FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-14567
ACC CORP.
(Exact name of registrant as specified in its charter)
Delaware 16-1175232
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 West Avenue, Rochester, New York 14611
(Address of principal executive offices)
(716) 987-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
As of November 1, 1996, the Registrant had issued and outstanding 16,521,691
shares of its Class A Common Stock, par value $.015 per share, and 0 shares of
its Series A Preferred Stock.
The Index of Exhibits filed with this Report is found at Page 24.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Amounts in thousands, except share and per share data)
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
____________ ___________ ____________ _____________
<S> <C> <C> <C> <C>
Revenue:
Toll revenue $ 70,226 $ 42,322 $ 206,362 $ 119,268
Local service and other 7,059 3,589 17,865 7,973
____________ ___________ ____________ ____________
77,285 45,911 224,227 127,241
Network costs 48,815 28,105 143,803 79,163
____________ ___________ ____________ ____________
Gross profit 28,470 17,806 80,424 48,078
Other operating expenses:
Depreciation and amortiza-
tion 4,266 3,011 12,061 8,405
Selling, general and
administrative 20,995 15,159 58,977 41,345
____________ ___________ ____________ ____________
25,261 18,170 71,038 49,750
____________ ___________ ____________ ____________
Income (loss) from
operations 3,209 (364) 9,386 (1,672)
Other income (expense):
Interest expense (1,015) (1,396) (3,908) (3,812)
Interest income 829 56 1,286 146
Foreign exchange gain
(loss) 22 (14) 48 (109)
____________ ___________ ____________ ____________
(164) (1,354) (2,574) (3,775)
____________ ___________ ____________ ____________
Income (loss) before
provision for income
taxes and minority
interest 3,045 (1,718) 6,812 (5,447)
Provision for income taxes 543 249 1,396 538
____________ ___________ ____________ ____________
Income (loss) before
minority interest 2,502 (1,967) 5,416 (5,985)
Minority interest in (income)
loss of
consolidated subsidiary (303) 118 (899) 225
____________ ___________ ____________ ____________
Net income (loss) 2,199 (1,849) 4,517 (5,760)
Less Series A
preferred stock dividend (334) - (1,022) -
Less Series A preferred
stock accretion (872) - (1,496) -
____________ ___________ ____________ ____________
Income (loss) applicable
to common stock $ 993 $ (1,849) $ 1,999 $ (5,760)
____________ ___________ ____________ ____________
Net income (loss) per common
& common equivalent share $ 0.06 $ (0.15) $ 0.13 $ (0.50)
____________ ___________ ____________ ____________
Average number of common
and common equivalent
shares (Note 7) 16,694,546 11,967,338 14,984,299 11,464,761
____________ ___________ ____________ ____________
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
September 30, December 31,
1996 1995
_____________ ____________
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,122 $ 518
Accounts receivable, net of allowance
for doubtful accounts of $3,889 in
1996 and $2,085 in 1995 53,327 38,978
Other receivables 2,600 3,965
Prepaid expenses and other assets 3,517 2,265
________ _______
Total current assets 82,566 45,726
________ _______
Property, plant and equipment:
At cost 98,686 83,623
Less-accumulated depreciation and
amortization (35,121) (26,932)
________ _______
63,565 56,691
________ _______
Other assets:
Goodwill and customer base, net 16,448 14,072
Deferred installation costs, net 3,664 3,310
Other 6,823 4,185
________ _______
26,935 21,567
________ _______
Total assets $173,066 $123,984
Current liabilities:
Notes payable $ - $ 1,966
Current maturities of
long-term debt 3,151 2,919
Accounts payable 6,890 7,340
Accrued network costs 25,937 28,192
Other accrued expenses 16,345 15,657
________ ________
Total current liabilities 52,323 56,074
________ ________
Deferred income taxes 2,939 2,577
________ ________
Long-term debt 6,884 28,050
________ ________
Redeemable Series A Preferred Stock, $1.00
par value, $1,000 liquidation value,
cumulative, convertible, Authorized-
10,000 shares; Issued - 10,000 shares 11,929 9,448
________ _______
Minority interest 2,527 1,428
________ _______
Shareholders' equity (Note 7):
Preferred Stock, $1.00 par value,
Authorized - 1,990,000 shares;
Issued - no shares - -
Class A Common Stock, $.015 par value
Authorized - 50,000,000 shares;
Issued - 16,464,284 in 1996 and
12,925,889 in 1995 247 194
Class B Common Stock, $.015 par value,
Authorized - 25,000,000 shares;
Issued - no shares - -
Capital in excess of par value 98,319 32,846
Cumulative translation adjustment (936) (950)
Retained earnings (deficit) 444 (4,073)
________ _______
98,074 28,017
Less-
Treasury stock, at cost (1,089,884
shares) (1,610) (1,610)
_______ _______
Total shareholders' equity 96,464 26,407
_______ _______
Total liabilities and
shareholders' equity $173,066 $123,984
________ ________
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACC CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in 000's, except per share data)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
__________ ___________
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,517 ($5,760)
__________ ___________
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 12,061 8,405
Deferred income taxes 362 515
Minority interest in income of
consolidated subsidiary 899 (225)
Unrealized foreign exchange (gain) loss (137) 430
Amortization of deferred financing costs 316 165
Loss on disposal of equipment - 193
(Increase)decrease in assets:
Restricted cash - -
Accounts receivable, net (14,225) (10,040)
Other receivables 1,653 252
Prepaid and other assets (1,228) (329)
Deferred installation costs (1,943) (1,160)
Other (390) 415
Increase(decrease) in liabilities:
Accounts payable (371) (8,217)
Accrued network costs (2,326) 15,041
Other accrued expenses (780) 3,305
___________ __________
Total adjustments (6,109) 8,750
___________ __________
Net cash provided by (used in)
operating activities (1,592) 2,990
___________ __________
Cash flows from investing activities:
Capital expenditures, net (14,865) (8,709)
Payment for purchase of subsidiary,
net of cash acquired - (1,386)
Cash paid for acquisition of customer base (2,226) (229)
__________ __________
Net cash used in investing activities (17,091) (10,324)
__________ __________
Cash flows from financing activities:
Borrowings under lines of credit 19,500 (7,602)
Repayments under lines of credit (40,413) -
Repayment of notes payable (2,586) -
Repayment of long-term debt (2,841) (1,734)
Proceeds from issuance of common stock 68,476 11,395
Proceeds from issuance of preferred stock - 10,000
Financing costs (441) (2,807)
Dividends paid - (440)
__________ __________
Net cash provided by financing activities 41,695 8,812
Effect of exchange rate changes on cash (408) (827)
__________ __________
Net increase in cash from operations 22,604 651
Cash and cash equivalents at beginning
of period 518 1,021
__________ __________
Cash and cash equivalents at end of period $23,122 $1,672
__________ __________
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $2,326 $2,831
__________ __________
Income taxes $1,033 $103
__________ __________
Supplemental schedule of noncash
investing activities:
Equipment purchased through capital leases $2,775 $2,995
__________ __________
Purchase of subsidiary with
short-term notes payable - $2,966
__________ __________
</TABLE>
<PAGE>
ACC CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
1. STATEMENT OF MANAGEMENT
The condensed financial statements of ACC Corp. and
subsidiaries (the "Company") included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest Annual
Report on Form 10-K.
The interim financial statements contained herein reflect all
adjustments of a normal recurring nature which are, in the opinion of
management, necessary to a fair statement of the results of operations
for the interim periods presented.
As used herein, unless the context otherwise requires, the
"Company" and "ACC" refer to ACC Corp. and its subsidiaries, including
ACC Long Distance Corp. ("ACC U.S."), ACC TelEnterprises Ltd., the
Company's approximately 70% (93% as of October, 1996) owned Canadian
subsidiary ("ACC Canada"), and ACC Long Distance UK Ltd. ("ACC U.K.").
In this Form 10-Q, references to "dollar" and "$" are to United States
dollars, references to "Cdn. $" are to Canadian dollars, references to
"<pound-sterling>" are to English pounds sterling, the terms "United
States" and "U.S." mean the United States of America and, unless the
context otherwise requires, its states, territories and possessions and
all areas subject to its jurisdiction, and the terms "United Kingdom" and
"U.K." mean England, Scotland and Wales.
2. FORM 10-K
Reference is made to the following footnotes included in the
Company's 1995 Annual Report on Form 10-K:
Principles of Consolidation
Sale of Subsidiary Stock
Toll Revenue
Other Receivables
Property, Plant and Equipment
Deferred Installation Costs
Goodwill and Customer Base
Common and Common Equivalent Shares
Foreign Currency Translation
Income Taxes
Cash Equivalents and Restricted Cash
Derivative Financial Instruments
Use of Estimates
Reclassifications
Operating Information
Discontinued Operations
Asset Write-down
Equal Access Costs
Debt
Senior Credit Facility and Lines of Credit
Income Taxes
Redeemable Preferred Stock
Equity
Private Placement
Employee Long Term Incentive Plan
Employee Stock Purchase Plan
Treasury Stock
Commitments and Contingencies
Operating Leases
Employment and Other Agreements
Purchase Commitment
Defined Contribution Plans
Annual Incentive Plan
Legal Matters
Geographic Area Information
Related Party Transactions
Subsequent Events
3. NET INCOME PER SHARE
Net income per common and common equivalent share is computed
on the basis of the weighted average number of common and common
equivalent shares outstanding during the period and net income reduced by
preferred dividends and accreted costs. The average number of shares
outstanding (adjusted for a three-for-two stock split - see Note 7) is
computed as follows:
For the Nine Months For the Three Months
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ---------------------
1996 1995 1996 1995
Average Number Outstanding:
Common Shares 13,767,380 11,217,241 15,315,633 11,645,924
Common Equivalent Shares 1,216,919 247,520 1,378,913 321,414
---------- ---------- ----------- ----------
TOTAL 14,984,299 11,464,761 16,694,546 11,967,338
Fully diluted income per share amounts are not presented for any period
because inclusion of these amounts would be anti-dilutive.
4. SFAS NO. 123
The Company is required to adopt SFAS No. 123, Accounting for
Stock-Based Compensation in 1996. This Statement encourages entities to
adopt a fair value based method of accounting for employee stock option
plans (whereby compensation cost is measured at the grant date based on
the value of the award and is recognized over the employee service
period) rather than the current intrinsic value based method of
accounting (whereby compensation cost is measured at the grant date as
the difference between market value and the price for the employee to
acquire the stock). If the Company elects to continue using the
intrinsic value method of accounting, pro forma disclosures of net income
and earnings per share, as if the fair value based method of accounting
had applied, will need to be disclosed. Management has decided that the
Company will not adopt the fair value based method of accounting for the
Company's stock option plans and will include the required pro forma
disclosures in the annual financial statements.
5. COMMON STOCK OFFERINGS
In May 1996, the Company completed a public offering of 3,018,750
shares of its Class A Common Stock at a price of $22.50 per share. The
offering raised net proceeds of $63.1 million, after deduction of fees
and expenses of $4.8 million.
In October 1996, the Company completed a public offering of
1,194,722 shares of its Class A Common Stock, on behalf of selling
shareholders, at a price of $45 per share. 937,500 of the shares
resulted from the conversion to Class A Common Stock of all of the
outstanding Series A Preferred Stock. Additionally, outstanding warrants
to purchase the Company's Class A Common Stock were exercised by the
warrant holders and the underlying shares of Class A Common Stock were
sold. The Company received the exercise price of the warrants and stock
options, approximately $2.1 million, but the proceeds from the offering
were received by the selling shareholders. Had the conversion of the
Series A Preferred Stock occurred at the beginning of the quarter and the
year to date period, the proforma earnings per share for the three and
nine months ended September 30, 1996 would have been $0.12 and $0.28,
respectively.
6. ACQUISITION
As of May 13, 1996, the Company, through its 70% owned subsidiary
ACC TelEnterprises Ltd., purchased certain assets of Internet Canada
Corp., a company based in Toronto, Canada, which is engaged in the
business of providing internet access and home page design and
development. The purchase price was Cdn. $3.0 million plus additional
amounts to be calculated based on the number of customer subscribers at
various dates, with the total not to exceed Cdn. $7.0 million. As of
October 31, 1996, Cdn. $4.2 million has been paid.
7. STOCK SPLIT
On July 14, 1996, the Company's Board of Directors authorized a
three-for-two stock split, in the form of a stock dividend issued on
August 8, 1996, of the Company's Class A Common Stock to shareholders of
record as of July 3, 1996. Share and per share amounts in the
accompanying financial statements and footnotes have been adjusted for
the split.
1. MINORITY INTEREST REPURCHASE
During the quarter, the Company made a cash tender offer of Cdn.
$21.50 per share (total purchase price of Cdn. $49.4 million or US $36.0
million) for the repurchase of the minority-held shares of ACC
TelEnterprises Ltd. As of the beginning of the quarter, the Company
owned approximately 70% of the issued and outstanding common shares of
ACC TelEnterprises Ltd. and the remaining common shares were publicly
held. In September, 1996, the tender offer was approved by the Boards of
Directors of both companies.
In October, 1996, 1.8 million of the outstanding shares,
representing approximately 80% of the minority interest, were tendered
and purchased by the Company, increasing the Company's ownership in ACC
Canada to 93%. As fewer than 90% of the publicly held shares (on a fully
diluted basis) were deposited under the tender offer, the Company intends
to consider other transactions that will result in ACC TelEnterprises
becoming a wholly-owned subsidiary of the Company. The Company has
formed a subsidiary which will amalgamate with ACC Canada, subject to
majority approval by shareholders. The Company will be able to vote the
shares acquired in the tender offer. The Company expects to have fully
acquired the minority interest by the end of the fourth quarter of 1996.
2. SUBSEQUENT EVENTS
In October, 1996, the Company's Chief Executive Officer was elected
Chairman of the Board of Directors of the Company. The former Chairman
resigned to pursue other entrepreneurial interests, but will remain a
director and employee of the Company. If the former Chairman's employment
with the Company were to terminate, he would be entitled to receive from
the Company a payment of $1 million, payable in three equal annual
installments, subject to the terms and conditions of his employment
agreement.
The Company has received a commitment letter from a financial
institution to provide a $100 million credit facility to the Company,
which will amend and restate the current $35 million credit facility.
The Company expects to execute definitive credit documents and close on
the new credit facility in the fourth quarter. The Company anticipates
that the new credit facility will be syndicated among several financial
institutions. The facility will provide additional working capital,
capital for acquisitions, and will contain generally more flexible terms
and conditions than the current credit facility. If the facility is
closed in the fourth quarter of 1996, the maximum aggregate principal
amount of the new facility would be required to be reduced by $8 million
per quarter commencing on December 31, 1998 until September 30, 2000, and
by $9 million per quarter commencing on December 31, 2000 until maturity
of the loan in October 2001.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion includes certain forward-looking
statements. Such forward-looking statements are subject to material
risks and uncertainties and other factors. For a discussion of material
risks and uncertainties and other factors that could cause actual results
to differ materially from the forward-looking statements, see "Recent
Losses; Potential Fluctuations in Operating Results," "Substantial
Indebtedness; Need for Additional Capital," "Dependence on Transmission
Facilities-Based Carriers and Suppliers," "Potential Adverse Effects of
Regulation," "Increasing Domestic and International Competition," "Risks
of Growth and Expansion," "Risks Associated with International
Operations," "Dependence on Effective Information Systems," "Risks
Associated With Acquisitions, Investments and Strategic Alliances,"
"Technological Changes May Adversely Affect Competitiveness and Financial
Results," "Dependence on Key Personnel," "Risks Associated with Financing
Arrangements; Dividend Restrictions," "Holding Company Structure;
Reliance on Subsidiaries for Dividends," "Potential Volatility of Stock
Price" and "Risks Associated with Derivative Financial Instruments"
included under the caption "Company Risk Factors" in Exhibit 99.1 hereto,
which is incorporated by reference herein, and the Company's periodic
reports and other documents filed with the SEC.
GENERAL
The Company's revenue is comprised of toll revenue and local service
and other revenue. Toll revenue consists of revenue derived from ACC's
long distance and operator-assisted services. Local service and other
revenue consists of revenue derived from the resale of local exchange
services, data line services, direct access lines and monthly
subscription fees. Network costs consist of expenses associated with the
leasing of transmission lines, access charges and certain variable costs
associated with the Company's network. The following table shows the
total revenue (net of intercompany revenue) and billable long distance
minutes of use attributable to the Company's U.S., Canadian and U.K.
operations during the three and nine month periods ended September 30,
1996 and 1995:
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
1996 1995
(Dollars and minutes in thousands)
AMOUNT PERCENT AMOUNT PERCENT
------- ------- -------- -------
Total Revenue:
United States $ 23,107 29.9% $ 15,291 33.3%
Canada 29,804 38.6% 20,547 44.8%
United Kingdom 24,374 31.5% 10,073 21.9%
-------- -------- --------- -------
Total $ 77,285 100.0% $ 45,911 100.0%
BILLABLE LONG DISTANCE MINUTES OF USE:
United States 142,157 31.3% 119,399 41.7%
Canada 170,667 37.6% 120,585 42.2%
United Kingdom 141,452 31.1% 46,119 16.1%
--------- ----- -------- -----
Total 454,276 100.0% 286,103 100.0%
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1995
--------------------- ------------------
(Dollars and minutes in thousands)
AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- -------
Total Revenue:
United States $ 71,840 32.0% $43,863 34.5%
Canada 87,370 39.0% 59,737 46.9%
United Kingdom 65,017 29.0% 23,641 18.6%
--------- ------- --------- ------
Total $224,227 100.0% $127,241 100.0%
BILLABLE LONG DISTANCE MINUTES OF USE:
United States 417,607 32.4% 343,813 41.6%
Canada 497,870 38.6% 376,829 45.5%
United Kingdom 374,315 29.0% 106,605 12.9%
------- ------ -------- -----
Total 1,289,792 100.0% 827,247 100.0%
The following table presents certain information concerning toll
revenue per billable long distance minute and network cost per billable
long distance minute attributable to the Company's U.S., Canadian and
U.K. operations during the three and nine month periods ended September
30, 1996 and 1995:
<PAGE>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
September 30,
1996 1995 1996 1995
------ ------ ----- -----
TOLL REVENUE PER BILLABLE LONG DISTANCE MINUTE:
United States $.141 $.121 $.155 $.119
Canada .152 .149 .154 .145
United Kingdom .172 .215 .173 .220
NETWORK COST PER BILLABLE LONG DISTANCE MINUTE:
United States $.100 $.069 $.109 $.069
Canada .108 .107 .110 .102
United Kingdom .114 .152 .117 .159
The Company believes that its historic revenue growth as well as its
historic network costs and results of operations for its Canadian and
U.K. operations generally reflect the state of development of the
Company's operations, the Company's customer mix and the competitive and
deregulatory environment in those markets. For U.S. operations, 1996
revenue and network cost per minute have been increased by non-recurring
international carrier sales in the second quarter of 1996. The Company
believes that toll revenue per billable minute and network cost per
billable minute will be lower in future periods, due to competitive
pressures. The Company entered the U.S., Canadian and U.K.
telecommunications markets in 1982, 1985 and 1993, respectively.
Deregulatory influences have affected the telecommunications
industry in the U.S. since 1984 and the U.S. market has experienced
considerable competition for a number of years. The competitive
influences on the pricing of ACC U.S.'s services and network costs have
been stabilizing during the past few years. This may change in the
future as a result of recent U.S. legislation that further opens the
market to competition, particularly from the regional operating companies
("RBOCs"). The Company expects competition based on price and service
offerings to increase.
The deregulatory trend in Canada, which commenced in 1989, has
increased competition. ACC Canada experienced significant downward
pressure on the pricing of its services during 1994. Although revenue
per minute has increased from 1995 to 1996 due to changes in customer and
product mix, the Company expects such downward pressure to continue,
however it is expected that the pricing pressure may abate over time as
the market matures. The impact of this pricing pressure on revenues of
ACC Canada is being offset by an increase in the Canadian residential and
student billable minutes of usage as a percentage of total Canadian
billable minutes of usage, and introduction of new products and services
including 800 service, local exchange resale, and internet services. Toll
revenue per billable minute attributable to residential and student
customers in Canada generally exceeds the toll revenue per billable
minute attributable to commercial customers. The Company expects that,
based on existing and anticipated regulations and rulings, its Canadian
contribution charges (access charges to originate calls from and
terminate calls in the local exchange telephone network) will increase
by up to approximately Cdn. $2.0 million in 1997 over 1996 levels, which
the Company will seek to offset with increased volume efficiencies, and
additional reductions in contribution rates may also offset this
increase. The Company also believes that its network costs per billable
minute in Canada may decrease during periods after 1996 if there is an
anticipated increase in long distance transmission facilities available
for lease from Canadian transmission facilities-based carriers as a
result of expected growth in the number and capacity of transmission
networks in that market. The foregoing forward-looking statements are
based upon expectations of actions that may be taken by third parties,
including Canadian regulatory authorities and transmission facilities-
based carriers. If such third parties do not act as expected, the
Company's actual results may differ materially from the foregoing
discussion.
The Company believes that, because deregulatory influences have only
fairly recently begun to impact the U.K. telecommunications industry, the
Company will continue to experience a significant increase in revenue
from that market during the next several quarters. The foregoing belief
is based upon expectations of actions that may be taken by U.K.
regulatory authorities and the Company's competitors; if such third
parties do not act as expected, the Company's revenues in the U.K. might
not increase. If ACC U.K. were to experience increased revenues, the
Company believes it should be able to enhance its economies of scale and
scope in the use of the fixed cost elements of its network.
Nevertheless, the deregulatory trend in that market is expected to result
in competitive pricing pressure on the Company's U.K. operations which
could adversely affect revenues and margins. Since the U.K. market for
transmission facilities is dominated by British Telecommunications PLC
("British Telecom") and Mercury Communications Ltd. ("Mercury"), the
downward pressure on prices for services offered by ACC U.K. may not be
accompanied by a corresponding reduction in ACC U.K.'s network costs in
the short term and, consequently, could adversely affect the Company's
business, results of operations and financial condition, particularly in
the event revenue derived from the Company's U.K. operations accounts for
an increasing percentage of the Company's total revenue. Moreover, the
Company's U.K. operations are highly dependent upon the transmission
lines leased from British Telecom. As each of the telecommunications
markets in which it operates continues to mature, the rate of growth in
its revenue and customer base in each such market is likely to decrease
over time.
Since the commencement of the Company's operations, the Company has
undertaken a program of developing and expanding its service offerings,
geographic focus and network. In connection with this development and
expansion, the Company has made significant investments in
telecommunications circuits, switches, equipment and software. These
investments generally are made significantly in advance of anticipated
customer growth and resulting revenue. The Company also has increased
its sales and marketing, customer support, network operations and field
services commitments in anticipation of the expansion of its customer
base and targeted geographic markets. The Company expects to continue to
expand the breadth and scale of its network and related sales and
marketing, customer support and operations activities. These expansion
efforts are likely to cause the Company to incur significant increases in
expenses from time to time, in anticipation of potential future growth in
the Company's customer base and targeted geographic markets.
The Company's operating results have fluctuated in the past and they
may continue to fluctuate significantly in the future as a result of a
variety of factors, some of which are beyond the Company's control. The
Company expects to focus in the near term on building and increasing its
customer base, service offerings and targeted geographic markets, which
will require it to increase significantly its expenses for marketing and
development of its network and new services, and may adversely impact
operating results from time to time. The Company's sales to other long
distance carriers have been increasing due to the Company's marketing
efforts to promote its lower international network costs. Revenues from
other resellers accounted for approximately 42%, 15% and 24% of the
revenues of ACC U.S., ACC Canada and ACC U.K., respectively, in the third
quarter of 1996 and 45%, 14% and 17% for the nine months ended September
30, 1996. With respect to these customers, the Company competes almost
exclusively on price, does not have long term contracts and generates
lower gross margins as a percentage of revenue. The Company's primary
interest in carrier revenue is to utilize excess capacity on its network.
Management believes that carrier revenue will represent less than 20% of
consolidated total revenue as the core businesses continue to grow. The
foregoing forward-looking statement is based upon expectations with
respect to growth in the Company's customer base and total revenues. If
such expectations are not realized, the Company's actual results may
differ materially from the foregoing discussion.
RESULTS OF OPERATIONS
The following table presents, for the three and nine month periods
ended September 30, 1996 and 1995, certain Statement of Operations data
expressed as a percentage of total revenue{(1)}:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30,
1996 1995 1996 1995
------- ------ ----- -----
Revenue:
Toll revenue 90.9% 92.2% 92.0% 93.7%
Local service and other 9.1 7.8 8.0 6.3
------ ------ ------ ------
Total revenue 100.0 100.0 100.0 100.0
Network costs 63.2 61.2 64.1 62.2
------ ------ ------ --------
Gross profit 36.8 38.8 35.9 37.8
Other operating expenses:
Depreciation and amortization 5.5 6.6 5.4 6.6
Selling, general and
administrative 27.2 33.0 26.3 32.5
------ ------ ----- ------
Total other operating expenses 32.7 39.6 31.7 39.1
Income (loss) from operations 4.1 (0.8) 4.2 (1.3)
Total other income (expense) (0.2) (2.9) (1.1) (3.0)
Income (loss) from operations
before provision
for income taxes and minority
interest 3.9 (3.7) 3.1 (4.3)
Provision for income taxes .7 .5 .6 .4
Minority interest in (income) loss
of consolidated subsidiary (.4) .3 (0.4) .2
------ ------ ------ ------
Income (loss) from continuing
operations 2.8% (3.9)% 2.1% (4.5)%
------ -------- ------ ------
(1) Includes the results of operations of Metrowide Communications
acquired on August 1, 1995.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1995
Revenue. Total revenue for the three months ended September 30,
1996 increased by 68.4% to $77.3 million from $45.9 million for the same
period in 1995, reflecting growth in toll revenue and local service and
other revenue. Long distance toll revenue for the 1996 quarter increased
by 66.0% to $70.2 million from $42.3 million in the 1995 quarter. In the
U.S., long distance toll revenue increased 39.3% as a result of a 19.0%
increase in billable minutes of use, primarily due to increased
international sales to carriers. These international sales have higher
rates per minute, also contributing to the increase in revenue. In
Canada, long distance toll revenue increased 44.0%, as a result of a
41.5% increase in billable minutes (primarily due to a 40.0% increase in
the number of customer accounts from approximately 160,000 to
approximately 224,000), and an increase in prices due to additional
residential customers which typically have a higher revenue per minute.
In the U.K., long distance toll revenue increased 144.4%, due to
significant volume increases (primarily due to a 187.5% increase in the
number of customer accounts from approximately 16,000 to approximately
46,000), offset by lower prices that resulted from entering the
commercial and residential markets and from competitive pricing pressure.
Since the end of 1994, ACC's revenue per minute on a consolidated basis
has been increasing slightly as a result of the increasing percentage of
U.K. revenues and the Company's introduction of higher price per minute
products, including international carrier revenue. Exchange rates did not
have a material impact on revenue in either the U.K. or Canada. At
September 30, 1996, the Company had approximately 382,000 customer
accounts compared to approximately 286,000 customer accounts at September
30, 1995, an increase of 33.6%.
For the three months ended September 30, 1996, local service and
other revenue increased by 96.7% to $7.1 million from $3.6 million for
the same period in 1995. This increase was primarily due to the
Metrowide Communications acquisition which occurred on August 1, 1995
(approximately $1.6 million) and operations in upstate New York
(approximately $1.6 million).
GROSS PROFIT. Gross profit, defined as revenue less network costs,
for the third quarter increased to $28.5 million from $17.8 million for
the 1995 quarter, primarily due to the increases in revenue discussed
above.
Expressed as a percentage of revenue, gross profit decreased to 36.8% for
the 1996 quarter from 38.8% for the 1995 quarter due to an increase in
lower margin carrier traffic in the U.S, offset partially by improved
margins in Canada due to network efficiencies.
OTHER OPERATING EXPENSES. Depreciation and amortization expense
increased to $4.3 million for the third quarter of 1996 from $3.0 million
for the third quarter of 1995. Expressed as a percentage of revenue,
these costs decreased to 5.5% in 1996 from 6.6% in the 1995 quarter,
reflecting the increase in revenue realized from year to year. The $1.3
million increase in depreciation and amortization expense was primarily
attributable to assets placed in service throughout 1995 and the first
nine months of 1996, particularly the addition of a switching center in
Manchester, England. Amortization of approximately $0.3 million
associated with the customer base and goodwill recorded in the Metrowide
Communications and Internet Canada acquisitions also contributed to the
increase.
Selling, general and administrative expenses for the third quarter
of 1996 were $21.0 million compared with $15.2 million for the third
quarter of 1995. Expressed as a percentage of revenue, selling, general
and administrative expenses were 27.2% for the third quarter of 1996,
compared to 33.0% for the third quarter of 1995. The increase in
selling, general and administrative expenses was primarily attributable
to a $3.5 million increase in personnel related costs and a $1.4 million
increase in customer related costs associated with the growth of the
Company's customer bases and geographic expansion in each country. Also
included in selling, general and administrative expenses for the third
quarter of 1996 was approximately $1.2 million related to the Company's
local service market sector in New York State compared to $0.4 million
for the third quarter of 1995. The reduction in selling, general and
administrative expenses as a percent of revenue is due to the Company's
growth and increased efficiency.
OTHER INCOME (EXPENSE). Interest expense decreased to $1.0 million
for the third quarter of 1996 compared to $1.4 million in 1995, due
primarily to the repayment, in May 1996, of borrowings under the
Company's credit facility. Interest income increased to $0.8 million for
the 1996 quarter from $0.1 million in the 1995 quarter due to invested
proceeds from the May 1996 Class A Common Stock offering.
Foreign exchange gains and losses reflect changes in the value of
Canadian and British currencies relative to the U.S. dollar for amounts
borrowed by the foreign subsidiaries from ACC Corp. The Company
continues to hedge substantially all intercompany loans to foreign
subsidiaries in an attempt to reduce the impact of transaction gains and
losses. The Company does not engage in speculative foreign currency
transactions. Due to this hedging, foreign exchange rate changes
resulted in a nominal gain for the third quarter of 1996 compared to a
nominal loss for the same period in 1995.
Provision for income taxes reflects the anticipated income tax
liability of the Company's U.S. operations based on its pretax income for
the period. The provision for income taxes increased during the third
quarter of 1996 compared to the same period in 1995 due to increased
profitability in the U.S business. The Company does not provide for
income taxes nor recognize a benefit related to income in foreign
subsidiaries due to net operating loss carryforwards generated by those
subsidiaries in prior years.
Minority interest in (income) loss of consolidated subsidiary
reflects the portion of the Company's Canadian subsidiary's income or
loss attributable to the approximately 30% (approximately 7% subsequent
to October, 1996) of that subsidiary's common stock that is publicly
traded in Canada. For the third quarter of 1996, minority interest in
income of the consolidated subsidiary was $0.3 million compared to a
minority interest in loss of consolidated subsidiary of $0.1 million in
the third quarter of 1995.
The Company's net income for the third quarter of 1996 was $2.2
million, compared to a net loss of $1.8 million for the third quarter of
1995. The third quarter 1996 net income resulted primarily from the
Company's operations in Canada (approximately $0.6 million), operations
in the U.S. (approximately $1.3 million) and operations in the U.K.
(approximately $0.3 million).
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1995
Revenue. Total revenue for the nine months ended September 30, 1996
increased by 76.3% to $224.2 million from $127.2 million for the same
period in 1995, reflecting growth in both toll revenue and local service
and other revenue. Long distance toll revenue for 1996 increased by
73.0% to $206.4 million from $119.3 million in 1995. In the U.S., long
distance toll revenue increased 58.2% as a result of a 21.5% increase in
billable minutes of use primarily due to increased international sales to
carriers. These international sales have a higher rate per minute, also
contributing to the revenue increase. The 1996 results include $9.0
million in non-recurring carrier revenue. Excluding this non-recurring
revenue, U.S. toll revenue increased 36.3% over the same period in 1995.
In Canada, long distance toll revenue increased 40.0%, as a result of
32.1% increase in billable minutes (primarily due to the previously
mentioned increase in customer accounts) and a slight increase in prices
due to additional residential customers which typically have a higher
revenue per minute. In the U.K., long distance toll revenue increased
176.0%, due to significant volume increases (due to the previously
mentioned increase in the number of customer accounts), offset by lower
prices that resulted from expanding the commercial and residential
markets and from competitive pricing pressure. Since the end of 1994,
ACC's revenue per minute on a consolidated basis has been increasing
slightly as a result of the increasing percentage of U.K. revenues and
the Company's introduction of higher price per minute products including
international carrier revenue. In the first half of 1996, revenue per
minute increases have been higher due to the increased sales to carriers.
Exchange rates did not have a material impact on revenue in either the
U.K. or Canada.
For the nine months ended September 30, 1996, local service and
other revenue increased by 123.8% to $17.9 million from $8.0 million for
the same period in 1995. This increase was primarily due to the
Metrowide Communications acquisition which occurred on August 1, 1995
(approximately $5.8 million) and operations in upstate New York
(approximately $3.3 million).
GROSS PROFIT. Gross profit, defined as revenue less network costs,
for the nine months ended September 30, 1996 increased to $80.4 million
from $48.1 million for the 1995 period, primarily due to the increases in
revenue discussed above. Expressed as a percentage of revenue, gross
profit decreased to 35.9% for the 1996 period from 37.8% for the 1995
period due to an increase in lower margin carrier traffic in the U.S,
offset partially by improved margins in Canada due to network
efficiencies.
OTHER OPERATING EXPENSES. Depreciation and amortization expense
increased to $12.1 million for the first nine months of 1996 from $8.4
million for the same period of 1995. Expressed as a percentage of
revenue, these costs decreased to 5.4% in 1996 from 6.6% in the 1995
period, reflecting the increase in revenue realized from year to year.
The $3.7 million increase in depreciation and amortization expense was
primarily attributable to assets placed in service throughout 1995 and in
the first nine months of 1996, particularly the addition of a switching
center in Manchester, England. Amortization of approximately $0.8
million associated with the customer base and goodwill recorded in the
Metrowide Communications and Internet Canada acquisitions also
contributed to the increase.
Selling, general and administrative expenses for the first nine
months of 1996 were $59.0 million compared with $41.3 million for the
same period of 1995. Expressed as a percentage of revenue, selling,
general and administrative expenses were 26.3% for the first nine months
of 1996, compared to 32.5% for the same period of 1995. The increase in
selling, general and administrative expenses was primarily attributable
to a $9.9 million increase in personnel related costs and a $5.0 million
increase in customer related costs associated with the growth of the
Company's customer bases and geographic expansion in each country. Also
included in selling, general and administrative expenses for the first
nine months of 1996 was approximately $3.1 million related to the
Company's local service market sector in New York State compared to $1.3
million for the same period of 1995. The reduction in selling, general
and administrative expenses as a percent of revenue is due to the
Company's growth and increased efficiency.
OTHER INCOME (EXPENSE). Interest expense increased to $3.9 million
for the nine months ended September 30, 1996, from $3.8 million for the
same period in 1995, as a result of the accrual of the $2.1 million
interest payment due to the credit facility lenders, offset by the
interest expense incurred with the subordinated debt in 1995. Interest
income increased to $1.3 million for the nine months ended September 30,
1996 compared to $0.1 million for the same period in 1995, due to the
invested proceeds from the May 1996 Class A Common Stock offering.
Foreign exchange gains and losses reflect changes in the value of
Canadian and British currencies relative to the U.S. dollar for amounts
borrowed by the foreign subsidiaries from ACC Corp. The Company
continues to hedge substantially all intercompany loans to foreign
subsidiaries in an attempt to reduce the impact of transaction gains and
losses. The Company does not engage in speculative foreign currency
transactions. Due to this hedging, foreign exchange rate changes
resulted in a nominal gain for the first nine months of 1996 compared to
a nominal loss for the same period in 1995.
Provision for income taxes reflects the anticipated income tax
liability of the Company's U.S. operations based on its pretax income for
the period. The provision for income taxes increased during the first
nine months of 1996 compared to the same period in 1995 due to increased
profitability in the U.S business. The Company does not provide for
income taxes nor recognize a benefit related to income in foreign
subsidiaries due to net operating loss carryforwards generated by those
subsidiaries in prior years.
Minority interest in (income) loss of consolidated subsidiary
reflects the portion of the Company's Canadian subsidiary's income or
loss attributable to the approximately 30% (7% subsequent to October,
1996) of that subsidiary's common stock that is publicly traded in
Canada. For the first nine months of 1996, minority interest in income
of the consolidated subsidiary was $0.9 million compared to a minority
interest in loss of consolidated subsidiary of $0.2 million for the same
period of 1995.
The Company's net income for the first nine months of 1996 was $4.5
million, compared to a net loss of $5.8 million for the same period of
1995. The 1996 net income resulted primarily from the Company's
operations in Canada (approximately $2.1 million), and operations in the
U.S. (approximately $2.9 million) offset by net losses in the U.K.
(approximately $0.5 million).
LIQUIDITY AND CAPITAL RESOURCES
In May, 1996, the Company raised net proceeds of $63.1 million
through the issuance of 3,018,750 million shares of its Class A Common
Stock. The proceeds from this offering were used to reduce all
indebtedness under the Company's credit facility and to finance the
repurchase of the minority interest in ACC Canada, and will also be used
for working capital needs. Historically, the Company has satisfied its
working capital requirements through cash flow from operations, through
borrowings and financings from financial institutions, vendors and other
third parties, and through the issuance of securities. The Company also
received net proceeds of approximately $2.1 million from the exercise of
options and warrants associated with the Class A Common Stock offering on
behalf of selling shareholders in October, 1996.
Net cash flows used in operations were $1.6 million for the nine
months ended September 30, 1996 compared to net cash provided by
operations of $3.0 million for the same period in 1995. The decrease of
$4.6 million primarily resulted from payments of previously accrued
network bills, particularly in the U.K., offset by a significant increase
in accounts receivable resulting from the expansion of the Company's
carrier segment revenue and customer base and related revenues in all
business segments. The Company has a carrier customer with a significant
accounts receivable balance. The Company has entered into a traffic
exchange agreement with the customer, under which the Company terminates
traffic over the customer's network as payment in kind for the
accumulated receivable balance. The receivable balance was approximately
$8.3 million at the beginning of the arrangement, but has been reduced to
approximately $4.0 million as of the end of October, 1996. Although the
Company expects to have fully received the balance by the end of the
first quarter of 1997, there are no assurances that the customer will be
financially viable until that time.
Net cash flows used in investing activities were $17.1 million and
$10.3 million for the nine months ended September 30, 1996 and 1995,
respectively. The increase of approximately $6.8 million in net cash
flow used in investing activities during 1996 as compared to 1995 was
primarily attributable to an increase in capital expenditures incurred by
the U.S. operation for local service (approximately $1.9 million), for
computer software ($1.8 million), and for the purchase of assets and
customer base from Internet Canada.
Accounts receivable increased by 36.8% at September 30, 1996 as
compared to December 31, 1995 as a result of expansion of the Company's
customer base due to sales and marketing efforts.
The Company's principal need for working capital is to meet its
selling, general and administrative expenses as its business expands. In
addition, the Company's capital resources have been used for the
Metrowide Communications and Internet Canada acquisitions, capital
expenditures, various customer base acquisitions, prior to the
termination thereof during the third quarter of 1995, payments of
dividends to holders of its Class A Common Stock, and, subsequent to the
end of the quarter, the repurchase of the minority interest in ACC
Canada. The Company has had a working capital deficit at the end of the
last several years but, at September 30, 1996, the Company had a working
capital surplus of approximately $30.2 million compared to a deficit of
approximately $10.3 million at December 31, 1995, due to the receipt of
the proceeds from the Class A Common Stock offering in May, 1996. The
working capital surplus that existed at September 30, 1996 was reduced in
October, 1996 when a significant portion of the minority held shares in
ACC TelEnterprises was purchased.
The Company anticipates that, throughout the remainder of 1996, its
capital expenditures will be approximately $10.0 million for the
expansion of its network, the acquisition, upgrading and development of
switches and other telecommunications equipment as conditions warrant,
the development, licensing and integration of its management information
system and other software, the development and expansion of its service
offerings and customer programs and other capital expenditures. ACC
expects that it will continue to make significant capital expenditures
during future periods, particularly for switching equipment for the UK
(located in Bristol) and for local exchange switches in New York, New
York; White Plains, New York; Boston, Massachusetts; and Springfield,
Massachusetts. The Company's actual capital expenditures and cash
requirements will depend on numerous factors, including the nature of
future expansion (including the extent of local exchange services, which
is particularly capital intensive), and acquisition opportunities,
economic conditions, competition, regulatory developments, the
availability of capital and the ability to incur debt and make capital
expenditures under the terms of the Company's financing arrangements.
The Company is obligated to pay the lenders under the credit
facility a contingent interest payment based on the appreciation in
market value of 140,000 shares of the Company's Class A Common Stock from
$9.95 per share, subject to a minimum of $0.75 million and a maximum of
$2.1 million. The payment is due upon the earlier of (i) January 21,
1997, (ii) any material amendment to the credit facility, (iii) the
signing of a letter of intent to sell the Company or any material
subsidiary, or (iv) the cessation of active trading of the Company's
Class A Common Stock on other than a temporary basis. The Company is
accruing this obligation over the 18-month period ending January 21, 1997
($1.7 million has been accrued through September 30, 1996).
As of September 30, 1996, the Company had approximately $23.1
million of cash and cash equivalents and maintained the $35.0 million
credit facility, subject to availability under a borrowing base formula
and certain other conditions (including borrowing limits based the
Company's operating cash flow), under which no borrowings were
outstanding and $3.0 million was reserved for letters of credit. The
maximum aggregate principal amount of the credit facility is required to
be reduced by $2.5 million per quarter commencing on July 1, 1997 and by
$2.9 million per quarter commencing on January 1, 1999 until maturity on
July 1, 2000. The Company has received a commitment letter from a
financial institution to provide a $100 million credit facility to the
Company, which will amend and restate the Company's current credit
facility. The Company expects to execute definitive credit documents and
close on the new credit facility in the fourth quarter. The Company
anticipates that the new credit facility will be syndicated among several
financial institutions. The facility will provide additional working
capital, capital for acquisitions and market expansion, and contains
generally more flexible terms and conditions than the current credit
facility. If the facility is closed in the fourth quarter of 1996, the
maximum aggregate principal amount of the new facility would be required
to be reduced by $8 million per quarter commencing on December 31, 1998
until September 30, 2000, and by $9 million per quarter commencing on
December 31, 2000 until maturity of the loan in October 2001.
During the quarter, the Company made a cash tender offer of Cdn.
$21.50 per share (total purchase price of Cdn. $49.4 million or US $36.0
million) for the repurchase of the minority-held shares of ACC
TelEnterprises Ltd. In October, 1996, the Company paid Cdn. $36.0
million to minority shareholders when 1.8 million of the outstanding
shares were tendered. Approximately .5 million shares are still
outstanding, and the Company plans to acquire these shares during the
fourth quarter of 1996, at a cost of Cdn. $ 10.0 million.
In addition, the Company has $10.0 million of capital lease
obligations which mature during 1996, 1997 and 1998. The Company's
financing arrangements, which are secured by substantially all of the
Company's assets and the stock of certain subsidiaries, require the
Company to maintain certain financial ratios and prohibit the payment of
dividends.
In the normal course of business, the Company uses various financial
instruments, including derivative financial instruments, for purposes
other than trading. These instruments include letters of credit,
guarantees of debt, interest rate swap agreements and foreign currency
exchange contracts relating to intercompany payables of foreign
subsidiaries. The Company does not use derivative financial instruments
for speculative purposes. Foreign currency exchange contracts are used
to mitigate foreign currency exposure and are intended to protect the
U.S. dollar value of certain currency positions and future foreign
currency transactions. The aggregate fair value, based on published
market exchange rates, of the Company's foreign currency contracts at
September 30, 1996 was $46.4 million. When applicable, interest rate
swap agreements are used to reduce the Company's exposure to risks
associated with interest rate fluctuations. As is customary for these
types of instruments, collateral is generally not required to support
these financial instruments.
By their nature, all such instruments involve risk, including the
risk of nonperformance by counterparties, and the Company's maximum
potential loss may exceed the amount recognized on the Company's balance
sheet. However, at September 30, 1996, in management's opinion there was
no significant risk of loss in the event of nonperformance of the
counterparties to these financial instruments. The Company controls its
exposure to counterparty credit risk through monitoring procedures and by
entering into multiple contracts, and management believes that reserves
for losses are adequate. Based upon the Company's knowledge of the
financial position of the counterparties to its existing derivative
instruments, the Company believes that it does not have any significant
exposure to any individual counterparty or any major concentration of
credit risk related to any such financial instruments.
The Company believes that, under its present business plan, the net
proceeds from the public offering of Class A Common Stock of the Company,
together with borrowing availability under the existing credit facility,
and cash from operations will be sufficient to meet anticipated working
capital and capital expenditure requirements of its existing operations.
The forward-looking information contained in the previous sentence may be
affected by a number of factors, including the matters described in this
paragraph and in Exhibit 99.1 attached hereto. The Company may need to
raise additional capital from public or private equity or debt sources in
order to finance its operations, capital expenditures and growth for
periods after 1996. Moreover, the Company believes that continued growth
and expansion through acquisitions, investments and strategic alliances
is important to maintain a competitive position in the market and,
consequently, a principal element of the Company's business strategy is
to develop relationships with strategic partners and to acquire assets or
make investments in businesses that are complementary to its current
operations. The Company may need to raise additional funds in order to
take advantage of opportunities for acquisitions, investments and
strategic alliances or more rapid international expansion, to develop new
products or to respond to competitive pressures. If additional funds are
raised through the issuance of equity securities, the percentage
ownership of the Company's then current shareholders may be reduced and
such equity securities may have rights, preferences or privileges senior
to those of holders of Class A Common Stock. There can be no assurance
that the Company will be able to raise such capital on acceptable terms
or at all. In the event that the Company is unable to obtain additional
capital or is unable to obtain additional capital on acceptable terms,
the Company may be required to reduce the scope of its presently
anticipated expansion opportunities and capital expenditures, which could
have a material adverse effect on its business, results of operations and
financial condition and could adversely impact its ability to compete.
The Company may seek to develop relationships with strategic
partners both domestically and internationally and to acquire assets or
make investments in businesses that are complementary to its current
operations. Such acquisitions, strategic alliances or investments may
require that the Company obtain additional financing and, in some cases,
the approval of the holders of debt of the Company. The Company's
ability to effect acquisitions, strategic alliances or investments may be
dependent upon its ability to obtain such financing and, to the extent
applicable, consents from its debt or preferred stock holders.
SFAS NO. 123
The Company is required to adopt SFAS No. 123, "Accounting for
Stock-Based Compensation" in 1996. This Statement encourages entities to
adopt a fair value based method of accounting for employee stock option
plans (whereby compensation cost is measured at the grant date based on
the value of the award and is recognized over the employee service
period), rather than the current intrinsic value based method of
accounting (whereby compensation cost is measured at the grant date as
the difference between market value and the price for the employee to
acquire the stock). If the Company elects to continue using the
intrinsic value method of accounting, pro forma disclosures of net income
and earnings per share, as if the fair value based method of accounting
had been applied, will need to be disclosed. Management has decided that
the Company will not adopt the fair value based method of accounting for
the Company's stock option plans and will include the required pro forma
disclosures in the annual financial statements.
<PAGE>
- -
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(c) Exhibits. See Exhibit Index.
(b) Reports on Form 8-K. On September 17, 1996, the Company filed a
Report on Form 8-K to report, under the heading of Item 5, Other Events,
on the cash tender offer for the minority-held shares of ACC
TelEnterprises Ltd., the election of a new Chairman of the Board of
Directors, the proposed network expansion in the U.K and the U.S., the
new proposed credit facility, and the acquisition of assets from Internet
Canada Corp.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused the Report to be signed on its behalf by
the Undersigned thereunto duly authorized.
ACC CORP.
(Registrant)
Dated: November 13, 1996 /s/ Michael R. Daley
Michael R. Daley
Executive Vice President
and Chief Financial Officer
Dated: November 13, 1996 /s/ Sharon L. Barnes
Sharon L. Barnes
Controller
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION LOCATION
11.1 Statement re Computation of See note 3 to the notes to
Per Share Earnings Consolidated Financial
Statements filed herewith
27.1 Financial Data Schedule Filed herewith
99.1 Company Risk Factors Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACC CORP.'S
FINANCIAL STATEMENTS CONTAINED IN ITS SEPTEMBER 30, 1996 FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 23,122
<SECURITIES> 0
<RECEIVABLES> 57,216
<ALLOWANCES> 3,889
<INVENTORY> 392
<CURRENT-ASSETS> 82,566
<PP&E> 98,686
<DEPRECIATION> 35,121
<TOTAL-ASSETS> 173,066
<CURRENT-LIABILITIES> 52,323
<BONDS> 6,884
11,929
0
<COMMON> 247
<OTHER-SE> 96,217
<TOTAL-LIABILITY-AND-EQUITY> 173,066
<SALES> 206,362
<TOTAL-REVENUES> 224,227
<CGS> 143,803
<TOTAL-COSTS> 58,977
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,901
<INTEREST-EXPENSE> 3,908
<INCOME-PRETAX> 6,812
<INCOME-TAX> 1,396
<INCOME-CONTINUING> 4,517
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,517
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99.1
COMPANY RISK FACTORS
AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE
"COMPANY" AND "ACC" REFER TO ACC CORP. AND ITS SUBSIDIARIES, INCLUDING ACC
LONG DISTANCE CORP. ("ACC U.S."), ACC TELENTERPRISES LTD., THE COMPANY'S
CANADIAN SUBSIDIARY ("ACC CANADA"), AND ACC LONG DISTANCE UK LTD.
("ACC U.K."). REFERENCES HEREIN TO "DOLLAR" AND "$" ARE TO UNITED STATES
DOLLARS, REFERENCES TO "CDN. $" ARE TO CANADIAN DOLLARS, REFERENCES TO
"<pound-sterling>" ARE TO ENGLISH POUNDS STERLING, THE TERMS "UNITED
STATES" AND "U.S." MEAN THE UNITED STATES OF AMERICA AND, UNLESS THE
CONTEXT OTHERWISE REQUIRES, ITS STATES, TERRITORIES AND POSSESSIONS AND ALL
AREAS SUBJECT TO ITS JURISDICTION, AND THE TERMS "UNITED KINGDOM" AND
"U.K." MEAN ENGLAND, SCOTLAND AND WALES.
Recent Losses; Potential Fluctuations in Operating Results
Although the Company has recently experienced revenue growth on an
annual basis and net income in the first three quarters of 1996, it has
incurred net losses and losses from continuing operations during each of
its last two fiscal years. The 1995 net loss of $5.4 million resulted
primarily from the expansion of operations in the U.K. (approximately $6.8
million), increased net interest expense associated with additional
borrowings (approximately $4.9 million), increased depreciation and
amortization from the addition of equipment and costs associated with the
expansion of local service in New York State (approximately $1.6 million)
and management restructuring costs (approximately $1.3 million), offset by
positive operating income from the U.S. and Canadian long distance
subsidiaries of approximately $9.0 million. The 1994 net loss of $11.3
million resulted primarily from operating losses due to expansion in the
U.K. (approximately $5.6 million), the recording of the valuation allowance
against deferred tax benefits (approximately $3.0 million), implementation
of equal access in Canada (approximately $2.2 million) and operating
losses due to expansion in local telephone service in the U.S.
(approximately $0.9 million). There can be no assurance that revenue
growth will continue or that the Company will be able to maintain the
profitability it attained in the first three quarters of 1996. 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 markets to more locations in its existing markets, and
when conditions warrant, to deregulating international 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. As each of the telecommunications markets in which the Company
operates continues to mature, growth in the Company's revenues and customer
base is likely to decrease over time.
The Company's operating results have fluctuated in the past and
may fluctuate significantly in the future as a result of a variety of
factors, some of which are outside of the Company's control, including
general economic conditions, specific economic conditions in the
telecommunications industry, the effects of governmental regulation and
regulatory changes, user demand, capital expenditures and other costs
relating to the expansion of operations, the introduction of new services
by the Company or its competitors, the mix of services sold and the mix of
channels through which those services are sold, pricing changes and new
service introductions by the Company and its competitors and prices charged
by suppliers. As a strategic response to a changing competitive
environment, the Company may elect from time to time to make certain
pricing, service or marketing decisions or enter into strategic alliances,
acquisitions or investments that could have a material adverse effect on
the Company's business, results of operations and cash flow. The Company's
sales to other long distance companies have been increasing. Because these
sales are at margins that are lower than those derived from most of the
Company's other revenues, this increase has in the past and may in the
future, reduce the Company's gross margins as a percentage of revenue. In
addition, to the extent that these and other long distance couriers are
less creditworthy and/or create larger credit balances, such sales may
represent a higher credit risk to the Company.
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. During 1995, the Company's income
(loss) from operations plus depreciation and amortization and asset write-
down ("EBITDA") minus capital expenditures and changes in working capital,
was $(7.0) million. The Company's leverage may adversely affect its
ability to raise additional capital. In addition, the Company's
indebtedness is expected to require significant repayments over the next
five years. The Company may need to raise additional capital from public
or private equity or debt sources in order to finance its anticipated
growth, including local service expansion 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, 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.
DEPENDENCE ON TRANSMISSION FACILITIES-BASED CARRIERS AND SUPPLIERS
The Company does not own telecommunications transmission lines.
Accordingly, telephone calls made by the Company's customers are connected
through transmission lines that the Company leases under a variety of
arrangements with transmission facilities-based long distance carriers,
some of which are or may become competitors of the Company, including AT&T
Corp. ("AT&T"), Bell Canada and British Telecommunications PLC ("British
Telecom"). Most inter-city transmission lines used by the Company are
leased on a monthly or longer-term basis at rates that currently are less
than the rates the Company charges its customers for connecting calls
through these lines. Accordingly, the Company is vulnerable to changes in
its lease arrangements, such as price increases and service cancellations.
ACC's ability to maintain and expand its business is dependent upon whether
the Company continues to maintain favorable relationships with the
transmission facilities-based carriers from which the Company leases
transmission lines, particularly in the U.K., where British Telecom and
Mercury Communications Ltd. ("Mercury") are the two principal, dominant
carriers. The Company's U.K. operations are highly dependent upon the
transmission lines leased from British Telecom. The Company generally
experiences delays in billings from British Telecom and needs to reconcile
billing discrepancies with British Telecom before making payment. Although
the Company believes that its relationships with carriers generally are
satisfactory, the deterioration or termination 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 22 regional operating companies ("RBOCs") and
other local exchange carriers, currently are subject to tariff controls and
other price constraints which in the future may be changed. Under recently
enacted U.S. legislation, constraints on the operations of the RBOCs have
been dramatically reduced, which will bring additional competitors to the
long distance market. In addition, regulatory proposals are pending that
may affect the prices charged by the RBOCs and other local exchange
carriers to the Company, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company currently acquires switches used in its North American operations
from one vendor. The Company purchases switches from such vendor for its
convenience, and switches of comparable quality may be obtained from
several alternative suppliers. However, a failure by a supplier to deliver
quality products or service products on a timely basis, or the inability to
develop alternative sources if and as required, could result in delays
which could have a material adverse effect on the Company's business,
results of operations and financial condition.
POTENTIAL ADVERSE EFFECTS OF REGULATION
Legislation that substantially revises the U.S.
Communications Act of 1934 (the "U.S. Communications Act") was signed
into law on February 8, 1996. The legislation provides specific
guidelines under which the RBOCs can provide long distance services,
which will permit the RBOCs to compete with the Company in the
provision of domestic and international long distance services. The
legislation also opens all local service markets 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's ability to compete is likely to be adversely affected.
Moreover, as a result of and to implement the legislation, certain federal
and other governmental regulations will be 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 Federal Communications Commission ("FCC") and
relevant state public service commissions ("PSCs") have the authority to
regulate interstate and intrastate rates, respectively, ownership of
transmission facilities, and the terms and conditions under which the
Company's services are provided. Federal and state regulations and
regulatory trends have had, and in the future are likely to have, both
positive and negative effects on the Company and its ability to compete.
The recent trend in both Federal and state regulation of telecommunications
service providers has been in the direction of lessened regulation. In
general, neither the FCC nor the relevant state PSCs currently regulate the
Company's long distance rates or profit levels, but either or both may do
so in the future. However, the general recent trend toward lessened
regulation has also given AT&T, the largest long distance carrier in the
U.S., increased pricing flexibility that has permitted it to compete more
effectively with smaller interexchange carriers, such as the Company.
There can be no assurance that changes in current or future Federal or
state regulations or future judicial changes would not have a material
adverse effect on the Company.
In order to provide their services, interexchange carriers,
including the Company, must generally purchase "access" from local exchange
carriers to originate calls from and terminate calls in the local exchange
telephone networks. Access charges presently represent a significant
portion of the Company's network costs in all areas in which it operates.
In the U.S., access charges generally are regulated by the FCC and the
relevant state PSCs. Under the terms of the AT&T Divestiture Decree, a
court order entered in 1982 which, among other things, required AT&T to
divest its 22 wholly-owned RBOCs from its long distance division ("AT&T
Divestiture Decree"), the RBOCs were required to price the "local
transport" portion of such access charges on an "equal price per unit of
traffic" basis. In November 1993, the FCC implemented new interim rules
governing local transport access charges while the FCC considers permanent
rules regarding new rate structures for transport pricing and switched
access competition. These interim rules have essentially maintained the
"equal price per unit of traffic" rule. However, under alternative access
charge rate structures being considered by the FCC, local exchange carriers
would be permitted to allow volume discounts in the pricing of access
charges. More recently, the FCC has informally announced that it intends,
in the near future, to undertake a comprehensive review of its regulation
of local exchange carrier access charges to better account for increasing
levels of local competition. While the outcome of these proceedings is
uncertain, if these rate structures are adopted many small interexchange
carriers, including the Company, could be placed at a significant cost
disadvantage to larger competitors, because access charges for AT&T and
other large interexchange carriers could decrease, and access charges for
small interexchange carriers could increase.
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
legislation eliminated many of the restrictions which prohibited the RBOCs
and GTOCs from providing long-haul, or inter-LATA, toll service, and thus
the Company will face additional competition. 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 U. S. Communications Act, local exchange carriers must
permit resale of their bundled local services and unbundled network
elements. Pricing rules for those services were set forth in the U.S.
Communications Act, with states directed to approve specific tariffs. In
July, 1996, the New York PSC established wholesale discounts for resale of
bundled local services. These services generally involve a discount of
17% on residential access lines and 11% on business access lines. However,
the New York PSC excluded Centrex, private line and PBX lines from the
wholesale discount, which could result in a limited ability of the Company
to resell those business services. The New York PSC also established
temporary rates for unbundled links at levels slightly below existing
rates, but also significantly above the New York Telephone rate for
complete, bundled local loops. The New York PSC is reviewing the
establishment of permanent wholesale discounts and permanent unbundled link
rates, which are expected to be in place by October, 1996. If the
permanent rates established by the New York PSC do not contain a
significant wholesale discount for bundled services, do not apply to
Centrex, private line, and PBX service, and do not reduce the rate for the
unbundled link to a level below the rate for bundled loops, the Company's
ability to compete in the provision of local service may be materially
adversely affected.
In Canada, services provided by ACC Canada are subject to or
affected by certain regulations of the Canadian Radio-television and
Telecommunications Commission (the "CRTC"). The CRTC annually reviews the
"contribution charges" (the equivalent of access charges in the U.S.) it
has assessed against the access lines leased by Canadian long distance
resellers, including the Company, from the local telephone companies in
Canada. The Company expects that, based on existing and anticipated
regulations and rulings, its Canadian contribution charges will increase by
up to approximately Cdn. $2.0 million in 1997 over 1995 levels, which the
Company will seek to offset with increased volume efficiencies. Additional
increases in these contribution charges could have a material adverse
effect on the Company's business, results of operations and financial
condition. The Canadian long distance telecommunications industry is the
subject of ongoing regulatory change. These regulations and regulatory
decisions have a direct and material effect on the ability of the Company
to conduct its business. The recent trend of such 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 in 1991, it has been the stated goal of Oftel to create
a competitive marketplace from which detailed regulation could eventually
be withdrawn. The regulatory regime currently being introduced by Oftel
has a direct and material effect on the ability of the Company to conduct
its business. Oftel has imposed mandatory rate reductions on British
Telecom in the past, which are expected to continue for the foreseeable
future, and this has had and may have, the effect of reducing the prices
the Company can charge its customers. 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.
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. Revenues from other resellers
accounted for approximately 22%, 7% and 9% of the revenues of ACC U.S., ACC
Canada and ACC U.K., respectively, in 1995, and 45%, 14% and 17% of the
revenues of ACC U.S., ACC Canada and ACC U.K. in the nine months ended
September 30, 1996 and could account for a higher percentage in the future.
With respect to these customers, the Company competes almost exclusively on
price.
Many of the Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources and
larger networks than the Company, control transmission lines and have
long-standing relationships with the Company's target customers. These
competitors include, among others, AT&T, MCI Telecommunications Corporation
("MCI") and Sprint Corp. ("Sprint") in the U.S.; Bell Canada, BC Telecom,
Inc., Unitel Communications Inc. ("Unitel") and Sprint Canada (a subsidiary
of Call-Net Telecommunications Inc.) in Canada; and British Telecom,
Mercury, AT&T and IDB WorldCom Services Inc. in the U.K. Other U.S.
carriers are also expected to enter the U.K. market. The Company also
competes with numerous other long distance providers, some of which focus
their efforts on the same business customers targeted by the Company and
selected residential customers and colleges and universities, the Company's
other target customers. In addition, through its local telephone service
business in upstate New York, the Company competes with New York Telephone
Company ("New York Telephone"), Frontier, Citizens Telephone Co., MFS
Communications Co., Inc. ("MFS") and Time Warner Cable and others,
including cellular and other wireless providers. Furthermore, the merger of
Bell Atlantic Corp. and Nynex Corp., the proposed merger of MCI and
British Telecom, 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
("Global One"), the proposed merger of Cable & Wireless PLC and 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 legislation recently enacted in the U.S., RBOCs
will be allowed to enter the long distance market, AT&T, MCI and other long
distance carriers will be allowed to enter the local telephone services
market, and any entity (including cable television companies and utilities)
will be allowed to enter both the local service and long distance
telecommunications markets. In addition, the FCC has, on several occasions
since 1984, approved or required price reductions by AT&T and, in October
1995, the FCC reclassified AT&T as a "non-dominant" carrier, which
substantially reduces the regulatory constraints on AT&T. As the Company
expands its geographic coverage, it will encounter increased competition.
Moreover, the Company believes that competition in non-U.S. markets is
likely to increase and become more similar to competition in the U.S.
markets over time as such non-U.S. markets continue to experience
deregulatory influences. Prices in the long distance industry have
declined from time to time in recent years and, as competition increases in
Canada and the U.K., prices are likely to continue to decrease. For
example, Bell Canada substantially reduced its rates during the first
quarter of 1994. The Company's competitors may reduce rates or offer
incentives to existing and potential customers of the Company. To maintain
its competitive position, the Company believes that it must be able to
reduce its prices in order to meet reductions in rates, if any, by others.
The Company has only limited experience in providing local
telephone services, having commenced providing such services in 1994, and,
although the Company believes the local business will enhance its ability
to compete in the long distance market, to date the Company has experienced
an operating cash flow deficit in the operation of that business in the
U.S. on a stand-alone basis. The Company's revenues from local telephone
and other services in 1995 and during the first nine months of 1996 were
$13.6 million and $17.9 million, respectively. In order to attract local
customers, the Company must offer substantial discounts from the prices
charged by local exchange carriers and must compete with other alternative
local companies that offer such discounts. The local telephone service
business requires significant initial investments in capital equipment as
well as significant initial promotional and selling expenses. Larger,
better capitalized alternative local providers, including AT&T and Time
Warner Cable, among others, will be better able to sustain losses
associated with discount pricing and initial investments and expenses.
There can be no assurance that the Company will achieve positive cash flow
or profitability in its local telephone service business.
RISKS OF GROWTH AND EXPANSION
The Company plans to expand its service offerings and principal
geographic markets in the United States, Canada and the United Kingdom. In
addition, the Company may establish a presence in deregulating
international markets that have high density telecommunications traffic,
when the Company believes that business and regulatory conditions warrant.
There can be no assurance that the Company will be able to add service or
expand its markets at the rate presently planned by the Company or that the
existing regulatory barriers will be reduced or eliminated. The Company's
rapid growth has placed, and in the future may continue to place, a
significant strain on the Company's administrative, operational and
financial resources and increased demands on its systems and controls. As
the Company increases its service offerings and expands its targeted
markets, there will be additional demands on the Company's customer
support, sales and marketing and administrative resources and network
infrastructure. There can be no assurance that the Company's operating and
financial control systems and infrastructure will be adequate to maintain
and effectively monitor future growth. The failure to continue to upgrade
the administrative, operating and financial control systems or the
emergence of unexpected expansion difficulties could materially adversely
affect the Company's business, results of operations and financial
condition.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A key component of the Company's strategy is its planned
expansion in international markets. To date, the Company has only limited
experience in providing telecommunications service outside the United
States, Canada and the U.K.. There can be no assurance that the Company
will be able to obtain the capital it requires to finance its expansion in
international markets on satisfactory terms or at all. In many
international markets, protective regulations and long-standing
relationships between potential customers of the Company and their local
providers create barriers to entry. Pursuit of international growth
opportunities may require significant investments for an extended period
before returns, if any, on such investments are realized. 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 international
markets. Such expansion, particularly the establishment of new operations
or acquisition of existing operations 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, to 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 consequences
resulting from operating in multiple jurisdictions with different tax laws,
which could materially adversely impact the success of the Company's
international operations. In many countries, the Company may need to enter
into a joint venture or other strategic relationship with one or more third
parties in order to successfully conduct its operations. As its revenues
from its Canadian and U.K. operations increase, an increasing portion of
the Company's revenues and expenses will be denominated in currencies other
than U.S. dollars, and changes in exchange rates may have a greater effect
on the Company's results of operations. There can be no assurance that
such factors will not have a material adverse effect on the Company's
future operations and, consequently, on the Company's business, results of
operations and financial condition. In addition, there can be no assurance
that laws or administrative practices relating to taxation, foreign
exchange or other matters of countries within which the Company operates
will not change. Any such change could have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
To complete its billing, the Company must record and process
massive amounts of data quickly and accurately. While the Company believes
its management information system is currently adequate, it has not grown
as quickly as the Company's business and substantial investments are
needed. The Company has made arrangements with a consultant and a vendor
for the development of new information systems and has budgeted
approximately $6.0 million for this purpose in 1996. The Company believes
that the successful implementation and integration of these new information
systems is important to its continued growth, its ability to monitor costs,
to bill customers and to achieve operating efficiencies, but there can be
no assurance that the Company will not encounter delays or cost-overruns or
suffer adverse consequences in implementing the systems. In addition, as
the Company's suppliers revise and upgrade their hardware, software and
equipment technology, there can be no assurance that the Company will not
encounter difficulties in integrating the new technology into the Company's
business or that the new systems will be appropriate for the Company's
business.
RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
As part of its business strategy, the Company expects to seek to
develop strategic alliances both domestically and internationally and to
acquire assets and businesses or make investments in companies that are
complementary to its current operations. The Company has no present
commitments or agreements with respect to any such strategic alliance,
investment or acquisition. Any such future strategic alliances,
investments or acquisitions would be accompanied by the risks commonly
encountered in strategic alliances with or acquisitions of or investments
in companies. Such risks include, among other things, the difficulty of
assimilating the operations and personnel of the companies, the potential
disruption of the Company's ongoing business, the inability of management
to maximize the financial and strategic position of the Company by the
successful incorporation of licensed or acquired technology and rights into
the Company's service offerings, the maintenance of uniform standards,
controls, procedures and policies and the impairment of relationships with
employees and customers as a result of changes in management. In addition,
the Company has experienced higher attrition rates with respect to
customers obtained through acquisitions, and may continue to experience
higher attrition rates with respect to any customers resulting from future
acquisitions. Moreover, to the extent that any such acquisition,
investment or alliance involved a business located outside the United
States, the transaction would involve the risks associated with
international expansion. There can be no assurance that the Company would
be successful in overcoming these risks or any other problems encountered
with such strategic alliances, investments or acquisitions.
In addition, if the Company were to proceed with one or more
significant strategic alliances, acquisitions or investments in which the
consideration consists of cash, a substantial portion of the Company's
available cash could be used to consummate the strategic alliances,
acquisitions or investments. If the Company were to consummate one or more
significant strategic alliances, acquisitions or investments in which the
consideration consists of stock, shareholders of the Company could suffer a
significant dilution of their interests in the Company. Many of the
businesses that might become attractive acquisition candidates for the
Company may have significant goodwill and intangible assets, and
acquisitions of these businesses, if accounted for as a purchase, would
typically result in substantial amortization charges to the Company. The
financial impact of acquisitions, investments and strategic alliances could
have a material adverse effect on the Company's business, financial
condition and results of operations and could cause substantial
fluctuations in the Company's quarterly and yearly operating results.
TECHNOLOGICAL CHANGES MAY ADVERSELY AFFECT COMPETITIVENESS AND FINANCIAL
RESULTS
The telecommunications industry is characterized by rapid and
significant technological advancements and introductions of new products
and services utilizing new technologies. There can be no assurance that
the Company will maintain competitive services or that the Company will
obtain appropriate new technologies on a timely basis or on satisfactory
terms.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the
continued contributions of its management team and technical, marketing and
sales personnel. The Company's employees may voluntarily terminate their
employment with the Company at any time. Competition for qualified
employees and personnel in the telecommunications industry is intense and,
from time to time, there are a limited number of persons with knowledge of
and experience in particular sectors of the telecommunications industry.
The Company's success also will depend on its ability to attract and retain
qualified management, marketing, technical and sales executives and
personnel. The process of locating such personnel with the combination of
skills and attributes required to carry out the Company's strategies is
often lengthy. The loss of the services of key personnel, or the inability
to attract additional qualified personnel, could have a material adverse
effect on the Company's results of operations, development efforts and
ability to expand. There can be no assurance that the Company will be
successful in attracting and retaining such executives and personnel. Any
such event could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISK ASSOCIATED WITH FINANCING ARRANGEMENTS; DIVIDEND RESTRICTIONS
The Company's financing arrangements are secured by substantially
all of the Company's assets and require the Company to maintain certain
financial ratios and restrict the payment of dividends, and the Company
anticipates that it will not pay any dividends on Class A Common Stock in
the foreseeable future. The Company's secured lenders would be entitled to
foreclose upon those assets in the event of a default under the financing
arrangements and to be repaid from the proceeds of the liquidation of those
assets before the assets would be available for distribution to the
Company's other creditors and shareholders in the event that the Company is
liquidated. In addition, the collateral security arrangements under the
Company's existing financing arrangements may adversely affect the
Company's ability to obtain additional borrowings or other capital. The
Company may need to raise additional capital from equity or debt sources to
finance its projected growth and capital expenditures contemplated for
periods after 1996.
HOLDING COMPANY STRUCTURE; RELIANCE ON SUBSIDIARIES FOR DIVIDENDS
ACC Corp. is a holding company, the principal assets of which are
its operating subsidiaries in the U.S., Canada and the U.K. ACC U.S., ACC
Canada, ACC U.K. and other operating subsidiaries of the Company are
subject to corporate law restrictions on their ability to pay dividends to
ACC Corp. There can be no assurance that ACC Corp. will be able to cause
its operating subsidiaries to declare and pay dividends or make other
payments to ACC Corp. when requested by ACC Corp. The failure to pay any
such dividends or make any such other payments could have a material
adverse effect upon the Company's business, financial condition and results
of operations.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the Class A Common Stock has been and may
continue to be, highly volatile. 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 Class
A Common Stock to fluctuate substantially. In addition, the stock markets
recently have experienced significant price and volume fluctuations that
particularly have affected telecommunications companies and resulted in
changes in the market prices of the stocks of many companies that have not
been directly related to the operating performance of those companies.
Such market fluctuations may materially adversely affect the market price
of the Class A Common Stock.
RISKS ASSOCIATED WITH DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Company uses various
financial instruments, including derivative financial instruments, to hedge
its foreign exchange and interest rate risks. The Company does not use
derivative financial instruments for speculative purposes. By their
nature, all such instruments involve risk, including the risk of
nonperformance by counterparties, and the Company's maximum potential loss
may exceed the amount recognized on the Company's balance sheet.
Accordingly, losses relating to derivative financial instruments could have
a material adverse effect upon the Company's business, financial condition
and results of operations.
