-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KorRTRkqHD2QIEVuLKfoScxkJ9T/nLBDkbfAqP6/dqI2jRiLCOJX+tSd98U4OzVO ZpvonT59ZHHk2NvDEWgISQ== 0000901309-96-000035.txt : 19960814 0000901309-96-000035.hdr.sgml : 19960814 ACCESSION NUMBER: 0000901309-96-000035 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACC CORP CENTRAL INDEX KEY: 0000783233 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 161175232 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14567 FILM NUMBER: 96609136 BUSINESS ADDRESS: STREET 1: 400 WEST AVENUE CITY: ROCHESTER STATE: NY ZIP: 14611 BUSINESS PHONE: 7169873000 MAIL ADDRESS: STREET 1: 400 WEST AVENUE CITY: ROCHESTER STATE: NY ZIP: 14611 FORMER COMPANY: FORMER CONFORMED NAME: AC TELECONNECT CORP DATE OF NAME CHANGE: 19870129 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ Commission file number 0-14567 ACC CORP. (Exact name of registrant as specified in its charter) Delaware 16-1175232 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 West Avenue, Rochester, New York 14611 (Address of principal executive offices) (716) 987-3000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of August 6, 1996, the Registrant had issued and outstanding 10,198,898 shares of its Class A Common Stock, par value $.015 per share, and 10,000 shares of its Series A Preferred Stock. After giving effect to the three- for-two stock split of the Class A Common Stock which will be effective on August 8, 1996, the number of shares of Class A Common Stock outstanding would increase to 15,298,347 shares. The Index of Exhibits filed with this Report is found at Page 24. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Amounts in thousands, except share and per share data) Three months ended Six months ended June 30, June 30, 1996 1995 1996 1995 ----------- ----------- ----------- ------------ Revenue: Toll revenue $ 74,600 $ 39,585 $ 136,137 $ 76,948 Leased lines and other 5,489 2,048 10,805 4,387 ----------- ----------- ----------- ------------ 80,089 41,633 146,942 81,335 Network costs 53,380 26,314 94,988 51,060 ----------- ----------- ----------- ------------ Gross profit 26,709 15,319 51,954 30,275 Other operating expenses: Depreciation and amortization 4,176 2,863 7,795 5,394 Selling, general and administrative 19,354 13,311 37,989 26,192 ----------- ----------- ----------- ----------- 23,530 16,174 45,784 31,586 ----------- ----------- ----------- ----------- Income (loss) from operations 3,179 (855) 6,170 (1,311) Other income (expense): Interest expense (1,290) (1,475) (2,891) (2,415) Interest income 380 66 457 88 Foreign exchange gain (loss) 14 (64) 26 (95) ----------- ----------- ----------- ----------- (896) (1,473) (2,408) (2,422) ----------- ----------- ----------- ----------- Income (loss) before provision for income taxes and minority interest 2,283 (2,328) 3,762 (3,733) Provision for income taxes 529 18 853 290 ----------- ----------- ----------- ----------- Income (loss) before minority interest 1,754 (2,346) 2,909 (4,023) Minority interest in (income) loss of consolidated subsidiary (296) 96 (596) 107 ----------- ----------- ----------- ----------- Net income (loss) 1,458 (2,250) 2,313 (3,916) Less Series A preferred stock dividend (339) - (638) - Less Series A preferred stock accretion (416) - (624) - ----------- ----------- ----------- ----------- Income (loss) applicable to common stock $ 703 $ (2,250) $ 1,051 $ (3,916) =========== =========== =========== =========== Net income (loss) per common & common equivalent share $ 0.05 $ (0.19) $ 0.08 $ (0.35) =========== =========== =========== =========== Average number of common and common equivalent shares (Note 7) 15,110,889 11,787,738 14,010,275 11,201,861 =========== =========== =========== ===========
ACC CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data) June 30 December 31, 1996 1995 (unaudited) ----------- ------------ Current assets: Cash and cash equivalents $ 30,380 $ 518 Accounts receivable, net of allowance for doubtful accounts of $3,648 in 1996 and $2,085 in 1995 50,508 38,978 Other receivables 2,529 3,965 Prepaid expenses and other assets 2,387 2,265 ---------- ---------- Total current assets 85,804 45,726 ---------- ---------- Property, plant and equipment: At cost 93,191 83,623 Less-accumulated depreciation and amortization (32,180) (26,932) ---------- ---------- 61,011 56,691 ---------- ---------- Other assets: Goodwill and customer base, net 16,732 14,072 Deferred installation costs, net 3,689 3,310 Other 4,115 4,185 ---------- ---------- 24,536 21,567 ---------- ---------- Total assets $ 171,351 $ 123,984 ========== ========== Current liabilities: Notes payable $ 517 $ 1,966 Current maturities of long-term debt 2,569 2,919 Accounts payable 6,151 7,340 Accrued network costs 29,652 28,192 Other accrued expenses 17,534 15,657 ---------- ---------- Total current liabilities 56,423 56,074 ---------- ---------- Deferred income taxes 2,471 2,577 ---------- ---------- Long-term debt 5,948 28,050 ---------- ---------- Redeemable Series A Preferred Stock, $1.00 par value, $1,000 liquidation value, cumulative, convertible, Authorized- 10,000 shares; Issued - 10,000 shares 10,710 9,448 ---------- ---------- Minority interest 2,031 1,428 ---------- ---------- Shareholders' equity (Note 7): Preferred Stock, $1.00 par value, Authorized - 1,990,000 shares; - - Issued - no shares Class A Common Stock, $.015 par value Authorized - 50,000,000 shares; Issued - 16,328,268 in 1996 and 12,925,889 in 1995 245 194 Class B Common Stock, $.015 par value, Authorized - 25,000,000 shares; Issued - no shares - - Capital in excess of par value 97,872 32,846 Cumulative translation adjustment (982) (950) Retained earnings (deficit) (1,757) (4,073) ---------- ---------- 95,378 28,017 Less- Treasury stock, at cost (1,089,884 shares) (1,610) (1,610) ---------- ---------- Total shareholders' equity 93,768 26,407 ---------- ---------- Total liabilities and shareholders' equity $ 171,351 $ 123,984 ========== ==========
ACC CORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Amounts in 000's) FOR THE SIX MONTHS ENDED JUNE 30, 1996 1995 --------- --------- Cash flows from operating activities: Net income (loss) $2,313 ($3,916) --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,795 5,394 Deferred income taxes (106) 268 Minority interest in income (loss) of consolidated subsidiary 596 (107) Unrealized foreign exchange loss (gain) (42) 207 (Increase) decrease in assets: Accounts receivable, net (11,573) (5,268) Other receivables 1,434 743 Prepaid and other assets (106) (515) Deferred installation costs (1,476) (863) Other (154) 383 Increase (decrease) in liabilities: Accounts payable (1,113) (3,407) Accrued network costs 1,506 6,716 Other accrued expenses 445 (398) --------- --------- Total adjustments (2,794) 3,153 --------- --------- Net cash used in operating activities (481) (763) --------- --------- Cash flows from investing activities: Capital expenditures, net (9,659) (4,775) Cash paid for acquisition of customer base (2,193) (227) --------- --------- Net cash used in investing activities (11,852) (5,002) --------- --------- Cash flows from financing activities: Borrowings under lines of credit 19,500 (13,316) Repayments under lines of credit (40,413) - Repayment of notes payable (1,470) - Repayment of long-term debt (1,554) (933) Proceeds from issuance of common stock 66,385 11,243 Proceeds from issuance of subordinated debt - 10,000 Financing costs - (1,319) Dividends paid - (440) Net cash provided by financing activities 42,448 5,235 --------- --------- Effect of exchange rate changes on cash (253) (577) --------- --------- Net increase in cash 29,862 (1,107) Cash and cash equivalents at beginning of period 518 1,021 --------- --------- Cash and cash equivalents at end of period $30,380 ($86) ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $1,798 $2,041 ========= ========= Income taxes $958 $103 ========= ========= Supplemental schedule of noncash investing activities: Equipment purchased through capital leases - $2,995 ========= =========
ACC CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1996 1. Statement of Management ----------------------- The condensed financial statements of ACC Corp. and subsidiaries (the "Company") included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. The interim financial statements contained herein reflect all adjustments of a normal recurring nature which are, in the opinion of management, necessary to a fair statement of the results of operations for the interim periods presented. 2. Form 10-K --------- Reference is made to the following footnotes included in the Company's 1995 Annual Report on Form 10-K: Principles of Consolidation Sale of Subsidiary Stock Toll Revenue Other Receivables Property, Plant and Equipment Deferred Installation Costs Goodwill and Customer Base Common and Common Equivalent Shares Foreign Currency Translation Income Taxes Cash Equivalents and Restricted Cash Derivative Financial Instruments Use of Estimates Reclassifications Operating Information Discontinued Operations Asset Write-down Equal Access Costs Debt Senior Credit Facility and Lines of Credit Income Taxes Redeemable Preferred Stock Equity Private Placement Employee Long Term Incentive Plan Employee Stock Purchase Plan Treasury Stock Commitments and Contingencies Operating Leases Employment and Other Agreements Purchase Commitment Defined Contribution Plans Annual Incentive Plan Legal Matters Geographic Area Information Related Party Transactions Subsequent Events 3. Net Income Per Share -------------------- Net income per common and common equivalent share is computed on the basis of the weighted average number of common and common equivalent shares outstanding during the period and net income reduced by preferred dividends and accreted costs. The average number of shares outstanding (adjusted for a three-for-two stock split - see Note 7) is computed as follows:
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED JUNE 30, JUNE 30, ------------------------ -------------------------- Average Number Outstanding: 1996 1995 1996 1995 ---- ---- ---- ---- Common Shares 12,984,746 10,999,349 14,006,468 11,593,416 Common Equivalent Shares 1,025,529 202,512 1,104,421 194,322 ---------- ---------- ---------- ---------- TOTAL 14,010,275 11,201,861 15,110,889 11,787,738 ========== ========== ========== ==========
Fully diluted income per share amounts are not presented for either period because inclusion of these amounts would be anti-dilutive. 4. SFAS No. 123 ------------ The Company is required to adopt SFAS No. 123, Accounting for Stock- Based Compensation in 1996. This Statement encourages entities to adopt a fair value based method of accounting for employee stock option plans (whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the employee service period) rather than the current intrinsic value based method of accounting (whereby compensation cost is measured at the grant date as the difference between market value and the price for the employee to acquire the stock). If the Company elects to continue using the intrinsic value method accounting, pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting had applied, will need to be disclosed. Management has decided that the Company will not adopt the fair value based method of accounting for the Company's stock option plans and will include the required pro forma disclosures in the annual financial statements. 5. Common Stock Offering --------------------- In May 1996, The Company completed a public offering of 2,012,500 (prior to the three-for-two stock split-see Note 7) shares of its Class A Common Stock at a price of $33.75 per share. The offering raised net proceeds of $63.1 million, after deduction of fees and expenses of $4.8 million. 6. Purchase -------- As of May 13, 1996, the Company, through its 70% owned subsidiary ACC TeleEnterprises Ltd., purchased certain assets of Internet Canada Corp. a company based in Toronto, Canada, which is engaged in the business of providing Internet access and home page design and development. The purchase price was Cdn. $3.0 million plus additional amounts to be calculated based on customer numbers at various dates, with the total not to exceed Cdn. $7.0 million. To date, Cdn. $4.2 million has been paid. 7. Stock Split ----------- On July 14, 1996, the Company's Board of Directors authorized a three-for-two stock split, in the form of a stock dividend to be issued on August 8, 1996, of the Company's Class A Common Stock to stockholders of record as of July 3, 1996. Per share amounts in the accompanying financial statements and footnotes have been adjusted for the split. 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," "Need for Additional Capital," "Dependence on Transmission Facilities-Based Carriers and Suppliers," "Potential Adverse Effects of Regulation," "Increasing Domestic and International Competition," "Risks of Growth and Expansion," "Risks Associated with International Operations," "Dependence on Effective Information Systems," "Risks Associated With Acquisitions, Investments and Strategic Alliances," "Technological Changes May Adversely Affect Competitiveness and Financial Results," "Dependence on Key Personnel," "Risks Associated with Financing Arrangements; Dividend Restrictions," "Holding Company Structure; Reliance on Subsidiaries for Dividends," "Potential Volatility of Stock Price" and "Risks Associated with Derivative Financial Instruments" included under the caption "Company Risk Factors" in Exhibit 99.1 hereto, which is incorporated by reference herein, and the Company's periodic reports and other documents filed with the SEC. As used herein, unless the context otherwise requires, the "Company" and "ACC" refer to ACC Corp. and its subsidiaries, including ACC Long Distance Corp. ("ACC U.S."), ACC TelEnterprises Ltd., the Company's approximately 70% owned Canadian subsidiary ("ACC Canada"), and ACC Long Distance UK Ltd. ("ACC U.K."). In this Form 10-Q, references to "dollar" and "$" are to United States dollars, references to "Cdn. $" are to Canadian dollars, references to "Pounds" are to English pounds sterling, the terms "United States" and "U.S." mean the United States of America and, unless the context otherwise requires, its states, territories and possessions and all areas subject to its jurisdiction, and the terms "United Kingdom" and "U.K." mean England, Scotland and Wales. GENERAL The Company's revenue is comprised of toll revenue and leased lines and other revenue. Toll revenue consists of revenue derived from ACC's long distance and operator-assisted services. Leased lines and other revenue consists of revenue derived from the resale of local exchange services, data line services, direct access lines and monthly subscription fees. Network costs consist of expenses associated with the leasing of transmission lines, access charges and certain variable costs associated with the Company's network. The following table shows the total revenue (net of intercompany revenue) and billable long distance minutes of use attributable to the Company's U.S., Canadian and U.K. operations during the three and six month periods ended June 30, 1996 and 1995:
THREE MONTHS ENDED JUNE 30, 1996 1995 ---- ---- (DOLLARS AND MINUTES IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- TOTAL REVENUE: - ------------- United States..................... $ 28,980 36.2% $ 13,556 32.6% Canada............................ 29,723 37.1% 19,908 47.8% United Kingdom.................... 21,386 26.7% 8,169 19.6% ------- ------ ------- ------ Total....................... $ 80,089 100.0% $ 41,633 100.0% ======== ====== ======== ====== BILLABLE LONG DISTANCE MINUTES OF USE: - ------------------------------------- United States..................... 136,932 32.0% 106,956 39.8% Canada............................ 168,435 39.3% 125,334 46.7% United Kingdom.................... 123,032 28.7% 36,157 13.5% ------- ----- ------- ----- Total....................... 428,399 100.0% 268,447 100.0%
SIX MONTHS ENDED JUNE 30, 1996 1995 (DOLLARS AND MINUTES IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- TOTAL REVENUE: - ------------- United States..................... $ 48,732 33.2% $28,576 35.1% Canada............................ 57,567 39.2% 39,191 48.2% United Kingdom.................... 40,643 27.6% 13,568 16.7% ------- ----- ------- ----- Total...................... $146,942 100.0% $81,335 100.0% ======== ====== ======= ====== BILLABLE LONG DISTANCE MINUTES OF USE: - ------------------------------------- United States..................... 275,450 33.1% 224,413 41.5% Canada............................ 327,203 39.4% 256,244 47.3% United Kingdom.................... 228,653 27.5% 60,486 11.2% ------- ----- ------- ----- Total...................... 831,306 100.0% 541,143 100.0% ======= ====== ======= ======
The following table presents certain information concerning toll revenue per billable long distance minute and network cost per billable long distance minute attributable to the Company's U.S., Canadian and U.K. operations during the three and six month periods ended June 30, 1996 and 1995:
Three Months Ended Six Months Ended June 30, 1996 1995 1996 1995 ---- ---- ---- ---- TOLL REVENUE PER BILLABLE LONG - ------------------------------ DISTANCE MINUTE: --------------- United States..................... $.198 $.119 $.163 $.118 Canada............................ .156 .149 .156 .144 United Kingdom.................... .173 .225 .177 .224 NETWORK COST PER BILLABLE LONG - ------------------------------ DISTANCE MINUTE: --------------- United States..................... $.145 $.070 $.113 $.070 Canada............................ .114 .104 .110 .100 United Kingdom.................... .116 .165 .121 .164
The Company believes that its historic revenue growth as well as its historic network costs and results of operations for its Canadian and U.K. operations generally reflect the state of development of the Company's operations, the Company's customer mix and the competitive and deregulatory environment in those markets. For the U.S. operation, 1996 revenue and network cost per minute have been inflated by non-recurring international carrier sales in the second quarter of 1996. The Company entered the U.S., Canadian and U.K. telecommunications markets in 1982, 1985 and 1993, respectively. Deregulatory influences have affected the telecommunications industry in the U.S. since 1984 and the U.S. market has experienced considerable competition for a number of years. The competitive influences on the pricing of ACC U.S.'s services and network costs have been stabilizing during the past few years. This may change in the future as a result of recent U.S. legislation that further opens the market to competition, particularly from the regional operating companies ("RBOCs"). The Company expects competition based on price and service offerings to increase. The deregulatory trend in Canada, which commenced in 1989, has increased competition. ACC Canada experienced significant downward pressure on the pricing of its services during 1994. Although revenue per minute has increased from 1995 to 1996 due to changes in customer and product mix, the Company expects such downward pressure to continue. However it is expected that the pricing pressure may abate over time as the market matures. The impact of this pricing pressure on revenues of ACC Canada is being offset by an increase in the Canadian residential and student billable minutes of usage as a percentage of total Canadian billable minutes of usage, and introduction of new products and services including 800 service, local exchange resale, and Internet services. Toll revenue per billable minute attributable to residential and student customers in Canada generally exceeds the toll revenue per billable minute attributable to commercial customers. The Company expects that, based on existing and anticipated regulations and rulings, its Canadian contribution charges (access charges to originate calls from and terminate calls in the local exchange telephone network) will increase by up to approximately Cdn. $2.0 million in 1997 over 1996 levels, which the Company will seek to offset with increased volume efficiencies. However, additional reductions in contribution rates may offset this increase. The Company also believes that its network costs per billable minute in Canada may decrease during periods after 1996 if there is an anticipated increase in long distance transmission facilities available for lease from Canadian transmission facilities-based carriers as a result of expected growth in the number and capacity of transmission networks in that market. The foregoing forward-looking statements are based upon expectations of actions that may be taken by third parties, including Canadian regulatory authorities and transmission facilities-based carriers. If such third parties do not act as expected, the Company's actual results may differ materially from the foregoing discussion. The Company believes that, because deregulatory influences have only recently begun to impact the U.K. telecommunications industry, the Company will continue to experience a significant increase in revenue from that market during the next few years. The foregoing belief is based upon expectations of actions that may be taken by U.K. regulatory authorities and the Company's competitors; if such third parties do not act as expected, the Company's revenues in the U.K. might not increase. If ACC U.K. were to experience increased revenues, the Company believes it should be able to enhance its economies of scale and scope in the use of the fixed cost elements of its network. Nevertheless, the deregulatory trend in that market is expected to result in competitive pricing pressure on the Company's U.K. operations which could adversely affect revenues and margins. Since the U.K. market for transmission facilities is dominated by British Telecommunications PLC ("British Telecom") and Mercury Communications Ltd. ("Mercury"), the downward pressure on prices for services offered by ACC U.K. may not be accompanied by a corresponding reduction in ACC U.K.'s network costs and, consequently, could adversely affect the Company's business, results of operations and financial condition, particularly in the event revenue derived from the Company's U.K. operations accounts for an increasing percentage of the Company's total revenue. Moreover, the Company's U.K. operations are highly dependent upon the transmission lines leased from British Telecom. As each of the telecommunications markets in which it operates continues to mature, the rate of growth in its revenue and customer base in each such market is likely to decrease over time. Since the commencement of the Company's operations, the Company has undertaken a program of developing and expanding its service offerings, geographic focus and network. In connection with this development and expansion, the Company has made significant investments in telecommunications circuits, switches, equipment and software. These investments generally are made significantly in advance of anticipated customer growth and resulting revenue. The Company also has increased its sales and marketing, customer support, network operations and field services commitments in anticipation of the expansion of its customer base and targeted geographic markets. The Company expects to continue to expand the breadth and scale of its network and related sales and marketing, customer support and operations activities. These expansion efforts are likely to cause the Company to incur significant increases in expenses from time to time, in anticipation of potential future growth in the Company's customer base and targeted geographic markets. The Company's operating results have fluctuated in the past and they may continue to fluctuate significantly in the future as a result of a variety of factors, some of which are beyond the Company's control. The Company expects to focus in the near term on building and increasing its customer base, service offerings and targeted geographic markets, which will require it to increase significantly its expenses for marketing and development of its network and new services, and may adversely impact operating results from time to time. The Company's sales to other long distance carriers have been increasing due to the Company's marketing efforts to promote its lower international network costs. Revenues from other resellers accounted for approximately 57%, 18% and 14% of the revenues of ACC U.S., ACC Canada and ACC U.K., respectively, in the second quarter of 1996 and 46%, 13% and 13% for the six months ended June 30, 1996, and may account for a higher percentage in the future. Excluding non-recurring carrier revenue of $9.0 million during the second quarter, ACC U.S. carrier revenue was 25.0% of total revenue. With respect to these customers, the Company competes almost exclusively on price, does not have long term contracts and generates lower gross margins as a percentage of revenue. The Company's primary interest in carrier revenue is to utilize excess capacity on its network. Management believes that carrier revenue will represent less than 20% of total revenue as the Company's core businesses continue to grow. The foregoing forward-looking statement is based upon expectations with respect to growth in the Company's customer base and total revenues. If such expectations are not realized, the Company's actual results may differ materially from the foregoing discussion. RESULTS OF OPERATIONS The following table presents, for the three and six month periods ended June 30, 1996 and 1995, certain Statement of Operations data expressed as a percentage of total revenue:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 1996(1) 1995 1996(1) 1995 ---- ---- ---- ---- Revenue: Toll revenue 93.2% 95.1% 92.7% 94.6% Leased lines and other 6.8 4.9 7.3 5.4 ------ ------ ------ ------ Total revenue 100.0 100.0 100.0 100.0 Network costs 66.7 63.2 64.6 62.8 ----- ----- ----- ----- Gross profit 33.3 36.8 35.4 37.2 Other operating expenses: Depreciation and amortization 5.2 6.9 5.3 6.6 Selling, general and administrative 24.2 32.0 25.9 32.2 ----- ----- ----- ----- Total other operating expenses 29.4 38.9 31.2 38.8 Income (loss) from operations 3.9 (2.1) 4.2 (1.6) Total other income (expense) (1.1) (3.5) (1.6) (3.0) Loss from operations before provision for income taxes and minority interest 2.8 (5.6) 2.6 (4.6) Provision for income taxes .7 --- .6 .4 Minority interest in (income) loss of consolidated subsidiary (.4) .2 (.4) .2 ----- ----- ----- ----- Income (loss) from continuing operations 1.7% (5.4)% 1.6% (4.8)% ====== ====== ===== ====== (1) Includes the results of operations of Metrowide Communications acquired on August 1, 1995.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1995 Revenue. Total revenue for the three months ended June 30, 1996 increased by 92.5% to $80.1 million from $41.6 million for the same period in 1995, reflecting growth in both toll revenue and leased lines and other revenue. Long distance toll revenue for the 1996 quarter increased by 88.4% to $74.6 million from $39.6 million in the 1995 quarter. In the United States, long distance toll revenue increased 112.2% as a result of a 28.0% increase in billable minutes of use, primarily due to increased international sales to interexchange carriers. The second quarter results include $9.0 million in non-recurring carrier revenue. Excluding this revenue, U.S. toll revenue increased 41.6% over the same quarter in 1995. In Canada, long distance toll revenue increased 40.3%, as a result of a 34.4% increase in billable minutes (primarily because of a 28.7% increase in the number of customer accounts from approximately 153,000 to approximately 197,000), and an increase in prices due to additional residential customers which typically have a higher revenue per minute. In the United Kingdom, long distance toll revenue increased 161.7%, due to a 240.3 % increase in billable minutes (primarily due to 168.8% increase in the number of customer accounts from approximately 16,000 to approximately 43,000), offset by lower prices that resulted from entering the commercial and residential markets and from competitive pricing pressure. Since the end of 1994, ACC's revenue per minute on a consolidated basis has been increasing slightly as a result of the increasing percentage of U.K. revenues and the Company's introduction of higher price per minute products, including international carrier revenue. Exchange rates did not have a material impact on revenue in either the U.K. or in Canada. At June 30, 1996, the Company had approximately 325,000 customer accounts compared to approximately 257,000 customer accounts at June 30, 1995, an increase of 26.5%. For the three months ended June 30, 1996, leased lines and other revenue increased by 175.0% to $5.5 million from $2.0 million for the same period in 1995. This increase was primarily due to the Metrowide Communications acquisition which occurred on August 1, 1995 (approximately $2.2 million) and local service revenue (approximately $1.0 million) generated through the Company's local exchange operations in upstate New York, which generated nominal revenues in 1995. Network Costs. Network costs increased to $53.4 million for the second quarter of 1996, from $26.3 million for the second quarter of 1995, due to the increase in billable long distance minutes. Network costs, expressed as a percentage of revenue, increased to 66.7% for the 1996 quarter from 63.2% for the 1995 quarter due to an increase in lower margin carrier traffic in the U.S, offset partially by improved margins in Canada and in the U.K., due to efficiencies in those markets. Excluding the $9.0 million in non- recurring carrier revenue, the U.S. margin would increase from 21.8% to 26.8%. Other Operating Expenses. Depreciation and amortization expense increased to $4.2 million for the second quarter of 1996 from $2.9 million for the second quarter of 1995. Expressed as a percentage of revenue, these costs decreased to 5.2% in 1996 from 6.9% in the 1995 quarter, reflecting the increase in revenue realized from year to year. The $1.3 million increase in depreciation and amortization expense was primarily attributable to assets placed in service throughout 1995, particularly the addition of a switching center in Manchester, England. Amortization of approximately $0.3 million associated with the customer base and goodwill recorded in the Metrowide Communications and Internet Canada acquisitions also contributed to the increase. Selling, general and administrative expenses for the second quarter of 1996 were $19.4 million compared with $13.3 million for the second quarter of 1995. Expressed as a percentage of revenue, selling, general and administrative expenses were 24.2% for the second quarter of 1996, compared to 32.0% for the second quarter of 1995. The increase in selling, general and administrative expenses was primarily attributable to a $3.3 million increase in personnel related costs and a $1.9 million increase in customer related costs associated with the growth of the Company's customer bases and geographic expansion in each country. Also included in selling, general and administrative expenses for the second quarter of 1996 was approximately $1.0 million related to the Company's local service market sector in New York State compared to $0.5 million for the second quarter of 1995. The reduction in selling, general and administrative expenses as a percent of revenue is due to the Company's growth and increased efficiency. Other Income (Expense). Interest expense decreased to $1.3 million for the second quarter of 1996 compared to $1.4 million in 1995, due primarily to the repayment, in May 1996, of borrowings under the Credit Facility. Interest income increased to $0.4 million for the 1996 quarter from $0.1 million in the 1995 quarter due to invested proceeds from the May 1996 Class A Common Stock offering. Foreign exchange gains and losses reflect changes in the value of Canadian and British currencies relative to the U.S. dollar for amounts borrowed by the foreign subsidiaries from ACC Corp. The Company continues to hedge all intercompany loans to foreign subsidiaries in an attempt to reduce the impact of transaction gains and losses. The Company does not engage in speculative foreign currency transactions. Due to this hedging, foreign exchange rate changes resulted in a nominal gain for the second quarter of 1996 compared to a nominal loss for the same period in 1995. Provision for income taxes reflects the anticipated income tax liability of the Company's U.S. operations based on its pretax income for the period. The provision for income taxes increased during the second quarter of 1996 compared to the same period in 1995 due to increased profitability in the U.S long distance business, and decreased losses in the local service business in the U.S. The Company does not provide for income taxes nor recognize a benefit related to income in foreign subsidiaries due to net operating loss carryforwards generated by those subsidiaries in prior years. Minority interest in (income) loss of consolidated subsidiary reflects the portion of the Company's Canadian subsidiary's income or loss attributable to the approximately 30% of that subsidiary's common stock that is publicly traded in Canada. For the second quarter of 1996, minority interest in income of the consolidated subsidiary was $0.3 million compared to a minority interest in loss of consolidated subsidiary of $0.1 million in the second quarter of 1995. The Company's net income for the second quarter of 1996 was $1.5 million, compared to a net loss of $2.3 million for the second quarter of 1995. The second quarter 1996 net income resulted primarily from the Company's operations in Canada (approximately $0.7 million), and long distance operations in the U.S. (approximately $1.2 million) offset, in part, by net losses in the U.K. (approximately $0.3 million) and in the Company's local operations (approximately $0.1 million). SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995 Revenue. Total revenue for the six months ended June 30, 1996 increased by 80.7% to $146.9 million from $81.3 million for the same period in 1995, reflecting growth in both toll revenue and leased lines and other revenue. Long distance toll revenue for 1996 increased by 77.0% to $136.1 million from $76.9 million in 1995. In the United States, long distance toll revenue increased 68.4% as a result of a 22.7% increase in billable minutes of use primarily due to increased international sales to interexchange carriers. As previously mentioned, the second quarter results include $9.0 million in non- recurring carrier revenue. Excluding this revenue, U.S. toll revenue increased 34.5% over the same period in 1995. In Canada, long distance toll revenue increased 38.1%, as a result of 27.7% increase in billable minutes (primarily because of the previously mentioned increase in customer accounts) an increase in prices due to additional residential customers which typically have a higher revenue per minute. In the United Kingdom, long distance toll revenue increased 199.1%, due to a 278.0% increase in billable minutes (due to the previously mentioned increase in the number of customer accounts), offset by lower prices that resulted from entering the commercial and residential markets and from competitive pricing pressure. Since the end of 1994, ACC's revenue per minute on a consolidated basis has been increasing slightly as a result of the increasing percentage of U.K. revenues and the Company's introduction of higher price per minute products including international carrier revenue. In the first half of 1996, revenue per minute increases have been higher due to the increased sales to interexchange carriers. Exchange rates did not have a material impact on revenue in either the U.K. or in Canada. For the six months ended June 30, 1996, leased lines and other revenue increased by 145.4% to $10.8 million from $4.4 million for the same period in 1995. This increase was primarily due to the Metrowide Communications acquisition which occurred on August 1, 1995 (approximately $4.3 million) and local service revenue (approximately $1.6 million) generated through the Company's local exchange operations in upstate New York, which generated nominal revenues in 1995. Network Costs. Network costs increased to $95.0 million for the first six months of 1996, from $51.1 million for the same period in 1995, due to the increase in billable long distance minutes. Network costs, expressed as a percentage of revenue, increased to 64.6% for the 1996 period from 62.8% for the 1995 period due to an increase in lower margin carrier traffic in the U.S, offset partially by improved margins in Canada and the U.K., due to efficiencies in those markets. Excluding the second quarter U.S. non- recurring carrier revenue, the U.S. margin would improve from 25.1% to 28.3%. Other Operating Expenses. Depreciation and amortization expense increased to $7.8 million for the first six months of 1996 from $5.4 million for the same period of 1995. Expressed as a percentage of revenue, these costs decreased to 5.3% in 1996 from 6.6% in the 1995 period, reflecting the increase in revenue realized from year to year. The $2.4 million increase in depreciation and amortization expense was primarily attributable to assets placed in service throughout 1995, particularly the addition of a switching center in Manchester, England. Amortization of approximately $0.5 million associated with the customer base and goodwill recorded in the Metrowide Communications and Internet Canada acquisitions also contributed to the increase. Selling, general and administrative expenses for the first six months of 1996 were $38.0 million compared with $26.2 million for the same period of 1995. Expressed as a percentage of revenue, selling, general and administrative expenses were 25.9% for the first six months of 1996, compared to 32.2% for the same period of 1995. The increase in selling, general and administrative expenses was primarily attributable to a $6.4 million increase in personnel related costs and a $3.4 million increase in customer related costs associated with the growth of the Company's customer bases and geographic expansion in each country. Also included in selling, general and administrative expenses for the first six months of 1996 was approximately $0.7 million related to the Company's local service market sector in New York State compared to $0.1 million for the same period of 1995. The reduction in selling, general and administrative expenses as a percent of revenue is due to the Company's growth and increased efficiency. Other Income (Expense). Interest expense increased to $2.9 million for the six months ended June 30, 1996, from $2.4 million for the same period in 1995, due to the financing costs associated with the Company's Credit Facility. Interest income increased to $0.5 million for the six months ended June 30, 1996 compared to the same period in 1995, due to same period in 1995 due to the invested proceeds from the May 1996 Class A Common Stock offering. Foreign exchange gains and losses reflect changes in the value of Canadian and British currencies relative to the U.S. dollar for amounts borrowed by the foreign subsidiaries from ACC Corp. The Company continues to hedge all intercompany loans to foreign subsidiaries in an attempt to reduce the impact of transaction gains and losses. The Company does not engage in speculative foreign currency transactions. Due to this hedging, foreign exchange rate changes resulted in a nominal gain for the first six months of 1996 compared to a nominal loss for the same period in 1995. Provision for income taxes reflects the anticipated income tax liability of the Company's U.S. operations based on its pretax income for the period. The provision for income taxes increased during the first six months of 1996 compared to the same period in 1995 due to increased profitability in the U.S long distance business, and decreased losses in the local service business in the U.S. The Company does not provide for income taxes nor recognize a benefit related to income in foreign subsidiaries due to net operating loss carryforwards generated by those subsidiaries in prior years. Minority interest in (income) loss of consolidated subsidiary reflects the portion of the Company's Canadian subsidiary's income or loss attributable to the approximately 30% of that subsidiary's common stock that is publicly traded in Canada. For the first six months of 1996, minority interest in income of the consolidated subsidiary was $0.6 million compared to a minority interest in loss of consolidated subsidiary of $0.1 million for the same period of 1995. The Company's net income for the first six months of 1996 was $2.3 million, compared to a net loss of $3.9 million for the same period of 1995. The 1996 net income resulted primarily from the Company's operations in Canada (approximately $1.4 million), and long distance operations in the U.S. (approximately $2.1 million) offset, in part, by net losses in the U.K. (approximately $0.8 million) and in the Company's local operations (approximately $0.4 million). LIQUIDITY AND CAPITAL RESOURCES In May, 1996, the Company raised net proceeds of $63.1 million through the issuance of 2,012,500 million shares of its Class A Common Stock. The proceeds from this offering were used to reduce all indebtedness under the Company's Credit Facility and will be used to fund working capital, for capital expenditure requirements, and for general corporate purposes. Historically, the Company has satisfied its working capital requirements through cash flow from operations, through borrowings and financings from financial institutions, vendors and other third parties, and through the issuance of securities. Net cash flows used in operations were $0.5 million for the six months ended June 30, 1996 compared to net cash used in operations of $0.8 million for the same period in 1995. The increase of approximately $0.3 million in the cash flow provided by operating activities during the six months ended June 30, 1996 as compared to the same period of 1995 was primarily attributable to the improved financial performance of ACC Canada and ACC UK during the 1996 period in comparison to 1995 offset by a significant increase in accounts receivable resulting from the expansion of the Company's customer base and related revenues in all business segments. If additional competition were to result in significant price reductions that are not offset by reductions in network costs, net cash flows from operations would be materially adversely affected. Net cash flows used in investing activities were $11.9 million and $5.0 million for the six months ended June 30, 1996 and 1995, respectively. The increase of approximately $6.9 million in net cash flow used in investing activities during of 1996 as compared 1995 was primarily attributable to an increase in capital expenditures incurred by the Company's local exchange subsidiary (approximately $1.6 million), for computer software ($1.8 million), and for the purchase of assets and customer base from Internet Canada. Accounts receivable increased by 29.6% at June 30, 1996 as compared to December 31, 1995 as a result of expansion of the Company's customer base due to sales and marketing efforts. Other accrued expenses increased by 12.0% at June 30, 1996 as compared to December 31, 1995. This increase is primarily due to costs associated with the ACC Canada acquisition of assets from Internet Canada. The Company's principal need for working capital is to meet its selling, general and administrative expenses as its business expands. In addition, the Company's capital resources have been used for the Metrowide Communications and Internet Canada acquisitions, capital expenditures, various customer base acquisitions and, prior to the termination thereof during the second quarter of 1995, payments of dividends to holders of its Class A Common Stock. The Company has had a working capital deficit at the end of the last several years but, at June 30, 1996, the Company had a working capital surplus of approximately $29.4 million compared to a deficit of approximately $10.3 million at December 31, 1995, due to the receipt of the proceeds from the Class A Common Stock offering in May, 1996. The Company anticipates that, throughout the remainder of 1996, its capital expenditures will be approximately $23.0 million for the expansion of its network, the acquisition, upgrading and development of switches and other telecommunications equipment as conditions warrant, the development, licensing and integration of its management information system and other software, the development and expansion of its service offerings and customer programs and other capital expenditures. ACC expects that it will continue to make significant capital expenditures during future periods. The Company's actual capital expenditures and cash requirements will depend on numerous factors, including the nature of future expansion (including the extent of local exchange services, which is particularly capital intensive), and acquisition opportunities, economic conditions, competition, regulatory developments, the availability of capital and the ability to incur debt and make capital expenditures under the terms of the Company's financing arrangements. The Company is obligated to pay the lenders under the Credit Facility a contingent interest payment based on the appreciation in market value of 140,000 shares of the Company's Class A Common Stock from $14.92 per share, subject to a minimum of $0.75 million and a maximum of $2.1 million. The payment is due upon the earlier of (i) January 21, 1997, (ii) any material amendment to the Credit Facility, (iii) the signing of a letter of intent to sell the Company or any material subsidiary, or (iv) the cessation of active trading of the Company's Class A Common Stock on other than a temporary basis. The Company is accruing this obligation over the 18-month period ending January 21, 1997 ($1.4 million has been accrued through June 30, 1996). Any holder of Series A Preferred Stock has the right to cause the Company to redeem such Series A Preferred Stock upon the occurrence of certain events, including the entry of a judgment against the Company or a default by the Company under any obligation or agreement for which the amount involved exceeds $500,000. As of June 30, 1996, the Company had approximately $30.4 million of cash and cash equivalents and maintained the $35.0 million Credit Facility, subject to availability under a borrowing base formula and certain other conditions (including borrowing limits based the Company's operating cash flow), under which no borrowings were outstanding and $3.0 million was reserved for letters of credit. The maximum aggregate principal amount of the Credit Facility is required to be reduced by $2.5 million per quarter commencing on July 1, 1997 and by $2.9 million per quarter commencing on January 1, 1999 until maturity on July 1, 2000. The Company also is obligated to pay, on demand commencing in August 1996, the remaining $0.7 million pursuant to a note issued in connection with the Metrowide Communications acquisition. In addition, the Company has $2.5 million, $2.6 million and $2.1 million of capital lease obligations which mature during 1996, 1997 and 1998, respectively. The Company's financing arrangements, which are secured by substantially all of the Company's assets and the stock of certain subsidiaries, require the Company to maintain certain financial ratios and prohibit the payment of dividends. In the normal course of business, the Company uses various financial instruments, including derivative financial instruments, for purposes other than trading. These instruments include letters of credit, guarantees of debt, interest rate swap agreements and foreign currency exchange contracts relating to intercompany payables of foreign subsidiaries. The Company does not use derivative financial instruments for speculative purposes. Foreign currency exchange contracts are used to mitigate foreign currency exposure and are intended to protect the U.S. dollar value of certain currency positions and future foreign currency transactions. The aggregate fair value, based on published market exchange rates, of the Company's foreign currency contracts at June 30, 1996 was $46.9 million. When applicable, interest rate swap agreements are used to reduce the Company's exposure to risks associated with interest rate fluctuations. As is customary for these types of instruments, collateral is generally not required to support these financial instruments. By their nature, all such instruments involve risk, including the risk of nonperformance by counterparties, and the Company's maximum potential loss may exceed the amount recognized on the Company's balance sheet. However, at June 30, 1996, in management's opinion there was no significant risk of loss in the event of nonperformance of the counterparties to these financial instruments. The Company controls its exposure to counterparty credit risk through monitoring procedures and by entering into multiple contracts, and management believes that reserves for losses are adequate. Based upon the Company's knowledge of the financial position of the counterparties to its existing derivative instruments, the Company believes that it does not have any significant exposure to any individual counterparty or any major concentration of credit risk related to any such financial instruments. The Company believes that, under its present business plan, the net proceeds from the public offering of Class A Common Stock of the Company, together with borrowings under the Credit Facility, vendor financing and cash from operations will be sufficient to meet anticipated working capital and capital expenditure requirements of its existing operations. The forward- looking information contained in the previous sentence may be affected by a number of factors, including the matters described in this paragraph and in Exhibit 99.1 attached hereto. The Company may need to raise additional capital from public or private equity or debt sources in order to finance its operations, capital expenditures and growth for periods after 1996. Moreover, the Company believes that continued growth and expansion through acquisitions, investments and strategic alliances is important to maintain a competitive position in the market and, consequently, a principal element of the Company's business strategy is to develop relationships with strategic partners and to acquire assets or make investments in businesses that are complementary to its current operations. The Company may need to raise additional funds in order to take advantage of opportunities for acquisitions, investments and strategic alliances or more rapid international expansion, to develop new products or to respond to competitive pressures. If additional funds are raised through the issuance of equity securities, the percentage ownership of the Company's then current shareholders may be reduced and such equity securities may have rights, preferences or privileges senior to those of holders of Class A Common Stock. There can be no assurance that the Company will be able to raise such capital on acceptable terms or at all. In the event that the Company is unable to obtain additional capital or is unable to obtain additional capital on acceptable terms, the Company may be required to reduce the scope of its presently anticipated expansion opportunities and capital expenditures, which could have a material adverse effect on its business, results of operations and financial condition and could adversely impact its ability to compete. The Company may seek to develop relationships with strategic partners both domestically and internationally and to acquire assets or make investments in businesses that are complementary to its current operations. Such acquisitions, strategic alliances or investments may require that the Company obtain additional financing and, in some cases, the approval of the holders of debt or preferred stock of the Company. The Company's ability to effect acquisitions, strategic alliances or investments may be dependent upon its ability to obtain such financing and, to the extent applicable, consents from its debt or preferred stock holders. SFAS NO. 123 The Company is required to adopt SFAS No. 123, "Accounting for Stock- Based Compensation" in 1996. This Statement encourages entities to adopt a fair value based method of accounting for employee stock option plans (whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the employee service period), rather than the current intrinsic value based method of accounting (whereby compensation cost is measured at the grant date as the difference between market value and the price for the employee to acquire the stock). If the Company elects to continue using the intrinsic value method of accounting, pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting had been applied, will need to be disclosed. Management has decided that the Company will not adopt the fair value based method of accounting for the Company's stock option plans and will include the required pro forma disclosures in the annual financial statements. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company held its Annual Meeting of Shareholders on July 14, 1996. At that Meeting, there were four Proposals acted upon. The first was the election of the Company's Board of Directors. Richard T. Aab, Hugh F. Bennett, Arunas A. Chesonis, Willard Z. Estey, David K. Laniak, Daniel D. Tessoni and Robert M. Van Degna were each elected as Directors of the Company for a one-year term. The detail concerning the votes cast for and withheld from voting with respect to each such Director is as follows: Votes: - ----- Name: For Withheld ---- --- -------- R. T. Aab 6,438,897 317,731 H. F. Bennett 6,439,635 316,993 A. A. Chesonis 6,439,636 316,992 W. Z. Estey 6,435,835 317,793 D. K. Laniak 6,439,405 317,223 D. D. Tessoni 6,390,135 366,493 Under the terms of the Company's Series A Preferred Stock, the holders of the Series A Preferred Stock unanimously elected Robert M. Van Degna as their representative on the Company's Board of Directors. There were no other Directors whose terms of office continued after this Meeting. Also at this Meeting, the Company's shareholders ratified the selection of Arthur Andersen LLP as the Company's independent auditors for its 1996 fiscal year. The detail concerning the votes cast for, against, and abstaining from voting with respect to this Proposal is as follows: Votes: - ----- For Against Abstaining --- ------- ---------- 6,658,321 82,420 15,887 There were no broker non-votes with respect to this Proposal. Also at this Meeting, the Company's shareholders approved an amendment to the Company's Long Term Incentive Plan to increase the number of shares of the Company's Class A Common Stock authorized for issuance by 500,000 shares. The detail concerning the votes cast for, against and abstaining from voting with respect to this proposal is as follows: Votes: - ----- For Against Abstaining --- ------- ---------- 3,902,116 1,275,472 44,120 There were 1,534,920 broker non-votes with respect to this Proposal. Also at this Meeting, the Company's shareholders approved the adoption of a Non-Employee Directors' Stock Option Plan. The detail concerning the votes cast for, against and abstaining from voting with respect to this Proposal is as following: Votes: - ----- For Against Abstaining --- ------- ---------- 4,004,039 1,274,403 53,157 There were 1,425,029 broker non-votes with respect to this proposal. ITEM 7. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. See Exhibit Index. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused the Report to be signed on its behalf by the Undersigned thereunto duly authorized. ACC CORP. (Registrant) Dated: August 12, 1996 /s/ Michael R. Daley ------------------------------------ Michael R. Daley Executive Vice President and Chief Financial Officer Dated: August 12, 1996 /s/ Sharon L. Barnes ------------------------------------ Sharon L. Barnes Controller EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION LOCATION 11.1 Statement re Computation of See note 3 to the notes to Per Share Earnings Consolidated Financial Statements filed herewith 27.1 Financial Data Schedule Filed herewith 99.1 Company Risk Factors Filed herewith EX-27 2 EXHIBIT 27-1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACC CORP.'S FINANCIAL STATEMENTS CONTAINED IN ITS JUNE 30, 1996 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 1 30,380 0 54,156 3,648 431 85,804 93,191 32,180 171,351 56,423 5,948 10,710 0 245 93,523 171,351 136,137 146,942 94,988 45,784 0 2,711 2,434 3,762 853 2,313 0 0 0 2,313 0.08 0
EX-99 3 EXHIBIT 99-1 EXHIBIT 99.1 COMPANY RISK FACTORS As used herein, unless the context otherwise requires, the "Company" and "ACC" refer to ACC Corp. and its subsidiaries, including ACC Long Distance Corp. ("ACC U.S."), ACC TelEnterprises Ltd., the Company's 70% owned Canadian subsidiary ("ACC Canada"), and ACC Long Distance UK Ltd. ("ACC U.K."). References herein to "dollar" and "$" are to United States dollars, references to "Cdn. $" are to Canadian dollars, references to "Pounds" are to English pounds sterling, the terms "United States" and "U.S." mean the United States of America and, unless the context otherwise requires, its states, territories and possessions and all areas subject to its jurisdiction, and the terms "United Kingdom" and "U.K." mean England, Scotland and Wales. Recent Losses; Potential Fluctuations in Operating Results Although the Company has recently experienced revenue growth on an annual basis, it has incurred net losses and losses from continuing operations during each of its last two fiscal years. The 1995 net loss of $5.4 million resulted primarily from the expansion of operations in the U.K. (approximately $6.8 million), increased net interest expense associated with additional borrowings (approximately $4.9 million), increased depreciation and amortization from the addition of equipment and costs associated with the expansion of local service in New York State (approximately $1.6 million) and management restructuring costs (approximately $1.3 million), offset by positive operating income from the U.S. and Canadian long distance subsidiaries of approximately $9.0 million. The 1994 net loss of $11.3 million resulted primarily from operating losses due to expansion in the U.K. (approximately $5.6 million), the recording of the valuation allowance against deferred tax benefits (approximately $3.0 million), implementation of equal access in Canada (approximately $2.2 million) and operating losses due to expansion in local telephone service in the U.S. (approximately $0.9 million). There can be no assurance that revenue growth will continue or that the Company will achieve profitability in the future. The Company intends to focus in the near term on the expansion of its service offerings, including its local telephone business, and geographic markets, which may adversely affect cash flow and operating performance. As each of the telecommunications markets in which the Company operates continues to mature, growth in the Company's revenues and customer base is likely to decrease over time. The Company's operating results have fluctuated in the past and may fluctuate significantly in the future as a result of a variety of factors, some of which are outside of the Company's control, including general economic conditions, specific economic conditions in the telecommunications industry, the effects of governmental regulation and regulatory changes, user demand, capital expenditures and other costs relating to the expansion of operations, the introduction of new services by the Company or its competitors, the mix of services sold and the mix of channels through which those services are sold, pricing changes and new service introductions by the Company and its competitors and prices charged by suppliers. As a strategic response to a changing competitive environment, the Company may elect from time to time to make certain pricing, service or marketing decisions or enter into strategic alliances, acquisitions or investments that could have a material adverse effect on the Company's business, results of operations and cash flow. The Company's sales to other long distance companies have been increasing. Because these sales are at margins that are lower than those derived from most of the Company's other revenues, this increase may reduce the Company's gross margins as a percentage of revenue. In addition, to the extent that these and other long distance couriers are less creditworthy, such sales may represent a higher credit risk to the Company. See "-Risks Associated With Acquisitions, Investments and Strategic Alliances." Need for Additional Capital The Company will need to continue to enhance and expand its operations in order to maintain its competitive position, expand its service offerings and geographic markets and continue to meet the increasing demands for service quality, availability and competitive pricing. As of the end of its last five fiscal years, the Company has experienced a working capital deficit. During 1995, the Company's EBITDA (which represents income (loss) from operations plus depreciation and amortization and asset write-down) minus capital expenditures and changes in working capital was $(7.0) million. The Company may need to raise additional capital from public or private equity or debt sources in order to finance its anticipated growth, including local service expansion, which is capital intensive, working capital needs, debt service obligations, contemplated capital expenditures and the optional redemption of the Series A Preferred Stock if it is not converted. In addition, the Company may need to raise additional funds in order to take advantage of unanticipated opportunities, including more rapid international expansion or acquisitions of, investments in or strategic alliances with companies that are complementary to the Company's current operations, or to develop new products or otherwise respond to unanticipated competitive pressures. If additional funds are raised through the issuance of equity securities, the percentage ownership of the Company's then current shareholders would be reduced and, if such equity securities take the form of Preferred Stock or Class B Common Stock, the holders of such Preferred Stock or Class B Common Stock may have rights, preferences or privileges senior to those of holders of Class A Common Stock. There can be no assurance that the Company will be able to raise such capital on satisfactory terms or at all. If the Company decides to raise additional funds through the incurrence of debt, the Company would need to obtain the consent of its lenders under the Company's revolving credit facility with First Union National Bank of North Carolina and Fleet Bank of Connecticut (formerly Shawmut Bank Connecticut, N.A.), as agents, which expires on July 1, 2000 (the "Credit Facility") and would likely become subject to additional or more restrictive financial covenants. In the event that the Company is unable to obtain such additional capital or is unable to obtain such additional capital on acceptable terms, the Company may be required to reduce the scope of its presently anticipated expansion, which could materially adversely affect the Company's business, results of operations and financial condition and its ability to compete. Dependence on Transmission Facilities-Based Carriers and Suppliers The Company does not own telecommunications transmission lines. Accordingly, telephone calls made by the Company's customers are connected through transmission lines that the Company leases under a variety of arrangements with transmission facilities-based long distance carriers, some of which are or may become competitors of the Company, including AT&T Corp. ("AT&T"), Bell Canada and British Telecommunications PLC ("British Telecom"). Most inter-city transmission lines used by the Company are leased on a monthly or longer-term basis at rates that currently are less than the rates the Company charges its customers for connecting calls through these lines. Accordingly, the Company is vulnerable to changes in its lease arrangements, such as price increases and service cancellations. ACC's ability to maintain and expand its business is dependent upon whether the Company continues to maintain favorable relationships with the transmission facilities-based carriers from which the Company leases transmission lines, particularly in the U.K., where British Telecom and Mercury Communications Ltd. ("Mercury") are the two principal, dominant carriers. The Company's U.K. operations are highly dependent upon the transmission lines leased from British Telecom. The Company generally experiences delays in billings from British Telecom and needs to reconcile billing discrepancies with British Telecom before making payment. Although the Company believes that its relationships with carriers generally are satisfactory, the deterioration or termination in the Company's relationships with one or more of those carriers could have a material adverse effect upon the Company's business, results of operations and financial condition. Certain of the vendors from whom the Company leases transmission lines, including 22 regional operating companies ("RBOCs") and other local exchange carriers, currently are subject to tariff controls and other price constraints which in the future may be changed. Under recently enacted U.S. legislation, constraints on the operations of the RBOCs have been dramatically reduced, which will bring additional competitors to the long distance market. In addition, regulatory proposals are pending that may affect the prices charged by the RBOCs and other local exchange carriers to the Company, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "-Potential Adverse Effects of Regulation." The Company currently acquires switches used in its North American operations from one vendor. The Company purchases switches from such vendor for its convenience, and switches of comparable quality may be obtained from several alternative suppliers. However, a failure by a supplier to deliver quality products on a timely basis, or the inability to develop alternative sources if and as required, could result in delays which could have a material adverse effect on the Company's business, results of operations and financial condition. Potential Adverse Effects of Regulation Legislation that substantially revises the U.S. Communications Act of 1934 (the "U.S. Communications Act") was signed into law on February 8, 1996. The legislation provides specific guidelines under which the RBOCs can provide long distance services, which will permit the RBOCs to compete with the Company in the provision of domestic and international long distance services. The legislation also opens all local service markets to competition from any entity (including, for example, long distance carriers, such as AT&T, cable television companies and utilities). Because the legislation opens the Company's markets to additional competition, particularly from the RBOCs, the Company's ability to compete is likely to be adversely affected. Moreover, as a result of and to implement the legislation, certain federal and other governmental regulations will be adopted, amended or modified, and any such adoption, amendment or modification could have a material adverse effect on the Company's business, results of operations and financial condition. In the U.S., the Federal Communications Commission ("FCC") and relevant state public service commissions ("PSCs") have the authority to regulate interstate and intrastate rates, respectively, ownership of transmission facilities, and the terms and conditions under which the Company's services are provided. Federal and state regulations and regulatory trends have had, and in the future are likely to have, both positive and negative effects on the Company and its ability to compete. The recent trend in both Federal and state regulation of telecommunications service providers has been in the direction of lessened regulation. In general, neither the FCC nor the relevant state PSCs currently regulate the Company's long distance rates or profit levels, but either or both may do so in the future. However, the general recent trend toward lessened regulation has also given AT&T, the largest long distance carrier in the U.S., increased pricing flexibility that has permitted it to compete more effectively with smaller interexchange carriers, such as the Company. There can be no assurance that changes in current or future Federal or state regulations or future judicial changes would not have a material adverse effect on the Company. In order to provide their services, interexchange carriers, including the Company, must generally purchase "access" from local exchange carriers to originate calls from and terminate calls in the local exchange telephone networks. Access charges presently represent a significant portion of the Company's network costs in all areas in which it operates. In the U.S., access charges generally are regulated by the FCC and the relevant state PSCs. Under the terms of the AT&T Divestiture Decree, a court order entered in 1982 which, among other things, required AT&T to divest its 22 wholly-owned RBOCs from its long distance division ("AT&T Divestiture Decree"), the RBOCs were required to price the "local transport" portion of such access charges on an "equal price per unit of traffic" basis. In November 1993, the FCC implemented new interim rules governing local transport access charges while the FCC considers permanent rules regarding new rate structures for transport pricing and switched access competition. These interim rules have essentially maintained the "equal price per unit of traffic" rule. However, under alternative access charge rate structures being considered by the FCC, local exchange carriers would be permitted to allow volume discounts in the pricing of access charges. More recently, the FCC has informally announced that it intends, in the near future, to undertake a comprehensive review of its regulation of local exchange carrier access charges to better account for increasing levels of local competition. While the outcome of these proceedings is uncertain, if these rate structures are adopted many small interexchange carriers, including the Company, could be placed at a significant cost disadvantage to larger competitors, because access charges for AT&T and other large interexchange carriers could decrease, and access charges for small interexchange carriers could increase. The Company currently competes with the RBOCs and other local exchange carriers such as the GTE Operating Companies ("GTOCs") in the provision of "short haul" toll calls completed within a Local Access and Transport Area ("LATA"). Subject to a number of conditions, the legislation eliminated many of the restrictions which prohibited the RBOCs and GTOCs from providing long-haul, or inter-LATA, toll service, and thus the Company will face additional competition. To complete long-haul and short-haul toll calls, the Company must purchase "access" from the local exchange carriers. The Company must generally price its toll services at levels equal to or below the retail rates established by the local exchange carriers for their own short-haul or long-haul toll rates. To the extent that the local exchange carriers are able to reduce the margin between the access costs to the Company and the retail toll prices charged by local exchange carriers, either by increasing access costs or lowering retail toll rates, or both, the Company will encounter adverse pricing and cost pressures in competing against local exchange carriers in both the short-haul and long-haul toll markets. Under the U. S. Communications Act, local exchange carriers must permit resale of their bundled local services and unbundled network elements. Pricing rules for those services were set forth in the U.S. Communications Act, with states directed to approve specific tariffs. In July, 1996, the New York PSC established wholesale discounts for resale of bundled local services consisting of 17% on residential access lines and 11% on business access lines. However, the New York PSC excluded Centrex, private line and PBX lines from the wholesale discount, which could result in a limited ability of the Company to resell those business services. The New York PSC also established temporary rates for unbundled links at levels slightly below existing rates, but also significantly above the New York Telephone rate for complete, bundled local loops. The New York PSC is reviewing the establishment of permanent wholesale discounts and permanent unbundled link rates, which are expected to be in place by October, 1996. If the permanent rates established by the New York PSC do not contain a significant wholesale discount for bundled services, do not apply to Centrex, private line, and PBX service, and do not reduce the rate for the unbundled link to a level below the rate for bundled loops, the Company's ability to compete in the provision of local service may be materially adversely affected. In Canada, services provided by ACC Canada are subject to or affected by certain regulations of the Canadian Radio-television and Telecommunications Commission (the "CRTC"). The CRTC annually reviews the "contribution charges" (the equivalent of access charges in the U.S.) it has assessed against the access lines leased by Canadian long distance resellers, including the Company, from the local telephone companies in Canada. The Company expects that, based on existing and anticipated regulations and rulings, its Canadian contribution charges will increase by up to approximately Cdn. $2.0 million in 1997 over 1995 levels, which the Company will seek to offset with increased volume efficiencies. Additional increases in these contribution charges could have a material adverse effect on the Company's business, results of operations and financial condition. The Canadian long distance telecommunications industry is the subject of ongoing regulatory change. These regulations and regulatory decisions have a direct and material effect on the ability of the Company to conduct its business. The recent trend of such regulations has been to open the market to commercial competition, generally to the Company's benefit. There can be no assurance, however, that any future changes in or additions to laws, regulations, government policy or administrative rulings will not have a material adverse effect on the Company's business, results of operations and financial condition. The telecommunications services provided by ACC U.K. are subject to and affected by regulations introduced by the U.K. telecommunications regulatory authority, The Office of Telecommunications ("Oftel"). Since the break up of the U.K. telecommunications duopoly consisting of British Telecom and Mercury in 1991, it has been the stated goal of Oftel to create a competitive marketplace from which detailed regulation could eventually be withdrawn. The regulatory regime currently being introduced by Oftel has a direct and material effect on the ability of the Company to conduct its business. Oftel has imposed mandatory rate reductions on British Telecom in the past, which are expected to continue for the foreseeable future, and this has had and may have, the effect of reducing the prices the Company can charge its customers. Although the Company is optimistic about its ability to continue to compete effectively in the U.K. market, there can be no assurance that future changes in regulation and government will not have a material adverse effect on the Company's business, results of operations and financial condition. Increasing Domestic and International Competition The long distance telecommunications industry is highly competitive and is significantly influenced by the marketing and pricing decisions of the larger industry participants. The industry has relatively insignificant barriers to entry, numerous entities competing for the same customers and high churn rates (customer turnover), as customers frequently change long distance providers in response to the offering of lower rates or promotional incentives by competitors. In each of its markets, the Company competes primarily on the basis of price and also on the basis of customer service and its ability to provide a variety of telecommunications services. The Company expects competition on the basis of price and service offerings to increase. Although many of the Company's university customers are under multi-year contracts, several of the Company's largest customers (primarily other long distance carriers) are on month-to-month contracts and are particularly price sensitive. Revenues from other resellers accounted for approximately 22%, 7% and 9%, of the revenues of ACC U.S., ACC Canada and ACC U.K., respectively, in 1995, and are expected to account for a higher percentage in the future. With respect to these customers, the Company competes almost exclusively on price. Many of the Company's competitors are significantly larger, have substantially greater financial, technical and marketing resources and larger networks than the Company, control transmission lines and have long-standing relationships with the Company's target customers. These competitors include, among others, AT&T, MCI Telecommunications Corporation ("MCI") and Sprint Corp. ("Sprint") in the U.S.; Bell Canada, BC Telecom, Inc., Unitel Communications Inc. ("Unitel") and Sprint Canada (a subsidiary of Call-Net Telecommunications Inc.) in Canada; and British Telecom, Mercury, AT&T and IDB WorldCom Services Inc. in the U.K. Other U.S. carriers are also expected to enter the U.K. market. The Company also competes with numerous other long distance providers, some of which focus their efforts on the same business customers targeted by the Company and selected residential customers and colleges and universities, the Company's other target customers. In addition, through its local telephone service business in upstate New York, the Company competes with New York Telephone Company ("New York Telephone"), Frontier Corp., Citizens Telephone Co., MFS Communications Co., Inc. ("MFS") and Time Warner Cable and others, including cellular and other wireless providers. Furthermore, the recently announced proposed merger of Bell Atlantic Corp. and Nynex Corp., the recently announced joint venture between MCI and Microsoft Corporation ("Microsoft"), under which Microsoft will promote MCI's services, the recently announced joint venture among Sprint, Deutsche Telekom AG and France Telecom, and other mergers, acquisitions and strategic alliances, could also increase competitive pressures upon the Company and have a material adverse effect on the Company's business, results of operations and financial condition. In addition to these competitive factors, recent and pending deregulation in each of the Company's markets may encourage new entrants. For example, as a result of legislation recently enacted in the U.S., RBOCs will be allowed to enter the long distance market, AT&T, MCI and other long distance carriers will be allowed to enter the local telephone services market, and any entity (including cable television companies and utilities) will be allowed to enter both the local service and long distance telecommunications markets. In addition, the FCC has, on several occasions since 1984, approved or required price reductions by AT&T and, in October 1995, the FCC reclassified AT&T as a "non-dominant" carrier, which substantially reduces the regulatory constraints on AT&T. As the Company expands its geographic coverage, it will encounter increased competition. Moreover, the Company believes that competition in non-U.S. markets is likely to increase and become more similar to competition in the U.S. markets over time as such non-U.S. markets continue to experience deregulatory influences. Prices in the long distance industry have declined from time to time in recent years and, as competition increases in Canada and the U.K., prices are likely to continue to decrease. For example, Bell Canada substantially reduced its rates during the first quarter of 1994. The Company's competitors may reduce rates or offer incentives to existing and potential customers of the Company. To maintain its competitive position, the Company believes that it must be able to reduce its prices in order to meet reductions in rates, if any, by others. The Company has only limited experience in providing local telephone services, having commenced providing such services in 1994, and, although the Company believes the local business will enhance its ability to compete in the long distance market, to date the Company has experienced an operating cash flow deficit in the operation of that business in the U.S. on a stand-alone basis. The Company's revenues from local telephone services in 1995 were $1.35 million. In order to attract local customers, the Company must offer substantial discounts from the prices charged by local exchange carriers and must compete with other alternative local companies that offer such discounts. The local telephone service business requires significant initial investments in capital equipment as well as significant initial promotional and selling expenses. Larger, better capitalized alternative local providers, including AT&T and Time Warner Cable, among others, will be better able to sustain losses associated with discount pricing and initial investments and expenses. There can be no assurance that the Company will achieve positive cash flow or profitability in its local telephone service business. Risks of Growth and Expansion The Company plans to expand its service offerings and principal geographic markets in the United States, Canada and the United Kingdom. In addition, the Company may establish a presence in deregulating Western European markets that have high density telecommunications traffic, such as France and Germany, when the Company believes that business and regulatory conditions warrant. There can be no assurance that the Company will be able to add service or expand its markets at the rate presently planned by the Company or that the existing regulatory barriers will be reduced or eliminated. The Company's rapid growth has placed, and in the future may continue to place, a significant strain on the Company's administrative, operational and financial resources and increased demands on its systems and controls. As the Company increases its service offerings and expands its targeted markets, there will be additional demands on the Company's customer support, sales and marketing and administrative resources and network infrastructure. There can be no assurance that the Company's operating and financial control systems and infrastructure will be adequate to maintain and effectively monitor future growth. The failure to continue to upgrade the administrative, operating and financial control systems or the emergence of unexpected expansion difficulties could materially adversely affect the Company's business, results of operations and financial condition. Risks Associated with International Operations A key component of the Company's strategy is its planned expansion in international markets. To date, the Company has only limited experience in providing telecommunications service outside the United States and Canada. There can be no assurance that the Company will be able to obtain the capital it requires to finance its expansion in international markets on satisfactory terms or at all. In many international markets, protective regulations and long-standing relationships between potential customers of the Company and their local providers create barriers to entry. Pursuit of international growth opportunities may require significant investments for an extended period before returns, if any, on such investments are realized. In addition, there can be no assurance that the Company will be able to obtain the permits and operating licenses required for it to operate, to hire and train employees or to market, sell and deliver high quality services in these markets. In addition to the uncertainty as to the Company's ability to expand its international presence, there are certain risks inherent to doing business on an international level, such as unexpected changes in regulatory requirements, tariffs, customs, duties and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, political risks, fluctuations in currency exchange rates, foreign exchange controls which restrict or prohibit repatriation of funds, technology export and import restrictions or prohibitions, delays from customs brokers or government agencies, seasonal reductions in business activity during the summer months in Europe and certain other parts of the world and potentially adverse tax consequences resulting from operating in multiple jurisdictions with different tax laws, which could materially adversely impact the success of the Company's international operations. In many countries, the Company may need to enter into a joint venture or other strategic relationship with one or more third parties in order to successfully conduct its operations. As its revenues from its Canadian and U.K. operations increase, an increasing portion of the Company's revenues and expenses will be denominated in currencies other than U.S. dollars, and changes in exchange rates may have a greater effect on the Company's results of operations. There can be no assurance that such factors will not have a material adverse effect on the Company's future operations and, consequently, on the Company's business, results of operations and financial condition. In addition, there can be no assurance that laws or administrative practices relating to taxation, foreign exchange or other matters of countries within which the Company operates will not change. Any such change could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Effective Information Systems To complete its billing, the Company must record and process massive amounts of data quickly and accurately. While the Company believes its management information system is currently adequate, it has not grown as quickly as the Company's business and substantial investments are needed. The Company has made arrangements with a consultant and a vendor for the development of new information systems and has budgeted approximately $6.0 million for this purpose in 1996. The Company believes that the successful implementation and integration of these new information systems is important to its continued growth, its ability to monitor costs, to bill customers and to achieve operating efficiencies, but there can be no assurance that the Company will not encounter delays or cost-overruns or suffer adverse consequences in implementing the systems. A vendor of the Company's software, which formerly was an affiliate of the Company, has a unique knowledge of certain of the Company's software and the Company may be dependent on the vendor for any modifications to the software. The Company believes that it currently is the only customer of the vendor and, as a result, the vendor is financially dependent on the Company. In addition, as the Company's suppliers revise and upgrade their hardware, software and equipment technology, there can be no assurance that the Company will not encounter difficulties in integrating the new technology into the Company's business or that the new systems will be appropriate for the Company's business. Risks Associated With Acquisitions, Investments and Strategic Alliances As part of its business strategy, the Company expects to seek to develop strategic alliances both domestically and internationally and to acquire assets and businesses or make investments in companies that are complementary to its current operations. The Company has no present commitments or agreements with respect to any such strategic alliance, investment or acquisition. Any such future strategic alliances, investments or acquisitions would be accompanied by the risks commonly encountered in strategic alliances with or acquisitions of or investments in companies. Such risks include, among other things, the difficulty of assimilating the operations and personnel of the companies, the potential disruption of the Company's ongoing business, the inability of management to maximize the financial and strategic position of the Company by the successful incorporation of licensed or acquired technology and rights into the Company's service offerings, the maintenance of uniform standards, controls, procedures and policies and the impairment of relationships with employees and customers as a result of changes in management. In addition, the Company has experienced higher attrition rates with respect to customers obtained through acquisitions, and may continue to experience higher attrition rates with respect to any customers resulting from future acquisitions. Moreover, to the extent that any such acquisition, investment or alliance involved a business located outside the United States, the transaction would involve the risks associated with international expansion. See "-Risks Associated with International Expansion." There can be no assurance that the Company would be successful in overcoming these risks or any other problems encountered with such strategic alliances, investments or acquisitions. In addition, if the Company were to proceed with one or more significant strategic alliances, acquisitions or investments in which the consideration consists of cash, a substantial portion of the Company's available cash (including proceeds of this offering) could be used to consummate the strategic alliances, acquisitions or investments. If the Company were to consummate one or more significant strategic alliances, acquisitions or investments in which the consideration consists of stock, shareholders of the Company could suffer a significant dilution of their interests in the Company. Many of the businesses that might become attractive acquisition candidates for the Company may have significant goodwill and intangible assets, and acquisitions of these businesses, if accounted for as a purchase, would typically result in substantial amortization charges to the Company. The financial impact of acquisitions, investments and strategic alliances could have a material adverse effect on the Company's business, financial condition and results of operations and could cause substantial fluctuations in the Company's quarterly and yearly operating results. Technological Changes May Adversely Affect Competitiveness and Financial Results The telecommunications industry is characterized by rapid and significant technological advancements and introductions of new products and services utilizing new technologies. There can be no assurance that the Company will maintain competitive services or that the Company will obtain appropriate new technologies on a timely basis or on satisfactory terms. Dependence on Key Personnel The Company's success depends to a significant degree upon the continued contributions of its management team and technical, marketing and sales personnel. The Company's employees may voluntarily terminate their employment with the Company at any time. Competition for qualified employees and personnel in the telecommunications industry is intense and, from time to time, there are a limited number of persons with knowledge of and experience in particular sectors of the telecommunications industry. The Company's success also will depend on its ability to attract and retain qualified management, marketing, technical and sales executives and personnel. The process of locating such personnel with the combination of skills and attributes required to carry out the Company's strategies is often lengthy. The loss of the services of key personnel, or the inability to attract additional qualified personnel, could have a material adverse effect on the Company's results of operations, development efforts and ability to expand. There can be no assurance that the Company will be successful in attracting and retaining such executives and personnel. Any such event could have a material adverse effect on the Company's business, financial condition and results of operations. Risk Associated with Financing Arrangements; Dividend Restrictions The Company's financing arrangements are secured by substantially all of the Company's assets and require the Company to maintain certain financial ratios and restrict the payment of dividends, and the Company anticipates that it will not pay any dividends on Class A Common Stock in the foreseeable future. The Company's secured lenders would be entitled to foreclose upon those assets in the event of a default under the financing arrangements and to be repaid from the proceeds of the liquidation of those assets before the assets would be available for distribution to the Company's other creditors and shareholders in the event that the Company is liquidated. In addition, the collateral security arrangements under the Company's existing financing arrangements may adversely affect the Company's ability to obtain additional borrowings or other capital. The Company may need to raise additional capital from equity or debt sources to finance its projected growth and capital expenditures contemplated for periods after 1996. See "- Substantial Indebtedness; Need for Additional Capital." Holding Company Structure; Reliance on Subsidiaries for Dividends ACC Corp. is a holding company, the principal assets of which are its operating subsidiaries in the U.S., Canada and the U.K. ACC Canada, a 70% owned subsidiary of ACC Corp., is a public company listed on the Toronto Stock Exchange and the Montreal Stock Exchange. The ability of ACC Canada to declare and pay dividends is restricted by the terms of the agreement under which the Company's Series A Preferred Stock was issued. In addition, ACC Canada's ability to make other payments to ACC Corp. and its other subsidiaries may be dependent upon the taking of action by ACC Canada's Board of Directors, applicable Canadian and provincial law and stock exchange regulations, in addition to the availability of funds. At the present time, three of ACC Canada's seven directors are representatives of ACC Corp. ACC Corp's percentage ownership interest in ACC Canada may decrease over time as a result of stock issuances or sales or, alternatively, may increase over time as a result of stock purchases, investments or other transactions. ACC U.S., ACC Canada, ACC U.K. and other operating subsidiaries of the Company are subject to corporate law restrictions on their ability to pay dividends to ACC Corp. There can be no assurance that ACC Corp. will be able to cause its operating subsidiaries to declare and pay dividends or make other payments to ACC Corp. when requested by ACC Corp. The failure to pay any such dividends or make any such other payments could have a material adverse effect upon the Company's business, financial condition and results of operations. Potential Volatility of Stock Price The market price of the Class A Common Stock has been and may continue to be, highly volatile. Factors such as variations in the Company's revenue, earnings and cash flow, the difference between the Company's actual results and the results expected by investors and analysts and announcements of new service offerings, marketing plans or price reductions by the Company or its competitors could cause the market price of the Class A Common Stock to fluctuate substantially. In addition, the stock markets recently have experienced significant price and volume fluctuations that particularly have affected telecommunications companies and resulted in changes in the market prices of the stocks of many companies that have not been directly related to the operating performance of those companies. Such market fluctuations may materially adversely affect the market price of the Class A Common Stock. Risks Associated with Derivative Financial Instruments In the normal course of business, the Company uses various financial instruments, including derivative financial instruments, to hedge its foreign exchange and interest rate risks. The Company does not use derivative financial instruments for speculative purposes. By their nature, all such instruments involve risk, including the risk of nonperformance by counterparties, and the Company's maximum potential loss may exceed the amount recognized on the Company's balance sheet. Accordingly, losses relating to derivative financial instruments could have a material adverse effect upon the Company's business, financial condition and results of operations. -----END PRIVACY-ENHANCED MESSAGE-----