<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1996
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
IXC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 4813 74-2644120
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
5000 PLAZA ON THE LAKE, SUITE 200
AUSTIN, TEXAS 78746
(512) 328-1112
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN J. WILLINGHAM
IXC COMMUNICATIONS, INC.
5000 PLAZA ON THE LAKE, SUITE 200
AUSTIN, TEXAS 78746
(512) 328-1112
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MICHAEL P. WHALEN, ESQ. JERRY V. ELLIOTT, ESQ.
ELAINE R. LEVIN, ESQ. SHEARMAN & STERLING
RIORDAN & MCKINZIE 599 LEXINGTON AVENUE
695 TOWN CENTER DRIVE, SUITE 1500 NEW YORK, NY 10022
COSTA MESA, CA 92626 (212) 848-4000
(714) 433-2900
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
PROPOSED
AMOUNT MAXIMUM PROPOSED
TITLE OF EACH CLASS OF TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
----------------------------------------------------------------------------------------------------------
Common Stock, par value $.01
per share................... shares $ $126,500,000 $43,621
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
IXC COMMUNICATIONS, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN FORM S-1 HEADING OR LOCATION IN PROSPECTUS
-------------------------------------------------------- -------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus.................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus...................................... Inside Front Cover Page; Additional
Information; Outside Back Cover
Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges....................... Prospectus Summary; Risk Factors
4. Use of Proceeds................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price................... Outside Front Cover Page;
Underwriters
6. Dilution.......................................... Risk Factors; Dilution
7. Selling Security Holders.......................... Not Applicable
8. Plan of Distribution.............................. Outside Front Cover Page;
Underwriters
9. Description of Securities to be Registered........ Prospectus Summary; Dividend Policy;
Capitalization; Description of
Capital Stock
10. Interests of Named Experts and Counsel............ Legal Matters; Experts
11. Information with Respect to the Registrant........ Outside Front Cover Page; Prospectus
Summary; Risk Factors; Dividend
Policy; Capitalization; Selected
Historical and Pro Forma Financial
Data; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business;
Management; Certain Transactions;
Principal Stockholders; Shares
Eligible for Future Sale;
Description of Certain
Indebtedness; Consolidated
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities..................................... Not Applicable
</TABLE>
<PAGE> 3
EXPLANATORY NOTE
This Registration Statement contains two forms of Prospectus: (i) one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and (ii) the other to be used in a concurrent offering outside the
United States and Canada (the "International Prospectus"). The two prospectuses
are identical in all material respects except for the front cover page. The form
of U.S. Prospectus is included herein and is followed by the alternate page to
be used in the International Prospectus. The alternate page for the
International Prospectus included herein is labeled "Alternate Page for
International Prospectus." Final forms of each Prospectus will be filed with the
Securities and Exchange Commission under Rule 424(b).
<PAGE> 4
PROSPECTUS (Subject to Completion)
Issued May 20, 1996
Shares
[IXC LOGO] IXC Communications, Inc.
COMMON STOCK
------------------------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY.
OF THE SHARES OF COMMON STOCK BEING OFFERED, SHARES ARE BEING
OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND
SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND
CANADA BY THE INTERNATIONAL UNDERWRITERS. PRIOR TO THIS OFFERING, THERE
HAS BEEN NO PUBLIC MARKET FOR THE COMPANY'S COMMON STOCK. IT IS CURRENTLY
ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE WILL BE
BETWEEN $ AND $ . SEE "UNDERWRITERS" FOR INFORMATION RELATING TO
THE METHOD OF DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
------------------------
APPLICATION HAS BEEN MADE TO LIST THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "IIXC."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
------------------------------------------------------
<S> <C> <C> <C>
Per Share....................................... $ $ $
Total(3)........................................ $ $ $
</TABLE>
------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Before deducting expenses payable by the Company, estimated at
$ .
(3) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
additional shares of Common Stock at the price to public less
underwriting discounts and commissions, for the purpose of covering
over-allotments, if any. If the U.S. Underwriters exercise such option
in full, the total price to public, underwriting discounts and
commissions and proceeds to Company will be $ , $ and
$ , respectively. See "Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters and subject to approval of certain legal matters by Shearman &
Sterling, counsel for the Underwriters. It is expected that delivery of the
Shares will be made on or about , 1996, at the office of Morgan
Stanley & Co. Incorporated, New York, N.Y., against payment therefor in
immediately available funds.
------------------------
MORGAN STANLEY & CO.
Incorporated
CS FIRST BOSTON
DILLON, READ & CO. INC.
, 1996
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
<PAGE> 5
[MAP]
<PAGE> 6
Map of IXC Communications, Inc. Fiber Expansion Plan showing:
IXC owned digital network;
IXC long-term leased or exchanged-fiber network;
IXC owned fiber network;
IXC switch sites;
Phase I Expansion; and
Phase II Expansion.
<PAGE> 7
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE COMMON STOCK OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY
SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
For investors outside the United States: No action has been or will be
taken in any jurisdiction by the Company or by any Underwriter that would permit
a public offering of the Common Stock or possession or distribution of this
Prospectus in any jurisdiction where action for that purpose is required, other
than in the United States. Persons into whose possession this Prospectus comes
are required by the Company and the Underwriters to inform themselves about and
to observe any restrictions as to the offering of the Common Stock and the
distribution of this Prospectus.
In this Prospectus references to "dollars" and "$" are to United States
Dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................................................................... 5
Risk Factors.......................................................................... 10
Use of Proceeds....................................................................... 17
Dividend Policy....................................................................... 17
Capitalization........................................................................ 18
Dilution.............................................................................. 19
Selected Historical and Pro Forma Financial Data...................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 22
Industry Overview..................................................................... 30
Business.............................................................................. 33
Management............................................................................ 47
Certain Transactions.................................................................. 51
Principal Stockholders................................................................ 53
Description of Capital Stock.......................................................... 55
Shares Eligible for Future Sale....................................................... 57
Description of Certain Indebtedness................................................... 58
Underwriters.......................................................................... 59
Legal Matters......................................................................... 61
Experts............................................................................... 62
Additional Information................................................................ 62
Glossary.............................................................................. A-1
Index to Financial Statements......................................................... F-1
</TABLE>
------------------------
The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements examined by an independent public
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
3
<PAGE> 8
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH
PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR
OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO
EXEMPTIONS FROM RULES 10b-6, 10b-7, AND 10b-8 UNDER THE SECURITIES EXCHANGE ACT
OF 1934.
4
<PAGE> 9
PROSPECTUS SUMMARY
Certain of the information contained in this Prospectus, including
information regarding the Company's Fiber Expansion (as defined below) and
switched long distance services and related strategy and financing, are
forward-looking statements. For a discussion of important factors that could
cause actual results to differ materially from the matters described in the
forward-looking statements, see "Risk Factors." Prospective investors should
carefully consider such factors and the other matters set forth under "Risk
Factors."
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and the Consolidated
Financial Statements (including the Notes thereto), appearing elsewhere in this
Prospectus. As used herein, unless the context otherwise requires, the term
"Company" refers to IXC Communications, Inc. ("IXC Communications") and its
subsidiaries, including predecessor corporations. Industry references were
obtained from a report issued in March 1996 from the FCC and from reports dated
April 1995 and January 1996 from International Data Corporation (an industry
research organization), which the Company has not independently verified. Unless
otherwise indicated, all information in this Prospectus assumes that the U.S.
Underwriters' over-allotment option will not be exercised and reflects a -for-1
stock split that will be effected in connection with this Offering.
Certain terms used herein are defined in the Glossary at page A-1.
THE COMPANY
The Company provides two principal services to long distance companies: (i)
long-haul transmission of voice and data over dedicated circuits; and (ii)
switched long distance services. The Company is one of only five carriers to own
a digital telecommunications network extending from coast-to-coast (the other
carriers are AT&T, MCI, Sprint and WorldCom). Its facilities include digital
switches located in Los Angeles, Dallas, Chicago, Philadelphia and Atlanta. The
Company is currently engaged in a major expansion of its network, as described
below.
The Company had revenues of approximately $91 million in 1995,
substantially all of which were generated by its long-haul business. The Company
has long-haul circuit contracts with over 200 long distance carriers, including
AT&T, MCI, Sprint, WorldCom, Cable & Wireless, Frontier and LCI. As of April 30,
1996, the Company had "take or pay" commitments from its long-haul customers of
approximately $160.0 million (consisting of approximately $90.0 million relating
to circuits currently in service and approximately $70.0 million relating to
circuits not yet ordered that the Company expects will be carried over leased
routes or routes being constructed). Long-haul transmission service is also
provided to customers after contract expiration on a month-to-month basis. The
Company's long-haul contracts provide for fixed monthly payments, generally in
advance. The Company has provided services to nine of its ten largest customers
for at least six years and, although sales volumes from particular customers
vary from year to year, has historically enjoyed a high customer retention rate
(annual customer retention has averaged over 90% from 1992-1995).
The Company recently expanded into the business of selling switched long
distance services to long distance resellers in order to complement its
long-haul business and to capitalize on its ability to provide switched services
over its own network. Switched long distance services are telecommunications
services such as residential long distance services that are processed through
the Company's digital switches and carried over long-haul circuits and other
transmission facilities owned or leased by the Company. During 1995, the Company
set up the infrastructure for its switched long distance business by installing
its switches, connecting them to its network and to the LECs, acquiring
software, hiring personnel and entering into contracts with customers. The
Company's switched network became fully operational in February 1996. The
Company sells switched long distance services on a per-call basis, charging by
minutes of use ("MOUs"), with payment due monthly after services are rendered.
The Company believes that it is well-positioned to attract long distance
resellers as customers for its switched long distance services because: (i) it
is not currently a significant competitor for sales to end users; and (ii) it
provides more focused service to its reseller customers, because
5
<PAGE> 10
servicing such customers is its primary business, unlike its major competitors
whose main business is selling retail long distance service to end-users.
The Company has entered into switched long distance services contracts with
over 30 long distance resellers including Excel and GE Capital Communication.
Excel, a rapidly growing long distance reseller, first utilized the Company's
switched long distance services in February 1996. Excel has contracted to
increase its volume on the Company's network to a minimum of 70 million minutes
of traffic per month no later than October 1996. The Company's switched long
distance business has grown rapidly since its switched network became fully
operational in February 1996, with Excel accounting for most of the growth. The
Company's switched long distance revenues amounted to approximately $3.6 million
in the quarter ended March 31, 1996, (with $0.7 million in January 1996, $1.3
million in February 1996 and $1.6 million in March 1996), $3.1 million in April
1996 and $ in May 1996. Excel accounted for 17%, 67% and % of such
revenues for the quarter ended March 31, 1996, April 1996 and May 1996,
respectively. See "Business -- Switched Long Distance Services."
The Company's primary business objectives over the near term are: (i) to
rapidly increase revenue from its switched long distance services business; (ii)
to substantially complete the backbone of the first phase of its planned network
expansion in the first quarter of 1997; and (iii) to utilize the expanded
network to increase its revenues and profitability.
INDUSTRY OVERVIEW
The domestic long distance market generated revenues of approximately $75.9
billion in 1995. In 1995, the first-tier long distance providers (AT&T, MCI and
Sprint) accounted for approximately 85.6% of such revenue, the second-tier
companies (WorldCom, Frontier, Cable & Wireless, LCI and others) accounted for
approximately 8.9%, and the third-tier companies (approximately 400 companies)
accounted for the remaining 5.5% of the total long distance market. According to
data included in an FCC report issued in March 1996, while total long distance
revenues grew at a compound annual rate of over 8% during the period from 1989
through 1995, the revenues of all carriers other than the first-tier carriers
grew in the aggregate at an annual compound rate of over 22% during the same
period. Such analysis also stated that the second-tier and third-tier carriers
increased their market share sixfold over a ten-year period, increasing from
less than 3% in 1984 to more than 17% in 1994. In addition, industry sources
estimate that combined revenues of second-tier and third-tier carriers grew by
17.9% in 1995. The Company provides long-haul services to companies in all three
tiers and switched long distance services to companies in the third tier.
FIBER EXPANSION
The Company owns a coast-to-coast network containing over 1,700 fiber optic
route miles and over 5,100 digital microwave route miles. Because of geographic
limitations and capacity constraints, the Company currently supplements its own
facilities with a significant amount of fiber optic capacity obtained from other
carriers to service customers that require capacity not available on the
Company's own network.
The Company is currently undertaking a major expansion of its network by
adding a substantial number of additional fiber route miles (the "Fiber
Expansion") to increase the Company's geographic scope and network capacity. The
Company believes the Fiber Expansion will improve profitability and cash flow
through increasing revenues and decreasing certain costs. The Fiber Expansion is
planned to include two phases, the first phase ("Phase I") to include
approximately 4,089 high-capacity fiber optic route miles from Philadelphia via
Chicago, Dallas and Phoenix to Los Angeles and a later phase ("Phase II") to
include approximately 3,120 high-capacity fiber optic route miles from New York
via Atlanta to Houston. The Company expects to substantially complete the
backbone of Phase I in the first quarter of 1997, meeting the cost of its
construction with cash on hand and the proceeds of this offering (the
"Offering"). The Company seeks to realize significant cost savings and offsets
to the estimated cost of the Fiber Expansion through a cooperative arrangement
with WorldCom and cost-saving arrangements with other carriers and large users
of fiber capacity. The Company
6
<PAGE> 11
has had experience with arrangements of this type with several major carriers,
including MCI, Sprint, Cable & Wireless and WorldCom.
Phase I of the Fiber Expansion will connect four of the Company's five
switches with high-capacity long-haul circuits on its own network, utilizing
advanced fiber optic technology capable of efficiently transmitting
capacity-intensive services, such as Internet and multimedia applications, frame
relay and ATM. Phase I is expected to deliver significant strategic and
financial benefits to the Company through: (i) producing substantial savings by
allowing the Company to move a portion of its excess long-haul traffic from
leased circuits on the networks of other carriers to its own expanded network;
(ii) providing high-capacity new routes and substantially increasing the
capacity of certain existing routes, allowing the Company to increase revenues
by leasing additional circuits to its customers; (iii) allowing the Company to
improve profitability in its switched long distance services business by
reducing underlying costs of long-haul transmission; and (iv) creating
sufficient capacity to support increased demand which may result from Internet
and multimedia applications, frame relay and ATM.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered
United States offering............................................ shares
International offering............................................ shares
Total.......................................................... shares
Common Stock outstanding immediately after this offering............ shares(1)(2)
Use of proceeds..................................................... For the Fiber Expansion.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol.............................. IIXC
</TABLE>
---------------
(1) Excludes: (i) shares of Common Stock reserved for issuance under
the 1994 Stock Plan (as defined herein), of which options to purchase
shares were outstanding as of March 31, 1996 at a weighted average
exercise price of $ per share; and (ii) shares of Common Stock
reserved for issuance under the 1996 Stock Plan (as defined herein), of
which no options to purchase shares were outstanding as of March 31, 1996.
(2) Reflects the stock split which occurred immediately prior to this Offering.
7
<PAGE> 12
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain summary consolidated financial data
of the Company. The historical financial data as of and for the years ended
December 31, 1993, 1994 and 1995 has been derived from the audited Consolidated
Financial Statements of the Company. The financial data for the three months
ended March 31, 1995 and 1996 is derived from unaudited financial statements.
The unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which management considers necessary for a fair presentation
of the financial position and the results of operations for this period. Results
of operations for the interim periods are not necessarily indicative of the
results of operations for the full year. The pro forma data has been derived
from the Unaudited Pro Forma Condensed Consolidated Statement of Operations,
which is included elsewhere herein. The pro forma financial information is
presented for informational purposes only and is not necessarily indicative of
the operating results that would have occurred, nor are they necessarily
indicative of future operations.
The summary consolidated financial data set forth below is qualified in its
entirety by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements, the Notes thereto and other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
HISTORICAL
-------------------
HISTORICAL
---------------------------------- PRO FORMA(1) THREE MONTHS
------------ ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED MARCH 31,
---------------------------------- DECEMBER 31, -------------------
1993 1994 1995 1995 1995 1996
-------- -------- -------- ------------ -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenues............. $ 71,123 $ 80,663 $ 91,001 $ 91,001 $ 21,766 $ 26,250
Operating income (loss)............ (10,596) 14,085 1,429 312 3,716 (5,777)
Interest expense................... 4,943 6,105 14,597 14,597 1,873 9,870
Income (loss) before extraordinary
items............................ (31,812)(2) 5,017 (3,218) (7,605) 1,267 (11,699)
Net income (loss) per common
share(3)......................... $ $ $ $ $ $
Net income (loss) per common share,
as adjusted(4)................... $ $ $
BALANCE SHEET DATA:
Cash(5)............................ $ 6,230 $ 6,048 $205,181 6,293 $193,076
Total assets....................... 94,281 105,409 336,475 104,742 346,467
Total debt(6)...................... 59,954 69,124 298,794 66,686 311,331
Stockholders' equity (deficit)..... 6,871 14,189 6,858 16,856 (4,841)
OTHER FINANCIAL AND OPERATIONS DATA:
EBITDA(7).......................... $ 10,175 $ 26,400 $ 27,124 $ 21,674 $ 7,725 $ 2,818
EBITDA, as adjusted(8)............. $ 10,175 $ 26,400 $ 36,916 -- $ 8,675 $ 11,143
Capital expenditures............... 27,008 7,087 23,670 23,670 2,571 13,564
Ratio of EBITDA to interest
expense(9)....................... 2.06x 4.32x 1.86x 1.48x 4.12x --
Minutes of use (in millions)....... -- -- 12.8 12.8 -- 33.9
</TABLE>
------------
(1) The pro forma statement of operations and other financial and operations
data for the year ended December 31, 1995 reflect the acquisition by the
Company of the minority interest in Switched Services Communications, L.L.C.
as if the acquisition (which actually occurred as of January 1, 1996) had
occurred as of January 1, 1995. See Note 17 to the Consolidated Financial
Statements.
(Footnotes continued on following page)
8
<PAGE> 13
(2) After giving effect to a $37,960 non-cash charge in 1993 relating to a
write-down of microwave equipment. (As of March 31, 1996, the remaining net
depreciated book value of microwave equipment was less than 6% of total
assets.) See Note 8 to the Consolidated Financial Statements.
(3) Net income (loss) per common share is based on the weighted average common
shares outstanding during the period, as adjusted for applicable stock
options and the stock split which occurred immediately prior to this
Offering.
(4) Net income (loss) per common share as adjusted is based on the weighted
average common shares outstanding during the period, adjusted for applicable
stock options, the stock split which occurred immediately prior to this
Offering and the shares issued in this Offering.
(5) Including $198,266 at December 31, 1995 and $187,584 at March 31, 1996 held
in an escrow account. See Note 3 to the Consolidated Financial Statements.
(6) Total debt consists of long-term debt, capital lease obligations and
deferred lease obligations, including the current portions thereof.
(7) Represents net income before depreciation, amortization, interest expense,
income taxes and extraordinary items ("EBITDA"). For the year ended December
31, 1993, EBITDA does not reflect a $37,960 write-down of microwave
equipment recorded by the Company. (As of March 31, 1996, the remaining net
depreciated book value of microwave equipment was less than 6% of total
assets.) See Note 8 to the Consolidated Financial Statements. The Company
has included information concerning EBITDA because it believes that EBITDA
is used by certain investors as one measure of an issuer's historical
ability to service its debt. EBITDA is not a measurement determined in
accordance with GAAP and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP. For
1995 and the three months ended March 31, 1996, EBITDA included $2,552 and
$2,557, respectively, of interest income relating to amounts held in escrow.
See the Consolidated Financial Statements.
(8) EBITDA, as adjusted, does not reflect negative EBITDA of IXC Long Distance,
Inc., the Company's switched long distance services subsidiary, because in
1996 such negative EBITDA related to operating expenses for the Company's
switched long distance business, principally in advance of related revenues,
and, for 1995, related to start-up expenses incurred before the Company
began generating material revenues from its switched long distance business.
(9) For the three months ended March 31, 1996, EBITDA was insufficient to cover
interest expense by $7,052. The Company paid the interest accrued during
such period with funds from the escrow account referred to in footnote 5.
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RISK FACTORS
An investment in the Common Stock offered hereby is speculative in nature
and involves a high degree of risk. Accordingly, the following risk factors
should be considered carefully in evaluating the Company and its business before
purchasing shares of Common Stock offered hereby.
NEGATIVE CASH FLOW AND CAPITAL REQUIREMENTS
The Fiber Expansion will require significant capital expenditures before
producing significant reductions in expenses. The Company anticipates meeting
the costs of Phase I of the Fiber Expansion, which will require estimated cash
expenditures subsequent to April 30, 1996 of $213.0 million, with the proceeds
of this Offering and a portion of its cash held in an escrow account ($158.5
million at April 30, 1996). Such escrow account was funded with a portion of the
proceeds of the $285.0 million of 12 1/2% Senior Notes due 2005 issued by the
Company in October 1995 (the "Senior Notes"). The Company estimates that its
total capital expenditures (including for the Fiber Expansion) for the last
three quarters of 1996 will be $200.0 million (including capital expenditures
relating to the Fiber Expansion). The amount of actual capital expenditures may
vary materially as a result of cost-saving arrangements, unexpected costs and
other factors. The successful completion of Phase II of the Fiber Expansion,
which is estimated to cost $275.0 million (before any cost-saving arrangements)
is dependent upon the Company's ability to enter into cost-saving arrangements
with carriers or other large users of fiber capacity, to raise the significant
capital required and/or to significantly increase its cash flow. The failure of
the Company to accomplish any of the foregoing may significantly delay or
prevent the completion of the Fiber Expansion. Failure to complete Phase I would
have a material adverse effect on the Company and the value of the Common Stock.
Failure to complete Phase II would have a material adverse effect on the value
of the Common Stock.
The development of the Company's switched long distance business will also
require significant capital. In order to offer switched long distance services,
the Company has installed switches, connected them to its network and to the
LECs, acquired software and hired the personnel needed to establish a national
switched network. Operating expenses and capital expenditures for the national
network will result in the Company's switched long distance business incurring
negative cash flow until the Company's customers route sufficient traffic over
the network to cover the costs of its operation, which the Company does not
expect to occur before the end of 1996. For a discussion of important factors
that could cause the Company's switched long distance business to fail to
generate positive cash flows, see "-- Development Risks and Dependence on
Switched Long Distance Business." The Company anticipates that its cash
requirements relating to the switched long distance services business will be
approximately $15.3 million in 1996, which includes funding negative cash flow
from, and making capital expenditures (net of financing) for, its switched long
distance business. A delay in the completion of the Fiber Expansion, or larger
than anticipated capital expenditures for the Fiber Expansion or negative cash
flow from the switched long distance business could impair the ability of the
Company to meet its obligations under the Senior Notes and other indebtedness or
to access additional sources of funding and adversely affect the value of the
Common Stock. For 1995 and the three months ended March 31, 1996, the Company's
EBITDA minus interest expense and capital expenditures (adjusted for the change
in working capital deficit) was negative $4.8 million and negative $38.5
million, respectively.
The Company is required to make annual interest payments of $35.6 million
with respect to the Senior Notes. Although the Company intends to utilize funds
in the escrow account ($158.5 million at April 30, 1996) to make such interest
payments in the short term, the Company is currently unable to satisfy such
obligations solely with its cash flow. Accordingly, the Company's ability to
meet its debt service requirements over the long term is dependent on its
ability to raise additional capital and/or a significant increase in its cash
flow.
The forward-looking statements set forth above with respect to the cost of
Phase I of the Fiber Expansion, the Company's ability to meet such costs, the
amount of the Company's cash requirements in 1996, and the Company's ability to
generate positive cash flows in its switched long distance business are based on
certain assumptions, including that there will be no significant cost overruns,
the Company's contractors and partners in cost-saving arrangements will perform
their obligations, rights-of-way can be
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<PAGE> 15
obtained on a timely, cost-effective basis, the backbone of Phase I is
substantially completed on schedule in the first quarter of 1997, the Company
generates significant levels of MOUs and that the Company can successfully
provide switched long distance services on a cost effective basis (including the
provision of billing information in an accurate and timely manner) for volumes
that it has not previously handled. See "-- Risks Relating to Completion of the
Fiber Expansion," "-- Development Risks and Dependence on Switched Long Distance
Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- The Company's Network."
RECENT AND EXPECTED LOSSES
The Company reported a loss before extraordinary items of $3.2 million for
the year ended December 31, 1995 and an operating loss of $5.8 million and a net
loss of $11.7 million for the three months ended March 31, 1996. As of March 31,
1996 the Company had an accumulated deficit of $34.5 million. The Company
expects a net loss for the year ending December 31, 1996 primarily as a result
of interest expense associated with the Senior Notes and start-up and
operational expenses costs associated with the switched long distance business.
Thereafter, the Company's profitability depends to a great extent on demand for
the long-haul circuits constructed in the Fiber Expansion and the success of the
Company's switched long distance services. There can be no assurance that the
Company will return to profitability in the future. Failure to be profitable
could impair the Company's ability to expand its switched long distance business
and to raise additional equity or debt financing which will be necessary to
complete Phase II of the Fiber Expansion or which may be required for other
reasons. Such events could have a material adverse effect on the Company and the
value of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS RELATING TO COMPLETION OF THE FIBER EXPANSION
The Fiber Expansion is an essential element of the Company's future
success. The Company commenced construction of Phase I of the Fiber Expansion in
November 1995. The Company has substantial existing commitments to purchase
materials and labor for such construction, and will need to obtain additional
materials and labor to complete Phase I of the Fiber Expansion, which materials
and labor may cost more than anticipated. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." The successful completion of each phase of the Fiber
Expansion is dependent, among other things, on the Company's ability: (i) to
obtain rights-of-way; (ii) to manage effectively the construction of the new
fiber routes; and (iii) with respect to Phase II of the Fiber Expansion, to
enter into additional cost-saving arrangements, obtain additional financing
and/or significantly increase its cash flow. In addition, the successful
construction of the Fiber Expansion will depend to a significant extent on third
party contractors retained by the Company. Difficulties or delays with respect
to any of the foregoing may significantly delay or prevent the completion of the
Fiber Expansion, which would have a material adverse effect on the Company and
the value of the Common Stock.
The Company has entered into the WorldCom Fiber Build Agreement (as defined
below) with WorldCom, relating to the construction by each party of a fiber
route approximately 1,100 miles long and the placing of fiber for both parties
in such route. The WorldCom Fiber Build Agreement provides for substantial
penalties ($400,000 per month) to either party that does not complete
construction of its route by October 1, 1996, but only in the event that the
other party has completed construction of its route. Although the Company does
not anticipate undue difficulty in acquiring the necessary rights-of-way or in
managing the construction for either Phase I or Phase II of the Fiber Expansion,
no assurance can be given that such rights will be acquired or that the Fiber
Expansion will be completed without significant delays, within its budget or at
all. In addition, no assurance can be given that WorldCom will be able to
complete its route under the WorldCom Fiber Build Agreement without significant
delays or at all. Increased costs or significant delays in the completion of
Phase I of the Fiber Expansion, including the portion to be constructed by
WorldCom, or of the remainder of the Fiber Expansion could have a material
adverse effect on the Company and the value of the Common Stock. See
"Business -- The Company's Network."
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PRICING PRESSURES AND RISKS OF INDUSTRY OVER-CAPACITY
The long distance transmission industry has generally been characterized by
over-capacity and declining prices since shortly after the AT&T divestiture in
1984. The Company believes that, in the last several years, increasing demand
has ameliorated the over-capacity and that pricing pressure has been reduced.
However, the Company anticipates that prices for its services will continue to
decline over the next several years. The Company is aware that certain long
distance carriers are expanding their capacity and believes that other long
distance carriers, as well as potential new entrants to the industry, are
considering the construction of new fiber optic and other long distance
transmission networks. However, the Company believes that there are significant
barriers to entry for new entrants that may consider building a new fiber optic
network. Since the cost of the actual fiber is a relatively small portion of
building new transmission lines, persons building such lines are likely to
install fiber that provides substantially more transmission capacity than will
be needed over the short or medium term. Further, recent technological advances
have also shown the potential to greatly expand the capacity of existing and new
fiber optic cable. In addition, the Company's cost-saving arrangements with
other carriers, which may involve the sale or lease of capacity or fibers on the
Fiber Expansion, may result in competitors having capacity on the Company's
routes along the Fiber Expansion, which may in turn result in pricing pressures
with respect to traffic carried along these routes. If industry capacity
expansion results in capacity that exceeds overall demand in general or along
any of the Company's routes, severe additional pricing pressure could develop.
In addition, strategic alliances or similar transactions, such as the recently
announced long distance capacity purchasing alliance among certain RBOCs, could
result in additional pricing pressure on long distance carriers. Such pricing
pressure could have a material adverse effect on the Company and the value of
the Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
DEVELOPMENT RISKS AND DEPENDENCE ON SWITCHED LONG DISTANCE BUSINESS
The success of the Company in the switched long distance business is
dependent on the Company's ability to generate significant customer traffic, to
manage an efficient switched long distance network and related customer service
and the timely completion of Phase I of the Fiber Expansion. The Company has not
previously managed a switched long distance network and there can be no
assurance given that its switched long distance services can be sold at a
profit. The failure of the Company to generate significant customer traffic, to
complete Phase I of the Fiber Expansion in a timely manner, or to effectively
manage the switched network and related customer service or to operate it at a
profit would have a material adverse effect on the Company and the value of the
Common Stock. Because the Company recently entered into the switched long
distance business, with its five switches becoming fully operational in February
1996, the Company expects substantial operating losses relating to its switched
long distance business unless and until larger volumes of traffic are carried on
the Company's switched long distance network. In addition, to the extent that
LECs grant volume discounts with respect to local access and egress charges, the
Company may have a cost disadvantage versus the larger carriers. The Company's
operating loss in the first quarter of 1996 was primarily attributable to its
switched services operations. The Company anticipates that its switched long
distance business will incur negative cash flow until the Company's customers
route sufficient traffic over the network to cover the costs of its operation,
which the Company does not expect to occur before the end of 1996. The preceding
forward-looking statement is based on certain assumptions as to the growth of
traffic on the Company's network and the control of its operating expenses. Such
assumptions may prove to be inaccurate due to changes in the businesses of the
Company's reseller customers, an inability to attract new customers, the loss of
existing customers, problems in the operation of the switched network, the
Company's lack of experience with switched long distance services, increases in
operating expenses or other factors affecting the Company's revenue or expenses.
If such traffic does not increase, there can be no assurance that the switched
long distance business will ever generate positive cash flows. In addition, the
credit risk for the Company's switched long distance business will be
substantially greater than the credit risk for the Company's long-haul business,
because switched long distance customers will be charged in arrears on the basis
of MOUs (which are frequently subject to dispute). See "Business -- Switched
Long Distance Services."
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RISKS INHERENT IN RAPID GROWTH
Part of the Company's strategy is to achieve rapid growth by entering the
switched long distance business and through completion of the Fiber Expansion.
Rapid growth would require: (i) the retention and training of new personnel;
(ii) the continued satisfactory performance by the Company's customer interface
and billing systems; (iii) the development and introduction of new products; and
(iv) the control of the Company's expenses related to the expansion into the
switched long distance business and the Fiber Expansion. The failure by the
Company to satisfy these requirements, or otherwise to manage its growth
effectively, would have a material adverse effect on the Company and the value
of the Common Stock. See "Business -- Long-Haul Services" and
"Business -- Switched Long Distance Services."
SUBSTANTIAL INDEBTEDNESS
The Company is highly leveraged. As of March 31, 1996, the Company had
approximately $311.3 million of long-term debt (including the current portion
thereof) and a stockholders' deficit of approximately $4.8 million. On a pro
forma basis, assuming this Offering was consummated as of March 31, 1996, there
would have been at such date approximately $ million of stockholders' equity
and a debt-to-equity ratio of to 1. The Company's significant debt burden
could have several important consequences to the Company, including, but not
limited to: (i) the cash received from operations may be insufficient to meet
the principal and interest on the Senior Notes, in addition to paying the other
indebtedness of the Company as it becomes due; (ii) a significant portion of the
Company's cash flow from operations must be used to service its debt instead of
being used in the Company's business; and (iii) the Company's flexibility to
obtain additional financing in the future, as needed for Phase II of the Fiber
Expansion or any other reason, may be impaired by the amount of debt outstanding
and the restrictions imposed by the covenants contained in the indenture for the
Senior Notes. See "Description of Certain Indebtedness." The ability of the
Company to meet its obligations will be subject to financial, business and other
factors, including factors beyond its control, such as prevailing economic
conditions. There can be no assurance that the Company's cash flow from
operations will be sufficient to meet its obligations under the Senior Notes or
other indebtedness as payments become due or that the Company will be able to
refinance the Senior Notes or other indebtedness at maturity.
RELIANCE ON MAJOR CUSTOMERS
The Company's ten largest customers in 1995 accounted for approximately 78%
of its revenues, with WorldCom and Frontier as its two largest customers. During
1993, 1994 and 1995, WorldCom accounted for approximately 23%, 25% and 20%
respectively, of the Company's revenues (with no revenues in 1993 or 1994 and
approximately 4% of the Company's revenues in 1995 relating to capacity-exchange
arrangements between WorldCom and the Company), and Frontier (including Allnet)
accounted for 24%, 23% and 21%, respectively, of the Company's revenues.
WorldCom has grown substantially in recent years, largely through acquisitions,
including the acquisition of certain customers of the Company. In 1995, WorldCom
acquired WilTel, a facilities-based carrier that has been both a long-term
customer of, and supplier to, the Company. The Company believes that as a result
of WorldCom's ownership of the WilTel long-haul transmission network, WorldCom
is likely to transfer long-haul circuits now leased from the Company, other than
the long-haul circuits under capacity exchange arrangements with the Company, to
its own network when its leases expire. During the first quarter of 1996, the
Company had revenues from WorldCom of approximately $4.3 million. Of such
revenues, approximately 39% related to capacity-exchange agreements, 3% related
to leases expiring in 1996, 16% related to leases expiring in 1997, 21% related
to leases expiring after 1997, and 21% related to month-to-month leases. Prior
to its acquisition in 1995 by Frontier (which is also a customer of the
Company), Allnet was a large customer of the Company, accounting for
approximately 18% and 17% of the Company's revenues in 1993 and 1994,
respectively. Although Frontier: (i) had "take or pay" commitments to the
Company for the period 1996 through 2000 of over $30.0 million as of March 31,
1996; and (ii) does not currently own significant long-haul network capacity,
the Company believes that the acquisition of Allnet by Frontier will not affect
the combined carrier's requirements for long-haul circuits, the Company cannot
predict whether the acquisition of Allnet by Frontier will affect the
relationship of the combined carrier with the Company or whether Frontier will
renew its contracts with the
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<PAGE> 18
Company after its commitments expire. Although there can be no assurance, the
Company believes that if revenues from WorldCom or from Frontier do not continue
or are reduced, they can be replaced over time with revenues generated from
other customers. However, the Company's revenues may in the short-term be
adversely affected and if such revenues are ultimately not replaced, then the
loss of WorldCom, Frontier or other significant customers could have a material
adverse effect on the Company and the value of the Common Stock. Additional
consolidations in the telecommunications industry involving the Company's
customers also could have a material adverse effect on the Company and the value
of the Common Stock. See "Business -- Long-Haul Services."
The Company's strategy for establishing and growing its switched long
distance business is based in large part on its relationship with Excel. The
failure by the Company to fulfill its obligations to provide a reliable switched
network for use by Excel or the failure by Excel: (i) to fulfill its obligations
to utilize the Company's switched long distance services (even though such
failure could give rise in certain circumstances to claims by the Company); or
(ii) to utilize the volume of MOUs that the Company expects it to utilize, could
result in a material adverse effect on the Company and the value of the Common
Stock. In addition, a significant reduction by Excel of its commitment to the
Company (as is permitted in certain circumstances by the terms of its contract
with the Company) could have a material adverse effect on the Company and the
value of the Common Stock. See "Business -- Switched Long Distance Services."
COMPETITION
The telecommunications industry is highly competitive. Many of the
Company's competitors (such as AT&T, MCI, Sprint, WorldCom and others) and
potential competitors have substantially greater financial, personnel,
technical, marketing and other resources than those of the Company and a far
more extensive transmission network than the Company. Such competitors may build
additional fiber capacity in the geographic areas to be served by the Fiber
Expansion. The Company is aware that another company is considering building a
new nationwide long distance fiber optic network. In addition, many
telecommunications companies are acquiring switches and users of switches will
have an increasing number of alternative providers of switched long distance
services. The Company competes primarily on the basis of pricing, availability,
transmission quality, customer service (including the capability of making rapid
additions to add end-users and access to end-user traffic records) and variety
of services. The ability of the Company to compete effectively will depend on
its ability to maintain high-quality services at prices generally equal to or
below those charged by its competitors.
In the United States, price competition in the long distance business has
generally been intensive. The FCC has, on several occasions since 1984, approved
or required price decreases by AT&T through the imposition of "price cap"
regulations. However, the FCC recently classified AT&T as a "non-dominant
interexchange carrier," with the effect that AT&T is no longer subject to price
regulation of its long distance services. Since the Company believes that its
customers generally price their service offerings at or below the prices charged
by AT&T for its telecommunications services, reductions by AT&T in its rates may
necessitate similar price decreases by the Company. In addition, the
Telecommunications Act of 1996 (the "Telecommunications Act") will allow the
RBOCs and others such as electric utilities and cable television companies to
enter the long distance market, and has reduced restraints on GTE, which has
already entered the long distance market. Further, a continuing trend toward
consolidation, mergers, acquisitions and strategic alliances in the
telecommunications industry could also give rise to significant new competitors
to the Company or to the Company's customers. See "-- Recent Legislation and
Regulatory Uncertainty," "Industry Overview," "Business -- Long-Haul Services,"
"Business -- Switched Long Distance Services" and "Business -- Regulation."
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a small number of key executive
officers, the loss of whom could have a material adverse effect on the Company.
The Company believes that its growth and future success will depend in large
part on its continued ability to attract and retain highly skilled and qualified
personnel. The loss of senior management or the failure to recruit additional
qualified personnel in the future
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could significantly impede attainment of the Company's financial, expansion,
marketing and other objectives. With the exception of contracts with two of its
Executive Vice Presidents, the Company does not have employment contracts and
does not presently intend to enter into contracts, with other members of senior
management. See "Management" and "Certain Transactions."
RECENT LEGISLATION AND REGULATORY UNCERTAINTY
Certain of the Company's operations are subject to regulation by the FCC
under the Communications Act of 1934, as amended (the "Communications Act"). In
addition, certain of the Company's businesses are subject to regulation by state
public utility or public service commissions. Changes in the regulation of, or
the enactment or changes in interpretation of legislation affecting, the
Company's operations could have a material adverse affect on the Company and the
value of the Common Stock. Recently, the federal government enacted the
Telecommunications Act, which, among other things, allows the RBOCs and others
to enter the long distance business. Entry of the RBOCs or other entities such
as electric utilities and cable television companies into the long distance
business may have a negative impact on the Company or its customers. The Company
anticipates that certain of such entrants will be strong competitors because,
among other reasons, they may enjoy one or more of the following advantages:
they may (i) be well capitalized; (ii) already have substantial end-user
customer bases; or (iii) enjoy cost advantages relating to local loops and
access charges. The introduction of additional strong competitors into the
switched long distance business would mean that the Company and its customers
would face substantially increased competition. This could have a material
adverse effect on the Company and the value of the Common Stock. In addition,
the Telecommunications Act provides that state proceedings may in certain
instances determine access and egress charges the Company and its customers are
required to pay to the LECs. No assurance can be given that such procedings will
not result in increases in such rates. Such increases could have a material
adverse effect on the Company or its customers. See "Industry Overview" and
"Business -- Regulation."
RISKS RELATED TO RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. For example, there have been recent technological advances that
show the potential to greatly expand the capacity of existing and new fiber
optic cable, which could greatly increase supply. 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. Such an
increase in supply or failure by the Company to maintain competitive services or
obtain new technologies could have a material adverse effect on the Company and
the value of the Common Stock. See "Industry Overview -- Technology."
CONCENTRATION OF STOCK OWNERSHIP
Upon completion of this Offering, Trustees of General Electric Pension
Trust ("GEPT") will beneficially own approximately % of the outstanding Common
Stock, Grumman Hill Investments, L.P. ("GHI") will beneficially own
approximately % of the outstanding Common Stock, and four of the members of
senior management and their affiliates will beneficially own approximately %
of the outstanding Common Stock. Such stockholders also control a majority of
IXC Communications' 10% Junior Series 3 Preferred Stock (the "Series 3 Preferred
Stock"). See "Certain Transactions." As a result, certain of these stockholders,
if they act together, generally would be able to elect all directors elected by
the holders of the Common Stock (and the director elected by the holders of the
Series 3 Preferred Stock) and exercise control over the business, policies and
affairs of IXC Communications, and will have the power to approve or disapprove
most actions requiring stockholder approval, including amendments to IXC
Communications' charter and by-laws, certain mergers or similar transactions and
sales of all or substantially all of IXC Communications' assets. This
concentration of stock ownership could have the effect of delaying or preventing
a change of control of IXC Communications or the removal of existing management
and may discourage attempts to do so. See "Principal Stockholders."
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<PAGE> 20
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock. Although it is anticipated that the Common Stock will be approved for
inclusion in the Nasdaq National Market, there can be no assurance that an
active public market for the Common Stock will develop or be sustained after
this Offering or that purchasers of the Common Stock will be able to resell
their Common Stock at prices equal to or greater than the initial public
offering price. The initial public offering price will be determined by
negotiation between IXC Communications and the representatives of the
Underwriters and may not be indicative of future market prices. See
"Underwriters" for the method of determining the initial public offering price.
The trading price of the Common Stock after this Offering could be subject to
wide fluctuations in response to numerous factors, including, but not limited
to, quarterly variations in operating results, competition, announcements of
technological innovations or new products by IXC Communications or its
competitors, product enhancements by IXC Communications or its competitors,
regulatory changes, any difference in actual results and results expected by
investors and analysts, changes in financial estimates by securities analysts
and other events or factors. In addition, the stock market has experienced
volatility that has affected the market prices of equity securities of many
companies and that often has been unrelated to the operating performance of such
companies. These broad market fluctuations may adversely affect the market price
of the Common Stock. See "Underwriters."
IMMEDIATE AND SUBSTANTIAL DILUTION
The estimated initial public offering price is substantially higher than
the net tangible book value per share of Common Stock. As a result, investors
participating in this Offering will incur immediate, substantial dilution. To
the extent currently outstanding options to purchase the Common Stock are
exercised, there will be further dilution. The existing stockholders of IXC
Communications, including certain officers and directors, will realize an
immediate increase in the net tangible book value of their shares of Common
Stock upon completion of this Offering. See "Dilution," "Certain Transactions"
and "Principal Stockholders."
ANTI-TAKEOVER PROVISIONS
IXC Communications' Restated Certificate of Incorporation permits the Board
of Directors to establish the rights, preferences, privileges and restrictions
of, and to issue, up to an additional 87,450 shares of Preferred Stock without
any further vote or action by IXC Communications' stockholders. Although IXC
Communications has no present plans to issue any additional shares of Preferred
Stock, the issuance of additional Preferred Stock could adversely affect the
holders of Common Stock. See "Description of Capital Stock." In addition, under
certain circumstances, the Senior Notes can require the Company to repurchase
the Senior Notes upon the occurrence of a Change of Control (as defined in the
indenture for the Senior Notes). See "Description of Certain Indebtedness." The
issuance of additional preferred stock or the existence of such provisions of
such indenture could have the effect of delaying or preventing a change in
control of IXC Communications and may discourage attempts to do so.
SHARES ELIGIBLE FOR FUTURE SALE
Following this Offering, all shares of the Common Stock
outstanding prior to this Offering will be "restricted securities" and may in
the future be sold in compliance with Rule 144 adopted under the Securities Act
of 1933, as amended (the "Securities Act"). Rule 144 generally provides that
beneficial owners of Common Stock who have held such Common Stock for two years
may sell within a three-month period a number of shares not exceeding the
greater of 1% of the total outstanding shares or the average weekly trading
volume of the shares during the four calendar weeks preceding such sale. All, or
substantially all, of the outstanding restricted Common Stock will have met the
two-year holding period requirement under Rule 144, and could begin to be sold
90 days after this Offering, subject to the conditions of Rule 144. Future sales
of Common Stock could negatively impact the market price of the Common Stock.
However, pursuant to the terms of certain lock-up agreements, the Common Stock
owned by executive officers, directors, GEPT and GHI may not be sold until 180
days from the date of this Prospectus, without the prior written consent of
Morgan Stanley & Co. Incorporated. Also, certain holders of Common Stock have
registration rights with
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respect to approximately shares of Common Stock held by them, which
registration rights become exercisable on March 1, 1997. In addition, the
Company intends as soon as practicable after consummation of this Offering, to
register approximately shares and shares of Common Stock,
reserved for issuance to its employees, directors, consultants and advisors
under the Company's 1994 Stock Plan and 1996 Stock Plan, respectively. As of
March 31, 1996, options to purchase shares of Common Stock were
outstanding under the 1994 Stock Plan and no options were outstanding under the
1996 Stock Plan. See "Management -- 1996 Stock Plan," "Management -- 1994 Stock
Plan," "Description of Capital Stock -- Registration Rights" and "Shares
Eligible for Future Sale."
USE OF PROCEEDS
The net proceeds to IXC Communications from the sale of the shares of
Common Stock offered hereby at an assumed initial public offering price of
$ per share are estimated to be $ million ($ million if the
U.S. Underwriters' over-allotment option is exercised in full), after deducting
underwriting discounts and commissions and offering expenses. IXC Communications
expects to use substantially all of the net proceeds of this Offering (together
with a portion of the funds remaining from the sale of the Senior Notes) to fund
the Fiber Expansion and the balance for general corporate purposes. Pending such
uses, IXC Communications intends to invest such funds in interest-bearing bank
accounts, United States government securities or other highly liquid
investments.
DIVIDEND POLICY
IXC Communications has never paid any cash dividends on its Common Stock
and does not expect to pay cash dividends on its Common Stock in the foreseeable
future. The terms of the indenture under which the Senior Notes were issued
restrict the payment of cash dividends. As of March 31, 1996 there were 12,550
shares of the Company's Series 3 Preferred Stock outstanding (liquidation
preference of $1,000 per share). Dividends on the Series 3 Preferred Stock
cumulate at an annual rate 10% (based on the liquidation preference) plus
interest. As of March 31, 1996, $5.2 million of accrued and unpaid dividends on
the Series 3 Preferred Stock were outstanding. The Company anticipates paying
the dividends on the Series 3 Preferred Stock (and related interest) when cash
is available after funding the Company's cash needs for operations and capital
expenditures and provided that the amount of such payment is permitted under the
terms of the indenture for the Senior Notes and applicable provisions of state
law. IXC Communications currently intends to retain future earnings, if any, to
finance its operations and fund the growth of its business. Any payment of
future dividends on its Common Stock will be at the discretion of the Board of
Directors of IXC Communications and will depend upon, among other things, IXC
Communications' earnings, financial condition, capital requirements, level of
indebtedness, contractual and legal restrictions with respect to the payment of
dividends and other factors that IXC Communications' Board of Directors deems
relevant.
17
<PAGE> 22
CAPITALIZATION
The following table sets forth the cash and the capitalization of IXC
Communications as of March 31, 1996, and as adjusted to reflect the stock split
to be completed immediately prior to this Offering and the sale by IXC
Communications of the Common Stock offered hereby at an assumed initial public
offering price of $ per share, and assuming no exercise of the
over-allotment option by the U.S. Underwriters. See "Use of Proceeds." This
table should be read in conjunction with the Consolidated Financial Statements,
the Notes thereto and other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------
AS
ACTUAL ADJUSTED
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cash(1)................................................................ $193,076 $
======== ========
Current portion of long-term debt...................................... $ 10,426 $ 10,426
Long-term debt, excluding current portion:
12 1/2% Senior Notes due 2005........................................ 277,336 277,336
Other senior long-term debt and lease obligations.................... 17,405 17,405
Senior subordinated debt............................................. 2,688 2,688
Subordinated debt.................................................... 3,476 3,476
-------- --------
Total long-term debt, less current portion........................ 300,905 300,905
Stockholders' equity:
Preferred stock, $.01 par value; 100,000 shares authorized:
10% Junior Series 3 Cumulative Preferred Stock, $.01 par value;
12,550 shares issued and outstanding (aggregate liquidation
preference, including accrued and unpaid dividends, of
$17,754)......................................................... 13 13
Common stock, $.01 par value; shares authorized (actual)
and shares (as adjusted); shares issued and
outstanding (actual); and shares issued and outstanding
(as adjusted)(2).................................................. 100
Additional paid-in capital........................................... 29,573
Accumulated deficit.................................................. (34,527) (34,527)
-------- --------
Total stockholders' equity (deficit).............................. (4,841)
-------- --------
Total capitalization................................................... $306,490 $
======== ========
</TABLE>
------------
(1) Includes $187,584 held in an escrow account. See Note 3 to the Consolidated
Financial Statements.
(2) Does not include shares of Common Stock issuable upon the exercise
of employee stock options outstanding as of March 31, 1996 under the
Company's 1994 Stock Plan, (of which, options covering shares were
exercisable as of March 31, 1996).
18
<PAGE> 23
DILUTION
The net tangible book value deficit of IXC Communications at March 31, 1996
was approximately $ , or $ per share of Common Stock. Net tangible
book value deficit per share represents the amount of IXC Communications' total
tangible assets less total liabilities, divided by the total number of
outstanding shares of Common Stock. After giving effect to the sale by IXC
Communications of the Common Stock offered hereby at an assumed initial public
offering price of $ per share (after deduction of underwriting discounts and
commissions and estimated offering expenses and assuming no exercise of the U.S.
Underwriters' over-allotment option) and the receipt of the net proceeds
therefrom, the pro forma net tangible book value of IXC Communications at March
31, 1996 would have been approximately $ , or $ per share. This
represents an immediate increase in net tangible book value of $ per share
to existing stockholders and an immediate dilution in net tangible book value of
$ per share to new investors purchasing shares of Common Stock in this
Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $
Net tangible book value deficit per share at March 31, 1996........ $
Increase in net tangible book value attributable to new
investors.......................................................
------
Pro forma net tangible book value per share after this Offering......
------
Dilution of net tangible book value per share to new investors....... $
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1996
the number of shares of Common Stock purchased from, the total consideration
paid to, and the average price per share paid to, IXC Communications by the
existing stockholders and by the new investors purchasing the Common Stock
offered hereby (assuming an initial public offering price of $ per share and
before deduction of underwriting discounts and commissions and estimated
offering expenses and no exercise of the U.S. Underwriters' over-allotment
option):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................ % $ % $
New investors................................
---------- ---- ---------- ----
Total...................................... 100% $ 100%
========== ==== ========== ====
</TABLE>
The above tables assume no exercise of any outstanding stock options. There
were shares of Common Stock reserved for issuance under the 1994 Stock
Plan, of which options to purchase an aggregate of shares were
outstanding at March 31, 1996, with a weighted average exercise price of $
per share. There were shares of Common Stock reserved for issuance
under the 1996 Stock Plan, of which no options to purchase shares were
outstanding as of March 31, 1996. See "Management -- 1996 Stock Plan,"
"Management -- 1994 Stock Plan" and Note 6 to Consolidated Financial Statements.
At May 15, 1996, there were 12,550 shares of 10% Series 3 Preferred Stock
outstanding which may be redeemed by the Company in whole or in part at any
time, subject to certain debt covenants and applicable provisions of state laws,
at a price of $1,000 per share plus any accumulated and unpaid dividends,
including accrued interest. The accumulated dividends in arrears on such
preferred stock (including accrued interest) as of March 31, 1996 were
approximately $5.2 million. Payment of these dividends would result in
additional dilution to the new investors of approximately $ per share.
19
<PAGE> 24
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth certain selected historical and pro forma
financial data of the Company. The historical data has been derived from the
audited Consolidated Financial Statements of the Company as of and for the
periods ended December 31, 1992, 1993, 1994 and 1995. The financial data for the
year ended December 31, 1991 and for the period from January 1, 1992 through
August 14, 1992 and for the three-month periods ended March 31, 1995 and 1996 is
derived from unaudited financial statements. The unaudited financial statements
include all adjustments, consisting of normal recurring accruals, which
management considers necessary for a fair presentation of the financial position
and the results of operations for such periods. Results of operations for the
interim periods are not necessarily indicative of the results of operations for
the full year. The pro forma data has been derived from the Unaudited Pro Forma
Condensed Consolidated Statement of Operations, which is included elsewhere
herein. The pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the operating results that
would have occurred, nor are they necessarily indicative of future operations.
The data should be read in conjunction with the Consolidated Financial
Statements, related Notes, and other financial information included herein.
<TABLE>
<CAPTION>
THE COMPANY'S
PREDECESSOR THE COMPANY
------------------------ -----------------------------------------------------------------------------
PRO
HISTORICAL FORMA(1) HISTORICAL
-------------------------------------------------------------------- ------------ ------------------
YEAR JANUARY 1 AUGUST 15 YEAR THREE MONTHS ENDED
ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, AUGUST 14, DECEMBER 31, ---------------------------- DECEMBER 31, ------------------
1991 1992 1992 1993 1994 1995 1995 1995 1996
------------ ---------- ------------ -------- ------- -------- ------------ ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net operating revenues. $ 67,611 $ 42,081 $23,893 $ 71,123 $80,663 $ 91,001 $ 91,001 $21,766 $ 26,250
Operating expenses:
Cost of services...... 43,578 26,116 13,588 37,823 33,896 39,852 39,852 8,175 15,600
Operations and
administration....... 20,721 11,226 6,759 22,835 20,561 32,282 32,282 6,256 10,417
Depreciation and
amortization......... 20,135 10,517 8,033 21,061 12,121 17,438 18,555 3,619 6,010
-------- -------- ------- -------- ------- -------- -------- ------- --------
Operating income
(loss)............... (16,823) (5,778) (4,487) (10,596) 14,085 1,429 312 3,719 (5,777)
Interest income........ 200 45 -- 215 211 468 468 111 126
Interest income on
amounts in escrow..... -- -- -- -- -- 2,552 2,552 -- 2,557
Interest expense....... (31,461) (18,749) (1,398) (4,943) (6,105) (14,597) (14,597) (1,873) (9,870)
Contract settlement
costs................. -- -- (2,000) (59) -- -- -- -- --
Write-down of property
and equipment......... -- -- -- (37,960) -- -- -- -- --
Equity in net
income (loss) of
unconsolidated
subsidiaries.......... -- -- -- -- (94) 19 19 (4) (5)
Benefit (provision)
for income taxes...... 4 (77) 2,847 21,977 (3,157) 1,693 3,873 (966) 1,363
Minority interest...... -- -- 710 (446) 77 5,218 (232) 283 (93)
-------- -------- ------- -------- ------- -------- -------- ------- --------
Income (loss) before
extraordinary items... $(48,080) $(24,559) $(4,328) (31,812) 5,017 (3,218) (7,605) 1,267 $(11,699)
Extraordinary
gain (loss)(2)........ -- -- -- 8,495 2,298 (1,747) (1,747) -- --
-------- -------- ------- -------- ------- -------- -------- ------- --------
Net income (loss)...... $(48,080) $(24,559) $(4,328) $(23,317) $ 7,315 $ (4,965) $ (9,352) $ 1,267 $(11,699)
======== ======== ======= ======== ======= ======== ======== ======= ========
Net income (loss)
per common share,
historical(3)......... $ $ $ $ $ $
======== ======= ======== ======== ======= ========
Weighted average
shares outstanding,
historical(3).........
======== ======= ======== ======== ======= ========
Net income (loss)
per commonshare,
as adjusted(4)........ $ $ $
======== ======== ========
Weighted average
shares outstanding,
as adjusted(4)........
======== ======== ========
</TABLE>
20
<PAGE> 25
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
THE COMPANY'S
PREDECESSOR THE COMPANY
------------------------ ---------------------------------------------------------------------------
PRO HISTORICAL
HISTORICAL FORMA(1) ------------------
------------------------------------------------------------------- ------------ THREE MONTHS
YEAR JANUARY 1 AUGUST 15 YEAR ENDED
ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, AUGUST 14, DECEMBER 31, --------------------------- DECEMBER 31, ------------------
1991 1992 1992 1993 1994 1995 1995 1995 1996
------------ ---------- ------------ ------- -------- -------- ------------ -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash(5)................... $ 2,666 $ 2,039 $ 2,746 $ 6,230 $ 6,048 $205,181 $ 6,293 $193,076
Total assets.............. 203,664 195,288 117,741 94,281 105,409 336,475 104,742 346,467
Total debt(6)............. 304,592 329,242 32,891 59,954 69,124 298,794 66,686 311,331
Stockholders' equity
(deficit)............... (137,990) (164,432) 30,028 6,871 14,189 6,858 16,856 (4,841)
OTHER FINANCIAL AND
OPERATIONS DATA:
EBITDA(7)................. 3,512 4,784 2,256 10,175 26,400 27,124 21,674 7,725 2,818
EBITDA, as adjusted(8).... 3,512 4,784 2,256 10,175 26,400 36,916 -- 8,675 11,143
Capital expenditures...... 952 18 1,435 27,008 7,087 23,670 23,670 2,571 13,564
Ratio of EBITDA to
interest expense(9)..... -- -- 1.61x 2.06x 4.32x 1.81x 1.48x 4.12x --
Minutes of use
(in millions)........... -- -- -- -- -- 12.8 12.8 -- 33.9
</TABLE>
------------
(1) The pro forma statement of operations and other financial and operations
data for the year ended December 31, 1995 reflect the acquisition by the
Company of the minority interest in SSC as if the acquisition (which
actually occurred as of January 1, 1996) had occurred as of January 1, 1995.
See Note 17 to the Consolidated Financial Statements.
(2) The extraordinary items for all periods result from early extinguishment of
debt or lease obligations, net of applicable income taxes.
(3) Net income (loss) per common share is based on the weighted average common
shares outstanding during the period, as adjusted for applicable stock
options and the stock split which occurred immediately prior to this
Offering.
(4) Net income (loss) per common share as adjusted is based on the weighted
average common shares outstanding during the period, adjusted for applicable
stock options, the stock split which occurred immediately prior to the
Offering and the shares issued in this Offering.
(5) Including $198,266 at December 31, 1995 and $187,584 at March 31, 1996 held
in an escrow account. See Note 3 to the Consolidated Financial Statements.
(6) Total debt consists of long-term debt, capital lease obligations and
deferred lease obligations, including the current portions thereof.
(7) EBITDA represents net income before depreciation, amortization, interest
expense, income taxes and extraordinary items. For the year ended December
31, 1993, EBITDA does not reflect the $37,960 write-down of microwave
equipment recorded by the Company. (As of March 31, 1996, the remaining net
depreciated book value of microwave equipment was less than 6% of total
assets.) See Note 8 to the Consolidated Financial Statements. The Company
has included information concerning EBITDA because it believes that EBITDA
is used by certain investors as one measure of an issuer's historical
ability to service its debt. EBITDA is not a measurement determined in
accordance with GAAP and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP. For
1995 and the three months ended March 31, 1996, EBITDA included $2,552 and
$2,557, respectively, of interest income relating to amounts held in escrow.
See the Consolidated Financial Statements.
(8) EBITDA, as adjusted, does not reflect negative EBITDA of IXC Long Distance,
Inc., the Company's switched long distance services subsidiary, because in
1996 such negative EBITDA related to operating expenses for the Company's
switched long distance business, principally in advance of related revenues,
and, for 1995, related to start-up expenses incurred before the Company
began generating material revenues from its switched long distance business.
(9) For the year ended December 31, 1991, the period January 1 through August
14, 1992 and the three months ended March 31, 1996, EBITDA was insufficient
to cover interest expense by $27,949, $13,965 and $7,052, respectively. For
the three months ended March 31, 1996, the Company paid the interest accrued
with funds from the escrow account referred to in footnote 5.
21
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides two principal services to long distance companies: (i)
long-haul transmission of voice and data over dedicated circuits and (ii)
switched long distance services. The Company is one of only five carriers to own
a digital telecommunications network extending from coast-to-coast. Its
facilities include digital switches located in Los Angeles, Dallas, Chicago,
Philadelphia and Atlanta.
Long-Haul Business. Substantially all of the Company's revenues in 1995
and prior years were generated by its long-haul business, which has historically
provided positive cash flow (even in years when the Company had net losses, as
in 1993 and 1995). The Company provides long-haul service to customers either on
a "take or pay" long-term basis or, after contract expiration, on a
month-to-month basis. The Company's long-haul transmission agreements are
generally long-term leases which provide for monthly payment in advance on a
fixed-rate basis, calculated according to the capacity and length of the circuit
used. As of April 30, 1996, the Company had "take or pay" commitments from its
long-haul customers of approximately $160.0 million (consisting of approximately
$90.0 million relating to circuits currently in service and approximately $70.0
million relating to circuits not yet ordered that the Company expects will be
carried over leased routes or routes being constructed). During 1995, the
Company leased transmission capacity to 212 customers, with the ten largest
customers during that year accounting for approximately 78% of revenues. The
Company's two largest customers, WorldCom and Frontier, accounted for
approximately 20% and 21%, respectively, of the Company's revenues in 1995. See
"Risk Factors -- Dependence on Major Customers."
Substantially all of the costs of communication services of the long-haul
business are fixed. The largest component of such costs for the long-haul
business is the expense of leasing off-net capacity from other carriers to meet
customer needs which the Company cannot meet with its own network due to
capacity or geographic constraints. In the normal course of business, the
Company enters into capacity-exchange agreements with other carriers. Pursuant
to such agreements, the Company exchanges excess capacity on its network where
required by the other carrier for capacity on the other carrier's network where
the Company requires it. As such agreements generally do not provide for cash
payments to be made, they allow the Company to substantially reduce the cash
payments it must make for off-net capacity from other carriers. Such exchanges
are accounted for at the fair value of the capacity exchanged, as non-cash
revenue and expense in equal amounts, which reduces the Company's overall gross
margin as a percentage of revenues. In 1995, the Company recorded revenue and
expense of $13.8 million relating to such exchanges. In addition, certain right
of way arrangements in connection with the Fiber Expansion constitute operating
leases and will contribute to the cost of communications services in the future.
The amount of such operating leases for prior periods has been immaterial.
Switched Long Distance Business. The Company has recently expanded into
the business of selling switched long distance service to long distance
resellers. The Company sells switched long distance services on a per-call
basis, charging by MOUs, with payments due monthly in arrears after services are
rendered. The Company's rates for calls generally vary with the duration of the
call, the day and time of day the call was made and whether the traffic is
intrastate, interstate or international. The Company has contracts with over 30
long distance resellers. See "Business -- Switched Long Distance Services."
The three main components of the costs of the switched long distance
business are LEC access and egress charges, long-haul network leasing costs and
operations and administration expenses. The LEC access and egress charges, which
are variable, represent a significant majority of the total cost for the
switched long distance business. After the Fiber Expansion is placed in service,
cost savings may be expected because the Company will be able to reduce the
amount of long-haul network capacity that otherwise would be required to be
leased from other parties. However, even after the Fiber Expansion is complete,
the Company anticipates that it will need to lease a significant amount of
capacity from other carriers as traffic increases and that, as a result, its
total transmission lease costs will continue to increase. Because the switched
long distance business
22
<PAGE> 27
generally has lower margins than the long-haul business, increases in switched
long distance volumes should cause a decrease in the Company's overall margins.
During 1995, the Company set up the infrastructure for its switched long
distance business by installing its switches, connecting them to its network and
to the LECs, leasing related long-haul circuits, acquiring software and hiring
the personnel and entering into contracts with customers. The Company's switched
network became fully operational in February 1996 and the Company did not have
material revenues from the switched long distance business during 1995. The
development and further expansion of the Company's switched long distance
business requires significant expenditures, a substantial portion of which will
be incurred before the realization of cash flow from such activities. The
Company anticipates that its switched long distance business will incur negative
cash flow until the Company's customers route sufficient traffic over the
network to cover the costs of its operation, which the Company does not expect
to occur before the end of 1996. For a discussion of important factors that
could cause the Company's switched long distance business to fail to generate
positive cash flows as described, see "Risk Factors -- Development Risks and
Dependence on Switched Long Distance Business." The Company will fund such
negative cash flow from cash flow from its long-haul business and cash on hand.
If such traffic does not increase, there can be no assurance that the switched
long distance business will ever generate positive cash flows. See "Risk
Factors -- Negative Cash Flow and Capital Requirements," "Risk
Factors -- Development Risks and Dependence on Switched Long Distance Business"
and "Risk Factors -- Recent and Expected Losses."
Capital Expenditures. The Company has spent significant amounts of capital
to develop its coast-to-coast network to service its long-haul and switched long
distance businesses. It is currently undertaking the Fiber Expansion of its
network in two phases. The Company estimates that it will spend approximately
$200.0 million for capital expenditures in the remaining three quarters of 1996.
However, the amount of actual capital expenditures may vary materially as a
result of cost-saving arrangements, unexpected costs and other factors. See
"-- Liquidity and Capital Resources."
Pricing; Net Losses. The Company expects that as competition increases
prices for both long-haul and switched services, prices will decline. The
Company incurred an operating loss during the first quarter of 1996 and expects
to incur an operating loss for the full year due to the switched long distance
business. After the Fiber Expansion is placed in service, the Company expects to
realize cost savings by reducing the amount of off-net capacity it leases from
other carriers. However, reductions in lease expense as a result of the Fiber
Expansion will be offset to some extent by increased depreciation expense as the
investment in the Fiber Expansion is depreciated.
Acquisition and Financing Transactions. In 1994, the Company and Excel, a
large long distance reseller, formed Switched Services Communications, L.L.C.
("SSC"), a joint venture, to lease, install and operate the five switches
incorporated into the Company's network and to provide switched long distance
services to the Company and Excel. In January 1996, the Company purchased
Excel's interest in SSC for a short-term non-interest bearing note for
approximately $6.2 million, to be paid in installments through June 1996. Excel
continues to have a contractual commitment to use the Company's network. See
"Business -- Switched Long Distance Services -- Excel."
In August 1994, IXC Communications acquired an 85% interest in MSM
Associates, Limited Partnership ("MSM"), which owns fiber capacity in Michigan
and Indiana, from GE Capital Corporation. Frontier, the owner of the remaining
15% minority interest of MSM, is a customer of the Company. See Note 1 to
Consolidated Financial Statements.
In October 1995, the Company issued $285.0 million of Senior Notes
primarily to finance a portion of Phase I of the Fiber Expansion. See
"Description of Certain Indebtedness."
Marca-Tel, S.A. de C.V. ("Marca-Tel") a joint venture in which the Company
indirectly holds a minority interest, has been successful in obtaining a license
from the Mexican government to provide certain telecommunication services in
Mexico, but is not currently providing such services. See "Business -- Possible
Mexican Joint Venture."
23
<PAGE> 28
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly financial
information for each of the Company's last five fiscal quarters. In the opinion
of the Company's management, this quarterly information has been prepared on the
same basis as the audited financial statements appearing elsewhere in this
Prospectus and includes all adjustments (which consist only of normal recurring
adjustments) necessary to present fairly the unaudited quarterly results set
forth herein. The Company's quarterly results have in the past been subject to
fluctuations, and thus, the operating results for any quarter are not
necessarily indicative of results for any future period. The Company may
experience substantial fluctuations in quarterly results in the future as a
result of customer turnover, variations in the success of its customers'
businesses and price competition. These fluctuations may be particularly large
as a percentage of revenue over the near term, because the Company has recently
entered the switched long distance business. In addition, any delays in
completion of the Fiber Expansion could cause quarterly results to vary.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
1995 1996
----------------------------------------------- --------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
-------- ------- ------------ ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenues:
Long-haul circuits....................... $21,766 $22,721 $ 22,772 $22,304 $22,628
Switched long distance................... -- -- -- 1,438 3,622
------- ------- ------- ------- -------
Net operating revenues................ $21,766 $22,721 $ 22,772 $23,742 $26,250
======= ======= ======= ======= =======
Operating expenses:
Cost of services......................... $ 8,175 $ 8,210 $ 10,423 $13,044 $15,600
Operations and administration............ 6,256 6,987 8,604 10,435 10,417
Depreciation and amortization............ 3,619 3,995 4,645 5,179 6,010
------- ------- ------- ------- -------
Total operating expenses.............. $18,050 $19,192 $ 23,672 $28,658 $32,027
======= ======= ======= ======= =======
EBITDA (1)................................. $ 7,725 $ 8,223 $ 5,884 $ 5,292 $ 2,818
======= ======= ======= ======= =======
</TABLE>
------------
(1) EBITDA represents net income before depreciation, amortization, interest
expense, income taxes and extraordinary items. The Company has included
information concerning EBITDA because it believes that EBITDA is used by
certain investors as one measure of an issuer's historical ability to
service its debt. EBITDA is not a measurement determined in accordance with
GAAP and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with GAAP. For the quarters
ended December 31, 1995 and March 31, 1996, EBITDA included $2,552 and
$2,557, respectively, of interest income relating to amounts held in escrow.
See the Consolidated Financial Statements.
RESULTS OF OPERATIONS
Net operating revenues for April and May 1996 were $10.9 million and $
million, respectively, an increase of 49.3% and % from $7.3 million and $
million in April and May 1995, respectively. The increase in revenues is
primarily a result of Excel beginning to use the Company's network on February
15, 1996 and the provision of switched long distance services to other
customers. By October 1996, Excel is required to utilize at least 70 million
minutes of traffic per month over the Company's network. See
"Business -- Switched Long Distance Services -- Excel."
THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1995
Net operating revenues for the three months ended March 31, 1996 increased
20.6% to $26.3 million from $21.8 million in the three months ended March 31,
1995. The increase is primarily a result of the implementation of the switched
long distance business (particularly for Excel), leading to switched long
distance services revenues of $3.6 million, together with a volume increase from
the long-haul business of $.9 million or 4%.
24
<PAGE> 29
Cost of communication services consists principally of access and egress
charges paid to LECs and transmission lease payments to, and exchanges with,
other carriers. For the three months ended March 31, 1996 cost of communication
services increased 90.2% to $15.6 million from $8.2 million in the three months
ended March 31, 1995. The increase is primarily a result of the addition of
long-haul leases of $4.5 million relating to the switched long distance
business, an aggregate of $2.9 million of per minute overflow charges paid to
other carriers and access and egress charges paid to LECs in connection with the
switched long distance business. The Company did not incur these expenses for
the switched long distance business in the first quarter of 1995. The Company
has historically had a relatively low cost of communications services as a
percentage of revenues because substantially all its revenues were derived from
the sale of long-haul transmission, which were generally made at a relatively
low cost over its own network. The Company expects that, in the event it
achieves increases in long-haul revenues, its cost of communications services as
a percentage of such revenues will increase (at least until Phase I of the Fiber
Expansion is complete) because additional leases (or exchanges) of capacity from
other carriers at a relatively high cost will be required. The cost of
communications services as a percentage of revenues in the switched long
distance business is substantially greater than that in the long-haul business
due to the relatively high cost of LEC access and egress charges and leases for
long-haul circuits supporting the switched network. Accordingly, increases in
switched long distance revenues will further increase the Company's cost of
communications services as a percentage of revenues.
Operations and administration expenses for the three months ended March 31,
1996 increased 65.1% to $10.4 million from $6.3 million in the three months
ended March 31, 1995. This increase is primarily the result of operating
expenses associated with the Company's switched network. The Company anticipates
that as it implements the Fiber Expansion and expands its switched service
business, operations and administration expenses will continue to increase.
Depreciation and amortization for the three months ended March 31, 1996
increased 66.7% to $6.0 million from $3.6 million in the three months ended
March 31, 1995. The increase is primarily the result of depreciation related to
capital expenditures associated with the Company's expansion and improvement of
its switched network. Depreciation and amortization will increase in subsequent
periods, as the Company's investment in the Fiber Expansion is depreciated.
Interest income for the three months ended March 31, 1996 increased to $2.7
million from $.1 million in the three months ended March 31, 1995. The increase
is primarily related to interest earned on the investment of the proceeds from
the sale of the Senior Notes.
Interest expense for the three months ended March 31, 1996 increased to
$9.9 million from $1.9 million in the three months ended March 31, 1995. The
increase is primarily the result of interest expense attributable to the Senior
Notes, which were issued during the fourth quarter of 1995.
Income taxes for the three months ended March 31, 1996 resulted in a $1.4
million tax benefit as opposed to a provision for income taxes of $1.0 million
in the three months ended March 31, 1995. The difference between the tax benefit
recorded for the first quarter of 1996 and the expected benefit at the federal
statutory rate is primarily due to losses incurred by a subsidiary that provides
switched long distance services. The related tax benefits have not been
recognized as a result of uncertainty regarding future profitability.
The Company experienced a net loss of $11.7 million for the three months
ended March 31, 1996 as opposed to net income of $1.3 million in the first three
months ended March 31, 1995 as a result of the factors discussed above.
1995 COMPARED WITH 1994
The year ended December 31, 1995 was a period of increased revenues, but an
operating loss for the Company, primarily due to start-up and operational
expenses related to the Company's switched long distance business. The operating
loss and a significant increase in interest expense because of the issuance of
the Senior Notes during the fourth quarter of 1995 resulted in a net loss for
the year.
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Net operating revenues for 1995 increased 12.8% to $91.0 million from $80.7
million in 1994. The increase is primarily the result of: (i) an increase in
non-cash revenues attributable to network capacity exchanged with other carriers
from $8.0 million in 1994 to $13.8 million in 1995; (ii) revenue in the amount
of $2.9 million associated with MSM (IXC Communications' 85% interest in MSM was
acquired in August 1994); and (iii) increased long-haul traffic in the amount of
$1.6 million due to the Company's expansion of its fiber optic network in South
Texas.
Cost of communication services for 1995 increased 17.7% to $39.9 million
(or 43.8% of net operating revenues) from $33.9 million (or 42.0% of net
operating revenues) in 1994. The increase is primarily a result of an increase
in transmission lease expense (to $39.9 million in 1995 from $30.5 million in
1994) associated with: (i) an increase of $3.6 million in leases for
transmission services primarily to support the switched long distance business;
and (ii) an increase in non-cash expense attributable to network capacity
exchanged with other carriers from $8.0 million in 1994 to $13.8 million in
1995. These increases were partially offset by a non-recurring decrease in lease
expenses under certain operating equipment leases as a result of a May 1994
lease restructuring (such leases generated no expense in 1995 as opposed to $3.4
million in 1994).
Operations and administration expenses for 1995 increased 56.8% to $32.3
million from $20.6 million in 1994. The increase is primarily the result of $9.4
million of start-up and operating expenses associated with the Company's
implementation of its switched network and the inclusion in the Company's
results of operations of an increase in the Company's operating expenses of $1.1
million associated with the MSM network.
Depreciation and amortization for 1995 increased 43.8% to $17.4 million
from $12.1 million in 1994. The increase is primarily the result of depreciation
associated with the MSM network, together with increased depreciation associated
with the Company's development of its switched network.
Interest income for 1995 increased to $3.0 million from $.2 million in
1994. The increase is primarily related to interest earned on investment of the
proceeds from the sale of the Senior Notes issued in the fourth quarter of 1995.
Interest expense for 1995 increased to $14.6 million from $6.1 million in
1994. The increase is primarily the result of interest expense attributable to
the Senior Notes issued in the fourth quarter of 1995.
Income taxes for 1995 resulted in a $1.7 million tax benefit as opposed to
a provision for income taxes of $3.2 million in 1994. In 1995 and 1994, the
Company's effective tax rate did not significantly differ from the federal
statutory rate.
Minority interest during 1995 was $5.2 million resulting primarily from
Excel's share of operations and administration expenses and the cost of
communications services associated with its minority share of SSC, a joint
venture formed in 1995. In January 1996 the Company purchased Excel's interest
in SSC, thereby eliminating the minority interest in SSC for 1996 and future
years.
In 1994, the Company exercised a debt prepayment option in connection with
financing of debt that resulted in a net extraordinary gain of $2.3 million.
The Company experienced a net loss of $5.0 million in 1995 as opposed to
net income of $7.3 million in 1994 as a result of the factors discussed above.
1994 COMPARED WITH 1993
Net operating revenues for 1994 increased 13.5% to $80.7 million from $71.1
million in 1993. The increase is primarily attributable to: (i) an increase in
non-cash revenues generated from network capacity exchanged with other carriers
from $3.7 million in 1993 to $8.0 million in 1994; (ii) the acquisition of an
85% interest in MSM in August 1994 resulting in an additional $2.0 million of
net operating revenues; and (iii) the extension of the Company's fiber optic
network in South Texas.
Cost of communications services in 1994 decreased 10.3% to $33.9 million
(or 42.0% of net operating revenue) from $37.8 million (or 53.2% of net
operating revenue) in 1993. The decrease is primarily the result of significant
reductions in certain operating equipment lease expenses due to the acquisition
of such
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<PAGE> 31
equipment by the Company in May 1994 resulting in the elimination of all future
expense charges associated with such operating leases (such lease expense for
1994 was $3.4 million as opposed to $11.2 million in 1993) partially offset by
an increase of $4.3 million in network capacity exchanged with other carriers in
1994 as compared to 1993. During 1993, the Company capitalized $2.0 million for
long term contracts with a common carrier for capacity on such carrier's
nationwide fiber optic communications system, which purchase price and related
costs were deferred and are being recognized over the five year term of the
contract. See Note 11 to the Consolidated Financial Statements.
Operations and administration expenses for 1994 decreased 9.6% to $20.6
million from $22.8 million in 1993. The decrease is primarily the result of
certain nonrecurring deferred compensation obligations of the Company incurred
in 1993.
Depreciation and amortization in 1994 decreased 42.7% to $12.1 million from
$21.1 million in 1993. The decrease primarily is the result of a write-down of
$38.0 million of the carrying value of certain dated microwave equipment to its
estimated fair value in 1993. The write-down resulted from the Company's
assessment of estimated future net cash flows expected to be produced by the
equipment in relation to its net historical cost of the system. See Note 8 to
the Consolidated Financial Statements.
Interest expense in 1994 increased 24.5% to $6.1 million from $4.9 million
in 1993. The increase is the result of increased average debt balances in 1994,
primarily associated with the acquisition of MSM and the construction of the
South Texas fiber extension.
Income taxes for 1994 resulted in a provision for income taxes of $3.2
million as opposed to a tax benefit of $22.0 million in 1993. The increase is
primarily attributable to a tax benefit related to the equipment write-down in
1993.
Extraordinary gains in 1994 decreased to $2.3 million from $8.5 million in
1993 in connection with the refinancing of certain operating lease arrangements
(see Note 5 to the Consolidated Financial Statements). In connection with such
transaction, financing was obtained which provided for a prepayment option. The
prepayment option was exercised by the Company in 1994 resulting in additional
gains.
Net income increased $30.6 million in 1994 to $7.3 million from a net loss
of $23.3 million in 1993 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Except for the historical information contained below, the matters
discussed in this section are forward-looking statements that involve a number
of risks and uncertainties. The Company's actual liquidity needs, capital
resources and results may differ materially from the discussion set forth below
in such forward-looking statements. For a discussion of the factors that could
materially affect such matters, see "Risk Factors," particularly "Risk
Factors -- Negative Cash Flow and Capital Requirements."
The Company's operations have historically provided positive cash flow
(even in years of net losses, as in 1993 and 1995), which to date has provided
adequate liquidity to meet the Company's operational needs. However, for 1995
and the three months ended March 31, 1996, the Company's EBITDA minus interest
expense and capital expenditures (adjusted for the change in working capital
deficit) was negative $4.8 million and negative $38.5 million, respectively. The
Company had $158.5 million of the net proceeds received from the sale of the
Senior Notes in an escrow account at April 30, 1996 to be used at the Company's
discretion for the Fiber Expansion, debt service of the Senior Notes and other
capital expenditures.
Cash provided by operating activities in 1995 decreased 32.6% to $9.1
million from $13.5 million in 1994, primarily as a result of start-up and
operational expenses associated with the Company's development of its switched
services in advance of related revenue. In order to offer switched services, the
Company set up the infrastructure for its switched long distance business by
installing switches, connecting them to its network and to the LECs, leasing
related long-haul circuits, acquiring software, hiring personnel and entering
into contracts with customers, which caused the Company's switched long distance
business to incur negative cash flow in 1995. The Company anticipates that its
switched long distance business will incur negative cash flow until the
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Company's customers route sufficient traffic over the network to cover the costs
of its operation, which the Company does not expect to occur before the end of
1996. For a discussion of important factors that could cause the Company's
switched long distance business to fail to generate positive cash flows as
described, see "Risk Factors -- Development Risks and Dependence on Switched
Long Distance Business" and "Risk Factors -- Negative Cash Flow and Capital
Requirements."
Cash used in investing activities increased to $219.4 million in 1995 from
$18.8 million in 1994 due to the Company investing the proceeds of the sale of
the Senior Notes in liquid securities and increased capital expenditures
associated with the Company's implementation of its switch network. The
Company's total capital expenditures were $23.7 million for 1995 and $13.6
million the first quarter of 1996. The Company anticipates making additional
capital expenditures for the remaining three quarters of 1996 of approximately
$200.0 million (including capital expenditures relating to the Fiber Expansion).
The Company believes that cash generated by the long-haul business, together
with vendor financing which the Company may seek, will be sufficient to fund
capital expenditures for 1996 relating to the switched long distance businesses,
other than expenditures related to the Company's Fiber Expansion plan.
Cash generated from financing activities increased to $211.2 million in
1995 from $5.1 million in 1994 as a result of the proceeds of the sale of the
Senior Notes and capital contributions of $6.0 million from Excel to support its
minority interest in the SSC joint venture. In January 1996, the Company
purchased Excel's interest in the joint venture for a short-term, non-interest
bearing promissory note in an original principal amount of approximately $6.2
million, an amount equal to Excel's total capital contribution. Such amount is
being paid in installments through June 1996. As of March 31, 1996, $5.7 million
was outstanding under such note. The Company currently anticipates that such
installment payments will be made from the Company's current cash balances and
from operating cash flow from the long-haul business.
The Company anticipates that Phase I of the Fiber Expansion will require
estimated cash expenditures subsequent to April 30, 1996 of $213.0 million. The
Company anticipates meeting the construction costs for the Phase I of the Fiber
Expansion (net of certain cost-saving arrangements) by utilizing all the funds
remaining from the Senior Notes being held in an escrow account (after reserving
certain funds to cover a portion of the interest payments in 1996 and 1997) and
the proceeds from this Offering. For a discussion of important factors that may
cause actual capital expenditures and the Company's ability to fund Phase I to
differ materially from the foregoing forward looking statements, see "Risk
Factors -- Negative Cash Flow and Capital Requirements." The Company has entered
into one such cost-saving arrangement with WorldCom in which each company is
constructing a fiber route and placing fibers for both companies in the route.
See "Business -- The Company's Network." The Company will seek to meet the costs
of construction of Phase II, which it estimates to be $275.0 million (before any
cost-savings arrangements), through additional cost-saving arrangements, its
operating cash flow and additional debt or equity financing. In the event no
other cost-saving arrangements are entered into, the Company anticipates that it
will be necessary either: (i) to meet the remaining costs of Phase II of the
Fiber Expansion through a combination of additional sales of equity securities,
incurrence of debt (subject to the restrictions set forth in the indenture for
the Senior Notes) and utilization of operating cash flow; or (ii) to slow or
delay the construction of the Fiber Expansion until sufficient funds are
available. See "Risk Factors -- Risks Relating to Completion of the Fiber
Expansion."
The Company is required to make interest payments in the amount of $35.6
million on the Senior Notes each year. See "Description of Certain
Indebtedness." EBITDA is currently insufficient to cover the Company's debt
service requirements under the Senior Notes. The Company currently anticipates,
but no assurance can be given, that a portion of such payments during 1996 and
1997 will be made from funds held in the escrow account and the balance of such
payments will be made from operating cash flow. For a discussion of important
factors, including the Company's assumption that increases in its operating cash
flow will occur as a result of the successful completion and utilization of
Phase I of the Fiber Expansion and growth in the switched long distance
business, that may cause actual results to differ materially from the foregoing
forward-looking statements, see "Risk Factors -- Negative Cash Flow and Capital
Requirements" and "Risk Factors -- Development Risks and Dependence on Switched
Long Distance Business." In addition, at March 31, 1996, there were
approximately $5.2 million of accrued and unpaid dividends on the Series 3
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Preferred Stock. Such dividends cumulate at an annual rate of 10% (based on the
liquidation preference) plus interest.
The Company is also required to make minimum annual lease payments for
facilities, equipment and transmission capacity used in its operations. In 1996,
the Company is required to make payments of approximately $4.4 million on
capital leases and $10.6 million on operating leases. The Company expects to
incur additional operating lease costs in connection with obtaining rights of
way for the Fiber Expansion. See Note 5 to Consolidated Financial Statements.
In connection with the Fiber Expansion, the Company has committed to pay
contractors to construct and install a portion of the fiber optic cable. As of
May 15, 1996 these commitments amounted to approximately: (i) $20.7 million for
construction and installation in Texas and (ii) $13.6 million for construction
and installation in Arizona. Also, under an agreement entered into in January
1996, the Company has a commitment to purchase $32.0 million of fiber optic
cable during a three-year term, with $25.0 million remaining as of May 15, 1996.
In June 1995, the Company entered into a three-year agreement with a common
carrier to purchase communication services, under which the Company is required
to purchase a monthly minimum of $350,000 in services. In September 1994, the
Company entered into an agreement with a common carrier to purchase dedicated
digital telecommunication services. Under the terms of the agreement, the
Company is required to purchase services with remaining monthly minimum
commitments of $.5 million through March 1998. The minimum commitments under
this agreement will be cancelled when the Company has paid a total of $22.5
million for services under the agreement. See Note 14 to Consolidated Financial
Statements.
The Company is currently analyzing the economic viability of pursuing the
opportunity presented by the Marca-Tel Mexican license, since such venture will
require significant amounts of cash. Although the Company cannot accurately
predict the amount of cash that would be needed to pursue this opportunity, it
estimates that at least $20.0 million (and possibly significantly more) would be
required during 1996 - 1997. The Company anticipates that the costs of pursuing
such opportunity, if they can be met at all, will be met through some
combination of the following: (i) offerings of debt or equity securities of the
Mexican joint venture; (ii) other incurrences of debt by the Mexican joint
venture; (iii) joint venture arrangements with third parties; (iv) vendor
financing of equipment purchases; and (v) equity offerings or, subject to the
restrictions imposed by the indenture for the Senior Notes, debt incurrences by
the Company or from working capital. See "Business -- Possible Mexican Joint
Venture."
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INDUSTRY OVERVIEW
DEVELOPMENT AND REGULATION
The development of the long distance telecommunications industry was
strongly influenced by a 1982 court decree requiring the divestiture by AT&T of
its seven RBOCs and dividing the country into approximately 200 LATAs. The seven
RBOCs were allowed to provide local telephone service, local access service to
long distance carriers and intra-LATA long distance service (service within a
LATA), but were prohibited from providing inter-LATA service (service between
LATAs). The right to provide inter-LATA service was given to AT&T and the other
interexchange carriers, including the LECs that are not RBOCs. The FCC requires
all interexchange carriers to allow the resale of their inter-LATA services to
long distance carriers, and the 1982 court decree substantially eliminated
different access arrangements as distinguishing features among long distance
carriers. These and other legislative and judicial factors have helped smaller
long distance carriers emerge as alternatives to AT&T, MCI and Sprint for long
distance services.
Recently, the federal government enacted the Telecommunications Act, which,
among other things, allows the RBOCs and others such as electric utilities and
cable television companies to enter the long distance business. The Company
expects that the Telecommunications Act will substantially alter the way in
which the telecommunications industry is regulated. Such changes are, however,
difficult to predict accurately, because the FCC has not yet developed the
numerous regulations necessary to implement the Telecommunications Act. Entry of
the RBOCs or other entities such as electric utilities and cable television
companies into the long distance business may result in reduced market shares
for existing long distance companies and additional pricing pressure on long
distance providers such as the Company. See "Risk Factors -- Recent Legislation
and Regulatory Uncertainty" and "Business -- Regulation."
MARKET AND COMPETITION
General. Companies in the domestic long distance market had estimated
revenues of $75.9 billion in 1995. AT&T is the largest long distance carrier,
with an estimated 56.5% of total market revenues in 1995, while MCI and Sprint
had an estimated 19.7% and 9.4%, respectively, of total market revenues in that
year. These three carriers constitute what generally is referred to as the
"first tier" in the long distance market. Medium-sized long distance companies,
some with national capabilities, such as WorldCom, Frontier, Cable & Wireless
and LCI, constitute the "second tier" of the industry and, cumulatively, are
believed to have accounted for approximately 8.9% of total market revenues in
1995. The remainder of the market share is held by smaller companies, which are
known as "third-tier" carriers. The Company provides long-haul services to
companies in all three tiers and switched long distance services to companies in
the third tier.
According to data included in Long Distance Market Shares, Fourth Quarter
1995, an FCC report issued in March 1996, while long distance revenues grew at a
compound annual rate of over 8% during the period from 1989 through 1995, the
revenues of all carriers other than the first tier grew in the aggregate at a
compound annual rate of over 22% during the same period. Such analysis also
stated that the smaller second-tier and third-tier carriers increased their
market share sixfold over a ten-year period, increasing from less than 3% in
1984 to more than 17% in 1994. In addition, industry sources estimate that
combined revenues of second-tier and third-tier carriers grew by 17.9% in 1995.
Competition among the Company's customers and other retail long distance
providers for end-user customers is based upon advertising, pricing, customer
service, network quality and value-added services. The Company believes that
AT&T, MCI and Sprint engage in only limited direct sales to small and
medium-sized commercial users, generally focusing on residential and large
commercial accounts, thus creating opportunities for smaller long distance
providers. Industry observers estimate that over 400 smaller companies have
emerged to compete in the long distance business. See "Risk
Factors -- Competition."
Long-Haul Services. Long distance companies may be categorized as
facilities-based carriers and non-facilities-based carriers. Sellers of
long-haul services are generally facilities-based carriers that own long-haul
transmission facilities, such as fiber optic cable or digital microwave
equipment. The first-tier and some second-tier long distance companies are
facilities-based carriers offering long-haul service nationwide.
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Facilities-based carriers in the third tier of the market generally offer
long-haul services only in a limited geographic area. Customers using long-haul
services include: (i) facilities-based carriers that require long-haul capacity
where they have geographic gaps in their facilities, need additional capacity or
require geographically different alternative routing; and (ii)
non-facilities-based carriers requiring long-haul capacity to carry their
customers' long distance traffic. The Company's competitors in the long-haul
business include AT&T, MCI, Sprint and WorldCom and certain regional carriers.
Competition in the long-haul business is based on price, customer service,
network location and quality, reliability and availability. See "Business --
Long-Haul Services."
Switched Long Distance Services. Long distance companies may be
characterized as switched or switchless carriers. Sellers of switched long
distance services are generally switched carriers, such as the Company, that own
one or more switches that direct telecommunications traffic. Facilities-based
carriers are generally switched carriers. However, many non-facilities based
carriers (i.e., many long distance resellers) have switches. The Company's
customers are switchless carriers that depend on switched carriers to provide
switched long distance services to their end users. The Company's competitors in
the switched long distance business include AT&T, MCI, Sprint, WorldCom and
Frontier and many non-facilities-based switched carriers. Competition in the
switched long distance business is based on customer service (particularly with
respect to speed in delivery of computer billing records and set-up of new end
users with the LECs), ability of the network to complete calls with a minimum of
network-caused busy signals, scope of services offered, price, reliability and
transmission quality.
CALL ROUTING
An inter-LATA long distance telephone call begins with the caller's LEC
transmitting the call by means of its local switched network to a point of
connection with an interexchange carrier. The interexchange carrier, through its
switches and long-haul network, transmits the call to the called party's LEC,
which then completes the call over its local facilities. For each long distance
call, the originating LEC charges an access fee. The interexchange carrier also
charges a fee for its transmission of the call, a portion of which consists of a
terminating fee charged by the LEC used to deliver the call. Under the
Telecommunications Act, State proceedings may in certain instances determine LEC
access and egress charge rates. It is uncertain at this time what effect such
proceedings may have on such rates.
The following diagram illustrates the routing of an inter-LATA telephone
call (the diagram assumes the carrier switches are not within the local dialing
areas of either the caller or called party.
[ROUTING CHART]
TECHNOLOGY
Telecommunications long-haul traffic generally is transmitted through
digital microwave or fiber optic equipment.
Fiber Optic Systems. Fiber optic systems use laser-generated light to
transmit voice and data in digital format through fine strands of glass. Fiber
optic systems are characterized by large circuit capacity, good
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sound quality, resistance to external signal interference and direct interface
to digital switching equipment. A pair of modern fiber optic strands, using
current technology, is capable of carrying 192 DS-3s or over 129,000
simultaneous telephone calls. Because fiber optic signals disperse over
distance, they must be regenerated at sites located along the fiber optic cable
(on older fiber optic systems the interval is 20 to 25 miles; on newer systems
that utilize modern fiber optic cable and splicing methods, such as will be used
in the Fiber Expansion, it is approximately 50 to 75 miles).
Microwave Systems. Although limited in capacity in comparison with fiber
optic systems (generally, no more than 28 DS-3s can be transmitted by microwave
between two antennae), digital microwave systems offer an effective and reliable
means of transmitting voice and data signals over intermediate and longer
distances. Microwaves are very high frequency radio waves that can be reflected,
focused and beamed in a line-of-sight transmission path. Because of their
electro-physical properties, microwaves can be used to transmit signals through
the air, with relatively little power. To create a communications circuit,
microwave signals are transmitted through a focusing antenna, received by an
antenna at the next station in the network, then amplified and retransmitted.
Because microwaves attenuate as they travel through the air, this transmission
process must be repeated at repeater stations, which consist of radio equipment,
antennae and back-up power sources, located on average every 25 miles along the
transmission network. As of March 31, 1996, the remaining net depreciated book
value of the Company's microwave equipment was less than 6% of total assets.
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BUSINESS
COMPANY OVERVIEW
The Company provides two principal services to long distance companies: (i)
long-haul transmission of voice and data over dedicated circuits; and (ii)
switched long distance services. The Company is one of only five carriers to own
a digital telecommunications network extending from coast-to-coast (the other
carriers are AT&T, MCI, Sprint and WorldCom). Its facilities include digital
switches located in Los Angeles, Dallas, Chicago, Philadelphia and Atlanta. The
Company is currently engaged in a major expansion of its network, as described
below.
The Company had revenues of approximately $91 million in 1995,
substantially all of which were generated by its long-haul business. The Company
has long-haul circuit contracts with over 200 long distance carriers, including
AT&T, MCI, Sprint, WorldCom, Cable & Wireless, Frontier and LCI. As of April 30,
1996, the Company had "take or pay" commitments from its long-haul customers of
approximately $160.0 million (consisting of approximately $90.0 million relating
to circuits currently in service and approximately $70.0 million relating to
circuits not yet ordered that the Company expects will be carried over leased
routes or routes being constructed). Long-haul transmission service is also
provided to customers after contract expiration on a month-to-month basis. The
Company's long-haul contracts provide for fixed monthly payments, generally in
advance. The Company has provided services to nine of its ten largest customers
for at least six years and, although sales volumes from particular customers
vary from year to year, has historically enjoyed a high customer retention rate
(annual customer retention has averaged over 90% from 1992-1995).
The Company recently expanded into the business of selling switched long
distance services to long distance resellers in order to complement its
long-haul business and to capitalize on its ability to provide switched services
over its own network. Switched long distance services are telecommunications
services such as residential long distance services that are processed through
the Company's digital switches and carried over long-haul circuits and other
transmission facilities owned or leased by the Company. During 1995, the Company
set up the infrastructure for its switched long distance business by installing
its switches, connecting them to its network and to the LECs, acquiring
software, hiring personnel and entering into contracts with customers. The
Company's switched network became fully operational in February 1996. The
Company sells switched long distance services on a per-call basis, charging by
minutes of use ("MOUs"), with payment due monthly after services are rendered.
The Company believes that it is well-positioned to attract long distance
resellers as customers for its switched long distance services because: (i) it
is not currently a significant competitor for sales to end users; and (ii) it
provides more focused service to its reseller customers, because servicing such
customers is its primary business, unlike its major competitors whose main
business is selling retail long distance service to end-users.
The Company has entered into switched long distance services contracts with
over 30 long distance resellers including Excel and GE Capital Communications.
Excel, a rapidly growing long distance reseller, first utilized the Company's
switched long distance services in February 1996. Excel has contracted to
increase its volume on the Company's network to a minimum of 70 million minutes
of traffic per month no later than October 1996. The Company's switched long
distance has grown rapidly since its switched network became fully operational
in February 1996, with Excel accounting for most of the growth. The Company's
switched long distance revenues amounted to approximately $3.6 million in the
quarter ended March 31, 1996, (with $.7 million in January 1996, $1.3 million in
February 1996 and $1.6 million in March 1996), $3.1 million in April 1996 and
$ in May 1996. Excel accounted for 17%, 67% and % of such revenues
for the quarter ended March 31, 1996, April 1996 and May 1996, respectively. See
"-- Switched Long Distance Services."
The Company owns a coast-to-coast network containing over 1,700 fiber optic
route miles and over 5,100 digital microwave route miles. In addition, the
Company currently supplements its own facilities with a significant amount of
fiber optic capacity obtained from other carriers to service customers that
require capacity not available on the Company's own network.
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The Company is currently undertaking a major expansion of its network by
adding a substantial number of additional fiber route miles to increase the
Company's network capacity, allowing it: (i) to increase revenues by offering
its customers significantly more capacity on certain existing routes and
high-capacity on new routes; and (ii) to reduce costs by moving traffic from
capacity leased from other carriers to its own network. In this way, the Company
seeks to improve profitability and cash flow through increasing revenues and
decreasing certain costs. In addition, the Company seeks to create sufficient
capacity through the Fiber Expansion to support increased long-haul demand which
may result in the future from frame relay, ATM, multimedia, Internet and other
capacity-intensive applications. The Company seeks to construct the Fiber
Expansion over routes where one or more of the following factors are present:
(i) customer demand or demographic historical factors indicate a demand for
high-capacity fiber network on the route; (ii) the route is attractive as a
complement to the routes of other carriers, which may enable the Company to
lease its new capacity on the route to other carriers or exchange a portion of
its new capacity on the route for capacity from another carrier; or (iii) the
capacity will replace capacity otherwise leased by the Company from other
carriers.
The principal executive offices of IXC Communications are located at 5000
Plaza on the Lake, Suite 200, Austin, Texas, 78746 and its telephone number is
(512) 328-1112.
BUSINESS STRATEGY
The Company's primary business objectives over the near term are: (i) to
rapidly increase revenue from its switched long distance services business; (ii)
to substantially complete the backbone of Phase I of the Fiber Expansion in the
first quarter of 1997; and (iii) to utilize the expanded network to increase its
revenues and profitability.
The key elements of the Company's strategy to achieve these objectives are:
Reducing Costs. The Company seeks to achieve substantial cost savings
through the Fiber Expansion by reducing the amount of capacity it would
otherwise obtain from other carriers. The Company incurred costs (including
through capacity exchanges) of $39.8 million for off-net fiber optic capacity
from other carriers in 1995. In the event the Company achieves revenue growth in
the long-haul business and the switched long distance business, its usage of
long-haul capacity (including capacity leased from other carriers) will
increase. The Company believes the Fiber Expansion will enable it to reduce
expenditures for capacity now leased off-net (and to reduce the additional
expenses for leasing capacity that would otherwise be required to support
revenue growth) and thereby increase its operating cash flow, because the new
fiber routes: (i) should carry much of the traffic that would otherwise be
transmitted over off-net circuits and (ii) may enable the Company to enter into
additional exchanges of fiber capacity with other carriers. See "-- The
Company's Network" and "Risk Factors -- Risks Relating to Completion of the
Fiber Expansion."
Increasing Long-Haul Circuit Revenues. The Company's ability to expand its
long-haul business has previously been limited because the existing network
owned by the Company is geographically limited and because the digital microwave
portion of its network has been utilized at or near its maximum practical
capacity. The Company seeks through the Fiber Expansion to install high-capacity
new routes and substantially increase the capacity of certain existing routes,
allowing the Company to lease additional circuits to its customers.
Establishing a Platform for Capacity-Intensive Data Applications. The
Company is using advanced (though commercially tested) fiber optic technology in
the Fiber Expansion. The expanded network will have SONET technology and the
broadband capabilities to provide a platform to support advanced, capacity-
intensive products such as frame relay, ATM, multimedia and Internet related
applications. See "-- The Company's Network" and "Risk Factors -- Risks Relating
to Completion of the Fiber Expansion."
Providing Backup Routing for Major Carriers. An area of substantial growth
in certain markets for the Company in recent years has been the provision of
circuits to facilities-based carriers such as AT&T, MCI, Sprint and WorldCom
(the other four companies that own coast-to-coast digital networks), to be used
as alternative routes by such carriers in the event of a service outage. Such
companies prefer alternative routes
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separated geographically from their routes to increase the possibility that the
alternative route will be functional in the event of a natural disaster. The
Company has planned the Fiber Expansion to be separated geographically as far as
practicable from the existing fiber routes of such carriers. The Company
believes that the Fiber Expansion, with the resulting significant increase in
fiber optic geographic coverage and capacity, will greatly increase the
attractiveness of the Company's network as alternative routing to certain major
carriers as a backup to their own networks.
Capitalizing on Significant Customer Relationship. The Company views Excel
as the "anchor tenant" of its switched network, potentially providing the
Company with significant traffic volumes on which to base its entry into the
switched long distance services business. The Company seeks to increase its
share of the traffic of Excel, which currently obtains the bulk of the switched
long distance services it requires from another carrier, through customer
service, network quality and geographic availability. See "-- Switched Long
Distance Services -- Customers and Marketing."
Establishing Other Long-Term Relationships. The Company seeks to establish
a dependable revenue stream through long-term relationships with its customers.
The Company has long-haul contracts (generally on a long-term basis) with over
200 long distance carriers, including AT&T, MCI, Sprint, WorldCom, Cable &
Wireless, Frontier and LCI. The Company has provided services to nine of its ten
largest customers for at least six years and, although sales volumes from
particular customers vary from year to year, has historically enjoyed a high
customer retention rate (annual customer retention has averaged over 90% from
1992-1995). Although the Company's five switches first became operational in the
fourth quarter of 1995, the Company has already entered into contracts with over
30 long distance resellers, including GE Capital Communication.
Providing an Automated Software Interface. The Company seeks to increase
its attractiveness to existing and potential customers of switched long distance
services by providing a sophisticated automated interface to the Company's
computer system through its proprietary IXC Online software. Utilizing IXC
Online, customers are able to access up-to-date information regarding their
end-user customers and the calls made by such end-users. IXC Online is designed
to allow each of the Company's carrier customers to: (i) download call detail
records for its end-users for billing purposes; (ii) arrange with the
appropriate LEC to register the carrier as the designated long distance carrier
for its new end-users; and (iii) file trouble reports for resolution.
Acting as an Alternative Switched Long Distance Services Provider. The
Company believes that it is well positioned to attract long distance resellers
as customers for its switched long distance services because: (i) it is not
currently a significant competitor for sales to end users; and (ii) it provides
more focused service to its reseller customers, because servicing such customers
is its primary business, unlike its major competitors (AT&T, MCI, Sprint, World
Com and Frontier) whose main business is selling retail long distance service to
end-users. See "-- Switched Long Distance Services" and "Risk
Factors -- Development Risks and Dependence on Switched Long Distance Business."
THE COMPANY'S NETWORK
SERVICES
The Company provides two basic services: (i) long-haul services; and (ii)
switched long distance services.
Long-Haul Services. A long-haul circuit is an unswitched
telecommunications transmission circuit used by customers, such as
non-facilities-based carriers that have switches but do not own transmission
facilities, to transport their already-switched traffic between LATAs. Calls
being transmitted over a long-haul circuit for a customer are generally routed
by the customer through a switch to a receiving terminal in the Company's
network. The Company transmits the signals over a long-haul circuit to the
terminal where the signals are to exit the Company's network. The signals are
then routed by the customer through another switch and to the call recipient
through a LEC. The Company typically bills the customers a fixed monthly rate
depending on the capacity and length of the circuit, regardless of the amount
the circuit is actually used. See "-- Long-Haul Services."
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Switched Long Distance Services. Switched long distance services are
telecommunications services such as residential and commercial long distance
service that involve processing calls through the switches of a carrier. Among
the Company's switched long distance services product offerings are two basic
services: (i) call origination and termination services and (ii) call
termination services. For non-facilities-based carriers such as switchless
carriers, the Company provides call origination and termination. This generally
includes: (i) arranging with the caller's LEC to connect the call to the
Company's switching center (this is referred to as "origination") and (ii)
transmitting the call to another Company switching center or a hub connecting
the call to the recipient's LEC and arranging with the LEC to connect the call
to the recipient (this is referred to as "termination"). Other customers (for
example, non-facilities based carriers with regional switches in certain areas
but not in others) require termination but not origination services. In this
case, the customer delivers a call to the Company's switching center and the
Company terminates the call. The Company typically bills the customer at a
variable rate depending on the duration, day and time of day of the call and
whether the call is intrastate, interstate or international. See "-- Switched
Long Distance Services."
FACILITIES
The Company is one of only five companies to own a coast-to-coast digital
network. The Company's owned network presently includes five digital switches
and over 6,800 route miles with a capacity of over 171,000 DS-3 miles (including
over 1,700 fiber optic route miles with capacity of over 114,000 DS-3 miles and
over 5,100 digital microwave route miles with a capacity of over 57,000 DS-3
miles). The Fiber Expansion, when completed, should increase the capacity
available to the Company to lease to its customers to over 300,000 DS-3 miles,
with significant additional capacity available when needed by the Company. See
the map depicting the network on the inside front cover of this Prospectus.
The Company's own facilities are supplemented with over 87,000 DS-3 miles
of fiber optic capacity obtained from other carriers. Of such capacity, over
48,000 DS-3 miles are leased by the Company. Approximately 39,000 DS-3 miles of
such capacity are obtained by the Company through long-term capacity-exchange
agreements with MCI and WorldCom whereby the Company trades capacity or fibers
on its fiber network for capacity on the other carriers' networks. The Company
has been able to negotiate these significant exchange agreements because of the
placement of the Company's existing networks in locations where other
facilities-based carriers require additional capacity and the comparatively
large expense to such other carriers of constructing new fiber optic facilities.
Such exchange agreements increase the scope of the Company's network through the
addition of the exchanged capacity while reducing the Company's cash
expenditures for offnet facilities.
The Company's network includes five digital switches located in Los
Angeles, Dallas, Chicago, Philadelphia and Atlanta, each directly connected over
either on-net or off-net long-haul circuits: (i) to at least two other switching
centers; (ii) to certain of the Company's over 30 Hubs (local connection
points); and (iii) to certain LEC Central Office switches. The Hubs are
connected (generally by off-net circuits) to LEC Central Office switches, which
in turn are connected to end-user telephone lines. The switches utilize common
channel signaling (SS7), which reduces connect time delays and directs calls
using least cost routing. The Company's switched operations are supplemented by
agreements with Allnet and WorldCom. Under such agreements, Allnet and WorldCom
supply switched capacity to the Company, automatically handling calls routed
through LEC Central Offices not connected to the Company's Hubs or switches and
calls which exceed the capacity of the Company's switched network.
The capacity of the Company's switches (which are currently configured to
handle over 200 million MOUs per month) may be expanded with processor upgrades,
additional memory and ports. The Company plans to add more ports and other
equipment for its existing switches and to add additional switches as required
to accommodate customer demand. While the Company cannot yet ascertain the
capital cost of such ports, additional equipment and switches, the Company
anticipates that it will be able, subject to certain restrictions under the
indenture relating to the Senior Notes, to obtain such equipment under capital
leases.
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NETWORK RELIABILITY
The Company's network offers a reliable means of transmitting large volumes
of voice and data signals. To assist in providing reliable and high-quality
transmission service, all important functions of the network are monitored
during regular business hours from regional operations centers in Columbus,
Kansas City, Fort Worth and Tucson. Thereafter, monitoring is conducted from the
Company's national operations center in its Austin headquarters. The national
center also provides overall system monitoring on a 24-hour basis. This system
alerts the Company to situations which could affect customer transmission and
generally allows the Company to take remedial actions before customer service is
affected. In addition, the Company employs approximately 100 operations
personnel who are based along the network to perform preventative maintenance as
well as repair functions on its long-haul network. Company operations personnel
conduct annual system performance testing and make periodic unannounced visits
to terminal sites to evaluate technician performance. In addition, the Company
maintains a staff of 55 technicians to provide maintenance and other technical
support services for switched long distance services.
FIBER EXPANSION
The Company currently supplements its own facilities with over 87,000 DS-3
miles of fiber optic capacity leased from other carriers and incurred costs
(including through capacity exchanges) of $39.8 million in 1995 for such
capacity. This capacity is required because the digital microwave portion of the
Company's network is utilized at or near its maximum capacity and because the
Company's customers require circuits not available on the Company's own network.
The Company is currently undertaking the Fiber Expansion to add a substantial
number of additional route miles to increase its network capacity and geographic
scope. The Fiber Expansion will allow the Company to: (i) increase revenues by
offering to its customers significantly more capacity on certain existing routes
and high-capacity new routes; (ii) reduce costs by moving long-haul traffic from
circuits leased from other carriers to its own network; and (iii) support
increased long-haul circuit demand which may result in the future from frame
relay, ATM, multimedia, Internet and other capacity-intensive applications. The
Company estimates that the Fiber Expansion will produce additional cost savings
by supporting growth in its long-haul business and switched long distance
business which would otherwise require significant off-net capacity usage. The
Fiber Expansion will enable the Company to avoid increased expenditures for
leasing off-net capacity because the new fiber routes: (i) should carry much of
the traffic that would otherwise be transmitted over off-net circuits and (ii)
may enable the Company to enter into additional exchanges of fiber capacity with
other carriers. In this way, the Company seeks to improve cash flow through
increasing revenues and decreasing certain costs.
Construction. The Company has planned the Fiber Expansion to cover, to the
greatest extent practicable, routes where one or more of the following factors
are present: (i) customer demand indicates a need for high-capacity fiber
network on the route; (ii) the route is attractive as a complement to the routes
of other carriers, which may enable the Company to lease its new capacity on the
route to other carriers or exchange a portion of its new capacity on the route
for capacity from another carrier; or (iii) the capacity will replace capacity
leased by the Company from other carriers. The Company plans to complete the
Fiber Expansion in two phases along the following routes, which the Company
believes to be generally geographically diverse from the existing long-haul
fiber networks of AT&T, MCI, Sprint and WorldCom (the routes are subject to
change depending on the availability of certain cost-saving arrangements and the
ability to reduce construction costs and enhance the benefits from the routes to
be constructed):
(i) Phase I will provide an alternative 4,089 mile fiber optic route to
supplement the Company's existing New York-Los Angeles route, which consists
primarily of digital microwave facilities. Phase I is planned to extend the
Company's existing New York-Philadelphia fiber optic route to Los Angeles over
new fiber optic cable through Chicago, Dallas and Phoenix.
(ii) Phase II is planned to include a 3,120 mile fiber optic route from
New York via Atlanta to Houston.
The proposed routes for the Fiber Expansion are set forth on a map on the
inside front cover page of this Prospectus.
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The Company intends to install and maintain a minimum of 48 fibers along
the backbone of the Fiber Expansion route. Because of the relatively low
incremental cost of additional strands of fiber, the Company may install
additional fiber in some segments of the Fiber Expansion route. The Company
plans generally to light initially only four of the new fibers (which will add
an aggregate of approximately 300,000 DS-3 miles to the Company's network).
Certain of the remaining fibers will be reserved and used as a platform to
support emerging capacity-intensive data and multimedia applications. The
Company intends to light certain additional fibers as needed in the future and
may use the other additional fibers for sale or exchange arrangements. See
" -- Business Strategy" and "Risk Factors -- Risks Relating to Completion of the
Fiber Expansion."
The Company has already begun the Fiber Expansion, with the backbone of
Phase I scheduled to be substantially completed and in service in the first
quarter of 1997. A portion of Phase I is being constructed in connection with an
agreement entered into with WorldCom in December 1995 (the "WorldCom Fiber Build
Agreement"). Pursuant to this agreement, each company is constructing a fiber
route approximately 1,100 miles long and placing fibers for both companies in
the route. WorldCom's route is to extend from Akron through Indianapolis to a
suburb of St. Louis, with a spur from Indianapolis to a suburb of Chicago. The
Company's route is to extend from Dallas to Phoenix with a spur to Ft. Worth.
Each party will maintain the fiber in its route at no cost to the other party.
This arrangement will result in substantial savings for the Company as opposed
to constructing both routes by itself. The WorldCom Fiber Build Agreement
provides for substantial penalties ($400,000 per month) for either party which
does not complete construction of the applicable route by October 1, 1996, but
only after a grace period and only in the event the other party has already
completed its route.
Phase I of the Fiber Expansion will connect four of the Company's five
switches with high-capacity long-haul circuits on its own network, utilizing
advanced fiber optic technology capable of efficiently transmitting
capacity-intensive services, such as Internet and multimedia applications, frame
relay and ATM. Phase I is expected to deliver significant strategic and
financial benefits to the Company as a result of: (i) producing substantial
savings by allowing the Company to move a portion of its excess long-haul
traffic from leased circuits on the networks of other carriers to its own
expanded network; (ii) providing high-capacity new routes and substantially
increasing the capacity of certain existing routes, allowing the Company to
increase revenues by leasing additional circuits to its customers; (iii)
allowing the Company to improve profitability in its switched long distance
services business by reducing underlying costs of long-haul transmission; and
(iv) creating sufficient capacity to support increased demand which may result
from Internet and multimedia applications, frame relay and ATM.
Cost. The principal components of the cost of the Fiber Expansion will
vary, depending on the segment of the route, and are estimated to be: (i) fiber
optic cable, between 15% and 25% of total construction costs; (ii) engineering
and construction, between 50% and 70% of total construction costs; (iii)
electronics, approximately between 5% and 10% of total construction costs; and
(iv) rights-of-way, approximately 0%-10% of total construction costs. The
rights-of-way will be provided pursuant to long-term leases or other
arrangements (some of which may provide for substantial continuing payments)
entered into with railroads, highway commissions, pipeline owners, utilities or
others. The Company anticipates that such rights-of-way will be available along
the planned routes of the Fiber Expansion. The Company will seek to realize
significant cost savings and offsets to the cost of the Fiber Expansion through
the WorldCom Fiber Build Agreement and through one or more of the following
cost-saving arrangements: (i) including additional fibers in the Fiber Expansion
for lease or sale to other carriers; (ii) exchanging excess fibers or capacity
on the Company's expanded network for excess fibers or capacity on other
carriers' networks; and (iii) obtaining the right to install Company-owned
fibers in new fiber optic routes being constructed by other carriers along the
proposed Fiber Expansion routes in exchange for the Company (a) sharing
construction costs with the other carrier, (b) allowing the other carrier to use
excess Company fiber elsewhere in the Company's network, or (c) allowing the
other carrier to add its own fibers to segments of the Fiber Expansion. There
can be no assurance that the Company will enter into additional cost-saving
arrangements. See "Risk Factors -- Negative Cash Flow and Capital Requirements."
The Company has had experience with arrangements of this type with several major
carriers, including MCI, Sprint, Cable & Wireless and WorldCom.
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The Company anticipates that Phase I of the Fiber Expansion will cost
approximately $225.0 million (taking into account the effect of cost-saving
arrangements it has already entered into, including the WorldCom Fiber Build
Agreement). As of April 30, 1996, the Company had spent over $12.0 million of
such amount for Phase I. The Company expects to substantially complete the
backbone of Phase I in the first quarter of 1997, meeting the cost of its
construction with cash on hand (including, as of April 30, 1996, approximately
$158.5 million from the escrow account described herein) and the proceeds of
this Offering.
Following Phase I, the Company plans to complete Phase II, consisting of
approximately 3,120 route miles. The Company anticipates that Phase II, if
constructed without any cost-saving arrangements, would cost approximately
$275.0 million. The Company will seek to meet the costs of Phase II through: (i)
additional cost-saving arrangements; (ii) cash flow from its existing
operations; (iii) increased cash flow resulting from reduced off-net capacity
costs as segments of the Fiber Expansion are completed; and (iv) if the Company
is able to successfully develop the switched-products business, increased cash
flow resulting from the development of the switched-products business. In the
event no other cost-saving arrangements are entered into, and the sources of
cash referred to above are not available as soon as desired, the Company
anticipates that, to proceed with Phase II, it will be necessary either: (i) to
meet the remaining costs of the Fiber Expansion through a combination of debt or
equity funding (subject to the restrictions set forth in the indenture for the
Senior Notes); or (ii) to slow or delay the construction of the Fiber Expansion
until sufficient funds are available. No assurance can be given that cash will
in fact be available from any of the sources listed above. See "-- The Company's
Network," "-- Business Strategy," "Risk Factors -- Negative Cash Flow and
Capital Requirements," "Risk Factors -- Risks Relating to Completion of the
Fiber Expansion," "Risk Factors -- Substantial Indebtedness," and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Construction Management. The Company's management and staff have
substantial experience in the construction of long-haul telecommunications
systems. The Company's existing nationwide digital network, its 346-mile Texas
fiber optic network and the recent 58-mile extension of its Michigan fiber optic
network to Indiana were engineered and constructed by the Company. The Texas
network and the Michigan-Indiana extension incorporated modern fiber optic cable
and SONET optronics. In addition, the Company successfully closed contracts on
its Texas network with AT&T, MCI and Sprint after such companies carefully
reviewed the Company's engineering and operations capabilities. The Company
believes that its experienced engineering and operations management and staff
have the requisite skills and experience to successfully complete the Fiber
Expansion.
LONG-HAUL SERVICES
OVERVIEW
Substantially all of the Company's 1995 revenues were generated by its
long-haul business. The Company has long-haul circuit contracts with over 200
long distance carriers.
STRATEGY
The Company is seeking to increase revenues in its long-haul business
through meeting these primary objectives: (i) expanding its network to provide
additional capacity on its existing routes and high-capacity new routes to
provide access to major population centers (including routes which may be
attractive to major carriers) as backup routes; (ii) providing high-quality,
reliable transmission services on a fixed-cost basis at rates generally below
those currently offered by AT&T and competitive with those offered by other
carriers; and (iii) use the expanded network as a platform to support increased
long-haul circuit demand which may result in the future from frame relay, ATM,
multimedia, Internet and other capacity-intensive applications.
The Company is seeking to decrease expenses in its long-haul business
through the Fiber Expansion, which the Company anticipates will allow it to move
traffic from circuits leased from other carriers to its own network.
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CUSTOMERS AND MARKETING
The Company has long-haul circuit contracts with over 200 long distance
carriers, including AT&T, MCI, Sprint, WorldCom, Cable & Wireless, Frontier and
LCI. As of April 30, 1996, the Company had "take or pay" commitments from its
long-haul customers aggregating over $160.0 million (consisting of approximately
$90.0 million relating to circuits currently in service and approximately $70.0
million relating to circuits not yet ordered that the Company expects will be
carried over leased routes or routes being constructed). The Company also
provides long-haul transmission to customers after contract expiration on a
month-to-month basis. The Company's long-haul contracts provide for fixed
monthly payments, generally in advance. The Company has provided services to
nine of its ten largest customers for at least six years and, although sales
volumes from particular customers vary from year to year, has historically
enjoyed a high customer retention rate (annual customer retention has averaged
over 90% from 1992-1995).
The Company markets its long-haul circuit capacity generally to: (i)
facilities-based carriers that require long-haul capacity where they have
geographic gaps in their facilities, need additional capacity or require
geographically different, alternative routing; and (ii) non-facilities-based
carriers requiring long-haul capacity to carry their customers' long distance
traffic. The Company focuses most of its direct sales efforts on providing
customer support services to existing customers and on adding new customers. The
Company's long-haul circuit sales force presently consists of eleven account
managers based at the Company's headquarters in Austin and at direct sales
offices in or near Washington, D.C., Dallas, New Haven, San Francisco, Kansas
City, Chicago, St. Louis, Houston and Sunrise Beach, Missouri.
During 1993, 1994, 1995 and the first quarter of 1996, WorldCom and
Frontier, the Company's two largest customers, accounted for 23% and 24%, 25%
and 23%, 20% and 21%, and 16% and 21% respectively, of the Company's revenues.
During fiscal 1995, the Company leased transmission capacity to 212 customers.
The ten largest customers during that year accounted for approximately 78% of
revenues. See "Risk Factors -- Reliance on Major Customers."
PRICES AND CONTRACTS
The Company's strategy is to offer prices generally lower than those of
AT&T and competitive with the prices of other carriers, to permit the Company's
customers, through a stable, long-term fixed pricing structure, to maintain
control over transmission costs. The Company's long-haul transmission agreements
with its customers generally provide for original terms of one to three years
and for monthly payment in advance on a fixed-rate basis, calculated according
to the capacity and length of the circuit. The agreements generally provide that
the customer may terminate the affected service without penalty "for cause" in
the event of substantial and prolonged outages arising from causes within the
Company's control, and for certain other defined causes. Generally, the lease
agreements further provide that the customer may terminate the agreement "for
convenience" at its discretion at any time upon notice to the Company. However,
termination for convenience generally requires either full payment of all
charges through the end of the lease term or the payment of substantial
termination fees intended to allow the Company to recover certain costs and, in
some cases, lost profits. Damages attributable to a customer's termination of
the agreement are generally reduced, however, by an offset for any income the
Company earns from re-leasing the terminated capacity during the remaining
portion of the lease term.
COMPETITION
In providing bulk long-haul circuit capacity, the Company competes with
AT&T, which is the largest supplier of long distance voice and data transmission
services in the United States, MCI, WorldCom and Sprint, all of which have
substantially greater financial resources than the Company and a far more
extensive transmission network than the Company's network. As a result of the
Telecommunications Act, the Company and its customers will also face competition
from the RBOCs, GTE and others such as electric utilities and cable television
companies. The Company also competes on a regional basis with major regional
carriers. Competition in the long-haul business is based on price, customer
service, network location and quality, reliability and availability. See "Risk
Factors -- Competition."
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SWITCHED LONG DISTANCE SERVICES
OVERVIEW
The Company has recently expanded into the business of selling switched
long distance services to long distance resellers in order to complement its
long-haul business and to capitalize on its ability to provide switched services
over its own network. During 1995, the Company set up the infrastructure for its
switched long distance business by installing its switches, connecting them to
its network and to the LECs, acquiring software, hiring personnel and entering
into contracts with customers. Although the Company's five switches first became
operational in the fourth quarter of 1995, the Company has already entered into
contracts with over 30 long distance resellers, including Excel and GE Capital
Communication. Pursuant to these contracts, the Company sells switched long
distance services on a per-call basis, charging by MOUs, with payment due
monthly after services are rendered. The Company believes that it is well
positioned to attract long distance resellers as customers for its switched long
distance services because: (i) it is not currently a significant competitor for
sales to end users; and (ii) it provides more focused service to its reseller
customers, because servicing such customers is its primary business, unlike its
major competitors whose main business is selling retail long distance services
to end-users.
STRATEGY
The Company seeks to rapidly increase revenues from its switched long
distance business through: (i) long-term arrangements with significant customers
and customers the Company considers likely to grow quickly; (ii) providing a
sophisticated automated software interface with its customers; and (iii)
offering pricing which is generally lower than that charged by AT&T and
competitive with that of other long distance service providers. The Company
seeks to increase the profitability of its switched long distance services
business by decreasing its average cost per MOU through efficiencies achieved
with higher volumes and through reducing network costs through the Fiber
Expansion. See "-- Business Strategy."
CUSTOMERS AND MARKETING
The Company focuses its sales efforts on directly contacting large reseller
customers with monthly volumes of at least $1 million and smaller, growing
resellers with volumes between $50,000 and $250,000 per month that the Company
expects to be reasonably likely to grow to the $1 million per month level. The
Company's switched-products sales force includes ten sales executives based at
the Company's headquarters in Austin and at direct sales offices in Atlanta,
Dallas, Denver and Los Angeles. Although sales of switched long distance
services to end-user customers do not currently account for a significant
portion of the Company's switched long distance business, the Company may, from
time to time, consider acquiring long distance resellers or end-user customer
bases. Even if this does occur, however, the Company does not expect to change
its focus from its reseller customers.
Excel. In 1994, the Company and Excel, a large long distance reseller,
formed the SSC joint venture to lease, install and operate the five switches
incorporated into the Company's network and to provide switched long distance
services to the Company and Excel. As of January 1, 1996, the Company became the
sole owner of SSC by purchasing Excel's minority interest and certain
contractual arrangements were modified so that, among other things: (i) the
Company is permitted to sell switched long distance services to Excel at a
positive margin (the joint venture had been required to sell to Excel at a price
approximately equal to its cost); and (ii) Excel is permitted to reduce its
minimum commitment to the Company by inviting the Company to bid along with
other carriers to provide long-haul circuits to Excel (as described below). The
parties modified their relationship because: (i) Excel desired to sell its
interest in the joint venture because the continuing growth of its business led
it to consider acquiring its own switches to supplement the services it will
receive from other carriers; and (ii) the Company desired to sell switched long
distance services to Excel at a positive margin and have the opportunity to bid
on the long-haul transmission for any new switches that Excel may acquire. On
February 15, 1996, Excel started to transfer traffic to the Company's network.
By October 1996, Excel is required to use at least 70 million minutes of traffic
per month. Excel's commitment continues through the earlier of the date on which
Excel has routed 4.2 billion minutes over the Company's network, or
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five years from the date Excel first routes 70 million minutes per month over
the Company's network. The minimum commitment is subject to reduction or
termination: (i) if Excel installs its own switches and invites the Company to
bid along with other carriers (to win such bids, the Company would have to be
the lowest bidder) to provide Excel with the long-haul circuits utilized by such
switches (even if this did occur, Excel would still have to meet the minimum
commitment of 70 million minutes per month until the expiration of the 24-month
period after the date Excel first routes 70 million minutes per month over the
Company's network); or (ii) for breach of contract by the Company or for other
reasons which the Company believes should be under its control.
Customer Contracts. The Company's rates for switched long distance
services generally vary with the duration of the call, the day and the time of
day the call was made and whether the traffic is intrastate, interstate or
international. The rates charged are not affected by which facilities are
selected by the Company's switching centers for transmission of the call or by
the distance of the call. Different rates are applied to combined origination
and termination services than are applied to termination services. The
agreements between the Company and its customers for switched long distance
services generally provide for payment in arrears based on MOUs. The agreements
generally also provide that the customer may terminate the affected service
without penalty in the event of substantial and prolonged outages arising from
causes within the Company's control, and for certain other defined causes.
Generally, the agreements provide that the customer, in order to avoid being
obligated to pay higher rates (or, in some cases, penalties), must utilize at
least a minimum dollar amount (measured by dollars or minutes of use) of
switched long distance services per month for the term of the agreement.
Customer Care. The Company believes that customer support will prove to be
an important factor in attracting and retaining customers for its switched long
distance services. Customer service for switched long distance services includes
processing new accounts, responding to inquiries and disputes relating to
billing, credit adjustments and cancellations and conducting technical repair
and other support services. IXC Online is designed to allow each of the
Company's carrier customers to: (i) download current call detail records for its
end-users for billing purposes; (ii) arrange with the appropriate LEC to
register the carrier as a designated long distance carrier for its new end
users; and (iii) file trouble reports for resolution. The Company employed 15
people in its switched long distance services customer service group as of March
31, 1996.
DECREASED COSTS THROUGH INCREASED VOLUMES
Large MOU volumes should enable the Company to spread its fixed costs over
more MOUs and to more efficiently configure its network, reducing the cost per
MOU. The Company seeks to efficiently configure the circuits available so that
calls are completed on a cost-effective basis. The Company periodically analyzes
calling patterns using mathematical formulas to determine the circuit capacity
required to cost-effectively service the expected call volume. For example, if
there is sufficient calling traffic available, the Company may upgrade
transmission circuitry in an area from DS-1 to DS-3. A similar analysis will be
made when deciding whether to install a new switch in a region.
SERVICES
The Company markets a variety of switched long distance services, including
operator services, directory assistance, international service and the
following:
1 Plus Switched Service. Provides end users with direct-dial service over
the Company's digital network.
1 Plus Dedicated Service. Provides direct-dial service over the Company's
digital network for end users that have arranged to connect to the Company's
nearest hub through a local loop. This service is less expensive than 1 Plus
Switched Service because the access charges of the end-user's LEC are reduced.
800/888 Switched Service. Provides customers with 800/888 service over the
Company's digital network.
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<PAGE> 47
800/888 Dedicated Service. Provides 800/888 service over the Company's
digital network for end users that have arranged to connect to the Company's
nearest hub through a local loop. This service is less expensive than 800/888
Switched Service because the access charges of the end-user's LEC are reduced.
Calling Card Service. Provides telephone card service.
Debit Card Service. Provides prepaid telephone card service.
Switched Termination Service. Provides carrier customers having use of a
switch in one area with termination services in other areas.
COMPETITION
The Company competes with numerous facilities-based interexchange carriers,
some of which are substantially larger, have substantially greater financial,
technical and marketing resources and utilize larger transmission systems than
the Company. AT&T is the largest supplier of switched long distance services in
the United States inter-LATA market. The Company also competes in selling
switched long distance services with: (i) other facilities-based carriers, such
as MCI, Sprint, WorldCom and certain regional carriers, and (ii) certain
non-facilities-based carriers. As a result of the Telecommunications Act, the
Company will also now face competition from the RBOCs, GTE and others such as
electric utilities and cable television companies. The Company believes that the
principal competitive factors affecting it are customer service (particularly
with respect to speed in delivery of computer billing records and setup of new
end users with the LECS), ability of the network to complete calls with a
minimum of network-caused busy signals, scope of services offered, price,
reliability and transmission quality. The Company seeks to compete effectively
with other interexchange carriers and resellers on the basis of these factors.
The ability of the Company to compete effectively will depend upon its ability
to maintain high-quality services at prices generally equal to or below those
charged by its competitors. In the United States, price competition in the long
distance business has been intensive over the last five years. The FCC has, on
several occasions since 1984, approved or required price decreases by AT&T
through the imposition of "price cap" regulations. However, the FCC recently
classified AT&T as a "non-dominant interexchange carrier," with the effect that
AT&T is no longer subject to price regulation of its long distance services.
Since the Company believes that its customers generally price their service
offerings at or below the prices charged by AT&T for its telecommunications
services, reductions by AT&T in its rates may necessitate similar price
decreases by the Company. See "Risk Factors -- Competition."
REGULATION
Certain subsidiaries of the Company operate as communications common
carriers in providing service to their customers that are other common carriers.
These subsidiaries are subject to applicable FCC regulations under the
Communications Act, some of which may be affected by the Telecommunications Act.
See "Risk Factors -- Recent Legislation and Regulatory Uncertainty." The
subsidiaries of the Company that are engaged in private-carriage activities
using the Company's fiber optic networks are not subject to FCC regulation. In
addition, those subsidiaries which operate the common carrier point-to-point
microwave network are subject to applicable FCC regulations for use of the radio
frequencies. The FCC issues licenses to use certain radio frequency spectrum at
transmitter site locations. Each license gives the Company the right to operate
the microwave radio station for the term of the license. Currently, the Company
holds licenses to operate the 231 microwave sites in the Company's network. The
licenses all expire in 2001. These licenses are renewable upon application
containing a statement that they are used in compliance with the applicable FCC
rules. The Company expects that the FCC will renew its licenses in due course.
The Company, as a point-to-point common carrier microwave license holder, is
subject to regulation by the Federal Aviation Administration with respect to the
construction of transmission towers and to certain local zoning regulation
affecting construction of towers and other facilities.
Recent court decisions (which were issued before the Telecommunications
Act) require the FCC to require carriers to file tariffs. However, the FCC
currently does not actively exercise its authority to regulate such carriers'
rates and services. Moreover, the Telecommunications Act gives the FCC authority
to forebear
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<PAGE> 48
from applying provisions of the Communications Act, including the requirement
that carriers file tariffs. The FCC has released a Notice of Proposed
Rulemaking, proposing a mandatory detariffing policy to eliminate the tariff
requirements for non-dominant interstate, interexchange carriers. However, the
FCC will retain jurisdiction to act upon complaints against any common carrier
for failure to comply with its statutory obligations as a common carrier.
The FCC regulates many of the rates, charges and services provided by the
local exchange carriers. This regulation may affect the Company because it
leases local access transmission facilities from local telephone companies. The
FCC's price cap regulation of the RBOCs and other LECs provides them with
considerable flexibility in pricing their services. In addition, the FCC
recently freed AT&T from price cap regulation. This FCC action may affect the
Company, because it competes with AT&T. The FCC's current and future actions
could result in decreases in the rates charged to end-user customers by AT&T and
other competitors for their services. Thus, one effect of the FCC's action may
be to intensify further price competition among long distance companies.
Regulation can also affect the costs of business for the Company, its
customers and its competitors. In order to provide services, carriers such as
the Company must purchase local access services from local exchange carriers to
originate or terminate calls. Presently, the pricing of such transport service
is under an interim rate structure which is a transitional step toward
pro-competitive, cost-based transport rates. The FCC has recently initiated two
rulemaking proceedings with respect to a final cost-based transport rate
structure. The pleadings cycles in both proceedings have closed, but no order
has yet been issued by the FCC. Moreover, the Telecommunications Act may affect
how access charges are to be set and structured, so future changes with respect
to access charges are likely.
The ability of the Company to provide long distance services within any
State is generally subject to regulation by a regulatory board in that State. As
of May 1996, the Company has obtained the requisite licenses and approvals in
over 45 States. It is in the process of obtaining licenses and approvals in the
remaining States (other than Alaska and Hawaii) and expects to obtain all such
licenses and approvals by the third quarter of 1996. Although the Company has
not yet obtained licenses or approvals in such remaining States, the Company is
able to offer its switched long distance services in such States to its carrier
customers through its contracts with other carriers.
The Telecommunications Act, among other things, allows the RBOCs and others
to enter the long distance business. Entry of the RBOCs or other entities such
as electric utilities and cable television companies into the long distance
business may have a negative impact on the Company or its customers. In
addition, the Telecommunications Act provides that State proceedings may in
certain instances determine access charge rates the Company and its customers
are required to pay to the LECs. It is uncertain at this time what effect such
proceedings may have on such rates. No assurance can be given that such rates
will not be increased. Such increases could have a material adverse effect on
the Company and its customers. See "Risk Factors -- Recent Legislation and
Regulatory Uncertainty" and "Industry Overview."
EMPLOYEES
As of March 31, 1996, the Company employed 338 people, of whom 149 provided
operational and technical services, 29 provided engineering services and the
balance were engaged in administration and marketing. The Company's employees
are not represented by any labor union. The Company considers its employee
relations to be good and has not experienced any work stoppages.
PROPERTIES AND LEASES
The principal properties owned by the Company consist of: (i) the Michigan,
Texas and New York to Washington, D.C. fiber optic systems, consisting of the
fiber optic cable and associated electronics and other equipment; (ii) the
portion of the Fiber Expansion under construction; and (iii) the coast-to-coast
microwave system, consisting of microwave transmitters, receivers, towers and
antennae, auxiliary power equipment, transportation equipment, equipment
shelters and miscellaneous components. Generally, the Company's fiber
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<PAGE> 49
optic system and microwave relay system components are standard commercial
products available from a number of suppliers.
The principal offices of the Company are located in approximately 44,000
square feet of space in Austin. The Company leases this space under an agreement
which expires in December 1999, at a current annual base rental of approximately
$707,000, and has an option to renew the lease for a five-year term at the then-
prevailing market rate (but not less than the then-current rental rate) at the
time of renewal. The Company has additional offices in another location in
Austin, consisting of approximately 16,000 square feet. The Company leases this
space under an agreement which expires in the year 2000, at a current annual
base rental of approximately $163,000.
The Company leases sites for its switches in or near Los Angeles, Dallas,
Chicago, Atlanta, and Philadelphia under lease agreements that expire between
2000 and 2005. The total current rental commitments for the switch site leases
are approximately $27,000 per month. The Company's five switches are leased
under capital leases from DSC Finance Corporation over a term of five years.
LITIGATION
The Company is involved in various legal proceedings, all of which have
arisen in the ordinary course of business and some of which are covered by
insurance. In the opinion of the Company's management, none of the claims
relating to such proceedings will have a material adverse effect on the
financial condition or results of operations of the Company.
POSSIBLE MEXICAN JOINT VENTURE
The Company formed a subsidiary in August 1993 to provide international
long distance service. The subsidiary and a third party, Westel International,
Inc., formed Progress International in July 1994. Progress International,
together with Fomento Radio Beep, S.A. de C.V., a large Mexican paging company,
has obtained a license from the Mexican Federal government to provide
telecommunication services in Mexico. Such application was made by Marca-Tel, a
Mexican corporation formed by such parties. The Company owns an indirect 24.5%
interest in Marca-Tel. Marca-Tel is not currently generating revenues.
The Company is currently analyzing the economic viability of the pursuit by
the joint venture of the opportunity presented by the Mexican license, comparing
(i) the potential benefits of the joint venture, including possible profits in
Marca-Tel and a possible increase in traffic on the Company's network from
cross-border traffic from Marca-Tel, with (ii) the costs associated with
proceeding with the joint venture. The Company anticipates that, in the event it
determines that it would be advantageous to pursue such opportunity, doing so
will require significant amounts of cash. Although the Company cannot accurately
predict the amount of cash that would be needed to pursue this opportunity, it
estimates that at least $20 million (and possibly significantly more) would be
required during 1996 - 1997. Because of other anticipated needs for the
Company's available liquidity, limitations imposed by the indenture for the
Senior Notes and for other reasons, the Company anticipates that it will not be
able to provide a significant amount of its share of the cash needed by the
joint venture. The Company anticipates that the costs of pursuing such
opportunity, if they can be met at all, will be met through some combination of
the following: (i) offerings of debt or equity securities of Progress
International or Marca-Tel; (ii) other incurrences of debt by Progress
International or Marca-Tel; (iii) joint venture arrangements with third parties;
(iv) vendor financing of equipment purchases; and (v) subject to the
restrictions imposed by the indenture for the Senior Notes, securities offerings
or debt incurrences of the Company or from working capital. No assurance can be
given that the Company will be successful in meeting such costs through the
foregoing methods or, consequently, that the Company will have sufficient
liquidity to pursue the opportunity presented by the Mexican license. In the
event that the joint venture does not appear to be economically viable, the
Company will have the opportunity to withdraw from Progress International and
Marca-Tel without incurring any material penalty.
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HISTORY
IXC Communications, a holding company formed in July 1992, acquired a
one-half interest in Electra Communications Corporation ("Electra"), the owner
of a fiber optic network in Texas, for $9.0 million. IXC Communications became
the sole owner of Electra in 1993 when stock held by the other stockholder was
redeemed for $13.7 million. IXC Communications acquired I-Link, Inc., the owner
of another fiber optic network in Texas, in 1994 in a stock-for-stock merger. At
the same time, it also acquired IXC Carrier, Inc. ("IXC Carrier"), in a
stock-for-stock merger. IXC Carrier has certain subsidiaries that have been
active in the communications business for over 25 years, initially serving as
analog microwave carriers for television signals for cable operators in Ohio and
Texas. Commencing in 1979, IXC Carrier, then a subsidiary of The Times Mirror
Company ("Times Mirror"), entered into long-term circuit lease agreements with
various carriers such as MCI in Texas and Sprint in the Ohio Valley and began
the development of a coast-to-coast network through the acquisition,
construction and leasing of microwave and fiber optic facilities. IXC Carrier
was acquired in a leveraged buy-out in 1986 by Communications Transmission, Inc.
("CTI"), a holding company that also acquired substantial interests in several
other telecommunications companies, including Allnet (a large long distance
reseller and long-term customer of the Company), MSM, and Electra Communications
Corporation ("Electra"). CTI encountered financial difficulties as a result of
its need to convert its facilities from analog to digital and its high degree of
leverage and disposed of all or substantially all its assets for the benefit of
its creditors in 1992. The Company, through IXC Carrier, carries on certain of
the telecommunications businesses of CTI. See Note 1 to the Consolidated
Financial Statements. Certain directors and officers of the Company were
directors or officers of CTI.
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<PAGE> 51
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of IXC Communications and their ages
as of May 15, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------ --- -------------------------------------------------------
<S> <C> <C>
Ralph J. Swett.......... 62 Chairman, President, Chief Executive Officer and
Director
Richard D. Irwin........ 61 Director
Wolfe H. Bragin......... 51 Director
Carl W. McKinzie........ 56 Director
Kenneth F. Hinther...... 52 Executive Vice President
John R. Fleming......... 42 Executive Vice President
John J. Willingham...... 39 Senior Vice President, Chief Financial Officer and
Secretary
David J. Thomas......... 45 Executive Vice President
James F. Guthrie........ 51 Executive Vice President, Strategic Planning
</TABLE>
Each director holds office until his successor has been elected and
qualified. Officers serve at the pleasure of the Board of Directors.
Mr. Swett has served as Chairman, Chief Executive Officer and President of
IXC Communications since its formation in July 1992. Prior to that, Mr. Swett
served as Chairman of the Board and Chief Executive Officer of CTI from 1986 to
1992. From 1969 to 1986, Mr. Swett served in increasingly senior positions (Vice
President, President and Chairman) of Times Mirror Cable Television ("TMCT"), a
subsidiary of Times Mirror and a previous owner of IXC Carrier, and as a Vice
President of Times Mirror from 1981 to 1986. Mr. Swett has served as Chairman of
IXC Carrier since 1979, its Chief Executive Officer since 1986 and its President
since 1991. Mr. Swett has managed communications businesses for the past 26
years.
Mr. Irwin has served as a director of IXC Communications since its
formation in July 1992. He has served as the President of Grumman Hill
Associates, Inc. ("Grumman Hill"), a merchant banking firm, since 1985. Prior to
the formation of Grumman Hill, Mr. Irwin was a Managing Director of Dillon, Read
& Co. Inc., from 1983 to 1985. Prior to that, he served as Chief Executive
Officer of Fotomat Corporation for 12 years. Mr. Irwin is also a member of the
Board of Directors of PharmChem Laboratories, Inc. and was the Chairman of ALC
from August 1988 through August 1995.
Mr. Bragin has served as a director of IXC Communications since May 1993.
Mr. Bragin has served since 1985 as Vice President of GEIC, a subsidiary of GE
that acts as an investment advisor to GEPT. Prior to joining GEIC in 1984, Mr.
Bragin served in numerous equipment leasing, investment and portfolio management
positions for General Electric Credit Corporation, now known as General Electric
Capital Corporation. Mr. Bragin is a member of the Board of Directors of Home
Express, Inc.
Mr. McKinzie has served as a director of IXC Communications since May 1993.
Mr. McKinzie has been a principal of Riordan & McKinzie, a Professional Law
Corporation ("Riordan & McKinzie"), since 1980.
Mr. Hinther has served as Executive Vice President of IXC Communications
since March 1996 and as Senior Vice President of IXC Communications from July
1992 through March 1996. Prior to that, Mr. Hinther served as Senior Vice
President -- Engineering and Operations of CTI from 1989 to July 1992 and as
Vice President -- Network Operations of CTI from 1986 to 1989. Mr. Hinther
served IXC Carrier as a Manager of Engineering from 1979 to 1982, and as
Director of Business Development from 1982 to 1986, and as a Vice President
since 1986. Mr. Hinther was Product Manager, Satellite Communications at
Rockwell International prior to joining IXC Carrier. He has over 24 years of
experience in the telecommunications industry.
Mr. Fleming has served as Executive Vice President of IXC Communications
since March 1996 and as Senior Vice President of IXC Communications from October
1994 through March 1996. He served as Vice
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<PAGE> 52
President of Sales and Marketing of IXC Communications from its formation in
July 1992 until October 1994. Prior to that, Mr. Fleming served as Director of
Business Development and Director of Carrier Sales of CTI from 1986 to March
1990 and as Vice President -- Marketing and Sales of CTI from March 1990 to July
1992. Mr. Fleming was a Branch Manager for Satellite Business Systems from 1983
to 1986. Mr. Fleming has been employed with IXC Carrier since 1986 and a Vice
President of IXC Carrier since 1990. Mr. Fleming has over 16 years experience in
the telecommunications industry.
Mr. Willingham has served as Vice President, Chief Financial Officer, and
Secretary of IXC Communications since July 1992 and as Senior Vice President
since October 1994. Mr. Willingham served as Vice President and Controller from
September 1989 to June 1990 and as Vice President and Chief Financial Officer
from June 1990 to July 1992 of CTI. Prior to joining CTI, Mr. Willingham was
employed by Ernst & Young LLP for eight years as a certified public accountant.
Mr. Willingham has been a Vice President of IXC Carrier since 1989 and Chief
Financial Officer of IXC Carrier since 1990. Mr. Willingham has over 10 years
experience in the telecommunications industry.
Mr. Thomas has served as Executive Vice President of IXC Communications
since March 1996 and as Senior Vice President of IXC Communications from August
1995 through March 1996. He was employed with ALC from 1983 to 1995, serving as
Vice President from 1991 to 1995 and as Treasurer from 1989 to 1995.
Mr. Guthrie has served as Executive Vice President of IXC Communications
since March 1996 and as Senior Vice President, Strategic Planning of IXC
Communications from December 1995 through March 1996. Prior to that, Mr. Guthrie
served as Vice President and Chief Financial Officer of Times Mirror from 1993
to 1995 and as the Chief Financial Officer of TMCT) from 1982 to 1993.
DIRECTOR COMPENSATION
Non-employee directors receive annual compensation of $10,000 in cash and a
$20,000 contribution by the Company under the Phantom Stock Plan (described
below) for service to the Company as members of the Board of Directors. All
directors receive reimbursement of reasonable out-of-pocket expenses incurred in
connection with meetings of the Board. The Company maintains a Phantom Stock
Plan for its outside directors, pursuant to which $20,000 per year of their
director's fees will be automatically deferred and treated as if it were
invested in Common Stock. No stock will be actually purchased under the plan,
and the participants will receive cash benefits equal to the value of the shares
that they are deemed to have purchased under the plan, with such value to be
determined on the date of distribution. The distribution of the benefits
generally will occur three years after the deferral.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For the last three years IXC Communications did not have, and does not
presently have, a compensation committee or any other committee of the Board of
Directors performing equivalent functions. All decisions regarding executive
compensation are made by the Board of Directors of IXC Communications, none of
whom, other than Mr. Swett, is an executive officer of IXC Communications.
Decisions with respect to Mr. Swett's compensation are approved by all members
of the Board other than Mr. Swett.
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<PAGE> 53
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid to the Chief Executive Officer and certain other executive officers (the
"Named Executive Officers") for their services to the Company for the year ended
December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY $ COMPENSATION $(1) COMPENSATION $(2)
------------------------------------------------ -------- ----------------- -----------------
<S> <C> <C> <C>
Ralph J. Swett.................................. 285,000 10,000 883,813(3)
Chairman, President and Chief Executive
Officer
Kenneth F. Hinther.............................. 212,083(4) 7,500 444,739(5)
Executive Vice President
John R. Fleming................................. 212,083(4) 7,500 444,739(5)
Executive Vice President
John J. Willingham.............................. 183,417(6) 7,500 442,871(5)
Senior Vice President and Chief Financial
Officer
</TABLE>
------------
(1) These amounts represent automobile allowances paid to the Named Executive
Officers in 1995.
(2) Includes payments of $862,027 (with respect to Mr. Swett) and $431,014 (with
respect to each of Mr. Hinther, Mr. Fleming and Mr. Willingham) made in
connection with a prior incentive arrangement. The incentive payments were
earned in 1993 but did not become payable until 1995.
(3) Includes an employer contribution of $13,500 under the 401(k) Plan (as
defined herein) and payments of $8,286 for term life insurance premiums.
(4) Represents $153,750 in salary and an additional amount of $58,333 in
compensation earned and deferred in prior years but paid in 1995.
(5) Includes employer contributions of $13,725 for Mr. Hinther and Mr. Fleming
and $11,858 for Mr. Willingham under the 401(k) Plan.
(6) Represents $131,750 in salary and an additional amount of $51,667 in
compensation earned and deferred in prior years but paid in 1995.
1996 STOCK PLAN
In May 1996, IXC Communications adopted the IXC Communications, Inc. 1996
Stock Plan (the "1996 Stock Plan"), a stock incentive plan covering
shares of Common Stock of IXC Communications in order to attract, retain and
reward employees, directors and other persons providing services to the Company.
The Board of Directors administers the 1996 Stock Plan. Any employee, director
or other person providing services to the Company is eligible to receive awards
under the 1996 Stock Plan, at the discretion of the Board of Directors. Awards
available under the 1996 Stock Plan include Common Stock options with exercise
prices at least equal to the fair market value of the Common Stock on the date
of grant.
1994 STOCK PLAN
In November 1994, IXC Communications adopted a stock incentive plan (the
"1994 Stock Plan") covering shares of Common Stock of IXC Communications to
attract, retain and reward employees, directors and other persons providing
services to the Company. The Board of Directors administers the 1994 Stock Plan.
Any employee, director or other person providing services to the Company is
eligible to receive awards under the 1994 Stock Plan, at the Board's discretion.
Awards available under the 1994 Stock Plan include Common Stock purchase options
and restricted Common Stock. None of the Named Executive Officers hold options
to acquire stock of IXC Communications or was granted options to acquire such
stock in 1995. No director holds an option to acquire stock.
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<PAGE> 54
401(k) PLAN
The IXC Carrier, Inc. 401(k) and Pension Plan and Trust (the "401(k) Plan")
is a tax-qualified retirement plan. In general, all employees of IXC Carrier
(substantially all the employees of the Company) who have attained age 18 and
completed one year of service are eligible to participate in the 401(k) Plan.
Participants may make pre-tax contributions to the 401(k) Plan, in an amount
currently not to exceed $9,500 per year. IXC Carrier may elect to make matching
contributions each year, which are allocated among participants depending on the
amount that they contribute to the 401(k) Plan. IXC Carrier may also elect to
make profit-sharing contributions to the 401(k) Plan, which are allocated among
participants as a percentage of compensation.
INDEMNIFICATION AND EXCULPATION ARRANGEMENTS
The Restated Certificate of Incorporation of IXC Communications limits the
liability of directors to IXC Communications or its stockholders to the fullest
extent permitted by the Delaware General Corporation Law (the "DGCL").
Accordingly, pursuant to the provisions of the DGCL presently in effect,
directors of IXC Communications will not be personally liable for monetary
damages for breach of a director's fiduciary duty as a director, except for
liability: (i) for any breach of the director's duty of loyalty to the Company
or its stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the DGCL; or (iv) for any transaction from which the director
derived an improper personal benefit. In addition, the bylaws of IXC
Communications require IXC Communications to indemnify its directors and
officers to the fullest extent permitted by the laws of the State of Delaware.
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<PAGE> 55
CERTAIN TRANSACTIONS
Prior to the sale of the Senior Notes: (i) GHI, a partnership whose general
partner is Grumman Hill, a corporation whose President is Mr. Irwin, and GEPT
each held 598 shares of IXC Communications' 10% Senior Series 1 Cumulative
Redeemable Preferred Stock ("Series 1 Preferred Stock"); (ii) Messrs. Swett,
Hinther and Fleming owned 78, 60, 13 and 13 shares of Series 1 Preferred Stock,
respectively; and (iii) Mr. McKinzie, a director of IXC Communications and a
principal of Riordan & McKinzie, the law firm that will pass upon the validity
of the issuance of the Common Stock in this Offering, owned 100 shares of Series
1 Preferred Stock. The Series 1 Preferred Stock was redeemed with a portion of
the proceeds of the sale of the Senior Notes at a price equal to the amount paid
for such stock plus accrued but unpaid dividends at 10% per annum. The
approximate amounts received by such persons with respect to such redemption
were: (i) GHI, $813,544; (ii) GEPT, $813,544; (iii) Mr. Swett, $106,114; (iv)
Mr. Hinther, $17,686; (v) Mr. Fleming, $17,686; and (vi) Mr. McKinzie, $120,554.
Prior to the sale of the Senior Notes, GHI and GEPT held shares of
preferred stock of a subsidiary of IXC Communications. Such preferred stock was
redeemed with a portion of the proceeds of the sale of the Senior Notes at a
price equal to the amount paid for such stock plus accrued but unpaid dividends
at 10% per annum. The approximate amounts received by such persons with respect
to such redemption were: (i) GHI, $905,934; and (ii) GEPT, $897,115.
Certain debentures of IXC Communications and one of its subsidiaries also
were redeemed at the original purchase price plus accrued but unpaid interest
with a portion of the proceeds of the sale of the Senior Notes. The approximate
amounts received by the following persons with respect to such redemption were:
(i) GEPT, $6,760,602; (ii) GHI, $6,788,635; (iii) Mr. Swett, $301,400; (iv) Mr.
Hinther, $50,233; and (v) Mr. Fleming, $50,233.
In 1994, IXC Communications and ALC (which has since been acquired by
Frontier) formed a corporation to acquire all of the equity interests in MSM for
an aggregate purchase price of $1,500,000 from a wholly owned subsidiary of
General Electric Credit Corporation, an affiliate of GEIC. In addition, in 1995,
IXC Communications entered into a ten-year agreement with GE Capital
Communication, an affiliate of GEIC, to supply it with switched products to be
resold by GE Capital Communication. Mr. Bragin, a director of IXC
Communications, is Vice President of GEIC, which is the investment advisor to
GEPT. "See Business -- Switched Long Distance Services."
Prior to the sale of the Senior Notes, a subsidiary of IXC Communications
was indebted to GEPT under the terms of a note agreement (the "GEPT Note
Agreement"). Certain stockholders of IXC Communications, including Messrs.
Swett, Hinther, Fleming, Willingham and Irwin and GHI, had pledged their stock
and debentures of IXC Communications (and, in the case of GHI, its stock and
debentures of a subsidiary of IXC Communications) as security for such
indebtedness. Such indebtedness, in the approximate principal amount of
$5,571,348, was repaid with a portion of the proceeds of the sale of the Senior
Notes and such pledges were released.
Mr. Swett, Mr. Hinther, Mr. Fleming, GEPT and GHI purchased Senior Notes in
the amounts of $250,000, $50,000, $50,000, $20,000,000 and $5,000,000,
respectively, on October 5, 1995.
For the years ended December 31, 1993, 1994 and 1995, the law firm of
Riordan & McKinzie, of which Mr. McKinzie, a director and stockholder of IXC
Communications, is a principal, provided certain legal services to IXC
Communications in the amount of approximately $1.1 million, $1.4 million, and
$2.6 million, respectively.
Grumman Hill, of which Mr. Irwin is President, receives an annual fee of
$100,000 from the Company for performing certain advisory services with respect
to the management, operation and business development activities of IXC
Communications.
Mr. Thomas entered into an employment agreement with IXC Communications in
August 1995 for a term of three years pursuant to which Mr. Thomas is entitled
to an annual base salary of $160,000, subject to adjustment in accordance with
IXC Communications' policies and procedures, and an annual bonus of up to
$75,000 if approved by the Board of Directors. Mr. Thomas was granted stock
options on August 28, 1995 for shares of Common Stock at a price of
$ per share vesting over a three-year period which, subject to certain
conditions, vest immediately upon a change of control of IXC Communications as
51
<PAGE> 56
set forth in his employment agreement and stock option agreement. Additionally,
Mr. Thomas receives an annual automobile allowance of $8,000 and is entitled to
receive reimbursement of certain relocation costs.
Mr. Guthrie entered into an employment agreement with IXC Communications in
December 1995 for a term of three years pursuant to which Mr. Guthrie is
entitled to an annual base salary of $200,000, subject to adjustment in
accordance with IXC Communications' policies and procedures, and an annual bonus
of up to $75,000 if approved by the Board of Directors. Mr. Guthrie was granted
stock options on December 28, 1995 for shares of Common Stock at a
price of $ per share vesting over a three-year period which, subject to
certain conditions, vest immediately upon a change of control of IXC
Communications as set forth in his employment agreement and stock option
agreement. Additionally, Mr. Guthrie receives an annual automobile allowance of
$8,000 and is entitled to receive reimbursement of certain relocation costs.
52
<PAGE> 57
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of May 1, 1996
regarding the beneficial ownership of: (i) each class of IXC Communications'
voting securities by each person who is known by IXC Communications to be the
beneficial owner of more than 5% of any class of IXC Communications' voting
securities, and (ii) each class of equity securities of IXC Communications by
(a) each director of IXC Communications, (b) each of IXC Communications' Named
Executive Officers (as defined under the heading "Management -- Executive
Compensation"), and (c) all directors and executive officers of IXC
Communications as a group. The table also gives effect to this Offering and
assumes that no person or entity listed in the table purchases shares of Common
Stock in this Offering.
<TABLE>
<CAPTION>
AMOUNT OF SHARES
OWNERSHIP OF SERIES 3
AMOUNT OF SHARES PREFERRED NOT AFFECTED BENEFICIALLY OWNED(1)
BENEFICIALLY OWNED(1) BY THIS OFFERING
PRIOR TO THE OFFERING ----------------------- AFTER THE OFFERING(2)
----------------------- PERCENT OF -----------------------
PERCENT OF OUTSTANDING PERCENTAGE OF
OUTSTANDING SERIES 3 SERIES 3 OUTSTANDING
NAME AND ADDRESS OF COMMON COMMON PREFERRED PREFERRED COMMON COMMON
BENEFICIAL OWNER STOCK STOCK STOCK(3) STOCK STOCK STOCK
--------------------------------- --------- ----------- --------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ralph J. Swett(4)(5)............. 12.5% 25.00 *
Kenneth F. Hinther(4)(6)......... 5.6 -- --
John R. Fleming(4)............... 5.6 -- --
John J. Willingham(4)(7)......... 5.2 -- --
Richard D. Irwin(8).............. 36.3 995.58 7.9%
Carl W. McKinzie(9).............. * -- --
300 S. Grand Avenue, 29th Floor
Los Angeles, CA 90071
Grumman Hill Investments,
L.P.(8)........................ 27.3 -- --
191 Elm Street
New Canaan, CT 06840
Trustees of General Electric
Pension Trust.................. 30.6 6,725.00 53.6
3003 Summer Street
Stamford, CT 06905
All directors and executive
officers of IXC Communications
as a group (7 persons)......... 66.0 1,020.58 8.1
</TABLE>
------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of common stock relating to options currently
exercisable or exercisable within 60 days of May 1, 1996, are deemed
outstanding for computing the percentage of the person holding such
securities but are not deemed outstanding for computing the percentage of
any other person. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have
sole voting and investment power with respect to all shares shown as
beneficially owned by them.
(2) Assumes no exercise of the U.S. Underwriters' over-allotment option.
(3) The shares of Series 3 Preferred Stock vote together with the shares of
Common Stock as a class, except where otherwise required by law, and have
the right to elect one member of the Board of Directors. See "Description
of Capital Stock -- Preferred Stock."
(4) The address of such persons is c/o IXC Communications, Inc. 5000 Plaza on
the Lake, Suite 200, Austin, Texas 78746.
(5) Includes shares held by Ralph J. Swett, Trustee of the EMS 1994
Trust and shares held by Ralph J. Swett, Trustee of the RJS 1994
Trust.
53
<PAGE> 58
(6) Includes shares held by Kenneth F. Hinther, Trustee of LISA's 1994
Trust, shares held by Lisa Hinther, Trustee of KEN's 1994 Trust and
shares held by Craig A. Hinther, Trustee for the Kenneth A. Hinther
1996 Trust.
(7) Includes shares held by John McC. Witherspoon, Trustee of trust for
the benefit of Jonica Lynn Willingham and shares held by John McC.
Witherspoon, Trustee of trust for the benefit of Russell Dennis Willingham.
(8) Includes shares held by The Irwin Family Limited Partnership dated
January 4, 1995 and shares held by The Irwin Family Limited
Partnership #2. Also includes 21.16 shares of Series 3 Preferred Stock held
by Richard D. Irwin Revocable Living Trust dated January 4, 1995, 915.42
shares of Series 3 Preferred Stock held by Grumman Hill and shares
of Common Stock held by GHI. Mr. Irwin is President of Grumman Hill, the
general partner of GHI, and Mr. Irwin may be deemed a beneficial owner of
the shares owned by such entity.
(9) Such shares are held by Trust for the Riordan & McKinzie Profit Sharing and
Savings Plan for the benefit of Carl W. McKinzie.
54
<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of shares of
Common Stock, par value $.01 per share, and 100,000 shares of Preferred Stock,
par value $.01 per share (the "Preferred Stock"). The following summary of
certain provisions of the Common Stock and the Preferred Stock of IXC
Communications does not purport to be complete and is subject to, and qualified
in its entirety by, the Restated Certificate of Incorporation and Bylaws of IXC
Communications, which have been filed as Exhibits to the Registration Statement
of which this Prospectus is a part, and the provisions of applicable law.
COMMON STOCK
As of 1996, there were outstanding shares of
Common Stock held by approximately holders of record. Each holder of
Common Stock or Series 3 Preferred Stock (described below) is entitled to one
vote per share on all matters to be voted on by the stockholders, voting
together as a single class. Subject to the rights of the holders of the
Preferred Stock, each holder of Common Stock is entitled to receive ratably such
dividends as may be declared from time to time by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." In the event of the
liquidation, dissolution or winding up of IXC Communications, the holders of the
Common Stock are entitled to share ratably in all assets, if any, remaining,
after payment of liabilities, subject to the prior liquidation rights of holders
of the Preferred Stock described below. The Common Stock has no preemptive or
other similar rights, and there are no redemption or sinking fund provisions
applicable to the Common Stock. All of the outstanding shares of Common Stock
are, and the shares of Common Stock offered hereby will be, when issued and
delivered, validly issued, fully paid and non-assessable.
PREFERRED STOCK
IXC Communications has designated 2,000 shares of Preferred Stock as Series
1 Preferred Stock and 12,550 shares of Preferred Stock as Series 3 Preferred
Stock. All of the 12,550 shares of Series 3 Preferred Stock are issued and
outstanding, all of the previously outstanding shares of Series 1 Preferred
Stock have been redeemed and no other shares of Preferred Stock are outstanding.
The shares of Series 3 Preferred Stock were purchased upon the formation of IXC
Communications at a purchase price of $1.00 per share. The holders of Preferred
Stock, subject to the terms of the Restated Certificate of Incorporation, are
entitled to receive a liquidation preference of $1,000 per share, plus an amount
equal to all accrued and unpaid dividends and IXC Communications may voluntarily
redeem the Preferred Stock for $1,000 per share, plus an amount equal to all
accrued and unpaid dividends. In addition, the holders of Preferred Stock are
entitled to receive annual dividends, subject to the limitations of the Restated
Certificate of Incorporation and in the indenture relating to the Senior Notes,
in an amount equal to $100 per share, plus an amount determined by applying a
10% annual rate compounded annually, to any accrued but unpaid dividend amount
from the last day of the period when such dividend accrues to the actual date of
payment. Cumulative dividends, including accrued but unpaid interest, with
respect to the Series 3 Preferred Stock, as of March 31, 1996 were approximately
$5.2 million and as of December 31, 1996 will be $6.5 million, assuming that no
dividends are paid. The holders of the Series 3 Preferred Stock have the right
to elect one member of the Board of Directors.
The Board of Directors of IXC Communications has the authority to issue the
Preferred Stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, terms of redemption, redemption prices, liquidation
preferences, voting rights and the number of shares consisting of any series or
the designation of such series without further vote or action by the
stockholders. The issuance of Preferred Stock (or the ability of the Board of
Directors to issue Preferred Stock) may have the effect of delaying, deferring
or preventing a change in control of IXC Communications without further action
by the stockholders and may adversely affect the voting and other rights of the
holders of Common Stock. The issuance of Preferred Stock with voting or
conversion rights may adversely affect the voting power of the holders of Common
Stock. IXC Communications has no present intention to issue additional shares of
Preferred Stock.
55
<PAGE> 60
REGISTRATION RIGHTS
In August 1992, Telecom Services Group, Inc., a predecessor-in-interest to
IXC Communications ("TSGI"), granted certain registration rights under the
Securities Act to 20 former stockholders of TSGI, including GEPT, GHI, Mr.
Swett, Mr. Hinther, Mr. Fleming and Mr. Willingham. The registration rights
cover shares of Common Stock of the Company (the "Registrable
Securities"). Subject to certain limitations, if IXC Communications registers
any of its securities under the Securities Act, whether or not for sale for its
own account, the holders of such registration rights are entitled to written
notice of the registration and are entitled to include (at IXC Communications'
expense) such Registrable Securities in such registration. Such registration
rights have been waived in connection with this Offering. The holders of at
least 25% of the Registrable Securities also have the right to require IXC
Communications, at any time after 180 days following the effective date of IXC
Communications' last registration, to file a registration statement under the
Securities Act with respect to such Registrable Securities and IXC
Communications is required to use its best efforts to effect such registration,
subject to certain conditions and limitations; provided, however, that no
registration rights are exercisable prior to March 1, 1997. All fees, costs and
expenses of such registrations (other than underwriting discounts, commissions
and transfer taxes) will be borne by IXC Communications.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CHARTER, THE BYLAWS AND THE
INDENTURE
The Bylaws of IXC Communications provide that stockholders may call a
special meeting of stockholders only upon a request of stockholders owning at
least 50% of IXC Communications' outstanding capital stock entitled to vote. In
addition, in the event of a Change of Control (as such term is defined in the
indenture for the Senior Notes), holders of the Senior Notes will have the right
to require IXC Communications to purchase their Senior Notes, in whole or in
part, at a price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest, Additional Payments and Liquidated Damages (as such
terms are defined in the indenture for the Senior Notes), if any, to the date of
purchase. These provisions, as well as the authorized and unissued preferred
stock described above, could discourage potential acquisition proposals and
could delay or prevent a change in control or management of IXC Communications.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
IXC Communications is subject to Section 203 of the DGCL which, subject to
certain exceptions, prohibits a Delaware corporation from engaging in certain
"business combinations" with any "interested stockholder" for a period of three
years following the date that such stockholder became an interested stockholder,
unless the transaction is approved in a prescribed manner. The business
combinations to which Section 203 applies include a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholders. In
general, Section 203 defines an "interested stockholder" as a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the outstanding voting stock of the corporation.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is U.S. Stock
Transfer Corporation.
LISTING
Application has been made to list the Common Stock for quotation on the
Nasdaq National Market under the trading symbol "IIXC."
56
<PAGE> 61
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, IXC Communications will have a total of
shares of Common Stock outstanding. Of these shares, the
shares of Common Stock offered hereby ( shares if the U.S.
Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restriction or registration under the Securities Act if held
by persons other than "affiliates" of the Company, as defined under the
Securities Act. The remaining shares of Common Stock outstanding will
be "restricted securities" as that term is defined by Rule 144 promulgated under
the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) which has beneficially owned restricted securities
for at least two years, including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the number of shares
of Common Stock then outstanding (approximately shares upon completion
of this Offering) or the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. An affiliate of IXC Communications may sell securities that are
not restricted without regard to the period of beneficial ownership but subject
to the volume restrictions described above. Sales under Rule 144 are also
subject to certain manner-of-sale provisions and notice requirements, and to the
availability of current public information about IXC Communications. In
addition, a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least three years, would be entitled to sell
such shares under Rule 144(k) without regard to the requirements described
above.
Under Rule 144 (and subject to the conditions thereof), substantially all
of the restricted shares will become eligible for sale 90 days after
this Offering. However, of such shares are subject to lock-up
restrictions. Pursuant to these lock-up restrictions, certain of IXC
Communications' current stockholders, including its executive officers and
directors, have agreed that, subject to certain exceptions, they will not,
directly or indirectly, sell, offer or sell any shares of Common Stock without
the prior written consent of Morgan Stanley & Co. Incorporated, on behalf of the
Underwriters, for a period of 180 days from the date of this Prospectus. See
"Underwriters." Certain of the Company's existing stockholders have registration
rights with respect to their Common Stock. See "Description of Capital
Stock -- Registration Rights."
In addition, the Commission has published a notice of proposed rule making
which, if adopted as proposed, would shorten the applicable holding periods
under Rule 144(d) and Rule 144(k) to one and two years, respectively (from the
current periods of two and three years). IXC Communications cannot predict
whether such amendments will be adopted or the effect thereof on the trading
market for its Common Stock.
The preceding description does not include shares of Common Stock acquired
upon exercise of options under the 1994 Stock Plan or the 1996 Stock Plan. Rule
701 under the Securities Act provides that shares of Common Stock acquired on
the exercise of outstanding options may be resold by persons other than
affiliates, beginning 90 days after the date of this Prospectus, subject only to
the manner-of-sale provisions of Rule 144, and by affiliates beginning 90 days
after the date of this Prospectus, subject to all provisions of Rule 144 except
its two-year minimum holding period. As of the date of this Prospectus, IXC
Communications had reserved an aggregate of and shares of
Common Stock for issuance pursuant to the 1994 Stock Plan and the 1996 Stock
Plan, respectively, and options to purchase shares and no shares were
outstanding under the 1994 Stock Plan and the 1996 Stock Plan, respectively. As
soon as practicable following this Offering, IXC Communications intends to file
a registration statement under the Securities Act to register shares of Common
Stock reserved for issuance under the 1994 Stock Plan, thus permitting the
resale of such shares by non-affiliates upon issuance in the public market
without restriction under the Securities Act. Such registration statement will
automatically become effective immediately upon filing.
Prior to this Offering, there has been no public market for the Common
Stock and no prediction can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market
57
<PAGE> 62
price of the Common Stock and could impair IXC Communications' future ability to
raise capital through an offering of its equity securities.
DESCRIPTION OF CERTAIN INDEBTEDNESS
On October 5, 1995, IXC Communications issued and sold its Senior Notes in
the aggregate principal amount of $285.0 million to a group of institutional and
accredited investors. Of the approximately $268.8 million net proceeds of such
sale, IXC Communications placed $200.0 million into an escrow account to be used
for the Fiber Expansion, debt service of the Senior Notes and other capital
expenditures. The escrow agreement is an exhibit to the Registration Statement
of which this Prospectus is a part. As of April 30, 1996, approximately $158.5
million remained in such escrow account. On April 1, 1996, IXC Communications
filed a Registration Statement on Form S-4 with the Commission relating to the
exchange by IXC Communications in connection with the Senior Notes as required
by a registration rights agreement among IXC Communications and the initial
purchasers named therein. The indenture for the Senior Notes contains certain
covenants that, among other things, limit the ability of IXC Communications and
certain of its subsidiaries (the "Restricted Subsidiaries") to incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase Equity Interests (as defined in the indenture for the
Senior Notes) or subordinated indebtedness, create certain liens, enter into
certain transactions with affiliates, sell assets of IXC Communications or its
Restricted Subsidiaries, issue or sell Equity Interests of IXC Communications'
Restricted Subsidiaries or enter into certain mergers and consolidations. In
addition, under certain limited circumstances, IXC Communications will be
required to offer to purchase Senior Notes at a price equal to 100% of the
principal amount thereof plus accrued and unpaid interest, Additional Payments
and Liquidated Damages, if any, to the date of purchase, with the excess
proceeds of certain Asset Sales (as defined in the indenture for the Senior
Notes). In the event of a Change of Control, holders of the Senior Notes will
have the right to require IXC Communications to purchase their Senior Notes, in
whole or in part, at a price equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, Additional Payments and Liquidated
Damages, if any, to the date of purchase. The indenture relating to the Senior
Notes is an exhibit to the Registration Statement of which this Prospectus is a
part.
In addition, the Company may seek to obtain a revolving credit facility
under which it will be able to borrow up to a certain percentage of the amount
of qualifying accounts receivable of its subsidiaries. The indenture for the
Senior Notes limits the Company from borrowing under such facility in excess of
85% of the amount of such qualifying accounts receivable. The Company
anticipates that its obligations under such revolving credit facility, if it is
obtained, will be secured by intercompany notes from the subsidiaries owning the
accounts receivable, which notes will in turn be secured by such accounts
receivable. As of December 31, 1995, the Company's accounts receivable were
approximately $5.6 million.
58
<PAGE> 63
UNDERWRITERS
Under the terms and subject to the conditions of the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement") the U.S. Underwriters named
below for whom Morgan Stanley & Co. Incorporated, CS First Boston Corporation
and Dillon, Read & Co. Inc. are acting as U.S. Representatives, and the
International Underwriters for whom Morgan Stanley & Co. International Limited,
CS First Boston Limited and Dillon, Read & Co. Inc. are acting as International
Representatives, have severally agreed to purchase, and IXC Communications has
agreed to sell to them severally, the respective number of shares of Common
Stock set forth opposite the names of each Underwriter below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated.......................................
CS First Boston Corporation.............................................
Dillon, Read & Co. Inc..................................................
---------
Subtotal........................................................
---------
International Underwriters:
Morgan Stanley & Co. International Limited..............................
CS First Boston Limited.................................................
Dillon, Read & Co. Inc. ................................................
---------
Subtotal........................................................
---------
Total......................................................
========
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives are collectively referred
to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the Underwriters to pay
for and accept delivery of the shares of Common Stock offered hereby are subject
to the approval of certain legal matters by their counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all of the shares
of Common Stock offered hereby (other than those covered by the U.S.
Underwriters' over-allotment option described below) if any such shares are
taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (a)
it is not purchasing any U.S. Shares (as defined herein) for the account of
anyone other than a United States or Canadian Person (as defined herein) and (b)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any U.S. Shares or distribute any prospectus relating to the U.S. Shares outside
of the United States or Canada or to anyone other than a United States or
Canadian Person. Pursuant to the Agreement between U.S. and International
Underwriters, each International Underwriter has represented and agreed that,
with certain exceptions: (i) it is not purchasing any International Shares (as
defined herein) for the account of any United States or Canadian Person and (ii)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any International Shares or distribute any prospectus relating to the
International Shares in the United States or in any province or territory of
Canada or to any United States or Canadian Person. The foregoing limitations do
not apply to stabilization transactions or to certain other transactions
specified in the Agreement between U.S. and International Underwriters. As used
herein, "United States or Canadian Person" means any national or
59
<PAGE> 64
resident of the United States or of any province or territory of Canada, or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States and Canada of any
United States or Canadian Person) and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian Person. All
shares of Common Stock to be purchased by the U.S. Underwriters and the
International Underwriters are referred to herein as the "U.S. Shares" and the
"International Shares," respectively.
Pursuant to the Agreement between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of shares of Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price of any
shares sold shall be the Price to Public set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of Common Stock, directly or indirectly, in any
province or territory of Canada in contravention of the securities laws thereof
and has represented that any offer of Common Stock in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
shares of Common Stock a notice stating in substance that, by purchasing such
Common Stock, such dealer represents and agrees that it has not offered or sold,
and will not offer or sell, directly or indirectly, any of such Common Stock in
any province or territory of Canada or to, or for the benefit of, any resident
of any province or territory of Canada in contravention of the securities laws
thereof and that any offer of Common stock in Canada will be made only pursuant
to an exemption from the requirement to file a prospectus in the province or
territory of Canada in which such offer is made, and that such dealer will
deliver to any other dealer to whom it sells any of such Common Stock a notice
to the foregoing effect.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and during the period of six months after the date hereof will not offer
to sell any shares of Common Stock to persons in the United Kingdom except to
persons whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purposes of their
business or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995 (the "U.K. Regulations"); (ii) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the U.K. Regulations with respect to anything done by it
in relation to the shares of Common Stock offered hereby in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and will
only issue or pass on to any person in the Untied Kingdom any document received
by it in connection with the issue of the shares of Common Stock, other than any
document which consists of, or is a part of, listing particulars, supplementary
listing particulars or any other document required or permitted to be published
by listing rules under Article IV of the Financial Services Act 1986, if that
person is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1995, or is a person to whom
the document may otherwise lawfully be issued or passed on.
The Underwriters initially propose to offer the shares of Common Stock
directly to the public at the Price to Public set forth on the cover page of
this Prospectus and part to certain dealers at a price that represents a
concession of not in excess of $ per share under the Price to Public.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to other Underwriters or to certain dealers.
After the initial offering of the shares of Common Stock, the offering price and
other selling terms may from time to time be varied by the Representatives.
Pursuant to the Underwriting Agreement, IXC Communications has granted to
the U.S. Underwriters, an option exercisable for 30 days after the date of this
Prospectus, to purchase up to additional shares of Common Stock at the
Price to Public set forth on the cover page hereof, less underwriting discounts
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<PAGE> 65
and commissions. To the extent such option is exercised, each U.S. Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares of Common Stock as the number set
forth next to such U.S. Underwriter's name in the preceding table bears to the
total number of shares of U.S. Shares offered by the U.S. Underwriters hereby.
IXC Communications and each of the executive officers and directors of IXC
Communications, GHI, certain trusts and partnerships and GEPT have agreed that
without the prior written consent of Morgan Stanley & Co. Incorporated on behalf
of the Underwriters, it will not (A) register for sale, issue, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (B) enter into any swap or other agreement that transfers, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (A) or (B) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise for a period of 180 days after the date of this Prospectus, other than
(A) the shares of Common Stock to be sold hereunder, (B) any shares of Common
Stock issued by the Company upon the exercise of an option issued pursuant to
the Company's 1994 Stock Plan or 1996 Stock Plan and (C) the issuance of
additional options to purchase shares of Common Stock pursuant to the Company's
1994 Stock Plan or 1996 Stock Plan. See "Shares Eligible for Future Sale."
IXC Communications has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act.
The Underwriters have informed IXC Communications that they do not intend
sales to discretionary accounts to exceed 5% of the total number of shares of
Common Stock offered by them.
Dillon, Read & Co. Inc. and CS First Boston Corporation acted as the
initial purchasers of the Senior Notes and received customary compensation in
connection therewith.
At the Company's request, the Underwriters have reserved for sale up to
shares of the Common Stock offered hereby, at the Price to Public, to
certain persons designated by the Company. Such shares generally will be
eligible for immediate resale. The number of shares of Common Stock for sale to
the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same basis as the other shares offered
hereby.
PRICING OF THE OFFERING
Prior to this Offering, there has been no public market for the Common
Stock of IXC Communications. The initial public offering price will be
determined by negotiations between IXC Communications and the Representatives.
Among the factors considered in determining the initial public offering price
will be the future prospects of the Company and its industry in general, sales,
earnings and certain other financial and operating information of the Company in
recent periods, and certain ratios and market prices of securities and certain
financial and operating information of companies engaged in activities similar
to those of the Company. The estimated initial public offering price range set
forth on the cover page of this Preliminary Prospectus is subject to change as a
result of market conditions and other factors.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for IXC Communications by Riordan & McKinzie. Certain legal matters
in connection with the Common Stock offered hereby will be passed upon for the
Underwriters by Shearman & Sterling. Carl W. McKinzie, a director and
stockholder of IXC Communications, is a stockholder of Riordan & McKinzie. IXC
Communications has granted an option covering shares of Common Stock to another
stockholder of Riordan & McKinzie.
61
<PAGE> 66
EXPERTS
The consolidated financial statements of IXC Communications at December 31,
1994 and 1995, and for each of the three years in the period ended December 31,
1995, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
IXC Communications has filed with the Commission a Registration Statement
on Form S-1 under the Securities Act for the registration of the Common Stock
offered hereby. As permitted by the rules and regulations of the Commission,
this Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. For further information with
respect to IXC Communications and the Common Stock offered hereby, reference is
made to the Registration Statement and to the exhibits thereto. Statements
contained in this Prospectus concerning the contents of any contract or other
document are not necessarily complete. With respect to each such contract or
other document that is an exhibit to the Registration Statement, reference is
made to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such reference.
IXC Communications has also filed with the Commission a Registration
Statement on Form S-4 under the Securities Act relating to an exchange of
12 1/2% Series A Senior Notes due 2005 for 12 1/2% Series B Senior Notes due
2005 pursuant to the indenture for the Senior Notes.
Such Registration Statements, the exhibits and schedules forming a part
thereof and the reports and other information filed by IXC Communications with
the Commission in accordance with the Exchange Act may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be
available for inspection and copying at the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material may also be obtained upon written request from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.
Following the offerings covered by such Registration Statements, IXC
Communications will comply with the information and reporting requirements of
the Securities Exchange Act of 1934, as amended, and, in accordance therewith
will file periodic reports, proxy statements and other information with the
Commission.
62
<PAGE> 67
GLOSSARY
Access charges -- The fees paid by long distance carriers to LECs for
originating and terminating long distance calls on their local networks.
ALC -- ALC Communications Corporation.
Allnet -- Allnet Communications Services, Inc.
ATM (asynchronous transfer mode) -- An information transfer standard that
is one of a general class of technologies that relay traffic by way of an
address contained within the first five bytes of a standard 53-byte-long packet
or cell. The ATM format can be used by many different information systems,
including local area networks, to deliver traffic at varying rates, permitting a
mix of voice, video and data (multimedia).
AT&T -- AT&T Corp.
Backbone -- The through-portions of a transmission network, as opposed to
spurs which branch off the through-portions.
Bandwidth -- The range of frequencies that can be transmitted through a
medium, such as glass fibers, without distortion. The greater the bandwidth, the
greater the information-carrying capacity of such medium.
Capacity-intensive -- Refers to products which use comparatively large
amounts of bandwidth.
Broadband -- Broadband communications systems can transmit large quantities
of voice, data and video. Examples of broadband communication systems include
DS-3 fiber optic systems, which can transmit 672 simultaneous voice
conversations, or a broadcast television station signal, that transmits high
resolution audio and video signals into the home. Broadband connectivity is also
an essential element for interactive multimedia applications.
Cable & Wireless -- Cable & Wireless, Inc.
CAP (Competitive Access Provider) -- A company that provides its customers
with an alternative to the LEC for local transport of private line, special
access and interstate transport of switched access telecommunications service.
Carriers -- Companies that provide telecommunications transmission
services.
Central Offices -- The switching centers or central switching facilities of
the LECs.
Dedicated -- Refers to telecommunications lines dedicated or reserved for
use by particular customers along predetermined routes.
Digital -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies (both
fiber and microwave) employ a sequence of these pulses to represent information
as opposed to the continuously variable analog signal. The precise digital
numbers minimize distortion (such as graininess or snow in the case of video
transmission, or static or other background distortion in the case of audio
transmission).
DS-1, DS-3 -- Standard telecommunications industry digital signal formats,
which are distinguishable by bit rate (the number of binary digits (0 and 1)
transmitted per second). DS-0 service has a bit rate of 64 kilobits per second
and can transmit only one voice conversation at a time. DS-1 service has a bit
rate of 1.544 megabits per second and can transmit 24 simultaneous voice
conversations. DS-3 service has a bit rate of 45 megabits per second and can
transmit 672 simultaneous voice conversations.
DS-3 miles -- A measure of the total capacity and length of a transmission
path, calculated as the capacity of the transmission path in DS-3s multiplied by
the length of the path in miles.
800/888 Service -- A telecommunications service for businesses that allows
calls to be made to a specific location at no charge to the calling party. Use
of the "800" or "888" service code denotes calls that are to be
A-1
<PAGE> 68
billed to the receiving party. A computer database in the provider's network
translates the 800 or 888 number into a conventional telephone number.
Enhanced data services -- Products and services designed for the transport
and delivery of integrated information to include voice, data and video and any
combination thereof.
Excel -- EXCEL Telecommunications, Inc.
Facilities-based carrier -- Carriers who own transmission facilities.
FCC -- Federal Communications Commission.
Frame Relay -- A high-speed, data-packet switching service used to transmit
data between computers. Frame Relay supports data units of variable lengths at
access speeds ranging from 56 kilobits per second to 1.5 megabits per second.
This service is well-suited for connecting local area networks, but is not
appropriate for voice and video applications due to the variable delays which
can occur. Frame Relay was designed to operate at high speeds on modern fiber
optic networks.
Frontier -- Frontier Corporation.
GAAP -- Generally Accepted Accounting Principles
GE Capital Communication -- GE Capital Communication Services Corporation.
GTE -- GTE Corporation.
ISDN (Integrated Services Digital Network) -- A complex networking concept
designed to provide a variety of voice, data and digital interface standards.
Incorporated into ISDN are many new enhanced services, such as high-speed data
file transfer, desktop video conferencing, telepublishing, telecommuting,
telepresence learning-remote collaboration, data network linking and home
information services.
Hubs -- Collection centers located centrally in an area where
telecommunications traffic can be aggregated for transport and distribution.
Interexchange Carrier -- A company providing inter-LATA or long distance
services between LATAs on an intrastate or interstate basis.
Inter-LATA -- InterLATA calls are calls that pass from one LATA to another.
Typically, these calls are referred to as long distance calls.
Intra-LATA -- IntraLATA calls are those local calls that originate and
terminate within the same LATA.
Kilobit -- One thousand bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "kilobits per
second."
LATAs (local access and transport areas) -- The approximately 200
geographic areas that define the areas between which the RBOCs were prohibited
from providing long distance services prior to the Telecommunications Act.
LCI -- LCI International, Inc.
LEC (local exchange carrier) -- A company providing local telephone
services.
Local loop -- A circuit within a LATA.
Long-Haul Circuit -- A private, dedicated telecommunications circuit
between locations in different LATAs.
MCI -- MCI Communications Corporation.
A-2
<PAGE> 69
Megabit -- One million bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "megabits per
second."
MOU -- Minutes of use of long distance service.
Off-net -- Refers to circuits on transmission facilities not owned by the
Company.
On-net -- Refers to circuits on transmission facilities owned by the
Company.
Optronic -- a combination of optical and electronic equipment.
RBOCs (regional Bell operating companies) -- The seven local telephone
companies (formerly part of AT&T) established by court decree in 1982.
Rockwell International -- Rockwell International Corp.
Route Miles -- The measure of the length of a transmission path in miles.
SONET (synchronous optical network technology) -- An electronics and
network architecture for variable-bandwidth products which enables transmission
of voice, video and data (multimedia) at very high speeds.
Sprint -- Sprint Corporation.
Switch -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
Switched long distance services -- Telecommunications services such as
residential long distance services that are processed through digital switches
and delivered over long-haul circuits and other transmission facilities.
WilTel -- WilTel Network Services, Inc.
WorldCom -- WorldCom, Inc.
A-3
<PAGE> 70
IXC COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1995................................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors........................................................ F-3
Consolidated Balance Sheets as of December 31, 1994 and 1995 and as of March 31, 1996
(unaudited)......................................................................... F-4
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and
1995 and for the three months ended March 31, 1995 and 1996 (unaudited)............. F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1993, 1994 and 1995 and for the three months ended March 31, 1996
(unaudited)......................................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and for the three months ended March 31, 1995 and 1996 (unaudited)............. F-7
Notes to Consolidated Financial Statements............................................ F-9
</TABLE>
F-1
<PAGE> 71
IXC COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
Effective January 1, 1996, IXC Communications, Inc. acquired the minority
interest of Switched Services Communications, L.L.C. ("SSC") previously owned by
Excel Telecommunications, Inc. The acquisition has been accounted for using the
purchase method of accounting for business combinations.
The unaudited pro forma condensed consolidated statement of operations of
IXC Communications, Inc. ("IXC" or the "Company") for the year ended December
31, 1995 reflects the acquisition by the Company of the minority interest of SSC
as if the acquisition had occurred on January 1, 1995.
The unaudited pro forma condensed consolidated statement of operations
should be read in conjunction with the historical financial statements of IXC,
related notes to financial statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus. The pro forma information is not necessarily indicative of the
results that would have resulted had the acquisition of the minority interest of
SSC actually occurred on the dates assumed herein, nor is the pro forma
information indicative of the future results of IXC and its consolidated
subsidiaries.
<TABLE>
<CAPTION>
IXC IXC
HISTORICAL PRO FORMA
---------- ADJUSTMENTS ---------
-----------
(NOTE 1)
<S> <C> <C> <C>
Net operating revenues.................................. $ 91,001 -- $ 91,001
Operating expenses...................................... 89,572 $ 1,117(a) 90,689
-------- ------- --------
1,429 (1,117) 312
Interest income......................................... 3,020 -- 3,020
Interest expense........................................ (14,597) -- (14,597)
Equity in net income of unconsolidated subsidiaries..... 19 -- 19
Minority interest....................................... 5,218 (5,450)(b) (232)
-------- ------- --------
Loss before income taxes and extraordinary item......... (4,911) (6,567) (11,478)
Income tax benefit...................................... 1,693 2,180(c) 3,873
-------- ------- --------
Loss before extraordinary item.......................... (3,218) (4,387) (7,605)
Extraordinary loss on early extinguishment of debt,
net................................................... (1,747) -- (1,747)
-------- ------- --------
Net loss................................................ (4,965) (4,387) (9,352)
Dividends applicable to preferred stock................. (1,843) -- (1,843)
-------- ------- --------
Net loss applicable to common shareholders.............. $ (6,808) $(4,387) $ (11,195)
======== ======= ========
</TABLE>
NOTE 1 -- PRO FORMA ADJUSTMENTS
The following pro forma adjustments reflect the impact of purchase
accounting related to the acquisition of the minority interest of SSC, as if it
had been acquired on January 1, 1995 (in thousands):
<TABLE>
<S> <C>
Amortization of goodwill............................................... $ 1,117(a)
Elimination of minority interest in net loss of SSC.................... $ 5,450(b)
Tax benefit of additional net losses of SSC (at 40%)................... $ 2,180(c)
</TABLE>
F-2
<PAGE> 72
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
IXC Communications, Inc.
We have audited the accompanying consolidated balance sheets of IXC
Communications, Inc. and its subsidiaries as of December 31, 1994 and 1995, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IXC
Communications, Inc. and its subsidiaries at December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Austin, Texas
March 1, 1996
F-3
<PAGE> 73
IXC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 6,048 $ 6,915 $ 5,492
Accounts receivable:
Trade, net of allowance for doubtful accounts of $762 in 1994, $1,769 in
1995 and $1,490 in 1996................................................... 3,421 5,537 6,213
Note receivable -- related party........................................... -- 238 227
Other...................................................................... 295 544 531
-------- -------- --------
3,716 6,319 6,971
Income tax receivable........................................................ -- 1,296 381
Net current deferred tax asset (Note 10)..................................... 118 450 450
Prepaid expenses............................................................. 1,038 1,069 1,689
-------- -------- --------
Total current assets....................................................... 10,920 16,049 14,983
Property and equipment:
Land......................................................................... 2,284 2,344 2,344
Buildings and improvements................................................... 896 5,167 5,424
Transmission system.......................................................... 108,564 138,659 150,996
Construction in progress..................................................... 5,943 5,658 14,094
-------- -------- --------
117,687 151,828 172,858
Less: accumulated depreciation............................................... (28,822) (45,429) (50,696)
-------- -------- --------
88,865 106,399 122,162
Prepaid contract costs (Note 11)............................................... 1,399 989 887
Escrow under Senior Notes (Note 3)............................................. -- 198,266 187,584
Deferred charges and other assets.............................................. 4,225 14,772 20,851
-------- -------- --------
Total assets.......................................................... $105,409 $336,475 $ 346,467
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable -- trade.................................................... $ 1,596 $ 6,792 $ 8,232
Accrued taxes................................................................ 3,864 2,924 3,138
Unearned income.............................................................. 988 1,693 1,859
Accrued interest............................................................. 76 8,748 18,010
Current portion of long-term debt -- related parties (Note 4)................ 6,850 1,371 1,394
Current portion of long-term debt and lease obligations (Notes 4 and 5)...... 11,688 3,163 9,032
Other current liabilities.................................................... 1,757 941 788
-------- -------- --------
Total current liabilities.................................................. 26,819 25,632 42,453
Long-term debt -- related parties, less current portion (Note 4)............... 24,653 6,446 6,164
Long-term debt and lease obligations, less current portion (Notes 4 and 5)..... 25,933 287,814 294,741
Net noncurrent deferred tax liability (Note 10)................................ 9,818 8,303 6,949
Other noncurrent liabilities................................................... 2,429 469 621
Commitments and contingencies (Notes 5, 6, 9 and 14)
Minority interest.............................................................. 168 953 380
Preferred stock of consolidated subsidiary held by minority interests (Note
6)........................................................................... 1,400 -- --
Stockholders' equity (deficit) (Note 6):
Preferred stock; 100,000 shares authorized:
10% Senior Series 1 cumulative preferred stock, $.01 par value; 1,460
shares issued and outstanding in 1994, none in 1995 and 1996.............. 1,460 -- --
10% Junior Series 3 cumulative preferred stock, $.01 par value; 12,550
shares issued and outstanding in 1994, 1995 and 1996 (aggregate
liquidation preference of $17,326 at December 31, 1995 and $17,754 at
March 31, 1996)........................................................... 13 13 13
Common Stock, $.01 par value; 15,000,000 shares authorized; 10,035,584 shares
issued and outstanding in 1994, 1995 and 1996.............................. 100 100 100
Additional paid-in capital................................................... 29,573 29,573 29,573
Accumulated deficit.......................................................... (16,957) (22,828) (34,527)
-------- -------- --------
Total stockholders' equity (deficit)......................................... 14,189 6,858 (4,841)
-------- -------- --------
Total liabilities and stockholders' equity (deficit).................. $105,409 $336,475 $ 346,467
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 74
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
--------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net operating revenues (Note 11)....... $ 71,123 $ 80,663 $ 91,001 $ 21,766 $ 26,250
Operating expenses:
Cost of services..................... 37,823 33,896 39,852 8,175 15,600
Operations and administration........ 22,835 20,561 32,282 6,256 10,417
Depreciation and amortization........ 21,061 12,121 17,438 3,619 6,010
---------- ----------- ----------- ----------- -----------
(10,596) 14,085 1,429 3,716 (5,777)
Interest income........................ 215 211 468 111 126
Interest income on escrow under Senior
Notes................................ -- -- 2,552 -- 2,557
Interest expense -- related parties.... (1,026) (2,649) (2,468) (792) (149)
Interest expense -- other.............. (3,917) (3,456) (12,129) (1,081) (9,721)
Contract settlement costs.............. (59) -- -- -- --
Write-down of property and equipment
(Note 8)............................. (37,960) -- -- -- --
Equity in net income (loss) of
unconsolidated subsidiaries.......... -- (94) 19 (4) (5)
---------- ----------- ----------- ----------- -----------
Income (loss) before (provision)
benefit for income taxes and minority
interest and extraordinary items..... (53,343) 8,097 (10,129) 1,950 (12,969)
Benefit (provision) for income taxes
(Note 10)............................ 21,977 (3,157) 1,693 (966) 1,363
Minority interest...................... (446) 77 5,218 283 (93)
---------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary
items................................ (31,812) 5,017 (3,218) 1,267 (11,699)
Extraordinary items:
Extraordinary gain (loss) on early
extinguishment of debt, less
applicable (provision) benefit for
income taxes of ($1,472) in 1994
and $1,164 in 1995 (Note 4)....... -- 2,298 (1,747) -- --
Extraordinary gain on forgiveness of
deferred lease obligations, less
applicable income taxes of $5,848
(Note 5).......................... 8,495 -- -- -- --
---------- ----------- ----------- ----------- -----------
Net income (loss)...................... (23,317) 7,315 (4,965) 1,267 (11,699)
Dividends applicable to preferred
stock................................ 1,567 1,752 1,843 479 433
---------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common
stockholders......................... $ (24,884) $ 5,563 $ (6,808) $ 788 $ (12,132)
========== =========== =========== =========== ===========
Income (loss) per common share:
Before extraordinary items........... $ (3.36) $ .32 $ (.48) $ .08 $ (1.17)
Extraordinary gain (loss)............ .86 .22 (.17) -- --
---------- ----------- ----------- ----------- -----------
Net income (loss).................... $ (2.50) $ .54 $ (.65) $ .08 $ (1.17)
========== =========== =========== =========== ===========
Weighted average common shares......... 9,965,519 10,372,054 10,428,315 10,369,297 10,286,051
========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 75
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
10% SENIOR SERIES 1 10% JUNIOR 3
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
------------------- ------------------- ------------------ ADDITIONAL
NUMBER OF NUMBER OF NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------ --------- ------- --------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992..................... 9,062,000 $ 91 1,300 $ 1,300 12,550 $ 13 $ 29,579 $ (955) $ 30,028
Issuance of preferred
stock.................. -- -- 160 160 -- -- -- -- 160
Issuance of common
stock.................. 948,558 9 -- -- -- -- (9) -- --
Net loss................. -- -- -- -- -- -- -- (23,317) (23,317)
---------- ---- ------- ------- ------- ---- ------- --------- ---------
Balance at December 31,
1993..................... 10,010,558 100 1,460 1,460 12,550 13 29,570 (24,272) 6,871
Issuance of common
stock.................. 25,026 -- -- -- -- -- 3 -- 3
Net income............... -- -- -- -- -- -- -- 7,315 7,315
---------- ---- ------- ------- ------- ---- ------- --------- ---------
Balance at December 31,
1994..................... 10,035,584 100 1,460 1,460 12,550 13 29,573 (16,957) 14,189
Redemption of preferred
stock.................. -- -- (1,460) (1,460) -- -- -- -- (1,460)
Net income............... -- -- -- -- -- -- -- (4,965) (4,965)
Dividends
paid -- preferred
stock -- 10% Senior
Series 1............... -- -- -- -- -- -- -- (505) (505)
Dividends
paid -- preferred stock
of consolidated
subsidiary............. -- -- -- -- -- -- -- (401) (401)
---------- ---- ------- ------- ------- ---- ------- --------- ---------
Balance at December 31,
1995..................... 10,035,584 100 -- -- 12,550 13 29,573 (22,828) 6,858
Net loss (unaudited)..... -- -- -- -- -- -- -- (11,699) (11,699)
---------- ---- ------- ------- ------- ---- ------- --------- ---------
Balance at March 31, 1996
(unaudited).............. 10,035,584 $100 -- $ -- 12,550 $ 13 $ 29,573 $ (34,527) $ (4,841)
========== ==== ======= ======= ======= ==== ======= ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 76
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- --------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)............................. $(23,317) $ 7,315 $ (4,965) $ 1,267 $(11,699)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation................................ 20,651 11,131 16,608 3,444 5,267
Amortization................................ 410 990 830 175 743
Amortization of debt issue costs and Senior
Note discount............................ 130 472 858 215 361
Interest income on escrow under Senior
Notes.................................... -- -- (2,552) -- (2,557)
Provision for doubtful accounts............. 447 1,565 1,505 150 176
Equity in net (income) loss of
unconsolidated subsidiaries.............. -- 94 (19) 4 5
Minority interest in net income (loss) of
subsidiaries............................. 446 (77) (5,218) (283) 93
Extraordinary (gain) loss on early
extinguishment of debt................... -- (3,770) 2,911 -- --
Gain on sale of property and equipment...... (330) (90) -- -- --
Write-down of property and equipment........ 37,960 -- -- -- --
Extraordinary gain on forgiveness of
deferred lease obligations............... (14,343) -- -- -- --
Deferred operating lease costs.............. 8,910 -- -- -- --
Changes in assets and liabilities, net of
effects of acquisitions:
Decrease (increase) in accounts
receivable............................. (206) (1,000) (4,108) (17) (828)
Decrease (increase) in other current
assets................................. 1,349 141 (1,466) 38 391
Increase (decrease) in accounts
payable................................ 2,777 (4,619) 5,196 (152) 1,440
Increase (decrease) in accrued taxes,
unearned income, accrued interest and
other current liabilities.............. (712) 139 7,503 (3) 9,368
Increase (decrease) in deferred income
taxes.................................. (17,227) 2,847 (1,847) 65 (1,354)
Decrease in other assets................. (2,045) (854) (4,092) (338) (1,186)
Increase (decrease) in noncurrent other
liabilities............................ 587 (752) (2,089) 689 226
-------- -------- -------- ------- --------
Total adjustments................... 38,804 6,217 14,020 3,987 12,145
-------- -------- -------- ------- --------
Net cash provided by operating activities..... 15,487 13,532 9,055 5,254 446
</TABLE>
F-7
<PAGE> 77
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- --------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM INVESTING ACTIVITIES:
Release of funds from escrow under Senior
Notes....................................... -- -- 4,300 -- 13,225
Purchase of restricted short-term
investments................................. -- -- (200,000) -- --
Purchase of property and equipment............ (27,008) (7,087) (23,670) (2,571) (13,564)
Sale of property and equipment................ 49 235 -- -- --
Payments for businesses acquired, net of cash
received.................................... (14,025) (11,976) -- -- --
-------- -------- -------- ------- --------
Net cash used in investing activities......... (40,984) (18,828) (219,370) (2,571) (339)
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Senior Notes,
net of discount............................. $ -- $ -- $ 277,148 $ -- $ --
Capital contribution in subsidiary by minority
shareholders................................ -- -- 6,002 490 --
Proceeds from long-term debt.................. 50,671 12,999 18,695 692 --
Payments on long-term debt and lease
obligations................................. (19,990) (7,837) (76,490) (3,620) (1,359)
Payments from (to) escrow..................... (1,500) 1,500 -- -- --
Payment of debt issue costs................... (1,760) (1,551) (10,407) -- (171)
Redemption of preferred stock................. -- -- (1,460) -- --
Redemption of preferred stock of consolidated
subsidiary held by minority interests....... -- -- (1,400) -- --
Dividend payments............................. -- -- (906) -- --
Issuance of common stock...................... -- 3 -- -- --
Proceeds from sale of preferred stock......... 160 -- -- -- --
Proceeds from sale of preferred stock of
subsidiary.................................. 1,400 -- -- -- --
-------- -------- -------- ------- --------
Net cash provided by (used in) financing
activities.................................. 28,981 5,114 211,182 (2,438) (1,530)
-------- -------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents................................. 3,484 (182) 867 245 (1,423)
Cash and cash equivalents at beginning of
period...................................... 2,746 6,230 6,048 6,048 6,915
-------- -------- -------- ------- --------
Cash and cash equivalents at end of period.... $ 6,230 $ 6,048 $ 6,915 $ 6,293 $ 5,492
======== ======== ======== ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid (received) for:
Income taxes............................. $ (746) $ 891 $ 1,240 $ 293 $ (908)
======== ======== ======== ======= ========
Interest................................. $ 1,683 $ 4,496 $ 4,955 $ 890 $ 304
======== ======== ======== ======= ========
</TABLE>
See accompanying notes.
F-8
<PAGE> 78
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND ACQUISITIONS
IXC Communications, Inc. ("IXC" or the "Company") is an Austin, Texas based
supplier of telecommunications services. IXC provides two basic products to
other long distance carriers: (i) long-haul voice and data circuits and (ii)
switched long distance services. Consistent with industry practice, the Company
considers itself to be operating in one business segment.
IXC, a Delaware corporation, was incorporated in 1992 and began operations
by acquiring 50% of the outstanding common stock of Electra Communications
Holding Corporation ("ECHC") which owned Electra Communication Corporation
("ECC"). ECC owned and operated a regional fiber optic transmission system in
Texas. ECHC became a wholly-owned subsidiary of IXC in 1993, when ECHC redeemed
all its outstanding stock not held by IXC.
Also during 1992 and 1993, the stockholders of IXC formed Telecom Services
Group, Inc. ("TSGI") and I-Link Communications Inc. ("ILCI").
TSGI acquired Communications Transmission Group, Inc. ("CTGI") from
Communications Transmission, Inc. ("CTI") in 1992. CTI was controlled by a
majority of the same shareholders as that of TSGI; therefore, the acquisition of
CTGI was a transaction among entities under common control and was accounted for
in a manner similar to the pooling of interests method.
ILCI acquired I-Link Holdings, Inc. ("ILHI") in 1993. The transaction was
accounted for in a manner similar to the pooling of interests method of
accounting as both entities were under common ownership by the same shareholder
group.
Effective February 22, 1994, TSGI and ILCI became wholly-owned subsidiaries
of IXC through a stock-for-stock merger, whereby IXC issued common and
redeemable preferred stock in exchange for all of the outstanding common and
preferred stock of TSGI and ILCI. IXC, TSGI and ILCI were controlled by the same
shareholder group, therefore the assets and liabilities acquired from the
controlling shareholders were recorded at their historical cost. The minority
interest acquired was recorded at fair value. The accompanying consolidated
financial statements of IXC have been restated to include the accounts and
operations of TSGI and ILCI since their acquisitions from third parties and the
elimination of all intercompany accounts and transactions.
On August 5, 1994, IXC, through its newly formed majority-owned (85%)
subsidiary, Mutual Signal Holding Corporation ("MSHC"), acquired MSM Associates,
Limited Partnership ("MSM"). MSHC purchased all of the issued and outstanding
common stock of Mutual Signal Corporation ("MSC"), the sole general partner of
MSM, for $1,050,000 and all of the outstanding limited partnership units of MSM
from the sole limited partner for $450,000. The acquisition was accounted for as
a purchase. Accordingly, the assets and liabilities of MSM at the date of
acquisition were adjusted to reflect the purchase price, using an allocation
based upon the fair values of the acquired assets. The operating results of MSM
have been included in the consolidated financial statements from the date of
acquisition. The owner of the remaining 15% minority interest of MSHC, Frontier
Corporation ("Frontier"), is a customer of IXC. Frontier, which is considered a
related party because of its miniority interest in MSHC, generated revenue to
IXC of $16.9 million in 1993, $18.7 million in 1994 and $19.1 million in 1995.
F-9
<PAGE> 79
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited pro forma results for 1993 and 1994 assuming the acquisitions of
MSC and MSM occurred as of January 1, 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994
-------- -------
<S> <C> <C>
Operating revenues...................................... $ 77,727 $82,290
Income (loss) before extraordinary items................ $(30,142) $ 5,574
Net income (loss)....................................... $(21,647) $ 7,872
Earnings (loss) per common share before extraordinary
items................................................. $ (2.19) $ 0.77
</TABLE>
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the acquisition been consummated as of the above dates, nor are
they necessarily indicative of future operations.
On September 15, 1994, IXC formed IXC Long Distance, Inc. Together with
Excel Telecommunications, Inc. ("Excel"), IXC Long Distance, Inc. then formed
Switched Services Communications, L.L.C. ("SSC") on September 19, 1994 for the
purpose of owning and operating a nationwide long distance switch network. As of
December 31, 1995 IXC Long Distance, Inc. owned a majority interest of SSC which
is consolidated as a majority-owned subsidiary.
Effective January 1, 1996, IXC Long Distance, Inc. entered into an
agreement with Excel to acquire its minority interest in SSC for $6.2 million.
In connection with the purchase agreement, Excel executed a second amended and
restated Service Agreement with SSC, requiring Excel to purchase certain minimum
communications services from SSC. (See Note 17)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of IXC include the accounts of IXC
and its wholly-owned and majority-owned subsidiaries. All minority owned
subsidiaries are accounted for by the equity method. Significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
Revenues
Long-haul voice and data circuit revenues are primarily generated from
providing capacity on the Company's fiber optic and microwave transmission
network at rates established under long-term contractual arrangements. Revenues
are recognized as services are provided.
Switched long-distance service revenues are primarily generated by
providing voice and data communications. Customers are billed on monthly cycle
dates. Revenues are recognized as services are provided.
The Company accounts for exchange agreements with other carriers by
recognizing the fair value of the revenue earned and expense incurred under the
respective agreements (see Note 11).
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market funds and all
investments with an initial maturity of three months or less. Short-term
investments held in the Company's escrow related to the Senior Notes (see Note
3) are not included as a cash equivalent.
Property and Equipment
Property and equipment is recorded at cost, adjusted for the writedown
discussed in Note 8. Depreciation is provided using the straight-line method
over the estimated useful lives of the various assets, generally 3 to
F-10
<PAGE> 80
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20 years. Maintenance and repairs are charged to operations as incurred.
Amortization of assets recorded under capital leases is included in depreciation
expense. Property and equipment recorded under capital leases are included with
the Company's owned assets.
In March 1995, the FASB issued Statement No. 121, Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. (See Note 17)
Capitalization of Interest
Interest costs are capitalized as part of the cost of constructing the
Company's fiber optic network. Interest costs capitalized during construction
periods are computed by determining the average accumulated expenditures for
each interim capitalization period and applying the interest rate related to the
specific borrowings associated with each construction project. Interest
capitalized during the years ended December 31, 1993, 1994 and 1995 was
approximately $379,000, $34,000 and $361,000, respectively.
Income Taxes
The Company accounts for income taxes using the liability method as
required by Statement No. 109, Accounting for Income Taxes, issued by the
Financial Accounting Standards Board.
Deferred income taxes are provided for temporary differences between the
basis of assets and liabilities for financial reporting and income tax
reporting. Investment tax credits are accounted for by the flow-through method.
Deferred Charges and Other Assets
Costs incurred in connection with obtaining long-term financing have been
deferred and are being amortized to interest expense over the terms of the
related debt agreements. The costs relating to long-term financing for the years
ended December 31, 1994 and 1995 were $2.8 million and $10.4 million,
respectively. Accumulated amortization for these costs for the years ended
December 31, 1994 and 1995 was $534,000 and $467,000, respectively (see Note 4
regarding extraordinary items).
Costs incurred in connection with the acquisition of certain lease
agreements (see Note 5) have been deferred and are being amortized over the
terms of the related agreements.
Costs incurred to obtain certain regulatory licenses are amortized on a
straight-line basis over 10 to 40 years.
Certain costs incurred in connection with installation of the nationwide
long distance network have been deferred and amortized on a straight-line basis
over 4 years. The network costs for the year ended December 31, 1995 were
$1,836,000, with accumulated amortization of $95,000.
The acquisition cost of customer accounts obtained through an outside sales
organization have been deferred and amortized over the term of the related
customer contracts.
Stock-Based Compensation
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, Accounting for Stock Issued to Employees, and intends to
continue to do so.
F-11
<PAGE> 81
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income (Loss) Per Common Share
Income (loss) per common share is based on net income (loss) less preferred
stock dividend requirements divided by the weighted average common shares
outstanding during the period, as adjusted for applicable stock options. Income
(loss) per share on a fully diluted basis is not presented as the fully diluted
effect is either antidilutive or the difference is not material.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in prior years have been reclassified to conform to the
1995 presentation.
3. ESCROW UNDER SENIOR NOTES
Under the terms of the Company's Senior Notes, issued in October 1995, the
Company was required to place $200 million of Senior Note proceeds in an escrow
account, which proceeds and the earnings thereon are restricted in their use to
fiber expansion, capital expenditures, certain interest, principal and other
payments on the Senior Notes and other permitted uses (see Note 4). Such funds
have been invested in short-term, investment-grade, interest-bearing securities
at December 31, 1995 as follows (in thousands):
<TABLE>
<S> <C>
Overnight investments............................. $ 96,975
U.S. Government securities........................ 101,291
--------
$198,266
========
</TABLE>
The escrow account is subject to a security interest under the Company's
Senior Notes. The investments in the escrow account at December 31, 1995, by
contractual maturity, were all due in three months or less and are classified as
held-to-maturity.
F-12
<PAGE> 82
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT
Long-term debt and lease obligations of IXC and its consolidated
subsidiaries at December 31, 1994 and 1995 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
Senior Notes -- 12.5%, net of unamortized discount of $7,762 at
December 31, 1995............................................. $ -- $277,238
Senior term loans -- 8.23% to 9.9%.............................. 14,405 --
Senior secured notes -- 9.93%................................... 12,150 --
Variable rate senior secured note due to stockholder (10.63% at
December 31, 1994)............................................ 9,750 --
Senior subordinated note due to related party -- 7%............. 5,694 4,416
Promissory note due to related party -- 9%...................... 3,111 3,401
Subordinated debentures due to stockholders -- 10%.............. 12,948 --
Capital lease obligations (see Note 5).......................... 6,560 13,697
Deferred lease obligations (see Note 5)......................... 4,432 --
Other debt...................................................... 74 42
------- --------
Total long-term debt and lease obligations................. $69,124 $298,794
======= ========
</TABLE>
These amounts are included in the balance sheets of the Company as follows
(in thousands):
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
Long-term debt -- related parties:
Current portion....................... $ 6,850 $ 1,371
Long-term portion..................... 24,653 6,446
Long-term debt and lease obligations:
Current portion....................... 11,688 3,163
Long-term portion..................... 25,933 287,814
------- --------
$69,124 $298,794
======= ========
</TABLE>
Senior Notes
On October 5, 1995, the Company issued $285 million of 12 1/2% Senior Notes
(effective rate 13%) due October 1, 2005, with interest payable semi-annually.
The Company has agreed to file a registration statement and to exchange the
Senior Notes for registered Senior Notes, or to register the Senior Notes on a
shelf registration statement. Until such exchange offer is consummated, or such
shelf registration statement is declared effective, the Company is required to
make additional interest payments at the rate of .5% per annum of the principal
amount thereof.
The Senior Notes may be redeemed at the option of the Company, in whole or
in part, on or after October 1, 2000 at a premium declining to zero in 2004. At
any time prior to October 1, 1998, the Company may redeem Senior Notes with an
aggregate principal amount of up to $100 million at a redemption price of 112.5%
of the principal amount from the net proceeds of a sale of Capital Stock of the
Company, provided that at least $100 million in aggregate principal amount of
Senior Notes remains outstanding immediately after the occurrence of such
redemption and that the redemption occurs within 35 days of the date of the
closing of the offering of such equity securities. Also, the Senior Notes
contain provisions that, in the event of a Change in Control (which meets the
definition set forth in the Indenture) of the Company, provide their holders the
right to require the Company to repurchase all or any part of the Senior Notes
at a price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest.
F-13
<PAGE> 83
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Of the net proceeds of approximately $277 million, $200 million has
initially been deposited into an escrow account primarily restricted for the
construction of a major fiber optic expansion program (see Note 3).
Approximately $53 million of the net proceeds was used to repay or repurchase
existing indebtedness (resulting in an extraordinary loss on early
extinguishment of debt of $1.7 million, net of applicable income tax benefit of
$1.2 million) and approximately $3.7 million was used to redeem certain
preferred stock.
The Senior Notes are senior unsecured obligations of the Company, except
for a security interest in the escrow account (see Note 3), and are guaranteed
on a senior unsecured basis by all wholly owned direct and indirect subsidiaries
(other than SSC) of IXC. The obligations of each guarantor are limited to 95% of
the equity of such guarantor (see Note 16).
The Senior Notes contain certain covenants that limit the ability of the
Company and its subsidiaries to incur additional indebtedness and issue
preferred stock, pay dividends or make other distributions, repurchase equity
interests or subordinated indebtedness, engage in sale and leaseback
transactions, create certain liens, enter into certain transactions with
affiliates, sell assets of the Company or its subsidiaries, issue or sell equity
interests of the Company's subsidiaries or enter into certain mergers and
consolidations.
Senior Term Loans
During 1993, to finance the construction of the Company's fiber optic
transmission system, the Company entered into a senior term loan agreement to
obtain $11 million in construction financing at 8.23% plus up to $750,000 of
capitalized interest during the construction period. During 1994, to finance an
extension of the Company's fiber optic transmission system, the Company entered
into a senior term loan agreement to obtain approximately $7.5 million in
construction financing at 9.9%, plus up to $750,000 of capitalized interest
during the construction period. These senior term loans were repaid or
repurchased from the proceeds of the issuance of the Senior Notes.
Senior Secured Notes
During 1993, to finance the redemption of the ECHC common stock not owned
by IXC (see Note 1), the Company issued $15 million of 9.63% senior secured
notes. During 1994, IXC and the senior secured note holder signed an agreement
which amended and restated the notes. In connection with this agreement, IXC was
released from certain restrictive covenants, the interest rate on the notes was
increased to 9.93%, $1,500,000 held in escrow was applied to the notes and the
escrow account was terminated. As the terms of the original notes were
substantively modified, the related unamortized original debt issuance costs of
$174,000 (net of $114,000 income tax benefit) are shown as an extraordinary loss
on early extinguishment of debt. The senior secured notes were repaid from the
proceeds of the issuance of the Senior Notes.
Variable Senior Secured Note Due to Stockholder
During 1993, to finance the acquisition of the rights, title and interest
in certain equipment lease agreements (see Note 5), the Company issued an 8.5%
senior secured note in the original principal amount of $17,000,000. During
1994, the note was purchased by a stockholder of IXC under a prepayment option.
The stockholder exchanged the note for a note that was amended (including a
reduction in its principal amount to $11,143,000) and restated in the form of a
variable rate senior secured note. This transaction resulted in an extraordinary
gain of approximately $2,472,000, net of applicable income taxes of $1,586,000.
The variable rate senior secured note due to stockholder was repaid from the
proceeds of the issuance of the Senior Notes.
Senior Subordinated Note Due to Minority Investor in Subsidiary
During 1994, the Company issued a $6.2 million 7% senior subordinated
promissory note to a minority investor in MSHC, one of IXC Communications'
subsidiaries. Under the terms of the senior subordinated
F-14
<PAGE> 84
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
promissory note, principal and interest are due and payable in 53 consecutive
monthly installments of $136,000 commencing August 31, 1994 through December 31,
1998.
Promissory Note Due to Minority Investor in Subsidiary
During 1994, to facilitate the acquisition of MSM, the Company issued a $3
million 9% promissory note to a minority investor in MSHC. Under the terms of
the promissory note, principal and interest payments of $560,000 are due
quarterly beginning March 31, 1998 through December 31, 1999. Thus, accrued
interest is reflected in the balance of the note.
Subordinated Debentures Due to Stockholders
During 1992, to finance the acquisition of a 50% interest in ECHC, IXC
issued $3.7 million of 10% subordinated debentures to certain stockholders.
During 1993, IXC issued an additional $2 million of 10% subordinated debentures
to certain stockholders. The debentures were unsecured general obligations of
IXC.
In addition, in connection with the construction of the Company's fiber
optic transmission system, IXC issued $5.1 million of 10% subordinated
debentures to certain stockholders.
All of the subordinated debentures due to stockholders were repaid from the
proceeds of the issuance of the Senior Notes.
Annual maturities of long-term debt at December 31, 1995 are as follows (in
thousands):
<TABLE>
<S> <C>
1996.............................................. $ 1,412
1997.............................................. 1,470
1998.............................................. 2,854
1999.............................................. 2,123
2000.............................................. --
Thereafter........................................ 277,238
--------
$285,097
========
</TABLE>
5. CAPITAL AND OPERATING LEASES
On August 14, 1992, in connection with the acquisition of CTGI, all
existing equipment lease obligations were restructured to provide for the
deferrals of future lease obligations that were otherwise payable. A provision
was also made for an escrow account to provide additional collateral for certain
equipment lease obligations. This escrow account was initially funded in March
1993 with excess collateral held by a creditor of CTGI's prior parent.
As of October 12, 1993, certain equipment lessors sold to IXC their
respective rights, title and interest in certain equipment lease agreements with
the Company. In connection with this transaction, a substantial portion of the
escrow account was withdrawn to pay certain deferred lease obligations to
another lessor. This resulted in an extraordinary gain of approximately
$8,495,000, net of applicable income taxes of $5,848,000. Certain equipment
lease agreements were not purchased by IXC and remained in effect as operating
leases. The escrow account (discussed in the preceding paragraph) was used to
supplement lease payments due under certain of the remaining leases (the "Escrow
Secured Leases") during 1993 and 1994. The Company recorded income of
approximately $731,000 and $1,444,000 to reflect nonrefundable proceeds used
from the escrow account during the years ended December 31, 1993 and 1994,
respectively.
During 1994, the Escrow Secured Leases were amended and the future basic
rental obligations due under the remaining leases (which were classified as
operating leases) were satisfied with approximately $18 million
F-15
<PAGE> 85
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in proceeds from the escrow account. The amendments to the Escrow Secured Leases
resulted in the leases meeting the criteria for capitalization under FAS No. 13.
The present value of the residual lease obligations approximated the fair value
of the leased assets which were both recorded at $6,031,000. The company made
principal payments of $550,000 during 1995 and repaid $1,120,000 of the
obligations using proceeds from the issuance of the Senior Notes. The remainder
of the lease obligations become due in installments in the years 1996 and 1997.
In connection with the satisfaction of the remaining Escrow Secured Leases,
the escrow account was terminated in 1994 and the residual balance in the
account, approximately $888,000, was distributed to the Company and recognized
as income.
Future minimum annual lease payments for facilities, equipment and
transmission capacity used in its operations at December 31, 1995, net of
sublease revenue, are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996.................................................... $ 3,707 $ 9,915
1997.................................................... 5,697 7,725
1998.................................................... 2,862 4,733
1999.................................................... 2,467 2,591
2000.................................................... 1,588 795
Thereafter.............................................. -- 2,615
------- -------
16,321 $28,374
=======
Less amounts related to interest........................ (2,624)
-------
Present value of capital lease obligations.............. 13,697
Less current portion.................................... (2,735)
-------
Net long-term capital lease obligations................. $10,962
=======
</TABLE>
The gross amount of assets recorded under capital leases at December 31,
1994 and 1995 were $7,648,000 and $17,946,000, respectively. The related
accumulated amortization was $1,388,000 and $4,078,000 at December 31, 1994 and
1995, respectively.
Expenses relating to facilities, equipment and transmission capacity leases
were approximately $37,183,000, $28,710,000 and $29,130,000 for the years ended
December 31, 1993, 1994 and 1995, respectively.
The Company had certain deferred lease obligations payable through 1998
that were not settled as part of the October 12, 1993 transaction discussed
above. On November 29, 1994, IXC entered into an agreement whereby these
obligations were restructured resulting in all the deferred obligations,
$4,432,000, being due during 1995. These obligations were repaid in 1995 from
the proceeds the Company received from the issuance of the Senior Notes.
In February 1995, the Company entered into a five-year equipment lease for
network switching equipment, for which the lease obligations had a present value
of $9,800,000. (See Note 17)
6. COMMON AND PREFERRED STOCK
IXC's 10% Senior Series 1 Cumulative Redeemable Preferred Stock was
non-voting and was redeemed on October 6, 1995, from the proceeds of the Senior
Notes for $1,965,000, including cumulative dividends in arrears and related
interest of $505,000.
F-16
<PAGE> 86
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 10% Junior Series 3 Cumulative Redeemable Preferred Stock ("Series 3
Preferred Stock") is voting (as a single class with IXC's common stock), is
entitled to elect one director and may be redeemed by the Company in whole or in
part at any time, subject to certain debt covenants, at a price of $1,000 per
share, plus accumulated and unpaid dividends and accrued interest. The
liquidation value of each Series 3 Preferred share is $1,000 plus any
accumulated and unpaid dividends including accrued interest. The Series 3
Preferred Stock is nonparticipatory and has no mandatory redemption
requirements. Dividends are payable at the determination of the Board of
Directors, subject to debt covenants. Interest accrues on unpaid dividends at a
rate of 10%. Cumulative preferred dividends in arrears, including interest, at
December 31, 1994 and 1995 were $3,201,000 and $4,776,000, respectively.
In November 1994, the Board of Directors adopted the IXC Communications,
Inc. Stock Plan ("IXC Stock Plan"), which provides for the issuance of
restricted stock or the granting of stock options for up to 500,000 shares of
common stock to key employees and others. Options granted may be either
"incentive stock options," within the meaning of Section 422(a) of the Internal
Revenue Code, or non-qualified options. The options are for 10 years and
generally vest at a rate of 25% per year commencing one year after the date of
grant and 25% on each anniversary thereafter, with the exception of two options
covering 35,000 shares which were 100% vested upon grant. The IXC Stock Plan was
adopted and approved by the majority of stockholders of IXC by written consent
on May 4, 1995.
The Company has not issued any restricted stock under the IXC Stock Plan.
All options granted under the IXC Stock Plan were granted at estimated market
value at the date of grant, based on annual appraisals obtained from an
independent party. In the event of a change of control of the Company, the
optionees, immediately following the consummation of such change of control,
fully vest, and the options may be exercised in full to purchase the total
number of shares covered by the option.
Option activity for the two years ended December 31, 1995 was as follows:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
--------- ---------
<S> <C> <C>
Options granted in 1994 and outstanding at
December 31, 1994..................................... 85,000 $7.31
Options granted in 1995................................. 181,356 7.31
------- -----
Options outstanding at December 31, 1995................ 266,356 $7.31
======= =====
Options exercisable at December 31, 1995................ 50,000
=======
Available for grant at December 31, 1995................ 233,644
=======
</TABLE>
During 1993, an indirect subsidiary of IXC issued 1,400 shares of 10%
Senior Series 1 Cumulative Redeemable Preferred Stock (the "ILHI Series 1
Preferred Stock") at $1,000 per share to stockholders of IXC. The ILHI Series 1
Preferred Stock was redeemed on October 6, 1995 from the proceeds of the Senior
Notes, for $1,801,000, including cumulative dividends in arrears and related
interest of $401,000.
7. MAJOR CUSTOMERS
Long-haul services are provided to domestic common carriers under long-term
contractual arrangements. Sales to certain customers exceeded 10% of total
revenues for each of the years ended December 31, 1993, 1994 and 1995. The
percentages of revenue represented by these customers are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
WorldCom, Inc........................................... 23% 25% 20%
Frontier Communications................................. 24% 23% 21%
</TABLE>
F-17
<PAGE> 87
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Trade receivables are primarily due from a limited customer base including
these major customers. Although the Company has a concentration of credit risk,
the Company has not experienced significant collection losses from these
respective customers. Additionally, the Company bills in advance which further
minimizes any potential losses due to concentration of credit risk.
8. IMPAIRMENT OF LONG-TERM ASSETS
Due to rate reductions in the long-haul business, in 1993 the Company
assessed the estimated future net cash flows expected to be produced by the
digital microwave system property and equipment. As a result, on December 31,
1993, the Company projected it would be unable to recover the recorded values of
such equipment and therefore reduced the carrying value of the digital microwave
system property and equipment by $37,960,000.
9. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement and 401(k) savings plan
which covers all full-time employees with one year of service. The Company
contributes 6% of eligible compensation, as defined in the plan, and matches 50%
of the employee's contributions up to a maximum of 6% of the employee's
compensation. Employees vest in the Company's contribution over five years.
Benefit expense for the years ended December 31, 1993, 1994 and 1995 was
approximately $394,000, $468,000 and $522,000, respectively.
10. INCOME TAXES
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards................................. $1,764 $2,411
Net operating loss carryforwards......................... -- 2,489
Accrued expenses......................................... 1,768 908
Other.................................................... 929 1,286
------ ------
4,461 7,094
Deferred tax liabilities:
Tax over book depreciation............................... 6,978 8,384
Other liability accruals................................. 5,062 5,090
Other.................................................... 2,121 1,473
------ ------
14,161 14,947
------ ------
Net deferred tax liability................................. $9,700 $7,853
====== ======
</TABLE>
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $7,775,000 for income tax purposes that will expire in 2010. The
Company has minimum tax and investment tax credit carryforwards at December 31,
1995 of approximately $1,721,000 and $690,000, respectively. The minimum tax
credits can be carried forward indefinitely and the investment tax credits
expire in 2001.
A valuation allowance was not provided for deferred tax assets at December
31, 1993, 1994 or 1995.
F-18
<PAGE> 88
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the provision (benefit) for income taxes
(excluding the effect attributable to extraordinary items) are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
-------- ------ -------
<S> <C> <C> <C>
Current:
Federal..................................... $ 561 $1,188 $ (381)
State....................................... 432 404 --
-------- ------ -------
Total current................................. 993 1,592 (381)
Deferred:
Federal..................................... (19,121) 1,131 (1,144)
State....................................... (3,849) 434 (168)
-------- ------ -------
Total deferred................................ (22,970) 1,565 (1,312)
-------- ------ -------
Provision (benefit) for income taxes.......... $(21,977) $3,157 $(1,693)
======== ====== =======
</TABLE>
The reconciliation of income tax expense (benefit) attributable to
continuing operations (excluding the effect attributable to extraordinary items)
computed at the U.S. federal statutory tax rates to income tax expense (benefit)
is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
-------- ------ -------
<S> <C> <C> <C>
Tax provision (benefit) at federal statutory
rates....................................... $(18,288) $2,780 $(1,670)
State income tax provision (benefit) net of
federal effect.............................. (3,141) 432 (302)
Permanent and other differences............... (548) (55) 279
--------- ------ -------
Provision (benefit) for income taxes.......... $(21,977) $3,157 $(1,693)
========= ====== =======
</TABLE>
11. EXCHANGE AGREEMENTS
During 1993, IXC entered into long-term contracts with a common carrier
which provides IXC with capacity on the carrier's nationwide fiber optic
communications system. For this capacity, the Company paid $2,000,000 and
provided the common carrier with access to and use of certain regional fiber
optic communication systems. The $2,000,000 paid and related costs incurred in
connection with the contract have been deferred and are being recognized over
the five-year term of the contract. Accumulated amortization relating to the
contract costs as of December 31, 1994 and 1995 was $648,000 and $1,058,000,
respectively.
In the normal course of business, IXC enters into long-term facilities
exchange agreements with other carriers to exchange capacity on the carrier's
network for access to the Company's regional fiber optic communication systems.
These exchanges are accounted for at fair value (see Note 2). These exchange
agreements accounted for noncash revenue and expense (in equal amounts) of
$3,743,000, $7,980,000 and $13,839,000 for 1993, 1994 and 1995.
12. RELATED PARTY TRANSACTIONS
A law firm, of which a director and stockholder of the Company was a
principal, provided certain legal services to the Company and received fees from
the Company in the amount of approximately $1.1 million in 1993, $1.4 million in
1994 and $2.6 million in 1995.
F-19
<PAGE> 89
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheets for cash and cash equivalents approximates fair value.
Accounts receivable and accounts payable: The carrying amounts reported in
the balance sheets for accounts receivable and accounts payable approximate
fair value.
Restricted short-term investments: The carrying amount reported in the
balance sheets for restricted short-term investments held in escrow
approximates fair value.
Long-term debt: The fair value of the Senior Notes has not been determined
due to the impracticability of such a calculation based on the limited
market of the privately issued notes and the lack of an actively quoted
price.
14. COMMITMENTS AND CONTINGENCIES
On September 1, 1994, IXC entered into an agreement with a common carrier
to purchase dedicated digital telecommunication services, superseding all prior
agreements. Under the terms of the agreement, IXC is required to purchase
services with remaining monthly minimum commitments of $500,000 through March
1998. Upon IXC paying a total of $22,548,000 for service subsequent to the
September 1, 1994 agreement, the minimum commitments under this agreement will
be canceled. Actual expenses under this and previous agreements for the years
ended December 31, 1993, 1994 and 1995 were $11,996,000, $12,552,000 and
$11,353,000, respectively.
In June 1995, IXC entered into a three-year agreement with a common carrier
to purchase communication services, under which, by April 1996, the Company is
required to purchase a monthly minimum of $350,000 in services. Actual expenses
under this agreement for the year ended December 31, 1995 were $1,471,000.
The Company plans to substantially expand its network beginning in 1996 to
include a coast-to-coast fiber optic system. In order to achieve this objective,
in November 1995, IXC entered into an agreement with a contractor to perform
construction and installation of fiber optic cable from Fort Worth, Texas to
Abilene, Texas. The approximate length of this project is 160 miles. The total
commitment under this agreement is approximately $6,487,000. As of December 31,
1995, no capital expenditures had yet been made under this agreement.
In January 1996, IXC also entered into an agreement with a supplier to
purchase fiber optic cable equipment to be used in the network expansion. Under
this agreement, the Company has a commitment to purchase a minimum number of
fiber kilometers during an initial three-year term, for a total commitment of
$32,000,000. In the event that IXC orders an amount of fiber less than the
commitment amount during the term of this agreement, the supplier may elect to
charge the Company the aggregate difference between the amount which would have
been billed to the Company for fiber based upon the commitment amount and the
amount actually billed to the Company. This agreement will automatically be
renewed for a period of one year unless one party has given the other party
notice at least 60 days in advance of such renewal that it elects to terminate
this agreement. As of December 31, 1995 no fiber purchases had been made under
this agreement.
In December 1995, IXC entered into a long-term indefeasible right to use
("IRU") agreement with a common carrier in which the Company will realize
significant cost savings to the cost of the planned fiber expansion. Under the
IRU, both parties will construct a fiber optic communications system and will
grant unrestricted rights to each other to use certain fiber on each others'
constructed communications systems. The scheduled completion date of all
construction, installation and fiber acceptance testing of each system is
F-20
<PAGE> 90
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
October 1, 1996. The initial term of this agreement is 20 years from July 1,
1997. The agreement may be renewed for two terms of 10 years each. The agreement
states that beginning at the end of the first full calendar quarter after the
final construction acceptance date, each party shall pay the other a usage fee
during the term in an annual amount of $2.0 million payable in four equal
installments at the end of each calendar quarter.
The Company is involved in various legal proceedings, all of which have
arisen in the ordinary course of business and some of which are covered by
insurance. In the opinion of the Company's management, none of the claims
relating to such proceedings will have material adverse effect on the financial
condition or results of operations of the Company.
15. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's allowance for doubtful accounts for the years
ended December 31, 1993, 1994 and 1995 was as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END OF
FOR THE YEARS ENDED OF PERIOD EXPENSES DEDUCTIONS PERIOD
--------------------------------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1993...................... $1,024 $ 447 $1,042 $ 429
December 31, 1994...................... $ 429 $1,565 $1,232 $ 762
December 31, 1995...................... $ 762 $1,505 $ 498 $ 1,769
</TABLE>
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES
IXC conducts a significant portion of its business through subsidiaries.
The Senior Notes are unconditionally guaranteed, jointly and severally, by all
of IXC's wholly-owned direct and indirect subsidiaries except for SSC (the
"Subsidiary Guarantors"). The obligations of each Guarantor are limited to 95%
of the equity of each Guarantor due to fraudulent conveyance considerations.
IXC's subsidiaries that were not wholly-owned at the time the Senior Notes were
issued, do not guarantee the Senior Notes (the "Non-Guarantor Subsidiaries").
The claims of creditors of Non-Guarantor Subsidiaries have priority over the
rights of IXC to receive dividends or distributions from such subsidiaries.
Presented below is condensed consolidating financial information for IXC,
the Subsidiary Guarantors and the Non-Guarantor Subsidiaries as of and for the
fiscal years ended December 31, 1994 and 1995 and the quarter ended March 31,
1996 (unaudited). All of the non-guarantor subsidiaries were acquired or formed
in 1994. Accordingly, the Company's audited consolidated financial statements
prior to January 1, 1994 do not include any direct or indirect consolidated
subsidiaries which are not guarantors. As a result, the aggregate net assets,
earnings and equity of IXC and the Subsidiary Guarantors for the year ended 1993
would be equivalent to the aggregate net assets, earnings and equity of the
Company. Accordingly, condensed consolidating financial information for such
periods is not presented.
The equity method has been used by IXC and the Subsidiary Guarantors with
respect to investments in Non-Guarantor Subsidiaries. Separate financial
statements for Subsidiary Guarantors are not presented based on management's
determination that they do not provide additional information that is material
to investors.
F-21
<PAGE> 91
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
The following table sets for the Guarantor and Non-Guarantor subsidiaries:
<TABLE>
<CAPTION>
GUARANTOR SUBSIDIARIES NON-GUARANTOR SUBSIDIARIES
----------------------------------------- ---------------------------------------
<S> <C>
Tower Communications Systems Corp. Mutual Signal Holding Corporation
West Texas Microwave Company Mutual Signal Corporation
Western States Microwave Transmission Mutual Signal Corporation of Michigan
Company MSM Associates, Limited Partnership
Atlantic States Microwave Transmission Switched Services Communications,
Company L.L.C.
Central States Microwave Transmission Progress International L.L.C.
Company US Advantage Long Distance, Inc.
IXC Carrier, Inc. Marca-Tel S.A. de C.V.
IXC Long Distance, Inc.
Link Net International, Inc.
Rio Grande Transmission, Inc.
Telcom Engineering, Inc.
</TABLE>
F-22
<PAGE> 92
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....... $ 146 $ 4,619 $ 934 $ 349(a) $ 6,048
Accounts receivable and other,
net........................... 10 3,674 529 (497)(e) 3,716
Other current assets............ 187 845 124 -- 1,156
-------- -------- ------- -------- --------
Total current assets.............. 343 9,138 1,587 (148) 10,920
Property and equipment, net....... -- 74,508 14,547 (190)(d) 88,865
Prepaid contract costs............ -- 1,399 -- -- 1,399
Due from affiliate................ 4,091 3,809 -- (7,900)(e) --
Other assets...................... 20,718 3,873 2,248 (22,614)(b) 4,225
-------- -------- ------- -------- --------
Total assets...................... $ 25,152 $ 92,727 $18,382 $(30,852) $105,409
======== ======== ======= ======== ========
Current liabilities:
Accounts payable, accrued
interest and other current
liabilities................... $ 134 $ 7,378 $ 815 $ (46)(a)(e) $ 8,281
Due to affiliate................ 3,800 283 114 (4,197)(e) --
Current portion of long-term
debt and lease obligations.... -- 17,035 1,503 -- 18,538
-------- -------- ------- -------- --------
Total current liabilities......... 3,934 24,696 2,432 (4,243) 26,819
Long-term debt and lease
obligations, less current
portion......................... 7,029 32,651 14,017 (3,111)(e) 50,586
Net deferred tax liability........ -- 11,458 -- (1,640)(e) 9,818
Other noncurrent liabilities...... -- 2,429 1,332 (1,332)(e) 2,429
Minority interest................. -- -- -- 168(c) 168
Preferred stock of consolidated
subsidiary held by minority
interests....................... -- 1,400 -- -- 1,400
Stockholders' equity:
Common stock.................... 100 3 1 (4)(b) 100
Preferred stock................. 1,473 -- 1 (1)(b) 1,473
Additional paid-in capital...... 29,573 39,760 500 (40,260)(b) 29,573
Retained earnings (accumulated
deficit)...................... (16,957) (19,670) 99 19,571(b)(c)(d)(e) (16,957)
-------- -------- ------- -------- --------
Total stockholders' equity........ 14,189 20,093 601 (20,694) 14,189
-------- -------- ------- -------- --------
Total liabilities and
stockholders'
equity...................... $ 25,152 $ 92,727 $18,382 $(30,852) $105,409
======== ======== ======= ======== ========
</TABLE>
---------------
(a) Eliminations of intercompany settlements in transit.
(b) Eliminations of investments in consolidated subsidiaries
(c) Recording of minority interest in equity operations.
(d) Eliminations of intercompany capitalized labor.
(e) Eliminations of intercompany receivables, and lease obligations.
F-23
<PAGE> 93
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net operating revenues............ $ -- $ 78,448 $ 3,410 $ (1,195)(a) $ 80,663
Operating expenses:
Cost of services................ -- 33,848 810 (762)(a)(b) 33,896
Operations and administration... 570 19,336 898 (243)(a) 20,561
Depreciation and amortization... 32 11,166 923 -- 12,121
------ ------- ------ ------- -------
(602) 14,098 779 (190) 14,085
Interest income................... 139 194 8 (130)(a) 211
Interest expense.................. (653) (5,141) (441) 130(a) (6,105)
Equity in net income (loss) of
unconsolidated subsidiaries..... 7,864 83 -- (8,041)(c) (94)
------ ------- ------ ------- -------
Income (loss) before provision
(benefit) for income taxes and
minority interest in net loss of
subsidiaries.................... 6,748 9,234 346 (8,231) 8,097
Benefit (provision) for income
taxes........................... 567 (3,477) (247) -- (3,157)
Minority interest................. -- -- -- 77(d) 77
------ ------- ------ ------- -------
Income before extraordinary
item............................ 7,315 5,757 99 (8,154) 5,017
Extraordinary gain, net........... -- 2,298 -- -- 2,298
------ ------- ------ ------- -------
Net income................... $7,315 $ 8,055 $ 99 $ (8,154) $ 7,315
====== ======= ====== ======= =======
</TABLE>
---------------
(a) Eliminations of intercompany administration services, communication services
and interest charges.
(b) Eliminations of capitalized intercompany labor.
(c) Eliminations of equity (income) loss from consolidated subsidiaries.
(d) Recording of minority interest in equity or earnings loss of non-guarantor
subsidiaries.
F-24
<PAGE> 94
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities......... $(1,262) $ 9,935 $ 1,199 $ 3,660(a)(b)(c) $ 13,532
Cash flows from investing
activities
Purchase of property and
equipment.................... -- (3,545) (3,732) 190(b) (7,087)
Sale of property and
equipment.................... -- 235 -- -- 235
Payments for businesses
acquired, net of cash
received..................... -- -- (11,976) -- (11,976)
------- ------- -------- ------- -------
Net cash provided by (used in)
investing activities......... -- (3,310) (15,708) 190 (18,828)
Cash flows from financing
activities
Payments from (advances to)
affiliates, net.............. 1,411 (1,525) 114 -- --
Proceeds from long-term debt... -- 229 15,770 (3,000)(a) 12,999
Payments on long-term debt and
lease obligations............ -- (7,331) (506) -- (7,837)
Payments from escrow........... -- 1,500 -- -- 1,500
Payments of debt issue costs... (139) (976) (436) -- (1,551)
Capital contribution in
subsidiary by minority
shareholders................. -- -- 500 (500)(c) --
Issuance of common stock....... 3 -- 1 (1)(c) 3
------- ------- -------- ------- -------
Net cash provided by (used in)
financing activities......... 1,275 (8,103) 15,443 (3,501) 5,114
Net increase (decrease) in cash
and cash equivalents......... 13 (1,478) 934 349 (182)
Cash and cash equivalents at
beginning of period.......... 133 6,097 -- -- 6,230
------- ------- -------- ------- -------
Cash and cash equivalents at
end of period................ $ 146 $ 4,619 $ 934 $ 349 $ 6,048
======= ======= ======== ======= =======
</TABLE>
---------------
(a) Eliminations of intercompany receivables, debt and lease obligations.
(b) Eliminations of intercompany capitalized labor.
(c) Eliminations of intercompany capital contribution.
F-25
<PAGE> 95
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents........... $ 1,418 $ 3,332 $ 1,742 $ 423(a) $ 6,915
Accounts receivable and
other, net............ -- 6,717 1,148 (2,328)(e) 6,319
Other current assets..... 6,565 4,481 358 (7,807)(e) 2,815
-------- ---------- ------------- ------------ ------------
Total current assets....... 7,983 14,530 3,248 (9,712) 16,049
Property and equipment,
net...................... -- 76,804 29,910 (315)(d) 106,399
Prepaid contract costs..... -- 989 -- -- 989
Escrow under Senior
Notes.................... 198,266 -- -- -- 198,266
Due from affiliate......... 74,604 3,351 568 (78,523)(e) --
Other assets............... 12,997 15,959 4,191 (18,375)(b) 14,772
-------- ---------- ------------- ------------ ------------
Total assets............... $293,850 $111,633 $ 37,917 $ (106,925) $336,475
======== ======== =========== ========= =========
Current liabilities:
Accounts payable, accrued
interest and other
current liabilities... $ 8,984 $ 13,922 $ 2,720 $ (4,528)(a)(e) $ 21,098
Due to affiliate......... 258 6,458 1,832 (8,548)(e) --
Current portion of
long-term debt and
lease obligations..... -- 1,511 3,023 -- 4,534
-------- ---------- ------------- ------------ ------------
Total current
liabilities.............. 9,242 21,891 7,575 (13,076) 25,632
Long-term debt and lease
obligations, less current
portion.................. 277,238 3,207 17,215 (3,400)(e) 294,260
Net noncurrent deferred tax
liability................ 222 10,997 -- (2,916)(e) 8,303
Due to affiliate/parent.... -- 70,384 3,878 (74,262)(e) --
Other noncurrent
liabilities.............. -- 469 -- -- 469
Minority interest.......... -- 1 -- 952(c) 953
Preferred stock of
consolidated subsidiary
held by minority
interests................ -- -- -- -- --
Stockholders' equity:
Preferred stock.......... 13 -- -- -- 13
Common stock............. 100 3 1 (4)(b) 100
Additional paid-in
capital............... 29,573 30,051 20,750 (50,801)(b) 29,573
Retained earnings
(accumulated
deficit).............. (22,538) (25,370) (11,502) 36,582(b)(c)(d)(e) (22,828)
-------- ---------- ------------- ------------ ------------
Total stockholders'
equity................... 7,148 4,684 9,249 (14,223) 6,858
-------- ---------- ------------- ------------ ------------
Total liabilities
and
stockholders'
equity......... $293,850 $111,633 $ 37,917 $ (106,925) $336,475
======== ======== =========== ========= =========
</TABLE>
---------------
(a) Eliminations of intercompany settlements in transit.
(b) Eliminations of investments in consolidated subsidiaries
(c) Recording of minority interest in equity operations.
(d) Eliminations of intercompany capitalized labor.
(e) Eliminations of intercompany receivables, and lease obligations.
F-26
<PAGE> 96
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net operating revenues.......... $ 404 $ 89,339 $ 12,155 $(10,897)(a) $ 91,001
Operating expenses:
Cost of services.............. -- 38,950 10,075 (9,173)(a)(b) 39,852
Operations and
administration............. 1,116 26,155 6,322 (1,311)(a) 32,282
Depreciation and
amortization............... 57 12,728 4,653 -- 17,438
-------- ------- -------- -------- --------
(769) 11,506 (8,895) (413) 1,429
Interest income................. 3,766 399 67 (3,764)(a) 468
Interest income on escrow under
Senior Notes.................. 2,552 -- -- -- 2,552
Interest expense................ (10,982) (5,838) (1,541) 3,764(a) (14,597)
Equity in net income (loss) of
unconsolidated subsidiaries... (1,185) (7,678) -- 8,882(c) 19
-------- ------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes and
minority interest in net loss
of subsidiaries............... (6,618) (1,611) (10,369) 8,469 (10,129)
Benefit (provision) for income
taxes......................... 2,246 546 (1,099) -- 1,693
Minority interest............... -- -- -- 5,218(d) 5,218
-------- ------- -------- -------- --------
Income (loss) before
extraordinary items........... (4,372) (1,065) (11,468) 13,687 (3,218)
Extraordinary gain, net......... (304) (1,309) (134) -- (1,747)
-------- ------- -------- -------- --------
Net income...................... $ (4,676) $ (2,374) $ (11,602) $ 13,687 $ (4,965)
======== ======= ======== ======== ========
</TABLE>
---------------
(a) Eliminations of intercompany administration services, communication services
and interest charges.
(b) Eliminations of capitalized intercompany labor.
(c) Eliminations of equity (income) loss from consolidated subsidiaries.
(d) Recording of minority interest in equity or earnings loss of non-guarantor
subsidiaries.
F-27
<PAGE> 97
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR IXC
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities........... $ (10,876) $ 24,272 $(8,333) $ 3,992(a)(b) $ 9,055
Cash flows from investing
activities
Release of funds from escrow
under Senior Notes............. 4,300 -- -- -- 4,300
Purchase of restricted short-term
investments.................... (200,000) -- -- -- (200,000)
Purchase of property and
equipment...................... -- (14,282) (9,565) 177(b) (23,670)
--------- -------- ------- ------- -------
Net cash provided by (used in)
investing activities........... (195,700) (14,282) (9,565) 177 (219,370)
Cash flow from financing
activities
Net proceeds from issuance of
Senior Notes, net of
discount....................... 277,148 -- -- -- 277,148
Capital contributions in
subsidiary by minority
shareholders................... -- (14,248) 20,250 -- 6,002
Payments from (advances to)
affiliates, net................ (50,827) 50,827 -- -- --
Proceeds from long-term debt..... -- 17,150 1,545 -- 18,695
Payments on long-term debt and
lease obligations.............. (5,700) (63,606) (3,089) (4,095)(a) (76,490)
Payments of debt issue costs..... (10,407) -- -- -- (10,407)
Redemption of preferred stock.... (1,460) (1,400) -- -- (2,860)
Payments of preferred stock
dividends...................... (906) -- -- -- (906)
--------- -------- ------- ------- -------
Net cash provided by (used in)
financing activities........... 207,848 (11,277) 18,706 (4,095) 211,182
Net increase (decrease) in cash
and cash equivalents........... 1,272 (1,287) 808 74 867
Cash and cash equivalents at
beginning of period............ 146 4,619 934 349 6,048
--------- -------- ------- -------
Cash and cash equivalents at end
of period...................... $ 1,418 $ 3,332 $ 1,742 $ 423 $ 6,915
========= ======== ======= ======= =======
</TABLE>
---------------
(a) Eliminations of intercompany receivables, debt and lease obligations.
(b) Eliminations of intercompany capitalized labor.
F-28
<PAGE> 98
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............. $ 2,505 $ 1,113 $ 1,031 $ 843(a) $ 5,492
Accounts receivable and
other, net.............. -- 9,118 2,623 (4,770)(e) 6,971
Other current assets....... 2,430 4,781 576 (5,267)(e) 2,520
-------- ---------- ------------- ------------ ------------
Total current assets......... 4,935 15,012 4,230 (9,194) 14,983
Property and equipment,
net........................ 1 83,321 39,154 (314)(d) 122,162
Escrow under Senior Notes.... 187,584 -- -- -- 187,584
Due from affiliate........... 91,914 3,095 -- (95,009)(e) --
Other assets................. 7,167 24,601 10,276 (20,306)(b) 21,738
-------- ---------- ------------- ------------ ------------
Total assets................. $291,601 $126,029 $ 53,660 $ (124,823) $346,467
======== ======== =========== ========= =========
Current liabilities:
Accounts payable, accrued
interest and other
current liabilities..... $ 18,216 $ 16,342 $ 4,765 $ (7,296)(a)(e) $ 32,027
Due to affiliate........... 436 228 1,696 (2,360)(e) --
Current portion of
long-term debt and lease
obligations............. -- 9,207 3,087 (1,868)(e) 10,426
-------- ---------- ------------- ------------ ------------
Total current liabilities.... 18,652 25,777 9,548 (11,524) 42,453
Long-term debt and lease
obligations, less current
portion.................... 277,336 3,270 20,299 -- 300,905
Net noncurrent deferred tax
liability.................. -- 9,791 -- (2,842)(e) 6,949
Due to affiliate/parent...... -- 88,438 6,571 (95,009)(e) --
Other noncurrent
liabilities................ -- 621 707 (707)(e) 621
Minority interest............ -- -- -- 380(c) 380
Stockholders' equity:
Preferred stock............ 13 -- 2,584 (2,584)(b) 13
Common stock............... 100 3 1 (4)(b) 100
Additional paid-in
capital................. 29,573 30,052 32,249 (62,301)(b) 29,573
Retained earnings
(accumulated deficit)... (34,073) (31,923) (18,299) 49,768(b)(c)(d)(e) (34,527)
-------- ---------- ------------- ------------ ------------
Total stockholders' equity
(deficit).................. (4,387) (1,868) 16,535 (15,121) (4,841)
-------- ---------- ------------- ------------ ------------
Total liabilities
and stockholders'
equity........... $291,601 $126,029 $ 53,660 $ (124,823) $346,467
======== ======== =========== ========= =========
</TABLE>
---------------
(a) Eliminations of intercompany settlements in transit.
(b) Eliminations of investments in consolidated subsidiaries
(c) Recording of minority interest in equity operations.
(d) Eliminations of intercompany capitalized labor.
(e) Eliminations of intercompany receivables, and lease obligations.
F-29
<PAGE> 99
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net operating revenues.......... $ -- $ 27,853 $ 5,246 $ (6,849)(a) $ 26,250
Operating expenses:
Cost of services.............. -- 14,635 7,452 (6,487)(a)(b) 15,600
Operations and
administration............. 834 7,984 1,797 (198)(a) 10,417
Depreciation and
amortization............... 14 3,793 2,203 -- 6,010
-------- -------- -------- -------- --------
(848) 1,441 (6,206) (164) (5,777)
Interest income................. 2,327 197 30 (2,428)(a) 126
Interest income on escrow under
Senior Notes.................. 2,557 -- -- -- 2,557
Interest expense................ (9,623) (2,098) (577) 2,428(a) (9,870)
Equity in net income (loss) of
unconsolidated subsidiaries... (6,553) (6,895) -- 13,443(c) (5)
-------- -------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes and
minority interest in net loss
of subsidiaries............... (12,140) (7,355) (6,753) 13,279 (12,969)
Benefit (provision) for income
taxes......................... 605 802 (44) -- 1,363
Minority interest............... -- -- -- (93)(d) (93)
-------- -------- -------- -------- --------
Income (loss) before
extraordinary items........... $(11,535) $ (6,553) $ (6,797) $ 13,186 $(11,699)
======== ======== ======== ======== ========
</TABLE>
---------------
(a) Eliminations of intercompany administration services, communication services
and interest charges.
(b) Eliminations of capitalized intercompany labor.
(c) Eliminations of equity (income) loss from consolidated subsidiaries.
(d) Recording of minority interest in equity or earnings loss of non-guarantor
subsidiaries.
F-30
<PAGE> 100
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR IXC
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities............. $ 3,934 $ 4,338 $ (4,752) $ (3,074)(a)(b) $ 446
Investing activities
Release of funds from escrow under
Senior Notes..................... 13,225 -- -- -- 13,225
Purchase of restricted short-term
investments...................... -- -- -- -- --
Purchase of property and
equipment........................ (1) (10,092) (3,731) 260(b) (13,564)
-------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities............. 13,224 (10,092) (3,731) 260 (339)
Financing activities
Payments from (advances to)
affiliates, net.................. (15,900) 7,400 8,500 -- --
Payments on long-term debt and
lease obligations................ -- (3,865) (728) 3,234(a) (1,359)
Payments of debt issue costs....... (171) -- -- -- (171)
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities............. (16,071) 3,535 7,772 3,234 (1,530)
Net increase (decrease) in cash and
cash equivalents................. 1,087 (2,219) (711) 420 (1,423)
Cash and cash equivalents at
beginning of period.............. 1,418 3,332 1,742 423 6,915
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
period........................... $ 2,505 $ 1,113 $ 1,031 $ 843 $ 5,492
======== ======== ======== ======== ========
</TABLE>
---------------
(a) Eliminations of intercompany receivables, debt and lease obligations.
(b) eliminations of intercompany capitalized labor.
F-31
<PAGE> 101
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. UNAUDITED INTERIM CONSOLIDATED FINANCIAL INFORMATION
Basis of Presentation and Significant Accounting Policies
The interim financial data as of March 31, 1996 and for the three month
periods ended March 31, 1995 and 1996 is unaudited. The information reflects all
adjustments, consisting only of normal recurring adjustments, that, in the
opinion of management, are necessary to present fairly the financial position
and results of operations of the Company for the periods indicated. Results of
operations for the interim periods are not necessarily indicative of the results
of operations for the full year.
As of January 1, 1996, the Company adopted FASB Statement No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. The adoption had no effect on the results of operations of the
Company.
Acquisition of Minority Interest in SSC
Effective January 1, 1996, IXC Long Distance, Inc. entered into an
agreement with Excel to acquire its minority interest in SSC for $6.25 million.
The purchase price was paid by the issuance of a non-interest bearing promissory
note due in monthly installments over six months. The acquisition was accounted
for as a purchase and the operating results of SSC have been included in the
consolidated financial statements from the date of acquisition. The purchase
price was allocated based on estimated fair values at the date of acquisition.
The excess of purchase price over assets acquired was $5,583,000 and is being
amortized on a straight-line basis over five years. Pro forma operating results
for the three month period ended March 31, 1995 as if SSC had been acquired as
of January 1, 1995, are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
MARCH 31
------------------------
HISTORICAL PRO FORMA
---------- ---------
<S> <C> <C>
Operating revenues..................................... $ 21,766 $21,766
Net income............................................. $ 1,267 $ 1,228
Earnings per share..................................... $ .08 $ .07
</TABLE>
Income Taxes
The Company has determined that a valuation allowance should be applied
against the net operating loss it expects to incur in 1996. The difference
between the tax benefit recorded for the first quarter of 1996 and the expected
benefit at the federal statutory rate is primarily due to losses incurred by a
subsidiary that provides switched long distance services. The related tax
benefits have not been recognized as a result of uncertainty regarding future
profitability.
Capital and Operating Leases
In March 1996, the Company entered into five-year equipment leases for
network switching equipment for which the lease obligations have a present value
of $7,038,000.
Issuance of Stock Options
During the quarter ended March 31, 1996, the Company granted stock options
covering 177,000 shares of common stock at $7.31 per share under the IXC Stock
Plan.
F-32
<PAGE> 102
[IXC LOGO]
<PAGE> 103
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
PROSPECTUS (Subject to Completion)
Issued May 20, 1996
Shares
[IXC LOGO] IXC Communications, Inc.
COMMON STOCK
------------------------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY.
OF THE SHARES OF COMMON STOCK BEING OFFERED, SHARES ARE BEING
OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL
UNDERWRITERS AND SHARES ARE BEING OFFERED INITIALLY IN THE UNITED
STATES AND CANADA BY THE U.S. UNDERWRITERS. PRIOR TO THIS OFFERING, THERE
HAS BEEN NO PUBLIC MARKET FOR THE COMPANY'S COMMON STOCK. IT IS
CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE
WILL BE BETWEEN $ AND $ . SEE "UNDERWRITERS" FOR INFORMATION
RELATING TO THE METHOD OF DETERMINING THE INITIAL PUBLIC OFFERING
PRICE.
------------------------
APPLICATION HAS BEEN MADE TO LIST THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "IIXC."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
------------------------------------------------------
<S> <C> <C> <C>
Per Share....................................... $ $ $
Total(3)........................................ $ $ $
</TABLE>
------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriters."
(2) Before deducting expenses payable by the Company, estimated at
$ .
(3) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
additional shares of Common Stock at the price to public less
underwriting discounts and commissions, for the purpose of covering
over-allotments, if any. If the U.S. Underwriters exercise such option
in full, the total price to public, underwriting discounts and
commissions and proceeds to the Company, will be $ , $ and
$ , respectively. See "Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters and subject to approval of certain legal matters by Shearman &
Sterling, counsel for the Underwriters. It is expected that delivery of the
Shares will be made on or about , 1996, at the office of Morgan
Stanley & Co. Incorporated, New York, N.Y., against payment therefor in
immediately available funds.
------------------------
MORGAN STANLEY & CO.
International
CS FIRST BOSTON
DILLON, READ & CO. INC.
, 1996
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
<PAGE> 104
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the sale and distribution of the securities being registered. All of the
amounts shown are estimated except the registration fee of the Securities and
Exchange Commission (the "Commission") and the filing fee for the National
Association of Securities Dealers, Inc. ("NASD").
<TABLE>
<CAPTION>
ITEM AMOUNT
--------------------------------------------------------------------------------- -------
<S> <C>
Commission registration fee...................................................... $43,621
NASD filing fee.................................................................. 13,150
Nasdaq National Market listing fee............................................... *
Printing and engraving expenses.................................................. *
Legal fees and expenses (excluding Blue Sky)..................................... *
Blue Sky fees and expenses....................................................... *
Offering-related premium increase on D&O insurance............................... *
Accounting fees and expenses..................................................... *
Transfer agent and registrar fees................................................ *
Miscellaneous.................................................................... *
-------
Total.................................................................. $ *
=======
</TABLE>
------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
IXC Communications, Inc. ("IXC Communications") is a Delaware corporation.
Article VII, Section 8 of IXC Communications' Bylaws provides that IXC
Communications shall indemnify its officers, directors, employees and agents to
the fullest extent permitted by the Delaware General Corporation Law ("DGCL").
Section 145 of the DGCL provides that a Delaware corporation has the power to
indemnify its officers and directors in certain circumstances.
Subsection (a) of Section 145 of the DGCL empowers a corporation to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation),
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding provided that such director or officer acted in good faith in
a manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, provided that such director or officer had no cause to believe his
or her conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
director or officer, or former director or officer, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person acted in any of the capacities set forth
above, against expenses actually and reasonably incurred in connection with the
defense or settlement of such action or suit provided that such director or
officer acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the corporation, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such director or officer shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery or
the court in which such action was brought shall determine that despite the
adjudication of liability, but in view of all the circumstances of the case,
such
II-1
<PAGE> 105
director or officer is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsections (a) and (b) or in the defense of any claim, issue or
matter therein, he or she shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him or her in connection
therewith; that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation shall have power to purchase and maintain insurance on
behalf of a director or officer of the corporation against any liability
asserted against him or her or incurred by him or her in any such capacity or
arising out of his or her status as such whether or not the corporation would
have the power to indemnify him or her against such liabilities under Section
145.
Article Tenth of the Restated Certificate of Incorporation of IXC
Communications currently provides that each director shall not be personally
liable to IXC Communications or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability: (i) for any breach of the
director's duty of loyalty to IXC Communications or its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for unlawful payment of dividends or unlawful
stock repurchases or redemptions as provided under Section 174 of the DGCL; or
(iv) for any transaction from which the director derived an improper personal
benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, IXC
Communications has sold the following unregistered securities (share amounts for
the Common Stock, par value $.01 (the "Common Stock") have been adjusted to
reflect stock split of 4,782-to-1 effective January 31, 1994 but not the stock
split that will be effected in connection with this Offering).
In late 1993, the Trust for the Riordan & McKinzie Profit Sharing and
Savings Plan for the benefit of Carl W. McKinzie (the "McKinzie Trust") paid IXC
Communications $100,020 for the purchase of 95,640 shares of Common Stock par
value $.01 per share at a purchase price of less than $0.01 per share and 100
shares of 10% Senior Series 1 Cumulative Redeemable Preferred Stock ("Series 1
Preferred Stock") at a purchase price of $1,000 per share. Certificate for such
shares were issued on January 31, 1994.
On February 22, 1994, IXC Communications issued an aggregate of 1,287,020
shares of its Common Stock to four of its executive officers (one of whom is
also a director). Such shares were issued pursuant to the conversion of shares
of common stock of I-Link Communications, Inc., a Delaware corporation ("IL"),
and Telecom Services Group, Inc., a Delaware corporation ("TSGI"), at the
effective date (February 22, 1994) of the merger of IL and I-Link Acquisition
Corporation, a Delaware corporation and wholly-owned subsidiary of IXC
Communications, and the merger of TSGI and TSGI Acquisition Corporation, a
Delaware corporation and wholly-owned subsidiary of IXC Communications (the
"TSGI Merger"). Also on February 22, 1994, IXC Communications issued an
aggregate of 3,133,380 shares of Common Stock and 12,550 shares of 10% Junior
Series 3 Cumulative Preferred Stock, $.01 par value (the "Series 3 Preferred
Stock") in exchange for common and preferred shares of TSGI, to former
stockholders of TSGI (who include Ralph J. Swett, Richard D. Irwin, General
Electric Pension Trust and Grumman Hill Investments, L.P.) at the effective date
of the TSGI Merger.
On May 26, 1994, IXC Communications issued and sold 25,026 shares of Common
Stock to American Business Development Corporations for an aggregate purchase
price of $2,502.
During the period from December 16, 1994 through March 15, 1996, IXC
Communications granted stock options to 20 individuals and others (including two
executive officers) covering an aggregate of 443,356 shares of Common Stock. No
consideration was paid for such options. Such grants were exempt from the
registration requirement of the Securities Act of 1933 as not involving the sale
of a security.
On October 5, 1995, IXC Communications issued and sold 12.5% Series A
Senior Notes due 2005 (the "Series A Notes") in the aggregate principal amount
of $285.0 million to an aggregate of 82 purchasers each
II-2
<PAGE> 106
of which was either an "accredited investor" or "qualified institutional buyer"
(as such terms are defined in Rule 501(a) and Rule a of the Securities Act) for
proceeds to IXC Communications of approximately $268.8 million, net of original
issue discount and placement fees of approximately $8.3 million. The aggregate
offering price of the Series A Notes was approximately $277.1 million. On April
1, 1996, IXC Communications and various of its subsidiaries filed a registration
statement on Form S-4 with the SEC pursuant to which IXC Communications is
offering to exchange registered 12.5% Series B Senior Notes due 2005 for the
Series A Notes. Dillon, Read & Co. Inc. and CS First Boston Corporation acted as
placement agents in connection with the sale of the Series A Notes.
The sales and issuances of the Common Stock, Series 1 Preferred Stock,
Series 3 Preferred Stock and the Series A Notes described above were deemed to
be exempt from registration under the Securities Act in reliance upon Section
4(2) thereof, as transactions not involving a public offering. The purchasers in
such private offerings of stock represented their intention to acquire the
securities for investment only and not with a view to the distribution thereof.
The purchasers of Series A Notes represented that they were not acquiring the
Series A Notes with a view to of for sale in connection with any distribution
thereof or with any present intention of offering or selling any of the Senior
Notes in a transaction that would violate the Securities Act. Appropriate
legends were affixed to the certificates representing the securities issued in
such transactions. All purchasers had adequate access, through their employment
or other relationships or otherwise, to sufficient information about IXC
Communications to make an informed investment decision. No underwriter or
placement agent was employed with respect to any such sales, other than the
firms named above which participated as placement agents in connection with the
sale of the Series A Notes.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
*3.1 Restated Certificate of Incorporation of IXC Communications, Inc., as amended.
3.2 Bylaws of IXC Communications, Inc. (incorporated by reference to Exhibit 3.2 of IXC
Communications, Inc.'s and each of the Guarantor's (as defined below) Registration
Statement on Form S-4 filed with the Commission on April 1, 1996 (File No. 333-2936)
(the "S-4")).
*4.1 Specimen certificate representing shares of Common Stock of IXC Communications, Inc.
4.2 Indenture dated as of October 5, 1995 by and among IXC Communications, Inc., on its
behalf and as successor-in-interest to I-Link Holdings, Inc. and IXC Carrier Group,
Inc., each of IXC Carrier, Inc., on its behalf and as successor-in-interest to
I-Link, Inc., CTI Investments, Inc., Texas Microwave, Inc. and WTM Microwave, Inc.,
Atlantic States Microwave Transmission Company, Central States Microwave
Transmission Company, Telcom Engineering, Inc., on its behalf and as
successor-in-interest to SWTT Company and Microwave Network, Inc., Tower
Communication Systems Corp., West Texas Microwave Company, Western States Microwave
Transmission Company, Rio Grande Transmission, Inc., IXC Long Distance, Inc., Link
Net International, Inc. (collectively, the "Guarantors"), and IBJ, Schroder Bank &
Trust Company, as Trustee, with respect to the 12 1/2% Series A and Series B Senior
Notes due 2005 (incorporated by reference to Exhibit 4.1 of the S-4).
4.3 Purchase Agreement dated October 5, 1995 by and among IXC Communications, Inc. and
the Purchasers named therein (incorporated by reference to Exhibit 4.2 of the S-4).
4.4 A/B Exchange Registration Rights Agreement dated as of October 5, 1995 by and among
IXC Communications, Inc., the Guarantors and the Purchasers named therein
(incorporated by reference to Exhibit 4.3 of the S-4).
4.5 Escrow Account and Disbursement Agreement dated as of October 5, 1995 by and among
IXC Communications, Inc., IBJ Schroder Bank & Trust Company, as Escrow Holder, and
IBJ Schroder Bank & Trust Company, as Collateral Agent (incorporated by reference to
Exhibit 4.4 of the S-4).
</TABLE>
II-3
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ------------------------------------------------------------------------------------
<C> <S>
4.6 Escrow Account Security Agreement dated as of October 5, 1995 by and between IXC
Communications, Inc. and IBJ Schroder Bank & Trust Company (incorporated by
reference to Exhibit 4.5 of the S-4).
4.7 Form of 12 1/2% Series A Senior Notes due 2005 (incorporated by reference to Exhibit
4.6 of the S-4).
4.8 Form of 12 1/2% Series B Senior Notes due 2005 (incorporated by reference to Exhibit
4.7 of the S-4).
4.9 Form of Guarantee by the Guarantors (incorporated by reference to Exhibit 4.8 of the
S-4).
*4.10 Registration Rights Agreement dated as of August 6, 1992 by and among Telecom
Services Group, Inc., predecessor-in-interest to IXC Communications, Inc., and each
of the signatories thereto.
*5.1 Opinion of Riordan & McKinzie, a Professional Law Corporation regarding the validity
of the issuance of the securities registered hereunder.
10.1 Office Lease dated June 21, 1989 with USAA Real Estate Company, as amended
(incorporated by reference to Exhibit 10.1 of the S-4).
10.2 Equipment Lease dated as of December 1, 1994 by and between DSC Finance Corporation
and Switched Services Communications, L.L.C.; Assignment Agreement dated as of
December 1, 1994 by and between Switched Services Communications, L.L.C. and DSC
Finance Corporation; and Guaranty dated December 1, 1994 made in favor of DSC
Finance Corporation by IXC Communications, Inc. (incorporated by reference to
Exhibit 10.2 of the S-4).
*10.3 Amended and Restated 1994 Stock Plan of IXC Communications, Inc.
10.4 Form of Non-Qualified Stock Option Agreement under the 1994 Stock Plan of IXC
Communications, Inc. (incorporated by reference to Exhibit 10.4 of the S-4).
10.5 Form of IXC Communications, Inc. Restricted Stock Agreement (incorporated by
reference to Exhibit 10.5 of the S-4).
10.6 Form of IXC Communications, Inc. Restricted Stock Agreement (incorporated by
reference to Exhibit 10.6 of the S-4).
10.7 Amended and Restated Development Agreement by and between Intertech Management
Group, Inc. and IXC Long Distance, Inc. (incorporated by reference to Exhibit 10.7
of the S-4 Amendment).
10.8 Second Amended and Restated Service Agreement dated as of January 1, 1996 by and
between Switched Services Communications, L.L.C. and Excel Telecommunications, Inc.
(incorporated by reference to Exhibit 10.8 of the S-4).
10.9 Equipment Purchase Agreement dated as of January 16, 1996 by and between Siecor
Corporation and IXC Carrier, Inc. (incorporated by reference to Exhibit 10.9 of the
S-4).
*10.10 1996 Stock Plan of IXC Communications, Inc.
10.11 IRU Agreement dated as of November 1995 between WorldCom, Inc. and IXC Carrier, Inc.
(incorporated by reference to Exhibit 10.11 of the S-4 Amendment).
*10.12 IXC Communications, Inc. Directors' Phantom Stock Plan.
11.1 Statement of Computation of Earnings per Share.
21.1 Subsidiaries of IXC Communications, Inc. (incorporated by reference to Exhibit 21.1
of the S-4).
</TABLE>
II-4
<PAGE> 108
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ------------------------------------------------------------------------------------
<C> <S>
*23.1 Consent of Riordan & McKinzie (contained in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
</TABLE>
------------
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted since the required information is inapplicable or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the Consolidated Financial
Statements and Notes thereto.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned the registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 109
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Austin, State of Texas,
on May 17, 1996.
IXC Communications, Inc.,
a Delaware corporation
By: /s/ JOHN J. WILLINGHAM
------------------------------------
John J. Willingham
Senior Vice President, Chief
Financial Officer and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below on this registration statement hereby constitutes and appoints Ralph J.
Swett and John J. Willingham, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities (unless revoked in writing) to sign
any and all amendments to this registration statement to which this power of
attorney is attached, including any post-effective amendments as well as any
related registration statement (or amendment thereto) filed in reliance upon
Rule 462(b) under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Commission, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in connection therewith, as fully to all
intents and purposes as he might and could do in person hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------------------------------------------- --------------------------------- -------------
<C> <S> <C>
* Chairman, President and Chief May 17, 1996
--------------------------------------------- Executive Officer, and Director
Ralph J. Swett (Principal Executive Officer)
/s/ JOHN J. WILLINGHAM Senior Vice President, Chief May 17, 1996
--------------------------------------------- Financial Officer and Secretary
John J. Willingham (Principal Financial and
Accounting Officer)
* Director May 17, 1996
---------------------------------------------
Richard D. Irwin
* Director May 17, 1996
---------------------------------------------
Wolfe H. Bragin
* Director May 17, 1996
---------------------------------------------
Carl W. McKinzie
*By: /s/ JOHN J. WILLINGHAM
---------------------------------------------
John J. Willingham
Attorney-in-Fact
May 17, 1996
</TABLE>
II-6
<PAGE> 110
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ -------------------------------------------------------------------------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement............................................
*3.1 Restated Certificate of Incorporation of IXC Communications, Inc., as
amended...................................................................
3.2 Bylaws of IXC Communications, Inc. (incorporated by reference to Exhibit
3.2 of IXC Communications, Inc.'s and each of the Guarantor's (as defined
below) Registration Statement on Form S-4 filed with the Commission on
April 1, 1996 (File No. 333-2936) (the "S-4"))............................
*4.1 Specimen certificate representing shares of Common Stock of IXC
Communications, Inc. .....................................................
4.2 Indenture dated as of October 5, 1995 by and among IXC Communications,
Inc., on its behalf and as successor-in-interest to I-Link Holdings, Inc.
and IXC Carrier Group, Inc., each of IXC Carrier, Inc., on its behalf and
as successor-in-interest to I-Link, Inc., CTI Investments, Inc., Texas
Microwave, Inc. and WTM Microwave, Inc., Atlantic States Microwave
Transmission Company, Central States Microwave Transmission Company,
Telcom Engineering, Inc., on its behalf and as successor-in-interest to
SWTT Company and Microwave Network, Inc., Tower Communication Systems
Corp., West Texas Microwave Company, Western States Microwave Transmission
Company, Rio Grande Transmission, Inc., IXC Long Distance, Inc., Link Net
International, Inc. (collectively, the "Guarantors"), and IBJ, Schroder
Bank & Trust Company, as Trustee, with respect to the 12 1/2% Series A and
Series B Senior Notes due 2005 (incorporated by reference to Exhibit 4.1
of the S-4)...............................................................
4.3 Purchase Agreement dated October 5, 1995 by and among IXC Communications,
Inc. and the Purchasers named therein (incorporated by reference to
Exhibit 4.2 of the S-4)...................................................
4.4 A/B Exchange Registration Rights Agreement dated as of October 5, 1995 by
and among IXC Communications, Inc., the Guarantors and the Purchasers
named therein (incorporated by reference to Exhibit 4.3 of the S-4).......
4.5 Escrow Account and Disbursement Agreement dated as of October 5, 1995 by
and among IXC Communications, Inc., IBJ Schroder Bank & Trust Company, as
Escrow Holder, and IBJ Schroder Bank & Trust Company, as Collateral Agent
(incorporated by reference to Exhibit 4.4 of the S-4).....................
4.6 Escrow Account Security Agreement dated as of October 5, 1995 by and
between IXC Communications, Inc. and IBJ Schroder Bank & Trust Company
(incorporated by reference to Exhibit 4.5 of the S-4).....................
4.7 Form of 12 1/2% Series A Senior Notes due 2005 (incorporated by reference
to Exhibit 4.6 of the S-4)................................................
4.8 Form of 12 1/2% Series B Senior Notes due 2005 (incorporated by reference
to Exhibit 4.7 of the S-4)................................................
4.9 Form of Guarantee by the Guarantors (incorporated by reference to Exhibit
4.8 of the S-4)...........................................................
*4.10 Registration Rights Agreement dated as of August 6, 1992 by and among
Telecom Services Group, Inc., predecessor-in-interest to IXC
Communications, Inc., and each of the signatories thereto.................
*5.1 Opinion of Riordan & McKinzie, a Professional Law Corporation regarding
the validity of the issuance of the securities registered hereunder.......
10.1 Office Lease dated June 21, 1989 with USAA Real Estate Company, as amended
(incorporated by reference to Exhibit 10.1 of the S-4)....................
</TABLE>
<PAGE> 111
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ -------------------------------------------------------------------------- ------------
<C> <S> <C>
10.2 Equipment Lease dated as of December 1, 1994 by and between DSC Finance
Corporation and Switched Services Communications, L.L.C.; Assignment
Agreement dated as of December 1, 1994 by and between Switched Services
Communications, L.L.C. and DSC Finance Corporation; and Guaranty dated
December 1, 1994 made in favor of DSC Finance Corporation by IXC
Communications, Inc. (incorporated by reference to Exhibit 10.2 of the
S-4)......................................................................
*10.3 Amended and Restated 1994 Stock Plan of IXC Communications, Inc. .........
10.4 Form of Non-Qualified Stock Option Agreement under the 1994 Stock Plan of
IXC Communications, Inc. (incorporated by reference to Exhibit 10.4 of the
S-4)......................................................................
10.5 Form of IXC Communications, Inc. Restricted Stock Agreement (incorporated
by reference to Exhibit 10.5 of the S-4)..................................
10.6 Form of IXC Communications, Inc. Restricted Stock Agreement (incorporated
by reference to Exhibit 10.6 of the S-4)..................................
10.7 Amended and Restated Development Agreement by and between Intertech
Management Group, Inc. and IXC Long Distance, Inc. (incorporated by
reference to Exhibit 10.7 of the S-4 Amendment)...........................
10.8 Second Amended and Restated Service Agreement dated as of January 1, 1996
by and between Switched Services Communications, L.L.C. and Excel
Telecommunications, Inc. (incorporated by reference to Exhibit 10.8 of the
S-4)......................................................................
10.9 Equipment Purchase Agreement dated as of January 16, 1996 by and between
Siecor Corporation and IXC Carrier, Inc. (incorporated by reference to
Exhibit 10.9 of the S-4)..................................................
*10.10 1996 Stock Plan of IXC Communications, Inc. ..............................
*10.12 IXC Communications, Inc. Directors' Phantom Stock Plan....................
11.1 Statement of Computation of Earnings per Share............................
21.1 Subsidiaries of IXC Communications, Inc. (incorporated by reference to
Exhibit 21.1 of the S-4)..................................................
*23.1 Consent of Riordan & McKinzie (contained in Exhibit 5.1)..................
23.2 Consent of Ernst & Young LLP..............................................
24.1 Powers of Attorney........................................................
27.1 Financial Data Schedule...................................................
</TABLE>
------------
* To be filed by amendment.
<PAGE> 1
______________ Shares
IXC COMMUNICATIONS, INC.
Common Stock (par value $.01 per share)
FORM OF
UNDERWRITING AGREEMENT
___________, 1996
<PAGE> 2
_____________, 1996
Morgan Stanley & Co.
Incorporated
CS First Boston Corporation
Dillon, Read & Co. Inc.
c/o Morgan Stanley & Co.
Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
CS First Boston Limited
Dillon, Read & Co. Inc.
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs:
IXC Communications, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to the several Underwriters named in Schedules I and
II hereto (the "Underwriters") ______ shares of its common stock (par value $.01
per share) (the "Firm Shares").
It is understood that, subject to the conditions hereinafter stated,
___________ Firm Shares (the "U.S. Firm Shares") will be sold to the several
U.S. Underwriters named in Schedule I hereto (the "U.S. Underwriters") in
connection with the offering and sale of such U.S. Firm Shares in the United
States and Canada to United States and Canadian Persons (as such terms are
defined in the Agreement Between U.S. and International Underwriters of even
date herewith), and _________ Firm Shares (the "International Shares") will be
sold to the several International Underwriters named in Schedule II hereto (the
"International Underwriters") in connection with the offering and sale of such
International Shares outside the United States and Canada to persons other than
United States and Canadian Persons. Morgan Stanley & Co. Incorporated, CS First
Boston Corporation and Dillion, Read & Co. Inc. shall act as representatives
(the "U.S. Representatives") of the several U.S. Underwriters, and Morgan
Stanley & Co. International Limited and CS First Boston Limited,
<PAGE> 3
2
Dillon, Read & Co. Inc. shall act as representatives (the
"International Representatives") of the several International Underwriters.
The Company also proposes to issue and sell to the several U.S.
Underwriters not more than an additional _______ shares of its common stock (par
value $.01 per share) (the "Additional Shares") if and to the extent that the
U.S. Representatives shall have determined to exercise, on behalf of the U.S.
Underwriters, the right to purchase such shares of Common Stock granted to the
U.S. Underwriters in Article II hereof. The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "Shares". The shares of
common stock (par value $.01 per share) of the Company to be outstanding after
giving effect to the sales contemplated hereby are hereinafter referred to as
the "Common Stock".
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement relating to the Shares. The registration
statement contains two prospectuses to be used in connection with the offering
and sale of the Shares: the "U.S. prospectus", to be used in connection with the
offering and sale of Shares in the United States and Canada to United States and
Canadian Persons, and the "international prospectus", to be used in connection
with the offering and sale of Shares outside the United States and Canada to
persons other than United States and Canadian Persons. The international
prospectus is identical to the U.S. prospectus except for the outside front
cover page. The registration statement as amended at the time it becomes
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement"; the U.S. prospectus and the
international prospectus in the respective forms first used to confirm sales of
Shares are hereinafter collectively referred to as the "Prospectus". If the
Company files a registration statement to register a portion of the Shares and
relies on Rule 462(b) for such registration statement to become effective upon
filing with the Commission (the "Rule 462 Registration Statement"), then any
reference to the "Registration Statement" shall be deemed to refer to both the
registration statement referred to above (Commission File No. 333 - ____) and
the Rule 462 Registration Statement, in each case as amended from time to time.
I.
The Company represents and warrants to each of the
Underwriters that:
(a) The Registration Statement has become effective, and if,
the Company has elected to rely upon Rule 462(b) under the Securities
Act, the Rule 462(b) Registration Statement shall have become effective
not later than the earlier of (i) 10:00 p.m. Eastern time on the date
hereof and (ii) the time confirmations are sent or given, as specified
by Rule 462(b) under the Securities Act; no stop order suspending
<PAGE> 4
3
the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) Each part of the Registration Statement, when such
part became effective, did not contain and each such part, as amended
or supplemented, if applicable, will not contain any untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, (ii) the Registration Statement and the Prospectus comply
and, as amended or supplemented, if applicable, will comply in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder, (iii) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, except
that the representations and warranties set forth in this paragraph (b)
do not apply to statements or omissions in the Registration Statement
or the Prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(c) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of Delaware,
has the corporate power and authority to own its property and to
conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated
under the laws of a state of the United States, is validly existing as
a corporation in good standing under the laws of the jurisdiction of
its incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus and
is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(e) The authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
<PAGE> 5
4
(f) The shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, fully paid and non-assessable.
(g) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights.
(h) This Agreement has been duly authorized, executed and
delivered by the Company.
(i) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law (including, without
limitation, the Communications Act of 1934, as amended, and the rules
and regulations of the Federal Communications Commission) or the
certificate of incorporation or by-laws of the Company or any agreement
or other instrument binding upon the Company or any of its subsidiaries
that is material to the Company and its subsidiaries, taken as a whole,
or any judgment, order or decree of any governmental body, agency or
court having jurisdiction over the Company or any subsidiary, and no
consent, approval, authorization or order of or qualification with any
governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares by the Underwriters.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus.
(k) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party
or to which any of the properties of the Company or any of its
subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or
any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required.
(l) (1) Each of the Company and its subsidiaries has all
certificates, consents, exemptions, orders, permits, licenses,
authorizations, or other approvals (each, an "Authorization"), of and
from, and has made all declarations and filings
<PAGE> 6
5
with, all federal, state, local and other governmental authorities, all
self-regulatory organizations and all courts and other tribunals,
necessary or required to engage in its business as currently conducted
by it in the manner described in the Prospectus, except for those
Authorizations which the failure to obtain or hold could not,
individually or in the aggregate, reasonably to be expected to have a
material adverse effect on the Company and it subsidiaries, taken as a
whole (each, a "Material Authorization"), (2) all such Material
Authorizations are valid and in full force and effect and (3) the
Company and its subsidiaries are in compliance in all material respects
with the terms and conditions of all such Material Authorizations and
with the rules and regulations of the regulatory authorities and
governing bodies having jurisdiction with respect thereto.
(m) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 or Rule 462 under the Securities
Act, complied when so filed in all material respects with the
Securities Act and the rules and regulations of the Commission
thereunder.
(n) The Company is not and, after giving effect to the
offering and sale of the Common Stock and the application of the
proceeds thereof as described in the Prospectus, will not be an
"investment company" as such term is defined in the Investment Company
Act of 1940, as amended.
(o) The Company and its subsidiaries are (i) in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are
in compliance with all terms and conditions of any such permit, license
or approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(p) In the ordinary course of its business, the Company
conducts a periodic review of the effect of Environmental Laws on the
business, operations and properties of the Company and its
subsidiaries, in the course of which it identifies and evaluates
associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for clean-up, closure of
properties or compliance with Environmental Laws or any permit, license
or approval, any related constraints on operating activities and any
potential liabilities to third parties). On the basis of such review,
the Company has reasonably concluded that such associated costs and
<PAGE> 7
6
liabilities would not, singly or in the aggregate, have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(q) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, (1) the
Company and its subsidiaries have not incurred any material liability
or obligation, direct or contingent, nor entered into any material
transaction not in the ordinary course of business; (2) the Company has
not purchased any of its outstanding capital stock, nor declared, paid
or otherwise made any dividend or distribution of any kind on its
capital stock; and (3) there has not been any material change in the
capital stock, short-term debt or long-term debt of the Company and its
consolidated subsidiaries, except in each case as described in or
contemplated by the Prospectus.
(r) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title
to all personal property owned by them which is material to the
business of the Company and its subsidiaries, in each case free and
clear of all liens, encumbrances and defects except such as are
described in the Prospectus or such as do not materially affect the
value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by
the Company and its subsidiaries are held by them under valid, and
subsisting leases which are enforceable, to the Company's knowledge,
against the other parties thereto with such exceptions as are not
material and do not interfere with the use made and proposed to be made
of such property and buildings by the Company and its subsidiaries, in
each case except as described in or contemplated by the Prospectus.
(s) The Company and its subsidiaries own or possess, or can
acquire on reasonable terms, all material patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and
trade names currently employed by them in connection with the business
now operated by them, and neither the Company nor any of its
subsidiaries has received any notice of infringement of or conflict
with asserted rights of others with respect to any of the foregoing
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would result in any material adverse
change in the condition, financial or otherwise, or in the earnings,
business or operations of the Company and its subsidiaries, taken as a
whole.
(t) No material labor dispute with the employees of the
Company or any of its subsidiaries exists, except as described in or
contemplated by the Prospectus, or, to the knowledge of the Company, is
imminent; and the Company is not aware of any
<PAGE> 8
7
existing, threatened or imminent labor disturbance by the employees of
any of its principal suppliers, manufacturers or contractors that could
result in any material adverse change in the condition, financial or
otherwise, or in the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.
(u) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; neither the Company nor any such
subsidiary has been refused any insurance coverage sought or applied
for; and neither the Company nor any such subsidiary has any reason to
believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the
condition, financial or otherwise, or the earnings, business or
operations of the Company and its subsidiaries, taken as a whole,
except as described in or contemplated by the Prospectus.
(v) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such subsidiary has
received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would result in a material adverse change in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole,
except as described in or contemplated by the Prospectus.
(w) Neither the Company nor any of its subsidiaries is in
violation of any federal or state law or regulation relating to
occupational safety and health or to the storage, handling or
transportation of hazardous or toxic materials and the Company and its
subsidiaries have received all permits, licenses or other approvals
required of them under applicable federal and state occupational safety
and health and environmental laws and regulations to conduct their
respective businesses, and the Company and each such subsidiary is in
compliance with all terms and conditions of any such permits, license
or approval, except any such violation of law or regulation, failure to
receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or
approvals which would not, singly or in the aggregate, result in a
material adverse change in the condition, financial or otherwise, or in
the earnings, business or operations of the Company and its
subsidiaries, taken as a whole, except as described in or contemplated
by the Prospectus.
<PAGE> 9
8
(x) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (1) transactions are executed in accordance with
management's general or specific authorizations; (2) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability; (3) access to assets is permitted only
in accordance with management's general or specific authorization; and
(4) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(y) The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida).
(z) The Shares have been approved for quotation on the Nasdaq
National Market System ("Nasdaq") by the National Association of
Securities Dealers, Inc.
(aa) There are no holders of securities (debt or equity) of
the Company or any of its subsidiaries, or holders of rights, options,
or warrants to obtain securities of the Company or any of its
subsidiaries, who have the right, during the 180 day period after the
date of this Agreement to request the Company to register securities
held by them under the Securities Act, other than holders who have
waived such right for the 180 day period after the date of the initial
public offering of the Shares and have waived their rights with respect
to the inclusion of their securities in the Registration Statement.
II.
The Company hereby agrees to sell to the several Underwriters,
and the Underwriters, upon the basis of the representations and warranties
herein contained, but subject to the conditions hereinafter stated, agree,
severally and not jointly, to purchase from the Company the respective numbers
of Firm Shares set forth in Schedules I and II hereto opposite their names at
$_____ a share (the "purchase price").
On the basis of the representations and warranties contained
in this Agreement, and subject to its terms and conditions, the Company agrees
to sell to the U.S. Underwriters the Additional Shares, and the U.S.
Underwriters shall have a one-time right, exercisable for a period for 30 days
from the date of this Agreement, to purchase, severally and not jointly, up to
_________ Additional Shares at the purchase price. Additional Shares may be
purchased as provided in Article IV hereof solely for the purpose of covering
overallotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each U.S. Underwriter agrees, severally
and not jointly, to purchase the number
<PAGE> 10
9
of Additional Shares (subject to such adjustments to eliminate fractional shares
as the U.S. Representatives may determine) that bears the same proportion to the
total number of Additional Shares to be purchased as the number of U.S. Firm
Shares set forth in Schedule I hereto opposite the name of such U.S. Underwriter
bears to the total number of U.S. Firm Shares. The Additional Shares to be
purchased by the U.S. Underwriters hereunder and the U.S. Firm Shares are
hereinafter collectively referred to as the "U.S. Shares".
The Company hereby agrees that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it
will not, during the period commencing on the date hereof and ending 180 days
after the date hereof, (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock (whether such shares or any
such securities are now owned by the undersigned or are hereafter acquired) or
(ii) enter into any swap or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of the Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise, other
than (A) sale of the Shares hereunder, (B) the sale of any shares of Common
Stock sold by the Company upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof of which the
Underwriters have been advised in writing and (C) the issuance of additional
options to purchase shares of Common Stock pursuant to the Company's 1994 Stock
Plan (and issuance of the shares of Common Stock issuable thereon [and the
issuance of additional options to purchase shares of Common Stock pursuant to
the Company's 1996 Stock Plan]). The Company further agrees that, without the
prior written consent of Morgan Stanley & Co. Incorporated on behalf of the
Underwriters, it will not, during the period commencing on the date hereof and
ending 180 days after the date hereof, make any demand for or exercise any right
with respect to, the registration of any shares of Common Stock or any security
convertible into or exercisable or exchangeable for Common Stock.
III.
The Company is advised by you that the Underwriters propose to
make a public offering of their respective portions of the Shares as soon after
the Registration Statement and this Agreement have become effective as in your
judgment is advisable. The Company is further advised by you that the Shares are
to be offered to the public initially at U.S.$____ a share (the public offering
price) and to certain dealers selected by you at a price that represents a
concession not in excess of U.S.$____ a share under the public offering price,
and that any Underwriter may allow, and such dealers may reallow, a concession,
not in excess of U.S.$____ a share, to any Underwriter or to certain other
dealers.
<PAGE> 11
10
Each U.S. Underwriter hereby makes to and with the Company the
representations and agreements of such U.S. Underwriter contained in the fifth
and sixth paragraphs of Article III of the Agreement Between U.S. and
International Underwriters of even date herewith. Each International Underwriter
hereby makes to and with the Company the representations and agreements of such
International Underwriter contained in the seventh, eighth, ninth and tenth
paragraphs of Article III of such Agreement.
IV.
Payment for the Firm Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Firm Shares for the respective accounts of the several Underwriters, at
10:00 A.M., New York City time, on __________, 1996, or at such other time on
the same or such other date, not later than ________, 1996, as shall be
designated in writing by you. The time and date of such payment are hereinafter
referred to as the "Closing Date".
Payment for any Additional Shares shall be made to the Company
in Federal or other funds immediately available in New York City against
delivery of such Firm Shares for the respective accounts of the several
Underwriters, at 10:00 A.M., New York City time, on the date specified in the
notice described in this Article IV or on such other date, in any event not
later than _____, 1996, as shall be designated in writing by you. The time and
date of such payment are hereinafter referred to as the "Option Closing Date".
The notice of the determination to exercise the option to purchase Additional
Shares and of the Option Closing Date may be given at any time within 30 days
after the date of this Agreement.
Certificates for the Firm Shares and Additional Shares shall
be in definitive form and registered in such names and in such denominations as
you shall request in writing not later than two full business days prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the purchase price therefor.
V.
The obligations of the Company and the several obligations of
the Underwriters hereunder are subject to the condition that the Registration
Statement shall have become effective not later than the date hereof.
<PAGE> 12
11
The several obligations of the Underwriters hereunder are
subject to the following further conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have occurred any downgrading,
nor shall any notice have been given of any intended or
potential downgrading or of any review for a possible change
that does not indicate the direction of the possible change,
in the rating accorded any of the Company's securities by any
"nationally recognized statistical rating organization" as
such term is defined for purposes of Rule 436(g)(2) under the
Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or
operations, of the Company and its subsidiaries, taken as a
whole, from that set forth in the Registration Statement,
that, in your judgment, is material and adverse and makes it,
in your judgment, impracticable to market the Shares on the
terms and in the manner contemplated in this Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer
of the Company, to the effect set forth in clause (a)(i) above and to
the effect that the representations and warranties of the Company
contained in this Agreement are true and correct as of the Closing Date
and that the Company has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or
satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely
upon the best of his knowledge as to proceedings threatened.
(c) You shall have received on the Closing Date an opinion of
Riordan & McKinzie, counsel for the Company, dated the Closing Date, to
the effect that
(i) the Company has been duly incorporated, is
validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to
conduct its business as described in the Prospectus and is
duly qualified to transact business and is in good standing in
each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be
in
<PAGE> 13
12
good standing would not have a material adverse effect on the
Company and its subsidiaries taken as a whole;
(ii) each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own
its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is
in good standing in each jurisdiction in which the conduct of
its business or its ownership or leasing of property requires
such qualification, except to the extent that the failure to
be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries
taken as a whole;
(iii) the authorized capital stock of the Company
conforms as to legal matters to the description thereof
contained in the Prospectus;
(iv) the shares of Common Stock outstanding prior to
the issuance of the Shares have been duly authorized and are
validly issued, fully paid and non-assessable;
(v) the Shares have been duly authorized and, when
issued and delivered in accordance with the terms of this
Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be
subject to any preemptive or similar rights;
(vi) this Agreement has been duly authorized,
executed and delivered by the Company;
(vii) the execution and delivery by the Company of,
and the performance by the Company of its obligations under,
this Agreement will not contravene any provision of applicable
law or the certificate of incorporation or by-laws of the
Company or, to the best of such counsel's knowledge, any
agreement or other instrument binding upon the Company or any
of its subsidiaries that is material to the Company and its
subsidiaries, taken as a whole, or, to the best of such
counsel's knowledge, any judgment, or decree of any
governmental body, agency or court having jurisdiction over
the Company or any subsidiary, and no consent, approval,
authorization or order of or qualification with any
governmental body or agency is required for the performance by
the Company of its obligations under this Agreement, except
such as may be required by the securities or Blue Sky laws of
the various states in connection with the offer and sale of
the Shares by the U.S. Underwriters;
<PAGE> 14
13
(viii) the statements (1) in the Prospectus under the
captions "Description of Capital Stock," "Underwriters" and
"Shares Eligible for Future Sale" and (2) in the Registration
Statement in Items 14 and 15, in each case insofar as such
statements constitute summaries of the legal matters,
documents or proceedings referred to therein, fairly present
the information called for with respect to such legal matters,
documents and proceedings and fairly summarize the matters
referred to therein, the statements in the Prospectus under
the captions "Risk Factors - Regulatory and Legislative
Uncertainty" and "Business - Regulation" and to the extent
that such statements purport to describe certain provisions of
U.S. federal laws, rules or regulations, have been reviewed by
us and are correct in all material respects;
(ix) after due inquiry, such counsel does not know of
any legal or governmental proceeding pending or threatened to
which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its
subsidiaries is subject that are required to be described in
the Registration Statement or the Prospectus and are not so
described or of any statutes, regulations, contracts or other
documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described
or filed as required;
(x) the Company is not and, after giving effect to
the offering and sale of the Common Stock and the application
of the proceeds thereof as described in the Prospectus, will
not be an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended; and
(xi) such counsel (1) is of the opinion that the
Registration Statement and Prospectus (except for financial
statements and schedules included therein as to which such
counsel need not express any opinion) comply as to form in all
material respects with the Securities Act and the rules and
regulations of the Commission thereunder, (2) believes that
(except for financial statements and schedules as to which
such counsel need not express any belief) the Registration
Statement and the prospectus included therein at the time the
Registration Statement became effective did not contain any
untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading and (3) believes
that (except for financial statements and schedules as to
which such counsel need not express any belief) the Prospectus
does not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading.
<PAGE> 15
14
(d) You shall have received on the Closing Date an opinion of
Shearman & Sterling, special counsel for the Underwriters, dated the
Closing Date, covering the matters referred to in subparagraphs (v),
(vi), (viii) (but only as to the statements in the Prospectus under
"Description of Capital Stock" and "Underwriters"), (x) and (xi) of
paragraph (c) above.
[(e) You shall have received on the Closing Date an opinion of
___________, special regulatory counsel for the Company, dated the
Closing Date. The contents of such opinion shall be in form and content
reasonably satisfactory to counsel for the Underwriters.]
With respect to subparagraph (xi) of paragraph (c) above,
Riordan & McKinzie and Shearman & Sterling may state that their opinion and
belief are based upon their participation in the preparation of the Registration
Statement and Prospectus and any amendments or supplements thereto and review
and discussion of the contents thereof, but are without independent check or
verification except as specified.
The opinion of Riordan & McKinzie described in paragraph (c)
above shall be rendered to you at the request of the Company and shall so state
therein.
(f) You shall have received, on each of the date hereof and
the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to you, from
Ernst & Young LLP independent public accountants, containing statements
and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the
Registration Statement and the Prospectus.
(g) The "lock-up" agreements between you and certain
shareholders, officers and directors of the Company relating to sales
of shares of Common Stock of the Company or any securities convertible
into or exercisable or exchangeable for such Common Stock, delivered to
you on or before the date hereof, shall be in full force and effect on
the Closing Date.
(h) The Company shall have complied with the provisions of
Section VI(a) hereof with respect to the furnishing of Prospectuses on
the business day next succeeding the date of this Agreement, in such
quantities as you shall have reasonably requested.
(i) You shall have received such other documents and
certificates as are reasonably requested by you or your counsel.
<PAGE> 16
15
(j) The Shares shall have been approved for quotation on
Nasdaq by the National Association of Securities Dealers, Inc.
The several obligations of the U.S. Underwriters to
purchase Additional Shares hereunder are subject to the delivery to the
U.S. Representatives on the Option Closing Date of such documents,
including legal opinions, as they may reasonably request with respect
to the good standing of the Company, the due authorization and issuance
of the Additional Shares and other matters related to the issuance of
the Additional Shares.
VI.
In further consideration of the agreements of the Underwriters
herein contained, the Company covenants as follows:
(a) To furnish to you, without charge, _____ signed copies of
the Registration Statement (including exhibits thereto) and for
delivery to each other Underwriter a conformed copy of the Registration
Statement (without exhibits thereto) and, during the period mentioned
in paragraph (c) below, as many copies of the Prospectus and any
supplements and amendments thereto or to the Registration Statement as
you may reasonably request. In the case of the Prospectus, to furnish
copies of the Prospectus in New York City and London, prior to 5:00
p.m., on the business day following the date of this Agreement, in such
quantities as you reasonably request.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and to file no such proposed amendment
or supplement to which you reasonably object.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of your counsel the Prospectus
is required by law to be delivered in connection with sales by an
Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of your counsel, it is necessary to
amend or supplement the Prospectus to comply with law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to
the Underwriters and to the dealers (whose names and addresses you will
furnish to the Company) to which Shares may have been sold by you on
behalf of the Underwriters and to any other dealers upon request,
either amendments or
<PAGE> 17
16
supplements to the Prospectus so that the statements in the Prospectus
as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus, as amended or supplemented, will
comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request and to pay all expenses (including fees and
disbursements of counsel) in connection with such qualification and in
connection with any review of the offering of the Shares by the
National Association of Securities Dealers, Inc.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earning statement that
satisfies the provisions of Section 11(a) of the Securities Act and the
rules and regulations of the Commission thereunder.
(f) Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or
cause to be paid the following: (i) the fees, disbursements and
expenses of the Company's counsel and the Company's accountants in
connection with the registration and delivery of the Shares under the
Securities Act and all other fees or expenses in connection with the
preparation and filing of the Registration Statements, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the
mailing and delivering of copies thereof to the Underwriters and
dealers, in the quantities hereinabove specified, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon,
(iii) the cost of printing or producing any Blue Sky or Legal
Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with
the qualification of the Shares for offer and sale under state
securities laws as provided in paragraph (d) above, including filing
fees and the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection
with the Blue Sky or Legal Investment memorandum, (iv) all filing fees
and disbursements of counsel to the Underwriters incurred in connection
with the review and qualification of the offering by the National
Association of Securities Dealers, Inc., (v) all costs and expenses
incidental to listing the Shares on the Nasdaq National Market System
[and other national securities exchanges and foreign stock exchanges],
(vi) the cost of printing certificates representing the Shares, (vii)
the costs and charges of any transfer agent, registrar or depositary,
(viii) the costs and expenses of the Company relating to investor
presentations on any "road show" undertaken in connection with the
marketing of the offering, including, without limitation, expenses
associated with the production of road show slides and graphics, fees
and expenses of
<PAGE> 18
17
any consultants engaged in connection with the road show presentations
with the prior approval of the Company, travel and lodging expense of
the representatives and officers of the Company and any such
consultants, and the cost of any aircraft chartered in connection with
the road show and (ix) all other costs and expenses incident to the
performance of the obligations of the Company hereunder for which
provision is not otherwise made in this paragraph. It is understood,
however, that except as provided in this Section, Article VII and the
third paragraph of Article IX below, the Underwriters will pay all of
their costs and expenses, including fees and disbursements of their
counsel, stock transfer taxes payable on resale of any of the Shares by
them, and any advertising expenses connected with any offers they may
make.
VII.
The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of either Section 15 of the Securities Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred by any Underwriter
or any such controlling person in connection with defending or investigating any
such action or claim) caused by any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act to the same extent as the foregoing indemnity from the Company
to such Underwriter, but only with reference to information relating to such
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto.
In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to
<PAGE> 19
18
either of the two preceding paragraphs, such person (the "indemnified party")
shall promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. In the case of any such
separate firm for the Underwriters and such control persons of Underwriters,
such firm shall be designated in writing by Morgan Stanley & Co. Incorporated.
In the case of any such separate firm for the Company, and such directors,
officers and control persons of the Company, such firm shall be designated in
writing by the Company. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by the second and third sentences of this paragraph,
the indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of the
aforesaid, request and (ii) such indemnifying party shall not have reimbursed
the indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding.
If the indemnification provided for in the first or second
paragraph of this Article VII is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the
<PAGE> 20
19
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other hand from the offering of the Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company on
the one hand and of the Underwriters on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other hand in connection with the offering of the Shares shall be deemed
to be in the same respective proportions as the net proceeds from the offering
of the Shares (before deducting expenses) received by the Company and the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover of the Prospectus, bear to the
aggregate public offering price of the Shares. The relative fault of the Company
on the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or by the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Underwriters' respective
obligations to contribute pursuant to this Article VII are several in proportion
to the respective number of Shares they have purchased hereunder, and not joint.
The Company and the Underwriters agree that it would not be just or
equitable if contribution pursuant to this Article VII were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Article VII, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged statement
or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Article VII are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
<PAGE> 21
20
The indemnity and contribution provisions contained in this
Article VII and the representations and warranties of the Company contained in
this Agreement shall remain operative and in full force and effect regardless of
(i) any termination of this Agreement, (ii) any investigation made by or on
behalf of any Underwriter or any person controlling any Underwriter or by or on
behalf of the Company, its officers or directors or any person controlling the
Company and (iii) acceptance of and payment for any of the Shares.
VIII.
This Agreement shall be subject to termination by notice given
by you to the Company, if (a) after the execution and delivery of this Agreement
and prior to the Closing Date (i) trading generally shall have been suspended or
materially limited on or by, as the case may be, any of the New York Stock
Exchange, the American Stock Exchange, the National Association of Securities
Dealers, Inc., the Chicago Board of Options Exchange, the Chicago Mercantile
Exchange or the Chicago Board of Trade, (ii) trading of any securities of the
Company shall have been suspended on any exchange or in any over-the-counter
market, (iii) a general moratorium on commercial banking activities in New York
shall have been declared by either federal or New York State authorities or (iv)
there shall have occurred any outbreak or escalation of hostilities or any
change in financial markets or any calamity or crisis that, in your judgment, is
material and adverse and (b) in the case of any of the events specified in
clauses (a)(i) through (iv), such event singly or together with any other such
event makes it, in your judgment, impracticable to market the Shares on the
terms and in the manner contemplated in the Prospectus.
IX.
This Agreement shall become effective upon the later of (x)
execution and delivery hereof by the parties hereto and (y) release of
notification of the effectiveness of the Registration Statement by the
Commission.
If, on the Closing Date or the Option Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Shares that it or they have agreed to purchase hereunder on such date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I or Schedule
II bears to the aggregate number of Firm Shares set forth opposite the names of
all such nondefaulting Underwriters, or in such other proportions as you may
specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such
<PAGE> 22
21
date; provided that in no event shall the number of Shares that any Underwriter
has agreed to purchase pursuant to Article II be increased pursuant to this
Article IX by an amount in excess of one-ninth of such number of Shares without
the written consent of such Underwriter. If, on the Closing Date or the Option
Closing Date, as the case may be, any Underwriter or Underwriters shall fail or
refuse to purchase Shares and the aggregate number of Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Shares to be purchased on such date, and arrangements satisfactory to you and
the Company for the purchase of such Shares are not made within 36 hours after
such default, this Agreement shall terminate without liability on the part of
any non-defaulting Underwriter or the Company. In any such case either you or
the Company shall have the right to postpone the Closing Date or the Option
Closing Date, as the case may be, but in no event for longer than seven days, in
order that the required changes, if any, in the Registration Statement and in
the Prospectus or in any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
If this Agreement shall be terminated by the Underwriters, or
any of them, because of any failure or refusal on the part of the Company to
comply with the terms or to fulfill any of the conditions of this Agreement, or
if for any reason the Company shall be unable to perform its obligations under
this Agreement, the Company will reimburse the Underwriters or such Underwriters
as have so terminated this Agreement with respect to themselves, severally, for
all out-of-pocket expenses (including the fees and disbursements of their
counsel) reasonably incurred by such Underwriters in connection with this
Agreement or the offering contemplated hereunder.
This Agreement may be signed in two or more counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.
<PAGE> 23
22
This Agreement shall be governed by the laws of the State of
New York.
Very truly yours,
IXC COMMUNICATIONS, INC.
By
----------------------------
Accepted, 1996
----------
MORGAN STANLEY & CO.
INCORPORATED
CS First Boston Corporation
Dillon, Read & Co. Inc.
Acting severally on behalf of themselves
and the several U.S. Underwriters
named in Schedule I hereto.
By Morgan Stanley & Co.
Incorporated
By
-----------------------------
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
CS First Boston Limited
Dillon, Read & Co. Inc.
Acting severally on behalf of themselves
and the several International Underwriters
named in Schedule II hereto.
By Morgan Stanley & Co. International Limited
By
----------------------------------
<PAGE> 24
23
SCHEDULE I
U.S. Underwriters
<TABLE>
<CAPTION>
========================================================================================
Number of
Firm Shares
Underwriter To Be Purchased
----------- ---------------
---------------------------------------------------------------------------------------
<S> <C>
Morgan Stanley & Co. Incorporated
----------------------------------------------------------------------------------------
CS First Boston Corporation
----------------------------------------------------------------------------------------
Dillon, Read & Co. Inc.
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Total U.S. Firm Shares.......................................
========================================================================================
</TABLE>
<PAGE> 25
24
[SCHEDULE II
International Underwriters]
<TABLE>
<CAPTION>
==============================================================================================
Number of
Firm Shares
Underwriter To Be Purchased
----------- ---------------
----------------------------------------------------------------------------------------------
<S> <C>
Morgan Stanley & Co. International Limited
----------------------------------------------------------------------------------------------
CS First Boston Limited
----------------------------------------------------------------------------------------------
Dillon, Read & Co. Inc.
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Total International Firm Shares...............................
==============================================================================================
</TABLE>
<PAGE> 1
EXHIBIT 11.1 -- COMPUTATION OF PER-SHARE EARNINGS
IXC COMMUNICATIONS, INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
FOR THE THREE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1995 and 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------- ----------------------------
1993 1994 1995 1995 1996
---------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS
Net income (loss) $(23,317) $7,315 $(4,965) $1,267 $(11,699)
Less: Dividends applicable to preferred stock (1,567) (1,752) (1,843) (479) (433)
--------------------------------- --------------------------
Net income (loss) applicable to common stockholders (24,884) 5,563 (6,808) 788 (12,132)
Extraordinary (gain) loss (8,495) (2,298) 1,747 -- --
--------------------------------- --------------------------
Net income applicable to common stockholders
before extraordinary items $(33,379) $3,265 $(5,061) $ 788 $(12,132)
================================= =========================
PRIMARY
Weighted average number of shares outstanding 9,622 10,025 10,036 10,036 10,036
Add: Dilutive effect of outstanding stock
options and, for periods prior to the
initial public offering (IPO), of common
stock options issued within one year of
the IPO 343 347 392 334 251
--------------------------------- --------------------------
Number of shares used to compute earnings (loss)
applicable to common stockholders 9,965 10,372 10,428 10,369 10,286
================================ ==========================
FULLY DILUTED
Weighted average number of shares outstanding 9,622 10,025 10,036 10,035 10,035
Add: Dilutive effect of outstanding stock
options and, for periods prior to the
initial public offering (IPO), of common
stock options issued within one year of
the IPO 343 347 392 334 251
--------------------------------- --------------------------
Number of shares issued to compute earnings (loss)
applicable to common stockholders 9,965 10,372 10,428 10,369 10,286
================================= ==========================
PRIMARY INCOME (LOSS) PER COMMON SHARE
Before extraordinary item $(3.36) $0.32 $(0.48) $0.08 $(1.17)
Extraordinary gain (loss) 0.86 0.22 (0.17) -- --
--------------------------------- --------------------------
Net income (loss) $(2.50) $0.54 $(0.65) $0.08 $(1.17)
================================= ===========================
FULLY DILUTED INCOME (LOSS) PER COMMON SHARE
Before extraordinary item $(3.36) $0.32 $(0.48) $0.08 $(1.17)
Extraordinary gain (loss) 0.86 0.22 (0.17) -- --
--------------------------------- --------------------------
Net income (loss) $(2.50) $0.54 $(0.65) $0.08 $(1.17)
================================= ===========================
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 1, 1996, in the Registration Statement (Form S-1)
and related Prospectus of IXC Communications, Inc. dated May 17, 1996 for the
registration of its common stock.
Ernst & Young LLP
Austin, Texas
May 17, 1996
<PAGE> 1
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of IXC
Communications, Inc. (the "Company"), hereby constitutes and appoints Ralph J.
Swett and John J. Willingham, and each of them with full power to act without
the other, his true and lawful attorneys-in-fact and agents of the undersigned,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities (unless revoked in writing) to sign
the Company's Registration Statement on Form S-1 and any or all amendments
thereto, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
to such attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing requisite or necessary to be
done in connection therewith, as fully to all intents and purposes as he might
and could do in person hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Dated: May 9, 1996.
/s/ Carl W. McKinzie
---------------------------
Carl W. McKinzie
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of IXC
Communications, Inc. (the "Company"), hereby constitutes and appoints Ralph J.
Swett and John J. Willingham, and each of them with full power to act without
the other, his true and lawful attorneys-in-fact and agents of the undersigned,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities (unless revoked in writing) to sign
the Company's Registration Statement on Form S-1 and any or all amendments
thereto, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
to such attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing requisite or necessary to be
done in connection therewith, as fully to all intents and purposes as he might
and could do in person hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Dated: May 10, 1996.
/s/ Richard D. Irwin
---------------------------
Richard D. Irwin
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of IXC
Communications, Inc. (the "Company"), hereby constitutes and appoints Ralph J.
Swett and John J. Willingham, and each of them with full power to act without
the other, his true and lawful attorneys-in-fact and agents of the undersigned,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities (unless revoked in writing) to sign
the Company's Registration Statement on Form S-1 and any or all amendments
thereto, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
to such attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing requisite or necessary to be
done in connection therewith, as fully to all intents and purposes as he might
and could do in person hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Dated: May 10, 1996.
/s/ Wolfe H. Bragin
---------------------------
Wolfe H. Bragin
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of IXC
Communications, Inc. (the "Company"), hereby constitutes and appoints John J.
Willingham, his true and lawful attorney-in-fact and agent of the undersigned,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities (unless revoked in writing) to sign
the Company's Registration Statement on Form S-1 and any or all amendments
thereto, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting to
such attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite or necessary to be done in connection
therewith, as fully to all intents and purposes as he might and could do in
person hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Dated: May 15, 1996.
/s/ Ralph J. Swett
---------------------------
Ralph J. Swett
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited March 31, 1996 consolidated balance sheets and income statements and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 5,492
<SECURITIES> 0
<RECEIVABLES> 7,430
<ALLOWANCES> (1,490)
<INVENTORY> 0
<CURRENT-ASSETS> 14,983
<PP&E> 172,858
<DEPRECIATION> (50,696)
<TOTAL-ASSETS> 346,467
<CURRENT-LIABILITIES> 42,453
<BONDS> 300,905
0
13
<COMMON> 100
<OTHER-SE> (4,954)
<TOTAL-LIABILITY-AND-EQUITY> 346,467
<SALES> 0
<TOTAL-REVENUES> 26,250
<CGS> 0
<TOTAL-COSTS> 15,600
<OTHER-EXPENSES> 16,427
<LOSS-PROVISION> 12
<INTEREST-EXPENSE> 9,870
<INCOME-PRETAX> 12,969
<INCOME-TAX> (1,363)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,699)
<EPS-PRIMARY> (1.18)
<EPS-DILUTED> 0
</TABLE>
