares
of USW Common Stock as to which dissent is made (which number may not be less
than all of the shares as to which such shareholder has a right to dissent)
and a demand for payment of the fair value of such shares if the Merger is
consummated. Any such written objection should be addressed to: Arthur Regan,
Secretary, US WATS, Inc., 111 Presidential Blvd., Suite 114, Bala Cynwyd,
Pennsylvania 19004.
Within 10 days after the vote of shareholders authorizing the Merger, USW
must give written notice of such authorization to each such dissenting
shareholder. Within 20 days after the giving of such notice, any shareholder
to whom USW failed to give notice of the Special Meeting (and who was entitled
to such notice) who elects to dissent from the Merger must file with USW a
written notice of such election, stating such shareholder's name and residence
address, the number of shares of USW Common Stock as to which dissent is made
(which number may not be less than all of the shares as to which such
shareholder has a right to dissent) and a demand for payment of the fair value
of such shares if the Merger is consummated.
At the time of filing the notice of election to dissent or within one month
thereafter, dissenting shareholders must submit certificates representing the
applicable shares to USW or its transfer agent, Liberty Transfer Co., for
notation thereon of the election to dissent, after which such certificates
will be returned to the shareholder. Any shareholder who fails to submit his
or her share certificates for such notation shall, at the option of USW
exercised by written notice to the shareholder within 45 days from the date of
filing of the notice of election to dissent, lose such shareholder's appraisal
rights unless a court, for good cause shown, shall otherwise direct.
Within 15 days after the expiration of the period within which shareholders
may file their notices of election to dissent, or within 15 days after
consummation of the Merger, whichever is later (but not later than 90 days
after the shareholders' vote authorizing the Merger), USW must make a written
offer (which, if the Merger has not been consummated within the 90 day period
after the shareholders' vote authorizing the Merger, may be conditioned upon
such consummation) to each shareholder who has filed such notice of election
to pay for the shares at a specified price which USW considers to be their
fair value based on the fair value of the shares as of the close of business
on the day prior to the shareholders' vote authorizing the Merger. If the
Company and the dissenting shareholder are unable to agree as to such value,
Section 623 provides for judicial determination of fair value based on the
fair value of the shares as of the close of business on the day prior to the
shareholders' vote authorizing the Merger. In the event of such a
disagreement, a proceeding shall be commenced by USW in the Supreme Court of
the State of New York, County of New York, or by the dissenting shareholder if
USW fails to commence the proceeding within the time period required by
Section 623 of the NYBCL. USW intends to commence such a proceeding in the
event of such a disagreement.
A negative vote on the Merger does not constitute a "written objection"
filed by an objecting shareholder. Failure by a shareholder to vote against
the Merger will not, however, constitute a waiver of rights under Section 623
provided that a written objection has been properly filed and such shareholder
has not voted in favor of the Merger.
The foregoing does not purport to be a complete statement of the provisions
of Section 623 and is qualified in its entirety by reference to said Section,
a copy of which is attached hereto in full as Exhibit C. Each shareholder
intending to exercise dissenter's rights should review Exhibit C carefully and
consult such shareholder's counsel for a more complete and definitive
statement of the rights of a dissenting shareholder and the proper procedure
to follow to exercise such rights.
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INFORMATION CONCERNING ACC
GENERAL
ACC is a switch-based provider of telecommunications services in the United
States, Canada and the United Kingdom. ACC primarily provides long distance
telecommunications services to a diversified customer base of businesses,
residential customers and educational institutions. ACC also provides local
telephone service as a switch-based local exchange reseller in upstate New
York and Massachusetts and as a reseller of local exchange services in Ontario
and Quebec, Canada. ACC entered the German market during 1997 as a switchless
reseller of long distance telecommunications services and plans to become a
switch-based provider in Germany as business and regulatory conditions
warrant. ACC operates an advanced telecommunications network, consisting of
nine long distance international and domestic switches located in the U.S.,
Canada and the U.K., six local exchange switches located in the U.S., leased
transmission lines, IRUs and network management systems designed to optimize
traffic routing.
ACC's objective is to grow its telecommunications customer base in its
existing markets and to establish itself in deregulating Western European
markets that have high density telecommunications traffic when ACC believes
that business and regulatory conditions warrant. The key elements of ACC'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.
ACC'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 ACC 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. ACC believes that its ownership
of switches reduces its reliance on other carriers and enables ACC to
efficiently route telecommunications traffic over multiple leased transmission
lines and IRUs 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 ACC 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. ACC 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. ACC 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.
ACC 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., ACC's wholly-owned Canadian
subsidiary ("ACC Canada"), ACC Long Distance UK Limited ("ACC U.K.") and ACC
Telecommunications GmbH ("ACC Germany"). ACC'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.
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INDUSTRY OVERVIEW
The global telecommunications industry has dramatically changed during the
past several years, beginning in the U.S. with AT&T's divestiture of its RBOCs
in 1984 and culminating with the 1996 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 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 over $93
billion in annual revenues during 1996, according to FCC estimates. AT&T has
remained the largest long distance carrier in the U.S. market, retaining
approximately 48% of the market, with MCI and Sprint with respective market
shares of approximately 20% and 10% of the market during 1996. 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. (which in 1996 merged with MFS
Communications, Inc.), CWI, Frontier Corp., Excel Telecommunications and LCI
International, constitute the second tier of the industry, although WorldCom
would become a first tier company upon consummation of its pending merger with
MCI. 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, and the World Trade Organization ("WTO") accord on basic services,
will have a substantial impact on the long distance market.
Since 1990, competition has existed in the Canadian long distance market
(except Saskatchewan). 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 AT&T Canada Long Distance Services Company ("AT&T Canada"), 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 (Pounds)l.5
billion, (Pounds)2.0 billion and (Pounds)2.2 billion, respectively, in
revenues during the 12 months ended March 31, 1997, according 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 58.2%, 78.4% and 88.7% of the
revenues from international, national and local voice telephone services,
respectively. CWC, which owns and operates interexchange and local loop
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"), WorldCom, ACC U.K. and
various cable companies, and switched-based resellers such as First Telecom
and 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
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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. Carriers that operate primarily as 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 incumbent local exchange carriers or "competitive local exchange
carriers" ("CLECs") such as Teleport Communications Group, Inc. 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 sophisticated 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, in contrast, 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 providers
of telecommunications services to offer a number of new services, including,
in certain states, a range of local exchange services. In February 1996
legislation was enacted (the "Telecommunications Act of 1996" or the "1996
Act") which was intended to introduce increased competition in U.S.
telecommunications markets, especially in local markets. The 1996 Act opens
the local services market by requiring incumbent LECs to permit
interconnection to their networks and by establishing local exchange carrier
obligations with respect to unbundled access, resale, number portability,
dialing parity, nondiscriminatory access to rights of way, mutual compensation
for termination of calls on other carriers' networks, and other matters. In
addition, the 1996 Act codifies local exchange carriers' equal access and
nondiscrimination obligations and precludes state regulation that prohibits or
has the effect of prohibiting competition for local telecommunication
services.
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As required by the 1996 Act, in August 1996 the FCC adopted new rules
implementing certain provisions of the 1996 Act (the "Interconnection
Orders"). These rules are designed to implement the pro-competitive,
deregulatory national policy framework of the new statute by removing or
minimizing the regulatory, economic and operational impediments to competition
for facilities-based and resold local services, including switched local
exchange services. Although setting minimum, uniform, national rules, the
Interconnection Orders also rely heavily on states to apply these rules and to
exercise their own discretion in implementing a pro-competitive regime in
their local telephone markets. Among other things, the Interconnection Orders
establish rules requiring incumbent LECs to interconnect with new entrants
such as the Company at specified network points; require incumbent LECs to
provide carriers nondiscriminatory access to network elements on an unbundled
basis; require states to set prices for interconnection and termination of
local calls; require incumbent LECs to offer their telecommunications services
for resale at retail prices minus avoided costs; and require LECs and
utilities to provide new entrants with nondiscriminatory access to poles,
ducts, conduit and rights of way owned or controlled by LECs or utilities. The
Interconnection Orders also require, among other things, that intra-LATA
presubscription (pursuant to which LECs must allow customers to choose
different carriers for intra-LATA toll service without having to dial extra
digits) be implemented no later than February 1999. Petitions seeking
reconsideration of one or more aspects of the Interconnection Orders have been
filed with the FCC and are pending. Also, the Interconnection Orders have been
appealed to various U.S. Courts of Appeals. These appeals were consolidated
into proceedings before the U.S. Eighth Circuit Court of Appeals. Certain of
the rules adopted in the Interconnection Orders, including rules that concern
the pricing of interconnection, have been vacated by the Court. Both the FCC
and various competitive carriers have petitioned the U.S. Supreme Court to
review the Eighth Circuit's rulings. There can be no assurance of how the
Interconnection Orders will be implemented or enforced or what effect they
will have on competition within the telecommunications industry generally or
on the competitive position of the Company specifically. Nonetheless, the
Company believes the trend toward increased competition and deregulation of
the telecommunications industry will be accelerated by the 1996 Act and
subsequent developments.
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 has
grown from $126.4 million to $308.8 million over the three fiscal years ended
December 31, 1996, although the Company expects its growth to decrease over
time. The Company plans to further increase 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 offers
local telephone services in selected additional U.S. and Canadian markets,
including New York, Massachusetts, Quebec 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.
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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 Western European markets when the Company
believes that business and regulatory conditions warrant.
The German telecommunications market is expected to substantially deregulate
in January 1998, as a result of the European Union ("EU") mandate to open
telecommunications markets to competition. Most significantly, the German
market is scheduled to be open for interconnection in January 1998. The
Company has established a subsidiary in Germany, and signed a resale agreement
with Deutsche Telekom ("DT") on May 20, 1997. Further, the Company received a
Class 4 full voice telephony license from the German Ministry of Post and
Telecommunications which is effective January 1, 1998. This license is a
requirement for the Company to become a switch-based provider of
telecommunications services in Germany. In October 1997, the Company signed a
network interconnect agreement with DT, which will permit utilization of DT's
networks to link ACC with its customers. With this agreement in place, the
Company plans to install, and have in service, a switch during 1998. The
Company expects to develop a small amount of revenue as a switchless reseller,
with potentially more substantial revenue growth as a switch-based reseller
when the market is fully deregulated. Successful entry into the German market,
however, will depend upon a number of factors, including deregulation by
governmental authorities, future interconnection pricing and public acceptance
of alternative carriers.
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, nine international and domestic switches, six local
exchange switches 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 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 intrastate long distance voice and data services in 48
states and international voice and data services in all states. The Company's
U.S. services include
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"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
"Risk Factors--Increasing Domestic and International Competition."
In Canada, ACC currently originates long distance voice and data services in
the Montreal, Toronto and Vancouver metropolitan areas as well as throughout
Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario and
Quebec. The Company offers its Canadian commercial customers both voice and
data telecommunications services. The Company's long distance voice services
are offered to its business customers in a nine-level discount structure
marketed under the name "Edge." Discounts are based on calling volume and call
destination and typically result in savings ranging from 10% to 20% when
compared to Stentor member rates. Calls to the U.S. are priced at a flat rate
regardless of the destination, and international calls are priced at a
percentage discount to the rates charged by the Stentor group. The Company
also offers toll-free "800" services within Canada, as well as to and from the
U.S., and offers an ACC Travel Card providing substantial savings off Stentor
member "Calling Card" rates. ACC Canada has introduced a frame relay network,
Internet access services (including Web design/hosting) and paging services,
and now provides these services in all provinces except Saskatchewan,
Manitoba, New Brunswick 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
(Pounds)5,000 per month in calls.
The Company's U.S. and Canadian commercial customers are offered customized
services, such as comprehensive billing packages and its "Travel Service
Elite" domestic calling cards, which allow the customer to place long distance
calls at competitive rates from anywhere in the U.S. and Canada. The Company's
standard monthly statement includes a management summary report, a call detail
report recording every long distance call and facsimile call, and a pricing
breakdown by call destination. Optional calling pattern reports, which are
available at no extra cost, include call summaries by account code, area or
city code, LATA (for U.S. bound calls), international destination and time-of-
day. This information is available to customers in the form of hard copy,
magnetic tape or disk.
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
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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.
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 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 programs. 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
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provides savings off the standard rates charged for residential service by
British Telecom or CWC, 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
authorizations ("International 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, subject to certain safeguards on non-competitive
routes and destination country regulations, the U.K. and all other countries
and territories, and to own interests in international submarine cable
facilities for service between the U.S. and the U.K. and other international
points. The Company believes it can compete effectively for international
traffic because these international authorizations allow it to offer end-to-
end services on certain routes and route traffic efficiently so as 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 similar resale licenses. Implementation of
the WTO agreement is expected to increase opportunities for alternative call
routings but will also increase competition in the industry. Moreover, the
FCC's recent decision, currently on appeal and subject to petitions for
reconsideration, is intended to accelerate reductions in international calling
rates and may reduce the Company's margin on international services.
Local Exchange Services. Building on its experience in providing local
telephone service to various university customers, the Company took advantage
of 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, and began providing
such service in Quebec in 1996. The Company believes that it can strengthen
its relationships with existing commercial, university and college and
residential customers in New York State and 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 may 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. During 1997, the Company expanded its local
telephone operations by installing switches in New York City, Albany and
Buffalo, New York, and Boston and Springfield, Massachusetts.
The Company has limited experience in providing local telephone services,
having commenced providing such services in 1994. 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, 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, the U.K. and Germany
through a variety of channels, including ACC's internal sales forces,
independent sales agents, co-marketing arrangements and affinity programs, as
described below. As of December 1, 1997, the Company had a total of
approximately 280 internal sales personnel and approximately 580 independent
sales agents serving its U.S., Canadian, U.K. and German markets. Although it
has not experienced significant turnover in recent periods, a loss of a
significant number of independent sales agents could have a material 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 the
U.K. 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
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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.
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 to other states. ACC has obtained
authorization to originate intrastate long distance voice services in 48
states.
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 McGill and Western Universities. 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" and "Zellers Long Distance."
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. ACC U.K. has
entered into co-marketing arrangements with utilities, university alumni
groups and other organizations.
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. The selection of any particular
circuit for the transmission of a call is controlled by routing software,
located in the switches, that is
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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.
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
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 the 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 three long distance switches and six
local exchange switches. These switches and additional points of presence
("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. points of presence 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 U.K. International Simple Resale
License for U.K.-U.S. calls and international private line resale authority in
the U.S. The Company has purchased an IRU to supplement such trans-Atlantic
leased-lines to the U.K. and to enable the Company to reduce network costs.
In Canada, the Company maintains long distance switches in Toronto, Montreal
and Vancouver. 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 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 long distance switches in London,
Manchester and Bristol, England. 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. In December 1996, ACC U.K.
was awarded an International Facilities License, and received a Public
Telecommunications Operator license in April 1997, which licenses have enabled
the Company to build a microwave network in U.K. and to begin to use the U.K.
as a regional hub for international telecommunications traffic.
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 is
also considering ownership of certain transmission facilities as a means of
reducing its network costs. The Company has purchased IRUs and negotiated
leases of private line circuits with carriers that operate
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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. and Canada and the U.S. 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
receivable 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. The Company is developing and implementing new systems 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.
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 42%, 12% and 24% of the revenues of ACC U.S., ACC
Canada and ACC U.K., respectively, in 1996. 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 longstanding relationships with the Company's target
customers. There can be no assurance that the Company will remain competitive
in this environment. Regulatory trends have had, and may have in the future,
significant effects on competition in the industry. As the Company expands its
geographic coverage, it will encounter increased competition. Moreover, the
Company believes that competition in non-U.S. markets is likely to increase
and become more like competition in the U.S. markets over time as such non-
U.S. markets continue to experience deregulatory influences. See "Risk
Factors--Potential Adverse Effects of Regulation" and "Increasing Domestic and
International Competition" and the discussion of "Regulation" 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 carriers and the resulting volume discounts 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
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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
interstate and international long distance services nationwide and to
originate intrastate long distance service in 48 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. RBOCs from outside the
NYNEX/Bell Atlantic region, including Southwest Bell, have, under the
authority contained in the 1996 Act, begun to offer long distance services in
the NYNEX/Bell Atlantic region. 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 and Massachusetts, the Company presently
competes or in the future will compete with NYNEX/Bell Atlantic, Frontier
Corp., AT&T, Citizens Telephone Co. and WorldCom 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, joint
ventures such as those between MCI and Microsoft Corporation ("Microsoft"),
under which Microsoft will promote MCI's services, the joint venture among
Sprint, Deutsche Telekom AG and France Telecom, called Global One, the
recently announced merger of WorldCom and MCI, and other strategic alliances
could increase competitive pressures upon the Company. The recent merger
between Nynex Corp. and Bell Atlantic is likely to strengthen the financial
resources of the new, combined company, and its integrated networks may
enhance its ability to offer long distance services in the combined NYNEX/Bell
Atlantic region.
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 the 1996 Act, RBOCs will be allowed to enter the long distance
market immediately in "out of region" states, and in the states where the RBOC
is an incumbent LEC upon a showing that certain conditions related to
competition have been met, and AT&T, MCI and other long distance carriers,
utilities and cable television companies will be allowed to enter the local
telecommunications market. In addition, the FCC has, on several occasions
since 1984, approved or required price reductions by AT&T and, in 1995 and
1996, the FCC reclassified AT&T as a "non-dominant" carrier for domestic and
international long distance services, which substantially reduces the
regulatory constraints on AT&T. In the recently-completed World Trade
Organization talks, the U.S. committed to allowing foreign carriers heretofore
prohibited from competing in U.S. markets, to enter the U.S. local, long
distance, and international markets, and the FCC has amended its rules to
implement these commitments, allowing virtually open entry to the U.S. market
by all entities from WTO member countries. The WTO accord will likely increase
the level of competition in the U.S. local, long distance, and international
markets. 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
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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, AT&T Canada, 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
act as reseller of telecommunications services. The Company also competes
against London Telecom, 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 CWC. The Company also faces competition from other operators
such as Energis and WorldCom, and from resellers including 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 and the FCC's Interconnection Orders. The
1996 Act is intended to introduce increased competition in U.S.
telecommunication markets. It opens the local services market by requiring
incumbent LECs to permit interconnection to their networks and by establishing
incumbent LEC obligations with respect to unbundled access, resale, number
portability, dialing parity, access to rights-of-way, mutual compensation and
other matters. In addition, the 1996 Act codifies the local exchange carriers'
equal access and nondiscrimination obligations and preempts state regulation
that prohibits or may have the effect of prohibiting the ability of any entity
to provide any intra- or interstate telecommunications service. 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 from several companies,
including from NYNEX/Bell Atlantic, 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 NYSPSC is currently reviewing an
application by NYNEX/Bell Atlantic for such in-region service. The 1996 Act
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.
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As required by the 1996 Act, in August 1996 the FCC adopted new rules
implementing certain provisions of the 1996 Act (the "Interconnection
Orders"). These rules are designed to implement the pro-competitive,
deregulatory national policy framework of the new statute by removing or
minimizing the regulatory, economic and operational impediments to competition
for facilities-based and resold local services, including switched local
exchange service. Although setting minimum, uniform, national rules, the
Interconnection Orders also rely heavily on states to apply these rules and to
exercise their own discretion in implementing a pro-competitive regime in
their local telephone markets.
Among other things, the Interconnection Orders establish rules requiring
incumbent LECs to interconnect with new entrants such as the Company at
specified network points; require incumbent LECs to provide carriers
nondiscriminatory access to network elements on an unbundled basis at any
technically feasible point at rates that are just, reasonable and
nondiscriminatory; establish rules requiring incumbent LECs to allow
interconnection via physical and virtual collocation; require the states to
set prices for interconnection, unbundled elements, and termination of local
calls that are nondiscriminatory and cost-based; require incumbent LECs to
offer for resale any telecommunication service that the carrier provides at
retail to end users at prices to be established by the states but which
generally are at retail prices minus reasonably avoided costs; and require
LECs and utilities to provide new entrants with nondiscriminatory access to
poles, ducts, conduit and rights of way owned or controlled by LECs or
utilities. Exemptions from some of these rules are available to LECs which
qualify as rural LECs under the 1996 Act. The Interconnection Orders also
require that intra-LATA presubscription (pursuant to which LECs must allow
customers to choose different carriers for intra-LATA toll service without
having to dial extra digits) be implemented no later than February 1999; that
incumbent LECs provide new entrants with nondiscriminatory access to directory
assistance services, directory listings, telephone numbers, and operator
services; and that incumbent LECs comply with certain network disclosure rules
designed to ensure interoperability of multiple local switched networks.
Petitions seeking reconsideration of one or more aspects of the
Interconnection Orders have been filed with the FCC and are pending. Also, the
Interconnection Orders have been appealed to various circuits of the U.S.
Court of Appeals which appeals were consolidated into proceedings before the
U.S. Eighth Circuit Court of Appeals. Certain of the rules adopted in the
Interconnection Orders, including rules that concern the pricing of
interconnection, have been vacated by the Court. Both the FCC and various
competitive carriers have petitioned the U.S. Supreme Court to review the
Eighth Circuit's rulings on the Interconnection Orders.
The 1996 Act both provided the FCC with deregulatory authority and required
the FCC to adopt rules to implement specific provisions of the 1996 Act.
Specifically, the FCC was provided authority to forebear from regulating, in
whole or in part, carriers where the FCC determines to that such forbearance
is consistent with the public interest. The FCC has engaged in a number of
additional rulemakings designed to transition to the increasingly deregulated
local and long distance markets. Two of the most prominent proceedings
involved universal service and access charge reform. Others are anticipated.
There can be no assurance as to how the 1996 Act, the Interconnection Orders
or other FCC and PSC rulemakings will be implemented or enforced or as to what
effect they will have on competition within the telecommunications industry
generally or on the competitive position of 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.
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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. In 1996, AT&T was re-classified
as a non-dominant carrier for international services.
Carriers such as the Company have traditionally been required to file
tariffs with the FCC containing the rates, terms and conditions of interstate
service. However, the FCC recently ordered that following a transition period,
scheduled to have concluded in November 1997, non-dominant carriers will no
longer be able to file tariffs with the FCC concerning their long distance
services. Such carriers will, however, be required to maintain at their
offices, and to provide to customers or regulators upon request, information
concerning their long distance services. The FCC order eliminating tariffs has
been appealed to the U.S. Court of Appeals for the District of Columbia. That
appeal is pending. A motion requesting stay of the FCC's detariffing order has
been filed with the Court. It argued that tariffing establishes a legal
binding relationship between carriers and customers, and that detariffing
eliminates certainty with regard to those legal relationships. It also argued
that detariffing imposes costs upon carriers because carriers will need to
enter into alternative forms of legally binding relationships with customers.
That motion was granted in February 1997. Therefore, carriers such as the
Company must continue to tariff interstate services until the appeal is
concluded or the stay is lifted. There can be no assurance of whether the
appeal will be successful, or if successful, what effect it may have on the
Company. However if detariffing ultimately takes effect, the Company, like
other long distance companies, would likely incur some additional costs in
establishing legally binding relationships with customers.
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 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 or switched
services 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 for switched services 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. The Company
has sought authority to resell private lines on a switched service basis
between the U.S. and other countries. Under recently adopted FCC policies and
under proposals to implement the WTO agreement, it is expected to become
easier, from a regulatory perspective, to obtain such authority for additional
markets. The Company is also authorized to acquire interests in international
facilities, enabling its recent acquisition of IRUs.
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.
The 1996 Act mandated several important federal regulatory developments. The
first concerns universal services. On May 8, 1997, the FCC issued an order to
implement the provisions of the 1996 Act relating to the preservation and
advancement of universal telephone service (the "Universal Service Order").
The Universal Service Order affirmed the policy principles for universal
telephone services set forth in the Telecommunications Act, including quality
service, affordable rates, access to advanced services, access in rural and
high-cost areas, equitable and non-discriminatory contributions, specific and
predictable support mechanisms, and access to advanced telecommunications
services for schools, health care providers and libraries. The Universal
Service Order added "competitive neutrality" to the 1996 Act's universal
service principles by providing that universal service support mechanisms and
rules should not unfairly advantage or disadvantage one provider over another,
nor unfairly favor or disfavor one technology over another. The Universal
Service Order also requires all telecommunications carriers providing
interstate telecommunications services, including the Company, to contribute
to universal service support. However, because the contribution factors are
likely to vary quarterly, the annualized impact on ACC cannot be estimated at
this time.
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An issue that may affect the Company is access charge reform. Access charges
are charges imposed by LECs on long distance providers for access to the local
exchange network, and were designed to compensate the LEC for its investment
in the local network. In addition to economic considerations, when adopted in
1984 at the time AT&T was divested from the RBOCs, access charge rates
reflected public policy considerations related to universal service and the
desirability of low local rates. Interstate access charges are regulated by
the FCC and intrastate access charges are regulated by the state public
service commissions. Pursuant to the 1996 Act, on May 16, 1997, the FCC issued
an order to implement certain reforms to its access charge rules (the "Access
Charge Reform Order"). The Access Charge Reform Order will require incumbent
LECs to substantially decrease over time the prices they charge for switched
access, and change how access charges are calculated. These changes are
intended to reduce access charges paid by interexchange carriers to LECs and
shift certain usage-based charges to flat-rated, monthly per-line charges. To
the extent that these rules begin to reduce charges to reflect the forward-
looking cost of providing access, the Company's competitive advantage in
providing customers with access services might decrease. In addition, the FCC
has determined that it will give incumbent LECs pricing flexibility with
respect to access charges. To the extent such pricing flexibility is granted
before substantial facilities-based competition develops, such flexibility
could be misused to the detriment of new entrants, including the Company.
Until the FCC adopts and releases rules detailing the extent and timing of
such pricing flexibility, the impact of these rules on the Company cannot be
determined. In its order, the FCC abolished the unitary rate structure option
for tandem-switched transport. This may have an adverse effect on smaller
interexchange carriers such as the Company because it may increase the costs
of transport which smaller interexchange carriers must purchase from LECs to
reach end user customers on the local exchange network.
Both the Universal Service and Access Charge Reform Orders are subject to
petitions seeking reconsideration by the FCC and direct appeals to U.S. Courts
of Appeals. Until the time when any such petitions or appeals are decided,
there can be no assurance as to how the Universal Service and/or Access Charge
Reform Orders will be implemented or enforced, or what effect the Orders will
have on competition within the telecommunications industry, generally, or on
the competitive position of the Company, specifically.
There can be no assurance as to how the 1996 Act will be implemented or
enforced or to what affect it or implementing regulations will have on
competition within the telecommunications industry generally or on the
competitive position of the Company.
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 and Massachusetts. Under the 1996 Act, as a local exchange
carrier, the Company is subject to many of the same obligations to which other
local exchange carriers, including the RBOCs, 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 48 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
1996 Act requires the incumbent local exchange carriers to adopt "intra-LATA
equal access" as a precondition for the local exchange carriers' entering into
the inter-LATA long distance business. The 1996 Act precludes states which
have not already ordered intra-LATA equal access from mandating such equal
access until the earlier of either (i) the date the incumbent local exchange
carrier receives in-region inter-LATA authority in that state, or (ii)
February of 1999. Because the timing of incumbent local
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exchange carrier entry into the long distance business, or actions by state
authorities which had not already ordered intra-LATA equal access, cannot be
determined with certainty, it is not possible to predict when intra-LATA equal
access will be available in each State.
With regard to New York, the Company's largest U.S. market, intra-LATA equal
access is currently being implemented for over 90% of its New York State
subscribers. 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 New York State
PSC ("NYPSC") has recently initiated a proceeding to examine intrastate access
charges. 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
NYSPSC 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's paying more per unit
of traffic than its competitors for local transport service.
The NYPSC is currently reviewing the further restructuring of intra-State
access charges, and is considering whether to restructure State access charges
so that they mirror all of the rate elements set forth in recently revised
federal access charge structures. This includes possible removal of any
remaining "equal price per unit of traffic" applications, and the
establishment of an intra-state Primary Interexchange Carrier Charge ("PICC"),
which would shift certain usage sensitive access charges to a flat rate fee
applicable to carriers based upon their numbers of presubscribed intra-LATA
and inter-LATA customers. Establishment of such an intra-state PICC could have
adverse effects on carriers which serve low volume customers and customers
located in rural or remote areas. The NYPSC is also reviewing proposals to
modify the mileage formula utilized to calculate transport charges for
carriers, such as the Company, which use common transport rather than direct
trucking transport. It is not possible to determine the impact, if any, which
such changes would have on the Company's intra-state access costs.
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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 several New York markets.
Many competitive local exchange companies, including the Company, receive
significant revenues from incumbent local exchange carriers (such as New York
Telephone) through the reciprocal compensation mechanism for terminating
traffic which the Company delivers to Internet providers. In early 1997, New
York Telephone announced it would refuse to pay such terminating compensation
for Internet traffic, and the Company, as well as other competing local
exchange carriers, have filed complaints with the NYPSC. The NYPSC is now
reviewing whether Internet traffic should be treated as "local" traffic for
purposes of reciprocal compensation. A petition has also been filed at the FCC
for a declaration that Internet traffic is to be considered "local" traffic
for reciprocal compensation purposes. If either the FCC or the NYPSC issues an
adverse ruling, and determines that Internet traffic delivered to the Company
for termination will not be eligible for reciprocal compensation, there could
be a significant impact upon the Company's local service revenues.
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 1996 Act, 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
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exchange "elements" (known as "links" and "ports"). The Company generally
intends to provide local service through the resale of unbundled links rather
than through the sale of bundled loops.
On April 1, 1997, the NYPSC adopted permanent rates for unbundled links and
certain other unbundled network elements for New York Telephone. The monthly
rate for unbundled links in designated areas of dense traffic (accounting for
approximately 70% of all loops in the state) is $12.49, plus a recurring $1.90
connection charge. The monthly rate in other areas of the state is $19.24,
plus a $1.90 recurring connection charge. Permanent unbundled link and
unbundled network element rates have not yet been established for Frontier
Corp. The permanent New York Telephone link rate is lower than the temporary
rates for New York Telephone's unbundled links; it is greater than the $10.10
rate for the comparable service New York Telephone offers to its own
residential customers, but below the rate of approximately $22 for the
comparable service New York Telephone offers to its business customers.
However, in order to utilize unbundled links, the Company must arrange for
collocation in New York Telephone's central offices, which adds significant
costs. As a result, the Company's marketing efforts are primarily directed
toward business customers (and certain concentrated residential customers)
which can be served through the Company's own facilities, rather than through
use of unbundled links obtained from New York Telephone or Frontier Corp.
One of the unbundled elements required to be provided by incumbent local
exchange carriers under the 1996 Act is access to the carrier's Operational
Support systems ("OSS"), which are electronic systems used by competing
carriers, such as the Company, to order services, including unbundled network
elements and resold services, from the incumbent local exchange company. Rates
for use of such OSS are established by the PSCs. The NYPSC has been reviewing
charges proposed by New York Telephone of approximately $2,500 per month for
the right to order resold services, and approximately $5,000 per month for the
right to order unbundled network elements, including unbundled links. A
carrier which orders both unbundled network elements and resold services would
pay approximately $7,500 per month. In addition to those monthly service
charges, an ordering carrier would pay approximately $1 for each preordering,
ordering and maintenance transaction. The NYPSC has issued an interim decision
denying New York Telephone the ability to apply the monthly recurring charges,
subject to New York Telephone's ability to further substantiate its
entitlement to such charges. The final outcome of that proceeding, and the
level of OSS charges which the Company will have to pay to order resold
services and unbundled network elements from New York Telephone, is not known.
The establishment of excessive OSS charges could have a significant effect on
the Company's ability to order services and compete in the local exchange
market.
Local Telephone Service in Massachusetts. The Massachusetts Department of
Public Utilities ("DPU") requires LECs to file a Statement of Business
Operations and a tariff before providing intrastate telecommunications
service, including local exchange service in Massachusetts. The Company has
filed its Statement and tariff and has received DPU approval of its
interconnection agreement with NYNEX/Bell Atlantic.
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 Telephone Services. 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.
Competition is also emerging in many other segments of the market. However,
despite the very impressive competitive in-roads that have been made in the
long distance market, the Stentor companies continue to have the vast share of
the local and calling card markets. 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.
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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 a decision released in May 1997, the CRTC removed restrictions on
international simple resale by Canadian domestic transmission facilities-based
carriers. Prior to this decision, only non-facilities based carriers such as
ACC Canada were permitted to engage in international simple resale. The
decision also re-emphasized the restriction on "switched hubbing" (i.e.
routing Canada overseas traffic to or from a destination country over resold
international private lines supplied by Teleglobe between Canada and an
intermediary country), unless agreed to by all countries or operating
authorities involved, including Teleglobe. After subsequent proceedings in the
courts and the CRTC to vary or reverse these rulings, the CRTC determined in
December 1997 to permit switched hubbing.
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. In
February 1997, the Canadian government committed under the WTO negotiations to
terminate Teleglobe Canada's status as the monopoly transmission facilities-
based provider of Canada-overseas telecommunications services by October 1,
1998. The Canadian House of Commons has passed legislation to implement this
change in Teleglobe's status, to put in place a licensing regime for
telecommunications service providers providing international
telecommunications services within a class or classes specified by the CRTC,
and to administer numbering resources in Canada. In October 1997 the CRTC
issued a public notice asking for comments on, among other things, the
licensing and regulatory regime which should be used for Teleglobe and other
international telecommunications services providers after October 1, 1998. The
CRTC suggested that international services provided by resellers might be
within such a regime.
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 AT&T Canada
(then named Unitel Communications Inc.) with "equal ease of access," i.e., to
allow it to directly connect its network to the telephone companies' toll and
end office switches to allow its customers to make long distance calls without
dialing extra digits. In July 1993, the CRTC ordered
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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.
The CRTC 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. These charges are levied on resellers based on leased
access lines. The charges vary for each telephone company based on that
company's estimated loss on local services. Contribution charges were subject
to 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.
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 April 1997 the CRTC issued a decision unbundling these charges and costs.
Previously, long distance carriers paid the telephone companies a flat rate of
$0.011 per minute. Effective July 1, 1997, a separate rate of $0.007 per
minute is payable for local end office connections, and between $0.004 and
$0.007 per minute for toll or access tandem connections. In June 1997 AT&T
Canada asked the CRTC to reconsider and vary the flat $0.007 per minute rate
for local end office connections.
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 was subsequently approved on an
interim basis.
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 subsequently
conducted 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
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unspecified increase in 1998 (the contribution component of the Carrier Access
Tariff was 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; (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 is one-half the peak rate, with the peak rate applicable
between 8 a.m. and 5 p.m., Monday through Friday.
In October 1996 the CRTC ended the Stentor monopoly over access to swipe
readers found on the latest generation of pay telephones and ordered the
telephone companies to file a tariff that would provide competitors with swipe
access. The CRTC agreed that lack of swipe access for their calling cards is a
major disadvantage for the Company and other competitors. The new swipe access
tariff was approved on an interim basis in May, 1997.
In December 1996, in Telecom Decision CRTC 96-11, the CRTC established 1996
contribution rates retroactive to January 1, 1996. The contribution rates were
reduced by up to 42% from 1995 levels, depending on the province. The CRTC
also ruled in Telecom Decision CRTC 96-12, that effective July 1, 1997,
contribution on line-side connections would be changed from a per circuit to a
per minute basis. This is consistent with the ruling in 1995 which implemented
per minute contribution for trunk-side connections.
The CRTC began a public proceeding in 1996 to examine and establish the
preconditions for deregulation of the Stentor companies' long distance
services. The Company and the other members of the Competitive
Telecommunications Alliance have proposed a timetable for deregulating the
long distance market. In December 1997, the CRTC released a decision under
which it will forbear from regulation of Stentor toll and toll-free services.
Among other things, the Stentor companies will no longer be required to file
tariffs for these services or demonstrate that the rates for them are just and
reasonable, and these services will no longer be required to meet an
imputation test (which prevented pricing below cost). However, the CRTC will
continue to apply a cap on overall North American basic toll rates charged by
the Stentor companies, and will continue to exercise a number of its powers
with respect to the prohibitions on unjust discrimination and undue preference
in respect of these services. The CRTC also released a decision under which it
will forbear from regulation of certain Stentor high capacity interexchange
private line services on specified high traffic routes. Among other things,
the Stentor companies will no longer be required to file tariffs for these
services or demonstrate that the rates for them are just and reasonable, there
will no longer be a prohibition on unjust discrimination and undue preference
in respect of these services, and these services will no longer be required to
meet an imputation test.
In June 1997 Stentor applied to the CRTC for: (i) the elimination of
contribution on international circuits, with offsetting adjustments to
domestic contribution rates; or (ii) the implementation of a per-minute
contribution mechanism applicable to international long distance minutes,
rather than the per-circuit mechanism still used for international circuits.
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.
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Local Telephone Services. On May 1, 1997 the CRTC released a number of
decisions which opened the Canadian local telecommunications market to
competition. The decisions apply in the territories of the Stentor telephone
companies, except SaskTel in Saskatchewan (which has subsequently announced
plans to open local telephone service in the province to competition). The
decision enables the systems operated by competitive local exchange carriers
("CLECs") to be interconnected with the systems operated by incumbent local
exchange carriers ("ILECs"). CLECs will not merely be customers of ILECs, but
will be carriers equal in status to ILECs in the local exchange market.
CLECs are not required to provide universal service in their serving areas,
or to file tariffs for services provided to their customers. However, the CRTC
imposed certain consumer protection and regulatory obligations on CLECs. Also,
CLECs must file tariffs to provide equal access to all interexchange ("IX")
service providers and wireless service providers. Such access must be on terms
and conditions equivalent to those contained in ILECs' tariffs, unless the
CLEC can justify any departure. ILECs cannot refuse to connect their IX
networks with a CLEC's network.
CLECs will have access to the following services of the ILECs found to be
essential by the CRTC: central office codes; subscriber listings; and local
loops situated in small urban and rural areas. These facilities are subject to
mandatory unbundling and mandated pricing. A number of other items, while not
found to be essential, were directed by the CRTC to be unbundled for a period
of five years, during which period those items are also to be provided to
competitors at mandated prices.
The May 1 decisions replaced the historical rate base rate of return
regulation of ILECs with price cap regulation for an initial period of four
years. In order to prevent ILECs from engaging in anti-competitive pricing,
ILECs will be required to demonstrate that services provided to their
customers are not priced below cost.
Contribution currently paid by IX carriers to ILECs will continue to be
collected, but will be treated as a "portable contribution", i.e. such amounts
will be pooled and distributed to ILECs and CLECs based on the number of
residential lines served by the respective local exchange carriers in each
rate band and the subsidy requirement associated with the rate band. Contrary
to the submissions of some parties, no explicit contribution will be payable
from local business exchange services or directory revenues.
Prior to these decisions, competitors could resell Centrex and other bulk
services, as well as individual business lines. Resale of residential lines
was not allowed. The decisions now allow competitors to resell all bundled
local services (including residential lines), and those services which are
unbundled pursuant to the decisions. However, contrary to the submissions of
some resellers, the CRTC did not order the ILECs to provide their services to
resellers at wholesale prices. Therefore, the scope for non-facilities-based
local competition is significantly restricted.
The ILECs will be permitted to raise basic residential local monthly rates
effective January 1, 1998. Toll contribution will be frozen for the price cap
period at the January 1, 1998 levels. These contribution levels will be
reduced to levels which take into account the effect of the basic residential
local rate increase. The CRTC also expanded somewhat the scope of contribution
paying services. While reduced interim contribution rates have been approved
for 1997 and the price cap period, final contribution rates for 1997 and for
the price cap period have not yet been determined. On September 8, 1997, AT&T
Canada asked the CRTC to allow for the adjustment of the contribution charge
payable by IX carriers on a quarterly basis during the initial price cap term
to account for the growth in toll minutes.
A subsequent decision of the CRTC in June 1997 allowed transmission
facilities-based local and long distance carriers (but not resellers such as
ACC Canada) to "co-locate" their equipment in the central offices of ILECs on
terms and conditions contained in tariffs or intercarrier agreements.
A number of issues relating to local competition remain to be resolved,
including the determination of final rates, finalization of arrangements
regarding local number portability, and certain other interconnection
arrangements.
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Under the local competition decisions, only transmission facilities-based
carriers (which are required, among other things, to meet Canadian ownership
requirements) may become CLECs. In September 1997 ACC Canada asked the CRTC to
remove this requirement and to establish entry procedures and regulatory
obligations for telecommunications service providers that are not facilities-
based carriers but that wish to become CLECs.
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 Communications Ltd. (now known as
"CWC") a license to run its own telecommunications system under the British
Telecommunications Act 1981. Both British Telecom and CWC are licensed under
the subsequent Telecommunications Act 1984 to run transmission facilities-
based telecommunications systems and provide telecommunications services. See
"Risk Factors--Dependence on Transmission Facilities-Based Carriers and
Suppliers."
In 1991, the British government established a "multi-operator" policy to
replace the duopoly that had existed between British Telecom and Mercury.
Under the multi-operator policy, the U.K Department of Trade and Industry (the
"DTI") will recommend the grant of a license to operate a telecommunications
network to any applicant that the DTI believes has a reasonable business plan
and where there are no other overriding considerations not to grant such
license. All public telecommunications operators and international simple
resellers operate under individual licenses granted by the Secretary of State
for Trade and Industry pursuant to the Telecommunications Act 1984. Any
telecommunications system with compatible equipment that is 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 further mandatory price reductions on British Telecom from
August 1997 which, although more limited in scope than those previously set,
may have, the effect of reducing the prices the Company can charge its
customers in order to remain competitive. Oftel is introducing a new access
charge control regime, which is expected to become effective in August 1997.
Under the new regime, British Telecom will have flexibility in setting access
charges, subject to certain safeguards. Oftel will set the starting charges
(which will be based on historical incremental costs) and the rates charged by
British Telecom to other carriers will be subject to certain price ceilings
established by Oftel for competitive and non-competitive services.
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
important in 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
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preferred stock of the Company. 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 "Risk Factors--
Substantial Indebtedness; Need for Additional Capital."
EMPLOYEES
As of December 1, 1997, the Company had 1,039 full-time employees worldwide.
Of this total, 356 employees were in the U.S., 405 were in Canada, 261 were in
the U.K. and 17 were in Germany. 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.
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, 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 incorporated by reference herein.
ACC U.K. is in the process of relocating its U.K. headquarters in London,
England to Adelaide House in Chiswick, London. ACC U.K. entered into an
Agreement for Lease for such location in October 1997. The term is for
approximately six years through March 2004. The lease for the current
headquarters will also continue until September 1998.
The Company has fifteen 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 the U.S. in Albany, Buffalo, New York City and Syracuse,
New York and in Boston and Springfield, Massachusetts; in Canada in Toronto,
Ontario, Montreal, Quebec, and Vancouver, British Columbia; and in London,
Bristol 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.
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LEGAL PROCEEDINGS
ACC is a party, in the ordinary course of business, to litigation regarding
services rendered, contract claims and other miscellaneous causes of action
arising from its business. Management of ACC does not consider that any such
matters will materially adversely affect ACC's business, results of operations
or financial condition.
ACC and its directors have been named as defendants in a civil suit, pending
in New York State Supreme Court for Monroe County, which was commenced by a
shareholder on November 3, 1997, within a week of ACC's receipt of an inquiry
from Tel-Save Holding, Inc. ("Tel-Save") regarding a proposed business
combination. The complaint alleges that the directors of ACC had failed to
consider the Tel-Save proposal immediately and properly as of that date and
had thereby breached their purported fiduciary duty to the shareholders to
maximize the value of their shares. The complaint seeks unspecified damages
and attorneys fees and a declaration and injunction mandating the directors
to, among other things, take steps to create an active auction of ACC. ACC has
filed a motion seeking dismissal of the complaint on the grounds that the
complaint fails to state a valid claim. The plaintiffs have agreed to
dismissal of the complaint without prejudice, subject to approval of the court
in light of events occurring subsequent to the filing of the action, they are
evaluating whether to oppose the motion to dismiss and proceed with the case.
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RECENT DEVELOPMENTS
ACC MANAGEMENT CHANGES
On December 5, 1997, ACC announced that its Chairman and Chief Executive
Officer, David K. Laniak, 62, had died unexpectedly due to health-related
complications. As a result, ACC's Board of Directors named Robert M. Van
Degna, Chairman of the Board. Mr. Van Degna has served as an outside director
of ACC since 1995. ACC's Board of Directors also established an office of the
Chief Executive Officer to jointly perform the functions of Chief Executive
Officer, consisting of Christopher Bantoft, ACC's Executive Vice President,
Michael R. Daley, ACC's Executive Vice President and Chief Financial Officer,
and Steve M. Dubnik, ACC's Executive Vice President.
THE TCG MERGER
The following description of certain provisions of the TCG Merger Agreement
is only a summary and does not purport to be complete. This description is
qualified in its entirety by reference to the complete text of the TCG Merger
Agreement which is incorporated by reference herein.
TCG Merger. The TCG Merger Agreement provides that a wholly-owned subsidiary
of TCG will merge with and into ACC in accordance with the DGCL, the separate
existence of TCG's acquisition subsidiary will cease, and ACC, as the
surviving corporation in the TCG Merger (the "Surviving Corporation"), will
continue its corporate existence under Delaware law as a wholly-owned
subsidiary of TCG.
A Certificate of Merger will be filed within five business days after all of
the conditions (other than those to be satisfied at the time of the TCG
Merger) set forth in the TCG Merger Agreement have been satisfied or waived by
the party or parties entitled to the benefit of such conditions. TCG and ACC
shall mutually determine the time and place of the closing of the TCG Merger.
The TCG Merger will become effective at the time of the filing of the
Certificate of Merger with the Secretary of State of Delaware or at such later
time as specified in the Certificate of Merger (the "TCG Effective Time").
TCG Merger Consideration. Each of the issued and outstanding shares of ACC
Common Stock will be converted into the right to receive that number of shares
of Class A Common Stock, par value $.01 per share, of TCG (the "TCG Stock")
equal to the product of one (1), multiplied by the TCG Exchange Ratio. The
"TCG Exchange Ratio" means:
(i) if the average of the last reported sales prices per share of the TCG
Stock as reported on The Nasdaq National Market for the ten consecutive
trading days immediately preceding the trading day immediately prior to the
closing date of the TCG Merger (the "Average Price") is less than $45.00,
1.11111;
(ii) if the Average Price is equal to or greater than $45.00, but not in
excess of $55.00, a fraction, the numerator of which shall be $50.00 and
the denominator of which shall be the Average Price; or
(iii) if the Average Price is greater than $55.00, 0.90909;
subject to payment of cash in lieu of any fractional share (the "TCG Merger
Consideration").
No fractional shares of TCG Stock will be issued. In lieu of fractional
shares, any person who would otherwise be entitled to a fractional share of
TCG Stock shall receive an amount in cash equal to the value of such
fractional share. Such value shall be the product of such fraction multiplied
by the last sales price of TCG Stock as reported on The Nasdaq National Market
on the business day immediately prior to the closing date.
Exchange of Certificates; Exchange Agent. Each share of ACC Common Stock
shall be canceled as of the TCG Effective Time. Following the TCG Merger, all
of the capital stock of the Surviving Corporation would be owned by TCG.
Shares of ACC Common Stock will be exchanged for the TCG Merger Consideration
and then cancelled, with the result that ACC Common Stock will no longer be
outstanding (except for shares owned by TCG) or listed on The Nasdaq National
Market.
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Prior to the closing date, TCG shall appoint an agent to act as exchange
agent (the "Exchange Agent") for the TCG Merger. On the closing date, TCG
shall instruct the Exchange Agent to mail to each ACC stockholder within five
business days a letter of transmittal and instructions for use in effecting
the surrender of the certificates representing ACC stock in exchange for
certificates and cash, if any, representing the TCG Merger Consideration.
After the TCG Effective Time, each holder of a share of ACC Common Stock
will surrender and deliver the certificates to the Exchange Agent together
with a duly completed and executed transmittal letter. Upon such surrender and
delivery, the holder shall receive a certificate and cash, if any,
representing the TCG Merger Consideration. Until so surrendered and exchanged,
each outstanding stock certificate after the TCG Effective Time shall be
deemed to evidence the right to receive that number of whole shares of TCG
Stock into which the shares of ACC Common Stock have been converted, subject
to payment of cash in lieu of any fractional share. No dividends or other
distributions in respect of the shares of TCG Stock, declared after the TCG
Effective Time and payable to holders of record after the TCG Effective Time,
shall be paid to the holders of any unsurrendered certificates until such
certificates and letters of transmittal are surrendered and delivered. After
the surrender and exchange of certificates, the record holders thereof will be
entitled to receive any such dividends or other distributions without
interest. Holders of any unsurrendered certificates shall not be entitled to
any rights as a holder of TCG Stock until such certificates are exchanged.
Stock Options and Stock Incentive Rights. At the Effective Time, TCG shall
cause each holder of a then-outstanding and unexercised option (the "ACC
Options") or stock incentive right (the "ACC SIRs") exercisable for shares of
ACC Common Stock to receive options or stock incentive rights, respectively,
exercisable for shares of TCG Stock having the same terms and conditions as
the ACC Options and ACC SIRs, except that the exercise price and the number of
shares issuable upon exercise shall be divided and multiplied, respectively,
by the TCG Exchange Ratio.
Certificate of Incorporation and Bylaws of Surviving Corporation. At and
after the TCG Effective Time, the Certificate of Incorporation of the
Surviving Corporation shall be amended to be identical to the Certificate of
Incorporation of TCG's acquisition subsidiary in effect at the TCG Effective
Time. At and after the TCG Effective Time, the Bylaws of TCG's Acquisition
Subsidiary in effect at the TCG Effective Time shall be the Bylaws of the
Surviving Corporation.
Acquisition Proposals. ACC covenants in the TCG Merger Agreement that it
will, and will direct and use commercially reasonable efforts to cause its
officers, directors, employees, representatives and agents to, immediately
cease any discussions or negotiations with any parties that may be ongoing
with respect to an ACC Takeover Proposal (as hereinafter defined). ACC will
not, nor will it authorize or permit its subsidiaries, officers, directors,
employees or agents or any representative to, (i) solicit, initiate or
encourage or take any other action designed or reasonably likely to facilitate
any proposal which constitutes or may reasonably be expected to lead to any
ACC Takeover Proposal or (ii) participate in any discussions or negotiations
regarding any ACC Takeover Proposal.
If, however, prior to the ACC Stockholders Meeting, the Board of Directors
of ACC determines in good faith, upon advice from outside counsel, that it is
necessary to do so in order to comply with its fiduciary duties to ACC's
stockholders under applicable law, ACC may, in response to an ACC Takeover
Proposal or material modification to an ACC Takeover Proposal made after the
date of the TCG Merger Agreement and not solicited after the date of the TCG
Merger Agreement, (i) furnish information with respect to ACC to any person
pursuant to a confidentiality agreement and (ii) participate in negotiations
regarding such ACC Takeover Proposal or material modification made after the
date of the TCG Merger Agreement.
Subject to the above-mentioned exception, the Board of Directors of ACC
cannot (i) withdraw or modify, or propose publicly to withdraw or modify, in a
manner adverse to TCG, or take any actions that are not explicitly permitted
by the TCG Merger Agreement and that would be inconsistent with, the approval
or recommendation by such Board of Directors of the TCG Merger; (ii) approve
or recommend any ACC Takeover Proposal; or (iii) cause ACC to enter into any
agreement related to any ACC Takeover Proposal. However, if the
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ACC Board of Directors determines, prior to the time of the ACC Stockholders
Meeting, after receipt of advice from outside counsel, that it is necessary to
do so to comply with applicable law, it may (i) withdraw or modify its
approval or recommendation of the TCG Merger or (ii) approve or recommend an
ACC Superior Proposal (as defined below) or, subject to the payment of the
termination fee discussed below, terminate the TCG Merger Agreement, but only
after the third day following TCG's receipt of written notice.
ACC has agreed to immediately advise TCG orally and in writing of any
request by any person for information about ACC or of any ACC Takeover
Proposal, the material terms and conditions of such request or ACC Takeover
Proposal and the identity of the person making such request or ACC Takeover
Proposal, unless the ACC Board of Directors decides in good faith, after
receipt of advice from outside counsel, that, in order to comply with its
fiduciary duties to ACC's stockholders, it cannot specify certain information,
in which case ACC may omit such information from such notice.
"ACC Takeover Proposal" means any inquiry, proposal or offer from any person
relating to the direct or indirect acquisition or purchase of 15% or more of
the assets of ACC and its subsidiaries or 15% or more of any class of equity
securities of ACC or any of its subsidiaries, any tender offer or exchange
offer that if consummated would result in any person beneficially owning 15%
or more of any class of equity securities of ACC or any of its subsidiaries,
any merger, consolidation, share exchange, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
ACC or any of its subsidiaries (other than the transactions contemplated by
the TCG Merger Agreement) or any other transaction the consummation of which
could reasonably be expected to impede, interfere with, prevent or materially
delay the TCG Merger or which would reasonably be expected to diminish
materially the benefits to TCG of the transactions contemplated by the TCG
Merger Agreement.
An "ACC Superior Proposal" means any bona fide proposal made by a third
party to acquire, directly or indirectly, for consideration consisting of cash
and/or securities, more than 15% of the voting power of the shares of ACC
Common Stock then outstanding or all or substantially all the assets of ACC
and otherwise on terms which the Board of Directors of ACC determines in its
good faith judgment (based on the advice of a financial advisor of nationally
recognized reputation) to be materially more favorable to ACC's stockholders
than the TCG Merger and for which financing, to the extent required, is then
committed or which, in the good faith judgment of the Board of Directors of
ACC, is reasonably capable of being financed by such third party.
Representations and Warranties. The TCG Merger Agreement contains various
representations of TCG and ACC. The respective representations and warranties
of the parties shall not survive beyond the TCG Effective Time.
The representations, warranties and certain covenants of ACC relate
generally to: (i) corporate organization, good standing and capitalization;
(ii) the authorization, execution, delivery and enforceability of the TCG
Merger Agreement; (iii) approval of governmental authorities; (iv) absence of
violations of, among other things, ACC's Certificate of Incorporation, Bylaws,
certain contracts or laws; (v) documents filed with the Commission and the
accuracy of information, including financial statements in accordance with
generally accepted accounting principles, contained therein; (vi) the absence
of any material adverse events affecting ACC's business, any material change
by ACC in its accounting methods or any undisclosed liabilities; (vii)
compliance with laws and possession of all required permits; (viii) absence of
brokers or finders, other than ACC's financial advisor; (ix) except for
certain listed ACC material contracts, the absence of contracts not required
by the 1933 Act or the 1934 Act, to be described in or filed as an exhibit to
ACC's securities filings; (x) employee benefit plans; (xi) taxes; (xii)
receipt of a fairness opinion from ACC's financial advisor; (xiii) Board of
Director approval of the TCG Merger Agreement; (xiv) absence of action that
would adversely affect the ability of TCG to treat the TCG Merger as a pooling
of interests; and (xv) absence of action that would cause the Rights to become
exercisable, to cause any person to become an Acquiring Person or give rise to
a Distribution Date (as such terms are defined in the ACC Shareholder Rights
Agreement).
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The representations, warranties and certain covenants of TCG relate
generally to: (i) corporate organization, good standing and capitalization;
(ii) the authorization, execution, delivery and enforceability of the TCG
Merger Agreement; (iii) approval of governmental authorities; (iv) the absence
of violations of, among other things, TCG's Certificate of Incorporation,
Bylaws, certain contracts or laws; (v) documents filed with the Commission and
the accuracy of information, including financial statements in accordance with
generally accepted accounting principles, contained therein; and (vi) the
absence of any material adverse events affecting TCG's business, any material
change by TCG in its accounting methods or any undisclosed liabilities.
Certain Covenants. The covenants and agreements of the parties listed in the
TCG Merger Agreement shall not survive beyond the TCG Effective Time, except
for those relating to indemnification of the officers and directors of ACC and
except for the agreements entered into by affiliates of ACC.
Pursuant to the TCG Merger Agreement, ACC covenants and agrees to conduct
its businesses in the ordinary course and consistent with past practice, and
to use commercially reasonable efforts to preserve intact its business
organization, to keep available the services of its officers and employees and
to maintain satisfactory relationships with all persons with whom it does
business.
Additionally, ACC agrees not to, without prior written consent of TCG, (i)
amend its Certificate of Incorporation or Bylaws, (ii) issue rights of any
kind (with certain exceptions) to acquire or sell any shares of the securities
of ACC or its subsidiaries, (iii) split, combine or reclassify any shares of
capital stock or pay certain dividends, (iv) other than in the ordinary course
of business, create debt obligations in respect of capital leases (with
certain exceptions), make capital expenditures or loans or investments in any
other person (with certain exceptions), acquire the stock or assets of, or
merge or consolidate with, any other person (with certain exceptions,
including the proposed Merger), voluntarily incur any material liability or
obligation or sell or otherwise dispose of any assets or properties material
to ACC and its subsidiaries, (v) other than as required by law or agreement,
increase the compensation paid to its officers in excess of 5% from the prior
year, increase the compensation of its employees, other than in the ordinary
course, enter into, amend or terminate certain employment agreements, employee
benefit agreements and retirement plans, or with certain exceptions, permit
the exercise of stock options or payment of related taxes by any means other
than cash, and (vi) enter into or amend any lease of real property other than
in the ordinary course of business, consistent with past practice.
ACC and its subsidiaries will use reasonable efforts to comply in all
material respects with all laws applicable to it or its properties, assets or
business and maintain all necessary permits.
ACC covenants and agrees to use its commercially reasonable efforts to take
all actions necessary to consummate the TCG Merger and the transactions
contemplated by the TCG Merger Agreement, including, but not limited to (i)
obtaining the consent of ACC's lenders and others to the TCG Merger Agreement
and the transactions contemplated thereby; (ii) defending any litigation
against ACC or its subsidiaries challenging the TCG Merger Agreement or the
consummation of the related transactions; (iii) obtaining all consents from
governmental authorities required for the transactions; and (iv) timely filing
of all necessary documents under the HSR Act.
Additionally, ACC covenants and agrees, among other things, to (i) give TCG,
its lenders and their respective authorized representatives access to all
offices, other facilities, contracts, books and records of or pertaining to
ACC; (ii) take all steps necessary to duly call, give notice of, convene and
hold a special meeting of its stockholders for the purpose of approving the
transactions contemplated by the TCG Merger Agreement, and the Board of
Directors of ACC covenants and agrees to recommend that the stockholders
approve the proposals and will use its commercially reasonable efforts to
obtain any necessary approval by ACC's stockholders of the proposals; (iii)
refrain from issuing or causing the publication of any press release or
announcement with respect to the TCG Merger or the related transactions
without the consent of TCG, except where such release or announcement is
required by law; (iv) use commercially reasonable efforts to ensure that each
person who is or may be an "affiliate" of ACC within the meaning of Rule 145
promulgated under the 1933 Act enters into an agreement as set forth on
Schedule 4.11 of the TCG Merger Agreement as soon as
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practicable after the date of the TCG Merger Agreement; (v) if any
antitakeover statute or regulation enacted under state or federal laws in the
United States is or may become applicable to the TCG Merger, grant such
approvals and take such actions as are necessary so that the transactions
contemplated by the TCG Merger Agreement may be consummated as promptly as
practicable on the terms contemplated by the TCG Merger Agreement and
otherwise act to eliminate or minimize the effects of any such takeover
statute; and (vi) not take any action that to its knowledge could reasonably
be expected to adversely affect the ability of TCG to treat the TCG Merger as
a pooling of interests, and to take such action as may be reasonably required
to negate the impact of any past actions which to its knowledge could
reasonably be expected to adversely impact the ability of TCG to treat the TCG
Merger as a pooling of interests.
TCG covenants and agrees that, on and after the TCG Effective Time,
employees of ACC and its subsidiaries prior to the TCG Effective Time who are
employees of the Surviving Corporation or its subsidiaries will be provided
with and permitted to participate in all Employee Plans and Compensation
Arrangements (as those terms are defined in the TCG Merger Agreement) provided
to similarly situated employees of TCG and/or its subsidiaries, which Employee
Plans and Compensation Arrangements may, in TCG's sole discretion, include
Employee Plans and Compensation Arrangements of ACC, and the vesting of all
outstanding ACC options and warrants or arrangements to acquire capital stock
of ACC and all ACC SIRs shall accelerate immediately upon the TCG Effective
Time.
TCG covenants and agrees to use its commercially reasonable efforts to take,
or cause to be taken, all actions and do or cause to be done, all things
necessary to consummate the TCG Merger and the transactions contemplated by
the TCG Merger Agreement, including, but not limited to, (i) obtaining all
required consents from governmental authorities, (ii) timely filing all
necessary documents under the HSR Act and (iii) causing the shares of TCG
Stock comprising the TCG Merger Consideration to be approved for listing on
The Nasdaq National Market as promptly as practicable.
TCG is not required to agree to anything that would (i) prohibit or limit
the ownership or operation by TCG or any of its subsidiaries or affiliates of
any material portion of the business or assets of TCG or of such subsidiaries
or affiliates, or compel TCG or any of its subsidiaries or affiliates to
dispose of or hold separate any such material portion, (ii) impose limitations
on TCG's ability to acquire or hold, or exercise full rights of ownership of,
any shares of capital stock, including, without limitation, the right to vote
any capital stock on all matters properly presented to stockholders, (iii)
prohibit TCG or its subsidiaries or affiliates from effectively controlling
the business or operations of TCG or (iv) otherwise materially adversely
affect TCG or any of its subsidiaries or affiliates.
Additionally, TCG covenants and agrees, among other things, to (i) give ACC,
its lenders and their respective authorized representatives access to all
offices, other facilities, contracts, books and records of or pertaining to
TCG; (ii) refrain from issuing or causing the publication of any press release
or announcement with respect to the TCG Merger or the related transactions
without the consent of ACC, except where such release or announcement is
required by law; (iii) use commercially reasonable efforts to ensure that each
person who is or may be an "affiliate" of TCG within the meaning of Rule 145
promulgated under the 1933 Act enters into an agreement as set forth on
Schedule 5.8 of the TCG Merger Agreement as soon as practicable after the date
of the TCG Merger Agreement; and (iv) refrain from declaring, paying or
setting aside any dividend or other distribution in respect of its equity
securities or redeeming, purchasing or otherwise acquiring or offering to
acquire any shares of its equity securities, other than such action which
would result in an adjustment to the TCG Merger Consideration or any such
action pursuant to an employment agreement, employee plan or compensation
arrangement.
Conditions to Each Party's Obligations. The respective obligations of each
party to effect the TCG Merger shall be subject to the fulfillment or waiver
at or prior to the closing of the following conditions: (i) the ACC
stockholders must have approved the TCG Merger and related transactions at or
prior to the TCG Effective Time; (ii) no order, judgment, injunction or action
shall have been enacted by any governmental authority which prohibits or
prevents the consummation of the TCG Merger; (iii) any waiting period
applicable to the TCG Merger under the HSR Act shall have expired or earlier
termination thereof shall have been granted and no
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action, suit, proceeding or investigation shall be pending by either the
United States Department of Justice or the Federal Trade Commission to prevent
the consummation of the transactions contemplated by the TCG Merger Agreement;
(iv) the Registration Statement filed under the 1933 Act with respect to the
TCG Merger shall have been declared effective, no stop order suspending the
effectiveness of such Registration Statement shall have been issued and no
action, suit, proceeding or investigation for that purpose shall have been
initiated or threatened by any governmental authority; and (v) the shares of
TCG Stock comprising the TCG Merger Consideration shall have been approved for
listing on The Nasdaq National Market.
Conditions to Obligations of ACC. The obligations of ACC to effect the TCG
Merger shall be subject to the fulfillment at or prior to the TCG Effective
Time of the following additional conditions, any one or more of which may be
waived by ACC: (i) the representations and warranties of TCG contained in the
TCG Merger Agreement that are modified by materiality or TCG Material Adverse
Effect (as defined in the TCG Merger Agreement) shall be true and correct and
those that are not so modified shall be true and correct in all material
respects, on the date of the TCG Merger Agreement and as of the TCG Effective
Time as if made at the TCG Effective Time; (ii) TCG shall have performed and
complied with all of its covenants and agreements in all material respects and
satisfied in all material respects all of the conditions required to be
performed or complied with by it; and (iii) ACC shall have received an opinion
from ACC's tax counsel that, for federal income tax purposes, the TCG Merger
will qualify as a reorganization within the meaning of Section 368(a) of the
Code.
Conditions to Obligations of TCG. The obligations of TCG to effect the TCG
Merger shall be subject to the fulfillment at or prior to the TCG Effective
Time of the following additional conditions, any one or more of which may be
waived by TCG: (i) the representations and warranties of ACC contained in the
TCG Merger Agreement that are modified by materiality or ACC Material Adverse
Effect (as defined in the TCG Merger Agreement) shall be true and correct and
those that are not so modified shall be true and correct in all material
respects, on the date of the TCG Merger Agreement and as of the TCG Effective
Time as if made at the TCG Effective Time; (ii) ACC shall have performed and
complied with all of its covenants and agreements in all material respects and
satisfied in all material respects all of the conditions required to be
performed or complied with by it; (iii) TCG shall have received an opinion
from TCG's tax counsel that, for federal income tax purposes, the TCG Merger
will qualify as a reorganization within the meaning of Section 368(a) of the
Code; (iv) all governmental consents required for the consummation of the TCG
Merger and the related transactions shall have been obtained by final order,
except as may be waived by TCG or those consents the failure of which to be
obtained will not materially adversely affect the business, assets, financial
condition, liabilities or the results of operations of the Surviving
Corporation and its subsidiaries taken as a whole; and (v) TCG shall have
received the opinion of special telecommunications counsel to ACC, in form and
substance reasonably satisfactory to TCG and customary for similar
transactions in such jurisdictions, covering regulatory matters in the Federal
Republic of Germany, the United Kingdom, Canada, Massachusetts, New York, the
United States and any other national or state jurisdiction in which ACC owns,
leases or operates one or more telecommunications switching devices.
Indemnification. The indemnification provisions of the By-laws and the
Certificate of Incorporation of the Surviving Corporation shall not be amended
or repealed for six years after the closing date in any manner that would
adversely affect the rights thereunder of individuals who immediately prior to
the closing date were directors, officers, agents or employees of ACC unless
otherwise required by applicable law. From and after the TCG Effective Time,
TCG and the Surviving Corporation shall jointly and severally indemnify,
defend and hold harmless the directors, officers and agents of ACC as provided
in ACC's Certificate of Incorporation, By-laws or indemnification agreements,
as in effect as of the date of the TCG Merger Agreement, with respect to
matters occurring through the closing date.
To the extent available, TCG agrees to cause the Surviving Corporation to
maintain in effect for not less than three years after the closing date
policies of directors' and officers' liability insurance comparable to those
maintained by ACC with carriers comparable to ACC's existing carriers and
containing terms and conditions which are no less advantageous in any material
respect to the officers, directors and employees of ACC, subject to certain
limitations.
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Termination; Termination Fees and Expenses. The TCG Merger Agreement may be
terminated at any time prior to the TCG Effective Time, whether before or
after approval of the stockholders of ACC: (a) by mutual written consent of
TCG and ACC; (b) by either TCG or ACC if (i) the TCG Merger is not consummated
on or prior to November 26, 1998, provided that such right is not available to
any breaching party, (ii) the approval of ACC's stockholders is not obtained
at the ACC Stockholders Meeting or (iii) any governmental authority takes any
action prohibiting the consummation of the TCG Merger; (c) by TCG, if (i) ACC
materially breaches any of its representations, warranties, covenants or other
agreements contained in the TCG Merger Agreement, which breach is incapable of
being cured or is not cured within 20 days after given written notice thereof
to ACC, (ii) ACC breaches its agreement not to solicit any ACC Takeover
Proposal and certain related provisions of the TCG Merger Agreement and fails
to promptly terminate the activity giving rise to such breach and fails to use
commercially reasonable best efforts to cure such breach, (iii) the Board of
Directors of ACC withdraws or adversely modifies its approval of the
transactions contemplated by the TCG Merger Agreement or approves any ACC
Takeover Proposal, or (iv) any person other than TCG or any of its affiliates
acquires beneficial ownership, or any "group" is formed which beneficially
owns 10% or more of the voting power of ACC; or (d) by ACC, if (i) TCG
materially breaches any of its representations, warranties, covenants or other
agreements contained in the TCG Merger Agreement, which breach is incapable of
being cured or is not cured within 20 days after giving written notice thereof
to TCG, or (ii) prior to the time of the ACC Stockholders Meeting, in
accordance with the provisions of the TCG Merger Agreement described under
"Acquisition Proposals" above.
ACC shall pay TCG $32,500,000 and shall reimburse expenses up to $7,500,000,
upon the consummation of a competing ACC Takeover Proposal if TCG terminates
the TCG Merger Agreement or if either party terminates due, in each case, to a
failure to obtain approval of ACC's stockholders and the competing ACC
Takeover Proposal was known to ACC or publicly announced before any such
termination and such competing transaction is signed or consummated within 12
months of the termination of the TCG Merger Agreement.
ACC shall pay TCG $32,500,000 and shall reimburse expenses up to $7,500,000
within one business day of termination of the TCG Merger Agreement if TCG
terminates due to ACC's withdrawal or adverse modification of the
recommendation to approve the TCG Merger, or upon ACC's approval or
recommendation of a competing ACC Takeover Proposal.
If ACC terminates the TCG Merger Agreement pursuant to the provisions of the
TCG Merger Agreement described under "Acquisition Proposals" above, ACC shall
pay TCG $32,500,000 and shall reimburse expenses up to $7,500,000 concurrently
with such termination. See "Acquisition Proposals" above.
Expenses. All costs and expenses incurred in connection with the TCG Merger
Agreement and the transactions contemplated in the TCG Merger Agreement shall
be paid by the party incurring such costs or expenses, subject to the
provisions of the three preceding paragraphs.
Amendment/Waiver. Subject to applicable law, the TCG Merger Agreement may be
amended, modified or supplemented only by a written agreement among ACC, TCG
and TCG's acquisition subsidiary. Any failure of ACC or TCG to comply with any
obligation, covenant, agreement or condition in the TCG Merger Agreement may
be waived by TCG or ACC, as the case may be, only by a written instrument
signed by the party granting such waiver.
Regulatory Approvals. Consummation of the merger requires (a) notification
pursuant to, and expiration or termination of the waiting period under, the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations thereunder, (b) consents from the FCC, state public
service or utility commissions (or comparable state governmental authorities)
and foreign telephone administrations, provided that such consents, if not
obtained, would have a material adverse effect on ACC or would materially and
adversely affect the ability of ACC to perform its obligations set forth in
the TCG Merger Agreement or to consummate the transactions contemplated
thereby, (c) filings with the Commission, state securities laws administrators
and the National Association of Securities Dealers, Inc., and (d) the filing
of the Certificate of Merger with the Secretary of State of Delaware in
accordance with the DGCL.
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THE PROPOSED MERGER OF TCG AND AT&T
On January 8, 1998, AT&T Corp. ("AT&T") and TCG announced that they had
entered into a definitive merger agreement (the "AT&T Merger Agreement"),
under which each share of TCG common stock would be converted into the right
to receive 0.943 of a share of AT&T common stock. Under the AT&T Merger
Agreement, a wholly-owned subsidiary of AT&T would be merged with and into TCG
and TCG would survive the merger as a wholly-owned subsidiary of AT&T (the
"TCG/AT&T Merger"). If the TCG/AT&T Merger is consummated, following the
TCG/AT&T Merger, all of the capital stock of the surviving corporation will be
owned by AT&T. Shares of TCG common stock will be exchanged for merger
consideration in the form of AT&T common stock, and cash in lieu of fractional
shares, and then cancelled. As a result, shares of TCG common stock will no
longer be outstanding or listed on The Nasdaq National Market. Consummation of
the TCG/AT&T Merger is subject to closing conditions and shareholder and
regulatory approvals. It is unlikely that the proposed TCG/AT&T Merger will
close before the consummation of the TCG Merger, due to the anticipated timing
of receipt of regulatory approvals and other closing conditions. No assurance
can be given that the TCG/AT&T Merger will be consummated. Assuming that the
Merger and the TCG Merger are both consummated, the ownership interest of USW
shareholders in the business of TCG who continue to hold their shares would be
substantially diluted as a result of consummation of the TCG/AT&T Merger. See
"Risk Factors--Substantial Dilution of Ownership Interest in ACC of Current
USW Shareholders Resulting From the Proposed TCG Merger and TCG/AT&T Merger."
INFORMATION CONCERNING USW
BUSINESS OF USW
General. USW is a switch-based interexchange carrier providing long distance
telephone communications services primarily to small and medium-sized business
customers. USW also provides inbound-800 long distance services, as well as
other telecommunications services such as travel cards (calling cards),
cellular, paging, dedicated access, pre-paid calling cards (debit cards),
International Callback and carrier termination services. USW uses its own
switches and facilities to originate, transport and terminate calls for
customers generally located between Boston, Massachusetts and Norfolk,
Virginia and in California (on-net area). Approximately 85% of the calls
billed by USW each month are processed through USW's own switches. For calls
originating or terminating outside USW's own network (off-net area), USW
utilizes the services provided by other long distance companies.
USW's revenues are derived primarily from the transport of outgoing and
incoming calls which are billed by USW to end-users at specified rates.
Transport costs of these calls are billed to USW from other carriers at
contractual rates. These carriers supply USW with call detail information
which enables USW to bill its customers depending upon USW's individual rates.
The combination of the efficiency of USW's networks and facilities, and the
purchase of long distance services in bulk from other carriers allows USW to
offer competitive rates to small and medium-sized businesses.
USW's principal executive offices are located at 111 Presidential Boulevard,
Suite 114, Bala Cynwyd, Pennsylvania 19004. USW's telephone number at that
location is (610) 660-0100.
Corporate Strategy. USW's objective is to provide its customers with a
comprehensive range of telecommunications services with value-added features
at competitive prices. USW markets through three channels (direct, agent and
reseller) and offers a diversified mix of products and services. USW employs a
direct sales force, and also markets through independent agents. USW offers
individual value-added services to resellers depending on each reseller's
requirements. USW offers competitive wholesale pricing to its resellers which
it expects will lead to significant revenue growth. Net sales revenue
attributable to USW's agents and resellers accounts for approximately 50% of
USW's non-wireless revenue. USW also utilizes numerous carriers allowing for
network redundancy. This allows USW to offer both carrier and specific and
private label services. USW is focused on servicing commercial accounts;
revenue from commercial accounts represented greater than 90% of gross revenue
during 1996.
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Services. USW provides domestic outbound long distance service to and from
anywhere in the United States, international calling services to 245
countries, inbound 800 services, cellular local and long distance services,
regional and national paging services, travel/calling cards, prepaid calling,
dedicated access services, private line networks, international callback, and
carrier termination services.
USW charges its customers based upon minutes of usage, at both flat and
banded rates (price is based on distance of call). In those areas which
provide for equal access (all intra-Local Access Transport Area "LATA") calls
are normally routed through the local exchange carrier), USW offers its
customers "dialers" to access USW's network for intra-LATA calls. The use of
dialers eliminates the need for the customer to dial USW's local access number
and personal authorization code prior to placing the call. USW is a "RESPORG"
(Responsible Organization) for the inbound 800 services its provides to its
customers. This allows USW direct access to the 800 number database allowing
for faster 800 number service. This increases the speed at which USW can
perform such services as blocking and routing changes for its customers'
inbound 800 services.
USW utilizes Bell Atlantic NYNEX Mobile Systems to carry its cellular, local
calls. USW provides its cellular customers with competitive long distance
services provided by its own network. USW's travel cards provides its
customers with an "easy-to-remember" 800 number access to USW's network from
all locations in the United States and Canada, and feature personal
identification numbers ("PINS") which are selected by the individual customer.
USW's prepaid calling card (debit cards) are marketed wholesale primarily to
retail distribution and specialty advertising outlets.
Switch And Network Facilities. USW maintains a digital network on both the
East and West coasts of the United States. USW's East Coast network extends
from Boston, Massachusetts south to Norfolk, Virginia and west to Pittsburgh,
Pennsylvania. USW's switching facilities are located in Philadelphia,
Pennsylvania and Oakland, California. Calls terminating off-net are
transported and terminated for USW on circuits operated by other carriers.
USW's network utilizes SS7 common channel signaling. SS7 signaling increases
network efficiency by reducing call set-up time.
The network is supported by a Digital Switch Corporation DEX400 switch in
Philadelphia and a Digital Switch Corporation DEX600 in Oakland, California
which are used to process customer calls.
Intelligent call processing required by USW's enhanced services products
(calling card and international callback) is provided by an NACT SCX switching
platform. This switching platform provides customized voice prompts and other
enhanced services required by these products. The ability of USW to transport
calls over its company owned switches and leased facilities allows USW to
maximize gross margins and control network quality of service.
USW is continually re-configuring its call processing through the
utilization of least-cost routing software. USW has contracted with numerous
domestic and international transport carriers which allow for the country-
specific least-cost routing and the maintenance of diverse routes.
Marketing. USW markets its services utilizing three sales channels focused
on developing a customer base primarily within the New York City to Washington
DC corridor. USW employs a direct sales force who are paid on a salary plus
commission basis. USW also maintains an independent agent network of more than
187 agents who receive a commission based on monthly billings. USW's reseller
channel is comprised of approximately 12 switchless resellers which contract
for services at a fixed price (buy price). These resellers are permitted to
establish their own retail billing rates, and do not lease or own any
switching equipment, transmission facilities, or billing software. Because of
this, they are dependent on switch-based carriers for products, customer
support services, billing, credit and collection services, as well as other
value-added features such as on-line electronic access to customer account
information, back office support, automatic electronic order entry and account
profitability reporting. USW offers its customers a comprehensive invoice
including extensive management reports to all sales channels. Included in
USW's invoices are more than 20 management reports covering call distribution
studies, time of day analysis, call duration distribution, as well as
individual telephone number call detail records allowing them to quickly
analyze their calling patterns and costs.
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USW's average monthly long distance revenue per retail customer is
approximately $250, which management believes is comparable to the industry
average for revenue generated through an agent sales force. Typically, agents
require ubiquitous product offerings that can be offered to any prospective
customer nationwide, and they focus on high margin small business and
residential accounts where the retail rates and margins sold to a customer
support the agents residual commission.
Coincident to entering the Competitive Local Exchange business in the Mid-
Atlantic states, USW plans to develop a direct sales force to solicit and
secure larger middle market accounts, where the combination of local and long
distance revenue justifies dedicated access. The nature of dedicated access
products, requires a more detailed and focused sales approach by experienced
telecommunications sales professionals who are capable of directing their
efforts to specific market segments in clearly defined geographic territories.
As a result of USW's initiatives in the local area, USW believes that its
agents and certain smaller business accounts will benefit from simple resale
of Bell Atlantic local services, in those instances where the bundling
approach does not justify dedicated T1 connectivity.
Competition. USW views the long distance industry as a three-tiered industry
which is dominated by the nation's three largest long distance providers:
AT&T, MCI Telecommunications Corporation ("MCI") and Sprint Communications
Company, L.P. ("Sprint"). AT&T, MCI and Sprint, collectively generate,
approximately 80% of the nation's long distance revenue (approximately $72
billion) and comprise what is knows as "Tier 1" International Long Distance
Companies. The second tier consists of several other companies with annual
revenues of $250 million to $1.5 billion each. The third tier, which includes
USW, consists of more than 300 companies with annual revenues of less than
$250 million each, the majority below $50 million each.
USW targets small and medium-sized commercial customers. The number of
telecommunications services offered by USW on a consolidated, one-bill basis
serves, to some extent, to distinguish USW from some of its competitors.
Competitive distinctions are made based upon the number of services offered,
the pricing plans, the length of contracts, as well as the billing information
provided. USW currently owns switch capacity, develops and implements its own
billing products, monitors and deploys its transmission facilities and
prepares and designs its own billing and reporting systems.
In addition to direct competition from what USW estimates are several
hundred switchless resellers, USW competes with the sales organizations and
resellers of large telecommunications companies such as MCI and Sprint, which
at any particular time may offer more desirable services or prices than those
offered by USW.
On October 29, 1996, the FCC adopted an order in which it eliminated the
requirement that non-dominant interstate carriers such as USW maintain tariffs
on file with the FCC for domestic interstate interexchange services. The FCC's
order was issued pursuant to authority granted to the FCC in the
Telecommunications Act to "forebear" from regulating any telecommunications
service provider if the FCC determines that the public interest will be
served. Pursuant to the FCC's order, after a transition period, relationships
between carriers and their customers would be set by contract and long
distance companies would no longer be permitted to file with the FCC tariffs
for interstate interexchange services. However, MCI, Sprint and The American
Carriers Telephone Association have separately appealed the FCC's order to the
United States Court of Appeal for the District of Columbia Circuit ("DC
Circuit"). On February 13, 1997, the DC Circuit stayed the FCC's order pending
judicial review. USW may benefit from the elimination of the FCC tariffs by
gaining more flexibility and speed in dealing with the marketplace changes.
However, the absence of tariffs will also require that USW secure contractual
agreements with its customers regarding many of the terms of its existing
tariffs or face possible claims arising because the rights of the parties are
no longer clearly defined.
In spite of AT&T's additional flexibility and the pending interexchange
competition from the RBOCs, USW believes that it continues to provide and sell
telecommunications service to small to medium sized business at competitive
rates. In addition, USW believes that the deregulation of the local exchange
telecom market represents a significant opportunity similar to the opportunity
provided upon the deregulation of AT&T in 1984.
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Employees. As of December 1, 1997 USW had 70 full-time employees working at
two locations. USW is not a party to any organized labor contracts. USW
considers its relationship with its employees to be satisfactory.
Regulatory Matters. USW is a regulated entity at the Federal level with
regard to international traffic and interstate traffic. USW has received
Section 214 authorization to resell international switched services and has
filed an FCC tariff for its domestic interstate services.
State regulatory requirements vary from state to state. USW has obtained
certification in all states which require certification in order to provide
long distance services, with the exception of two (2) states in which
certifications are pending (Connecticut and Oklahoma). Some states place
statutory restrictions on the operations of "telecommunications service
resellers" as that term is defined in these states. Some states require
telecommunications service resellers to file and operate in accordance with
service and rate "tariffs." Changes in existing regulations or their
interpretation in any state could classify USW as a "telecommunications
service reseller" and subject it to regulation. Such regulation could result
in an increase in customers' usage charges and, in some cases, could limit or
eliminate USW's ability to service customers in that jurisdiction. USW would
incur, among other expenses, certain administrative costs and legal fees in
contesting or complying with such regulatory changes that would increase USW's
cost of doing business.
The providers of local exchange telecommunications services to USW are also
heavily regulated at the Federal level and in the states in which they
operate. Changes in existing regulations or their interpretation affecting
these providers could materially adversely affect their business or even
prevent them from offering telecommunications services to their customers,
including USW, on favorable terms.
In addition, certain services offered by USW which are not presently
regulated in all states may become regulated. Such regulation could delay the
deployment of products and/or services and would increase certain
administrative costs and legal fees in contesting or complying with such
regulations. The FCC has granted applications by companies seeking to provide
international callback (also known as "call reorganization" services) to those
countries where the practice is legal under local law. The FCC has taken the
view that call reorigination services create an incentive to lower foreign
collection rates to the benefit of U.S. ratepayers and serve FCC's general
policies favoring resale and increased competition in the international
marketplace, although the FCC has consistently expressed its support for call
reorigination services enacted by foreign countries. In response to the input
of certain foreign countries in rule making proceedings, the FCC has
acknowledged that foreign countries face unusual difficulties in implementing
prohibitions on call reorigination but has stated that such countries continue
to bear the principal responsibility for enforcing their domestic laws.
However, the FCC has stated that, as a matter of international comity the FCC
will prohibit U.S. authorized carriers from providing call reorigination in
countries where it is expressly prohibited. The FCC established a variety of
requirements that a foreign country must meet before the FCC will consider
assisting a foreign government in enforcing its domestic ban. There can be no
assurance that the FCC will not enforce such a ban.
The business of USW is also affected by the 1996 Act and the FCC's
Interconnection Orders, Access Charge Reform Order, Universal Service Order
and the other regulatory developments described under "Information Concerning
ACC--Regulation--United States."
Telecommunication Fraud. USW is subject to attempts by outsiders to gain
access to USW's telecommunications network. Such attempts can take the form of
the theft of calling cards, and the cloning of cellular phones. Breaches of
security can also involve improper use of 800 telephone numbers and customer
PBX equipment. USW monitors the use of its network through certain fraud
detection devices and believes that its procedures are satisfactory. Due to
the highly technical nature of the business, complete assurance that
sufficient controls are in place to prevent a material loss is not possible,
however, USW does not believe that it has been subject to material
telecommunications fraud.
Properties. USW currently leases approximately 18,000 square feet in three
buildings at a monthly cost of approximately $29,000. Its executive offices
and headquarters at 111 Presidential Boulevard in Bala Cynwyd,
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Pennsylvania is leased for a term of five years expiring in 1998. USW's leased
switch space in Philadelphia, Pennsylvania expires in 2003. USW's leased
switch space in Oakland, California expires in 2000. USW considers its space
to be adequate for its current needs.
Legal Proceedings. USW is party, in the ordinary course of business, to
litigation involving services rendered, contract claims and other
miscellaneous causes of actions arising from its business. Management of USW
does not consider that any such matters will materially affect USW's financial
condition or results of operations.
On June 13, 1997, Mark Scully, the former President and Chief Operating
Officer of the Company, filed a complaint against the Company, Kevin O'Hare,
Aaron Brown and Stephen Parker in the United States District Court for the
Eastern District of Pennsylvania. Mr. Scully asserts various claims in
connection with his termination of employment with the Company on December 30,
1996. In particular, he alleges, among other things, breach of contract in
connection with the termination of certain stock options, breach of the
alleged contract for employment, violation of Pennsylvania's Wage Payment
Laws, breach of an asserted duty of good faith and fair dealing, fraudulent
and negligent misrepresentation, promissory estoppel and civil conspiracy. Mr.
Scully alleges damages of at least $1.6 million, plus attorneys' fees, costs
and other disbursements and the cost of COBRA payments and interest; $1
million of the alleged damages claimed are punitive. The Company contest the
allegations of the complaint and intends to vigorously defend against the
action. Management cannot presently predict the outcome of this suit,
accordingly no adjustment has been recorded in the Financial Statements.
USW MANAGEMENT
Directors and Executive Officers. The USW directors and executive officers
and their ages, as of December 1, 1997, are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Stephen J. Parker 59 President, Chief Executive Officer and Director
Aaron R. Brown 44 Chairman of the Board
Murray Goldberg 53 Director
David B. Hurwitz 34 Executive Vice President of Sales and Marketing
Arthur Regan 34 Secretary and Director
</TABLE>
Stephen J. Parker has served as President and Chief Executive Officer of USW
since October 1, 1997. Prior to that time, Mr. Parker served as Chairman of
the Board of Directors of USW from May 1995 until November 1997. Mr. Parker
has also served as Executive Vice President of USW from March 1990 until May
24, 1995. He was employed part-time by USW from October 1989 until March 1990.
Prior to his employment with USW, and in August 1989, Mr. Parker and Mr. Brown
founded Parker Brown, Inc. ("PBI"), a broker-dealer that became licensed with
the NASD in November 1990. PBI did not conduct any business, and Mr. Parker
sold his interest in PBI in September 1991. Mr. Parker co-founded Parker Brown
Partners ("PBP") in August 1989. PBP was organized to operate as a branch
office of Morgan Gladstone, a registered broker-dealer, and to provide
investment banking and consulting services to start-up and development stage
businesses. PBP operated as a branch office of Morgan Gladstone until April
1990. Mr. Parker is a former stockbroker, and in addition to his association
with PBI and Morgan Gladstone, he was employed as a stockbroker with Princeton
Financial, and with Profile Investments, both in Philadelphia, during 1989.
Mr. Parker holds a Ph.D. from Ohio University.
Aaron R. Brown has been a director of USW since May 1995 and was named
Chairman of the Board of Directors of USW on November 26, 1997. Mr. Brown
served as Chairman of the Board and President of USW from its inception until
May 1995 and as Chief Executive Officer from inception until December 16,
1996. Prior to his employment with USW, and in August 1989, Mr. Brown co-
founded PBI. PBI did not conduct any business, and Mr. Brown sold his interest
in PBI in September 1991. Mr. Brown also co-founded PBP in August
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1989. PBP was organized to operate as a branch office of Morgan Gladstone, a
registered broker-dealer, and to provide investment banking and consulting
services to start-up and development stage businesses. PBP operated as a
branch office of Morgan Gladstone until April 1990. Mr. Brown was Vice
President of Finance for United Environmental Services, an asbestos removal
firm in Philadelphia, in 1988. Mr. Brown is a Certified Public Accountant.
Murray Goldberg has been a director of USW since November 1996. Mr. Goldberg
has been an independent sales agent of USW since 1993, and is also currently
employed as a sales agent for MEG Associates. Mr. Goldberg is also the owner
and a Vice-President of Jamco, Inc., a discount shoe distributor in Florida
and the owner and director of Doxs, Inc., an anaesthesia equipment developer
and distributor. Prior to January 1993, Mr. Goldberg worked as an
anesthesiologist at Paoli Memorial Hospital. In addition, from June 1994 until
May 1996, Mr. Goldberg was an owner of Strathmore Bagel Franchise Company.
David B. Hurwitz has been Executive Vice President of Sales and Marketing
since December 1996. He served from 1995 to 1996 as the Vice President of
Sales and Marketing of Commonwealth Long Distance, a C-TEC company. Prior to
the position with Commonwealth, he served as Executive Vice President and
Chief Operating Officer of InterNet Communications Services, Inc. and as
General Manager of FiberNet from 1992 to 1995. Both InterNet and FiberNet are
affiliated with one another. From 1985 to 1992, Mr. Hurwitz held sales and
sales management positions with RCI Long Distance, a subsidiary of Rochester
Telephone Corp. (now Frontier Corporation).
Arthur Regan has been a director of USW since August 1997. Mr. Regan is
currently President of Regan & Associates, Inc., a proxy
solicitation/shareholder services firm in New York, New York that has been a
vendor of USW since 1993. Mr. Regan also is the Chairman, President and Chief
Executive Officer of RD's Place, Inc., a messenger/courier company located in
Jersey City, New Jersey. Mr. Regan was previously a Director and President of
David Francis & Co., Inc., a proxy solicitation/shareholder services firm,
from 1988 through 1991.
Compensation of Directors. Directors who also serve as salaried employees of
USW do not receive any additional compensation for their services as
directors.
During 1996, no compensation was paid to non-employee directors of USW for
their services as directors. Beginning in 1997, non-employee directors are
entitled to receive $1,000 for each Board meeting attended in person, and $500
for participation in each Board meeting conducted by telephone conference
call. In addition, USW granted to each non-employee director options to
purchase 20,000 shares of USW Common Stock for his services as a director
during 1997. These grants consist of options to purchase 20,000 shares of USW
Common Stock at $1.43 per share granted to Mr. Sugarman, a former director,
and options to purchase 20,000 shares of USW Common Stock at $1.69 per share
granted to Mr. Regan.
Executive Compensation. The following table shows for the year ended
December 31, 1994, 1995 and 1996, certain compensation paid or accrued by USW
for services by Named Executive Officers as defined in Item 402(a)(3) of
Regulation S-K promulgated under the 1933 Act (the "Executive Officers") for
the years indicated. For information about the employment status of the
Executive Officers and the current Executive Officers of USW, see the notes to
this Summary Compensation Table.
80
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------ ---------------------- -------------------
OTHER RESTRICTED COMMON
ANNUAL STOCK STOCK LTIP
NAME AND PRINCIPAL SALARY BONUS COMP. AWARDS UNDERLYING PAYOUTS ALL OTHER
POSITION YEAR ($) ($) ($)(1) ($) OPTIONS (#) ($) COMP.($)(2)
------------------ ---- ------- ------ ------ ---------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen J. Parker....... 1996 165,000 -- -- -- -- -- 2,065
President and Chief 1995 160,000 -- -- -- 600,000(3) -- 4,332
Executive Officer 1994 149,063 -- -- -- -- -- 3,098
Aaron R. Brown.......... 1996 165,000 -- -- -- -- -- 1,116
Former Chief Executive 1995 160,000 -- -- -- 600,000(3) -- 1,932
Officer(4) 1994 149,063 -- -- -- -- -- 1,070
Kevin M. O'Hare.........
Former President and 1996 8,333 -- -- -- 1,100,000(5) -- --
Chief Executive 1995 N/A N/A N/A N/A N/A N/A N/A
Officer(5) 1994 N/A N/A N/A N/A N/A N/A N/A
Mark Scully............. 1996 150,000 -- -- -- -- -- --
Former President(6) 1995 100,000 -- -- N/A 850,000(7) -- --
1994 N/A N/A N/A N/A 150,000(8) N/A N/A
Ward G. Schultz......... 1996 121,666 -- -- -- -- -- --
Former Chief Financial 1995 94,000 37,500(10) -- -- 100,000 -- --
Officer(9) 1994 75,301 -- -- -- 200,000 -- --
</TABLE>
- --------
(1) For 1994, 1995 and 1996 the aggregate amount of such Other Annual
Compensation for each Executive Officer is not reportable under SEC rules
because such amount is neither $50,000 nor 10% of the total salary and
bonus for such Executive Officer.
(2) Includes amounts paid for life insurance of the Executive Officer where
USW is not the beneficiary of the policy.
(3) On May 11, 1995, USW agreed to issue each of Messrs. Brown and Parker
warrants to purchase 600,000 shares of USW's Common Stock in
consideration for their limited personal guarantees provided in
connection with USW's revolving credit facility. The warrants were issued
after the rescission of a transaction consisting of a stock grant and
option cancellation described under "Certain Relationships and Related
Transactions."
(4) Mr. Brown resigned his positions with USW as Chief Executive Officer and
Treasurer effective December 16, 1996, but remained a Director of USW at
the end of fiscal 1996.
(5) Mr. O'Hare became President and Chief Executive Officer of USW on
December 16, 1996. Mr. O'Hare resigned from these positions as of
September 30, 1997. Mr. O'Hare's options to purchase 1,000,000 shares of
USW Common Stock terminated upon his termination of employment.
(6) USW terminated Mr. Scully's employment as President of USW on December
30, 1996.
(7) Mr. Scully's options to purchase 850,000 shares of USW Common Stock were
cancelled upon his termination as President on December 30, 1996. Mr.
Scully has instituted litigation against USW and Messrs. O'Hare, Brown
and Parker in connection with his termination.
(8) Represents options to purchase 150,000 shares of USW's Common Stock
granted outside of any benefit plan to Olney Telecom, Inc. on December
12, 1994, as compensation for its services as an independent contractor.
Mr. Scully, the sole owner of Olney Telecom, may be deemed to be the
beneficial owner of such options and underlying shares.
(9) USW terminated Mr. Schultz's employment as Chief Financial Officer of USW
on February 27, 1997. Mr. Schultz's options to purchase 300,000 shares of
USW Common Stock were cancelled upon his termination as Chief Financial
Officer on February 27, 1997.
81
<PAGE>
(10) Represents the fair market value on April 27, 1995, $.75 per share of
50,000 shares of USW's Common Stock awarded to Mr. Schultz as
compensation for his services an Executive Officer of USW.
The following table summarizes the number of options granted to Executive
Officers during the year ended December 31, 1996. USW did not grant any stock
appreciation rights in 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF SHARES % OF TOTAL ANNUAL RATES OF STOCK
OF COMMON STOCK OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED IN EXERCISE PRICE EXPIRATION FOR
NAME OPTIONS GRANTED FISCAL YEAR(1) $/SHARE DATE OPTION TERM(2)
---- ---------------- -------------- -------------- ---------- ---------------------
5% 10%
---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Kevin M. O'Hare......... 600,000(3) 29% $1.03125 12/16/01 $170,949 $377,753
125,000(4) 6% $1.50000 12/16/01 $ 5,146 $ 48,230
125,000(4) 6% $2.00000 12/16/01 $ 0 $ 0
125,000(4) 6% $2.50000 12/16/01 $ 0 $ 0
125,000(4) 6% $3.00000 12/16/01 $ 0 $ 0
Aaron R. Brown.......... -- -- -- -- -- --
Stephen J. Parker....... -- -- -- -- -- --
Mark Scully............. -- -- -- -- -- --
Ward G. Schultz......... -- -- -- -- -- --
</TABLE>
- --------
(1) Based upon options to purchase a total of 2,045,000 shares granted to all
officers and employees of USW in 1996 under its Amended and Restated Stock
Option Plan or its predecessor plans.
(2) These amounts represent hypothetical gains that could be achieved for the
respective stock options if exercised at the end of the option term. These
gains are based on assumed rates of stock appreciation of 5% and 10%
compounded annually from the date the respective option were granted to
their expiration date.
(3) Of the options to purchase 600,000 shares of USW Common Stock granted to
Mr. O'Hare on December 16, 1996, options to purchase 300,000 shares were
immediately exercisable and options to purchase 150,000 were to become
exercisable on the second and third anniversary of the grant date. Mr.
O'Hare's options to purchase 500,000 of the foregoing shares terminated
upon his termination of employment.
(4) Options to purchase a total of 500,000 shares of USW Common Stock were
granted to Mr. O'Hare that will vest upon the attainment of certain
performance criteria. Each 125,000 share increment underlying the option
becomes exercisable, or vests, provided the average of the closing bid and
asked prices of the Common Stock equals or exceeds $1.50, $2.00, $2.50 and
$3.00 per share, respectively, for at least thirty (30) consecutive
trading days within the period ending on the third anniversary of the date
of grant. In the event that the option shall have so vested, the per share
exercise price shall equal the product of (i) the arithmetic mean of the
closing bid and asked prices of the Common Stock for such thirty (30) day
period, and (ii) 85%. On January 10, 1997, these options were replaced
with a grant of 500,000 options with an exercise price of $1.30. Mr.
O'Hare's options to purchase the foregoing shares terminated upon his
termination of employment.
82
<PAGE>
The following table summarizes the number and value of unexercised options
held by the Executive Officers as of December 31, 1996. No Executive Officer
exercised any options in 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON
STOCK UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS OR IN-THE-MONEY OPTIONS AT
SHARES WARRANTS AT FISCAL YEAR-END FISCAL YEAR-END(1)
ACQUIRED ON VALUE --------------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kevin M. O'Hare......... 0 N/A 300,000(2) 800,000(3) $ 65,625 $65,625
Aaron R. Brown(4)....... 0 N/A 780,000(5) 120,000(6) 112,500 0
Stephen J. Parker(4).... 0 N/A 780,000(5) 120,000(6) 112,500 0
Mark Scully(7).......... 0 N/A 150,000(8) 0 37,500 0
Ward G. Schultz......... 0 N/A 130,000(9) 170,000(10) 5,000 20,000
</TABLE>
- --------
(1) Based upon a market price for the USW Common Stock of $1.25 per share.
(2) Represents options to purchase USW Common Stock issued to Mr. O'Hare on
December 16, 1996 under the Amended and Restated Stock Option Plan at a
price of $1.03125 per share, which vested immediately. Mr. O'Hare's
options to purchase 200,000 of the foregoing shares terminated upon his
termination of employment.
(3) Includes 300,000 options issued to Mr. O'Hare on December 16, 1996 under
the Amended and Restated Stock Option Plan, at a price of $1.03125 per
share, 125,000 of which will each vest in 1997 and 1998, respectively,
and 500,000 options issued to Mr. O'Hare under the same plan which will
vest in 125,000 share increments in accordance with certain stock price
performance criteria described in footnote 3 to the Option Grant table,
above. Mr. O'Hare's options to purchase the foregoing 800,000 shares
terminated upon his termination of employment.
(4) Options to purchase 300,000 shares of USW Common Stock issued on
September 1, 1993 to each of Messrs. Brown and Parker that vested upon
the attainment of certain performance goals were terminated on December
16, 1996, the date Messrs. Brown and Parker resigned certain executive
positions with USW.
(5) Includes options to purchase 180,000 shares of USW Common Stock issued on
September 1, 1993 under the 1993 Executive Stock Option Plan (the
"Executive Plan"), now consolidated with the Employee Compensation Stock
Option Plan in the Amended and Restated Stock Option Plan) at an exercise
price of $1.375 per share and warrants to purchase 600,000 shares of
USW's Company Stock issued on May 11, 1995 at $1.0625 per share (See
"Certain Relationships and Related Transactions").
(6) Represents options to purchase 120,000 shares of USW Common Stock issued
on September 1, 1993 under the Executive Plan at a price of $1.375 per
share.
(7) Options to purchase 850,000 shares of Common Stock granted under the
Executive Plan on May 1, 1995 with an exercise price of $.75 per share
were terminated upon Mr. Scully's termination on December 30, 1996.
(8) Represents options to purchase 150,000 shares of Common Stock granted to
Olney Telecom, Inc., a company of which Mr. Scully is the sole owner,
outside of any formal benefit plan as compensation for its services on
December 19, 1994 at an exercise price of $1.00 per share.
(9) Includes options to purchase 50,000 shares of Common Stock granted under
the 1992 Employee Compensation Stock Option Plan on August 5, 1994 at an
exercise price of $1.53 per share, options to purchase 60,000 shares of
Common Stock granted under the Executive Plan on August 5, 1994 at an
exercise price of $1.53 per share and options to purchase 20,000 shares
of Common Stock granted under the Executive Plan on April 27, 1995 at an
exercise plan on April 27, 1995 at an exercise price of $1.00 per share.
Mr. Shultz's options to purchase the foregoing shares terminated upon his
termination of employment.
(10) Includes options to purchase 90,000 shares of Common Stock granted under
the Executive Plan on August 5, 1994 at an exercise price of $1.53 per
share and options to purchase 80,000 shares of Common Stock granted under
the Executive Plan on April 27, 1995 at an exercise price of $1.00 per
share. Mr. Shultz's options to purchase the foregoing shares terminated
upon his termination of employment.
83
<PAGE>
Employment Agreements. Mr. Parker has a seven year Employment Agreement with
USW terminating December 31, 2000, which is automatically renewable for an
additional five years unless either party provides written notice of non-
renewal no later than thirty (30) days prior to the expiration of the initial
term. The contract provides for an annual base salary of not less than
$165,000 subject to annual cost of living increases as measured by the growth
in the Consumer Price Index--Urban Consumer, All Items, U.S. Cities' Average.
Upon the death of Mr. Parker, USW is obligated to pay his beneficiary his
annual salary in effect at the time of his death for the remainder of the term
of the agreement. Mr. Parker's Employment Agreement provides that Mr. Parker
may not be terminated by USW except for the conviction of a felony.
Mr. Brown had an Employment Agreement that was substantially similar to the
Employment Agreement USW has with Mr. Parker, described above. Effective
January 14, 1997, Mr. Brown released USW from its obligations under the
Agreement. On January 14, 1997, Mr. Brown entered into a Consulting Agreement
with USW. The Consulting Agreement, which is for a term of six years with an
automatic extension of one year unless a party gives thirty-days written
notice of its intent not to renew, provides that Mr. Brown will be compensated
at a rate of $125,000 annually, to be increased each year in accordance with
the Consumer Price Index.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 1, 1997 information
concerning the shares of USW's Common Stock beneficially owned by: (i) each
person or group known to USW to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock; (ii) each director; (iii) each Executive
Officer; and (iv) all directors and executive officers as a group. Except as
otherwise indicated, each person named or included in a group has sole voting
and investment power with respect to his or its shares of Common Stock. USW
also has outstanding 30,000 shares of USW Preferred Stock. For purposes of
this table, it has been assumed that the outstanding shares of USW Preferred
Stock have been converted into 300,000 shares of USW Common Stock in
accordance with its terms as of December 1, 1997. To USW's knowledge, no
Executive Officer or Director of USW owns any shares of USW Preferred Stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE
OWNER OR IDENTITY OF GROUP OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------------ ----------------------- ----------------
<S> <C> <C>
Stephen J. Parker...................... 2,990,000(1) 16.22%
111 Presidential Boulevard--Suite 114
Bala Cynwyd, PA 19004
Aaron R. Brown......................... 2,640,000(2) 14.32%
111 Presidential Boulevard--Suite 114
Bala Cynwyd, PA 19004
Murray Goldberg........................ 2,270,000(3) 12.88%
26 Anthony Drive
Malvern, PA 19355
Arthur Regan........................... 32,000(4) *
15 Park Row
New York, NY 10038
Tel-Save Holdings, Inc................. 2,367,725(5) 13.43%
6805 Route 202
New Hope, Pa. 18938
Gold & Appel Transfer, S.A. ........... 1,909,500(6) 10.83%
Omar Hodge Building
Wickhams Cay, Road Town
Tortola, British Virgin Islands
All Directors and executive officers... 8,311,000 42.23%
as a group (5 persons)
</TABLE>
84
<PAGE>
- --------
* Indicates less than 1%
(1) Includes 2,181,000 shares of USW Common Stock owned by Mr. Parker which
are subject to a Shareholder Tender Agreement. Pursuant to the Shareholder
Tender Agreement, Mr. Parker granted a proxy to ACC to vote his shares in
favor of the Merger. See "The USW Special Meeting--Shareholder Tender
Agreements". Also includes warrants to purchase 569,000 shares of USW
Common Stock at an exercise price of $1.0625 per share and options to
purchase 240,000 shares of USW Common Stock at an exercise price of $1.375
per share.
(2) Includes 1,831,000 shares of USW Common Stock owned by Mr. Brown which are
subject to a Shareholder Tender Agreement. Pursuant to the Shareholder
Tender Agreement, Mr. Brown granted a proxy to ACC to vote his shares in
favor of the Merger. See "The USW Special Meeting--Shareholder Tender
Agreements"). Also includes warrants to purchase 569,000 shares of USW
Common Stock at an exercise price of $1.0625 per share and options to
purchase 240,000 shares of USW Common Stock at an exercise price of $1.375
per share.
(3) Includes 2,270,000 shares of USW Common Stock owned by Mr. Goldberg which
are subject to a Shareholder Tender Agreement. Pursuant to the Shareholder
Tender Agreement, Mr. Goldberg granted a proxy to ACC to vote his shares
in favor of the Merger. See "The USW Special Meeting--Shareholder Tender
Agreements."
(4) Includes 12,000 shares of USW Common Stock and options to purchase 20,000
shares of USW Common Stock at an exercise price of $1.69 per share.
(5) As reported on Schedule 13D, under the 1934 Act, filed by Tel-Save
Holdings, Inc.
(6) As reported on Schedule 13D, under the 1934 Act, filed by Gold & Appel
Transfer, S.A.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Loan Guarantees. On May 11, 1995, USW entered into a Loan and Security
Agreement with Century Business Credit Corporation ("Century") for a revolving
credit facility of $2,000,000. On April 27, 1995, USW issued 500,000 shares of
restricted Common Stock to each of Aaron R. Brown and Stephen J. Parker in
consideration for their limited personal guarantee given to Century equal to
25% of the indebtedness incurred with Century. In connection with this
transaction Brown and Parker also terminated 420,000 stock options. After
review of the transaction by a Special Committee appointed by the Board of
Directors, the issuance of the restricted stock and the cancellation of
options were rescinded. In their place, USW issued to each of Messrs. Brown
and Parker warrants to purchase 600,000 shares of USW Common Stock in
consideration for the limited personal guarantees given by each in connection
with the credit facility. Each warrant issued in the transaction entities the
holder to purchase shares of USW Common Stock at price of $1.0625 per share
until May 11, 2000. The warrants are non-transferable by the officers and the
stock issuable upon exercise of the warrants is restricted stock under the
federal securities laws.
Indemnification Arrangements. USW is a party to indemnification agreements
with two of its directors, Aaron R. Brown and Stephen J. Parker, dated August
1990. In addition, USW has entered into an indemnification agreement with
Kevin O'Hare, a former executive officer of USW, dated July, 1997. In general,
the indemnification agreements obligate USW to indemnify each of Messrs.
Brown, Parker and O'Hare against the liabilities and expenses incurred by them
in acting as a director or officer of USW to the maximum extent allowed by
law. USW, together with Messrs. Parker, Brown and O'Hare, have been sued by
USW's former president for various claims asserted by the plaintiff in
connection with his termination of employment with USW on December 30, 1996.
USW and the individual defendants have selected counsel to defend the action.
The Board of Directors of USW has authorized USW to advance the expenses of
the individual defendants incurred in defending this action upon the receipt
of an undertaking from each of them to repay the amounts so advanced in the
event it is determined that they are not entitled to indemnification under
applicable law.
85
<PAGE>
Sales Agency. Mr. Goldberg acts as a sub-agent for USW and is the co-owner
of a company that acts as an agent for USW in the sale of USW's products and
services. During 1996, USW paid Mr. Goldberg and such company a total of
$224,467 in commissions for their services as USW's sales agents.
Loans. During the first quarter of 1996, USW borrowed $100,000 from each of
Aaron R. Brown and Stephen J. Parker, directors of USW. During 1996, USW
repaid the entire outstanding balance of the loans to Messrs. Brown and Parker
with interest.
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION COMPENSATION
During the year ended December 31, 1996, Messrs. Brown, Parker and Goldberg
participated in deliberations of USW's Board of Directors concerning Executive
Officer compensation. Messrs. Brown, and Parker served as Executive Officers
during fiscal 1996. USW did not have a Compensation Committee in 1996.
USW SELECTED FINANCIAL DATA
The following selected financial data presented below as of December 31,
1996, 1995, 1994, 1993 and 1992 and for each of the five year periods ended
December 31, 1996, are derived from USW's consolidated financial statements
which are included in this Proxy Statement/Prospectus. The unaudited financial
data as of September 30, 1997 and for the nine months ended September 30, 1997
and 1996 have been prepared on a basis consistent with the audited
consolidated financial statements and, in the opinion of management of USW,
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial condition and results of operations
for the periods presented. The following information should be read in
connection with, and is qualified in its entirety by, the Consolidated
Financial Statements of USW and related notes and "USW Management's Discussion
and Analysis of Financial Condition and Results of Operations," which are
included elsewhere in this Proxy Statement/Prospectus and incorporated by
reference herein.
86
<PAGE>
USW SELECTED CONSOLIDATED FINANCIAL AND OPERATIONS DATA
<TABLE>
<CAPTION>
ACTUAL
------------------------
NINE MONTHS NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED
------------------------------------------------------------ SEPT. 30, SEPT. 30,
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ 10,447 $ 20,521 $ 23,633 $ 27,755 $ 40,304 $ 28,576 $ 43,303
Network costs(1)........ 7,326 14,009 14,707 15,918 26,802 18,813 31,720
---------- ---------- ---------- ---------- ---------- ----------- -----------
Gross Profit............ 3,121 6,512 8,926 11,837 13,502 9,763 11,583
Other operating
expenses:
Depreciation and
amortization.......... 85 215 505 770 930 679 756
Selling, general and
administrative........ 2,761 5,799 9,695 11,021(2) 12,266 8,479 11,873
Assets write-down...... -- -- -- 305(3) -- -- --
---------- ---------- ---------- ---------- ---------- ----------- -----------
Total other operating
expenses............ 2,846 6,014 10,200 12,096 13,196 9,158 12,629
---------- ---------- ---------- ---------- ---------- ----------- -----------
Income (loss) from
operations............. 275 498 (1,274) (259) 306 605 (1,046)
Other Interest income... 2 9 13 70 63 41 52
Interest expense....... (12) (16) -- (89) (273) (202) (251)
---------- ---------- ---------- ---------- ---------- ----------- -----------
Total other income
(expense)........... (10) (7) 13 (19) (210) (161) (199)
---------- ---------- ---------- ---------- ---------- ----------- -----------
Income (loss) before
provision for (benefit
from) income taxes..... 265 491 (1,261) (278) 96 444 (1,245)
Provision for (benefit
from) income taxes..... 104 67 (14) -- 7 -- --
---------- ---------- ---------- ---------- ---------- ----------- -----------
Income (loss)........... 161 424 (1,247) (278) 89 444 (1,245)
Extraordinary Item
Utilization of
operating loss
carryforward.......... 77 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------- -----------
Net income (loss)....... 238 424 (1,247) (278) 89 444 (1,245)
Less Preferred dividend
earned................. -- (45) (118) (67) (27) (20) (20)
---------- ---------- ---------- ---------- ---------- ----------- -----------
Net income (loss)
applicable to Common
Stock.................. $ 238 $ 379 $ (1,365) $ (345) $ 62 $ 424 $ (1,265)
========== ========== ========== ========== ========== =========== ===========
Net income (loss) per
common and common
equivalent share
applicable to common
stock from continuing
operations............. $ 0.01 $ 0.03 $ (0.09) $ (0.02) $ 0.00 $ 0.03 $ (0.08)
Extraordinary Item...... 0.01 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------- -----------
Net income (loss) per
common and common
equivalent share....... $ 0.02 $ 0.03 $ (0.09) $ (0.02) $ 0.00 $ 0.03 $ (0.08)
========== ========== ========== ========== ========== =========== ===========
Weighted average number
of common shares....... 13,728,874 14,492,814 14,875,584 15,100,400 15,877,900 15,870,299 15,927,170
========== ========== ========== ========== ========== =========== ===========
OTHER FINANCIAL AND
OPERATIONS DATA:
Net cash provided by
(used in) operating
activities............. $ (76) $ 901 $ 1,453 $ (269) $ 1,786 $ 356 $ (1,243)
Common Stock cash
dividends declared..... -- -- -- -- -- -- --
Cash dividends declared
per share of Common
Stock.................. -- -- -- -- -- -- --
Book Value per common
share (unaudited)(4)... $ 0.05 $ 0.07 $(0.00) $ 0.05 $ 0.05 $ 0.08 $ (0.02)
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents............ $ 545 $ 842 $ 629 $ 681 $ 1,455 $ 1,330 $ 750
Current assets.......... $4,056 $5,795 $ 6,239 $ 5,688 $ 8,106 $ 8,164 $10,786
Current liabilities..... $3,810 $5,688 $ 8,336 $77,849 $10,321 $ 9,682 $13,809
Net working capital
(deficit).............. $ 246 $ 107 $(2,097) $(2,161) $(2,215) $(1,518) $(3,023)
Property, plant and
equipment, net......... $ 300 $1,913 $ 3,087 $ 3,491 $ 3,600 $ 3,312 $ 3,248
Total assets............ $4,439 $8,266 $ 9,553 $99,500 $11,992 $11,760 $14,246
Short-term debt,
including current
maturities of long term
debt................... $ 300 -- $ 127 $11,306 $ 1,391 $ 1,885 $ 2,319
Long-term debt,
excluding current
maturities............. -- -- -- $ 601 $ 509 $ 552 $ 449
Redeemable preferred
stock.................. -- $1,500 $ 1,300 $ 300 $ 300 $ 300 $ 330
Common shareholders'
equity................. $ 629 $1,078 $ (83) $ 751 $ 862 $ 1,225 $ (342)
</TABLE>
- -------
NOTE: Book Value per common share = common shareholders' equity/common shares
outstanding at end of period.
(1) Fiscal 1995 includes a reduction of network costs of $2,880,000 in
connection with the settlement in favor of USW of litigation with
Colonial Penn. Offsetting this amount is the related award to AT&T for
$669,000. Fiscal 1994 includes a reduction of network costs of $783,000
in connection with the reversal of an account payable due to a former
vendor.
(2) Includes litigation fees related to Colonial Penn and AT&T litigation in
the amount of $850,000.
(3) Amount represents the write-off of $305,000 of telecommunications
equipment used to carry traffic on the AT&T network, or that was deemed
obsolete.
(4) Represents common shareholders' equity divided by the number of common
shares outstanding at the end of the period.
88
<PAGE>
USW MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
"USW Selected Financial Data" and USW's Consolidated Financial Statements and
Notes thereto included or incorporated by reference herein. Except for the
historical information contained herein, the discussion in this Proxy
Statement/Prospectus contains certain forward-looking statements that involve
risks and uncertainties, such as statements of USW's plans, objectives,
expectations and intentions. USW's actual results could differ materially from
those discussed here.
General. USW is a switch-based interexchange carrier providing long distance
telephone communications services primarily to small and medium-sized business
customers. USW also provides inbound-800 long distance services, as well as
other telecommunications services such as travel cards (calling card),
cellular, paging, dedicated access, pre-paid calling cards (debit cards),
international callback and carrier termination services. USW uses its own
switches and facilities to originate, transport and terminate calls for
customers generally located between Boston, Massachusetts and Norfolk,
Virginia and in California (on-net area). Approximately 85% of the calls
billed by USW each month are processed through USW's own switches. For calls
originating or terminating outside USW's own network (off-net area), USW
utilizes the services provided by other long distance companies.
USW's revenues are derived primarily from the transport of outgoing and
incoming calls which are billed by USW to end-users at specified rates.
Transport costs of these calls are billed to USW from other carriers at
contractual rates. These carriers supply USW with call details information
which enables USW to bill its customers depending upon USW's individual rates.
The combination of the efficiency of USW's networks and facilities, and the
purchase of long distance services in bulk from other carriers allow USW to
offer competitive rates to small and medium-sized businesses.
Results of Operations.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
USW's total revenue for the nine months ended September 30, 1997 increased
approximately $14,727,000 over the nine months ended September 30, 1996 or
51.5%. This increase was primarily due to an increase in revenue through the
carrier and agent sales channels of approximately $7,378,000 (166%) and
$5,988,000 (46%), respectively. USW's revenue through switchless resale also
increased approximately $2,108,000 or 123%. The increase in these sales
channels was somewhat offset by a decrease in revenue obtained through the
direct sales channels which declined by approximately $1,157,000 (24%).
USW's gross profit for the nine months ended September 30, 1997 increased
approximately $1,820,000 over the nine months ended September 30, 1996 or
18.6%. However, USW's gross profit margin declined from 34.2% for the nine
months ended September 30, 1996 to 26.7% for the nine months ended September
30, 1997. The decrease in gross profit margin is primarily attributable to the
substantial increase in carrier revenue, which increased from approximately
15% of overall revenue as of the nine months ended September 30, 1996 to
approximately 27% of overall revenue in the nine months ended September 30,
1997. Carrier revenue generates a much lower margin than retail products, but
is a necessary component of utilizing network facilities.
Selling, General and Administrative ("SG&A") expenses for the nine months
ended September 30, 1997 were approximately $3,471,000 higher than the amount
incurred for the nine months ended September 30, 1996. SG&A expenses for the
nine months ended September 30, 1997 were 29.2% of revenue, whereas SG&A for
the nine months ended September 30, 1996 was 32.0%. This decline is a result
of a decrease in salary expense as a percentage of revenue from 8.0% for the
nine months ended September 30, 1996 to 6.3% for the nine months ended
September 30, 1997. Also, decreases occurred in other miscellaneous SG&A
expenses as a percentage of revenue from 7.7% for the nine months ended
September 30, 1996 to 6.3% for the nine months ended September 30, 1997.
89
<PAGE>
SG&A expenses for the nine months ended September 30, 1997 increased
approximately $3,471,000 or 37.9% over the amount for the nine months ended
September 30, 1996. Of this increase, approximately
$2,100,000 was attributable to higher commission expense, $448,000 to higher
salary expense, $187,000 to higher bad debt expense and $501,000 to other
miscellaneous SG&A expenses. The increases in commission, bad debt, salary and
other miscellaneous expenses are primarily a result of USW's higher revenue.
USW recorded a net loss before preferred dividends for the nine months ended
September 30, 1997 of approximately $1,245,000 versus net income of
approximately $445,000 for the nine months ended September 30, 1996, a
decrease of approximately $1,690,000. The higher net income reported in 1996
resulted from revenue generated through a different mix of sales channels
producing higher margins. The decline in operating results in 1997 is
substantially due to lower network efficiencies, higher call transport costs,
lower gross margins and higher SG&A expenses.
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue for the year ended December 31, 1996 increased approximately
$12,549,000 (approximately 45%) over revenues for the year ended December 31,
1995. Revenues for the fourth quarter ending December 31, 1996 increased over
the quarter ended September 30, 1996 by approximately $1,506,000
(approximately 15%). Quarterly revenue levels steadily increased during 1996.
The increases were mainly due to significant growth in international calling
as well as the implementation of the carrier termination revenue channel.
Revenue level from the inbound product remained steady in dollar amount,
although decreased as a percentage of overall revenue. Revenue from the
domestic 1+ product increased by approximately $2,100,000 in 1996
(approximately 16%), but decreased as a percentage of overall revenue due to
the increases in international calling and revenue generated through the new
carrier sales channel.
During 1996, USW focused its efforts on a national agent program and
implementing the carrier sales product. As a result, USW's revenue by
distribution channel changed during 1996. Direct sales revenue as a percentage
of total sales, exclusive of wireless revenue, declined by approximately 29%
in 1996 compared to 1995. The primary reason for the decline was the growth of
agent and reseller channels. Revenue through these channels increased
approximately 33% in 1996.
As part of its plan for growth in 1996, USW implemented a national agent
sales program and emphasized its efforts on the carrier sales program. This
strategy enabled USW to maximize network efficiencies by increasing the volume
of traffic on the network.
The national agent sales program included the addition of four agent sales
managers throughout the country. This strategy enabled USW to penetrate other
local markets and utilize the network on both the east and west coasts.
The carrier sales channel was also an important area of focus in 1996. This
distribution channel (domestic carrier termination) generated approximately
14% of overall revenue in 1996 and helped maximize network efficiencies.
DISTRIBUTION OF REVENUES
<TABLE>
<CAPTION>
SERVICE % 1996 % 1995
------- ------ ------
<S> <C> <C>
Domestic 1+................................................. 39% 49%
International............................................... 24% 17%
Inbound..................................................... 16% 25%
Wireless.................................................... 7% 9%
Domestic Carrier Termination................................ 14% --
</TABLE>
90
<PAGE>
Gross profit in 1996 as a percentage of net sales revenue decreased to 33.5%
from 42.6% in 1995. However, several non-recurring items were recorded in 1995
which represented the resolution of items pertaining to prior years. A net
amount of approximately $2,880,000 in accounts payable was reversed during the
quarter ended June 30, 1995. This accounts payable reversal pertained to
services rendered in 1993 and 1994. Excluding the
non-recurring items in 1995, gross profit as a percentage of net sales revenue
decreased from 34.7% in 1995 to 33.5% in 1996. This decrease is mainly
attributed to the increase in carrier revenue which generates lower gross
margins compared to retail and other revenues.
SG&A expenses increased in 1996 by approximately $1,100,000, primarily due
to an increase in salary and commission expense. SG&A as a percentage of net
sales decreased from 43.6% in 1995 to 32.7% in 1996, primarily due to
decreased legal expenses, depreciation and bad debt expenses as discussed
below.
Salary expense increased approximately $445,000, due to the addition of four
new agent sales managers and eight new administrative positions which were
created to support USW's revenue growth. Commission expense increased
approximately $1,312,000 due to increased reseller and agent traffic levels.
Legal expense decreased by approximately $729,000 in 1996 due to litigation
expenses incurred in 1995 in connection with the Colonial Penn and AT&T
litigation. Depreciation expense decreased by approximately $151,000 in 1996,
mainly due to a write off of approximately $305,000 of telecommunications
equipment in 1995. USW purchased additional fixed assets (primarily
telecommunications equipment) which increased depreciation expense by
approximately $154,000 in 1996. Bad debt expense declined in 1996 by
approximately $363,000 (from approximately 3.0% to 1.2% of net sales) despite
the write-off of a large receivable in the amount of $350,000. Bad debt
expense, exclusive of this write-off, would have been approximately .3% in
1996.
Net income before preferred stock dividends in 1996 substantially improved
over the results achieved in 1995. Net income for 1996 was $88,625 as compared
to a net loss of $277,723 in 1995. The primary reason for this improvement was
a decrease in SG&A expense as a percentage of overall revenue. As indicated
above, SG&A expense accounted for 43.6% of revenue in 1995 and only 32.7% in
1996.
YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenue for the year ended December 31, 1995 increased approximately $4.122
million (approximately 17.4%) over revenues for the year ended December 31,
1994. Revenues for the fourth quarter ended December 31, 1995 increased over
the quarter ended September 30, 1995 by approximately $215,000 (approximately
3.1%). Quarterly revenue levels during 1995 remained relatively level. Despite
the relatively level revenue levels during 1995, USW did experience
significant shifts in product mix during the year. USW experienced significant
growth in its domestic 1+, international calling, and wireless products offset
by declines in traffic levels of USW's inbound 800 services.
DISTRIBUTION OF REVENUES
<TABLE>
<CAPTION>
% %
SERVICE 1995 1994
------- ---- ----
<S> <C> <C>
Domestic 1+..................................................... 49% 47%
International................................................... 17% 9%
Inbound......................................................... 25% 38%
Wireless........................................................ 9% 6%
</TABLE>
The significant reduction in revenue levels from USW's inbound product is
primarily due to USW's completed transition away from the resale of AT&T
inbound 800 service. Management believes that USW's attrition levels during
1995 of approximately 3.3% per month were negatively impacted by this event.
91
<PAGE>
During 1995, USW focused its efforts on increasing the efficiency of its
network and developing a carrier sales product. As a result, USW's revenue by
distribution channel changed during 1995. Direct Sales revenue as a percentage
of total sales, exclusive of wireless revenue, declined from approximately 41%
in January of 1995 to approximately 35% at December, 1995.
The primary reason for the decline in the percentage of Direct Sales Revenue
was the growth in USW's Enhanced Services (international callback and debit
card products). During 1995 however, USW decided to de-emphasize its marketing
of debit cards and eliminated its recharge feature. USW also established
monthly minimums for its wholesale debit card customers in an effort to
increase the utilization of its debit cards. Debit card revenue recognized in
1995 was less than 1.0% of net sales. USW also decided during 1995 not to
pursue the marketing of its cell-air-saver product introduced early in 1995
due to a poor market response.
Non-Wireless Revenue attributable to agents and resellers declined from
approximately 59% in January of 1995 to approximately 57% in December of 1995.
As part of its plan for growth, management is focusing its Direct Sales force
on the solicitation of larger commercial accounts and has developed a carrier
sales group to solicit other long distance companies. USW is adding
experienced sales personnel to its sales force in order to assist USW in
developing its traffic levels to a point which justifies larger capacity
circuits creating more efficient transport costs as discussed below.
Gross profit earned in 1995 as a percentage of net sales revenue exceeded
the percentage earned in 1994 (approximately 42.6% vs. 37.8%) however several
non-recurring items were recorded in both 1994 and 1995 which represented a
resolution of items pertaining to prior years. As part of a settlement between
USW and Colonial Penn Group, Inc. and Colonial Penn Insurance (collectively
"Colonial Penn"), on May 5, 1995 Colonial Penn abandoned all of its claims
against USW and released USW from any obligation to pay approximately
$2,945,000 outstanding for telephone usage charges in return for a payment to
Colonial Penn of $65,000 and a promise by USW not to sue Colonial Penn for
alleged violations of the antitrust laws.
As a result, a net amount of approximately $2,880,000 in accounts payable
was reversed during the quarter ended June 30, 1995. This accounts payable
reversal pertained to services rendered in 1993 and 1994. Also included in
gross profit during 1995 was a charge of approximately $669,000 for the
counterclaim awarded to AT&T in connection with the 1995 AT&T antitrust
litigation. USW recorded the reversal of approximately $783,000 in transport
costs pertaining to years prior to 1994 in gross profit for 1994.
Gross profit excluding these non-recurring items was approximately 34.7% for
1995 versus approximately 34.5% for 1994. The small increase in gross profit
during 1995 was net of significant reductions in both revenue per minute
(yield) and transport cost on a per minute basis. Beginning late 1994 and
throughout 1995, USW implemented a number of strategies to significantly
reduce its call transport costs. USW implemented extensive least cost routing
software, re-negotiated pricing on numerous contracts (primarily those with
carriers transporting USW's calls to and from areas not serviced by USW's own
facilities) and began originating most of its 800 service on its own network.
Due to competitive forces which developed in USW's marketplace during 1995
USW and its resellers reduced pricing on USW's core products. Pricing on USW's
domestic 1+ and 800 service was reduced approximately $.014 leading to a
reduction of gross revenue of approximately $100,000 per month. Similar market
conditions required USW to reduce pricing on calls to international
destinations by approximately $.05 to $.10 resulting in an additional gross
revenue reduction of approximately $20,000 per month.
USW continued to negotiate improved pricing in 1996.
As discussed, most of USW's actions taken during 1995 to reduce its call
transport costs pertained to costs for transporting calls to areas not
serviced by USW's own facilities. These costs approximated 60.0% of USW's
total monthly call transport costs including international terminations during
1995.
92
<PAGE>
In order to reduce USW's cost of transporting calls originating and
terminating on USW's own facilities, as well as reduce USW's reliance on other
carriers, USW continually seeks to acquire more efficient long haul
facilities. The efficient utilization of these circuits result in
substantially lower per mile transport costs in 1995, USW did not have
sufficient call volumes to cost justify these facilities. In order to cost
justify this capacity, USW entered the carrier sales market by offering call
termination services to other regional long distance carriers.
USW began soliciting other long distance carriers late in 1995 concurrent
with the commissioning of its second switch in Oakland, California. Minutes
processed by USW's network as a result of this new business increased
substantially in 1996.
The advent of USW's carrier sales volume helped justify the installation
cost of higher capacity facilities in USW's Mid-Atlantic network. USW's two
switches, permit coast to coast calls to be transported on a cost level
approximately equal to that of a tier two national carrier. The addition of
carrier sales volumes lowered USW's overall gross profit as a percentage of
sales in 1996, however, as it is more fully deployed it should increase the
overall gross profit of USW. USW's carrier sales product contributed
approximately 17.5% to USW's overall sales volume in 1996.
SG&A expenses increased from their level in 1994 by approximately $1,896,000
primarily due to unfavorable variances in depreciation, commission, and legal
expense, and favorable variances in salary and bad debt expense. SG&A as a
percentage of net sales increased slightly from approximately 43.2% in 1994,
to approximately 43.6% in 1995. This increase was primarily due to increased
legal expenses as discussed below.
Depreciation expense increased approximately $525,000 due to the purchase of
additional fixed assets (primarily telecommunications equipment) which
increased depreciation expense approximately $220,000 and the write-off of
approximately $305,000 worth of telecommunications equipment, which was either
obsolete, or purchased to carry traffic on the AT&T network. Commission
expense increased approximately $850,000 due to reduced pricing given to
resellers and agents and increased reseller and agent traffic levels. Legal
expense increased approximately $760,000 over the 1994 level due to USW's
litigation with Colonial Penn and AT&T. These litigation expenses involved
expert witness costs, deposition costs, economists, expert witness fees and
out of pocket costs totaling approximately $850,000. USW did not bear any fees
for time incurred by its legal counsel for the AT&T litigation.
As a result of USW's reduction in administrative staff early in 1995, USW's
salary expense declined approximately $175,000 over its level in 1994. The
amount provided for bad debt expense declined by approximately $110,000 (from
approximately 4.0% to approximately 3.0% of net sales), despite the write-off
of two large receivables in the amount of approximately $520,000 relating to
transactions in 1994. Substantial bad debt expense was also recorded in 1994
related to these two receivables. Bad debt expense exclusive of these two
receivables would have been approximately 2.6% in 1994 compared with
approximately 1.2% in 1995.
Loss from operations in 1995 was substantially improved over the results
achieved in 1994, however, as noted above, several items which related to
USW's litigation with Colonial Penn and AT&T had a net positive effect on
results of operations in 1995. Included in the loss for 1995 is the reversal
of approximately $2,880,000 in accounts payable due Colonial Penn for call
transport services rendered in 1993 and 1994. Also included in the results for
1995 are litigation expenses of approximately $850,000, the award to AT&T of
approximately $669,000, the write-off of fixed assets and accounts receivable
related to the AT&T litigation in the amount of approximately $305,000 and
certain changes in estimates for items pertaining to years prior to 1995 in
the amount of approximately $150,000. Results for 1994 included a reversal of
an accounts payable related to services provided prior to 1994 for
approximately $783,000. Loss from operations exclusive of these items would
have been a loss of approximately $1,170,000 for 1995, compared with a loss of
approximately $2,000,000 for 1994.
93
<PAGE>
Liquidity And Capital Resources. USW's working capital ratio decreased
during the third quarter ended September 30, 1997 to 0.78:1.00 from 0.84:1.00
for the second quarter ended June 30, 1997 and from 0.81:1.00 at March 31,
1997. Accounts receivable net of allowance for doubtful accounts increased
from its balance at December 31, 1996 approximately $3,382,000 primarily due
to increased traffic levels. The average days sales outstanding increased from
45 days for the quarter ended December 31, 1996, to 49 days for the quarter
ended September 30, 1997. Accounts payable increased by approximately
$1,852,000 from the period ended December 31, 1996 to the quarter ended
September 30, 1997. The average days outstanding for accounts payable
increased from 52 days for the quarter ended December 31, 1996, to 58 days for
the quarter ended September 30, 1997.
USW believes that it will require additional funds in the near future to
continue its operations. On November 26, 1997, USW raised $2.3 million in a
private placement of 1,590,000 shares of USW Common Stock. In addition, since
September 30, 1997, USW has received $150,988 through the exercise of options
to purchase 140,000 shares of USW Common Stock. There can be no assurance that
USW will be able to obtain such funds on terms acceptable to USW, if at all.
CHANGES IN AND DISAGREEMENTS WITH USW ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On March 14, 1997, USW replaced Rudolph, Palitz LLP ("Rudolph") as the
principal accountant for USW and its subsidiaries. Rudolph's report on USW's
consolidated financial statements for the past year has not contained an
adverse opinion or a disclaimer of opinion, nor have its opinions been
qualified or modified as to uncertainty, audit scope or accounting principles.
USW's decision to replace Rudolph was approved by the Board of Directors.
During USW's two immediately preceding fiscal years (January 1, 1994 to
December 31, 1994 and January 1, 1995 to December 31, 1995) and any subsequent
interim period preceding USW's replacement of Rudolph, there were no
disagreements with Rudolph on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Rudolph, would
have caused it to make reference to the subject matter of the disagreement in
connection with its report.
On January 12, 1996, USW replaced Baratz & Associates, P.A. ("Baratz") as
the principal accountant for USW and its subsidiaries. Baratz's reports on
USW's consolidated financial statements for either of the past two years have
not contained an adverse opinion or a disclaimer of opinion, nor have its
opinions been qualified or modified as to uncertainty, audit scope or
accounting principles. USW's decision to replace Baratz was approved by the
Board of Directors. During USW's fiscal years 1993, 1994 (January 1, 1993 to
December 31, 1993 and January 1, 1994 to December 31, 1994) and any subsequent
interim period preceding USW's replacement of Baratz, there were no
disagreements with Baratz on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Baratz, would have
caused it to make reference to the subject matter of the disagreement in
connection with its report.
94
<PAGE>
UNAUDITED ACC PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements combine the
consolidated balance sheets and statements of operations of ACC and USW as if
the ACC/USW Merger had occurred at the beginning of the periods indicated for
the purposes of the Pro Forma Condensed Combined Statement of Operations. The
Merger is intended to be treated as a pooling of interests for financial
reporting purposes. No adjustment has been included in the pro forma amounts
for any anticipated cost savings or other synergies.
The following unaudited Pro Forma Condensed Combined Balance Sheet as of
September 30, 1997 and Pro Forma Condensed Combined Statements of Operations
for the nine months ended September 30, 1997, and years ended December 31,
1996, 1995, 1994, illustrate the effect of the proposed Merger as if the
Merger had occurred on September 30, 1997 for the Pro Forma Condensed Combined
Balance Sheet and as of January 1, 1994 for the Pro Forma Condensed Combined
Statements of Operations. No adjustment has been included in the pro forma
amounts for any anticipated cost savings or other synergies.
Pursuant to the terms of the Merger Agreement, each issued and outstanding
share of USW Common Stock (other than Dissenting Shares) will be converted
into the right to receive a fraction of a share of ACC Common Stock equal to
the Exchange Ratio in effect at closing. For the purpose of these pro forma
statements, an Exchange Ratio of 0.061 has been applied to all periods
presented, on a pro forma basis. The actual Exchange Ratio will be determined
prior to closing of the Merger based on (i) the volume-weighted average
closing market price per share of ACC Common Stock as reported by The Nasdaq
National Market over the 20 trading day period ending on the third full
trading day preceding the closing and (ii) the amount of Contingent
Obligations (as hereinafter defined) of USW which remain outstanding at the
closing. See "Risk Factors--The Effect of Stock Price Fluctuations and Other
Adjustments on the Consideration to be Received by the Holders of USW Common
Stock in the Merger" and "The Merger Agreement--Merger Consideration; Exchange
of USW's Shares."
These Pro Forma Condensed Combined Financial Statements should be read in
conjunction with historical financial statements of ACC and USW which are
incorporated by reference herein.
The Pro Forma Condensed Combined Financial Statements are presented for
comparative purposes only and are not intended to be indicative of actual
results had the transactions occurred as of the dates indicated above nor do
they purport to indicate results which may be attained in the future.
95
<PAGE>
ACC PRO FORMA CONDENSED COMBINED BALANCE SHEET (1)
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACC/USW
PRO
ACC USW PRO FORMA FORMA
HISTORICAL(2) HISTORICAL(2) ADJUSTMENTS(3) COMBINED
------------- ------------- -------------- --------
<S> <C> <C> <C> <C>
Current assets............. $ 79,462 $10,786 $(237) $ 90,011
Property, plant and
equipment, net............ 104,450 3,248 -- 107,698
Other assets............... 92,685 212 -- 92,897
-------- ------- ----- --------
Total assets............. $276,597 $14,246 $(237) $290,606
======== ======= ===== ========
Current liabilities........ $ 62,441 $13,809 $ 339 $ 76,589
Long term debt............. 74,388 449 -- 74,837
Other liabilities.......... 3,398 -- -- 3,398
Redeemable preferred stock. -- 330 -- 330
Shareholders' equity....... 136,370 (342) (576) 135,452
-------- ------- ----- --------
Total liabilities and
shareholders' equity.... $276,597 $14,246 $(237) $290,606
======== ======= ===== ========
</TABLE>
The accompanying notes are an integral part of this statement
96
<PAGE>
ACC PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS(1)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ACC/USW PRO
ACC USW PRO FORMA FORMA
HISTORICAL(2) HISTORICAL(2) ADJUSTMENTS(4) COMBINED
------------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
Total revenue........... $ 267,277 $ 43,303 $ (1,119) $ 309,461
Network costs........... 156,973 31,720 (1,119) 187,574
----------- ----------- ------------ -----------
Gross profit............ 110,304 11,583 -- 121,887
Other operating ex-
penses:
Depreciation and amor-
tization............. 16,401 756 -- 17,157
Selling, general and
administrative....... 76,091 11,873 -- 87,964
----------- ----------- ------------ -----------
Income (loss) from oper-
ations................. 17,812 (1,046) -- 16,766
Other income (expense):
Interest income (ex-
pense), net.......... (1,941) (199) -- (2,140)
Foreign exchange gain
(loss)............... (168) -- -- (168)
----------- ----------- ------------ -----------
Income (loss) from con-
tinuing operations be-
fore
provision for income
taxes.................. 15,703 (1,245) -- 14,458
Provision for income
taxes.................. 2,379 -- -- 2,379
Minority interest of
consolidated subsidi-
ary.................... -- -- -- --
----------- ----------- ------------ -----------
Net income (loss) from
continuing operations.. 13,324 (1,245) -- 12,079
Preferred stock divi-
dends and accretion.... -- 20 -- 20
----------- ----------- ------------ -----------
Net income from continu-
ing operations after
preferred stock divi-
dends and accretion.... $13,324 $ (1,265) $ -- $ 12,059
=========== =========== ============ ===========
Weighted average number
of common and common
equivalent shares...... 17,494,614 15,927,170 (14,690,675) 18,731,109
=========== =========== ============ ===========
Net income (loss) from
continuing operations
after
preferred stock divi-
dends and accretion per
common and common
equivalent share(5).... $ 0.76 $ (0.08) $ 0.64
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement
97
<PAGE>
ACC PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (1)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
UNAUDITED
UNAUDITED ACC/USW
ACC USW PRO FORMA PRO FORMA
HISTORICAL(2) HISTORICAL(2) ADJUSTMENTS(4) COMBINED
------------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Total revenue........... $308,767 $40,304 $(1,077) $347,994
Network costs........... 193,599 26,802 (1,077) 219,324
---------- ---------- ----------- ----------
Gross profit............ 115,168 13,502 -- 128,670
Other operating
expenses:
Depreciation and
amortization......... 16,433 930 -- 17,363
Selling, general and 84,511 12,266 -- 96,777
administrative....... ---------- ---------- ----------- ----------
Income (loss) from
operations............. 14,224 306 -- 14,530
Other income (expense):
Interest income
(expense), net....... (3,874) (210) -- (4,084)
Foreign exchange gain 509 -- -- 509
(loss)............... ---------- ---------- ----------- ----------
Income (loss) from
continuing operations
before provision for
income taxes........... 10,859 96 -- 10,955
Provision for income
taxes.................. 2,185 7 -- 2,192
Minority interest of
consolidated (909) -- -- (909)
subsidiary............. ---------- ---------- ----------- ----------
Net income (loss) from
continuing operations.. 7,765 89 -- 7,854
Preferred stock
dividends and 2,481 27 -- 2,508
accretion.............. ---------- ---------- ----------- ----------
Net income from
continuing operations
after preferred stock
dividends and $ 5,284 $ 62 $ -- $ 5,346
accretion.............. ========== ========== =========== ==========
Weighted average number
of common and common 15,641,119 15,877,900 (14,595,864) 16,923,155
equivalent shares...... ========== ========== =========== ==========
Net income (loss) from
continuing operations
after preferred stock
dividends and accretion
per common and common
equivalent share(5).... $ 0.34 $ 0.00 $ 0.32
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement
98
<PAGE>
ACC PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (1)
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
UNAUDITED
UNAUDITED ACC/USW
ACC USW PRO FORMA PRO FORMA
HISTORICAL(2) HISTORICAL(2) ADJUSTMENTS(4) COMBINED
------------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Total revenue........... $ 188,866 $ 27,755 $ (254) $ 216,367
Network costs........... 114,841 15,918 (254) 130,505
---------- ---------- ----------- ----------
Gross profit............ 74,025 11,837 -- 85,862
Other operating
expenses:
Depreciation and
amortization.......... 11,614 770 -- 12,384
Selling, general and
administrative........ 62,193 11,326 -- 73,519
---------- ---------- ----------- ----------
Income (loss) from
operations............. 218 (259) -- (41)
Other income (expense):
Interest income
(expense), net (4,933) (19) -- (4,952)
Foreign exchange gain
(loss)................ (110) -- -- (110)
---------- ---------- ----------- ----------
Income (loss) from
continuing operations
before provision for
income taxes........... (4,825) (278) -- (5,103)
Provision for income
taxes 396 -- -- 396
Minority interest of
consolidated
subsidiary............. (133) -- -- (133)
---------- ---------- ----------- ----------
Net income (loss) from
continuing operations.. (5,354) (278) -- (5,632)
Preferred stock
dividends and
accretion.............. 540 67 -- 607
---------- ---------- ----------- ----------
Net income from
continuing operations
after preferred stock
dividends and
accretion.............. $ (5,894) (345) $ -- $ (6,239)
========== ========== =========== ==========
Weighted average number
of common and common
equivalent shares...... 11,684,829 15,100,400 (13,860,165) 12,925,064
========== ========== =========== ==========
Net income (loss) from
continuing operations
after preferred stock
dividends and accretion
per common and common
equivalent share (5)... $ (0.50) $ (0.02) $ (0.48)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement
99
<PAGE>
ACC PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (1)
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
UNAUDITED
UNAUDITED ACC/USW
ACC USW PRO FORMA PRO FORMA
HISTORICAL(2) HISTORICAL(2) ADJUSTMENTS(4) COMBINED
------------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
Total revenue........... $ 126,444 $ 23,633 $ -- $ 150,077
Network costs........... 79,438 14,707 -- 94,145
----------- ----------- ------------ -----------
Gross profit............ 47,006 8,926 -- 55,932
Other operating
expenses:
Depreciation and
amortization.......... 8,932 505 -- 9,437
Selling, general and
administrative........ 46,388 9,695 900 56,983
----------- ----------- ------------ -----------
Income (loss) from
operations............. (8,314) (1,274) (900) (10,488)
Other income (expense):
Interest income
(expense), net........ (1,899) 13 -- (1,886)
Foreign exchange gain
(loss)................ (31) -- -- (31)
----------- ----------- ------------ -----------
Income (loss) from
continuing operations
before provision for
income taxes........... (10,244) (1,261) (900) (12,405)
Provision for income
taxes.................. 3,456 (14) (324) 3,118
Minority interest of
consolidated
subsidiary............. 2,371 -- -- 2,371
----------- ----------- ------------ -----------
Net income (loss) from
continuing operations.. (11,329) (1,247) (576) (13,152)
Preferred stock
dividends and
accretion.............. -- 118 -- 118
----------- ----------- ------------ -----------
Net income from
continuing operations
after preferred stock
dividends and
accretion.............. $ (11,329) $ (1,365) $ (576) $ (13,270)
=========== =========== ============ ===========
Weighted average number
of common and common
equivalent shares...... 10,602,721 14,875,584 (13,782,245) 11,696,060
=========== =========== ============ ===========
Net income (loss) from
continuing operations
after preferred stock
dividends and accretion
per common and common
equivalent share (5)... $ (1.07) $ (0.09) $ (1.13)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement
100
<PAGE>
NOTES TO ACC PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) The unaudited pro forma financial data do not give effect to any
restructuring costs, nor any potential cost savings or other synergies that
could result from the Merger. The pro forma data are not necessarily
indicative of the operating results or financial position that would have
occurred had the Merger been consummated at the dates indicated, nor
necessarily indicative of future operating results or financial position.
Management estimates that within twelve months from the date of the Merger,
certain non recurring charges will be recorded to reflect restructuring of USW
operations, which will yield material ongoing synergies in operations. The pro
forma adjustments are based on available information and upon certain
assumptions that management believes are reasonable under the circumstances.
(2) These columns represent historical results of operations and financial
position.
(3) Pro forma adjustments that eliminate accounts receivable from current
assets and accounts payable from current liabilities are attributable to
outstanding amounts resulting from intercompany transactions between ACC and
USW. Other adjustments to stockholders' equity and current liabilities reflect
the after tax impact of Merger related costs which were reflected in the
results of operations as if the Merger was consummated as of January 1, 1994.
(4) Pro forma adjustments that eliminate the revenues, corresponding network
costs and intercompany profits are attributable to intercompany transactions
between ACC and USW. Estimated costs of $900,000 directly related to the
Merger for investment banking, legal and accounting fees are reflected as if
the Merger was consummated as of January 1, 1994. Adjustments to pro forma
number weighted average number of common shares and related impact on net
income (loss) per common and common equivalent share applicable to common
stock are based on the number of shares that would have been outstanding had
the merger occurred on the earliest date presented.
(5) Pro forma per share data are based on the number of ACC common stock and
common equivalent shares that would have been outstanding had the Merger
occurred on the earliest date presented.
THE MERGER AGREEMENT
The following paragraphs summarize, among other things, the material terms
of the Merger Agreement which is attached to this Proxy Statement/Prospectus
as Exhibit A and is incorporated by reference herein. The information
regarding the Merger Agreement in this Proxy Statement/Prospectus does not
purport to be complete and is qualified in its entirety by reference to the
full text thereof. Holders of USW Common Stock are urged to read the Merger
Agreement in its entirety for a more complete description of the Merger and
related transactions. Capitalized terms used below but not defined herein have
the meanings given to them in the Merger Agreement.
MERGER CONSIDERATION; EXCHANGE OF USW'S SHARES
The Merger Agreement provides that, subject to the satisfaction or waiver of
certain conditions described below, Acquisition Sub will be merged with and
into USW, with USW surviving the Merger as a wholly-owned subsidiary of ACC.
At the Effective Time, each outstanding share of USW Common Stock (other
than Dissenting Shares) will be converted into the right to receive a fraction
of a share of ACC Common Stock equal to the Exchange Ratio (as hereinafter
defined) determined as of such date. The initial Exchange Ratio in effect at
October 28, 1997, the date of signing of the Merger Agreement, without making
any downward adjustment for the amount of USW's Contingent Obligations, as
described below, was 0.078. The initial Exchange Ratio was calculated by
dividing the USW Per Share Price (as hereinafter defined) by $32.14 (i.e., the
volume-weighted average closing market price per share of ACC Common Stock as
reported by The Nasdaq National Market over the 20 trading day
101
<PAGE>
period ending on the third full trading day immediately preceding the date of
signing the Merger Agreement) ("Average Pre-Agreement Trading Price"). The USW
Per Share Price is calculated by dividing the "USW Aggregate Value" (i.e., the
sum of $46 million, the aggregate exercise price to be paid upon the exercise
of outstanding USW options and the aggregate exercise price of all outstanding
USW Warrants) by the "USW Fully Diluted Shares" (i.e., the sum of the number
of shares of USW Common Stock outstanding, the number of shares issuable upon
the exercise of all outstanding USW options, the number of shares issuable
upon the exercise of all outstanding USW Warrants and the number of shares
issuable upon conversion of all outstanding shares of USW Preferred Stock). On
the date of signing the Merger Agreement, the USW Per Share Price was
approximately $2.52 and the USW Aggregate Value was approximately $51 million.
The USW Aggregate Value (as described above) is subject to adjustment under
certain circumstances at the Effective Time based on (i) the amount of any
undisclosed liabilities of USW which were required to be disclosed on USW's
balance sheet dated June 30, 1997 and (ii) any amount paid in settlement of
certain litigation brought against USW (or $1 million if such litigation is
not settled before the Effective Time), less the amount of any settlement
proceeds received by USW prior to the Effective Time with respect to a certain
trademark claim brought by USW. The net amount of any such adjustment to the
USW Aggregate Value is referred to herein as the "Contingent Obligations."
The Exchange Ratio will be determined at the Effective Time based on the
volume-weighted average closing market price per share of ACC Common Stock
over the 20 day trading period ending on the third full trading day
immediately preceding the Effective Time ("Average Pre-Closing Trading
Price"). If the Average Pre-Closing Trading Price represents an increase of up
to 10% over the Average Pre-Agreement Trading Price (assuming no adjustment
for Contingent Obligations and no change in the number of USW Fully Diluted
Shares), the Exchange Ratio will equal the USW Per Share Price divided by the
Average Pre-Closing Trading Price. If, however, the Average Pre-Closing
Trading Price represents an increase of 10% or more over the Average Pre-
Agreement Trading Price (assuming no adjustment for Contingent Obligations and
no change in the number of USW Fully Diluted Shares), USW Aggregate Value is
increased by the product of $46 million multiplied by one-half of the
percentage (but no more than 20%) by which the difference in stock price
exceeds 10%. The Exchange Ratio is then calculated by dividing the enhanced
USW Aggregate Value by the USW Fully Diluted Shares, and then dividing the
quotient by the Average Pre-Closing Trading Price. For example (assuming no
adjustment for Contingent Obligations and no change in the number of USW Fully
Diluted Shares), if the Average Pre-Closing Trading Price of ACC Common Stock
was $45 (an increase of 40% over the Average Pre-Agreement Trading Price), the
USW Aggregate Value would be increased by $4.6 million and the Exchange Ratio
would be decreased to approximately 0.055. As illustrated in the table below,
the USW Aggregate Value is not impacted to the extent that the Average Pre-
Closing Trading Price exceeds the Average Pre-Agreement Trading Price by more
than 30%.
If the Average Pre-Closing Trading Price represents a decrease of up to 15%
from the Average Pre-Agreement Trading Price (assuming no adjustment for
Contingent Obligations and no change in the number of USW Fully Diluted
Shares), the Exchange Ratio will be increased by an amount equal to the USW
Per Share Price divided by the Average Pre-Closing Trading Price. The Merger
Agreement provides, however, that if the Average Pre-Closing Trading Price
were to decrease by 15% or more from the Average Pre-Agreement Trading Price,
the Exchange Ratio would be increased by an amount equal to the product of the
USW Per Share Price multiplied by 115%, divided by $32.14. As illustrated in
the table below, and based on the assumptions described therein, this 15%
"collar" will effectively prevent the Exchange Ratio from increasing above
0.081 regardless of decreases of more than 15% in the price of ACC Common
Stock.
As of December 1, 1997, based on a 20 day volume-weighted average closing
market price per share of $39.36 and 21,933,737 USW Fully Diluted Shares on
that date, and an assumed value of Contingent Obligations of $1 million, the
Exchange Ratio would be 0.061, representing an aggregate value for USW of
approximately $52.9 million or $2.41 per share of USW Common Stock.
102
<PAGE>
Set forth below is a table which shows in quantitative terms the Exchange
Ratio, USW Per Share Price and USW Aggregate Value, for a range of different
Average Pre-Closing Trading Prices as of the Effective Time. The table assumes
that the number of USW Fully Diluted Shares at the Effective Time is
21,933,737 and that the value of Contingent Obligations is $1 million.
<TABLE>
<CAPTION>
USW
AVERAGE USW AGGREGATE
PRE-CLOSING EXCHANGE PER SHARE VALUE
TRADING PRICE RATIO PRICE (MILLIONS)
------------- -------- --------- ---------
<S> <C> <C> <C>
$60.00 0.042 $2.49 $54.6
55.00 0.045 2.49 54.6
50.00 0.050 2.49 54.6
45.00 0.055 2.49 54.6
39.36 0.061 2.41 52.9
35.00 0.065 2.28 50.0
30.00 0.076 2.28 50.0
27.32(1) 0.082 2.28 50.0
</TABLE>
- --------
(1) The Average Pre-Closing Trading Price of $27.32 represents the price at
which the 15% "collar" described above is triggered. Therefore, if the
Average Pre-Closing Trading Price decreases below $27.32, the USW Per
Share Price would decrease below $2.28 and the USW Aggregate Value would
decrease below $50 million. However, the Exchange Ratio would remain
constant at 0.082.
No fractional shares will be issued in the Merger. Each holder of USW Common
Stock will receive a cash payment in lieu of such fractional shares equal to
such fraction multiplied by the Average Pre-Closing Trading Price.
EFFECTIVE TIME OF MERGER
The Merger will become effective on the date and time which is the later of
(i) the date and time that a Certificate of Merger is filed with the office of
the Secretary of State of the State of New York in accordance with the NYBCL,
(ii) the date and time that a Certificate of Merger is filed with the office
of the Secretary of State of the State of Delaware in accordance with the
DGCL, and (iii) such later time and date as may be specified in the New York
and Delaware Certificates of Merger. The date and time when the Merger will
become effective is referred to herein as the "Effective Time." The Effective
Time is expected to occur promptly after the satisfaction or waiver of all of
the conditions to the Merger set forth in the Merger Agreement.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
Pursuant to the Merger Agreement, as of the Effective Time and until their
successors are duly elected or appointed and qualified, the members of the
Board of Directors of USW, as the surviving corporation, will be Arunas A.
Chesonis, Michael R. Daley and Steve M. Dubnik. Messrs. Daley and Dubnik are
members of the Office of the Chief Executive and Mr. Chesonis is the President
of ACC. As of the Effective Time, the officers of USW will be: Ms. Mae H.
Squier-Dow, President; Mr. Michael R. Daley, Treasurer; Mr. John J. Zimmer,
Vice President; Mr. Daniel J. Venuti, Vice President of Legal and Regulatory
Affairs; Mr. Steven Mowers, Controller; and Ms. Sarah Ayer-Gudell, Assistant
Secretary. Ms. Squier-Dow is the President of ACC Long Distance Corp.; Mr.
Zimmer is the Vice President and Treasurer of ACC; Mr. Venuti is the Vice
President of Legal and Regulatory Affairs of ACC Long Distance Corp.; Mr.
Mowers is Controller of ACC Long Distance Corp; and Ms. Ayer-Gudell is the
Assistant Secretary of ACC.
CONDITIONS TO THE MERGER
Consummation of the Merger is subject to the fulfillment or waiver, at or
prior to the Effective Time, of a number of conditions described in the Merger
Agreement, including without limitation: (a) approval of the
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<PAGE>
Merger by the requisite vote of the holders of USW Common Stock, with no more
than 10% of USW's shares being Dissenting Shares; (b) no order, decree or
injunction that would prevent consummation of the Merger; (c) consent or
approval by all required governmental agencies, including necessary approvals
by the FCC and applicable PSCs; (d) delivery to ACC of the pooling letters and
affiliate agreements by affiliates of USW and the Non-Compete Agreements by
certain officers of USW, each duly approved and executed; (e) delivery of the
Tax Opinions and delivery of letters from each party's independent public
accountants addressed to their respective clients, dated as of the Effective
Time, that the Merger, if consummated in accordance with the Merger Agreement,
will qualify for treatment as a "pooling of interests" for financial reporting
purposes in accordance with generally accepted accounting principles; (f)
completion by ACC's independent public accountants of certain agreed upon
procedures, including an examination of the work papers and other materials
prepared by USW's independent public accountants in connection with their
audit of USW's financial statements; and (g) each party's material compliance
with all covenants, agreements and conditions as required by the Merger
Agreement prior to the closing of the Merger. Tel-Save, a holder of more than
10% of the issued and outstanding shares of USW Common Stock, has publicly
disclosed that it is opposed to the Merger. If Tel-Save exercises its
Dissenters' Rights as to its shares, a condition to closing the Merger will
not be satisfied. In addition, Tel-Save and another USW shareholder holding
more than 10% of the issued and outstanding shares of USW Common Stock have
not yet delivered pooling letters and affiliate agreements to ACC.
Furthermore, counsel to ACC and USW have determined that because of
circumstances arising after the execution of the Merger Agreement, neither
firm will be able to deliver to its respective client the tax opinions in the
form required by the Merger Agreement. If any of the conditions to the Merger
are not satisfied or waived by the party to which the condition applies, such
party will not be obligated to close the transaction.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations of USW and ACC. The
respective representations and warranties of the parties shall not survive
beyond the Effective Time.
The representations, warranties and certain covenants of USW relate
generally to: (i) corporate organization, good standing and capitalization;
(ii) the authorization, execution, delivery and enforceability of the Merger
Agreement; (iii) approval of governmental authorities; (iv) absence of
violations of, among other things, USW's Certificate of Incorporation, Bylaws,
certain contracts or laws; (v) documents filed with the Commission and the
accuracy of information, including financial statements in accordance with
generally accepted accounting principles, contained therein; (vi) the absence
of any material adverse events affecting USW's business or any undisclosed
liabilities; (vii) compliance with laws and possession of all required
permits; (viii) absence of brokers or finders, other than USW's financial
advisor; (ix) except for certain listed USW material contracts, the absence of
contracts not required by the 1933 Act or the 1934 Act, to be described in or
filed as an exhibit to USW's securities filings; (x) employee benefit plans;
(xi) taxes, litigation and intellectual property; (xii) Board of Director
approval of the Merger Agreement; and (xiii) absence of action that would
adversely affect the ability of ACC to treat the Merger as a pooling of
interests.
The representations, warranties and certain covenants of ACC relate
generally to: (i) corporate organization, good standing and capitalization;
(ii) the authorization, execution, delivery and enforceability of the Merger
Agreement; (iii) approval of governmental authorities; (iv) the absence of
violations of, among other things, the Certificate of Incorporation, Bylaws,
certain contracts or laws; (v) documents filed with the Commission and the
accuracy of information, including financial statements in accordance with
generally accepted accounting principles, contained therein; and (vi) the
absence of any material adverse events affecting ACC's business or any
undisclosed liabilities.
EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES
As soon as practicable after the Effective Time, each USW shareholder will
be provided a form letter of transmittal and instructions (the "Transmittal
Letter") for use in surrendering the certificates that immediately prior to
the Effective Time represented shares of USW Common Stock (the "USW Stock
Certificates"). Upon
104
<PAGE>
surrender to ACC of a USW Stock Certificate, together with a duly executed
Transmittal Letter and any other required documents, the holder of such USW
Stock Certificate will be entitled to receive in exchange therefor a
certificate for the number of whole shares of ACC Common Stock (and cash in
lieu of fractional shares thereof) to which such holder is entitled under the
Merger Agreement. See "The Merger Agreement." The USW Stock Certificates will
be cancelled upon surrender to ACC.
The Transmittal Letter will provide, among other things, that each USW
shareholder releases and discharges USW and its officers and directors from
any claims, damages, losses or liabilities which the shareholder now has or
may have arising out of or relating to the formation, financing, management or
operation of USW, the issuance, holding or repurchase of securities of USW, or
the shareholder's status as a shareholder, officer, director or employee of
USW.
From and after the Effective Time, the holders of USW Stock Certificates
evidencing ownership of shares of USW Common Stock outstanding immediately
prior to the Effective Time will cease to have any rights with respect to such
shares of USW Common Stock except as otherwise provided in the Merger
Agreement or by applicable law. No dividends or other distributions, if any,
in respect of the shares of ACC Common Stock, declared after the Effective
Time and payable to holders of record after the Effective Time, shall be paid
to the holders of any unsurrendered USW Stock Certificates until such USW
Stock Certificates are surrendered and delivered as provided herein and no
interest shall be paid on the amount of any cash. Holders of any unsurrendered
USW Stock Certificates shall not be entitled to vote the ACC Common Stock
issuable to them until such USW Stock Certificates are exchanged pursuant to
the Merger Agreement.
TREATMENT OF USW STOCK OPTIONS, USW WARRANTS AND USW PREFERRED STOCK
At the Effective Time, ACC will cause each holder of a USW Stock Option to
receive an option to purchase shares of ACC Common Stock having substantially
the same terms and conditions as the USW Stock Options, except that the
exercise price and number of shares of ACC Common Stock issuable upon exercise
shall be divided and multiplied, respectively, by the Exchange Ratio. At the
Effective Time, (i) each share of USW Preferred Stock which is issued and
outstanding (other than Dissenting Shares) shall be converted pursuant to its
terms into USW Common Stock and immediately thereafter converted into ACC
Common Stock in accordance with the Merger Agreement, and (ii) each USW
Warrant which is outstanding shall be treated as if it had been exercised
immediately prior to the Effective Time, and as if the exercise price had been
paid by subtracting that number of shares of USW Common Stock equal in value
to the aggregate exercise price of such USW Warrants, as determined using the
Exchange Ratio, from the number of shares of USW Common Stock issuable
thereunder calculated based on the USW Per Share Price.
CERTAIN OTHER AGREEMENTS
Pursuant to the Merger Agreement, USW has agreed, among other things, that
during the period from the date of the Merger Agreement until the Effective
Time, except as contemplated by the Merger Agreement or as otherwise consented
to by ACC, it will conduct its business and engage in transactions only in the
ordinary and usual course of business and maintain existing relationships with
suppliers, customers, employees and other business associates. Further, USW
has agreed that, without obtaining prior written consent of ACC, it will not
authorize for issuance and will not, nor propose to, issue, grant or sell any
shares of capital stock or other securities of USW, including but not limited
to any securities convertible into or exchangeable for shares of stock of any
class of USW, except for the issuance of shares of USW Common Stock pursuant
to the exercise of outstanding stock options granted under USW's Stock Option
Plans. In addition, USW has agreed to certain other substantial restrictions
on the conduct of its business and other matters pending the Merger, as
described in Section 6.1 of the Merger Agreement, which is incorporated herein
by reference.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Directors and executive officers of USW beneficially own approximately
42.23% of the outstanding USW Common Stock and will receive ACC Common Stock
in the Merger for their outstanding USW Common Stock
105
<PAGE>
on the same basis as other shareholders of USW. See "Information Concerning
USW--Security Ownership of Certain Beneficial Owners and Management." Any
options to purchase USW Common Stock that are not exercised prior to the
Effective Time will become options to purchase shares of ACC Common Stock
having substantially the same terms and conditions as the USW Options, except
that the exercise price and number of shares issuable upon exercise shall be
divided and multiplied, respectively, by the Exchange Ratio. Each USW Warrant
which is outstanding at the Effective Time shall be treated as if it had been
exercised immediately prior to the Effective Time, and as if the exercise
price had been paid by subtracting that number of shares of USW Common Stock
equal in value to the aggregate exercise price of such USW Warrants, as
determined using the Exchange Ratio, from the number of shares of USW Common
Stock issuable thereunder calculated based on the USW Per Share Price. The
following table indicates the number of shares subject to options and warrants
to purchase USW Common Stock held by directors and executive officers of USW
at December 1, 1997 and the weighted average exercise prices of such options.
<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES AVERAGE
SUBJECT TO USW OPTIONS EXERCISE PRICE PER
NAME AND USW WARRANTS SHARE
---- ---------------------- ------------------
<S> <C> <C>
Stephen J. Parker............... 809,000 $1.16
Aaron R. Brown.................. 809,000 $1.16
David B. Hurwitz................ 400,000 $1.10
Arthur Regan.................... 20,000 $1.69
Murray Goldberg................. 0 0
</TABLE>
NON-COMPETE AND CONFIDENTIALITY AGREEMENTS
Pursuant to the Merger Agreement, at or prior to the Effective Time, Messrs.
Aaron R. Brown and Stephen Parker will each enter into a Non-Compete Agreement
with ACC. Each Non-Compete Agreement includes a covenant by each such person
not to compete or interfere with the business conducted by ACC at the
Effective Time for a stated period of time, subject to certain exceptions.
Each Non-Compete Agreement also contains terms restricting the disclosure and
use of confidential information with respect to the business, properties, and
personnel of USW and ACC. Delivery of the Non-Compete Agreements is a
condition to ACC's obligation to consummate the Merger. A form of such Non-
Compete Agreement is included as Exhibit C to the Merger Agreement attached as
Exhibit A hereto, and such description is qualified in its entirety by such
reference.
POOLING LETTERS AND AFFILIATE AGREEMENTS
Another condition of ACC's obligation to consummate the Merger is to obtain
from each director and other "affiliate" of USW ("Affiliates") a pooling
letter and an affiliate agreement confirming their understanding and agreement
that they will not, among other things, sell, transfer or otherwise reduce
their interest in the shares of ACC Common Stock they receive in the Merger or
reduce their risk relating thereto until after ACC has published financial
results covering at least the 30 days of combined operations occurring after
the Closing Date. Each party to such agreements also will represent and
warrant that it has not made or completed any sales of shares of stock of USW
during the 30-day period immediately preceding the Effective Time of the
Merger. Forms of the pooling letter and affiliate agreement are included as
Exhibits A and B to the Merger Agreement attached as Exhibit A hereto, and
this description is qualified in its entirety by such reference.
INDEMNIFICATION
From and after the Effective Time, ACC and USW, as the surviving corporation
in the Merger, agree to fulfill, assume and honor the indemnification
provisions of the By-laws and Certificate of Incorporation of USW and any
indemnification agreements entered into by USW and certain of its current and
former officers and directors, as in effect as of the Effective Time.
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<PAGE>
CERTAIN REGULATORY FILINGS AND APPROVALS
Consummation of the Merger is contingent upon the receipt of approvals from
the FCC with respect to the transfer of control of USW to ACC and certain
related transactions. All of the applications necessary to obtain FCC approval
have been filed. Consummation of the Merger is also contingent upon
notification to and/or approval by various state PSCs. All of the
notifications and/or requests for approval of the transfer of control of USW
to ACC have been filed with the relevant PSCs.
Under the Hart-Scott-Rodino Act and applicable rules, the Merger may not be
consummated until notifications have been given and certain information has
been furnished to the Federal Trade Commission ("FTC") and the Antitrust
Division of the Department of Justice and specified waiting periods have
expired. The required waiting periods for such filings have expired. However,
at any time before or after the Effective Time of the Merger, and
notwithstanding expiration of such waiting periods, the FTC, the Antitrust
Division or any state could take such action under the antitrust laws as it
deems necessary or desirable in the public interest.
AMENDMENT; WAIVER
The Merger Agreement provides that USW and ACC may not amend the Merger
Agreement except by a writing by the party to be charged. The Merger Agreement
provides that either party to the Merger Agreement may at any time before the
Effective Time waive any or all of the conditions to such party's obligations
to consummate the Merger.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time only (a) by the mutual written consent of USW and ACC; (b) by either USW
or ACC if the Merger has not been consummated on or before March 31, 1998,
provided that this right to terminate shall not be available to any party
whose breach of the Merger Agreement has been the cause of, or resulted in,
the failure of the Merger to occur on or before such date, and provided that
this period is extended to September 30, 1998 if the Merger has not been
consummated due to an action instituted by the Federal Trade Commission or
Department of Justice; (c) by either ACC or USW if a court or governmental
entity has issued an order enjoining the Merger, unless the party relying on
such order has not complied with certain obligations under the Agreement; (d)
by ACC if (i) USW shall have misstated any representation or breached any
warranty or covenant which would result in it being unable to satisfy the
conditions to Closing set forth in the Agreement or (ii) any party to a
Shareholder Tender Agreement (other than ACC) shall have violated its
provisions; or (e) by USW if ACC shall have misstated any representation or
breached any warranty or covenant which would result in it being unable to
satisfy the conditions to Closing set forth in the Agreement.
EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS
GENERAL
USW is incorporated in the State of New York and ACC is incorporated in the
State of Delaware. Shareholders of USW, whose rights are currently governed by
the NYBCL and the USW Certificate of Incorporation and USW Bylaws, will, upon
consummation of the Merger, become shareholders of ACC and their rights will
be governed by the DGCL and the ACC Certificate of Incorporation and ACC
Bylaws.
Two New York State bills (Numbers S476B and S5680), which passed the Senate
on June 25, 1997 and the Assembly on July 15, 1997 and were signed into law by
the Governor on August 26, 1997, generally revise the NYBCL. These new laws
and their revisions to the NYBCL will take effect on February 22, 1998 (180
days after the date that the Governor signed them into law). The new
amendments to the NYBCL are extensive and amend certain provisions, including
those relating to corporate finance, proxies, powers of directors and mergers,
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and also repeal certain provisions relating thereto. The most notable new
amendments are summarized below. The Merger will effect several changes in the
rights of shareholders as a result of differences between the NYBCL and the
DGCL. The provisions of the NYBCL and DGCL differ in numerous respects,
although the new amendments to the NYBCL will reduce certain of these
differences. Summarized below are certain of the principal differences between
the NYBCL and the DGCL affecting the rights of shareholders. The summary is
not intended to be relied upon as an exhaustive list or a detailed description
of the provisions discussed and is qualified in the entirety by the respective
corporate codes of the States of New York and Delaware and by the USW
Certificate of Incorporation and USW Bylaws and the ACC Certificate of
Incorporation and Bylaws.
DIVIDENDS
The DGCL provides that a corporation may, unless otherwise restricted by its
certificate of incorporation, declare and pay dividends out of surplus, or if
no surplus exists, out of net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year (provided that the
amount of capital of the corporation is not less than the aggregate amount of
the capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets). Under the NYBCL,
dividends may be paid only out of surplus.
VOTE REQUIRED FOR CERTAIN TRANSACTIONS
The NYBCL requires that certain mergers, consolidations, dissolutions and
sales of all or substantially all of the assets not in the ordinary course of
business be approved by the holders of two-thirds of the outstanding stock
entitled to vote thereon. Under the DGCL, such transactions require approval
by the holders of a majority of the outstanding stock entitled to vote
thereon, unless otherwise expressly provided in the certificate of
incorporation, and a vote of the shareholders of the surviving corporation is
not necessary where, in the case of a merger, (i) no amendment of its
certificate of incorporation is effected, (ii) each share of its stock
outstanding immediately prior to the Effective Time is to be an identical
outstanding or treasury share of the surviving corporation after the Effective
Time, and (iii) the merger results in no more than a 20% increase in its
outstanding common stock. The new amendments to the NYBCL include provisions
permitting a plan of merger, plan of share exchange, or sale, lease, exchange
or other disposition to be adopted by a majority of all outstanding shares
(instead of two-thirds vote) in cases where the certificate of incorporation
so provides which are similar to the DGCL provisions.
ACC's Certificate of Incorporation provides that its Bylaws and certain
articles of its Certificate of Incorporation may not be altered, amended or
repealed by shareholders except by the affirmative vote of the holders of at
least 80% of the issued and outstanding ACC Common Stock, and also provides
that special meetings of shareholders may only be called by the Chairman of
the Board, President or the Board of Directors, and not by any shareholder.
USW's Bylaws require its President to call a special meeting of shareholders
whenever he is directed in writing to do so by the holders of at least 20% of
the outstanding shares entitled to vote at such meeting.
DISSENTERS' RIGHTS OF APPRAISAL
Under the NYBCL, dissenting shareholders who follow prescribed statutory
procedures are entitled to appraisal rights in connection with certain
mergers, consolidations and sales of all or substantially all the assets of a
corporation and in connection with certain amendments to a corporation's
certificate of incorporation which adversely affect the rights of such
shareholder. The DGCL provides similar rights and procedures for mergers and
consolidations only. Furthermore, under the DGCL, even in the case of a merger
or consolidation, such dissenters' appraisal rights do not apply to
shareholders of the surviving corporation in a merger if shareholder approval
of the merger is not required and are not provided for shares of a constituent
corporation that are listed on a national securities exchange or The Nasdaq
Stock Market or are held of record by more than 2,000
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shareholders, so long as the only consideration to be received by holders in
such merger or consolidation consists of any combination of (i) shares of
stock of the surviving corporation, (ii) shares of stock of any corporation,
which shares are listed on a national securities exchange or The Nasdaq Stock
Market or are held of record by more than 2,000 shareholders, or (iii) cash in
lieu of fractional shares.
The availability of appraisal rights to shareholders of USW who dissent with
respect to the Merger is discussed under "The USW Special Meeting--Dissenters'
Rights."
BUSINESS COMBINATION STATUTES
The NYBCL prohibits any "business combination" (as therein defined) between
a "resident domestic corporation" and an "interested shareholder" for a period
of five years after the date that the interested shareholder became an
interested shareholder unless prior to that date the board of directors of the
resident domestic corporation approved the business combination or the
transaction that resulted in the interested shareholder becoming an interested
shareholder. After such five year period has elapsed, such a business
combination is permitted only if (i) it is approved by a majority of the
outstanding voting stock not owned by the interested shareholder or its
affiliate or (ii) certain statutory fair price requirements are met. A
"resident domestic corporation" is defined as any corporation that (i) is
incorporated in New York, (ii) has its principal executive offices and
significant business operations in New York or has at least 250 employees or
25% of its employees employed primarily in New York (including employees of
its 80% subsidiaries), and (iii) has at least 10% of its voting stock
beneficially owned by New York residents. An "interested shareholder" is any
person who beneficially owns, directly or indirectly, 20% or more of the
outstanding voting stock of the corporation. The NYBCL provision is not
applicable to the proposed Merger because, among other reasons, USW's
principal executive offices, significant business operations and employees are
located outside of New York State.
Section 203 of the DGCL prohibits any "business combination" (as therein
defined) between a Delaware corporation and an "interested stockholder" for
three years following the date that the interested stockholder became an
interested stockholder unless (i) prior to that date the board of directors
approved the business combination or the transaction that resulted in the
interested stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (not counting shares owned by persons who are directors
and also officers and not counting certain shares in employee stock plans), or
(iii) on or subsequent to such date the business combination is approved by
the board of directors and approved at a meeting (not by written consent) by
at least two-thirds of the outstanding voting stock not owned by the
interested stockholder. The DGCL defines "interested stockholder" as any
person who beneficially owns, directly or indirectly, 15% or more of the
outstanding voting stock of the corporation. Unlike the NYBCL, the DGCL does
not require, in order to be covered by these statutory provisions, that the
corporation's principal executive offices or significant operations be located
in Delaware or that at least a specified percentage of its voting stock be
beneficially owned by Delaware residents.
CORPORATE ACTION BY WRITTEN CONSENT WITHOUT A SHAREHOLDERS' MEETING
The NYBCL permits corporate action without a shareholders' meeting only upon
the unanimous written consent of holders of all outstanding shares entitled to
vote on such action. The DGCL provides that, unless the certificate of
incorporation provides otherwise, any action required or permitted to be taken
at an annual or special meeting may be taken without a meeting of shareholders
upon the written consent of holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize the proposed
corporate action at a meeting at which all shares entitled to vote thereon
were present and voted, and then requires the corporation to provide prompt
notice of the actions taken through such procedure to the shareholders who did
not consent with respect to such action. The new amendments to the NYBCL
include provisions similar to those of the DGCL and allow, if the certificate
of incorporation so permits, shareholder
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action without a meeting upon the written consent of holders of outstanding
shares having not less than the minimum number of votes that would be
necessary to authorize such action at a meeting at which all shares entitled
to vote thereon were present and voted. ACC's Certificate of Incorporation
expressly includes a provision prohibiting shareholders' action by written
consent in lieu of a special or annual meeting.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The NYBCL permits a classified board with as many as four classes (with each
class to be as nearly equal in number as possible), but forbids fewer than
three directors in any class. The new amendments to the NYBCL delete this
requirement of at least three directors in any class. The DGCL permits a
classified board of directors with as many as three classes, without
specifying any minimum number required in each class. ACC's Certificate of
Incorporation and USW's Certificate of Incorporation do not provide for a
classified board of directors. With the changes to the NYBCL, there will be no
material differences in the provisions relating to classification of
directors.
NUMBER OF DIRECTORS
Under the DGCL, a corporation may have as few as one director and there is
no statutory upper limit on the number of directors. The specific number may
be fixed in the by-laws or in the certificate of incorporation, but if fixed
in the certificate of incorporation, may be changed only by amendment of the
certificate of incorporation. If the certificate of incorporation is silent as
to the number of directors, the board of directors may fix or change the
authorized number of directors pursuant to a provision of the by-laws. ACC's
Certificate of Incorporation provides that the number of directors shall be
not less than three, with the exact number to be determined by the Board.
Under the NYBCL, the number of directors may not be less than three (except
where there are less than three shareholders), and any higher number may be
fixed by the by-laws or by action of the shareholders or of the board of
directors under the specific provisions of the by-laws adopted by the
shareholders. The number of directors may be increased or decreased by
amendment of the by-laws or by action of the shareholders or of the board of
directors under the specific provisions of a by-law adopted by the
shareholders, subject to certain limitations. The new amendments to the NYBCL
change the minimum number of directors, except where there are fewer than
three shareholders, from three to one. With the changes to the NYBCL, there
will be no material differences in the provisions relating to number of
directors.
ISSUANCE TO OFFICERS, DIRECTORS AND EMPLOYEES OF RIGHTS OR OPTIONS TO PURCHASE
SHARES
The NYBCL requires the affirmative vote of a majority of the shares entitled
to vote in order to issue to officers, directors or employees options or
rights to purchase stock. The new amendments to the NYBCL change the
shareholder vote required in order to issue rights or options to directors,
officers or employees from a majority of all outstanding shares to a majority
of votes cast at a meeting of shareholders. The DGCL does not require
stockholder approval of such transactions. However, ACC is subject to various
other applicable legal requirements, such as rules of the Securities and
Exchange Commission and The Nasdaq National Market which may make stockholder
approval of certain rights or option plans and grants thereunder necessary or
desirable in certain circumstances.
LOANS TO DIRECTORS
Under the DGCL, loans may be made to employees or officers, even those who
are also directors, if the Board of Directors finds that the loan may benefit
the corporation. The NYBCL requires that loans to directors be authorized by
an affirmative vote of shareholders (excluding, for this purpose, shares of
the director who is the proposed borrower). The new amendments to the NYBCL
delete this requirement and permit loans or guarantees to directors if the
board determines that the loan or guarantee benefits the corporation and the
certificate of incorporation expressly authorizes the board to make such
determination.
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CONSIDERATION FOR SHARES
Under the NYBCL, neither obligations of the subscriber for future payments
nor obligations of the subscriber for future services constitutes payment or
part payment for shares of a corporation. Furthermore, certificates for shares
may not be issued until the full amount of the consideration therefor has been
paid (except in the case of shares purchased pursuant to stock options granted
to directors, officers or employees under a plan permitting installment
payments). Under the DGCL, shares of stock may be issued, and deemed to be
fully paid and nonassessable, if the corporation receives consideration (in
the form of cash, services rendered, personal property, real property, leases
of real property, or a combination thereof) for the full subscription price or
having a value not less than the par value of such shares and the corporation
receives a binding obligation of the subscriber to pay the balance of the
subscription price. The new amendments to the NYBCL contain provisions similar
to the DGCL and broaden the consideration acceptable for the issuance of
shares to include binding obligations to pay the subscription price in cash or
other property or a binding obligation to perform services having an agreed
value.
INSPECTION OF SHAREHOLDERS LIST
With respect to the inspection of shareholder lists, the NYBCL provides a
right of inspection, upon at least five days' written demand, to (i) any
person who shall have been a shareholder of record for at least six months
immediately preceding his demand or (ii) any person holding, or thereunto
authorized in writing by the holders of, at least 5% of any class of
outstanding shares. The corporation has certain rights calculated to assure
itself that the demand for inspection is not for a purpose that is in the
interest of a business or object other than the business of the corporation.
The new amendments to the NYBCL conform this provision to the DGCL and change
the right of inspection of shareholder lists to allow any shareholder to
inspect shareholder lists for any purpose reasonably related to such person's
interest as a shareholder.
The DGCL permits any stockholder to inspect the shareholders list for any
purpose reasonably related to such person's interest as a stockholder. In
addition, for a period of at least ten days prior to each stockholders
meeting, a list of stockholders entitled to vote at the meeting shall be open
for examination by any stockholder for any purpose germane to the meeting.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The NYBCL and DGCL provisions regarding indemnification by a corporation of
its directors and officers provide that indemnification may be made in
connection with derivative actions except where the director or officer is
adjudged to be liable to the corporation, unless and only to the extent that,
an appropriate court determines that, in view of all the circumstances, such
director or officer is fairly and reasonably entitled to such indemnification.
The NYBCL additionally provides that indemnification may not be made in
connection with derivative actions where a claim is settled or otherwise
disposed of.
The NYBCL and DGCL also provide that the indemnification and advancement of
expenses granted pursuant to, or provided by, such laws is not exclusive of
any other rights to which a director or officer may be entitled. The NYBCL
additionally provides that no indemnification may be made to or on behalf of
any director or officer for liability arising from actions taken in bad faith,
intentional wrongdoing, or where an improper personal benefit was derived. The
DGCL contains no such express limitation.
SHAREHOLDER RIGHTS PLAN
On October 3, 1997, the Board of Directors of ACC declared a dividend of one
preferred share purchase right (a "Right") for each outstanding share of ACC
Common Stock. The dividend was paid on October 15, 1997 (the "Record Date") to
the shareholders of record on October 15, 1997. Each Right entitles the
registered holder to purchase from the Company one one-thousandth of a share
(a "Unit") of Series A Preferred Stock, par value $1.00 per share (the
"Preferred Stock"), of the Company at a price of $150 per one one-thousandth
of
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a share of Preferred Stock (the "Purchase Price"), subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement dated
as of October 3, 1997, as the same may be amended from time to time (the
"Rights Agreement"), between the Company and First Union National Bank, as
Rights Agent (the "Rights Agent").
Initially, the Rights will attach to all certificates representing shares of
outstanding ACC Common Stock, and no separate Rights Certificates will be
distributed. The Rights will separate from the ACC Common Stock and the
"Distribution Date" will occur upon the earlier of (i) 10 days following a
public announcement (the date of such announcement being the "Stock
Acquisition Date") that a person or group of affiliated or associated persons
(other than the Company, any subsidiary of the Company or any employee benefit
plan of the Company or such subsidiary (an "Acquiring Person") has acquired,
obtained the right to acquire, or otherwise obtained beneficial ownership of
7.5% or more, for the period commencing November 7, 1997 and ending on
December 31, 1998, and 15% or more thereafter, of the then outstanding shares
of ACC Common Stock, and (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any
person becomes an Acquiring Person) following the commencement of a tender
offer or exchange offer that would result in a person or group beneficially
owning 7.5% or more, for the period commencing November 7, 1997 and ending on
December 31, 1998, and 15% or more thereafter, of the then outstanding shares
of ACC Common Stock. Until the Distribution Date, (i) the Rights will be
evidenced by ACC Common Stock certificates and will be transferred with and
only with such ACC Common Stock certificates, (ii) new ACC Common Stock
certificates issued after the Record Date (also including shares distributed
from treasury) will contain a notation incorporating the Rights Agreement by
reference and (iii) the surrender for transfer of any certificates
representing outstanding ACC Common Stock will also constitute the transfer of
the Rights associated with the ACC Common Stock represented by such
certificates.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on the tenth anniversary of the Rights Agreement
unless earlier redeemed by the Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates will
be mailed to holders of record of ACC Common Stock as of the close of business
on the Distribution Date and, thereafter, the separate Rights Certificates
alone will represent the Rights.
In the event that (i) the Company is the surviving corporation in a merger
with an Acquiring Person and shares of ACC Common Stock shall remain
outstanding, (ii) a person becomes an Acquiring Person, (iii) an Acquiring
Person engages in one or more "self-dealing" transactions as set forth in the
Rights Agreement, or (iv) during such time as there is an Acquiring Person, an
event occurs which results in such Acquiring Person's ownership interest being
increased by more than 1% (e.g., by means of a recapitalization) (each such
event being a "Section 11(a)(i) Event"), then, in each such case, each holder
of a Right will thereafter have the right to receive, upon exercise, Units of
Preferred Stock (or, in certain circumstances, ACC Common Stock, cash,
property or other securities of the Company) having a value equal to two times
the exercise price of the Right. The exercise price is the Purchase Price
multiplied by the number of Units of Preferred Stock issuable upon exercise of
a Right prior to the events described in this paragraph. Notwithstanding any
of the foregoing, following the occurrence of any of the events set forth in
this paragraph, all Rights that are, or (under certain circumstances specified
in the Rights Agreement) were, beneficially owned by any Acquiring Person will
be null and void.
In the event that, at any time following the Stock Acquisition Date, (i) the
Company is acquired in a merger or other business combination transaction and
the Company is not the surviving corporation (other than a merger described in
the preceding paragraph), (ii) any Person consolidates or merges with the
Company and all or part of the ACC Common Stock is converted or exchanged for
securities, cash or property of any other Person or (iii) 50% or more of the
Company's assets or earning power is sold or transferred, each holder of a
Right (except Rights which previously have been voided as described above)
shall thereafter have the right to receive, upon exercise, common stock of the
ultimate parent of the Acquiring Person having a value equal to two times the
exercise price of the Right.
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The Purchase Price payable, and the number of Units of Preferred Stock
issuable, upon exercise of the Rights are subject to adjustment from time to
time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Preferred Stock, (ii) if
holders of the Preferred Stock are granted certain rights or warrants to
subscribe for Preferred Stock or convertible securities at less than the
current market price of the Preferred Stock, or (iii) upon the distribution to
the holders of the Preferred Stock of evidences of indebtedness, cash or
assets (excluding regular quarterly cash dividends) or of subscription rights
or warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. The Company is not required to issue fractional Units. In lieu thereof,
an adjustment in cash may be made based on the market price of the Preferred
Stock prior to the date of exercise.
At any time until ten business days following the Stock Acquisition Date, a
majority of the Company's Board of Directors may redeem the Rights in whole,
but not in part, at a price of $.01 per Right (subject to adjustment in
certain events) (the "Redemption Price"), payable, at the election of such
majority of the Company's Board of Directors, in cash or shares of ACC Common
Stock. Immediately upon the action of a majority of the Company's Board of
Directors ordering the redemption of the Rights, the Rights will terminate and
the only right of the holders of Rights will be to receive the Redemption
Price.
The Board of Directors, at its option, may exchange each Right for (i) one
Unit of Preferred Stock or (ii) such number of Units of Preferred Stock as
will equal (x) the difference between the aggregate market price of the number
of Units of Preferred Stock to be received upon a Section 11(a)(ii) Event the
purchase price set forth in the Rights Agreement, divided by (y) the market
price per Unit of Preferred Stock upon a Section 11(a)(ii) Event.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company, including, without limitation, the right to
vote or to receive dividends. While the distribution of the Rights will not be
taxable to stockholders or to the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights
become exercisable for Units of Preferred Stock (or other consideration).
Any of the provisions of the Rights Agreement may be amended without the
approval of the holders of ACC Common Stock at any time prior to the
Distribution Date. After the Distribution Date, the provisions of the Rights
Agreement may be amended in order to cure any ambiguity, defect or
inconsistency, to make changes which do not adversely affect the interests of
holders of Rights (excluding the interests of any Acquiring Person), or to
shorten or lengthen any time period under the Rights Agreement; provided,
however, that no amendment to adjust the time period governing redemption
shall be made at such time as the Rights are not redeemable.
The Units of Preferred Stock that may be acquired upon exercise of the
Rights will be nonredeemable and subordinate to any other shares of preferred
stock that may be issued by the Company.
Each Unit of Preferred Stock will receive ratably any dividend declared on
the ACC Common Stock.
In the event of liquidation, the holder of Preferred Stock will receive a
preferred liquidation payment equal to the greater of $1.00 per Unit or the
per share amount paid in respect of a share of the ACC Common Stock.
Each Unit of Preferred Stock will have one vote, voting together with the
ACC Common Stock.
In the event of any merger, consolidation or other transaction in which
shares of ACC Common Stock are exchanged, each Unit of Preferred Stock will be
entitled to receive the per share amount paid in respect of each share of ACC
Common Stock.
The rights of holders of the Preferred Stock to dividends, liquidation and
voting, and in the event of mergers and consolidations, are protected by
customary antidilution provisions.
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Because of the nature of the Preferred Stock's dividend, liquidation and
voting rights, the economic value of one Unit of Preferred Stock that may be
acquired upon the exercise of each Right is expected to approximate the
economic value of one share of ACC Common Stock.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on (i) the Rights being redeemed or (ii) a
substantial number of Rights being acquired. Under the TCG Merger Agreement,
ACC has agreed to take all necessary action so that the execution and delivery
of the TCG Merger Agreement and the consummation of the transactions
contemplated thereby will not (i) cause the Rights to become exercisable, (ii)
cause any person to become an Acquiring Person or (iii) give rise to a
Distribution Date. The Rights Agreement, as amended, has been filed as
exhibits to ACC's Registration Statement on Form 8-A dated October 3, 1997 (as
amended on Form 8-A/A dated December 10, 1997). The foregoing description of
the Rights Agreement and the Rights is qualified in its entirety by reference
to the Rights Agreement.
USW does not have a shareholder rights plan.
LEGAL MATTERS
The validity of the issuance of the shares of ACC Common Stock offered
hereby will be passed upon for the Company by Nixon, Hargrave, Devans & Doyle
LLP, Rochester, New York.
EXPERTS
The consolidated financial statements and schedules of ACC included or
incorporated by reference in this Proxy Statement/Prospectus and elsewhere in
this Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included or incorporated by reference herein in reliance upon
the authority of said firm as experts in giving said reports.
The consolidated financial statements of USW as of and for the year ended
December 31, 1996 included or incorporated in this Proxy Statement/Prospectus
by reference from the USW Annual Report on Form 10-K for the year ended
December 31, 1996 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is included or incorporated herein
by reference, and have been so incorporated or included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of USW as of and for the year ended
December 31, 1995 included or incorporated in this Proxy Statement/Prospectus
by reference from the USW Annual Report on Form 10-K for the year ended
December 31, 1996 have been audited by Rudolph, Palitz LLP, independent
auditors, as stated in their report, which is included or incorporated herein
by reference, and have been so incorporated or included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The consolidated statements of operations, shareholder's equity, and cash
flows of USW for the year ended December 31, 1994 included or incorporated in
this Proxy Statement/Prospectus by reference from the USW Annual Report on
Form 10-K for the year ended December 31, 1996 have been audited by Baratz &
Associates, P.A., independent auditors, as stated in their report, which is
included or incorporated herein by reference, and have been so included or
incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
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INDEX TO USW CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1996 and 1995.............. F-5
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994...................................................... F-7
Consolidated Statements of Common Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994......................................... F-8
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994...................................................... F-11
Notes to Consolidated Financial Statements................................ F-12
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of September 30, 1997....................... F-20
Consolidated Statements of Operations for the three months and nine months
ended September 30, 1997 and 1996........................................ F-22
Consolidated Statements of Cash Flows for the nine months ended September
30, 1997 and 1996........................................................ F-23
Notes to Consolidated Financial Statements................................ F-24
</TABLE>
F-1
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INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
US WATS, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheet of US WATS, Inc.
and subsidiaries as of December 31, 1996, and the related consolidated
statements of operations, common shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of USW's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for opinion.
In our opinion, the 1996 consolidated financial statements present fairly,
in all material respects, the financial position of US WATS, Inc. and
subsidiaries as of December 31, 1996, and the results of their operations and
cash flows for the year then ended in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 28, 1997, except for Notes
9 and 12, for which the date is
January 21, 1998
F-2
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INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
US WATS, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated balance sheet of US WATS, Inc.
and subsidiaries as of December 31, 1995, and the related consolidated
statements of operations, common shareholders' equity (deficiency), and cash
flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for opinion.
In our opinion, the 1995 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of US WATS,
Inc. and subsidiaries as of December 31, 1995, and the results of their
operations and cash flows for the year then ended in conformity with generally
accepted accounting principles.
RUDOLPH, PALITZ LLP
Plymouth Meeting, Pennsylvania
March 25, 1996
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
US WATS, Inc.
Bala Cynwyd, Pennsylvania
We have audited the accompanying consolidated statements of operations,
common shareholder's equity, and cash flows of US WATS, Inc. and subsidiaries
for the year ended December 31, 1994. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain 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 audit provides a reasonable basis
for opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of US WATS,
Inc. and subsidiaries for the year ended December 31, 1994, in conformity with
generally accepted accounting principles.
BARATZ & ASSOCIATES, P.A.
Marlton, New Jersey
March 8, 1995
F-4
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
----------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................. $ 1,455,186 $ 680,834
Accounts receivable, net of allowance for doubtful ac-
counts of $672,058 for 1996 and $268,921 for 1995.... 6,513,899 4,900,066
Prepaid expenses and other............................ 137,325 107,191
----------- ----------
Total Current Assets................................ 8,106,410 5,688,091
----------- ----------
Property and Equipment:
Telecommunications equipment.......................... 3,773,459 3,046,877
Equipment............................................. 1,356,609 1,231,346
Software.............................................. 610,286 484,199
Office furniture and fixtures......................... 130,003 119,630
Leasehold improvements................................ 35,226 35,226
----------- ----------
5,905,583 4,917,278
Less accumulated depreciation and amortization.......... 2,305,565 1,426,463
----------- ----------
Total Property and Equipment.......................... 3,600,018 3,490,815
----------- ----------
Other assets, principally deposits...................... 285,931 321,455
----------- ----------
$11,992,359 $9,500,361
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Note payable...................................... $ 1,196,860 $ 1,175,164
Capital lease obligations, current portion........ 194,472 130,664
Accounts payable.................................. 6,378,296 4,581,373
Accrued commissions............................... 918,129 753,596
Accrued expenses and other........................ 553,445 361,010
State and Federal taxes payable................... 963,372 475,012
Deferred revenue.................................. 116,222 371,791
----------- -----------
Total Current Liabilities....................... 10,320,796 7,848,610
----------- -----------
Long-Term Liabilities:
Capital lease obligations, net of current portion. 509,224 601,037
----------- -----------
Commitments and Contingencies--see notes
Redeemable preferred stock, $.01 par, authorized
150,000 shares,
issued and outstanding: 30,000 shares in 1996,
30,000 shares in 1995
Redemption value: $11.00 per share................ 300,000 300,000
----------- -----------
Common Shareholders' Equity:
Common stock, $.001 par, authorized
30,000,000 shares; issued:
15,902,100 shares in 1996
15,852,100 shares in 1995......................... 15,902 15,852
Additional paid-in capital........................ 2,623,350 2,573,400
Accumulated Deficit............................... (1,776,663) (1,838,288)
----------- -----------
862,589 750,964
Common stock held in treasury
(250,000 shares), at cost........................ (250) (250)
----------- -----------
Total Common Shareholders' Equity............... 862,339 750,714
----------- -----------
$11,992,359 $ 9,500,361
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues................................ $40,304,442 $27,755,388 $23,633,312
Cost of sales........................... 26,802,398 15,918,212 14,706,549
----------- ----------- -----------
Gross profit............................ 13,502,044 11,837,176 8,926,763
Selling, general and administrative ex-
penses................................. 13,196,173 12,095,991 10,199,679
----------- ----------- -----------
Income (loss) from operations........... 305,871 (258,815) (1,272,916)
Other income (expense)
Interest income....................... 62,732 69,859 12,975
Interest expense...................... (272,978) (88,767) (435)
----------- ----------- -----------
Income (loss) before income tax expense
(benefit).............................. 95,625 (277,723) (1,260,376)
Income tax expense (benefit)............ 7,000 -- (14,300)
----------- ----------- -----------
Net income (loss) before preferred divi-
dends.................................. 88,625 (277,723) (1,246,076)
Preferred dividends earned.............. 27,000 67,255 118,500
----------- ----------- -----------
Net income (loss) available to common
shareholders........................... $ 61,625 $ (344,978) $(1,364,576)
=========== =========== ===========
Net income (loss) per share available to
common shareholders ................... $ -- $ (.02) $ (.09)
=========== =========== ===========
Weighted average number of shares out-
standing............................... 15,877,900 15,100,400 14,875,584
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-7
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON COMMON
STOCK PAR ADD'L TREASURY TREASURY COMMON
SHARES VALUE PAID-IN STOCK STOCK SHAREHOLDERS'
DESCRIPTION ISSUES $.001 CAPITAL DEFICIT SHARES AT COST EQUITY
----------- ---------- -------- ---------- ----------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 15,852,100 $ 15,852 $2,573,400 $(1,838,288) 250,000 $(250) $750,714
Net Income before
Preferred Dividends for
the year ended December
31, 1996............... -- -- -- 88,625 -- -- 88,625
Exercise of Employee
Stock Options.......... 50,000 50 49,950 -- -- -- 50,000
Cash Dividends on
Preferred Stock,
December 1, 1996 ($.90
per share)............. -- -- -- (27,000) -- -- (27,000)
---------- -------- ---------- ----------- ------- ----- --------
Balance, December 31,
1996................... 15,902,100 $ 15,902 $2,623,350 $(1,776,663) 250,000 $(250) 862,339
========== ======== ========== =========== ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-8
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON
COMMON STOCK COMMON ADD'L TREASURY TREASURY SHAREHOLDERS'
SHARES PAR VALUE PAID-IN STOCK STOCK EQUITY
DESCRIPTION ISSUES $.001 CAPITAL DEFICIT SHARES AT COST (DEFICIENCY)
----------- ------------ --------- ---------- ----------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 14,691,100 $14,691 $1,395,691 $(1,493,310) 250,000 $ (250) $ (83,178)
Net Income before
Preferred Dividends for
the year ended December
31, 1995............... -- -- -- (277,723) -- -- (277,723)
Conversion of 100,000
shares of Series 9%
Preferred Stock........ 1,000,000 1,000 999,000 -- -- -- 1,000,000
Employee Stock Bonus.... 50,000 50 24,950 -- -- -- 25,000
Exercise of Employee
Stock Options.......... 111,000 111 153,759 -- -- -- 153,870
Cash Dividends on
Preferred Stock,
December 1, 1995 ($.90
per share)............. -- -- -- (67,255) -- -- (67,255)
---------- ------- ---------- ----------- ------- ------ ---------
Balance, December 31,
1995................... 15,852,100 $15,852 $2,573,400 $(1,838,288) 250,000 $(250) $ 750,714
========== ======= ========== =========== ======= ====== =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-9
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
COMMON
COMMON STOCK COMMON ADD'L TREASURY TREASURY SHAREHOLDERS'
SHARES PAR VALUE PAID-IN STOCK STOCK EQUITY
DESCRIPTION ISSUES $.001 CAPITAL DEFICIT SHARES AT COST (DEFICIENCY)
----------- ------------ --------- ---------- ----------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 14,487,000 $ 14,487 $1,190,770 $ (127,234) 250,000 $(250) $ 1,077,773
Net Income before Pre-
ferred Dividends for
the year ended December
31, 1994............... -- -- -- (1,246,076) -- -- (1,246,076)
Conversion of 20,000
shares of Series 9%
Preferred Stock........ 200,000 200 199,800 -- -- -- 200,000
Exercise of Employee
Stock Options.......... 4,100 4 5,121 -- -- -- 5,125
Cash Dividends on Pre-
ferred Stock, December
1, 1994 ($.90 per
share)................. -- -- -- (120,000) -- -- (120,000)
---------- -------- ---------- ----------- ------- ----- ------------
Balance, December 31,
1994................... 14,691,100 $ 14,691 $1,395,691 $(1,493,310) 250,000 $(250) $ (83,178)
========== ======== ========== =========== ======= ===== ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-10
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) before preferred
dividends............................ $ 88,625 $ (277,723) $(1,246,076)
Adjustment to reconcile net income
(loss) to net cash provided by (used-
in) operating activities
Litigation settlement............... -- (2,882,223) --
Issuance of stock bonus............. -- 25,000 --
Depreciation and amortization....... 930,293 769,685 505,443
Provision for bad debts............. 479,208 842,628 953,397
Write-off of fixed assets........... -- 305,008 --
Changes in assets and liabilities
which provided (used cash):
Accounts receivable............... (2,093,041) (218,822) (1,563,504)
Prepaid expenses and other........ (30,134) (20,822) (47,654)
Other assets...................... 24,332 (27,501) 330,731
Deferred revenue.................. (255,569) 79,274 292,517
Accounts payable and accrued
expenses......................... 2,153,891 1,209,863 2,062,980
State & Federal Taxes payable..... 488,360 (72,977) 165,372
----------- ----------- -----------
Net cash provided by (used in) 1,785,965 (268,610) 1,453,206
operating activities................. ----------- ----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment.... (864,304) (695,469) (1,679,252)
Investment in internet service (40,000) -- --
provider............................. ----------- ----------- -----------
Net cash used in investing activities. (904,304) (695,469) (1,679,252)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from stock option exercises.. 50,000 153,870 5,125
Increase in notes payable net......... 21,696 1,175,164 127,166
Repayment of capital lease
obligations.......................... (152,005) (134,453) --
Preferred stock dividend.............. (27,000) (67,255) (120,000)
Payment of loan acquisition costs..... -- (110,986) --
----------- ----------- -----------
Net cash (used in) provided by
financing activities................. (107,309) 1,016,340 12,291
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 774,352 52,261 (213,755)
Beginning cash and cash equivalents..... 680,834 628,573 842,328
----------- ----------- -----------
Ending cash and cash equivalents........ $ 1,455,186 $ 680,834 $ 628,573
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-11
<PAGE>
US WATS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND
US WATS, Inc. and subsidiaries ("USW") are switch-based interexchange
carriers providing long distance telephone communications services primarily
to small and medium-size business customers. USW also provides inbound-800
long distance services, as well as other telecommunications services such as
travel cards (calling cards), cellular, paging, dedicated access, data
services, pre-paid calling cards (debit cards), international callback, and
carrier termination services. USW uses its own switches and facilities to
originate, transport and terminate calls for customers generally located in
the Mid-Atlantic region and California (on-net areas). For calls originating
or terminating outside USW's own network (off-net area), USW utilizes the
services provided by other long distance companies. Substantially all of USW's
revenues are earned from its customers located on the East Coast.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of US WATS, Inc.
and its three wholly-owned subsidiaries, USW Corporation, USW Enterprises,
Inc., and Carriers Group, Inc. after elimination of all inter-company
accounts, transactions and profits. USW's investment in an internet service
provider is accounted for under the Cost Method.
Revenue Recognition
USW recognizes revenue based upon the customer's usage of services. USW
bills its customers for service on a monthly basis.
Cash and Cash Equivalents
USW considers cash in bank and repurchase agreements with a maturity of
three months or less when purchased as cash and cash equivalents.
At certain times during the year, USW has balances in its operating accounts
that in the aggregate exceed the $100,000 Federal Deposit Insurance
Corporation insurance limit.
Allowance for Doubtful Accounts
Write-offs of accounts receivable for 1996 and 1995 were approximately
$213,000 and $1,052,000, respectively.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated for
financial reporting purposes using the straight line method over the estimated
useful lives of the assets:
<TABLE>
<S> <C>
Telecommunications equipment.................................... 7 years
Furniture fixtures and other.................................... 5 years
</TABLE>
Depreciation and amortization expense of property, plant and equipment for
1996, 1995, and 1994, was $930,293, $1,030,462, and $504,879, respectively.
Included in depreciation expense for 1995 was approximately $305,008 resulting
from the recognized obsolescence of telecommunications equipment.
Deferred Revenue
Deferred revenue consists primarily of prepayments of Debit Card and
International Call Back services. Deferred revenue is recognized as income
based on monthly usage.
F-12
<PAGE>
US WATS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred Financing Costs
Loan origination costs are amortized by the straight-line method over the
term of the related loan, and are included in other assets.
Accounts Payable
Accounts payable includes the cost of access charges due local telephone
companies and long distance transport purchased from long distance carriers.
Marketing
All costs related to marketing and advertising USW's products and services
are expended in the period incurred.
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.
Earnings (Loss) Per Common Share
Earnings (loss) per common share is based upon the weighted average number
of common shares outstanding in 1996, 1995 and 1994. The assumed exercise
and/or conversion of preferred stock, options or warrants has not been
included in the calculation of earnings (loss) per share for 1996, 1995 or
1994 since the effect is anti-dilative or not significant.
Fair Value of Financial Instruments
The fair value of USW's financial instruments such as accounts receivable,
accounts payable, and note payable approximate their carrying amounts.
Carrying Value of Long-Term Assets
USW evaluates the carrying value of long-term assets, including property,
plant and equipment, and other intangibles, based upon current and anticipated
undiscounted cash flows, and recognizes an impairment when it is probable that
such estimated cash flows will be less than the carrying value of the asset.
Management of the amount of impairment, if any, is based upon the difference
between carrying value and fair value.
Reclassification of Accounts
Certain reclassifications have been made to conform prior years' balances to
the current year presentation.
3. NOTE PAYABLE
On May 11, 1995, USW entered into a Loan and Security Agreement with Century
Business Credit Corporation for a revolving credit facility of $2,000,000. The
loan is for a period of two years, and is automatically renewable for two
successive years. Interest on the loan is calculated at prime plus 3 3/4%
(effective rate is 12% at December 31, 1996) and a minimum loan value of
$750,000 must be maintained. The loan is collateralized by accounts receivable
and fixed and intangible assets of USW.
At December 31, 1996, USW was not in compliance with certain loan covenants
pertaining to the acquisition of property and equipment, and Board of Director
membership by specific individuals who are no longer employed by USW. USW
received a waiver or amended the Loan and Security Agreement to correct such
non-compliance.
F-13
<PAGE>
US WATS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. OBLIGATIONS UNDER CAPITAL LEASES
Property under capital leases is recorded at the lesser of the present value
of the minimum lease payments or its fair value at inception. USW leases
various equipment under three-to-five-year noncancellable leases which expire
at various dates through 2000.
The leases carry interest rates ranging from approximately 12.9% to
approximately 13.9% and are collateralized by the equipment purchased. The
future minimum lease payments for the next five years and related lease
obligation balances as of December 31, 1996 and 1995 follow:
<TABLE>
<S> <C>
1997........................................................... $277,639
1998........................................................... 272,843
1999........................................................... 190,483
2000........................................................... 137,350
--------
TOTAL.......................................................... $878,315
========
</TABLE>
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Aggregate capital lease obligation as of the year ended
December 31............................................. $878,315 $987,397
Less--amounts representing interest...................... 174,619 255,696
-------- --------
Present value of net minimum payments under capital
leases.................................................. 703,696 731,701
Less--current portion of capital lease obligations....... 194,472 130,664
-------- --------
Capital lease obligations, net of current portion...... $509,224 $601,037
======== ========
</TABLE>
The following is an analysis of property under capital leases:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Telecommunications Equipment........................ $1,028,660 $1,114,260
Office Equipment.................................... 57,300 57,300
---------- ----------
TOTAL............................................. 1,085,960 1,171,560
Less Accumulated Amortization....................... 224,340 119,829
---------- ----------
Net Assets Under Capital Lease.................... $ 861,620 $1,051,731
========== ==========
</TABLE>
Amortization of assets under capital leases charged to operations and
included in depreciation expense was $149,523, $102,574, and $17,255 in 1996,
1995, and 1994 respectively.
5. INCOME TAXES
The net deferred tax asset at December 31, includes the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred Tax Asset................................... $ 953,000 $ 942,000
Deferred Tax Liability............................... (322,000) (301,000)
Valuation Allowance for Deferred Tax Asset........... (631,000) (641,000)
--------- ---------
$ -- $ --
========= =========
</TABLE>
F-14
<PAGE>
US WATS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The utilization of the deferred tax assets depends on USW's estimate of its
ability to earn taxable income in the future. Although estimates are subject
to change, management was not able to determine their utilization of the
deferred tax asset. Accordingly, a valuation allowance has been provided for
the entire deferred tax asset. The tax effect of major temporary differences
that gave rise to USW's deferred tax assets and liabilities at December 31,
are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Net Operating Loss................................... $ 609,000 $ 784,000
Allowance for Doubtful Accounts...................... 344,000 158,000
Depreciation......................................... (322,000) (301,000)
--------- ---------
Net Deferred Tax Asset............................... $ 631,000 $ 641,000
========= =========
</TABLE>
The provision for income tax expense (benefit) for the years ended December
31, consisted of the following amounts:
<TABLE>
<CAPTION>
1996 1995 1994
------ ---- --------
<S> <C> <C> <C>
Current tax expense (benefit)
Federal........................................... $7,000 $-- $(14,300)
State............................................. -- -- --
------ ---- --------
7,000 -- (14,300)
Deferred tax expense
Federal........................................... -- -- --
State............................................. -- -- --
------ ---- --------
$7,000 $-- $(14,300)
====== ==== ========
</TABLE>
Total income tax expense (benefit) amounted to $7,000 in 1996, $0 in 1995,
and $(14,300) in 1994, (effective tax rates of 8.1%, 0%, and (1.1)%,
respectively), compared to income tax expense (benefit) of $29,500, $(94,000),
and $(427,500), computed by applying the statutory rate of 34% to income
(loss) before income tax (benefit). These differences are accounted for as
follows:
<TABLE>
<CAPTION>
% OF % OF % OF
1996 PRETAX 1995 PRETAX 1994 PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
-------- ------ -------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" income
tax expense (benefit)..... $ 29,500 34.0 $(94,000) (34.0) $(427,500) (34.0)
State income tax expense,
net of Federal income tax
benefit................... -- -- -- -- -- --
Utilization of NOL......... -- -- -- -- (14,300) (1.1)
Valuation allowance........ (30,500) (35.1) 80,000 28.9 427,500 34.0
Other...................... 8,000 9.2 14,000 5.1 -- --
-------- ----- -------- ----- --------- -----
Actual income tax expense
(benefit)................. $ 7,000 8.1 $ -- -- $ (14,300) (1.1)
======== ===== ======== ===== ========= =====
</TABLE>
USW has available approximately $ 1,497,000 and $952,000 of tax carry
forwards which may be used against future Federal taxable income and
alternative taxable income respectively. These carry forwards expire in 2010.
F-15
<PAGE>
US WATS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
USW has a long term contract for the purchase of 1+, 800, and Private lines
services over a 36 month period. The contract provides for a minimum monthly
commitment of $250,000 and an aggregate commitment of $9,000,000 over the
contract life. USW has met its monthly commitments through December 1996.
USW leases certain offices and equipment. Future annual minimum leases
payments under the significant agreements are as follows for the years ended
December 31:
<TABLE>
<S> <C>
1997......................................................... $ 370,345
1998......................................................... 322,705
1999......................................................... 151,280
2000......................................................... 140,514
2001......................................................... 62,019
thereafter................................................... 62,019
----------
TOTAL........................................................ $1,108,882
==========
</TABLE>
Rent expense incurred for operating leases was approximately $ 422,896,
$351,300, and $367,600, in 1996, 1995, and 1994, respectively.
USW has entered into employment agreements with each of its five Executive
Officers. With respect to the officers agreements, the total minimum
commitment level over the next three years is approximately $2,499,000.
USW entered into a consulting contract with its former Chairman for
consulting services to be rendered over the next six year period. The total
minimum aggregate commitment level of the contract is approximately $750,000.
USW is party, in the ordinary course of business, to litigation involving
services rendered, contract claims and other miscellaneous causes of action
arising from its business. Management does not consider that any such matters
will materially effect USW's financial statements will not be materially
affected by such proceedings. See Also Note 13 Subsequent Events.
7. PENSION PLANS
USW sponsors a 401(K) Pension and Profit Sharing Plan for all employees. USW
has elected not to match any employee contributions or make any profit sharing
contributions to the plan.
8. PREFERRED STOCK
REDEEMABLE PREFERRED:
USW has outstanding cumulative, convertible, redeemable preferred stock
which is convertible at the option of respective shareholders thereof, into
ten (10) common shares at a conversion price of one dollar ($1.00) each.
At any time after September 1, 1996, USW, at the option of its Board of
Directors, may redeem part or all of the preferred shares outstanding at
$11.00 each plus unpaid and accumulated dividends. The maximum aggregate
redemption value at December 31, 1996 is $330,000. The preferred stock is
mandatorily redeemable in cash on January 2, 2049 at $11.00 per share.
Dividends on the preferred stock are payable in cash only at a rate of 9% per
annum on December 1, March 1, June 1, and September 1.
PREFERRED STOCK:
In July 1994, the shareholders approved an amendment to USW's Certificate of
Incorporation to authorize 850,000 shares of par value $.01 per share
preferred stock, no shares were issued as of December 31, 1996.
F-16
<PAGE>
US WATS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. STOCK OPTIONS AND WARRANTS
Subsequent to the initial filing of these financial statements for the year
ended December 31, 1996, Management determined that certain options had been
excluded from the original information below. The information below has been
updated to reflect the changes in such option activity. Under USW's stock
option plans, options may be granted to officers and employees of USW and its
subsidiaries. No option may be granted for a term in excess of ten years from
the date of grant. As of December 31, 1996, 2,414,040 of the outstanding stock
options were exercisable under the plans. The exercise prices of the
outstanding options represented the fair market value at dates of grant.
A summary of USW's stock option plans activity for common shares for the
three years ended December 31, 1996 follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF SHARES PRICE
---------------- --------
<S> <C> <C>
Outstanding 1/1/94............................... 2,037,300 $1.125
Granted........................................ 2,254,700 $1.53
Exercised...................................... (4,100) $1.25
Terminated..................................... (1,179,600) $1.25
---------- ------
Outstanding 12/31/94............................. 3,108,300 $1.37
Granted........................................ 2,282,500 $1.17
Exercised...................................... (111,000) $1.48
Terminated..................................... (1,028,800) $1.66
---------- ------
Outstanding 12/31/95............................. 4,251,000 $1.19
Granted........................................ 2,045,000 $1.52
Exercised...................................... (50,000) $1.00
Terminated..................................... (1,770,000) $ .97
---------- ------
Outstanding 12/31/96............................. 4,476,000 $1.43
---------- ------
</TABLE>
Subsequent to year end, the Company has terminated 800,000 outstanding
options with members of management at prices ranging from $1.50 to $3.00. In
1997, USW has issued an additional 1,500,000 options to members of management
exercisable at prices ranging from $1.25 to $1.30.
USW accounts for its stock option plans in accordance with Accounting
Principles Board Opinion No. 25, under which compensation cost is recognized
based on the difference, it any, between the fair value of USW's stock at the
time of option grant and the amount the employee must pay to acquire the
stock. USW's options have been issued at fair market value at the time of
grant. Had compensation cost for the incentive and nonqualified options had
been determined consistent with Statement of Financial Accounting Standards
No. 123, Accounting for Stock--Based Compensation (SFAS 123), USW's pro forma
net loss and the net loss per share for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1996 1995
--------- -----------
<S> <C> <C>
Reported Net Income (Loss)........................ $ 61,625 $ (344,978)
Proforma Net Loss................................. $(288,493) $(1,560,848)
Reported Net Income (Loss) Per Share.............. $ -- $ (0.02)
Proforma Net Loss Per Share....................... $ (0.02) $ (0.10)
</TABLE>
In accordance with the requirements of SFAS 123, this method of accounting
has not been applied to options granted prior to the fiscal year beginning
January 1, 1995. The resulting pro forma compensation cost may not be
representative of that to be expected in future years.
F-17
<PAGE>
US WATS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The weighted average fair value of options granted during fiscal 1996 and
1995 was $.55 and $.97, respectively. The fair values of each stock option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants in 1996
and 1995; risk-free interest rates of 6.5%, expected dividend yields of 0%,
expected lives of three years from the date of grant, and expected price
volatility ranging from 69% to 200% for the options granted in 1995 and 1996.
On May 11, 1995, USW agreed to issue to each of two directors/officer of USW
600,000 Warrants to purchase Common Stock, in consideration for limited
personal guarantees to be provided in connection with the revolving credit
facility. Each Warrant entitles the holder to purchase one share of Common
Stock of USW at a price of $1.0625 per share until May 11, 2000.
10. CASH FLOW INFORMATION
Supplemental Disclosure of Cash Flow Information
USW made cash payments for interest of $272,978, $87,189, and $0 for the
years ended December 31, 1996, 1995, and 1994 respectively. USW made cash
payments for income taxes of $0, $75,000, and $56,640 for the years ended
December 31, 1996, 1995 and 1994 respectively.
Supplemental Disclosure of Non-Cash Financing Activities
Redeemable Preferred Stock in the amounts of $1,000,000 and $200,00 was
converted into Common Stock in the years ended December 31, 1995 and 1994,
respectively.
Non-Cash Transactions
During the years ended December 31, 1996 and 1995, USW acquired
approximately $124,000 and $939,000, respectively of telephone communications
and other equipment with capital leases. The lease agreements were financed
over three and five year periods.
11. LITIGATION SETTLEMENTS
During 1995, USW's dispute with Colonial Penn Group, Inc. and Colonial Penn
Insurance Company (collectively "CPG") was favorably resolved, resulting in
the reversal of an accounts payable in the amount of approximately $2,880,000.
However, this benefit was substantially offset by the cost of unsuccessfully
litigating the resultant AT&T case on the basis of anti-trust. The costs of
litigation with AT&T incurred during 1995 approximated $850,000. These costs
do not include the additional expense of approximately $305,000 of related
expenses pertaining to the write-down of certain AT&T signal conversion
equipment and accounts receivable written-off, which were attributable to AT&T
services provided by USW. In addition, AT&T was awarded a counter claim in the
litigation in the amount of $669,000, pertaining to services utilized in prior
years. As a result of settlement of these matters USW recognized a net
favorable impact of approximately $1,056,000 in 1995.
12. RELATED PARTY TRANSACTIONS (UNAUDITED)
Indemnification Arrangements
USW is a party to indemnification agreements with two of its directors,
Aaron R. Brown and Stephen J. Parker, dated August 1990. In addition, USW has
entered into an indemnification agreement with Kevin O'Hare, a former
executive officer of USW, dated July, 1997. In general, the indemnification
agreements obligate USW to indemnify each of Messrs. Brown, Parker and O'Hare
against the liabilities and expenses incurred by them in acting as a director
or officer of USW to the maximum extent allowed by law. USW, together with
Messrs. Parker, Brown and O'Hare, have been sued by USW's former president for
various claims asserted by the plaintiff in connection with his termination of
employment with USW on December 30, 1996. USW and the
F-18
<PAGE>
US WATS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
individual defendants have selected counsel to defend the action. The Board of
Directors of USW has authorized USW to advance the expenses of the individual
defendants incurred in defending this action upon the receipt of an
undertaking from each of them to repay the amounts so advanced in the event it
is determined that they are not entitled to indemnification under applicable
law. As of December 31, 1996, no amounts had been advanced by USW under such
agreements.
Sales Agency
Mr. Goldberg, a director of USW, acts as a sub-agent for USW and is the co-
owner of a company that acts as an agent for USW in the sale of USW's products
and services. During 1996, USW paid Mr. Goldberg and such company a total of
$224,467 in commissions for their services as USW's sales agents.
Loans
During the first quarter of 1996, USW borrowed $100,000 from each of Aaron
R. Brown and Stephen J. Parker, directors of USW. During 1996, USW repaid the
entire outstanding balance of the loans to Messrs. Brown and Parker with
interest.
13. SUBSEQUENT EVENTS (UNAUDITED)
On June 13, 1997, Mark Scully, the former President and Chief Operating
Officer of the Company, filed a complaint against the Company, Kevin O'Hare,
Aaron Brown and Stephen Parker in the United States District Court for the
Eastern District of Pennsylvania. Mr. Scully asserts various claims in
connection with his termination of employment with the Company on December 30,
1996. In particular, he alleges, among other things, breach of contract in
connection with the termination of certain stock options, breach of the
alleged contract for employment, breach of an asserted duty of good faith and
fair dealing, fraudulent and negligent misrepresentation, and civil
conspiracy. Mr. Scully alleges damages of at least $1.6 million, plus
attorneys' fees, costs and other disbursements and the cost of COBRA payments
and interest; $1 million of the alleged damages claimed are punitive. The
Company contests the allegations of the complaint and intends to vigorously
defend against the action. Management cannot presently predict the outcome of
this suit, accordingly no adjustment has been recorded in the Financial
Statements.
The Company was notified in August, 1997 that it had failed to meet the
Capital and Surplus requirement for continued listing of its Common Stock on
the Nasdaq SmallCap Market as of June 30, 1997. The Company was granted a
temporary exemption from the NASD subject to the Company meeting certain
conditions. In order to prevent the Company's stock from being delisted, on
September 19, 1997, certain members of the Company's Board of Directors
exercised outstanding warrants to purchase 62,000 shares of Common Stock for
$65,720 in net proceeds to the Company. On November 26, 1997, the Company sold
an additional 1,590,000 shares of its Common Stock for $1.50 per share,
raising $2,300,000 of net proceeds in a private placement sale to a
significant former shareholder.
On October 28, 1997, the Company entered into an Agreement and Plan of
Merger with ACC Corp. and a wholly-owned subsidiary of ACC Corp., pursuant to
which ACC Corp. will issue approximately $46 million worth of its Common Stock
to holders of US WATS capital stock, and US WATS will become a wholly-owned
subsidiary of ACC Corp. The number of shares to be issued to the holders of US
WATS capital stock will be calculated using a price of $2.48 per share of US
WATS Common Stock, subject to certain adjustments. The merger is subject to
the satisfaction of certain conditions, including that the merger be treated
as a pooling of interests.
F-19
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................... $ 730,256
Accounts receivable, net of allowance for doubtful accounts of
$768,691...................................................... 9,895,850
Prepaid expenses and other..................................... 159,707
-----------
Total Current Assets......................................... 10,785,813
-----------
Property and Equipment:
Telecommunications equipment................................... 3,871,638
Equipment...................................................... 1,577,875
Software....................................................... 643,935
Office furniture and fixtures.................................. 155,553
Leasehold improvements......................................... 36,432
-----------
6,285,433
Less accumulated depreciation and amortization................. 3,037,006
-----------
Total Property and Equipment, net............................ 3,248,427
-----------
Other assets, principally deposits............................... 212,031
-----------
$14,246,271
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Note payable.................................................. $ 2,051,201
Capital lease obligations, current portion.................... 268,265
Accounts payable.............................................. 8,230,168
Accrued commissions........................................... 1,330,563
Accrued expenses and other.................................... 580,157
State and Federal taxes payable............................... 1,245,540
Deferred revenue.............................................. 103,489
-----------
Total Current Liabilities................................... 13,809,383
-----------
Long-Term Liabilities:
Capital lease obligations, net of current portion............. 448,656
-----------
Commitments and Contingencies
Redeemable preferred stock, $.01 par, authorized 150,000 shares;
30,000 shares issued and outstanding in 1997 and 1996
Redemption value: $11.00 per share............................ 330,000
-----------
Common Shareholders' Equity
Common stock, $.001 par, authorized 30,000,000 shares; issued
15,989,100 shares............................................ 15,989
Additional paid-in capital.................................... 2,684,138
Deficit....................................................... (3,041,645)
-----------
(341,518)
Common stock held in treasury (250,000 shares), at cost......... (250)
-----------
Total Common Shareholders' Equity........................... (341,768)
-----------
$14,246,271
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................... $13,911,630 $10,222,492 $43,302,987 $28,576,118
Cost of sales.............. 10,505,021 7,017,683 31,720,290 18,813,045
----------- ----------- ----------- -----------
Gross profit............... 3,406,609 3,204,809 11,582,697 9,763,073
Selling, general and 4,337,847 3,051,169 12,628,637 9,158,056
administrative expenses... ----------- ----------- ----------- -----------
(Loss) income from
operations................ (931,238) 153,640 (1,045,940) 605,017
Other income (expense)
Interest income.......... 14,642 19,607 52,313 41,444
Interest expense......... (91,966) (76,633) (251,105) (201,773)
----------- ----------- ----------- -----------
Total other income
(expense)............... (77,324) (57,026) (198,792) (160,329)
(Loss) income before income
taxes..................... (1,008,562) 96,614 (1,244,732) 444,688
Income taxes............... -- -- -- --
----------- ----------- ----------- -----------
Net (loss) income before
preferred dividends....... (1,008,562) 96,614 (1,244,732) 444,688
Preferred dividends earned. 6,750 6,750 20,250 20,250
----------- ----------- ----------- -----------
Net (loss) income available $(1,015,312) $ 89,864 $(1,264,982) $ 424,438
to common shareholders.... =========== =========== =========== ===========
Earnings per common shares
available to common $ (.06) $ .01 $ (.08) $ .03
shareholders.............. =========== =========== =========== ===========
Weighted average number of 15,935,187 15,897,752 15,927,170 15,870,299
shares..................... =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
US WATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) before preferred dividends....... $(1,244,732) $ 444,688
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities...
Depreciation and amortization.................... 756,386 679,226
Provision for bad debts.......................... 555,015 367,614
Changes in assets and liabilities which provided
(used) cash:
Accounts receivable............................ (3,952,965) (2,167,680)
Prepaid expenses and other..................... (22,382) (26,376)
Other assets................................... 89,700 (1,862)
Deferred revenue............................... 3,266 --
Accounts payable and accrued expenses.......... 2,291,016 824,263
State and Federal Taxes payable................ 282,168 235,737
----------- -----------
Net cash provided by (used in) operating (1,242,528) 355,610
activities........................................ ----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment................. (379,852) (338,115)
----------- -----------
Net cash provided by (used in) investing
activities........................................ (379,852) (338,115)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from stock option exercises............... 90,875 50,000
Increase (decrease) in notes payable net........... 854,343 521,397
Repayment of capital lease obligations............. 13,225 (116,100)
Preferred stock dividend........................... (20,250) (20,250)
Advance from officers.............................. -- 196,824
Payment of lease acquisition costs................. (40,743) --
----------- -----------
Net cash provided by (used in) financing 897,450 631,871
activities........................................ ----------- -----------
Net increase (decrease) in cash...................... (724,930) 649,366
Beginning cash and cash equivalents.................. 1,455,186 680,834
----------- -----------
Ending cash and cash equivalents..................... $ 730,256 $ 1,330,200
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
US WATS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND
US WATS, Inc. and subsidiaries ("USW") are switch-based interexchange
carriers providing long distance telephone communications services primarily
to small and medium-size business customers. USW also provides inbound-800
long distance services, as well as other telecommunications services such as
travel cards (calling cards), cellular, paging, internet service, dedicated
access, data services, prepaid calling cards (debit cards), International
Callback and carrier termination services. USW uses its own switches and
facilities to originate, transport and terminate calls for customers located
in the Mid-Atlantic region as well as all of California with the exception for
select Independent Telephone Company territories. Approximately 85% of the
calls billed by USW each month are processed through USW's own switches. For
calls originating or terminating outside USW's own network (off-net area), USW
utilizes the services provided by other long distance companies.
USW's revenues are derived primarily from the transport of outgoing and
incoming calls which are billed by USW to end-users at specified rates.
Transport costs of these calls are billed to USW from other carriers at
contractual rates. These carriers supply USW with call detail information
which enables USW to bill its customers depending upon USW's individual rates.
The combination of the efficiency of USW's network and facilities, and the
purchase of long distance services in bulk from other carriers allow USW to
offer competitive rates to small and medium-sized businesses.
USW differentiates itself from a price-only sales approach by offering
various value-added services for its customers, provided by its customized
proprietary software. USW's outbound long distance services, inbound 800
services, cellular services, as well as paging and internet services are
provided on one combined bill which includes various management reports. USW
believes its consultative approach to meeting its customers' needs
distinguishes it from its larger competitors. All of USW's customer support
functions, such as customer service, credit and collections, and
administrative services are centrally located at USW's offices at 111
Presidential Boulevard, Suite 114, Bala Cynwyd, Pennsylvania 19004. USW's
telephone number at that location is (610) 660-0100.
The accompanying unaudited interim consolidated financial statements and
related notes have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission and in the opinion of management, include
all adjustments necessary for a fair presentation of such financial
statements. Such adjustments consist only of normal recurring items. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. Where
appropriate, certain amounts in the prior period financial statements have
been reclassified to conform to the current period presentation. The results
of operations for nine months ended September 30, 1997 are not necessarily
indicative of results to be expected for the full year.
The accompanying unaudited interim consolidated financial statements and
related notes should be read in conjunction with the financial statements and
related notes included in USW's Form 10-K and Form 10-K/A for the year ended
December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of US WATS, Inc.
and its three wholly-owned subsidiaries, USW Corporation, USW Enterprises,
Inc., and Carriers Group Inc., after elimination of all inter-company
accounts, transactions and profits. USW's investment in an internet service
provider is accounted for under the cost method.
F-24
<PAGE>
US WATS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
USW recognizes revenue based upon the customer's usage of services. USW
primarily bills its customers for service on a monthly basis, however, in some
instances, it bills certain customers on a more frequent basis.
Cash and Cash Equivalents
USW considers cash in its bank and repurchase agreements with a maturity of
three months or less when purchased as cash and cash equivalents.
At certain times during the year, USW has balances in its operating accounts
that in the aggregate exceed the $100,000 Federal Deposit Insurance
Corporation insurance limit.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated for
financial reporting purposes using the straight line method over the estimated
useful lives of the assets:
<TABLE>
<S> <C>
Telecommunications equipment.................................... 7 years
Furniture fixtures and other.................................... 5 years
</TABLE>
Deferred Revenue
Deferred revenue consists primarily of prepayments of Debit Card and
International Call Back services. Deferred revenue is recognized as income
based on monthly usage.
Deferred Financing Costs
Loan origination costs are amortized by the straight-line method over the
term of the related loan, and are included in other assets.
Accounts Payable
Accounts payable includes the cost of access charges due local telephone
companies and long distance transport purchased from long distance carriers.
Marketing
All costs related to marketing and advertising USW's products and services
are expensed in the period incurred.
Use of Estimates
The preparation of the Consolidated 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.
Earnings Per Common Share
Earnings (loss) per common share is based upon the weighted average number
of common shares outstanding for the three months and nine months ended
September 30, 1997 and September 30, 1996. The assumed exercise and/or
conversion of preferred stock, options or warrants has not been included in
the calculation of earnings (loss) per share for the three months and nine
months ended September 30, 1997 and September 30, 1996, since the effect is
anti-dilative or not significant.
Fair Value of Financial Instruments
The fair value of USW's financial instruments such as accounts receivable,
accounts payable, and note payable approximate their carrying amounts.
F-25
<PAGE>
US WATS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Carrying Value of Long-Term Assets
USW evaluates the carrying value of long-term assets, including property,
plant and equipment, and other intangibles, based upon current and anticipated
undiscounted cash flows, and recognizes an impairment when it is probable that
such estimated cash flows will be less than the carrying value of the asset.
Measurement of the amount of impairment, if any, is based upon the difference
between carrying value and fair value.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share. This Statement
will be effective for financial reporting purposes, for both interim and year-
end financial statements ending after December 15, 1997. Management has not
yet determined what impact, if any, application of this statement will have on
USW's financial statements.
The Financial Accounting Standards Board has issued SFAS No. 130. "Reporting
Comprehensive Income," which will result in disclosure of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. USW is not required to adopt this
standard until fiscal 1998. At this time, USW has not determined the impact
this standard will have on USW's financial statements.
The Financial Accounting Standards Board has issued SFAS No. 131.
"Disclosures about Segments of an Enterprise and Related Information" which
establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. USW is not required to adopt this
standard until 1998. At this time, USW has not determined the impact this
standard will have on USW's financial statements.
Reclassification of Accounts
Certain reclassifications have been made to conform prior years' balances to
the current year presentation.
3. NOTE PAYABLE
On May 11, 1995, USW entered into a Loan and Security Agreement with Century
Business Credit Corporation for a revolving credit facility of $2,000,000. The
loan was established for an initial period of two years, and was automatically
renewed for two successive years on March 11, 1997. Interest on the loan is
currently calculated at prime plus 3 1/4% with a minimum loan value of
$750,000. The loan is collateralized by accounts receivable and fixed and
intangible assets of USW. As of September 30, 1997, USW's outstanding line of
credit with Century Business Credit Corporation exceeds the facility's defined
limit. However, USW is currently in the process of negotiating a higher line
of credit.
4. LITIGATION
USW is party, in the ordinary course of business, to litigation involving
services rendered, contract claims and other miscellaneous causes of action
arising from its business. Management does not consider that any such matters
will materially effect USW's financial condition or results of operations.
On June 13, 1997, Mark Scully, the former President and Chief Operating
Officer of USW, filed a complaint against USW, Kevin O'Hare, Aaron Brown and
Stephen Parker in the United States District Court for the Eastern District of
Pennsylvania. Mr. Scully asserts various claims in connection with his
termination of employment with USW on December 30, 1996. In particular, he
alleges, among other things, breach of contract in connection
F-26
<PAGE>
US WATS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
with the termination of certain stock options, breach of the alleged contract
for employment, breach of an asserted duty of good faith and fair dealing,
fraudulent and negligent misrepresentation, and civil conspiracy. Mr. Scully
alleges damages of at least $1.6 million, plus attorneys' fees, costs and
other disbursements and the cost of COBRA payments and interest; $1 million of
the alleged damages claimed are punitive. USW contests the allegations of the
complaint and intends to vigorously defend against the action.
5. CHANGES IN MANAGEMENT
Effective September 30, 1997, Kevin O'Hare, President and Chief Executive
Officer, terminated his employment with USW. Mr. O'Hare was immediately
replaced by Stephen Parker as President and Chief Executive Officer. Upon
termination Mr. O'Hare received severance pay of approximately $67,000, which
is included in Accrued expenses and other as of September 30, 1997, and
100,000 stock options at $1.03125 per share. Mr. O'Hare originally had a three
year employment agreement effective December 16, 1996 including an additional
500,000 stock options at $1.03125 per share and 500,000 stock options at $1.30
per share. These additional stock options were relinquished as of September
30, 1997.
In October 1997, Mark Mendes, Chief Operating Officer, and Christopher
Shannon, Chief Financial Officer terminated their employment with USW. Mr.
Mendes and Mr. Shannon each had a three year employment agreement--their
termination agreements entitled them to receive severance pay in the amount of
$54,000 and $52,000 respectively, which was accrued for in October 1997. Also
upon termination, Mr. Mendes received 56,667 stock options at $1.25 per share
and Mr. Shannon received 56,667 stock options at $1.219 per share. At
termination, each relinquished 293,333 stock options at the same price.
6. SUBSEQUENT EVENTS
On October 28, 1997, USW entered into an Agreement and Plan of Merger with
ACC Corp. and a wholly-owned subsidiary of ACC Corp., pursuant to which ACC
Corp. will issue approximately $46 million worth of its Common Stock to
holders of US WATS capital stock, and US WATS will become a wholly-owned
subsidiary of ACC Corp. The number of shares to be issued to the holders of US
WATS capital stock will be calculated using a price of $2.48 per share of US
WATS Common Stock, subject to certain adjustments. The merger is subject to
the satisfaction of certain conditions, including that the merger be treated
as a pooling of interests. See footnote #5, regarding subsequent events
related to Changes in Management.
F-27
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
ACC CORP.,
ACC ACQUISITION-BLUE CORP.,
AND
US WATS, INC.
DATED AS OF OCTOBER 28, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
ARTICLE I DEFINITIONS..................................................... 1
ARTICLE II THE MERGER..................................................... 8
Section 2.1 The Merger............................................... 8
Section 2.2 Closing; Effective Time of the Merger.................... 8
Section 2.3 Effects of Merger; Certificate of Incorporation and By-
Laws.................................................... 8
Section 2.4 Directors and Officers................................... 9
Section 2.5 Additional Actions....................................... 9
ARTICLE III CONVERSION OF SECURITIES...................................... 10
Section 3.1 Conversion of Capital Stock.............................. 10
Section 3.2 Exchange of Certificates................................. 15
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF USW.......................... 18
Organization, Standing and Power; Qualification; Enti-
Section 4.1 ties.................................................... 18
Organization, Standing and Power and Qualification of the
Section 4.2 USW Entities............................................ 18
Section 4.3 USW Capital Structure.................................... 19
Power and Authority; Non-Contravention; Filings and Con-
Section 4.4 sents................................................... 20
Section 4.5 USW SEC Documents; Financial Information................. 21
Section 4.6 Related Party Transactions............................... 22
Section 4.7 Accounts Receivable...................................... 22
Section 4.8 Absence of Certain Changes or Events..................... 22
Section 4.9 Taxes.................................................... 24
Section 4.10 Tangible Assets and Real Property........................ 26
Section 4.11 Intellectual Property.................................... 27
Section 4.12 Contracts................................................ 28
Section 4.13 Labor Matters............................................ 29
Section 4.14 Environmental Matters.................................... 30
Section 4.15 Employee Benefit Plans................................... 30
Section 4.16 Compliance with Laws..................................... 32
Section 4.17 Litigation............................................... 33
Section 4.18 Indemnification Claims................................... 33
Section 4.19 Restrictions on Business Activities...................... 33
Section 4.20 Governmental Authorization............................... 33
Section 4.21 Insurance................................................ 34
Section 4.22 Payments Resulting from Mergers.......................... 34
Section 4.23 Pooling of Interests..................................... 34
Section 4.24 Power of Attorney........................................ 34
Section 4.25 Certain Documents........................................ 34
Section 4.26 Vote Required............................................ 35
ARTICLE V REPRESENTATIONS AND WARRANTIES OF ACC AND SUB................... 35
Section 5.1 Organization............................................. 35
Section 5.2 ACC Capital Structure.................................... 35
Power and Authority; Non-Contravention; Required Filings
Section 5.3 and Consents............................................ 36
Section 5.4 SEC Filings; Financial Statements........................ 37
Section 5.5 Absence of Undisclosed Liabilities....................... 38
Section 5.6 Absence of Certain Changes or Events..................... 38
Section 5.7 Interim Operations of Sub................................ 38
Section 5.8 Pooling of Interests..................................... 38
Section 5.9 Litigation............................................... 38
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ARTICLE VI CONDUCT OF BUSINESS............................................ 39
Section 6.1 Covenants of USW......................................... 39
Section 6.2 Cooperation.............................................. 42
ARTICLE VII ADDITIONAL AGREEMENTS......................................... 42
Section 7.1 No Solicitation.......................................... 42
Section 7.2 Registration Statement; Information Statement............ 43
Section 7.3 Governmental Filings..................................... 44
Section 7.4 Consents................................................. 44
Section 7.5 Access to Information.................................... 44
Section 7.6 Legal Conditions to Merger............................... 45
Section 7.7 Tax-Free Reorganization.................................. 45
Section 7.8 Pooling Accounting....................................... 45
Section 7.9 Affiliate Agreements..................................... 46
Section 7.10 Stock Options............................................ 46
Section 7.11 Registration............................................. 47
Section 7.12 Expenses................................................. 47
Section 7.13 Brokers or Finders....................................... 47
Section 7.14 Voting Agreements........................................ 47
Section 7.15 Indemnification and Insurance............................ 48
Section 7.16 Additional Agreements; Reasonable Efforts................ 48
Section 7.17 Notification of Certain Matters.......................... 48
Section 7.18 Meeting of USW Shareholders.............................. 48
Section 7.19 Confidentiality.......................................... 49
Section 7.20 Public Disclosures....................................... 49
Section 7.21 Resignation of Directors and Officers.................... 49
Section 7.22 Cooperation.............................................. 49
Section 7.23 Noncompete and Nonsolicitation Agreement................. 50
Section 7.24 SEC and Stockholder Filings.............................. 50
Section 7.25 Takeover Statutes........................................ 50
Section 7.26 Nasdaq Notice of Listing of Additional Shares............ 50
Section 7.27 Filing of Financial Results.............................. 50
ARTICLE VIII CONDITIONS TO MERGER......................................... 51
Conditions to Each Party's Obligation to Effect the Merg-
Section 8.1 er...................................................... 51
Section 8.2 Additional Conditions to Obligations of ACC and Sub...... 52
Section 8.3 Additional Conditions to Obligations of USW.............. 54
ARTICLE IX TERMINATION AND AMENDMENT...................................... 54
Section 9.1 Termination.............................................. 54
Section 9.2 Effect of Termination.................................... 55
Section 9.3 Amendment................................................ 55
Section 9.4 Extension; Waiver........................................ 56
ARTICLE X CONFIDENTIALITY AND NON-DISCLOSURE.............................. 56
Section 10.1 Evaluation Material...................................... 56
Section 10.2 Use of Evaluation Material............................... 56
Section 10.3 Mandatory Disclosure..................................... 57
Section 10.4 Return of Evaluation Material............................ 57
Section 10.5 Injunctive Relief........................................ 57
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ARTICLE XI GENERAL PROVISIONS............................................. 58
Section 11.1 Notices................................................. 58
Section 11.2 Interpretation.......................................... 59
Section 11.3 Schedules............................................... 59
Section 11.4 Severability............................................ 60
Nonsurvival of Representations, Warranties and Agree-
Section 11.5 ments.................................................. 60
Section 11.6 Entire Agreement........................................ 60
Section 11.7 Governing Law........................................... 60
Section 11.8 Assignment.............................................. 60
Section 11.9 Third Party Beneficiary................................. 60
Section 11.10 No Rule of Construction................................. 61
Section 11.11 Counterparts............................................ 61
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EXHIBITS
Exhibit A --Form of Pooling Letter
Exhibit B --Form of Affiliate Agreement
Exhibit C --Form of Non-Compete/Non-Solicitation Agreement
Exhibit D --Shareholder Tender Agreement
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SCHEDULES
Schedule 5.2(a) --ACC Capital Structure
Schedule 5.3(b)(ii) --Non-Contravention
Schedule 5.5 --Undisclosed Liabilities
Schedule 7.23
Schedule 8.2(k) --Disclosure Documents List
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of October 28,
1997, by and among ACC Corp., a Delaware corporation ("ACC"), ACC Acquisition-
Blue Corp., a Delaware corporation and a wholly-owned subsidiary of ACC
("Sub"), and US WATS, Inc., a New York corporation ("USW").
WHEREAS, the Boards of Directors of ACC, Sub and USW each (i) deem it
advisable and in the best interests of each corporation and its respective
stockholders and shareholders that ACC and USW combine, and (ii) have approved
the execution, delivery and performance of this Agreement, the Merger (as
defined in Section 2.1) and the other transactions contemplated by this
Agreement, subject to authorization by resolution of the shareholders of USW
and to the other terms and conditions set forth in this Agreement;
WHEREAS, the combination of ACC and USW shall be effected by the terms of
this Agreement through a transaction in which Sub will merge with and into
USW, USW will become a wholly-owned subsidiary of ACC and the USW shareholders
will become stockholders of ACC;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended, and the regulations thereunder (the
"Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a pooling of interests.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms shall have the meanings
indicated below:
"ACC" has the meaning set forth in the first paragraph of this Agreement.
"ACC Balance Sheet" has the meaning given such term in Section 5.4
hereof.
"ACC Class A Common Stock" has the meaning given such term in Section
3.1(d) hereof.
"ACC Material Adverse Effect" has the meaning given such term in Section
5.1 hereof.
"ACC SEC Reports" has the meaning given such term in Section 5.4( a)
hereof.
"ACC Transaction Documents" has the meaning given such term in Section
5.3(a) hereof.
"Acquisition Proposal" has the meaning given such term in Section 7.1(a)
hereof.
"Affiliate" means, with respect to any Person, any subsidiary, officer or
director of such Person and any other Person which directly or indirectly
controls, is controlled by or is under common control with such Person,
whether through the ownership of securities, by contract or otherwise.
"Affiliate Agreement" has the meaning given such term in Section 7.9
hereof.
"Agreement" has the meaning set forth in the first paragraph of this
Agreement.
"Average Pre-Agreement Trading Price" has the meaning set forth in
Section 3.1(g) hereof.
"Average Pre-Closing Trading Price" has the meaning set forth in Section
3.1(g) hereof.
"Balance Sheet Date" has the meaning set forth in Section 4.5 hereof.
"Business" means the provision of voice and data telecommunications
services as currently conducted by USW and the USW Entities.
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"Certificate" or "Certificates" have the meanings set forth in Section
3.2(b) hereof.
"Closing" has the meaning set forth in Section 2.2 hereof.
"Closing Date" has the meaning set forth in Section 2.2 hereof.
"Code" has the meaning set forth in the recitals hereto.
"Constituent Corporations" shall have the meaning given such term in
Section 2.3(a) hereof.
"Delaware Certificate of Merger" has the meaning set forth in Section 2.2
hereof.
"Delaware Secretary of State" has the meaning set forth in Section 2.2
hereof.
"DGCL" has the meaning set forth in Section 2.1 hereof.
"Disclosing Company" has the meaning set forth in Section 10.1 hereof.
"Effective Time" has the meaning set forth in Section 2.2 hereof.
"Environmental Laws" has the meaning set forth in Section 4.14(b) hereof.
"Environmental Permits" has the meaning set forth in Section 4.14(c)
hereof.
"ERISA" means the Employee Retirement Income Security Act of 1977, as
amended.
"ERISA Affiliate" has the meaning set forth in Section 4.15(c) hereof.
"Evaluation Material" has the meaning given such term in Section 10.1
hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"Exchange Fund" has the meaning set forth in Section 3.2(a) hereof.
"GAAP" means United States generally accepted accounting principles
consistently applied.
"Governing Documents" means (i) with respect to a corporation, its
articles of incorporation and Bylaws, (ii) with respect to a limited
liability company, its articles of organization and operating agreement,
(iii) with respect to a partnership, its certificate of partnership or
limited partnership and its partnership agreement, and (iv) with respect to
any other entity, its governing documents, such as certificates or articles
of formation, trust or operating agreements and similar documents.
"Governmental Entity" means any (i) nation, state, commonwealth,
province, territory, county, municipality, district or other jurisdiction
of any nature; (ii) federal, state, local, municipal, foreign or other
government; or (iii) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency,
commission, official, organization, authority and any court or other
tribunal).
"Hazardous Material" has the meaning set forth in Section 4.14(a) hereof.
"HSR Act" has the meaning set forth in Section 4.4(c) hereof.
"Indemnification Agreements" has the meaning given such term in Section
4.18 hereof.
"Information Statement" has the meaning given such term in Section 7.2(a)
hereof.
"Initial USW Common Stock Exchange Ratio" has the meaning given such term
in Section 3.1(g) hereof.
"Licensed Intellectual Property" has the meaning given such term in
Section 4.11(b) hereof.
"Liens or Other Encumbrance" means any lien, pledge, mortgage, security
interest, claim, lease, charge, option, right of first refusal, easement,
servitude, transfer restriction under any shareholder or other agreement or
encumbrance or any other rights of third parties.
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"Merger" has the meaning set forth in Section 2.1 hereof.
"Merger Consideration" has the meaning given such term in Section 3.1(d)
hereof.
"NASDAQ" means the Nasdaq National Market.
"New York Certificate of Merger" has the meaning set forth in Section 2.2
hereof.
"Non-Compete/Non-Solicitation Agreement" has the meaning set forth in
Section 7.23 hereof.
"NYBCL" has the meaning set forth in Section 2.1 hereof.
"Other Filings" has the meaning set forth in Section 7.3 hereof.
"Person" means and includes an individual, a corporation, a partnership,
a limited liability company, a limited liability partnership, a joint
venture, a trust, an unincorporated association, a Governmental Entity or
any other entity, wherever located or organized.
"Receiving Party" has the meaning set forth in Section 10.1 hereof.
"Registration Statement" has the meaning given such term in Section
7.2(a) hereof.
"Representatives" has the meaning given such term in Section 10.2.
"Returns" has the meaning given such term in Section 4.9 hereof.
"Rule 145" has the meaning given such term in Section 7.9 hereof.
"SEC" has the meaning set forth in Section 4.4(c) hereof.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Shareholder Tender Agreement" has the meaning set forth in Section 7.14
hereof.
"Sub" has the meaning set forth in the first paragraph of this Agreement.
"Subsidiary" means, with respect to any entity, any corporation,
partnership or limited liability company, at least a majority of the
securities or other interests having by their terms ordinary voting power
to elect a majority of the Board of Directors or others performing similar
functions with respect to such corporation or other organization is
directly or indirectly owned or controlled by such entity or by any one or
more of its Subsidiaries, or by such entity and one or more of its
Subsidiaries.
"Surviving Corporation" has the meaning given such term in Section 2.3(a)
hereof.
"Takeover Statute" has the meaning set forth in Section 7.25 hereof.
"Transfer Agent" has the meaning set forth in Section 3.2(a) hereof.
"USW" has the meaning set forth in the first paragraph of this Agreement.
"USW Affiliate" has the meaning given such term in Section 7.9 hereof.
"USW Aggregate Value" has the meaning set forth in Section 3.1(g).
"USW Authorizations" has the meaning set forth in Section 4.20 hereof.
"USW Balance Sheet" has the meaning set forth in Section 4.5 of this
Agreement.
"USW Benefit Plans" has the meaning set forth in Section 4.15(a) hereof.
"USW Capital Stock" has the meaning given such term in Section 3.1(d)(ii)
hereof.
"USW Common Stock" has the meaning given such term in Section 3.1(d)(i)
hereof.
"USW Common Stock Exchange Ratio" has the meaning given such term in
Section 3.1(g) hereof.
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"USW Components" has the meaning given such term in Section 4.11(e)
hereof.
"USW Convertible Securities" has the meaning given such term in Section
3.1(d) hereof.
"USW Disclosure Letter" has the meaning given such term in Article IV
hereof.
"USW Entity" or "USW Entities" means any corporation, limited liability
company, partnership, limited partnership or other organization, whether
incorporated or unincorporated, (i) of which at least a majority of the
securities or interests having by the terms thereof ordinary voting power
to elect at least a majority of the Board of Directors or others performing
similar functions with respect to such corporation or other organization is
directly or indirectly owned or controlled by USW and/or by any one or more
of the USW Entities, (ii) of which USW or any one or more of the USW
Entities is the general partner or managing member or (iii) which USW or
any one or more of the USW Entities otherwise controls.
"USW Financial Statements" has the meaning given such term in Section 4.5
hereof.
"USW Fully Diluted Shares" has the meaning given such term in Section
3.1(g).
"USW Intellectual Property Rights" has the meaning given such term in
Section 4.11(a) hereof.
"USW Material Adverse Effect" has the meaning given such term in Section
4.1 hereof.
"USW Per Share Price" has the meaning given such term in Section 3.1(g)
hereof.
"USW Preferred Stock" has the meaning given such term in Section
3.1(d)(ii) hereof.
"USW Product" has the meaning given such term in Section 4.11(b) hereof.
"USW SEC Documents" has the meaning given such term in Section 4.5
hereof.
"USW Shareholder Consents" has the meaning given such term in Section
7.2(a) hereof.
"USW Shareholders Meeting" has the meaning given such term in Section
7.18 hereof.
"USW Stock Options" has the meaning given such term in Section 3.1(e)
hereof.
"USW Transaction Documents" has the meaning given such term in Section
4.4(a) hereof.
"USW Warrant" has the meaning given such term in Section 3.1(f) hereof.
"Voting Agreements" has the meaning given such term in Section 7.14
hereof.
ARTICLE II
THE MERGER
Section 2.1 The Merger. Upon the terms and subject to the conditions set
forth in this Agreement and in accordance with the New York Business
Corporation Law (the "NYBCL") and the Delaware General Corporation Law (the
"DGCL"), Sub shall be merged with and into USW (the "Merger"). At the
Effective Time, as defined in Section 2.2 hereof, the outstanding shares of
capital stock of Sub and USW shall be converted or cancelled in the manner
provided in Article III of this Agreement; the separate corporate existence of
Sub shall cease; and USW shall be the surviving corporation in the Merger and
shall become a wholly-owned subsidiary of ACC.
Section 2.2 Closing; Effective Time of the Merger. The closing of the Merger
(the "Closing") will take place at 10:00 a.m., New York time, on a date to be
specified by ACC and USW, which shall be no later than the third business day
after satisfaction (or waiver in accordance with Section 9.4) of all
conditions set forth in Article VIII, at the offices of Nixon, Hargrave,
Devans & Doyle LLP, Clinton Square, Rochester, New York 14603, unless another
date or place is agreed to in writing by ACC and USW. It is the intent of the
parties that the Closing occur, and the Merger become effective, on or before
January 31, 1998, or as promptly as practicable thereafter. Subject to the
provisions of this Agreement, (i) a Certificate of Merger (the "New York
Certificate of Merger") shall be duly prepared, executed and acknowledged by
Sub and by USW as the Surviving Corporation
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(as defined in Section 2.3(a)) and simultaneously with or immediately prior to
the Closing delivered to the Secretary of State of the State of New York (the
"New York Secretary of State") for filing, and (ii) a Certificate of Merger
(the "Delaware Certificate of Merger") shall be duly prepared, executed and
acknowledged by USW and Sub and simultaneously with or as soon as practicable
following the Closing delivered to the Secretary of State of the State of
Delaware (the "Delaware Secretary of State") for filing.
The Merger shall become effective upon the latest of: (a) the date and time
of the filing of the New York Certificate of Merger with the New York
Secretary of State, (b) the date and time of the filing of the Delaware
Certificate of Merger with the Delaware Secretary of State or (c) such other
date and time as is provided in the New York Certificate of Merger (the
"Effective Time"). The date on which the Effective Time occurs in herein
referred to as the "Closing Date."
Section 2.3 Effects of Merger; Certificate of Incorporation and By-Laws.
(a) At the Effective Time: (i) the separate existence of Sub shall cease and
Sub shall be merged with and into USW (Sub and USW are sometimes referred to
collectively herein as the "Constituent Corporations" and USW is sometimes
referred to herein as the "Surviving Corporation"); (ii) the Certificate of
Incorporation and Bylaws of Sub as in effect immediately prior to the
Effective Time shall be the Certificate of Incorporation and Bylaws of the
Surviving Corporation until amended in accordance with the terms thereof and
in accordance with applicable law.
(b) The Merger shall have the effects set forth in this Agreement and in the
NYBCL and the DGCL. Without limiting the generality of the foregoing, from and
after the Effective Time, the Surviving Corporation shall possess all the
rights, privileges, powers and franchises of a public as well as of a private
nature, and be subject to all the restrictions, disabilities and duties of
each of the Constituent Corporations; and all and singular rights, privileges,
powers and franchises of each of the Constituent Corporations, and all
property, real, personal and mixed, and all debts due to either of the
Constituent Corporations on whatever account, as well as for stock
subscriptions and all other things in action or belonging to each of the
Constituent Corporations, shall be vested in the Surviving Corporation, and
all property, rights, privileges, powers and franchises, and all and every
other interest shall be thereafter as effectually the property of the
Surviving Corporation as they were of the Constituent Corporations, and the
title to any real estate vested by deed or otherwise, in either of the
Constituent Corporations, shall not revert or be in any way impaired; but all
rights of creditors and all liens upon any property of either of the
Constituent Corporations shall be preserved unimpaired, and all debts,
liabilities and duties of the Constituent Corporations shall thereafter attach
to the Surviving Corporation, and may be enforced against it to the same
extent as if such debts and liabilities had been incurred by it.
Section 2.4 Directors and Officers. The directors and officers of Sub
immediately prior to the Effective Time shall be the initial directors and
officers of the Surviving Corporation, and shall hold office until their
respective successors are duly elected or appointed.
Section 2.5 Additional Actions. If, at any time after the Effective Time,
USW shall consider or be advised that any deeds, bills of sale, assignments,
assurances or any other actions or things are necessary or desirable to vest,
perfect or confirm of record or otherwise in USW its right, title or interest
in, to or under any of the rights, properties or assets of Sub or otherwise to
carry out this Agreement, the officers and directors of USW shall be
authorized to execute and deliver, in the name and on behalf of Sub, all such
deeds, bills of sale, assignments and assurances and to take and do, in the
name and on behalf of Sub, all such other actions and things as may be
necessary or desirable to vest, perfect or confirm any and all right, title
and interest in, to and under such rights, properties or assets in USW as the
Surviving Corporation or otherwise to carry out this Agreement.
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ARTICLE III
CONVERSION OF SECURITIES
Section 3.1 Conversion of Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of the Constituent Corporations
or any holder of any shares of USW Capital Stock (as defined in Section
3.1(d)(ii)) or capital stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding share of the
capital stock of Sub shall be converted into and become one fully paid and
nonassessable share of Common Stock of the Surviving Corporation. Such one
share of common stock of the Surviving Corporation shall constitute all of
the issued and outstanding capital stock of the Surviving Corporation and
shall be owned by ACC.
(b) Cancellation of ACC-Owned Stock. All shares of USW Capital Stock that
are owned by ACC, Sub or any other wholly-owned subsidiary of ACC shall be
cancelled and retired and shall cease to exist and no stock of ACC or other
consideration shall be delivered in exchange therefor.
(c) USW Treasury Stock. Each share of USW Capital Stock held in the
treasury of USW or by a wholly owned subsidiary of USW shall be cancelled
as of the Effective Time and no Merger Consideration shall be payable with
respect thereto.
(d) USW Capital Stock. The shares of USW Capital Stock which are issued
and outstanding at the Effective Time (other than shares to be cancelled in
accordance with Section 3.1(b)) shall be converted, in the aggregate, into
the right to receive the number of shares of Class A common stock, $.015
par value, of ACC ("ACC Class A Common Stock"), set forth in Section 3.1(g)
(the "Merger Consideration"). Subject to the foregoing limitations and any
applicable backup or other withholding requirements, each such issued and
outstanding share of USW Capital Stock shall be converted into the
consideration set forth below:
(i) Each share of USW Common Stock, par value $.001 per share (the
"USW Common Stock"), which is issued and outstanding as of the
Effective Time (other than shares to be cancelled in accordance with
Section 3.1(b) and other than Dissenting Shares (as defined in Section
3.1(i))) shall be converted into the right to receive a fraction of a
fully paid and non-assessable share of ACC Class A Common Stock that is
equal to one multiplied by the USW Common Stock Exchange Ratio; and
(ii) Each share of USW 9% Series Convertible Preferred Stock, par
value $.01 per share (the "USW Preferred Stock" and, collectively with
the USW Common Stock, "USW Capital Stock"), which is issued and
outstanding as of the Effective Time (other than shares to be cancelled
in accordance with Section 3.1(b) and other than Dissenting Shares)
shall be converted pursuant to its terms into USW Common Stock and
immediately thereafter converted into ACC Class A Common Stock as
provided in Section 3.1(d)(i) above.
All such shares of USW Capital Stock, when so converted, shall no longer be
outstanding and shall automatically be cancelled and retired and shall
cease to exist, and each holder of a certificate representing any such
shares shall cease to have any rights with respect thereto, except the
right to receive the shares of ACC Class A Common Stock upon the surrender
of such certificate in accordance with Section 3.2, with out interest.
(e) USW Stock Options. All then outstanding options to acquire Capital
Stock of USW, whether vested or unvested ("USW Stock Options") shall be
assumed by ACC in accordance with Section 7.10.
(f) Warrant Conversion. Each warrant to acquire shares of USW Capital
Stock (each a "USW Warrant"), which is outstanding at the Effective Time
and which has not theretofore been exercised, shall be treated as if such
USW Warrant had been exercised immediately prior to the Effective Time, and
as if the price for such USW Warrant exercise has been paid by subtracting
from the number of shares issuable upon the exercise of such USW Warrant
that number of shares of USW Capital Stock that equals in value the
aggregate price to be paid for such exercise, as calculated using the USW
Per Share Price.
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(g) Merger Consideration. Subject to the provisions of Section 3.1(h),
Merger Consideration shall be the USW Common Stock Exchange Ratio times
(the number of shares of USW Common Stock outstanding at the Effective Time
plus the number of shares of USW Common Stock issuable upon the conversion
of all outstanding shares of USW Preferred Stock and the number of shares
of USW Common Stock issuable pursuant to Section 3.1(f) hereof) calculated
in the following manner and using the following definitions:
"Average Pre-Agreement Trading Price" means the average of the daily
closing prices per share of ACC Class A Common Stock, as quoted by
NASDAQ as reported in The Wall Street Journal, Eastern Edition, or if
not reported thereby, The New York Times, for the twenty consecutive
full NASDAQ trading days ending on the third full NASDAQ trading day
immediately preceding the date of this Agreement.
"Average Pre-Closing Trading Price" means the average of the daily
closing prices per share of ACC Class A Common Stock, as quoted by
NASDAQ as reported in The Wall Street Journal, Eastern Edition, or if
not reported thereby, The New York Times, for the twenty consecutive
full NASDAQ trading days ending on the third full NASDAQ trading day
immediately preceding the Closing Date.
"USW Aggregate Value" shall be $46 million + the aggregate exercise
price to be paid upon exercise of all outstanding options + the
aggregate exercise price of all warrants.
"USW Fully Diluted Shares" shall equal the number of shares of USW
Common Stock outstanding + the number of shares issuable upon the
exercise of outstanding options + the number of shares issuable upon
the exercise of USW Warrants + the number of shares of USW Common Stock
issuable upon conversion of all outstanding shares of USW Preferred
Stock.
"USW Per Share Price" shall equal USW Aggregate Value/USW Fully
Diluted Shares.
(i) The "Initial USW Common Stock Exchange Ratio" shall equal:
USW Per Share Price
Divided by
the Average Pre-Agreement Trading Price.
(ii) The Initial USW Common Stock Exchange Ratio will be adjusted at
Closing (as adjusted, the "USW Common Stock Exchange Ratio") using
the following formulae:
(A) If (x) the positive difference between the Average Pre-
Closing Trading Price and the Average Pre-Agreement Trading
Price is 10% or less or (y) the negative difference between the
Average Pre-Closing Trading Price and the Average Pre-Agreement
Trading Price is 15% or less, the USW Common Stock Exchange
Ratio shall equal:
USW Per Share Price
Divided by
The Average Pre-Closing Trading Price.
(B) If the Average Pre-Closing Trading Price represents an
increase of 10% or more over the Average Pre-Agreement Trading
Price, the USW Common Stock Exchange Ratio shall equal:
(USW Aggregate Value + ($46 million x 0.5 x (that amount, but no
more than 20%, representing the amount by which the percentage
difference in stock price exceeds 10%))) /USW Fully Diluted
Shares
Divided by
The Average Pre-Closing Trading Price.
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(C) If the Average Pre-Closing Trading Price represents a
decrease of 15% or more over the Average Pre-Agreement Trading
Price, the USW Common Stock Exchange Ratio shall equal:
USW Per Share Price x 115%
Divided by
The Average Pre-Agreement Trading Price.
(h) Adjustments.
(i) If between the date of this Agreement and the Effective Time,
the outstanding shares of ACC Class A Common Stock or USW Capital
Stock shall have been changed into a different number of shares or a
different class or series by reason of any reclassification,
recapitalization, split-up, stock dividend, stock combination,
exchange of shares, readjustment or otherwise, then the USW Common
Stock Exchange Ratio shall be correspondingly adjusted; provided,
however, that no adjustment shall be made with respect to a change
in USW Capital Stock unless such changes have been made in
compliance with the requirements of Section 6.1 or the requirements
thereof have been waived by ACC.
(ii) In addition, except as contemplated by subsection (iii)
below, (A) for each liability of USW, that (I) was not reflected on
the USW Balance Sheet and was required under GAAP to be reflected on
the USW Balance Sheet, (II) was not disclosed on the USW Disclosure
Letter or (III) was not incurred in the ordinary course of USW's
Business and that is identified by ACC in writing to USW prior to
Closing (an "Undisclosed Liability"), to the extent that such
Undisclosed Liability exceeds $50,000 and the total of such
Undisclosed Liabilities in the aggregate does not exceed $250,000,
the USW Aggregate Value shall be adjusted down by the amount of such
excess of such items over $50,000. For Undisclosed Liabilities that
in the aggregate exceed $250,000, the USW Aggregate Value shall be
adjusted down by the amount of such excess; provided, however, that
(B) for each Undisclosed Liability of USW relating to the matters
addressed by Section 4.9 hereof, the USW Aggregate Value shall be
adjusted down by the amount of such Undisclosed Liability, without
regard to any deductible provided for in subsection (ii)(A) hereof.
The adjustments provided for in subsections (ii)(A) and (B) hereof
shall not be exclusive but shall be in addition to all other rights
and remedies of ACC.
(iii) In addition to the foregoing, the following adjustments
shall apply:
(A) With respect to the litigation described in paragraph 1 of
Section 4.17 of the USW Disclosure Letter (the "Litigation") ,
(I) if such Litigation is settled prior to the Closing for any
amount up to and including $1,000,000, the USW Aggregate Value
shall be reduced by the amount of such settlement and (II) if
such Litigation is not settled prior to the Closing, the USW
Aggregate Value shall be reduced by $1,000,000.
(B) If the default referenced in Section 4.12(c) of the USW
Disclosure Letter is not cured, if permitted to be cured by the
agreement referenced therein, prior to Closing or waived,
together with any penalties relating thereto, by the other party
to such agreement, then the USW Aggregate Value shall be reduced
by $200,000.
(C) If USW shall settle the litigation brought by it against
U.S West prior to Closing, such settlement amount, including any
attorneys' fees included therein for periods prior to and
including October 31, 1997, shall be an offset against the
amounts, if any, in subsections (iii)(A) and (B) hereof by which
the USW Aggregate Value shall be reduced.
(i) Dissenting Shares. Notwithstanding any provision of this Agreement to
the contrary, each outstanding share of USW Capital Stock held by a holder
exercising dissenter's, appraisal or other similar rights
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("Dissenter's Rights") with respect to such shares pursuant to Sections 910
and 623 or other applicable provisions of the NYBCL, who has not effectively
withdrawn or lost such rights (a "Dissenting Share"), shall not be converted
into or represent a right to receive shares of ACC Class A Common Stock
pursuant to this Article III, but the holder thereof shall be entitled only to
such rights as are granted by the applicable provisions of the NYBCL;
provided, however, that each Dissenting Share held by a person at the
Effective Time who shall, after the Effective Time, lose such Dissenter's
Rights or withdraw such demand for appraisal or payment of fair market value
pursuant to the NYBCL, shall be deemed to be converted, as of the Effective
Time, into the right to receive shares of ACC Class A Common Stock pursuant to
this Article III. USW shall give ACC (i) prompt notice and copies of all
notices of dissent, demands for appraisal or payment of fair market value,
withdrawals of demands for appraisal or payment of fair market value, and
other instruments received by USW relating to the exercise of Dissenter's
Rights received by USW and (ii) the opportunity to direct all negotiations and
proceedings with respect thereto under the NYBCL. USW will not, except with
the prior written consent of ACC, voluntarily make any payment with respect to
any demands for appraisal or payment of fair market value and will not, except
with the prior written consent of ACC, settle or offer to settle any such
demands.
Section 3.2 Exchange of Certificates. The procedures for exchanging
outstanding shares of USW Capital Stock for ACC Class A Common Stock pursuant
to the Merger are as follows:
(a) Transfer Agent. As of the Effective Time, ACC shall deposit with a
transfer agent designated by ACC, reasonably acceptable to USW (the "Transfer
Agent"), for the benefit of the holders of shares of USW Capital Stock, for
exchange in accordance with Article III of this Agreement, through the
Transfer Agent, certificates representing the Merger Consideration (such
shares of ACC Class A Common Stock, together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund") issuable pursuant to Article III of this Agreement in
exchange for outstanding shares of USW Capital Stock.
The Transfer Agent shall not be entitled to vote or exercise any rights of
ownership with respect to the ACC Class A Common Stock held by it from time to
time hereunder.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Transfer Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of USW Capital Stock (each a "Certificate" and
collectively, the "Certificates") whose shares were converted pursuant to
Article III of this Agreement into the right to receive shares of ACC Class A
Common Stock (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Transfer Agent and shall be in
such form and have such other provisions as ACC and USW may reasonably
specify) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares and/or fractions
of shares of ACC Class A Common Stock. Upon surrender of a Certificate for
cancellation to the Transfer Agent or to such other agent or agents reasonably
acceptable to USW as may be appointed by ACC, together with such letter of
transmittal, duly executed, and such other documents as may be reasonably
required by the Transfer Agent, the holder of such Certificate shall be
entitled to receive in exchange therefor a certificate representing that
number of shares and/or fractions of shares of ACC Class A Common Stock which
such holder has the right to receive pursuant to the provisions of Section 3.1
(with any fraction of a share rounded in accordance with Section 3.2(e)), and
the Certificate so surrendered shall immediately be cancelled.
Until surrendered as contemplated by this Section 3.2, each Certificate
shall be deemed at any time after the Effective Time to represent only the
right to receive upon such surrender the certificate representing shares of
ACC Class A Common Stock as contemplated by this Section 3.2.
(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the Effective Time with respect to ACC
Class A Common Stock with a record date after the Effective Time shall be paid
to the holder of any unsurrendered Certificate with respect to the shares of
ACC Class A
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Common Stock represented thereby until the holder of record of such
Certificate shall surrender such Certificate. Subject to the effect of
applicable laws, following surrender of any such Certificate, there shall be
paid to the record holder of the certificates representing shares and/or
fractions of shares of ACC Class A Common Stock issued in exchange therefor,
without interest, (i) at the time of such surrender, the amount of dividends
or other distributions with a record date after the Effective Time previously
paid with respect to such shares of ACC Class A Common Stock, and (ii) at the
appropriate payment date, the amount of dividends or other distributions with
a record date after the Effective Time but prior to surrender and a payment
date subsequent to surrender payable with respect to such shares of ACC Class
A Common Stock.
(d) No Further Ownership Rights in USW Capital Stock. All shares of ACC
Class A Common Stock issued upon the surrender for exchange of shares of USW
Capital Stock in accordance with the terms hereof shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of USW
Capital Stock, subject, however, to the Surviving Corporation's obligation to
pay any dividends or make any other distributions with a record date prior to
the Effective Time which may have been declared or made by USW on such shares
of USW Capital Stock in accordance with the terms of this Agreement on or
prior to the date hereof and which remain unpaid at the Effective Time, and
there shall be no further registration of transfers on the stock transfer
books of the Surviving Corporation of the shares of USW Capital Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for
any reason, they shall be cancelled and exchanged as provided in this Section
3.2.
(e) No Fractional Shares. No fractional shares of ACC Common Stock shall be
issued pursuant to the Merger nor will any fractional share interest involved
entitle the holder thereof to vote, to receive dividends or to exercise any
other rights of a shareholder of ACC. In lieu thereof, any Person who would
otherwise be entitled to a fractional share of ACC Common Stock pursuant to
the provisions hereof shall receive an amount in cash equal to the value of
such fractional share. The value of such fractional share shall be the product
of such fraction multiplied by the Average Pre-Closing Trading Price, subject
to appropriate adjustment in the event of a stock split, stock dividend or
recapitalization after the date of this Agreement applicable to shares of ACC
Common Stock and not reflected in the Average Pre-Closing Trading Price.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the shareholders of USW for one year after the
Effective Time shall be delivered to ACC, upon demand, and any former
shareholders of USW who have not previously complied with this Section 3.2
shall thereafter look only to ACC for payment of their claim for ACC Class A
Common Stock, and any dividends or distributions with respect to ACC Class A
Common Stock.
(g) No Liability. Neither the Transfer Agent, nor ACC, Sub or USW shall be
liable to any holder of shares of USW Capital Stock or ACC Class A Common
Stock, as the case may be, with respect to any shares of ACC Class A Common
Stock (or dividends or distributions with respect thereto) delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
(h) Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Transfer Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of
an affidavit of that fact by the holder thereof and the delivery of such bond
as the Transfer Agent may reasonably require, such shares of ACC Class A
Common Stock and any dividends or other distributions with respect to ACC
Class A Common Stock to which such holder is entitled.
(i) Transfer Taxes. No transfer taxes shall be payable by any shareholder of
USW in respect of the issuance of the ACC Class A Common Stock under this
Section 3.2, except that if any ACC Class A Common Stock is to be issued in a
name other than that in which the Certificate surrendered has been registered,
it shall be a condition of such issuance that the person requesting such
issuance shall pay to ACC any transfer taxes payable by reason thereof, or of
any prior transfer of such surrendered certificate, or establish to the
satisfaction of ACC that such taxes have been paid or are not payable.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF USW
Except as set forth in the disclosure schedule delivered by USW to ACC and
Sub on or before the date of this Agreement (which disclosure schedule shall
be organized into numbered sections corresponding with the section numbers of
this Agreement) (the "USW Disclosure Letter"), USW represents and warrants to
ACC and Sub as follows:
Section 4.1 Organization, Standing and Power; Qualification; Entities. USW
is a corporation duly organized, validly existing and in good standing under
the laws of the State of New York. USW has all requisite corporate power and
authority to own, lease, operate and transfer its properties and to carry on
its business as currently being conducted and as currently proposed to be
conducted. USW is duly qualified to do business and is in good standing in
each jurisdiction in which the failure to be so qualified and in good standing
could have a material adverse effect on the business, assets (including
intangible assets), properties, liabilities (contingent or otherwise),
financial condition, operations, or results of operations of USW taken
together with the USW Entities as a whole (a "USW Material Adverse Effect").
Section 4.1 of the USW Disclosure Letter sets forth a complete and accurate
list of all USW Entities and their jurisdiction of incorporation or
organization and qualification or license, and a description of the interest
of USW in each such entity. Except for the interests in the USW Entities
listed in Section 4.1 of the USW Disclosure Letter, USW does not directly or
indirectly own any equity or similar interest in, or any interest convertible
or exchangeable or exercisable for any equity or similar interest in, any
corporation, partnership, limited liability company, joint venture or other
business association or entity. USW has delivered true and correct copies of
the Certificate of Incorporation and By-laws of USW, each as amended to date,
to ACC. USW is not in violation of any of the provisions of its Certificate of
Incorporation or By-laws.
Section 4.2 Organization, Standing and Power and Qualification of the USW
Entities. Each of the USW Entities is duly organized, validly existing and in
good standing under the laws of its state of formation; has all requisite
corporate or other power to own, lease and operate its properties and to carry
on its business as currently being conducted and as currently proposed to be
conducted; is duly qualified to do business and is in good standing in each
jurisdiction in which the failure to be so qualified and in good standing
could have a USW Material Adverse Effect. USW will, by the Closing Date, have
delivered to ACC true and correct copies of the Governing Documents of each of
the USW Entities, each as amended to date; and none of the USW Entities is in
violation of any of the provisions of its Governing Documents.
Section 4.3 USW Capital Structure.
(a) The authorized capital stock of USW consists of 30,000,000 shares of USW
Common Stock, par value $.001 per share and 1,000,000 shares of preferred
stock, par value $.001 per share. As of the date of this Agreement,
(i) 15,989,100 shares of USW Common Stock and 30,000 Shares of USW
Preferred Stock are issued and outstanding, all of which are validly
issued, fully paid and nonassessable;
(ii) 250,000 shares of USW Common Stock are held by USW as treasury
shares;
(iii) no shares of USW Common Stock are held by any of the USW Entities;
(iv) options to purchase an aggregate of 3,026,000 shares of USW Common
Stock; and
(v) 1,188,000 shares of USW Common Stock are reserved for issuance
pursuant to certain outstanding warrants; and
(vi) 300,000 shares of USW Common Stock are reserved for issuance upon
conversion of USW Preferred Stock.
Section 4.3(a) of the USW Disclosure Letter sets forth a complete and accurate
list of all outstanding options, warrants and other securities exercisable for
or convertible into shares of USW Capital Stock (together
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with a vesting schedule and the exercise price of each option grant) as of
October 23, 1997 and no additional USW stock options have been issued or
granted since such date. All shares of USW Common Stock and USW Preferred
Stock subject to issuance as specified above, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable,
shall be duly authorized, validly issued, fully paid and nonassessable. There
are no obligations, contingent or otherwise, of USW or any of the USW Entities
to repurchase, redeem or otherwise acquire any shares of USW Capital Stock or
the capital stock of any of the USW Entities or make any investment (in the
form of a loan, capital contribution or otherwise) in any of the USW Entities
or any other entity. All of the outstanding shares of capital stock or other
equity interests of each of the USW Entities are duly authorized, validly
issued, fully paid and nonassessable, and all such shares or equity interests
are owned by USW free and clear of all security interests, liens, claims,
pledges, agreements, limitations on USW's voting rights, charges or other
encumbrances of any nature. Except as set forth in Section 4.3 of the USW
Disclosure Letter, there are no outstanding USW debt securities or other
agreements or instruments issued by USW entitling the holders thereof or
parties thereto to vote or to direct or otherwise restrict the vote of the
holders of shares of USW Common Stock or USW Preferred Stock or which are
convertible into or exchangeable for capital stock of USW.
(b) Except as set forth in Section 4.3(a), there are no equity securities of
any class of USW or any of the USW Entities, or any security exchangeable into
or exercisable for such equity securities, issued, reserved for issuance or
outstanding. Except as set forth in Section 4.3(a), there are no options,
warrants, equity securities, calls, rights, commitments or agreements of any
character to which USW or any of the USW Entities is a party or by which it is
bound obligating USW or any of the USW Entities to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock of
USW or any of the USW Entities or obligating USW or any of the USW Entities to
grant, extend, accelerate the vesting of or enter into any such option,
warrant, equity security, call, right, commitment or agreement, and, except
for the Voting Agreements and related proxies contemplated by this Agreement,
there are no voting trusts, proxies or other agreements or understandings with
respect to the shares of capital stock of USW.
Section 4.4 Power and Authority; Non-Contravention; Filings and Consents.
(a) USW has full corporate power and authority to execute, deliver and
perform its obligations under this Agreement and the other documents required
to be executed and delivered by USW hereunder (collectively, the "USW
Transaction Documents") and to consummate the transactions contemplated hereby
and thereby. The execution and delivery of this Agreement and the other USW
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by the Board of Directors of USW
and, prior to the Closing will have been duly authorized by the shareholders
of USW, and no other corporate proceedings on the part of USW, its
shareholders or directors are necessary to authorize the execution, delivery
and performance of the obligations of USW under this Agreement or the USW
Transaction Documents. This Agreement and the other USW Transaction Documents
have been duly executed and delivered by USW and constitute the valid and
binding obligations of USW, enforceable against USW in accordance with their
terms.
(b) Except as set forth on Section 4.4(b) of the USW Disclosure Letter, the
execution and delivery by USW of this Agreement (subject to the receipt of the
requisite vote of USW's shareholders) and the other USW Transaction Documents
do not, and the consummation of the transactions contemplated hereby and
thereby will not, (i) conflict with, or result in any violation or breach of
any provision of the Certificate of Incorporation or By-laws of USW, (ii)
conflict with, or result in any violation of or breach of any provision of the
Governing Documents of any of the USW Entities, (iii) result in any violation
or breach of, or constitute (with or without notice or lapse of time, or both)
a default under, or give rise to a right of termination, cancellation or
acceleration of any material obligation or loss of any benefit under any note,
mortgage, indenture, lease, contract or other agreement or obligation to which
USW or any of the USW Entities is a party or by which USW or any of the USW
Entities or any of their respective properties or assets may be bound, or (iv)
conflict with or violate any judgment, order, decree, statute, law, ordinance,
rule or regulation or any material permit, concession, franchise or license
applicable to USW, any of the USW Entities or any of their respective
properties or assets.
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(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to USW or any of the USW Entities in connection with the execution and
delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) the filing of a pre-merger notification
report under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), (ii) the filing by ACC of the Registration Statement
(as defined in Section 7.2) with the Securities and Exchange Commission (the
"SEC") in accordance with the Securities Act, (iii) the filing of the New York
Certificate of Merger and related certificates with and by the New York
Secretary of State in accordance with the NYBCL and the Delaware Certificate
of Merger with the Delaware Secretary of State in accordance with the DGCL,
(iv) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal and state
securities laws and the laws of any foreign country, and (v) such other
consents, authorizations, filings, approvals and registrations that are
disclosed on the USW Disclosure Letter or which, if not obtained or made,
would not have a USW Material Adverse Effect and would not prevent or
materially delay the consummation of the transactions contemplated by this
Agreement or otherwise prevent USW from performing its obligations hereunder
in any material respect.
Section 4.5 USW SEC Documents; Financial Information. USW has filed with the
SEC and has made available to ACC all reports, proxy statements, forms, and
other documents required to be filed with the SEC three full fiscal years
prior to the date hereof (the "USW SEC Documents"), and, as of the Closing
Date, USW shall have filed with the SEC all USW SEC Documents required to be
filed prior thereto. As of their respective dates, (i) the USW SEC Documents
complied, and all similar documents filed with the SEC after the date of this
Agreement but prior to the Closing will comply, in all material respects with
the requirements of the Securities Act or the Exchange Act, as the case may
be, and the rules and regulations of the SEC promulgated thereunder applicable
to such USW SEC Documents and similar documents and (ii) none of the USW SEC
Documents contained, nor will any similar documents filed after the date of
this Agreement but prior to the Closing contain, any untrue statement of a
material fact and none of the USW SEC Documents omitted, nor will any similar
document filed after the date of this Agreement but prior to the Closing omit,
to state a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The consolidated financial statements (including
any related notes and schedules) of USW included in the USW SEC Documents
(including any similar documents filed with the SEC after the date of this
Agreement but prior to the Closing)(collectively, the "USW Financial
Statements") comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto and have been or will be prepared in accordance with GAAP
(except, in the case of unaudited statements, as permitted by Form 10-Q under
the Exchange Act) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly present in all
material respects the consolidated financial position of USW and its
consolidated subsidiaries (including all applicable USW Entities) as of the
dates thereof and the consolidated results of their operations and cash flows
for the periods then-ended (subject, in the case of unaudited statements, to
normal year-end audit adjustments consistent with prior years). Except as set
forth on Section 4.5 of the USW Disclosure Letter or as disclosed in the USW
SEC Documents and the June 30, 1997 consolidated balance sheet included in the
USW SEC Documents (the "USW Balance Sheet"), and except for liabilities and
obligations incurred in the ordinary course of business consistent with past
practice since the date of the USW Balance Sheet, neither USW nor any of USW's
consolidated subsidiaries has any liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise) which would be required
by GAAP to be set forth on a consolidated balance sheet of USW and its
consolidated subsidiaries or in the notes thereto that are not so included or
disclosed.
Section 4.6 Related Party Transactions. No Affiliate of USW is an officer,
director, employee or consultant of, or owns or otherwise controls any Person
which is, or is engaged in business as, a competitor, customer or supplier of
the Business.
Section 4.7 Accounts Receivable. Except as set forth on Section 4.7 of the
USW Disclosure Letter, the accounts receivable shown on the USW Balance Sheet
arose in the ordinary course of business and have been collected or are
reasonably expected to be collectible in the book amounts thereof, less an
amount not in excess
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of the allowance for doubtful accounts and returns provided for in the USW
Balance Sheet. The accounts receivable of USW arising after the date of the
USW Balance Sheet (the "Balance Sheet Date") and before the date of this
Agreement arose in the ordinary course of business and have been collected or
will be collectible in the book amounts thereof, less allowances for doubtful
accounts and returns determined in accordance with the past practices of USW.
None of such accounts receivable is subject to any valid and material claim of
offset or recoupment or counterclaim, and USW has no knowledge of any specific
facts that would be likely to give rise to any such claim; no material amount
of such accounts receivable is contingent upon the performance by USW or any
of the USW Entities of any obligation; and no agreement for deduction or
discount has been made with respect to any such accounts receivable.
Section 4.8 Absence of Certain Changes or Events. Except as set forth in
Section 4.8 of the USW Disclosure Letter, and except as reflected in the USW
Financial Statements, since the Balance Sheet Date, USW and the USW Entities
have conducted their respective businesses in the ordinary course and in a
manner consistent with past practices, and have not:
(a) suffered any event or occurrence that has had or could reasonably be
expected to have a USW Material Adverse Effect;
(b) suffered any damage, destruction or loss, whether covered by
insurance or not, adversely affecting its properties or business;
(c) granted any increase in the compensation payable or to become payable
by USW or any of the USW Entities to their respective officers, employees,
consultants or agents except for compensation increases granted in the
ordinary course of business and in a manner consistent with past practices
to the non-officer employees of USW and the USW Entities in connection with
such employees' annual performance review;
(d) declared, set aside or paid any dividend or made any other
distribution on or in respect of the shares of its capital stock or
declared any direct or indirect redemption, retirement, purchase or other
acquisition of such shares, except for purchases of stock from terminated
non-officer employees in the ordinary course of business and in a manner
consistent with past practices, as itemized in Section 4.8(d) of the USW
Disclosure Letter;
(e) issued any shares of its capital stock or any warrants, rights, or
options for, or entered into any commitment relating to such capital stock,
except for issuances made in the ordinary course of business and in a
manner consistent with past practices (including issuances made upon
exercises and conversions of employee stock options) as described in
Section 4.8(e) of the USW Disclosure Letter;
(f) made any change in the accounting methods or practices it follows,
whether for general financial or tax purposes, or any change in
depreciation or amortization policies or rates;
(g) sold, leased, abandoned or otherwise disposed of any real property or
machinery, equipment or other operating property except in the ordinary
course of business and in a manner consistent with past practices and in an
amount that is not material to USW;
(h) sold, assigned, transferred, licensed or otherwise disposed of any
patent, trademark, trade name, brand name, copyright (or pending
application for any patent, trademark or copyright), invention, work of
authorship, process, know-how, formula or trade secret or interest
thereunder or other material intangible asset, except for non-exclusive
licenses which were granted in the ordinary course of business and in a
manner consistent with past practices and in an amount that is not material
to USW;
(i) entered into any material commitment or transaction (including
without limitation any borrowing or capital expenditure) except as set
forth on Section 4.8(i) of the USW Disclosure Letter;
(j) incurred any liability, except in the ordinary course of business and
consistent with past practice and except as set forth on Section 4.8(j) of
the USW Disclosure Letter;
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(k) permitted or allowed any of its property or assets to be subjected to
any mortgage, deed of trust, pledge, lien, security interest or other
encumbrance of any kind, except for liens for current taxes not yet due and
purchase money security interests incurred in the ordinary course of
business;
(l) made any capital expenditure or commitment for additions to property,
plant or equipment which were in excess of One Hundred Thousand dollars
($100,000) in the aggregate, except as set forth on Section 4.8(l) of the
USW Disclosure Letter;
(m) paid, loaned or advanced any amount to, or sold, transferred or
leased any properties or assets to, or entered into any agreement or
arrangement with any of its officers, directors or shareholders or any
affiliate of any of the foregoing, other than employee compensation and
benefits and reimbursement of employment related business expenses incurred
in the ordinary course of business;
(n) increased or established any reserve for Taxes or any other liability
which, if paid in full, would have a USW Material Adverse Effect except as
set forth on Section 4.8(n) of the USW Disclosure Letter;
(o) waived any rights material to USW or any USW Entity;
(p) taken any action to (i) amend its Certificate of Incorporation, By-
Laws or Governing Documents or (ii) liquidate, dissolve, merge,
consolidate, restructure, recapitalize or reorganize USW or any USW Entity;
or
(q) entered into any agreement, contract, commitment or arrangement to
take any of the actions (i) described in this Section 4.8 or (ii) which
would constitute a breach of any of the representations or warranties of
USW contained in this Agreement, or authorized, recommended, proposed or
announced an intention to take any such action.
Section 4.9 Taxes. As used in this Agreement, the terms "Tax" and,
collectively, "Taxes" mean any and all federal, state and local taxes of any
country, assessments and other governmental charges, duties, impositions and
liabilities, including taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with
respect to such amounts and any obligations under any agreements or
arrangements with any other person with respect to such amounts and including
any liability for taxes of a predecessor entity.
(a) USW has prepared and timely filed all returns, estimates, information
statements and reports required to be filed with any taxing authority
("Returns") relating to any and all Taxes concerning or attributable to USW or
its operations with respect to Taxes for any period ending on or before the
Closing Date and such Returns have been completed in all material respects in
accordance with applicable law or an adequate reserve has been made for such
Taxes on the USW Balance Sheet.
(b) USW, as of the Closing Date: (i) will have paid all Taxes shown to be
payable on such Returns covered by Section 4.9(a) and (ii) will have withheld
with respect to its employees all Taxes required to be withheld and remitted
all withheld amounts in accordance with applicable laws, rules and
regulations.
(c) Except as set forth on Section 4.9 of the USW Disclosure Letter, there
is no Tax deficiency outstanding or assessed against USW that is not reflected
as a liability on the USW Balance Sheet.
(d) USW has no material liabilities for unpaid Taxes that have not been
accrued for or reserved on the USW Balance Sheet, whether asserted or
unasserted, contingent or otherwise.
(e) USW is not a party to any tax-sharing agreement or similar arrangement
with any other party, or any contractual obligation to pay any Tax obligations
of, or with respect to any transaction relating to, any other person or to
indemnify any other person with respect to any Tax.
(f) Section 4.9 of the USW Disclosure Letter sets forth the date or dates
through which the IRS has examined the federal tax returns of USW and the date
or dates through which any foreign, state, local or other
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taxing authority has examined any other tax returns of USW. Section 4.9 of the
USW Disclosure Letter also contains a complete list of each year for which any
federal, state, local or foreign tax authority has obtained or has requested
an extension of the statute of limitations from USW and lists each tax case of
USW currently pending in audit, at the administrative appeals level or in
litigation. Section 4.9 of the USW Disclosure Letter further lists the date
and issuing authority of each statutory notice of deficiency, notice of
proposed assessment and revenue agent's report issued to USW within the last
two (2) years. Except as set forth in Section 4.9 of the USW Disclosure
Letter, neither the IRS nor any foreign, state, local or other taxing
authority has, in the three years preceding the date hereof, examined or is in
the process of examining any federal, foreign, state, local or other tax
returns of USW. To the knowledge of USW, neither the IRS nor any foreign,
state, local or other taxing authority is now asserting or threatening to
assert any deficiency or claim for additional taxes (or interest thereon or
penalties in connection therewith).
Section 4.10 Tangible Assets and Real Property.
(a) Each of USW and the USW Entities own or lease all tangible assets and
properties which are used in the conduct of their respective businesses as
currently conducted and as currently planned to be conducted or which are
reflected on the USW Balance Sheet or acquired since the date of the USW
Balance Sheet ("Material Tangible Assets"). The Material Tangible Assets are
in good operating condition and repair, except as would be expected in the
ordinary course of business.
(b) Except as set forth on Section 4.10(b) of the USW Disclosure Letter,
each of USW and the USW Entities have good and marketable title to all
Material Tangible Assets that they own, free and clear of all mortgages,
liens, pledges, charges or encumbrances of any kind or character, except for
liens for current taxes not yet due and payable, purchase money security
interests, mechanics and other statutory liens and minor liens which do not in
any case materially detract from the value of the property subject thereto or
materially impair the operations of USW, and which have arisen in the ordinary
course of business.
(c) Assuming the due execution and delivery thereof by the other parties
thereto, all leases of Material Tangible Assets to which USW or any of the USW
Entities is a party are in full force and effect and are valid, binding and
enforceable in accordance with their respective terms, except as such
enforceability may be limited by (i) bankruptcy laws and other similar laws
affecting creditors' rights generally and (ii) general principles of equity,
regardless of whether asserted in a proceeding in equity or at law. True and
correct copies of all such leases have been provided to ACC.
(d) Section 4.10(d) of the USW Disclosure Letter sets forth true and
complete lists all real property leased by USW and each of the USW Entities.
USW does not own any real property. All real properties owned or leased by
USW, and the structures thereon, are in good condition, consistent with their
present use. None of such facilities, properties or structures violates any
applicable laws, rules or regulations in any material respects. Assuming the
due execution and delivery thereof by the other parties thereto, all such real
property leases are in full force and effect and are valid, binding and
enforceable in accordance with their respective terms, except as such
enforceability may be limited by (i) bankruptcy laws and other similar laws
affecting creditors' rights generally and (ii) general principles of equity,
regardless of whether asserted in a proceeding in equity or at law. True and
correct copies of all such real property leases have been provided to ACC.
Section 4.11 Intellectual Property.
(a) USW and the USW Entities own, or are licensed or otherwise possess
legally enforceable rights to use, all patents, trademarks, trade names,
service marks, copyrights and mask works, and any applications for and
registrations of such patents, trademarks, trade names, service marks,
copyrights and mask works and all processes, formulae, methods, schematics,
technology, know-how, inventions, computer software programs or applications
and tangible or intangible proprietary information or material that are
necessary to conduct the business of USW and the USW Entities as currently
conducted (all of which are referred to as the "USW Intellectual Property
Rights"), none of which is subject to any Taxes or maintenance or license
fees.
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(b) Section 4.11 of the USW Disclosure Letter contains an accurate and
complete list of (i) all patents and patent applications and all trademarks,
trade names, service marks and registered copyrights, included in the USW
Intellectual Property Rights, including the jurisdictions in which each such
USW Intellectual Property Right has been issued or registered or in which any
such application for such issuance and registration has been filed, (ii) all
licenses, sublicenses, distribution agreements and other agreements to which
USW or any of the USW Entities is a party and pursuant to which any person is
authorized to use any USW Intellectual Property Rights or has the right to
manufacture, reproduce, market or exploit any product of USW or any of the USW
Entities (an "USW Product") or any adaptation, translation or derivative work
based on any USW Product or any portion thereof, (iii) all licenses,
sublicenses and other agreements to which USW or any of the USW Entities is a
party and pursuant to which USW or any of the USW Entities is authorized to
use any third party technology, trade secret, know-how, process, patent,
trademark or copyright, including software ("Licensed Intellectual Property"),
which is incorporated in or forms a part of any USW Product, (iv) all joint
development agreements to which USW or any of the USW Entities is a party, and
(v) all agreements with Governmental Entities or other third parties pursuant
to which USW or any of the USW Entities has obtained funding for research and
development activities.
(c) Neither USW nor any of the USW Entities is, nor will any of them be, as
a result of the execution and delivery of this Agreement or the performance of
any obligation under this Agreement, in breach of any license, sublicense or
other material agreement relating to the USW Intellectual Property Rights or
Licensed Intellectual Property.
(d) Neither USW nor any of the USW Entities (i) has received notice of any
suit, action or proceeding which involves a claim of infringement of any
patent, trademark, service mark, copyright, trade secret or other proprietary
right of any third party; (ii) has knowledge that the manufacturing,
marketing, licensing or sale of any USW Product infringes any patent,
trademark, service mark, copyright, trade secret or other proprietary right of
any third party; and (iii) has knowledge of any claim challenging or
questioning the validity or effectiveness of any license or agreement relating
to any USW Intellectual Property Rights or Licensed Intellectual Property.
(e) All designs, drawings, specifications, source code, object code,
documentation, flow charts and diagrams incorporating, embodying or reflecting
any USW Product at any stage of its development (the "USW Components") were
written, developed and created solely and exclusively by employees of USW or
the USW Entities without the assistance of any third party or were created by
third parties who assigned ownership of their rights with respect thereto to
USW by means of valid and enforceable agreements, copies of which have been
provided at USW's offices to ACC. USW and the USW Entities have at all times
used commercially reasonable efforts to treat the USW Products and USW
Components as containing trade secrets and have not disclosed or otherwise
dealt with such items in such a manner as to cause the loss of such trade
secrets by their release into the public domain.
(f) Each person currently or formerly employed by USW or any of the USW
Entities (including independent contractors, if any) that has or had access to
confidential information of USW or any of the USW Entities has executed and
delivered to USW a confidentiality and non-disclosure agreement substantially
in the form previously provided to ACC. To the best of USW's knowledge,
neither the execution nor the delivery of any such agreement, nor the carrying
on of the business of USW and the USW Entities as currently conducted by any
such person, as an employee or independent contractor, has or will conflict
with or result in a breach of the terms, conditions or provisions of, or
constitute a default under, any contract, covenant or instrument under which
any of such persons is obligated.
Section 4.12 Contracts.
(a) Except as set forth in Section 4.12 of the USW Disclosure Letter,
neither USW nor any of the USW Entities is a party or subject to any
agreement, obligation or commitment, written or oral:
(i) that calls for any fixed and/or contingent payment or expenditure or
any related series of fixed and/or contingent payments or expenditures by
or to USW or any of the USW Entities totaling more than ten thousand
dollars ($10,000) per month except for vendor agreements for which the
threshold shall be $50,000 per month;
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(ii) that restricts USW or any of the USW Entities from carrying on
anywhere in the world any portion of their respective businesses as
currently conducted;
(iii) to provide funds to or to make any investment in any other person
or entity (in the form of a loan, capital contribution or otherwise);
(iv) with respect to obligations as guarantor, surety, co-signer,
endorser, co-maker, indemnitor or otherwise in respect of the obligation of
any other person or entity;
(v) or any line of credit, standby financing, revolving credit or other
similar financing arrangement;
(b) To the best of USW's knowledge, no party to any such contract, agreement
or instrument has expressed its intention to cancel, withdraw, modify or amend
such contract, agreement or instrument.
(c) Except as set forth on Section 4.12(c) of the USW Disclosure Letter,
neither USW nor any of the USW Entities is in default under or in breach or
violation of, nor to USW's knowledge is there any valid basis for any claim of
default by USW or any of the USW Entities under, or breach or violation by USW
or any of the USW Entities of, any contract, commitment or restriction to
which USW or any of the USW Entities is a party or by which USW or any of the
USW Entities or any of their respective properties or assets is bound or
affected, except for such breaches, violations and claims of default as would
not be reasonably likely, either individually or in the aggregate, to have a
USW Material Adverse Effect. To the best of USW's knowledge, no other party is
in default under or in breach or violation of, nor, to the best of USW's
knowledge, is there any valid basis for any claim of default by any other
party under, or any breach or violation by any other party of, any contract,
commitment, or restriction to which USW or any of the USW Entities is a party
or by which USW or any of the USW Entities or any of their respective
properties or assets is bound or affected, except for such breaches,
violations and claims of default as would not be reasonably likely, either
individually or in the aggregate, to have a USW Material Adverse Effect.
Section 4.13 Labor Matters. There is no unfair labor practice complaint
against USW or any of the USW Entities pending, or to the best of USW's
knowledge threatened, before any Governmental Entity. There is no strike,
labor dispute, walkout, slowdown, work stoppage or lockout pending, or to the
best of USW's knowledge threatened, against USW or any of the USW Entities.
Neither USW nor any of the USW Entities is now and neither USW nor any USW
Entity has ever been subject to any union organizing activities. Neither USW
nor any of the USW Entities has ever experienced any strike, labor dispute,
walkout, slowdown, work stoppage, lockout or other labor difficulty. To the
best of USW's knowledge, except as set forth in Section 4.13 of the USW
Disclosure Letter, no officer of USW or any of the USW Entities intends to
leave his or her employment, whether as a result of the transactions
contemplated by this Agreement or otherwise.
Section 4.14 Environmental Matters.
(a) Except as set forth in Section 4.14 of the USW Disclosure Letter, no
material amount of any substance that has been designated by applicable law or
regulation to be radioactive, toxic, hazardous or otherwise a danger to health
or the environment (a "Hazardous Material"), is present, as a result of the
actions of USW or any of the USW Entities or, to the best of USW's knowledge,
as a result of any actions of any third party or otherwise, in, on or under
any property, including the land and the improvements, ground water and
surface water, that USW or any of the USW Entities has at any time owned,
operated, occupied or leased. To the best of USW's knowledge, no underground
storage tanks are present under any property that USW or any of the USW
Entities has at any time owned, operated, occupied or leased.
(b) At no time has USW or any of the USW Entities transported, stored, used,
manufactured, disposed of, released or exposed its employees or others to
Hazardous Materials in violation of any law, rule, regulation or treaty
promulgated by any Governmental Entity (collectively, "Environmental Laws").
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(c) USW and the USW Entities currently hold all environmental approvals,
permits, licenses, clearances and consents (the "Environmental Permits")
necessary for the conduct of the business of USW and the USW Entities as such
business is currently being conducted.
(d) No action, proceeding, writ, injunction or claim is pending or, to the
best of USW's knowledge, threatened concerning any Environmental Permit or
Environmental Law as it relates to USW or any of the USW Entities. Neither USW
nor any of the USW Entities is aware of any fact or circumstance which could
involve USW or any of the USW Entities in any environmental litigation or
impose upon USW or any of the USW Entities any liability concerning Hazardous
Materials, Environmental Laws or Environmental Permits that could have a USW
Material Adverse Effect.
Section 4.15 Employee Benefit Plans.
(a) Except as set forth on Section 4.15(a) of the USW Disclosure Letter,
neither USW nor any USW Entity has established or maintains or is obligated to
make contributions to or under or otherwise participates in with respect to
any current or former employee, director, officer or agent of USW or any of
the USW Entities: (i) any stock option, restricted stock, stock appreciation
rights, bonus or other type of incentive compensation plan, program, agreement
or arrangement; (ii) any severance, pension, profit-sharing, thrift or
savings, retirement, deferred compensation, employee stock ownership, employee
stock purchase or supplemental executive retirement plan, agreement or
arrangement, including, but not limited to, those described in Section 3(2) of
ERISA; (iii) any life insurance, death benefit, health and hospitalization,
disability, cafeteria or Section 125, employee assistance, education or
tuition assistance, vacation benefit or fringe benefit plan, or other employee
benefit plan, program, agreement or arrangement, including, but not limited
to, those described in Section 3(1) of ERISA; or (iv) any grantor trust to
provide funding for non-tax-qualified employee benefits or compensation. All
such plans listed in such Section in which United States-based employees
participate (collectively, the "USW Benefit Plans") have been operated and
administered in all material respects in accordance with all applicable laws,
rules and regulations, including, but not limited to ERISA and the Code (and
any similar statute of a state or other jurisdiction, domestic or foreign, if
applicable). With respect to each USW Benefit Plan, USW and the USW Entities
have made available to ACC the following (to the extent they exist with
respect to such USW Benefit Plan): (i) the document(s) governing such plan,
including, if applicable, the plan document, the trust agreement, any
insurance contract, administrative services agreement, investment manager
agreement, and any amendments thereto; (ii) the two most recent annual reports
of such plan on the appropriate IRS Form 5500-series form; (iii) the financial
statements of the plan for the two most recent plan years, and if applicable,
actuarial valuation or other actuarial reports for the plan for the two most
recent plan years; (iv) the most recent summary plan description for the plan
and any subsequent summary of material modifications; (v) the most recent
ruling letter with respect to the tax-exempt status of any voluntary
employee's beneficiary association under Section 501(c)(9) of the Code which
is implementing such plan; and (i) for each plan that is intended to be
qualified under Section 401(a) of the Code, a copy of the most recent IRS
determination or opinion letter. No act or failure to act by USW or any of the
USW Entities (i) has resulted in a "prohibited transaction" (as defined in
ERISA) with respect to the USW Benefit Plans that is not subject to a
statutory or regulatory exception; or (ii) has resulted or could reasonably be
expected to result in the imposition of any Tax or penalty in any material
amount on USW or any of the USW Entities pursuant to any provision of the Code
or ERISA or any other applicable law. No USW Benefit Plan is subject to Title
IV of ERISA; and no circumstance exists or will exist as a result of the
consummation of the transactions contemplated by this Agreement that could
result in the existence of any Liens or Other Encumbrances on the property of
USW or any of the USW Entities under the provisions of Title IV of ERISA.
Neither USW nor any USW Entity has previously made, is currently making, or is
obligated in any way to make, any contributions to any multi-employer plan
within the meaning of Section 3(37) of ERISA. USW and each USW Entity has made
all contributions or payments required under the terms of or in connection
with all USW Benefit Plans or has properly reserved for such amounts on the
USW Balance Sheet. No USW Benefit Plan provides health and hospitalization or
other medical or life insurance benefits to terminated or retired employees or
independent contractors (other than benefits mandated by applicable law).
Neither USW nor any USW Entity has any obligation or commitment (formal or
informal) to create any new
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benefit plan or program, or to amend any existing USW Benefit Plan to increase
the benefits thereunder. USW and each USW Entity is in compliance in all
material respects with all requirements applicable to any retirement or other
employee benefit plan maintained for its non-United States employees, and
there is no unfunded liability with respect to any such plan which is not
properly reflected in or reserved for in the USW Balance Sheet.
(b) Neither USW nor any USW Entity is a party to any oral or written (i)
union, guild or collective bargaining agreement which covers employees in the
United States (nor is USW aware of any union organizing activity currently
being conducted in respect to any of USW's or any USW Entity's employees),
(ii) agreement with any director, officer, employee or agent the material
benefits of which are contingent, or the terms of which are materially
altered, upon the occurrence of a transaction of the nature contemplated by
this Agreement or which provides for any payment or payments (including any
compensation guarantee, severance, unemployment compensation, golden
parachute, bonus or otherwise) of more than an aggregate of $50,000 to such
officer or employee upon such occurrence, or (iii) agreement or plan,
including any stock option plan, stock appreciation rights plan, restricted
stock plan or stock purchase plan, any of the benefits of which will be
increased, or with respect to vesting, will be accelerated, by the occurrence
of any of the transactions contemplated by this Agreement.
(c) None of the companies with which USW is a member of a "controlled group"
within the meaning of Section 1563(a) of the Code (each, an "ERISA Affiliate")
nor any administrator or fiduciary of any employee benefit plan adopted by a
member of such controlled group (or any agent of any of the foregoing) has
engaged in any transaction or acted or failed to act in a manner which is
reasonably likely to subject ACC or Sub to any material liability (to
individuals, the Internal Revenue Service, the Pension Benefit Guaranty
Corporation, or any other party) for breach of fiduciary duties, accumulated
funding deficiencies, termination or other liability under ERISA, the Code, or
any other applicable laws with respect to an employee benefit plan.
(d) Neither USW nor any ERISA Affiliate, nor any officer, director, agent or
employee of USW or any ERISA Affiliate has made any oral or written statement
regarding any USW Benefit Plan which is reasonably likely to result in
additional material liability to ACC, USW or any ERISA Affiliate, whether
direct or indirect, in excess of any current or potential liability of USW or
any ERISA Affiliate as of the Closing Date.
(e) Except as required by Section 4980B of the Code, neither USW nor any
ERISA Affiliate has promised any former employee or other individual not
employed by USW or any ERISA Affiliate medical or other benefit coverage, and
neither USW nor any ERISA Affiliate maintains or contributes to any plan or
arrangement providing medical benefits, life insurance or other welfare
benefits to former employees, their spouses or dependents or any other
individual not employed by USW or any ERISA Affiliate.
Section 4.16 Compliance with Laws. Each of USW and the USW Entities has
complied in all material respects with all applicable federal, state, local
and foreign statutes, laws and regulations, and is not in violation of, and
has not received any notices of violation with respect to, any such statute,
law or regulation, with respect to the conduct of its business or the
ownership or operation of its business, including, without limitation, the
Americans with Disabilities Act, the federal Foreign Corrupt Practices Act and
all United States statutes, laws and regulations as from time to time govern
the license and delivery of technology and products abroad by persons subject
to the jurisdiction of the United States.
Section 4.17 Litigation. Except as set forth in Section 4.17 of the USW
Disclosure Letter, there is no action, suit, proceeding, claim, arbitration or
investigation pending before any agency, court or tribunal, or to the best of
USW's knowledge, threatened, against USW or any of the USW Entities or any of
their respective properties or officers or directors (in their capacities as
such). There is no judgment, decree or order against USW or any of the USW
Entities or, to the best of USW's knowledge, any of their respective directors
or officers (in their capacities as such) that is reasonably expected to
result in an outcome adverse to USW and which could prevent, enjoin or
materially alter or delay any of the transactions contemplated by this
Agreement, or could reasonably be expected to have a USW Material Adverse
Effect.
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Section 4.18 Indemnification Claims. Section 4.18 of the USW Disclosure
Letter sets forth a list of all persons who are parties to director, officer
and/or employee indemnification agreements with USW or any of the USW Entities
(the "Indemnification Agreements"). There are no outstanding claims under any
of the Indemnification Agreements or under any indemnification rights granted
pursuant to the Certificate of Incorporation or Bylaws of USW or under the
Governing Documents of any of the USW Entities (as currently or previously in
effect); and to the best of USW's knowledge, there are no facts or
circumstances that either now, or with the passage of time, could reasonably
be expected to provide a basis for a claim under any such Indemnification
Agreement or under any indemnification rights granted pursuant to the
Certificate of Incorporation or Bylaws of USW or the Governing Documents of
any USW Entity.
Section 4.19 Restrictions on Business Activities. There is no agreement,
judgment, injunction, order or decree binding upon USW or any of the USW
Entities which has or could reasonably be expected to have the effect of
prohibiting or materially impairing any current business practice of USW or
any of the USW Entities, or the conduct of business by USW or any of the USW
Entities as currently conducted.
Section 4.20 Governmental Authorization. USW and each USW Entity has
obtained each governmental consent, license, permit, grant or other
authorization of a Governmental Entity that is required for the operation of
its business as currently conducted (collectively, the "USW Authorizations"),
and all such USW Authorizations are in full force and effect, except for such
USW Authorizations that, if not obtained by USW, would not, either
individually or in the aggregate, have a USW Material Adverse Effect. USW and
each USW Entity is, and at all times since January 1, 1997, has been, in
compliance with the terms and requirements of each USW Authorization. Since
January 1, 1997, neither USW nor any USW Entity has received any notice or
other communication from any Governmental Entity asserting (a) any violation
of or failure to comply with any term or requirement of any USW Authorization,
or (b) any revocation, withdrawal, suspension, cancellation, termination or
modification of any USW Authorization, except where any such violation,
failure to comply, revocation, withdrawal, suspension, cancellation,
termination or modification would not have a Material Adverse Effect.
Section 4.21 Insurance. Section 4.21 of the USW Disclosure Letter contains a
list of all policies of insurance maintained by USW and the USW Entities, all
of which are maintained with responsible and reputable insurance companies in
such amounts, on such terms and covering such risks, as is reasonably deemed
necessary by USW and all of which are in full force and effect. There is no
material claim pending under any of such policies as to which coverage has
been questioned, denied or disputed by the underwriters of such policies. All
premiums due and payable under all such policies have been paid, and USW and
the USW Entities are otherwise in compliance with the terms of such policies.
USW has no knowledge of any threatened termination of, or material premium
increase with respect to, any of such policies.
Section 4.22 Payments Resulting from Mergers. Neither the consummation nor
announcement of any transaction contemplated by this Agreement will (either
alone or upon the occurrence of any additional or further acts or events)
result in any material payment (whether of severance pay or otherwise)
becoming due from USW or any of the USW Entities to any director, officer,
employee or former employee thereof under (i) any management, employment,
deferred compensation, severance (including any payment, right or benefit
resulting from a change in control), bonus or other contract for personal
services with any officer, director or employee or any plan, agreement or
understanding similar to any of the foregoing, or any "rabbi trust" or similar
arrangement, or (ii) material benefit under any USW Benefit Plan being
established or becoming accelerated, vested or payable.
Section 4.23 Pooling of Interests. To the best of USW's knowledge, neither
USW nor any of the USW Entities nor any director, officer, shareholder,
partner, manager, member or similar person of USW or any of the USW Entities
has taken any action which could reasonably be expected to impair ACC's
ability to account for the Merger as a pooling of interests.
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Section 4.24 Power of Attorney. USW has not granted to any person a power of
attorney or similar authorization or authority that is currently in effect.
Section 4.25 Certain Documents. USW has furnished to ACC, or its
representatives, for its examination USW's and the USW Entities' minute books
and Governing Documents. The minute books of USW and each of the USW Entities
accurately reflect in all material respects all actions taken to this date by
the shareholders, boards of directors and committees of USW and the USW
Entities. USW has made available to ACC true and complete copies of all
documents and information requested by ACC.
Section 4.26 Vote Required. The affirmative vote of the holders of two-
thirds of the outstanding shares of USW Common Stock is the only vote of the
holders of any class or series of USW's capital stock necessary to approve and
adopt this Agreement and consummate the transactions contemplated by this
Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ACC AND SUB
ACC and Sub represent and warrant to USW as follows:
Section 5.1 Organization. Each of ACC and Sub is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, has all requisite corporate power to own,
lease and operate its property and to carry on its business as now being
conducted and as proposed to be conducted, and is duly qualified to do
business and is in good standing as a foreign corporation in each jurisdiction
in which the failure to be so qualified would have a material adverse effect
on the ability of ACC or Sub to consummate the transactions contemplated in
this Agreement or on the business, assets (including intangible assets),
properties, liabilities (contingent or otherwise), financial condition,
operations, or results of operations of the business of ACC taken together
with its Subsidiaries as a whole (an "ACC Material Adverse Effect"). Each of
ACC and Sub has made available to USW copies of its Certificate of
Incorporation and By-laws as in effect as of the date of this Agreement.
Section 5.2 ACC Capital Structure.
Set forth in Schedule 5.2(a) hereto is a description of the authorized and
unissued and issued and outstanding capital stock of ACC. There are no other
classes or series of capital stock of ACC authorized, issued or outstanding.
(b) Except as set forth in Schedule 5.2(a), there are no equity securities
of any class of ACC, or any security exchangeable into or exercisable for such
equity securities, issued, reserved for issuance or outstanding. Except as set
forth in Schedule 5.2(a), there are no options, warrants, equity securities,
calls, rights, commitments or agreements of any character to which ACC is a
party or by which it is bound obligating ACC to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock of
ACC or obligating ACC to grant, extend, accelerate the vesting of or enter
into any such option, warrant, equity security, call, right, commitment or
agreement. To the best knowledge of ACC, there are no voting trusts, proxies
or other agreements or understandings with respect to the shares of capital
stock of ACC.
(c) The shares of ACC Class A Common Stock to be issued pursuant to the
Merger, when issued, will be duly authorized, validly issued, fully paid, and
nonassessable, and free of and not subject to any preemptive rights or rights
of first refusal created by statute or the Certificate of Incorporation or By-
laws of ACC or any agreement to which ACC is a party or by which it is bound.
Section 5.3 Power and Authority; Non-Contravention; Required Filings and
Consents.
(a) ACC and Sub have all requisite corporate power and authority to enter
into this Agreement and the other documents required to be executed and
delivered by ACC or Sub hereunder (collectively, the "ACC
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Transaction Documents") and to consummate the transactions contemplated hereby
and thereby. The execution and delivery of this Agreement and the other ACC
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of ACC and Sub, respectively. This Agreement and the ACC
Transaction Documents to which they are parties have been duly executed and
delivered by ACC and Sub and constitute the valid and binding obligations of
ACC and Sub, respectively, enforceable in accordance with their terms, except
as such enforceability may be limited by (i) bankruptcy laws and other similar
laws affecting creditors' rights generally and (ii) general principles of
equity, regardless of whether asserted in a proceeding in equity or at law.
(b) The execution and delivery of this Agreement by ACC and Sub and the
other ACC Transaction Documents do not, and the consummation of the
transactions contemplated hereby or thereby will not, (i) conflict with, or
result in any violation or breach of any provision of the Certificate of
Incorporation or Bylaws of ACC or Sub, (ii) except as set forth on Schedule
5.3(b)(ii), result in any violation or breach of, or constitute (with or
without notice or lapse of time, or both) a default (or give rise to a right
of termination, cancellation or acceleration of any obligation or loss of any
material benefit) under any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, lease, contract or other agreement,
instrument or obligation to which ACC or Sub is a party or by which either of
them or any of their properties or assets may be bound, or (iii) conflict with
or violate any permit, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to ACC or Sub
or any of its or their properties or assets, except in the case of (ii) and
(iii) for any such conflicts, violations, defaults, terminations,
cancellations or accelerations which would not be reasonably likely to have an
ACC Material Adverse Effect.
(c) The outstanding shares of Sub Common Stock are the only shares of Sub
capital stock entitled to vote with respect to the Merger, and the approval of
this Agreement by the holders of a majority of the issued and outstanding
shares of Sub Common Stock is the only approval of Sub stockholders required
for the consummation of the Merger, no other class vote of any series or class
of Sub capital stock being required. No consent, approval, order or
authorization of, or registration, declaration or filing with, any
Governmental Entity is required by or with respect to ACC or any of its
Subsidiaries in connection with the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby, except for (i)
the filing of a pre-merger notification report under the HSR Act and, in the
case of this Agreement and the transactions contemplated hereby, (ii) the
filing by ACC of the Registration Statement with the SEC in accordance with
the Securities Act, (iii) the filing of the New York Certificate of Merger
with the New York Secretary of State in accordance with the NYBCL and the
Delaware Certificate of Merger with the Delaware Secretary of State in
accordance with the DGCL, (iv) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required
under applicable federal and state securities laws and the laws of any foreign
country and (v) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not be reasonably likely
to have an ACC Material Adverse Effect.
Section 5.4 SEC Filings; Financial Statements.
(a) ACC has filed with the SEC and made available to USW all forms, proxy
statements, reports and documents required to be filed by ACC with the SEC
since June 30, 1997 other than registration statements on Form S-8
(collectively, the "ACC SEC Reports") and as of the Closing Date ACC shall
have filed all ACC SEC Reports required to be filed prior thereto. The ACC SEC
Reports (i) at the time filed, complied in all material respects with the
applicable requirements of the Exchange Act, and (ii) did not at the time they
were filed (or if amended or superseded by a filing prior to the date of this
Agreement, then on the date of such filing) contain any untrue statement of a
material fact or omit to state a material fact required to be stated in such
ACC SEC Reports or necessary in order to make the statements in such ACC SEC
Reports, in the light of the circumstances under which they were made, not
misleading. None of ACC's Subsidiaries is required to file any forms, reports
or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the ACC SEC Reports, including any ACC SEC
Reports filed after the date of this Agreement until the Closing,
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complied or will comply as to form in all material respects with the
applicable published rules and regulations of the SEC with respect thereto,
was or will be prepared in accordance with GAAP applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes to
such financial statements or, in the case of unaudited statements, as
permitted by Form 10-Q promulgated by the SEC) and fairly presented or will
present the consolidated financial position of ACC and its Subsidiaries as at
the respective dates and the consolidated results of its operations and cash
flows for the periods indicated, except that the unaudited interim financial
statements do not contain notes and were or are subject to normal and
recurring year-end adjustments which were not or are not expected to be
material in amount. The consolidated balance sheet of ACC as of June 30, 1997
is referred to herein as the "ACC Balance Sheet." Since June 30, 1997, there
has been no change in ACC's accounting policies except as described in the
notes to ACC's consolidated financial statements and except as required by
changes to GAAP and SEC accounting principles.
Section 5.5 Absence of Undisclosed Liabilities. Except as disclosed in
Schedule 5.5, or as reflected in the ACC Balance Sheet, ACC and its
Subsidiaries do not have any liabilities, either accrued or contingent
(whether or not required to be reflected in financial statements in accordance
with GAAP), and whether due or to become due, which individually or in the
aggregate would be reasonably likely to have an ACC Material Adverse Effect
other than normal or recurring liabilities incurred since the date of such ACC
Balance Sheet, in the ordinary course of business consistent with past
practices.
Section 5.6 Absence of Certain Changes or Events. Except as disclosed in
writing to USW or as disclosed in the ACC SEC Reports, or as reflected in the
ACC Balance Sheet, since June 30, 1997, ACC has conducted its business only in
the ordinary course and in a manner consistent with past practice and, since
such date, there has not been: (i) any ACC Material Adverse Effect; (ii) any
damage, destruction or loss (whether or not covered by insurance) with respect
to ACC having an ACC Material Adverse Effect; (iii) any material change by ACC
in its accounting methods, principles or practices to which USW has not
previously consented in writing; (iv) any revaluation by ACC of any of its
assets having an ACC Material Adverse Effect; or (v) any sale of a material
amount of property except in the ordinary course.
Section 5.7 Interim Operations of Sub. Sub was formed solely for the purpose
of engaging in the transactions contemplated by this Agreement, has engaged in
no other business activities and has conducted its operations only as
contemplated by this Agreement.
Section 5.8 Pooling of Interests. To the best of ACC's knowledge, neither
ACC nor any Subsidiary of ACC nor any director, officer or stockholder of ACC
or any Subsidiary of ACC has taken any action which could reasonably be
expected to impair ACC's ability to account for the Merger as a pooling of
interests.
Section 5.9 Litigation. There is no action, suit, proceeding, claim,
arbitration or investigation pending, or to the best knowledge of ACC,
threatened, against ACC or Sub which in any manner challenges or seeks to
prevent, enjoin, alter or materially delay any of the transactions
contemplated by this Agreement.
ARTICLE VI
CONDUCT OF BUSINESS
Section 6.1 Covenants of USW. During the period from the date of this
Agreement until the earlier of the termination of this Agreement or the
Effective Time, USW agrees (and shall cause each of the USW Entities) to carry
on its business and that of the USW Entities in the usual, regular and
ordinary course in substantially the same manner as previously conducted
except to the extent that ACC shall otherwise consent or request, to pay its
debts and taxes when due, subject to good faith disputes over such debts or
taxes, to pay or perform its other obligations when due, and, to the extent
consistent with such business, to use all reasonable efforts consistent with
past practices and policies to (i) preserve intact its present business
organization, (ii) keep available the services of its present officers and key
employees and (iii) preserve its relationships with customers, suppliers,
distributors, licensors, licensees and others having business dealings with
it. USW shall promptly
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notify ACC of any event or occurrence not in the ordinary course of business
of USW and any of the USW Entities where such event or occurrence would result
in a breach of any covenant of USW set forth in this Agreement or cause any
representation or warranty of USW set forth in this Agreement to be untrue as
of the date of, or giving effect to, such event or occurrence; provided,
however, that any failure by USW to provide such notice shall not in and of
itself give rise to a right in favor of ACC to terminate this Agreement.
Except as expressly contemplated by this Agreement, neither USW nor any of the
USW Entities shall, without the prior written consent of ACC:
(a) transfer or license to any person or entity or otherwise extend,
amend or modify any rights to the USW Intellectual Property Rights other
than in the ordinary course of business consistent with past practices;
(b) declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital
stock, or split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, or purchase or otherwise
acquire, directly or indirectly, any shares of its capital stock except
from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with any
termination of service by such party;
(c) issue, deliver or sell or authorize or propose the issuance, delivery
or sale of, any shares of its capital stock or securities convertible into
shares of its capital stock, or subscriptions, rights, warrants or options
to acquire, or other agreements or commitments of any character obligating
it to issue any such shares or other convertible securities (except for
exercises and conversions of securities outstanding on the date of this
Agreement in the ordinary course of business consistent with past
practices);
(d) acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or substantial portion of the
assets of, or by any other manner, any business or any corporation,
partnership or other business organization or division, or otherwise
acquire or agree to acquire any assets other than acquisitions involving
aggregate consideration of not more than fifty thousand dollars ($50,000)
and inventory purchased in the ordinary course of business consistent with
past practices;
(e) sell, lease, license or otherwise dispose of any of its properties or
assets except for transactions entered into in the ordinary course of
business consistent with past practice;
(f) take any action to: (i) increase or agree to increase the
compensation payable or to become payable to its officers or employees
(except for compensation increases granted in the ordinary course of
business and in a manner consistent with past practices, to the non-officer
employees of USW and the USW Entities in connection with such employees'
annual performance reviews), (ii) grant any severance or termination pay
to, or enter into any employment or severance agreements with, any officer
or employee, (iii) enter into any collective bargaining agreement, (iv)
establish, adopt, enter into or amend in any material respect any bonus,
profit sharing, thrift, compensation, stock option, restricted stock,
pension, retirement, deferred compensation, employment, termination,
severance or other plan, trust, fund, policy or arrangement for the benefit
of any directors, officers or employees, (v) hire employees or consultants
so that the total number of employees of USW and the USW Entities exceeds
seventy-five (75), and (vi) terminate employees and consultants so that the
total number of employees of USW and the USW Entities is less than sixty
(60) (including those who terminate their employment voluntarily);
(g) revalue any of its assets, including writing down the value of
inventory or writing off notes or accounts receivable other than in the
ordinary course of business;
(h) incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or warrants or rights to
acquire any debt securities or guarantee any debt securities of others,
other than indebtedness incurred under outstanding lines of credit in the
ordinary course of business consistent with past practice;
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(i) amend or propose to amend its Certificate of Incorporation or By-
laws, including by reincorporation, by merger or otherwise, in any other
jurisdiction;
(j) incur or commit to incur any capital expenditure which individually
exceeds fifty thousand dollars ($50,000), other than the existing
commitments set forth in the USW Disclosure Letter;
(k) enter into or amend any agreements pursuant to which any third party
is granted exclusive marketing or manufacturing rights with respect to any
USW Product;
(l) amend or terminate any material contract, agreement or license to
which it is a party except in the ordinary course of business;
(m) accelerate, amend or change the period of exercisability of options
or restricted stock granted under any employee stock plan of USW or
authorize cash payments in exchange for any options granted under any of
such plans except as required by the terms of such plans or any related
agreements in effect as of the date of this Agreement;
(n) waive or release any material right or claim, except in the ordinary
course of business;
(o) initiate any litigation or arbitration proceeding;
(p) compromise or otherwise settle or adjust any assertion or claim of a
deficiency in taxes (or interest thereon or penalties in connection
therewith), extend the statute of limitations with any tax authority, file
any pleading in court in any tax litigation or any appeal from an asserted
deficiency, or make any tax election;
(q) change any of USW's accounting policies and practices, except such
changes as may be required in the opinion of USW's management to respond to
economic or market conditions or as may be required by the rules of the
Institute of Certified Public Accountants or Financial Accounting Standards
Board or by applicable governmental authorities;
(r) change its personnel policies;
(s) permit any insurance policy naming USW or any of the USW Entities as
a beneficiary or a loss payee to be canceled or terminated;
(t) other than in the ordinary course of business consistent with past
practice, enter into, or permit any USW Entity to enter into any
transaction or agreement, arrangement or understanding, directly or
indirectly, with any related party or Affiliate except on terms no less
favorable than would be available in competitive arm's-length transactions;
(u) act or fail or omit to act, or permit any USW Entity to act or fail
or omit to act, so as to cause any USW Material Adverse Effect;
(v) adopt, or permit a USW Entity to adopt, a plan of complete or partial
liquidation, dissolution, merger, consolidation, share exchange,
restructuring, recapitalization or other reorganization of USW or any of
the USW Entities;
(w) grant any person a power of attorney or similar authority; or
(x) take, or agree in writing or otherwise to take, any of the actions
described in subsections (a) through (w) above, or any action which is
reasonably likely to make any of its representations or warranties
contained in this Agreement untrue or incorrect in any material respect on
the date made (to the extent so limited) or as of the Effective Time.
Section 6.2 Cooperation. Subject to compliance with applicable law, from the
date hereof until the Effective Time, each of ACC and USW shall confer on a
regular and frequent basis with one or more representatives of the other party
to report operational matters of materiality and the general status of ongoing
operations and shall promptly provide the other party or its counsel with
copies of all filings made by such party with any Governmental Entity in
connection with this Agreement, the Merger and the other transactions
contemplated hereby.
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ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 No Solicitation.
(a) From and after the date of this Agreement until the earlier of the
Effective Time or the termination of this Agreement in accordance with its
terms, USW shall not, directly or indirectly through any officer, director,
employee, representative or agent of USW or otherwise, (i) solicit, initiate,
or encourage any inquiries or proposals that constitute, or could reasonably
be expected to lead to, a proposal or offer for a merger, consolidation, share
exchange, business combination, sale of all or substantially all assets, sale
of shares of capital stock (including without limitation by way of a tender
offer) or similar transactions involving USW other than the transactions
contemplated by this Agreement (any of the foregoing inquiries or proposals
being referred to in this Agreement as an "Acquisition Proposal"), (ii) engage
or participate in negotiations or discussions concerning, or provide any
information to any person or entity relating to, any Acquisition Proposal, or
(iii) agree to, enter into, accept, approve or recommend any Acquisition
Proposal.
(b) USW shall notify ACC immediately (and no later than 24 hours) after
receipt by USW (or its advisors) of any Acquisition Proposal or any request
for information in connection with an Acquisition Proposal or for access to
the properties, books or records of USW by any person or entity that informs
USW that it is considering making, or has made, an Acquisition Proposal. Such
notice shall be made orally and in writing and shall indicate in reasonable
detail the identity of the offeror and the terms and conditions of such
proposal, inquiry or contact.
Section 7.2 Registration Statement; Information Statement.
(a) USW hereby covenants and agrees that the information supplied and to be
supplied to ACC by USW for inclusion in the registration statement of ACC on
Form S-4 pursuant to which shares of ACC Class A Common Stock issued in the
Merger will be registered with the SEC (the "Registration Statement") shall
not contain, either at the time such information is provided to ACC or at the
time the Registration Statement is declared effective by the SEC, any untrue
statement of a material fact or omit to state any material fact required to be
stated in the Registration Statement or necessary in order to make the
statements in the Registration Statement, in light of the circumstances under
which they were made, not misleading. The information supplied and to be
supplied by USW for inclusion in the information statement/prospectus (the
"Information Statement") to be sent to the shareholders of USW in connection
with the solicitation of the written consent of the shareholders of USW
concerning the approval of this Agreement and the Merger (the "USW Shareholder
Consents") shall not, on the date the Information Statement is first mailed to
shareholders of USW, on the date the USW Shareholder Consents are required to
be returned to USW, or at the Effective Time, contain any statement which, at
such time and in light of the circumstances under which it was made, is false
or misleading with respect to any material fact, or omit to state any material
fact necessary in order to make the statements made in the Information
Statement not false or misleading or omit to state any material fact necessary
to correct any statement in any earlier communication with respect to the
solicitation of the USW Shareholder Consents which has become false or
misleading. If at any time prior to the Effective Time any event relating to
USW, any of the USW Entities or any of their respective officers, directors or
affiliates should be discovered by USW which should be set forth in an
amendment to the Registration Statement or a supplement to the Information
Statement, USW shall promptly inform ACC.
(b) ACC hereby covenants and agrees that the information supplied and to be
supplied by ACC for inclusion or incorporation by reference in the
Registration Statement shall not at the time the Registration Statement is
declared effective by the SEC contain any untrue statement of a material fact
or omit to state any material fact required to be stated in the Registration
Statement or necessary in order to make the statements in the Registration
Statement, in light of the circumstances under which they were made, not
misleading. The information supplied and to be supplied by ACC for inclusion
or incorporation by reference in the Information Statement shall not, on the
date the Information Statement is first mailed to shareholders of USW, on the
date the USW Shareholder Consents are required to be returned to USW, or at
the Effective Time, contain any statement which, at such time and in light of
the circumstances under which it shall be made, is false or
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misleading with respect to any material fact, or omit to state any material
fact necessary in order to make the statements made in the Information
Statement not false or misleading; or omit to state any material fact
necessary to correct any statement in any earlier communication with respect
to the solicitation of the USW Shareholder Consents which has become false or
misleading. If at any time prior to the Effective Time any event relating to
ACC or any of its officers, directors or affiliates should be discovered by
ACC which should be set forth in an amendment to the Registration Statement or
a supplement to the Information Statement, ACC shall promptly inform USW.
Section 7.3 Governmental Filings. As promptly as practicable after the
execution of this Agreement, ACC shall prepare and file with the SEC the
Registration Statement. ACC shall use its best efforts to respond to any
comments of the SEC, to have the Registration Statement declared effective
under the Securities Act as promptly as practicable after such filing, and to
cause the Prospectus contained in the Registration Statement to be mailed to
USW's shareholders at the earliest practicable time. As promptly as
practicable after the date of this Agreement, ACC and USW shall prepare and
file any other filings required under any other federal or state laws
(including blue sky laws) relating to the Merger and the transactions
contemplated by this Agreement, including, without limitation, under the HSR
Act (the "Other Filings"). USW will notify ACC promptly of the receipt of any
request for additional information under the HSR Act and will supply ACC with
copies of all correspondence between USW or any of its representatives, on the
one hand, and any government officials. The Registration Statement and the
Other Filings shall comply in all material respects with all applicable
requirements of law. As promptly as practicable after the execution of this
Agreement, under the direction and subject to the review and approval of ACC,
USW shall prepare and, after receiving the authorization of ACC, distribute
the Information Statement to its shareholders for the purpose of soliciting
the USW Shareholders. The Information Statement shall include the
recommendation of the Board of Directors of USW in favor of the Merger and
this Agreement. Whenever any event occurs which is required to be set forth in
an amendment or supplement to the Registration Statement, the Information
Statement or any other filing, ACC or USW, as the case may be, shall promptly
inform the other of such occurrence and cooperate in filing with the
applicable government officials, and/or mailing to shareholders of USW, such
amendment or supplement.
Section 7.4 Consents. Each of ACC and USW shall use its best efforts to
obtain all necessary consents, waivers and approvals under its respective
material agreements, contracts, licenses and leases as may be necessary or
advisable to consummate the Merger and the other transactions contemplated by
this Agreement.
Section 7.5 Access to Information. Upon reasonable notice, USW shall afford
to the officers, employees, accountants, counsel and other representatives of
ACC, reasonable access, during normal business hours during the period prior
to the Effective Time, to all its and the USW Entities' properties, books,
contracts, commitments and records and, during such period, USW shall furnish
promptly to ACC (i) a copy of each report, schedule, registration statement
and other document filed or received by it during such period from any
Governmental Entity and (ii) all other information concerning the business,
properties and personnel of USW and each of the USW Entities as ACC may
reasonably request. No information or knowledge obtained in any investigation
pursuant to this Section 7.5 shall affect or be deemed to modify any
representation or warranty contained in this Agreement or the conditions to
the obligations of the parties to consummate the Merger.
Section 7.6 Legal Conditions to Merger. Each of ACC and USW will take all
reasonable actions necessary to comply promptly with all legal requirements
which may be imposed on itself with respect to the Merger (which actions shall
include, without limitation, furnishing all information required under the HSR
Act and in connection with approvals of or filings with any other Governmental
Entity) and will promptly cooperate with and furnish information to each other
in connection with any such requirements imposed upon any of them or any of
their Subsidiaries in connection with the Merger. Each of ACC and USW will,
and will cause its Subsidiaries to, take all reasonable actions necessary (i)
to obtain (and will cooperate with each other in obtaining) any consent,
authorization, order or approval of, or any exemption by, any Governmental
Entity or other public third party, required to be obtained or made by USW,
ACC or any of their Subsidiaries in connection with the Merger or the taking
of any action contemplated by this Agreement, (ii) to lift, rescind or
mitigate the effect of any injunction or restraining order or other order
adversely affecting its ability to consummate the
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transactions contemplated hereby, (iii) to fulfill all conditions applicable
to ACC, USW or Sub pursuant to this Agreement, and (iv) to prevent, with
respect to a threatened or pending temporary, preliminary or permanent
injunction or other order, decree or ruling or statute, rule, regulation or
executive order, the entry, enactment or promulgation thereof, as the case may
be.
Section 7.7 Tax-Free Reorganization. ACC and USW shall each use its best
efforts to cause the Merger to be treated as a reorganization within the
meaning of Section 368(a) of the Code.
Section 7.8 Pooling Accounting. Each of ACC and USW agrees not to take any
action and to use its best efforts to cause its respective affiliates not to
take any action after the date of this Agreement that would adversely affect
the ability of ACC to treat the business combination to be effected by the
Merger as a pooling of interests, and each of ACC and USW agrees to take such
actions and to use its best efforts to cause its respective affiliates to take
such actions as may be reasonably required to negate the impact of any past
actions that would adversely impact the ability of ACC to treat the business
combination to be effected by the Merger as a pooling of interests. USW shall
cause its affiliates to sign and deliver to ACC a customary "pooling letter",
substantially in the form attached hereto as Exhibit A; and ACC shall close
the trading window provided for under the ACC Insider Trading Policy not less
than 30 days prior to the Closing Date and shall not reopen the trading window
until such time as ACC has published (within the meaning of Accounting Series
Release No. 130, as amended, of the SEC) in an effective registration
statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q or
Current Report on Form 8-K filed with the SEC, or any publicly disclosed
quarterly earnings report or press release or other authorized public
disclosure by ACC, financial results covering at least 30 days of combined
post-Merger operations of ACC and USW.
Section 7.9 Affiliate Agreements. Upon the execution of this Agreement, USW
will provide ACC with a list of those persons who are, in the reasonable
knowledge and judgment of USW, after consultation with legal counsel,
"affiliates" of USW, within the meaning of Rule 145 promulgated under the
Securities Act ("Rule 145")(each such person who is an "affiliate" of USW
within the meaning of Rule 145 is referred to herein as a "USW Affiliate").
USW shall provide ACC with such information and documents as ACC shall
reasonably request for purposes of reviewing such list and shall notify ACC in
writing regarding any change in the identity of such USW Affiliates prior to
the Closing Date. USW shall use its reasonable efforts to deliver or cause to
be delivered to ACC by the date of this Agreement from each of the USW
Affiliates, an executed Affiliate Agreement, substantially in the form
attached hereto as Exhibit B, by which each such USW Affiliate agrees to
comply with the applicable requirements of Rule 145 ("Affiliate Agreement").
ACC shall be entitled to place appropriate legends on the certificates
evidencing any ACC Class A Common Stock to be received by such USW Affiliates
pursuant to the terms of this Agreement, and to issue appropriate stop
transfer instructions to the transfer agent for the ACC Class A Common Stock,
consistent with the terms of the Affiliate Agreements.
Section 7.10 Stock Options.
(a) At the Effective Time, each USW Stock Option, whether vested or
unvested, shall be, in connection with the Merger, assumed by ACC. Each USW
Stock Option so assumed by ACC under this Agreement shall continue to have,
and be subject to, the same terms and conditions set forth in the agreement,
document or plan governing such option and/or as provided in the respective
option agreements governing such USW Stock Option immediately prior to the
Effective Time, except that (i) such USW Stock Option shall be exercisable for
that number of whole shares of ACC Class A Common Stock equal to that number
of shares of ACC Class A Common Stock (rounded up to the nearest whole share)
into which the number of shares of USW Common Stock subject to such USW Stock
Option immediately prior to the Effective Time would be converted under
Section 3.1; (ii) the per share exercise price for the shares of ACC Class A
Common Stock issuable upon exercise of such assumed USW Stock Option shall be
equal to (A) the aggregate exercise price for the shares of USW Common Stock
otherwise purchasable pursuant to such USW Stock Option, divided by (B) the
number of full shares of ACC Common Stock deemed purchasable pursuant to such
USW Stock Option (rounded up to the nearest whole cent). As soon as
practicable after the Effective Time, ACC shall deliver to each holder of a
USW Stock Option a document confirming the foregoing assumption of each USW
Stock Option by ACC.
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(b) ACC shall take all corporate action necessary to reserve for issuance a
sufficient number of shares of ACC Class A Common Stock to satisfy the
exercise of the assumed USW Stock Options in full.
(c) It is the intention of the parties that the USW Stock Options assumed by
ACC qualify after the Effective Time as incentive stock options, as defined in
Section 422 of the Code, to the extent that such USW Stock Options qualified
as incentive stock options immediately prior to the Effective Time.
Section 7.11 Registration. ACC shall prepare and file with the SEC and shall
use its best efforts to cause to become effective, a registration statement on
Form S-8 with respect to the shares of ACC Class A Common Stock issuable upon
exercise of the assumed USW Stock Options as soon as practicable after the
Closing Date.
Section 7.12 Expenses. The parties shall each pay their own legal,
accounting and other similar out-of-pocket expenses related to the
negotiation, preparation and carrying out of this Agreement and the
transactions herein contemplated. If the Merger is consummated, reasonable
legal and accounting fees and expenses and other similar out-of-pocket
expenses reasonably incurred by USW relating to the negotiation, preparation
and carrying out of this Agreement and the transactions herein contemplated
shall be borne by the Surviving Corporation and shall be paid at the Effective
Time to the person or persons designated by USW. A schedule of all such fees
and expenses to be incurred through the Closing shall be submitted to ACC
prior to the Closing.
Section 7.13 Brokers or Finders. Each of ACC and USW represents, as to
itself, its Subsidiaries and its affiliates, that no agent, broker, investment
banker, financial advisor or other firm or person is or will be entitled to
any broker's or finder's fee or any other commission or similar fee in
connection with any of the transactions contemplated by this Agreement, except
First Union Capital Markets Corp., whose fees and expenses will be paid by ACC
at or prior to the Effective Time, and each of ACC and USW agrees to indemnify
and hold the other harmless from and against any and all claims, liabilities
or obligations with respect to any other fees, commissions or expenses
asserted by any person on the basis of any act or statement alleged to have
been made by such party or its affiliates.
Section 7.14 Voting Agreements. USW shall cause each director and officer of
USW and (and the affiliates thereof) to execute and deliver to ACC, by the
date of this Agreement, voting agreements and irrevocable proxies in the forms
annexed hereto as Exhibit D (the "Shareholder Tender Agreement"), agreeing,
among other things, to vote in favor of the Merger.
Section 7.15 Indemnification and Insurance. From and after the Effective
Time, the Surviving Corporation and ACC will fulfill, assume and honor in all
respects the obligations of USW pursuant to USW's Certificate of Incorporation
and By-Laws and any indemnification agreement between USW and any of USW's
directors and officers existing and in force as of the Effective Time.
Section 7.16 Additional Agreements; Reasonable Efforts. Subject to the terms
and conditions of this Agreement, each of the parties agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, subject to the appropriate vote of
shareholders of USW described in Section 8.1(a), including cooperating fully
with the other party, including by provision of information and making all
necessary filings under the HSR Act. ACC and USW will use their reasonable
best efforts to resolve any competitive issues relating to or arising under
the HSR Act or any other federal or state antitrust or fair trade law raised
by any Governmental Entity. If such offers are not accepted by such
Governmental Entity, ACC (with USW's cooperation) may pursue all litigation
resulting from such issues. The parties hereto will consult and cooperate with
one another, and consider in good faith the views of one another, in
connection with any analyses, appearances, presentations, memoranda, briefs,
arguments, opinions and proposals made or submitted by or on behalf of any
party hereto in connection with proceedings under or relating to the HSR Act
or any other federal or state antitrust or fair trade law. In the event of a
challenge to the transactions contemplated by this Agreement pursuant to the
HSR Act, ACC and USW shall use all reasonable efforts to defeat such
challenge, including by institution and defense of litigation, or to settle
such challenge on
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terms that permit the consummation of the Merger; provided, however, that
nothing herein shall require either party to agree to divest or hold separate
any portion of its business or otherwise take action that could reasonably be
expected to have an ACC Material Adverse Effect or a USW Material Adverse
Effect. In case, at any time after the Effective Time, any further action is
necessary or desirable to carry out the purposes of this Agreement or to vest
the Surviving Corporation with full title to all properties, assets, rights,
approvals, immunities and franchises of either of the Constituent
Corporations, the proper officers and directors of each party to this
Agreement shall take all such necessary action.
Section 7.17 Notification of Certain Matters. USW shall give prompt notice
to ACC, and ACC and Sub shall give prompt notice to USW, of the occurrence, or
failure to occur, of any event, which occurrence or failure to occur, if
uncured, would be likely to cause the failure of any of the conditions set
forth in Article VIII of this Agreement.
Section 7.18 Meeting of USW Shareholders. USW shall take all steps
reasonably necessary in accordance with its Certificate of Incorporation and
By-laws and the NYBCL to call, set a record date, give notice of, convene and
hold a special meeting of its stockholders (the "USW Shareholders Meeting") to
occur as soon as practicable for the purpose of approving and adopting this
Agreement and authorizing the Merger and for such other purposes as may be
necessary. The Board of Directors of USW shall (i) take all steps reasonably
necessary to present and recommend to its stockholders the approval and
adoption of this Agreement and approval of the transactions contemplated
hereby to which it is a party and any other matters to be submitted to its
stockholders in connection therewith and (ii) use all reasonable efforts to
obtain the approval and adoption by the USW stockholders of this Agreement and
any of the transactions contemplated hereby requiring such stockholder
approval.
Section 7.19 Confidentiality. USW and ACC acknowledge and confirm that they
have entered into a Non-Disclosure Agreement dated August 1, 1997 and that the
same shall remain in full force and effect in accordance with its terms,
notwithstanding the execution of this Agreement and whether or not the
transactions contemplated by this Agreement are consummated or terminated.
Section 7.20 Public Disclosures. USW and ACC shall consult with each other
before issuing any press release or otherwise making any public statement with
respect to the transactions contemplated by this Agreement, and shall not
issue any such press release or make any such public statement prior to such
consultation except as may be required by applicable law or requirements of
the Exchange Act, NASDAQ or any national securities exchange as advised by
counsel, in which case the parties shall use their reasonable efforts to
consult with each other prior to issuing such a release or making such a
statement. ACC and USW shall issue a joint press release, mutually acceptable
to USW and ACC, promptly upon execution and delivery of this Agreement. USW
and ACC shall cooperate and consult with each other to develop and implement
guidelines for communications to employees, customers and suppliers of USW
regarding the transactions contemplated by this Agreement.
Section 7.21 Resignation of Directors and Officers. At or prior to the
Closing, USW shall deliver to ACC if and as requested by ACC evidence
satisfactory to ACC of the resignation of the directors and officers, solely
in their capacities as such, of USW and any USW Entity, such resignations to
be effective at the Effective Time.
Section 7.22 Cooperation. Each of USW and ACC shall use its best efforts (i)
to cooperate with each other in determining whether any filings are required
to be made or consents are required to be obtained in any jurisdiction prior
to the Closing, in connection with the consummation of the transactions
contemplated hereby and cooperate in making any such filings promptly and in
seeking to obtain any such consents in a timely manner, or (ii) to take, or
cause to be taken, all actions necessary to comply promptly with all legal
requirements which may be imposed by agency or court order on such party (or
any subsidiaries or other Affiliates of such party) with respect to this
Agreement, and (iii) to take, or cause to be taken, all actions necessary to
obtain (and to cooperate with the other party to obtain) any consent,
authorization, order or approval of, or any exemption
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by, any Governmental Entity and/or any other public entity which is required
to be obtained or made by such party or any of its subsidiaries or other
Affiliates in connection with this Agreement and the transactions contemplated
hereby. USW shall reasonably cooperate with ACC in furnishing financial
information relating to the business of USW for periods prior to the Closing
to the extent such information may be required to prepare financial
information required to be filed under the Securities Act, the Exchange Act or
the rules and regulations promulgated by the SEC thereunder.
Section 7.23 Noncompete and Nonsolicitation Agreement. Subject to the
satisfaction of the conditions to its obligations in Article VIII, below, the
persons listed on Schedule 7.23 shall execute and deliver to ACC at the
Closing, without further consideration, a non-compete and non-solicitation
agreement in substantially the form attached hereto as Exhibit C (the "Non-
Compete/Non-Solicitation Agreement")
Section 7.24 SEC and Stockholder Filings. Each of USW and ACC shall send to
the other a copy of all material public reports and materials as and when it
sends the same to its stockholders, the SEC or any state or foreign securities
commission.
Section 7.25 Takeover Statutes. If any "fair price," "moratorium," "business
combination," "control share acquisition" or other similar antitakeover
statute or regulation enacted under state or federal laws in the United States
(each a "Takeover Statute"), including Section 203 of the DGCL and Section 912
of the NYBCL, is or may become applicable to the Merger, USW, ACC and the
members of their respective Boards of Directors will grant such approvals, and
take such actions as are necessary so that the transactions contemplated by
this Agreement may be consummated as promptly as practicable on the terms
contemplated hereby and thereby and otherwise act to eliminate or minimize the
effects of any Takeover Statute on any of the transactions contemplated hereby
or thereby.
Section 7.26 Nasdaq Notice of Listing of Additional Shares. ACC shall file a
Notice of Listing of Additional Shares, pay all requisite filing fees with the
Nasdaq and otherwise comply with all requirements to list the shares of ACC
Class A Common Stock being issued pursuant hereto on the Nasdaq National
Market.
Section 7.27 Filing of Financial Results. As soon as practicable after the
Effective Time, ACC shall use its best efforts to include in an effective
registration statement, Annual Report on Form 10-K, Quarterly Report on Form
10-Q or Current Report on Form 8-K filed with the SEC, financial results
covering at least 30 days of combined post-Merger operations of ACC and USW.
ARTICLE VIII
CONDITIONS TO MERGER
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction prior to the Closing Date of the
following conditions:
(a) Shareholder Approval. This Agreement and the Merger shall have been
approved and adopted by the requisite votes of holders of USW Capital Stock
(including any requisite class votes) pursuant to the NYBCL.
(b) Governmental Approvals. The waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated, and no action shall have been instituted by the Department of
Justice or Federal Trade Commission challenging or seeking to enjoin the
consummation of the Merger, which action shall not have been withdrawn or
terminated. All authorizations, consents, orders or approvals of any
Governmental Entity required to consummate the transactions contemplated by
this Agreement, the absence of which would be reasonably likely to result
in an ACC Material Adverse Effect or a USW Material Adverse Effect, shall
have been obtained and be in effect.
(c) Securities Requirements. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order. All permits
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and other authorizations required (if any) under applicable state blue sky
laws for the issuance of shares of ACC Class A Common Stock pursuant to the
Merger, shall have been obtained.
(d) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger or limiting or
restricting ACC's or USW's conduct or operation of the business of ACC or
USW after the Merger shall have been issued and be in effect, nor shall any
proceeding brought by a domestic administrative agency or commission or
other domestic Governmental Entity, seeking any of the foregoing be
pending; nor shall there be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger which makes the consummation of the Merger illegal or prevents or
prohibits the Merger.
(e) Tax Opinions. ACC and USW shall each have received written opinions,
dated as of the Closing Date, from their respective counsel Nixon,
Hargrave, Devans & Doyle LLP and Morgan, Lewis & Bockius LLP in form and
substance reasonably satisfactory to them to the effect that the Merger
will be treated for federal income tax purposes as a tax-free
reorganization within the meaning of Section 368(a) of the Code. In
rendering such opinion, counsel may rely upon reasonable representations
and certificates of ACC, Sub, USW and certain shareholders of USW, and the
parties to this Agreement agree to make, and to use reasonable efforts to
cause the shareholders of USW to make, such representations and deliver
such certificates.
(f) Pooling.
(i) ACC shall have received a letter from Arthur Andersen, LLP and
USW shall have received a letter from Deloitte & Touche, LLP, dated as
of the Effective Time, confirming the appropriateness of pooling of
interest accounting for the Merger under Accounting Principles Board
Opinion No. 16 if the Merger is closed and consummated in accordance
with this Agreement; and
(ii) Neither ACC nor USW shall have received any notice, response or
indication from the Securities and Exchange Commission that pooling of
interest accounting for the Merger under Accounting Principles Board
Opinion No. 16 will be unavailable or inappropriate if the Merger is
closed and consummated in accordance with this Agreement.
(g) Moratorium. There shall not have occurred and be continuing any
general banking moratorium in the United States or any general suspension
of trading of securities on any national stock exchange or in the over-the-
counter market.
Section 8.2 Additional Conditions to Obligations of ACC and Sub. The
obligations of ACC and Sub to effect the Merger are subject to the
satisfaction of each of the following additional conditions, any of which may
be waived in writing exclusively by ACC and Sub:
(a) Representations and Warranties. The representations and warranties of
USW set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as of the Closing Date as
though made on and as of the Closing Date. ACC shall have received a
certificate signed on behalf of USW by an executive officer of USW to such
effect.
(b) Performance of Obligations. USW shall have performed in all material
respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, and ACC shall have received a
certificate signed on behalf of USW by an executive officer of USW to such
effect.
(c) Ancillary Agreements and Documentation. ACC shall have received (i)
executed Affiliate Agreements and Pooling Letters from each of the USW
Affiliates; (ii) Non-Compete/Non-Solicitation Agreement from each of the
persons listed on Schedule 7.23 and (iii) an update of the USW Disclosure
Letter as of the Closing Date.
(d) Third-Party Consents and Waivers. USW shall have provided all notices
to third parties, and shall have received all third-party consents or
waivers, required for or in connection with the consummation of the
transactions contemplated by this Agreement under any contract set forth
(or required to be set forth) in Section 4.4 of the USW Disclosure Letter
or to be obtained pursuant to Section 7.4.
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(e) Lease. The current lease for USW's location at 401 North Broad
Street, Philadelphia, Pennsylvania shall be amended to modify the
relocation provision and such amendment shall be, in form and substance,
acceptable to ACC.
(f) Dissenting Shares. The number of Dissenting Shares shall be less than
ten percent (10%) of the shares of USW Capital Stock outstanding as of the
Effective Time.
(g) Stock Options and Warrants. USW shall have received all consents
necessary for ACC to assume all outstanding USW Stock Options in accordance
with Section 7.10 hereof and to convert all outstanding USW Warrants into
the right to receive that number of shares of ACC Class A Common Stock into
which the shares of USW Capital Stock issuable pursuant to Section 3.1(f)
hereof would be converted.
(h) Accountants Consent. Deloitte & Touche LLP shall have furnished to
ACC an undertaking to consent to the use and inclusion of financial
statements relating to USW audited by it in filings made by ACC subsequent
to the Effective Time with the SEC, NASDAQ and state securities
authorities.
(i) Audit. Arthur Andersen LLP shall have audited the books and records
of USW and the results of such audit shall be satisfactory to ACC.
(j) Carriers Group, Inc. If requested by ACC prior to December 31, 1997,
Carriers Group, Inc. shall have exercised its right to terminate the
agreement between Carriers Group, Inc. and Wiltel for network services.
(k) Disclosure Documents List. Within two weeks of the date of this
Agreement, USW shall have provided to ACC true and complete copies of each
of the documents described on the Disclosure Documents List attached hereto
as Schedule 8.2(k), which shall be in form and substance satisfactory to
ACC.
(l) Exhibits. Within two weeks of the date of this Agreement, USW and ACC
shall have agreed upon the form of Exhibits A, B and C to be attached
hereto.
(m) Schedules. Within seven days of the date of this Agreement, USW shall
have furnished ACC with an updated USW Disclosure Letter which shall not
vary materially from the USW Disclosure Letter delivered to ACC by USW on
the date hereof.
Section 8.3 Additional Conditions to Obligations of USW. The obligation of
USW to effect the Merger is subject to the satisfaction of each of the
following additional conditions, any of which may be waived, in writing,
exclusively by USW:
(a) Representations and Warranties. The representations and warranties of
ACC and Sub set forth of this Agreement shall be true and correct in all
material respects as of the date of this Agreement and as of the Closing
Date as though then made. USW shall have received a certificate signed on
behalf of ACC by an executive officer of ACC to such effect.
(b) Performance Obligations. ACC and Sub shall have performed in all
material respects all obligations required to be performed by them under
this Agreement at or prior to the Closing Date; and USW shall have received
a certificate signed on behalf of ACC by an executive officer of ACC to
such effect.
(c) No ACC Material Adverse Effect. No ACC Material Adverse Effect shall
have occurred, and USW shall have received a certificate signed on behalf
of ACC by an executive officer of ACC to such effect. Notwithstanding
anything herein to the contrary, neither a decrease in the market price or
trading volume of ACC Class A Common Stock nor the failure of ACC to meet
the earnings predictions of equity analysts for any period ending (or for
which earnings are released) after the date of this Agreement and prior to
the Closing Date shall be deemed by themselves to constitute an ACC
Material Adverse Effect.
(d) Fairness Opinion. USW shall have received an opinion from Bengur,
Bryan & Co., Inc. that the terms of the transactions contemplated by this
Agreement are fair to the shareholders of USW as of the Closing Date.
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ARTICLE IX
TERMINATION AND AMENDMENT
Section 9.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time (with respect to Section 9.1(b) through Section 9.1(d),
by written notice by the terminating party to the other party):
(a) by the mutual written consent of ACC, Sub and USW;
(b) by either ACC or USW if the Merger shall not have been consummated by
March 31, 1998; provided, however, that if the Merger shall not have been
consummated due to the waiting period (or any extension thereof) under the
HSR Act not having expired or been terminated, or due to an action having
been instituted by the Department of Justice or Federal Trade Commission
challenging or seeking to enjoin the consummation of the Merger, then such
date shall be extended to September 30, 1998, and provided further that the
right to terminate this Agreement under this Section 9.1(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of or resulted in the failure of the Merger to
occur on or before such date; or
(c) by either ACC or USW if a court of competent jurisdiction or other
Governmental Entity shall have issued a nonappealable final order, decree
or ruling or taken any other action, in each case having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger,
except, if the party relying on such order, decree or ruling or other
action has not complied with its obligations under Article VII of this
Agreement; or
(d) by ACC and Sub if (i) USW shall have misstated any representation or
is in breach of any warranty contained herein which would result in USW
being unable to satisfy the conditions to Closing set forth in Section 8.1
or 8.2 or (ii) USW shall have breached any covenant, undertaking or
restriction contained herein which would result in USW being unable to
satisfy the conditions to Closing set forth in Section 8.1 or 8.2 or (iii)
any party to a Shareholder Tender Agreement (other than ACC or Sub) shall
have violated the provisions thereof; or
(e) by USW if (i) ACC or Sub shall have misstated any representation or
is in breach of any warranty contained herein which would result in ACC
being unable to satisfy the conditions to Closing set forth in Section 8.1
or 8.3 or (ii) ACC or Sub shall have breached any covenant, undertaking or
restriction contained herein which would result in ACC being unable to
satisfy the conditions to Closing set forth in Section 8.1 or 8.3.
Section 9.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 9.1, this Agreement shall forthwith become
void and of no effect, and there shall be no liability or obligation on the
part of ACC, USW, Sub or their respective officers, directors, stockholders,
shareholders or affiliates, except to the extent that such termination results
from the willful breach by a party of any of its representations, warranties
or covenants set forth in this Agreement; provided, however, that the
provisions of Section 7.19 and of Article X concerning the confidentiality of
certain information shall remain in full force and effect and survive any
termination of this Agreement.
Section 9.3 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto. This
Agreement may be amended by the parties hereto, by action taken or authorized
by their respective Boards of Directors, at any time before or after approval
of the matters presented in connection with the Merger by the shareholders of
USW, but, after any such approval, no amendment shall be made which by law
requires further approval by such shareholders without such further approval.
Section 9.4 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto and (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in a written instrument signed on behalf of such
party.
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ARTICLE X
CONFIDENTIALITY AND NON-DISCLOSURE
Section 10.1 Evaluation Material. In connection with the Merger and the
transactions contemplated by this Agreement, USW has provided to ACC and ACC
has provided to USW (in each case the providing party is herein referred to as
the "Disclosing Company" and the receiving party is herein referred to as the
"Receiving Party") certain documents and information (including information in
verbal, visual, written and/or electronic format) relating to the Disclosing
Company's business, which are not generally available to others, and are
protected by the Disclosing Company against unrestricted disclosure to others
("Evaluation Material"). Evaluation Material shall not include any document or
information that (a) was known to the Receiving Company prior to the
commencement of any disclosure of Evaluation Material by the Disclosing
Company or its Representatives (as defined in Section 10.2) to the Receiving
Company; (b) was or is independently developed by the Receiving Company
without use of Evaluation Material; (c) is now or hereafter becomes available
to the public other than as a consequence of a breach by the Receiving Party
of its obligations under this Article X and (d) is or becomes available to the
Receiving Company on a nonconfidential basis from a source (other than the
Disclosing Company) which, to the best of the Receiving Company's knowledge
after due inquiry, is not prohibited from disclosing such information to the
Receiving Company by a legal, contractual or fiduciary obligation to the
Disclosing Company.
Section 10.2 Use of Evaluation Material. Unless and until the Merger is
consummated, all Evaluation Material will be used solely for the purpose of
evaluating the Merger and the transactions contemplated by this Agreement and
the planning for the implementation of the Merger and such Evaluation Material
shall be kept strictly confidential by the Receiving Company and those of its
directors, officers, employees and advisors to whom disclosure is necessary
for the performance of such evaluation and such planning (collectively
referred to as the "Representatives"), it being understood that these
Representatives have been or shall be informed of the confidential nature of
the Evaluation Material and shall agree to be bound by the provisions of this
Article X, and to refrain from disclosing and to not disclose the Evaluation
Material to any other person. Without limiting the generality of the
foregoing, upon the consummation of the Merger, only ACC shall be permitted to
disclose the Evaluation Material of both ACC and USW. The Receiving Company
shall cause its Representatives to observe the terms of this Article X, and
the Receiving Company shall be responsible for any breach of this Article X by
any of its Representatives.
Section 10.3 Mandatory Disclosure. In the event that the Receiving Company
or any of its Representatives become legally compelled (by deposition,
interrogatory, request for documents, subpoena, civil investigative demand,
other demand or request by a governmental agency or other application of
statutes, rules and regulations under the Federal securities laws or similar
process) to disclose any of the Evaluation Material, the Receiving Company
shall provide the Disclosing Company with prompt prior written notice of such
requirement prior to such disclosure. In the event that a protective order or
other remedy is not obtained, or that the Disclosing Company waives compliance
with the provision hereof, the Receiving Company agrees to furnish only that
portion of the Evaluation Material which the Receiving Company is legally
required to furnish and, where appropriate, to exercise its best efforts to
obtain assurances that confidential treatment will be accorded such Evaluation
Material.
Section 10.4 Return of Evaluation Material. If the Merger is not consummated
or if the Disclosing Company so requests, the Receiving Company shall promptly
return to the Disclosing Company all copies of Evaluation Material in its
possession or in the possession of its Representatives which consists of
written or visual material, and the Receiving Company shall destroy all copies
of any analyses, compilations, studies or other documents prepared by the
Receiving Company or for the Receiving Company's use containing any Evaluation
Material. Notwithstanding the return or destruction of the Evaluation
Material, each party and its Representatives shall continue to be bound by its
obligations of confidentiality and other obligations hereunder. Any
destruction required pursuant to this Section 10.4 shall be certified in
writing to the applicable party by an authorized officer supervising such
destruction.
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Section 10.5 Injunctive Relief. ACC and USW understand and agree that money
damages will not be a sufficient remedy for any breach of this Article X by
either party or any of their respective Representatives and that the non-
breaching party shall be entitled to equitable relief, including injunction
and specific performance, as a remedy for any such breach. Such remedies shall
not be deemed to be the exclusive remedies for a breach of this Article X but
shall be in addition to all other remedies available at law or in equity.
ARTICLE XI
GENERAL PROVISIONS
Section 11.1 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally or by
commercial delivery service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with confirmation of receipt) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to ACC or Sub, to:
ACC Corp.
400 West Avenue
Rochester, New York 14611
Attention: Steven M. Dubnik, President and
Chief Operating Officer, ACC North America
Fax: 716-987-3450
with a copy to:
ACC Corp.
400 West Avenue
Rochester, New York 14611
Attention: Daniel J. Venuti
Vice President Legal & Regulatory Affairs and
General Counsel, ACC TeleCom
Fax: 716-987-3450
and a copy to:
Nixon, Hargrave, Devans & Doyle LLP
Clinton Square
Post Office Box 1051
Rochester, New York 14603
Attention: James A. Locke III, Esq.
Fax: 716-263-1600
(b) if to USW, to:
US WATS, Inc.
111 Presidential Boulevard
Suite 114
Bala Cynwyd, Pennsylvania 19004
Attention: President
Fax: 610-667-1929
with a copy to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103-6993
Attention: Stephen M. Goodman, Esq.
Fax: 215-963-5299
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(c) If to the Shareholders or Option Holders (as defined in Section 7.10
hereof) to: the address of such Holder as set forth in the stock transfer
books and other applicable records of USW.
Section 11.2 Interpretation. When a reference is made in this Agreement to a
section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The phrase "made available" in this Agreement shall mean that the
information referred to has been made available if requested by the party to
whom such information is to be made available. The phrases "the date of this
Agreement," "the date hereof," and terms of similar import, unless the context
otherwise requires, shall be deemed to refer to the date first set forth in
the first paragraph of this Agreement. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. Reference
to a party's "knowledge" means actual knowledge of such party and its
Subsidiaries after reasonable inquiry of such party's and its Subsidiaries'
directors, officers, and other management-level employees who could reasonably
be expected to have knowledge of such matters.
Section 11.3 Schedules. The USW Disclosure Letter, containing exceptions to
certain representations and warranties in this Agreement shall be arranged in
separate parts corresponding to the numbered and lettered sections, and the
disclosure in any numbered or lettered part shall be deemed to relate to and
to qualify only the particular representation or warranty set forth in the
corresponding numbered or lettered section, and not any other representation
or warranty (unless an express and specific reference to any other Section of
the USW Disclosure Letter which clearly identifies the particular item being
referred is set forth therein).
Section 11.4 Severability. In the event that any provision of this
Agreement, or the application thereof, becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder of
this Agreement will continue in full force and effect and the application of
such provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
Section 11.5 Nonsurvival of Representations, Warranties and
Agreements. Except as explicitly set forth in this Agreement, none of the
representations, warranties and agreements in this Agreement or in any closing
certificate delivered pursuant to this Agreement shall survive the Closing and
the Effective Time.
Section 11.6 Entire Agreement. This Agreement (including the documents and
the instruments referred to herein, including the USW Disclosure Letter)
constitutes the entire agreement and supersedes all prior agreements and
understandings both written and oral, among the parties with respect to the
subject matter hereof, other than the Non-Disclosure Agreement dated August 1,
1997 between ACC and USW.
Section 11.7 Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of New York without regard to any
applicable conflicts of law except that the DGCL shall, to the extent
applicable, govern the procedures to be taken hereunder to effect the Merger.
Section 11.8 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
Section 11.9 Third Party Beneficiary. Nothing contained in this Agreement is
intended to confer upon any person other than the parties hereto and their
respective successors and permitted assigns, any rights, remedies or
obligations under, or by reason of this Agreement, except that the persons who
are shareholders of USW immediately prior to the Effective Time of the Merger
(and their successors and assigns) are express intended third party
beneficiaries of Articles II and III, Section 7.10, and, to the extent
relevant to any of the foregoing, Article XI and as such are entitled to rely
on the provisions hereof as if a party hereto.
A-38
<PAGE>
Section 11.10 No Rule of Construction. The parties acknowledge that all
parties have read and negotiated the language used in this Agreement. The
parties agree that, because all parties participated in negotiating and
drafting this Agreement, no rule of construction shall apply to this Agreement
which construes ambiguous language in favor of or against any party by reason
of that party's role in drafting this Agreement.
Section 11.11 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
IN WITNESS WHEREOF, each of ACC, Sub and USW has caused this Agreement to be
signed by its respective officer thereunto duly authorized, as of the date
first written above.
ACC CORP. US WATS, INC.
/s/ Steve M. Dubnik /s/ Stephen Parker
By: _________________________________ By: _________________________________
Title: President and COO--North America Title: Chairman and CEO
ACC ACQUISITION--BLUE CORP.
/s/ Steve M. Dubnik
By: _________________________________
Title: Authorized Agent
A-39
<PAGE>
Exhibit A to
Agreement
and Plan of
Merger
FORM OF POOLING LETTER
, 1998
ACC Corp.
400 West Avenue
Rochester, New York 14611
US WATS, Inc.
111 Presidential Boulevard
Suite 114
Bala Cynwyd, Pennsylvania 19004
Ladies and Gentlemen:
Pursuant to the terms of the Agreement and Plan of Merger dated as of
October 28, 1997 (the "Agreement") by and among ACC Corp., a Delaware
corporation ("ACC"), ACC Acquisition-Blue Corp., a Delaware corporation
("Sub") and US WATS, Inc., a New York corporation ("USW"), Sub will be merged
with and into USW with USW to be the surviving corporation in the Merger (the
"Merger").
The undersigned represents, warrants and covenants with and to ACC and USW
that:
A. The undersigned understands that the Merger is intended to be
accounted for using the "pooling-of-interests" method and that such
treatment for financial accounting purposes is dependent upon the accuracy
of certain of the representations and warranties, and the undersigned's
compliance with certain of the covenants and agreements, set forth herein.
Accordingly, the undersigned will not sell, transfer or otherwise dispose
of the undersigned's interests in, or acquire or sell any options or other
securities relating to securities of ACC or USW that would be intended to
reduce the undersigned's risk relative to, any shares of common stock of
either ACC or USW beneficially owned by the undersigned, during the period
commencing on the 30th day prior to the effectiveness of the Merger and
ending at such time as ACC publicly releases a report (the "Combined
Financial Results Report") covering at least 30 days of combined operations
of ACC after the Merger.
B. The undersigned also understands that stop transfer instructions will
be given to the transfer agents of ACC and USW in order to prevent any
breach of the covenants and agreements make by the undersigned in paragraph
A, although such stop transfer instructions will be promptly rescinded upon
the publication of the Combined Financial Results Report.
<PAGE>
C. The undersigned understands and agrees that this letter agreement
shall apply to all shares of the capital stock of ACC and USW that are
deemed to be beneficially owned by the undersigned pursuant to applicable
federal securities laws.
Very truly yours,
_____________________________________
[Name]
Accepted this day of
______________________________, 1998.
ACC CORP.
By:__________________________________
Name:
Title:
<PAGE>
Exhibit B to
Agreement
and Plan of
Merger
FORM OF AFFILIATE AGREEMENT
January , 1998
ACC Corp.
400 West Avenue
Rochester, New York 14611
US WATS, Inc.
111 Presidential Boulevard
Suite 114
Bala Cynwyd, Pennsylvania 19004
Ladies and Gentlemen:
The undersigned has been advised that as of the date of this letter the
undersigned may be deemed to be an "affiliate" of US WATS, Inc., a New York
corporation ("USW"), as the term "affiliate" is defined for purposes of
paragraphs (c) and (d) of Rule 145 of the rules and regulations (the "Rules
and Regulations") of the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"). Pursuant to the
terms of the Agreement and Plan of Merger dated as of October 28, 1997 (the
"Agreement") by and among ACC Corp., a Delaware corporation ("ACC"), ACC
Acquisition-Blue Corp., a Delaware corporation and a wholly-owned subsidiary
of ACC ("Sub") and USW, Sub will be merged with and into USW with USW to be
the surviving corporation in the merger (the "Merger").
As a result of the Merger, the undersigned will receive shares of Class A
Common Stock, par value $0.015 per share, of ACC (the "ACC Common Stock") in
exchange for shares owned by the undersigned of Common Stock, par value $0.001
per share, of USW (the "USW Common Stock").
The undersigned represents, warrants and covenants to ACC and USW that as of
the date the undersigned receives any ACC Common Stock as a result of the
Merger:
A. The undersigned shall not make any sale, transfer or other disposition
of the ACC Common Stock in violation of the Act or the Rules and
Regulations.
B. The undersigned has carefully read this letter and the Agreement and
discussed the requirements of such documents and other applicable
limitations upon the undersigned's ability to sell, transfer or otherwise
dispose of the ACC Common Stock to the extent the undersigned felt
necessary with the undersigned's counsel or counsel for USW.
C. The undersigned has been advised that the issuance of ACC Common Stock
to the undersigned pursuant to the Merger will be registered with the
Commission under the Act on a Registration Statement on Form S-4. However,
the undersigned has also been advised that, since at the time the Merger is
submitted for a vote of the stockholders of USW, the undersigned may be
deemed to be an affiliate of USW, the undersigned may not sell, transfer or
otherwise dispose of the ACC Common Stock issued to the undersigned in the
Merger unless (i) such sale, transfer or other disposition has been
registered under the Act, (ii) such sale, transfer or other disposition is
made in conformity with Rule 145 promulgated by the Commission under the
Act, or (iii) in the opinion of counsel reasonably acceptable to ACC, or
pursuant to a "no action" letter obtained by the undersigned from the staff
of the Commission, such sale, transfer or other disposition is otherwise
exempt from registration under the Act.
<PAGE>
D. The undersigned also understands that there will be placed on the
certificates for the ACC Common Stock issued to the undersigned or any
substitution thereof, a legend stating in substance:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF
1933 APPLIES. THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF ONLY IN ACCORDANCE WITH THE
TERMS OF LETTER AGREEMENTS BETWEEN THE REGISTERED HOLDER HEREOF AND ACC
CORP., COPIES OF WHICH AGREEMENTS ARE ON FILE AT THE PRINCIPAL OFFICES
OF ACC CORP."
E. The undersigned further understands and agrees that the
representations, warranties, covenants and agreements of the undersigned
set forth herein are for the benefit of ACC, USW and the Surviving
Corporation (as defined in the Merger Agreement) and will be relied upon by
such entities and their respective counsel and accountants.
F. The undersigned understands and agrees that this letter agreement
shall apply to all shares of the capital stock of ACC and USW that are
deemed to be beneficially owned by the undersigned pursuant to applicable
federal securities laws.
Execution of this letter should not be considered an admission on the part
of the undersigned that the undersigned is an "affiliate" of USW as described
in the first paragraph of this letter or as a waiver of any rights the
undersigned may have to object to any claim that the undersigned is such an
affiliate on or after the date of this letter.
Very truly yours,
_____________________________________
Name:
Accepted this day of
______________________________, 1998.
ACC CORP.
By:__________________________________
Name:
Title:
<PAGE>
Exhibit C to
Agreement
and Plan of
Merger
NON-COMPETITION AND NON-SOLICITATION AGREEMENT
This Non-Competition and Non-Solicitation Agreement (the "Agreement") is
made this day of , 1998 ("Effective Date") between ACC
Corp., a Delaware corporation ("ACC") and ("Shareholder") as a
holder of capital stock of US WATS, Inc., a New York corporation ("USW").
WHEREAS, this Agreement is made pursuant to the terms of the Agreement and
Plan of Merger ("Merger Agreement"), dated as of October 28, 1997, by and
among ACC, ACC Acquisition-Blue Corp. and USW pursuant to which ACC is
acquiring all of the outstanding capital stock of USW as described in the
Merger Agreement; and
WHEREAS, the covenants and agreements contained in this Agreement are
important to the value and prospects of the business of USW and an important
part of the benefits which ACC will receive in connection the Merger
Agreement; and
WHEREAS, Shareholder has had access to confidential and proprietary
information concerning the business of USW; and
WHEREAS, one of the obligations under, and conditions to, the consummation
of the transactions contemplated by the Merger Agreement is that Shareholder
enter into this Agreement not to engage, directly or indirectly, in the
business engaged in by USW or ACC or any activities competitive with such
business, to maintain all information regarding the business of USW in
confidence, not to solicit the employees, agents, customers and others with
business relationships with USW and ACC and not to engage in certain other
activities and transactions involving ACC and/or its management; and
WHEREAS, Shareholder acknowledges that an important part of the benefits
which ACC will receive in connection with the transactions contemplated by the
Merger Agreement are the non-competition, non-disclosure and non-solicitation
covenants of Shareholder contained in this Agreement;
WHEREAS, the provisions of this Agreement are essential to protect the
business of USW acquired by ACC pursuant to the Merger Agreement; and
WHEREAS, ACC would not enter into the Merger Agreement or consummate the
transactions contemplated thereby but for this Agreement;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. The terms set forth below shall have the following
meanings:
"Affiliate" means, with respect to Shareholder, any partner, parent,
subsidiary, or officer, director, member or manager of any entity which
directly or indirectly, is controlled by Shareholder, whether through
the ownership of securities, by contract or otherwise, and their
respective heirs, personal representatives and successors.
"Business" means providing voice and data telecommunications and
related services as conducted on the date hereof as described in the
1997 Annual Report on Form 10-K of ACC, including, without limitation,
the sale or resale of (whether on a switchless, switched or facility-
based or other basis) switched or dedicated long distance services,
internet access, calling card services, private data service,
conference calling, voice messaging, fax broadcasting or local
telephone service.
<PAGE>
"Confidential Information" shall mean any confidential or proprietary
information of USW or ACC, including without limitation any "know-how",
trade secrets, specifications, engineering drawings, blueprints,
technical and computer data, documentation and software, customer lists
or information relating to customers, details of corporate organization
and activities, legal matters, details of client, consultant or
supplier contracts, pricing policies, operational methods, financial,
business or marketing plans or strategies, product or service
development techniques or plans, technical processes, designs and
design projects and information, discoveries, innovations, inventions,
improvements and research and development projects and information,
business acquisition plans and new personnel acquisition plans related
to USW or ACC or the Business of either of them. The term "Confidential
Information" does not include, and there shall be no obligation
hereunder with respect to information that currently is or later
becomes generally available to the public, other than as a result of a
disclosure after the date hereof by USW or ACC or any agent or other
representative of any of them acting with their knowledge or at their
request. The Shareholder shall not have any obligation hereunder to
keep confidential any of the Confidential Information to the extent
disclosure of any thereof is required by judicial or administrative
process, or, in the reasonable opinion of his counsel, by any other
mandatory requirements of law or process, or determined in good faith
by such party to be necessary or appropriate to comply with any legal
or regulatory order, regulation or requirement, or which can be shown
to have been provided to the Shareholder by a third party who obtains
such information other than as a result of a breach of this Agreement
or any other obligation of confidentiality; provided, however, that in
the event disclosure is required by law or process, the party concerned
shall provide ACC with prompt notice of such requirement so that ACC
may seek an appropriate protective order.
"Effective Date" means the Closing Date as defined in the Merger
Agreement.
"Person" means and includes an individual, a corporation, a
partnership, a limited liability company, a limited liability
partnership, a joint venture, a trust, an unincorporated association,
or any other entity, wherever located or organized.
"Restricted Persons" shall mean Shareholder and his Affiliates.
"Restricted Period" shall mean the period beginning on the Effective
Date and ending on the second anniversary thereof.
2. Non-Competition. During the Restricted Period, each of the Restricted
Persons shall not, directly or indirectly, on their own behalf or on behalf
of any other Person in any manner whatsoever in the United States, Canada,
United Kingdom, Germany or France:
(a) engage, in any way or to any extent, in the Business in
competition with ACC, USW or any of their direct or indirect
subsidiaries; or
(b) whether as a principal, agent, consultant, proprietor,
stockholder, joint venturer, investor, employee, partner, member,
manager or in any other capacity, own, manage, control, invest in or
acquire an interest in or participate in the ownership, management or
control of, or render services directly or indirectly relating to the
Business to, any person, corporation, partnership, limited liability
company, limited liability partnership, proprietorship, firm,
association or other business entity engaged in any way and to any
extent in the Business in competition with ACC, USW or any of their
direct or indirect subsidiaries.
Notwithstanding any provision of this Section to the contrary, any one or
more of the Shareholder and/or any of its Affiliates may own, individually
or collectively, directly or indirectly, securities of any entity traded on
any national securities exchange or national market system which engages in
a business competitive with the Business, if the Shareholder or any of its
Affiliates is not a controlling shareholder or a member of a group (within
the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") of controlling shareholders of such entity,
and the Shareholder or any of its Affiliates does not, directly or
indirectly, individually or in the aggregate, own five percent (5%) or more
of any class of securities of such entity.
2
<PAGE>
3. Non-Disclosure. Shareholder acknowledges that USW has developed trade
secrets and confidential information concerning its business and that
Shareholder's involvement in management of USW has given Shareholder
knowledge of the trade secrets, customer information and other confidential
and proprietary information of USW. Shareholder shall, and shall cause its
Affiliates to, protect, preserve, and maintain in strict confidence all
Confidential Information, and neither the Shareholder nor any of its
Affiliates shall, at any time, divulge, furnish or make accessible to
anyone, nor directly or indirectly disclose or permit to be disclosed to
anyone, or use or otherwise exploit or permit to be exploited for its own
benefit or for the benefit of anyone other than ACC, or in competition with
or in a manner otherwise detrimental to the interests of the ACC, any
Confidential Information.
4. Non-Solicitation. During the Restricted Period, the Restricted Persons
shall not, directly or indirectly, on their own behalf or on behalf of any
other Person in any manner whatsoever: (a) induce or endeavor to induce or
hire any employee or agent of or consultant to USW ("Covered Person") to
terminate his, her or its association with USW, ACC or any of their direct
or indirect subsidiaries or in any manner interfere with the relationship
of USW, ACC or any of their direct or indirect subsidiaries with such
Covered Person; or (b) induce or endeavor to induce, or assist others to
induce any customer of the Business of USW or ACC or any of their direct or
indirect subsidiaries to terminate or reduce its relationship with USW, ACC
or any of their direct or indirect subsidiaries in connection with the
Business or do anything, directly or indirectly, to interfere with the
business relationship between USW, ACC and its direct and indirect
subsidiaries and any such Person; (c) solicit, divert or appropriate, or
attempt to solicit, divert or appropriate, any potential customer or
supplier of ACC or any of its direct or indirect subsidiaries for the
purpose of competing with the Business of USW or ACC or any of their direct
or indirect subsidiaries; or (d) in any manner whatsoever, induce or
endeavor to induce, or assist others to induce, any customer or any Person
purchasing or distributing the products or services of the Business of USW,
ACC or any of their direct or indirect subsidiaries to terminate or reduce
its use, purchase or further purchase of such products or services or to
purchase substitute or replacement products or services from any Person
other than USW, ACC or their direct or indirect subsidiaries.
5. Rights and Remedies Upon Breach. In the event that any Restricted
Person breaches or threatens to commit a breach of any provision of this
Agreement, ACC and/or USW shall have the following rights and remedies,
each of which shall be independent of the others and severally enforceable,
and each of which shall be in addition to, and not in lieu of, any other
rights and remedies available to ACC and/or USW under law or in equity, and
each of which may be pursued by ACC and/or USW in any order that either of
them desires:
(a) Specific Performance. The right and remedy to have the provisions
of this Agreement specifically enforced by injunctive relief in any
court of competent jurisdiction, without posting a bond or other
security of any kind whatsoever, it being agreed that any breach of
this Agreement would cause irreparable injury to ACC and/or USW and
that money damages alone would not provide an adequate remedy to ACC
and/or USW.
(b) Accounting. The right and remedy to require the Shareholder
and/or its Affiliates to account for and pay over to ACC all profits,
monies, accruals or other benefits derived or received by the
Shareholder and/or its Affiliates as the result of transactions
constituting a breach of this Agreement.
(c) Money Damages. The right and remedy to recover money damages
insofar as they can be determined.
(d) Costs of Enforcement. In the event that a court of competent
jurisdiction determines that a Restricted Person has breached any of
the provisions of this Agreement, ACC and/or USW shall have the right
to be paid by Shareholder and/or the breaching Affiliate all of ACC's
and/or USW's costs and expenses, including reasonable attorneys' fees
and disbursements, incurred in enforcing the terms of this Agreement.
If, however a court of competent jurisdiction does not rule in favor of
such action
3
<PAGE>
to enforce the terms of this Agreement, the Shareholder shall have the
right to be paid by ACC and/or USW all of such Shareholder's costs and
expenses, including reasonable attorneys' fees and disbursements,
incurred in defending such action.
6. Representations.
(a) The Shareholder hereby represents and warrants to ACC that (i)
the recitals to this Agreement insofar as they relate to the
Shareholder and any of its Affiliates are accurate, (ii) this Agreement
has been duly and validly authorized, executed and delivered by the
Shareholder, and (iii) upon the execution and delivery of this
Agreement by the Shareholder and ACC, this Agreement shall be the valid
and binding obligation of the Shareholder enforceable against it in
accordance with its terms.
(b) ACC hereby represents and warrants to the Shareholder that (i)
the recitals to this Agreement insofar as they relate to ACC are
accurate, (ii) this Agreement has been duly and validly authorized,
executed and delivered by ACC, and (iii) upon the execution and
delivery of this Agreement by ACC and the Shareholder, this Agreement
shall be the valid and binding obligation of ACC enforceable against it
in accordance with its terms.
7. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without reference to its
principles of conflicts of law.
8. Jurisdiction, Venue. In the event of any action or proceeding with
respect to any matter pertaining to this Agreement, each of the parties
hereto hereby waives the right to a trial by jury. The parties hereto
hereby irrevocably consent to the nonexclusive jurisdiction and venue of
the Courts of the State of New York and of any Federal Court located in the
Western District of New York in connection with any action or proceeding
arising out of or relating to this Agreement. The parties hereby
irrevocably waive, to the fullest extent permitted by applicable law, any
objection which they may now or hereafter have to the laying of venue of
such dispute brought in such court or any defense of inconvenient forum for
the maintenance of such dispute. Each of the parties hereby agrees that a
judgment in any such dispute may be enforced in other jurisdictions by suit
on the judgment or in any other matter provided by law. Shareholder hereby
waives personal service of any process in connection with any such action
or proceeding and agrees that the service thereof may be made by certified
or registered mail addressed to or by personal delivery to Shareholder at
the address for notices set forth in Section 11 of this Agreement. In the
alternative, in its discretion, ACC or USW may effect service upon
Shareholder in any other form or manner permitted by law.
9. Entire Agreement. This Agreement constitutes the entire agreement of
the parties with respect to the matters set forth herein. The failure by
any party to exercise any right under, or to object to the breach by any
other party of any term, provision or condition of, this Agreement shall
not constitute a waiver thereof and shall not preclude such party from
thereafter exercising that or any other right, or from thereafter objecting
to that or any prior or subsequent breach of the same or any other term,
provision or condition of the Agreement. Any consent granted pursuant to
this Agreement shall be in writing, executed by the person authorized by
the consenting party to receive notices, and shall be a consent only to the
transaction, act or agreement specifically referred to in the consent and
not to other similar transactions, acts or agreements. No action taken
pursuant to this Agreement shall be deemed a waiver or consent by the party
taking such action of compliance by the other party with any of the
covenants or obligations of the other party contained in this Agreement.
10. Binding Agreement; Amendment. This Agreement shall be binding upon
and inure to the benefit of the parties, the Affiliates of the Shareholder
and the successors and assigns of ACC. This Agreement may be amended,
modified or terminated only by a written instrument executed by the parties
hereto.
11. Notices. All notices required or permitted by this Agreement shall be
in writing and shall be deemed to have been given (a) when delivered
personally, (b) when sent by telecopy to the telecopy number below where
the party to whom the notice is sent has such a number, (c) the second day
following the day
4
<PAGE>
on which the same has been delivered prepaid to a national air courier
service, or (d) three business days following deposit in the mails,
registered or certified, postage prepaid, in each case addressed as follows
(or to such other address as shall from time to time be supplied in writing
by any party hereto):
If to ACC or USW, to:
ACC Corp.
400 West Avenue
Rochester, New York 14611
Attention: Chief Financial Officer
Facsimile: (716) 987-3335
With a copy to:
ACC Corp.
400 West Avenue
Rochester, New York 14611
Attention: Corporate Counsel
Facsimile: (716) 987-3335
If to Shareholder to:
_____________________________________
_____________________________________
_____________________________________
Facsimile:
With a copy to:
_____________________________________
_____________________________________
_____________________________________
Facsimile:
or to such other Person, address or telecopy number as any of the foregoing
may have designated for that purpose by notice to the others.
12. Judicial Modification. If any court of competent jurisdiction
determines that any of the provisions of this Agreement, or any part
thereof, is invalid or unenforceable, such court shall have the power to
reduce the duration or scope of such provision, as the case may be, to the
extent reasonably necessary for the protection of ACC and USW and, in its
reduced form, such provision shall then be enforceable. The invalidity or
unenforceability of any provision of this Agreement shall not affect the
validity or enforceability of any other provision.
13. Interpretation. The parties hereto acknowledge and agree that: (i)
each party and its counsel reviewed and negotiated the terms and provisions
of this Agreement and have contributed to its revision; (ii) the rule of
construction to the effect that any ambiguities are resolved against the
drafting party shall not be employed in the interpretation of this
Agreement; and (iii) the terms and provisions of this Agreement shall be
construed fairly as to parties hereto, regardless of which party was
generally responsible for preparation of this Agreement.
14. Headings. Section and other headings contained in this Agreement are
for reference purposes only and are not in any way intended to define,
interpret, describe or otherwise limit the scope, extent or intent of this
Agreement or any of its provisions.
5
<PAGE>
15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
ACC:
ACC CORP.
By __________________________________
Title _______________________________
SHAREHOLDER:
_____________________________________
[Name]
6
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Exhibit D to Agreement
and Plan of
Merger
SHAREHOLDER VOTING AND TENDER AGREEMENT
BY AND BETWEEN
ACC ACQUISITION-BLUE CORP.
AND
----------------
DATED AS OF OCTOBER 28, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SHAREHOLDER VOTING AND TENDER AGREEMENT
SHAREHOLDER VOTING AND TENDER AGREEMENT, dated as of October 28, 1997 (this
"Agreement"), by and between ACC Acquisition-Blue Corp., a Delaware
corporation ("Purchaser"), and ("Shareholder").
WHEREAS, the Shareholder is the owner of shares (the "Shares")
of Common Stock, $.001 par value per share (the "Common Stock") of US WATS,
Inc., a New York corporation (the "Company"); and
WHEREAS, ACC Corp., a Delaware corporation ("Parent"), the Purchaser and the
Company, have entered into an Agreement and Plan of Merger, dated as of the
date hereof (as amended from time to time, the "Merger Agreement"), which
provides, among other things, that, upon the terms and subject to the
conditions therein, Purchaser will exchange shares of ACC Corp. Class A Common
Stock for all of the outstanding shares of Common Stock and will merge with
the Company (the "Merger"); and
WHEREAS, as a condition to the willingness of Parent and Purchaser to enter
into the Merger Agreement, Purchaser has requested that the Shareholder agree,
and in order to induce Parent and Purchaser to enter into the Merger
Agreement, the Shareholder has agreed, to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties, covenants and agreements set forth herein, and
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and subject to the terms and conditions set forth
herein, the parties hereto hereby agree as follows:
1. Representations, Warranties and Covenants of the Shareholder. The
Shareholder represents, warrants and covenants to the Purchaser as follows:
(a) The Shareholder is the sole lawful, record and beneficial owner of,
and has good, valid and marketable title to, all the Shares, and there
exist no liens, claims, security interests, options, proxies, voting
agreements, charges or encumbrances of whatever nature ("Liens") affecting
the Shares.
(b) Upon transfer to the Purchaser by the Shareholder of the Shares upon
consummation of the Merger, Purchaser will have good, valid and marketable
title to the Shares, free and clear of all Liens.
(c) The Shares constitute all of the securities (as defined in Section
3(a)(10) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which definition will apply for all purposes of this Agreement) of
the Company beneficially owned (as defined in Rule 13d-3 under the Exchange
Act, which meaning will apply for all purposes of this Agreement), directly
or indirectly, by the Shareholder (excluding any securities beneficially
owned by any of its affiliates or associates (as such terms are defined in
Rule 12b-2 under the Exchange Act, which definition will apply for all
purposes of this Agreement) as to which it does not have voting or
investment power).
(d) Except for the Shares, the Shareholder does not, directly or
indirectly, beneficially own or have any option, warrant or other right to
acquire any securities of the Company that are or may by their terms become
entitled to vote or any securities that are convertible or exchangeable
into or exercisable for any securities of the Company that are or may by
their terms become entitled to vote, nor is the Shareholder subject to any
contract, commitment, arrangement, understanding or relationship (whether
or not legally enforceable) that allows or obligates it to vote or acquire
any securities of the Company.
(e) The execution and delivery of this Agreement by the Shareholder does
not, and the performance by the Shareholder of his obligations hereunder
will not, constitute a violation of, conflict with, result in a default (or
an event which, with notice or lapse of time or both, would result in a
default) under, or result in the creation of any Lien on any Shares under,
(i) any contract, commitment, agreement, understanding, arrangement or
restriction of any kind to which the Shareholder is a party or by which the
Shareholder is bound or (ii) any judgment, writ, decree, order or ruling
applicable to the Shareholder.
D-2
<PAGE>
(f) Neither the execution and delivery of this Agreement nor the
performance by the Shareholder of his obligations hereunder will violate
any order, writ, injunction, judgment, law, decree, statute, rule or
regulation applicable to the Shareholder or require any consent,
authorization or approval of, filing with or notice to, any court,
administrative agency or other governmental body or authority, other than
any required notices or filings pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations
promulgated thereunder (the "HSR Act"), or the federal securities laws or
the federal communications laws.
2. Representations and Warranties of Purchaser. Purchaser represents and
warrants to the Shareholder as follows:
(a) Purchaser is duly organized and validly existing and in good standing
under the laws of the State of Delaware, has the requisite corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby, and has taken all necessary corporate
action to authorize the execution, delivery and performance of this
Agreement. This Agreement has been duly and validly executed and delivered
by Purchaser and constitutes the legal, valid and binding obligation of
Purchaser, enforceable against Purchaser in accordance with its terms,
except that (i) the enforceability hereof may be subject to applicable
bankruptcy, insolvency or other similar laws, now or hereinafter in effect,
affecting creditors' rights generally, and (ii) the availability of the
remedy of specific performance or injunctive or other forms of equitable
relief may be subject to equitable defenses and would be subject to the
discretion of the court before which any proceeding therefor may be
brought.
(b) The execution and delivery of this Agreement by Purchaser does not,
and the performance by Purchaser of its obligations hereunder will not,
constitute a violation of, conflict with, or result in a default (or an
event which, with notice or lapse of time or both, would result in a
default) under, its certificate of incorporation or bylaws or any contract,
commitment, agreement, understanding, arrangement or restriction of any
kind to which Purchaser is a party or by which Purchaser is bound.
(c) Neither the execution and delivery of this Agreement nor the
performance by Purchaser of its obligations hereunder will violate any
order, writ, injunction, judgment, ruling, law, decree, statute, rule or
regulation applicable to Purchaser or require any consent, authorization or
approval of, filing with, or notice to, any court, administrative agency or
other governmental body or authority, other than any required notices or
filings pursuant to the HSR Act, the federal securities laws or the federal
communications law.
3. Restriction on Transfer of the Shares. During the term of this Agreement,
except as otherwise provided herein, the Shareholder will not (a) offer to
sell, sell, pledge or otherwise dispose of or transfer any interest in or
encumber with any Lien any of the Shares, (b) acquire any shares of Common
Stock or other securities of the Company (otherwise than in connection with a
transaction of the type described in Section 7 and any such additional shares
or securities will be deemed Shares and included in the Shares subject to this
Agreement), (c) deposit the Shares into a voting trust, enter into a voting
agreement or arrangement with respect to the Shares or grant any proxy or
power of attorney with respect to the Shares, or (d) enter into any contract,
option or other arrangement or undertaking with respect to the direct or
indirect acquisition or sale, assignment or other disposition of or transfer
of any interest in or the voting of the shares or any shares of Common Stock
or any other securities of the Company.
4. Tender of Shares. In the event the Shareholder takes or proposes to take
any action in violation of paragraph 3, then the Purchaser shall have an
option to purchase the Shares at the USW Per Share Price set forth in Section
3.1(g) of the Merger Agreement and the Shareholder will tender and sell all of
the Shares on such terms.
5. Voting of Shares. The Shareholder, by this Agreement, does hereby
constitute and appoint Purchaser, or any nominee thereof, with full power of
substitution, during and for the term of this Agreement, as his true and
lawful attorney and proxy for and in his, her or its name, place and stead, to
vote each of such Shares at any annual, special or adjourned meeting of the
stockholders of the Company (and this appointment will include the
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<PAGE>
right to sign its name (as stockholder) to any consent, certificate or other
document relating to the Company which may be required or permitted by
applicable law) (a) in favor of the Merger, the execution and delivery by the
Company of the Merger Agreement and the approval and adoption of the terms
thereof and hereof; (b) against any action or agreement that would result in a
breach in any respect of any covenant, agreement, representation or warranty
of the Company under the Merger Agreement; and (c) against the following
actions (other than the Merger and the other transactions contemplated by the
Merger Agreement): (i) any extraordinary corporate transaction, such as a
merger, consolidation or other business combination involving the Company or
its subsidiaries; (ii) a sale, lease or transfer of a material amount of
assets of the Company or one of its subsidiaries, or a reorganization,
recapitalization, dissolution or liquidation of the Company or its
subsidiaries; (iii) (A) any change in a majority of the persons who constitute
the board of directors of the Company as of the date hereof; (B) any change in
the present capitalization of the Company or any amendment of the Company's
Certificate of Incorporation or By-Laws, as amended to date; (C) any other
material change in the Company's corporate structure or business; or (D) any
other action which, in the case of each of the matters referred to in clauses
(iii)(A), (B), (C) and (D), is intended, or could reasonably be expected, to
impede, interfere with, delay, postpone, or adversely affect the Merger and
the other transactions contemplated by this Agreement and the Merger
Agreement. This proxy and power of attorney is a proxy and power coupled with
an interest, and the Shareholder declares that it is irrevocable. The
Shareholder hereby revokes all and any other proxies with respect to the
Shares that it may have heretofore made or granted.
6. Enforcement of the Agreement. The Shareholder acknowledges that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that Purchaser will be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, this being in addition to any
other remedy to which it is entitled at law or in equity.
7. Adjustments. The number and type of securities subject to this Agreement
will be appropriately adjusted in the event of any stock dividends, stock
splits, recapitalizations, combinations, exchanges of shares or the like or
any other action that would have the effect of changing the Shareholder's
ownership of the Company's capital stock or other securities.
8. Termination. This Agreement will terminate on the date the Merger
Agreement is terminated in accordance with its terms.
9. Expenses. All fees and expenses incurred by either of the parties hereto
will be borne by the party incurring such fees and expenses.
10. Brokerage. Purchaser and the Shareholder each represent and warrant to
the other that the negotiations relevant to this Agreement have been carried
on by Purchaser and the Shareholder directly with each other, and that there
are no claims for finder's fees or brokerage commissions or other like
payments in connection with this Agreement or the transactions contemplated
hereby. Each of Purchaser and the Shareholder will indemnify and hold harmless
the other from and against any and all claims or liabilities for finder's fees
or brokerage commissions or other like payments incurred by reason of action
taken by it.
11. Miscellaneous.
(a) All representations and warranties contained herein will survive the
termination hereof.
(b) Any provision of this Agreement may be waived at any time by the party
that is entitled to the benefits thereof. No such waiver, amendment or
supplement will be effective unless in a writing which is signed by the party
or parties sought to be bound thereby. Any waiver by any party of a breach of
any provision of this Agreement will not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Agreement. The failure of a party to insist upon strict
adherence to any term of this Agreement or one or more sections hereof will
not be considered a waiver or deprive that party of the right thereafter to
insist upon strict adherence to that term or any other term of this Agreement.
D-4
<PAGE>
(c) This Agreement contains the entire agreement among Purchaser and the
Shareholder with respect to the subject matter hereof, and supersedes all
prior agreements among Purchaser and the Shareholder with respect to such
matters. This Agreement may not be amended, changed, supplemented, waived or
otherwise modified, except upon the delivery of a written agreement executed
by the parties hereto.
(d) This Agreement will be governed by and construed in accordance with the
laws of the State of New York applicable to contracts made and performed in
that state.
(e) The descriptive headings contained herein are for convenience and
reference only and will not affect in any way the meaning or interpretation of
this Agreement.
(f) All notices and other communications hereunder will be in writing and
will be given (and will be deemed to have been duly given upon receipt) by
delivery in person, by telecopy, or by registered or certified mail, postage
prepaid, return receipt requested, addressed as follows:
If to the Shareholder to:
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
If to the Purchaser to:
ACC Acquisition Corp.
400 West Avenue
Rochester, New York 14611
Attention: Steve M. Dubnik
President and CEO
North American Operations
with copies to:
Nixon, Hargrave, Devans & Doyle LLP
Clinton Square
P. O. Box 1051
Rochester, New York 14603
Attention: James A. Locke III, Esq.
or to such other address as any party may have furnished to the other parties
in writing in accordance herewith.
(g) This Agreement may be executed in any number of counterparts, each of
which will be deemed to be an original, but all of which together will
constitute one agreement.
(h) This Agreement is binding upon and is solely for the benefit of the
parties hereto and their respective successors, legal representatives and
assigns. Neither this Agreement nor any of the rights, interests and
obligations under this Agreement will be assigned by any of the parties hereto
without the prior written consent of the other parties, except that Purchaser
will have the right to assign to Purchaser or any other direct or indirect
wholly owned subsidiary of Parent any and all rights and obligations of
Purchaser under this Agreement, including the right to purchase Shares
tendered by the Shareholder pursuant to the terms hereof and the Exchange and
Merger, provided that any such assignment will not relieve Purchaser from any
of its obligations hereunder.
(i) If any provision of this Agreement is invalid, illegal or incapable of
being enforced by any rule of law or public policy, all other terms and
provisions of this Agreement will nevertheless remain in full force and effect
so long as the economic or legal substance of the transactions contemplated
hereby is not affected in any manner adverse to any party hereto. Upon any
such determination that any term or other provision is invalid, illegal or
D-5
<PAGE>
incapable of being enforced, the parties hereto will negotiate in good faith
to modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that the transactions
contemplated by this Agreement are consummated to the extent possible.
(j) The Shareholder hereby irrevocably and unconditionally (i) consents to
submit to the jurisdiction of the courts of the State of New York and of the
federal courts located in Rochester, New York for any disputes arising out of
or relating to this Agreement, (ii) waives any objection to the laying of
venue of any action, suit or proceeding arising out of this Agreement in any
such court, and (iii) waives and agrees not to plead or claim in any such
court that any such action, suit or proceeding brought in any such court has
been brought in an inconvenient forum.
(k) All rights, powers and remedies provided under this Agreement or
otherwise available in respect hereof at law or in equity will be cumulative
and not alternative, and the exercise of any thereof by either party will not
preclude the simultaneous or later exercise of any other such right, power or
remedy by such party.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on
the date first above written.
ACC Acquisition-Blue Corp.
By: _________________________________
Name:
Title:
-------------------------------------
D-6
<PAGE>
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- --------------------------------------------------------------------------------
EXHIBIT B
SHAREHOLDER VOTING AND TENDER AGREEMENT
BY AND BETWEEN
ACC ACQUISITION-BLUE CORP.
AND
----------------
DATED AS OF OCTOBER 28, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
B-1
<PAGE>
SHAREHOLDER VOTING AND TENDER AGREEMENT
SHAREHOLDER VOTING AND TENDER AGREEMENT, dated as of October 28, 1997 (this
"Agreement"), by and between ACC Acquisition-Blue Corp., a Delaware
corporation ("Purchaser"), and ("Shareholder").
WHEREAS, the Shareholder is the owner of shares (the "Shares")
of Common Stock, $.001 par value per share (the "Common Stock") of US WATS,
Inc., a New York corporation (the "Company"); and
WHEREAS, ACC Corp., a Delaware corporation ("Parent"), the Purchaser and the
Company, have entered into an Agreement and Plan of Merger, dated as of the
date hereof (as amended from time to time, the "Merger Agreement"), which
provides, among other things, that, upon the terms and subject to the
conditions therein, Purchaser will exchange shares of ACC Corp. Class A Common
Stock for all of the outstanding shares of Common Stock and will merge with
the Company (the "Merger"); and
WHEREAS, as a condition to the willingness of Parent and Purchaser to enter
into the Merger Agreement, Purchaser has requested that the Shareholder agree,
and in order to induce Parent and Purchaser to enter into the Merger
Agreement, the Shareholder has agreed, to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties, covenants and agreements set forth herein, and
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and subject to the terms and conditions set forth
herein, the parties hereto hereby agree as follows:
1. Representations, Warranties and Covenants of the Shareholder. The
Shareholder represents, warrants and covenants to the Purchaser as follows:
(a) The Shareholder is the sole lawful, record and beneficial owner of,
and has good, valid and marketable title to, all the Shares, and there
exist no liens, claims, security interests, options, proxies, voting
agreements, charges or encumbrances of whatever nature ("Liens") affecting
the Shares.
(b) Upon transfer to the Purchaser by the Shareholder of the Shares upon
consummation of the Merger, Purchaser will have good, valid and marketable
title to the Shares, free and clear of all Liens.
(c) The Shares constitute all of the securities (as defined in Section
3(a)(10) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which definition will apply for all purposes of this Agreement) of
the Company beneficially owned (as defined in Rule 13d-3 under the Exchange
Act, which meaning will apply for all purposes of this Agreement), directly
or indirectly, by the Shareholder (excluding any securities beneficially
owned by any of its affiliates or associates (as such terms are defined in
Rule 12b-2 under the Exchange Act, which definition will apply for all
purposes of this Agreement) as to which it does not have voting or
investment power).
(d) Except for the Shares, the Shareholder does not, directly or
indirectly, beneficially own or have any option, warrant or other right to
acquire any securities of the Company that are or may by their terms become
entitled to vote or any securities that are convertible or exchangeable
into or exercisable for any securities of the Company that are or may by
their terms become entitled to vote, nor is the Shareholder subject to any
contract, commitment, arrangement, understanding or relationship (whether
or not legally enforceable) that allows or obligates it to vote or acquire
any securities of the Company.
(e) The execution and delivery of this Agreement by the Shareholder does
not, and the performance by the Shareholder of his obligations hereunder
will not, constitute a violation of, conflict with, result in a default (or
an event which, with notice or lapse of time or both, would result in a
default) under, or result in the creation of any Lien on any Shares under,
(i) any contract, commitment, agreement, understanding, arrangement or
restriction of any kind to which the Shareholder is a party or by which the
Shareholder is bound or (ii) any judgment, writ, decree, order or ruling
applicable to the Shareholder.
B-2
<PAGE>
(f) Neither the execution and delivery of this Agreement nor the
performance by the Shareholder of his obligations hereunder will violate
any order, writ, injunction, judgment, law, decree, statute, rule or
regulation applicable to the Shareholder or require any consent,
authorization or approval of, filing with or notice to, any court,
administrative agency or other governmental body or authority, other than
any required notices or filings pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations
promulgated thereunder (the "HSR Act"), or the federal securities laws or
the federal communications laws.
2. Representations and Warranties of Purchaser. Purchaser represents and
warrants to the Shareholder as follows:
(a) Purchaser is duly organized and validly existing and in good standing
under the laws of the State of Delaware, has the requisite corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby, and has taken all necessary corporate
action to authorize the execution, delivery and performance of this
Agreement. This Agreement has been duly and validly executed and delivered
by Purchaser and constitutes the legal, valid and binding obligation of
Purchaser, enforceable against Purchaser in accordance with its terms,
except that (i) the enforceability hereof may be subject to applicable
bankruptcy, insolvency or other similar laws, now or hereinafter in effect,
affecting creditors' rights generally, and (ii) the availability of the
remedy of specific performance or injunctive or other forms of equitable
relief may be subject to equitable defenses and would be subject to the
discretion of the court before which any proceeding therefor may be
brought.
(b) The execution and delivery of this Agreement by Purchaser does not,
and the performance by Purchaser of its obligations hereunder will not,
constitute a violation of, conflict with, or result in a default (or an
event which, with notice or lapse of time or both, would result in a
default) under, its certificate of incorporation or bylaws or any contract,
commitment, agreement, understanding, arrangement or restriction of any
kind to which Purchaser is a party or by which Purchaser is bound.
(c) Neither the execution and delivery of this Agreement nor the
performance by Purchaser of its obligations hereunder will violate any
order, writ, injunction, judgment, ruling, law, decree, statute, rule or
regulation applicable to Purchaser or require any consent, authorization or
approval of, filing with, or notice to, any court, administrative agency or
other governmental body or authority, other than any required notices or
filings pursuant to the HSR Act, the federal securities laws or the federal
communications law.
3. Restriction on Transfer of the Shares. During the term of this Agreement,
except as otherwise provided herein, the Shareholder will not (a) offer to
sell, sell, pledge or otherwise dispose of or transfer any interest in or
encumber with any Lien any of the Shares, (b) acquire any shares of Common
Stock or other securities of the Company (otherwise than in connection with a
transaction of the type described in Section 7 and any such additional shares
or securities will be deemed Shares and included in the Shares subject to this
Agreement), (c) deposit the Shares into a voting trust, enter into a voting
agreement or arrangement with respect to the Shares or grant any proxy or
power of attorney with respect to the Shares, or (d) enter into any contract,
option or other arrangement or undertaking with respect to the direct or
indirect acquisition or sale, assignment or other disposition of or transfer
of any interest in or the voting of the shares or any shares of Common Stock
or any other securities of the Company.
4. Tender of Shares. In the event the Shareholder takes or proposes to take
any action in violation of paragraph 3, then the Purchaser shall have an
option to purchase the Shares at the USW Per Share Price set forth in Section
3.1(g) of the Merger Agreement and the Shareholder will tender and sell all of
the Shares on such terms.
5. Voting of Shares. The Shareholder, by this Agreement, does hereby
constitute and appoint Purchaser, or any nominee thereof, with full power of
substitution, during and for the term of this Agreement, as his true and
lawful attorney and proxy for and in his, her or its name, place and stead, to
vote each of such Shares at any annual, special or adjourned meeting of the
stockholders of the Company (and this appointment will include the
B-3
<PAGE>
right to sign its name (as stockholder) to any consent, certificate or other
document relating to the Company which may be required or permitted by
applicable law) (a) in favor of the Merger, the execution and delivery by the
Company of the Merger Agreement and the approval and adoption of the terms
thereof and hereof; (b) against any action or agreement that would result in a
breach in any respect of any covenant, agreement, representation or warranty
of the Company under the Merger Agreement; and (c) against the following
actions (other than the Merger and the other transactions contemplated by the
Merger Agreement): (i) any extraordinary corporate transaction, such as a
merger, consolidation or other business combination involving the Company or
its subsidiaries; (ii) a sale, lease or transfer of a material amount of
assets of the Company or one of its subsidiaries, or a reorganization,
recapitalization, dissolution or liquidation of the Company or its
subsidiaries; (iii) (A) any change in a majority of the persons who constitute
the board of directors of the Company as of the date hereof; (B) any change in
the present capitalization of the Company or any amendment of the Company's
Certificate of Incorporation or By-Laws, as amended to date; (C) any other
material change in the Company's corporate structure or business; or (D) any
other action which, in the case of each of the matters referred to in clauses
(iii)(A), (B), (C) and (D), is intended, or could reasonably be expected, to
impede, interfere with, delay, postpone, or adversely affect the Merger and
the other transactions contemplated by this Agreement and the Merger
Agreement. This proxy and power of attorney is a proxy and power coupled with
an interest, and the Shareholder declares that it is irrevocable. The
Shareholder hereby revokes all and any other proxies with respect to the
Shares that it may have heretofore made or granted.
6. Enforcement of the Agreement. The Shareholder acknowledges that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that Purchaser will be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, this being in addition to any
other remedy to which it is entitled at law or in equity.
7. Adjustments. The number and type of securities subject to this Agreement
will be appropriately adjusted in the event of any stock dividends, stock
splits, recapitalizations, combinations, exchanges of shares or the like or
any other action that would have the effect of changing the Shareholder's
ownership of the Company's capital stock or other securities.
8. Termination. This Agreement will terminate on the date the Merger
Agreement is terminated in accordance with its terms.
9. Expenses. All fees and expenses incurred by either of the parties hereto
will be borne by the party incurring such fees and expenses.
10. Brokerage. Purchaser and the Shareholder each represent and warrant to
the other that the negotiations relevant to this Agreement have been carried
on by Purchaser and the Shareholder directly with each other, and that there
are no claims for finder's fees or brokerage commissions or other like
payments in connection with this Agreement or the transactions contemplated
hereby. Each of Purchaser and the Shareholder will indemnify and hold harmless
the other from and against any and all claims or liabilities for finder's fees
or brokerage commissions or other like payments incurred by reason of action
taken by it.
11. Miscellaneous.
(a) All representations and warranties contained herein will survive the
termination hereof.
(b) Any provision of this Agreement may be waived at any time by the party
that is entitled to the benefits thereof. No such waiver, amendment or
supplement will be effective unless in a writing which is signed by the party
or parties sought to be bound thereby. Any waiver by any party of a breach of
any provision of this Agreement will not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Agreement. The failure of a party to insist upon strict
adherence to any term of this Agreement or one or more sections hereof will
not be considered a waiver or deprive that party of the right thereafter to
insist upon strict adherence to that term or any other term of this Agreement.
B-4
<PAGE>
(c) This Agreement contains the entire agreement among Purchaser and the
Shareholder with respect to the subject matter hereof, and supersedes all
prior agreements among Purchaser and the Shareholder with respect to such
matters. This Agreement may not be amended, changed, supplemented, waived or
otherwise modified, except upon the delivery of a written agreement executed
by the parties hereto.
(d) This Agreement will be governed by and construed in accordance with the
laws of the State of New York applicable to contracts made and performed in
that state.
(e) The descriptive headings contained herein are for convenience and
reference only and will not affect in any way the meaning or interpretation of
this Agreement.
(f) All notices and other communications hereunder will be in writing and
will be given (and will be deemed to have been duly given upon receipt) by
delivery in person, by telecopy, or by registered or certified mail, postage
prepaid, return receipt requested, addressed as follows:
If to the Shareholder to:
If to the Purchaser to:
ACC Acquisition Corp.
400 West Avenue
Rochester, New York 14611
Attention: Steve M. Dubnik
President and CEO
North American Operations
with copies to:
Nixon, Hargrave, Devans & Doyle LLP
Clinton Square
P. O. Box 1051
Rochester, New York 14603
Attention: James A. Locke III, Esq.
or to such other address as any party may have furnished to the other parties
in writing in accordance herewith.
(g) This Agreement may be executed in any number of counterparts, each of
which will be deemed to be an original, but all of which together will
constitute one agreement.
(h) This Agreement is binding upon and is solely for the benefit of the
parties hereto and their respective successors, legal representatives and
assigns. Neither this Agreement nor any of the rights, interests and
obligations under this Agreement will be assigned by any of the parties hereto
without the prior written consent of the other parties, except that Purchaser
will have the right to assign to Purchaser or any other direct or indirect
wholly owned subsidiary of Parent any and all rights and obligations of
Purchaser under this Agreement, including the right to purchase Shares
tendered by the Shareholder pursuant to the terms hereof and the Exchange and
Merger, provided that any such assignment will not relieve Purchaser from any
of its obligations hereunder.
(i) If any provision of this Agreement is invalid, illegal or incapable of
being enforced by any rule of law or public policy, all other terms and
provisions of this Agreement will nevertheless remain in full force and effect
so long as the economic or legal substance of the transactions contemplated
hereby is not affected in any manner adverse to any party hereto. Upon any
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto will negotiate in good faith
to modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that the transactions
contemplated by this Agreement are consummated to the extent possible.
B-5
<PAGE>
(j) The Shareholder hereby irrevocably and unconditionally (i) consents to
submit to the jurisdiction of the courts of the State of New York and of the
federal courts located in Rochester, New York for any disputes arising out of
or relating to this Agreement, (ii) waives any objection to the laying of
venue of any action, suit or proceeding arising out of this Agreement in any
such court, and (iii) waives and agrees not to plead or claim in any such
court that any such action, suit or proceeding brought in any such court has
been brought in an inconvenient forum.
(k) All rights, powers and remedies provided under this Agreement or
otherwise available in respect hereof at law or in equity will be cumulative
and not alternative, and the exercise of any thereof by either party will not
preclude the simultaneous or later exercise of any other such right, power or
remedy by such party.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on
the date first above written.
ACC ACQUISITION-BLUE CORP.
By: _________________________________
Name:
Title:
B-6
<PAGE>
EXHIBIT C
SECTION 623 OF THE NEW YORK BUSINESS CORPORATION LAW
(S) 623. Procedure to enforce shareholder's right to receive payment for
shares. (a) A shareholder intending to enforce his right under a section of
this chapter to receive payment for his shares if the proposed corporate
action referred to therein is taken shall file with the corporation, before
the meeting of shareholders at which the action is submitted to a vote, or at
such meeting but before the vote, written objection to the action. The
objection shall include a notice of his election to dissent, his name and
residence address, the number and classes of shares as to which he dissents
and a demand for payment of the fair value of his shares if the action is
taken. Such objection is not required from any shareholder to whom the
corporation did not give notice of such meeting in accordance with this
chapter or where the proposed action is authorized by written consent of
shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which term
as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall
give written notice of such authorization or consent by registered mail to
each shareholder who filed written objection or from whom written objection
was not required, excepting any shareholder who voted for or consented in
writing to the proposed action and who thereby is deemed to have elected not
to enforce his right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent shall
file with the corporation a written notice of such election, stating his name
and residence address, the number and classes of shares as to which he
dissents and a demand for payment of the fair value of his shares. Any
shareholder who elects to dissent from a merger under section 905 (Merger of
subsidiary corporation) or paragraph (c) of section 907 (Merger or
consolidation of domestic and foreign corporations) or from a share exchange
under paragraph (g) of Section 913 (Share exchanges) shall file a written
notice of such election to dissent within twenty days after the giving to him
of a copy of the plan of merger or exchange or an outline of the material
features thereof under section 905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any
beneficial owner as to less than all of the shares of such owner, as to which
such nominee or fiduciary has a right to dissent, held of record by such
nominee or fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease
to have any of the rights of a shareholder except the right to be paid the
fair value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his
acceptance in writing of an offer made by the corporation, as provided in
paragraph (g), but in no case later than sixty days from the date of
consummation of the corporate action except that if the corporation fails to
make a timely offer, as provided in paragraph (g), the time for withdrawing a
notice of election shall be extended until sixty days from the date an offer
is made. Upon expiration of such time, withdrawal of a notice of election
shall require the written consent of the corporation. In order to be
effective, withdrawal of a notice of election must be accompanied by the
return to the corporation of any advance payment made to the shareholder as
provided in paragraph (g). If a notice of election is withdrawn, or the
corporate action is rescinded, or a court shall determine that the shareholder
is not entitled to receive payment for his shares, or the shareholder shall
otherwise lose his dissenters' rights, he shall not have the right to receive
payment for his shares and he shall be reinstated to all his rights as a
shareholder as of the consummation of the corporate action, including any
intervening preemptive rights and the right to payment of any intervening
dividend or other distribution or, if any such rights have expired of any such
dividend or distribution other than in cash has been completed, in lieu
thereof, at the election of the corporation, the fair value thereof in cash as
determined by the board as of the time of such expiration or completion, but
without prejudice otherwise to any corporate proceedings that may have been
taken in the interim.
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<PAGE>
(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the
shareholder or other person who submitted them on his behalf. Any shareholder
of shares represented by certificates who fails to submit his certificates for
such notation as herein specified shall, at the option of the corporation
exercised by written notice to him within forty-five days from the date of
filing of such notice of election to dissent, lose his dissenter's rights
unless a court, for good cause shown, shall otherwise direct. Upon transfer of
a certificate bearing such notation, each new certificate issued therefor
shall bear a similar notation together with the name of the original
dissenting holder or the shares and a transferee shall acquire no rights in
the corporation except those which the original dissenting shareholder had at
the time of transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later
(but in no case later than ninety days from the shareholders' authorization
date), the corporation or, in the case of a merger or consolidation, the
surviving or new corporation, shall make a written offer by registered mail to
each shareholder who has filed such notice of election to pay for his shares
at a specified price which the corporation considers to be their fair value.
Such offer shall be accompanied by a statement setting forth the aggregate
number of shares with respect to which notices of election to dissent have
been received and the aggregate number of holders of such shares. If the
corporate action has been consummated, such offer shall also be accompanied by
(1) advance payment to each such shareholder who has submitted the
certificates representing his shares to the corporation, as provided in
paragraph (f), of an amount equal to eighty percent of the amount of such
offer, or (2) as to each shareholder who has not yet submitted his
certificates a statement that advance payment to him of an amount equal to
eighty percent of the amount of such offer will be made by the corporation
promptly upon submission of his certificates. If the corporate action has not
been consummated at the time of the making of the offer, such advance payment
or statement as to advance payment shall be sent to each shareholder entitled
thereto forthwith upon consummation of the corporate action. Every advance
payment or statement as to advance payment shall include advice to the
shareholder to the effect that acceptance of such payment does not constitute
a waiver of any dissenters' rights. If the corporate action has not been
consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the
making of such offer, and a profit and loss statement or statements for not
less than a twelve-month period ended on the date of such balance sheet or, if
the corporation was not in existence throughout such twelve month period, for
the portion thereof during which it was in existence. Notwithstanding the
foregoing, the corporation shall not be required to furnish a balance sheet or
profit and loss statement or statements to any shareholder to whom such
balance sheet or profit and loss statement or statements were previously
furnished, nor if in connection with obtaining the shareholders' authorization
for or consent to the proposed corporate action the shareholders were
furnished with a proxy or information statement, which included financial
statements, pursuant to Regulation 14A or Regulation 14C of the United States
Securities and Exchange Commission. If within thirty days after the making of
such offer, the corporation making the offer and any shareholder agree upon
the price to be paid for his shares, payment therefor shall be made within
sixty days after the making of such offer or the consummation of the proposed
corporation action, whichever is later, upon the surrender of the certificates
for any such shares represented by certificates.
(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen days, or if it makes the offer and
any dissenting shareholder or shareholders fail to agree with it within the
period of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a
special proceeding in the supreme court in the judicial district in which
the office of the corporation is located to determine the rights of
dissenting shareholders and to fix
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the fair value of their shares. If, in the case of merger or consolidation,
the surviving or new corporation is a foreign corporation without an office
in this state, such proceeding shall be brought in the county where the
office of the domestic corporation, whose shares are to be valued, was
located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the
expiration of such twenty day period. If such proceeding is not instituted
within such thirty day period, all dissenter's rights shall be lost unless
the supreme court, for good cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid
for their shares, shall be made parties to such proceeding, which shall
have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in such proceeding upon each
dissenting shareholder who is a resident of this state in the manner
provided by law for the service of a summons, and upon each nonresident
dissenting shareholder either by registered mail and publication, or in
such other manner as is permitted by law. The jurisdiction of the court
shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as to
whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not
request any such determination or if the court finds that any dissenting
shareholder is so entitled, it shall proceed to fix the value of the
shares, which, for the purposes of this section, shall be the fair value as
of the close of business on the day prior to the shareholders'
authorization date. In fixing the fair value of the shares, the court shall
consider the nature of the transaction giving rise to the shareholders'
right to receive payment for shares and its effects on the corporation and
its shareholders, the concepts and methods then customary in the relevant
securities and financial markets for determining fair value of shares of a
corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the
fair value of the shares without a jury and without referral to an
appraiser or referee. Upon application by the corporation or by any
shareholder who is a party to the proceeding, the court may, in its
discretion, permit pretrial disclosure, including, but not limited to,
disclosure of any expert's reports relating to the fair value of the shares
whether or not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice laws
and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so
determined.
(6) The final order shall include an allowance for interest at such rate
as the court finds to be equitable, from the date the corporate action was
consummated to the date of payment. In determining the rate of interest,
the court shall consider all relevant factors, including the rate of
interest which the corporation would have had to pay to borrow money during
the pendency of the proceeding. If the court finds that the refusal of any
shareholder to accept the corporate offer of payment for his shares was
arbitrary, vexatious or otherwise not in good faith, no interest shall be
allowed to him.
(7) Each party to such proceeding shall bear its own costs and expenses,
including the fees and expenses of its counsel and of any experts employed
by it. Notwithstanding the foregoing, the court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees
incurred by the corporation against any or all of the dissenting
shareholders who are parties to the proceeding, including any who have
withdrawn their notices of election as provided in paragraph (e), if the
court finds that their refusal to accept the corporate offer was arbitrary,
vexatious or otherwise not in good faith. The court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees
incurred by any or all of the dissenting shareholders who are parties to
the proceeding against the corporation if the court finds any of the
following: (A) that the fair value of the shares as determined materially
exceeds the amount which the corporation offered to pay; (B) that no offer
or required advance payment was made by the corporation; (C) that the
corporation failed to institute the special proceeding within the period
specified therefor; or (D) that the
C-3
<PAGE>
action of the corporation in complying with its obligations as provided in
this section was arbitrary, vexatious or otherwise not in good faith. In
making any determination as provided in clause (A), the court may consider
the dollar amount or the percentage, or both, by which the fair value of
the shares as determined exceeds the corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be
due him, upon surrender of the certificates for any such shares represented
by certificates.
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section
515 (Reacquired shares), except that, in the case of a merger or
consolidation, they may be held and disposed of as the plan of merger or
consolidation may otherwise provide.
(j) No payment shall be made to a dissenting shareholder under this section
at a time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be deemed
withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it is
liquidated, be subordinated to the rights of creditors of the corporation,
but have rights superior to the non-dissenting shareholders, and if it is
not liquidated, retain his right to be paid for his shares, which right the
corporation shall be obliged to satisfy when the restrictions of this
paragraph do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment
for his shares cannot be made because of the restrictions of this
paragraph. If the dissenting shareholder fails to exercise such option as
provided, the corporation shall exercise the option by written notice given
to him within twenty days after the expiration of such period of thirty
days.
(k) The enforcement by a shareholder of his right to receive payment for
his shares in the manner provided herein shall exclude the enforcement by
such shareholder of any other right to which he might otherwise be entitled
by virtue of share ownership, except as provided in paragraph (e), and
except that this section shall not exclude the right of such shareholder to
bring or maintain an appropriate action to obtain relief on the ground that
such corporation action will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to
be given by a corporation to a shareholder under this section shall be
given in the manner provided in section 605 (Notice of meetings of
shareholders).
(m) This section shall not apply to foreign corporations except as
provided in subparagraph (e)(2) of section 907 (Merger or consolidation of
domestic and foreign corporations). (Last amended by L. 1986, Ch 117, (S)
3.)
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<PAGE>
EXHIBIT D
BENGUR BRYAN & CO., INC.
October 27, 1997
Board of Directors
US WATS, Inc.
111 Presidential Boulevard
Suite 114
Bala Cynwyd, PA 19004
Dear Sirs:
US WATS, Inc. ("Company"), ACC Corp. ("Buyer") and ACC Acquisition-Blue
Corp. ("Merger Sub") have entered into an Agreement and Plan of Merger dated
as of October 28, 1997 (the "Agreement"). Pursuant to the Agreement, the
implementation of which is contingent on shareholder approval by the holders
of common stock, par value $0.001, of the Company (the "Company
Shareholders"), Company shall merge with and into Merger Sub (the "Merger"),
and each share of Company common stock issued and outstanding immediately
prior to the effective time of the Merger (other than shares as to which
dissenters' rights are perfected under New York law) will be converted into
the right to receive a fraction of a share of Class A Common Stock of Buyer
("ACC Common Stock") equal to the USW Common Stock Exchange Ratio (to be
determined at closing pursuant to the Agreement) (the "Exchange Ratio"). We
have assumed, with your consent, that the Merger will qualify for pooling-of-
interests accounting treatment and as a tax free transaction for the Company
Shareholders for federal income tax purposes. You have requested our opinion
as to whether the ACC Common Stock to be received by Company Shareholders in
the Merger, the amount of which shall be calculated using the Exchange Ratio,
is fair, from a financial point of view, to the Company Shareholders.
Bengur Bryan & Co., Inc. ("Bengur Bryan"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, private
placements and valuations for estate, corporate and other purposes. We have
acted as financial advisor to the Board of Directors of Company in connection
with the transaction described above and we have provided investment banking
services to the Company and have received fees for the rendering of such
services.
In connection with this opinion, we have reviewed certain publicly available
financial information and other information concerning Company and Buyer and
certain internal analyses and other information furnished to us by Company and
Buyer. We have also held discussions with members of the senior managements of
Company and Buyer regarding the businesses and prospects of their respective
companies and the joint prospects of a combined company. In addition, we have
(i) reviewed the reported prices and trading activity for the common stock of
both Company and Buyer, (ii) compared certain financial and stock market
information for Company and Buyer with similar information for certain other
companies whose securities are publicly traded, (iii) reviewed the financial
terms of certain recent business combinations which we deemed comparable in
whole or in part, (iv) reviewed the terms of the Agreement, and (v) performed
such other studies and analyses and considered such other factors as we deemed
appropriate.
We have not independently verified the information described above and for
purposes of this opinion have assumed and relied on the accuracy, completeness
and fairness thereof and have not undertaken an independent evaluation or
appraisal thereof. With respect to any information relating to the prospects
of the Company and Buyer, we have assumed that such information reflects the
currently available judgments and estimates of the managements of the Company
and Buyer as to the likely future financial performances of their respective
companies and of the combined entity. In addition, we have not made nor been
provided with an independent evaluation or appraisal of the assets of the
Company and Buyer, nor have we been furnished with any such evaluations or
appraisals. Our opinion is based on market, economic and other conditions as
they exist and can be evaluated as of the date of this letter.
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<PAGE>
We have assumed that, in the course of obtaining necessary regulatory and
other consents or approvals (if any) for the Merger, no restrictions,
including any divestiture requirements or amendments or modifications, will be
imposed that will have an adverse effect on the contemplated benefits of the
Merger.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to the acquisition of the
Company or any of its assets.
Our advisory services and the opinion expressed herein were prepared for the
use of the Board of Directors of Company and do not constitute recommendation
to the Company Shareholders as to how they should vote at the shareholders'
meeting in connection with the Merger. We hereby consent, however, to the
inclusion of this opinion as an exhibit to any proxy or registration statement
distributed in connection with the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the ACC Common Stock to be received by Company
Shareholders in the Merger, to be calculated using the Exchange Ratio is fair,
from a financial point of view, to the Company Shareholders.
Very truly yours,
Bengur Bryan & Co., Inc.
D-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") permits the
Company to indemnify any Director or officer of the Company against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement,
incurred in defense of any action (other than an action by or in the right of
the Company) arising by reason of the fact that he/she is or was an officer or
Director of the Company, if in any civil action or proceeding it is determined
that he/she acted in good faith and in a manner he/she reasonably believed to
be in or not opposed to the best interests of the Company and, with respect to
any criminal action or proceeding, it is determined that he/she had no
reasonable cause to believe his/her conduct was unlawful. Section 145 also
permits the Company to indemnify any such officer or Director against expenses
incurred in an action by or in the right of the Company if he/she acted in
good faith and in a manner he/she reasonably believed to be in or not opposed
to the best interests of the Company, except in respect of any matter as to
which such person is adjudged to be liable to the Company, unless allowed by
the court in which such action is brought. This statute requires
indemnification of such officers and Directors against expenses to the extent
they may be successful in defending any such action. The statute also permits
purchase of liability insurance by the Company on behalf of its officers and
Directors.
Article SEVEN, Section 2 of the Company's Certificate of Incorporation and
Article V of its By-laws (collectively its "charter documents") generally
provide for the mandatory indemnification of and advancement of litigation
expenses to the Company's Directors, officers and employees to the fullest
extent permitted by the DGCL against all liabilities, losses and expenses
incurred in connection with any action, suit or proceeding in which any of
them become involved by reason of their service rendered to the Company or, at
its request, to another entity; provided that it is determined, in connection
with any civil action, that the indemnitee acted in good faith and in a manner
that he/she reasonably believed to be in or not opposed to the Company's best
interests, and in connection with any criminal proceeding, that the indemnitee
had no reasonable cause to believe his/her conduct was unlawful. These
provisions of the Company's charter documents are not exclusive of any other
indemnification rights to which an indemnitee may be entitled, whether by
contract or otherwise. The Company may also purchase liability insurance on
behalf of its Directors and officers, whether or not it would have the
obligation or power to indemnify any of them under the terms of its charter
documents or the DGCL. The Company has acquired and maintains liability
insurance for the benefit of its Directors and officers for serving in such
capacities, and it also has entered into indemnification agreements with each
of its Directors and executive officers for serving in such capacities.
See also the undertaking made with respect to indemnification matters
involving the Registrant's directors, officers and controlling persons, found
in Item 22 below.
ITEM 21. EXHIBITS
(a) Exhibits
See Index of Exhibits immediately following the signature page of this
Registration Statement.
(c) Opinion of Financial Advisor
See Exhibit D to the Proxy Statement/Prospectus.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933 (the "1933 Act"),
each filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (the "1934 Act") (and,
where applicable, each filing of
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<PAGE>
an employee benefit plan's Annual Report pursuant to Section 15(d) of the 1934
Act) that is incorporated by reference in this Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
The Registrant undertakes that every prospectus: (i) that is filed pursuant
to paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the 1933 Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the 1933 Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofaras indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions described in Item 20 above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in that
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any such action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the Registration Statement when it became effective.
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<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ROCHESTER, NEW YORK, ON
THE 22ND DAY OF JANUARY, 1998.
ACC CORP.
By: /s/ Michael R. Daley
----------------------------------
Michael R. Daley,
Executive Vice President and
Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes and appoints Michael R. Daley, Steve M.
Dubnik and John J. Zimmer, and each of them, his true and lawful attorney-in-
fact and agent, with full power of substitution and resubstitution for him and
in his name, place and stead, in any and all capacities to sign any and all
amendments (including post-effective amendments) to the Registration Statement
on Form S-4, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
Dated: January 22,
1998 By: /s/ Michael R. Daley
----------------------------------
Michael R. Daley,
Executive Vice President and
Chief
Financial Officer (Principal
Executive
Officer and Principal Financial
and
Accounting Officer)
Dated: January 22,
1998 By: /s/ Steve M. Dubnik
----------------------------------
Steve M. Dubnik,
Executive Vice President
(Principal Executive Officer)
Dated: January 22,
1998 By: /s/ Christopher Bantoft
----------------------------------
Christopher Bantoft,
Executive Vice President
(Principal Executive Officer)
Dated: January 22,
1998 By: /s/ Hugh F. Bennett
----------------------------------
Hugh F. Bennett,
Director
Dated: January 22,
1998 By: /s/ Arunas A. Chesonis
----------------------------------
Arunas A. Chesonis,
President and a Director
Dated: January , By:
1998 ----------------------------------
Willard Z. Estey,
Director
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<PAGE>
Dated: January 22, By: /s/ Daniel D. Tessoni,
1998 ----------------------------------
Daniel D. Tessoni,
Director
Dated: January 22,
1998 By: /s/ Robert M. Van Degna
----------------------------------
Robert M. Van Degna,
Director and Chairman
Dated: January 22,
1998 By: /s/ Leslie D. Shroyer
----------------------------------
Leslie D. Shroyer,
Director
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<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT LOCATION
------- ---------------------- --------
2.1 Form of Agreement and Plan of Merger
dated as of October 28, 1997 by and
among ACC Corp., US WATS, Inc. and ACC
Acquisition-Blue Corp. (included as
Exhibit A to the Proxy
Statement/Prospectus)
3.1 First Restated Certificate of Incorporated by reference to
Incorporation of ACC Corp. Exhibit 3 to the Company's
Quarterly Report on Form
10-Q for its Quarter Ended
September 30, 1995
("September 30, 1995 10-Q")
3.2 Certificate of Designation of the Filed herewith.
Voting Powers, Designation,
Preferences and Relative,
Participating, Optional or other
Special Rights and Qualifications,
Limitations and Restrictions of the
Series A Preferred Stock of ACC Corp
3.3 Bylaws of ACC Corp., as amended on May Incorporated by reference to
21, 1996 Exhibit 99.5 to the
Company's Current Report on
Form 8-K filed on September
17, 1996 ("September 17,
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-3, No.
333-01157 declared
effective May 2, 1996
4.5 Form of Rights Agreement, dated as of Incorporated by reference
October 3, 1997, between ACC Corp. and from Exhibit 1 to the
First Union National Bank, as Rights Company's Registration
Agent, which includes as Exhibit A-- Statement on Form 8-A dated
Form of Rights Certificate; Exhibit October 3, 1997 (as amended
B--Summary of Rights to Purchase on Form 8-A/A dated
Preferred Stock; and Exhibit C-- December 10, 1997)
Certificate of Designation
5 Opinion of Nixon, Hargrave, Devans & *
Doyle LLP
8.1 Form of Opinion of Nixon, Hargrave, *
Devans & Doyle LLP, counsel to ACC, as
to certain tax matters
8.2 Form of Opinion of Morgan, Lewis & *
Bockius LLP, counsel to USW, as to
certain tax matters
23.1 Consent of Arthur Andersen LLP Filed herewith
23.2 Consent of Nixon, Hargrave, Devans & *
Doyle LLP (contained in the opinion
filed as Exhibit 5)
23.3 Consent of Bengur Bryan & Co., Inc. Filed herewith
23.4 Consent of Deloitte & Touche LLP Filed herewith
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT LOCATION
------- ---------------------- --------
<C> <S> <C>
23.5 Consent of Rudolph, Palitz LLP Filed herewith
23.6 Consent of Baratz & Associates, P.A. Filed herewith
24 Power of Attorney (included on the signature page
of the Registration Statement)
99.1 Opinion of Bengur Bryan & Co., Inc. (included as
Exhibit D to the Proxy Statement/Prospectus)
99.2 Form of Proxy of US WATS, Inc. Filed herewith
</TABLE>
- --------
* to be filed by amendment to the Registration Statement
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF DESIGNATION
OF THE VOTING POWERS, DESIGNATION,
PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS AND QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS OF THE
SERIES A PREFERRED STOCK
----------------
PURSUANT TO SECTIONS 151 AND 157 OF THE GENERAL CORPORATION LAW OF THE STATE
OF DELAWARE
----------------
I, David K. Laniak, Chairman of the Board and Chief Executive Officer of ACC
Corp., a corporation organized and existing under the General Corporation Law
of the State of Delaware (the "Corporation"), DO HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors of the
Corporation by its Certificate of Incorporation (the "Certificate"), and,
pursuant to the provisions of Sections 151 and 157 of the General Corporation
Law of the State of Delaware, said Board of Directors, at a duly called
meeting held on October 3, 1997, at which a quorum was present and acted
throughout, adopted the following resolutions, which resolutions remain in
full force and effect on the date hereof creating a series of 100,000 shares
of Preferred Stock having a par value of $1.00 per share, designated as Series
A Preferred Stock (the "Series A Preferred Stock") out of the class of
2,000,000 shares of preferred stock of the par value of $1.00 per share (the
"Preferred Stock"):
RESOLVED, that pursuant to the authority vested in the Board of Directors in
accordance with the provisions of the Certificate, the Board of Directors does
hereby create, authorize and provide for the issuance of the Series A
Preferred Stock having the voting powers, designation, relative,
participating, optional and other special rights, preferences, and
qualifications, limitations and restrictions thereof that are set forth as
follows:
Section l. Designation and Amount. The shares of such series shall be
designated as "Series A Preferred Stock" and the number of shares constituting
such series shall be 100,000.
Section 2. Dividends and Distributions. (A) Each holder of one one-
thousandth of a share (a "Unit") of Series A Preferred Stock shall be entitled
to receive, when, as and if declared by the Board of Directors out of funds
legally available for that purpose, dividends payable in cash, in an amount
per Unit (rounded to the nearest cent) equal to the per share amount of cash
dividends declared on shares of the Common Stock. In the event that the
Corporation shall at any time after October 3, 1997 (the "Rights Declaration
Date") (i) declare any dividend on outstanding shares of Common Stock payable
in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock
or (iii) combine outstanding shares of Common Stock into a smaller number of
shares, then in each such case the amount to which the holder of a Unit of
Series A Preferred Stock was entitled immediately prior to such event pursuant
to the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which shall be the number of shares of Common Stock
that are outstanding immediately after such event and the denominator of which
shall be the number of shares of Common Stock that were outstanding
immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on Units of
Series A Preferred Stock as provided in paragraph (A) above immediately after
it declares a dividend or distribution on the shares of Common Stock (other
than a dividend payable in shares of Common Stock).
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<PAGE>
Section 3. Voting Rights. The holders of Units of Series A Preferred Stock
shall have the following voting rights:
(A) Each Unit of Series A Preferred Stock shall entitle the holder
thereof to one vote on all matters submitted to a vote of the stockholders
of the Corporation. In the event the Corporation shall at any time after
the Rights Declaration Date (i) declare any dividend on outstanding shares
of Common Stock payable in shares of Common Stock, (ii) subdivide
outstanding shares of Common Stock or (iii) combine the outstanding shares
of Common Stock into a smaller number of shares, then in each such case the
number of votes per Unit to which holders of Units of Series A Preferred
Stock were entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction the numerator of which shall be the
number of shares of Common Stock outstanding immediately after such event
and the denominator of which shall be the number of shares of Common Stock
that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of Units
of Series A Preferred Stock and the holders of shares of Common Stock shall
vote together as one class on all matters submitted to a vote of
stockholders of the Corporation.
(C) Except as set forth herein, holders of Units of Series A Preferred
Stock shall have no special voting rights and their consents shall not be
required (except to the extent they are entitled to vote with holders of
shares of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Reacquired Shares. Any Units of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All
such Units shall, upon their cancellation, become authorized but unissued
Units of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 5. Liquidation, Dissolution or Winding Up. (A) Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (i) to the holders of shares of junior stock unless
the holders of Units of Series A Preferred Stock shall have received, subject
to adjustment as hereinafter provided in paragraph (B), the greater of either
(a) $1.00 per Unit or (b) the amount equal to the aggregate per share amount
to be distributed to holders of shares of Common Stock, or (ii) to the holders
of shares of parity stock, unless simultaneously therewith distributions are
made ratably on Units of Series A Preferred Stock and all other shares of such
parity stock in proportion to the total amounts to which the holders of Units
of Series A Preferred Stock are entitled under clause (i)(a) of this sentence
and to which the holders of shares of such parity stock are entitled, in each
case upon such liquidation, dissolution or winding up.
(B) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on outstanding shares of Common
Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of
Common Stock, or (iii) combine outstanding shares of Common Stock into a
smaller number of shares, then in each such case the aggregate amount to which
holders of Units of Series A Preferred Stock were entitled immediately prior
to such event pursuant to clause (i)(b) of paragraph (A) of this Section 5
shall be adjusted by multiplying such amount by a fraction the numerator of
which shall be the number of shares of Common Stock that are outstanding
immediately after such event and the denominator of which shall be the number
of shares of Common Stock that were outstanding immediately prior to such
event.
Section 6. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of common stock are exchanged for or converted into other stock or
securities, cash and/or any other property, then in any such case Units of
Series A Preferred Stock shall at the same time be similarly exchanged for or
converted into an amount per Unit (subject to the provision for adjustment
hereinafter set forth) equal to the aggregate amount of stock, securities,
cash and/or any other property (payable in kind), as the case may be, into
which or for which each share of Common Stock is converted or exchanged. In
the event the Corporation shall at any time after the Rights Declaration Date
(i)
C-2
<PAGE>
declare any dividend on outstanding shares of Common Stock payable in shares
of Common Stock, (ii) subdivide outstanding shares of Common Stock, or (iii)
combine outstanding Common Stock into a smaller number of shares, then in each
such case the amount set forth in the immediately preceding sentence with
respect to the exchange or conversion of Units of Series A Preferred Stock
shall be adjusted by multiplying such amount by a fraction the numerator of
which shall be the number of shares of Common Stock that are outstanding
immediately after such event and the denominator of which shall be the number
of shares of Common Stock that were outstanding immediately prior to such
event.
Section 7. Redemption. The Units of Series A Preferred Stock shall not be
redeemable.
Section 8. Ranking. The Units of Series A Preferred Stock shall rank junior
to all other series of the Preferred Stock and to any other class of preferred
stock that hereafter may be issued by the Corporation as to the payment of
dividends and the distribution of assets, unless the terms of any such series
or class shall provide otherwise.
Section 9. Amendment. The Certificate, including, without limitation, this
resolution, shall not hereafter be amended, either directly or indirectly, or
through merger or consolidation with another corporations in any manner that
would alter or change the powers, preferences or special rights of the Series
A Preferred Stock so as to affect them adversely without the affirmative vote
of the holders of a majority or more of the outstanding Units of Series A
Preferred Stock, voting separately as a class.
Section 10. Fractional Shares. The Series A Preferred Stock may be issued in
Units or other fractions of a share, which Units or fractions shall entitle
the holder, in proportion to such holder's fractional shares, to exercise
voting rights, receive dividends, participate in distributions and to have the
benefit of all other rights of holders of Series A Preferred Stock.
Section 11. Certain Definitions. As used herein with respect to the Series A
Preferred Stock, the following terms shall have the following meanings:
(A) The term "Common Stock" shall mean the class of stock designated as
the Class A common stock, par value $.015 per share, of the Corporation at
the date hereof or any other class of stock resulting from successive
changes or reclassification of such common stock.
(B) The term "junior stock", as used in Section 5 hereof, shall mean the
Common Stock and any other class or series of capital stock of the
Corporation over which the Series A Preferred Stock has preference or
priority in the distribution of assets on any liquidation, dissolution or
winding up of the Corporation.
(C) The term "parity stock", as used in Section 5 hereof, shall mean any
class or series of capital stock ranking pari passu with the Series A
Preferred Stock in the distribution of assets on any liquidation,
dissolution or winding up of the Corporation.
IN WITNESS WHEREOF, ACC Corp. has caused this Certificate to be signed this
3rd day of October, 1997.
ACC CORP.
/s/ David K. Laniak
By__________________________________
Name: David K. Laniak
Title: Chairman of the Board and
Chief Executive Officer
C-3
<PAGE>
EXHIBIT 23.1
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports dated January 24, 1997
incorporated by reference in ACC Corp.'s Form 10-K for the year ended December
31, 1996 and to all references to our Firm included in this registration
statement.
Arthur Andersen LLP
Rochester, New York
January 21, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF FINANCIAL ADVISOR
As financial advisor to US WATS, Inc., we hereby consent to the inclusion of
our fairness opinion addressed to the Board of Directors of US WATS, Inc. and
dated October 27, 1997 in this registration statement onForm S-4, and to all
references to our Firm and summaries of such fairness opinion included in this
registration statement, and the Proxy Statement/Prospectus included therein.
Bengur Bryan & Co., Inc.
Baltimore, Maryland
January 20, 1998
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
ACC Corp. on Form S-4 of our report dated March 28, 1997, except for Notes 9
and 12, for which the date is January 21, 1998, appearing in the Annual Report
on Form 10-K/A of US WATS, Inc. for the year ended December 31, 1996, and to
the use of our report dated March 28, 1997, except for Notes 9 and 12, for
which the date is January 21, 1998, appearing in the Prospectus, which is part
of this Registration Statement. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
Deloitte & Touche LLP
Philadelphia, PA
January 22, 1998
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of ACC Corp. on Form S-4 of our report dated March 25, 1996, appearing in the
Annual Report on Form 10-K/A of US WATS, Inc. for the year ended December 31,
1996, and to the use of our report dated March 25, 1996, appearing in the
Prospectus, which is part of this Registration Statement. We also consent to
the reference to us under the heading "Experts" in such Prospectus.
Rudolph, Palitz LLP
Plymouth Meeting, Pennsylvania
January 22, 1998
<PAGE>
EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of ACC Corp. on Form S-4 of our report on the consolidated statements of
operations, shareholders' equity, and cash flows for the year ended December
31, 1994 dated March 8, 1995, appearing in the Annual Report on Form 10-K/A of
US WATS, Inc. for the year ended December 31, 1996, and to the use of our
report dated March 8, 1995, appearing in the Prospectus, which is part of this
Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
Baratz & Associates, P.A.
Marlton, New Jersey
January 22, 1998
<PAGE>
EXHIBIT 99.2
US WATS, INC.
111 PRESIDENTIAL BOULEVARD, SUITE 114
BALA CYNWYD, PENNSYLVANIA 19004
PROXY--Special Meeting of Shareholders-- , 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Aaron R. Brown and Stephen J. Parker as
proxies, each with the power to appoint his substitute, and hereby authorizes
them, and each of them acting alone, to represent and to vote, as designated
below, all the Common Stock of US WATS, Inc. held of record by the undersigned
on the close of business on , 1998 at the Special Meeting of
Shareholders to be held on , 1998 or at any adjournment thereof.
1. PROPOSAL TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF MERGER BY AND AMONG
ACC CORP., A DELAWARE CORPORATION, ACC ACQUISITION-BLUE CORP., A DELAWARE
CORPORATION AND US WATS, INC., AND APPROVAL OF THE MERGER OF ACC
ACQUISITION-BLUE CORP. WITH AND INTO US WATS, INC. AND ALL TRANSACTIONS
RELATED THERETO.
FOR [_] AGAINST [_] ABSTAIN [_]
2. PROPOSAL TO AUTHORIZE THE ADJOURNMENT OF THE MEETING TO ALLOW FOR
COLLECTION OF ADDITIONAL SHAREHOLDER VOTES TO OBTAIN A QUORUM OR IN ORDER
TO OBTAIN MORE VOTES IN FAVOR OF THE AGREEMENT AND PLAN OF MERGER AND THE
MERGER, IF NECESSARY.
FOR [_] AGAINST [_] ABSTAIN [_]
IN THEIR DISCRETION, THE PROXIES, AND EACH OF THEM ACTING ALONE, ARE HEREBY
AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE
MEETING OR ANY ADJOURNMENT.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED IN FAVOR OF PROPOSAL NO. 1 AND NO . 2 AND IN ACCORDANCE WITH THE
PROXY'S BEST JUDGMENT UPON OTHER MATTERS PROPERLY COMING BEFORE THE MEETING
AND ANY ADJOURNMENTS THEREOF.
When shares are held by joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee or guardian, please give full title
as such. If a corporation, please sign in full corporate name by President or
other authorized officer. If a partnership, please sign in partnership name by
authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THIS
PROXY PROMPTLY IN THE ENCLOSED ENVELOPE.
------------------------------------------
Name(s) (Please Print)
------------------------------------------
Signature
------------------------------------------
Signature, if held jointly
------------------------------------------
Date
