<PAGE> 1
SCHEDULE 13E-4
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Issuer Tender Offer Statement
(Pursuant to Section 13(e)(1) of the Securities Exchange Act of 1934)
IXC Communications, Inc.
- --------------------------------------------------------------------------------
(Name of Issuer)
IXC Communications, Inc.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Statement)
10% Junior Series 3 Cumulative Redeemable Preferred Stock,
par value $.01 per share
- --------------------------------------------------------------------------------
(Title of Class of Securities)
None
- --------------------------------------------------------------------------------
(CUSIP Number of Class of Securities)
Karen C. Goodin
Michael P. Whalen
Riordan & McKinzie
695 Town Center Drive, Suite 1500
Costa Mesa, CA 92626
(714) 433-2900
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to Receive Notices and
Communications on Behalf of the Person(s) Filing Statement)
October 2, 1997
- --------------------------------------------------------------------------------
(Date Tender Offer First Published, Sent or Given to Security Holders)
Calculation of Filing Fee
<TABLE>
<CAPTION>
Transaction Valuation(1) Amount of Filing Fee
<S> <C>
$125.50 $42.00
</TABLE>
(1) Estimated solely for the purpose of determining the filing
fee. The transaction valuation was determined in accordance
with Rule 240.0-11(b)(2) and 240.0-11(a)(4) under the
Securities Exchange Act of 1934. The filing fee was calculated
based upon the par value of $.01 per share of the Issuer's 10%
Junior Series 3 Cumulative Redeemable Preferred Stock,
multiplied by 12,550 (the number of shares of Series 3
Preferred Stock sought to be acquired pursuant to the exchange
offer).
[ ] Check box if any part of the fee is offset as provided by
Rule 0-11(a)(2) and identify the filing with which the
offsetting fee was previously paid. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
Amount Previously Paid:
---------------------------------------------------------
Form of Registration No.:
-------------------------------------------------------
Filing Party:
-------------------------------------------------------------------
Date Filed:
---------------------------------------------------------------------
<PAGE> 2
ITEM 1. SECURITY AND ISSUER
(a) The name of the issuer of the securities to which this Schedule
13E-4 relates is IXC Communications, Inc., a Delaware corporation (the
"Company"). The address of its principal executive office is 5000 Plaza on the
Lake, Suite 200, Austin, Texas 78746.
(b) This Schedule 13E-4 relates to the offer by the Company to exchange
shares of its Common Stock, par value $.01 per share (the "Common Stock"), for
up to all of its outstanding shares of 10% Junior Series 3 Cumulative Redeemable
Preferred Stock, par value $.01 per share (the "Series 3 Preferred Stock"), upon
the terms and subject to the conditions set forth in the Offering Circular dated
October 1, 1997 (the "Offering Circular") and in the related Letter of
Transmittal (collectively, the "Exchange Offer"), copies of which are attached
hereto as Exhibits (a)(1) and (a)(2), respectively, and incorporated herein by
reference. The Common Stock to be exchanged will not be registered under the
Securities Act of 1933, as amended. There are 12,550 shares of Series 3
Preferred Stock issued and outstanding. Shares of Series 3 Preferred Stock are
held by certain officers, directors and affiliates of the Company as follows:
(i) Ralph J. Swett, the Chairman, President and Chief Executive Officer holds 25
shares; (ii) Richard D. Irwin (a director) and certain of his affiliates hold
995.58 shares; and (iii) Trustees of General Electric Pension Trust (a major
stockholder and an affiliate of Wolfe H. Bragin, a director) hold 6,725 shares
of Series 3 Preferred Stock. Mr. Swett and Mr. Irwin have advised the Company
that they intend to participate in the Exchange Offer. The Company does not
know whether GEPT will participate in the Exchange Offer. The Exchange Offer is
conditioned upon a minimum of 90% of the shares of Series 3 Preferred Stock
being properly tendered and not withdrawn; however, the Company reserves the
right, but will not be obligated, to exchange a lesser percentage of shares of
Series 3 Preferred Stock if less than 90% of the shares of Series 3 Preferred
Stock is not properly tendered. The information set forth in Section 1 and
Section 13 of the Offering Circular is incorporated herein by reference.
(c) There is currently no established trading market for the Series 3
Preferred Stock.
(d) This Schedule 13E-4 is being filed by the Company.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
(a) The information set forth in Section 8 of the Offering Circular is
incorporated herein by reference.
(b) No funds are, or are expected to be, borrowed for the purpose of
the Exchange Offer.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER
OR AFFILIATE
(a) - (j) The information set forth in Section 5 of the Offering
Circular is incorporated herein by reference.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER
Not applicable.
- 2 -
<PAGE> 3
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH
RESPECT TO THE ISSUER'S SECURITIES
Not applicable.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
The information set forth in Section 11 of the Offering Circular is
incorporated herein by reference.
ITEM 7. FINANCIAL INFORMATION
(a) The following is incorporated herein by reference: (1) the Offering
Circular under the captions Selected Historical Financial Data and Pro Forma
Financial Data; (2) the audited financial statements of the Company set forth in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996; and (3) the unaudited financial statements of the Company set forth in the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, as
amended.
ITEM 8. ADDITIONAL INFORMATION
(a) - (e) Not applicable.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
99 (a)(1) Form of Offering Circular dated October 2, 1997.
99 (a)(2) Form of Letter of Transmittal.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f) Not applicable.
- 3 -
<PAGE> 4
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
October 1, 1997 IXC Communications, Inc.
By: /s/ James F. Guthrie
----------------------------------------------
James F. Guthrie, Executive Vice President and
Chief Financial Officer
- 4 -
<PAGE> 5
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------
<S> <C>
99(a)(1) Form of Offering Circular dated October 2, 1997.
99(a)(2) Form of Letter of Transmittal.
99(b) Not applicable.
99(c) Not applicable.
99(d) Not applicable.
99(e) Not applicable.
99(f) Not applicable.
</TABLE>
<PAGE> 6
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
(AMENDMENT NO. 1)
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-20803
------------------------
IXC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE 75-2644120
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5000 PLAZA ON THE LAKE, SUITE 200,
AUSTIN, TEXAS 78746
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (512) 328-1112
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock, $.01 par value, outstanding (the only
class of common stock of the Company outstanding) was 30,898,841 on July 31,
1997.
================================================================================
<PAGE> 7
This Amendment No. 1 to the Quarterly Report on Form 10-Q is being filed to
add certain exhibits and to amend Item 6 (Exhibits and Reports on Form 8-K)
contained in Part II of the Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, that was filed with the Securities and Exchange Commission on
August 6, 1997 ("Form 10-Q").
IXC Communications, Inc. hereby amends its Form 10-Q by adding Exhibits
10.19 and 10.20 to the exhibits contained under Item 6, contained in Part II of
the Form 10-Q for the quarter ended June 30, 1997, as set forth below:
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<C> <S>
3.1 + Restated Certificate of Incorporation of IXC Communications, Inc., as amended
3.2 Bylaws of IXC Communications, Inc., as amended (incorporated by reference to
Exhibit 3.2 of IXC Communications, Inc. Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997 (the "10-Q")).
4.1 Specimen certificate representing shares of Common Stock of IXC Communications,
Inc. (incorporated by reference to Exhibit 4.1 of IXC Communications, Inc.
Registration Statement on Form S-1 filed with the Commission on May 20, 1996, as
amended (File No. 333-4061) (the "S-1")).
4.2 Indenture dated as of October 5, 1995 by and among IXC Communications, Inc., on
its behalf and as successor-in-interest to I-Link Holdings, Inc. and IXC Carrier
Group, Inc., each of IXC Carrier, Inc., on its behalf and as
successor-in-interest to I-Link, Inc., CTI Investments, Inc., Texas Microwave,
Inc. and WTM Microwave, Inc., Atlantic States Microwave Transmission Company,
Central States Microwave Transmission Company, Telcom Engineering, Inc., on its
behalf and as successor-in-interest to SWTT Company and Microwave Network, Inc.,
Tower Communication Systems Corp., West Texas Microwave Company, Western States
Microwave Transmission Company, Rio Grande Transmission, Inc., IXC Long Distance,
Inc., Link Net International, Inc. (collectively, the "Guarantors") and IBJ
Schroder Bank & Trust Company, as Trustee, with respect to the 12 1/2% Series A
and Series B Senior Notes due 2005 (incorporated by reference to Exhibit 4.1 of
IXC Communications, Inc.'s and each of the Guarantor's Registration Statement on
Form S-4 filed with the Commission on April 1, 1996, as amended (File No.
333-2936) (the "S-4")).
4.3 Purchase Agreement dated October 5, 1995 by and among IXC Communications, Inc.,
and the Purchasers named therein (incorporated by reference to Exhibit 4.2 of the
S-4).
4.4 A/B Exchange Registration Rights Agreement dated as of October 5, 1995 by and
among IXC Communications, Inc., the Guarantors and the Purchasers named therein
(incorporated by reference to Exhibit 4.3 of the S-4).
4.5 Escrow Account and Disbursement Agreement dated as of October 5, 1995 by and
among IXC Communications, Inc., IBJ Schroder Bank & Trust Company, as Escrow
Holder, and IBJ Schroder Bank & Trust Company, as Collateral Agent (incorporated
by reference to Exhibit 4.4 of the S-4).
4.6 Escrow Account Security Agreement dated as of October 5, 1995 by and between IXC
Communications, Inc. and IBJ Schroder Bank & Trust Company (incorporated by
reference to Exhibit 4.5 of the S-4).
4.7 Form of 12 1/2% Series A Senior Notes due 2005 (incorporated by reference to
Exhibit 4.6 of the S-4).
4.8 Form of 12 1/2% Series B Senior Notes due 2005 and Subsidiary Guarantee
(incorporated by reference to Exhibit 4.8 of the S-1).
4.9 Amendment No. 1 to Indenture and Subsidiary Guarantee dated as of June 4, 1996 by
and among IXC Communications, Inc., the Guarantors and the Trustee (incorporated
by reference to Exhibit 4.11 of the S-1).
</TABLE>
1
<PAGE> 8
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<C> <S>
4.10 Stock Exchange Agreement dated as of June 10, 1996 by and between IXC
Communications, Inc., and Trustees of General Electric Pension Trust ("GEPT")
(incorporated by reference to Exhibit 4.12 of the S-1).
4.11 Registration Rights Agreement dated as of June 10, 1996 by and among IXC
Communications, Inc., GEPT and certain stockholders of IXC Communications, Inc.
(incorporated by reference to Exhibit 4.13 of the S-1).
4.12 Purchase Agreement dated as of March 25, 1997 by and among IXC Communications,
Inc., Credit Suisse First Boston Corporation ("CS First Boston") and Dillon Read
& Co. Inc. ("Dillon Read") incorporated by reference to Exhibit 4.12 of the
10-Q).
4.13 Registration Rights Agreement dated as of March 25, 1997 by and among IXC
Communications, Inc., CS First Boston and Dillon Read (incorporated by reference
to Exhibit 4.13 of the 10-Q).
4.14 Amendment to Registration Rights Agreement dated as of March 25, 1995 between IXC
Communications, Inc. and GEPT (incorporated by reference to Exhibit 4.14 of the
10-Q).
4.15 + Registration Rights Agreement dated as of July 8, 1997 among IXC Communications,
Inc. and each of William G. Rodi, Gordon Hutchins, Jr. and William F. Linsmeier.
4.16 + Registration Rights Agreement dated as of July 8, 1997 among IXC Communications,
Inc. and each of William G. Rodi, Gordon Hutchins, Jr. and William F. Linsmeier.
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 Outside Directors' Phantom Stock Plan of IXC Communications, Inc., 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>
2
<PAGE> 9
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<C> <S>
10.14 Employment Agreement dated December 28, 1995 by and between IXC Communications,
Inc. and James F. Guthrie (incorporated by reference to Exhibit 10.14 of the
S-1).
10.15 Employment Agreement dated August 28, 1995, by and between IXC Communications,
Inc. and David J. Thomas (incorporated by reference to Exhibit 10.15 of the S-1).
10.16 Special Stock Plan of IXC Communications, Inc.
10.17 + Lease dated as of June 4, 1997 between IXC Communications, Inc. and Carramerica
Realty, L.P.
10.18 + Loan and Security Agreement dated as of July 18, 1997 among IXC Communications,
Inc., IXC Carrier, Inc. and NTFC Capital Corporation
10.19 * IRU and Stock Purchase Agreement dated as of July 22, 1997 between IXC Internet
Services, Inc. and PSINet Inc.
10.20 * Joint Marketing and Services Agreement dated on July 22, 1997 between IXC
Internet Services, Inc. and PSINet Inc.
11.1 + Statement of Computation of Earnings per Share.
27.1 + Financial Data Schedule.
</TABLE>
- ---------------
+ Previously filed.
* Filed herewith.
(B) REPORTS ON FORM 8-K.
(1) Form 8-K dated April 1, 1997 and filed with the Commission on April 3, 1997
with respect to the Company's notice of offering of unregistered securities
pursuant to Rule 135c(d) of the Securities Act of 1933, as amended, with
respect to the sale of Convertible Preferred Stock, which occurred on April
1, 1997.
3
<PAGE> 10
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 1 to the report to be signed on
its behalf by the undersigned thereunto duly authorized.
IXC Communications, Inc.,
a Delaware corporation
August 8, 1997 By: /s/ JAMES F. GUTHRIE
------------------------------------
James F. Guthrie
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
4
<PAGE> 11
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996............................................ 3
Condensed Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 1997 and 1996.................. 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1997 and 1996.......................... 5
Notes to Condensed Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risks........................................................ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 17
Item 2. Changes in Securities........................................ 17
Item 3. Defaults Upon Senior Securities.............................. 17
Item 4. Submission of Matters to a Vote of Security Holders.......... 18
Item 5. Other Information............................................ 18
Item 6. Exhibits and Reports on Form 8-K............................. 19
SIGNATURE............................................................................ 22
</TABLE>
5
<PAGE> 12
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED) (SEE NOTE 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 40,974 $ 61,340
Accounts receivable and other receivables, net of allowance for
doubtful accounts of $6,418 at June 30, 1997 and $4,030 at
December 31, 1996............................................ 62,436 47,568
Other current assets............................................ 3,593 2,197
--------- --------
Total current assets.................................... 107,003 111,105
Property and equipment............................................ 493,643 337,742
Less: accumulated depreciation.................................... (87,804) (69,133)
--------- --------
405,839 268,609
Escrow under Senior Notes......................................... -- 51,412
Investment in unconsolidated subsidiary........................... 11,070 5,486
Deferred charges and other non-current assets..................... 28,988 22,539
--------- --------
Total assets............................................ $ 552,900 $459,151
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities.................. $ 119,935 $ 74,945
Accrued interest................................................ 8,906 8,906
Current portion of long-term debt and capital lease
obligations.................................................. 6,450 6,750
--------- --------
Total current liabilities............................... 135,291 90,601
Long-term debt and capital lease obligations, less current
portion......................................................... 294,299 295,531
Other noncurrent liabilities...................................... 12,392 9,540
7 1/4% Junior Convertible Preferred Stock; $.01 par value;
authorized -- 3,000,000 shares of all classes of Preferred
Stock; 1,018,123 shares issued and outstanding (aggregate
liquidation preference of $101,813, including dividends of
$1,813, at June 30, 1997)....................................... 98,010 --
Stockholders' equity:
10% Junior Series 3 Cumulative Preferred Stock, $.01 par value;
authorized -- 3,000,000 shares of all classes of Preferred
Stock; 12,550 shares issued and outstanding (aggregate
liquidation preference of $20,004 at June 30, 1997).......... 13 13
Common stock, $.01 par value; 100,000,000 shares authorized:
shares issued and outstanding 30,799,560 at June 30, 1997 and
30,795,014 at December 31, 1996.............................. 308 308
Additional paid-in capital........................................ 121,551 123,434
Accumulated deficit............................................... (108,964) (60,276)
--------- --------
Total stockholders' equity.............................. 12,908 63,479
--------- --------
Total liabilities and stockholders' equity.............. $ 552,900 $459,151
========= ========
</TABLE>
See accompanying notes.
6
<PAGE> 13
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS AND NUMBER OF SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net operating revenues:
Private line................................ $ 38,494 $ 24,003 $ 69,363 $ 46,631
Switched long distance...................... 50,371 19,004 103,412 22,626
-------- -------- -------- --------
Net operating revenues.............. 88,865 43,007 172,775 69,257
Operating expenses:
Cost of communication services.............. 74,150 31,643 143,132 47,243
Operations and administration............... 18,664 10,786 35,231 21,203
Depreciation and amortization............... 13,363 6,644 23,365 12,654
-------- -------- -------- --------
Operating loss...................... (17,312) (6,066) (28,953) (11,843)
Interest income............................... 1,162 127 2,238 253
Interest income on escrow under Senior
Notes....................................... -- 2,080 203 4,637
Interest expense.............................. (8,014) (9,490) (15,760) (19,360)
Equity in net loss of unconsolidated
subsidiaries................................ (4,532) (9) (6,351) (14)
-------- -------- -------- --------
Loss before benefit for income taxes and
minority interest........................... (28,696) (13,358) (48,623) (26,327)
Benefit for income taxes...................... -- 1,402 252 2,765
Minority interest............................. (114) (111) (317) (204)
-------- -------- -------- --------
Net loss...................................... (28,810) (12,067) (48,688) (23,766)
Dividends applicable to preferred stock....... (2,288) (432) (2,758) (865)
-------- -------- -------- --------
Net loss applicable to common and common
equivalent stockholders..................... $(31,098) $(12,499) $(51,446) $(24,631)
-------- -------- -------- --------
Net loss per common and common equivalent
share....................................... $ (1.01) $ (0.50) $ (1.67) $ (0.99)
======== ======== ======== ========
Weighted average common and common equivalent
shares...................................... 30,799 25,011 30,799 25,011
======== ======== ======== ========
</TABLE>
See accompanying notes.
7
<PAGE> 14
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net cash provided by (used in) operating activities............... $ (5,988) $ 812
Investing activities
Release of funds from escrow under Senior Notes................. 69,428 36,525
Deposit into escrow under Senior Notes.......................... (18,152) --
Purchase of property and equipment.............................. (140,901) (32,783)
--------- --------
Net cash provided by (used in) investing activities............... (89,625) 3,742
Financing activities
Net proceeds from the sale of convertible preferred stock....... 96,197 --
Principal payments on long-term debt and capital lease
obligations.................................................. (9,230) (5,137)
Capital contribution to unconsolidated subsidiary............... (11,650) --
Other financing activities...................................... (70) (675)
--------- --------
Net cash provided by (used in) financing activities............... 75,247 (5,812)
--------- --------
Net decrease in cash and cash equivalents......................... (20,366) (1,258)
Cash and cash equivalents at beginning of period.................. 61,340 6,915
--------- --------
Cash and cash equivalents at end of period........................ $ 40,974 $ 5,657
========= ========
Supplemental disclosure of cash flow information:
Cash paid (received) for:
Interest..................................................... $ 18,518 $ 18,713
========= ========
Taxes........................................................ $ 89 $ (884)
========= ========
</TABLE>
See accompanying notes.
8
<PAGE> 15
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation for
the periods indicated have been included. Operating results for the three month
and six month periods ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997. The Balance
Sheet at December 31, 1996 has been derived from the audited financial
statements at that date, but does not include all of the information and notes
required by generally accepted accounting principles for complete financial
statements. The accompanying financial statements should be read in conjunction
with the audited consolidated financial statements (including the notes thereto)
for the year ended December 31, 1996.
2. LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Loss per common and common equivalent share is based on net loss less
preferred stock dividend requirements, divided by the weighted average common
and common equivalent shares outstanding during the period. Outstanding options
are included in the calculation to the extent they are dilutive. Loss per share
on a fully diluted basis is not presented as the fully diluted effect is either
antidilutive or not materially different from primary loss per common and common
equivalent share, as computed.
3. INCOME TAXES
The Company has determined that a valuation allowance should be applied
against a portion of the deferred tax assets related to the net operating loss
incurred in 1997 due to uncertainty regarding its realizability. The difference
between the tax benefit recorded for the six months ended June 30, 1997 and the
expected benefit at the federal statutory rate is primarily due to the valuation
allowance applied against the deferred tax assets.
4. COMMITMENTS AND CONTINGENCIES
During 1997, the Company has made and will continue to make material
commitments related to the expansion of its network.
During the first quarter of 1997, the Company entered into two agreements
with major long distance carriers for the sale of dark fiber for approximately
$219 million. Although these agreements provide for certain penalties if the
Company does not complete construction of the defined routes within the time
frame specified in the agreements, management does not anticipate that the
Company will incur any substantial penalties under these provisions.
On April 4, 1997 Tel-Central Communications, Inc. ("Tel-Central") filed a
complaint against IXC Long Distance, Inc., one of the Company's subsidiaries, in
the United States District Court in the Western District of Missouri, after the
Company terminated service to Tel-Central for failure to pay for services.
Tel-Central's complaint makes various state and federal law claims and seeks
damages of over $100 million and asks for punitive damages of $100 million. The
Company believes that Tel-Central's claims are without merit and that such
complaint is part of an attempt by Tel-Central to avoid payment of its
outstanding balance to the Company. On May 23, 1997, Tel-Central filed a
voluntary Chapter 11 petition in bankruptcy. On May 30, 1997, the Company filed
a motion to dismiss this action. The Tel-Central action is currently stayed as a
result
9
<PAGE> 16
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
of the Tel-Central's Chapter 11 bankruptcy proceeding. The Company believes that
it is unlikely that this suit will result in any material liability to the
Company.
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.
5. STOCK OPTIONS
During the quarter ended June 30, 1997, the Company granted 377,400 stock
options under the 1996 Stock Plan. At June 30, 1997 stock options covering
2,059,426 shares of common stock were outstanding.
6. PROSPECTIVE ACCOUNTING CHANGES
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" ("SFAS
No. 128"), which simplifies the calculation of earnings per share. Under SFAS
No. 128, stock options and other equity instruments are excluded from the
calculation of "basic earnings per share", which will replace primary earnings
per share disclosures. SFAS No. 128 is effective for financial statements for
periods ending after December 15, 1997. The Company believes that the future
adoption of SFAS No. 128 will not have a significant impact on earnings per
share disclosures for the periods presented.
7. CONVERTIBLE PREFERRED STOCK
In April 1997 the Company issued $100 million of 7 1/4% Junior Convertible
Preferred Stock Due 2007 ("Convertible Preferred Stock"). The net proceeds of
approximately $96.2 million from the offering are being used to fund capital
expenditures and general corporate purposes. The Convertible Preferred Stock and
the common stock issuable upon conversion thereof have not been registered under
the Securities Act of 1933 and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements.
On March 31, 2007, the Convertible Preferred Stock must be redeemed by the
Company at a price equal to the liquidation preference plus accrued and unpaid
dividends; thus it is "mandatorily redeemable" and is not included in
stockholders' equity. Dividends payable prior to or on June 30, 1999 are, at the
option of the Company, payable in cash or through the issuance of additional
shares of Convertible Preferred Stock equal to the dividend amount divided by
the liquidation preference of such additional shares. The registration rights
agreement entered into by the Company with the initial purchasers of the
Convertible Preferred Stock requires that the Company file a shelf registration
statement with the Securities and Exchange Commission ("SEC") for the benefit of
the holders of the Convertible Preferred Stock, with respect to the Convertible
Preferred Stock and the shares of common stock that may be issued upon
conversion thereof. In the event such shelf registration statement is not
declared effective by the SEC before September 1, 1997, the Convertible
Preferred Stock will accrue dividends at a rate per annum of 7 3/4% until the
shelf registration statement is declared effective. After March 31, 1999, to the
extent and for so long as the Company is not permitted to pay cash dividends on
the Convertible Preferred Stock by the terms of any then outstanding
indebtedness or any other agreement or instrument to which the Company is
subject, the Company will be required to pay dividends, which shall accrue at
the rate per annum of 8 3/4%, through the issuance of additional shares of
Convertible Preferred Stock. Payment of cash dividends on the Convertible
Preferred Stock is not currently permitted under the indenture for the Company's
12% Senior Notes due 2005 until certain financial conditions have been met.
During June 1997, the Company issued 18,123 additional shares of Convertible
Preferred Stock in satisfaction of its June 1997 dividend requirements.
10
<PAGE> 17
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. SUBSEQUENT EVENT
In July 1997 the Company announced an agreement with PSINet Inc. ("PSINet")
to acquire PSINet's broad spectrum of Internet services for resale to its
customers. Under the terms of the PSINet agreements, after consummation of the
transaction, the Company will provide PSINet with an indefeasible right to use
10,000 miles of OC-48 transmission capacity on its Network over a 20-year period
in exchange for 20% (post-issuance) of PSINet common stock. In addition, if the
value of the PSINet common stock received by the Company is less than $240
million at the earlier of one year after the final delivery of the transmission
capacity (scheduled for late-1999) or four years after closing, PSINet, at its
option, will pay the Company cash and/or deliver additional PSINet common stock
to bring the value of the Company's investment to $240 million. Upon delivery of
the transmission capacity to PSINet, the Company will also receive a maintenance
fee which, when all the capacity has been delivered, will be approximately $11.5
million per year. The Company expects to consummate the transactions
contemplated by the PSINet agreements upon the satisfaction of certain
conditions, including receipt of approval of PSINet stockholders. There can be
no assurance that such conditions will be satisfied or that the PSINet
transaction will be consummated.
9. 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 certain wholly-owned direct and indirect subsidiaries (the
"Subsidiary Guarantors"). The obligations of each Subsidiary Guarantor are
limited to the minimum extent necessary to prevent the guarantee from violating
or becoming voidable under applicable law relating to fraudulent conveyance or
fraudulent transfer or similar laws affecting the rights of creditors generally.
Certain subsidiaries of the Company 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 with respect to investments
in subsidiaries. The equity method has been used by 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 six months ended June 30, 1997.
11
<PAGE> 18
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------------------------------------------
NON-
SUBSIDIARY GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 21,463 $ 17,117 $ 2,394 $ -- $ 40,974
Accounts receivable and other
receivables, net................... -- 39,882 22,554 -- 62,436
Other current assets.................. 1,577 1,809 207 -- 3,593
--------- -------- -------- --------- ---------
Total current assets.......... 23,040 58,808 25,155 -- 107,003
Property and equipment, net............. 7,978 353,817 44,304 (260) 405,839
Escrow under Senior Notes............... -- -- -- -- --
Due from affiliates..................... 414,305 (17,033) 18,059 (415,331) --
Deferred charges and other assets....... (44,093) (16,245) 25,346 75,050 40,058
--------- -------- -------- --------- ---------
Total assets.................. $ 401,230 $379,347 $112,864 $ (340,541) $ 552,900
========= ======== ======== ========= =========
Current liabilities:
Accounts payable, accrued interest and
other current liabilities.......... $ 10,533 $ 84,692 $ 33,624 $ (8) $ 128,841
Due to affiliate...................... 4,041 (4,060) 19 -- --
Current portion of long-term debt and
capital lease obligations.......... -- 319 6,131 -- 6,450
--------- -------- -------- --------- ---------
Total current liabilities..... 14,574 80,951 39,774 (8) 135,291
Long-term debt and capital lease
obligations, less current portion..... 277,799 1,267 15,233 -- 294,299
Due to affiliates....................... (2,837) 338,202 79,966 (415,331) --
Other noncurrent liabilities............ 13 17,678 754 (6,053) 12,392
Convertible preferred stock............. 98,010 -- -- -- 98,010
Stockholders' equity (deficit):
Preferred stock....................... 13 -- 2,585 (2,585) 13
Common stock.......................... 308 4 2 (6) 308
Additional paid-in capital............ 121,550 33,285 33,018 (66,302) 121,551
Retained earnings (accumulated
deficit)........................... (108,200) (92,040) (58,468) 149,744 (108,964)
--------- -------- -------- --------- ---------
Total stockholders' equity
(deficit)................... 13,671 (58,751) (22,863) 80,851 12,908
--------- -------- -------- --------- ---------
Total liabilities and
stockholders' equity
(deficit)................... $ 401,230 $379,347 $112,864 $ (340,541) $ 552,900
========= ======== ======== ========= =========
</TABLE>
12
<PAGE> 19
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------------------------------------
NON-
SUBSIDIARY GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net operating revenue:
Private line........................................... $ 40 79,343 6,999 (17,019) 69,363
Switched long distance................................. -- 47,828 93,795 (38,211) 103,412
-------- -------- -------- -------- --------
Net operating revenues.......................... 40 127,171 100,794 (55,230) 172,775
Operating expenses:
Cost of communication service.......................... -- 94,376 103,590 (54,834) 143,132
Operations and administration.......................... 96 23,758 11,773 (396) 35,231
Depreciation and amortization.......................... 726 16,941 5,741 (43) 23,365
-------- -------- -------- -------- --------
(782) (7,904) (20,310) 43 (28,953)
Interest income.......................................... 20,265 5,392 625 (24,044) 2,238
Interest income on escrow under Senior Notes............. 203 -- -- 203
Interest expense......................................... (18,046) (17,460) (4,298) 24,044 (15,760)
Equity in net loss of unconsolidated subsidiaries........ (49,879) (25,534) (4,914) 73,976 (6,351)
-------- -------- -------- -------- --------
Loss before benefit (provision) for income taxes and
minority interest...................................... (48,239) (45,506) (28,897) 74,019 (48,623)
Benefit (provision) for income taxes................... (449) (85) 786 252
Minority Interest...................................... (317) (317)
-------- -------- -------- -------- --------
Net loss................................................. $(48,688) $(45,591) $ (28,111) $ 73,702 $ (48,688)
======== ======== ======== ======== ========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------------------------------------
NON-
SUBSIDIARY GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating activities...... $ 4,360 $(10,994) $ 1,467 $ (821) $ (5,988)
Investing activities:
Release of funds from escrow under Senior Notes........ 69,428 69,428
Deposits into escrow under Senior Notes................ (18,152) -- -- (18,152)
Purchase of property and equipment..................... (8,130) (120,330) (12,441) (140,901)
-------- -------- -------- -------- --------
Net cash provided by (used) in, investing activities... 43,146 (120,330) (12,441) -- (89,625)
Financing activities:
Net proceeds from convertible preferred stock.......... 96,197 -- -- -- 96,197
Payments from (advance to) affiliates.................. (187,444) 159,728 27,716 -- --
Principal payments on long-term debt and capital lease
obligations.......................................... (89) (2,933) (6,208) -- (9,230)
Capital contribution to unconsolidated subsidiary...... -- (2,130) (9,520) -- (11,650)
Other financing activities............................. (70) 3,231 (3,231) -- (70)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities.... (91,406) 157,896 8,757 -- 75,247
Net increase (decrease) in cash and cash equivalents... (43,900) 26,572 (2,217) (821) (20,366)
Cash and cash equivalents at beginning of period....... 65,363 (9,455) 4,611 821 61,340
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period............. $ 21,463 $ 17,117 $ 2,394 $ -- $ 40,974
======== ======== ======== ======== ========
</TABLE>
13
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained below, the matters
discussed in this item 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 in the
forward-looking statements. For a discussion of important factors that may cause
the actual results, performance or achievements of the Company to be materially
different from those expressed or implied by the forward-looking statements, see
"Business -- Risk Factors" in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996. In light of such risks and uncertainties,
there can be no assurance that the forward-looking information contained in this
item will in fact transpire.
THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH THE THREE AND SIX MONTHS
ENDED JUNE 30, 1996
Net operating revenue for the second quarter and year-to-date 1997
increased by 106.6% and 149.5% over the comparable 1996 periods, due mainly to
the continuing implementation of the Company's switched services business.
Revenue for the switched services business increased 165.1% and 357.0% for the
1997 second quarter and year-to-date over 1996. Billable minutes of use ("MOUs")
increased over 1996 by 218.1% to 636.2 million minutes for the quarter and
432.7% to 1.2 billion minutes year-to-date. Revenue for the Company's private
line business increased 60.4% for the quarter and 48.7% year-to-date over 1996
due to increased demand for capacity and the availability of additional capacity
resulting from the Company's network expansion.
Cost of communication services consists primarily of access charges paid to
Local Exchange Carriers ("LECs") and transmission lease payments to, and
exchanges with, other carriers. These costs increased 134.3% for the quarter and
203.0% year-to-date over 1996 due to additional leases supporting the Company's
private line and switched services businesses, MOUs obtained from other carriers
and access charges paid to LECs in connection with the switched services
business. The Company has historically had a relatively low cost of
communication services as a percentage of revenues because substantially all its
revenues were derived from private line services, generally provided at a
relatively low cost over its own network. Expenses in the switched services
business are substantially greater than the private line business due to the
relatively high cost of LEC access charges, leases for long distance circuits
and MOUs obtained from other carriers. The Company expects its cost of
communication services as a percentage of revenue to increase over historical
results if the switched services revenue becomes a larger share of the Company's
business.
Operations and administration expenses for the quarter and year-to-date for
1997 have increased 73.0% and 66.2% over 1996 primarily as a result of costs
associated with the Company's switched network. Although the Company has been
successful in establishing its nationwide switched services business with
significant revenues, EBITDA in the switched services business has fallen
significantly below the Company's expectations. In the first half of 1997, the
Company's EBITDA from switched services continued to be negative and the Company
believes it is likely to remain negative for the balance of the year. The
Company believes these results are due to two primary factors:
First, the Company typically prices its interstate services to customers at
a blended-average rate based upon the expected usage and mix of traffic between
high-access-cost and low-access-cost LATAs. Certain of IXC's customers have
generated switched traffic comprised of a substantially higher mix of minutes
originating or terminating in high-access-cost LATAs than was anticipated at the
time the customer contracts were negotiated and pricing established.
Second, the Company configures its switched network to account for the
expected traffic distribution of its customers. In certain areas, traffic volume
has been higher than expected causing certain of the Company's switches to run
at capacity and requiring the Company to overflow excess traffic onto other
carriers' switched networks at a substantial cost.
14
<PAGE> 21
The Company is attempting to improve EBITDA in the switched services
business by: examining the traffic distributions of its customers; identifying
customers generating an unprofitable mix of traffic, and where appropriate and
as contractually allowed, adjusting contract terms; pre-screening new contract
proposals to evaluate the financial impact of expected traffic distributions;
including provisions in certain new contracts to assure reasonable traffic
distributions; and adding switch capacity to reduce the cost of network overflow
traffic. The Company is also developing procedures to better analyze its
expected traffic patterns in order to enhance network efficiency. The Company
believes that efforts to maintain a profitable mix of switched minutes may slow
the growth rate of switched services revenue, but, coupled with anticipated
reductions in leased circuit expense as the network is completed, would provide
improvement in switched service operating results.
Depreciation and amortization for the quarter and year-to-date for 1997
increased 101.1% and 84.6% over the comparable 1996 periods due to the increase
in depreciable assets as a result of the Company's network expansion.
Depreciation and amortization will continue to increase in conjunction with
spending on capital assets to increase network capacity.
Interest income for the quarter and year-to-date for 1997 decreased over
1996 by $1.0 million and $2.4 million as proceeds from the Company's 1996 and
1997 debt and equity placements were used to construct the Company's network and
operate its business.
Interest expense for the quarter and year-to-date periods decreased over
1996 by $1.5 million and $3.6 million. Total interest costs for the year-to-date
1997 period were $19.2 million, compared to $19.9 million for the comparable
1996 period. Capitalization of interest reduced interest expense by $3.4 million
year-to-date in 1997 compared to $0.5 million in 1996.
Equity in net loss of unconsolidated subsidiaries increased by $4.5 million
for the second quarter and $6.3 million for the year-to-date 1997 over 1996 due
to the increased losses in the Mexican telecommunications investment described
below. Losses are expected to continue for this investment for the foreseeable
future.
The income tax benefit for the quarter and year-to-date for 1997 decreased
by $1.4 million and $2.5 million over 1996. This decrease occurred because the
tax benefit of the Company's losses are being fully reserved in 1997, whereas in
1996 the Company recognized tax benefits related to the favorable resolution of
federal income tax examinations.
The Company experienced a net loss of $48.7 million for the six months
ended June 30, 1997 as compared to a net loss of $23.8 million for the six
months ended June 30, 1996 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's private line operations have historically provided positive
cash flow (even in years of net losses, as in 1993 and 1995), which has provided
adequate liquidity to meet the Company's operational needs. However, the
Company's capital expenditures and, since the issuance of the Company's 12 1/2%
Senior Notes due 2005 (the "Senior Notes") in the fourth quarter of 1995, its
interest expense have been financed with the proceeds of debt and equity
securities.
Cash used in operating activities was $6.0 million for the six months ended
June 30, 1997 compared to cash provided by operations of $0.8 million in the
comparable period of 1996, primarily as a result of network expansion and
operational expenses associated with the development of the Company's switched
services business. The Company's switched services business is expected to
require cash to meet operating expenses until sufficient profitable traffic can
be routed over the Company's owned network.
Cash used in investing activities for the six months ended June 30, 1997
was $89.6 million compared to $3.7 million provided by investing activities for
the six months ended June 30, 1996. This increase was primarily the result of
increased purchases of property and equipment for the Company's fiber expansion
in
15
<PAGE> 22
1997. The Company's total capital expenditures were $140.9 million for the six
months ended June 30, 1997, including capital expenditures relating to the
construction of network routes and related equipment.
Cash provided by financing activities increased to $75.2 million for the
first six months of 1997 versus a use of cash of $5.8 million for the comparable
period in 1996. This variance is primarily due to the $96.2 million in net
proceeds provided by the issuance and sale of the Company's 7 1/4% Junior
Convertible Preferred Stock Due 2007 (the "Convertible Preferred Stock") in
April 1997, offset by $11.7 million of funding provided to the Company's Mexican
telecommunications investment.
The Company expects that its primary sources for cash over the next twelve
months will be cash on hand, cash generated by operations, the proceeds if any,
from offerings of debt and/or equity securities, the Proposed Credit Facility
(as herein defined), the NTFC Equipment Facility (as herein defined), additional
vendor financing the Company may seek and the anticipated proceeds of fiber
sales.
As of June 30, 1997, the Company had approximately $41.0 million in cash.
The Company expects that during the remainder of 1997 and 1998 it will generate
substantial additional cash from operations. On July 2, 1997, the Company
announced that it expects EBITDA for 1997 will be in the range of $20-$30
million, and that it expects EBITDA for 1998 will be $125 million or more. The
EBITDA estimates are based on a number of assumptions that, though considered
reasonable by the Company, are inherently subject to significant economic and
competitive uncertainties and contingencies beyond the control of the Company
and upon assumptions with respect to future business decisions which are subject
to change. Accordingly, there can be no assurance that the estimated EBITDA will
be achieved, and actual results may vary materially from those estimated.
Important factors that could cause actual estimated EBITDA results to differ
materially from those in the forward-looking statements set forth above include,
without limitation: (i) delays or cost overruns with respect to the network
expansion; (ii) delays by the Company's contractors and partners in cost-saving
arrangements in fulfilling their obligations; (iii) delays or
higher-than-expected costs in obtaining rights-of-way; (iv) delays in the
completion of the routes of the network expansion scheduled for completion in
1997; (v) an inability by the Company to continue to increase traffic on its
switched network, particularly higher margin traffic; (vi) an inability by the
Company to successfully commence service for new switched 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;
(vii) the loss of one or more large customers; (viii) increases in expenses;
(ix) decreases in the Company's rates caused by the competitive pressures and
(x) the inability to complete the fiber sales discussed below.
The Company seeks to supplement its sources of cash with debt and/or equity
offerings in an aggregate amount of at least $100 million in the third or fourth
quarter of 1997.
The Company is engaged in discussions with potential lenders regarding a
revolving credit facility (the "Proposed Credit Facility") under which it seeks
to borrow up to a certain percentage of eligible accounts receivable. Although
the total availability under the Proposed Credit Facility would vary from time
to time according to the aggregate amount of eligible accounts receivable, the
Company anticipates that the lender would impose a limit on borrowings under the
facility. There can be no assurance that the Company will obtain such a
facility. In addition in July 1997 the Company entered into a secured equipment
financing facility with NTFC Capital Corporation, an affiliate of Northern
Telecom Inc. ("Nortel") (the "NTFC Equipment Facility"), to provide up to $28
million in financing. The Company expects to borrow approximately $20 million
under this agreement in the third quarter in connection with the purchase of
certain equipment for use in its network.
In February 1997, the Company and a carrier entered into a contract
pursuant to which the carrier will purchase an indefeasible right to use fibers
from Chicago to Los Angeles (the "Chicago-Los Angeles Fiber Sale") which
following performance by the Company of its Obligations thereunder to the
satisfaction of such carrier will result in proceeds to the Company of
approximately $97.9 million. The Company expects to receive approximately
one-half of the proceeds during 1997, with the balance expected to be paid in
the first quarter of 1998. In February 1997, the Company entered into a contract
with another carrier pursuant to which the carrier will purchase an indefeasible
right to use fibers from Los Angeles to New York (the "New York-Los Angeles
Fiber Sale") which entitles the Company to receive following performance by the
16
<PAGE> 23
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-20803
IXC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 74-2644120
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
5000 PLAZA ON THE LAKE, SUITE 200, AUSTIN, TEXAS 78746
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (512) 328-1112
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
NAME OF EACH EXCHANGE ON WHICH REGISTERED: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR
VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on March 21, 1997, based on the closing price
of the Common Stock on the Nasdaq National Market on such date, was
$280,181,250.
The number of shares of the Registrant's Common Stock outstanding as of
March 21, 1997 was 30,799,560 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days of December 31, 1996 in
connection with the Annual Meeting of Stockholders are incorporated by reference
into Part III hereof.
================================================================================
<PAGE> 24
IXC COMMUNICATIONS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I
Item 1. Business..................................................................... 1
Item 2. Properties................................................................... 29
Item 3. Legal Proceedings............................................................ 30
Item 4. Submission of Matters to a Vote of Security Holders.......................... 30
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........ 30
Item 6. Selected Financial Data...................................................... 32
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 32
Item 8. Financial Statements and Supplementary Data.................................. 40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................... 40
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 41
Item 11. Executive Compensation....................................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 41
Item 13. Certain Relationships and Related Transactions............................... 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports and Form 8-K............ 42
Glossary................................................................................ A-1
Financial Statements.................................................................... F-1
Signatures.............................................................................. I-1
</TABLE>
<PAGE> 25
PART I
Certain of the information contained in the Registrant's Form 10-K (the
"Form 10-K"), including information regarding its network expansion and switched
long distance services and related strategy and financing, are forward-looking
statements which involve risks and uncertainties. The Registrant's actual
results may differ significantly from the results discussed in the
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 "Business -- Risk Factors." Certain terms used
herein are defined in the Glossary at page A-1.
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.
ITEM 1. BUSINESS.
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 of 1996
(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, cable television companies or foreign 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 "-- 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 8.4% 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 private line services to
companies in all three tiers and switched long distance services to companies in
the second and third tiers.
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<PAGE> 26
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. The report 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."
Private Line Services. Long distance companies may be categorized as
facilities-based carriers and nonfacilities-based carriers. Sellers of private
line services are generally facilities-based carriers that own long distance
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 private line service nationwide.
Facilitiesbased carriers in the third tier of the market generally offer private
line services only in a limited geographic area. Customers using private line
services include: (i) facilities-based carriers that require long distance
transmission 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 distance transmission capacity
to carry their customers' long distance traffic. The Company's competitors in
the private line 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
$500.0 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 private line business. Important competitive
factors in the private line business are price, customer service, network
location and quality, reliability and availability. See "-- Private Line
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 distance transmission 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.
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<PAGE> 27
TECHNOLOGY
Long distance voice traffic generally is transmitted through digital
microwave or fiber optic systems. Long distance data traffic is generally
transmitted through fiber optic systems 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 with digital
switching equipment. A pair of modern fiber optic strands, using current
technology, is capable of carrying 192 DS-3s, or over 129,000 simultaneous
telephone calls. Because fiber optic signals disperse over distance, they must
be regenerated at sites located along the fiber optic cable (on older fiber
optic systems the interval is 20 to 25 miles; on newer systems that utilize
modern fiber optic cable and splicing methods, such as will be used in the
network 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
electrophysical 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 December 31, 1996, the remaining net depreciated
book value of the Company's microwave equipment was less than 3% 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.
COMPANY OVERVIEW
The Company provides two principal services to long distance companies: (i)
transmission of voice and data over dedicated circuits ("private lines"); 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). As of
February 28, 1997, the Company's network included approximately 10,000 digital
route miles, containing over 96,000 fiber miles (excluding fibers as to which
the Company has sold or exchanged long-term rights to use). Its facilities
include five long distance switches located in Los Angeles, Dallas, Chicago,
Philadelphia and Atlanta and ten Frame Relay-ATM switches located in major
cities.
The Company had revenues of $203.8 million for 1996, with approximately
$99.8 million generated by its private line business and approximately $104.0
million generated by its switched services business. The Company has private
line circuit contracts with over 200 long distance carriers, including AT&T,
MCI, Sprint, WorldCom, Cable & Wireless, Frontier and LCI. The Company also
provides private line transmission service to customers after contract
expiration on a monthto-month basis. Pursuant to the Company's private line
contracts, customers are required to make fixed monthly payments, generally in
advance. Many of such contracts contain substantial "take or pay" commitments.
The Company has historically enjoyed a high customer retention rate in its
private line business.
The Company expanded into the business of selling switched long distance
services to long distance resellers in order to complement its private line
business and to capitalize on its ability to provide switched
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<PAGE> 28
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 distance circuits and other transmission
facilities owned or leased by the Company. 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's switched network
became fully operational in February 1996.
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), of which approximately 3.3 billion minutes
remained as of February 28, 1997. The Company's switched long distance business
has grown rapidly, with Excel accounting for most of the growth. The Company's
switched long distance revenues amounted to approximately $104.0 million for
1996, with $3.6 million in the first quarter, $19.0 million in the second
quarter, $35.3 million in the third quarter and $46.1 million in the fourth
quarter. 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 three long distance switches anticipated to be located in
Fresno, California, Joplin, Missouri and New York, New York. See "-- Switched
Long Distance Services." 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 in competition with their reseller customers.
The Company's primary business objectives over the near term are: (i) to
continue to increase revenue from its switched long distance services business;
(ii) to complete a substantial portion of the network expansion in 1997; and
(iii) to utilize its expanded network to increase its revenues and
profitability.
Because of geographic limitations and capacity constraints, the Company
currently supplements its own facilities with a significant amount of fiber
capacity obtained from other carriers. The Company is currently engaged in a
major expansion of its network, to increase the Company's geographic scope and
network capacity. Prior to beginning construction of the network expansion in
late 1995, the Company owned a coast-to-coast network containing over 1,700
route miles of fiber optic cable and over 5,000 route miles of digital
microwave. The network expansion includes routes planned: (i) from New York to
Los Angeles via Cleveland, Chicago, St. Louis, Dallas and Phoenix; (ii) from Los
Angeles to San Francisco; (iii) from New York to Houston via Atlanta; and (iv)
from Houston to Dallas. These routes would add approximately 7,000 route miles
to the Company's network. As of February 28, 1997, over 3,100 route miles of the
network expansion were complete.
The network 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 private line traffic from leased circuits on the networks of other
carriers to its own expanded network;
(ii) providing high-capacity new routes and substantially increasing the
capacity of certain existing routes, allowing the Company to increase revenues
by leasing additional circuits to its customers, including high-capacity
circuits 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 transmission costs; and
(iv) creating sufficient capacity to support increased demand which may
result from Internet and multimedia applications, Frame Relay and ATM.
The Company plans to meet the costs of the routes from New York to Los
Angeles via St. Louis and from New York to Houston via Atlanta with cash on
hand, the proceeds of a proposed offering of Junior Convertible Preferred Stock
Due 2007 (the "Convertible Preferred Stock") of IXC Communications which is
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<PAGE> 29
expected to close at the end of March 1997 or the beginning of April 1997 (the
"Convertible Stock Sale"), the proceeds in connection with a contract with LCI
pursuant to which LCI will purchase an indefeasible right to use fibers from
Chicago to Los Angeles for approximately $97.9 million (the "LCI Fiber Sale")
and a contract with MCI pursuant to which MCI will purchase an indefeasible
right to use fibers from Los Angeles to New York for approximately $121.0
million (the "MCI Fiber Sale"), additional cost-saving arrangements, cash flow
from its operations and vendor financing it may seek. The Company is reducing
the per-route-mile cost of these routes through fiber sales to LCI and MCI,
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. This equipment, in connection with the network 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 late 1996 and will begin such
services in the first half of 1997. Although such services will not be a
significant source of revenues in 1997, the Company expects 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 high quality
provider of choice of these services.
During the last six months, the Company continued to sign contracts with
new and existing customers for switched long distance services and private line
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 a significant agreement with a major long distance carrier
that will obtain private line services from the Company. Under this contract the
Company will supply DS-3 circuits for aggregate revenues of over $24.0 million
during 1997-1998. The Company also entered into an interconnection agreement
with Bell Atlantic that will facilitate its entry into the data communications
business.
Over 3,100 route miles of the network expansion had been completed through
February 28, 1997. The Company has entered into several agreements with other
carriers that will result in reductions or offsets to its per-route-mile cost of
construction, including:
(i) a contract with LCI pursuant to which LCI will purchase an indefeasible
right to use fibers from Chicago to Los Angeles for approximately $97.9 million;
(ii) a contract with MCI pursuant to which MCI will purchase an
indefeasible right to use fibers from Los Angeles to New York for approximately
$121.0 million. This contract replaces a $20.0 million lease contract with MCI
for OC-48 capacity announced in January 1997;
(iii) a contract with Vyvx to exchange the use of certain fibers on the
Company's New York to Los Angeles route for the use of fibers on a 1,600-mile
route Vyvx is constructing from Washington, D.C. to Houston;
(iv) joint construction contracts with other carriers: LCI (Youngstown,
Ohio -- Toledo), DTI (Anderson, Missouri -- Kansas City), and CCTS (Riverdale,
Illinois -- Chicago). These arrangements allow the Company and the other
carriers to share the costs of construction of these routes;
(v) a 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 by
including cities in upstate New York, bring the network to Albany (which may
facilitate a future extension to Boston), and provide many additional fibers
into New York City; and
(vi) other contracts providing for the Company to sell another carrier the
use of fibers in routes the Company is constructing: GST (Phoenix to the
Arizona-New Mexico border) and WorldCom (Phoenix -- Las Vegas).
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<PAGE> 30
In January 1997, the Company entered into agreements to purchase two long
distance companies, LDS, a switchless reseller with 1996 revenues of
approximately $30.0 million, and Telecom One, a switchless reseller with 1996
revenues of approximately $8.0 million. The consideration for these acquisitions
will be the Company's common stock (the "Common Stock"). The Company expects to
complete these acquisitions in 1997 upon the satisfaction of certain conditions,
including receipt of regulatory approvals. For a description of how many shares
of the Common Stock will be issued pursuant to these acquisitions, see
"-- Acquisitions."
BUSINESS STRATEGY
The Company's primary business objectives over the near term are: (i) to
continue to increase revenue from its switched long distance services business;
(ii) to complete the route from New York to Los Angeles via St. Louis and a
substantial portion of the route from New York to Houston via Atlanta 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 network expansion by reducing the amount of capacity it would
otherwise obtain from other carriers. The Company incurred costs (including
through noncash capacity exchanges) of $60.1 million for off-net fiber optic
capacity from other carriers for 1996. In the event the Company achieves revenue
growth in the private line business or the switched long distance business, its
usage of long distance transmission capacity (including capacity leased from
other carriers) will increase. The Company believes the network 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
Network Expansion."
Increasing Private Line Revenues. The Company's ability to expand its
private line 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 network 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 circuits such as OC-48's, OC-12's and OC-3's.
The network 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 route from New
York to Los Angeles via St. Louis. The carrier has ordered circuits under the
contract for aggregate revenue in excess of $24.0 million during 1997-1998. The
Company continues to seek significant new orders over the network expansion
routes and believes that it is well positioned to obtain such orders.
Establishing a Platform for Capacity-Intensive Data Applications. The
Company is using advanced fiber optic technology in the network 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. 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. This
equipment, in connection with the network 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 with such
facilities in late 1996 and will begin offering such services in the first half
of 1997. Although such services will not be a significant source of revenues in
1997, the Company expects 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 high quality provider of choice of these services. The
Company entered into an interconnection agreement
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<PAGE> 31
with Bell Atlantic in late 1996 that will facilitate its entry into the data
services business. See "-- The Company's Network" and "-- Risk
Factors -- Development Risks of the Frame Relay and ATM Transmission Business."
Providing Backup Routing for Major Carriers. An area of 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 network expansion to be
separated geographically as far as practicable from the existing fiber routes of
such carriers. The Company believes that the network 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, $900.0 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, 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 private line 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 in its private line business. Although the Company's switches
first became fully operational in the first quarter of 1996, the Company has
already entered into contracts with over 70 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,
WorldCom and Frontier) whose main business is selling retail long distance
service to end-users in competition with their reseller customers. See
"-- Switched Long Distance Services" and "-- Risk Factors -- Development Risks
and Dependence on Switched Long Distance Business."
Acquisitions. As part of its growth strategy, the Company has agreed to
acquire LDS and Telecom One and may, from time to time, acquire businesses,
assets or securities of companies which it believes provide a strategic fit with
its business and network. Although the Company currently has no commitments or
agreements with respect to any possible acquisitions other than with LDS and
Telecom One, it has reviewed potential acquisition candidates and has held
preliminary discussions with a number of these candidates. The Company will use
shares of its Common Stock as consideration for the LDS and Telecom One
acquisitions
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<PAGE> 32
and may use Common Stock as consideration for other acquisitions. See
"-- Acquisitions" and "-- Risk Factors -- Acquisition Risks."
THE COMPANY'S NETWORK
Services
The Company provides two basic services: (i) private line services; and
(ii) switched long distance services. In addition, the Company is entering into
the business of providing data services.
Private Line Services. A private line 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
traffic between LATAs. Calls being transmitted over a private line circuit for a
carrier 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 private line to the terminal where the signals exit the Company's
network. The signals are generally then routed by the carrier customer through
another switch and to the call recipient through a LEC. The Company typically
bills carrier customers a fixed monthly rate depending on the capacity and
length of the circuit, regardless of the amount the circuit is actually used.
See "-- Private Line 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 transmits the call to the recipient's LEC, which then 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."
Data Services. Data services are telecommunications services such as ATM
and Frame Relay that provide highspeed transmission of data. The Company will
offer these services to carriers for resale to end users. Although the Company
is still beta-testing its data services facilities, when these facilities are in
commercial use the Company intends to bill customers for data services generally
at a variable rate depending on usage.
Facilities
The Company is one of only five carriers that currently owns a
coast-to-coast digital network. As of February 28, 1997, the Company's network
included approximately 10,000 route miles (containing over 96,000 fiber miles).
Prior to beginning construction of the network expansion in late 1995, the
Company owned a coast-to-coast network containing over 1,700 route miles of
fiber optic cable and over 5,000 route miles of digital microwave. As of
February 28, 1997, the Company and its partners in cost-saving arrangements had
substantially completed over 3,100 fiber route miles of the network expansion.
The Company's own facilities are supplemented with over 200,000 DS-3 miles
of fiber 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
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significant exchange agreements because of the placement of the Company's
existing networks in locations where other facilities-based carriers require
additional capacity and the comparatively large expense to such other carriers
of constructing new fiber optic facilities. Such exchange agreements increase
the scope of the Company's network through the addition of the exchanged
capacity while reducing the Company's cash expenditures for off-net facilities.
The Company's network includes five digital switches located in Los
Angeles, Dallas, Chicago, Philadelphia and Atlanta, each directly connected over
either on-net or off-net private line 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
Company plans to install additional switches in 1997 in Fresno, California,
Joplin, Missouri and New York, New York. 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 network also includes ten Frame Relay-ATM data switches located in
major cities. 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 on a per-minute basis, 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 (the "Indenture") for the Company's outstanding $285.0 million
principal amount of 12 1/2% Senior Notes due 2005 (the "Senior Notes"), 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 private line 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.
Network Expansion
In 1995 the Company undertook a significant increase in its network. The
Company believes the network expansion will improve its profitability and cash
flow by improving its cost of communications services as it moves traffic onto
facilities it owns and increasing its revenues by allowing the lease of
substantial additional private line capacity. The network expansion is planned
to add thousands of 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 private line 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 routes of the network expansion are
planned to be generally geographically diverse from the existing fiber networks
of AT&T, MCI, Sprint and WorldCom.
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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. This equipment, in connection with the network expansion and
additional equipment and software being 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 late 1996 and will begin offering
such services in the first half of 1997. Although such services will not be a
significant source of revenues in 1997, the Company expects 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 high quality
provider of choice of these services.
The Company estimates that the network expansion will produce additional
cost savings by supporting growth in its private line and switched long distance
businesses which would otherwise require significant off-net capacity usage. The
network 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 improving certain costs. The network 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 route from New York to Los Angeles via St.
Louis. The Company will supply circuits under the contract for aggregate
revenues in excess of $24.0 million during 1997-1998. The Company continues to
seek significant new orders over the network expansion routes and believes that
it is well positioned to obtain such orders.
Construction. The Company has planned the network 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 initial
public offering of the Company's Common Stock (the "IPO") in July 1996, the
Company had planned to construct the network 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 network 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 and because of certain delays in constructing portions
of the planned routes. 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 AkronPittsburgh-Philadelphia route
with a Cleveland-upstate New York-New York City route because of a cost-saving
arrangement with MFS through which MFS will include fibers for the Company in
the route which MFS is constructing for its own use, 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 network expansion is progressing well,
without significant delays or cost overruns. The Cleveland to Phoenix portion of
the route from New York to Los Angeles via St. Louis is now complete. In
addition, to meet customer demand, the Company has augmented that route to
include: (i) a Kansas City to Joplin, Missouri route and other routes not
originally planned for Phase I; and (ii) substantially more electronics than
originally planned. The New York to Cleveland portion of the network expansion
is scheduled for completion
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in the fourth quarter of 1997. The Phoenix to Los Angeles portion of the network
expansion is also scheduled for completion in 1997.
The Company presently plans to complete the network expansion along the
following routes (the routes and expected delivery dates are subject to change):
(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 which are now used to capacity. This coast-to-coast
route is to extend from New York 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
1997.
(ii) An additional route is now under construction from New York via
Washington, D.C. and Atlanta to Houston. The Washington-Houston portion of the
route will be constructed by Vyvx and is scheduled for completion by the end of
1997. The portion of the route from New York to Washington, D.C. is also
scheduled to be completed by the end of 1997.
(iii) Routes are also planned for later construction from Los Angeles to
San Francisco, from Houston to Dallas, from Toledo to Detroit, and from South
Bend to Chicago.
Additional routes will be added to the network expansion as opportunities
for advantageous cost sharing or exchange arrangements arise or as customer
demand requires.
The Company plans generally to light initially only four of the new fibers
in the route from New York to Los Angeles via St. Louis and the route from New
York to Houston via Atlanta (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 the Network Expansion."
A portion of the network 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 compared to constructing both routes by itself.
In December 1996, the Company entered into an agreement with Vyvx whereby
the Company will provide Vyvx with the use of fibers from Los Angeles to New
York in exchange for the use of 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 in this
regard. Such penalties increase from $400,000 per month commencing July 1998 to
$800,000 per month commencing 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) the LCI Fiber Sale pursuant to which LCI will purchase an indefeasible
right to use fibers from Chicago to Los Angeles for approximately $97.9 million;
(ii) the MCI Fiber Sale pursuant to which MCI will purchase an indefeasible
right to use fibers from Los Angeles to New York for approximately $121.0
million. This contract replaces a $20.0 million lease contract with MCI for
OC-48 capacity announced in January 1997;
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<PAGE> 36
(iii) a contract with Vyvx to exchange the use of certain fibers on the
Company's New York to Los Angeles route for the use of fibers on a 1,600-mile
route to be constructed by Vyvx from Washington, D.C. to Houston;
(iv) joint construction contracts with other carriers: LCI (Youngstown,
Ohio -- Toledo), DTI (Anderson, Missouri -- Kansas City), and CCTS (Riverdale,
Illinois -- Chicago). These arrangements allow the Company and the other
carriers to share the costs of construction of these routes;
(v) a 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 by
including cities in upstate New York, bring the network to Albany (which may
facilitate a future extension to Boston), and provide many additional fibers
into New York City; and
(vi) other contracts providing for the Company to sell another carrier the
use of fibers in routes the Company is constructing: GST (Phoenix to the
Arizona-New Mexico border) and WorldCom (Phoenix -- Las Vegas).
Cost. The principal components of the cost of the network 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. Although the Company has not
yet obtained all the necessary rights-of-way along the planned routes, the
Company anticipates that the rights-of-way will be available.
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 network expansion. The Company seeks to enter into
additional cost-saving arrangements such as: (i) including additional fibers in
the network 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 network 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 network
expansion. 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 routes from New York to Los Angeles via
St. Louis and from New York to Houston via Atlanta will cost approximately
$310.0 million (taking into account the effect of cost-saving arrangements it
has already entered into). After deducting the net proceeds of the LCI Fiber
Sale and the MCI Fiber Sale, the net cost of these routes will be less than
$120.0 million or approximately $19,000 per route mile. The Company will seek to
meet the remaining costs of the 1997 and 1998 network expansion through: (i)
cash on hand; (ii) the proceeds of the Convertible Stock Sale; (iii) the
proceeds of the LCI Fiber Sale, the MCI Fiber sale or other fiber sales; (iv)
additional costsaving arrangements; (v) cash flow from its existing operations;
(vi) increased cash flow resulting from reduced off-net capacity costs as
segments of the network expansion are completed; (vii) if the Company is able to
successfully develop the switched-products business, increased cash flow from
the switched-products business; and (viii) vendor financing the Company may
seek. In the event no other cost-saving arrangements are entered into, and the
sources of cash referred to above are not available as soon as desired, the
Company anticipates that, to complete the network expansion, it will be
necessary either: (i) to meet the remaining costs 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 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 -- Risks Relating to the Network Expansion" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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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 3,100 miles
of fiber optic cable completed as part of the network expansion and its 346-mile
Texas fiber network constructed in 1993, were engineered and constructed by the
Company. The completed segments of the network expansion and Texas fiber network
incorporated modern fiber optic cable and SONET optronics. In addition, the
Company successfully closed contracts on its Texas fiber 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 network expansion.
PRIVATE LINE SERVICES
Overview
Substantially all of the Company's 1995 revenues, approximately 49% of its
revenues in 1996 and approximately 37% of its revenues in the fourth quarter of
1996 were generated by its private line business. The Company has private line
circuit contracts with over 200 long distance carriers.
Strategy
The Company is seeking to increase revenues in its private line 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 private line 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 private line 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 private line business
through the network 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 private line contracts with over 200 long distance
carriers, including AT&T, MCI, Sprint, WorldCom, Cable & Wireless, Frontier and
LCI. The Company also provides private line transmission to customers after
contract expiration on a month-to-month basis. The Company's private line
contracts provide for fixed monthly payments, generally in advance. Many of such
contracts contain substantial "take or pay" commitments. The Company has
historically enjoyed a high customer retention rate in its private line
business.
The Company markets its private line circuit capacity generally to: (i)
facilities-based carriers that require private line 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 private line 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 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 private line 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 private line customers
during that year accounted for approximately 36% of revenues. See "-- Risk
Factors -- Reliance on Major Customers."
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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 private line 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. Many of such contracts
contain substantial "take or pay" commitments. Furthermore, circuit orders under
private line agreements are generally for a term of one year or more and may not
be cancelled by the customer. However, 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 private line 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 and recent WTO Agreement (as defined below), the Company
and its customers will also face competition from the RBOCs, GTE and others such
as electric utilities, cable television companies and foreign 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 "-- Private Line 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
private line 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 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.
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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
network 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, LDS and
Telecom One, companies which the Company expects to acquire, do sell directly to
end users. In addition, 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. As of February 28, 1997, approximately 3.3 billion minutes of the
commitment remained. 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.
Customer Care. The Company believes that customer support is 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
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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. See "-- Risk Factors -- Development Risks and Dependence on Switched Long
Distance Business."
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 DS3. 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 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 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
As part of its growth strategy, the Company has agreed to acquire LDS and
Telecom One and may, from time to time, acquire businesses, assets or securities
of companies which it believes provide a strategic fit with its business and
network. Although the Company currently has no commitments or agreements with
respect to any possible acquisitions other than with LDS and Telecom One, it has
reviewed potential acquisition candidates and has held preliminary discussions
with a number of these candidates. The Company will use shares of its Common
Stock as payment for the LDS and Telecom One acquisitions and may use Common
Stock as consideration for other acquisitions.
In January 1997, the Company agreed to purchase all the stock of LDS, a
switchless reseller, for a purchase price payable in the Company's Common Stock.
LDS is based in Los Angeles and markets to niche ethnic markets (for example,
immigrants from Mexico, India and Asia). The acquisition by the Company of LDS
is contingent on the satisfaction of a number of conditions, including receipt
of certain regulatory approvals from federal and state agencies. There can be no
assurance that such regulatory approvals will be obtained or that the other
conditions will be satisfied. The exact number of shares to be paid to the LDS
shareholders will not be determined until the closing date. The purchase price
has two components:
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(i) 1,015,385 shares of Common Stock (calculated to be worth $29.7 million based
on a per share price of $29.25, the 20-day average closing price of the Common
Stock when the agreement was reached), the number of shares will be adjusted
depending on the LDS balance sheet at the closing date; and (ii) in the event
the five-day average closing price of the Common Stock prior to the closing has
increased above $29.25 per share, a number of shares of Common Stock having a
market value on the closing date equal to 150,000 multiplied by the amount of
the increase. In addition, the Company has agreed to grant certain registration
rights to the LDS shareholders upon the closing of the acquisition of LDS. The
Company anticipates that this acquisition will be completed in mid-1997.
In January 1997, the Company agreed to purchase all the stock of Telecom
One, a switchless reseller with an agent program, for a purchase price payable
in the Company's Common Stock. Telecom One's agent program is an arrangement in
which Telecom One pays commissions to agents who sell Telecom One's services to
end users. The acquisition by the Company of Telecom One is contingent on the
satisfaction of a number of conditions, including the receipt of certain
regulatory approvals from federal and state agencies. There can be no assurance
that such regulatory approvals will be obtained or that the other conditions
will be satisfied. The shareholders of Telecom One will be paid Common Stock in
two installments: at the closing date and at the end of 1999. The value of the
Common Stock to be issued to the shareholders of Telecom One on the closing date
will be equal to 50% of the estimated value of Telecom One, calculated based on
revenues. The value of the Common Stock to be issued at the end of 1999 will be
equal to 50% of the estimated value of Telecom One, calculated based on its then
current revenues and EBITDA. The amount of these payments will be adjusted
depending on the Telecom One balance sheet at the payment dates. The Company
estimates that the initial payment will be approximately 106,000 shares of
Common Stock (or approximately $3.0 million based on a per-share price of
$28.14, the average closing price of the Common Stock during the 20-day period
prior to the date of the acquisition agreement). In addition, the Company has
agreed to grant certain registration rights to the Telecom One shareholders. The
Company anticipates that this acquisition will be completed in mid-1997.
The Company estimates that the aggregate number of shares of Common Stock
to be issued to the shareholders of LDS at the closing of the LDS acquisition
and in the initial installment of the Telecom One acquisition will be between
1.1 million and 1.3 million. In addition, at the end of 1999, the Company will
be required to pay the Telecom One shareholders additional shares of Common
Stock, depending upon the future revenues of Telecom One and the balance sheet
of Telecom One at the end of 1999, which the Company estimates is unlikely to
exceed 200,000 shares.
The Company expects that the acquisitions of LDS and Telecom One will
result in increased revenues to the Company. In addition, the Company believes
it can improve the profitability of the acquired companies because it can lower
their costs of call transmission. These acquisitions are a part of a Company
strategy to expand by acquiring select resellers on advantageous terms as
opportunities arise. The Company believes that LDS's niche marketing business
and that Telecom One's agent program present solid opportunities for continued
growth. The Company does not expect these acquisitions to change its strategic
focus of providing services to its reseller customers. Instead, the Company
intends to operate the acquired companies under their own names and separately
from its reseller business so as to ensure the Company's continued focus on
reseller customers. Accordingly, the Company does not believe these acquisitions
will adversely affect the Company's relationship with its existing reseller
customers although there can be no assurance in this regard. 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
nonfacilities-based 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. Upon
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completion of segments of such network, Qwest and Frontier may also become
competitors of the Company. As a result of the Telecommunications Act and recent
WTO Agreement, the Company will also now face competition from the RBOCs, GTE
and others such as electric utilities, cable television companies and foreign
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. Also, at least
one satellite company, Orion Network Systems, Inc., has announced its intent to
provide internet access services to businesses through satellite technology.
REGULATION
Certain subsidiaries of the Company operate as communications common
carriers. These subsidiaries are subject to applicable FCC regulations under the
Communications Act of 1934, as amended (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 Communications Act currently limits ownership of an entity holding such
licenses by non-U.S. citizens, foreign corporations and foreign governments. 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 forbear 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 resulted in the order being stayed. (Oral argument
is scheduled for September 1997.) 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.
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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.
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.
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, which is seeking FCC authority to operate in the
United States as an international resale carrier, is responsible for providing
all the capital that may be required from Marca-Tel's stockholders in order to
finance Marca-Tel. The Company and Westel jointly have contributed funds to
Progress International (approximately $7.3 million by the Company as of December
31, 1996), 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 MarcaTel 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
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capital contributions. The Indenture contains significant limitations on the
Company's ability to invest in Progress International or Marca-Tel.
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 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 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 from the sale of 840,053 shares of Common Stock to GEPT in a
private placement which occurred simultaneously with the closing of the IPO (the
"GEPT Private Placement") for Progress International (as of February 28, 1997
approximately $1.1 million of such proceeds remained available for this
purpose). The Indenture 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, provided that the Company meets
certain financial ratios, 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, that
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.
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.
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RISK FACTORS
Statements contained in this Annual Report on Form 10-K regarding the
Company's expectations with respect to its network expansion, related financings
and fiber sale and cost-saving agreements, future operations and other
information, which can be identified by the use of forward-looking terminology,
such as "may," "will," "expect," "anticipate," "estimate," "seek" or "continue"
or the negative thereof or other variations thereon or comparable terminology,
are forward-looking statements. The discussions set forth below constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including risks and uncertainties, that could cause
actual results to differ materially from results referred to in the
forward-looking statements. There can be no assurance that the Company's
expectations regarding any of these matters will be fulfilled.
RELIANCE ON CONVERTIBLE STOCK SALE
Although the Company is seeking to realize approximately $96.5 million in
proceeds, after applicable discounts and commissions, from the Convertible Stock
Sale, there can be no assurance that the Company will be successful in
completing the Convertible Stock Sale, or, if completed, in a sufficient amount
so as to realize net proceeds in such amount. The ability of the Company to
complete the Convertible Stock Sale is dependent on many factors, including the
future prospects of the Company and its industry in general, sales, earnings and
other financial and operating results of the Company in recent periods and
market conditions. An inability to complete the Convertible Stock Sale would
prevent or significantly delay the completion of the network expansion and would
have a material adverse effect on the Company.
NEGATIVE CASH FLOW AND CAPITAL REQUIREMENTS
The Company's total capital expenditures were $136.4 million for 1996 and
the Company's EBITDA minus interest expense and capital expenditures (adjusted
for the change in working capital) was negative $130.2 million. The Company
estimates that the total capital expenditures for 1997 will be $340.0 million
(of which $49.7 million were made in the first two months of 1997) and the
Company expects to continue to make substantial capital expenditures thereafter.
The Company anticipates meeting the cash requirements relating to such capital
expenditures from cash on hand, the proceeds of the Convertible Stock Sale, the
proceeds of the LCI Fiber Sale and the MCI Fiber Sale, additional cost-saving
arrangements, cash flow from its operations and vendor financing it may seek.
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. See "-- Acquisitions." The Company's
ability to meet the cash costs of such capital expenditures is dependent upon
the Company's ability to complete the construction of the network expansion in a
timely manner and otherwise perform its obligations so that it can complete the
LCI Fiber Sale and the MCI Fiber Sale, to enter into cost- saving arrangements
with carriers or other large users of fiber capacity, to otherwise raise
significant capital and/or to significantly increase its cash flow. The failure
of the Company to accomplish any of the foregoing may significantly delay or
prevent such capital expenditures, which would have a material adverse effect on
the Company and the value of the Convertible Preferred Stock and 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 and
fourth quarters 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 four quarters of 1996. The Company expects that
the network expansion will result in an improvement in the gross margins and
EBITDA generated by 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 "-- Risk Factors -- Development Risks
and Dependence on Switched Long Distance Business."
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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, 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: (i) there will be no significant delays or
cost overruns with respect to the network expansion; (ii) the Company's
contractors and partners in cost-saving arrangements will perform their
obligations; (iii) rights-of-way can be obtained on a timely, cost-effective
basis; (iv) the routes of the network expansion scheduled for completion in 1997
are substantially completed on schedule; (v) the Company will continue to
increase traffic on its switched network; (vi) the Company can successfully
commence service for new switched long distance customers and 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; (vii) the Company can successfully complete
the LCI Fiber Sale and the MCI Fiber Sale; and (viii) the Company can obtain
vendor financing. See "-- Risk Factors -- Risks Relating to the Network
Expansion," "-- Risk Factors -- Development Risks and Dependence on Switched
Long Distance Business," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "-- The Company's Network."
The cash requirements described above do not include any cash which may be
required for acquisitions the Company may make. See "-- Risk
Factors -- Acquisition Risks" and "-- Acquisitions."
RISKS RELATING TO THE NETWORK EXPANSION
The continuing network expansion is an essential element of the Company's
future success. Although the Company has made significant progress, right-of-way
acquisition for, and construction of, the New York to Los Angeles via St. Louis
route are not yet complete. The Company has, from time to time, experienced
delays with respect to the construction of certain portions of the network
expansion and may experience similar delays in the future. These delays have not
had a material effect on the Company to date but have delayed the receipt of
certain revenues from its private line business and have affected operating
results, including EBITDA, by delaying the Company's ability to carry long
distance traffic over its owned facilities instead of facilities it leases from
other carriers. The Company has substantial existing commitments to purchase
materials and labor for construction of the network expansion, and will need to
obtain additional materials and labor which may cost more than anticipated. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Substantial segments of the
route from New York to Los Angeles via St. Louis and all the route from
Washington to Houston via Atlanta 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 "-- The Company's Network" for
a description of such cost-saving arrangements. The successful completion of
these routes 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 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 network expansion, which would have a
material adverse effect on the Company, its financial results and the value of
the Common Stock.
The Company has entered into an agreement with WorldCom, relating to the
construction by each party of a fiber route approximately 1,100 miles long and
the placing of fiber for the use of both parties in such route. WorldCom's route
extends from Akron through Indianapolis to the Missouri-Oklahoma border, 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.
In December 1996, the Company entered into an agreement with Vyvx whereby
the Company will provide Vyvx with the right to use fibers from Los Angeles to
New York in exchange for the right to use 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
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assurance in this regard. Such penalties increase from $400,000 per month
commencing in July 1998 to $800,000 per month commencing in October 1998.
The Company entered into a significant agreement with a major long distance
carrier that will obtain private line services from the Company utilizing routes
included in the network expansion, including routes under construction. Under
this contract, the Company will supply DS-3 circuits for aggregate revenues of
over $24.0 million during 1997-1998. Delays in completion of such routes could
result in cancellation of orders under such contract.
In February 1997, the Company agreed to make the LCI Fiber Sale. The
agreement provides for (i) the Company to issue credits to LCI in the amount of
$3.00 per route mile per day on uncompleted sections if the route is not
completed by September 1, 1997 and (ii) the Company to provide OC-48 capacity to
LCI along uncompleted sections (which capacity may have to be obtained by the
Company from other carriers), if the route is not completed by December 1, 1997.
In March 1997, the Company agreed to make the MCI Fiber Sale. The agreement
provides for the Company to issue a credit to MCI of $100 per route mile per
month along any incomplete route segment, commencing January 1, 1998.
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 network 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 network expansion routes (including the routes from New York to Los
Angeles via St. Louis and from New York to Houston via Atlanta) will be
completed without significant delays or penalties, within its budget or at all.
Increased costs or significant delays in the completion of these routes,
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
"-- 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 (WorldCom, MCI, LCI and others) are expanding their capacity
and believes that other long distance carriers, as well as potential new
entrants to the industry, are considering the construction of new fiber optic
and other long distance transmission networks. 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. Although the Company believes that there are significant barriers to
entry for some new entrants that may consider building a new fiber optic
network, such as substantial construction costs, and the difficulty and expense
of securing appropriate rights-of-way, establishing and maintaining a sufficient
customer base, recruiting and retaining appropriate personnel and maintaining a
reliable network, certain of these barriers may not apply to some new entrants
(such as Qwest, utility companies or railroads which already have significant
rights-of-way). Since the cost of the actual fiber is a relatively small portion
of building new transmission lines, companies building such lines are likely to
install fiber that provides substantially more transmission capacity than will
be needed over the short or medium term. Further, recent technological advances
have shown the potential to greatly expand the capacity of existing and new
fiber optic cable. Although such technological advances may enable the Company
to increase its capacity, an increase in the capacity of the Company's
competitors could adversely affect the Company's business. In addition, the LCI
Fiber Sale, the MCI Fiber Sale and the Company's cost-saving arrangements with
other carriers, which involve the sale or lease of capacity or fibers on the
network expansion, will result in competitors having capacity on the Company's
routes, 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
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pricing pressure could develop. In addition, strategic alliances or similar
transactions, such as the long distance capacity purchasing alliance among
certain RBOCs announced in the spring of 1996, could result in additional
pricing pressure on long distance carriers. Furthermore, the marginal cost of
carrying additional calls over existing fiber optic cable is extremely low. As a
result, certain industry observers have predicted that, within a few years,
there may be dramatic and substantial price reductions and that long distance
calls will not be materially more expensive than local calls. Price reductions
could have a material adverse effect on the Company and the value of the Common
Stock. 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 network expansion, especially the route from
New York to Los Angeles via St. Louis. 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 generate positive EBITDA
or net income. The failure of the Company to generate increased customer
traffic, to complete these routes in a timely manner, or to effectively manage
the switched network and related customer service or to generate positive EBITDA
or net income from the switched long distance business 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 and fourth quarters
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 four quarters of 1996. The Company expects that the network expansion will
result in an improvement in the gross margins and EBITDA generated by its
switched long distance business. The Company has experienced and expects to
continue to experience difficulties in commencing services for end users of
carrier customers. In late 1996, Excel experienced service interruptions and
other difficulties in connection with transferring its end users to the networks
of MCI, WorldCom and the Company. The Company has encountered similar
difficulties in transferring end user customers of other carriers to its
network. These difficulties have, on occasion, led to billing disputes and
requests by carrier customers that the Company provide refunds or credits.
Although the Company believes that its performance with respect to these matters
has met or exceeded industry norms, such difficulties may adversely affect the
Company's relationships with its customers.
Important factors that could cause the Company's switched 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,
including delays in the construction of the network expansion. If such traffic
does not increase, there can be no assurance that the switched long distance
business will ever generate positive EBITDA. In addition, to the extent that
LECs grant volume discounts with respect to local access charges, the Company
may have a cost disadvantage versus the larger carriers. Furthermore, the credit
risk for the Company's switched 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 (in particular, resellers of debit card services) are not as well
capitalized as most of the Company's private line customers. See "-- Switched
Long Distance Services."
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<PAGE> 49
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 network
expansion. In addition, the Company may from time to time make acquisitions of
resellers which it believes provide a strategic fit with its business and
network. See "-- Acquisition Risks." The Company's rapid growth has placed, and
its planned future growth will continue to place, a significant and increasing
strain on the Company's financial, management, technical, information and
accounting resources. 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
network expansion. The failure by the Company to satisfy these requirements, or
otherwise to manage its growth effectively, would have a material adverse effect
on the Company and the value of the Common Stock. See "-- Private Line Services"
and "-- Switched Long Distance Services." An area of recent and anticipated
growth for the Company has been in selling private lines to Internet service
providers. Because such customers are generally not as well capitalized as most
of the Company's private line customers, sales to such customers increase the
Company's collection risks.
SUBSTANTIAL INDEBTEDNESS
The Company is highly leveraged. As of December 31, 1996, the Company had
approximately $302.3 million of longterm debt and capital lease obligations
(including the current portion thereof) principally related to the Senior Notes.
In addition, the Company is engaged in discussion with potential lenders
regarding a revolving credit facility (the "Proposed Credit Facility"). The
Company anticipates that borrowings under the Proposed Credit Facility would be
available with respect to a percentage of its eligible accounts receivable.
Although the total availability under the Proposed Credit Facility will vary
from time to time according to the aggregate amount of eligible accounts
receivable, the Company anticipates that the lender will impose a limit on
borrowings under the facility. There can be no assurance that the Company will
obtain the Proposed Credit Facility. The Company's significant debt burden could
have several important consequences to the Company, including, but not limited
to: (i) the cash received from operations may be insufficient to meet the
principal and interest due on the Senior Notes, in addition to paying the other
indebtedness of the Company as it becomes due and cash dividends on the
Company's 10% Junior Series 3 Preferred Stock (the "Series 3 Preferred Stock")
and the Convertible Preferred Stock; (ii) a significant portion of the Company's
cash flow from operations must be used to service its debt instead of being used
in the Company's business; and (iii) the Company's flexibility to obtain
additional financing in the future, as needed to continue the network 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 or in
agreements relating to other 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
or the Series 3 Preferred Stock and the Convertible Preferred Stock as payments
become due or that the Company will be able to refinance the Senior Notes or
other indebtedness at maturity or the Convertible Preferred Stock upon mandatory
redemption.
ACQUISITION RISKS
As part of its growth strategy, the Company has agreed to acquire LDS and
Telecom One and may, from time to time, acquire businesses, assets or securities
of companies which it believes provide a strategic fit with its business and
network. Although the Company currently has no commitments or agreements with
respect to any possible acquisitions other than with LDS and Telecom One, it has
reviewed potential acquisition candidates and has held preliminary discussions
with a number of these candidates. Any such acquisitions will be accompanied by
the risks commonly associated with acquisitions. These risks include potential
exposure to unknown liabilities of acquired companies, the difficulty and
expense of integrating the operations and personnel of the companies, the
potential disruption to the business of the Company, the potential diversion of
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<PAGE> 50
management time and attention, the impairment of relationships with and the
possible loss of key employees and customers of the acquired business, the
incurrence of amortization expenses if an acquisition is accounted for as a
purchase and dilution to the stockholders of the Company if the acquisition is
made for stock. Any acquired businesses will need to be integrated with the
Company's existing operations. This will entail, among other things, integration
of switching, transmission, technical, sales, marketing, billing, accounting,
quality control, management, personnel, payroll, regulatory compliance and other
systems and operating hardware and software, some or all of which may be
incompatible with the Company's existing systems. The Company has limited
expertise dealing with these problems. In addition, persons receiving Common
Stock in an acquisition may sell such stock, which could have a negative impact
on the market price of the Common Stock. There can be no assurance that
services, technologies or businesses of acquired companies will be effectively
assimilated into the business or product offerings of the Company or that they
will contribute to the Company's revenues or earnings to any material extent. In
addition, the Company's relationships with its carrier customers are based, in
part, on the fact that the Company generally does not compete with its carrier
customers for end users. To the extent that the Company is perceived as
competing for end users, it may be viewed as a less attractive supplier by its
carrier customers. The risks associated with acquisitions could have a material
adverse effect on the Company and the value of the Common Stock.
The closings of the LDS and Telecom One acquisitions are subject to the
satisfaction of customary closing conditions, including the receipt of any
required approvals of state and federal regulators. There can be no assurance
that such conditions will be satisfied or that such approvals will be obtained
in a timely manner or at all. A failure to satisfy or to obtain waivers to such
conditions or to obtain such regulatory approvals would prevent consummation of
the related acquisition.
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. Excel has announced that it intends to commence
development of its own nationwide long distance network, including acquiring or
leasing switches and long distance transmission circuits. To the extent Excel
implements its own network, it will utilize the network to transmit traffic
which would otherwise have been transmitted over the network of the Company or
another of Excel's suppliers. In such event, subject to contractual minimums,
Excel may reduce its traffic on the Company's network. Furthermore, such
minimums may be reduced or eliminated after June 30, 1998 under certain
circumstances if Excel allows the Company to bid on the long distance
transmission circuits for Excel's network. The loss of Excel as a customer after
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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 "-- 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 distance transmission
network, WorldCom is likely to transfer private line circuits now leased from
the Company, other than the private line circuits under capacity exchange
arrangements with the Company, to its own network when its leases expire. During
1996, the Company had revenues from WorldCom of approximately $16.8 million. Of
such revenues, approximately 38% related to capacity-exchange agreements, 36%
related to leases expiring in 1997, and 26% 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 the coast-tocoast system Qwest is constructing, 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 has "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 distance network capacity; and (iii) the Company believes that
the acquisition of Allnet by Frontier will not affect the combined carrier's
requirements for long distance transmission 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 industry
involving the Company's customers could have a material adverse effect on the
Company and the value of the Common Stock. See "-- Private Line 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 network 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 highquality 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,
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<PAGE> 52
the Company will compete with satellite carriers in such market. Also, at least
one satellite company, Orion Network Systems, Inc., has announced its intention
to provide internet access services to businesses through satellite technology.
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.
Ameritech recently filed (but withdrew without prejudice) an application for
authorization to provide in-region long distance services. Ameritech has stated
that it intends to refile its application at the end of March, 1997. Other RBOCs
are actively working to satisfy prerequisites for re-entry into the in-region
long distance business. Formal RBOC applications are likely to be filed soon.
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," "-- Private Line Services,"
"-- Switched Long Distance Services" and "-- Regulation."
On February 15, 1997, the United States Trade Representative designate
announced that an agreement had been reached with World Trade Organization
("WTO") countries to open world telecommunications markets to competition. The
agreement, known as the WTO Basic Telecommunications Services Agreement ("WTO
Agreement"), is scheduled to become effective on January 1, 1998. The WTO
Agreement will provide U.S. companies with foreign market access for local, long
distance, and international services, either on a facilities basis or through
resale of existing network capacity. The WTO Agreement also provides that U.S.
companies can acquire, establish or hold a significant stake in
telecommunications companies around the world. Conversely, foreign companies
will be permitted to enter domestic U.S. telecommunications markets and acquire
ownership interest in U.S. companies. Therefore, foreign telecommunications
companies could also be significant new competitors to the Company or the
Company's customers. See "-- Industry Overview," "-- Private Line Services,"
"-- Switched Long Distance Services."
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a small number of key executive
officers, the loss of whom could have a material adverse effect on the Company.
The Company believes that its growth and future success will depend in large
part on its continued ability to attract and retain highly skilled and qualified
personnel. The loss of one or more members of senior management or the failure
to recruit additional qualified personnel in the future could significantly
impede attainment of the Company's financial, expansion, marketing and other
objectives.
DEVELOPMENT RISKS OF THE FRAME RELAY AND ATM TRANSMISSION BUSINESS
The Company will soon begin offering Frame Relay, ATM and other data
transmission services. Although the Company has not yet made a material
investment for, or generated material revenues from, this business, the Company
believes that data transmission services present a promising opportunity for the
Company. To succeed in providing these services, the Company must compete with
AT&T, MCI, Sprint, WorldCom and other large competitors. In addition, the
Company expects that it will be necessary to continue to make upgrades to its
network (in advance of related revenues) to be competitive in providing these
services. The provision of data transmission services involves technical issues
with which the Company has very limited experience. In addition, the provision
of these services must be successfully integrated with the Company's existing
businesses. To the extent the Company does not successfully compete in providing
these services, it
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will not realize a return on its investment in data switches and other equipment
and it will not benefit from the growth, if any, in demand for these services. A
failure to successfully compete in data transmission services could have a
material adverse effect on the Company and the value of the Common Stock.
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; and/or (iii) enjoy cost advantages relating to local loops and
access charges. The introduction of additional strong competitors into the
switched long distance business would mean that the Company and its customers
would face substantially increased competition. This could have a material
adverse effect on the Company and the value of the Common Stock. 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
"-- 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."
ITEM 2. PROPERTIES.
The principal properties owned by the Company consist of: (i) the Michigan,
Texas and New York to Washington, D.C. fiber optic systems, including the fiber
optic cable and associated electronics and other equipment; (ii) the portion of
the network 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 2000, at a
current annual base rental of approximately $750,000, 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
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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 $450,000. Upon the expiration of the sublease in the second
location, the Company will lease such space from the landlord under an agreement
which expires in January 2003, at an annual base rental of approximately
$570,000.
The Company leases sites for its switches in or near Los Angeles, Dallas,
Chicago, Atlanta, and Philadelphia under lease agreements that expire between
2000 and 2005. The total current rental commitments for the switch site leases
are approximately $30,000 per month. The Company's five switches are leased
under capital leases from DSC Finance Corporation over a term of five years.
ITEM 3. LEGAL PROCEEDINGS.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market (the
"NNM") under the trading symbol "IIXC." The Company commenced its IPO on July 2,
1996 at a per share price of $16.00. 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 NNM.
<TABLE>
<CAPTION>
PRICE RANGE
-------------
HIGH LOW
--- ---
<S> <C> <C>
Fiscal Year 1996
Third quarter (from July 3,1996).................................... $211/8 $111/2
Fourth quarter...................................................... 303/4 195/8
Fiscal Year 1997
First Quarter (through March 21, 1997).............................. 36 21
</TABLE>
The closing sale price of the Common Stock as reported by the NNM on March
21, 1997 was $22 3/8. As of March 3, 1997, there were approximately 93 holders
of record of the Common Stock and approximately 86 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 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 Convertible Preferred Stock and Series 3 Preferred Stock.
Assuming completion of the Convertible Stock Sale, dividends on the Convertible
Preferred Stock will be payable quarterly in cash (or on or prior to two years
after the date of issuance, at the option of the Company, in additional shares
of Convertible Preferred Stock) in arrears from the date of issuance at a rate
of 7 1/4% per annum of the liquidation preference ($100.0 million), commencing
in June 1997. The Company's ability to pay cash
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dividends on shares of Convertible Preferred Stock will be limited by the terms
of the Indenture and by the terms of the Series 3 Preferred Stock. As of
December 31, 1996 the Company's Series 3 Preferred Stock had a liquidation
preference, including cumulative and unpaid dividends, of $19.1 million.
Dividends on the Series 3 Preferred Stock accumulate at an annual rate of 10%
(based on the liquidation preference) plus interest. 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 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.
RECENT SALES OF UNREGISTERED SECURITIES
On July 9, 1996, IXC Communications issued and sold 840,053 shares of
Common Stock to Trustees of General Electric Pension Trust ("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 sale and issuance of the Common Stock in the GEPT Private Placement was
deemed to be exempt from registration under the Securities Act of 1933, as
amended (the "Securities Act") in reliance upon Section 4(2) thereof, as
transactions not involving a public offering. GEPT represented its intention to
acquire the securities for investment only and not with a view to the
distribution thereof. Appropriate legends were affixed to the certificates
representing the securities issued in the GEPT Private Placement. GEPT had
adequate access, through its relationships with the Company, to sufficient
information about the Company to make an informed investment decision. No
underwriter or placement agent was employed with respect to such sale.
During the period from January 1, 1996 through December 31, 1996, IXC
Communications granted stock options to 79 individuals (including two executive
officers) covering an aggregate of 1,138,350 shares of Common Stock. No
consideration was paid for such options. Such grants were exempt from the
registration requirement of the Securities Act as not involving the sale of a
security. Stock options representing such shares have been subsequently
registered under the Securities Act.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain selected historical financial data
of the Company and its predecessor. The historical financial data for the
Company has been derived from the audited Consolidated Financial Statements of
the Company as of and for the periods ended December 31, 1996, 1995, 1994, 1993
and 1992. The historical financial data for the period January 1, 1992 through
August 14, 1992 relates to the "Company's Predecessor", IXC Carrier, Inc. ("IXC
Carrier"), and has been derived from unaudited financial statements. 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
---------------------------------------------------- -----------
AUG. 15 JAN. 1
YEAR ENDED DECEMBER 31, THROUGH THROUGH
----------------------------------------- DEC. 31, AUG. 14,
1996 1995 1994 1993 1992 1992
-------- -------- -------- -------- -------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenues.......... $203,761 $ 91,001 $ 80,663 $ 71,123 $ 23,893 $ 42,081
Operating income (loss)......... (14,016) 1,429 14,085 (10,596) (4,487) (5,778)
Net income (loss)............... (37,448) (4,965) 7,315 (23,317) (4,328) (24,559)
Net income (loss) per common and
common equivalent share...... $ (1.39) $ (.27) $ .22 $ (1.04)
BALANCE SHEET DATA (END OF
PERIOD):
Total assets.................... $459,151 $336,475 $105,409 $ 94,281 $117,741 $ 195,288
Total debt and capital lease
obligations.................. 302,281 298,794 69,124 59,954 32,891 329,242
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following should be read in conjunction with the Company's Consolidated
Financial Statements and the related notes thereto contained elsewhere in this
on Form 10-K.
OVERVIEW
The Company provides two principal services to long distance companies: (i)
transmission of voice and data over dedicated circuits (referred to as private
line services) 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 five long
distance switches located in Los Angeles, Dallas, Chicago, Philadelphia and
Atlanta and ten Frame Relay-ATM switches located in major cities.
Private Line Business. Substantially all of the Company's revenues in 1995
and prior years and approximately 49% of its revenues for 1996 (37% for the
fourth quarter of 1996) were generated by its private line business, which has
historically provided positive cash flow (even in years when the Company had net
losses, as in 1993, 1995 and 1996). The Company provides private line service to
customers generally either on a "take or pay" long-term basis or, after contract
expiration, on a month-to-month basis. The Company's private line 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. Many of such contracts contain substantial "take or pay"
commitments. During 1996, the Company leased transmission capacity to 252
customers, with the ten largest private line customers during that year
accounting for approximately 36% of revenues. The Company's two largest private
line customers, Frontier and WorldCom, accounted for approximately 10% and 8%,
respectively, of the Company's revenues in 1996. See "-- Business -- Risk
Factors -- Reliance on Major Customers."
Substantially all of the costs of services of the private line business are
fixed. The largest component of such costs for the private line business is the
expense of leasing off-net capacity from other carriers to meet
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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 reduce the Company's overall gross margin as a
percentage of revenues. In 1995 and in 1996 the Company recorded revenue and
expense of $13.8 million and $14.0 million, respectively, relating to such
exchanges. In addition, certain right-of-way arrangements in connection with the
construction of the Company's network 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 1996, was immaterial.
Switched Long Distance Business. The Company recently 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 payment due monthly 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 "-- Business -- 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 distance network leasing costs (including
MOUs and long distance 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 Company transfers
traffic onto its newly constructed network routes, the Company expects to
realize cost savings for the switched long distance business because it will be
able to reduce the amount of long distance network capacity that otherwise would
be required to be leased from other parties. However, the Company does not
intend to expand its network to all areas of the United States. Accordingly, the
Company anticipates that it will continue to need to lease a significant amount
of capacity from other carriers regardless of the network expansion. Because the
switched long distance business generally has lower margins than the private
line business, increases in switched long distance volumes have caused and will
continue to 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 distance 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 $104.0 million for
1996, the majority of which was in the third and fourth quarters. 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 and fourth quarters 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 four
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 "Business -- Risk Factors -- Development Risks and
Dependence on Switched Long Distance Business." The Company will fund such
negative EBITDA from cash flow from its private line business and cash on hand.
If such traffic does not increase, there can be no assurance that the switched
long distance business will generate positive EBITDA. See, "-- Business -- Risk
Factors -- Development Risks and Dependence on Switched Long Distance Business."
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Capital Expenditures. The Company has spent significant amounts of capital
to develop its coast-to-coast network to service its private line and switched
long distance businesses and is currently engaged in a substantial expansion of
its network. The Company spent $136.4 million for capital expenditures during
1996 and estimates that it will spend approximately $340.0 million in 1997 (of
which $49.7 million was spent in the first two months of 1997) and the Company
expects to continue to make substantial capital expenditures thereafter.
However, 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. The Company's ability
to meet the cash costs of such capital expenditures is dependent upon the
Company's ability to complete the construction of the network expansion in a
timely manner and otherwise perform its obligations so that it can complete the
LCI Fiber Sale and the MCI Fiber Sale, to enter into costsaving arrangements
with carriers or other large users of fiber capacity, to otherwise raise
significant capital and/or to significantly increase its cash flow. The failure
of the Company to accomplish any of the foregoing may significantly delay or
prevent such capital expenditures, which would have a material adverse effect on
the Company and the value of the Common Stock. See "-- Liquidity and Capital
Resources."
Pricing; Net Losses. The Company expects that, as competition increases,
prices for both private line and switched services will decline. The Company
incurred an operating loss during 1996 and does not expect to generate net
income in 1997 due to substantial interest expense associated with the Senior
Notes and operating expenses associated with the switched long distance
business. As the Company transfers traffic onto its newly constructed network
routes, 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 transferring traffic onto its newly constructed routes
will be offset to some extent by increased depreciation expense as the
investment in the newly constructed network routes is depreciated.
Acquisition and Financing Transactions. In 1994, the Company and Excel
formed Switched Services Communications, L.L.C. ("SSC"), a joint venture, to
lease, install and operate the five switches 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 noninterest bearing note for
approximately $6.2 million which was fully paid in 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.
In October 1995, the Company issued $285.0 million of Senior Notes
primarily to finance a portion of the network expansion.
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.
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. The
Company and Westel jointly have contributed funds (approximately $7.3 million by
the Company as of December 31, 1996) to the company which owns a 49% interest in
Marca-Tel, substantially all of which has been used to fund Marca-Tel. See
"-- Business -- Mexican Joint Venture."
The Company has entered into agreements to acquire LDS and Telecom One and
has had discussions with several other telecommunications companies that it may
acquire. Other than agreements with LDS and Telecom One, no commitment or
agreement has been reached with any acquisition candidates as of the date of
this Annual Report on Form 10-K has been filed with the Securities and Exchange
Commission (the "Commission"). See "-- Business -- Acquisitions."
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Fiber Sales. In February 1997, the Company and LCI entered into an
agreement providing for the LCI Fiber Sale for approximately $97.9 million.
Assuming that the network expansion between Los Angeles and Chicago proceeds
according to schedule, the Company expects to receive this amount in 1997.
In February 1997, the Company entered into the MCI Fiber Sale agreement
under which the Company is entitled to receive approximately $121.0 million.
Assuming that the network expansion proceeds according to schedule, this amount
will be due in January 1998. However, MCI has the option to pay this amount over
a period of up to 24 months commencing January 1998.
RESULTS OF OPERATIONS
1996 Compared With 1995
Net operating revenues for 1996 increased 124.0% to $203.8 million from
$91.0 million for 1995. The increase is primarily a result of the successful
commencement of the Company's switched long distance business (particularly the
addition of Excel as a customer). Switched long distance services revenues were
$104.0 million for 1996 (compared to $1.4 million for 1995). The vast majority
of these revenues were generated in the third and fourth quarters of 1996.
Billable MOUs were 1,105.2 million for 1996. Revenue per MOU decreased from
10.7c. in the first quarter of 1996 to 9.2c. in the fourth quarter of 1996. This
decrease resulted from continuing competitive price pressure, which is expected
to continue. Revenues for the Company's private line business for 1996 increased
11.4% to $99.8 million from $89.6 million for 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 1996 increased 259.6% to $143.5 million from
$39.9 million for 1995. The increase is primarily a result of the addition of
long distance 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 any significant
expenses for the switched long distance business during 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
private line services, generally made at a relatively low cost over its own
network. The Company expects that, in the event it achieves increases in private
line revenues, its cost of communications services as a percentage of such
revenues will increase because additional leases (or exchanges) of capacity from
other carriers at a relatively high cost will be required to support new
business. The cost of communications services as a percentage of revenues in the
switched long distance business is substantially greater than that in the
private line business due to the relatively high cost of LEC access charges,
leases for long distance circuits and MOUs leased from other carriers.
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 1996 increased 45.8% to $47.1
million from $32.3 million for 1995. This increase is primarily the result of
operating expenses associated with the Company's switched network. The Company
anticipates that as it expands its switched service business, operations and
administration expenses will continue to increase, but will decline as a
percentage of revenue. In addition, the Company expects that for 1997 operations
and administration expenses will increase slightly due to the integration of LDS
and Telecom One into the Company's operations.
Depreciation and amortization for 1996 increased 56.3% to $27.2 million
from $17.4 million for 1995. The increase is primarily the result of
depreciation related to capital expenditures associated with the Company's
expansion and improvement of its network. Depreciation and amortization will
increase in subsequent periods, as the Company's investment in newly constructed
routes and other network equipment is depreciated.
Interest income for 1996 increased to $10.2 million from $3.0 million for
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.
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Interest expense for 1996 increased to $37.1 million from $14.6 million for
1995. The increase is primarily the result of interest expense attributable to
the Senior Notes, which were issued during the fourth quarter of 1995.
Equity in net income (loss) of unconsolidated subsidiaries for 1996 was a
loss of $2.0 million in 1996 compared to slight income for 1995. The loss was
primarily the result of start-up losses relating to the Company's investment in
its Mexican Joint Venture.
Income taxes for 1996 resulted in a $6.0 million tax benefit compared to a
benefit of $1.7 million for 1995. The difference between the tax benefits
recorded for 1996 and the expected 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 $37.4 million for 1996 compared to a
net loss of $5.0 million for 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.
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.
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Income taxes for 1995 resulted in a $1.7 million tax benefit as opposed to
a provision for income taxes of $3.2 million in 1994. In 1995 and 1994, the
Company's effective tax rate did not significantly differ from the federal
statutory rate.
Minority interest during 1995 was $5.2 million resulting primarily from
Excel's share of operations and administration expenses and the cost of
communications services associated with its minority share of SSC, a joint
venture formed in 1995. In January 1996 the Company purchased Excel's interest
in SSC, thereby eliminating the minority interest in SSC for 1996 and future
years.
In 1994, the Company exercised a debt prepayment option in connection with
financing of debt that resulted in a net extraordinary gain of $2.3 million.
The Company experienced a net loss of $5.0 million in 1995 as opposed to
net income of $7.3 million in 1994 as a result of the factors discussed above.
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 important factors that
could materially affect such matters, see "Business -- Risk Factors."
The Company's private line operations have historically provided positive
cash flow (even in years of net losses, as in 1993 and 1995), which has provided
adequate liquidity to meet the Company's operational needs. However, the
Company's capital expenditures and, since the issuance of the Senior Notes in
the fourth quarter of 1995, its interest expense have been financed with the
proceeds of debt and equity securities. The Company expects to be able to
service its interest expense in 1997 and subsequent periods with internal cash
flow, although there can be no assurance in this regard. For 1995 and 1996, the
Company's EBITDA minus interest expense minus capital expenditures plus the
increases in working capital was negative $13.1 million and negative $130.2
million, respectively.
Cash used in operating activities was $28.7 million in 1996, as compared to
cash provided by operating activities of $11.6 million in 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. For a discussion
of important factors that could cause the Company's switched long distance
business to fail to generate positive EBITDA, see "Business -- Risk Factors
- -- Development Risks and Dependence on Switched Long Distance Business."
Cash used in investing activities in 1995 was $221.9 million, primarily as
a result of the Company investing the proceeds of the Senior Notes. Cash
provided by investing activities in 1996 was $10.4 million, resulting from the
release of funds from the escrow under the Senior Notes and offset by purchases
of property and equipment. The Company's total capital expenditures were $136.4
million for 1996 and $23.7 million for 1995 (including capital expenditures
relating to the construction of network routes and related equipment).
Cash provided by financing activities was $72.7 million in 1996 and $211.2
million in 1995. The cash provided by financing activities in 1995 resulted
primarily from the issuance of the Senior Notes, partially offset by payments on
long-term debt and capital lease obligations. The cash provided by financing
activities in 1996 resulted primarily from the issuance of Common Stock in the
IPO and in the GEPT Private Placement, partially offset by payments on long-term
debt and capital lease obligations.
As of February 28, 1997, the Company had approximately $31.0 million in
cash. The net proceeds to the Company of the Convertible Stock Sale are
estimated to be $96.5 million. There can be no assurance that the Company can
complete the Convertible Stock Sale. See "-- Business -- Risk
Factors -- Reliance on Convertible Stock Sale. In February 1997, the Company and
LCI entered into the LCI Fiber Sale which will result in proceeds to the Company
of approximately $97.9 million. The Company expects to receive all of such
amount in 1997, assuming the construction of the network expansion between Los
Angeles and Chicago
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proceeds according to schedule. In addition, the Company is engaged in
discussions with potential lenders regarding the Proposed Credit Facility under
which it expects to be able to borrow up to a certain percentage of eligible
accounts receivable. Although the total availability under the Proposed Credit
Facility will vary from time to time according to the aggregate amount of
eligible accounts receivable, the Company anticipates that the lender will
impose a limit on borrowings under the facility. There can be no assurance that
the Company will obtain such facility. The Company expects that its EBITDA for
1997 will increase significantly over EBITDA for 1996. Although there can be no
assurance, the Company expects EBITDA for 1997 to be modestly below analysts'
estimates of $78.0 million to $90.0 million. In particular, the Company expects
that operating income and EBITDA in the first half of 1997 will be less than
originally anticipated due to planned delays in the network fiber expansion and
increased start-up costs in the switched long distance business. The preceding
forward-looking statements regarding the Company's operating income and EBITDA
for 1997 are based on certain assumptions as to future events, many of which are
not within the Company's control. Important factors that could adversely affect
the Company's ability to achieve the EBITDA results discussed above include: (i)
delays or cost overruns with respect to the network expansion; (ii) delays by
the Company's contractors and partners in cost-saving arrangements in fulfilling
their obligations; (iii) delays or higher-than-expected costs in obtaining
rights-of-way; (iv) delays in the completion of the routes of the network
expansion scheduled for completion in 1997; (v) an inability by the Company to
continue to increase traffic on its switched network, in particular, higher
margin traffic; (vi) an inability by the Company to successfully commence
service for new 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, (vii) the loss of one or
more large customers; (viii) increases in expenses; and (ix) decreases in the
Company's rates caused by the competitive pressures. See "-- Business -- Risk
Factors -- Risks Relating to the Network Expansion," "Business -- Risk
Factors -- Development Risks and Dependence on Switched Long Distance Business,"
"Business -- Risk Factors -- Risks Inherent in Rapid Growth," and
"Business -- Risk Factors -- Reliance on Major Customers."
The Company anticipates the following major uses for its available cash:
(i) the network 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 network expansion, approximately $201.0
million; and (ii) for other capital expenditures, approximately $139.0 million.
Approximately $49.7 million of capital expenditures were made in the first two
months of 1997. The Company expects to continue to make substantial capital
expenditures in 1998 and thereafter.
The Company is required to make interest payments in the amount of $35.6
million on the Senior Notes each year. For 1996, EBITDA was insufficient to
cover the Company's debt service requirements under the Senior Notes. The
Company anticipates that such payments during 1997 will be made from cash on
hand. For a discussion of important factors that may cause actual results,
including the Company's assumption that increases in its EBITDA will occur as a
result of the successful completion and utilization of the network expansion and
growth in the switched long distance business, to differ materially from the
foregoing forward-looking statement, see "Business -- Risk
Factors -- Development Risks and Dependence on Switched Long Distance Business."
The Company is also required to make principal payments of $1.63 million on
other debt in 1997 and quarterly principal payments of $560,000 on another debt
instrument from March 31, 1998 through December 31, 1999. 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. The Company will also be required
(except in certain limited circumstances) to pay quarterly cash dividends on the
Convertible Preferred Stock (at an annual rate of 7 1/4%) beginning June 30,
1999 (and prior to such time such dividends may be paid in cash or additional
shares of Convertible Preferred Stock). Payment of dividends on the Convertible
Preferred Stock is not currently permitted under the terms of the Indenture
until certain financial conditions have been met or under the terms of the
Series 3 Preferred Stock until the Company's Restated Certificate of
Incorporation, as amended, is amended (which is expected to occur in May 1997).
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The Company is required to make minimum annual lease payments for
facilities, equipment and transmission capacity used in its operations. In 1997,
1998 and 1999, the Company is currently required to make payments of
approximately $6.6 million, $5.1 million and $4.6 million, respectively, on
capital leases and $22.6 million, $13.4 million and $4.0 million, respectively,
on operating leases. The Company expects to incur additional operating and
capital lease costs in connection with the network expansion.
In connection with its fiber optic network expansion, the Company has
entered into various construction and installation agreements with contractors.
Total commitments remaining under these agreements were approximately $39.6
million at December 31, 1996.
In connection with the network expansion, as of December 31, 1996, the
Company had committed to pay $32.9 million for fiber usage rights on other long
distance carriers' networks. Pursuant to these agreements relating to the
construction of the network expansion, the Company has committed to pay a total
of $28.2 million for periods ranging from twenty to twenty-five years for
maintenance and license fees. For 1997, estimates of these shared construction
costs are included in the Company's capital expenditure estimates.
The Company expects to meet its needs for cash in 1997 by using cash on
hand, the proceeds of the Convertible Stock Sale, cash generated by operations,
the proceeds of the LCI Fiber Sale, additional cost-saving arrangements and
vendor financing it may seek. In addition, the Company is engaged in discussions
with potential lenders regarding the Proposed Credit Facility under which it
expects to be able to borrow up to a certain percentage of eligible accounts
receivable. Although the total availability under the Proposed Credit Facility
will vary from time to time according to the aggregate amount of eligible
accounts receivable, the Company anticipates that the lender will impose a limit
on borrowings under the facility. There can be no assurance that the Company
will be successful in obtaining the necessary cash or the Proposed Credit
Facility to meet its needs. A failure to raise such cash would delay or prevent
such capital expenditures and the construction of the network expansion. Also,
the foregoing capital expenditure and cash requirements for 1997 and 1998 do not
take into account any acquisitions. See "-- Business -- Acquisitions."
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 Marca-Tel. The remaining 51% of MarcaTel 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, which is seeking FCC authority to operate in the
United States as an international resale carrier, is responsible for providing
all the capital that may be required from Marca-Tel's stockholders in order to
finance Marca-Tel. The Company and Westel jointly have contributed funds to
Progress International (approximately $7.3 million by the Company as of December
31, 1996), 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 MarcaTel 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. The Indenture contains significant limitations on the Company's
ability to invest in Progress International or Marca-Tel.
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
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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 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 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
February 28, 1997 approximately $1.1 million of such proceeds remained available
for this purpose). The Indenture 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, provided that the
Company meets certain financial ratios, 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, that such business plan will be successful. See
"-- Business -- Mexican Joint Venture."
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 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 that: (i) there will be no significant delays or cost overruns with
respect to the network expansion; (ii) the Company's contractors and partners in
cost-saving arrangements will perform their obligations; (iii) rights-of-way can
be obtained in a timely, cost-effective basis; (iv) the routes of the network
expansion scheduled for completion in 1997 are substantially completed on
schedule; (v) the Company will continue to increase traffic on its switched
network; (vi) the Company can successfully commence service for new 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; (vii) the Company can successfully complete the LCI
Fiber Sale and the MCI Fiber Sale; and (viii) the Company can obtain vendor
financing.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Index included at "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-40-
<PAGE> 65
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be filed with the
Commission within 120 days after December 31, 1996 and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be filed with the
Commission within 120 days after December 31, 1996 and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be filed with the
Commission within 120 days after December 31, 1996 and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be filed with the
Commission within 120 days after December 31, 1996 and is incorporated herein by
reference.
-41-
<PAGE> 66
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
(1) Index to Financial Statements:
Report of Independent Auditors............................................ F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995.............. F-2
Consolidated Statements of Operations for the years ended December
31, 1996, 1995 and 1994................................................... F-3
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994............................. F-4
Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994................................................... F-5
Notes to Consolidated Financial Statements................................ F-7
(2) Index to Financial Statement Schedules:
All information required in Financial Statement Schedules for which
provision is made in the applicable accounting regulations of the
Commission (i) are included in the notes to the financial statements
included in this report or (ii) are not required under the related
instruction or are inapplicable and, therefore, have been omitted.
(3)(a) Exhibits:
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<C> <C> <S>
3.1 + Restated Certificate of Incorporation of IXC Communications, Inc., as amended.
3.2 + Bylaws of IXC Communications, Inc., as amended.
4.1 Specimen certificate representing shares of Common Stock of IXC Communications,
Inc. (incorporated by reference to Exhibit 4.1 of IXC Communications, Inc.
Registration Statement on Form S-1 filed with the Commission on May 20, 1996, as
amended (File No. 333-4061)(the "S-1")).
4.2 Indenture dated as of October 5, 1995 by and among IXC Communications, Inc., on
its behalf and as successor-in-interest to I-Link Holdings, Inc. and IXC Carrier
Group, Inc., each of IXC Carrier, Inc., on its behalf and as
successor-in-interest to I-Link, Inc., CTI Investments, Inc., Texas Microwave,
Inc. and WTM Microwave, Inc., Atlantic States Microwave Transmission Company,
Central States Microwave Transmission Company, Telcom Engineering, Inc., on its
behalf and as successor-in-interest to SWTT Company and Microwave Network, Inc.,
Tower Communication Systems Corp., West Texas Microwave Company, Western States
Microwave Transmission Company, Rio Grande Transmission, Inc., IXC Long Distance,
Inc., Link Net International, Inc. (collectively, the "Guarantors") and IBJ
Schroder Bank & Trust Company, as Trustee, with respect to the 12 1/2% Series A
and Series B Senior Notes due 2005 (incorporated by reference to Exhibit 4.1 of
IXC Communications, Inc.'s and each of the Guarantor's Registration Statement on
Form S-4 filed with the Commission on April 1, 1996, as amended (File No.
333-2936) (the "S-4")).
4.3 Purchase Agreement dated October 5, 1995 by and among IXC Communications, Inc.,
and the Purchasers named therein (incorporated by reference to Exhibit 4.2 of the
S-4).
4.4 A/B Exchange Registration Rights Agreement dated as of October 5, 1995 by and
among IXC Communications, Inc., the Guarantors and the Purchasers named therein
(incorporated by reference to Exhibit 4.3 of the S-4).
</TABLE>
-42-
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<C> <C> <S>
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).
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).
</TABLE>
-43-
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<C> <C> <S>
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 *+ Outside Directors' Phantom Stock Plan of IXC Communications, Inc., 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 *+ Special Stock Plan of IXC Communications, Inc.
10.17 + Stock Acquisition Agreement and Plan of Merger dated as of January 17, 1997 by
and among IXC Communications, Inc., IXC Long Distance, Inc., IXC-One Acquisition
Corp., L.D. Services, Inc. and the Shareholders named therein.
11.1 + Statement of Computation of Earnings per Share.
21.1 + Subsidiaries of IXC Communications, Inc.
23.1 + Consent of Ernst & Young LLP.
24.1 + Powers of Attorney.
</TABLE>
- ---------------
* Management contract or executive compensation plan or arrangement required to
be indicated as such and filed as an exhibit pursuant to applicable rules of
the Commission.
+ Filed herewith.
(b) Reports on Form 8-K:
None.
-44-
<PAGE> 69
GLOSSARY
Access charges -- The fees paid by long distance carriers to LECs for
originating and terminating long distance calls on their local networks.
ALC -- ALC Communications Corporation, the parent of Allnet. ALC was
acquired by Frontier in August, 1995.
Allnet -- Allnet Communication Services, Inc.
Ameritech -- Ameritech Communications, Inc.
ATM (asynchronous transfer mode) -- An information transfer standard that
is one of a general class of technologies that relay traffic by way of an
address contained within the first five bytes of a standard 53-byte-long packet
or cell. The ATM format can be used by many different information systems,
including local area networks, to deliver traffic at varying rates, permitting a
mix of voice, video and data (multimedia).
AT&T -- AT&T Corp.
Backbone -- The through-portions of a transmission network, as opposed to
spurs which branch off the throughportions.
Bandwidth -- The range of frequencies that can be transmitted through a
medium, such as glass fibers, without distortion. The greater the bandwidth, the
greater the information-carrying capacity of such medium.
Broadband -- Broadband communications systems can transmit large quantities
of voice, data and video. Examples of broadband communication systems include
DS-3 fiber optic systems, which can transmit 672 simultaneous voice
conversations, or a broadcast television station signal, that transmits high
resolution audio and video signals into the home. Broadband connectivity is also
an essential element for interactive multimedia applications.
Cable & Wireless -- Cable & Wireless, P.L.C.
CAP (Competitive Access Provider) -- A company that provides its customers
with an alternative to the LEC for local transport of private line, special
access and interstate transport of switched access telecommunications service.
Capacity-intensive -- Refers to products which use comparatively large
amounts of bandwidth.
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). Both the Company's microwave and fiber optic facilities transmit
digital information.
Digital route miles -- Route miles of the Company's microwave and fiber
optic routes.
DS-1, DS-3 -- Standard telecommunications industry digital signal formats,
which are distinguishable by bit rate (the number of binary digits (0 and 1)
transmitted per second). DS-0 service has a bit rate of 64 kilobits per second
and can transmit only one voice or data transmission at a time. DS-1 service has
a bit rate of 1.544 megabits per second and can transmit 24 simultaneous voice
or data transmissions. DS-3 service has a bit rate of 45 megabits per second and
can transmit 672 simultaneous voice or data transmissions.
A-1
<PAGE> 70
DS-3 miles -- A measure of the total capacity and length of a transmission
path, calculated as the capacity of the transmission path in DS-3s multiplied by
the length of the path in miles.
DTI -- Digital Teleport, Inc.
EBITDA -- Operating income (loss) plus depreciation and amortization.
EBITDA is not a measurement determined in accordance with GAAP, should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with GAAP and is not necessarily comparable with similarly titled
measures for other companies.
800/888 service -- A telecommunications service for businesses that allows
calls to be made to a specific location at no charge to the calling party. Use
of the "800" or "888" service code denotes calls that are to be billed to the
receiving party. A computer database in the provider's network translates the
800 or 888 number into a conventional telephone number.
Enhanced data services -- Products and services designed for the transport
and delivery of integrated information to include voice, data and video and any
combination thereof.
Excel -- EXCEL Communications, Inc.
Facilities-based carrier -- Carriers who own transmission facilities.
FCC -- Federal Communications Commission.
Fiber miles -- The number of fiber route miles of a fiber optic route
multiplied by the number of fiber strands in the route.
Frame Relay -- A high-speed, data-packet switching service used to transmit
data between computers. Frame Relay supports data units of variable lengths at
access speeds ranging from 56 kilobits per second to 1.5 megabits per second.
This service is well-suited for connecting local area networks, but is not
appropriate for voice and video applications due to the variable delays which
can occur. Frame Relay was designed to operate at high speeds on modern fiber
optic networks.
Frontier -- Frontier Corporation.
GAAP -- Generally Accepted Accounting Principles.
GE Capital Communication -- GE Capital Communication Services 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.
A-2
<PAGE> 71
Intranet -- An infrastructure based on Internet standards and technologies
that provides access to information within limited and well-defined groups such
as universities, governments and other large organizations.
Kilobit -- One thousand bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "kilobits per
second."
LATAs (local access and transport areas) -- The approximately 200
geographic areas that define the areas between which the RBOCs were prohibited
from providing long distance services prior to the Telecommunications Act.
LCI -- LCI International Management Services, Inc.
LDS -- L.D. Services, Inc.
LEC (local exchange carrier) -- A company providing local telephone
services.
Local loop -- A circuit within a LATA.
MCI -- MCI Communications Corporation.
Megabit -- One million bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "megabits per
second."
MFS -- MFS Network Technologies, Inc.
MOUs -- Minutes of use of long distance service.
Non-facilities based carrier -- Carriers that do not own transmission
facilities.
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.
Private lines -- Transmission of voice and data over dedicated circuits.
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.
A-3
<PAGE> 72
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.
Telecom One -- Telecom One, Inc.
Vyvx -- Vyvx, Inc., a subsidiary of The Williams Companies, Inc.
Westel -- Westel International, Inc.
WilTech -- The WilTech Group.
WilTel -- WilTel Network Services, Inc.
WorldCom -- WorldCom, Inc.
A-4
<PAGE> 73
IXC COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995.......................... F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and
1994................................................................................ F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994.................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE> 74
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, 1996 and 1995, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. 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, 1996 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, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Austin, Texas
February 28, 1997, except for
the third paragraph of Note 19,
as to which the date is
March 17, 1997
F-2
<PAGE> 75
IXC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents.............................................. $ 61,340 $ 6,915
Accounts receivable:
Trade, net of allowance for doubtful accounts of $4,030,000 in
1996 and $1,769,000 in 1995...................................... 45,102 5,537
Other............................................................. 2,466 782
-------- --------
47,568 6,319
Income tax receivable.................................................. -- 1,296
Deferred tax assets (Note 12).......................................... 463 450
Prepaid expenses....................................................... 1,734 1,069
-------- --------
Total current assets.............................................. 111,105 16,049
Property and equipment, net (Note 4)................................... 268,609 106,399
Escrow under Senior Notes (Note 5)..................................... 51,412 198,266
Investment in unconsolidated subsidiaries.............................. 5,486 187
Deferred charges and other non-current assets.......................... 22,539 15,574
-------- --------
Total assets................................................. $459,151 $336,475
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable -- trade.............................................. $ 64,923 $ 6,792
Accrued liabilities (Note 6)........................................... 18,928 14,306
Current portion of long-term debt and capital lease obligations (Notes
7 and 8)............................................................. 6,750 4,534
-------- --------
Total current liabilities......................................... 90,601 25,632
Long-term debt and capital lease obligations (Notes 7 and 8)........... 295,531 294,260
Deferred tax liability (Note 12)....................................... 2,434 8,303
Other noncurrent liabilities........................................... 6,201 469
Commitments and contingencies (Notes 8 and 16)
Minority interest...................................................... 905 953
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 in 1996 and 1995 (aggregate
liquidation preference of $19,059,000 at December 31, 1996)...... 13 13
Common Stock, $.01 par value; 100,000,000 shares authorized; shares
issued and outstanding 30,795,014 in 1996 and 24,335,255 in
1995.............................................................. 308 243
Additional paid-in capital........................................... 123,434 29,430
Accumulated deficit.................................................. (60,276) (22,828)
-------- --------
Total stockholders' equity........................................... 63,479 6,858
-------- --------
Total liabilities and stockholders' equity................... $459,151 $336,475
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 76
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
-------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net operating revenues (Note 10):
Private line.............................................. $ 99,793 $ 89,563 $80,663
Switched long distance.................................... 103,968 1,438 --
-------- -------- -------
$203,761 $ 91,001 $80,663
Operating expenses:
Cost of services.......................................... 143,469 39,852 33,896
Operations and administration............................. 47,067 32,282 20,561
Depreciation and amortization............................. 27,241 17,438 12,121
-------- -------- -------
Operating income (loss)................................ (14,016) 1,429 14,085
Interest income............................................. 2,838 468 211
Interest income on escrow under Senior Notes................ 7,404 2,552 --
Interest expense............................................ (37,076) (14,597) (6,105)
Equity in net income (loss) of unconsolidated
subsidiaries.............................................. (1,961) 19 (94)
-------- -------- -------
Income (loss) before income taxes, minority interests and
extraordinary gain (loss)................................. (42,811) (10,129) 8,097
Benefit (provision) for income taxes (Note 12).............. 5,981 1,693 (3,157)
Minority interests.......................................... (618) 5,218 77
-------- -------- -------
Income (loss) before extraordinary gain (loss).............. (37,448) (3,218) 5,017
Extraordinary gain (loss) on early extinguishment of debt
(involving a related party in 1994), less applicable
(provision) benefit for income taxes of $1,164,000 in 1995
and ($1,472,000) in 1994.................................. -- (1,747) 2,298
-------- -------- -------
Net income (loss)........................................... (37,448) (4,965) 7,315
Dividends applicable to preferred stock..................... 1,739 1,843 1,752
-------- -------- -------
Net income (loss) applicable to common stockholders......... $(39,187) $ (6,808) $ 5,563
======== ======== =======
Income (loss) per common and common equivalent share:
Before extraordinary gain (loss).......................... $ (1.39) $ (.20) $ .13
Extraordinary gain (loss)................................. -- (.07) .09
-------- -------- -------
Net income (loss)......................................... $ (1.39) $ (.27) $ .22
======== ======== =======
Weighted average common and common equivalent shares used in
computation of income (loss) per share.................... 28,209 25,108 24,993
======== ======== =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 77
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
10% SENIOR SERIES 10% JUNIOR SERIES
1 3
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------ ----------------- ----------------- ADDITIONAL TOTAL
NUMBER OF NUMBER OF NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------- --------- ------ --------- ------ ---------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.... 1 $ 1,460 13 $ 13 24,274 $242 $ 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.... 1 1,460 13 13 24,335 243 29,430 (16,957) 14,189
Redemption of preferred
stock....................... (1) (1,460) -- -- -- -- -- -- (1,460)
Net loss...................... -- -- -- -- -- -- -- (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.... -- -- 13 13 24,335 243 29,430 (22,828) 6,858
Issuance of common stock...... -- -- -- -- 6,460 65 94,004 -- 94,069
Net loss...................... -- -- -- -- -- -- -- (37,448) (37,448)
--- ------- --- ---- ------ ---- -------- -------- --------
Balance at December 31, 1996.... -- $ -- 13 $ 13 30,795 $308 $123,434 $ (60,276) $ 63,479
=== ======= === ==== ====== ==== ======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 78
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)............................................ $(37,448) $(4,965) $ 7,315
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Depreciation............................................... 23,695 16,608 11,131
Amortization............................................... 3,546 830 990
Amortization of debt issue costs and Senior Note
discount................................................ 1,086 858 472
Provision for doubtful accounts............................ 3,060 1,505 1,565
Equity in net (income) loss of unconsolidated
subsidiaries............................................ 1,961 (19) 94
Minority interest in net income (loss) of subsidiaries..... 618 (5,218) (77)
Compensation expense on stock options...................... 182 -- --
Extraordinary (gain) loss on early extinguishment of
debt.................................................... -- 2,911 (3,770)
Gain on sale of property and equipment..................... -- -- (90)
Changes in assets and liabilities, net of effects of
acquisitions:
Increase in accounts receivable......................... (44,309) (4,108) (1,000)
Decrease (increase) in other current assets............. 490 (1,466) 141
Increase (decrease) in accounts payable - trade......... 17,950 5,196 (4,619)
Increase in accrued liabilities......................... 4,436 7,503 139
Increase (decrease) in deferred income taxes............ (5,882) (1,847) 2,847
Decrease in deferred charges and other non-current
assets................................................ (4,538) (4,092) (854)
Increase (decrease) in other noncurrent liabilities..... 6,466 (2,089) (752)
-------- ------- -------
Total adjustments..................................... 8,761 16,572 6,217
-------- ------- -------
Net cash provided by (used in) operating
activities....................................... (28,687) 11,607 13,532
-------- ------- -------
</TABLE>
See accompanying notes.
F-6
<PAGE> 79
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOW FROM INVESTING ACTIVITIES:
Release of funds from escrow under Senior Notes.......... $ 154,244 $ 4,300 $ --
Deposit into escrow under Senior Notes................... (7,404) (202,552) --
Purchase of property and equipment....................... (136,391) (23,670) (7,087)
Sale of property and equipment........................... -- -- 235
Payments for businesses acquired, net of cash received... -- -- (11,976)
--------- --------- --------
Net cash provided by (used in) investing
activities................................... 10,449 (221,922) (18,828)
--------- --------- --------
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 --
Capital contribution to unconsolidated subsidiary........ (7,319) -- --
Proceeds from long-term debt............................. -- 18,695 12,999
Payments on long-term debt and capital lease
obligations............................................ (12,786) (76,490) (7,837)
Payments from escrow..................................... -- -- 1,500
Payment of debt issue costs.............................. (1,301) (10,407) (1,551)
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................................. 94,069 -- 3
--------- --------- --------
Net cash provided by financing activities...... 72,663 211,182 5,114
--------- --------- --------
Net increase (decrease) in cash and cash equivalents..... 54,425 867 (182)
Cash and cash equivalents at beginning of year........... 6,915 6,048 6,230
--------- --------- --------
Cash and cash equivalents at end of year................. $ 61,340 $ 6,915 $ 6,048
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) for:
Income taxes........................................ $ (832) $ 1,240 $ 891
========= ========= ========
Interest............................................ $ 37,561 $ 4,955 $ 4,496
========= ========= ========
</TABLE>
See accompanying notes.
F-7
<PAGE> 80
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND ACQUISITIONS
IXC Communications, Inc. and its subsidiaries (collectively referred to as
"IXC" or the "Company") is an Austin, Texas based supplier of telecommunications
services. IXC provides two principal services to long distance companies: (i)
private line 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.
Long distance companies may be categorized as facilities-based carriers or
non-facilities-based carriers. Sellers of private line services are generally
facilities-based carriers, like IXC, that own private line transmission
facilities, such as fiber optic or digital microwave transmission facilities.
Customers using private line services include: (i) facilities-based carriers
that require private line capacity where they have geographic gaps in their
facilities, need additional capacity or require geographically different
routing; and (ii) non-facilities-based carriers requiring private line capacity
to carry their customers' long distance traffic. The Company provides private
line services to customers either on a "take-or-pay" long term basis, or after
contract expiration on a month-to-month basis.
In late 1995, the Company expanded into the business of selling switched
long distance services to long distance resellers. Long distance companies may
be characterized as switched or switchless carriers. Sellers of switched long
distance services are generally switched carriers, like IXC, that own one or
more switches that direct telecommunications traffic. Customers using the
Company's switched long distance service generally are switchless carriers that
depend on switched carriers to provide long distance services to their users.
The Company sells switched long distance services on a per-call basis, with
payment due monthly after services are rendered.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
IXC, a Delaware corporation, was incorporated in 1992 and, through a series
of transactions through 1994, acquired various wholly-owned and majority-owned
subsidiaries which are included in the consolidated financial statements. The
consolidated financial statements of IXC include the accounts of IXC
Communications, Inc. and its wholly-owned and majority-owned subsidiaries. The
Company has a 50% interest in Progress International L.L.C. ("Progress") which
is accounted for using the equity method. Progress has a 49% interest in
Marca-Tel S.A. de C.V. ("Marca-Tel"), a telecommunications company located in
Mexico. The Company also accounts for its 25% interest in U.S. Advantage Long
Distance, Inc., a reseller of long distance minutes, using the equity method.
Significant intercompany accounts and transactions have been eliminated in the
consolidated financial statements.
Revenues
Private line voice and data circuit revenues are generated primarily by
providing capacity on the Company's fiber optic and microwave transmission
network at rates established under long-term contractual arrangements or on a
month-to-month basis after contract expiration. Revenues are recognized as
services are provided.
Switched long-distance service revenues are generated primarily by
providing voice and data communications. Revenues are recognized as services are
provided.
The Company accounts for capacity exchange agreements with other carriers
by recognizing the fair value of the revenue earned and expense incurred under
the respective agreements.
F-8
<PAGE> 81
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. All cash
equivalents are recorded at cost and classified as available for sale.
Short-term investments held in the Company's escrow related to the Senior Notes
(see Note 5) are not included as a cash equivalent. Escrow investments are
recorded at cost.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the various assets,
ranging from three to twenty years. Maintenance and repairs are charged to
operations as incurred. Property and equipment recorded under capital leases are
included with the Company's owned assets. Amortization of assets recorded under
capital leases is included in depreciation expense.
Costs associated with uncompleted portions of the fiber optic network are
classified as construction in progress in the accompanying consolidated balance
sheets. Upon completion, the costs will be classified as transmission systems
and depreciated over their useful lives.
Upon indication of an impairment, the Company records a loss on its
long-lived assets when the undiscounted cash flows estimated to be generated by
those assets are less than the related carrying amount of the assets.
Fiber Exchange Agreements
In connection with its fiber optic network expansion, the Company has
entered into various agreements to purchase, sell or exchange fiber usage
rights. Purchases of fiber usage rights from other carriers are recorded at cost
as a separate component of property and equipment. The recorded assets are
amortized over the lesser of the term of the related agreement or the estimated
life of the fiber optic cable. Sales of fiber usage rights are recorded as
deferred revenue and are included in other non-current liabilities in the
accompanying consolidated balance sheets. Revenues are recognized over the terms
of the related agreements. Non-monetary exchanges of fiber usage rights (swaps
of fiber usage rights with other long distance carriers) are recorded at the
cost of the asset transferred.
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. Total interest
incurred during the years ended December 31, 1996, 1995 and 1994 was $40.0
million, $15.0 million and $6.1 million, respectively, of which, $2.9 million,
$0.4 million and $34,000 was capitalized.
Income Taxes
The Company accounts for income taxes using the liability method as
required by Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes.
Deferred income taxes are provided for net operating losses and 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.
F-9
<PAGE> 82
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred Charges and Other Non-current Assets
Costs incurred in connection with obtaining long-term financing have been
deferred and are being amortized as interest expense over the terms of the
related debt agreements. Deferred costs relating to long-term financing at
December 31, 1996 and 1995 were $11.4 million and $10.4 million, respectively.
Accumulated amortization of these costs at December 31, 1996 and 1995 was $1.4
million and $0.5 million, respectively.
Costs incurred to obtain certain regulatory licenses are amortized on a
straight-line basis over ten to forty years.
Certain costs incurred in connection with installation of the switched long
distance network have been deferred and are being amortized on a straight-line
basis over four years. Deferred network costs at December 31, 1996 and 1995 were
$5.0 million and $1.8 million, with accumulated amortization of $1.0 million and
$0.1 million, respectively.
The acquisition cost of customer accounts obtained through an outside sales
organization have been deferred and amortized over the estimated average term of
the related customer contracts.
Stock-Based Compensation
The Company has elected to account for its employee stock options under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations, because, the alternative fair
value accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25 compensation expense is
recognized only when the exercise price of the Company's employee stock options
is less than the market price of the underlying stock on the date of grant.
Income (Loss) Per Common and Common Equivalent Share
Income (loss) per common share is based on net income (loss) less preferred
stock dividend requirements, divided by the weighted average common and common
equivalent shares outstanding during the period. Outstanding options are
included in the calculation to the extent they are dilutive or were issued
within one year of the Company's initial public offering. Income (loss) per
share on a fully diluted basis is not presented as the fully diluted effect is
either antidilutive or not materially different from primary income (loss) per
common share, as computed.
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.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, funds held
in escrow and trade receivables. The Company places its cash equivalents and
funds held in escrow in quality investments with reputable financial
institutions. Trade receivables include significant balances due from a small
number of customers. At December 31, 1996,
F-10
<PAGE> 83
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$9.1 million in trade receivables from the Company's private line services are
due from seven customers. Switched long distance services receivables are also
concentrated, with $21.1 million in trade receivables due from one customer. If
any of these individually significant customers experienced deteriorating
financial condition, results of operations of the Company could be adversely
affected. The Company performs ongoing credit evaluations of its customers'
financial condition. IXC has not experienced significant losses from sales to
any of its significant customers. (See Note 10)
Reclassifications
Certain amounts for prior years have been reclassified to conform to the
1996 presentation.
3. ACQUISITION OF MINORITY INTEREST
Effective January 1, 1996, IXC purchased the minority interest in a joint
venture for $6.2 million. The acquisition of the minority interest was accounted
for as a purchase and the financial statements of the former joint venture have
been consolidated with the Company 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 net assets acquired was $5.6 million and is
being amortized on a straight-line basis over five years. Unaudited pro forma
operating results for the year ended December 31, 1995 as if the minority
interest had been acquired as of January 1, 1995, are as follows (in thousands,
except per share amounts):
<TABLE>
<S> <C>
Net operating revenues.................................................. $ 91,001
========
Loss before income taxes, minority interests and extraordinary loss..... $(11,246)
========
Net loss................................................................ $ (9,352)
========
Loss per common and common equivalent share:
Before extraordinary loss............................................. $ (.38)
Extraordinary loss.................................................... (.07)
--------
Net loss........................................................... $ (.45)
========
</TABLE>
4. PROPERTY AND EQUIPMENT
The following table summarizes the Company's property and equipment:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and right of ways....................................... $ 2,345 $ 2,344
Buildings and improvements................................... 5,048 4,021
Transmission systems......................................... 181,170 137,398
Furniture and other.......................................... 4,629 2,407
Fiber usage rights........................................... 38,533 --
Construction in progress..................................... 106,017 5,658
-------- --------
337,742 151,828
Less: Accumulated depreciation and amortization.............. (69,133) (45,429)
-------- --------
Property and equipment, net.................................. $268,609 $106,399
======== ========
</TABLE>
F-11
<PAGE> 84
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. 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 Notes proceeds in an escrow
account, which proceeds and the earnings thereon are restricted in their use to
network expansion, capital expenditures, certain interest, principal and other
payments on the Senior Notes and other permitted uses (see Note 7). Such funds
have been invested in short-term, investment-grade, interest-bearing securities
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
Overnight investments........................................... $14,201 $ 96,975
U.S. Government securities...................................... 37,211 101,291
------- --------
$51,412 $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, 1996 and
1995 were all due in three months or less and classified as available for sale.
6. ACCRUED LIABILITIES
The following table summarizes the Company's accrued liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued taxes.................................................. $ 2,750 $ 2,924
Deferred revenue............................................... 3,044 1,693
Accrued interest............................................... 8,906 8,748
Other.......................................................... 4,228 941
------- -------
$18,928 $14,306
======= =======
</TABLE>
7. LONG-TERM DEBT
Long-term debt and capital lease obligations of IXC consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior Notes -- 12.5%, net of unamortized discount of
$7,344,000 and $7,762,000 at December 31, 1996 and 1995,
respectively................................................. $277,656 $277,238
Senior subordinated note -- 7%................................. 3,046 4,416
Promissory note -- 9%.......................................... 3,717 3,401
Capital lease obligations...................................... 17,862 13,697
Other debt..................................................... -- 42
-------- --------
Total long-term debt and capital lease obligations........ $302,281 $298,794
Less current portion........................................... (6,750) (4,534)
-------- --------
Long-term debt and capital lease obligations................... $295,531 $294,260
======== ========
</TABLE>
F-12
<PAGE> 85
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
Senior Notes
On October 5, 1995, the Company issued $285 million of 12 1/2% Senior Notes
(effective rate 12.8%) due October 1, 2005, with interest payable semi-annually.
In July 1996, the Company exchanged certain of the Senior Notes for registered
Senior Notes. Until the exchange was consummated, the Company was required to
make additional interest payments at the rate of .5% per annum on the principal
amount.
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.
Of the net proceeds of approximately $277 million, $200 million was
deposited into an escrow account primarily restricted for the construction of a
major network expansion program (see Note 5). Approximately $53.7 million of the
net proceeds was used to repay or repurchase certain previously-existing
indebtedness of the Company, including $22.7 million paid to certain
stockholders. This resulted in an extraordinary loss on early extinguishment of
debt of $1.7 million in 1995, net of applicable income tax benefit of $1.2
million. In addition, approximately $3.8 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, and are guaranteed on a senior
unsecured basis by certain wholly owned direct and indirect subsidiaries 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. See Note 20 for financial
information for guarantor and non-guarantor subsidiaries.
The Senior Notes contain certain covenants that restrict the ability of the
Company and its subsidiaries to incur additional indebtedness and issue certain
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 Subordinated Note
During 1994, the Company issued a $6.2 million, 7% senior subordinated
promissory note to a minority investor in one of IXC's subsidiaries. Under the
terms of the senior subordinated promissory note, principal and interest are due
in monthly installments of $136,000 through December 31, 1998.
Promissory Note
During 1994, to facilitate an acquisition, the Company issued a $3.0
million 9% promissory note to a minority investor in the acquired entity. Under
the terms of the promissory note, principal and interest payments of $560,000
are due quarterly beginning March 31, 1998 and ending December 31, 1999. Thus,
accrued interest is reflected in the balance of the note.
F-13
<PAGE> 86
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
Annual maturities of long-term debt at December 31, 1996 are as follows (in
thousands):
<TABLE>
<S> <C>
1997.............................................. $ 1,470
1998.............................................. 3,170
1999.............................................. 2,123
2005.............................................. 285,000
--------
291,763
Less discount on Senior Notes..................... (7,344)
--------
$284,419
========
</TABLE>
8. CAPITAL AND OPERATING LEASES
The Company leases certain facilities, equipment and transmission capacity
used in its operations under noncancellable capital and operating leases. Future
minimum annual lease payments under these lease agreements at December 31, 1996,
are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1997.................................................... $ 6,599 $22,597
1998.................................................... 5,120 13,432
1999.................................................... 4,616 4,029
2000.................................................... 3,737 1,211
2001.................................................... 1,143 712
-------
21,215
Less amounts related to interest........................ (3,353)
-------
Present value of capital lease obligations.............. 17,862
Less current portion.................................... (5,280)
-------
Long-term capital lease obligations..................... $12,582
=======
</TABLE>
The gross amount of assets recorded under capital leases at December 31,
1996 and 1995 was $22.2 million and $17.9 million, respectively. The related
accumulated amortization was $5.9 million and $4.1 million at December 31, 1996
and 1995, respectively.
Lease expense relating to facilities, equipment and transmission capacity
leases, excluding amortization of fiber exchange agreements, was approximately
$49.9 million, $29.1 million and $28.7 million for the years ended December 31,
1996, 1995 and 1994, respectively.
In November 1994, IXC entered into an agreement whereby certain deferred
lease obligations payable through 1998 were restructured resulting in all the
deferred obligations, $4.4 million, being due during 1995. These obligations
were repaid in 1995 from the proceeds the Company received from the issuance of
the Senior Notes.
In 1996 and 1995, the Company entered into equipment leases for network
switching equipment, for which the lease obligations had a present value of $7.2
million and $9.8 million, respectively. In 1996, the Company entered into
equipment leases for broadband network switching equipment for which the lease
obligations had a present value of $1.3 million.
F-14
<PAGE> 87
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMON AND PREFERRED STOCK
Preferred Stock
The 10% Junior Series 3 Cumulative Redeemable Preferred Stock ("Series 3
Preferred Stock") votes as a single class with IXC's common stock, is entitled
to elect one director and may be redeemed at the Company's option 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 an
annual rate of 10%. Cumulative preferred dividends in arrears, including
interest, at December 31, 1996 and 1995 were $6.5 million ($518.65 per share)
and $4.8 million ($380.59 per share), respectively.
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 $2.0 million, including cumulative dividends in arrears and related
interest of $505,000.
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 $1.8 million, including cumulative dividends in arrears and related
interest of $401,000.
Common Stock
During 1996, the Company issued 6,440,000 shares of Common Stock in an
initial public offering and a private placement, resulting in net proceeds of
$94.0 million. At December 31, 1996, the Company has 3,382,435 shares reserved
for future issuance under stock option plans.
During 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 have been retroactively
adjusted to reflect the stock splits and the increase in authorized shares.
Stock Option and Award Plans
In November 1994, the Board of Directors adopted the IXC Communications,
Inc. Stock Plan, as amended (the "1994 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. Awards under the
1994 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. 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 expire after 10 years and generally
vest at rates of 25% and 33% per year commencing one year after the date of
grant, with the exception of two options covering 84,871 shares which were 100%
vested upon grant.
In 1996, IXC adopted the IXC Communications, Inc. 1996 Stock Plan, as
amended (the "1996 Stock Plan"), which provides for the issuance of restricted
stock or the granting of stock options for up to 2,121,787 shares of common
stock to key employees and others. 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.
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 expire after
F-15
<PAGE> 88
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMON AND PREFERRED STOCK (CONTINUED)
10 years and generally vest at rates of 25% and 33% per year commencing one year
after the date of grant. During 1996, 476,600 options were granted under the
1996 Stock Plan.
The Company has not issued any restricted stock under the 1994 Stock Plan
or the 1996 Stock Plan. All options granted under the 1994 Stock Plan and the
1996 Stock Plan were granted at estimated market value at the date of grant. In
the event of a change of control of the Company, the options outstanding
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.
In October 1996, IXC adopted a stock incentive plan (the "Special Stock
Plan") covering 67,900 shares of common stock. 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 at exercise prices less than market value at the date of grant.
In 1996, the Company recognized $182,000 in compensation expense related to
grants under the Special 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 year of outside director's fees for certain directors is 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 is determined based on the market
price of the shares deemed to have been purchased and is charged to expense over
the related period. On June 6, 1996 the stockholders approved the Directors'
Plan. In 1996, the Company recognized $60,000 as directors' fees related to the
Directors' Plan.
Stock Based Compensation
The Company has elected to account for its employee stock options under APB
25. As a result, pro forma information regarding net income and income (loss)
per share is required by SFAS No. 123, which requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: risk-free interest rates ranging
from 5.25% to 6.73% and 5.74% to 5.95%; no dividend yield; volatility factor of
the expected market price of the Company's common stock of .523; and a
weighted-average expected life of the options of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
F-16
<PAGE> 89
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMON AND PREFERRED STOCK (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Pro forma loss applicable to common stockholders................ $(39,805) $(6,871)
Pro forma loss per common and common equivalent share........... $ (1.41) $ (0.27)
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1998.
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year......... 645,880 $ 3.01 206,113 $3.01 -- $ --
Granted............................... 1,138,351 12.04 439,767 3.01 206,113 3.01
Exercised............................. (19,702) 3.01 -- -- -- --
Forfeited............................. (63,956) 3.01 -- -- -- --
--------- ------ ------- ----- ------- -----
Outstanding-end of year............... 1,700,573 $ 9.05 645,880 $3.01 206,113 $3.01
========= ====== ======= ===== ======= =====
Exercisable at end of year............ 257,527 121,243 --
Weighted-average fair value of options
granted during the year............. $ 7.34 $ 1.51 --
</TABLE>
The following table summarizes outstanding options at December 31, 1996 by
price range:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------------------------------- ---------------------
WEIGHTED- WEIGHTED-AVERAGE WEIGHTED-
NUMBER AVERAGE REMAINING NUMBER AVERAGE
OF RANGE OF EXERCISE CONTRACTUAL OF EXERCISE
OPTIONS EXERCISE PRICE PRICE LIFE OF OPTIONS OPTIONS PRICE
--------- ----------------- --------- ---------------- ------- ---------
<S> <C> <C> <C> <C> <C>
1,059,323 $3.01 $ 3.01 8.8 257,527 $3.01
302,250 15.38 to 16.00 15.43 9.6 -- --
339,000 22.25 22.25 9.8 -- --
--------------- ------
1,700,573 $3.01 to $22.25 $ 9.05 9.2 257,527 $3.01
=============== ======
</TABLE>
10. MAJOR CUSTOMERS
Prior to 1996, substantially all of the Company's revenues were earned from
private line services. Private line services generally are provided to carriers
under long-term contractual arrangements or on a month-to-month basis after
contract expiration. In late 1995, the Company expanded into the business of
selling switched long distance services to long distance resellers. Excel
Communications is the Company's largest switched long distance customer. Sales
to certain customers exceeded 10% of total revenues for each of the years ended
December 31, 1996, 1995 and 1994. The percentages of revenues represented by
these customers are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Excel Communications.................................... 35% -- --
Frontier Communications................................. 10% 21% 23%
WorldCom, Inc........................................... 8% 20% 25%
</TABLE>
F-17
<PAGE> 90
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. 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, 1996, 1995 and 1994 was
approximately $779,000, $522,000 and $468,000, respectively.
12. 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:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards..................................... $ 2,068 $ 2,411
Net operating loss carryforwards............................. 22,240 2,489
Accrued expenses............................................. 3,156 908
Other........................................................ -- 1,286
-------- --------
Gross deferred tax assets............................... 27,464 7,094
Valuation allowance..................................... (17,264) --
-------- --------
Net deferred tax assets........................................ 10,200 7,094
Deferred tax liabilities:
Tax over book depreciation................................... (10,372) (8,384)
Other liability accruals..................................... (1,799) (5,090)
Other........................................................ -- (1,473)
-------- --------
(12,171) (14,947)
-------- --------
Net deferred tax liability..................................... $ (1,971) $ (7,853)
======== ========
As recorded in the consolidated balance sheets:
Deferred tax assets.......................................... $ 463 $ 450
Deferred tax liability....................................... (2,434) (8,303)
-------- --------
$ (1,971) $ (7,853)
======== ========
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $55.6 million for income tax purposes that expire through 2011.
The Company has minimum tax and investment tax credit carryforwards at December
31, 1996 of approximately $0.7 million and $1.4 million, respectively. The
minimum tax credits can be carried forward indefinitely and the investment tax
credits expire in 2001.
At December 31, 1996, a valuation allowance of $17.3 million was
established to offset a portion of the Company's deferred tax assets. The
valuation allowance is related to deferred tax assets, primarily net operating
losses, that may not be realizable. No valuation allowance was provided for
deferred tax assets at December 31, 1995 or 1994.
F-18
<PAGE> 91
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES (CONTINUED)
Significant components of the benefit (provision) for income taxes
(excluding the effect attributable to extraordinary items) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................. $ 829 $ 381 $(1,188)
State............................................... (250) -- (404)
------- ------- -------
Total current......................................... 579 381 (1,592)
Deferred:
Federal............................................. 4,136 1,144 (1,131)
State............................................... 1,266 168 (434)
------- ------- -------
Total deferred........................................ 5,402 1,312 (1,565)
------- ------- -------
Benefit (provision) for income taxes.................. $ 5,981 $ 1,693 $(3,157)
======= ======= =======
</TABLE>
The reconciliation of income tax benefit (provision) attributable to
continuing operations computed at the U.S. federal statutory tax rates to income
tax benefit (provision) is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit (provision) at federal statutory rates... $ 14,766 $ 1,670 $(2,780)
State income tax benefit (provision) net of federal
effect............................................. 3,106 302 (432)
Net operating losses not benefited................... (17,264) -- --
Resolution of tax examinations....................... 3,511 -- --
Permanent and other differences...................... 1,862 (279) 55
-------- ------- -------
Benefit (provision) for income taxes................. $ 5,981 $ 1,693 $(3,157)
======== ======= =======
</TABLE>
13. CAPACITY EXCHANGE AGREEMENTS
In the normal course of business, IXC enters into long-term agreements with
other carriers to exchange capacity on such carriers' networks for access to the
Company's fiber optic communication systems. Exchanges are accounted for at fair
value (see Note 2). Exchange agreements accounted for noncash revenue and
expense (in equal amounts) of $14.0 million in 1996, $13.8 million in 1995 and
$8.0 million in 1994.
14. 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 $3.5 million in 1996, $2.6 million in
1995 and $1.4 million in 1994.
15. 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.
F-19
<PAGE> 92
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Accounts receivable and accounts payable: The carrying amounts reported in
the balance sheets for accounts receivable and accounts payable approximate
fair value.
Escrow under Senior Notes: 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 is estimated at $311
million based on the last trading price of the Senior Notes in 1996.
16. COMMITMENTS AND CONTINGENCIES
In connection with its fiber optic network expansion, the Company has
entered into various construction and installation agreements with contractors.
Total commitments under these agreements are approximately $87.2 million. At
December 31, 1996, capital expenditures totaling $47.6 million have been made
under these agreements.
In connection with its fiber expansion agreements, the Company has
committed to pay $40.3 million for fiber usage rights on other long distance
carriers' networks, $7.4 million of which was paid by December 31, 1996.
Pursuant to the same agreements, the Company has committed to pay a total of
$28.2 million, in periodic installments for twenty to twenty-five years for
maintenance and license fees. Several of these agreements require the Company to
share network construction costs with the other party. The exact amounts of
these construction costs are not specified in the related agreements and are
thus excluded from the figures above.
The Company is from time to time 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.
17. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's allowance for doubtful accounts 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, 1996........................ $1,769 $3,060 $ 799 $ 4,030
December 31, 1995........................ $ 762 $1,505 $ 498 $ 1,769
December 31, 1994........................ $ 429 $1,565 $1,232 $ 762
</TABLE>
F-20
<PAGE> 93
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. QUARTERLY RESULTS (UNAUDITED)
The Company's unaudited quarterly results are as follows:
<TABLE>
<CAPTION>
FOR THE 1996 QUARTER ENDED:
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30
-------- -------- -------------
DECEMBER 31
------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (A)
<S> <C> <C> <C> <C>
Net operating revenues.................... $ 26,250 $ 43,007 $61,016 $ 73,488
Operating loss............................ (5,777) (6,066) (2,121) (52)
Net loss.................................. (11,699) (12,067) (5,624) (8,058)
Net loss per common share................. $ (0.49) $ (0.50) $ (0.19) $ (0.27)
</TABLE>
- ---------------
(a) Includes a $1.9 million loss relating to the Company's share of losses of
its unconsolidated subsidiary, Progress.
<TABLE>
<CAPTION>
FOR THE 1995 QUARTER ENDED:
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net operating revenues.................... $ 21,766 $ 22,721 $22,772 $ 23,742
Operating income (loss)................... 3,716 3,529 (900) (4,916)
Income (loss) before extraordinary gain
(loss).................................. 1,267 1,502 (307) (5,680)
Net income (loss)......................... 1,267 496 (307) (6,421)
Net income (loss) per common share before
extraordinary gain (loss)............... $ 0.03 $ 0.04 $ (0.03) $ (0.24)
Net income (loss) per common share........ 0.03 -- (0.03) (0.27)
</TABLE>
19. SUBSEQUENT EVENTS
On January 22, 1997 the Company signed separate agreements to acquire L.D.
Services, Inc. and Telecom One, Inc., both long distance resellers. Subject to
certain adjustments, the Company will acquire L.D. Services, Inc. for
approximately $30 million and Telecom One, Inc. for approximately $5 million,
both to be paid in common stock of the Company. Consummation of these
transactions is pending regulatory approval.
Effective February 4, 1997 the Company entered into an agreement to sell
fiber to a common carrier without optronics along IXC's Chicago to Los Angeles
fiber optic route for approximately $97.9 million. The route from Chicago to Los
Angeles is scheduled for completion in mid-1997. The agreement provides for
certain penalties if IXC does not complete construction of the route within the
timeframe specified in the agreement. Management does not anticipate that the
Company will incur any penalties under these provisions.
In February 1997, the Company entered into an agreement to sell $100
million of preferred stock to two investor groups. The agreement was terminated
in March 1997 due to a disagreement between the Company and one of the investor
groups. In order to satisfy the commitments described in Notes 7 and 16 and to
provide working capital for operations, the Company plans to pursue a similar
$100 million preferred stock offering under Rule 144A.
20. 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
certain wholly-owned direct and indirect subsidiaries (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. Certain IXC
subsidiaries do not guarantee the Senior Notes (the "Non-Guarantor
Subsidiaries"). The claims of creditors
F-21
<PAGE> 94
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
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 at December 31,
1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994.
The equity method has been used by IXC with respect to investments in
subsidiaries. The equity method has been used by 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>
Broadband Services, Inc. Mutual Signal Holding Corp.
IXC Carrier, Inc. Mutual Signal Corporation
Atlantic States Microwave Mutual Signal Corporation of
Transmission Company Michigan
Central States Microwave MSM Associates, Limited Partnership
Transmission Company Progress International L.L.C.
Rio Grande Transmission, Inc. Marca-Tel S.A. de C.V.
Telecom Engineering, Inc. Switched Services Communications, L.L.C.
Tower Communications System Corp. Summer Street Communications, Inc.
West Texas Microwave Company US Advantage Long Distance, Inc.
Western States Microwave Company
IXC Long Distance, Inc.
Link Net International, Inc.
</TABLE>
F-22
<PAGE> 95
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents... $ 65,363 $ (9,455) $ 4,611 $ 821(a) $ 61,340
Accounts receivable and
other, net............... 111 28,657 32,363 (13,563)(d) 47,568
Other current assets........ 937 3,765 549 (3,054)(d) 2,197
-------- -------- -------- --------- --------
Total current assets.......... 66,411 22,967 37,523 (15,796) 111,105
Property and equipment, net... 8 231,514 37,347 (260) 268,609
Escrow under Senior Notes..... 51,412 -- -- -- 51,412
Due from affiliate............ 225,093 40,742 6,574 (272,409)(d) --
Other assets.................. 8,429 6,527 13,049 20(b) 28,025
-------- -------- -------- --------- --------
Total assets.................. $351,353 $301,750 $ 94,493 $ (288,445) $459,151
======== ======== ======== ========= ========
Current liabilities:
Accounts payable and other
current liabilities...... $ 10,077 $ 70,207 $ 16,909 $ (13,342)(a)(d) $ 83,851
Due to affiliate............ 141 523 40 (704)(d) --
Current portion of long-term
debt and lease
obligations.............. -- 2,469 6,024 (1,743) 6,750
-------- -------- -------- --------- --------
Total current liabilities..... 10,218 73,199 22,973 (15,789) 90,601
Long-term debt and capital
lease obligations........... 277,656 1,487 21,548 (5,160)(d) 295,531
Deferred tax liability........ -- 7,484 -- (5,050) 2,434
Due to affiliate/parent....... -- 231,666 40,743 (272,409)(d) --
Other noncurrent
liabilities................. -- 6,201 749 (749) 6,201
Minority interest............. -- -- -- 905(c) 905
Stockholders' equity:
Preferred stock............. 13 -- 2,585 (2,585) 13
Common stock................ 308 4 2 (6)(b) 308
Additional paid-in
capital.................. 123,434 30,053 36,249 (66,302)(b) 123,434
Accumulated deficit......... (60,276) (48,344) (30,356) 78,700(b)(c)(d) (60,276)
-------- -------- -------- --------- --------
Total stockholders' equity.... 63,479 (18,287) 8,480 9,807 63,479
-------- -------- -------- --------- --------
Total liabilities
and stockholders'
equity............ $351,353 $301,750 $ 94,493 $ (288,445) $459,151
======== ======== ======== ========= ========
</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 receivables, payables and lease obligations.
F-23
<PAGE> 96
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net operating revenues............ $ 66 $148,692 $ 104,156 $(49,153)(a) $203,761
Operating expenses:
Cost of services................ -- 86,929 103,912 (47,372)(a) 143,469
Operations and administration... 3,955 36,711 7,558 (1,157)(a) 47,067
Depreciation and amortization... 58 18,055 9,453 (325) 27,241
-------- -------- -------- -------- --------
(3,947) 6,997 (16,767) (299) (14,016)
Interest income................... 17,572 6,738 596 (22,068)(a) 2,838
Interest income on escrow under
Senior Notes.................... 7,404 -- -- -- 7,404
Interest expense.................. (38,181) (15,936) (5,027) 22,068(a) (37,076)
Equity in net income (loss) of
unconsolidated subsidiaries..... (26,277) (23,688) -- 48,004(b) (1,961)
-------- -------- -------- -------- --------
Loss before income taxes and
minority interest............... (43,429) (25,889) (21,198) 47,705 (42,811)
Benefit (provision) for income
taxes........................... 5,981 2,915 2,344 (5,259) 5,981
Minority interest................. -- -- -- (618)(c) (618)
-------- -------- -------- -------- --------
Net loss.......................... $(37,448) $(22,974) $ (18,854) $ 41,828 $(37,448)
======== ======== ======== ======== ========
</TABLE>
- ---------------
(a) Eliminations of intercompany administration services, communication services
and interest charges.
(b) Eliminations of equity in net income (loss) from consolidated subsidiaries.
(c) Recording of minority interest in equity or earnings loss of non-guarantor
subsidiaries.
F-24
<PAGE> 97
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR IXC
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES........... $ (25,099) $ 49,161 $ (40,627) $(12,122)(a)(b) $ (28,687)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Release of funds from escrow
under Senior Notes............. 154,244 -- -- -- 154,244
Deposit into escrow under Senior
Notes.......................... (7,404) -- -- -- (7,404)
Purchase of property and
equipment...................... (9) (169,498) (7,259) 40,375(b) (136,391)
--------- -------- ------- ------- ---------
Net cash provided by (used in)
investing activities........... 146,831 (169,498) (7,259) 40,375 10,449
CASH FLOW FROM FINANCING
ACTIVITIES:
Capital contribution to
unconsolidated subsidiary...... 12,422 (44,714) -- 24,973 (7,319)
Payments on long-term debt and
capital lease obligations...... (9,018) (583) (3,185)(a) (12,786)
Payment of debt issue costs...... (1,301) -- -- -- (1,301)
Issuance of preferred stock...... -- -- 2,585 (2,585) --
Issuance of common stock......... 81,581 -- 15,500 (3,012) 94,069
Advances to affiliates........... (150,489) 161,282 33,253 (44,046) --
--------- -------- ------- ------- ---------
Net cash provided by (used in)
financing activities........... (57,787) 107,550 50,755 (27,855) 72,663
Net increase (decrease) in cash
and cash equivalents........... 63,945 (12,787) 2,869 398 54,425
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...................... $ 65,363 $ (9,455) $ 4,611 $ 821 $ 61,340
========= ======== ======= ======= =========
</TABLE>
- ---------------
(a) Eliminations of intercompany receivables, debt and lease obligations.
(b) Eliminations of intercompany capitalized labor.
F-25
<PAGE> 98
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. 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)(d) 6,319
Other current assets........ 6,565 4,481 358 (7,807)(d) 2,815
-------- -------- ------- --------- --------
Total current assets.......... 7,983 14,530 3,248 (9,712) 16,049
Property and equipment, net... -- 76,804 29,910 (315) 106,399
Escrow under Senior Notes..... 198,266 -- -- -- 198,266
Due from affiliate............ 74,604 3,351 568 (78,523)(d) --
Other assets.................. 12,707 16,948 4,191 (18,085)(b) 15,761
-------- -------- ------- --------- --------
Total assets.................. $293,560 $111,633 $ 37,917 $ (106,635) $336,475
======== ======== ======= ========= ========
Current liabilities:
Accounts payable and other
current liabilities...... $ 8,984 $ 13,922 $ 2,720 $ (4,528)(a)(d) $ 21,098
Due to affiliate............ 258 6,458 1,832 (8,548)(d) --
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 capital
lease obligations........... 277,238 3,207 17,215 (3,400)(d) 294,260
Deferred tax liability........ 222 10,997 -- (2,916) 8,303
Due to affiliate/parent....... -- 70,384 3,878 (74,262)(d) --
Other noncurrent
liabilities................. -- 469 -- -- 469
Minority interest............. -- 1 -- 952(c) 953
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
Accumulated deficit......... (22,828) (25,370) (11,502) 36,872(b)(c)(d) (22,828)
-------- -------- ------- --------- --------
Total stockholders' equity.... 6,858 4,684 9,249 (13,933) 6,858
-------- -------- ------- --------- --------
Total liabilities
and stockholders'
equity............ $293,560 $111,633 $ 37,917 $ (106,635) $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 receivables, payables and lease obligations.
F-26
<PAGE> 99
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. 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) 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... (1,474) (7,678) -- 9,171(b) 19
-------- ------- -------- -------- --------
Loss before income taxes,
minority interests and
extraordinary loss............ (6,907) (1,611) (10,369) 8,758 (10,129)
Benefit (provision) for income
taxes......................... 2,246 546 (1,099) -- 1,693
Minority interests.............. -- -- -- 5,218(c) 5,218
-------- ------- -------- -------- --------
Loss before extraordinary
items......................... (4,661) (1,065) (11,468) 13,976 (3,218)
Extraordinary loss, net of
taxes......................... (304) (1,309) (134) -- (1,747)
-------- ------- -------- -------- --------
Net loss........................ $ (4,965) $ (2,374) $ (11,602) $ 13,976 $ (4,965)
======== ======= ======== ======== ========
</TABLE>
- ---------------
(a) Eliminations of intercompany administration services, communication services
and interest charges.
(b) Eliminations of equity in net income (loss) from consolidated subsidiaries.
(c) Recording of minority interest in equity or earnings loss of non-guarantor
subsidiaries.
F-27
<PAGE> 100
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. 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............. $ (8,324) $ 24,272 $(8,333) $ 3,992(a) $ 11,607
CASH FLOWS FROM INVESTING
ACTIVITIES:
Release of funds from escrow under
Senior Notes..................... 4,300 -- -- -- 4,300
Purchase of restricted short-term
investments...................... (202,552) -- -- -- (202,552)
Purchase of property and
equipment........................ -- (14,282) (9,565) 177 (23,670)
--------- -------- ------- ------- ---------
Net cash used in investing
activities....................... (198,252) (14,282) (9,565) 177 (221,922)
CASH FLOW FROM FINANCING
ACTIVITIES:
Net proceeds from issuance of
Senior Notes, net of discount.... 277,148 -- -- -- 277,148
Capital contribution 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
capital lease obligations........ (5,700) (63,606) (3,089) (4,095)(a) (76,490)
Payment of debt issue costs........ (10,407) -- -- -- (10,407)
Redemption of preferred stock...... (1,460) (1,400) -- -- (2,860)
Dividend payments.................. (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 year................ 146 4,619 934 349 6,048
--------- -------- ------- ------- ---------
Cash and cash equivalents at end
of year.......................... $ 1,418 $ 3,332 $ 1,742 $ 423 $ 6,915
========= ======== ======= ======= =========
</TABLE>
- ---------------
(a) Eliminations of intercompany receivables, debt and lease obligations.
F-28
<PAGE> 101
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. 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) 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)(b) (94)
------ ------- ------ ------- -------
Income before income taxes,
minority interests and
extraordinary gain.............. 6,748 9,234 346 (8,231) 8,097
Benefit (provision) for income
taxes........................... 567 (3,477) (247) -- (3,157)
Minority interests................ -- -- -- 77(c) 77
------ ------- ------ ------- -------
Income before extraordinary
gain............................ 7,315 5,757 99 (8,154) 5,017
Extraordinary gain, net of
taxes........................... -- 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 equity in net income (loss) from consolidated subsidiaries.
(c) Recording of minority interest in equity or earnings loss of non-guarantor
subsidiaries.
F-29
<PAGE> 102
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. 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) $ 13,532
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment...................... -- (3,545) (3,732) 190 (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
capital lease obligations...... -- (7,331) (506) -- (7,837)
Payments from escrow............. -- 1,500 -- -- 1,500
Payment of debt issue costs...... (139) (976) (436) -- (1,551)
Capital contribution in
subsidiary by minority
shareholders................... -- -- 500 (500)(b) --
Issuance of common stock......... 3 -- 1 (1)(b) 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 year.............. 133 6,097 -- -- 6,230
------- ------- ------- ------- --------
Cash and cash equivalents at end
of year........................ $ 146 $ 4,619 $ 934 $ 349 $ 6,048
======= ======= ======= ======= ========
</TABLE>
- ---------------
(a) Eliminations of intercompany receivables, debt and lease obligations.
(b) Eliminations of intercompany capital contribution.
F-30
<PAGE> 103
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Austin, State of California, on the 27th day of March, 1997.
IXC COMMUNICATIONS, INC.
By: /s/ JOHN J. WILLINGHAM
------------------------------------
John J. Willingham
Senior Vice President, Chief
Financial Officer and Assistant
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------------ ---------------
<C> <S> <C>
/s/ RALPH J. SWETT Chairman, President and Chief March 27, 1997
- ---------------------------------------- Executive Officer, and Director
Ralph J. Swett (Principal Executive Officer)
/s/ JOHN J. WILLINGHAM Senior Vice President, Chief March 27, 1997
- ---------------------------------------- Financial Officer and Assistant
John J. Willingham Secretary (Principal Financial and
Accounting Officer)
/s/ RICHARD D. IRWIN* Director March 27, 1997
- ----------------------------------------
Richard D. Irwin
/s/ WOLFE H. BRAGIN* Director March 27, 1997
- ----------------------------------------
Wolfe H. Bragin
/s/ CARL W. MCKINZIE* Director March 27, 1997
- ----------------------------------------
Carl W. McKinzie
/s/ PHILLIP L. WILLIAMS* Director March 27, 1997
- ----------------------------------------
Phillip L. Williams
/s/ JOE C. CULP* Director March 27, 1997
- ----------------------------------------
Joe C. Culp
*By: /s/ JOHN J. WILLINGHAM
- ----------------------------------------
John J. Willingham
(Attorney-in-fact)
</TABLE>
I-1
<PAGE> 104
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ---------------------------------------------------------------------- -----------
<C> <C> <S> <C>
3.1 + Restated Certificate of Incorporation of IXC Communications, Inc., as
amended...............................................................
3.2 + Bylaws of IXC Communications, Inc., as amended........................
4.1 Specimen certificate representing shares of Common Stock of IXC
Communications, Inc. (incorporated by reference to Exhibit 4.1 of IXC
Communications, Inc. Registration Statement on Form S-1 filed with the
Commission on May 20, 1996, as amended (File No. 333-4061) (the
"S-1"))...............................................................
4.2 Indenture dated as of October 5, 1995 by and among IXC Communications,
Inc., on its behalf and as successor-in-interest to I-Link Holdings,
Inc. and IXC Carrier Group, Inc., each of IXC Carrier, Inc., on its
behalf and as successor-in- interest to I-Link, Inc., CTI Investments,
Inc., Texas Microwave, Inc. and WTM Microwave, Inc., Atlantic States
Microwave Transmission Company, Central States Microwave Transmission
Company, Telcom Engineering, Inc., on its behalf and as
successor-in-interest to SWTT Company and Microwave Network, Inc.,
Tower Communication Systems Corp., West Texas Microwave Company,
Western States Microwave Transmission Company, Rio Grande
Transmission, Inc., IXC Long Distance, Inc., Link Net International,
Inc. (collectively, the "Guarantors") and IBJ Schroder Bank & Trust
Company, as Trustee, with respect to the 12 1/2% Series A and Series B
Senior Notes due 2005 (incorporated by reference to Exhibit 4.1 of IXC
Communications, Inc.'s and each of the Guarantor's Registration
Statement on Form S-4 filed with the Commission on April 1, 1996, as
amended (File No. 333-2936) (the "S-4"))..............................
4.3 Purchase Agreement dated October 5, 1995 by and among IXC
Communications, Inc., and the Purchasers named therein (incorporated
by reference to Exhibit 4.2 of the S-4)...............................
4.4 A/B Exchange Registration Rights Agreement dated as of October 5, 1995
by and among IXC Communications, Inc., the Guarantors and the
Purchasers named therein (incorporated by reference to Exhibit 4.3 of
the S-4)..............................................................
4.5 Escrow Account and Disbursement Agreement dated as of October 5, 1995
by and among IXC Communications, Inc., IBJ Schroder Bank & Trust
Company, as Escrow Holder, and IBJ Schroder Bank & Trust Company, as
Collateral Agent (incorporated by reference to Exhibit 4.4 of the
S-4)..................................................................
4.6 Escrow Account Security Agreement dated as of October 5, 1995 by and
between IXC Communications, Inc. and IBJ Schroder Bank & Trust Company
(incorporated by reference to Exhibit 4.5 of the S-4).................
4.7 Form of 12 1/2% Series A Senior Notes due 2005 (incorporated by
reference to Exhibit 4.6 of the S-4)..................................
4.8 Form of 12 1/2% Series B Senior Notes due 2005 and Subsidiary
Guarantee (incorporated by reference to Exhibit 4.8 of the S-1).......
4.9 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> 105
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ---------------------------------------------------------------------- -----------
<C> <C> <S> <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)..................................................................
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 *+ Outside Directors' Phantom Stock Plan of IXC Communications, Inc., 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> 106
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ---------------------------------------------------------------------- -----------
<C> <C> <S> <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 *+ Special Stock Plan of IXC Communications, Inc.........................
10.17 + Stock Acquisition Agreement and Plan of Merger dated as of January 17,
1997 by and among IXC Communications, Inc., IXC Long Distance, Inc.,
IXC-One Acquisition Corp., L.D. Services, Inc. and the Shareholders
named therein.........................................................
11.1 + Statement of Computation of Earnings per Share........................
21.1 + Subsidiaries of IXC Communications, Inc...............................
23.1 + Consent of Ernst & Young LLP..........................................
24.1 + Powers of Attorney....................................................
</TABLE>
- ---------------
* Management contract or executive compensation plan or arrangement required to
be indicated as such and filed as an exhibit pursuant to applicable rules of
the Commission.
+ Filed herewith.
<PAGE> 1
EXHIBIT 99(a)(1)
IXC COMMUNICATIONS, INC.
OFFERING CIRCULAR
OFFER TO EXCHANGE SHARES OF ITS COMMON STOCK
FOR EACH OUTSTANDING SHARE OF
10% JUNIOR SERIES 3 CUMULATIVE REDEEMABLE PREFERRED STOCK
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., AUSTIN, TEXAS
TIME, ON FRIDAY, OCTOBER 31, 1997, UNLESS EXTENDED.
IXC Communications, Inc., a Delaware corporation (the "Company"),
hereby offers to exchange, upon the terms and subject to the conditions set
forth in this Offering Circular (the "Offering Circular") and in the
accompanying Letter of Transmittal (the "Letter of Transmittal" and, together
with the Offering Circular, the "Exchange Offer"), shares of its common stock,
par value $.01 per share (the "Common Stock"), for each outstanding share of its
10% Junior Series 3 Cumulative Redeemable Preferred Stock, par value $.01 per
share (the "Series 3 Preferred Stock"). The Common Stock issued pursuant to the
Exchange Offer will not be registered under the Securities Act of 1933, as
amended (the "Securities Act").
The number of shares of Common Stock to be exchanged for each share of
Series 3 Preferred Stock which has been properly tendered and not withdrawn (the
"Exchange Ratio") will be based upon the last reported sale price of the
Company's Common Stock on the Nasdaq National Market ("NNM") on the Expiration
Date (as defined) (the "Valuation Price"). The Exchange Ratio will be equal to
the ratio between (i) the sum of the per share liquidation preference of, and
the accrued and unpaid dividends on, one share of Series 3 Preferred Stock as of
the Expiration Date (if the Expiration Date is October 31, 1997, this amount
will be approximately $1,645 per share) and (ii) the Valuation Price.
The term "Expiration Date" means 5:00 p.m., Austin, Texas time on
October 31, 1997, unless the Company extends the period of time during which the
Exchange Offer is open, in which event the term "Expiration Date" shall mean the
latest time and date at which the Company shall accept the tendered shares of
Series 3 Preferred Stock. In the event that, at the Expiration Date, less than
90% of the outstanding shares of Series 3 Preferred Stock has been properly
tendered and not withdrawn, the Company reserves the right, in its sole
discretion, to terminate the Exchange Offer or exchange any or all of the
tendered but not withdrawn shares of Series 3 Preferred Stock for shares of
Common Stock. All shares of Series 3 Preferred Stock tendered, but not exchanged
pursuant to the Exchange Offer, will be returned. The Company will pay all of
its fees and expenses in connection with the Exchange Offer as set forth in
Section 11.
The Company's indenture relating to its 12 1/2% Senior Notes due 2005
(the "Indenture") currently prohibits the payment of cash dividends on, and the
redemption of, the Series 3 Preferred Stock. Under the terms of the Company's
Restated Certificate of Incorporation, as amended (the "Restated Certificate"),
unpaid dividends on the Series 3 Preferred Stock accumulate at an annual rate of
10% (based on the liquidation preference) plus interest. As of October 31, 1997,
the amount of accrued and unpaid dividends on the Series 3 Preferred Stock will
be $645 per share. Holders of Series 3 Preferred Stock are entitled to cash
dividends only when, as and if declared by the Board of Directors. The Company
has never paid cash dividends on the Series 3 Preferred Stock and does not
expect to pay cash dividends on the Series 3 Preferred Stock in the foreseeable
future. However, cash dividends may not be paid on the Company's 7 1/4% Junior
Convertible Preferred Stock Due 2007 (the "Convertible Preferred Stock"),
12 1/2% Junior Exchangeable Preferred Stock Due 2009 (the "Exchangeable
Preferred Stock") or Common Stock until all accrued dividends have been paid in
cash on the Series 3 Preferred Stock. The holders of the Series 3 Preferred
Stock have no remedy under the terms of the Restated Certificate in the event
that cash dividends are not paid. Under the terms of the Restated Certificate,
the Company has no obligation to redeem the Series 3 Preferred Stock and the
Series 3 Preferred Stock may remain outstanding indefinitely. See Section 12.
(cover continued on the following page)
<PAGE> 2
THE EXCHANGE OFFER IS CONDITIONED UPON A MINIMUM OF 90% OF THE SHARES
OF SERIES 3 PREFERRED STOCK BEING PROPERLY TENDERED AND NOT WITHDRAWN PRIOR TO
THE EXPIRATION DATE; HOWEVER, THE COMPANY RESERVES THE RIGHT, BUT WILL NOT BE
OBLIGATED, TO EXCHANGE A LESSER PERCENTAGE OF SHARES OF SERIES 3 PREFERRED STOCK
IF LESS THAN 90% OF THE SHARES OF SERIES 3 PREFERRED STOCK HAS BEEN PROPERLY
TENDERED AND NOT WITHDRAWN ON OR PRIOR TO THE EXPIRATION DATE.
THE DATE OF THIS OFFERING CIRCULAR IS OCTOBER 2, 1997.
- ii -
<PAGE> 3
There is currently no established trading market for the Series 3
Preferred Stock. The Common Stock is quoted on the NNM. On October 1, 1997,
the last full trading day prior to the announcement by the Company of the
Exchange Offer, the closing per share price of the Common Stock reported on the
NNM was $34.125. No assurance can be given as to the prices at which the Common
Stock might be traded, or the trading volume of the Common Stock, following the
consummation of the Exchange Offer. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT
MARKET QUOTATIONS FOR THE COMMON STOCK. See Section 15.
The Exchange Offer does not constitute a notice of redemption of the
Series 3 Preferred Stock pursuant to the Restated Certificate, nor does the
Company intend to effect such a redemption by making the Exchange Offer.
Stockholders must make their own investment decision as to whether or not to
tender the Series 3 Preferred Stock. In making such investment decisions,
stockholders should review carefully the information set forth herein,
including, but not limited to, the information set forth under the heading
"Market and Trading Information."
For the year ended December 31, 1996, earnings (loss) per share
applicable to the Common Stock was $(1.39) per share. For the year ended
December 31, 1996, assuming the Exchange Offer had been consummated on December
31, 1995, earnings (loss) per share applicable to the Common Stock would have
been $(1.30) per share (assuming 100% of the Series 3 Preferred Stock was
exchanged for Common Stock pursuant to the Exchange Offer). For the six months
ended June 30, 1997 earnings (loss) per share applicable to the Common Stock was
$(1.67) per share. Assuming the Exchange Offer had been consummated on December
31, 1996, earnings (loss) per share for such six month period would have been
$(1.61) per share. See Section 17. The pro forma adjustments giving effect to
the Exchange Offer assume that holders of 100% of the outstanding Series 3
Preferred Stock exchange such stock for shares of Common Stock and that the
closing price of the Common Stock on the Expiration Date is $34.125 per share.
As of the date of this Offering Circular, 12,550 shares of Series 3
Preferred Stock are issued and outstanding. Certain officers, directors and
affiliates of the Company that beneficially own Series 3 Preferred Stock have
advised the Company that they intend to participate in the Exchange Offer. See
Section 13.
Holders of shares of Series 3 Preferred Stock accepted for exchange
will not receive any separate payment in respect of dividends on such shares
accrued subsequent to the Expiration Date.
The Exchange Offer is being made by the Company in reliance on the
exemption from the registration requirements of the Securities Act afforded by
Section 3(a)(9) thereof. The Company therefore will not pay any commission or
other remuneration to any broker, dealer, salesman or other person for
soliciting tenders of the Series 3 Preferred Stock. The principal solicitation
is being made by mail; however, additional solicitations may be made by fax,
telephone or in person by officers and employees of the Company, who will not
receive additional compensation. See Section 11.
The Exchange Offer is not being made to, nor will the Company accept
tenders from, holders of the Series 3 Preferred Stock in any jurisdiction in
which the Exchange Offer or the acceptance thereof would not be in compliance
with the securities, or blue sky laws of such jurisdiction.
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 OFFERING CIRCULAR. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE BOARD OF DIRECTORS HAS APPROVED THE EXCHANGE OFFER. HOWEVER,
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO ANY
STOCKHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING SHARES OF SERIES 3
PREFERRED STOCK. STOCKHOLDERS MUST MAKE THEIR OWN DECISIONS WHETHER TO TENDER
SHARES OF SERIES 3 PREFERRED STOCK PURSUANT TO THE EXCHANGE OFFER.
- iii -
<PAGE> 4
IXC COMMUNICATIONS, INC.
OFFER TO EXCHANGE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
OFFER TO EXCHANGE...................................................... i
INTRODUCTION........................................................... 1
1. Number of Shares.............................................. 2
2. Procedure for Tendering Shares................................ 2
3. Withdrawal Rights............................................. 3
4. Certain Conditions of the Exchange Offer...................... 4
5. Background and Purposes of the Exchange Offer................. 5
6. Exchange Consideration........................................ 6
7. Certain Information About the Company......................... 6
8. Selected Historical and Pro Forma Financial Data.............. 7
9. Certain Federal Income Tax Considerations..................... 10
10. Extensions; Amendments; Termination........................... 11
11. Fees and Expenses............................................. 11
12. Description of Series 3 Preferred Stock....................... 11
13. Security Ownership............................................ 12
14. Description of Capital Stock.................................. 12
15. Market and Trading Information................................ 13
16. Additional Information........................................ 14
</TABLE>
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<PAGE> 5
IMPORTANT
To accept the Exchange Offer, stockholders must strictly comply with
the instructions contained in the Letter of Transmittal. Any stockholder
tendering shares should (i) complete and sign the Letter of Transmittal (or a
facsimile copy thereof) and mail or deliver it, together with stock certificates
representing the tendered Series 3 Preferred Stock, and any other required
documents, to the Company at the address set forth below, or (2) request a
broker, dealer, commercial bank, trust company or other nominee to effect the
transaction for such stockholder. Any stockholders having Series 3 Preferred
Stock in the name of a broker, dealer, commercial bank, trust company or other
nominee should contact such person or institution if they desire to tender such
Series 3 Preferred Stock.
Questions and requests for assistance or for additional copies of this
Offering Circular, or the Letter of Transmittal, may be directed to Kelli
McGlynn, Investor Relations, at the address and telephone number set forth
below.
IXC Communications, Inc.
5000 Plaza on the Lake, Suite 200,
Austin, Texas 78746
(512) 427-3731
THE COMPANY HAS NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON
BEHALF OF THE COMPANY AS TO WHETHER STOCKHOLDERS SHOULD TENDER OR REFRAIN FROM
TENDERING SHARES OF SERIES 3 PREFERRED STOCK PURSUANT TO THE OFFER. THE COMPANY
HAS NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
IN CONNECTION WITH THE OFFER ON BEHALF OF THE COMPANY OTHER THAN THOSE CONTAINED
IN THIS OFFERING CIRCULAR OR IN THE LETTER OF TRANSMITTAL. DO NOT RELY ON ANY
SUCH RECOMMENDATION OR ANY SUCH INFORMATION OR REPRESENTATIONS, IF GIVEN OR
MADE, AS HAVING BEEN AUTHORIZED BY THE COMPANY. THE DELIVERY OF THIS OFFERING
CIRCULAR SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
(1) The Annual Report of the Company on Form 10-K (File No. 0-20803)
for its fiscal year ending December 31, 1996 (the "Form 10-K");
(2) The Company's Current Reports on Form 8-K dated February 27,
1997, March 6, 1997, March 26, 1997, April 1, 1997, July 3, 1997, July 29, 1997,
August 5, 1997, August 18, 1997, August 20, 1997, August 21, 1997 and September
17, 1997;
(3) The Company's Quarterly Reports on Form 10-Q for the quarter
ended March 31, 1997 and the quarter ended June 30, 1997, as amended
(collectively, the "Form 10-Qs");
(4) The Company's definitive Proxy Statement for the Annual Meeting
of Stockholders on May 6, 1997; and
(5) All documents subsequently filed by the Company with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
prior to the termination of this offering shall be deemed to be incorporated by
reference in this Offering Circular. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Offering Circular to the
extent that a statement contained herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Offering
Circular.
THIS OFFERING CIRCULAR INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE
NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON
REQUEST FROM KELLI McGLYNN, INVESTOR RELATION COORDINATOR, IXC COMMUNICATIONS,
INC., 5000 PLAZA ON THE LAKE, SUITE 200, AUSTIN, TEXAS 78746 (TELEPHONE
512-328-1112). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST
SHOULD BE MADE BY THE DATE WHICH IS FIVE BUSINESS DAYS PRIOR TO THE EXPIRATION
DATE.
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<PAGE> 6
INTRODUCTION
The Company hereby offers, upon the terms and subject to the conditions
set forth herein, and in the accompanying Letter of Transmittal, to exchange
shares of its Common Stock for each validly tendered outstanding share of its
Series 3 Preferred Stock.
The Exchange Offer is conditioned upon a minimum of 90% of the shares
of Series 3 Preferred Stock being properly tendered and not withdrawn on or
prior to the Expiration Date; however, the Company reserves the right, but will
not be obligated, to exchange a lesser percentage of shares of Series 3
Preferred Stock if less than 90% of the shares of Series 3 Preferred Stock has
been properly tendered and not withdrawn on or prior to the Expiration Date. The
12,550 shares of Series 3 Preferred Stock that the Company is offering to
exchange represent all of the issued and outstanding Series 3 Preferred Stock.
The Company will return all shares of Series 3 Preferred Stock not exchanged
under the Exchange Offer. The Company will pay all of its fees and expenses in
connection with the Exchange Offer as set forth herein. See Section 11.
THE BOARD OF DIRECTORS HAS APPROVED THE EXCHANGE OFFER. HOWEVER,
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO ANY
STOCKHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING SHARES.
STOCKHOLDERS MUST MAKE THEIR OWN DECISIONS WHETHER TO TENDER SHARES PURSUANT TO
THE EXCHANGE OFFER.
There is currently no established trading market for the Series 3
Preferred Stock. The Common Stock is listed on the NNM under the symbol "IIXC."
On October 1, 1997, the last full trading day prior to the announcement by the
Company of the Exchange Offer, the closing price per share of the Company's
Common Stock was $34.125. No assurance can be given as to the prices at which
the Common Stock might be traded, or the trading volume of the Common Stock,
following the consummation of the Exchange Offer. STOCKHOLDERS ARE URGED TO
OBTAIN CURRENT MARKET QUOTATIONS FOR THE COMMON STOCK. See Section 15.
Each share of Series 3 Preferred Stock acquired by the Company shall
have the status of an authorized and unissued share of preferred stock available
for redesignation and reissuance by the Company subject to applicable law. Such
shares will be available for issuance by the Company, without further
stockholder action, for general or corporate purposes, including stock splits or
dividends, acquisitions, the raising of additional capital for use in the
Company's business and the implementation of employee benefit plans. The Company
has no current plans for any such uses of such Series 3 Preferred Stock.
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS OFFERING
CIRCULAR, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING
WHETHER TO EXCHANGE SHARES OF SERIES 3 PREFERRED STOCK FOR SHARES OF COMMON
STOCK, WHICH INVOLVE A HIGH DEGREE OF RISK.
Loss of Rights and Privileges of Series 3 Preferred Stockholders Who
Exchange Their Shares in the Exchange Offer. Series 3 Preferred Stockholders who
exchange all or a portion of their Series 3 Preferred Stock for Common Stock
will no longer own the Series 3 Preferred Stock exchanged and, consequently,
will no longer be entitled to any of the rights and privileges of the Series 3
Preferred Stock, including but not limited to, the cumulative dividends payable
thereon, and the liquidation preference therefor, as follows:
Loss of 10% Dividend. The holders of Series 3 Preferred Stock, subject
to the terms of the Restated Certificate and the Indenture, are entitled to
receive annual dividends 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. Holders of Common Stock are not entitled
to dividends other than as declared by the Board of Directors. Dividends which
are not declared by the Board of Directors with respect to the Common Stock do
not accrue. Furthermore, dividends may not be paid on the Common Stock until all
accrued and unpaid dividends are paid on all outstanding shares of preferred
stock of the Company.
Loss of Liquidation Preference. Upon liquidation, dissolution or
winding up of the Company, holders of Series 3 Preferred Stock are entitled to
receive a liquidation preference of $1,000 per share plus an amount equal to all
accrued and unpaid dividends before any distribution to holders of the Common
Stock or any capital stock
<PAGE> 7
ranking junior to the Series 3 Preferred Stock. By exchanging their Series 3
Preferred Stock for Common Stock as provided herein, the holders of Series 3
Preferred Stock will give up their rights to such liquidation preference.
Loss of Certain Voting Rights. The holders of the Series 3 Preferred
Stock vote together with the holders of the Common Stock as a class, except
where required by law or the Restated Certificate, and have the right to elect
one member of the Board of Directors. By exchanging Series 3 Preferred Stock as
provided herein, the holders of Series 3 Preferred Stock will give up their
rights to vote as a separate class for the purpose of electing a member of the
Board.
Dividends on Common Stock. The Company has never paid dividends on the
Common Stock and does not expect to pay any dividends on the Common Stock in the
foreseeable future.
1. NUMBER OF SHARES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will accept for exchange up to all 12,550 shares of Series 3 Preferred
Stock, or such lesser number of shares as are properly tendered. The Exchange
Offer is conditioned upon a minimum of 90% of the shares of Series 3 Preferred
Stock being properly tendered and not withdrawn, on or prior to the Expiration
Date; however, the Company reserves the right, but will not be obligated, to
exchange a lesser percentage of shares of Series 3 Preferred Stock if less than
90% of the shares of Series 3 Preferred Stock has been properly tendered and not
withdrawn on or prior to the Expiration Date. See Section 11 for a description
of the Company's right to extend the time during which the Exchange Offer is
open and to delay, terminate or amend the Exchange Offer.
As set forth above, the Company will determine the number of shares of
its Common Stock to be exchanged for each share of its Series 3 Preferred Stock
using the Exchange Ratio determined using the closing price of the Company's
Common Stock on the Expiration Date. If (1) the Company increases or decreases
the number of shares of Common Stock to be exchanged for the Series 3 Preferred
Stock, or the Company decreases the number of shares of Series 3 Preferred Stock
being sought, and (2) the Exchange Offer is scheduled to expire less than ten
business days from and including the date that notice of such increase or
decrease is first published, sent or given in the manner specified in Section
11, the Exchange Offer will be extended for ten business days from and including
the date of such notice. For purposes of the Exchange Offer, a "business day"
means any day other than a Saturday, Sunday or federal holiday and consists of
the time period from 12:01 a.m., through 12:00 midnight, Eastern time.
If the number of shares of Series 3 Preferred Stock properly tendered,
and not withdrawn, is greater than or equal to 90% of the outstanding Series 3
Preferred Stock, the Company will, upon the terms and subject to the conditions
of the Exchange Offer, exchange all shares of Series 3 Preferred Stock so
tendered. Tendering holders of Series 3 Preferred Stock whose shares are
accepted for exchange will not receive fractional shares of Common Stock but
instead will receive a cash payment in lieu thereof. See Section 6.
2. PROCEDURE FOR TENDERING SHARES
A holder electing to tender Series 3 Preferred Stock in the Exchange
Offer should either (i) complete and sign the Letter of Transmittal, or a
facsimile thereof, and mail or otherwise deliver the completed Letter of
Transmittal, or such facsimile, together with certificates for shares of Series
3 Preferred Stock, and any other required documents, to the Company at the
address set forth on the cover page of the Letter of Transmittal, or (ii)
request his broker, dealer, commercial bank, trust company or other nominee to
effect the transaction for him.
The term "holder" with respect to the Series 3 Preferred Stock means
any person in whose name shares of Series 3 Preferred Stock are registered on
the books of the Company or any other person who has obtained a properly
completed stock power from the registered holder.
In order for a tender of Series 3 Preferred Stock to constitute a valid
tender, holders should complete and deliver the Letter of Transmittal to the
Company on or prior to the Expiration Date.
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<PAGE> 8
The tender by a holder of Series 3 Preferred Stock pursuant to the
procedure set forth herein will constitute an agreement between such holder and
the Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
The method of delivery of the Series 3 Preferred Stock and Letter of
Transmittal and all other required documents to the Company is at the election
and risk of each holder. Except as otherwise provided herein, such delivery will
be deemed made only when actually received by the Company. INSTEAD OF EFFECTING
DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND
DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY.
All signatures on each Letter of Transmittal must be guaranteed by an
Eligible Institution (as defined in the Letter of Transmittal). If the Letter of
Transmittal is signed by a person other than the registered holder, such
certificate(s) must be endorsed or accompanied by an appropriate stock power
bearing the signature of the registered holder or holders exactly as the name or
names appear(s) on the certificate(s).
If the Letter of Transmittal or any other certificates, stock powers or
proxies are signed by trustees, executors, administrators, guardians, or other
persons acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority to so act must be submitted.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, withdrawal and revocation of tendered Series 3 Preferred
Stock will be resolved by the Company, whose determination will be final and
binding. The Company reserves the absolute right to reject any and all tenders
and withdrawals of Series 3 Preferred Stock that are not in proper form or the
acceptance of which would, in the opinion of the Company or counsel for the
Company, be unlawful. The Company also reserves the right to waive any
irregularities or conditions of tender as to particular shares of Series 3
Preferred Stock. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instruction in the Letter of Transmittal) will be
final and binding. Unless waived, any irregularities in connection with tenders
and withdrawals of Series 3 Preferred Stock must be cured within such time as
the Company shall determine. The Company shall not be under any duty to give
notification of defects in such tenders, withdrawals, deliveries or revocations
and shall not incur any liability for failure to give such notification. Tenders
and withdrawals of Series 3 Preferred Stock will not be deemed to have been made
until such irregularities have been cured or waived. Any shares of Series 3
Preferred Stock received by the Company that are not properly tendered or
delivered and as to which the irregularities have not been cured or waived will
be returned by the Company to the tendering holders of Series 3 Preferred Stock
unless otherwise provided in the Letter of Transmittal as soon as practicable
following the Expiration Date.
3. WITHDRAWAL RIGHTS
Except as otherwise provided in this Section 3, Series 3 Preferred
Stock tendered pursuant to the Exchange Offer is irrevocable. Any stockholder
desiring to withdraw shares of Series 3 Preferred Stock tendered pursuant to the
Exchange Offer must notify the Company as set forth below at any time before the
Expiration Date, or if not previously accepted for payment by the Company, at
any time after the Expiration Date.
For a withdrawal to be effective, the Company must timely receive (at
its address set forth on the cover page of the Letter of Transmittal) a written,
or facsimile transmission notice, of withdrawal. Such notice of withdrawal must:
(i) be timely received by the Company at the address set forth on the cover page
of the Letter of Transmittal before the Expiration Date; (ii) specify the name
of the registered holder of the Series 3 Preferred Stock to be withdrawn; (iii)
contain the certificate number(s) shown on the particular certificate(s)
evidencing the shares of Series 3 Preferred Stock to be withdrawn; (iv) be
signed by the registered holder of such Series 3 Preferred Stock in the same
manner as the original signature on the Letter of Transmittal, including any
required signature guarantees; and (v) state the number of shares of Series 3
Preferred Stock to be withdrawn.
The Company, in its sole discretion, will determine the proper form and
validity (including time of receipt) of notices of withdrawal, and such
decisions shall be final and binding on all parties. Neither the Company, nor
any
- 3 -
<PAGE> 9
other person is or will be obligated to give any notice of any defects or
irregularities in any notice of withdrawal, and no such person will incur any
liability for failure to give any such notice. Any Series 3 Preferred Stock
properly withdrawn will be returned to the holder thereof without cost to such
holder as soon as practicable following the Expiration Date, and will thereafter
be deemed not tendered for purposes of the Exchange Offer. Properly withdrawn
Series 3 Preferred Stock may, however, be retendered at any time before the
Expiration Date by following one of the procedures described in Section 2.
4. CERTAIN CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, the Company
shall not be required to accept for exchange, or exchange shares, of Series 3
Preferred Stock tendered pursuant to the Exchange Offer, and may terminate or
amend the Exchange Offer and may postpone the acceptance for exchange of, and
exchange of, shares of Series 3 Preferred Stock tendered, if any time on or
after the date of this Offering Circular and prior to the acceptance for
exchange of any shares of Series 3 Preferred Stock, any of the following
conditions shall occur:
(a) less than 90% of Series 3 Preferred Stock is properly tendered and
not withdrawn prior to the Expiration Date;
(b) there shall have been instituted, pending or threatened any action
or proceeding before any court or governmental, administrative or regulatory
authority or agency, domestic or foreign: (i) challenging or seeking to make
illegal, materially delay or otherwise directly or indirectly restrain or
prohibit or make materially more costly the Exchange Offer, or the acceptance
for exchange of, or exchange of, any shares of Series 3 Preferred Stock by the
Company, or seeking to obtain material damages in connection with any
transaction contemplated by the Exchange Offer; (ii) seeking to impose or
confirm limitations on the ability of any stockholder of the Company or any
affiliate of any stockholder of the Company to exercise effectively full rights
of ownership of any shares of Common Stock or Series 3 Preferred Stock; (iii)
seeking to require divestiture by any stockholder of the Company or any
affiliate of any stockholder of the Company of any shares of Common Stock or
Series 3 Preferred Stock; or (iv) that otherwise is or is reasonably likely to
be materially adverse to the business, operations, properties, condition
(financial or otherwise), assets or liabilities or prospects of the Company and
its subsidiaries taken as a whole;
(c) there shall have been any action taken, or any statute, rule,
regulations, legislations, interpretation, judgment, order or injunction
enacted, entered, enforced, promulgated, amended, issued or deemed applicable to
(i) the Company or any subsidiary or affiliate of the Company or (ii) any
transaction contemplated by the Exchange Offer, by any legislative body, court,
government or governmental, administrative or regulatory authority or agency,
domestic or foreign, that is or is reasonably likely to result, directly or
indirectly, in any of the consequences referred to in clauses (i) through (iv)
of paragraph (a) above;
(d) there shall have occurred any change, condition, event or
development that is or is reasonably likely to be materially adverse to the
business, operations, properties, condition (financial or otherwise), assets or
liabilities or prospects of the Company and its subsidiaries taken as a whole;
or
(e) there shall have occurred: (i) any general suspension of, or
limitation on prices for, trading in securities on the NNM or any national
securities exchange; (ii) any decline, measured from the date of this Offering
Circular in the Standard & Poor's 500 Index by an amount in excess of 25%; (iii)
a declaration of a banking moratorium or any suspension of payments in respect
of banks in the United States by New York or federal banking authorities; (iv)
any limitation (whether or not mandatory) by any government or governmental,
administrative or regulatory authority or agency, domestic or foreign, on, or
other event that, in the judgment of the Company, might affect, the extension of
credit by banks or other lending institutions; (v) a commencement of a war or
armed hostilities or other national or international calamity directly or
indirectly involving the United States or any material escalation thereof; or
(vi) in the case of any of the foregoing existing on the date of this Offering
Circular, a material acceleration or worsening thereof; which in the sole
judgment of the Company in any such case, and regardless of the circumstances
giving rise to any such condition, makes it inadvisable to proceed with such
acceptance for exchange or exchange.
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<PAGE> 10
The foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company regardless of the circumstances giving rise to
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its sole discretion. The failure by the Company at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such right; the waiver of any such right with respect to particular facts and
circumstances shall not be deemed a waiver with respect to any other facts and
circumstances; and each such right shall be deemed an ongoing right that may be
asserted at any time and from time to time.
If any of the conditions listed above is not satisfied, the Company
may: (i) refuse to accept any Series 3 Preferred Stock and return all tendered
Series 3 Preferred Stock to exchanging and tendering holders; (ii) extend the
Exchange Offer and retain all Series 3 Preferred Stock tendered prior to the
expiration of the Exchange Offer, subject to withdrawal rights of tendering
holders of Series 3 Preferred Stock described herein; or (iii) waive or amend
certain of such unsatisfied conditions with respect to the Exchange Offer and
accept all properly tendered Series 3 Preferred Stock. If such waiver or
amendment constitutes a material change to the Exchange Offer, the Company will
promptly disclose such waiver in a manner reasonably calculated to inform
holders of Series 3 Preferred Stock of such waiver or amendment, and the Company
will extend the Exchange Offer for a period which the Company in its discretion
deems appropriate, depending on the significance of the waiver or amendment and
the manner of disclosure to holders of Series 3 Preferred Stock.
5. BACKGROUND AND PURPOSES OF THE EXCHANGE OFFER
PREFERRED STOCK ARREARAGES
As of October 31, 1997 the amount of accrued and unpaid dividends on
the Preferred Stock will be $645 per share. The Indenture currently prohibits
the payment of cash dividends on, and the redemption of, the Series 3 Preferred
Stock. Under the terms of the Restated Certificate, unpaid dividends accumulate
or accrue, at an annual rate of 10% (based on the liquidation preference) plus
interest. Holders of Series 3 Preferred Stock are entitled to cash dividends
only when, as and if declared by the Board of Directors. As of the date of this
Offering Circular, the Company has never paid dividends on the Series 3
Preferred Stock and does not expect to do so in the foreseeable future.
However, cash dividends may not be paid on the Company's Convertible Preferred
Stock, Exchangeable Preferred Stock or Common Stock until all accrued
dividends have been paid in cash on the Series 3 Preferred Stock. The
holders of the Series 3 Preferred Stock have no remedy under the terms of the
Restated Certificate in the event that cash dividends are not paid. Under the
Restated Certificate, the Company has no obligation to redeem the Series 3
Preferred Stock and the Series 3 Preferred Stock may remain outstanding
indefinitely.
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
The Company believes that the elimination or reduction in the number of
outstanding shares of Series 3 Preferred Stock resulting from the Exchange offer
will provide a number of benefits to the Company and holders of Common Stock and
Series 3 Preferred Stock, including the following:
(a) Even though additional shares of common stock would be
issued in the Exchange Offer, elimination of the Series 3 Preferred Stock would
increase earnings and/or decrease loss per share and increase book value per
share applicable to the Common Stock. For the year ended December 31, 1996,
assuming the Exchange Offer had been consummated on December 31, 1995, earnings
(loss) per share applicable to the Common Stock would have been $(1.30) per
share, compared to $(1.39) per share, assuming all shares of Series 3 Preferred
Stock were exchanged for Common Stock pursuant to the Exchange Offer. For the
six months ended June 30, 1997, assuming the Exchange Offer had been consummated
on December 31, 1996, earnings (loss) per share applicable to the Common Stock
would have been $(1.61) per share, compared to $(1.67) per share. For the year
ended December 31, 1996, assuming the Exchange Offer had been consummated on
December 31, 1995, the pro forma book value per share of Common Stock, would
have increased from $1.44 per share to $2.02 per share. For the six months ended
June 30, 1997, on a pro forma basis the book value per share of Common Stock
would have been $.41, compared to $(.23) per share. The pro forma adjustments
giving effect to the Exchange Offer assume that holders of 100% of the
outstanding Series 3 Preferred Stock exchange such stock for shares of Common
Stock and that the closing price of the Common Stock on the Expiration Date is
$34.125 per share. See Section 8.
(b) Completion of the Exchange Offer will eliminate or
significantly reduce the number of shares of Series 3 Preferred Stock
outstanding and the after-tax cost of the Series 3 Preferred Stock. Under the
terms of the Restated Certificate, unpaid dividends on the Series 3 Preferred
Stock accumulate at an annual rate of 10% (based on the liquidation preference)
plus interest. Dividends on the Series 3 Preferred Stock, including unpaid
dividends, reduce the Company's net income applicable to the Common Stock and
are not a deductible expense to the Company for income tax purposes.
- 5 -
<PAGE> 11
(c) The issuance of Common Stock in the Exchange Offer will
increase the number of shares of Common Stock available for trading on the NNM
and the number of holders of Common Stock which the Company believes will
increase the liquidity of the Common Stock.
(d) By offering holders of Series 3 Preferred Stock the
opportunity to exchange their shares for shares of Common Stock, which
represents a more liquid investment than the Series 3 Preferred Stock, the
Company is providing liquidity to the holders of the Series 3 Preferred Stock
for their investment and an increased opportunity to dispose of their shares for
cash if they should determine to do so. There is currently no established
trading market for the Series 3 Preferred Stock and the Series 3 Preferred Stock
is not registered under the Securities Act. Such shares of Series 3 Preferred
Stock are "restricted securities" and may be sold in compliance with Rule 144
under the Securities Act. Shares of Common Stock issued in exchange for the
Series 3 Preferred Stock will not be registered under the Securities Act. Such
shares of Common Stock will also be "restricted securities" and may be sold in
compliance with Rule 144. Rule 144 generally provides that beneficial owners of
restricted stock who have held such restricted stock for one year may sell
within a three-month period a number of shares not exceeding the greater of 1%
of the total outstanding shares of the average weekly trading volume of the
shares during the four calendar weeks preceding such sale. The Commission has
taken the position that if securities are acquired from the issuer solely in
exchange for other securities of the issuer, the securities so acquired are
deemed to have been acquired at the same time as the securities surrendered in
the exchange. Holders of shares of Series 3 Preferred Stock that exchange such
shares for Common Stock will be deemed, for purposes of Rule 144, to have
acquired such shares of Common Stock at the time they acquired the shares of
Series 3 Preferred Stock. Accordingly, if they have met the one-year holding
period requirement under Rule 144 with respect to the shares of Series 3
Preferred Stock exchanged, they will be deemed to have met the one-year holding
requirement with respect to the Common Stock issued in exchange for such Series
3 Preferred Stock. Such Common Stock can be sold subject to the conditions of
Rule 144. Such Common Stock will be accepted for quotation on the NNM, subject
to official notice of issuance.
(e) By offering holders of Series 3 Preferred Stock a common
equity stake in the Company, the Company is providing the holders with an
opportunity to participate in the potential long-term appreciation of the
Company's business.
NO RECOMMENDATION BY BOARD OF DIRECTORS
The Board of Directors of the Company has approved the Exchange Offer.
However, neither the Company nor its Board of Directors makes any recommendation
to stockholders as to whether to tender or refrain from tendering their Series 3
Preferred Stock. Stockholders must make their decisions whether to tender their
Series 3 Preferred Stock and, if so, how many shares.
6. EXCHANGE CONSIDERATION; NO FRACTIONAL SHARES
The Company will use newly issued Common Stock as the consideration for
the Exchange Offer which Common Stock will not be registered under the
Securities Act. Such Common Stock will be accepted for quotation on the NNM,
subject to official notice of issuance. Tendering holders of Series 3 Preferred
Stock whose shares are accepted for exchange will not receive fractional shares
of Common Stock but instead will receive a cash payment in lieu thereof equal to
such fractional amount multiplied by the Valuation Price. Such cash payment may
be made on behalf of the Company by a subsidiary of the Company. No interest
will be paid on cash payments made to tendering record holders of Series 3
Preferred Stock in lieu of fractional shares of Common Stock. Holders of Series
3 Preferred Stock accepted for exchange will not receive any separate payment in
respect of dividends with respect to such shares accrued subsequent to the
Expiration Date.
7. CERTAIN INFORMATION ABOUT THE COMPANY
The Company is a provider of telecommunications transmission services
to long distance and other communications companies. Additional information
about the Company is available from the Company's public filings with the
Securities and Exchange Commission as described in Section 16 below.
- 6 -
<PAGE> 12
8. SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth certain selected historical financial
data of the Company and its predecessor. The historical financial data for the
Company has been derived from the audited Consolidated Financial Statements of
the Company as of and for the periods ended December 31, 1992, 1993, 1994, 1995
and 1996. The historical financial data for the period January 1, 1992 through
August 14, 1992 relates to the Company's predecessor, IXC Carrier, Inc. (the
"Company's Predecessor"), and has been derived from unaudited interim financial
statements. The historical financial data for the Company for the six-month
periods ended June 30, 1996 and 1997 has also been derived from unaudited
interim financial statements. The unaudited interim financial statements include
all adjustments, consisting of normal recurring accruals, which management
considers necessary for a fair presentation of the financial position and the
results of operations for such interim periods. Results of operations for the
interim periods are not necessarily indicative of the results of operations for
the full year.
The pro forma statement of operations data and other financial data is
based on the historical financial statements of the Company and have been
prepared to give effect to the Exchange Offer as if it had been consummated on
December 31, 1995. The pro forma balance sheet data as of December 31, 1996 and
June 30, 1997 are based on historical financial statements of the Company and
have been prepared to give effect to the Exchange Offer as if it had become
effective December 31, 1996 and June 30, 1997, respectively. The adjustments
giving effect to the Exchange Offer assume that holders of 100% of the
outstanding Series 3 Preferred Stock elect to exchange each share of the Series
3 Preferred Stock for 48.2 shares of Common Stock. This assumes a closing price
of $34.125 per share of Common Stock on the Expiration Date. The pro forma
financial information does not purport to be indicative of the results which
would have actually been obtained had such transaction been completed as of the
assumed dates or the results which may be obtained in the future.
The selected financial data set forth below is qualified in its
entirely by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Conditions and Results of Operations", "Business" and
the Company's financial statements and the notes thereto appearing in the
Company's Form 10-K for the year ended December 31, 1996 and the Company's Form
10-Q, as amended, for the quarter ended June 30, 1997 which are incorporated by
reference herein.
- 7 -
<PAGE> 13
<TABLE>
<CAPTION>
THE
COMPANY'S
PREDECESSOR THE COMPANY
---------- -------------------------------------------------------
JAN. 1 AUG. 15
THROUGH THROUGH
AUG. 14, DEC. 31, YEAR ENDED DECEMBER 31,
---------- -------- --------------------------------------------
1992 1992 1993 1994 1995 1996
---------- -------- -------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenues................... $ 42,081 $ 23,893 $ 71,123 $ 80,663 $ 91,001 $ 203,761
Operating expenses:
Cost of services......................... 26,116 13,588 37,823 33,896 39,852 143,469
Operations and administration............ 11,226 6,759 22,835 20,561 32,282 47,067
Depreciation and amortization............ 10,517 8,033 21,061 12,121 17,438 27,241
---------- -------- -------- --------- --------- ---------
Operating income (loss).................. (5,778) (4,487) (10,596) 14,085 1,429 (14,016)
Interest income.......................... 45 -- 215 211 468 2,838
Interest income in escrow under
Senior Notes........................... -- -- -- -- 2,552 7,404
Interest expense......................... (18,749) (1,398) (4,943) (6,105) (14,597) (37,076)
Contract settlement costs................ -- (2,000) (59) -- -- --
Write-down of property and equipment..... -- -- (37,960) -- -- --
Equity in net income (loss) of -- -- (94) 19 (1,961)
unconsolidated subsidiaries............ --
Benefit (provision) for income taxes..... (77) 2,847 21,977 (3,157) 1,693 5,981
Minority interests....................... -- 710 (446) 77 5,218 (618)
---------- -------- -------- --------- --------- ---------
Income (loss) before extraordinary gain
(loss)(1).............................. (24,559) (4,328) (31,812) 5,017 (3,218) (37,448)
Extraordinary gain (loss)(2)............. -- -- 8,495 2,298 (1,747) --
---------- -------- -------- --------- --------- ---------
Net income (loss)........................ $ (24,559) $ (4,328) $(23,317) $ 7,315 $ (4,965) $ (37,448)
========== ======== ======== ========= ========= =========
Income (loss) per common and common
equivalent share:
HISTORICAL:
Before extraordinary gain (loss)....... $ (1.39) $ .13 $ (.20) $ (1.39)
Extraordinary gain (loss).............. .35 .09 (.07) --
-------- --------- --------- ---------
Net income (loss)...................... $ (1.04) $ .22 $ (.27) $ (1.39)
======== ========= ========= =========
PRO FORMA(3):
Net income (loss)...................... $ (1.30)
=========
Weighted average common and common
equivalent shares
Historical............................. $ 24,009 24,993 25,108 28,209
Pro Forma(3)........................... 28,768
OTHER FINANCIAL DATA:
EBITDA(4)................................ $ 4,739 $ 3,546 $ 10,465 $ 26,206 $ 18,867 $ 13,225
Capital expenditures..................... 18 1,435 27,008 7,087 23,670 136,391
Ratio (deficiency) of earnings to
combined fixed charges and
preferred stock dividends
Historical(5).......................... 1.4x (12,348) (47,355)
Pro Forma (6).......................... (45,616)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1996 1997
---------- ---------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenues.............................................. $ 69,257 $ 172,775
Operating expenses:
Cost of services.................................................... 47,243 143,132
Operations and administration....................................... 21,203 35,231
Depreciation and amortization....................................... 12,654 23,365
---------- ---------
Operating income (loss)............................................. (11,843) (28,953)
Interest income..................................................... 253 2,238
Interest income in escrow under Senior Notes........................ 4,637 203
Interest expense.................................................... (19,360) (15,760)
Contract settlement costs........................................... -- --
Write-down of property and equipment................................ -- --
Equity in net income (loss) of unconsolidated....................... (14) (6,351)
subsidiaries........................................................
Benefit (provision) for income taxes................................ 2,765 252
Minority interests.................................................. (204) (317)
---------- ---------
Income (loss) before extraordinary gain (loss)(1)................... (23,766) (48,688)
Extraordinary gain (loss)(2)........................................ -- --
---------- ---------
Net income (loss)................................................... $ (23,766) $ (48,688)
========== =========
Income (loss) per common and common equivalent share:
HISTORICAL:
Before extraordinary gain (loss).................................. $ (.99) $ (1.67)
Extraordinary gain (loss)......................................... -- --
---------- ---------
Net income (loss)................................................. $ (.99) $ (1.67)
========== =========
PRO FORMA(3):
Net income (loss)................................................. $ (1.61)
=========
Weighted average common and common equivalent shares
Historical........................................................ 25,011 30,799
Pro Forma(3)...................................................... 31,385
OTHER FINANCIAL DATA:
EBITDA(4)........................................................... $ 811 $ (5,588)
Capital expenditures................................................ 32,783 140,901
Ratio (deficiency) of earnings to combined fixed charges and
preferred stock dividends
Historical(5)..................................................... (27,669) (54,584)
Pro Forma (6)..................................................... (53,639)
</TABLE>
- 8 -
<PAGE> 14
<TABLE>
<CAPTION>
THE COMPANY
-----------------------------------------------------------------------
DECEMBER 31, JUNE 30,
-------------------------------------------------------- ----------
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 2,746 $ 6,230 $ 6,048 $ 6,915 $ 61,340 $ 40,974
Cash held in escrow under
Senior Notes....................... -- -- -- 198,266 51,412 --
Total assets......................... 117,741 94,281 105,409 336,475 459,151 552,900
Total debt and capital lease
obligations........................ 32,891 59,954 69,124 298,794 302,281 300,749
Redeemable preferred stock........... -- 1,400 1,400 -- -- 98,010
Stockholders' equity ................ 30,028 6,871 14,189 6,858 63,479 12,908
Book value per common share(7)
Historical......................... $ 1.44 $ (0.23)
Pro Forma.......................... $ 2.02 $ 0.41
</TABLE>
- ----------
(1) Includes a $38.0 million non-cash charge in 1993 relating to a write-down of
microwave equipment.
(2) The extraordinary items for all periods result from early extinguishment of
debt (involving a related party in 1994), including capital lease
obligations, net of applicable income taxes.
(3) The pro forma net income (loss) per common and common equivalent share and
the weighted average common and common equivalent shares reflect the common
shares to be issued in the Exchange Offer as if the shares had been
outstanding for the entire periods presented, based upon an assumed Closing
Price of $34.125 per share on the Expiration Date.
(4) EBITDA is operating income (loss) plus depreciation and amortization. EBITDA
for 1995 and subsequent periods includes the negative EBITDA of the
Company's switched long distance services business. The Company has included
information concerning EBITDA because it believes that EBITDA is used by
certain investors as one measure of an issuer's historical ability to
service its debt. EBITDA is not a measurement determined in accordance with
GAAP, should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with GAAP and is not necessarily
comparable with similarly titled measures for other companies.
(5) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, earnings represent income before the
provision (benefit) for income taxes, plus fixed charges. Fixed charges
consist of interest expense, amortization of financing costs and the portion
of rental expense on operating leases which the Company estimates to be
representative of the interest factor attributable to the leases. Preferred
stock dividends consist of dividends on the Series 3 Preferred Stock, and
dividends on the Company's Convertible Preferred Stock. Historically,
amounts are as adjusted for the sale of the Convertible Preferred Stock and
the Exchangeable Preferred Stock as if they had occurred on or before
January 1, 1997, and assuming dividends are paid in cash at 7 1/4% on the
Convertible Preferred Stock and at 12 1/2% on the Exchangeable Preferred
Stock, the Company's earnings would have been insufficient to cover combined
fixed charges and preferred stock dividends by $75.6 million for the six
months ended June 30, 1997. Additional dividends will accrue on the
Convertible Preferred Stock if the Company fails to comply with certain of
its obligations under the registration rights agreement relating thereto or
if, after March 31, 1999, the Company is not contractually permitted to pay
cash dividends on the Convertible Preferred Stock. Additional dividends will
also accrue on the Exchangeable Preferred Stock if the Company fails to
comply with certain of its obligations under the registration rights
agreement in connection therewith.
(6) The pro forma ratio (deficiency) of earnings to combined fixed charges and
preferred stock dividends reflect the historical ratios adjusted to exclude
dividends on the Series 3 Preferred Stock.
- 9 -
<PAGE> 15
(7) The historical book value per common share is computed using the shares
outstanding at the end of each respective period and stockholders' equity
less the liquidation preference for the Series 3 Preferred Stock. The pro
forma computation includes the Common Stock shares assumed to be issued
based upon an assumed Closing Price of $34.125 per share on the Expiration
Date.
9. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Set forth below is a summary of the Company's understanding of the
material Federal income tax considerations applicable to the Company and to
holders whose Series 3 Preferred Stock is tendered and accepted in the Exchange
Offer if the Exchange Offer is consummated. This summary does not discuss all
aspects of Federal income taxation that may be relevant to a particular holder
of Series 3 Preferred Stock in light of such holder's personal investment
circumstances or to certain types of holders of Series 3 Preferred Stock subject
to special treatment under the Federal income tax laws (for example, life
insurance companies, tax-exempt organizations, foreign corporations and
individuals who are not citizens or residents of the United States) and does not
discuss any aspect of state, local, or foreign taxation. The discussion with
respect to exchanging or non-tendering holders is limited to those who have held
the Series 3 Preferred Stock as "capital assets" and who will hold the Common
Stock as "capital assets" (generally, property held for investment) within the
meaning of Section 1221 of the Internal Revenue Code (the "Code"). The summary
is based upon the Company's understanding of the laws, regulations, filings and
decisions now in effect and upon proposed regulations, all of which are subject
to change (possibly with retroactive effect) by legislation, administrative
action or judicial decision.
This discussion is only a summary of the Company's understanding of
certain U.S. Federal income tax considerations relevant to the Exchange Offer
and does not purport to be a complete analysis of all potential tax
consequences of such exchange, or all the potential tax effects thereof.
Further, the discussion is not binding on the Internal Revenue Service (the
"IRS") or the courts. The Company has not sought, and will not seek, any
rulings from the IRS with respect to the positions discussed herein and there
can be no assurance that the IRS will not take a different position concerning
the tax consequences of the Exchange Offer, or that any such position would
not be sustained.
THE SUMMARY REFLECTS THE COMPANY'S UNDERSTANDING AS TO CERTAIN TAX
CONSEQUENCES AND IS NOT BASED UPON A LEGAL OPINION OF TAX COUNSEL. THE
FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER ARE COMPLEX. THE SUMMARY
IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY. EACH HOLDER OF SERIES 3
PREFERRED STOCK SHOULD CONSULT SUCH TAX HOLDER'S TAX ADVISOR AS TO THE SPECIFIC
TAX CONSEQUENCES TO SUCH HOLDER OF THE EXCHANGE OFFER, INCLUDING THE APPLICATION
AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
EXCHANGE OF SERIES 3 PREFERRED STOCK FOR COMMON STOCK
General. An exchange of Series 3 Preferred Stock for Common Stock
pursuant to the Exchange Offer should constitute a recapitalization under
Section 368(a)(1)(E) of the Code. Except as provided below with respect to
Common Stock received in exchange for unpaid dividends, a holder who exchanges
Series 3 Preferred Stock for Common Stock should not recognize any gain or loss
on the exchange. The Common Stock received by such a holder should have an
initial tax basis equal to the adjusted tax basis of the Series 3 Preferred
Stock exchanged therefor. The Common Stock should have a holding period that
includes the period during which the holder held the Series 3 Preferred Stock
exchanged therefor.
Holders of Series 3 Preferred Stock should recognize gain upon receipt
of Common Stock in exchange for their rights to accrued but unpaid dividends on
the Series 3 Preferred Stock exchanged therefor in an amount equal to the unpaid
dividends on the Expiration Date. Assuming the Expiration Date is not extended,
that amount would be $645 per share. The basis of Common Stock received in
exchange for unpaid dividends should equal the amount of gain recognized in the
exchange for such Common Stock. The holding period of the Common Stock received
in exchange for unpaid dividends will commence the day following receipt of such
Common Stock.
Treatment of non-exchanging holders. The Exchange Offer will not result
in the recognition of income, gain or loss to holders of Series 3 Preferred
Stock who do not participate in the Exchange Offer.
TAX CONSEQUENCES TO THE COMPANY
Section 382 of the Code limits the use of net operating loss carryovers
by a corporation that has been subject to an "ownership change." The taxable
income of such a corporation which is available for offset by pre-ownership
change net operating loss carryovers is limited each year to the long term
tax-exempt rate (published monthly by the Internal Revenue Service) multiplied
by the value of the equity of the corporation on the date immediately preceding
an ownership change. Similar limitations apply in respect of carryovers of other
beneficial tax attributes.
- 10 -
<PAGE> 16
The Company believes that an ownership change should not occur as a
result of the consummation of the Exchange Offer and that it would therefore
have full utilization of its net operating loss carryovers to offset future
taxable income.
10. EXTENSIONS; AMENDMENTS; TERMINATION
In order to extend the Expiration Date, the Company will make a public
announcement thereof, prior to 10:00 a.m., Austin, Texas time, on the next
business day after the previously scheduled Expiration Date. Such announcement
may state that the Company is extending the Exchange Offer for a specified
period or on a daily basis.
The Company expressly reserves the right, in its sole discretion, at
any time and from time to time, to (i) delay accepting any Series 3 Preferred
Stock to extend the Exchange Offer or to terminate the Exchange Offer and not
accept Series 3 Preferred Stock not previously accepted if any of the conditions
set forth herein in Section 4 shall exist or shall have occurred and shall not
have been waived or satisfied by the Company, or (ii) waive any such condition
or amend the terms of the Exchange Offer in any respect. Any such delay in
acceptance, extension, termination, amendment or waiver will be followed as
promptly as practicable by public announcement thereof. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose each amendment in a manner reasonably
calculated to inform the holders of such amendment and the Company will extend
each such amended Exchange Offer for a period which the Company in its
discretion deems appropriate, depending upon the significance of the amendment
and the manner of disclosure to holders of the Series 3 Preferred Stock, if such
amended Exchange Offer would otherwise expire during such period. Any such
extension shall be in compliance with the applicable rules and regulations of
the Securities and Exchange Commission (the "Commission").
Subject to applicable law (including Rule 13e-4(e)(2) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which requires
that material changes be promptly disseminated to holders in a manner reasonably
calculated to inform them of such change) and without limiting the manner in
which the Company may choose to make a public announcement, if any, of any
extension, amendment, waiver or termination of the Exchange Offer, the Company
shall have no obligation to publish, advertise, or otherwise communicate any
such public announcement, other than by timely making of a press release.
If, prior to the Expiration Date, the Company should decide to increase
or decrease the percentage or the consideration being offered in the Exchange
Offer and, at the time notice of any such increase or decrease in the percentage
or the consideration being offered is first published, sent or given to holders
of such shares, the Exchange Offer is scheduled to expire at any time earlier
than the period ending on the tenth business day from and including the date
that such notice is first published, sent or given, the Exchange Offer will be
extended at least until the expiration of such ten business day period.
11. FEES AND EXPENSES
Other than as set forth in the Letter of Transmittal, the expenses of
soliciting tenders of Series 3 Preferred Stock will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitations
may be made by fax, telephone or in person by officers and employees of the
Company, who will not receive additional compensation. Arrangements may also be
made with brokerage houses and other custodians, nominees and fiduciaries to
forward the material regarding the Exchange Offer to the beneficial owners of
Series 3 Preferred Stock. The Company will reimburse such forwarding agents for
reasonable out-of-pocket expenses incurred by them, but no compensation will be
paid for their services.
12. DESCRIPTION OF SERIES 3 PREFERRED STOCK
The following summary of the terms of the Series 3 Preferred Stock does
not purport to be complete and is qualified in its entirety by reference to the
Restated Certificate, the Company's Bylaws and the provisions of applicable law.
- 11 -
<PAGE> 17
The holders of Series 3 Preferred Stock, subject to the terms of the
Restated Certificate, as amended, are entitled to receive a liquidation
preference of $1,000 per share, plus an amount equal to all accrued and unpaid
dividends and the Company may voluntarily redeem the Series 3 Preferred Stock
for $1,000 per share, plus an amount equal to all accrued and unpaid dividends.
In addition, the holders of Series 3 Preferred Stock are entitled to receive
annual dividends, subject to the limitations of the Restated Certificate and in
the Indenture, in an amount equal to $100 per share, plus an amount determined
by applying a 10% annual rate (compounded annually), to any accrued but unpaid
dividend amount from the last day of the period when such dividend accrues to
the actual date of payment. Cumulative dividends, including accrued but unpaid
interest, with respect to the Series 3 Preferred Stock, as of October 31, 1997,
will be approximately $8.1 million. The holders of the Series 3 Preferred
Stock vote together with the holders of the Common Stock as a class, except
where otherwise required by law or the Restated Certificate, and have the right
to elect one member of the Board of Directors.
13. SECURITY OWNERSHIP
As of the date of this Offering Circular, there are 12,550 shares of
Series 3 Preferred Stock issued and outstanding. Shares of Series 3 Preferred
Stock are held by certain officers, directors and affiliates of the company as
follows: (i) Ralph J. Swett, the Chairman, President and Chief Executive
Officer, beneficially owns 25 shares; (ii) Richard D. Irwin (a director) and
certain of his affiliates beneficially own 999.58 shares; and (iii) Trustees of
General Electric Pension Trust ("GEPT") (a major stockholder and an affiliate of
Wolfe H. Bragin, a director of the Company) beneficially owns 6,725 shares of
Series 3 Preferred Stock. Mr. Swett and Mr. Irwin have advised the Company that
they intend to participate in the Exchange Offer. The Company does not know
whether GEPT will participate in the Exchange Offer.
14. DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares
of Common Stock, par value $0.01 per share, and 3,000,000 shares of Preferred
Stock, par value $.01 per share (the "Preferred Stock"). The following summary
of certain provisions of the Common Stock and the Preferred Stock of the Company
does not purport to be complete and is subject to, and qualified in its entirety
by, the Restated Certificate, the Company's Bylaws and the provisions of
applicable law.
COMMON STOCK
As of September 1, 1997, there were 30,908,190 outstanding shares of
Common Stock held by 86 holders of record. Each holder of Common Stock and
Series 3 Preferred Stock is entitled to one vote per share on all matters to be
voted on by the stockholders, voting together as a single class. Subject to the
rights of the holders of the Preferred Stock, each holder of Common Stock is
entitled to receive ratably such dividends as may be declared from time to time
by the Board of Directors out of funds legally available therefor. In the event
of the liquidation, dissolution or winding up of the Company, the holders of the
Common Stock are entitled to share ratably in all assets, if any, remaining,
after payment of liabilities, subject to the prior liquidation rights of holders
of the Preferred Stock described below. The Common Stock has no preemptive or
other similar rights, and there are no redemption or sinking fund provisions
applicable to the Common Stock.
PREFERRED STOCK
The Company has designated 1,400,000 shares of Preferred Stock as
Convertible Preferred Stock, 450,000 shares of Preferred Stock as Exchangeable
Preferred Stock, 2,000 shares of Preferred Stock as Series 1 Preferred Stock and
12,550 shares of Preferred Stock as Series 3 Preferred Stock. As of September 1,
1997, there were 1,018,123 shares of Convertible Preferred Stock issued and
outstanding, 300,000 shares of Exchangeable Preferred Stock issued and
outstanding, all of the 12,550 shares of Series 3 Preferred Stock were issued
and outstanding, all of the previously outstanding shares of Series 1 Preferred
Stock had been redeemed, and no other shares of Preferred Stock were
outstanding. As of September 1, 1997, the Convertible Preferred Stock, the
Series 3 Preferred Stock and the Exchangeable Preferred Stock were held by 17,
87 and 3 holders of record respectively. The shares of Series 3 Preferred Stock
were purchased upon the formation of a predecessor of the Company at a purchase
price of $1.00 per share.
- 12 -
<PAGE> 18
The Board of Directors of the Company has the authority to issue the
Preferred Stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, terms of redemption, redemption prices, liquidation
preferences, voting rights and the number of shares consisting of any series or
the designation of such series without further vote or action by the
stockholders.
The Convertible Preferred Stock was issued and sold in April 1997. The
Convertible Preferred Stock is convertible at the option of the holders, unless
previously redeemed, at any time into shares of Common Stock at a rate (subject
to adjustment in certain events) of 4.263 shares of Common Stock for each share
of Convertible Preferred Stock, equivalent to a conversion price of $23.46 for
each share of Common Stock. Dividends on the Convertible Preferred Stock accrue
at a rate per annum of 7 1/4% per share on the liquidation preference thereof of
$100 per share ($7.25 per annum per share). Dividends payable prior to or on
June 30, 1999, are, at the option of the Company, payable (i) in cash or (ii)
through the issuance of additional shares of Convertible Preferred Stock equal
to the dividend amount divided by the liquidation preference of such additional
shares. After March 31, 1999, to the extent and for so long as the Company is
not permitted to pay cash dividends on the Convertible Preferred Stock by the
terms of any then outstanding indebtedness or any other agreement or instrument
to which the Company is subject, the Company will be required to pay dividends,
which shall accrue at the rate per annum of 8 3/4%, through the issuance of
additional shares of Convertible Preferred Stock.
The Exchangeable Preferred Stock was issued and sold in August 1997.
The Exchangeable Preferred Stock will be, under certain terms and conditions,
exchangeable into the Company's 12 1/2% Subordinated Exchange Debentures Due
2009 (the "Exchange Debentures") as set forth in the Certificate of Designation
in connection with the Exchangeable Preferred Stock. Dividends on the
Exchangeable Preferred Stock accrue at a rate per annum of 12 1/2% of the
liquidation preference thereof of $1,000 per share. Dividends are payable
quarterly in cash, except that on or prior to February 15, 2001, dividends may
be paid, at the Company's option, by the issuance of additional shares of
Exchangeable Preferred Stock (including fractional shares) having an aggregate
liquidation preference equal to the amount of such dividends. The Exchangeable
Preferred Stock is not redeemable prior to August 15, 2002, except that, on or
prior to August 15, 2000, the Company may redeem, at its option, up to 35% of
the outstanding Exchangeable Preferred Stock with the net proceeds of one or
more public equity offerings if at least $195 million aggregate liquidation
preference of the Exchangeable Preferred Stock remains outstanding after each
such redemption. On or after August 15, 2002, the Exchangeable Preferred Stock
is redeemable at the option of the Company. The Company is required to redeem
the Exchangeable Preferred Stock on August 15, 2009 out of any funds legally
available therefor.
The Series 3 Preferred Stock ranks senior to the Exchangeable Preferred
Stock, the Convertible Preferred Stock and the Common Stock with respect to
payment of dividends, and amounts upon liquidation, dissolution and winding up.
The Company may not pay cash dividends on the Exchangeable Preferred Stock, the
Convertible Preferred Stock or the Common Stock until all accrued and unpaid
dividends on the Series 3 Preferred Stock have been paid in full.
15. MARKET AND TRADING INFORMATION
There is currently no established trading market for the Series 3
Preferred Stock. The Common Stock is quoted on the NNM under the symbol "IIXC."
The following table sets forth for the calendar periods indicated, beginning
July 3, 1996, the date on which the Company's Common Stock was first publicly
traded, the high ask and low bid prices per share for the Common Stock as
reported by the National Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C>
1996
Third Quarter (from July 3, 1996).................................. 21-3/8 11-1/2
Fourth Quarter..................................................... 30-3/4 17-1/4
</TABLE>
- 13 -
<PAGE> 19
<TABLE>
<CAPTION>
1997
<S> <C> <C>
First Quarter...................................................... 36-1/4 18-3/4
Second Quarter..................................................... 27-7/8 17
Third Quarter...................................................... 33 19-1/2
</TABLE>
No dividends have been paid on the Common Stock and the Company does
not expect to pay dividends on the Common Stock in the foreseeable future.
The shares of Common Stock issuable in the Exchange Offer have been
accepted for quotation on the NNM, subject to official notice of issuance.
Quotations on the NNM reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
STOCKHOLDERS ARE URGED TO CONTACT THEIR BROKERS AND OBTAIN CURRENT INFORMATION
WITH RESPECT TO THE COMMON STOCK.
The trading price of the Common Stock could be subject to wide
fluctuations in response to numerous factors, including, but not limited to,
quarterly variations in operating results, competition, announcement of
technological innovations or new products by the Company or its competitors,
product enhancements by the Company or its competitors, regulatory changes, any
difference in actual results and results expected by investors and analysts,
changes in financial estimates by securities analysts and other events or
factors. In addition, the stock market has experienced volatility that has
affected the market prices of equity securities of many companies that often has
been unrelated to the operating performance of such companies. NO ASSURANCE CAN
BE GIVEN CONCERNING THE PRICES AT WHICH THE COMMON STOCK MIGHT BE TRADED OR THE
TRADING VOLUME OF THE COMMON STOCK FOLLOWING THE CONSUMMATION OF THE EXCHANGE
OFFER.
16. ADDITIONAL INFORMATION
The Company has filed a Schedule 13E-4 Issuer Tender Offer Statement
(the "Schedule 13E-4") with the Commission with respect to the Exchange Offer.
As permitted by the rules and regulations of the Commission, this Offering
Circular omits certain information and exhibits contained in the Schedule 13E-4.
Such additional information and exhibits can be inspected at and obtained from
the Commission in the manner set forth below or from the Company at no cost. For
further information with respect to the securities offered hereby and the
Company, reference is made to the Schedule 13E-4 and the exhibits thereto.
Statements contained in this Offering Circular as to the terms of any contract
or other document are not necessarily complete, and, in each case, reference is
made to the copy of each contract or other document that has been filed as an
exhibit to the Schedule 13E-4, each such statement being qualified in all
respects by such reference.
The Company is subject to the information requirements of the Exchange
Act and, in accordance therewith, files periodic reports and other information
with the Commission. Such reports and other information filed with the
Commission, as well as the Schedule 13E-4, can be inspected and copied at the
public reference facilities of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and 7 World Trade
Center, New York, New York 10048. Copies of such material may also be obtained
by mail, upon payment of the Commission's customary charges, from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission also maintains a Web site on the World
Wide Web at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically.
- 14 -
<PAGE> 1
EXHIBIT 99(a)(2)
LETTER OF TRANSMITTAL
In Respect of Its Offer to Exchange
Shares of Its Common Stock
for
Each Outstanding Share of 10% Junior Series 3
Cumulative Redeemable Preferred Stock
Pursuant to Its Offering Circular
dated October 2, 1997
To
IXC COMMUNICATIONS, INC.
Deliver by Mail or by Hand to:
IXC Communications, Inc.
5000 Plaza on the Lake
Suite 200
Austin, Texas 78746
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS
OTHER THAN THAT SHOWN ABOVE DOES NOT
CONSTITUTE A VALID DELIVERY.
The Exchange Offer and Withdrawal Rights will expire at 5:00
p.m., Austin, Texas time, on October 31, 1997 unless terminated earlier or
extended as provided in the Offering Circular.
EACH TENDERING STOCKHOLDER MUST COMPLETE PAGES 1 AND 4
OF THIS LETTER OF TRANSMITTAL AND SIGN IT ON PAGE 4.
SEE INSTRUCTIONS BEGINNING ON PAGE 5.
IN ORDER TO AVOID BACKUP WITHHOLDING, A TENDERING STOCKHOLDER MAY ALSO
NEED TO COMPLETE AND SIGN PAGE 9 OF THIS LETTER OF TRANSMITTAL. SEE INSTRUCTION
11 AND THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9."
<TABLE>
<CAPTION>
DESCRIPTION OF 10% JUNIOR SERIES 3 CUMULATIVE REDEEMABLE PREFERRED STOCK (THE "SERIES 3
PREFERRED STOCK") TENDERED
- ----------------------------------------------------------------------------------------------------------------------------------
Certificate(s) Tendered
Name(s) and Address(es) of Registered Holder(s) (Attach additional list if necessary)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Number of
Shares of Series 3 Number of Shares
Preferred Stock of Series 3
Certificate Represented by Preferred Stock
Number(s)* Certificate(s) Tendered**
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Total Number of Shares
Series 3 Preferred Stock
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Please indicate in this column the certificate number(s) for each
certificate representing the shares of Series 3 Preferred Stock you desire
to tender. If nothing is indicated in this column, the total number of
shares of Series 3 Preferred Stock evidenced by all certificates submitted
with this Letter of Transmittal will be deemed to have been tendered.
** Please indicate in this column the number of shares of Series 3 Preferred
Stock you wish to tender. If nothing is indicated in this column, the total
number of shares of Series 3 Preferred Stock evidenced by each certificate
delivered with this Letter of Transmittal will be deemed to have been
tendered.
PLEASE READ CAREFULLY THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL.
<PAGE> 2
Ladies and Gentlemen:
The undersigned holder(s) of the share certificates referred to on page
1 and transmitted herewith hereby tender(s) to IXC Communications, Inc., a
Delaware corporation (the "Corporation"), the number of shares of 10% Junior
Series 3 Cumulative Redeemable Preferred Stock ("Series 3 Preferred Stock") of
the Corporation, $0.01 par value, specified on page 1 and represented by such
certificates, pursuant to the Corporation's offer to exchange (the "Offering
Circular") shares of the Corporation's common stock (the "Common Stock") for
each share of the Series 3 Preferred Stock set forth in the Offering Circular
dated October 2, 1997 and in the Letter of Transmittal (collectively, the
"Exchange Offer"). The undersigned hereby acknowledges receipt of the Exchange
Offer. Capitalized terms used in this Letter of Transmittal but not defined
herein have the meanings provided in the Offering Circular.
Each of the undersigned hereby represents and warrants that he or she
has full power and authority to tender, exchange, assign, and transfer the
Series 3 Preferred Stock tendered hereby, and that when the same are accepted
for exchange by the Corporation, the Corporation will acquire good and
unencumbered title thereto, free and clear of all liens, claims, restrictions,
charges and encumbrances, and such Series 3 Preferred Stock shall not be subject
to any adverse claims. The undersigned will, upon request, execute and deliver
any additional documents deemed by the Corporation to be necessary or desirable
to complete the exchange, assignment, and transfer to the Corporation of the
Series 3 Preferred Stock tendered hereby.
The undersigned hereby deposits with the Corporation the above
certificates representing the Series 3 Preferred Stock. If certificate numbers
are not indicated above, the undersigned is nonetheless depositing all
certificates that accompany this Letter of Transmittal. The undersigned hereby
exchanges, assigns and transfers to, or upon the order of, the Corporation the
Series 3 Preferred Stock tendered hereby that is accepted pursuant to the
Exchange Offer and hereby irrevocably constitutes and appoints the Secretary of
the Corporation the true and lawful attorney-in-fact of the undersigned with
respect to such Series 3 Preferred Stock, with full power of substitution (such
power of attorney being deemed to be an irrevocable power coupled with an
interest), to: (a) deliver certificates for such Series 3 Preferred Stock
together with all accompanying evidences of transfer an authenticity to, or upon
the order of, the Corporation for the exchange pursuant to the Exchange Offer;
(b) present such Series 3 Preferred Stock for transfer on the books of the
Corporation; (c) receive all benefits and otherwise exercise all rights of
beneficial ownership of such Series 3 Preferred Stock, all in accordance with
the terms of the Exchange Offer; and (d) make delivery of certificates for
Common Stock or Series 3 Preferred Stock as provided under "Special Issuance and
Delivery Instructions" on pages 4 and 6 of this Letter of Transmittal.
All authority herein conferred or agreed to be conferred shall survive
the death or incapacity of the undersigned and all obligations of the
undersigned hereunder shall be binding upon the heirs, personal representatives,
successors, and assigns of the undersigned. Except as stated in the Exchange
Offer, this tender is irrevocable.
- 2 -
<PAGE> 3
The Exchange Offer is subject to a number of conditions, each of which
may be waived or modified by the Corporation as more particularly described in
the Offering Circular. The undersigned recognizes that as a result of such
conditions the Corporation may not be required to exchange any of the Series 3
Preferred Stock tendered hereby. In such event, shares of Series 3 Preferred
Stock not exchanged will be returned to the undersigned at the address set forth
on page 1 of the Letter of Transmittal unless otherwise indicated under "Special
Issuance and Delivery Instructions."
THE UNDERSIGNED UNDERSTANDS THAT THE UNDERSIGNED WILL BE DEEMED TO HAVE
RECEIVED ALL ACCRUED AND UNPAID DIVIDENDS ON THE SERIES 3 PREFERRED STOCK UPON
ACCEPTANCE BY THE CORPORATION OF THE SERIES 3 PREFERRED STOCK TENDERED HEREBY
AND RECEIPT OF THE COMMON STOCK ISSUED IN CONNECTION WITH THE EXCHANGE OFFER.
This Letter of Transmittal is subject to the terms and conditions set
forth in the Offering Circular.
Unless otherwise indicated under Special Issuance and Delivery
Instructions on pages 4 and 6, please issue and mail any Common Stock issued for
the Series 3 Preferred Stock tendered hereby in accordance with the Offering
Circular and send any certificate(s) for unexchanged Series 3 Preferred Stock
(and accompanying documents, as appropriate), to the stockholder named above at
the address shown on page 1. The undersigned recognizes that the Corporation has
no obligation to transfer any certificate(s) for Series 3 Preferred Stock
delivered herewith from the name of the registered holder(s) thereof if the
Corporation does not accept for exchange any of such Series 3 Preferred Stock so
tendered.
- 3 -
<PAGE> 4
STOCKHOLDER(S) SIGN HERE
Must be signed by registered holder(s) exactly as name(s) appear(s) on share
certificate(s) or by person(s) authorized to become registered holder(s) by
certificates, stock powers and other documents transmitted herewith. If signing
is by trustee, executor, administrator, guardian, or other person acting in a
fiduciary or representative capacity, please set forth full title. See
Instruction 3. Signatures must be guaranteed.
X
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Signature(s) of Holder(s)
Print or type name(s):
----------------------------------------------------------
------------------------------------------------------------
Dated:
------------------------------------------------------------
Area Code and Telephone Number:
-------------------------------------------------
Tax Identification or Social Security Nos.:
-------------------------------------
Signature(s) Guaranteed:
--------------------------------------------------------
(See Instruction 5)
IN ORDER TO AVOID BACKUP WITHHOLDING, A TENDERING STOCKHOLDER MAY ALSO NEED TO
COMPLETE AND SIGN PAGE [9] OF THIS LETTER OF TRANSMITTAL.
SPECIAL ISSUANCE AND
DELIVERY INSTRUCTIONS
(SEE INSTRUCTION 4)
To be completed ONLY if (i) the certificates for Common Stock issued in exchange
for Series 3 Preferred Stock are to be delivered or to be issued in the name of
someone other than the person whose name appears, or to an address other than
that shown, on page 1 of the Letter of Transmittal, or (ii) certificates for the
shares of the Series 3 Preferred Stock (if any) not tendered or not accepted for
exchange are to be delivered to and issued in the name of someone other than the
person whose name appears, or to an address other than that shown, on page 1 of
this Letter of Transmittal.
Name:
---------------------------------------------------------------------------
(Please Print)
Address:
------------------------------------------------------------------------
------------------------------------------------------------------------
(Include Zip Code)
- 4 -
<PAGE> 5
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES FOR SERIES 3
PREFERRED STOCK. This Letter of Transmittal or a facsimile hereof, properly
completed and duly executed (with signatures guaranteed), must be used in
connection with a tender of Series 3 Preferred Stock and must be actually
received by the Corporation at the address set forth above on or before the
Expiration Date. If tendered Series 3 Preferred Stock is registered in different
ways on different certificates, it will be necessary to complete, sign and
submit as many separate Letters of Transmittal as there are different
registrations of such certificates.
THE METHOD OF DELIVERY OF CERTIFICATES FOR SERIES 3 PREFERRED
STOCK AND OTHER DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER.
INSTEAD OF EFFECTING DELIVERY BY MAIL, IT IS RECOMMENDED THAT
HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY
2. PARTIAL TENDERS. If you want to tender fewer than all of the Series
3 Preferred Stock evidenced by any certificate enclosed herewith, the number of
shares of Series 3 Preferred Stock that you want to tender represented by such
certificate must be entered on the appropriate line on page 1 under "Number of
Shares of Series 3 Preferred Stock Tendered" opposite the appropriate
certificate number. A new certificate for the remainder of the shares of the
Series 3 Preferred Stock which were evidenced by such certificate(s) delivered
herewith will be sent to the registered holder, unless otherwise provided in the
Special Issuance and Delivery Instructions on pages 4 and 6, after the
expiration of the Exchange Offer. All shares of Series 3 Preferred Stock
represented by certificates listed on page 1 are deemed to have been tendered
unless otherwise indicated.
3. SIGNATURES, STOCK POWERS AND ENDORSEMENTS. If this Letter of
Transmittal is signed by the registered holder(s) of the certificates
transmitted hereby, such signature(s) must correspond exactly with the name(s)
of such registered holder(s) as they appear on the face of each such
certificate, without any alteration or change whatsoever. The signatures must be
guaranteed by an Eligible Institution (as defined in Instruction 5).
If any certificate transmitted hereby is registered in the names of two
or more holders, all such holders must sign this Letter of Transmittal.
If the Letter of Transmittal is properly signed by the registered
holder(s) of the certificate(s) transmitted thereby, no endorsements of such
certificate(s) or separate stock power(s) are required. Signatures on such
certificates or stock powers and on this Letter of Transmittal must be
guaranteed by an Eligible Institution (as defined in Instruction 5).
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the certificates transmitted hereby, each such
certificate must be endorsed or accompanied by an appropriate stock power, in
either case signed exactly as the name(s) of the registered holder(s) appear(s)
on the face of such certificates, without any alteration or change whatsoever.
- 5 -
<PAGE> 6
Signatures on such certificates or stock powers and on this Letter of
Transmittal must be guaranteed by an Eligible Institution (as defined in
Instruction 5).
If this Letter of Transmittal or any other certificates, stock powers
or proxies are signed by any trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation, partner of a partnership or any
other person acting in a fiduciary or representative capacity, each such person
should so indicate when signing, and must deliver to the Corporation proper
evidence satisfactory to the Corporation of his, her or its authority so to act.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If (i) certificates for
shares of Common Stock or (ii) certificates for shares of any Series 3 Preferred
Stock not exchanged, are to be issued or delivered in the name of a person other
than the person(s) signing this Letter of Transmittal or are to be delivered to
an address other than as set forth on page 1 of this Letter of Transmittal,
please complete the "Special Issuance and Delivery Instructions" on page 4.
5. GUARANTEE OF SIGNATURES. All signatures on this Letter of
Transmittal must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc. or a commercial bank, trust company, savings bank or savings association
having an office, branch or agency in the United States (each being herein
referred to as an "Eligible Institution") in accordance with applicable law and
with the Securities Transfer Agents Medallion Program (STAMP) operated by
Keymark Financial Services, Inc.
6. TRANSFER TAXES. The Corporation will pay or cause to be paid all
transfer taxes, if any, with respect to the exchange and transfer of any Series
3 Preferred Stock to it pursuant to the Exchange Offer. If, however, (i)
certificates for the shares of Common Stock or any shares of Series 3 Preferred
Stock not exchanged are to be issued in the name of, or delivered to, any person
other than the registered holder(s), or (ii) a transfer tax is imposed for any
reason other than the transfer or sale of Series 3 Preferred Stock to the
Corporation pursuant to the Exchange Offer, the amount of any transfer taxes
(whether imposed on the registered holder(s), such other person or otherwise)
will be payable by the tendering holder(s). Unless satisfactory evidence of the
payment of such taxes, or exemption therefrom, is submitted herewith, the amount
of such transfer taxes will be billed directly to the tendering holder(s).
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR TRANSFER
TAX STAMPS TO BE AFFIXED TO THE CERTIFICATES LISTED IN THIS LETTER OF
TRANSMITTAL.
7. INADEQUATE SPACE. If the space provided on page 1 is inadequate, the
additional share certificate numbers and related number of Series 3 Preferred
Stock tendered with this Letter of Transmittal should be listed on a separate,
signed schedule affixed hereto.
8. IRREGULARITIES. All questions as to the validity, form, eligibility
(including time of receipt), and acceptance of any tender of Series 3 Preferred
Stock will be determined by the Corporation, which determinations shall be final
and binding. The Corporation reserves the absolute right to reject any or all
tenders determined by it not to be in appropriate form or the acceptance of or
payment for which would, in the opinion of the Corporation's counsel, be
unlawful. The Corporation also reserves the absolute right to waive any of the
conditions of the Exchange Offer or any defect in any tender with respect to any
particular shares of Series 3
- 6 -
<PAGE> 7
Preferred Stock or any particular stockholder, and the Corporation's
interpretations of the terms and conditions of the Exchange Offer (including
these Instructions) shall be final and binding. Unless waived, any defects or
irregularities in connection with tenders must be cured within such time as the
Corporation shall determine. The Corporation shall not be obligated to give
notice of defects or irregularities in tenders, nor shall it incur any liability
for failure to give any such notice. Tenders will not be deemed to have been
made until all defects and irregularities have been cured or waived.
9. ADDITIONAL COPIES. Additional copies of the Offering Circular and
this Letter of Transmittal may be obtained from the Corporation at the address
set forth in Instruction 10.
10. QUESTIONS. Any questions concerning the tender of Series 3
Preferred Stock under this Letter of Transmittal may be directed to:
IXC COMMUNICATIONS, INC.
5000 Plaza on the Lake
Suite 200
Austin, Texas 78746
Contact:
Kelli McGlynn
Investor Relations
(512) 427-3731 (telephone)
(512) 328-1604 (facsimile)
11. CERTAIN FEDERAL INCOME TAX CONSEQUENCES.
(a) Backup Withholding. In order to prevent the application of Federal
income tax backup withholding, each stockholder of record (or each owner of
Series 3 Preferred Stock, if other than the stockholder of record, hereinafter
also referred to as "Shareholder") must, unless an exemption applies, provide
the Corporation with such Shareholder's taxpayer identification number on the
Substitute Form W-9 set forth on this Letter of Transmittal and certify under
penalties of perjury that such number is correct. If the Shareholder is an
individual, the tax payer identification number is his or her Social Security
Number. If the Corporation is not provided with the correct taxpayer
identification number, the Shareholder may be subject to penalties imposed by
the Internal Revenue Service.
If backup withholding applies, the Corporation is required to withhold
31% of any payments made to the Shareholder. Backup withholding is not an
additional tax. Rather, the amount withheld is applied to the taxpayer's Federal
income tax liability. If backup withholding results in an overpayment of taxes,
a refund may be obtained from the Internal Revenue Service.
Certain Shareholders (including, among others, corporations and certain
foreign persons) are not subject to these backup withholding and reporting
requirements. To qualify as an exempt recipient on the basis of foreign status,
a foreign Shareholder must submit to the Corporation a statement, signed under
penalty of perjury, attesting to that individual's exempt status. Such
statements can be obtained from the Corporation. A Shareholder should consult
his or her tax
- 7 -
<PAGE> 8
advisor as to his or her qualification for exemption from the backup withholding
and reporting requirements and the procedure for obtaining an exemption.
(b) Withholding of Tax on Certain Foreign Persons. Under Federal income
tax law, the Corporation is required to withhold a tax on certain types of
payments made to a nonresident alien individual, foreign partnership or foreign
corporation. In certain situations, a Shareholder may be exempt from
withholding. A Shareholder should consult his or her tax advisor as to his or
her qualification for exemption from these withholding requirements and the
procedure for obtaining exemption.
- 8 -
<PAGE> 9
<TABLE>
<CAPTION>
PAYER'S NAME: IXC COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PART 1 - PLEASE Social Security Number
SUBSTITUTE PROVIDE YOUR TIN IN
THE BOX AT RIGHT OR
AND CERTIFY BY Employer Identification
Form W-9 SIGNING AND DATING Number
BELOW
Department of the Treasury PART 2 - CHECK THE BOX IF YOU ARE NOT
Internal Revenue Service SUBJECT TO BACKUP withholding because
(1) you have not been notified that you
are subject to backup withholding as a
result of failure to report all interest
or dividends, or (2) the Internal
Revenue Service has notified you that
Payer's Request for you are no longer subject to backup
Taxpayer Identification withholding.
Number (TIN)
CERTIFICATION - UNDER THE Part 3
PENALTIES OF PERJURY, I CERTIFY
THAT THE INFORMATION PROVIDED Awaiting
ON THIS FORM IS TRUE, CORRECT, TIN / /
AND COMPLETE.
Signature__________________
Date_________ , 199_
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENT MADE TO YOU PURSUANT TO
THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED "GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM
W-9" FOR ADDITIONAL DETAILS.
IMPORTANT: This Letter of Transmittal must be RECEIVED by the
Corporation on or prior to the Expiration Date.
- 9 -
