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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
IXC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 74-2644120
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER 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)
JEFFREY C. SMITH
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:
MICHAEL P. WHALEN, ESQ.
KAREN C. GOODIN, ESQ.
MICHAEL G. MCKINNON, ESQ.
RIORDAN & MCKINZIE
695 TOWN CENTER DRIVE, SUITE 1500
COSTA MESA, CA 92626
(714) 433-2900
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
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, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
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
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED+ PRICE PER SHARE OFFERING PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------
7 1/4% Junior Convertible Preferred Stock Due 2007, par
value $.01 per share................................. 1,400,000 shares $128(1) $179,200,000 $54,303
- -----------------------------------------------------------------------------------------------------------------------------
5,967,604
Common Stock, par value $.01 per share................. shares(2) -- -- (3)
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per share................. 97,481 shares $27.69(4) $2,699,249 $818
- -----------------------------------------------------------------------------------------------------------------------------
Total......................................... $55,121
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+ Includes up to 400,000 shares of the Registrant's 7 1/4% Junior Convertible
Preferred Stock Due 2007 (the "Convertible Preferred Stock") which may, at
the option of the Registrant, be paid as dividends in kind on the
Convertible Preferred Stock.
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended
(the "Securities Act") based on the average of the bid and asked prices,
$127 and $129, respectively, on August 6, 1997.
(2) Or such greater number of shares of Common Stock resulting from an
adjustment to the conversion price of the Convertible Preferred Stock
pursuant to the Certificate of Designation governing the Convertible
Preferred Stock.
(3) Pursuant to Rule 457(i) under the Securities Act, no additional filing is
required with respect to the shares of Common Stock of the Registrant
issuable upon conversion of the Convertible Preferred Stock.
(4) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act based on the average of
the high and low sales prices, $27 7/8 and $27 1/2, respectively, on August
6, 1997 as reported on the Nasdaq National Market.
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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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.
PROSPECTUS (SUBJECT TO COMPLETION)
DATED AUGUST 12, 1997
IXC COMMUNICATIONS, INC.
1,400,000 SHARES OF 7 1/4% JUNIOR CONVERTIBLE PREFERRED STOCK DUE 2007
(LIQUIDATION PREFERENCE $100 PER SHARE) AND THE COMMON STOCK
INTO WHICH THE PREFERRED STOCK IS CONVERTIBLE AND
97,481 SHARES OF COMMON STOCK
This Prospectus relates to the offer and sale by (i) the Convertible
Preferred Selling Holders (as defined herein) of (a) up to 1,400,000 shares of
7 1/4% Junior Convertible Preferred Stock Due 2007, par value $0.01 per share
(the "Convertible Preferred Stock"), of IXC Communications, Inc., a Delaware
corporation (the "Company") and (b) the shares of common stock, par value $.01
per share (the "Common Stock"), of the Company (including any shares of Common
Stock resulting from an adjustment to the conversion price of the Convertible
Preferred Stock pursuant to the antidilution provisions of the Certificate of
Designation (the "Certificate of Designation") governing the Convertible
Preferred Stock) issuable upon conversion of the Convertible Preferred Stock and
(ii) the Telecom One Selling Holders (as defined herein,and together with the
Convertible Preferred Selling Holders, the "Selling Holders") of 97,481 shares
of Common Stock (the "Telecom One Common Stock"). The shares of Convertible
Preferred Stock, the Common Stock issuable upon conversion of the Convertible
Preferred Stock and the Telecom One Common Stock to which this Prospectus
relates are collectively referred to as the "Securities"). The 1,400,000 shares
of Convertible Preferred Stock includes 1,000,000 shares of Convertible
Preferred Stock issued in the Original Offering (as defined herein) and up to
400,000 shares of Convertible Preferred Stock which may, at the option of the
Company, be issued as payment of dividends in kind on the Convertible Preferred
Stock. See "Selling Holders."
------------------------
The Common Stock is quoted on the Nasdaq National Market ("NNM") under the
symbol ("IIXC"). On August 6, 1997, the last reported sale price of the Common
Stock on the NNM was $27 7/8 per share. The Convertible Preferred Stock is
traded in the Private Offerings, Resales and Trading through Automated Linkages
("PORTAL"). On August 6, 1997, the average of the bid and asked prices of the
Convertible Preferred Stock was $128. Shares of Convertible Preferred Stock sold
pursuant to this Prospectus will not be eligible for trading in the PORTAL
Market. The Company does not intend to list the Convertible Preferred Stock on
any securities exchange or to seek approval for quotation of the Convertible
Preferred Stock through any automated quotation system. Although the Initial
Purchasers have advised the Company that they intend to make a market in the
Convertible Preferred Stock, they are not obligated to do so and may suspend any
such market-making activities at any time and without prior notice. Accordingly,
there can be no assurance that an active market for the Convertible Preferred
Stock will develop or be maintained.
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Each share of Convertible Preferred Stock has a liquidation preference of
$100. The Convertible Preferred Stock is convertible at the option of the holder
at any time, unless previously redeemed, into Common Stock of the Company at a
conversion price of $23.46 per share of Common Stock, subject to adjustment in
certain events. The Convertible Preferred Stock is not redeemable prior to April
3, 2000. On or after such date, the Convertible Preferred Stock will be
redeemable at the option of the Company, in whole or in part, at the redemption
prices set forth herein plus accrued and unpaid dividends through the redemption
date, provided that prior to April 1, 2002, the Convertible Preferred Stock will
not be subject to redemption unless for any 20 trading days within the period of
30 consecutive trading days ending on the trading day immediately prior to the
notice of redemption, the Closing Bid Price (as defined herein) for the Common
Stock on the NNM equals or exceeds 150% of the then effective conversion price.
The Convertible Preferred Stock is subject to mandatory redemption on March 31,
2007, at a redemption price of $100 per share plus accrued and unpaid dividends.
Dividends on the Convertible Preferred Stock are cumulative from the April 1,
1997 (the "Original Offering Date") and are payable quarterly in arrears on each
March 31, June 30, September 30 and December 31 commencing June 30, 1997 out of
funds legally available therefor. Dividends payable prior to or on March 31,
1999 shall be, at the option of the Company, payable (i) in cash or (ii) through
the issuance of additional shares of Convertible Preferred Stock equal to the
dividend amount divided by the liquidation preference of such additional shares.
After March 31, 1999, to the extent and for so long as the Company is not
permitted to pay cash dividends on the Convertible Preferred Stock by the terms
of any then outstanding indebtedness or any other agreement or instrument to
which the Company is subject, the Company shall pay dividends, which shall
accrue at the rate per annum of 8 3/4%, through the issuance of additional
shares of Convertible Preferred Stock. The Convertible Preferred Stock ranks
junior to the Company's outstanding Series 3 Preferred Stock (as defined herein)
and will rank on a parity with the Exchangeable Preferred Stock (as defined
herein) with respect to the payment of dividends and amounts upon liquidation,
dissolution and winding up. At June 30, 1997, the aggregate liquidation
preference of the Series 3 Preferred Stock, including accrued and unpaid
dividends, was $20.0 million. See "Risk Factors -- Ranking; Ability to Pay
Dividends on the Convertible Preferred Stock" and "Description of Convertible
Preferred Stock."
------------------------
The Selling Holders may sell the Securities to which this Prospectus relates
from time to time through underwriters or dealers, through brokers or other
agents, or directly to one or more purchasers, at market prices prevailing at
the time of sale or at prices otherwise negotiated. The Company will receive no
proceeds from the sale of the Securities. The Company will pay all expenses
incident to the registration of the Securities offered hereby, except for
selling commissions and underwriting discounts for the Selling Holders. The
Selling Holders and any broker, dealer or underwriter that participates with the
Selling Holders in the distribution of the Securities may be deemed to be an
"underwriter" within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), and any commissions received by them and any profit on the
resale of such Securities purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The Company has agreed to
indemnify the Selling Holders against certain liabilities, including certain
liabilities under the Securities Act. See "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS TO 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 COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1997.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Commission. Such reports, proxy statements, information statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at its offices at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such materials can be obtained by mail from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such reports, proxy statements,
information statements and other information concerning the Company are also
available for inspection at the offices of the NNM, 1735 K Street, N.W.,
Washington, D.C. 20006. In addition the Commission maintains an Internet site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the Commission.
The Company has filed with the Commission a registration statement on Form
S-3 (together with all exhibits, schedules, amendments, and supplements thereto,
the "Registration Statement") under the Securities Act with respect to the
Common Stock offered by this Prospectus. This Prospectus, which forms a part of
the Registration Statement, does not contain all the information set forth in
the Registration Statement (certain parts of which have been omitted in
accordance with the rules and regulations of the Commission). For further
information with respect to the Company and the Common Stock, reference is made
to the Registration Statement. Statements contained in this Prospectus as to the
contents of any contract, agreement, or other document are not necessarily
complete, and, in each instance, reference is made to the copy of the document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by reference to such exhibit. The Registration
Statement may be inspected and copied at the public reference facilities at the
Commission's offices at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven
World Trade Center, 13th Floor, New York, New York, 10048. Copies of all or any
part thereof may be obtained from such office upon payment of prescribed fees.
2
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
(1) The Annual Report of the Company on Form 10-K (File No. 0-20803)
for its fiscal year ended December 31, 1996;
(2) The Company's Current Reports on Form 8-K dated February 27, 1997,
March 6, 1997, March 26, 1997, April 1, 1997, July 3, 1997, July 29, 1997
and August 5, 1997;
(3) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997;
(4) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, as amended;
(5) The description of the Common Stock contained in Amendment No. 2
to Registration Statement on Form S-1 (File No. 333-4061);
(6) The Company's definitive Proxy Statement for the Annual Meeting of
Stockholders on May 6, 1997; and
(7) All documents subsequently filed by the Company with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act prior to the termination of this offering shall be deemed to be
incorporated by reference in this Prospectus. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein, modified or
supersedes such statement. Any such statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a
part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of the documents
that have been incorporated by reference herein, other than exhibits to such
documents (unless such exhibits are specifically incorporated by reference
therein). Requests for such copies should be directed to: Kelli McGlynn,
Investor Relations Coordinator, IXC Communications, Inc., 5000 Plaza on the
Lake, Suite 200, Austin, Texas 78746, telephone number (512) 328-1112.
3
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RISK FACTORS
In addition to the other information contained in this Prospectus the
following factors should be considered carefully in evaluating an investment in
the Convertible Preferred Stock or the Common Stock, which involves a high
degree of risk. Statements contained in this Prospectus regarding the Company's
expectations with respect to its network expansion, related financings and fiber
sale and cost-saving agreements, future operations and other information, which
can be identified by the use of forward-looking terminology, such as "may,"
"will," "expect," "anticipate," "estimate," "seek" or "continue" or the negative
thereof or other variations thereon or comparable terminology, are
forward-looking statements. The discussions set forth below constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including risks and uncertainties, that could cause
actual results to differ materially from results referred to in the
forward-looking statements. There can be no assurance that the Company's
expectations regarding any of these matters will be fulfilled. As used herein,
unless the context otherwise requires, the "Company" refers to IXC
Communication, Inc. and its subsidiaries, including predecessor corporations.
Certain terms used herein are defined in the Glossary at page A-1.
POSSIBLE INABILITY TO COMPLETE THE PROPOSED EXCHANGEABLE PREFERRED OFFERING
Although the Company is seeking to realize up to $200.0 million in gross
proceeds from a proposed offering (the "Proposed Exchangeable Preferred
Offering") of a new series of its junior exchangeable preferred stock due 2009
(the "Exchangeable Preferred Stock"), there can be no assurance that the Company
will be successful in completing the Proposed Exchangeable Preferred Offering,
or, if completed, in a sufficient amount so as to realize gross proceeds in such
amount. The ability of the Company to complete the Proposed Exchangeable
Preferred Offering is dependent on many factors, including the future prospects
of the Company and its industry in general, sales, earnings and other financial
and operating results of the Company in recent periods and market conditions. An
inability to complete the Proposed Exchangeable Preferred Offering or an
alternative financing would prevent or significantly delay the expansion of the
Company's network (the "Network") and would have a material adverse effect on
the Company and the value of the Common Stock and the Convertible Preferred
Stock.
NEGATIVE CASH FLOW AND CAPITAL REQUIREMENTS
The Company's capital expenditures were $140.9 million for the six months
ended June 30, 1997 and the Company's EBITDA minus interest expense and capital
expenditures (adjusted for the change in working capital) for such period was
negative $113.5 million. The Company estimates that the total capital
expenditures for 1997 will be at least $400.0 million and the Company expects to
continue to make substantial capital expenditures thereafter. The Company
anticipates meeting the cash requirements relating to such capital expenditures
from cash on hand, the proceeds of the Proposed Exchangeable Preferred Offering,
the anticipated proceeds from the sale of fiber to LCI (the "LCI Fiber Sale"),
the anticipated proceeds from the sale of fiber to MCI (the "MCI Fiber Sale"),
the Proposed Credit Facility (defined below), additional cost-saving
arrangements, cash flow from its operations, the NTFC Equipment Facility (as
defined) and other vendor financing, if available. The amount of actual capital
expenditures may vary materially as a result of cost-saving arrangements,
increases or decreases in the amount of traffic on the Network, unexpected
costs, delays or advances in the timing of certain capital expenditures and
other factors. The Company's ability to meet the cash costs of such capital
expenditures is dependent upon the Company's ability to complete the
construction of the Network expansion in a timely manner and otherwise perform
its obligations to the satisfaction of each of LCI and MCI so that it can
complete the LCI Fiber Sale and the MCI Fiber Sale, to enter into cost-saving
arrangements with carriers or other large users of fiber capacity, to otherwise
raise significant capital and/or to significantly increase its cash flow. The
failure of the Company to accomplish any of the foregoing may significantly
delay or prevent such capital expenditures, which would have a material adverse
effect on the Company and the value of the Common Stock and the Convertible
Preferred Stock.
The Company's switched services business will require cash to meet
operating expenses. In order to offer switched long distance services, the
Company installed switches, connected them to its Network and to the LECs (as
defined), acquired software and hired the personnel needed to establish a
national switched
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network. The Company's switched services business generated negative EBITDA for
each of the four quarters of 1996. EBITDA from switched services remained
negative in the first two quarters of 1997 and the Company believes it is likely
to remain negative for the balance of the year, due to, among other things,
higher-than-anticipated access costs and uneven traffic patterns creating high
network overflow costs. Although the Company is attempting to control such costs
and improve EBITDA from switched services, there is no assurance it will be
successful in doing so. The Company expects that the Network expansion will
result in an improvement in the EBITDA generated by its switched services
business. For a discussion of important factors that could cause the Company's
switched services business to fail to generate positive EBITDA, see
"-- Development Risks and Dependence on Switched Services Business."
The Company is required to make annual interest payments of $35.6 million
with respect to the Company's outstanding $285.0 million principal amount of the
12 1/2% Senior Notes Due 2005 (the "Senior Notes"). The Company will also be
required to make interest payments and, beginning December 31, 1997, principal
payments in connection with borrowings under a secured equipment financing
facility of up to $28.0 million entered into with NTFC Capital Corporation, an
affiliate of Northern Telecom Inc. ("Nortel"), in July 1997 (the "NTFC Equipment
Facility"). In addition, the Company will also be required to make interest
payments with respect to the Proposed Credit Facility, if obtained, and dividend
payments with respect to the Company's 10% Junior Series 3 Cumulative Redeemable
Preferred Stock (the "Series 3 Preferred Stock"), the Convertible Preferred
Stock and the Exchangeable Preferred Stock. Delays in the Network expansion,
larger than anticipated capital expenditures for the Network or continued
negative cash flow from the switched services business could impair the ability
of the Company to meet its obligations under the Senior Notes and other
indebtedness, to pay cash dividends on the Series 3 Preferred Stock, the
Convertible Preferred Stock and the Exchangeable Preferred Stock and to access
additional sources of funding, any of which would have a material adverse effect
on the Company and the value of the Convertible Preferred Stock and the Common
Stock. See "-- Risks Relating to the Network Expansion," and "-- Development
Risks and Dependence on Switched Services Business."
The Company anticipates that following the Proposed Exchangeable Preferred
Offering, and in the event that it is unable to enter into the Proposed Credit
Facility, obtain vendor financing on acceptable terms or consummate the MCI
Fiber Sale and the LCI Fiber Sale, it will be required to (x) sell additional
equity and/or debt securities in order to complete its planned Network expansion
or (y) curtail or delay its planned Network expansion. Furthermore, before
incurring additional indebtedness, the Company may be required to obtain the
consent of its debtholders. The Company's failure to obtain additional financing
or, in the alternative, its decision to curtail or delay its planned network
expansion could have a material adverse effect on its business, results of
operations and financial condition. The cash requirements described above do not
include any cash which may be required for acquisitions the Company may make.
RANKING; ABILITY TO PAY DIVIDENDS ON THE CONVERTIBLE PREFERRED STOCK
The Convertible Preferred Stock ranks senior to the Common Stock and will
rank on parity with the Exchangeable Preferred Stock with respect to payment of
dividends and amounts upon liquidation, dissolution or winding up. The
Convertible Preferred Stock ranks junior to the Series 3 Preferred Stock with
respect to the payment of dividends and amounts upon liquidation, dissolution or
winding up.
The ability of the Company to pay any dividends is subject to applicable
provisions of state law and to pay cash dividends on the Convertible Preferred
Stock after March 31, 1999 and on the Exchangeable Preferred Stock after
February 15, 2001, will be subject to the terms of the Senior Notes Indenture
(as defined), the Series 3 Preferred Stock and any other indebtedness of the
Company then outstanding. The terms of the Senior Notes Indenture currently
prohibit the Company from paying cash dividends on any preferred stock,
including the Convertible Preferred Stock. The ability of the Company in the
future to pay cash dividends on the Convertible Preferred Stock will depend on
its meeting certain financial criteria, which in turn will require significant
improvements in the Company's EBITDA and Consolidated Net Worth (as defined in
the Senior Notes Indenture). There can be no assurance that the Company will be
able to meet such financial criteria in order to pay cash dividends on the
Convertible Preferred Stock. Moreover, under Delaware law the Company is
permitted to pay dividends on its capital stock, including the Convertible
Preferred Stock, only out of its
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surplus, or in the event that it has no surplus, out of its net profits for the
year in which a dividend is declared or for the immediately preceding fiscal
year. Surplus is defined as the excess of a company's total assets over the sum
of its total liabilities plus the par value of its outstanding capital stock. In
order to pay dividends in cash, the Company must have surplus or net profits
equal to the full amount of the cash dividend at the time such dividend is
declared. The Company cannot predict what the value of its assets or the amount
of its liabilities will be in the future and, accordingly, there can be no
assurance that the Company will be able to pay cash dividends on the Convertible
Preferred Stock.
The holders of Series 3 Preferred Stock, subject to the terms of the
Company's Restated Certificate of Incorporation, as amended (the "Restated
Certificate"), are entitled to receive a liquidation preference of $1,000 per
share, plus an amount equal to all accrued and unpaid dividends and the Company
may voluntarily redeem the Series 3 Preferred Stock for $1,000 per share, plus
an amount equal to all accrued and unpaid dividends. In addition, the holders of
Series 3 Preferred Stock are entitled to receive annual dividends, subject to
applicable provisions of state law and the limitations of the Restated
Certificate and in the Senior Notes Indenture, 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.
Although dividends on the Convertible Preferred Stock may be made, at the
option of the Company, in cash or with additional shares of Convertible
Preferred Stock, all accrued dividends on the Series 3 Preferred Stock must be
paid in cash before the Company can pay any cash dividends in respect of the
Convertible Preferred Stock. In addition, the Convertible Preferred Stock
prohibits the payment of cash dividends on pari passu preferred stock (including
the Exchangeable Preferred Stock) unless and until cash dividends are being paid
on the Convertible Preferred Stock.
SUBSTANTIAL INDEBTEDNESS; INSUFFICIENCY OF EARNINGS TO COVER FIXED CHARGES,
INCLUDING DIVIDENDS ON THE CONVERTIBLE PREFERRED STOCK
Following the consummation of the Proposed Exchangeable Preferred Offering,
the Company will remain highly leveraged. As of June 30, 1997, the Company had
outstanding approximately $300.7 million of long-term debt and capital lease
obligations (including the current portion thereof) principally related to its
outstanding $285.0 million principal amount of the Senior Notes. The Proposed
Exchangeable Preferred Offering will result in a ratio of debt and redeemable
preferred stock to stockholders' equity for the Company which will be
significantly higher than that which presently exists. Furthermore, the Company
may borrow up to $28 million under the NTFC Equipment Facility. In addition, the
Company is engaged in discussions with potential lenders regarding a revolving
credit facility (the "Proposed Credit Facility"). The Company anticipates that
borrowings under the Proposed Credit Facility would be available with respect to
a percentage of its eligible accounts receivable. Although the total
availability under the Proposed Credit Facility will vary from time to time
according to the aggregate amount of eligible accounts receivable, the Company
anticipates that the lender will impose a limit on borrowings under the Proposed
Credit Facility. There can be no assurance that the Company will obtain the
Proposed Credit Facility on favorable terms, if at all.
Simultaneously with the Proposed Exchangeable Preferred Offering, the
Company is soliciting consents from the holders of the Senior Notes to permit,
among other things, the incurrence by the Company of additional indebtedness
which, if permitted, could be substantial.
The Company's significant debt burden could have several important
consequences to the holders of the Common Stock and the Convertible Preferred
Stock, including, but not limited to: (i) 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; (ii) the Company's significant degree of leverage
could increase its vulnerability to changes in general economic conditions or
increases in prevailing interest rates; (iii) the Company's flexibility to
obtain additional financing in the future, as needed to continue the Network
expansion or for 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 (the "Senior Notes Indenture") and in agreements
relating to
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other indebtedness; (iv) a substantial portion of the indebtedness of the
Company will mature in accordance with its terms prior to the mandatory
redemption of the Convertible Preferred Stock; and (v) the Company may be more
leveraged than certain of its competitors, which may be a competitive
disadvantage. 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 or the Series 3 Preferred Stock, the Convertible Preferred
Stock or the Exchangeable Preferred Stock as payments become due or that the
Company will be able to refinance the Senior Notes or other indebtedness at
maturity or the Convertible Preferred Stock or the Exchangeable Preferred Stock
upon mandatory redemption.
The Company anticipates that earnings will be insufficient to cover fixed
charges and preferred stock dividends for the next several years. In order for
the Company to meet its debt and dividend service obligations, and its dividend
and redemption obligations with respect to the Convertible Preferred Stock, the
Company will need to substantially improve its operating results. There can be
no assurance that the Company's operating results will be sufficient to enable
the Company to meet its debt and dividend service obligations, and its dividend
and redemption obligations with respect to the Convertible Preferred Stock. In
the absence of such operating results, the Company could face substantial
liquidity problems and might be required to raise additional financing through
the issuance of debt or equity securities; however, there can be no assurance
that the Company would be successful in raising such financing.
RECENT AND EXPECTED LOSSES
The Company reported a net loss of $37.4 million for the year ended
December 31, 1996 and a net loss of $48.7 million for the six months ended June
30, 1997. The Company does not expect to generate net income in 1997, due to
substantial interest expense associated with the Senior Notes and operational
expenses associated with the switched long distance business. Thereafter, the
Company's ability to generate operating income, EBITDA and net income will
depend to a great extent on demand for the private line circuits constructed in
the Network expansion and the success of the Company's switched long distance
and data services. There can be no assurance that the Company will return to
profitability in the future. Failure to generate operating income, EBITDA and
net income will impair the Company's ability to: (i) meet its obligations under
the Senior Notes or other indebtedness; (ii) pay cash dividends on the Series 3
Preferred Stock, the Convertible Preferred Stock and the Exchangeable Preferred
Stock; (iii) expand its switched services business; and (iv) raise additional
equity or debt financing which will be necessary to continue the Network
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 and the
Convertible Preferred Stock.
EFFECT OF SUBSTANTIAL ADDITIONAL INDEBTEDNESS ON THE COMPANY'S ABILITY TO MAKE
PAYMENTS ON THE CONVERTIBLE PREFERRED STOCK
The Senior Notes Indenture and the Certificate of Designation limit, but do
not prohibit, the incurrence of additional indebtedness by the Company and its
subsidiaries, and the Company may incur substantial additional indebtedness
during the next few years to finance the construction of network routes and
purchase of network electronics. All additional indebtedness of the Company will
rank senior in right of payment to any payment obligations with respect to the
Convertible Preferred Stock (to the extent that such additional indebtedness
represents senior indebtedness). The debt service requirements of any additional
senior indebtedness would make it more difficult for the Company to pay cash
obligations with respect to the Convertible Preferred Stock.
RISKS RELATING TO THE NETWORK EXPANSION; MAINTENANCE OF NETWORK, RIGHTS-OF-WAY
AND PERMITS
The continuing Network expansion is an essential element of the Company's
future success. The Company has, from time to time, experienced delays with
respect to the construction of certain portions of the Network expansion and may
experience similar delays in the future. These delays have delayed the Company's
ability to transfer long distance traffic from leased facilities to owned
facilities. Although the Company has made significant progress, right-of-way
acquisition for, and construction of, the New York to Los Angeles via St. Louis
route is not yet complete. The Company has substantial existing commitments to
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purchase materials and labor for construction of the Network expansion, and will
need to obtain additional materials and labor which may cost more than
anticipated. Substantial segments of the route from New York to Los Angeles via
St. Louis and all of the route from Washington to Houston via Atlanta are being
constructed by contractors or, pursuant to cost-saving arrangements, by third
parties that will include the Company's fiber in routes such carriers are
constructing for their own use. Difficulties or delays with respect to any of
the foregoing may significantly delay or prevent the completion of the Network
expansion, which would have a material adverse effect on the Company, its
financial results and the value of the Common Stock and the Convertible
Preferred Stock.
The expansion of the Company's Network and its construction or acquisition
of new networks will be dependent, among other things, on its ability to acquire
rights-of-way and required permits from railroads, utilities and governmental
authorities on satisfactory terms and conditions and on its ability to finance
such expansion, acquisition and construction. Once expansion of the Network is
completed and requisite rights and permits are obtained, there can be no
assurance that the Company will be able to maintain all of its existing rights
and permits. Loss of substantial rights and permits or the failure to enter into
and maintain required arrangements for the Company's Network could have a
material adverse effect on the Company's business, financial condition and
results of operations and on the value of the Common Stock and the Convertible
Preferred Stock.
CONTRACTS CONTINGENT UPON SATISFACTORY COMPLETION OF NETWORK EXPANSION
In December 1996, the Company entered into an agreement with Vyvx whereby
the parties will exchange the rights to use fibers. The parties are required to
complete their routes by December 31, 1997, with penalties taking effect in July
1998 if one party, but not the other, has failed to complete its route. Although
the Company anticipates that it will complete its route in time to avoid any
penalty, there can be no assurance in this regard. Such penalties increase from
$400,000 per month commencing in July 1998 to $800,000 per month commencing in
October 1998. The Company entered into a significant agreement with a major long
distance carrier that will obtain private line services from the Company
utilizing routes included in the Network expansion, including routes under
construction. Under this contract, the Company will supply DS-3 circuits for
aggregate revenues of over $24.0 million during 1997-1998. Delays in completion
of such routes could result in cancellation of orders under such contract. In
February 1997, the Company entered into an agreement with respect to the LCI
Fiber Sale. The agreement provides for (i) the Company to issue credits to LCI
in the amount of $3.00 per route mile per day on uncompleted sections if the
route is not completed by September 1, 1997 and (ii) the Company to provide
OC-48 capacity to LCI along uncompleted sections (which capacity may have to be
obtained by the Company from other carriers) if the route is not completed by
December 1, 1997. The Company expects that, although the route from Chicago to
Dallas will be delivered to LCI prior to the incurrence of any obligation to
give substantial credits to LCI, the route from Dallas to Los Angeles will not
be completed until late 1997. The Company does not expect the effect of giving
LCI credits or capacity along this route will be material. In March 1997, the
Company entered into an agreement with respect to the MCI Fiber Sale. The
agreement provides for the Company to issue a credit to MCI of $100 per route
mile per month along any incomplete route segment, commencing January 1, 1998.
There can be no assurance that the Company will be able to complete the
expansion routes without significant delays or penalties, within its budget or
at all. Any significant delay in, or the Company's inability to complete, the
Network expansion would have a material adverse effect on the Company's ability
to perform its obligations pursuant to the above contracts and on its business,
financial condition and results of operations and on the value of the Common
Stock and the Convertible Preferred Stock.
DEPENDENCE UPON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY RISKS
The Company's success in marketing its services to business and government
users requires that the Company provide superior reliability, capacity and
security via its Network. The Company's Network and networks upon which it
depends are subject to physical damage, power loss, capacity limitations,
software defects, breaches of security (by computer virus, break-ins or
otherwise) and other disruptions which may cause interruptions in service or
reduced capacity for customers and which could have a material adverse
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effect on the Company's business, financial condition and results of operations
and on the value of the Common Stock and the Convertible Preferred Stock.
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 (WorldCom, MCI, LCI and others) 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. Although the Company believes
that there are significant barriers to entry for some new entrants that may
consider building a new fiber optic network, such as substantial construction
costs and the difficulty and expense of securing appropriate rights-of-way,
establishing and maintaining a sufficient customer base, recruiting and
retaining appropriate personnel and maintaining a reliable network, certain of
these barriers may not apply to some new entrants (such as Qwest, utility
companies or railroads which already have significant rights-of-way). Since the
cost of the actual fiber is a relatively small portion of the cost of building
new transmission lines, companies 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 shown
the potential to greatly expand the capacity of existing and new fiber optic
cable. Although such technological advances may enable the Company to increase
its capacity, an increase in the capacity of the Company's competitors could
adversely affect the Company's business. 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. As a result, certain
industry observers have predicted that, within a few years, there may be
dramatic and substantial price reductions and that long distance calls will not
be materially more expensive than local calls. Price reductions could have a
material adverse effect on the Company and the value of the Common Stock and the
Convertible Preferred Stock.
DEVELOPMENT RISKS AND DEPENDENCE ON SWITCHED SERVICES BUSINESS
The success of the Company in the switched services 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 the Network expansion. Prior to 1996 the Company had not
previously managed a switched long distance network and there can be no
assurance that its switched services business can generate positive EBITDA or
net income. The failure of the Company to generate increased customer traffic,
to complete these routes in a timely manner, or to effectively manage the
switched network and related customer service or to generate positive EBITDA or
net income from the switched services business would have a material adverse
effect on the Company. The Company's switched services business will require
cash to meet its operating expenses. The Company's switched services business
generated negative EBITDA for each of the four quarters of 1996. EBITDA from
switched services remained negative in the first two quarters of 1997 and the
Company believes it is likely to remain negative for the balance of the year,
due to higher-than-anticipated access costs and uneven traffic patterns creating
high network overflow costs. Although the Company is attempting to control such
costs and improve EBITDA from switched services, there is no assurance it will
be successful. The Company expects that the Network expansion will result in an
improvement in the gross margins and EBITDA generated by its switched services
business. The Company has experienced and expects to continue to experience
difficulties in commencing services for end users of carrier customers. Although
the Company believes that its performance with respect to these matters has met
or exceeded industry norms, such difficulties may adversely affect the Company's
relationships with its customers.
Important factors that could cause the Company's switched services business
to fail to generate positive EBITDA include changes in the businesses of the
Company's reseller customers, an inability to attract new customers or to
quickly transfer new customers to its Network without problems, the loss of
existing
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customers, problems in the operation of the switched network, the Company's lack
of experience with switched services, increases in operating expenses or other
factors affecting the Company's revenue or expenses, including delays in the
construction of the Network expansion and increased expenses related to access
charges and network overflow, not all of which are capable of control by the
Company. If traffic does not increase and costs are not adequately controlled
there can be no assurance that the switched long distance business will ever
generate positive EBITDA. In addition, to the extent that LECs grant volume
discounts with respect to local access charges, the Company may have a cost
disadvantage versus the larger carriers. Furthermore, the credit risk for the
Company's switched services business is substantially greater than the credit
risk for the Company's private line business, because switched long distance
customers will be charged in arrears on the basis of MOUs (which are frequently
subject to dispute), and because many switched long distance customers (in
particular, resellers of debit card services) are not as well capitalized as
most of the Company's private line customers.
RISKS INHERENT IN RAPID GROWTH
Part of the Company's strategy is to achieve rapid growth through expanding
its switched services business and through completing the Network expansion. In
addition, the Company may from time to time make acquisitions of resellers which
it believes provide a strategic fit with its business and Network. See
"-- Integration of Acquired Business; Business Combinations; Change of Control."
The Company's rapid growth has placed, and its planned future growth will
continue to place, a significant and increasing strain on the Company's
financial, management, technical, information and accounting resources. See "--
Dependence on Billing, Customer Services and Information Systems." Continued
rapid growth would require: (i) the retention and training of new personnel;
(ii) the 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 services business and the Network 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 and the Convertible Preferred Stock.
DEPENDENCE ON BILLING, CUSTOMER SERVICES AND INFORMATION SYSTEMS
Sophisticated information and processing systems are vital to the Company's
growth and its ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. Billing and information systems for
the Company's historical lines of business have been produced largely in-house
with partial reliance on third-party vendors. These systems have generally met
the Company's needs due in part to the low volume of customer billing. As the
Company's long distance operation continues to expand, the need for
sophisticated billing and information systems will increase significantly. The
Company's plans for the development and implementation of its billing systems
rely, for the most part, on the delivery of products and services by third party
vendors. Failure of these vendors to deliver proposed products and services in a
timely and effective manner and at acceptable costs, failure of the Company to
adequately identify all of its information and processing needs, failure of the
Company's related processing or information systems or the failure of the
Company to upgrade systems as necessary could have a material adverse effect on
the ability of the Company to reach its objectives, on its financial condition
and on its results of operations and on the value of the Common Stock and the
Convertible Preferred Stock.
INTEGRATION OF ACQUIRED BUSINESSES; BUSINESS COMBINATIONS
As part of its growth strategy, the Company acquired Telecom One, a
switchless reseller, in July 1997 and may, from time to time, acquire
businesses, assets or securities of companies which it believes provide a
strategic fit with its business and Network. Although the Company currently has
no commitments or agreements with respect to any possible acquisitions, it has
reviewed potential acquisition candidates and has held preliminary discussions
with a number of these candidates. Any such acquisitions will be accompanied by
the risks commonly associated with acquisitions. These risks include potential
exposure to unknown liabilities of acquired companies, the difficulty and
expense of integrating the operations and personnel of the
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companies, the potential disruption to the business of the Company, the
potential diversion of management time and attention, the impairment of
relationships with and the possible loss of key employees and customers of the
acquired business, the incurrence of amortization expenses if an acquisition is
accounted for as a purchase and dilution to the stockholders of the Company if
the acquisition is made for stock. Any acquired businesses will need to be
integrated with the Company's existing operations. This will entail, among other
things, integration of switching, transmission, technical, sales, marketing,
billing, accounting, quality control, management, personnel, payroll, regulatory
compliance and other systems and operating hardware and software, some or all of
which may be incompatible with the Company's existing systems. The Company has
limited expertise dealing with these problems. In addition, persons receiving
Common Stock in an acquisition may sell such stock, which could have a negative
impact on the market price of the Common Stock. There can be no assurance that
services, technologies or businesses of acquired companies will be effectively
assimilated into the business or product offerings of the Company or that they
will contribute to the Company's revenues or earnings to any material extent.
The risks associated with acquisitions could have a material adverse effect on
the Company and the value of the Common Stock and the Convertible Preferred
Stock.
RELIANCE ON MAJOR CUSTOMERS
The Company's ten largest customers in 1996 accounted for approximately 70%
of its revenues, with Excel, WorldCom and Frontier as its three largest
customers. Excel first became a customer in 1996 and accounted for 35% of the
Company's revenues (69% of the Company's switched long distance revenues) during
1996. During 1994, 1995 and 1996, WorldCom accounted for approximately 25%, 20%
and 8% respectively, of the Company's revenues (the Company derived no revenues
from capacity-exchange arrangements with WorldCom in 1994, and approximately 4%
and 3% of its revenues from such arrangements with WorldCom in 1995 and 1996,
respectively) and Frontier (including Allnet) accounted for 23%, 21% and 10%,
respectively, of the Company's revenues.
Many of the Company's arrangements with large customers do not provide the
Company with guarantees that customer usage will be maintained at current
levels. In addition, construction by certain of the Company's customers of their
own facilities or further consolidations in the telecommunications industry
involving the Company's customers would lead such customers to reduce or cease
their use of the Company's services which could have a material adverse effect
on the Company and the value of the Common Stock and the Convertible Preferred
Stock.
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); (ii)
to utilize the volume of MOUs that the Company expects it to utilize or (iii) to
maintain and expand its business, could result in a material adverse effect on
the Company.
DEPENDENCE UPON SOLE AND LIMITED SOURCES OF SUPPLY
The Company relies on other companies to supply certain key components of
its network infrastructure, including telecommunications services, network
capacity and switching and networking equipment, which, in the quantities and
quality demanded by the Company, are available only from sole or limited
sources. The Company is also dependent upon LECs to provide telecommunications
services and facilities to the Company and its customers. The Company has from
time to time experienced delays in receiving telecommunications services and
facilities, and there can be no assurance that the Company will be able to
obtain such services or facilities on the scale and within the time frames
required by the Company at an affordable cost, or at all. Any such difficulty in
obtaining such services or additional capacity on a timely basis at an
affordable cost, or at all, would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
also is dependent on its suppliers' ability to provide products and components
that comply with various Internet and telecommunications standards, interoperate
with products and components from other vendors and fulfill their intended
function as a part of the network infrastructure. Any failure of the
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Company's suppliers to provide such products could have a material adverse
effect on the Company's business, financial condition and results of operations.
COMPETITION
The telecommunications industry is highly competitive. Many of the
Company's competitors 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 Network expansion. Qwest has announced that it is building a new
nationwide long distance fiber optic network and Frontier has announced that it
will pay $500 million to obtain fibers in Qwest's 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.
An alternative method of transmitting telecommunications traffic is through
satellite transmission. Satellite transmission is superior to fiber optic
transmission for distribution communications, for example, video broadcasting.
Although satellite transmission is not preferred to fiber optic transmission for
voice traffic in most parts of the United States because it exhibits a slight
(approximately one-quarter-second) time delay, such delay is not important for
many data-oriented uses. In the event the market for data transmission grows,
the Company will compete with satellite carriers in such market. Also, at least
one satellite company, Orion Network Systems, Inc., has announced its intention
to provide Internet access services to businesses through satellite technology.
The Company competes with large and small facilities-based interexchange
carriers as well as with other coastto-coast and regional fiber optic network
providers. There are currently four principal facilities-based long distance
fiber optic networks (AT&T, MCI, Sprint and WorldCom). The Company is aware that
others are planning additional networks that, if constructed, could employ
similar advanced technology as the Company's Network. Upon completion of the
Company's Network, each of Qwest, Frontier and GTE will have a fiber network
similar in geographic scope and potential operating capability to that of the
Company. The Company also sells switched services to both facilities-based
carriers and nonfacilities-based carriers (switchless resellers), competing with
facilities-based carriers such as AT&T, MCI, Sprint, WorldCom and certain
regional carriers. The Company competes in its markets on the basis of price,
transmission quality, network reliability and customer service and support. The
ability of the Company to compete effectively in its markets will depend upon
its ability to maintain high quality services at prices equal to or below those
charged by its competitors many of whom have extensive experience in the long
distance market. In addition, the Telecom Act of 1996 (as defined) will allow
the RBOCs and others to enter the long distance market. There can be no
assurance that the Company will be able to compete successfully with existing
competitors or new entrants in its markets. Failure by the Company to do so
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "-- Risks Related to Technological
Change."
On February 15, 1997, the United States Trade Representative designate
announced that an agreement had been reached with World Trade Organization
("WTO") countries to open world telecommunications markets to competition. The
agreement, known as the WTO Basic Telecommunications Services Agreement ("WTO
Agreement"), is scheduled to become effective on January 1, 1998. The WTO
Agreement will provide U.S. companies with foreign market access for local, long
distance, and international services, either on a facilities basis or through
resale of existing network capacity. The WTO Agreement also provides that U.S.
companies can acquire, establish or hold a significant stake in
telecommunications companies around the world. Conversely, foreign companies
will be permitted to enter domestic U.S. telecommunications markets and acquire
ownership interest in U.S. companies. On June 4, 1997, the FCC initiated a
rulemaking proceeding to bring FCC policies and procedures into conformance with
the WTO Agreement. Therefore,
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foreign telecommunications companies could also be significant new competitors
to the Company or the Company's customers.
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 one or more members of senior management or the failure
to recruit additional qualified personnel in the future could significantly
impede attainment of the Company's financial, expansion, marketing and other
objectives.
DEVELOPMENT RISKS OF THE FRAME RELAY AND ATM TRANSMISSION BUSINESS
The Company began offering Frame Relay, ATM and other data transmission
services during the first quarter of 1997. Although the Company has not yet made
a material investment for, or generated material revenues from, this business,
the Company believes that data transmission services present a promising
opportunity for the Company. To succeed in providing these services, the Company
must compete with AT&T, MCI, Sprint, WorldCom and other large competitors. In
addition, the Company expects that it will be necessary to continue to make
upgrades to its Network (in advance of related revenues) to be competitive in
providing these services. The provision of data transmission services involves
technical issues with which the Company has very limited experience. In
addition, the provision of these services must be successfully integrated with
the Company's existing businesses. To the extent the Company does not
successfully compete in providing these services, it will not realize a return
on its investment in data switches and other equipment and it will not benefit
from the growth, if any, in demand for these services. A failure to successfully
compete in data transmission services could have a material adverse effect on
the Company and the value of the Common Stock and the Convertible Preferred
Stock.
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
Common Stock and the Convertible Preferred Stock. In 1996 the federal government
enacted the Telecommunications Act of 1996 (the "Telecom Act of 1996"), 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; and/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 and the Convertible Preferred Stock. On July 18, 1997,
in Iowa Utilities Board v. FCC, the United States Court of Appeals for the
Eighth Circuit invalidated key portions of the FCC's August 29, 1996
interconnection order, which the FCC had adopted to facilitate the emergence of
local exchange competition. Although the FCC has announced that it will seek
Supreme Court review of the Eighth Circuit's ruling, the further emergence and
development of local exchange competition may likely be delayed as a result.
Consequently, the Company and its customers may not benefit as quickly from the
lower access costs that might otherwise have resulted had competition in the
provision of local access services not been thus delayed. Further, the FCC has
issued orders relating to universal service funding by interstate
telecommunications carriers, and to the access charges the Company and its
customers are required to pay to LECs. These orders have been appealed. The
outcomes of the appeals, and the outcomes of future FCC
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proceedings on these issues, are impossible to predict. In addition, the Telecom
Act of 1996 provides that state proceedings may in certain instances determine
access charges the Company and its customers are required to pay to the LECs.
There can be no assurance that such proceedings will not result in increases in
such rates. Such increases could have a material adverse effect on the Company
or its customers.
POTENTIAL LIABILITY OF INTERNET ACCESS PROVIDERS
The law governing the liability of on-line services providers and Internet
access providers for participating in the hosting or transmission of
objectionable materials or information currently is unsettled. Under the terms
of the Telecom Act of 1996, both civil and criminal penalties can be imposed for
the use of interactive computer services for the transmission of certain
indecent or obscene communications. However, this provision was recently found
to be unconstitutional by the United States Supreme Court in American Civil
Liberties Union v. Janet Reno. Nonetheless, many states have adopted or are
considering adopting similar requirements, and the constitutionality of such
state requirements remains unsettled at this time. In addition, several private
lawsuits have been filed seeking to hold Internet access providers accountable
for information which they transmit. In one such case, the court ruled that an
Internet access provider is not directly liable for copies that are made and
stored on its computer but may be held liable as a contributing infringer where,
with knowledge of the infringing activity, the Internet access provider induces,
causes or materially contributes to another person's infringing conduct. While
the outcome of these activities is uncertain, the ultimate imposition of
potential liability on Internet access providers for information which they
host, distribute or transport could materially change the way they must conduct
business. To avoid undue exposure to such liability, Internet access providers
could be compelled to engage in burdensome investigation of subscriber materials
or even discontinue offering the service altogether.
RISKS RELATED TO TECHNOLOGICAL CHANGE
The market for the Company's telecommunications services is characterized
by rapidly changing technology, evolving industry standards, emerging
competition and frequent new product and service introductions. There can be no
assurance that the Company will successfully identify new service opportunities
and develop and bring new services to market. The Company is also at risk from
fundamental changes in the way telecommunications services are marketed and
delivered. The Company's data communications service strategy assumes that
technology such as Frame Relay and ATM protocols, utilizing fiber optic or
copper-based telecommunications infrastructures, will continue to be the primary
protocols and transport infrastructure for data communications services. Future
technological changes, including changes related to the emerging wireline and
wireless transmission and switching technologies, could have a material adverse
effect on the Company's business, results of operations, and financial
condition. The Company's pursuit of necessary technological advances may require
substantial time and expense, and there can be no assurance that the Company
will succeed in adapting its telecommunications services business to alternate
access devices, conduits and protocols.
In addition, recent technological advances that show the potential to
greatly expand the capacity of existing and new fiber optic cable, which could
greatly increase supply, could have a material adverse effect on the Company.
CONCENTRATION OF STOCK OWNERSHIP
GEPT beneficially owns approximately 26.9% of the outstanding Common Stock
of the Company, Grumman Hill Investments, L.P. ("GHI") and Richard D. Irwin
together beneficially own approximately 22.6% of the outstanding Common Stock,
and three of the members of senior management and their affiliates beneficially
own approximately 18.4% of the outstanding Common Stock. Such stockholders also
control a majority of the Series 3 Preferred Stock and GEPT owns 30.0% of the
Convertible Preferred Stock. As a result, certain of these stockholders, if they
act together, generally would be able to elect a majority of 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 the Company, and would have the power to approve or disapprove
most actions requiring stockholder approval, including amendments to the
14
<PAGE> 16
Company's charter and by-laws, certain mergers or similar transactions and sales
of all or substantially all of the Company's assets (subject to approval of the
holders of Convertible Preferred Stock to the extent required by applicable
law). This concentration of stock ownership could have the effect of delaying or
preventing a change of control of the Company or the removal of existing
management and may discourage attempts to do so.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock has fluctuated over a broad range
since the completion of the Company's initial public offering in July 1996. The
trading price of the Common Stock is subject to wide fluctuations in response to
numerous factors, including, but not limited to, quarterly variations in
operating results of the Company or any of its principal customers, competition,
announcements of technological innovations or new products or pricing by the
Company or its competitors, product enhancements by the Company or its
competitors, regulatory changes, any difference between 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 Convertible Preferred Stock and the Common Stock.
ABSENCE OF PUBLIC MARKET FOR THE CONVERTIBLE PREFERRED STOCK ON RESALE
Prior to the resale of the Convertible Preferred Stock pursuant to this
Prospectus, the Convertible Preferred Stock was eligible for trading in the
PORTAL Market. Convertible Preferred Stock sold pursuant to this Prospectus will
no longer be eligible for trading in the PORTAL Market. Furthermore, the Company
does not currently intend to list the Convertible Preferred Stock resold
pursuant to this Prospectus on any securities exchange or seek approval for
quotation through any automated quotation system. Accordingly, there can be no
assurance as to the development or liquidity of any market for the Convertible
Preferred Stock resold pursuant to this Prospectus.
Although the Initial Purchasers have advised the Company that they intend
to make a market in the Convertible Preferred Stock, they are not obligated to
do so and may suspend any such market-making activities at any time without
prior notice. In addition, such market-making activity will be subject to the
limits imposed by the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Accordingly, there can be no assurance that any
market for the Convertible Preferred Stock will develop or, if one does develop,
that it will be maintained. If an active market for the Convertible Preferred
Stock fails to be sustained, the trading price of such Convertible Preferred
Stock could be materially adversely affected.
SHARES ELIGIBLE FOR FUTURE SALE
As of July 1, 1997, approximately 21 million shares of the Common Stock
beneficially owned by the Company's officers and directors and GEPT are
"restricted securities" and may in the future be sold in compliance with Rule
144 adopted under the Securities Act. In addition, at the end of 1999, the
Company will be required to pay the Telecom One Selling Holders additional
shares of Common Stock, depending on the future revenues of Telecom One and the
balance sheet of Telecom One at the end of 1999. Although the Company cannot
presently determine the number of shares to be paid to the Telecom One Selling
Holders, the Company believes it is unlikely to exceed 200,000 shares. In
addition, the Telecom One Selling Holders have been granted registration rights
with respect to the shares of Common Stock to be issued by the Company in 1999
for such acquisition. See "Description of Capital Stock -- Registration Rights."
All of the shares of Common Stock issued to Telecom One shareholders will also
be "restricted securities" and may be sold in compliance with Rule 144. Rule 144
generally provides that beneficial owners of Common Stock who have held such
Common Stock for one year 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 approximately 21 million
15
<PAGE> 17
shares of restricted Common Stock held by the Company's officers and directors
and GEPT, including the 840,053 shares of Common Stock issued to GEPT in a
private placement which occurred simultaneously with the closing of the initial
public offering of the Company's Common Stock (the "IPO") on July 9, 1996 (the
"GEPT Private Placement"), has met the one-year holding period requirement under
Rule 144, and can be sold subject to the conditions of Rule 144. As of July 1,
1997, the Convertible Preferred Stock was convertible into approximately 4.3
million shares of Common Stock at the option of the holders at any time after 60
days from the Original Offering Date. Future sales of Common Stock or the
perception that such sales may occur could negatively impact the market price of
the Common Stock. In connection with the GEPT Private Placement, GEPT and
certain other stockholders were granted registration rights with respect to all
the shares of Common Stock owned by them (a total of approximately 19.5 million
shares), which demand registration rights became exercisable on May 15, 1997.
The Company has registered 1,212,450 shares, 2,121,787 shares and 67,900 shares
of Common Stock for issuance to its employees, directors, consultants and
advisors under the Company's 1994 Stock Plan, 1996 Stock Plan and Special Stock
Plan, respectively. As of June 30, 1997, options to purchase an aggregate of
2,059,426 shares of Common Stock were outstanding under the 1994 Stock Plan, the
1996 Stock Plan and the Special Stock Plan.
16
<PAGE> 18
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The Company's ratio of earnings to combined fixed charges and preferred
stock dividends for each of the periods indicated is as follows:
<TABLE>
<CAPTION>
THE COMPANY'S
PREDECESSOR -- HISTORICAL
- ----------------------------
PERIOD FROM PERIOD FROM FOR THE
JANUARY 1 AUGUST 14 SIX MONTHS
THROUGH THROUGH FOR THE YEAR ENDED DECEMBER 31, ENDED
AUGUST 14, DECEMBER 31, ------------------------------------------- JUNE 30,
1992 1992 1993 1994 1995 1996 1997
- ------------ ------------ -------- ---- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
$(24,484) $ (7,642) $(55,735) 1.4x $(12,348) $(47,355) $(54,584)
</TABLE>
For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, earnings represent income before the provision
(benefit) for income taxes, plus fixed charges. Fixed charges consist of
interest expense, amortization of financing costs and the portion of rental
expense on operating leases which the Company estimates to be representative of
the interest factor attributable to the leases. Preferred stock dividends
consist of dividends on the Series 3 Preferred Stock, and dividends on the
Convertible Preferred Stock. Where earnings are inadequate to cover fixed
charges and preferred stock dividend requirements, the deficiency is shown.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Securities. The Securities are being sold by the Selling Holders. All of the
expenses incurred in connection with the registration of the Securities offered
hereby will be paid by the Company, except for selling commissions and
underwriting discounts.
17
<PAGE> 19
SELLING HOLDERS
CONVERTIBLE PREFERRED SELLING HOLDERS
The Convertible Preferred Stock was originally issued by the Company and
sold (the "Original Offering") to Credit Suisse First Boston Corporation and
Dillon, Reed & Co., Inc. (the "Initial Purchasers") on April 1, 1997 at a
purchase price of $100 per share, and was thereafter sold by the Initial
Purchasers from time to time in a transaction exempt from the registration
requirements of the Securities Act, to persons reasonably believed by such
Initial Purchasers to be "qualified institutional buyers" (as defined in Rule
144A under the Securities Act), to certain "accredited investors" (as defined in
Rule 501(a)(1), (2), (3), (4), (5), (6) or (7) under the Securities Act) or
outside the United States to non-U.S. persons in offshore transactions in
reliance on Regulation S under the Securities Act.
The Registration Statement of which the Prospectus is a part has been filed
pursuant to Rule 415 under the Securities Act to afford the holders (the
"Convertible Preferred Selling Holders") of the Convertible Preferred Stock
(including shares of Common Stock issuable upon conversion of the Convertible
Preferred Stock) the opportunity to sell their Securities in public transactions
rather than pursuant to an exemption from the registration and prospectus
delivery requirements of the Securities Act. In order to avail itself of that
opportunity, a Convertible Preferred Selling Holder must notify the Company of
its intention to sell Securities and provide such other information concerning
the Convertible Preferred Selling Holder and the Securities to be sold as may
then be required by the Securities Act and the rules and regulations thereunder,
as applicable. No offer or sale pursuant to this Prospectus may be made by any
Convertible Preferred Selling Holder until such a request has been made and
until any supplement for the Prospectus has been filed or an amendment to the
Registration Statement of which this Prospectus is a part has become effective.
Additional Convertible Preferred Selling Holders will be added to the Prospectus
upon such Convertible Preferred Selling Holder's request and provision of the
requested information to the Company. The Company will from time to time
supplement or amend the Prospectus to the Registration Statement, as applicable,
to add additional Convertible Preferred Selling Holders and to reflect the
required information concerning any Convertible Preferred Selling Holders. The
Convertible Preferred Selling Holders may from time to time offer and sell
pursuant to this Prospectus any or all of the Convertible Preferred Stock and
any Common Stock issued upon conversion of the Convertible Preferred Stock.
The following table sets forth information with respect to the Convertible
Preferred Selling Holders as of August 1, 1997. The Convertible Preferred
Selling Holders may, from time to time, also receive additional shares of
Convertible Preferred Stock in the event payment of dividends on the Convertible
Preferred Stock is made with additional shares of Convertible Preferred Stock
which may also be offered and sold pursuant to this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF CONVERTIBLE
CONVERTIBLE PREFERRED SELLING HOLDERS PREFERRED STOCK
------------------------------------------------------------- ----------------
<S> <C>
Cede & Co.................................................... 654,247
Other holders of Convertible Preferred Stock................. 363,876
---------
Total.............................................. 1,018,123
=========
</TABLE>
TELECOM ONE SELLING HOLDERS
The Telecom One Common Stock was issued and sold to William G. Rodi, Gordon
Hutchins, Jr. and William F. Linsmeier (collectively, the "Telecom One Selling
Holders") by the Company on July 10, 1997 in connection with the acquisition by
the Company of all of the outstanding capital stock of Telecom One from the
Telecom One Selling Holders (the "Telecom One Acquisition"). Following the
Telecom One Acquisition, Telecom One became a wholly owned indirect subsidiary
of the Company. For the past three years, Mr. Rodi has served as an officer and
one of two directors of Telecom One. Concurrently with the Telecom One
Acquisition, Mr. Rodi signed an employment agreement with Telecom One under
which he serves as its President and Chief Executive Officer. Mr. Hutchins has
also served as an officer and one of two directors of
18
<PAGE> 20
Telecom One. Concurrently, with the Telecom One Acquisition, Mr. Hutchins signed
a consulting agreement with Telecom One and now receives a consulting fee for
his services. Mr. Linsmeier has served as an employee of Telecom One.
Concurrently with the Telecom One Acquisition, Mr. Linsmeier signed an
employment agreement with Telecom One under which he serves as its Vice
President of Sales and Marketing.
All of the shares of Telecom One Common Stock offered hereby are offered by
the Telecom One Selling Holders. The following table sets forth, with respect to
the Telecom One Selling Holders, the number of shares of Common Stock owned by
each Telecom One Selling Holder prior to this offering, the number of shares of
Common Stock offered for each Telecom One Selling Holder's account and the
number of shares held by each Telecom One Selling Holder after the anticipated
completion of this offering. None of the Telecom One Selling Holders owned prior
to this offering, and none will own after this offering, more than one percent
(1%) of the Company's outstanding Common Stock (based on the number of shares
outstanding on the date of this Prospectus). In addition, at the end of 1999,
the Company will be required to pay the Telecom One Selling Holders additional
shares of Common Stock, depending on the future revenues of Telecom One and the
balance sheet of Telecom One at the end of 1999. Although the Company cannot
presently determine the number of shares of Common Stock to be paid to the
Telecom One Selling Holders, the Company believes it is unlikely to exceed
200,000 shares. In addition, the Telecom One Selling Holders have been granted
registration rights with respect to the shares of Common Stock to be issued by
the Company in 1999 for such acquisition. See "Description of Capital
Stock -- Registration Rights."
<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON STOCK SHARES OF COMMON
OWNED PRIOR COMMON STOCK OWNED
TO STOCK OFFERED AFTER
THIS IN THIS COMPLETION OF
NAME OF TELECOM ONE SELLING HOLDERS OFFERING OFFERING THIS OFFERING
---------------------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
William G. Rodi......................... 45,085 45,085 0
Gordon Hutchins, Jr..................... 45,085 45,085 0
William F. Linsmeier.................... 7,311 7,311 0
-
------ ------
Totals........................ 97,481 97,481 0
====== ====== =
</TABLE>
PLAN OF DISTRIBUTION
The Securities may be sold from time to time to purchasers directly by the
Selling Holders (or such Selling Holders' donees or pledgees). Alternatively,
the Selling Holders may from time to time offer the Securities to or through
underwriters, brokers, dealers or agents, who may receive compensation in the
form of underwriting discounts, concessions or commissions from the Selling
Holders or the purchasers of such securities for whom they may act as agents.
The Selling Holders and any underwriters, broker, dealers or agents that
participate in the distribution of Securities may be deemed to be "underwriters"
within the meaning of the Securities Act and any profit on the sale of such
securities and any discounts, commissions, concessions or other compensation
received by any such underwriter, broker, dealer or agent may be deemed to be
underwriting discounts and commissions under the Securities Act.
The Securities may be sold from time to time in one or more transactions at
fixed prices, at prevailing market prices at the time of sale, at varying prices
determined at the time of sale or at negotiated prices. The sale of the
Securities may be effected in transactions (which may involve crosses or block
transactions) (i) on any national securities exchange or quotation service on
which the Securities may be listed or quoted at the time of sale, (ii) in the
over-the-counter market, (iii) in transactions otherwise than on such exchanges
or in the over-the-counter market or (iv) through the writing of options. At the
time a particular offering of the Securities is made, a Prospectus Supplement,
if required, will be distributed which will set forth the aggregate amount and
type of Securities being offered and the terms of the offering, including the
name of any underwriters, brokers, dealers or agents, any discounts, commissions
and other terms constituting compensa-
19
<PAGE> 21
tion from the Selling Holders and any discounts, commissions or concessions
allowed or reallowed or paid to broker or dealers. The Company will receive no
proceeds from this offering.
To comply with the securities laws of certain jurisdictions, if applicable,
the Securities may be offered or sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain jurisdictions
the Securities may not be offered or sold unless they have been registered or
qualified for sale in such jurisdictions or any exemption from registration or
qualification is available and is complied with.
The Selling Holders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of any of the Securities by the Selling
Holders. The foregoing may affect the marketability of such Securities.
Pursuant to the applicable registration rights agreement, all expenses of
the registration of the Securities will be paid by the Company, including,
without limitation, Commission filing fees an expenses of compliance with state
securities or "blue sky" laws. However, the Selling Holders will pay all
underwriting discounts and selling commissions, if any.
The Selling Holders will be indemnified by the Company against certain
civil liabilities, including certain liabilities under the Securities Act, or
will be entitled to contribution in connection therewith. The Company will be
indemnified by the Selling Holders severally against certain civil liabilities,
including certain liabilities under the Securities Act, or will be entitled to
contribution in connection therewith.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, par value $0.01 per share, and 3,000,000 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 the Company
does not purport to be complete and is subject to, and qualified in its entirety
by, the Restated Certificate, the Certificate of Designations and Bylaws of the
Company, as amended, and the provisions of applicable law. See "Description of
Convertible Preferred Stock."
COMMON STOCK
As of July 1, 1997, there were 30,799,560 outstanding shares of Common
Stock held by 88 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. In the event of the liquidation, dissolution or winding up of the
Company, 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 issuable upon
conversion of the Convertible Preferred Stock will be, when issued and
delivered, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company has designated 1,400,000 shares of Preferred Stock as
Convertible Preferred Stock, 2,000 shares of Preferred Stock as Series 1
Preferred Stock and 12,550 shares of Preferred Stock as Series 3 Preferred
Stock. As of July 1, 1997, there were 1,018,123 shares of Convertible Preferred
Stock issued and outstanding, 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. As of July 1, 1997, the Convertible Preferred Stock was
held by 16 holders of record. The shares of Series 3 Preferred Stock were
purchased upon the formation of the Company at a
20
<PAGE> 22
purchase price of $1.00 per share. See "Description of Convertible Preferred
Stock." The Company expects to designate at least 200,000 shares of Preferred
Stock as Exchangeable Preferred Stock.
The holders of Series 3 Preferred Stock, subject to the terms of the
Restated Certificate, are entitled to receive a liquidation preference of $1,000
per share, plus an amount equal to all accrued and unpaid dividends and the
Company may voluntarily redeem the Series 3 Preferred Stock for $1,000 per
share, plus an amount equal to all accrued and unpaid dividends. In addition,
the holders of Series 3 Preferred Stock are entitled to receive annual
dividends, subject to the limitations of the Restated Certificate and in the
Indenture, 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 June 30, 1997,
were approximately $7.5 million. Although dividends on the Convertible Preferred
Stock may be made, at the option of the Company, in cash or with additional
shares of Convertible Preferred Stock, the Series 3 Preferred Stock requires
that all accrued and unpaid dividends thereon (approximately $7.5 million at
June 30, 1997) be paid in cash before the Company can pay any cash dividends in
respect of the Convertible Preferred Stock. The holders of the Series 3
Preferred Stock, voting as a separate class, have the right to elect one member
of the Board of Directors. As of July 1, 1997, the Series 3 Preferred Stock was
held by 87 holders of record.
The Board of Directors of the Company 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 the Company 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. The
Company has no present intention to issue additional shares of Preferred Stock
(other than shares in lieu of cash in respect of dividends on the Convertible
Preferred Stock).
REGISTRATION RIGHTS
In June 1996, The Company granted certain registration rights to GEPT, GHI
and Richard D. Irwin, Ralph J. Swett, John J. Willingham, Carl W. McKinzie and
Phillip L. Williams, in consideration of the GEPT Private Placement and the
lock-up arrangements each of the parties entered into in connection with the
IPO. Such registration rights cover all the shares of Common Stock of the
Company held by such persons (a total of approximately 19.5 million shares)
which demand registration rights became exercisable on May 15, 1997. Subject to
certain exceptions, whenever The Company registers any of its Common Stock under
the Securities Act during the period the agreement is effective, 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
the Company's expense) such Common Stock in such registration. GEPT also has the
right, subject to certain limitations, to require the Company to use its best
efforts to file registration statements under the Securities Act covering Common
Stock held by GEPT. All fees, costs and expenses of such registrations (other
than underwriting discounts and commissions) will be borne by the Company.
In connection with the Telecom One Acquisition (as defined below), the
Company entered into a registration rights agreement with the Telecom One
Selling Holders (the "Telecom One Registration Rights Agreement"), pursuant to
which the Company would, at its cost, (a) on or before 30 days following July
10, 1997 (the "Initial Filing Date"), file a shelf registration statement, (b)
use commercially reasonable efforts to cause the shelf registration statement to
be declared effective under the Securities Act on or about 45 days following the
Initial Filing Date, and (c) keep the shelf registration statement effective for
the lesser of (i) a period of two years from the date on which the Shelf
Registration becomes effective under the Securities Act, (ii) a period ending on
the date upon which all Common Stock covered by the shelf registration statement
has been sold, and (iii) until such time as the Telecom One Common Stock is
eligible to be sold under Rule 144
21
<PAGE> 23
under the Securities Act. The Registration Statement to which this Prospectus
forms a part has been filed by the Company pursuant to its obligations under the
Telecom One Registration Rights Agreement. A copy of the Telecom One
Registration Right Agreement is available upon request to the Company. In
addition, the Telecom One Selling Holders have been granted registration rights
with respect to the shares of Common Stock to be issued by the Company in 1999
for such acquisition. See "Description of Capital Stock -- Registration Rights."
Although the Company cannot presently determine the number of shares to be paid
to the Telecom One Selling Holders in 1999, the Company believes it is unlikely
to exceed 200,000 shares.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CHARTER, THE BYLAWS AND THE
INDENTURE
The Bylaws of the Company provide that stockholders may call a special
meeting of stockholders only upon a request of stockholders owning at least 50%
of the Company's outstanding capital stock entitled to vote. In addition, in the
event of a Change in Control (as such term is defined in the Indenture) (i)
holders of the Senior Notes will have the right to require the Company 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 and
Liquidated Damages (as such term is defined in the Indenture), if any, to the
date of purchase, and (ii) subject to applicable provisions of state law, the
restrictions of the Indenture and the Series 3 Preferred Stock, the Company will
be obligated to repurchase all or any part of the outstanding Convertible
Preferred Stock or to adjust the Conversion Price. 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 the Company.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company 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.
LISTING
The Common Stock is listed on the NNM under the symbol "IIXC."
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is U. S. Stock
Transfer Corporation.
DESCRIPTION OF CONVERTIBLE PREFERRED STOCK
The following description of the Convertible Preferred Stock does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the Restated Certificate and Bylaws of the Company and the
Certificate of Designation creating the Convertible Preferred Stock. General
terms of information with respect to the Company's preferred stock are set forth
below under "Description of Capital Stock."
GENERAL
The holders of the Convertible Preferred Stock have no preemptive or
preferential right to purchase or subscribe to stock, obligations, warrants,
rights to subscribe to stock or other securities of the Company of any class.
The Convertible Preferred Stock currently trades in the PORTAL Market.
22
<PAGE> 24
RANKING
The Convertible Preferred Stock ranks senior to the Common Stock and will
rank on a parity to the Exchangeable Preferred Stock with respect to payment of
dividends and amounts upon liquidation, dissolution or winding up. The
Convertible Preferred Stock ranks junior to the Series 3 Preferred Stock with
respect to the payment of dividends and amounts upon liquidation, dissolution or
winding up.
The holders of Series 3 Preferred Stock, subject to the terms of the
Restated Certificate, are entitled to receive a liquidation preference of $1,000
per share, plus an amount equal to all accrued and unpaid dividends, and the
Company may voluntarily redeem the Series 3 Preferred Stock for $1,000 per
share, plus an amount equal to all accrued and unpaid dividends. In addition,
the holders of Series 3 Preferred Stock are entitled to receive annual
dividends, subject to the limitations of the Restated Certificate and in the
Indenture, 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 June 30, 1997,
were approximately $7.5 million. Although dividends on the Convertible Preferred
Stock may be made, at the option of the Company, in cash or with additional
shares of Convertible Preferred Stock, the Series 3 Preferred Stock requires
that all accrued and unpaid dividends thereon (approximately $7.5 million at
June 30, 1997) be paid in cash before the Company can pay any cash dividends in
respect of the Convertible Preferred Stock.
While any shares of Convertible Preferred Stock are outstanding, the
Company may not authorize, create or increase the authorized amount of any class
or series of stock that ranks senior to the Convertible Preferred Stock with
respect to the payment of dividends or amounts upon liquidation, dissolution or
winding up without the consent of the holders of 66 2/3% of the outstanding
shares of Convertible Preferred Stock. However, the Company may create
additional classes of stock, increase the authorized number of shares of
preferred stock or issue series of preferred stock on a parity with the
Convertible Preferred Stock (such as the Exchangeable Preferred Stock) with
respect, in each case, to the payment of dividends and amounts upon liquidation,
dissolution and winding up (a "Parity Stock") without the consent of any holder
of Convertible Preferred Stock. See "-- Voting Rights" below.
DIVIDENDS
Holders of shares of Convertible Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors of the Company out
of funds of the Company legally available for payment, cumulative dividends at
the rate per annum of 7 1/4% per share on the liquidation preference thereof of
$100.00 per share of Convertible Preferred Stock (equivalent to $7.25 per annum
per share). Dividends on the Convertible Preferred Stock will be payable
quarterly on March 31, June 30, September 30 and December 31 of each year,
commencing June 30, 1997, with respect to the period from the issue date to June
30, 1997 (and, in the case of any accrued but unpaid dividends, at such
additional times and for such interim periods, if any, as determined by the
Board of Directors), at such annual rate. Each such dividend will be payable to
holders of record as they appear on the stock records of the Company at the
close of business on each March 15, June 15, September 15 and December 15, as
the case may be, next preceding such quarterly dividend payment date. Any
dividend on the Convertible Preferred Stock payable prior to or on March 31,
1999 shall be, at the option of the Company, payable (i) in cash or (ii) through
the issuance of a number of additional shares (rounded to the nearest whole
share) of Convertible Preferred Stock (the "Additional Shares") equal to the
dividend amount divided by the liquidation preference of such Additional Shares.
In addition, with respect to dividends payable after March 31, 1999, to the
extent, and for so long as, the Company is prohibited by the terms of any of its
indebtedness then outstanding or by the terms of the Series 3 Preferred Stock or
any agreement or instrument to which the Company is then subject, to pay cash
dividends on the Convertible Preferred Stock, such dividends will accrue at the
rate per annum of 8 3/4% and will be payable through the issuance of a number of
Additional Shares equal to the dividend amount divided by the liquidation
preference of such Additional Shares. Dividends will accrue from the date of the
original issuance of the Convertible Preferred Stock. Dividends will be
cumulative from such date, whether or not in any dividend period or periods
there shall be funds of the Company legally available for the payment of such
dividends. Accumulations of dividends on
23
<PAGE> 25
shares of Convertible Preferred Stock will not bear interest. Dividends payable
on the Convertible Preferred Stock for any period greater or less than a full
dividend period will be computed on the basis of a 360-day year consisting of
twelve 30-day months. Dividends payable on the Convertible Preferred Stock for
each full dividend period will be computed by dividing the annual dividend rate
by four.
Except as provided in the next sentence, no dividend will be declared or
paid on any Parity Stock unless full cumulative dividends have been paid on the
Convertible Preferred Stock for all prior dividend periods. If accrued dividends
on the Convertible Preferred Stock for all prior dividend periods have not been
paid in full then any dividend declared on the Convertible Preferred Stock for
any dividend period and on any Parity Stock will be declared ratably in
proportion to accrued and unpaid dividends on the Convertible Preferred Stock
and such Parity Stock.
The Company will not (i) declare, pay or set apart funds for the payment of
any dividend or other distribution with respect to any Junior Stock (as defined
below) or (ii) redeem, purchase or otherwise acquire for consideration any
Junior Stock through a sinking fund or otherwise, unless (A) all accrued and
unpaid dividends with respect to the Convertible Preferred Stock and any Parity
Stock at the time such dividends are payable have been paid or funds have been
set apart for payment of such dividends and (B) sufficient funds have been paid
or set apart for the payment of the dividend for the current dividend period
with respect to the Convertible Preferred Stock and any Parity Stock.
As used herein, (i) the term "dividend" does not include dividends payable
solely in shares of Junior Stock on Junior Stock, or in options, warrants or
rights to holders of Junior Stock to subscribe for or purchase any Junior Stock,
(ii) the term "Junior Stock" means the Common Stock and any other class of
capital stock of the Company now or hereafter issued and outstanding that ranks
junior as to the payment of dividends or amounts upon liquidation, dissolution
and winding up to the Convertible Preferred Stock.
OPTIONAL REDEMPTION
Shares of Convertible Preferred Stock will not be redeemable prior to April
3, 2000. On and after April 3, 2000, the shares of Convertible Preferred Stock
will be redeemable at the option of the Company, in whole or in part, on not
less than 15 nor more than 60 days' notice. Notwithstanding the foregoing, prior
to April 1, 2002, the Company shall only have the option to redeem shares of
Convertible Preferred Stock if, during the period of 30 consecutive Trading Days
(as defined below) ending on the Trading Day immediately preceding the date that
the notice of redemption is mailed to holders, the Closing Bid Price (as defined
below) for the Common Stock exceeded 150% of the Conversion Price effective on
the date of such notice for at least 20 of such Trading Days. The notice of any
call for redemption shall specify the redemption date thereof (each, a
"Redemption Date"). The Call Price per share of Convertible Preferred Stock
shall be as follows if the Redemption Date of the call for redemption occurs
during the 12-month period beginning April 1 (or, in the case of the year 2000,
on April 3) of the years indicated, plus in each case accrued and unpaid
dividends on such shares to and including the Redemption Date:
<TABLE>
<CAPTION>
CALL PRICE
YEAR PER SHARE
----------------------------------------------------------- ----------
<S> <C>
2000....................................................... $ 104.83
2001....................................................... 104.03
2002....................................................... 103.22
2003....................................................... 102.42
2004....................................................... 101.61
2005....................................................... 100.81
2006....................................................... 100.00
</TABLE>
On a Redemption Date, the Company must pay any accrued and unpaid
dividends, in arrears, for any dividend period ending on or prior to the
Redemption Date. In the case of a Redemption Date falling after a dividend
payment record date and prior to the related payment date, the holders of the
Convertible Preferred Stock at the close of business on such record date will be
entitled to receive the dividend payable on such shares on the corresponding
dividend payment date, notwithstanding the redemption of such shares following
24
<PAGE> 26
such dividend payment record date. Except as provided for in the preceding
sentences, no payment or allowance will be made for accrued dividends on any
shares of Convertible Preferred Stock called for redemption or on the shares of
Common Stock issuable upon such redemption.
The term "Closing Bid Price" means on any day the last reported bid price
on such day, or in case no bid takes place on such day, the average of the
reported closing bid and asked prices, in each case on the NNM or, if the Common
Stock is not quoted on such system, on the principal national securities
exchange on which such stock is listed or admitted to trading, or if not listed
or admitted to trading on any national securities exchange, the average of the
closing bid and asked prices as furnished by any independent registered broker-
dealer firm, selected by the Company for that purpose.
"Trading Day" means, in respect of any securities exchange or securities
market, each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day
on which securities are not traded on the applicable securities exchange or in
the applicable securities market.
In the event that full cumulative dividends on the Convertible Stock and
any Parity Stock have not been paid or declared and set apart for payment, the
Convertible Preferred Stock may not be redeemed in part and the Company may not
purchase or acquire shares of Convertible Preferred Stock otherwise than
pursuant to a purchase or exchange offer made on the same terms to all holders
of shares of Convertible Preferred Stock.
On and after any Redemption Date, provided that the Company has made
available at the office of the Registrar and Transfer Agent a sufficient amount
of cash to effect the redemption, dividends will cease to accrue on the
Convertible Preferred Stock called for redemption (except that, in the case of a
Redemption Date after a dividend payment record date and prior to the related
dividend payment date, holders of Convertible Preferred Stock on the dividend
payment record date will be entitled on such dividend payment date to receive
the dividend payable on such shares), such shares shall no longer be deemed to
be outstanding and all rights of the holders of such shares as holders of
Convertible Preferred Stock shall cease except the right to receive the cash
deliverable upon such redemption, without interest from the Redemption Date.
MANDATORY REDEMPTION
Each share of Convertible Preferred Stock (if not earlier redeemed or
converted) will be mandatorily redeemed by the Company on March 31, 2007 (the
"Mandatory Redemption Date") at a redemption price of $100.00 per share of the
Convertible Preferred Stock plus accrued and unpaid dividends (including
dividends in arrears) to the Mandatory Redemption Date.
LIQUIDATION PREFERENCE
The holders of shares of Convertible Preferred Stock will be entitled to
receive out of the funds, if any, available therefor, in the event of any
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, $100.00 per share of Convertible Preferred Stock plus an amount per
share of Convertible Preferred Stock equal to all dividends (whether or not
earned or declared) accrued and unpaid thereon to the date of final distribution
to such holders (the "Liquidation Preference"), and no more.
Until the holders of the Convertible Preferred Stock have been paid the
Liquidation Preference in full, no payment will be made to any holder of Junior
Stock upon the liquidation, dissolution or winding up of the Company. If, upon
any liquidation, dissolution or winding up of the Company, the assets of the
Company, or proceeds thereof, distributable among the holders of the shares of
Convertible Preferred Stock are insufficient to pay in full the Liquidation
Preference and the liquidation preference with respect to any other shares of
Parity Stock, then such assets, or the proceeds thereof, will be distributed
among the holders of shares of Convertible Preferred Stock and any such Parity
Stock ratably in accordance with the respective amounts which would be payable
on such shares of Convertible Preferred Stock and any such Parity Stock if all
amounts payable thereon were paid in full. Neither a consolidation or merger of
the Company with another corporation nor a sale of transfer of all or
substantially all the Company's assets will be considered a liquidation,
dissolution or winding up, voluntary or involuntary, of the Company.
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<PAGE> 27
VOTING RIGHTS
Except as indicated below, or except as otherwise from time to time
required by applicable law, the holders of shares of Convertible Preferred Stock
will have no voting rights.
If and whenever six quarterly dividends (whether or not consecutive)
payable on the Convertible Preferred Stock are in arrears, whether or not earned
or declared, provided that at least 200,000 shares of Convertible Preferred
Stock are at the time outstanding, the number of directors then constituting the
Board of Directors of the Company will be increased by two and the holders of
shares of Convertible Preferred Stock, voting together as a class with the
holders of any other series of preferred stock upon which like rights have been
conferred and are exercisable, will have the right to elect two additional
directors to serve on the Company's Board of Directors at an annual meeting of
stockholders or a special meeting of the holders of the Convertible Preferred
Stock and such other preferred stock properly called and at each subsequent
annual meeting of stockholders until all such dividends and dividends for the
current quarterly period on the Convertible Preferred Stock and such other
preferred stock have been paid or declared and set aside for payment.
The approval of two-thirds of the outstanding shares of Convertible
Preferred Stock will be required in order to amend the terms of the Convertible
Preferred Stock so as to affect materially and adversely the rights, preferences
or voting powers of the holders of the Convertible Preferred Stock.
Except as required by law, the holders of Convertible Preferred Stock will
not be entitled to vote on any merger or consolidation involving the Company or
a sale of all or substantially all the assets of the Company. See "-- Conversion
Rights."
CONVERSION RIGHTS
Shares of Convertible Preferred Stock are convertible, in whole or in part,
at any time at the option of the holders thereof, into shares of Common Stock
initially at $23.46 per share of Common Stock, subject to adjustment as
described below ("Conversion Price"). The right to convert shares of Convertible
Preferred Stock called for redemption will terminate at the close of business on
the Redemption Date for such call. For information as to notices of redemption,
see "-- Optional Redemption" above.
Conversion of shares of Convertible Preferred Stock, or a specified portion
thereof, may be effected by delivering certificates evidencing such shares,
together with written notice of conversion and a proper assignment of such
certificates to the Company or in blank, to the office or agency to be
maintained by the Company for that purpose. Currently, such office is
ChaseMellon Shareholder Services, L.L.C. located at 2323 Bryan Street, Suite
2300, Dallas, Texas, 75201.
Each conversion will be deemed to have been effected immediately prior to
the close of business on the date on which the certificates for shares of
Convertible Preferred Stock shall have been surrendered and notice (and if
applicable, payment of an amount equal to the dividend payable on such shares)
received by the Company as aforesaid and the conversion shall be at the
Conversion Price in effect at such time and on such date.
Holders of shares of Convertible Preferred Stock at the close of business
on a dividend payment record date will be entitled to receive the dividend
payable on such shares on the corresponding dividend payment date
notwithstanding the conversion of such shares following such dividend payment
record date and prior to such dividend payment date. However, shares of
Convertible Preferred Stock surrendered for conversion during the period between
the close of business on any dividend payment record date and the opening of
business on the corresponding dividend payment date (except shares converted
after the issuance of a notice of redemption with respect to a Redemption Date
during such period, which will be entitled to such dividend) must be accompanied
by payment of an amount equal to the dividend payable on such shares on such
dividend payment date. A holder of shares of Convertible Preferred Stock on a
dividend payment record date who (or whose transferee) tenders any such shares
for conversion into shares of Common Stock on such dividend payment date will
receive the dividend payable by the Company on such shares of Convertible
Preferred Stock on such date, and the converting holder need not include payment
of the amount of such dividend upon surrender of shares of Convertible Preferred
Stock for conversion. Except as provided above, the Company
26
<PAGE> 28
will make no payment or allowance for unpaid dividends, whether or not in
arrears, on converted shares or the dividends on the shares of Common Stock
issued upon such conversion.
Fractional shares of Common Stock will not be issued upon conversion but,
in lieu thereof, the Company will pay a cash adjustment based on the current
market price of the Common Stock on the day prior to the conversion date.
The Conversion Price will be subject to adjustment, under certain
circumstances, upon the occurrence of certain events, including: (i) the payment
of dividends (and other distributions) of Common Stock on any class of capital
stock of the Company; (ii) the issuance to all holders of Common Stock of
rights, warrants or options entitling them to subscribe for or purchase Common
Stock at less than the current market price (as defined) thereof; (iii)
subdivisions and combinations of Common Stock; (iv) distributions to all holders
of Common Stock of evidences of indebtedness of the Company, shares of capital
stock, securities, cash or property (excluding any rights, warrants or options
referred to in clause (ii) above and any dividend or distribution paid
exclusively in cash and any dividend or distribution referred to in clause (i)
above); (v) distributions consisting exclusively of cash to all holders of
Common Stock in an aggregate amount that, together with (A) other all-cash
distributions made within the preceding 12 months and (B) any cash and the fair
market value, as of the expiration of the tender or exchange offer referred to
below, of consideration payable in respect of any tender or exchange offer by
the Company or a Subsidiary for the Common Stock concluded within the preceding
12 months, exceeds 12.5% of the Company's aggregate market capitalization (such
aggregate market capitalization being the product of the current market price
(as defined) of the Common Stock multiplied by the number of shares of Common
Stock then outstanding) on the date of such distribution; and (vi) the
successful completion of a tender or exchange offer made by the Company or any
Subsidiary for the Common Stock which involves an aggregate consideration that,
together with (X) any cash and the fair market value of other consideration
payable in respect of any tender or exchange offer by the Company or a
Subsidiary for the Common Stock concluded within the preceding 12 months and (Y)
the aggregate amount of any all-cash distributions to all holders of the
Company's Common Stock made within the preceding 12 months, exceeds 12.5% of the
Company's aggregate market capitalization on the expiration of such tender or
exchange offer. No adjustment of the Conversion Price will be required to be
made until cumulative adjustments amount to 1% or more of the Conversion Price
as last adjusted.
Notwithstanding any other provision in the preceding paragraphs to the
contrary, if any Change in Control occurs then, at the Company's election, the
Conversion Price in effect will be adjusted immediately after such Change in
Control as described below. In addition, in the event of a Common Stock Change
in Control (as defined), each share of the Convertible Preferred Stock shall be
convertible solely into common stock of the kind received by holders of Common
Stock as the result of such Common Stock Change in Control. For purposes of
calculating any adjustment to be made pursuant to this paragraph in the event of
a Change in Control, immediately after such Change in Control:
(i) in the case of a Non-Stock Change in Control (as defined), the
Conversion Price will thereupon become the lower of (A) the Conversion
Price in effect immediately prior to such Non-Stock Change in Control, but
after giving effect to any other prior adjustments, and (B) the result
obtained by multiplying the greater of the Applicable Price (as defined) or
the then applicable Reference Market Price (as defined) by a fraction of
which the numerator will be $100.00 and the denominator will be the then
current Call Price per share; and
(ii) in the case of a Common Stock Change in Control, the Conversion
Price in effect immediately prior to such Common Stock Change in Control,
but after giving effect to any other prior adjustments, will thereupon be
adjusted by multiplying such Conversion Price by a fraction, of which the
numerator will be the Purchaser Stock Price (as defined) and the
denominator will be the Applicable Price; provided, however, that in the
event of a Common Stock Change in Control in which (A) 100% of the value of
the consideration received by a holder of Common Stock is common stock of
the successor, acquiror, or other third party (and cash, if any, is paid
with respect to any fractional interests in such common stock resulting
from such Common Stock Change in Control) and (B) all of the Common Stock
will have been exchanged for, converted into, or acquired for, common stock
(and cash with
27
<PAGE> 29
respect to fractional interests) of the successor, acquiror or other third
party, the Conversion Price in effect immediately prior to such Common
Stock Change in Control will thereupon be adjusted by multiplying such
Conversion Price by a fraction, of which the numerator will be one (1) and
the denominator will be the number of shares of common stock of the
successor, acquiror, or other third party received by a holder of one share
of Common Stock as a result of such Common Stock Change in Control.
The foregoing conversion price adjustments in the event of a Non-Stock
Change in Control will apply in situations whereby a Change in Control not
involving a change in beneficial ownership of the Common Stock has occurred or
whereby all or substantially all of the Common Stock is acquired in a
transaction in which 50% or less of the value received by holders of Common
Stock consists of common stock that has been admitted for listing on a national
securities exchange or quoted on the NNM. If the market price of the Common
Stock immediately prior to a Non-Stock Change in Control is lower than the
applicable Conversion Price then in effect, the Conversion Price will be
adjusted as described in (i) above and the holders of the Convertible Preferred
Stock will be entitled to receive the amount and kind of consideration that
would have been received if the Convertible Preferred Stock had been converted
into Common Stock prior to the Non-Stock Change in Control after giving effect
to such adjustment.
The foregoing Conversion Price adjustments in the event of a Common Stock
Change in Control will apply in situations whereby more than 50% of the value
received by holders of Common Stock consists of common stock of another company
that has been admitted for listing on a national securities exchange or quoted
on the NNM, in which case the Preferred Stock will become convertible into
shares of common stock of the other company. If consideration for the Common
Stock consists partly of common stock of another company and partly of other
securities, cash or property, each share of Convertible Preferred Stock will be
convertible solely into a number of shares of such common stock determined so
that the initial value of such shares (measured as described in the definition
of Purchaser Stock Price below) equals the value of the shares of Common Stock
into which such share of Convertible Preferred Stock was convertible immediately
before the Transaction (measured as described in the definition of Applicable
Price below). If consideration for Common Stock is solely common stock of
another company, each share of Convertible Preferred Stock will be convertible
into the same number of shares of such common stock receivable by a holder of
the number of shares of Common Stock into which such share of Convertible
Preferred Stock was convertible immediately before such transaction.
Depending upon whether the Change in Control is a Non-Stock Change in
Control or Common Stock Change in Control, a holder may receive significantly
different consideration upon conversion. In the event of a Non-Stock Change in
Control, the holder has the right to convert each share of the Convertible
Preferred Stock into the kind and amount of the shares of stock and other
securities or property or assets receivable by a holder of the number of shares
of Common Stock issuable upon conversion of such share of the Convertible
Preferred Stock immediately prior to such Non-Stock Change in Control, but after
giving effect to the adjustment described above. However, in the event of a
Common Stock Change in Control in which less than 100% of the value of the
consideration received by a holder of Common Stock is common stock of the
acquiror or other third party, a holder of a share of the Convertible Preferred
Stock who converts a share following the Common Stock Change in Control will
receive consideration in the form of such common stock only, whereas a holder
who has converted his share prior to the Common Stock Change in Control will
receive consideration in the form of common stock as well as any other
securities or assets (which may include cash) receivable thereupon by a holder
of the number of shares of Common Stock issuable upon conversion of such share
of Convertible Preferred Stock immediately prior to such Common Stock Change in
Control.
The term "Applicable Price" means (i) in the event of a Non-Stock Change in
Control in which the holders of the Common Stock receive only cash, the amount
of cash received by the holder of one share of Common Stock and (ii) in the
event of any other Non-Stock Change in Control or any Common Stock Change in
Control, the average of the Closing Bid Prices for the Common Stock during the
ten Trading Days prior to and including the record date for the determination of
the holders of Common Stock entitled to receive cash, securities, property or
other assets in connection with such Non-Stock Change in Control or Common Stock
Change in Control or, if there is no such record date, the date upon which the
holders of the
28
<PAGE> 30
Common Stock shall have the right to receive such cash, securities, property or
other assets, in each case, as adjusted in good faith by the Board of Directors
to appropriately reflect any of the events referred to in clauses (i) through
(vi) of the sixth paragraph of this subsection.
The term "Common Stock Change in Control" means any Change in Control in
which more than 50% of the value (as determined in good faith by the Board of
Directors of the Company) of the consideration received by holders of Common
Stock consists of common stock that for each of the ten consecutive Trading Days
referred to in the preceding paragraph has been admitted for listing or admitted
for listing subject to notice of issuance on a national securities exchange or
quoted on the NNM; provided, however, that a Change in Control shall not be a
Common Stock Change in Control unless either (i) the Company continues to exist
after the occurrence of such Change in Control and the outstanding shares of
Convertible Preferred Stock continue to exist as outstanding shares of
Convertible Preferred Stock, or (ii) not later than the occurrence of such
Change in Control, the outstanding shares of Convertible Preferred Stock are
converted into or exchanged for shares of convertible preferred stock of a
corporation succeeding to the business of the Company, which convertible
preferred stock has powers, preferences and relative, participating, optional or
other rights, and qualifications, limitations and restrictions, substantially
similar to those of the Convertible Preferred Stock.
The term "Non-Stock Change in Control" means any Change in Control other
than a Common Stock Change in Control.
The term "Purchaser Stock Price" means, with respect to any Common Stock
Change in Control, the product of (i) the number of shares of common stock
received in such Common Stock Change of Control for each share of Common Stock,
and (ii) the average of the per share Closing Prices for the common stock
received in such Common Stock Change in Control for the ten consecutive Trading
Days prior to and including the record date for the determination of the holders
of Common Stock entitled to receive such common stock, or if there is no such
record date, the date upon which the holders of the Common Stock shall have the
right to receive such common stock, in each case, as adjusted in good faith by
the Board of Directors to appropriately reflect any of the events referred to in
clauses (i) through (vi) of the sixth paragraph of this subsection; provided,
however, that if no such Closing Prices exist, then the Purchaser Stock Price
shall be set at a price determined in good faith by the Board of Directors of
the Company.
The term "Reference Market Price" shall initially mean $13.50 (which is an
amount equal to 66 2/3% of the reported last sale price for the Common Stock on
the NNM on March 25, 1997), and in the event of any adjustment to the conversion
prices other than as a result of a Change in Control, the Reference Market Price
shall also be adjusted so that the ratio of the Reference Market Price to the
Conversion Price after giving effect to any such adjustment shall always be the
same as the ratio of $13.50 to the initial Conversion Price set forth on the
cover page of this Prospectus.
In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions pursuant to which the Common Stock is
converted into the right to receive other securities, cash or other property,
each share of Convertible Preferred Stock then outstanding would, without the
consent of any holders of Convertible Preferred Stock, become convertible only
into the kind and amount of securities, cash and other property receivable upon
the transaction by a holder of the number of shares of Common Stock which would
have been received by a holder immediately prior to such transaction if such
holder had converted its share of Convertible Preferred Stock.
If at any such time the Company makes a distribution of property to its
stockholders that would be taxable to such stockholders as a dividend for
federal income tax purposes (for example, distributions or evidences of
indebtedness or assets of the Company, but generally not stock dividends or
rights to subscribe for capital stock) and, pursuant to the antidilution
provisions described above, the Conversion Price of the Convertible Preferred
Stock is reduced, such reduction may be deemed to be the receipt of taxable
income by holders of the Convertible Preferred Stock.
29
<PAGE> 31
CERTAIN RIGHTS TO REQUIRE PURCHASE OF CONVERTIBLE PREFERRED STOCK
In the event a Change in Control occurs, the Company will be obligated,
subject to applicable provisions of state law and the restrictions of the
Indenture, either to offer (a "Repurchase Offer") to purchase all or any part of
the shares of Convertible Preferred Stock on the date (the "Repurchase Date")
that is 75 days after the date the Company gives notice of the Change in
Control, at a price (the "Repurchase Price") equal to $100.00 per share,
together with accrued and unpaid dividends through the Repurchase Date or to
adjust the Conversion Price as described above under "-- Conversion Rights." If
a Repurchase Offer is made, the Company shall deposit, on or prior to the
Repurchase Date, with a Paying Agent an amount of money sufficient to pay the
aggregate Repurchase Price of the Convertible Preferred Stock which is to be
paid on the Repurchase Date.
On or before the 15th day after the Company knows or reasonably should know
that a Change in Control has occurred, the Company will be required to mail to
all holders of record of the Convertible Preferred Stock a notice of the
occurrence of such Change in Control and whether or not the Indenture permits at
such time a Repurchase Offer, and, as applicable, either the new Conversion
Price (as adjusted at the option of the Company) or the date by which the
Repurchase Offer must be accepted, the Repurchase Price for the Convertible
Preferred Stock and the procedures which the holder must follow to accept the
Repurchase Offer. To accept the Repurchase Offer, the Holder of a share of
Convertible Preferred Stock will be required to deliver, on or before the 10th
day prior to the Repurchase Date, written notice to the Company (or an agent
designated by the Company for such purpose) of the holder's acceptance, together
with the certificates evidencing the shares of Convertible Preferred Stock with
respect to which the offer is being accepted, duly endorsed for transfer.
The term "Beneficial Owner" shall be determined in accordance with Rules
13d-3 and 13d-5 promulgated by the Commission under the Exchange Act or any
successor provision thereto, except that a Person shall be deemed to have
"beneficial ownership" of all shares that such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage of time.
A "Change in Control" shall be deemed to have occurred at such time as (i)
the sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and certain subsidiaries taken as
a whole to any "person" (as such term is used in Section 13(d)(3) of the
Exchange Act), (ii) the adoption of a plan relating to the liquidation or
dissolution of the Company, (iii) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of which
is that any "person" (as defined above), (other than certain present officers,
directors and stockholders of the Company and their affiliates), becomes the
Beneficial Owner, directly or indirectly, of more than 50% of the voting stock
of the Company or (iv) the first day on which a majority of the members of the
board of directors are not Continuing Directors (as defined in the Certificate
of Designations).
The effect of these provisions obligating the Company to offer to purchase
the shares of Convertible Preferred Stock or to adjust the Conversion Price upon
the occurrence of a Change in Control may make it more difficult for any person
or group to acquire control of the Company or to effect a business combination
with the Company. The Company's ability to pay cash to holders of shares of
Convertible Preferred Stock following the occurrence of a Change in Control may
be limited by the Company's then existing financial resources and applicable
provisions of state law or by provisions in the Indenture and other agreements
governing indebtedness of the Company, and by the terms of the Series 3
Preferred Stock. The Company will, prior to electing to make a Repurchase Offer,
make an offer to redeem all of the outstanding shares of the Series 3 Preferred
Stock. There can be no assurance that sufficient funds will be available when
necessary to make any required repurchases. See "Risk Factors -- Change in
Control."
In the event a Change in Control occurs and the Company makes a Repurchase
Offer for shares of Convertible Preferred Stock, the Company intends to comply
with applicable tender offer rules under the Exchange Act, including Rules 13e-4
(other than SEC filing requirements if not then applicable) and 14e-1, as then
in effect, with respect to any such purchase.
30
<PAGE> 32
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Certificate of Designation provides that the Company, without the
consent of the holders of any of the outstanding Convertible Preferred Stock,
may consolidate with or merge into any other Person or convey, transfer or lease
its properties and assets substantially as an entirety to any Person or may
permit any Person to consolidate with or merge into, or transfer or lease its
properties substantially as an entirety to, the Company; provided, that (a) the
successor, transferee or lessee is organized under the laws of any United States
jurisdiction; (b) the shares of Convertible Preferred Stock shall become shares
of such successor, transferee or lessee, having in respect of such successor,
transferee or lessee the same powers, preferences and relative participating,
optional or other special rights and the qualifications, limitations or
restrictions thereon, the Convertible Preferred Stock had immediately prior to
such transaction; and (c) certain other conditions are met.
Under any consolidation by the Company with, or merger by the Company into,
any other Person or any conveyance, transfer or lease of the properties and
assets of the Company substantially as an entirety as described in the preceding
paragraph, the successor resulting from such consolidation or into which the
Company is merged or the transferee or lessee to which such conveyance, transfer
or lease is made, will succeed to, and be substituted for, and may exercise
every right and power of, the Company under the shares of Convertible Preferred
Stock, and thereafter, except in the case of a lease, the predecessor (if still
in existence) will be released from its obligations and covenants with respect
to the Convertible Preferred Stock.
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
The transfer agent, registrar, dividend disbursing agent and redemption
agent for the shares of Convertible Preferred Stock in ChaseMellon Shareholder
Services, L.L.C.
REGISTRATION RIGHTS
In connection with the Original Offering, the Company entered into a
registration rights agreement with the Initial Purchasers (the "Registration
Rights Agreement"), for the benefit of the holders (the "Registration Rights
Holders") of the Convertible Preferred Stock and of the Common Stock issuable
upon conversion thereof pursuant to which the Company would, at its cost, (a) as
promptly as practicable, file a Registration Statement (a "Shelf Registration
Statement") covering resales of the Convertible Preferred Stock (together with
the Common Stock issuable upon conversion thereof) pursuant to Rule 415 under
the Securities Act, (b) use its best efforts to cause the Shelf Registration
Statement to be declared effective under the Securities Act and (c) keep the
Shelf Registration Statement effective until such time as the Convertible
Preferred Stock and the shares of Common Stock issuable upon conversion thereof
are eligible to be sold under Rule 144(k) under the Securities Act or until all
the Convertible Preferred Stock and the Common Stock issuable upon conversion
thereof have been sold pursuant to such Shelf Registration Statement. The
Registration Statement to which this Prospectus forms a part has been filed by
the Company pursuant to its obligations under the Registration Rights Agreement.
If the Shelf Registration Statement to which this Prospectus forms a part
ceases to be effective or usable (subject to certain exceptions) in connection
with resales of the Convertible Preferred Stock and the Common Stock issuable
upon conversion thereof in accordance with and during the periods specified in
the Registration Rights Agreement (each such event is referred to as a
"Registration Default"), dividends will accrue on the Convertible Preferred
Stock at the rate of 7 3/4% per annum, from and including the date on which any
such Registration Default shall occur to but excluding the date on which all
Registration Defaults have been cured. At all other times, dividends will accrue
on the Convertible Preferred Stock at a rate of 7 1/4% per annum.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available upon request to the Company or the
Initial Purchasers.
31
<PAGE> 33
BOOK-ENTRY-ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
The description of book-entry procedures in this Prospectus includes
summaries of certain rules and operating procedures of The Depository Trust
Company ("DTC") that affect transfers of interest in the global certificate
issued in connection with the Original Offering of the Convertible Preferred
Stock. Except as described in the next paragraph, the Convertible Preferred
Stock was originally issued only as fully registered securities registered in
the name of Cede & Co. (as nominee for DTC). One fully registered global
Convertible Preferred Stock certificate (the "Global Certificate") was
originally issued, representing, in the aggregate, Convertible Preferred Stock
sold in reliance on Rule 144A, and was deposited with DTC.
Convertible Preferred Stock initially sold to certain "accredited
investors" (as defined in Rule 501(a)(1), (2), (3), (4), (5), (6) or (7) under
the Securities Act) or sold in offshore transactions pursuant to Regulation S
under the Securities Act was issued in fully registered certificated form
("Certificated Securities"). Upon the sale of any Convertible Preferred Stock
during the period of the effectiveness of the Registration Statement to which
this Prospectus is a part, all requirements pertaining to legends on such
Convertible Preferred Stock will cease to apply, the requirements requiring that
any such Convertible Preferred Stock be issued in global form will cease to
apply, and Certificated Securities without legends will be available to the
transferee of the Convertible Preferred Selling Holder of such Convertible
Preferred Stock upon the sale or exchange of such Convertible Preferred Selling
Holder's Convertible Preferred Stock or directions to transfer such Convertible
Preferred Selling Holder's interest in the Global Certificate, as applicable.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Participants in DTC
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of its
Participants and by the New York Stock Exchange, the American Stock Exchange,
Inc. and the National Association of Securities Dealers, Inc. Access to the DTC
system is also available to others such as securities brokers and dealers, banks
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly ("Indirect Participants"). The
rules applicable to DTC and its Participants are on file with the Commission.
Purchases of Convertible Preferred Stock within the DTC system must be made
by or through Participants, which will receive a credit for the Convertible
Preferred Stock on DTC's records. The ownership interest of each actual
purchaser of Convertible Preferred Stock ("Beneficial Owner") is in turn to be
recorded on the Participants' and Indirect Participants' records. Beneficial
Owners will not receive written confirmation from DTC of their purchases, but
Beneficial Owners are expected to receive written confirmations providing
details of the transactions, as well as periodic statements of their holdings,
from the Participants or Indirect Participants through which the Beneficial
Owners purchased Convertible Preferred Stock. Transfers of ownership interests
in the Convertible Preferred Stock are to be accomplished by entries made on the
books of Participants and Indirect Participants acting on behalf of Beneficial
Owners. Beneficial Owners will not receive certificates representing their
ownership interests in Convertible Preferred Securities, except in the event
that use of the book-entry system for the Convertible Preferred Stock is
discontinued.
DTC has no knowledge of the actual Beneficial Owners of the Convertible
Preferred Stock; DTC's records reflect only the identity of the Participants to
whose accounts such Convertible Preferred Stock are credited, which may or may
not be the Beneficial Owners. The Participants and Indirect Participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to Participants, by
Participants to Indirect Participants, and by Participants and Indirect
Participants to Beneficial Owners will be governed by
32
<PAGE> 34
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices in respect of the Convertible Preferred Stock held in
book-entry form shall be sent to Cede & Co. If less than all of the Convertible
Preferred Stock are being redeemed, DTC will determine the amount of the
interest of each Participant to be redeemed in accordance with its procedures.
Although voting with respect to the Convertible Preferred Stock is limited,
in those cases where a vote is required, neither DTC nor Cede & Co. will itself
consent or vote with respect to Convertible Preferred Stock. Under its usual
procedures, DTC would mail an Omnibus Proxy to the Company as soon as possible
after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or
voting rights to those Participants to whose accounts the Convertible Preferred
Stock are credited on the record date (identified in a listing attached to the
Omnibus Proxy).
Distributions on the Convertible Preferred Stock held in book-entry form
will be made to DTC in immediately available funds. DTC's practice is to credit
Direct Participants' accounts on the relevant payment date in accordance with
their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payments on such payment date. Payments by
Participants and Indirect Participants to Beneficial Owners will be governed by
standing instructions and customary practices and will be the responsibility of
such Participants and Indirect Participants and not of DTC, or the Company,
subject to any statutory or regulatory requirements as may be in effect from
time to time. Payment of distributions to DTC is the responsibility of the
Company, disbursement of such payments to Participants is the responsibility of
DTC, and disbursement of such payments to the Beneficial Owners is the
responsibility of Participants and Indirect Participants.
Except as provided herein or in the Certificate of Designation, a
Beneficial Owner of an interest in global Convertible Preferred Stock will not
be entitled to receive physical delivery of Convertible Preferred Stock.
Accordingly, each Beneficial Owner must rely on the procedures of DTC to
exercise any rights under the Convertible Preferred Stock.
DTC may discontinue providing its services as securities depository with
respect to the Convertible Preferred Stock at any time by giving notice to the
Company. Under such circumstances, in the event that a successor securities
depository is not obtained, Convertible Preferred Stock certificates are
required to be printed and delivered. Additionally, the Company may decide to
discontinue use of the system of book-entry transfers through DTC (or a
successor depository). In that event, certificates for the Convertible Preferred
Stock will be printed and delivered. In each of the above circumstances, the
Company will appoint a Paying Agent with respect to the Convertible Preferred
Stock.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable, but the
Company does not take responsibility for the accuracy thereof.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the global
Convertible Preferred Stock as represented by a Global Certificate.
PAYMENT AND PAYING AGENCY
Payments in respect of the Convertible Preferred Stock held at book-entry
at DTC will be made to DTC, which shall credit the relevant accounts at DTC on
the applicable distribution dates or, in the case of Certificated Securities,
such payments shall be made by check mailed to the address of the holder
entitled thereto as such address shall appear on the Register. The Paying Agent
shall initially be ChaseMellon Shareholder Services, L.L.C. The Paying Agent
shall be permitted to resign as Paying Agent upon 30 days' written notice to the
Company. In the event that ChaseMellon Shareholder Services, L.L.C. shall no
longer be the Paying Agent, the Company shall appoint a successor to act as
Paying Agent (which shall be a bank or trust company).
33
<PAGE> 35
LEGAL MATTERS
The validity of the Securities is passed upon for the Company by Riordan &
McKinzie, Costa Mesa, California. Carl W. McKinzie, a director and stockholder
of the Company, is a stockholder of Riordan & McKinzie. The Company has granted
an option covering shares of Common Stock to another stockholder of Riordan &
McKinzie. Also, certain attorneys of Riordan & McKinzie beneficially own
additional shares of the Company.
EXPERTS
The consolidated financial statements of IXC Communications, Inc. at
December 31, 1995 and 1996, and for each of the three years in the period ended
December 31, 1996, appearing in the Annual Report (Form 10-K) of IXC
Communications, Inc. have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon and included therein and
incorporated by reference herein. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
34
<PAGE> 36
GLOSSARY
Access charges -- The fees paid by long distance carriers to LECs for
originating and terminating long distance calls on their local networks.
Allnet -- Allnet Communication 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.
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.
Carriers -- Companies that provide telecommunications transmission
services.
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). Both the Company's microwave and fiber optic facilities transmit
digital information.
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 or data transmission at a time. DS-1 service has
a bit rate of 1.544 megabits per second and can transmit 24 simultaneous voice
or data transmissions. DS-3 service has a bit rate of 45 megabits per second and
can transmit 672 simultaneous voice or data transmissions.
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.
EBITDA -- Operating income (loss) plus depreciation and amortization.
EBITDA is not a measurement determined in accordance with GAAP, should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with GAAP and is not necessarily comparable with similarly titled
measures for other companies.
Excel -- EXCEL Communications, 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.
GEPT -- Trustee of General Electric Pension Trust
GHI -- Grumman Hill Investments, L.P.
GTE -- GTE Corporation.
A-1
<PAGE> 37
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 Management Services, Inc.
LEC (local exchange carrier) -- A company providing local telephone
services.
Local loop -- A circuit within a LATA.
MCI -- MCI Communications Corporation.
Megabit -- One million bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "megabits per
second."
MOUs -- Minutes of use of long distance service.
Nonfacilities based carrier -- Carriers that do not own transmission
facilities.
NTFC -- NTFC Capital Corporation
OC-3, OC-12 and OC-48 -- Standard telecommunications industry measurements
for optical transmission capacity distinguishable by bit rate transmitted per
second and the number of voice or data transmissions that can be simultaneously
transmitted through fiber optic cable. An OC-3 is generally equivalent to three
DS-3s and has a bit rate of 155.52 megabits per second and can transmit 2,016
simultaneous voice or data transmissions. An OC-12 has a bit rate of 622.08
megabits per second and can transmit 8,064 simultaneous voice or data
transmissions. An OC-48 has a bit rate of 2,488.32 megabits per second and can
transmit 32,256 simultaneous voice or data transmissions.
Qwest -- Qwest Communications Corporation.
RBOCs (regional Bell operating companies) -- The seven local telephone
companies (formerly part of AT&T) established by court decree in 1982.
Route miles -- The measure of the length of a transmission path in miles.
Sprint -- Sprint Corp.
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 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.
Telecom One -- Telecom One, Inc.
Vyvx -- Vyvx, Inc., a subsidiary of The Williams Companies, Inc.
WorldCom -- WorldCom, Inc.
A-2
<PAGE> 38
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED 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. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE
SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE ISSUER SINCE
SUCH DATE.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information................ 2
Documents Incorporated by Reference... 3
Risk Factors.......................... 4
Ratio of Earnings To Fixed Charges and
Preferred Stock Dividends........... 17
Use of Proceeds....................... 17
Selling Holders....................... 18
Plan of Distribution.................. 19
Description of Capital Stock.......... 20
Description of Convertible Preferred
Stock............................... 22
Legal Matters......................... 34
Experts............................... 34
Glossary.............................. A-1
</TABLE>
======================================================
======================================================
IXC COMMUNICATIONS, INC.
1,400,000 SHARES OF
7 1/4 JUNIOR CONVERTIBLE
PREFERRED STOCK DUE 2007
(LIQUIDATION PREFERENCE
$100 PER SHARE) AND THE
COMMON STOCK INTO WHICH
THE PREFERRED STOCK IS
CONVERTIBLE
AND
97,481 SHARES
OF COMMON STOCK OF
IXC COMMUNICATIONS, INC.
------------------------
PROSPECTUS
------------------------
, 1997
======================================================
<PAGE> 39
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses and costs (other than
underwriting discounts and selling 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").
<TABLE>
<CAPTION>
ITEM AMOUNT
-------------------------------------------------------------------------- --------
<S> <C>
Commission registration fee............................................... $ 55,121
Printing and engraving expenses........................................... 75,000
Legal fees and expenses................................................... 30,000
Accounting fees and expenses.............................................. 15,000
Transfer agent and registrar fees......................................... 5,000
Miscellaneous............................................................. 9,879
--------
Total................................................................ $190,000
========
</TABLE>
All expenses will be borne by IXC Communications, Inc. ("IXC Communications").
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
IXC Communications, Inc. 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 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
II-1
<PAGE> 40
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 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------------
<S> <C>
4.1 Specimen certificate representing shares of Common Stock of IXC Communications,
Inc. (incorporated by reference to Exhibit 4.1 of IXC Communications, Inc.
Registration Statement on Form S-1 filed with the Commission on May 20, 1996, as
amended (File No. 333-4061) (the "S-1")).
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 IXC Communications, Inc.'s and each of the Guarantor's
Registration Statement on Form S-4 filed with the Commission on April 1, 1996,
as amended (File No. 333-2936) (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).
</TABLE>
II-2
<PAGE> 41
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------------
<S> <C>
4.8 Form of 12 1/2% Series B Senior Notes due 2005 and Subsidiary Guarantee
(incorporated by reference to Exhibit 4.8 of the S-1).
4.9 Amendment No. 1 to Indenture and Subsidiary Guarantee dated as of June 4, 1996
by and among IXC Communications, Inc., the Guarantors and the Trustee
(incorporated by reference to Exhibit 4.11 of the S-1).
4.10 Stock Exchange Agreement dated as of June 10, 1996 by and between IXC
Communications, Inc., and Trustees of General Electric Pension Trust ("GEPT")
(incorporated by reference to Exhibit 4.12 of the S-1).
4.11 Registration Rights Agreement dated as of June 10, 1996 by and among IXC
Communications, Inc., GEPT and certain stockholders of IXC Communications, Inc.
(incorporated by reference to Exhibit 4.13 of the S-1).
4.12 Purchase Agreement dated as of March 25, 1997 by and among IXC Communications,
Inc., Credit Suisse First Boston Corporation ("CS First Boston") and Dillon Read
& Co. Inc. ("Dillon Read") (incorporated by reference to Exhibit 4.12 of IXC
Communications, Inc. Quarterly Report on Form 10-Q for the quarter ended March
31, 1997 (the "March 31, 1997 10-Q")).
4.13 Registration Rights Agreement dated as of March 25, 1997 by and among IXC
Communications, Inc., CS First Boston and Dillon Read (incorporated by reference
to Exhibit 4.13 of the March 31, 1997 10-Q).
4.14 Restated Certificate of Incorporation of IXC Communications, Inc., as amended
(incorporated by reference to Exhibit 3.1 of IXC Communications, Inc. Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997, as amended (the "June
30, 1997 10-Q")).
4.15 Amendment to Registration Rights Agreement dated as of March 25, 1995 between
IXC Communications, Inc. and GEPT (incorporated by reference to Exhibit 4.14 of
the March 31, 1997 10-Q).
4.16 Registration Rights Agreement dated as of July 8, 1997 between IXC
Communications, Inc. and William G. Rodi, Gordon Hutchins, Jr. and William F.
Linsmeier (incorporated by reference to Exhibit 4.15 of the June 30, 1997 10-Q).
4.17 Registration Rights Agreement dated as of July 8, 1997 between IXC
Communications, Inc. and William G. Rodi, Gordon Hutchins, Jr. and William F.
Linsmeier (incorporated by reference to Exhibit 4.16 of the June 30, 1997 10-Q).
5.1* Opinion of Riordan & McKinzie, a Professional Law Corporation regarding the
validity of the issuance of the securities registered hereunder.
12.1+ Statement regarding computation of ratios.
23.1* Consent of Riordan & McKinzie (contained in Exhibit 5.1).
23.2+ Consent of Ernst & Young LLP.
24.1 Power of Attorney (contained on page II-5).
</TABLE>
- ---------------
* To be filed by amendment.
+ Filed herewith.
(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.
II-3
<PAGE> 42
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in a posteffective amendment by
those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such posteffective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1993 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 of 1933 and will be governed by the final adjudication of such issue.
II-4
<PAGE> 43
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and 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 August 11, 1997.
IXC Communications, Inc.,
a Delaware corporation
By: /s/ JAMES F. GUTHRIE
---------------------------------------
James F. Guthrie
Executive Vice President and Chief
Financial Officer
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, President, Chairman of the Board and Chief Executive Officer of IXC
Communications, Inc. and Jeffrey C. Smith, Vice President, General Counsel and
Secretary of IXC Communications, Inc. and each of them 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 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
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.
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>
/s/ RALPH J. SWETT Chairman, President and Chief August 11, 1997
- --------------------------------------------- Executive Officer, and
Ralph J. Swett Director
(Principal Executive Officer)
/s/ JAMES F. GUTHRIE Executive Vice President and August 11, 1997
- --------------------------------------------- Chief Financial Officer
James F. Guthrie (Principal Financial and
Accounting Officer)
/s/ RICHARD D. IRWIN Director August 11, 1997
- ---------------------------------------------
Richard D. Irwin
/s/ WOLFE H. BRAGIN Director August 11, 1997
- ---------------------------------------------
Wolfe H. Bragin
/s/ CARL W. MCKINZIE Director August 11, 1997
- ---------------------------------------------
Carl W. McKinzie
/s/ PHILLIP L. WILLIAMS Director August 11, 1997
- ---------------------------------------------
Phillip L. Williams
/s/ JOE C. CULP Director August 11, 1997
- ---------------------------------------------
Joe C. Culp
</TABLE>
II-5
<PAGE> 44
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NO. PAGE
- ------- ----------------------------------------------------------------------- -----------
<S> <C> <C>
4.1 Specimen certificate representing shares of Common Stock of IXC
Communications, Inc. (incorporated by reference to Exhibit 4.1 of IXC
Communications, Inc. Registration Statement on Form S-1 filed with the
Commission on May 20, 1996, as amended (File No. 333-4061) (the
"S-1"))................................................................
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 IXC
Communications, Inc.'s and each of the Guarantor's Registration
Statement on Form S-4 filed with the Commission on April 1, 1996, as
amended (File No. 333-2936) (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 and Subsidiary Guarantee
(incorporated by reference to Exhibit 4.8 of the S-1)..................
4.9 Amendment No. 1 to Indenture and Subsidiary Guarantee dated as of June
4, 1996 by and among IXC Communications, Inc., the Guarantors and the
Trustee (incorporated by reference to Exhibit 4.11 of the S-1).........
4.10 Stock Exchange Agreement dated as of June 10, 1996 by and between IXC
Communications, Inc., and Trustees of General Electric Pension Trust
("GEPT") (incorporated by reference to Exhibit 4.12 of the S-1)........
4.11 Registration Rights Agreement dated as of June 10, 1996 by and among
IXC Communications, Inc., GEPT and certain stockholders of IXC
Communications, Inc. (incorporated by reference to Exhibit 4.13 of the
S-1)...................................................................
4.12 Purchase Agreement dated as of March 25, 1997 by and among IXC
Communications, Inc., Credit Suisse First Boston Corporation ("CS First
Boston") and Dillon Read & Co. Inc. ("Dillon Read") (incorporated by
reference to Exhibit 4.12 of IXC Communications, Inc. Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997 (the "March 31, 1997
10-Q"))................................................................
</TABLE>
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NO. PAGE
- ------- ----------------------------------------------------------------------- -----------
<S> <C> <C>
4.13 Registration Rights Agreement dated as of March 25, 1997 by and among
IXC Communications, Inc., CS First Boston and Dillon Read (incorporated
by reference to Exhibit 4.13 of the March 31, 1997 10-Q)...............
4.14 Restated Certificate of Incorporation of IXC Communications, Inc., as
amended (incorporated by reference to Exhibit 3.1 of IXC
Communications, Inc. Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, as amended (the "June 30, 1997 10-Q"))............
4.15 Amendment to Registration Rights Agreement dated as of March 25, 1995
between IXC Communications, Inc. and GEPT (incorporated by reference to
Exhibit 4.14 of the March 31, 1997 10-Q)...............................
4.16 Registration Rights Agreement dated as of July 8, 1997 between IXC
Communications, Inc. and William G. Rodi, Gordon Hutchins, Jr. and
William F. Linsmeier (incorporated by reference to Exhibit 4.15 of the
June 30, 1997 10-Q)....................................................
4.17 Registration Rights Agreement dated as of July 8, 1997 between IXC
Communications, Inc. and William G. Rodi, Gordon Hutchins, Jr. and
William F. Linsmeier (incorporated by reference to Exhibit 4.16 of the
June 30, 1997 10-Q)....................................................
5.1* Opinion of Riordan & McKinzie, a Professional Law Corporation regarding
the validity of the issuance of the securities registered hereunder....
12.1+ Statement regarding computation of ratios..............................
23.1* Consent of Riordan & McKinzie (contained in Exhibit 5.1)...............
23.2+ Consent of Ernst & Young LLP...........................................
24.1 Power of Attorney (contained on page II-5).............................
</TABLE>
- ---------------
* To be filed by amendment.
+ Filed herewith.
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(DOLLARS IN THOUSANDS, EXCEPT NOTES AND STATISTICAL DATA)
<TABLE>
<CAPTION>
THE COMPANY'S
PREDECESSOR - HISTORICAL
-------------------------
PERIOD FROM
PERIOD FROM AUGUST 14
JANUARY 1 THROUGH FOR THE SIX
THROUGH DECEMBER FOR THE YEAR ENDED DECEMBER 31, MONTHS ENDED
AUGUST 14, 31, ---------------------------------------- JUNE 30,
1992 1992 1993 1994 1995 1996 1997
----------- ----------- -------- ------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS:
Consolidated pretax income
(loss) from continuing
operations................... $ (24,482) $(7,175) $(53,789) $ 8,174 $ (4,911) $(43,429) $(48,940)
Minority interest in net loss
(income) of subsidiaries with
fixed charges................ -- -- -- (77) (5,218) 618 317
Equity in loss of less than 50%
owned affiliate with no
guaranteed debt.............. -- -- -- 86 (35) (37) --
FIXED CHARGES:
Interest expensed and
capitalized.................. 18,751 1,398 5,322 6,139 14,958 40,009 19,130
Interest portion of rental
expense...................... 9,985 5,444 10,690 5,495 2,135 19,960 16,247
Less interest capitalized
during the period............ (2) -- (379) (34) (361) (2,933) (3,370)
Plus capitalized interest
amortization................. -- -- -- -- 20 165 167
-------- ------- -------- ------- -------- -------- --------
Earnings....................... $ 4,252 $ (333) $(38,156) $19,783 $ 6,588 $ 14,353 $(16,449)
======== ======= ======== ======= ======== ======== ========
FIXED CHARGES:
Interest expensed and
capitalized............... $ 18,751 $ 1,398 $ 5,322 $ 6,139 $ 14,958 $ 40,009 $ 19,130
Interest portion of rental
expense................... 9,985 5,444 10,690 5,495 2,135 19,960 16,247
Preferred stock dividend
requirements of majority-
owned subsidiaries
(non-intercompany)........ -- -- 209 249 126 -- --
-------- ------- -------- ------- -------- -------- --------
Fixed Charges.................. $ 28,736 $ 6,842 $ 16,221 $11,883 $ 17,219 $ 59,969 $ 35,377
======== ======= ======== ======= ======== ======== ========
PREFERRED STOCK DIVIDEND
REQUIREMENTS:
Series 1 and 3............... $ -- $ 467 $ 1,358 $ 2,604 $ 1,717 $ 1,739 $ 945
Junior Convertible Preferred
Stock..................... -- -- -- -- -- -- 1,813
-------- ------- -------- ------- -------- -------- --------
Total Preferred Stock Dividend
Requirements................. $ -- $ 467 $ 1,358 $ 2,604 $ 1,717 $ 1,739 $ 2,758
======== ======= ======== ======= ======== ======== ========
Total Fixed Charges and
Preferred Stock Dividend
Requirements................. $ 28,736 $ 7,309 $ 17,579 $14,487 $ 18,936 $ 61,708 $ 38,135
======== ======= ======== ======= ======== ======== ========
Ratio of Earnings to Combined
Fixed Charges and Preferred
Stock Dividends
(Deficiency)(1).............. $ (24,484) $(7,642) $(55,735) 1.4x $(12,348) $(47,355) $(54,584)
======== ======= ======== ======= ======== ======== ========
</TABLE>
- ---------------
(1) Where earnings are inadequate to cover fixed charges and preferred stock
dividend requirements, the deficiency is shown.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form S-3 of IXC Communications, Inc. for the
registration of 97,481 shares of its Common Stock and 1,400,000 shares of its
7 1/4% Junior Convertible Preferred Stock (including any Common Stock issuable
upon conversion thereof) and to the incorporation by reference therein of our
report dated February 28, 1997, except for the third paragraph of Note 19, as to
which the date is March 17, 1997, with respect to the consolidated financial
statements of IXC Communications Inc. included in its Annual Report (Form 10-K)
for the year ended December 31, 1996, filed with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
Austin, Texas
August 11, 1997
