- -
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 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 May 1, 1997, the Registrant had issued and outstanding
16,729,108 shares of its Class A Common Stock, par value $.015
per share.
The Index of Exhibits filed with this Report is found at Page 23.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Amounts in thousands, except share and per share data)
Three months ended
March 31,
1997 1996
Revenue:
Toll revenue $73,840 $61,538
Local service revenue and other 8,812 5,317
82,652 66,855
Network costs 48,616 41,608
Gross profit 34,036 25,247
Other operating expenses:
Depreciation and amortization 5,131 3,619
Selling, general and administrative 23,534 18,637
28,665 22,256
Income from operations 5,371 2,991
Other income (expense):
Interest (651) (1,524)
Foreign exchange gain (loss) (152) 12
(803) (1,512)
Income before provision for income
taxes and minority interest 4,568 1,479
Provision for income taxes 516 324
Income before minority interest 4,052 1,155
Minority interest in (earnings) of
consolidated subsidiary 0 (299)
Net income 4,052 856
Less Series A preferred stock dividend 0 (299)
Less Series A preferred stock accretion 0 (209)
Income applicable to common stock $4,052 $348
Net income per common
& common equivalent share $0.23 $0.03
Weighted average number of common
and common equivalent shares 17,495,914 12,800,453
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in 000's)
MARCH 31,
1997 1996
Cash flows from operating activities:
Net income $4,052 $856
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,131 3,619
Deferred income taxes 2,449 (260)
Minority interest in earnings of
consolidated subsidiary 0 299
Unrealized foreign exchange loss 162 59
Amortization of deferred financing costs 148 0
(Increase)decrease in assets:
Accounts receivable, net (4,031) (2,604)
Other receivables 476 1,710
Prepaid expenses and other assets 112 (523)
Deferred installation costs (941) (675)
Other (5,543) (169)
Increase(decrease) in liabilities:
Accounts payable (8,652) 1,594
Accrued network costs (398) (257)
Other accrued expenses (18,111) (1,913)
Net cash provided by
(used in) operating activities (25,146) 1,736
Cash flows from investing activities:
Capital expenditures, net (4,241) (5,625)
Acquisition of customer base (404)
Net cash used in investing activities (4,645) (5,625)
Cash flows from financing activities:
Borrowings under lines of credit and notes payable 58,617 11,850
Repayments under lines of credit and notes payable (26,380) (8,643)
Repayment of long-term debt, other than lines of credit (4,563) (852)
Proceeds from issuance of common stock 1,500 2,446
Financing costs (1,169) 0
Net cash provided by financing activities 28,005 4,801
Effect of exchange rate changes on cash (239) (41)
Net increase (decrease) in cash from operations (2,025) 871
Cash and cash equivalents at beginning of period 2,035 518
Cash and cash equivalents at end of period $10 $1,389
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $626 $896
Income taxes $0 $583
ACC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
(UNAUDITED)
Mar. 31, Dec. 31
1997 1996
CURRENT ASSETS:
Cash and cash equivalents $10 $2,035
Accounts receivable, net of allowance
for doubtful accounts of $3,670 in
1997 and $3,795 in 1996 54,860 51,474
Other receivables 3,240 3,792
Prepaid expenses and other assets 4,483 4,632
TOTAL CURRENT ASSETS 62,593 61,933
PROPERTY, PLANT, AND EQUIPMENT
At cost 121,825 119,398
Less-accumulated depreciation and
amortization (41,787) (38,946)
TOTAL PROPERTY, PLANT, AND EQUIPMENT 80,038 80,452
OTHER ASSETS:
Goodwill and customer base, net 49,923 50,629
Deferred installation costs, net 4,522 4,312
Other 13,073 6,705
TOTAL OTHER ASSETS 67,518 61,646
TOTAL ASSETS $210,149 $204,031
CURRENT LIABILITIES:
Notes payable $1,187 $730
Current maturities of
long-term debt 2,541 3,521
Accounts payable 5,829 15,351
Accrued network costs 21,968 22,908
Other accrued expenses 17,590 34,884
TOTAL CURRENT LIABILITIES 49,115 77,394
Deferred income taxes 3,943 2,767
Long-term debt 33,824 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 - 17,801,131 in 1997 and
17,684,361 in 1996 267 265
Class B Common Stock, $.015 par value,
Authorized - 25,000,000 shares;
Issued - no shares 0 -
Capital in excess of par value 118,377 116,878
Cumulative translation adjustment (1,511) (1,362)
Retained earnings 7,744 3,692
124,877 119,473
Less-
Treasury stock, at cost (1,089,884
shares in 1997 and 1996) (1,610) (1,610)
TOTAL SHAREHOLDERS' EQUITY 123,267 117,863
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $210,149 $204,031
ACC CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997
1. Statement of Management
The condensed financial statements of ACC Corp. and subsidiaries
(the "Company") included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented not
misleading. These condensed financial statements be read in conjunction
with the financial statements and the notes thereto included in the
Company's latest Annual Report on Form 10-K.
The interim financial statements contained herein reflect all
adjustments of a normal recurring nature which are, in the opinion of
management, necessary to a fair statement of the results of operations for
the interim periods presented.
As used herein, unless the context otherwise requires, the
"Company" and "ACC" refer to ACC Corp. and its subsidiaries, including its
U.S. operating subsidiaries("ACC U.S."), ACC TelEnterprises Ltd.("ACC
Canada"), ACC Long Distance UK Ltd. ("ACC U.K."), and ACC
Telecommunications GmbH ("ACC Germany"). In this Form 10-Q, references to
"dollar" and "$" are to United States dollars, references to "Cdn. $" are
to Canadian dollars, references to "pound symbol" 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.
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
Ended March 31,
Average Number Outstanding: 1997 1996
Common Shares 16,654,398 11,963,025
Common Equivalent Shares 841,516 837,428
TOTAL 17,495,914 12,800,453
Fully diluted income per share amounts are not presented for any period
because inclusion of these amounts would be anti-dilutive.
4. SFAS No. 128
In February 1997, Statement of Financial Accounting Standard No. 128
was issued, which establishes standards for computing and presenting
earnings per share (EPS). The Statement, which supersedes Opinion 15,
replaces the presentation of primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS on the face of
the income statement and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator
of the diluted EPS computation. The Statement is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods. Earlier application is not permitted. The Statement
requires restatement of all prior-period EPS data presented.
While the Statement prohibits early adoption, pro forma presentation
of the impact of the Statement for the reporting periods is illustrated
below;
Pro Forma Earnings Per Share Computation under FAS 128
Three months ended March 31, 1997 and 1996
(amounts in thousands except share and per share amounts)
1997 1996
Income Shares Per share Income Shares Per share
Basic EPS
Net income $4,052 $ 856
Less: preferred
stock dividends
and preferred
stock accretion - (508)
Income available to ____________________ ____________________
common shareholders $4,052 16,654,398 $.24 $ 348 11,963,025 $.03
Diluted EPS
Add: Options and
warrants 841,516 837,428
Income available to
common shareholders $4,052 17,495,914 $.23 $ 348 12,800,453 $.03
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 March 31, 1996 was excluded
from the above, as the effect would have been antidilutive.
5. SFAS No. 129
In February 1997, Statement of Financial Accounting Standard
No. 129 was issued, which establishes standards for disclosing
information about an entity's capital structure. The Statement
eliminates exemptions of nonpublic entities to the disclosure
requirements of APB No. 10, APB No. 15 and FASB No. 47, but
imposes no new disclosure requirements of the Company.
6. 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion includes certain forward-looking
statements. Such forward-looking statements are subject to
material risks and uncertainties and other factors. For a
discussion of material risks and uncertainties and other factors
that could cause actual results to differ materially from the
forward-looking statements, see "Recent Losses; Potential
Fluctuations in Operating Results," "Substantial Indebtedness;
Need for Additional Capital," "Dependence on Transmission
Facilities-Based Carriers and Suppliers," "Potential Adverse
Effects of Regulation," "Increasing Domestic and International
Competition," "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 Association 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 Risk"
and "Risks of Entry into Cellular Business and Expansion of
Internet, Paging and Data Transmission Business," 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 U.S., Canadian and U.K. operations (no revenue
was derived from Germany operations in 1996 or 1997) during the
three month periods ended March 31, 1997 and 1996:
Three Months Ended March 31,
1997 1996
(Dollars and minutes in thousands)
Amount Percent Amount Percent
Total Revenue:
United States $ 25,969 31 % $ 19,754 29 %
Canada 29,691 36 % 27,845 42 %
United Kingdom 26,992 33 % 19,256 29 %
Total $ 82,652 100 % $ 66,855 100 %
Billable Long Distance Minutes of Use:
United States 170,142 33 % 138,518 34 %
Canada 186,898 36 % 158,768 39 %
United Kingdom 162,468 31 % 109,830 27 %
Total 519,508 100 % 407,116 100 %
The following table presents certain information concerning
toll revenue per billable minute and network cost per billable
minute attributable to the Company's U.S., Canadian and U.K.
operations during the three month periods ended March 31, 1997
and 1996:
Three Months Ended March 31,
1997 1996
Toll Revenue Per Billable Long Distance Minute:
United States................. $.127 $.128
Canada .135 .155
United Kingdom .166 .175
Network Cost Per Billable Long Distance Minute:
United States $.084 $.082
Canada .093 .107
United Kingdom .104 .121
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 during the second quarter
of 1997. The Company believes that toll revenue per billable
minute and network cost per billable minute will be lower in
future periods, due to competitive pressures.
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 US's 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 Company expects U.S.
competition based on price and service offerings to increase.
The deregulatory trend in Canada, which commenced in 1989,
has increased competition. ACC Canada experienced significant
downward pressure on the pricing of its services during 1994 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 quarter 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. Toll revenue per billable minute
attributable to residential and student customers in Canada
generally exceeds the toll revenue per billable minute
attributable to commercial customers.
The Company 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.
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 by preparing to enter the deregulating German and
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
Company has only limited experience in providing local telephone
services, having commenced such services in 1994. 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 generated a small operating profit
for the first three months of 1997, and for the full year 1996.
However, the Company incurred operating losses from this business
in 1994 and 1995 and 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. The Company's sales to
other long distance carriers increased over the prior year due to
the Company's efforts to promote its lower international network
costs. Revenues from wholesale carriers accounted for
approximately 33%, 4% and 21% of the revenues of ACC U.S., ACC
Canada and ACC U.K., respectively, in the first quarter of 1997.
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 first
quarter of 1997 was 18% of the Company's consolidated revenue
compared to 17% in the first quarter of 1996, and management
believes that carrier revenue will continue to represent less
than 20% of consolidated total revenue as the core businesses
continue to grow. The foregoing forward-looking statement is
based upon expectations with respect to growth in the Company's
customer base and total revenues. If such expectations are not
realized, the Company's actual results may differ materially from
the foregoing discussion.
Results of Operations
The following table presents, for the quarters ended March
31, 1997 and 1996, certain Statement of Operations data expressed
as a percentage of total revenue:
Three months ended
March 31,
1997 1996
Revenue:
Toll revenue 89.3% 92.1%
Local service and other 10.7 7.9
Total revenue 100.0 100.0
Network costs 58.8 62.2
Gross profit 41.2 37.8
Other operating expenses:
Depreciation and amortization 6.2 5.4
Selling, general and administrative 28.5 27.9
Total other operating expenses 34.7 33.3
Income from operations 6.5 4.5
Total other (expense) (1.0) (2.3)
Income from operations before provision
for income taxes and minority
interest 5.5 2.2
Provision for income taxes .6 .5
Minority interest in (income)
of consolidated subsidiary -- .4
Income from operations 4.9% 1.3%
Quarter ended March 31, 1997 Compared with Quarter ended March
31, 1996
Revenue. Consolidated total revenue for the quarter ended
March 31, 1997 increased by 23.6% to $82.7 million from $66.9
million for the same period in 1996, reflecting growth in long
distance toll revenue, local exchange service and other revenue.
Long distance toll revenue increased 20.0% to $73.8 million for
the first quarter of 1997 from $61.5 million for the first
quarter of 1996, and billable minutes of use increased 27.6%.
Toll revenue growth from the core commercial, residential, and
university customer base was 17.5%, while toll revenue growth
from wholesale carriers was 30.8%. For the first quarter of 1997,
wholesale carrier revenue represented 18.4% of consolidated total
revenue, compared to 17.4% for the first quarter of 1996. Toll
revenue per billable minute decreased to $.142 for the first
quarter of 1997 from $.151 for the first quarter of 1996,
reflecting increased competitive pricing pressures in the long
distance business. Local service and other revenues increased
65.7% to $8.8 million for the first quarter of 1997 compared to
$5.3 million for the first quarter of 1996, reflecting continued
growth in the local exchange and Internet business lines, as well
as growth in other value added products and services. Exchange
rates had no material impact on revenue in either Canada or the
U.K.. Customer accounts at March 31, 1997 were approximately
392,000 compared to approximately 284,000 at March 31, 1996,
representing a 38% increase.
In the U.S., long distance toll revenue increased 22.6% to
$21.7 million for the first quarter of 1997 compared to $17.7
million for the first quarter of 1996 as a result of a 22.8%
increase in billable minutes. Toll revenue from wholesale
carriers increased 54.0% while toll revenues from the commercial
residential, and university customer base increased 7.6%.
In Canada, long distance toll revenue increased 2.8% to $25.3
million for the first quarter of 1997 compared to $24.6 million for the
first quarter of 1996. While billable minutes of use in Canada increased
by 17.7%, this was offset by a substantial decrease in wholesale carrier
traffic and pricing pressures. During the first quarter of 1997, long
distance toll revenue from carriers declined 70%, due in large
measure to the loss of wholesale traffic from one large Canadian
long distance carrier. Toll revenue from the commercial, residential, and
university customer base increased 15.1%, attributable to substantial
growth in the commercial segment. It is expected that the continued
growth in the commercial, residential, and university segments will offset
the reduction in lower margin wholesale carrier revenue. In the
U.K., long distance toll revenue increased 40.1% to $26.9 million
for the first quarter of 1997 compared to $19.2 million for the
first quarter of 1996. This was the result of a 47.9% increase
in billable minutes offset by competitive pricing pressures.
In the U.S., local service and other revenue increased by
111.3% to $4.3 million for the first quarter of 1997 from $2.0
million for the first quarter of 1996. Efforts to expand and
grow the local exchange business resulted in revenue of $2.8
million for the first quarter of 1997 compared to $.7 million
for the first quarter of 1996. Recent switch installations in
Albany and Buffalo will be followed by further market penetration
with planned installations of local exchange switches in New York
City and Boston and Springfield, Massachusetts later in 1997. In
Canada, local service and other revenue increased by 37.8% to
$4.4 million for the first quarter of 1997 from $3.2 million for
the first quarter of 1996. Internet revenue for the first
quarter of 1997 was $.6 million. The Company commenced Internet
services with the acquisition of Internet Canada in May 1996.
Continued expansion and growth in local service, paging, Internet
and data communications is expected to become a larger component
of total revenues in future periods.
Gross Profit. Gross profit, defined as revenue less network
costs, for the quarter ended March 31, 1997 increased 34.8% to
$34.0 million from $25.2 for the first quarter of 1996.
Expressed as a percentage of revenue, gross profit increased to
41.2% for the first quarter of 1997 from 37.8% for the first
quarter of 1996. Contributing to the improved 1997 margin were
reduced contribution charges in Canada. This accounted for
approximately a 2% increase in gross profit in 1997.
Gross profits are expected to increase in the U.K. as a result of
a planned installation of a microwave network, which will link
the Company's three existing U.K. switches, and lower network
costs (through reduced reliance on leased lines with British
Telecom), while providing additional network capacity. In May
1997, the Company was awarded a Public Telecommunications
Operator (PTO) license from the U.K Department of Trade and
Industry, which authorizes the ownership of facilities (such as
microwave networks) in the U.K. Also, in March 1997, the Company
signed an Indefeasible Right of Use (IRU) agreement to purchase a
DS-3 high-capacity transmission line, on the U.K. half of the
PTAT-1 cable. Ownership of this facility reduces reliance on
leased lines and increases network capacity. These developments
are expected to lower operating costs and positively impact gross
profit in the near term. The foregoing forward-looking statements
are based on expectations regarding anticipated levels of
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 Operating Expenses. Depreciation and amortization
expense for the quarter ended March 31, 1997 increased to $5.1
million from $3.6 million for the first quarter of 1996.
Expressed as a percentage of revenue, these costs increased to
6.2% for the first quarter of 1997 from 5.4% for the first
quarter of 1996. The $1.5 million increase in depreciation and
amortization expense was attributable to assets placed in service
throughout 1996 and for the first quarter of 1997, as well as
amortization of the customer base and goodwill associated with
the Internet Canada acquisitions.
Selling, general and administrative expenses (SG&A) for the
quarter ended March 31, 1997 were $23.5 million compared with
$18.6 million for the first quarter of 1996. Expressed as a
percentage of revenue, selling, general and administrative
expenses were 28.5% for the first quarter of 1997 compared with
27.9% for the first quarter of 1996. Included in the 1997
quarter were $.5 million of SG&A expenses associated with the
Internet Canada acquisition completed in May 1996. Additionally,
SG&A expenses associated with the U.S. local exchange business
for the first quarter of 1997 were $1.8 million, compared with
$.9 million for the first quarter of 1996, with the year to year
increase attributable to the significant growth in related local
exchange revenue. Other increases in SG&A expenses were
primarily attributable to increases in personnel related costs
and infrastructure to support expansion and growth in the
Company's business lines.
Other Income (Expense). Interest expense decreased to $.7
million for the quarter ended March 31, 1997 compared to $1.6
million for the first quarter of 1996. The decrease was largely
attributable to reduced capital lease obligations ($4.4 million,
on average) and debt refinancings at lower rates. Interest income
for the first quarter of both 1997 and 1996 was less than $.1
million.
Foreign exchange gains and losses reflect changes in the
value of foreign currencies relative to the U.S. dollar for
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 and losses. The Company
does not engage in speculative foreign currency transactions.
During the first quarter of 1997, the Company recognized net
losses on foreign currency transactions of $0.2 million and a
nominal gain during the first quarter of 1996
Provision for income taxes reflects the anticipated income
tax liability of the Company's U.S. operations based on its
pretax income for the period. The provision for income taxes
increased during the current quarter due to profitability in the
U.S business. Foreign subsidiary income tax provisions are
offset against net operating loss carryforwards generated by
those subsidiaries in prior years. Valuation allowances of $7.7
million at December 31, 1996, largely attributable to deferred
tax assets related to non-U.S. loss carryforwards, were reduced
during the first quarter of 1997 by $.7 million. The remaining
valuation allowance, which is periodically reviewed for adequacy,
largely reflects the uncertainty of realizing the benefit of the
loss carryforwards.
Minority interest in (income) of consolidated subsidiary for the
first quarter of 1996 of $.3 million reflects the portion of the
Company's Canadian subsidiary's income or loss attributable to
the approximately 30% of that subsidiary's common stock that 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 of 1997. As a
result, the Canadian subsidiary is 100% owned, and no minority
interest exists as of March 31, 1997.
The Company's income from operations for the current quarter
was $5.4 million compared to $3.0 million for the first quarter
of 1996, and was comprised of the following: U.S operations
($2.7 million), Canadian operations ($1.0 million), U.K.
operations ($2.0 million), and German operations (($.3) million).
Net income for the quarter ended March 31, 1997 was $4.1 million,
compared to $1.1 million for the first quarter of 1996.
Liquidity And Capital Resources
Historically, the Company has satisfied its working capital
requirements through cash flow from operations, through
borrowings and financing from financial institutions, vendors and
other third parties, and through the issuance of securities. On
January 14, 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 March 31, 1997, the unused amount under the Credit
Facility was approximately $66 million.
Net cash flows used in operations for the quarter ended
March 31, 1997 were $25.1 million compared to net cash provided
by operations of $1.7 million for the first quarter of 1996. The
decrease of $26.9 million primarily resulted from payments of
previously accrued expenses associated with the Canadian minority
interest repurchase and accrued year-end bonuses, payment of
accounts payable, a 6.6% increase in accounts receivable
coincident with revenue growth, and expenditures for other non-
current assets including IRU's.
Net cash flows used in investing activities (for capital
expenditures and acquisition of customer base) for the quarter
ended March 31, 1997 were $4.6 million compared with $5.6 million
for the first quarter of 1996.
Net cash provided by financing activities for the quarter
ended March 31, 1997 was $28.0 million compared with $4.8 million
for the first quarter of 1996. The increase reflects utilization
of 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 and Internet Canada), 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 March 31, 1997, reflected a
working capital surplus of approximately $13.5 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 $39.0
million for the expansion of its network, the acquisition,
upgrading and development of switches and other
telecommunications equipment as conditions warrant, the
development, licensing and integration of its management
information system and other software, the development and
expansion of its service offerings and customer programs and
other capital expenditures. $5.2 million in capital expenditures
were recorded during the quarter ended March 31, 1997. ACC
expects that it will continue to make significant capital
expenditures during future periods, particularly for the
acquisition and installation of switching equipment for the U.K.
(located in Bristol) 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 March 31, 1997, the Company had approximately $.01
million 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 $31 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 March 31, 1997, the Company has $5.0
million of capital lease obligations which mature at various
times from 1997 through 2000. During the current quarter, 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 March 31, 1997 was $73.6 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 March 31, 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.
Accounting Change
In March 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards 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. This statement's objective is to simplify the
computation of EPS and to make the U.S. standard for EPS
computations more compatible with that of the International
Accounting Standards Committee. 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.
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: May 15, 1997 /s/ Michael R. Daley
Michael R. Daley
Executive Vice President
and Chief Financial
Officer
Dated: May 15, 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
99.2 Schedule of Employment Filed herewith
Continuation Incentive
Agreements.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 10
<SECURITIES> 0
<RECEIVABLES> 58,530<F1>
<ALLOWANCES> 3,670
<INVENTORY> 818
<CURRENT-ASSETS> 62,593
<PP&E> 121,825<F2>
<DEPRECIATION> 41,787
<TOTAL-ASSETS> 210,149
<CURRENT-LIABILITIES> 49,115
<BONDS> 33,824<F3>
0
0
<COMMON> 267
<OTHER-SE> 123,000
<TOTAL-LIABILITY-AND-EQUITY> 210,149
<SALES> 73,840<F4>
<TOTAL-REVENUES> 82,652
<CGS> 48,616<F5>
<TOTAL-COSTS> 28,665<F6>
<OTHER-EXPENSES> 0<F7>
<LOSS-PROVISION> 281<F8>
<INTEREST-EXPENSE> 651<F9>
<INCOME-PRETAX> 4,568
<INCOME-TAX> 516
<INCOME-CONTINUING> 4052
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4052
<EPS-PRIMARY> .23
<EPS-DILUTED> 0
<FN>
<F1>Add back allowance
<F2>Gross
<F3>Total long-term debt
<F4>Toll only
<F5>Network costs
<F7>Unusual operating expenses
<F6>Total operating expenses
<F8>Bad debt expenses from consolidated income statement
<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 quarter 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 18% of consolidated revenues during the first
three 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."
- - 1 -
<PAGE>
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
- - 2 -
<PAGE>
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,
regulatory proposals are pending that may affect the prices charged by the
RBOCs and other local exchange carriers to the Company, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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 other governmental
regulations will be adopted, amended or modified, and any such adoption,
amendment or modification could have a material adverse effect on the Company's
business, results of operations and financial condition.
In the U.S., the Federal Communications Commission ("FCC") and relevant
state public service commissions ("PSCs") have the authority to regulate
interstate and intrastate rates, respectively, ownership of transmission
facilities, and the terms and conditions under which the Company's services are
provided. Federal and state regulations and regulatory trends have had, and in
the future are likely to have, both positive and negative effects on the
Company and its ability to compete. The recent trend in both Federal and state
regulation of telecommunications service providers has been in the direction of
lessened regulation. In general, neither the FCC nor the relevant state PSCs
currently regulate the Company's long distance rates or profit levels, but
either or both may do so in the future. However, the general recent trend
toward 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., access
charges generally are regulated by the FCC and the relevant state PSCs. Under
the terms of the AT&T Divestiture Decree, the RBOCs were required to price the
"local transport" portion of such access charges on an "equal price per unit of
traffic" basis. In November 1993, the FCC implemented new interim rules
governing local transport access charges while the FCC considers permanent
rules regarding new rate structures for transport pricing and switched access
competition. These interim rules have essentially maintained the "equal price
per unit of traffic" rule. However, under alternative access charge rate
structures being considered by the FCC, local exchange carriers would be
permitted to allow volume discounts in the pricing of access charges. More
recently, the FCC has commenced a comprehensive review of its regulation of
local exchange carrier
- - 3 -
<PAGE>
access charges to better account for increasing levels of local competition.
While the outcome of these proceedings is uncertain, if these rate structures
are adopted, many small interexchange carriers, including the Company, could be
placed at a significant cost disadvantage to larger competitors, because access
charges for AT&T and other large interexchange carriers could decrease, and
access charges for small interexchange carriers could increase.
The Company currently competes with the RBOCs and other local exchange
carriers such as the GTE Operating Companies ("GTOCs") in the provision of
"short haul" toll calls completed within a Local Access and Transport Area
("LATA"). Subject to a number of conditions, the 1996 Act eliminated many of
the restrictions which prohibited the RBOCs and GTOCs from providing long-haul,
or inter-LATA, toll service, and thus the Company will face additional
competition 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. Pricing rules for those
services were set forth in the 1996 Act, with states directed to approve
specific tariffs. 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 major cities (accounting for approximately
70% of all loops in the state) will be $12.49, plus a recurring $1.90
connection charge. The monthly rate in other areas of the state will be
$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 existing
temporary rates for New York Telephone's unbundled links; it is greater than
the $10.10 rate for the comparable service New York Telephone offers to its
own residential customers, but below the rate of approximately $22 for the
comparable service New York Telephone offers to its business customers.
However, in order to utilize unbundled links, the Company must arrange for
collocation in New York Telephone's central offices, which adds significant
costs. As a result, the Company's marketing efforts are primarily directed
toward business customers (and certain concentrated residential customers)
which can be served through the Company's own facilities, rather than through
use of unbundled links obtained from New York Telephone or Frontier Corp.
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. 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,
- - 4 -
<PAGE>
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 $5.8 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 the
U.S. and Canada in 1995 and 1996 were $13.6 million and $26.3 million,
respectively, and $5.3 million and $8.8 million, respectively, for the first
three 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
the access charge rate structure 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
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<PAGE>
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 18% of consolidated revenues in the
first three 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."
- - 6 -
<PAGE>
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 is
making preparations to enter the deregulating German market in anticipation of
deregulation in 1998, and has recently 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 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
- - 7 -
<PAGE>
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 such strategic alliance, investment or acquisition. Any such
future strategic alliances, investments or acquisitions would be accompanied by
the risks commonly encountered in strategic alliances with or acquisitions of
or investments in companies. Such risks include, among other things, the
difficulty of assimilating the operations and personnel of the companies, the
potential disruption of the Company's ongoing business, the 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."
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<PAGE>
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
- - 9 -
<PAGE>
voluntarily terminate their employment with the Company at any time.
Competition for qualified employees and personnel in the telecommunications
industry is intense and, from time to time, there are a limited number of
persons with knowledge of and experience in particular sectors of the
telecommunications industry. The Company's success also will depend on its
ability to attract and retain qualified management, marketing, technical and
sales executives and personnel. The process of locating such personnel with
the combination of skills and attributes required to carry out the Company's
strategies is often lengthy. The loss of the services of key personnel, or the
inability to attract additional qualified personnel, could have a material
adverse effect on the Company's results of operations, development efforts and
ability to expand. There can be no assurance that the Company will be
successful in attracting and retaining such executives and personnel. Any such
event could have a material adverse effect on the Company's business, financial
condition and results of operations.
RISK ASSOCIATED WITH FINANCING ARRANGEMENTS; DIVIDEND RESTRICTIONS
The Company's financing arrangements are secured by substantially all of
the Company's assets and require the Company to maintain certain financial
ratios and restrict the payment of dividends, and the Company anticipates that
it will not pay any dividends on Class A Common Stock in the foreseeable
future. The Company's secured lenders would be entitled to foreclose upon
those assets in the event of a default under the financing arrangements and to
be repaid from the proceeds of the liquidation of those assets before the
assets would be available for distribution to the Company's other creditors and
shareholders in the event that the Company is liquidated. In addition, the
collateral security arrangements under the Company's existing financing
arrangements may adversely affect the Company's ability to obtain additional
borrowings or other capital. The Company may need to raise additional capital
from equity or debt sources to finance its projected growth and capital
expenditures contemplated for periods after 1996. 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
- - 10 -
<PAGE>
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. Issuance of the Senior Notes will also increase the Company's
expenses denominated in U.S. dollars. To the extent the Operating Companies
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.
- - 11 -
<PAGE>
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.
The Company currently provides service to certain Internet Service
Providers (ISPs), and completes calls which originate from New York Telephone
and Frontier Corp. customers to those ISPs. Under "reciprocal compensation
arrangements" required by the 1996 Act, and as part of the Company's
interconnection arrangements (specified by either contractual agreement,
or tariff), the Company currently receives compensation when terminating
these calls to ISPS. However, New York Telephone has recently given notice
it believes such calls are not eligible for such compensation, has requested
credit for past calls, and has threatened to refuse to pay for future calls
terminated by the Company to the ISPs. Revenue attributable to reciprocal
compensation arrangements represented less than $1.0 million during 1996 but
could represent larger amounts in future periods. The Company has filed a
complaint with the PSC in response to the position taken by New York Telephone,
and while confident of a favorable outcome it is unable to predict whether
its application will be successful.
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SCHEDULE OF EMPLOYMENT CONTINUATION
INCENTIVE AGREEMENTS
EXHIBIT 99.2
SIGNATURE
NAME COMPANY DATE TERM
- ------------- ------- ------ ------
Laniak, David Corp. 5/9/97 1 year
Bantoft, Chris UK 4/8/97 1 year
Chesonis, Arunas Corp. 4/1/97 1 year
Daley, Michael Corp. 1/26/96 1 year
Dubnik, Steve Corp. 8/4/94 1 year
LaFrance, Michael Corp. 1/4/97 1 year
Squier-Dow, Mae US 4/14/97 1 year
Szabo, Frank Corp. 2/1/97 6 months
Yawman, Phil Corp. 6 months
Zimmer, John Corp. 12/20/95 6 months
