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 JUNE 30, 1997.
( ) 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 (IRS 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 August 1, 1997, the Registrant had issued and outstanding
16,803,665 shares of its Class A Common Stock, par value $.015
per share.
The Index of Exhibits filed with this Report is found at Page 30.
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)
Three months ended Six months ended
June 30, June 30,
<CAPTION>
1997 1996 1997 1996
Revenue:
<S> <C> <C> <C> <C>
Toll revenue $80,837 $74,600 $154,677 $136,137
Local service and other 8,664 5,489 17,476 10,805
89,501 80,089 172,153 146,942
Network costs 53,520 53,380 102,136 94,988
Gross profit 35,981 26,709 70,017 51,954
Other operating expenses:
Depreciation and amortization 5,348 4,176 10,479 7,795
Selling, general and administrative 24,766 19,354 48,300 37,989
30,114 23,530 58,779 45,784
Income from operations 5,867 3,179 11,238 6,170
Other income (expense):
Net Interest (689) (910) (1,340) (2,434)
Foreign exchange gain (loss) (36) 14 (188) 26
(725) (896) (1,528) (2,408)
Income before provision for income
taxes and minority interest 5,142 2,283 9,710 3,762
Provision for income taxes 778 529 1,294 853
Income before minority interest 4,364 1,754 8,416 2,909
Minority interest in (earnings) of
consolidated subsidiary 0 (296) 0 (596)
Net income 4,364 1,458 8,416 2,313
Less Series A preferred stock dividend 0 (339) 0 (638)
Less Series A preferred stock accretion 0 (416) 0 (624)
Income applicable to common stock $4,364 $703 $8,416 $1,051
Earnings per common and common
equivalent share $0.25 $0.05 $0.48 $0.08
</TABLE>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
UNAUDITED
June 30, December 31,
1997 1996
CURRENT ASSETS:
Cash and cash equivalents $0 $2,035
Accounts receivable, net of allowance
for doubtful accounts of $3,612 in
1997 and $3,795 in 1996 56,442 51,474
Other receivables 3,057 3,792
Prepaid expenses and other assets 6,584 4,632
TOTAL CURRENT ASSETS 66,083 61,933
PROPERTY, PLANT, AND EQUIPMENT
At cost 135,964 119,398
Less-accumulated depreciation and
amortization (45,472) (38,946)
TOTAL PROPERTY, PLANT, AND EQUIPMENT 90,492 80,452
OTHER ASSETS:
Goodwill and customer base, net 51,770 50,629
Deferred installation costs, net 4,795 4,312
Other 11,614 6,705
TOTAL OTHER ASSETS 68,179 61,646
TOTAL ASSETS $224,754 $204,031
June 30, December 31,
1997 1996
CURRENT LIABILITIES:
Notes payable $277 $730
Current maturities of
long-term debt 2,417 3,521
Accounts payable 14,778 15,351
Accrued network costs 25,470 22,908
Other accrued expenses 17,058 34,884
TOTAL CURRENT LIABILITIES 60,000 77,394
Deferred income taxes 3,186 2,767
Long-term debt 33,419 6,007
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 - 17,828,159 in 1997 and
17,684,361 in 1996 268 265
Class B Common Stock, $.015 par value,
Authorized - 25,000,000 shares;
Issued - no shares - -
Capital in excess of par value 118,831 116,878
Cumulative translation adjustment (1,448) (1,362)
Retained earnings 12,108 3,692
129,759 119,473
Less-
Treasury stock, at cost (1,089,884
shares in 1997 and 1996) (1,610) (1,610)
TOTAL SHAREHOLDERS' EQUITY 128,149 117,863
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $224,754 $204,031
<TABLE>
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in 000's)
FOR THE SIX MONTHS ENDED
JUNE 30,
<CAPTION>
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $8,416 $2,313
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 10,479 7,795
Deferred income taxes 1,538 (106)
Minority interest in earnings of consolidated subsidiary 596
Unrealized foreign exchange loss (26) (42)
Amortization of deferred financing costs 278 0
(INCREASE) DECREASE IN ASSETS:
Accounts receivable, net (4,871) (11,573)
Other receivables (546) 1,434
Prepaid expenses and other assets (1,972) (106)
Deferred installation costs (1,725) (1,476)
Other (4,299) (154)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable (1,446) (1,113)
Accrued network costs 2,719 1,506
Other accrued expenses (17,769) 445
Net cash provided by (used in) operating activities (9,224) (481)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (17,611) (9,659)
Payment for purchase of subsidiary, net of cash acquired (1,850)
Acquisition of customer base (465) (2,193)
Net cash used in investing activities (19,926) (11,852)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit and notes payable 84,443 19,500
Repayments under lines of credit and notes payable (53,100) (41,883)
Repayment of long-term debt, other than lines of credit (5,462) (1,554)
Proceeds from issuance of common stock 1,956 66,385
Financing costs (1,273) 0
Net cash provided by financing activities 26,564 42,448
Effect of exchange rate changes on cash 551 (253)
Net increase (decrease) in cash from operations (2,035) 29,862
Cash and cash equivalents at beginning of period 2,035 518
Cash and cash equivalents at end of period $0 $30,380
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $1,371 $1,798
Income taxes $920 $958
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Fair Value of Transphone assets acquired other than cash $3,777 $0
Fair value of Transphone liabilities assumed 0 0
Net cash paid $1,850 $0
</TABLE>
ACC CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997
1. Statement of Management
The condensed financial statements of ACC Corp. and subsidiaries
(the "Company") included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented not
misleading. These condensed financial statements be read in conjunction
with the financial statements and the notes thereto included in the
Company's latest Annual Report on Form 10-K.
The interim financial statements contained herein reflect all
adjustments of a normal recurring nature which are, in the opinion of
management, necessary to a fair statement of the results of operations for
the interim periods presented.
As used herein, unless the context otherwise requires, the
"Company" and "ACC" refer to ACC Corp. and its subsidiaries, including its
U.S. operating subsidiaries("ACC U.S."), ACC TelEnterprises Ltd.("ACC
Canada"), ACC Long Distance UK Ltd. ("ACC U.K."), and ACC
Telecommunications GmbH ("ACC Germany"). In this Form 10-Q, references to
"dollar" and "$" are to United States dollars, references to "Cdn. $" are
to Canadian dollars, references to "pound" are to English pounds sterling,
references to "DM" are to German Deutchmarks, 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. "North American Operations" includes operations in the
United States and Canada, while "Europe Operations" includes operations in
the United Kingdom and Germany operations.
2. Form 10-K
Reference is made to the following footnotes included in the
Company's 1996 Annual Report on Form 10-K:
Principles of Consolidation
Minority Interest
Revenue
Other Receivables
Property, Plant and Equipment
Deferred Costs
Goodwill and Customer Base
Common and Common Equivalent Shares
Foreign Currency Translation
Income Taxes
Cash Equivalents
Derivative Financial Instruments
Financial Instruments
Stock-Based Compensation
Use of Estimates
Reclassifications
Description of Business
Equal Access Costs
Debt
Senior Credit Facility and Lines of Credit
Working Capital Lines of Credit
Income Taxes
Redeemable Preferred Stock
Public Offerings
Private Placement
Stock-Based Compensation
Employee Long-Term Incentive Plan
Employee Stock Purchase Plan
Non-Employee Directors' Stock Option Plan
United Kingdom Sharesave Scheme
Treasury Stock
Operating Leases
Employment and Other Agreements
Purchase Commitments
Defined Contribution Plans
Annual Incentive Plan
Legal Matters
Geographic Area Information
Related Party Transactions
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 (1996 data
retroactively restated for a three-for-two stock split as of August 8,
1996) is computed as follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
Average Number Outstanding: 1997 1996 1997 1996
Common Shares 16,726,483 14,006,467 16,690,640 12,984,746
Common Equivalent Shares 707,503 1,104,422 794,888 1,025,529
TOTAL 17,433,986 15,110,889 17,485,528 14,010,275
Fully diluted income per share amounts are not presented for the prior
period because inclusion of these amounts would be anti-dilutive. Fully
diluted income per share amounts for the current period do not differ
materially from primary earnings per share amounts.
4. Recently issued accounting standards
SFAS No. 128
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share,"
which is applicable to the Company beginning in the fourth quarter of 1997.
This statement, upon adoption, will require all prior-period earnings per
share ("EPS") data to be restated, to conform to the provisions of the
statement. The statement will eliminate the disclosure of primary earnings
per share which includes the dilutive effect of stock options, warrants and
other convertible securities ("Common Stock Equivalents") and instead
requires reporting of "basic" earnings per share, which will exclude Common
Stock Equivalents. Additionally, the statement changes the methodology for
fully diluted earnings per share. In the opinion of the Company's
management, the adoption of this new accounting standard will not have a
material effect on the reported earnings per share of the Company.
While the Statement prohibits early adoption, pro forma presentation
of the impact of the Statement for the reporting periods is illustrated
below:
<TABLE>
Pro Forma Earnings Per Share Computation under FAS 128
Three Months ended Six Months ended
June 30,1997 and 1996 June 30, 1997 and 1996
(amounts in thousands except (amounts in thousands except
share and per share amounts) share and per share amounts)
1997 1996 1997 1996
<CAPTION>
Income Shares Per Share Income Shares Per Share Income Shares Per Share Income Shares Per Share
Basic EPS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income $4,364 $1,458 $8,416 $2,313
Less: preferred
stock dividends
and preferred
stock accretion - (755) - (1,262)
Income available to
common shareholders $4,364 16,726,483 $.26 $ 703 14,006,467 $.05 $8,416 16,690,640 $.50 $ 1,051 12,984,746 $.07
Diluted EPS
Add: Options and
warrants - 707,503 - 1,104,422 - 794,888 - 1,025,529
Income available to
common shareholders $4,364 17,433,986 $.25 $ 703 15,110,889 $.05 $8,416 17,485,528 $.48 $ 1,051 14,010,275 $.07
</TABLE>
Pro forma basic earnings per common share were computed by
dividing net income by weighted average number of shares of
common stock outstanding during the quarter. The pro forma
dilutive effect of options and warrants reflects application of
the treasury stock method, utilizing average market prices during
the period, and excludes any assumed exercise that would have
been antidilutive. Assumed conversion of outstanding redeemable
and convertible preferred stock at June 30,1996 was excluded from
the above, as the effect would have been antidilutive.
SFAS No. 130
In June 1997, the FASB issued Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income", which is
applicable to the Company effective January 1, 1998. This
Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses,
gains and losses)in a full set of general purpose financial
statements. Comprehensive income is defined as the change in the
equity of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources. It
includes all changes in equity during a period (from net income
and other sources) except those resulting from investments by owners
and distributions to owners. Management believes that the adoption
of this statement will not have a material effect on the
Company's consolidated results of operations or financial
position.
SFAS No. 131
In June 1997, the FASB issued Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise
and Related Information", which is applicable to the Company
effective January 1,1998. This Statement requires that a public
business enterprise report financial and descriptive information
about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information
is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Statement requires disclosure of a measure of segment
profit or loss, certain specific revenue and expense items, and segment
assets. It requires reconciliations of total segment revenues,
total segment profit or loss, total segment assets, and other
amounts disclosed for segments to corresponding amounts in the
enterprise's general purpose financial statements. It requires that
all public business enterprises report information about the revenues
derived from the enterprise's products or services, about the countries
in which the enterprise earns revenues and holds assets, and about
major customers regardless of whether that information is used in
making operating decisions. Management believes that the
adoption of this statement will not have a material effect on the
Company's consolidated results of operations or financial
position.
5. Senior Credit Facility
Under the terms of the five-year senior revolving credit
facility agreement of July 21, 1995, the Company was obligated to
pay the financial institution an aggregate contingent interest
payment based on the minimum of $750,000 or the appreciation in
value of 140,000 shares of the Company's Class A Common Stock
over the 18 month period ending January 21, 1997, but not to
exceed $2.1 million. A payment of $2.1 million was made on
January 15, 1997 in conjunction with the amendment to the credit
facility, and was reflected as an accrued expense on the balance
sheet at December 31, 1996.
On January 14, 1997, the Company signed an agreement with
the same financial institution to provide a $100 million credit
facility to the Company which amended and restated the previous
$35 million credit facility. The amended credit facility was
syndicated among five financial institutions. Borrowings can be
made in U.S. dollars, Canadian dollars and British pounds, and
are limited individually to $30 million for ACC Canada, $20
million for ACC U.K. and $15 million for the Company's local
exchange business in the U.S., with total borrowings for the
Company limited to $100 million. The amended facility will be
used to finance capital expenditures, provide working capital and
to provide capital for acquisitions. The maximum aggregate
principal amount of the amended facility is required to be
reduced by $8 million per quarter commencing on March 31, 1999
until December 31, 2000, and by $9 million per quarter commencing
on March 31, 2001 until maturity of the loan in January 2002.
6. Business Combinations
On May 30, 1997 ACC U.K. acquired Transphone International Ltd.
("Transphone") in a business combination accounted for as a
purchase. Transphone, a long distance reseller, is based in
London, United Kingdom, and provides international and domestic
long distance services. Transphone reported 1.5 million pounds (U.S.
$2.4 million) annual revenues for the year ended December 31,
1996. The results of operations of Transphone are included in the
accompanying financial statements since the date of acquisition,
and the impact on results of operations for the quarter ended
June 30, 1997 was not material. On May 30, 1997 ACC U.K. paid
1.1 million pounds (U.S. $1.8 million) for 100% of the outstanding
common stock of Transphone. The fair value of assets acquired
was 2.3 million pounds (U.S. $3.8 million) and liabilities assumed were
1.2 million pounds (U.S. $1.9 million). Goodwill associated with the
purchase of 0.8 million pounds (U.S. $1.3 million) is being amortized
over 20 years, and customer base of 1.1 million pounds (U.S. $1.8
million) is being amortized over 5 years. (Note: U.S. dollar
equivalent amounts noted above are estimated based on the May 30,
1997 exchange rate).
On July 15, 1997 ACC U.K. acquired United Telecom Ltd. ("UT") in
a business combination which will be accounted for as a purchase.
UT, a pre-paid calling card and long distance services provider, is
based in London U.K.. The results of operations of UT will be
reflected in the third quarter results of operations effective 7/1/97.
The difference in results of operations from July 1 to July 15, 1997
is deemed not material. UT reported annual revenues of 2.8
million pounds (US $4.5 million) for the fiscal year ended April 30,
1997. On July 15, 1997 ACC U.K. paid 2.5 million pounds (US $4.1
million) for 100% of the outstanding common stock of UT. The
former shareholders of UT may earn additional purchase price
consideration of up to 1.0 million pounds (U.S. $1.6 million) if
certain profit objectives are attained during 1998. The fair
value of assets acquired was 4.7 million pounds (US $7.7 million) and
liabilities assumed were 2.2 million pounds (US $3.6 million).
Goodwill associated with the purchase of 2.9 million pounds (US $4.7
million) will be amortized over 20 years, and customer base of
0.6 million pounds (US $1.0 million) will be amortized over 5 years.
(Note: U.S. dollar equivalent amounts noted above are estimated
based on the July 15, 1997 exchange rate).
7. Derivative Financial Instruments
The Company uses derivative financial instruments to reduce
its exposure to market risks from changes in foreign
exchange rates and interest rates. The Company does not
hold or issue financial instruments for speculative
purposes. The derivative instruments used are currency
forward contracts and interest rate swap agreements. These
derivatives are non-leveraged and involve little complexity.
The Company enters into contracts to buy and sell foreign
currencies in the future in order to protect the U.S. dollar
value of certain currency positions and future foreign
currency transactions. The fair value method is used to
account for these instruments. Under the fair value method,
changes in fair value are recognized in the consolidated
balance sheet as a component of other accrued expenses, and
in the consolidated income statement as foreign currency
gain or loss. For reporting purposes, the contractual
assets or liabilities of the foreign currency agreements are
offset because the agreements provide for a right of offset.
Any premiums or discounts related to foreign currency
contracts are amortized over the life of the contracts.
The Company enters into cross-currency rate swaps to hedge
intercompany debt from certain subsidiaries. Under these
agreements, the Company typically pays a fixed rate of
interest on a foreign dollar note, and receives a variable
rate of interest on a U.S. dollar receivable. The fair
value method is used to account for these instruments.
Under the fair value method, the amounts receivable and
payable are carried at their fair value on the consolidated
balance sheet as a component of other receivables. Changes
in the fair value are recognized in the consolidated income
statement as foreign currency gain or loss. Interest due
under the fixed contracts and interest receivable under the
variable contracts are recognized in the consolidated income
statement as a component of net interest expense.
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," "Potential Adverse Effects of
Regulation," "Increasing Domestic and International Competition,"
"Expansion of Local Exchange Business," "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," "Risks Associated with Rapidly Changing
Industry," "Dependence on Key Personnel," "Risks Associated with
Financing Arrangements; Dividend Restrictions," "Holding Company
Structure; Reliance on Subsidiaries for Dividends," "Potential
Volatility of Stock Price," "Risks Associated with Derivative
Financial Instruments," "Currency Risks; Possible Effect on
Financial Condition, Operating Results and Financing Costs;
Exchange Controls," "International Tax Risks" and "Risks of Entry
into Cellular Business and Expansion of Internet, Paging and Data
Transmission Businesses," 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(per
minute charges for long distance services) 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
provision of local exchange services, including local dial tone,
direct access lines, Internet fees and monthly subscription fees,
and also from data services. 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 North American and European
operations during the three and six month periods ended June 30,
1997 and 1996:
<TABLE>
Three Months ended Six Months ended
June 30, 1997 and 1996 June 30, 1997 and 1996
(dollars and minutes in thousands) (dollars and minutes in thousands)
1997 1996 1997 1996
<CAPTION>
Amount Percent Amount Percent Amount Percent Amount Percent
Total Revenue:
North America:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
US $ 26,441 29.5% $ 28,980 36.2% $52,409 30.4% $ 48,735 33.2%
Canada 29,699 33.2 29,723 37.1 59,390 34.5 57,567 39.2
Total North America 56,140 62.7 58,703 73.3 111,799 64.9 106,302 72.3
Europe:
UK 33,358 37.3 21,386 26.7 60,351 35.1 40,642 27.7
Germany 3 - - 0.0 3 - - 0.0
Total Europe 33,361 37.3 21,386 26.7 60,354 35.1 40,642 27.7
Total Revenue $ 89,501 100% $ 80,089 100% $172,153 100% $146,944 100%
Billable Long Distance Minutes of Use:
North America:
US 173,400 30.9% 136,932 32.0% 343,542 31.8% 275,450 33.0%
Canada 202,585 36.0 168,435 39.3 389,483 36.0 327,203 39.2
Total North America 375,985 66.9 305,367 71.3 733,025 67.8 602,653 72.1
Europe:
UK 185,918 33.1 123,032 28.7 348,386 32.2 232,863 27.9
Germany - - - 0.0 - - - 0.0
Total Europe 185,918 33.1 123,032 28.7 348,386 32.2 232,863 27.9
Total Minutes 561,903 100% 428,399 100% 1,081,411 100% 835,516 100%
</TABLE>
The following table presents certain information concerning
long distance toll revenue (net of intercompany revenue) per
billable minute and network cost per billable minute attributable
to the Company's North American and European operations during
the three and six month periods ended June 30, 1997 and 1996:
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Toll Revenue Per Billable Long Distance Minute:
North America
United States $0.128 $0.198 $0.128 $0.163
Canada 0.125 0.156 0.130 0.155
Total North America $0.127 $0.175 $0.129 $0.159
Europe
United Kingdom $0.179 $0.173 $0.173 $0.174
Germany - - - -
Total Europe $0.179 $0.173 $0.173 $0.174
Network Cost Per Billable Long Distance Minute:
Total North America $0.085 $0.128 $0.087 $0.112
Total Europe 0.116 0.116 0.111 0.119
The Company believes that historically its revenue growth as
well as its network costs and results of operations for 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 regulatory environment in those
markets. The Company entered the U.S, Canadian, and U.K
telecommunications markets in 1982, 1985, and 1993, respectively.
In 1997, the Company established a subsidiary in Germany, and
expects to offer long distance service as a switchless reseller
during the third quarter of 1997. The Company believes that toll
revenue per billable minute and network cost per billable minute
will be lower in future periods, and heavily influenced by
competitive pressures and regulatory actions.
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 services and network
costs have been stabilizing during the past few years. This may
change in the future as a result of the 1996 Amendment to the
U.S. Communications Act (the "1996 Act") that further opened the
market to competition, particularly from the regional Bell
operating companies ("RBOCs").
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 and
1995. Although revenue per minute increased from 1995 to 1996
due to changes in customer and product mix, revenue per minute
fell during the first half of 1997, and the Company expects such
downward pressure to continue. 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, Internet services, and, since February
1997, paging services.
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,
but the rate of growth is expected to decline. 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 UK'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. The Company has actively pursued growth opportunities in
the U.K. market. On May 30, 1997, the Company acquired
Transphone Ltd.. Transphone provides domestic and international
long distance service as a reseller, and is based in London,
U.K.. In acquiring Transphone Ltd., the Company obtained what it
believes is a strong base of commercial customers in a desirable
geographic area. On July 15, 1997 the Company also acquired
United Telecom Ltd. ("UT"). UT provides domestic and
international long distance services through a pre-paid calling
card platform in retail telephone shops. UT is based in London,
U.K.. In acquiring UT, the Company obtains what it believes is a
new delivery channel in a growing niche market. The acquisition
is also expected to create network cost efficiencies, as UT's
customers have peak calling activity at night and on weekends.
This calling pattern will enable the Company to facilitate
routing of off-peak traffic over the Company's switched based
network, thereby adding to economies of scale. The Transphone
Ltd. and UT acquisitions are expected to be accretive to earnings
commencing in 1998. The foregoing forward looking statements are
based upon expectations with respect to customer behavior, market
trends and the Company's ability to successfully integrate and
develop the businesses acquired. If such expectations are not
realized, actual results may differ materially from the foregoing
discussion.
The German telecommunications market is expected to substantially
deregulate in January 1998, as a result of the European Union
("EU") mandate to open telecommunications markets to competition.
Most significantly, the German market is scheduled to be open for
interconnection in January 1998. The Company has established a
subsidiary in Germany, and signed a resale agreement with
Deutsche Telekom ("DT") on May 20, 1997. Further, the Company
received a Class 4 full voice telephony license from the German
Ministry of Post and Telecommunications which is effective
January 1, 1998. This license is a requirement for the Company
to become a switch-based provider of telecommunications services
in Germany. The Company is in the process of negotiating an
interconnection agreement with DT. The Company believes it is
positioned to develop a moderate amount of revenue in the third
and fourth quarter of 1997 as a switchless reseller, with
potentially more substantial revenue growth in 1998 if the market
is fully deregulated. The foregoing forward-looking statement is
based upon expectations with respect to regulatory actions and
cooperation from DT. If such expectations are not realized, the
expected revenue growth from the German market may not
materialize.
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 geographic markets. The Company expects to
continue to expand the breadth and scale of its network and
related sales and marketing, customer support and operating
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 geographic markets.
The Company recently announced the creation of two
continental operating divisions in North America and Europe. In
conjunction with this new structure, the Company plans to further
expand its European operations as business activity more fully
develops in the deregulating German market and by entering other
telecommunications marketplaces when regulatory and market
conditions warrant. While the Company has had a successful
history of entering into newly deregulated markets, there can be
no assurances that the same successes will be experienced in the
future.
The Company has also expanded operations in the U.S. local
exchange business and anticipates that a significant portion of
its future growth will come from this business. The local
exchange business is highly competitive and includes several
larger, better capitalized local service providers, including
AT&T, among others, who can sustain losses associated with
discount pricing, and the high initial investment and expenses
typically incurred to attract local customers. The Company's
U.S. local service business commenced operations in 1994 and
generated a small operating profit for the first six months of
1997, and for the full year 1996. However, there can be no
assurances that the Company will continue to achieve positive
cash flow or profitability in this business in the future.
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. Revenues from wholesale
carriers accounted for approximately 20% and 31% of the revenues
of ACC North America and ACC Europe, respectively, in the second
quarter of 1997, and 19% and 26% for the six months ended June
30, 1997. Included in 1996 second quarter and six month revenues
were $9 million of North American non recurring carrier revenues,
or 11% and 8% of consolidated revenues. 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.
Carrier revenue for the second quarter of 1997 was 24% of the
Company's consolidated revenue compared to 29% in the second
quarter of 1996, and 21% for the six months ended June 30, 1997
compared to 24% for the six months ended June 30, 1996.
Management believes that carrier revenue will continue to average
20% to 25% 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 quarters ended June
30, 1997 and 1996, and the six months ended June 30, 1997 and
1996, certain Statement of Operations data expressed as a
percentage of total revenue:
<TABLE>
Three Months ended Six Months ended
June 30, 1997 and 1996 June 30, 1997 and 1996
1997 1996 1997 1996
<CAPTION>
Revenue:
<S> <C> <C> <C> <C>
Toll revenue 90.3% 93.1% 89.8% 92.6%
Local service and other 9.7 6.9 10.2 7.4
Total revenue 100.0 100.0 100.0 100.0
Network costs 59.8 66.7 59.3 64.6
Gross profit 40.2 33.3 40.7 35.4
Other operating expenses:
Depreciation and amortization 6.0 5.2 6.1 5.3
Selling, general and administrative 27.6 24.2 28.1 25.9
Total other operating expenses 33.6 29.4 34.2 31.2
Income from operations 6.6 3.9 6.5 4.2
Total other income (expenses) < 0.8> <1.1> <0.9> <1.6>
Income from operations before provision
for income taxes and minority
interest 5.7 2.8 5.6 2.6
Provision for income taxes 0.9 0.7 0.8 0.6
Minority interest in (income)
loss of consolidated subsidiary - <.4> - <.4>
Income (loss) from operations 4.9% 1.7% 4.8% 1.6%
</TABLE>
QUARTER ENDED JUNE 30, 1997 COMPARED WITH QUARTER ENDED JUNE 30,
1996
REVENUE. Total revenue for the quarter ended June 30, 1997
increased $9.4 million, or 12%, to $89.5 million from $80.1
million for the same period in 1996. Long distance toll revenue
increased $6.2 million, or 8%, to
$80.8 million from $74.6 million, and local service and other
revenue increased $3.2 million, or 58%, to $8.7 million from $5.5
million. The growth in long distance toll revenues was fueled by
a 31% increase in billable minutes and 27% growth in number of
customer accounts. Revenue from wholesale carriers during the current
quarter declined to $21.5 million (24% of total revenues) from $23.5
million (29% of total revenues)for the same period in 1996.
Significantly reduced revenues from two carriers were realized in
the current quarter, accounting for a $3.8 million reduction in
carrier revenues from the same quarter in 1996. Additionally,
the 1996 quarter reflects $9 million of non recurring carrier
revenues. Excluding wholesale carrier revenues, long distance toll
revenue for the current quarter increased 16% from the same period in
1996. Long distance toll revenue per billable minute for the current
quarter decreased 17%, from $.174 to $.144, largely a result of competitive
pricing pressures and lower revenue from carriers. The growth in other
revenues is largely attributable to growth in market share in the
competitive local exchange business in the U.S. and a full quarter of
revenues in 1997 from Internet revenues in Canada compared to one
month in 1996.
Total revenue (unaffiliated) in North America for the current
quarter decreased 4% from the same period in 1996. Long distance
toll revenue (unaffiliated) decreased 11% from 1996, as the 1996
quarter included $9 million of non recurring carrier revenue.
Excluding carrier revenues, long distance toll revenue for the
current quarter increased 11% from the same period in 1996, and
is attributable to growth in minutes and customer accounts. Long
distance toll revenue per minute for the current quarter
decreased 27% from $.175 to $.127, a result of competitive
pricing pressures in both the U.S. and Canada and lower revenue
from carriers. Local service and other revenues for the current
quarter increased 58% over the same period in 1996, a result of
growth in U.S. local exchange revenues and increased Internet related
revenues in Canada. The Company continues to invest in the
local exchange business, having recently installed switches in
Buffalo and Albany, and has planned installations for additional
switches in New York City, Boston and Springfield Massachusetts.
Continued expansion and growth in local exchange service, Internet
and other services is expected to become a larger component of
total revenues in future periods.
Total revenue (unaffiliated) in Europe (substantially all long
distance toll revenue) for the current quarter increased 56% from
the same period in 1996. Excluding carrier revenues, long
distance toll revenue for the current period increased 25% from
the same period in 1996, and is attributable to growth in minutes
and customers accounts. Long distance toll revenue per billable
minute for the current quarter increased 3% from $.173 to $.179 as
the impact of higher revenues from carriers offset retail price
reductions implemented during the quarter for international and
domestic long distance rates. No material revenues from the German
operating unit were generated during the current quarter.
NETWORK COST. Network cost for the quarter ended June 30, 1997
increased $.1 million, or 0%, to $53.5 million from $53.4 million
for the same period in 1996. As a percent of revenue, network
cost for the current quarter was 60% compared to 67% for the same
period in 1996. Network cost per billable minute for the current
quarter decreased 24%, from $.125 to $.095. The reduction of
current quarter network cost as a percent of revenue, and per
minute, is largely attributable to 1) reduced contribution
charges enacted during the quarter in Canada, 2) a favorable
shift in business/customer mix, as higher margin local exchange
revenues constitute a higher percent of revenues in 1997 as
compared to 1996, and lower margin wholesale carrier revenues
constitute a lower percentage of 1997 revenues as compared to
1996, and 3) internal network efficiencies.
Network cost in North America for the current quarter as a
percent of unaffiliated revenue decreased to 57% from 67% for the
same period in 1996, and per billable minute also decreased from
$.128 to $.085. These improvements resulted from the aforementioned
reduction in Canadian contribution charges, increased amount of higher
margin local exchange revenue in the U.S., and internal network
efficiencies. Network cost in Europe for the current quarter as
a percent of unaffiliated revenue decreased to 65% from 67% for
the same period in 1996, and per billable minute was essentially
unchanged at $.116. Recent investments in switches, a microwave
network and IRU are expected to more significantly lower network
costs in the near term, as ownership of these facilities will
enable the company to reduce reliance on leased lines and
increase network capacity. This forward looking statement is
based on expectations regarding customer demand and the relative
cost and availability of leased lines and alternative
transmission facilities in the Company's markets, and could be
adversely impacted by competitive pricing pressures. If such
expectations are not realized, the Company's actual results may
differ materially from the foregoing discussion.
OTHER OPERATION EXPENSES - DEPRECIATION AND AMORTIZATION. Total
depreciation expense for the quarter ended June 30, 1997
increased $1.2 million, or 28%, from $4.2 million for the same
period in 1996, largely attributable to recent switch
installations in Albany and Buffalo, and other capital
expenditures, as well as higher amortization of the customer base
and goodwill associated with the Internet Canada acquisition in
1996.
OTHER OPERATION EXPENSES - SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES. Total Selling, General and Administrative expenses
("SG&A") for the quarter ended June 30, 1997 increased $5.4
million, or 28%, to $24.8 million from $19.4 million for the same
period in 1996. As a percent of revenue, SG&A increased 4% to
28% from 24%. Selling expenses, (i.e., agent, salesperson and
other commissions), increased $1.8 million in connection with higher
revenues ($.6 million increase in selling expenses related to growth
in local exchange revenues). Operating costs incurred in connection
with the Company's German subsidiary contributed $.4 million of costs.
Payroll and all other operating costs increased $3.2 million and this
increase was primarily attributable to infrastructure costs to support
expansion and growth in the Company's business lines.
OTHER INCOME/EXPENSES. Net interest expense for the quarter
ended June 30, 1997 decreased $.2 million, or 24%, from $.9
million to $.7 million. Foreign exchange gains/losses reflect
changes in the value of amounts borrowed by the foreign
subsidiaries from ACC Corp. and ACC US. The Company continues
to hedge substantially all intercompany loans to foreign
subsidiaries in an attempt to reduce the impact of transaction
gains or losses. The Company does not engage in speculative
foreign currency transactions. During the quarter ended June 30,
1997 the Company recognized losses on foreign currency
transactions of $36,000 compared to a $14,000 gain in the same
period of 1996.
PROVISION FOR TAXES. Provision for taxes for the quarter ended
June 30, 1997 increased $.2 million, or 47%, from $.5 million to
$.7 million. Stated as a percent of pre tax income, the
effective tax rate for the current quarter was 15% as compared to
27% for the same period in 1996. Income taxes are provided on
all revenues in excess of available net operating loss
carryforwards ("NOL's") at the statutory rate applicable for each
country. The Company continues to utilize NOL's to offset
taxable income generated in Canada and the U.K.. The increase in
operating earnings in both of these subsidiaries, which is not
subject to tax due to utilization of NOL's, reduces the effective
tax rate for the consolidated Company.
MINORITY INTEREST IN (EARNINGS) OF CONSOLIDATED SUBSIDIARY.
Minority interest for the quarter ended June 30, 1996 reflects
the portion of the Company's Canadian subsidiary's income
attributable to the approximately 30% of that subsidiary's common
stock that was publicly traded in Canada. Prior to December 31,
1996, the Company repurchased approximately 24% of the
outstanding shares, and the remaining 6% was repurchased in
January 1997. As a result, the Canadian subsidiary is currently
100% owned, with no remaining minority interest.
The Company's income from operations for the quarter ended June
30, 1997 was $5.9 million compared to $3.2 million for the same
period in 1996, and was comprised of the following: North
America operations $3.5 million as compared to $3.2 million, and
European operations, $2.4 million as compared to $.0 million.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED
JUNE 30, 1996
REVENUE. Total revenue for the six months ended June 30, 1997
increased $25.2 million, or 17%, to $172.2 million. from $146.9
million for the same period in 1996. Long distance toll revenue
increased $18.5 million, or 14%, to $154.7 million from $136.1
million, and local service and other revenue increased $6.7
million, or 62%, to $17.5 million from $10.8 million. The growth
in long distance toll revenues was fueled by a 29% increase in
billable minutes and 27% growth in number of customer accounts.
Revenue from wholesale carriers during the current period
increased to $36.7 million (21% of total revenues) from $35.1
million (24% of total revenues)for the same period in 1996.
Significantly reduced revenues from two carriers were realized in
the current period, accounting for a $6.3 million reduction in
carrier revenues from the same period in 1996. Additionally, the
1996 period reflects $9 million of non recurring carrier revenues.
Excluding wholesale carrier revenues, long distance toll revenue
for the current period increased 17% from the same period in
1996. Long distance toll revenue per billable minute for the
current period decreased 12%, from $.163 to $.143, largely a
result of competitive pricing pressures. The growth in other
revenues is largely attributable to growth in market share in the
competitive local exchange business in the U.S. and a full six
months of revenues in 1997 from Internet revenues in Canada
compared to one month in 1996.
Total revenue (unaffiliated) in North America for the current
period increased 5% from the same period in 1996. Long distance
toll revenue (unaffiliated) decreased 1% from 1996, as the 1996
period included $9 million of non recurring carrier revenue.
Excluding carrier revenues, long distance toll revenue for the
current period increased 12% from the same period in 1996, and is
attributable to growth in minutes and customer accounts. Long
distance toll revenue per minute for the current period decreased
19% from $.159 to $.129, a result of competitive pricing
pressures in both the U.S. and Canada and lower revenue from
carriers. Local service and other revenues for the current
period increased 62% over the same period in 1996, a result of
growth in U.S. local exchange revenues and increased Internet
related revenues in Canada. The Company continues to invest in
the local exchange business, having recently installed switches
in Buffalo and Albany, and has planned installations for
additional switches in New York City, Boston and Springfield
Massachusetts. Continued expansion and growth in local exchange
service, Internet and other services is expected to become a
larger component of total revenues in future periods.
Total revenue (unaffiliated) in Europe (substantially all long
distance toll revenue) for the current period increased 49% from
the same period in 1996. Excluding carrier revenues, long
distance toll revenue for the current period increased 26% from
the same period in 1996, and is attributable to growth in minutes
and customer accounts. Long distance toll revenue per billable
minute for the current period decreased 1% from $.174 to $.173 as
the impact of higher revenues from carriers partially offset
retail price reductions implemented during the period for
international and domestic long distance rates. No material
revenues from the German operating unit were generated during the
current period.
NETWORK COST. Network cost for the six months ended June 30, 1997
increased $7.1 million, or 8%, to $102.1 million from $95.0
million for the same period in 1996. As a percent of revenue,
network cost for the current period was 59% compared to 65% for
the same period in 1996. Network cost per billable minute for
the current period decreased 17%, from $.114 to $.094. The
reduction of current period network cost as a percent of revenue,
and per minute, is largely attributable to 1) reduced
contribution charges enacted during the period in Canada, 2) a
favorable shift in business/customer mix, as higher margin local
exchange revenues constitute a higher percent of revenues in 1997
as compared to 1996, and lower margin wholesale carrier revenues
constitute a lower percentage of 1997 revenues as compared to
1996, and 3) internal network efficiencies.
Network cost in North America for the current period as a percent
of unaffiliated revenue decreased to 57% from 63% for the same
period in 1996, and per billable minute also decreased from $.112
to $.087. These improvements resulted from the aforementioned
reduction in Canadian contribution charges, increased amount of
higher margin local exchange revenue in the U.S., and internal
network efficiencies. Network cost in Europe for the current
period as a percent of unaffiliated revenue decreased to 63% from
68% for the same period in 1996, and per billable minute decreased
from $.119 to $.111. Recent investments in switches, a
microwave network and IRU are expected to more significantly
lower network costs in the near term, as ownership of these
facilities will enable the Company to reduce reliance on leased
lines and increase network capacity. This forward looking
statement is based on expectations regarding customer demand and
the relative cost and availability of leased lines and
alternative transmission facilities in the Company's markets, and
could be adversely impacted by competitive pricing pressures. If
such expectations are not realized, the Company's
actual results may differ materially from the foregoing
discussion.
OTHER OPERATION EXPENSES - DEPRECIATION AND AMORTIZATION. Total
depreciation expense for the six months ended June 30, 1997
increased $2.7 million, or 34%, from $7.8 million for the same
period in 1996, largely attributable to recent switch
installations in Albany and Buffalo, and other capital
expenditures, as well as higher amortization of the customer
base and goodwill associated with the Internet Canada acquisition
in 1996.
OTHER OPERATING EXPENSES - SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES. Total Selling, General and Administrative expenses
("SG&A") for the six months ended June 30, 1997 increased $10.3
million, or 27%, to $48.3 million from $38.0 million for the same
period in 1996. As a percent of revenue, SG&A increased 2% to
28% from 26%. Selling expenses, (i.e., agent, salesperson and
other commissions), increased $3.6 million in connection with
higher revenues ($1.1 million increase in selling expenses related
to growth in U.S. local exchange revenues). Operating costs
incurred in connection with the Company's German subsidiary
contributed $.7 million of costs. Payroll and all other operating
costs increased $6.0 million and this increase was primarily
attributable to infrastructure costs to support expansion and
growth in the Company's business lines.
OTHER INCOME/EXPENSES. Net interest expense for the six months
ended June 30, 1997 decreased $1.1 million, or 45%, from $2.4
million to $1.3 million. Foreign exchange gains/losses reflect
changes in the value of amounts borrowed by the foreign subsidiaries
from ACC Corp. and ACC U.S. The Company continues to hedge substantially
all intercompany loans to foreign subsidiaries in an attempt to
reduce the impact of transaction gains or losses. The Company does
not engage in speculative foreign currency transactions. During the
six months ended June 30, 1997 the Company recognized losses on foreign
currency transactions of $188,000 compared to a $26,000 gain in the same
period of 1996.
PROVISION FOR TAXES. Provision for taxes for the six months ended
June 30, 1997 increased $.4 million, or 52%, from $.9 million to
$1.3 million. Stated as a percent of pre tax income, the
effective tax rate for the current period was 13% as compared to
23% for the same period in 1996. Income taxes are provided on
all revenues in excess of available net operating loss
carryforwards ("NOL's") at the statutory rate applicable for each
country. The Company continues to utilize NOL's to offset taxable
income generated in Canada and the U.K.. The increase in
operating earnings in both of these subsidiaries, which is not
subject to tax due to utilization of NOL's, reduces the effective
tax rate for the consolidated Company.
MINORITY INTEREST IN (EARNINGS) OF CONSOLIDATED SUBSIDIARY.
Minority interest for the six months ended June 30, 1996 reflects
the portion of the Company's Canadian subsidiary's income
attributable to the approximately 30% of that subsidiary's common
stock that was publicly traded in Canada. Prior to December 31,
1996, the Company repurchased approximately 24% of the
outstanding shares, and the remaining 6% was repurchased in
January 1997. As a result, the Canadian subsidiary is currently
100% owned, with no remaining minority interest.
The Company's income from operations for the six months ended
June 30, 1997 was $11.2 million compared to $6.2 million for the
same period in 1996, and was comprised of the following: North
America operations $7.1 million as compared to $6.4 million, and
European operations $4.2 million as compared to ($.2) million.
LIQUIDITY AND CAPITAL RESOURCES
In May 1996, the Company raised net proceeds of $63.1
million through an offering of Common Stock. The proceeds from
this offering were used to repay indebtedness under the Credit
Facility, for working capital needs, and capital expenditures.
The Company also expended $32.1 million in 1996 to repurchase the
minority interest in ACC Canada. 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 $1.9 million from the exercise of options and
warrants by selling shareholders in the October 1996 secondary
Common Stock offering and an additional $4.9 million from the
exercise of employee stock options at various times during the
year.
In January 1997, the Company entered into an amended and
restated $100 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). As of June 30, 1997, the unused amount under the Credit
Facility was approximately $65 million.
Net cash flows used in operations for the six months ended
June 30, 1997 were $9.2 million compared to $.5 million for the
same period in 1996. The increase of $8.7 million primarily
resulted from $18.2 million of higher payments of previously
accrued expenses associated with the Canadian minority interest
repurchase and accrued year-end bonuses, and expenditures for
other non-current assets (including an IRU for $5.2 million),
partially offset by higher net income of $6.1 million and
depreciation of $2.7 million, and smaller increase in accounts
receivable of $6.7 million.
Net cash flows used in investing activities (for capital
expenditures, acquisition of customer base and acquisition of
Transphone Ltd.) for the six months ended June 30, 1997 were
$19.9 million compared with $11.8 million for the same period in
1996.
Net cash provided by financing activities for the six months
ended June 30, 1997 was $26.6 million compared with $42.4 million
for the same period of 1996. The decrease reflects the Credit
Facility to fund working capital needs, capital expenditures and
refinancing of existing debt.
The Company's principal need for working capital is to fund
network costs and to meet its selling, general and administrative
expenses as its business expands. In addition, the Company's
capital resources have been used for acquisitions (i.e.,
Metrowide Communications, Internet Canada and Transphone Ltd.),
capital expenditures, various customer base acquisitions, and the
repurchase of the minority interest in ACC Canada. The Company
has historically reflected working capital deficits at the end of
the last several years but, at June 30, 1997, reflected a working
capital surplus of approximately $6.1 million compared to a
deficit of approximately $15.5 million at December 31, 1996, due
primarily to utilization of the Credit Facility to satisfy
current liabilities.
The Company anticipates that, throughout the remainder of
1997, its capital expenditures will be approximately $47 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. Approximately $17.5
million in capital expenditures were recorded during the six
months ended June 30, 1997. ACC expects that it will continue to
make significant capital expenditures during future periods,
particularly for switching equipment for the U.K. and for local
exchange switches in U.S markets, and related costs. 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 has also formed a
German subsidiary in anticipation of deregulation in that
marketplace, and anticipates that the initial capital
expenditures related to this operation will approximate $2.5
million during 1997.
As of June 30, 1997, the Company had approximately $-0- of
cash and cash equivalents and maintained the $100 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 $32 million was
outstanding. The maximum aggregate principal amount of the Credit
Facility is required to be reduced by $8 million per quarter
commencing on March 31, 1999 until December 31, 2000, and by $9
million per quarter commencing on March 31, 2001 until maturity
of the loan in January 2002.
In addition, as of June 30, 1997, the Company had $4.3
million of capital lease obligations which mature at various
times from 1997 through 2000. During the six months ended June
30, 1997, the Company prepaid a $4.0 million capitalized lease
obligation using funds from the Credit Facility. The Company's
financing arrangements, which are secured by substantially all of
the Company's assets including stock of certain subsidiaries,
require the Company to maintain certain financial ratios.
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
U.S. dollar 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 June 30, 1997 was $76.9 million. From time
to time, the Company uses interest rate swap agreements to reduce
its 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 June 30, 1997, in
management's opinion there was no significant risk of loss due to
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. 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 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 for the foreseeable future. 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 future periods.
In addition, the Company may have to refinance a substantial
amount of indebtedness and obtain additional funds prior to 2002,
when the Credit Facility matures. 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. There can be no assurance that the
Company will be able to raise such capital on acceptable terms or
at all. The Company's ability to obtain additional sources of
capital will depend upon, among other things, its financial
condition at the time, the restrictions and the instruments
governing its indebtedness and other factors, including market
conditions, beyond the control of the Company. Additional
sources of capital may include public and private equity and debt
financings, sale of assets, capitalized leases and other
financing arrangements. 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
Company's creditors. 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 creditors.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See Exhibit Index.
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: August 14, 1997 /s/ Michael R. Daley
Michael R. Daley
Executive Vice President
and Chief Financial
Officer
Dated: August 14, 1997 /s/ Frank C. Szabo
Frank C. Szabo
Vice President and
Controller
EXHIBIT INDEX
Exhibit Number Description Location
11.1 Statement re Computation of See note 3 to the
Per Share Earnings notes to
Consolidated
Financial
Statements filed
herewith
27.1 Financial Data Schedule Filed herewith
99.1 Company Risk Factors Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 60,054<F1>
<ALLOWANCES> 3,612
<INVENTORY> 935
<CURRENT-ASSETS> 66,083
<PP&E> 135,964<F2>
<DEPRECIATION> 45,472
<TOTAL-ASSETS> 224,754
<CURRENT-LIABILITIES> 60,000
<BONDS> 33,419<F3>
0
0
<COMMON> 268
<OTHER-SE> 127,881
<TOTAL-LIABILITY-AND-EQUITY> 224,754
<SALES> 154,677<F4>
<TOTAL-REVENUES> 172,153
<CGS> 102,136<F5>
<TOTAL-COSTS> 58,778<F6>
<OTHER-EXPENSES> 0<F7>
<LOSS-PROVISION> 1,163<F8>
<INTEREST-EXPENSE> 1,340<F9>
<INCOME-PRETAX> 9,710
<INCOME-TAX> 1,294
<INCOME-CONTINUING> 8,416
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,416
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>add back allowance
<F2>gross
<F3>Total long-term debt
<F4>Toll only
<F5>Network costs
<F6>Total operating expenses
<F8>Bad debt expense from consolidated income statement
<F7>Unusual operating expenses
<F9>Net
</FN>
</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. ("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 experienced revenue growth on an annual basis
since 1990 and net income in 1996 and the first six months of 1997, it incurred
net losses and losses from continuing operations during 1994 and 1995. There
can be no assurance that revenue growth will continue or that the Company will
be able to maintain its profitability and positive cash flow from operations.
If the Company cannot continue its revenue growth and maintain profitability
and positive cash flow from operations, it may not be able to meet its debt
service or working capital requirements. The Company intends to focus in the
near term on the expansion of its service offerings, including its local
telephone service and Internet services, and expanding its geographic markets,
including deregulating Western European markets. Such expansion, particularly
the establishment of new operations or acquisition of existing operations in
deregulating Western European markets, may adversely affect cash flow and
operating performance and these effects may be material, as was the case with
the Company's U.K. operations in 1994 and 1995. As each of the
telecommunications markets in which the Company operates continues to mature,
growth in the Company's revenues and customer base is likely to decrease over
time.
The Company's operating results have fluctuated in the past and may
fluctuate significantly in the future as a result of a variety of factors, some
of which are outside of the Company's control, including general economic
conditions, specific economic conditions in the telecommunications industry,
the effects of governmental regulation and regulatory changes, user demand,
capital expenditures and other costs relating to the expansion of operations,
the introduction of new services by the Company or its competitors, the mix of
services sold and the mix of channels through which those services are sold,
pricing changes by the Company or its competitors and prices charged by
suppliers. As a strategic response to a changing competitive environment, the
Company may elect from time to time to make certain pricing, service or
marketing decisions or enter into strategic alliances, acquisitions or
investments that could have a material adverse effect on the Company's
business, results of operations and cash flow. Revenues from other resellers
accounted for approximately 12.7% of consolidated revenues in 1995, 25.2% of
consolidated revenues in 1996 and 21% of consolidated revenues during the first
six months of 1997. Carrier revenues during 1997 will be adversely affected
by the loss of wholesale traffic from a large Canadian long distance carrier
which accounted for approximately $13.4 million of revenue during 1996, most of
which is expected to be non-recurring. Because sales to other carriers are at
margins that are lower than those derived from most of the Company's other
revenues, increases in carrier revenue as a percentage of revenues have in the
past reduced and may in the future reduce, the Company's gross margins as a
percentage of revenue. In addition, certain of its long distance carrier
customers may pose credit or collection risks. See the Risk Factor discussion
below of " Risks Associated With Acquisitions, Investments and Strategic
Alliances" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
SUBSTANTIAL INDEBTEDNESS; NEED FOR ADDITIONAL CAPITAL
The Company will need to continue to enhance and expand its operations in
order to maintain its competitive position, expand its service offerings and
geographic markets and continue to meet the increasing demands for service
quality, availability and competitive pricing. As of the end of its last five
fiscal years, the Company has experienced a working capital deficit. The
Company believes that, under its present business plan, cash from operations
and borrowings available under its credit facility will be sufficient to meet
its anticipated capital and capital expenditure requirements for the
foreseeable future. The Company may need to raise additional capital from
public or private equity or debt sources in order to finance its anticipated
growth, including local service expansion and expansion into international
markets (both of which will be capital intensive), working capital needs, debt
service obligations, and, contemplated capital expenditures. In addition, the
Company may need to raise additional funds in order to take advantage of
unanticipated opportunities, 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
DEPENDENCE ON TRANSMISSION FACILITIES-BASED CARRIERS
The Company generally does not own telecommunications transmission lines
other than the recently acquired Indefeasible Rights of Use. 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 at rates that currently are
less than the rates the Company charges its customers for connecting calls
through these lines. Accordingly, to the extent that the Company continues to
lease transmission lines, it will remain vulnerable to changes in its lease
arrangements, such as price increases and service cancellations. ACC's ability
to maintain and expand its business is dependent upon maintaining favorable
relationships with the transmission facilities-based carriers from which the
Company leases transmission lines, particularly in the U.K., where British
Telecom and 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. Although the Company believes
that its relationships with carriers generally are satisfactory, the
deterioration or termination of the Company's relationships with one or more of
those carriers could have a material adverse effect upon the Company's
business, results of operations and financial condition. Certain of the
vendors from whom the Company leases transmission lines, including the
22 former Bell System Operating Companies ("RBOCs") and other local exchange
carriers, currently are subject to tariff controls and other price constraints
which in the future may be changed. Under the 1996 amendments to the U.S.
Communications Act of 1934 (the "1996 Act"), constraints on the operations of
the RBOCs have been dramatically reduced, which will bring into the long
distance market additional competitors from whom the Company leases
transmission lines. In addition, certain regulatory issues are pending
that may affect the prices charged by the RBOCs and other local
exchange carriers to the Company, which could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "-Potential Adverse Effects of Regulation."
POTENTIAL ADVERSE EFFECTS OF REGULATION
The 1996 Act provides specific guidelines under which the RBOCs can
provide long distance services, which will permit the RBOCs to compete with the
Company in the provision of domestic and international long 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 may be subject to additional competition. Moreover, as a result of and
to implement the legislation, certain federal and state governmental
regulations will be adopted, amended or modified, and any such adoption,
amendment or modification could have a material adverse effect on the Company's
business, results of operations and financial condition.
In the U.S., the 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 reduced regulation has given AT&T, the largest long distance carrier in
the U.S., as well as the RBOCs, increased pricing flexibility that has
permitted them to compete more effectively with smaller interexchange carriers,
such as the Company. In addition, the commitments made by the U.S. government
in the recently-completed World Trade Organization ("WTO") negotiations will
allow foreign-affiliated carriers previously prohibited from providing service
in the U.S. market to compete with the Company in the U.S. market. There can
be no assurance that changes in current or future Federal or state regulations
or future judicial changes would not have a material adverse effect on the
Company's business, results of operations and financial condition.
In order to provide their services, interexchange carriers, including the
Company, must generally purchase "access" from local exchange carriers to
originate calls from and terminate calls in the local exchange telephone
networks. Access charges presently represent a significant portion of the
Company's network costs in all areas in which it operates. In the U.S., the
FCC regulates interstate access and the states regulate intrastate access.
Pursuant to the 1996 Act, on May 16, 1997, the FCC issued an order to implement
certain reforms to its access charge rules (the "Access Charge Reform Order").
The Access Charge Reform Order will require incumbent LECs to substantially
decrease over time the prices they charge for switched and special access,
and change how access charges are calculated. These changes are intended to
reduce access charges paid by interexchange carriers to LECs and shift
certain usage-based charges to flat-rated, monthly per-line charges. To the
extent that these rules begin to reduce access charges to reflect the forward-
looking cost of providing access, the Company's competitive advantage in
providing customers with access services might decrease. In addition, the FCC
has determined that it will give incumbent LECs pricing flexibility with
respect to access charges. To the extent such pricing flexibility is granted
before substantial facilities-based competition develops, such flexibility
could be misused to the detriment of new entrants, including the Company.
Until the FCC adopts and releases rules detailing the extent and timing of
such pricing flexibility, the impact of these rules on the Company cannot be
determined. In its order, the FCC abolished the unitary rate structure option
for local transport. This effectively abolishes the "equal price per unit of
traffic" rule which has been in effect since the divestiture of AT&T, and may
have an adverse effect on smaller interexchange carriers such as the Company
because it may permit volume discounts in the pricing of access charges.
On May 8, 1997, the FCC issued an order to implement the provisions of
the 1996 Act relating to the preservation and advancement of universal
telephone service (the "Universal Service Order"). The Universal Service
Order affirmed the policy principles for universal telephone service set
forth in the Telecommunications Act, including quality service, affordable
rates, access to advanced services, access in rural and high-cost areas,
equitable and non-discriminatory contributions, specific and predictable
support mechanisms, and access to advanced telecommunications services for
schools, health care providers and libraries. The Universal Service Order
added "competitive neutrality" to the FCC's universal service principles by
providing that universal service support mechanisms and rules should not
unfairly advantage or disadvantage one provider over another, nor unfairly
favor or disfavor one technology over another. The Universal Service Order
also requires all telecommunications carriers providing interstate
telecommunications services, including the Company, to contribute to
universal service support. Such contributions will be assessed based on
interstate and international end-user telecommunications revenues.
Both the Universal Service and Access Charge Reform Orders are subject
to petitions seeking reconsideration by the FCC and direct appeals to U.S.
Courts of Appeals. Until the time when any such petitions or appeals are
decided, there can be no assurance of how the Universal Service and/or Access
Charge Reform Orders will be implemented or enforced, or what effect the
Orders will have on competition within the telecommunications industry,
generally, or on the competitive position of the Company, specifically.
The Company currently competes with the RBOCs and other local exchange
carriers such as the GTE Operating Companies ("GTOCs") in the provision of
"short haul" toll calls completed within a Local Access and Transport Area
("LATA"). Subject to a number of conditions, the 1996 Act established
conditions that would allow for the eventual elimination of many of the
restrictions which prohibited the RBOCs from providing long-haul, or
inter-LATA, toll service, and thus the Company will face additional
competition in this market. To complete long-haul and short-haul toll calls,
the Company must purchase "access" from the local exchange carriers. The
Company must generally price its toll services at levels equal to or below the
retail rates established by the local exchange carriers for their own short-
haul or long-haul toll rates. To the extent that the local exchange carriers
are able to reduce the margin between the access costs to the Company and the
retail toll prices charged by local exchange carriers, either by increasing
access costs or lowering retail toll rates, or both, the Company will encounter
adverse pricing and cost pressures in competing against local exchange carriers
in both the short-haul and long-haul toll markets.
Under the 1996 Act, local exchange carriers must permit resale of their
bundled local services and unbundled network elements. General pricing
principles for those services were set forth in the 1996 Act, with states
directed to approve specific tariffs based on these principles. At the end of
1996, the New York State PSC ("NYSPSC") replaced temporary wholesale discounts
with permanent wholesale discounts of 19.1% for New York Telephone (business
and residential) and 17% for Frontier Corp. (business and residential).
Discounts were made applicable to centrex, private line and PBX lines.
On April 1, 1997, the NYPSC adopted permanent rates for unbundled links
and certain other unbundled network elements for New York Telephone. The
monthly rate for unbundled links in designated areas of dense traffic
(accounting for approximately 70% of all loops in the state) is $12.49,
plus a recurring $1.90 connection charge. The monthly rate in other areas of
the state is $19.24, plus a $1.90 recurring connection charge. Permanent
unbundled link and unbundled network element rates have not yet been
established for Frontier Corp. The permanent New York Telephone link rate is
lower than the temporary rates previously established for New York Telephone's
unbundled links; it is greater than the $10.10 rate for the comparable service
New York Telephone offers to its own residential customers, but below the rate
of approximately $22 for the comparable service New York Telephone offers to
its business customers. However, in order to utilize unbundled links, the
Company must arrange for collocation in New York Telephone's central offices,
which adds significant costs. As a result, the Company's marketing efforts
are primarily directed toward business customers (and certain concentrated
residential customers) which can be served through the Company's own
facilities, rather than through use of unbundled links obtained from New York
Telephone or Frontier Corp.
In Canada, the Canadian Radio-television and Telecommunications Commission
("CRTC") annually reviews the "contribution charges" (the equivalent of access
charges in the U.S.) assessed by the dominant carriers for the access lines
leased by Canadian long distance resellers, including the Company, from the
local telephone companies in Canada. Changes in these contribution charges
could have a material adverse effect on the Company's business, results of
operations and financial condition. On May 1, 1997 the CRTC issued several
rules intended to encourage increased competition in the telecommunications
and broadcast distribution (cable) industries. Generally, the rules describe
how new service providers can enter the local exchange market, how and when
telephone companies can apply for broadcasting licenses, and the details of
a new methodology that will be used to regulate local telephone rates. The
rules governing entry in the local exchange market cover issues of inter-
connection, resale, subscriber listings, number portability, rate
rebalancing, local service subsidies, rate regulation, service obligations
and cable competition. While certain of the rules appear favorable to the
Company, the rules will likely increase competition in Canadian local exchange
service through new entrants. The Company is unable to predict the extent to
which the full implementation of the rules will have a material adverse effect
on the Company's business, results of operations or financial condition. The
Canadian long distance telecommunications industry is the subject
of ongoing regulatory change. These regulations and regulatory
decisions have a direct and material effect on the ability of the
Company to conduct its business. The recent trend of such regulatory
changes has been to open the market to commercial competition,
generally to the Company's benefit. There can be no assurance, however, that
any future changes in or additions to laws, regulations, government policy or
administrative rulings will not have a material adverse effect on the Company's
business, results of operations and financial condition.
The telecommunications services provided by ACC U.K. are subject to and
affected by regulations introduced by the U.K. telecommunications regulatory
authority, The Office of Telecommunications ("Oftel"). Since the break up of
the U.K. telecommunications duopoly consisting of British Telecom and Mercury
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. In
addition, the new access charge control regime to be implemented in 1997 could
substantially increase the Company's network costs in the U.K. market,
depending upon the levels at which starting charges and price ceilings are set
by Oftel. Although the Company is optimistic about its ability to continue to
compete effectively in the U.K. market, there can be no assurance that future
changes in regulation and government will not have a material adverse effect on
the Company's business, results of operations and financial condition.
EXPANSION OF LOCAL EXCHANGE BUSINESS
The Company anticipates that a significant portion of its growth in its
U.S. operations in the future will come from local exchange operations and
anticipates incurring approximately $13.7 million in capital expenditures during
1997 relating to the installation of additional local exchange switches in the
northeastern United States. The Company has only limited experience in
providing local telephone services, having commenced providing such services in
1994. The Company's revenues from local telephone and other services in
North America in 1995 and 1996 were $13.6 million and $26.3 million,
respectively, and $10.8 million and $17.5 million, respectively, for the first
six months of 1996 and 1997. In order to attract local customers, the
Company must offer substantial discounts from the prices charged by local
exchange carriers and must compete with other alternative local service
companies that offer such discounts. The local service business requires
significant initial investments in capital equipment as well as significant
initial promotional and selling expenses. Larger, better capitalized local
service providers, including AT&T, among others, will be better able to sustain
losses associated with discount pricing and initial investments and expenses.
Although the Company's local service business generated a small operating
profit in 1996, it incurred operating losses in 1994 and 1995 and many
companies that compete with the Company's local service business are not
profitable. There can be no assurance that the Company will continue to
achieve positive cash flow or profitability in its local telephone service
business. In addition, the FCC and PSCs are considering regulatory changes in
rate structures and access charges which could materially adversely affect the
ability of small interexchange carriers, such as the Company, to compete in the
provision of local service. See "- Potential Adverse Effects of Regulation."
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
12.7% of consolidated revenues in 1995, 25.2% of consolidated revenues in
1996 and 21% of consolidated revenues in the first six months of 1997.
With respect to these customers, the Company competes almost exclusively
on the basis of price.
Many of the Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources and larger
networks than the Company, control more transmission lines and have long-
standing relationships with the Company's target customers. These competitors
include, among others, AT&T, MCI Telecommunications Corporation ("MCI"), and
Sprint Corp. ("Sprint") in the U.S.; Bell Canada, BC Telecom, Inc., AT&T Canada
Long Distance Services Company ("AT&T Canada") and Sprint Canada (a subsidiary
of Call-Net Telecommunications Inc.) in Canada; and British Telecom, Mercury,
AT&T, and WorldCom, Inc. ("Worldcom") in the U.K. Other U.S. carriers also have
and are expected to enter the U.K. market. The Company also competes with
numerous other long distance providers, some of which focus their efforts on
the same business customers targeted by the Company and selected residential
customers and colleges and universities, the Company's other target customers.
In addition, through its local telephone service business in upstate New York
and Massachusetts, the Company competes with New York Telephone Company ("New
York Telephone"), Frontier Corp., Citizens Telephone Co., WorldCom and Time
Warner and others, including cellular and other wireless providers.
Furthermore, corporate transactions such as the proposed 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 called Global One, the recently
announced joint venture among British Telecom, MCI and Telefonica de Espana SA,
and additional mergers, acquisitions and strategic alliances which are likely
to occur, could also increase competitive pressures upon the Company and have a
material adverse effect on the Company's business, results of operations and
financial condition.
In addition to these competitive factors, recent and pending deregulation
in each of the Company's markets may encourage new entrants. For example, as a
result of the 1996 Act, RBOCs are allowed to enter the long distance market,
AT&T, MCI and other long distance carriers are allowed to enter the local
telephone services market, and any entity (including cable television companies
and utilities) is allowed to enter both the local service and long distance
telecommunications markets. In addition, the FCC has, on several occasions
since 1984, approved or required price reductions by AT&T and, in 1995 and
1996, the FCC reclassified AT&T as a "non-dominant" carrier, which
substantially reduces the regulatory constraints on AT&T. As the Company
expands its geographic coverage, it will encounter increased competition.
Moreover, the Company believes that competition in non-U.S. markets is likely
to increase and become more similar to competition in U.S. markets over time as
such non-U.S. markets continue to experience deregulatory influences. The WTO
accord reached in February 1997 is likely to accelerate this trend in some
markets. Prices in the long distance industry have declined from time to time
in recent years and are likely to continue to decrease. For example, Bell
Canada substantially reduced its rates during the first quarter of 1994 and
British Telecom substantially reduced its rates in 1996. The Company's
competitors may reduce rates or offer incentives to existing and potential
customers of the Company. AT&T, in particular, has experienced sharp declines
in its market share over recent years and may make aggressive pricing decisions
in an effort to halt or reverse this decline. To maintain its competitive
position, the Company believes that it must be able to reduce its prices in
order to meet reductions in rates, if any, by others. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RISKS OF GROWTH AND EXPANSION
The Company plans to expand its service offerings and principal geographic
markets in the United States, Canada and the United Kingdom. In addition, the
Company intends to establish a presence in deregulating Western European
markets that have high density telecommunications traffic, when the Company
believes that business and regulatory conditions warrant. The Company
has entered the German market as a switchless reseller in anticipation of
deregulation in 1998, and has established a German subsidiary. There can
be no assurance, however, that the Company will be able to add service or
expand its markets at the rate presently planned by the Company or that the
existing regulatory barriers to such expansion will be reduced or eliminated.
The Company's rapid growth has placed, and in the future may continue to place,
a significant strain on the Company's administrative, operational and financial
resources and increased demands on its systems and controls. As the Company
increases its service offerings and expands its targeted markets, there will be
additional demands on the Company's customer support, sales and marketing and
administrative resources and network infrastructure. There can be no assurance
that the Company's operating and financial control systems and infrastructure
will be adequate to maintain and effectively monitor future growth. The failure
to continue to upgrade the administrative, operating and financial control
systems or the emergence of unexpected expansion difficulties could materially
adversely affect the Company's business, results of operations and financial
condition.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A key component of the Company's strategy is its planned expansion in
Western European markets. In the WTO accord reached in February 1997, a number
of countries agreed to accelerate or initiate liberalization of their
telecommunications markets by allowing increased competition and foreign
ownership of telecommunications providers and by adopting measures to ensure
reasonable nondiscriminatory interconnection, effective competitive safeguards,
and an effective independent regulation. This agreement may, therefore, expand
the international opportunities available to the Company. To date, the Company
has no significant experience in providing telecommunications service outside
the United States, Canada and the U.K. The Company is making preparations to
enter the emerging German market in anticipation of deregulation in 1998. There
can be no assurance, however, that the Company will be able to obtain the
capital it requires to finance its expansion in international markets on
satisfactory terms or at all. In many international markets, protective
regulations and long-standing relationships between potential customers of the
Company and their local providers create barriers to entry. Where protective
regulations are being eliminated, the pro-competitive effect of this action
could substantially increase the number of entities competing with the Company.
Pursuit of international growth opportunities may require significant
investments for an extended period before returns, if any, on such investments
are realized. The Company intends to focus in the near term on the expansion
of its service offerings, including its local telephone business and Internet
services, and expanding its geographic markets to more locations in its
existing markets, and when conditions warrant, to deregulating Western European
markets. Such expansion, particularly the establishment of new operations or
acquisition of existing operations in deregulating international markets, may
adversely affect cash flow and operating performance and these effects may be
material, as was the case with the Company's U.K. operations in 1994 and 1995.
In addition, there can be no assurance that the Company will be able to obtain
the permits and operating licenses required for it to operate, hire and train
employees or to market, sell and deliver high quality services in these
international markets. In addition to the uncertainty as to the Company's
ability to expand its international presence, there are certain risks inherent
to doing business on an international level, such as unexpected changes in
regulatory requirements, tariffs, customs, duties and other trade barriers,
difficulties in staffing and managing foreign operations, longer payment
cycles, problems in collecting accounts receivable, political risks,
fluctuations in currency exchange rates, foreign exchange controls which
restrict or prohibit repatriation of funds, technology export and import
restrictions or prohibitions, delays from customs brokers or government
agencies, seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world and potentially adverse tax
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. There are risks in
participating in joint ventures, including the risk that the other participant
in the joint venture may at any time have economic, business or legal interests
that are inconsistent with those of the joint venture or the Company. As its
revenues from its Canadian and U.K. operations increase and as it establishes
operations in other countries, an increasing portion of the Company's revenues
will be denominated in currencies other than U.S. dollars, although a
significant portion of the Company's interest expense may be denominated in
U.S. dollars. Therefore, changes in exchange rates (particularly a
strengthening of the U.S. dollar) will have a greater effect on the Company's
results of operations. There can be no assurance that such factors will not
have a material adverse effect on the Company's future operations and,
consequently, on the Company's business, results of operations and financial
condition. In addition, there can be no assurance that laws or administrative
practices relating to taxation, foreign exchange or other matters of countries
within which the Company operates will not change. Any such change could have
a material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
To complete its billing, the Company must record and process massive
amounts of data quickly and accurately. The Company believes that the
successful implementation and integration of new information systems is
important to its continued growth and 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 systems 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 material 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 difficulty of
successfully incorporating licensed or acquired technology and rights into the
Company's service offerings, the maintenance of uniform standards, controls,
procedures and policies and the impairment of relationships with employees and
customers as a result of changes in management. In addition, the Company has
in the past experienced higher attrition rates with respect to customers
obtained through acquisitions, and may again experience higher attrition rates
with respect to any customers resulting from future acquisitions. Moreover, to
the extent that any such acquisition, investment or alliance involved a
business located outside the United States, the transaction would involve the
risks associated with international expansion discussed above under "Risks
Associated with International Operations."
There can be no assurance that the Company would be successful in overcoming
these risks or any other problems encountered with such strategic alliances,
investments or acquisitions.
In addition, if the Company were to proceed with one or more significant
strategic alliances, acquisitions or investments in which the consideration
consists of cash, a substantial portion of the Company's available cash could
be used to consummate the strategic alliances, acquisitions or investments.
Many of the businesses that might become attractive acquisition candidates for
the Company may have significant goodwill and intangible assets, and
acquisitions of these businesses, if accounted for as a purchase, would
typically result in substantial amortization charges to the Company. The
financial impact of acquisitions, investments and strategic alliances could
have a material adverse effect on the Company's business, financial condition
and results of operations and could cause substantial fluctuations in the
Company's quarterly and yearly operating results.
TECHNOLOGICAL CHANGES MAY ADVERSELY AFFECT COMPETITIVENESS AND FINANCIAL
RESULTS
The telecommunications industry is characterized by rapid and significant
technological 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.
RISKS ASSOCIATED WITH RAPIDLY CHANGING INDUSTRY
The international telecommunications industry is changing rapidly due to,
among other things, deregulation, privatization of dominant telecommunications
providers, technological improvements, expansion of telecommunications
infrastructure and the globalization of the world's economies and free trade.
There can be no assurance that one or more of these factors will not vary
unpredictably, which could have a material adverse effect on the Company.
There can also be no assurance, even if these factors turn out as anticipated,
that the Company will be able to implement its strategy or that its strategy
will be successful in this rapidly evolving market. There can be no assurance
that the Company will be able to compete effectively or adjust its contemplated
plan of development to meet changing market conditions.
Much of the Company's planned growth is predicated upon the deregulation
of telecommunications markets. There can be no assurance that such
deregulation will occur when or as anticipated, if at all, or that the Company
will be able to grow in the manner or at the rates currently contemplated.
As a result of existing excess international transmission capacity, the
marginal cost of carrying an additional international call is often very low
for carriers that own transmission lines. Industry observers have predicted
that these low marginal costs may result in significant pricing pressures and
that, within a few years after the end of this century, there may be no charges
based on the distance a call is carried. Certain of the Company's competitors
have introduced calling plans that provide for flat rates on calls within the
U.S. and Canada, regardless of time of day or distance of the call. If this
type of pricing were to become prevalent, it would have a material adverse
effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its management team and technical, marketing and sales
personnel. The Company's employees may voluntarily terminate their
employment with the Company at any time. Competition for qualified
employees and personnel in the telecommunications industry is intense
and, from time to time, there are a limited number of persons with
knowledge of and experience in particular sectors of the telecommunications
industry. The Company's success also will depend on its ability to
attract and retain qualified management, marketing, technical and
sales executives and personnel. The process of locating such personnel with
the combination of skills and attributes required to carry out the Company's
strategies is often lengthy. The loss of the services of key personnel, or the
inability to attract additional qualified personnel, could have a material
adverse effect on the Company's results of operations, development efforts and
ability to expand. There can be no assurance that the Company will be
successful in attracting and retaining such executives and personnel. Any such
event could have a material adverse effect on the Company's business, financial
condition and results of operations.
RISKS ASSOCIATED WITH FINANCING ARRANGEMENTS; DIVIDEND RESTRICTIONS
The Company's financing arrangements are secured by substantially all of
the Company's assets and require the Company to maintain certain financial
ratios and restrict the payment of dividends, and the Company anticipates that
it will not pay any dividends on Class A Common Stock in the foreseeable
future. The Company's secured lenders would be entitled to foreclose upon
those assets in the event of a default under the financing arrangements and to
be repaid from the proceeds of the liquidation of those assets before the
assets would be available for distribution to the Company's other creditors and
shareholders in the event that the Company is liquidated. In addition, the
collateral security arrangements under the Company's existing financing
arrangements may adversely affect the Company's ability to obtain additional
borrowings or other capital. The Company may need to raise additional capital
from equity or debt sources to finance its projected growth and capital
expenditures contemplated for periods after 1996. See the Risk Factor
discussion above under "Substantial Indebtedness; Need for Additional Capital"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CURRENCY RISKS; POSSIBLE EFFECT ON FINANCIAL CONDITION, OPERATING RESULTS AND
FINANCING COSTS; EXCHANGE CONTROLS
A significant portion of the Company's assets, sales and earnings are
attributable to operations conducted in Canada and the United Kingdom and, in
the future, the Company may increase the amount of business it conducts in
jurisdictions outside the United States. Consequently, a significant portion
of the Company's revenues and expenses are, and, in the future, are expected to
continue to be, denominated in non-U.S. currencies. Fluctuations in exchange
rates relative to the U.S. dollar may have a material adverse effect upon the
Company's business, financial condition or results of operations and could
adversely affect the effective interest rate on the Company's U.S. denominated
indebtedness. To the extent the operating subsidiaries distribute dividends
in non-U.S. currencies in the future, the amount of cash to be received
by ACC Corp. will be affected by fluctuations in exchange rates. In addition,
certain countries in which the Company may commence operations restrict the
expatriation or conversion of currency. See "-Risks Associated with
Derivative Financial Instruments" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
INTERNATIONAL TAX RISKS
Distributions of earnings and other payments (including interest) received
from the Company's operating subsidiaries and affiliates may be subject to
withholding taxes imposed by the jurisdictions in which such entities are
formed or operating, which will reduce the amount of after-tax cash the Company
can receive from its operating companies. In general, a U.S. corporation may
claim a foreign tax credit against its federal income tax expense for such
foreign withholding taxes and for foreign income taxes paid directly by foreign
corporate entities in which the Company owns 10% or more of the voting stock.
The ability to claim such foreign tax credits and to utilize net foreign losses
is, however, subject to numerous limitations, and the Company may incur
incremental tax costs as a result of these limitations or because the Company
is not in a tax-paying position in the United States.
The Company may also be required to include in its income for U.S. federal
income tax purposes its proportionate share of certain earnings of those
foreign corporate subsidiaries that are classified as "controlled foreign
corporations" without regard to whether distributions have been actually
received from such subsidiaries.
RISKS OF ENTRY INTO CELLULAR BUSINESS AND EXPANSION OF INTERNET, PAGING AND
DATA TRANSMISSION BUSINESSES
The Company believes that offering a full-service portfolio of local, long
distance, data transmission and other services is an effective strategy for
building upon its market position and obtaining economies of scale in its
network and other areas. However, the Company has only limited experience in
providing local exchange, Internet, paging and data transmission services in
selected markets, and is considering entering the cellular business in Canada
when market conditions warrant. The Company may be required to make
significant operating and capital investments in order to provide these
services. There are numerous operating complexities associated with providing
these services. The Company will be required to develop new products, services
and systems and new marketing initiatives for selling these services and will
also need to implement the necessary billing and collecting systems. The
Company may face significant competitive product and pricing pressures in
providing these services and entering new markets, and there can be no
assurance that the Company's strategy will be successful.
