<PAGE> 1
IXC COMMUNICATIONS, INC.
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________
Commission file number 0-20803
DELAWARE 74-2644120
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5000 PLAZA ON THE LAKE, SUITE 200
AUSTIN, TEXAS 78746
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (512) 328-1112
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ ] Yes [X] No
(Registrant has been public for less than 90 days)
The number of shares of Common Stock, $.01 par value, outstanding (the
only class of common stock of the Company outstanding) was 30,775,308 on July
31, 1996.
<PAGE> 2
IXC COMMUNICATIONS, INC.
QUARTER ENDED JUNE 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995 . . . . 3
Condensed Consolidated Statements of Operations for the Three Months and
Six Months Ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 16
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
-2-
<PAGE> 3
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
June 30, 1996 1995
------------- ------------
(Unaudited) (See Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 5,657 $ 6,915
Accounts receivable and other, net of allowance for
doubtful accounts of $2,231 at June 30, 1996 and
$1,769 at December 31, 1995 ........................... 21,563 6,319
Other current assets ..................................... 2,333 2,815
-------- --------
Total current assets ................................ 29,553 16,049
Property and equipment ....................................... 192,738 151,828
Less: accumulated depreciation .............................. (56,495) (45,429)
-------- --------
136,243 106,399
Escrow under Senior Notes ................................... 148,140 198,266
Deferred charges and other assets ............................. 22,483 15,761
-------- --------
Total assets ............................................. $336,419 $336,475
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities ........... $ 29,464 $ 12,350
Accrued interest ......................................... 9,160 8,748
Current portion of long-term debt and lease obligations ... 9,025 4,534
-------- --------
Total current liabilities ........................... 47,649 25,632
Long-term debt and lease obligations, less current portion ... 298,873 294,260
Other noncurrent liabilities ................................. 6,805 9,725
Stockholders' equity (deficit):
Preferred stock, 3,000,000 shares authorized:
10% Junior Series 3 cumulative preferred stock, $.01
par value; 12,550 shares issued and outstanding
(aggregate liquidation preference of $18,186 at June
30, 1996 and $17,754 at December 31, 1995) ......... 13 13
Common stock, $.01 par value; 100,000,000 shares
authorized; 24,335,255 shares issued and outstanding .... 243 243
Additional paid-in capital .............................. 29,430 29,430
Accumulated deficit ..................................... (46,594) (22,828)
-------- --------
Total stockholders' equity (deficit) .................... (16,908) 6,858
-------- --------
Total liabilities and stockholders' equity (deficit) ..... $336,419 $336,475
======== ========
</TABLE>
See accompanying notes.
- 3 -
<PAGE> 4
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
------------ ------------- ---------- ------------
<S> <C> <C> <C> <C>
Net operating revenues:
Private line.................................................... $ 24,003 $ 22,721 $ 46,631 $ 44,487
Switched long distance.......................................... 19,004 -- 22,626 --
---------- ---------- ---------- ----------
Net operating revenues....................................... 43,007 22,721 69,257 44,487
Operating expenses:
Cost of communications services................................. 31,643 8,210 47,243 16,385
Operations and administration................................... 10,786 6,987 21,203 13,243
Depreciation and amortization................................... 6,644 3,995 12,654 7,614
---------- ---------- ---------- ----------
(6,066) 3,529 (11,843) 7,245
Interest income.................................................... 127 96 253 207
Interest income on escrow under Senior Notes....................... 2,080 -- 4,637 --
Interest expense................................................... (9,490) (1,602) (19,360) (3,475)
Equity in net income (loss) of unconsolidated subsidiaries......... (9) 13 (14) 9
---------- ---------- ---------- ----------
Income (loss) before (provision) benefit for income taxes and
minority interest............................................... (13,358) 2,036 (26,327) 3,986
Benefit (provision) for income taxes............................... 1,402 (1,124) 2,765 (2,090)
Minority interest.................................................. (111) 590 (204) 873
---------- ---------- ---------- ----------
Income (loss) before extraordinary items........................... (12,067) 1,502 (23,766) 2,769
Extraordinary items:
Extraordinary loss on early extinguishment of debt, less
benefit for income taxes of $671................................ -- (1,006) -- (1,006)
---------- ---------- ---------- ----------
Net income (loss).................................................. $ (12,067) $ 496 $ (23,766) $ 1,763
Dividends applicable to preferred stock............................ (432) (481) (865) (960)
---------- ---------- ---------- ----------
Net income (loss) applicable to common stockholders................ $ (12,499) $ 15 $ (24,631) $ 803
========== ========== ========== ==========
Net income (loss) per common share:
Before extraordinary loss....................................... $ (0.50) $ 0.04 $ (0.99) $ 0.07
Extraordinary loss................................................. -- (0.04) -- (0.04)
---------- ---------- ---------- ----------
Net income (loss).................................................. $ (0.50) $ -- $ (0.99) $ 0.03
========== ========== ========== ==========
Weighted average of common shares ................................ 25,011 25,215 25,011 25,209
Before extraordinary item as adjusted (See Note 2) ............. $ (0.40) $ 0.03 $ (0.78) $ 0.06
Extraordinary item as adjusted.................................. -- (0.03) -- (0.03)
---------- ---------- ---------- ----------
Net income (loss) as adjusted.................................. $ (0.40) $ -- $ (0.78) $ 0.03
========== ========== ========== ==========
Weighted average common shares as adjusted (See Note 2) ........... 31,451 31,655 31,451 31,649
========== ========== ========== ==========
</TABLE>
See accompanying notes.
- 4 -
<PAGE> 5
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended
June 30,
------------------------
1996 1995
---------- -----------
<S> <C> <C>
Net cash provided by operating activities........................... $ 812 $ 9,925
Investing activities
Release of funds from escrow under Senior Notes.................. 36,525 --
Purchase of property and equipment............................... (32,783) (8,998)
-------- --------
Net cash provided by (used in) investing activities.............. 3,742 (8,998)
Financing activities
Proceeds from long-term debt..................................... -- 15,087
Principal payments on long-term debt and lease obligations....... (5,137) (18,210)
Capital contribution in subsidiary by minority shareholders...... -- 2,572
Payment of debt issue costs...................................... (675) --
-------- --------
Net cash used in financing activities............................ (5,812) (551)
-------- --------
Net increase (decrease) in cash and cash equivalents................ (1,258) 376
Cash and cash equivalents at beginning of period.................... 6,915 6,048
-------- --------
Cash and cash equivalents at end of period.......................... $ 5,657 $ 6,424
======== ========
Supplemental disclosure of cash flow information
Cash paid (received) for:
Interest............................................................ $ 18,713 $ 1,708
======== ========
Income taxes........................................................ $ (884) $ 630
======== ========
</TABLE>
See accompanying notes.
- 5 -
<PAGE> 6
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation for
the periods indicated have been included. Operating results for the three and
six month periods ended June 30, 1996 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1996. The Balance
Sheet at December 31, 1995 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements (including the
notes thereto) for the year ended December 31, 1995.
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 financial position or results
of operations of the Company.
2. EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is based on the average number of shares
of the Company's common stock outstanding during each period. Outstanding
options are included in the calculation to the extent they are not antidilutive
or qualify for inclusion under the Securities and Exchange Commission Staff
Accounting Bulletin Topic 4D. Earnings (loss) per common share as adjusted
includes the 6,440,053 shares of the Company's common stock issued in the Public
Offering and the Private Placement (each as defined in Note 9 below) as if those
shares were outstanding for the entire period presented.
3. ACQUISITION OF MINORITY INTEREST
Effective January 1, 1996, IXC Long Distance, Inc. entered into an
agreement with Excel Telecommunications, Inc. ("Excel") to acquire its minority
interest in a joint venture for $6,247,500. 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 the former joint venture 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 six-month period ended June 30, 1995 as if the joint venture
had been acquired as of January 1, 1995, are as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Six months ended
June 30, 1995
--------------------------
Historical Pro Forma
---------- ---------
<S> <C> <C>
Net operating revenues $44,487 $44,487
Net income $ 1,763 $ 885
Dividends applicable to preferred stock (960) (960)
------- -------
Net income applicable to common stockholders 803 (75)
Extraordinary item (1,006) (1,006)
------- -------
Net income applicable to common stockholders
before extraordinary item $ 1,809 $ 931
======= =======
Net income per common share
Before extraordinary loss $ 0.07 $ 0.04
Extraordinary loss (0.04) (0.04)
------- -------
Net income $ 0.03 $ 0.00
======= =======
</TABLE>
- 6 -
<PAGE> 7
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4. 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 three and six months ended June 30,
1996 and the expected benefit at the federal statutory rate is primarily due to
state income taxes and losses incurred which are not being benefited due to
uncertainty regarding their realization.
5. COMMITMENTS AND CONTINGENCIES
During 1996 the Company has made and will continue to make material
commitments related to Phase I of the Fiber Expansion. These commitments are
expected to be paid with cash held in an escrow account and the proceeds
received from the Company's recent public offering.
In March 1996, the Company entered into five-year equipment leases for
network switching equipment for which the lease obligations had a present
value of $7,038,000.
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.
6. STOCK SPLITS
From January 1, 1996 through June 12, 1996, the Company effected stock
splits resulting, in the aggregate, in a 2.4249-for-1 split of the Company's
common stock (with fractional shares paid in cash). The Company also increased
the number of authorized shares of its common stock to 100,000,000 and the
number of authorized shares of its preferred stock to 3,000,000. The
accompanying financial statements include the stock splits and the increase in
authorized shares, and all prior periods have been retroactively adjusted.
7. STOCK OPTIONS
During the quarter ended June 30, 1996, the Company did not grant any
stock options. At June 30, 1996 stock options covering 1,047,800 shares of
common stock were outstanding.
8. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts a significant portion of its business through
subsidiaries. The Senior Notes (as defined in Note 9 below) are unconditionally
guaranteed, jointly and severally, by the "Subsidiary Guarantors" consisting of
all of the Company's wholly owned direct and indirect subsidiaries except for
Switched Services Communications, L.L.C., and Summer Street Communications, Inc.
The obligations of each Subsidiary Guarantor are limited to the minimum extent
necessary to prevent the guarantee from violating or becoming voidable under
applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally. The Company'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 the Company to receive dividends or distributions from such
subsidiaries.
The equity method has been used by the Company and the Subsidiary
Guarantors with respect to investments in Non-Guarantor Subsidiaries. Separate
financial statements for the Subsidiary Guarantors are not presented based on
management's determination that they do not provide additional information that
is material to investors. Presented below is condensed consolidating financial
information for the Company, the Subsidiary Guarantors and the Non-Guarantor
Subsidiaries as of and for the six months ended June 30, 1996.
- 7 -
<PAGE> 8
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
8. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------------------------------------------
Subsidiary Non-Guarantor
IXC Guarantors Subsidiaries Eliminations Consolidated
-------- ---------- ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalent................................... $ 96 $ 2,155 $ 492 $ 2,914 $ 5,657
Accounts receivable and other, net......................... 111 12,895 15,516 (6,959) 21,563
Other current assets....................................... 853 4,494 319 (3,333) 2,333
-------- -------- ------- --------- --------
Total current assets......................................... 1,060 19,544 16,327 (7,378) 29,553
Property and equipment, net.................................. 3 98,326 38,192 (278) 136.243
Escrow under Senior Notes.................................... 148,140 -- -- -- 148,140
Due from affiliate........................................... 118,331 18,377 -- (136,708) --
Deferred charges and other assets............................ 3,494 13,851 10,317 (5,179) 22,483
-------- -------- ------- --------- --------
Total assets................................................. $271,028 $150,098 $64,836 $(149,543) $336,419
======== ======== ======= ========= ========
Current liabilities:
Accounts payable, accrued interest and other
current liabilities...................................... $ 9,673 $ 18,961 $14,610 ($4,620) $ 38,624
Due to affiliate........................................... 334 82 260 (676) --
Current portion of long-term debt and lease obligations.... -- 4,932 5,994 (1,901) 9,025
-------- -------- ------- --------- --------
Total current liabilities.................................... 10,007 23,975 20,864 (7,197) 47,649
Long-term debt and lease obligations, less current
portion.................................................... 277,438 3,176 24,143 (5,884) 298,873
Other noncurrent liabilities................................. -- 132,385 19,098 (144,678) 6,805
Stockholders' equity (deficit):
Preferred stock............................................ 13 -- 2,584 (2,584) 13
Common stock............................................... 243 3 1 (4) 243
Additional paid-in capital................................. 29,430 30,052 23,749 (53,801) 29,430
Accumulated deficit........................................ (46,103) (39,493) (25,603) 64,605 (46,594)
-------- -------- ------- --------- --------
Total stockholders' equity (deficit)......................... (16,417) (9,438) 731 8,216 (16,908)
-------- -------- ------- --------- --------
Total liabilities and stockholders' equity (deficit)..... $271,028 $150,098 $64,836 $(149,543) $336,419
======== ======== ======= ========= ========
</TABLE>
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<PAGE> 9
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
8. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the six months ended June 30, 1996
-------------------------------------------------------------------------------------
Subsidiary Non-Guarantor
IXC Guarantors Subsidiaries Eliminations Consolidated
-------- ---------- --------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net operating revenue:
Private line ............................ $ - $ 51,804 $ 6,143 $(11,316) $46,631
Switched long distance .................. - 7,898 19,517 (4,789) 22,626
-------- -------- -------- -------- --------
Net operating revenues ............... - 59,702 25,660 (16,105) 69,257
Operating expenses:
Cost of communications services .......... - 32,905 29,770 (15,432) 47,243
Operations and administration ........... 1,550 16,643 3,406 (396) 21,203
Depreciation and amortization ........... 29 7,975 4,762 (112) 12,654
-------- -------- -------- ------- --------
(1,579) 2,179 (12,278) (165) (11,843)
Interest income ........................... 5,580 961 52 (6,340) 253
Interest income on escrow under Senior Notes 4,637 - - - 4,637
Interest expense .......................... (19,249) (4,736) (1,715) 6,340 (19,360)
Equity in net income (loss) of
unconsolidated subsidiaries ............. (14,087) (14,319) - 28,392 (14)
-------- -------- -------- -------- --------
Income (loss) before (provision) benefit for
income taxes and minority interest ...... (24,698) (15,915) (13,941) 28,227 (26,327)
Benefit (provision) for income taxes .... 1,133 1,792 (160) - 2,765
Minority interest ......................... - - - (204) (204)
-------- -------- -------- ------- --------
Net loss .................................. $(23,565) $(14,123) $(14,101) $28,023 $(23,766)
======== ======== ======== ======= ========
</TABLE>
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<PAGE> 10
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
8. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the six months ended June 30, 1996
-------------------------------------------------------------------
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 .. $ 4,781 $ 10,300 $(11,893) $(2,376) $ 812
Investing activities
Proceeds from note receivable ...................... -- 772 -- (772) --
Release of funds from escrow under Senior Notes .... 36,525 -- -- -- 36,525
Purchase of property and equipment ................. (3) (28,033) (4,747) -- (32,783)
-------- -------- -------- ------- --------
Net cash provided by (used in) investing
activities ......................................... 36,522 (27,261) (4,747) (772) 3,742
Financing activities
Payments from (advances to) affiliates, net (41,950) 24,150 17,800 -- --
Principal payments on long-term debt and lease
obligations ........................................ -- (8,366) (2,410) 5,639 (5,137)
Payment of debt issue costs .......................... (675) -- -- -- (675)
-------- -------- -------- ------- --------
Net cash provided by (used in) financing
activities ......................................... (42,625) 15,784 15,390 5,639 (5,812)
Net decrease in cash and cash equivalents ............ (1,322) (1,177) (1,250) 2,491 (1,258)
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 ........... $ 96 $ 2,155 $ 492 $ 2,914 $ 5,657
======== ======== ======== ======= ========
</TABLE>
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<PAGE> 11
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
9. SUBSEQUENT EVENTS
On July 2, 1996, the Company sold 5,600,000 shares of its common stock in
a public offering (the "Public Offering") resulting in net proceeds (before
expenses) of $83,328,000. Concurrently with the closing of the Public Offering,
the Company sold to an affiliate in a private placement 840,053 shares of
restricted common stock resulting in net proceeds of $12,500,000 (the "Private
Placement").
On August 2, 1996, the Company completed an exchange offering of $263.9
million aggregate principal amount of 12 1/2% Series B Senior Notes due 2005
for a like principal amount of 12-1/2% Series A Senior Notes due 2005
(collectively, the "Senior Notes"). The exchange offer was registered under
the Securities Act of 1933, as amended.
- 11 -
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH THE THREE AND SIX MONTHS
ENDED JUNE 30, 1995
Net operating revenues for the three months ended June 30, 1996 increased
89.4% to $43.0 million from $22.7 million for the three months ended June 30,
1995, and for the six months ended June 30, 1996 increased 55.7% to $69.3
million from $44.5 million for the six months ended June 30, 1995. The
increase is primarily a result of the continuing implementation of the Company's
switched long distance business (particularly for Excel). Billable minutes of
use were 200 million and 234 million for the three and six months ended June 30,
1996, respectively. Switched long distance services revenues were $19.0 million
and $22.6 million for the three and six months ended June 30, 1996,
respectively. (The Company did not have any billable minutes of use during the
six months ended June 30, 1995.) The Company's private-line business for the
three months ended June 30, 1996 increased 5.7% to $24.0 million from $22.7
million for the three months ended June 30,1995 and for the six months ended
June 30, 1996 increased 4.7% to $46.6 million from $44.5 million for the six
months ended June 30, 1995.
Cost of communication services consists principally of access charges paid
to Local Exchange Carriers ("LECs") and transmission lease payments to, and
exchanges with, other carriers. Cost of communication services for the three
months ended June 30, 1996 increased 285.4% to $31.6 million from $8.2 million
for the three months ended June 30, 1995 and for the six months ended June 30,
1996 increased 187.8% to $47.2 million from $16.4 million for the six months
ended June 30, 1995. The increase is primarily a result of the addition of
private-line leases supporting the switched long distance business, overflow
charges paid to other carriers and access 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 during the first half 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 private-line services, generally made at a relatively
low cost over its own network. The Company expects that, in the event it
achieves increases in private-line revenues, its cost of communications services
as a percentage of such revenues will increase (at least until Phase I of the
ongoing network expansion (the "Fiber Expansion") is complete) because
additional leases (or exchanges) of capacity from other carriers at a relatively
high cost will be required to support new business. The cost of communications
services as a percentage of revenues in the switched long distance business is
substantially greater than that in the private-line business due to the
relatively high cost of LEC access charges and leases for private lines
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 June 30,
1996 increased 54.3% to $10.8 million from $7.0 million for the three months
ended June 30, 1995 and for the six months ended June 30, 1996 increased 60.6%
to $21.2 million from $13.2 million for the six months ended June 30, 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 but decline as a percentage of
revenue.
Depreciation and amortization for the three months ended June 30, 1996
increased 65.0% to $6.6 million from $4.0 million for the three months ended
June 30, 1995 and for the six months ended June 30, 1996 increased 67.1% to
$12.7 million from $7.6 million for the six months ended June 30, 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 increased.
Interest income for the three months ended June 30, 1996 increased to $2.2
million from $.1 million for the three months ended June 30, 1995 and to $4.9
million for the six months ended June 30, 1996 from $.2 million for
- 12 -
<PAGE> 13
the six months ended June 30, 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 June 30, 1996 increased to
$9.5 million from $1.6 million for the three months ended June 30, 1995 and to
$19.4 million for the six months ended June 30, 1996 from $3.5 million for the
six months ended June 30, 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 June 30, 1996 resulted in a $1.4
million tax benefit as opposed to a provision for income taxes of $1.1 million
for the three months ended June 30, 1995 and a $2.8 million tax benefit for the
six months ended June 30, 1996 as opposed to a provision for income taxes of
$2.1 million for six months ended June 30, 1995. The difference between the
tax benefits recorded for the three and six months ended June 30, 1996 and the
expected benefit at the federal statutory rate is primarily due to state income
taxes and losses incurred which are not being benefited due to uncertainty
regarding their realization.
The Company experienced a net loss of $12.1 million for the three months
ended June 30, 1996 as opposed to a net income of $.5 million for the three
months ended June 30, 1995 and a net loss of $23.8 million in the six months
ended June 30, 1996 as opposed to a net income of $1.8 million for the six
months ended June 30, 1995, as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
On July 2, 1996, the Company sold 5,600,000 shares of its common stock in a
public offering (the "Public Offering") resulting in net proceeds (before
expenses) of $83,328,000, which is expected to be used to fund Phase I of the
Fiber Expansion and for general corporate purposes. Concurrent with the closing
of the Public Offering, the Company closed a private placement of 840,053 shares
of restricted common stock with Trustees of General Electric Pension Trust (the
"Private Placement") resulting in net proceeds of $12,500,000.
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 six months ended June 30, 1996, the Company's net income before
depreciation, amortization, interest expense, income taxes and extraordinary
items ("EBITDA") minus interest expense and capital expenditures (adjusted for
the change in working capital deficit) was negative $4.8 million and negative
$55.2 million, respectively. The Company had $142.7 million of the net proceeds
received from the sale of the Senior Notes in an escrow account at July 31, 1996
to be used at the Company's discretion for the Fiber Expansion, debt service of
the Senior Notes and other capital expenditures. In addition, the Company had
approximately $94.0 million in cash at July 31, 1996.
Cash provided by operating activities for the six-month period ended June
30, 1996 decreased 91.9% to $0.8 million from $9.9 million for the six-month
period ended June 30, 1995, primarily as a result of start-up and operational
expenses associated with the Company's development of its switched services
business 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 and for the six-month
period ended June 30, 1996. 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. A
discussion of important factors which could affect the Company's ability to
achieve positive cash flow in its switched long distance business is set forth
below.
- 13 -
<PAGE> 14
Cash provided by investing activities increased to $3.7 million for the
six-month period ended June 30, 1996 from cash used of $9.0 million for the
six-month period ended June 30, 1995. The Company's total capital expenditures
were $23.7 million for 1995 and $32.8 million for the six-month period ended
June 30, 1996. The Company anticipates making additional capital expenditures
for the remaining two quarters of 1996 of approximately $184 million (including
capital expenditures relating to the Fiber Expansion). The Company expects to
make such capital expenditures with the proceeds of the Public Offering together
with a portion of the cash held in an escrow account ($142.7 million at July 31,
1996), cash generated by the private-line business and vendor financing which
the Company may seek. The Company will also make additional capital
expenditures for various improvements and upgrades, such as adding capacity to
its switches and adding new switches, as demand warrants.
The Company anticipates that Phase I of the Fiber Expansion will require
estimated cash expenditures subsequent to July 31, 1996 of $199.6 million. The
Company anticipates meeting the construction costs for 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 of the Public Offering.
The Company is required to make interest payments in the amount of $35.6
million on the Senior Notes each year. 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.
In addition, at June 30, 1996, there were approximately $5.6 million of accrued
and unpaid dividends on the Series 3 Preferred Stock. Such dividends cumulate
at an annual rate of 10% (based on the liquidation preferences) plus interest.
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, the Company's ability to
generate positive cash flows in its switched long distance business and the
Company's ability to service its debt are based on certain assumptions as to
future events. Important factors that could adversely affect the Company's
ability to achieve the results discussed above include: cost overruns, a
failure by the Company's contractors or partners in cost-saving arrangements to
perform their obligations, a failure to obtain rights-of-way on a timely,
cost-effective basis, a failure to substantially complete the backbone of Phase
I on schedule in the first quarter of 1997, or an inability to generate
significant levels of MOUs or 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 the Company has
not previously handled.
The Company is also required to make minimum annual lease payments for
facilities, equipment and transmission capacity used on 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.
- 14 -
<PAGE> 15
The Company is proceeding with the initial development and implementation
of a business plan for the Mexican license obtained by a company in which it has
an indirect minority interest, Marca-Tel S.A de C.V. ("Marca-Tel"). If
implemented, the development of the Marca-Tel business will require significant
amounts of cash. Although the Company cannot accurately predict its share of
the amount of cash that would be needed to pursue this opportunity, it estimates
that at least $30.0 million (and possibly significantly more) would be required
by Marca-Tel during 1996-1997. The $12.5 million proceeds of the Private
Placement will be available, if the Company so elects, to pursue the opportunity
in Mexico. 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) further equity offerings or, subject to the
restrictions imposed by the indenture for the Senior Notes, debt incurrences by
the Company or from working capital.
- 15 -
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In June 1996, the holders of a majority of each class of stock of the
Company executed majority written consents approving the following matters:
a. The election of the following men to serve as directors until
the next annual meeting of stockholders or until such time as their
successors are duly elected and qualified:
Ralph J. Swett
Richard D. Irwin
Wolfe (Bill) Bragin
Carl W. McKinzie
Joe C. Culp
Phillip L. Williams
b. The designation of Mr. Irwin as the member of the Board of
Directors elected by the holders of the Series 3 Preferred Stock.
c. Amendments to the Company's Restated Certificate of
Incorporation which: (i) increased the authorized number of shares of
Common Stock to 100,000,000 shares; (ii) increased the authorized
number of shares of preferred stock to 3,000,000 shares; and (iii)
effected stock splits resulting, in the aggregate, in a 2.4249-for-one
stock split of the outstanding shares of Common Stock.
d. The Company's 1996 Stock Plan, the Company's Amended and
Restated 1994 Stock Plan and the Company's Outside Directors' Phantom
Stock Plan.
- 16 -
<PAGE> 17
ITEM 5. OTHER INFORMATION
On July 9, 1996 the Company completed an initial public offering of
5,600,000 shares of its common stock, par value $.01 (the "Common Stock") at an
offering price of $16.00 per share for net proceeds (before expenses) of
approximately $83.3 million.
On April 1, 1996, the Company and various of the subsidiaries filed a
Registration Statement on Form S-4 with the Commission relating to the offer
(the "Exchange Offer") by the Company to exchange its 12 1/2% Series A Senior
Notes due 2005 ("Series A Notes") for 12 1/2% Series B Senior Notes due 2005
("Series B Notes") which was declared effective by the Commission on July 5,
1996. On August 2, 1996 the Company consummated the Exchange Offer.
Approximately 93% of the Series A Notes were tendered prior to the expiration
of the Exchange Offer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement re: computation of earnings per share.
27 Financial data schedule.
(b) Reports on Form 8-K.
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Austin, State of Texas,
on August 15, 1996.
IXC Communications, Inc.,
a Delaware corporation
By: /s/ JOHN J. WILLINGHAM
-------------------------------------
John J. Willingham
Senior Vice President,
Chief Financial Officer and Secretary
(Duly Authorized Officer and
Principal Financial Officer)
- 17 -
<PAGE> 1
EXHIBIT 11.1
IXC COMMUNICATIONS, INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
For the Three-Month Periods Ended June 30, 1996 and 1995
and the Six-Month Periods Ended June 30, 1996 and 1995
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, Pro Forma(1)
1996 1995 1996 1995 6/30/95
--------- ------- ------------------ -------
EARNINGS
<S> <C> <C> <C> <C> <C>
Net income (loss) $(12,067) $ 496 $(23,766) $ 1,763 $ 885
Less: Dividends applicable to preferred stock (432) (481) (865) (960) (960)
------------------ ------------------ -------
Net income (loss) applicable to common stockholders (12,499) 15 (24,631) 803 (75)
Extraordinary items -- (1,006) -- (1,006) (1,006)
------------------ ------------------ -------
Net incomem (loss) applicable to common stockholders
before extraordinary items $(12,499) $ 1,021 $(24,631) $ 1,809 $ 931
================== ================== =======
PRIMARY
Weighted average number of shares outstanding 24,335 24,335 24,335 24,335 24,335
Add: Effect, for periods prior to the initial
public offering (IPO), of common stock
options issued within one year of the IPO 833 833 833 833 833
Add: Dilutive effect of outstanding stock options -- 251 -- 243 243
Less: Assumed repurchase of shares under the
treasury stock method (157) (204) (157) (202) (202)
------------------ ------------------ -------
Number of shares used to compute earnings (loss)
applicable to common shareholders 25,011 25,215 25,011 25,209 25,209
================== ================== =======
FULLY DILUTED
Weighted average number of shares outstanding 24,335 24,335 24,335 24,335 24,335
Add: Effect, for periods prior to the IPO, of
common stock options issued within one year
of the IPO 833 833 833 833 833
Add: Dilutive effect of outstanding stock options -- 251 -- 243 243
Less: Assumed repurchase of shares under the
treasury stock method (157) (204) (157) (202) (202)
------------------ ------------------ -------
Number of shares used to compute earnings (loss)
applicable to common shareholders 25,011 25,215 25,011 25,209 25,209
================== ================== =======
PRIMARY INCOME (LOSS) PER COMMON SHARE
Before extraordinary items $ (0.50) $ 0.04 $ (0.99) $ 0.07 $ 0.04
Extraordinary items -- (0.04) -- (0.04) $ (0.04)
------------------ ------------------ -------
Net income (loss) $ (0.50) $ -- $ (0.99) $ 0.03 $ --
================== ================== =======
Before extraordinary items as adjusted $ (.40) $ .03 $ (.78) $ .06 $ .03
Extraordinary items as adjusted -- (.03) -- (.03) (.03)
------------------ ------------------ -------
Net income (loss) as adjusted $ (.40) $ -- $ (.78) $ .03 $ --
================== ================== =======
FULLY DILUTED INCOME (LOSS) PER COMMON SHARE
Before extraordinary items $ (0.50) $ 0.04 $ (0.99) $ 0.07 $ 0.04
Extraordinary items -- (0.04) -- (0.04) (0.04)
------------------ ------------------ -------
Net income (loss) $ (0.50) $ -- $ (0.99) $ 0.03 $ --
================== ================== =======
Before extraordinary items as adjusted $ (.40) $ .03 $ (.78) $ .06 $ .03
Extraordinary items as adjusted -- (.03) -- (.03) (.03)
------------------ ------------------ -------
Net income (loss) as adjusted $ (.40) $ -- $ (.78) $ .03 $ --
================== ================== =======
</TABLE>
- ------------------
(1) The pro forma information reflects the acquisition 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.
- 18 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS AND UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,657
<SECURITIES> 0
<RECEIVABLES> 23,794
<ALLOWANCES> 2,231
<INVENTORY> 0
<CURRENT-ASSETS> 29,553
<PP&E> 192,738
<DEPRECIATION> (56,495)
<TOTAL-ASSETS> 336,419
<CURRENT-LIABILITIES> 47,649
<BONDS> 298,873
0
13
<COMMON> 243
<OTHER-SE> (17,164)
<TOTAL-LIABILITY-AND-EQUITY> 336,419
<SALES> 0
<TOTAL-REVENUES> 69,257
<CGS> 0
<TOTAL-COSTS> 47,243
<OTHER-EXPENSES> 12,654
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,360
<INCOME-PRETAX> (26,327)
<INCOME-TAX> (2,765)
<INCOME-CONTINUING> (26,327)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,766)
<EPS-PRIMARY> (0.99)
<EPS-DILUTED> 0
</TABLE>
