<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 1997
REGISTRATION NO. 333-33421
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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
(512) 328-1112
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JEFFREY C. SMITH
IXC COMMUNICATIONS, INC.
5000 PLAZA ON THE LAKE, SUITE 200
AUSTIN, TEXAS 78746
(512) 328-1112
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
Copies to:
MICHAEL P. WHALEN, ESQ.
KAREN C. GOODIN, ESQ.
MICHAEL G. MCKINNON, ESQ.
RIORDAN & MCKINZIE
695 TOWN CENTER DRIVE, SUITE 1500
COSTA MESA, CA 92626
(714) 433-2900
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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PROSPECTUS
IXC COMMUNICATIONS, INC.
1,400,000 SHARES OF 7 1/4% JUNIOR CONVERTIBLE PREFERRED STOCK DUE 2007
(LIQUIDATION PREFERENCE $100 PER SHARE) AND THE SHARES OF COMMON STOCK
INTO WHICH THE PREFERRED STOCK IS CONVERTIBLE AND
97,481 ADDITIONAL SHARES OF COMMON STOCK
This Prospectus relates to the offer and sale by (i) the Convertible
Preferred Selling Holders (as defined herein) of (a) up to 1,400,000 shares of
7 1/4% Junior Convertible Preferred Stock Due 2007, par value $0.01 per share
(the "Convertible Preferred Stock"), of IXC Communications, Inc., a Delaware
corporation (the "Company") and (b) the shares of common stock, par value $.01
per share (the "Common Stock"), of the Company (including any shares of Common
Stock resulting from an adjustment to the conversion price of the Convertible
Preferred Stock pursuant to the antidilution provisions of the Certificate of
Designation (the "Certificate of Designation") governing the Convertible
Preferred Stock) issuable upon conversion of the Convertible Preferred Stock and
(ii) the Telecom One Selling Holders (as defined herein,and together with the
Convertible Preferred Selling Holders, the "Selling Holders") of 97,481 shares
of Common Stock (the "Telecom One Common Stock"). The shares of Convertible
Preferred Stock, the Common Stock issuable upon conversion of the Convertible
Preferred Stock and the Telecom One Common Stock to which this Prospectus
relates are collectively referred to as the "Securities"). The 1,400,000 shares
of Convertible Preferred Stock includes 1,000,000 shares of Convertible
Preferred Stock issued in the Original Offering (as defined herein) and up to
400,000 shares of Convertible Preferred Stock which may, at the option of the
Company, be issued as payment of dividends-in-kind on the Convertible Preferred
Stock. See "Selling Holders."
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The Common Stock is quoted on the Nasdaq National Market ("NNM") under the
symbol ("IIXC"). On August 20, 1997, the last reported sale price of the Common
Stock on the NNM was $26 11/16 per share. The Convertible Preferred Stock is
traded in the Private Offerings, Resales and Trading through Automated Linkages
("PORTAL"). On August 20, 1997, the average of the bid and asked prices of the
Convertible Preferred Stock was $128.50. Shares of Convertible Preferred Stock
sold pursuant to this Prospectus will not be eligible for trading in the PORTAL
Market. The Company does not intend to list the Convertible Preferred Stock on
any securities exchange or to seek approval for quotation of the Convertible
Preferred Stock through any automated quotation system. Although the Initial
Purchasers (as defined herein) have advised the Company that they intend to make
a market in the Convertible Preferred Stock, they are not obligated to do so and
may suspend any such market-making activities at any time and without prior
notice. Accordingly, there can be no assurance that an active market for the
Convertible Preferred Stock will develop or be maintained.
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Each share of Convertible Preferred Stock has a liquidation preference of
$100. The Convertible Preferred Stock is convertible at the option of the holder
at any time, unless previously redeemed, into Common Stock of the Company at a
conversion price of $23.46 per share of Common Stock, subject to adjustment in
certain events. The Convertible Preferred Stock is not redeemable prior to April
3, 2000. On or after such date, the Convertible Preferred Stock will be
redeemable at the option of the Company, in whole or in part, at the redemption
prices set forth herein plus accrued and unpaid dividends through the redemption
date, provided that prior to April 1, 2002, the Convertible Preferred Stock will
not be subject to redemption unless for any 20 trading days within the period of
30 consecutive trading days ending on the trading day immediately prior to the
notice of redemption, the Closing Bid Price (as defined herein) for the Common
Stock on the NNM equals or exceeds 150% of the then effective conversion price.
The Convertible Preferred Stock is subject to mandatory redemption on March 31,
2007, at a redemption price of $100 per share plus accrued and unpaid dividends.
Dividends on the Convertible Preferred Stock are cumulative from the April 1,
1997 (the "Original Offering Date") and are payable quarterly in arrears on each
March 31, June 30, September 30 and December 31 commencing June 30, 1997 out of
funds legally available therefor. Dividends payable prior to or on March 31,
1999 shall be, at the option of the Company, payable (i) in cash or (ii) through
the issuance of additional shares of Convertible Preferred Stock equal to the
dividend amount divided by the liquidation preference of such additional shares.
After March 31, 1999, to the extent and for so long as the Company is not
permitted to pay cash dividends on the Convertible Preferred Stock by the terms
of any then outstanding indebtedness or any other agreement or instrument to
which the Company is subject, the Company shall pay dividends, which shall
accrue at the rate per annum of 8 3/4%, through the issuance of additional
shares of Convertible Preferred Stock. The Convertible Preferred Stock ranks
junior to the Company's outstanding Series 3 Preferred Stock (as defined herein)
and ranks on a parity with the Exchangeable Preferred Stock (as defined herein)
with respect to the payment of dividends and amounts upon liquidation,
dissolution and winding up. At June 30, 1997, the aggregate liquidation
preference of the Series 3 Preferred Stock, including accrued and unpaid
dividends, was $20.0 million. See "Risk Factors -- Ranking; Ability to Pay
Dividends on the Convertible Preferred Stock" and "Description of Convertible
Preferred Stock."
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The Selling Holders may sell the Securities to which this Prospectus relates
from time to time through underwriters or dealers, through brokers or other
agents, or directly to one or more purchasers, at market prices prevailing at
the time of sale or at prices otherwise negotiated. The Company will receive no
proceeds from the sale of the Securities. The Company will pay all expenses
incident to the registration of the Securities offered hereby, except for
selling commissions and underwriting discounts for the Selling Holders. The
Selling Holders and any broker, dealer or underwriter that participates with the
Selling Holders in the distribution of the Securities may be deemed to be an
"underwriter" within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), and any commissions received by them and any profit on the
resale of such Securities purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The Company has agreed to
indemnify the Selling Holders against certain liabilities, including certain
liabilities under the Securities Act. See "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS TO BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS AUGUST 28, 1997.
<PAGE> 3
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act (as defined herein) and in accordance therewith files reports and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements, information statements and other information filed by
the Company can be inspected and copied at the public reference facilities
maintained by the Commission at its offices at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of such materials can be obtained by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Such reports, proxy statements, information
statements and other information concerning the Company are also available for
inspection at the offices of the NNM, 1735 K Street, N.W., Washington, D.C.
20006. In addition the Commission maintains an Internet site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the Commission.
The Company has filed with the Commission a registration statement on Form
S-3 (together with all exhibits, schedules, amendments, and supplements thereto,
the "Registration Statement") under the Securities Act with respect to the
Common Stock offered by this Prospectus. This Prospectus, which forms a part of
the Registration Statement, does not contain all the information set forth in
the Registration Statement (certain parts of which have been omitted in
accordance with the rules and regulations of the Commission). For further
information with respect to the Company and the Common Stock, reference is made
to the Registration Statement. Statements contained in this Prospectus as to the
contents of any contract, agreement, or other document are not necessarily
complete, and, in each instance, reference is made to the copy of the document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by reference to such exhibit. The Registration
Statement may be inspected and copied at the public reference facilities at the
Commission's offices at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven
World Trade Center, 13th Floor, New York, New York, 10048. Copies of all or any
part thereof may be obtained from such office upon payment of prescribed fees.
2
<PAGE> 4
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
(1) The Annual Report of the Company on Form 10-K (File No. 0-20803)
for its fiscal year ended December 31, 1996;
(2) The Company's Current Reports on Form 8-K dated February 27, 1997,
March 6, 1997, March 26, 1997, April 1, 1997, July 3, 1997, July 29, 1997,
August 5, 1997, August 18, 1997 and August 21, 1997;
(3) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997;
(4) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, as amended;
(5) The description of the Common Stock contained in Amendment No. 2
to Registration Statement on Form S-1 (File No. 333-4061);
(6) The Company's definitive Proxy Statement for the Annual Meeting of
Stockholders on May 6, 1997; and
(7) All documents subsequently filed by the Company with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") prior to the
termination of this offering shall be deemed to be incorporated by
reference in this Prospectus. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein, modified or supersedes such
statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of the documents
that have been incorporated by reference herein, other than exhibits to such
documents (unless such exhibits are specifically incorporated by reference
therein). Requests for such copies should be directed to: Kelli McGlynn,
Investor Relations Coordinator, IXC Communications, Inc., 5000 Plaza on the
Lake, Suite 200, Austin, Texas 78746, telephone number (512) 328-1112.
3
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RISK FACTORS
In addition to the other information contained in this Prospectus the
following factors should be considered carefully in evaluating an investment in
the Convertible Preferred Stock or the Common Stock, which involves a high
degree of risk. Statements contained in this Prospectus regarding the Company's
expectations with respect to its network expansion, related financings and fiber
sale and cost-saving agreements, future operations and other information, which
can be identified by the use of forward-looking terminology, such as "may,"
"will," "expect," "anticipate," "estimate," "seek" or "continue" or the negative
thereof or other variations thereon or comparable terminology, are
forward-looking statements. The discussions set forth below constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including risks and uncertainties, that could cause
actual results to differ materially from results referred to in the
forward-looking statements. There can be no assurance that the Company's
expectations regarding any of these matters will be fulfilled. As used herein,
unless the context otherwise requires, the "Company" refers to IXC
Communication, Inc. and its subsidiaries, including predecessor corporations.
Certain terms used herein are defined in the Glossary at page A-1.
NEGATIVE CASH FLOW AND CAPITAL REQUIREMENTS
The Company's capital expenditures were $140.9 million for the six months
ended June 30, 1997 and the Company's EBITDA minus interest expense and capital
expenditures (adjusted for the change in working capital) for such period was
negative $113.5 million. The Company estimates that the total capital
expenditures for 1997 will be at least $400.0 million and the Company expects to
continue to make substantial capital expenditures thereafter. The Company
anticipates meeting the cash requirements relating to such capital expenditures
from cash on hand, the proceeds from the sale (the "Exchangeable Preferred
Sale") of the Company's 12 1/2% Junior Exchangeable Preferred Stock due 2009 and
12 1/2% Series B Junior Exchangeable Preferred Stock due 2009 (collectively, the
"Exchangeable Preferred Stock") which occurred on August 20, 1997 and resulted
in net proceeds to the Company of approximately $288 million, the anticipated
proceeds from the sale of fiber to LCI (the "LCI Fiber Sale"), the anticipated
proceeds from the sale of fiber to MCI (the "MCI Fiber Sale"), the Proposed
Credit Facility (defined below), additional cost-saving arrangements, cash flow
from its operations, the NTFC Equipment Facility (as defined) and other vendor
financing, if available. The amount of actual capital expenditures may vary
materially as a result of cost-saving arrangements, increases or decreases in
the amount of traffic on the Network, unexpected costs, delays or advances in
the timing of certain capital expenditures and other factors. The Company's
ability to meet the cash costs of such capital expenditures is dependent upon
the Company's ability to complete the construction of the Network expansion in a
timely manner and otherwise perform its obligations to the satisfaction of each
of LCI and MCI so that it can complete the LCI Fiber Sale and the MCI Fiber
Sale, to enter into cost-saving arrangements with carriers or other large users
of fiber capacity, to otherwise raise significant capital and/or to
significantly increase its cash flow. The failure of the Company to accomplish
any of the foregoing may significantly delay or prevent such capital
expenditures, which would have a material adverse effect on the Company and the
value of the Common Stock and the Convertible Preferred Stock.
The Company's switched services business will require cash to meet
operating expenses. In order to offer switched long distance services, the
Company installed switches, connected them to its Network and to the LECs (as
defined), acquired software and hired the personnel needed to establish a
national switched network. The Company's switched services business generated
negative EBITDA for each of the four quarters of 1996. EBITDA from switched
services remained negative in the first two quarters of 1997 and the Company
believes it is likely to remain negative for the balance of the year, due to,
among other things, higher-than-anticipated access costs and uneven traffic
patterns creating high network overflow costs. Although the Company is
attempting to control such costs and improve EBITDA from switched services,
there is no assurance it will be successful in doing so. The Company expects
that the Network expansion will result in an improvement in the EBITDA generated
by its switched services business. For a discussion of important factors that
could cause the Company's switched services business to fail to generate
positive EBITDA, see "-- Development Risks and Dependence on Switched Services
Business."
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The Company is required to make annual interest payments of $35.6 million
with respect to the Company's outstanding $285.0 million principal amount of the
12 1/2% Senior Notes Due 2005 (the "Senior Notes"). The Company will also be
required to make interest payments and, beginning December 31, 1997, principal
payments in connection with borrowings under a secured equipment financing
facility of up to $28.0 million entered into with NTFC Capital Corporation, an
affiliate of Northern Telecom Inc. ("Nortel"), in July 1997 (the "NTFC Equipment
Facility"). In addition, the Company will also be required to make interest
payments with respect to the Proposed Credit Facility, if obtained, and dividend
payments with respect to the Company's 10% Junior Series 3 Cumulative Redeemable
Preferred Stock (the "Series 3 Preferred Stock"), the Convertible Preferred
Stock and the Exchangeable Preferred Stock.
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") in an aggregate principal amount
equal to the liquidation preference of the Exchangeable Preferred Stock then
outstanding, as set forth in the Company's Certificate of Designation relating
to the Exchangeable Preferred Stock. Upon such exchange, the Company will be
required to make annual interest payments of $37.5 million with respect to the
Exchange Debentures issued in exchange for the initial Exchangeable Preferred
Stock plus additional annual interest payments with respect to Exchange
Debentures exchanged for Exchangeable Preferred Stock issued as payment of
dividends-in-kind and on Exchange Debentures issued in lieu of cash payments of
interest. After February 15, 2001 interest on the Exchange Debentures may be
paid only in cash.
Delays in the Network expansion, larger than anticipated capital
expenditures for the Network or continued negative cash flow from the switched
services business could impair the ability of the Company to meet its
obligations under the Senior Notes, the Exchange Debentures, if issued, and
other indebtedness, to pay cash dividends on the Series 3 Preferred Stock, the
Convertible Preferred Stock and the Exchangeable Preferred Stock and to access
additional sources of funding, any of which would have a material adverse effect
on the Company and the value of the Convertible Preferred Stock and the Common
Stock. See "-- Risks Relating to the Network Expansion," and "-- Development
Risks and Dependence on Switched Services Business."
The Company anticipates that in the event that it is unable to enter into
the Proposed Credit Facility, obtain vendor financing on acceptable terms or
consummate the MCI Fiber Sale and the LCI Fiber Sale, it will be required to (x)
sell additional equity and/or debt securities in order to complete its planned
Network expansion or (y) curtail or delay its planned Network expansion.
Furthermore, before incurring additional indebtedness, the Company may be
required to obtain the consent of its debtholders. The Company's failure to
obtain additional financing or, in the alternative, its decision to curtail or
delay its planned network expansion could have a material adverse effect on its
business, results of operations and financial condition. The cash requirements
described above do not include any cash which may be required for acquisitions
the Company may make.
RANKING; ABILITY TO PAY DIVIDENDS ON THE CONVERTIBLE PREFERRED STOCK
The Convertible Preferred Stock ranks senior to the Common Stock and will
rank on parity with the Exchangeable Preferred Stock with respect to payment of
dividends and amounts upon liquidation, dissolution or winding up. The
Convertible Preferred Stock ranks junior to the Series 3 Preferred Stock with
respect to the payment of dividends and amounts upon liquidation, dissolution or
winding up.
The ability of the Company to pay any dividends is subject to applicable
provisions of state law and to pay cash dividends on the Convertible Preferred
Stock after March 31, 1999 and on the Exchangeable Preferred Stock after
February 15, 2001, will be subject to the terms of the Senior Notes Indenture
(as defined), the Series 3 Preferred Stock, the Exchangeable Preferred Stock,
the Exchange Debentures (if outstanding) and any other indebtedness of the
Company then outstanding. The terms of the Senior Notes Indenture currently
prohibit the Company from paying cash dividends on any preferred stock,
including the Convertible Preferred Stock. The ability of the Company in the
future to pay cash dividends on the Convertible Preferred Stock will depend on
its meeting certain financial criteria, which in turn will require significant
improvements in the
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Company's EBITDA and Consolidated Net Worth (as defined in the Senior Notes
Indenture). There can be no assurance that the Company will be able to meet such
financial criteria in order to pay cash dividends on the Convertible Preferred
Stock. Moreover, under Delaware law the Company is permitted to pay dividends on
its capital stock, including the Convertible Preferred Stock, only out of its
surplus, or in the event that it has no surplus, out of its net profits for the
year in which a dividend is declared or for the immediately preceding fiscal
year. Surplus is defined as the excess of a company's total assets over the sum
of its total liabilities plus the par value of its outstanding capital stock. In
order to pay dividends in cash, the Company must have surplus or net profits
equal to the full amount of the cash dividend at the time such dividend is
declared. The Company cannot predict what the value of its assets or the amount
of its liabilities will be in the future and, accordingly, there can be no
assurance that the Company will be able to pay cash dividends on the Convertible
Preferred Stock.
The holders of Series 3 Preferred Stock, subject to the terms of the
Company's Restated Certificate of Incorporation, as amended (the "Restated
Certificate"), are entitled to receive a liquidation preference of $1,000 per
share, plus an amount equal to all accrued and unpaid dividends and the Company
may voluntarily redeem the Series 3 Preferred Stock for $1,000 per share, plus
an amount equal to all accrued and unpaid dividends. In addition, the holders of
Series 3 Preferred Stock are entitled to receive annual dividends, subject to
applicable provisions of state law and the limitations of the Restated
Certificate and in the Senior Notes Indenture, in an amount equal to $100 per
share, plus an amount determined by applying a 10% annual rate, compounded
annually, to any accrued but unpaid dividend amount from the last day of the
period when such dividend accrues to the actual date of payment.
Although dividends on the Convertible Preferred Stock may be made, at the
option of the Company, in cash or with additional shares of Convertible
Preferred Stock, all accrued dividends on the Series 3 Preferred Stock must be
paid in cash before the Company can pay any cash dividends in respect of the
Convertible Preferred Stock or the Exchangeable Preferred Stock. If the Company
exchanges the Exchangeable Preferred Stock for the Exchange Debentures, the
payment of principal, premium, if any, and interest or any other amounts owing
in respect of the Exchange Debentures will rank senior to payment of dividends
and any other amounts owing in respect of the Convertible Preferred Stock. In
addition, the Exchangeable Preferred Stock prohibits the payment of cash
dividends on pari passu preferred stock (including the Convertible Preferred
Stock) unless and until cash dividends are being paid on the Exchangeable
Preferred Stock.
SUBSTANTIAL INDEBTEDNESS; INSUFFICIENCY OF EARNINGS TO COVER FIXED CHARGES,
INCLUDING DIVIDENDS ON THE CONVERTIBLE PREFERRED STOCK
The Company is highly leveraged. As of June 30, 1997, the Company had
outstanding approximately $300.7 million of long-term debt and capital lease
obligations (including the current portion thereof) principally related to its
outstanding $285.0 million principal amount of the Senior Notes. The
Exchangeable Preferred Sale which occurred on August 20, 1997 resulted in a
ratio of debt and redeemable preferred stock to stockholders' equity for the
Company significantly higher than that which existed as of June 30, 1997. As
adjusted for the sale of the Convertible Preferred Stock in the Original
Offering and the Exchangeable Preferred Sale as if they had occurred on or
before January 1, 1997, the Company's earnings would have been insufficient to
cover combined fixed charges and preferred stock dividends by $75.6 million for
the six months ended June 30, 1997. Furthermore, the Company may borrow up to
$28 million under the NTFC Equipment Facility. In addition, the Company is
engaged in discussions with potential lenders regarding a revolving credit
facility (the "Proposed Credit Facility"). The Company anticipates that
borrowings under the Proposed Credit Facility would be available with respect to
a percentage of its eligible accounts receivable. Although the total
availability under the Proposed Credit Facility may vary from time to time
according to the aggregate amount of eligible accounts receivable, the Company
anticipates that the lender will impose a limit on borrowings under the Proposed
Credit Facility. There can be no assurance that the Company will obtain the
Proposed Credit Facility on favorable terms, if at all. In addition, the Company
will become more highly leveraged if it exchanges Exchange Debentures for the
Exchangeable Preferred Stock.
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<PAGE> 8
Furthermore, the Company is soliciting consents from the holders of the
Senior Notes to permit, among other things, the incurrence by the Company of
additional indebtedness which, if permitted, could be substantial.
The Company's significant debt burden could have several important
consequences to the holders of the Common Stock and the Convertible Preferred
Stock, including, but not limited to: (i) a significant portion of the Company's
cash flow from operations must be used to service its debt instead of being used
in the Company's business; (ii) the Company's significant degree of leverage
could increase its vulnerability to changes in general economic conditions or
increases in prevailing interest rates; (iii) the Company's flexibility to
obtain additional financing in the future, as needed to continue the Network
expansion or for any other reason, may be impaired by the amount of debt
outstanding and the restrictions imposed by the covenants contained in the
indenture for the Senior Notes (the "Senior Notes Indenture") and in agreements
relating to other indebtedness; (iv) a substantial portion of the indebtedness
of the Company will mature in accordance with its terms prior to the mandatory
redemption of the Convertible Preferred Stock; and (v) the Company may be more
leveraged than certain of its competitors, which may be a competitive
disadvantage. There can be no assurance that the Company's cash flow from
operations will be sufficient to meet its obligations under the Senior Notes or
other indebtedness or the Series 3 Preferred Stock, the Convertible Preferred
Stock or the Exchangeable Preferred Stock as payments become due or that the
Company will be able to refinance the Senior Notes or other indebtedness at
maturity or the Convertible Preferred Stock or the Exchangeable Preferred Stock
upon mandatory redemption.
The Company anticipates that earnings will be insufficient to cover fixed
charges and preferred stock dividends for the next several years. In order for
the Company to meet its debt and dividend service obligations, and its dividend
and redemption obligations with respect to the Convertible Preferred Stock, the
Company will need to substantially improve its operating results. There can be
no assurance that the Company's operating results will be sufficient to enable
the Company to meet its debt and dividend service obligations, and its dividend
and redemption obligations with respect to the Convertible Preferred Stock. In
the absence of such operating results, the Company could face substantial
liquidity problems and might be required to raise additional financing through
the issuance of debt or equity securities; however, there can be RECENT AND
EXPECTED LOSSES
The Company reported a net loss of $37.4 million for the year ended
December 31, 1996 and a net loss of $48.7 million for the six months ended June
30, 1997. The Company does not expect to generate net income in 1997, due to
substantial interest expense associated with the Senior Notes and operational
expenses associated with the switched long distance business. Thereafter, the
Company's ability to generate operating income, EBITDA and net income will
depend to a great extent on demand for the private line circuits constructed in
the Network expansion and the success of the Company's switched long distance
and data services. There can be no assurance that the Company will return to
profitability in the future. Failure to generate operating income, EBITDA and
net income will impair the Company's ability to: (i) meet its obligations under
the Senior Notes or other indebtedness; (ii) pay cash dividends on the Series 3
Preferred Stock, the Convertible Preferred Stock and the Exchangeable Preferred
Stock; (iii) expand its switched services business; and (iv) raise additional
equity or debt financing which will be necessary to continue the Network
expansion or which may be required for other reasons. Such events could have a
material adverse effect on the Company and the value of the Common Stock and the
Convertible Preferred Stock.
EFFECT OF SUBSTANTIAL ADDITIONAL INDEBTEDNESS ON THE COMPANY'S ABILITY TO MAKE
PAYMENTS ON THE CONVERTIBLE PREFERRED STOCK
The Senior Notes Indenture and the Restated Certificate limit, but do not
prohibit, the incurrence of additional indebtedness by the Company and its
subsidiaries, and the Company may incur substantial additional indebtedness
during the next few years to finance the construction of network routes and
purchase of network electronics. All additional indebtedness of the Company will
rank senior in right of payment to any payment obligations with respect to the
Convertible Preferred Stock (to the extent that such additional indebtedness
represents senior indebtedness). In addition, the Exchange Debentures, if
issued, will rank senior
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in right of payment to any payment obligations with respect to the Convertible
Preferred Stock. The debt service requirements of any additional senior
indebtedness would make it more difficult for the Company to pay cash
obligations with respect to the Convertible Preferred Stock.
RISKS RELATING TO THE NETWORK EXPANSION; MAINTENANCE OF NETWORK, RIGHTS-OF-WAY
AND PERMITS
The continuing Network expansion is an essential element of the Company's
future success. The Company has, from time to time, experienced delays with
respect to the construction of certain portions of the Network expansion and may
experience similar delays in the future. These delays have delayed the Company's
ability to transfer long distance traffic from leased facilities to owned
facilities. Although the Company has made significant progress, right-of-way
acquisition for, and construction of, the New York to Los Angeles via St. Louis
route is not yet complete. The Company has substantial existing commitments to
purchase materials and labor for construction of the Network expansion, and will
need to obtain additional materials and labor which may cost more than
anticipated. Substantial segments of the route from New York to Los Angeles via
St. Louis and all of the route from Washington to Houston via Atlanta are being
constructed by contractors or, pursuant to cost-saving arrangements, by third
parties that will include the Company's fiber in routes such carriers are
constructing for their own use. Difficulties or delays with respect to any of
the foregoing may significantly delay or prevent the completion of the Network
expansion, which would have a material adverse effect on the Company, its
financial results and the value of the Common Stock and the Convertible
Preferred Stock.
The expansion of the Company's Network and its construction or acquisition
of new networks will be dependent, among other things, on its ability to acquire
rights-of-way and required permits from railroads, utilities and governmental
authorities on satisfactory terms and conditions and on its ability to finance
such expansion, acquisition and construction. Once expansion of the Network is
completed and requisite rights and permits are obtained, there can be no
assurance that the Company will be able to maintain all of its existing rights
and permits. Loss of substantial rights and permits or the failure to enter into
and maintain required arrangements for the Company's Network could have a
material adverse effect on the Company's business, financial condition and
results of operations and on the value of the Common Stock and the Convertible
Preferred Stock.
CONTRACTS CONTINGENT UPON SATISFACTORY COMPLETION OF NETWORK EXPANSION
In December 1996, the Company entered into an agreement with Vyvx whereby
the parties will exchange the rights to use fibers. The parties are required to
complete their routes by December 31, 1997, with penalties taking effect in July
1998 if one party, but not the other, has failed to complete its route. Although
the Company anticipates that it will complete its route in time to avoid any
penalty, there can be no assurance in this regard. Such penalties increase from
$400,000 per month commencing in July 1998 to $800,000 per month commencing in
October 1998. The Company entered into a significant agreement with a major long
distance carrier that will obtain private line services from the Company
utilizing routes included in the Network expansion, including routes under
construction. Under this contract, the Company will supply DS-3 circuits for
aggregate revenues of over $24.0 million during 1997-1998. Delays in completion
of such routes could result in cancellation of orders under such contract. In
February 1997, the Company entered into an agreement with respect to the LCI
Fiber Sale. The agreement provides for (i) the Company to issue credits to LCI
in the amount of $3.00 per route mile per day on uncompleted sections if the
route is not completed by September 1, 1997 and (ii) the Company to provide
OC-48 capacity to LCI along uncompleted sections (which capacity may have to be
obtained by the Company from other carriers) if the route is not completed by
December 1, 1997. The Company expects that, although the route from Chicago to
Dallas will be delivered to LCI prior to the incurrence of any obligation to
give substantial credits to LCI, the route from Dallas to Los Angeles will not
be completed until late 1997. The Company does not expect the effect of giving
LCI credits or capacity along this route will be material. In March 1997, the
Company entered into an agreement with respect to the MCI Fiber Sale. The
agreement provides for the Company to issue a credit to MCI of $100 per route
mile per month along any incomplete route segment, commencing January 1, 1998.
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There can be no assurance that the Company will be able to complete the
expansion routes without significant delays or penalties, within its budget or
at all. Any significant delay in, or the Company's inability to complete, the
Network expansion would have a material adverse effect on the Company's ability
to perform its obligations pursuant to the above contracts and on its business,
financial condition and results of operations and on the value of the Common
Stock and the Convertible Preferred Stock.
DEPENDENCE UPON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY RISKS
The Company's success in marketing its services to business and government
users requires that the Company provide superior reliability, capacity and
security via its Network. The Company's Network and networks upon which it
depends are subject to physical damage, power loss, capacity limitations,
software defects, breaches of security (by computer virus, break-ins or
otherwise) and other disruptions which may cause interruptions in service or
reduced capacity for customers and which could have a material adverse effect on
the Company's business, financial condition and results of operations and on the
value of the Common Stock and the Convertible Preferred Stock.
PRICING PRESSURES AND RISKS OF INDUSTRY OVER-CAPACITY
The long distance transmission industry has generally been characterized by
over-capacity and declining prices since shortly after the AT&T divestiture in
1984. The Company believes that, in the last several years, increasing demand
has ameliorated the over-capacity and that pricing pressure has been reduced.
However, the Company anticipates that prices for its services will continue to
decline over the next several years. The Company is aware that certain long
distance carriers (WorldCom, MCI, LCI and others) are expanding their capacity
and believes that other long distance carriers, as well as potential new
entrants to the industry, are considering the construction of new fiber optic
and other long distance transmission networks. Although the Company believes
that there are significant barriers to entry for some new entrants that may
consider building a new fiber optic network, such as substantial construction
costs and the difficulty and expense of securing appropriate rights-of-way,
establishing and maintaining a sufficient customer base, recruiting and
retaining appropriate personnel and maintaining a reliable network, certain of
these barriers may not apply to some new entrants (such as Qwest, utility
companies or railroads which already have significant rights-of-way). Since the
cost of the actual fiber is a relatively small portion of the cost of building
new transmission lines, companies building such lines are likely to install
fiber that provides substantially more transmission capacity than will be needed
over the short or medium term. Further, recent technological advances have shown
the potential to greatly expand the capacity of existing and new fiber optic
cable. Although such technological advances may enable the Company to increase
its capacity, an increase in the capacity of the Company's competitors could
adversely affect the Company's business. If industry capacity expansion results
in capacity that exceeds overall demand in general or along any of the Company's
routes, severe additional pricing pressure could develop. As a result, certain
industry observers have predicted that, within a few years, there may be
dramatic and substantial price reductions and that long distance calls will not
be materially more expensive than local calls. Price reductions could have a
material adverse effect on the Company and the value of the Common Stock and the
Convertible Preferred Stock.
DEVELOPMENT RISKS AND DEPENDENCE ON SWITCHED SERVICES BUSINESS
The success of the Company in the switched services business is dependent
on the Company's ability to generate significant customer traffic, to manage an
efficient switched long distance network and related customer service and the
timely completion of the Network expansion. Prior to 1996 the Company had not
previously managed a switched long distance network and there can be no
assurance that its switched services business can generate positive EBITDA or
net income. The failure of the Company to generate increased customer traffic,
to complete these routes in a timely manner, or to effectively manage the
switched network and related customer service or to generate positive EBITDA or
net income from the switched services business would have a material adverse
effect on the Company. The Company's switched services business will require
cash to meet its operating expenses. The Company's switched services business
generated negative EBITDA for each of the four quarters of 1996. EBITDA from
switched services remained negative in the first
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two quarters of 1997 and the Company believes it is likely to remain negative
for the balance of the year, due to higher-than-anticipated access costs and
uneven traffic patterns creating high network overflow costs. Although the
Company is attempting to control such costs and improve EBITDA from switched
services, there is no assurance it will be successful. The Company expects that
the Network expansion will result in an improvement in the gross margins and
EBITDA generated by its switched services business. The Company has experienced
and expects to continue to experience difficulties in commencing services for
end users of carrier customers. Although the Company believes that its
performance with respect to these matters has met or exceeded industry norms,
such difficulties may adversely affect the Company's relationships with its
customers.
Important factors that could cause the Company's switched services business
to fail to generate positive EBITDA include changes in the businesses of the
Company's reseller customers, an inability to attract new customers or to
quickly transfer new customers to its Network without problems, the loss of
existing customers, problems in the operation of the switched network, the
Company's lack of experience with switched services, increases in operating
expenses or other factors affecting the Company's revenue or expenses, including
delays in the construction of the Network expansion and increased expenses
related to access charges and network overflow, not all of which are capable of
control by the Company. If traffic does not increase and costs are not
adequately controlled there can be no assurance that the switched long distance
business will ever generate positive EBITDA. In addition, to the extent that
LECs grant volume discounts with respect to local access charges, the Company
may have a cost disadvantage versus the larger carriers. Furthermore, the credit
risk for the Company's switched services business is substantially greater than
the credit risk for the Company's private line business, because switched long
distance customers will be charged in arrears on the basis of MOUs (which are
frequently subject to dispute), and because many switched long distance
customers (in particular, resellers of debit card services) are not as well
capitalized as most of the Company's private line customers.
RISKS INHERENT IN RAPID GROWTH
Part of the Company's strategy is to achieve rapid growth through expanding
its switched services business and through completing the Network expansion. In
addition, the Company may from time to time make acquisitions of resellers which
it believes provide a strategic fit with its business and Network. See
"-- Integration of Acquired Business; Business Combinations; Change of Control."
The Company's rapid growth has placed, and its planned future growth will
continue to place, a significant and increasing strain on the Company's
financial, management, technical, information and accounting resources. See "--
Dependence on Billing, Customer Services and Information Systems." Continued
rapid growth would require: (i) the retention and training of new personnel;
(ii) the satisfactory performance by the Company's customer interface and
billing systems; (iii) the development and introduction of new products; and
(iv) the control of the Company's expenses related to the expansion into the
switched services business and the Network expansion. The failure by the Company
to satisfy these requirements, or otherwise to manage its growth effectively,
would have a material adverse effect on the Company and the value of the Common
Stock and the Convertible Preferred Stock.
DEPENDENCE ON BILLING, CUSTOMER SERVICES AND INFORMATION SYSTEMS
Sophisticated information and processing systems are vital to the Company's
growth and its ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. Billing and information systems for
the Company's historical lines of business have been produced largely in-house
with partial reliance on third-party vendors. These systems have generally met
the Company's needs due in part to the low volume of customer billing. As the
Company's long distance operation continues to expand, the need for
sophisticated billing and information systems will increase significantly. The
Company's plans for the development and implementation of its billing systems
rely, for the most part, on the delivery of products and services by third party
vendors. Failure of these vendors to deliver proposed products and services in a
timely and effective manner and at acceptable costs, failure of the Company to
adequately identify all of its information and processing needs, failure of the
Company's related processing or information systems or the
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failure of the Company to upgrade systems as necessary could have a material
adverse effect on the ability of the Company to reach its objectives, on its
financial condition and on its results of operations and on the value of the
Common Stock and the Convertible Preferred Stock.
INTEGRATION OF ACQUIRED BUSINESSES; BUSINESS COMBINATIONS
As part of its growth strategy, the Company acquired Telecom One, a
switchless reseller, in July 1997 and may, from time to time, acquire
businesses, assets or securities of companies which it believes provide a
strategic fit with its business and Network. Although the Company currently has
no commitments or agreements with respect to any possible acquisitions, it has
reviewed potential acquisition candidates and has held preliminary discussions
with a number of these candidates. Any such acquisitions will be accompanied by
the risks commonly associated with acquisitions. These risks include potential
exposure to unknown liabilities of acquired companies, the difficulty and
expense of integrating the operations and personnel of the companies, the
potential disruption to the business of the Company, the potential diversion of
management time and attention, the impairment of relationships with and the
possible loss of key employees and customers of the acquired business, the
incurrence of amortization expenses if an acquisition is accounted for as a
purchase and dilution to the stockholders of the Company if the acquisition is
made for stock. Any acquired businesses will need to be integrated with the
Company's existing operations. This will entail, among other things, integration
of switching, transmission, technical, sales, marketing, billing, accounting,
quality control, management, personnel, payroll, regulatory compliance and other
systems and operating hardware and software, some or all of which may be
incompatible with the Company's existing systems. The Company has limited
expertise dealing with these problems. In addition, persons receiving Common
Stock in an acquisition may sell such stock, which could have a negative impact
on the market price of the Common Stock. There can be no assurance that
services, technologies or businesses of acquired companies will be effectively
assimilated into the business or product offerings of the Company or that they
will contribute to the Company's revenues or earnings to any material extent.
The risks associated with acquisitions could have a material adverse effect on
the Company and the value of the Common Stock and the Convertible Preferred
Stock.
RELIANCE ON MAJOR CUSTOMERS
The Company's ten largest customers in 1996 accounted for approximately 70%
of its revenues, with Excel, WorldCom and Frontier as its three largest
customers. Excel first became a customer in 1996 and accounted for 35% of the
Company's revenues (69% of the Company's switched long distance revenues) during
1996. During 1994, 1995 and 1996, WorldCom accounted for approximately 25%, 20%
and 8% respectively, of the Company's revenues (the Company derived no revenues
from capacity-exchange arrangements with WorldCom in 1994, and approximately 4%
and 3% of its revenues from such arrangements with WorldCom in 1995 and 1996,
respectively) and Frontier (including Allnet) accounted for 23%, 21% and 10%,
respectively, of the Company's revenues.
Many of the Company's arrangements with large customers do not provide the
Company with guarantees that customer usage will be maintained at current
levels. In addition, construction by certain of the Company's customers of their
own facilities or further consolidations in the telecommunications industry
involving the Company's customers would lead such customers to reduce or cease
their use of the Company's services which could have a material adverse effect
on the Company and the value of the Common Stock and the Convertible Preferred
Stock.
The Company's strategy for establishing and growing its switched long
distance business is based in large part on its relationship with Excel. The
failure by the Company to fulfill its obligations to provide a reliable switched
network for use by Excel or the failure by Excel: (i) to fulfill its obligations
to utilize the Company's switched long distance services (even though such
failure could give rise in certain circumstances to claims by the Company); (ii)
to utilize the volume of MOUs that the Company expects it to utilize or (iii) to
maintain and expand its business, could result in a material adverse effect on
the Company.
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DEPENDENCE UPON SOLE AND LIMITED SOURCES OF SUPPLY
The Company relies on other companies to supply certain key components of
its network infrastructure, including telecommunications services, network
capacity and switching and networking equipment, which, in the quantities and
quality demanded by the Company, are available only from sole or limited
sources. The Company is also dependent upon LECs to provide telecommunications
services and facilities to the Company and its customers. The Company has from
time to time experienced delays in receiving telecommunications services and
facilities, and there can be no assurance that the Company will be able to
obtain such services or facilities on the scale and within the time frames
required by the Company at an affordable cost, or at all. Any such difficulty in
obtaining such services or additional capacity on a timely basis at an
affordable cost, or at all, would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
also is dependent on its suppliers' ability to provide products and components
that comply with various Internet and telecommunications standards, interoperate
with products and components from other vendors and fulfill their intended
function as a part of the network infrastructure. Any failure of the Company's
suppliers to provide such products could have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION
The telecommunications industry is highly competitive. Many of the
Company's competitors and potential competitors have substantially greater
financial, personnel, technical, marketing and other resources than those of the
Company and a far more extensive transmission network than the Company. Such
competitors may build additional fiber capacity in the geographic areas to be
served by the Network expansion. Qwest has announced that it is building a new
nationwide long distance fiber optic network and Frontier has announced that it
will pay $500 million to obtain fibers in Qwest's network. In addition, many
telecommunications companies are acquiring switches and users of switches will
have an increasing number of alternative providers of switched long distance
services. The Company competes primarily on the basis of pricing, availability,
transmission quality, customer service (including the capability of making rapid
additions to add end users and access to end-user traffic records) and variety
of services. The ability of the Company to compete effectively will depend on
its ability to maintain high-quality services at prices generally equal to or
below those charged by its competitors.
An alternative method of transmitting telecommunications traffic is through
satellite transmission. Satellite transmission is superior to fiber optic
transmission for distribution communications, for example, video broadcasting.
Although satellite transmission is not preferred to fiber optic transmission for
voice traffic in most parts of the United States because it exhibits a slight
(approximately one-quarter-second) time delay, such delay is not important for
many data-oriented uses. In the event the market for data transmission grows,
the Company will compete with satellite carriers in such market. Also, at least
one satellite company, Orion Network Systems, Inc., has announced its intention
to provide Internet access services to businesses through satellite technology.
The Company competes with large and small facilities-based interexchange
carriers as well as with other coast-to-coast and regional fiber optic network
providers. There are currently four principal facilities-based long distance
fiber optic networks (AT&T, MCI, Sprint and WorldCom). The Company is aware that
others are planning additional networks that, if constructed, could employ
similar advanced technology as the Company's Network. Upon completion of the
Company's Network, each of Qwest, Frontier and GTE will have a fiber network
similar in geographic scope and potential operating capability to that of the
Company. The Company also sells switched services to both facilities-based
carriers and nonfacilities-based carriers (switchless resellers), competing with
facilities-based carriers such as AT&T, MCI, Sprint, WorldCom and certain
regional carriers. The Company competes in its markets on the basis of price,
transmission quality, network reliability and customer service and support. The
ability of the Company to compete effectively in its markets will depend upon
its ability to maintain high quality services at prices equal to or below those
charged by its competitors many of whom have extensive experience in the long
distance market. In addition, the Telecom Act of 1996 (as defined) will allow
the RBOCs and others to enter the long distance market. There can be no
assurance that the Company will be able to compete successfully with existing
competitors or new
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entrants in its markets. Failure by the Company to do so would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "-- Risks Related to Technological Change."
On February 15, 1997, the United States Trade Representative designate
announced that an agreement had been reached with World Trade Organization
("WTO") countries to open world telecommunications markets to competition. The
agreement, known as the WTO Basic Telecommunications Services Agreement ("WTO
Agreement"), is scheduled to become effective on January 1, 1998. The WTO
Agreement will provide U.S. companies with foreign market access for local, long
distance, and international services, either on a facilities basis or through
resale of existing network capacity. The WTO Agreement also provides that U.S.
companies can acquire, establish or hold a significant stake in
telecommunications companies around the world. Conversely, foreign companies
will be permitted to enter domestic U.S. telecommunications markets and acquire
ownership interest in U.S. companies. On June 4, 1997, the FCC initiated a
rulemaking proceeding to bring FCC policies and procedures into conformance with
the WTO Agreement. Therefore, foreign telecommunications companies could also be
significant new competitors to the Company or the Company's customers.
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a small number of key executive
officers, the loss of whom could have a material adverse effect on the Company.
The Company believes that its growth and future success will depend in large
part on its continued ability to attract and retain highly skilled and qualified
personnel. The loss of one or more members of senior management or the failure
to recruit additional qualified personnel in the future could significantly
impede attainment of the Company's financial, expansion, marketing and other
objectives.
DEVELOPMENT RISKS OF THE FRAME RELAY AND ATM TRANSMISSION BUSINESS
The Company began offering Frame Relay, ATM and other data transmission
services during the first quarter of 1997. Although the Company has not yet made
a material investment for, or generated material revenues from, this business,
the Company believes that data transmission services present a promising
opportunity for the Company. To succeed in providing these services, the Company
must compete with AT&T, MCI, Sprint, WorldCom and other large competitors. In
addition, the Company expects that it will be necessary to continue to make
upgrades to its Network (in advance of related revenues) to be competitive in
providing these services. The provision of data transmission services involves
technical issues with which the Company has very limited experience. In
addition, the provision of these services must be successfully integrated with
the Company's existing businesses. To the extent the Company does not
successfully compete in providing these services, it will not realize a return
on its investment in data switches and other equipment and it will not benefit
from the growth, if any, in demand for these services. A failure to successfully
compete in data transmission services could have a material adverse effect on
the Company and the value of the Common Stock and the Convertible Preferred
Stock.
RECENT LEGISLATION AND REGULATORY UNCERTAINTY
Certain of the Company's operations are subject to regulation by the FCC
under the Communications Act of 1934, as amended (the "Communications Act"). In
addition, certain of the Company's businesses are subject to regulation by state
public utility or public service commissions. Changes in the regulation of, or
the enactment or changes in interpretation of legislation affecting, the
Company's operations could have a material adverse affect on the Company and the
Common Stock and the Convertible Preferred Stock. In 1996 the federal government
enacted the Telecommunications Act of 1996 (the "Telecom Act of 1996"), which,
among other things, allows the RBOCs and others to enter the long distance
business. Entry of the RBOCs or other entities such as electric utilities and
cable television companies into the long distance business may have a negative
impact on the Company or its customers. The Company anticipates that certain of
such entrants will be strong competitors because, among other reasons, they may
enjoy one or more of the following advantages: they may (i) be well capitalized;
(ii) already have substantial end-user customer bases; and/or (iii) enjoy cost
advantages relating to local loops and access charges. The introduction of
additional strong
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competitors into the switched long distance business would mean that the Company
and its customers would face substantially increased competition. This could
have a material adverse effect on the Company and the value of the Common Stock
and the Convertible Preferred Stock. On July 18, 1997, in Iowa Utilities Board
v. FCC, the United States Court of Appeals for the Eighth Circuit invalidated
key portions of the FCC's August 29, 1996 interconnection order, which the FCC
had adopted to facilitate the emergence of local exchange competition. Although
the FCC has announced that it will seek Supreme Court review of the Eighth
Circuit's ruling, the further emergence and development of local exchange
competition may likely be delayed as a result. Consequently, the Company and its
customers may not benefit as quickly from the lower access costs that might
otherwise have resulted had competition in the provision of local access
services not been thus delayed. Further, the FCC has issued orders relating to
universal service funding by interstate telecommunications carriers, and to the
access charges the Company and its customers are required to pay to LECs. These
orders have been appealed. The outcomes of the appeals, and the outcomes of
future FCC proceedings on these issues, are impossible to predict. In addition,
the Telecom Act of 1996 provides that state proceedings may in certain instances
determine access charges the Company and its customers are required to pay to
the LECs. There can be no assurance that such proceedings will not result in
increases in such rates. Such increases could have a material adverse effect on
the Company or its customers.
POTENTIAL LIABILITY OF INTERNET ACCESS PROVIDERS
The law governing the liability of on-line services providers and Internet
access providers for participating in the hosting or transmission of
objectionable materials or information currently is unsettled. Under the terms
of the Telecom Act of 1996, both civil and criminal penalties can be imposed for
the use of interactive computer services for the transmission of certain
indecent or obscene communications. However, this provision was recently found
to be unconstitutional by the United States Supreme Court in American Civil
Liberties Union v. Janet Reno. Nonetheless, many states have adopted or are
considering adopting similar requirements, and the constitutionality of such
state requirements remains unsettled at this time. In addition, several private
lawsuits have been filed seeking to hold Internet access providers accountable
for information which they transmit. In one such case, the court ruled that an
Internet access provider is not directly liable for copies that are made and
stored on its computer but may be held liable as a contributing infringer where,
with knowledge of the infringing activity, the Internet access provider induces,
causes or materially contributes to another person's infringing conduct. While
the outcome of these activities is uncertain, the ultimate imposition of
potential liability on Internet access providers for information which they
host, distribute or transport could materially change the way they must conduct
business. To avoid undue exposure to such liability, Internet access providers
could be compelled to engage in burdensome investigation of subscriber materials
or even discontinue offering the service altogether.
RISKS RELATED TO TECHNOLOGICAL CHANGE
The market for the Company's telecommunications services is characterized
by rapidly changing technology, evolving industry standards, emerging
competition and frequent new product and service introductions. There can be no
assurance that the Company will successfully identify new service opportunities
and develop and bring new services to market. The Company is also at risk from
fundamental changes in the way telecommunications services are marketed and
delivered. The Company's data communications service strategy assumes that
technology such as Frame Relay and ATM protocols, utilizing fiber optic or
copper-based telecommunications infrastructures, will continue to be the primary
protocols and transport infrastructure for data communications services. Future
technological changes, including changes related to the emerging wireline and
wireless transmission and switching technologies, could have a material adverse
effect on the Company's business, results of operations, and financial
condition. The Company's pursuit of necessary technological advances may require
substantial time and expense, and there can be no assurance that the Company
will succeed in adapting its telecommunications services business to alternate
access devices, conduits and protocols.
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In addition, recent technological advances that show the potential to
greatly expand the capacity of existing and new fiber optic cable, which could
greatly increase supply, could have a material adverse effect on the Company.
CONCENTRATION OF STOCK OWNERSHIP
GEPT beneficially owns approximately 26.9% of the outstanding Common Stock
of the Company, Grumman Hill Investments, L.P. ("GHI") and Richard D. Irwin
together beneficially own approximately 22.6% of the outstanding Common Stock,
and three of the members of senior management and their affiliates beneficially
own approximately 18.4% of the outstanding Common Stock. Such stockholders also
control a majority of the Series 3 Preferred Stock and GEPT owns 30.0% of the
Convertible Preferred Stock. As a result, certain of these stockholders, if they
act together, generally would be able to elect a majority of directors elected
by the holders of the Common Stock (and the director elected by the holders of
the Series 3 Preferred Stock) and exercise control over the business, policies
and affairs of the Company, and would have the power to approve or disapprove
most actions requiring stockholder approval, including amendments to the
Company's charter and by-laws, certain mergers or similar transactions and sales
of all or substantially all of the Company's assets (subject to approval of the
holders of Convertible Preferred Stock to the extent required by applicable
law). This concentration of stock ownership could have the effect of delaying or
preventing a change of control of the Company or the removal of existing
management and may discourage attempts to do so.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock has fluctuated over a broad range
since the completion of the Company's initial public offering in July 1996. The
trading price of the Common Stock is subject to wide fluctuations in response to
numerous factors, including, but not limited to, quarterly variations in
operating results of the Company or any of its principal customers, competition,
announcements of technological innovations or new products or pricing by the
Company or its competitors, product enhancements by the Company or its
competitors, regulatory changes, any difference between actual results and
results expected by investors and analysts, changes in financial estimates by
securities analysts and other events or factors. In addition, the stock market
has experienced volatility that has affected the market prices of equity
securities of many companies and that often has been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of the Convertible Preferred Stock and the Common Stock.
ABSENCE OF PUBLIC MARKET FOR THE CONVERTIBLE PREFERRED STOCK ON RESALE
Prior to the resale of the Convertible Preferred Stock pursuant to this
Prospectus, the Convertible Preferred Stock was eligible for trading in the
PORTAL Market. Convertible Preferred Stock sold pursuant to this Prospectus will
no longer be eligible for trading in the PORTAL Market. Furthermore, the Company
does not currently intend to list the Convertible Preferred Stock resold
pursuant to this Prospectus on any securities exchange or seek approval for
quotation through any automated quotation system. Accordingly, there can be no
assurance as to the development or liquidity of any market for the Convertible
Preferred Stock resold pursuant to this Prospectus.
Although the Initial Purchasers have advised the Company that they intend
to make a market in the Convertible Preferred Stock, they are not obligated to
do so and may suspend any such market-making activities at any time without
prior notice. In addition, such market-making activity will be subject to the
limits imposed by the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Accordingly, there can be no assurance that any
market for the Convertible Preferred Stock will develop or, if one does develop,
that it will be maintained. If an active market for the Convertible Preferred
Stock fails to be sustained, the trading price of such Convertible Preferred
Stock could be materially adversely affected.
15
<PAGE> 17
SHARES ELIGIBLE FOR FUTURE SALE
As of July 1, 1997, approximately 21 million shares of the Common Stock
beneficially owned by the Company's officers and directors and GEPT are
"restricted securities" and may in the future be sold in compliance with Rule
144 adopted under the Securities Act. In addition, at the end of 1999, the
Company will be required to pay the Telecom One Selling Holders additional
shares of Common Stock, depending on the future revenues of Telecom One and the
balance sheet of Telecom One at the end of 1999. Although the Company cannot
presently determine the number of shares to be paid to the Telecom One Selling
Holders, the Company believes it is unlikely to exceed 200,000 shares. In
addition, the Telecom One Selling Holders have been granted registration rights
with respect to the shares of Common Stock to be issued by the Company in 1999
for such acquisition. See "Description of Capital Stock -- Registration Rights."
All of the shares of Common Stock issued to Telecom One shareholders will also
be "restricted securities" and may be sold in compliance with Rule 144. Rule 144
generally provides that beneficial owners of Common Stock who have held such
Common Stock for one year may sell within a three-month period a number of
shares not exceeding the greater of 1% of the total outstanding shares or the
average weekly trading volume of the shares during the four calendar weeks
preceding such sale. All, or substantially all, of the approximately 21 million
shares of restricted Common Stock held by the Company's officers and directors
and GEPT, including the 840,053 shares of Common Stock issued to GEPT in a
private placement which occurred simultaneously with the closing of the initial
public offering of the Company's Common Stock (the "IPO") on July 9, 1996 (the
"GEPT Private Placement"), has met the one-year holding period requirement under
Rule 144, and can be sold subject to the conditions of Rule 144. As of July 1,
1997, the Convertible Preferred Stock was convertible into approximately 4.3
million shares of Common Stock at the option of the holders at any time after 60
days from the Original Offering Date. Future sales of Common Stock or the
perception that such sales may occur could negatively impact the market price of
the Common Stock. In connection with the GEPT Private Placement, GEPT and
certain other stockholders were granted registration rights with respect to all
the shares of Common Stock owned by them (a total of approximately 19.5 million
shares), which demand registration rights became exercisable on May 15, 1997.
The Company has registered 1,212,450 shares, 2,121,787 shares and 67,900 shares
of Common Stock for issuance to its employees, directors, consultants and
advisors under the Company's 1994 Stock Plan, 1996 Stock Plan and Special Stock
Plan, respectively. As of June 30, 1997, options to purchase an aggregate of
2,059,426 shares of Common Stock were outstanding under the 1994 Stock Plan, the
1996 Stock Plan and the Special Stock Plan.
16
<PAGE> 18
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Securities. The Securities are being sold by the Selling Holders. All of the
expenses incurred in connection with the registration of the Securities offered
hereby will be paid by the Company, except for selling commissions and
underwriting discounts.
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The Company's ratio of earnings to combined fixed charges and preferred
stock dividends for each of the periods indicated is as follows:
<TABLE>
<CAPTION>
THE COMPANY'S
PREDECESSOR -- HISTORICAL
- ----------------------------
PERIOD FROM PERIOD FROM FOR THE
JANUARY 1 AUGUST 14 SIX MONTHS
THROUGH THROUGH FOR THE YEAR ENDED DECEMBER 31, ENDED
AUGUST 14, DECEMBER 31, ------------------------------------------- JUNE 30,
1992 1992 1993 1994 1995 1996 1997+
- ------------ ------------ -------- ---- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
$(24,484) $ (7,642) $(55,735) 1.4x $(12,348) $(47,355) $(54,584)
</TABLE>
- ---------------
+ As adjusted for the sale of the Convertible Preferred Stock and the
Exchangeable Preferred Sale as if they had occurred on or before January 1,
1997, and assuming dividends are paid in cash at 7 1/4% on the Convertible
Preferred Stock and at 12 1/2% on the Exchangeable Preferred Stock, the
Company's earnings would have been insufficient to cover combined fixed
charges and preferred stock dividends by $75.6 million for the six months
ended June 30, 1997.
For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, earnings represent income before the provision
(benefit) for income taxes, plus fixed charges. Fixed charges consist of
interest expense, amortization of financing costs and the portion of rental
expense on operating leases which the Company estimates to be representative of
the interest factor attributable to the leases. Preferred stock dividends
consist of dividends on the Series 3 Preferred Stock, and dividends on the
Convertible Preferred Stock. Where earnings are inadequate to cover fixed
charges and preferred stock dividend requirements, the deficiency is shown.
17
<PAGE> 19
SELLING HOLDERS
CONVERTIBLE PREFERRED SELLING HOLDERS
The Convertible Preferred Stock was originally issued by the Company and
sold (the "Original Offering") to Credit Suisse First Boston Corporation and
Dillon, Reed & Co., Inc. (the "Initial Purchasers") on April 1, 1997 at a
purchase price of $100 per share, and was thereafter sold by the Initial
Purchasers from time to time in a transaction exempt from the registration
requirements of the Securities Act, to persons reasonably believed by such
Initial Purchasers to be "qualified institutional buyers" (as defined in Rule
144A under the Securities Act), to certain "accredited investors" (as defined in
Rule 501(a)(1), (2), (3), (4), (5), (6) or (7) under the Securities Act) or
outside the United States to non-U.S. persons in offshore transactions in
reliance on Regulation S under the Securities Act.
The Registration Statement of which the Prospectus is a part has been filed
pursuant to Rule 415 under the Securities Act to afford the holders (the
"Convertible Preferred Selling Holders") of the Convertible Preferred Stock
(including shares of Common Stock issuable upon conversion of the Convertible
Preferred Stock) the opportunity to sell their Securities in public transactions
rather than pursuant to an exemption from the registration and prospectus
delivery requirements of the Securities Act. In order to avail itself of that
opportunity, a Convertible Preferred Selling Holder must notify the Company of
its intention to sell Securities and provide such other information concerning
the Convertible Preferred Selling Holder and the Securities to be sold as may
then be required by the Securities Act and the rules and regulations thereunder,
as applicable. No offer or sale pursuant to this Prospectus may be made by any
Convertible Preferred Selling Holder until such a request has been made and
until any supplement for the Prospectus has been filed or an amendment to the
Registration Statement of which this Prospectus is a part has become effective.
Additional Convertible Preferred Selling Holders will be added to the Prospectus
upon such Convertible Preferred Selling Holder's request and provision of the
requested information to the Company. The Company will from time to time
supplement or amend the Prospectus to the Registration Statement, as applicable,
to add additional Convertible Preferred Selling Holders and to reflect the
required information concerning any Convertible Preferred Selling Holders. The
Convertible Preferred Selling Holders may from time to time offer and sell
pursuant to this Prospectus any or all of the Convertible Preferred Stock and
any Common Stock issued upon conversion of the Convertible Preferred Stock.
The following table sets forth information with respect to certain
Convertible Preferred Selling Holders which beneficially hold an aggregate of
132,829 shares of Convertible Preferred Stock and which have requested to be
included in this Prospectus as of the date of this Prospectus. An additional
885,294 shares of Convertible Preferred Stock are outstanding as of the date of
this Prospectus and are held by other holders, none of which have made any
request to the Company to be included in this Prospectus as of the date of this
Prospectus. The Convertible Preferred Selling Holders may, from time to time,
also receive additional shares of Convertible Preferred Stock in the event
payment of dividends on the Convertible Preferred Stock is made with additional
shares of Convertible Preferred Stock which may also be offered and sold
pursuant to this
18
<PAGE> 20
Prospectus. Such information set forth in the following table has been obtained
from the respective Convertible Preferred Selling Holders identified in such
table.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF CONVERTIBLE
CONVERTIBLE PREFERRED SELLING HOLDERS PREFERRED STOCK
------------------------------------------------------------- ----------------
<S> <C>
OCM Convertible Trust........................................ 27,858
OCM Convertible Limited Partnership.......................... 2,036
Delta Air Lines Master Trust................................. 18,510
State Employees' Retirement Fund of the State of Delaware.... 7,361
State of Connecticut Combined Investment Funds............... 25,615
Vanguard Convertible Securities Fund, Inc.................... 16,772
Hughes Aircraft Company Master Retirement Trust.............. 9,205
Security Insurance Company of Hartford....................... 10,181
Value Line Convertible Fund, Inc. ........................... 10,181
MFS Convertible Securities Fund.............................. 20
MFS Total Return Fund........................................ 5,090
-------
Total.............................................. 132,829
=======
</TABLE>
Because the Convertible Preferred Selling Holders may, pursuant to this
Prospectus, offer all or some portion of the Convertible Preferred Stock or the
Common Stock issuable upon conversion of the Convertible Preferred Stock, no
estimate can be given as to the amount of the Convertible Preferred Stock or the
Common Stock issuable upon conversion of the Convertible Preferred Stock that
will be held by the Convertible Preferred Selling Holders upon termination of
any such sales. In addition, the Convertible Preferred Selling Holders
identified above may have (i) sold, transferred or otherwise disposed of all or
a portion of their Convertible Preferred Stock since the date on which they
provided the information regarding their Convertible Preferred Stock, in
transactions exempt from the registration requirements of the Securities Act, or
(ii) received additional shares of Convertible Preferred Stock payable as
dividends in kind on the Convertible Preferred Stock held by such Convertible
Preferred Selling Holder and may own more shares of Convertible Preferred Stock
than is indicated in the table above.
TELECOM ONE SELLING HOLDERS
The Telecom One Common Stock was issued and sold to William G. Rodi, Gordon
Hutchins, Jr. and William F. Linsmeier (collectively, the "Telecom One Selling
Holders") by the Company on July 10, 1997 in connection with the acquisition by
the Company of all of the outstanding capital stock of Telecom One from the
Telecom One Selling Holders (the "Telecom One Acquisition"). Following the
Telecom One Acquisition, Telecom One became a wholly owned indirect subsidiary
of the Company. For the past three years, Mr. Rodi served as an officer and one
of two directors of Telecom One. Following the Telecom One Acquisition, Mr. Rodi
continued to serve as Telecom One's President and Chief Executive Officer until
his death in August 1997. Mr. Hutchins served as an officer and one of two
directors of Telecom One since 1993. Prior to the Telecom One Acquisition Mr.
Hutchins provided certain consulting services to the Company from time to time.
Concurrently, with the Telecom One Acquisition, Mr. Hutchins signed a consulting
agreement with Telecom One for a term of three years. Mr. Linsmeier has served
as an employee of Telecom One. Concurrently with the Telecom One Acquisition,
Mr. Linsmeier signed an employment agreement with Telecom One for a term of
three years, under which he serves as its Vice President of Sales and Marketing.
All of the shares of Telecom One Common Stock offered hereby are offered by
the Telecom One Selling Holders. The following table sets forth, with respect to
the Telecom One Selling Holders, the number of shares of Common Stock owned by
each Telecom One Selling Holder prior to this offering, the number of shares of
Common Stock offered for each Telecom One Selling Holder's account and the
number of shares held by each Telecom One Selling Holder after the anticipated
completion of this offering (assuming all shares offered hereby are sold). In
addition, at the end of 1999, the Company will be required to pay the Telecom
One Selling Holders additional shares of Common Stock, depending on the future
revenues of
19
<PAGE> 21
Telecom One and the balance sheet of Telecom One at the end of 1999. Although
the Company cannot presently determine the number of shares of Common Stock to
be paid to the Telecom One Selling Holders, the Company believes it is unlikely
to exceed 200,000 shares. In addition, the Telecom One Selling Holders have been
granted registration rights with respect to the shares of Common Stock to be
issued by the Company in 1999 for such acquisition. See "Description of Capital
Stock -- Registration Rights."
<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON STOCK SHARES OF COMMON
OWNED PRIOR COMMON STOCK OWNED
TO STOCK OFFERED AFTER
THIS IN THIS COMPLETION OF
NAME OF TELECOM ONE SELLING HOLDERS OFFERING OFFERING THIS OFFERING
---------------------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
The Estate of William G. Rodi........... 45,085 45,085 0
Gordon Hutchins, Jr..................... 45,085 45,085 0
William F. Linsmeier.................... 7,311 7,311 0
-
------ ------
Totals........................ 97,481 97,481 0
====== ====== =
</TABLE>
PLAN OF DISTRIBUTION
The Securities may be sold from time to time to purchasers directly by the
Selling Holders (or such Selling Holders' donees or pledgees). Alternatively,
the Selling Holders may from time to time offer the Securities to or through
underwriters, brokers, dealers or agents, who may receive compensation in the
form of underwriting discounts, concessions or commissions from the Selling
Holders or the purchasers of such securities for whom they may act as agents.
The Selling Holders and any underwriters, broker, dealers or agents that
participate in the distribution of Securities may be deemed to be "underwriters"
within the meaning of the Securities Act and any profit on the sale of such
securities and any discounts, commissions, concessions or other compensation
received by any such underwriter, broker, dealer or agent may be deemed to be
underwriting discounts and commissions under the Securities Act.
The Securities may be sold from time to time in one or more transactions at
fixed prices, at prevailing market prices at the time of sale, at varying prices
determined at the time of sale or at negotiated prices. The sale of the
Securities may be effected in transactions (which may involve crosses or block
transactions) (i) on any national securities exchange or quotation service on
which the Securities may be listed or quoted at the time of sale, (ii) in the
over-the-counter market, (iii) in transactions otherwise than on such exchanges
or in the over-the-counter market or (iv) through the writing of options. At the
time a particular offering of the Securities is made, a Prospectus Supplement,
if required, will be distributed which will set forth the aggregate amount and
type of Securities being offered and the terms of the offering, including the
name of any underwriters, brokers, dealers or agents, any discounts, commissions
and other terms constituting compensation from the Selling Holders and any
discounts, commissions or concessions allowed or reallowed or paid to broker or
dealers. The Company will receive no proceeds from this offering.
To comply with the securities laws of certain jurisdictions, if applicable,
the Securities may be offered or sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain jurisdictions
the Securities may not be offered or sold unless they have been registered or
qualified for sale in such jurisdictions or any exemption from registration or
qualification is available and is complied with.
The Selling Holders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of any of the Securities by the Selling
Holders. The foregoing may affect the marketability of such Securities.
Pursuant to the applicable registration rights agreement, all expenses of
the registration of the Securities will be paid by the Company, including,
without limitation, Commission filing fees and expenses of compliance with state
securities or "blue sky" laws. However, the Selling Holders will pay all
underwriting discounts and selling commissions, if any.
20
<PAGE> 22
The securities may be sold, to the extent permitted, from time to time, in
transactions effected in accordance with the provisions of Rule 144 of the
Securities Act.
The Selling Holders will be indemnified by the Company against certain
civil liabilities, including certain liabilities under the Securities Act, or
will be entitled to contribution in connection therewith. The Company will be
indemnified by the Selling Holders severally against certain civil liabilities,
including certain liabilities under the Securities Act, or will be entitled to
contribution in connection therewith.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, par value $0.01 per share, and 3,000,000 shares of Preferred
Stock, par value $.01 per share (the "Preferred Stock"). The following summary
of certain provisions of the Common Stock and the Preferred Stock of the Company
does not purport to be complete and is subject to, and qualified in its entirety
by, the Restated Certificate, the Certificate of Designations and Bylaws of the
Company, as amended, and the provisions of applicable law. See "Description of
Convertible Preferred Stock."
COMMON STOCK
As of August 20, 1997, there were 30,898,841 outstanding shares of Common
Stock held by 86 holders of record. Each holder of Common Stock or Series 3
Preferred Stock (described below) is entitled to one vote per share on all
matters to be voted on by the stockholders, voting together as a single class.
Subject to the rights of the holders of the Preferred Stock, each holder of
Common Stock is entitled to receive ratably such dividends as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. In the event of the liquidation, dissolution or winding up of the
Company, the holders of the Common Stock are entitled to share ratably in all
assets, if any, remaining, after payment of liabilities, subject to the prior
liquidation rights of holders of the Preferred Stock described below. The Common
Stock has no preemptive or other similar rights, and there are no redemption or
sinking fund provisions applicable to the Common Stock. All of the outstanding
shares of Common Stock are, and the shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock will be, when issued and
delivered, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company has designated 1,400,000 shares of Preferred Stock as
Convertible Preferred Stock, 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 August 20,
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 August 20, 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 the Company at a purchase price of $1.00 per
share. See "Description of Convertible Preferred Stock."
The holders of Series 3 Preferred Stock, subject to the terms of the
Restated Certificate, are entitled to receive a liquidation preference of $1,000
per share, plus an amount equal to all accrued and unpaid dividends and the
Company may voluntarily redeem the Series 3 Preferred Stock for $1,000 per
share, plus an amount equal to all accrued and unpaid dividends. In addition,
the holders of Series 3 Preferred Stock are entitled to receive annual
dividends, subject to the limitations of the Restated Certificate and in the
Indenture, in an amount equal to $100 per share, plus an amount determined by
applying a 10% annual rate compounded annually, to any accrued but unpaid
dividend amount from the last day of the period when such dividend accrues to
the actual date of payment. Cumulative dividends, including accrued but unpaid
interest, with respect to the Series 3 Preferred Stock, as of June 30, 1997,
were approximately $7.5 million. Although dividends on the Convertible Preferred
Stock may be made, at the option of the Company, in cash or with
21
<PAGE> 23
additional shares of Convertible Preferred Stock, the Series 3 Preferred Stock
requires that all accrued and unpaid dividends thereon (approximately $7.5
million at June 30, 1997) be paid in cash before the Company can pay any cash
dividends in respect of the Convertible Preferred Stock. The holders of the
Series 3 Preferred Stock, voting as a separate class, have the right to elect
one member of the Board of Directors.
The Exchangeable Preferred Stock will be, under certain terms and
conditions, exchangeable into the Exchange Debentures as set forth in the
Company's Certificate of Designation relating to 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.
The Exchangeable Preferred Stock is nonvoting except (i) as otherwise
required by law and (ii) that holders of the Exchangeable Preferred Stock,
voting together as a class with the holders of any other series of preferred
stock with similar exercisable voting rights (including the Convertible
Preferred Stock), (a) upon the failure of the Company (1) to pay dividends for
six or more dividend periods, (2) to satisfy any mandatory redemption obligation
with respect to the Exchangeable Preferred Stock, (3) to comply with the
covenants set forth in the Certificate of Designation with respect to the
Exchangeable Preferred Stock or (4) to comply with certain covenants or make
certain payments on certain indebtedness, will be entitled to elect two members
to the Board of Directors of the Company; and (b) have the right, subject to
certain exceptions, to approve each issuance by the Company of preferred stock
that ranks senior to the Exchangeable Preferred Stock with such approval
requiring consent of holders of two-thirds of the shares of Exchangeable
Preferred Stock. The Exchangeable Preferred Stock ranks on a parity with the
Convertible Preferred Stock and junior to the Series 3 Preferred Stock with
respect to payment of dividends and amounts upon liquidation, dissolution and
winding up. On any scheduled dividend payment date, the Company may, at its
option, exchange all but not less than all of the shares of Exchangeable
Preferred Stock then outstanding for the Exchange Debentures.
The Board of Directors of the Company has the authority to issue the
Preferred Stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, terms of redemption, redemption prices, liquidation
preferences, voting rights and the number of shares consisting of any series or
the designation of such series without further vote or action by the
stockholders. The issuance of Preferred Stock (or the ability of the Board of
Directors to issue Preferred Stock) may have the effect of delaying, deferring
or preventing a change in control of the Company without further action by the
stockholders and may adversely affect the voting and other rights of the holders
of Common Stock. The issuance of Preferred Stock with voting or conversion
rights may adversely affect the voting power of the holders of Common Stock. The
Company has no present intention to issue additional shares of Preferred Stock
(other than shares in lieu of cash in respect of dividends on the Convertible
Preferred Stock).
REGISTRATION RIGHTS
In June 1996, The Company granted certain registration rights to GEPT, GHI
and Richard D. Irwin, Ralph J. Swett, John J. Willingham, Carl W. McKinzie and
Phillip L. Williams, in consideration of the GEPT Private Placement and the
lock-up arrangements each of the parties entered into in connection with the
IPO. Such registration rights cover all the shares of Common Stock of the
Company held by such persons (a total of approximately 19.5 million shares)
which demand registration rights became exercisable on May 15, 1997. Subject to
certain exceptions, whenever the Company registers any of its Common Stock under
the Securities Act during the period the agreement is effective, whether or not
for sale for its own account, the holders of such registration rights are
entitled to written notice of the registration and are entitled to include
22
<PAGE> 24
(at the Company's expense) such Common Stock in such registration. GEPT also has
the right, subject to certain limitations, to require the Company to use its
best efforts to file registration statements under the Securities Act covering
Common Stock held by GEPT. All fees, costs and expenses of such registrations
(other than underwriting discounts and commissions) will be borne by the
Company.
In connection with the Telecom One Acquisition (as defined below), the
Company entered into a registration rights agreement with the Telecom One
Selling Holders (the "Telecom One Registration Rights Agreement"), pursuant to
which the Company would, at its cost, (a) on or before 30 days following July
10, 1997 (the "Initial Filing Date"), file a shelf registration statement, (b)
use commercially reasonable efforts to cause the shelf registration statement to
be declared effective under the Securities Act on or about 45 days following the
Initial Filing Date, and (c) keep the shelf registration statement effective for
the lesser of (i) a period of two years from the date on which the Shelf
Registration becomes effective under the Securities Act, (ii) a period ending on
the date upon which all Common Stock covered by the shelf registration statement
has been sold, and (iii) until such time as the Telecom One Common Stock is
eligible to be sold under Rule 144 under the Securities Act. The Registration
Statement to which this Prospectus forms a part has been filed by the Company
pursuant, in part, to its obligations under the Telecom One Registration Rights
Agreement. A copy of the Telecom One Registration Right Agreement is available
upon request to the Company. In addition, the Telecom One Selling Holders have
been granted registration rights with respect to the shares of Common Stock to
be issued by the Company in 1999 for such acquisition. Although the Company
cannot presently determine the number of shares to be paid to the Telecom One
Selling Holders in 1999, the Company believes it is unlikely to exceed 200,000
shares of Common Stock.
The Company has agreed to file a registration statement (the "Exchange
Offer Registration Statement") with respect to an offer (the "Exchange Offer")
to exchange (x) the Exchangeable Preferred Stock for a new issue of preferred
stock of the Company registered under the Securities Act, with terms
substantially identical to those of the Exchangeable Preferred Stock or (y) if
the Exchangeable Preferred Stock has previously been converted into Exchange
Debentures, the Exchange Debentures for a new issue of debentures of the Company
registered under the Securities Act, with terms substantially identical to those
of the Exchange Debentures, by October 6, 1997 and (ii) to use its best efforts
to cause the Exchange Offer Registration Statement to become effective under the
Securities Act by January 19, 1998. In certain instances, the Company will be
obligated to file a shelf registration statement with respect to the resale of
the Exchangeable Preferred Stock or Exchange Debentures, as the case may be, and
to keep such shelf registration statement effective until all the Exchangeable
Preferred Stock or Exchange Debentures, as the case may be, has been sold
thereunder or the date on which all the Exchangeable Preferred Stock or Exchange
Debentures, as the case may be, held by persons that are not affiliates of the
Company may be resold without registration pursuant to Rule 144(k) under the
Securities Act. The dividend rate on the Exchangeable Preferred Stock or the
interest rate on the Exchange Debentures, as the case may be, is subject to
increase under certain circumstances if the Company is not in compliance with
its obligations under the registration rights agreement in connection with the
Exchangeable Preferred Stock.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CHARTER, THE BYLAWS AND THE
INDENTURE
The Bylaws of the Company provide that stockholders may call a special
meeting of stockholders only upon a request of stockholders owning at least 50%
of the Company's outstanding capital stock entitled to vote. In addition, in the
event of a Change in Control (as such term is defined in the Indenture) (i)
holders of the Senior Notes will have the right to require the Company to
purchase their Senior Notes, in whole or in part, at a price equal to 101% of
the aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages (as such term is defined in the Indenture), if any, to the
date of purchase, and (ii) subject to applicable provisions of state law, the
restrictions of the Indenture and the Series 3 Preferred Stock, the Company will
be obligated to repurchase all or any part of the outstanding Convertible
Preferred Stock or to adjust the Conversion Price. These provisions, as well as
the authorized and unissued preferred stock described above, could discourage
potential acquisition proposals and could delay or prevent a change in control
or management of the Company.
23
<PAGE> 25
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to Section 203 of the DGCL which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in certain "business
combinations" with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder,
unless the transaction is approved in a prescribed manner. The business
combinations to which Section 203 applies include a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholders. In
general, Section 203 defines an "interested stockholder" as a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the outstanding voting stock of the corporation.
LISTING
The Common Stock is listed on the NNM under the symbol "IIXC."
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is U. S. Stock
Transfer Corporation.
DESCRIPTION OF CONVERTIBLE PREFERRED STOCK
The following description of the Convertible Preferred Stock does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the Restated Certificate and Bylaws of the Company and the
Certificate of Designation creating the Convertible Preferred Stock. General
terms of information with respect to the Company's preferred stock are set forth
below under "Description of Capital Stock."
GENERAL
The holders of the Convertible Preferred Stock have no preemptive or
preferential right to purchase or subscribe to stock, obligations, warrants,
rights to subscribe to stock or other securities of the Company of any class.
The Convertible Preferred Stock currently trades in the PORTAL Market.
RANKING
The Convertible Preferred Stock ranks senior to the Common Stock and will
rank on a parity to the Exchangeable Preferred Stock with respect to payment of
dividends and amounts upon liquidation, dissolution or winding up. The
Convertible Preferred Stock ranks junior to the Series 3 Preferred Stock with
respect to the payment of dividends and amounts upon liquidation, dissolution or
winding up. If the Company exchanges the Exchangeable Preferred Stock for the
Exchange Debentures, the payment of principal, premium, if any, and interest or
any other amounts owing in respect of the Exchange Debentures will rank senior
to payment of dividends and any other amounts owing in respect of the
Convertible Preferred Stock.
The holders of Series 3 Preferred Stock, subject to the terms of the
Restated Certificate, are entitled to receive a liquidation preference of $1,000
per share, plus an amount equal to all accrued and unpaid dividends, and the
Company may voluntarily redeem the Series 3 Preferred Stock for $1,000 per
share, plus an amount equal to all accrued and unpaid dividends. The holders of
Exchangeable Preferred Stock are entitled to receive a liquidation preference of
$1,000 per share and the Company is required to redeem the Exchangeable
Preferred Stock for $1,000 per share, plus an amount equal to accumulated and
unpaid dividends on August 15, 2009. In addition, the holders of Series 3
Preferred Stock are entitled to receive annual dividends, subject to the
limitations of the Restated Certificate and in the Indenture, in an amount equal
to $100 per share, plus an amount determined by applying a 10% annual rate
compounded annually, to any accrued but unpaid dividend amount from the last day
of the period when such dividend accrues to the actual date of payment.
Cumulative dividends, including accrued but unpaid interest, with respect to the
Series 3 Preferred Stock, as of June 30, 1997, were approximately $7.5 million.
Dividends on the Exchangeable Preferred Stock accrue at a rate of 12 1/2% per
annum of the liquidation preference thereof and will be payable quarterly in
arrears on February 15, May 15, August 15 and November 15 of each year
commencing November 15, 1997.
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<PAGE> 26
Although dividends on the Convertible Preferred Stock may be made, at the option
of the Company, in cash or with additional shares of Convertible Preferred
Stock, the Series 3 Preferred Stock requires that all accrued and unpaid
dividends thereon (approximately $7.5 million at June 30, 1997) be paid in cash
before the Company can pay any cash dividends in respect of the Convertible
Preferred Stock (or the Exchangeable Preferred Stock).
While any shares of Convertible Preferred Stock are outstanding, the
Company may not authorize, create or increase the authorized amount of any class
or series of stock that ranks senior to the Convertible Preferred Stock with
respect to the payment of dividends or amounts upon liquidation, dissolution or
winding up without the consent of the holders of 66 2/3% of the outstanding
shares of Convertible Preferred Stock. However, the Company may create
additional classes of stock, increase the authorized number of shares of
preferred stock or issue series of preferred stock on a parity with the
Convertible Preferred Stock (such as the Exchangeable Preferred Stock) with
respect, in each case, to the payment of dividends and amounts upon liquidation,
dissolution and winding up (a "Parity Stock") without the consent of any holder
of Convertible Preferred Stock. See "-- Voting Rights" below.
DIVIDENDS
Holders of shares of Convertible Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors of the Company out
of funds of the Company legally available for payment, cumulative dividends at
the rate per annum of 7 1/4% per share on the liquidation preference thereof of
$100.00 per share of Convertible Preferred Stock (equivalent to $7.25 per annum
per share). Dividends on the Convertible Preferred Stock will be payable
quarterly on March 31, June 30, September 30 and December 31 of each year,
commencing June 30, 1997, with respect to the period from the issue date to June
30, 1997 (and, in the case of any accrued but unpaid dividends, at such
additional times and for such interim periods, if any, as determined by the
Board of Directors), at such annual rate. Each such dividend will be payable to
holders of record as they appear on the stock records of the Company at the
close of business on each March 15, June 15, September 15 and December 15, as
the case may be, next preceding such quarterly dividend payment date. Any
dividend on the Convertible Preferred Stock payable prior to or on March 31,
1999 shall be, at the option of the Company, payable (i) in cash or (ii) through
the issuance of a number of additional shares (rounded to the nearest whole
share) of Convertible Preferred Stock (the "Additional Shares") equal to the
dividend amount divided by the liquidation preference of such Additional Shares.
In addition, with respect to dividends payable after March 31, 1999, to the
extent, and for so long as, the Company is prohibited by the terms of any of its
indebtedness then outstanding or by the terms of the Series 3 Preferred Stock or
any agreement or instrument to which the Company is then subject, to pay cash
dividends on the Convertible Preferred Stock, such dividends will accrue at the
rate per annum of 8 3/4% and will be payable through the issuance of a number of
Additional Shares equal to the dividend amount divided by the liquidation
preference of such Additional Shares. Dividends will accrue from the date of the
original issuance of the Convertible Preferred Stock. Dividends will be
cumulative from such date, whether or not in any dividend period or periods
there shall be funds of the Company legally available for the payment of such
dividends. Accumulations of dividends on shares of Convertible Preferred Stock
will not bear interest. Dividends payable on the Convertible Preferred Stock for
any period greater or less than a full dividend period will be computed on the
basis of a 360-day year consisting of twelve 30-day months. Dividends payable on
the Convertible Preferred Stock for each full dividend period will be computed
by dividing the annual dividend rate by four.
Except as provided in the next sentence, no dividend will be declared or
paid on any Parity Stock unless full cumulative dividends have been paid on the
Convertible Preferred Stock for all prior dividend periods. If accrued dividends
on the Convertible Preferred Stock for all prior dividend periods have not been
paid in full then any dividend declared on the Convertible Preferred Stock for
any dividend period and on any Parity Stock will be declared ratably in
proportion to accrued and unpaid dividends on the Convertible Preferred Stock
and such Parity Stock.
The Company will not (i) declare, pay or set apart funds for the payment of
any dividend or other distribution with respect to any Junior Stock (as defined
below) or (ii) redeem, purchase or otherwise acquire for consideration any
Junior Stock through a sinking fund or otherwise, unless (A) all accrued and
unpaid
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<PAGE> 27
dividends with respect to the Convertible Preferred Stock and any Parity Stock
at the time such dividends are payable have been paid or funds have been set
apart for payment of such dividends and (B) sufficient funds have been paid or
set apart for the payment of the dividend for the current dividend period with
respect to the Convertible Preferred Stock and any Parity Stock.
As used herein, (i) the term "dividend" does not include dividends payable
solely in shares of Junior Stock on Junior Stock, or in options, warrants or
rights to holders of Junior Stock to subscribe for or purchase any Junior Stock,
(ii) the term "Junior Stock" means the Common Stock and any other class of
capital stock of the Company now or hereafter issued and outstanding that ranks
junior as to the payment of dividends or amounts upon liquidation, dissolution
and winding up to the Convertible Preferred Stock.
OPTIONAL REDEMPTION
Shares of Convertible Preferred Stock will not be redeemable prior to April
3, 2000. On and after April 3, 2000, the shares of Convertible Preferred Stock
will be redeemable at the option of the Company, in whole or in part, on not
less than 15 nor more than 60 days' notice. Notwithstanding the foregoing, prior
to April 1, 2002, the Company shall only have the option to redeem shares of
Convertible Preferred Stock if, during the period of 30 consecutive Trading Days
(as defined below) ending on the Trading Day immediately preceding the date that
the notice of redemption is mailed to holders, the Closing Bid Price (as defined
below) for the Common Stock exceeded 150% of the Conversion Price effective on
the date of such notice for at least 20 of such Trading Days. The notice of any
call for redemption shall specify the redemption date thereof (each, a
"Redemption Date"). The Call Price per share of Convertible Preferred Stock
shall be as follows if the Redemption Date of the call for redemption occurs
during the 12-month period beginning April 1 (or, in the case of the year 2000,
on April 3) of the years indicated, plus in each case accrued and unpaid
dividends on such shares to and including the Redemption Date:
<TABLE>
<CAPTION>
CALL PRICE
YEAR PER SHARE
----------------------------------------------------------- ----------
<S> <C>
2000....................................................... $ 104.83
2001....................................................... 104.03
2002....................................................... 103.22
2003....................................................... 102.42
2004....................................................... 101.61
2005....................................................... 100.81
2006....................................................... 100.00
</TABLE>
On a Redemption Date, the Company must pay any accrued and unpaid
dividends, in arrears, for any dividend period ending on or prior to the
Redemption Date. In the case of a Redemption Date falling after a dividend
payment record date and prior to the related payment date, the holders of the
Convertible Preferred Stock at the close of business on such record date will be
entitled to receive the dividend payable on such shares on the corresponding
dividend payment date, notwithstanding the redemption of such shares following
such dividend payment record date. Except as provided for in the preceding
sentences, no payment or allowance will be made for accrued dividends on any
shares of Convertible Preferred Stock called for redemption or on the shares of
Common Stock issuable upon such redemption.
The term "Closing Bid Price" means on any day the last reported bid price
on such day, or in case no bid takes place on such day, the average of the
reported closing bid and asked prices, in each case on the NNM or, if the Common
Stock is not quoted on such system, on the principal national securities
exchange on which such stock is listed or admitted to trading, or if not listed
or admitted to trading on any national securities exchange, the average of the
closing bid and asked prices as furnished by any independent registered broker-
dealer firm, selected by the Company for that purpose.
"Trading Day" means, in respect of any securities exchange or securities
market, each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day
on which securities are not traded on the applicable securities exchange or in
the applicable securities market.
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<PAGE> 28
In the event that full cumulative dividends on the Convertible Stock and
any Parity Stock have not been paid or declared and set apart for payment, the
Convertible Preferred Stock may not be redeemed in part and the Company may not
purchase or acquire shares of Convertible Preferred Stock otherwise than
pursuant to a purchase or exchange offer made on the same terms to all holders
of shares of Convertible Preferred Stock.
On and after any Redemption Date, provided that the Company has made
available at the office of the Registrar and Transfer Agent a sufficient amount
of cash to effect the redemption, dividends will cease to accrue on the
Convertible Preferred Stock called for redemption (except that, in the case of a
Redemption Date after a dividend payment record date and prior to the related
dividend payment date, holders of Convertible Preferred Stock on the dividend
payment record date will be entitled on such dividend payment date to receive
the dividend payable on such shares), such shares shall no longer be deemed to
be outstanding and all rights of the holders of such shares as holders of
Convertible Preferred Stock shall cease except the right to receive the cash
deliverable upon such redemption, without interest from the Redemption Date.
MANDATORY REDEMPTION
The Company is required to redeem the Convertible Preferred Stock (if not
earlier redeemed or converted) on March 31, 2007 (the "Mandatory Redemption
Date") at a redemption price of $100.00 per share of the Convertible Preferred
Stock plus accrued and unpaid dividends (including dividends in arrears) to the
Mandatory Redemption Date. For factors which could prohibit the Company from
redeeming the Convertible Preferred Stock, see "Risk Factors -- Substantial
Indebtedness; Insufficiency of Earnings to Cover Fixed Charges, Including
Dividends on the Convertible Preferred Stock."
LIQUIDATION PREFERENCE
The holders of shares of Convertible Preferred Stock will be entitled to
receive out of the funds, if any, available therefor, in the event of any
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, $100.00 per share of Convertible Preferred Stock plus an amount per
share of Convertible Preferred Stock equal to all dividends (whether or not
earned or declared) accrued and unpaid thereon to the date of final distribution
to such holders (the "Liquidation Preference"), and no more. In the event of any
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, in which the amounts payable with respect to the Convertible
Preferred Stock and any Parity Stock (including the Exchangeable Preferred
Stock) are not paid in full, the Convertible Preferred Stock and any Parity
Stock will share equally and ratably in any distribution to which each is
entitled.
Until the holders of the Convertible Preferred Stock have been paid the
Liquidation Preference in full, no payment will be made to any holder of Junior
Stock upon the liquidation, dissolution or winding up of the Company. If, upon
any liquidation, dissolution or winding up of the Company, the assets of the
Company, or proceeds thereof, distributable among the holders of the shares of
Convertible Preferred Stock are insufficient to pay in full the Liquidation
Preference and the liquidation preference with respect to any other shares of
Parity Stock, then such assets, or the proceeds thereof, will be distributed
among the holders of shares of Convertible Preferred Stock and any such Parity
Stock ratably in accordance with the respective amounts which would be payable
on such shares of Convertible Preferred Stock and any such Parity Stock if all
amounts payable thereon were paid in full. Neither a consolidation or merger of
the Company with another corporation nor a sale of transfer of all or
substantially all the Company's assets will be considered a liquidation,
dissolution or winding up, voluntary or involuntary, of the Company.
VOTING RIGHTS
Except as indicated below, or except as otherwise from time to time
required by applicable law, the holders of shares of Convertible Preferred Stock
will have no voting rights.
If and whenever six quarterly dividends (whether or not consecutive)
payable on the Convertible Preferred Stock are in arrears, whether or not earned
or declared, provided that at least 200,000 shares of Convertible Preferred
Stock are at the time outstanding, the number of directors then constituting the
Board of Directors of the Company will be increased by two and the holders of
shares of Convertible Preferred Stock,
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<PAGE> 29
voting together as a class with the holders of any other series of preferred
stock upon which like rights have been conferred (including the Exchangeable
Preferred Stock) and are exercisable, will have the right to elect two
additional directors to serve on the Company's Board of Directors at an annual
meeting of stockholders or a special meeting of the holders of the Convertible
Preferred Stock and such other preferred stock properly called and at each
subsequent annual meeting of stockholders until all such dividends and dividends
for the current quarterly period on the Convertible Preferred Stock and such
other preferred stock have been paid or declared and set aside for payment.
The approval of two-thirds of the outstanding shares of Convertible
Preferred Stock will be required in order to amend the terms of the Convertible
Preferred Stock so as to affect materially and adversely the rights, preferences
or voting powers of the holders of the Convertible Preferred Stock.
Except as required by law, the holders of Convertible Preferred Stock will
not be entitled to vote on any merger or consolidation involving the Company or
a sale of all or substantially all the assets of the Company. See "-- Conversion
Rights."
CONVERSION RIGHTS
Shares of Convertible Preferred Stock are convertible, in whole or in part,
at any time at the option of the holders thereof, into shares of Common Stock
initially at $23.46 per share of Common Stock, subject to adjustment as
described below ("Conversion Price"). The right to convert shares of Convertible
Preferred Stock called for redemption will terminate at the close of business on
the Redemption Date for such call. For information as to notices of redemption,
see "-- Optional Redemption" above.
Conversion of shares of Convertible Preferred Stock, or a specified portion
thereof, may be effected by delivering certificates evidencing such shares,
together with written notice of conversion and a proper assignment of such
certificates to the Company or in blank, to the office or agency to be
maintained by the Company for that purpose. Currently, such office is
ChaseMellon Shareholder Services, L.L.C. located at 2323 Bryan Street, Suite
2300, Dallas, Texas, 75201.
Each conversion will be deemed to have been effected immediately prior to
the close of business on the date on which the certificates for shares of
Convertible Preferred Stock shall have been surrendered and notice (and if
applicable, payment of an amount equal to the dividend payable on such shares)
received by the Company as aforesaid and the conversion shall be at the
Conversion Price in effect at such time and on such date.
Holders of shares of Convertible Preferred Stock at the close of business
on a dividend payment record date will be entitled to receive the dividend
payable on such shares on the corresponding dividend payment date
notwithstanding the conversion of such shares following such dividend payment
record date and prior to such dividend payment date. However, shares of
Convertible Preferred Stock surrendered for conversion during the period between
the close of business on any dividend payment record date and the opening of
business on the corresponding dividend payment date (except shares converted
after the issuance of a notice of redemption with respect to a Redemption Date
during such period, which will be entitled to such dividend) must be accompanied
by payment of an amount equal to the dividend payable on such shares on such
dividend payment date. A holder of shares of Convertible Preferred Stock on a
dividend payment record date who (or whose transferee) tenders any such shares
for conversion into shares of Common Stock on such dividend payment date will
receive the dividend payable by the Company on such shares of Convertible
Preferred Stock on such date, and the converting holder need not include payment
of the amount of such dividend upon surrender of shares of Convertible Preferred
Stock for conversion. Except as provided above, the Company will make no payment
or allowance for unpaid dividends, whether or not in arrears, on converted
shares or the dividends on the shares of Common Stock issued upon such
conversion.
Fractional shares of Common Stock will not be issued upon conversion but,
in lieu thereof, the Company will pay a cash adjustment based on the current
market price of the Common Stock on the day prior to the conversion date.
The Conversion Price will be subject to adjustment, under certain
circumstances, upon the occurrence of certain events, including: (i) the payment
of dividends (and other distributions) of Common Stock on any
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<PAGE> 30
class of capital stock of the Company; (ii) the issuance to all holders of
Common Stock of rights, warrants or options entitling them to subscribe for or
purchase Common Stock at less than the current market price (as defined)
thereof; (iii) subdivisions and combinations of Common Stock; (iv) distributions
to all holders of Common Stock of evidences of indebtedness of the Company,
shares of capital stock, securities, cash or property (excluding any rights,
warrants or options referred to in clause (ii) above and any dividend or
distribution paid exclusively in cash and any dividend or distribution referred
to in clause (i) above); (v) distributions consisting exclusively of cash to all
holders of Common Stock in an aggregate amount that, together with (A) other
all-cash distributions made within the preceding 12 months and (B) any cash and
the fair market value, as of the expiration of the tender or exchange offer
referred to below, of consideration payable in respect of any tender or exchange
offer by the Company or a Subsidiary for the Common Stock concluded within the
preceding 12 months, exceeds 12.5% of the Company's aggregate market
capitalization (such aggregate market capitalization being the product of the
current market price (as defined) of the Common Stock multiplied by the number
of shares of Common Stock then outstanding) on the date of such distribution;
and (vi) the successful completion of a tender or exchange offer made by the
Company or any Subsidiary for the Common Stock which involves an aggregate
consideration that, together with (X) any cash and the fair market value of
other consideration payable in respect of any tender or exchange offer by the
Company or a Subsidiary for the Common Stock concluded within the preceding 12
months and (Y) the aggregate amount of any all-cash distributions to all holders
of the Company's Common Stock made within the preceding 12 months, exceeds 12.5%
of the Company's aggregate market capitalization on the expiration of such
tender or exchange offer. No adjustment of the Conversion Price will be required
to be made until cumulative adjustments amount to 1% or more of the Conversion
Price as last adjusted.
Notwithstanding any other provision in the preceding paragraphs to the
contrary, if any Change in Control occurs then, at the Company's election, the
Conversion Price in effect will be adjusted immediately after such Change in
Control as described below. In addition, in the event of a Common Stock Change
in Control (as defined), each share of the Convertible Preferred Stock shall be
convertible solely into common stock of the kind received by holders of Common
Stock as the result of such Common Stock Change in Control. For purposes of
calculating any adjustment to be made pursuant to this paragraph in the event of
a Change in Control, immediately after such Change in Control:
(i) in the case of a Non-Stock Change in Control (as defined), the
Conversion Price will thereupon become the lower of (A) the Conversion
Price in effect immediately prior to such Non-Stock Change in Control, but
after giving effect to any other prior adjustments, and (B) the result
obtained by multiplying the greater of the Applicable Price (as defined) or
the then applicable Reference Market Price (as defined) by a fraction of
which the numerator will be $100.00 and the denominator will be the then
current Call Price per share; and
(ii) in the case of a Common Stock Change in Control, the Conversion
Price in effect immediately prior to such Common Stock Change in Control,
but after giving effect to any other prior adjustments, will thereupon be
adjusted by multiplying such Conversion Price by a fraction, of which the
numerator will be the Purchaser Stock Price (as defined) and the
denominator will be the Applicable Price; provided, however, that in the
event of a Common Stock Change in Control in which (A) 100% of the value of
the consideration received by a holder of Common Stock is common stock of
the successor, acquiror, or other third party (and cash, if any, is paid
with respect to any fractional interests in such common stock resulting
from such Common Stock Change in Control) and (B) all of the Common Stock
will have been exchanged for, converted into, or acquired for, common stock
(and cash with respect to fractional interests) of the successor, acquiror
or other third party, the Conversion Price in effect immediately prior to
such Common Stock Change in Control will thereupon be adjusted by
multiplying such Conversion Price by a fraction, of which the numerator
will be one (1) and the denominator will be the number of shares of common
stock of the successor, acquiror, or other third party received by a holder
of one share of Common Stock as a result of such Common Stock Change in
Control.
The foregoing conversion price adjustments in the event of a Non-Stock
Change in Control will apply in situations whereby a Change in Control not
involving a change in beneficial ownership of the Common Stock
29
<PAGE> 31
has occurred or whereby all or substantially all of the Common Stock is acquired
in a transaction in which 50% or less of the value received by holders of Common
Stock consists of common stock that has been admitted for listing on a national
securities exchange or quoted on the NNM. If the market price of the Common
Stock immediately prior to a Non-Stock Change in Control is lower than the
applicable Conversion Price then in effect, the Conversion Price will be
adjusted as described in (i) above and the holders of the Convertible Preferred
Stock will be entitled to receive the amount and kind of consideration that
would have been received if the Convertible Preferred Stock had been converted
into Common Stock prior to the Non-Stock Change in Control after giving effect
to such adjustment.
The foregoing Conversion Price adjustments in the event of a Common Stock
Change in Control will apply in situations whereby more than 50% of the value
received by holders of Common Stock consists of common stock of another company
that has been admitted for listing on a national securities exchange or quoted
on the NNM, in which case the Preferred Stock will become convertible into
shares of common stock of the other company. If consideration for the Common
Stock consists partly of common stock of another company and partly of other
securities, cash or property, each share of Convertible Preferred Stock will be
convertible solely into a number of shares of such common stock determined so
that the initial value of such shares (measured as described in the definition
of Purchaser Stock Price below) equals the value of the shares of Common Stock
into which such share of Convertible Preferred Stock was convertible immediately
before the Transaction (measured as described in the definition of Applicable
Price below). If consideration for Common Stock is solely common stock of
another company, each share of Convertible Preferred Stock will be convertible
into the same number of shares of such common stock receivable by a holder of
the number of shares of Common Stock into which such share of Convertible
Preferred Stock was convertible immediately before such transaction.
Depending upon whether the Change in Control is a Non-Stock Change in
Control or Common Stock Change in Control, a holder may receive significantly
different consideration upon conversion. In the event of a Non-Stock Change in
Control, the holder has the right to convert each share of the Convertible
Preferred Stock into the kind and amount of the shares of stock and other
securities or property or assets receivable by a holder of the number of shares
of Common Stock issuable upon conversion of such share of the Convertible
Preferred Stock immediately prior to such Non-Stock Change in Control, but after
giving effect to the adjustment described above. However, in the event of a
Common Stock Change in Control in which less than 100% of the value of the
consideration received by a holder of Common Stock is common stock of the
acquiror or other third party, a holder of a share of the Convertible Preferred
Stock who converts a share following the Common Stock Change in Control will
receive consideration in the form of such common stock only, whereas a holder
who has converted his share prior to the Common Stock Change in Control will
receive consideration in the form of common stock as well as any other
securities or assets (which may include cash) receivable thereupon by a holder
of the number of shares of Common Stock issuable upon conversion of such share
of Convertible Preferred Stock immediately prior to such Common Stock Change in
Control.
The term "Applicable Price" means (i) in the event of a Non-Stock Change in
Control in which the holders of the Common Stock receive only cash, the amount
of cash received by the holder of one share of Common Stock and (ii) in the
event of any other Non-Stock Change in Control or any Common Stock Change in
Control, the average of the Closing Bid Prices for the Common Stock during the
ten Trading Days prior to and including the record date for the determination of
the holders of Common Stock entitled to receive cash, securities, property or
other assets in connection with such Non-Stock Change in Control or Common Stock
Change in Control or, if there is no such record date, the date upon which the
holders of the Common Stock shall have the right to receive such cash,
securities, property or other assets, in each case, as adjusted in good faith by
the Board of Directors to appropriately reflect any of the events referred to in
clauses (i) through (vi) of the sixth paragraph of this subsection.
The term "Common Stock Change in Control" means any Change in Control in
which more than 50% of the value (as determined in good faith by the Board of
Directors of the Company) of the consideration received by holders of Common
Stock consists of common stock that for each of the ten consecutive Trading Days
referred to in the preceding paragraph has been admitted for listing or admitted
for listing subject to notice of issuance on a national securities exchange or
quoted on the NNM; provided, however, that a Change
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<PAGE> 32
in Control shall not be a Common Stock Change in Control unless either (i) the
Company continues to exist after the occurrence of such Change in Control and
the outstanding shares of Convertible Preferred Stock continue to exist as
outstanding shares of Convertible Preferred Stock, or (ii) not later than the
occurrence of such Change in Control, the outstanding shares of Convertible
Preferred Stock are converted into or exchanged for shares of convertible
preferred stock of a corporation succeeding to the business of the Company,
which convertible preferred stock has powers, preferences and relative,
participating, optional or other rights, and qualifications, limitations and
restrictions, substantially similar to those of the Convertible Preferred Stock.
The term "Non-Stock Change in Control" means any Change in Control other
than a Common Stock Change in Control.
The term "Purchaser Stock Price" means, with respect to any Common Stock
Change in Control, the product of (i) the number of shares of common stock
received in such Common Stock Change of Control for each share of Common Stock,
and (ii) the average of the per share Closing Prices for the common stock
received in such Common Stock Change in Control for the ten consecutive Trading
Days prior to and including the record date for the determination of the holders
of Common Stock entitled to receive such common stock, or if there is no such
record date, the date upon which the holders of the Common Stock shall have the
right to receive such common stock, in each case, as adjusted in good faith by
the Board of Directors to appropriately reflect any of the events referred to in
clauses (i) through (vi) of the sixth paragraph of this subsection; provided,
however, that if no such Closing Prices exist, then the Purchaser Stock Price
shall be set at a price determined in good faith by the Board of Directors of
the Company.
The term "Reference Market Price" shall initially mean $13.50 (which is an
amount equal to 66 2/3% of the reported last sale price for the Common Stock on
the NNM on March 25, 1997), and in the event of any adjustment to the conversion
prices other than as a result of a Change in Control, the Reference Market Price
shall also be adjusted so that the ratio of the Reference Market Price to the
Conversion Price after giving effect to any such adjustment shall always be the
same as the ratio of $13.50 to the initial Conversion Price set forth on the
cover page of this Prospectus.
In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions pursuant to which the Common Stock is
converted into the right to receive other securities, cash or other property,
each share of Convertible Preferred Stock then outstanding would, without the
consent of any holders of Convertible Preferred Stock, become convertible only
into the kind and amount of securities, cash and other property receivable upon
the transaction by a holder of the number of shares of Common Stock which would
have been received by a holder immediately prior to such transaction if such
holder had converted its share of Convertible Preferred Stock.
If at any such time the Company makes a distribution of property to its
stockholders that would be taxable to such stockholders as a dividend for
federal income tax purposes (for example, distributions or evidences of
indebtedness or assets of the Company, but generally not stock dividends or
rights to subscribe for capital stock) and, pursuant to the antidilution
provisions described above, the Conversion Price of the Convertible Preferred
Stock is reduced, such reduction may be deemed to be the receipt of taxable
income by holders of the Convertible Preferred Stock.
CERTAIN RIGHTS TO REQUIRE PURCHASE OF CONVERTIBLE PREFERRED STOCK
In the event a Change in Control occurs, the Company will be obligated,
subject to applicable provisions of state law and the restrictions of the
Indenture, either to offer (a "Repurchase Offer") to purchase all or any part of
the shares of Convertible Preferred Stock on the date (the "Repurchase Date")
that is 75 days after the date the Company gives notice of the Change in
Control, at a price (the "Repurchase Price") equal to $100.00 per share,
together with accrued and unpaid dividends through the Repurchase Date or to
adjust the Conversion Price as described above under "-- Conversion Rights." If
a Repurchase Offer is made, the Company shall deposit, on or prior to the
Repurchase Date, with a Paying Agent an amount of money sufficient to pay the
aggregate Repurchase Price of the Convertible Preferred Stock which is to be
paid on the Repurchase Date.
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<PAGE> 33
On or before the 15th day after the Company knows or reasonably should know
that a Change in Control has occurred, the Company will be required to mail to
all holders of record of the Convertible Preferred Stock a notice of the
occurrence of such Change in Control and whether or not the Indenture permits at
such time a Repurchase Offer, and, as applicable, either the new Conversion
Price (as adjusted at the option of the Company) or the date by which the
Repurchase Offer must be accepted, the Repurchase Price for the Convertible
Preferred Stock and the procedures which the holder must follow to accept the
Repurchase Offer. To accept the Repurchase Offer, the Holder of a share of
Convertible Preferred Stock will be required to deliver, on or before the 10th
day prior to the Repurchase Date, written notice to the Company (or an agent
designated by the Company for such purpose) of the holder's acceptance, together
with the certificates evidencing the shares of Convertible Preferred Stock with
respect to which the offer is being accepted, duly endorsed for transfer.
The term "Beneficial Owner" shall be determined in accordance with Rules
13d-3 and 13d-5 promulgated by the Commission under the Exchange Act or any
successor provision thereto, except that a Person shall be deemed to have
"beneficial ownership" of all shares that such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage of time.
A "Change in Control" shall be deemed to have occurred at such time as (i)
the sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and certain subsidiaries taken as
a whole to any "person" (as such term is used in Section 13(d)(3) of the
Exchange Act), (ii) the adoption of a plan relating to the liquidation or
dissolution of the Company, (iii) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of which
is that any "person" (as defined above), (other than certain present officers,
directors and stockholders of the Company and their affiliates), becomes the
Beneficial Owner, directly or indirectly, of more than 50% of the voting stock
of the Company or (iv) the first day on which a majority of the members of the
board of directors are not Continuing Directors (as defined in the Certificate
of Designations).
The effect of these provisions obligating the Company to offer to purchase
the shares of Convertible Preferred Stock or to adjust the Conversion Price upon
the occurrence of a Change in Control may make it more difficult for any person
or group to acquire control of the Company or to effect a business combination
with the Company. The Company's ability to pay cash to holders of shares of
Convertible Preferred Stock following the occurrence of a Change in Control may
be limited by the Company's then existing financial resources and applicable
provisions of state law or by provisions in the Indenture and other agreements
governing indebtedness of the Company, and by the terms of the Series 3
Preferred Stock. The Company will, prior to electing to make a Repurchase Offer,
make an offer to redeem all of the outstanding shares of the Series 3 Preferred
Stock. There can be no assurance that sufficient funds will be available when
necessary to make any required repurchases.
In the event a Change in Control occurs and the Company makes a Repurchase
Offer for shares of Convertible Preferred Stock, the Company intends to comply
with applicable tender offer rules under the Exchange Act, including Rules 13e-4
(other than Commission filing requirements if not then applicable) and 14e-1, as
then in effect, with respect to any such purchase.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Certificate of Designation provides that the Company, without the
consent of the holders of any of the outstanding Convertible Preferred Stock,
may consolidate with or merge into any other Person or convey, transfer or lease
its properties and assets substantially as an entirety to any Person or may
permit any Person to consolidate with or merge into, or transfer or lease its
properties substantially as an entirety to, the Company; provided, that (a) the
successor, transferee or lessee is organized under the laws of any United States
jurisdiction; (b) the shares of Convertible Preferred Stock shall become shares
of such successor, transferee or lessee, having in respect of such successor,
transferee or lessee the same powers, preferences and relative participating,
optional or other special rights and the qualifications, limitations or
restrictions thereon, the
32
<PAGE> 34
Convertible Preferred Stock had immediately prior to such transaction; and (c)
certain other conditions are met.
Under any consolidation by the Company with, or merger by the Company into,
any other Person or any conveyance, transfer or lease of the properties and
assets of the Company substantially as an entirety as described in the preceding
paragraph, the successor resulting from such consolidation or into which the
Company is merged or the transferee or lessee to which such conveyance, transfer
or lease is made, will succeed to, and be substituted for, and may exercise
every right and power of, the Company under the shares of Convertible Preferred
Stock, and thereafter, except in the case of a lease, the predecessor (if still
in existence) will be released from its obligations and covenants with respect
to the Convertible Preferred Stock.
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
The transfer agent, registrar, dividend disbursing agent and redemption
agent for the shares of Convertible Preferred Stock in ChaseMellon Shareholder
Services, L.L.C.
REGISTRATION RIGHTS
In connection with the Original Offering, the Company entered into a
registration rights agreement with the Initial Purchasers (the "Registration
Rights Agreement"), for the benefit of the holders (the "Registration Rights
Holders") of the Convertible Preferred Stock and of the Common Stock issuable
upon conversion thereof pursuant to which the Company would, at its cost, (a) as
promptly as practicable, file a Registration Statement (a "Shelf Registration
Statement") covering resales of the Convertible Preferred Stock (together with
the Common Stock issuable upon conversion thereof) pursuant to Rule 415 under
the Securities Act, (b) use its best efforts to cause the Shelf Registration
Statement to be declared effective under the Securities Act and (c) keep the
Shelf Registration Statement effective until such time as the Convertible
Preferred Stock and the shares of Common Stock issuable upon conversion thereof
are eligible to be sold under Rule 144(k) under the Securities Act or until all
the Convertible Preferred Stock and the Common Stock issuable upon conversion
thereof have been sold pursuant to such Shelf Registration Statement. The
Registration Statement to which this Prospectus forms a part has been filed by
the Company pursuant, in part, to its obligations under the Registration Rights
Agreement.
If the Shelf Registration Statement to which this Prospectus forms a part
ceases to be effective or usable (subject to certain exceptions) in connection
with resales of the Convertible Preferred Stock and the Common Stock issuable
upon conversion thereof in accordance with and during the periods specified in
the Registration Rights Agreement (each such event is referred to as a
"Registration Default"), dividends will accrue on the Convertible Preferred
Stock at the rate of 7 3/4% per annum, from and including the date on which any
such Registration Default shall occur to but excluding the date on which all
Registration Defaults have been cured. At all other times, dividends will accrue
on the Convertible Preferred Stock at a rate of 7 1/4% per annum.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available upon request to the Company or the
Initial Purchasers.
BOOK-ENTRY-ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
The description of book-entry procedures in this Prospectus includes
summaries of certain rules and operating procedures of The Depository Trust
Company ("DTC") that affect transfers of interest in the global certificate
issued in connection with the Original Offering of the Convertible Preferred
Stock. Except as described in the next paragraph, the Convertible Preferred
Stock was originally issued only as fully registered securities registered in
the name of Cede & Co. (as nominee for DTC). One fully registered global
Convertible Preferred Stock certificate (the "Global Certificate") was
originally issued, representing, in the aggregate, Convertible Preferred Stock
sold in reliance on Rule 144A, and was deposited with DTC.
Convertible Preferred Stock initially sold to certain "accredited
investors" (as defined in Rule 501(a)(1), (2), (3), (4), (5), (6) or (7) under
the Securities Act) or sold in offshore transactions
33
<PAGE> 35
pursuant to Regulation S under the Securities Act was issued in fully registered
certificated form ("Certificated Securities"). Upon the sale of any Convertible
Preferred Stock during the period of the effectiveness of the Registration
Statement to which this Prospectus is a part, all requirements pertaining to
legends on such Convertible Preferred Stock will cease to apply, the
requirements requiring that any such Convertible Preferred Stock be issued in
global form will cease to apply, and Certificated Securities without legends
will be available to the transferee of the Convertible Preferred Selling Holder
of such Convertible Preferred Stock upon the sale or exchange of such
Convertible Preferred Selling Holder's Convertible Preferred Stock or directions
to transfer such Convertible Preferred Selling Holder's interest in the Global
Certificate, as applicable.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Participants in DTC
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of its
Participants and by the New York Stock Exchange, the American Stock Exchange,
Inc. and the National Association of Securities Dealers, Inc. Access to the DTC
system is also available to others such as securities brokers and dealers, banks
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly ("Indirect Participants"). The
rules applicable to DTC and its Participants are on file with the Commission.
Purchases of Convertible Preferred Stock within the DTC system must be made
by or through Participants, which will receive a credit for the Convertible
Preferred Stock on DTC's records. The ownership interest of each actual
purchaser of Convertible Preferred Stock ("Beneficial Owner") is in turn to be
recorded on the Participants' and Indirect Participants' records. Beneficial
Owners will not receive written confirmation from DTC of their purchases, but
Beneficial Owners are expected to receive written confirmations providing
details of the transactions, as well as periodic statements of their holdings,
from the Participants or Indirect Participants through which the Beneficial
Owners purchased Convertible Preferred Stock. Transfers of ownership interests
in the Convertible Preferred Stock are to be accomplished by entries made on the
books of Participants and Indirect Participants acting on behalf of Beneficial
Owners. Beneficial Owners will not receive certificates representing their
ownership interests in Convertible Preferred Securities, except in the event
that use of the book-entry system for the Convertible Preferred Stock is
discontinued.
DTC has no knowledge of the actual Beneficial Owners of the Convertible
Preferred Stock; DTC's records reflect only the identity of the Participants to
whose accounts such Convertible Preferred Stock are credited, which may or may
not be the Beneficial Owners. The Participants and Indirect Participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to Participants, by
Participants to Indirect Participants, and by Participants and Indirect
Participants to Beneficial Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
Redemption notices in respect of the Convertible Preferred Stock held in
book-entry form shall be sent to Cede & Co. If less than all of the Convertible
Preferred Stock are being redeemed, DTC will determine the amount of the
interest of each Participant to be redeemed in accordance with its procedures.
Although voting with respect to the Convertible Preferred Stock is limited,
in those cases where a vote is required, neither DTC nor Cede & Co. will itself
consent or vote with respect to Convertible Preferred Stock. Under its usual
procedures, DTC would mail an Omnibus Proxy to the Company as soon as possible
after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or
voting rights to those Participants to
34
<PAGE> 36
whose accounts the Convertible Preferred Stock are credited on the record date
(identified in a listing attached to the Omnibus Proxy).
Distributions on the Convertible Preferred Stock held in book-entry form
will be made to DTC in immediately available funds. DTC's practice is to credit
Direct Participants' accounts on the relevant payment date in accordance with
their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payments on such payment date. Payments by
Participants and Indirect Participants to Beneficial Owners will be governed by
standing instructions and customary practices and will be the responsibility of
such Participants and Indirect Participants and not of DTC, or the Company,
subject to any statutory or regulatory requirements as may be in effect from
time to time. Payment of distributions to DTC is the responsibility of the
Company, disbursement of such payments to Participants is the responsibility of
DTC, and disbursement of such payments to the Beneficial Owners is the
responsibility of Participants and Indirect Participants.
Except as provided herein or in the Certificate of Designation, a
Beneficial Owner of an interest in global Convertible Preferred Stock will not
be entitled to receive physical delivery of Convertible Preferred Stock.
Accordingly, each Beneficial Owner must rely on the procedures of DTC to
exercise any rights under the Convertible Preferred Stock.
DTC may discontinue providing its services as securities depository with
respect to the Convertible Preferred Stock at any time by giving notice to the
Company. Under such circumstances, in the event that a successor securities
depository is not obtained, Convertible Preferred Stock certificates are
required to be printed and delivered. Additionally, the Company may decide to
discontinue use of the system of book-entry transfers through DTC (or a
successor depository). In that event, certificates for the Convertible Preferred
Stock will be printed and delivered. In each of the above circumstances, the
Company will appoint a Paying Agent with respect to the Convertible Preferred
Stock.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable, but the
Company does not take responsibility for the accuracy thereof.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the global
Convertible Preferred Stock as represented by a Global Certificate.
PAYMENT AND PAYING AGENCY
Payments in respect of the Convertible Preferred Stock held at book-entry
at DTC will be made to DTC, which shall credit the relevant accounts at DTC on
the applicable distribution dates or, in the case of Certificated Securities,
such payments shall be made by check mailed to the address of the holder
entitled thereto as such address shall appear on the Register. The Paying Agent
shall initially be ChaseMellon Shareholder Services, L.L.C. The Paying Agent
shall be permitted to resign as Paying Agent upon 30 days' written notice to the
Company. In the event that ChaseMellon Shareholder Services, L.L.C. shall no
longer be the Paying Agent, the Company shall appoint a successor to act as
Paying Agent (which shall be a bank or trust company).
LEGAL MATTERS
The validity of the Securities is passed upon for the Company by Riordan &
McKinzie, Costa Mesa, California. Carl W. McKinzie, a director and stockholder
of the Company, is a stockholder of Riordan & McKinzie. The Company has granted
an option covering shares of Common Stock to another stockholder of Riordan &
McKinzie. Also, certain attorneys of Riordan & McKinzie beneficially own
additional shares of the Company.
35
<PAGE> 37
EXPERTS
The consolidated financial statements of IXC Communications, Inc. at
December 31, 1995 and 1996, and for each of the three years in the period ended
December 31, 1996, appearing in the Annual Report (Form 10-K) of IXC
Communications, Inc. have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon and included therein and
incorporated by reference herein. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
36
<PAGE> 38
GLOSSARY
Access charges -- The fees paid by long distance carriers to LECs for
originating and terminating long distance calls on their local networks.
Allnet -- Allnet Communication Services, Inc.
ATM (asynchronous transfer mode) -- An information transfer standard that
is one of a general class of technologies that relay traffic by way of an
address contained within the first five bytes of a standard 53-byte-long packet
or cell. The ATM format can be used by many different information systems,
including local area networks, to deliver traffic at varying rates, permitting a
mix of voice, video and data (multimedia).
AT&T -- AT&T Corp.
Bandwidth -- The range of frequencies that can be transmitted through a
medium, such as glass fibers, without distortion. The greater the bandwidth, the
greater the information-carrying capacity of such medium.
Carriers -- Companies that provide telecommunications transmission
services.
Digital -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies (both
fiber and microwave) employ a sequence of these pulses to represent information
as opposed to the continuously variable analog signal. The precise digital
numbers minimize distortion (such as graininess or snow in the case of video
transmission, or static or other background distortion in the case of audio
transmission). Both the Company's microwave and fiber optic facilities transmit
digital information.
DS-1, DS-3 -- Standard telecommunications industry digital signal formats,
which are distinguishable by bit rate (the number of binary digits (0 and 1)
transmitted per second). DS-0 service has a bit rate of 64 kilobits per second
and can transmit only one voice or data transmission at a time. DS-1 service has
a bit rate of 1.544 megabits per second and can transmit 24 simultaneous voice
or data transmissions. DS-3 service has a bit rate of 45 megabits per second and
can transmit 672 simultaneous voice or data transmissions.
DS-3 miles -- A measure of the total capacity and length of a transmission
path, calculated as the capacity of the transmission path in DS-3s multiplied by
the length of the path in miles.
EBITDA -- Operating income (loss) plus depreciation and amortization.
EBITDA is not a measurement determined in accordance with GAAP, should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with GAAP and is not necessarily comparable with similarly titled
measures for other companies.
Excel -- EXCEL Communications, Inc.
Facilities-based carrier -- Carriers who own transmission facilities.
FCC -- Federal Communications Commission.
Frame Relay -- A high-speed, data-packet switching service used to transmit
data between computers. Frame Relay supports data units of variable lengths at
access speeds ranging from 56 kilobits per second to 1.5 megabits per second.
This service is well-suited for connecting local area networks, but is not
appropriate for voice and video applications due to the variable delays which
can occur. Frame Relay was designed to operate at high speeds on modern fiber
optic networks.
Frontier -- Frontier Corporation.
GAAP -- Generally Accepted Accounting Principles.
GEPT -- Trustees of General Electric Pension Trust
GHI -- Grumman Hill Investments, L.P.
GTE -- GTE Corporation.
A-1
<PAGE> 39
Interexchange Carrier -- A company providing inter-LATA or long distance
services between LATAs on an intrastate or interstate basis.
Inter-LATA -- InterLATA calls are calls that pass from one LATA to another.
Typically, these calls are referred to as long distance calls.
Intra-LATA -- IntraLATA calls are those local calls that originate and
terminate within the same LATA.
Kilobit -- One thousand bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "kilobits per
second."
LATAs (local access and transport areas) -- The approximately 200
geographic areas that define the areas between which the RBOCs were prohibited
from providing long distance services prior to the Telecommunications Act.
LCI -- LCI International Management Services, Inc.
LEC (local exchange carrier) -- A company providing local telephone
services.
Local loop -- A circuit within a LATA.
MCI -- MCI Communications Corporation.
Megabit -- One million bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "megabits per
second."
MOUs -- Minutes of use of long distance service.
Nonfacilities based carrier -- Carriers that do not own transmission
facilities.
NTFC -- NTFC Capital Corporation
OC-3, OC-12 and OC-48 -- Standard telecommunications industry measurements
for optical transmission capacity distinguishable by bit rate transmitted per
second and the number of voice or data transmissions that can be simultaneously
transmitted through fiber optic cable. An OC-3 is generally equivalent to three
DS-3s and has a bit rate of 155.52 megabits per second and can transmit 2,016
simultaneous voice or data transmissions. An OC-12 has a bit rate of 622.08
megabits per second and can transmit 8,064 simultaneous voice or data
transmissions. An OC-48 has a bit rate of 2,488.32 megabits per second and can
transmit 32,256 simultaneous voice or data transmissions.
Qwest -- Qwest Communications Corporation.
RBOCs (regional Bell operating companies) -- The seven local telephone
companies (formerly part of AT&T) established by court decree in 1982.
Route miles -- The measure of the length of a transmission path in miles.
Sprint -- Sprint Corp.
Switch -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
Switched services -- Telecommunications services such as residential long
distance services that are processed through digital switches and delivered over
long-haul circuits and other transmission facilities.
Telecom One -- Telecom One, Inc.
Vyvx -- Vyvx, Inc., a subsidiary of The Williams Companies, Inc.
WorldCom -- WorldCom, Inc.
A-2
<PAGE> 40
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE
SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE ISSUER SINCE
SUCH DATE.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Documents Incorporated by Reference... 3
Risk Factors.......................... 4
Use of Proceeds....................... 17
Ratio of Earnings To Fixed Charges and
Preferred Stock Dividends........... 17
Selling Holders....................... 18
Plan of Distribution.................. 20
Description of Capital Stock.......... 21
Description of Convertible Preferred
Stock............................... 24
Legal Matters......................... 35
Experts............................... 36
Glossary.............................. A-1
</TABLE>
======================================================
======================================================
IXC COMMUNICATIONS, INC.
1,400,000 SHARES OF
7 1/4 JUNIOR CONVERTIBLE
PREFERRED STOCK DUE 2007
(LIQUIDATION PREFERENCE
$100 PER SHARE) AND THE
SHARES OF COMMON STOCK
INTO WHICH
THE PREFERRED STOCK IS
CONVERTIBLE
AND
97,481 ADDITIONAL SHARES
OF COMMON STOCK OF
IXC COMMUNICATIONS, INC.
------------------------
PROSPECTUS
------------------------
AUGUST 28, 1997
======================================================
<PAGE> 41
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses and costs (other than
underwriting discounts and selling commissions) expected to be incurred in
connection with the sale and distribution of the securities being registered.
All of the amounts shown are estimated except the registration fee of the
Securities and Exchange Commission (the "Commission").
<TABLE>
<CAPTION>
ITEM AMOUNT
-------------------------------------------------------------------------- --------
<S> <C>
Commission registration fee............................................... $ 55,121
Printing and engraving expenses........................................... 75,000
Legal fees and expenses................................................... 30,000
Accounting fees and expenses.............................................. 15,000
Transfer agent and registrar fees......................................... 5,000
Miscellaneous............................................................. 9,879
--------
Total................................................................ $190,000
========
</TABLE>
All expenses will be borne by IXC Communications, Inc. ("IXC Communications").
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
IXC Communications, Inc. is a Delaware corporation. Article VII, Section 8
of IXC Communications' Bylaws provides that IXC Communications shall indemnify
its officers, directors, employees and agents to the fullest extent permitted by
the Delaware General Corporation Law ("DGCL"). Section 145 of the DGCL provides
that a Delaware corporation has the power to indemnify its officers and
directors in certain circumstances.
Subsection (a) of Section 145 of the DGCL empowers a corporation to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation),
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding provided that such director or officer acted in good faith in
a manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, provided that such director or officer had no cause to believe his
or her conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
director or officer, or former director or officer, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person acted in any of the capacities set forth
above, against expenses actually and reasonably incurred in connection with the
defense or settlement of such action or suit provided that such director or
officer acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the corporation, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such director or officer shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery or
the court in which such action was brought shall determine that despite the
adjudication of liability, but in view of all the circumstances of the case,
such director or officer is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsections (a) and (b) or in the defense of any claim, issue or
matter therein, he or she shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him or her in connection
therewith; that indemnification provided for by
II-1
<PAGE> 42
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and that the corporation shall have power to
purchase and maintain insurance on behalf of a director or officer of the
corporation against any liability asserted against him or her or incurred by him
or her in any such capacity or arising out of his or her status as such whether
or not the corporation would have the power to indemnify him or her against such
liabilities under Section 145.
Article Tenth of the Restated Certificate of Incorporation of IXC
Communications currently provides that each director shall not be personally
liable to IXC Communications or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability: (i) for any breach of the
director's duty of loyalty to IXC Communications or its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for unlawful payment of dividends or unlawful
stock repurchases or redemptions as provided under Section 174 of the DGCL; or
(iv) for any transaction from which the director derived an improper personal
benefit.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------------
<S> <C>
4.1 Specimen certificate representing shares of Common Stock of IXC Communications,
Inc. (incorporated by reference to Exhibit 4.1 of IXC Communications, Inc.
Registration Statement on Form S-1 filed with the Commission on May 20, 1996, as
amended (File No. 333-4061) (the "S-1")).
4.2 Indenture dated as of October 5, 1995 by and among IXC Communications, Inc., on
its behalf and as successor-in-interest to I-Link Holdings, Inc. and IXC Carrier
Group, Inc., each of IXC Carrier, Inc., on its behalf and as
successor-in-interest to I-Link, Inc., CTI Investments, Inc., Texas Microwave,
Inc. and WTM Microwave, Inc., Atlantic States Microwave Transmission Company,
Central States Microwave Transmission Company, Telcom Engineering, Inc., on its
behalf and as successor-in-interest to SWTT Company and Microwave Network, Inc.,
Tower Communication Systems Corp., West Texas Microwave Company, Western States
Microwave Transmission Company, Rio Grande Transmission, Inc., IXC Long
Distance, Inc., Link Net International, Inc. (collectively, the "Guarantors")
and IBJ Schroder Bank & Trust Company, as Trustee, with respect to the 12 1/2%
Series A and Series B Senior Notes due 2005 (incorporated by reference to
Exhibit 4.1 of IXC Communications, Inc.'s and each of the Guarantor's
Registration Statement on Form S-4 filed with the Commission on April 1, 1996,
as amended (File No. 333-2936) (the "S-4")).
4.3 Purchase Agreement dated October 5, 1995 by and among IXC Communications, Inc.,
and the Purchasers named therein (incorporated by reference to Exhibit 4.2 of
the S-4).
4.4 A/B Exchange Registration Rights Agreement dated as of October 5, 1995 by and
among IXC Communications, Inc., the Guarantors and the Purchasers named therein
(incorporated by reference to Exhibit 4.3 of the S-4).
4.5 Escrow Account and Disbursement Agreement dated as of October 5, 1995 by and
among IXC Communications, Inc., IBJ Schroder Bank & Trust Company, as Escrow
Holder, and IBJ Schroder Bank & Trust Company, as Collateral Agent (incorporated
by reference to Exhibit 4.4 of the S-4).
4.6 Escrow Account Security Agreement dated as of October 5, 1995 by and between IXC
Communications, Inc. and IBJ Schroder Bank & Trust Company (incorporated by
reference to Exhibit 4.5 of the S-4).
4.7 Form of 12 1/2% Series A Senior Notes due 2005 (incorporated by reference to
Exhibit 4.6 of the S-4).
</TABLE>
II-2
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------------
<S> <C>
4.8 Form of 12 1/2% Series B Senior Notes due 2005 and Subsidiary Guarantee
(incorporated by reference to Exhibit 4.8 of the S-1).
4.9 Amendment No. 1 to Indenture and Subsidiary Guarantee dated as of June 4, 1996
by and among IXC Communications, Inc., the Guarantors and the Trustee
(incorporated by reference to Exhibit 4.11 of the S-1).
4.10 Stock Exchange Agreement dated as of June 10, 1996 by and between IXC
Communications, Inc., and Trustees of General Electric Pension Trust ("GEPT")
(incorporated by reference to Exhibit 4.12 of the S-1).
4.11 Registration Rights Agreement dated as of June 10, 1996 by and among IXC
Communications, Inc., GEPT and certain stockholders of IXC Communications, Inc.
(incorporated by reference to Exhibit 4.13 of the S-1).
4.12 Purchase Agreement dated as of March 25, 1997 by and among IXC Communications,
Inc., Credit Suisse First Boston Corporation ("CS First Boston") and Dillon Read
& Co. Inc. ("Dillon Read") (incorporated by reference to Exhibit 4.12 of IXC
Communications, Inc. Quarterly Report on Form 10-Q for the quarter ended March
31, 1997 (the "March 31, 1997 10-Q")).
4.13 Registration Rights Agreement dated as of March 25, 1997 by and among IXC
Communications, Inc., CS First Boston and Dillon Read (incorporated by reference
to Exhibit 4.13 of the March 31, 1997 10-Q).
4.14 Restated Certificate of Incorporation of IXC Communications, Inc., as amended
(incorporated by reference to Exhibit 3.1 of IXC Communications, Inc. Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997, as amended (the "June
30, 1997 10-Q")).
4.15 Amendment to Registration Rights Agreement dated as of March 25, 1997 between
IXC Communications, Inc. and GEPT (incorporated by reference to Exhibit 4.14 of
the March 31, 1997 10-Q).
4.16 Registration Rights Agreement dated as of July 8, 1997 between IXC
Communications, Inc. and William G. Rodi, Gordon Hutchins, Jr. and William F.
Linsmeier (incorporated by reference to Exhibit 4.15 of the June 30, 1997 10-Q).
4.17 Registration Rights Agreement dated as of July 8, 1997 between IXC
Communications, Inc. and William G. Rodi, Gordon Hutchins, Jr. and William F.
Linsmeier (incorporated by reference to Exhibit 4.16 of the June 30, 1997 10-Q).
4.18+ IXC Communications, Inc. Certificate of Designation of the Powers, Preferences
and Relative, Participating, Optional and Other Special Rights of 12 1/2% Junior
Exchangeable Preferred Stock Due 2009 and 12 1/2% Series B Junior Exchangeable
Preferred Stock Due 2009 and Qualifications, Limitations and Restrictions
Thereof.
5.1+ Opinion of Riordan & McKinzie, a Professional Law Corporation regarding the
validity of the issuance of the securities registered hereunder.
12.1+ Statement regarding computation of ratios.
23.1+ Consent of Riordan & McKinzie (contained in Exhibit 5.1).
23.2+ Consent of Ernst & Young LLP.
24.1* Power of Attorney.
</TABLE>
- ---------------
* Previously filed.
+ Filed herewith.
II-3
<PAGE> 44
(b) Financial Statement Schedules
All schedules are omitted since the required information is inapplicable or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the Consolidated Financial
Statements and Notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in a posteffective amendment by
those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such posteffective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1993 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-4
<PAGE> 45
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Austin, State of Texas, on August 26, 1997.
IXC Communications, Inc.,
a Delaware corporation
By: /s/ JAMES F. GUTHRIE
---------------------------------------
James F. Guthrie
Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------- ----------------
<C> <S> <C>
* Chairman, President and Chief August 26, 1997
- --------------------------------------------- Executive Officer, and
Ralph J. Swett Director
(Principal Executive Officer)
/s/ JAMES F. GUTHRIE Executive Vice President and August 26, 1997
- --------------------------------------------- Chief Financial Officer
James F. Guthrie (Principal Financial and
Accounting Officer)
* Director August 26, 1997
- ---------------------------------------------
Richard D. Irwin
* Director August 26, 1997
- ---------------------------------------------
Wolfe H. Bragin
* Director August 26, 1997
- ---------------------------------------------
Carl W. McKinzie
* Director August 26, 1997
- ---------------------------------------------
Phillip L. Williams
* Director August 26, 1997
- ---------------------------------------------
Joe C. Culp
</TABLE>
*By: /s/ JEFFREY C. SMITH
-------------------------------
Jeffrey C. Smith
Attorney-in-Fact
II-5
<PAGE> 46
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NO. PAGE
- ------- ----------------------------------------------------------------------- -----------
<S> <C> <C>
4.1 Specimen certificate representing shares of Common Stock of IXC
Communications, Inc. (incorporated by reference to Exhibit 4.1 of IXC
Communications, Inc. Registration Statement on Form S-1 filed with the
Commission on May 20, 1996, as amended (File No. 333-4061) (the
"S-1"))................................................................
4.2 Indenture dated as of October 5, 1995 by and among IXC Communications,
Inc., on its behalf and as successor-in-interest to I-Link Holdings,
Inc. and IXC Carrier Group, Inc., each of IXC Carrier, Inc., on its
behalf and as successor-in-interest to I-Link, Inc., CTI Investments,
Inc., Texas Microwave, Inc. and WTM Microwave, Inc., Atlantic States
Microwave Transmission Company, Central States Microwave Transmission
Company, Telcom Engineering, Inc., on its behalf and as
successor-in-interest to SWTT Company and Microwave Network, Inc.,
Tower Communication Systems Corp., West Texas Microwave Company,
Western States Microwave Transmission Company, Rio Grande Transmission,
Inc., IXC Long Distance, Inc., Link Net International, Inc.
(collectively, the "Guarantors") and IBJ Schroder Bank & Trust Company,
as Trustee, with respect to the 12 1/2% Series A and Series B Senior
Notes due 2005 (incorporated by reference to Exhibit 4.1 of IXC
Communications, Inc.'s and each of the Guarantor's Registration
Statement on Form S-4 filed with the Commission on April 1, 1996, as
amended (File No. 333-2936) (the "S-4"))...............................
4.3 Purchase Agreement dated October 5, 1995 by and among IXC
Communications, Inc., and the Purchasers named therein (incorporated by
reference to Exhibit 4.2 of the S-4)...................................
4.4 A/B Exchange Registration Rights Agreement dated as of October 5, 1995
by and among IXC Communications, Inc., the Guarantors and the
Purchasers named therein (incorporated by reference to Exhibit 4.3 of
the S-4)...............................................................
4.5 Escrow Account and Disbursement Agreement dated as of October 5, 1995
by and among IXC Communications, Inc., IBJ Schroder Bank & Trust
Company, as Escrow Holder, and IBJ Schroder Bank & Trust Company, as
Collateral Agent (incorporated by reference to Exhibit 4.4 of the
S-4)...................................................................
4.6 Escrow Account Security Agreement dated as of October 5, 1995 by and
between IXC Communications, Inc. and IBJ Schroder Bank & Trust Company
(incorporated by reference to Exhibit 4.5 of the S-4)..................
4.7 Form of 12 1/2% Series A Senior Notes due 2005 (incorporated by
reference to Exhibit 4.6 of the S-4)...................................
4.8 Form of 12 1/2% Series B Senior Notes due 2005 and Subsidiary Guarantee
(incorporated by reference to Exhibit 4.8 of the S-1)..................
4.9 Amendment No. 1 to Indenture and Subsidiary Guarantee dated as of June
4, 1996 by and among IXC Communications, Inc., the Guarantors and the
Trustee (incorporated by reference to Exhibit 4.11 of the S-1).........
4.10 Stock Exchange Agreement dated as of June 10, 1996 by and between IXC
Communications, Inc., and Trustees of General Electric Pension Trust
("GEPT") (incorporated by reference to Exhibit 4.12 of the S-1)........
4.11 Registration Rights Agreement dated as of June 10, 1996 by and among
IXC Communications, Inc., GEPT and certain stockholders of IXC
Communications, Inc. (incorporated by reference to Exhibit 4.13 of the
S-1)...................................................................
4.12 Purchase Agreement dated as of March 25, 1997 by and among IXC
Communications, Inc., Credit Suisse First Boston Corporation ("CS First
Boston") and Dillon Read & Co. Inc. ("Dillon Read") (incorporated by
reference to Exhibit 4.12 of IXC Communications, Inc. Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997 (the "March 31, 1997
10-Q"))................................................................
</TABLE>
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NO. PAGE
- ------- ----------------------------------------------------------------------- -----------
<S> <C> <C>
4.13 Registration Rights Agreement dated as of March 25, 1997 by and among
IXC Communications, Inc., CS First Boston and Dillon Read (incorporated
by reference to Exhibit 4.13 of the March 31, 1997 10-Q)...............
4.14 Restated Certificate of Incorporation of IXC Communications, Inc., as
amended (incorporated by reference to Exhibit 3.1 of IXC
Communications, Inc. Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, as amended (the "June 30, 1997 10-Q"))............
4.15 Amendment to Registration Rights Agreement dated as of March 25, 1997
between IXC Communications, Inc. and GEPT (incorporated by reference to
Exhibit 4.14 of the March 31, 1997 10-Q)...............................
4.16 Registration Rights Agreement dated as of July 8, 1997 between IXC
Communications, Inc. and William G. Rodi, Gordon Hutchins, Jr. and
William F. Linsmeier (incorporated by reference to Exhibit 4.15 of the
June 30, 1997 10-Q)....................................................
4.17 Registration Rights Agreement dated as of July 8, 1997 between IXC
Communications, Inc. and William G. Rodi, Gordon Hutchins, Jr. and
William F. Linsmeier (incorporated by reference to Exhibit 4.16 of the
June 30, 1997 10-Q)....................................................
4.18+ IXC Communications, Inc. Certificate of Designation of the Powers,
Preferences and Relative, Participating, Optional and Other Special
Rights of 12 1/2% Junior Exchangeable Preferred Stock Due 2009 and
12 1/2% Series B Junior Exchangeable Preferred Stock Due 2009 and
Qualifications, Limitations and Restrictions Thereof...................
5.1+ Opinion of Riordan & McKinzie, a Professional Law Corporation regarding
the validity of the issuance of the securities registered hereunder....
12.1+ Statement regarding computation of ratios..............................
23.1+ Consent of Riordan & McKinzie (contained in Exhibit 5.1)...............
23.2+ Consent of Ernst & Young LLP...........................................
24.1* Power of Attorney......................................................
</TABLE>
- ---------------
* Previously filed.
+ Filed herewith.
<PAGE> 1
EXHIBIT 4.18
IXC COMMUNICATIONS, INC.
CERTIFICATE OF DESIGNATION OF THE POWERS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
AND OTHER SPECIAL RIGHTS OF 12 1/2% JUNIOR
EXCHANGEABLE PREFERRED STOCK DUE 2009 AND 12 1/2% SERIES B
JUNIOR EXCHANGEABLE PREFERRED STOCK DUE 2009 AND
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
IXC Communications, Inc. (the "Company"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware, does hereby certify that (i) pursuant to authority conferred upon the
board of directors of the Company (the "Board of Directors") by its Restated
Certificate of Incorporation (hereinafter referred to as the "Restated
Certificate of Incorporation"), and pursuant to the provisions of Sections
141(c)(2) and 151 of the General Corporation Law of the State of Delaware, said
Board of Directors is authorized to issue Preferred Stock of the Company in one
or more series and has authorized a committee of the Board of Directors (the
"Placement Committee") to adopt the resolution set forth below and (ii) the
Placement Committee duly approved and adopted the following resolution on August
14, 1997 (the "Resolution"):
RESOLVED that, pursuant to the authority vested in the Board
of Directors by its Restated Certificate of Incorporation, and the
authority vested by such Board of Directors in a committee of the Board
(the "Placement Committee"), all the members of which are members of
such Board, the Placement Committee does hereby create, authorize and
provide for the issuance of 12 1/2% Junior Exchangeable Preferred Stock
Due 2009, par value $.01 per share, with a stated value of $1000 per
share, initially consisting of up to 450,000 shares and 12 1/2% Series
B Junior Exchangeable Preferred Stock Due 2009, par value $0.1 per
share, with a stated value of $1,000
<PAGE> 2
2
per share, initially consisting of up to 450,000 shares (collectively,
the "Exchangeable Preferred Stock") having the designation,
preferences, relative, participating, optional and other special rights
and the qualifications, limitations and restrictions thereof that are
set forth in the Restated Certificate of Incorporation and in this
Resolution as follows:
(a) Designation. There is hereby created out of the authorized
and unissued shares of Preferred Stock of the Company (i) a series of Preferred
Stock designated as the "12 1/2% Junior Exchangeable Preferred Stock Due 2009"
(the "Initial Exchangeable Preferred Stock") and (ii) a series of Preferred
Stock designated as the "12 1/2% Series B Junior Exchangeable Preferred Stock
Due 2009" (the "Series B Stock"). The number of shares constituting the Initial
Exchangeable Preferred Stock shall be 450,000, and the number of shares
constituting the Series B Stock shall be 450,000. The Initial Exchangeable
Preferred Stock and the Series B Stock are referred to as the Exchangeable
Preferred Stock. The liquidation preference of the Exchangeable Preferred Stock
shall be $1000 per share (the "Liquidation Preference").
(b) Rank. The Exchangeable Preferred Stock will, with respect
to dividend rights and rights on liquidation, winding-up and dissolution, rank
(i) senior to all classes of common stock and to each other class of Capital
Stock or series of Preferred Stock established hereafter by the Board of
Directors of the Company, the terms of which do not expressly provide that it
ranks senior to, or on a parity with, the Exchangeable Preferred Stock as to
dividend rights and rights on liquidation, winding-up and dissolution of the
Company (collectively referred to, together with all classes of common stock of
the Company, as "Junior Stock"); (ii) on a parity with each share of Convertible
Preferred Stock now or hereafter outstanding and on a parity with each other
class of Capital Stock or series of Preferred Stock established hereafter by the
Board of Directors of the
<PAGE> 3
3
Company, the terms of which expressly provide that such class or series will
rank on a parity with the Exchangeable Preferred Stock as to dividend rights and
rights on liquidation, winding-up and dissolution (collectively referred to as
"Parity Stock"); and (iii) junior to each share of Series 3 Preferred Stock now
or hereafter outstanding and junior to each class of Capital Stock or series of
Preferred Stock established hereafter by the Board of Directors of the Company,
the terms of which hereafter established classes or series expressly provide
that such class or series will rank senior to the Exchangeable Preferred Stock
as to dividend rights or rights on liquidation, winding-up and dissolution of
the Company (collectively referred to as "Senior Stock"). All claims of the
holders of the Exchangeable Preferred Stock, including claims with respect to
dividend payments, redemption payments, mandatory repurchase payments or rights
upon liquidation, winding-up or dissolution, shall rank junior to the claims of
the holders of any debt of the Company and all other creditors of the Company.
(c) Dividends. (i) Holders of the outstanding shares of
Exchangeable Preferred Stock will be entitled to receive, when, as and if
declared by the Board of Directors of the Company, out of funds legally
available therefor, cumulative preferential dividends on each share of the
Exchangeable Preferred Stock at a rate per annum equal to 12 1/2% of the
Liquidation Preference of such share payable quarterly (each such quarterly
period being herein called a "Dividend Period"). In addition to the dividends
described in the preceding sentence, holders of outstanding shares of
Exchangeable Preferred Stock will be entitled to additional dividends (the
"Additional Dividends"), when, as and if declared by the Board of Directors of
the Company, out of funds legally available therefor, with respect to the shares
of Exchangeable Preferred Stock, which Additional Dividends shall accrue as
follows if any of the following events occur (each such event in clauses (A),
(B) and (C) below being herein called a "Registration Default"): (A) if by
October 6, 1997, neither the Exchange Offer Registration Statement nor the Shelf
Registration Statement has been filed with the SEC; (B) if by January 19, 1998,
neither the Registered Exchange Offer is consummated nor the Shelf
<PAGE> 4
4
Registration Statement declared effective by the SEC; or (C) if after January
19, 1998 and after either the Exchange Offer Registration Statement or the Shelf
Registration Statement is declared effective, such Registration Statement
thereafter ceases to be effective (in each case except as permitted below) in
connection with resales of Exchangeable Preferred Stock in accordance with and
during the periods specified herein.
Additional Dividends shall accrue on the shares of
Exchangeable Preferred Stock from and including the date on which any such
Registration Default shall occur, to but excluding the date on which all such
Registration Defaults have been cured, at a rate of .50% per annum.
A Registration Default referred to in clause (C) of paragraph
(c)(i) shall be deemed not to have occurred and be continuing in relation to a
Registration Statement or the related prospectus if (i) such Registration
Default has occurred solely as a result of (x) the filing of a post-effective
amendment to the Registration Statement to incorporate annual audited financial
information with respect to the Company where such post-effective amendment is
not yet effective and needs to be declared effective to permit Holders to use
the related prospectus or (y) other material events with respect to the Company
that would need to be described in the Registration Statement or the related
prospectus and (ii) in the case of clause (y), the Company proceeds promptly and
in good faith to amend or supplement the Registration Statement and related
prospectus to describe such events unless the Company has determined in good
faith that there are material legal or commercial impediments in doing so;
provided, however, that in any case if such Registration Default occurs for a
continuous period in excess of 45 days, Additional Dividends shall be payable in
accordance with the immediately preceding paragraphs of this paragraph (c)(i)
from the day such Registration Default initially occurs until such Registration
Default is cured.
Any amounts of Additional Dividends due pursuant to clauses
(A), (B) or (C) of this paragraph (c)(i) or pursuant to the proviso contained in
the preceding sentence will be payable on the regular dividend payment dates
with
<PAGE> 5
5
respect to the Exchangeable Preferred Stock and on the same terms and
conditions and subject to the same limitations as pertain at such time for the
payment of regular dividends. The amount of Additional Dividends will be
determined by multiplying the applicable Additional Dividends rate by the
aggregate liquidation preference of the outstanding shares of Exchangeable
Preferred Stock, multiplied by a fraction, the numerator of which is the number
of days such Additional Dividend rate was applicable during such period
(determined on the basis of a 360-day year comprised of twelve 30-day months),
and the denominator of which is 360.
All dividends on the Exchangeable Preferred Stock, including
Additional Dividends, to the extent accrued, shall be cumulative, whether or not
earned or declared, on a daily basis from the Issue Date or, in the case of
additional shares of Exchangeable Preferred Stock issued in payment of a
dividend, from the date of issuance of such additional shares of Exchangeable
Preferred Stock, and shall be payable quarterly in arrears on each February 15,
May 15, August 15 and November 15 (each, a "Dividend Payment Date"), commencing
on November 15, 1997, to holders of record on the February 1, May 1, August 1
and November 1 immediately preceding the relevant Dividend Payment Date. Any
dividend on the Exchangeable Preferred Stock payable pursuant to this paragraph
(c)(i) on or prior to February 15, 2001 shall be, at the option of the Company,
payable (1) in cash or (2) through the issuance of a number of additional shares
(including fractional shares) of Exchangeable Preferred Stock (the "Additional
Shares") equal to the dividend amount divided by the Liquidation Preference of
such Additional Shares. With respect to dividends accrued after February 15,
2001, all dividends shall be payable in cash.
Any dividend accruing after February 15, 2001 that is not paid
in cash on the relevant Dividend Payment Date shall accrue interest at a rate
per annum equal to the then applicable dividend rate per annum from such
Dividend Payment Date to the date of payment of such dividend. Such interest, if
any, shall be payable in cash on each Dividend Payment Date. Any accrued
interest not paid on a Dividend Payment Date shall accrue interest on such
interest pursuant to this paragraph. Any references herein to the payment of
<PAGE> 6
6
accrued and unpaid dividends shall be deemed to include any such interest.
(ii) In the event the Company notifies the holders of
Exchangeable Preferred Stock of its election not to make a Change of Control
Offer (as defined in paragraph (h)(i)) pursuant to paragraph (h)(iii), then,
within 60 days of the occurrence of the applicable Change of Control, holders of
a majority of the outstanding shares of the Exchangeable Preferred Stock will
designate an Independent Financial Advisor to determine, within 20 days of such
designation, in the opinion of such firm, the appropriate dividend rate that the
Exchangeable Preferred Stock should bear so that, after such reset, the
Exchangeable Preferred Stock would have a market value of 101% of the
Liquidation Preference; provided, however, that no such reset shall be required
to be made if such Independent Financial Advisor determines that the
Exchangeable Preferred Stock has a market value of 101% or greater. If within 5
days of the designation of an Independent Financial Advisor by the Holders, the
Company determines that such Independent Financial Advisor is reasonably
unacceptable to the Company, the Company shall designate a second Independent
Financial Advisor to determine, within 15 days of such designation, in its
opinion, such an appropriate reset dividend rate for the Exchangeable Preferred
Stock. In the event that the two Independent Financial Advisors cannot agree,
within 25 days of the designation of an Independent Financial Advisor by the
Holders of a majority of the outstanding shares of the Exchangeable Preferred
Stock, on the appropriate reset dividend rate, the two Independent Financial
Advisors shall, within 10 days of such 25th day, designate a third Independent
Financial Advisor, which, within 15 days of designation, will determine, in its
opinion, an appropriate reset dividend rate which is between the two rates
selected by the first two Independent Financial Advisors. Upon the determination
of the reset rate, the Exchangeable Preferred Stock shall accrue and accumulate
dividends at the reset rate as of the date of occurrence of the Change of
Control; provided, however, that the reset rate shall in no event be less than
12 1/2% per annum or greater than 15% per annum. The reasonable fees and
expenses including reasonable fees and expenses of legal counsel, if any, and
customary
<PAGE> 7
7
indemnification of each of the three above-referenced Independent Financial
Advisors, shall be borne by the Company.
(iii) All dividends paid with respect to shares of the
Exchangeable Preferred Stock pursuant to paragraph (c)(i) shall be paid pro rata
to the holders entitled thereto.
(iv) No dividend may be declared or paid or set apart for the
payment of dividends by the Company on any Parity Stock for any period unless
full cumulative dividends in respect of each Dividend Period ending on or before
such period shall have been or contemporaneously are declared and paid (or are
deemed declared and paid) in full or declared and, if payable in cash, a sum in
cash sufficient for such payment set apart for such payment on the Exchangeable
Preferred Stock. If full dividends are not so paid, the Exchangeable Preferred
Stock will share dividends pro rata with the Parity Stock.
(v) The Company will not (A) declare, pay or set apart funds
for the payment of any dividend or other distribution with respect to any Junior
Stock or (B) redeem, purchase or otherwise acquire for consideration any Junior
Stock through a sinking fund or otherwise, unless (1) all accrued and unpaid
dividends with respect to the Exchangeable Preferred Stock and any Parity Stock
at the time such dividends are payable have been paid or funds have been set
apart for payment of such dividends and (2) sufficient funds have been paid or
set apart for the payment of the dividend for the current dividend period with
respect to the Exchangeable Preferred Stock and any Parity Stock. As used
herein, the term "dividend" does not include dividends payable solely in shares
of Junior Stock on Junior Stock or in options, warrants or rights to holders of
Junior Stock to subscribe or purchase any Junior Stock.
(vi) Dividends on account of arrears for any past Dividend
Period and dividends in connection with any optional redemption may be declared
and paid at any time, without reference to any regular Dividend Payment Date, to
holders of record on such date, not more than 45 days prior
<PAGE> 8
8
to the payment thereof, as may be fixed by the Board of Directors of the
Company.
(vii) Dividends payable on the Exchangeable Preferred Stock
for any period other than a Dividend Period shall be computed on the basis of a
360-day consisting year of twelve 30-day months and the actual number of days
elapsed in the period for which payable. Dividends payable on the Exchangeable
Preferred Stock for a full Dividend Period will be computed by dividing the per
annum dividend rate by four.
(d) Liquidation Preference. (i) Upon any voluntary or
involuntary liquidation, dissolution or winding-up of the Company, holders of
Exchangeable Preferred Stock will be entitled to be paid, out of the assets of
the Company available for distribution to its stockholders, the Liquidation
Preference of the outstanding shares of Exchangeable Preferred Stock, plus,
without duplication, an amount in cash equal to all accumulated and unpaid
dividends (whether or not earned or declared and including Additional Dividends,
if any,) thereon to the date fixed for liquidation, dissolution or winding-up
(including an amount equal to a prorated dividend for the period from the last
Dividend Payment Date to the date fixed for liquidation, dissolution or
winding-up that would have been payable had the Exchangeable Preferred Stock
been the subject of an Optional Redemption on such date) before any distribution
is made on any Junior Stock. If, upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the amounts payable with respect to
the Exchangeable Preferred Stock and all Parity Stock are not paid in full, the
Exchangeable Preferred Stock and the Parity Stock will share equally and ratably
(in proportion to the respective amounts that would be payable on such shares of
Exchangeable Preferred Stock and the Parity Stock, respectively, if all amounts
payable thereon had been paid in full) in any distribution of assets of the
Company to which each is entitled. After payment of the full amount of the
Liquidation Preference of the outstanding shares of Exchangeable Preferred Stock
(and, if applicable, an amount equal to a prorated dividend), the holders of
shares of Exchangeable Preferred Stock will not be entitled to any
<PAGE> 9
9
further participation in any distribution of assets of the Company.
(ii) For the purposes of this paragraph (d), neither the sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Company nor the consolidation or merger of the Company with or into one or more
other entities shall be deemed to be a liquidation, dissolution or winding-up of
the Company.
(e) Redemption. (i) Optional Redemption. (A) Except as set
forth in clause (B) below, the Exchangeable Preferred Stock shall not be
redeemable at the option of the Company prior to August 15, 2002. On or after
August 15, 2002, each share of the Exchangeable Preferred Stock may be redeemed
(subject to the legal availability of funds therefor) at any time, in whole or
in part, at the option of the Company, at the redemption prices (expressed as a
percentage of the Liquidation Preference of such share) set forth below, plus,
without duplication, an amount in cash equal to all accrued and unpaid dividends
to the date fixed for redemption (the "Optional Redemption Date") (including an
amount in cash equal to a prorated dividend for the period from the Dividend
Payment Date immediately prior to the Optional Redemption Date) (the "Optional
Redemption Price"), if redeemed during the 12-month period beginning August 15
of each of the years set forth below:
<TABLE>
<CAPTION>
Year in which redemption
occurs Percentage
------ ----------
<S> <C>
2002.................................. 106.250%
2003.................................. 105.000
2004.................................. 103.750
2005.................................. 102.500
2006.................................. 101.250
2007 and thereafter................... 100.000
</TABLE>
(B) At any time and from time to time prior to August 15,
2000, the Company may redeem in the aggregate up to 35% of the outstanding
shares of Exchangeable Preferred
<PAGE> 10
10
Stock with the proceeds of one or more Public Equity Offerings at a redemption
price (expressed as a percentage of the Liquidation Preference thereof) of
112.500% plus accrued and unpaid dividends, if any, to the redemption date
(including an amount in cash equal to a prorated dividend for any partial
dividend period); provided, however, that at least $195 million aggregate
Liquidation Preference of the Exchangeable Preferred Stock remains outstanding
after each such redemption.
(C) In the event of a redemption of only a portion of the then
outstanding shares of Exchangeable Preferred Stock, the Company shall effect
such redemption on a pro rata basis, except that the Company may redeem all of
the shares held by holders of fewer than 100 shares (or all of the shares held
by holders who would hold less than 100 shares as a result of such redemption),
as may be determined by the Company.
(ii) Mandatory Redemption. Each share of the Exchangeable
Preferred Stock (if not earlier redeemed or converted) shall be subject to
mandatory redemption in whole (to the extent of lawfully available funds
therefor) on August 15, 2009 (the "Mandatory Redemption Date") at a price equal
to 100% of the Liquidation Preference of such share, plus, without duplication,
all accrued and unpaid dividends thereon (including an amount equal to a
prorated dividend thereon from the immediately preceding Dividend Payment Date
to the Mandatory Redemption Date), if any, to the Mandatory Redemption Date (the
"Mandatory Redemption Price").
(iii) Procedure for Redemption. (A) On and after the Optional
Redemption Date or the Mandatory Redemption Date, as the case may be (the
"Redemption Date"), unless the Company defaults in the payment of the applicable
redemption price, dividends will cease to accumulate on shares of Exchangeable
Preferred Stock called for redemption and all rights of holders of such shares
will terminate except for the right to receive the Optional Redemption Price or
the Mandatory Redemption Price, as the case may be, without interest; provided,
however, that if a notice of redemption shall have been given as provided in
subparagraph (iii)(B) and the funds necessary for redemption (including an
amount
<PAGE> 11
11
in respect of all dividends that will accrue to the Redemption Date) shall have
been segregated and irrevocably set apart by the Company, in trust for the
benefit of the holders of the shares called for redemption, then dividends shall
cease to accumulate on the Redemption Date on the shares to be redeemed and, at
the close of business on the day on which such funds are segregated and set
apart, the holders of the shares to be redeemed shall, with respect to the
shares to be redeemed, cease to be stockholders of the Company and shall be
entitled only to receive the Optional Redemption Price or the Mandatory
Redemption Price, as the case may be, for such shares without interest from the
Redemption Date.
(B) With respect to a redemption pursuant to paragraph (e)(i)
or (e)(ii), the Company will send a written notice of redemption by first class
mail to each holder of record of shares of Exchangeable Preferred Stock, not
fewer than 30 days nor more than 60 days prior to the Redemption Date at its
registered address (the "Redemption Notice"); provided, however, that no failure
to give such notice nor any deficiency therein shall affect the validity of the
procedure for the redemption of any shares of Exchangeable Preferred Stock to be
redeemed except as to the holder or holders to whom the Company has failed to
give said notice or except as to the holder or holders whose notice was
defective. The Redemption Notice shall state:
(1) whether the redemption is pursuant to
paragraph (e)(i) or (e)(ii) hereof;
(2) the Optional Redemption Price or the Mandatory
Redemption Price, as the case may be;
(3) whether all or less than all the outstanding shares of the
Exchangeable Preferred Stock are to be redeemed and the total number of
shares of the Exchangeable Preferred Stock being redeemed;
(4) the Redemption Date;
(5) that the holder is to surrender to the Company, in the
manner, at the place or places and at
<PAGE> 12
12
the price designated, his certificate or certificates representing the
shares of Exchangeable Preferred Stock to be redeemed; and
(6) that dividends on the shares of the Exchangeable Preferred
Stock to be redeemed shall cease to accumulate on such Redemption Date
unless the Company defaults in the payment of the Optional Redemption
Price or the Mandatory Redemption Price, as
the case may be.
(C) Each holder of Exchangeable Preferred Stock shall
surrender the certificate or certificates representing such shares of
Exchangeable Preferred Stock to the Company, duly endorsed (or otherwise in
proper form for transfer, as determined by the Company), in the manner and at
the place designated in the Redemption Notice, and on the Redemption Date the
full Optional Redemption Price or Mandatory Redemption Price, as the case may
be, for such shares shall be payable in cash to the person whose name appears on
such certificate or certificates as the owner thereof, and each surrendered
certificate shall be canceled and retired. In the event that less than all of
the shares represented by any such certificate are redeemed, a new certificate
shall be issued representing the unredeemed shares.
(f) Voting Rights. (i) The holders of Exchangeable Preferred
Stock, except as otherwise required under Delaware law or as set forth in
paragraphs (ii) and (iii) below, shall not be entitled to vote on any matter
required or permitted to be voted upon by the stockholders of the Company.
(ii) (A) If (1) dividends on the Exchangeable Preferred Stock
are in arrears and unpaid for six or more Dividend Periods (whether or not
consecutive) (a "Dividend Default"); (2) the Company fails to redeem the
Exchangeable Preferred Stock on August 15, 2009, or fails to otherwise discharge
any redemption obligation with respect to the Exchangeable Preferred Stock; (3)
a breach or violation of any of the provisions set forth under paragraph (l)
(Certain Additional Provisions) occurs and the breach or violation continues for
a period of 30 days or more after the Company
<PAGE> 13
13
receives notice thereof specifying the default from the holders of at least 25%
of the shares of Exchangeable Preferred Stock then outstanding; or (4) the
Company fails to pay at final maturity (giving effect to any applicable grace
period) the principal amount of any Indebtedness of the Company or any
Significant Subsidiary (other than any Permitted PSINet Non-Recourse Debt) or
the final maturity of any such Indebtedness is accelerated because of a default
and the total amount of such Indebtedness unpaid or accelerated exceeds $5
million, then the number of directors constituting the Board of Directors of the
Company will, subject to paragraph (f)(ii)(E), be increased by two and the
Holders of the then outstanding shares of Exchangeable Preferred Stock (together
with the holders of Parity Stock upon which like rights have been conferred and
are exercisable), voting separately and as a class, shall have the right and
power to elect such two additional directors. Each such event described in
clauses (1),(2),(3) or (4) above is a "Voting Rights Triggering Event".
(B) The voting rights set forth in paragraph (f)(ii)(A) above
will continue until such time as (x) in the case of a Dividend Default, all
dividends in arrears on the Exchangeable Preferred Stock are paid in full in
cash or (y) in all other cases, any failure, breach or default giving rise to
such Voting Rights Triggering Event is remedied or waived by the Holders of at
least a majority of the outstanding shares of Exchangeable Preferred Stock then
outstanding, at which time the term of any directors elected pursuant to the
provisions of paragraph (f)(ii)(A) above (subject to the right of holders of any
other preferred stock to elect directors) shall terminate forthwith and the
number of directors constituting the Board of Directors shall be decreased by
two (until the occurrence of any subsequent Voting Rights Triggering Event). At
any time after voting power to elect directors shall have become vested and be
continuing in the holders of Exchangeable Preferred Stock (together with the
holders of Parity Stock upon which like rights have been conferred and are
exercisable) pursuant to paragraph (f)(ii)(A) hereof, or if vacancies shall
exist in the offices of directors elected by such holders, a proper officer of
the Company may, and upon the written request of the holders of record of at
least 25%
<PAGE> 14
14
of the shares of Exchangeable Preferred Stock then outstanding or the holders of
25% of the shares of Parity Stock then outstanding upon which like rights have
been confirmed and are exercisable addressed to the secretary of the Company
shall, call a special meeting of the Holders of Exchangeable Preferred Stock and
the holders of such Parity Stock for the purpose of electing the directors which
such holders are entitled to elect pursuant to the terms hereof; provided,
however, that no such special meeting shall be called if the next annual meeting
of stockholders of the Company is to be held within 60 days after the voting
power to elect directors shall have become vested, in which case such meeting
shall be deemed to have been called for such next annual meeting. If such
meeting shall not be called by a proper officer of the Company within 20 days
after personal service to the secretary of the Company at its principal
executive offices, then the Holders of record of at least 25% of the outstanding
shares of Exchangeable Preferred Stock or the holders of 25% of the shares of
Parity Stock upon which like rights have been confirmed and are exercisable may
designate in writing one of their members to call such meeting at the expense of
the Company, and such meeting may be called by the person so designated upon the
notice required for the annual meetings of stockholders of the Company and shall
be held at the place for holding the annual meetings of stockholders. Any holder
of Exchangeable Preferred Stock or such Parity Stock so designated shall have,
and the Company shall provide, access to the lists of holders of Exchangeable
Preferred Stock and the holders of such Parity Stock to be called pursuant to
the provisions hereof. If no special meeting of the Holders of Exchangeable
Preferred Stock and the holders of such Parity Stock is called as provided in
this paragraph (f)(ii), then such meeting shall be deemed to have been called
for the next annual meeting of stockholders of the Company or special meeting of
the holders of any other capital stock of the Company.
(C) At any meeting held for the purposes of electing directors
at which the Holders of Exchangeable Preferred Stock (together with the holders
of Parity Stock upon which like rights have been conferred and are exercisable)
shall have the right, voting together as a
<PAGE> 15
15
separate class, to elect directors as aforesaid, the presence in person or by
proxy of the holders of at least a majority in voting power of the outstanding
shares of Exchangeable Preferred Stock (and such Parity Stock) shall be required
to constitute a quorum thereof.
(D) Any vacancy occurring in the office of a director elected
by the Holders of Exchangeable Preferred Stock (and such Parity Stock) may be
filled by the remaining director elected by the Holders of Exchangeable
Preferred Stock (and such Parity Stock) unless and until such vacancy shall be
filled by the Holders of Exchangeable Preferred Stock (and such Parity Stock).
(E) In the event that an event occurs at any time which
results in the holders of any Parity Stock having voting rights to elect
directors to the Board of Directors, holders of Exchangeable Preferred Stock
shall, whether or not such event otherwise constitutes a Voting Rights
Triggering Event pursuant to paragraph (f)(ii)(A), have the voting rights set
forth in paragraphs (f)(ii)(A) and (f)(ii)(B), and such event shall be deemed
(for purposes of this paragraph (f) only) to constitute a Voting Rights
Triggering Event. In addition, in the event that during a time in which
directors elected by the holders of Exchangeable Preferred Stock pursuant to
this paragraph (f)(ii) are serving on the Board of Directors ("Previously-
Elected Directors") an event occurs which results in holders of Parity Stock
having voting rights to elect (voting together with the holders of Exchangeable
Preferred Stock) at least two directors to the Board of Directors, the holders
of Exchangeable Preferred Stock shall vote together with the holders of such
Parity Stock to elect such new directors, and upon the election of the new
directors the Previously-Elected Directors shall (unless such Previously-
Elected Directors are elected as new directors) cease to serve on the Board of
Directors.
(iii) (A) So long as any shares of the Exchangeable Preferred
Stock are outstanding, the Company will not authorize, create or increase the
authorized amount of any class or series of Senior Stock without the affirmative
vote or consent of holders of at least
<PAGE> 16
16
two-thirds of the shares of Exchangeable Preferred Stock then outstanding,
voting or consenting, as the case may be, as one class, given in person or by
proxy, either in writing or by resolution adopted at an annual or special
meeting (except that no such vote or consent shall be required for the issuance
of additional shares of Series 3 Preferred Stock to be paid as dividends on such
Series 3 Preferred Stock pursuant to the terms of such Series 3 Preferred
Stock).
(B) So long as any shares of the Exchangeable Preferred Stock
are outstanding, the Company will not amend this Certificate of Designation so
as to affect adversely the specified rights, preferences, privileges or voting
rights of Holders of shares of Exchangeable Preferred Stock or to authorize the
issuance of any additional shares of Exchangeable Preferred Stock (except to
authorize the issuance of additional shares of Exchangeable Preferred Stock to
be paid as dividends on the Exchangeable Preferred Stock, for which no consent
shall be necessary) without the affirmative vote or consent of Holders of at
least a majority of the issued and outstanding shares of Exchangeable Preferred
Stock, voting or consenting, as the case may be, as one class, given in person
or by proxy, either in writing or by resolution adopted at an annual or special
meeting.
(C) Except as set forth in paragraph (f)(iii)(A) or (B) above,
(x) the creation, authorization or issuance of any shares of any Junior Stock,
Parity Stock or Senior Stock, including the designation of a series of
Exchangeable Preferred Stock, or (y) the increase or decrease in the amount of
authorized Capital Stock of any class, including Preferred Stock, shall not
require the consent of Holders of Exchangeable Preferred Stock and shall not be
deemed to affect adversely the rights, preferences, privileges or voting rights
of shares of Exchangeable Preferred Stock.
(D) Prior to the exchange of Exchangeable Preferred Stock for
Exchange Debentures, the Company shall not amend or modify the Exchange
Indenture (except as expressly provided therein in respect of amendments without
the consent of holders of Exchange Debentures) without
<PAGE> 17
17
the affirmative vote or consent of holders of at least a majority of the shares
of Exchangeable Preferred Stock then outstanding, voting or consenting, as the
case may be, as one class, given in person or by proxy, either in writing or by
resolution adopted at an annual or special meeting.
(iv) In any case in which the Holders of Exchangeable
Preferred Stock shall be entitled to vote pursuant to this paragraph (f) or
pursuant to Delaware law, each Holder of Exchangeable Preferred Stock entitled
to vote with respect to such matters shall be entitled to one vote for each
share of Exchangeable Preferred Stock held.
(g) Exchange. (i) Exchange for Debentures. (A) The Company
may, at its option, on any scheduled Dividend Payment Date, exchange the
Exchangeable Preferred Stock, in whole but not in part, for the Exchange
Debentures; provided however, that (1) on the date of such exchange there are no
accumulated and unpaid dividends on the Exchangeable Preferred Stock (including
the dividends payable on such date) or other contractual impediment to such
exchange; (2) there shall be funds legally available sufficient therefor; (3)
immediately after giving effect to such exchange, no Default (as defined in the
Exchange Indenture) shall have occurred and be continuing, and (iv) the Company
shall have delivered to the Trustee under the Exchange Indenture an opinion of
counsel with respect to the due authorization and issuance of the Exchange
Debentures.
(B) Upon any exchange pursuant to this paragraph (g)(i),
holders of outstanding shares of Exchangeable Preferred Stock will be entitled
to receive $1.00 principal amount of Exchange Debentures for each $1.00 of
liquidation preference of Exchangeable Preferred Stock held by them. Exchange
Debentures issued in exchange for Exchangeable Preferred Stock will be issued in
principal amounts of $1,000 and integral multiples thereof to the extent
possible, and will also be issued in principal amounts less than $1,000 so that
each holder of Exchangeable Preferred Stock will receive certificates
representing the entire amount of Exchange Debentures to which such holder's
shares of Exchangeable Preferred Stock entitle such holder;
<PAGE> 18
18
provided, however, that the Company may pay cash in lieu of issuing an Exchange
Debenture in a principal amount less than $1,000.
(ii) Procedures. (A) The Company will send a written notice of
exchange (the "Exchange Notice") by mail to each holder of record of shares of
Exchangeable Preferred Stock not fewer than 30 days nor more than 60 days before
the date fixed for such exchange (the "Exchange Date"); provided, however, that
no failure to give such notice nor any deficiency therein shall affect the
validity of the procedure for the exchange of any shares of Exchangeable
Preferred Stock to be exchanged except as to the holder or holders to whom the
Company has failed to give said notice or except as to the holder or holders
whose notice was defective. The Exchange Notice shall state:
(1) the Exchange Date;
(2) that the holder is to surrender to the Company, in the
manner and at the place or places designated, his certificate or
certificates representing the shares of Exchangeable Preferred Stock to
be exchanged;
(3) that dividends on the shares of Exchangeable Preferred
Stock to be exchanged shall cease to accrue on such Exchange Date
whether or not certificates for shares of Exchangeable Preferred Stock
are surrendered for exchange on such Exchange Date unless the Company
shall default in the delivery of Exchange Debentures; and
(4) that interest on the Exchange Debentures shall accrue from
the Exchange Date whether or not certificates for shares of
Exchangeable Preferred Stock are surrendered for exchange on such
Exchange Date.
(B) On and after the Exchange Date, dividends will cease to
accrue on the outstanding shares of Exchangeable Preferred Stock, and all rights
of the holders of Exchangeable Preferred Stock (except the right to receive
Exchange Debentures, an amount in cash, to the extent
<PAGE> 19
19
applicable, equal to the accumulated and unpaid dividends to the Exchange Date
and, if the Company so elects, cash in lieu of any Exchange Debenture that is in
a principal amount that is not an integral multiple of $1,000) will terminate.
The person entitled to receive the Exchange Debentures issuable upon such
exchange will be treated for all purposes as the registered holder of such
Exchange Debentures.
(C) On or before the Exchange Date, each holder of
Exchangeable Preferred Stock shall surrender the certificate or certificates
representing such shares of Exchangeable Preferred Stock, in the manner and at
the place designated in the Exchange Notice. The Company shall cause the
Exchange Debentures to be executed on the Exchange Date and, upon surrender in
accordance with the Exchange Notice of the certificates for any shares of
Exchangeable Preferred Stock so exchanged, duly endorsed (or otherwise in proper
form for transfer, as determined by the Company), such shares shall be exchanged
by the Company into Exchange Debentures. The Company shall pay interest on the
Exchange Debentures at the rate and on the dates specified therein from the
Exchange Date.
(iii) No Exchange in Certain Cases. Notwithstanding the
foregoing provisions of this paragraph (g), the Company shall not be entitled to
exchange the Exchangeable Preferred Stock for Exchange Debentures if such
exchange, or any term or provision of the Exchange Indenture or the Exchange
Debentures, or the performance of the Company's obligations under the Exchange
Indenture or the Exchange Debentures, shall materially violate or conflict with
any applicable law or agreement or instrument then binding on the Company or if,
at the time of such exchange, the Company is insolvent or if it would be
rendered insolvent by such exchange.
(iv) Exchange of Initial Exchangeable Preferred Stock for
Series B Stock. The Series B Stock will be issued by the Company only in
connection with an exchange offer, on a share for share basis, for the Initial
Exchangeable Preferred Stock as required pursuant to the Registration Rights
Agreement. Each share of Series B Stock issued in exchange for a share of
Initial Exchangeable Preferred Stock
<PAGE> 20
20
will be deemed to have the same liquidation preference and accrued and unpaid
dividends as the share of Initial Exchangeable Preferred Stock so exchanged.
(h) Change of Control. (i) Upon the occurrence of a Change of
Control (the date of such occurrence being the "Change of Control Date"), the
Company shall either (1) offer to purchase each holder's Exchangeable Preferred
Stock in cash pursuant to the offer described in paragraph (h)(iii) (the "Change
of Control Offer") at a purchase price equal to 101% of the Liquidation
Preference thereof, plus, without duplication, all accrued and unpaid dividends,
if any, to the Change of Control Payment Date, including an amount in cash equal
to a prorated dividend for the period from the Dividend Payment Date immediately
prior to the Change of Control Payment Date to the Change of Control Payment
Date or (2) notify each holder of the Company's election not to make an offer as
described in clause (1) above, in which case the dividend rate on the
Exchangeable Preferred Stock shall be subject to reset pursuant to paragraph
(c)(ii).
(ii) Prior to the mailing of the notice referred to in
paragraph (h)(iii), but in any event within 30 days following the date on which
the Company knows or reasonably should have known that a Change in Control has
occurred, the Company covenants that it shall promptly determine if the purchase
of the Exchangeable Preferred Stock would violate or constitute a default under
the indebtedness of the Company.
(iii) Within 30 days following the date on which the Company
knows or reasonably should have known that a Change in Control has occurred, the
Company must send, by first-class mail, postage prepaid, a notice to each holder
of Exchangeable Preferred Stock. Such notice shall state whether the Company has
elected to make an offer to purchase shares of Exchangeable Preferred Stock and
if it has so elected, such notice shall contain all instructions and materials
necessary to enable such holders to tender Exchangeable Preferred Stock pursuant
to the Change of
<PAGE> 21
21
Control Offer. If the Company has elected to make a Change of Control Offer,
such notice shall state:
(A) that a Change of Control has occurred, that a Change of
Control Offer is being made pursuant to this paragraph (h) and that all
Exchangeable Preferred Stock validly tendered and not withdrawn will be
accepted for payment;
(B) the purchase price (including the amount of accrued
dividends, if any) and the purchase date (which must be no earlier than
30 days nor later than 60 days from the date such notice is mailed,
other than as may be required by law) (the "Change of Control Payment
Date");
(C) that any shares of Exchangeable Preferred Stock not
tendered will continue to accrue dividends;
(D) that, unless the Company defaults in making payment
therefor, any share of Exchangeable Preferred Stock accepted for
payment pursuant to the Change of Control Offer shall cease to accrue
dividends after the Change of Control Payment Date;
(E) that holders electing to have any shares of Exchangeable
Preferred Stock purchased pursuant to a Change of Control Offer will be
required to surrender stock certificates representing such shares of
Exchangeable Preferred Stock, properly endorsed for transfer, together
with such other customary documents as the Company and the Transfer
Agent may reasonably request to the Transfer Agent and registrar for
the Exchangeable Preferred Stock at the address specified in the notice
prior to the close of business on the Business Day prior to the Change
of Control Payment Date;
(F) that holders will be entitled to withdraw their election
if the Company receives, not later than five Business Days prior to the
Change of Control Payment Date, a telegram, a telex, facsimile
transmission or letter setting forth the name of the
<PAGE> 22
22
holder, the number of shares of Exchangeable Preferred Stock the holder
delivered for purchase and a statement that such holder is withdrawing
his election to have such shares of Exchangeable Preferred Stock
purchased;
(G) that holders whose shares of Exchangeable Preferred Stock
are purchased only in part will be issued a new certificate
representing the unpurchased shares of Exchangeable Preferred Stock;
and
(H) the circumstances and relevant facts regarding such Change
of Control (including information with respect to pro forma historical
income, cash flow and capitalization after giving effect to such Change
of Control).
If the Company elects not to make a Change of Control Offer,
such notice shall state that the dividend rate on the Exchangeable Preferred
Stock is subject to adjustment pursuant to paragraph (c)(ii).
(iv) The Company will comply with any tender offer rules under
the Exchange Act which then may be applicable, including Rules 13e-4 and 14e-1,
in connection with any offer made by the Company to repurchase the shares of
Exchangeable Preferred Stock as a result of a Change of Control. To the extent
that the provisions of any securities laws or regulations conflict with
provisions of this Certificate of Designation, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under this Certificate of Designation by virtue
thereof.
(v) On the Change of Control Payment Date the Company shall
(A) accept for payment the shares of Exchangeable Preferred Stock validly
tendered pursuant to the Change of Control Offer, (B) pay to the holders of
shares so accepted the purchase price therefor in cash and (C) cancel each
surrendered certificate and retire the shares represented thereby. Unless the
Company defaults in the payment for the shares of Exchangeable Preferred Stock
tendered pursuant to the Change of Control Offer, dividends will cease to accrue
with respect to the shares of
<PAGE> 23
23
Exchangeable Preferred Stock tendered and all rights of holders of such tendered
shares will terminate, except for the right to receive payment therefor, on the
Change of Control Payment Date.
(vi) To accept the Change of Control Offer, the holder of a
share of Exchangeable Preferred Stock shall deliver, on or before the 10th day
prior to the Change of Control Payment Date, written notice to the Company (or
an agent designated by the Company for such purpose) of such holder's
acceptance, together with certificates evidencing the shares of Exchangeable
Preferred Stock with respect to which the Change of Control Offer is being
accepted, duly endorsed for transfer.
(i) Conversion or Exchange. Except as otherwise provided
herein, the holders of shares of Exchangeable Preferred Stock shall not have any
rights hereunder to convert such shares into or exchange such shares for shares
of any other class or classes or of any other series of any class or classes of
Capital Stock of the Company.
(j) Reissuance of Exchangeable Preferred Stock. Shares of
Exchangeable Preferred Stock that have been issued and reacquired in any manner,
including shares purchased or redeemed or exchanged, shall not be reissued as
shares of Exchangeable Preferred Stock and shall (upon compliance with any
applicable provisions of the laws of Delaware) have the status of authorized and
unissued shares of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of Preferred Stock; provided,
however, that so long as any shares of Exchangeable Preferred Stock are
outstanding, any issuance of such shares must be in compliance with the terms
hereof.
(k) Business Day. If any payment, redemption or exchange shall
be required by the terms hereof to be made on a day that is not a Business Day,
such payment, redemption or exchange shall be made on the immediately succeeding
Business Day.
<PAGE> 24
24
(l) Certain Additional Provisions. The Company covenants and
agrees for the benefit of the Holders as follows:
(i) SEC Reports. The Company shall file with the Trustee and
provide Holders, within 15 days after it files them with the SEC, copies of its
annual report and the information, documents and other reports which the Company
is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange
Act. Notwithstanding that the Company may not be required to remain subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company shall continue to file with the SEC and provide the Trustee and Holders
with such annual reports and such information, documents and other reports as
are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a
U.S. corporation subject to such Sections, such information, documents and other
reports to be so filed and provided at the times specified for the filing of
such information, documents and reports under such Sections.
(ii) Limitation on Indebtedness. (A) The Company shall not
Incur, and shall not permit any Restricted Subsidiary to Incur, directly or
indirectly, any Indebtedness unless, on the date of such Incurrence and after
giving pro forma effect thereto (including pro forma application of the net
proceeds therefrom) and to any other Indebtedness Incurred or repaid since the
end of the period referred to below and the receipt and application of the
proceeds thereof, either (i) the Indebtedness to Operating Cash Flow Ratio for
the Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
Indebtedness is Incurred would have been not more than 5.0 to 1.0, or (ii) the
Company's Consolidated Capital Ratio as of the end of the most recent fiscal
quarter for which internal financial statements are available immediately
preceding the date on which such Indebtedness is Incurred is less than 2.0 to
1.0.
<PAGE> 25
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(B) Notwithstanding the foregoing paragraph (a), the Company
and its Restricted Subsidiaries may Incur any or all of the following
Indebtedness:
(1) Indebtedness Incurred pursuant to one or more Credit
Agreements; provided, however, that, after giving effect to any such
Incurrence, the aggregate principal amount of such Indebtedness then
outstanding does not exceed the greater of (A) $150,000,000 and (B) 85%
of the book value of the Accounts Receivables of the Company and its
Restricted Subsidiaries;
(2) Indebtedness owed to and held by the Company or a
Restricted Subsidiary; provided, however, that any subsequent issuance
or transfer of any Capital Stock which results in any Restricted
Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another
Restricted Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Indebtedness by the issuer thereof;
(3) the Exchange Debentures (including Exchange Debentures
issued in lieu of cash interest payments with respect to Exchange
Debentures);
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this paragraph
(l)(ii)(B));
(5) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to paragraph (l)(ii)(A) pursuant to clause (3) or (4)
of this paragraph (l)(ii)(B) or this clause (5);
(6) Hedging Obligations consisting of Interest Rate Agreements
directly related to Indebtedness permitted to be Incurred by the
Company and its Restricted Subsidiaries pursuant to this Certificate of
Designation.
(7) Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money
<PAGE> 26
26
obligations, in each case Incurred for the purpose of financing all or
any part of the purchase price or cost of construction or improvement
of property used in the business of the Company or such Restricted
Subsidiary;
(8) In the event that the PSINet Shares are held by the
Company or a Restricted Subsidiary, the Incurrence by the Company or
such Restricted Subsidiary of Permitted PSINet Non-Recourse Debt; and
(9) Indebtedness in an aggregate principal amount at any time
outstanding which, together with the amount of all other Indebtedness
of the Company and its Restricted Subsidiaries outstanding on the date
of such Incurrence (other than Indebtedness permitted by clauses (1)
through (8) of this paragraph (l)(ii)(B) and paragraph (l)(ii)(A)),
does not exceed 5% of Consolidated Tangible Assets.
(C) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to paragraph (l)(ii)(B) if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinated Obligations unless such
Indebtedness shall be subordinated to the Exchange Debentures to at least the
same extent as such Subordinated Obligations.
(D) For purposes of determining compliance with this paragraph (l)(ii),
(1) in the event that an item of Indebtedness meets the criteria of more than
one of the types of Indebtedness described above, the Company, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses and
(2) an item of Indebtedness may be divided and classified in more than one of
the types of Indebtedness described above.
(iii) Limitation on Restricted Payments. (A) The Company shall
not, and shall not permit any Restricted
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Subsidiary, directly or indirectly, to make a Restricted Payment if at the time
the Company or such Restricted Subsidiary makes such Restricted Payment:
(1) a Voting Rights Triggering Event shall have occurred and
be continuing (or would result therefrom);
(2) the Company is not able to Incur an additional $1.00 of
Indebtedness under paragraph (l)(ii)(A); or
(3) the aggregate amount of such Restricted Pay ment and all
other Restricted Payments since the Issue Date would exceed the sum of:
(I) an amount equal to the Cumulative Operating Cash
Flor for the period (taken as one accounting period) from the
beginning of the first full fiscal quarter commencing after
the Issue Date to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment less 1.50
times the Company's Cumulative Consolidated Interest Expense
for such period;
(II) the aggregate Net Cash Proceeds received by the
Company from the issuance or sale of its Parity Stock and
Junior Stock (in each case other than Disqualified Stock)
subsequent to the Issue Date (other than an issuance or sale
to a Subsidiary of the Company and other than an issuance or
sale to an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the
benefit of their employees);
(III) the amount by which Indebtedness of the Company
is reduced on the Company's balance sheet upon the conversion
or exchange (other than by a Subsidiary of the Company)
subsequent to the Issue Date of any Indebtedness of the
Company convertible or exchangeable for Parity Stock or Junior
Stock (in each case other than Disqualified
<PAGE> 28
28
Stock) of the Company (less the amount of any cash, or the
fair value of any other property, distributed by the Company
upon such conversion or exchange); and
(IV) an amount equal to the sum of (x) the net
reduction in Investments in any Person resulting from
dividends, repayments of loans or advances or other transfers
of assets (but excluding such interest, dividends, repayments,
advances or other transfers of assets to the extent any such
item increases Consolidated Net Income), in each case to the
Company or any Restricted Subsidiary from any Person
(including, without limitation, from Unrestricted
Subsidiaries), and (y) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair
market value of the net assets of an Unrestricted Subsidiary
at the time such Unrestricted Subsidiary is designated a
Restricted Subsidiary; provided, however, that the foregoing
sum shall not exceed, in the case of any Person (including any
Unrestricted Subsidiary), the amount of Investments previously
made (and treated as a Restricted Payment) by the Company or
any Restricted Subsidiary in such Person.
(B) The provisions of paragraph (l)(iii)(A) shall not
prohibit:
(1) any Restricted Payment made out of the proceeds of the
substantially concurrent sale of, or any acquisition of any Parity
Stock or Junior Stock of the Company made by exchange for, other Parity
Stock or Junior Stock, as the case may be, of the Company (in each case
other than Disqualified Stock and other than Parity Stock or Junior
Stock issued or sold to a Subsidiary of the Company or an employee
stock ownership plan or to a trust established by the Company or any of
its Subsidiaries for the benefit of their employees); provided,
however, that (I) such Restricted Payment shall be excluded in the
calculation of the amount of Restricted Payments and (II) the Net Cash
Proceeds from such sale shall be excluded from the
<PAGE> 29
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calculation of amounts under paragraph (l)(iii)(A)(3)(II);
(2) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would
have complied with paragraph (l)(iii); provided, however, that at the
time of payment of such dividend, no other Voting Rights Triggering
Event shall have occurred and be continuing (or result therefrom);
provided further, however, that such dividend shall be included in the
calculation of the amount of Restricted Payments; or
(3) the repurchase or other acquisition of shares of, or
options to purchase shares of, common stock of the Company or any of
its Subsidiaries from employees, former employees, directors or former
directors of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former
directors), pursuant to the terms of the agreements (including
employment agreements) or plans (or amendments thereto) approved by the
Board of Directors under which such individuals purchase or sell or are
granted the option to purchase or sell, shares of such common stock;
provided, however, that the aggregate amount of such repurchases and
other acquisitions shall not exceed $1,000,000 in any calendar year;
provided further, however, that such repurchases and other acquisitions
shall be excluded in the calculation of the amount of Restricted
Payments.
(iv) Limitation on Restrictions on Distributions from
Restricted Subsidiaries. The Company shall not, and shall not permit any
Restricted Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to (A) pay dividends or make any other distributions on
its Capital Stock to the Company or a Restricted Subsidiary or pay any
Indebtedness owed to the
<PAGE> 30
30
Company, (B) make any loans or advances to the Company or (C) transfer any of
its property or assets to the Company, except:
(1) any encumbrance or restriction pursuant to an
agreement in effect at or entered into on the Issue
Date;
(2) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary on or prior to the
date on which such Restricted Subsidiary was acquired by the Company
(other than Indebtedness Incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant
to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Company) and outstanding on such date;
(3) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (1) or (2) of this paragraph (l)(iv) or
this clause (3) or contained in any amendment to an agreement referred
to in clause (1) or (2) of this paragraph (l)(iv) or this clause (3);
provided, however, that the encumbrances and restrictions with respect
to such Restricted Subsidiary contained in any such refinancing
agreement or amendment are no less favorable to the holders of
Exchangeable Preferred Stock than encumbrances and restrictions with
respect to such Restricted Subsidiary contained in such predecessor
agreements;
(4) any such encumbrance or restriction consisting of
customary nonassignment provisions in leases governing leasehold
interests to the extent such provisions restrict the transfer of the
lease or the property leased thereunder;
<PAGE> 31
31
(5) in the case of clause (C) above, restrictions contained in
IRU Agreements, security agreements or mortgages securing Indebtedness
or other obligations of a Restricted Subsidiary to the extent such
restrictions restrict the transfer of the property subject to such
security agreements or mortgages;
(6) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of
such Restricted Subsidiary pending the closing of such sale or
disposition; and
(7) any such encumbrance or restriction contained
in the PSINet Agreement.
(v) Limitation on Affiliate Transactions. (A) The Company
shall not, and shall not permit any Restricted Subsidiary to, enter into or
permit to exist any transaction (including the purchase, sale, lease or exchange
of any property, employee compensation arrangements or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction") unless
(1) such Affiliate Transaction is on terms that are no less favorable to the
Company or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (2) the Company delivers to the Transfer
Agent (I) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $1,000,000 a resolution of the Board of Directors set
forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (1) above and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of Directors
and (II) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $10,000,000, other than transactions with GE Capital
Communication and Excluded PSINet Transactions, an opinion as to the fairness to
the Company or such Restricted Subsidiary of such Affiliate Transaction from a
financial point of view issued by an investment banking firm of national
standing.
<PAGE> 32
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(B) The provisions of the foregoing paragraph (l)(v)(A) shall
not prohibit (1) any Restricted Payment permitted to be paid pursuant to
paragraph (l)(iii), (2) any issuance of securities, or other payments, awards or
grants in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans approved by the
Board of Directors, (3) the grant of stock options or similar rights to
employees and directors of the Company pursuant to plans approved by the Board
of Directors, (4) loans or advances to employees in the ordinary course of
business in accordance with the past practices of the Company or its Restricted
Subsidiaries, but in any event not to exceed $500,000 in the aggregate
outstanding at any one time, (5) any employment or consulting arrangement or
agreement entered into by the Company or any of its Restricted Subsidiaries in
the ordinary course of business and consistent with the past practice of the
Company or such Restricted Subsidiary, (6) the payment of reasonable fees to
directors of the Company and its Restricted Subsidiaries who are not employees
of the Company or its Restricted Subsidiaries, (7) any Affiliate Transaction
between the Company and a Restricted Subsidiary or between Restricted
Subsidiaries, (8) transactions in connection with Permitted Businesses between
the Company and GE Capital Communication, (9) transactions between the Company
or any Restricted Subsidiary specifically contemplated by the PSINet Agreement
and (10) the issuance or sale of any Capital Stock (other than Disqualified
Stock) of the Company. Notwithstanding the foregoing, Affiliate Transactions
shall not include any transaction involving the sale, purchase, repurchase,
redemption, transfer, exchange or other acquisition or disposition of Senior
Notes, Exchangeable Preferred Stock or Convertible Preferred Stock by or from,
or the payment of principal of, premium, if any, and interest on, or liquidation
preference of and dividend on, any Senior Notes, Exchangeable Preferred Stock or
Convertible Preferred Stock, as the case may be, to any Affiliate of the Company
or any Affiliate of a Restricted Subsidiary of the Company; provided, however,
that such transaction is offered substantially concurrently to all other holders
of Senior Notes, Exchangeable Preferred Stock or Convertible Preferred Stock, as
the case may be, on the same terms and conditions;
<PAGE> 33
33
provided further, however, that such transaction is approved by a majority of
the disinterested members of the Board of Directors, other than transactions in
connection with the payment of principal of, premium, if any, and interest on,
or liquidation preference of and dividends on, Senior Notes, Exchangeable
Preferred Stock or Convertible Preferred Stock, as the case may be, pursuant to
the provisions of the indenture or certificate of designation governing the
payment of interest and principal, dividends and liquidation preference,
optional redemption, repurchases from the proceeds of an asset disposition and
repurchases upon a change of control.
(vi) When Company May Merge or Transfer Assets. The Company
shall not consolidate with or merge with or into, or convey, transfer or lease,
in one transaction or a series of transactions, all or substantially all its
assets to, any Person, unless: (1) the resulting, surviving or transferee Person
(the "Successor Company") shall be a Person organized and existing under the
laws of the United States of America, any State thereof or the District of
Columbia and the Successor Company (if not the Company) shall expressly assume
all the obligations of the Company under the Exchangeable Preferred Stock; (2)
immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary as a result of such transaction as having been Incurred by such
Successor Company or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing, (3) immediately after giving
effect to such transaction, the Successor Company would be able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (l)(ii)(A); (4)
immediately after giving effect to such transaction, the Successor Company shall
have Consolidated Net Worth in an amount that is not less than the Consolidated
Net Worth of the Company immediately prior to such transaction; and (5) the
Company shall have delivered to the Trustee an Officers' Certificate, stating
that such consolidation, merger or transfer and such assumption (if any) comply
with this Certificate of Designation.
<PAGE> 34
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(m) Certificates. (i) Form and Dating. The Exchangeable
Preferred Stock and the Transfer Agent's certificate of authentication shall be
substantially in the form of Exhibit A, which is hereby incorporated in and
expressly made a part of this Certificate of Designation. The Exchangeable
Preferred Stock certificate may have notations, legends or endorsements required
by law, stock exchange rule, agreements to which the Company is subject, if any,
or usage (provided that any such notation, legend or endorsement is in a form
acceptable to the Company). Each Exchangeable Preferred Stock certificate shall
be dated the date of its authentication. The terms of the Exchangeable Preferred
Stock certificate set forth in Exhibit A are part of the terms of this
Certificate of Designation.
(A) Global Exchangeable Preferred Stock. The Exchangeable
Preferred Stock sold in reliance on Rule 144A shall be issued initially in the
form of one or more fully registered global certificates with the global
securities legend and restricted securities legend set forth in Exhibit A hereto
(the "Global Exchangeable Preferred Stock"), which shall be deposited on behalf
of the purchasers represented thereby with the Transfer Agent, at its New York
office, as custodian for DTC (or with such other custodian as DTC may direct),
and registered in the name of DTC or a nominee of DTC, duly executed by the
Company and authenticated by the Transfer Agent as hereinafter provided. Subject
to the terms hereof and to the requirements of applicable law, the number of
shares of Exchangeable Preferred Stock represented by Global Exchangeable
Preferred Stock may from time to time be increased or decreased by adjustments
made on the records of the Transfer Agent and DTC or its nominee as hereinafter
provided.
(B) Book-Entry Provisions. In the event Global Exchangeable
Preferred Stock is deposited with or on behalf of DTC, the Company shall execute
and the Transfer Agent shall authenticate and deliver initially one or more
Global Exchangeable Preferred Stock certificates that (a) shall be registered in
the name of DTC for such Global Exchangeable Preferred Stock or the nominee of
DTC and (b) shall be delivered by the Transfer Agent to DTC or pursuant to DTC's
<PAGE> 35
35
instructions or held by the Transfer Agent as custodian for DTC.
Members of, or participants in, DTC ("Agent Members") shall
have no rights under this Certificate of Designation with respect to any Global
Exchangeable Preferred Stock held on their behalf by DTC or by the Transfer
Agent as the custodian of DTC or under such Global Exchangeable Preferred Stock,
and DTC may be treated by the Company, the Transfer Agent and any agent of the
Company or the Transfer Agent as the absolute owner of such Global Exchangeable
Preferred Stock for all purposes whatsoever. Notwithstanding the foregoing,
nothing herein shall prevent the Company, the Transfer Agent or any agent of the
Company or the Transfer Agent from giving effect to any written certification,
proxy or other authorization furnished by DTC or impair, as between DTC and its
Agent Members, the operation of customary practices of DTC governing the
exercise of the rights of a holder of a beneficial interest in any Global
Exchangeable Preferred Stock.
(C) Certificated Exchangeable Preferred Stock. Exchangeable
Preferred Stock initially sold in offshore transactions pursuant to Regulation S
under the Securities Act will be issued in fully registered certificated form
("Certificated Exchangeable Preferred Stock").
Except as otherwise provided by applicable law or as provided
in this paragraph (m)(i) or in paragraph (m)(iii), owners of beneficial
interests in Global Exchangeable Preferred Stock will not be entitled to receive
physical delivery of Certificated Exchangeable Preferred
Stock.
After a transfer of any Initial Exchangeable Preferred Stock
during the period of the effectiveness of a Shelf Registration Statement with
respect to such Initial Exchangeable Preferred Stock, all requirements
pertaining to legends on such Initial Exchangeable Preferred Stock will cease to
apply, the requirements requiring that any such Initial Exchangeable Preferred
Stock issued to Holders be issued in global form will cease to apply, and
Certificated Exchangeable Preferred Stock without legends will be
<PAGE> 36
36
available to the transferee of the Holder of such Initial Exchangeable Preferred
Stock upon exchange of such transferring Holder's Initial Exchangeable Preferred
Stock or directions to transfer such Holder's interest in the Global
Exchangeable Preferred Stock, as applicable. Upon the consummation of a
Registered Exchange Offer with respect to the Initial Exchangeable Preferred
Stock pursuant to which Holders of such Initial Exchangeable Preferred Stock are
offered Series B Stock in exchange for their Initial Exchangeable Preferred
Stock, all requirements that Initial Exchangeable Preferred Stock be issued in
global form will cease to apply and Certificated Exchangeable Preferred Stock
with the restricted securities legend set forth in Exhibit A hereto will be
available to Holders of such Initial Exchangeable Preferred Stock that do not
exchange their Initial Exchangeable Preferred Stock, and Series B Stock in
certificated form will be available to Holders that exchange such Initial
Exchangeable Preferred Stock in such Registered Exchange Offer.
(ii) Execution and Authentication. Two Officers shall sign the
certificates representing Exchangeable Preferred Stock for the Company by manual
or facsimile signature. The Company's seal shall be impressed, affixed,
imprinted or reproduced on the Exchangeable Preferred Stock and may be in
facsimile form.
If an Officer whose signature is on certificates representing
Exchangeable Preferred Stock no longer holds that office at the time the
Transfer Agent authenticates the Exchangeable Preferred Stock evidenced thereby,
the shares of Exchangeable Preferred Stock evidenced thereby shall be valid
nevertheless.
A certificate representing Exchangeable Preferred Stock shall
not be valid until an authorized signatory of the Transfer Agent manually signs
the certificate of authentication on the Exchangeable Preferred Stock. The
signature shall be conclusive evidence that the Exchangeable Preferred Stock has
been authenticated under this Certificate of Designation.
<PAGE> 37
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The Transfer Agent shall authenticate and deliver: (1) 300,000
shares of Initial Exchangeable Preferred Stock for original issue and (2)
300,000 shares of Series B Stock for issue only in a Registered Exchange Offer
pursuant to the Registration Rights Agreement, in each case upon a written order
of the Company signed by two Officers or by an Officer and either an Assistant
Treasurer or an Assistant Secretary of the Company. In addition, the Transfer
Agent shall authenticate and deliver, from time to time, Additional Shares for
original issue upon order of the Company signed by two Officers or by an Officer
or either an Assistant Treasurer or Assistant Secretary of the Company. Such
orders shall specify the number of shares of Exchangeable Preferred Stock to be
authenticated and the date on which the original issue of Exchangeable Preferred
Stock is to be authenticated and whether the Exchangeable Preferred Stock is to
be Initial Exchangeable Preferred Stock or Series B Stock.
The Transfer Agent may appoint an authenticating agent
reasonably acceptable to the Company to authenticate the Exchangeable Preferred
Stock. Unless limited by the terms of such appointment, an authenticating agent
may authenticate Exchangeable Preferred Stock whenever the Transfer Agent may do
so. Each reference in this Certificate of Designation to authentication by the
Transfer Agent includes authentication by such agent. An authenticating agent
has the same rights as the Transfer Agent or agent for service of notices and
demands.
(iii) Transfer and Exchange. (A) Transfer and Exchange of
Certificated Exchangeable Preferred Stock. When Certificated Exchangeable
Preferred Stock is presented to the Transfer Agent with a request to register
the transfer of such Certificated Exchangeable Preferred Stock or to exchange
such Certificated Exchangeable Preferred Stock for an equal number of shares of
Certificated Exchangeable Preferred Stock of other authorized denominations, the
Transfer Agent shall register the transfer or make the exchange as requested if
its reasonable requirements for such transaction are met; provided, however,
that the
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Certificated Exchangeable Preferred Stock surrendered for transfer or exchange:
(1) shall be duly endorsed or accompanied by a written
instrument of transfer in form reasonably satisfactory to the Company
and the Transfer Agent, duly executed by the Holder thereof or its
attorney duly authorized in writing; and
(2) in the case of Transfer Restricted Securities that are
Certificated Exchangeable Preferred Stock, are being transferred or
exchanged pursuant to an effective registration statement under the
Securities Act or pursuant to clause (I) or (II) below, and are
accompanied by the following additional information and documents, as
applicable:
(I) if such Transfer Restricted Securities are being
delivered to the Transfer Agent by a Holder for registration
in the name of such Holder, without transfer, a certification
from such Holder to that effect in substantially the form of
Exhibit B hereto; or
(II) if such Transfer Restricted Securities are being
transferred to the Company or to a "qualified institutional
buyer" ("QIB") in accordance with Rule 144A under the
Securities Act or pursuant to an exemption from registration
in accordance with Rule 144 or Regulation S under the
Securities Act, a certification to that effect (in
substantially the form of Exhibit B hereto).
(B) Restrictions on Transfer of Certificated Exchangeable
Preferred Stock for a Beneficial Interest in Global Exchangeable Preferred
Stock. Certificated Exchangeable Preferred Stock may not be exchanged for a
beneficial interest in Global Exchangeable Preferred Stock except upon
satisfaction of the requirements set forth below. Upon receipt by the Transfer
Agent of Certificated Exchangeable Preferred Stock, duly endorsed or accompanied
<PAGE> 39
39
by appropriate instruments of transfer, in form satisfactory to the Transfer
Agent, together with:
(1) if such Certificated Exchangeable Preferred Stock is a
Transfer Restricted Security, certification that such Certificated
Exchangeable Preferred Stock is being transferred to a QIB in
accordance with Rule 144A under the Securities Act; and
(2) whether or not such Certificated Exchangeable Preferred
Stock is a Transfer Restricted Security, written instructions directing
the Transfer Agent to make, or to direct DTC to make, an adjustment on
its books and records with respect to such Global Exchangeable
Preferred Stock to reflect an increase in the number of shares of
Exchangeable Preferred Stock represented by the Global Exchangeable
Preferred Stock,
then the Transfer Agent shall cancel such Certificated Exchangeable Preferred
Stock and cause, or direct DTC to cause, in accordance with the standing
instructions and procedures existing between DTC and the Transfer Agent, the
number of shares of Exchangeable Preferred Stock represented by the Global
Exchangeable Preferred Stock to be increased accordingly. If no Global
Exchangeable Preferred Stock is then outstanding, the Company shall issue and
the Transfer Agent shall authenticate, upon written order of the Company in the
form of an Officers' Certificate, a new Global Exchangeable Preferred Stock
representing the appropriate number of shares.
(C) Transfer and Exchange of Global Exchangeable Preferred
Stock. The transfer and exchange of Global Exchangeable Preferred Stock or
beneficial interests therein shall be effected through DTC, in accordance with
this Certificate of Designation (including applicable restrictions on transfer
set forth herein, if any) and the procedures of DTC therefor.
(D) Transfer of a Beneficial Interest in Global Exchangeable
Preferred Stock for a Certificated Exchangeable Preferred Stock.
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(1) Any person having a beneficial interest in Exchangeable
Preferred Stock that is being transferred or exchanged pursuant to an
effective registration statement under the Securities Act or pursuant
to clause (I) or (II) below may upon request, and if accompanied by the
information specified below, exchange such beneficial interest for
Certificated Exchangeable Preferred Stock representing the same number
of shares of Exchangeable Preferred Stock. Upon receipt by the Transfer
Agent of written instructions or such other form of instructions as is
customary for DTC from DTC or its nominee on behalf of any person
having a beneficial interest in Global Exchangeable Preferred Stock and
upon receipt by the Transfer Agent of a written order or such other
form of instructions as is customary for DTC or the person designated
by DTC as having such a beneficial interest in a Transfer Restricted
Security only, and upon the following additional information and
documents (all of which may be submitted by facsimile):
(I) if such beneficial interest is being transferred
to the person designated by DTC as being the owner of a
beneficial interest in Global Exchangeable Preferred Stock, a
certification from such person to that effect (in
substantially the form of Exhibit B hereto); or
(II) if such beneficial interest is being transferred
to a QIB in accordance with Rule 144A under the Securities Act
or pursuant to an exemption from registration in accordance
with Rule 144 or Regulation S under the Securities Act, a
certification to that effect (in substantially the form of
Exhibit B hereto);
then, the Transfer Agent or DTC, at the direction of the Transfer Agent, will
cause, in accordance with the standing instructions and procedures existing
between DTC and the Transfer Agent, the number of shares of Exchangeable
Preferred Stock represented by Global Exchangeable Preferred Stock to be reduced
on its books and records and, following such reduction, the Company will execute
and the Transfer
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41
Agent will authenticate and deliver to the transferee Certificated Exchangeable
Preferred Stock.
(2) Certificated Exchangeable Preferred Stock issued in
exchange for a beneficial interest in a Global Exchangeable Preferred
Stock pursuant to this paragraph (m)(iii)(D) shall be registered in
such names and in such authorized denominations as DTC, pursuant to
instructions from its direct or indirect participants or otherwise,
shall instruct the Transfer Agent. The Transfer Agent shall deliver
such Certificated Exchangeable Preferred Stock to the persons in whose
names such Exchangeable Preferred Stock are so registered in accordance
with the instructions of DTC.
(E) Restrictions on Transfer and Exchange of Global
Exchangeable Preferred Stock. Notwithstanding any other provisions of this
Certificate of Designation (other than the provisions set forth in paragraph
(m)(iii)(F)), Global Exchangeable Preferred Stock may not be transferred as a
whole except by DTC to a nominee of DTC or by a nominee of DTC to DTC or another
nominee of DTC or by DTC or any such nominee to a successor depository or a
nominee of such successor depository.
(F) Authentication of Certificated Exchangeable
Preferred Stock. If at any time:
(1) DTC notifies the Company that DTC is unwilling or unable
to continue as depository for the Global Exchangeable Preferred Stock
and a successor depository for the Global Exchangeable Preferred Stock
is not appointed by the Company within 90 days after delivery of such
notice;
(2) DTC ceases to be a clearing agency registered
under the Exchange Act;
(3) there shall have occurred and be continuing a
Voting Rights Triggering Event; or
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42
(4) the Company, in its sole discretion, notifies the Transfer
Agent in writing that it elects to cause the issuance of Certificated
Exchangeable Preferred Stock under this Certificate of Designation,
then the Company will execute, and the Transfer Agent, upon receipt of a written
order of the Company signed by two Officers or by an Officer and either an
Assistant Treasurer or an Assistant Secretary of the Company requesting the
authentication and delivery of Certificated Exchangeable Preferred Stock to the
persons designated by the Company, will authenticate and deliver Certificated
Exchangeable Preferred Stock equal to the number of shares of Exchangeable
Preferred Stock represented by the Global Exchangeable Preferred Stock, in
exchange for such Global Exchangeable Preferred Stock.
(G) Legend. (1) Except as permitted by the following paragraph
(2), each certificate evidencing the Global Exchangeable Preferred Stock and the
Certificated Exchangeable Preferred Stock (and all Exchangeable Preferred Stock
issued in exchange therefor or substitution thereof) shall bear a legend in
substantially the following form:
"THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES
ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF
THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY
BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER.
"THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE ISSUER THAT
(A) THIS SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED ONLY (i) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS
A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A,
(ii) IN AN
<PAGE> 43
43
OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE SECURITIES
ACT, (iii) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (iv)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR (v) TO THE COMPANY, IN EACH OF CASES (i) THROUGH (iv) IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE
RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.
"BY ITS ACQUISITION HEREOF, THE HOLDER REPRESENTS THAT (A) IT IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT") OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS
SECURITY IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S.
(2) Upon any sale or transfer of a Transfer Restricted
Security (including any Transfer Restricted Security represented by Global
Exchangeable Preferred Stock) pursuant to Rule 144 under the Securities Act or
an effective registration statement under the Securities Act:
(I) in the case of any Transfer Restricted Security
that is a Certificated Exchangeable Preferred Stock, the
Transfer Agent shall permit the Holder thereof to exchange
such Transfer Restricted Security for a Certificated
Exchangeable Preferred Stock that does not bear the legend set
forth above and rescind any restriction on the transfer of
such Transfer Restricted Security;
(II) in the case of any Transfer Restricted Security
that is represented by a Global Exchangeable Preferred Stock,
the Transfer Agent shall permit the Holder thereof to exchange
such Transfer Restricted Security for a Certificated
Exchangeable Preferred Stock Security that does not bear the
legend set forth above and rescind any restriction on the
transfer of such Transfer Restricted Security, if the Holder's
request for
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such exchange was made in reliance on Rule 144 and the Holder
certifies to that effect in writing to the Transfer Agent
(such certification to be in the form set forth on the reverse
of the Transfer Restricted Security); and
(III) in the case of any Transfer Restricted Security
that is represented by a Global Exchangeable Preferred Stock,
the Transfer Agent shall permit the Holder thereof to exchange
such Transfer Restricted Security (in connection with the
offer to exchange Series B Stock for Initial Exchangeable
Preferred Stock pursuant to the Registration Rights Agreement)
for another Global Exchangeable Preferred Stock that does not
bear the legend set forth above.
(H) Cancelation or Adjustment of Global Exchangeable Preferred
Stock. At such time as all beneficial interests in Global Exchangeable Preferred
Stock have either been exchanged for Certificated Exchangeable Preferred Stock,
redeemed, repurchased or canceled, such Global Exchangeable Preferred Stock
shall be returned to DTC for cancelation or retained and canceled by the
Transfer Agent. At any time prior to such cancelation, if any beneficial
interest in Global Exchangeable Preferred Stock is exchanged for Certificated
Exchangeable Preferred Stock, redeemed, repurchased or canceled, the number of
shares of Exchangeable Preferred Stock represented by such Global Exchangeable
Preferred Stock shall be reduced and an adjustment shall be made on the books
and records of the Transfer Agent with respect to such Global Exchangeable
Preferred Stock, by the Transfer Agent or DTC, to reflect such reduction.
(I) Obligations with Respect to Transfers and Exchanges of
Exchangeable Preferred Stock. (1) To permit registrations of transfers and
exchanges, the Company shall execute and the Transfer Agent shall authenticate
Certificated Exchangeable Preferred Stock and Global Exchangeable Preferred
Stock as required pursuant to the provisions of this paragraph (iii).
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45
(2) All Certificated Exchangeable Preferred Stock and Global
Exchangeable Preferred Stock issued upon any registration of transfer
or exchange of Certificated Exchangeable Preferred Stock or Global
Exchangeable Preferred Stock shall be the valid obligations of the
Company, entitled to the same benefits under this Certificate of
Designation as the Certificated Exchangeable Preferred Stock or Global
Exchangeable Preferred Stock surrendered upon such registration of
transfer or exchange.
(3) Prior to due presentment for registration of transfer of
any shares of Exchangeable Preferred Stock, the Transfer Agent and the
Company may deem and treat the person in whose name such shares of
Exchangeable Preferred Stock are registered as the absolute owner of
such Exchangeable Preferred Stock and neither the Transfer Agent nor
the Company shall be affected by notice to the contrary.
(4) No service charge shall be made to a Holder for any
registration of transfer or exchange upon surrender of any Exchangeable
Preferred Stock Certificate at the office of the Transfer Agent
maintained for that purpose. However, the Company may require payment
of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection with any registration of transfer or
exchange of Exchangeable Preferred Stock Certificates.
(5) Upon any sale or transfer of shares of Exchangeable
Preferred Stock (including any Exchangeable Preferred Stock represented
by a Global Exchangeable Preferred Stock Certificate) pursuant to an
effective registration statement under the Securities Act, pursuant to
Rule 144 under the Securities Act or pursuant to an opinion of counsel
reasonably satisfactory to the Company that no legend is required:
(A) in the case of any Certificated Exchangeable
Preferred Stock, the Transfer Agent shall
permit the holder thereof to exchange such
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46
Exchangeable Preferred Stock for Certificated
Exchangeable Preferred Stock that does not
bear the legend set forth in
paragraph (iii)(G) above and rescind any
restriction on the transfer of such
Exchangeable Preferred Stock; and
(B) in the case of any Global Exchangeable Preferred
Stock, such Exchangeable Preferred Stock shall not be
required to bear the legend set forth in paragraph
(iii)(G) above but shall continue to be subject to
the provisions of paragraph (iii)(D) hereof;
provided, however, that with respect to any request
for an exchange of Exchangeable Preferred Stock that
is represented by Global Exchangeable Preferred Stock
for Certificated Exchangeable Preferred Stock that
does not bear the legend set forth in paragraph
(iii)(G) above in connection with a sale or transfer
thereof pursuant to Rule 144 (and based upon an
opinion of counsel if the Company so requests), the
Holder thereof shall certify in writing to the
Transfer Agent that such request is being made
pursuant to Rule 144 (such certification to be
substantially in the form of Exhibit B hereto).
(iv) Replacement Certificates. If a mutilated Exchangeable
Preferred Stock certificate is surrendered to the Transfer Agent or if the
Holder of a Exchangeable Preferred Stock certificate claims that the
Exchangeable Preferred Stock certificate has been lost, destroyed or wrongfully
taken, the Company shall issue and the Transfer Agent shall countersign a
replacement Exchangeable Preferred Stock certificate if the reasonable
requirements of the Transfer Agent and of Section 8-405 of the Uniform
Commercial Code as in effect in the State of New York are met. If required by
the Transfer Agent or the Company, such Holder shall furnish an indemnity bond
sufficient in the judgment of the Company and the Transfer Agent to protect the
Company and the Transfer Agent from any loss which
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47
either of them may suffer if a Exchangeable Preferred Stock certificate is
replaced. The Company and the Transfer Agent may charge the Holder for their
expenses in replacing a Exchangeable Preferred Stock certificate.
(v) Temporary Certificates. Until definitive Exchangeable
Preferred Stock certificates are ready for delivery, the Company may prepare and
the Transfer Agent shall countersign temporary Exchangeable Preferred Stock
certificates. Temporary Exchangeable Preferred Stock certificates shall be
substantially in the form of definitive Exchangeable Preferred Stock
certificates but may have variations that the Company considers appropriate for
temporary Exchangeable Preferred Stock certificates. Without unreasonable delay,
the Company shall prepare and the Transfer Agent shall countersign definitive
Exchangeable Preferred Stock certificates and deliver them in exchange for
temporary Exchangeable Preferred Stock certificates.
(vi) Cancelation. (A) In the event the Company shall purchase
or otherwise acquire Certificated Exchangeable Preferred Stock, the same shall
thereupon be delivered to the Transfer Agent for cancelation.
(B) At such time as all beneficial interests in Global
Exchangeable Preferred Stock have either been exchanged for Certificated
Exchangeable Preferred Stock, redeemed, repurchased or canceled, such Global
Exchangeable Preferred Stock shall thereupon be delivered to the Transfer
Agent for cancelation.
(C) The Transfer Agent and no one else shall cancel and
destroy all Exchangeable Preferred Stock certificates surrendered for transfer,
exchange, replacement or cancelation and deliver a certificate of such
destruction to the Company unless the Company directs the Transfer Agent to
deliver canceled Exchangeable Preferred Stock certificates to the Company. The
Company may not issue new Exchangeable Preferred Stock certificates to replace
Exchangeable Preferred Stock certificates to the extent they evidence
Exchangeable Preferred Stock which the Company has purchased or otherwise
acquired.
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48
(m) Additional Rights of Holders. In addition to the rights
provided to Holders under this Certificate of Designation, Holders shall have
the rights set forth in the Registration Rights Agreement.
(n) Certain Definitions. As used in this Certificate of
Designation, the following terms shall have the following meanings (and (1)
terms defined in the singular have comparable meanings when used in the plural
and vice versa, (2) "including" means including without limitation, (3) "or" is
not exclusive and (4) an accounting term not otherwise defined has the meaning
assigned to it in accordance with United States generally accepted accounting
principles as in effect on the Issue Date and all accounting calculations will
be determined in accordance with such principles), unless the content otherwise
requires:
"Accounts Receivable" means, with respect to any Person, all
accounts receivable of such Person net of allowances for uncollectible accounts,
discounts, refunds and all other allowances as determined in accordance with
GAAP.
"Additional Assets" means (i) any property or assets (other
than Indebtedness and Capital Stock) in a Related Business; (ii) the Capital
Stock of a Person that becomes a Restricted Subsidiary as a result of the
acquisition of such Capital Stock by the Company or another Restricted
Subsidiary; or (iii) Capital Stock in any Person that at such time is a
Restricted Subsidiary; provided, however, that any such Restricted Subsidiary
described in clauses (ii) or (iii) above is primarily engaged in a Related
Business.
"Affiliate" of any specified Person means any other Person,
directly or indirectly, controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings
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49
correlative to the foregoing. For purposes of paragraphs (l)(iii) and (l)(v)
only, "Affiliate" shall also mean any beneficial owner of Capital Stock
representing 10% or more of the total voting power of the Voting Stock (on a
fully diluted basis) of the Company or of rights or warrants to purchase such
Capital Stock (whether or not currently exercisable) and any Person who would be
an Affiliate of any such beneficial owner pursuant to the first sentence hereof.
"Asset Swap" means an exchange of assets by the Company or any
of its Restricted Subsidiaries for one or more Permitted Businesses, assets to
be used in a Permitted Business, or for a controlling equity interest in any
Person whose assets consist primarily of one or more Permitted Businesses.
"Attributable Debt" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
dividend rate borne by the Exchangeable Preferred Stock compounded annually) of
the total obligations of the lessee for rental payments during the remaining
term of the lease included in such Sale/Leaseback Transaction (including any
period for which such lease has been extended).
"Average Life" means, as of the date of determina tion, with
respect to any Indebtedness or Preferred Stock, the quotient obtained by
dividing (i) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment of
such Indebtedness or redemption or similar payment with respect to such
Preferred Stock multi plied by the amount of such payment by (ii) the sum of all
such payments.
"Board of Directors" means the Board of Directors of the
Company or any committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
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50
"Capital Lease Obligations" means an obligation that is
required to be classified and accounted for as a capital lease for financial
reporting purposes in accordance with GAAP, and the amount of Indebtedness
represented by such obligation shall be the capitalized amount of such
obligation determined in accordance with GAAP; and the Stated Maturity thereof
shall be the date of the last payment of rent or any other amount due under such
lease prior to the first date upon which such lease may be terminated by the
lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into or exchangeable for
such equity.
"Change of Control" means the occurrence of any of the
following events:
(i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than one or more Permitted Holders,
is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that for purposes of this clause (i)
such person shall be deemed to have "beneficial ownership" of all
shares that any such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time, and
except that any person that is deemed to have beneficial ownership of
shares solely as a result of being part of a group pursuant to Rule
13d-5(b)(1) shall not be deemed to have beneficial ownership of any
shares held by a Permitted Holder forming a part of such group),
directly or indirectly, of more than 50% of the total voting power of
the Voting Stock of the Company (for the purposes of this clause (i),
such other person shall be deemed to beneficially own any Voting Stock
of a specified corporation held by a parent corporation, if such other
person is the beneficial owner (as defined in this clause (i)),
directly or indirectly, of more than 35% of the voting
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51
power of the Voting Stock of such parent corporation and the Permitted
Holders beneficially own (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of
the board of directors of such parent corporation);
(ii) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
(together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of the
Company was approved by a vote of a majority of the directors of the
Company then still in office who were either directors at the beginning
of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority
of the Board of Directors then in office; provided, however, that any
directors elected by holders of Preferred Stock of the Company pursuant
to any voting rights provisions included in the certificate of
designation relating to such Preferred Stock shall be excluded in
making any determination pursuant to this clause (ii); or
(iii) the merger or consolidation of the Company with or into
another Person or the merger of another Person with or into the
Company, or the sale of all or substantially all the assets of the
Company to another Person (other than a Person that is controlled by
the Permitted Holders), and, in the case of any such merger or
consolidation, the securities of the Company that are outstanding
immediately prior to such transaction and which represent 100% of the
aggregate voting power of the Voting Stock of the Company are changed
into or exchanged for cash, securities or property, unless pursuant to
such transaction such securities are changed into or exchanged for, in
addition to any other consideration, securities of the surviving
corporation that represent immediately after such transaction, at
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52
least a majority of the aggregate voting power of the Voting Stock of
the surviving corporation.
Notwithstanding the foregoing, a Change of Control shall not
be deemed to have occurred if, after such event that otherwise would constitute
a Change of Control, the Securities are rated Investment Grade by Moody's or
Standard & Poor's on the 30th day following the event that otherwise would
constitute a Change of Control (the "Change of Control Determination Date");
provided, however, that to the extent there is a "rating watch" with respect to
the Exchangeable Preferred Stock or other rating agency review on such 30th day,
then the Change of Control Determination Date shall be the first Business Day
thereafter on which the Exchangeable Preferred Stock is not subject to a "rating
watch" or other rating agency review by either Moody's or Standard & Poor's. The
term "Investment Grade", for such purpose, means a rating of Baa3 or higher in
the case of Moody's, or BBB- or higher in the case of Standard & Poor's.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means the party named as such in this Certificate of
Designation until a successor replaces it and, thereafter, means the successor.
"Consolidated Capital Ratio" of any Person as of any date
means the ratio of (i) the aggregate consolidated principal amount of
Indebtedness of such Person then outstanding to (ii) the greater of either (a)
the aggregate consolidated paid-in capital of such Person as of such date or (b)
the stockholders' equity as of such date as shown on the consolidated balance
sheet of such Person determined in accordance with GAAP.
"Consolidated Interest Expense" means, for any period, the
total interest expense of the Company and its consolidated Restricted
Subsidiaries, plus, to the extent not included in such total interest expense,
and to the extent incurred by the Company or its Restricted Subsidiaries,
without duplication, (i) interest expense attributable to capital leases and the
interest expense
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attributable to leases constituting part of a Sale/Leaseback Transaction, (ii)
amortization of debt discount and debt issuance cost, (iii) capitalized
interest, (iv) noncash interest expenses, (v) commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing, (vi) net costs associated with Hedging Obligations (including
amortization of fees), (vii) Preferred Stock dividends in respect of all (A)
Preferred Stock of Restricted Subsidiaries and (B) Preferred Stock of the
Company that is Disqualified Stock, in each case held by Persons other than the
Company or a Restricted Subsidiary, (viii) interest incurred in connection with
Investments in discontinued operations, (ix) interest accruing on any
Indebtedness of any other Person to the extent such Indebtedness is Guaranteed
by (or secured by the assets of) the Company or any Restricted Subsidiary and
(x) the cash contributions to any employee stock ownership plan or similar trust
to the extent such contributions are used by such plan or trust to pay interest
or fees to any Person (other than the Company) in connection with Indebtedness
Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net
income of the Company and its consolidated Subsidi aries; provided, however,
that there shall not be included in such Consolidated Net Income:
(i) any net income of any Person (other than the Company) if
such Person is not a Restricted Subsidiary, except that subject to the
exclusion contained in clause (iv) below, the net income of any such
Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Person during such period to the Company or a Restricted Subsidiary as
a dividend or other distribution (subject, in the case of a dividend or
other distribution paid to a Restricted Subsidiary, to the limitations
contained in clause (iii) below);
(ii) any net income (or loss) of any Person acquired by the
Company or a Subsidiary in a pooling of interests transaction for any
period prior to the date of such acquisition;
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(iii) any net income of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions
by such Restricted Subsidiary, directly or indirectly, to the Company,
except that subject to the exclusion contained in clause (iv) below,
the net income of any such Restricted Subsidiary for such period shall
be included in such Consolidated Net Income up to the aggregate amount
of cash actually distributed by such Restricted Subsidiary during such
period to the Company or another Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution paid to another Restricted Subsidiary, to the limitation
contained in this clause);
(iv) any gain (but not loss) realized upon the sale or other
disposition of any assets of the Company, its consolidated Subsidiaries
or any other Person (including pursuant to any sale-and-leaseback
arrangement) which is not sold or otherwise disposed of in the ordinary
course of business and any gain (but not loss) realized upon the sale
or other disposition of any Capital Stock of any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in account
ing principles.
Notwithstanding the foregoing, for the purpose of paragraph (l)(iii) only, there
shall be excluded from Consolidated Net Income any dividends, repayments of
loans or advances or other transfers of assets from any Person (including any
Unrestricted Subsidiary) to the Company or a Restricted Subsidiary to the extent
such dividends, repayments or transfers increase the amount of Restricted
Payments permitted under paragraph (l)(iii) (A)(3)(IV) thereof.
"Consolidated Net Worth" means, with respect to any Person as
of any date, the sum of: (i) the consolidated
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equity of the common stockholders of such Person and its consolidated
Subsidiaries as of such date plus (ii) the respective amounts reported on such
Person's balance sheet as of such date with respect to any series of preferred
stock (other than Disqualified Stock) that by its terms is not entitled to the
payment of dividends unless such dividends may be declared and paid only out of
net earnings in respect of the year of such declaration and payment, but only to
the extent of any cash received by such Person upon issuance of such preferred
stock, less (x) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going concern
business made within 12 months after the acquisition of such business)
subsequent to the Issue Date in the book value of any asset owned by such Person
or a consolidated Subsidiary of such Person, (y) all investments as of such date
in unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments), and (z) all unamortized debt discount and
expense and unamortized deferred charges as of such date, as determined in
accordance with GAAP.
"Consolidated Tangible Assets" means, with respect to any
Person as of any date, the sum of the consolidated gross book value as reflected
in accounting books and records of such Person of all its property, both real
and personal, less (i) the net book value of all its licenses, patents, patent
applications, copyrights, trademarks, tradenames, goodwill, non-compete
agreements or organizational expenses and other like intangibles, (ii)
unamortized debt discount and expenses, (iii) all reserves for depreciation,
obsolescence, depletion and amortization of its properties and (iv) all other
proper reserves which should be provided in connection with the business
conducted by such Person, all of the foregoing as determined in accordance with
GAAP.
"Convertible Preferred Stock" means the Company's 7 1/4%
Junior Convertible Preferred Stock Due 2007.
"Credit Agreements" means one or more debt facilities or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit
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loans, term loans, receivables financing (including through the sale of
receivables to such lenders or to special purpose entities formed to borrow from
such lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time.
"Cumulative Consolidated Interest Expense" means, with respect
to any Person, as of any date of determination, Consolidated Interest Expense
for the period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the Issue Date to the end of such Person's most
recently ended fiscal quarter for which internal financial statements are
available at such date of determination.
"Cumulative Operating Cash Flow" means, as of any date of
determination, Operating Cash Flow for the Company and its Restricted
Subsidiaries for the period (taken as one accounting period) from the beginning
of the first fiscal quarter commencing after the Issue Date to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at such date of determination.
"Currency Agreement" means in respect of a Person any foreign
exchange contract, currency swap agreement or other similar agreement designed
to protect such Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage
of time or both would be, a Voting Rights Triggering Event.
"Disqualified Stock" means, with respect to any Person, any
Capital Stock which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first
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anniversary of the Stated Maturity of the Exchangeable Preferred Stock;
provided, however, that any Capital Stock that would not constitute Disqualified
Stock but for provisions thereof giving holders thereof the right to require
such Person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the first anniversary of
the Stated Maturity of the Securities shall not constitute Disqualified Stock if
the "asset sale" or "change of control" provisions applicable to such Capital
Stock are not more favorable to the holders of such Capital Stock than the
comparable provisions of the Exchange Indenture; provided further, however, that
the Company's Convertible Preferred Stock outstanding on the Issue Date (and any
shares of Convertible Preferred Stock issued as payment of a dividend on
Convertible Preferred Stock) shall be deemed not to constitute Disqualified
Stock.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchange Date" means the date on which the Securities are
exchanged for the Exchangeable Preferred Stock.
"Exchange Debentures" means the debentures issuable pursuant
to the Exchange Indenture.
"Exchange Offer Registration Statement" means a registration
statement filed with the SEC with respect to a Registered Exchange Offer.
"Exchange Indenture" means the Indenture dated as of August
15, 1997, by and between the Company and The Bank of New York, as Trustee,
governing the Exchange Debentures.
"Excluded PSINet Transactions" means any transaction between
the Company or any of its Restricted Subsidiaries with PSINet Inc., so long as
at the time of engaging in, or contracting to engage in, such transaction, the
Company and its Subsidiaries have not acquired shares of PSINet Common Stock
other than the PSINet Shares.
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"GAAP" means generally accepted accounting principles in the
United States of America as in effect as of the Issue Date, including those set
forth in (i) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC. All ratios and
computations based on GAAP contained in this Certificate of Designation shall be
computed in conformity with GAAP.
"GE Capital Communications" means GE Capital Communications
Services Corporation.
"Guarantee" means any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness of any Person
and any obligation, direct or indirect, contingent or otherwise, of such Person
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness of such Person or (ii) entered into for the purpose of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Hedging Obligations" of any Person means the obligations of
such Person pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" means the Person in whose name a share of
Exchangeable Preferred Stock is registered on the Transfer Agent's books.
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"Incur" means issue, assume, Guarantee, incur or otherwise
become liable for; provided, however, that any Indebtedness or Capital Stock of
a Person existing at the time such Person becomes a Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred
by such Subsidiary at the time it becomes a Subsidiary. The term "Incurrence"
when used as a noun shall have a correlative meaning. The accretion of principal
of a non-interest bearing or other discount security shall be deemed the
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person
on any date of determination (without duplication):
(i) the principal in respect of (A) indebtedness of such
Person for money borrowed and (B) indebtedness evidenced by securities,
debentures, bonds or other similar instruments for the payment of which
such Person is responsible or liable, including, in each case, any
premium on such indebtedness to the extent such premium has become due
and payable;
(ii) all Capital Lease Obligations of such Person and all
Attributable Debt in respect of Sale/Leaseback Transactions entered
into by such Person;
(iii) all obligations of such Person issued or assumed as the
deferred purchase price of property, and all obligations of such Person
under any title retention agreement (but excluding trade accounts
payable arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of
any obligor on any letter of credit, banker's acceptance or similar
credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in
clauses (i) through (iii) above) entered into in the ordinary course of
business of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the tenth Business Day following payment on
the letter of credit);
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(v) the amount of all obligations of such Person with respect
to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any Subsidiary of such Person, the
liquidation preference with respect to, any Preferred Stock (but
excluding, in each case, any accrued dividends) of such Subsidiary
(which will constitute Indebtedness Incurred by such Subsidiary and not
Indebtedness Incurred by such Person);
(vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including
by means of any Guarantee;
(vii) all obligations of the type referred to in clauses (i)
through (vi) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of
the value of such property or assets or the amount of the obligation so
secured; and
(viii) to the extent not otherwise included in this
definition, Hedging Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Indebtedness to Operating Cash Flow Ratio" means, as of any
date of determination, the ratio of (a) the aggregate principal amount of all
outstanding Indebtedness of a Person and its Restricted Subsidiaries as of such
date on a consolidated basis, plus the aggregate liquidation preference of all
outstanding Preferred Stock of the Restricted Subsidiaries of such Person as of
such date (excluding any such Preferred Stock held by such Person or a Wholly
Owned Restricted Subsidiary of such Person), plus the
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aggregate liquidation preference or redemption amount of all Disqualified Stock
of such Person (excluding any Disqualified Stock held by such Person or a Wholly
Owned Restricted Subsidiary of such Person) as of such date to (b) Operating
Cash Flow of such Person and its Restricted Subsidiaries for the most recent
four-quarter period for which internal financial statements are available,
determined on a pro forma basis after giving effect to all acquisitions and
dispositions of assets (notwithstanding clause (ii) of the definition of
"Consolidated Net Income" and including Asset Swaps) made by such Person and its
Restricted Subsidiaries since the beginning of such four-quarter period through
such date as if such acquisitions and dispositions had occurred at the beginning
of such four-quarter period through such date as if such acquisitions and
dispositions had occurred at the beginning of such four-quarter period.
"Independent Financial Advisor" means a United States
investment banking firm of national standing in the United States which does
not, and whose directors, officers and employees or affiliates do not, have a
direct or indirect financial interest in the Company.
"Interest Rate Agreement" means in respect of a Person any
interest rate swap agreement, interest rate cap agreement or other financial
agreement or arrangement designed to protect such Person against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect
advance, loan or any other extensions of credit (other than advances, loans or
other extensions of credit to customers in the ordinary course of business that
are recorded as accounts receivable on the balance sheet of the lender and other
than commission, travel, relocation and similar advances to directors, officers
and employees made in the ordinary course of business) (including by way of
Guarantee or similar arrangement) or capital contribution to any Person (by
means of any transfer of cash or other property to others or any payment for
property or services for the account or use of such Person), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar
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62
instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary," the definition of "Restricted Payment" and paragraph
(l)(iii), (i) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of any Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors;
provided further, however, that an acquisition of assets, Capital Stock or other
securities by the Company or any of its Restricted Subsidiaries shall not be
deemed to be an Investment to the extent the consideration for such Capital
Stock or other securities consists of common equity securities of the Company.
"IRU" means an indefeasible right to use fiber or
telecommunications capacity.
"IRU Agreement" means an agreement pursuant to which an
interest in an IRU is sold or leased or otherwise transferred.
"Issue Date" means the date on which the Initial Exchangeable
Preferred Stock is originally issued.
"IXC Internet Capital Contribution" means the contribution by
the Company to IXC Internet, Inc. (so long as IXC Internet, Inc. is a
Subsidiary) of $10 million in cash, an IRU in two excess fibers in the Company's
network (including two fibers in network routes to be built or acquired in the
future) and space in certain points of
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63
presence, in each case as contemplated in connection with the transactions
contemplated by the PSINet Agreement.
"Legal Holiday" means a Saturday, a Sunday or a day on which
banking institutions are not required to be open in the State of New York.
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any conditional sale or other
title retention agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc. or its
successor.
"Net Cash Proceeds", with respect to any issuance or sale of
Capital Stock, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Officer" means the Chairman of the Board, the President, any
Vice President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two
Officers.
"Operating Cash Flow" means, with respect to any Person for
any period, the Consolidated Net Income of such Person for such period, (A) plus
(i) extraordinary net losses, net losses on sales of assets outside the ordinary
course of business during such period and noncash charges relating to
write-downs of property and equipment, to the extent such losses and charges
were deducted in computing such Consolidated Net Income, plus (ii) provision for
taxes based on income or profits, to the extent such provision for taxes was
included in computing such Consolidated Net Income, and any provision for taxes
utilized in computing the net losses under clause (i) hereof, plus (iii)
Consolidated Interest Expense of such Person and its
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64
Restricted Subsidiaries for such period, to the extent that any such expense
was deducted in computing such Consolidated Net Income, plus (iv) depreciation,
amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) and other noncash charges (excluding any such noncash charge to the
extent that it represents an accrual of or reserve for cash charges in any
future period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Restricted Subsidiaries for such period to the
extent that such depreciation, amortization and other noncash charges were
deducted in computing such Consolidated Net Income and (B) less all noncash
income for such period (excluding any such noncash income to the extent it
represents an accrual of cash income in any future period or amortization of
cash income received in a period). Notwithstanding the foregoing, the provision
for taxes on the income or profits of, and the depreciation and amortization and
other noncash charges of, a Restricted Subsidiary of the referent Person shall
be added to Consolidated Net Income to compute Operating Cash Flow only to the
extent (and in the same proportion) that the net income of such Restricted
Subsidiary was included in calculating the Consolidated Net Income of such
Person for such period and only if and to the extent such Restricted Subsidiary
could have paid such amount at the date of determination as a dividend or
similar distribution to the referent Person by such Restricted Subsidiary
without prior governmental approval (that has not been obtained), pursuant to
the terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
"Opinion of Counsel" means a written opinion from legal
counsel who is acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Permitted Business" means (i) any communications business and
(ii) any business reasonably related or ancillary thereto.
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65
"Permitted Holders" means the officers and directors of the
Company, and Trustees of General Electric Pension Trust, Grumman Hill
Associates, Inc. and Grumman Hill Investments, L.P., and each of their
respective officers and directors and their Related Parties.
"Permitted Investment" means an Investment by the Company or
any Restricted Subsidiary in (i) the Company, a Restricted Subsidiary or a
Person that will, upon the making of such Investment, become a Restricted
Subsidiary; provided, however, that the primary business of such Restricted
Subsidiary is a Related Business; (ii) another Person if as a result of such
Investment such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the Company or a
Restricted Subsidiary; provided, however, that such Person's primary business is
a Related Business; (iii) Temporary Cash Investments; (iv) receivables owing to
the Company or any Restricted Subsidiary if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances; (v) payroll, travel, commission and similar
advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses for accounting purposes and that are made
in the ordinary course of business; (vi) loans or advances to employees made in
the ordinary course of business consistent with past practices of the Company or
such Restricted Subsidiary; (vii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments; (viii) the
IXC Internet Capital Contribution; (ix) the Investment in PSINet Inc.
contemplated by the PSINet Agreement, including the Investment in shares of
PSINet Common Stock purchased pursuant to the PSINet Agreement and the $240
million value protection right provided for by the PSINet Agreement; and (x)
other Investments in any Person that in the aggregate do not exceed $30 million
(without regard to increases and decreases in the value of the Investments).
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66
"Permitted PSINet Non-Recourse Debt" means Indebtedness where
(i) the holders of such Indebtedness expressly agree that they will look solely
to the shares of PSINet Common Stock held by the issuer of such Indebtedness for
payment on or in respect of such Indebtedness and expressly waive any recourse
they may have on or with respect to such Indebtedness to the Company or any
Restricted Subsidiary, (ii) neither the Company nor any Restricted Subsidiary
(A) provides credit support (whether or not in the form of an undertaking,
agreement or instrument which would constitute Indebtedness), other than the
pledge by the issuer of such Indebtedness of shares of PSINet Common Stock, or
(B) is directly or indirectly liable and (iii) no default with respect to such
Indebtedness (including any rights which the holders thereof may have to take
enforcement action against the shares of PSINet Common Stock securing such
Indebtedness) would permit (upon notice, lapse of time or both) any holder of
any other Indebtedness of the Company or any Restricted Subsidiary to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
"Person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any
Person, means Capital Stock of any class or classes (however designated) which
is preferred as to the payment of dividends or distributions, or as to the
distribution of assets upon any voluntary or involuntary liquidation or
dissolution of such Person, over shares of Capital Stock of any other class of
such Person.
"principal" of any debt security means the principal of the
Security plus the premium, if any, payable on the Security which is due or
overdue or is to become due at the relevant time.
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67
"PSINet Agreement" means the IRU and Stock Purchase Agreement
dated as of July 22, 1997, between IXC Internet Services, Inc. and PSINet Inc.
and the related documents executed in connection therewith, in each case as in
effect as of the Issue Date.
"PSINet Common Stock" means the common stock of PSINet, Inc.
"PSINet Shares" means the shares of PSINet Common Stock
acquired by the Company or any Subsidiary pursuant to the terms of the PSINet
Agreement.
"Public Equity Offering" means an underwritten primary public
offering of common stock of the Company pursuant to an effective registration
statement under the Securities Act.
"Refinance" means, in respect of any Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue other Indebtedness in exchange or replacement for, such indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances
any Indebtedness of the Company or any Restricted Subsidiary existing on the
Issue Date or Incurred in compliance with this Certificate of Designation,
including Indebtedness that Refinances Refinancing Indebtedness; provided,
however, that (i) such Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being Refinanced, (ii) such
Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the Average Life of
the Indebtedness being Refinanced and (iii) such Refinancing Indebtedness has an
aggregate principal amount (or if Incurred with original issue discount, an
aggregate issue price) that is equal to or less than the aggregate principal
amount (or if Incurred with original issue discount, the aggregate accreted
value) then outstanding or committed (plus accrued interest on the principal
amount of Indebtedness Refinanced, and fees and
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68
expenses, including any premium and defeasance costs) under the Indebtedness
being Refinanced; provided further, however, that Refinancing Indebtedness shall
not include (x) Indebtedness of a Subsidiary that Refinances Indebtedness of the
Company (unless such Subsidiary was obligated under, or a guarantor of, the
Indebtedness being Refinanced) or (y) Indebtedness of the Company or a
Restricted Subsidiary that Refinances Indebtedness of an Unrestricted
Subsidiary.
"Registered Exchange Offer" means the offer by the Company,
pursuant to the Registration Rights Agreement, to holders of Initial
Exchangeable Preferred Stock to issue and deliver to such holders, in exchange
for the Initial Exchangeable Preferred Stock, a like aggregate liquidation
preference of Series B Stock registered under the Securities Act.
"Registration Rights Agreement" means the Registration Rights
Agreement dated August 14, 1997, among the Company and Credit Suisse First
Boston Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley and Co. Incorporated.
"Related Business" means any Permitted Business, the
businesses conducted by the Company and the Restricted Subsidiaries on the Issue
Date and any business related, ancillary or complementary to such businesses
conducted by the Company and the Restricted Subsidiaries on the Issue Date.
"Related Party" with respect to any Permitted Holder means (i)
any controlling stockholder, 80% (or more) owned Subsidiary, or spouse or
immediate family member (in the case of an individual) of such Principal or (ii)
any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding an 80% or more
controlling interest of which consist of such Permitted Holder or such other
Persons referred to in the immediately preceding clause (i).
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"Representative" means any trustee, agent or representative
(if any) for an issue of Senior Indebtedness of the Company.
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of, in the case of the Company, any Junior Stock or, in the case of
any Restricted Subsidiary, any Capital Stock (including any payment in
connection with any merger or consolidation involving such Person) or similar
payment to the direct or indirect holders of such Stock (other than dividends or
distributions payable solely in Junior Stock (other than Disqualified Stock) and
dividends or distributions to the extent paid to the Company or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Restricted Subsidiary to minority
stockholders (or owners of an equivalent interest in the case of a Subsidiary
that is an entity other than a corporation)), (ii) the purchase, redemption or
other acquisition or retirement for value of any Junior Stock of the Company or
Capital Stock of any direct or indirect parent of the Company or (iii) the
making of any Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Company
that is not an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to
property now owned or hereafter acquired whereby the Company or a Restricted
Subsidiary transfers such property to a Person and the Company or a Restricted
Subsidiary leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of
the Company secured by a Lien.
"Senior Notes" means the Company's 12 1/2% Senior
Notes Due 2005.
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"Series 3 Preferred Stock" means the Company's 10%
Junior Series 3 Cumulative Redeemable Preferred Stock.
"Shelf Registration Statement" means a registration statement
filed with the SEC covering resales of Exchangeable Preferred Stock.
"Significant Subsidiary" means any Restricted Subsidiary that
would be a "Significant Subsidiary" of the Company within the meaning of Rule
1-02 under Regulation S-X promulgated by the SEC.
"Standard & Poor's" means Standard & Poor's Ratings Group, or
its successor.
"Stated Maturity" means, with respect to any security, the
date specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Indebtedness" means the Exchange Debentures and
any other Indebtedness of the Company that specifically provides that such
Indebtedness is to rank pari passu with the Exchange Debentures in right of
payment and is not subordinated by its terms to any Indebtedness or other
obligation of the Company which is not Senior Indebtedness (as defined in the
Exchange Debenture).
"Subordinated Obligation" means any Indebtedness of the
Company (whether outstanding on the Issue Date or thereafter Incurred) which is
subordinate or junior in right of payment to the Exchange Debentures pursuant to
a written agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the
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71
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
(i) such Person, (ii) such Person and one or more Subsidiaries of such Person or
(iii) one or more Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (i)
any investment in direct obligations of the United States of America or any
agency thereof or obligations guaranteed by the United States of America or any
agency thereof, (ii) investments in time deposit accounts, certificates of
deposit and money market deposits maturing within 180 days of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States of America, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of
$50,000,000 (or the foreign currency equivalent thereof) and has outstanding
debt which is rated "A" (or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as defined in
Rule 436 under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor, (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) investments in commercial
paper, maturing not more than 90 days after the date of acquisition, issued by a
corporation (other than an Affiliate of the Company) organized and in existence
under the laws of the United States of America or any foreign country recognized
by the United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings
Group, and (v) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by Standard
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& Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"Trustee" means the party named as such in the Exchange
Indenture until a successor replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President
or any other officer or assistant officer of the Trustee assigned by the Trustee
to administer its corporate trust matters.
"Uniform Commercial Code" means the New York Uniform
Commercial Code as in effect from time to time.
"Unrestricted Subsidiary" means (i) any Subsidiary of the
Company that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of
its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien (excluding Liens incurred to secure obligations in respect of an IRU) on
any property of, the Company or any Restricted Subsidiary; provided, however,
that either (A) the Subsidiary to be so designated has total assets of $1,000 or
less or (B) if such Subsidiary has assets greater than $1,000, the Investment
resulting from such designation would be permitted under paragraph (l)(iii). The
Board of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that immediately after giving effect to such
designation (x) the Company could Incur $1.00 of additional Indebtedness under
paragraph (l)(iii)(A) and (y) no Default shall have occurred and be continuing.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the resolution of the Board of
Directors giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
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73
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock
or other interests (including partnership interests) of such Person then
outstanding and normally entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof.
"Wholly Owned Restricted Subsidiary" means a Restricted
Subsidiary all the Capital Stock of which (other than directors' qualifying
shares) is owned by the Company or one or more Wholly Owned Subsidiaries.
<PAGE> 74
IN WITNESS WHEREOF, said IXC Communications, Inc., has caused
this Certificate of Designation to be signed by James F. Guthrie, its
Chief Financial Officer and Executive Vice President, this 19th day of
August, 1997.
IXC COMMUNICATIONS, INC.,
By: /s/ JAMES F. GUTHRIE
----------------------------------
Name: James F. Guthrie
Title: Chief Financial Officer and
Executive Vice President
<PAGE> 75
EXHIBIT A
FORM OF EXCHANGEABLE PREFERRED STOCK
FACE OF SECURITY
[THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF
1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE
EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE
SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF
SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF
THIS SECURITY AGREES FOR THE BENEFIT OF THE ISSUER THAT (A) THIS SECURITY MAY BE
OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (i) TO A PERSON WHOM THE
SELLER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 144A, (II) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE
SECURITIES ACT, (iii) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (iv) PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (v) TO THE
ISSUER, IN EACH OF CASES (i) THROUGH (iv) IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND
EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY
FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.]*
[BY ITS ACQUISITION HEREOF, THE HOLDER REPRESENTS THAT (A) IT
IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN
AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S.]*/
- --------
* Subject to removal upon registration under the Securities Act of 1933 or
otherwise when the security shall no longer be a restricted security.
<PAGE> 76
2
[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"),
NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OF PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS
THE REGISTERED OWNER HEREOF, CEDE & CO. HAS AN INTEREST HEREIN.]**
[TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO
TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR
THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL
SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS
SET FORTH IN THE CERTIFICATE OF DESIGNATION REFERRED TO BELOW.]**
Certificate Number Number of Shares of Convertible
Preferred Stock
[ ] [ ]
CUSIP NO.: [ ]
12 1/2% Junior Exchangeable Preferred Stock Due 2009
(par value $0.01) (liquidation preference $1000
per share)
of
IXC Communications, Inc.
IXC Communications, Inc., a Delaware corporation (the
"Company"), hereby certifies that [ ] (the
- --------
** Subject to removal if not a global security.
<PAGE> 77
3
"Holder") is the registered owner of fully paid and non-assessable preferred
securities of the Company designated the 12 1/2% [Series B] Junior Exchangeable
Preferred Stock Due 2009 (par value $0.01) (liquidation preference $1000 per
share) (the "Exchangeable Preferred Stock"). The shares of Exchangeable
Preferred Stock are transferable on the books and records of the Registrar, in
person or by a duly authorized attorney, upon surrender of this certificate duly
endorsed and in proper form for transfer. The designation, rights, privileges,
restrictions, preferences and other terms and provisions of the Exchangeable
Preferred Stock represented hereby are issued and shall in all respects be
subject to the provisions of the Certificate of Designation dated August [ ],
1997, as the same may be amended from time to time (the "Certificate of
Designation"). Capitalized terms used herein but not defined shall have the
meaning given them in the Certificate of Designation. The ompany will provide a
copy of the Certificate of Designation to a Holder without charge upon written
request to the Company at its principal place of business.
Reference is hereby made to select provisions of the
Exchangeable Preferred Stock set forth on the reverse hereof, and to the
Certificate of Designation, which select provisions and the Certificate of
Designation shall for all purposes have the same effect as if set forth at this
place.
Upon receipt of this certificate, the Holder is bound by the
Certificate of Designation and is entitled to the benefits thereunder.
Unless the Transfer Agent's Certificate of Authentication
hereon has been properly executed, these shares of Exchangeable Preferred Stock
shall not be entitled to any benefit under the Certificate of Designation or be
valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has executed this certificate
this [ ] day of [ ], [ ].
IXC COMMUNICATIONS, INC.,
<PAGE> 78
4
By:
----------------------------------
Name:
Title:
[Seal]
By:
----------------------------------
Name:
Title:
<PAGE> 79
5
TRANSFER AGENT'S CERTIFICATE OF AUTHENTICATION
This is one of the Exchangeable Preferred Stock referred to in
the within mentioned Certificate of Designation.
Dated: [ ], [ ]
THE BANK OF NEW YORK
as Transfer Agent,
By:
----------------------------------
Authorized Signatory
<PAGE> 80
6
REVERSE OF SECURITY
Dividends on each share of Exchangeable Preferred Stock shall
be payable at a rate per annum set forth in the face hereof or as provided in
the Certificate of Designation (including Additional Dividends).
The shares of Exchangeable Preferred Stock shall be redeemable
as provided in the Certificate of Designation. The shares of Exchangeable
Preferred Stock shall be exchangeable at the Company's option into the Company's
12-1/2% Subordinated Exchange Debentures Due 2009 in the manner and according to
the terms set forth in the Certificate of Designation.
As required under Delaware law, the Company shall furnish to
any Holder upon request and without charge, a full summary statement of the
designations, voting rights preferences, limitations and special rights of the
shares of each class or series authorized to be issued by the Company so far as
they have been fixed and determined and the authority of the Board of Directors
to fix and determine the designations, voting rights, preferences, limitations
and special rights of the class and series of shares of the Company.
<PAGE> 81
7
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers the
shares of Exchangeable Preferred Stock evidenced hereby to:
---------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Insert assignee's social security or tax identification number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Insert address and zip code of assignee)
and irrevocably appoints:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
agent to transfer the shares of Exchangeable Preferred Stock evidenced hereby on
the books of the Transfer Agent and Registrar. The agent may substitute another
to act for him or her.
Date:
-----------------------
Signature:
---------------------------------
(Sign exactly as your name appears on the other side of this Exchangeable
Preferred Stock Certificate)
Signature Guarantee:***
--- ---------------------------------------------
- ------------------
*** (Signature must be guaranteed by an "eligible guarantor
institution" that is, a bank, stockbroker, savings and loan association or
credit union meeting the requirements of the Registrar, which requirements
include membership or participation in the Securities Transfer Agents Medallion
Program ("STAMP") or such other "signature
<PAGE> 82
8
- ------------
guarantee program" as may be determined by the Registrar in addition to, or in
substitution for, STAMP, all in accordance with the Securities Exchange Act of
1934, as amended.)
<PAGE> 83
EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR
REGISTRATION OF TRANSFER OF EXCHANGEABLE PREFERRED STOCK
Re: 12 1/2% Junior Exchangeable Preferred Stock Due 2009 (the "Exchangeable
Preferred Stock") of IXC Communications, Inc. (the "Company")
This Certificate relates to ____ shares of Exchangeable
Preferred Stock held in [ ] */ book-entry or [ ] */ definitive form by
_______________ (the "Transferor").
The Transferor*:
[ ] has requested the Transfer Agent by written order to deliver in
exchange for its beneficial interest in the Exchangeable Preferred Stock held by
the depository shares of Exchangeable Preferred Stock in definitive, registered
form equal to its beneficial interest in such Exchangeable Preferred Stock (or
the portion thereof indicated above); or
[ ] has requested the Transfer Agent by written order to exchange or
register the transfer of Exchangeable Preferred Stock.
In connection with such request and in respect of such
Exchangeable Preferred Stock, the Transferor does hereby certify that the
Transferor is familiar with the Certificate of Designation relating to the above
captioned Exchangeable Preferred Stock and that the transfer of this
Exchangeable Preferred Stock does not require registration under the Securities
Act of 1933 (the "Securities Act") because */:
[ ] Such Exchangeable Preferred Stock is being acquired for the
Transferor's own account without transfer.
[ ] Such Exchangeable Preferred Stock is being transferred to the
Company.
- -------- * /Please check applicable box.
<PAGE> 84
2
[ ] Such Exchangeable Preferred Stock is being transferred (i) to a
qualified institutional buyer (as defined in Rule 144A under the Securities
Act), in reliance on Rule 144A or (ii) pursuant to an exemption from
registration in accordance with Rule 904 under the Securities Act (and, in the
case of clause (ii), based on an opinion of counsel if the Company so requests
and together with a certification in substantially the form of Exhibit C to the
Certificate of Designation).
[ ] Such Exchangeable Preferred Stock is being transferred in reliance
on and in compliance with another exemption from the registration requirements
of the Securities Act (and based on an opinion of counsel if the Company so
requests).
[INSERT NAME OF TRANSFEROR]
Date: by
------------------ -----------------------------------
<PAGE> 85
EXHIBIT C
FORM OF CERTIFICATE TO BE DELIVERED IN
CONNECTION WITH TRANSFERS PURSUANT TO REGULATION S
----------, ----
The Bank of New York
Attention: [ ]
Ladies and Gentlemen:
In connection with our proposed sale of certain 12 1/2% Junior
Exchangeable Preferred Stock Due 2009 (the "Exchangeable Preferred Stock") of
IXC Communications, Inc., a Delaware corporation ("the "Company"), we represent
that:
(i) the offer of the Exchangeable Preferred Stock was not made
to a person in the United States;
(ii) at the time the buy order was originated, the transferee
was outside the United States or we and any person acting on our behalf
reasonably believed that the transferee was outside the United States;
(iii) no directed selling efforts have been made by us in the
United States in contravention of the requirements of Rule 903(b) or
Rule 904(b) of Regulation S under the Securities Act of 1933 (the
"Securities Act"), as applicable; and
(iv) the transaction is not part of a plan or scheme by us to
evade the registration requirements of the Securities Act.
You and the Company are entitled to rely upon this letter and
you are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with
<PAGE> 86
4
respect to the matters covered hereby. Terms used in this certificate have
the meanings set forth in Regulation S.
Very truly yours,
---------------------------------------------
(Name of Transferor)
by
------------------------------------------
Name:
Title:
Address:
<PAGE> 1
EXHIBIT 5.1
RIORDAN & MCKINZIE
A PROFESSIONAL LAW CORPORATION
695 TOWN CENTER DRIVE, SUITE 1500
COSTA MESA, CALIFORNIA 92626
August 27, 1997
9-098-001
IXC Communications, Inc.
5000 Plaza on the Lake, Suite 200
Austin, Texas 78746
Ladies and Gentlemen:
We have acted as counsel to IXC Communications, Inc., a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of (i) 1,018,123 shares
(the "Convertible Preferred Shares") of the Company's 7 1/4% Convertible
Preferred Stock Due 2007, $.01 par value per share (the "Convertible Preferred
Stock"), (ii) 381,877 shares (the "Additional Preferred Shares") of Convertible
Preferred Stock which may be issued as payment of dividends in-kind with respect
to the Convertible Preferred Stock, (iii) the shares of the Company's Common
Stock, $.01 par value per share (the "Common Stock") issuable upon conversion of
the Convertible Preferred Stock, and 97,481 shares (the "Telecom One Shares") of
Common Stock issued to former stockholders of Telecom One, Inc. This opinion is
delivered to you in accordance with the requirements of Item 601(b)(5) of
Regulation S-K under the 1933 Act in connection with the Registration Statement
on Form S-3, including all pre-effective and post-effective amendments thereto
(the "Registration Statement"), for the aforementioned sale, filed with the
Securities and Exchange Commission (the "Commission") under the 1933 Act.
In rendering the opinion set forth herein, we have made such investigations
of fact and law, and examined such documents and instruments, or copies thereof
established to our satisfaction to be true and correct copies thereof, as we
have deemed necessary under the circumstances.
Based upon the foregoing and such other examination of law and fact as we
have deemed necessary, and in reliance thereon, we are of the opinion that:
1. The Convertible Preferred Shares are duly authorized, validly
issued, fully paid and non-assessable. The Additional Preferred Shares,
when authorized by the Company's Board of Directors as payment of dividends
in-kind with respect to the outstanding shares of Convertible Preferred
Stock in accordance with the Company's Restated Certificate of
Incorporation, as amended (the "Restated Certificate") will be duly
authorized, validly issued, fully paid and non-assessable.
2. The Convertible Preferred Shares and the Additional Preferred
Shares are convertible at the option of the holder thereof into shares of
Common Stock in accordance with the terms of the Restated Certificate. The
shares of Common Stock issuable upon conversion of the Convertible
Preferred Shares and, if issued, the Additional Preferred Shares, pursuant
to the Restated Certificate, will be duly authorized, validly issued, fully
paid and non-assessable.
3. The Telecom One Shares are duly authorized, validly issued, fully
paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus which is a part of the Registration Statement.
In giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the 1933 Act or the rules
and regulations of the Commission thereunder.
Very truly yours,
/s/ RIORDAN & MCKINZIE
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(DOLLARS IN THOUSANDS, EXCEPT NOTES AND STATISTICAL DATA)
<TABLE>
<CAPTION>
THE COMPANY'S
PREDECESSOR - HISTORICAL
-------------------------
PERIOD FROM
PERIOD FROM AUGUST 14
JANUARY 1 THROUGH FOR THE SIX
THROUGH DECEMBER FOR THE YEAR ENDED DECEMBER 31, MONTHS ENDED
AUGUST 14, 31, ---------------------------------------- JUNE 30,
1992 1992 1993 1994 1995 1996 1997
----------- ----------- -------- ------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS:
Consolidated pretax income
(loss) from continuing
operations................... $ (24,482) $(7,175) $(53,789) $ 8,174 $ (4,911) $(43,429) $(48,940)
Minority interest in net loss
(income) of subsidiaries with
fixed charges................ -- -- -- (77) (5,218) 618 317
Equity in loss of less than 50%
owned affiliate with no
guaranteed debt.............. -- -- -- 86 (35) (37) --
FIXED CHARGES:
Interest expensed and
capitalized.................. 18,751 1,398 5,322 6,139 14,958 40,009 19,130
Interest portion of rental
expense...................... 9,985 5,444 10,690 5,495 2,135 19,960 16,247
Less interest capitalized
during the period............ (2) -- (379) (34) (361) (2,933) (3,370)
Plus capitalized interest
amortization................. -- -- -- -- 20 165 167
-------- ------- -------- ------- -------- -------- --------
Earnings....................... $ 4,252 $ (333) $(38,156) $19,783 $ 6,588 $ 14,353 $(16,449)
======== ======= ======== ======= ======== ======== ========
FIXED CHARGES:
Interest expensed and
capitalized............... $ 18,751 $ 1,398 $ 5,322 $ 6,139 $ 14,958 $ 40,009 $ 19,130
Interest portion of rental
expense................... 9,985 5,444 10,690 5,495 2,135 19,960 16,247
Preferred stock dividend
requirements of majority-
owned subsidiaries
(non-intercompany)........ -- -- 209 249 126 -- --
-------- ------- -------- ------- -------- -------- --------
Fixed Charges.................. $ 28,736 $ 6,842 $ 16,221 $11,883 $ 17,219 $ 59,969 $ 35,377
======== ======= ======== ======= ======== ======== ========
PREFERRED STOCK DIVIDEND
REQUIREMENTS:
Series 1 and 3............... $ -- $ 467 $ 1,358 $ 2,604 $ 1,717 $ 1,739 $ 945
Junior Convertible Preferred
Stock..................... -- -- -- -- -- -- 1,813
-------- ------- -------- ------- -------- -------- --------
Total Preferred Stock Dividend
Requirements................. $ -- $ 467 $ 1,358 $ 2,604 $ 1,717 $ 1,739 $ 2,758
======== ======= ======== ======= ======== ======== ========
Total Fixed Charges and
Preferred Stock Dividend
Requirements................. $ 28,736 $ 7,309 $ 17,579 $14,487 $ 18,936 $ 61,708 $ 38,135
======== ======= ======== ======= ======== ======== ========
Ratio of Earnings to Combined
Fixed Charges and Preferred
Stock Dividends
(Deficiency)(1).............. $ (24,484) $(7,642) $(55,735) 1.4x $(12,348) $(47,355) $(54,584)
======== ======= ======== ======= ======== ======== ========
</TABLE>
- ---------------
(1) Where earnings are inadequate to cover fixed charges and preferred stock
dividend requirements, the deficiency is shown.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 to the Registration Statement on Form S-3 of IXC Communications,
Inc. (Registration No. 333-33421) for the registration of 97,481 shares of its
Common Stock and 1,400,000 shares of its 7 1/4% Junior Convertible Preferred
Stock (including any Common Stock issuable upon conversion thereof) and to the
incorporation by reference therein of our report dated February 28, 1997, except
for the third paragraph of Note 19, as to which the date is March 17, 1997, with
respect to the consolidated financial statements of IXC Communications Inc.
included in its Annual Report (Form 10-K) for the year ended December 31, 1996,
filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Austin, Texas
August 22, 1997
