<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
IXC COMMUNICATIONS, INC.
(Exact name of registrant as specified in charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 4813 74-2644120
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
5000 PLAZA ON THE LAKE, SUITE 200
AUSTIN, TEXAS 78746
(512) 328-1112
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
JOHN J. WILLINGHAM
IXC COMMUNICATIONS, INC.
5000 PLAZA ON THE LAKE, SUITE 200
AUSTIN, TEXAS 78746
(512) 328-1112
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C>
ELAINE R. LEVIN, ESQ. JERRY V. ELLIOTT, ESQ.
MICHAEL P. WHALEN, ESQ. JAMES S. SCOTT, SR., ESQ.
RIORDAN & MCKINZIE SHEARMAN & STERLING
695 TOWN CENTER DRIVE, SUITE 1500 599 LEXINGTON AVENUE
COSTA MESA, CA 92626 NEW YORK, NY 10022
(714) 433-2900 (212) 848-4000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
---------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
============================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
OFFERING PRICE AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE PER OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per
share................................ 2,300,000 $35.56 $81,788,000 $24,784
============================================================================================================
</TABLE>
(1) Includes 300,000 shares which the Underwriters have the option to purchase
from the Selling Stockholders to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
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)
Issued January 29, 1997
2,000,000 Shares
[IXC LOGO] IXC Communications, Inc.
COMMON STOCK
------------------------
All of the shares of Common Stock offered hereby, other than upon exercise of
the Underwriters' over-allotment option, are being sold by the Company. The
Common Stock is quoted on the Nasdaq National Market under the symbol "IIXC."
The last reported sale price for the Common Stock on January 27, 1997, as
reported on the Nasdaq National Market, was $35.625 per share. See "Price Range
of Common Stock."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE FOR INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
------------ -------------- ------------
<S> <C> <C> <C>
Per Share................................... $ $ $
Total(3).................................... $ $ $
</TABLE>
- ------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Before deducting expenses payable by the Company, estimated at
$ .
(3) Certain stockholders of the Company (the "Selling Stockholders") have
granted to the Underwriters an option, exercisable within 30 days of the
date hereof, to purchase up to an aggregate of 300,000 additional shares
of Common Stock at the price to public less underwriting discounts and
commissions, for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total price to public,
underwriting discounts and commissions and proceeds to the Selling
Stockholders will be $ , $ and $ , respectively.
The Company will not receive any proceeds from the sale of shares by the
Selling Stockholders. See "Principal and Selling Stockholders" and
"Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters and subject to approval of certain legal matters by Shearman &
Sterling, counsel for the Underwriters. It is expected that delivery of the
Shares will be made on or about , 1997 at the office of Morgan
Stanley & Co. Incorporated, New York, N.Y., against payment therefor in
immediately available funds.
------------------------
MORGAN STANLEY & CO.
Incorporated
CREDIT SUISSE FIRST BOSTON
DILLON, READ & CO. INC.
, 1997
<PAGE> 3
No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained in this Prospectus,
and if given or made, such information or representation must not be relied upon
as having been authorized by the Company or by any Underwriter. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
security other than the Common Stock offered hereby to any person in any
jurisdiction in which it is unlawful to make any such offer or solicitation to
such person. Neither the delivery of this Prospectus nor any sale made hereby
shall under any circumstance imply that the information contained herein is
correct as of any date subsequent to the date hereof.
For investors outside the United States: No action has been or will be
taken in any jurisdiction by the Company or by any Underwriter that would permit
a public offering of the Common Stock or possession or distribution of this
Prospectus in any jurisdiction where action for that purpose is required, other
than in the United States. Persons into whose possession this Prospectus comes
are required by the Company and the Underwriters to inform themselves about and
to observe any restrictions as to the offering of the Common Stock and the
distribution of this Prospectus.
In this Prospectus references to "dollars" and "$" are to United States
Dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH
PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR
OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO
EXEMPTIONS FROM RULES 10B-6, 10B-7 AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT
OF 1934.
2
<PAGE> 4
[MAP]
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................................................... 4
Risk Factors.......................................................................... 10
Use of Proceeds....................................................................... 19
Price Range of Common Stock........................................................... 19
Dividend Policy....................................................................... 19
Capitalization........................................................................ 20
Selected Historical and Pro Forma Financial Data...................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 23
Industry Overview..................................................................... 32
Business.............................................................................. 35
Management............................................................................ 52
Certain Transactions.................................................................. 58
Principal and Selling Stockholders.................................................... 60
Description of Capital Stock.......................................................... 62
Shares Eligible for Future Sale....................................................... 64
Description of Certain Indebtedness................................................... 65
Underwriters.......................................................................... 66
Legal Matters......................................................................... 67
Experts............................................................................... 67
Available Information................................................................. 68
Glossary.............................................................................. A-1
Index to Financial Statements......................................................... F-1
</TABLE>
The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements examined by an independent public
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
3
<PAGE> 6
PROSPECTUS SUMMARY
Certain of the information contained in this Prospectus, including
information regarding the Company's Fiber Expansion (as defined below) and
switched long distance services and related strategy and financing, are
forward-looking statements. For a discussion of important factors that could
cause actual results to differ materially from the matters described in the
forward-looking statements, see "Risk Factors." Prospective investors should
carefully consider such factors and the other matters set forth under "Risk
Factors." 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" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and the Consolidated
Financial Statements (including the Notes thereto), appearing elsewhere in this
Prospectus. As used herein, unless the context otherwise requires, the term
"Company" refers to IXC Communications, Inc. ("IXC Communications") and its
subsidiaries, including predecessor corporations. Industry data was obtained
from a report issued in March 1996 from the FCC and from reports dated April
1995 and January 1996 from International Data Corporation (an industry research
organization), which the Company has not independently verified. Unless
otherwise indicated, all information in this Prospectus assumes that the
Underwriters' over-allotment option will not be exercised and has been adjusted
to reflect stock splits through the date of this Prospectus.
THE COMPANY
The Company provides two principal services to long distance companies: (i)
long-haul transmission of voice and data over dedicated circuits; and (ii)
switched long distance services. The Company is one of only five carriers that
currently own a digital telecommunications network extending from coast-to-coast
(the other carriers are AT&T, MCI, Sprint and WorldCom). Its facilities also
include digital switches located in Los Angeles, Dallas, Chicago, Philadelphia
and Atlanta. The Company is currently engaged in a major expansion of its
network (the "Fiber Expansion"), as set forth in the map on the inside front
cover page of this Prospectus.
The Company had revenues of approximately $130.3 million in the nine months
ended September 30, 1996, with approximately $72.4 million generated by its
long-haul business and approximately $57.9 million generated by its switched
services business. The Company has long-haul circuit contracts with over 200
long distance carriers, including AT&T, MCI, Sprint, WorldCom, Cable & Wireless,
Frontier and LCI. The Company also provides long-haul transmission service to
customers after contract expiration on a month-to-month basis. The Company's
long-haul contracts provide for fixed monthly payments, generally in advance.
The Company has historically enjoyed a high customer retention rate.
In late 1995, the Company expanded into the business of selling switched
long distance services to long distance resellers in order to complement its
long-haul business and to capitalize on its ability to provide switched services
over its own network. Switched long distance services are telecommunications
services that are processed through the Company's digital switches and carried
over long-haul circuits and other transmission facilities owned or leased by the
Company. During 1995, the Company set up the infrastructure for its switched
long distance business by installing its switches, connecting them to its
network and to the LECs, acquiring software, hiring personnel and entering into
contracts with customers. The Company's switched network became fully
operational in February 1996. The Company sells switched long distance services
on a per-call basis, charging by minutes of use ("MOUs"), with payment due
monthly after services are rendered. The Company believes that it is
well-positioned to continue to attract long distance resellers as customers for
its switched long distance services because: (i) it is not currently a
significant competitor for sales to end users; and (ii) it provides more focused
service to its reseller customers, since servicing such customers is its primary
business, unlike its major competitors whose main business is selling retail
long distance service to end users.
4
<PAGE> 7
The Company has switched long distance services contracts with over 70 long
distance resellers. Excel, the Company's largest customer of switched long
distance services, is contractually obligated to continue to utilize a minimum
of 70 million minutes of traffic per month until reaching total usage of 4.2
billion minutes (subject to Excel's right to reduce or terminate its commitment
under certain circumstances). The Company's switched long distance business has
grown rapidly since its switched network became fully operational in February
1996, with Excel accounting for most of the growth. The Company's switched long
distance revenues amounted to approximately $58.0 million in the nine months
ended September 30, 1996, with $4.0 million in the quarter ended March 31, 1996,
$19.0 million in the quarter ended June 30, 1996 and $35.0 million in the
quarter ended September 30, 1996. The Company plans to continue to expand the
capabilities of the switched network in 1997 to meet customer demand by adding
additional equipment, including at least one switch. See "Business -- Switched
Long Distance Services."
The Company's primary business objectives over the near term are: (i) to
rapidly increase revenue from its switched long distance services business; (ii)
to complete a substantial portion of the Fiber Expansion in 1997; and (iii) to
utilize its expanded network to increase its revenues and profitability.
INDUSTRY OVERVIEW
The domestic long distance market generated revenues of approximately $75.9
billion in 1995. In 1995, the first-tier long distance providers (AT&T, MCI and
Sprint) accounted for approximately 85.6% of such revenue, the second-tier
companies (WorldCom, Frontier, Cable & Wireless, LCI and others) accounted for
approximately 8.9%, and the third-tier companies (approximately 400 companies)
accounted for the remaining 5.5% of the long distance market. According to data
included in an FCC report issued in March 1996, while total long distance
revenues grew at a compound annual rate of over 8% during the period from 1989
through 1995, the revenues of all carriers other than the first-tier carriers
grew in the aggregate at an annual compound rate of over 22% during the same
period. Such analysis also stated that the second-tier and third-tier carriers
increased their market share sixfold over a ten-year period, increasing from
less than 3% in 1984 to more than 17% in 1994. In addition, industry sources
estimate that combined revenues of second-tier and third-tier carriers grew by
17.9% in 1995. The Company provides long-haul services to companies in all three
tiers and switched long distance services to companies in the third tier.
FIBER EXPANSION
The Company is currently engaged in the Fiber Expansion, a major
enlargement of its network, to increase the Company's geographic scope and
network capacity. The Company believes the Fiber Expansion will improve its
profitability and cash flow by decreasing its cost of communications services as
it moves traffic onto facilities it owns and increasing its revenue by allowing
the lease of substantial additional capacity. It will connect the Company's
switches with high-capacity long-haul circuits, utilizing advanced fiber optic
technology capable of efficiently transmitting capacity-intensive services, such
as Internet, Intranet and multimedia applications, frame relay and ATM. The
Fiber Expansion is expected to deliver significant strategic and financial
benefits to the Company through:
(i) producing substantial savings by allowing the Company to move a
portion of its excess long-haul traffic from leased circuits on the
networks of other carriers to its own expanded network. Because of
geographic limitations and capacity constraints, the Company currently
supplements its own facilities with a significant amount of fiber optic
capacity obtained from other carriers to service customers that require
capacity not available on the Company's own network;
(ii) providing high-capacity new routes and substantially increasing
the capacity of certain existing routes, allowing the Company to increase
revenues by leasing additional circuits to its customers including
high-capacity products such as OC-48's, OC-12's and OC-3's;
(iii) allowing the Company to improve profitability in its switched
long distance services business by reducing its underlying costs of
long-haul transmission; and
5
<PAGE> 8
(iv) creating sufficient capacity to support increased demand which
may result from Internet and multimedia applications, frame relay and ATM.
Prior to beginning construction of the Fiber Expansion in late 1995, the
Company owned a coast-to-coast network containing over 1,700 fiber optic route
miles and over 5,000 digital microwave route miles. As of the date of this
Prospectus, over fiber route miles of a total of approximately
7,000 fiber route miles of the Fiber Expansion were complete. The Fiber
Expansion is planned to include routes from New York via Cleveland, Chicago,
Dallas and Phoenix to Los Angeles and from New York via Atlanta to Houston. The
Company expects to substantially complete the Fiber Expansion in 1997, meeting
the cost of its construction with cash on hand, the proceeds of this offering
(the "Offering") and funds the Company seeks to borrow under a credit facility
currently being negotiated. The Company is reducing the per-route-mile cost of
the Fiber Expansion through fiber exchange arrangements with WorldCom and Vyvx
(a video transmission subsidiary of The Williams Companies) and joint
construction and other cost-saving arrangements with other carriers.
In 1996 the Company began equipping its network with the data switches and
other equipment necessary to enter into the frame relay and ATM transmission
business. Such equipment, in connection with the Fiber Expansion and additional
equipment and software to be installed in 1997, should allow the Company to
enter into the business of frame relay and ATM transmission for Internet and
Intranet providers and other large users of data capacity. The Company began
beta testing such facilities in 1996 and began offering such services in the
first quarter of 1997. Although the Company does not expect such services to be
a significant source of revenues in 1997, industry sources predict that the
market for such high-capacity data uses will grow substantially in the future
along with the expected growth of Internet and Intranet use. To position itself
to benefit from such growth, the Company seeks to establish itself as a reliable
supplier of such services.
RECENT EVENTS
The Company continued in the second half of 1996 to sign contracts with new
and existing customers for switched long distance services and long-haul
services. During this period, Excel's usage of the Company's network increased
substantially above its 70 million minute per month minimum. In addition, the
Company entered into two significant agreements with major long distance
carriers that will obtain long-haul services from the Company utilizing portions
of the Fiber Expansion. Under one contract the Company will supply one-year DS-3
circuits aggregating over $24.0 million in revenue during 1997-1998: under the
other contract the Company will supply OC-48 capacity aggregating over $20.1
million in revenue over a five-year term.
Over fiber route miles of the Fiber Expansion were completed
from June 30, 1996 through the date of this Prospectus. During that period, the
Company entered into several additional agreements with other carriers that will
result in reductions to its per-route-mile cost of construction, including:
(i) a contract with Vyvx to exchange certain fibers on the Company's
New York to Los Angeles route for fibers on Vyvx's 1,600-mile route to be
constructed from Washington, D.C. to Houston. This contract with Vyvx is
similar to the Company's existing agreement with WorldCom pursuant to which
the Company is providing WorldCom with fibers on its Dallas to Phoenix
route in exchange for fibers on WorldCom's 1,100-mile route from Akron to
St. Louis. Through these arrangements the Company expects to save most of
the costs of construction (other than the cost of equipping the route with
electronics) and rights-of-way it would otherwise incur if it built the
route itself;
(ii) joint construction contracts with other carriers: LCI
(Youngstown, Ohio -- Toledo), DTI (Anderson, Missouri -- Kansas City), and
CCTS (Riverdale, Illinois -- Chicago). These contracts relate to routes the
other carriers are constructing, providing the other carriers will include
the Company's fiber in their routes. These arrangements allow the Company
and the other carriers to share most of the costs of construction (other
than the cost of equipping the route with electronics) of these routes;
6
<PAGE> 9
(iii) a joint construction contract with MFS, a recently acquired
subsidiary of WorldCom, pursuant to which MFS will include fibers for the
Company in a route MFS is constructing from Cleveland through upstate New
York to New York City. This route, which replaces a previously planned
Company route from Cleveland to Philadelphia, will substantially increase
the scope of the Company's network through large cities in upstate New
York, bring the network to Albany (facilitating a future extension to
Boston), and provide many additional fibers into New York City; and
(iv) contracts providing for the Company to include another carrier's
fiber in routes the Company is constructing: GST (Tucson -- Phoenix) and
WorldCom (Phoenix -- Las Vegas).
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered............................... 2,000,000 shares
Common Stock outstanding immediately after this
offering......................................... 32,795,014 shares(1)
Capital expenditures, including the
Use of proceeds.................................... Fiber Expansion. See "Use of Proceeds."
Nasdaq National Market symbol...................... IIXC
</TABLE>
- ------------------
(1) Computed using shares outstanding at December 31, 1996, but excludes: (i)
1,212,450 shares of Common Stock reserved for issuance under the 1994 Stock
Plan (as defined herein), of which options to purchase 1,156,073 shares were
outstanding as of December 31, 1996 at a weighted average exercise price of
$4.77 per share; (ii) 2,121,787 shares of Common Stock reserved for issuance
under the 1996 Stock Plan (as defined herein), of which options to purchase
476,600 shares were outstanding as of December 31, 1996 at a weighted
average exercise price of $20.30 per share; and (iii) 67,900 shares of
Common Stock reserved for issuance under the Special Stock Plan (as defined
herein), of which options to purchase 67,900 shares were outstanding as of
December 31, 1996 at a weighted average exercise price of $3.01 per share.
7
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain summary consolidated financial data
of the Company. The historical financial data as of and for the years ended
December 31, 1993, 1994 and 1995 has been derived from the audited Consolidated
Financial Statements of the Company. The historical financial data for the nine
months ended September 30, 1995 and 1996 is derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which management considers necessary
for a fair presentation of the financial position and the results of operations
for the periods. Results of operations for the nine months ended September 30,
1996 are not necessarily indicative of the results of operations that may be
expected for the year ending December 31, 1996. The pro forma data has been
derived from the Unaudited Pro Forma Condensed Consolidated Statement of
Operations, which is included elsewhere herein. The pro forma financial
information is presented for informational purposes only and is not necessarily
indicative of the operating results that would have occurred, nor are they
necessarily indicative of future operations.
The summary consolidated financial data set forth below is qualified in its
entirety by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements, the Notes thereto and other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL --------------------
-------------------------------- PRO FORMA(1)
------------ NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED SEPTEMBER 30,
-------------------------------- DECEMBER 31, --------------------
1993 1994 1995 1995 1995 1996
-------- -------- -------- ------------ -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenues............. $ 71,123 $ 80,663 $ 91,001 $ 91,001 $ 67,259 $130,273
Operating income (loss)............ (10,596) 14,085 1,429 312 6,345 (13,964)
Interest expense................... 4,943 6,105 14,597 14,597 5,110 28,658
Income (loss) before extraordinary
items............................ (31,812)(2) 5,017 (3,218) (7,605) 2,462 (29,390)
Net income (loss) per common
share............................ $ (1.04) $ .22 $ (.27) $ 0.00 $ (1.13)
Weighted average common shares
outstanding...................... 24,009 24,993 25,108 25,141 27,126
BALANCE SHEET DATA:
Cash(3)............................ $ 6,230 $ 6,048 $205,181 $ 4,729 $206,212
Total assets....................... 94,281 105,409 336,475 121,586 438,305
Total debt(4)...................... 59,954 69,124 298,794 103,591 302,031
Stockholders' equity (deficit)..... 6,871 14,189 6,858 17,995 71,633
OTHER FINANCIAL AND OPERATIONS DATA:
EBITDA(5).......................... $ 10,175 $ 26,400 $ 27,124 $ 21,674 $ 5,884 $ 13,503
Capital expenditures............... 27,008 7,087 23,670 23,670 27,920 73,275
Ratio of EBITDA to interest
expense(6)....................... 2.06x 4.32x 1.86x 1.48x 1.15x 0.47x
Minutes of use (in millions)....... -- -- 12.8 12.8 -- 608.3
Fiber route in miles(7)............ 20,723 20,747 22,159 22,159 22,159 37,915
</TABLE>
- ---------------
(1) The pro forma statement of operations data and the other financial and
operations data for the year ended December 31, 1995 reflect the acquisition
by the Company of the minority interest in Switched Services Communications,
L.L.C. ("SSC") as if the acquisition (which actually occurred as of January
1, 1996) had occurred as of January 1, 1995. See the Unaudited Condensed
Consolidated Financial Statements included elsewhere herein.
(2) Includes a $37,960 non-cash charge in 1993 relating to a write-down of
microwave equipment. (As of September 30, 1996, the remaining net
depreciated book value of microwave equipment was less than 4% of total
assets.) See Note 8 to the Consolidated Financial Statements.
8
<PAGE> 11
(3) Including $198,266 at December 31, 1995 and $116,268 at September 30, 1996
held in an escrow account. See Note 3 to the Consolidated Financial
Statements.
(4) Total debt consists of long-term debt, capital lease obligations and
deferred lease obligations, including the current portions thereof.
(5) Represents net income before depreciation, amortization, interest expense,
income taxes and extraordinary items. For the year ended December 31, 1993,
EBITDA does not reflect a $37,960 write-down of microwave equipment recorded
by the Company. (As of September 30, 1996, the remaining net depreciated
book value of microwave equipment was less than 4% of total assets.) See
Note 8 to the Consolidated Financial Statements. EBITDA for 1995 and the
nine months ended September 30, 1996 includes the negative EBITDA of IXC
Long Distance, Inc., the Company's switched long distance services
subsidiary. For 1995, such amounts principally relate to start-up and
operating expenses incurred before the Company began generating material
revenues from its switched long distance 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 and 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.
For 1995 and the nine months ended September 30, 1996, EBITDA included
$2,552 and $7,351, respectively, of interest income relating to amounts held
in escrow. See the Consolidated Financial Statements.
(6) For the nine months ended September 30, 1996, EBITDA was insufficient to
cover interest expense by $15,155. The Company paid the interest accrued
during such period with funds from the escrow account referred to in
footnote(4).
(7) Fiber route miles represents the number of strands included in the Company's
fiber bundles multiplied by route miles.
9
<PAGE> 12
RISK FACTORS
An investment in the Common Stock offered hereby is speculative in nature
and involves a high degree of risk. Accordingly, the following risk factors
should be considered carefully in evaluating the Company and its business before
purchasing shares of Common Stock offered hereby.
NEGATIVE CASH FLOW AND CAPITAL REQUIREMENTS
The Company's total capital expenditures for 1996 were $153.3 million
(including capital expenditures relating to the Fiber Expansion). For 1995 and
the nine months ended September 30, 1996, the Company's EBITDA minus interest
expense and capital expenditures (adjusted for the change in working capital)
was negative $4.8 million and negative $20.1 million, respectively. The Company
estimates that total capital expenditures for 1997 will be $315.5 million
(including capital expenditures relating to the Fiber Expansion). The Company
anticipates meeting the cash requirements relating to such capital expenditures
from the proceeds of this Offering and cash on hand of approximately $112.6
million at December 31, 1996 (consisting of approximately $61.3 million in
unrestricted cash and approximately $51.3 million held in an escrow account),
and funds to be borrowed under a credit facility currently being negotiated (the
"Proposed Credit Facility"). Although the Company had not obtained the Proposed
Credit Facility as of the date of this Prospectus, and there can be no assurance
that the Company will succeed in obtaining the Proposed Credit Facility, the
Company believes that it is likely that the Proposed Credit Facility can be
obtained and in an amount sufficient to fund the Company's remaining needs for
cash for capital expenditures in 1997. 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 Company's network, unexpected costs,
delays or advances in the timing of certain capital expenditures and other
factors. Furthermore, the foregoing capital expenditure and cash requirements do
not take into account any acquisitions. See "Business -- Acquisitions." The
Company's ability to meet the cash costs of such capital expenditures and to
successfully complete the Fiber Expansion is dependent upon the Company's
ability to enter into the Proposed Credit Facility and borrow sufficient funds
under the facility, to enter into cost-saving arrangements with carriers or
other large users of fiber capacity, to otherwise raise the significant capital
required and/or to significantly increase its cash flow. The failure of the
Company to accomplish any of the foregoing may significantly delay or prevent
the Company's making such capital expenditures or the completion of the Fiber
Expansion, which would have a material adverse effect on the Company and the
value of the Common Stock.
The Company's switched long distance 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,
acquired software and hired the personnel needed to establish a national
switched network. Taken on a stand-alone basis, the switched long distance
business generated negative gross margins over the first two quarters of 1996
and began to generate slightly positive gross margins during the third quarter
of 1996 as the Company began to carry more switched long distance traffic. After
allocating selling, general and administrative expense to the switched long
distance business, however, it would have generated negative EBITDA for each of
the first three quarters of 1996. The Company expects that the Fiber Expansion
will result in an improvement in the gross margins in its switched long distance
business. For a discussion of important factors that could cause the Company's
switched long distance business to fail to generate positive EBITDA, see
"-- Development Risks and Dependence on Switched Long Distance Business."
The Company is required to make annual interest payments of $35.6 million
with respect to the Senior Notes. The Company is currently unable to satisfy
such obligations solely with its cash flow. Furthermore, if the Company borrows
funds under the Proposed Credit Facility, it will be required to make periodic
interest and principal payments with respect to such borrowings. The Company's
ability to meet its debt service requirements over the long term is dependent on
a significant increase in its cash flow and/or its ability to raise additional
capital. A delay in the completion of the Fiber Expansion, larger than
anticipated capital expenditures for the Company's network or negative cash flow
from the switched long distance business could impair the ability of the Company
to meet its obligations under the Senior Notes and other indebtedness or to
access additional sources of funding, any of which would have a material adverse
effect on the Company and the value of the Common Stock.
10
<PAGE> 13
The forward-looking statements set forth above with respect to the
estimated cash requirements relating to capital expenditures, the Company's
ability to meet such cash requirements, the amount of the Company's other cash
requirements, and the Company's ability to improve its gross margins and EBITDA
in its switched long distance business are based on certain assumptions,
including that the Company will be able to enter into the Proposed Credit
Facility, there will be no significant delays or cost overruns with respect to
the Fiber Expansion, the Company's contractors and partners in cost-saving
arrangements will perform their obligations, rights-of-way can be obtained on a
timely, cost-effective basis, the portions of the Fiber Expansion scheduled for
completion in 1997 are substantially completed on schedule, the Company will
continue to increase traffic on its switched network and that the Company can
successfully provide switched long distance services on a cost effective basis
(including the provision of billing information in an accurate and timely
manner) for volumes that it has not previously handled. See "-- Risks Relating
to Completion of the Fiber Expansion," "-- Development Risks and Dependence on
Switched Long Distance Business," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- The Company's
Network."
RECENT AND EXPECTED LOSSES
The Company reported a loss before extraordinary items of $3.2 million for
the year ended December 31, 1995 and an operating loss of $14.0 million, EBITDA
of $13.5 million and a net loss of $29.4 million for the nine months ended
September 30, 1996. The Company expects to incur a net loss for the year ending
December 31, 1996, reflecting substantial interest expense associated with the
Senior Notes and start-up costs 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 long-haul circuits constructed in the Fiber Expansion and the success of
the Company's switched long distance services. There can be no assurance that
the Company will return to profitability in the future. Failure to generate
operating income, EBITDA and net income will impair the Company's ability to
meet its obligations under the Senior Notes (defined below) or other
indebtedness (such as the Proposed Credit Facility), expand its switched long
distance business and raise additional equity or debt financing which will be
necessary to complete the Fiber Expansion or which may be required for other
reasons. Such events could have a material adverse effect on the Company and the
value of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS RELATING TO COMPLETION OF THE FIBER EXPANSION
The Fiber Expansion is an essential element of the Company's future
success. Although the Company has made significant progress, construction of the
Fiber Expansion is not yet complete. The Company has substantial existing
commitments to purchase materials and labor for such construction, and will need
to obtain additional materials and labor which may cost more than anticipated.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Substantial segments of the
Fiber Expansion are being constructed by contractors or, pursuant to cost-saving
arrangements, by third parties such as right-of-way providers or carriers that
will include the Company's fiber in routes such carriers are constructing for
their own use. See "Business -- Company's Network" for a description of such
cost-saving arrangements. The successful completion of the Fiber Expansion is
dependent, among other things, on the performance of such contractors,
right-of-way providers and carriers and on the Company's ability: (i) to obtain
rights-of-way; (ii) to manage effectively the construction of the new fiber
routes; and (iii) to enter into additional cost-saving arrangements, obtain
additional financing under the Proposed Credit Facility or otherwise and/or
significantly increase its cash flow. Difficulties or delays with respect to any
of the foregoing may significantly delay or prevent the completion of the Fiber
Expansion, which would have a material adverse effect on the Company and the
value of the Common Stock.
The Company has entered into the WorldCom Fiber Build Agreement (as defined
below) with WorldCom, relating to the construction by each party of a fiber
route approximately 1,100 miles long and the placing of fiber for both parties
in such route. WorldCom's route extends from Akron through Indianapolis to a
suburb of St. Louis, with a spur from Indianapolis to a suburb of Chicago. The
Company's route extends from Dallas to Phoenix with a spur to Ft. Worth. The
WorldCom Fiber Build Agreement provides for
11
<PAGE> 14
substantial penalties ($400,000 per month) to either party that did not complete
construction of its route by October 1, 1996, but only in the event that the
other party completed construction of its route. As of December 31, 1996,
neither WorldCom nor the Company had completed their routes, and thus, neither
party has been required to pay a penalty. The Company anticipates that it will
complete its route in the near future, prior to incurring any penalty, although
there can be no assurance that the Company will be able to complete its route by
that time. In the event WorldCom completes its route before the Company, and the
Company fails to complete its route within 30 days thereafter, the Company will
be required to pay the $400,000 per month penalty until it completes its
construction.
In December 1996, the Company entered into an agreement with Vyvx whereby
the Company will provide Vyvx with fibers from Los Angeles to New York City in
exchange for fibers from Houston to Washington, D.C. The parties are required to
complete their routes by December 31, 1997, with penalties taking effect in July
1998 if one party, but not the other, has failed to complete its route. Although
the Company anticipates that it will complete its route in time to avoid any
penalty, there can be no assurance that the Company will complete its route in
time. Such penalties increase from $400,000 per month in July 1998 to $800,000
per month in and after October 1998. In addition, the Company entered into two
significant agreements with major long distance carriers that will obtain
long-haul services from the Company utilizing portions of the Fiber Expansion.
Under one such contract, the Company will supply one-year DS-3 circuits for an
aggregate of over $24.0 million in revenue during 1996-1997; under the other
contract the Company will supply OC-48 capacity aggregating over $20.1 million
over a five-year term. Delays in completion of such routes could result in
cancellation of orders under such contracts.
Although the Company does not anticipate undue difficulty in obtaining
performance by its contractors or by its partners in cost-sharing arrangements
or in acquiring the necessary rights-of-way or in managing the construction of
the Fiber Expansion, there can be no assurance that such third parties
(including WorldCom and Vyvx) will perform or that such rights will be acquired
or that the Fiber Expansion will be completed without significant delays or
penalties, within its budget or at all. Increased costs or significant delays in
the completion of the Fiber Expansion, including the portion to be constructed
by WorldCom or Vyvx, could have a material adverse effect on the Company and the
value of the Common Stock. See "Business -- The Company's Network."
PRICING PRESSURES AND RISKS OF INDUSTRY OVER-CAPACITY
The long distance transmission industry has generally been characterized by
over-capacity and declining prices since shortly after the AT&T divestiture in
1984. The Company believes that, in the last several years, increasing demand
has ameliorated the over-capacity and that pricing pressure has been reduced.
However, the Company anticipates that prices for its services will continue to
decline over the next several years. The Company is aware that certain long
distance carriers are expanding their capacity and believes that other long
distance carriers, as well as potential new entrants to the industry, are
considering the construction of new fiber optic and other long distance
transmission networks. In particular, Qwest has announced its intention to
construct a coast-to-coast fiber optic network and Frontier has announced it
will purchase fibers for $500 million in Qwest's network. The Company believes
that there are significant barriers to entry for 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. Since the cost of the actual fiber
is a relatively small portion of building new transmission lines, persons
building such lines are likely to install fiber that provides substantially more
transmission capacity than will be needed over the short or medium term.
Further, recent technological advances have shown the potential to greatly
expand the capacity of existing and new fiber optic cable. In addition, the
Company's cost-saving arrangements with other carriers, which may involve the
sale or lease of capacity or fibers on the Fiber Expansion, will result in
competitors having capacity on the Company's routes along the Fiber Expansion,
which may in turn result in pricing pressures with respect to traffic carried
along these routes. If industry capacity expansion results in capacity that
exceeds overall demand in general or along any of the Company's routes, severe
additional pricing pressure could develop. In addition, strategic alliances or
similar transactions, such as the long distance
12
<PAGE> 15
capacity purchasing alliance among certain RBOCs announced in the spring of
1996, could result in additional pricing pressure on long distance carriers.
Such pricing pressure could have a material adverse effect on the Company and
the value of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."
DEVELOPMENT RISKS AND DEPENDENCE ON SWITCHED LONG DISTANCE BUSINESS
The success of the Company in the switched long distance business is
dependent on the Company's ability to generate significant customer traffic, to
manage an efficient switched long distance network and related customer service
and the timely completion of the Fiber Expansion. Prior to 1996 the Company had
not previously managed a switched long distance network and there can be no
assurance that its switched long distance services can be sold at a profit. The
failure of the Company to generate increased customer traffic, to complete the
Fiber Expansion in a timely manner, or to effectively manage the switched
network and related customer service or to operate it at a profit would have a
material adverse effect on the Company and the value of the Common Stock. The
Company's switched long distance business will require cash to meet its
operating expenses. In order to offer switched long distance services, the
Company installed switches, connected them to its network and to the LECs,
acquired software and hired the personnel needed to establish a national
switched network. Taken on a stand-alone basis, the switched long distance
business generated negative gross margins over the first two quarters of 1996
and began to generate slightly positive gross margins during the third quarter
of 1996 as the Company began to carry more switched long distance traffic. After
allocating selling, general and administrative expense to the switched long
distance business, however, it would have generated negative EBITDA for each of
the first three quarters of 1996. The Company expects that the Fiber Expansion
will result in an improvement in the gross margins in its switched long distance
business. Important factors that could cause the Company's switched long
distance 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 long distance services,
increases in operating expenses or other factors affecting the Company's revenue
or expenses. If such traffic does not increase, there can be no assurance that
the switched long distance business will ever generate positive EBITDA. 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. In
addition, the credit risk for the Company's switched long distance business is
substantially greater than the credit risk for the Company's long-haul business,
because switched long distance customers will be charged in arrears on the basis
of MOUs (which are frequently subject to dispute), and because many switched
long distance customers are not as well capitalized as most of the Company's
long-haul customers. See "Business -- Switched Long Distance Services."
RISKS INHERENT IN RAPID GROWTH
Part of the Company's strategy is to achieve rapid growth through expanding
its switched long distance business and through completing the Fiber Expansion.
Continued rapid growth would require: (i) the retention and training of new
personnel; (ii) the satisfactory performance by the Company's customer interface
and billing systems; (iii) the development and introduction of new products; and
(iv) the control of the Company's expenses related to the expansion into the
switched long distance business and the Fiber Expansion. The failure by the
Company to satisfy these requirements, or otherwise to manage its growth
effectively, would have a material adverse effect on the Company and the value
of the Common Stock. See "Business -- Long-Haul Services" and
"Business -- Switched Long Distance Services."
SUBSTANTIAL INDEBTEDNESS
The Company is highly leveraged. As of December 31, 1996, the Company had
approximately $302.3 million of long-term debt (including the current portion
thereof) principally related to its outstanding $285.0 million principal amount
of 12 1/2% Senior Notes due 2005 (the "Senior Notes"). In addition, the Company
seeks to obtain additional debt financing through the Proposed Credit Facility.
The Company's
13
<PAGE> 16
significant debt burden could have several important consequences to the
Company, including, but not limited to: (i) the cash received from operations
may be insufficient to meet the principal and interest due on the Senior Notes,
in addition to paying the other indebtedness (such as the Proposed Credit
Facility) of the Company as it becomes due; (ii) a significant portion of the
Company's cash flow from operations must be used to service its debt instead of
being used in the Company's business; and (iii) the Company's flexibility to
obtain the Proposed Credit Facility or additional financing in the future, as
needed to complete the Fiber Expansion or any other reason, may be impaired by
the amount of debt outstanding and the restrictions imposed by the covenants
contained in the indenture for the Senior Notes (the "Indenture") or in
agreements relating to other indebtedness. See "Description of Certain
Indebtedness." The ability of the Company to meet its obligations will be
subject to financial, business and other factors, including factors beyond its
control, such as prevailing economic conditions. There can be no assurance that
the Company's cash flow from operations will be sufficient to meet its
obligations under the Senior Notes or other indebtedness as payments become due
or that the Company will be able to refinance the Senior Notes or other
indebtedness at maturity.
ACQUISITION RISKS
As part of its growth strategy, the Company may, from time to time, acquire
businesses, assets or securities of companies which will complement and expand
the Company's existing business. 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. In addition, persons receiving Common Stock in an acquisition
may sell such stock, which could have a negative impact on the market price of
the Common Stock. There can be no assurance that services, technologies or
businesses of acquired companies will be effectively assimilated into the
business or product offerings of the Company or that they will contribute to the
Company's revenues or earnings to any material extent. The occurrence of some or
all of such events could have a material adverse effect on the Company and the
value of the Common Stock. There can be no assurance that the Company will be
able to identify suitable acquisition candidates or that, if identified, the
Company will be able to acquire such companies on suitable terms.
The Company may use its Common Stock to pay all or a portion of the
purchase price for acquisitions it may make in the future. To the extent that
the Company uses its Common Stock for all or a portion of such consideration,
dilution will be experienced by existing stockholders, including purchasers in
the Offering. Furthermore, because the value of the Common Stock to be used in
an acquisition may be determined prior to the closing of the acquisition, the
price per share of the Common Stock at the date of issuance may be below the
market value at that date. Also, the Company may grant registration rights to
the holders of such stock. In the event that the Company's Common Stock is not
used as consideration for an acquisition, the Company would be required to
utilize its cash resources, if available, in order to make acquisitions. To the
extent that the Company agrees to pay cash for any acquisition, such cash will
not be available for the Company's extensive planned capital expenditures. See
"Business -- Acquisitions."
14
<PAGE> 17
RELIANCE ON MAJOR CUSTOMERS
The Company's ten largest customers in 1996 accounted for approximately 70%
of its revenues, with Excel, WorldCom and Frontier as its three largest
customers. Excel first became a customer in 1996 and accounted for 35% of the
Company's revenues (69% of the Company's switched long distance revenues) during
1996. During 1994, 1995 and 1996, WorldCom accounted for approximately 25%, 20%
and 8% respectively, of the Company's revenues (the Company derived no revenues
from capacity-exchange arrangements with WorldCom in 1994, and approximately 4%
and 3% of its revenues from such arrangements with WorldCom in 1995 and 1996,
respectively) and Frontier (including Allnet) accounted for 23%, 21% and 10%,
respectively, of the Company's revenues.
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 and the value of the Common Stock. In addition to its commitments to
its other suppliers, Excel has entered into a four-year, $900.0 million contract
to purchase switched long distance services from WorldCom and a two-year, $120.0
million contract to purchase switched long distance services from MCI. Although
the Company believes that Excel's commitments to WorldCom and MCI will not
impair Excel's relationship with the Company, WorldCom and MCI are significant
competitors to the Company for Excel's business. In the event the Company is not
able to effectively compete with WorldCom, MCI or other Excel suppliers, it may
not continue to obtain revenues from Excel after Excel's commitment to the
Company has been satisfied. The loss of Excel as a customer after Excel's
commitment has been satisfied or a significant reduction by Excel of its
commitment to the Company (as is permitted in certain circumstances by the terms
of its contract with the Company) could have a material adverse effect on the
Company and the value of the Common Stock. See "Business -- Switched Long
Distance Services."
WorldCom has grown substantially in recent years, largely through
acquisitions, including the acquisition of certain customers of the Company. In
1995, WorldCom acquired WilTel, a facilities-based carrier that has been both a
long-term customer of, and supplier to, the Company. The Company believes that
as a result of WorldCom's ownership of the WilTel long-haul transmission
network, WorldCom is likely to transfer long-haul circuits now leased from the
Company, other than the long-haul circuits under capacity exchange arrangements
with the Company, to its own network when its leases expire. During the first
nine months of 1996, the Company had revenues from WorldCom of approximately
$12.7 million. Of such revenues, approximately 38% related to capacity-exchange
agreements, 23% related to leases expiring in 1996, 23% related to leases
expiring in 1997, 16% related to leases expiring after 1997. Prior to its
acquisition in 1995 by Frontier (which is also a customer of the Company),
Allnet was a large customer of the Company, accounting for approximately 18% and
17% of the Company's revenues in 1993 and 1994, respectively. Frontier has
announced that it will pay $500.0 million to obtain fibers in Qwest's
coast-to-coast system being constructed which will reduce Frontier's need to
lease circuits from the Company. The Company does not expect an immediate loss
of Frontier's business because: (i) Frontier had "take or pay" commitments to
the Company for the period 1997 through 2000 of over $14.2 million as of
December 31, 1996; (ii) Frontier does not currently own significant long-haul
network capacity; and (iii) the Company believes that the acquisition of Allnet
by Frontier will not affect the combined carrier's requirements for long-haul
circuits. However, as segments of the Qwest network are completed, it is likely
that Frontier will not renew circuits on the Company's network that can be
carried on such completed segments. Although there can be no assurance, the
Company believes that if revenues from WorldCom or from Frontier do not continue
or are reduced, they can be replaced over time with revenues generated from
other customers. However, in such event, the Company's revenues may in the
short-term be adversely affected and if such revenues are not replaced, then the
loss of, or reductions in the revenues from, Excel, WorldCom, Frontier or other
significant customers could have a material adverse effect on the Company and
the value of the Common Stock. In addition, construction by other customers of
the Company of their own facilities or further consolidations in the
telecommunications
15
<PAGE> 18
industry involving the Company's customers could have a material adverse effect
on the Company and the value of the Common Stock. See "Business -- Long-Haul
Services."
COMPETITION
The telecommunications industry is highly competitive. Many of the
Company's competitors (such as AT&T, MCI, Sprint, WorldCom and others) and
potential competitors (such as Qwest and Frontier) have substantially greater
financial, personnel, technical, marketing and other resources than those of the
Company and a far more extensive transmission network than the Company. Such
competitors may build additional fiber capacity in the geographic areas to be
served by the Fiber Expansion. Qwest has announced that it intends to build 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.
In the United States, price competition in the long distance business has
generally been intensive. The FCC has, on several occasions since 1984, approved
or required price decreases by AT&T through the imposition of "price cap"
regulations. However, the FCC recently classified AT&T as a "non-dominant
interexchange carrier," with the effect that AT&T is no longer subject to price
regulation of its long distance services. Since the Company believes that its
customers generally price their service offerings at or below the prices charged
by AT&T for its telecommunications services, reductions by AT&T in its rates may
necessitate similar price decreases by the Company. In addition, the
Telecommunications Act of 1996 (the "Telecommunications Act") will allow the
RBOCs and others such as electric utilities and cable television companies to
enter the long distance market, and has removed restraints on GTE. In fact, the
RBOCs have begun providing out-of-region interLATA long distance services, and
Ameritech has filed an application for authorization to provide in-region long
distance services. GTE has begun providing both out-of-region interLATA long
distance services and in-region long distance services. Further, a continuing
trend toward consolidation, mergers, acquisitions and strategic alliances in the
telecommunications industry could also give rise to significant new competitors
to the Company or to the Company's customers. See "-- Recent Legislation and
Regulatory Uncertainty," "Industry Overview," "Business -- Long-Haul Services,"
"Business -- Switched Long Distance Services" and "Business -- Regulation."
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a small number of key executive
officers, the loss of whom could have a material adverse effect on the Company.
The Company believes that its growth and future success will depend in large
part on its continued ability to attract and retain highly skilled and qualified
personnel. The loss of 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. With the exception of contracts with three of its vice presidents,
the Company does not have employment contracts, and, other than employment
contracts intended to retain management of acquired companies, the Company does
not presently intend to enter into contracts with other members of management.
See "Management" and "Certain Transactions."
16
<PAGE> 19
RECENT LEGISLATION AND REGULATORY UNCERTAINTY
Certain of the Company's operations are subject to regulation by the FCC
under the Communications Act of 1934, as amended (the "Communications Act"). In
addition, certain of the Company's businesses are subject to regulation by state
public utility or public service commissions. Changes in the regulation of, or
the enactment or changes in interpretation of legislation affecting, the
Company's operations could have a material adverse affect on the Company and the
value of the Common Stock. In 1996 the federal government enacted the
Telecommunications Act, which, among other things, allows the RBOCs and others
to enter the long distance business. Entry of the RBOCs or other entities such
as electric utilities and cable television companies into the long distance
business may have a negative impact on the Company or its customers. The Company
anticipates that certain of such entrants will be strong competitors because,
among other reasons, they may enjoy one or more of the following advantages:
they may (i) be well capitalized; (ii) already have substantial end-user
customer bases; or (iii) enjoy cost advantages relating to local loops and
access charges. The introduction of additional strong competitors into the
switched long distance business would mean that the Company and its customers
would face substantially increased competition. This could have a material
adverse effect on the Company and the value of the Common Stock. Further, the
FCC has recently commenced rulemaking proceedings 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. The outcomes of these FCC
proceedings are impossible to predict. In addition, the Telecommunications Act
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 and on the value of the Common Stock. See "Industry Overview" and
"Business -- Regulation."
RISKS RELATED TO RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. For example, there have been recent technological advances that
show the potential to greatly expand the capacity of existing and new fiber
optic cable, which could greatly increase supply. There can be no assurance that
the Company will maintain competitive services or that the Company will obtain
appropriate new technologies on a timely basis or on satisfactory terms. Such an
increase in supply or failure by the Company to maintain competitive services or
obtain new technologies could have a material adverse effect on the Company and
the value of the Common Stock. See "Industry Overview -- Technology."
CONCENTRATION OF STOCK OWNERSHIP
Upon completion of this Offering, Trustees of General Electric Pension
Trust ("GEPT") will beneficially own, on a fully diluted basis, approximately
25.3% of the outstanding Common Stock, Grumman Hill Investments, L.P. ("GHI")
and Richard D. Irwin together will beneficially own approximately 26.7% of the
outstanding Common Stock, and four of the members of senior management and their
affiliates will beneficially own approximately 21.4% of the outstanding Common
Stock (20.5% if the Underwriters' over-allotment option is exercised in full).
Such stockholders also control a majority of IXC Communications' 10% Junior
Series 3 Preferred Stock (the "Series 3 Preferred Stock"). See "Certain
Transactions." As a result, certain of these stockholders, if they act together,
generally would be able to elect all directors elected by the holders of the
Common Stock (and the director elected by the holders of the Series 3 Preferred
Stock) and exercise control over the business, policies and affairs of IXC
Communications, and would have the power to approve or disapprove most actions
requiring stockholder approval, including amendments to IXC Communications'
charter and by-laws, certain mergers or similar transactions and sales of all or
substantially all of IXC Communications' assets. This concentration of stock
ownership could have the effect of delaying or preventing a change of control of
IXC Communications or the removal of existing management and may discourage
attempts to do so. See "Principal and Selling Stockholders."
17
<PAGE> 20
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock has fluctuated over a broad range
since the completion of the Company's initial public offering in July 1996. The
trading price of the Common Stock is subject to wide fluctuations in response to
numerous factors, including, but not limited to, quarterly variations in
operating results of the Company or any of its principal customers, competition,
announcements of technological innovations or new products or pricing by the
Company or its competitors, product enhancements by the Company or its
competitors, regulatory changes, any difference between actual results and
results expected by investors and analysts, changes in financial estimates by
securities analysts and other events or factors. In addition, the stock market
has experienced volatility that has affected the market prices of equity
securities of many companies and that often has been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of the Common Stock. See "Underwriters."
ANTI-TAKEOVER PROVISIONS
IXC Communications' Restated Certificate of Incorporation permits the Board
of Directors to establish the rights, preferences, privileges and restrictions
of, and to issue, up to an additional 2,987,450 shares of Preferred Stock
without any further vote or action by IXC Communications' stockholders. Although
the Company has no present plans to issue any additional shares of Preferred
Stock, the issuance of additional Preferred Stock could adversely affect the
holders of Common Stock. See "Description of Capital Stock." In addition, under
certain circumstances, the holders of the Senior Notes can require the Company
to repurchase the Senior Notes upon the occurrence of a Change of Control (as
defined in the Indenture). See "Description of Certain Indebtedness." The
issuance of additional preferred stock or the existence of such provisions of
such indenture could have the effect of delaying or preventing a change in
control of the Company and may discourage attempts to do so.
SHARES ELIGIBLE FOR FUTURE SALE
Following this Offering (assuming no exercise of the Underwriters'
over-allotment option) 25,175,308 shares of the outstanding Common Stock will be
"restricted securities" and may in the future be sold in compliance with Rule
144 adopted under the Securities Act. Rule 144 generally provides that
beneficial owners of Common Stock who have held such Common Stock for two years
may sell within a three-month period a number of shares not exceeding the
greater of 1% of the total outstanding shares or the average weekly trading
volume of the shares during the four calendar weeks preceding such sale. All, or
substantially all, of the 25,175,308 outstanding restricted Common Stock, other
than 840,053 shares of Common Stock issued to GEPT in a private placement which
occurred simultaneously with the closing of the IPO on July 9, 1996 (the "GEPT
Private Placement"), has met the two-year holding period requirement under Rule
144, and can be sold subject to the conditions of Rule 144. Future sales of
Common Stock or the perception that such sales may occur could negatively impact
the market price of the Common Stock. However, pursuant to the terms of certain
lock-up agreements, the Common Stock owned by executive officers, directors,
GEPT (including the shares purchased in the GEPT Private Placement) and GHI may
not be sold until days from the date of this Prospectus, without the prior
written consent of Morgan Stanley & Co. Incorporated. In connection with the
GEPT Private Placement, GEPT and certain other stockholders were granted
registration rights with respect to all the shares of Common Stock owned by them
(a total of 21,710,804 shares), which registration rights become exercisable on
March 1, 1997. See "Description of Capital Stock -- Registration Rights." The
Company has registered 1,212,450 shares, 2,121,787 shares and 67,900 shares of
Common Stock reserved for issuance to its employees, directors, consultants and
advisors under the Company's 1994 Stock Plan, 1996 Stock Plan and Special Stock
Plan, respectively. As of September 30, 1996, options to purchase 1,175,775
shares, 137,600 shares and 67,900 shares of Common Stock were outstanding under
the 1994 Stock Plan, the 1996 Stock Plan and the Special Stock Plan,
respectively. See "Management -- 1996 Stock Plan," "Management -- 1994 Stock
Plan," "Management -- Special Stock Plan," "Description of Capital Stock --
Registration Rights" and "Shares Eligible for Future Sale."
18
<PAGE> 21
USE OF PROCEEDS
The net proceeds to IXC Communications from the sale of the shares of
Common Stock offered hereby are estimated to be $ million (assuming a price
to public of $ ), after deducting underwriting discounts and
commissions and offering expenses. IXC Communications expects to use
substantially all of the net proceeds of this Offering to fund capital
expenditures, including a portion of the Fiber Expansion, and the balance for
general corporate purposes, including possible acquisitions. Pending such uses,
the Company intends to deposit all such net proceeds in interest-bearing bank
accounts, or invest such proceeds in United States government securities or
other highly liquid investments.
PRICE RANGE OF COMMON STOCK
The price to public in the initial public offering of the Company's common
stock (the "IPO") was $16 per share. The Common Stock is quoted on the Nasdaq
National Market under the trading symbol "IIXC." The following table sets forth,
on a per share basis for the periods indicated, the high and low closing sale
prices for the Common Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
PRICE RANGE
----------------
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year 1996
Third quarter (from July 3, 1996).................................. $21 1/8 $11 1/2
Fourth quarter..................................................... 30 3/4 19 5/8
Fiscal Year 1997
First Quarter (through January 27, 1997)........................... 36 1/4 28 1/4
</TABLE>
See the cover page of this Prospectus for a recent closing sale price of
the Common Stock as reported by the Nasdaq National Market. As of December 31,
1996, there were approximately 83 holders of record of the Common Stock and
approximately 78 holders of record of Series 3 Preferred Stock.
DIVIDEND POLICY
IXC Communications has never paid any cash dividends on its Common Stock
and does not expect to pay cash dividends on its Common Stock in the foreseeable
future. The terms of the indenture under which the Senior Notes were issued
restrict the payment of cash dividends. No dividends may be paid on the Common
Stock until all dividends are paid in full on the Company's Series 3 Preferred
Stock. As of December 31, 1996 there were 12,550 shares of the Company's Series
3 Preferred Stock outstanding (liquidation preference of $1,000 per share).
Dividends on the Series 3 Preferred Stock accumulate at an annual rate of 10%
(based on the liquidation preference) plus interest. As of December 31, 1996,
approximately $6.5 million of accrued and unpaid dividends on the Series 3
Preferred Stock were outstanding. IXC Communications anticipates paying the
dividends on the Series 3 Preferred Stock (and related interest) when cash is
available after funding its cash needs for operations and capital expenditures
and provided that the amount of such payment is permitted under the terms of the
indenture for the Senior Notes and applicable provisions of state law. In
addition to paying such dividends, IXC Communications currently intends to
retain future earnings, if any, to finance its operations and fund the growth of
its business. Any payment of future dividends on its Common Stock will be at the
discretion of the Board of Directors of IXC Communications and will depend upon,
among other things, IXC Communications' earnings, financial condition, capital
requirements, level of indebtedness, contractual and legal restrictions with
respect to the payment of dividends and other factors that IXC Communications'
Board of Directors deems relevant.
19
<PAGE> 22
CAPITALIZATION
The following table sets forth the cash and the capitalization of IXC
Communications as of September 30, 1996, and as adjusted to reflect the sale by
IXC Communications of 2,000,000 shares of Common Stock offered hereby assuming a
price to public of $ and underwriting discounts and commissions and
offering expenses of $ . This table should be read in conjunction with
the Consolidated Financial Statements, the Notes thereto and other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash(1)............................................................... $ 206,212 $
Current portion of long term-debt..................................... 6,907
Long-term debt, excluding current portion:
12 1/2% Senior Notes due 2005....................................... 277,541
Other senior long-term debt and lease obligations................... 11,987
Senior subordinated debt............................................ 1,961
Subordinated debt................................................... 3,635
--------- --------
Total long-term debt, less current portion.................. $ 295,124 $
--------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 3,000,000 shares authorized:
10% Junior Series 3 Cumulative Preferred Stock, $.01 par value;
12,550 shares issued and outstanding (aggregate liquidation
preference, including accrued and unpaid dividends, of
$18,622,000).................................................... 13
Common stock, $.01 par value; 100,000,000 shares authorized;
30,775,308 shares issued and outstanding (actual); and 32,775,308
shares issued and outstanding (as adjusted)(2)................... 308
Additional paid-in capital.......................................... 123,530
Accumulated deficit................................................. (52,218)
--------- --------
Total stockholders' equity (deficit)........................ $ 71,633 $
--------- --------
Total capitalization........................................ $ 373,664 $
========= ========
</TABLE>
- ---------------
(1) Includes $116,268 held in an escrow account. See Note 3 to the Consolidated
Financial Statements.
(2) Does not include 1,381,275 shares of Common Stock issuable upon the exercise
of stock options outstanding as of September 30, 1996 under the Company's
1996 Stock Plan, 1994 Stock Plan and Special Stock Plan (of which, options
covering 208,427 shares were exercisable as of September 30, 1996).
20
<PAGE> 23
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth certain selected historical and pro forma
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 and 1995. The historical financial data for the year ended December
31, 1991, and the period January 1, 1992 through August 14, 1992 relates to the
"Company's Predecessor", IXC Carrier, Inc. ("IXC Carrier"), formerly known as
Communications Transmission Group, Inc., and has been derived from unaudited
financial statements. The historical financial data for the Company for the
nine-month periods ended September 30, 1995 and 1996 has also been derived from
unaudited financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which management considers
necessary for a fair presentation of the financial position and the results of
operations for such periods. Results of operations for the interim periods are
not necessarily indicative of the results of operations for the full years. The
pro forma data has been derived from the Unaudited Pro Forma Condensed
Consolidated Statement of Operations, which is included elsewhere herein. The
pro forma financial information is presented for informational purposes only and
is not necessarily indicative of the operating results that would have occurred,
nor are they necessarily indicative of future operations. The data should be
read in conjunction with the Consolidated Financial Statements, related Notes,
and other financial information included herein.
<TABLE>
<CAPTION>
THE COMPANY'S THE COMPANY
PREDECESSOR -------------------------------------------------
-----------------------
HISTORICAL
-----------------------------------------------------------------------------
YEAR JAN. 1 AUG. 15
ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31,
DEC. 31, AUG. 14, DEC. 31, ------------------------------------
1991 1992 1992 1993 1994 1995
--------- --------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenues..................... $ 67,611 $ 42,081 $ 23,893 $ 71,123 $ 80,663 $ 91,001
Operating expenses:
Cost of services......................... 43,578 26,116 13,588 37,823 33,896 39,852
Operations and administration............ 20,721 11,226 6,759 22,835 20,561 32,282
Depreciation and amortization............ 20,135 10,517 8,033 21,061 12,121 17,438
--------- --------- -------- ------- -------- --------
Operating income (loss).................. (16,823) (5,778) (4,487) (10,596) 14,085 1,429
Interest income............................ 200 45 -- 215 211 468
Interest income on amounts in escrow....... -- -- -- -- -- 2,552
Interest expense........................... (31,461) (18,749) (1,398) (4,943) (6,105) (14,597)
Contract settlement costs.................. -- -- (2,000) (59) -- --
Write-down of property and equipment....... -- -- -- (37,960) -- --
Equity in net income (loss) of
unconsolidated subsidiaries.............. -- -- -- -- (94) 19
Benefit (provision) for income taxes....... 4 (77) 2,847 21,977 (3,157) 1,693
Minority interest.......................... -- -- 710 (446) 77 5,218
--------- --------- -------- ------- -------- --------
Income (loss) before extraordinary items... $ (48,080) $ (24,559) $ (4,328) $(31,812)(2) $ 5,017 $ (3,218)
Extraordinary gain (loss)(3)............... -- -- -- 8,495 2,298 (1,747)
--------- --------- -------- ------- -------- --------
Net income (loss).......................... $ (48,080) $ (24,559) $ (4,328) $(23,317) $ 7,315 $ (4,965)
========= ========= ======== ======= ======== ========
Income (loss) per common share, historical
and pro forma............................
Before extraordinary items................. $ (1.39) $ .13 $ (.20)
Extraordinary gain (loss).................. .35 .09 (.07)
------- -------- --------
Net Income (loss).......................... $ (1.04) $ .22 $ (.27)
======= ======== ========
Weighted average common shares outstanding,
historical............................... 24,009 24,993 25,108
======= ======== ========
Income (loss) per common share, as
adjusted(4):
Before extraordinary items............... $ (.16)
========
Extraordinary gain (loss)................ (.06)
--------
Net income (loss)........................ $ (.22)
========
Weighted average common shares outstanding,
as adjusted(4)...........................
BALANCE SHEET DATA:
Cash(5).................................... $ 2,666 $ 2,039 $ 2,746 $ 6,230 $ 6,048 $205,181
Total assets............................... 203,664 195,288 117,741 94,281 105,409 336,475
Total debt(6).............................. 304,592 329,242 32,891 59,954 69,124 298,794
Stockholders' equity (deficit)............. (137,990) (164,432) 30,028 6,871 14,189 6,858
OTHER FINANCIAL AND OPERATIONS DATA:
EBITDA(7).................................. $ 3,512 $ 4,784 $ 2,256 $ 10,175 $ 26,400 $ 27,124
Capital expenditures....................... 952 18 1,435 27,008 7,087 23,670
Ratio of EBITDA to interest expense(8)..... -- -- 1.61x 2.06x 4.32x 1.86x
Minutes of use (in millions)............... -- -- -- -- -- 12.8
Fiber route miles(9)....................... -- -- -- 20,723 20,747 22,159
<CAPTION>
PRO HISTORICAL
FORMA(1) ---------------------
--------
YEAR NINE MONTHS ENDED
ENDED SEPTEMBER 30,
DEC. 31, ---------------------
1995 1995 1996
-------- -------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenues..................... $91,001 $ 67,259 $130,273
Operating expenses:
Cost of services......................... 39,852 26,808 91,017
Operations and administration............ 32,282 21,847 33,286
Depreciation and amortization............ 18,555 12,259 19,934
-------- -------- --------
Operating income (loss).................. 312 6,345 (13,964)
Interest income............................ 468 311 1,473
Interest income on amounts in escrow....... 2,552 -- 6,441
Interest expense........................... (14,597) (5,110) (28,658)
Contract settlement costs.................. -- -- --
Write-down of property and equipment....... -- -- --
Equity in net income (loss) of
unconsolidated subsidiaries.............. 19 44 (24)
Benefit (provision) for income taxes....... 3,873 (2,001) 5,699
Minority interest.......................... (232) 2,873 (357)
-------- -------- --------
Income (loss) before extraordinary items... $(7,605) $ 2,462 $(29,390)
Extraordinary gain (loss)(3)............... (1,006) --
-------- --------
Net income (loss).......................... $ 1,456 $(29,390)
======== ========
Income (loss) per common share, historical
and pro forma............................
Before extraordinary items................. $ (.38) $ (0.04) $ (1.13)
========
Extraordinary gain (loss).................. (0.04) 0.00
-------- --------
Net Income (loss).......................... $ 0.00 $ (1.13)
======== ========
Weighted average common shares outstanding,
historical............................... 25,141 27,126
======== ========
Income (loss) per common share, as
adjusted(4):
Before extraordinary items............... $ (.30) $ (1.05)
======== ========
Extraordinary gain (loss)................ --
Net income (loss)........................ $ (1.05)
========
Weighted average common shares outstanding,
as adjusted(4)........................... 29,126
========
BALANCE SHEET DATA:
Cash(5).................................... $ 4,729 $206,212
Total assets............................... 121,586 438,305
Total debt(6).............................. 103,591 302,031
Stockholders' equity (deficit)............. 17,995 71,633
OTHER FINANCIAL AND OPERATIONS DATA:
EBITDA(7).................................. $21,674 $ 5,884 $ 13,503
Capital expenditures....................... 23,670 27,920 73,275
Ratio of EBITDA to interest expense(8)..... 1.48 x 1.15x 0.47x
Minutes of use (in millions)............... 12.8 -- 608.3
Fiber route miles(9)....................... 22,159 22,159 37,915
</TABLE>
21
<PAGE> 24
- ---------------
(1) The pro forma statement of operations data and the other financial and
operations data for the year ended December 31, 1995 reflect the acquisition
by the Company of the minority interest in SSC as if the acquisition (which
actually occurred as of January 1, 1996) had occurred as of January 1, 1995.
See the Unaudited Condensed Consolidated Financial Statements included
elsewhere herein.
(2) Includes a $37,960 non-cash charge in 1993 relating to a write-down of
microwave equipment. (As of September 30, 1996, the remaining net
depreciated book value of microwave equipment was less than 4% of total
assets.) See Note 8 to the Consolidated Financial Statements.
(3) The extraordinary items for all periods result from early extinguishment of
debt (involving a related party in 1994) or lease obligations, net of
applicable income taxes.
(4) Net income (loss) per common share as adjusted and weighted average shares
outstanding as adjusted reflect the 2,000,000 shares to be issued in this
Offering.
(5) Including $198,266 at December 31, 1995 and $116,268 at September 30, 1996
held in an escrow account. See Note 3 to the Consolidated Financial
Statements.
(6) Total debt consists of long-term debt, capital lease obligations and
deferred lease obligations, including the current portions thereof.
(7) EBITDA represents net income before depreciation, amortization, interest
expense, income taxes and extraordinary items. For the year ended December
31, 1993, EBITDA does not reflect the $37,960 write-down of microwave
equipment recorded by the Company. (As of September 30, 1996, the remaining
net depreciated book value of microwave equipment was less than 4% of total
assets.) See Note 8 to the Consolidated Financial Statements. EBITDA for
1995 and the nine months ended September 30, 1996 includes the negative
EBITDA of IXC Long Distance, Inc., the Company's switched long distance
services subsidiary. For 1995, such amounts principally relate to start-up
and operating expenses incurred before the Company began generating material
revenues from its switched long distance 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 and 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.
For 1995 and the nine months ended September 30, 1996, EBITDA included
$2,552 and $7,351, respectively, of interest income relating to amounts held
in escrow. See the Consolidated Financial Statements.
(8) For the year ended December 31, 1991 and the period January 1 through August
14, 1992 and the nine months ended September 30, 1996, EBITDA was
insufficient to cover interest expense by $27,949, $13,965 and $15,155,
respectively. The Company paid the semi-annual interest payments in 1996
with funds from the escrow account referred to in footnote (5).
(9) Fiber route miles represents the number of strands included in the Company's
fiber bundles multiplied by route miles.
22
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides two principal services to long distance companies: (i)
long-haul transmission of voice and data over dedicated circuits; and (ii)
switched long distance services. The Company is one of only five carriers that
currently own a digital telecommunications network extending from
coast-to-coast. The Company's facilities also include digital switches located
in Los Angeles, Dallas, Chicago, Philadelphia and Atlanta.
Long-Haul Business. Substantially all of the Company's revenues in 1995 and
prior years and approximately 56% of its revenues for the nine months ended
September 30, 1996 were generated by its long-haul business, which has
historically provided positive cash flow (even in years when the Company had net
losses, as in 1993 and 1995). The Company provides long-haul service to
customers either on a "take or pay" long-term basis or, after contract
expiration, on a month-to-month basis. The Company's long-haul transmission
agreements are generally long-term leases which provide for monthly payment in
advance on a fixed-rate basis, calculated according to the capacity and length
of the circuit used. During 1996, the Company leased transmission capacity to
252 customers, with the ten largest long-haul customers during that year
accounting for approximately 36% of revenues. The Company's two largest
long-haul customers, Frontier and WorldCom, accounted for approximately 10% and
8%, respectively, of the Company's revenues in 1996. See "Risk
Factors -- Reliance on Major Customers."
Substantially all of the costs of communication services of the long-haul
business are fixed. The largest component of such costs for the long-haul
business is the expense of leasing off-net capacity from other carriers to meet
customer needs which the Company cannot currently meet with its own network due
to capacity or geographic constraints. In addition to such leases, in the normal
course of business, the Company enters into capacity-exchange agreements with
other carriers. Pursuant to such agreements, the Company exchanges excess
capacity on its network with other carriers for capacity on the other carrier's
network. As such exchange agreements generally do not provide for cash payments
to be made, they allow the Company to substantially reduce the cash payments it
must make for off-net capacity from other carriers. Such exchanges are accounted
for at the fair value of the capacity exchanged, as non-cash revenue and expense
in equal amounts, which reduces the Company's overall gross margin as a
percentage of revenues. In 1995, and the first nine months of 1996 the Company
recorded revenue and expense of $13.8 million and $10.5 million, respectively,
relating to such exchanges. In addition, certain right-of-way arrangements in
connection with the Fiber Expansion constitute operating leases and will
contribute to the cost of communications services in the future. The amount of
such operating leases for prior periods, including the nine months ended
September 30, 1996, was immaterial.
Switched Long Distance Business. In late 1995, the Company expanded into
the business of selling switched long distance services to long distance
resellers. The Company sells switched long distance services on a per-call
basis, charging by MOUs, with payments due monthly in arrears after services are
rendered. The Company's rates for calls generally vary with the duration of the
call, the day and time of day the call was made and whether the traffic is
intrastate, interstate or international. The Company has contracts with over 70
long distance resellers. The Company's largest switched long distance customer,
Excel, accounted for approximately 35% of the Company's revenues in 1996. See
"Risk Factors -- Reliance on Major Customers" and "Business -- Switched Long
Distance Services."
The three main components of the costs of the switched long distance
business are LEC access charges, long-haul network leasing costs (including MOUs
and long-haul circuits) and operations and administration expenses. The LEC
access charges, which are variable, represent a significant majority of the
total cost for the switched long distance business. As the Fiber Expansion is
placed in service, the Company expects to realize cost savings for the switched
long distance business because it will be able to reduce the amount of long-haul
network capacity that otherwise would be required to be leased from other
parties. However, even after the Fiber Expansion is complete, the Company
anticipates that it will need to lease a significant amount of capacity from
other carriers. Because the switched long distance business generally has lower
margins than the
23
<PAGE> 26
long-haul business, increases in switched long distance volumes should cause a
decrease in the Company's overall margins.
During 1995, the Company set up the infrastructure for its switched long
distance business by installing its switches, connecting them to its network and
to the LECs, leasing related long-haul circuits, acquiring software and hiring
personnel and entering into contracts with customers. The Company's switched
network became fully operational in February 1996 and the Company did not have
material revenues from the switched long distance business during 1995. The
switched long distance business generated revenues of $57.9 million for the nine
months ended September 30, 1996. The development and further expansion of the
Company's switched long distance business requires significant expenditures, a
substantial portion of which will be incurred before the realization of
operating cash flow from such activities. Taken on a stand-alone basis, the
switched long distance business generated negative gross margins over the first
two quarters of 1996 and began to generate slightly positive gross margins
during the third quarter of 1996 as the Company began to carry more switched
long distance traffic. After allocating selling, general and administrative
expense to the switched long distance business, however, it would have generated
negative EBITDA for each of the first three quarters of 1996. For a discussion
of important factors that could cause the Company's switched long distance
business to fail to generate positive cash flows as described, see "Risk
Factors -- Development Risks and Dependence on Switched Long Distance Business."
The Company will fund such negative EBITDA from cash flow from its long-haul
business and cash on hand. If such traffic does not increase, there can be no
assurance that the switched long distance business will ever generate positive
EBITDA. See "Risk Factors -- Negative Cash Flow and Capital Requirements," "Risk
Factors -- Development Risks and Dependence on Switched Long Distance Business"
and "Risk Factors -- Recent and Expected Losses."
Capital Expenditures. The Company has spent significant amounts of capital
to develop its coast-to-coast network to service its long-haul and switched long
distance businesses and is currently engaged in the Fiber Expansion. The Company
spent approximately $153.3 million for capital expenditures during 1996 and
estimates that it will spend approximately $315.5 million in 1997. However, the
amount of actual capital expenditures may vary materially as a result of
cost-saving arrangements, unexpected costs and other factors. See " -- Liquidity
and Capital Resources."
Pricing; Net Losses. The Company expects that, as competition increases,
prices for both long-haul and switched services will decline. The Company
incurred an operating loss during the nine months ended September 30, 1996 and
expects to incur an operating loss for the full year due to the switched long
distance business. As the Fiber Expansion is placed in service, the Company
expects to realize cost savings by reducing the amount of off-net capacity it
leases from other carriers. However, reductions in lease expense as a result of
the Fiber Expansion will be offset to some extent by increased depreciation
expense as the investment in the Fiber Expansion is depreciated.
Acquisition and Financing Transactions. In 1994, the Company and Excel, a
large long distance reseller, formed Switched Services Communications, L.L.C.
("SSC"), a joint venture, to lease, install and operate the five switches
incorporated into the Company's network and to provide switched long distance
services to the Company and Excel. In January 1996, the Company purchased
Excel's interest in SSC for a short-term non-interest bearing note for
approximately $6.2 million which was fully paid in installments through August
1996. Excel continues to have a contractual commitment to use the Company's
network. See "Business -- Switched Long Distance Services -- Excel."
In August 1994, IXC Communications acquired an 85% interest in MSM
Associates, Limited Partnership ("MSM"), which owns fiber capacity in Michigan
and Indiana, from GE Capital Corporation. Frontier, the owner of the remaining
15% minority interest of MSM, is a customer of the Company. See Note 1 to
Consolidated Financial Statements.
In October 1995, the Company issued $285.0 million of Senior Notes
primarily to finance a portion of the Fiber Expansion. See "Description of
Certain Indebtedness."
In July 1996, the Company raised gross proceeds of approximately $83.3
million (before deducting certain expenses) through its IPO and $12.5 million
from the GEPT Private Placement.
24
<PAGE> 27
Marca-Tel S.A. de C.V. ("Marca-Tel"), a joint venture in which the Company
indirectly holds a minority interest, has been successful in obtaining a license
from the Mexican government to provide certain telecommunication services in
Mexico. However, the Marca-Tel services in Mexico are not yet in operation. See
"Business -- Mexican Joint Venture."
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly financial
information for each of the Company's last five fiscal quarters. In the opinion
of the Company's management, this quarterly information has been prepared on the
same basis as the audited financial statements appearing elsewhere in this
Prospectus and includes all adjustments (which consist only of normal recurring
adjustments) necessary to present fairly the unaudited quarterly results set
forth herein. The Company's quarterly results have in the past been subject to
fluctuations, and thus, the operating results for any quarter are not
necessarily indicative of results for any future period. The Company may
experience substantial fluctuations in quarterly results in the future as a
result of customer turnover, variations in the success of its customers'
businesses and price competition. These fluctuations may be particularly large
as a percentage of revenue over the near term, because the Company has recently
entered the switched long distance business. In addition, delays in completion
of the Fiber Expansion could cause quarterly results to vary.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------
1995 1996
------------------------- -----------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
------------ ----------- -------- -------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenues:
Long-haul circuits................ $22,772 $22,304 $ 22,628 $ 24,003 $25,766
Switched long distance............ -- 1,438 3,622 19,004 35,250
------- ------- -------- -------- -------
Net operating revenues............ 22,772 23,742 26,250 43,007 61,016
Operating expenses:
Cost of services.................. 10,423 13,044 15,600 31,643 43,774
Operations and administration..... 8,604 10,435 10,417 10,786 12,083
Depreciation and amortization..... 4,645 5,179 6,010 6,644 7,280
------- ------- -------- -------- -------
Total operating expenses..... 23,672 28,658 32,027 49,073 63,137
------- ------- -------- -------- -------
Operating loss....................... $ (900) $(4,916) $ (5,777) $ (6,066) $(2,121)
======= ======= ======== ======== =======
Loss before extraordinary items...... $ (307) $(5,680) $(11,699) $(12,067) $(5,624)
======= ======= ======== ======== =======
Net loss............................. $ (307) $(6,421) $(11,699) $(12,067) $(5,624)
======= ======= ======== ======== =======
Loss per common share:
Before extraordinary items........ $ (.03) $ (.24) $ (.49) $ (.40) $ (.19)
Extraordinary items............... -- (.03) -- -- --
------- ------- -------- -------- -------
Net loss.......................... $ (.03) $ (.27) $ (.49) $ (.40) $ (.19)
======= ======= ======== ======== =======
OTHER FINANCIAL AND OPERATIONS DATA:
EBITDA(1)............................ $ 5,884 $ 5,292 $ 2,818 $ 2,665 $ 8,020
Billable minutes of use (in
millions)......................... -- 12.8 33.9 199.3 375.1
Fiber route miles(2)................. 22,159 22,159 22,159 22,159 37,915
</TABLE>
- ---------------
(1) EBITDA represents net income before depreciation, amortization, interest
expense, income taxes and extraordinary items. The Company has included
information concerning EBITDA because it believes that EBITDA is used by
certain investors as one measure of an issuer's historical ability to
service its debt. EBITDA is not a measurement determined in accordance with
GAAP and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with GAAP and is not
necessarily comparable with similarly titled measures for other companies.
For the quarters ended December 31, 1995, March 31, 1996, June 30, 1996 and
September 30, 1996 EBITDA included $2,552, $2,557, $2,080 and $1,804
respectively, of interest income relating to amounts held in escrow.
(2) Fiber route miles represents the number of strands included in the Company's
fiber bundles multiplied by route miles.
25
<PAGE> 28
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 Compared With Nine Months Ended September
30, 1995
Net operating revenues for the nine months ended September 30, 1996
increased 93.6% to $130.3 million from $67.3 million for the nine months ended
September 30, 1995. The increase is primarily a result of the continuing
successful implementation of the Company's switched long distance business
(particularly the addition of Excel as a customer). Billable MOUs were 608
million for the nine months ended September 30, 1996. Switched long distance
services revenues were $57.9 million for the nine months ended September 30,
1996 (the Company did not have any revenues or billable MOUs during the nine
months ended September 30, 1995 for switched long distance services). Revenues
for the Company's long-haul business for the nine months ended September 30,
1996 increased 7.6% to $72.4 million from $67.3 million for the nine months
ended September 30, 1995.
Cost of communication services consists principally of access charges paid
to LECs and transmission lease payments to, and exchanges with, other carriers.
Cost of communication services for the nine months ended September 30, 1996
increased 239.6% to $91.0 million from $26.8 million for the nine months ended
September 30, 1995. The increase is primarily a result of the addition of
long-haul leases supporting the switched long distance business, MOUs leased
from other carriers and access charges paid to LECs in connection with the
switched long distance business. The Company did not incur these expenses for
the switched long distance business during the nine months ended September 30,
1995. The Company has historically had a relatively low cost of communications
services as a percentage of revenues because substantially all its revenues were
derived from the sale of long haul transmission, generally made at a relatively
low cost over its own network. The Company expects that, in the event it
achieves increases in long-haul revenues, its cost of communications services as
a percentage of such revenues will increase (at least until a substantial
portion of the Fiber Expansion is complete) because additional leases (or
exchanges) of capacity from other carriers at a relatively high cost will be
required to support new business. The cost of communications services as a
percentage of revenues in the switched long distance business is substantially
greater than that in the long-haul business due to the relatively high cost of
LEC access charges, leases for long-haul circuits and MOUs leased from other
carriers supporting the switched network. Accordingly, increases in switched
long distance revenues are expected to further increase the Company's cost of
communications services as a percentage of revenues.
Operations and administration expenses for the nine months ended September
30, 1996 increased 52.8% to $33.3 million from $21.8 million for the nine months
ended September 30, 1995. This increase is primarily the result of operating
expenses associated with the Company's switched network. The Company anticipates
that as it implements the Fiber Expansion and expands its switched service
business, operations and administration expenses will continue to increase, but
will decline as a percentage of revenue.
Depreciation and amortization for the nine months ended September 30, 1996
increased 61.8% to $19.9 million from $12.3 million for the nine months ended
September 30, 1995. The increase is primarily the result of depreciation related
to capital expenditures associated with the Company's expansion and improvement
of its switched network. Depreciation and amortization will increase in
subsequent periods, as the Company's investment in the Fiber Expansion is
depreciated.
Interest income for the nine months ended September 30, 1996 increased to
$7.9 million from $0.3 million for the nine months ended September 30, 1995. The
increase is primarily related to interest earned on the investment of the
proceeds from the sale of the Senior Notes issued in October 1995 and the
interest earned in 1996 on the investment of the proceeds from the IPO and the
GEPT Private Placement.
Interest expense for the nine months ended September 30, 1996 increased to
$28.7 million from $5.1 million for the nine months ended September 30, 1995.
The increase is primarily the result of interest expense attributable to the
Senior Notes, which were issued during the fourth quarter of 1995.
Income taxes for the nine months ended September 30, 1996 resulted in a
$5.7 million tax benefit as opposed to a provision for income taxes of $2.0
million for the nine months ended September 30, 1995. The difference between the
tax benefits recorded for the nine months ended September 30, 1996 and the
expected
26
<PAGE> 29
benefit at the federal statutory rate is primarily due to state taxes, losses
incurred (the tax benefit of which is not recorded due to uncertainty regarding
its realization), and resolution of Federal income tax examinations which were
concluded in the second and third quarters of 1996.
The Company experienced a net loss of $29.4 million in the nine months
ended September 30, 1996 as opposed to net income of $1.5 million for the nine
months ended September 30, 1995, as a result of the factors discussed above.
1995 Compared With 1994
The year ended December 31, 1995 was a period of increased revenues, but a
net loss for the Company, primarily due to start-up and operational expenses
related to the Company's switched long distance business. Reduced operating
income and a significant increase in interest expense because of the issuance of
the Senior Notes during the fourth quarter of 1995 resulted in a net loss for
the year.
Net operating revenues for 1995 increased 12.8% to $91.0 million from $80.7
million in 1994. The increase is primarily the result of: (i) an increase in
non-cash revenues attributable to network capacity exchanged with other carriers
from $8.0 million in 1994 to $13.8 million in 1995; (ii) additional revenue in
the amount of $5.4 million associated with MSM (IXC Communications' 85% interest
in MSM was acquired in August 1994); and (iii) increased long-haul traffic in
the amount of $1.6 million due to the Company's expansion of its fiber optic
network in South Texas. These increases were partially offset by $2.5 million in
proceeds from an escrow account used to supplement lease payments in 1994, which
did not occur in 1995 (see Note 5 to the Consolidated Financial Statements).
Cost of communication services for 1995 increased 17.7% to $39.9 million
(or 43.8% of net operating revenues) from $33.9 million (or 42.0% of net
operating revenues) in 1994. The increase is primarily a result of an increase
in transmission lease expense (to $38.7 million in 1995 from $29.3 million in
1994) associated with: (i) an increase of $3.6 million in leases for
transmission services primarily to support the switched long distance business;
and (ii) an increase in non-cash expense attributable to network capacity
exchanged with other carriers from $8.0 million in 1994 to $13.8 million in
1995. These increases were partially offset by a non-recurring decrease in lease
expenses under certain operating equipment leases as a result of a May 1994
lease restructuring (such leases generated no expense in 1995 as opposed to $3.4
million in 1994).
Operations and administration expenses for 1995 increased 56.8% to $32.3
million from $20.6 million in 1994. The increase is primarily the result of $9.4
million of start-up and operating expenses associated with the Company's
implementation of its switched network and the inclusion in the Company's
results of operations of an increase in the Company's operating expenses of $1.1
million associated with the MSM network.
Depreciation and amortization for 1995 increased 43.8% to $17.4 million
from $12.1 million in 1994. The increase is primarily the result of depreciation
associated with the MSM network, together with increased depreciation associated
with the Company's development of its switched network.
Interest income for 1995 increased to $3.0 million from $.2 million in
1994. The increase is primarily related to interest earned on investment of the
proceeds from the sale of the Senior Notes issued in the fourth quarter of 1995.
Interest expense for 1995 increased to $14.6 million from $6.1 million in
1994. The increase is primarily the result of interest expense attributable to
the Senior Notes issued in the fourth quarter of 1995.
Income taxes for 1995 resulted in a $1.7 million tax benefit as opposed to
a provision for income taxes of $3.2 million in 1994. In 1995 and 1994, the
Company's effective tax rate did not significantly differ from the federal
statutory rate.
Minority interest during 1995 was $5.2 million resulting primarily from
Excel's share of operations and administration expenses and the cost of
communications services associated with its minority share of SSC, a joint
venture formed in 1995. In January 1996 the Company purchased Excel's interest
in SSC, thereby eliminating the minority interest in SSC for 1996 and future
years.
27
<PAGE> 30
In 1994, the Company exercised a debt prepayment option in connection with
financing of debt that resulted in a net extraordinary gain of $2.3 million.
The Company experienced a net loss of $5.0 million in 1995 as opposed to
net income of $7.3 million in 1994 as a result of the factors discussed above.
1994 Compared With 1993
Net operating revenues for 1994 increased 13.5% to $80.7 million from $71.1
million in 1993. The increase is primarily attributable to: (i) an increase in
non-cash revenues generated from network capacity exchanged with other carriers
from $3.7 million in 1993 to $8.0 million in 1994; (ii) the acquisition of an
85% interest in MSM in August 1994 resulting in an additional $2.7 million of
net operating revenues; and (iii) the extension of the Company's fiber optic
network in South Texas.
Cost of communications services in 1994 decreased 10.3% to $33.9 million
(or 42.0% of net operating revenue) from $37.8 million (or 53.2% of net
operating revenue) in 1993. The decrease is primarily the result of significant
reductions in certain operating equipment lease expenses due to the acquisition
of such equipment by the Company in May 1994 resulting in the elimination of all
future expense charges associated with such operating leases (such lease expense
for 1994 was $3.4 million as opposed to $11.2 million in 1993) partially offset
by an increase of $4.2 million in network capacity exchanged with other carriers
in 1994 as compared to 1993. During 1993, the Company capitalized $2.0 million
for long term contracts with a common carrier for capacity on such carrier's
nationwide fiber optic communications system, which purchase price and related
costs were deferred and are being recognized over the five year term of the
contract. See Note 11 to the Consolidated Financial Statements.
Operations and administration expenses for 1994 decreased 9.6% to $20.6
million from $22.8 million in 1993. The decrease is primarily the result of
certain nonrecurring deferred compensation obligations of the Company incurred
in 1993.
Depreciation and amortization in 1994 decreased 42.7% to $12.1 million from
$21.1 million in 1993. The decrease primarily is the result of a write-down of
$38.0 million of the carrying value of certain dated microwave equipment to its
estimated fair value in 1993. The write-down resulted from the Company's
assessment of estimated future net cash flows expected to be produced by the
equipment in relation to its net historical cost of the system. See Note 8 to
the Consolidated Financial Statements.
Interest expense in 1994 increased 24.5% to $6.1 million from $4.9 million
in 1993. The increase is the result of increased average debt balances in 1994,
primarily associated with the acquisition of MSM and the construction of the
South Texas fiber extension.
Income taxes for 1994 resulted in a provision for income taxes of $3.2
million as opposed to a tax benefit of $22.0 million in 1993. The increase is
primarily attributable to a tax benefit related to the equipment write-down in
1993.
Extraordinary gains in 1994 decreased to $2.3 million from $8.5 million in
1993 in connection with the refinancing of certain operating lease arrangements
(see Note 5 to the Consolidated Financial Statements). In connection with such
transaction, financing was obtained which provided for a prepayment option. The
prepayment option was exercised by the Company in 1994 resulting in additional
gains.
Net income increased $30.6 million in 1994 to $7.3 million from a net loss
of $23.3 million in 1993 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Except for the historical information contained below, the matters
discussed in this section are forward-looking statements that involve a number
of risks and uncertainties. The Company's actual liquidity needs, capital
resources and results may differ materially from the discussion set forth below
in such forward-looking statements. For a discussion of the factors that could
materially affect such matters, see "Risk Factors," particularly "Risk
Factors -- Negative Cash Flow and Capital Requirements."
28
<PAGE> 31
The Company's operations have historically provided positive cash flow
(even in years of net losses, as in 1993 and 1995), which to date has provided
adequate liquidity to meet the Company's operational needs. However, for 1995
and the nine months ended September 30, 1996, the Company's EBITDA minus
interest expense and capital expenditures (adjusted for the change in working
capital) was negative $4.8 million and negative $20.1 million, respectively. The
Company had $51.3 million of the net proceeds received from the sale of the
Senior Notes in an escrow account at December 31, 1996 to be used at the
Company's discretion for the Fiber Expansion, debt service of the Senior Notes
and other capital expenditures.
Cash provided by operating activities in 1995 decreased 32.6% to $9.1
million from $13.5 million in 1994 and for the nine month period ended September
30, 1996 decreased 51.4% to $7.0 million from $14.4 million for the nine month
period ended September 30, 1995, primarily as a result of start-up and
operational expenses associated with the Company's development of its switched
services business. The Company's switched long distance business will require
cash to meet operating expenses. In order to offer switched long distance
services, the Company has installed switches, connected them to its network and
to the LECs, acquired software and hired the personnel needed to establish a
national switched network. Taken on a stand-alone basis, the switched long
distance business generated negative gross margins over the first two quarters
of 1996 and began to generate slightly positive gross margins during the third
quarter of 1996 as the Company began to carry more switched long distance
traffic. After allocating selling, general and administrative expense to the
switched long distance business, however, it would have generated negative
EBITDA for each of the first three quarters of 1996. For a discussion of
important factors that could cause the Company's switched long distance business
to fail to generate positive EBITDA see "-- Development Risks and Dependence on
Switched Long Distance Business."
Cash used in investing activities increased to $219.4 million in 1995 from
$18.8 million in 1994 due to the Company investing the proceeds of the sale of
the Senior Notes in liquid securities and increased capital expenditures
associated with the Company's implementation of its switch network. Cash used in
investing activities decreased to $3.1 million for the nine month period ended
September 30, 1996 from $17.5 million for the nine month period ended September
30, 1995. The Company's total capital expenditures were $23.7 million for 1995
and $73.3 million during the nine month period ended September 30, 1996. The
Company made additional capital expenditures during 1996 of approximately $80.0
million (including capital expenditures relating to the Fiber Expansion).
Cash generated from financing activities increased to $211.2 million in
1995 from $5.1 million in 1994 as a result of the proceeds of the sale of the
Senior Notes and capital contributions of $6.0 million from Excel to support its
minority interest in the SSC joint venture. In January 1996, the Company
purchased Excel's interest in the joint venture for a short-term, non-interest
bearing promissory note in an original principal amount of approximately $6.2
million, an amount equal to Excel's total capital contribution. Such amount was
paid in installments through August 1996. Net cash generated from financing
activities was $94.0 million for the nine months ended September 30, 1996 as a
result of the IPO and the GEPT Private Placement.
As of December 31, 1996, the Company had approximately (i) $51.3 million of
the proceeds of the Senior Notes remaining in an escrow account; and (ii) $61.3
million in unrestricted cash. The net proceeds to the Company of this Offering
are $ million. The Company is seeking to obtain additional financing under
the Proposed Credit Facility. Although the Company had not obtained the Proposed
Credit Facility as of the date of this Prospectus, and there can be no assurance
that the Company will succeed in obtaining the Proposed Credit Facility, the
Company believes that it is likely that the Proposed Credit Facility can be
obtained and in an amount sufficient to fund the Company's remaining needs for
cash for capital expenditures in 1997.
The Company anticipates the following major uses for its available cash:
(i) the Fiber Expansion and other capital expenditures; (ii) debt service; (iii)
lease payments; (iv) funding its joint venture in Mexico; and (v) working
capital.
The Company anticipates that capital expenditures for 1997 will be as
follows: (i) for construction of the Fiber Expansion, approximately $201.4
million; and (ii) other capital expenditures in 1997, approximately $114.1
million.
29
<PAGE> 32
The Company is required to make interest payments in the amount of $35.6
million on the Senior Notes each year. See "Description of Certain
Indebtedness." For the nine months ended September 30, 1996, EBITDA was
insufficient to cover the Company's debt service requirements under the Senior
Notes. The Company currently anticipates, but no assurance can be given, that a
portion of such payments during 1997 will be made from cash or funds held in the
escrow account and the balance of such payments will be made from EBITDA. For a
discussion of important factors, including the Company's assumption that
increases in its EBITDA will occur as a result of the successful completion and
utilization of the Fiber Expansion and growth in the switched long distance
business that may cause actual results to differ materially from the foregoing
forward-looking statements, see "Risk Factors -- Negative Cash Flow and Capital
Requirements" and "Risk Factors -- Development Risks and Dependence on Switched
Long Distance Business." In addition, at December 31, 1996, there were
approximately $6.5 million of accrued and unpaid dividends on the Series 3
Preferred Stock. Such dividends accrue at an annual rate of 10% (based on the
liquidation preference) plus interest. Payment of such dividends is not
currently permitted under the terms of the Indenture.
The Company is required to make minimum annual lease payments for
facilities, equipment and transmission capacity used in its operations. The
Company expects to incur additional operating lease costs in connection with
obtaining rights-of-way for the Fiber Expansion. See Note 5 to Consolidated
Financial Statements.
The Company expects to meet its needs for cash by using the remaining
proceeds of the escrow account, cash on hand, the proceeds of this Offering,
cash generated by operations and, if such facility can be obtained, funds
borrowed under the Proposed Credit Facility. There can be no assurance that the
Company will be successful in obtaining the Proposed Credit Facility or
otherwise obtain the necessary cash to meet its needs. A failure to raise such
cash would delay or prevent such capital expenditures and the construction of
the Fiber Expansion.
The Company is indirectly participating in the development of a long
distance network to engage in the telecommunications business in Mexico by
Marca-Tel. The Company indirectly owns 24.5% of Marca-Tel through its ownership
of 50% of Progress International LLC ("Progress International"), which owns 49%
of MarcaTel. The remaining 51% of Marca-Tel is owned by a Mexican individual and
Fomento Radio Beep, S.A. de C.V. The other 50% of Progress International is
owned by Westel. See "Business -- Mexican Joint Venture."
Progress International is responsible for providing all the capital that
may be required from Marca-Tel's stockholders in order to finance Marca-Tel. As
of December 31, 1996, the Company and Westel jointly have contributed
approximately $13.8 million to Progress International substantially all of which
has been used to fund Marca-Tel. Although the Company cannot accurately predict
the capital that will be required from Progress International to implement the
Marca-Tel business plan, it estimates that an additional $45.0 million (and
possibly significantly more) will be required by Marca-Tel from the stockholders
of Progress International during 1997-1998. Progress International is
considering selling equity interests in Progress International to one or more
third parties who could assist Progress International with the funding of
Marca-Tel. However, Progress International has not had any material discussions
in this regard and there can be no assurance that any such funding will be
available on satisfactory terms or at all. The Company is currently, and may
remain, the primary source of funds available to Progress International for
investment in Marca-Tel. Since the ownership interests of the Company and Westel
in Progress International are to be proportional to their respective capital
contributions, the Company's percentage ownership of Progress International, and
therefore its indirect ownership interest in Marca-Tel, could increase if it
makes additional capital contributions.
Marca-Tel is deploying three switching centers and a fiber optic route
linking Mexico's three major cities (Mexico City, Monterrey and Guadalajara),
with interconnection to the Company's U.S. network at its border crossing at
Reynosa/McAllen. Marca-Tel has entered into a turn-key contract with a major
international supplier of telecommunications equipment for a portion of this
build that provides for interim vendor financing for the equipment and fiber
purchases as well as a portion of the civil construction work. The Company
anticipates that Marca-Tel may be able to obtain additional funding through some
combination of the following: (i) offerings of debt or equity securities; (ii)
other incurrences of debt; (iii) joint venture
30
<PAGE> 33
arrangements with third parties; and (iv) additional vendor financing of
equipment purchases. Initially, such sources of capital likely will not be
adequate to meet the needs of Marca-Tel, and the Company anticipates that, until
such sources are adequate to enable Marca-Tel to continue to pursue its business
plan, it will be necessary for Progress International to fund the shortfall. The
Company is not obligated to continue to fund Progress International; however, if
Progress International does not fund Marca-Tel's needs, the Company's interest
in Progress International, and thus its indirect interest in Marca-Tel, may be
diluted or lost entirely. Although the indenture for the Senior Notes generally
restricts the amount of funding the Company can provide Progress International,
the indenture does allow the Company to use the $12.5 million proceeds of the
GEPT Private Placement for Progress International (as of December 31, 1996
approximately $6.9 million of such proceeds remain to be used for this purpose).
The indenture for the Senior Notes also allows the Company to fund Progress
International with the proceeds of certain equity offerings or, under certain
circumstances, with funds raised through debt incurrence or from working
capital. No assurance can be given that adequate funding sources will be
available from Progress International or from third parties to implement
Marca-Tel's business plan or, if implemented, such business plan will be
successful. See "Business -- Mexican Joint Venture."
The forward-looking statements set forth above with respect to the cost of
the Fiber Expansion, the Company's ability to meet such costs, the amount of the
Company's cash requirements in 1997 and thereafter, the Company's ability to
service its debt, the Company's and Westel's ability to fund Marca-Tel and the
successful completion and operation of Marca-Tel's fiber optic system in Mexico
are based on certain assumptions as to future events. Important factors that
could adversely affect the Company's ability to achieve the results discussed
above include: cost overruns, a failure by the Company's contractors or partners
in cost-saving arrangements to perform their obligations, a failure to obtain
rights-of-way on a timely, cost-effective basis, a failure to substantially
complete the Fiber Expansion on schedule, or an inability to generate
significant levels of traffic or successfully provide switched long distance
services on a cost-effective basis (including the provision of billing
information in an accurate and timely manner) for volumes that the Company has
not previously handled.
31
<PAGE> 34
INDUSTRY OVERVIEW
DEVELOPMENT AND REGULATION
The development of the long distance telecommunications industry was
strongly influenced by a 1982 court decree requiring the divestiture by AT&T of
its seven RBOCs and dividing the country into approximately 200 LATAs. The seven
RBOCs were allowed to provide local telephone service, local access service to
long distance carriers and intra-LATA long distance service (service within a
LATA), but were prohibited from providing inter-LATA service (service between
LATAs). The right to provide inter-LATA service was given to AT&T and the other
interexchange carriers, including the LECs that are not RBOCs. The FCC requires
all interexchange carriers to allow the resale of their inter-LATA services to
long distance carriers, and the 1982 court decree substantially eliminated
different access arrangements as distinguishing features among long distance
carriers. These and other legislative and judicial factors have helped smaller
long distance carriers emerge as alternatives to AT&T, MCI and Sprint for long
distance services.
In 1996, the federal government enacted the Telecommunications Act, which,
among other things, allows the RBOCs and others such as electric utilities and
cable television companies to enter the long distance business. The Company
expects that the Telecommunications Act will substantially alter the way in
which the telecommunications industry is regulated. Such changes are, however,
difficult to predict accurately, because the FCC has not yet enacted all of the
numerous regulations necessary to implement the Telecommunications Act. Entry of
the RBOCs or other entities such as electric utilities and cable television
companies into the long distance business may result in reduced market shares
for existing long distance companies and additional pricing pressure on long
distance providers such as the Company. See "Risk Factors -- Competition," "Risk
Factors -- Recent Legislation and Regulatory Uncertainty" and
"Business -- Regulation."
MARKET AND COMPETITION
General. Companies in the domestic long distance market had estimated
revenues of $75.9 billion in 1995. AT&T is the largest long distance carrier,
with an estimated 56.5% of total market revenues in 1995, while MCI and Sprint
had an estimated 19.7% and 9.4%, respectively, of total market revenues in that
year. These three carriers constitute what generally is referred to as the
"first tier" in the long distance market. Medium-sized long distance companies,
some with national capabilities, such as WorldCom, Frontier, Cable & Wireless
and LCI, constitute the "second tier" of the industry and, cumulatively, are
believed to have accounted for approximately 8.9% of total market revenues in
1995. The remainder of the market share is held by smaller companies, which are
known as "third-tier" carriers. The Company provides long-haul services to
companies in all three tiers and switched long distance services to companies in
the third tier.
According to data included in Long Distance Market Shares, Fourth Quarter
1995, an FCC report issued in March 1996, while long distance revenues grew at a
compound annual rate of over 8% during the period from 1989 through 1995, the
revenues of all carriers other than the first tier grew in the aggregate at a
compound annual rate of over 22% during the same period. Such analysis also
stated that the smaller second-tier and third-tier carriers increased their
market share sixfold over a ten-year period, increasing from less than 3% in
1984 to more than 17% in 1994. In addition, industry sources estimate that
combined revenues of second-tier and third-tier carriers grew by 17.9% in 1995.
Competition among the Company's customers and other retail long distance
providers for end-user customers is based upon advertising, pricing, customer
service, network quality and value-added services. The Company believes that
AT&T, MCI and Sprint engage in only limited direct sales to small and
medium-sized commercial users, generally focusing on residential and large
commercial accounts, thus creating opportunities for smaller long distance
providers. Industry observers estimate that over 400 smaller companies have
emerged to compete in the long distance business. See "Risk
Factors -- Competition."
Long-Haul Services. Long distance companies may be categorized as
facilities-based carriers and non-facilities-based carriers. Sellers of
long-haul services are generally facilities-based carriers that own long-haul
transmission facilities, such as fiber optic cable or digital microwave
equipment. The first-tier and some second-tier long distance companies are
facilities-based carriers offering long-haul service nationwide.
32
<PAGE> 35
Facilities-based carriers in the third tier of the market generally offer
long-haul services only in a limited geographic area. Customers using long-haul
services include: (i) facilities-based carriers that require long-haul capacity
where they have geographic gaps in their facilities, need additional capacity or
require geographically different alternative routing; and (ii)
non-facilities-based carriers requiring long-haul capacity to carry their
customers' long distance traffic. The Company's competitors in the long-haul
business include AT&T, MCI, Sprint and WorldCom and certain regional carriers.
Qwest has announced its intention to construct a coast-to-coast fiber optic
network and Frontier has announced that it will pay $500 million for fibers in
Qwest's network. As such network is completed, Qwest will become a competitor of
the Company and Frontier may also become a competitor of the Company in the
long-haul business. Important competitive factors in the long-haul business are
price, customer service, network location and quality, reliability and
availability. See "Business -- Long-Haul Services."
Switched Long Distance Services. Long distance companies may be
characterized as switched or switchless carriers. Sellers of switched long
distance services are generally switched carriers, such as the Company, that own
one or more switches that direct telecommunications traffic. Facilities-based
carriers are generally switched carriers. However, many non-facilities based
carriers (i.e., many long distance resellers) have switches. The Company's
customers are switchless carriers that depend on switched carriers to provide
switched long distance services to their end users. The Company's competitors in
the switched long distance business include AT&T, MCI, Sprint, WorldCom and
Frontier and many non-facilities-based switched carriers. Important competitive
factors in the switched long distance business are customer service
(particularly with respect to speed in delivery of computer billing records and
set-up of new end users with the LECs), ability of the network to complete calls
with a minimum of network-caused busy signals, scope of services offered, price,
reliability and transmission quality.
CALL ROUTING
An inter-LATA long distance telephone call begins with the caller's LEC
transmitting the call by means of its local switched network to a point of
connection with an interexchange carrier. The interexchange carrier, through its
switches and long-haul network, transmits the call to the called party's LEC,
which then completes the call over its local facilities. For each long distance
call, the originating LEC charges an access fee. The interexchange carrier also
charges a fee for its transmission of the call, a portion of which consists of a
fee charged by the LEC used to deliver the call. Under the Telecommunications
Act, state proceedings may in certain instances determine LEC access charge
rates. It is uncertain at this time what effect such proceedings may have on
such rates.
The following diagram illustrates the routing of an inter-LATA telephone
call (the diagram assumes the carrier switches are not within the local dialing
areas of either the caller or called party).
[Diagram]
TECHNOLOGY
Long-haul voice traffic generally is transmitted through digital microwave
or fiber optic equipment. Long-haul data traffic is generally transmitted
through fiber optic equipment or satellites.
Fiber Optic Systems. Fiber optic systems use laser-generated light to
transmit voice and data in digital format through fine strands of glass. Fiber
optic systems are characterized by large circuit capacity, good sound quality,
resistance to external signal interference and direct interface to digital
switching equipment. A pair of modern fiber optic strands, using current
technology, is capable of carrying 192 DS-3s, or over 129,000 simultaneous
telephone calls. Because fiber optic signals disperse over distance, they must
be regenerated at
33
<PAGE> 36
sites located along the fiber optic cable (on older fiber optic systems the
interval is 20 to 25 miles; on newer systems that utilize modern fiber optic
cable and splicing methods, such as will be used in the Fiber Expansion, it is
approximately 50 to 75 miles).
Microwave Systems. Although limited in capacity in comparison with fiber
optic systems (generally, no more than 28 DS-3s can be transmitted by microwave
between two antennae), digital microwave systems offer an effective and reliable
means of transmitting voice and data signals over intermediate and longer
distances. Microwaves are very high frequency radio waves that can be reflected,
focused and beamed in a line-of-sight transmission path. Because of their
electro-physical properties, microwaves can be used to transmit signals through
the air, with relatively little power. To create a communications circuit,
microwave signals are transmitted through a focusing antenna, received by an
antenna at the next station in the network, then amplified and retransmitted.
Because microwaves attenuate as they travel through the air, this transmission
process must be repeated at repeater stations, which consist of radio equipment,
antennae and back-up power sources, located on average every 25 miles along the
transmission network. As of September 30, 1996, the remaining net depreciated
book value of the Company's microwave equipment was less than 4% of total
assets.
Satellites. 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.
34
<PAGE> 37
BUSINESS
COMPANY OVERVIEW
The Company provides two principal services to long distance companies: (i)
long-haul transmission of voice and data over dedicated circuits; and (ii)
switched long distance services. The Company is one of only five carriers that
currently own a digital telecommunications network extending from coast-to-coast
(the other carriers are AT&T, MCI, Sprint and WorldCom). Its facilities include
digital switches located in Los Angeles, Dallas, Chicago, Philadelphia and
Atlanta.
The Company had revenues of approximately $130.3 million in the nine months
ended September 30, 1996, with approximately $72.4 million generated by its
long-haul business and approximately $57.9 million generated by its switched
services business. The Company has long-haul circuit contracts with over 200
long distance carriers, including AT&T, MCI, Sprint, WorldCom, Cable & Wireless,
Frontier and LCI. The Company also provides long-haul transmission service to
customers after contract expiration on a month-to-month basis. The Company's
long-haul contracts provide for fixed monthly payments, generally in advance.
The Company has historically enjoyed a high customer retention rate.
In late 1995, the Company expanded into the business of selling switched
long distance services to long distance resellers in order to complement its
long-haul business and to capitalize on its ability to provide switched services
over its own network. Switched long distance services are telecommunications
services that are processed through the Company's digital switches and carried
over long-haul circuits and other transmission facilities owned or leased by the
Company. During 1995, the Company set up the infrastructure for its switched
long distance business by installing its switches, connecting them to its
network and to the LECs, acquiring software, hiring personnel and entering into
contracts with customers. The Company's switched network became fully
operational in February 1996. The Company sells switched long distance services
on a per-call basis, charging by minutes of use ("MOUs"), with payment due
monthly after services are rendered. The Company believes that it is
well-positioned to continue to attract long distance resellers as customers for
its switched long distance services because: (i) it is not currently a
significant competitor for sales to end users; and (ii) it provides more focused
service to its reseller customers, since servicing such customers is its primary
business, unlike its major competitors whose main business is selling retail
long distance service to end users.
The Company has switched long distance services contracts with over 70 long
distance resellers. Excel, the Company's largest customer of switched long
distance services, is contractually obligated to continue to utilize a minimum
of 70 million minutes of traffic per month until reaching total usage of 4.2
billion minutes (subject to Excel's right to reduce or terminate its commitment
under certain circumstances). The Company's switched long distance business has
grown rapidly since its switched network became fully operational in February
1996, with Excel accounting for most of the growth. The Company's switched long
distance revenues amounted to approximately $58.0 million in the nine months
ended September 30, 1996, with $4.0 million in the quarter ended March 31, 1996,
$19.0 million in the quarter ended June 30, 1996 and $35.0 million in the
quarter ended September 30, 1996. The Company plans to continue to expand the
capabilities of the switched network in 1997 to meet customer demand by adding
additional equipment, including at least one switch. See "Business -- Switched
Long Distance Services."
The Company's primary business objectives over the near term are: (i) to
rapidly increase revenue from its switched long distance services business; (ii)
to complete a substantial portion of the Fiber Expansion in 1997; and (iii) to
utilize its expanded network to increase its revenues and profitability.
The Company is currently engaged in the Fiber Expansion, a major
enlargement of its network, to increase the Company's geographic scope and
network capacity. The Company believes the Fiber Expansion will improve its
profitability and cash flow by decreasing its cost of communications services as
it moves traffic onto facilities it owns and increasing its revenues by allowing
the lease of substantial additional capacity. It will connect the Company's
switches with high-capacity long-haul circuits, utilizing advanced fiber optic
technology capable of efficiently transmitting capacity-intensive services, such
as Internet, Intranet and
35
<PAGE> 38
multimedia applications, frame relay and ATM. The Fiber Expansion is expected to
deliver significant strategic and financial benefits to the Company through:
(i) producing substantial savings by allowing the Company to move a
portion of its excess long-haul traffic from leased circuits on the
networks of other carriers to its own expanded network. Because of
geographic limitations and capacity constraints, the Company currently
supplements its own facilities with a significant amount of fiber optic
capacity obtained from other carriers to service customers that require
capacity not available on the Company's own network;
(ii) providing high-capacity new routes and substantially increasing
the capacity of certain existing routes, allowing the Company to increase
revenues by leasing additional circuits to its customers including
high-capacity products such as OC-48's, OC-12's and OC-3's;
(iii) allowing the Company to improve profitability in its switched
long distance services business by reducing its underlying costs of
long-haul transmission; and
(iv) creating sufficient capacity to support increased demand which
may result from Internet and multimedia applications, frame relay and ATM.
Prior to beginning construction of the Fiber Expansion in late 1995, the
Company owned a coast-to-coast network containing over 1,700 fiber optic route
miles and over 5,000 digital microwave route miles. As of the date of this
Prospectus, over fiber route miles of a total of approximately 7,000
fiber route miles of the Fiber Expansion were complete. The Fiber Expansion is
planned to include routes from New York via Cleveland, Chicago, Dallas and
Phoenix to Los Angeles and from New York via Atlanta to Houston. The Company
expects to substantially complete the Fiber Expansion in 1997, meeting the cost
of its construction with cash on hand, the proceeds of this Offering and funds
the Company seeks to borrow under the Proposed Credit Facility currently being
negotiated. The Company is reducing the per-route-mile cost of the Fiber
Expansion through fiber exchange arrangements with WorldCom and Vyvx and joint
construction arrangements with other carriers.
In 1996 the Company began equipping its network with the data switches and
other equipment necessary to enter into the frame relay and ATM transmission
business. Such equipment, in connection with the Fiber Expansion and additional
equipment and software to be installed in 1997, should allow the Company to
enter into the business of frame relay and ATM transmission for Internet and
Intranet providers and other large users of data capacity. The Company began
beta testing such facilities in 1996 and began offering such services in the
first quarter of 1997. Although the Company does not expect such services to be
a significant source of revenues in 1997, industry sources predict that the
market for such high-capacity data uses will grow substantially in the future
along with the expected growth of Internet and Intranet use. To position itself
to benefit from such growth, the Company seeks to establish itself as a reliable
supplier of such services.
The Company continued in the second half of 1996 to sign contracts with new
and existing customers for switched long distance services and long-haul
services. During this period, Excel's usage of the Company's network increased
substantially above its 70 million minute per month minimum. In addition, the
Company entered into two significant agreements with major long distance
carriers that will obtain long-haul services from the Company utilizing portions
of the Fiber Expansion. Under one contract the Company will supply one-year DS-3
circuits aggregating over $24.0 million in revenue during 1997-1998; under the
other contract the Company will supply OC-48 capacity aggregating over $20.1
million in revenue over a five-year term.
Over fiber route miles of the Fiber Expansion were completed from
June 30, 1996 through the date of this Prospectus. During that period, the
Company entered into several additional agreements with other carriers that will
result in reductions to its per-route-mile cost of construction, including:
(i) a contract with Vyvx to exchange certain fibers on the Company's
New York to Los Angeles route for fibers on Vyvx's 1,600-mile route to be
constructed from Washington, D.C. to Houston. This contract with Vyvx is
similar to the Company's existing agreement with WorldCom pursuant to which
the Company is providing WorldCom with fibers on its Dallas to Phoenix
route in exchange for fibers on WorldCom's 1,100-mile route from Akron to
St. Louis. Through these arrangements the Company
36
<PAGE> 39
expects to save most of the costs of construction (other than the cost of
equipping the route with electronics) and rights-of-way it would otherwise
incur if it built the route itself;
(ii) joint construction contracts with other carriers: LCI
(Youngstown, Ohio -- Toledo), DTI (Anderson, Missouri -- Kansas City), and
CCTS (Riverdale, Illinois -- Chicago). These contracts relate to routes the
other carriers are constructing, providing the other carriers will include
the Company's fiber in their routes. These arrangements allow the Company
and the other carriers to share most of the costs of construction (other
than the cost of equipping the route with electronics) of these routes;
(iii) a joint construction contract with MFS, a recently acquired
subsidiary of WorldCom, pursuant to which MFS will include fibers for the
Company in a route MFS is constructing from Cleveland through upstate New
York to New York City. This route, which replaces a previously planned
Company route from Cleveland to Philadelphia, will substantially increase
the scope of the Company's network through large cities in upstate New
York, bring the network to Albany (facilitating a future extension to
Boston), and provide many additional fibers into New York City; and
(iv) contracts providing for the Company to include another carrier's
fiber in routes the Company is constructing: GST (Tucson -- Phoenix) and
WorldCom (Phoenix -- Las Vegas).
The principal executive offices of IXC Communications are located at 5000
Plaza on the Lake, Suite 200, Austin, Texas, 78746 and its telephone number is
(512) 328-1112.
BUSINESS STRATEGY
The Company's primary business objectives over the near term are: (i) to
rapidly increase revenue from its switched long distance services business; (ii)
to complete a substantial portion of the Fiber Expansion in 1997; and (iii) to
utilize its expanded network to increase its revenues and profitability.
The key elements of the Company's strategy to achieve these objectives are:
Reducing Costs. The Company seeks to achieve substantial cost savings
through the Fiber Expansion by reducing the amount of capacity it would
otherwise obtain from other carriers. The Company incurred costs (including
through capacity exchanges) of $41.2 million for off-net fiber optic capacity
from other carriers in the nine months ended September 30, 1996. In the event
the Company achieves revenue growth in the long-haul business and the switched
long distance business, its usage of long-haul capacity (including capacity
leased from other carriers) will increase. The Company believes the Fiber
Expansion will enable it to reduce expenditures for capacity now leased off-net
(and to reduce the additional expenses for leasing capacity that would otherwise
be required to support revenue growth) and thereby increase its operating cash
flow, because the new fiber routes: (i) should carry much of the traffic that
would otherwise be transmitted over off-net circuits and (ii) may enable the
Company to enter into additional exchanges of fiber capacity with other
carriers. See "-- The Company's Network" and "Risk Factors -- Risks Relating to
Completion of the Fiber Expansion."
Increasing Long-Haul Circuit Revenues. The Company's ability to expand its
long-haul business has previously been limited because the existing network
owned by the Company is geographically limited and because the digital microwave
portion of its network has been utilized at or near its maximum practical
capacity. The Company seeks through the Fiber Expansion to install high-capacity
new routes and substantially increase the capacity of certain existing routes,
allowing the Company to lease additional circuits to its customers, including
high-capacity products such as OC-48's, OC-12's and OC-3's. The Fiber Expansion
has already enabled the Company to obtain significant orders for capacity on the
new routes. The Company entered into a contract in September 1996 with a major
long distance carrier for the Company to provide DS-3 circuits, each with a
one-year term, principally along the new routes of the Fiber Expansion. The
carrier has ordered circuits under the contract for aggregate revenue in excess
of $24.0 million during 1997-1998. In addition, the Company contracted in
January 1997 to lease OC-48 capacity for an aggregate amount of over $20.1
million over a five-year period to another major long distance carrier over a
portion of
37
<PAGE> 40
the Fiber Expansion. The Company continues to seek significant new orders over
the Fiber Expansion routes and believes that it is well positioned to obtain
such orders.
Establishing a Platform for Capacity-Intensive Data Applications. The
Company is using advanced (though commercially tested) fiber optic technology in
the Fiber Expansion. The expanded network will have SONET technology and the
broadband capabilities to provide a platform to support advanced, capacity-
intensive products such as frame relay, ATM, multimedia and Internet related
applications. See "-- The Company's Network" and "Risk Factors -- Risks Relating
to Completion of the Fiber Expansion."
Providing Backup Routing for Major Carriers. An area of substantial growth
in certain markets for the Company in recent years has been the provision of
circuits to facilities-based carriers such as AT&T, MCI, Sprint and WorldCom
(the other four companies that currently own coast-to-coast digital networks),
to be used as alternative routes by such carriers in the event of a service
outage. Such companies prefer alternative routes separated geographically from
their routes to increase the possibility that the alternative route will be
functional in the event of a natural disaster. The Company has planned the Fiber
Expansion to be separated geographically as far as practicable from the existing
fiber routes of such carriers. The Company believes that the Fiber Expansion,
with the resulting significant increase in fiber optic geographic coverage and
capacity, will greatly increase the attractiveness of the Company's network as
alternative routing to certain major carriers as a backup to their own networks.
Capitalizing on Excel Relationship. The Company views Excel as the "anchor
tenant" of its switched network, providing the Company with significant traffic
volumes on which to base its entry into the switched long distance services
business. The Company seeks to maintain and increase its level of traffic from
Excel, which currently obtains the bulk of the switched long distance services
it requires from other carriers, through customer service, network quality and
geographic availability. See "-- Switched Long Distance Services -- Customers
and Marketing." Excel entered into a four-year, $900 million contract to
purchase switched long distance services from WorldCom and a two-year, $120.0
million contract to purchase switched long distance services from MCI. Although
the Company believes that Excel's commitments to WorldCom, MCI and its other
suppliers will not impair Excel's relationship with the Company, WorldCom and
MCI will be significant competitors for Excel's business. See "Risk
Factors -- Reliance on Major Customers."
Establishing Other Long-Term Relationships. The Company seeks to establish
a dependable revenue stream through long-term relationships with its customers.
The Company has long-haul contracts (generally on a long-term basis) with over
200 long distance carriers, including AT&T, MCI, Sprint, WorldCom, Cable &
Wireless, Frontier and LCI. The Company has historically enjoyed a high customer
retention rate. Although the Company's switches first became fully operational
in the first quarter of 1996, the Company has already entered into contracts
with over 30 long distance resellers.
Providing an Automated Software Interface. The Company seeks to increase
its attractiveness to existing and potential customers of switched long distance
services by providing a sophisticated automated interface to the Company's
computer system through its proprietary IXC Online software. Utilizing IXC
Online, customers are able to access up-to-date information regarding their
end-user customers and the calls made by such end-users. IXC Online is designed
to allow each of the Company's carrier customers to: (i) download call detail
records for its end-users for billing purposes; (ii) arrange with the
appropriate LEC to register the carrier as the designated long distance carrier
for its new end-users; and (iii) file trouble reports for resolution.
Acting as an Alternative Switched Long Distance Services Provider. The
Company believes that it is well positioned to attract long distance resellers
as customers for its switched long distance services because: (i) it is not
currently a significant competitor for sales to end users; and (ii) it provides
more focused service to its reseller customers, since servicing such customers
is its primary business, unlike its major competitors (AT&T, MCI, Sprint, World
Com and Frontier) whose main business is selling retail long distance service to
end-users. See "-- Switched Long Distance Services" and "Risk
Factors -- Development Risks and Dependence on Switched Long Distance Business."
38
<PAGE> 41
Acquisitions. The Company may from time to time acquire other businesses,
assets, or securities of companies which will complement and expand the
Company's existing business. The Company intends to use Common Stock as
consideration for acquisitions. See "Risk Factors -- Acquisition Risks."
THE COMPANY'S NETWORK
Services
The Company provides two basic services: (i) long-haul services; and (ii)
switched long distance services.
Long-Haul Services. A long-haul circuit is an unswitched telecommunications
transmission circuit used by customers, such as non-facilities-based carriers
that have switches but do not own transmission facilities, to transport their
already-switched traffic between LATAs. Calls being transmitted over a long-haul
circuit for a customer are generally routed by the customer through a switch to
a receiving terminal in the Company's network. The Company transmits the signals
over a long-haul circuit to the terminal where the signals are to exit the
Company's network. The signals are generally then routed by the customer through
another switch and to the call recipient through a LEC. The Company typically
bills the customers a fixed monthly rate depending on the capacity and length of
the circuit, regardless of the amount the circuit is actually used. See
"-- Long-Haul Services."
Switched Long Distance Services. Switched long distance services are
telecommunications services such as residential and commercial long distance
service that involve processing calls through the switches of a carrier. Among
the Company's switched long distance services product offerings are two basic
services: (i) call origination and termination services and (ii) call
termination services. For non-facilities-based carriers such as switchless
carriers, the Company provides call origination and termination. This generally
includes: (i) arranging with the caller's LEC to connect the call to the
Company's switching center (this is referred to as "origination") and (ii)
transmitting the call to another Company switching center or a hub connecting
the call to the recipient's LEC and arranging with the LEC to connect the call
to the recipient (this is referred to as "termination"). Other customers (for
example, non-facilities based carriers with regional switches in certain areas
but not in others) require termination but not origination services. In this
case, the customer delivers a call to the Company's switching center and the
Company terminates the call. The Company typically bills the customer at a
variable rate depending on the duration, day and time of day of the call and
whether the call is intrastate, interstate or international. See "-- Switched
Long Distance Services."
Facilities
The Company is one of only five carriers that currently owns a
coast-to-coast digital network. Prior to beginning construction of the Fiber
Expansion in late 1995, the Company owned a coast-to-coast network containing
over 1,700 fiber optic route miles and over 5,000 digital microwave route miles.
As of the date of this Prospectus, the Company and its partners in cost-saving
arrangements had substantially completed over fiber route miles of the
Fiber Expansion. The Fiber Expansion, when completed, should increase the
capacity available to the Company to lease to its customers to over 700,000 DS-3
miles, with significant additional capacity available when needed by the
Company. See the map depicting the network on the inside front cover of this
Prospectus.
The Company's own facilities are supplemented with over 200,000 DS-3 miles
of fiber optic capacity obtained from other carriers. Of such capacity, over
161,000 DS-3 miles are leased by the Company. Approximately 39,000 DS-3 miles of
such capacity are obtained by the Company through long-term capacity-exchange
agreements with MCI and WorldCom whereby the Company trades capacity or fibers
on its fiber network for capacity on the other carriers' networks. In addition,
the Company has recently entered into agreements with CCTS and LCI to exchange
OC-48 capacity on certain routes. The Company has been able to negotiate these
significant exchange agreements because of the placement of the Company's
existing networks in locations where other facilities-based carriers require
additional capacity and the comparatively large expense to such other carriers
of constructing new fiber optic facilities. Such exchange agreements
39
<PAGE> 42
increase the scope of the Company's network through the addition of the
exchanged capacity while reducing the Company's cash expenditures for off-net
facilities.
The Company's network includes five digital switches located in Los
Angeles, Dallas, Chicago, Philadelphia and Atlanta (with an additional switch to
be installed in Joplin, Missouri in 1997), each directly connected over either
on-net or off-net long-haul circuits: (i) to at least two other switching
centers; (ii) to certain of the Company's over 50 Hubs (local connection
points); and (iii) to certain LEC Central Office switches. The Hubs are
connected (generally by off-net circuits) to LEC Central Office switches, which
in turn are connected to end-user telephone lines. The switches utilize common
channel signaling (SS7), which reduces connect time delays and directs calls
using least-cost routing. The Company's switched operations are supplemented by
agreements with Allnet and WorldCom. Under such agreements, Allnet and WorldCom
supply switched capacity to the Company, automatically handling calls routed
through LEC Central Offices not connected to the Company's Hubs or switches and
calls which exceed the capacity of the Company's switched network.
The capacity of the Company's switches may be expanded with processor
upgrades, additional memory and ports. The Company plans to add more ports and
other equipment for its existing switches and to add additional switches as
required to accommodate customer demand. While the Company cannot yet ascertain
the capital cost of such ports, additional equipment and switches, the Company
anticipates that it will be able, subject to certain restrictions under the
Indenture, to obtain such equipment under capital leases.
Network Reliability
The Company's network offers a reliable means of transmitting large volumes
of voice and data signals. To assist in providing reliable and high-quality
transmission service, all important functions of the network are monitored
during regular business hours from regional operations centers in Columbus,
Kansas City, Fort Worth and Tucson. Thereafter, monitoring is conducted from the
Company's national operations center in its Austin headquarters. The national
center also provides overall system monitoring on a 24-hour basis. This system
alerts the Company to situations which could affect customer transmission and
generally allows the Company to take remedial actions before customer service is
affected. In addition, at December 31, 1996, the Company employed approximately
34 operations personnel who are based along the network to perform preventative
maintenance as well as repair functions on its long-haul network. Company
operations personnel conduct annual system performance testing and make periodic
unannounced visits to terminal sites to evaluate technician performance. At
December 31, 1996, the Company maintained a staff of 21 technicians to provide
maintenance and other technical support services for switched long distance
services.
Fiber Expansion
The Company believes the Fiber Expansion will improve its profitability and
cash flow by decreasing its cost of communications services as it moves traffic
onto facilities it owns and increasing its revenues by allowing the lease of
substantial additional capacity. The Fiber Expansion is planned to add
approximately 7,000 additional fiber route miles to increase the geographic
scope and capacity of the Company's previously existing network. It will connect
the Company's switches with high-capacity long-haul circuits, utilizing advanced
fiber optic technology capable of efficiently transmitting capacity-intensive
services, such as Internet, Intranet and multimedia applications, frame relay
and ATM. The Fiber Expansion is expected to deliver significant strategic and
financial benefits to the Company through:
(i) producing substantial savings by allowing the Company to move a
portion of its excess long-haul traffic from leased circuits on the
networks of other carriers to its own expanded network. Because of
geographic limitations and capacity constraints, the Company currently
supplements its own facilities with a significant amount of fiber optic
capacity obtained from other carriers to service customers that require
capacity not available on the Company's own network;
(ii) providing high-capacity new routes and substantially increasing
the capacity of certain existing routes, allowing the Company to increase
revenues by leasing additional circuits to its customers including
high-capacity products such as OC-48's, OC-12's and OC-3's;
40
<PAGE> 43
(iii) allowing the Company to improve profitability in its switched
long distance services business by reducing its underlying costs of
long-haul transmission; and
(iv) creating sufficient capacity to support increased demand which
may result from Internet and multimedia applications, frame relay and ATM.
In 1996 the Company began equipping its network with the data switches and
other equipment necessary to enter into the frame relay and ATM transmission
business. Such equipment, in connection with the Fiber Expansion and additional
equipment and software to be installed in 1997, should allow the Company to
enter into the business of frame relay and ATM transmission for Internet and
Intranet providers and other large users of data capacity. The Company began
beta testing such facilities in 1996 and began offering such services in the
first quarter of 1997. Although the Company does not expect such services to be
a significant source of revenues in 1997, industry sources predict that the
market for such high-capacity data uses will grow substantially in the future
along with the expected growth of Internet and Intranet use. To position itself
to benefit from such growth, the Company seeks to establish itself as a reliable
supplier of such services.
The Company estimates that the Fiber Expansion will produce additional cost
savings by supporting growth in its long-haul business and switched long
distance business which would otherwise require significant off-net capacity
usage. The Fiber Expansion will enable the Company to avoid increased
expenditures for leasing off-net capacity because the new fiber routes: (i)
should carry much of the traffic that would otherwise be transmitted over
off-net circuits and (ii) may enable the Company to enter into additional
exchanges of fiber capacity with other carriers. In this way, the Company seeks
to improve cash flow through increasing revenues and decreasing certain costs.
The Fiber Expansion has already enabled the Company to obtain significant orders
for capacity on the new routes. The Company entered into a contract in September
1996 with a major long distance carrier for the Company to provide DS-3
circuits, each with a one-year term, principally along the new routes of the
Fiber Expansion. The carrier has ordered circuits under the contract for
aggregate revenue in excess of $24.0 million during 1997-1998. In addition, the
Company contracted in January 1997 to lease OC-48 capacity for $20.1 million to
another major long distance carrier over a five-year period over a portion of
the Fiber Expansion. The Company continues to seek significant new orders over
the Fiber Expansion routes and believes that it is well positioned to obtain
such orders.
Construction. The Company has planned the Fiber Expansion to cover, to the
greatest extent practicable, routes where one or more of the following factors
are present: (i) customer demand indicates a need for high-capacity fiber
network on the route; (ii) the route is attractive as a complement to the routes
of other carriers, which may enable the Company to lease its new capacity on the
route to other carriers or exchange a portion of its new capacity on the route
for capacity from other carriers; or (iii) the capacity will replace capacity
leased by the Company from other carriers. At the time of the Company's IPO in
July 1996, the Company had planned to construct the Fiber Expansion in two
phases: Phase I from Philadelphia through Chicago, Dallas and Phoenix to Los
Angeles and Phase II from New York to Houston along with additional spurs to the
Phase I route. The Company's plans for the Fiber Expansion routes and the
scheduled completion of such routes have changed because the Company has been
successful in selling capacity on certain uncompleted routes and in entering
advantageous cost-saving arrangements. The most significant route changes made
include (i) acceleration of the Joplin, Missouri to Kansas City route originally
planned for Phase II because significant new capacity on the route has been
ordered by the Company's customers; (ii) replacement of the
Akron-Pittsburgh-Philadelphia route with a Cleveland-upstate New York-New York
City route because of a cost-saving arrangement with MFS through which MFS will
construct the route at an attractive price, and (iii) acceleration of the
Washington, D.C. to Houston route originally planned for Phase II because,
pursuant to the cost-saving arrangement entered into with Vyvx, Vyvx will
construct such route (at no cash cost to the Company other than the costs of
electronics to equip the route) for the Company in exchange for fibers elsewhere
on the Company's network.
Although such changes in the planned routes make exact comparisons
impossible, the Company believes that the Fiber Expansion is progressing well,
without significant delays or cost overruns. The Company had earlier planned to
complete the Philadelphia to Los Angeles route in the first quarter of 1997.
Much of that route is now complete, including, to meet customer demand: (i) a
Kansas City to Joplin, Missouri route and
41
<PAGE> 44
other routes not originally planned for Phase I; and (ii) substantially more
electronics than originally planned. The Phoenix to Los Angeles route is
scheduled for completion in the second quarter of 1997.
The Company presently plans to complete the Fiber Expansion along the
following routes, which the Company believes to be generally geographically
diverse from the existing long-haul fiber networks of AT&T, MCI, Sprint and
WorldCom (the routes are subject to change depending on the availability of
certain cost-saving arrangements and the Company's ability to reduce
construction costs and enhance the benefits from the routes to be constructed):
(i) One route will consist of a fiber optic route to supplement the
Company's existing New York-Los Angeles route, which consists primarily of
digital microwave facilities. This cross-country route is to extend from
New York City to Los Angeles over new fiber optic cable through upstate New
York, Cleveland, Chicago, St. Louis, Dallas and Phoenix. This route, much
of which is already complete, is scheduled for completion in the second
quarter of 1997.
(ii) An additional route is planned from New York via Atlanta to
Houston. The southeastern route being constructed by Vyvx from Washington,
D.C. to Houston is scheduled for completion by the end of 1997 and the
route from New York City to Washington, D.C. is also scheduled to be
completed by the end of 1997.
The proposed routes for the Fiber Expansion are set forth on the following
map (a larger version of the map is located on the inside front cover page of
this Prospectus).
[Small map]
The Company plans generally to light initially only four of the new fibers
in the Fiber Expansion (which will add an aggregate of approximately 350,000
DS-3 miles to the Company's network). Certain of the remaining fibers will be
reserved and used as a platform to support emerging capacity-intensive data and
multimedia applications. The Company intends to light additional fibers as
needed in the future and may use the other additional fibers for sale or
exchange arrangements. See "-- Business Strategy" and "Risk Factors -- Risks
Relating to Completion of the Fiber Expansion."
A portion of the Fiber Expansion is being constructed in connection with an
agreement entered into with WorldCom (the "WorldCom Fiber Build Agreement").
Pursuant to this agreement, each company is constructing a fiber route
approximately 1,100 miles long and placing fibers for both companies in the
route. WorldCom's route extends from Akron through Indianapolis to a suburb of
St. Louis, with a spur from Indianapolis to a suburb of Chicago. The Company's
route extends from Dallas to Phoenix. Each party will maintain the fiber in its
route at no cost to the other party. This arrangement will result in substantial
savings for the Company as opposed to constructing both routes by itself. The
WorldCom Fiber Build Agreement provides for substantial penalties ($400,000 per
month) for either party which did not complete construction of the applicable
route by October 1, 1996, but only after a grace period and only in the event
the other party has already completed its route. As of December 31, 1996,
neither WorldCom nor the Company had completed their routes, and thus, neither
party has been required to pay a penalty. The Company anticipates that it will
complete its route in the near future, prior to incurring any penalty, although
there can be no assurance that the Company will be able to complete its route by
that time. In the event WorldCom completes its route before the Company, and the
Company fails to complete its route within 30 days thereafter, the Company will
be required to pay the $400,000 per month penalty until it completes its
construction.
42
<PAGE> 45
In December 1996, the Company entered into an agreement with Vyvx whereby
the Company will provide Vyvx with fibers from Los Angeles to New York City in
exchange for fibers from Houston to Washington, D.C. The parties are required to
complete their routes by December 31, 1997, with penalties taking effect in July
1998 if one party, but not the other, has failed to complete its route. Although
the Company anticipates that it will complete its route in time to avoid any
penalty, there can be no assurance that the Company will complete its route in
time. Such penalties increase from $400,000 per month in July 1998 to $800,000
per month in and after October 1998.
The Company has entered into several additional agreements with others that
will result in reductions to its per-route-mile cost of construction, including:
(i) joint construction contracts with other carriers: LCI (Youngstown,
Ohio -- Toledo), DTI (Anderson, Missouri -- Kansas City), and CCTS
(Riverdale, Illinois -- Chicago). These contracts relate to routes the
other carriers are constructing, providing the other carriers will include
the Company's fiber in their routes. These arrangements allow the Company
and the other carriers to share most of the costs of construction (other
than the cost of equipping the route with electronics) of these routes;
(ii) a joint construction contract with MFS, a recently acquired
subsidiary of WorldCom, pursuant to which MFS will include fibers for the
Company in a route MFS is constructing from Cleveland through upstate New
York to New York City. This route, which replaces a previously planned
Company route from Cleveland to Philadelphia, will substantially increase
the scope of the Company's network through large cities in upstate New
York, bring the network to Albany (facilitating a future extension to
Boston), and provide many additional fibers into New York City; and
(iii) contracts providing for the Company to include another carrier's
fiber in routes the Company is constructing: GST (Tucson -- Phoenix) and
WorldCom (Phoenix -- Las Vegas).
Cost. The principal components of the cost of the Fiber Expansion will
include: (i) fiber optic cable; (ii) engineering and construction; (iii)
electronics; and (iv) rights-of-way. The rights-of-way will be provided pursuant
to long-term leases or other arrangements (some of which may provide for
substantial continuing payments) entered into with railroads, highway
commissions, pipeline owners, utilities or others. The Company anticipates that
such rights-of-way will be available along the planned routes of the Fiber
Expansion.
Through the WorldCom Fiber Build Agreement, the Vyvx fiber exchange and the
other cost-saving arrangements described above, the Company has reduced its
expected cost of the Fiber Expansion. The Company seeks to enter into additional
cost-saving arrangements such as: (i) including additional fibers in the Fiber
Expansion for lease or sale to other carriers; (ii) exchanging excess fibers or
capacity on the Company's expanded network for excess fibers or capacity on
other carriers' networks; and (iii) obtaining the right to install Company-owned
fibers in new fiber optic routes being constructed by other carriers along the
proposed Fiber Expansion routes in exchange for the Company (a) sharing
construction costs with the other carrier, (b) allowing the other carrier to use
excess Company fiber elsewhere in the Company's network, or (c) allowing the
other carrier to add its own fibers to segments of the Fiber Expansion. See
"Risk Factors -- Negative Cash Flow and Capital Requirements." The Company has
had experience with arrangements of this type with several major carriers,
including MCI, Sprint, Cable & Wireless, WorldCom and LCI.
The Company anticipates that the Fiber Expansion will cost approximately
$315.9 million (taking into account the effect of cost-saving arrangements it
has already entered into). As of December 31, 1996, the Company had spent
approximately $97.2 million of such amount. The Company will seek to meet the
remaining costs of the Fiber Expansion through: (i) cash on hand; (ii) the
proceeds of this Offering; (ii) the Proposed Credit Facility; (iii) additional
cost-saving arrangements; (iv) cash flow from its existing operations; (v)
increased cash flow resulting from reduced off-net capacity costs as segments of
the Fiber Expansion are completed; and (vi) if the Company is able to
successfully develop the switched-products business, increased cash flow from
the switched-products business. In the event no other cost-saving arrangements
are entered into, and the sources of cash referred to above are not available as
soon as desired, the Company anticipates
43
<PAGE> 46
that, to complete the Fiber Expansion, it will be necessary either: (i) to meet
the remaining costs of the Fiber Expansion through a combination of debt or
equity funding (subject to the restrictions set forth in the Indenture); or (ii)
to slow or delay the construction of the Fiber Expansion until sufficient funds
are available. There can be no assurance that sufficient cash will in fact be
available from the sources listed above. See "-- The Company's Network,"
"-- Business Strategy," "Risk Factors -- Negative Cash Flow and Capital
Requirements," "Risk Factors -- Risks Relating to Completion of the Fiber
Expansion," "Risk Factors -- Substantial Indebtedness," and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Construction Management. The Company's management and staff have
substantial experience in the construction of long-haul telecommunications
systems. The Company's existing nationwide digital network including
miles of fiber optic cable completed as of the date of this Prospectus as part
of the Fiber Expansion and its 346-mile Texas fiber optic network constructed in
1993 were engineered and constructed by the Company. The completed segments of
the Fiber Expansion and Texas network extension incorporated modern fiber optic
cable and SONET optronics. In addition, the Company successfully closed
contracts on its Texas network with AT&T, MCI and Sprint after such companies
carefully reviewed the Company's engineering and operations capabilities. The
Company believes that its experienced engineering and operations management and
staff have the requisite skills and experience to successfully complete the
Fiber Expansion.
LONG-HAUL SERVICES
Overview
Substantially all of the Company's 1995 revenues and approximately 56% of
its revenues for the nine months ending September 30, 1996 were generated by its
long-haul business. The Company has long-haul circuit contracts with over 200
long distance carriers.
Strategy
The Company is seeking to increase revenues in its long-haul business
through meeting these primary objectives: (i) expanding its network to provide
additional capacity on its existing routes and high-capacity new routes to
provide access to major population centers (including routes which may be
attractive to major carriers) as backup routes; (ii) providing high-quality,
reliable transmission services on a fixed-cost basis at rates generally below
those currently offered by AT&T and competitive with those offered by other
carriers; and (iii) using the expanded network as a platform to support
increased long-haul circuit demand which may result in the future from frame
relay, ATM, multimedia, Internet and other capacity-intensive applications.
The Company is seeking to decrease expenses in its long-haul business
through the Fiber Expansion, which the Company anticipates will allow it to move
traffic from circuits leased from other carriers to its own network.
Customers and Marketing
The Company has long-haul circuit contracts with over 200 long distance
carriers, including AT&T, MCI, Sprint, WorldCom, Cable & Wireless, Frontier and
LCI. The Company also provides long-haul transmission to customers after
contract expiration on a month-to-month basis. The Company's long-haul contracts
provide for fixed monthly payments, generally in advance. The Company has
historically enjoyed a high customer retention rate.
The Company markets its long-haul circuit capacity generally to: (i)
facilities-based carriers that require long-haul capacity where they have
geographic gaps in their facilities, need additional capacity or require
geographically different, alternative routing; and (ii) non-facilities-based
carriers requiring long-haul capacity to carry their customers' long distance
traffic. The Company focuses most of its direct sales efforts on providing
customer support services to existing customers and on adding new customers. The
Company's long-haul circuit sales force at December 31, 1996 consisted of ten
account managers based at the Company's
44
<PAGE> 47
headquarters in Austin and at direct sales offices in or near Washington, D.C.,
New Haven, San Francisco, Kansas City, Chicago, St. Louis, Houston and Sunrise
Beach, Missouri.
During 1994, 1995 and 1996, WorldCom and Frontier, the Company's two
largest long-haul customers, accounted for 25% and 23%, 20% and 21%, and 8% and
10% respectively, of the Company's revenues. During 1996, the Company leased
transmission capacity to 252 customers. The ten largest long-haul customers
during that year accounted for approximately 36% of revenues. See "Risk
Factors -- Reliance on Major Customers."
Prices and Contracts
The Company's strategy is to offer prices generally lower than those of
AT&T and competitive with the prices of other carriers, to permit the Company's
customers, through a stable, long-term fixed pricing structure, to maintain
control over transmission costs. The Company's long-haul transmission agreements
with its customers generally provide for original terms of one to three years
and for monthly payment in advance on a fixed-rate basis, calculated according
to the capacity and length of the circuit. The agreements generally provide that
the customer may terminate the affected service without penalty "for cause" in
the event of substantial and prolonged outages arising from causes within the
Company's control, and for certain other defined causes. Generally, the lease
agreements further provide that the customer may terminate the agreement "for
convenience" at its discretion at any time upon notice to the Company. However,
termination for convenience generally requires either full payment of all
charges through the end of the lease term or the payment of substantial
termination fees intended to allow the Company to recover certain costs and, in
some cases, lost profits. Damages attributable to a customer's termination of
the agreement are generally reduced, however, by an offset for any income the
Company earns from re-leasing the terminated capacity during the remaining
portion of the lease term.
Competition
In providing bulk long-haul circuit capacity, the Company competes with
AT&T, which is the largest supplier of long distance voice and data transmission
services in the United States, MCI, WorldCom and Sprint, all of which have
substantially greater financial resources than the Company and a far more
extensive transmission network than the Company's network. As a result of the
Telecommunications Act, the Company and its customers will also face competition
from the RBOCs, GTE and others such as electric utilities and cable television
companies. Qwest has announced its intention to construct a coast-to-coast fiber
optic network and Frontier has announced that it will pay $500 million for
fibers in Qwest's network. As such network is completed, Qwest will become a
competitor of the Company and Frontier may also become a competitor of the
Company in the long-haul business. Important competitive factors in the
long-haul business are price, customer service, network location and quality,
reliability and availability. See "Business -- Long-Haul Services." The Company
also competes on a regional basis with major regional carriers. Important
competitive factors in the long-haul business are price, customer service,
network location and quality, reliability and availability. See "Risk
Factors -- Competition."
SWITCHED LONG DISTANCE SERVICES
Overview
In late 1995, the Company expanded into the business of selling switched
long distance services to long distance resellers in order to complement its
long-haul business and to capitalize on its ability to provide switched services
over its own network. Switched long distance services are telecommunications
services that are processed through the Company's digital switches and carried
over long-haul circuits and other transmission facilities owned or leased by the
Company. During 1995, the Company set up the infrastructure for its switched
long distance business by installing its switches, connecting them to its
network and to the LECs, acquiring software, hiring personnel and entering into
contracts with customers. The Company's switched network became fully
operational in February 1996. The Company sells switched long distance services
on a per-call basis, charging by MOUs with payment due monthly after services
are rendered. The
45
<PAGE> 48
Company believes that it is well-positioned to attract long distance resellers
as customers for its switched long distance services because: (i) it is not
currently a significant competitor for sales to end users; and (ii) it provides
more focused service to its reseller customers, since servicing such customers
is its primary business, unlike its major competitors whose main business is
selling retail long distance service to end users.
Strategy
The Company seeks to rapidly increase revenues from its switched long
distance business through: (i) long-term arrangements with significant customers
and customers the Company considers likely to grow quickly; (ii) providing a
sophisticated automated software interface with its customers; (iii) offering
pricing which is generally lower than that charged by AT&T and competitive with
that of other long distance service providers; and (iv) acquisitions. The
Company seeks to increase the profitability of its switched long distance
services business by decreasing its average cost per MOU through efficiencies
achieved with higher volumes and through reducing network costs through the
Fiber Expansion. See "-- Business Strategy."
Customers and Marketing
The Company focuses its sales efforts on directly contacting large reseller
customers with monthly volumes of at least $1 million and smaller, growing
resellers with volumes between $50,000 and $250,000 per month that the Company
expects to be reasonably likely to grow to the $1 million per month level. The
Company's switched-products sales force at December 31, 1996 included 29 sales
executives based at the Company's headquarters in Austin and at direct sales
offices in Atlanta, Dallas, Denver and Los Angeles. Although sales of switched
long distance services to end-user customers do not currently account for a
significant portion of the Company's switched long distance business, the
Company may, from time to time, consider acquiring other long distance resellers
or end-user customer bases. Notwithstanding such potential acquisitions,
however, the Company does not expect to change its strategic focus from its
reseller customers. Instead, the Company intends to operate any such acquired
companies separately from its reseller business so as to ensure its continued
focus on reseller customers.
Excel. Excel, the Company's largest customer of switched long distance
services, is contractually obligated to utilize at least 70 million minutes of
traffic per month. Excel's commitment continues through the earlier of the date
on which Excel has routed 4.2 billion minutes over the Company's network or June
30, 2001. The minimum commitment is subject to reduction or termination: (i) if
Excel installs its own switches and invites the Company to bid along with other
carriers (to win such bids, the Company would have to be the lowest bidder) to
provide Excel with the long-haul circuits utilized by such switches (even if
this did occur, Excel would still have to meet the minimum commitment of 70
million minutes per month until June 30, 1998); or (ii) for breach of contract
by the Company or for other reasons which the Company believes should be under
its control. Although Excel's minimum commitment is 70 million minutes per
month, its usage increased substantially above the minimum commitment by
December 1996. The Company is Excel's main or sole supplier of 1 Plus Switched
Service in over 50 LATAs. The Company believes that Excel will utilize the
Company's 1 Plus Switched Service for most or all of Excel's growth in such
LATAs.
Customer Contracts. The Company's rates for switched long distance services
generally vary with the duration of the call, the day and the time of day the
call was made and whether the traffic is intrastate, interstate or
international. The rates charged are not affected by which facilities are
selected by the Company's switching centers for transmission of the call or by
the distance of the call. Different rates are applied to combined origination
and termination services than are applied to termination services. The
agreements between the Company and its customers for switched long distance
services generally provide for payment in arrears based on MOUs. The agreements
generally also provide that the customer may terminate the affected service
without penalty in the event of substantial and prolonged outages arising from
causes within the Company's control, and for certain other defined causes.
Generally, the agreements provide that the customer, in order to avoid being
obligated to pay higher rates (or, in some cases, penalties), must utilize at
least a minimum dollar amount (measured by dollars or MOUs) of switched long
distance services per month for the term of the agreement.
46
<PAGE> 49
Customer Care. The Company believes that customer support will prove to be
an important factor in attracting and retaining customers for its switched long
distance services. Customer service for switched long distance services includes
processing new accounts, responding to inquiries and disputes relating to
billing, credit adjustments and cancellations and conducting technical repair
and other support services. IXC Online is designed to allow each of the
Company's carrier customers to: (i) download current call detail records for its
end-users for billing purposes; (ii) arrange with the appropriate LEC to
register the carrier as the designated long distance carrier for its new end
users; and (iii) file trouble reports for resolution. The Company employed
approximately 45 people in its switched long distance services customer service
group as of December 31, 1996.
Decreased Costs through Increased Volumes
Large MOU volumes should enable the Company to spread its fixed costs over
more MOUs and to more efficiently configure its network, reducing the cost per
MOU. The Company seeks to efficiently configure the circuits available so that
calls are completed on a cost-effective basis. The Company periodically analyzes
calling patterns using mathematical formulas to determine the circuit capacity
required to cost-effectively service the expected call volume. For example, if
there is sufficient calling traffic available, the Company may upgrade
transmission circuitry in an area from DS-1 to DS-3. A similar analysis will be
made when deciding whether to install a new switch in a region.
Services
The Company markets a variety of switched long distance services, including
operator services, directory assistance, international service and the
following:
1 Plus Switched Service. Provides end users with direct-dial service over
the Company's digital network.
1 Plus Dedicated Service. Provides direct-dial service over the Company's
digital network for end users that have arranged to connect to the Company's
nearest hub through a local loop. This service is less expensive than 1 Plus
Switched Service because the access charges of the end-user's LEC are reduced.
800/888 Switched Service. Provides customers with 800/888 service over the
Company's digital network.
800/888 Dedicated Service. Provides 800/888 service over the Company's
digital network for end users that have arranged to connect to the Company's
nearest hub through a local loop. This service is less expensive than 800/888
Switched Service because the access charges of the end-user's LEC are reduced.
Calling Card Service. Provides telephone card service.
Debit Card Service. Provides prepaid telephone card service.
Switched Termination Service. Provides carrier customers having use of a
switch in one area with termination services in other areas.
Acquisitions
The Company may from time to time acquire other businesses, assets, or
securities of companies which will complement and expand the Company's existing
business. The Company intends to use Common Stock as consideration for other
acquisitions. See "Risk Factors -- Acquisition Risks."
Competition
The Company competes with numerous facilities-based interexchange carriers,
some of which are substantially larger, have substantially greater financial,
technical and marketing resources and utilize larger transmission systems than
the Company. AT&T is the largest supplier of switched long distance services in
the United States inter-LATA market. The Company also competes in selling
switched long distance services with: (i) other facilities-based carriers, such
as MCI, Sprint, WorldCom and certain regional carriers, and (ii) certain
non-facilities-based carriers. Qwest has announced its intention to construct a
coast-to-coast fiber
47
<PAGE> 50
optic network and Frontier has announced that it will pay $500 million for
fibers in Qwest's network. Upon completion of segments of such network, Qwest
and Frontier may also become competitors of the Company. As a result of the
Telecommunications Act, the Company will also now face competition from the
RBOCs, GTE and others such as electric utilities and cable television companies.
The Company believes that the principal competitive factors affecting it are
customer service (particularly with respect to speed in delivery of computer
billing records and set-up of new end users with the LECS), ability of the
network to complete calls with a minimum of network-caused busy signals, scope
of services offered, price, reliability and transmission quality. The Company
seeks to compete effectively with other interexchange carriers and resellers on
the basis of these factors. The ability of the Company to compete effectively
will depend upon its ability to maintain high-quality services at prices
generally equal to or below those charged by its competitors. In the United
States, price competition in the long distance business has been intensive over
the last five years. The FCC has, on several occasions since 1984, approved or
required price decreases by AT&T through the imposition of "price cap"
regulations. However, the FCC recently classified AT&T as a "non-dominant
interexchange carrier," with the effect that AT&T is no longer subject to price
regulation of its long distance services. Since the Company believes that its
customers generally price their service offerings at or below the prices charged
by AT&T for its telecommunications services, reductions by AT&T in its rates may
necessitate similar price decreases by the Company. See "Risk
Factors -- Competition."
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.
REGULATION
Certain subsidiaries of the Company operate as communications common
carriers. These subsidiaries are subject to applicable FCC regulations under the
Communications Act, some of which may be affected by the Telecommunications Act
and regulations being promulgated thereunder. See "Risk Factors -- Recent
Legislation and Regulatory Uncertainty." In addition, those subsidiaries which
operate the Company's microwave network are subject to applicable FCC
regulations for use of the radio frequencies. The FCC issues licenses to use
certain radio frequency spectrum at transmitter site locations. Each license
gives the Company the right to operate the microwave radio station for the term
of the license. Currently, the Company holds licenses to operate the microwave
sites in the Company's network. The licenses all expire in 2001. These licenses
are renewable upon application containing a statement that they are used in
compliance with the applicable FCC rules. The Company expects that the FCC will
renew its licenses in due course. The Company is subject to regulation by the
Federal Aviation Administration with respect to the construction of transmission
towers and to certain local zoning regulation affecting construction of towers
and other facilities.
Recent court decisions (which were issued before the Telecommunications
Act) require the FCC to require carriers to file tariffs. However, the FCC
currently does not actively exercise its authority to regulate such carriers'
rates and services. Moreover, the Telecommunications Act gives the FCC authority
to forebear from applying provisions of the Communications Act, including the
requirement that carriers file tariffs. The FCC has recently issued an order
implementing a mandatory detariffing policy that eliminates the tariff
requirements for non-dominant interstate, interexchange carriers. A court
challenge of the FCC's order is currently pending. The FCC will retain
jurisdiction to act upon complaints against any common carrier for failure to
comply with its statutory obligations as a common carrier.
In addition, the FCC recently freed AT&T from price cap regulation. This
FCC action may affect the Company, because it competes with AT&T. The FCC's
current and future actions could result in decreases in the rates charged to
end-user customers by AT&T and other competitors for their services. Thus, one
effect of the FCC's action may be to further intensify price competition among
long distance companies.
48
<PAGE> 51
The FCC regulates many of the rates, charges and services provided by the
local exchange carriers. Such regulation can also affect the costs of business
for the Company, its customers and its competitors, because carriers such as the
Company must purchase local access services from LECs to originate and terminate
calls. The FCC's current price cap regulation of the RBOCs and other LECs
provides them with considerable flexibility in pricing their services. The
pricing of transport services is under an interim rate structure which is a
transitional step toward pro-competitive, cost-based transport rates. The FCC
has commenced a proceeding to reform access charges and transport rate structure
and pricing. As part of access charge reform, the FCC is considering whether to
use: (i) a market-based approach, which would ultimately deregulate LEC
interstate access services when such services are subject to substantial
competition; or (ii) a prescriptive approach, under which the FCC would adopt
rules to drive access rates to economically efficient levels. The outcome of the
FCC proceeding is impossible to predict, but future changes with respect to
access charges are likely.
The Telecommunications Act, among other things, allows the RBOCs and others
to enter the long distance business. Entry of the RBOCs or other entities such
as electric utilities and cable television companies into the long distance
business may have a negative impact on the Company or its customers. In
addition, the Telecommunications Act provides that State proceedings may in
certain instances determine access charge rates the Company and its customers
are required to pay to the LECs. It is uncertain at this time what effect such
proceedings may have on such rates. There can be no assurance that such rates
will not be increased. Such increases could have a material adverse effect on
the Company and its customers. See "Risk Factors -- Recent Legislation and
Regulatory Uncertainty" and "Industry Overview."
The ability of the Company to provide long distance services within any
State is generally subject to regulation by a regulatory board in that State. As
of December 31, 1996, the Company is operating in the 48 contiguous continental
United States. The Company has obtained the requisite licenses and approvals in
46 of those States, and is being permitted to operate in the two remaining
States while its applications are pending. The Company expects to obtain all
such licenses and approvals by the end of 1997.
EMPLOYEES
As of December 31, 1996, the Company employed 520 people, of whom 242
provided operational and technical services, 58 provided engineering services
and the balance were engaged in administration and marketing. The Company's
employees are not represented by any labor union. The Company considers its
employee relations to be good and has not experienced any work stoppages.
PROPERTIES AND LEASES
The principal properties owned by the Company consist of: (i) the Michigan,
Texas and New York to Washington, D.C. fiber optic systems, consisting of the
fiber optic cable and associated electronics and other equipment; (ii) the
portion of the Fiber Expansion completed or under construction; and (iii) the
coast-to-coast microwave system, consisting of microwave transmitters,
receivers, towers and antennae, auxiliary power equipment, transportation
equipment, equipment shelters and miscellaneous components. Generally, the
Company's fiber optic system and microwave relay system components are standard
commercial products available from a number of suppliers.
The principal offices of the Company are located in approximately 44,000
square feet of space in Austin. The Company leases approximately 38,000 square
feet of such space under an agreement which expires in December 1999, at a
current annual base rental of approximately $707,000, and has an option to renew
the lease for a five-year term at the then-prevailing market rate (but not less
than the then-current rental rate) at the time of renewal, and leases
approximately 6,000 square feet of such space under an agreement which expires
in November 2000 at a current annual base rental of approximately $121,000. The
Company has additional offices in two other locations in Austin, consisting of
approximately 16,000 square feet and 57,000 square feet. The Company leases the
space in the first location under an agreement which expires in the year 2000,
at a current annual base rental of approximately $163,000, and subleases the
space in the second location under an agreement which expires in 1997, at a
current annual base rental of approximately $289,000.
49
<PAGE> 52
The Company leases sites for its switches in or near Los Angeles, Dallas,
Chicago, Atlanta, and Philadelphia under lease agreements that expire between
2000 and 2005. The total current rental commitments for the switch site leases
are approximately $27,000 per month. The Company's five switches are leased
under capital leases from DSC Finance Corporation over a term of five years.
LITIGATION
The Company is involved in various legal proceedings, all of which have
arisen in the ordinary course of business and some of which are covered by
insurance. In the opinion of the Company's management, none of the claims
relating to such proceedings will have a material adverse effect on the
financial condition or results of operations of the Company.
MEXICAN JOINT VENTURE
The Company is indirectly participating in the development of a long
distance network to engage in the telecommunications business in Mexico by
Marca-Tel. The Company indirectly owns 24.5% of Marca-Tel through its ownership
of 50% of Progress International which owns 49% of Marca-Tel. The remaining 51%
of Marca-Tel is owned by a Mexican individual and Fomento Radio Beep, S.A. de
C.V. The other 50% of Progress International is owned by Westel.
Progress International is responsible for providing all the capital that
may be required from Marca-Tel's stockholders in order to finance Marca-Tel. As
of December 31, 1996, the Company and Westel jointly have contributed
approximately $13.8 million to Progress International substantially all of which
has been used to fund Marca-Tel. Although the Company cannot accurately predict
the capital that will be required from Progress International to implement the
Marca-Tel business plan, it estimates that an additional $45.0 million (and
possibly significantly more) will be required by Marca-Tel from the stockholders
of Progress International during 1997-1998. Progress International is
considering selling equity interests in Progress International to one or more
third parties who could assist Progress International with the funding of
Marca-Tel. However, Progress International has not had any material discussions
in this regard and there can be no assurance that any such funding will be
available on satisfactory terms or at all. The Company is currently, and may
remain, the primary source of funds available to Progress International for
investment in Marca-Tel. Since the ownership interests of the Company and Westel
in Progress International are to be proportional to their respective capital
contributions, the Company's percentage ownership of Progress International, and
therefore its indirect ownership interest in Marca-Tel, could increase if it
makes additional capital contributions.
Marca-Tel is deploying three switching centers and a fiber optic route
linking Mexico's three major cities (Mexico City, Monterrey and Guadalajara),
with interconnection to the Company's U.S. network at its border crossing at
Reynosa/McAllen. Marca-Tel has entered into a turnkey contract with a major
international supplier of telecommunications equipment for a portion of this
build that provides for interim vendor financing for the equipment and fiber
purchases as well as a portion of the civil construction work. The Company
anticipates that Marca-Tel may be able to obtain additional funding through some
combination of the following: (i) offerings of debt or equity securities; (ii)
other incurrences of debt; (iii) joint venture arrangements with third parties;
and (iv) additional vendor financing of equipment purchases. Initially, such
sources of capital likely will not be adequate to meet the needs of Marca-Tel,
and the Company anticipates that, until such sources are adequate to enable
Marca-Tel to continue to pursue its business plan, it will be necessary for
Progress International to fund the shortfall. The Company is not obligated to
continue to fund Progress International; however, if Progress International does
not fund Marca-Tel's needs, the Company's interest in Progress International,
and thus its indirect interest in Marca-Tel, may be diluted or lost entirely.
Although the indenture for the Senior Notes generally restricts the amount of
funding the Company can provide Progress International, the indenture does allow
the Company to use the $12.5 million proceeds of the GEPT Private Placement for
Progress International (as of December 31, 1996 approximately $6.9 million of
such proceeds remain to be used for this purpose). The indenture for the Senior
Notes also allows the Company to fund Progress International with the proceeds
of certain equity offerings or, under certain circumstances, with funds raised
through debt incurrence or from working capital. No assurance can be given
50
<PAGE> 53
that adequate funding sources will be available from Progress International or
from third parties to implement Marca-Tel's business plan or, if implemented,
such business plan will be successful.
HISTORY
IXC Communications, a holding company formed in July 1992, acquired a
one-half interest in Electra Communications Corporation ("Electra"), the owner
of a fiber optic network in Texas, for $9.0 million. IXC Communications became
the sole owner of Electra in 1993 when stock held by the other stockholder was
redeemed for $13.7 million. IXC Communications acquired I-Link, Inc., the owner
of another fiber optic network in Texas, in 1994 in a stock-for-stock merger. At
the same time, it also acquired IXC Carrier, Inc. in a stock-for-stock merger.
IXC Carrier has certain subsidiaries that have been active in the communications
business for over 25 years, initially serving as analog microwave carriers for
television signals for cable operators in Ohio and Texas. Commencing in 1979,
IXC Carrier, then a subsidiary of The Times Mirror Company ("Times Mirror"),
entered into long-term circuit lease agreements with various carriers such as
MCI in Texas and Sprint in the Ohio Valley and began the development of a
coast-to-coast network through the acquisition, construction and leasing of
microwave and fiber optic facilities.
51
<PAGE> 54
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of IXC Communications and their ages
as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- -------------------------------------------
<S> <C> <C>
Ralph J. Swett..................... 62 Chairman, President, Chief Executive
Officer and Director
Richard D. Irwin................... 61 Director
Wolfe H. Bragin.................... 52 Director
Carl W. McKinzie................... 57 Director
Phillip L. Williams................ 74 Director
Joe C. Culp........................ 63 Director
Kenneth F. Hinther................. 53 Executive Vice President
John R. Fleming.................... 42 Executive Vice President
John J. Willingham................. 39 Senior Vice President, Chief Financial
Officer and Secretary
David J. Thomas.................... 46 Executive Vice President
James F. Guthrie................... 52 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. The Company
intends to nominate an additional director prior to the next annual meeting of
stockholders.
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.
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 General Electric Credit Corporation, now known as General Electric
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.
52
<PAGE> 55
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
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 experience in the communications industry.
Mr. Hinther has served as Executive Vice President of IXC Communications
since March 1996 and as Senior Vice President of IXC Communications from July
1992 through March 1996. Prior to that, Mr. Hinther served as Senior Vice
President -- Engineering and Operations of CTI from 1989 to July 1992 and as
Vice President -- Network Operations of CTI from 1986 to 1989. Mr. Hinther
served IXC Carrier as a Manager of Engineering from 1979 to 1982, and as
Director of Business Development from 1982 to 1986, and as a Vice President
since 1986. Mr. Hinther was Product Manager, Satellite Communications at
Rockwell International prior to joining IXC Carrier. He has over 25 years of
experience in the telecommunications industry.
Mr. Fleming has served as Executive Vice President of IXC Communications
since March 1996 and as Senior Vice President of IXC Communications from October
1994 through March 1996. He served as Vice President of Sales and Marketing of
IXC Communications from its formation in July 1992 until October 1994. Prior to
that, Mr. Fleming served as Director of Business Development and Director of
Carrier Sales of CTI from 1986 to March 1990 and as Vice President -- Marketing
and Sales of CTI from March 1990 to July 1992. Mr. Fleming was a Branch Manager
for Satellite Business Systems from 1983 to 1986. Mr. Fleming has been employed
with IXC Carrier since 1986 and a Vice President of IXC Carrier since 1990. Mr.
Fleming has over 16 years experience in the telecommunications industry.
Mr. Willingham has served as Vice President, Chief Financial Officer, and
Secretary of IXC Communications since July 1992 and as Senior Vice President
since October 1994. Mr. Willingham served as Vice President and Controller from
September 1989 to June 1990 and as Vice President and Chief Financial Officer
from June 1990 to July 1992 of CTI. Prior to joining CTI, Mr. Willingham was
employed by Ernst & Young LLP for eight years as a certified public accountant.
Mr. Willingham has been a Vice President of IXC Carrier since 1989 and Chief
Financial Officer of IXC Carrier since 1990. Mr. Willingham has over 10 years
experience in the telecommunications industry.
Mr. Thomas has served as Executive Vice President of IXC Communications
since March 1996 and as Senior Vice President of IXC Communications from August
1995 through March 1996. He was employed with ALC from 1983 to 1995, serving as
Vice President from 1991 to 1995 and as Treasurer from 1989 to 1995. Mr. Thomas
has over 14 years experience in the telecommunications industry.
Mr. Guthrie has served as Executive Vice President of IXC Communications
since March 1996 and as Senior Vice President, Strategic Planning of IXC
Communications from December 1995 through March 1996. Prior to that, Mr. Guthrie
served as Vice President and Chief Financial Officer of Times Mirror from 1993
to 1995 and as the Chief Financial Officer of TMCT from 1982 to 1993.
DIRECTOR COMPENSATION
Non-employee directors currently receive annual compensation of $10,000 in
cash and certain non-employee directors (Messrs. Bragin, Culp and Williams)
receive a $20,000 annual contribution by the Company under the Phantom Stock
Plan (described below) for service to the Company as members of the Board of
Directors. All directors receive reimbursement of reasonable out-of-pocket
expenses incurred in connection with meetings of the Board. Mr. Culp was granted
an option in connection with consulting services provided for the Company which
is fully exercisable to purchase 60,622 shares of Common Stock at a purchase
price of $3.01 per share. Mr. Swett receives no compensation for services
rendered as a director. The Company adopted a Phantom Stock Plan in May 1996 for
certain of its outside directors, pursuant to which $20,000 per director per
year of their director's fees will be automatically deferred and treated as if
it were invested in Common Stock. No stock will be actually purchased under the
plan, and the participants will receive cash benefits equal to the value of the
shares that they are deemed to have purchased under the plan,
53
<PAGE> 56
with such value to be determined on the date of distribution. The distribution
of the benefits generally will occur three years after the deferral. The Phantom
Stock Plan will be administered by Messrs. Swett, Irwin and McKinzie, none of
whom are participants in the plan.
Audit Committee. The Board of Directors established the Audit Committee in
June 1996 to: (i) make recommendations concerning the engagement of independent
public accountants; (ii) review with the independent public accountants the
plans for, and scope of, the audit procedures to be utilized and results of the
audit; (iii) approve the professional services provided by the independent
public accountants; (iv) review the independence of the independent public
accountants; and (v) review the adequacy and effectiveness of the Company's
internal accounting controls. Mr. Williams, Mr. Culp and Mr. McKinzie are the
members of the Audit Committee.
Compensation Committee. The Board of Directors established the Compensation
Committee in June of 1996 consisting of Mr. Irwin, Mr. Bragin and Mr. McKinzie,
none of whom are employees of the Company. The Compensation Committee will
determine the compensation for the Company's executive officers and administer
the 1996 Stock Plan, the 1994 Stock Plan and the Special Stock Plan, except that
all grants of stock-based awards are made by the entire Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to July of 1996, IXC Communications did not have a compensation
committee or any other committee of the Board of Directors performing equivalent
functions. All decisions regarding executive compensation were made by the Board
of Directors of IXC Communications prior to the establishment of the
Compensation Committee, none of whom, other than Mr. Swett, was an executive
officer of IXC Communications. Decisions with respect to Mr. Swett's
compensation were approved by all members of the Board other than Mr. Swett. The
Company's Compensation Committee, which was established in June of 1996,
consists of Messrs. Irwin, Bragin and McKinzie, neither of which was at any time
during fiscal 1996 or at any other time an officer or employee of the Company.
There are no compensation committee interlocks between the Company and other
entities involving the Company's executive officers and Board members who serve
as executive officers or Board members of such other entities.
54
<PAGE> 57
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid to the Chief Executive Officer and the four most highly compensated
executive officers other than the Chief Executive Officer (the "Named Executive
Officers") for their services to the Company for the years ended December 31,
1995 and December 31, 1996.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------------
OTHER ANNUAL ALL OTHER
COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS $(1) $(2)
---------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Ralph J. Swett 1996 $299,712 $175,000 $ 10,000 $ 8,286(3)
Chairman, President and 1995 $285,000 -- 10,000 883,813(3)
Chief Executive Officer
Kenneth F. Hinther 1996 165,519 100,000 7,500 --
Executive Vice President 1995 212,083(4) -- 7,500 444,739(5)
John R. Fleming 1996 165,519 100,000 7,500 --
Executive Vice President 1995 212,083(4) -- 7,500 444,739(5)
John J. Willingham 1996 143,519 100,000 7,500 --
Senior Vice President and 1995 183,417(6) -- 7,500 442,871(5)
Chief Financial Officer
James F. Guthrie 1996 200,000 -- 8,000 17,842
Executive Vice President 1995 -- -- -- --
</TABLE>
- ---------------
(1) These amounts represent automobile allowances paid to the Named Executive
Officers in 1996 and 1995.
(2) Includes payments in 1995 of $862,027 (with respect to Mr. Swett) and
$431,014 (with respect to each of Mr. Hinther, Mr. Fleming and Mr.
Willingham) made in connection with a prior incentive arrangement. The
incentive payments were earned in 1993 but did not become payable until
1995.
(3) Includes an employer contribution of $13,500 under the 401(k) Plan (as
defined herein) in 1995 and payments of $8,286 for term life insurance
premiums in 1995 and 1996.
(4) Represents $153,750 in salary and an additional amount of $58,333 in
compensation earned and deferred in prior years but paid in 1995.
(5) Includes employer contributions of $13,725 for Mr. Hinther and Mr. Fleming
and $11,858 for Mr. Willingham under the 401(k) Plan in 1995.
(6) Represents $131,750 in salary and an additional amount of $51,667 in
compensation earned and deferred in prior years but paid in 1995.
EMPLOYMENT AGREEMENTS
Mr. Guthrie entered into an employment agreement with IXC Communications in
December 1995 for a term of three years pursuant to which Mr. Guthrie is
entitled to an annual base salary of $200,000, subject to adjustment in
accordance with IXC Communications' policies and procedures, and an annual bonus
of up to $75,000 if approved by the Board of Directors.
55
<PAGE> 58
STOCK OPTIONS
The following table sets forth information concerning each grant of stock
options made during 1996 to each of the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK PRICE
SHARES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM(1)
OPTIONS EMPLOYEES PRICE PER EXPIRATION ------------------------
NAME GRANTED IN PERIOD SHARE DATE 5% 10%
- ------------------------- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ralph J. Swett........... -- -- -- --
Kenneth F. Hinther....... -- -- -- --
John R. Fleming.......... -- -- -- --
John J. Willingham....... -- -- -- --
James F. Guthrie(2)...... 242,490(3) 21.4% $ 3.01 1/08/06 $ 459,027 $1,163,265
100,000(4) 8.8% $ 22.25 10/28/06 $1,399,291 $3,546,077
</TABLE>
- ---------------
(1) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years). It is calculated by assuming that the
stock price on the date of grant appreciates at the indicated annual rate,
compounded annually for the entire term of the option.
(2) All of Mr. Guthrie's options become immediately exercisable upon the sale of
substantially all of the Company's assets, a successful tender offer for
greater than fifty percent (50%) of the outstanding capital stock of the
Company or a merger or consolidation in which the stockholders of the
Company immediately preceding such merger or consolidation will not hold a
majority of the outstanding capital stock of the surviving corporation
immediately after such merger or consolidation.
(3) The options become exercisable in three equal installments beginning on
January 19, 1997 and continuing on the two successive annual anniversary
dates thereafter.
(4) The options become exercisable in four equal installments beginning on
October 29, 1997 and continuing on the three successive annual anniversary
dates thereafter.
The following table sets forth the number and value as of December 31, 1996
of shares underlying unexercised options held by each of the Named Executive
Officers.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AS OF IN-THE-MONEY OPTIONS AS OF
DECEMBER 31, 1996 DECEMBER 31, 1996(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ralph J. Swett..................... -- -- -- --
Kenneth F. Hinther................. -- -- -- --
John R. Fleming.................... -- -- -- --
John J. Willingham................. -- -- -- --
James F. Guthrie................... 0 342,490 0 $ 7,576,673
</TABLE>
- ---------------
(1) Based on the fair market value (the closing price for the Company's Common
Stock as reported on the Nasdaq National Market as of December 31, 1996,
($30.75 per share)), less the exercise price payable upon exercise of such
options.
56
<PAGE> 59
1996 STOCK PLAN
In May 1996, IXC Communications adopted the IXC Communications, Inc. 1996
Stock Plan (the "1996 Stock Plan"), a stock incentive plan covering 2,121,787
shares of Common Stock of IXC Communications that may be awarded in order to
attract, retain and reward employees, directors and other persons providing
services to the Company. The Compensation Committee administers the 1996 Stock
Plan, except that all grants of stock-based awards are made by the entire Board
of Directors. Any employee, director or other person providing services to the
Company is eligible to receive awards under the 1996 Stock Plan, at the
discretion of the Board of Directors. Awards available under the 1996 Stock Plan
include Common Stock options with exercise prices at least equal to the fair
market value of the Common Stock on the date of grant. Mr. Guthrie was the only
Named Executive Officer granted options to acquire stock of IXC Communications
in 1996.
1994 STOCK PLAN
In November 1994, IXC Communications adopted a stock incentive plan (the
"1994 Stock Plan") covering 1,212,450 shares of Common Stock of IXC
Communications to attract, retain and reward employees, directors and other
persons providing services to the Company. The Compensation Committee
administers the 1994 Stock Plan, except that all grants of stock-based awards
are made by the entire Board of Directors. Any employee, director or other
person providing services to the Company is eligible to receive awards under the
1994 Stock Plan, at the Board's discretion. Awards available under the 1994
Stock Plan include Common Stock purchase options and restricted Common Stock.
Mr. Culp is the only director who holds options to acquire stock. No options
were granted in 1996 to Named Executive Officers under the 1994 Stock Plan.
SPECIAL STOCK PLAN
In October 1996, IXC Communications adopted a stock incentive plan (the
"Special Stock Plan") covering 67,900 shares of Common Stock of IXC
Communications to induce certain individuals to become employed with the Company
and/or its subsidiaries. The Compensation Committee administers the Special
Stock Plan. Any employee, director or other person providing services to the
Company is eligible to receive awards under the Special Stock Plan, at the
Board's discretion. Awards available under the Special Stock Plan include Common
Stock purchase options and restricted Common Stock. All available options to
acquire stock under the Special Stock Plan were granted in 1996, none of which
were granted to a Named Executive Officer of the Company.
401(K) PLAN
The IXC Carrier, Inc. 401(k) and Pension Plan and Trust (the "401(k) Plan")
is a tax-qualified retirement plan. In general, all employees of IXC Carrier
(substantially all the employees of the Company) who have attained age 18 and
completed one year of service are eligible to participate in the 401(k) Plan.
Participants may make pre-tax contributions to the 401(k) Plan, in an amount
currently not to exceed $9,500 per year. IXC Carrier may elect to make matching
contributions each year, which are allocated among participants depending on the
amount that they contribute to the 401(k) Plan. IXC Carrier may also elect to
make profit-sharing contributions to the 401(k) Plan, which are allocated among
participants as a percentage of compensation.
INDEMNIFICATION AND EXCULPATION ARRANGEMENTS
The Restated Certificate of Incorporation of IXC Communications limits the
liability of directors to IXC Communications or its stockholders to the fullest
extent permitted by the Delaware General Corporation Law (the "DGCL").
Accordingly, pursuant to the provisions of the DGCL presently in effect,
directors of IXC Communications will not be personally liable for monetary
damages for breach of a director's fiduciary duty as a director, except for
liability: (i) for any breach of the director's duty of loyalty to the Company
or its stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as
57
<PAGE> 60
provided in Section 174 of the DGCL; or (iv) for any transaction from which the
director derived an improper personal benefit. In addition, the bylaws of IXC
Communications require IXC Communications to indemnify its directors and
officers to the fullest extent permitted by the laws of the State of Delaware.
CERTAIN TRANSACTIONS
Prior to the sale of the Senior Notes: (i) GHI, a partnership whose general
partner is Grumman Hill, a limited liability company of which Mr. Irwin is a
member, and GEPT each held 598 shares of IXC Communications' 10% Senior Series 1
Cumulative Redeemable Preferred Stock ("Series 1 Preferred Stock"); (ii) Messrs.
Swett, Williams, Hinther and Fleming owned 78, 60, 13 and 13 shares of Series 1
Preferred Stock, respectively; and (iii) Mr. McKinzie, a director of IXC
Communications and a principal of Riordan & McKinzie, the law firm that will
pass upon the validity of the issuance of the Common Stock in this Offering,
owned 100 shares of Series 1 Preferred Stock. The Series 1 Preferred Stock was
redeemed with a portion of the proceeds of the sale of the Senior Notes at a
price equal to the amount paid for such stock plus accrued but unpaid dividends
at 10% per annum. The approximate amounts received by such persons with respect
to such redemption were: (i) GHI, $813,544; (ii) GEPT, $813,544; (iii) Mr.
Swett, $106,114; (iv) Mr. Williams, $76,229; (v) Mr. Hinther, $17,686; (vi) Mr.
Fleming, $17,686; and (vii) Mr. McKinzie, $120,554.
Prior to the sale of the Senior Notes, GHI and GEPT held shares of
preferred stock of a subsidiary of IXC Communications. Such preferred stock was
redeemed with a portion of the proceeds of the sale of the Senior Notes at a
price equal to the amount paid for such stock plus accrued but unpaid dividends
at 10% per annum. The approximate amounts received by such persons with respect
to such redemption were: (i) GHI, $905,934; and (ii) GEPT, $897,115.
Certain debentures of IXC Communications and one of its subsidiaries also
were redeemed at the original purchase price plus accrued but unpaid interest
with a portion of the proceeds of the sale of the Senior Notes. The approximate
amounts received by the following persons with respect to such redemption were:
(i) GEPT, $6,760,602; (ii) GHI, $6,788,635; (iii) Mr. Swett, $301,400; (iv) Mr.
Hinther, $50,233; and (v) Mr. Fleming, $50,233.
In 1994, IXC Communications and ALC (which has since been acquired by
Frontier) formed a corporation to acquire all of the equity interests in MSM for
an aggregate purchase price of $1,500,000 from a wholly owned subsidiary of
General Electric Credit Corporation, an affiliate of GEIC. In addition, in 1995,
IXC Communications entered into a ten-year agreement with GE Capital
Communication, an affiliate of GEIC, to supply it with switched products to be
resold by GE Capital Communication. Mr. Bragin, a director of IXC
Communications, is Vice President of GEIC, which is the investment advisor to
GEPT. "See Business -- Switched Long Distance Services."
Prior to the sale of the Senior Notes, a subsidiary of IXC Communications
was indebted to GEPT under the terms of a note agreement (the "GEPT Note
Agreement"). Certain stockholders of IXC Communications, including Messrs.
Swett, Hinther, Fleming, Williams, Willingham and Irwin and GHI, had pledged
their stock and debentures of IXC Communications (and, in the case of GHI, its
stock and debentures of a subsidiary of IXC Communications) as security for such
indebtedness. Such indebtedness, in the approximate principal amount of
$5,571,348, was repaid with a portion of the proceeds of the sale of the Senior
Notes and such pledges were released.
Mr. Swett, Mr. Hinther, Mr. Fleming, GEPT and GHI purchased Senior Notes in
the amounts of $250,000, $50,000, $50,000, $20,000,000 and $5,000,000,
respectively, on October 5, 1995.
For the years ended December 31, 1994, 1995 and 1996, the law firm of
Riordan & McKinzie, of which Mr. McKinzie, a director and stockholder of IXC
Communications, is a principal, provided certain legal services to IXC
Communications in the amount of approximately $1.4 million, $2.6 million and
$3.1 million, respectively.
58
<PAGE> 61
Grumman Hill, a corporation whose president is Mr. Irwin, receives an
annual fee of $100,000 from the Company for performing certain advisory services
with respect to the management, operation and business development activities of
IXC Communications.
Culp Communications Associates, of which Mr. Culp is President, received
approximately $8,000, $106,000 and $67,600 in connection with Mr. Culp's
consulting services provided to the Company in 1994, 1995 and 1996,
respectively. Mr. Culp is continuing to provide such consulting services to the
Company in 1997.
Mr. Williams received fees for serving as an advisor to the Company's Board
of Directors of $12,500 in 1994 and 1995 and $14,375 in 1996.
Mr. Thomas entered into an employment agreement with IXC Communications in
August 1995 for a term of three years pursuant to which Mr. Thomas is entitled
to an annual base salary of $160,000, subject to adjustment in accordance with
IXC Communications' policies and procedures, and an annual bonus of up to
$75,000 if approved by the Board of Directors. Mr. Thomas was granted stock
options on August 28, 1995 for 243,353 shares of Common Stock at a price of
$3.01 per share vesting over a three-year period which, subject to certain
conditions, vest immediately upon a change of control of IXC Communications as
set forth in his employment agreement and stock option agreement. Additionally,
Mr. Thomas receives an annual automobile allowance of $8,000 and is entitled to
receive reimbursement of certain relocation costs.
In order to reduce the dilution of GEPT's stock ownership caused by the
IPO, GEPT acquired 840,053 shares of Common Stock from the Company at a per
share price of $14.88 (the price paid by the underwriters in the IPO, that is,
the public offering price per share less underwriters' discounts and
commissions) for an aggregate purchase price of $12.5 million in the GEPT
Private Placement simultaneously with the closing of the IPO. Although GEPT
received Common Stock which was not registered under the Securities Act, it
received registration rights with respect to such stock and all other Company
Common Stock it owns, of which its demand registration rights are not
exercisable until March 1, 1997. See "Description of Capital
Stock -- Registration Rights." The Company is able to use the $12.5 million
proceeds, if it so elects, to pursue the Marca-Tel opportunity in Mexico. See
"Business -- Mexican Joint Venture."
In connection with the IPO and the GEPT Private Placement, GEPT, GHI and
Messrs. Irwin, Swett, Hinther, Fleming, Willingham, McKinzie and Williams have
entered into an agreement with IXC Communications pursuant to which they were
granted registration rights, of which its demand registration rights are not
exercisable until March 1, 1997 with respect to shares of IXC Communications
Common Stock held by them. See "Description of Capital Stock -- Registration
Rights."
Pursuant to the terms of a letter agreement dated August 22, 1996 among IXC
Communications, GEPT and Messrs. Swett, Hinther and Fleming, each of GEPT and
Messrs. Swett, Hinther and Fleming (the "Affiliate Senior Note Holders") waived
the right to require the Company to file a shelf registration statement for the
Senior Notes held by the Affiliate Senior Note Holders on or prior to August 30,
1996 in exchange for the Company granting the Affiliate Senior Note Holders of
at least 70% of the then remaining transfer restricted Senior Notes the right to
require the Company to file a shelf registration statement as long as such
Affiliate Senior Note Holders hold transfer-restricted Senior Notes.
59
<PAGE> 62
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of December 31, 1996
regarding the beneficial ownership of: (i) each class of IXC Communications'
voting securities by each person who is known by IXC Communications to be the
beneficial owner of more than 5% of any class of IXC Communications' voting
securities, and (ii) each class of equity securities of IXC Communications by
(a) each director of IXC Communications, (b) each person who has granted the
Underwriters an option to purchase shares of Common Stock held by such person if
the Underwriters' over-allotment option is exercised (a "Selling Stockholder"),
(c) each of IXC Communications' Named Executive Officers (as defined under the
heading "Management -- Executive Compensation"), and (d) all directors and
executive officers of IXC Communications as a group. The table also gives effect
to this Offering and assumes that no other person or entity listed in the table
purchases shares of Common Stock in this Offering.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
SERIES 3 SHARES OF PERCENT OF PERCENT OF STOCK
PREFERRED PERCENT OF COMMON COMMON COMMON SUBJECT PERCENT IF
STOCK SERIES 3 STOCK STOCK STOCK TO OVER- OVER-
NAME AND ADDRESS BENEFICIALLY PREFERRED BENEFICIALLY BEFORE AFTER ALLOTMENT ALLOTMENT
OF BENEFICIAL OWNER OWNED(1) STOCK OWNED(2) OFFERING OFFERING(3) OPTION EXERCISED(4)
- ----------------------------------- ------------ ---------- ------------ ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ralph J. Swett(5)(6)............... 25.00 * 3,037,061 9.9% 9.3% 75,000 9.0%
Kenneth F. Hinther(5)(7)........... -- -- 1,353,738 4.4 4.1 75,000 3.9
John R. Fleming(5)................. -- -- 1,353,739 4.4 4.1 75,000 3.9
John J. Willingham(5)(7)........... -- -- 1,272,568 4.1 3.9 75,000 3.7
James F. Guthrie(5)(9)............. * 80,830 * -- *
David J. Thomas (5)(10)............ -- -- 81,118 * -- *
Richard D. Irwin(11)............... 995.58 7.9% 8,740,850 28.4 26.7 -- 26.7
Carl W. McKinzie(12)............... -- -- 231,917 * * -- *
300 S. Grand Avenue, 29th Floor,
Los Angeles, CA 90071
Wolfe H. Bragin.................... -- -- 2,000 * * -- *
Phillip L. Williams(13)............ -- -- 144,150 * * -- *
633 West Fifth Street, Suite
4000,
Los Angeles, CA 90071-2007
Joe C. Culp(14).................... -- 60,622 * * -- *
#5 Hedge Lane,
Austin, TX 78746
Grumman Hill Investments,
L.P.(15)......................... -- 6,636,990 21.6 20.2 -- 20.2
191 Elm Street,
New Canaan, CT 06840
Grumman Hill Associates, Inc....... 915.42 7.3 -- -- -- -- --
191 Elm Street,
New Canaan, CT 06840
Trustees of General Electric
Pension Trust.................... 6,725.00 53.6 8,289,258 26.9 25.3 -- 25.3
3003 Summer Street,
Stamford, CT 06905
All directors and executive
officers of IXC Communications as
a group (11 persons)............. 1,020.58 8.1 16,189,645 52.2 49.0 -- 49.0
</TABLE>
- ---------------
* Less than 1%
(1) The shares of Series 3 Preferred Stock vote together with the shares of
Common Stock as a class, except where otherwise required by law, and have
the right to elect one member of the Board of Directors. See "Description
of Capital Stock -- Preferred Stock."
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Shares of common stock relating to options currently
exercisable or exercisable within 60 days of December 31, 1996, are deemed
outstanding for computing the percentage of the person holding such
securities but are not deemed outstanding for computing the percentage of
any other person. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have
sole voting and investment power with respect to all shares shown as
beneficially owned by them.
60
<PAGE> 63
(3) Assumes no exercise of the Underwriters' over-allotment option.
(4) Assumes that the Underwriters' over-allotment option is exercised in full.
(5) The address of such persons is c/o IXC Communications, Inc. 5000 Plaza on
the Lake, Suite 200, Austin, Texas 78746.
(6) Includes 484,980 shares held by Ralph J. Swett, Trustee of the EMS 1994
Trust and 484,980 shares held by Ralph J. Swett, Trustee of the RJS 1994
Trust.
(7) Includes 181,867 shares held by Kenneth F. Hinther, Trustee of LISA's 1994
Trust, 181,867 shares held by Lisa Hinther, Trustee of KEN's 1994 Trust and
121,245 shares held by Craig A. Hinther, Trustee for the Kenneth A. Hinther
1996 Trust.
(8) Includes 121,915 shares held by John McC. Witherspoon, Trustee of trust for
the benefit of Jonica Lynn Willingham and 121,915 shares held by John McC.
Witherspoon, Trustee of trust for the benefit of Russell Dennis Willingham.
(9) Represents shares issuable with respect to the exercise of options. See
"Management -- Option Grants in Last Fiscal Year."
(10) Represents shares issuable with respect to the exercise of options. See
"Certain Transactions."
(11) Includes 1,628,216 shares held by The Irwin Family Limited Partnership
dated January 4, 1995 and 341,341 shares held by The Irwin Family Limited
Partnership #2. Also includes 21.16 shares of Series 3 Preferred Stock held
by Richard D. Irwin Revocable Living Trust dated January 4, 1995, 915.42
shares of Series 3 Preferred Stock held by Grumman Hill and 6,636,990
shares of Common Stock held by GHI. Mr. Irwin is President of Grumman Hill,
and Mr. Irwin may be deemed a beneficial owner of the shares owned by such
entity.
(12) Such shares are held by Trust for the Riordan & McKinzie Profit Sharing and
Savings Plan for the benefit of Carl W. McKinzie.
(13) Such shares are held by Phillip L. Williams, as Trustee of the Phillip and
Jane Williams Living Trust, UDT August 20, 1985.
(14) Represents shares issuable with respect to the exercise of options. See
"Management -- Director Compensation."
(15) The sole general partner of Grumman Hill Investments, L.P. is Grumman Hill
Company, L.L.C., a Delaware limited liability company, of which Mr. Irwin,
a director of the Company, is the general manager and a beneficial owner of
a membership interest. Mr. Irwin may be deemed to have voting and
investment power with respect to the shares held of record by Grumman Hill
Investments, L.P.
Pursuant to the Underwriting Agreement, the Underwriters have agreed to
purchase shares of Common Stock from the Selling Stockholders, if and to the
extent the Underwriters' over-allotment option is exercised.
61
<PAGE> 64
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, par value $.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 of Incorporation and Bylaws of IXC
Communications, as amended, which have been filed as Exhibits to the
Registration Statement of which this Prospectus is a part, and the provisions of
applicable law.
COMMON STOCK
As of December 31, 1996, there were 30,795,014 outstanding shares of Common
Stock held by 83 holders of record. Each holder of Common Stock or Series 3
Preferred Stock (described below) is entitled to one vote per share on all
matters to be voted on by the stockholders, voting together as a single class.
Subject to the rights of the holders of the Preferred Stock, each holder of
Common Stock is entitled to receive ratably such dividends as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of the liquidation, dissolution or
winding up of IXC Communications, the holders of the Common Stock are entitled
to share ratably in all assets, if any, remaining, after payment of liabilities,
subject to the prior liquidation rights of holders of the Preferred Stock
described below. The Common Stock has no preemptive or other similar rights, and
there are no redemption or sinking fund provisions applicable to the Common
Stock. All of the outstanding shares of Common Stock are, and the shares of
Common Stock offered hereby will be, when issued and delivered, validly issued,
fully paid and non-assessable.
PREFERRED STOCK
IXC Communications has designated 2,000 shares of Preferred Stock as Series
1 Preferred Stock and 12,550 shares of Preferred Stock as Series 3 Preferred
Stock. All of the 12,550 shares of Series 3 Preferred Stock are issued and
outstanding, all of the previously outstanding shares of Series 1 Preferred
Stock have been redeemed and no other shares of Preferred Stock are outstanding.
The shares of Series 3 Preferred Stock were purchased upon the formation of IXC
Communications at a purchase price of $1.00 per share. The holders of Preferred
Stock, subject to the terms of the Restated Certificate of Incorporation, are
entitled to receive a liquidation preference of $1,000 per share, plus an amount
equal to all accrued and unpaid dividends and IXC Communications may voluntarily
redeem the Preferred Stock for $1,000 per share, plus an amount equal to all
accrued and unpaid dividends. In addition, the holders of Preferred Stock are
entitled to receive annual dividends, subject to the limitations of the Restated
Certificate of Incorporation and in the indenture relating to the Senior Notes,
in an amount equal to $100 per share, plus an amount determined by applying a
10% annual rate compounded annually, to any accrued but unpaid dividend amount
from the last day of the period when such dividend accrues to the actual date of
payment. Cumulative dividends, including accrued but unpaid interest, with
respect to the Series 3 Preferred Stock, as of December 31, 1996 were
approximately $6.5 million. The holders of the Series 3 Preferred Stock have the
right to elect one member of the Board of Directors.
The Board of Directors of IXC Communications has the authority to issue the
Preferred Stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, terms of redemption, redemption prices, liquidation
preferences, voting rights and the number of shares consisting of any series or
the designation of such series without further vote or action by the
stockholders. The issuance of Preferred Stock (or the ability of the Board of
Directors to issue Preferred Stock) may have the effect of delaying, deferring
or preventing a change in control of IXC Communications without further action
by the stockholders and may adversely affect the voting and other rights of the
holders of Common Stock. The issuance of Preferred Stock with voting or
conversion rights may adversely affect the voting power of the holders of Common
Stock. IXC Communications has no present intention to issue additional shares of
Preferred Stock.
62
<PAGE> 65
REGISTRATION RIGHTS
In June 1996, IXC Communications granted certain registration rights to
GEPT, GHI and Messrs. Irwin, Swett, Hinther, Fleming, Willingham, McKinzie and
Williams, in consideration of the GEPT Private Placement and the lock-up
arrangements each of the parties entered into in connection with the IPO. Such
registration rights cover all the shares of Common Stock of IXC Communications
held by such persons and the demand registration rights are effective from March
1, 1997 through April 30, 2000. 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 (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.
In August 1992, Telecom Services Group, Inc., a predecessor-in-interest to
IXC Communications ("TSGI"), granted certain registration rights under the
Securities Act to 20 former stockholders of TSGI with respect to certain shares
of Common Stock of the Company held by them (the "Registrable Securities").
Subject to certain limitations, if IXC Communications registers any of its
securities under the Securities Act, whether or not for sale for its own
account, the holders of such registration rights are entitled to written notice
of the registration and are entitled to include (at IXC Communications' expense)
such Registrable Securities in such registration. Such registration rights were
amended in connection with the IPO to delay their effectiveness until March 1,
1997. The holders of at least 25% of the Registrable Securities also have the
right to require IXC Communications, at any time after 180 days following the
effective date of IXC Communications' last registration, to file a registration
statement under the Securities Act with respect to such Registrable Securities
and IXC Communications is required to use its best efforts to effect such
registration, subject to certain conditions and limitations; provided, however,
that no registration rights are exercisable prior to March 1, 1997. All fees,
costs and expenses of such registrations (other than underwriting discounts,
commissions and transfer taxes) will be borne by IXC Communications.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CHARTER, THE BYLAWS AND THE
INDENTURE
The Bylaws of IXC Communications provide that stockholders may call a
special meeting of stockholders only upon a request of stockholders owning at
least 50% of IXC Communications' outstanding capital stock entitled to vote. In
addition, in the event of a Change of Control (as such term is defined in the
indenture for the Senior Notes), holders of the Senior Notes will have the right
to require IXC Communications to purchase their Senior Notes, in whole or in
part, at a price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages (as such term is defined in
the indenture for the Senior Notes), if any, to the date of purchase. These
provisions, as well as the authorized and unissued preferred stock described
above, could discourage potential acquisition proposals and could delay or
prevent a change in control or management of IXC Communications.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
IXC Communications is subject to Section 203 of the DGCL which, subject to
certain exceptions, prohibits a Delaware corporation from engaging in certain
"business combinations" with any "interested stockholder" for a period of three
years following the date that such stockholder became an interested stockholder,
unless the transaction is approved in a prescribed manner. The business
combinations to which Section 203 applies include a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholders. In
general, Section 203 defines an "interested stockholder" as a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the outstanding voting stock of the corporation.
63
<PAGE> 66
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is U.S. Stock
Transfer Corporation.
LISTING
The Common Stock is listed on the Nasdaq National Market under the symbol
"IIXC."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering IXC Communications will have a total of
32,798,045 shares of Common Stock outstanding. Of these shares, the 2,000,000
shares of Common Stock will be freely tradeable without restriction or
registration under the Securities Act if held by persons other than "affiliates"
of the Company, as defined under the Securities Act. 25,175,308 of these shares
of Common Stock outstanding (including the 840,053 shares issued in the GEPT
Private Placement) are "restricted securities" as that term is defined by Rule
144 promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) which has beneficially owned restricted securities
for at least two years, including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the number of shares
of Common Stock then outstanding (approximately 328,000 shares upon completion
of this Offering) or the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. An affiliate of IXC Communications may sell securities that are
not restricted without regard to the period of beneficial ownership but subject
to the volume restrictions described above. Sales under Rule 144 are also
subject to certain manner-of-sale provisions and notice requirements, and to the
availability of current public information about IXC Communications. In
addition, a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least three years, would be entitled to sell
such shares under Rule 144(k) without regard to the requirements described
above.
Under Rule 144 (and subject to the conditions thereof), substantially all
of the 24,335,255 restricted shares, excluding 840,053 shares of Common Stock
issued in the GEPT Private Placement, are eligible for sale. However,
of such shares, plus the 840,053 shares issued in the GEPT Private Placement,
are subject to lock-up restrictions. Pursuant to these lock-up restrictions,
certain of IXC Communications' current stockholders, including its executive
officers and directors, have agreed that, subject to certain exceptions, they
will not, directly or indirectly, sell, offer or sell any shares of Common Stock
(other than 134,303 shares of Common Stock which are subject to options held by
third parties) without the prior written consent of Morgan Stanley & Co.
Incorporated, on behalf of the Underwriters, for a period of days from the
date of this Prospectus. See "Underwriters." Certain of the Company's existing
stockholders have registration rights with respect to their Common Stock. See
"Description of Capital Stock -- Registration Rights."
In addition, the Commission has published a notice of proposed rule making
which, if adopted as proposed, would shorten the applicable holding periods
under Rule 144(d) and Rule 144(k) to one and two years, respectively (from the
current periods of two and three years). IXC Communications cannot predict
whether such amendments will be adopted or the effect thereof on the trading
market for its Common Stock.
The preceding description does not include shares of Common Stock acquired
upon exercise of options under the 1994 Stock Plan, the 1996 Stock Plan or the
Special Stock Plan. IXC Communications has registered under the Securities Act
1,212,450, 2,121,787 and 67,900 shares of Common Stock for issuance pursuant to
the 1994 Stock Plan, the 1996 Stock Plan and the Special Stock Plan,
respectively.
No prediction can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially
64
<PAGE> 67
and adversely affect the market price of the Common Stock and could impair IXC
Communications' future ability to raise capital through an offering of its
equity securities.
DESCRIPTION OF CERTAIN INDEBTEDNESS
On October 5, 1995, IXC Communications issued and sold its Senior Notes in
the aggregate principal amount of $285.0 million to a group of institutional and
accredited investors. Of the approximately $268.8 million net proceeds of such
sale, IXC Communications placed $200.0 million into an escrow account to be used
for the Fiber Expansion, debt service of the Senior Notes and other capital
expenditures. The escrow agreement is incorporated by reference as an exhibit to
the Registration Statement of which this Prospectus is a part. As of December
31, 1996, approximately $51.3 million remained in such escrow account. On August
2, 1996, IXC Communications consummated its offer 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 indenture for the
Senior Notes contains certain covenants that, among other things, limit the
ability of IXC Communications and certain of its subsidiaries (the "Restricted
Subsidiaries") to incur additional indebtedness and issue preferred stock, pay
dividends or make other distributions, repurchase Equity Interests (as defined
in the indenture for the Senior Notes) or subordinated indebtedness, create
certain liens, enter into certain transactions with affiliates, sell assets of
IXC Communications or its Restricted Subsidiaries, issue or sell Equity
Interests of IXC Communications' Restricted Subsidiaries or enter into certain
mergers and consolidations. In addition, under certain limited circumstances,
IXC Communications will be required to offer to purchase Senior Notes at a price
equal to 100% of the principal amount thereof plus accrued and unpaid interest,
Additional Payments and Liquidated Damages, if any, to the date of purchase,
with the excess proceeds of certain Asset Sales (as defined in the indenture for
the Senior Notes). In the event of a Change of Control, holders of the Senior
Notes will have the right to require IXC Communications to purchase their Senior
Notes, in whole or in part, at a price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any,
to the date of purchase. The indenture relating to the Senior Notes is an
exhibit to the Registration Statement of which this Prospectus is a part.
In addition, the Company may seek to obtain a revolving credit facility
under which it will be able to borrow up to a certain percentage of the amount
of qualifying accounts receivable of its subsidiaries. The indenture for the
Senior Notes limits the Company from borrowing under such facility in excess of
85% of the amount of such qualifying accounts receivable. The Company
anticipates that its obligations under such revolving credit facility, if it is
obtained, will be secured by intercompany notes from the subsidiaries owning the
accounts receivable, which notes will in turn be secured by such accounts
receivable. As of December 31, 1996, the Company's accounts receivable (net of
allowance for doubtful accounts) were approximately $43.4 million.
65
<PAGE> 68
UNDERWRITERS
Under the terms and subject to the conditions of the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement") the Underwriters named
below have severally agreed to purchase, and IXC Communications has agreed to
sell to them severally, the respective number of shares of Common Stock set
forth opposite the names of each Underwriter below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
Morgan Stanley & Co. Incorporated....................................
Credit Suisse First Boston Corporation...............................
Dillon, Read & Co. Inc...............................................
-----------
Total...................................................... 2,000,000
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the U.S. Underwriters' over-allotment option described below) if any
such shares are taken.
The Underwriters initially propose to offer the shares of Common Stock
directly to the public at the Price to Public set forth on the cover page of
this Prospectus and part to certain dealers at a price that represents a
concession of not in excess of $ per share under the Price to Public. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to other Underwriters or to certain dealers. After the
initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Representatives.
Pursuant to the Underwriting Agreement, the Selling Stockholders have
granted to the Underwriters, an option exercisable for 30 days after the date of
this Prospectus, to purchase up to 300,000 additional shares of Common Stock at
the Price to Public set forth on the cover page hereof, less underwriting
discounts and commissions. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
the number set forth next to such Underwriter's name in the preceding table
bears to the total number of shares offered hereby.
IXC Communications and each of the executive officers and directors of IXC
Communications, GHI (other than 134,303 shares of Common Stock which are subject
to options held by third parties), certain trusts and partnerships and GEPT have
agreed that without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the Underwriters, it will not (A) register for sale,
issue, offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (other than shares of Common Stock acquired in the
open market after the date of this Prospectus) or (B) enter into any swap or
other agreement that transfers, in whole or in part, any of the economic
consequences of ownership of the Common Stock, whether any such transaction
described in clause (A) or (B) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise for a period of days
after the date of this Prospectus, other than (A) the shares of Common Stock to
be sold hereunder, (B) any shares of Common Stock issued by the Company upon the
exercise of an option issued pursuant to the Company's 1994 Stock Plan, 1996
Stock Plan or the Special Stock Plan and (C) the issuance of additional options
to purchase shares of Common Stock pursuant to the Company's 1994 Stock Plan or
1996 Stock Plan. See "Shares Eligible for Future Sale."
IXC Communications has agreed, and if the overallotment option is
exercised, the Selling Stockholders have agreed, to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
66
<PAGE> 69
The Underwriters have informed IXC Communications that they do not intend
sales to discretionary accounts to exceed 5% of the total number of shares of
Common Stock offered by them.
Dillon, Read & Co. Inc. and Credit Suisse First Boston Corporation acted as
the initial purchasers of the Senior Notes and received customary compensation
in connection therewith. Morgan Stanley & Co. Incorporated, Credit Suisse First
Boston Corporation and Dillon, Read & Co. Inc. acted as underwriters for the IPO
and received customary compensation in connection therewith.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for IXC Communications by Riordan & McKinzie. Certain legal matters
in connection with the Common Stock offered hereby will be passed upon for the
Underwriters by Shearman & Sterling. Carl W. McKinzie, a director and
stockholder of IXC Communications, is a stockholder of Riordan & McKinzie. IXC
Communications has granted an option covering shares of Common Stock to another
stockholder of Riordan & McKinzie. Also, certain attorneys of Riordan & McKinzie
beneficially own additional shares of IXC Communications.
EXPERTS
The consolidated financial statements of IXC Communications at December 31,
1994 and 1995, and for each of the three years in the period ended December 31,
1995, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
67
<PAGE> 70
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission at its offices at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's Regional Offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, 13th
Floor, New York, New York 10048. Copies of such materials can be obtained by
mail from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. Such reports and other
information concerning the Company are also available for inspection at the
offices of the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C.
20006. In addition the Commission maintains an Internet site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the Commission.
The Company has filed with the Commission a registration statement on Form
S-1 (together with all exhibits, schedules, amendments, and supplements thereto,
the "Registration Statement") under the Securities Act with respect to the
Common Stock offered by this Prospectus. This Prospectus, which forms a part of
the Registration Statement, does not contain all the information set forth in
the Registration Statement (certain parts of which have been omitted in
accordance with the rules and regulations of the Commission). For further
information with respect to the Company and the Common Stock, reference is made
to the Registration Statement. Statements contained in this Prospectus as to the
contents of any contract, agreement, or other document are not necessarily
complete, and, in each instance, reference is made to the copy of the document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by reference to such exhibit. The Registration
Statement may be inspected and copied at the public reference facilities at the
Commission's offices at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven
World Trade Center, 13th Floor, New York, New York, 10048. Copies of all or any
part thereof may be obtained from such office upon payment of prescribed fees.
68
<PAGE> 71
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 through-portions.
Bandwidth -- The range of frequencies that can be transmitted through a
medium, such as glass fibers, without distortion. The greater the bandwidth, the
greater the information-carrying capacity of such medium.
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.
Carriers -- Companies that provide telecommunications transmission
services.
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).
DS-1, DS-3 -- Standard telecommunications industry digital signal formats,
which are distinguishable by bit rate (the number of binary digits (0 and 1)
transmitted per second). DS-0 service has a bit rate of 64 kilobits per second
and can transmit only one voice or data transmission at a time. DS-1 service has
a bit rate of 1.544 megabits per second and can transmit 24 simultaneous voice
or data transmissions. DS-3 service has a bit rate of 45 megabits per second and
can transmit 672 simultaneous voice or data transmissions.
DS-3 miles -- A measure of the total capacity and length of a transmission
path, calculated as the capacity of the transmission path in DS-3s multiplied by
the length of the path in miles.
A-1
<PAGE> 72
DTI -- Digital Teleport, Inc.
EBITDA -- Net income before depreciation, amortization, interest expense,
income taxes and extraordinary items. EBITDA is not a measurement determined in
accordance with GAAP and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP 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.
Frame Relay -- A high-speed, data-packet switching service used to transmit
data between computers. Frame Relay supports data units of variable lengths at
access speeds ranging from 56 kilobits per second to 1.5 megabits per second.
This service is well-suited for connecting local area networks, but is not
appropriate for voice and video applications due to the variable delays which
can occur. Frame Relay was designed to operate at high speeds on modern fiber
optic networks.
Frontier -- Frontier Corporation.
GAAP -- Generally Accepted Accounting Principles.
GE Capital Communication -- GE Capital Communication Services Corporation.
GEIC -- General Electric Investment Corporation.
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.
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."
A-2
<PAGE> 73
LATAs (local access and transport areas) -- The approximately 200
geographic areas that define the areas between which the RBOCs were prohibited
from providing long distance services prior to the Telecommunications Act.
LCI -- LCI International Management Services, Inc.
LEC (local exchange carrier) -- A company providing local telephone
services.
Local loop -- A circuit within a LATA.
Long-Haul Circuit -- A private, dedicated telecommunications circuit
between locations in different LATAs.
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.
OC-3, OC-12 and OC-48 -- Standard telecommunications industry measurements
for optical transmission capacity distinguishable by bit rate transmitted per
second and the number of voice or data transmissions that can be simultaneously
transmitted through fiber optic cable. An OC-3 is generally equivalent to three
DS-3s and has a bit rate of 155.52 megabits per second and can transmit 2,016
simultaneous voice or data transmissions. An OC-12 has a bit rate of 622.08
megabits per second and can transmit 8,064 simultaneous voice or data
transmissions. An OC-48 has a bit rate of 2,488.32 megabits per second and can
transmit 32,256 simultaneous voice or data transmissions.
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 Corp.
Switch -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
Switched long distance services -- Telecommunications services such as
residential long distance services that are processed through digital switches
and delivered over long-haul circuits and other transmission facilities.
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-3
<PAGE> 74
IXC COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995.......................... F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and
1995................................................................................ F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1993, 1994 and 1995.................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets as of September 30, 1996.............. F-29
Unaudited Condensed Consolidated Statements of Operations for the Nine Months Ended
September 30, 1996 and 1995......................................................... F-30
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1996 and 1995......................................................... F-31
Notes to Unaudited Condensed Consolidated Financial Statements........................ F-32
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1995................................................................... F-38
</TABLE>
F-1
<PAGE> 75
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
IXC Communications, Inc.
We have audited the accompanying consolidated balance sheets of IXC
Communications, Inc. and its subsidiaries as of December 31, 1994 and 1995, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IXC
Communications, Inc. and its subsidiaries at December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Austin, Texas
March 1, 1996, except for Note 17,
as to which the date is June 12, 1996
F-2
<PAGE> 76
IXC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 6,048 $ 6,915
Accounts receivable:
Trade, net of allowance for doubtful accounts of $762 in 1994 and $1,769 in 1995........ 3,421 5,537
Note receivable -- related party........................................................ -- 238
Other................................................................................... 295 544
-------- --------
3,716 6,319
Income tax receivable..................................................................... -- 1,296
Net current deferred tax asset (Note 10).................................................. 118 450
Prepaid expenses.......................................................................... 1,038 1,069
-------- --------
Total current assets.................................................................... 10,920 16,049
Property and equipment:
Land...................................................................................... 2,284 2,344
Buildings and improvements................................................................ 896 5,167
Transmission system....................................................................... 108,564 138,659
Construction in progress.................................................................. 5,943 5,658
-------- --------
117,687 151,828
Less: accumulated depreciation............................................................ (28,822) (45,429)
-------- --------
88,865 106,399
Prepaid contract costs (Note 11)............................................................ 1,399 989
Escrow under Senior Notes (Note 3).......................................................... -- 198,266
Deferred charges and other assets........................................................... 4,225 14,772
-------- --------
Total assets....................................................................... $105,409 $336,475
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable -- trade................................................................. $ 1,596 $ 6,792
Accrued taxes............................................................................. 3,864 2,924
Unearned income........................................................................... 988 1,693
Accrued interest.......................................................................... 76 8,748
Current portion of long-term debt -- related parties (Note 4)............................. 6,850 1,371
Current portion of long-term debt and lease obligations (Notes 4 and 5)................... 11,688 3,163
Other current liabilities................................................................. 1,757 941
-------- --------
Total current liabilities............................................................... 26,819 25,632
Long-term debt -- related parties, less current portion (Note 4)............................ 24,653 6,446
Long-term debt and lease obligations, less current portion (Notes 4 and 5).................. 25,933 287,814
Net noncurrent deferred tax liability (Note 10)............................................. 9,818 8,303
Other noncurrent liabilities................................................................ 2,429 469
Commitments and contingencies (Notes 5, 6, 9 and 14)
Minority interest........................................................................... 168 953
Preferred stock of consolidated subsidiary held by minority interests (Note 6).............. 1,400 --
Stockholders' equity (deficit) (Note 6):
Preferred stock; 3,000 shares authorized:
10% Senior Series 1 cumulative preferred stock, $.01 par value; 1 share issued and
outstanding in 1994 and none in 1995................................................... 1,460 --
10% Junior Series 3 cumulative preferred stock, $.01 par value; 13 shares issued and
outstanding in 1994 and 1995 (aggregate liquidation preference of $17,326 at December
31, 1995).............................................................................. 13 13
Common Stock, $.01 par value; 100,000 shares authorized; 24,335 shares issued and
outstanding in 1994 and 1995............................................................ 243 243
Additional paid-in capital................................................................ 29,430 29,430
Accumulated deficit....................................................................... (16,957) (22,828)
-------- --------
Total stockholders' equity (deficit)...................................................... 14,189 6,858
-------- --------
Total liabilities and stockholders' equity (deficit)............................... $105,409 $336,475
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 77
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
-------- ------- --------
<S> <C> <C> <C>
Net operating revenues (Note 11)...................................... $ 71,123 $80,663 $ 91,001
Operating expenses:
Cost of services.................................................... 37,823 33,896 39,852
Operations and administration....................................... 22,835 20,561 32,282
Depreciation and amortization....................................... 21,061 12,121 17,438
-------- ------- --------
(10,596) 14,085 1,429
Interest income....................................................... 215 211 468
Interest income on escrow under Senior Notes.......................... -- -- 2,552
Interest expense -- related parties................................... (1,026) (2,649) (2,468)
Interest expense -- other............................................. (3,917) (3,456) (12,129)
Contract settlement costs............................................. (59) -- --
Write-down of property and equipment (Note 8)......................... (37,960) -- --
Equity in net income (loss) of unconsolidated subsidiaries............ -- (94) 19
-------- ------- --------
Income (loss) before (provision) benefit for income taxes and minority
interest and extraordinary items.................................... (53,343) 8,097 (10,129)
Benefit (provision) for income taxes (Note 10)........................ 21,977 (3,157) 1,693
Minority interest..................................................... (446) 77 5,218
-------- ------- --------
Income (loss) before extraordinary items.............................. (31,812) 5,017 (3,218)
Extraordinary items:
Extraordinary gain (loss) on early extinguishment of debt (involving
a related party in 1994), less applicable (provision) benefit for
income taxes of ($1,472) in 1994 and $1,164 in 1995 (Note 4)..... -- 2,298 (1,747)
Extraordinary gain on forgiveness of deferred lease obligations,
less applicable income taxes of $5,848 (Note 5).................. 8,495 -- --
-------- ------- --------
Net income (loss)..................................................... (23,317) 7,315 (4,965)
Dividends applicable to preferred stock............................... 1,567 1,752 1,843
-------- ------- --------
Net income (loss) applicable to common stockholders................... $(24,884) $ 5,563 $ (6,808)
======== ======= ========
Income (loss) per common share:
Before extraordinary items.......................................... $ (1.39) $ .13 $ (.20)
Extraordinary gain (loss)........................................... .35 .09 (.07)
-------- ------- --------
Net income (loss)................................................... $ (1.04) $ .22 $ (.27)
======== ======= ========
Weighted average common shares........................................ 24,009 24,993 25,108
======== ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 78
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
10% SENIOR SERIES
1 10% JUNIOR 3
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
----------------- ------------------ ----------------- ADDITIONAL
NUMBER OF NUMBER OF NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ --------- ------- --------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992......... 21,974 $219 1 $ 1,300 13 $ 13 $29,451 $ (955) $ 30,028
Issuance of preferred stock........ -- -- 160 -- -- -- -- 160
Issuance of common stock........... 2,300 23 -- -- -- -- (23) -- --
Net loss........................... -- -- -- -- -- -- -- (23,317) (23,317)
------ ---- --- ------- --- ---- ------- -------- --------
Balance at December 31, 1993......... 24,274 242 1 1,460 13 13 29,428 (24,272) 6,871
Issuance of common stock........... 61 1 -- -- -- -- 2 -- 3
Net income......................... -- -- -- -- -- -- -- 7,315 7,315
------ ---- --- ------- --- ---- ------- -------- --------
Balance at December 31, 1994......... 24,335 243 1 1,460 13 13 29,430 (16,957) 14,189
Redemption of preferred stock...... -- -- (1) (1,460) -- -- -- -- (1,460)
Net income......................... -- -- -- -- -- -- -- (4,965) (4,965)
Dividends paid -- preferred
stock -- 10% Senior Series 1..... -- -- -- -- -- -- -- (505) (505)
Dividends paid -- preferred stock
of consolidated subsidiary....... -- -- -- -- -- -- -- (401) (401)
------ ---- --- ------- --- ---- ------- -------- --------
Balance at December 31, 1995......... 24,335 $243 -- $ -- 13 $ 13 $29,430 $(22,828) $ 6,858
====== ==== === ======= === ==== ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 79
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
-------- ------- -------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)...................................................... $(23,317) $ 7,315 $(4,965)
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation......................................................... 20,651 11,131 16,608
Amortization......................................................... 410 990 830
Amortization of debt issue costs and Senior Note discount............ 130 472 858
Interest income on escrow under Senior Notes......................... -- -- (2,552)
Provision for doubtful accounts...................................... 447 1,565 1,505
Equity in net (income) loss of unconsolidated subsidiaries........... -- 94 (19)
Minority interest in net income (loss) of subsidiaries............... 446 (77) (5,218)
Extraordinary (gain) loss on early extinguishment of debt............ -- (3,770) 2,911
Gain on sale of property and equipment............................... (330) (90) --
Write-down of property and equipment................................. 37,960 -- --
Extraordinary gain on forgiveness of deferred lease obligations...... (14,343) -- --
Deferred operating lease costs....................................... 8,910 -- --
Changes in assets and liabilities, net of effects of acquisitions:
Decrease (increase) in accounts receivable........................ (206) (1,000) (4,108)
Decrease (increase) in other current assets....................... 1,349 141 (1,466)
Increase (decrease) in accounts payable........................... 2,777 (4,619) 5,196
Increase (decrease) in accrued taxes, unearned income, accrued
interest and other current liabilities........................... (712) 139 7,503
Increase (decrease) in deferred income taxes...................... (17,227) 2,847 (1,847)
Decrease in other assets.......................................... (2,045) (854) (4,092)
Increase (decrease) in noncurrent other liabilities............... 587 (752) (2,089)
-------- ------- -------
Total adjustments............................................ 38,804 6,217 14,020
-------- ------- -------
Net cash provided by operating activities.............................. $ 15,487 $13,532 $ 9,055
======== ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 80
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOW FROM INVESTING ACTIVITIES:
Release of funds from escrow under Senior Notes..................... $ -- $ -- $ 4,300
Purchase of restricted short-term investments....................... -- -- (200,000)
Purchase of property and equipment.................................. (27,008) (7,087) (23,670)
Sale of property and equipment...................................... 49 235 --
Payments for businesses acquired, net of cash received.............. (14,025) (11,976) --
-------- -------- ---------
Net cash used in investing activities............................... (40,984) (18,828) (219,370)
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Senior Notes, net of discount......... -- -- 277,148
Capital contribution in subsidiary by minority shareholders......... -- -- 6,002
Proceeds from long-term debt........................................ 50,671 12,999 18,695
Payments on long-term debt and lease obligations.................... (19,990) (7,837) (76,490)
Payments from (to) escrow........................................... (1,500) 1,500 --
Payment of debt issue costs......................................... (1,760) (1,551) (10,407)
Redemption of preferred stock....................................... -- -- (1,460)
Redemption of preferred stock of consolidated subsidiary held by
minority interests................................................ -- -- (1,400)
Dividend payments................................................... -- -- (906)
Issuance of common stock............................................ -- 3 --
Proceeds from sale of preferred stock............................... 160 -- --
Proceeds from sale of preferred stock of subsidiary................. 1,400 -- --
-------- -------- ---------
Net cash provided by (used in) financing activities................. 28,981 5,114 211,182
-------- -------- ---------
Net increase (decrease) in cash and cash
equivalents....................................................... 3,484 (182) 867
Cash and cash equivalents at beginning of period.................... 2,746 6,230 6,048
-------- -------- ---------
Cash and cash equivalents at end of period.......................... $ 6,230 $ 6,048 $ 6,915
======== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) for:
Income taxes................................................... $ (746) $ 891 $ 1,240
======== ======== =========
Interest....................................................... $ 1,683 $ 4,496 $ 4,955
======== ======== =========
</TABLE>
See accompanying notes.
F-7
<PAGE> 81
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND ACQUISITIONS
IXC Communications, Inc. ("IXC" or the "Company") is an Austin, Texas based
supplier of telecommunications services. IXC provides two basic products to
other long distance carriers: (i) long-haul voice and data circuits and (ii)
switched long distance services. Consistent with industry practice, the Company
considers itself to be operating in one business segment.
IXC, a Delaware corporation, was incorporated in 1992 and began operations
by acquiring 50% of the outstanding common stock of Electra Communications
Holding Corporation ("ECHC") which owned Electra Communication Corporation
("ECC"). ECC owned and operated a regional fiber optic transmission system in
Texas. ECHC became a wholly-owned subsidiary of IXC in 1993, when ECHC redeemed
all its outstanding stock not held by IXC.
Also during 1992 and 1993, the stockholders of IXC formed Telecom Services
Group, Inc. ("TSGI") and I-Link Communications Inc. ("ILCI").
TSGI acquired Communications Transmission Group, Inc. ("CTGI") from
Communications Transmission, Inc. ("CTI") in 1992. CTI was controlled by a
majority of the same shareholders as that of TSGI; therefore, the acquisition of
CTGI was a transaction among entities under common control and was accounted for
in a manner similar to the pooling of interests method.
ILCI acquired I-Link Holdings, Inc. ("ILHI") in 1993. The transaction was
accounted for in a manner similar to the pooling of interests method of
accounting as both entities were under common ownership by the same shareholder
group.
Effective February 22, 1994, TSGI and ILCI became wholly-owned subsidiaries
of IXC through a stock-for-stock merger, whereby IXC issued common and
redeemable preferred stock in exchange for all of the outstanding common and
preferred stock of TSGI and ILCI. IXC, TSGI and ILCI were controlled by the same
shareholder group, therefore the assets and liabilities acquired from the
controlling shareholders were recorded at their historical cost. The minority
interest acquired was recorded at fair value. The accompanying consolidated
financial statements of IXC have been restated to include the accounts and
operations of TSGI and ILCI since their acquisitions from third parties and the
elimination of all intercompany accounts and transactions.
On August 5, 1994, IXC, through its newly formed majority-owned (85%)
subsidiary, Mutual Signal Holding Corporation ("MSHC"), acquired MSM Associates,
Limited Partnership ("MSM"). MSHC purchased all of the issued and outstanding
common stock of Mutual Signal Corporation ("MSC"), the sole general partner of
MSM, for $1,050,000 and all of the outstanding limited partnership units of MSM
from the sole limited partner for $450,000. The acquisition was accounted for as
a purchase. Accordingly, the assets and liabilities of MSM at the date of
acquisition were adjusted to reflect the purchase price, using an allocation
based upon the fair values of the acquired assets. The operating results of MSM
have been included in the consolidated financial statements from the date of
acquisition. The owner of the remaining 15% minority interest of MSHC, Frontier
Corporation ("Frontier"), is a customer of IXC. Frontier, which is considered a
related party because of its miniority interest in MSHC, generated revenue to
IXC of $16.9 million in 1993, $18.7 million in 1994 and $19.1 million in 1995.
F-8
<PAGE> 82
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited pro forma results for 1993 and 1994 assuming the acquisitions of
MSC and MSM occurred as of January 1, 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994
-------- -------
<S> <C> <C>
Operating revenues...................................... $ 77,727 $82,290
Income (loss) before extraordinary items................ $(30,142) $ 5,574
Net income (loss)....................................... $(21,647) $ 7,872
Income (loss) per common share before extraordinary
items................................................. $ (1.32) $ 0.15
</TABLE>
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the acquisition been consummated as of the above dates, nor are
they necessarily indicative of future operations.
On September 15, 1994, IXC formed IXC Long Distance, Inc. Together with
Excel Telecommunications, Inc. ("Excel"), IXC Long Distance, Inc. then formed
Switched Services Communications, L.L.C. ("SSC") on September 19, 1994 for the
purpose of owning and operating a nationwide long distance switch network. As of
December 31, 1995 IXC Long Distance, Inc. owned a majority interest of SSC which
is consolidated as a majority-owned subsidiary.
Effective January 1, 1996, IXC Long Distance, Inc. entered into an
agreement with Excel to acquire its minority interest in SSC for $6.2 million.
In connection with the purchase agreement, Excel executed a second amended and
restated Service Agreement with SSC, requiring Excel to purchase certain minimum
communications services from SSC. (See Note 17)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of IXC include the accounts of IXC
and its wholly-owned and majority-owned subsidiaries. All minority owned
subsidiaries are accounted for by the equity method. Significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
Revenues
Long-haul voice and data circuit revenues are primarily generated from
providing capacity on the Company's fiber optic and microwave transmission
network at rates established under long-term contractual arrangements. Revenues
are recognized as services are provided.
Switched long-distance service revenues are primarily generated by
providing voice and data communications. Customers are billed on monthly cycle
dates. Revenues are recognized as services are provided.
The Company accounts for exchange agreements with other carriers by
recognizing the fair value of the revenue earned and expense incurred under the
respective agreements (see Note 11).
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market funds and all
investments with an initial maturity of three months or less. Short-term
investments held in the Company's escrow related to the Senior Notes (see Note
3) are not included as a cash equivalent.
Property and Equipment
Property and equipment is recorded at cost, adjusted for the writedown
discussed in Note 8. Depreciation is provided using the straight-line method
over the estimated useful lives of the various assets, generally 3 to
F-9
<PAGE> 83
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20 years. Maintenance and repairs are charged to operations as incurred.
Amortization of assets recorded under capital leases is included in depreciation
expense. Property and equipment recorded under capital leases are included with
the Company's owned assets.
In March 1995, the FASB issued Statement No. 121, Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of.
Capitalization of Interest
Interest costs are capitalized as part of the cost of constructing the
Company's fiber optic network. Interest costs capitalized during construction
periods are computed by determining the average accumulated expenditures for
each interim capitalization period and applying the interest rate related to the
specific borrowings associated with each construction project. Interest
capitalized during the years ended December 31, 1993, 1994 and 1995 was
approximately $379,000, $34,000 and $361,000, respectively.
Income Taxes
The Company accounts for income taxes using the liability method as
required by Statement No. 109, Accounting for Income Taxes, issued by the
Financial Accounting Standards Board.
Deferred income taxes are provided for temporary differences between the
basis of assets and liabilities for financial reporting and income tax
reporting. Investment tax credits are accounted for by the flow-through method.
Deferred Charges and Other Assets
Costs incurred in connection with obtaining long-term financing have been
deferred and are being amortized to interest expense over the terms of the
related debt agreements. The costs relating to long-term financing for the years
ended December 31, 1994 and 1995 were $2.8 million and $10.4 million,
respectively. Accumulated amortization for these costs for the years ended
December 31, 1994 and 1995 was $534,000 and $467,000, respectively (see Note 4
regarding extraordinary items).
Costs incurred in connection with the acquisition of certain lease
agreements (see Note 5) have been deferred and are being amortized over the
terms of the related agreements.
Costs incurred to obtain certain regulatory licenses are amortized on a
straight-line basis over 10 to 40 years.
Certain costs incurred in connection with installation of the nationwide
long distance network have been deferred and amortized on a straight-line basis
over 4 years. The network costs for the year ended December 31, 1995 were
$1,836,000, with accumulated amortization of $95,000.
The acquisition cost of customer accounts obtained through an outside sales
organization have been deferred and amortized over two years, the estimated
average of the term of the related customer contracts.
Stock-Based Compensation
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, Accounting for Stock Issued to Employees, and intends to
continue to do so.
F-10
<PAGE> 84
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income (Loss) Per Common Share
Income (loss) per common share is based on net income (loss) less preferred
stock dividend requirements divided by the weighted average common shares
outstanding during the period, as adjusted for applicable stock options. Income
(loss) per share on a fully diluted basis is not presented as the fully diluted
effect is either antidilutive or not material.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in prior years have been reclassified to conform to the
1995 presentation.
3. ESCROW UNDER SENIOR NOTES
Under the terms of the Company's Senior Notes, issued in October 1995, the
Company was required to place $200 million of Senior Note proceeds in an escrow
account, which proceeds and the earnings thereon are restricted in their use to
fiber expansion, capital expenditures, certain interest, principal and other
payments on the Senior Notes and other permitted uses (see Note 4). Such funds
have been invested in short-term, investment-grade, interest-bearing securities
at December 31, 1995 as follows (in thousands):
<TABLE>
<S> <C>
Overnight investments............................. $ 96,975
U.S. Government securities........................ 101,291
--------
$198,266
========
</TABLE>
The escrow account is subject to a security interest under the Company's
Senior Notes. The investments in the escrow account at December 31, 1995, by
contractual maturity, were all due in three months or less and are classified as
held-to-maturity.
F-11
<PAGE> 85
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT
Long-term debt and lease obligations of IXC and its consolidated
subsidiaries at December 31, 1994 and 1995 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
Senior Notes -- 12.5%, net of unamortized discount of $7,762 at
December 31, 1995............................................. $ -- $277,238
Senior term loans -- 8.23% to 9.9%.............................. 14,405 --
Senior secured notes -- 9.93%................................... 12,150 --
Variable rate senior secured note due to stockholder (10.63% at
December 31, 1994)............................................ 9,750 --
Senior subordinated note due to related party -- 7%............. 5,694 4,416
Promissory note due to related party -- 9%...................... 3,111 3,401
Subordinated debentures due to stockholders -- 10%.............. 12,948 --
Capital lease obligations (see Note 5).......................... 6,560 13,697
Deferred lease obligations (see Note 5)......................... 4,432 --
Other debt...................................................... 74 42
------- --------
Total long-term debt and lease obligations................. $69,124 $298,794
======= ========
</TABLE>
These amounts are included in the balance sheets of the Company as follows
(in thousands):
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
Long-term debt -- related parties:
Current portion............................... $ 6,850 $ 1,371
Long-term portion............................. 24,653 6,446
Long-term debt and lease obligations:
Current portion............................... 11,688 3,163
Long-term portion............................. 25,933 287,814
------- --------
$69,124 $298,794
======= ========
</TABLE>
Senior Notes
On October 5, 1995, the Company issued $285 million of 12 1/2% Senior Notes
(effective rate 13%) due October 1, 2005, with interest payable semi-annually.
The Company has agreed to file a registration statement and to exchange the
Senior Notes for registered Senior Notes, or to register the Senior Notes on a
shelf registration statement. Until such exchange offer is consummated, or such
shelf registration statement is declared effective, the Company is required to
make additional interest payments at the rate of .5% per annum of the principal
amount thereof.
The Senior Notes may be redeemed at the option of the Company, in whole or
in part, on or after October 1, 2000 at a premium declining to zero in 2004. At
any time prior to October 1, 1998, the Company may redeem Senior Notes with an
aggregate principal amount of up to $100 million at a redemption price of 112.5%
of the principal amount from the net proceeds of a sale of Capital Stock of the
Company, provided that at least $100 million in aggregate principal amount of
Senior Notes remains outstanding immediately after the occurrence of such
redemption and that the redemption occurs within 35 days of the date of the
closing of the offering of such equity securities. Also, the Senior Notes
contain provisions that, in the event of a Change in Control (which meets the
definition set forth in the Indenture) of the Company, provide their holders the
right to require the Company to repurchase all or any part of the Senior Notes
at a price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest.
F-12
<PAGE> 86
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Of the net proceeds of approximately $277 million, $200 million has
initially been deposited into an escrow account primarily restricted for the
construction of a major fiber optic expansion program (see Note 3).
Approximately $53 million of the net proceeds was used to repay or repurchase
existing indebtedness (resulting in an extraordinary loss on early
extinguishment of debt of $1.7 million, net of applicable income tax benefit of
$1.2 million) and approximately $3.7 million was used to redeem certain
preferred stock.
The Senior Notes are senior unsecured obligations of the Company, except
for a security interest in the escrow account (see Note 3), and are guaranteed
on a senior unsecured basis by all wholly owned direct and indirect subsidiaries
(other than SSC) of IXC. The obligations of each guarantor are limited to the
minimum extent necessary to prevent the guarantee from violating or becoming
voidable under applicable law relating to fraudulent conveyance or fraudulent
transfer or similar laws affecting the rights of creditors generally.
The Senior Notes contain certain covenants that limit the ability of the
Company and its subsidiaries to incur additional indebtedness and issue
preferred stock, pay dividends or make other distributions, repurchase equity
interests or subordinated indebtedness, engage in sale and leaseback
transactions, create certain liens, enter into certain transactions with
affiliates, sell assets of the Company or its subsidiaries, issue or sell equity
interests of the Company's subsidiaries or enter into certain mergers and
consolidations.
Senior Term Loans
During 1993, to finance the construction of the Company's fiber optic
transmission system, the Company entered into a senior term loan agreement to
obtain $11 million in construction financing at 8.23% plus up to $750,000 of
capitalized interest during the construction period. During 1994, to finance an
extension of the Company's fiber optic transmission system, the Company entered
into a senior term loan agreement to obtain approximately $7.5 million in
construction financing at 9.9%, plus up to $750,000 of capitalized interest
during the construction period. These senior term loans were repaid or
repurchased from the proceeds of the issuance of the Senior Notes.
Senior Secured Notes
During 1993, to finance the redemption of the ECHC common stock not owned
by IXC (see Note 1), the Company issued $15 million of 9.63% senior secured
notes. During 1994, IXC and the senior secured note holder signed an agreement
which amended and restated the notes. In connection with this agreement, IXC was
released from certain restrictive covenants, the interest rate on the notes was
increased to 9.93%, $1,500,000 held in escrow was applied to the notes and the
escrow account was terminated. As the terms of the original notes were
substantively modified, the related unamortized original debt issuance costs of
$174,000 (net of $114,000 income tax benefit) are shown as an extraordinary loss
on early extinguishment of debt. The senior secured notes were repaid from the
proceeds of the issuance of the Senior Notes.
Variable Senior Secured Note Due to Stockholder
During 1993, to finance the acquisition of the rights, title and interest
in certain equipment lease agreements (see Note 5), the Company issued an 8.5%
senior secured note in the original principal amount of $17,000,000. During
1994, the note was purchased by a stockholder of IXC under a prepayment option.
The stockholder exchanged the note for a note that was amended (including a
reduction in its principal amount to $11,143,000) and restated in the form of a
variable rate senior secured note. This transaction resulted in an extraordinary
gain of approximately $2,472,000, net of applicable income taxes of $1,586,000.
The variable rate senior secured note due to stockholder was repaid from the
proceeds of the issuance of the Senior Notes.
F-13
<PAGE> 87
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Senior Subordinated Note Due to Minority Investor in Subsidiary
During 1994, the Company issued a $6.2 million 7% senior subordinated
promissory note to a minority investor in MSHC, one of IXC Communications'
subsidiaries. Under the terms of the senior subordinated promissory note,
principal and interest are due and payable in 53 consecutive monthly
installments of $136,000 commencing August 31, 1994 through December 31, 1998.
Promissory Note Due to Minority Investor in Subsidiary
During 1994, to facilitate the acquisition of MSM, the Company issued a $3
million 9% promissory note to a minority investor in MSHC. Under the terms of
the promissory note, principal and interest payments of $560,000 are due
quarterly beginning March 31, 1998 through December 31, 1999. Thus, accrued
interest is reflected in the balance of the note.
Subordinated Debentures Due to Stockholders
During 1992, to finance the acquisition of a 50% interest in ECHC, IXC
issued $3.7 million of 10% subordinated debentures to certain stockholders.
During 1993, IXC issued an additional $2 million of 10% subordinated debentures
to certain stockholders. The debentures were unsecured general obligations of
IXC.
In addition, in connection with the construction of the Company's fiber
optic transmission system, IXC issued $5.1 million of 10% subordinated
debentures to certain stockholders.
All of the subordinated debentures due to stockholders were repaid from the
proceeds of the issuance of the Senior Notes.
Annual maturities of long-term debt at December 31, 1995 are as follows (in
thousands):
<TABLE>
<S> <C>
1996.............................................. $ 1,412
1997.............................................. 1,470
1998.............................................. 2,854
1999.............................................. 2,123
2000.............................................. --
Thereafter........................................ 277,238
--------
$285,097
========
</TABLE>
5. CAPITAL AND OPERATING LEASES
On August 14, 1992, in connection with the acquisition of CTGI, all
existing equipment lease obligations were restructured to provide for the
deferrals of future lease obligations that were otherwise payable. A provision
was also made for an escrow account to provide additional collateral for certain
equipment lease obligations. This escrow account was initially funded in March
1993 with excess collateral held by a creditor of CTGI's prior parent.
As of October 12, 1993, certain equipment lessors sold to IXC their
respective rights, title and interest in certain equipment lease agreements with
the Company. In connection with this transaction, a substantial portion of the
escrow account was withdrawn to pay certain deferred lease obligations to
another lessor. This resulted in an extraordinary gain of approximately
$8,495,000, net of applicable income taxes of $5,848,000. Certain equipment
lease agreements were not purchased by IXC and remained in effect as operating
leases. The escrow account (discussed in the preceding paragraph) was used to
supplement lease payments due under certain of the remaining leases (the "Escrow
Secured Leases") during 1993 and 1994. The Company recorded
F-14
<PAGE> 88
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income of approximately $731,000 and $1,444,000 to reflect nonrefundable
proceeds used from the escrow account during the years ended December 31, 1993
and 1994, respectively.
During 1994, the Escrow Secured Leases were amended and the future basic
rental obligations due under the remaining leases (which were classified as
operating leases) were satisfied with approximately $18 million in proceeds from
the escrow account. The amendments to the Escrow Secured Leases resulted in the
leases meeting the criteria for capitalization under FAS No. 13. The present
value of the residual lease obligations approximated the fair value of the
leased assets which were both recorded at $6,031,000. The company made principal
payments of $550,000 during 1995 and repaid $1,120,000 of the obligations using
proceeds from the issuance of the Senior Notes. The remainder of the lease
obligations become due in installments in the years 1996 and 1997.
In connection with the satisfaction of the remaining Escrow Secured Leases,
the escrow account was terminated in 1994 and the residual balance in the
account, approximately $888,000, was distributed to the Company and recognized
as income.
Future minimum annual lease payments for facilities, equipment and
transmission capacity used in its operations at December 31, 1995, net of
sublease revenue, are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996.................................................... $ 3,707 $ 9,915
1997.................................................... 5,697 7,725
1998.................................................... 2,862 4,733
1999.................................................... 2,467 2,591
2000.................................................... 1,588 795
Thereafter.............................................. -- 2,615
------- -------
16,321 $28,374
=======
Less amounts related to interest........................ (2,624)
-------
Present value of capital lease obligations.............. 13,697
Less current portion.................................... (2,735)
-------
Net long-term capital lease obligations................. $10,962
=======
</TABLE>
The gross amount of assets recorded under capital leases at December 31,
1994 and 1995 were $7,648,000 and $17,946,000, respectively. The related
accumulated amortization was $1,388,000 and $4,078,000 at December 31, 1994 and
1995, respectively.
Expenses relating to facilities, equipment and transmission capacity leases
were approximately $37,183,000, $28,710,000 and $29,130,000 for the years ended
December 31, 1993, 1994 and 1995, respectively.
The Company had certain deferred lease obligations payable through 1998
that were not settled as part of the October 12, 1993 transaction discussed
above. On November 29, 1994, IXC entered into an agreement whereby these
obligations were restructured resulting in all the deferred obligations,
$4,432,000, being due during 1995. These obligations were repaid in 1995 from
the proceeds the Company received from the issuance of the Senior Notes.
In February 1995, the Company entered into a five-year equipment lease for
network switching equipment, for which the lease obligations had a present value
of $9,800,000.
F-15
<PAGE> 89
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMON AND PREFERRED STOCK
IXC's 10% Senior Series 1 Cumulative Redeemable Preferred Stock was
non-voting and was redeemed on October 6, 1995, from the proceeds of the Senior
Notes for $1,965,000, including cumulative dividends in arrears and related
interest of $505,000.
The 10% Junior Series 3 Cumulative Redeemable Preferred Stock ("Series 3
Preferred Stock") is voting (as a single class with IXC's common stock), is
entitled to elect one director and may be redeemed by the Company in whole or in
part at any time, subject to certain debt covenants, at a price of $1,000 per
share, plus accumulated and unpaid dividends and accrued interest. The
liquidation value of each Series 3 Preferred share is $1,000 plus any
accumulated and unpaid dividends including accrued interest. The Series 3
Preferred Stock is nonparticipatory and has no mandatory redemption
requirements. Dividends are payable at the determination of the Board of
Directors, subject to debt covenants. Interest accrues on unpaid dividends at a
rate of 10%. Cumulative preferred dividends in arrears, including interest, at
December 31, 1994 and 1995 were $3,201,000 and $4,776,000, respectively.
In November 1994, the Board of Directors adopted the IXC Communications,
Inc. Stock Plan ("IXC Stock Plan"), which provides for the issuance of
restricted stock or the granting of stock options for up to 1,212,450 shares of
common stock to key employees and others. Options granted may be either
"incentive stock options," within the meaning of Section 422(a) of the Internal
Revenue Code, or non-qualified options. The options are for 10 years and
generally vest at a rate of 25% per year commencing one year after the date of
grant and 25% on each anniversary thereafter, with the exception of two options
covering 84,871 shares which were 100% vested upon grant. The IXC Stock Plan was
adopted and approved by the majority of stockholders of IXC by written consent
on May 4, 1995.
The Company has not issued any restricted stock under the IXC Stock Plan.
All options granted under the IXC Stock Plan were granted at estimated market
value at the date of grant, based on annual appraisals obtained from an
independent party. In the event of a change of control of the Company, the
optionees, immediately following the consummation of such change of control,
fully vest, and the options may be exercised in full to purchase the total
number of shares covered by the option.
Option activity for the two years ended December 31, 1995 was as follows:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
--------- ---------
<S> <C> <C>
Options granted in 1994 and outstanding at
December 31, 1994..................................... 206,113 $3.01
Options granted in 1995................................. 439,767 3.01
------- -----
Options outstanding at December 31, 1995................ 645,880 $3.01
======= =====
Options exercisable at December 31, 1995................ 121,243
=======
Available for grant at December 31, 1995................ 566,570
=======
</TABLE>
During 1993, an indirect subsidiary of IXC issued 1,400 shares of 10%
Senior Series 1 Cumulative Redeemable Preferred Stock (the "ILHI Series 1
Preferred Stock") at $1,000 per share to stockholders of IXC. The ILHI Series 1
Preferred Stock was redeemed on October 6, 1995 from the proceeds of the Senior
Notes, for $1,801,000, including cumulative dividends in arrears and related
interest of $401,000.
F-16
<PAGE> 90
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. MAJOR CUSTOMERS
Long-haul services are provided to domestic common carriers under long-term
contractual arrangements. Sales to certain customers exceeded 10% of total
revenues for each of the years ended December 31, 1993, 1994 and 1995. The
percentages of revenue represented by these customers are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
WorldCom, Inc........................................... 23% 25% 20%
Frontier Communications................................. 24% 23% 21%
</TABLE>
Trade receivables are primarily due from a limited customer base including
these major customers. Although the Company has a concentration of credit risk,
the Company has not experienced significant collection losses from these
respective customers. Additionally, the Company bills in advance which further
minimizes any potential losses due to concentration of credit risk.
8. IMPAIRMENT OF LONG-TERM ASSETS
Due to rate reductions in the long-haul business, in 1993 the Company
assessed the estimated future net cash flows expected to be produced by the
digital microwave system property and equipment. As a result, on December 31,
1993, the Company projected it would be unable to recover the recorded values of
such equipment and therefore reduced the carrying value of the digital microwave
system property and equipment by $37,960,000.
9. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement and 401(k) savings plan
which covers all full-time employees with one year of service. The Company
contributes 6% of eligible compensation, as defined in the plan, and matches 50%
of the employee's contributions up to a maximum of 6% of the employee's
compensation. Employees vest in the Company's contribution over five years.
Benefit expense for the years ended December 31, 1993, 1994 and 1995 was
approximately $394,000, $468,000 and $522,000, respectively.
10. INCOME TAXES
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards................................. $1,764 $2,411
Net operating loss carryforwards......................... -- 2,489
Accrued expenses......................................... 1,768 908
Other.................................................... 929 1,286
------ ------
4,461 7,094
Deferred tax liabilities:
Tax over book depreciation............................... 6,978 8,384
Other liability accruals................................. 5,062 5,090
Other.................................................... 2,121 1,473
------ ------
14,161 14,947
------ ------
Net deferred tax liability................................. $9,700 $7,853
====== ======
</TABLE>
F-17
<PAGE> 91
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $7,775,000 for income tax purposes that will expire in 2010. The
Company has minimum tax and investment tax credit carryforwards at December 31,
1995 of approximately $1,721,000 and $690,000, respectively. The minimum tax
credits can be carried forward indefinitely and the investment tax credits
expire in 2001.
A valuation allowance was not provided for deferred tax assets at December
31, 1993, 1994 or 1995.
Significant components of the provision (benefit) for income taxes
(excluding the effect attributable to extraordinary items) are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
-------- ------ -------
<S> <C> <C> <C>
Current:
Federal..................................... $ 561 $1,188 $ (381)
State....................................... 432 404 --
-------- ------ -------
Total current................................. 993 1,592 (381)
Deferred:
Federal..................................... (19,121) 1,131 (1,144)
State....................................... (3,849) 434 (168)
-------- ------ -------
Total deferred................................ (22,970) 1,565 (1,312)
-------- ------ -------
Provision (benefit) for income taxes.......... $(21,977) $3,157 $(1,693)
======== ====== =======
</TABLE>
The reconciliation of income tax expense (benefit) attributable to
continuing operations (excluding the effect attributable to extraordinary items)
computed at the U.S. federal statutory tax rates to income tax expense (benefit)
is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
-------- ------ -------
<S> <C> <C> <C>
Tax provision (benefit) at federal statutory
rates....................................... $(18,288) $2,780 $(1,670)
State income tax provision (benefit) net of
federal effect.............................. (3,141) 432 (302)
Permanent and other differences............... (548) (55) 279
--------- ------ -------
Provision (benefit) for income taxes.......... $(21,977) $3,157 $(1,693)
========= ====== =======
</TABLE>
11. EXCHANGE AGREEMENTS
During 1993, IXC entered into long-term contracts with a common carrier
which provides IXC with capacity on the carrier's nationwide fiber optic
communications system. For this capacity, the Company paid $2,000,000 and
provided the common carrier with access to and use of certain regional fiber
optic communication systems. The $2,000,000 paid and related costs incurred in
connection with the contract have been deferred and are being recognized over
the five-year term of the contract. Accumulated amortization relating to the
contract costs as of December 31, 1994 and 1995 was $648,000 and $1,058,000,
respectively.
In the normal course of business, IXC enters into long-term facilities
exchange agreements with other carriers to exchange capacity on the carrier's
network for access to the Company's regional fiber optic communication systems.
These exchanges are accounted for at fair value (see Note 2). These exchange
agreements accounted for noncash revenue and expense (in equal amounts) of
$3,743,000, $7,980,000 and $13,839,000 for 1993, 1994 and 1995.
F-18
<PAGE> 92
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. RELATED PARTY TRANSACTIONS
A law firm, of which a director and stockholder of the Company was a
principal, provided certain legal services to the Company and received fees from
the Company in the amount of approximately $1.1 million in 1993, $1.4 million in
1994 and $2.6 million in 1995.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheets for cash and cash equivalents approximates fair value.
Accounts receivable and accounts payable: The carrying amounts reported in
the balance sheets for accounts receivable and accounts payable approximate
fair value.
Restricted short-term investments: The carrying amount reported in the
balance sheets for restricted short-term investments held in escrow
approximates fair value.
Long-term debt: The fair value of the Senior Notes has not been determined
due to the impracticability of such a calculation based on the limited
market of the privately issued notes and the lack of an actively quoted
price.
14. COMMITMENTS AND CONTINGENCIES
On September 1, 1994, IXC entered into an agreement with a common carrier
to purchase dedicated digital telecommunication services, superseding all prior
agreements. Under the terms of the agreement, IXC is required to purchase
services with remaining monthly minimum commitments of $500,000 through March
1998. Upon IXC paying a total of $22,548,000 for service subsequent to the
September 1, 1994 agreement, the minimum commitments under this agreement will
be canceled. Actual expenses under this and previous agreements for the years
ended December 31, 1993, 1994 and 1995 were $11,996,000, $12,552,000 and
$11,353,000, respectively.
In June 1995, IXC entered into a three-year agreement with a common carrier
to purchase communication services, under which, by April 1996, the Company is
required to purchase a monthly minimum of $350,000 in services. Actual expenses
under this agreement for the year ended December 31, 1995 were $1,471,000.
The Company plans to substantially expand its network beginning in 1996 to
include a coast-to-coast fiber optic system. In order to achieve this objective,
in November 1995, IXC entered into an agreement with a contractor to perform
construction and installation of fiber optic cable from Fort Worth, Texas to
Abilene, Texas. The approximate length of this project is 160 miles. The total
commitment under this agreement is approximately $6,487,000. As of December 31,
1995, no capital expenditures had yet been made under this agreement.
In January 1996, IXC also entered into an agreement with a supplier to
purchase fiber optic cable equipment to be used in the network expansion. Under
this agreement, the Company has a commitment to purchase a minimum number of
fiber kilometers during an initial three-year term, for a total commitment of
$32,000,000. In the event that IXC orders an amount of fiber less than the
commitment amount during the term of this agreement, the supplier may elect to
charge the Company the aggregate difference between the amount which would have
been billed to the Company for fiber based upon the commitment amount and the
amount actually billed to the Company. This agreement will automatically be
renewed for a period of one year unless one party has given the other party
notice at least 60 days in advance of such renewal that it elects to terminate
this agreement. As of December 31, 1995 no fiber purchases had been made under
this agreement.
F-19
<PAGE> 93
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1995, IXC entered into a long-term indefeasible right to use
("IRU") agreement with a common carrier in which the Company will realize
significant cost savings to the cost of the planned fiber expansion. Under the
IRU, both parties will construct a fiber optic communications system and will
grant unrestricted rights to each other to use certain fiber on each others'
constructed communications systems. The scheduled completion date of all
construction, installation and fiber acceptance testing of each system is
October 1, 1996. The agreement provides for substantial penalties ($400,000 per
month) for either party which does not complete construction of the applicable
route by October 1, 1996, but only after a grace period and only in the event
the other party has already completed its route. The initial term of this
agreement is 20 years from July 1, 1997. The agreement may be renewed for two
terms of 10 years each. The agreement states that beginning at the end of the
first full calendar quarter after the final construction acceptance date, each
party shall pay the other a usage fee during the term in an annual amount of
$2.0 million payable in four equal installments at the end of each calendar
quarter.
The Company is involved in various legal proceedings, all of which have
arisen in the ordinary course of business and some of which are covered by
insurance. In the opinion of the Company's management, none of the claims
relating to such proceedings will have material adverse effect on the financial
condition or results of operations of the Company.
15. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's allowance for doubtful accounts for the years
ended December 31, 1993, 1994 and 1995 was as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END OF
FOR THE YEARS ENDED OF PERIOD EXPENSES DEDUCTIONS PERIOD
--------------------------------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1993...................... $1,024 $ 447 $1,042 $ 429
December 31, 1994...................... $ 429 $1,565 $1,232 $ 762
December 31, 1995...................... $ 762 $1,505 $ 498 $ 1,769
</TABLE>
F-20
<PAGE> 94
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES
IXC conducts a significant portion of its business through subsidiaries.
The Senior Notes are unconditionally guaranteed, jointly and severally, by all
of IXC's wholly-owned direct and indirect subsidiaries except for SSC (the
"Subsidiary Guarantors"). The obligations of each Guarantor are limited to the
minimum extent necessary to prevent the guarantee from violating or becoming
voidable under applicable law relating to fraudulent conveyance or fraudulent
transfer or similar laws affecting the rights of creditors generally. IXC's
subsidiaries that were not wholly-owned at the time the Senior Notes were
issued, do not guarantee the Senior Notes (the "Non-Guarantor Subsidiaries").
The claims of creditors of Non-Guarantor Subsidiaries have priority over the
rights of IXC to receive dividends or distributions from such subsidiaries.
Presented below is condensed consolidating financial information for IXC,
the Subsidiary Guarantors and the Non-Guarantor Subsidiaries as of and for the
fiscal years ended December 31, 1994 and 1995. All of the non-guarantor
subsidiaries were acquired or formed in 1994. Accordingly, the Company's audited
consolidated financial statements prior to January 1, 1994 do not include any
direct or indirect consolidated subsidiaries which are not guarantors. As a
result, the aggregate net assets, earnings and equity of IXC and the Subsidiary
Guarantors for the year ended 1993 would be equivalent to the aggregate net
assets, earnings and equity of the Company. Accordingly, condensed consolidating
financial information for such periods is not presented.
The equity method has been used by IXC and the Subsidiary Guarantors with
respect to investments in Non-Guarantor Subsidiaries. Separate financial
statements for Subsidiary Guarantors are not presented based on management's
determination that they do not provide additional information that is material
to investors.
The following table sets forth the Guarantor and Non-Guarantor
subsidiaries:
<TABLE>
<CAPTION>
GUARANTOR SUBSIDIARIES NON-GUARANTOR SUBSIDIARIES
----------------------------------------- ---------------------------------------
<S> <C>
Tower Communications Systems Corp. Mutual Signal Holding Corporation
West Texas Microwave Company Mutual Signal Corporation
Western States Microwave Transmission Mutual Signal Corporation of Michigan
Company MSM Associates, Limited Partnership
Atlantic States Microwave Transmission Switched Services Communications,
Company L.L.C.
Central States Microwave Transmission Progress International L.L.C.
Company US Advantage Long Distance, Inc.
IXC Carrier, Inc. Marca-Tel S.A. de C.V.
IXC Long Distance, Inc.
Link Net International, Inc.
Rio Grande Transmission, Inc.
Telcom Engineering, Inc.
</TABLE>
F-21
<PAGE> 95
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....... $ 146 $ 4,619 $ 934 $ 349(a) $ 6,048
Accounts receivable and other,
net........................... 10 3,674 529 (497)(e) 3,716
Other current assets............ 187 845 124 -- 1,156
-------- -------- ------- -------- --------
Total current assets.............. 343 9,138 1,587 (148) 10,920
Property and equipment, net....... -- 74,508 14,547 (190)(d) 88,865
Prepaid contract costs............ -- 1,399 -- -- 1,399
Due from affiliate................ 4,091 3,809 -- (7,900)(e) --
Other assets...................... 20,718 3,873 2,248 (22,614)(b) 4,225
-------- -------- ------- -------- --------
Total assets...................... $ 25,152 $ 92,727 $18,382 $(30,852) $105,409
======== ======== ======= ======== ========
Current liabilities:
Accounts payable, accrued
interest and other current
liabilities................... $ 134 $ 7,378 $ 815 $ (46)(a)(e) $ 8,281
Due to affiliate................ 3,800 283 114 (4,197)(e) --
Current portion of long-term
debt and lease obligations.... -- 17,035 1,503 -- 18,538
-------- -------- ------- -------- --------
Total current liabilities......... 3,934 24,696 2,432 (4,243) 26,819
Long-term debt and lease
obligations, less current
portion......................... 7,029 32,651 14,017 (3,111)(e) 50,586
Net deferred tax liability........ -- 11,458 -- (1,640)(e) 9,818
Other noncurrent liabilities...... -- 2,429 1,332 (1,332)(e) 2,429
Minority interest................. -- -- -- 168(c) 168
Preferred stock of consolidated
subsidiary held by minority
interests....................... -- 1,400 -- -- 1,400
Stockholders' equity:
Common stock.................... 243 3 1 (4)(b) 243
Preferred stock................. 1,473 -- 1 (1)(b) 1,473
Additional paid-in capital...... 29,430 39,760 500 (40,260)(b) 29,430
Retained earnings (accumulated
deficit)...................... (16,957) (19,670) 99 19,571(b)(c)(d)(e) (16,957)
-------- -------- ------- -------- --------
Total stockholders' equity........ 14,189 20,093 601 (20,694) 14,189
-------- -------- ------- -------- --------
Total liabilities and
stockholders' equity........ $ 25,152 $ 92,727 $18,382 $(30,852) $105,409
======== ======== ======= ======== ========
</TABLE>
- ---------------
(a) Eliminations of intercompany settlements in transit.
(b) Eliminations of investments in consolidated subsidiaries
(c) Recording of minority interest in equity operations.
(d) Eliminations of intercompany capitalized labor.
(e) Eliminations of intercompany receivables and lease obligations.
F-22
<PAGE> 96
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net operating revenues............ $ -- $78,448 $3,410 $(1,195)(a) $80,663
Operating expenses:
Cost of services................ -- 33,848 810 (762)(a)(b) 33,896
Operations and administration... 570 19,336 898 (243)(a) 20,561
Depreciation and amortization... 32 11,166 923 -- 12,121
------ ------- ------ ------- -------
(602) 14,098 779 (190) 14,085
Interest income................... 139 194 8 (130)(a) 211
Interest expense.................. (653) (5,141) (441) 130(a) (6,105)
Equity in net income (loss) of
unconsolidated subsidiaries..... 7,864 83 -- (8,041)(c) (94)
------ ------- ------ ------- -------
Income (loss) before provision
(benefit) for income taxes and
minority interest in net loss of
subsidiaries.................... 6,748 9,234 346 (8,231) 8,097
Benefit (provision) for income
taxes........................... 567 (3,477) (247) -- (3,157)
Minority interest................. -- -- -- 77(d) 77
------ ------- ------ ------- -------
Income before extraordinary
item............................ 7,315 5,757 99 (8,154) 5,017
Extraordinary gain, net........... -- 2,298 -- -- 2,298
------ ------- ------ ------- -------
Net income................... $7,315 $ 8,055 $ 99 $(8,154) $ 7,315
====== ======= ====== ======= =======
</TABLE>
- ---------------
(a) Eliminations of intercompany administration services, communication services
and interest charges.
(b) Eliminations of capitalized intercompany labor.
(c) Eliminations of equity (income) loss from consolidated subsidiaries.
(d) Recording of minority interest in equity or earnings loss of non-guarantor
subsidiaries.
F-23
<PAGE> 97
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities......... $(1,262) $ 9,935 $ 1,199 $ 3,660(a)(b)(c) $ 13,532
Cash flows from investing
activities
Purchase of property and
equipment.................... -- (3,545) (3,732) 190(b) (7,087)
Sale of property and
equipment.................... -- 235 -- -- 235
Payments for businesses
acquired, net of cash
received..................... -- -- (11,976) -- (11,976)
------- ------- ------- ------- --------
Net cash provided by (used in)
investing activities......... -- (3,310) (15,708) 190 (18,828)
Cash flows from financing
activities
Payments from (advances to)
affiliates, net.............. 1,411 (1,525) 114 -- --
Proceeds from long-term debt... -- 229 15,770 (3,000)(a) 12,999
Payments on long-term debt and
lease obligations............ -- (7,331) (506) -- (7,837)
Payments from escrow........... -- 1,500 -- -- 1,500
Payments of debt issue costs... (139) (976) (436) -- (1,551)
Capital contribution in
subsidiary by minority
shareholders................. -- -- 500 (500)(c) --
Issuance of common stock....... 3 -- 1 (1)(c) 3
------- ------- ------- ------- --------
Net cash provided by (used in)
financing activities......... 1,275 (8,103) 15,443 (3,501) 5,114
Net increase (decrease) in cash
and cash equivalents......... 13 (1,478) 934 349 (182)
Cash and cash equivalents at
beginning of period.......... 133 6,097 -- -- 6,230
------- ------- ------- ------- --------
Cash and cash equivalents at
end of period................ $ 146 $ 4,619 $ 934 $ 349 $ 6,048
======= ======= ======= ======= ========
</TABLE>
- ---------------
(a) Eliminations of intercompany receivables, debt and lease obligations.
(b) Eliminations of intercompany capitalized labor.
(c) Eliminations of intercompany capital contribution.
F-24
<PAGE> 98
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents........... $ 1,418 $ 3,332 $ 1,742 $ 423(a) $ 6,915
Accounts receivable and
other, net............ -- 6,717 1,148 (2,328)(e) 6,319
Other current assets..... 6,565 4,481 358 (7,807)(e) 2,815
-------- -------- -------- --------- --------
Total current assets....... 7,983 14,530 3,248 (9,712) 16,049
Property and equipment,
net...................... -- 76,804 29,910 (315)(d) 106,399
Prepaid contract costs..... -- 989 -- -- 989
Escrow under Senior
Notes.................... 198,266 -- -- -- 198,266
Due from affiliate......... 74,604 3,351 568 (78,523)(e) --
Other assets............... 12,997 15,959 4,191 (18,375)(b) 14,772
-------- -------- -------- --------- --------
Total assets............... $293,850 $111,633 $ 37,917 $(106,925) $336,475
======== ======== ======== ========= ========
Current liabilities:
Accounts payable, accrued
interest and other
current liabilities... $ 8,984 $ 13,922 $ 2,720 $ (4,528)(a)(e) $ 21,098
Due to affiliate......... 258 6,458 1,832 (8,548)(e) --
Current portion of
long-term debt and
lease obligations..... -- 1,511 3,023 -- 4,534
-------- -------- -------- --------- --------
Total current
liabilities.............. 9,242 21,891 7,575 (13,076) 25,632
Long-term debt and lease
obligations, less current
portion.................. 277,238 3,207 17,215 (3,400)(e) 294,260
Net noncurrent deferred tax
liability................ 222 10,997 -- (2,916)(e) 8,303
Due to affiliate/parent.... -- 70,384 3,878 (74,262)(e) --
Other noncurrent
liabilities.............. -- 469 -- -- 469
Minority interest.......... -- 1 -- 952(c) 953
Preferred stock of
consolidated subsidiary
held by minority
interests................ -- -- -- -- --
Stockholders' equity:
Preferred stock.......... 13 -- -- -- 13
Common stock............. 243 3 1 (4)(b) 243
Additional paid-in
capital............... 29,430 30,051 20,750 (50,801)(b) 29,430
Retained earnings
(accumulated
deficit).............. (22,538) (25,370) (11,502) 36,582(b)(c)(d)(e) (22,828)
-------- -------- -------- --------- --------
Total stockholders'
equity................... 7,148 4,684 9,249 (14,223) 6,858
-------- -------- -------- --------- --------
Total liabilities
and
stockholders'
equity......... $293,850 $111,633 $ 37,917 $(106,925) $336,475
======== ======== ======== ========= ========
</TABLE>
- ---------------
(a) Eliminations of intercompany settlements in transit.
(b) Eliminations of investments in consolidated subsidiaries
(c) Recording of minority interest in equity operations.
(d) Eliminations of intercompany capitalized labor.
(e) Eliminations of intercompany receivables, and lease obligations.
F-25
<PAGE> 99
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net operating revenues.......... $ 404 $89,339 $ 12,155 $(10,897)(a) $ 91,001
Operating expenses:
Cost of services.............. -- 38,950 10,075 (9,173)(a)(b) 39,852
Operations and
administration............. 1,116 26,155 6,322 (1,311)(a) 32,282
Depreciation and
amortization............... 57 12,728 4,653 -- 17,438
-------- ------- -------- -------- --------
(769) 11,506 (8,895) (413) 1,429
Interest income................. 3,766 399 67 (3,764)(a) 468
Interest income on escrow under
Senior Notes.................. 2,552 -- -- -- 2,552
Interest expense................ (10,982) (5,838) (1,541) 3,764(a) (14,597)
Equity in net income (loss) of
unconsolidated subsidiaries... (1,185) (7,678) -- 8,882(c) 19
-------- ------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes and
minority interest in net loss
of subsidiaries............... (6,618) (1,611) (10,369) 8,469 (10,129)
Benefit (provision) for income
taxes......................... 2,246 546 (1,099) -- 1,693
Minority interest............... -- -- -- 5,218(d) 5,218
-------- ------- -------- -------- --------
Income (loss) before
extraordinary items........... (4,372) (1,065) (11,468) 13,687 (3,218)
Extraordinary gain, net......... (304) (1,309) (134) -- (1,747)
-------- ------- -------- -------- --------
Net income...................... $ (4,676) $(2,374) $(11,602) $ 13,687 $ (4,965)
======== ======= ======== ======== ========
</TABLE>
- ---------------
(a) Eliminations of intercompany administration services, communication services
and interest charges.
(b) Eliminations of capitalized intercompany labor.
(c) Eliminations of equity (income) loss from consolidated subsidiaries.
(d) Recording of minority interest in equity or earnings loss of non-guarantor
subsidiaries.
F-26
<PAGE> 100
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR IXC
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities........... $ (10,876) $ 24,272 $(8,333) $ 3,992(a)(b) $ 9,055
Cash flows from investing
activities
Release of funds from escrow
under Senior Notes............. 4,300 -- -- -- 4,300
Purchase of restricted short-term
investments.................... (200,000) -- -- -- (200,000)
Purchase of property and
equipment...................... -- (14,282) (9,565) 177(b) (23,670)
--------- -------- ------- ------- ---------
Net cash provided by (used in)
investing activities........... (195,700) (14,282) (9,565) 177 (219,370)
Cash flow from financing
activities
Net proceeds from issuance of
Senior Notes, net of
discount....................... 277,148 -- -- -- 277,148
Capital contributions in
subsidiary by minority
shareholders................... -- (14,248) 20,250 -- 6,002
Payments from (advances to)
affiliates, net................ (50,827) 50,827 -- -- --
Proceeds from long-term debt..... -- 17,150 1,545 -- 18,695
Payments on long-term debt and
lease obligations.............. (5,700) (63,606) (3,089) (4,095)(a) (76,490)
Payments of debt issue costs..... (10,407) -- -- -- (10,407)
Redemption of preferred stock.... (1,460) (1,400) -- -- (2,860)
Payments of preferred stock
dividends...................... (906) -- -- -- (906)
--------- -------- ------- ------- ---------
Net cash provided by (used in)
financing activities........... 207,848 (11,277) 18,706 (4,095) 211,182
Net increase (decrease) in cash
and cash equivalents........... 1,272 (1,287) 808 74 867
Cash and cash equivalents at
beginning of period............ 146 4,619 934 349 6,048
--------- -------- ------- ------- ---------
Cash and cash equivalents at end
of period...................... $ 1,418 $ 3,332 $ 1,742 $ 423 $ 6,915
========= ======== ======= ======= =========
</TABLE>
- ---------------
(a) Eliminations of intercompany receivables, debt and lease obligations.
(b) Eliminations of intercompany capitalized labor.
F-27
<PAGE> 101
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUBSEQUENT EVENTS
From January 1, 1996 through June 12, 1996, the Company effected stock
splits resulting in a 2.4249 for 1 split of the Company's common stock (with
fractional shares to be paid in cash). The Company also increased the number of
authorized shares of its common stock to 100,000,000 and the number of
authorized shares of its preferred stock to 3,000,000. The accompanying
financial statements have been retroactively adjusted to reflect the stock
splits and the increase in authorized shares.
On May 14, 1996, the Board of Directors adopted, and on June 6, 1996
stockholders approved, the IXC Communications, Inc. 1996 Stock Plan (the "1996
Stock Plan"), a stock incentive plan covering 2,121,787 shares of common stock.
Awards under the 1996 Stock Plan are given at the discretion of the Board of
Directors and include common stock options with exercise prices at least equal
to the fair market value at the date of grant.
Additionally on May 14, 1996 the Board of Directors adopted the IXC
Communications, Inc. Outside Directors' Phantom Stock Plan (the "Directors'
Plan"), pursuant to which $20,000 per director per year of outside director's
fees are deferred and treated as if it were invested in shares of the Company's
common stock. No shares of common stock will be actually purchased and the
participants will receive cash benefits equal to the value of the shares that
they are deemed to have purchased under the Directors' Plan, with such value to
be determined on the date of distribution. Distribution of benefits generally
will occur three years after the deferral. Compensation expense will be
determined based on increases in the market price of the number of shares deemed
to have been purchased and will be charged to expense over the related period.
On June 6, 1996 the stockholders approved the Directors' Plan.
F-28
<PAGE> 102
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 89,944
Accounts receivable and other, net of allowance for doubtful accounts of
$3,588 at September 30, 1996............................................. 32,867
Other current assets........................................................ 3,114
--------
Total current assets................................................ 125,925
Property and equipment........................................................ 234,418
Less: accumulated depreciation................................................ (62,887)
--------
171,531
Escrow under Senior Notes..................................................... 116,268
Deferred charges and other assets............................................. 24,581
--------
Total assets........................................................ $438,305
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities.............................. $ 41,915
Accrued interest............................................................ 18,344
Current portion of long-term debt and lease obligations..................... 6,907
--------
Total current liabilities........................................... 67,166
Long-term debt and lease obligations, less current portion.................... 295,124
Other noncurrent liabilities.................................................. 4,382
Stockholders' equity:
Preferred stock, 3,000,000 shares authorized:
10% Junior Series 3 cumulative preferred stock, $.01 par value;
12,550 shares issued and outstanding (aggregate liquidation preference
of $18,622 at September 30, 1996)...................................... 13
Common stock, $.01 par value; 100,000,000 shares authorized;
30,775,308 shares issued and outstanding at September 30, 1996........... 308
Additional paid-in capital.................................................... 123,530
Accumulated deficit........................................................... (52,218)
--------
Total stockholders' equity.......................................... 71,633
--------
Total liabilities and stockholders' equity.......................... $438,305
========
</TABLE>
See accompanying notes.
F-29
<PAGE> 103
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS AND NUMBER OF SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1996 1995
-------- -------
<S> <C> <C>
Net operating revenues:
Private line.......................................................... $ 72,397 $67,259
Switched long distance................................................ 57,876 --
-------- -------
Net operating revenues............................................. 130,273 67,259
Operating expenses:
Cost of communications services....................................... 91,017 26,808
Operations and administration......................................... 33,286 21,847
Depreciation and amortization......................................... 19,934 12,259
-------- -------
(13,964) 6,345
Interest income......................................................... 1,473 311
Interest income on escrow under Senior Notes............................ 6,441 --
Interest expense........................................................ (28,658) (5,110)
Equity in net income (loss) of unconsolidated
subsidiaries.......................................................... (24) 44
-------- -------
Income (loss) before (provision) benefit for income taxes and minority
interest.............................................................. (34,732) 1,590
Benefit (provision) for income taxes.................................... 5,699 (2,001)
Minority interest....................................................... (357) 2,873
-------- -------
Income (loss) before extraordinary items................................ (29,390) 2,462
Extraordinary items:
Extraordinary loss on early extinguishment of debt, less benefit for
income taxes of $671............................................... -- (1,006)
-------- -------
Net income (loss)....................................................... $(29,390) $ 1,456
Dividends applicable to preferred stock................................. (1,302) (1,425)
-------- -------
Net income (loss) applicable to common stockholders..................... $(30,692) $ 31
-------- -------
Net income (loss) per common share:
Before extraordinary loss............................................. $ (1.13) $ 0.04
Extraordinary loss.................................................... 0.00 (0.04)
-------- -------
Net income (loss).................................................. $ (1.13) $ 0.00
======== =======
Weighted average common shares.......................................... 27,126 25,141
======== =======
</TABLE>
See accompanying notes.
F-30
<PAGE> 104
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Net cash provided by operating activities.............................. $ 7,007 $ 14,365
Investing activities
Release of funds from escrow under Senior Notes...................... 70,125 --
Purchase of property and equipment................................... (73,259) (17,523)
-------- --------
Net cash (used in) investing activities.............................. (3,134) (17,523)
Financing activities
Proceeds from long-term debt......................................... -- 18,342
Principal payments on long-term debt and lease obligations........... (11,585) (22,505)
Net proceeds from issuance of common stock -- initial public
offering.......................................................... 81,515 --
Proceeds from issuance of common stock -- private placement.......... 12,500 --
Capital contributions in subsidiary by minority shareholders......... -- 6,002
Capital contribution to unconsolidated subsidiary.................... (1,988)
Payment of debt issue costs.......................................... (1,286) --
-------- --------
Net cash provided by financing activities............................ 79,156 1,839
-------- --------
Net increase (decrease) in cash and cash equivalents................... 83,029 (1,319)
Cash and cash equivalents at beginning of period....................... 6,915 6,048
-------- --------
Cash and cash equivalents at end of period............................. $ 89,944 $ 4,729
======== ========
Supplemental disclosure of cash flow information
Cash paid (received) for:
Interest.......................................................... $ 19,156 $ 2,688
======== ========
Taxes............................................................. $ (864) $ 1,213
======== ========
</TABLE>
See accompanying notes
F-31
<PAGE> 105
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying Unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996.
As of January 1, 1996, the Company adopted FASB Statement No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. The adoption had no effect on the financial position or results of
operations of the Company.
2. EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is based on the average number of shares
of the Company's common stock outstanding during each period. Outstanding
options are included in the calculation to the extent they are not antidilutive
or qualify for inclusion under the Securities and Exchange Commission Staff
Accounting Bulletin Topic 4D.
3. ACQUISITION OF MINORITY INTEREST
Effective January 1, 1996, IXC Long Distance, Inc. purchased from Excel
Telecommunications, Inc. ("Excel") its minority interest in a joint venture for
$6,247,500. The acquisition was accounted for as a purchase and the operating
results of the former joint venture have been included in the consolidated
financial statements from the date of acquisition. The purchase price was
allocated based on estimated fair values at the date of acquisition. The excess
of purchase price over assets acquired was $5,583,000 and is being amortized on
a straight-line basis over five years. Unaudited pro forma operating results for
the nine month period ended September 30, 1995 as if the joint venture had been
acquired as of January 1, 1995, are as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
HISTORICAL PRO FORMA
---------- ---------
<S> <C> <C>
Net operating revenues......................................... $67,259 $67,259
Net income (loss).............................................. 1,456 (759)
Dividends applicable to preferred stock........................ (1,425) (1,425)
------- -------
Income (loss) applicable to common stockholders................ 31 (2,184)
Extraordinary item............................................. (1,006) (1,006)
------- -------
Income (loss) applicable to common stockholders before
extraordinary item........................................... $ 1,037 $(1,178)
======= =======
Earnings per common share
Before extraordinary item.................................... $ 0.04 $ (0.05)
Extraordinary item........................................... $ (0.04) $ (0.04)
------- -------
Net income (loss)......................................... $ 0.00 $ (0.09)
======= =======
</TABLE>
4. INCOME TAXES
The Company has determined that a valuation allowance should be applied
against the net operating loss it expects to incur in 1996. The difference
between the tax benefit recorded for the nine months ended September 30, 1996
and the expected benefit at the federal statutory rate is primarily due to state
income
F-32
<PAGE> 106
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
taxes, losses incurred (the tax benefit of which is not recorded due to
uncertainty regarding its realization), and resolution of Federal income tax
examinations, which were concluded in the second and third quarters of 1996.
5. COMMITMENTS AND CONTINGENCIES
During 1996 the Company has made and will continue to make material
commitments related to Phase 1 of the Fiber Expansion. These commitments are
expected to be paid with cash held in an escrow account and the proceeds
received from the Company's recent public offering. Additionally during 1996,
the Company has entered into and seeks to continue to enter into cost sharing
arrangements with other large users of fiber capacity in order to realize cost
savings and offsets to the estimated cost of the Fiber Expansion.
In March 1996, the Company entered into five-year equipment leases for
network switching equipment for which the lease obligations had an initial
present value of $7,038,000.
From time to time the Company is involved in various legal proceedings
arising in the ordinary course of business, some of which are covered by
insurance. In the opinion of the Company's management, none of the claims
relating to such proceedings will have a material effect on the financial
condition or results of operations of the Company.
6. SENIOR NOTES
On April 1, 1996, the Company and various of the subsidiaries filed a
Registration Statement on Form S-4 with the Commission relating to the offer
(the "Exchange Offer") by the Company to exchange its 12 1/2% Series A Senior
Notes due 2005 ("Series A Notes") for 12 1/2% Series B Senior Notes due 2005
("Series B Notes," and together with the Series A Notes, the "Senior Notes")
which was declared effective by the Commission on July 5, 1996. On August 2,
1996 the Company consummated the Exchange Offer. Approximately 93% of the Series
A Notes were tendered prior to the expiration of the Exchange Offer.
7. STOCK SPLIT
From January 1, 1996 through June 12, 1996, the Company effected stock
splits resulting in a 2.4249 for 1 split of the Company's common stock (with
fractional shares paid in cash). The Company also increased the number of
authorized shares of its common stock to 100,000,000 and the number of
authorized shares of its preferred stock to 3,000,000. The accompanying
financial statements include the stock splits and the increase in authorized
shares, and all prior periods have been retroactively adjusted.
8. STOCK OFFERING AND PRIVATE PLACEMENT
On July 9, 1996, the Company completed an initial public offering (the
"IPO" or the "Public Offering") of 5,600,000 shares of its common stock, at an
offering price of $16.00 per share resulting in net proceeds (before expenses)
of approximately $83,328,000. The Company expects to use the net proceeds from
the offering (together with a portion of the funds remaining from the sale of
the Senior Notes) to fund the Fiber Expansion and for general corporate
purposes. Concurrently with the closing of the Public Offering, the Company sold
to an affiliate in a private placement 840,053 shares of restricted common stock
resulting in proceeds of $12,500,000 (the "Private Placement").
9. STOCK OPTIONS
During the quarter ended September 30, 1996, the Company granted 345,900
stock options. At September 30, 1996 stock options covering 1,357,025 shares of
common stock were outstanding.
F-33
<PAGE> 107
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
10. PHANTOM STOCK PLAN
On May 14, 1996 the Board of Directors adopted the IXC Communications, Inc.
Outside Directors' Phantom Stock Plan (the "Directors' Plan"), pursuant to which
$20,000 per participating director per year of outside director's fees are
deferred and treated as if it were invested in shares of the Company's common
stock. No shares of common stock have been or will be actually purchased and the
participants will receive cash benefits equal to the value of the shares that
they are deemed to have purchased under the Directors' Plan, with such value to
be determined on the date of distribution. Distribution of benefits generally
will occur three years after the deferral. Compensation expense will be
determined based on increases in the market price of the number of shares deemed
to have been purchased and will be charged to expense over the related period.
On June 6, 1996 the stockholders approved the Directors' Plan.
11. THE 1996 STOCK PLAN
On May 14, 1996, the Board of Directors adopted, and on June 6, 1996
stockholders approved, the IXC Communications, Inc. 1996 Stock Plan (the "1996
Stock Plan"), a stock incentive plan covering 2,121,787 shares of common stock.
Awards under the 1996 Stock Plan are given at the discretion of the Board of
Directors and include common stock options with exercise prices at least equal
to the fair market value at the date of grant.
12. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts a significant portion of its business through
subsidiaries. The Senior Notes are unconditionally guaranteed, jointly and
severally, by the "Subsidiary Guarantors" consisting of most of the Company's
wholly owned direct and indirect subsidiaries. The obligations of each
Subsidiary Guarantor are limited to the minimum extent necessary to prevent the
quarantee from violating or becoming voidable under applicable law relating to
fraudulent conveyance or fraudulent transfer or similar laws affecting the
rights of creditors generally. The Company's subsidiaries that were not wholly
owned at the time the Senior Notes were issued do not guarantee the Senior Notes
(the "Non-Guarantor Subsidiaries"). The claims of creditors of Non-Guarantor
Subsidiaries have priority over the rights of the Company to receive dividends
or distributions from such subsidiaries.
The equity method has been used by the Company and the Subsidiary
Guarantors with respect to investments in Non-Guarantor Subsidiaries. Separate
financial statements for Subsidiary Guarantors are not presented based on
management's determination that they do not provide additional information that
is material to investors. Presented below is condensed consolidating financial
information for the Company, the Subsidiary Guarantors and the Non-Guarantor
Subsidiaries as of and for the nine months ended September 30, 1996.
F-34
<PAGE> 108
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
12. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............ $ 74,533 $ 760 $12,449 $ 2,202 $ 89,944
Accounts receivable and other, net... 341 17,966 24,631 (10,071) 32,867
Other current assets................. 1,528 4,756 584 (3,754) 3,114
-------- -------- ------- --------- --------
Total current assets......... 76,402 23,482 37,664 (11,623) 125,925
Property and equipment, net............ 3 134,079 37,719 (270) 171,531
Escrow under Senior Notes.............. 116,268 -- -- -- 116,268
Due from affiliates.................... 161,769 31,412 1,820 (195,001) --
Deferred charges and other assets...... 13,673 7,943 11,314 (8,349) 24,581
-------- -------- ------- --------- --------
Total assets................. $368,115 $196,916 $88,517 $(215,243) $438,305
======== ======== ======= ========= ========
Current liabilities:
Accounts payable, accrued interest
and other current liabilities..... $ 19,008 $ 30,309 $20,352 $ (9,410) $ 60,259
Due to affiliate..................... 111 491 1,207 (1,809) --
Current portion of long-term debt and
lease obligations................. -- 2,466 4,713 (272) 6,907
-------- -------- ------- --------- --------
Total current liabilities.... 19,119 33,266 26,272 (11,491) 67,166
Long-term debt and lease obligations,
less current portion................. 277,542 359 22,745 (5,522) 295,124
Due to affiliates...................... -- 162,854 32,147 (195,001) --
Other noncurrent liabilities........... -- 10,516 -- (6,134) 4,382
Stockholders' equity (deficit):
Preferred stock...................... 13 -- 2,584 (2,584) 13
Common stock......................... 308 3 3 (6) 308
Additional paid-in capital........... 123,530 30,052 36,248 (66,300) 123,530
Retained earnings (accumulated
deficit).......................... (52,397) (40,134) (31,482) 71,795 (52,218)
-------- -------- ------- --------- --------
Total stockholders' equity
(deficit).................. 71,454 (10,079) 7,353 2,905 71,633
======== ======== ======= ========= ========
Total liabilities and
stockholders' equity
(deficit).................. $368,115 $196,916 $88,517 $(215,243) $438,305
======== ======== ======= ========= ========
</TABLE>
F-35
<PAGE> 109
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
12. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
---------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net operating revenue:
Private line................ $ -- $ 81,075 $ 9,350 $(18,028) $ 72,397
Switched long distance...... -- 18,834 51,723 (12,681) 57,876
-------- -------- -------- -------- --------
Net operating revenues... -- 99,909 61,073 (30,709) 130,273
Operating expenses:
Cost of communications
service.................. -- 55,731 64,911 (29,625) 91,017
Operations and
administration........... 2,769 24,861 6,249 (593) 33,286
Depreciation and
amortization............. 43 12,718 7,410 (237) 19,934
-------- -------- -------- -------- --------
(2,812) 6,599 (17,497) (254) (13,964)
Interest income............... 10,840 1,944 251 (11,562) 1,473
Interest income on escrow
under Senior Notes.......... 6,441 -- -- -- 6,441
Interest expense.............. (28,816) (8,192) (3,213) 11,563 (28,658)
Equity in net income (loss) of
unconsolidated
subsidiaries................ (16,645) (19,681) -- 36,302 (24)
-------- -------- -------- -------- --------
Income (loss) before
(provision) benefit for
income taxes and minority
interest subsidiaries....... (30,992) (19,330) (20,459) 36,049 (34,732)
Benefit (provision) for
income taxes............. 1,133 4,566 479 (479) 5,699
Minority interest............. -- -- -- (357) (357)
-------- -------- -------- -------- --------
Net income (loss)............. $(29,859) $(14,764) $(19,980) $ 35,213 $(29,390)
======== ======== ======== ======== ========
</TABLE>
F-36
<PAGE> 110
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
12. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities.............................. $ 1,643 $ 13,280 $(19,902) $ 11,986 $ 7,007
Investing activities
Release of funds from escrow under
Senior Notes......................... 70,125 -- -- -- 70,125
Purchase of property and equipment...... (3) (67,016) (6,254) 14 (73,259)
-------- -------- -------- -------- --------
Net cash provided by (used) in investing
activities........................... 70,122 (67,016) (6,254) 14 (3,134)
Financing Activities
Payments from (advance to) affiliates... (91,378) 61,912 28,230 1,236 --
Capital contribution to unconsolidated
subsidiary........................... 12,500 (1,988) -- (12,500) (1,988)
Principal payments on long-term debt and
lease obligations.................... -- (8,760) (3,868) 1,043 (11,585)
Net proceeds from issuance of common
stock - IPO.......................... 81,515 -- 1 81,515
Proceeds from issuance of common
stock - Private Placement............ -- -- 12,500 12,500
Payment of debt issue costs............. (1,286) -- -- -- (1,286)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities........................... 1,350 51,164 36,863 (10,221) 79,156
Net increase (decrease) in cash and cash
equivalents.......................... 73,115 (2,572) 10,707 1,779 83,029
Cash and cash equivalents at beginning
of period............................ 1,418 3,332 1,742 423 6,915
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
period............................... $ 74,533 $ 760 $ 12,449 $ 2,202 $ 89,944
======== ======== ======== ======== ========
</TABLE>
F-37
<PAGE> 111
IXC COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Effective January 1, 1996, IXC Communications, Inc. acquired the minority
interest of Switched Services Communications, L.L.C. ("SSC") previously owned by
Excel Telecommunications, Inc. The acquisition has been accounted for using the
purchase method of accounting for business combinations.
The unaudited pro forma condensed consolidated statement of operations of
IXC Communications, Inc. ("IXC" or the "Company") for the year ended December
31, 1995 reflects the acquisition by the Company of the minority interest of SSC
as if the acquisition had occurred on January 1, 1995.
The unaudited pro forma condensed consolidated statement of operations
should be read in conjunction with the historical financial statements of IXC,
related notes to financial statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus. The pro forma information is not necessarily indicative of the
results that would have resulted had the acquisition of the minority interest of
SSC actually occurred on the dates assumed herein, nor is the pro forma
information indicative of the future results of IXC and its consolidated
subsidiaries.
<TABLE>
<CAPTION>
IXC IXC
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(NOTE 1)
<S> <C> <C> <C>
Net operating revenues.................................... $ 91,001 -- $ 91,001
Operating expenses........................................ 89,572 $ 1,117(a) 90,689
-------- ------- --------
1,429 (1,117) 312
Interest income........................................... 3,020 -- 3,020
Interest expense.......................................... (14,597) -- (14,597)
Equity in net income of unconsolidated subsidiaries....... 19 -- 19
Minority interest......................................... 5,218 (5,450)(b) (232)
-------- ------- --------
Loss before income taxes and extraordinary item........... (4,911) (6,567) (11,478)
Income tax benefit........................................ 1,693 2,180(c) 3,873
-------- ------- --------
Loss before extraordinary item............................ $ (3,218) $(4,387) $ (7,605)
======== ======= ========
Loss per common share before extraordinary item........... $ (.20) $ (.38)
======== ========
Weighted average common shares outstanding................ 25,108 25,108
======== ========
</TABLE>
NOTE 1 -- PRO FORMA ADJUSTMENTS
The following pro forma adjustments reflect the impact of purchase
accounting related to the acquisition of the minority interest of SSC, as if it
had been acquired on January 1, 1995 (in thousands):
<TABLE>
<S> <C>
Amortization of goodwill.................................................... $1,117(a)
Elimination of minority interest in net loss of SSC......................... $5,450(b)
Tax benefit of additional net losses of SSC (at 40%)........................ $2,180(c)
</TABLE>
F-38
<PAGE> 112
IXC LOGO
IXC COMMUNICATIONS, INC.
<PAGE> 113
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the sale and distribution of the securities being registered. All of the
amounts shown are estimated except the registration fee of the Securities and
Exchange Commission (the "Commission") and the filing fee for the National
Association of Securities Dealers, Inc. ("NASD").
<TABLE>
<CAPTION>
ITEM AMOUNT
--------------------------------------------------------------------------- -------
<S> <C>
Commission registration fee................................................ $24,784
NASD filing fee............................................................ 8,679
Nasdaq National Market listing fee......................................... 17,500
Printing and engraving expenses............................................ *
Legal fees and expenses (excluding Blue Sky)............................... *
Blue Sky fees and expenses................................................. *
Accounting fees and expenses............................................... *
Transfer agent and registrar fees.......................................... *
Miscellaneous.............................................................. *
-------
Total............................................................ $ *
=======
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
IXC Communications, Inc. ("IXC Communications") is a Delaware corporation.
Article VII, Section 8 of IXC Communications' Bylaws provides that IXC
Communications shall indemnify its officers, directors, employees and agents to
the fullest extent permitted by the Delaware General Corporation Law ("DGCL").
Section 145 of the DGCL provides that a Delaware corporation has the power to
indemnify its officers and directors in certain circumstances.
Subsection (a) of Section 145 of the DGCL empowers a corporation to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation),
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding provided that such director or officer acted in good faith in
a manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, provided that such director or officer had no cause to believe his
or her conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
director or officer, or former director or officer, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person acted in any of the capacities set forth
above, against expenses actually and reasonably incurred in connection with the
defense or settlement of such action or suit provided that such director or
officer acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the corporation, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such director or officer shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery or
the court in which such action was brought shall determine that despite the
adjudication of liability, but in view of all the circumstances of the case,
such director or officer is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper.
II-1
<PAGE> 114
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsections (a) and (b) or in the defense of any claim, issue or
matter therein, he or she shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him or her in connection
therewith; that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation shall have power to purchase and maintain insurance on
behalf of a director or officer of the corporation against any liability
asserted against him or her or incurred by him or her in any such capacity or
arising out of his or her status as such whether or not the corporation would
have the power to indemnify him or her against such liabilities under Section
145.
Article Tenth of the Restated Certificate of Incorporation of IXC
Communications currently provides that each director shall not be personally
liable to IXC Communications or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability: (i) for any breach of the
director's duty of loyalty to IXC Communications or its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for unlawful payment of dividends or unlawful
stock repurchases or redemptions as provided under Section 174 of the DGCL; or
(iv) for any transaction from which the director derived an improper personal
benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, IXC
Communications has sold the following unregistered securities (share amounts for
the Common Stock, par value $.01 (the "Common Stock") have been adjusted to
reflect a stock split of 4,782-to-1 effective January 31, 1994 and the stock
splits that were effected in June 1996).
On February 22, 1994, IXC Communications issued an aggregate of 3,120,893
shares of its Common Stock to four of its executive officers (one of whom is
also a director). Such shares were issued pursuant to the conversion of shares
of common stock of I-Link Communications, Inc., a Delaware corporation ("IL"),
and Telecom Services Group, Inc., a Delaware corporation ("TSGI"), at the
effective date (February 22, 1994) of the merger of IL and I-Link Acquisition
Corporation, a Delaware corporation and wholly-owned subsidiary of IXC
Communications, and the merger of TSGI and TSGI Acquisition Corporation, a
Delaware corporation and wholly-owned subsidiary of IXC Communications (the
"TSGI Merger"). Also on February 22, 1994, IXC Communications issued an
aggregate of 7,598,119 shares of Common Stock and 12,550 shares of 10% Junior
Series 3 Cumulative Preferred Stock, $.01 par value (the "Series 3 Preferred
Stock") in exchange for common and preferred shares of TSGI, to former
stockholders of TSGI (who include Ralph J. Swett, Richard D. Irwin, Trustees of
General Electric Pension Trust ("GEPT") and Grumman Hill Investments, L.P.) at
the effective date of the TSGI Merger.
On May 26, 1994, IXC Communications issued and sold 60,685 shares of Common
Stock to American Business Development Corporations for an aggregate purchase
price of $2,502.
During the period from December 16, 1994 through December 31, 1996, IXC
Communications granted stock options to 85 individuals (including two executive
officers) covering an aggregate of 1,152,506 shares of Common Stock. No
consideration was paid for such options. Such grants were exempt from the
registration requirement of the Securities Act of 1933, as amended (the
"Securities Act") as not involving the sale of a security. Stock options
representing such shares have been subsequently registered under the Securities
Act.
On October 5, 1995, IXC Communications issued and sold 12.5% Series A
Senior Notes due 2005 (the "Series A Notes") in the aggregate principal amount
of $285.0 million to an aggregate of 82 purchasers each of which was either an
"accredited investor" or "qualified institutional buyer" (as such terms are
defined in Rule 501(a) and Rule 144A(a) of the Securities Act) for proceeds to
IXC Communications of approximately $268.8 million, net of original issue
discount and placement fees of approximately $8.3 million. The aggregate
offering price of the Series A Notes was approximately $277.1 million. On August
2, 1996, IXC Communications and various of its subsidiaries consummated its
offer to exchange registered 12.5% Series B Senior Notes
II-2
<PAGE> 115
due 2005 for the Series A Notes. Dillon, Read & Co. Inc. and CS First Boston
Corporation acted as placement agents in connection with the sale of the Series
A Notes.
On July 9, 1996, IXC Communications issued and sold 840,053 shares of
Common Stock to GEPT (the "GEPT Private Placement") for an aggregate purchase
price of $12.5 million concurrently with the closing of IXC Communications'
initial public offering.
The sales and issuances of the Common Stock, Series 1 Preferred Stock,
Series 3 Preferred Stock and the Series A Notes and the GEPT Private Placement
described above were deemed to be exempt from registration under the Securities
Act in reliance upon Section 4(2) thereof, as transactions not involving a
public offering. The purchasers in such private offerings of stock represented
their intention to acquire the securities for investment only and not with a
view to the distribution thereof. The purchasers of Series A Notes represented
that they were not acquiring the Series A Notes with a view to of for sale in
connection with any distribution thereof or with any present intention of
offering or selling any of the Senior Notes in a transaction that would violate
the Securities Act. Appropriate legends were affixed to the certificates
representing the securities issued in such transactions. All purchasers had
adequate access, through their employment or other relationships or otherwise,
to sufficient information about IXC Communications to make an informed
investment decision. No underwriter or placement agent was employed with respect
to any such sales, other than the firms named above which participated as
placement agents in connection with the sale of the Series A Notes.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
DESCRIPTION
--------------------------------------------------------------------------------------
EXHIBIT
NUMBER
- ------
<S> <C> <C>
1.1 + Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of IXC Communications, Inc., as amended
(incorporated by reference to Exhibit 3.1 of IXC Communications, Inc.
Registration Statement on Form S-1 filed with the Commission on May 20, 1996, as
amended (File No. 333-4061) (the "S-1"))
3.2 Bylaws of IXC Communications, Inc., as amended (incorporated by reference to
Exhibit 3.2 of the S-1)
4.1 Specimen certificate representing shares of Common Stock of IXC Communications,
Inc. (incorporated by reference to Exhibit 4.1 of the S-1)
4.2 Indenture dated as of October 5, 1995 by and among IXC Communications, Inc., on
its behalf and as successor-in-interest to I-Link Holdings, Inc. and IXC Carrier
Group, Inc., each of IXC Carrier, Inc., on its behalf and as
successor-in-interest to I-Link, Inc., CTI Investments, Inc., Texas Microwave,
Inc. and WTM Microwave, Inc., Atlantic States Microwave Transmission Company,
Central States Microwave Transmission Company, Telcom Engineering, Inc., on its
behalf and as successor-in-interest to SWTT Company and Microwave Network, Inc.,
Tower Communication Systems Corp., West Texas Microwave Company, Western States
Microwave Transmission Company, Rio Grande Transmission, Inc., IXC Long Distance,
Inc., Link Net International, Inc. (collectively, the "Guarantors" and IBJ
Schroder Bank & Trust Company, as Trustee, with respect to the 12 1/2% Series A
and Series B Senior Notes due 2005 (incorporated by reference to Exhibit 4.1 of
IXC Communications, Inc.'s and each of the Guarantor's Registration Statement on
Form S-4 filed with the Commission on April 1, 1996, as amended (File No.
333-2936) (the "S-4")
4.3 Purchase Agreement dated October 5, 1995 by and among IXC Communications, Inc.),
and the Purchasers named therein (incorporated by reference to Exhibit 4.2 of the
S-4)
4.4 A/B Exchange Registration Rights Agreement dated as of October 5, 1995 by and
among IXC Communications, Inc., the Guarantors and the Purchasers named therein
(incorporated by reference to Exhibit 4.3 of the S-4)
</TABLE>
II-3
<PAGE> 116
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER --------------------------------------------------------------------------------------
- ------
<S> <C> <C>
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 Registration Rights Agreement dated as of August 6, 1992 by and among Telecom
Services Group, Inc., predecessor-in-interest to IXC Communications, Inc., and
each of the signatories thereto (incorporated by reference to Exhibit 4.9 of the
S-1)
4.10 Amendment to Registration Rights Agreement dated as of May 1, 1996 by and among
IXC Communications, Inc. and each of the signatories thereto (incorporated by
reference to Exhibit 4.10 of the S-1)
4.11 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)
4.12 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)
4.13 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)
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
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)
</TABLE>
II-4
<PAGE> 117
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER --------------------------------------------------------------------------------------
- ------
<S> <C> <C>
10.8 Second Amended and Restated Service Agreement dated as of January 1, 1996 by and
between Switched Services Communications, L.L.C. and Excel Telecommunications,
Inc. (incorporated by reference to Exhibit 10.8 of the S-4)
10.9 Equipment Purchase Agreement dated as of January 16, 1996 by and between Siecor
Corporation and IXC Carrier, Inc. (incorporated by reference to Exhibit 10.9 of
the S-4)
10.10 + 1996 Stock Plan of IXC Communications, Inc., as amended
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
10.13 Business Consultant and Management Agreement dated as of January 3, 1995 by and
between IXC Communications, Inc. and Culp Communications Associates (incorporated
by reference to Exhibit 10.13 of the S-1)
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 + IRU Agreement dated as of December 12, 1996 by and among IXC Carrier, Inc., The
Wiltech Group and Vyvx, Inc.
10.17 + Special Stock Plan of IXC Communications, Inc.
11.1 Statement of Computation of Earnings per Share
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-7)
</TABLE>
- ---------------
+ To be filed by amendment.
(b) Financial Statement Schedules
All schedules are omitted since the required information is inapplicable or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the Consolidated Financial
Statements and Notes thereto.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
II-5
<PAGE> 118
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The undersigned the registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 119
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 January 28, 1997.
IXC Communications, Inc.,
a Delaware corporation
By: /s/ JOHN J. WILLINGHAM
----------------------------------
John J. Willingham
Senior Vice President, Chief
Financial
Officer and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below on this registration statement hereby constitutes and appoints Ralph J.
Swett and John J. Willingham, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities (unless revoked in writing) to sign
any and all amendments to this registration statement to which this power of
attorney is attached, including any post-effective amendments as well as any
related registration statement (or amendment thereto) filed in reliance upon
Rule 462(b) under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Commission, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in connection therewith, as fully to all
intents and purposes as he might and could do in person hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ -----------------
<C> <S> <C>
/s/ RALPH J. SWETT Chairman, President and Chief January 28, 1997
- --------------------------------------------- Executive Officer, and
Ralph J. Swett Director (Principal Executive
Officer)
/s/ JOHN J. WILLINGHAM Senior Vice President, Chief January 28, 1997
- --------------------------------------------- Financial Officer and
John J. Willingham Secretary (Principal Financial
and Accounting Officer)
/s/ RICHARD D. IRWIN Director January 28, 1997
- ---------------------------------------------
Richard D. Irwin
/s/ WOLFE H. BRAGIN Director January 28, 1997
- ---------------------------------------------
Wolfe H. Bragin
/s/ CARL W. MCKINZIE Director January 28, 1997
- ---------------------------------------------
Carl W. McKinzie
/s/ PHILLIP L. WILLIAMS Director January 28, 1997
- ---------------------------------------------
Phillip L. Williams
/s/ JOE C. CULP Director January 28, 1997
- ---------------------------------------------
Joe C. Culp
</TABLE>
II-7
<PAGE> 120
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------------------------------------------------------------------------------
<S> <C> <C> <C>
1.1 + Form of Underwriting Agreement.........................................
3.1 Restated Certificate of Incorporation of IXC Communications, Inc., as
amended (incorporated by reference to Exhibit 3.1 of IXC
Communications, Inc. Registration Statement on Form S-1 filed with the
Commission on May 20, 1996, as amended (File No. 333-4061) (the
"S-1"))................................................................
3.2 Bylaws of IXC Communications, Inc., as amended (incorporated by
reference to Exhibit 3.2 of the S-1)...................................
4.1 Specimen certificate representing shares of Common Stock of IXC
Communications, Inc. (incorporated by reference to Exhibit 4.1 of the
S-1)...................................................................
4.2 Indenture dated as of October 5, 1995 by and among IXC Communications,
Inc., on its behalf and as successor-in-interest to I-Link Holdings,
Inc. and IXC Carrier Group, Inc., each of IXC Carrier, Inc., on its
behalf and as successor-in-interest to I-Link, Inc., CTI Investments,
Inc., Texas Microwave, Inc. and WTM Microwave, Inc., Atlantic States
Microwave Transmission Company, Central States Microwave Transmission
Company, Telcom Engineering, Inc., on its behalf and as successor-in-
interest to SWTT Company and Microwave Network, Inc., Tower
Communication Systems Corp., West Texas Microwave Company, Western
States Microwave Transmission Company, Rio Grande Transmission, Inc.,
IXC Long Distance, Inc., Link Net International, Inc. (collectively,
the "Guarantors" and IBJ Schroder Bank & Trust Company, as Trustee,
with respect to the 12 1/2% Series A and Series B Senior Notes due 2005
(incorporated by reference to Exhibit 4.1 of IXC Communications, Inc.'s
and each of the Guarantor's Registration Statement on Form S-4 filed
with the Commission on April 1, 1996, as amended (File No. 333-2936)
(the "S-4")............................................................
4.3 Purchase Agreement dated October 5, 1995 by and among IXC
Communications, Inc.), and the Purchasers named therein (incorporated
by reference to Exhibit 4.2 of the S-4)................................
4.4 A/B Exchange Registration Rights Agreement dated as of October 5, 1995
by and among IXC Communications, Inc., the Guarantors and the
Purchasers named therein (incorporated by reference to Exhibit 4.3 of
the S-4)...............................................................
4.5 Escrow Account and Disbursement Agreement dated as of October 5, 1995
by and among IXC Communications, Inc., IBJ Schroder Bank & Trust
Company, as Escrow Holder, and IBJ Schroder Bank & Trust Company, as
Collateral Agent (incorporated by reference to Exhibit 4.4 of the
S-4)...................................................................
4.6 Escrow Account Security Agreement dated as of October 5, 1995 by and
between IXC Communications, Inc. and IBJ Schroder Bank & Trust Company
(incorporated by reference to Exhibit 4.5 of the S-4)..................
4.7 Form of 12 1/2% Series A Senior Notes due 2005 (incorporated by
reference to Exhibit 4.6 of the S-4)...................................
4.8 Form of 12 1/2% Series B Senior Notes due 2005 and Subsidiary Guarantee
(incorporated by reference to Exhibit 4.8 of the S-1)..................
4.9 Registration Rights Agreement dated as of August 6, 1992 by and among
Telecom Services Group, Inc., predecessor-in-interest to IXC
Communications, Inc., and each of the signatories thereto (incorporated
by reference to Exhibit 4.9 of the S-1)................................
</TABLE>
<PAGE> 121
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------------------------------------------------------------------------------
<S> <C> <C> <C>
4.10 Amendment to Registration Rights Agreement dated as of May 1, 1996 by
and among IXC Communications, Inc. and each of the signatories thereto
(incorporated by reference to Exhibit 4.10 of the S-1).................
4.11 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).........
4.12 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)........
4.13 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)...................................................................
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................................................................
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)..................................
10.10 + 1996 Stock Plan of IXC Communications, Inc., as amended................
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................................................................
10.13 Business Consultant and Management Agreement dated as of January 3,
1995 by and between IXC Communications, Inc. and Culp Communications
Associates (incorporated by reference to Exhibit 10.13 of the S-1).....
</TABLE>
<PAGE> 122
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------------------------------------------------------------------------------
<S> <C> <C> <C>
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 + IRU Agreement dated as of December 12, 1996 by and among IXC Carrier,
Inc., The Wiltech Group and Vyvx, Inc. ................................
10.17 + Special Stock Plan of IXC Communications, Inc. ........................
11.1 Statement of Computation of Earnings per Share.........................
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-7).............................
</TABLE>
- ---------------
+ To be filed by amendment.
<PAGE> 1
EXHIBIT 11.1 -- COMPUTATION OF PER-SHARE EARNINGS
IXC COMMUNICATIONS, INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
FOR THE THREE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 and 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------- -------------------------------
1993 1994 1995 1995 1996
---------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS
Adjusted net income (loss) $(23,317) $7,315 $(4,965) $ 1,456 $(29,390)
Less: Dividends applicable to preferred stock (1,567) (1,752) (1,843) (1,425) (1,302)
--------------------------------- -------------------------
Net income (loss) applicable to common stockholders (24,884) 5,563 (6,808) 31 (30,692)
Extraordinary (gain) loss (8,495) (2,298) 1,747 1,006 --
--------------------------------- -------------------------
Net income (loss) applicable to common
stockholders before extraordinary items $(33,379) $3,265 $(5,061) $ 1,037 $(30,692)
================================= =========================
PRIMARY
Weighted average number of shares outstanding 23,333 24,310 24,335 24,335 26,451
Add: Effect for periods prior to the initial
public offering (IPO), of common stock
options issued within one year of the IPO 833 833 833 833 832
Add: Dilutive effect of outstanding stock
options -- 9 120 160 --
Less: Assumed repurchase of shares under
the treasury stock method (157) (159) (180) (187) (157)
--------------------------------- -------------------------
Number of shares used to compute earnings (loss)
applicable to common stockholders 24,009 24,993 25,108 25,141 27,126
================================ =========================
FULLY DILUTED
Weighted average number of shares outstanding 23,333 24,310 24,335 24,335 26,451
Add: Effect for periods prior to the initial
public offering (IPO), of common stock
options issued within one year of the IPO 833 833 833 833 832
Add: Dilutive effect of outstanding stock
options -- 9 120 160 --
Less: Assumed repurchase of shares under
the treasury stock method (157) (159) (180) (187) (157)
--------------------------------- -------------------------
Number of shares used to compute earnings (loss)
applicable to common stockholders 24,009 24,993 25,108 25,141 27,126
================================= =========================
PRIMARY INCOME (LOSS) PER COMMON SHARE
Before extraordinary item $(1.39) $0.13 $(0.20) $ 0.04 $(1.13)
Extraordinary gain (loss) 0.35 0.09 (0.07) (0.04) --
--------------------------------- -------------------------
Net income (loss) $(1.04) $0.22 $(0.27) $ 0.00 $(1.13)
================================= =========================
FULLY DILUTED INCOME (LOSS) PER COMMON SHARE
Before extraordinary item $(1.39) $0.13 $(0.20) $ 0.04 $(1.13)
Extraordinary gain (loss) 0.35 0.09 (0.07) (0.04) --
--------------------------------- -------------------------
Net income (loss) $(1.04) $0.22 $(0.27) $ 0.00 $(1.13)
================================= =========================
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the caption "Experts" and to the
use of our report dated March 1, 1996, except for Note 17, as to which the date
is June 12, 1996, in the Registration Statement on Form S-1 and related
Prospectus of IXC Communications, Inc. for the registration of 2,000,000 shares
of common stock.
/s/ Ernst & Young LLP
--------------------------------------
Austin, Texas
January 28, 1997
