<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 8-K
CURRENT REPORT
---------------
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): OCTOBER 30, 1998
---------------
IXC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
COMMISSION FILE NUMBER 0-20803
DELAWARE 75-2644120
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1122 CAPITAL OF TEXAS HIGHWAY SOUTH,
AUSTIN, TEXAS 78746-6426
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (512) 328-1112
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
<PAGE> 2
ITEM 5. OTHER EVENTS.
Attached as Exhibit 99.1 are the audited consolidated financial
statements of IXC Communications, Inc. for the three year period ended December
31, 1997. Such consolidated financial statements have been restated to include
the combined results of operations, financial position, and cash flows of
Eclipse Telecommunications, Inc., which was acquired by IXC Communications, Inc.
on June 3, 1998 in a transaction accounted for as a pooling of interests. Such
consolidated financial statements are incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Yount, Hyde & Barbour, P.C.
23.5 Consent of Mayer Hoffman McCann L.C.
27.1 Financial Data Schedule for 1997
27.2 Financial Data Schedule for 1996
99.1 Registrant's audited consolidated restated financial
statements for the three year period ended December 31,
1997
2
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: October 29, 1998
IXC Communications, Inc.
By: /s/ STUART K. COPPENS
-------------------------------------
Stuart K. Coppens
Vice President of Finance and
Chief Accounting Officer
3
<PAGE> 4
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Yount, Hyde & Barbour, P.C.
23.5 Consent of Mayer Hoffman McCann L.C.
27.1 Financial Data Schedule for 1997
27.2 Financial Data Schedule for 1996
99.1 Registrant's audited consolidated restated financial
statements for the three year period ended December 31,
1997
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (File No. 333-11409), Registration Statement on Form S-8 (File No.
333-18467), Registration Statement on Form S-8 (File No. 333-49817), Amendment
No. 1 to the Registration Statement on Form S-3 (File No. 333-33421) and
Amendment No. 1 to the Registration Statement on Form S-3 (File No. 333-52433)
of our report dated June 30, 1998, with respect to the consolidated financial
statements of IXC Communications, Inc. included in the Current Report on Form
8-K for the year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
Austin, Texas
October 29, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report on Network Long Distance, Inc. dated May 18, 1998 included in this
Form 8-K, into IXC Communications, Inc.'s previously filed registration
statements on Form S-3 (File No. 333-52433), Form S-3 (File No. 333-33421),
Form S-8 (File No. 333-49817), Form S-8 (File No. 333-18467) and Form S-8 (File
No. 333-11409).
/s/ ARTHUR ANDERSEN LLP
Jackson, Mississippi
October 29, 1998
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-11409, No. 333-18467, and No. 333-49817 of IXC Communications, Inc. on Form
S-8 and Registration Statement No. 333-33421 and No. 333-52433 on Form S-3 of
our report on National Teleservice, Inc. dated July 28, 1997, appearing in this
Current Report on Form 8-K of IXC Communications, Inc. dated October 29, 1998.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
October 29, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this current report on Form 8-K of our report dated May 10, 1996
previously included in IXC Communications, Inc.'s (IXC) current report on Form
8-K dated April 15, 1998, in IXC's registration statements on Form S-8 (File
Nos. 333-11409, 333-18467 and 333-49817) and Amendment No. 1 to registration
statements on Form S-3 (File Nos. 333-33421 and 333-52433) and the
incorporation by reference in these registration statements of our report dated
May 10, 1996 included in Network Long Distance, Inc.'s Form 10-K for the year
ended March 31, 1997, and to all references to our Firm included in these
registration statements.
/s/ YOUNT, HYDE & BARBOUR, P.C.
Culpeper, Virginia
October 29, 1998
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
references into IXC Communications, Inc.'s previously filed registration
statements on Form S-8 (File No. 333-11409), Form S-8 (File No. 333-18467),
Form S-8 (File No. 333-49817), Amendment No. 1 to Registration Statement on
Form S-3 (File No. 333-33421), and Amendment No. 1 to Registration Statement on
Form S-3 (File No. 333-52433) of our report dated March 11, 1996, the inclusion
of our report dated March 11, 1996 on the financial statements of United Wats,
Inc. in the Form 8-K filed by IXC Communications, Inc. on or about October 29,
1998, and to all references to our Firm included in the above referenced
registration statements.
/s/ MAYER HOFFMAN MCCANN L.C.
Kansas City, Missouri
October 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> OTHER OTHER OTHER OTHER
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 APR-01-1997 JUL-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 23,204 42,981 284,172 155,855
<SECURITIES> 0 0 0 0
<RECEIVABLES> 80,008 90,461 109,467 124,330
<ALLOWANCES> 8,767 9,617 13,127 13,119
<INVENTORY> 5 105 101 0
<CURRENT-ASSETS> 99,395 128,141 385,558 273,059
<PP&E> 418,862 503,022 587,417 734,282
<DEPRECIATION> 81,436 92,117 105,787 120,408
<TOTAL-ASSETS> 505,639 613,426 954,801 968,872
<CURRENT-LIABILITIES> 125,902 153,116 176,425 205,676
<BONDS> 0 0 0 0
0 0 0 403,368
13 101,826 407,838 1
<COMMON> 309 309 310 356
<OTHER-SE> 76,298 46,527 12,184 19,028
<TOTAL-LIABILITY-AND-EQUITY> 505,639 613,426 954,801 968,872
<SALES> 0 0 0 0
<TOTAL-REVENUES> 106,882 113,812 136,829 521,617
<CGS> 0 0 0 0
<TOTAL-COSTS> 84,894 90,979 101,035 395,667
<OTHER-EXPENSES> 36,222 38,939 51,215 175,490
<LOSS-PROVISION> 4,258 4,534 5,451 20,782
<INTEREST-EXPENSE> 7,991 8,096 8,027 31,702
<INCOME-PRETAX> (22,735) (27,550) (30,290) (97,245)
<INCOME-TAX> (440) 250 696 1,359
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (22,498) (27,914) (31,172) (99,164)
<EPS-PRIMARY> (.67) (.87) (1.09) (3.47)
<EPS-DILUTED> (.67) (.87) (1.09) (3.47)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> OTHER OTHER OTHER OTHER
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 APR-01-1996 JUL-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 5,671 6,430 91,358 64,090
<SECURITIES> 102 1,040 1,040 0
<RECEIVABLES> 11,164 26,697 49,831 63,224
<ALLOWANCES> 0 2,253 5,680 6,407
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 31,956 47,742 141,415 127,019
<PP&E> 179,446 196,039 239,769 344,437
<DEPRECIATION> 52,903 56,495 65,009 72,838
<TOTAL-ASSETS> 382,089 373,317 467,340 485,335
<CURRENT-LIABILITIES> 23,335 58,795 78,332 102,828
<BONDS> 0 0 0 0
0 0 0 0
321 13 13 13
<COMMON> 571 936 1,005 338
<OTHER-SE> 12,096 2,636 85,366 74,930
<TOTAL-LIABILITY-AND-EQUITY> 382,089 373,317 467,340 485,335
<SALES> 0 0 0 0
<TOTAL-REVENUES> 45,928 63,187 78,755 281,967
<CGS> 0 0 0 0
<TOTAL-COSTS> 31,169 47,007 60,911 194,881
<OTHER-EXPENSES> 22,560 23,544 29,938 107,030
<LOSS-PROVISION> 355 381 2,038 6,311
<INTEREST-EXPENSE> 9,953 9,682 9,163 37,636
<INCOME-PRETAX> (12,601) (12,181) (14,217) (49,499)
<INCOME-TAX> 1,507 1,918 2,122 5,880
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (11,474) (11,406) (10,624) (44,237)
<EPS-PRIMARY> (0.45) (.43) (.33) (1.52)
<EPS-DILUTED> (0.45) (.43) (.33) (1.52)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
IXC Communications, Inc.
We have audited the accompanying consolidated balance sheets of IXC
Communications, Inc. and its subsidiaries as of December 31, 1997 and 1996 and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the consolidated
financial statements of Network Long Distance, Inc., including the subsidiaries
Long Distance Telecom, Inc. and National Teleservice, Incorporated
(collectively, Network Long Distance) which was combined with the Company on
June 3, 1998, in a business combination accounted for as a pooling of interests
as described in Note 3 to the consolidated financial statements, which
statements reflect total assets constituting 5.5% and 5.4% of the related 1997
and 1996 consolidated financial statement totals, respectively, and which
statements reflect net income (loss) constituting ($4.6) million, $(6.8) million
and $0.8 million of the related 1997, 1996 and 1995 consolidated financial
statement totals, respectively. Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to data included for Network Long Distance is based solely on the reports of the
other auditors. We also did not audit the financial statements of MarcaTel S.A.
de C.V. (MarcaTel), a corporation in which the Company has an indirect interest,
accounted for using the equity method, as of and for the year ended December 31,
1997. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to data included for
MarcaTel, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors for the
periods indicated, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IXC
Communications, Inc. and its subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Austin, Texas
June 30, 1998 (except for Note 23, as
to which the date is October 28, 1998)
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Network Long Distance, Inc.:
We have audited the accompanying consolidated balance sheets of Network Long
Distance, Inc. (a Delaware Corporation) and subsidiaries as of March 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three year period ended March
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Long Distance Telecom, Inc. included in the consolidated financial statements of
Network Long Distance, Inc. which statements constitute total revenues of 5.1%
for the year ended March 31, 1996, of the related consolidated totals. We did
not audit the financial statements of United Wats, Inc., included in the
consolidated financial statements of Network Long Distance, Inc. which
statements constitute total revenues of 15.4% for the year ended March 31, 1996
of the related consolidated totals. We did not audit the financial statements of
National Teleservice, Incorporated, which statements constitute total assets of
28.1% and 20.4% as of March 31, 1997 and 1996, respectively, and total revenues
of 30.6% and 33.3% for the years ended March 31, 1997 and 1996, respectively, of
the related consolidated totals. The financial statements of Long Distance
Telecom, Inc., United Wats, Inc. and National Teleservice, Incorporated were
audited by other auditors whose reports thereon have been furnished to us, and
our opinion, insofar as it relates to the amounts included for Long Distance
Telecom, Inc., United Wats, Inc., and National Teleservice, Incorporated, is
based solely upon the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Network Long Distance, Inc. and
subsidiaries as of March 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three year period ended March
31, 1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Jackson, Mississippi
May 18, 1998
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
Board of Directors
National Teleservice, Incorporated
Winona, Minnesota
We have audited the accompanying consolidated balance sheets of
National Teleservice, Inc. (the Company) as of March 31, 1997 and 1996 and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended March 31, 1997, not separately
presented herein. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of National Teleservice, Inc. at March
31, 1997 and 1996 and the results of its operations and its cash flows for each
of the three years in the period ended March 31, 1997, in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
July 28, 1997
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
To the Board of Directors UNITED WATS, INC.
We have audited the balance sheet of United Wats, Inc. as of December
31, 1995, and the related statements of income, changes in stockholders' equity
and cash flows for the years ended December 31, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United Wats, Inc. as of
December 31, 1995, and the results of its operations and its cash flows for the
years ended December 31, 1995 and 1994 in conformity with generally accepted
accounting principles.
/s/ MAYER HOFFMAN MCCANN L.C.
Kansas City, Missouri
March 11, 1996
<PAGE> 5
INDEPENDENT AUDITOR'S REPORT
To the General Partner
Telecommunications Ventures Limited Partnership No. 1
T/A Blue Ridge Telephone
Culpeper, VA 22701
We have audited the balance sheet of Telecommunications Ventures Limited
Partnership No. 1, T/A Blue Ridge Telephone, as of December 31, 1995 and the
related statements of operations, partners' equity (deficit) and cash flows for
the years ended December 31, 1995 and 1994. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Telecommunications Ventures
Limited Partnership No. 1, T/A Blue Ridge Telephone, as of December 31, 1995 and
the results of its operations and its cash flows for the years ended December
31, 1995 and 1994 in conformity with generally accepted accounting principles.
/s/ YOUNT, HYDE & BARBOUR, P.C.
Culpeper, Virginia
May 10, 1996
<PAGE> 6
IXC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ............................................. $ 155,855 $ 64,090
Accounts receivable:
Trade, net of allowance for doubtful accounts of $13,119
in 1997 and $6,407 in 1996 ....................................... 111,211 56,817
Other .............................................................. 1,885 2,827
--------- ---------
113,096 59,644
Deferred tax assets ................................................... 947 620
Prepaid expenses and other current assets ............................. 3,161 2,665
--------- ---------
Total current assets ........................................ 273,059 127,019
Property and equipment, net ........................................... 613,874 271,599
Escrow under 12 1/2% Senior Notes ..................................... -- 51,412
Investment in unconsolidated subsidiaries ............................. 17,497 5,486
Deferred charges and other non-current assets ......................... 64,442 29,819
--------- ---------
Total assets ................................................ $ 968,872 $ 485,335
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable-trade ................................................ $ 86,651 $ 50,364
Accrued service cost .................................................. 56,994 22,602
Accrued liabilities ................................................... 43,427 18,824
Current portion of unearned revenue ................................... 6,310 3,044
Current portion of long-term debt and capital lease obligations........ 12,294 7,994
--------- ---------
Total current liabilities ................................... 205,676 102,828
Long-term debt and capital lease obligations, less
current portion ..................................................... 308,453 297,584
Deferred tax liability ................................................ 2,701 2,536
Unearned revenue -- noncurrent ........................................ 59,627 5,302
Other noncurrent liabilities .......................................... 6,253 899
Minority interest ..................................................... 1,465 905
7 1/4% Junior Convertible Preferred Stock; $.01 par value;
authorized -- 3,000,000 shares of all classes of Preferred
Stock; 1,055,367 shares issued and outstanding (aggregate
liquidation preference of $105,537) at December 31, 1997 ............ 101,239 --
12 1/2% Junior Exchangeable Preferred Stock; $.01 par value;
authorized -- 3,000,000 shares of all classes of Preferred
Stock; 308,958 shares issued and outstanding (aggregate
liquidation preference of $313,786 including accrued
dividends of $4,828) at December 31, 1997 ........................... 302,129 --
Stockholders' equity (deficit):
10% Junior Series 3 Cumulative Preferred Stock, $.01 par value;
authorized -- 3,000,000 shares of all classes of Preferred Stock;
414 shares issued and outstanding at December 31, 1997 and 12,550
shares issued and outstanding at December 31, 1996 (aggregate
liquidation preference of $692 at December 31, 1997, and $19,059
at December 31, 1996) ............................................. 1 13
Common Stock, $.01 par value; authorized -- 100,000,000 shares;
35,575,325 shares and 33,816,952 shares issued and outstanding at
December 31,1997 and December 31, 1996 ............................ 356 338
Additional paid-in capital .......................................... 143,355 138,149
Accumulated deficit ................................................. (162,383) (63,219)
--------- ---------
Total stockholders' equity (deficit) ........................ (18,671) 75,281
--------- ---------
Total liabilities, redeemable preferred stock
and stockholders' equity (deficit) ........................ $ 968,872 $ 485,335
========= =========
</TABLE>
See accompanying notes.
<PAGE> 7
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net operating revenue:
(Net of service credits and bad debt provisions of $20,782,
$6,311 and $2,712, respectively)
Private line ............................................ $ 162,329 $ 99,793 $ 89,563
Long distance switched services ......................... 359,288 182,174 65,151
--------- --------- ---------
521,617 281,967 154,714
Operating expenses:
Cost of services ........................................ 395,667 194,881 83,158
Operations and administration ........................... 102,760 71,103 49,013
Depreciation and amortization ........................... 65,114 29,636 19,163
Write-off of intangible assets .......................... 4,025 6,291 --
Merger costs ............................................ 3,591 -- --
--------- --------- ---------
Operating income (loss) ......................... (49,540) (19,944) 3,380
Interest income ........................................... 7,565 2,838 468
Interest income on escrow under 12 1/2% Senior Notes ...... 203 7,404 2,552
Interest expense .......................................... (31,702) (37,636) (14,903)
Equity (loss) net income (loss) of unconsolidated
subsidiaries ............................................ (23,800) (1,961) 19
Other, net ................................................ 29 (200) (201)
--------- --------- ---------
Loss before (provision) benefit for income taxes, minority
interest and extraordinary loss .......................... (97,245) (49,499) (8,685)
(Provision) benefit for income taxes ...................... (1,359) 5,880 1,033
Minority interest ......................................... (560) (618) 5,218
--------- --------- ---------
Loss before extraordinary loss ............................ (99,164) (44,237) (2,434)
Extraordinary loss on early extinguishment of debt, net of
provision for income tax of $1,164 ....................... -- -- (1,747)
--------- --------- ---------
Net loss .................................................. (99,164) (44,237) (4,181)
Dividends applicable to preferred stock ................... (21,636) (1,739) (1,843)
--------- --------- ---------
Net loss applicable to common stockholders ................ $(120,800) $ (45,976) $ (6,024)
========= ========= =========
Basic and diluted loss per share:
Before extraordinary loss ................................. $ (3.47) $ (1.52) $ (0.15)
Extraordinary loss ........................................ -- -- (0.07)
--------- --------- ---------
Net loss .................................................. $ (3.47) $ (1.52) $ (0.22)
========= ========= =========
</TABLE>
See accompanying notes.
<PAGE> 8
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
10% SENIOR 10% JUNIOR
SERIES 1 SERIES 3
--------------- ---------------
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMU- STOCKHOLDERS'
--------------- --------------- --------------- PAID-IN ULATED EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------ ------ ------ ------ ------ ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 1 $ 1,460 13 $ 13 27,004 $ 270 $ 36,027 $ (13,982) $ 23,788
Redemption of Senior Series1 (1) (1,460) -- -- -- -- -- -- (1,460)
Issuance of common stock ... -- -- -- -- 280 3 6,273 -- 6,276
Dividends paid -- preferred
stock .................... -- -- -- -- -- -- -- (942) (942)
Net loss ................... -- -- -- -- -- -- -- (4,181) (4,181)
--- ------- ----- ----- ------ ----- --------- --------- ---------
Balance at December 31, 1995 -- -- 13 13 27,284 273 42,300 (19,105) 23,481
Issuance of common stock ... -- -- -- -- 6,533 65 95,849 -- 95,914
Change in fiscal year of
merged entities .......... -- -- -- -- -- -- -- 123 123
Net loss ................... -- -- -- -- -- -- -- (44,237) (44,237)
--- ------- ----- ----- ------ ----- --------- --------- ---------
Balance at December 31, 1996 -- -- 13 13 33,817 338 138,149 (63,219) 75,281
Issuance of common stock ... -- -- -- -- 1,187 12 23,440 -- 23,452
Stock option exercises ..... -- -- -- -- 63 1 1,967 -- 1,968
Accretion of preferred stock -- -- -- -- -- -- (724) -- (724)
Preferred dividends paid
in kind and accrued ...... -- -- -- -- -- -- (19,323) -- (19,323)
Conversion of Series 3
Preferred Stock .......... -- -- (12) (12) 605 6 5 -- (1)
Other ...................... -- -- -- -- (97) (1) (159) -- (160)
Net loss ................... -- -- -- -- -- -- -- (99,164) (99,164)
--- ------- ----- ----- ------ ----- --------- --------- ---------
Balance at December 31, 1997 -- $ -- 1 $ 1 35,575 $ 356 $ 143,355 $(162,383) $ (18,671)
=== ======= ===== ===== ====== ===== ========= ========= =========
</TABLE>
See accompanying notes.
<PAGE> 9
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $ (99,164) $ (44,237) $ (4,181)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation ..................................... 51,929 24,509 17,705
Amortization ..................................... 14,887 6,412 2,492
Write-off of intangible assets ................... 4,025 6,291 --
Provision for doubtful accounts .................. 20,782 6,311 2,712
Equity in net (income) loss of
unconsolidated subsidiaries .................... 23,800 1,961 (19)
Minority interest in net (income) loss
of subsidiaries ................................ 560 618 (5,218)
Compensation expense on stock options
and phantom stock .............................. 1,447 254 51
Extraordinary loss on early extinguishment
of debt ........................................ -- -- 2,911
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable ............................ (70,498) (45,958) (8,656)
Other current assets ........................... 879 660 (1,150)
Accounts payable - trade ....................... 26,242 19,971 7,374
Accrued liabilities and accrued service costs... 15,903 4,436 7,503
Deferred income taxes .......................... (457) (6,135) (1,100)
Deferred charges and other non-current assets... (30,513) (3,774) (4,013)
Other non-current liabilities .................. 61,964 5,752 (2,724)
--------- --------- ---------
Net cash provided by (used in)
operating activities ....................... 21,786 (22,929) 13,687
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Release of funds from escrow under 12 1/2%
Senior Notes ..................................... 69,564 154,244 4,300
Deposit into escrow under 12 1/2% Senior Notes...... (18,152) (7,404) (202,552)
Purchase of property and equipment ................. (315,853) (136,976) (24,937)
Acquisitions, net of cash acquired and common
stock issued ..................................... (2,502) (3,777) (1,296)
Investments in unconsolidated subsidiaries ......... (35,497) (7,319) --
--------- --------- ---------
Net cash used in investing activities ........ (302,440) (1,232) (224,485)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of 12 1/2% Senior Notes...... -- -- 277,148
Net proceeds from sale of 6 3/4% Convertible
Preferred Stock .................................. 95,354 -- --
Net proceeds from sale of 7 3/4% Convertible
Preferred Stock .................................. 287,967 -- --
Proceeds from new debt and capital lease
obligations ...................................... -- 3,250 21,314
Principal payments on long-term debt and
capital lease obligations ........................ (11,499) (16,679) (77,790)
Payment of debt issue costs ........................ -- (1,301) (10,407)
Redemption of preferred stock ...................... -- -- (2,860)
Payment of dividends ............................... -- -- (36)
Capital contribution in subsidiary by
minority interest holders ........................ -- -- 6,002
Issuance of common stock ........................... 173 94,069 --
Other financing activities ......................... 424 -- (906)
--------- --------- ---------
Net cash provided by financing activities .... 372,419 79,339 212,465
--------- --------- ---------
Effect of change in year-end from merged entities... -- 537 --
--------- --------- ---------
Net increase in cash and cash equivalents .......... 91,765 55,715 1,667
Cash and cash equivalents at beginning of year...... 64,090 8,375 6,708
--------- --------- ---------
Cash and cash equivalents at end of year ........... $ 155,855 $ 64,090 $ 8,375
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes ....................................... $ 516 $ 706 $ 1,859
========= ========= =========
Interest, net of amounts capitalized ............... $ 30,638 $ 38,082 $ 5,306
========= ========= =========
</TABLE>
See accompanying notes.
<PAGE> 10
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND OPERATIONS
IXC Communications, Inc. and its subsidiaries (collectively referred to as "IXC"
or the "Company") is an Austin, Texas based provider of telecommunications
services. IXC provides two principal services: (i) private line voice and data
circuits, and (ii) long distance switched services.
Long distance companies may be categorized as facilities-based carriers or
non-facilities-based carriers. Sellers of private line services are generally
facilities-based carriers, like IXC, that own private line transmission
facilities, such as fiber optic or digital microwave transmission facilities.
Customers using private line services include: (i) facilities-based carriers
that require private line capacity where they have geographic gaps in their
facilities, need additional capacity or require geographically different
routing; and (ii) non-facilities-based carriers requiring private line capacity
to carry their customers' long distance traffic. The Company provides private
line services to customers either on a "take-or-pay" long term basis, or after
contract expiration on a month-to-month basis.
In late 1995, the Company expanded into the business of selling long distance
switched services to long distance resellers. Sellers of switched long distance
services are generally switched carriers, like IXC, that own one or more
switches that direct telecommunications traffic or switchless carriers that
depend on switched carriers to provide long distance services to their users.
The Company sells switched long distance services on a per-call basis, with
payment due monthly after services are rendered. In June 1998 the Company
acquired Eclipse Telecommunications, Inc., formerly Network Long Distance, Inc.
("Eclipse") (See Note 3). Eclipse is a switched long distance provider that
sells long distance voice and data services mainly to small and medium-sized
businesses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
IXC, a Delaware corporation, was incorporated in 1992. The accompanying
consolidated financial statements include accounts of the Company and its
wholly-owned and majority-owned subsidiaries. Less-than-majority-owned
subsidiaries, and subsidiaries for which control is deemed to be temporary, are
accounted for using the equity method. For equity method investments, the
Company's share of income is calculated according to the Company's equity
ownership. Any differences between the carrying amount of an investment and the
amount of the underlying equity in the net assets of the equity investee are
amortized over the expected life of the investment. Significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements. On June 3, 1998, the Company acquired Eclipse in a transaction
accounted for as a pooling of interests (See Note 3). All prior period
consolidated financial statements presented have been restated to include the
combined results of operations, financial position and cash flows of Eclipse as
though it had always been a part of IXC.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
<PAGE> 11
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market funds and all
investments with an initial maturity of three months or less. All cash
equivalents are recorded at cost and classified as available for sale.
Short-term investments held in the Company's escrow related to the 12 1/2%
Senior Notes are not included as a cash equivalent due to restrictions on their
use.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the various assets,
ranging from three to twenty years. Maintenance and repairs are charged to
operations as incurred. Property and equipment recorded under capital leases is
included with the Company's owned assets. Amortization of assets recorded under
capital leases is included in depreciation expense. Costs associated with
uncompleted portions of the fiber optic network are classified as construction
in progress in the accompanying consolidated balance sheets. Upon completion,
the costs will be classified as transmission systems and depreciated over their
useful lives.
Interest is capitalized as part of the cost of constructing the Company's fiber
optic network and for amounts invested in companies or joint ventures accounted
for using the equity method during pre-operating periods. Interest capitalized
during construction periods is computed by determining the average accumulated
expenditures for each interim capitalization period and applying an average
interest rate. Total interest capitalized during the years ended December 31,
1997, 1996 and 1995 was $7.3 million, $2.9 million, and $0.4 million,
respectively.
The Company reviews its long-lived assets by comparing the undiscounted cash
flows estimated to be generated by those assets with the related carrying amount
of the assets. Upon an indication of an impairment, a loss is recorded if the
discounted cash flows projected for the assets is less than the assets' carrying
value.
The Company's property and equipment consisted of the following as of December
31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land and rights of way $ 4,201 $ 2,420
Buildings and improvements 22,006 5,611
Transmission systems 446,255 185,445
Furniture and other 10,348 6,411
Fiber usage rights 34,991 38,533
Construction in process 216,481 106,017
------- -------
734,282 344,437
Less: Accumulated depreciation and
amortization (120,408) (72,838)
--------- --------
Property and equipment, net $ 613,874 $ 271,599
========== ==========
</TABLE>
Deferred Charges and Other Non-current Assets
Deferred charges consist of deferred financing costs, deferred network costs,
deferred customer acquisition costs, and goodwill. Deferred financing costs are
costs incurred in connection with obtaining long-term financing; such costs are
amortized as interest expense over the terms of the related debt agreements.
Certain costs incurred with the connection of customers to the switched long
distance network were deferred and are amortized on a straight-line basis over
two years. The acquisition cost of retail customer
<PAGE> 12
accounts obtained through an outside sales organization, including certain
transaction costs, were deferred and are amortized over a period not to exceed
three years. Goodwill associated with acquisitions is amortized over periods
ranging from 20 to 30 years. During fiscal 1997 and fiscal 1996, non-cash
charges were recorded to reduce the carrying amount of certain customer
acquisition costs and goodwill; such write-downs amounted to approximately $6.3
million in 1996 and $4.0 million in 1997 and are included in amortization
expense. Accumulated amortization on all intangible assets amounted to $13.8
million at December 31, 1997 and $5.1 million at December 31, 1996.
Revenues
Private line voice and data circuit revenues are generated primarily by
providing capacity on the Company's fiber optic and microwave transmission
network at rates established under long-term contractual arrangements or on a
month-to-month basis after contract expiration. Revenue is recognized as
services are provided.
Switched long-distance service revenues are generated primarily by providing
voice and data communication services. Revenue is recognized as services are
provided, and customers are billed monthly after services are rendered.
The Company accounts for capacity exchange agreements with other carriers by
recognizing the fair value of the revenue earned and expense incurred under the
respective agreements. Exchange agreements accounted for non-cash revenue and
expense (in equal amounts) of $14.0 million in 1997, $14.0 million in 1996, and
$13.8 million in 1995. Sales of indefeasible rights to use fiber or capacity
("IRU") are recorded as deferred revenue at the earlier of the acceptance of the
applicable portion of the network by the customer or the receipt of cash. The
revenue is recognized over the life of the agreement as services are provided
beginning on the date of customer acceptance.
Fiber Exchange Agreements
In connection with its fiber optic network expansion, the Company has entered
into various agreements to purchase, sell or exchange fiber usage rights.
Purchases of fiber usage rights from other carriers are recorded at cost as a
separate component of property and equipment. The recorded assets are amortized
over the lesser of the term of the related agreement or the estimated life of
the fiber optic cable. Sales of fiber usage rights are recorded as unearned
revenue. Revenue is recognized over the terms of the related agreements.
Non-monetary exchanges of fiber usage rights (swaps of fiber usage rights with
other long distance carriers) are recorded at the cost of the asset transferred
or, if applicable, the fair value of the asset received.
Income Taxes
Deferred income taxes are provided for net operating losses and for temporary
differences between the basis of assets and liabilities for financial reporting
and income tax reporting. Investment tax credits are accounted for by the
flow-through method.
Stock-Based Compensation
The Company accounts for employee stock options under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations. Under APB 25 compensation expense is recognized when
the exercise price of the Company's employee stock options is less than the
market price of the underlying stock on the date of grant.
<PAGE> 13
Basic and Diluted Loss Per Share
Basic earnings per share is calculated using the weighted average number of
common shares outstanding, excluding any dilutive effects of options, warrants
and convertible securities. Diluted earnings per share includes the weighted
average number of common shares outstanding and the number of common equivalent
shares which would be issued related to options and convertible securities using
the treasury method.
Reclassifications
Certain amounts for prior years have been reclassified to conform to the 1997
presentation.
3. ACQUISITIONS
Eclipse Merger
On June 3, 1998, the Company completed the acquisition of Eclipse through a
merger of a Company subsidiary with Eclipse by exchanging approximately
4,051,970 shares of its common stock for all of the outstanding common stock of
Eclipse. Each share of Eclipse common stock was exchanged for .2998 shares of
the Company's common stock. In addition, outstanding Eclipse stock options were
converted at the same exchange factor into options to purchase shares of the
Company's common stock.
The merger constituted a tax-free reorganization and has been accounted for as a
pooling of interests. Accordingly, all prior period consolidated financial
statements have been restated to include the combined results of operations,
financial position and cash flows of Eclipse as though it had always been a part
of the Company. Prior to the merger, Eclipse utilized a March 31 fiscal yearend.
For purposes of the combined results of operations for the years ended December
31, 1997, 1996, and 1995, the amounts include Eclipse's historical results of
operations for the years ended March 31, 1998, 1997, and 1996, respectively. The
reported 1997 year-end balance sheet depicted for Eclipse used its March 31,
1998 financial statements. In order to report cash flow for 1998, a $1.5 million
adjustment will be reported in the 1998 statements of stockholders'
equity(deficit) and cash flows, representing Eclipse's first quarter 1998 net
income, which is in both the beginning retained earnings balance and the fiscal
1998 net income amount. There were no transactions between Eclipse and the
Company prior to the merger; however, certain reclassifications, primarily
related to the presentation of certain excise taxes and bad debt provisions,
were made to conform Eclipse's accounting policies to those of the Company. The
results of operations for the separate companies and the combined amounts
presented in the restated consolidated financial statements follow (in
thousands):
<TABLE>
<CAPTION>
ECLIPSE IXC ADJUSTMENTS COMBINED
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
1997
Operating revenue......... $105,823 $420,710 $(4,916) $521,617
Operating expenses........ 110,204 465,945 (4,992) 571,157
Net income (loss)......... (4,609) (94,555) -- (99,164)
</TABLE>
<TABLE>
<CAPTION>
ECLIPSE IXC ADJUSTMENTS COMBINED
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
1996
Operating revenue......... $ 86,005 $203,761 $(7,799) $281,967
Operating expenses........ 91,933 217,777 (7,799) 301,911
Net income (loss)......... (6,789) (37,448) -- (44,237)
</TABLE>
<TABLE>
<CAPTION>
ECLIPSE IXC ADJUSTMENTS COMBINED
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
1995
Operating revenue......... $67,585 $91,001 $(3,872) $154,714
Operating expenses........ 65,634 89,572 (3,872) 151,334
Net loss.................. 784 (4,965) -- (4,181)
</TABLE>
<PAGE> 14
A reconciliation of the Company's historical loss per share to the loss per
share as restated due to the Eclipse merger is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Loss per share, as previously reported $(3.75) $(1.42) $(0.28)
Effect of Eclipse's income (loss) (0.15) (0.25) 0.03
Effect of change in weighted average
shares outstanding 0.43 0.15 0.03
------ ------ ------
Restated basic and diluted loss
per share $(3.47) $(1.52) $(0.22)
====== ====== ======
</TABLE>
The effect of change in the weighted average shares outstanding represents the
addition of shares issued to Eclipse's former shareholders in order to complete
the merger, to the Company's historical weighted average shares outstanding. The
effect of Eclipse's income (loss) represents the impact of adding Eclipse's net
income or loss to the Company's historical results.
In connection with the merger, the Company recorded in 1998 a charge of $7.7
million for merger related costs, including professional services associated
with the merger, termination costs associated with duplicate functions, costs of
exiting excess office space, and the write-off of duplicate equipment and
software.
Other Acquisitions
Prior to its merger with the Company, Eclipse had entered into several business
combinations and customer base acquisitions. Certain of those combinations were
accounted for using the pooling of interests method, and the results of
operations of the acquired businesses are included herein for all periods
presented. The results of operations of other businesses acquired through
purchase transactions are included herein for only the periods subsequent to
their respective purchase. No pro forma financial information for any of the
business combinations has been presented in these consolidated financial
statements as the revenues, results of operations, and assets of the previously
acquired businesses are not material.
The acquisitions accounted for as purchases were paid for with both cash and
common stock. The consideration paid and assets acquired during the fiscal years
ended December 31, 1997, 1996, and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Fair value of tangible assets acquired $ (85) $ 776 $ 1,242
Liabilities assumed -- -- (1,182)
Excess of cost over net assets acquired 25,994 4,887 7,317
Value of common stock issued (23,452) (1,862) (6,276)
-------- ------- -------
Cash paid for acquisitions $ 2,457 $ 3,801 $ 1,101
======== ======= =======
</TABLE>
4. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
Marca-tel
As of December 31, 1997, the Company indirectly owned 24.5% of Marca-Tel S.A. de
C.V. ("Marca-Tel") through its ownership of 50% of Progress International LLC
("Progress"), which owned 49% of Marca-Tel. The remaining 51% of Marca-Tel is
owned by a Mexican individual and Formento Radio Beep, S.A. de C.V. The other
50% of Progress is owned by Westel International, Inc. ("Westel").
<PAGE> 15
Following is summarized financial information for Marca-Tel for the years ending
December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
INCOME STATEMENT DATA:
Net revenue $ 5,786 $ --
Gross profit (loss) (4,556) (3,110)
Net loss (23,395) (3,120)
BALANCE SHEET DATA:
Current assets $ 10,123 $ 4,381
Non-current assets 80,351 34,733
Current liabilities 18,431 26,665
Non-current liabilities 51,831 2,871
</TABLE>
Marca-Tel is included in the financial statements of the Company as of and for
the years ended December 31, 1997 and 1996 as follows (in millions):
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Investment in unconsolidated subsidiaries $ 11.6 $ 5.3
Equity in net loss of unconsolidated
subsidiaries (23.6) (1.8)
</TABLE>
In June 1998 the Company obtained a note receivable from Westel for $14.9
million of advances that the Company had made to Progress International on
Westel's behalf. The note receivable from Westel is secured by a portion of
Westel's investment in Progress.
Telenor
In October 1997, the Company formed a joint venture with Telenor AS, the
Norwegian national telephone company, to provide telecommunication services to
carriers and resellers in nine European countries. The joint venture is owned 40
percent by the Company, 40 percent by Telenor Global Services AS, and 20 percent
by Clarion Resources Communications Corporation, a U.S.-based telecommunications
company in which Telenor owns a controlling interest. Under the terms of the
agreement, the Company has two seats on the joint venture's board. Approximately
$5.8 million was invested in this joint venture in 1997.
UniDial
In December 1997, the Company announced a joint venture with UniDial
Communications to sell UniDial products exclusively over the Company's network.
The Company owns 20% of the joint venture, which will be known as UniDial
Communications Services, LLC ("Unidial") and will offer UniDial Communications'
full suite of wireless, voicemail, and paging products over the Company's
network backbone. The Company will provide the joint venture with its full range
of voice, video, Internet, and data services to be private labeled under the
UniDial Communications name. The products will be marketed through a full-time
national sales force of UniDial Communications network consultants. No amounts
were invested in the joint venture in 1997. As of June 30, 1998, the Company had
invested $5 million in the joint venture.
PSINet Transaction.
To enhance the Company's product and service offerings, in February 1998 the
Company consummated agreements with PSINet which allow each party to market and
sell the products and services of the other party. Under the terms of the
agreements, the Company will provide PSINet with an IRU in 10,000 miles
<PAGE> 16
of OC-48 transmission capacity on its Network over a 20-year period in exchange
for approximately 10.2 million shares representing less than 20% (post-issuance)
of PSINet fully diluted common stock. If the value of the PSINet common stock
received by the Company is less than $240 million at the earlier of one year
after the final delivery of the transmission capacity (scheduled for late-1999)
or four years after the transaction's closing, PSINet, at its option, will pay
the Company cash and/or deliver additional PSINet common stock to increase the
value of the cash and common stock paid by PSINet to $240.0 million. Upon
delivery of the transmission capacity to PSINet, the Company will begin to
receive a maintenance fee which, as the full capacity has been delivered, should
increase to approximately $11.5 million per year. Revenue from the IRU will be
recognized over its term of 20 years as the capacity is delivered.
From the transaction date through May 1998, the Company accounted for its
investment in PSINet under the equity method since the Company was deemed to
have significant influence over PSINet based upon its level of ownership and
control. In June 1998, the Company changed from the equity method to the cost
method due to a change in its level of ownership and control. At June 30, 1998,
the Company's recorded investment in PSINet was approximately $123.5 million.
5. ESCROW UNDER 12 1/2% SENIOR NOTES
The terms of the indenture for the 12 1/2% Senior Notes required the Company to
place $200 million of Senior Notes proceeds into an escrow account, under which
the proceeds and the earnings thereon were restricted in their use to network
expansion, capital expenditures, certain interest, principal and other payments
on the 12 1/2% Senior Notes and other permitted uses (see Note 7). Such funds
were invested in short-term, investment-grade, interest-bearing securities as
follows at December 31, 1997 and 1996 (in thousands):
1997 1996
----- -------
Overnight investments $ -- $14,201
U.S. Government securities -- 37,211
----- -------
$ -- $51,412
===== =======
The escrow account was subject to a security interest under the Company's
12 1/2% Senior Notes. The investments in the escrow account at December 31, 1996
were all due in three months or less and classified as available for sale.
During 1997, all remaining funds held in escrow were used for the network
expansion program.
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31, 1997 and 1996 (in
thousands):
1997 1996
-------- -------
Accrued taxes $ 5,529 $ 2,750
Accrued interest 8,906 8,906
Deposits 12,873 --
Accrued compensation 8,206 5,083
Other accrued liabilities 7,913 2,085
-------- -------
$ 43,427 $18,824
======== =======
<PAGE> 17
7. LONG-TERM DEBT
Long-term debt and capital lease obligations of IXC consist of the following at
December 31 ,1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
12 1/2% Senior Notes, net of unamortized
discount of $6,862 and $7,344 for 1997
and 1996, respectively $278,138 $277,656
Capital lease obligations 36,595 18,015
Other debt 6,014 9,907
-------- --------
Total long-term debt and capital 320,747 305,578
lease obligations
Less current portion (12,294) (7,994)
-------- --------
Long-term debt and capital lease obligations $308,453 $297,584
======== ========
</TABLE>
12 1/2% Senior Notes
On October 5, 1995, the Company issued $285 million of 12 1/2% Senior Notes
(effective rate 12.8%) due October 1, 2005, with interest payable semi-annually.
Of the net proceeds of approximately $277 million, $200 million was deposited
into an escrow account primarily restricted for the construction of a major
network expansion program. Approximately $53.7 million of the net proceeds was
used to repay or repurchase certain previously-existing indebtedness of the
Company, including $22.7 million paid to certain stockholders. This resulted in
an extraordinary loss on early extinguishment of debt of $1.7 million in 1995,
net of applicable income tax benefit of $1.2 million. In addition, approximately
$3.8 million was used to redeem certain preferred stock.
The 12 1/2% Senior Notes were senior unsecured obligations of the Company and
were guaranteed on a senior unsecured basis by certain wholly owned direct and
indirect subsidiaries of IXC. The obligations of each guarantor were limited to
the minimum extent necessary to prevent the guarantee from violating or becoming
voidable under applicable law relating to fraudulent conveyance or fraudulent
transfer or similar laws affecting the rights of creditors generally.
The 12 1/2% Senior Notes contained certain covenants that restricted the ability
of the Company and its subsidiaries to incur additional indebtedness and issue
certain preferred stock, pay dividends or make other distributions, repurchase
equity interests or subordinated indebtedness, engage in sale and leaseback
transactions, create certain liens, enter into certain transactions with
affiliates, sell assets of the Company or its subsidiaries, issue or sell equity
interests of the Company's subsidiaries or enter into certain mergers and
consolidations.
The 12 1/2% Senior Notes were redeemable at the option of the Company, in whole
or in part, on or after October 1, 2000 at a premium, declining to zero in 2004.
At any time prior to October 1, 1998, the Company had the option to redeem the
12 1/2% Senior Notes with an aggregate principal amount of up to $100 million at
a redemption price of 112.5% of the principal amount from the net proceeds of a
sale of capital stock of the Company, provided that at least $100 million in
aggregate principal amount of 12 1/2% Senior Notes remains outstanding
immediately after the occurrence of such redemption and that the redemption
occurs within 35 days of the date of the closing of the offering of such equity
securities. Also, the 12 1/2% Senior Notes contained provisions that, in the
event of a Change in Control (which meets the definition set forth in the
Indenture) of the Company, provided their holders the right to require the
Company to repurchase all or any part of the 12 1/2% Senior Notes at a price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest.
On April 21, 1998, the Company issued $450.0 million of 9% Senior Subordinated
Notes due 2008 (the "9% Notes"). In connection with the sale of the 9% Notes,
the Company announced a tender offer to purchase for cash all of its outstanding
12 1/2% Senior Notes. Pursuant to the terms of the tender offer, $284.2 million
(out of $285.0 million) in aggregate principal amount of the 12 1/2% Senior
Notes were tendered and accepted for payment by the Company. In connection with
the consummation of the tender offer, the 12 1/2% Senior Notes were amended to
eliminate substantially all of the restrictive covenants
<PAGE> 18
therein and all guarantees given thereunder. The Company used approximately
$342.7 million of the estimated $435.6 million net proceeds of the 9% Notes
offering to pay the tender offer price for the 12 1/2% Senior Notes. In August
1998, the remaining outstanding 12 1/2% Senior Notes were tendered for exchange.
With the early extinguishment of the 12 1/2% Senior Notes, a charge of
approximately $69.8 million was recorded as an extraordinary item in the second
quarter of fiscal 1998. The remaining proceeds of the offering were used to fund
capital expenditures and for general corporate purposes.
The 9% Notes are general unsecured obligations of the Company and will be
subordinate in right of payment to all existing and future senior indebtedness
of the Company and other liabilities of the Company's subsidiaries.
NTFC Credit Facility
In 1997, the Company entered into a secured equipment financing facility with
NTFC Capital Corporation under which the Company has available financing of up
to $28 million. Approximately $18 million of the facility was borrowed as of
December 31, 1997; the remainder was borrowed in the first quarter of 1998.
Annual maturities of the 12 1/2% Senior Notes and other long-term debt at
December 31, 1997 are as follows (in thousands):
1998 $ 3,982
1999 1,964
2000 68
2005 285,000
--------
291,014
Less discount on 12 1/2% Senior Notes (6,862)
--------
$284,152
========
As discussed above, the 12 1/2% Senior Notes were due in 2005. These notes were
paid off using the proceeds from the Company's offering of 9% Notes, which are
due in full in 2008.
8. CAPITAL AND OPERATING LEASES
The Company leases certain facilities, equipment and transmission capacity used
in its operations under noncancellable capital and operating leases. Future
minimum annual lease payments under these lease agreements at December 31, 1997,
are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
1998 $ 10,845 $36,607
1999 10,860 9,505
2000 9,421 6,719
2001 6,863 5,110
2002 4,766 4,794
-------
42,755
Less amounts related to interest (6,160)
-------
Present value of capital lease
obligations 36,595
Less: current portion (8,312)
-------
Long-term capital lease obligations $28,283
=======
</TABLE>
The gross amount of assets recorded under capital leases at December 31, 1997
and 1996 was $39.6 million and $22.8 million, respectively. The related
accumulated depreciation was $17.9 million and $6.3 million at December 31, 1997
and 1996, respectively.
<PAGE> 19
Lease expense relating to facilities, equipment and transmission capacity
leases, excluding amortization of fiber exchange agreements, was approximately
$99.1 million, $50.6 million and $29.6 million for the years ended December 31,
1997, 1996 and 1995, respectively.
9. MANDATORILY REDEEMABLE PREFERRED STOCK
7 1/4% Junior Convertible Preferred Stock Due 2007
In April 1997, the Company issued $100 million (1,000,000 shares) of 7 1/4%
Junior Convertible Preferred Stock Due 2007 ("7 1/4% Convertible Preferred
Stock"). The 7 1/4% Convertible Preferred Stock and the common stock issuable
upon conversion thereof were registered under the Securities Act of 1933, as
amended (the "Securities Act") in August 1997 in compliance with the
registration rights agreement entered into by the Company with the initial
purchasers of the Convertible Preferred Stock. The 7 1/4% Convertible Preferred
Stock is convertible at the option of the holder into shares of common stock at
a conversion rate of 4.263 shares of common stock for each share of 7 1/4%
Convertible Preferred Stock. On March 31, 2007, the 7 1/4% Convertible Preferred
Stock must be redeemed by the Company at a price equal to the liquidation
preference ($100 per share) plus accrued and unpaid dividends; thus it is
"mandatorily redeemable" and is not included in stockholders' equity. Dividends
payable prior to or on June 30, 1999 are, at the option of the Company, payable
in cash or through the issuance of additional shares of 7 1/4% 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 7 1/4%
Convertible Preferred Stock by the terms of any then outstanding indebtedness or
any other agreement or instrument to which the Company is subject, the Company
will be required to pay dividends, which shall accrue at the rate per annum of 8
3/4%, through the issuance of additional shares of 7 1/4% Convertible Preferred
Stock. Payment of cash dividends on the 7 1/4% Convertible Preferred Stock was
not permitted under the indenture for the Company's 12 1/2% Senior Notes until
certain financial conditions were met. During 1997, the Company issued
approximately 55,367 additional shares of 7 1/4% Convertible Preferred Stock in
satisfaction of its 1997 dividend requirements. Any difference between the
carrying value and the Redemption amount of the 7 1/4% Convertible Preferred
Stock is accreted to additional paid-in-capital for all periods through the
mandatory redemption date.
12 1/2% Junior Exchangeable Preferred Stock Due 2009
In August 1997, the Company issued $300 million (300,000 shares) of 12 1/2%
Junior Exchangeable Preferred Stock Due 2009 (the "Exchangeable Preferred
Stock"). The net proceeds of approximately $288.0 million from the offering are
being used to fund capital expenditures, investments in the Company's
unconsolidated subsidiaries and general corporate purposes. The Exchangeable
Preferred Stock was registered under the Securities Act of 1933, as amended (the
"Securities Act") in December 1997 in compliance with the registration rights
agreement entered into by the Company with the initial purchasers of the
Exchangeable Preferred Stock. The Company may exchange all of the shares of
Exchangeable Preferred Stock for 12 1/2% Subordinated Exchange Debentures Due
2009 ("Exchange Debentures") in a principle amount equal to the liquidation
preference of the Exchangeable Preferred Stock at the time of the exchange. If
exchanged, the Exchange Debentures will bear interest at the rate of 12 1/2% per
annum, payable semiannually on February 15 and August 15, commencing with the
first of such dates to occur after the date of such exchange. The Exchange
Debentures will be general unsecured obligations of the Company, subordinated in
right of payment to all existing and future senior indebtedness of the Company
and to all indebtedness and other liabilities of the Company's subsidiaries. On
August 15, 2009, the Exchangeable Preferred Stock must be redeemed by the
Company at a price equal to the liquidation preference ($1,000 a share) plus
accrued and unpaid dividends; thus it is "mandatorily redeemable" and is not
included in stockholders' equity. Dividends on the Exchangeable Preferred Stock
accrue at a rate of 12 1/2% per annum of the liquidation preference thereof
(including unpaid dividends) and will be payable quarterly in arrears on
February 15, May 15, August 15, and November 15 of each year commencing November
15, 1997. Dividends payable prior to or on August 15, 2000 are, at the option of
the Company,
<PAGE> 20
payable in cash or through issuance of additional shares of Exchangeable
Preferred Stock equal to the dividend amount divided by the liquidation
preference of such additional shares. After February 15, 2001, interest on the
Exchangeable Preferred Stock may be paid only in cash. Payment of cash dividends
on the Exchangeable Preferred Stock is not currently permitted under the
indenture for the Company's 12 1/2% Senior Notes due 2005 until certain
financial conditions have been met. During 1997, the Company issued
approximately 8,958 additional shares of Exchangeable Preferred Stock in
satisfaction of its 1997 dividend requirements. Any difference between the
carrying value and the redemption amount of the Exchangeable Preferred Stock is
accreted by a charge to additional paid-in-capital for all periods through the
mandatory redemption date.
10. PREFERRED STOCK
6 3/4% Cumulative Convertible Preferred Stock
In March and April 1998, the Company sold $155.3 million of 6 3/4% Cumulative
Convertible Preferred Stock ("6 3/4% Convertible Preferred Stock") issued in the
form of depositary shares (3,105,000 depositary shares at $50 per share; each
depositary share represents 1/20 of a share of 6 3/4% Convertible Preferred
Stock at $1,000 per share) to qualified institutional buyers under Rule 144A of
the Securities Act of 1933, as amended ("The Act"). The net proceeds of
approximately $147.2 million from the offering are being used to fund capital
expenditures, including a portion of the network expansion, and for general
corporate purposes, including acquisitions of related businesses or interests
therein and joint ventures. The 6 3/4% Convertible Preferred Stock can be
converted at the option of the holder thereof into shares of Common Stock, par
value $.01 per share, of the Company at any time unless previously redeemed or
repurchased, at a conversion rate of 0.6874 shares of common stock per
depositary share (13.748 shares of Common Stock per share of the 6 3/4%
Convertible Preferred Stock). Dividends on the 6 3/4% Convertible Preferred
Stock are payable quarterly in arrears in cash or Common Stock, under certain
circumstances, on January 1, April 1, July 1 and October 1 of each year,
commencing on July 1, 1998. In conjunction with issuing the 6 3/4% Convertible
Preferred Stock, the Company has filed a shelf registration statement with the
SEC with respect to an offer to exchange the 6 3/4% Convertible Preferred Stock
registered under The Act.
Junior Series 3 Cumulative Redeemable Preferred Stock
The 10% Junior Series 3 Cumulative Redeemable Preferred Stock ("Series 3
Preferred Stock") voted as a single class with IXC's common stock except in
matters impacting the rights of the Series 3, was entitled to elect one director
and could be redeemed at the Company's option in whole or in part at any time,
subject to certain debt covenants, at a price of $1,000 per share, plus
accumulated and unpaid dividends and accrued interest. The Series 3 Preferred
Stock was nonparticipatory and had no mandatory redemption requirements.
Dividends were payable at the determination of the Board of Directors, subject
to debt covenants. Interest accrued on unpaid dividends at an annual rate of
10%.
On October 31, 1997, the Company consummated its offer to exchange shares of its
Common Stock for its Series 3 Preferred Stock. Holders of approximately 96.7% of
its Series 3 Preferred Stock accepted such offer. Each holder that tendered
shares of Series 3 Preferred Stock received approximately 49.85 shares of Common
Stock for each share of Series 3 Preferred Stock tendered prior to the
expiration date. The conversion rate was calculated by dividing the aggregate
per share liquidation preference of, and the accrued and unpaid dividend on, one
share of Series 3 Preferred Stock as of October 31, 1997 by $33.00 (the last
reported sales price of the Company's Common Stock on the Nasdaq National Market
on October 31, 1997). The aggregate liquidation preference and accrued and
unpaid dividends on the Series 3 Preferred Stock at October 31, 1997, was
approximately $20.6 million ($1,645 per share for the 12,550 shares
outstanding). Cumulative preferred dividends in arrears, including interest, at
December 31, 1997 and 1996 were $277,614 ($670.64 per share) and $6.5 million
($518.65 per share), respectively. On March 31, 1998, the Company redeemed the
remaining 414 shares of its 10% Junior Series 3 Cumulative Redeemable Preferred
Stock outstanding for approximately $0.7 million in cash ($1,000 per share, plus
$0.3 million of accrued and unpaid dividends).
<PAGE> 21
10% Senior Series 1 Cumulative Redeemable Preferred Stock
IXC's 10% Senior Series 1 Cumulative Redeemable Preferred Stock was non-voting
and was redeemed on October 6, 1995 from the proceeds of the 12 1/2% Senior
Notes for $2.0 million, including cumulative dividends in arrears and related
interest of $505,000.
ILHI Series 1 Preferred Stock
During 1993, an indirect subsidiary of IXC issued 1,400 shares of 10% Senior
Series 1 Cumulative Redeemable Preferred Stock (the "ILHI Series 1 Preferred
Stock") at $1,000 per share to stockholders of IXC. The ILHI Series 1 Preferred
Stock was redeemed on October 6, 1995 from the proceeds of the 12 1/2% Senior
Notes for $1.8 million, including cumulative dividends in arrears and related
interest of $401,000.
11. STOCKHOLDERS' EQUITY
Common Stock
During 1996, the Company issued 6,440,000 shares of Common Stock in an initial
public offering and a private placement, resulting in net proceeds of $94.1
million. At December 31, 1997, the Company has reserved approximately 8,319,000
shares for future issuance under stock option plans and the 7 1/4% Convertible
Preferred Stock. Subsequent to December 31, 1997, the Company reserved 2,134,377
for possible future issuance related to the conversion of the 6 3/4% Convertible
Preferred Stock. The Company also reserved an additional 26,300 shares for
possible future issuance related to paid-in-kind dividends on the 7 1/4%
Convertible Preferred Stock.
Stock Option and Award Plans
In November 1994, the Company adopted the IXC Communications, Inc. Stock Plan,
as amended (the "1994 Stock Plan"), which provides for the issuance of
restricted stock or the granting of stock options for up to 1,212,450 shares of
common stock to key employees and others. Awards under the 1994 Stock Plan are
given at the discretion of the Board of Directors and include common stock
options with exercise prices at least equal to the fair market value at the date
of grant. Options granted may be either "incentive stock options," within the
meaning of Section 422(a) of the Internal Revenue Code, or non-qualified
options. The options expire after 10 years and generally vest at rates of 25%
and 33% per year commencing one year after the date of grant, with the exception
of two grants covering 84,871 shares which were 100% vested upon grant.
In 1996, the Company adopted the IXC Communications, Inc. 1996 Stock Plan, as
amended (the "1996 Stock Plan"), which provides for the issuance of restricted
stock or the granting of stock options for up to 2,121,787 shares of common
stock to key employees and others. Awards under the 1996 Stock Plan are granted
at the discretion of the Board of Directors and include common stock options
with exercise prices at least equal to the fair market value at the date of
grant. Options granted may be either "incentive stock options," within the
meaning of Section 422(a) of the Internal Revenue Code, or non-qualified
options. The options expire after 10 years and generally vest at rates of 25%
and 33% per year commencing one year after the date of grant. During 1997 and
1996, 744,900 and 476,600 options were granted, respectively, under the 1996
Stock Plan.
<PAGE> 22
The Company has not issued any restricted stock under the 1994 Stock Plan or the
1996 Stock Plan. All options granted under the 1994 Stock Plan and the 1996
Stock Plan were granted at estimated market value at the date of grant. In the
event of a change of control of the Company, the options outstanding immediately
following the consummation of such change of control fully vest, and the options
may be exercised in full to purchase the total number of shares covered by the
option.
In October 1996, the Company adopted a stock incentive plan (the "Special Stock
Plan") covering 67,900 shares of common stock. Any employee, director or other
person providing services to the Company is eligible to receive awards under the
Special Stock Plan, at the Board's discretion. Awards available under the
Special Stock Plan include common stock purchase options and restricted common
stock. All available options to acquire stock under the Special Stock Plan were
granted in 1996 at exercise prices less than market value at the date of grant
and vest over three to four years. In 1997 and 1996, the Company recognized
$247,000 and $182,000 in compensation expense respectively, related to grants
under the Special Stock Plan.
On May 14, 1996 the Company adopted the IXC Communications, Inc. Outside
Directors' Phantom Stock Plan (the "Directors' Plan"), pursuant to which $20,000
per year of outside director's fees for certain directors is deferred and
treated as if it were invested in shares of the Company's common stock. No
shares of common stock will be actually purchased and the participants will
receive cash benefits equal to the value of the shares that they are deemed to
have purchased under the Directors' Plan, with such value to be determined on
the date of distribution. Distribution of benefits generally will occur three
years after the deferral. Compensation expense is determined based on the market
price of the shares deemed to have been purchased and is charged to expense over
the related period. In 1997 and 1996, the Company recognized $102,000 and
$60,000 as compensation expense related to the Directors' Plan.
In September 1997, the Company adopted the 1997 Special Executive Stock Plan, a
stock incentive plan covering 500,000 shares of common stock. The purposes of
the new plan were to promote the interests of the Company and its stockholders
by enabling it to offer grants of stock to better attract, retain and reward key
executives and, to strengthen the mutuality of interests between an executive
and the Company's stockholders by providing an executive with a proprietary
interest in pursuing the Company's long-term growth and financial success. The
terms and conditions of the 1997 Special Executive Stock Plan were essentially
the same as those of the 1994 and 1996 Plans. All available options to acquire
stock under the 1997 Special Executive Stock Plan were granted in 1997 at market
value at the date of grant. The options granted will vest over a five year
period.
Prior to the pooling of interests transaction described above, Eclipse granted
stock options to various parties from time to time. The options vest in periods
of up to ten years. The terms and conditions of the Eclipse options, including
exercise prices and option expiration periods, were set by Eclipse's board of
directors. In connection with the Eclipse merger, all outstanding Eclipse
options were converted into substitute options at an exchange rate of .2998 IXC
options for each Eclipse option; such substitute options provided for
substantially the same terms and conditions as the original Eclipse options.
Under the terms of a stock option agreement with a former officer of a
subsidiary of Eclipse, the Company recorded in fiscal 1997 a $1.1 million charge
for compensation.
Stock Based Compensation
The Company has elected to account for its employee stock options under APB 25
and to make fair value disclosures only for option grants. The fair value
disclosures below assume that fair value for option grants was estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for 1997, 1996 and 1995, respectively: risk-free
interest rates ranging from 5.2% to 6.4%, 5.3% to 6.7% and 5.5% to 6.0%; no
dividend yield; volatility factors of the expected market
<PAGE> 23
price of the Company's common stock of .551 in 1997 and .523 for 1996 and 1995
(for Eclipse options, fair value was calculated assuming volatility factors of
.376 in 1997, .478 in 1996, and .403 in 1995); and a weighted-average expected
life of the options of approximately 5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions, are fully
transferable, and do not result in additional dilution on exercise. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. The Company's employee stock
options have characteristics significantly different from those of traded
options, and changes in the subjective input assumptions can materially affect
the fair value estimate. Therefore, in management's opinion, the existing models
do not necessarily provide a reliable single measure of the fair value of its
stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Because SFAS No. 123
is applicable only to options granted subsequent to December 31, 1994, its pro
forma effect will not be fully reflected until 1998. The Company's pro forma
information follows (in thousands except for loss per share information):
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- -------
<S> <C> <C> <C>
Pro forma loss applicable to common stockholders $(125,564) $(46,791) $(8,517)
Pro forma basic and diluted loss per share (3.61) (1.55) (0.32)
</TABLE>
The Company's stock option activity and related information for the years ended
December 31, 1997, 1996, and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ----------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,018,961 $11.90 1,006,240 $11.67 242,089 $ 6.28
Granted ........................ 1,324,347 25.43 1,165,333 12.55 767,149 13.43
Exercised ...................... (62,976) 11.22 (19,702) 3.01 -- --
Forfeited ...................... (130,385) 24.16 (132,910) 17.02 (2,998) 25.95
--------- --------- ---------
Outstanding at end of year ..... 3,149,947 17.12 2,018,961 11.90 1,006,240 11.67
========= ========= =========
Exercisable at end of year ..... 984,742 525,948 421,643
========= ========= =========
Weighted average fair value of
options granted during the year $ 14.67 $ 7.50 $ 7.14
========= ========= =========
</TABLE>
The following table summarizes outstanding options at December 31, 1997 by price
range:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------- -----------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE CONTRACTUAL EXERCISE
OPTIONS EXERCISE PRICES PRICE LIFE OPTIONS PRICE
--------- ---------------- -------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
1,036,095 $ 3.01 $ 3.01 7.8 536,604 $ 3.01
1,149,082 $15.38 to $26.25 20.22 8.8 253,868 22.19
964,770 $26.28 to $36.88 28.54 8.7 194,270 30.28
--------- -------
3,149,947 $ 3.01 to $36.88 17.11 8.4 984,742 13.33
========= =======
</TABLE>
<PAGE> 24
12. LOSS PER SHARE
Loss per share data for the years ended December 31, 1997, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Net loss before extraordinary
items.......................... $ (99,164) $ (44,237) $ (2,434)
Extraordinary loss, net of tax... -- -- (1,747)
--------- --------- ---------
Net loss ........................ (99,164) (44,237) (4,181)
Less: Preferred stock dividends.. (21,636) (1,739) (1,843)
--------- --------- ---------
Net loss available to common
shareholders ................ $(120,800) $ (45,976) $ (6,024)
========= ========= =========
Weighted average shares
outstanding ................. 34,777 30,277 26,793
========= ========= =========
BASIC AND DILUTED LOSS PER SHARE:
Before extraordinary loss
(net of tax) .................. $ (3.47) $ (1.52) $ (0.15)
Extraordinary loss (net of tax). -- -- (0.07)
--------- --------- ---------
Net loss per share .............. $ (3.47) $ (1.52) $ (0.22)
========= ========= =========
</TABLE>
The following table summarizes securities outstanding as of the end of each
period presented which could potentially dilute basic earnings per share in the
future. Such securities were excluded from the computation above since they
would have been anti-dilutive due to the Company's net loss. The figures
presented for the 7 1/4% Convertible Preferred Stock assume that each preferred
share was converted into 4.263 common shares. Certain shares of the Company's
common stock were held in escrow under the terms of purchase agreements related
to acquisitions made by the Company during 1995 and 1996. Additionally, shares
are held in escrow related to certain former owners of the Company's Eclipse
subsidiary. All shares held in escrow are excluded from the calculation of
weighted average shares outstanding.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
7 1/4% Junior Convertible Preferred Stock.... 4,499,030 -- --
Stock options................................ 3,149,947 2,018,961 1,006,240
Stock in escrow from acquisitions .......... 26,008 26,008 11,392
Other stock in escrow ....................... 93,941 187,881 187,881
</TABLE>
13. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents, funds held in escrow and
trade receivables. The Company places its cash equivalents and funds held in
escrow in quality investments with reputable financial institutions. Trade
receivables include significant balances due from a small number of customers.
At December 31, 1997, $23.7 million in trade receivables from the Company's
private line services are due from ten customers. Switched long distance
services receivables are also concentrated, with $40.5 million in trade
receivables due from six customers, including $22.6 million from Excel
Communications, Inc. If any of these individually significant customers are
unable to meet their financial obligations, results of operations of the Company
could be adversely affected. The Company performs ongoing credit evaluations of
its customers' financial condition. IXC has not experienced significant losses
from sales to any of its significant customers.
Sales of switched long distance services to Excel Communications exceeded 10% of
total revenues for each of the years ended December 31, 1997 and 1996. The
percentages of revenue for customers with 10% or more of the Companys' business
in any one year are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- ----
<S> <C> <C> <C>
Excel Communications, Inc.. 23% 25% --
Frontier Communications.... 3% 7% 12%
WorldCom, Inc. ............ 3% 6% 12%
</TABLE>
<PAGE> 25
14. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement and 401(k) savings plan which
covers all full-time employees with one year of service. The Company contributes
6% of eligible compensation, as defined in the plan, and matches 100% of the
employee's contributions up to a maximum of 3% of the employee's compensation.
Employees vest in the Company's contribution over five years. Benefit expense
for 1997, 1996 and 1995 was approximately $1,263,000, $779,000 and $522,000,
respectively.
The Company continues to operate certain defined contribution benefit plans that
were operated by Eclipse prior to its merger with the Company. Contributions to
these plans amounted to $68,000, $90,000, and $49,000 in 1997, 1996, and 1995,
respectively.
15. INCOME TAXES
Deferred income taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows as of December 31,
1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Tax credit carryforwards: ............. $ 2,068 $ 2,068
Net operating loss carryforwards ...... 37,999 22,240
Investment in joint venture ........... 9,465 794
Deferred revenue ...................... 19,787 --
Reserve for bad debts ................. 4,938 2,137
Accrued expenses ...................... 3,537 769
-------- --------
Gross deferred tax assets ........ 77,794 28,008
Valuation allowances ............. (56,776) (18,491)
-------- --------
Net deferred tax asset ................ 21,018 9,517
-------- --------
DEFERRED TAX LIABILITIES:
Tax over book depreciation ............ (21,738) (9,267)
Other liability accruals .............. (1,034) (2,166)
-------- --------
Gross deferred tax liabilities ........ (22,772) (11,433)
-------- --------
Net deferred tax liabilities ..... $ (1,754) $ (1,916)
======== ========
AS RECORDED IN THE CONSOLIDATED BALANCE
SHEETS:
Current deferred tax assets ........... $ 947 $ 620
Noncurrent deferred tax liability ..... (2,701) (2,536)
-------- --------
Gross deferred tax liabilities ........ $ (1,754) $ (1,916)
======== ========
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $95.1 million for income tax purposes that expire through 2012.
The Company has minimum tax, investment tax credit, and capital loss
carryforwards at December 31, 1997 of approximately $0.7 million, $1.4 million,
and $0.5 million, respectively. The minimum tax credits can be carried forward
indefinitely. The investment tax credits expire in 2001 and the capital loss
carryforwards expire through 2002.
<PAGE> 26
Valuation allowances were established to offset a portion of the Company's
deferred tax assets at December 31, 1997 and 1996, respectively. The valuation
allowance is related to deferred tax assets, primarily net operating losses,
that may not be realizable. During the years ended December 31, 1997 and 1996,
the valuation allowance was increased by $37.5 million and $18.5 million,
respectively.
Significant components of the benefit (provision) for income taxes (excluding
the effect attributable to extraordinary items) for the years ended December 31,
1997, 1996, and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
CURRENT:
Federal ...................... $ -- $ (5) $ (67)
State ........................ (1,816) (250) --
------- ------- -------
Total Current .............. (1,816) (255) (67)
------- ------- -------
DEFERRED:
Federal ...................... 393 4,869 932
State ........................ 64 1,266 168
------- ------- -------
Total deferred ............... 457 6,135 1,100
------- ------- -------
Benefit (provision) for income
taxes ...................... $(1,359) $ 5,880 $ 1,033
======= ======= =======
</TABLE>
Reconciliations of the income tax benefit (provision) attributable to continuing
operations computed at the U.S. federal statutory tax rates to income tax
benefit (provision) for the years ended December 31, 1997, 1996, and 1995, are
as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Tax benefit at federal statutory rate ............ $ 34,126 $ 17,260 $ 1,131
State income tax benefit provision ............... 3,690 3,106 302
Change in valuation allowance .................... (37,529) (18,491) --
Resolution of tax examinations ................... -- 3,511 --
Permanent and other differences .................. (1,646) 494 (400)
-------- -------- --------
Benefit (provision) for income taxes.............. $ (1,359) $ 5,880 $ 1,033
======== ======== ========
</TABLE>
16. RELATED PARTY TRANSACTIONS
A law firm, of which a director and stockholder of the Company was a principal,
provided certain legal services to the Company and charged fees and costs
incurred to the Company in the amount of approximately $4.3 million in 1997,
$3.5 million in 1996 and $2.6 million in 1995.
The Company's Eclipse subsidiary obtains certain services including leasing
office space and consulting services from shareholders. Payments to these
shareholders amounted to $335,000, $900,000, and $713,000 in 1997, 1996, and
1995, respectively.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheets
for cash and cash equivalents approximates fair value.
<PAGE> 27
Accounts receivable and accounts payable: The carrying amounts reported in the
balance sheets for accounts receivable and accounts payable approximate fair
value.
Escrow under 12 1/2% Senior Notes: The carrying amount reported in the balance
sheets for restricted short-term investments held in escrow approximates fair
value.
Long-term debt: The fair value of the 12 1/2% Senior Notes is estimated at $330
million based on the last trading price of the 12 1/2% Senior Notes in 1997.
Redeemable preferred stock: The fair value of the Convertible and Exchangeable
Preferred Stock has not been determined due to the impracticability of such a
calculation based on the limited market of the preferred stock and the lack of
an actively quoted price.
18. COMMITMENTS AND CONTINGENCIES
In connection with its fiber optic network expansion, the Company has entered
into various construction and installation agreements with contractors. Total
commitments under these agreements were approximately $77.6 million at December
31, 1997. The Company's Eclipse subsidiary was committed under noncancellable,
noncapitalizable fixed cost agreements for transmission facilities that require
minimum payments of approximately $12.4 million in 1999 and $3.5 million in
2000.
In connection with its fiber expansion agreements, the Company has committed to
pay $42.0 million for fiber usage rights on other long distance carriers'
networks, $8.4 million of which was paid by December 31, 1997. Pursuant to the
same agreements, the Company has committed to pay a total of $30.4 million, in
periodic installments for twenty to twenty-five years related to maintenance and
license fees. Several of these agreements require the Company to share network
construction costs with the other party. The exact amounts of these construction
costs are not specified in the related agreements and are thus excluded from the
figures above.
The Company is from time to time involved in various legal proceedings, all of
which have arisen in the ordinary course of business and some of which are
covered by insurance. In the opinion of the Company's management, none of the
claims relating to such proceedings will have a material adverse effect on the
financial condition or results of operations of the Company.
19. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's allowance for doubtful accounts and service credits
was as follows (in thousands):
<TABLE>
<CAPTION>
Balance at Charged Balance at
Beginning to End
For the Years Ended Of Period Revenue Deductions Of Period
------------------- ---------- ------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1997........... $6,407 $20,782 $ 14,070 $13,119
December 31, 1996........... $2,842 $6,311 $ 2,746 $ 6,407
December 31, 1995........... $1,262 $2,712 $ 1,132 $ 2,842
</TABLE>
<PAGE> 28
20. QUARTERLY RESULTS (UNAUDITED)
The Company's unaudited quarterly results are as follows (in thousands except
per share amounts):
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Net operating revenue....................... $ 106,882 $ 113,812 $ 136,829 $ 164,094
Gross profit................................ 21,988 22,833 35,794 45,335
Net loss.................................... (22,498) (27,914) (31,172) (17,580)
Basic and diluted net loss per share:....... $ (0.67) $ (0.87) $ (1.09) $ (0.84)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Net operating revenue....................... $ 45,928 $ 63,187 $ 78,755 $ 94,097
Gross profit................................ 17,234 18,867 22,140 28,845
Net loss.................................... (11,474) (11,406) (10,624) (10,733)
Basic and diluted net loss per share:....... $(0.45) $ (0.43) $ (0.33) $ (0.34)
</TABLE>
The 1996 and first three quarters of 1997 earnings per share amounts have been
restated immaterially to comply with Statement of Financial Accounting Standards
No. 128, Earnings per Share and the Securities and Exchange Commission Staff
Accounting Bulletin 98.
21. SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"), which is effective for
years beginning after December 15, 1997. Statement 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. Statement 131 is effective
for financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements retroactively in 1998.
Management has not completed its review of Statement 131, but anticipates that
the adoption of Statement 131 will not affect results of operations or financial
position, but may affect the disclosure of segment information. Under applicable
accounting literature effective prior to the adoption of FAS 131, the Company
considers its operations to be exclusively within a single industry.
22. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Due to the Company having no items of other comprehensive
income in any of the periods presented, the adoption of SFAS No. 130 had no
impact on the Company's reporting or display of financial information at June
30, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. Because the Company
has not entered into derivative financial instruments, the implementation of
SFAS No. 133 will not have an impact on the Company's consolidated results of
operations, financial position or cash flows.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-5, "Reporting on the costs of Start-Up Activities." The SOP
requires costs of start-up activities and organization costs to be expensed as
incurred, and is effective for fiscal years beginning after December 15, 1998.
The effects of adoption must be reported as a cumulative change in accounting
principle. The Company is reviewing the pronouncement to determine its impact.
If unamortized start-up activities or organization costs, described in the
pronouncement, are identified, they will be written off in its first quarter
ended March 31, 1999.
23. SUBSEQUENT EVENT
On October 28, 1998 the Company entered into a $600 million credit facility
with a syndicate of financial institutions. Loans under the credit facility
bear interest at rates based on either LIBOR or the bank's prime rate plus
applicable margins. The facility has a five-year term and is secured by the
assets of certain of the Company's subsidiaries. The Company must comply with
certain financial and other covenants. On October 28, 1998, the Company drew
down $200 million under the facility.
