<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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IXC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 4813 74-2644120
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
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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.
RIORDAN & MCKINZIE
695 TOWN CENTER DRIVE, SUITE 1500
COSTA MESA, CA 92626
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT
TITLE OF EACH CLASS OF TO BE OFFERING AGGREGATE OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
12 1/2% Series B Junior
Exchangeable Preferred Stock Due
2009, par value $0.01........... 450,000 shares $.01 (2) $3,000(2) $1,000
- ------------------------------------------------------------------------------------------------------------------
12 1/2% Subordinated Exchange
Debentures Due 2009............. (3)(4) (3)(4) (3)(4) (3)(4)
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(1) Includes 150,000 shares of 12 1/2% Series B Junior Exchangeable Preferred
Stock Due 2009 that may, at the option of the Registrant, be issued as
dividends on the 12 1/2% Series B Junior Exchangeable Preferred Stock Due
2009. No additional registration fee is payable in respect thereof.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) under the Securities Act of 1933, as amended.
The Proposed Maximum Aggregate Offering Price was calculated based upon
one-third of the par value of $.01 per share of the Registrant's 12 1/2%
Junior Exchangeable Preferred Stock, multiplied by 300,000 (the number of
shares to be received or cancelled by the Registrant in the transaction).
(3) The outstanding shares of 12 1/2% Series B Junior Exchangeable Preferred
Stock Due 2009 may be exchanged for all, but not less than all, of the
12 1/2% Subordinated Exchange Debentures Due 2009 (the "Exchange
Debentures") on any scheduled dividend payment date at the Registrant's
option. No additional registration fee is payable in respect thereof.
(4) Includes $300 million principal amount of the Exchange Debentures and up to
$150 million principal amount of Exchange Debentures which may be issued as
interest payments on the Exchange Debentures. No additional registration fee
is payable in respect thereof.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
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 OCTOBER 3, 1997
IXC COMMUNICATIONS, INC.
OFFER TO EXCHANGE SHARES OF ITS
12 1/2% SERIES B JUNIOR EXCHANGEABLE PREFERRED STOCK DUE 2009
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING SHARES OF
12 1/2% JUNIOR EXCHANGEABLE PREFERRED STOCK DUE 2009
The Exchange Offer will expire at 5:00 p.m., New York City time, on
, 1997, unless extended.
IXC Communications, Inc. ("IXC" or the "Company") hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus and the
accompanying Letter of Transmittal (the "Letter of Transmittal" which, together
with this Prospectus, constitute the "Exchange Offer"), to exchange one share of
its 12 1/2% Series B Junior Exchangeable Preferred Stock Due 2009 (the "New
Preferred Stock") which has been registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a registration statement (the
"Registration Statement") of which this Prospectus is a part, for each
outstanding share of its 12 1/2% Junior Exchangeable Preferred Stock Due 2009
(the "Old Preferred Stock" and together with the New Preferred Stock, the
"Exchangeable Preferred Stock"), of which an aggregate of $300,000,000
liquidation preference is outstanding as of the date hereof. The terms of the
New Preferred Stock are substantially identical in all material respects
(aggregate liquidation preference, dividend rate, mandatory redemption and
ranking) to the terms of Old Preferred Stock, except that the New Preferred
Stock has been registered under the Securities Act and therefore will not be
subject to certain transfer restrictions applicable to the Old Preferred Stock.
See "The Exchange Offer" and "Description of the Exchangeable Preferred Stock."
The Company will accept for exchange any and all shares of Old Preferred
Stock validly tendered and not withdrawn prior to 5:00 p.m., New York City time,
on , 1997, unless extended by the Company (such date and time, as it
may be extended, the "Expiration Date"). Tenders of shares of Old Preferred
Stock may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the Expiration Date. The Exchange Offer is not conditioned upon any minimum
number of shares of Old Preferred Stock being tendered for exchange. However,
the Exchange Offer is subject to certain customary conditions. The Company will
not receive any proceeds from the Exchange Offer. See "The Exchange Offer."
The Exchange Offer is being made to satisfy certain obligations of the
Company under the Registration Rights Agreement dated as of August 14, 1997 (the
"Registration Rights Agreement") among the Company and the purchasers named
therein (the "Initial Purchasers"). Following the completion of the Exchange
Offer, holders of shares of Old Preferred Stock not tendered will not have any
further registration rights (except that the Company will be required to file a
shelf registration statement in certain limited instances) and such shares will
continue to be subject to restrictions on transfer. Accordingly, the liquidity
of the market for a holder's shares of Old Preferred Stock could be adversely
affected if the holder does not participate in the Exchange Offer. See "Risk
Factors -- Consequences of Failure to Exchange of Old Preferred Stock."
The Old Preferred Stock was originally issued and sold on August 20, 1997
in a transaction exempt from registration under the Securities Act in reliance
upon the exemptions provided by Rule 144A and by Section 4(2) of the Securities
Act. Accordingly, the Old Preferred Stock may not be reoffered, resold or
otherwise pledged, hypothecated or transferred in the United States unless so
registered or unless an exemption from the registration requirements of the
Securities Act and applicable state securities laws is available.
(continued on following page)
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO
HOLDERS OF OLD PREFERRED STOCK ON , 1997.
SEE "RISK FACTORS" ON PAGE 14 FOR INFORMATION THAT SHOULD BE CONSIDERED IN
CONNECTION WITH THE EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 3
(Continuation of cover page)
Each share of Exchangeable Preferred Stock has a liquidation preference of
$1,000 (the "Liquidation Preference"). Dividends on the Exchangeable Preferred
Stock accrue from August 20, 1997 at the rate of 12 1/2% per annum of the
liquidation preference thereof and are payable quarterly in arrears on February
15, May 15, August 15 and November 15 of each year (each, a "Dividend Payment
Date"), commencing on November 15, 1997. Dividends are payable in cash, except
that on each Dividend Payment Date occurring on or prior to February 15, 2001,
dividends may be paid, at the Company's option, by the issuance of additional
shares of New Preferred Stock or Old Preferred Stock, as applicable (including
fractional shares), having an aggregate liquidation preference equal to the
amount of such dividends. The Company is required to redeem the Exchangeable
Preferred Stock at the liquidation preference thereof, plus accumulated and
unpaid dividends, if any, on August 15, 2009, out of any funds legally available
therefor. The Exchangeable Preferred Stock ranks: (i) senior to all existing and
future Junior Stock (as defined); (ii) on a parity with all existing and future
Parity Stock (as defined), including the Convertible Preferred Stock (as
defined); and (iii) junior to all existing and future Senior Stock (as defined),
including the Series 3 Preferred Stock (as defined). In addition, the
Exchangeable Preferred Stock will rank junior in right of payment to all
indebtedness and other liabilities of the Company and its subsidiaries. As of
June 30, 1997, there was approximately $20.0 million of outstanding Senior Stock
of the Company and approximately $449.2 million of outstanding indebtedness and
other liabilities of the Company and its subsidiaries (including approximately
$149.6 million of outstanding indebtedness and other liabilities (including
trade payables) of the Company's subsidiaries). See "Description of the
Exchangeable Preferred Stock."
On any scheduled Dividend Payment Date, the Company may, at its option,
exchange all but not less than all of the shares of Exchangeable Preferred Stock
then outstanding for the Company's 12 1/2% Subordinated Exchange Debentures Due
2009 (the "Exchange Debentures"). The Exchange Debentures will bear interest at
a rate of 12 1/2% per annum, payable semiannually on February 15 and August 15
of each year, commencing with the first such date to occur after the date of
exchange. The Exchange Debentures will be subordinated to all existing and
future Senior Indebtedness (as defined) of the Company and to all indebtedness
and other liabilities (including trade payables) of the Company's subsidiaries.
As of June 30, 1997, there was approximately $449.2 million of outstanding
indebtedness and other liabilities of the Company and its subsidiaries
(including approximately $149.6 million of outstanding indebtedness and other
liabilities (including trade payables) of the Company's subsidiaries), all of
which would have been senior in right of payment to the Exchange Debentures. See
"Description of the Exchange Debentures -- Ranking."
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") with respect to similar transactions set forth in
no-action letters issued to third parties unrelated to the Company, the New
Preferred Stock issued pursuant to the Exchange Offer in exchange for the Old
Preferred Stock may be offered for resale, resold and otherwise transferred by
holders thereof who are not "affiliates" of the Company (within the meaning of
Rule 405 under the Securities Act) without compliance with the registration and
prospectus delivery requirements of the Securities Act; provided that the New
Preferred Stock is acquired in the ordinary course of the holders' business,
such holders have no arrangement or understanding with any person to participate
in any distribution (within the meaning of the Securities Act) of the New
Preferred Stock and neither the holders nor any other person is engaging in or
intends to engage in a distribution of the New Preferred Stock. Each
broker-dealer that receives New Preferred Stock for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Preferred Stock. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Preferred Stock received in exchange for Old Preferred Stock
where such Old Preferred Stock was acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
Prior to this Exchange Offer, there has been no public market for the
Exchangeable Preferred Stock. The Old Preferred Stock has traded on the Private
Offerings, Resale and Trading through Automated Linkages ("PORTAL") Market. If a
market for the New Preferred Stock should develop, the New Preferred Stock could
trade at prices higher or lower than their original offering price. The Company
does not currently intend to list the New Preferred Stock on any securities
exchange or to seek approval for quotation through any automated quotation
system. There can be no assurance that an active public market for the New
Preferred Stock will develop. See "Risk Factors -- Lack of Public Market."
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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 (the "Form 10-K");
(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,
August 5, 1997, August 18, 1997, August 20, 1997, August 21, 1997,
September 17, 1997, September 29, 1997 and October 3, 1997.
(3) The Company's Quarterly Reports on Form 10-Q for the quarter ended
March 31, 1997 and the quarter ended June 30, 1997, as amended
(collectively, the "Form 10-Qs");
(4) The Company's definitive Proxy Statement for the Annual Meeting of
Stockholders on May 6, 1997; and
(5) 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 modifies 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.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
KELLI MCGLYNN, INVESTOR RELATION COORDINATOR, IXC COMMUNICATIONS. INC., 5000
PLAZA ON THE LAKE, SUITE 200, AUSTIN, TEXAS 78746 (TELEPHONE 512-328-1112). IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
THE DATE WHICH IS FIVE BUSINESS DAYS PRIOR TO THE EXPIRATION DATE.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement," which term shall include all amendments,
exhibits, annexes and schedules thereto) pursuant to the Securities Act, and the
rules and regulations promulgated thereunder, covering the New Preferred Stock
being offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements made in
this Prospectus as to the contents of any contract, agreement or other document
referred to in the Registration Statement are necessarily summaries of those
documents, and, with respect to each such contract, agreement or other document
filed as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved, and each
statement shall be deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports and other information with the Commission. Such
reports, proxy and other information can be inspected at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington D.C. 20549. At the Commission's Regional offices at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at Seven World
Trade Center, 13th floor, New York, New York 10048. Copies of such material can
be obtained at prescribed rates upon request from the Public Reference Section
of the Commission at 450 Fifth Street, N.W. Washington D.C. 20549. The
Commission also maintains a site on the World Wide Web (http://www.sec.gov) that
contains reports, proxy information statements and other information regarding
registrants, like the Company, that file electronically with the Commission. The
Company's common stock is listed on the Nasdaq National Market under the symbol
"IIXC." Reports, proxy statements and other information concerning the Company
may be inspected and copied at the offices of The Nasdaq Stock Market at 1735 K
Street, N.W., Washington D.C. 20006.
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PROSPECTUS SUMMARY
Certain of the statements contained in this Prospectus, including
information regarding the Company's network expansion and switched long distance
services and related strategy and financing, are forward-looking statements. For
a discussion of important factors that could cause actual results to differ
materially from the matters described in the forward-looking statements and
other matters that should be carefully considered by prospective investors, see
"Risk Factors." Certain terms used herein are defined in the Glossary at page
A-1.
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" appearing elsewhere in this Prospectus and
the information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's financial statements
(including the notes thereto) appearing in the Form 10-K and the Form 10-Qs
which are incorporated by reference herein. As used herein, except with respect
to the cover page and unless the context otherwise requires, the terms "Company"
and "IXC" refer to IXC Communications, Inc. ("IXC Communications") and its
subsidiaries, including predecessor corporations. Certain industry data was
obtained from a report issued in March 1996 from the FCC and from a report dated
January 1996 from International Data Corporation (an industry research
organization), which the Company has not independently verified.
THE COMPANY
The Company is a leading provider of telecommunications transmission
services to long distance and other communications companies. The Company is one
of only five long distance carriers that currently own a coast-to-coast digital
telecommunications network (the others are AT&T, MCI, Sprint and WorldCom). The
Company is expanding its network (the "Network") of 10,300 digital route miles
to include over 12,500 digital route miles by the end of 1997 and, subject to
the availability of capital and the completion of cost-sharing arrangements
currently being negotiated, over 16,000 digital route miles by the end of 1998
and over 20,000 digital route miles by the end of 1999. The Company provides two
principal products: transmission of voice and data over dedicated circuits
("private lines") and transmission of long distance traffic processed through
the Company's switches ("switched services"). During the first quarter of 1997,
the Company began providing Frame Relay and ATM-based switched data services in
order to capitalize on the growing demand for Internet and electronic data
transfer services. Additionally, the Company recently announced an agreement
with PSINet Inc. ("PSINet"), a major Internet service provider, to acquire
PSINet's broad spectrum of Internet services for resale to the Company's
customers.
Since beginning the Network expansion and entering into the switched
services business in late 1995, the Company's revenues have grown rapidly. The
Company generated revenues of $91.0 million in 1995, $203.8 million in 1996 and
$307.3 million over the twelve months ended June 30, 1997. The Company's
customers include AT&T, MCI, Sprint, WorldCom, Cable & Wireless, Excel,
Frontier, LCI and over 200 other long distance companies, wireless companies,
cable television providers, Internet service providers, governmental agencies
and other large corporations. In an independent survey conducted by
Atlantic-ACM, the Company had the highest overall carrier rating of all major
long distance transmission service providers.
The growing demand for the Company's services and the nearly complete usage
of its Network capacity have required the Company to supplement its Network with
capacity leased from other carriers. As a result, in 1995 the Company began
expanding its Network to increase its geographic scope and capacity and reduce
its off-net lease expense. The Company is expanding its network with modern,
technologically advanced, non-zero dispersion shifted fiber and OC-48
electronics (upgradeable to OC-192 capacity). The new fiber and electronics are
less expensive to install and operate and have greater capacity and technical
capabilities than the fiber and electronics of older networks. Upon completion
of the routes currently being constructed, engineered, or planned through 1998,
over 10,000 route miles of the 16,000 digital route miles of the Network will
consist of advanced fiber and electronics. Through a combination of its owned
and leased facilities, the Company expects to be able to originate and terminate
long distance traffic in all 50 U.S. states, as well as terminate long distance
traffic in over 200 foreign countries.
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The Company expects that usage of long distance transmission capacity will
continue to increase over the next several years due to: (i) continued growth in
the long distance market; (ii) entry into the market of new communications
providers as permitted by changes in telecommunications laws; (iii) requirements
of the first-tier carriers to expand and obtain redundancy for their networks;
(iv) growth resulting from lower retail rates caused by reductions in domestic
access charges and international settlement rates; (v) growth in the capacity
requirements of the Internet; (vi) growth in data transmission; and (vii) growth
associated with the use of new technologies and new applications of existing
technologies. The Company believes that its established reputation as a
high-quality provider of telecommunications services and its expanded Network
position it to take advantage of the increasing demand for transmission
capacity.
THE NETWORK
Prior to beginning the Network expansion in late 1995, the Company owned a
digital coast-to-coast network containing over 1,900 route miles of fiber optic
cable and over 5,000 route miles of digital microwave. Since then, the Company
has made substantial progress in expanding its Network, which now includes: (i)
over 3,300 route miles of advanced fiber optic cable and electronics in
operation, (ii) over 3,100 additional route miles of advanced fiber optic cable
being engineered or constructed, (iii) over 39,000 DS-3 miles of fiber optic
capacity obtained in capacity swaps with other carriers; (iv) over 160,000 DS-3
miles of fiber capacity leased from other carriers; (v) 6 digital long distance
switches; and (vi) 14 Frame Relay-ATM data switches. The Company anticipates
that, subject to the availability of capital and the completion of cost-sharing
arrangements, by the end of 1998 the Network would include over 16,000 route
miles of digital transmission capacity with 8 long distance switches and 30
Frame Relay-ATM switches and, by the end of 1999, the Network would increase to
over 20,000 route miles of digital transmission capacity.
In early 1997, the Company completed construction of, and placed into
service, the portion of its Network linking Cleveland, Chicago, St. Louis,
Dallas and Phoenix. The Company expects completion of the routes from Cleveland
to New York, Phoenix to Los Angeles, and Washington, D.C. to Atlanta by the end
of 1997. Additional routes from Atlanta to Houston are currently being
engineered or constructed and routes from New York to Washington, D.C., Houston
to Dallas, Los Angeles to San Francisco, and a route linking Toledo, Detroit and
Chicago are planned for construction, with all such routes scheduled to be
completed by mid-1998.
The new fiber optic route miles are being constructed with capability for
bi-directional SONET rings for enhanced network reliability. As each new route
is completed and placed into service, it will be equipped with an OC-48 in order
to provide initial transmission capacity. The Company is currently in the
process of equipping certain of its routes with additional OC-48s in order to
meet customer demand for its services.
The expanded Network is expected to deliver the following significant
strategic and financial benefits to the Company:
(i) substantial savings by allowing the Company to move on to its own
Network a significant portion of its traffic that it currently carries on
circuits which it leases from other carriers (resulting in estimated
savings of $30 million in 1997);
(ii) high-capacity new routes and substantially increased capacity on
certain existing routes, allowing the Company to increase revenues by
leasing additional circuits to its customers, including high-capacity
circuits such as OC-48s, OC-12s and OC-3s;
(iii) lower underlying transmission and network operating costs,
resulting in improved profitability;
(iv) sufficient capacity to support increasing demand expected from
Internet and multimedia applications, Frame Relay and ATM; and
(v) reduced capital costs through sales and exchanges of excess fiber
which the Company is including in its Network expansion specifically for
that purpose.
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BUSINESS STRATEGY
The Company's objective is to develop a nationwide network at a low net
construction cost in order to establish a basis for long-term growth in market
share and profitability. The Company's primary near-term goals are to: (i)
complete the route from New York to Los Angeles and the route from Washington,
D.C. to Atlanta in 1997; (ii) better balance traffic distributions to improve
EBITDA in its switched services business; (iii) enter into additional
cost-saving arrangements with other carriers to reduce the cost of the existing
Network construction and develop additional Network expansion opportunities;
(iv) utilize the expanded Network to increase revenues by generating new
customers and increasing business from existing customers; (v) improve
profitability by migrating traffic from circuits leased from other carriers onto
the Network; and (vi) leverage the relationship with PSINet to generate new
Internet services customers and large account customers who require bundled
voice, data and Internet transmission services.
In order to achieve these goals the Company intends to pursue the following
strategy:
Enter Into Cost-Saving Arrangements. The Company has included excess fiber
in its Network expansion which it is using to reduce the net cost of
construction through: (i) leasing or selling excess fiber to other carriers; and
(ii) exchanging excess fiber for fibers or capacity on other carriers' networks.
Additionally, the Company seeks to obtain the right to install Company-owned
fibers in new routes being constructed by other carriers along the proposed
Network expansion routes in exchange for the Company (a) sharing network
construction costs; (b) allowing the other carrier to use excess fiber along
certain routes in the Network; or (c) allowing the other carrier to add its own
fiber to certain segments of the Network.
The Company has already entered into several cost-saving agreements with
other carriers that are expected to reduce the per-route-mile cost of
construction, including:
(i) a contract with WorldCom pursuant to which each company has
constructed a fiber route approximately 1,100 miles long and placed fibers
for both companies along the route;
(ii) contracts with LCI pursuant to which LCI would purchase an
indefeasible right to use fibers from Chicago to Los Angeles for
approximately $97.9 million (the "Chicago-LA LCI Fiber Sale") and from
Cleveland to New York for approximately $20.0 million (the "Cleveland-NY
LCI Fiber Sale");
(iii) a contract with MCI pursuant to which MCI would purchase an
indefeasible right to use fibers from New York to Los Angeles for
approximately $121.0 million (the "MCI Fiber Sale");
(iv) a contract with Vyvx to exchange the use of certain fibers on the
Company's New York to Los Angeles route for the use of fibers on a
1,600-mile route under construction by Vyvx from Washington D.C. to
Houston;
(v) joint construction agreements with LCI, DTI and CCTS allowing the
Company to share the costs of constructing certain routes in Illinois, Ohio
and Missouri;
(vi) a contract with MFS pursuant to which MFS will include fibers for
the Company in a route it is constructing from Cleveland to New York; and
(vii) contracts with GST and WorldCom providing for the sale of fiber
along certain routes.
Reduce Operating Costs. The Company expects to achieve substantial
operating cost savings from the Network expansion by replacing a portion of the
capacity it leases from other carriers with its own Network capacity. The
Company incurred costs of approximately $60.1 million for leased off-net fiber
optic capacity from other carriers in 1996. The Company believes the Network
expansion will result in reduced expenditures for capacity currently leased
off-net (as well as future capacity required to support revenue growth) and
increased operating cash flow, because the new fiber routes (i) are targeted for
geographic areas that the Network currently does not reach or is capacity
limited or where the Company leases off-net capacity and (ii) will allow the
Company to enter into additional exchanges of fiber capacity on new routes with
other carriers.
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Increase Private Line Revenues. Geographic limitations and nearly full
utilization of the Network had previously limited the Company's ability to
expand its private line business. The Network expansion has added high-capacity
new routes and substantially increased the capacity of certain existing routes,
allowing the Company to lease additional circuits to its customers, including
high-capacity, high-margin circuits such as OC-48s, OC-12s and OC-3s. The
Company has already generated significant orders for capacity on the new routes,
including a contract with a major carrier under which the Company will provide
DS-3 circuits, each with a one-year term, principally along the planned route
from New York to Los Angeles with aggregate revenues in excess of $24.0 million
during 1997-1998. The Company continues to seek significant new orders over the
Network expansion routes and believes that it is well positioned to obtain such
orders.
Additionally, the Company specifically designed the Network expansion along
routes geographically diverse from those of other facilities-based carriers. In
recent years, companies such as AT&T and MCI have used the Company to provide
alternative routes to help protect their networks in the event of a service
outage. Such companies prefer routes separated geographically from their own
networks to increase the possibility that the alternative route will be
functional in the event of a natural disaster. The Company believes that the
Network expansion greatly increases the attractiveness of the Company's Network
as an alternative routing network backup to the major carriers.
Develop the Switched Services Business. The Company has established itself
as an alternative provider of switched long distance services with nation-wide
origination and domestic and international termination capability. The Company
currently has over 80 customers and believes that it is well positioned to
attract long distance resellers for its switched services because, unlike its
present major competitors (AT&T, MCI, Sprint and WorldCom) whose primary focus
is providing retail long distance services to end users, the Company (i) is not
currently a significant competitor to its customers for sales to end users; and
(ii) provides more focused service to its reseller customers, since serving such
customers is its primary business. The Company believes that this, combined with
the low embedded cost of its Network, provides a significant advantage when
competing to provide switched long distance traffic to resellers, cable
companies, RBOCs, utility companies and others which are permitted to enter the
long distance business under recent changes in telecommunications law. By the
end of 1998, the Company intends to add two additional long distance switches
which, if installed, will provide additional capacity to originate and terminate
traffic and the technical platform to offer enhanced, higher margin, long
distance products such as 800 PIN and pre-paid debit cards. Although the Company
has never achieved positive EBITDA in its switched services business, the
Company seeks to improve EBITDA in this business by: examining (and improving
procedures to examine) the traffic patterns of its customers; identifying
customers generating an unprofitable mix of traffic, and where appropriate and
as contractually allowed, adjusting contract terms; and prescreening new
contract proposals to evaluate the financial impact of expected traffic
distributions.
Establish a Platform for Capacity-Intensive Data Applications. The Company
is using advanced fiber optic technology in its Network expansion. The expanded
Network's SONET technology and broadband capabilities provide a platform to
support advanced, capacity-intensive products such as Frame Relay, ATM,
multimedia, and Internet-related applications. The Company has equipped its
network with 14 data switches (30 expected by the end of 1998) and other
equipment necessary to enter into the Frame Relay and ATM transmission business.
PSINET TRANSACTION
In July 1997, the Company announced an agreement with PSINet to acquire
PSINet's broad spectrum of Internet services for resale to its customers. Under
the terms of the PSINet agreements, after consummation of the transaction, the
Company will provide PSINet with an indefeasible right to use 10,000 miles of
OC-48 transmission capacity on its Network over a 20-year period in exchange for
20% (post-issuance) of PSINet common stock. In addition, if the value of the
PSINet common stock received by the Company is less than $240 million at the
earlier of one year after the final delivery of the transmission capacity
(scheduled for late-1999) or four years after closing, PSINet, at its option,
will pay the Company cash and/or deliver additional PSINet common stock to bring
the value of the Company's investment to $240 million. Upon delivery of the
transmission capacity to PSINet, the Company will also receive a maintenance fee
which,
4
<PAGE> 9
when all the capacity has been delivered, will be approximately $11.5 million
per year. The Company expects to consummate the transactions contemplated by the
PSINet agreements upon the satisfaction of certain conditions, including receipt
of approval of PSINet stockholders. There can be no assurance that such
conditions will be satisfied or that the PSINet transaction will be consummated.
TENDER OFFER FOR SERIES 3 PREFERRED STOCK
On October 3, 1997, the Company commenced an offer (the "Series 3 Tender
Offer") to exchange shares of the Company's common stock (the "Common Stock")
for all its issued and outstanding shares of the Series 3 Preferred Stock. The
number of shares of Common Stock to be exchanged for each share of tendered
Series 3 Preferred Stock will be the ratio between the aggregate per share
liquidation preference of, and the accrued and unpaid dividends on, one share of
Series 3 Preferred Stock as of the expiration date of the exchange offer and the
last reported sale price of the Company's Common Stock on the Nasdaq National
Market on the expiration date of the Series 3 Tender Offer (scheduled, subject
to extensions, for October 31, 1997). The aggregate liquidation preference and
accrued and unpaid dividends on the Series 3 Preferred Stock at October 31,
1997, will be approximately $20.6 million (or $1645 per share). The Common Stock
to be issued in connection with the Series 3 Tender Offer will not be registered
under the Securities Act. The Series 3 Tender Offer is conditioned upon at least
90% of the shares of Series 3 Preferred Stock being properly tendered and not
withdrawn. The Company has reserved the right, but is not obligated, to
terminate the Series 3 Tender Offer in the event that less than 90% of the
shares of Series 3 Preferred Stock is properly tendered. There can be no
assurance that the Company will consummate the Series 3 Tender Offer, or, if
consummated, that all of the shares of Series 3 Preferred Stock will be tendered
and exchanged for Common Stock.
NEW PRESIDENT AND CHIEF EXECUTIVE OFFICER
The Company recently announced that Benjamin L. Scott, the President and
Chief Executive Officer of PrimeCo Personal Communications L.P. ("PrimeCo"), a
joint venture among Bell Atlantic Corporation ("Bell Atlantic"), U S WEST Media
Group and Airtouch Communications, Inc., will become the new President and Chief
Executive Officer of the Company in October 1997. Mr. Scott will also become a
member of the Company's Board of Directors upon his employment with the Company.
See "Management."
The Company was incorporated in the State of Delaware on July 27, 1992. The
Company's principal executive offices are located at 5000 Plaza on the Lake,
Suite 200, Austin, Texas 78746 and its telephone number is (512) 328-1112.
TERMS OF THE EXCHANGE OFFER
The Exchange Offer......... The Company is offering to exchange one share of
New Preferred Stock for each outstanding share of
Old Preferred Stock, that was issued and sold on
August 20, 1997 in a transaction exempt from
registration under the Securities Act (the
"Exchangeable Preferred Sale"). The terms of the
New Preferred Stock are substantially identical in
all material respects (aggregate liquidation
preference, dividend rate, mandatory redemption and
ranking) to the terms of the Old Preferred Stock,
except that the New Preferred Stock has been
registered under the Securities Act and therefore
will not be subject to certain transfer
restrictions applicable to the Old Preferred Stock.
See "The Exchange Offer" for a description of the
procedures for tendering Old Preferred Stock. The
Exchange Offer satisfies the registration
obligations of the Company under the Registration
Rights Agreement. Holders that do not tender all of
their Old Preferred Stock will no longer have any
registration rights under the Registration Rights
Agreement (except that the Company will
5
<PAGE> 10
be required to file a shelf registration statement
in certain limited instances). See "-- Exchange
Offer Procedures."
Tenders; Expiration Date;
Withdrawal; Termination.... The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1997, or such
later date and time, if any, as extended by the
Company, in its sole discretion. Tenders of Old
Preferred Stock pursuant to the Exchange Offer may
be withdrawn and re-tendered at any time prior to
the Expiration Date. Any Old Preferred Stock not
accepted for exchange for any reason will be
returned without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
The Company may terminate the Exchange Offer if any
of the events set forth under "The Exchange
Offer -- Conditions to the Exchange Offer" shall
have occurred and shall not have been waived by the
Company.
Dividends on the New
Preferred Stock and the Old
Preferred Stock............ Dividends on each share of New Preferred Stock will
accrue from the last Dividend Payment Date (as
defined) on the Old Preferred Stock. No additional
dividends will be paid on the Old Preferred Stock
tendered and accepted for exchange.
Conditions to the
Exchange Offer............. The Exchange Offer is subject to certain customary
conditions, certain of which may be waived by the
Company. It is not, however, conditioned on any
minimum number of shares of Old Preferred Stock
being tendered for exchange. See "The Exchange
Offer -- Conditions to Exchange Offer."
Exchange Offer
Procedures................. Old Preferred Stock may be tendered by properly
completing and signing the Letter of Transmittal
and delivering the Letter of Transmittal to the
Exchange Agent (as defined) at its address set
forth in this Prospectus on or prior to the
Expiration Date, together with: (i) the certificate
or certificates representing the Old Preferred
Stock being tendered and any required signature
guarantees; (ii) a timely confirmation of a
book-entry transfer of the Old Preferred Stock, if
such procedure is available, into the Exchange
Agent's account at The Depository Trust Company
(the "Book-Entry Transfer Facility" or
"Depository") pursuant to the procedure for
book-entry transfer described in this Prospectus;
or (iii) the completion of the procedures for
guaranteed delivery set forth in this Prospectus.
See "The Exchange Offer -- Exchange Offer
Procedures." Pursuant to the Registration Rights
Agreement, the Company is required to file a shelf
registration statement for a continuous offering
pursuant to Rule 415 under the Securities Act in
respect of the Old Preferred Stock if: (i) because
of any change in law or in currently prevailing
interpretations of the staff of the Commission, the
Company is not permitted to effect the Exchange
Offer; (ii) the Exchange Offer is not consummated
within 150 days after the date of the Registration
Rights Agreement; (iii) any Initial Purchaser so
requests with respect to the Old Preferred Stock
not eligible to be exchanged for New Preferred
Stock in the Exchange Offer and held by it
following consummation of the Exchange Offer; or
(iv) any holder of Old Preferred Stock (other than
a broker-dealer electing to exchange Old Preferred
Stock, acquired for its own account as a result of
market-making activities or other
6
<PAGE> 11
trading activities for New Preferred Stock (an
"Exchanging Dealer")) is not eligible to
participate in the Exchange Offer or, in the case
of any holder of Old Preferred Stock (other than an
Exchanging Dealer) that participates in the
Exchange Offer, such holder does not receive freely
tradeable New Preferred Stock on the date of the
exchange. See "The Exchange Offer -- Purpose of the
Exchange Offer."
Acceptance of Old Preferred
Stock and Delivery of New
Preferred Stock............ The Company will accept for exchange any and all
shares of Old Preferred Stock which are validly
tendered (and not withdrawn) in the Exchange Offer
prior to 5:00 p.m., New York City time, on the
Expiration Date. The New Preferred Stock issued
pursuant to the Exchange Offer will be delivered
after acceptance of the tendered Old Preferred
Stock and promptly following the Expiration Date.
See "The Exchange Offer -- Acceptance of Old
Preferred Stock for Exchange; Delivery of New
Preferred Stock."
Exchange Agent............. The Bank of New York is serving as Exchange Agent
(the "Exchange Agent") in connection with the
Exchange Offer.
Federal Income Tax
Consequences............... The Exchange Offer will not result in any income,
gain or loss to the holders of Exchangeable
Preferred Stock or the Company for federal income
tax purposes. See "Certain U.S. Federal Income Tax
Consequences."
Use of Proceeds............ There will be no proceeds to the Company from the
exchange of the Old Preferred Stock for the New
Preferred Stock pursuant to the Exchange Offer.
CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE
OLD PREFERRED STOCK PURSUANT TO THE EXCHANGE OFFER
Based on interpretations by the staff of the Commission with respect to
similar transactions set forth in no-action letters issued to third parties
unrelated to the Company, the New Preferred Stock issued pursuant to the
Exchange Offer in exchange for the Old Preferred Stock may be offered for
resale, resold and otherwise transferred by holders thereof who are not
"affiliates" of the Company (within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act; provided that the New Preferred Stock is
acquired in the ordinary course of the holders' business, such holders have no
arrangement or understanding with any person to participate in any distribution
(within the meaning of the Securities Act) of the New Preferred Stock and
neither the holders nor any other person is engaging in or intends to engage in
a distribution of the New Preferred Stock. Each broker-dealer that receives New
Preferred Stock for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
the New Preferred Stock. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Preferred Stock
received in exchange for Old Preferred Stock where such Old Preferred Stock was
acquired by such broker-dealer as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 180 days after
the Expiration Date, it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution."
To comply with the securities laws of certain jurisdictions, it may be
necessary to qualify for sale or register the New Preferred Stock prior to
offering or selling such New Preferred Stock. The Company is
7
<PAGE> 12
required, under the Registration Rights Agreement, to register the New Preferred
Stock in any jurisdiction reasonably requested by the holders, subject to
certain limitations. Upon consummation of the Exchange Offer, holders of Old
Preferred Stock that were not prohibited from participating in the Exchange
Offer and did not tender their Old Preferred Stock will not have any
registration rights under the Registration Rights Agreement (except that the
Company will be required to file a shelf registration statement in certain
limited instances) covering such Old Preferred Stock not tendered and such Old
Preferred Stock will continue to be subject to the restrictions on transfer
contained in the legend thereon. In general, the Old Preferred Stock may not be
offered or sold, unless registered under the Securities Act and applicable state
securities laws, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. See "The
Exchange Offer -- Consequences of Failure to Exchange."
SUMMARY DESCRIPTION OF THE NEW PREFERRED STOCK AND THE EXCHANGE DEBENTURES
The terms of the New Preferred Stock and the Old Preferred Stock are
substantially identical in all material respects (aggregate liquidation
preference, dividend rate, mandatory redemption and ranking), except for certain
transfer restrictions and registration rights relating to the Old Preferred
Stock.
NEW PREFERRED STOCK
Securities Offered......... 300,000 shares of 12 1/2% Series B Junior
Exchangeable Preferred Stock Due 2009, plus any
additional shares issued from time to time in lieu
of cash dividends.
Dividends.................. Dividends on the New Preferred Stock will accrue at
a rate of 12 1/2% per annum of the Liquidation
Preference thereof and will be payable quarterly in
arrears on February 15, May 15, August 15 and
November 15 of each year (each a "Dividend Payment
Date") commencing November 15, 1997. Dividends on
each share of New Preferred Stock will accrue from
the last Dividend Payment Date on the Old Preferred
Stock. Dividends will be payable in cash, except
that on each Dividend Payment Date occurring on or
prior to February 15, 2001, dividends may be paid,
at the Company's option, by the issuance of
additional shares of New Preferred Stock (including
fractional shares) having an aggregate Liquidation
Preference equal to the amount of such dividends.
It is not anticipated that the Company will pay any
dividends in cash for any period ending on or prior
to February 15, 2001.
Liquidation Preference..... $1,000 per share.
Ranking.................... The New Preferred Stock will rank (i) senior to all
existing and future Junior Stock (as defined
herein); (ii) on a parity with all existing and
future Parity Stock (as defined herein), including
the Convertible Preferred Stock; and (iii) junior
to all existing and future Senior Stock, including
the Series 3 Preferred Stock. In addition, the New
Preferred Stock will rank junior in right of
payment to all indebtedness and other obligations
of the Company and its subsidiaries. As of June 30,
1997, there was approximately $20.0 million of
outstanding Senior Stock of the Company and
approximately $449.2 million of outstanding
indebtedness and other liabilities of the Company
(including approximately $149.6 million of
outstanding indebtedness and other liabilities
(including trade payables) of the Company's
subsidiaries). See "Description of the Exchangeable
Preferred Stock -- Ranking."
Optional Redemption........ The New Preferred Stock will not be redeemable
prior to August 15, 2002, except that, on or prior
to August 15, 2000, the Company may
8
<PAGE> 13
redeem, at its option, up to 35% of the outstanding
Exchangeable Preferred Stock at the redemption
price set forth herein with the net proceeds of one
or more Public Equity Offerings (as defined) if at
least $195 million aggregate Liquidation Preference
of the Exchangeable Preferred Stock remains
outstanding after each such redemption. On or after
August 15, 2002, the New Preferred Stock is
redeemable at the option of the Company, in whole
or in part, at the redemption prices set forth
herein plus accumulated and unpaid dividends, if
any, to the date of redemption See "Description of
the Exchangeable Preferred Stock -- Optional
Redemption."
Mandatory Redemption....... The Company is required to redeem the New Preferred
Stock at its Liquidation Preference, plus
accumulated and unpaid dividends, if any, on August
15, 2009, out of any funds legally available
therefor.
Change of Control.......... In the event of a Change of Control (as defined),
if the Company elects, the Company shall offer to
purchase shares of New Preferred Stock, in whole or
in part, at a purchase price equal to 101% of the
aggregate Liquidation Preference thereof, plus
accumulated and unpaid dividends, if any, to the
date of purchase.
In the event the Company does not elect to make the
offer referred to above, then holders of a majority
of the New Preferred Stock (and, in certain
circumstances, the Company) will designate an
Independent Financial Advisor (as defined) to
determine the appropriate dividend rate that the
New Preferred Stock should bear so that, after such
reset, the New Preferred Stock would have a market
value of 101% of the Liquidation Preference. After
determination of the reset rate, the New Preferred
Stock shall accrue and accumulate dividends at the
reset rate as of the date of occurrence of the
Change of Control; provided, however, that the
reset rate shall in no event be less than 12 1/2%
per annum (the initial dividend rate on the New
Preferred Stock) or greater than 15% per annum. See
"Description of the Exchangeable Preferred Stock --
Change of Control."
Voting Rights.............. Holders of the New Preferred Stock will have
limited voting rights, including (i) those required
by law and (ii) that holders of the outstanding
shares of Exchangeable 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, (a) upon
the failure of the Company (1) to pay dividends for
six or more Dividend Periods (as defined) whether
or not consecutive, (2) to satisfy any mandatory
redemption obligation with respect to the
Exchangeable Preferred Stock, (3) to comply with
the covenants set forth in the Certificate of
Designation of the Powers, Preferences and
Relative, Participating, Optional and other Special
Rights of 12 1/2% Junior Preferred Stock Due 2009
and 12 1/2% Series B Junior Preferred Stock Due
2009 and Qualifications, Limitations and
Restrictions Thereof filed with the Secretary of
State of the State of Delaware on August 19, 1997
(the "Certificate of Designation") or (4) to comply
with certain covenants or make certain payments on
certain Indebtedness (as defined), will be entitled
to elect two members to the Board of Directors of
the Company; and (b) have the right to approve each
issuance by the Company of any Senior Stock, except
that without the consent of the holders of
Exchangeable Preferred Stock, the Company may
create additional classes of stock, increase the
9
<PAGE> 14
authorized number of shares of preferred stock or
issue series of a stock that ranks junior to or on
parity with the Exchangeable Preferred Stock. See
"Description of the Exchangeable Preferred
Stock -- Voting Rights."
Covenants.................. The Certificate of Designation limits: (i) the
incurrence of additional debt by the Company and
certain of its subsidiaries, (ii) the payment of
dividends on Junior Stock of the Company and the
purchase, redemption or retirement of Junior Stock,
(iii) investments, (iv) certain transactions with
affiliates and (v) certain consolidations, mergers
and transfers of assets. The Certificate of
Designation also prohibits certain restrictions on
distributions from certain subsidiaries. All of
these limitations and prohibitions, however, are
subject to a number of important qualifications.
See "Description of the Exchangeable Preferred
Stock -- Certain Covenants."
Senior Debt Restrictions... The Company's debt instruments contain provisions
which restrict, and if a default under any thereof
exists prohibit, redemption or repurchase of the
Exchangeable Preferred Stock, including upon a
Change of Control or through the issue of Exchange
Debentures, and the payment of cash dividends on
the Exchangeable Preferred Stock. See "Risk
Factors," "Description of Capital Stock" and
"Description of Certain Indebtedness."
Exchange Feature........... On any scheduled Dividend Payment Date, the Company
may, at its option, exchange all but not less than
all of the shares of Exchangeable Preferred Stock
then outstanding for Exchange Debentures in a
principal amount equal to the Liquidation
Preference of the shares of Exchangeable Preferred
Stock held by such holder at the time of such
exchange.
THE EXCHANGE DEBENTURES
Securities Offered......... 12 1/2% Subordinated Exchange Debentures Due 2009
issuable in exchange for the Exchangeable Preferred
Stock in an aggregate principal amount equal to the
Liquidation Preference of the Exchangeable
Preferred Stock, plus accumulated and unpaid
dividends to the date of exchange.
Maturity................... August 15, 2009.
Interest................... The Exchange Debentures will bear interest at the
rate of 12 1/2% per annum, payable semiannually on
February 15 and August 15, commencing with the
first of such dates to occur after the date of
exchange (the "Exchange Date"). On or prior to
February 15, 2001, interest may, at the option of
the Company, be paid by issuing additional Exchange
Debentures with a principal amount equal to such
interest. After February 15, 2001, interest on the
Exchange Debentures may be paid only in cash.
Ranking.................... The Exchange Debentures will be general unsecured
obligations of the Company, subordinated in right
of payment to all existing and future Senior
Indebtedness (including the Senior Notes (as
defined)) of the Company and to all indebtedness
and other liabilities (including trade payables) of
the Company's subsidiaries. As of June 30, 1997,
there was approximately $449.2 million of
outstanding indebtedness and other liabilities of
the Company and its subsidiaries (including
approximately
10
<PAGE> 15
$149.6 million of outstanding indebtedness and
other liabilities (including trade payables) of the
Company's subsidiaries), all of which would have
been senior in right of payment to the Exchange
Debentures. See "Description of the Exchange
Debentures -- Ranking."
Optional Redemption........ The Exchange Debentures will not be redeemable
prior to August 15, 2002, except that, until August
15, 2000, the Company may redeem, at its option, up
to an aggregate of 35% of the aggregate principal
amount of the Exchange Debentures at the redemption
price set forth herein with the net proceeds of one
or more Public Equity Offerings if at least $195
million of the principal amount of the Exchange
Debentures remains outstanding after each such
redemption. On or after August 15, 2002, the
Exchange Debentures are redeemable at the option of
the Company, in whole or in part, at the redemption
prices set forth herein plus accrued and unpaid
interest, if any, to the date of redemption. See
"Description of the Exchange Debentures -- Optional
Redemption."
Change of Control.......... In the event of a Change of Control, holders of the
Exchange Debentures will have the right to require
the Company to purchase their Exchange Debentures,
in whole or in part, at a price equal to 101% of
the aggregate principal amount thereof, plus
accrued and unpaid interest, if any, to the date of
purchase. See "Description of the Exchange
Debentures -- Change of Control."
Restrictive Covenants...... The indenture under which the Exchange Debentures
will be issued (the "Exchange Indenture") will
limit (i) the incurrence of additional debt by the
Company and certain of its subsidiaries, (ii) the
payment of dividends on capital stock of the
Company and the purchase, redemption or retirement
of capital stock or indebtedness which ranks junior
to the Exchange Debentures, (iii) investments, (iv)
certain transactions with affiliates, (v) sales of
assets, including capital stock of subsidiaries and
(vi) certain consolidations, mergers and transfers
of assets. The Exchange Indenture will also
prohibit certain restrictions on distributions from
certain subsidiaries. All of these limitations and
prohibitions, however, are subject to a number of
important qualifications. See "Description of the
Exchange Debentures -- Certain Covenants."
Senior Debt Restrictions... The Company's debt instruments contain provisions
which restrict, and if a default under any thereof
exists prohibit, redemption or repurchase of the
Exchange Debentures.
RISK FACTORS
In determining whether to exchange New Preferred Stock for Old Preferred
Stock, the holders of Old Preferred Stock should consider carefully the
information set forth under the caption "Risk Factors" and all other information
contained in this Prospectus before making any decision to acquire New Preferred
Stock.
11
<PAGE> 16
SUMMARY CONSOLIDATED FINANCIAL AND OPERATIONS DATA
The following table sets forth certain consolidated financial data of the
Company. The historical financial data as of and for the years ended December
31, 1994, 1995 and 1996 has been derived from the audited Consolidated Financial
Statements of the Company. The historical financial data for the six months
ended June 30, 1996 and 1997 is derived from unaudited interim financial
statements. The unaudited interim financial statements include all adjustments,
consisting of normal recurring accruals, which management considers necessary
for a fair presentation of the financial position and the results of operations
for these interim periods. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the full year.
The summary consolidated financial and operations data set forth below is
qualified in its entirety by, and should be read in conjunction with the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and the Company's financial
statements, (including the notes thereto) appearing in the Form 10-K and the
Form 10-Qs which are incorporated by referenced herein and other information
included in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------- -------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenues..................... $80,663 $ 91,001 $203,761 $ 69,257 $172,775
Operating income (loss).................... 14,085 1,429 (14,016) (11,843) (28,953)
Interest expense........................... 6,105 14,597 37,076 19,360 15,760
Income (loss) before extraordinary gain
(loss)(1)............................... 5,017 (3,218) (37,448) (23,766) (48,688)
OTHER FINANCIAL DATA:
EBITDA(2).................................. 26,206 18,867 13,225 811 (5,588)
Capital expenditures....................... 7,087 23,670 136,391 32,783 140,901
Ratio (deficiency) of earnings to combined
fixed charges and preferred stock
dividends(3)............................ 1.4x (12,348) (47,355) (27,669) (54,584)
OTHER OPERATIONS DATA:
Minutes of use (in millions)............... -- 12.8 1,105.2 233.2 1,242.2
Digital route miles in service (end of
period)................................. 6,700 6,758 7,325 7,082 10,281
Fiber miles (end of period)(4)............. 20,747 22,159 33,445 27,991 85,671
Number of long distance switches........... -- 5 5 5 5
Number of data switches.................... -- -- 10 -- 13
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------
ACTUAL AS ADJUSTED(5)
-------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $ 40,974 $328,974
Total assets....................................................... 552,900 840,900
Total debt and capital lease obligations........................... 300,749 300,749
Redeemable preferred stock......................................... 98,010 386,010
Stockholders' equity............................................... 12,908 12,908
</TABLE>
- ---------------
(1) The Company recognized an extraordinary gain (involving a related party) of
$2.3 million in 1994 and an extraordinary loss of $1.7 million in 1995, in
each case relating to the early extinguishment of debt.
(2) EBITDA is operating income (loss) plus depreciation and amortization. EBITDA
for 1995 and subsequent periods includes the negative EBITDA of the
Company's switched long distance services business. The Company has included
information concerning EBITDA because it believes that EBITDA is used by
certain investors as one measure of an issuer's historical ability to
service its debt. EBITDA is
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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.
(3) 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 Company's 10% Junior Series 3
Cumulative Redeemable Preferred Stock (the "Series 3 Preferred Stock") and
dividends on the Company's 7 1/4% Junior Convertible Preferred Stock Due
2007 ("Convertible Preferred Stock"). Where earnings are inadequate to cover
combined fixed charges and preferred stock dividends, the deficiency is
shown. As adjusted for the sale of the Convertible Preferred Stock and the
Exchangeable Preferred Sale as if they had occurred on or before January 1,
1997, and assuming dividends are paid in cash at 7 1/4% on the Convertible
Preferred Stock and at 12 1/2% on the Exchangeable Preferred Stock, the
Company's earnings would have been insufficient to cover combined fixed
charges and preferred stock dividends by $75.6 million for the six months
ended June 30, 1997. Additional dividends will accrue on the Convertible
Preferred Stock if the Company fails to comply with certain of its
obligations under the registration rights agreement relating thereto, or if,
after March 31, 1999, the Company is not contractually permitted to pay cash
dividends on the Convertible Preferred Stock. Additional dividends will also
accrue on the Exchangeable Preferred Stock if the Company fails to comply
with certain of its obligations under the Registration Rights Agreement.
(4) Fiber miles represent the number of route miles of a fiber optic route
multiplied by the number of fiber strands in the route.
(5) Reflects the impact of the sale of the Exchangeable Preferred Stock offered
hereby as if it had occurred as of June 30, 1997, and assuming net proceeds
to the Company of $288 million.
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RISK FACTORS
In addition to the other information contained in this Prospectus, before
tendering their shares of Old Preferred Stock for shares of New Preferred Stock
offered hereby, holders of Old Preferred Stock should consider the following
factors carefully in evaluating the Company and its business, which (other than
"Consequences of Failure to Exchange Old Preferred Stock") are generally
applicable to the Old Preferred Stock as well as to the New Preferred Stock.
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.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD PREFERRED STOCK
Upon consummation of the Exchange Offer, holders of Old Preferred Stock
(other than those that were prohibited from participating in the Exchange Offer)
that did not tender their Old Preferred Stock will not have any registration
rights under the Registration Rights Agreement covering such Old Preferred Stock
not tendered and such Old Preferred Stock will continue to be subject to the
restrictions on transfer contained in the legend thereon (except that the
Company will be required to file a shelf registration statement in certain
limited instances). See "The Exchange -- Purpose of the Exchange Offer." In
general, the Old Preferred Stock may not be offered or sold, unless registered
under the Securities Act and applicable state securities laws, except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not intend to register the
Old Preferred Stock under the Securities Act. Based on interpretations by the
staff of the Commission with respect to similar transactions set forth in
no-action letters issued to third parties unrelated to the Company, the New
Preferred Stock issued pursuant to the Exchange Offer in exchange for the Old
Preferred Stock may be offered for resale, resold and otherwise transferred by
holders thereof who are not "affiliates" of the Company (within the meaning of
Rule 405 under the Securities Act) without compliance with the registration and
prospectus delivery requirements of the Securities Act; provided that the New
Preferred Stock is acquired in the ordinary course of the holders' business,
such holders have no arrangement or understanding with any person to participate
in any distribution (within the meaning of the Securities Act) of the New
Preferred Stock and neither the holders nor any other person is engaging in or
intends to engage in a distribution of the New Preferred Stock. Each
broker-dealer that receives New Preferred Stock for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of the New Preferred Stock. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Preferred Stock received in exchange for Old Preferred Stock where such Old
Preferred Stock was acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." The New Preferred Stock may not be offered or sold
unless it has been registered or qualified for sale under applicable state
securities laws or an exemption from registration or qualification is available
and is complied with. The Registration Rights Agreement requires the Company to
register or qualify the New Preferred Stock for resale in any state (if
required) as may be requested by their holders, subject to certain limitations.
LACK OF PUBLIC MARKET
Prior to this Exchange Offer, although, the Old Preferred Stock has traded
on the Portal Market, there has been no public market for the Old Preferred
Stock. The New Preferred Stock will not be eligible to trade
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on the PORTAL Market. If a market for the New Preferred Stock should develop,
the New Preferred Stock could trade at prices higher or lower than their initial
offering price. The Company does not currently intend to list the New Preferred
Stock on any securities exchange or to seek approval for quotation through any
automated quotation system. There can be no assurance that an active public
market for the New Preferred Stock will develop.
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 net proceeds of approximately $288 million from the
Exchangeable Preferred Sale, the anticipated proceeds of the Chicago-LA LCI
Fiber Sale and 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 Chicago-LA 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 Exchangeable
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 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, if any, 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 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
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value of the Exchangeable Preferred Stock. See "-- Risks Relating to the Network
Expansion," and "-- Development Risks and Dependence on Switched Services
Business."
The Company anticipates that in the event it is unable to enter into the
Proposed Credit Facility, obtain vendor financing on acceptable terms or
consummate the MCI Fiber Sale and the Chicago-LA 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. See "-- Acquisition Risks."
ABILITY TO PAY DIVIDENDS ON THE EXCHANGEABLE PREFERRED STOCK
The ability of the Company to pay any dividends is subject to applicable
provisions of state law and to pay cash dividends on the Exchangeable Preferred
Stock after February 15, 2001 and on the Convertible Preferred Stock after March
31, 1999, 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 and the Exchangeable Preferred Stock. The ability of
the Company in the future to pay cash dividends on the Exchangeable Preferred
Stock or 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 Exchangeable Preferred
Stock or the Convertible Preferred Stock. See "Description of Certain
Indebtedness." Moreover, under Delaware law the Company is permitted to pay
dividends on its capital stock, including the Exchangeable Preferred Stock, only
out of its 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 Exchangeable 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 the Company's Restated Certificate presently prohibits the payment
of dividends on the Exchangeable Preferred Stock with cash or with additional
shares of Exchangeable Preferred Stock until all accrued and unpaid dividends on
the Series 3 Preferred Stock (approximately $7.5 million at June 30, 1997) have
been paid in cash, the Company has received written consents from the holders of
sufficient shares of each class to approve an amendment to the Restated
Certificate to permit payment of dividends on the Exchangeable Preferred Stock
with additional shares of Exchangeable Preferred Stock. Such amendment is
expected to be effective prior to November 1997. All accrued dividends on the
Series 3 Preferred Stock must
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be paid in cash before the Company can pay any cash dividends in respect of the
Convertible Preferred Stock or the Exchangeable 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.
On October 3, 1997 the Company commenced the Series 3 Tender Offer. There
can be no assurance that the Company will consummate the Series 3 Tender Offer
or, if consummated, that all the shares of Series 3 Preferred Stock will be
tendered and exchanged for Common Stock.
SUBSTANTIAL INDEBTEDNESS; INSUFFICIENCY OF EARNINGS TO COVER FIXED CHARGES,
INCLUDING DIVIDENDS ON THE EXCHANGEABLE PREFERRED STOCK
The Company is 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
Exchangeable Preferred Sale which occurred on August 20, 1997 resulted in a
ratio of debt and redeemable preferred stock to stockholders' equity for the
Company significantly higher than that which existed as of June 30, 1997. As
adjusted for the sale of the Convertible Preferred Stock and the Exchangeable
Preferred Sale as if they had occurred on or before January 1, 1997, the
Company's earnings would have been insufficient to cover combined fixed charges
and preferred stock dividends by $75.6 million for the six month period ended
June 30, 1997. Furthermore, provided the Company meets certain financial tests,
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. In addition, the Company will become more highly leveraged if it exchanges
Exchange Debentures for the Exchangeable Preferred Stock.
Furthermore, 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 Exchangeable 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 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 Exchangeable Preferred Stock; and (v) the Company may be more
leveraged than certain of its competitors, which may be a competitive
disadvantage. See "Description of Certain Indebtedness." 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 Exchangeable Preferred Stock, the
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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 Exchangeable 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 Exchangeable
Preferred Stock.
SUBORDINATION OF THE EXCHANGEABLE PREFERRED STOCK
The Company's obligations with respect to the Exchangeable Preferred Stock
are subordinate and junior in right of payment to all present and future
indebtedness of the Company and its subsidiaries, including the Senior Notes,
and to all present and future Senior Stock of the Company, including the Series
3 Preferred Stock. The Exchangeable Preferred Stock will rank pari passu with
all existing and future Parity Stock, including the Convertible Preferred Stock.
See "Description of Capital Stock." As of June 30, 1997, there was approximately
$20 million of outstanding Senior Stock of the Company and approximately $449.2
million of outstanding indebtedness and other liabilities of the Company
(including approximately $149.6 million of indebtedness and other liabilities
(including trade payables) of the Company's subsidiaries). In the event of
bankruptcy, liquidation or reorganization of the Company, the assets of the
Company will be available to pay obligations on the Exchangeable Preferred Stock
only after all Senior Stock and all indebtedness of the Company have been paid,
and there may not be sufficient assets remaining to pay amounts due on any or
all of the Exchangeable Preferred Stock then outstanding. See "Description of
the Exchangeable Preferred Stock -- Ranking."
While any shares of Exchangeable 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 Exchangeable 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 Exchangeable Preferred Stock. However, without the consent of any
holder of Exchangeable Preferred Stock, the Company may create additional
classes of stock, increase the authorized number of shares of preferred stock or
issue a new series of Junior Stock or Parity Stock.
SUBORDINATION OF THE EXCHANGE DEBENTURES
The payment of principal, premium, if any, and interest on or any other
amounts owing in respect of, the Exchange Debentures, if issued, will be
subordinated to the prior payment in full of all existing and future Senior
Indebtedness, including indebtedness represented by the Senior Notes, and will
be effectively subordinated to all indebtedness and other liabilities (including
trade payables) of the Company's subsidiaries. As of June 30, 1997, there was
approximately $449.2 million of outstanding indebtedness and other liabilities
of the Company (including approximately $149.6 million of indebtedness and other
liabilities (including trade
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payables) of the Company's subsidiaries), all of which would have been senior in
right of payment to the Exchange Debentures. The Senior Notes Indenture and the
Exchange Indenture permit the incurrence by the Company and its subsidiaries of
additional indebtedness, all of which may constitute Senior Indebtedness, under
certain circumstances. In addition, the Company may not pay principal of,
premium, if any, or interest on or any other amounts owing in respect of, the
Exchange Debentures, or purchase, redeem or otherwise retire the Exchange
Debentures, if (i) the obligations with respect to the Senior Notes are not paid
when due or (ii) any other event of default has occurred under the Senior Notes
Indenture, and is continuing or would occur as a consequence of such payment. In
the event of bankruptcy, liquidation or reorganization of the Company, the
assets of the Company will be available to pay obligations on the Exchange
Debentures only after all Senior Indebtedness has been paid, and there may not
be sufficient assets remaining to pay amounts due on any or all of the Exchange
Debentures then outstanding. See "Description of the Exchange
Debentures -- Ranking."
EFFECT OF SUBSTANTIAL ADDITIONAL INDEBTEDNESS ON THE COMPANY'S ABILITY TO MAKE
PAYMENTS ON THE EXCHANGEABLE PREFERRED STOCK AND EXCHANGE DEBENTURES
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
Exchangeable Preferred Stock and Exchange Debentures (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 Exchangeable
Preferred Stock and Exchange Debentures.
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
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 Exchangeable 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 Exchangeable 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
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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 Chicago-LA 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. Although the route
from Chicago to Dallas has been delivered to LCI, the Company expects that 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
Exchangeable 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 effect on
the Company's business, financial condition and results of operations and on the
value of the Exchangeable 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
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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
Exchangeable 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 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." 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
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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 Exchangeable 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 Exchangeable 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 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. 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 Exchangeable 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
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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 Exchangeable 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 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
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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, 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
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in data transmission services could have a material adverse effect on the
Company and the value of the Exchangeable 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
Exchangeable 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
Exchangeable 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
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.
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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
As of September 1, 1997 Trustees of General Electric Pension Trust ("GEPT")
beneficially owns approximately 27% of the outstanding Common Stock, Grumman
Hill Investments, L.P. ("GHI") and Richard D. Irwin together beneficially own
approximately 22% of the outstanding Common Stock, and two of the members of
senior management and their affiliates beneficially own approximately 14% of the
outstanding Common Stock. Such stockholders also control a majority of the
Series 3 Preferred Stock and GEPT owns 30% 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 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.
FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical facts
are "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as "estimates," "projects," "anticipates,"
"expects," "intends," "believes," or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy that involve
risks and uncertainties. The Company wishes to caution the reader that these
forward-looking statements, such as the Company's plans to expand its existing
networks or to build and acquire networks in new areas, and statements regarding
development of the Company's businesses, the estimate of market sizes and
addressable markets for the Company's services and products, the Company's
anticipated capital expenditures, regulatory reform and other statements
contained in this Prospectus regarding matters that are not historical facts,
are only estimates or predictions. No assurance can be given that future results
will be achieved; actual events or results may differ materially as a result of
risks facing the Company or actual results differing from the assumptions
underlying such statements. Such risks and assumptions include, but are not
limited to, the Company's ability to successfully market its services to current
and new customers, generate customer demand for its services in the particular
markets where it plans to market services, access markets, identify, finance and
complete suitable acquisitions, design and construct fiber optic networks,
install cable and facilities, including switching electronics, and obtain
rights-of-way, building access rights and any
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required governmental authorizations, franchises and permits, all in a timely
manner, at reasonable costs and on satisfactory terms and conditions, as well as
regulatory, legislative and judicial developments that could cause actual
results to vary materially from the future results indicated, expressed or
implied, in such forward-looking statements.
THE EXCHANGE OFFER
PURPOSES OF THE EXCHANGE OFFER
The Old Preferred Stock was originally issued and sold on August 20, 1997
in reliance upon the exemptions from registration under Rule 144A and Section
4(2) of the Securities Act. Pursuant to the Registration Rights Agreement, the
Company agreed to register with the Commission a series of preferred shares with
substantially identical terms as the Old Preferred Stock, to be offered in
exchange for the Old Preferred Stock. The purpose of the Exchange Offer is to
satisfy the Company's obligations under the Registration Rights Agreement.
Holders that do not tender all of their Old Preferred Stock will no longer have
any registration rights under the Registration Rights Agreement other than as
set forth in the following paragraph. Each broker-dealer that receives New
Preferred Stock for its own account in exchange for Old Preferred Stock, where
such Old Preferred Stock was acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Preferred
Stock. See "Plan of Distribution."
Pursuant to the Registration Rights Agreement, the Company is required to
file a shelf registration statement for a continuous offering pursuant to Rule
415 under the Securities Act in respect of the Old Preferred Stock if: (i)
because of any change in law or in currently prevailing interpretations of the
staff of the Commission, the Company is not permitted to effect the Exchange
Offer; (ii) the Exchange Offer is not consummated within 150 days after the date
of the Registration Rights Agreement; (iii) any Initial Purchaser so requests
with respect to the Old Preferred Stock not eligible to be exchanged for New
Preferred Stock in the Exchange Offer and held by it following consummation of
the Exchange Offer; or (iv) any holder of Old Preferred Stock (other than an
Exchanging Dealer) is not eligible to participate in the Exchange Offer or, in
the case of any holder of Old Preferred Stock (other than an Exchanging Dealer)
that participates in the Exchange Offer, such holder does not receive freely
tradeable New Preferred Stock on the date of the exchange. The Company is
required to use its best efforts to keep the shelf registration statement
continuously effective for a period of two years from the date of its
effectiveness or such shorter period that will terminate when all the Old
Preferred Stock covered by the shelf registration statement has been sold
pursuant thereto or is eligible for sale under Rule 144(k) under the Securities
Act.
TERMS OF THE EXCHANGE OFFER
GENERAL
The Company offers to exchange, upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal, the same number and aggregate liquidation preference of New
Preferred Stock for the Old Preferred Stock tendered for exchange. The terms of
the New Preferred Stock are substantially identical in all material respects
(aggregate liquidation preference, dividend rate, mandatory redemption and
ranking) to the terms of the Old Preferred Stock, except that the New Preferred
Stock has been registered under the Securities Act and therefore will not be
subject to certain transfer restrictions applicable to the Old Preferred Stock).
See "Description of the Exchangeable Preferred Stock." The New Preferred Stock,
like the Old Preferred Stock, is governed by the Certificate of Designation. See
"Description of the Exchangeable Preferred Stock." The Exchange Offer is not
conditioned upon any minimum number of shares of Old Preferred Stock being
tendered for exchange.
Based on interpretations by the staff of the Commission with respect to
similar transactions set forth in noaction letters issued to third parties
unrelated to the Company, the New Preferred Stock issued pursuant to the
Exchange Offer in exchange for the Old Preferred Stock may be offered for
resale, resold and otherwise transferred by holders thereof who are not
"affiliates" of the Company (within the meaning of Rule 405 under
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the Securities Act) without compliance with the registration and prospectus
delivery requirements of the Securities Act; provided that the New Preferred
Stock is acquired in the ordinary course of the holders' business, such holders
have no arrangement or understanding with any person to participate in any
distribution (within the meaning of the Securities Act) of the New Preferred
Stock and neither the holders nor any other person is engaging in or intends to
engage in a distribution of the New Preferred Stock. Any holder who tenders in
the Exchange Offer for the purpose of participating in a public distribution of
the New Preferred Stock must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with the distribution.
EXPIRATION DATE; EXTENSIONS, TERMINATION; AMENDMENT
The Exchange Offer will expire on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., New York City time, on , 1997 or such later
date and time, if any, as extended by the Company, in its sole discretion. The
Company may extend the Exchange Offer at any time and from time to time by
giving oral or written notice to holders of the Old Preferred Stock and unless
otherwise required by applicable law or regulation, by press release or other
public announcement on or before the Expiration Date. During any extension of
the Exchange Offer, all Old Preferred Stock tendered for exchange will remain
subject to the Exchange Offer. In connection with the Exchange Offer, the
Company will comply with all applicable requirements of the federal securities
laws, including, but not limited to, Rule 14e-1 under the Exchange Act.
The Company expressly reserves the right to (i) terminate the Exchange
Offer and not accept for exchange any shares of Old Preferred Stock if any of
the events set forth under "-- Conditions to the Exchange Offer" shall have
occurred and shall not have been waived by the Company and (ii) amend the terms
of the Exchange Offer in any manner which, in its good faith judgment, is
advantageous to the holders of the Old Preferred Stock, whether before or after
any tender of the Old Preferred Stock. Unless the Company terminates the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date,
the Company will exchange the New Preferred Stock for the Old Preferred Stock
promptly after acceptance of the tendered Old Preferred Stock by the Company and
following the Expiration Date.
EXCHANGE OFFER PROCEDURES
The Exchange Offer is subject to the terms and conditions set forth in this
Prospectus and the Letter of Transmittal.
Old Preferred Stock may be tendered by properly completing and signing the
Letter of Transmittal and delivering the Letter of Transmittal to the Exchange
Agent at its address set forth in this Prospectus on or prior to the Expiration
Date, together with: (i) the certificate or certificates representing the Old
Preferred Stock being tendered and any required signature guarantees; (ii) a
timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of
the Old Preferred Stock, if such procedure is available, into the Exchange
Agent's account at the Depository pursuant to the procedure for book-entry
transfer described below; or (iii) the completion of the procedures for
guaranteed delivery set forth below. See "Guaranteed Delivery Procedures."
If the New Preferred Stock (and any untendered Old Preferred Stock) is to
be issued in the name of the registered holder and the registered holder has
signed the Letter of Transmittal the holder's signature need not be guaranteed.
In any other case, the tendered Old Preferred Stock must be endorsed or
accompanied by written instruments of transfer in form satisfactory to the
Exchange Agent and duly executed by the registered holder and the signature on
the endorsement or instrument of transfer must be guaranteed by a commercial
bank or trust company located or having an office or correspondent in the United
States, or by a member firm of a national securities exchange or of the National
Association of Securities Dealers, Inc. (an "Eligible Institution"). If the New
Preferred Stock and/or Old Preferred Stock not exchanged are to be delivered to
an address other than that of the registered holder appearing on the register
for the Old Preferred Stock, the signature on the Letter of Transmittal must be
guaranteed by an Eligible Institution. Each broker-dealer that receives New
Preferred Stock for its own account in exchange for Old Preferred Stock, where
such Old Preferred Stock was acquired by such broker-dealer as a result of
market-making activities or other trading
28
<PAGE> 33
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Preferred Stock. See "Plan of Distribution."
THE METHOD OF DELIVERY OF OLD PREFERRED STOCK, LETTERS OF TRANSMITTAL AND
ALL OTHER DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL,
IT IS RECOMMENDED THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED,
PROPER INSURANCE OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF
THE EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE
EXPIRATION DATE, NO LETTERS OF TRANSMITTAL OR OLD PREFERRED STOCK SHOULD BE SENT
TO THE COMPANY.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal, the
Old Preferred Stock or a Book-Entry Confirmation and all other required
documents are received by the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Preferred Stock will
be determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the right to reject any or all tenders
not in proper form or the acceptance for exchange of which may, in the opinion
of the Company's counsel, be unlawful. The Company also reserves the right to
waive any of the conditions of the Exchange Offer or any defect, withdrawal,
rejection of tender or irregularity in the tender of any Old Preferred Stock.
Neither the Company, the Exchange Agent nor any other person will be under any
duty to give notification of any defects, withdrawals, rejections or
irregularities or incur any liability for failure to give any such notification.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The holder tendering Old Preferred Stock exchanges, assigns and transfers
the Old Preferred Stock to the Company and irrevocably constitutes and appoints
the Exchange Agent as the holder's agent and attorney-in-fact to cause the Old
Preferred Stock to be assigned, transferred and exchanged. The holder represents
and warrants to the Company and the Exchange Agent that: (i) it has full power
and authority to tender, exchange, assign and transfer the Old Preferred Stock
and to acquire New Preferred Stock in exchange for the Old Preferred Stock; (ii)
when the Old Preferred Stock is accepted for exchange, the Company will acquire
good and unencumbered title to the Old Preferred Stock, free and clear of all
liens, restrictions, charges and encumbrances and not subject to any adverse
claim; and (iii) it will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
exchange, assignment and transfer of tendered Old Preferred Stock. All authority
conferred by the holder will survive the death or incapacity of the holder and
every obligation of the holder shall be binding upon the heirs, legal
representatives, successors assigns, executors and administrators of the holder.
Each holder will also certify that the holder, among other things: (i) is
not an "affiliate" of the Company (within the meaning of Rule 405 under the
Securities Act) or that, if it is an "affiliate," it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable; (ii) is acquiring the New Preferred Stock offered in the
ordinary course of its business; (iii) has no arrangement or understanding with
any person to participate in the distribution (within the meaning of the
Securities Act) of the New Preferred Stock; and (iv) is not engaged in and does
not intend to engage in the distribution of the New Preferred Stock if such
holder is not a broker-dealer.
WITHDRAWAL RIGHTS
Old Preferred Stock tendered pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date.
To be effective, a written notice of withdrawal must be timely received by
the Exchange Agent at its address set forth in this Prospectus by mail, courier,
telegraphic, telex or facsimile transmission. Any notice of
29
<PAGE> 34
withdrawal must specify the person named in the Letter of Transmittal as having
tendered Old Preferred Stock to be withdrawn, the certificate numbers of Old
Preferred Stock to be withdrawn, the aggregate liquidation preference of Old
Preferred Stock to be withdrawn, a statement that the holder is withdrawing its
election to tender the Old Preferred Stock for exchange, and the name of the
registered holder of the Old Preferred Stock, and must be signed by the holder
in the same manner as the original signature on the Letter of Transmittal
(including any required signature guarantees) or be accompanied by evidence
satisfactory to the Exchange Agent that the person withdrawing the tender has
succeeded to the beneficial ownership of the Old Preferred Stock being
withdrawn. The Exchange Agent will return the properly withdrawn Old Preferred
Stock promptly following receipt of notice of withdrawal. If Old Preferred Stock
has been tendered pursuant to a book-entry transfer, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Preferred Stock and otherwise
comply with the procedures of the Book-Entry Transfer Facility. All questions as
to the validity of notices of withdrawals, including time of receipt, will be
determined by the Company, and such determination will be final and binding on
all parties. Any Old Preferred Stock which have been tendered for exchange but
which are not exchanged will be returned to the holder thereof without cost to
the holder (or, in the case of Old Preferred Stock tendered by book-entry
transfer, by crediting an account maintained with the Book-Entry Transfer
Facility for the Old Preferred Stock) as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Preferred Stock may be re-tendered at any time on or prior to the Expiration
Date. Any Old Preferred Stock so withdrawn and not re-tendered will not be
exchanged for New Preferred Stock under the Exchange Offer.
ACCEPTANCE OF OLD PREFERRED STOCK FOR EXCHANGE; DELIVERY OF NEW PREFERRED STOCK
Upon terms and subject to the conditions of the Exchange Offer, the Company
will accept for exchange any and all shares of Old Preferred Stock which are
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. For the purposes of the Exchange Offer, the Company shall
be deemed to have accepted for exchange validly tendered Old Preferred Stock
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Old
Preferred Stock for the purpose of causing the Old Preferred Stock to be
assigned, transferred and exchanged for New Preferred Stock. Upon the terms and
subject to the conditions of the Exchange Offer, delivery of New Preferred Stock
in exchange for Old Preferred Stock will be made by the Exchange Agent after
acceptance of the tendered Old Preferred Stock by the Company and promptly
following the Expiration Date. Any Old Preferred Stock not accepted for exchange
by the Company for any reason will be returned without expense to the tendering
holders (or, in the case of Old Preferred Stock tendered by book-entry transfer,
by crediting an account maintained with the Book-Entry Transfer Facility) as
promptly as practicable after the Expiration Date or, if the Company terminates
the Exchange Offer prior to the Expiration Date, promptly after the Exchange
Offer is terminated. See "-- Conditions to the Exchange Offer."
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account at the Book-Entry Transfer
Facility for purposes of the Exchange Offer within two business days after the
date of this Prospectus, and any financial institution that is a participant in
the Book-Entry Transfer Facility's systems may make book-entry delivery of Old
Preferred Stock by causing the Book-Entry Transfer Facility to transfer the Old
Preferred Stock into the Exchange Agent's account at the Book-Entry Transfer
Facility in accordance with the Book-Entry Transfer Facility's procedure for
transfer. The Letter of Transmittal with any required signature guarantees and
any other required documents, must be received by the Exchange Agent on or prior
to the Expiration Date for any book-entry transfers.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Preferred Stock and (i) whose Old
Preferred Stock is not immediately available or (ii) who cannot deliver their
Old Preferred Stock, the Letter of Transmittal or any
30
<PAGE> 35
other documents required hereby to the Exchange Agent prior to the Expiration
Date, must tender their Old Preferred Stock and follow the guaranteed delivery
procedures. Pursuant to such procedures: (i) such tender must be made by or
through an Eligible Institution; (ii) prior to the Expiration Date, the Exchange
Agent must have received from the Eligible Institution a properly completed and
duly executed notice of guaranteed delivery (a "Notice of Guaranteed Delivery")
(by facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of the Old Preferred Stock, the certificate number or
numbers of such Old Preferred Stock and the aggregate liquidation preference of
the Old Preferred Stock tendered, stating that the tender is being made thereby
and guaranteeing that, within five business days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof), together with the certificate(s)
representing the Old Preferred Stock (or a confirmation of electronic delivery
or book-entry delivery into the Exchange Agent's account at the Depository) and
any of the required documents will be deposited by the Eligible Institution with
the Exchange Agent; and (iii) such properly completed and executed Letter of
Transmittal (or facsimile thereof), as well as all other documents required by
the Letter of Transmittal and the certificate(s) representing all tendered Old
Preferred Stock in proper form for transfer (or a confirmation of electronic
mail delivery or book-entry delivery into the Exchange Agent's account at the
Depository), must be received by the Exchange Agent within five business days
after the Expiration Date. Any holder of Old Preferred Stock who wishes to
tender its Old Preferred Stock pursuant to the guaranteed delivery procedures
described above must ensure that the Exchange Agent receives the Notice of
Guaranteed Delivery prior to 5:00 p.m., New York City time, on the Expiration
Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company will
not be required to issue New Preferred Stock in exchange for any properly
tendered Old Preferred Stock not previously accepted and may terminate the
Exchange Offer (by oral or written notice to the holders and by timely public
announcement communicated, unless otherwise required by applicable law or
regulation, by making a press release or other public announcement, or, at its
option, modify or otherwise amend the Exchange Offer, if any of the following
events occur:
1. there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof, or (ii) resulting in a material delay in the
ability of the Company to accept for exchange or exchange some or all of
the Old Preferred Stock pursuant to the Exchange Offer, or any statute,
rule, regulation, order or injunction shall be sought, proposed,
introduced, enacted, promulgated or deemed applicable to the Exchange Offer
or any of the transactions contemplated by the Exchange Offer by any
government or governmental authority, domestic or foreign, or any action
shall have been taken, proposed or threatened, by any government,
governmental authority, agency or court, domestic or foreign, that in the
sole judgment of the Company might directly or indirectly result in any of
the consequences referred to in clause (i) or (ii) above or, in the sole
judgment of the Company, might result in the holders of New Preferred Stock
having obligations with respect to resales and transfers of New Preferred
Stock which are greater than those described in the interpretation of the
Commission referred to on the cover page of this Prospectus, or would
otherwise make it inadvisable to proceed with the Exchange Offer; or
2. any change (or any development involving a prospective change)
shall have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company, taken as a whole, that, in the sole judgment of
the Company is or may be adverse to the Company, or the Company shall have
become aware of facts that, in the sole judgment of the Company have or may
have adverse significance with respect to the value of the Old Preferred
Stock or the New Preferred Stock; which, in the sole judgment of the
Company in any case, and regardless of the circumstances (including any
action by the Company) giving rise to any such
31
<PAGE> 36
condition, makes it unlawful to proceed with the Exchange Offer and/or with
such acceptance for exchange or with such exchange.
The Company expressly reserves the right to terminate the Exchange Offer
and not accept for exchange any Old Preferred Stock upon the occurrence of any
of the foregoing conditions (which represent all of the material conditions to
the acceptance by the Company of properly tendered Old Preferred Stock). In
addition, the Company may amend the Exchange Offer at any time prior to the
Expiration Date if any of the conditions set forth above occur. Moreover,
regardless of whether any of such conditions has occurred, the Company may amend
the Exchange Offer in any manner which, in its good faith judgment, is
advantageous to holders of the Old Preferred Stock.
These conditions are for the sole benefit of the Company and may be waived
by the Company, in whole or in part, in its sole discretion. Any determination
made by the Company that any of these conditions has occurred will be final and
binding on all holders of Exchangeable Preferred Stock, absent manifest error.
The Exchange Offer is not conditioned upon any minimum number of shares of Old
Preferred Stock being tendered for exchange.
In addition, the Company will not accept for exchange any Old Preferred
Stock tendered, and no New Preferred Stock will be issued in exchange for any
such Old Preferred Stock, if at such time any stop order shall be threatened or
in effect with respect to the Registration Statement of which this Prospectus
constitutes a part.
EXCHANGE AGENT
The Bank of New York, the Transfer Agent for the Exchangeable Preferred
Stock, has been appointed as the Exchange Agent for the Exchange Offer. All
executed Letters of Transmittal, questions and requests for assistance and
requests for additional copies of this Prospectus or of the Letter of
Transmittal should be directed to the Exchange Agent, addressed as follows:
The Bank of New York
101 Barclay 21 West
New York, New York 10286
Attention: Reorganization Department
Facsimile: (212) 815-6339
Confirm by telephone: (212) 815-2742
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
SOLICITATION OF TENDERS; EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus and the Letter of Transmittal. If given or made, such
information or representations should not be relied upon as having been
authorized by the Company. Neither the delivery of this Prospectus nor any
exchange made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the respective
dates as of which information is given herein. The Exchange Offer is not being
made to (nor will tenders be accepted from or on behalf of) holders of Old
Preferred Stock in any jurisdiction in which the making of the Exchange Offer or
the acceptance thereof would not be in compliance with the laws of such
jurisdiction. The Company may, however, at the reasonable request of any holder,
take such action as it may deem necessary to make the Exchange Offer in any such
jurisdiction and extend the Exchange Offer to holders of Old Preferred Stock in
such jurisdiction.
32
<PAGE> 37
TRANSFER TAXES
Holders who tender their Old Preferred Stock in exchange for New Preferred
Stock will not be obligated to pay any transfer taxes in connection therewith,
except that holders who instruct the Company to register New Preferred Stock in
the name of, or request that Old Preferred Stock not tendered or not accepted in
the Exchange Offer be returned to, a person other than the registered tendering
holder will be responsible for the payment of any applicable transfer taxes
thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Preferred Stock
(other than those that were prohibited from participating in the Exchange Offer)
that did not tender their Old Preferred Stock will not have any registration
rights under the Registration Rights Agreement with respect to such non-tendered
Old Preferred Stock and, accordingly, such Old Preferred Stock will continue to
be subject to the restrictions on transfer contained in the legend thereon
(except that the Company will be required to file a shelf registration statement
in certain limited instances). In general, the Old Preferred Stock may not be
offered or sold, unless registered under the Securities Act and the applicable
state securities laws, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. The
Company does not intend to register the Old Preferred Stock under the Securities
Act. Based on interpretations by the staff of the Commission with respect to
similar transactions set forth in no-action letters issued to third parties
unrelated to the Company, the New Preferred Stock issued pursuant to the
Exchange Offer in exchange for the Old Preferred Stock may be offered for
resale, resold and otherwise transferred by holders thereof who are not
"affiliates" of the Company (within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act; provided that the New Preferred Stock is
acquired in the ordinary course of the holders' business, such holders have no
arrangement or understanding with any person to participate in any distribution
(within the meaning of the Securities Act) of the New Preferred Stock and
neither the holders nor any other person is engaging in or intends to engage in
a distribution of the New Preferred Stock. If any holder has any arrangement or
understanding with respect to the distribution of the New Preferred Stock to be
acquired pursuant to the Exchange Offer, the holder (i) could not rely on the
applicable interpretations of the staff of the Commission and (ii) must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives New
Preferred Stock for its own account in exchange for Old Preferred Stock must
acknowledge that it will deliver a prospectus in connection with any resale of
the New Preferred Stock. See "Plan of Distribution." In addition, to comply with
the securities laws of certain jurisdictions, if applicable, the New Preferred
Stock may not be offered or sold unless it has been registered or qualified for
sale in such jurisdiction or an exemption from registration or qualification is
available and is complied with. The Company has agreed under the Registration
Rights Agreement to register or qualify the New Preferred Stock for resale in
any jurisdictions requested by any holder, subject to certain limitations.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Preferred Stock are
urged to consult their financial and tax advisors in making their own decisions
on what action to take.
Upon consummation of the Exchange Offer, holders of Old Preferred Stock
that were not prohibited from participating in the Exchange Offer and did not
tender their Old Preferred Stock will not have any registration rights under the
Registration Rights Agreement with respect to such non-tendered Old Preferred
Stock and, accordingly, such Old Preferred Stock will continue to be subject to
the restrictions on transfer contained in the legend thereon (except that the
Company will be required to file a shelf registration statement in certain
limited instances).
The Company has not entered into any arrangement or understanding with any
person to distribute the New Preferred Stock to be received in the Exchange
Offer and, as of the Expiration Date, to the best of the
33
<PAGE> 38
Company's information and belief, each person participating in the Exchange
Offer will be acquiring the New Preferred Stock in its ordinary course of
business and will not have any arrangement or understanding with any person to
participate in the distribution of the New Preferred Stock to be received in the
Exchange Offer. In this regard, the Company will make each person participating
in the Exchange Offer aware (through this Prospectus or otherwise) that if the
Exchange Offer is being registered for the purpose of secondary resale, any
holder using the Exchange Offer to participate in a distribution of New
Preferred Stock to be acquired in the registered Exchange Offer (i) may not rely
on the staff position enunciated in K-III Communications Corporation (available
May 14, 1993), Morgan Stanley and Co. Inc. (available June 5, 1991) and Exxon
Capital Holding Corp. (available May 13, 1988) or similar letters and (ii) must
comply with registration and prospectus delivery requirements of the Securities
Act in connection with a secondary resale transaction.
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer.
34
<PAGE> 39
CAPITALIZATION
The following table sets forth the cash and the capitalization of IXC
Communications as of June 30, 1997, and as adjusted to reflect the Exchangeable
Sale as if such sale occurred on June 30, 1997. This table should be read in
conjunction with the Consolidated Financial Statements, the Notes thereto and
other financial information included elsewhere in this Prospectus or
incorporated by reference herein.
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................. $ 40,974 $ 328,974
========= =========
Debt and capital lease obligations:
12 1/2% Senior Notes Due 2005....................................... $ 277,888 $ 277,888
Capital lease obligations........................................... 16,707 16,707
Senior subordinated note............................................ 2,323 2,323
Promissory note..................................................... 3,831 3,831
--------- ---------
Debt and capital lease obligations............................... 300,749 300,749
--------- ---------
7 1/4% Junior Convertible Preferred Stock Due 2007, $.01 par
value(1)(2)......................................................... 98,010 98,010
12 1/2% Junior Exchangeable Preferred Stock Due 2009, $.01 par
value(1)(3)......................................................... -- 288,000
Stockholders' equity:
10% Junior Series 3 Cumulative Redeemable Preferred Stock, $.01 par
value; 12,550 shares issued and outstanding (aggregate
liquidation preference, including accrued and unpaid dividends,
of $20,004,000)(1)............................................... 13 13
Common stock, $.01 par value; 100,000,000 shares authorized;
30,799,560 shares issued and outstanding(4)...................... 308 308
Additional paid-in capital.......................................... 121,551 121,551
Accumulated deficit................................................. (108,964) (108,964)
--------- ---------
Total stockholders' equity....................................... 12,908 12,908
--------- ---------
Total capitalization............................................. $ 411,667 $ 699,667
========= =========
</TABLE>
- ---------------
(1) Preferred stock, 3,000,000 shares authorized.
(2) On March 31, 2007, the Convertible Preferred Stock must be redeemed by the
Company at a price equal to the liquidation preference plus accrued and
unpaid dividends; thus it is "mandatorily redeemable" and not included in
stockholders' equity. Each share of Convertible Preferred Stock is
convertible into Common Stock at the price of $23.46 per share at the option
of the holder.
(3) On August 15, 2009, the Exchangeable Preferred Stock must be redeemed by the
Company at a price equal to the liquidation preference plus accrued and
unpaid dividends; thus it is "mandatorily redeemable" and not included in
stockholders' equity.
(4) Does not include 2,059,426 shares of Common Stock issuable upon the exercise
of stock options outstanding as of June 30, 1997 (of which options covering
392,038 shares were exercisable as of June 30, 1997) under the Company's
1996 Stock Plan, 1994 Stock Plan and Special Stock Plan (each as defined).
35
<PAGE> 40
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth certain selected historical financial data
of the Company and its predecessor. The historical financial data for the
Company has been derived from the audited Consolidated Financial Statements of
the Company as of and for the periods ended December 31, 1992, 1993, 1994, 1995
and 1996. The historical financial data for the period January 1, 1992 through
August 14, 1992 relates to the Company's predecessor, IXC Carrier, Inc. ("IXC
Carrier" or the "Company's Predecessor"), and has been derived from unaudited
interim financial statements. The historical financial data for the Company for
the six-month periods ended June 30, 1996 and 1997 has also been derived from
unaudited interim financial statements. The unaudited interim financial
statements include all adjustments, consisting of normal recurring accruals,
which management considers necessary for a fair presentation of the financial
position and the results of operations for such interim periods. Results of
operations for the interim periods are not necessarily indicative of the results
of operations for the full year. The selected historical financial data set
forth below is qualified in its entirety by, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operations", "Business" and the Company's financial statements and the notes
thereto appearing in the Form 10-K and the Form 10-Qs which are incorporated by
reference herein and the other information included elsewhere in this Prospectus
or incorporated by reference herein.
<TABLE>
<CAPTION>
THE
COMPANY'S THE COMPANY
PREDECESSOR ------------------------------------------------------------------------
----------- AUG. 15
JAN. 1 THROUGH SIX MONTHS ENDED
THROUGH DEC. YEAR ENDED DECEMBER 31, JUNE 30,
AUG. 14, 31, ---------------------------------------- -------------------
1992 1992 1993 1994 1995 1996 1996 1997
----------- ------- -------- ------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenues............. $ 42,081 $23,893 $ 71,123 $80,663 $ 91,001 $203,761 $ 69,257 $172,775
Operating expenses:
Cost of services................. 26,116 13,588 37,823 33,896 39,852 143,469 47,243 143,132
Operations and administration.... 11,226 6,759 22,835 20,561 32,282 47,067 21,203 35,231
Depreciation and amortization.... 10,517 8,033 21,061 12,121 17,438 27,241 12,654 23,365
--------- ------- -------- ------- -------- -------- -------- --------
Operating income (loss)............ (5,778) (4,487) (10,596) 14,085 1,429 (14,016) (11,843) (28,953)
Interest income.................... 45 -- 215 211 468 2,838 253 2,238
Interest income in escrow under
Senior Notes..................... -- -- -- -- 2,552 7,404 4,637 203
Interest expense................... (18,749) (1,398) (4,943) (6,105) (14,597) (37,076) (19,360) (15,760)
Contract settlement costs.......... -- (2,000) (59) -- -- -- -- --
Write-down of property and
equipment........................ -- -- (37,960) -- -- -- -- --
Equity in net income (loss) of
unconsolidated subsidiaries...... -- -- -- (94) 19 (1,961) (14) (6,351)
Benefit (provision) for income
taxes............................ (77) 2,847 21,977 (3,157) 1,693 5,981 2,765 252
Minority interests................. -- 710 (446) 77 5,218 (618) (204) (317)
--------- ------- -------- ------- -------- -------- -------- --------
Income (loss) before extraordinary
gain (loss)(1)................... (24,559) (4,328) (31,812) 5,017 (3,218) (37,448) (23,766) (48,688)
Extraordinary gain (loss)(2)....... -- -- 8,495 2,298 (1,747) -- -- --
--------- ------- -------- ------- -------- -------- -------- --------
Net income (loss).................. $ (24,559) $(4,328) $(23,317) $ 7,315 $ (4,965) $(37,448) $(23,766) $(48,688)
========= ======== ======== ======= ======== ======== ======== ========
Income (loss) per common and common
equivalent share:
Before extraordinary gain (loss)........................ $ (1.39) $ .13 $ (.20) $ (1.39) $ (.99) $ (1.67)
Extraordinary gain (loss)............................... .35 .09 (.07) -- -- --
--------- ------- -------- -------- -------- --------
Net income (loss)....................................... $ (1.04) $ .22 $ (.27) $ (1.39) $ (.99) $ (1.67)
======== ======= ======== ======== ======== ========
Weighted average common and common equivalent shares...... 24,009 24,993 25,108 28,209 25,011 30,799
OTHER FINANCIAL DATA:
EBITDA(3).......................... $ 4,739 $3,546 $ 10,465 $26,206 $ 18,867 $ 13,225 $ 811 $ (5,588)
Capital expenditures............... 18 1,435 27,008 7,087 23,670 136,391 32,783 140,901
Ratio (deficiency) of earnings to
combined fixed charges and preferred stock dividends(4)............ 1.4x (12,348) (47,355) (27,669) (54,584)
</TABLE>
36
<PAGE> 41
<TABLE>
<CAPTION>
THE COMPANY
--------------------------------------------------------------
DECEMBER 31,
--------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
-------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 2,746 $ 6,230 $ 6,048 $ 6,915 $ 61,340 $ 40,974
Cash held in escrow under Senior Notes.................. -- -- -- 198,266 51,412 --
Total assets............................................ 117,741 94,281 105,409 336,475 459,151 552,900
Total debt and capital lease obligations................ 32,891 59,954 69,124 298,794 302,281 300,749
Redeemable preferred stock.............................. -- 1,400 1,400 -- -- 98,010
Stockholders' equity (deficit).......................... 30,028 6,871 14,189 6,858 63,479 12,908
</TABLE>
- ---------------
(1) Includes a $38.0 million non-cash charge in 1993 relating to a write-down of
microwave equipment.
(2) The extraordinary items for all periods result from early extinguishment of
debt (involving a related party in 1994), including capital lease
obligations, net of applicable income taxes.
(3) EBITDA is operating income (loss) plus depreciation and amortization. EBITDA
for 1995 and subsequent periods includes the negative EBITDA of the
Company's switched long distance services business. The Company has included
information concerning EBITDA because it believes that EBITDA is used by
certain investors as one measure of an issuer's historical ability to
service its debt. EBITDA is not a measurement determined in accordance with
GAAP, 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.
(4) 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 Company's Series 3 Preferred
Stock, and dividends on the Company's Convertible Preferred Stock. As
adjusted for the sale of the Convertible Preferred Stock and the
Exchangeable Preferred Sale as if they had occurred on or before January 1,
1997, and assuming dividends are paid in cash at 7 1/4% on the Convertible
Preferred Stock and at 12 1/2% on the Exchangeable Preferred Stock, the
Company's earnings would have been insufficient to cover combined fixed
charges and preferred stock dividends by $75.6 million for the six months
ended June 30, 1997. Additionally, additional dividends will accrue on the
Convertible Preferred Stock if the Company fails to comply with certain of
its obligations under the registration rights agreement relating thereto or
if, after March 31, 1999, the Company is not contractually permitted to pay
cash dividends on the Convertible Preferred Stock. Additional dividends will
also accrue on the Exchangeable Preferred Stock if the Company fails to
comply with certain of its obligations under the Registration Rights
Agreement.
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<PAGE> 42
MANAGEMENT
The directors and executive officers of the Company and their ages as of
September 1, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------- ---- -------------------------------------------------------------
<S> <C> <C>
Ralph J. Swett 63 Chairman, President, Chief Executive Officer and Director
Richard D. Irwin 62 Director
Wolfe H. Bragin 53 Director
Carl W. McKinzie 57 Director
Phillip L. Williams 75 Director
Joe C. Culp 64 Director
John R. Fleming 43 Executive Vice President
James F. Guthrie 53 Chief Financial Officer and Executive Vice President
David J. Thomas 46 Executive Vice President
Michael W. Vent 45 Executive Vice President
</TABLE>
Each director holds office until his successor has been elected and
qualified. Officers serve at the pleasure of the Board of Directors.
Mr. Swett has served as Chairman, Chief Executive Officer and President of
IXC Communications since its formation in July 1992. Prior to that, Mr. Swett
served as Chairman of the Board and Chief Executive Officer of Communications
Transmission, Inc. ("CTI") from 1986 to 1992. From 1969 to 1986, Mr. Swett
served in increasingly senior positions (Vice President, President and Chairman)
of Times Mirror Cable Television ("TMCT"), a subsidiary of Times Mirror and a
previous owner of IXC Carrier, and as a Vice President of Times Mirror from 1981
to 1986. Mr. Swett has served as Chairman of IXC Carrier since 1979, its Chief
Executive Officer since 1986 and its President since 1991. Mr. Swett has managed
communications businesses for the past 26 years. As described below, Mr. Swett
will cease to serve as the President and Chief Executive Officer of IXC
Communications during October 1997 upon the beginning of the employment of
Benjamin L. Scott. Mr. Swett will continue to serve as the Chairman of IXC
Communications through its next annual meeting of stockholders.
Mr. Irwin has served as a director of IXC Communications since its
formation in July 1992. He has served as the President of Grumman Hill Company,
L.L.C. or its predecessor ("Grumman Hill"), a merchant banking firm and the
general partner of GHI, since 1985. Prior to the formation of Grumman Hill, Mr.
Irwin was a Managing Director of Dillon, Read & Co. Inc., from 1983 to 1985.
Prior to that, he served as Chief Executive Officer of Fotomat Corporation for
12 years. Mr. Irwin is also a member of the Board of Directors of PharmChem
Laboratories, Inc. and was the Chairman of ALC from August 1988 through August
1995.
Mr. Bragin has served as a director of IXC Communications since May 1993.
Mr. Bragin has served since 1985 as Vice President of GEIC, a subsidiary of GE
that acts as an investment advisor to GEPT. Prior to joining GEIC in 1984, Mr.
Bragin served in numerous equipment leasing, investment and portfolio management
positions for GE Credit Corporation, now known as GE Capital Corporation. Mr.
Bragin is a member of the Board of Directors of a number of private companies.
Mr. McKinzie has served as a director of IXC Communications since May 1993.
Mr. McKinzie has been a principal of Riordan & McKinzie, a Professional Law
Corporation ("Riordan & McKinzie"), since 1980.
Mr. Williams was elected a director of IXC Communications in June 1996. Mr.
Williams has been a private investor and business advisor since May 1993. Prior
to that, Mr. Williams served as Vice Chairman of the Board of Times Mirror from
1987 to May 1993. Mr. Williams is a member of the Board of Directors of Tejon
Ranch Company.
Mr. Culp was elected a director of IXC Communications in June 1996. Mr.
Culp has been President of Culp Communications Associates, a management and
marketing consulting firm, since 1990. From 1989 to 1990 Mr. Culp served as
Executive Vice President of CTI. Prior to that, Mr. Culp served as President and
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<PAGE> 43
Chief Executive Officer of Lightnet, Inc. from 1988 to 1989 and as President of
Rockwell International's Telecommunications Group from 1982 until 1988. Mr. Culp
has over 40 years of experience in the communications industry.
Mr. Fleming has served as Executive Vice President of IXC Communications
since March 1996 and as Senior Vice President of IXC Communications from October
1994 through March 1996. He served as Vice President of Sales and Marketing of
IXC Communications from its formation in July 1992 until October 1994. Prior to
that, Mr. Fleming served as Director of Business Development and Director of
Carrier Sales of CTI from 1986 to March 1990 and as Vice President -- Marketing
and Sales of CTI from March 1990 to July 1992. Mr. Fleming was a Branch Manager
for Satellite Business Systems from 1983 to 1986. Mr. Fleming has been employed
with IXC Carrier since 1986 and a Vice President of IXC Carrier since 1990. Mr.
Fleming has over 16 years of experience in the telecommunications industry.
Mr. Guthrie has served as Chief Financial Officer of IXC Communications
since July 1997, as Executive Vice President of IXC Communications since March
1996 and as Senior Vice President, Strategic Planning of IXC Communications from
December 1995 through March 1996. Prior to that, Mr. Guthrie served as Vice
President and Chief Financial Officer of Times Mirror from 1993 to 1995 and as
the Chief Financial Officer of TMCT from 1982 to 1993.
Mr. Thomas has served as Executive Vice President of IXC Communications
since March 1996 and as Senior Vice President of IXC Communications from August
1995 through March 1996. He was employed with ALC Communications Corporation
("ALC") from 1983 to 1995, serving as Vice President from 1991 to 1995 and as
Treasurer from 1989 to 1995. Mr. Thomas has over 14 years of experience in the
telecommunications industry.
Mr. Vent was elected Executive Vice President of IXC Communications
effective April 1, 1997 and has served as Senior Vice President -- Network
Planning and Implementation from December 1996 through March 1997. Prior to
that, Mr. Vent served as Vice President and General Manager of Broadband
Services of IXC Communications from October 1995 through November 1996 and Vice
President and General Manager of Switch Services of IXC Communications from
October 1994 through September 1995. Mr. Vent served as Vice President of
Management Information Systems and Network Services of WCT Communications, Inc.
from September 1993 through August 1994, and Vice President and Chief
Information Officer of Advanced Technologies of Progressive Communications
Technology, Inc. from August 1992 through August 1993. He was employed by MCI
from 1979 through July 1992, serving as Director of Network and Computer
Operations from January 1990 through July 1992. Mr. Vent has over 22 years of
experience in the telecommunications industry.
NEW EMPLOYMENT AGREEMENT AND STOCK PLAN
IXC Communications recently entered into an employment agreement with
Benjamin L. Scott, 47, for a term of five years pursuant to which Mr. Scott will
serve as President and Chief Executive Officer of IXC Communications and become
a member of the Board of Directors upon the commencement of his employment with
IXC Communications which is expected to occur in October 1997 (the "Commencement
Date"). It is anticipated that Mr. Scott will also become the Chairman of the
Board of IXC Communications within 30 days following IXC Communications' 1998
annual meeting of stockholders. Mr. Scott served as President and Chief
Executive Officer of PrimeCo from 1995 until September 30, 1997. Prior to that,
Mr. Scott served as an officer of Bell Atlantic from 1991 to 1995, including as
President and Chief Executive Officer of Bell Atlantic International Wireless.
Prior to that, Mr. Scott was employed by AT&T from 1971 through 1991, with his
last position being President and Chief Executive Officer of AT&T Canada.
Pursuant to the terms of his employment agreement, Mr. Scott will be
entitled to an annual base salary of $350,000, subject to adjustment in
accordance with IXC Communications' policies and procedures, and an annual bonus
of $225,000 for his first year of service. Thereafter, annual bonuses, if
approved by the Board of Directors, are anticipated to be one-half or more of
his base salary if Mr. Scott achieves or exceeds certain performance goals. Mr.
Scott also will receive a signing bonus of $650,000, $350,000 of which will be
paid on
39
<PAGE> 44
the Commencement Date and $300,000 of which will be paid on January 1, 1999. Mr.
Scott was also granted an option to purchase 500,000 shares of Common Stock at a
price of $27.50 per share vesting over a five-year period in connection with his
employment agreement under IXC Communications' 1997 Special Executive Stock Plan
which was adopted in September 1997 and covers an aggregate of 500,000 shares of
Common Stock. Mr. Scott's option will become fully vested if Mr. Scott is
terminated without cause or if a change in control (as defined in his employment
agreement) occurs pursuant to the terms of his employment agreement. Mr. Scott
is also entitled to receive certain severance and relocation benefits as
described in his employment agreement.
DESCRIPTION OF THE EXCHANGEABLE PREFERRED STOCK
The following is a summary of certain provisions of the Certificate of
Designation and the Exchangeable Preferred Stock. The terms of the New Preferred
Stock are identical in all material respects to the terms of the Old Preferred
Stock (aggregate liquidation preference, dividend rate, mandatory redemption and
ranking), except for certain transfer restrictions and registration rights
relating to the Old Preferred Stock. The New Preferred Stock, like the Old
Preferred Stock, is governed by the Certificate of Designation. A copy of the
Certificate of Designation and the form of Exchangeable Preferred Stock is
available upon request to the Company at the address set forth under "Available
Information." The following summary of certain provisions of the Certificate of
Designation does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Certificate of
Designation. The definitions of certain capitalized terms used but not defined
in the following summary are set forth under "Description of the Exchange
Debentures -- Certain Definitions." Other capitalized terms used but not defined
herein and not otherwise defined under "Description of the Exchange
Debentures -- Certain Definitions" are defined in the Certificate of
Designation.
GENERAL
Subject to certain conditions, the Exchangeable Preferred Stock will be
exchangeable for the Exchange Debentures at the option of the Company on any
scheduled Dividend Payment Date on or after the date of issuance of the
Exchangeable Preferred Stock. When issued, the Exchangeable Preferred Stock will
be validly issued, fully paid and nonassessable. The holders of the Exchangeable
Preferred Stock will have no preemptive or preferential right to purchase or
subscribe to stock, obligations, warrants, or other securities of the Company of
any class. The Old Preferred Stock is eligible for trading in the PORTAL Market.
RANKING
The Exchangeable Preferred Stock, with respect to dividend rights and
rights on liquidation, winding-up and dissolution, ranks: (i) senior to all
classes of common stock and to each other class of Capital Stock or series of
Preferred Stock established hereafter by the Board of Directors the terms of
which do not expressly provide that it ranks senior to, or on a parity with, the
Exchangeable Preferred Stock as to dividend rights and rights on liquidation,
winding-up and dissolution of the Company (collectively referred to, together
with all classes of common stock of the Company, as "Junior Stock"); (ii)
subject to certain conditions, on a parity with the Convertible Preferred Stock
and each other class of Capital Stock or series of Preferred Stock established
hereafter by the Board of Directors, the terms of which expressly provide that
such class or series will rank on a parity with the Exchangeable Preferred Stock
as to dividend rights and rights on liquidation, winding-up and dissolution
(collectively referred to as "Parity Stock"); and (iii) subject to certain
conditions, junior to the Series 3 Preferred Stock and each class of Capital
Stock or series of Preferred Stock established hereafter by the Board of
Directors, the terms of which expressly provide that such class or series will
rank senior to the Exchangeable Preferred Stock as to dividend rights and rights
upon liquidation, winding-up and dissolution of the Company (collectively
referred to as "Senior 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
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<PAGE> 45
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, 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 Series 3 Preferred Stock, as of
June 30, 1997, were approximately $7.5 million.
Although the Company's Restated Certificate presently prohibits the payment
of dividends on the Exchangeable Preferred Stock with cash or with additional
shares of Exchangeable Preferred Stock until all accrued and unpaid dividends on
the Series 3 Preferred Stock (approximately $7.5 million at June 30, 1997) have
been paid in cash, the Company has received written consents from the holders of
sufficient shares of each class to approve an amendment to the Restated
Certificate to permit payment of dividends on the Exchangeable Preferred Stock
with additional shares of Exchangeable Preferred Stock. Such amendment is
expected to be effective prior to November 1997. 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 or the Exchangeable
Preferred Stock.
While any shares of Exchangeable 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 Exchangeable Preferred Stock with
respect to the payment of dividends or amounts upon liquidation, dissolution or
winding up without the consent of the holders of at least 66 2/3% of the
outstanding shares of Exchangeable Preferred Stock. However, without the consent
of any holder of Exchangeable Preferred Stock, the Company may create additional
classes of stock, increase the authorized number of shares of preferred stock or
issue series of a stock that ranks junior to or on parity with the Exchangeable
Preferred Stock with respect, in each case, to the payment of dividends and
amounts upon liquidation, dissolution and winding up. See "-- Voting Rights."
DIVIDENDS
The holders of shares of Exchangeable Preferred Stock will be entitled to
receive, when, as and if dividends are declared by the Board of Directors out of
funds of the Company legally available therefor, cumulative preferential
dividends from the Issue Date of the Exchangeable Preferred Stock accruing at
the rate per share of 12 1/2% per annum (subject to increase as set forth under
"-- Change of Control"), payable quarterly in arrears on each of February 15,
May 15, August 15 and November 15 or, if any such date is not a Business Day, on
the next succeeding Business Day (each, a "Dividend Payment Date"), to the
holders of record as of the next preceding February 1, May 1, August 1 and
November 1. Dividends will be payable in cash, except that on each Dividend
Payment Date occurring on or prior to February 15, 2001, dividends may be paid,
at the Company's option, by the issuance of additional shares of Exchangeable
Preferred Stock (including fractional shares) having an aggregate Liquidation
Preference equal to the amount of such dividends. The issuance of such
additional shares of Exchangeable Preferred Stock will constitute "payment" of
the related dividend for all purposes of the Certificate of Designation. The
first dividend payment of Exchangeable Preferred Stock will be payable on
November 15, 1997. Dividends payable on the Exchangeable Preferred Stock will be
computed on a basis of the 360-day year consisting of twelve 30-day months and
will be deemed to accrue on a daily basis.
Dividends on the Exchangeable Preferred Stock will accrue whether or not
the Company has earnings or profits, whether or not there are funds legally
available for the payment of such dividends and whether or not dividends are
declared. Dividends will accumulate to the extent they are not paid on the
Dividend Payment Date for the period to which they relate. The Certificate of
Designation will provide that the Company will take all actions required or
permitted under the Delaware General Corporation Law (the "DGCL") to permit the
payment of dividends on the Exchangeable Preferred Stock, including, without
limitation, through the revaluation of its assets in accordance with the DGCL,
to make or keep funds legally available for the payment of dividends.
No dividend whatsoever shall be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding share of the Exchangeable
Preferred Stock with respect to any dividend period unless
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<PAGE> 46
all dividends for all preceding dividend periods have been declared and paid or
declared and a sufficient sum set apart for the payment of such dividend, upon
all outstanding shares of Exchangeable Preferred Stock.
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
Exchangeable Preferred Stock for all prior dividend periods. If accrued
dividends on the Exchangeable Preferred Stock for all prior dividend periods
have not been paid in full then any dividend declared on the Exchangeable
Preferred Stock for any dividend period and on any Parity Stock will be declared
ratably in proportion to accrued and unpaid dividends on the Exchangeable
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 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 Exchangeable 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 Exchangeable Preferred Stock and any Parity Stock.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Exchangeable Preferred
Stock will not be redeemable at the option of the Company prior to August 15,
2002. Thereafter, the Exchangeable Preferred Stock will be redeemable, at the
Company's option, in whole or in part, at any time or from time to time, upon
not less than 30 nor more than 60 days' prior notice mailed by first-class mail
to each Holder's registered address, at the following redemption prices
(expressed in percentages of the Liquidation Preference thereof), plus
accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for any partial dividend period), if redeemed during the
12-month period commencing on August 15 of the years set forth below:
<TABLE>
<CAPTION>
PERIOD REDEMPTION PRICE
------ ----------------
<S> <C>
2002................................................. 106.250%
2003................................................. 105.000
2004................................................. 103.750
2005................................................. 102.500
2006................................................. 101.250
2007 and thereafter.................................. 100.000
</TABLE>
In addition, at any time and from time to time prior to August 15, 2000,
the Company may redeem in the aggregate up to 35% of the outstanding shares of
Exchangeable Preferred Stock with the proceeds of one or more Public Equity
Offerings, at a redemption price (expressed as a percentage of the Liquidation
Preference thereof) of 112.5% plus accumulated and unpaid dividends (including
an amount in cash equal to a prorated dividend for any partial dividend period);
provided, however, that at least $195.0 million aggregate Liquidation Preference
of Exchangeable Preferred Stock remains outstanding after each such redemption.
In the case of any partial redemption, selection of the Exchangeable
Preferred Stock for redemption will be made on a pro rata basis.
MANDATORY REDEMPTION
On August 15, 2009, the Company will be required to redeem (subject to the
legal availability of funds therefor) all outstanding shares of Exchangeable
Preferred Stock at a price in cash equal to the Liquidation Preference thereof,
plus accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for any partial dividend period), if any, to the date of
redemption. The Company will not be required to make sinking fund payments with
respect to the Exchangeable Preferred Stock. The Certificate of Designation will
provide that the Company will take all actions required or permitted under
Delaware law to permit such redemption.
42
<PAGE> 47
EXCHANGE
The Company may, at its option, subject to certain conditions, on any
scheduled Dividend Payment Date, exchange the Exchangeable Preferred Stock, in
whole but not in part, for the Exchange Debentures; provided, however, that: (i)
on the date of such exchange there are no accumulated and unpaid dividends on
the Exchangeable Preferred Stock (including the dividend payable on such date)
or other contractual impediments to such exchange; (ii) there shall be funds
legally available sufficient therefor; (iii) immediately after giving effect to
such exchange, no Default (as defined in the Exchange Indenture) shall have
occurred and be continuing; and (iv) the Company shall have delivered to the
Trustee under the Exchange Indenture an opinion of counsel with respect to the
due authorization and issuance of the Exchange Debentures. The exchange of the
Exchange Debentures is limited by the terms of the Company's Senior Notes and
Series 3 Preferred Stock.
Upon any exchange pursuant to the preceding paragraph, holders of
outstanding shares of Exchangeable Preferred Stock will be entitled to receive,
subject to the second succeeding sentence, $1.00 principal amount of Exchange
Debentures for each $1.00 liquidation preference of Exchangeable Preferred Stock
held by them. The Exchange Debentures will be issued in registered form, without
coupons. Exchange Debentures issued in exchange for Exchangeable Preferred Stock
will be issued in principal amounts of $1,000 and integral multiples thereof to
the extent possible, and will also be issued in principal amounts less that
$1,000 so that each holder of Exchangeable Preferred Stock will receive
certificates representing the entire amount of Exchange Debentures to which such
holder's shares of Exchangeable Preferred Stock entitle such holder; provided,
however, that the Company may pay cash in lieu of issuing an Exchange Debenture
in a principal amount less than $1,000. The Company will send a written notice
of exchange by mail to each holder of record of shares of Exchangeable Preferred
Stock not fewer than 30 days nor more than 60 days before the date fixed for
such exchange. On and after the Exchange Date, dividends will cease to accrue on
the outstanding shares of Exchangeable Preferred Stock, and all rights of the
holders of Exchangeable Preferred Stock (except the right to receive the
Exchange Debentures, an amount in cash, to the extent applicable, equal to the
accumulated and unpaid dividends to the exchange date and, if the Company so
elects, cash in lieu of any Exchange Debenture that is in a principal amount
that is not an integral multiple of $1,000) will terminate. The person entitled
to receive the Exchange Debentures issuable upon such exchange will be treated
for all purposes as the registered holder of such Exchange Debentures. See
"Description of the Exchange Debentures."
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, each holder of Exchangeable Preferred Stock will be entitled to be
paid, out of the assets of the Company available for distribution to
stockholders, an amount equal to the Liquidation Preference per share of
Exchangeable Preferred Stock held by such holder, plus accumulated and unpaid
dividends thereon to the date fixed for liquidation, dissolution or winding-up
before any distribution is made on any Junior Stock, including, without
limitation, common stock of the Company. If, upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, the amounts payable with
respect to the Exchangeable Preferred Stock and all other Parity Stock are not
paid in full, the holders of the Exchangeable Preferred Stock and the Parity
Stock will share equally and ratably in any distribution of assets of the
Company in proportion to the full liquidation preference and accumulated and
unpaid dividends to which each is entitled. After payment of the full amount of
the Liquidation Preference and accumulated and unpaid dividends to which they
are entitled, the holders of shares of Exchangeable Preferred Stock will not be
entitled to any further participation in any distribution of assets of the
Company. However, neither the sale, conveyance, exchange or transfer (for cash,
shares of stock, securities or other consideration) of all or substantially all
of the property or assets of the Company nor the consolidation or merger of the
Company with one or more entities shall be deemed to be a liquidation,
dissolution or winding-up of the Company.
The Certificate of Designation will not contain any provision requiring
funds to be set aside to protect the Liquidation Preference of the Exchangeable
Preferred Stock, although such Liquidation Preference will be substantially in
excess of the par value of such shares of Exchangeable Preferred Stock.
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<PAGE> 48
VOTING RIGHTS
The holders of Exchangeable Preferred Stock, except as otherwise required
under Delaware law or as provided in the Certificate of Designation, shall not
be entitled or permitted to vote on any matter required or permitted to be voted
upon by the stockholders of the Company.
The Certificate of Designation provides that: if (i) dividends on the
Exchangeable Preferred Stock are in arrears and unpaid for six or more Dividend
Periods (whether or not consecutive); (ii) the Company fails to redeem the
Exchangeable Preferred Stock on August 15, 2009, or fails to otherwise discharge
any redemption obligation with respect to the Exchangeable Preferred Stock;
(iii) a breach or violation of any of the provisions described under the caption
"-- Certain Covenants" occurs and the breach or violation continues for a period
of 30 days or more after the Company receives notice thereof specifying the
default from the holders of at least 25% of the shares of Exchangeable Preferred
Stock then outstanding; or (iv) the Company fails to pay at final maturity
(giving effect to any applicable grace period) the principal amount of any
Indebtedness of the Company or any Significant Subsidiary (other than any
Permitted PSINet Non-Recourse Debt) or the final maturity of any such
Indebtedness is accelerated because of a default and the total amount of such
Indebtedness unpaid or accelerated exceeds $5 million, then the holders of the
outstanding shares of Exchangeable 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 be entitled to elect two
additional members to the Board of Directors to serve on the Board of Directors,
and the number of members of the Board of Directors will be immediately and
automatically increased by two. Such voting rights of the Exchangeable Preferred
Stock will continue until such time as, in the case of a dividend default, all
dividends in arrears on the Exchangeable Preferred Stock are paid in full in
cash and, in all other cases, any failure, breach or default giving rise to such
voting rights is remedied or waived by the holders of at least a majority of the
shares of Exchangeable Preferred Stock then outstanding, at which time the term
of any directors elected pursuant to the provisions of this paragraph (subject
to the right of holders of any other preferred stock to elect such directors)
shall terminate. Each such event described in clauses (i) through (v) above is
referred to herein as a "Voting Rights Triggering Event."
The Certificate of Designation also provides that the Company will not
authorize any class of Senior Stock without the affirmative vote or consent of
holders of at least two-thirds of the shares of Exchangeable Preferred Stock
then outstanding, voting or consenting, as the case may be, as one class. In
addition, the Certificate of Designation provides that the Company may not
authorize the issuance of any additional shares of Exchangeable Preferred Stock
without the affirmative vote or consent of the holders of at least a majority of
the then outstanding shares of Exchangeable Preferred Stock, voting or
consenting, as the case may be, as one class. Further, the Certificate of
Designation also provides that, except as set forth above, (a) the creation,
authorization or issuance of any shares of Junior Stock, Parity Stock or Senior
Stock, including the designation of a series thereof within the existing class
of Exchangeable Preferred Stock, or (b) the increase or decrease in the amount
of authorized Capital Stock of any class, including any preferred stock, shall
not require the consent of the holders of Exchangeable Preferred Stock and shall
not be deemed to affect adversely the rights, preferences, privileges or voting
rights of shares of Exchangeable Preferred Stock.
CHANGE OF CONTROL
The Certificate of Designation provides that upon the occurrence of a
Change of Control, the Company shall either (i) offer to repurchase the
Exchangeable Preferred Stock at a purchase price in cash equal to 101% of the
Liquidation Preference thereof plus accumulated and unpaid dividends, if any, to
the date of purchase, as described below or (ii) notify such holders of the
Company's election not to make such offer, in which case the dividend rate on
the Exchangeable Preferred Stock shall be reset as described below.
In the event the Company determines to make an offer to repurchase shares
of Exchangeable Preferred Stock, then within 30 days following any Change of
Control, the Company shall mail a notice to each Holder stating: (1) that a
Change of Control has occurred and that such Holder has the right to require the
Company to purchase such Holder's Exchangeable Preferred Stock at a purchase
price in cash equal to 101% of the aggregate Liquidation Preference thereof plus
accumulated and unpaid dividends, if any, thereon to the date of
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<PAGE> 49
purchase; (2) the circumstances and relevant facts regarding such Change of
Control (including information with respect to pro forma historical income, cash
flow and capitalization after giving effect to such Change of Control); (3) the
purchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by the
Company, consistent with the covenant described hereunder, that a Holder must
follow in order to have its Exchangeable Preferred Stock purchased.
In the event the Company notifies the holders of Exchangeable Preferred
Stock of its election not to make the offer described above, then, within 60
days of the occurrence of the Change of Control, holders of a majority of the
Exchangeable Preferred Stock will designate an Independent Financial Advisor to
determine, within 20 days of such designation, in the opinion of such firm, the
appropriate dividend rate that the Exchangeable Preferred Stock should bear so
that, after such reset, the Exchangeable Preferred Stock would have a market
value of 101% of the liquidation preference; provided, however, that no such
reset shall be required to be made if such Independent Financial Advisor
determines that the Exchangeable Preferred Stock has a market value of 101% or
greater. If within 5 days of the designation of an Independent Financial Advisor
by the holders, the Company determines that such Independent Financial Advisor
is reasonably unacceptable to the Company, the Company shall designate a second
Independent Financial Advisor to determine, within 15 days of such designation,
in its opinion, such an appropriate reset dividend rate for the Exchangeable
Preferred Stock. In the event that the two Independent Financial Advisors cannot
agree, within 25 days of the designation of an Independent Financial Advisor by
the holders of a majority of the Exchangeable Preferred Stock, on the
appropriate reset dividend rate, the two Independent Financial Advisors shall,
within 10 days of such 25th day, designate a third Independent Financial
Advisor, which, within 15 days of designation, will determine, in its opinion,
an appropriate reset dividend rate which is between the two rates selected by
the first two Independent Financial Advisors. Upon the determination of the
reset rate, the Exchangeable Preferred Stock shall accrue and accumulate
dividends at the reset rate as of the date of occurrence of the Change of
Control; provided, however, that the reset rate shall in no event be less than
12 1/2% per annum (the initial dividend rate on the Exchangeable Preferred
Stock) or greater than 15% per annum. The reasonable fees and expenses,
including reasonable fees and expenses of legal counsel, if any, and customary
indemnification, of each of the three above-referenced Independent Financial
Advisors shall be borne by the Company.
A Change of Control will be deemed to have occurred upon the occurrence of
any of the following events (each a "Change of Control"):
(i) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that for purposes of this clause (i) such person shall
be deemed to have "beneficial ownership" of all shares that any such person
has the right to acquire, whether such right is exercisable immediately or
only after the passage of time, and except that any person that is deemed
to have beneficial ownership of shares solely as a result of being part of
a group pursuant to Rule 13d-5(b)(1) shall not be deemed to have beneficial
ownership of any shares held by a Permitted Holder forming a part of such
group), directly or indirectly, of more than 50% of the total voting power
of the Voting Stock of the Company (for the purposes of this clause (i),
such other person shall be deemed to beneficially own any Voting Stock of a
specified corporation held by a parent corporation, if such other person is
the beneficial owner (as defined in this clause (i)), directly or
indirectly, of more than 35% of the voting power of the Voting Stock of
such parent corporation and the Permitted Holders beneficially own (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, in the aggregate a lesser percentage of the voting power of the
Voting Stock of such parent corporation and do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the board of directors of such parent corporation);
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors (together
with any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company was approved by
a vote of a majority of the directors of the Company then still in office
who were either directors at the beginning of such period or whose election
or nomination for election was previously so approved) cease for any reason
to constitute a majority of the Board of Directors then in office;
provided, however, that any directors
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elected by holders of Preferred Stock pursuant to any voting rights
provisions included in the certificate of designation relating to such
Preferred Stock shall be excluded in making any determination pursuant to
this clause (ii); or
(iii) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company to another
Person (other than a Person that is controlled by the Permitted Holders),
and, in the case of any such merger or consolidation, the securities of the
Company that are outstanding immediately prior to such transaction and
which represent 100% of the aggregate voting power of the Voting Stock of
the Company are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities of the
surviving corporation that represent immediately after such transaction, at
least a majority of the aggregate voting power of the Voting Stock of the
surviving corporation.
Notwithstanding the foregoing, a Change of Control shall not be deemed to
have occurred if, after such event that otherwise would constitute a Change of
Control, the Exchangeable Preferred Stock are rated Investment Grade by Moody's
or Standard & Poor's on the 30th day following the event that otherwise would
constitute a Change of Control (the "Change of Control Determination Date");
provided, however, that to the extent there is a "rating watch" with respect to
the Exchangeable Preferred Stock or other rating agency review on such 30th day,
then the Change of Control Determination Date shall be the first Business Day
thereafter on which the Exchange Debentures are not subject to a "rating watch"
or other rating agency review by either Moody's or Standard & Poor's. The term
"Investment Grade", for such purpose, means a rating of Baa3 or higher in the
case of Moody's, or BBB- or higher in the case of Standard & Poor's.
The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the purchase of Exchangeable Preferred Stock
pursuant to the covenant described hereunder. To the extent that the provisions
of any securities laws or regulations conflict with the provisions of the
covenant described hereunder, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the covenant described hereunder by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. The Company has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into transactions,
including acquisitions, refinancings or other recapitalizations, that would not
constitute a Change of Control, but that could increase the amount of
indebtedness outstanding at such time or otherwise affect the Company's capital
structure or credit ratings. Restrictions on the ability of the Company and its
Restricted Subsidiaries to incur additional indebtedness are contained in the
covenant described under "-- Certain Covenants -- Limitation on Indebtedness."
Such restrictions can only be waived with the consent of the holders of a
majority of the outstanding shares of the Exchangeable Preferred Stock. Except
for the limitations contained in such covenants, however, the Certificate of
Designation will not contain any covenants or provisions that may afford holders
of the Exchangeable Preferred Stock protection in the event of a highly
leveraged transaction.
The indenture governing the Senior Notes contains, and future indebtedness
of the Company may contain, prohibitions on the occurrence of certain events
that would constitute a Change of Control or require such indebtedness to be
repurchased upon a Change of Control. Moreover, the Company's ability to pay
cash to the holders of Exchangeable Preferred Stock following the occurrence of
a Change of Control may be limited by the Company's then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any repurchases. In the event a Change of Control occurs
at a time when the Company is prohibited from purchasing Exchangeable Preferred
Stock, the Company could seek the consent of its lenders to make such purchase,
or could attempt to refinance the borrowings that contain such prohibitions. If
the Company does not obtain such consent or repay such borrowings, the Company
would be required to elect to utilize the reset provision described herein.
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CERTAIN COVENANTS
The Certificate of Designation contains covenants including, among others,
the following:
Limitation on Indebtedness. (a) The Company shall not Incur, and shall not
permit any Restricted Subsidiary to Incur, directly or indirectly, any
Indebtedness unless, on the date of such Incurrence and after giving pro forma
effect thereto (including pro forma application of the net proceeds therefrom)
and to any other Indebtedness Incurred or repaid since the end of the period
referred to below and the receipt and application of the proceeds thereof,
either (i) the Indebtedness to Operating Cash Flow Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which such Indebtedness is
Incurred would have been not more than 5 to 1, or (ii) the Company's
Consolidated Capital Ratio as of the end of the most recent fiscal quarter for
which internal financial statements are available immediately preceding the date
on which such Indebtedness is Incurred is less than 2.0 to 1.0.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur any or all of the following Indebtedness:
(1) Indebtedness Incurred pursuant to one or more Credit Agreements;
provided, however, that, after giving effect to any such Incurrence, the
aggregate principal amount of such Indebtedness then outstanding does not
exceed the greater of (A) $150,000,000 and (B) 85% of the book value of the
Accounts Receivables of the Company and its Restricted Subsidiaries;
(2) Indebtedness owed to and held by the Company or a Restricted
Subsidiary; provided, however, that any subsequent issuance or transfer of
any Capital Stock which results in any Restricted Subsidiary ceasing to be
a Restricted Subsidiary or any subsequent transfer of such Indebtedness
(other than to the Company or another Restricted Subsidiary) shall be
deemed, in each case, to constitute the Incurrence of such Indebtedness by
the issuer thereof;
(3) the Exchange Debentures and the New Exchange Debentures (including
Exchange Debentures or New Exchange Debentures issued in lieu of cash
interest payments with respect to Exchange Debentures or New Exchange
Debentures);
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this covenant);
(5) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (3) or (4) or this clause
(5);
(6) Hedging Obligations consisting of Interest Rate Agreements
directly related to Indebtedness permitted to be Incurred by the Company
and its Restricted Subsidiaries pursuant to the terms of the Certificate of
Designation;
(7) Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case Incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property used in the business of the Company
or such Restricted Subsidiary;
(8) In the event that the PSINet Shares are held by the Company or a
Restricted Subsidiary, the Incurrence by the Company or such Restricted
Subsidiary of Permitted PSINet Non-Recourse Debt; and
(9) Indebtedness in an aggregate principal amount at any time
outstanding which, together with the amount of all other Indebtedness of
the Company and its Restricted Subsidiaries outstanding on the date of such
Incurrence (other than Indebtedness permitted by clauses (1) - (8) above
and paragraph (a)), does not exceed 5% of Consolidated Tangible Assets.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated
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Obligations unless such Indebtedness would be subordinated to the Exchange
Debentures to at least the same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in its sole discretion,
will classify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to (i) declare or pay
any dividend or make any distribution on or in respect of, in the case of the
Company, any Junior Stock or, in the case of any Restricted Subsidiary, any
Capital Stock (including any payment in connection with any merger or
consolidation involving the Company) or similar payment to the direct or
indirect holders of any such Stock (other than dividends or distributions
payable solely in Junior Stock (other than Disqualified Stock) and dividends or
distributions to the extent paid to the Company or a Restricted Subsidiary, and
other than pro rata dividends or other distributions made by a Subsidiary that
is not a Wholly Owned Subsidiary to minority stockholders (or owners of an
equivalent interest in the case of a Subsidiary that is an entity other than a
corporation)), (ii) purchase, redeem or otherwise acquire or retire for value
any Junior Stock of the Company or any Capital Stock of any direct or indirect
parent of the Company, or (iii) make any investment in any Person (other than a
Permitted Investment) (any such dividend, distribution, purchase, redemption,
other acquisition, retirement or investment being herein referred to as a
"Restricted Payment") if at the time the Company or such Restricted Subsidiary
makes such Restricted Payment: (1) a Voting Rights Triggering Event shall have
occurred and be continuing (or would result therefrom); (2) the Company is not
able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a) of
the covenant described under "-- Limitation on Indebtedness"; or (3) the
aggregate amount of such Restricted Payment and all other Restricted Payments
since the Issue Date would exceed the sum of:
(A) an amount equal to the Cumulative Operating Cash Flow for the
period (taken as one accounting period) from the beginning of the first
full fiscal quarter commencing after the Issue Date to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment less 1.50
times the Company's Cumulative Consolidated Interest expense for such
period;
(B) the aggregate Net Cash Proceeds received by the Company from the
issuance or sale of its Parity Stock and Junior Stock (in each case other
than Disqualified Stock) subsequent to the Issue Date (other than an
issuance or sale to a Subsidiary of the Company and other than an issuance
or sale to an employee stock ownership plan or to a trust established by
the Company or any of its Subsidiaries for the benefit of their employees);
(C) the amount by which Indebtedness of the Company is reduced on the
Company's balance sheet upon the conversion or exchange (other than by a
Subsidiary of the Company) subsequent to the Issue Date of any Indebtedness
of the Company convertible or exchangeable for Parity Stock or Junior Stock
(in each case other than Disqualified Stock) of the Company (less the
amount of any cash, or the fair value of any other property, distributed by
the Company upon such conversion or exchange); and
(D) an amount equal to the sum of (i) the net reduction in Investments
in any Person resulting from dividends, repayments of loans or advances or
other transfers of assets (but excluding such interest, dividends,
repayments, advances or other transfers of assets to the extent any such
item increases Consolidated Net Income), in each case to the Company or any
Restricted Subsidiary from any Person (including, without limitation, from
Unrestricted Subsidiaries), and (ii) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of
the net assets of an Unrestricted Subsidiary at the time such Unrestricted
Subsidiary is designated a Restricted Subsidiary; provided, however, that
the foregoing sum shall not exceed, in the case of any Person (including
any Unrestricted Subsidiary), the amount of Investments previously made
(and treated as a Restricted Payment) by the Company or any Restricted
Subsidiary in such Person.
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(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(i) any Restricted Payment made out of the proceeds of the
substantially concurrent sale of, or any acquisition of any Parity Stock or
Junior Stock of the Company made by exchange for, other Parity Stock or
Junior Stock, as the case may be, of the Company (in each case other than
Disqualified Stock and other than Parity Stock or Junior Stock issued or
sold to a Subsidiary of the Company or an employee stock ownership plan or
to a trust established by the Company or any of its Subsidiaries for the
benefit of their employees); provided, however, that (A) such Restricted
Payment shall be excluded in the calculation of the amount of Restricted
Payments and (B) the Net Cash Proceeds from such sale shall be excluded
from the calculation of amounts under clause (3)(B) of paragraph (a) above;
(ii) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with this covenant; provided, however, that at the time of payment of such
dividend, no other Voting Rights Triggering Event shall have occurred and
be continuing (or result therefrom); provided further, however, that such
dividend shall be included in the calculation of the amount of Restricted
Payments; or
(iii) the repurchase or other acquisition of shares of, or options to
purchase shares of, common stock of the Company or any of its Subsidiaries
from employees, former employees, directors or former directors of the
Company or any of its Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant to
the terms of the agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors under which such
individuals purchase or sell or are granted the option to purchase or sell,
shares of such common stock; provided, however, that the aggregate amount
of such repurchases and other acquisitions shall not exceed $1,000,000 in
any calendar year; provided further, however, that such repurchases and
other acquisitions shall be excluded in the calculation of the amount of
Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (a) pay dividends or make any other distributions on its Capital
Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed to
the Company, (b) make any loans or advances to the Company or (c) transfer any
of its property or assets to the Company, except:
(i) any encumbrance or restriction pursuant to an agreement in effect
at or entered into on the Issue Date;
(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred
by such Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by the Company (other than Indebtedness
Incurred as consideration in, or to provide all or any portion of the funds
or credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by the Company) and outstanding on
such date;
(iii) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an agreement
referred to in clause (i) or (ii) of this covenant or this clause (iii) or
contained in any amendment to an agreement referred to in clause (i) or
(ii) of this covenant or this clause (iii); provided, however, that the
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in any such refinancing agreement or amendment are no less
favorable to the holders of Exchangeable Preferred Stock than encumbrances
and restrictions with respect to such Restricted Subsidiary contained in
such predecessor agreements;
(iv) any such encumbrance or restriction consisting of customary
non-assignment provisions in leases governing leasehold interests to the
extent such provisions restrict the transfer of the lease or the property
leased thereunder;
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(v) in the case of clause (c) above, restrictions contained in IRU
Agreements, security agreements or mortgages securing Indebtedness or other
obligations of a Restricted Subsidiary to the extent such restrictions
restrict the transfer of the property subject to such security agreements
or mortgages;
(vi) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition; and
(vii) any such encumbrance or restriction contained in the PSINet
Agreement.
Limitation on Affiliate Transactions. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless (i) such Affiliate
Transaction is on terms that are no less favorable to the Company or the
relevant Restricted Subsidiary than those that would have been obtained in a
comparable transaction by the Company or such Restricted Subsidiary with an
unrelated Person and (ii) the Company delivers to the Transfer Agent (a) with
respect to any Affiliate Transaction involving aggregate consideration in excess
of $1,000,000 a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction involving aggregate consideration in excess of
$10,000,000, other than transactions with GE Capital Communication and Excluded
PSINet Transactions, an opinion as to the fairness to the Company or such
Restricted Subsidiary of such Affiliate Transaction from a financial point of
view issued by an investment banking firm of national standing.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i)
any Restricted Payment permitted to be paid pursuant to the covenant described
under "-- Limitation on Restricted Payments," (ii) any issuance of securities,
or other payments, awards or grants in cash, securities or otherwise pursuant
to, or the funding of, employment arrangements, stock options and stock
ownership plans approved by the Board of Directors, (iii) the grant of stock
options or similar rights to employees and directors of the Company pursuant to
plans approved by the Board of Directors, (iv) loans or advances to employees in
the ordinary course of business in accordance with the past practices of the
Company or its Restricted Subsidiaries, but in any event not to exceed $500,000
in the aggregate outstanding at any one time, (v) any employment or consulting
arrangement or agreement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business and consistent with the past
practice of the Company or such Restricted Subsidiary, (vi) the payment of
reasonable fees to directors of the Company and its Restricted Subsidiaries who
are not employees of the Company or its Restricted Subsidiaries, (vii) any
Affiliate Transaction between the Company and a Restricted Subsidiary or between
Restricted Subsidiaries, (viii) transactions in connection with Permitted
Businesses between the Company and GE Capital Communication, (ix) transactions
between the Company or any Restricted Subsidiary specifically contemplated by
the PSINet Agreement and (x) the issuance or sale of any Capital Stock (other
than Disqualified Stock) of the Company. Notwithstanding the foregoing,
Affiliate Transactions shall not include any transaction involving the sale,
purchase, repurchase, redemption, transfer, exchange or other acquisition or
disposition of Senior Notes, Convertible Preferred Stock or Exchangeable
Preferred Stock by or from, or the payment of the principal of, premium, if any,
and interest on, or liquidation preference of and dividends on, any Senior
Notes, Convertible Preferred Stock or Exchangeable Preferred Stock, as the case
may be, to any Affiliate of the Company or any Affiliate of a Restricted
Subsidiary of the Company; provided, however, that such transaction is offered
substantially concurrently to all other holders of Senior Notes, Convertible
Preferred Stock or Exchangeable Preferred Stock, as the case may be, on the same
terms and conditions; provided further, however, that such transaction is
approved by a majority of the disinterested members of the Board of Directors,
other than transactions in connection with the payment of the principal of,
premium, if any, and interest on, or liquidation preference of and dividends on,
Senior Notes, Convertible Preferred Stock or the Exchangeable Preferred Stock,
as the case may be, pursuant to the provisions of the indenture or certificate
of designation governing the payment of interest and principal, dividends and
liquidation preference, redemption, repurchases from the proceeds of an asset
disposition and repurchases upon a change of control.
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Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "Successor Company") shall be
a Person organized and existing under the laws of the United States of America,
any State thereof or the District of Columbia and the Successor Company (if not
the Company) shall expressly assume all the obligations of the Company under the
Exchangeable Preferred Stock and the Certificate of Designation; (ii)
immediately after giving effect to such transaction, no Default shall have
occurred and be continuing, (iii) immediately after giving effect to such
transaction, the Successor Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness"; and (iv) immediately after giving effect to
such transaction, the Successor Company shall have Consolidated Net Worth in an
amount that is not less than the Consolidated Net Worth of the Company
immediately prior to such transaction; and (v) the Company shall have delivered
to the Transfer Agent an Officers' Certificate, stating that such consolidation,
merger or transfer and such assumption (if any) comply with the Certificate of
Designations.
SEC Reports. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall file with the SEC and provide the holders of Exchangeable
Preferred Stock with such annual reports and such information, documents and
other reports as are specified in Sections 13 and 15(d) of the Exchange Act and
applicable to a U.S. corporation subject to such Sections, such information,
documents and other reports to be so filed and provided at the times specified
for the filing of such information, documents and reports under such Sections.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Old Preferred Stock was
issued in the form of a Global Security. The Global Security was deposited on
the date of closing of the sale of the Old Preferred Stock with, or on behalf
of, the Depository and registered in the name of Cede & Co., as nominee of the
Depository (such nominee being referred to as the "Global Security Holder").
Shares of Old Preferred Stock that were issued as described below under
"Certificated Exchangeable Preferred Stock" were issued in definitive form (the
"Certificated Securities"). Upon the consummation of the Exchange Offer, all
requirements that the Old Preferred Stock be issued in global form will cease to
apply and Certificated Exchangeable Preferred Stock with a restricted securities
legend will be available to holders of such Old Preferred Stock that do not
exchange their Old Preferred Stock, and Certificated Exchangeable Preferred
Stock representing the New Preferred Stock will be available to holders that
exchange such Old Preferred Stock in the Exchange Offer.
The Depository has advised the Company as follows: The Depository is a
limited-purpose trust company and organized under the laws of the State of New
York, 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 Securities Exchange
Act of 1934 (the "Exchange Act"). The Depository was created to hold securities
of institutions that have accounts with the Depository ("participants") and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. The Depository's participants include securities
brokers and dealers (which may include the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to the
Depository's book-entry system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, whether directly or indirectly.
Pursuant to procedures established by the Depository, ownership of
beneficial interests in the Global Security is shown on, and the transfer of
those ownership interests is effected only through, records maintained by the
Depository (with respect to participants' interest) and such participants (with
respect to the owners of beneficial interests in the Global Security other than
participants). The laws of some jurisdictions may require
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that certain purchasers of securities take physical delivery of such securities
in definitive form. Such limits and laws may impair the ability to transfer or
pledge beneficial interests in the Global Security.
So long as the Depository or its nominee is the registered holder and owner
of the Global Security, the Depository or such nominee, as the case may be, will
be considered the sole legal owner and holder of the related Exchangeable
Preferred Stock for all purposes of such Exchangeable Preferred Stock and the
Certificate of Designation. Except as set forth below, owners of beneficial
interests in the Global Security will not be entitled to have the Exchangeable
Preferred Stock represented by the Global Security registered in their names,
will not receive or be entitled to receive physical delivery of certificated
Exchangeable Preferred Stock in definitive form and will not be considered to be
the owners or holders of any Exchangeable Preferred Stock under the Global
Security. The Company understands that under existing industry practice, in the
event an owner of a beneficial interest in the Global Security desires to take
any action that the Depository, as the holder of the Global Security, is
entitled to take, the Depository would authorize the participants to take such
action, and that the participants would authorize beneficial owners owning
through such participants to take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
Payment in respect of dividends and redemption payments on Exchangeable
Preferred Stock represented by the Global Security registered in the name of and
held by the Depository or its nominee will be made to the Depository or its
nominee, as the case may be, as the registered owner and holder of the Global
Security.
The Company expects that the Depository or its nominee, upon receipt of any
payment in respect of dividends and redemption payments on the Global Security,
will credit participants' accounts with payments in amounts proportionate to
their respective beneficial interests in the liquidation preference of the
Global Security as shown on the records of the Depository or its nominee. The
Company also expects that payments by participants to owners of beneficial
interests in the Global Security held through such participants will be governed
by standing instructions and customary practices and will be the responsibility
of such participants. The Company will not have any responsibility or liability
for any aspect of the records relating to, or payments made on account of,
beneficial ownership interests in the Global Security for any Exchangeable
Preferred Stock or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests or for any other aspect of the
relationship between the Depository and its participants or the relationship
between such participants and the owners of beneficial interests in the Global
Security owning through such participants.
Unless and until it is exchanged in whole or in part for certificated
Exchangeable Preferred Stock in definitive form, the Global Security may not be
transferred except as a whole by the Depository to a nominee of such Depository
or by a nominee of such Depository to such Depository or another nominee of such
Depository.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Security among participants of
the Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Transfer Agent nor the Company will have any responsibility for the performance
by the Depository or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
CERTIFICATED EXCHANGEABLE PREFERRED STOCK
The Exchangeable Preferred Stock represented by the Global Security is
exchangeable for certificated Exchangeable Preferred Stock in definitive form of
like tenor as such Exchangeable Preferred Stock if (i) the Depository notifies
the Company that it is unwilling or unable to continue as Depository for the
Global Security or if at any time the Depository ceases to be a clearing agency
registered under the Exchange Act or (ii) the Company in its discretion at any
time determines not to have all of the Exchangeable Preferred Stock represented
by the Global Security. Any Exchangeable Preferred Stock that is exchangeable
pursuant to the preceding sentence is exchangeable for certificated Exchangeable
Preferred Stock issuable in authorized denominations and registered in such
names as the Depository shall direct. In addition, upon the consummation of the
Exchange Offer, all requirements that the Old Preferred Stock be issued in
global form will cease to apply and Certificated Exchangeable Preferred Stock
with a restricted securities legend will be available to
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<PAGE> 57
holders of such Old Preferred Stock that do not exchange their Old Preferred
Stock, and Certificated Exchangeable Preferred Stock representing the New
Preferred Stock will be available to holders that exchange such Old Preferred
Stock in the Exchange Offer. Subject to the foregoing, the Global Security is
not exchangeable, except for a Global Security of the same aggregate
denomination to be registered in the name of the Depository or its nominee. In
addition, certificates representing Old Preferred Stock which is not tendered
for New Preferred Stock will bear a restricted securities legend (unless the
Company determines otherwise in accordance with applicable law) subject, with
respect to such Exchangeable Preferred Stock, to the provisions of such legend.
DESCRIPTION OF THE EXCHANGE DEBENTURES
The Exchange Debentures, if issued, will be issued under the Exchange
Indenture, to be dated as of August 15, 1997 (the "Exchange Indenture"), between
the Company and The Bank of New York, as Trustee (the "Trustee"). The following
is a summary of certain provisions of the Exchange Indenture and the Exchange
Debentures. A copy of the Exchange Indenture and the form of Exchange Debentures
are available upon request to the Company at the address set forth under
"Available Information." The following summary of certain provisions of the
Exchange Indenture does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Exchange
Indenture, including the definitions of certain terms therein and those terms
made a part thereof by the Trust Indenture Act of 1939, as amended. The terms of
the Company's Senior Notes and Series 3 Preferred Stock limit the Company's
ability to issue the Exchange Debentures.
The Exchange Debentures will be unsecured subordinated obligations of the
Company, limited in aggregate principal amount to the liquidation preference of
the Exchangeable Preferred Stock, plus, without duplication, accumulated and
unpaid dividends on the Exchange Date of the Exchangeable Preferred Stock into
Exchange Debentures (plus any additional Exchange Debentures issued in lieu of
cash interest as described herein). The Exchange Debentures will be issued only
in fully registered form, without coupons, in denominations of $1,000 and any
integral multiple of $1,000 (other than as described in "-- Exchangeable
Preferred Stock -- Exchange" or with respect to additional Exchange Debentures
issued in lieu of cash interest as described herein). The Exchange Debentures
will be subordinated to all existing and future senior and senior subordinated
debt of the Company.
Principal of, premium, if any, and interest on the Exchange Debentures will
be payable, and the Exchange Debentures may be presented for registration of
transfer or exchange, at the office of the Paying Agent and Registrar. The
Trustee will initially act as Paying Agent and Registrar. The Company may change
any Paying Agent and Registrar without prior notice to holders of the Exchange
Debentures. Holders of the Exchange Debentures must surrender Exchange
Debentures to the Paying Agent to collect principal payments.
The Exchange Debentures will mature on August 15, 2009. Each Exchange
Debenture will bear interest at the rate of 12 1/2% per annum from the most
recent interest payment date to which interest has been paid or provided for or,
if no interest has been paid or provided for, from the Exchange Date. Interest
will be payable semiannually in cash (or, on or prior to February 15, 2001, in
additional Exchange Debentures, at the option of the Company) in arrears on each
February 15 and August 15, commencing with the first such date after the
Exchange Date. Interest on the Exchange Debentures will be computed on the basis
of a 360-day year comprised of twelve 30-day months and the actual number of
days elapsed.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Exchange Debentures
will not be redeemable at the option of the Company prior to August 15, 2002.
Thereafter, the Exchange Debentures will be redeemable, at the Company's option,
in whole or in part, at any time or from time to time, upon not less than 30 nor
more than 60 days' prior notice mailed by first-class mail to each Holder's
registered address, at the following redemption prices (expressed in percentages
of principal amount), plus accrued interest to the redemption date (subject to
the right of Holders of record on the relevant record date to receive interest
due on the
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relevant interest payment date), if redeemed during the 12-month period
commencing on August 15 of the years set forth below:
<TABLE>
<CAPTION>
PERIOD REDEMPTION PRICE
------ ----------------
<S> <C>
2002................................................. 106.250%
2003................................................. 105.000
2004................................................. 103.750
2005................................................. 102.500
2006................................................. 101.250
2007 and thereafter.................................. 100.000
</TABLE>
In addition, at any time and from time to time prior to August 15, 2000,
the Company may redeem in the aggregate up to 35% of the original principal
amount of the Exchange Debentures with the proceeds of one or more Public Equity
Offerings, at a redemption price (expressed as a percentage of principal amount)
of 112.5% plus accrued interest to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date); provided, however, that at least $195 million
aggregate principal amount of the Exchange Debentures remains outstanding after
each such redemption.
In the case of any partial redemption, selection of the Exchange Debentures
for redemption will be made by the Trustee on a pro rata basis, by lot or by
such other method as the Trustee in its sole discretion shall deem to be fair
and appropriate, although no Exchange Debenture of $1,000 in original principal
amount or less shall be redeemed in part. If any Exchange Debenture is to be
redeemed in part only, the notice of redemption relating to such Exchange
Debenture shall state the portion of the principal amount thereof to be
redeemed. A new Exchange Debenture in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Exchange Debenture.
RANKING
The indebtedness evidenced by the Exchange Debentures will be subordinated,
unsecured obligations of the Company. The payment of the principal of, premium
(if any) and interest on the Exchange Debentures is subordinate in right of
payment, as set forth in the Exchange Indenture, to the prior payment in full of
all Senior Indebtedness (including senior subordinated indebtedness) of the
Company, whether outstanding on the Issue Date or thereafter incurred, including
the obligations of the Company under the Senior Notes.
As of June 30, 1997, the outstanding Indebtedness and other liabilities of
the Company and its subsidiaries was approximately $449.2 million. Although the
Exchange Indenture contains limitations on the amount of additional Indebtedness
that the Company may incur, under certain circumstances the amount of such
Indebtedness could be substantial and, in any case, such Indebtedness may be
Senior Indebtedness. See "-- Certain Covenants -- Limitation on Indebtedness."
A substantial portion of the operations of the Company are conducted
through its subsidiaries. Claims of creditors of such subsidiaries, including
trade creditors, secured creditors and creditors holding indebtedness and
guarantees issued by such subsidiaries, and claims of preferred stockholders (if
any) of such subsidiaries generally will have priority with respect to the
assets and earnings of such subsidiaries over the claims of creditors of the
Company, including holders of the Exchange Debentures, even if such obligations
do not constitute Senior Indebtedness. The Exchange Debentures, therefore, will
be effectively subordinated to creditors (including trade creditors) and
preferred stockholders (if any) of subsidiaries of the Company. At June 30,
1997, the total Indebtedness and other liabilities of the Company's subsidiaries
was approximately $149.6 million, including trade payables. Although the
Exchange Indenture limits the incurrence of Indebtedness and preferred stock of
certain of the Company's subsidiaries, such limitation is subject to a number of
significant qualifications. Moreover, the Exchange Indenture does not impose any
limitation on the incurrence by such subsidiaries of liabilities that are not
considered Indebtedness or Preferred Stock under the Exchange Indenture. See
"-- Certain Covenants -- Limitation on Indebtedness."
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<PAGE> 59
Only Indebtedness of the Company that is Senior Indebtedness (including
senior subordinated indebtedness) will rank senior to the Exchange Debentures in
accordance with the provisions of the Exchange Indenture. The Exchange
Debentures will in all respects rank pari passu with all other Subordinated
Indebtedness of the Company.
The Company may not pay principal of, premium (if any) or interest on, the
Exchange Debentures or make any deposit pursuant to the provisions described
under "Defeasance" below and may not repurchase, redeem or otherwise retire any
Exchange Debentures (collectively, "pay the Exchange Debentures") if (i) any
Designated Senior Indebtedness is not paid when due or (ii) any other default on
Designated Senior Indebtedness occurs and the maturity of such Designated Senior
Indebtedness is accelerated in accordance with its terms unless, in either case,
the default has been cured or waived and any such acceleration has been
rescinded or such Designated Senior Indebtedness has been paid in full. However,
the Company may pay the Exchange Debentures without regard to the foregoing if
the Company and the Trustee receive written notice approving such payment from
the Representative of the Designated Senior Indebtedness with respect to which
either of the events set forth in clause (i) or (ii) of the immediately
preceding sentence has occurred and is continuing. During the continuance of any
default (other than a default described in clause (i) or (ii) of the second
preceding sentence) with respect to any Designated Senior Indebtedness pursuant
to which the maturity thereof may be accelerated immediately without further
notice (except such notice as may be required to effect such acceleration) or
the expiration of any applicable grace periods, the Company may not pay the
Exchange Debentures for a period (a "Payment Blockage Period") commencing upon
the receipt by the Trustee (with a copy to the Company) of written notice (a
"Blockage Notice") of such default from the Representative of the holders of
such Designated Senior Indebtedness specifying an election to effect a Payment
Blockage Period and ending 179 days thereafter (or earlier if such Payment
Blockage Period is terminated (i) by written notice to the Trustee and the
Company from the Person or Persons who gave such Blockage Notice, (ii) because
the default giving rise to such Blockage Notice is no longer continuing or (iii)
because such Designated Senior Indebtedness has been repaid in full).
Notwithstanding the provisions described in the immediately preceding sentence
(but subject to the provisions described in the first sentence of this
paragraph), unless the holders of such Designated Senior Indebtedness or the
Representative of such holders have accelerated the maturity of such Designated
Senior Indebtedness, the Company may resume payments on the Exchange Debentures
after the end of such Payment Blockage Period. The Exchange Debentures shall not
be subject to more than one Payment Blockage Period in any consecutive 360-day
period, irrespective of the number of defaults with respect to Designated Senior
Indebtedness during such period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property, the holders of Senior Indebtedness will
be entitled to receive payment in full of such Senior Indebtedness before the
holders of Exchange Debentures are entitled to receive any payment, and until
the Senior Indebtedness is paid in full, any payment or distribution to which
holders of Exchange Debentures would be entitled but for the subordination
provisions of the Exchange Indenture will be made to holders of such Senior
Indebtedness as their interests may appear. If a distribution is made to holders
of Exchange Debentures that, due to the subordination provisions, should not
have been made to them, such holders are required to hold it in trust for the
holders of Senior Indebtedness and pay it over to them as their interests may
appear.
If payment of the Exchange Debentures is accelerated because of an Event of
Default, the Company or the Trustee shall promptly notify the holders of
Designated Senior Indebtedness or the Representative of such holders of the
acceleration. If any Designated Senior Indebtedness is outstanding, the Company
may not pay the Exchange Debentures until five Business Days after the
Representatives of all the issues of Designated Senior Indebtedness receive
notice of such acceleration and, thereafter, may pay the Exchange Debentures
only if the Exchange Indenture otherwise permits payment at that time.
By reason of the subordination provisions contained in the Exchange
Indenture, in the event of insolvency, creditors of the Company who are holders
of Senior Indebtedness of the Company may recover more, ratably, than the
holders of Exchange Debentures, and creditors of the Company who are not holders
of
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Senior Indebtedness may recover less, ratably, than holders of Senior
Indebtedness and may recover more, ratably, than holders of Exchange Debentures.
The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the Trustee for the payment of principal of and interest on the Exchange
Debentures pursuant to the provisions described under "-- Defeasance."
BOOK-ENTRY, DELIVERY AND FORM
The Exchange Debentures, if issued, will be issued in the form of a Global
Note. The Global Note will be deposited with, or on behalf of, the Depository
and registered in the name of the Depository or its nominee. Except as set forth
below, the Global Note may be transferred, in whole and not in part, only to the
Depository or another nominee of the Depository. Investors may hold their
beneficial interests in the Global Note directly through the Depository if they
have an account with the Depository or indirectly through organizations which
have accounts with the Depository.
Exchange Debentures that are issued as described below under "Certificated
Exchange Debentures" will be issued in definitive form. Upon the transfer of an
Exchange Debenture in definitive form, such Exchange Debenture will, unless the
Global Note has previously been exchanged for Exchange Debentures in definitive
form, be exchanged for an interest in the Global Note representing the principal
amount of Exchange Debentures being transferred.
The Depository has advised the Company as follows: The Depository is a
limited-purpose trust company and organized under the laws of the State of New
York, 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. The
Depository was created to hold securities of institutions that have accounts
with the Depository ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depository's participants include securities brokers and dealers (which may
include the Initial Purchasers), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depository's book-entry system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
whether directly or indirectly.
Upon the issuance of the Global Note, the Depository will credit, on its
book-entry registration and transfer system, the principal amount of the
Exchange Debentures represented by such Global Note to the accounts of
participants. The accounts to be credited shall be designated by the Initial
Purchasers of such Exchange Debentures. Ownership of beneficial interests in the
Global Note will be limited to participants or persons that may hold interests
through participants. Ownership of beneficial interests in the Global Note will
be shown on, and the transfer of those ownership interests will be effected only
through, records maintained by the Depository (with respect to participants'
interest) and such participants (with respect to the owners of beneficial
interests in the Global Note other than participants). The laws of some
jurisdictions may require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and laws may impair
the ability to transfer or pledge beneficial interests in the Global Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of the related Exchange
Debentures for all purposes of such Exchange Debentures and the Exchange
Indenture. Except as set forth below, owners of beneficial interests in the
Global Note will not be entitled to have the Exchange Debentures represented by
the Global Note registered in their names, will not receive or be entitled to
receive physical delivery of certificated Exchange Debentures in definitive form
and will not be considered to be the owners or holders of any Exchange
Debentures under the Global Note. The Company understands that under existing
industry practice, in the event an owner of a beneficial interest in the Global
Note desires to take any action that the Depository, as the holder of the Global
Note, is entitled to take, the Depository would authorize the participants to
take such action, and that the participants would authorize beneficial
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<PAGE> 61
owners owning through such participants to take such action or would otherwise
act upon the instructions of beneficial owners owning through them.
Payment of principal of and interest on Exchange Debentures represented by
the Global Note registered in the name of and held by the Depository or its
nominee will be made to the Depository or its nominee, as the case may be, as
the registered owner and holder of the Global Note.
The Company expects that the Depository or its nominee, upon receipt of any
payment of principal of or interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of the Depository or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in the Global
Note held through such participants will be governed by standing instructions
and customary practices and will be the responsibility of such participants. The
Company will not have any responsibility or liability for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interests in the Global Note for any Exchange Debenture or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests or for any other aspect of the relationship between the Depository and
its participants or the relationship between such participants and the owners of
beneficial interests in the Global Note owning through such participants.
Unless and until it is exchanged in whole or in part for certificated
Exchange Debentures in definitive form, the Global Note may not be transferred
except as a whole by the Depository to a nominee of such Depository or by a
nominee of such Depository to such Depository or another nominee of such
Depository.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the performance by the
Depository or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTIFICATED EXCHANGE DEBENTURES
The Exchange Debentures represented by the Global Note are exchangeable for
certificated Exchange Debentures in definitive form of like tenor as such
Exchange Debentures in denominations of U.S. $1,000 and integral multiples
thereof if (i) the Depository notifies the Company that it is unwilling or
unable to continue as Depository for the Global Note or if at any time the
Depository ceases to be a clearing agency registered under the Exchange Act,
(ii) the Company in its discretion at any time determines not to have all of the
Exchange Debentures represented by the Global Note or (iii) a default entitling
the holders of the Exchange Debentures to accelerate the maturity thereof has
occurred and is continuing. Any Exchange Debenture that is exchangeable pursuant
to the preceding sentence is exchangeable for certificated Exchange Debentures
issuable in authorized denominations and registered in such names as the
Depository shall direct. Subject to the foregoing, the Global Note is not
exchangeable, except for a Global Note of the same aggregate denomination to be
registered in the name of the Depository or its nominee. In addition, such
certificates will bear a restricted securities legend (unless the Company
determines otherwise in accordance with applicable law) subject, with respect to
such Old Preferred Stock, to the provisions of such legend.
CHANGE OF CONTROL
The Exchange Indenture will provide that upon the occurrence of a Change of
Control (as defined under "Description of the Exchangeable Preferred
Stock -- Change of Control"), each holder of Exchange Debentures shall have the
right to require that the Company repurchase such holder's Exchange Debentures
at a purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant interest payment date).
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to
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require the Company to purchase such Holder's Exchange Debentures at a purchase
price in cash equal to 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase (subject to the right of
holders of record on the relevant record date to receive interest on the
relevant interest payment date); (2) the circumstances and relevant facts
regarding such Change of Control (including information with respect to pro
forma historical income, cash flow and capitalization after giving effect to
such Change of Control); (3) the purchase date (which shall be no earlier than
30 days nor later than 60 days from the date such notice is mailed); and (4) the
instructions determined by the Company, consistent with the covenant described
hereunder, that a Holder must follow in order to have its Exchange Debentures
purchased.
The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the purchase of Exchange Debentures pursuant to
the covenant described hereunder. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. The Company has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Exchange Indenture, but
that could increase the amount of indebtedness outstanding at such time or
otherwise affect the Company's capital structure or credit ratings. Restrictions
on the ability of the Company and its Restricted Subsidiaries to incur
additional Indebtedness are contained in the covenants described under
"-- Certain Covenants -- Limitation on Indebtedness." Such restrictions can only
be waived with the consent of the holders of a majority in principal amount of
the Exchange Debentures then outstanding. Except for the limitations contained
in such covenants, however, the Exchange Indenture will not contain any
covenants or provisions that may afford holders of the Exchange Debentures
protection in the event of a highly leveraged transaction.
The indenture governing the Senior Notes contains, and future indebtedness
of the Company may contain, prohibitions on the occurrence of certain events
that would constitute a Change of Control or require such indebtedness to be
repurchased upon a Change of Control. Moreover, the exercise by the holders of
their right to require the Company to repurchase the Exchange Debentures could
cause a default under such indebtedness, even if the Change of Control itself
does not, due to the financial effect of such repurchase on the Company.
Finally, the Company's ability to pay cash to the holders of Exchange Debentures
following the occurrence of a Change of Control may be limited by the Company's
then existing financial resources. There can be no assurance that sufficient
funds will be available when necessary to make any required repurchases. In the
event a Change of Control occurs at a time when the Company is prohibited from
purchasing Exchange Debentures, the Company could seek the consent of its
lenders to make such purchase, or could attempt to refinance the borrowings that
contain such prohibitions. If the Company does not obtain such consent or repay
such borrowings, the Company will remain prohibited from purchasing Exchange
Debentures. The provisions under the Exchange Indenture relative to the
Company's obligation to make an offer to repurchase the Exchange Debentures as a
result of a Change of Control may be waived or modified with the written consent
of the holders of a majority in principal amount of the Exchange Debentures.
CERTAIN COVENANTS
The Exchange Indenture contains covenants including, among others, the
following:
Limitation on Indebtedness. (a) The Company shall not Incur, and shall not
permit any Restricted Subsidiary to Incur, directly or indirectly, any
Indebtedness unless, on the date of such Incurrence and after giving pro forma
effect thereto (including pro forma application of the net proceeds therefrom)
and to any other Indebtedness Incurred or repaid since the end of the period
referred to below and the receipt and application of the proceeds thereof,
either (i) the Indebtedness to Operating Cash Flow Ratio for the
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Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
Indebtedness is Incurred would have been not more than 5 to 1, or (ii) the
Company's Consolidated Capital Ratio as of the end of the most recent fiscal
quarter for which internal financial statements are available immediately
preceding the date on which such Indebtedness is Incurred is less than 2.0 to
1.0.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur any or all of the following Indebtedness:
(1) Indebtedness Incurred pursuant to one or more Credit Agreements;
provided, however, that, after giving effect to any such Incurrence, the
aggregate principal amount of such Indebtedness then outstanding does not
exceed the greater of (A) $150,000,000 and (B) 85% of the book value of the
Accounts Receivables of the Company and its Restricted Subsidiaries;
(2) Indebtedness owed to and held by the Company or a Restricted
Subsidiary; provided, however, that any subsequent issuance or transfer of
any Capital Stock which results in any Restricted Subsidiary ceasing to be
a Restricted Subsidiary or any subsequent transfer of such Indebtedness
(other than to the Company or another Restricted Subsidiary) shall be
deemed, in each case, to constitute the Incurrence of such Indebtedness by
the issuer thereof;
(3) the Exchange Debentures (including Exchange Debentures issued in
lieu of cash interest payments with respect to Exchange Debentures);
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this covenant);
(5) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (3) or (4) or this clause
(5);
(6) Hedging Obligations consisting of Interest Rate Agreements
directly related to Indebtedness permitted to be Incurred by the Company
and its Restricted Subsidiaries pursuant to the Exchange Indenture;
(7) Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case Incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property used in the business of the Company
or such Restricted Subsidiary;
(8) In the event that the PSINet Shares are held by the Company or a
Restricted Subsidiary, the Incurrence by the Company or such Restricted
Subsidiary of Permitted PSINet Non-Recourse Debt; and
(9) Indebtedness in an aggregate principal amount at any time
outstanding which, together with the amount of all other Indebtedness of
the Company and its Restricted Subsidiaries outstanding on the date of such
Incurrence (other than Indebtedness permitted by clauses (1) - (8) above
and paragraph (a)), does not exceed 5% of Consolidated Tangible Assets.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations unless
such Indebtedness shall be subordinated to the Exchange Debentures to at least
the same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in its sole discretion,
will classify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
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Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to make a Restricted
Payment if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (1) a Default shall have occurred and be continuing (or
would result therefrom); (2) the Company is not able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness"; or (3) the aggregate amount of such Restricted
Payment and all other Restricted Payments since the Issue Date would exceed the
sum of:
(A) an amount equal to the Cumulative Operating Cash Flow for the
period (taken as one accounting period) from the beginning of the first
full fiscal quarter commencing after the Issue Date to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment less 1.50
times the Company's Cumulative Consolidated Interest expense for such
period;
(B) the aggregate Net Cash Proceeds received by the Company from the
issuance or sale of its Capital Stock (other than Disqualified Stock)
subsequent to the Issue Date (other than an issuance or sale to a
Subsidiary of the Company and other than an issuance or sale to an employee
stock ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees);
(C) the amount by which Indebtedness of the Company is reduced on the
Company's balance sheet upon the conversion or exchange (other than by a
Subsidiary of the Company) subsequent to the Issue Date of any Indebtedness
of the Company convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any cash, or the
fair value of any other property, distributed by the Company upon such
conversion or exchange); and
(D) an amount equal to the sum of (i) the net reduction in Investments
in any Person resulting from dividends, repayments of loans or advances or
other transfers of assets (but excluding such interest, dividends,
repayments, advances or other transfers of assets to the extent any such
item increases Consolidated Net Income), in each case to the Company or any
Restricted Subsidiary from any Person (including, without limitation, from
Unrestricted Subsidiaries), and (ii) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of
the net assets of an Unrestricted Subsidiary at the time such Unrestricted
Subsidiary is designated a Restricted Subsidiary; provided, however, that
the foregoing sum shall not exceed, in the case of any Person (including
any Unrestricted Subsidiary), the amount of Investments previously made
(and treated as a Restricted Payment) by the Company or any Restricted
Subsidiary in such Person.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(i) any Restricted Payment made out of the proceeds of the
substantially concurrent sale of, or any acquisition of any Capital Stock
of the Company made by exchange for, Capital Stock of the Company (other
than Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary of the Company or an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the benefit of
their employees); provided, however, that (A) such Restricted Payment shall
be excluded in the calculation of the amount of Restricted Payments and (B)
the Net Cash Proceeds from such sale shall be excluded from the calculation
of amounts under clause (3)(B) of paragraph (a) above;
(ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent sale
of, Indebtedness of the Company which is permitted to be Incurred pursuant
to the covenant described under "-- Limitation on Indebtedness"; provided,
however, that such purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value shall be excluded in the calculation of
the amount of Restricted Payments;
(iii) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with this covenant; provided, however, that at the time of payment of such
dividend, no other Default shall have occurred and be continuing (or result
therefrom); provided
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further, however, that such dividend shall be included in the calculation
of the amount of Restricted Payments;
(iv) the repurchase or other acquisition of shares of, or options to
purchase shares of, common stock of the Company or any of its Subsidiaries
from employees, former employees, directors or former directors of the
Company or any of its Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant to
the terms of the agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors under which such
individuals purchase or sell or are granted the option to purchase or sell,
shares of such common stock; provided, however, that the aggregate amount
of such repurchases and other acquisitions shall not exceed $1,000,000 in
any calendar year; provided further, however, that such repurchases and
other acquisitions shall be excluded in the calculation of the amount of
Restricted Payments; or
(v) dividends paid on the Convertible Preferred Stock pursuant to its
terms; provided, however,that at the time of any such payment no Default
shall have occurred and be continuing (or result therefrom); provided
further, however, that such dividends shall be excluded in the calculation
of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (a) pay dividends or make any other distributions on its Capital
Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed to
the Company, (b) make any loans or advances to the Company or (c) transfer any
of its property or assets to the Company, except:
(i) any encumbrance or restriction pursuant to an agreement in effect
at or entered into on the Issue Date;
(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred
by such Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by the Company (other than Indebtedness
Incurred as consideration in, or to provide all or any portion of the funds
or credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by the Company) and outstanding on
such date;
(iii) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an agreement
referred to in clause (i) or (ii) of this covenant or this clause (iii) or
contained in any amendment to an agreement referred to in clause (i) or
(ii) of this covenant or this clause (iii); provided, however, that the
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in any such refinancing agreement or amendment are no less
favorable to the holders of Exchange Debentures than encumbrances and
restrictions with respect to such Restricted Subsidiary contained in such
predecessor agreements;
(iv) any such encumbrance or restriction consisting of customary
non-assignment provisions in leases governing leasehold interests to the
extent such provisions restrict the transfer of the lease or the property
leased thereunder;
(v) in the case of clause (c) above, restrictions contained in IRU
Agreements, security agreements or mortgages securing Indebtedness or other
obligations of a Restricted Subsidiary to the extent such restrictions
restrict the transfer of the property subject to such security agreements
or mortgages;
(vi) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition; and
(vii) any such encumbrance or restriction contained in the PSINet
Agreement.
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Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall
not, and shall not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless (i) the Company (or such Restricted
Subsidiary, as the case may be) receives consideration at the time of such Asset
Disposition at least equal to the fair market value (evidenced by a resolution
of the Board of Directors as set forth in an Officers' Certificate delivered to
the Trustee), (ii) after giving effect to such Asset Disposition, the non-cash
consideration received in connection with all Asset Dispositions for the period
beginning on the Issue Date through and including the date of such proposed
Asset Disposition, less cash received in connection with the sale, disposition,
transfer or other conversion of non-cash consideration received in connection
with Asset Dispositions during such period, does not exceed 5% of the Company's
Consolidated Tangible Assets after giving effect to such Asset Disposition and
(iii) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted Subsidiary, as the
case may be) (A) first, to the extent the Company elects (or is required by the
terms of any Indebtedness), to prepay, repay, redeem or purchase Senior
Indebtedness or Indebtedness (other than any Disqualified Stock) of a Restricted
Subsidiary (in each case other than Indebtedness owed to the Company or an
Affiliate of the Company, unless permitted pursuant to the last sentence of
paragraph (b) of the covenant described under "-- Limitation on Affiliate
Transactions") within one year from the later of the date of such Asset
Disposition or the receipt of such Net Available Cash; (B) second, to the extent
of the balance of such Net Available Cash after application in accordance with
clause (A), to the extent the Company elects, to acquire Additional Assets
within one year from the later of the date of such Asset Disposition or the
receipt of such Net Available Cash; and (C) third, to the extent of the balance
of such Net Available Cash after application in accordance with clauses (A) and
(B), to make an offer to the holders of the Exchange Debentures (and to holders
of other Subordinated Indebtedness designated by the Company) to purchase
Exchange Debentures (and such other Subordinated Indebtedness) pursuant to and
subject to the conditions contained in the Exchange Indenture; provided,
however, that in connection with any prepayment, repayment or purchase of
Indebtedness pursuant to clause (A) or (C) above, the Company or such Restricted
Subsidiary shall permanently retire such Indebtedness and shall cause the
related loan commitment (if any) to be permanently reduced in an amount equal to
the principal amount so prepaid, repaid or purchased. Notwithstanding the
foregoing provisions of this paragraph, the Company and the Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
with this paragraph except to the extent that the aggregate Net Available Cash
from all Asset Dispositions which are not applied in accordance with this
paragraph exceeds $10 million. Pending application of Net Available Cash
pursuant to this covenant, such Net Available Cash shall be invested in
Permitted Investments.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the assumption of Indebtedness of the Company or any
Restricted Subsidiary and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such Asset
Disposition (which assumption shall also constitute a repayment of Indebtedness
pursuant to the preceding paragraph) and (y) securities received by the Company
or any Restricted Subsidiary from the transferee that are promptly converted by
the Company or such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that results in the purchase of
the Exchange Debentures (and other Subordinated Indebtedness) pursuant to clause
(a)(ii)(C) above, the Company will be required to purchase Exchange Debentures
tendered pursuant to an offer by the Company for the Exchange Debentures (and
other Subordinated Indebtedness) at a purchase price of 100% of their principal
amount (without premium) plus accrued but unpaid interest (or, in respect of
such other Subordinated Indebtedness, such lesser price, if any, as may be
provided for by the terms of, or agreed to by the holders of, such Subordinated
Indebtedness) in accordance with the procedures (including prorating in the
event of oversubscription) set forth in the Exchange Indenture. The Company
shall not be required to make such an offer to purchase Exchange Debentures (and
other Subordinated Indebtedness) pursuant to this covenant if the Net Available
Cash available therefor is less than $10 million (which lesser amount shall be
carried forward for purposes of determining whether such an offer is required
with respect to the Net Available Cash from any subsequent Asset Disposition).
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(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Exchange Debentures pursuant
to this covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless (i) such Affiliate
Transaction is on terms that are no less favorable to the Company or the
relevant Restricted Subsidiary than those that would have been obtained in a
comparable transaction by the Company or such Restricted Subsidiary with an
unrelated Person and (ii) the Company delivers to the Trustee (a) with respect
to any Affiliate Transaction involving aggregate consideration in excess of
$1,000,000 a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction involving aggregate consideration in excess of
$10,000,000, other than transactions with GE Capital Communication and Excluded
PSINet Transactions, an opinion as to the fairness to the Company or such
Restricted Subsidiary of such Affiliate Transaction from a financial point of
view issued by an investment banking firm of national standing.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i)
any Restricted Payment permitted to be paid pursuant to the covenant described
under "-- Limitation on Restricted Payments," (ii) any issuance of securities,
or other payments, awards or grants in cash, securities or otherwise pursuant
to, or the funding of, employment arrangements, stock options and stock
ownership plans approved by the Board of Directors, (iii) the grant of stock
options or similar rights to employees and directors of the Company pursuant to
plans approved by the Board of Directors, (iv) loans or advances to employees in
the ordinary course of business in accordance with the past practices of the
Company or its Restricted Subsidiaries, but in any event not to exceed $500,000
in the aggregate outstanding at any one time, (v) any employment or consulting
arrangement or agreement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business and consistent with the past
practice of the Company or such Restricted Subsidiary, (vi) the payment of
reasonable fees to directors of the Company and its Restricted Subsidiaries who
are not employees of the Company or its Restricted Subsidiaries, (vii) any
Affiliate Transaction between the Company and a Restricted Subsidiary or between
Restricted Subsidiaries, (viii) transactions in connection with Permitted
Businesses between the Company and GE Capital Communication, (ix) transactions
between the Company or any Restricted Subsidiary specifically contemplated by
the PSINet Agreement and (x) the issuance or sale of any Capital Stock (other
than Disqualified Stock) of the Company. Notwithstanding the foregoing,
Affiliate Transactions shall not include any transaction involving the sale,
purchase, repurchase, redemption, transfer, exchange or other acquisition or
disposition of Senior Notes, Exchange Debentures or Convertible Preferred Stock
by or from, or the payment of principal of, premium, if any, and interest on, or
liquidation preference of and dividend on, any Senior Notes, Exchange Debentures
or Convertible Preferred Stock, as the case may be, to any Affiliate of the
Company or any Affiliate of a Restricted Subsidiary of the Company; provided,
however, that such transaction is offered substantially concurrently to all
other holders of Senior Notes, Exchange Debentures or Convertible Preferred
Stock, as the case may be, on the same terms and conditions; provided further,
however, that such transaction is approved by a majority of the disinterested
members of the Board of Directors, other than transactions in connection with
the payment of principal of, premium, if any, and interest on, or liquidation
preference of and dividends on, Senior Notes, Exchange Debentures or Convertible
Preferred Stock, as the case may be, pursuant to the provisions of the indenture
or certificate of designation governing the payment of interest and principal,
dividends and liquidation preference, optional redemption, repurchases from the
proceeds of an asset disposition and repurchases upon a change of control.
Limitation on the Sale or Issuance of Common Stock of Restricted
Subsidiaries. The Company shall not sell or otherwise dispose of any Common
Stock of a Restricted Subsidiary, and shall not permit any Restricted
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Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any
of its Common Stock except (i) to the Company or a Wholly Owned Subsidiary, (ii)
if, immediately after giving effect to such issuance, sale or other disposition,
neither the Company nor any of its Subsidiaries own any Common Stock of such
Restricted Subsidiary or (iii) if, immediately after giving effect to such
issuance, sale or other disposition, such Restricted Subsidiary would no longer
constitute a Restricted Subsidiary and any Investment in such Person remaining
after giving effect thereto would have been permitted to be made under the
covenant described under "-- Limitation on Restricted Payments" if made on the
date of such issuance, sale or other disposition.
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "Successor Company") shall be
a Person organized and existing under the laws of the United States of America,
any State thereof or the District of Columbia and the Successor Company (if not
the Company) shall expressly assume, by an indenture supplemental thereto,
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Company under the Exchange Debentures and the Exchange
Indenture; (ii) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor Company
or any Subsidiary as a result of such transaction as having been Incurred by
such Successor Company or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing, (iii) immediately after giving
effect to such transaction, the Successor Company would be able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under "-- Limitation on Indebtedness;" (iv) immediately after giving
effect to such transaction, the Successor Company shall have Consolidated Net
Worth in an amount that is not less than the Consolidated Net Worth of the
Company immediately prior to such transaction; and (v) the Company shall have
delivered to the Trustee an Officers' Certificate, stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Exchange Indenture.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Exchange Indenture, but the predecessor Company in the
case of a conveyance, transfer or lease shall not be released from the
obligation to pay the principal of and interest on the Exchange Debentures
except in the case of a sale, assignment, transfer, lease, conveyance or other
disposition of all the Company's assets that meets the requirements described in
the preceding paragraph.
SEC Reports. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall file with the SEC and provide the Trustee and holders of
the Exchange Debentures with such annual reports and such information, documents
and other reports as are specified in Sections 13 and 15(d) of the Exchange Act
and applicable to a U.S. corporation subject to such Sections, such information,
documents and other reports to be so filed and provided at the times specified
for the filing of such information, documents and reports under such Sections.
DEFAULTS
An Event of Default is defined in the Exchange Indenture as (i) a default
in the payment of interest on the Exchange Debentures when due and continued for
30 days, (ii) a default in the payment of principal of any Exchange Debenture
when due at its Stated Maturity, upon optional redemption, upon required
repurchase, upon declaration or otherwise, (iii) the failure by the Company to
comply with its obligations under "-- Certain Covenants -- Merger and
Consolidation" above, (iv) the failure by the Company to comply for 30 days
after notice with any of its obligations in the covenants described above under
"Change of Control" (other than a failure to purchase Exchange Debentures) or
under "-- Certain Covenants" under "-- Limitation on Indebtedness,"
"-- Limitation on Restricted Payments," "-- Limitation on Restrictions on
Distributions from Restricted Subsidiaries," "-- Limitation on Sales of Assets
and Subsidiary Stock" (other than a failure to purchase Exchange Debentures),
"-- Limitation on Affiliate Transactions," "-- Limitation on the Sale or
Issuance of Common Stock of Restricted Subsidiaries" or "-- SEC Reports," (v)
the failure by the Company to comply for 60 days after notice with its other
agreements contained in the Exchange Indenture, (vi) Indebtedness of the Company
or any Significant Subsidiary (other than any Permitted
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PSINet Non-Recourse Debt) is not paid within any applicable grace period after
final maturity or is accelerated by the holders thereof because of a default and
the total amount of such Indebtedness unpaid or accelerated exceeds $5 million
(the "cross acceleration provision"), (vii) certain events of bankruptcy,
insolvency or reorganization of the Company or a Significant Subsidiary (the
"bankruptcy provisions") or (viii) any judgment or decree for the payment of
money in excess of $5 million is entered against the Company or a Significant
Subsidiary, remains outstanding for a period of 60 days following such judgment
and is not discharged, waived or stayed within 10 days after notice (the
"judgment default provision"). However, a default under clauses (iv), (v) and
(viii) will not constitute an Event of Default until the Trustee or the holders
of 25% in principal amount of the outstanding Exchange Debentures notify the
Company of the default and the Company does not cure such default within the
time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Exchange Debentures may
declare the principal of and accrued but unpaid interest on all the Exchange
Debentures to be due and payable. Upon such a declaration, such principal and
interest shall be due and payable immediately. If an Event of Default relating
to certain events of bankruptcy, insolvency or reorganization of the Company
occurs and is continuing, the principal of and interest on all the Exchange
Debentures will ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holders of the
Exchange Debentures. Under certain circumstances, the holders of a majority in
principal amount of the outstanding Exchange Debentures may rescind any such
acceleration with respect to the Exchange Debentures and its consequences.
Subject to the provisions of the Exchange Indenture relating to the duties of
the Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Exchange Indenture at the request or direction of any of the holders of the
Exchange Debentures unless such holders have offered to the Trustee reasonable
indemnity or security against any loss, liability or expense. Except to enforce
the right to receive payment of principal, premium (if any) or interest when
due, no holder of an Exchange Debenture may pursue any remedy with respect to
the Exchange Indenture or the Exchange Debentures unless (i) such holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
holders of at least 25% in principal amount of the outstanding Exchange
Debentures have requested the Trustee to pursue the remedy, (iii) such holders
have offered the Trustee reasonable security or indemnity against any loss,
liability or expense, (iv) the Trustee has not complied with such request within
60 days after the receipt thereof and the offer of security or indemnity and (v)
the holders of a majority in principal amount of the outstanding Exchange
Debentures have not given the Trustee a direction inconsistent with such request
within such 60-day period. Subject to certain restrictions, the holders of a
majority in principal amount of the outstanding Exchange Debentures are given
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or of exercising any trust or power
conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Exchange Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other holder of an
Exchange Debenture or that would involve the Trustee in personal liability.
The Exchange Indenture provides that if a Default occurs and is continuing
and is known to the Trustee, the Trustee must mail to each holder of the
Exchange Debentures notice of the Default within 90 days after it occurs. Except
in the case of a Default in the payment of principal of or interest on any
Exchange Debenture, the Trustee may withhold notice if and so long as a
committee of its trust officers determines that withholding notice is not
opposed to the interest of the holders of the Exchange Debentures. In addition,
the Company is required to deliver to the Trustee, within 120 days after the end
of each fiscal year, a certificate indicating whether the signers thereof know
of any Default that occurred during the previous year. The Company also is
required to deliver to the Trustee, within 30 days after the occurrence thereof,
written notice of any event which would constitute certain Defaults, their
status and what action the Company is taking or proposes to take in respect
thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Exchange Indenture may be amended with
the consent of the holders of a majority in principal amount of the Exchange
Debentures then outstanding (including consents obtained
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in connection with a tender offer or exchange for the Exchange Debentures) and
any past default or compliance with any provisions may also be waived with the
consent of the holders of a majority in principal amount of the Exchange
Debentures then outstanding. However, without the consent of each holder of an
outstanding Exchange Debenture affected thereby, no amendment may, among other
things, (i) reduce the amount of Exchange Debentures whose holders must consent
to an amendment, (ii) reduce the rate of or extend the time for payment of
interest on any Exchange Debenture, (iii) reduce the principal of or extend the
Stated Maturity of any Exchange Debenture, (iv) reduce the premium payable upon
the redemption of any Exchange Debenture or change the time at which any
Exchange Debenture may be redeemed as described under "-- Optional Redemption",
(v) make any Exchange Debenture payable in money other than that stated in the
Exchange Debenture, (vi) impair the right of any holder of the Exchange
Debentures to receive payment of principal of and interest on such holder's
Exchange Debentures on or after the due dates therefor or to institute suit for
the enforcement of any payment on or with respect to such holder's Exchange
Debentures, (vii) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions or (viii) make any change to the
subordination provisions of the Exchange Indenture that would adversely affect
the holders of Exchange Debentures.
Without the consent of any holder of the Exchange Debentures, the Company
and Trustee may amend the Exchange Indenture to cure any ambiguity, omission,
defect or inconsistency, to provide for the assumption by a successor
corporation of the obligations of the Company under the Exchange Indenture, to
provide for uncertificated Exchange Debentures in addition to or in place of
certificated Exchange Debentures (provided that the uncertificated Exchange
Debentures are issued in registered form for purposes of Section 163(f) of the
Code, or in a manner such that the uncertificated Exchange Debentures are
described in Section 163(f)(2)(B) of the Code), to add guarantees with respect
to the Exchange Debentures, to secure the Exchange Debentures, to add to the
covenants of the Company for the benefit of the holders of the Exchange
Debentures or to surrender any right or power conferred upon the Company, to
make any change that does not adversely affect the rights of any holder of the
Exchange Debentures or to comply with any requirement of the SEC in connection
with the qualification of the Exchange Indenture under the Trust Indenture Act.
However, no amendment may be made to the subordination provisions of the
Exchange Indenture that adversely affects the rights of any holder of Senior
Indebtedness then outstanding unless the holders of such Senior Indebtedness (or
their Representative) consent to such change.
The consent of the holders of the Exchange Debentures is not necessary
under the Exchange Indenture to approve the particular form of any proposed
amendment. It is sufficient if such consent approves the substance of the
proposed amendment.
After an amendment under the Exchange Indenture becomes effective, the
Company is required to mail to holders of the Exchange Debentures a notice
briefly describing such amendment. However, the failure to give such notice to
all holders of the Exchange Debentures, or any defect therein, will not impair
or affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the
Exchange Debentures and the Exchange Indenture ("legal defeasance"), except for
certain obligations, including those respecting the defeasance trust and
obligations to register the transfer or exchange of the Exchange Debentures, to
replace mutilated, destroyed, lost or stolen Exchange Debentures and to maintain
a registrar and paying agent in respect of the Exchange Debentures. The Company
at any time may terminate its obligations under "Change of Control" and under
the covenants described under "-- Certain Covenants" (other than the covenant
described under "-- Merger and Consolidation"), the operation of the cross
acceleration provision, the bankruptcy provisions with respect to Significant
Subsidiaries and the judgment default provision described under "-- Defaults"
above and the limitations contained in clauses (iii) and (iv) under "-- Certain
Covenants -- Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Exchange Debentures
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may not be accelerated because of an Event of Default with respect thereto. If
the Company exercises its covenant defeasance option, payment of the Exchange
Debentures may not be accelerated because of an Event of Default specified in
clause (iv), (vi), (vii) (with respect only to Significant Subsidiaries) or
(viii) under "-- Defaults" above or because of the failure of the Company to
comply with clause (iii) or (iv) under "-- Certain Covenants -- Merger and
Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Exchange
Debentures to redemption or maturity, as the case may be, and must comply with
certain other conditions, including delivery to the Trustee of an Opinion of
Counsel to the effect that holders of the Exchange Debentures will not recognize
income, gain or loss for Federal income tax purposes as a result of such deposit
and defeasance and will be subject to Federal income tax on the same amounts and
in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
The Bank of New York is to be the Trustee under the Exchange Indenture and
has been appointed by the Company as Registrar and Paying Agent with regard to
the Exchange Debentures.
The Holders of a majority in principal amount of the outstanding Exchange
Debentures will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Exchange Indenture provides that if an Event
of Default occurs (and is not cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Exchange Indenture
at the request of any holder of Exchange Debentures, unless such Holder shall
have offered to the Trustee security and indemnity satisfactory to it against
any loss, liability or expense and then only to the extent required by the terms
of the Exchange Indenture.
GOVERNING LAW
The Exchange Indenture provides that it and the Exchange Debentures will be
governed by, and construed in accordance with, the laws of the State of New York
without giving effect to applicable principles of conflicts of law to the extent
that the application of the law of another jurisdiction would be required
thereby.
CERTAIN DEFINITIONS
"Accounts Receivable" means, with respect to any Person, all accounts
receivable of such Person net of allowances for uncollectible accounts,
discounts, refunds and all other allowances as determined in accordance with
GAAP.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by the Company or another Restricted Subsidiary or (iii)
Capital Stock in any Person that at such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described in clauses (ii)
or (iii) above is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "-- Certain Covenants -- Limitation
on Restricted Payments,"
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"-- Certain Covenants -- Limitation on Affiliate Transactions" and "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only,
"Affiliate" shall also mean any beneficial owner of Capital Stock representing
10% or more of the total voting power of the Voting Stock (on a fully diluted
basis) of the Company or of rights or warrants to purchase such Capital Stock
(whether or not currently exercisable) and any Person who would be an Affiliate
of any such beneficial owner pursuant to the first sentence hereof.
"Asset Disposition" means (i) the sale, lease, conveyance or other
disposition of any assets (including by way of a sale and leaseback) other than
in the ordinary course of business consistent with past practices (provided that
the sale, lease, conveyance or other disposition of all or substantially all the
assets of the Company and its Restricted Subsidiaries taken as a whole will be
deemed not to constitute an Asset Disposition but will be governed by the
covenant described under "-- Certain Covenants -- Merger and Consolidation", and
not by the covenant described under "-- Certain Covenants -- Limitation on Sales
of Assets and Subsidiary Stock") and (ii) the issue or sale by the Company or
any of its Restricted Subsidiaries of Capital Stock of any of the Company's
Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a
single transaction or a series of related transactions (a) that have a fair
market value in excess of $1,000,000 or (b) for net proceeds in excess of
$1,000,000. Notwithstanding the foregoing: (i) a transfer of assets by the
Company to its Wholly Owned Subsidiaries or by its Restricted Subsidiaries to
the Company or to another of the Company's Wholly Owned Subsidiaries, (ii) an
issuance of Capital Stock by a Wholly Owned Subsidiary of the Company to the
Company or to another of the Company's Wholly Owned Subsidiaries, (iii) a
Restricted Payment that is not prohibited by the covenant described under
"-- Certain Covenants -- Limitation on Restricted Payments," (iv) an issuance or
sale of Capital Stock of an Unrestricted Subsidiary, (v) an Asset Swap and (vi)
the sale of any IRU pursuant to IRU Agreements the network of the Company and
its Restricted Subsidiaries (including, without limitation, sales of IRUs
specifically provided for in the PSINet Agreement), will be deemed not to
constitute Asset Dispositions.
"Asset Swap" means an exchange of assets by the Company or any of its
Restricted Subsidiaries for one or more Permitted Businesses, assets to be used
in a Permitted Business, or for a controlling equity interest in any Person
whose assets consist primarily of one or more Permitted Businesses.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the dividend or
interest rate borne by the Exchangeable Preferred Stock or the Exchange
Debentures, as the case may be, compounded annually) of the total obligations of
the lessee for rental payments during the remaining term of the lease included
in such Sale/Leaseback Transaction (including any period for which such lease
has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, rights to purchase,
warrants, options, participations or other equivalents of or interests in
(however designated) equity of such Person, including any Preferred Stock, but
excluding any debt securities convertible into or exchangeable for such equity.
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"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Capital Ratio" of any Person as of any date means the ratio
of (i) the aggregate consolidated principal amount of Indebtedness of such
Person then outstanding to (ii) the greater of either (a) the aggregate
consolidated paid-in capital of such Person as of such date or (b) the
stockholders' equity as of such date as shown on the consolidated balance sheet
of such Person determined in accordance with GAAP.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, without duplication, (i)
interest expense attributable to capital leases and the interest expense
attributable to leases constituting part of a Sale/ Leaseback Transaction, (ii)
amortization of debt discount and debt issuance cost, (iii) capitalized
interest, (iv) non-cash interest expenses, (v) commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing, (vi) net costs associated with Hedging Obligations (including
amortization of fees), (vii) Preferred Stock dividends in respect of all (A)
Preferred Stock of Restricted Subsidiaries and (B) Preferred Stock of the
Company that is Disqualified Stock, in each case held by Persons other than the
Company or a Restricted Subsidiary, (viii) interest incurred in connection with
Investments in discontinued operations, (ix) interest accruing on any
Indebtedness of any other Person to the extent such Indebtedness is Guaranteed
by (or secured by the assets of) the Company or any Restricted Subsidiary and
(x) the cash contributions to any employee stock ownership plan or similar trust
to the extent such contributions are used by such plan or trust to pay interest
or fees to any Person (other than the Company) in connection with Indebtedness
Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income:
(i) any net income of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that subject to the exclusion
contained in clause (iv) below, the net income of any such Person for such
period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such
period to the Company or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution paid
to a Restricted Subsidiary, to the limitations contained in clause (iii)
below);
(ii) any net income (or loss) of any Person acquired by the Company or
a Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition;
(iii) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that subject to
the exclusion contained in clause (iv) below, the net income of any such
Restricted Subsidiary for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Restricted Subsidiary during such period to the Company
or another Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution paid to another
Restricted Subsidiary, to the limitation contained in this clause);
(iv) any gain (but not loss) realized upon the sale or other
disposition of any assets of the Company, its consolidated Subsidiaries or
any other Person (including pursuant to any sale-and-leaseback arrangement)
which is not sold or otherwise disposed of in the ordinary course of
business and any gain (but not loss) realized upon the sale or other
disposition of any Capital Stock of any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purposes of the covenant described under
"Certain Covenants -- Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from any Person (including any
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Unrestricted Subsidiary) to the Company or a Restricted Subsidiary to the extent
such dividends, repayments or transfers increase the amount of Restricted
Payments permitted under such covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of: (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that by
its terms is not entitled to the payment of dividends unless such dividends may
be declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the Issue Date in the book value of any asset
owned by such Person or a consolidated Subsidiary of such Person, (y) all
investments as of such date in unconsolidated Subsidiaries and in Persons that
are not Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, as determined in accordance with GAAP.
"Consolidated Tangible Assets" means, with respect to any Person as of any
date, the sum of the consolidated gross book value as reflected in accounting
books and records of such Person of all its property, both real and personal,
less (i) the net book value of all its licenses, patents, patent applications,
copyrights, trademarks, tradenames, goodwill, non-compete agreements or
organizational expenses and other like intangibles, (ii) unamortized debt
discount and expenses, (iii) all reserves for depreciation, obsolescence,
depletion and amortization of its properties and (iv) all other proper reserves
which should be provided in connection with the business conducted by such
Person, all of the foregoing as determined in accordance with GAAP.
"Convertible Preferred Stock" means the Company's 7 1/4% Junior Convertible
Preferred Stock Due 2007.
"Credit Agreements" means one or more debt facilities or commercial paper
facilities with banks or other institutional lenders providing for revolving
credit loans, term loans, receivables financing (including through the sale of
receivables to such lenders or to special purpose entities formed to borrow from
such lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time.
"Cumulative Consolidated Interest Expense" means, with respect to any
Person, as of any date of determination, Consolidated Interest Expense for the
period (taken as one accounting period) from the beginning of the first fiscal
quarter commencing after the Issue Date to the end of such Person's most
recently ended fiscal quarter for which internal financial statements are
available at such date of determination.
"Cumulative Operating Cash Flow" means, as of any date of determination,
Operating Cash Flow for the Company and its Restricted Subsidiaries for the
period (taken as one accounting period) from the beginning of the first fiscal
quarter commencing after the Issue Date to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at such date of determination.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, in the case of the Exchangeable Preferred Stock, a Voting Rights
Triggering Event and, in the case of the Exchange Debentures, an Event of
Default.
"Designated Senior Indebtedness" means (i) the Senior Notes and any
Indebtedness Incurred pursuant to clause (1) of paragraph (b) of the covenant
described under "-- Certain Covenants -- Limitation on Indebtedness" and (ii)
any other Senior Indebtedness of the Company which, at the date of
determination, has an aggregate principal amount outstanding of, or under which,
at the date of determination, the holders thereof are committed to lend up to,
at least $25 million and is specifically designated by the Company in the
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instrument evidencing or governing such Senior Indebtedness as "Designated
Senior Indebtedness" for purposes of the Exchange Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable at the option of the holder thereof, in whole or in part, in
each case on or prior to the first anniversary of the Stated Maturity of the
Exchange Debentures; provided, however, that any Capital Stock that would not
constitute Disqualified Stock but for provisions thereof giving holders thereof
the right to require such Person to repurchase or redeem such Capital Stock upon
the occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversary of the Stated Maturity of the Exchange Debentures shall not
constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are not more favorable to the
holders of such Capital Stock than the provisions described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and "-- Certain
Covenants -- Change of Control"; provided further, however, that the Company's
Convertible Preferred Stock outstanding on the Issue Date shall be deemed not to
constitute Disqualified Stock.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Date" means the date on which the Exchange Debentures are
exchanged for the Exchangeable Preferred Stock.
"Excluded PSINet Transactions" means any transaction between the Company or
any of its Restricted Subsidiaries with PSINet Inc., so long as at the time of
engaging in, or contracting to engage in, such transaction, the Company and its
Subsidiaries have not acquired shares of PSINet Common Stock other than the
PSINet Shares.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
"GE Capital Communications" means GE Capital Communications Services
Corporation.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such Person or (ii) entered into for the purpose of assuring in
any other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" means the Person in whose name, in the case of the Exchangeable
Preferred Stock, a share of Exchangeable Preferred Stock is registered on the
Transfer Agent's books or, in the case of the Exchange Debentures, an Exchange
Debenture is registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a
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correlative meaning. The accretion of principal of a non-interest bearing or
other discount security shall be deemed the Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(i) the principal in respect of (A) indebtedness of such Person for
money borrowed and (B) indebtedness evidenced by Exchange Debentures,
debentures, bonds or other similar instruments for the payment of which
such Person is responsible or liable, including, in each case, any premium
on such indebtedness to the extent such premium has become due and payable;
(ii) all Capital Lease Obligations of such Person and all Attributable
Debt in respect of Sale/ Leaseback Transactions entered into by such
Person;
(iii) all obligations of such Person issued or assumed as the deferred
purchase price of property, and all obligations of such Person under any
title retention agreement (but excluding trade accounts payable arising in
the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in clauses (i)
through (iii) above) entered into in the ordinary course of business of
such Person to the extent such letters of credit are not drawn upon or, if
and to the extent drawn upon, such drawing is reimbursed no later than the
tenth Business Day following payment on the letter of credit);
(v) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Subsidiary of such Person, the liquidation preference
with respect to, any Preferred Stock (but excluding, in each case, any
accrued dividends) of such Subsidiary (which will constitute Indebtedness
Incurred by such Subsidiary and not Indebtedness Incurred by such Person);
(vi) all obligations of the type referred to in clauses (i)through (v)
of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee;
(vii) all obligations of the type referred to in clauses (i) through
(vi) of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of
such property or assets or the amount of the obligation so secured; and
(viii) to the extent not otherwise included in this definition,
Hedging Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date.
"Indebtedness to Operating Cash Flow Ratio" means, as of any date of
determination, the ratio of (a) the aggregate principal amount of all
outstanding Indebtedness of a Person and its Restricted Subsidiaries as of such
date on a consolidated basis, plus the aggregate liquidation preference of all
outstanding Preferred Stock of the Restricted Subsidiaries of such Person as of
such date (excluding any such Preferred Stock held by such Person or a Wholly
Owned Subsidiary of such Person), plus the aggregate liquidation preference or
redemption amount of all Disqualified Stock of such Person (excluding any
Disqualified Stock held by such Person or a Wholly Owned Subsidiary of such
Person) as of such date to (b) Operating Cash Flow of such Person and its
Restricted Subsidiaries for the most recent four-quarter period for which
internal financial statements are available, determined on a pro forma basis
after giving effect to all acquisitions and dispositions of assets
(notwithstanding clause (ii) of the definition of "Consolidated Net Income" and
including Asset Swaps) made by such Person and its Restricted Subsidiaries since
the beginning of such four-quarter period through such date as if such
acquisitions and dispositions had occurred at the beginning of such four-quarter
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period through such date as if such acquisitions and dispositions had occurred
at the beginning of such four-quarter period.
"Independent Financial Advisor" means a United States investment banking
firm of national standing in the United States which does not, and whose
directors, officers and employees or affiliates do not, have a direct or
indirect financial interest in the Company.
"Interest Rate Agreement" means in respect of a Person any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
"Investment" in any Person means any direct or indirect advance, loan or
any other extensions of credit (other than advances, loans or other extensions
of credit to customers in the ordinary course of business that are recorded as
accounts receivable on the balance sheet of the lender and other than
commission, travel, relocation and similar advances to directors, officers and
employees made in the ordinary course of business) (including by way of
Guarantee or similar arrangement) or capital contribution to any Person (by
means of any transfer of cash or other property to others or any payment for
property or services for the account or use of such Person), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar instruments issued
by such Person. For purposes of the definition of "Unrestricted Subsidiary," the
definition of "Restricted Payment" and the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments," (i) "Investment" shall include
the portion (proportionate to the Company's equity interest in such Subsidiary)
of the fair market value of the net assets of any Subsidiary of the Company at
the time that such Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary equal to an amount (if positive)
equal to (x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors; provided further, however, that an acquisition of assets,
Capital Stock or other securities by the Company or any of its Restricted
Subsidiaries shall not be deemed to be an Investment to the extent the
consideration for such Capital Stock or other securities consists of common
equity securities of the Company.
"IRU" means an indefeasible right to use fiber or telecommunications
capacity.
"IRU Agreement" means an agreement pursuant to which an interest in an IRU
is sold or leased or otherwise transferred.
"Issue Date" means the date on which the Exchangeable Preferred Stock are
originally issued.
"IXC Internet Capital Contribution" means the contribution by the Company
to IXC Internet, Inc. (so long as IXC Internet, Inc. is a Subsidiary) of $10
million in cash, an IRU in two excess fibers in the Company's network (including
two fibers in network routes to be built or acquired in the future) and space in
certain points of presence, in each case as contemplated in connection with the
transactions contemplated by the PSINet Agreement.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc. or its successor.
"Net Available Cash" means the aggregate cash proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset
Disposition (including any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Disposition), net of the direct
costs relating to such Asset Disposition (including legal, accounting and
investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be
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applied to the repayment of Indebtedness (other than Indebtedness Incurred
pursuant to clause (1) of paragraph (b) of the covenant described under
"-- Certain Covenants -- Limitation on Indebtedness") secured by a Lien on the
asset or assets that were the subject of such Asset Disposition and any reserve
for adjustment in respect of the sale price of such asset or assets established
in accordance with GAAP; provided, however, that Net Available Cash shall not
include that portion of Net Available Cash from an Asset Disposition by a
Restricted Subsidiary of the Company that are paid as a pro rata dividend or
distributed with respect to Capital Stock of such Restricted Subsidiary, or used
to purchase, redeem or otherwise retire for value Capital Stock of such
Restricted Subsidiary, held by a Person other than the Company or any of its
Affiliates.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Operating Cash Flow" means, with respect to any Person for any period, the
Consolidated Net Income of such Person for such period, (A) plus (i)
extraordinary net losses, net losses on sales of assets outside the ordinary
course of business during such period and non-cash charges relating to
write-downs of property and equipment, to the extent such losses and charges
were deducted in computing such Consolidated Net Income, plus (ii) provision for
taxes based on income or profits, to the extent such provision for taxes was
included in computing such Consolidated Net Income, and any provision for taxes
utilized in computing the net losses under clause (i) hereof, plus (iii)
Consolidated Interest Expense of such Person and its Restricted Subsidiaries for
such period, to the extent that any such expense was deducted in computing such
Consolidated Net Income, plus (iv) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) and other non-cash
charges (excluding any such non-cash charge to the extent that it represents an
accrual of or reserve for cash charges in any future period or amortization of a
prepaid cash expense that was paid in a prior period) of such Person and its
Restricted Subsidiaries for such period to the extent that such depreciation,
amortization and other non-cash charges were deducted in computing such
Consolidated Net Income and (B) less all non-cash income for such period
(excluding any such non-cash income to the extent it represents an accrual of
cash income in any future period or amortization of cash income received in a
period). Notwithstanding the foregoing, the provision for taxes on the income or
profits of, and the depreciation and amortization and other non-cash charges of,
a Restricted Subsidiary of the referent Person shall be added to Consolidated
Net Income to compute Operating Cash Flow only to the extent (and in the same
proportion) that the net income of such Restricted Subsidiary was included in
calculating the Consolidated Net Income of such Person for such period and only
if and to the extent such Restricted Subsidiary could have paid such amount at
the date of determination as a dividend or similar distribution to the referent
Person by such Restricted Subsidiary without prior governmental approval (that
has not been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Restricted Subsidiary or its stockholders.
"Permitted Business" means (i) any communications business and (ii) any
business reasonably related or ancillary thereto.
"Permitted Holders" means the officers and directors of the Company, and
Trustees of General Electric Pension Trust, Grumman Hill Associates, Inc. and
Grumman Hill Investments, L.P., and each of their respective officers and
directors and their Related Parties.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) the Company, a Restricted Subsidiary or a Person that will,
upon the making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a Related
Business; (ii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) receivables owing to the Company or any
Restricted Subsidiary if created or acquired
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in the ordinary course of business and payable or dischargeable in accordance
with customary trade terms; provided, however, that such trade terms may include
such concessionary trade terms as the Company or any such Restricted Subsidiary
deems reasonable under the circumstances; (v) payroll, travel, commission and
similar advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses for accounting purposes and that are made
in the ordinary course of business; (vi) loans or advances to employees made in
the ordinary course of business consistent with past practices of the Company or
such Restricted Subsidiary; (vii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments; (viii) any
Person to the extent such Investment represents the non-cash portion of the
consideration received for an Asset Disposition as permitted pursuant to the
covenant described under "-- Certain Covenants -- Limitation on Sales of Assets
and Subsidiary Stock"; (ix) the IXC Internet Capital Contribution; (x) the
Investment in PSINet Inc. contemplated by the PSINet Agreement, including the
Investment in shares of PSINet Common Stock purchased pursuant to the PSINet
Agreement and the $240 million value protection right provided for by the PSINet
Agreement; and (xi) other Investments in any Person that in the aggregate do not
exceed $30 million without regard to increases and decreases in the value of the
Investments).
"Permitted PSINet Non-Recourse Debt" means Indebtedness where (i) the
holders of such Indebtedness expressly agree that they will look solely to the
shares of PSINet Common Stock held by the issuer of such Indebtedness for
payment on or in respect of such Indebtedness and expressly waive any recourse
they may have on or with respect to such Indebtedness to the Company or any
Restricted Subsidiary, (ii) neither the Company nor any Restricted Subsidiary
(A) provides credit support (whether or not in the form of an undertaking,
agreement or instrument which would constitute Indebtedness), other than the
pledge by the issuer of such Indebtedness of shares of PSINet Common Stock, or
(B) is directly or indirectly liable and (iii) no default with respect to such
Indebtedness (including any rights which the holders thereof may have to take
enforcement action against the shares of PSINet Common Stock securing such
Indebtedness) would permit (upon notice, lapse of time or both) any holder of
any other Indebtedness of the Company or any Restricted Subsidiary to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"Principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"PSINet Agreement" means the IRU and Stock Purchase Agreement dated as of
July 22, 1997, between IXC Internet Services, Inc. and PSINet Inc. and the
related documents executed in connection therewith, in each case as in effect as
of the Issue Date.
"PSINet Common Stock" means the common stock of PSINet, Inc.
"PSINet Shares" means the shares of PSINet Common Stock acquired by the
Company or any Subsidiary pursuant to the terms of the PSINet Agreement.
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
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"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Exchange Indenture, including
Indebtedness that Refinances Refinancing Indebtedness; provided, however, that
(i) such Refinancing Indebtedness has a Stated Maturity no earlier than the
Stated Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accredited value) then
outstanding or committed (plus accrued interest on the principal amount of
Indebtedness Refinanced, and fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided further,
however, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of the Company (unless such Subsidiary
was obligated under, or a guarantor of, the Indebtedness being Refinanced); or
(y) Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any Permitted Business, the businesses conducted
by the Company and the Restricted Subsidiaries on the Issue Date and any
business related, ancillary or complementary to such businesses conducted by the
Company and the Restricted Subsidiaries on the Issue Date.
"Related Party" with respect to any Permitted Holder means (i) any
controlling stockholder, 80% (or more) owned Subsidiary, or spouse or immediate
family member (in the case of an individual) of such Principal or (ii) any
trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding an 80% or more
controlling interest of which consist of such Permitted Holder or such other
Persons referred to in the immediately preceding clause (i).
"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness of the Company.
"Restricted Payment" with respect to any Person means (i) the declaration
or payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the direct or
indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) and
dividends or distributions to the extent paid to the Company or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation)), (ii) the purchase, redemption or other acquisition
or retirement for value of any Capital Stock of the Company held by any Person
or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than the Company or a Restricted Subsidiary), including the
exercise of any option to exchange any Capital Stock (other than into Capital
Stock of the Company that is not Disqualified Stock), (iii) the purchase,
repurchase, redemption, defeasance or other acquisition or retirement for value,
prior to scheduled maturity, scheduled repayment or scheduled sinking fund
payment of any Subordinated Obligations (other than the purchase, repurchase or
other acquisition of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition) or (iv) the making
of any Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
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"Senior Indebtedness" of the Company means (i) Indebtedness of the Company,
whether outstanding on the Issue Date or thereafter Incurred, and (ii) accrued
and unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company to the
extent post-filing interest is allowed in such proceeding) in respect of (A)
indebtedness of the Company for money borrowed and (B) indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment of which
such Person is responsible or liable unless, in the case of (i) and (ii), in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is provided that such obligations are subordinate or pari passu
in right of payment to the Exchange Debentures; provided, however, that Senior
Indebtedness shall not include (1) any obligation of such Person to any
Subsidiary of such Person, (2) any liability for Federal, state, local or other
taxes owed or owing by such Person, (3) any accounts payable or other liability
to trade creditors arising in the ordinary course of business (including
guarantees thereof or instruments evidencing such liabilities) or (4) that
portion of any Indebtedness which at the time of Incurrence is Incurred in
violation of the Exchange Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Standard & Poor's" means Standard & Poor's Ratings Group, or its
successor.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Indebtedness" means the Exchange Debentures and any other
Indebtedness of the Company that specifically provides that such Indebtedness is
to rank pari passu with the Exchange Debentures in right of payment and is not
subordinated by its terms to any Indebtedness or other obligation of the Company
which is not Senior Indebtedness.
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Exchange Debentures pursuant to a written
agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following:
(i) any investment in direct obligations of the United States of
America or any agency thereof or obligations guaranteed by the United
States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws
of the United States of America, any state thereof or any foreign country
recognized by the United States, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of $50,000,000
(or the foreign currency equivalent thereof) and has outstanding debt which
is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule
436 under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor,
(iii) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above,
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(iv) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United
States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings
Group, and
(v) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by Standard & Poor's Ratings Group or "A" by Moody's Investors Service,
Inc.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien (excluding Liens
incurred to secure obligations in respect of an IRU) on any property of, the
Company or any Restricted Subsidiary; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, the Investment resulting from such
designation would be permitted under the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments". The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided,
however, that immediately after giving effect to such designation (x) the
Company could Incur $1.00 of additional Indebtedness under paragraph (a) of the
covenant described under "-- Certain Covenants Limitation on Indebtedness" and
(y) no Default shall have occurred and be continuing. Any such designation by
the Board of Directors shall be evidenced to the Trustee by promptly filing with
the Trustee a copy of the resolution of the Board of Directors giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the Company
or one or more Wholly Owned Subsidiaries.
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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 IXC
Communications 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 IXC Communications, as amended, and the provisions of applicable
law.
COMMON STOCK
As of September 1, 1997, there were 30,908,190 outstanding shares of Common
Stock held by 86 holders of record. Each holder of Common Stock or Series 3
Preferred Stock 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 IXC Communications, the holders of the
Common Stock are entitled to share ratable 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, 900,000 shares of Preferred Stock as Exchangeable
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. The Company has
reserved up to 150,000 shares of Old Preferred Stock for payment of dividends on
the Old Preferred Stock and up to 150,000 shares of New Preferred Stock for
payment of dividends on the New Preferred Stock. The New Preferred Stock will be
issued by the Company in connection with the Exchange Offer, on a share for
share basis, for the Old Preferred Stock pursuant to the terms of the Exchange
Offer. Upon the exchange of each share of Old Preferred Stock for each share of
New Preferred Stock, each share of Old Preferred Stock received by the Company
shall have the status of an authorized and unissued share of Preferred Stock
available for redesignation and reissuance by the Company. As of September 1,
1997, there were 1,018,123 shares of Convertible Preferred Stock issued and
outstanding, 300,000 shares of Exchangeable Preferred Stock issued and
outstanding, all of the 12,550 shares of Series 3 Preferred Stock were issued
and outstanding, all of the previously outstanding shares of Series 1 Preferred
Stock had been redeemed, and no other shares of Preferred Stock were
outstanding. As of September 1, 1997, the Convertible Preferred Stock, the
Series 3 Preferred Stock and the Exchangeable Preferred Stock were held by 17,
87 and 3 holders of record respectively. The shares of Series 3 Preferred Stock
were purchased upon the formation of IXC Communications at a purchase price of
$1.00 per share. See "Description of the Exchangeable Preferred Stock."
The holders of Series 3 Preferred Stock, subject to the terms of the
Restated Certificate, as amended, are entitled to receive a liquidation
preference of $1,000 per share, plus an amount equal to all accrued and unpaid
dividends and IXC Communications may voluntarily redeem the 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
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unpaid dividends thereon 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.
On October 3, 1997, the Company commenced an offer (the "Series 3 Tender
Offer") to exchange shares of the Company's common stock (the "Common Stock")
for all its issued and outstanding shares of the Series 3 Preferred Stock. The
number of shares of Common Stock to be exchanged for each share of tendered
Series 3 Preferred Stock will be the ratio between the aggregate per share
liquidation preference of, and the accrued and unpaid dividends on, one share of
Series 3 Preferred Stock as of the expiration date of the exchange offer and the
last reported sale price of the Company's Common Stock on the Nasdaq National
Market on the expiration date of the Series 3 Tender Offer (scheduled, subject
to extensions, for October 31, 1997). The aggregate liquidation preference and
accrued and unpaid dividends on the Series 3 Preferred Stock at October 31,
1997, will be approximately $20.6 million (or $1645 per share). The Common Stock
to be issued in connection with the Series 3 Tender Offer will not be registered
under the Securities Act. The Series 3 Tender Offer is conditioned upon at least
90% of the shares of Series 3 Preferred Stock being properly tendered and not
withdrawn. The Company has reserved the right, but is not obligated, to
terminate the Series 3 Tender Offer in the event that less than 90% of the
shares of Series 3 Preferred Stock is properly tendered. There can be no
assurance that the Company will consummate the Series 3 Tender Offer, or, if
consummated, that all of the shares of Series 3 Preferred Stock will be tendered
and exchanged for Common Stock.
The Convertible Preferred Stock is convertible at the option of the
holders, unless previously redeemed, at any time into shares of Common Stock at
a rate (subject to adjustment in certain events) of 4.263 shares of Common Stock
for each share of Convertible Preferred Stock, equivalent to a conversion price
of $23.46 for each share of Common Stock. Dividends on the Convertible Preferred
Stock accrue at a rate per annum of 7 1/4% per share on the liquidation
preference thereof of $100 per share ($7.25 per annum per share). Dividends
payable prior to or on June 30, 1999, are, 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
will be required to 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 Board of Directors of IXC Communications has the authority to issue the
Preferred Stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, terms of redemption, redemption prices, liquidation
preferences, voting rights and the number of shares consisting of any series or
the designation of such series without further vote or action by the
stockholders. The issuance of Preferred Stock (or the ability of the Board of
Directors to issue Preferred Stock) may have the effect of delaying, deferring
or preventing a change in control of IXC Communications without further action
by the stockholders and may adversely affect the voting and other rights of the
holders of Common Stock. The issuance of Preferred Stock with voting or
conversion rights may adversely affect the voting power of the holders of Common
Stock.
REGISTRATION RIGHTS
In June 1996, IXC Communications 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 sale of Common Stock
to GEPT and the lock-up arrangements each of the parties entered into in
connection with the Company's initial public offering of its Common Stock which
occurred in July 1996. Such registration rights cover all the shares of Common
Stock of IXC Communications 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 IXC Communications 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
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(at IXC Communications' expense) such Common Stock in such registration. GEPT
also has the right, subject to certain limitations, to require IXC
Communications 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 IXC Communications.
The former shareholders of Telecom One and their transferees and assignees
(the "Telecom One Holders") were also granted registration rights with respect
to the shares of Common Stock issued by the Company for such acquisition which
occurred in June 1997. In connection with the sale of the Convertible Preferred
Stock, the Company entered into a registration rights agreement with the initial
purchasers of the Convertible Preferred Stock, which required the Company, at
its cost, to file a shelf registration statement for the benefit of the holders
of the Convertible Preferred Stock with respect to the Convertible Preferred
Stock and any shares of Common Stock issuable upon conversion thereof. On August
28, 1997, the Commission declared effective a shelf registration statement filed
by the Company pursuant to its obligations with respect to the holders of the
Convertible Preferred Stock and with respect to the Telecom One Holders. In
addition, the Telecom One 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. Although the Company cannot presently determine the number of
shares to be issued to the Telecom One Holders in 1999, the Company believes it
is unlikely to exceed 200,000 shares of Common Stock.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CHARTER, THE BYLAWS AND THE
INDENTURE
The Bylaws of IXC Communications provide that stockholders may call a
special meeting of stockholders only upon a request of stockholders owning at
least 50% of IXC Communications' outstanding capital stock entitled to vote. In
addition, in the event of a Change in Control (as such term is defined in the
Indenture) (i) holders of the Senior Notes will have the right to require IXC
Communications to purchase their Senior Notes, in whole or in part, at a price
equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest 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 its 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 IXC Communications.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
IXC Communications is subject to Section 203 of the DGCL, which, subject to
certain exceptions, prohibits a Delaware corporation from engaging in certain
"business combinations" with any "interested stockholder" for a period of three
years following the date that such stockholder became an interested stockholder,
unless the transaction is approved in a prescribed manner. The business
combinations to which Section 203 applies include a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholders. In
general, Section 203 defines an "interested stockholder" as a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the outstanding voting stock of the corporation.
LISTING
The Common Stock is listed on the NNM under the symbol "IIXC."
DESCRIPTION OF CERTAIN INDEBTEDNESS
On October 5, 1995, IXC Communications issued and sold its Senior Notes in
the aggregate principal amount of $285.0 million to a group of institutional and
accredited investors. Of the approximately $268.8 million net proceeds of such
sale, IXC Communications placed $200.0 million into an escrow account to be used
for the Network expansion, debt service of the Senior Notes and other capital
expenditures. The
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Company has fully utilized all amounts in such escrow account. On August 2,
1996, IXC Communications consummated its offer with certain holders to exchange
its 12.5% Series A Senior Notes due 2005 for 12.5% Series B Senior Notes due
2005 registered under the Securities Act as required by a registration rights
agreement among IXC Communications and the initial purchasers named therein. The
Senior Notes Indenture contains certain covenants that, among other things,
limit the ability of IXC Communications and certain of its subsidiaries (the
"Restricted Subsidiaries") to incur additional indebtedness and issue preferred
stock, pay dividends or make other distributions, repurchase Equity Interests
(as defined in the Senior Notes Indenture) or subordinated indebtedness, create
certain liens, enter into certain transactions with affiliates, sell assets of
IXC Communications or its Restricted Subsidiaries (as defined in the Senior
Notes Indenture), issue or sell Equity Interests of IXC Communications'
Restricted Subsidiaries or enter into certain mergers and consolidations.
Pursuant to such covenants, the Company is generally prohibited by the Senior
Notes Indenture from paying dividends on the Convertible Preferred Stock or the
Exchangeable Preferred Stock (or repurchasing Convertible Preferred Stock or the
Exchangeable Preferred Stock following the occurrence of a change in control)
if: (i) the Company is in default under the Senior Notes Indenture; (ii) the
Company's Consolidated Net Worth (as defined in the Senior Notes Indenture),
after giving effect to such dividend or repurchase, would be less than $50.0
million; (iii) the Company's ratio of Indebtedness to Operating Cash Flow (as
defined in the Senior Notes Indenture) at the time was greater than or equal to
5 to 1; or (iv) the sum of such dividend or repurchase, together with all other
dividends (and other restricted payments) made since the initial issuance of the
Senior Notes, would exceed the sum of net proceeds to the Company from time to
time from the sale of Equity Interests plus the Company's Cumulative Operating
Cash Flow (as defined in the Senior Notes Indenture) (from January 1, 1996 to
the end of the fiscal quarter immediately preceding the date of such dividend)
less 1.75 times the Company's Cumulative Total Interest Expense (as defined in
the Senior Notes Indenture) over the same period. Because the Company does not
satisfy the financial tests included in such covenants, it is currently
prohibited from paying cash dividends on the Convertible Preferred Stock or the
Exchangeable Preferred Stock. The ability of the Company in the future to pay
cash dividends on the Exchangeable Preferred Stock or 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 Exchangeable Preferred Stock or on the Convertible Preferred
Stock.
Under certain limited circumstances, IXC Communications will be required to
offer to purchase Senior Notes at a price equal to 100% of the principal amount
thereof plus accrued and unpaid interest and Liquidated Damages, if any, to the
date of purchase, with the excess proceeds of certain Asset Sales (as defined in
the Senior Notes Indenture). In the event of a change of control, holders of the
Senior Notes will have the right to require IXC Communications to purchase their
Senior Notes, in whole or in part, at a price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of purchase.
In July 1997, the Company entered into the NTFC Equipment Facility pursuant
to which the Company may borrow up to $28.0 million in connection with the
purchase of certain equipment for use in its Network, provided the Company meets
certain financial tests. The Company is required to make interest payments, and
beginning December 31, 1997, principal payments over a five year period in
quarterly installments under the NTFC Equipment Facility. The obligations under
the NTFC Equipment Facility are secured by the equipment purchased hereunder.
In addition, the Company is engaged in discussions with potential lenders
regarding the Proposed Credit Facility under which it expects to be able to
borrow up to a certain percentage of the amount of 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 this facility. The Senior Notes Indenture limits the Company
from borrowing under such a facility, if one should be obtained, in excess of
85% of the amount of such eligible accounts receivable. The Company anticipates
that its obligations under the Proposed Credit Facility, if it is obtained, will
be secured by intercompany notes from the subsidiaries owning the accounts
receivable, which
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notes will in turn be secured by such accounts receivable. However, there can be
no assurance that the Company will obtain such facility. As of June 30, 1997,
the Company's trade accounts receivable (net of allowance for doubtful accounts)
were approximately $57.4 million.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of certain U.S. Federal income tax
considerations relevant to the exchange of Old Preferred Stock for New Preferred
Stock and does not purport to be a complete analysis of all potential tax
consequences of such exchange, or all the potential tax effects thereof.
Further, the discussion below is not binding on the Internal Revenue Service
(the "IRS") or the courts. The Company has not sought, and will not seek, any
rulings from the IRS with respect to the positions discussed herein and there
can be no assurance that the IRS will not take a different position concerning
the tax consequences of the exchange of the Old Preferred Stock for the New
Preferred Stock, or that any such position would not be sustained.
This summary is based upon current provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), regulations of the Treasury Department,
administrative rulings and pronouncements of the IRS and judicial decisions
currently in effect, all of which are subject to change, possibly with
retroactive effect. The discussion does not deal with all aspects of U.S.
Federal income taxation that may be relevant to particular investors in light of
their personal investment circumstances (for example, to persons holding the
Exchangeable Preferred Stock or Exchange Debentures as part of a conversion
transaction or as part of a hedge or hedging transaction, or as a position in a
straddle for tax purposes), nor does it discuss U.S. Federal income tax
considerations applicable to certain types of investors subject to special
treatment under the U.S. Federal income tax laws (for example, insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
taxpayers subject to the alternative minimum tax or non-U.S. holders). In
addition, the discussion does not consider the effect of any foreign, state,
local, gift, estate or other tax laws that may be applicable to a particular
investor.
The exchange of Old Preferred Stock for New Preferred Stock will not
constitute a recognition event for federal income tax purposes. Consequently, no
gain or loss will be recognized by a holder on the exchange. Immediately after
the exchange, a holder's adjusted tax basis in the New Preferred Stock will be
the same as the holder's adjusted basis in the Old Preferred Stock immediately
before the exchange. A holder will be considered to have held the New Preferred
Stock from the time the holder originally acquired the Old Preferred Stock.
Dividends on each share of New Preferred Stock will accrue from the last
Dividend Payment Date on the Old Preferred Stock. No additional dividends will
be paid on the Old Preferred Stock tendered and accepted for exchange.
EACH POTENTIAL INVESTOR SHOULD CONSULT ITS TAX ADVISOR REGARDING THE
PARTICULAR TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF THE
EXCHANGEABLE PREFERRED STOCK AND OF HOLDING OR DISPOSING OF EXCHANGE DEBENTURES,
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission with respect to
similar transactions set forth in noaction letters issued to third parties
unrelated to the Company, the New Preferred Stock issued pursuant to the
Exchange Offer in exchange for the Old Preferred Stock may be offered for
resale, resold and otherwise transferred by holders thereof who are not
"affiliates" of the Company (within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act; provided that the New Preferred Stock is
acquired in the ordinary course of the holders' business, such holders have no
arrangement or understanding with any person to participate in any distribution
(within the meaning of the Securities Act) of the New Preferred Stock and
neither the holder nor any other person is engaging in or intends to engage in a
distribution of the New Preferred Stock. Each broker-dealer
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that receives New Preferred Stock for its own account pursuant to the Exchange
Offer must acknowledge that it will deliver a prospectus in connection with any
resale of such New Preferred Stock. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Preferred Stock received in exchange for Old Preferred Stock
where such Old Preferred Stock was acquired as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale.
The Company will not receive any proceeds from any sale of New Preferred
Stock by broker-dealers. New Preferred Stock received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Preferred Stock or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such New
Preferred Stock. Any broker-dealer that resells New Preferred Stock that was
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such New Preferred Stock may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of New Preferred Stock and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by,
acknowledging that it will deliver and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incidental to the Exchange Offer (including the reasonable fees and
disbursements of one counsel for the holders of the Exchangeable Preferred
Stock) other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the Exchangeable Preferred Stock (including certain
broker-dealers) against certain liabilities, including certain liabilities under
the Securities Act.
Each holder of the Old Preferred Stock who wishes to exchange its Old
Preferred Stock for New Preferred Stock in the Exchange Offer will be required
to make certain representations to the Company as set forth in "The Exchange
Offer -- Terms and Conditions of the Letter of Transmittal." The Company has not
entered into any arrangement or understanding with any person to distribute the
New Preferred Stock to be received in the Exchange Offer and, as of the
Expiration Date, to the best of the Company's information and belief, each
person participating in the Exchange Offer will be acquiring the New Preferred
Stock in its ordinary course of business and will not have any arrangement or
understanding with any person to participate in the distribution of the New
Preferred Stock to be received in the Exchange Offer.
LEGAL MATTERS
The validity of the New Preferred Stock and the Exchange Debentures will be
passed upon for IXC Communications by Riordan & McKinzie, Los Angeles,
California, but investors exchanging Exchangeable Preferred Stock in the
Exchange Offer and other purchasers of Exchangeable Preferred Stock should not
rely on Riordan & McKinzie with respect to any other matters. Carl W. McKinzie,
a director and stockholder of IXC Communications, is a stockholder of Riordan &
McKinzie. IXC Communications has granted an option covering shares of Common
Stock to another stockholder of Riordan & McKinzie. Also, certain attorneys of
Riordan & McKinzie beneficially own additional shares of IXC Communications.
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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 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.
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<PAGE> 90
GLOSSARY
Access charges -- The fees paid by long distance carriers to LECs for
originating and terminating long distance calls on their local networks.
ALC -- ALC Communications Corporation, the parent of Allnet. ALC was
acquired by Frontier in August, 1995.
Allnet -- Allnet Communication Services, Inc.
Ameritech -- Ameritech Communications, Inc.
ATM (asynchronous transfer mode) -- An information transfer standard that
is one of a general class of technologies that relay traffic by way of an
address contained within the first five bytes of a standard 53-byte-long packet
or cell. The ATM format can be used by many different information systems,
including local area networks, to deliver traffic at varying rates, permitting a
mix of voice, video and data (multimedia).
AT&T -- AT&T Corp.
Backbone -- The through-portions of a transmission network, as opposed to
spurs which branch off the throughportions.
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.
Broadband -- Broadband communications systems can transmit large quantities
of voice, data and video. Examples of broadband communication systems include
DS-3 fiber optic systems, which can transmit 672 simultaneous voice
conversations, or a broadcast television station signal, that transmits high
resolution audio and video signals into the home. Broadband connectivity is also
an essential element for interactive multimedia applications.
Cable & Wireless -- Cable & Wireless, P.L.C.
CAP (Competitive Access Provider) -- A company that provides its customers
with an alternative to the LEC for local transport of private line, special
access and interstate transport of switched access telecommunications service.
Capacity-intensive -- Refers to products which use comparatively large
amounts of bandwidth.
CCTS -- Consolidated Communications Telecom Services, Inc.
Central Offices -- The switching centers or central switching facilities of
the LECs.
Dedicated -- Refers to telecommunications lines dedicated or reserved for
use by particular customers along predetermined routes.
Digital -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies (both
fiber and microwave) employ a sequence of these pulses to represent information
as opposed to the continuously variable analog signal. The precise digital
numbers minimize distortion (such as graininess or snow in the case of video
transmission, or static or other background distortion in the case of audio
transmission). Both the Company's microwave and fiber optic facilities transmit
digital information.
Digital route miles -- Route miles of the Company's microwave and fiber
optic routes.
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.
A-1
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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.
DTI -- Digital Teleport, Inc.
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.
800/888 service -- A telecommunications service for businesses that allows
calls to be made to a specific location at no charge to the calling party. Use
of the "800" or "888" service code denotes calls that are to be billed to the
receiving party. A computer database in the provider's network translates the
800 or 888 number into a conventional telephone number.
Enhanced data services -- Products and services designed for the transport
and delivery of integrated information to include voice, data and video and any
combination thereof.
Excel -- EXCEL Communications, Inc.
Facilities-based carrier -- Carriers who own transmission facilities.
FCC -- Federal Communications Commission.
Fiber miles -- The number of fiber route miles of a fiber optic route
multiplied by the number of fiber strands in the route.
Frame Relay -- A high-speed, data-packet switching service used to transmit
data between computers. Frame Relay supports data units of variable lengths at
access speeds ranging from 56 kilobits per second to 1.5 megabits per second.
This service is well-suited for connecting local area networks, but is not
appropriate for voice and video applications due to the variable delays which
can occur. Frame Relay was designed to operate at high speeds on modern fiber
optic networks.
Frontier -- Frontier Corporation.
GAAP -- Generally Accepted Accounting Principles.
GE Capital Communication -- GE Capital Communication Services Company.
GEIC -- General Electric Investment Corporation.
GEPT -- General Electric Pension Trust.
GST -- GST Net, Inc.
GTE -- GTE Corporation.
Hubs -- Collection centers located centrally in an area where
telecommunications traffic can be aggregated for transport and distribution.
ISDN (Integrated Services Digital Network) -- A complex networking concept
designed to provide a variety of voice, data and digital interface standards.
Incorporated into ISDN are many new enhanced services, such as high-speed data
file transfer, desktop video conferencing, telepublishing, telecommuting,
telepresence learning-remote collaboration, data network linking and home
information services.
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.
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Intranet -- An infrastructure based on Internet standards and technologies
that provides access to information within limited and well-defined groups such
as universities, governments and other large organizations.
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 Telecom Act of 1996.
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."
MFS -- MFS Network Technologies, Inc.
MOUs -- Minutes of use of long distance service.
Non-facilities-based carrier -- Carriers that do not own transmission
facilities.
NTFC -- NTFC Capital Corporation
OC-3, OC-12, OC-48 and OC-192 -- 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. An OC-192 has a
bit rate of 9,953.28 megabits per second and can transmit 129,024 simultaneous
voice or data transmissions.
Off-net -- Refers to circuits on transmission facilities not owned by the
Company.
On-net -- Refers to circuits on transmission facilities owned by the
Company.
Optronic -- a combination of optical and electronic equipment.
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.
Rockwell International -- Rockwell International Corp.
Route miles -- The measure of the length of a transmission path in miles.
SONET (synchronous optical network technology) -- An electronics and
network architecture for variable-bandwidth products which enables transmission
of voice, video and data (multimedia) at very high speeds.
Sprint -- Sprint Corporation.
Switch -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
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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.
Westel -- Westel International, Inc.
WilTech -- The WilTech Group.
WilTel -- WilTel Network Services, Inc.
WorldCom -- WorldCom, Inc.
A-4
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======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. 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, IN ANY JURISDICTION WHERE, OR TO ANY
PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN A CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF.
------------------------
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Documents Incorporated by Reference... i
Available Information................. i
Prospectus Summary.................... 1
Risk Factors.......................... 14
The Exchange Offer.................... 27
Use of Proceeds....................... 34
Capitalization........................ 35
Selected Historical and Pro Forma
Financial Data...................... 36
Management............................ 38
Description of the Exchangeable
Preferred Stock..................... 40
Description of the Exchange
Debentures.......................... 53
Description of Capital Stock.......... 79
Description of Certain Indebtedness... 81
Certain U.S. Federal Income Tax
Consequences........................ 83
Plan of Distribution.................. 83
Legal Matters......................... 84
Experts............................... 85
Glossary.............................. A-1
</TABLE>
======================================================
======================================================
IXC COMMUNICATIONS, INC.
450,000 SHARES
OF 12 1/2% SERIES B
JUNIOR EXCHANGEABLE PREFERRED
STOCK OF
IXC COMMUNICATIONS, INC.
------------------------
PROSPECTUS
------------------------
, 1997
======================================================
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. 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 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.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
3.1+ Restated Certificate of Incorporation of IXC Communications, Inc., as amended.
3.2 Bylaws of IXC Communications, Inc., as amended (incorporated by reference to
Exhibit 3.2 of IXC Communications, Inc. Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997 (the "March 31, 1997 10-Q")).
4.1* Certificate of Designation of the Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of 12 1/2% Junior
Exchangeable Preferred Stock Due 2009 and 12 1/2% Series B Junior Exchangeable
Preferred Stock Due 2009 and Qualifications, Limitations and Restrictions
Thereof.
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 11, 1996
(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).
</TABLE>
II-2
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ------------------------------------------------------------------------------
<S> <C>
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 4.13 of
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 Amendment to Registration Rights Agreement dated as of March 25, 1997 by and
between IXC Communications, Inc. and GEPT (incorporated by reference to
Exhibit 4.14 of the March 31, 1997 10-Q).
4.15 Registration Rights Agreement dated as of July 8, 1997 among IXC
Communications, Inc. and each of William G. Rodi, Gordon Hutchins, Jr. and
William F. Linsmeier (incorporated by reference to Exhibit 4.15 of IXC
Communications, Inc. Quarterly Report on Form 10-Q for the quarter ended June
30, 1997 (the "June 30, 1997 10-Q")).
4.16 Purchase Agreement dated as of August 14, 1997 by and among IXC
Communications, Inc. and the initial purchasers named in Schedule A thereto
(incorporated by reference to Exhibit 4.1 of IXC Communications, Inc. Current
Report on Form 8-K dated August 20, 1997 (the "8-K")).
4.17 Indenture dated as of August 15, 1997 between IXC Communications, Inc. and The
Bank of New York (incorporated by reference to Exhibit 4.2 of the 8-K).
4.18 Registration Rights Agreement dated as of August 4, 1997 by and among IXC
Communications, Inc. and the purchasers named therein (incorporated by
reference to Exhibit 4.3 of the 8-K).
5.1+ Opinion of Riordan & McKinzie, a Professional Law Corporation regarding the
validity of the issuance of the securities registered hereunder.
10.1 Office Lease dated June 21, 1989 with USAA Real Estate Company, as amended
(incorporated by reference to Exhibit 10.1 of the S-4).
10.2 Equipment Lease dated as of December 1, 1994 by and between DSC Finance
Corporation and Switched Services Communications, L.L.C.; Assignment Agreement
dated as of December 1, 1994 by and between Switched Services Communications,
L.L.C. and DSC Finance Corporation; and Guaranty dated December 1, 1994 made
in favor of DSC Finance Corporation by IXC Communications, Inc. (incorporated
by reference to Exhibit 10.2 of the S-4).
10.3 Amended and Restated 1994 Stock Plan of IXC Communications, Inc., as amended
(incorporated by reference to Exhibit 10.3 of the June 30, 1997 10-Q).
10.4 Form of Non-Qualified Stock Option Agreement under the 1994 Stock Plan of IXC
Communications, Inc. (incorporated by reference to Exhibit 10.4 of the S-4).
10.5 Form of IXC Communications, Inc. Restricted Stock Agreement (incorporated by
reference to Exhibit 10.5 of the S-4).
10.6 Form of IXC Communications, Inc. Restricted Stock Agreement (incorporated by
reference to Exhibit 10.6 of the S-4).
10.7 Amended and Restated Development Agreement by and between Intertech Management
Group, Inc. and IXC Long Distance, Inc. (incorporated by reference to Exhibit
10.7 of the S-4).
10.8 Second Amended and Restated Service Agreement dated as of January 1, 1996 by
and between Switched Services Communications, L.L.C. and Excel
Telecommunications, Inc. (incorporated by reference to Exhibit 10.8 of the
S-4).
10.9 Equipment Purchase Agreement dated as of January 16, 1996 by and between
Siecor Corporation and IXC Carrier, Inc. (incorporated by reference to Exhibit
10.9 of the S-4).
</TABLE>
II-3
<PAGE> 98
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ------------------------------------------------------------------------------
<S> <C>
10.10 1996 Stock Plan of IXC Communications, Inc., as amended (incorporated by
reference to Exhibit 10.10 of IXC Communications, Inc. Annual Report on Form
10-K for the year ended December 31, 1996 (the "10-K")).
10.11 IRU Agreement dated as of November 1995 between WorldCom, Inc. and IXC
Carrier, Inc. (incorporated by reference to Exhibit 10.11 of the S-4).
10.12 IXC Communications, Inc. Outside Directors' Phantom Stock Plan, as amended
(incorporated by reference to Exhibit 10.12 of the 10-K).
10.13* Business Consultant and Management Agreement dated as of March 1, 1997 by and
between IXC Communications, Inc. and Culp Communications Associates.
10.14 Employment Agreement dated December 28, 1995 by and between IXC
Communications, Inc. and James F. Guthrie (incorporated by reference to
Exhibit 10.14 of the S-1).
10.15 Employment Agreement dated August 28, 1995, by and between IXC Communications,
Inc. and David J. Thomas (incorporated by reference to Exhibit 10.15 of the
S-1).
10.16 Special Stock Plan of IXC Communications, Inc. (incorporated by reference to
Exhibit 10.16 of the 10-K).
10.17 Lease dated as of June 4, 1997 between IXC Communications, Inc. and Carramerca
Realty, L.P. (incorporated by reference to Exhibit 10.17 of the June 30, 1997
10-Q).
10.18 Loan and Security Agreement dated as of July 18, 1997 between IXC Carrier,
Inc. and NFTC Capital Corporation (incorporated by reference to Exhibit 10.18
of the June 30, 1997 10-Q).
10.19 IRU and Stock Purchase Agreement dated as of July 22, 1997 between IXC
Internet Services, Inc. and PSINet Inc. (incorporated by reference to Exhibit
10-19 of the June 30, 1997 10-Q).
10.20 Joint Marketing and Services Agreement dated as of July 22, 1997 between IXC
Internet Services, Inc. and PSINet Inc. (incorporated by reference to Exhibit
10-20 of the June 30, 1997 10-Q).
10.21* Employment Agreement dated as of September 9, 1997 between Benjamin L. Scott
and IXC Communications, Inc.
10.22* IXC Communications, Inc. 1997 Special Executive Stock Plan.
11.1* Statement of Computation of Earnings per Share.
12.1* Statement regarding Computation of Ratios.
21.1* Subsidiaries of IXC Communications, Inc.
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-6).
99.1+ Form of Letter of Transmittal with respect to the Exchange Offer.
99.2+ Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
* Filed herewith
+ To be filed by amendment
(b) Not Applicable
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (a) to
include any prospectus required by Section 10(a)(3) of the Securities
II-4
<PAGE> 99
Act; (b) 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; (c) 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.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective 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.
(b) The undersigned registrant hereby undertakes 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 15(d) of the Securities
Exchange 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.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
registrant pursuant to the foregoing provisions, or otherwise, 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
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by registrant
of expenses incurred or paid by a director, officer or controlling person of
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, 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.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
(e) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
II-5
<PAGE> 100
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Austin, State of Texas,
on October 2, 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
- ----------------------------------------------- ---------------------------- ----------------
<S> <C> <C>
/s/ RALPH J. SWETT Chairman, President and October 2, 1997
- ----------------------------------------------- Chief Executive Officer, and
Ralph J. Swett Director (Principal
Executive Officer)
/s/ JAMES F. GUTHRIE Executive Vice President and October 2, 1997
- ----------------------------------------------- Chief Financial Officer
James F. Guthrie (Principal Financial and
Accounting Officer)
/s/ RICHARD D. IRWIN Director October 2, 1997
- -----------------------------------------------
Richard D. Irwin
/s/ WOLFE H. BRAGIN Director October 2, 1997
- -----------------------------------------------
Wolfe H. Bragin
</TABLE>
II-6
<PAGE> 101
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ---------------------------- ----------------
<S> <C> <C>
/s/ CARL W. MCKINZIE Director October 2, 1997
- -----------------------------------------------
Carl W. McKinzie
/s/ PHILLIP L. WILLIAMS Director October 2, 1997
- -----------------------------------------------
Phillip L. Williams
/s/ JOE C. CULP Director October 2, 1997
- -----------------------------------------------
Joe C. Culp
</TABLE>
II-7
<PAGE> 1
EXHIBIT 4.1
IXC COMMUNICATIONS, INC.
CERTIFICATE OF DESIGNATION OF THE POWERS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
AND OTHER SPECIAL RIGHTS OF 12 1/2% JUNIOR
EXCHANGEABLE PREFERRED STOCK DUE 2009 AND 12 1/2% SERIES B
JUNIOR EXCHANGEABLE PREFERRED STOCK DUE 2009 AND
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
IXC Communications, Inc. (the "Company"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware, does hereby certify that (i) pursuant to authority conferred upon the
board of directors of the Company (the "Board of Directors") by its Restated
Certificate of Incorporation (hereinafter referred to as the "Restated
Certificate of Incorporation"), and pursuant to the provisions of Sections
141(c)(2) and 151 of the General Corporation Law of the State of Delaware, said
Board of Directors is authorized to issue Preferred Stock of the Company in one
or more series and has authorized a committee of the Board of Directors (the
"Placement Committee") to adopt the resolution set forth below and (ii) the
Placement Committee duly approved and adopted the following resolution on August
14, 1997 (the "Resolution"):
RESOLVED that, pursuant to the authority vested in the Board
of Directors by its Restated Certificate of Incorporation, and the
authority vested by such Board of Directors in a committee of the Board
(the "Placement Committee"), all the members of which are members of
such Board, the Placement Committee does hereby create, authorize and
provide for the issuance of 12 1/2% Junior Exchangeable Preferred Stock
Due 2009, par value $.01 per share, with a stated value of $1000 per
share, initially consisting of up to 450,000 shares and 12 1/2% Series
B Junior Exchangeable Preferred Stock Due 2009, par value $.01 per
share, with a stated value of $1,000
<PAGE> 2
2
per share, initially consisting of up to 450,000 shares (collectively,
the "Exchangeable Preferred Stock") having the designation,
preferences, relative, participating, optional and other special rights
and the qualifications, limitations and restrictions thereof that are
set forth in the Restated Certificate of Incorporation and in this
Resolution as follows:
(a) Designation. There is hereby created out of the authorized
and unissued shares of Preferred Stock of the Company (i) a series of Preferred
Stock designated as the "12 1/2% Junior Exchangeable Preferred Stock Due 2009"
(the "Initial Exchangeable Preferred Stock") and (ii) a series of Preferred
Stock designated as the "12 1/2% Series B Junior Exchangeable Preferred Stock
Due 2009" (the "Series B Stock"). The number of shares constituting the Initial
Exchangeable Preferred Stock shall be 450,000, and the number of shares
constituting the Series B Stock shall be 450,000. The Initial Exchangeable
Preferred Stock and the Series B Stock are referred to as the Exchangeable
Preferred Stock. The liquidation preference of the Exchangeable Preferred Stock
shall be $1000 per share (the "Liquidation Preference").
(b) Rank. The Exchangeable Preferred Stock will, with respect
to dividend rights and rights on liquidation, winding-up and dissolution, rank
(i) senior to all classes of common stock and to each other class of Capital
Stock or series of Preferred Stock established hereafter by the Board of
Directors of the Company, the terms of which do not expressly provide that it
ranks senior to, or on a parity with, the Exchangeable Preferred Stock as to
dividend rights and rights on liquidation, winding-up and dissolution of the
Company (collectively referred to, together with all classes of common stock of
the Company, as "Junior Stock"); (ii) on a parity with each share of Convertible
Preferred Stock now or hereafter outstanding and on a parity with each other
class of Capital Stock or series of Preferred Stock established hereafter by the
Board of Directors of the
<PAGE> 3
3
Company, the terms of which expressly provide that such class or series will
rank on a parity with the Exchangeable Preferred Stock as to dividend rights and
rights on liquidation, winding-up and dissolution (collectively referred to as
"Parity Stock"); and (iii) junior to each share of Series 3 Preferred Stock now
or hereafter outstanding and junior to each class of Capital Stock or series of
Preferred Stock established hereafter by the Board of Directors of the Company,
the terms of which hereafter established classes or series expressly provide
that such class or series will rank senior to the Exchangeable Preferred Stock
as to dividend rights or rights on liquidation, winding-up and dissolution of
the Company (collectively referred to as "Senior Stock"). All claims of the
holders of the Exchangeable Preferred Stock, including claims with respect to
dividend payments, redemption payments, mandatory repurchase payments or rights
upon liquidation, winding-up or dissolution, shall rank junior to the claims of
the holders of any debt of the Company and all other creditors of the Company.
(c) Dividends. (i) Holders of the outstanding shares of
Exchangeable Preferred Stock will be entitled to receive, when, as and if
declared by the Board of Directors of the Company, out of funds legally
available therefor, cumulative preferential dividends on each share of the
Exchangeable Preferred Stock at a rate per annum equal to 12 1/2% of the
Liquidation Preference of such share payable quarterly (each such quarterly
period being herein called a "Dividend Period"). In addition to the dividends
described in the preceding sentence, holders of outstanding shares of
Exchangeable Preferred Stock will be entitled to additional dividends (the
"Additional Dividends"), when, as and if declared by the Board of Directors of
the Company, out of funds legally available therefor, with respect to the shares
of Exchangeable Preferred Stock, which Additional Dividends shall accrue as
follows if any of the following events occur (each such event in clauses (A),
(B) and (C) below being herein called a "Registration Default"): (A) if by
October 6, 1997, neither the Exchange Offer Registration Statement nor the Shelf
Registration Statement has been filed with the SEC; (B) if by January 19, 1998,
neither the Registered Exchange Offer is consummated nor the Shelf
<PAGE> 4
4
Registration Statement declared effective by the SEC; or (C) if after January
19, 1998 and after either the Exchange Offer Registration Statement or the Shelf
Registration Statement is declared effective, such Registration Statement
thereafter ceases to be effective (in each case except as permitted below) in
connection with resales of Exchangeable Preferred Stock in accordance with and
during the periods specified herein.
Additional Dividends shall accrue on the shares of
Exchangeable Preferred Stock from and including the date on which any such
Registration Default shall occur, to but excluding the date on which all such
Registration Defaults have been cured, at a rate of .50% per annum.
A Registration Default referred to in clause (C) of paragraph
(c)(i) shall be deemed not to have occurred and be continuing in relation to a
Registration Statement or the related prospectus if (i) such Registration
Default has occurred solely as a result of (x) the filing of a post-effective
amendment to the Registration Statement to incorporate annual audited financial
information with respect to the Company where such post-effective amendment is
not yet effective and needs to be declared effective to permit Holders to use
the related prospectus or (y) other material events with respect to the Company
that would need to be described in the Registration Statement or the related
prospectus and (ii) in the case of clause (y), the Company proceeds promptly and
in good faith to amend or supplement the Registration Statement and related
prospectus to describe such events unless the Company has determined in good
faith that there are material legal or commercial impediments in doing so;
provided, however, that in any case if such Registration Default occurs for a
continuous period in excess of 45 days, Additional Dividends shall be payable in
accordance with the immediately preceding paragraphs of this paragraph (c)(i)
from the day such Registration Default initially occurs until such Registration
Default is cured.
Any amounts of Additional Dividends due pursuant to clauses
(A), (B) or (C) of this paragraph (c)(i) or pursuant to the proviso contained in
the preceding sentence will be payable on the regular dividend payment dates
with
<PAGE> 5
5
respect to the Exchangeable Preferred Stock and on the same terms and
conditions and subject to the same limitations as pertain at such time for the
payment of regular dividends. The amount of Additional Dividends will be
determined by multiplying the applicable Additional Dividends rate by the
aggregate liquidation preference of the outstanding shares of Exchangeable
Preferred Stock, multiplied by a fraction, the numerator of which is the number
of days such Additional Dividend rate was applicable during such period
(determined on the basis of a 360-day year comprised of twelve 30-day months),
and the denominator of which is 360.
All dividends on the Exchangeable Preferred Stock, including
Additional Dividends, to the extent accrued, shall be cumulative, whether or not
earned or declared, on a daily basis from the Issue Date or, in the case of
additional shares of Exchangeable Preferred Stock issued in payment of a
dividend, from the date of issuance of such additional shares of Exchangeable
Preferred Stock, and shall be payable quarterly in arrears on each February 15,
May 15, August 15 and November 15 (each, a "Dividend Payment Date"), commencing
on November 15, 1997, to holders of record on the February 1, May 1, August 1
and November 1 immediately preceding the relevant Dividend Payment Date. Any
dividend on the Exchangeable Preferred Stock payable pursuant to this paragraph
(c)(i) on or prior to February 15, 2001 shall be, at the option of the Company,
payable (1) in cash or (2) through the issuance of a number of additional shares
(including fractional shares) of Exchangeable Preferred Stock (the "Additional
Shares") equal to the dividend amount divided by the Liquidation Preference of
such Additional Shares. With respect to dividends accrued after February 15,
2001, all dividends shall be payable in cash.
Any dividend accruing after February 15, 2001 that is not paid
in cash on the relevant Dividend Payment Date shall accrue interest at a rate
per annum equal to the then applicable dividend rate per annum from such
Dividend Payment Date to the date of payment of such dividend. Such interest, if
any, shall be payable in cash on each Dividend Payment Date. Any accrued
interest not paid on a Dividend Payment Date shall accrue interest on such
interest pursuant to this paragraph. Any references herein to the payment of
<PAGE> 6
6
accrued and unpaid dividends shall be deemed to include any such interest.
(ii) In the event the Company notifies the holders of
Exchangeable Preferred Stock of its election not to make a Change of Control
Offer (as defined in paragraph (h)(i)) pursuant to paragraph (h)(iii), then,
within 60 days of the occurrence of the applicable Change of Control, holders of
a majority of the outstanding shares of the Exchangeable Preferred Stock will
designate an Independent Financial Advisor to determine, within 20 days of such
designation, in the opinion of such firm, the appropriate dividend rate that the
Exchangeable Preferred Stock should bear so that, after such reset, the
Exchangeable Preferred Stock would have a market value of 101% of the
Liquidation Preference; provided, however, that no such reset shall be required
to be made if such Independent Financial Advisor determines that the
Exchangeable Preferred Stock has a market value of 101% or greater. If within 5
days of the designation of an Independent Financial Advisor by the Holders, the
Company determines that such Independent Financial Advisor is reasonably
unacceptable to the Company, the Company shall designate a second Independent
Financial Advisor to determine, within 15 days of such designation, in its
opinion, such an appropriate reset dividend rate for the Exchangeable Preferred
Stock. In the event that the two Independent Financial Advisors cannot agree,
within 25 days of the designation of an Independent Financial Advisor by the
Holders of a majority of the outstanding shares of the Exchangeable Preferred
Stock, on the appropriate reset dividend rate, the two Independent Financial
Advisors shall, within 10 days of such 25th day, designate a third Independent
Financial Advisor, which, within 15 days of designation, will determine, in its
opinion, an appropriate reset dividend rate which is between the two rates
selected by the first two Independent Financial Advisors. Upon the determination
of the reset rate, the Exchangeable Preferred Stock shall accrue and accumulate
dividends at the reset rate as of the date of occurrence of the Change of
Control; provided, however, that the reset rate shall in no event be less than
12 1/2% per annum or greater than 15% per annum. The reasonable fees and
expenses including reasonable fees and expenses of legal counsel, if any, and
customary
<PAGE> 7
7
indemnification of each of the three above-referenced Independent Financial
Advisors, shall be borne by the Company.
(iii) All dividends paid with respect to shares of the
Exchangeable Preferred Stock pursuant to paragraph (c)(i) shall be paid pro rata
to the holders entitled thereto.
(iv) No dividend may be declared or paid or set apart for the
payment of dividends by the Company on any Parity Stock for any period unless
full cumulative dividends in respect of each Dividend Period ending on or before
such period shall have been or contemporaneously are declared and paid (or are
deemed declared and paid) in full or declared and, if payable in cash, a sum in
cash sufficient for such payment set apart for such payment on the Exchangeable
Preferred Stock. If full dividends are not so paid, the Exchangeable Preferred
Stock will share dividends pro rata with the Parity Stock.
(v) The Company will not (A) declare, pay or set apart funds
for the payment of any dividend or other distribution with respect to any Junior
Stock or (B) redeem, purchase or otherwise acquire for consideration any Junior
Stock through a sinking fund or otherwise, unless (1) all accrued and unpaid
dividends with respect to the Exchangeable 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 (2) sufficient funds have been paid or
set apart for the payment of the dividend for the current dividend period with
respect to the Exchangeable Preferred Stock and any Parity Stock. As used
herein, 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 or purchase any Junior Stock.
(vi) Dividends on account of arrears for any past Dividend
Period and dividends in connection with any optional redemption may be declared
and paid at any time, without reference to any regular Dividend Payment Date, to
holders of record on such date, not more than 45 days prior
<PAGE> 8
8
to the payment thereof, as may be fixed by the Board of Directors of the
Company.
(vii) Dividends payable on the Exchangeable Preferred Stock
for any period other than a Dividend Period shall be computed on the basis of a
360-day consisting year of twelve 30-day months and the actual number of days
elapsed in the period for which payable. Dividends payable on the Exchangeable
Preferred Stock for a full Dividend Period will be computed by dividing the per
annum dividend rate by four.
(d) Liquidation Preference. (i) Upon any voluntary or
involuntary liquidation, dissolution or winding-up of the Company, holders of
Exchangeable Preferred Stock will be entitled to be paid, out of the assets of
the Company available for distribution to its stockholders, the Liquidation
Preference of the outstanding shares of Exchangeable Preferred Stock, plus,
without duplication, an amount in cash equal to all accumulated and unpaid
dividends (whether or not earned or declared and including Additional Dividends,
if any,) thereon to the date fixed for liquidation, dissolution or winding-up
(including an amount equal to a prorated dividend for the period from the last
Dividend Payment Date to the date fixed for liquidation, dissolution or
winding-up that would have been payable had the Exchangeable Preferred Stock
been the subject of an Optional Redemption on such date) before any distribution
is made on any Junior Stock. If, upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the amounts payable with respect to
the Exchangeable Preferred Stock and all Parity Stock are not paid in full, the
Exchangeable Preferred Stock and the Parity Stock will share equally and ratably
(in proportion to the respective amounts that would be payable on such shares of
Exchangeable Preferred Stock and the Parity Stock, respectively, if all amounts
payable thereon had been paid in full) in any distribution of assets of the
Company to which each is entitled. After payment of the full amount of the
Liquidation Preference of the outstanding shares of Exchangeable Preferred Stock
(and, if applicable, an amount equal to a prorated dividend), the holders of
shares of Exchangeable Preferred Stock will not be entitled to any
<PAGE> 9
9
further participation in any distribution of assets of the Company.
(ii) For the purposes of this paragraph (d), neither the sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Company nor the consolidation or merger of the Company with or into one or more
other entities shall be deemed to be a liquidation, dissolution or winding-up of
the Company.
(e) Redemption. (i) Optional Redemption. (A) Except as set
forth in clause (B) below, the Exchangeable Preferred Stock shall not be
redeemable at the option of the Company prior to August 15, 2002. On or after
August 15, 2002, each share of the Exchangeable Preferred Stock may be redeemed
(subject to the legal availability of funds therefor) at any time, in whole or
in part, at the option of the Company, at the redemption prices (expressed as a
percentage of the Liquidation Preference of such share) set forth below, plus,
without duplication, an amount in cash equal to all accrued and unpaid dividends
to the date fixed for redemption (the "Optional Redemption Date") (including an
amount in cash equal to a prorated dividend for the period from the Dividend
Payment Date immediately prior to the Optional Redemption Date) (the "Optional
Redemption Price"), if redeemed during the 12-month period beginning August 15
of each of the years set forth below:
<TABLE>
<CAPTION>
Year in which redemption
occurs Percentage
------ ----------
<S> <C>
2002.................................. 106.250%
2003.................................. 105.000
2004.................................. 103.750
2005.................................. 102.500
2006.................................. 101.250
2007 and thereafter................... 100.000
</TABLE>
(B) At any time and from time to time prior to August 15,
2000, the Company may redeem in the aggregate up to 35% of the outstanding
shares of Exchangeable Preferred
<PAGE> 10
10
Stock with the proceeds of one or more Public Equity Offerings at a redemption
price (expressed as a percentage of the Liquidation Preference thereof) of
112.500% plus accrued and unpaid dividends, if any, to the redemption date
(including an amount in cash equal to a prorated dividend for any partial
dividend period); provided, however, that at least $195 million aggregate
Liquidation Preference of the Exchangeable Preferred Stock remains outstanding
after each such redemption.
(C) In the event of a redemption of only a portion of the then
outstanding shares of Exchangeable Preferred Stock, the Company shall effect
such redemption on a pro rata basis, except that the Company may redeem all of
the shares held by holders of fewer than 100 shares (or all of the shares held
by holders who would hold less than 100 shares as a result of such redemption),
as may be determined by the Company.
(ii) Mandatory Redemption. Each share of the Exchangeable
Preferred Stock (if not earlier redeemed or converted) shall be subject to
mandatory redemption in whole (to the extent of lawfully available funds
therefor) on August 15, 2009 (the "Mandatory Redemption Date") at a price equal
to 100% of the Liquidation Preference of such share, plus, without duplication,
all accrued and unpaid dividends thereon (including an amount equal to a
prorated dividend thereon from the immediately preceding Dividend Payment Date
to the Mandatory Redemption Date), if any, to the Mandatory Redemption Date (the
"Mandatory Redemption Price").
(iii) Procedure for Redemption. (A) On and after the Optional
Redemption Date or the Mandatory Redemption Date, as the case may be (the
"Redemption Date"), unless the Company defaults in the payment of the applicable
redemption price, dividends will cease to accumulate on shares of Exchangeable
Preferred Stock called for redemption and all rights of holders of such shares
will terminate except for the right to receive the Optional Redemption Price or
the Mandatory Redemption Price, as the case may be, without interest; provided,
however, that if a notice of redemption shall have been given as provided in
subparagraph (iii)(B) and the funds necessary for redemption (including an
amount
<PAGE> 11
11
in respect of all dividends that will accrue to the Redemption Date) shall have
been segregated and irrevocably set apart by the Company, in trust for the
benefit of the holders of the shares called for redemption, then dividends shall
cease to accumulate on the Redemption Date on the shares to be redeemed and, at
the close of business on the day on which such funds are segregated and set
apart, the holders of the shares to be redeemed shall, with respect to the
shares to be redeemed, cease to be stockholders of the Company and shall be
entitled only to receive the Optional Redemption Price or the Mandatory
Redemption Price, as the case may be, for such shares without interest from the
Redemption Date.
(B) With respect to a redemption pursuant to paragraph (e)(i)
or (e)(ii), the Company will send a written notice of redemption by first class
mail to each holder of record of shares of Exchangeable Preferred Stock, not
fewer than 30 days nor more than 60 days prior to the Redemption Date at its
registered address (the "Redemption Notice"); provided, however, that no failure
to give such notice nor any deficiency therein shall affect the validity of the
procedure for the redemption of any shares of Exchangeable Preferred Stock to be
redeemed except as to the holder or holders to whom the Company has failed to
give said notice or except as to the holder or holders whose notice was
defective. The Redemption Notice shall state:
(1) whether the redemption is pursuant to
paragraph (e)(i) or (e)(ii) hereof;
(2) the Optional Redemption Price or the Mandatory
Redemption Price, as the case may be;
(3) whether all or less than all the outstanding shares of the
Exchangeable Preferred Stock are to be redeemed and the total number of
shares of the Exchangeable Preferred Stock being redeemed;
(4) the Redemption Date;
(5) that the holder is to surrender to the Company, in the
manner, at the place or places and at
<PAGE> 12
12
the price designated, his certificate or certificates representing the
shares of Exchangeable Preferred Stock to be redeemed; and
(6) that dividends on the shares of the Exchangeable Preferred
Stock to be redeemed shall cease to accumulate on such Redemption Date
unless the Company defaults in the payment of the Optional Redemption
Price or the Mandatory Redemption Price, as
the case may be.
(C) Each holder of Exchangeable Preferred Stock shall
surrender the certificate or certificates representing such shares of
Exchangeable Preferred Stock to the Company, duly endorsed (or otherwise in
proper form for transfer, as determined by the Company), in the manner and at
the place designated in the Redemption Notice, and on the Redemption Date the
full Optional Redemption Price or Mandatory Redemption Price, as the case may
be, for such shares shall be payable in cash to the person whose name appears on
such certificate or certificates as the owner thereof, and each surrendered
certificate shall be canceled and retired. In the event that less than all of
the shares represented by any such certificate are redeemed, a new certificate
shall be issued representing the unredeemed shares.
(f) Voting Rights. (i) The holders of Exchangeable Preferred
Stock, except as otherwise required under Delaware law or as set forth in
paragraphs (ii) and (iii) below, shall not be entitled to vote on any matter
required or permitted to be voted upon by the stockholders of the Company.
(ii) (A) If (1) dividends on the Exchangeable Preferred Stock
are in arrears and unpaid for six or more Dividend Periods (whether or not
consecutive) (a "Dividend Default"); (2) the Company fails to redeem the
Exchangeable Preferred Stock on August 15, 2009, or fails to otherwise discharge
any redemption obligation with respect to the Exchangeable Preferred Stock; (3)
a breach or violation of any of the provisions set forth under paragraph (l)
(Certain Additional Provisions) occurs and the breach or violation continues for
a period of 30 days or more after the Company
<PAGE> 13
13
receives notice thereof specifying the default from the holders of at least 25%
of the shares of Exchangeable Preferred Stock then outstanding; or (4) the
Company fails to pay at final maturity (giving effect to any applicable grace
period) the principal amount of any Indebtedness of the Company or any
Significant Subsidiary (other than any Permitted PSINet Non-Recourse Debt) or
the final maturity of any such Indebtedness is accelerated because of a default
and the total amount of such Indebtedness unpaid or accelerated exceeds $5
million, then the number of directors constituting the Board of Directors of the
Company will, subject to paragraph (f)(ii)(E), be increased by two and the
Holders of the then outstanding shares of Exchangeable Preferred Stock (together
with the holders of Parity Stock upon which like rights have been conferred and
are exercisable), voting separately and as a class, shall have the right and
power to elect such two additional directors. Each such event described in
clauses (1),(2),(3) or (4) above is a "Voting Rights Triggering Event".
(B) The voting rights set forth in paragraph (f)(ii)(A) above
will continue until such time as (x) in the case of a Dividend Default, all
dividends in arrears on the Exchangeable Preferred Stock are paid in full in
cash or (y) in all other cases, any failure, breach or default giving rise to
such Voting Rights Triggering Event is remedied or waived by the Holders of at
least a majority of the outstanding shares of Exchangeable Preferred Stock then
outstanding, at which time the term of any directors elected pursuant to the
provisions of paragraph (f)(ii)(A) above (subject to the right of holders of any
other preferred stock to elect directors) shall terminate forthwith and the
number of directors constituting the Board of Directors shall be decreased by
two (until the occurrence of any subsequent Voting Rights Triggering Event). At
any time after voting power to elect directors shall have become vested and be
continuing in the holders of Exchangeable Preferred Stock (together with the
holders of Parity Stock upon which like rights have been conferred and are
exercisable) pursuant to paragraph (f)(ii)(A) hereof, or if vacancies shall
exist in the offices of directors elected by such holders, a proper officer of
the Company may, and upon the written request of the holders of record of at
least 25%
<PAGE> 14
14
of the shares of Exchangeable Preferred Stock then outstanding or the holders of
25% of the shares of Parity Stock then outstanding upon which like rights have
been confirmed and are exercisable addressed to the secretary of the Company
shall, call a special meeting of the Holders of Exchangeable Preferred Stock and
the holders of such Parity Stock for the purpose of electing the directors which
such holders are entitled to elect pursuant to the terms hereof; provided,
however, that no such special meeting shall be called if the next annual meeting
of stockholders of the Company is to be held within 60 days after the voting
power to elect directors shall have become vested, in which case such meeting
shall be deemed to have been called for such next annual meeting. If such
meeting shall not be called by a proper officer of the Company within 20 days
after personal service to the secretary of the Company at its principal
executive offices, then the Holders of record of at least 25% of the outstanding
shares of Exchangeable Preferred Stock or the holders of 25% of the shares of
Parity Stock upon which like rights have been confirmed and are exercisable may
designate in writing one of their members to call such meeting at the expense of
the Company, and such meeting may be called by the person so designated upon the
notice required for the annual meetings of stockholders of the Company and shall
be held at the place for holding the annual meetings of stockholders. Any holder
of Exchangeable Preferred Stock or such Parity Stock so designated shall have,
and the Company shall provide, access to the lists of holders of Exchangeable
Preferred Stock and the holders of such Parity Stock to be called pursuant to
the provisions hereof. If no special meeting of the Holders of Exchangeable
Preferred Stock and the holders of such Parity Stock is called as provided in
this paragraph (f)(ii), then such meeting shall be deemed to have been called
for the next annual meeting of stockholders of the Company or special meeting of
the holders of any other capital stock of the Company.
(C) At any meeting held for the purposes of electing directors
at which the Holders of Exchangeable Preferred Stock (together with the holders
of Parity Stock upon which like rights have been conferred and are exercisable)
shall have the right, voting together as a
<PAGE> 15
15
separate class, to elect directors as aforesaid, the presence in person or by
proxy of the holders of at least a majority in voting power of the outstanding
shares of Exchangeable Preferred Stock (and such Parity Stock) shall be required
to constitute a quorum thereof.
(D) Any vacancy occurring in the office of a director elected
by the Holders of Exchangeable Preferred Stock (and such Parity Stock) may be
filled by the remaining director elected by the Holders of Exchangeable
Preferred Stock (and such Parity Stock) unless and until such vacancy shall be
filled by the Holders of Exchangeable Preferred Stock (and such Parity Stock).
(E) In the event that an event occurs at any time which
results in the holders of any Parity Stock having voting rights to elect
directors to the Board of Directors, holders of Exchangeable Preferred Stock
shall, whether or not such event otherwise constitutes a Voting Rights
Triggering Event pursuant to paragraph (f)(ii)(A), have the voting rights set
forth in paragraphs (f)(ii)(A) and (f)(ii)(B), and such event shall be deemed
(for purposes of this paragraph (f) only) to constitute a Voting Rights
Triggering Event. In addition, in the event that during a time in which
directors elected by the holders of Exchangeable Preferred Stock pursuant to
this paragraph (f)(ii) are serving on the Board of Directors ("Previously-
Elected Directors") an event occurs which results in holders of Parity Stock
having voting rights to elect (voting together with the holders of Exchangeable
Preferred Stock) at least two directors to the Board of Directors, the holders
of Exchangeable Preferred Stock shall vote together with the holders of such
Parity Stock to elect such new directors, and upon the election of the new
directors the Previously-Elected Directors shall (unless such Previously-
Elected Directors are elected as new directors) cease to serve on the Board of
Directors.
(iii) (A) So long as any shares of the Exchangeable Preferred
Stock are outstanding, the Company will not authorize, create or increase the
authorized amount of any class or series of Senior Stock without the affirmative
vote or consent of holders of at least
<PAGE> 16
16
two-thirds of the shares of Exchangeable Preferred Stock then outstanding,
voting or consenting, as the case may be, as one class, given in person or by
proxy, either in writing or by resolution adopted at an annual or special
meeting (except that no such vote or consent shall be required for the issuance
of additional shares of Series 3 Preferred Stock to be paid as dividends on such
Series 3 Preferred Stock pursuant to the terms of such Series 3 Preferred
Stock).
(B) So long as any shares of the Exchangeable Preferred Stock
are outstanding, the Company will not amend this Certificate of Designation so
as to affect adversely the specified rights, preferences, privileges or voting
rights of Holders of shares of Exchangeable Preferred Stock or to authorize the
issuance of any additional shares of Exchangeable Preferred Stock (except to
authorize the issuance of additional shares of Exchangeable Preferred Stock to
be paid as dividends on the Exchangeable Preferred Stock, for which no consent
shall be necessary) without the affirmative vote or consent of Holders of at
least a majority of the issued and outstanding shares of Exchangeable Preferred
Stock, voting or consenting, as the case may be, as one class, given in person
or by proxy, either in writing or by resolution adopted at an annual or special
meeting.
(C) Except as set forth in paragraph (f)(iii)(A) or (B) above,
(x) the creation, authorization or issuance of any shares of any Junior Stock,
Parity Stock or Senior Stock, including the designation of a series of
Exchangeable Preferred Stock, or (y) the increase or decrease in the amount of
authorized Capital Stock of any class, including Preferred Stock, shall not
require the consent of Holders of Exchangeable Preferred Stock and shall not be
deemed to affect adversely the rights, preferences, privileges or voting rights
of shares of Exchangeable Preferred Stock.
(D) Prior to the exchange of Exchangeable Preferred Stock for
Exchange Debentures, the Company shall not amend or modify the Exchange
Indenture (except as expressly provided therein in respect of amendments without
the consent of holders of Exchange Debentures) without
<PAGE> 17
17
the affirmative vote or consent of holders of at least a majority of the shares
of Exchangeable Preferred Stock then outstanding, voting or consenting, as the
case may be, as one class, given in person or by proxy, either in writing or by
resolution adopted at an annual or special meeting.
(iv) In any case in which the Holders of Exchangeable
Preferred Stock shall be entitled to vote pursuant to this paragraph (f) or
pursuant to Delaware law, each Holder of Exchangeable Preferred Stock entitled
to vote with respect to such matters shall be entitled to one vote for each
share of Exchangeable Preferred Stock held.
(g) Exchange. (i) Exchange for Debentures. (A) The Company
may, at its option, on any scheduled Dividend Payment Date, exchange the
Exchangeable Preferred Stock, in whole but not in part, for the Exchange
Debentures; provided however, that (1) on the date of such exchange there are no
accumulated and unpaid dividends on the Exchangeable Preferred Stock (including
the dividends payable on such date) or other contractual impediment to such
exchange; (2) there shall be funds legally available sufficient therefor; (3)
immediately after giving effect to such exchange, no Default (as defined in the
Exchange Indenture) shall have occurred and be continuing, and (iv) the Company
shall have delivered to the Trustee under the Exchange Indenture an opinion of
counsel with respect to the due authorization and issuance of the Exchange
Debentures.
(B) Upon any exchange pursuant to this paragraph (g)(i),
holders of outstanding shares of Exchangeable Preferred Stock will be entitled
to receive $1.00 principal amount of Exchange Debentures for each $1.00 of
liquidation preference of Exchangeable Preferred Stock held by them. Exchange
Debentures issued in exchange for Exchangeable Preferred Stock will be issued in
principal amounts of $1,000 and integral multiples thereof to the extent
possible, and will also be issued in principal amounts less than $1,000 so that
each holder of Exchangeable Preferred Stock will receive certificates
representing the entire amount of Exchange Debentures to which such holder's
shares of Exchangeable Preferred Stock entitle such holder;
<PAGE> 18
18
provided, however, that the Company may pay cash in lieu of issuing an Exchange
Debenture in a principal amount less than $1,000.
(ii) Procedures. (A) The Company will send a written notice of
exchange (the "Exchange Notice") by mail to each holder of record of shares of
Exchangeable Preferred Stock not fewer than 30 days nor more than 60 days before
the date fixed for such exchange (the "Exchange Date"); provided, however, that
no failure to give such notice nor any deficiency therein shall affect the
validity of the procedure for the exchange of any shares of Exchangeable
Preferred Stock to be exchanged except as to the holder or holders to whom the
Company has failed to give said notice or except as to the holder or holders
whose notice was defective. The Exchange Notice shall state:
(1) the Exchange Date;
(2) that the holder is to surrender to the Company, in the
manner and at the place or places designated, his certificate or
certificates representing the shares of Exchangeable Preferred Stock to
be exchanged;
(3) that dividends on the shares of Exchangeable Preferred
Stock to be exchanged shall cease to accrue on such Exchange Date
whether or not certificates for shares of Exchangeable Preferred Stock
are surrendered for exchange on such Exchange Date unless the Company
shall default in the delivery of Exchange Debentures; and
(4) that interest on the Exchange Debentures shall accrue from
the Exchange Date whether or not certificates for shares of
Exchangeable Preferred Stock are surrendered for exchange on such
Exchange Date.
(B) On and after the Exchange Date, dividends will cease to
accrue on the outstanding shares of Exchangeable Preferred Stock, and all rights
of the holders of Exchangeable Preferred Stock (except the right to receive
Exchange Debentures, an amount in cash, to the extent
<PAGE> 19
19
applicable, equal to the accumulated and unpaid dividends to the Exchange Date
and, if the Company so elects, cash in lieu of any Exchange Debenture that is in
a principal amount that is not an integral multiple of $1,000) will terminate.
The person entitled to receive the Exchange Debentures issuable upon such
exchange will be treated for all purposes as the registered holder of such
Exchange Debentures.
(C) On or before the Exchange Date, each holder of
Exchangeable Preferred Stock shall surrender the certificate or certificates
representing such shares of Exchangeable Preferred Stock, in the manner and at
the place designated in the Exchange Notice. The Company shall cause the
Exchange Debentures to be executed on the Exchange Date and, upon surrender in
accordance with the Exchange Notice of the certificates for any shares of
Exchangeable Preferred Stock so exchanged, duly endorsed (or otherwise in proper
form for transfer, as determined by the Company), such shares shall be exchanged
by the Company into Exchange Debentures. The Company shall pay interest on the
Exchange Debentures at the rate and on the dates specified therein from the
Exchange Date.
(iii) No Exchange in Certain Cases. Notwithstanding the
foregoing provisions of this paragraph (g), the Company shall not be entitled to
exchange the Exchangeable Preferred Stock for Exchange Debentures if such
exchange, or any term or provision of the Exchange Indenture or the Exchange
Debentures, or the performance of the Company's obligations under the Exchange
Indenture or the Exchange Debentures, shall materially violate or conflict with
any applicable law or agreement or instrument then binding on the Company or if,
at the time of such exchange, the Company is insolvent or if it would be
rendered insolvent by such exchange.
(iv) Exchange of Initial Exchangeable Preferred Stock for
Series B Stock. The Series B Stock will be issued by the Company only in
connection with an exchange offer, on a share for share basis, for the Initial
Exchangeable Preferred Stock as required pursuant to the Registration Rights
Agreement. Each share of Series B Stock issued in exchange for a share of
Initial Exchangeable Preferred Stock
<PAGE> 20
20
will be deemed to have the same liquidation preference and accrued and unpaid
dividends as the share of Initial Exchangeable Preferred Stock so exchanged.
(h) Change of Control. (i) Upon the occurrence of a Change of
Control (the date of such occurrence being the "Change of Control Date"), the
Company shall either (1) offer to purchase each holder's Exchangeable Preferred
Stock in cash pursuant to the offer described in paragraph (h)(iii) (the "Change
of Control Offer") at a purchase price equal to 101% of the Liquidation
Preference thereof, plus, without duplication, all accrued and unpaid dividends,
if any, to the Change of Control Payment Date, including an amount in cash equal
to a prorated dividend for the period from the Dividend Payment Date immediately
prior to the Change of Control Payment Date to the Change of Control Payment
Date or (2) notify each holder of the Company's election not to make an offer as
described in clause (1) above, in which case the dividend rate on the
Exchangeable Preferred Stock shall be subject to reset pursuant to paragraph
(c)(ii).
(ii) Prior to the mailing of the notice referred to in
paragraph (h)(iii), but in any event within 30 days following the date on which
the Company knows or reasonably should have known that a Change in Control has
occurred, the Company covenants that it shall promptly determine if the purchase
of the Exchangeable Preferred Stock would violate or constitute a default under
the indebtedness of the Company.
(iii) Within 30 days following the date on which the Company
knows or reasonably should have known that a Change in Control has occurred, the
Company must send, by first-class mail, postage prepaid, a notice to each holder
of Exchangeable Preferred Stock. Such notice shall state whether the Company has
elected to make an offer to purchase shares of Exchangeable Preferred Stock and
if it has so elected, such notice shall contain all instructions and materials
necessary to enable such holders to tender Exchangeable Preferred Stock pursuant
to the Change of
<PAGE> 21
21
Control Offer. If the Company has elected to make a Change of Control Offer,
such notice shall state:
(A) that a Change of Control has occurred, that a Change of
Control Offer is being made pursuant to this paragraph (h) and that all
Exchangeable Preferred Stock validly tendered and not withdrawn will be
accepted for payment;
(B) the purchase price (including the amount of accrued
dividends, if any) and the purchase date (which must be no earlier than
30 days nor later than 60 days from the date such notice is mailed,
other than as may be required by law) (the "Change of Control Payment
Date");
(C) that any shares of Exchangeable Preferred Stock not
tendered will continue to accrue dividends;
(D) that, unless the Company defaults in making payment
therefor, any share of Exchangeable Preferred Stock accepted for
payment pursuant to the Change of Control Offer shall cease to accrue
dividends after the Change of Control Payment Date;
(E) that holders electing to have any shares of Exchangeable
Preferred Stock purchased pursuant to a Change of Control Offer will be
required to surrender stock certificates representing such shares of
Exchangeable Preferred Stock, properly endorsed for transfer, together
with such other customary documents as the Company and the Transfer
Agent may reasonably request to the Transfer Agent and registrar for
the Exchangeable Preferred Stock at the address specified in the notice
prior to the close of business on the Business Day prior to the Change
of Control Payment Date;
(F) that holders will be entitled to withdraw their election
if the Company receives, not later than five Business Days prior to the
Change of Control Payment Date, a telegram, a telex, facsimile
transmission or letter setting forth the name of the
<PAGE> 22
22
holder, the number of shares of Exchangeable Preferred Stock the holder
delivered for purchase and a statement that such holder is withdrawing
his election to have such shares of Exchangeable Preferred Stock
purchased;
(G) that holders whose shares of Exchangeable Preferred Stock
are purchased only in part will be issued a new certificate
representing the unpurchased shares of Exchangeable Preferred Stock;
and
(H) the circumstances and relevant facts regarding such Change
of Control (including information with respect to pro forma historical
income, cash flow and capitalization after giving effect to such Change
of Control).
If the Company elects not to make a Change of Control Offer,
such notice shall state that the dividend rate on the Exchangeable Preferred
Stock is subject to adjustment pursuant to paragraph (c)(ii).
(iv) The Company will comply with any tender offer rules under
the Exchange Act which then may be applicable, including Rules 13e-4 and 14e-1,
in connection with any offer made by the Company to repurchase the shares of
Exchangeable Preferred Stock as a result of a Change of Control. To the extent
that the provisions of any securities laws or regulations conflict with
provisions of this Certificate of Designation, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under this Certificate of Designation by virtue
thereof.
(v) On the Change of Control Payment Date the Company shall
(A) accept for payment the shares of Exchangeable Preferred Stock validly
tendered pursuant to the Change of Control Offer, (B) pay to the holders of
shares so accepted the purchase price therefor in cash and (C) cancel each
surrendered certificate and retire the shares represented thereby. Unless the
Company defaults in the payment for the shares of Exchangeable Preferred Stock
tendered pursuant to the Change of Control Offer, dividends will cease to accrue
with respect to the shares of
<PAGE> 23
23
Exchangeable Preferred Stock tendered and all rights of holders of such tendered
shares will terminate, except for the right to receive payment therefor, on the
Change of Control Payment Date.
(vi) To accept the Change of Control Offer, the holder of a
share of Exchangeable Preferred Stock shall deliver, on or before the 10th day
prior to the Change of Control Payment Date, written notice to the Company (or
an agent designated by the Company for such purpose) of such holder's
acceptance, together with certificates evidencing the shares of Exchangeable
Preferred Stock with respect to which the Change of Control Offer is being
accepted, duly endorsed for transfer.
(i) Conversion or Exchange. Except as otherwise provided
herein, the holders of shares of Exchangeable Preferred Stock shall not have any
rights hereunder to convert such shares into or exchange such shares for shares
of any other class or classes or of any other series of any class or classes of
Capital Stock of the Company.
(j) Reissuance of Exchangeable Preferred Stock. Shares of
Exchangeable Preferred Stock that have been issued and reacquired in any manner,
including shares purchased or redeemed or exchanged, shall not be reissued as
shares of Exchangeable Preferred Stock and shall (upon compliance with any
applicable provisions of the laws of Delaware) have the status of authorized and
unissued shares of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of Preferred Stock; provided,
however, that so long as any shares of Exchangeable Preferred Stock are
outstanding, any issuance of such shares must be in compliance with the terms
hereof.
(k) Business Day. If any payment, redemption or exchange shall
be required by the terms hereof to be made on a day that is not a Business Day,
such payment, redemption or exchange shall be made on the immediately succeeding
Business Day.
<PAGE> 24
24
(l) Certain Additional Provisions. The Company covenants and
agrees for the benefit of the Holders as follows:
(i) SEC Reports. The Company shall file with the Trustee and
provide Holders, within 15 days after it files them with the SEC, copies of its
annual report and the information, documents and other reports which the Company
is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange
Act. Notwithstanding that the Company may not be required to remain subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company shall continue to file with the SEC and provide the Trustee and Holders
with such annual reports and such information, documents and other reports as
are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a
U.S. corporation subject to such Sections, such information, documents and other
reports to be so filed and provided at the times specified for the filing of
such information, documents and reports under such Sections.
(ii) Limitation on Indebtedness. (A) The Company shall not
Incur, and shall not permit any Restricted Subsidiary to Incur, directly or
indirectly, any Indebtedness unless, on the date of such Incurrence and after
giving pro forma effect thereto (including pro forma application of the net
proceeds therefrom) and to any other Indebtedness Incurred or repaid since the
end of the period referred to below and the receipt and application of the
proceeds thereof, either (i) the Indebtedness to Operating Cash Flow Ratio for
the Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
Indebtedness is Incurred would have been not more than 5.0 to 1.0, or (ii) the
Company's Consolidated Capital Ratio as of the end of the most recent fiscal
quarter for which internal financial statements are available immediately
preceding the date on which such Indebtedness is Incurred is less than 2.0 to
1.0.
<PAGE> 25
25
(B) Notwithstanding the foregoing paragraph (a), the Company
and its Restricted Subsidiaries may Incur any or all of the following
Indebtedness:
(1) Indebtedness Incurred pursuant to one or more Credit
Agreements; provided, however, that, after giving effect to any such
Incurrence, the aggregate principal amount of such Indebtedness then
outstanding does not exceed the greater of (A) $150,000,000 and (B) 85%
of the book value of the Accounts Receivables of the Company and its
Restricted Subsidiaries;
(2) Indebtedness owed to and held by the Company or a
Restricted Subsidiary; provided, however, that any subsequent issuance
or transfer of any Capital Stock which results in any Restricted
Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another
Restricted Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Indebtedness by the issuer thereof;
(3) the Exchange Debentures (including Exchange Debentures
issued in lieu of cash interest payments with respect to Exchange
Debentures);
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this paragraph
(l)(ii)(B));
(5) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to paragraph (l)(ii)(A) pursuant to clause (3) or (4)
of this paragraph (l)(ii)(B) or this clause (5);
(6) Hedging Obligations consisting of Interest Rate Agreements
directly related to Indebtedness permitted to be Incurred by the
Company and its Restricted Subsidiaries pursuant to this Certificate of
Designation.
(7) Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money
<PAGE> 26
26
obligations, in each case Incurred for the purpose of financing all or
any part of the purchase price or cost of construction or improvement
of property used in the business of the Company or such Restricted
Subsidiary;
(8) In the event that the PSINet Shares are held by the
Company or a Restricted Subsidiary, the Incurrence by the Company or
such Restricted Subsidiary of Permitted PSINet Non-Recourse Debt; and
(9) Indebtedness in an aggregate principal amount at any time
outstanding which, together with the amount of all other Indebtedness
of the Company and its Restricted Subsidiaries outstanding on the date
of such Incurrence (other than Indebtedness permitted by clauses (1)
through (8) of this paragraph (l)(ii)(B) and paragraph (l)(ii)(A)),
does not exceed 5% of Consolidated Tangible Assets.
(C) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to paragraph (l)(ii)(B) if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinated Obligations unless such
Indebtedness shall be subordinated to the Exchange Debentures to at least the
same extent as such Subordinated Obligations.
(D) For purposes of determining compliance with this paragraph (l)(ii),
(1) in the event that an item of Indebtedness meets the criteria of more than
one of the types of Indebtedness described above, the Company, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses and
(2) an item of Indebtedness may be divided and classified in more than one of
the types of Indebtedness described above.
(iii) Limitation on Restricted Payments. (A) The Company shall
not, and shall not permit any Restricted
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27
Subsidiary, directly or indirectly, to make a Restricted Payment if at the time
the Company or such Restricted Subsidiary makes such Restricted Payment:
(1) a Voting Rights Triggering Event shall have occurred and
be continuing (or would result therefrom);
(2) the Company is not able to Incur an additional $1.00 of
Indebtedness under paragraph (l)(ii)(A); or
(3) the aggregate amount of such Restricted Pay ment and all
other Restricted Payments since the Issue Date would exceed the sum of:
(I) an amount equal to the Cumulative Operating Cash
Flor for the period (taken as one accounting period) from the
beginning of the first full fiscal quarter commencing after
the Issue Date to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment less 1.50
times the Company's Cumulative Consolidated Interest Expense
for such period;
(II) the aggregate Net Cash Proceeds received by the
Company from the issuance or sale of its Parity Stock and
Junior Stock (in each case other than Disqualified Stock)
subsequent to the Issue Date (other than an issuance or sale
to a Subsidiary of the Company and other than an issuance or
sale to an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the
benefit of their employees);
(III) the amount by which Indebtedness of the Company
is reduced on the Company's balance sheet upon the conversion
or exchange (other than by a Subsidiary of the Company)
subsequent to the Issue Date of any Indebtedness of the
Company convertible or exchangeable for Parity Stock or Junior
Stock (in each case other than Disqualified
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28
Stock) of the Company (less the amount of any cash, or the
fair value of any other property, distributed by the Company
upon such conversion or exchange); and
(IV) an amount equal to the sum of (x) the net
reduction in Investments in any Person resulting from
dividends, repayments of loans or advances or other transfers
of assets (but excluding such interest, dividends, repayments,
advances or other transfers of assets to the extent any such
item increases Consolidated Net Income), in each case to the
Company or any Restricted Subsidiary from any Person
(including, without limitation, from Unrestricted
Subsidiaries), and (y) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair
market value of the net assets of an Unrestricted Subsidiary
at the time such Unrestricted Subsidiary is designated a
Restricted Subsidiary; provided, however, that the foregoing
sum shall not exceed, in the case of any Person (including any
Unrestricted Subsidiary), the amount of Investments previously
made (and treated as a Restricted Payment) by the Company or
any Restricted Subsidiary in such Person.
(B) The provisions of paragraph (l)(iii)(A) shall not
prohibit:
(1) any Restricted Payment made out of the proceeds of the
substantially concurrent sale of, or any acquisition of any Parity
Stock or Junior Stock of the Company made by exchange for, other Parity
Stock or Junior Stock, as the case may be, of the Company (in each case
other than Disqualified Stock and other than Parity Stock or Junior
Stock issued or sold to a Subsidiary of the Company or an employee
stock ownership plan or to a trust established by the Company or any of
its Subsidiaries for the benefit of their employees); provided,
however, that (I) such Restricted Payment shall be excluded in the
calculation of the amount of Restricted Payments and (II) the Net Cash
Proceeds from such sale shall be excluded from the
<PAGE> 29
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calculation of amounts under paragraph (l)(iii)(A)(3)(II);
(2) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would
have complied with paragraph (l)(iii); provided, however, that at the
time of payment of such dividend, no other Voting Rights Triggering
Event shall have occurred and be continuing (or result therefrom);
provided further, however, that such dividend shall be included in the
calculation of the amount of Restricted Payments; or
(3) the repurchase or other acquisition of shares of, or
options to purchase shares of, common stock of the Company or any of
its Subsidiaries from employees, former employees, directors or former
directors of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former
directors), pursuant to the terms of the agreements (including
employment agreements) or plans (or amendments thereto) approved by the
Board of Directors under which such individuals purchase or sell or are
granted the option to purchase or sell, shares of such common stock;
provided, however, that the aggregate amount of such repurchases and
other acquisitions shall not exceed $1,000,000 in any calendar year;
provided further, however, that such repurchases and other acquisitions
shall be excluded in the calculation of the amount of Restricted
Payments.
(iv) Limitation on Restrictions on Distributions from
Restricted Subsidiaries. The Company shall not, and shall not permit any
Restricted Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to (A) pay dividends or make any other distributions on
its Capital Stock to the Company or a Restricted Subsidiary or pay any
Indebtedness owed to the
<PAGE> 30
30
Company, (B) make any loans or advances to the Company or (C) transfer any of
its property or assets to the Company, except:
(1) any encumbrance or restriction pursuant to an
agreement in effect at or entered into on the Issue
Date;
(2) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary on or prior to the
date on which such Restricted Subsidiary was acquired by the Company
(other than Indebtedness Incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant
to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Company) and outstanding on such date;
(3) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (1) or (2) of this paragraph (l)(iv) or
this clause (3) or contained in any amendment to an agreement referred
to in clause (1) or (2) of this paragraph (l)(iv) or this clause (3);
provided, however, that the encumbrances and restrictions with respect
to such Restricted Subsidiary contained in any such refinancing
agreement or amendment are no less favorable to the holders of
Exchangeable Preferred Stock than encumbrances and restrictions with
respect to such Restricted Subsidiary contained in such predecessor
agreements;
(4) any such encumbrance or restriction consisting of
customary nonassignment provisions in leases governing leasehold
interests to the extent such provisions restrict the transfer of the
lease or the property leased thereunder;
<PAGE> 31
31
(5) in the case of clause (C) above, restrictions contained in
IRU Agreements, security agreements or mortgages securing Indebtedness
or other obligations of a Restricted Subsidiary to the extent such
restrictions restrict the transfer of the property subject to such
security agreements or mortgages;
(6) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of
such Restricted Subsidiary pending the closing of such sale or
disposition; and
(7) any such encumbrance or restriction contained
in the PSINet Agreement.
(v) Limitation on Affiliate Transactions. (A) The Company
shall not, and shall not permit any Restricted Subsidiary to, enter into or
permit to exist any transaction (including the purchase, sale, lease or exchange
of any property, employee compensation arrangements or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction") unless
(1) such Affiliate Transaction is on terms that are no less favorable to the
Company or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (2) the Company delivers to the Transfer
Agent (I) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $1,000,000 a resolution of the Board of Directors set
forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (1) above and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of Directors
and (II) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $10,000,000, other than transactions with GE Capital
Communication and Excluded PSINet Transactions, an opinion as to the fairness to
the Company or such Restricted Subsidiary of such Affiliate Transaction from a
financial point of view issued by an investment banking firm of national
standing.
<PAGE> 32
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(B) The provisions of the foregoing paragraph (l)(v)(A) shall
not prohibit (1) any Restricted Payment permitted to be paid pursuant to
paragraph (l)(iii), (2) any issuance of securities, or other payments, awards or
grants in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans approved by the
Board of Directors, (3) the grant of stock options or similar rights to
employees and directors of the Company pursuant to plans approved by the Board
of Directors, (4) loans or advances to employees in the ordinary course of
business in accordance with the past practices of the Company or its Restricted
Subsidiaries, but in any event not to exceed $500,000 in the aggregate
outstanding at any one time, (5) any employment or consulting arrangement or
agreement entered into by the Company or any of its Restricted Subsidiaries in
the ordinary course of business and consistent with the past practice of the
Company or such Restricted Subsidiary, (6) the payment of reasonable fees to
directors of the Company and its Restricted Subsidiaries who are not employees
of the Company or its Restricted Subsidiaries, (7) any Affiliate Transaction
between the Company and a Restricted Subsidiary or between Restricted
Subsidiaries, (8) transactions in connection with Permitted Businesses between
the Company and GE Capital Communication, (9) transactions between the Company
or any Restricted Subsidiary specifically contemplated by the PSINet Agreement
and (10) the issuance or sale of any Capital Stock (other than Disqualified
Stock) of the Company. Notwithstanding the foregoing, Affiliate Transactions
shall not include any transaction involving the sale, purchase, repurchase,
redemption, transfer, exchange or other acquisition or disposition of Senior
Notes, Exchangeable Preferred Stock or Convertible Preferred Stock by or from,
or the payment of principal of, premium, if any, and interest on, or liquidation
preference of and dividend on, any Senior Notes, Exchangeable Preferred Stock or
Convertible Preferred Stock, as the case may be, to any Affiliate of the Company
or any Affiliate of a Restricted Subsidiary of the Company; provided, however,
that such transaction is offered substantially concurrently to all other holders
of Senior Notes, Exchangeable Preferred Stock or Convertible Preferred Stock, as
the case may be, on the same terms and conditions;
<PAGE> 33
33
provided further, however, that such transaction is approved by a majority of
the disinterested members of the Board of Directors, other than transactions in
connection with the payment of principal of, premium, if any, and interest on,
or liquidation preference of and dividends on, Senior Notes, Exchangeable
Preferred Stock or Convertible Preferred Stock, as the case may be, pursuant to
the provisions of the indenture or certificate of designation governing the
payment of interest and principal, dividends and liquidation preference,
optional redemption, repurchases from the proceeds of an asset disposition and
repurchases upon a change of control.
(vi) When Company May Merge or Transfer Assets. The Company
shall not consolidate with or merge with or into, or convey, transfer or lease,
in one transaction or a series of transactions, all or substantially all its
assets to, any Person, unless: (1) the resulting, surviving or transferee Person
(the "Successor Company") shall be a Person organized and existing under the
laws of the United States of America, any State thereof or the District of
Columbia and the Successor Company (if not the Company) shall expressly assume
all the obligations of the Company under the Exchangeable Preferred Stock; (2)
immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary as a result of such transaction as having been Incurred by such
Successor Company or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing, (3) immediately after giving
effect to such transaction, the Successor Company would be able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (l)(ii)(A); (4)
immediately after giving effect to such transaction, the Successor Company shall
have Consolidated Net Worth in an amount that is not less than the Consolidated
Net Worth of the Company immediately prior to such transaction; and (5) the
Company shall have delivered to the Trustee an Officers' Certificate, stating
that such consolidation, merger or transfer and such assumption (if any) comply
with this Certificate of Designation.
<PAGE> 34
34
(m) Certificates. (i) Form and Dating. The Exchangeable
Preferred Stock and the Transfer Agent's certificate of authentication shall be
substantially in the form of Exhibit A, which is hereby incorporated in and
expressly made a part of this Certificate of Designation. The Exchangeable
Preferred Stock certificate may have notations, legends or endorsements required
by law, stock exchange rule, agreements to which the Company is subject, if any,
or usage (provided that any such notation, legend or endorsement is in a form
acceptable to the Company). Each Exchangeable Preferred Stock certificate shall
be dated the date of its authentication. The terms of the Exchangeable Preferred
Stock certificate set forth in Exhibit A are part of the terms of this
Certificate of Designation.
(A) Global Exchangeable Preferred Stock. The Exchangeable
Preferred Stock sold in reliance on Rule 144A shall be issued initially in the
form of one or more fully registered global certificates with the global
securities legend and restricted securities legend set forth in Exhibit A hereto
(the "Global Exchangeable Preferred Stock"), which shall be deposited on behalf
of the purchasers represented thereby with the Transfer Agent, at its New York
office, as custodian for DTC (or with such other custodian as DTC may direct),
and registered in the name of DTC or a nominee of DTC, duly executed by the
Company and authenticated by the Transfer Agent as hereinafter provided. Subject
to the terms hereof and to the requirements of applicable law, the number of
shares of Exchangeable Preferred Stock represented by Global Exchangeable
Preferred Stock may from time to time be increased or decreased by adjustments
made on the records of the Transfer Agent and DTC or its nominee as hereinafter
provided.
(B) Book-Entry Provisions. In the event Global Exchangeable
Preferred Stock is deposited with or on behalf of DTC, the Company shall execute
and the Transfer Agent shall authenticate and deliver initially one or more
Global Exchangeable Preferred Stock certificates that (a) shall be registered in
the name of DTC for such Global Exchangeable Preferred Stock or the nominee of
DTC and (b) shall be delivered by the Transfer Agent to DTC or pursuant to DTC's
<PAGE> 35
35
instructions or held by the Transfer Agent as custodian for DTC.
Members of, or participants in, DTC ("Agent Members") shall
have no rights under this Certificate of Designation with respect to any Global
Exchangeable Preferred Stock held on their behalf by DTC or by the Transfer
Agent as the custodian of DTC or under such Global Exchangeable Preferred Stock,
and DTC may be treated by the Company, the Transfer Agent and any agent of the
Company or the Transfer Agent as the absolute owner of such Global Exchangeable
Preferred Stock for all purposes whatsoever. Notwithstanding the foregoing,
nothing herein shall prevent the Company, the Transfer Agent or any agent of the
Company or the Transfer Agent from giving effect to any written certification,
proxy or other authorization furnished by DTC or impair, as between DTC and its
Agent Members, the operation of customary practices of DTC governing the
exercise of the rights of a holder of a beneficial interest in any Global
Exchangeable Preferred Stock.
(C) Certificated Exchangeable Preferred Stock. Exchangeable
Preferred Stock initially sold in offshore transactions pursuant to Regulation S
under the Securities Act will be issued in fully registered certificated form
("Certificated Exchangeable Preferred Stock").
Except as otherwise provided by applicable law or as provided
in this paragraph (m)(i) or in paragraph (m)(iii), owners of beneficial
interests in Global Exchangeable Preferred Stock will not be entitled to receive
physical delivery of Certificated Exchangeable Preferred
Stock.
After a transfer of any Initial Exchangeable Preferred Stock
during the period of the effectiveness of a Shelf Registration Statement with
respect to such Initial Exchangeable Preferred Stock, all requirements
pertaining to legends on such Initial Exchangeable Preferred Stock will cease to
apply, the requirements requiring that any such Initial Exchangeable Preferred
Stock issued to Holders be issued in global form will cease to apply, and
Certificated Exchangeable Preferred Stock without legends will be
<PAGE> 36
36
available to the transferee of the Holder of such Initial Exchangeable Preferred
Stock upon exchange of such transferring Holder's Initial Exchangeable Preferred
Stock or directions to transfer such Holder's interest in the Global
Exchangeable Preferred Stock, as applicable. Upon the consummation of a
Registered Exchange Offer with respect to the Initial Exchangeable Preferred
Stock pursuant to which Holders of such Initial Exchangeable Preferred Stock are
offered Series B Stock in exchange for their Initial Exchangeable Preferred
Stock, all requirements that Initial Exchangeable Preferred Stock be issued in
global form will cease to apply and Certificated Exchangeable Preferred Stock
with the restricted securities legend set forth in Exhibit A hereto will be
available to Holders of such Initial Exchangeable Preferred Stock that do not
exchange their Initial Exchangeable Preferred Stock, and Series B Stock in
certificated form will be available to Holders that exchange such Initial
Exchangeable Preferred Stock in such Registered Exchange Offer.
(ii) Execution and Authentication. Two Officers shall sign the
certificates representing Exchangeable Preferred Stock for the Company by manual
or facsimile signature. The Company's seal shall be impressed, affixed,
imprinted or reproduced on the Exchangeable Preferred Stock and may be in
facsimile form.
If an Officer whose signature is on certificates representing
Exchangeable Preferred Stock no longer holds that office at the time the
Transfer Agent authenticates the Exchangeable Preferred Stock evidenced thereby,
the shares of Exchangeable Preferred Stock evidenced thereby shall be valid
nevertheless.
A certificate representing Exchangeable Preferred Stock shall
not be valid until an authorized signatory of the Transfer Agent manually signs
the certificate of authentication on the Exchangeable Preferred Stock. The
signature shall be conclusive evidence that the Exchangeable Preferred Stock has
been authenticated under this Certificate of Designation.
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The Transfer Agent shall authenticate and deliver: (1) 300,000
shares of Initial Exchangeable Preferred Stock for original issue and (2)
300,000 shares of Series B Stock for issue only in a Registered Exchange Offer
pursuant to the Registration Rights Agreement, in each case upon a written order
of the Company signed by two Officers or by an Officer and either an Assistant
Treasurer or an Assistant Secretary of the Company. In addition, the Transfer
Agent shall authenticate and deliver, from time to time, Additional Shares for
original issue upon order of the Company signed by two Officers or by an Officer
or either an Assistant Treasurer or Assistant Secretary of the Company. Such
orders shall specify the number of shares of Exchangeable Preferred Stock to be
authenticated and the date on which the original issue of Exchangeable Preferred
Stock is to be authenticated and whether the Exchangeable Preferred Stock is to
be Initial Exchangeable Preferred Stock or Series B Stock.
The Transfer Agent may appoint an authenticating agent
reasonably acceptable to the Company to authenticate the Exchangeable Preferred
Stock. Unless limited by the terms of such appointment, an authenticating agent
may authenticate Exchangeable Preferred Stock whenever the Transfer Agent may do
so. Each reference in this Certificate of Designation to authentication by the
Transfer Agent includes authentication by such agent. An authenticating agent
has the same rights as the Transfer Agent or agent for service of notices and
demands.
(iii) Transfer and Exchange. (A) Transfer and Exchange of
Certificated Exchangeable Preferred Stock. When Certificated Exchangeable
Preferred Stock is presented to the Transfer Agent with a request to register
the transfer of such Certificated Exchangeable Preferred Stock or to exchange
such Certificated Exchangeable Preferred Stock for an equal number of shares of
Certificated Exchangeable Preferred Stock of other authorized denominations, the
Transfer Agent shall register the transfer or make the exchange as requested if
its reasonable requirements for such transaction are met; provided, however,
that the
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38
Certificated Exchangeable Preferred Stock surrendered for transfer or exchange:
(1) shall be duly endorsed or accompanied by a written
instrument of transfer in form reasonably satisfactory to the Company
and the Transfer Agent, duly executed by the Holder thereof or its
attorney duly authorized in writing; and
(2) in the case of Transfer Restricted Securities that are
Certificated Exchangeable Preferred Stock, are being transferred or
exchanged pursuant to an effective registration statement under the
Securities Act or pursuant to clause (I) or (II) below, and are
accompanied by the following additional information and documents, as
applicable:
(I) if such Transfer Restricted Securities are being
delivered to the Transfer Agent by a Holder for registration
in the name of such Holder, without transfer, a certification
from such Holder to that effect in substantially the form of
Exhibit B hereto; or
(II) if such Transfer Restricted Securities are being
transferred to the Company or to a "qualified institutional
buyer" ("QIB") in accordance with Rule 144A under the
Securities Act or pursuant to an exemption from registration
in accordance with Rule 144 or Regulation S under the
Securities Act, a certification to that effect (in
substantially the form of Exhibit B hereto).
(B) Restrictions on Transfer of Certificated Exchangeable
Preferred Stock for a Beneficial Interest in Global Exchangeable Preferred
Stock. Certificated Exchangeable Preferred Stock may not be exchanged for a
beneficial interest in Global Exchangeable Preferred Stock except upon
satisfaction of the requirements set forth below. Upon receipt by the Transfer
Agent of Certificated Exchangeable Preferred Stock, duly endorsed or accompanied
<PAGE> 39
39
by appropriate instruments of transfer, in form satisfactory to the Transfer
Agent, together with:
(1) if such Certificated Exchangeable Preferred Stock is a
Transfer Restricted Security, certification that such Certificated
Exchangeable Preferred Stock is being transferred to a QIB in
accordance with Rule 144A under the Securities Act; and
(2) whether or not such Certificated Exchangeable Preferred
Stock is a Transfer Restricted Security, written instructions directing
the Transfer Agent to make, or to direct DTC to make, an adjustment on
its books and records with respect to such Global Exchangeable
Preferred Stock to reflect an increase in the number of shares of
Exchangeable Preferred Stock represented by the Global Exchangeable
Preferred Stock,
then the Transfer Agent shall cancel such Certificated Exchangeable Preferred
Stock and cause, or direct DTC to cause, in accordance with the standing
instructions and procedures existing between DTC and the Transfer Agent, the
number of shares of Exchangeable Preferred Stock represented by the Global
Exchangeable Preferred Stock to be increased accordingly. If no Global
Exchangeable Preferred Stock is then outstanding, the Company shall issue and
the Transfer Agent shall authenticate, upon written order of the Company in the
form of an Officers' Certificate, a new Global Exchangeable Preferred Stock
representing the appropriate number of shares.
(C) Transfer and Exchange of Global Exchangeable Preferred
Stock. The transfer and exchange of Global Exchangeable Preferred Stock or
beneficial interests therein shall be effected through DTC, in accordance with
this Certificate of Designation (including applicable restrictions on transfer
set forth herein, if any) and the procedures of DTC therefor.
(D) Transfer of a Beneficial Interest in Global Exchangeable
Preferred Stock for a Certificated Exchangeable Preferred Stock.
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(1) Any person having a beneficial interest in Exchangeable
Preferred Stock that is being transferred or exchanged pursuant to an
effective registration statement under the Securities Act or pursuant
to clause (I) or (II) below may upon request, and if accompanied by the
information specified below, exchange such beneficial interest for
Certificated Exchangeable Preferred Stock representing the same number
of shares of Exchangeable Preferred Stock. Upon receipt by the Transfer
Agent of written instructions or such other form of instructions as is
customary for DTC from DTC or its nominee on behalf of any person
having a beneficial interest in Global Exchangeable Preferred Stock and
upon receipt by the Transfer Agent of a written order or such other
form of instructions as is customary for DTC or the person designated
by DTC as having such a beneficial interest in a Transfer Restricted
Security only, and upon the following additional information and
documents (all of which may be submitted by facsimile):
(I) if such beneficial interest is being transferred
to the person designated by DTC as being the owner of a
beneficial interest in Global Exchangeable Preferred Stock, a
certification from such person to that effect (in
substantially the form of Exhibit B hereto); or
(II) if such beneficial interest is being transferred
to a QIB in accordance with Rule 144A under the Securities Act
or pursuant to an exemption from registration in accordance
with Rule 144 or Regulation S under the Securities Act, a
certification to that effect (in substantially the form of
Exhibit B hereto);
then, the Transfer Agent or DTC, at the direction of the Transfer Agent, will
cause, in accordance with the standing instructions and procedures existing
between DTC and the Transfer Agent, the number of shares of Exchangeable
Preferred Stock represented by Global Exchangeable Preferred Stock to be reduced
on its books and records and, following such reduction, the Company will execute
and the Transfer
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Agent will authenticate and deliver to the transferee Certificated Exchangeable
Preferred Stock.
(2) Certificated Exchangeable Preferred Stock issued in
exchange for a beneficial interest in a Global Exchangeable Preferred
Stock pursuant to this paragraph (m)(iii)(D) shall be registered in
such names and in such authorized denominations as DTC, pursuant to
instructions from its direct or indirect participants or otherwise,
shall instruct the Transfer Agent. The Transfer Agent shall deliver
such Certificated Exchangeable Preferred Stock to the persons in whose
names such Exchangeable Preferred Stock are so registered in accordance
with the instructions of DTC.
(E) Restrictions on Transfer and Exchange of Global
Exchangeable Preferred Stock. Notwithstanding any other provisions of this
Certificate of Designation (other than the provisions set forth in paragraph
(m)(iii)(F)), Global Exchangeable Preferred Stock may not be transferred as a
whole except by DTC to a nominee of DTC or by a nominee of DTC to DTC or another
nominee of DTC or by DTC or any such nominee to a successor depository or a
nominee of such successor depository.
(F) Authentication of Certificated Exchangeable
Preferred Stock. If at any time:
(1) DTC notifies the Company that DTC is unwilling or unable
to continue as depository for the Global Exchangeable Preferred Stock
and a successor depository for the Global Exchangeable Preferred Stock
is not appointed by the Company within 90 days after delivery of such
notice;
(2) DTC ceases to be a clearing agency registered
under the Exchange Act;
(3) there shall have occurred and be continuing a
Voting Rights Triggering Event; or
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(4) the Company, in its sole discretion, notifies the Transfer
Agent in writing that it elects to cause the issuance of Certificated
Exchangeable Preferred Stock under this Certificate of Designation,
then the Company will execute, and the Transfer Agent, upon receipt of a written
order of the Company signed by two Officers or by an Officer and either an
Assistant Treasurer or an Assistant Secretary of the Company requesting the
authentication and delivery of Certificated Exchangeable Preferred Stock to the
persons designated by the Company, will authenticate and deliver Certificated
Exchangeable Preferred Stock equal to the number of shares of Exchangeable
Preferred Stock represented by the Global Exchangeable Preferred Stock, in
exchange for such Global Exchangeable Preferred Stock.
(G) Legend. (1) Except as permitted by the following paragraph
(2), each certificate evidencing the Global Exchangeable Preferred Stock and the
Certificated Exchangeable Preferred Stock (and all Exchangeable Preferred Stock
issued in exchange therefor or substitution thereof) shall bear a legend in
substantially the following form:
"THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES
ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF
THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY
BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER.
"THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE ISSUER THAT
(A) THIS SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED ONLY (i) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS
A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A,
(ii) IN AN
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OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE SECURITIES
ACT, (iii) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (iv)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR (v) TO THE COMPANY, IN EACH OF CASES (i) THROUGH (iv) IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE
RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.
"BY ITS ACQUISITION HEREOF, THE HOLDER REPRESENTS THAT (A) IT IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT") OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS
SECURITY IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S.
(2) Upon any sale or transfer of a Transfer Restricted
Security (including any Transfer Restricted Security represented by Global
Exchangeable Preferred Stock) pursuant to Rule 144 under the Securities Act or
an effective registration statement under the Securities Act:
(I) in the case of any Transfer Restricted Security
that is a Certificated Exchangeable Preferred Stock, the
Transfer Agent shall permit the Holder thereof to exchange
such Transfer Restricted Security for a Certificated
Exchangeable Preferred Stock that does not bear the legend set
forth above and rescind any restriction on the transfer of
such Transfer Restricted Security;
(II) in the case of any Transfer Restricted Security
that is represented by a Global Exchangeable Preferred Stock,
the Transfer Agent shall permit the Holder thereof to exchange
such Transfer Restricted Security for a Certificated
Exchangeable Preferred Stock Security that does not bear the
legend set forth above and rescind any restriction on the
transfer of such Transfer Restricted Security, if the Holder's
request for
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such exchange was made in reliance on Rule 144 and the Holder
certifies to that effect in writing to the Transfer Agent
(such certification to be in the form set forth on the reverse
of the Transfer Restricted Security); and
(III) in the case of any Transfer Restricted Security
that is represented by a Global Exchangeable Preferred Stock,
the Transfer Agent shall permit the Holder thereof to exchange
such Transfer Restricted Security (in connection with the
offer to exchange Series B Stock for Initial Exchangeable
Preferred Stock pursuant to the Registration Rights Agreement)
for another Global Exchangeable Preferred Stock that does not
bear the legend set forth above.
(H) Cancelation or Adjustment of Global Exchangeable Preferred
Stock. At such time as all beneficial interests in Global Exchangeable Preferred
Stock have either been exchanged for Certificated Exchangeable Preferred Stock,
redeemed, repurchased or canceled, such Global Exchangeable Preferred Stock
shall be returned to DTC for cancelation or retained and canceled by the
Transfer Agent. At any time prior to such cancelation, if any beneficial
interest in Global Exchangeable Preferred Stock is exchanged for Certificated
Exchangeable Preferred Stock, redeemed, repurchased or canceled, the number of
shares of Exchangeable Preferred Stock represented by such Global Exchangeable
Preferred Stock shall be reduced and an adjustment shall be made on the books
and records of the Transfer Agent with respect to such Global Exchangeable
Preferred Stock, by the Transfer Agent or DTC, to reflect such reduction.
(I) Obligations with Respect to Transfers and Exchanges of
Exchangeable Preferred Stock. (1) To permit registrations of transfers and
exchanges, the Company shall execute and the Transfer Agent shall authenticate
Certificated Exchangeable Preferred Stock and Global Exchangeable Preferred
Stock as required pursuant to the provisions of this paragraph (iii).
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(2) All Certificated Exchangeable Preferred Stock and Global
Exchangeable Preferred Stock issued upon any registration of transfer
or exchange of Certificated Exchangeable Preferred Stock or Global
Exchangeable Preferred Stock shall be the valid obligations of the
Company, entitled to the same benefits under this Certificate of
Designation as the Certificated Exchangeable Preferred Stock or Global
Exchangeable Preferred Stock surrendered upon such registration of
transfer or exchange.
(3) Prior to due presentment for registration of transfer of
any shares of Exchangeable Preferred Stock, the Transfer Agent and the
Company may deem and treat the person in whose name such shares of
Exchangeable Preferred Stock are registered as the absolute owner of
such Exchangeable Preferred Stock and neither the Transfer Agent nor
the Company shall be affected by notice to the contrary.
(4) No service charge shall be made to a Holder for any
registration of transfer or exchange upon surrender of any Exchangeable
Preferred Stock Certificate at the office of the Transfer Agent
maintained for that purpose. However, the Company may require payment
of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection with any registration of transfer or
exchange of Exchangeable Preferred Stock Certificates.
(5) Upon any sale or transfer of shares of Exchangeable
Preferred Stock (including any Exchangeable Preferred Stock represented
by a Global Exchangeable Preferred Stock Certificate) pursuant to an
effective registration statement under the Securities Act, pursuant to
Rule 144 under the Securities Act or pursuant to an opinion of counsel
reasonably satisfactory to the Company that no legend is required:
(A) in the case of any Certificated Exchangeable
Preferred Stock, the Transfer Agent shall
permit the holder thereof to exchange such
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46
Exchangeable Preferred Stock for Certificated
Exchangeable Preferred Stock that does not
bear the legend set forth in
paragraph (iii)(G) above and rescind any
restriction on the transfer of such
Exchangeable Preferred Stock; and
(B) in the case of any Global Exchangeable Preferred
Stock, such Exchangeable Preferred Stock shall not be
required to bear the legend set forth in paragraph
(iii)(G) above but shall continue to be subject to
the provisions of paragraph (iii)(D) hereof;
provided, however, that with respect to any request
for an exchange of Exchangeable Preferred Stock that
is represented by Global Exchangeable Preferred Stock
for Certificated Exchangeable Preferred Stock that
does not bear the legend set forth in paragraph
(iii)(G) above in connection with a sale or transfer
thereof pursuant to Rule 144 (and based upon an
opinion of counsel if the Company so requests), the
Holder thereof shall certify in writing to the
Transfer Agent that such request is being made
pursuant to Rule 144 (such certification to be
substantially in the form of Exhibit B hereto).
(iv) Replacement Certificates. If a mutilated Exchangeable
Preferred Stock certificate is surrendered to the Transfer Agent or if the
Holder of a Exchangeable Preferred Stock certificate claims that the
Exchangeable Preferred Stock certificate has been lost, destroyed or wrongfully
taken, the Company shall issue and the Transfer Agent shall countersign a
replacement Exchangeable Preferred Stock certificate if the reasonable
requirements of the Transfer Agent and of Section 8-405 of the Uniform
Commercial Code as in effect in the State of New York are met. If required by
the Transfer Agent or the Company, such Holder shall furnish an indemnity bond
sufficient in the judgment of the Company and the Transfer Agent to protect the
Company and the Transfer Agent from any loss which
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either of them may suffer if a Exchangeable Preferred Stock certificate is
replaced. The Company and the Transfer Agent may charge the Holder for their
expenses in replacing a Exchangeable Preferred Stock certificate.
(v) Temporary Certificates. Until definitive Exchangeable
Preferred Stock certificates are ready for delivery, the Company may prepare and
the Transfer Agent shall countersign temporary Exchangeable Preferred Stock
certificates. Temporary Exchangeable Preferred Stock certificates shall be
substantially in the form of definitive Exchangeable Preferred Stock
certificates but may have variations that the Company considers appropriate for
temporary Exchangeable Preferred Stock certificates. Without unreasonable delay,
the Company shall prepare and the Transfer Agent shall countersign definitive
Exchangeable Preferred Stock certificates and deliver them in exchange for
temporary Exchangeable Preferred Stock certificates.
(vi) Cancelation. (A) In the event the Company shall purchase
or otherwise acquire Certificated Exchangeable Preferred Stock, the same shall
thereupon be delivered to the Transfer Agent for cancelation.
(B) At such time as all beneficial interests in Global
Exchangeable Preferred Stock have either been exchanged for Certificated
Exchangeable Preferred Stock, redeemed, repurchased or canceled, such Global
Exchangeable Preferred Stock shall thereupon be delivered to the Transfer
Agent for cancelation.
(C) The Transfer Agent and no one else shall cancel and
destroy all Exchangeable Preferred Stock certificates surrendered for transfer,
exchange, replacement or cancelation and deliver a certificate of such
destruction to the Company unless the Company directs the Transfer Agent to
deliver canceled Exchangeable Preferred Stock certificates to the Company. The
Company may not issue new Exchangeable Preferred Stock certificates to replace
Exchangeable Preferred Stock certificates to the extent they evidence
Exchangeable Preferred Stock which the Company has purchased or otherwise
acquired.
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48
(m) Additional Rights of Holders. In addition to the rights
provided to Holders under this Certificate of Designation, Holders shall have
the rights set forth in the Registration Rights Agreement.
(n) Certain Definitions. As used in this Certificate of
Designation, the following terms shall have the following meanings (and (1)
terms defined in the singular have comparable meanings when used in the plural
and vice versa, (2) "including" means including without limitation, (3) "or" is
not exclusive and (4) an accounting term not otherwise defined has the meaning
assigned to it in accordance with United States generally accepted accounting
principles as in effect on the Issue Date and all accounting calculations will
be determined in accordance with such principles), unless the content otherwise
requires:
"Accounts Receivable" means, with respect to any Person, all
accounts receivable of such Person net of allowances for uncollectible accounts,
discounts, refunds and all other allowances as determined in accordance with
GAAP.
"Additional Assets" means (i) any property or assets (other
than Indebtedness and Capital Stock) in a Related Business; (ii) the Capital
Stock of a Person that becomes a Restricted Subsidiary as a result of the
acquisition of such Capital Stock by the Company or another Restricted
Subsidiary; or (iii) Capital Stock in any Person that at such time is a
Restricted Subsidiary; provided, however, that any such Restricted Subsidiary
described in clauses (ii) or (iii) above is primarily engaged in a Related
Business.
"Affiliate" of any specified Person means any other Person,
directly or indirectly, controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings
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49
correlative to the foregoing. For purposes of paragraphs (l)(iii) and (l)(v)
only, "Affiliate" shall also mean any beneficial owner of Capital Stock
representing 10% or more of the total voting power of the Voting Stock (on a
fully diluted basis) of the Company or of rights or warrants to purchase such
Capital Stock (whether or not currently exercisable) and any Person who would be
an Affiliate of any such beneficial owner pursuant to the first sentence hereof.
"Asset Swap" means an exchange of assets by the Company or any
of its Restricted Subsidiaries for one or more Permitted Businesses, assets to
be used in a Permitted Business, or for a controlling equity interest in any
Person whose assets consist primarily of one or more Permitted Businesses.
"Attributable Debt" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
dividend rate borne by the Exchangeable Preferred Stock compounded annually) of
the total obligations of the lessee for rental payments during the remaining
term of the lease included in such Sale/Leaseback Transaction (including any
period for which such lease has been extended).
"Average Life" means, as of the date of determina tion, with
respect to any Indebtedness or Preferred Stock, the quotient obtained by
dividing (i) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment of
such Indebtedness or redemption or similar payment with respect to such
Preferred Stock multi plied by the amount of such payment by (ii) the sum of all
such payments.
"Board of Directors" means the Board of Directors of the
Company or any committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
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50
"Capital Lease Obligations" means an obligation that is
required to be classified and accounted for as a capital lease for financial
reporting purposes in accordance with GAAP, and the amount of Indebtedness
represented by such obligation shall be the capitalized amount of such
obligation determined in accordance with GAAP; and the Stated Maturity thereof
shall be the date of the last payment of rent or any other amount due under such
lease prior to the first date upon which such lease may be terminated by the
lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into or exchangeable for
such equity.
"Change of Control" means the occurrence of any of the
following events:
(i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than one or more Permitted Holders,
is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that for purposes of this clause (i)
such person shall be deemed to have "beneficial ownership" of all
shares that any such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time, and
except that any person that is deemed to have beneficial ownership of
shares solely as a result of being part of a group pursuant to Rule
13d-5(b)(1) shall not be deemed to have beneficial ownership of any
shares held by a Permitted Holder forming a part of such group),
directly or indirectly, of more than 50% of the total voting power of
the Voting Stock of the Company (for the purposes of this clause (i),
such other person shall be deemed to beneficially own any Voting Stock
of a specified corporation held by a parent corporation, if such other
person is the beneficial owner (as defined in this clause (i)),
directly or indirectly, of more than 35% of the voting
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51
power of the Voting Stock of such parent corporation and the Permitted
Holders beneficially own (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of
the board of directors of such parent corporation);
(ii) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
(together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of the
Company was approved by a vote of a majority of the directors of the
Company then still in office who were either directors at the beginning
of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority
of the Board of Directors then in office; provided, however, that any
directors elected by holders of Preferred Stock of the Company pursuant
to any voting rights provisions included in the certificate of
designation relating to such Preferred Stock shall be excluded in
making any determination pursuant to this clause (ii); or
(iii) the merger or consolidation of the Company with or into
another Person or the merger of another Person with or into the
Company, or the sale of all or substantially all the assets of the
Company to another Person (other than a Person that is controlled by
the Permitted Holders), and, in the case of any such merger or
consolidation, the securities of the Company that are outstanding
immediately prior to such transaction and which represent 100% of the
aggregate voting power of the Voting Stock of the Company are changed
into or exchanged for cash, securities or property, unless pursuant to
such transaction such securities are changed into or exchanged for, in
addition to any other consideration, securities of the surviving
corporation that represent immediately after such transaction, at
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52
least a majority of the aggregate voting power of the Voting Stock of
the surviving corporation.
Notwithstanding the foregoing, a Change of Control shall not
be deemed to have occurred if, after such event that otherwise would constitute
a Change of Control, the Securities are rated Investment Grade by Moody's or
Standard & Poor's on the 30th day following the event that otherwise would
constitute a Change of Control (the "Change of Control Determination Date");
provided, however, that to the extent there is a "rating watch" with respect to
the Exchangeable Preferred Stock or other rating agency review on such 30th day,
then the Change of Control Determination Date shall be the first Business Day
thereafter on which the Exchangeable Preferred Stock is not subject to a "rating
watch" or other rating agency review by either Moody's or Standard & Poor's. The
term "Investment Grade", for such purpose, means a rating of Baa3 or higher in
the case of Moody's, or BBB- or higher in the case of Standard & Poor's.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means the party named as such in this Certificate of
Designation until a successor replaces it and, thereafter, means the successor.
"Consolidated Capital Ratio" of any Person as of any date
means the ratio of (i) the aggregate consolidated principal amount of
Indebtedness of such Person then outstanding to (ii) the greater of either (a)
the aggregate consolidated paid-in capital of such Person as of such date or (b)
the stockholders' equity as of such date as shown on the consolidated balance
sheet of such Person determined in accordance with GAAP.
"Consolidated Interest Expense" means, for any period, the
total interest expense of the Company and its consolidated Restricted
Subsidiaries, plus, to the extent not included in such total interest expense,
and to the extent incurred by the Company or its Restricted Subsidiaries,
without duplication, (i) interest expense attributable to capital leases and the
interest expense
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attributable to leases constituting part of a Sale/Leaseback Transaction, (ii)
amortization of debt discount and debt issuance cost, (iii) capitalized
interest, (iv) noncash interest expenses, (v) commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing, (vi) net costs associated with Hedging Obligations (including
amortization of fees), (vii) Preferred Stock dividends in respect of all (A)
Preferred Stock of Restricted Subsidiaries and (B) Preferred Stock of the
Company that is Disqualified Stock, in each case held by Persons other than the
Company or a Restricted Subsidiary, (viii) interest incurred in connection with
Investments in discontinued operations, (ix) interest accruing on any
Indebtedness of any other Person to the extent such Indebtedness is Guaranteed
by (or secured by the assets of) the Company or any Restricted Subsidiary and
(x) the cash contributions to any employee stock ownership plan or similar trust
to the extent such contributions are used by such plan or trust to pay interest
or fees to any Person (other than the Company) in connection with Indebtedness
Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net
income of the Company and its consolidated Subsidi aries; provided, however,
that there shall not be included in such Consolidated Net Income:
(i) any net income of any Person (other than the Company) if
such Person is not a Restricted Subsidiary, except that subject to the
exclusion contained in clause (iv) below, the net income of any such
Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Person during such period to the Company or a Restricted Subsidiary as
a dividend or other distribution (subject, in the case of a dividend or
other distribution paid to a Restricted Subsidiary, to the limitations
contained in clause (iii) below);
(ii) any net income (or loss) of any Person acquired by the
Company or a Subsidiary in a pooling of interests transaction for any
period prior to the date of such acquisition;
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(iii) any net income of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions
by such Restricted Subsidiary, directly or indirectly, to the Company,
except that subject to the exclusion contained in clause (iv) below,
the net income of any such Restricted Subsidiary for such period shall
be included in such Consolidated Net Income up to the aggregate amount
of cash actually distributed by such Restricted Subsidiary during such
period to the Company or another Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution paid to another Restricted Subsidiary, to the limitation
contained in this clause);
(iv) any gain (but not loss) realized upon the sale or other
disposition of any assets of the Company, its consolidated Subsidiaries
or any other Person (including pursuant to any sale-and-leaseback
arrangement) which is not sold or otherwise disposed of in the ordinary
course of business and any gain (but not loss) realized upon the sale
or other disposition of any Capital Stock of any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in account
ing principles.
Notwithstanding the foregoing, for the purpose of paragraph (l)(iii) only, there
shall be excluded from Consolidated Net Income any dividends, repayments of
loans or advances or other transfers of assets from any Person (including any
Unrestricted Subsidiary) to the Company or a Restricted Subsidiary to the extent
such dividends, repayments or transfers increase the amount of Restricted
Payments permitted under paragraph (l)(iii) (A)(3)(IV) thereof.
"Consolidated Net Worth" means, with respect to any Person as
of any date, the sum of: (i) the consolidated
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equity of the common stockholders of such Person and its consolidated
Subsidiaries as of such date plus (ii) the respective amounts reported on such
Person's balance sheet as of such date with respect to any series of preferred
stock (other than Disqualified Stock) that by its terms is not entitled to the
payment of dividends unless such dividends may be declared and paid only out of
net earnings in respect of the year of such declaration and payment, but only to
the extent of any cash received by such Person upon issuance of such preferred
stock, less (x) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going concern
business made within 12 months after the acquisition of such business)
subsequent to the Issue Date in the book value of any asset owned by such Person
or a consolidated Subsidiary of such Person, (y) all investments as of such date
in unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments), and (z) all unamortized debt discount and
expense and unamortized deferred charges as of such date, as determined in
accordance with GAAP.
"Consolidated Tangible Assets" means, with respect to any
Person as of any date, the sum of the consolidated gross book value as reflected
in accounting books and records of such Person of all its property, both real
and personal, less (i) the net book value of all its licenses, patents, patent
applications, copyrights, trademarks, tradenames, goodwill, non-compete
agreements or organizational expenses and other like intangibles, (ii)
unamortized debt discount and expenses, (iii) all reserves for depreciation,
obsolescence, depletion and amortization of its properties and (iv) all other
proper reserves which should be provided in connection with the business
conducted by such Person, all of the foregoing as determined in accordance with
GAAP.
"Convertible Preferred Stock" means the Company's 7 1/4%
Junior Convertible Preferred Stock Due 2007.
"Credit Agreements" means one or more debt facilities or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit
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loans, term loans, receivables financing (including through the sale of
receivables to such lenders or to special purpose entities formed to borrow from
such lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time.
"Cumulative Consolidated Interest Expense" means, with respect
to any Person, as of any date of determination, Consolidated Interest Expense
for the period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the Issue Date to the end of such Person's most
recently ended fiscal quarter for which internal financial statements are
available at such date of determination.
"Cumulative Operating Cash Flow" means, as of any date of
determination, Operating Cash Flow for the Company and its Restricted
Subsidiaries for the period (taken as one accounting period) from the beginning
of the first fiscal quarter commencing after the Issue Date to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at such date of determination.
"Currency Agreement" means in respect of a Person any foreign
exchange contract, currency swap agreement or other similar agreement designed
to protect such Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage
of time or both would be, a Voting Rights Triggering Event.
"Disqualified Stock" means, with respect to any Person, any
Capital Stock which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first
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anniversary of the Stated Maturity of the Exchangeable Preferred Stock;
provided, however, that any Capital Stock that would not constitute Disqualified
Stock but for provisions thereof giving holders thereof the right to require
such Person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the first anniversary of
the Stated Maturity of the Securities shall not constitute Disqualified Stock if
the "asset sale" or "change of control" provisions applicable to such Capital
Stock are not more favorable to the holders of such Capital Stock than the
comparable provisions of the Exchange Indenture; provided further, however, that
the Company's Convertible Preferred Stock outstanding on the Issue Date (and any
shares of Convertible Preferred Stock issued as payment of a dividend on
Convertible Preferred Stock) shall be deemed not to constitute Disqualified
Stock.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchange Date" means the date on which the Securities are
exchanged for the Exchangeable Preferred Stock.
"Exchange Debentures" means the debentures issuable pursuant
to the Exchange Indenture.
"Exchange Offer Registration Statement" means a registration
statement filed with the SEC with respect to a Registered Exchange Offer.
"Exchange Indenture" means the Indenture dated as of August
15, 1997, by and between the Company and The Bank of New York, as Trustee,
governing the Exchange Debentures.
"Excluded PSINet Transactions" means any transaction between
the Company or any of its Restricted Subsidiaries with PSINet Inc., so long as
at the time of engaging in, or contracting to engage in, such transaction, the
Company and its Subsidiaries have not acquired shares of PSINet Common Stock
other than the PSINet Shares.
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"GAAP" means generally accepted accounting principles in the
United States of America as in effect as of the Issue Date, including those set
forth in (i) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC. All ratios and
computations based on GAAP contained in this Certificate of Designation shall be
computed in conformity with GAAP.
"GE Capital Communications" means GE Capital Communications
Services Corporation.
"Guarantee" means any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness of any Person
and any obligation, direct or indirect, contingent or otherwise, of such Person
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness of such Person or (ii) entered into for the purpose of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Hedging Obligations" of any Person means the obligations of
such Person pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" means the Person in whose name a share of
Exchangeable Preferred Stock is registered on the Transfer Agent's books.
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"Incur" means issue, assume, Guarantee, incur or otherwise
become liable for; provided, however, that any Indebtedness or Capital Stock of
a Person existing at the time such Person becomes a Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred
by such Subsidiary at the time it becomes a Subsidiary. The term "Incurrence"
when used as a noun shall have a correlative meaning. The accretion of principal
of a non-interest bearing or other discount security shall be deemed the
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person
on any date of determination (without duplication):
(i) the principal in respect of (A) indebtedness of such
Person for money borrowed and (B) indebtedness evidenced by securities,
debentures, bonds or other similar instruments for the payment of which
such Person is responsible or liable, including, in each case, any
premium on such indebtedness to the extent such premium has become due
and payable;
(ii) all Capital Lease Obligations of such Person and all
Attributable Debt in respect of Sale/Leaseback Transactions entered
into by such Person;
(iii) all obligations of such Person issued or assumed as the
deferred purchase price of property, and all obligations of such Person
under any title retention agreement (but excluding trade accounts
payable arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of
any obligor on any letter of credit, banker's acceptance or similar
credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in
clauses (i) through (iii) above) entered into in the ordinary course of
business of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the tenth Business Day following payment on
the letter of credit);
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(v) the amount of all obligations of such Person with respect
to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any Subsidiary of such Person, the
liquidation preference with respect to, any Preferred Stock (but
excluding, in each case, any accrued dividends) of such Subsidiary
(which will constitute Indebtedness Incurred by such Subsidiary and not
Indebtedness Incurred by such Person);
(vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including
by means of any Guarantee;
(vii) all obligations of the type referred to in clauses (i)
through (vi) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of
the value of such property or assets or the amount of the obligation so
secured; and
(viii) to the extent not otherwise included in this
definition, Hedging Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Indebtedness to Operating Cash Flow Ratio" means, as of any
date of determination, the ratio of (a) the aggregate principal amount of all
outstanding Indebtedness of a Person and its Restricted Subsidiaries as of such
date on a consolidated basis, plus the aggregate liquidation preference of all
outstanding Preferred Stock of the Restricted Subsidiaries of such Person as of
such date (excluding any such Preferred Stock held by such Person or a Wholly
Owned Restricted Subsidiary of such Person), plus the
<PAGE> 61
61
aggregate liquidation preference or redemption amount of all Disqualified Stock
of such Person (excluding any Disqualified Stock held by such Person or a Wholly
Owned Restricted Subsidiary of such Person) as of such date to (b) Operating
Cash Flow of such Person and its Restricted Subsidiaries for the most recent
four-quarter period for which internal financial statements are available,
determined on a pro forma basis after giving effect to all acquisitions and
dispositions of assets (notwithstanding clause (ii) of the definition of
"Consolidated Net Income" and including Asset Swaps) made by such Person and its
Restricted Subsidiaries since the beginning of such four-quarter period through
such date as if such acquisitions and dispositions had occurred at the beginning
of such four-quarter period through such date as if such acquisitions and
dispositions had occurred at the beginning of such four-quarter period.
"Independent Financial Advisor" means a United States
investment banking firm of national standing in the United States which does
not, and whose directors, officers and employees or affiliates do not, have a
direct or indirect financial interest in the Company.
"Interest Rate Agreement" means in respect of a Person any
interest rate swap agreement, interest rate cap agreement or other financial
agreement or arrangement designed to protect such Person against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect
advance, loan or any other extensions of credit (other than advances, loans or
other extensions of credit to customers in the ordinary course of business that
are recorded as accounts receivable on the balance sheet of the lender and other
than commission, travel, relocation and similar advances to directors, officers
and employees made in the ordinary course of business) (including by way of
Guarantee or similar arrangement) or capital contribution to any Person (by
means of any transfer of cash or other property to others or any payment for
property or services for the account or use of such Person), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar
<PAGE> 62
62
instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary," the definition of "Restricted Payment" and paragraph
(l)(iii), (i) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of any Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors;
provided further, however, that an acquisition of assets, Capital Stock or other
securities by the Company or any of its Restricted Subsidiaries shall not be
deemed to be an Investment to the extent the consideration for such Capital
Stock or other securities consists of common equity securities of the Company.
"IRU" means an indefeasible right to use fiber or
telecommunications capacity.
"IRU Agreement" means an agreement pursuant to which an
interest in an IRU is sold or leased or otherwise transferred.
"Issue Date" means the date on which the Initial Exchangeable
Preferred Stock is originally issued.
"IXC Internet Capital Contribution" means the contribution by
the Company to IXC Internet, Inc. (so long as IXC Internet, Inc. is a
Subsidiary) of $10 million in cash, an IRU in two excess fibers in the Company's
network (including two fibers in network routes to be built or acquired in the
future) and space in certain points of
<PAGE> 63
63
presence, in each case as contemplated in connection with the transactions
contemplated by the PSINet Agreement.
"Legal Holiday" means a Saturday, a Sunday or a day on which
banking institutions are not required to be open in the State of New York.
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any conditional sale or other
title retention agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc. or its
successor.
"Net Cash Proceeds", with respect to any issuance or sale of
Capital Stock, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Officer" means the Chairman of the Board, the President, any
Vice President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two
Officers.
"Operating Cash Flow" means, with respect to any Person for
any period, the Consolidated Net Income of such Person for such period, (A) plus
(i) extraordinary net losses, net losses on sales of assets outside the ordinary
course of business during such period and noncash charges relating to
write-downs of property and equipment, to the extent such losses and charges
were deducted in computing such Consolidated Net Income, plus (ii) provision for
taxes based on income or profits, to the extent such provision for taxes was
included in computing such Consolidated Net Income, and any provision for taxes
utilized in computing the net losses under clause (i) hereof, plus (iii)
Consolidated Interest Expense of such Person and its
<PAGE> 64
64
Restricted Subsidiaries for such period, to the extent that any such expense
was deducted in computing such Consolidated Net Income, plus (iv) depreciation,
amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) and other noncash charges (excluding any such noncash charge to the
extent that it represents an accrual of or reserve for cash charges in any
future period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Restricted Subsidiaries for such period to the
extent that such depreciation, amortization and other noncash charges were
deducted in computing such Consolidated Net Income and (B) less all noncash
income for such period (excluding any such noncash income to the extent it
represents an accrual of cash income in any future period or amortization of
cash income received in a period). Notwithstanding the foregoing, the provision
for taxes on the income or profits of, and the depreciation and amortization and
other noncash charges of, a Restricted Subsidiary of the referent Person shall
be added to Consolidated Net Income to compute Operating Cash Flow only to the
extent (and in the same proportion) that the net income of such Restricted
Subsidiary was included in calculating the Consolidated Net Income of such
Person for such period and only if and to the extent such Restricted Subsidiary
could have paid such amount at the date of determination as a dividend or
similar distribution to the referent Person by such Restricted Subsidiary
without prior governmental approval (that has not been obtained), pursuant to
the terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
"Opinion of Counsel" means a written opinion from legal
counsel who is acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Permitted Business" means (i) any communications business and
(ii) any business reasonably related or ancillary thereto.
<PAGE> 65
65
"Permitted Holders" means the officers and directors of the
Company, and Trustees of General Electric Pension Trust, Grumman Hill
Associates, Inc. and Grumman Hill Investments, L.P., and each of their
respective officers and directors and their Related Parties.
"Permitted Investment" means an Investment by the Company or
any Restricted Subsidiary in (i) the Company, a Restricted Subsidiary or a
Person that will, upon the making of such Investment, become a Restricted
Subsidiary; provided, however, that the primary business of such Restricted
Subsidiary is a Related Business; (ii) another Person if as a result of such
Investment such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the Company or a
Restricted Subsidiary; provided, however, that such Person's primary business is
a Related Business; (iii) Temporary Cash Investments; (iv) receivables owing to
the Company or any Restricted Subsidiary if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances; (v) payroll, travel, commission and similar
advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses for accounting purposes and that are made
in the ordinary course of business; (vi) loans or advances to employees made in
the ordinary course of business consistent with past practices of the Company or
such Restricted Subsidiary; (vii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments; (viii) the
IXC Internet Capital Contribution; (ix) the Investment in PSINet Inc.
contemplated by the PSINet Agreement, including the Investment in shares of
PSINet Common Stock purchased pursuant to the PSINet Agreement and the $240
million value protection right provided for by the PSINet Agreement; and (x)
other Investments in any Person that in the aggregate do not exceed $30 million
(without regard to increases and decreases in the value of the Investments).
<PAGE> 66
66
"Permitted PSINet Non-Recourse Debt" means Indebtedness where
(i) the holders of such Indebtedness expressly agree that they will look solely
to the shares of PSINet Common Stock held by the issuer of such Indebtedness for
payment on or in respect of such Indebtedness and expressly waive any recourse
they may have on or with respect to such Indebtedness to the Company or any
Restricted Subsidiary, (ii) neither the Company nor any Restricted Subsidiary
(A) provides credit support (whether or not in the form of an undertaking,
agreement or instrument which would constitute Indebtedness), other than the
pledge by the issuer of such Indebtedness of shares of PSINet Common Stock, or
(B) is directly or indirectly liable and (iii) no default with respect to such
Indebtedness (including any rights which the holders thereof may have to take
enforcement action against the shares of PSINet Common Stock securing such
Indebtedness) would permit (upon notice, lapse of time or both) any holder of
any other Indebtedness of the Company or any Restricted Subsidiary to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
"Person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any
Person, means Capital Stock of any class or classes (however designated) which
is preferred as to the payment of dividends or distributions, or as to the
distribution of assets upon any voluntary or involuntary liquidation or
dissolution of such Person, over shares of Capital Stock of any other class of
such Person.
"principal" of any debt security means the principal of the
Security plus the premium, if any, payable on the Security which is due or
overdue or is to become due at the relevant time.
<PAGE> 67
67
"PSINet Agreement" means the IRU and Stock Purchase Agreement
dated as of July 22, 1997, between IXC Internet Services, Inc. and PSINet Inc.
and the related documents executed in connection therewith, in each case as in
effect as of the Issue Date.
"PSINet Common Stock" means the common stock of PSINet, Inc.
"PSINet Shares" means the shares of PSINet Common Stock
acquired by the Company or any Subsidiary pursuant to the terms of the PSINet
Agreement.
"Public Equity Offering" means an underwritten primary public
offering of common stock of the Company pursuant to an effective registration
statement under the Securities Act.
"Refinance" means, in respect of any Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue other Indebtedness in exchange or replacement for, such indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances
any Indebtedness of the Company or any Restricted Subsidiary existing on the
Issue Date or Incurred in compliance with this Certificate of Designation,
including Indebtedness that Refinances Refinancing Indebtedness; provided,
however, that (i) such Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being Refinanced, (ii) such
Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the Average Life of
the Indebtedness being Refinanced and (iii) such Refinancing Indebtedness has an
aggregate principal amount (or if Incurred with original issue discount, an
aggregate issue price) that is equal to or less than the aggregate principal
amount (or if Incurred with original issue discount, the aggregate accreted
value) then outstanding or committed (plus accrued interest on the principal
amount of Indebtedness Refinanced, and fees and
<PAGE> 68
68
expenses, including any premium and defeasance costs) under the Indebtedness
being Refinanced; provided further, however, that Refinancing Indebtedness shall
not include (x) Indebtedness of a Subsidiary that Refinances Indebtedness of the
Company (unless such Subsidiary was obligated under, or a guarantor of, the
Indebtedness being Refinanced) or (y) Indebtedness of the Company or a
Restricted Subsidiary that Refinances Indebtedness of an Unrestricted
Subsidiary.
"Registered Exchange Offer" means the offer by the Company,
pursuant to the Registration Rights Agreement, to holders of Initial
Exchangeable Preferred Stock to issue and deliver to such holders, in exchange
for the Initial Exchangeable Preferred Stock, a like aggregate liquidation
preference of Series B Stock registered under the Securities Act.
"Registration Rights Agreement" means the Registration Rights
Agreement dated August 14, 1997, among the Company and Credit Suisse First
Boston Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley and Co. Incorporated.
"Related Business" means any Permitted Business, the
businesses conducted by the Company and the Restricted Subsidiaries on the Issue
Date and any business related, ancillary or complementary to such businesses
conducted by the Company and the Restricted Subsidiaries on the Issue Date.
"Related Party" with respect to any Permitted Holder means (i)
any controlling stockholder, 80% (or more) owned Subsidiary, or spouse or
immediate family member (in the case of an individual) of such Principal or (ii)
any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding an 80% or more
controlling interest of which consist of such Permitted Holder or such other
Persons referred to in the immediately preceding clause (i).
<PAGE> 69
69
"Representative" means any trustee, agent or representative
(if any) for an issue of Senior Indebtedness of the Company.
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of, in the case of the Company, any Junior Stock or, in the case of
any Restricted Subsidiary, any Capital Stock (including any payment in
connection with any merger or consolidation involving such Person) or similar
payment to the direct or indirect holders of such Stock (other than dividends or
distributions payable solely in Junior Stock (other than Disqualified Stock) and
dividends or distributions to the extent paid to the Company or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Restricted Subsidiary to minority
stockholders (or owners of an equivalent interest in the case of a Subsidiary
that is an entity other than a corporation)), (ii) the purchase, redemption or
other acquisition or retirement for value of any Junior Stock of the Company or
Capital Stock of any direct or indirect parent of the Company or (iii) the
making of any Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Company
that is not an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to
property now owned or hereafter acquired whereby the Company or a Restricted
Subsidiary transfers such property to a Person and the Company or a Restricted
Subsidiary leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of
the Company secured by a Lien.
"Senior Notes" means the Company's 12 1/2% Senior
Notes Due 2005.
<PAGE> 70
70
"Series 3 Preferred Stock" means the Company's 10%
Junior Series 3 Cumulative Redeemable Preferred Stock.
"Shelf Registration Statement" means a registration statement
filed with the SEC covering resales of Exchangeable Preferred Stock.
"Significant Subsidiary" means any Restricted Subsidiary that
would be a "Significant Subsidiary" of the Company within the meaning of Rule
1-02 under Regulation S-X promulgated by the SEC.
"Standard & Poor's" means Standard & Poor's Ratings Group, or
its successor.
"Stated Maturity" means, with respect to any security, the
date specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Indebtedness" means the Exchange Debentures and
any other Indebtedness of the Company that specifically provides that such
Indebtedness is to rank pari passu with the Exchange Debentures in right of
payment and is not subordinated by its terms to any Indebtedness or other
obligation of the Company which is not Senior Indebtedness (as defined in the
Exchange Debenture).
"Subordinated Obligation" means any Indebtedness of the
Company (whether outstanding on the Issue Date or thereafter Incurred) which is
subordinate or junior in right of payment to the Exchange Debentures pursuant to
a written agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the
<PAGE> 71
71
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
(i) such Person, (ii) such Person and one or more Subsidiaries of such Person or
(iii) one or more Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (i)
any investment in direct obligations of the United States of America or any
agency thereof or obligations guaranteed by the United States of America or any
agency thereof, (ii) investments in time deposit accounts, certificates of
deposit and money market deposits maturing within 180 days of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States of America, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of
$50,000,000 (or the foreign currency equivalent thereof) and has outstanding
debt which is rated "A" (or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as defined in
Rule 436 under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor, (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) investments in commercial
paper, maturing not more than 90 days after the date of acquisition, issued by a
corporation (other than an Affiliate of the Company) organized and in existence
under the laws of the United States of America or any foreign country recognized
by the United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings
Group, and (v) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by Standard
<PAGE> 72
72
& Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"Trustee" means the party named as such in the Exchange
Indenture until a successor replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President
or any other officer or assistant officer of the Trustee assigned by the Trustee
to administer its corporate trust matters.
"Uniform Commercial Code" means the New York Uniform
Commercial Code as in effect from time to time.
"Unrestricted Subsidiary" means (i) any Subsidiary of the
Company that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of
its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien (excluding Liens incurred to secure obligations in respect of an IRU) on
any property of, the Company or any Restricted Subsidiary; provided, however,
that either (A) the Subsidiary to be so designated has total assets of $1,000 or
less or (B) if such Subsidiary has assets greater than $1,000, the Investment
resulting from such designation would be permitted under paragraph (l)(iii). The
Board of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that immediately after giving effect to such
designation (x) the Company could Incur $1.00 of additional Indebtedness under
paragraph (l)(iii)(A) and (y) no Default shall have occurred and be continuing.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the resolution of the Board of
Directors giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
<PAGE> 73
73
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock
or other interests (including partnership interests) of such Person then
outstanding and normally entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof.
"Wholly Owned Restricted Subsidiary" means a Restricted
Subsidiary all the Capital Stock of which (other than directors' qualifying
shares) is owned by the Company or one or more Wholly Owned Subsidiaries.
<PAGE> 74
IN WITNESS WHEREOF, said IXC Communications, Inc., has caused
this Certificate of Designation to be signed by James F. Guthrie, its
Chief Financial Officer and Executive Vice President, this 19th day of
August, 1997.
IXC COMMUNICATIONS, INC.,
By: /s/ JAMES F. GUTHRIE
----------------------------------
Name: James F. Guthrie
Title: Chief Financial Officer and
Executive Vice President
<PAGE> 75
EXHIBIT A
FORM OF EXCHANGEABLE PREFERRED STOCK
FACE OF SECURITY
[THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF
1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE
EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE
SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF
SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF
THIS SECURITY AGREES FOR THE BENEFIT OF THE ISSUER THAT (A) THIS SECURITY MAY BE
OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (i) TO A PERSON WHOM THE
SELLER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 144A, (II) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE
SECURITIES ACT, (iii) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (iv) PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (v) TO THE
ISSUER, IN EACH OF CASES (i) THROUGH (iv) IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND
EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY
FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.]*
[BY ITS ACQUISITION HEREOF, THE HOLDER REPRESENTS THAT (A) IT
IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN
AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S.]*/
- --------
* Subject to removal upon registration under the Securities Act of 1933 or
otherwise when the security shall no longer be a restricted security.
<PAGE> 76
2
[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"),
NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OF PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS
THE REGISTERED OWNER HEREOF, CEDE & CO. HAS AN INTEREST HEREIN.]**
[TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO
TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR
THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL
SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS
SET FORTH IN THE CERTIFICATE OF DESIGNATION REFERRED TO BELOW.]**
Certificate Number Number of Shares of Convertible
Preferred Stock
[ ] [ ]
CUSIP NO.: [ ]
12 1/2% Junior Exchangeable Preferred Stock Due 2009
(par value $0.01) (liquidation preference $1000
per share)
of
IXC Communications, Inc.
IXC Communications, Inc., a Delaware corporation (the
"Company"), hereby certifies that [ ] (the
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** Subject to removal if not a global security.
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"Holder") is the registered owner of fully paid and non-assessable preferred
securities of the Company designated the 12 1/2% [Series B] Junior Exchangeable
Preferred Stock Due 2009 (par value $0.01) (liquidation preference $1000 per
share) (the "Exchangeable Preferred Stock"). The shares of Exchangeable
Preferred Stock are transferable on the books and records of the Registrar, in
person or by a duly authorized attorney, upon surrender of this certificate duly
endorsed and in proper form for transfer. The designation, rights, privileges,
restrictions, preferences and other terms and provisions of the Exchangeable
Preferred Stock represented hereby are issued and shall in all respects be
subject to the provisions of the Certificate of Designation dated August [ ],
1997, as the same may be amended from time to time (the "Certificate of
Designation"). Capitalized terms used herein but not defined shall have the
meaning given them in the Certificate of Designation. The ompany will provide a
copy of the Certificate of Designation to a Holder without charge upon written
request to the Company at its principal place of business.
Reference is hereby made to select provisions of the
Exchangeable Preferred Stock set forth on the reverse hereof, and to the
Certificate of Designation, which select provisions and the Certificate of
Designation shall for all purposes have the same effect as if set forth at this
place.
Upon receipt of this certificate, the Holder is bound by the
Certificate of Designation and is entitled to the benefits thereunder.
Unless the Transfer Agent's Certificate of Authentication
hereon has been properly executed, these shares of Exchangeable Preferred Stock
shall not be entitled to any benefit under the Certificate of Designation or be
valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has executed this certificate
this [ ] day of [ ], [ ].
IXC COMMUNICATIONS, INC.,
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By:
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Name:
Title:
[Seal]
By:
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Name:
Title:
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TRANSFER AGENT'S CERTIFICATE OF AUTHENTICATION
This is one of the Exchangeable Preferred Stock referred to in
the within mentioned Certificate of Designation.
Dated: [ ], [ ]
THE BANK OF NEW YORK
as Transfer Agent,
By:
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Authorized Signatory
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REVERSE OF SECURITY
Dividends on each share of Exchangeable Preferred Stock shall
be payable at a rate per annum set forth in the face hereof or as provided in
the Certificate of Designation (including Additional Dividends).
The shares of Exchangeable Preferred Stock shall be redeemable
as provided in the Certificate of Designation. The shares of Exchangeable
Preferred Stock shall be exchangeable at the Company's option into the Company's
12-1/2% Subordinated Exchange Debentures Due 2009 in the manner and according to
the terms set forth in the Certificate of Designation.
As required under Delaware law, the Company shall furnish to
any Holder upon request and without charge, a full summary statement of the
designations, voting rights preferences, limitations and special rights of the
shares of each class or series authorized to be issued by the Company so far as
they have been fixed and determined and the authority of the Board of Directors
to fix and determine the designations, voting rights, preferences, limitations
and special rights of the class and series of shares of the Company.
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ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers the
shares of Exchangeable Preferred Stock evidenced hereby to:
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(Insert assignee's social security or tax identification number)
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(Insert address and zip code of assignee)
and irrevocably appoints:
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agent to transfer the shares of Exchangeable Preferred Stock evidenced hereby on
the books of the Transfer Agent and Registrar. The agent may substitute another
to act for him or her.
Date:
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Signature:
---------------------------------
(Sign exactly as your name appears on the other side of this Exchangeable
Preferred Stock Certificate)
Signature Guarantee:***
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*** (Signature must be guaranteed by an "eligible guarantor
institution" that is, a bank, stockbroker, savings and loan association or
credit union meeting the requirements of the Registrar, which requirements
include membership or participation in the Securities Transfer Agents Medallion
Program ("STAMP") or such other "signature
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guarantee program" as may be determined by the Registrar in addition to, or in
substitution for, STAMP, all in accordance with the Securities Exchange Act of
1934, as amended.)
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EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR
REGISTRATION OF TRANSFER OF EXCHANGEABLE PREFERRED STOCK
Re: 12 1/2% Junior Exchangeable Preferred Stock Due 2009 (the "Exchangeable
Preferred Stock") of IXC Communications, Inc. (the "Company")
This Certificate relates to ____ shares of Exchangeable
Preferred Stock held in [ ] */ book-entry or [ ] */ definitive form by
_______________ (the "Transferor").
The Transferor*:
[ ] has requested the Transfer Agent by written order to deliver in
exchange for its beneficial interest in the Exchangeable Preferred Stock held by
the depository shares of Exchangeable Preferred Stock in definitive, registered
form equal to its beneficial interest in such Exchangeable Preferred Stock (or
the portion thereof indicated above); or
[ ] has requested the Transfer Agent by written order to exchange or
register the transfer of Exchangeable Preferred Stock.
In connection with such request and in respect of such
Exchangeable Preferred Stock, the Transferor does hereby certify that the
Transferor is familiar with the Certificate of Designation relating to the above
captioned Exchangeable Preferred Stock and that the transfer of this
Exchangeable Preferred Stock does not require registration under the Securities
Act of 1933 (the "Securities Act") because */:
[ ] Such Exchangeable Preferred Stock is being acquired for the
Transferor's own account without transfer.
[ ] Such Exchangeable Preferred Stock is being transferred to the
Company.
- -------- * /Please check applicable box.
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[ ] Such Exchangeable Preferred Stock is being transferred (i) to a
qualified institutional buyer (as defined in Rule 144A under the Securities
Act), in reliance on Rule 144A or (ii) pursuant to an exemption from
registration in accordance with Rule 904 under the Securities Act (and, in the
case of clause (ii), based on an opinion of counsel if the Company so requests
and together with a certification in substantially the form of Exhibit C to the
Certificate of Designation).
[ ] Such Exchangeable Preferred Stock is being transferred in reliance
on and in compliance with another exemption from the registration requirements
of the Securities Act (and based on an opinion of counsel if the Company so
requests).
[INSERT NAME OF TRANSFEROR]
Date: by
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EXHIBIT C
FORM OF CERTIFICATE TO BE DELIVERED IN
CONNECTION WITH TRANSFERS PURSUANT TO REGULATION S
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The Bank of New York
Attention: [ ]
Ladies and Gentlemen:
In connection with our proposed sale of certain 12 1/2% Junior
Exchangeable Preferred Stock Due 2009 (the "Exchangeable Preferred Stock") of
IXC Communications, Inc., a Delaware corporation ("the "Company"), we represent
that:
(i) the offer of the Exchangeable Preferred Stock was not made
to a person in the United States;
(ii) at the time the buy order was originated, the transferee
was outside the United States or we and any person acting on our behalf
reasonably believed that the transferee was outside the United States;
(iii) no directed selling efforts have been made by us in the
United States in contravention of the requirements of Rule 903(b) or
Rule 904(b) of Regulation S under the Securities Act of 1933 (the
"Securities Act"), as applicable; and
(iv) the transaction is not part of a plan or scheme by us to
evade the registration requirements of the Securities Act.
You and the Company are entitled to rely upon this letter and
you are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with
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respect to the matters covered hereby. Terms used in this certificate have
the meanings set forth in Regulation S.
Very truly yours,
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(Name of Transferor)
by
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Name:
Title:
Address:
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EXHIBIT 10.13
Culp Communications Associates
5 Hedge Lane
Austin, Texas 78746
(512) 327-4338
Business Consultant
and
Management Agreement
Agreement made this 1st day of March, 1997, between IXC Communications, Inc.,
hereinafter referred to as the Corporation, and Culp Communications Associates,
hereinafter referred to as CCA.
In consideration of the mutual promises herein contained, the parties hereto
agree as follows:
1. Term: This Agreement will be for an initial period of six months commencing
on 01 March 1997 and will be extended month to month thereafter unless
terminated by either party in writing.
2. Duties: The duties of CCA will include the rendering of consultation and
management services. CCA will make itself available to consult with the Board of
Directors, the officers, and department heads of the Corporation ("Corporate
Management"), at reasonable times to be agreed upon between the parties.
3. Hours: CCA shall make itself available to the Corporate Management an average
of ten days per month for the performance of its duties under this Agreement.
4. Conflicts: CCA will be free to represent or perform services for any other
clients, provided that it does not interfere or conflict with its duties under
this Agreement. CCA shall inform Corporation of its current client list and
shall inform Corporation of any potential conflicts which may develop during the
term of this agreement.
5. Compensation: For services rendered hereunder CCA will receive a daily sum
equal to $800.00 per day. During the term, Corporation agrees to pay as a
guaranteed retainer a minimum of 10 days per month. A detailed statement of
services rendered, specifying the number of days, will be submitted to
Corporation by CCA.
In addition to the compensation specified herein, Corporation shall also
reimburse CCA for all out of pocket expenses incurred by CCA arising out of its
performance under the terms of this Agreement, including all travel expenses.
Allowable travel expenses shall include reimbursement for all travel expenses
normally reimbursable to the senior executives of Corporation. All costs to CCA
for said out of pocket expenses and travel expenses shall be chargeable to the
Corporation, and the Corporation shall reimburse and pay over to CCA said costs
upon receipt of written invoices itemizing such costs.
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6. Office Space: Corporation will make available to CCA, for the term of this
Agreement, suitable office space, reasonable secretarial support, and phone
service for the performance of its duties under this agreement.
7. Assignment: Because of the personal nature of the services to be rendered,
this Agreement may not be assigned by CCA without Corporation's prior written
consent, which may be withheld for any reason or no reason at all. However, this
Agreement will inure to the benefit of and be binding on Corporation's
successors and assigns.
8. Early Termination: It is agreed that CCA may terminate this Agreement upon 14
days written notice to Corporation in the event that Joe Culp accepts full time
employment during the term of this Agreement or any extension thereof.
9. Assistants: If it is reasonably necessary for CCA to have the aid of
assistants or the services of other persons, companies or firms in order to
properly perform the duties and obligations required of CCA, CCA may from time
to time, with the prior approval of the Corporation, employ engage or retain the
same. All costs to CCA for said services shall be chargeable to the Corporation,
assuming that the Corporation has given prior approval, and the Corporation
shall reimburse and pay over to CCA said costs upon receipt of written invoices
itemizing such costs.
10. Limited Liability: With regards to the services to be performed by CCA
pursuant to the terms of this Agreement, neither CCA nor any employee or agent
of CCA, shall be liable to the Corporation, or to anyone who may claim any right
due to this relationship with the Corporation for any act or omissions in the
performance of said services on the part of CCA or on the part of the agents or
employees of CCA, except when said acts or omissions of CCA are due to willful
misconduct or culpable negligence. The Corporation shall hold CCA free and
harmless from any obligations, costs, claims, judgments, attorneys fees and
attachments arising from or growing out of the services rendered to the
Corporation pursuant to the terms of this Agreement or in any way connected with
the rendering of said services, except when the same shall arise due to the
willful misconduct or culpable negligence of CCA, and CCA is adjudged to be
guilty of willful misconduct or culpable negligence by a court of competent
jurisdiction.
11. Remedies: If any action at law or equity is necessary to enforce the terms
of this Agreement, the prevailing party shall be entitled to reasonable
attorney's fees, costs, and necessary disbursements in addition to any other
relief to which he may be entitled.
12. Texas Law. This Agreement shall be construed under and in accordance with
the laws of the State of Texas. In case any one or more of the provisions
contained in this Agreement shall for any reason be held to be invalid, illegal,
or unenforceable in any respect, such invalidity, illegality, or unenforceable
in any respect, such invalidity, illegality, or unenforceability shall not
affect any other provision thereof, and this Agreement shall be
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construed as if such invalid, illegal, or unenforceable provision had never been
contained herein.
13. Independent Contractor: In performing Services pursuant to this Agreement,
CCA shall be, and at all times shall act as an independent contractor. CCA shall
not make any contract or commitment to incur any charge or expense in the name
of IXC. CCA expressly agrees, acknowledges and stipulates that neither this
Agreement nor the performance of CCA's obligations or duties hereunder shall
ever result in CCA, or any one employed by CCA, being: (i) an employee or
servant of IXC; or (ii) entitled to any benefits from IXC including, but not
limited to pension, profit sharing, or accident, health, medical, life or
disability insurance benefits or coverage, to which employees of IXC may be
entitled. The sole and only compensation or benefit of any nature to which CCA
shall be entitled are the payments provided for herein. CCA will be responsible
for all required federal, state and local government withholdings or deductions
for taxes or similar charges, or otherwise pursuant to law, regulation or order
with respect to payment by Corporation of such compensation. The provisions of
this paragraph shall survive termination of this Agreement. IXC shall have no
right to direct or control CCA or its employees and agents but shall have the
right to conduct normal inspections of work in progress and conduct regular
reviews and receive periodic updates of progress.
14. Prior Agreements Superseded. This Agreement constitutes the sole and only
Agreement of the parties hereto with regard to your consulting duties as
outlined herein. This Agreement supersedes any prior understandings or written
or oral agreements between the parties with regards to the subject matter of
this Agreement.
Executed this the 1st day of March, 1997.
Culp Communication Associates Inc.
By /s/ Joe C. Culp
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Joe C. Culp, President
IXC Communications, Inc.
By /s/ Ralph J. Swett
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Ralph J. Swett
President and CEO
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EXHIBIT 10.21
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into effective as of
September 9, 1997 by and between IXC Communications, Inc., a Delaware
corporation ("Company"), and Benjamin L. Scott ("Employee").
ARTICLE I
EMPLOYMENT
The Company hereby employs Employee and Employee hereby accepts
employment with the Company upon the terms and conditions set forth below.
1.1 TERM.
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(a) The Company acknowledges the obligation of Employee to
give thirty-day notice of termination to his prior employer. However,
Employee must commence employment with the Company no later than
October 31, 1997, with the actual date that the Employee commences
employment with the Company to be referred to in this Agreement as the
Employee's "Commencement Date." The term of this Agreement will
continue for five (5) years from the Commencement Date.
(b) This Agreement will terminate prior to the date specified
in Paragraph (a) above, upon the earliest to occur of any of the
following events:
(i) On the six (6) month anniversary of the
Commencement Date if, as of that date, Employee has not
permanently relocated himself and Employee's immediate family
to Austin, Texas or within twenty (20) miles of its city
limits ("Austin Area");
(ii) After having moved to the Austin Area within the
time period specified in Subparagraph (i) above, on the date
that Employee and his immediate family cease to be permanent
residents in the Austin Area. In the event of a personal
hardship, the Board of Directors of the Company ("Board of
Directors") will not unreasonably withhold its consent to a
request by Employee for an exception to this Subparagraph
(ii);
(iii) Upon written notice to Employee that the Board
of Directors has determined that Employee should be terminated
for Cause, as that term is defined in Section of this
Agreement; or
(iv) Upon the Employee's death, Disability (as that
term is defined in Internal Revenue Code ("Code") Section
22(e)(3)), or voluntary termination of employment by Employee.
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1.2 DUTIES.
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(a) Employee agrees to serve as President and Chief Executive
Officer of the Company as well as of its major subsidiaries or in such
other capacity or capacities as the Board of Directors may reasonably
require that are consistent with his position, provided that the duties
and responsibilities of Employee are not materially diminished and
there is no change in his title or reporting responsibilities.
(b) Employee will report directly to the Board of Directors.
(c) Employee will become the Chairman of the Board of
Directors of the Company no later than thirty (30) days after the 1998
Annual Meeting of Stockholders of the Company. If that does not occur,
Employee may elect, in his sole and absolute discretion, to voluntarily
resign and:
(i) Become fully vested in his Option (issued
pursuant to Section of this Agreement);
(ii) Receive two (2) year's base salary, payable at
the regular payroll periods;
(iii) Receive a prorata portion of Employee's
guaranteed bonus of two hundred twenty-five thousand dollars
($225,000), as set forth in Section of this Agreement;
(iv) Receive the remaining three hundred thousand
dollar ($300,000) installment of his sign-on bonus, payable at
the time set forth in Section of this Agreement; and
(v) The Company agrees, under those circumstances, to
forgive the entire outstanding loan (including any accrued
interest) provided to Employee under Section of this
Agreement.
ARTICLE II
COMPENSATION AND BENEFITS
2.1 COMPENSATION.
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(a) As compensation for accepting employment with the Company,
Employee will receive the sum of six hundred and fifty thousand dollars
($650,000), three hundred and fifty thousand dollars ($350,000) of
which will be paid on the Commencement Date and three hundred thousand
dollars ($300,000) of which will be paid on January 1, 1999.
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(i) Employee may elect to defer the receipt of such
amounts no later than two (2) weeks prior to the date such
amounts would otherwise be paid, and any such election shall
be irrevocable.
(ii) Notwithstanding anything in this Agreement to
the contrary, in the event Employee's employment is terminated
for any reason, Employee shall be entitled to the three
hundred thousand dollars ($300,000) installment set forth
above, if not previously paid, on January 1, 1999.
(b) As compensation for the services to be rendered under this
Agreement, Employee will be entitled to receive from the Company an
annual base salary of three hundred fifty thousand dollars ($350,000),
payable bi-weekly, and an annual bonus for the twelve (12) month period
beginning on the Commencement Date ("Employment Year") of two hundred
twenty-five thousand dollars ($225,000) payable on October 31, 1998.
(c) With respect to periods after the end of Employee's first
Employment Year, bonuses, if any, are awarded by, and at the direction
of, the Board of Directors. Employee will have the opportunity to earn
an annual incentive bonus. It is anticipated that such bonus will
approximate fifty percent (50%) of the Employee's base salary if the
Performance Goals (as that term is defined in Section of this
Agreement) are achieved and Employee's performance under this Agreement
is satisfactory. Such bonus amount could be substantially more if the
Performance Goals are substantially exceeded.
(d) Employee's base salary may be increased from time to time
in accordance with the Company's policies and procedures.
(e) Notwithstanding the preceding provisions of this Section ,
to the extent necessary to comply with the million dollar compensation
deduction limitation of Section 162(m) of the Code, the payment of
items of compensation to Employee (including any amounts described in
Section of this Agreement that are includible in Employee's income)
that would otherwise be nondeductible because of the application of
that limitation will be nonforfeitable and an absolute obligation of
the Company, but the payment will be deferred until those amounts will
be deductible. Any amounts so deferred will accrue interest at the rate
of nine percent (9%) per annum, compounded annually.
2.2 BENEFITS. The Company will make available to Employee the
group-term life insurance coverage and medical benefits comparable to those
currently provided to the Chairman of the Company. Other fringe benefits that
Employee will receive will include dental insurance, participation in the
Company's 401(k) Plan, as well as the reimbursement of reasonable and
appropriate business expenses, including the use of a cellular phone, all in
accordance with the Company's stated policies and procedures. Some of the
specific fringe benefits to be provided to Employee include, but are not limited
to, the following:
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(a) An annual automobile allowance of twelve thousand dollars
($12,000) payable in monthly installments;
(b) Five (5) weeks of vacation with respect to each Employment
Year; and
(c) Disability insurance providing a benefit equal to
seventy-five percent (75%) of Employee's base salary. The Employee
shall be permitted to pay the minimum amount necessary so that any
Disability benefits received by the Employee will not be subject to
federal income tax.
2.3 RELOCATION COSTS.
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(a) The Company will reimburse Employee for:
(i) The reasonable costs of moving Employee's
household goods from Dallas, Texas to the Austin Area;
(ii) The closing costs of selling Employee's home in
Dallas, Texas, not to exceed the usual and customary costs of
closing to be borne by the seller of a home in Dallas, Texas,
including a reasonable broker's commission; and
(iii) The closing costs of purchasing a home in the
Austin Area, not to exceed the usual and customary costs of
closing to be borne by the buyer of a home in the Austin Area.
(b) The Company will loan Employee up to five hundred thousand
dollars ($500,000) to be applied to the purchase of a home in the
Austin Area that is comparable to Employee's current home in Dallas,
Texas. This amount will become payable by the Company no later than
seven (7) days prior to the closing of the escrow (or at a prior time
when those amounts become payable by Employee). This amount must be
returned to the Company, should the Employee not actually purchase the
home. The amount of the loan will be the difference between (i) the net
purchase price of a comparable home in the Austin, Area, and (ii) the
net selling price of Employee's home in Dallas, Texas. For example, if
the net purchase price of the home in the Austin Area is $1,250,000 and
the net selling price of Employee's home in Dallas, Texas is $750,000,
the loan will be for $500,000. If the net purchase price for a
comparable home is $1,000,000 and the net selling price is $750,000,
the loan will be for $250,000. Such loan will bear interest at the rate
of seven percent (7%) per annum, compounded annually, will be secured
by a junior deed of trust on the house purchased by Employee, and will
be due and payable one hundred twenty (120) days after termination of
Employee's employment with the Company. The loan, including all
interest accrued thereon, will be subject to forgiveness at the time
of, and in accordance with, the following provisions:
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(i) Twenty percent (20%) of the outstanding balance
of the loan, including all interest accrued thereon, will be
forgiven on each anniversary of the Commencement Date,
provided Employee is still employed by the Company on that
date.
(ii) For purposes of this Agreement, the term "Change
in Control" means any of the following:
(A) A successful tender offer for greater
than forty-five percent (45%) of the outstanding
capital stock of the Company;
(B) A sale of all or substantially all of
the assets of the Company; or
(C) A merger or consolidation of the Company
with any other corporation in which the stockholders
of the Company immediately preceding such merger or
consolidation will not hold at least fifty-one
percent (51%) of the outstanding capital stock of the
surviving corporation (whether or not the Company is
the surviving corporation) immediately after such
merger or consolidation.
(iii) The outstanding balance of the loan, including
all interest accrued thereon, will be forgiven upon the:
(A) Employee's death or Disability during
the term of this Agreement;
(B) Employee's voluntary resignation
pursuant to Section of this Agreement;
(C) Termination of employment by Employee
upon a Change in Control; or
(D) Company's termination of the employment
of Employee without Cause (as that term is defined in
Section of this Agreement).
2.4 STOCK OPTION.
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(a) The Company will grant a nonqualified stock option to
Employee allowing Employee to purchase five hundred thousand (500,000)
shares of common stock of the Company ("Option"). The term of the
Option will be for ten (10) years.
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(b) The exercise price per share under the Option will be
twenty-seven dollars and fifty cents ($27.50), which was the closing
price of the stock on September 9, 1997.
(c) The Option will vest in equal installments over a five (5)
year period on the first, second, third, fourth, and fifth
anniversaries of the Commencement Date. Except as otherwise expressly
provided in this Agreement, in no event will Employee vest upon any
anniversary of the Commencement Date unless Employee is employed by the
Company on such date.
(d) If Employee voluntarily resigns or is terminated for Cause
(as that term is defined in Paragraph (i) below) prior to the
expiration of this Agreement, Employee can exercise the vested portion
of the Option not later than the ninetieth (90th) day following the
effective date of his resignation or termination, at which time the
unexercised portion of the Option (whether vested or not) will be
forfeited.
(e) If Employee is terminated for a reason that does not
constitute Cause prior to the expiration of this Agreement, the entire
Option will become immediately exercisable and remain exercisable for
ninety (90) days following the effective date of his termination, at
which time the unexercised portion of the Option will be forfeited.
(f) Upon the death or Disability of the Employee:
(i) Employee will be entitled to the additional
vesting (if applicable) at the end of the Employment Year
during which the Employee's death or Disability occurs; and
(ii) Employee (or his personal representative or
estate, whichever is applicable) can exercise the vested
portion of the Option not later than one (1) year following
the date of his death or Disability, at which time the
unexercised portion of the Option (whether vested or not) will
be forfeited.
(g) If there is a Change in Control of the Company (as that
term is defined in Section of this Agreement), the Option will become
immediately vested, unless the Company desires to use, and the
acceleration of vesting would prevent the Company from using, the
"pooling of interests" accounting method in connection with the Change
in Control. Notwithstanding that acceleration in the vesting of the
Option would be available, Employee may elect not to have the vesting
accelerated.
(h) Although no antidilution rights are granted to Employee,
should any such rights subsequently be granted to the other senior
executive officers of the Company, such rights will be similarly
extended to Employee, provided that Employee remains employed by the
Company at that time.
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(i) For purposes of this Agreement, the term "Cause" means any
of the following:
(i) Employee's failure or refusal to:
(A) Materially perform his duties and
responsibilities as set forth in Section of this
Agreement; or
(B) Devote all of his business time and
attention exclusively to the business and affairs of
the Company in accordance with the terms of this
Agreement;
in each case if such failure or refusal is not cured within
thirty (30) days after written notice thereof to Employee by
the Company;
(ii) The willful misappropriation by Employee of the
funds or property of the Company;
(iii) The use of alcohol or illegal drugs, materially
interfering with the performance of Employee's obligations
under this Agreement, continuing after written warning;
(iv) Conviction of Employee in a court of law of, or
entering a plea of guilty or no contest to, any felony or any
crime involving moral turpitude, dishonesty, or theft;
(v) The commission in bad faith by the Employee of
any act which materially injures or could reasonably be
expected to materially injure the reputation, business, or
business relationships of the Company;
(vi) Any material breach (not covered by any of
Subparagraphs (i) through (v) of this Paragraph (i)) of any
term, provision, or condition of this Agreement, if such
breach is not cured within thirty (30) days after written
notice thereof to Employee by the Company; or
(vii) Material failure to meet the Annual Performance
Goals after Employee is provided with written notice by the
Board of Directors of any such material failure and three (3)
months after such notice Employee fails to meet the Interim
Performance Goals for such three (3) month period.
(A) For purposes of this Agreement, the term
"Annual Performance Goals" shall mean the targeted
performance goals established for the Company by
Employee and adopted by the Board of Directors for
one (1) year, and the term "Interim Performance
Goals"
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shall mean the reasonable targeted performance goals
established by the Board of Directors for the three
(3) month period following the failure to satisfy the
Annual Performance Goals.
(B) If Employee's employment is terminated
pursuant to this Subparagraph (vii), Employee will be
entitled to receive two (2) year's base salary at his
then current rate (payable at the regular payroll
periods), and will be entitled to additional vesting
of the Option granted pursuant to this Section as if
he were employed at the end of the Employment Year
during which the Employee's termination occurs, and
forgiveness of the outstanding balance of the loan
(including all interest accrued thereon) in
accordance with Section as if he were employed at the
end of the Employment Year during which the
termination of Employee's employment occurs.
2.5 WITHHOLDING. Any amounts includible in Employee's income as a
result of this Agreement (e.g., payments and forgiveness of debt) will be
subject to all applicable legal requirements with respect to the withholding of
federal, state, and local taxes and other normal withholdings.
2.6 SEVERANCE BENEFITS.
-------------------
(a) In the event Employee is terminated without Cause (as that
term is defined in Section of this Agreement), Employee shall receive
the greater of:
(i) His then current base salary, as well as health,
life, and disability insurance for the remainder of the term
of the Agreement, his guaranteed bonus (if unpaid) under
Section of this Agreement, immediate vesting of his Option
granted pursuant to Section , and forgiveness of the
outstanding balance of the loan (including all interest
accrued thereon) made pursuant to Section of this Agreement;
or
(ii) Two (2) year's base salary, health, life, and
disability insurance, immediate vesting of his Option, and
forgiveness of the outstanding balance of the loan (including
all interest accrued thereon) made pursuant to Section of this
Agreement.
(b) In the event the term of this Agreement expires and the
Company determines not to continue the employment of Employee as
Chairman on terms and conditions comparable for such position, then the
Company shall pay to Employee as a severance benefit one (1) year's
base salary at the Employee's then current rate. If Company extends
such an offer on comparable terms and conditions and Employee refuses
such offer, no amounts will become payable by Company to Employee by
reason of this Paragraph (b).
- 8 -
<PAGE> 9
(c) In the event of a Change in Control of the Company (as
that term is defined in Section of this Agreement), Employee may elect,
in his absolute discretion, to voluntarily resign and receive the
following:
(i) Immediate vesting of the Option granted pursuant
to Section of this Agreement;
(ii) Forgiveness of the outstanding balance of his
loan (including interest accrued thereon) under Section of
this Agreement; and
(iii) One (1) year's base salary at the Employee's
then current rate.
(d) The Employee shall be under no obligation to mitigate his
damages or to seek other employment and if the Employee obtains other
employment, any compensation earned by Employee therefrom shall not
reduce the Company's obligations to make the payments to Employee that
are otherwise required under this Agreement.
(e) Any payments that are required pursuant to the terms of
this Section shall become payable at the same time those amounts would
have been paid to Employee had his employment with the Company
continued.
ARTICLE III
FIDELITY
3.1 CONFIDENTIAL INFORMATION.
-------------------------
(a) Employee agrees not to disclose any Confidential
Information (as that term is defined in Paragraph (e) below) of the
Company, including information received in confidence from the Company
or from others, whether before, during, or after Employee's employment
with the Company, except upon the prior written consent of the Company.
(b) Employee acknowledges that the Confidential Information of
the Company includes matters conceived or developed by Employee, as
well as matters learned by Employee from other employees or agents of
the Company.
(c) Any Confidential Information that Employee may prepare,
use, or come into contact with will be and remain the Company's sole
property and will not be removed from the Company's premises without
its written consent, except as required in accordance with Employee's
performance of Employee's duties hereunder, and will be returned to the
Company, together with all copies, summaries, and extracts thereof,
upon termination of this Agreement.
- 9 -
<PAGE> 10
(d) Except as the Company may otherwise consent or direct in
writing, Employee will not, sell, use, lecture upon, or publish any
Confidential Information or authorize anyone else to do those things at
any time either before or after the expiration of this Agreement.
(e) For purposes of this Agreement, the term "Confidential
Information" means information (i) disclosed to or known by Employee as
a consequence of or through Employee's employment by the Company, (ii)
not generally known outside the Company, and (iii) that relates to the
Company. Confidential Information will also include the Company's
proprietary information (such as trade secrets).
(f) This Section will continue in full force and effect after
the expiration of this Agreement.
3.2 COMPETITION.
------------
(a) The following provisions of this Section will apply from
the Commencement Date until the earliest to occur of the following
events:
(i) Two (2) years;
(ii) The remainder of the term of this Agreement; or
(iii) The maximum period during which the provisions
of this Section can be enforced under Texas law.
(b) The following provisions of this Section will not apply if
the Company terminates the employment of Employee for a reason that
does not constitute "Cause" under Subparagraphs (i) through (vi) of
Section of this Agreement.
(c) Except in furtherance of the execution of Employee's
duties under this Agreement, Employee expressly covenants and agrees
that Employee will not, without the prior written consent of the Board
of Directors, either acting alone or in conjunction with others,
directly or indirectly:
(i) Engage in any competition with the Company with
respect to those products or services of a type for which
Employee had responsibility for at the Company;
(ii) Solicit business of any type engaged in by the
Company (or by any subsidiary or affiliate of Company) with
respect to those products or services of a type for which
Employee had responsibility for at the Company from any person
or business which is an account, customer, or client of the
Company (or any subsidiary or affiliate of the Company);
- 10 -
<PAGE> 11
(iii) Induce or attempt to influence any such
account, customer, or client to curtail or cancel his or its
business with the Company (or any subsidiary or affiliate of
Company); or
(iv) Induce or attempt to influence any employee to
terminate his or her employment with the Company (or with any
subsidiary or affiliate of the Company).
3.3 ENFORCEMENT. Because the remedy at law for any breach of the
provisions of this Article would be inadequate, Employee hereby consents to the
granting of an injunction or other equitable relief enjoining any breach of
these provisions by any court having jurisdiction without the necessity of
proving actual monetary loss. In addition to such injunctive relief, the Company
may pursue at law any remedies available to it.
ARTICLE IV
MISCELLANEOUS MATTERS
4.1 BINDING ON SUCCESSOR. The Company will not enter into any merger,
acquisition, or other business combination with any other party in which the
Company will not be the surviving entity unless the other party to that
agreement consents to be bound by the terms of this Agreement.
4.2 NO ASSIGNMENT. Except as required by law, Employee may not assign
or alienate (voluntarily or involuntarily) any right to receive payments under
this Agreement.
4.3 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without reference to the conflict
of laws provisions thereof.
4.4 CAPTIONS. The captions of this Agreement are included solely for
convenience of reference and have no force or effect.
4.5 AMENDMENTS. This Agreement may not be amended, modified, or waived
in any manner other than by a written agreement executed by the parties to this
Agreement. The waiver by either party of compliance with any provision of this
Agreement by the other party will not operate or be construed as a waiver of any
other provision of this Agreement, or of any subsequent breach by the other
party of any provision of this Agreement.
4.6 NOTICES. All notices and other communications hereunder will be
sufficient if in writing and either hand-delivered or mailed by registered or
certified mail, return receipt requested, with postage prepaid, to the parties
at the following addresses (or to such other address or addresses as either
party shall have designated in writing to the other party hereto):
- 11 -
<PAGE> 12
IF TO THE COMPANY:
------------------
IXC Communications, Inc.
5000 Plaza on the Lake, Suite 200
Austin, Texas 78746
Attn: Ralph J. Swett, Chairman
IF TO EMPLOYEE:
---------------
Benjamin L. Scott
c/o IXC Communications, Inc.
5000 Plaza on the Lake, Suite 200
Austin, Texas 78746
4.7 SEVERABILITY. The invalidity or unenforceability of any provision
of this Agreement will not affect the validity or enforceability of any other
provision of this Agreement.
4.8 ENTIRE AGREEMENT AND MODIFICATION. This Agreement constitutes the
full and complete understanding and agreement of the parties and supersedes all
prior understandings and agreements between the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year indicated above.
BENJAMIN L. SCOTT, an individual IXC COMMUNICATIONS, INC.
/s/ Benjamin L. Scott By: /s/ Ralph J. Swett
- ------------------------------------- ------------------------------
Its: Chairman
------------------------------
- 12 -
<PAGE> 1
EXHIBIT 10.22
IXC COMMUNICATIONS, INC.
1997 SPECIAL EXECUTIVE STOCK PLAN
1. PURPOSE. The purpose of this IXC Communications, Inc. 1997 Special
Executive Stock Plan ("Plan") is to promote the interests of IXC Communications,
Inc. ("Company") and its shareholders by enabling it to offer grants of stock to
better attract, retain, and reward certain key executives and, accordingly, to
strengthen the mutuality of interests between those executives and the Company's
shareholders by providing those executives with a proprietary interest in
pursuing the Company's long-term growth and financial success.
2. DEFINITIONS. For purposes of this Plan, the following terms shall
have the meanings set forth below.
(a) "Board" means the Board of Directors of IXC
Communications, Inc.
(b) "Code" means the Internal Revenue Code of 1986, as
amended. Reference to any specific section of the Code shall be deemed
to be a reference to any successor provision.
(c) "Committee" means the administrative Committee of this
Plan that is provided in Section below.
(d) "Common Stock" means the common stock of the Company or
any security issued in substitution, exchange, or in lieu thereof.
(e) "Company" means IXC Communications, Inc., a Delaware
corporation, or any successor corporation. Except where the context
indicates otherwise, the term "Company" shall include its Parent and
Subsidiaries.
(f) "Disabled" means permanent and total disability, as
defined in Code Section 22(e)(3).
(g) "Exchange Act" means the Securities Exchange Act of 1934.
(h) "Fair Market Value" of Common Stock shall be determined in
accordance with the following rules.
(i) If the Common Stock is admitted to trading or
listed on a national securities exchange, the closing price
for any day shall be the last reported sale price regular way,
or if no such reported sale takes place on that day, the
average of the last reported bid and ask prices regular way,
in either case on the principal national securities exchange
on which the Common Stock is admitted to trading or listed.
(ii) If not listed or admitted to trading on any
national securities
<PAGE> 2
exchange, the last sale price on that day of the Common Stock
reported on the Nasdaq National Market of the Nasdaq Stock
Market ("Nasdaq National Market") or, if no such reported sale
takes place on that day, the average of the closing bid and
ask prices on that day.
(iii) If not included in the Nasdaq National Market,
the average of the closing bid and ask prices of the Common
Stock on that day reported by the Nasdaq Stock Market, or any
comparable system on that day.
(iv) If the Common Stock is not included in the
Nasdaq Stock Market or any comparable system, the closing bid
and ask prices on that day as furnished by any member of the
National Association of Securities Dealers, Inc. selected from
time to time by the Company for that purpose.
In the case of a day on which the stock markets are not open, Fair
Market Value shall be determined as of the last preceding day on which
the stock markets were open. In the case of an Incentive Stock Option,
Fair Market Value shall be determined without reference to any
restriction other than one that, by its terms, will never lapse.
(i) "Incentive Stock Option" means an option to purchase
Common Stock that is an incentive stock option within the meaning of
Code Section 422.
(j) "Insider" means a person who is subject to Section 16 of
the Exchange Act.
(k) "Non-Qualified Stock Option" means any option to purchase
Common Stock that is not an Incentive Stock Option.
(l) "Option" means an Incentive Stock Option or a
Non-Qualified Stock Option.
(m) "Parent" shall mean any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company
if each of the corporations (other than the Company) owns stock
possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock in one of the other corporations in the
chain, as determined in accordance with the rules of Code Section
424(e).
(n) "Participant" means a person who was been granted an
Option or Restricted Stock.
(o) "Plan" means this IXC Communications, Inc. 1997 Special
Executive Stock Plan, as it may be amended from time to time.
- 2 -
<PAGE> 3
(p) "Restricted Stock" means shares of Common Stock issued
under Section below that are subject to restrictions upon assignment or
alienation prior to vesting.
(q) "Severance" means, with respect to a Participant, the
termination of the Participant's provision of services to the Company
as an employee, whether by reason of death, disability, or any other
reason.
(i) For purposes of determining the exercisability of
an Incentive Stock Option, a Participant who is on a leave of
absence that exceeds ninety (90) days will be considered to
have incurred a Severance on the ninety-first (91st) day of
the leave of absence, unless the Participant's rights to
reemployment are guaranteed by statute or contract.
(ii) A Participant will not be considered to have
incurred a Severance because of a transfer of employment
between the Company and a Subsidiary or Parent (or vice
versa).
(r) "Subsidiary" means any corporation or entity in which the
Company, directly or indirectly, controls fifty percent (50%) or more
of the total voting power of all classes of its stock having voting
power, as determined in accordance with the rules of Code Section
424(f).
(s) "Ten Percent Shareholder" means any person who owns (after
taking into account the constructive ownership rules of Section 424(d)
of the Code) more than ten percent (10%) of the stock of the IXC
Communications, Inc. or of any of its Parents or Subsidiaries.
3. ADMINISTRATION.
---------------
(a) This Plan shall be administered by a Committee appointed
by the Board. The Board may remove members from, or add members to, the
Committee at any time. To the extent possible and advisable, the
Committee shall be composed of individuals that satisfy Rule 16b-3
under the Exchange Act and Code Section 162(m). Notwithstanding
anything herein to the contrary, any action which may be taken by the
Committee may also be taken by the Board.
(b) The Committee may conduct its meetings in person or by
telephone. A majority of the members of the Committee shall constitute
a quorum, and any action shall constitute the action of the Committee
if it is authorized by:
(i) A majority of the members present at any meeting;
or
(ii) The unanimous consent of all of the members in
writing without a meeting.
- 3 -
<PAGE> 4
(c) The Committee is authorized to interpret this Plan and to
adopt rules and procedures relating to the administration of this Plan.
All actions of the Committee in connection with the interpretation and
administration of this Plan shall be binding upon all parties.
(d) Subject to the limitations of Sections and below, the
Committee is expressly authorized to make such modifications to this
Plan, and to the grants of Options and Restricted Stock hereunder as
are necessary to effectuate the intent of this Plan as a result of any
changes in the tax, accounting, or securities laws treatment of
Participants and of the Plan.
(e) The Committee may delegate its responsibilities to others
under such conditions and limitations as it may prescribe, except that
the Committee may not delegate its authority with regard to the
granting of Options or Restricted Stock to Insiders.
4. DURATION OF PLAN.
-----------------
(a) This Plan shall be effective as of September 9, 1997,
provided it is approved by the majority of the Company's shareholders,
in accordance with the provisions of Code Section 422, within twelve
(12) months before or after the date of its adoption by the Board of
Directors.
(b) In the event that this Plan is not so approved, this Plan
shall terminate and any Options granted under this Plan shall be void.
(c) This Plan shall terminate on September 8, 2007, except
with respect to Options then outstanding.
5. NUMBER OF SHARES.
-----------------
(a) The maximum number of shares of Common Stock which may be
issued under this Plan shall be five hundred thousand (500,000). This
number may be adjusted from time to time as set forth in Section below.
The maximum number of shares that may be issued to a single Participant
is five hundred thousand (500,000).
(b) Upon the expiration or termination of an outstanding
Option which shall not have been exercised in full, the shares of
Common Stock remaining unissued under the Option shall again become
available for use under the Plan.
(c) Upon the forfeiture of shares of Restricted Stock, the
forfeited shares of Common Stock shall again become available for use
under the Plan.
- 4 -
<PAGE> 5
(d) The payment of part or all of the exercise price of an
Option in the form of surrendering Common Stock owned by the
Participant shall reduce the number of shares considered to have been
issued upon the exercise of the Option (by the number of shares that
were surrendered) for purposes of determining the maximum number of
shares that may be issued under the Plan.
6. ELIGIBILITY.
------------
(a) Persons eligible for Options under this Plan shall consist
of employees and individuals who have accepted offers of employment
with the Company.
(b) In the event that the Company acquires another entity, the
Committee may authorize the issuance of Options ("Substitute Options")
to the individuals performing services for the acquired entity in
substitution of stock options previously granted to those individuals
in connection with their performance of services for such entity upon
such terms and conditions as the Committee shall determine, taking into
account the limitations of Code Section 424(a) in the case of a
Substitute Option that is intended to be an Incentive Stock Option.
7. FORM OF OPTIONS.
----------------
(a) Options shall be granted under this Plan on such terms and
in such form as the Committee may approve, which shall not be
inconsistent with the provisions of this Plan. However, if a grant of
an Option or of Restricted Stock would not be exempt under Rule 16b-3
of the Exchange Act if effected by the Committee, the Board may make
such a grant.
(b) The exercise price per share of Common Stock purchasable
under an Option shall be set forth in the Option, which in all cases
shall be at least equal to the Fair Market Value of the Common Stock on
the date of the grant.
(c) The exercise price of an Incentive Stock Option granted to
a Ten Percent Shareholder shall be no less than one hundred ten percent
(110%) of the Fair Market Value of the Common Stock on the date of the
grant.
8. EXERCISE OF OPTIONS.
--------------------
(a) An Option shall be exercisable at such time or times and
be subject to such terms and conditions as may be set forth in the
Option.
(b) The aggregate Fair Market Value (determined as of the date
of grant) of the number of shares of Common Stock with respect to which
Incentive Stock Options are exercisable for the first time by a
Participant during any calendar year shall not exceed one hundred
thousand dollars ($100,000) or such other limit as may be required by
Code Section 422.
- 5 -
<PAGE> 6
(c) Options shall only be exercisable for whole numbers of
shares.
(d) Options are exercised by payment of the full amount of the
purchase price to the Company.
(i) The payment shall be in the form of cash or such
other forms of consideration as the Committee shall deem
acceptable, such as the surrender of outstanding shares of
Common Stock owned by the Participant or by withholding shares
that would otherwise be issued upon the exercise of the
Option.
(ii) If the payment is made by means of the surrender
of Restricted Stock, a number of shares issued upon the
exercise of the Option equal to the number of shares of
Restricted Stock surrendered shall be subject to the same
restrictions as the Restricted Stock that was surrendered.
(iii) After giving due considerations of the
consequences under Rule 16b-3 under the Exchange Act and under
the Code, the Committee may also authorize the exercise of
Options by the delivery to the Company or its designated agent
of an irrevocable written notice of exercise form together
with irrevocable instructions to a broker-dealer to sell or
margin a sufficient portion of the shares of Common Stock and
to deliver the sale or margin loan proceeds directly to the
Company to pay all or a portion of the exercise price of the
Option.
9. RESTRICTED STOCK.
-----------------
(a) The Committee may issue grants of Restricted Stock upon
such terms and conditions as it may deem appropriate, which need not be
the same for each such grant.
(b) Restricted Stock may not be sold to Participants for less
than Fair Market Value.
(c) A Participant shall not have a vested right to the shares
subject to the grant of Restricted Stock until satisfaction of the
vesting requirements specified in the grant. The Participant may not
assign or alienate the Participant's interest in the shares of
Restricted Stock prior to vesting.
(d) The following rules apply with respect to events that
occur prior to the date on which the Participant obtains a vested right
to the Restricted Stock.
(i) Stock dividends, shares resulting from stock
splits, etc. that are issued with respect to the shares
covered by a grant of Restricted Stock shall be treated as
additional shares received under the grant of Restricted
Stock.
- 6 -
<PAGE> 7
(ii) Cash dividends constitute taxable compensation
to the Participant that is deductible by the Company.
10. MODIFICATION OF GRANTS.
-----------------------
(a) The Committee may modify an existing Option, including the
right to:
(i) Accelerate the right to exercise it;
(ii) Extend or renew it; or
(iii) Cancel it and issue a new Option.
However, no modification may be made to an Option that would impair the
rights of the Participant holding the Option without the Participant's
consent. Modifications to grants of Restricted Stock are also subject
to this restriction.
(b) Whether a modification of an existing Incentive Stock
Option will be treated as the issuance of a new Incentive Stock Option
will be determined in accordance with the rules of Code Section 424(h).
(c) Whether a modification of an existing grant of Restricted
Stock or of an Option previously granted to an Insider will be treated
as a new grant will be determined in accordance with Rule 16b-3 under
the Exchange Act.
11. TERMINATION OF OPTIONS.
-----------------------
(a) Except to the extent the terms of an Option require its
prior termination, each Option shall terminate on the earliest of the
following dates.
(i) The date which is ten (10) years from the date on
which the Option is granted or five (5) years in the case of
an Incentive Stock Option granted to a Ten Percent
Shareholder.
(ii) The date which is one (1) year from the date of
the Severance of the Participant to whom the Option was
granted, if the Participant was Disabled at the time of
Severance.
(iii) The date which is one (1) year from the date of
the Severance of the Participant to whom the Option was
granted, if the Participant's death occurs:
(A) While the Participant is employed by the
Company; or
- 7 -
<PAGE> 8
(B) Within ninety (90) days following the
Participant's Severance.
(iv) In the case of any Severance other than those
described in Subparagraphs (ii) or (iii) above, the date that
is ninety (90) days from the date of the Participant's
Severance.
12. NON-TRANSFERABILITY OF GRANTS.
------------------------------
(a) No Option under this Plan shall be assignable or
transferable except by will or by the laws of descent and distribution.
(b) Grants of Restricted Stock shall be subject to such
restrictions on transferability as may be imposed in such grants.
13. ADJUSTMENTS
-----------
(a) In the event of any change in the capitalization of the
Company affecting its Common Stock (e.g., a stock split, reverse stock
split, stock dividend, recapitalization, combination, or
reclassification), the Committee shall authorize such adjustments as it
may deem appropriate with respect to:
(i) The aggregate number of shares of Common Stock
that may be issued under this Plan;
(ii) The number of shares of Common Stock covered by
each outstanding Option; and
(iii) The exercise price per share in respect of each
outstanding Option.
(b) The Committee may also make such adjustments in the event
of a spin-off or other distribution of Company assets to shareholders,
other than normal cash dividends.
14. AMENDMENT AND TERMINATION.
--------------------------
(a) The Board may at any time amend or terminate this Plan.
However, no modification may be made to the Plan that would impair the
rights of the Participant holding an Option or Restricted Stock without
the Participant's consent.
(b) Without the approval of the majority of the shareholders
of the Company, the Board may not amend the provisions of this Plan
regarding:
- 8 -
<PAGE> 9
(i) The class of individuals entitled to receive
Incentive Stock Options; or
(ii) The aggregate number of shares of Common Stock
that may be issued under the Plan, except as adjusted pursuant
to Section above.
15. NOTICE OF DISQUALIFYING DISPOSITION. A Participant must notify the
Company if the Participant disposes of stock acquired pursuant to the exercise
of an Incentive Stock Option issued under the Plan prior to the expiration of
the holding periods required to qualify for long-term capital gains treatment on
the sale.
16. TAX WITHHOLDING.
----------------
(a) The Company shall have the right to take such actions as
may be necessary to satisfy its tax withholding obligations relating to
the operation of this Plan.
(b) If Common Stock that was surrendered by the Participant is
used to satisfy the Company's tax withholding obligations, the stock
shall be valued based on its Fair Market Value when the tax withholding
is required to be made.
17. NO ADDITIONAL RIGHTS.
---------------------
(a) Neither the adoption of this Plan nor the granting (or
exercise) of any Option or Restricted Stock shall:
(i) Affect or restrict in any way the power of the
Company to undertake any corporate action otherwise permitted
under applicable law; or
(ii) Confer upon any Participant the right to
continued employment with the Company, nor shall it interfere
in any way with the right of the Company to terminate the
employment of any Participant at any time, with or without
cause.
(b) No Participant shall have any rights as a shareholder with
respect to any shares covered by an Option granted to the Participant
or subject to a grant of Restricted Stock until the date a certificate
for such shares has been issued to the Participant.
18. SECURITIES LAW RESTRICTIONS.
----------------------------
(a) No shares of Common Stock shall be issued under this Plan
unless the Committee shall be satisfied that the issuance will be in
compliance with applicable federal and state securities laws.
- 9 -
<PAGE> 10
(b) The Committee may require certain investment (or other)
representations and undertakings by the Participant (or other person
exercising an Option or purchasing Restricted Stock by reason of the
death of the Participant) in order to comply with applicable law.
(c) Certificates for shares of Common Stock delivered under
this Plan may be subject to such restrictions as the Committee may deem
advisable. The Committee may cause a legend to be placed on the
certificates to refer to these restrictions.
19. INDEMNIFICATION. To the maximum extent permitted by law, the
Company shall indemnify each member of the Board, as well as any other employee
of the Company with duties under this Plan, against expenses (including any
amount paid in settlement) reasonably incurred by the individual in connection
with any claims against him or her by reason of the performance of the
individual's duties under this Plan, unless the losses are due to the
individual's gross negligence or lack of good faith.
20. GOVERNING LAW. This Plan and all actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Delaware.
- 10 -
<PAGE> 1
EXHIBIT 11.1
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EARNINGS
Net income (loss)................................. $(28,810) $(12,067) $(48,688) $(23,766)
Less: Dividends applicable to preferred
stock........................................ (2,288) (432) (2,758) (865)
-------- -------- -------- --------
Net income (loss) applicable to common
stockholders................................... $(31,098) (12,499) $(51,446) $(24,631)
======== ======== ======== ========
PRIMARY
Weighted average number of shares outstanding..... 30,799 24,335 30,799 24,335
Add: Effect, for periods including and prior to
the initial public offering (IPO), of common
stock options issued within one year of the
IPO............................................ -- 833 -- 833
Less: Assumed repurchase of shares under the
treasury stock method.......................... -- (157) -- (157)
-------- -------- -------- --------
Number of shares used to compute earnings (loss)
applicable to common shareholders.............. 30,799 25,011 30,799 25,011
======== ======== ======== ========
FULLY DILUTED
Weighted average number of shares outstanding..... 30,799 24,335 30,799 24,335
Add: Effect, for periods including and prior to
the IPO, of common stock options issued within
one year of the IPO............................ -- 833 -- 833
Less: Assumed repurchase of shares under the
treasury stock method.......................... -- (157) -- (157)
-------- -------- -------- --------
Number of shares used to compute earnings (loss)
applicable to common shareholders.............. 30,799 25,011 30,799 25,011
======== ======== ======== ========
PRIMARY LOSS PER COMMON AND COMMON EQUIVALENT
SHARE.......................................... $ (1.01) (0.50) $ (1.67) $ (0.99)
======== ======== ======== ========
FULLY DILUTED LOSS PER COMMON AND COMMON
EQUIVALENT SHARE............................... $ (1.01) $ (0.50) $ (1.67) $ (0.99)
======== ======== ======== ========
</TABLE>
<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 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF OTHER NAMES
INCORPORATION UNDER WHICH
OR SUBSIDIARY
NAME OF SUBSIDIARY ORGANIZATION DOES BUSINESS TYPE OF ENTITY
------------------ --------------- ------------- --------------
<S> <C> <C> <C>
Atlantic States Microwave Transmission Company Nevada None Corporation
Central States Microwave Transmission Company Ohio None Corporation
IXC Broadband Services, Inc. Delaware None Corporation
IXC Carrier, Inc. Nevada None Corporation
IXC International, Inc. Delaware None Corporation
IXC Internet Services, Inc. Delaware None Corporation
IXC Long Distance, Inc. Delaware None Corporation
IXC-One Acquisition Corp. California None Corporation
Link Net International, Inc. Delaware None Corporation
Marca-Tel S.A. de C.V. Mexico None Corporation
MSM Associates, Limited Partnership Delaware None Limited Partnership
Mutual Signal Holding Corporation Delaware None Corporation
Mutual Signal Corporation of Michigan New York None Corporation
Mutual Signal Corp. New York None Corporation
Progress International, L.L.C. Texas None Limited Liability Company
Rio Grande Transmission, Inc. Delaware None Corporation
Switched Services Communications, L.L.C. Texas None Limited Liability Company
Telcom Engineering, Inc. Texas None Corporation
Telcom One, Inc. Delaware None Corporation
Tower Communication Systems Corp. Ohio None Corporation
U.S. Advantage Long Distance, Inc. Texas None Corporation
West Texas Microwave Company Texas None Corporation
Western States Microwave Transmission Company Nevada None Corporation
</TABLE>
<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-4 of IXC Communications, Inc. for the
registration of 450,000 shares of its 12 1/2% Series B Junior Exchangeable
Preferred Stock Due 2009 (including any 12 1/2% Subordinated Exchange Debentures
Due 2009 issuable upon exchange 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
October 3, 1997
