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 MARCH 31, 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 April 16, 1996, the Registrant had issued and outstanding 8,104,026
shares of its Class A Common Stock, par value $.015 per share, and 10,000
shares of its Series A Preferred Stock.
The Index of Exhibits filed with this Report is found at Page 20.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Amounts in thousands, except share and per share data)
<CAPTION>
Three months ended
March 31,
1996 1995
__________ __________
<S> <C> <C>
Revenue:
Toll revenue $ 61,538 $ 37,366
Leased lines and other 5,317 2,342
__________ __________
66,855 39,708
Network costs 41,608 24,745
___________ __________
Gross profit 25,247 14,963
Other operating expenses:
Depreciation and amortization 3,619 2,532
Selling, general and administrative 18,637 12,877
___________ __________
22,256 15,409
___________ __________
Income (loss) from operations 2,991 (446)
Other income (expense):
Interest (1,524) (918)
Foreign exchange gain (loss) 12 (30)
___________ __________
(1,512) (948)
___________ __________
Income (loss) before provision for
income taxes and minority interest 1,479 (1,394)
Provision for income taxes 324 270
___________ __________
Income (loss) before minority
interest 1,155 (1,664)
Minority interest in (income)
loss of consolidated subsidiary (299) 10
___________ __________
Net income (loss) 856 (1,654)
Less Series A preferred stock
dividend (299) -
Less Series A preferred stock
accretion (209) -
___________ __________
Income (loss) applicable to
common stock $ 348 $ (1,654)
=========== ==========
Net income (loss) per common
& common equivalent share $ 0.04 $ (0.23)
=========== ==========
Average number of common
and common equivalent shares 8,533,635 7,085,727
=========== ==========
</TABLE>
<PAGE>
<TABLE>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<CAPTION>
March 31, December 31,
1996 1995
___________ ___________
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,389 $ 518
Accounts receivable, net of allowance
for doubtful accounts of $2,700 in
1996 and $2,085 in 1995 41,458 38,978
Other receivables 2,254 3,965
Prepaid expenses and other assets 2,782 2,265
___________ ___________
Total current assets 47,883 45,726
___________ ___________
Property, plant and equipment:
At cost 88,946 83,623
Less-accumulated depreciation and
amortization (29,376) (26,932)
___________ ___________
59,570 56,691
___________ ___________
Other assets:
Goodwill and customer base, net 13,552 14,072
Deferred installation costs, net 3,539 3,310
Other 4,206 4,185
___________ ___________
21,297 21,567
___________ ___________
Total assets $ 128,750 $ 123,984
=========== ===========
Current liabilities:
Notes payable $ 695 $ 1,966
Current maturities of
long-term debt 2,786 2,919
Accounts payable 8,900 7,340
Accrued network costs 27,769 28,192
Other accrued expenses 13,683 15,657
___________ ___________
Total current liabilities 53,833 56,074
___________ ___________
Deferred income taxes 2,317 2,577
___________ ___________
Long-term debt 31,719 28,050
___________ ___________
Redeemable Series A Preferred
Stock, $1.00 par value, $1,000
liquidation value, cumulative,
convertible, Authorized - 10,000
shares; Issued - 10,000 shares 9,956 9,448
___________ ___________
Minority interest 1,740 1,428
___________ ___________
Shareholders' equity:
Preferred Stock, $1.00 par value,
Authorized - 1,990,000 shares;
Issued - no shares - -
Class A Common Stock, $.015 par value
Authorized - 50,000,000 shares;
Issued - 8,829,666 in 1996 and
8,617,259 in 1995 132 129
Class B Common Stock, $.015 par value,
Authorized - 25,000,000 shares;
Issued - no shares - -
Capital in excess of par value 34,832 32,911
Cumulative translation adjustment (950) (950)
Retained earnings (deficit) (3,219) (4,073)
____________ ___________
30,795 28,017
Less-
Treasury stock, at cost (726,589
shares) (1,610) (1,610)
____________ ___________
Total shareholders' equity 29,185 26,407
____________ ___________
Total liabilities and
shareholders' equity $ 128,750 $ 123,984
============ ===========
</TABLE>
<PAGE>
<TABLE>
ACC CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in 000's)
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
1996 1995
__________ ____________
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 856 $ (1,654)
__________ ____________
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Depreciation and amortization 3,619 2,532
Deferred income taxes (260) 250
Minority interest in income (loss)
of consolidated subsidiary 299 (10)
Unrealized foreign exchange loss (gain) 59 (6)
(Increase) decrease in assets:
Accounts receivable, net (2,604) (1,816)
Other receivables 1,710 470
Prepaid and other assets (523) (483)
Deferred installation costs (675) (630)
Other (169) (5)
Increase (decrease) in liabilities:
Accounts payable 1,594 (1,541)
Accrued network costs (257) 1,527
Other accrued expenses (1,913) 198
__________ ___________
Net cash provided by (used in)
operating activities 1,736 (1,168)
__________ ___________
Cash flows from investing activities:
Capital expenditures, net (5,625) (1,845)
__________ ___________
Net cash used in investing
activities (5,625) (1,845)
__________ ___________
Cash flows from financing activities:
Borrowings under lines of credit 11,850 11,358
Repayments under lines of credit (7,350) (9,846)
Repayment of notes payable (1,293) -
Repayment of long-term debt (852) (335)
Proceeds from issuance of common
stock 2,446 1,442
Dividends paid - (208)
__________ ___________
Net cash provided by
financing activities 4,801 2,411
Effect of exchange rate changes
on cash (41) (338)
__________ ___________
Net increase in cash 871 (940)
Cash and cash equivalents at
beginning of period 518 1,021
__________ ___________
Cash and cash equivalents at
end of period $1,389 $81
========== ===========
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest $896 $942
========== ===========
Income taxes $583 -
========== ===========
Supplemental schedule of noncash
investing activities:
Equipment purchased through
capital lease - $55
========== ===========
Supplemental schedule of noncash
financing activities:
Sale of common stock ($6,600
received in April, 1995) - $6,840
========== ===========
</TABLE>
<PAGE>
ACC CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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. 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.
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 Cost
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 Cost
Debt
Senior Credit Facility and Lines of Credit
Income Taxes
Redeemable Preferred Stock
Equity
Private Placement
Employee Long Term Incentive Plan
Employee Stock 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 accredited costs. The average number of shares outstanding is computed
as follows:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
____________________________________
Average Number Outstanding: 1996 1995
______ ______
<S> <C> <C>
Common Shares 7,975,350 6,932,453
Common Equivalent Shares 558,285 153,274
_________ _________
TOTAL 8,533,635 7,085,727
<FN>
Fully diluted income per share amounts are not presented for either period
because inclusion of these amounts would be anti-dilutive.
</TABLE>
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 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 not
decided if the Company will adopt the fair value based method of accounting
for the Company's stock option plans. The Company believes the adopting the
fair value basis of accounting could have a material impact on the financial
statements and such impact is dependent upon future stock option activity.
Item 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 Securities and
Exchange Commission.
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%
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
"Pounds" are to English pounds sterling, the terms "United States" and "U.S."
mean the United States of America and, unless the context otherwise requires,
its states, territories and possessions and all areas subject to its
jurisdiction, and the terms "United Kingdom" and "U.K." mean England, Scotland
and Wales.
GENERAL
The Company's revenue is comprised of toll revenue and leased lines and
other revenue. Toll revenue consists of revenue derived from ACC's long
distance and operator-assisted services. Leased lines and other revenue
consists of revenue derived from the resale of local exchange services, data
line services, direct access lines and monthly subscription fees. Network
costs consist of expenses associated with the leasing of transmission lines,
access charges and certain variable costs associated with the Company's
network. The following table shows the total revenue (net of intercompany
revenue) and billable long distance minutes of use attributable to the
Company's U.S., Canadian and U.K. operations during the three months ended
March 31, 1996 and 1995:
<TABLE>
<CAPTION>
Quarter Ended March 31,
_______________________
1996 1995
__________________ ___________________
Amount Percent Amount Percent
______ _______ ______ _______
(Dollar and minutes in thousands)
<S> <C> <C> <C> <C>
Total Revenue:
United States. . . . . . $ 19,755 29.5% $ 15,025 37.8%
Canada . . . . . . . . . 27,844 41.6% 19,284 48.5%
United Kingdom . . . . . 19,256 28.9% 5,399 13.6%
________ ______ ________ ______
Total . . . . . . $ 66,855 100.0% $ 39,708 100.0%
Billable Long Distance Minutes of Use:
United States. . . . . . 138,518 34.4% 117,457 43.1%
Canada . . . . . . . . . 158,768 39.4% 130,909 48.0%
United Kingdom . . . . . 105,621 26.2% 24,330 8.9%
_______ ______ _______ ______
Total . . . . . . . 402,907 100.0% 272,696 100.0%
</TABLE>
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 months ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
______ ______
<S> <C> <C>
Toll Revenue Per Billable Long Distance Minute:
United States. . . . . . . . . . . . . . . . . . . $.128 $.118
Canada . . . . . . . . . . . . . . . . . . . . . . .155 .139
United Kingdom . . . . . . . . . . . . . . . . . . .182 .222
Network Cost Per Billable Long Distance Minute:
United States. . . . . . . . . . . . . . . . . . . $.104 $.076
Canada . . . . . . . . . . . . . . . . . . . . . . .106 .099
United Kingdom . . . . . . . . . . . . . . . . . . .125 .154
</TABLE>
The Company believes that its historic revenue growth as well as its
historic network costs and results of operations for each of its U.S.,
Canadian and U.K. operations generally reflect the state of development of
the Company's operations, the Company's customer mix and the competitive and
deregulatory environment in each of those markets. The Company entered the
U.S., Canadian and U.K. telecommunications markets in 1982, 1985 and 1993,
respectively.
Deregulatory influences have affected the telecommunications industry in
the U.S. since 1984 and the U.S. market has experienced considerable
competition for a number of years. The competitive influences on the pricing
of ACC U.S.'s services and network costs have been stabilizing during the
past few years. This may change in the future as a result of recent U.S.
legislation that further opens the market to competition, particularly from
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. The Company expects such downward
pressure to continue, although it is expected that the pricing pressure may
abate over time as the market matures. The impact of this pricing pressure
on revenues of ACC Canada is being offset, in part, by an increase in the
Canadian residential and student billable minutes of usage as a percentage of
total Canadian billable minutes of usage. Toll revenue per billable minute
attributable to residential and student customers in Canada generally exceeds
the toll revenue per billable minute attributable to commercial customers.
The Company expects that, based on existing and anticipated regulations and
rulings, its Canadian contribution charges will increase by up to
approximately Cdn. $2.0 million in 1997 over 1995 levels, which the Company
will seek to offset with increased volume efficiencies. However, additional
reductions in contribution rates may offset this increase. The Company also
believes that its network costs per billable minute in Canada may decrease
during periods after 1996 if there is an anticipated increase in long
distance transmission facilities available for lease from Canadian
transmission facilities-based carriers as a result of expected growth in the
number and capacity of transmission networks in that market. The foregoing
forward-looking statements are based upon expectations of actions that may be
taken by third parties, including Canadian regulatory authorities and
transmission facilities-based carriers. If such third parties do not act as
expected, the Company's actual results may differ materially from the
foregoing discussion.
The Company believes that, because deregulatory influences have only
recently begun to impact the U.K. telecommunications industry, the Company
will continue to experience a significant increase in revenue from that
market during the next few years. The foregoing belief is based upon
expectations of actions that may be taken by U.K. regulatory authorities and
the Company's competitors; if such third parties do not act as expected, the
Company's revenues in the U.K. might not increase. If ACC U.K. were to
experience increased revenues, the Company believes it should be able to
enhance its economies of scale and scope in the use of the fixed cost
elements of its network. Nevertheless, the deregulatory trend in that market
is expected to result in competitive pricing pressure on the Company's U.K.
operations which could adversely affect revenues and margins. Since the U.K.
market for transmission facilities is dominated by British 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 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, growth in its revenue and customer base in each such market is likely
to decrease over time.
The Company believes that competition in non-U.S. markets is likely to
increase and become more like competition in the U.S. markets over time as
non-U.S. markets continue to experience deregulatory influences. Prices in
the long distance industry have declined from time to time in recent years
and, as competition in Canada and the U.K. increases, prices are likely to
continue to decrease.
Since the commencement of the Company's operations, the Company has
undertaken a program of developing and expanding its service offerings,
geographic focus and network. In connection with this development and
expansion, the Company has made significant investments in telecommunications
circuits, switches, equipment and software. These investments generally are
made significantly in advance of anticipated customer growth and resulting
revenue. The Company also has increased its sales and marketing, customer
support, network operations and field services commitments in anticipation of
the expansion of its customer base and targeted geographic markets. The
Company expects to continue to expand the breadth and scale of its network
and related sales and marketing, customer support and operations activities.
These expansion efforts are likely to cause the Company to incur significant
increases in expenses from time to time, in anticipation of potential future
growth in the Company's customer base and targeted geographic markets.
The Company's operating results have fluctuated in the past and they may
continue to fluctuate significantly in the future as a result of a variety of
factors, some of which are beyond the Company's control. The Company expects
to focus in the near term on building and increasing its customer base,
service offerings and targeted geographic markets, which will require it to
increase significantly its expenses for marketing and development of its
network and new services, and may adversely impact operating results from
time to time. The Company's sales to other long distance carriers have been
increasing due to the Company's marketing efforts to promote its lower
international network costs. Revenues from other resellers accounted for
approximately 22.4%, 9.3% and 16.6% of the revenues of ACC U.S., ACC Canada
and ACC U.K., respectively, in the first quarter of 1996, and are expected to
account for a higher percentage in the future. With respect to these
customers, the Company competes almost exclusively on price, does not have
long term contracts and generates lower gross margins as a percentage of
revenue.
RESULTS OF OPERATIONS
The following table presents, for the three months ended March 31, 1996
and 1995, certain statement of operations data expressed as a percentage of
total revenue:
<TABLE>
<CAPTION>
Three Months Ended March 31,
____________________________
1996(1) 1995
______ ______
<S> <C> <C>
Revenue:
Toll revenue 92.0% 94.1%
Leased lines and other 8.0 5.9
_____ _____
Total revenue 100.0 100.0
Network costs 62.2 62.3
_____ _____
Gross profit 37.8 37.7
Other operating expenses:
Depreciation and amortization 5.4 6.4
Selling, general and administrative 27.9 32.4
_____ _____
Total other operating expenses 33.3 38.8
Income (loss) from operations 4.5 (1.1)
Total other income (expense) (2.3) (2.4)
Loss from operations before provision
for (benefit from) income
taxes and minority interest 2.2 (3.5)
Provision for (benefit from) income taxes 0.5 .7
Minority interest in (income)
loss of consolidated subsidiary (0.4) --
_____ _____
Income (loss) from continuing operations 1.3% (4.2)%
<FN>
(1) Includes the results of operations of Metrowide Communications acquired
on August 1, 1995.
</TABLE>
Three Months Ended March 31, 1996 Compared With Three Months Ended March 31,
1995
Revenue. Total revenue for the three months ended March 31, 1996
increased by 68.4% to $66.9 million from $39.7 million for the same period in
1995, reflecting growth in both toll revenue and leased lines and other
revenue. Long distance toll revenue for the 1996 quarter increased by 64.7%
to $61.5 million from $37.4 million in the 1995 quarter. In the United
States, long distance toll revenue increased 28.0% as a result of a 17.9%
increase in billable minutes of use and a more favorable mix of toll services
provided. The volume increases are primarily a result of increased revenue
attributable to other carriers (approximately $7.3 million), commercial
(approximately $14.6 million) and residential (approximately $2.3 million)
customers in the Company's service regions. In Canada, long distance toll
revenue increased 35.8%, primarily as a result of a 21.3% increase in
billable minutes (primarily because of a 57.9% increase in the number of
customer accounts from approximately 111,000 to approximately 175,000), and
an increase in prices due to additional residential customers which typically
have a higher revenue per minute. 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 successful
introduction of higher price per minute products. In the United Kingdom,
long distance toll revenue increased 255.5%, due to significant volume
increases (including a 192.9% increase in the number of customer accounts
from approximately 14,000 to approximately 41,000), offset by lower prices
that resulted from entering the commercial and residential markets and from
competitive pricing pressure. Exchange rates did not have a material impact
on revenue in either the U.K. or in Canada. At March 31, 1996, the Company
had approximately 303,000 customer accounts compared to approximately 213,000
customer accounts at March 31, 1995, an increase of 42.3%.
For the three months ended March 31, 1996, leased lines and other
revenue increased by 127.0% to $5.3 million from $2.3 million for the same
period in 1995. This increase was primarily due to the Metrowide
Communications acquisition which occurred on August 1, 1995 (approximately
$1.0 million) and local service revenue (approximately $0.7 million)
generated through the Company's local exchange operations in upstate New
York, which generated nominal revenues in 1994.
Network Costs. Network costs increased to $41.6 million for the first
quarter of 1996, from $24.7 million for the first quarter of 1995, due to the
increase in billable long distance minutes. Network costs, expressed as a
percentage of revenue, decreased slightly to 62.2% for the 1996 quarter from
62.3% for the 1995 quarter due to increased volume efficiencies in the U.K.
and an increase in the mix of higher margin residential customers in Canada,
offset by an increase in lower margin carrier traffic in the U.S.
Other Operating Expenses. Depreciation and amortization expense
increased to $3.6 million for the first quarter of 1996 from $2.5 million for
the first quarter of 1995. Expressed as a percentage of revenue, these costs
decreased to 5.4% in 1996 from 6.4% in the 1995 quarter, reflecting the
increase in revenue realized from year to year. The $1.1 million increase in
depreciation and amortization expense was primarily attributable to assets
placed in service throughout 1995, 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 acquisition also contributed to the increase.
Selling, general and administrative expenses for the first quarter of
1996 were $18.6 million compared with $12.9 million for the first quarter of
1995. Expressed as a percentage of revenue, selling, general and
administrative expenses were 27.9% for the first quarter of 1996, compared to
32.4% for the first quarter of 1995. The increase in selling, general and
administrative expenses was primarily attributable to a $3.1 million increase
in personnel related costs and a $1.6 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 quarter of 1996 was approximately $0.9
million related to the Company's local service market sector in New York
State compared to $0.4 million for the first quarter of 1995.
Other Income (Expense). Net interest expense increased to $1.5 million
for the first quarter of 1996 compared to $0.9 million in 1995, due primarily
to contingent interest associated with the Company's revolving credit
facility with First Union National Bank of North Carolina and Fleet Bank of
Connecticut (formerly Shawmut Bank Connecticut, N.A.), as agents, which
expires on July 1, 2000 (the "Credit Facility").
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 all foreign currency transactions in an attempt to minimize the impact
of transaction gains and losses on the income statement. The Company does
not engage in speculative foreign currency transactions. Due to this
hedging, foreign exchange rate changes resulted in a nominal gain for the
first 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 remained approximately the same for both
periods presented due to the Company's pretax income in the U.S. being
relatively constant. 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 in 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% of that subsidiary's common stock that
is publicly traded in Canada. For the first 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 a nominal amount
in the first quarter of 1995.
The Company's net income for the first quarter of 1996 was $0.9 million,
compared to a net loss of $1.7 million for the first quarter of 1995. The
first quarter 1996 net income resulted primarily from the Company's
operations in Canada (approximately $0.7 million), and long distance
operations in the U.S. (approximately $0.9 million) offset, in part, by net
losses in the U.K. (approximately $0.5 million) and in the Company's local
operations (approximately $0.3 million).
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has satisfied its working capital requirements
through cash flow from operations, through borrowings and financings from
financial institutions, vendors and other third parties, and through the
issuance of securities. In addition, the Company used the proceeds from the
1993 sale of ACC Canada common stock and the 1993 sale of its cellular
operations to fund the expansion of its operations in Canada and the U.K.
During 1995, the Company raised $20.0 million, through the issuance of
825,000 shares of Class A Common Stock for $11.1 million (net of issuance
expense) and notes which were exchanged for 10,000 shares of Series A
Preferred Stock for $8.9 million (net of issuance expenses). The proceeds
from the 1995 issuances of Class A Common Stock and notes were used to reduce
indebtedness and for working capital and capital expenditures. In July 1995,
the Company entered into the five-year $35.0 million Credit Facility.
Net cash flows provided by operations were $1.7 million for the three
months ended March 31, 1996 compared to net cash used in operations of $1.2
million for the same period in 1995. The increase of approximately $2.9
million in the cash flow provided by operating activities during the first
quarter of 1996 as compared to the first quarter of 1995 was primarily
attributable to the improved financial performance of ACC Canada and ACC UK
during the 1996 period in comparison to 1995 partially offset by an increase
in accounts receivable resulting from the expansion of the Company's customer
base and related revenues in all business segments. If additional
competition were to result in significant price reductions that are not
offset by reductions in network costs, net cash flows from operations would
be materially adversely affected.
Net cash flows used in investing activities were $5.6 million and $1.8
million for the three months ended March 31, 1996 and 1995, respectively.
The increase of approximately $3.8 million in net cash flow used in investing
activities during the first quarter of 1996 as compared to the first quarter
of 1995 was primarily attributable to an increase in capital expenditures
incurred by the Company's local exchange subsidiary (approximately $1.4
million) and for computer software ($1.8 million).
Accounts receivable increased by 6.3% at March 31, 1996 as compared to
December 31, 1995 as a result of expansion of the Company's customer base due
to sales and marketing efforts, particularly in the U.K.
Accounts payable increased by 21.3% at March 31, 1996 as compared to
December 31, 1995 due to increased network costs and other operating expenses.
Other accrued expenses decreased by $2.0 million at March 31, 1996 as
compared to December 31, 1995. This decrease was primarily related to 1995
compensation which was accrued at December 31, 1995 and paid during the first
quarter of 1996.
The Company's principal need for working capital is to meet its selling,
general and administrative expenses as its business expands. In addition,
the Company's capital resources have been used for the Metrowide
Communications acquisition, capital expenditures, various customer base
acquisitions and, prior to the termination thereof during the second quarter
of 1995, payments of dividends to holders of its Class A Common Stock. The
Company has had a working capital deficit at the end of the last several
years and, at March 31, 1996, the Company had a working capital deficit of
approximately $6.0 million compared to a deficit of approximately $10.3
million at December 31, 1995. This decrease related to the payment of
network invoices using funds borrowed through the Credit Facility. These
costs were included in accrued network costs at December 31, 1995. The
Company has experienced delays from time to time in billings from carriers
from which it leases transmission lines. In addition, prior to making
payment to the carriers, the Company typically needs to resolve discrepancies
between the amount billed by the carriers and the Company's records
concerning usage of leased lines. The Company accrues an expense for the
amount of its estimated obligation to the carriers pending the resolution of
such discussions. For the first quarter of 1996, the Company's EBITDA (which
represents income (loss) from operations plus depreciation and amortization)
minus capital expenditures and changes in working capital was approximately
$3.3 million.
The Company anticipates that, throughout the remainder of 1996, its
capital expenditures will be approximately $20.0 million for the expansion of
its network, the acquisition, upgrading and development of switches and other
telecommunications equipment as conditions warrant, the development,
licensing and integration of its management information system and other
software, the development and expansion of its service offerings and customer
programs and other capital expenditures. ACC expects that it will continue
to make significant capital expenditures during future periods. The
Company's actual capital expenditures and cash requirements will depend on
numerous factors, including the nature of future expansion (including the
extent of local exchange services, which is particularly capital intensive)
and acquisition opportunities, economic conditions, competition, regulatory
developments, the availability of capital and the ability to incur debt and
make capital expenditures under the terms of the Company's financing
arrangements. Prior to 1995, the Company had funded capital expenditures
through its credit facilities and other short term debt arrangements, which
were refinanced in 1995 with the Credit Facility.
The Company is obligated to pay the lenders under the Credit Facility a
contingent interest payment based on the appreciation in market value of
140,000 shares of the Company's Class A Common Stock from $14.92 per share,
subject to a minimum of $0.75 million and a maximum of $2.1 million. The
payment is due upon the earlier of (i) January 21, 1997, (ii) any material
amendment to the Credit Facility, (iii) the signing of a letter of intent to
sell the Company or any material subsidiary, or (iv) the cessation of active
trading of the Company's Class A Common Stock on other than a temporary
basis. The Company is accruing this obligation over the 18-month period
ending January 21, 1997 ($0.8 million has been accrued through March 31,
1996).
Any holder of Series A Preferred Stock has the right to cause the
Company to redeem such Series A Preferred Stock upon the occurrence of
certain events, including the entry of a judgment against the Company or a
default by the Company under any obligation or agreement for which the amount
involved exceeds $500,000.
As of March 31, 1996, the Company had approximately $1.4 million of cash
and cash equivalents and maintained the $35.0 million Credit Facility,
subject to availability under a borrowing base formula and certain other
conditions (including borrowing limits based on the Company's operating cash
flow), under which borrowings of approximately $25.4 million were
outstanding, approximately $6.6 million was available for borrowing and $3.0
million was reserved for letters of credit. The maximum aggregate principal
amount of the Credit Facility is required to be reduced by $2.5 million per
quarter commencing on July 1, 1997 and by $2.9 million per quarter commencing
on January 1, 1999 until maturity on July 1, 2000. During 1995, the Company
entered into swap agreements with respect to $11.5 million of indebtedness
under the Credit Facility, as required by the terms of the Credit Facility.
The swap agreements expire at various times through December 1998 and require
the Company to pay interest at rates ranging from 5.98% to 6.25% per annum
and permit the Company to receive interest at variable rates.
The Company also is obligated to pay, on demand commencing in August
1996, the remaining $0.7 million pursuant to a note issued in connection with
the Metrowide Communications acquisition. In addition, the Company has $2.9
million, $2.6 million and $2.1 million of capital lease obligations which
mature during 1996, 1997 and 1998, respectively. The Company's financing
arrangements, which are secured by substantially all of the Company's assets
and the stock of certain subsidiaries, require the Company to maintain
certain financial ratios and prohibit the payment of dividends.
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 March 31, 1996 was $31.4 million. Interest rate swap
agreements are used to reduce the Company's exposure to risks associated with
interest rate fluctuations. The Company was party to interest rate swap
agreements at March 31, 1996 which had the effect of converting interest in
respect of $11.5 million principal amount of the Credit Facility to a fixed
rate. As is customary for these types of instruments, collateral is
generally not required to support these financial instruments.
By their nature, all such instruments involve risk, including the risk
of nonperformance by counterparties, and the Company's maximum potential loss
may exceed the amount recognized on the Company's balance sheet. However, at
March 31, 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 anticipated public offering of Class A Common Stock of the
Company, together with borrowings under the Credit Facility, vendor financing
and cash from operations will be sufficient to meet anticipated working
capital and capital expenditure requirements of its existing operations. The
forward-looking information contained in the previous sentence may be
affected by a number of factors, including the matters described in this
paragraph and 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 and for the optional redemption of Series A Preferred Stock if it is not
converted. Moreover, the Company believes that continued growth and
expansion through acquisitions, investments and strategic alliances is
important to maintain a competitive position in the market and, consequently,
a principal element of the Company's business strategy is to develop
relationships with strategic partners and to acquire assets or make
investments in businesses that are complementary to its current operations.
The Company may need to raise additional funds in order to take advantage of
opportunities for acquisitions, investments and strategic alliances or more
rapid international expansion, to develop new products or to respond to
competitive pressures. If additional funds are raised through the issuance
of equity securities, the percentage ownership of the Company's then current
shareholders may be reduced and such equity securities may have rights,
preferences or privileges senior to those of holders of Class A Common Stock.
There can be no assurance that the Company will be able to raise such capital
on acceptable terms or at all. In the event that the Company is unable to
obtain additional capital or is unable to obtain additional capital on
acceptable terms, the Company may be required to reduce the scope of its
presently anticipated expansion opportunities and capital expenditures, which
could have a material adverse effect on its business, results of operations
and financial condition and could adversely impact its ability to compete.
The Company may seek to develop relationships with strategic partners
both domestically and internationally and to acquire assets or make
investments in businesses that are complementary to its current operations.
Such acquisitions, strategic alliances or investments may require that the
Company obtain additional financing and, in some cases, the approval of the
holders of debt or preferred stock of the Company. The Company's ability to
effect acquisitions, strategic alliances or investments may be dependent upon
its ability to obtain such financing and, to the extent applicable, consents
from its debt or preferred stock holders.
SFAS NO. 123
The Company is required to adopt SFAS No. 123, "Accounting for Stock-
Based Compensation" in 1996. This Statement encourages entities to adopt a
fair value based method of accounting for employee stock option plans
(whereby compensation cost is measured at the grant date based on the value
of the award and is recognized over the employee service period), rather than
the current intrinsic value based method of accounting (whereby compensation
cost is measured at the grant date as the difference between market value and
the price for the employee to acquire the stock). If the Company elects to
continue using the intrinsic value method of accounting, pro forma
disclosures of net income and earnings per share, as if the fair value based
method of accounting had been applied, will need to be disclosed. Management
has not decided if the Company will adopt the fair value based method of
accounting for the Company's stock option plans. The Company believes that
adopting the fair value basis of accounting could have a material impact on
the financial statements and such impact is dependent upon future stock
option activity.
<PAGE>
PART II. OTHER INFORMATION
Item 7. Exhibits and Reports on Form 8-K.
(a) Exhibits. See Exhibit Index.
(b) Reports on Form 8-K. On February 22, 1996, the Company filed a
Current Report on Form 8-K to disclose, under the heading of Item 5, Other
Events, certain agreements between the Company and AMBIX Systems Corp., AMBIX
Acquisition Corp. or the Company's Chairman of the Board, Richard T. Aab,
relating to the development and licensing of certain telecommunications
software programs; adoption by the Company's Board of Directors of a Non-
Employee Directors' Stock Option Plan and the grant of certain options
thereunder, subject to obtaining shareholder approval of the plan; a certain
Participation Agreement between Mr. Aab and Fleet Venture Resources, Inc.,
Fleet Equity Partners VI, L.P. and Chisholm Partners II, L.P. (the "Fleet
Investors") which grants to the Fleet Investors certain rights to participate
in certain proposed transfers of shares by Mr. Aab; and certain material
contracts which were filed as exhibits to the Report.
<PAGE>
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: April 29, 1996 /s/ Michael R. Daley
Michael R. Daley
Executive Vice President
and Chief Financial Officer
Dated: April 29, 1996 /s/ John J. Zimmer
John J. Zimmer
Vice President of Finance
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Location
10.1 Software License Agreement dated Incorporated by reference
February 21, 1996 between AMBIX from Exhibit 99.6 to the
Acquisition Corp. and the Company Company's Current Report on
Form 8-K dated February 22,
1996 (Commission File No. 0-
14567)
10.2 Bill of Sale from AMBIX Systems Incorporated by reference
Corp. to the Company dated from Exhibit 99.7 to the
February 6, 1996 Company's Current Report on
Form 8-K dated February 22,
1996 (Commission File No. 0-
14567)
10.3 Second Amendment to Credit Incorporated by reference
Agreement dated March 29, 1996, from Exhibit 99.5 to
amending the Credit Agreement Amendment No. 2 to the
dated July 21, 1995 among the Company's Registration
Company, First Union Bank of Statement on Form S-3 filed
North Carolina and Fleet Bank of on April 8, 1996
Connecticut, N.A. (formerly (Registration No. 333-01157)
Shawmut Bank Connecticut, N.A.)
11.1 Statement re Computation of Per See Note 3 to the Notes to
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 MARCH 31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,389
<SECURITIES> 0
<RECEIVABLES> 44,158
<ALLOWANCES> 2,700
<INVENTORY> 417
<CURRENT-ASSETS> 47,883
<PP&E> 88,946
<DEPRECIATION> 29,376
<TOTAL-ASSETS> 128,750
<CURRENT-LIABILITIES> 53,833
<BONDS> 31,719
9,956
0
<COMMON> 132
<OTHER-SE> 29,053
<TOTAL-LIABILITY-AND-EQUITY> 128,750
<SALES> 61,538
<TOTAL-REVENUES> 66,855
<CGS> 41,608
<TOTAL-COSTS> 22,256
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,212
<INTEREST-EXPENSE> 1,524
<INCOME-PRETAX> 1,479
<INCOME-TAX> 324
<INCOME-CONTINUING> 856
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 856
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0
</TABLE>
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 70%
owned 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
"Pounds" are to English pounds sterling, the terms "United States" and
"U.S." mean the United States of America and, unless the context otherwise
requires, its states, territories and possessions and all areas subject to
its jurisdiction, and the terms "United Kingdom" and "U.K." mean England,
Scotland and Wales.
RECENT LOSSES; POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
Although the Company has recently experienced revenue growth on an
annual basis, it has incurred net losses and losses from continuing
operations during each of its last two fiscal years. The 1995 net loss of
$5.4 million resulted primarily from the expansion of operations in the
U.K. (approximately $6.8 million), increased net interest expense
associated with additional borrowings (approximately $4.9 million),
increased depreciation and amortization from the addition of equipment and
costs associated with the expansion of local service in New York State
(approximately $1.6 million) and management restructuring costs
(approximately $1.3 million), offset by positive operating income from the
U.S. and Canadian long distance subsidiaries of approximately $9.0 million.
The 1994 net loss of $11.3 million resulted primarily from operating losses
due to expansion in the U.K. (approximately $5.6 million), the recording of
the valuation allowance against deferred tax benefits (approximately $3.0
million), implementation of equal access in Canada (approximately $2.2
million) and operating losses due to expansion in local telephone service
in the U.S. (approximately $0.9 million). There can be no assurance that
revenue growth will continue or that the Company will achieve profitability
in the future. The Company intends to focus in the near term on the
expansion of its service offerings, including its local telephone business,
and geographic markets, which may adversely affect cash flow and operating
performance. As each of the telecommunications markets in which the
Company operates continues to mature, growth in the Company's revenues and
customer base is likely to decrease over time.
The Company's operating results have fluctuated in the past and may
fluctuate significantly in the future as a result of a variety of factors,
some of which are outside of the Company's control, including general
economic conditions, specific economic conditions in the telecommunications
industry, the effects of governmental regulation and regulatory changes,
user demand, capital expenditures and other costs relating to the expansion
of operations, the introduction of new services by the Company or its
competitors, the mix of services sold and the mix of channels through which
those services are sold, pricing changes and new service introductions by
the Company and its competitors and prices charged by suppliers. As a
strategic response to a changing competitive environment, the Company may
elect from time to time to make certain pricing, service or marketing
decisions or enter into strategic alliances, acquisitions or investments
that could have a material adverse effect on the Company's business,
results of operations and cash flow. The Company's sales to other long
distance companies have been increasing. Because these sales are at
margins that are lower than those derived from most of the Company's other
revenues, this increase may reduce the Company's gross margins as a
percentage of revenue. In addition, to the extent that these and other
long distance couriers are less creditworthy, such sales may represent a
higher credit risk to the Company. See "-Risks Associated With
Acquisitions, Investments and Strategic Alliances."
SUBSTANTIAL INDEBTEDNESS; NEED FOR ADDITIONAL CAPITAL
The Company will need to continue to enhance and expand its operations
in order to maintain its competitive position, expand its service offerings
and geographic markets and continue to meet the increasing demands for
service quality, availability and competitive pricing. As of the end of
its last five fiscal years, the Company has experienced a working capital
deficit. During 1995, the Company's EBITDA (which represents income (loss)
from operations plus depreciation and amortization and asset write-down)
minus capital expenditures and changes in working capital was $(7.0)
million. The Company is highly leveraged. The Company's leverage may
adversely affect its ability to raise additional capital. In addition, the
Company's indebtedness requires significant repayments over the next five
years. The Company may need to raise additional capital from public or
private equity or debt sources in order to finance its anticipated growth,
including local service expansion, which is capital intensive, working
capital needs, debt service obligations, contemplated capital expenditures
and the optional redemption of the Series A Preferred Stock if it is not
converted. In addition, the Company may need to raise additional funds in
order to take advantage of unanticipated opportunities, including more
rapid international expansion or acquisitions of, investments in or
strategic alliances with companies that are complementary to the Company's
current operations, or to develop new products or otherwise respond to
unanticipated competitive pressures. If additional funds are raised
through the issuance of equity securities, the percentage ownership of the
Company's then current shareholders would be reduced and, if such equity
securities take the form of Preferred Stock or Class B Common Stock, the
holders of such Preferred Stock or Class B Common Stock may have rights,
preferences or privileges senior to those of 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 revolving
credit facility with First Union National Bank of North Carolina and Fleet
Bank of Connecticut (formerly Shawmut Bank Connecticut, N.A.), as agents,
which expires on July 1, 2000 (the "Credit Facility") and would likely
become subject to additional or more restrictive financial covenants. In
the event that the Company is unable to obtain such additional capital or
is unable to obtain such additional capital on acceptable terms, the
Company may be required to reduce the scope of its presently anticipated
expansion, which could materially adversely affect 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 in the Company's
relationships with one or more of those carriers could have a material
adverse effect upon the Company's business, results of operations and
financial condition. Certain of the vendors from whom the Company leases
transmission lines, including 22 regional operating companies ("RBOCs") and
other local exchange carriers, currently are subject to tariff controls and
other price constraints which in the future may be changed. Under recently
enacted U.S. legislation, constraints on the operations of the RBOCs have
been dramatically reduced, which will bring additional competitors to the
long distance market. In addition, regulatory proposals are pending that
may affect the prices charged by the RBOCs and other local exchange
carriers to the Company, which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-Potential Adverse Effects of Regulation." The Company currently acquires
switches used in its North American operations from one vendor. The
Company purchases switches from such vendor for its convenience, and
switches of comparable quality may be obtained from several alternative
suppliers. However, a failure by a supplier to deliver quality products on
a timely basis, or the inability to develop alternative sources if and as
required, could result in delays which could have a material adverse effect
on the Company's business, results of operations and financial condition.
POTENTIAL ADVERSE EFFECTS OF REGULATION
Legislation that substantially revises the U.S. Communications
Act of 1934 (the "U.S. Communications Act") was signed into law on
February 8, 1996. The legislation provides specific guidelines under
which the RBOCs can provide long distance services, which will permit
the RBOCs to compete with the Company in the provision of domestic
and international long distance services. The legislation opens all local
service markets to competition from any entity (including long distance
carriers, such as AT&T, cable television companies and utilities). Because
the legislation opens the Company's markets to additional competition,
particularly from the RBOCs, the Company's ability to compete is likely to
be adversely affected. Moreover, as a result of and to implement the
legislation, certain federal and other governmental regulations will be
amended or modified, and any such amendment or modification could have a
material adverse effect on the Company's business, results of operations
and financial condition.
In the U.S., the Federal Communications Commission ("FCC") and
relevant state public service commissions ("PSCs") have the authority to
regulate interstate and intrastate rates, respectively, ownership of
transmission facilities, and the terms and conditions under which the
Company's services are provided. Federal and state regulations and
regulatory trends have had, and in the future are likely to have, both
positive and negative effects on the Company and its ability to compete.
The recent trend in both Federal and state regulation of telecommunications
service providers has been in the direction of lessened regulation. In
general, neither the FCC nor the relevant state PSCs currently regulate the
Company's long distance rates or profit levels, but either or both may do
so in the future. However, the general recent trend toward lessened
regulation has also given AT&T, the largest long distance carrier in the
U.S., increased pricing flexibility that has permitted it to compete more
effectively with smaller interexchange carriers, such as the Company.
There can be no assurance that changes in current or future Federal or
state regulations or future judicial changes would not have a material
adverse effect on the Company.
In order to provide their services, interexchange carriers, including
the Company, must generally purchase "access" from local exchange carriers
to originate calls from and terminate calls in the local exchange telephone
networks. Access charges presently represent a significant portion of the
Company's network costs in all areas in which it operates. In the U.S.,
access charges generally are regulated by the FCC and the relevant state
PSCs. Under the terms of the AT&T Divestiture Decree, a court order
entered in 1982 which, among other things, required AT&T to divest its 22
wholly-owned RBOCs from its long distance division ("AT&T Divestiture
Decree"), the RBOCs were required to price the "local transport" portion of
such access charges on an "equal price per unit of traffic" basis. In
November 1993, the FCC implemented new interim rules governing local
transport access charges while the FCC considers permanent rules regarding
new rate structures for transport pricing and switched access competition.
These interim rules have essentially maintained the "equal price per unit
of traffic" rule. However, under alternative access charge rate structures
being considered by the FCC, local exchange carriers would be permitted to
allow volume discounts in the pricing of access charges. If these rate
structures are adopted, access charges for AT&T and other large
interexchange carriers would decrease, and access charges for small
interexchange carriers would increase. While the outcome of these
proceedings is uncertain, should the FCC adopt permanent access charge
rates along the lines of the proposed structures it is currently
considering, the Company would be at a cost disadvantage with regard to
access charges in comparison to AT&T and larger interexchange carrier
competitors.
The Company currently competes with the RBOCs and other local exchange
carriers in the provision of "short haul" toll calls completed within a
Local Access and Transport Area ("LATA"), and will in the future, under
provisions of recently enacted federal legislation, compete with such
carriers in the long-haul, or inter-LATA, toll business. To complete
long-haul and short-haul toll calls, the Company must purchase "access"
from the local exchange carriers. The Company must generally price its
toll services at levels equal to or below the retail rates established by
the local exchange carriers for their own short-haul or long-haul toll
rates. To the extent that the local exchange carriers are able to reduce
the margin between the access costs to the Company and the retail toll
prices charged by local exchange carriers, either by increasing access
costs or lowering retail toll rates, or both, the Company will encounter
adverse pricing and cost pressures in competing against local exchange
carriers in both the short-haul and long-haul toll markets.
In Canada, services provided by ACC Canada are subject to or affected
by certain regulations of the Canadian Radio-television and
Telecommunications Commission (the "CRTC"). The CRTC annually reviews the
"contribution charges" (the equivalent of access charges in the U.S.) it
has assessed against the access lines leased by Canadian long distance
resellers, including the Company, from the local telephone companies in
Canada. The Company expects that, based on existing 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 regulations has been to
open the market to commercial competition, generally to the Company's
benefit. There can be no assurance, however, that any future changes in or
additions to laws, regulations, government policy or administrative rulings
will not have a material adverse effect on the Company's business, results
of 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. 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 22.4%, 9.3% and
16.6%, of the revenues of ACC U.S., ACC Canada and ACC U.K., respectively,
in the first quarter of 1996, and are expected to account for a higher
percentage in the future. With respect to these customers, the Company
competes almost exclusively on price.
Many of the Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources and
larger networks than the Company, control transmission lines and have
long-standing relationships with the Company's target customers. These
competitors include, among others, 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 Corp., Citizens Telephone Co., MFS
Communications Co., Inc. ("MFS") and Time Warner Cable and others,
including cellular and other wireless providers. Furthermore, the recently
announced proposed merger of Bell Atlantic Corp. and Nynex Corp., the
recently announced joint venture between MCI and Microsoft Corporation
("Microsoft"), under which Microsoft will promote MCI's services, the
recently announced joint venture among Sprint, Deutsche Telekom AG and
France Telecom, and other mergers, acquisitions and strategic alliances,
could also increase competitive pressures upon the Company and have a
material adverse effect on the Company's business, results of operations
and financial condition.
In addition to these competitive factors, recent and pending
deregulation in each of the Company's markets may encourage new entrants.
For example, as a result of legislation recently enacted in the U.S., RBOCs
will be allowed to enter the long distance market, AT&T, MCI and other long
distance carriers will be allowed to enter the local telephone services
market, and any entity (including cable television companies and utilities)
will be allowed to enter both the local service and long distance
telecommunications markets. In addition, the FCC has, on several occasions
since 1984, approved or required price reductions by AT&T and, in October
1995, the FCC reclassified AT&T as a "non-dominant" carrier, which
substantially reduces the regulatory constraints on AT&T. As the Company
expands its geographic coverage, it will encounter increased competition.
Moreover, the Company believes that competition in non-U.S. markets is
likely to increase and become more similar to competition in the U.S.
markets over time as such non-U.S. markets continue to experience
deregulatory influences. Prices in the long distance industry have
declined from time to time in recent years and, as competition increases in
Canada and the U.K., prices are likely to continue to decrease. For
example, Bell Canada substantially reduced its rates during the first
quarter of 1994. The Company's competitors may reduce rates or offer
incentives to existing and potential customers of the Company. To maintain
its competitive position, the Company believes that it must be able to
reduce its prices in order to meet reductions in rates, if any, by others.
The Company has only limited experience in providing local telephone
services, having commenced providing such services in 1994, and, although
the Company believes the local business will enhance its ability to compete
in the long distance market, to date the Company has experienced an
operating cash flow deficit in the operation of that business in the U.S.
on a stand-alone basis. The Company's revenues from local telephone
services in 1995 were $1.35 million. In order to attract local customers,
the Company must offer substantial discounts from the prices charged by
local exchange carriers and must compete with other alternative local
companies that offer such discounts. The local telephone service business
requires significant initial investments in capital equipment as well as
significant initial promotional and selling expenses. Larger, better
capitalized alternative local providers, including AT&T and Time Warner
Cable, among others, will be better able to sustain losses associated with
discount pricing and initial investments and expenses. There can be no
assurance that the Company will achieve positive cash flow or profitability
in its local telephone service business.
RISKS OF GROWTH AND EXPANSION
The Company plans to expand its service offerings and principal
geographic markets in the United States, Canada and the United Kingdom. In
addition, the Company may establish a presence in deregulating Western
European markets that have high density telecommunications traffic, such as
France and Germany, when the Company believes that business and regulatory
conditions warrant. There can be no assurance that the Company will be
able to add service or expand its markets at the rate presently planned by
the Company or that the existing regulatory barriers will be reduced or
eliminated. The Company's rapid growth has placed, and in the future may
continue to place, a significant strain on the Company's administrative,
operational and financial resources and increased demands on its systems
and controls. As the Company increases its service offerings and expands
its targeted markets, there will be additional demands on the Company's
customer support, sales and marketing and administrative resources and
network infrastructure. There can be no assurance that the Company's
operating and financial control systems and infrastructure will be adequate
to maintain and effectively monitor future growth. The failure to continue
to upgrade the administrative, operating and financial control systems or
the emergence of unexpected expansion difficulties could materially
adversely affect the Company's business, results of operations and
financial condition.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A key component of the Company's strategy is its planned expansion in
international markets. To date, the Company has only limited experience in
providing telecommunications service outside the United States and Canada.
There can be no assurance that the Company will be able to obtain the
capital it requires to finance its expansion in international markets on
satisfactory terms or at all. In many international markets, protective
regulations and long-standing relationships between potential customers of
the Company and their local providers create barriers to entry. Pursuit of
international growth opportunities may require significant investments for
an extended period before returns, if any, on such investments are
realized. In addition, there can be no assurance that the Company will be
able to obtain the permits and operating licenses required for it to
operate, to hire and train employees or to market, sell and deliver high
quality services in these markets. In addition to the uncertainty as to
the Company's ability to expand its international presence, there are
certain risks inherent 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. A vendor of the
Company's software, which formerly was an affiliate of the Company, has a
unique knowledge of certain of the Company's software and the Company may
be dependent on the vendor for any modifications to the software. The
Company believes that it currently is the only customer of the vendor and,
as a result, the vendor is financially dependent on the Company. In
addition, as the Company's suppliers revise and upgrade their hardware,
software and equipment technology, there can be no assurance that the
Company will not encounter difficulties in integrating the new technology
into the Company's business or that the new systems will be appropriate for
the Company's business.
RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
As part of its business strategy, the Company expects to seek to
develop strategic alliances both domestically and internationally and to
acquire assets and businesses or make investments in companies that are
complementary to its current operations. The Company has no present
commitments or agreements with respect to any such strategic alliance,
investment or acquisition. Any such future strategic alliances,
investments or acquisitions would be accompanied by the risks commonly
encountered in strategic alliances with or acquisitions of or investments
in companies. Such risks include, among other things, the difficulty of
assimilating the operations and personnel of the companies, the potential
disruption of the Company's ongoing business, the inability of management
to maximize the financial and strategic position of the Company by the
successful incorporation of licensed or acquired technology and rights into
the Company's service offerings, the maintenance of uniform standards,
controls, procedures and policies and the impairment of relationships with
employees and customers as a result of changes in management. In addition,
the Company has experienced higher attrition rates with respect to
customers obtained through acquisitions, and may continue to experience
higher attrition rates with respect to any customers resulting from future
acquisitions. Moreover, to the extent that any such acquisition,
investment or alliance involved a business located outside the United
States, the transaction would involve the risks associated with
international expansion. See "-Risks Associated with International
Expansion." There can be no assurance that the Company would be successful
in overcoming these risks or any other problems encountered with such
strategic alliances, investments or acquisitions.
In addition, if the Company were to proceed with one or more
significant strategic alliances, acquisitions or investments in which the
consideration consists of cash, a substantial portion of the Company's
available cash (including proceeds of this offering) could be used to
consummate the strategic alliances, acquisitions or investments. If the
Company were to consummate one or more significant strategic alliances,
acquisitions or investments in which the consideration consists of stock,
shareholders of the Company could suffer a significant dilution of their
interests in the Company. Many of the businesses that might become
attractive acquisition candidates for the Company may have significant
goodwill and intangible assets, and acquisitions of these businesses, if
accounted for as a purchase, would typically result in substantial
amortization charges to the Company. The financial impact of acquisitions,
investments and strategic alliances could have a material adverse effect on
the Company's business, financial condition and results of operations and
could cause substantial fluctuations in the Company's quarterly and yearly
operating results.
TECHNOLOGICAL CHANGES MAY ADVERSELY AFFECT COMPETITIVENESS AND FINANCIAL
RESULTS
The telecommunications industry is characterized by rapid and
significant technological advancements and introductions of new products
and services utilizing new technologies. There can be no assurance that
the Company will maintain competitive services or that the Company will
obtain appropriate new technologies on a timely basis or on satisfactory
terms.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the
continued contributions of its management team and technical, marketing and
sales personnel. The Company's employees may voluntarily terminate their
employment with the Company at any time. Competition for qualified
employees and personnel in the telecommunications industry is intense and,
from time to time, there are a limited number of persons with knowledge of
and experience in particular sectors of the telecommunications industry.
The Company's success also will depend on its ability to attract and retain
qualified management, marketing, technical and sales executives and
personnel. The process of locating such personnel with the combination of
skills and attributes required to carry out the Company's strategies is
often lengthy. The loss of the services of key personnel, or the inability
to attract additional qualified personnel, could have a material adverse
effect on the Company's results of operations, development efforts and
ability to expand. There can be no assurance that the Company will be
successful in attracting and retaining such executives and personnel. Any
such event could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISK ASSOCIATED WITH FINANCING ARRANGEMENTS; DIVIDEND RESTRICTIONS
The Company's financing arrangements are secured by substantially all
of the Company's assets and require the Company to maintain certain
financial ratios and restrict the payment of dividends, and the Company
anticipates that it will not pay any dividends on Class A Common Stock in
the foreseeable future. These financial arrangements will require the
repayment of significant amounts and significant reductions in borrowing
capacity thereunder during the next five years. The Company's secured
lenders would be entitled to foreclose upon those assets in the event of a
default under the financing arrangements and to be repaid from the proceeds
of the liquidation of those assets before the assets would be available for
distribution to the Company's other creditors and shareholders in the event
that the Company is liquidated. In addition, the collateral security
arrangements under the Company's existing financing arrangements may
adversely affect the Company's ability to obtain additional borrowings or
other capital. The Company may need to raise additional capital from
equity or debt sources to finance its projected growth and capital
expenditures contemplated for periods after 1996. See "Substantial
Indebtedness; Need for Additional Capital."
HOLDING COMPANY STRUCTURE; RELIANCE ON SUBSIDIARIES FOR DIVIDENDS
ACC Corp. is a holding company, the principal assets of which are its
operating subsidiaries in the U.S., Canada and the U.K. ACC Canada, a 70%
owned subsidiary of ACC Corp., is a public company listed on the Toronto
Stock Exchange and the Montreal Stock Exchange. The ability of ACC Canada
to declare and pay dividends is restricted by the terms of the agreement
under which the Company's Series A Preferred Stock was issued. In
addition, ACC Canada's ability to make other payments to ACC Corp. and its
other subsidiaries may be dependent upon the taking of action by ACC
Canada's Board of Directors, applicable Canadian and provincial law and
stock exchange regulations, in addition to the availability of funds. At
the present time, three of ACC Canada's seven directors are representatives
of ACC Corp. ACC Corp's percentage ownership interest in ACC Canada may
decrease over time as a result of stock issuances or sales or,
alternatively, may increase over time as a result of stock purchases,
investments or other transactions. ACC U.S., ACC Canada, ACC U.K. and
other operating subsidiaries of the Company are subject to corporate law
restrictions on their ability to pay dividends to ACC Corp. There can be no
assurance that ACC Corp. will be able to cause its operating subsidiaries
to declare and pay dividends or make other payments to ACC Corp. when
requested by ACC Corp. The failure to pay any such dividends or make any
such other payments could have a material adverse effect upon the Company's
business, financial condition and results of operations.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the Class A Common Stock has been and may continue
to be, highly volatile. Factors such as variations in the Company's
revenue, earnings and cash flow, the difference between the Company's
actual results and the results expected by investors and analysts and
announcements of new service offerings, marketing plans or price reductions
by the Company or its competitors could cause the market price of the Class
A Common Stock to fluctuate substantially. In addition, the stock markets
recently have experienced significant price and volume fluctuations that
particularly have affected telecommunications companies and resulted in
changes in the market prices of the stocks of many companies that have not
been directly related to the operating performance of those companies.
Such market fluctuations may materially adversely affect the market price
of the Class A Common Stock.
RISKS ASSOCIATED WITH DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Company uses various financial
instruments, including derivative financial instruments, to hedge its
foreign exchange and interest rate risks. The Company does not use
derivative financial instruments for speculative purposes. By their
nature, all such instruments involve risk, including the risk of
nonperformance by counterparties, and the Company's maximum potential loss
may exceed the amount recognized on the Company's balance sheet.
Accordingly, losses relating to derivative financial instruments could have
a material adverse effect upon the Company's business, financial condition
and results of operations.
