<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1998
REGISTRATION NO. 333-48079
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
IXC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
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DELAWARE 4813 74-2644120
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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1122 CAPITAL OF TEXAS HIGHWAY SOUTH
AUSTIN, TEXAS 78746
(512) 328-1112
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JEFFREY C. SMITH
IXC COMMUNICATIONS, INC.
1122 CAPITAL OF TEXAS HIGHWAY SOUTH
AUSTIN, TEXAS 78746
(512) 427-3700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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MICHAEL P. WHALEN, ESQ. JAMES M. ASH, ESQ.
KAREN C. GOODIN, ESQ. BROGAN SULLIVAN, ESQ.
RIORDAN & MCKINZIE BLACKWELL SANDERS MATHENY
695 TOWN CENTER DRIVE, SUITE 1500 WEARY & LOMBARDI LLP
COSTA MESA, CA 92626 2300 MAIN STREET, SUITE 1100
KANSAS CITY, MO 64108
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
[NET LONG DISTANCE LETTERHEAD]
April 21, 1998
Dear Network Long Distance, Inc. Stockholder:
You are cordially invited to attend a Special Meeting of the stockholders
of Network Long Distance, Inc. ("NLD") to be held on Tuesday, May 19, 1998, at
2:00 p.m. Eastern Time, at NLD's corporate offices, 11817 Canon Boulevard, Suite
600, Newport News, Virginia. At this important meeting, you will be asked to
vote upon a merger (the "Merger") between NLD and a subsidiary of IXC
Communications, Inc., a Delaware corporation ("IXC").
Specifically, you are being asked to approve a Stock Acquisition Agreement
and Plan of Merger, as amended (the "Agreement") under which (i) all outstanding
shares of NLD common stock will be converted into the right to receive 0.2998
shares of IXC common stock (the "Exchange Ratio"), (ii) all outstanding options
or warrants to purchase NLD common stock will be converted into the right to
receive options or warrants to purchase the number of shares of IXC common stock
equal to the Exchange Ratio multiplied by the number of shares of NLD common
stock that may be purchased under the outstanding options or warrants, and (iii)
NLD will become a wholly owned subsidiary of IXC by merging with a wholly owned
subsidiary of IXC.
This strategic business combination is subject to your approval. The
combination is also subject to certain regulatory approvals and other
conditions. If all required approvals are received and other conditions are met,
it is presently anticipated that the transaction will be completed in May 1998.
The proposal is more fully described in the accompanying Notice and Proxy
Statement/Prospectus and its various attachments. I encourage you to study these
materials carefully.
YOUR BOARD OF DIRECTORS HAS CAREFULLY REVIEWED AND CONSIDERED THE TERMS AND
CONDITIONS OF THE AGREEMENT AND BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF NLD AND ITS STOCKHOLDERS. THE DIRECTORS RECOMMEND THAT YOU VOTE
"FOR" THE MERGER.
Because a majority vote of all outstanding shares of NLD common stock is
required to approve the Merger, your vote is important no matter how many shares
you hold. Under Delaware law, the failure to vote, abstentions, and broker
non-votes will have the same effect as votes cast against approval of the
Merger. To ensure your shares will be represented at the meeting, whether or not
you plan to attend, I urge you to promptly complete and mail your proxy in the
enclosed self-addressed envelope, which requires no postage if mailed in the
United States.
Sincerely,
/s/ John Crawford
JOHN CRAWFORD
Chairman of the Board and
Chief Executive Officer
<PAGE> 3
NETWORK LONG DISTANCE, INC.
11817 CANON BOULEVARD, SUITE 600
NEWPORT NEWS, VIRGINIA 23606
(757) 873-1040
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
NOTICE HEREBY IS GIVEN that a Special Meeting of the stockholders (the
"Stockholders") of Network Long Distance, Inc., a Delaware corporation ("NLD"),
will be held at NLD's corporate offices, 11817 Canon Boulevard, Suite 600,
Newport News, Virginia, on Tuesday, May 19, 1998, at 2:00 p.m., Eastern time
(together with any and all adjournments, postponements or continuations thereof,
the "Special Meeting"), for the following purposes:
1. To consider and to vote upon a Stock Acquisition Agreement and Plan
of Merger, as amended (the "Merger Agreement"), a copy of which is attached
as Annex B to the accompanying Proxy Statement/Prospectus, pursuant to
which (a) the NLD Stockholders will become stockholders of IXC
Communications, Inc. ("IXC"), and (b) NLD will become a wholly owned
subsidiary of IXC. Under the terms of the Merger Agreement, each
outstanding share of common stock of NLD will be converted into the right
to receive 0.2998 shares (the "Exchange Ratio") of common stock of IXC and
each outstanding option or warrant to purchase NLD common stock will be
converted into the right to receive an option or warrant to purchase IXC
common stock at the Exchange Ratio.
2. To transact such other business as may properly come before the
meeting and at any and all adjournments thereof.
Stockholders who held of record shares of NLD common stock at the close of
business on April 15, 1998, are entitled to notice of and to vote on each matter
presented at the Special Meeting and at any and all adjournments thereof.
Approval of the Merger Agreement requires the affirmative vote of the holders of
a majority of the outstanding shares of NLD common stock.
Whether or not you plan to attend the Special Meeting in person, you are
urged to sign and date the enclosed proxy card and return it promptly in the
enclosed postage-paid envelope, which requires no additional postage if mailed
in the United States. Stockholders attending the Special Meeting may vote in
person even if they have returned a proxy card.
By Order of the Board of Directors,
/s/ JOHN V. LEAF
JOHN V. LEAF
Secretary
Newport News, Virginia
April 21, 1998
<PAGE> 4
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LOGO LOGO
NETWORK LONG DISTANCE, INC. IXC COMMUNICATIONS, INC.
PROXY STATEMENT FOR SPECIAL MEETING OF PROSPECTUS FOR 4,313,837 SHARES OF COMMON
STOCKHOLDERS TO BE HELD ON MAY 19, 1998 STOCK INCLUDING OPTIONS AND WARRANTS TO
PURCHASE UP TO 297,754 SHARES OF COMMON STOCK
</TABLE>
------------------------
This Proxy Statement/Prospectus ("Proxy Statement/Prospectus") is being
furnished to the holders of common stock, par value $.0001 per share ("NLD
Common Stock"), of Network Long Distance, Inc., a Delaware corporation ("NLD"),
in connection with the solicitation by the Board of Directors of NLD (the "NLD
Board") of proxies to be used at a Special Meeting of stockholders of NLD to be
held at NLD's corporate offices, 11817 Canon Boulevard, Suite 600, Newport News,
Virginia on Tuesday, May 19, 1998, at 2:00 p.m., Eastern Time (together with any
and all adjournments, postponements or continuations thereof, the "Special
Meeting").
The Special Meeting has been called to consider and vote upon a proposal to
approve the Stock Acquisition Agreement and Plan of Merger dated as of December
19, 1997, as amended (the "Merger Agreement"), among IXC Communications, Inc., a
Delaware corporation ("IXC"), IXC Long Distance, Inc., a Delaware corporation
and a wholly owned subsidiary of IXC ("IXC Long Distance"), Pisces Acquisition
Corp., a Delaware corporation and a newly formed, wholly owned subsidiary of IXC
Long Distance ("Acquisition Corp."), and NLD, which provides for the merger (the
"Merger") of Acquisition Corp. with and into NLD. As a result of the Merger, (i)
NLD will become a wholly owned subsidiary of IXC, (ii) each share of NLD Common
Stock outstanding prior to the time the Merger is effective shall be converted
into the right to receive 0.2998 shares (the "Exchange Ratio") of common stock,
par value $.01 per share ("IXC Common Stock") of IXC, and (iii) each option and
warrant to purchase NLD Common Stock outstanding prior to the time the Merger is
effective shall be converted into the right to receive an option or warrant to
purchase the number of shares of IXC Common Stock equal to the Exchange Ratio
multiplied by the number of shares of NLD Common Stock that may be purchased
under such outstanding options and warrants.
IXC has filed a Registration Statement on Form S-4 (the "Registration
Statement," which term shall include all amendments, exhibits, annexes and
schedules thereto) with the Securities and Exchange Commission (the
"Commission") registering the issuance of up to 4,313,837 shares of IXC Common
Stock (including shares of IXC Common Stock which may be issued in connection
with the exercise of options and warrants for NLD Common Stock) and the exchange
of options and warrants to purchase up to 297,754 shares of IXC Common Stock for
all outstanding options and warrants for the purchase of NLD Common Stock. This
Proxy Statement/Prospectus constitutes the Prospectus of IXC, filed as part of
the Registration Statement, with respect to such securities.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DESCRIPTION OF CERTAIN
MATTERS RELATED TO IXC AND THE SECURITIES TO BE ISSUED IN THE MERGER.
IXC Common Stock is listed for trading on the Nasdaq National Market (the
"NNM") under the trading symbol "IIXC." On April 14, 1998 the last reported sale
price of IXC Common Stock on the NNM was $50 1/8.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to stockholders of NLD on or about April 21, 1998.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/ PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is April 15, 1998.
<PAGE> 5
TABLE OF CONTENTS
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AVAILABLE INFORMATION....................................... iii
DOCUMENTS INCORPORATED BY REFERENCE......................... iv
SUMMARY..................................................... 1
The Companies............................................. 1
Recent Developments....................................... 2
The Special Meeting....................................... 2
Summary of Certain Information Concerning the Merger...... 3
Risk Factors.............................................. 7
Selected Historical Financial Data of IXC................. 8
Selected Historical Financial Data of NLD................. 9
Unaudited Selected Pro Forma Combined Financial
Information............................................ 10
Comparative Per Share Data................................ 12
Markets and Market Prices................................. 12
RISK FACTORS................................................ 14
THE COMPANIES............................................... 27
IXC....................................................... 27
NLD....................................................... 28
Acquisition Corp.......................................... 28
THE SPECIAL MEETING......................................... 28
Purpose of Special Meeting................................ 29
Place, Date, and Time of the Special Meeting; Record
Date................................................... 29
Voting at the Special Meeting............................. 29
Proxies................................................... 29
THE MERGER.................................................. 31
Description of the Merger................................. 31
Consummation of the Merger................................ 31
Background of the Merger.................................. 31
NLD's Reasons for the Merger; Recommendation of the NLD
Board.................................................. 33
IXC's Reasons for the Merger.............................. 34
Opinion of Morgan Stanley................................. 34
Nasdaq National Market.................................... 38
Material Federal Income Tax Consequences of the Merger.... 38
Resales of IXC Common Stock Under Federal Securities
Laws................................................... 38
Accounting Treatment...................................... 39
Consents and Approvals.................................... 39
Appraisal Rights.......................................... 39
Interests of Certain Persons in the Merger................ 39
Conduct of Business after the Merger...................... 40
TERMS OF THE MERGER AGREEMENT............................... 40
The Merger................................................ 40
Effective Time of the Merger.............................. 41
Effects of the Merger on NLD Common Stock................. 41
Treatment of Stock Options and Warrants................... 41
Fractional Shares......................................... 42
Number of Shares of IXC Common Stock Anticipated to be
Issued Pursuant to the Merger Agreement................ 42
Appointment of the Exchange Agent......................... 42
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i
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Payment of the Merger Consideration; Surrender of NLD
Stock Certificates, NLD Options and NLD Warrants....... 42
Representations and Warranties............................ 43
No Solicitation........................................... 43
Conditions to the Merger.................................. 43
Covenants; Conduct of Business Prior to Effective Time.... 45
Termination of the Merger Agreement....................... 47
Fees and Expenses of the Merger........................... 48
COMPARATIVE RIGHTS OF STOCKHOLDERS.......................... 48
Number of Directors....................................... 48
Classification............................................ 49
Removal of Directors; Filling Vacancies on the Board of
Directors.............................................. 49
Limitation on Directors' Liability........................ 49
Indemnification........................................... 49
Restrictions on Business Combinations/Corporate Control... 50
Special Meetings.......................................... 50
Amendment or Repeal of the Charter and Bylaws............. 50
Cumulative Voting......................................... 50
Appraisal Rights in Mergers............................... 50
Dividends................................................. 51
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
FOR IXC AND NLD........................................... 52
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR
NLD....................................................... 58
MARKET PRICE AND DIVIDENDS ON NLD COMMON STOCK AND RELATED
NLD STOCKHOLDER MATTERS................................... 65
Market Information........................................ 65
Holders of NLD Common Stock............................... 65
Security Ownership of Certain Beneficial Owners and
Management............................................. 66
Dividends................................................. 66
MANAGEMENT'S DISCUSSION AND ANALYSIS OF NLD'S FINANCIAL
CONDITION AND RESULTS OF OPERATION........................ 67
LEGAL MATTERS............................................... 75
EXPERTS..................................................... 75
FUTURE STOCKHOLDER PROPOSALS................................ 76
FINANCIAL STATEMENTS OF NLD................................. F-1
ANNEXES:
Annex A: Glossary
Annex B: Stock Acquisition Agreement and Plan of Merger,
as amended
Annex C: Opinion of Morgan Stanley & Co. Incorporated
</TABLE>
ii
<PAGE> 7
AVAILABLE INFORMATION
IXC has filed the Registration Statement with the Commission with respect
to the IXC Common Stock to be issued in connection with the Merger of which this
Proxy Statement/Prospectus constitutes a part pursuant to the Securities Act of
1933, as amended (the "Securities Act"). The information contained herein with
respect to IXC and its affiliates has been provided by IXC, and the information
contained herein with respect to NLD and its affiliates has been provided by
NLD. This Proxy Statement/Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements made in
this Proxy Statement/Prospectus as to the contents of any contract, agreement or
other document referred to in the Registration Statement are necessarily
summaries of those documents, and, with respect to each such contract, agreement
or other document filed as an exhibit to the Registration Statement, reference
is made to the exhibit for a more complete description of the matter involved,
and each statement shall be deemed qualified in its entirety by such reference.
IXC and NLD are each subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, file reports and other information with the Commission.
Such reports and other information can be inspected at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington D.C. 20549, and at the Commission's regional offices at the Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at
Seven World Trade Center, 13th floor, New York, New York 10048. Copies of such
material can be obtained at prescribed rates upon request from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington D.C.
20549. The Commission also maintains a site on the World Wide Web
(http://www.sec.gov) that contains reports, proxy information statements and
other information regarding registrants, like IXC and NLD, that file
electronically with the Commission. The IXC Common Stock is listed on the NNM
under the symbol "IIXC." The NLD Common Stock is listed on the NNM under the
symbol "NTWK." Reports, proxy statements and other information concerning IXC or
NLD may be inspected and copied at the offices of The Nasdaq Stock Market at
1735 K Street, N.W., Washington D.C. 20006.
iii
<PAGE> 8
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, which have been filed with the Commission, are
incorporated herein by reference:
1. For IXC (Commission File No. 0-20803), its:
(a) Annual Report on Form 10-K for the fiscal year ended December
31, 1997 filed with the Commission on March 16, 1998 (the "IXC 10-K").
(b) Current Reports on Form 8-K dated January 8, 1998, January 30,
1998, February 12, 1998, March 2, 1998, March 30, 1998 and April 2,
1998.
(c) Description of the IXC Common Stock contained in the
Registration Statement on Form 8-A dated May 31, 1996 and filed with the
Commission on June 3, 1996 as amended by Form 8-A/A dated June 26, 1996
as filed with the Commission on June 26, 1996.
2. For NLD (Commission File No. 0-23172), its:
(a) Annual Report on Form 10-K for the fiscal year ended March 31,
1997 filed with the Commission on June 30, 1997 as amended by Form
10-K/A filed with the Commission on July 29, 1997 (as amended, the "NLD
10-K").
(b) Quarterly Reports on Form 10-Q for the quarters ended June 30,
1997, September 30, 1997 and December 31, 1997 filed with the Commission
on August 14, 1997, November 13, 1997 and February 13, 1998,
respectively (the "NLD 10-Qs").
(c) Current Reports on Form 8-K dated May 7, 1997 (as amended by
Form 8-K/A filed with the Commission on June 26, 1997), May 8, 1997,
December 19, 1997 and February 10, 1998.
All documents subsequently filed by IXC or NLD with the Commission pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this Proxy Statement/Prospectus and prior to the date of the Special Meeting
shall be deemed to be incorporated by reference in this Proxy
Statement/Prospectus. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement/Prospectus to the extent that a
statement contained herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Proxy Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS,
OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY INCORPORATED BY
REFERENCE THEREIN, ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROXY
STATEMENT/PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO, IN THE CASE
OF DOCUMENTS RELATING TO IXC, IXC COMMUNICATIONS, INC., 1122 CAPITAL OF TEXAS
HIGHWAY SOUTH, AUSTIN, TEXAS 78746, (512) 427-3731, ATTENTION: KELLI MCGLYNN,
AND IN THE CASE OF DOCUMENTS RELATING TO NLD, NETWORK LONG DISTANCE, INC., 11817
CANON BOULEVARD, SUITE 600, NEWPORT NEWS, VIRGINIA 23606, ATTENTION: THOMAS G.
KEEFE, CHIEF FINANCIAL OFFICER. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE RECEIVED BY IXC OR NLD, AS THE CASE MAY BE, BY
MAY 12, 1998.
------------------------
NO PERSON IS AUTHORIZED BY IXC OR NLD TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS, IN CONNECTION WITH THE SOLICITATION AND THE OFFERING MADE
BY THIS PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING
iv
<PAGE> 9
BEEN AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE THE
SOLICITATION OF A PROXY OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
PURCHASE, ANY SECURITIES IN ANY JURISDICTION IN WHICH SUCH SOLICITATION OR
OFFERING MAY NOT LAWFULLY BE MADE.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL IMPLY THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF IXC OR NLD SINCE
THE DATE HEREOF.
WHEN USED IN THIS PROXY STATEMENT/PROSPECTUS, THE WORDS "MAY," "WILL,"
EXPECT," "ANTICIPATE," "ESTIMATE," "BELIEVE," "SEEK" AND "CONTINUE" AND WORDS OF
SIMILAR IMPORT MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. SUCH
STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES, INCLUDING THOSE SET FORTH
UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS, THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. FOR A
DISCUSSION OF SUCH RISKS, SEE "RISK FACTORS," "THE MERGER -- BACKGROUND OF THE
MERGER," "THE MERGER -- NLD'S REASONS FOR THE MERGER; RECOMMENDATION OF THE NLD
BOARD" AND "THE MERGER -- IXC'S REASONS FOR THE MERGER." READERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK
ONLY AS OF THE DATE OF THIS PROXY STATEMENT/PROSPECTUS.
v
<PAGE> 10
SUMMARY
Certain of the statements contained in this Proxy Statement/Prospectus,
including information regarding IXC's network expansion and switched long
distance services and related strategy and financing, are forward-looking
statements. For a discussion of important factors that could cause actual
results to differ materially from the matters described in the forward-looking
statements and other matters that should be carefully considered by the NLD
Stockholders, see "Risk Factors." Certain terms used herein are defined in the
Glossary contained in Annex A to this Proxy Statement/Prospectus.
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," appearing elsewhere in this Proxy
Statement/Prospectus, the information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and IXC's financial
statements (including the notes thereto) appearing in the IXC 10-K, which are
incorporated by reference herein, and the information contained in "Management's
Discussion and Analysis of NLD's Financial Condition and Results of Operation"
and NLD's financial statements (including the notes thereto) appearing elsewhere
in this Proxy Statement/Prospectus. As used herein, except with respect to the
cover page and unless the context otherwise requires, the term "IXC" refers to
IXC Communications, Inc. and its subsidiaries, including predecessor
corporations.
THE COMPANIES
IXC. IXC is a leading provider of telecommunications transmission,
switched long distance and associated services to long distance and other
communications companies. IXC owns a digital telecommunications network (the
"Network") which includes over 11,500 digital route miles. Substantial additions
to the Network are currently under construction. Subject to the availability of
capital and the completion of cost-sharing arrangements currently being
negotiated, the Network is planned to include over 18,000 digital route miles by
the end of 1998, and over 20,000 digital route miles by the end of 1999. IXC
provides two principal products: transmission of voice and data over dedicated
circuits ("private lines") and transmission of long distance traffic processed
through IXC's switches ("long distance switched services"). During the first
quarter of 1997, IXC began providing Frame Relay and ATM-based switched data
services in order to capitalize on the growing demand for Internet and
electronic data transfer services. IXC was incorporated in the State of Delaware
on July 27, 1992. IXC's principal executive offices are located at 1122 Capital
of Texas Highway South, Austin, Texas 78746 and its telephone number is (512)
427-3700.
NLD. NLD provides long distance and other telecommunications services to
end-users, independent agents, and other long distance companies, with a primary
concentration on small to medium-sized businesses. Over the past four years, NLD
has grown significantly through mergers, acquisitions, and its own sales
programs to become a nationwide provider of long distance and other
telecommunications services. NLD transmits long distance telephone calls over
various types of transmission circuits leased from other telecommunications
carriers at fixed or variable rates. Calls may be routed through one of NLD's
three switching centers, which select the least expensive manner to complete the
calls from among the various available transmission alternatives, or calls may
be completed by various underlying carriers. NLD provides billing, customer
service, and other features related to the calls. NLD was incorporated in the
State of Delaware on December 3, 1987. NLD's principal executive offices are
located at 11817 Canon Boulevard, Suite 600, Newport News, Virginia 23606 and
its telephone number is (757) 873-1040.
Acquisition Corp. Acquisition Corp. was incorporated in the State of
Delaware on December 17, 1997 solely for the purpose of consummating the Merger.
Acquisition Corp. has limited assets and has no business and has not carried on
any activities other than those which are directly related to its formation and
its execution of the Merger Agreement. Its principal executive offices are
located at 1122 Capital of Texas Highway South, Austin, Texas 78746 and its
telephone number if (512) 328-1112.
1
<PAGE> 11
RECENT DEVELOPMENTS
Convertible Preferred Offering. On March 30, 1998, IXC issued and sold
$135.0 million of its 6 3/4% Cumulative Convertible Preferred Stock (the "1998
Convertible Preferred Stock") issued in the form of depositary shares (2,700,000
depositary shares at $50 per share) to qualified institutional buyers under Rule
144A of the Securities Act. On April 14, 1998, IXC issued and sold an additional
$20.25 million of its 1998 Convertible Preferred Stock (405,000 depositary
shares at $50 per share) in connection with an overallotment option granted to
the initial purchasers of the 1998 Convertible Preferred Stock. The offer and
sale of the 1998 Convertible Preferred Stock (an aggregate of $155.25 million,
including the sale in connection with the overallotment option) is referred to
as the "Convertible Preferred Offering." The 1998 Convertible Preferred Stock is
convertible at any time into IXC Common Stock at the option of the holder. IXC
expects to use the net proceeds of the Convertible Preferred Offering 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 Refinancing. IXC is currently offering (the "Tender Offer") to
purchase for cash all of its outstanding 12 1/2% Senior Notes Due 2005 (the
"Senior Notes"), $285.0 million in aggregate principal amount of which are
outstanding, at a purchase price (the "Offer Price") of $1,198.81 per $1,000 of
note principal (including $20 per $1,000 of note principal as the Consent
Payment (as defined)). The Tender Offer expires at 11:59 p.m. New York City time
on April 16, 1998, unless extended (the "Tender Offer Expiration Date"). In
connection with the Tender Offer, IXC has solicited (the "Solicitation") and
received the requisite consents from the holders of the Senior Notes to, among
other things, eliminate substantially all of the covenants and guarantees under
the indenture governing the Senior Notes (the "Senior Notes Indenture") and
permit the incurrence of additional indebtedness. The consideration to be paid
in respect of validly delivered, and not revoked, consents will be 2.0% of the
principal amount of the Senior Notes for which consents were validly delivered
and not revoked (collectively, the "Consent Payment"). The consummation of the
Tender Offer is conditioned upon, among other things, IXC obtaining financing
therefor. IXC anticipates issuing at least $350 million in debt securities (the
"New Notes") with a portion of the net proceeds thereof to pay the Offer Price
and the Consent Payment (estimated to be an aggregate of approximately $341.7
million, assuming all $285.0 million in aggregate principal amount of the Senior
Notes is tendered and accepted for payment). As of April 3, 1998, over 99% of
the aggregate principal amount of the Senior Notes has been tendered (and could
not be withdrawn) pursuant to the Tender Offer.
THE SPECIAL MEETING
A Special Meeting of the stockholders of NLD (the "NLD Stockholders") will
be held on May 19, 1998 at 2:00 p.m. Eastern Time, at NLD's corporate offices,
11817 Canon Boulevard, Suite 600, Newport News, Virginia, for the purpose of
approving the Merger Agreement and such other matters as may properly come
before the Special Meeting. Only NLD Stockholders of record at the close of
business on April 15, 1998 (the "Record Date") will be entitled to notice of and
to vote at the Special Meeting. Each share of NLD Common Stock outstanding as of
the Record Date is entitled to one vote upon each matter presented at the
Special Meeting, exercisable at the Special Meeting in person or by properly
executed proxy. The presence, in person or by properly executed proxy, of a
majority of the shares of NLD Common Stock entitled to vote is necessary to
constitute a quorum of the NLD Common Stock at the Special Meeting. To approve
the Merger Agreement, the affirmative vote of a majority of the outstanding
shares of NLD Common Stock entitled to vote thereon is required. As of the
Record Date, the directors and executive officers of NLD, together with their
affiliates as a group, beneficially owned 45.1% of the issued and outstanding
shares of NLD Common Stock entitled to vote at the Special Meeting. No
dissenters' rights of appraisal apply to the Merger or any of the other
transactions contemplated by the Merger Agreement. See "THE SPECIAL MEETING."
THE NLD BOARD HAS APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY, HAS AUTHORIZED THE EXECUTION AND DELIVERY OF THE MERGER
AGREEMENT, AND RECOMMENDS THAT NLD STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER
AGREEMENT.
2
<PAGE> 12
SUMMARY OF CERTAIN INFORMATION CONCERNING THE MERGER
Effective Time of the
Merger..................... This Proxy Statement/Prospectus relates to the
proposed Merger of Acquisition Corp. with and into
NLD. Upon the consummation of the Merger, NLD will
be the surviving corporation (the "Surviving
Corporation") and will be a wholly owned subsidiary
of IXC. The Merger will be effective upon the
filing of a certificate of merger (the "Certificate
of Merger") with the Secretary of State of
Delaware. The date and time of such filing (the
"Effective Time") is currently expected to occur,
subject to approval by the NLD Stockholders of the
Merger, within five business days following the
satisfaction or waiver of all the conditions
precedent to the Merger set forth in the Merger
Agreement. See "TERMS OF THE MERGER
AGREEMENT -- Effective Time of the Merger" and
"-- Conditions to the Merger."
Conversion of NLD Common
Stock; Merger
Consideration............ Upon and subject to the terms of the Merger
Agreement, each share of NLD Common Stock
outstanding as of the Effective Time shall be
converted into 0.2998 (the "Exchange Ratio") shares
of IXC Common Stock; provided, however, that each
holder of NLD Common Stock entitled to receive a
fractional share of IXC Common Stock shall receive
cash in lieu of such fractional share. See "TERMS
OF THE MERGER AGREEMENT -- Effect of the Merger on
NLD Common Stock" and "-- Fractional Shares."
Treatment of Stock Options
and Warrants............... As of the Effective Time, all of the outstanding
options and warrants to acquire NLD Common Stock
shall be converted into options or warrants to
acquire IXC Common Stock. IXC shall grant each
holder of an NLD option or warrant (collectively,
the "NLD Options") who is or has been an employee,
officer or director of NLD a substitute option
(each, a "Substitute Option") and each holder of an
NLD warrant (collectively, the "NLD Warrants")
issued pursuant to Stock Purchase Option or Warrant
Agreements dated as of February 24, 1994 with NLD
and certain individuals or entities a substitute
warrant (each, a "Substitute Warrant") in exchange
for the surrender, cancellation and termination of
each NLD Option and NLD Warrant, respectively. As
of the Effective Time, all of the outstanding NLD
Options and NLD Warrants shall be converted into
the right to receive Substitute Options and
Substitute Warrants, as applicable. The Substitute
Options and Substitute Warrants will (a) reflect
the application of the Exchange Ratio (except that
any resulting fractional share amounts less than
one-half shall be rounded down to the nearest whole
share and shall be rounded up otherwise), (b)
provide for exercisability over the same period as
set forth in the NLD Options or NLD Warrants
exchanged therefor, and (c) contain such terms and
conditions as IXC and NLD shall agree upon. See
"TERMS OF THE MERGER AGREEMENT -- Treatment of
Stock Options and Warrants."
Number of Shares of IXC
Common Stock Anticipated
to be Issued Pursuant to
the Merger Agreement..... Based on the number of shares of NLD Common Stock
outstanding on the Record Date, it is presently
anticipated that approximately four million shares
of IXC Common Stock and Substitute Options and
3
<PAGE> 13
Substitute Warrants to purchase approximately
300,000 shares of IXC Common Stock will be issued
pursuant to the terms of the Merger Agreement.
Surrender of NLD Stock
Certificates............. NLD and IXC have appointed U.S. Stock Transfer
Corporation as exchange agent to exchange
certificates representing NLD Common Stock for the
IXC Common Stock, NLD Options for Substitute
Options, and NLD Warrants for Substitute Warrants.
Promptly after the Effective Time, holders of NLD
Common Stock, NLD Options, and NLD Warrants will be
furnished with a notice of the consummation of the
Merger and a transmittal letter to be used for the
exchange.
NLD Stockholders should not return any stock
certificates with the form of proxy accompanying
this Proxy Statement/Prospectus. See "TERMS OF THE
MERGER AGREEMENT -- Payment of the Merger
Consideration; Surrender of NLD Stock Certificates,
NLD Options and NLD Warrants."
Management After the
Merger..................... Upon consummation of the Merger, Acquisition Corp.
will be merged with and into NLD and NLD will be
the surviving entity thereof. The directors of
Acquisition Corp. in office at the Effective Time
shall become on such date the directors of NLD. The
present directors of Acquisition Corp. are Jeffrey
C. Smith, James F. Guthrie and Stuart K. Coppens,
each of whom is presently an executive officer of
IXC. The officers of NLD in office at the Effective
Time shall remain as of such date the officers of
NLD. The present officers of NLD are John D.
Crawford, Timothy A. Barton and Thomas G. Keefe.
See "THE MERGER -- Conduct of Business After the
Merger."
NLD's Reasons for the
Merger, Recommendation of
the
Board.................... The NLD Board has concluded that the Merger offers
NLD and the NLD Stockholders a significant
opportunity to create a combined organization that
will be a leader in the telecommunications
industry. The NLD Board believes that the terms of
the Merger are fair to, and in the best interests
of, NLD and the NLD Stockholders. As of the Record
Date, NLD's directors, executive officers and their
affiliates beneficially owned shares of NLD Common
Stock representing 45.1% of the outstanding NLD
Common Stock. Each of NLD's directors, executive
officers and their affiliates intend to vote the
shares of NLD Common Stock beneficially owned by
them for approval of the Merger Agreement. See "THE
MERGER -- Background of the Merger" and "-- NLD's
Reasons for the Merger; Recommendation of the NLD
Board."
Interests of Certain
Persons in the Merger...... Certain members of NLD's management and the NLD
Board may be deemed to have interests in the Merger
in addition to or different from their interests as
NLD Stockholders generally. These include, among
other matters, provisions in the Merger Agreement
relating to employment agreements for certain
officers of NLD. See "THE MERGER -- Interests of
Certain Persons in the Merger."
Conditions of the Merger... The obligations of IXC, IXC Long Distance,
Acquisition Corp. and NLD to effect the Merger are
subject to the satisfaction or waiver of certain
conditions, including, but not limited to (i)
compliance by IXC
4
<PAGE> 14
and NLD with various covenants; (ii) the continuing
accuracy in all material respects of the
representations and warranties of IXC, Acquisition
Corp. and NLD, (iii) the receipt of certain state
and federal regulatory approvals; (iv) the absence
of any material adverse change in the financial
condition, operations, business or prospects of IXC
or NLD; (v) NLD's average monthly revenues as
defined in the Merger Agreement being at least $8.4
million; (vi) the receipt of a letter from each of
IXC's and NLD's accountants stating that the Merger
will qualify as a pooling of interests under GAAP
and applicable Commission regulations; (vii) the
expiration or termination of any waiting period
applicable to the Merger under the
Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"); and (viii) the
performance by each party of such party's
obligations under the Merger Agreement required to
be performed by such party prior to the Effective
Time. See "TERMS OF THE MERGER
AGREEMENT -- Conditions to the Merger."
Opinion of Morgan
Stanley.................... Morgan Stanley & Co. Incorporated ("Morgan
Stanley"), an investment banking firm retained by
NLD, has delivered to the NLD Board a written
opinion dated December 19, 1997 to the effect that,
as of the date of such opinion and based upon and
subject to certain matters stated therein, the
Exchange Ratio is fair, from a financial point of
view, to the NLD Stockholders. See "THE
MERGER -- Opinion of Morgan Stanley." The full text
of the written opinion of Morgan Stanley, which
sets forth the assumptions made, matters considered
and limitations on the review undertaken by Morgan
Stanley, is attached as Annex C to this Proxy
Statement/Prospectus and should be read carefully
in its entirety.
Termination of the
Merger Agreement and
Termination Fee.......... The Merger Agreement and the Merger may be
terminated at any time prior to the filing of the
Certificate of Merger, whether before or after
approval of the Merger by the NLD Stockholders, (i)
by the mutual consent of the Boards of Directors of
IXC and NLD, (ii) by either NLD or IXC if the other
party is in willful breach of any of its
representations, warranties, covenants or
agreements in the Merger Agreement and such breach
has not been cured within 20 business days notice
thereof, (iii) by either NLD or IXC if the
consummation of the Merger has been enjoined or if
any Final Order (as defined) issued by a Regulatory
Commission (as defined) contains an unduly
burdensome provision, (iv) by either NLD or IXC, if
the NLD Stockholders do not approve the Merger at
the Special Meeting; (v) by the Board of Directors
of IXC or NLD at any time after December 31, 1998
(subject to an extension of up to 60 days in
certain instances) if, by such date, the Merger
shall not have become effective; or (vi) by NLD if
NLD shall have received a bona fide fully funded
offer to acquire all of the outstanding NLD Common
Stock or all of NLD's assets which, after taking
into account payment to IXC of the Termination Fee
(as defined), would, in the opinion of the NLD
Board, result in a value to the NLD stockholders of
greater than $142 million and concurrent with such
termination of the Merger Agreement NLD pays IXC a
fee of $7.5 million (the "Termination Fee"). See
"TERMS OF THE MERGER AGREEMENT -- Termination of
the Merger Agreement."
5
<PAGE> 15
Fees and Expenses of
the Merger............... In the event that the Merger Agreement shall be
terminated as described above, all obligations of
the parties under the Merger Agreement shall
terminate, except the obligation to pay the
Termination Fee, and there shall be no liability of
any party thereto to another (except by reason of
any breach by any party of any of its
representations, warranties, covenants or
agreements thereunder which has not been waived).
Otherwise, each party will pay its own costs and
expenses in connection with the Merger Agreement;
provided, however, that any costs paid in
connection with the printing of the Registration
Statement will be borne equally by IXC and NLD. See
"TERMS OF THE MERGER AGREEMENT -- Fees and Expenses
of the Merger."
Federal Income Tax
Consequences of the
Merger................... Based on an opinion from NLD's counsel, the Merger
will constitute a tax-free reorganization within
the meaning of Section 368(a)(1)(B) of the Internal
Revenue Code of 1986, as amended (the "Code"), and,
accordingly, for federal income tax purposes (i) no
gain or loss will be recognized by either IXC or
NLD as a result of the Merger and (ii) no gain or
loss will be recognized by the NLD Stockholders
with respect to the IXC Common Stock that will be
received by them upon consummation of the Merger,
except to the extent of cash received in lieu of
fractional shares. If the Merger were not to
constitute a tax-free reorganization, each NLD
Stockholder would recognize gain or loss measured
by the difference between the fair market value of
the IXC Common Stock received upon consummation of
the Merger, determined at the Effective Time, and
the tax basis of such stockholder's shares of NLD
Common Stock.
Each NLD Stockholder should consult with such
stockholder's own tax advisor regarding the tax
consequences of the Merger. See "THE
MERGER -- Material Federal Income Tax Consequences
of the Merger."
Accounting Treatment....... The Merger is intended to qualify as a pooling of
interests for financial reporting purposes in
accordance with GAAP, which means that IXC will
restate its historical consolidated financial
statements to include the assets, liabilities,
stockholders' equity and results of operations of
NLD. See "THE MERGER -- Accounting Treatment."
Appraisal Rights........... Under Delaware law, NLD stockholders have no right
to an appraisal of the value of their shares in
connection with the Merger and the transactions
contemplated thereby. See "THE MERGER--Appraisal
Rights."
Resales of IXC Common Stock
Under Federal Securities
Laws..................... The shares of IXC Common Stock to be issued
pursuant to the Merger Agreement have been
registered under the Securities Act, and therefore
may be resold without restriction by persons who
are not deemed to be "affiliates" of either IXC or
NLD. See "THE MERGER -- Resales of IXC Common Stock
Under Federal Securities Laws."
Consents and Approvals..... The Merger is subject to the HSR Act, and the rules
and regulations thereunder, which provide that
certain transactions may not be consummated until
required information and material have been
furnished to the
6
<PAGE> 16
Justice Department and the Federal Trade Commission
(the "FTC") and certain waiting periods have
expired or been terminated. The Merger also
requires the approval of the Federal Communications
Commission (the "FCC") and certain state regulatory
commissions in the jurisdictions where NLD operates
(such commissions together with the FCC constitute
the "Regulatory Commissions"). As of April 14, 1998
approximately 60% of the state regulatory approvals
have been obtained. See "THE MERGER -- Consents and
Approvals."
Listing of IXC Common
Stock...................... At the Effective Time, the shares of IXC Common
Stock to be issued pursuant to the Merger Agreement
will be approved for listing on the NNM under the
trading symbol "IIXC."
RISK FACTORS
In determining whether to exchange NLD Common Stock for IXC Common Stock,
the NLD Stockholders should consider carefully the information set forth under
the caption "Risk Factors" and all other information contained in this Proxy
Statement/Prospectus before making any decision to acquire IXC Common Stock.
7
<PAGE> 17
SELECTED HISTORICAL FINANCIAL DATA OF IXC
The following table sets forth certain selected historical financial data
of IXC. The historical financial data for IXC have been derived from the audited
Consolidated Financial Statements of IXC. The selected historical financial data
set forth below is qualified in its entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and IXC's Consolidated Financial
Statements, related notes thereto and other financial information incorporated
by reference in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenue..................... $420,710 $203,761 $ 91,001 $ 80,663 $ 71,123
Operating income (loss)................... (45,235) (14,016) 1,429 14,085 (10,596)
Income (loss) before extraordinary gain
(loss)................................. (94,555) (37,448) (3,218) 5,017 (31,812)
Extraordinary gain (loss)(1).............. -- -- (1,747) 2,298 8,495
Net income (loss)......................... $(94,555) $(37,448) $ (4,965) $ 7,315 $(23,317)
Basic and diluted income (loss) per
share(2):
Before extraordinary gain (loss)....... $ (3.75) $ (1.42) $ (.21) $ .13 $ (1.43)
Extraordinary gain (loss).............. -- -- (.07) .10 .36
Net income (loss)...................... $ (3.75) $ (1.42) $ (.28) $ .23 $ (1.07)
Weighted average basic shares............. 30,961 27,525 24,335 24,310 23,332
Weighted average diluted shares........... 30,961 27,525 24,335 24,318 23,332
BALANCE SHEET DATA:
Cash and cash equivalents................. $152,720 $ 61,340 $ 6,915 $ 6,048 $ 6,230
Total assets.............................. 917,095 459,151 336,475 105,409 94,281
Total debt and capital lease
obligations............................ 320,295 302,281 298,794 69,124 59,954
Redeemable preferred stock................ 403,368 -- -- -- --
Stockholders' equity (deficit)............ (47,955) 63,479 6,858 14,189 6,871
OTHER FINANCIAL DATA:
EBITDA(3)................................. $ 15,513 $ 13,225 $ 18,867 $ 26,206 $ 10,465
</TABLE>
- ---------------
(1) The extraordinary items for all periods result from early extinguishment of
debt (involving a related party in 1994), including capital lease
obligations, net of applicable income taxes.
(2) The basic and diluted income (loss) per share amounts prior to 1997 have
been restated as required to comply with Statement of Financial Accounting
Standards No. 128, Earnings Per Share and the Securities and Exchange
Commission Staff Accounting Bulletin 98.
(3) EBITDA is operating income (loss) plus depreciation and amortization. IXC
has included information concerning EBITDA because it believes that EBITDA
is used by certain investors as one measure of an issuer's historical
ability to service its debt. EBITDA is not a measurement determined in
accordance with GAAP, should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP and
is not necessarily comparable with similarly titled measures for other
companies.
8
<PAGE> 18
SELECTED HISTORICAL FINANCIAL DATA OF NLD
The following table sets forth certain selected financial data of NLD. The
historical financial data for NLD have been derived from the audited
Consolidated Financial Statements of NLD as of March 31, 1997 and 1996 and for
the three year period ended March 31, 1997. The historical financial data for
NLD as of March 31, 1995, 1994 and 1993 and for the years ended March 31, 1994
and 1993 have been derived from unaudited financial statements. The historical
financial data for NLD as of December 31, 1997 and 1996 and for the nine-month
periods ended December 31, 1997 and 1996 have been derived from unaudited
interim financial statements. The unaudited interim financial statements include
all adjustments, consisting of normal recurring accruals, which management
considers necessary for a fair presentation of the financial position and the
results of operations for such interim periods. Results of operations for the
interim periods are not necessarily indicative of the results of operations for
the full year. These data should be read in conjunction with "Management's
Discussion and Analysis of NLD's Financial Condition and Results of Operations"
and NLD's Consolidated Financial Statements appearing elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED MARCH 31, AND AT DECEMBER 31,
----------------------------------------------- -------------------
1997 1996 1995 1994 1993 1997 1996
------- ------- ------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenue.......... $86,006 $67,584 $48,319 $27,037 $15,277 $78,464 $63,430
Operating income (loss)........ (5,927) 1,950 2,660 1,347 378 (5,327) (3,798)
Net income (loss).............. (6,789) 784 1,715 670 526 (6,110) (4,114)
Basic income (loss) per
share(1).................... $ (0.74) $ 0.10 $ 0.22 $ 0.10 $ 0.07 $ (0.49) $ (0.45)
Diluted income (loss) per
share(1).................... $ (0.74) $ 0.10 $ 0.22 $ 0.10 $ 0.07 $ (0.49) $ (0.45)
Weighted average basic
shares(1)................... 9,179 8,068 7,680 6,947 7,207 12,404 9,158
Weighted average diluted
shares(1)................... 9,179 8,199 7,706 6,947 7,207 12,404 9,158
BALANCE SHEET DATA:
Cash and cash equivalents...... $ 1,962 $ 1,460 $ 661 $ 681 $ 326 $ 1,087 $ 2,755
Total assets................... 26,184 29,263 17,333 6,511 5,627 49,910 29,277
Total debt and capital lease
obligations................. 3,297 4,000 1,439 1,282 1,259 1,143 3,527
Redeemable preferred stock..... -- -- -- 246 -- -- --
Stockholders' equity........... 11,802 16,622 9,404 7,396 1,450 29,614 14,349
OTHER FINANCIAL DATA:
EBITDA(2)...................... $ 2,758 $ 3,675 $ 3,469 $ 2,190 $ 1,392 $ 2,035 $ 2,020
</TABLE>
- ---------------
(1) The basic and diluted income (loss) per share amounts prior to 1997 have
been restated as required to comply with Statement of Financial Accounting
Standards No. 128, Earnings Per Share and the Securities and Exchange
Commission Staff Accounting Bulletin 98.
(2) EBITDA is operating income (loss) plus depreciation, amortization and
provision to reduce carrying value of certain assets. For the purpose of
this EBITDA calculation, and to achieve consistency with combined pro forma
presentations of EBITDA elsewhere in this Proxy Statement/Prospectus,
provisions of $6.3 million to reduce the carrying value of certain assets in
the year ended March 31, 1997 have been included in depreciation and
amortization, and provisions of $4.0 million and $4.1 million to reduce the
carrying value of certain assets in the nine months ended December 31, 1997
and 1996, respectively, have been included in depreciation and amortization.
NLD has included information concerning EBITDA because it believes that
EBITDA is used by certain investors as one historical measure of cash flow
in the telecommunications industry. EBITDA is not a measurement determined
in accordance with GAAP, should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP and
is not necessarily comparable with similarly titled measures for other
companies.
9
<PAGE> 19
UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited selected pro forma combined financial information
reflects the combination of the historical consolidated balance sheets and
related consolidated statements of operations of IXC with the historical
consolidated balance sheets and related consolidated statements of operations of
NLD, using the pooling of interests method of accounting for business
combinations, contained elsewhere in this Proxy Statement/Prospectus.
The unaudited pro forma combined balance sheet data as of December 31, 1997
reflect the assumption that the Merger occurred as of that date. The unaudited
pro forma combined statement of operations data reflect the assumption that the
Merger occurred at the beginning of each of the periods presented. Statement of
operations data for the years ended December 31, 1996 and 1995 include financial
information for NLD for its years ended March 31, 1997 and 1996, respectively.
For the year ended December 31, 1997, NLD information is for the twelve months
ended December 31, 1997. All IXC information is for its calendar years (and
fiscal years) ended December 31.
This pro forma financial information should be read in conjunction with the
Unaudited Pro Forma Combined Condensed Financial Statements and notes thereto
included elsewhere in this Proxy Statement/Prospectus. The unaudited pro forma
financial information is not necessarily indicative of the operating results or
financial position that would have occurred had the Merger been consummated on
the dates indicated in the preceding paragraph nor is it necessarily indicative
of future operating results of the combined companies.
The following table also sets forth unaudited Pro Forma As Adjusted
combined financial information to reflect the sale of $155.25 million of 1998
Convertible Preferred Stock for net proceeds of $147.25 million, the redemption
for cash of IXC's 10% Junior Series 3 Cumulative Redeemable Preferred Stock (the
"Series 3 Preferred Stock") (which occurred in March 1998), the proposed
issuance of the New Notes for estimated net proceeds of $410.0 million at an
interest rate of 9% and the subsequent purchase of all the Senior Notes
(assuming that all tendering holders of the Senior Notes are entitled to the
Consent Payment). The statement of operations data reflect the assumption that
such transactions occurred as of January 1, 1997. The balance sheet data reflect
the assumption that such transactions occurred as of December 31, 1997. This
information should be read in conjunction with the Unaudited Pro Forma Combined
Condensed Financial Statements and the notes thereto included elsewhere in this
Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA AS ADJUSTED
----------------------------------- ------------
DECEMBER 31, DECEMBER 31,
----------------------------------- ------------
1997 1996 1995 1997
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenues..................... $ 528,827 $ 307,126 $ 179,159 $ 528,827
Operating income (loss).................... (54,529) (21,797) (5,073) (54,529)
Income (loss) before extraordinary
loss(1)................................. (105,831) (46,343) (11,433) (108,341)
Basic and diluted loss per share before
extraordinary loss(1)(2)................ $ (3.65) $ (1.53) $ (0.48) $ (4.02)
Weighted average basic and diluted
shares.................................. 34,902 31,376 27,941 34,902
BALANCE SHEET DATA:
Cash and cash equivalents(3)............... $ 153,807 $ 367,505
Total assets............................... 967,005 1,186,926
Total debt and capital lease obligations... 321,437 468,299
Redeemable preferred stock................. 403,368 403,368
Stockholders' equity (deficit)(3)(4)....... (18,341) 54,717
OTHER FINANCIAL DATA:
EBITDA(5).................................. $ 17,281 $ 16,534 $ 16,762 $ 17,281
</TABLE>
(footnotes appear on next page)
10
<PAGE> 20
- ---------------
(1) The Pro Forma As Adjusted income (loss) before extraordinary loss and basic
and diluted loss per share before extraordinary loss reflect an assumed
interest rate of 9% on the New Notes. A 1/8% increase in the interest rate
would increase the Pro Forma As Adjusted income (loss) before extraordinary
loss and basic and diluted loss per share before extraordinary loss by
$531,250 and $.02, respectively.
(2) The pro forma combined basic and diluted loss per share before extraordinary
loss for the respective periods presented is based on the combined weighted
average number of common shares of IXC and NLD. The number of shares of NLD
Common Stock is based on an exchange ratio of .2998 of IXC Common Stock for
each issued and outstanding share of NLD Common Stock.
(3) The Pro Forma As Adjusted amounts give effect to the redemption of the
remaining 414 outstanding shares of the Series 3 Preferred Stock, which
occurred on March 31, 1998, as if it had occurred on December 31, 1997 at a
redemption price of $692,000 (equal to the aggregate liquidation preference
of such shares at December 31, 1997).
(4) The Pro Forma As Adjusted amounts for stockholders' equity (deficit) give
effect to the extraordinary loss of approximately $73.5 million resulting
from the early extinguishment of the Senior Notes assuming 100% of the
Senior Notes are purchased in the Tender Offer.
(5) EBITDA is operating income (loss) plus depreciation and amortization. IXC
has included information concerning EBITDA because it believes that EBITDA
is used by certain investors as one measure of an issuer's historical
ability to service its debt. EBITDA is not a measurement determined in
accordance with GAAP, should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP and
is not necessarily comparable with similarly titled measures for other
companies.
11
<PAGE> 21
COMPARATIVE PER SHARE DATA
The following table presents certain historical, pro forma combined and pro
forma equivalent per share financial data for IXC Common Stock and NLD Common
Stock. The pro forma data do not purport to be indicative of the results of
future operations or the results that would have occurred had the Merger been
consummated at the beginning of the periods presented. The information presented
herein should be read in conjunction with the Unaudited Pro Forma Combined
Condensed Financial Statements and the notes thereto, appearing elsewhere in
this Proxy Statement/Prospectus. Neither IXC nor NLD paid cash dividends on
their respective common stock for any of the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ ------ --------
<S> <C> <C> <C>
IXC COMMUNICATIONS, INC.
Basic and diluted loss per share from continuing operations:
Historical................................................ $(3.75) $(1.42) $ (0.21)
Pro forma combined for merger of IXC and NLD.............. (3.65) (1.53) (0.48)
Book value per common share at period end:
Historical................................................ (1.54)
Pro forma combined for merger of IXC and NLD.............. (0.54)
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS YEAR ENDED
ENDED MARCH 31,
DECEMBER 31, ----------------
1997 1997 1996
-------------- ------ ------
<S> <C> <C> <C>
NETWORK LONG DISTANCE, INC.
Basic and diluted income (loss) per share from continuing
operations:
Historical................................................ $ (0.74) $(0.74) $ 0.10
Pro forma equivalent...................................... (1.10) (0.46) (0.14)
Book value per common share at period end:
Historical................................................ 2.25
Pro forma equivalent...................................... (0.16)
</TABLE>
Pro forma combined per share information is based upon the weighted average
number of shares outstanding, for operating results, or the number of shares
outstanding at year end, for book value information, assuming the Merger had
taken place at the beginning of each pro forma year.
Pro forma equivalent per share information is based upon the weighted
average number of shares outstanding, for operating results, or the number of
shares outstanding at year end, for book value information, assuming the pro
forma combined IXC shares had been converted to NLD shares at the Exchange Ratio
required by the Merger.
MARKETS AND MARKET PRICES
The IXC Common Stock is listed on the NNM under the symbol "IIXC" and the
NLD Common Stock is listed on the NNM under the symbol "NTWK." The following
table sets forth the closing price per share of IXC Common Stock and the closing
price per share of NLD Common Stock, each as reported on the NNM, and the
"equivalent per share price" (as defined) of NLD Common Stock as of: (i)
December 18, 1997, the date preceding public announcement of the Merger; and
(ii) April 14, 1998, the last practicable date prior to the date of this Proxy
Statement/Prospectus. The "equivalent per share price" of NLD Common Stock as of
any date equals the closing price per share of IXC Common Stock on such date
multiplied by the Exchange Ratio.
<TABLE>
<CAPTION>
IXC COMMON NLD COMMON EQUIVALENT PER
MARKET PRICE PER SHARE AS OF STOCK STOCK SHARE PRICE
---------------------------- ---------- ---------- --------------
<S> <C> <C> <C>
December 18, 1997................................... $ 31 $ 8.25 $ 9.29
April 14, 1998...................................... $50.125 $14.50 $15.03
</TABLE>
12
<PAGE> 22
Because the Exchange Ratio is fixed, a change in the market price of IXC
Common Stock before the Effective Time will affect the market value of the IXC
Common Stock to be received in the Merger in exchange for the NLD Common Stock.
THERE CAN BE NO ASSURANCE AS TO THE MARKET PRICE OF THE IXC COMMON STOCK AT ANY
TIME BEFORE, AT OR AFTER THE EFFECTIVE TIME. NLD STOCKHOLDERS ARE URGED TO
OBTAIN CURRENT MARKET QUOTATIONS FOR IXC COMMON STOCK AND NLD COMMON STOCK.
Following the Merger, the NLD Common Stock will no longer be listed on the
NNM. The IXC Common Stock issued in connection with the Merger is expected to be
listed on the NNM.
13
<PAGE> 23
RISK FACTORS
In addition to the other information contained in this Proxy
Statement/Prospectus, before voting their shares of NLD Common Stock for the
Merger and the resulting exchange for shares of IXC Common Stock offered hereby,
NLD Stockholders should consider the following factors carefully in evaluating
the Merger and IXC and its business. Statements contained in this Proxy
Statement/Prospectus regarding IXC's expectations with respect to its network
expansion, related financings and fiber sale and cost-saving agreements, future
operations and other information, which can be identified by the use of
forward-looking terminology, such as "may," "will," "expect," "anticipate,"
"estimate," "believe," "seek" or "continue" or the negative thereof or other
variations thereon or comparable terminology, are forward-looking statements.
The discussions set forth below constitute cautionary statements identifying
important factors with respect to such forward-looking statements, including
risks and uncertainties, that could cause actual results to differ materially
from results referred to in the forward-looking statements. There can be no
assurance that IXC's expectations regarding any of these matters will be
fulfilled.
FIXED EXCHANGE RATIO DESPITE POSSIBLE CHANGE IN STOCK PRICES
The Exchange Ratio is expressed in the Merger Agreement as a fixed ratio.
Accordingly, the Exchange Ratio will not be adjusted in the event of the
increase or decrease in the price of either IXC Common Stock or NLD Common
Stock. The prices of either IXC Common Stock or NLD Common Stock at the
Effective Time may vary from their prices at the date of this Proxy
Statement/Prospectus and at the date of the Special Meeting, possibly by a
material amount. Such variations may be the result of changes in the business,
operations or prospects of IXC or NLD, market assessments of the likelihood that
the Merger will be consummated and the timing thereof, regulatory
considerations, general market and economic conditions, factors affecting the
telecommunications industry in general and other factors. Because the Effective
Time will occur at a date later than the Special Meeting, there can be no
assurance that the prices of IXC Common Stock or NLD Common Stock on the date of
the Special Meeting will be indicative of their prices at the Effective Time.
The closing price for IXC Common Stock on the NNM on December 18, 1997, the last
trading day prior to the public announcement of the Merger, was $31 per share
and on April 14, 1998, the last trading day before the date of this Proxy
Statement/Prospectus, was $50 1/8 per share. There can be no assurance that the
market price of IXC Common Stock on and after the Effective Time will not be
lower than such prices. Stockholders of IXC and NLD are urged to obtain current
market quotations for IXC Common Stock and NLD Common Stock. See
"SUMMARY -- Markets and Market Prices." The Effective Time is expected to occur
following the Special Meeting, subject to approval by the NLD Stockholders of
the Merger, within five business days following the satisfaction or waiver of
all the conditions precedent to the Merger as set forth in the Merger Agreement.
CONFLICTS OF INTEREST
In considering the recommendation to adopt and approve the Merger by the
NLD Board, the NLD Stockholders should be aware that certain officers and
directors of NLD may be deemed to have conflicts of interest with respect to the
Merger; such interests, together with other relevant factors, were considered by
the NLD Board in recommending the Merger to the NLD Stockholders and approving
the Merger Agreement. See "THE MERGER -- Interests of Certain Persons in the
Merger."
TAX RISKS ASSOCIATED WITH THE MERGER
The Merger Agreement provides that Acquisition Corp. will be merged with
and into NLD and NLD will be the surviving corporation and a wholly owned
subsidiary of IXC. Based upon an opinion from NLD's counsel, the parties expect
the Merger to constitute a tax-free reorganization. However, neither IXC nor NLD
has sought or obtained a ruling to this effect from the Internal Revenue Service
(the "IRS"). There is therefore a risk that all the gain or loss realized by an
NLD Stockholder as a result of the Merger will be subject to tax. However, even
if the Merger does not constitute a tax-free reorganization, neither IXC nor its
stockholders, as such, will realize taxable income or loss in the Merger. See
"THE MERGER -- Certain Federal Income Tax Consequences of the Merger."
14
<PAGE> 24
NEGATIVE CASH FLOW AND CAPITAL REQUIREMENTS
IXC's capital expenditures were $314.3 million and interest expense and
capitalized interest were $38.6 million for 1997. After giving effect to the
issuance of the 1998 Convertible Preferred Stock, the proposed issuance of the
New Notes and the purchase of the Senior Notes in the Tender Offer (assuming
100% of the Senior Notes are tendered in the Tender Offer and accepted for
payment and are entitled to receive the Consent Payment) (collectively the
"Transactions"), IXC's cash flow provided by operating activities would have
been $11.7 million (assuming the Transactions had occurred on December 31, 1996)
and its net loss would have been $170.6 million (including an extraordinary loss
of $73.5 million) for 1997 (assuming the Transactions had occurred on January 1,
1997). IXC's EBITDA was $15.5 million, its cash flow provided by operating
activities was $14.3 million and its net loss was $94.6 million for 1997. IXC
expects to make substantial capital expenditures of approximately $525 million
(subject to the availability of capital) during 1998 and substantial amounts
thereafter. Accordingly, IXC needs and will continue to need a substantial
amount of cash from outside sources. IXC anticipates meeting the cash
requirements relating to such capital expenditures from cash on hand, cash flow
from fiber sales and its operations, other vendor financing, if available, the
anticipated proceeds from the sale of the New Notes, if issued, and additional
equity and/or debt financings. IXC intends to incur a substantial amount of
additional indebtedness. The amount of actual capital expenditures may vary
materially as a result of cost-saving arrangements, increases or decreases in
the amount of traffic on the Network, unexpected costs, delays or advances in
the timing of certain capital expenditures and other factors. IXC's ability to
meet the cash costs of such capital expenditures is dependent in part upon IXC's
ability to complete the construction of the Network expansion in a timely manner
and otherwise perform its obligations to the satisfaction of each of LCI and MCI
so that it can complete the sale to LCI of an indefeasible right to use ("IRU")
fibers from Chicago to Los Angeles (the "Chicago-LA LCI Fiber Sale") and the
sale to MCI of an IRU in fibers from New York to Los Angeles (the "MCI Fiber
Sale"), to enter into cost-saving arrangements with carriers or other large
users of fiber capacity, to otherwise raise significant capital and/or to
significantly increase its cash flow. The failure of IXC to accomplish any of
the foregoing may significantly delay or prevent such capital expenditures,
which would have a material adverse effect on IXC and the value of IXC Common
Stock and its other securities.
IXC's long distance switched services business will require cash to meet
operating expenses. In order to offer long distance switched services, IXC
installed switches, connected them to its Network and to the LECs (as defined),
acquired software and hired the personnel needed to establish a national
switched network. IXC's long distance switched services business generated
negative EBITDA for 1996 and 1997 and IXC believes it may be negative during
1998, due to, among other things, access costs and uneven traffic patterns
creating high network overflow costs. Although IXC has not yet achieved positive
EBITDA in its long distance switched services business, IXC is seeking to
improve the results in this business by increasing the scale and scope of
traffic carried over its Network. Specifically, IXC's focus is on (i) obtaining
traffic that meets its profitability requirements and aligns with IXC's current
and planned Network, (ii) identifying new products and customers with large
capacity requirements, (iii) identifying Internet, intranet and data traffic
opportunities and (iv) identifying joint venture and acquisition candidates that
will increase the flow and mix of traffic in IXC's Network and increase its
global reach. For a discussion of important factors that could cause IXC's long
distance switched services business to fail to generate positive EBITDA, see
"-- Development Risks and Dependence on Long Distance Switched Services
Business."
IXC is required to make annual interest payments of $35.6 million with
respect to IXC's outstanding $285.0 million principal amount of IXC's Senior
Notes. If IXC issues the New Notes, IXC will be required to make interest
payments on such New Notes and on any remaining Senior Notes. IXC will also be
required to make interest payments and, beginning June 30, 1998, principal
payments in connection with borrowings under a secured equipment financing
facility of $28.0 million (all of which had been borrowed at March 31, 1998)
entered into with NTFC Capital Corporation and Export Development Corporation,
in July 1997 (the "NTFC Equipment Facility"). Dividends on IXC's 7 1/4% Junior
Convertible Preferred Stock Due 2007 (the "1997 Convertible Preferred Stock")
and IXC's 12 1/2% Series B Junior Exchangeable Preferred Stock Due 2009 (the
"Exchangeable Preferred Stock") are payable quarterly in cash (or, on or prior
to March 31, 1999 and February 15, 2001 in additional shares of 1997 Convertible
Preferred Stock and Exchangeable Preferred
15
<PAGE> 25
Stock, respectively). Dividends on the 1998 Convertible Preferred Stock are
payable quarterly in cash or, if the documents governing IXC's indebtedness as
of the date of issuance of the 1998 Convertible Preferred Stock prohibit such
payment in cash, in shares of IXC Common Stock. Delays in the Network expansion,
larger than anticipated capital expenditures for the Network or continued
negative cash flow from the long distance switched services business could
impair the ability of IXC to meet its obligations under the Senior Notes, the
New Notes, if issued, and other indebtedness, to pay cash dividends on the 1997
Convertible Preferred Stock, the 1998 Convertible Preferred Stock and
Exchangeable Preferred Stock and to access additional sources of funding, any of
which would have a material adverse effect on IXC and the value of the IXC
Common Stock and its other securities. See "-- Risks Relating to the Network
Expansion," and "-- Development Risks and Dependence on Long Distance Switched
Services Business."
IXC anticipates that in the event it is unable to obtain vendor financing
on acceptable terms, consummate the MCI Fiber Sale and the Chicago-LA LCI Fiber
Sale, or sell additional equity and/or debt securities in order to complete its
planned Network expansion, it may be required to curtail or delay its planned
Network expansion. Furthermore, before incurring additional indebtedness, IXC
may be required to obtain the consent of, or repay, its debtholders. IXC's
failure to obtain additional financing or, in the alternative, its decision to
curtail or delay its planned Network expansion could have a material adverse
effect on its business, results of operations and financial condition.
In October 1997, IXC 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 IXC, 40 percent by Telenor Global Services AS ("Telenor"), and 20 percent by
Clarion Resources Communications Corporation, a U.S.-based telecommunications
company in which Telenor owns a controlling interest. Although IXC cannot
accurately predict the capital that will be required to implement such joint
venture (the "European Joint Venture"), IXC estimates that its 1997 funding of
approximately $5.8 million will be sufficient for 1998. However, there can be no
assurance that the European Joint Venture will not require more capital from the
Company during 1998 and thereafter.
In December 1997, IXC formed Unidial Communications Services, LLC, a joint
venture with Unidial Incorporated ("Unidial"). The joint venture is building a
direct sales force to market and sell Unidial's and IXC's products over IXC's
Network. The joint venture is owned 80 percent by Unidial and 20 percent by IXC.
Subject to the terms of the joint venture agreement, upon request of the
President of the joint venture, IXC is obligated to contribute up to an
additional $7.5 million during 1998 and after November 1, 1998, it may be
obligated to contribute up to an additional $4.0 million. After its funding
obligation is fulfilled, IXC is not required to fund any future contributions to
the joint venture, but to the extent Unidial funds such contributions, IXC's
interest in the joint venture may be diluted.
The cash requirements described above do not include any cash which may be
required for acquisitions IXC may make. See "-- Integration of Acquired
Businesses; Business Combinations."
SUBSTANTIAL INDEBTEDNESS
IXC is highly leveraged. As of December 31, 1997, IXC had outstanding
approximately $320.3 million of long-term debt and capital lease obligations
(including the current portion thereof) principally consisting of its
outstanding $285.0 million principal amount of the Senior Notes. Adjusted for
the effect of the Transactions as if they had occurred on December 31, 1997, the
total indebtedness and other liabilities (including trade payables) of IXC and
its subsidiaries would have been approximately 632.7 million. Furthermore, IXC
may borrow an aggregate of $28.0 million (all of which had been borrowed at
March 31, 1998), under the NTFC Equipment Facility. If IXC issues the New Notes,
IXC will remain highly leveraged and IXC's interest expense may increase
substantially. Furthermore, IXC will become more highly leveraged if it
exchanges the Exchangeable Preferred Stock for IXC's 12 1/2% Subordinated
Exchange Debentures Due 2009 pursuant to the terms of the Certificate of
Designation in connection with the Exchangeable Preferred Stock.
IXC's significant debt burden could have several important consequences to
the holders of the IXC Common Stock, including, but not limited to: (i) all or a
significant portion of IXC's cash flow from operations must be used to service
its debt instead of being used in IXC's business (in 1997, IXC's EBITDA
16
<PAGE> 26
was $15.5 million, IXC's cash flow from operations was $14.3 million and
interest expense was $31.3 million); (ii) IXC's significant degree of leverage
could increase its vulnerability to changes in general economic conditions or
increases in prevailing interest rates; (iii) IXC's flexibility to obtain
additional financing in the future, as needed to continue the Network expansion
or for any other reason, may be impaired by the amount of debt outstanding and
the restrictions imposed by the covenants contained in the Senior Notes
Indenture and in agreements relating to other indebtedness; and (iv) IXC may be
more leveraged than certain of its competitors, which may be a competitive
disadvantage. There can be no assurance that IXC's cash flow from operations
will be sufficient to meet its obligations under the Senior Notes, the New
Notes, if issued, or other indebtedness or the 1998 Convertible Preferred Stock,
the 1997 Convertible Preferred Stock or the Exchangeable Preferred Stock as
payments become due or that the Company will be able to refinance the Senior
Notes or the New Notes, if issued, or other indebtedness at maturity or the 1997
Convertible Preferred Stock or the Exchangeable Preferred Stock upon mandatory
redemption.
IXC's earnings before fixed charges were insufficient to cover its fixed
charges by $10.6 million, $45.6 million and $99.6 million for fiscal 1995, 1996
and 1997. Assuming the Transactions had occurred on January 1, 1997, IXC's
earnings before fixed charges for fiscal 1997 would have been insufficient to
cover fixed charges by $102.1 million. IXC anticipates that earnings will be
insufficient to cover fixed charges and cash dividends on preferred stock for
the next several years. In order for IXC to meet its debt and dividend service
obligations, and its dividend and redemption obligations with respect to its
preferred stock, IXC will need to substantially improve its operating results.
There can be no assurance that IXC's operating results will be sufficient to
enable IXC to meet its debt service obligations, and its dividend and redemption
obligations with respect to its preferred stock. In the absence of a substantial
improvement in operating results, IXC would face substantial liquidity problems
and would be required to raise additional financing through the issuance of debt
or equity securities; however, there can be no assurance that IXC would be
successful in raising such financing.
RECENT AND EXPECTED LOSSES
IXC reported a net loss of $37.4 million for the year ended December 31,
1996 and a net loss of $94.6 million for the year ended December 31, 1997,
primarily due to substantial depreciation related to capital expenditures,
interest expense associated with the Senior Notes and operational expenses
associated with the long distance switched services business and such net losses
may continue. Adjusted for the effect of the Transactions as if they had
occurred on January 1, 1997, (including the extraordinary loss on early
extinguishment of debt in the amount of $73.5 million), IXC's net loss would
have been $170.6 million. During 1998 and thereafter, IXC's ability to generate
operating income, EBITDA and net income will depend to a great extent on demand
for the private line circuits constructed in the Network expansion and the
success of IXC's switched long distance and data services. There can be no
assurance that IXC will return to profitability in the future. Failure to
generate operating income, EBITDA and net income will impair IXC's ability to:
(i) meet its obligations under the Senior Notes, the New Notes, if issued, or
other indebtedness; (ii) pay cash dividends on the 1998 Convertible Preferred
Stock, the 1997 Convertible Preferred Stock or the Exchangeable Preferred Stock;
(iii) expand its long distance switched services business; and (iv) raise
additional equity or debt financing which will be necessary to continue the
Network expansion or which may be required for other reasons. Such events could
have a material adverse effect on IXC and the value of the IXC Common Stock and
its other securities.
RISKS RELATING TO THE NETWORK EXPANSION; MAINTENANCE OF NETWORK, RIGHTS-OF-WAY
AND PERMITS
The continuing Network expansion is an essential element of IXC's future
success. IXC has, from time to time, experienced delays with respect to the
construction of certain portions of the Network expansion and may experience
similar delays in the future. These delays have postponed IXC's ability to
transfer long distance traffic from leased facilities to owned facilities. IXC
has substantial existing commitments to purchase materials and labor for
construction of the Network expansion, and will need to obtain additional
materials and labor which may cost more than anticipated. The route from
Washington to Houston via Atlanta is being constructed by contractors or,
pursuant to cost-saving arrangements, by third parties that will
17
<PAGE> 27
include IXC's fiber in routes such carriers are constructing for their own use.
Difficulties or delays with respect to any of the foregoing may significantly
delay or prevent the completion of the Network expansion, which would have a
material adverse effect on IXC, its financial results and the value of the IXC
Common Stock and its other securities.
The expansion of IXC's Network and its construction or acquisition of new
networks will be dependent, among other things, on its ability to acquire
rights-of-way and required permits from railroads, utilities and governmental
authorities on satisfactory terms and conditions and on its ability to finance
such expansion, acquisition and construction. Once expansion of the Network is
completed and requisite rights and permits are obtained, there can be no
assurance that IXC will be able to maintain all of its existing rights and
permits. Loss of substantial rights and permits or the failure to enter into and
maintain required arrangements for IXC's Network could have a material adverse
effect on IXC's business, financial condition and results of operations and on
the value of the IXC Common Stock and its other securities.
DEPENDENCE UPON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY RISKS
IXC's success in marketing its services to business and government users
requires that IXC provide superior reliability, capacity and security via its
Network. IXC's Network and networks upon which it depends are subject to
physical damage, power loss, capacity limitations, software defects, breaches of
security (by computer virus, break-ins or otherwise) and other disruptions which
may cause interruptions in service or reduced capacity for customers, which
could have a material adverse effect on IXC's business, financial condition and
results of operations and on the value of the IXC Common Stock and its other
securities.
PRICING PRESSURES AND RISKS OF INDUSTRY OVER-CAPACITY
The long distance transmission industry has generally been characterized by
over-capacity and declining prices since shortly after the AT&T divestiture in
1984. IXC believes that, in the last several years, increasing demand has
ameliorated the over-capacity and that pricing pressure has been reduced.
However, IXC anticipates that prices for its services will continue to decline
over the next several years. IXC is aware that certain long distance carriers
(WorldCom, MCI, LCI, Qwest and others) are expanding their capacity and believes
that other long distance carriers, as well as potential new entrants to the
industry, are considering the construction of new fiber optic and other long
distance transmission networks. If the MCI/WorldCom merger or the Qwest/LCI
merger is approved, the result would be an even larger, and potentially
stronger, competitor (or competitors) with expanded capacity. Although IXC
believes that there are significant barriers to entry for some new entrants that
may consider building a new fiber optic network, such as substantial
construction costs and the difficulty and expense of securing appropriate
rights-of-way, establishing and maintaining a sufficient customer base,
recruiting and retaining appropriate personnel and maintaining a reliable
network, certain of these barriers may not apply to some new entrants (such as
Qwest, utility companies or railroads which already have significant
rights-of-way). In addition, Level III has announced that it will spend
approximately $3.0 billion to construct a 20,000 mile fiber optic communications
network entirely based on Internet technology. The Williams Companies has also
announced that it is accelerating the expansion of its national fiber optic
network with a $2.7 billion investment to create a 32,000 mile system by the end
of 2001. Since the cost of the actual fiber is a relatively small portion of the
cost of building new transmission lines, companies building such lines are
likely to install fiber that provides substantially more transmission capacity
than will be needed over the short or medium term. Further, recent technological
advances have shown the potential to greatly expand the capacity of existing and
new fiber optic cable. Although such technological advances may enable IXC to
increase its capacity, an increase in the capacity of IXC's competitors could
adversely affect IXC's business. If industry capacity expansion results in
capacity that exceeds overall demand in general or along any of IXC's routes,
severe additional pricing pressure could develop. As a result, certain industry
observers have predicted that, within a few years, there may be dramatic and
substantial price reductions and that long distance calls will not be materially
more expensive than local calls. In addition, several companies (including AT&T
and ICG Communications, Inc.) have announced plans to offer long distance voice
telephony over the Internet, at substantially reduced prices. Price reductions
could have a material adverse effect on IXC and the value of the IXC Common
Stock.
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<PAGE> 28
DEVELOPMENT RISKS AND DEPENDENCE ON LONG DISTANCE SWITCHED SERVICES BUSINESS
The success of IXC in the long distance switched services business is
dependent on IXC's ability to generate significant customer traffic, to manage
an efficient switched long distance network and related customer service and the
timely completion of the Network expansion. Prior to 1996 IXC had not previously
managed a switched long distance network and there can be no assurance that its
long distance switched services business can generate positive EBITDA or net
income. The failure of IXC to generate increased customer traffic, to complete
new routes in a timely manner, or to effectively manage the switched network and
related customer service or to generate positive EBITDA or net income from the
long distance switched services business would have a material adverse effect on
IXC. IXC's long distance switched services business will require cash to meet
its operating expenses. IXC's long distance switched services business generated
negative EBITDA for each of the four quarters of 1996 and 1997 and IXC believes
it may be negative during 1998, due to access costs and uneven traffic patterns
creating high network overflow costs. Although IXC is attempting to control such
costs and improve EBITDA from long distance switched services, there is no
assurance it will be successful. IXC expects that the Network expansion will
result in an improvement in the gross margins and EBITDA generated by its long
distance switched services business. IXC has experienced and expects to continue
to experience difficulties in commencing services for end users of carrier
customers. Although IXC believes that its performance with respect to these
matters has met or exceeded industry norms, such difficulties may adversely
affect IXC's relationships with its customers.
Important factors that could cause IXC's long distance switched services
business to fail to generate positive EBITDA include changes in the businesses
of IXC's reseller customers, an inability to attract new customers or to quickly
transfer new customers to its Network without problems, the loss of existing
customers, problems in the operation of the switched network, IXC's lack of
experience with long distance switched services, increases in operating expenses
or other factors affecting IXC's revenue or expenses, including delays in the
construction of the Network expansion and increased expenses related to access
charges and network overflow, not all of which can be controlled by IXC. If
traffic does not increase and costs are not adequately controlled there can be
no assurance that the long distance switched services business will ever
generate positive EBITDA. In addition, to the extent that LECs grant volume
discounts with respect to local access charges, IXC may have a cost disadvantage
versus the larger carriers. Furthermore, the credit risk for IXC's long distance
switched services business is substantially greater than the credit risk for
IXC's private line business, because switched long distance customers are
charged in arrears on the basis of MOUs (which are frequently subject to
dispute), and because many switched long distance customers (in particular,
resellers of debit card services) are not as well capitalized as most of IXC's
private line customers. IXC's provision for bad debt was $3.0 million in 1996
(when it had $104.0 million of long distance switched services revenue) and
$17.4 million in 1997 (when it had $258.3 million of long distance switched
services revenue).
RISKS INHERENT IN RAPID GROWTH
Part of IXC's strategy is to achieve rapid growth through expanding its
long distance switched services business and through expanding the Network. In
addition, IXC may from time to time make acquisitions of resellers, such as NLD
and Telecom One, which it believes provide a strategic fit with its business and
Network. See "-- Integration of Acquired Businesses; Business Combinations."
IXC's rapid growth has placed, and its planned future growth will continue to
place, a significant and increasing strain on IXC's financial, management,
technical, information and accounting resources. See "-- Dependence on Billing,
Customer Services and Information Systems." Continued rapid growth would
require: (i) the retention and training of new personnel; (ii) the satisfactory
performance by IXC's customer interface and billing systems; (iii) the
development and introduction of new products; and (iv) the control of IXC's
expenses related to the expansion into the long distance switched services
business and the Network expansion. The failure by IXC to satisfy these
requirements, or otherwise to manage its growth effectively, would have a
material adverse effect on IXC and the value of the IXC Common Stock and its
other securities.
19
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DEPENDENCE ON BILLING, CUSTOMER SERVICES AND INFORMATION SYSTEMS
Sophisticated information and processing systems are vital to IXC's growth
and its ability to monitor costs, bill customers, provision customer orders and
achieve operating efficiencies. Billing and information systems for IXC's
historical lines of business have been produced largely in-house with partial
reliance on third-party vendors. These systems have generally met IXC's needs
due in part to the low volume of customer billing. As IXC's long distance
operation continues to expand, the need for sophisticated billing and
information systems will increase significantly. For example, during the first
half of 1997, IXC had negative gross margins in its long distance switched
services business, due in part to certain customers which were using IXC's
services for termination in LATAs where IXC's prices were too low relative to
access costs in such LATAs. IXC's plans for the development and implementation
of its billing systems rely, for the most part, on the delivery of products and
services by third party vendors. Failure of these vendors to deliver proposed
products and services in a timely and effective manner and at acceptable costs,
failure of IXC to adequately identify all of its information and processing
needs, failure of IXC's related processing or information systems or the failure
of IXC to upgrade systems as necessary could have a material adverse effect on
the ability of IXC to reach its objectives, on its financial condition and on
its results of operations and on the value of the IXC Common Stock and its other
securities.
YEAR 2000 RISKS
Certain of IXC's older computer programs identify years with two digits
instead of four. This is likely to cause problems because the programs may
recognize the year 2000 as the year 1900. These problems (the "Year 2000
Problems") could result in a system failure or miscalculations disrupting
operations, including a temporary inability to process transactions, send
invoices or engage in similar normal business activities. IXC has completed an
assessment identifying which programs will have to be modified or replaced in
order to function properly with respect to dates in the year 2000 and
thereafter. IXC believes that the cost of modifying those systems that were not
already scheduled for replacement for business reasons prior to 2000 is
immaterial. Updating the current software to be Year 2000-compliant is scheduled
to be completed by mid-1999, prior to any anticipated impact on operating
systems. Although IXC does not expect Year 2000 Problems to have a material
adverse effect on its internal operations, it is possible that Year 2000
Problems could have a material adverse effect on (i) IXC's suppliers and their
ability to service IXC, to accurately invoice for services rendered and to
accurately process payments received; and (ii) IXC's customers and their ability
to continue to utilize IXC's services, to collect from their customers and to
pay IXC for services received. The cumulative effect of such problems, if they
occur, could have a material adverse effect on IXC and the value of the IXC
Common Stock and its other securities.
INTEGRATION OF ACQUIRED BUSINESSES; BUSINESS COMBINATIONS
As part of its growth strategy, IXC may, from time to time, acquire
businesses, assets or securities of companies which it believes provide a
strategic fit with its business and the Network. Although IXC currently has no
commitments or agreements with respect to any material acquisitions (other than
with respect to NLD), it has reviewed potential acquisition candidates and has
held preliminary discussions with a number of these candidates. The acquisition
of NLD and any other companies will be accompanied by the risks commonly
associated with acquisitions. These risks include potential exposure to unknown
liabilities of acquired companies, the difficulty and expense of integrating the
operations and personnel of the companies, the potential disruption to the
business of IXC, the potential diversion of management time and attention, the
impairment of relationships with and the possible loss of key employees and
customers of the acquired business, the incurrence of amortization expenses if
an acquisition is accounted for as a purchase and dilution to the stockholders
of IXC if the acquisition is made for stock. Any acquired businesses will need
to be integrated with IXC's existing operations. This will entail, among other
things, integration of switching, transmission, technical, sales, marketing,
billing, accounting, quality control, management, personnel, payroll, regulatory
compliance and other systems and operating hardware and software, some or all of
which may be incompatible with IXC's existing systems. IXC has limited expertise
in dealing with these problems. There can be no assurance that services,
technologies or businesses of acquired companies will be effectively
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assimilated into the business or product offerings of the Company or that they
will contribute to IXC's revenues or earnings to any material extent. In
particular, transferring substantial amounts of additional traffic to the
Network (as will be required in connection with the acquisition of NLD) can
cause service interruptions and integration problems. The risks associated with
the acquisition of NLD (as well as with other acquisitions) could have a
material adverse effect on IXC and the value of the IXC Common Stock and its
other securities.
RELIANCE ON MAJOR CUSTOMERS
IXC's ten largest customers in 1997 accounted for approximately 61% of its
revenues, with Excel, AT&T, WorldCom and Frontier, its four largest customers,
accounting for approximately 29%, 6%, 4% and 4% of IXC's revenue in 1997,
respectively. Excel, WorldCom and Frontier, IXC's three largest customers in
1996, accounted for 35%, 8% and 10% of IXC's revenues in 1996, respectively.
Most of IXC's arrangements with large customers do not provide IXC with
guarantees that customer usage will be maintained at current levels. In
addition, construction by certain of IXC's customers of their own facilities,
construction of additional facilities by competitors or further consolidations
in the telecommunications industry involving IXC's customers would lead such
customers to reduce or cease their use of IXC's services which could have a
material adverse effect on IXC and the value of the IXC Common Stock and its
other securities.
IXC's strategy for establishing and growing its long distance switched
services business is based in large part on its relationship with Excel. The
failure by IXC to fulfill its obligations to provide a reliable switched network
for use by Excel or the failure by Excel: (i) to fulfill its obligations to
utilize IXC's switched long distance services (even though such failure could
give rise in certain circumstances to claims by IXC); (ii) to utilize the volume
of MOUs that IXC expects it to utilize; or (iii) to maintain and expand its
business, could result in a material adverse effect on IXC.
DEPENDENCE UPON SOLE AND LIMITED SOURCES OF SUPPLY
IXC relies on other companies to supply certain key components of its
network infrastructure, including telecommunications services, network capacity
and switching and networking equipment, which, in the quantities and quality
demanded by IXC, are available only from sole or limited sources. IXC is also
dependent upon LECs to provide telecommunications services and facilities to IXC
and its customers. IXC has from time to time experienced delays in receiving
telecommunications services and facilities, and there can be no assurance that
IXC will be able to obtain such services or facilities on the scale and within
the time frames required by IXC at an affordable cost, or at all. Any such
difficulty in obtaining such services or additional capacity on a timely basis
at an affordable cost, or at all, would have a material adverse effect on IXC's
business, financial condition and results of operations. IXC also is dependent
on its suppliers' ability to provide products and components that comply with
various Internet and telecommunications standards, interoperate with products
and components from other vendors and fulfill their intended function as a part
of the Network infrastructure. Any failure of IXC's suppliers to provide such
products could have a material adverse effect on IXC's business, financial
condition and results of operations.
COMPETITION
The telecommunications industry is highly competitive. Many of IXC's
competitors and potential competitors have substantially greater financial,
personnel, technical, marketing and other resources than those of IXC and a far
more extensive transmission network than IXC. Such competitors may build
additional fiber capacity in the geographic areas to be served by the Network or
to be served by the Network expansion. Qwest is building a new nationwide long
distance fiber optic network and Frontier has agreed to pay $500.0 million to
obtain fibers in Qwest's network. If the MCI/WorldCom merger or the Qwest/LCI
merger is approved, the result would be an even larger, and potentially
stronger, competitor (or competitors). In addition, Level III has announced that
it will spend approximately $3.0 billion to construct a 20,000 mile fiber optic
communications network entirely based on Internet technology. The Williams
Companies, a competitor
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of IXC, has also announced that it is accelerating the expansion of its national
fiber optic network with a $2.7 billion investment to create a 32,000 mile
system by the end of 2001. Furthermore, many telecommunications companies are
acquiring switches and IXC's reseller customers will have an increasing number
of alternative providers of switched long distance services. IXC competes
primarily on the basis of pricing, availability, transmission quality, customer
service (including the capability of making rapid additions to add end users and
access to end-user traffic records) and variety of services. The ability of IXC
to compete effectively will depend on its ability to maintain high-quality
services at prices generally equal to or below those charged by its competitors.
An alternative method of transmitting telecommunications traffic is through
satellite transmission. Satellite transmission is superior to fiber optic
transmission for distribution communications, for example, video broadcasting.
Although satellite transmission is not preferred to fiber optic transmission for
voice traffic in most parts of the United States because it exhibits a slight
(approximately one-quarter-second) time delay, such delay is not important for
many data-oriented uses. In the event the market for data transmission grows,
IXC will compete with satellite carriers in such market. Also, at least one
satellite company, Orion Network Systems, Inc., has announced its intention to
provide Internet access services to businesses through satellite technology.
IXC competes with large and small facilities-based interexchange carriers
as well as with other coast-to-coast and regional fiber optic network providers.
There are currently four principal facilities-based long distance fiber optic
networks (AT&T, MCI, Sprint and WorldCom) and Qwest is building another. IXC
anticipates that each of Qwest and Frontier will have a fiber network similar in
geographic scope and potential operating capability to that of IXC. IXC also
sells long distance switched services to both facilities-based carriers and
nonfacilities-based carriers (switchless resellers), competing with
facilities-based carriers such as AT&T, MCI, Sprint, WorldCom and certain
regional carriers. IXC competes in its markets on the basis of price,
transmission quality, network reliability and customer service and support. The
ability of IXC to compete effectively in its markets will depend upon its
ability to maintain high quality services at prices equal to or below those
charged by its competitors many of whom have extensive experience in the long
distance market. In addition, the Telecommunications Act of 1996 (the "Telecom
Act of 1996") will allow the RBOCs and others to enter the long distance market.
When RBOCs enter the long distance market, they may acquire, or take substantial
business from, IXC's reseller customers. There can be no assurance that IXC will
be able to compete successfully with existing competitors or new entrants in its
markets. Failure by IXC to do so would have a material adverse effect on IXC's
business, financial condition and results of operations. See "-- Risks Related
to Technological Change" and "-- Recent Legislation and Regulatory Uncertainty."
On February 15, 1997, the United States Trade Representative designate
announced that an agreement had been reached with World Trade Organization
("WTO") countries to open world telecommunications markets to competition. The
agreement, known as the WTO Basic Telecommunications Services Agreement (the
"WTO Agreement"), became effective on February 5, 1998. The WTO Agreement will
provide U.S. companies with foreign market access for local, long distance, and
international services, either on a facilities basis or through resale of
existing network capacity. The WTO Agreement also provides that U.S. companies
can acquire, establish or hold a significant stake in telecommunications
companies around the world. Conversely, foreign companies will be permitted to
enter domestic U.S. telecommunications markets and acquire ownership interest in
U.S. companies. On June 4, 1997, the FCC initiated a rulemaking proceeding to
bring FCC policies and procedures into conformance with the WTO Agreement, and
on November 26, 1997 released an order on foreign entry, although a petition for
reconsideration of the order is pending. While the outcome of the petition for
reconsideration cannot be predicted, foreign telecommunications companies could
also be significant new competitors to IXC or IXC's customers.
DEPENDENCE ON KEY PERSONNEL
IXC's businesses are managed by a small number of key executive officers,
the loss of whom could have a material adverse effect on IXC. IXC believes that
its growth and future success will depend in large part on its continued ability
to attract and retain highly skilled and qualified personnel. As a result of the
recent growth in the telecommunications industry, competition for qualified
operations and management personnel has
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intensified. The loss of one or more members of senior management or the failure
to recruit additional qualified personnel in the future could significantly
impede attainment of IXC's financial, expansion, marketing and other objectives.
DEVELOPMENT RISKS OF THE FRAME RELAY AND ATM TRANSMISSION BUSINESS
IXC began offering Frame Relay, ATM and other data transmission services
during the first quarter of 1997. Although IXC has not yet generated material
revenues from this business, IXC believes that data transmission services
present a promising opportunity for IXC. To succeed in providing these services,
IXC must compete with AT&T, MCI, Sprint, WorldCom and other large competitors.
In addition, IXC expects that it will be necessary to continue to make upgrades
to its Network (in advance of related revenues) to be competitive in providing
these services. The provision of data transmission services involves technical
issues with which IXC has very limited experience. In addition, the provision of
these services must be successfully integrated with IXC's existing businesses.
To the extent IXC does not successfully compete in providing these services, it
will not realize a return on its investment in data switches and other equipment
and it will not benefit from the growth, if any, in demand for these services. A
failure to successfully compete in data transmission services could have a
material adverse effect on IXC and the value of the IXC Common Stock and its
other securities.
RECENT LEGISLATION AND REGULATORY UNCERTAINTY
Certain of IXC's operations are subject to regulation by the FCC under the
Communications Act of 1934, as amended. In addition, certain of IXC's businesses
are subject to regulation by state public utility or public service commissions.
Changes in the regulation of, or the enactment or changes in interpretation of
legislation affecting, IXC's operations could have a material adverse affect on
IXC and the IXC Common Stock. In 1996 the federal government enacted the Telecom
Act of 1996, which, among other things, allows the RBOCs and others to enter the
long distance business. Entry of the RBOCs or other entities such as electric
utilities and cable television companies into the long distance business may
have a negative impact on IXC or its customers. IXC anticipates that certain of
such entrants will be strong competitors because, among other reasons, they may
enjoy one or more of the following advantages: they may (i) be well capitalized;
(ii) already have substantial end-user customer bases; and/or (iii) enjoy cost
advantages relating to local loops and access charges. The introduction of
additional strong competitors into the switched long distance business would
mean that IXC and its customers would face substantially increased competition.
This could have a material adverse effect on IXC and the value of the IXC Common
Stock. On July 18, 1997, in Iowa Utilities Board v. FCC, the United States Court
of Appeals for the Eighth Circuit invalidated key portions of the FCC's August
29, 1996 interconnection order, which the FCC had adopted to facilitate the
emergence of local exchange competition. The Supreme Court recently agreed to
hear an appeal of the Eighth Circuit's ruling. The further emergence and
development of local exchange competition may likely be delayed as a result.
Consequently, IXC and its customers may not benefit as quickly from the lower
access costs that might otherwise have resulted had competition in the provision
of local access services not been thus delayed. Further, the FCC has issued
orders relating to universal service funding by interstate telecommunications
carriers, and to the access charges IXC and its customers are required to pay to
LECs. These orders have been appealed. The outcomes of the appeals, and the
outcomes of future FCC proceedings on these issues, are impossible to predict.
In addition, the Telecom Act of 1996 provides that state proceedings may in
certain instances determine access charges IXC and its customers are required to
pay to the LECs. There can be no assurance that such proceedings will not result
in increases in such rates. Such increases could have a material adverse effect
on IXC or its customers.
Some members of Congress have expressed dissatisfaction with the FCC's
implementation of the Telecom Act of 1996, and in particular with respect to the
development of local exchange competition, RBOC re-entry into in-region long
distance markets and universal service funding. It is possible that new
legislation will be introduced, seeking to amend the Telecom Act of 1996.
However, it is impossible to predict the scope or likelihood of success of any
such possible further legislation, or the potential impact on IXC of any such
possible further legislation.
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RISKS RELATING TO MEXICAN JOINT VENTURE
IXC is indirectly participating in the development of a long distance
network to engage in the telecommunications business in Mexico by Marca-Tel S.A.
de C.V. ("Marca-Tel"). IXC indirectly owns 24.5% of Marca-Tel through its
ownership of 50% of Progress International LLC ("Progress International"), which
owns 49% of Marca-Tel. The remaining 51% of Marca-Tel is owned by a Mexican
individual and Fomento Radio Beep, S.A. de C.V. The other 50% of Progress
International is owned by Westel International, Inc. In February, 1998,
Marca-Tel announced that it was putting further investment in new fiber routes
on hold, awaiting more suitable market and regulatory conditions. Because of the
continuing adverse market and regulatory environment in Mexico, Marca-Tel has
determined to limit further investment and to reduce its scope of operations. At
the present time, IXC does not anticipate significant additional funding to
Progress International for investment in Marca-Tel until the market and
regulatory conditions in Mexico improve. Failure to provide further significant
funding to Progress International is likely to result in a default under
Marca-Tel's financial arrangements and could result in the foreclosure of a
security interest held by a third party. IXC's carrying value for IXC's
investment in Progress International at December 31, 1997 was $11.6 million.
IXC's interest in Progress International, and thus its indirect interest in
Marca-Tel, therefore could be diluted or lost entirely, which could have a
material adverse effect on IXC and the value of the IXC Common Stock and its
other securities.
POTENTIAL LIABILITY OF INTERNET ACCESS PROVIDERS
The law governing the liability of on-line services providers and Internet
access providers for participating in the hosting or transmission of
objectionable materials or information currently is unsettled. Under the terms
of the Telecom Act of 1996, both civil and criminal penalties can be imposed for
the use of interactive computer services for the transmission of certain
indecent or obscene communications. However, this provision was recently found
to be unconstitutional by the United States Supreme Court in American Civil
Liberties Union v. Janet Reno. Nonetheless, many states have adopted or are
considering adopting similar requirements, and the constitutionality of such
state requirements remains unsettled at this time. In addition, several private
lawsuits have been filed seeking to hold Internet access providers accountable
for information which they transmit. In one such case, the court ruled that an
Internet access provider is not directly liable for copies that are made and
stored on its computer but may be held liable as a contributing infringer where,
with knowledge of the infringing activity, the Internet access provider induces,
causes or materially contributes to another person's infringing conduct. While
the outcome of these activities is uncertain, the ultimate imposition of
potential liability on Internet access providers for information which they
host, distribute or transport could materially change the way they must conduct
business. To avoid undue exposure to such liability, Internet access providers
could be compelled to engage in burdensome investigation of subscriber materials
or even discontinue offering the service altogether.
RISKS RELATING TO SWITCHED SERVICES RESELLERS
Revenues derived from switched services resellers account for substantially
all of IXC's switched long distance revenue. A substantial portion of such
revenues are produced by a limited number of resellers. Sales to switched
services resellers generate low margins for IXC. In addition, these customers
frequently choose to move their business based solely on small price changes and
generally are perceived in the telecommunications industry as presenting a high
risk of payment delinquency or non-payments. IXC's provision for service credit
and bad debt was $3.0 million or 1.5% of total revenues in 1996 (when it had
$104.0 million of long distance switched services revenue) and $17.4 million or
4.1% of total revenues in 1997 (when it had $258.3 million of long distance
switched services revenue). IXC expects service credit and bad debt expense to
continue to increase, but seeks to control it so that it will not increase as a
percentage of revenues. IXC is continuing to implement procedures to control its
exposure to service credit and bad debt expense. Any material increase in
service credit and bad debt expense as a percentage of revenues could have a
material adverse effect on IXC's results of operations and financial position
and on the value of the IXC Common Stock and its other securities.
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RISKS RELATED TO TECHNOLOGICAL CHANGE
The market for IXC's telecommunications services is characterized by
rapidly changing technology, evolving industry standards, emerging competition
and frequent new product and service introductions. There can be no assurance
that IXC will successfully identify new service opportunities and develop and
bring new services to market. IXC is also at risk from fundamental changes in
the way telecommunications services are marketed and delivered. IXC's data
communications service strategy assumes that technology such as Frame Relay and
ATM protocols, utilizing fiber optic or copper-based telecommunications
infrastructures, will continue to be the primary protocols and transport
infrastructure for data communications services. Future technological changes,
including changes related to the emerging wireline and wireless transmission and
switching technologies, could have a material adverse effect on IXC's business,
results of operations, and financial condition. IXC's pursuit of necessary
technological advances may require substantial time and expense, and there can
be no assurance that IXC will succeed in adapting its telecommunications
services business to alternate access devices, conduits and protocols.
In addition, recent technological advances that show the potential to
greatly expand the capacity of existing and new fiber optic cable, which could
greatly increase supply, could have a material adverse effect on IXC.
CONCENTRATION OF STOCK OWNERSHIP
As of March 1, 1998, Trustees of General Electric Pension Trust ("GEPT")
beneficially owned approximately 30.2% of the outstanding IXC Common Stock,
Grumman Hill Investments, L.P., Richard D. Irwin and his affiliates together
beneficially owned approximately 10.4% of the outstanding IXC Common Stock, and
two of the members of senior management and their affiliates beneficially owned
approximately 12.8% of the outstanding IXC Common Stock. GEPT owns 30% of the
1997 Convertible Preferred Stock. As a result, certain of these stockholders, if
they act together, generally would be able to elect a majority of directors
elected by the holders of the IXC Common Stock and exercise control over the
business, policies and affairs of IXC, and would have the power to approve or
disapprove most actions requiring stockholder approval, including amendments to
IXC's charter and by-laws, certain mergers or similar transactions and sales of
all or substantially all of IXC's assets (subject to approval of the holders of
preferred stock to the extent required by applicable law). This concentration of
stock ownership could have the effect of delaying or preventing a change of
control of IXC or the removal of existing management and may discourage attempts
to do so.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the IXC Common Stock has fluctuated over a broad range
since the completion of the IXC's initial public offering in July 1996. The
trading price of the IXC Common Stock is subject to wide fluctuations in
response to numerous factors, including, but not limited to, quarterly
variations in operating results of IXC or any of its principal customers,
competition, announcements of technological innovations or new products or
pricing by IXC or its competitors, product enhancements by IXC or its
competitors, regulatory changes, any difference between actual results and
results expected by investors and analysts, changes in financial estimates by
securities analysts and other events or factors. In addition, the stock market
has experienced volatility that has affected the market prices of equity
securities of many companies and that often has been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of the IXC Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of IXC Common Stock or the perception that such sales may
occur could negatively impact the market price of the IXC Common Stock. Shares
of IXC Common Stock that have not been previously traded in the public market
but may at some time be sold in the public market include (i) shares held by
affiliates; (ii) shares issued or to be issued in acquisitions, including the
proposed NLD Merger; (iii) shares issuable upon conversion of the 1998
Convertible Preferred Stock, the 1997 Convertible Preferred Stock and
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any IXC convertible preferred stock to be issued in the future; and (iv) shares
to be issued pursuant to stock options. The aggregate number of such shares is
much greater than the number of shares of IXC Common Stock which have been
previously traded in the public market.
DILUTION
As of December 31, 1997, there were outstanding 2,852,246 shares of IXC
Common Stock reserved for issuance pursuant to options exercisable by persons
granted options under IXC's stock plans, at a weighted average exercise price of
$15.90 per share, subject to various vesting schedules. In addition, the 1997
Convertible Preferred Stock is convertible into approximately 4.5 million shares
of IXC Common Stock at a purchase price of $23.46 per share and the 1998
Convertible Preferred Stock is convertible into approximately 2.1 million shares
at a conversion rate of 13.748 shares of IXC Common Stock per share of 1998
Convertible Preferred Stock. Any exercise of such options or conversion of
Convertible Preferred Stock may take place at a time when IXC would be able to
obtain funds from the sale of IXC Common Stock at prices higher than the
exercise price thereof or the conversion price, respectively. As a result, NLD
Stockholders may incur substantial dilution of their holdings of IXC Common
Stock.
In addition, upon consummation of the Merger, the outstanding NLD Options
and NLD Warrants will be converted into Substitute Options and Substitute
Warrants to purchase up to 297,754 shares of IXC Common Stock at exercise prices
ranging from $25.02 to $34.82 per share. The exercise of all or a portion of
such Substitute Options may result in a significant increase in the number of
shares of IXC Common Stock that will be subject to trading on the NNM, and the
issuance and sale of the shares of IXC Common Stock upon the exercise thereof
may have an adverse effect on the price of the IXC Common Stock. See
"-- Possible Volatility of Stock Price."
FORWARD-LOOKING STATEMENTS
The statements contained in this Proxy Statement/Prospectus that are not
historical facts are "forward-looking statements" (as such term is defined in
the Private Securities Litigation Reform Act of 1995), which can be identified
by the use of forward-looking terminology such as "estimates," "projects,"
"anticipates," "expects," "intends," "believes," or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. IXC wishes to caution the reader
that these forward-looking statements, such as IXC's plans to expand its
existing networks or to build and acquire networks in new areas, and statements
regarding development of IXC's businesses, the estimate of market sizes and
addressable markets for IXC's services and products, IXC's anticipated capital
expenditures, regulatory reform and other statements contained in this Proxy
Statement/Prospectus regarding matters that are not historical facts, are only
estimates or predictions. No assurance can be given that future results will be
achieved; actual events or results may differ materially as a result of risks
facing IXC or actual results differing from the assumptions underlying such
statements. Such risks and assumptions include, but are not limited to, IXC's
ability to successfully market its services to current and new customers,
generate customer demand for its services in the particular markets where it
plans to market services, access markets, identify, finance and complete
suitable acquisitions, design and construct fiber optic networks, install cable
and facilities, including switching electronics, and obtain rights-of-way,
building access rights and any required governmental authorizations, franchises
and permits, all in a timely manner, at reasonable costs and on satisfactory
terms and conditions, as well as regulatory, legislative and judicial
developments that could cause actual results to vary materially from the future
results indicated, expressed or implied, in such forward-looking statements.
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THE COMPANIES
IXC
IXC is a leading provider of telecommunications transmission, switched long
distance and associated services to long distance and other communications
companies. IXC owns a digital telecommunications network (the "Network") which
includes over 11,500 digital route miles. Substantial additions to the Network
are currently under construction. Subject to the availability of capital and the
completion of cost-sharing arrangements currently being negotiated, the Network
is planned to include over 18,000 digital route miles by the end of 1998, and
over 20,000 digital route miles by the end of 1999. IXC provides two principal
products: transmission of voice and data over dedicated circuits ("private
lines") and transmission of long distance traffic processed through IXC's
switches ("long distance switched services"). During the first quarter of 1997,
IXC began providing Frame Relay and ATM-based switched data services in order to
capitalize on the growing demand for Internet and electronic data transfer
services. IXC was incorporated in the State of Delaware on July 27, 1992. IXC's
principal executive offices are located at 1122 Capital of Texas Highway South,
Austin, Texas 78746 and its telephone number is (512) 427-3700.
Since beginning the Network expansion and entering into the long distance
switched services business in late 1995, IXC's revenues have grown rapidly. IXC
generated revenues of $91.0 million in 1995, $203.8 million in 1996 and $420.7
million in 1997. IXC's customers include AT&T, MCI, Sprint, WorldCom, Cable &
Wireless, Excel, Frontier, LCI and over 200 other long distance companies,
wireless companies, cable television providers, Internet service providers and
governmental agencies.
The growing demand for IXC's services and the nearly complete usage of its
then-existing Network capacity have required IXC to supplement its Network with
capacity leased from other carriers. As a result, in 1995 IXC began expanding
its Network to increase its geographic scope and capacity and reduce its off-net
lease expense. IXC is expanding its network with modern, technologically
advanced, non-zero dispersion shifted fiber and OC-192 electronics (initially
configured on certain routes at OC-48 capacity). The new fiber and electronics
are less expensive to install and operate and have greater capacity and
technical capabilities than the fiber and electronics of older networks. Upon
completion of the routes currently being constructed, engineered, or planned
through 1998, over 11,000 route miles of the 18,000 digital route miles of the
Network will consist of advanced fiber and electronics. Through a combination of
its owned and leased facilities, IXC originates and terminates long distance
traffic in all 50 U.S. states, as well as terminates long distance traffic in
over 200 foreign countries.
On March 30, 1998, IXC issued and sold $135.0 million of its 1998
Convertible Preferred Stock issued in the form of depositary shares (2,700,000
depositary shares at $50 per share) to qualified institutional buyers under Rule
144A of the Securities Act. On April 14, 1998, IXC issued and sold an additional
$20.25 million of its 1998 Convertible Preferred Stock (405,000 depositary
shares at $50 per share) in connection with an overallotment option granted to
the initial purchasers of the 1998 Convertible Preferred Stock. The 1998
Convertible Preferred Stock is convertible at any time into IXC Common Stock at
the option of the holder. IXC expects to use the net proceeds of the Convertible
Preferred Offering 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.
IXC is currently offering to purchase for cash all of its outstanding
Senior Notes, $285.0 million in aggregate principal amount of which are
outstanding, at the Offer Price of $1,198.81 per $1,000 of note principal
(including $20 per $1,000 of note principal as the Consent Payment). The Tender
Offer expires at 11:59 p.m. New York City time on April 16, 1998, unless
extended. In connection with the Tender Offer, IXC has solicited and received
the requisite consents from the holders of the Senior Notes to, among other
things, eliminate substantially all of the covenants and guarantees under the
Senior Notes Indenture and permit the incurrence of additional indebtedness. The
consideration to be paid in respect of validly delivered, and not revoked,
consents will be 2.0% of the principal amount of the Senior Notes for which
consents were validly delivered and not revoked. The consummation of the Tender
Offer is conditioned upon, among other things, IXC obtaining financing therefor.
IXC anticipates issuing the New Notes with a portion of the net proceeds
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thereof to pay the Offer Price and the Consent Payment (estimated to be an
aggregate of approximately $341.7 million, assuming all $285.0 million in
aggregate principal amount of the Senior Notes is tendered and accepted for
payment). As of April 3, 1998, over 99% of the aggregate principal amount of the
Senior Notes has been tendered (and could not be withdrawn) pursuant to the
Tender Offer.
NLD
NLD's five operating divisions provide long distance and other
telecommunications services to end-users, independent agents, and other long
distance companies, with a primary concentration on small to medium-sized
businesses. Over the last four years, NLD has grown significantly through
mergers, acquisitions, and its own sales programs to become a nationwide
provider of long distance and other telecommunications services. NLD now offers
a wide range of products and services, including "1+" domestic long distance
service, inbound (800) service, dedicated access and private line service,
travel cards, conference calling, shipping, paging, prepaid calling cards,
wireless services, and national Internet access services. NLD was incorporated
in the State of Delaware on December 3, 1987. NLD's principal executive offices
are located at 11817 Canon Boulevard, Suite 600, Newport News, Virginia 23606
and its telephone number is (757) 873-1040.
NLD transmits long distance telephone calls over various types of
transmission circuits leased from other telecommunications carriers at fixed or
variable rates. Calls may be routed through one of NLD's three switching
centers, which select the least expensive manner to complete the calls among the
various available transmission alternatives, or calls may be completed by
various underlying carriers. NLD provides billing, customer service, and other
features and services related to the calls.
NLD's operating divisions formerly comprised five independent operating
entities, namely NLD and four corporate subsidiaries acquired since May 1996.
Pursuant to a plan of consolidation implemented in December 1997, these
subsidiaries were merged into NLD and now operate as divisions. Two of the
divisions (formerly Eastern Telecom International Corporation ("ETI") and
National Teleservices, Inc. ("NTI")) were acquired through merger transactions
completed in May 1997, subsequent to the end of NLD's last fiscal year. NLD
believes that these transactions, which were effected pursuant to NLD's stated
strategy of growth through mergers and acquisitions, have improved NLD's
competitive position in the telecommunications industry.
ETI (now Eclipse Communications -- Mid-Atlantic Division) is a switch-based
interexchange carrier located in Newport News, Virginia, operating primarily
along the east coast of the United States. It has expanded rapidly through the
deployment of an aggressive direct sales program. It operates a Northern Telecom
DMS 250 digital switch located in Washington, D.C., and offers "1+" direct
dialing, "0" plus operator assisted calls, 800/888 toll-free services, dedicated
lines, calling cards, international service, prepaid calling cards, paging,
Internet access, and conference calling.
NTI (now Eclipse Communications -- Midwest Division) is a switch-based
interexchange carrier located in Winona, Minnesota, operating primarily in the
mid-west United States. Like ETI, it has expanded rapidly through direct sales.
NTI operates a DEC 600 digital switch located in Winona and offers a full range
of telecommunications products and services.
ACQUISITION CORP.
Acquisition Corp. was incorporated in the State of Delaware on December 17,
1997 solely for the purpose of consummating the Merger. Acquisition Corp. has
limited assets and has no business and has not carried on any activities other
than those which are directly related to its formation and its execution of the
Merger Agreement.
THE SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to the NLD Stockholders
in connection with the solicitation of proxies by the NLD Board from the NLD
Stockholders for use at the Special Meeting.
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PURPOSE OF SPECIAL MEETING
The purpose of the Special Meeting is to consider and vote upon (a) a
proposal to approve the Merger Agreement (the "Merger Proposal") and (b) such
other matters, if any, as may properly come before the Special Meeting or any
adjournment or postponement thereof. The NLD Board is not aware of, as of the
date of mailing of this Proxy Statement/Prospectus, any business to be brought
before the Special Meeting other than the Merger Proposal. However, the enclosed
proxy card authorizes the voting of shares represented by the proxy on all such
other matters that may properly come before the Special Meeting, and any
adjournment or postponement thereof, and it is the intention of the proxy
holders to take such action in connection therewith as shall be in accordance
with their best judgment.
At the Effective Time, Acquisition Corp. will merge with and into NLD, with
NLD surviving as a wholly owned subsidiary of IXC, and each share of NLD Common
Stock outstanding immediately prior to the Merger will be converted into the
right to receive 0.2998 shares of IXC Common Stock. Because both NLD and IXC are
public companies, no dissenters' rights of appraisal apply to the Merger or any
of the other transactions contemplated by the Merger Agreement, and therefore
dissenting NLD Stockholders have no right to receive cash in lieu of IXC Common
Stock pursuant to the terms of the Merger Agreement.
THE NLD BOARD HAS APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY, HAS AUTHORIZED THE EXECUTION AND DELIVERY OF THE MERGER
AGREEMENT, AND RECOMMENDS THAT NLD STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER
AGREEMENT.
PLACE, DATE, AND TIME OF THE SPECIAL MEETING; RECORD DATE
The Special Meeting is scheduled to be held on May 19, 1998 at 2:00 p.m.
Eastern Time at NLD's corporate offices, 11817 Canon Boulevard, Suite 600,
Newport News, Virginia. Only holders of record of shares of NLD Common Stock at
the close of business on April 15, 1998, the Record Date, will be entitled to
notice of and to vote at the Special Meeting. A list of NLD Stockholders of
record entitled to vote at the Special Meeting will be available for inspection
by NLD Stockholders at NLD's principal business office at 11817 Canon Boulevard,
Suite 600, Newport News, Virginia 23606, at least 10 days prior to the Special
Meeting. The list will also be available on the date of the Special Meeting at
the meeting site.
VOTING AT THE SPECIAL MEETING
Only NLD Stockholders who hold shares of NLD Common Stock of record as of
the Record Date will be entitled to notice of and to vote at the Special
Meeting. Each share of NLD Common Stock outstanding as of the Record Date is
entitled to one vote on the Merger Proposal and on any other matter presented at
the Special Meeting, exercisable at the Special Meeting in person or by properly
executed proxy. As of the Record Date, there were 13,395,878 shares of NLD
Common Stock entitled to vote at the Special Meeting.
The presence, in person or by properly executed proxy, of a majority of the
shares of NLD Common Stock entitled to vote is necessary to constitute a quorum
of the NLD Common Stock at the Special Meeting. To approve the Merger Agreement,
the affirmative vote of a majority of the outstanding shares of NLD Common Stock
entitled to vote thereon is required. A failure to vote, abstentions, and broker
non-votes will have the same effect as votes cast against approval of the Merger
Agreement.
PROXIES
NLD Stockholders are requested to complete, date, sign, and promptly return
the accompanying proxy card in the enclosed envelope. All shares of NLD Common
Stock represented at the Special Meeting by properly executed proxies received
by NLD prior to or at the Special Meeting, unless such proxies have been
revoked, will be voted at the Special Meeting in accordance with the
instructions on the proxy card. If no instructions are specified on an executed
proxy card, the proxy granted therein will be voted FOR approval of the Merger
Agreement.
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Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted by (a) filing with the Secretary of NLD
written notice of such revocation bearing a later date than on the proxy card
being revoked, (b) duly executing a subsequent proxy card relating to the same
shares and delivering it to the Secretary of NLD, or (c) attending the Special
Meeting and voting in person (although attendance at the Special Meeting without
delivering a written revocation or a subsequently dated proxy or voting in
person will not revoke an earlier proxy). Any written notice revoking a proxy
should be sent to NLD at 11817 Canon Boulevard, Suite 600, Newport News,
Virginia 23606, Attention: John V. Leaf, Secretary.
All expenses of this solicitation, including the cost of preparing and
mailing the proxy materials furnished to NLD Stockholders in connection with the
Special Meeting, will be borne by NLD, except that NLD and IXC will share
equally expenses incurred in connection with printing this Proxy
Statement/Prospectus. In addition to solicitation by use of the mails, proxies
may also be solicited on behalf of NLD by certain directors, officers, and
regular employees of NLD in person or by telephone or telegram. Such persons
will receive no additional compensation for their services.
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THE MERGER
DESCRIPTION OF THE MERGER
IXC, IXC Long Distance, Acquisition Corp. and NLD have entered into the
Merger Agreement pursuant to which (i) Acquisition Corp., a newly organized and
wholly owned subsidiary of IXC Long Distance, a wholly owned subsidiary of IXC,
will be merged with and into NLD and (ii) NLD will become a wholly owned
subsidiary of IXC. Each share of NLD Common Stock outstanding as of the
Effective Time shall be converted into 0.2998 shares of IXC Common Stock;
provided, however, that each NLD Stockholder entitled to receive a fractional
share of IXC Common Stock shall receive cash in lieu of such fractional share.
The Merger is subject to the satisfaction of a number of conditions,
including approval of the Merger by the NLD Stockholders at the Special Meeting.
See "TERMS OF THE MERGER AGREEMENT -- Conditions to the Merger."
CONSUMMATION OF THE MERGER
If the Merger Agreement is approved by the requisite vote of the NLD
Stockholders and the other conditions to the Merger are satisfied, the Effective
Time of the Merger will occur upon the filing of the Certificate of Merger with
the Secretary of State of Delaware. The date and time of such filing is
currently expected to occur, subject to obtaining the requisite approval of the
NLD Stockholders at the Special Meeting, within five business days following the
satisfaction or waiver of all the conditions precedent to the Merger set forth
in the Merger Agreement.
BACKGROUND OF THE MERGER
Global Considerations. NLD has implemented an active acquisition program
designed to identify, review, and evaluate potential business combinations,
corporate acquisitions, strategic alliances, and other significant corporate
transactions involving participants in the telecommunications industry. Since
June 30, 1996, NLD has consummated four acquisition transactions which have
placed NLD in the "second tier" of telecommunications companies, that is,
companies with annual revenues of between $100 million and $1 billion.
Despite the success of its acquisition program, the NLD Board recognized
that NLD's relatively small size among telecommunications companies could hinder
NLD's efforts to compete effectively in its existing markets or participate
meaningfully in rapidly growing domestic and international telecommunications
markets. In addition, the NLD Board perceived that NLD could be at a greater
competitive disadvantage in the future, given the ongoing consolidation in the
telecommunications industry. In this light, the NLD Board discussed at length
the current and future state of the telecommunications industry and NLD's
strategic position and prospects at various meetings during 1997.
In the course of these discussions, the NLD Board came to the preliminary
view that the interests of the NLD Stockholders might best be served by some
form of strategic transaction, including the possible sale of NLD. In the event
of a sale or merger transaction, the Board considered that NLD had desirable
properties, markets, and prospects and a strong management team which could
attract a favorable price, based on consolidation trends in the
telecommunications industry and the price levels of recent, similar
transactions. The NLD Board also considered the possible countervailing risks of
consummating, or even seriously pursuing, any such transaction, including
diversion of NLD's management resources; disruption of NLD's businesses caused
by uncertainty regarding NLD's future among employees, regulatory authorities,
and others; and the possible adverse impact upon employees and customers.
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The NLD Board's Decision to Explore Strategic Alternatives. In July 1997,
after further consideration of the foregoing issues, NLD retained Morgan Stanley
to explore NLD's strategic alternatives and prepare an assessment of the
financial and other aspects of such alternatives. During the next several weeks,
members of NLD's senior management met with Morgan Stanley and discussed the
following:
- The telecommunications industry in general and NLD's business in
particular;
- The consolidation trends in the telecommunications industry and the
factors resulting in such consolidation, including rapidly changing
technology and a regulatory environment that promotes competition;
- The increased importance of economies of scale as a result of these
consolidation trends;
- The viability of NLD continuing its own acquisition strategy to build
economies of scale to compete more effectively in the telecommunications
industry and the impediments to such a strategy, including the degree of
competition for quality acquisitions from other, larger
telecommunications companies;
- Acquisition values in recent mergers and acquisitions involving
telecommunications companies;
- The anticipated degree of interest of various potential acquirors of NLD
and the financial implications of possible transactions;
- Alternative forms of possible transactions which might be undertaken and
the benefits and risks associated with each of them; and
- Various procedures which might be used to explore available alternatives.
Members of NLD's senior management participating in these discussions
reviewed them with the members of the NLD Board in both formal NLD Board
meetings and informal personal conversations, and at a meeting held on August 1,
1997, the NLD Board determined to explore a potential sale of NLD. The NLD Board
considered whether it would be appropriate to engage in such an exploration of
alternatives in a publicly announced process, but concluded that proceeding on a
confidential basis was an appropriate way to assure that any ultimate
transaction or transactions would represent the best available alternative to
NLD.
Preliminary Strategic Partner Candidate. Soon after its engagement, Morgan
Stanley commenced the process of identifying potential strategic partners for
NLD. A promising candidate was soon identified, and following a preliminary
management presentation by NLD, the two companies initiated an exchange of
information for due diligence purposes. Ultimately, NLD agreed to negotiate
exclusively with this candidate until August 18, 1997. Even prior to that date,
however, the NLD Board came to realize that the interests of the NLD
stockholders would be best served by exploring additional strategic partnering
opportunities. Accordingly, NLD did not enter into an agreement with this
candidate.
NLD/IXC Discussions. After the exclusivity period ended, the NLD Board
determined to undertake a more structured approach to seeking a compatible
strategic partner. Accordingly, over the next several weeks, and pursuant to the
NLD Board's authorization, Morgan Stanley initiated discussions with various
other companies which either had expressed interest in or were considered likely
to have an interest in acquiring NLD or engaging in other possible transactions
with NLD. Based upon these contacts, approximately 20 companies executed
confidentiality agreements with NLD and received preliminary information about
NLD's operations. NLD's management made presentations to six of those companies,
and two of them, including IXC, conducted extensive due diligence investigations
of NLD and received draft merger agreements from NLD's legal counsel. Through
this process, NLD identified IXC as the most compatible company with which to
negotiate and conclude a strategic relationship.
Accordingly, in late November 1997, NLD and IXC management determined to
pursue further discussions. On November 25, 1997, a meeting was held in Newport
News, Virginia, involving several members of senior management of both NLD and
IXC, including Mr. Crawford, NLD's Chairman and Chief Executive Officer, and Mr.
Swett, IXC's Chairman. At this meeting, NLD's senior management made a
presentation outlining the anticipated benefits of a business combination
transaction whereby NLD would
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operate as a subsidiary of IXC. Following this presentation, IXC indicated its
interest in further developing and negotiating such a transaction.
Over the course of the next few weeks, NLD and IXC management exchanged
information about their respective companies, principally financial information
used to determine, among other things, the potential synergies of a business
combination transaction. On December 16, 1997, a meeting of various senior
management personnel of both NLD and IXC (including Messrs. Crawford and Swett),
along with representatives of Morgan Stanley and attorneys for each party, took
place in Kansas City. At this meeting, IXC and NLD agreed on the Exchange Ratio
and the proposed transaction's basic structure.
Approval and Execution of the Merger Agreement. Final negotiations between
NLD and IXC regarding the terms of the Merger Agreement continued over the next
two days and into the late evening of December 18, 1997. In the early hours of
December 19, 1997, the NLD Board convened a special meeting by teleconference to
review the proposed IXC transaction and the terms of the Merger Agreement. At
that meeting, Morgan Stanley and NLD's legal counsel each made detailed
presentations to the NLD Board on key elements of the proposed transaction, and
Morgan Stanley delivered its opinion that, as of such date and based upon the
assumptions made, matters considered, and limits of review, as stated in such
opinion, the transaction contemplated by the Merger Agreement was fair to the
NLD Stockholders from a financial point of view.
Following these presentations and the delivery of Morgan Stanley's opinion,
and after further discussing and considering the terms of the proposed
transaction, the NLD Board voted to approve the Merger and adopt the Merger
Agreement. On December 19, 1997, prior to the opening of the financial markets,
the Merger Agreement was executed by the parties. See "NLD's Reasons for the
Merger; Recommendation of the NLD Board" and "Opinion of Morgan Stanley."
NLD'S REASONS FOR THE MERGER; RECOMMENDATION OF THE NLD BOARD
The NLD Board believes that the Merger offers NLD and the NLD Stockholders
a significant opportunity to create a combined organization that will be a
leader in the telecommunications industry. The NLD Board has approved the Merger
and the Merger Agreement, has determined that the Merger is fair to and in the
best interest of the NLD Stockholders, and recommends that the NLD Stockholders
vote FOR approval and execution of the Merger Agreement.
At the meeting held on December 19, 1997, the NLD Board, with the
assistance of Morgan Stanley and NLD's legal counsel, considered and discussed
the terms of the Merger and reviewed various related business, financial, and
legal considerations. In reaching its decision to approve the Merger and the
Merger Agreement and to recommend that the NLD Stockholders vote to approve the
Merger Agreement, the NLD Board considered, among other things, the following
factors: (a) the opportunity for the NLD Stockholders to receive IXC Common
Stock in a tax-free exchange; (b) information with respect to the financial
condition, results of operation, business and growth prospects of NLD and IXC,
on both an historical and estimated prospective basis, and current industry,
economic, and market conditions, including the financial analysis and
presentations of Morgan Stanley; (c) the changing regulatory environment in the
domestic telecommunications industry, including consolidation trends; (d) the
historical market prices and recent trading patterns of NLD Common Stock and IXC
Common Stock and market prices, recent trading patterns, and financial data
relating to other companies in the same business as NLD; (e) the opportunity for
NLD Stockholders to participate, as holders of IXC Common Stock, in a combined
enterprise which would have greater financial, technical, and marketing
resources and which is expected to produce a stronger competitor in the
communications industry than NLD would be on a stand-alone basis; (f) the high
degree of compatibility of the businesses of NLD and IXC, which would provide
the NLD Stockholders with a significant continuing interest in the
communications industry and would continue to provide career opportunities and
employment for many of the employees of NLD; (g) the potential for operational
and financial synergies as a result of the integration of the resources of NLD
and IXC; (h) the opinion of Morgan Stanley that as of such date the Exchange
Ratio was fair to NLD Stockholders from a financial point of view (see "Opinion
of Morgan Stanley"); (i) the larger public float and trading volume of shares of
IXC Common Stock compared to the
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public float and trading volume of shares of NLD Common Stock, which could
provide the NLD Stockholders with greater liquidity in their investment; (j) the
structure of the transaction and the terms of the Merger Agreement, which were
the result of arms'-length negotiations between IXC and NLD; (k) the treatment
of the Merger for accounting purposes as a pooling-of-interests transaction
(which avoids a reduction in earnings which would result from the creation and
amortization of goodwill under purchase accounting); and (l) alternatives to the
Merger available to NLD and the NLD Stockholders.
The foregoing discussion of the information and factors considered and
given weight by the NLD Board is not intended to be exhaustive. In view of the
variety of factors considered in connection with its evaluation of the Merger,
the NLD Board found that each of the foregoing factors supported its
recommendation and conclusions, and the NLD Board did not find it practicable to
and did not quantify or otherwise assign relative weights to the specific
factors considered in reaching its determination. In addition, individual
members of the NLD Board may have given different weights to different factors.
THE NLD BOARD RECOMMENDS THAT THE NLD STOCKHOLDERS VOTE FOR APPROVAL AND
ADOPTION OF THE MERGER AND THE MERGER AGREEMENT.
IXC'S REASONS FOR THE MERGER
In reaching its decision to approve the Merger Agreement, the IXC Board of
Directors considered a number of factors, including, without limitation, the
following: (a) a review of the advice of management and legal advisors regarding
the terms of the Merger Agreement; (b) information with respect to the financial
condition, results of operation, business and growth prospects of IXC and NLD on
both an historical and estimated prospective basis, and current industry,
economic, and market conditions, including a presentation by IXC management
regarding its due diligence review of NLD; (c) the changing regulatory
environment in the domestic telecommunications industry, including consolidation
trends; (d) the historical market prices and recent trading patterns of IXC
Common Stock and NLD Common Stock and market prices, recent trading patterns,
and financial data relating to other companies in the same business as NLD; (e)
the opportunity for IXC stockholders to participate in a combined enterprise
which would have greater marketing resources and which is expected to produce a
stronger competitor in the communications industry than would be on a
stand-alone basis; (f) the high degree of compatibility of the business of IXC
and NLD; (g) the potential for operational and financial synergies as a result
of the integration of the resources of IXC and NLD; (h) the structure of the
transaction and the terms of the Merger Agreement, which were the result of
arms'-length negotiations between IXC and NLD; (i) alternatives to the Merger
available to IXC and its stockholders; (j) that the addition of NLD's retail
customer relationships in new geographic regions and markets will improve the
combined company's ability to pursue the retail market and strategic
acquisitions and partnerships and to form communications alliances in the
future; (k) that the size of the combined company will enable it to achieve
enhanced operating and purchase efficiencies; (l) that NLD's traffic pattern
fits IXC's existing and planned Network; and (m) that NLD has a national direct
sales force in place. In addition, IXC believes that NLD's operations will be a
strategic fit with IXC's Network because it will enable IXC to generate
increased revenues by moving NLD's traffic onto IXC's Network.
The IXC Board of Directors did not assign any specific or relative weight
to the factors under its consideration. The Board of Directors of IXC determined
that the Merger is in the best interests of IXC and its stockholders, and
therefore unanimously approved the Merger. The Merger is not subject to the
approval of the stockholders of IXC.
OPINION OF MORGAN STANLEY
As noted above, in July 1997 NLD retained Morgan Stanley to act as its
financial advisor in connection with a proposed sale or business combination
involving NLD, and at the December 19, 1997 NLD Board meeting, Morgan Stanley
rendered its oral opinion that, as of such date and subject to the various
considerations to be set forth in its written opinion, the Exchange Ratio is
fair from a financial point of view to the NLD Stockholders. Morgan Stanley
subsequently delivered to the NLD Board a written opinion dated December 19,
1997 (the "Morgan Stanley Opinion") confirming such oral opinion.
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The full text of the Morgan Stanley Opinion which sets forth, among other
things, assumptions made, procedure followed, matters considered, and
limitations on the review undertaken by Morgan Stanley, is attached as Annex C
to this Proxy Statement/Prospectus and is incorporated herein by reference. The
Morgan Stanley Opinion is directed to the NLD Board and addresses only the
fairness from a financial point of view of the Exchange Ratio to the NLD
Stockholders. It does not address any other aspect of the Merger and does not
constitute an opinion or a recommendation as to how any NLD Stockholders should
vote at the Special Meeting. In addition, the Morgan Stanley Opinion does not in
any manner address the prices at which the shares of IXC will trade following
consummation of the Merger. The summary of the Morgan Stanley Opinion set forth
in this Proxy Statement/Prospectus is qualified in its entirety by reference to
the full text of such opinion. The NLD Stockholders are urged to read the Morgan
Stanley Opinion in its entirety.
In arriving at its opinion, Morgan Stanley, among other things: (a)
reviewed certain publicly available financial statements and other information
of NLD and IXC, respectively; (b) reviewed certain internal financial statements
and other financial and operating data concerning NLD prepared by the management
of NLD; (c) analyzed certain financial projections prepared by the management of
NLD; (d) discussed the past and current operations and financial condition and
the prospects of NLD with senior executives of NLD; (e) discussed the past and
current operations and financial condition and the prospects of IXC with senior
executives of IXC; (f) reviewed the reported prices and trading activity for the
NLD Common Stock and the IXC Common Stock; (g) compared the financial
performance of NLD and IXC and the prices and trading activity of the NLD Common
Stock and IXC Common Stock with that of certain other comparable publicly traded
companies and their securities; (h) reviewed the financial terms, to the extent
publicly available, of certain comparable acquisition transactions; (i)
discussed with senior executives of NLD and IXC their views of the strategic,
financial, and operational benefits anticipated from the Merger; (j)
participated in discussions and negotiations among representatives of NLD, IXC,
and certain other parties and their financial and legal advisors; (k) reviewed
the Merger Agreement; and (l) performed such other analyses it had deemed
appropriate.
In rendering its opinion, Morgan Stanley assumed and relied upon, without
independent verification, the accuracy and completeness of the information
reviewed by Morgan Stanley for purposes of its opinion. With respect to the
financial projections, Morgan Stanley assumed that they had been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the future financial performance of NLD. Morgan Stanley also
assumed that the Merger will be consummated in accordance with the terms set
forth in the Merger Agreement, including, among other things, that the Merger
will be treated as a "pooling-of-interests" business combination in accordance
with GAAP and will be treated as a tax-free reorganization and/or exchange, each
pursuant to the Code. Morgan Stanley did not make any independent valuation or
appraisal of the assets or liabilities of NLD, nor had Morgan Stanley been
furnished with any such appraisals. Morgan Stanley's opinion is necessarily
based on economic, market, and other conditions as in effect on, and the
information made available to Morgan Stanley as of, the date of its opinion.
The following is a brief summary of certain analyses performed by Morgan
Stanley and reviewed with the NLD Board in connection with the Morgan Stanley
Opinion.
Historical Stock Performance. Morgan Stanley's analysis of the performance
of the NLD Common Stock consisted of a historical analysis of closing prices and
trading volumes from the date of NLD's public offering of stock on February 24,
1994 through and including December 16, 1997. During this period, NLD Common
Stock achieved a high of $12.125 and a low of $5.250, based on closing prices.
NLD Common Stock closed at a price of $8.375 on December 16, 1997.
Morgan Stanley also reviewed the performance of the IXC Common Stock, which
consisted of a historical analysis of closing prices and trading volumes from
the date of IXC's initial public offering on July 3, 1996 through and including
December 16, 1997. During this period, IXC Common Stock achieved a high of
$39.125 and a low of $11.500, based on closing prices. IXC Common Stock closed
at a price of $31.563 on December 16, 1997.
Comparable Company Trading Analysis. Morgan Stanley performed a comparable
public company trading analysis pursuant to which it compared certain financial
information of NLD with that of a group of
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publicly traded long distance telecommunications service providers, including
AT&T, MCI, Sprint, WorldCom, Excel, Frontier, LCI, Qwest, IXC, Tel-Save
Holdings, Inc., Total-Tel USA Communications, Inc. ("Total-Tel") and USLD
Communications Corp. ("USLD") (collectively, the "LD Comparables"). The LD
Comparables were selected based on the general business, operating, and
financial characteristics representative of companies which provide long
distance telecommunications services. Of the LD Comparables, Morgan Stanley
believed that Total-Tel and USLD were most closely comparable to NLD. Morgan
Stanley's analysis included, among other things, a review of each company's
respective net aggregate value (market value of equity plus net debt and
preferred stock) expressed as a multiple of last twelve months' revenues. Morgan
Stanley noted that the multiple of net aggregate value to last twelve months'
revenues was 0.8x for Total-Tel and 1.2x for USLD (assuming the "unaffected"
trading price of USLD Common prior to the announcement on September 17, 1997 of
the acquisition of USLD by LCI). Based on the multiples derived from this
analysis and in Morgan Stanley's judgment, the appropriate reference multiple
range derived from its comparable company trading analysis was 0.9x to 1.2x last
twelve months' revenues, which implied a reference equity trading value per
share range of approximately $7.00 to $9.50 for NLD Common.
No company utilized as a comparison in the comparable companies trading
analysis is identical to NLD. Accordingly, an analysis of the foregoing
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of NLD and the LD Comparables and
other factors that could affect public trading characteristics of the LD
Comparables. Mathematical analysis (such as determining the mean or median) is
not in itself a meaningful method of using comparable company trading analysis.
Precedent Transaction Analysis. Morgan Stanley reviewed and analyzed
public information relating to the financial terms of certain precedent
transactions involving long distance telecommunications service providers (the
"Precedent Transactions") which, in Morgan Stanley's judgment, were deemed to be
comparable to the Merger for purposes of this analysis. The transactions
reviewed included the following: the acquisition of ACC Corp. by Teleport
Communications Group Inc.; the acquisition of MCI by WorldCom; the acquisition
of US WATS, Inc. by ACC Corp.; the acquisition of USLD by LCI; the acquisition
of Telco Communication Group, Inc. by Excel; the acquisition of the remaining
minority interest in ACC TelEnterprises Ltd. by ACC Corp.; the acquisition of
Teledial America, Inc. by LCI; the acquisition of Schneider Communications, Inc.
by Frontier; the acquisition of Corporate Telmanagement Group, Inc. by LCI; the
acquisition of ALC by Frontier; the acquisition of American Sharecom by
Frontier; the acquisition of WCT Communications Inc by Frontier; the acquisition
of a 20 percent interest in Sprint by France Telecom and Deutsche Telekom AG;
and the acquisition of Advanced Telecommunications Corporation by LDDS
Communications, Inc. Morgan Stanley's analysis included, among other things, a
review of net aggregate value paid expressed as a multiple of the acquiree's
last twelve months' revenues in each of the Precedent Transactions. Morgan
Stanley also analyzed the relationship between the multiple of net aggregate
value paid to the acquiree's last twelve months' revenue in each of the
Precedent Transactions and (a) the size of the acquiree, based on the acquiree's
last twelve months' revenues; and (b) the profitability of the acquiree, based
on the acquiree's last twelve months' EBITDA margin. Morgan Stanley noted that
there appeared to be a positive correlation between the multiple of net
aggregate value paid to the acquiree's last twelve months' revenues and both the
size and profitability of the acquiree in the Precedent Transactions. Based on
the multiples derived from this analysis and in Morgan Stanley's judgment, the
appropriate reference multiple range derived from its Precedent Transaction
analysis was 1.1x to 1.5x last twelve months' revenues, which implied a
reference equity value per share range of approximately $8.50 to $11.50 for NLD
Common Stock.
No transaction utilized in the Precedent Transaction analysis is identical
to the Merger. In evaluating the Precedent Transactions, Morgan Stanley made
judgments and assumptions with regard to industry performance, general business,
economic, market, and financial conditions, and other matters, many of which are
beyond NLD's control, such as the impact of competition on the business of NLD
and the industry generally, industry growth, and the absence of any adverse
material change in the financial condition and prospects of NLD or the industry
or in the financial markets in general. Mathematical analysis (such as
determining the mean or median) is not in itself a meaningful method of using
precedent transaction data.
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IXC Valuation. Morgan Stanley informed NLD that it analyzed the valuation
of IXC by performing a comparable public company trading analysis pursuant to
which it compared certain financial information of IXC with that of Qwest.
Morgan Stanley believes that Qwest, based on certain general business, operating
and financial characteristics, is the only public traded company directly
comparable to IXC. Morgan Stanley compared IXC's business model and certain
operating statistics to those of Qwest, noting many similarities between the two
companies. Morgan Stanley's analysis included, among other things, a review of
each company's respective (a) market capitalization (market value of equity plus
total debt and preferred stock) expressed as a multiple of book capitalization
(stockholders' equity book value plus total debt and preferred stock), and (b)
net aggregate value expressed as a multiple of last twelve months' revenues. In
addition, Morgan Stanley compared and contrasted certain financial information
of IXC with that of LCI and WorldCom, each of which has certain similarities to
IXC.
Qualifications; Financial Advisor's Engagement. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to a
partial analysis or summary description. In arriving at its opinion, Morgan
Stanley considered the results of all of its analyses as a whole and did not
attribute any particular weight to any particular analysis or factor considered
by it. Furthermore, selecting any portions of Morgan Stanley's analyses, without
considering all analyses, would create an incomplete view of the process
underlying the Morgan Stanley Opinion. In addition, Morgan Stanley may have
deemed various assumptions more or less probable than other assumptions, so that
the ranges of valuations resulting from any particular analysis described above
should not be taken to be Morgan Stanley's view of the actual value of NLD or
IXC.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions, and
other matters, many of which are beyond the control of NLD or IXC. The analyses
performed by Morgan Stanley are not necessarily indicative of actual values,
which may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as a part of the Morgan Stanley
Opinion and were provided to the NLD Board in connection with the delivery of
the Morgan Stanley Opinion. The analyses do not purport to be appraisals or to
reflect the prices at which NLD or IXC might actually be sold. Because such
estimates are inherently subject to uncertainty, none of NLD, IXC, or Morgan
Stanley nor any other person assumes responsibility for their accuracy. In
addition, as described above, the Morgan Stanley Opinion, including Morgan
Stanley's presentation to the NLD Board, was one of many factors taken into
consideration by the NLD Board in making its determination to approve the Merger
Agreement. Consequently, Morgan Stanley's analyses described above should not be
viewed as determinative of the opinion of the NLD Board with respect to the
value of NLD or IXC.
The NLD Board retained Morgan Stanley based upon its experience and
expertise. Morgan Stanley is an internationally recognized investment banking
and advisory firm. Morgan Stanley, as part of its investment banking business,
is continually engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwriting, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements, and valuations for corporate and other purposes. Morgan Stanley is a
full-service securities firm engaged in securities trading and brokerage
activities, as well as providing investment banking and financial advisory
services. In the ordinary course of its trading and brokerage activities, Morgan
Stanley or its affiliates may at any time hold long or short positions and may
trade or otherwise effect transactions, for its own account or the accounts of
customers, in securities of NLD or IXC. In the past, Morgan Stanley and its
affiliates have provided financial advisory and investment banking services to
IXC and its affiliates, for which services Morgan Stanley has received customary
fees, including acting as lead underwriter in connection with IXC's initial
public offering of IXC Common Stock in July 1996.
Pursuant to an engagement letter between NLD and Morgan Stanley, NLD agreed
to pay Morgan Stanley (a) an advisory fee estimated to be between $100,000 and
$200,000 in the event the Merger is not consummated; and (b) if the Merger is
consummated, a transaction fee equal to an agreed upon percentage of the value
of the total number of shares of IXC Common Stock issued to the NLD Stockholders
pursuant to the Merger, based on the IXC Common Stock price at closing. The
transaction fee percentage increases as the value of the IXC Common Stock to be
issued increases, up to a maximum of 4% for any portion of such value exceeding
$176 million. In addition to the foregoing compensation, NLD agreed to reimburse
Morgan Stanley
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for its expenses and to indemnify Morgan Stanley for liabilities and expenses
arising out of the engagement and the transactions in connection therewith,
including liabilities under federal securities laws.
NASDAQ NATIONAL MARKET
It is a condition to consummation of the Merger that the shares of IXC
Common Stock issuable pursuant to the Merger be approved for listing on the NNM.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
Blackwell Sanders Matheny Weary & Lombardi LLP, counsel to NLD, has advised
NLD that the following discussion expresses its opinion as to the material
federal income tax consequences of the Merger to the NLD Stockholders. The
signed opinion of Blackwell Sanders Matheny Weary & Lombardi LLP is filed as an
exhibit to the Registration Statement of which this Proxy Statement/Prospectus
is a part. Such opinion is based upon the Code, Treasury Regulations, IRS
rulings and judicial decisions now in effect, all of which are subject to change
at any time by legislative, judicial or administrative action. Any such change
may be applied retroactively and could affect the tax consequences to the NLD
Stockholders. There can be no assurance that the IRS will not take a contrary
view, and no ruling from the IRS has been or will be sought. No information is
provided herein with respect to foreign, state or local tax laws or estate and
gift tax considerations. The discussion is directed to NLD Stockholders who hold
their shares of NLD Common Stock as "capital assets" within the meaning of
Section 1221 of the Code.
Special tax consequences neither described below nor covered by the opinion
of Blackwell Sanders Matheny Weary & Lombardi LLP may be applicable to
particular classes of taxpayers, including financial institutions,
broker-dealers, persons who are not citizens or residents of the United States
or who are foreign corporations, foreign partnerships or foreign estates or
trusts as to the United States, NLD Stockholders who acquired their NLD Common
Stock through the exercise of an NLD Option or otherwise as compensation, and
persons who receive payments in respect of NLD Options. For a description of the
income tax consequences to the holders of NLD Options from the substitution of
such options, see "TERMS OF THE MERGER AGREEMENT -- Treatment of Stock Options
and Warrants."
Based on the opinion of Blackwell Sanders Matheny Weary & Lombardi LLP, the
Merger will constitute a tax-free reorganization under Section 368(a)(1)(B) of
the Code so that (i) NLD Stockholders will not recognize gain or loss with
respect to the IXC Common Stock received by them in exchange for their shares of
NLD Common Stock; (ii) each NLD Stockholder's tax basis in the IXC Common Stock
received in exchange for NLD Common Stock will be the same as the tax basis of
such stockholder's NLD Common Stock exchanged therefor; and (iii) the holding
period of the IXC Common Stock received by an NLD Stockholder in exchange for
NLD Common Stock will include the holding period of such stockholder's NLD
Common Stock exchanged therefor. An NLD Stockholder receiving cash in the
exchange in lieu of a fractional interest in IXC Common Stock will be treated as
if such stockholder actually received such fractional share interest, and such
fractional interest was subsequently redeemed by IXC.
If the Merger were not to constitute a reorganization under Section
368(a)(1)(B) of the Code, each NLD Stockholder would recognize gain or loss
equal to the difference between the fair market value of the IXC Common Stock
received determined at the Effective Time and such stockholder's tax basis in
the shares of NLD Common Stock. Such gain or loss would be a long-term capital
gain or loss, provided such shares of NLD Common Stock were held for more than
eighteen months.
NLD STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
TAX CONSEQUENCES OF THE MERGER AND THE ACQUISITION, OWNERSHIP AND DISPOSITION OF
IXC COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND
FOREIGN TAX LAWS, AND OF CHANGES IN APPLICABLE TAX LAWS.
RESALES OF IXC COMMON STOCK UNDER FEDERAL SECURITIES LAWS
The shares of IXC Common Stock to be issued in the Merger have been
registered under the Securities Act by the Registration Statement and therefore
may be resold without restriction by all former NLD
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stockholders who are not deemed to be "affiliates" of either IXC or NLD. An
affiliate of an issuer is defined in the rules and regulations of the Commission
as a person that, directly or indirectly, through one or more intermediaries,
controls, or is controlled by, or is under common control with, the issuer.
Affiliates of NLD who receive shares of IXC Common Stock in the Merger
("Affiliate Shares") would be unable to resell those shares in the absence of a
registration statement covering such resales under the Securities Act or the
availability of an exemption from such registration, such as the exemption
provided by Rule 145 under the Securities Act. In general, sales by an affiliate
of NLD can be effected under Rule 145 in one of three ways, depending on the
circumstances. First, the person or entity can sell the Affiliate Shares at any
time, provided (a) IXC is current on its reporting obligations under the
Exchange Act, (b) the number of such shares to be sold by such an affiliate and
certain members of his or her immediate family within any three-month period
does not exceed the greater of 1% of the outstanding shares of IXC Common Stock
or the average weekly trading volume of such stock during the four calendar
weeks preceding such sale, and (c) the shares are sold only through unsolicited
"brokers' transactions" or in transactions directly with a "market maker," as
such terms are defined in Rule 144 under the Securities Act. Second, if the
person or entity has held the Affiliate Shares for at least one year, the person
or entity can freely resell the shares if IXC has filed on a timely basis all
reports it is obligated to file with the Commission under the Exchange Act
(e.g., Forms 10-K and 10-Q). Third, Affiliate Shares are freely tradeable if the
person or entity (a) has held the Affiliate Shares for at least two years, (b)
is not an affiliate of IXC at the time of the sale of those shares and (c) has
not been an affiliate of IXC for the past three months.
NLD has agreed to identify to IXC all persons who are, and to NLD's best
knowledge who will be, at the Closing Date (as defined), affiliates of NLD as
such term is used in Rule 145 (or otherwise under applicable Commission
accounting releases with respect to pooling of interests accounting treatment).
NLD has agreed to use all reasonable efforts to cause its affiliates to deliver
to IXC on or prior to the Closing Date a written acknowledgment of such persons'
affiliate status, including such person's agreement not to dispose of any
consideration received by them in connection with the Merger in any manner that
would cause the transactions contemplated by the Merger Agreement not to qualify
for pooling of interests accounting treatment. See "-- Accounting Treatment."
ACCOUNTING TREATMENT
IXC intends to account for the acquisition of NLD by the
pooling-of-interests method of accounting in accordance with GAAP for financial
reporting purposes, which means that IXC will restate its historical
consolidated financial statements to, among other things, include assets,
liabilities, stockholders' equity and results of operations of NLD.
CONSENTS AND APPROVALS
The Merger is subject to the HSR Act, and the rules and regulations
thereunder, which provide that certain transactions may not be consummated until
required information and materials have been furnished to the Justice Department
and the FTC and certain waiting periods have expired or been terminated.
The Merger also requires the approval of the Regulatory Commissions. As of
April 14, 1998 approximately 60% of the state regulatory approvals have been
obtained.
APPRAISAL RIGHTS
Under the Delaware General Corporation Law (the "DGCL"), the NLD
Stockholders are not entitled to appraisal rights in the event the Merger is
consummated.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the NLD Board with respect to the
approval of the Merger Agreement, the NLD Stockholders should be aware that
certain members of the management of NLD and the NLD Board may have certain
interests in the Merger that are different from, or in addition to, the
interests
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of NLD Stockholders generally. The NLD Board was aware of these interests and
considered them in approving the Merger Agreement and the transactions
contemplated thereby.
Stock Ownership. Following the Merger, NLD will continue as the Surviving
Corporation and as a wholly owned subsidiary of IXC. As of the Record Date, the
directors, executive officers and affiliates of NLD beneficially owned (a)
approximately six million shares of NLD Common Stock which represents
approximately 45.1% of the outstanding shares of NLD Common Stock, (excluding
all options, warrants, rights and other securities to acquire NLD Common Stock),
for which they will receive the same consideration in connection with the Merger
as other NLD Stockholders and (b) NLD Options to purchase approximately 570,000
shares of NLD Common Stock which will be treated as described below in "TERMS OF
THE MERGER AGREEMENT -- Treatment of Stock Options and Warrants."
Employment Agreements. The Merger Agreement provides that NLD will enter
into employment agreements with certain senior executives of NLD as IXC may
reasonably request. As of the date of this Proxy Statement/Prospectus, IXC has
requested certain employees of NLD enter into such employment agreements. While
the definitive terms of the employment agreements have not been agreed upon, it
is anticipated that each of the employment agreements will provide that the
party thereto will, after the Effective Time, initially receive his or her
current base salary and will either have his or her present benefit package
continue or receive a benefit package that is substantially equivalent thereto.
In addition, it is anticipated that each person will be eligible to receive
significant additional compensation if certain performance criteria (principally
related to the achieving certain levels of revenue and profitability) are
satisfied.
CONDUCT OF BUSINESS AFTER THE MERGER
Upon consummation of the Merger, Acquisition Corp. will be merged with and
into NLD and NLD will continue as the Surviving Corporation. The directors of
Acquisition Corp. in office at the Effective Time shall become on such date the
directors of NLD. The present directors of Acquisition Corp. are James F.
Guthrie, Jeffrey C. Smith and Stuart K. Coppens, each of whom is presently an
executive officer of IXC. The officers of NLD in office at the Effective Time
shall remain as of such date the officers of NLD. The present officers of NLD
are John D. Crawford, Timothy A. Barton and Thomas G. Keefe.
After consummation of the Merger, persons who are currently directors,
executive officers and affiliates of NLD will beneficially own approximately 1.8
million shares of IXC Common Stock which is approximately 5.7% of the
outstanding shares of IXC Common Stock, based on the number of shares of IXC
Common Stock outstanding on the Record Date which was 31,764,340 shares
(excluding all options, warrants, rights and other securities to acquire IXC
Common Stock).
After the Merger has been completed, IXC management will undertake to
combine the business of NLD with the business of IXC with the goal of moving
NLD's customers onto IXC's Network. At the Effective Time, NLD plans to change
its name to "Eclipse Telecommunications, Inc."
TERMS OF THE MERGER AGREEMENT
THE DETAILED TERMS OF AND CONDITIONS TO THE MERGER ARE CONTAINED IN THE
MERGER AGREEMENT, WHICH IS INCLUDED IN FULL AS ANNEX B TO THIS PROXY
STATEMENT/PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING SUMMARY
DESCRIPTION OF THE TERMS OF THE MERGER AGREEMENT IS QUALIFIED IN ITS ENTIRETY
BY, AND MADE SUBJECT TO, THE MORE COMPLETE INFORMATION SET FORTH IN THE MERGER
AGREEMENT.
THE MERGER
The Merger Agreement provides that at the Effective Time, Acquisition Corp.
shall be merged with and into NLD and thereupon the separate existence of
Acquisition Corp. shall cease and NLD, as the Surviving Corporation, shall
continue to exist under and be governed by the DGCL.
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EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of the Certificate of
Merger with the Secretary of State of Delaware. The Effective Time is currently
expected to occur following the date of the Special Meeting, subject to the
approval by the NLD Stockholders of the Merger, within five business days
following the satisfaction or waiver of all the conditions precedent to the
Merger set forth in the Merger Agreement. The date on which the closing of the
transactions contemplated by the Merger Agreement (the "Closing") occurs is
referred to as the "Closing Date."
EFFECTS OF THE MERGER ON NLD COMMON STOCK
Each share of IXC Common Stock outstanding as of the Effective Time shall
be converted into 0.2998 shares of IXC Common Stock to be represented by one or
more IXC Common Stock certificates; provided, however, that each NLD Stockholder
entitled to receive a fractional share of IXC Common Stock, whether or not in
addition to a whole number of shares of IXC Common Stock, shall receive cash in
lieu of such fractional share. See "-- Fractional Shares."
Thus, assuming that the aggregate number of shares of NLD Common Stock at
the Effective Time is the same as the number of shares outstanding on the Record
Date, approximately four million shares of IXC Common Stock will be issued as
consideration for the NLD Common Stock in the Merger.
IXC has agreed to take all steps necessary to register the shares of IXC
Common Stock to be issued in connection with the Merger Agreement under the
Securities Act and to list such shares for trading on the NNM.
TREATMENT OF STOCK OPTIONS AND WARRANTS
This Proxy Statement/Prospectus also constitutes the Prospectus of IXC in
connection with the exchange of NLD Options for Substitute Options and NLD
Warrants for Substitute Warrants. As of the Effective Time, all of the
outstanding NLD Options and NLD Warrants will be converted into the right to
receive Substitute Options and Substitute Warrants, as applicable. The
Substitute Options and Substitute Warrants will (a) reflect the application of
the Exchange Ratio (except that any resulting fractional share amounts less than
one-half shall be rounded down to the nearest whole share and shall be rounded
up otherwise), (b) provide for exercisability over the same period as set forth
in the NLD Options or NLD Warrants exchanged therefor, and (c) contain such
terms and conditions as IXC and NLD shall agree upon. As of April 14, 1998, NLD
had issued NLD Options to purchase an aggregate of 873,000 shares of NLD Common
Stock and NLD Warrants to purchase an aggregate of 120,000 shares of NLD Common
Stock.
IXC has agreed to register under the Securities Act either the issuance of
the shares of IXC Common Stock upon the exercise of a Substitute Option or
Substitute Warrant or the resale of such IXC Common Stock and to list such
shares for trading on the NNM.
For federal income tax purposes, a Substitute Option or Substitute Warrant
that is granted with respect to an NLD Option or NLD Warrant that was not
received in connection with services rendered to NLD will be treated for
reorganizational purposes as a security. No gain or loss should be recognized by
a holder of such NLD Options or NLD Warrants who receives Substitute Options or
Substitute Warrants, respectively, pursuant to the exchange and such holder's
aggregate tax basis in the Substitute Options or Substitute Warrants will be the
same as the aggregate tax basis of such holder in the NLD Options or NLD
Warrants, respectively. In such case, the holding period for the Substitute
Options or Substitute Warrants in the hands of the holder of the NLD Options or
NLD Warrants will include the period during which the NLD Options or NLD
Warrants were held by such holder, provided that the NLD Options or NLD Warrants
are capital assets at the Effective Time.
For federal income tax purposes, the holder of NLD Options or NLD Warrants
that received such options or warrants in connection with services rendered to
NLD should not recognize gain or loss as a result of such conversion of such
options or warrants to Substitute Options or such warrants to Substitute
Warrants, as applicable, provided neither the NLD Options nor the Substitute
Options and the NLD Warrants nor the
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Substitute Warrants, as applicable, had or have a readily ascertainable fair
market value (within the meaning of Treasury Regulations Section 1.83-7(b)) when
issued or at the Effective Time.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY. BECAUSE OF THE
INTRICACIES OF THE FEDERAL INCOME TAX LAWS REGARDING THE TREATMENT OF OPTIONS
AND WARRANTS HOLDERS OF NLD OPTIONS AND NLD WARRANTS SHOULD CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE POTENTIAL CONSEQUENCES OF THE MERGER ON THE
FEDERAL INCOME TAX TREATMENT OF THEIR NLD OPTIONS AND NLD WARRANTS AND ANY
SUBSTITUTE OPTIONS OR SUBSTITUTE WARRANTS, AS APPLICABLE, THEY MAY RECEIVE
THEREFOR. HOLDERS OF NLD OPTIONS AND NLD WARRANTS ARE ALSO ADVISED TO CONSULT
THEIR TAX ADVISORS WITH RESPECT TO THE APPLICABILITY AND EFFECT OF STATE, LOCAL
AND FOREIGN TAX LAWS, NONE OF WHICH ARE DISCUSSED HEREIN.
FRACTIONAL SHARES
Each NLD Stockholder entitled to receive a fractional share of IXC Common
Stock, whether or not in addition to a whole number of shares of IXC Common
Stock, shall receive cash in lieu of such fractional share in an amount equal to
such fractional proportion multiplied by the closing price of one share of IXC
Common Stock on the first business day preceding the Effective Time.
NUMBER OF SHARES OF IXC COMMON STOCK ANTICIPATED TO BE ISSUED PURSUANT TO THE
MERGER AGREEMENT
It is presently anticipated that an aggregate of no more than 4,313,837
shares of IXC Common Stock will be issued as consideration in connection with
the Merger pursuant to the Merger Agreement and the transactions which are
described therein, including shares of IXC Common Stock issued upon exercise of
the Substitute Options and the Substitute Warrants. Based on the number of
shares of IXC Common Stock issued and outstanding on the Record Date, which was
31,764,340 shares, the number of shares of IXC Common Stock anticipated to be
issued pursuant to the Merger Agreement would represent approximately 13.6% of
the shares of IXC Common Stock outstanding following the Merger (excluding all
options, warrants, rights, and other securities to acquire IXC Common Stock).
APPOINTMENT OF THE EXCHANGE AGENT
NLD and IXC have mutually appointed U.S. Stock Transfer Corporation, as
exchange agent (the "Exchange Agent"), to effect the exchange of the IXC Common
Stock for certificates that, immediately prior to the Effective Time,
represented shares of NLD Common Stock and the exchange of NLD Options for
Substitute Options and NLD Warrants. The Exchange Agent also serves as IXC's
transfer agent and registrar.
PAYMENT OF THE MERGER CONSIDERATION; SURRENDER OF NLD STOCK CERTIFICATES, NLD
OPTIONS AND NLD WARRANTS
Promptly after the Effective Time, a letter of transmittal containing a
notice of consummation of the Merger will be sent to each holder of an NLD
Option or NLD Warrant and each record holder of NLD Common Stock. The letter of
transmittal will also set forth the procedure for surrendering the instruments
representing the NLD Options, the NLD Warrants and the certificates representing
shares of NLD Common Stock to the Exchange Agent for exchange.
Upon the surrender for exchange of the certificates representing shares of
NLD Common Stock, each holder shall receive a certificate or certificates
representing the number of shares of IXC Common Stock into which the shares of
NLD Common Stock theretofore represented by the certificates so surrendered
shall have been converted pursuant to the Merger and cash (without interest
thereon) in lieu of any resulting fractional share of IXC Common Stock. Upon the
surrender for exchange of instruments representing NLD Options and NLD Warrants,
each holder of an NLD Option or an NLD Warrant shall receive an instrument
representing the Substitute Option or Substitute Warrant exercisable for the
number of shares of IXC Common Stock as described in "-- Treatment of Stock
Options and Warrants."
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Until surrendered to the Exchange Agent, each certificate which theretofore
represented outstanding shares of NLD Common Stock will represent only the right
to receive IXC Common Stock, subject to any withholding of taxes. No dividend or
other distribution, if any, payable to holders of IXC Common Stock shall be paid
to the holders of any such certificates for shares of NLD Common Stock until
such certificates are surrendered, but upon surrender of such certificates all
such declared dividends and distributions, if any, shall be paid to the holder
of record of the shares of IXC Common Stock represented by the certificate
issued in exchange therefor, without interest.
NLD STOCKHOLDERS AND HOLDERS OF NLD OPTIONS AND NLD WARRANTS ARE REQUESTED
NOT TO SURRENDER THEIR CERTIFICATES REPRESENTING NLD COMMON STOCK OR INSTRUMENTS
REPRESENTING NLD OPTIONS OR NLD WARRANTS FOR EXCHANGE UNTIL THEY RECEIVE A
NOTICE AND TRANSMITTAL FORM FROM THE EXCHANGE AGENT.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
IXC, IXC Long Distance and Acquisition Corp., on the one hand, and NLD on the
other hand, relating to, among other things, the parties' organization,
financial statements, undisclosed liabilities, pending and threatened
litigation, certain tax matters and enforceability of the Merger Agreement.
These representations and warranties will expire on the Closing Date.
NO SOLICITATION
NLD has agreed that prior to the Effective Time it shall not, nor shall any
of its directors, officers, employees, agents or representatives, directly or
indirectly, solicit, initiate or encourage (including by way of furnishing or
disclosing information) inquiries or proposals concerning any merger,
consolidation or acquisition or purchase of all or any substantial portion of
the assets or capital stock of NLD ("NLD Acquisition Transaction") or negotiate
or enter into any discussions or other communications with any prospective
purchaser (other than IXC or its affiliates) with respect to any NLD Acquisition
Transaction, except to the extent required for the NLD Board and NLD's officers
to meet their fiduciary duties to the NLD Stockholders. NLD has also agreed to
immediately advise IXC of any inquiries or proposals relating to any NLD
Acquisition Transaction.
CONDITIONS TO THE MERGER
Mutual Conditions. The respective obligations of IXC and NLD to effect the
Merger are subject to the satisfaction or waiver at or before the Closing of
certain conditions including, without limitation:
(a) The receipt of Final Orders (as defined) of the Regulatory
Commissions approving and authorizing the transactions contemplated by the
Merger Agreement, which Final Orders are not to be unduly burdensome. A
"Final Order" means an order of any Regulatory Commission which is not
subject to rehearing by such Regulatory Commission or to judicial review.
(b) The Registration Statement shall be effective under the Securities
Act and shall not be the subject of any stop order by the Commission and
the NNM shall have approved for listing, subject to official notice of
issuance, the shares of IXC Common Stock issuable pursuant to the Merger.
(c) The receipt by each of IXC and NLD of a letter from its
independent public accountants, dated as of the Closing Date, in form and
substance reasonably satisfactory, in each case, to NLD and IXC, stating
that the transactions to be effected pursuant to the Merger Agreement will
qualify as a pooling of interests transaction under GAAP and applicable
Commission regulations.
(d) Any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
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IXC Conditions. The obligations of IXC, IXC Long Distance and Acquisition
Corp. to effect the Merger are subject to the satisfaction or waiver at or
before the Closing of certain conditions, including, without limitation:
(a) All representations and warranties of NLD contained in the Merger
Agreement shall be true and accurate in all material respects as of the
Closing.
(b) No material adverse effect in the financial condition, operations,
business or prospects of NLD and its subsidiaries (a "NLD Material Adverse
Event") shall have occurred from December 19, 1997 through the Closing Date
and the average monthly revenues of NLD, as determined in accordance with
the Merger Agreement, shall be at least $8,400,000.
(c) NLD shall perform and comply in all material respects with all of
its obligations under the Merger Agreement which are to be performed or
complied with by it prior to the Closing Date.
(d) NLD shall have delivered to IXC and Acquisition Corp. all of the
documents required to be delivered by it pursuant to the Merger Agreement
and IXC and IXC's counsel shall have approved the form and substance of
such documents.
(e) There shall be no claims, actions or suits pending or threatened
against NLD or any of its subsidiaries that would restrict or prohibit NLD
from consummating the transactions contemplated by the Merger Agreement.
(f) The approval of the Merger by NLD Stockholders shall have been
obtained.
(g) Prior to the Closing, there shall not have occurred any damage,
destruction or loss in respect of NLD or its assets exceeding $500,000 not
covered by insurance.
(h) Neither NLD nor any of its subsidiaries shall have suffered or
incurred the loss, termination, suspension or adverse modification to, or
been threatened with any such loss, termination, suspension or adverse
modification to, any certificate, license or permit necessary or required
for NLD or such subsidiary to continue, both before and after the Effective
Time, to operate and conduct its business in the manner, and in the
geographic areas, currently conducted by it as of December 19, 1997, except
such as would not have an NLD Material Adverse Effect.
(i) All Regulatory Commission approvals and material regulatory
approvals, including all licenses, permits, authorizations, consents and
other approvals of and filings with any governmental or regulatory agency
required to be obtained or made in connection with the consummation of the
transactions contemplated by the Merger Agreement shall have been obtained
or made by or on behalf of the parties to the Merger Agreement.
(j) All material consents of other third parties required to have been
obtained in connection with the consummation of the transactions
contemplated by the Merger Agreement shall have been obtained by or on
behalf of NLD.
NLD Conditions. The obligations of NLD to effect the Merger are subject to
the satisfaction or waiver at or before the Closing of certain conditions,
including, without limitation:
(a) All representations and warranties of IXC and Acquisition Corp. in
the Merger Agreement shall be true and accurate in all material respects as
of the Closing.
(b) No material adverse effect on the financial condition, operations,
business or prospects of IXC and its subsidiaries (an "IXC Material Adverse
Effect") shall have occurred from December 19, 1997 through the Closing
Date.
(c) IXC and Acquisition Corp. shall perform and comply in all material
respects with all of their obligations under the Merger Agreement which are
to be performed or complied with by IXC or Acquisition Corp. prior to the
Closing Date.
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(d) IXC and Acquisition Corp. shall have delivered to NLD all of the
documents required to be delivered by them pursuant to the Merger Agreement
and NLD and NLD's counsel shall have approved the form and substance of
such documents.
(e) There shall be no claims, actions or suits pending or threatened
against IXC, IXC Long Distance or Acquisition Corp. that would restrict or
prohibit IXC, IXC Long Distance or Acquisition Corp. from consummating the
transactions contemplated by the Merger Agreement.
(f) The approval of the Merger by NLD Stockholders shall have been
obtained.
COVENANTS; CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME
NLD Covenants. The Merger Agreement provides that NLD agrees that from
December 19, 1997 through the Effective Time that:
(a) NLD shall, and shall cause each of its subsidiaries to, continue
to carry on its telecommunications business and keep its books of account,
records and files in substantially the same manner as heretofore. NLD will
continue, and will cause each of its subsidiaries to continue, to carry on
such activities, plans, capital and operating programs which were approved
by the NLD Board prior to December 19, 1997, provided that such activities,
plans and programs shall not involve expenditures exceeding $250,000 for
each such activity, plan or program unless approved by IXC.
(b) Subject to the terms of the Merger Agreement, NLD shall take all
necessary corporate and other action required of it to carry out the
transactions contemplated by the Merger Agreement.
(c) NLD will obtain, and will cause each of its subsidiaries to
obtain, or cause to be obtained the consent of any third party whose
consent is required in order that NLD can enter into and consummate the
transactions contemplated by the Merger Agreement without material
violation of any representation, warranty or covenant made by it in the
Merger Agreement; provided, however, that if in the reasonable business
judgment of NLD and IXC, it would be impracticable to obtain regulatory
approval of the Merger in a jurisdiction, the failure to obtain such
approval will not be a breach of this covenant.
(d) Promptly after the occurrence, or failure to occur, of any event,
the occurrence or failure of which (i) would result in an NLD Material
Adverse Effect, or could reasonably be expected to result in an NLD
Material Adverse Effect or materially adversely affect the ability of NLD
to perform any of its obligations under the Merger Agreement, (ii) if known
as of December 19, 1997, would have been required to be disclosed to IXC,
or (iii) causes any representation or warranty contained in the Merger
Agreement to be untrue or inaccurate in any material respect at any time
from December 19, 1997 to and including the Closing Date, NLD shall provide
IXC with all relevant information related thereto.
Additionally, subject to the terms of the Merger Agreement, NLD and its
subsidiaries have agreed not to do any of the following without the prior
written consent of IXC:
(i) Issue, sell, purchase or redeem, or grant shares, options,
warrants or such other rights to purchase or otherwise agree to issue,
sell, purchase or redeem any shares of its capital stock or any other
securities of NLD or any of its subsidiaries;
(ii) Amend its Certificate of Incorporation or amend its Bylaws;
(iii) Incur or prepay any liability for borrowed money, short term
debt or long term debt (as those terms are defined in GAAP) or, at Closing,
have any Indebtedness as defined in the Senior Notes Indenture;
(iv) Pay or guarantee any obligation or liability, other than (A)
obligations or liabilities reflected in the balance sheet contained in the
NLD's unaudited consolidated financial statements for the quarters ending
June 30, 1997 and September 30, 1997, when due, (B) liabilities incurred
since the date of such balance sheet in the ordinary course of business and
(C) obligations under contracts and agreements referred to in the Merger
Agreement or entered into in the ordinary course of business;
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(v) Adopt or modify any severance, consulting, bonus, pension, profit
sharing, benefit or other compensation plan or arrangement or increase its
overall work force, other than in the normal course of business, or enter
into any written contract of employment requiring payments of more than
$75,000 in any 12-month period;
(vi) Enter into or modify any contract or commitment, incur any
liability, absolute or contingent, waive or fail to enforce any right or
enter into any other transactions, other than in the ordinary course of
business;
(vii) Willfully take any action that would or might reasonably be
expected to result in any representation or warranty set forth in the
Merger Agreement being or becoming untrue in any material respect or in any
of the conditions to the consummation of the transactions contemplated by
the Merger Agreement not being satisfied;
(viii) Have declared, paid, made or become obligated to make any
dividend payment or other distribution to the NLD Stockholders;
(ix) Enter into any material contracts (or modify in a material way
any such existing contracts) for (A) the material purchase of
communications services, or (B) the acquisition (by merger, consolidation
or acquisition of stock or assets or otherwise) of any corporation,
partnership or other business organization or division thereof;
(x) Willfully take any action which would, or would be reasonably
likely to, prevent accounting for the transactions contemplated by the
Merger Agreement as a pooling of interests in accordance with GAAP and
applicable Commission regulations;
(xi) Take any action which would, or would be reasonably likely to,
adversely affect the ability of the Merger to qualify for tax-free
treatment under the Code, both to the parties to the Merger Agreement and
their respective shareholders;
(xii) Make any changes in its accounting methods, except as required
by law, rule, regulation, or GAAP; or
(xiii) Fail to maintain its advertising and promotional expenditures
in the ordinary course of business consistent with past practice.
IXC Covenants. The Merger Agreement provides that IXC agrees that from
December 19, 1997 through the Effective Time that:
(a) IXC shall continue to carry on its telecommunications business and
keep its books of account, records and files in substantially the same
manner as heretofore.
(b) Subject to the terms of the Merger Agreement, IXC shall take, and
shall cause IXC Long Distance and Acquisition Corp. to take, all necessary
corporate and other action required of it to carry out the transactions
contemplated by the Merger Agreement.
(c) IXC will obtain or cause to be obtained the consent of any third
party whose consent is required in order that IXC can enter into and
consummate the transactions contemplated by the Merger Agreement without
material violation of any representation, warranty or covenant made by it
in the Merger Agreement; provided, however, that if in the reasonable
business judgment of NLD and IXC, it would be impracticable to obtain
regulatory approval of the Merger in a jurisdiction, the failure to obtain
such approval will not be a breach of this covenant.
(d) Promptly after the occurrence, or failure to occur, of any event,
the occurrence or failure of which (i) would result in an IXC Material
Adverse Effect or could reasonably be expected to result in an IXC Material
Adverse Effect or materially adversely affect the ability of IXC to perform
any of its obligations under the Merger Agreement, (ii) if known as of
December 19, 1997, would have been required to be disclosed to NLD, or
(iii) causes any representation or warranty of IXC contained in the Merger
Agreement to be untrue or inaccurate in any material respect at any time
from December 19,
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1997 to and including the Closing Date, IXC shall provide to NLD all
relevant information related thereto.
Additionally, subject to the terms of the Merger Agreement, IXC has agreed
not to do any of the following without the prior written consent of NLD:
(i) From December 19, 1997 through the Effective Time, issue, sell,
purchase or redeem, or grant options to purchase or otherwise agree to
issue, sell, purchase or redeem any shares of its capital stock or other
securities of IXC except for fair value as determined as of the date of
grant or agreement in the good faith judgment of the IXC Board of
Directors;
(ii) Willfully take any action that would or might reasonably be
expected to result in any representation or warranty set forth in the
Merger Agreement being or becoming untrue in any material respect or in any
of the conditions to the consummation of the transactions contemplated by
the Merger Agreement not being satisfied;
(iii) Make or become obligated to make any cash dividend payment or
other cash distribution to the holders of IXC Common Stock;
(iv) Willfully take any action which would, or would be reasonably
likely to, prevent accounting for the transactions contemplated by the
Merger Agreement as a pooling of interests in accordance with GAAP and
applicable Commission regulations; or
(v) Willfully take any action which would, or would be reasonably
likely to, adversely affect the ability of the Merger to qualify for
tax-free treatment under the Code, both to the parties to the Merger
Agreement and their respective shareholders (except for any cash received
in lieu of fractional shares).
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement and the Merger may be terminated at any time prior to
the Effective Time, whether before or after approval by the NLD Stockholders,
by:
(i) The mutual consent of the Boards of Directors of NLD and IXC;
(ii) IXC, if NLD is in willful breach of any of its representations,
warranties, covenants or agreements under the Merger Agreement in any
material respect and such breach has not been cured within 20 business days
of IXC's notice to NLD of such breach;
(iii) NLD, if IXC, IXC Long Distance or Acquisition Corp. is in
willful breach of any of its representations, warranties, covenants or
agreements under the Merger Agreement in any material respect and such
breach has not been cured within 20 business days of NLD's notice to IXC of
such breach;
(iv) Either NLD or IXC, if the consummation of the Merger has been
enjoined and such injunction is not subject to appeal or if a Final Order
which contains an unduly burdensome term, condition or provision is issued
and no appeal is taken by either party therefrom;
(v) Either NLD or IXC, by written notice to the other, if the approval
of the Merger by the NLD Stockholders shall not have been obtained at the
Special Meeting, including any adjournments thereof;
(vi) The Board of Directors of NLD or IXC if the Merger shall not have
become effective on or before December 31, 1998; provided, however, that
the right to terminate the Merger Agreement under this section should not
be available to any party whose failure to fulfill any obligation under the
Merger Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before such date; and provided further, if
any condition to the Merger Agreement shall fail to be satisfied by reason
or the existence of an injunction or order of any court or governmental or
regulatory body, then at the request of either party the deadline date
referred to above shall be extended for a reasonable period of time, not in
excess of 60 days, to permit the parties to have such injunction vacated or
order reversed; or
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(vii) NLD if it received a bona fide, fully funded offer (an "NLD
Fully-Funded Offer") to acquire all of its outstanding common stock or all
or substantially all of its assets, which, after taking into account the
payment of the Termination Fee would in the opinion of the NLD Board result
in a value (at the time of the closing of such acquisition) to the NLD
Stockholders greater than $142 million.
FEES AND EXPENSES OF THE MERGER
NLD has agreed to pay IXC the Termination Fee ($7.5 million) in the event
NLD terminates the Merger Agreement because it has received an NLD Fully-Funded
Offer.
In the event that the Merger Agreement shall be terminated as described
above, all obligations of the parties under the Merger Agreement shall
terminate, except the obligation to pay the Termination Fee, and there shall be
no liability of any party thereto to another (except by reason of any breach by
any party of its representations, warranties, covenants or agreements hereunder
which has not been waived). Otherwise, IXC and NLD shall each pay its own costs
and expenses in connection with the Merger Agreement; provided, however, that
any costs paid in connection with the printing of the Registration Statement
shall be borne equally by IXC and NLD.
COMPARATIVE RIGHTS OF STOCKHOLDERS
Upon consummation of the Merger, the NLD Stockholders will become
stockholders of IXC, a Delaware corporation, and their rights will be governed
by IXC's Restated Certificate of Incorporation, as amended (the "IXC Charter")
and bylaws, as amended (the "IXC Bylaws"), which differ in certain material
respects from NLD's Certificate of Incorporation, as amended (the "NLD Charter")
and bylaws, as amended (the "NLD Bylaws"). As stockholders of IXC, the rights of
the former NLD Stockholders will continue to be governed by the DGCL.
The following comparison of the IXC Charter and the IXC Bylaws, on the one
hand, and the NLD Charter and the NLD Bylaws, on the other, is not intended to
be complete and is qualified in its entirety by reference to the IXC Charter,
the IXC Bylaws, the NLD Charter and the NLD Bylaws. Copies of the IXC Charter
and the IXC Bylaws are available for inspection at the offices of IXC, and
copies will be sent to the NLD Stockholders upon request. Copies of the NLD
Charter and the NLD Bylaws are available for inspection at the principal
executive offices of NLD, and copies will be sent to the NLD Stockholders upon
request.
NUMBER OF DIRECTORS
The DGCL provides that a corporation's board of directors shall consist of
at least one member and that the authorized number of directors shall be fixed
in the corporation's bylaws, unless the certificate of incorporation fixes the
number of directors. The IXC Bylaws provide that the authorized number of
directors constituting the IXC Board shall be not less than seven nor more than
nine and is currently set at seven. The NLD Charter and the NLD Bylaws provide
that the NLD Board shall consist of no less than three nor more than eleven
directors. The NLD Board currently consists of eight members.
The number of directors of IXC may be changed by the affirmative vote of a
majority of the IXC Board entitled to vote or by the affirmative vote of a
majority of the shares of capital stock of IXC entitled to vote, provided that,
in the event payment of dividends on the Convertible Preferred Stock or the
Exchangeable Preferred Stock are in arrears for six or more dividend periods,
and in certain other instances described in the IXC Charter, the IXC Board shall
be automatically increased by two and such holders of Convertible Preferred
Stock or Exchangeable Preferred Stock, as the case may be, will be entitled to
elect two additional members to the IXC Board. The NLD Charter provides that the
number of directors constituting the whole NLD Board can be increased above
three by the vote of the majority of the NLD Board. The NLD Charter also
provides that its provisions relating to the NLD Board may be changed only by
the affirmative vote of at least 80% of the outstanding shares of NLD Common
Stock entitled to vote for the election of directors.
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CLASSIFICATION
The NLD Charter provides that the NLD Board will be divided into three
classes, with each class serving for a term of three years. The term of only one
class of directors expires annually, so it is only possible to elect one class
of the NLD Board (currently either three or four members of the NLD Board) in
any one year. The IXC Board is not classified.
REMOVAL OF DIRECTORS; FILLING VACANCIES ON THE BOARD OF DIRECTORS
Under the DGCL, any director or the entire board of directors generally may
be removed, with or without cause, by the holders of a majority of the shares
entitled to vote at an election of directors; provided, however, that directors
serving on a classified board may be removed only for cause unless the
corporation's charter provides otherwise. The IXC Bylaws provide that any
director may be removed, with or without cause, by the majority vote of the
shares entitled to vote at an election of directors. The NLD Charter provides
that NLD Stockholders representing 80% of the outstanding shares of NLD Common
Stock entitled to vote for the election of directors may remove an NLD director,
but only for cause.
The DGCL generally provides that all vacancies on the board of directors,
including vacancies caused by an increase in the number of authorized directors,
may be filled by a majority of the remaining directors even if they constitute
less than a quorum, unless otherwise provided in a corporation's bylaws or
certificate of incorporation. Both the IXC Bylaws and the NLD Charter provide
that vacancies may be filled by a majority of the directors then in office even
if such remaining directors constitute less than a quorum.
LIMITATION ON DIRECTORS' LIABILITY
The DGCL permits a corporation to limit the personal liability of its
directors, with specified exceptions. The DGCL permits a corporation to include
in its certificate of incorporation a provision limiting or eliminating the
liability of its directors to such corporation or its stockholders for monetary
damages arising from a breach of fiduciary duty, except for liability for: (i) a
breach of the duty of loyalty, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) a
declaration of a dividend or the authorization of the repurchase or redemption
of stock in violation of the DGCL or (iv) any transaction from which the
director derived an improper personal benefit. The IXC Charter eliminates
director liability as provided in the DGCL. The NLD Charter contains no
provision regarding elimination or limitation of personal liability of
directors.
INDEMNIFICATION
The DGCL provides in general that a corporation may indemnify any person,
including its directors, officers, employees and agents, who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than actions by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation or serving at the request of the corporation as a
director, officer, employee or agent of another corporation or entity, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with the
action, suit or proceeding if the person acted in good faith and in a manner the
person reasonably believed to be in, or not opposed to, the best interests of
the corporation and, with respect to any criminal proceeding, had no reasonable
cause to believe the person's conduct was unlawful. The DGCL permits similar
indemnification for expenses in the case of actions by or in the right of the
corporation. In general, no indemnification for expenses in derivative actions
is permitted under the DGCL where the person has been adjudged liable to the
corporation, unless a court finds him or her entitled to such indemnification.
However, to the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding, or in defense of any claim, issue or matter, he or
she shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him or her in connection therewith. The DGCL also
provides that the indemnification permitted or required by the DGCL is not
exclusive of any other rights to which a person seeking indemnification may be
entitled.
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The NLD Charter provides for indemnification of its officers, directors,
employees and agents, as set forth in DGCL as described above. The IXC Bylaws
provide for indemnification of directors, officers, employees and agents to the
fullest extent permitted by the DGCL.
RESTRICTIONS ON BUSINESS COMBINATIONS/CORPORATE CONTROL
Section 203 of the DGCL applies to a broad range of business combinations
(as defined in the DGCL) between a Delaware corporation and an interested
stockholder (as defined). The DGCL definition of "business combination" includes
mergers, sales of assets, issuance of voting stock and certain other
transactions. An "interested stockholder" is defined to include any person who
owns, directly or indirectly, 15% or more of the outstanding voting stock of a
corporation. The DGCL prohibits a corporation from engaging in a business
combination with an interested stockholder for a period of three years following
the date on which the stockholder became an interested stockholder, unless (i)
the board of directors approved the business combination before the stockholder
became an interested stockholder, or the board of directors approved the
transaction that resulted in the stockholder becoming an interested stockholder,
(ii) upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, such stockholder owned at least 85% of the
voting stock outstanding when the transaction began other than shares held by
directors who are also officers and by certain employee stock plans, or (iii)
the board of directors approved the business combination at or after the
stockholder became an interested stockholder and the business combination was
approved at a meeting by at least two-thirds of the outstanding voting stock not
owned by such stockholder. Both IXC and NLD are subject to the provisions of
Section 203 of the DGCL. Neither IXC, IXC Long Distance nor Acquisition Corp. is
an interested stockholder of NLD for purposes of Section 203.
SPECIAL MEETINGS
Under the DGCL, a special meeting of the stockholders may be called by the
board of directors or such other person as may be authorized by the certificate
of incorporation or bylaws. The IXC Bylaws provide that special meetings of
stockholders may be called by the president and shall be called by the president
or secretary at the request in writing of a majority of the Board, or at the
request of the holders of shares of a majority of the capital stock of IXC
issued and outstanding and entitled to vote. The NLD Bylaws provide that special
meetings of the NLD Stockholders may be called by the president, the NLD Board,
the holders of not less than one-tenth of all the shares of NLD entitled to vote
at the meeting or NLD's legal counsel.
AMENDMENT OR REPEAL OF THE CHARTER AND BYLAWS
Under the DGCL, a corporation may amend its certificate of incorporation,
from time to time, in any and as many respects as may be desired, so long as its
certificate of incorporation as amended would contain only such provisions as it
would be lawful and proper to insert in an original certificate of
incorporation. The DGCL also provides that a certificate of incorporation may
confer on the board of directors the power to amend the bylaws. Additionally,
under the DGCL, a corporation's bylaws may be amended by the stockholders
entitled to vote, which power may not be divested or limited where the board
also has such power. The IXC Bylaws provide that such bylaws may be amended by
the Board of Directors and the IXC Charter confers on the IXC Board the power to
amend the IXC Bylaws. The NLD Charter does not confer on the NLD Board the power
to amend the NLD Bylaws.
CUMULATIVE VOTING
Under the DGCL, cumulative voting of stock applies only when so provided in
the certificate of incorporation of a corporation. Neither the IXC Charter nor
the NLD Charter provides for cumulative voting.
APPRAISAL RIGHTS IN MERGERS
The DGCL provides that stockholders have the right, in some circumstances,
to dissent from certain corporate reorganizations and to instead demand payment
of the fair cash value of their shares. The DGCL
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does not provide for appraisal rights in connection with a merger or
consolidation (unless the certificate of incorporation so provides, which the
NLD Charter does not) to the holders of shares of a constituent corporation (i)
listed on a national securities exchange (or designated as a national market
system security by the National Association of Securities Dealers, Inc.) or (ii)
held of record by more than 2,000 stockholders, unless the applicable agreement
of merger or consolidation requires the holders of such shares to receive, in
exchange for such shares, any property other than (A) shares of stock of the
resulting or surviving corporation, (B) shares of stock of any other corporation
listed on a national securities exchange (or designated as described above) or
held of record by more than 2,000 holders, (C) cash in lieu of fractional shares
or (D) any combination of the foregoing. Neither the IXC Charter nor the NLD
Charter provides for such rights of appraisal.
DIVIDENDS
The DGCL permits a corporation to pay dividends out of surplus (defined as
the excess, if any, of net assets over capital) or, if no surplus exists, out of
its net profits for the fiscal year in which such dividends are declared and/or
for its preceding fiscal year, provided, that dividends may not be paid out of
net profits if the capital of such corporation is less than the aggregate amount
of capital represented by the outstanding stock of all classes having a
preference upon the distribution of assets. The IXC Charter provides for the
payment of dividends on IXC's preferred stock. In addition, the IXC Charter
provides for quarterly dividend payments on its 1997 Convertible Preferred Stock
and its Exchangeable Preferred Stock at an annual rate of 7 1/4% and 12 1/2% of
the aggregate liquidation preference thereof, respectively, payable in cash (or,
on or prior to February 15, 2001 and March 31, 1999, at the option of IXC, in
additional shares of Convertible Preferred Stock or Exchangeable Preferred
Stock, respectively). The IXC Charter also provides for quarterly dividend
payments on its 1998 Convertible Preferred Stock at an annual rate of 6 3/4% of
the aggregate liquidation preference thereof payable in cash or, if the
documents governing IXC's indebtedness as of the issuance of the 1998
Convertible Preferred Stock prohibit such payment in cash, in shares of IXC
Common Stock. No dividends can be paid on the IXC Common Stock until all
dividends are paid in full on the Exchangeable Preferred Stock, the 1998
Convertible Preferred Stock and the 1997 Convertible Preferred Stock. At
December 31, 1997, the aggregate liquidation preference of the 1997 Convertible
Preferred Stock and the Exchangeable Preferred Stock were approximately $105.5
million and $309.0 million, respectively. IXC issued 135,000 shares of 1998
Convertible Preferred Stock on March 30, 1998 with an aggregate liquidation
preference of $135 million on such date. IXC issued an additional 20,250 shares
of 1998 Convertible Preferred Stock on April 14, 1998 with an aggregate
liquidation preference of $20.25 million on such date. IXC has never paid any
cash dividends on the IXC Common Stock and does not expect to pay cash dividends
on the IXC Common Stock in the foreseeable future. In addition, the Senior Notes
Indenture restricts payment of cash dividends until IXC meets certain financial
criteria. The IXC Bylaws provide that the IXC Board may declare dividends at any
special or regular meeting. IXC has not declared or paid cash dividends on the
IXC Common Stock since its initial public offering and does not intend to pay
such dividends in the foreseeable future. According to the NLD Bylaws, holders
of shares of NLD Common Stock are entitled to receive such dividends as may be
declared by the NLD Board whenever, and in such amounts, as the NLD Board deems
advisable. NLD has not declared or paid cash dividends on the NLD Common Stock
and does not intend to pay dividends prior to the consummation of the Merger.
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UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS FOR
IXC AND NLD
The following unaudited pro forma combined condensed financial data reflect
the combination of the historical consolidated balance sheets and related
consolidated statements of operations of IXC with the consolidated balance
sheets and statements of operations of NLD, using the pooling of interests
method of accounting for a business combination.
The pro forma combined condensed balance sheet as of December 31, 1997
assumes that the Merger occurred as of that date and reflects the combination of
the historical balance sheet of IXC as of December 31, 1997 with the historical
balance sheet of NLD as of December 31, 1997.
As a result of the differing year ends of IXC and NLD, results of
operations for different year ends have been combined. IXC's results of
operations for years ended December 31, 1997, 1996 and 1995 have been combined
with NLD's results of operations for the twelve month period ended December 31,
1997, and results of operations for the years ended March 31, 1997 and 1996,
respectively. Accordingly, NLD's operating results for the periods January 1,
1997 through March 31, 1997 are included in the Pro Forma Financial Statements
for both of the years ended December 31, 1997 and 1996. Revenue, net loss and
basic net loss per share of NLD was $22.6 million, $2.7 million and $.29,
respectively, for the period January 1, 1997 through March 31, 1997. The
unaudited pro forma combined statements of operations reflect the assumption
that the Merger occurred at the beginning of each of the periods presented.
NLD consummated several acquisitions during the periods presented.
Accordingly, included elsewhere herein are separate pro forma combined
statements of operations of NLD which reflect those acquisitions.
The following unaudited pro forma combined condensed financial information
has been prepared from, and should be read in conjunction with, the historical
consolidated financial statements and notes thereto of IXC and the historical
consolidated and pro forma combined financial statements of NLD, incorporated by
reference or presented in this Proxy Statement/Prospectus. This pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the results of operations or financial position that would have
occurred had the Merger been consummated on the dates indicated in the preceding
paragraphs, nor is it necessarily indicative of future operating results or
financial position of the combined companies.
52
<PAGE> 62
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR
IXC AND NLD
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
IXC PRO FORMA
HISTORICAL NLD* ADJUSTMENTS COMBINED
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net operating revenues:
Private Line.................................. $ 162,398 $ -- $ -- $ 162,398
Switched Long Distance........................ 258,312 108,117 -- 366,429
--------- -------- -------- ---------
420,710 108,117 -- 528,827
Operating Expenses:
Cost of Services.............................. 325,127 68,008 -- 393,135
Operations and administration................. 80,070 38,341 -- 118,411
Depreciation and amortization................. 60,748 11,062 -- 71,810
--------- -------- -------- ---------
465,945 117,411 -- 583,356
--------- -------- -------- ---------
Operating loss............................. (45,235) (9,294) -- (54,529)
Interest income (expense), net.................. (23,571) (707) -- (24,278)
Other, net...................................... (560) (315) -- (875)
Equity in net loss of unconsolidated
subsidiaries.................................. (23,800) -- -- (23,800)
--------- -------- -------- ---------
Loss before income taxes........................ (93,166) (10,316) -- (103,482)
Provision for income taxes...................... (1,389) (960) -- (2,349)
--------- -------- -------- ---------
Net loss from continuing operations............. $ (94,555) $(11,276) $ -- $(105,831)
========= ======== ======== =========
Basic and diluted loss per share before
extraordinary items........................... $ (3.75) $ (3.65)
========= =========
Weighted average basic and diluted shares....... 30,961 34,902
========= =========
</TABLE>
- ---------------
* See NLD pro forma combined statement of operations for the twelve months ended
December 31, 1997.
See accompanying Notes to Pro Forma Combined Condensed Financial Statements
53
<PAGE> 63
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR
IXC AND NLD
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
IXC PRO FORMA
HISTORICAL NLD* ADJUSTMENTS COMBINED
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net operating revenues:
Private Line................................. $ 99,793 $ -- $ -- $ 99,793
Switched Long Distance....................... 103,968 103,365 -- 207,333
-------- -------- -------- --------
203,761 103,365 307,126
Operating Expenses:
Cost of Services............................. 143,469 67,306 -- 210,775
Operations and administration................ 47,067 32,750 -- 79,817
Depreciation and amortization................ 27,241 11,090 -- 38,331
-------- -------- -------- --------
217,777 111,146 -- 328,923
-------- -------- -------- --------
Operating loss............................ (14,016) (7,781) -- (21,797)
Interest income (expense), net................. (26,834) (992) -- (27,826)
Other, net..................................... (618) 74 -- (544)
Equity in net loss of unconsolidated
subsidiaries................................. (1,961) -- -- (1,961)
-------- -------- -------- --------
Loss before income taxes....................... (43,429) (8,699) -- (52,128)
Benefit (provision) for income taxes........... 5,981 (196) -- 5,785
-------- -------- -------- --------
Net loss from continuing operations............ $(37,448) $ (8,895) $ -- $(46,343)
======== ======== ======== ========
Basic and diluted loss per share before
extraordinary items.......................... $ (1.42) $ (1.53)
======== ========
Weighted average basic and diluted shares...... 27,525 31,376
======== ========
</TABLE>
- ---------------
* See NLD pro forma combined statement of operations for year ended March 31,
1997.
See accompanying Notes to Pro Forma Combined Condensed Financial Statements
54
<PAGE> 64
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR
IXC AND NLD
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
IXC PRO FORMA
HISTORICAL NLD* ADJUSTMENTS COMBINED
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net operating revenues:
Private Line....................................... $ 89,563 $ -- $ -- $ 89,563
Switched Long Distance............................. 1,438 88,158 -- 89,596
-------- ------- -------- --------
91,001 88,158 -- 179,159
Operating Expenses:
Cost of Services................................... 39,852 61,635 -- 101,487
Operations and administration...................... 32,282 28,628 -- 60,910
Depreciation and amortization...................... 17,438 4,397 -- 21,835
-------- ------- -------- --------
89,572 94,660 -- 184,232
-------- ------- -------- --------
Operating income (loss)......................... 1,429 (6,502) -- (5,073)
Interest income (expense), net....................... (11,577) (1,177) -- (12,754)
Other, net........................................... 5,218 29 -- 5,247
Equity in net income of unconsolidated
subsidiaries....................................... 19 -- -- 19
-------- ------- -------- --------
Loss before income taxes, and extraordinary loss..... (4,911) (7,650) -- (12,561)
Benefit (provision) for income taxes................. 1,693 (565) -- 1,128
-------- ------- -------- --------
Net loss from continuing operations.................. (3,218) (8,215) -- (11,433)
======== ======= ======== ========
Basic and diluted loss per share before extraordinary
loss............................................... $ (0.21) $ (0.48)
======== ========
Weighted average basic and diluted shares............ 24,335 27,941
======== ========
</TABLE>
- ---------------
* See NLD pro forma combined statement of operations for the year ended March
31, 1996.
See accompanying Notes to Pro Forma Combined Condensed Financial Statements
55
<PAGE> 65
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET FOR
IXC AND NLD
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
IXC NLD PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $152,720 $ 1,087 $ -- $153,807
Accounts receivable.......................... 93,286 16,593 -- 109,879
Other current assets......................... 3,500 1,453 -- 4,953
-------- ------- ------ --------
Total current assets...................... 249,506 19,133 -- 268,639
-------- ------- ------ --------
Property and equipment, net.................... 608,937 4,938 -- 613,875
Other assets................................... 58,652 25,839 -- 84,491
-------- ------- ------ --------
TOTAL ASSETS.............................. $917,095 $49,910 $ -- $967,005
======== ======= ====== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities............................ $181,677 $18,595 $ -- $200,272
Long-term debt and capital lease obligations... 308,124 1,025 -- 309,149
Other non-current liabilities.................. 71,881 676 -- 72,557
-------- ------- ------ --------
561,682 20,296 -- 581,978
-------- ------- ------ --------
7 1/4% Junior Convertible Preferred Stock...... 101,239 -- -- 101,239
12 1/2% Junior Exchangeable Preferred Stock.... 302,129 -- -- 302,129
-------- ------- ------ --------
403,368 -- -- 403,368
-------- ------- ------ --------
10% Junior Series 3 Preferred Stock............ 1 -- -- 1
Common Stock................................... 316 1 39 356
Additional paid in capital..................... 106,559 38,666 (39) 145,186
Retained earnings (deficit).................... (154,831) (9,053) -- (163,884)
-------- ------- ------ --------
(47,955) 29,614 -- (18,341)
-------- ------- ------ --------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY..................... $917,095 $49,910 $ -- $967,005
======== ======= ====== ========
</TABLE>
See accompanying Notes to Pro Forma Combined Financial Statements
56
<PAGE> 66
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS FOR
IXC AND NLD
1. BASIS OF PRESENTATION
On December 19, 1997, IXC and NLD entered into an agreement and plan of
merger that provides for the merger of IXC with NLD. Under the terms of the
merger agreement, each outstanding share of NLD Common Stock will be converted
into the right to receive 0.2998 of a share of IXC Common Stock. The business
combination is intended to be accounted for using the pooling of interests
method of accounting for business combinations.
2. PRO FORMA ADJUSTMENTS
a) To give effect to the issuance of 4.0 million shares of IXC Common Stock
in exchange for all of the shares of NLD Common Stock outstanding as of
December 31, 1997 and to the retirement of the NLD Common Stock, based
upon an exchange ratio of 0.2998. The actual number of shares of IXC
Common Stock will be determined at the effective time.
b) There were no transactions between IXC and NLD during the periods
presented.
3. BASIC AND DILUTIVE LOSS PER SHARE
The pro forma combined basic and diluted earnings per share for the
respective periods presented is based on the combined weighted average number of
common shares of IXC and NLD. The number of shares of NLD Common Stock is based
on the Exchange Ratio or 0.2998 of IXC Common Stock for each issued and
outstanding share of NLD Common Stock.
57
<PAGE> 67
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR
NLD
The accompanying unaudited Pro Forma Combined Statements of Operations for
the twelve months ended December 31, 1997 and years ended March 31, 1997 and
1996, illustrate the effect of NLD's acquisition of ETI on May 5, 1997 and the
acquisition of substantially all of the customer base of Universal Network
Service, Inc. ("UniNet") on May 31, 1996, in each case, as if such acquisition
had occurred at the beginning of the applicable period. Both acquisitions were
accounted for as a purchase.
These Unaudited Pro Forma Combined Statements of Operations should be read
in conjunction with the historical statements of NLD, ETI and UniNet.
These Unaudited Pro Forma Combined Statements of Operations are presented
in connection with the IXC and NLD pro forma presentation included elsewhere in
this Proxy Statement/Prospectus. In connection therewith, certain financial
statement items have been reclassified from NLD's historical financial statement
presentation to conform to IXC's method of presentation including classification
of NLD's, ETI's and UniNet's historical provision for losses on accounts
receivable as a reduction in net operating revenue and classification of NLD's
historical provision to reduce carrying value of certain assets as depreciation
and amortization.
These Pro Forma Combined Statements of Operations are presented for
comparative purposes only and are not intended to be indicative of actual
results had the transactions occurred as of the dates indicated above nor do
they purport to indicate results which may be attained in the future.
58
<PAGE> 68
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR
NLD(1)(2)
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NLD ETI PRO FORMA NLD
HISTORICAL(3) HISTORICAL(4) ADJUSTMENTS ADJUSTED
------------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Net operating revenues:
Switched long distance.................. $ 98,286 $ 9,831 $ -- $108,117
Operating expenses:
Cost of services........................ 63,234 4,774 -- 68,008
Operations and administration........... 32,278 6,063 -- 38,341
Depreciation and amortization(8)........ 10,230 245 587(5) 11,062
-------- ------- ----- --------
105,742 11,082 587 117,411
-------- ------- ----- --------
Operating loss............................ (7,456) (1,251) (587) (9,294)
Interest expense, net..................... (447) (155) (105)(6) (707)
Other, net................................ (81) (234) -- (315)
-------- ------- ----- --------
Loss before income taxes.................. (7,984) (1,640) (692) (10,316)
Benefit (provision) for income taxes...... (801) (195) 36(7) (960)
-------- ------- ----- --------
Net loss.................................. $ (8,785) $(1,835) $(656) $(11,276)
======== ======= ===== ========
Number of shares issued and
outstanding(9):
Basic................................... 11,884 13,146
======== ========
Diluted................................. 11,884 13,146
======== ========
Loss per share:
Basic................................... $ (0.74) $ (0.86)
======== ========
Diluted................................. $ (0.74) $ (0.86)
======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Statements of Operations.
59
<PAGE> 69
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR
NLD(1)(2)
FOR THE YEAR ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ETI
NLD/ HISTORICAL --
UNINET 11 MONTHS ENDED
NLD UNINET PRO FORMA PRO FORMA MARCH 31, PRO FORMA
HISTORICAL(10) HISTORICAL(11) ADJUSTMENTS COMBINED 1997(13) ADJUSTMENTS
-------------- -------------- ----------- --------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues:
Switched long distance.......... $82,755 $2,326 $(776)(12) $84,305 $19,060 $ --
Operating expenses:
Cost of services................ 55,961 1,775 (592)(12) 57,144 10,162 --
Operations and administration... 24,036 827 -- 24,863 7,887 --
Depreciation and
amortization(8)............... 8,684 149 (149)(12) 8,775 630 1,685(5)
91(5)
------- ------ ----- ------- ------- -------
88,681 2,751 (650) 90,782 18,679 1,685
------- ------ ----- ------- ------- -------
Operating income (loss)........... (5,926) (425) (126) (6,477) 381 (1,685)
Interest income (expenses), net... (560) 76 (76)(11) (615) (77) (300)(6)
(55)(6)
Other, net........................ (200) -- -- (200) 274 --
------- ------ ----- ------- ------- -------
Income (loss) before income
taxes........................... (6,686) (349) (257) (7,292) 578 (1,985)
Benefit (provision) for income
taxes........................... (101) -- -- (101) (197) 102(7)
------- ------ ----- ------- ------- -------
Net income (loss)................. $(6,787) $ (349) $(257) $(7,393) $ 381 $(1,883)
======= ====== ===== ======= ======= =======
Number of shares issued and
outstanding(9):
Basic........................... 9,179 9,211
======= =======
Diluted......................... 9,179 9,211
======= =======
Loss per share:
Basic........................... $ (0.74) $ (0.80)
======= =======
Diluted......................... $ (0.74) $ (0.80)
======= =======
<CAPTION>
NLD ADJUSTED
------------
<S> <C>
Net operating revenues:
Switched long distance.......... $103,365
Operating expenses:
Cost of services................ 67,306
Operations and administration... 32,750
Depreciation and
amortization(8)............... 11,090
--------
111,146
--------
Operating income (loss)........... (7,781)
Interest income (expenses), net... (992)
Other, net........................ 74
--------
Income (loss) before income
taxes........................... (8,699)
Benefit (provision) for income
taxes........................... (196)
--------
Net income (loss)................. $ (8,895)
========
Number of shares issued and
outstanding(9):
Basic........................... 12,844
========
Diluted......................... 12,844
========
Loss per share:
Basic........................... $ (0.69)
========
Diluted......................... $ (0.69)
========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Statements of Operations.
60
<PAGE> 70
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR
NLD(1)(2)
FOR THE YEAR ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NLD/
UNINET
NLD UNINET PRO FORMA PRO FORMA ETI PRO FORMA NLD
HISTORICAL(10) HISTORICAL(15) ADJUSTMENTS COMBINED HISTORICAL(16) ADJUSTMENTS ADJUSTED
-------------- -------------- ----------- --------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net operating
revenues:
Switched long
distance......... $66,377 $ 8,818 $(2,939)(12) $72,256 $15,902 $ -- $88,158
Operating expenses:
Cost of services... 45,970 10,889 (3,629)(12) 53,230 8,405 -- 61,635
Operations and
administration... 16,732 5,056 -- 21,788 6,840 -- 28,628
Depreciation and
amortization..... 1,725 815 (815)(12) 2,089 623 1,685(5) 4,397
364(5)
------- ------- ------- ------- ------- ------- -------
64,427 16,760 (4,080) 77,107 15,868 1,685 94,660
------- ------- ------- ------- ------- ------- -------
Operating income
(loss)............. 1,950 (7,942) 1,141 (4,851) 34 (1,685) (6,502)
Interest expense,
net................ (306) (451) 451(12) (651) (226) (300)(6) (1,177)
(345)(6)
Other, net........... (200) (305) 305(12) (200) 229 -- 29
------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes....... 1,444 (8,698) 1,552 (5,702) 37 (1,985) (7,650)
Benefit (provision)
for income taxes... (660) (20) 20(7) (660) (7) 102(7) (565)
------- ------- ------- ------- ------- ------- -------
Net income (loss).... 784 (8,718) 1,572 (6,362) 30 (1,883) (8,215)
Pro forma tax
provision(14)...... (126) -- -- (126) -- -- (126)
------- ------- ------- ------- ------- ------- -------
Pro forma net income
(loss)............. $ 658 $(8,718) $ 1,572 $(6,488) $ 30 $(1,883) $(8,341)
======= ======= ======= ======= ======= ======= =======
Number of shares
issued and
outstanding(9):
Basic.............. 8,068 8,394 12,027
======= ======= =======
Diluted............ 8,199 8,394 12,027
======= ======= =======
Earnings (loss) per
share :
Basic.............. $ 0.10 $ (0.76) $ (0.68)
======= ======= =======
Diluted............ $ 0.10 $ (0.76) $ (0.68)
======= ======= =======
Pro forma earnings
(loss) per
share(14):
Basic.............. $ 0.08 $ (0.77) $ (0.69)
======= ======= =======
Diluted............ $ 0.08 $ (0.77) $ (0.69)
======= ======= =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Statements of Operations
61
<PAGE> 71
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR
NLD
NOTE 1
On May 5, 1997, NLD acquired ETI in a transaction accounted for as a
purchase. Results of operations of ETI for the period from January 1, 1997
through May 5, 1997 are included in the Pro Forma Combined Statement of
Operations for the twelve months ended December 31, 1997. Results for ETI after
May 5, 1997 are included in NLD's historical results of operations.
On May 31, 1996, NLD acquired substantially all of the customer base of
UniNet in a transaction accounted for as a purchase. Results of operations of
UniNet for the period from prior to May 31, 1996 are included in the applicable
Pro Forma Combined Statements of Operations. Results for UniNet after May 31,
1996 are included in NLD's historical results of operations.
These Pro Forma Combined Statements of Operations should be read in
conjunction with the historical financial statements of NTI, ETI and UniNet.
These Pro Forma Combined Statements of Operations are presented for
comparative purposes only and are not intended to be indicative of actual
results had the transaction occurred as of the dates indicated above nor do they
purport to indicate results which may be attained in the future.
NOTE 2
The adjustments to the unaudited Pro Forma Combined Statements of
Operations do not give effect to direct transaction costs or any resulting
restructuring costs associated with the consummation of the ETI acquisition nor
do these statements give effect to any potential cost savings and synergies that
could result from the ETI acquisition. The unaudited Pro Forma Combined
Statements of Operations are not necessarily indicative of the operating results
or financial position that would have occurred had the ETI acquisition been
consummated at the earliest date presented or necessarily indicative of future
operating results or financial position.
NOTE 3
This column represents the historical results of operations for NLD for the
twelve-month period ended December 31, 1997. NLD utilizes a March 31 fiscal year
end. However, for purposes of the Pro Forma Combined Statements of Operations,
NLD has presented information for the twelve months ended December 31, 1997.
Accordingly, NLD's operating results for the period January 1, 1997 through
March 31, 1997 are included in the Pro Forma Statements for the twelve months
ended December 31, 1997 and the fiscal year ended March 31, 1997. Revenue, net
loss, basic net loss per share and diluted net loss per share of NLD was $22.6
million, $2.7 million, $0.29 and $0.29, respectively, for the period January 1,
1997 through March 31, 1997.
NOTE 4
This column represents the historical results of operations of ETI from
January 1, 1997 through the date of acquisition, May 5, 1997.
NOTE 5
This adjustment represents amortization of the incremental excess of cost
over net tangible assets acquired which is amortized using the straight-line
method over 6 to 20 years, respectively, for the excess allocated to customer
base acquisition costs and goodwill.
NOTE 6
This adjustment represents the interest expense on the borrowings from
NLD's credit facility to pay the cash portion of the purchase price for the
applicable acquisitions. NLD's incremental borrowing rate on the credit facility
is prime plus 0.75%. For purposes of the Pro Forma Combined Statements of
Operations, NLD is assuming an annual rate of 9.0%.
62
<PAGE> 72
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR
NLD
NOTE 7
This adjustment represents the tax effect of the pro forma adjustments
using a 34% tax rate. The ETI acquisition was a tax-free exchange, as a result,
amortization of related intangibles is not deductible for tax purposes.
NOTE 8
This pro forma presentation of depreciation and amortization includes
historical provisions to reduce carrying value of certain assets of NLD of $6.3
million for the twelve months ended December 31, 1997 and $6.3 million for the
twelve months ended March 31, 1997.
NOTE 9
The pro forma share data are based on NLD's historical weighted average
shares outstanding as calculated for basic and diluted earnings per share with
pro forma amounts being adjusted to reflect the issuance of approximately
195,000 restricted common shares in connection with the UniNet acquisition and
3,633,000 restricted common shares in connection with the ETI acquisition. Pro
forma share data excludes approximately 49,000 common shares issued in
connection with the UniNet acquisition because these shares are held in escrow
pending certain performance factors.
NOTE 10
This column represents the historical results of operations of NLD for the
year ended March 31 which results include the effect of the pooling-of-interest
with NTI discussed in the historical financial statements of NLD.
NOTE 11
This column represents the historical results of operations of UniNet from
April 1, 1996 through the date of acquisition, May 31, 1996.
NOTE 12
This adjustment represents the elimination of UniNet's revenues and
expenses for that portion of UniNet's business not acquired by NLD. NLD
purchased a portion of UniNet's customer base, which accounted for approximately
67% of UniNet's monthly revenues and transmission costs at the date of
acquisition. For purposes of the Pro Forma Combined Statements of Operations for
the years ended March 31, 1997 and 1996, NLD has assumed that certain selling,
general and administrative costs are directly attributable to the customer base
and, as such, are reflected as acquired by NLD.
NOTE 13
This column represents the historical results of operations of ETI for the
eleven-month period ended March 31, 1997. ETI utilized an April 30 fiscal year
end prior to its acquisition by NLD. Upon consummation of the ETI acquisition,
ETI conformed its fiscal year end to that of NLD.
NOTE 14
On June 30, 1996, NLD merged with Long Distance Telecom, Inc., d/b/a Blue
Ridge Telephone ("Blue Ridge"). Prior to the merger, Blue Ridge operated in the
form of a partnership. This amount represents the pro forma adjustment to
reflect results as if Blue Ridge had been subject to income tax for all periods
presented.
63
<PAGE> 73
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR
NLD
NOTE 15
Prior to its acquisition by NLD, UniNet utilized a December 31 fiscal year
end. This column represents the historical results of operations of UniNet for
the year ended December 31, 1995.
NOTE 16
This column represents the historical results of operations of ETI for the
year ended April 30, 1996. ETI utilized an April 30 fiscal year end prior to its
acquisition by NLD. Upon consummation of the ETI acquisition, ETI conformed its
fiscal year end to that of NLD.
64
<PAGE> 74
MARKET PRICE AND DIVIDENDS ON NLD COMMON STOCK AND
RELATED NLD STOCKHOLDER MATTERS
MARKET INFORMATION
From February 24, 1994 to October 20, 1997, the NLD Common Stock was traded
on the Nasdaq SmallCap Market under the symbol "NTWK." Since October 21, 1997,
the NLD Common Stock has been traded on the NNM under the same symbol. The
following table sets forth the high and low sales prices per share of NLD Common
Stock as reported by the Nasdaq SmallCap Market or the NNM, as the case may be,
for NLD's last three fiscal years (NLD's fiscal year ends on March 31).
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1996
First Quarter............................................... $ 9.38 $ 7.25
Second Quarter.............................................. $11.25 $ 7.63
Third Quarter............................................... $11.25 $ 9.13
Fourth Quarter.............................................. $10.00 $ 8.88
FISCAL YEAR ENDED MARCH 31, 1997
First Quarter............................................... $12.13 $ 9.13
Second Quarter.............................................. $11.63 $10.50
Third Quarter............................................... $11.38 $ 7.75
Fourth Quarter.............................................. $ 9.00 $ 7.00
FISCAL YEAR ENDED MARCH 31, 1998
First Quarter............................................... $10.50 $ 7.00
Second Quarter.............................................. $11.75 $ 9.50
Third Quarter............................................... $10.50 $ 8.13
Fourth Quarter.............................................. $16.50 $ 8.53
</TABLE>
On December 18, 1997, the date immediately prior to the public announcement
of the Merger, the closing price for the NLD Common Stock as reported by the NNM
was $8.38 per share. On April 14, 1998, the last practicable date prior to this
Proxy Statement/Prospectus, the closing price for the NLD Common Stock as
reported by the NNM was $14.50 per share.
HOLDERS OF NLD COMMON STOCK
The number of record owners of NLD Common Stock as of March 31, 1998, was
approximately 193. This number does not include stockholders who hold NLD Common
Stock in their accounts at broker/dealers.
65
<PAGE> 75
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The number and percentage of shares of NLD Common Stock owned beneficially
by (a) any person who is known to NLD to be the beneficial owner of more than 5%
of the NLD Common Stock, (b) each NLD director, and (c) all NLD directors and
officers as a group, as well as the number of shares of IXC Common Stock to be
owned beneficially by each such person and group following the Merger pursuant
to the terms of the Merger Agreement, is set forth below. Immediately following
the Effective Time, no current NLD officer or director will own beneficially
more than 5% of the outstanding IXC Common Stock.
<TABLE>
<CAPTION>
SHARES OF NLD SHARES OF IXC
NAME COMMON STOCK PERCENTAGE COMMON STOCK
---- ------------- ---------- -------------
<S> <C> <C> <C>
Timothy A. Barton, Director(1)....................... 505,556 3.5% 151,566
John D. Crawford, Director(2)........................ 3,065,768 22.9% 919,117
O.A. Friend(3)....................................... 1,555,239 11.6% 466,260
Thomas G. Keefe, Director(4)(5)...................... 134,524 0.9% 40,330
John V. Leaf, Director(6)............................ 1,555,239 11.6% 466,260
Leon L. Nowalsky, Director(7)........................ 254,568 1.8% 76,319
Russell J. Page, Director(8)......................... 225,000 1.6% 67,455
Timothy J. Sledz, Director(9)........................ 372,751 2.6% 111,751
Albert A. Woodward, Director(10)..................... 10,700 -- 3,208
All Directors and Officers, as a Group(11)........... 6,609,662 46.0% 1,981,577
</TABLE>
- ---------------
(1) Includes 50,000 shares of NLD Common Stock under a presently exercisable
option which, if not exercised prior to the Effective Time, will become an
option to purchase 14,990 shares of IXC Common Stock.
(2) Includes 459,000 shares of NLD Common Stock held by three trusts of which
Mr. Crawford is either the trustee or beneficiary.
(3) Held by Mr. Friend as the sole trustee of the 1993 Friend Family Revocable
Trust.
(4) Includes 30,000 shares of NLD Common Stock under a presently exercisable
option which, if not exercised prior to the Effective Time, will become an
option to purchase 8,994 shares of IXC Common Stock.
(5) Held by Mr. Keefe as the sole trustee of the Thomas G. Keefe Revocable
Trust dated October 1, 1997.
(6) Owned by Leaf Family Partners Ltd., of which Mr. Leaf is the General
Partner.
(7) Includes 225,000 shares of NLD Common Stock under a presently exercisable
option which, if not exercised prior to the Effective Time, will become an
option to purchase 67,455 shares of IXC Common Stock.
(8) Includes 225,000 shares of NLD Common Stock under a presently exercisable
option which, if not exercised prior to the Effective Time, will become an
option to purchase 67,455 shares of IXC Common Stock.
(9) Includes (a) 230,641 shares of NLD Common Stock owned by ValueTel, Inc., of
which Mr. Sledz is an officer and director, and (b) 16,500 shares of NLD
Common Stock held in escrow pursuant to the 1995 transaction between
ValueTel, Inc. and NLD.
(10) Includes 10,000 shares of NLD Common Stock under a presently exercisable
option which, if not exercised prior to the Effective Time, will become an
option to purchase 2,998 shares of IXC Common Stock.
(11) Includes 570,000 shares of NLD Common Stock under presently exercisable
options which, if not exercised prior to this Effective Time, will become
options to purchase 170,886 shares of IXC Common Stock.
DIVIDENDS
NLD Stockholders are entitled to receive such dividends as may be declared
by the NLD Board. No dividends have been paid with respect to NLD Common Stock,
and no dividends are anticipated to be paid in the foreseeable future.
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<PAGE> 76
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
NLD'S FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis relates to NLD's financial condition
and results of operations of NLD for the three years ended March 31, 1997 and
the nine months ended December 31, 1997 after giving effect to NLD's May 1997
merger with NTI, which was accounted for as a pooling-of-interests. This
information should be read in conjunction with NLD's Consolidated Financial
Statements and the Notes thereto appearing elsewhere in this document.
Certain statements set forth in this Management's Discussion and Analysis
of NLD's Financial Condition and Results of Operations are not historical facts,
but rather forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements relate
to future events or the future financial performance of NLD and involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of NLD to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions; industry capacity;
uncertainty regarding and changes in customer preferences; demographic changes;
competition; changes in methods of marketing and technology; changes in
political, social and economic conditions and regulatory factors; and various
other factors beyond NLD's control. NLD undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The following discussion should be read
in conjunction with NLD's Consolidated Financial Statements and the related
notes thereto, included elsewhere herein.
GENERAL
NLD's predecessor corporations commenced operations in 1979, and since its
initial public offering in 1994, NLD has expanded substantially as a result of
its continuing dual focus on internal sales growth and the addition of calling
volume through mergers and acquisitions.
NLD has completed a number of transactions in the past several years under
its active mergers and acquisitions program. On May 12, 1997, NLD merged with
NTI, and in connection therewith issued 3,274,188 shares of NLD Common Stock in
exchange for all of NTI's outstanding common stock. Of the shares issued,
155,524 shares are currently held in escrow pending the resolution of purchase
price contingencies. On November 15, 1996, NLD merged with United Wats, Inc.
("UWI") and in connection therewith issued 2,277,780 shares of NLD Common Stock
in exchange for all of UWI's outstanding common stock. On June 30, 1996, NLD
merged with Blue Ridge and in connection therewith issued 337,079 shares of NLD
Common Stock for all of Blue Ridge's outstanding common stock.
Each of these mergers was accounted for as a pooling-of-interests and,
accordingly, NLD's financial statements for the periods prior to the mergers
have been restated to include the results of NTI, UWI and Blue Ridge for all
periods presented. Separate and combined results of operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
NLD................................................... $49,249,000 $30,810,000 $24,217,000
Blue Ridge (through June 30, 1996).................... 994,000 3,463,000 2,790,000
UWI (through September 30, 1996)...................... 9,448,000 10,810,000 2,368,000
NTI................................................... 26,315,000 22,501,000 18,944,000
----------- ----------- -----------
Combined........................................... $86,006,000 $67,584,000 $48,319,000
=========== =========== ===========
</TABLE>
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<PAGE> 77
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income (loss) before income taxes:
NLD................................................... $(9,011,000) $ (442,000) $ 609,000
Blue Ridge (through June 30, 1996).................... 45,000 313,000 62,000
UWI (through September 30, 1996)...................... 414,000 727,000 463,000
NTI................................................... 1,864,000 847,000 1,427,000
----------- ----------- -----------
Combined........................................... $(6,688,000) $ 1,445,000 $ 2,561,000
=========== =========== ===========
</TABLE>
In May 1996, NLD purchased substantially all of the customer base of
UniNet, a provider of long distance telecommunication services, in a transaction
accounted for as a purchase. The results of operations attributable to the
UniNet customer base acquired are included in NLD's results of operations from
the date of acquisition. As consideration for the purchase, NLD issued 243,758
shares of NLD Common Stock with an assigned value of approximately $1,862,000
and paid approximately $3,650,000 cash. NLD acquired the outstanding accounts
receivable related to the customer base at an assigned value of approximately
$776,000. Intangible assets acquired were allocated to customer base acquisition
cost at approximately $2,115,000 and goodwill was valued at approximately
$2,772,000. NLD originally amortized customer base acquisition cost over 7.5
years and goodwill over 30 years, using the straight-line method and based
primarily on expected customer attrition rates, estimated net cash flows, and
industry practices. Of the 243,758 shares of the NLD Common Stock issued, 48,752
shares are currently held in escrow pending the resolution of purchase price
contingencies. In March 1998, the purchase price contingencies remained
unresolved, and as a result, the escrowed shares have not been considered as
part of the purchase price.
In October 1995, NLD acquired substantially all of the assets of ValueTel,
Inc. ("ValueTel"), a long distance reseller whose customer base was located
primarily in Illinois, in a transaction accounted for as a purchase. The results
of operations attributable to the ValueTel assets are included in NLD's results
of operations for the year ended March 31, 1996 from the date of acquisition. As
consideration for the purchase, NLD issued 890,915 shares of NLD Common Stock
with an assigned value of approximately $5,955,000, assumed liabilities of
ValueTel of approximately $696,000, and forgave a ValueTel payable to NLD of
approximately $608,000. NLD acquired substantially all of ValueTel's accounts
receivable at an assigned value of approximately $1,610,000. Intangible assets
acquired were allocated to customer base acquisition cost at approximately
$3,334,000 and goodwill was valued at approximately $2,315,000. NLD originally
amortized customer base acquisition costs over 7.5 years and goodwill over 30
years, using the straight-line method and based primarily on expected customer
attrition rates, estimated net cash flows, and industry practices. Of the
890,915 shares of NLD Common Stock issued, 16,500 shares are currently held in
escrow pending the resolution of purchase price contingencies. The escrowed
shares have not been considered as part of the purchase price. The purchase
agreement with ValueTel calls for a re-evaluation of customer attrition rates
one year from the acquisition date. As of March 1998, such re-evaluation was in
progress, and NLD's management believes that, as a result of the re-evaluation,
the escrowed shares will not be released.
In May 1997, NLD acquired ETI, a provider of long distance
telecommunications services, in a transaction accounted for as a purchase. As
consideration for the purchase, NLD issued 3,633,272 shares of NLD Common Stock
and paid $1,979,603 in cash. At March 31, 1997, ETI had total assets of
$7,352,000 and shareholder's equity of $1,083,000. For the eleven month period
ended March 31, 1997, ETI had revenues of $20,429,000 and net income of
$383,000.
In addition to the acquisitions referred to above, NLD has completed a
series of acquisitions of segments of other long distance providers' customer
bases. These acquisitions have been accomplished through the purchase of the
customer base and related accounts receivable for cash, shares of NLD Common
Stock, the issuance of notes payable, the forgiveness of accounts receivable, or
a combination thereof. All of the acquisitions have been accounted for as
purchases.
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<PAGE> 78
The table below sets forth information concerning significant customer base
acquisitions by NLD:
<TABLE>
<CAPTION>
PURCHASE PRICE
---------------------- ASSETS ACQUIRED
CASH AND VALUE OF ------------------------------------
ACQUISITION NOTES SHARES ACCOUNTS CUSTOMER OTHER
ACQUIRED ENTITY DATE PAYABLE ISSUED RECEIVABLE BASE INTANGIBLES
--------------- ------------------ ---------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Quantum Communications,
Inc. (Quantum)......... Jan-96 $ 814,000 $590,000 $191,000 $827,000 $ --
Network Services, Inc.
(NSI).................. May-95 758,000 55,000 259,000 368,000 --
Colorado River
Communications (CRC)... Nov-94 1,742,000 232,000 336,000 692,000 870,000
</TABLE>
NLD derives its revenues principally from the number of minutes it bills
its customer for services provided. Minutes billed are those minutes during
which a call is actually connected (excluding the minutes during which the
customer receives a busy signal or waits for the call to be answered). NLD's
profitability is dependent upon, among other things, its ability to achieve
transmission costs that are less then its revenues.
NLD's facilities include 100% leased, digital fiber optic transmission
facilities. These facilities are utilized primarily by NLD for the provisioning
of its own telecommunications network. Facilities are also leased on behalf of
NLD's customers to provide private customer connections. NLD leases these
facilities at rates less than those it charges to its customers. NLD's primary
fiber optic vendors are WorldCom Network Services, Inc. and MCI, but facilities
from Bell Atlantic, Bell South, Ameritech, US West, NYNEX and WorldCom ICC, Inc.
(formerly MFS) are also integral parts of NLD's network.
The continued availability of cost-effective digital, fiber optic
transmission facilities in NLD's service areas, as well as proper facility
utilization planning, are critical to NLD's ability to provide its services on a
profitable basis.
NLD contracts with other underlying telecommunications carriers to
originate and terminate calls in areas where NLD does not deploy its own
facilities. These services do not carry a fixed monthly cost. NLD pays the
carrier, on a per minute basis, for any calls which are transmitted over these
facilities. NLD is currently dependent on three primary carriers, Frontier
Communications of the West, Inc. WorldCom Network Services, Inc. and Sprint. NLD
utilizes other fiber-optic carriers to a lesser extent to supplement
communication transport services; however, there can be no assurance that in the
future NLD will continue to have access on an ongoing basis to transmission
facilities at favorable rates.
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<PAGE> 79
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated NLD's statement of
operations as a percentage of its revenues.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Revenues.................................................... 100% 100% 100%
Transmission costs.......................................... 65.1 68.0 68.5
Selling, general and administrative......................... 26.9 23.8 22.1
Provision for losses on accounts receivable................. 3.8 1.8 0.9
Depreciation and amortization............................... 2.8 2.6 1.7
Provision to reduce carrying value of certain assets........ 7.3 -- --
Related party consulting expenses........................... 1.0 1.0 1.2
Operating income (loss)..................................... (6.9) 2.9 5.5
Interest (income) expenses, net............................. 0.7 0.5 0.01
Other (income) expense...................................... -- 0.03 0.2
Loss on write down of investment in land.................... 0.2 0.3 --
Income (loss) before income taxes........................... (7.8) 2.1 5.3
Provision (benefit) for income taxes........................ 0.1 1.0 1.7
Net income (loss)........................................... (7.9)% 1.1% 3.6%
</TABLE>
YEAR ENDED MARCH 31, 1997 VS YEAR ENDED MARCH 31, 1996
Revenues for 1997 increased 27.3% to $86,005,615 compared to $67,584,268
for 1996. Of the increase in revenues during 1997, $5,352,000 or 29% were
derived from the acquisition of the UniNet customer base in May 1996. In
addition, revenues derived from the October 1995 ValueTel acquisition and the
January 1996 Quantum customer base acquisition provided approximately $3,347,000
or 18.2% of the increase in revenues during fiscal 1997. These acquisitions were
accounted for as purchases; accordingly, the results of operation of these
customer bases were included only from the date of acquisition. The remainder of
the increase was the result of increased revenues from NLD's direct retail and
affinity marketing programs. These increases were partially offset by a
reduction in wholesale revenues during 1997 of approximately $4,558,000 as a
result of NLD de-emphasizing this area.
Transmission costs as a percent of revenues decreased to 65.1% of revenues
compared to 68.0% of revenues for 1996. This reduction was achieved through a
renegotiation of rates charged by certain underlying carriers of NLD during
1997, in addition to the reduction of wholesale revenues during 1997. Wholesale
traffic typically carries a lower rate per minute than other types of traffic
and therefore results in higher transmission costs as a percent of revenues.
Selling, general and administrative expenses for 1997 increased to
$23,168,758 or 26.9% of revenues as compared to $16,055,517 or 23.8% of revenues
for 1996. This increase is related to increases in personnel costs, commissions,
taxes, and professional fees related to NLD's merger and acquisition activities.
Provision for losses on accounts receivable increased to $3,250,549 or 3.8%
of revenues for 1997 as compared to $1,270,453 or 1.8% of revenues for 1996. The
increase is attributed to greater then expected losses on accounts related to
certain customer base acquisitions and the continued process of de-emphasizing
its reseller marketing activities.
Depreciation and amortization expense increased to $2,394,303 or 2.8% of
revenues for 1997 compared to $1,724,968 or 2.6% of revenues for 1996. The
increase relates to the amortization of the intangibles generated from the
acquisition of the UniNet customer base in May 1996. Additionally, 1997 included
seven more months of amortization associated with the ValueTel acquisition than
in 1996 since ValueTel was acquired in October 1995.
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<PAGE> 80
During the year ended March 31, 1997, NLD incurred a non-cash provision to
reduce carrying value of certain assets of approximately $6.3 million related to
a write down in the carrying value of certain assets, including goodwill and
customer base acquisition costs associated with certain acquisitions. NLD
determined during the settlement process called for in certain acquisition
agreements that attrition rates for certain customer bases and businesses
acquired were significantly greater than originally anticipated. Consequently,
NLD determined that future cash flows would be less than that required to
realize these assets. NLD reassessed the fair value of these assets by
estimating the present value of the future cash flows through updating with
historical results the cash flow models utilized to initially allocate the
intangibles acquired.
Net interest expense in 1997 was $560,220 or 0.7% of revenues, as compared
to $305,533 or 0.5% of revenues in 1996. In May 1996, NLD entered into a
$14,250,000 credit facility with a bank which includes a revolving credit
facility and term loan facility (the "1997 Facility"). The proceeds of the term
loan of approximately $3,250,000 was used to finance the May 1996 acquisition of
UniNet. The revolving credit facility was used for general operating purposes.
During 1997, NLD took a non-cash charge of $200,000 to write down the
carrying value of land it owns. The write down was required to reduce the
carrying value of the land to its approximate fair market value. In December
1997, NLD sold this land for an amount that approximated its book value.
NLD recorded a tax provision of $101,175 on a pre-tax loss of $6,687,704 in
1997. Although NLD generated a consolidated pre-tax loss in 1997, non-deductible
items primarily related to certain tax free mergers and acquisitions resulted in
the recognition of taxable income.
For the year ended March 31, 1997, NLD reported a net loss of $6,788,879 or
(7.9%) of revenues as compared to net income of $784,181 or 1.1% of revenues for
1996. This resulted in a loss per common share of $(0.74) in 1997 as compared to
$0.10 earnings per common share in 1996.
YEAR ENDED MARCH 31, 1996 VS YEAR ENDED MARCH 31, 1995
Revenues for 1996 increased 39.9% to $67,584,268 as compared to $48,318,537
for 1995. Revenues derived from the acquisition of customer bases during fiscal
1996 (NSI in May 1995, ValueTel in October 1995 and Quantum in January 1996)
were approximately $5,552,900 or 28.8% of the increase in revenues during 1996.
The remainder of the increase was due to increases in NLD's wholesale and direct
retail marketing activities.
Line costs as a percentage of revenues decreased to 68.0% in 1996 from
68.5% in 1995. Although revenues increased substantially during 1996, line costs
as a percentage of revenues remained relatively flat as NLD was not able to
negotiate lower rates with its primary carriers until after the close of year
end.
Selling, general and administrative expenses increased to $16,055,517 or
23.8% of revenues in 1996 as compared to $10,701,022 or 22.1% of revenues in
1995. The increase is attributable to NLD's establishment of its mergers and
acquisitions program along with increases in staff and facilities to better
serve NLD's growing customer base.
Provision for losses on accounts receivable increased to $1,207,453 or 1.8%
of revenues in 1996 as compared to $458,753 or 0.9% of revenues in 1995. The
increase in the provision was primarily related to reseller/wholesale accounts
receivable. During 1996, certain resellers/wholesale customers of NLD began to
experience financial difficulties which impeded their ability to pay NLD on a
timely basis. NLD entered into specific payment plans with certain resellers and
place others on lock box arrangements. As a result, in 1996, NLD chose to
de-emphasize its reseller/wholesale marketing activities and concentrate on
direct retail and marketing activities along with its mergers and acquisitions
program.
Deprecation and amortization increased to $1,724,968 or 2.6% of revenues in
1996 as compared to $809,845 or 1.7% of revenues in 1995. The increase is
associated to the amortization of the intangibles generated through NLD's
customer base acquisitions. During 1996, NLD acquired customer bases from NSI,
Value Tel, and Quantum. Additionally, NLD acquired a customer base from CRC in
November 1994.
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<PAGE> 81
Net interest expense increased to $305,533 or 0.5% of revenues in 1996 as
compared to $5,652 in 1995. The increase relates to additional borrowing under
NLD's line of credit to fund its expanded operations. In addition, interest
expense in 1995 was offset by interest income generated from the investment of
the proceeds generated by the public stock offering completed during February
1994.
During 1996, Palmview Partnership, a subsidiary of NLD, relinquished title
to land it had originally purchased in exchange for cancellation of the
outstanding debt of $344,640. The result of this transaction was a loss of
$177,409 or 0.3% of revenues during 1996.
NLD recorded a tax provision of $660,281 on income before income taxes of
$1,444,462. The effective tax rate of 45.7% is due to certain permanent items
related to mergers and acquisitions.
Net income decreased to $784,181 or 1.1% of revenues for 1996 as compared
to $1,715,200 or 3.5% of revenues for 1995. This resulted in $0.10 earnings per
common share in 1996 as compared to $0.22 in earnings per common share in 1995.
LIQUIDITY AND CAPITAL RESOURCES -- FISCAL YEAR ENDED MARCH 31, 1997
Net cash provided by operating activities was $5,046,338 in 1997 as
compared to $509,861 in 1996. This increase is due primarily to increases in
depreciation and amortization, provision for losses on accounts receivable,
accounts payable and the non cash provision to reduce the carrying value of
certain assets.
Net cash used in investing activities increased to $4,437,777 in 1997 as
compared to $993,223 in 1996. The primary use of cash in investing activities
during 1997 was for mergers and acquisitions and the purchase of marketable
securities.
Net cash used in financing activities was $643,165 in 1997 as compared to
net cash provided by financing activities in 1996 of $1,282,984. This change was
due to principal payments on debts exceeding borrowings under NLD's credit
facilities.
In May 1996, NLD entered into the 1997 Facility. Borrowings under the
revolving credit portion may not exceed the lesser of $11,000,000 minus any
reserves the lender may deem eligible or 75% of eligible receivables. Borrowings
under the revolver bear interest at the prime rate plus 0.75%. Borrowings and
unpaid interest on the revolving facility are repayable in full at maturity of
the facility on June 1, 1999. NLD was allowed to borrow $3,250,000 under the
term loan facility. The term loan was repayable in 36 equal monthly installments
of $90,278 plus accrued interest. The term loan bore interest at the prime rate
plus 3%. Substantially all of the assets of NLD are pledged as collateral under
the 1997 Facility. At March 31, 1997, $40,000 and $2,437,000, were outstanding
under the revolving and term loan, respectively. Subsequent to March 31, 1997,
NLD paid off the remaining balance under the term loan. As of March 31, 1997,
NLD was not in compliance with certain financial covenants enumerated in the
1997 Facility. Accordingly, NLD received a waiver with respect to certain of
such covenants from its lender as of March 31, 1997. As a result of and in
connection with the merger transactions consummated in May 1997, NLD complied
with certain of the financial covenants, and has currently negotiated certain
amendments to the 1997 Facility to reflect changes in financial position and
anticipated changes in business strategies and operating results associated with
such transactions. While management believes that NLD will be able to comply
with the renegotiated loan agreement, there can be no assurance that NLD will
not require additional waivers in the future or, if such waivers are required,
that the lender will grant them.
NTI had a $2,000,000 line of credit with a bank, due on demand, which was
scheduled to expire on April 1, 1998. Terms of the agreement limited the amount
advanced to the lesser of $2,000,000 or the sum of 80% of NTI's eligible billed
accounts receivable, 50% of its unbilled accounts receivable, and 50% of its
equipment. Borrowings were secured by NTI's equipment, accounts receivable, and
general intangibles. The interest rate on the line of credit was prime plus
0.5%. NLD had no outstanding balances under the line of credit agreement as of
March 31, 1997 and 1996. Subsequent to March 31, 1997, NLD terminated the line
of credit.
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<PAGE> 82
NTI had a $400,000 letter of credit with a bank which expired June 1, 1997.
The interest rate on this letter of credit was prime plus 0.5%. NLD was also
required to pay a yearly service fee equal to 2.0% of the face amount of the
letter. NLD had no drawings on this letter of credit as of March 31, 1997 and
1996.
NINE MONTHS ENDED DECEMBER 31, 1997 VS. NINE MONTHS ENDED DECEMBER 31, 1996
General. In May 1997, NLD acquired ETI. To consummate this transaction, NLD
issued 3,633,272 shares of NLD Common Stock and paid $1,979,603 in cash in
exchange for 100% of ETI's outstanding stock. The transaction was accounted for
as a purchase and therefore ETI's results of operations are not included in the
three- and nine-month periods ended December 31, 1996. Results for the nine
months ended December 31, 1997 include ETI from the date of acquisition.
On December 19, 1997, NLD signed a definitive agreement to merge with IXC.
Upon closing of the Merger (which is expected to occur in the second calendar
quarter of 1998), IXC will acquire 100% of NLD's outstanding common stock and
NLD will become a wholly owned subsidiary of IXC. Under terms of the Merger
Agreement, NLD Stockholders will receive 0.2998 shares of IXC Common Stock for
each share of NLD Common Stock. Warrants to purchase NLD Common Stock will be
converted into options to purchase shares of IXC Common Stock at the exchange
ratio of 0.2998. In addition, upon closing of the Merger NLD plans to change its
name to "Eclipse Telecommunications, Inc."
Results of Operations. Revenues for the nine months ended December 31, 1997
were $78,463,517 compared to $63,430,220 for the same period in 1996, an
increase of 23.7%. The increase for the nine month period is attributed to the
ETI acquisition, without which there would have been a decrease of approximately
6% in revenues from the year earlier nine month period. Such decrease stemmed
primarily from higher than normal attrition rates in customer base acquisitions
(see Note 3 to Notes to Consolidated Financial Statements).
Transmission costs for the nine months ended December 31, 1997 and 1996,
were $49,227,012 and $41,953,727 respectively, or, 62.7% of revenues in 1997 and
66.1% in 1996. The reduction in transmission costs as a percent of revenues is
associated with increased calling volumes, the consolidation of NLD's
facilities, and the renegotiation of certain underlying carrier agreements.
Selling, general, and administrative expenses for the nine months ended
December 31, 1997 were $21,250,354 or 27.1% of revenues. This compared to
$16,604,849 or 26.2% of revenues for the nine months ended December 31, 1996.
Although revenues have increased, SG&A expenses, as a percentage of revenues,
have remained relatively flat due to increases in commissions and personnel
costs related to the continued growth of NLD and professional fees related to
its ongoing mergers and acquisitions activities.
For the nine months ended December 31, 1997 and 1996, depreciation and
amortization expenses were $3,337,189 and $1,767,799, or 4.3% and 2.8%,
respectively. The increase is related to the amortization of the intangible of
approximately $25,248,000 created by the merger with ETI in May 1997.
For the nine months ended December 31, 1997 and 1996, the provision for
losses on accounts receivable was $2,354,485 and $2,852,098, or 3.0% and 4.5% of
revenues, respectively. During the nine month period ended December 31, 1996 NLD
chose to de-emphasize its wholesale operations and revise its policies
associated with provision for losses and write-off of accounts receivable which
resulted in an additional charge of $1,000,000 (after tax). For the nine month
period ended December 31, 1997, the revised policy for provision for losses on
accounts receivable resulted in a higher provision for delinquent accounts as a
percentage of amounts owed by such accounts, resulting in the 3.0% provision for
losses on accounts receivable as a percentage of revenue noted above.
Merger expenses and related charges for the nine months ended December 31,
1997 were $2,496,445 or 3.2% of revenues. Merger expenses and other related
charges for the nine month period ended December 31, 1997 consisted of $676,000
for severance payments to former officers and various other employees of NLD,
$355,000 for integration, relocation, and other facilities-related charges,
$425,000 related to certain legal and regulatory matters and contingencies and
$1,040,000 related to financial advisory, legal, accounting, and other
professional services incurred in connection with consummating the ETI and NTI
acquisitions.
73
<PAGE> 83
During the nine month period ended December 31, 1997 NLD incurred non-cash
charges related to a reduction in the carrying value of certain intangible
assets. During the quarter ended December 31, 1997, current management noted
that the attrition rates of the customer bases acquired under these acquisitions
(the revenue of which currently represents less than 10% of total NLD revenue)
were substantially higher than the attrition expectations formerly established
when the bases were previously analyzed in the quarters ended December 31, 1996
and March 31, 1997. As a result, applying the requirements of "Statement of
Financial Accounting Standard No. 121," "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"),
management revised estimates of the recoverability of these intangible assets,
resulting in a non-cash charge of $3,732,000. The write-down included $1,137,000
for customer acquisition costs associated with the purchase of selected assets
from ValueTel, $431,000 for goodwill and $1,000,000 for customer acquisition
costs associated with the purchase of selected assets from UniNet, and the
remaining amount for customer acquisition costs associated with the purchase of
ten other customer bases. The fair values of these assets were determined by
estimating the present value of future cash flows to be generated by these
assets.
Due to the impairment of various intangibles, NLD analyzed the lives of its
intangibles in accordance with SFAS 121. Consequently, NLD has established new
periods for amortizing certain customer base intangible assets that it believes
to be reasonable estimates of the remaining lives of these customer base
intangibles assets. The revised remaining useful lives assigned by NLD are 3
years for acquired customer bases.
Non-recurring stock compensation expense related to the NTI merger was
$1,100,000 or 1.4% of revenues for the nine month period ended December 31,
1997. This was a non-cash charge related to the exercise of stock options by an
officer of NTI.
For the nine month period ended December 31, 1997, NLD incurred a net loss
of $(6,109,948) compared to a net loss of $(4,113,944) for the same period in
1996. The increase in the net loss for the nine month period ended December 31,
1997, as compared to the same period in 1996, is due to the merger expenses and
other related charges and the stock compensation expense.
LIQUIDITY AND CAPITAL RESOURCES -- NINE MONTH ENDED DECEMBER 31, 1997
For the nine months ended December 31, 1997, NLD's cash flow provided by
operating activities was $4,226,499 compared to cash flow provided by operating
activities of $3,423,848 for the nine months ended December 31, 1996. For the
nine months ended December 31, 1997, NLD's cash used in investing activities was
$2,887,728, compared to $3,465,557 used in investing activities for the nine
months ended December 31, 1996. The primary use of cash in investing activities
during both the nine months ended December 31, 1997 and 1996, was related to
NLD's acquisition program. During the nine months ended December 31, 1997, NLD
merged with ETI and NTI and during the nine months ended December 31, 1996, NLD
acquired a customer base from UniNet. Net cash used in financing activities
during the nine months ended December 31, 1997 was $2,213,920 compared to net
cash provided by financing activities during the same period of 1996 of
$799,837. During the nine months ended December 31, 1997, NLD paid off the
remaining balance owed under a term loan entered into during May of 1996.
As noted above, in May 1996, NLD entered into the 1997 Facility, under
which substantially all of NLD's assets are pledged. NLD was allowed to borrow
$3,250,000 under the term loan facility. The term loan was repayable in 36 equal
monthly installments of $90,278 plus accrued interest. The term loan bore
interest at the prime rate plus 3%. During the nine months ended December 31,
1997, NLD repaid the remaining balance due under the term loan.
Management believes that cash from operations and funds available under the
1997 Facility will be sufficient to meet NLD's liquidity and capital needs,
assuming no cash is needed for acquisitions, for the foreseeable future.
74
<PAGE> 84
YEAR 2000 COMPLIANCE
NLD is currently in the process of evaluating its information technology
infrastructure for the Year 2000 compliance. NLD does not expect that the cost
to modify its information technology infrastructure to be Year 2000 compliant
will be material to its financial condition or results of operations. NLD does
not anticipate any material disruption in its operations as a result of any
failure by NLD to be in compliance. NLD does not currently have any information
concerning the Year 2000 compliance status of its suppliers and customers. In
the event that any of NLD's significant suppliers or customers does not
successfully and timely achieve Year 2000 compliance, NLD's business or
operations could be adversely affected.
LEGAL MATTERS
The validity of the issuance of the shares of IXC Common Stock being
offered hereby will be passed upon for IXC by Riordan & McKinzie, Los Angeles,
California. Carl W. McKinzie, a director and stockholder of IXC is a stockholder
of Riordan & McKinzie. IXC has granted an option covering shares of IXC Common
Stock to another stockholder of Riordan & McKinzie. Also, certain attorneys of
Riordan & McKinzie beneficially own additional shares of IXC.
EXPERTS
The consolidated financial statements of IXC Communications, Inc. appearing
in IXC Communications, Inc.'s Annual Report (Form 10-K) for the year ended
December 31, 1997, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon included therein and incorporated by
reference herein, which, as to the year 1997, is based in part on the report of
Arthur Andersen LLP, independent auditors. The financial statements referred to
above are incorporated herein by reference in reliance upon such reports given
upon the authority of such firms as experts in accounting and auditing.
The consolidated financial statements and schedules of NLD included, and
incorporated by reference, in this Proxy Statement/Prospectus and elsewhere in
this Registration Statement, to the extent and for the periods indicated in
their reports, have been audited by Arthur Andersen LLP, independent public
accountants. In those reports, that firm states that with respect to certain
acquired entities its opinion is based on the reports of other independent
public accountants, namely Deloitte & Touche LLP, Mayer Hoffman McCann L.C., and
Yount, Hyde & Barbour, P.C. The financial statements and supporting schedules
referred to above have been included herein in reliance upon the authority of
those firms as experts in accounting and auditing in giving said reports.
The consolidated financial statements of National Teleservice, Inc.
incorporated in this Proxy Statement/Prospectus by reference from NLD's Form
8-K/A filed with the Commission on June 26, 1997 have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein
and incorporated herein by reference, and have been so incorporated in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of Eastern Telecom International
Corporation as of March 31, 1997 and April 30, 1996, and for the eleven month
period ended March 31, 1997 and each of the years in the two year period ended
April 30, 1996 have been incorporated by reference herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
75
<PAGE> 85
FUTURE STOCKHOLDER PROPOSALS
Proposals of NLD Stockholders intended to be presented at NLD's 1998 annual
meeting of stockholders must be received by NLD's Secretary at NLD's principal
executive offices on or before May 3, 1998, for consideration for inclusion in
the proxy statement and form of proxy relating to such meeting. However, if the
Merger is consummated, NLD Stockholders will become stockholders of IXC at the
Effective Time and NLD will not hold a 1998 annual stockholder meeting.
Proposals of stockholders of IXC intended to be presented at IXC's 1999 annual
meeting of stockholders must be received by IXC's Secretary at IXC's principal
executive offices on or before December 18, 1998, for consideration for
inclusion in the proxy statement and form of proxy relating to such meeting.
76
<PAGE> 86
NETWORK LONG DISTANCE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF NETWORK LONG
DISTANCE, INC.
Report of Independent Public Accountants............... F-2
Independent Auditors' Report........................... F-3
Independent Auditors' Report........................... F-4
Independent Auditor's Report........................... F-5
Consolidated Balance Sheets as of March 31, 1997 and
1996.................................................. F-6
Consolidated Statements of Operations for the years
ended March 31, 1997, 1996 and 1995................... F-7
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1997, 1996 and 1995............. F-8
Consolidated Statements of Cash Flows for the years
ended March 31, 1997, 1996 and 1995................... F-9
Notes to Consolidated Financial Statements............. F-10
UNAUDITED INTERIM FINANCIAL STATEMENTS OF NETWORK LONG
DISTANCE, INC.
Unaudited Consolidated Balance Sheet as of December 31,
1997.................................................. F-30
Unaudited Consolidated Statements of Operations for the
nine months ended December 31, 1997 and 1996.......... F-31
Unaudited Consolidated Statements of Cash Flows for the
nine months ended December 31, 1997 and 1996.......... F-32
Notes to Unaudited Consolidated Financial Statements... F-33
</TABLE>
F-1
<PAGE> 87
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,
1997 and 1996, 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, 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 financial
statements of Long Distance Telecom, Inc. included in the consolidated financial
statements of Network Long Distance, Inc. which statements constitute total
assets of 3.7% as of March 31, 1996 and total revenues of 5.1% and 5.8% for the
years ended March 31, 1996 and 1995, respectively, 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 assets of 8.2% as of March 31, 1996 and total
revenues of 15.4% and 4.9% for the years ended March 31, 1996 and 1995,
respectively, 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%, 33.3% and 39.2% for the years ended March 31, 1997,
1996 and 1995, respectively, of the 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three year period ended March
31, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Jackson, Mississippi
January 21, 1998
F-2
<PAGE> 88
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
July 28, 1997
Minneapolis, Minnesota
F-3
<PAGE> 89
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
F-4
<PAGE> 90
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
F-5
<PAGE> 91
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,962,216 $ 1,460,232
Accounts receivable, net of allowance for doubtful
accounts of $2,377,000 and $1,098,000 at March 31, 1997
and 1996, respectively................................. 11,714,585 12,266,356
Other receivables......................................... 360,965 708,962
Deferred tax asset........................................ 157,406 --
Other current assets...................................... 930,491 801,857
Marketable securities..................................... 788,124 --
----------- -----------
Total current assets.............................. 15,913,787 15,237,407
Property and equipment, net................................. 2,990,049 4,225,750
Customer base acquisition costs, net........................ 5,645,730 5,073,145
Goodwill, net............................................... 450,020 3,287,637
Other intangibles, net...................................... 264,221 412,220
Other assets................................................ 919,702 1,026,927
----------- -----------
Total assets...................................... $26,183,509 $29,263,086
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 507,945 $ 1,794,137
Accrued telecommunications cost........................... 7,535,055 4,157,675
Other accrued liabilities................................. 2,084,192 1,569,980
Deferred tax liability.................................... -- 232,470
Current maturities of long-term debt and capital lease
obligation............................................. 1,244,006 349,015
Accrued compensation...................................... 855,261 536,977
----------- -----------
Total current liabilities......................... 12,226,459 8,640,254
Deferred tax liability...................................... 101,866 349,551
Long-term debt and capital lease obligations................ 2,053,317 3,651,426
Commitments and contingencies
Series A convertible preferred stock -- $.01 par value;
25,000,000 shares authorized; no shares issued and
outstanding at March 31, 1997 and 1996 (redemption value
$3 per share)............................................. -- --
Stockholders' equity:
Common stock -- $.0001 par value; 20,000,000 shares
authorized; 9,837,572 and 9,642,566 shares issued and
outstanding at March 31, 1997 and 1996, respectively... 984 964
Additional paid-in capital................................ 14,847,728 12,990,521
Unrealized loss on marketable securities.................. (11,641) --
Retained earnings (deficit)............................... (2,942,914) 3,722,660
Treasury stock............................................ (92,290) (92,290)
----------- -----------
Total stockholders' equity........................ 11,801,867 16,621,855
----------- -----------
Total liabilities and stockholders' equity........ $26,183,509 $29,263,086
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 92
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues (including excise taxes of $4,549,000;
$2,664,000; and $1,293,000 in 1997, 1996, and 1995,
respectively)....................................... $86,005,615 $67,584,268 $48,318,537
Operating expenses:
Transmission costs.................................. 55,961,204 45,969,734 33,106,230
Selling, general and administrative................. 23,168,758 16,055,517 10,701,022
Provision for losses on accounts receivable......... 3,250,549 1,207,453 458,753
Depreciation and amortization....................... 2,394,303 1,724,968 809,845
Provision to reduce carrying value of certain
assets........................................... 6,291,000 -- --
Related party consulting expense.................... 867,285 676,225 583,186
----------- ----------- -----------
Total operating expenses.................... 91,933,099 65,633,897 45,659,036
----------- ----------- -----------
Operating income (loss)............................... (5,927,484) 1,950,371 2,659,501
Interest expense, net................................. 560,220 305,533 5,652
Other expense......................................... -- 22,967 93,076
Loss on write down of investment in land.............. 200,000 177,409 --
----------- ----------- -----------
Income (loss) before income taxes..................... (6,687,704) 1,444,462 2,560,773
Provision (benefit) for income taxes.................. 101,175 660,281 845,573
----------- ----------- -----------
Net income (loss)..................................... $(6,788,879) $ 784,181 $ 1,715,200
=========== =========== ===========
Pro forma adjustment (Note 1):
Income tax provision................................ 4,700 126,375 28,685
----------- ----------- -----------
Pro forma net income (loss)........................... $(6,793,579) $ 657,806 $ 1,686,515
----------- ----------- -----------
Earnings (loss) per common share:
Basic............................................... $ (0.74) $ 0.10 $ 0.22
----------- ----------- -----------
Diluted............................................. $ (0.74) $ 0.10 $ 0.22
----------- ----------- -----------
Pro forma earnings (loss) per common share:
Basic............................................... $ (0.74) $ 0.08 $ 0.22
=========== =========== ===========
Diluted............................................. $ (0.74) $ 0.08 $ 0.22
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 93
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
$.0001 PAR VALUE ADDITIONAL RETAINED TREASURY STOCK LOSS ON
------------------ PAID-IN EARNINGS --------------------- MARKETABLE
NUMBER AMOUNT CAPITAL (DEFICIT) NUMBER AMOUNT SECURITIES
--------- ------ ----------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1994........ 8,536,843 $854 $ 6,159,604 $ 1,493,532 1,028,917 $(239,559) $ --
Issuance of common stock to
former holders of Series A
Convertible Preferred
Stock........................ 63,502 6 190,500 -- -- -- --
Issuance of common stock for
acquisitions................. 29,038 3 232,126 -- -- -- --
Issuance of common stock (net
of direct costs of
$53,585)..................... 728,773 73 151,038 -- -- -- --
Retirement of treasury stock... (632,527) (63) (18,339) (128,867) (632,527) 147,269 --
Dividends on common stock,
$0.02 per share.............. -- -- -- (105,000) -- -- --
Net income..................... -- -- -- 1,715,200 -- -- --
--------- ---- ----------- ----------- --------- --------- --------
BALANCE, MARCH 31, 1995........ 8,725,629 873 6,714,929 2,974,865 396,390 (92,290) --
Issuance of common stock for
acquisitions................. 916,937 91 6,275,592 -- -- -- --
Dividends on common stock,
$0.006 per share............. -- -- -- (36,386) -- -- --
Net income..................... -- -- -- 784,181 -- -- --
--------- ---- ----------- ----------- --------- --------- --------
BALANCE, MARCH 31, 1996........ 9,642,566 964 12,990,521 3,722,660 396,390 (92,290) --
Issuance of common stock for
acquisition.................. 195,006 20 1,857,207 -- -- -- --
Net loss....................... -- -- -- (6,788,879) -- -- --
Unrealized loss on marketable
securities................... -- -- -- -- -- -- (11,641)
Effect of change in fiscal year
end of merged entities....... -- -- -- 123,305 -- -- --
--------- ---- ----------- ----------- --------- --------- --------
BALANCE, MARCH 31, 1997........ 9,837,572 $984 $14,847,728 $(2,942,914) 396,390 $ (92,290) $(11,641)
========= ==== =========== =========== ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 94
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
--------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................... $(6,788,879) $ 784,181 $1,715,200
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization....................... 2,394,303 1,724,968 809,845
Provision for losses on accounts receivable......... 3,041,617 1,112,151 403,314
Provision to reduce carrying value of certain
assets............................................ 6,291,000 -- --
Writedown of investment in land..................... 200,000 177,409 --
Loss on equity investment........................... -- 66,667 --
Provision (benefit) for deferred income taxes....... (733,163) 212,103 189,508
Provision for employee stock incentive plan......... 30,835 50,752 42,350
Noncash compensation expense........................ 40,739 -- --
(Gain) loss on disposal of equipment................ -- (17,000) 127,968
Changes in assets and liabilities, net of effect of
business combinations:
Accounts receivable............................... (1,648,867) (4,547,718) (3,506,328)
Other receivables and current assets.............. 223,386 (1,310,126) 8,416
Accounts payable and other current liabilities.... 2,020,651 2,177,700 2,005,614
Other............................................. (25,284) 78,774 (328,052)
----------- ----------- ----------
Net cash provided by operating activities...... 5,046,338 509,861 1,467,835
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................... (585,073) (1,267,829) (2,130,369)
Collections of advances to officers.................... 598,971 -- --
Maturity of marketable securities...................... 100,000 -- --
Purchase of marketable securities...................... (1,539,475) -- --
Sale of short-term investments......................... -- 1,558,562 2,751,238
Acquisitions and related costs......................... (3,801,004) (1,101,173) (1,781,055)
Decrease (increase) in other intangible assets......... 24,441 (195,321) (110,853)
Proceeds from sale of equipment........................ 764,363 17,000 --
Other.................................................. -- (4,462) (4,179)
----------- ----------- ----------
Net cash used in investing activities.......... (4,437,777) (993,223) (1,275,218)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit....... (2,492,731) 2,532,235 --
Principal payments on debt............................. (1,315,129) (1,299,619) (532,237)
Proceeds from issuance of debt......................... 3,250,000 86,754 123,000
Decrease in capital lease obligation................... (85,305) -- --
Proceeds from issuance of common stock................. -- -- 204,695
Redemption of preferred stock.......................... -- -- (55,527)
Dividends on common stock.............................. -- (36,386) (134,597)
Offering costs......................................... -- -- (53,585)
----------- ----------- ----------
Net cash provided by (used in) financing
activities........................................ (643,165) 1,282,984 (448,251)
----------- ----------- ----------
Effect of change in fiscal year end of merged
entities.......................................... 536,588 -- --
----------- ----------- ----------
Net increase (decrease) in cash and cash
equivalents....................................... 501,984 799,622 (255,634)
Cash and cash equivalents at beginning of period.... 1,460,232 660,610 916,244
----------- ----------- ----------
Cash and cash equivalents at end of period.......... $ 1,962,216 $ 1,460,232 $ 660,610
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 95
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS, MERGERS, ACQUISITIONS AND RELATED MATTERS:
Description of Business
Network Long Distance, Inc. (the "Company" or "Network") provides long
distance telecommunications services to commercial and residential customers
throughout most of the United States with a primary concentration on small to
medium-sized businesses. The Company provides these services primarily through
three customer service channels -- business retail, agents and association
programs. The business retail channel involves the sale of long distance
services directly to end-users. The agents channel involves the sale of long
distance services directly to end-users through master agents of the Company.
The association program channel establishes exclusive marketing agreements with
various trade or business associations to market the Company's products and
services to members of the associations. Previously, the Company operated a
switchless reseller channel which involved the sale of long distance services to
other entities who resell the services to end-users. The Company began to
de-emphasize its switchless reseller channel during the year ended March 31,
1996. See Note 2.
Calls are transmitted over circuits leased from other telecommunications
carriers at fixed or variable rates. Calls are switched through the Company's
switching center or by other carriers on the Company's behalf. The Company
furnishes its end user customers, as well as its reseller customers, with
various long distance products including 1+ dialing, WATS, private line, calling
cards and 800 services. Billing, collection and customer service are available
at additional costs to reseller customers.
Prior to June, 1997, the Company's principal offices were located in Baton
Rouge, Louisiana. The Company's principal offices are located in Newport News,
Virginia.
Mergers
On June 30, 1996, Network merged with Long Distance Telecom, Inc. dba Blue
Ridge Telephone ("Blue Ridge") and in connection therewith issued 337,079 shares
of common stock for all of Blue Ridge's common stock. On November 15, 1996,
Network merged with United Wats, Inc. ("United Wats") and in connection
therewith issued 2,277,780 shares of common stock for all of United Wats' common
stock. On May 12, 1997, Network merged with National Teleservice, Incorporated
("National"), and in connection therewith issued 3,118,664 shares of common
stock for all of National's common stock. An additional 155,524 shares of
Network common stock were placed in escrow pending resolution of certain
indemnification obligations related to the merger with National. (These
transactions are collectively referred to as the "Mergers.") Each of the Mergers
was accounted for as a pooling-of-interests and, accordingly, the Network
financial statements for periods prior to the Mergers have been restated to
include the results of Blue Ridge, United Wats and National for all periods
presented. The combined companies of Network, Blue Ridge, United Wats and
F-10
<PAGE> 96
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
National are hereinafter referred to as the Company. Separate and combined
results of operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Network.............................. $49,249,000 $30,810,000 $24,217,000
Blue Ridge (through June 30, 1996)... 994,000 3,463,000 2,790,000
United Wats (through September 30,
1996)............................. 9,448,000 10,810,000 2,368,000
National............................. 26,315,000 22,501,000 18,944,000
----------- ----------- -----------
Combined.......................... $86,006,000 $67,584,000 $48,319,000
=========== =========== ===========
Income (loss) before income tax:
Network.............................. $(9,011,000) $ (442,000) $ 609,000
Blue Ridge (through June 30, 1996)... 45,000 313,000 62,000
United Wats (through September 30,
1996)............................. 414,000 727,000 463,000
National............................. 1,864,000 847,000 1,427,000
----------- ----------- -----------
Combined.......................... $(6,688,000) $ 1,445,000 $ 2,561,000
=========== =========== ===========
</TABLE>
Prior to the Mergers, Blue Ridge operated in the form of a partnership
under the name "Telecommunications Ventures Limited Partnership No. 1 T/A Blue
Ridge Telephone." On June 17, 1996, Blue Ridge changed to a corporate form of
organization. Blue Ridge did not recognize income tax expense for the periods
presented because its tax attributes flowed to its partners. The consolidated
statements of operations include an unaudited pro forma adjustment to reflect
results as if Blue Ridge had been subject to income tax for all periods
presented.
Prior to the Mergers, both Blue Ridge and United Wats utilized a December
31 fiscal year end. For purposes of the combined results of operations for the
year ended March 31, 1997, the amounts include Blue Ridge and United Wats
historical results of operations for the twelve months ended March 31, 1997. For
purposes of the combined results of operations for the years ended March 31,
1996 and 1995, the Blue Ridge and United Wats amounts reflect Blue Ridge and
United Wats historical results of operations for the years ended December 31,
1995 and 1994, respectively, and the Network amounts reflect Network's
historical results for the years ended March 31, 1996 and 1995, respectively.
Therefore, the Blue Ridge and United Wats historical results of operations for
the three months ended March 31, 1996 are not contained in the Company's
consolidated statements of operations and cash flows for any period presented.
There were no significant intercompany transactions among Network, Blue Ridge,
United Wats and National.
F-11
<PAGE> 97
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following are condensed statements of operations and cash flows for
Blue Ridge and United Wats for the three months ended March 31, 1996:
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
BLUE RIDGE UNITED WATS
---------- -----------
<S> <C> <C>
Revenue............................................. $ 926,000 $3,855,000
Operating expenses.................................. 852,000 3,636,000
--------- ----------
Operating income.................................... 74,000 219,000
Other income (expenses)............................. (4,000) --
--------- ----------
Income before tax................................... 70,000 219,000
Provision for income tax............................ -- 79,000
--------- ----------
Net income.......................................... $ 70,000 $ 140,000
========= ==========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
BLUE RIDGE UNITED WATS
---------- -----------
<S> <C> <C>
Net Income.......................................... $ 70,000 $ 140,000
Depreciation........................................ 31,000 8,000
Change in current assets and liabilities............ (2,000) 475,000
--------- ----------
Cash provided by operating activities............... 99,000 623,000
--------- ----------
Cash provided by (used in) investing activities..... 10,000 (37,000)
--------- ----------
Cash used in financing activities................... (138,000) (20,000)
--------- ----------
Increase (decrease) in cash and cash equivalents.... $ (29,000) $ 566,000
========= ==========
</TABLE>
Merger and Acquisition Activity and Related Matters
The Company has been actively engaged in an acquisition program, focusing
on companies primarily in the long distance industry. See Note 3. Certain of the
acquisitions have resulted in the Company acquiring significant intangible
assets, primarily customer base acquisition costs and goodwill. As explained in
Note 3, during the year ended March 31, 1997, primarily pursuant to certain
contractual reevaluation criteria, management determined that the Company's
ability to realize the unamortized balance of intangible assets related to
certain prior acquisitions was uncertain. As a result, the Company incurred
$6,291,000 in non-cash provisions to reduce the carrying value of such
intangibles to their estimated fair value. As of March 31, 1997, the Company has
approximately $6,100,000 of remaining unamortized intangible assets related to
acquisition transactions. Management believes that its investment in such
intangible assets is realizable based on the estimated future net cash flows
expected to be generated from the acquired entities or customer bases. However,
management's estimates of future net cash flows may change in the future and
such changes could be material.
The Company incurred a net loss of $6,789,000 for the year ended March 31,
1997. Factors that contributed significantly to the loss were the provision to
reduce the carrying value of intangible assets, an increased provision for
losses on accounts receivable and increased selling, general and administrative
expenses. As a result of the loss, stockholders' equity declined from
$16,622,000 at March 31, 1996 to $11,802,000 at March 31, 1997. Because of the
operating loss and resulting decline in stockholders' equity
F-12
<PAGE> 98
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reported by the Company for the year ended March 31, 1997, the Company was not
in compliance with certain financial covenants contained in its bank credit
facility (See Note 5). Accordingly, the Company received a waiver with respect
to certain of such covenants from its lender as of March 31, 1997. As a result
of and in connection with the merger transactions consummated in May 1997, the
Company complied with certain of the financial covenants, and has negotiated
certain amendments to the credit facility to reflect changes in financial
position and anticipated changes in business strategies and operating results
associated with such transactions. While management believes that the Company
will be able to comply with the renegotiated loan agreement, there can be no
assurance that the Company will not require additional waivers in the future or,
if such waivers are required, that the lender will grant them.
The Partnerships
During the year ended March 31, 1997, the land owned by the LaQuinta
Partnership was written down to its estimated fair market value, resulting in a
$200,000 loss. In 1996, Palmview Partnership relinquished title to the land it
had originally purchased in exchange for cancellation of the outstanding debt of
$344,640, resulting in a loss of $177,000. Palmview Partnership was subsequently
dissolved.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
balances have been eliminated in consolidation.
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, the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the periods reported. Actual results
could differ from those estimates. Estimates are used primarily when accounting
for allowance for doubtful accounts, depreciation and amortization, and taxes.
In addition, estimates are used by management in estimating future net cash
flows when evaluating the Company's ability to realize its investments in
long-lived assets, and in determining estimated fair value of assets which are
deemed to have been impaired. See "Accounts Receivable" and "Intangible Assets,"
and Note 3.
Fair Value of Financial Instruments
The carrying amounts for cash, accounts receivable, other receivables,
accounts payable, accrued liabilities and long-term debt approximate their fair
value.
Accounts Receivable
Accounts receivable represent amounts due on monthly billings for long
distance and other telecommunications costs incurred by customers.
The allowance for doubtful accounts is established through a provision for
losses on accounts receivable which is charged to expense. Accounts receivable
are written off against the allowance for doubtful accounts when management
believes the collectibility of the receivable is unlikely. The allowance, which
is based on evaluations of the collectibility of the receivables and prior bad
debt experience, is an amount that management believes will be adequate to
absorb probable losses on accounts receivable existing at the reporting date.
The evaluations take into consideration such factors as changes in the aging and
volume of the accounts receivable, overall quality, review of specific problem
receivables and current industry conditions that
F-13
<PAGE> 99
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
may affect a customer's ability to pay. Actual results could differ from
management's estimates. Write-offs during the fiscal years 1997, 1996 and 1995
were approximately $2,215,000, $868,000, and, $264,000, respectively.
During the year ended March 31, 1996, the Company began re-evaluating its
switchless reseller channel activities generally and, specifically, its
relationship with certain resellers. As a result, the Company chose to
de-emphasize its reseller marketing activities by reducing the number of
reseller customers and the related wholesale accounts receivable. In addition,
certain reseller customers experienced financial difficulties which impeded
their ability to pay the Company on a timely basis. Reseller customers with slow
payment histories have been placed on specific payment plans or under lock box
agreements.
During the year ended March 31, 1997, the Company determined that losses on
certain accounts receivable acquired through acquisition transactions were
greater than expected at the time of acquisition. As a result, the Company has
written-off or made provision for such accounts receivable to reduce the
carrying amount to the estimated realizable value.
Management has specifically evaluated its allowance for doubtful accounts
and believes the allowance to be adequate to absorb probable losses on the
accounts receivable at March 31, 1997. However the actual losses on accounts
receivable could differ from management's evaluation at March 31, 1997 and such
difference could be material.
Property and Equipment
As of March 31, 1997 and 1996, property and equipment included:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Land.............................................. $ 75,000 $ 75,000
Building and improvements......................... 562,620 791,602
Telecommunications equipment...................... 4,274,989 4,713,825
Furniture and fixtures............................ 1,782,252 1,567,266
----------- -----------
6,694,861 7,147,693
Less: Accumulated depreciation.................... (3,704,812) (2,921,943)
----------- -----------
Total property and equipment, net....... $ 2,990,049 $ 4,225,750
=========== ===========
</TABLE>
Property and equipment are recorded at cost. Depreciation is provided for
financial reporting purposes using primarily the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Building................................. 30 years
Building improvements.................... 5-10 years
Telecommunications equipment............. 3-10 years
Furniture and fixtures................... 5-10 years
</TABLE>
Maintenance and repairs are expensed as incurred. Replacements and
betterments are capitalized. The cost and related reserves of assets sold or
retired are removed from the property accounts, and any resulting gain or loss
is reflected in results of operations.
Intangible Assets
The Company's intangible assets include customer base acquisition costs and
non-compete agreements incurred as a result of purchased customer bases;
goodwill, customer base acquisition costs and non-compete agreements resulting
from acquisitions of businesses; and software development costs attributable to
telecommunications service activities.
F-14
<PAGE> 100
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In allocating the excess of the purchase price over tangible assets
acquired in business combinations, the Company utilizes cash flow models and
projected attrition rates to quantify the values allocated to the various
intangibles as well as the related useful lives. While management believes that
the cash flow models are achievable and the attrition rates are reasonable,
management regularly reassesses the realization of the acquisition-related
intangibles through periodic updates of the cash flow models. Additionally,
certain acquisition agreements call for a comparison, at a specified date, of
actual customer attrition rates experienced to those expected at the time of the
acquisition agreement (the "True-Up"). If actual attrition rates differ from
expected rates, certain adjustments to the acquisition price may be required. If
at the time of the True-Up, actual attrition rates are significantly greater
than expected by the Company, the Company makes a determination, based on
estimated future net cash flows, whether the intangible asset related to the
acquisition has been impaired. If an impairment has occurred, a provision for
reduction in the carrying value is made to reduce the carrying amount of the
intangibles to the estimated fair value of the related customer base. Such
provisions are applied first to any goodwill attributable to the impaired assets
until goodwill is eliminated and then to the customer base acquisition costs.
See Note 3.
Customer base acquisition costs include the excess of the purchase price
over any tangible assets acquired as well as specific costs incurred to
consummate the transaction such as attorney's fees, accountant's fees and due
diligence costs. Customer base acquisition costs are recorded based upon the
estimated value (primarily based on estimated future net cash flows) of the
customer base acquired and are amortized over 6 to 7 years using the
straight-line method. Accumulated amortization at March 31, 1997 and 1996, was
approximately $1,607,000 and $418,000, respectively.
Goodwill is recorded in connection with business combinations to the extent
the purchase price exceeds the estimated fair value of specifically identifiable
tangible and intangible assets. The Company periodically evaluates the
realizability of goodwill based primarily on expected cash flows from the
acquired assets or business. Goodwill is amortized over 30 years using the
straight-line method. Accumulated amortization at March 31, 1997 and 1996, was
approximately $75,000 and $115,000, respectively.
Other intangibles include software costs of approximately $235,000 and
$296,000 as of March 31, 1997 and 1996, respectively, and non-compete agreements
of approximately $231,000 at both March 31, 1997 and 1996. The Company
capitalizes external costs related to software development while internal costs
are expensed. Software costs are amortized using the straight-line method over
lives ranging from 4 to 5 years. Non-compete agreements are amortized using the
straight-line method over the lives of the agreements, currently 5 years.
Accumulated amortization of other intangibles as of March 31, 1997 and 1996, was
approximately $317,000 and $194,000, respectively.
See Note 3 for discussion related to the application of Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
Other Receivables
Other receivables consist of current amounts due from customers and
entities that are providing or have formerly provided billing and collection
services for a portion of the Company's customer base.
Other Current Assets
At March 31, 1997 and 1996, other current assets consisted of costs of
direct response advertising and other prepaid expenses. Direct response
advertising costs are capitalized and amortized over the expected life of the
customer. The Company has determined that the expected life of a customer
obtained through direct response advertising is one year. At March 31, 1997 and
1996, approximately $9,000 and $183,000, net of
F-15
<PAGE> 101
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accumulated amortization of approximately $368,000 and $194,000, respectively,
was included in other current assets related to direct response advertising .
Marketable Securities
The Company accounts for marketable securities in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities". The
Company has classified all of its marketable securities as available-for-sale,
and has established a $11,641 unrealized holding loss allowance in shareholders'
equity as the fair market value of its investments is less than their carrying
value as of March 31, 1997. The Company's investment in marketable securities
consists of U.S. Government securities and corporate equity securities. The U.S.
Government securities have maturity dates ranging from May 21, 1997 to May 31,
2001. The Company utilizes the specific identification method in computing
realized gains or losses.
Other Assets
Other assets consist primarily of long-term notes receivable from employees
of approximately $211,000 and $262,000 at March 31, 1997 and 1996, respectively,
deferred financing costs of $100,000, net of accumulated amortization of $83,000
at March 31, 1997 and land held for sale of $608,000 and $808,000 at March 31,
1997 and 1996, respectively.
Income Taxes
Income taxes are provided using an asset and liability approach. The
current provision for income taxes represents actual or estimated amounts
payable or refundable on tax returns filed or to be filed for each year.
Deferred tax assets and liabilities are recorded for the estimated future tax
effects of (a) temporary differences between the tax basis of assets and
liabilities and amounts reported in the balance sheets, and (b) operating loss
and tax credit carryforwards. The overall change in deferred tax assets and
liabilities for the period measures the deferred tax expense for the period.
Effects of changes in enacted tax laws on deferred tax assets and liabilities
are reflected as adjustments to tax expense in the period of adjustment. The
measurement of deferred tax assets may be reduced by a valuation allowance based
on judgmental assessment of available evidence if deemed more likely than not
that some or all of the deferred tax assets will not be realized.
Recognition of Revenue
Customer long distance calls are routed through switching centers owned by
the Company or others over long distance telephone lines provided by others. The
Company records revenues at the time of customer usage primarily on a measured
time basis.
Transmission Costs
Transmission costs include all payments to local exchange carriers and
interexchange carriers primarily for access and transport charges. The Company
primarily utilizes long-term fixed cost contracts with other carriers in order
to carry customer calls.
Earnings per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share." The Company adopted SFAS No. 128 effective
December 15, 1997 and, as such, has complied with SFAS No. 128 in these
financial statements, which have been restated for the Mergers, in reporting
earnings per share for the years ended March 31, 1997, 1996 and 1995.
Accordingly, basic earnings (loss) per common share and basic pro forma earnings
(loss) per common share has been computed by dividing net income (loss) and pro
forma net income (loss), respectively, by weighted average common shares
F-16
<PAGE> 102
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
outstanding for all periods presented. Diluted earnings (loss) per common share
and diluted pro forma earnings (loss) per common share has been computed by
dividing net income (loss) and pro forma net income (loss), respectively, by
weighted average common shares outstanding plus the effects of dilutive
potential common shares for the years ended March 31, 1996 and 1995. For the
year ended March 31, 1997, the effects of dilutive potential common shares are
not considered in calculating earnings (loss) per common share and pro forma
earnings (loss) per common share because their effects would be anti-dilutive to
the net loss and pro forma net loss reported for the year. (See Note 7.) The
following reconciles the denominators used in calculating basic and diluted
earnings (loss) per common share and basic and diluted pro forma earnings (loss)
per common share:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding.... 9,178,828 8,068,200 7,680,425
Effect of dilutive potential common
shares -- Stock warrants.................... -- 130,402 25,859
--------- --------- ---------
Weighted average common shares outstanding
plus effect of dilutive potential common
shares...................................... 9,178,828 8,198,602 7,706,284
========= ========= =========
</TABLE>
Common Stock Escrow Agreement
As part of its public offering of common stock in March 1994, the Company
transferred 626,688 shares of common stock, owned by two officers, into an
escrow account. The common stock could have been released from escrow in three
annual increments of 208,896 shares if the Company either had met earnings per
share requirements, on a fully diluted basis as defined in the agreement, or had
consummated an offering of the Company's common stock considering certain
conditions defined in the agreement. The stipulated earnings per share amounts
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, EPS
---------- ------
<S> <C>
1995...................................... $ 0.375
1996...................................... 0.60
1997...................................... 1.00
</TABLE>
As the Company failed to meet the earnings per share requirements, pursuant
to the terms of the agreement, the common stock held in escrow will be forfeited
and canceled to the Company's treasury by July 15, 2000. The escrowed shares
have been excluded from the weighted average number of shares outstanding for
the years ended March 31, 1997, 1996 and 1995. As discussed in Note 9, one of
the officers subject to the escrow agreement has initiated litigation against
the Company seeking the release of the escrowed shares or other compensation. If
the escrowed shares are released, future per share earnings (loss) would be
reduced.
Statement of Cash Flows
For purposes of the statement of cash flows, cash on hand and on deposit
are considered to be cash and cash equivalents.
Reclassifications
Certain items for 1996 and 1995 have been reclassified to conform with the
1997 presentation.
F-17
<PAGE> 103
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recently Issued Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This statement establishes standards for disclosing
information about an entity's capital structure. This statement is effective for
financial statements for periods ending after December 15, 1997, and will not
materially change the disclosures currently included in the Company's financial
statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The statement
is effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement 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 issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This statement is effective for fiscal years beginning after December 15, 1997.
3. MERGERS AND ACQUISITIONS:
The Company has completed several acquisitions of customer bases of other
long distance companies, and business combinations with other long distance
companies. The following is a discussion of those transactions which have been
material.
Customer Base Acquisitions
The Company has completed a series of acquisitions of segments of other
long distance providers' customer bases. Such acquisitions have been
accomplished through the purchase of the customer base and related accounts
receivable for cash, shares of the Company's common stock, issuance of notes
payable and forgiveness of accounts receivable or a combination thereof. All
acquisitions have been accounted for as purchases.
The table below sets forth information concerning significant customer base
acquisitions by the Company:
<TABLE>
<CAPTION>
PURCHASE PRICE
--------------------- ASSETS ACQUIRED
CASH AND VALUE OF -----------------------------------
ACQUISITION NOTES SHARES ACCOUNTS CUSTOMER OTHER
ACQUIRED ENTITY DATE PAYABLE ISSUED RECEIVABLE BASE INTANGIBLES
--------------- ----------- ---------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Quantum Communications, Inc.
(Quantum)...................... Jan-96 $ 814,000 $590,000 $191,000 $827,000 $ --
Network Services, Inc. (NSI)..... May-95 758,000 55,000 259,000 368,000 --
Colorado River Communications
(CRC).......................... Nov-94 1,742,000 232,000 336,000 692,000 870,000
</TABLE>
Business Combinations
In May 1996, the Company purchased substantially all of the customer base
of Universal Network Services, Inc. ("UniNet"), a provider of long distance
telecommunication services, in a transaction accounted for as a purchase. The
results of operations of the UniNet customer base acquired are included in the
results of operations of the Company from the date of acquisition. Consideration
for the purchase included 243,758
F-18
<PAGE> 104
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shares of the Company's common stock with an assigned value of approximately
$1,862,000 and approximately $3,650,000 cash. The Company acquired the
outstanding accounts receivable related to the customer base which were valued
at approximately $776,000. Intangible assets acquired were allocated to customer
base acquisition cost at approximately $2,115,000 and goodwill at approximately
$2,772,000. The Company originally amortized customer base acquisition cost over
7.5 years and goodwill over 30 years using the straight-line method based
primarily on expected customer attrition rates, estimated net cash flows, and
industry practices. Of the 243,758 shares of the Company's common stock issued,
48,752 shares are held in escrow pending resolution of purchase price
contingencies. The escrowed shares have not been considered as part of the
purchase price.
In October 1995, the Company acquired substantially all of the assets of
ValueTel, Inc., ("ValueTel"), a long distance reseller whose customer base was
located primarily in Illinois, in a transaction accounted for as a purchase.
Results of operations of ValueTel are included in the Company's results of
operations for the year ended March 31, 1996 from the date of acquisition. As
consideration for the purchase, the Company issued 890,915 shares of its common
stock with an assigned value of approximately $5,955,000, assumed liabilities of
ValueTel of approximately $696,000 and forgave a ValueTel payable to the Company
of approximately $608,000. The Company acquired substantially all of ValueTel's
accounts receivable which were valued at approximately $1,610,000. Intangible
assets acquired were allocated to customer base at approximately $3,334,000 and
goodwill at approximately $2,315,000. The Company originally amortized customer
base acquisition costs over 7.5 years and goodwill over 30 years using the
straight-line method based primarily on expected customer attrition rates,
estimated net cash flows, and industry practices. Of the 890,915 shares of the
Company's common stock issued, 16,500 shares are held in escrow pending
resolution of purchase price contingencies. The escrowed shares have not been
considered as part of the purchase price. The purchase agreement with ValueTel
calls for a re-evaluation of customer attrition rates one year from the
acquisition date. As of March 31, 1997, such re-evaluation was in progress.
However, management of the Company believes that, as a result of the
re-evaluation, the escrowed shares will not be released.
The following unaudited pro forma combined results of operations for the
Company assume that the UniNet and ValueTel acquisitions were completed on April
1, 1995.
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues.......................................... $87,610,000 $76,786,000
Loss applicable to common shareholders............ (6,044,000) (6,192,000)
Loss per share.................................... (0.61) (0.74)
</TABLE>
These pro forma amounts represent the historical operating results of the
acquired entities combined with those of the Company with appropriate
adjustments which give effect to interest expense, amortization and common
shares issued. These pro forma amounts are not necessarily indicative of
operating results which would have occurred if UniNet and ValueTel had been
operated by current management during the periods presented.
Provision to Reduce the Carrying Value of Certain Assets
During the fiscal quarter ended December 31, 1996, as part of the
re-evaluation called for in the ValueTel agreement, the Company determined that
the attrition rates for the customer base acquired were greater than originally
anticipated. As a result, management determined that it was appropriate to
re-evaluate attrition rates of all customer bases acquired prior to the
beginning of fiscal year 1997. In March 1997, management determined that
attrition rates related to the customer base acquired in connection with the
UniNet acquisition were also greater than expected. Consequently, management,
applying the requirements of SFAS No.121, determined that future cash flows from
the acquired customer bases would be less than that required to realize these
assets. Management then reassessed the fair value of these assets by estimating
the present
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NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
value of the future cash flows through updating with historical results the cash
flow models utilized to initially allocate the intangibles acquired. As a
result, the Company incurred non-cash expense related to the provision to reduce
the carrying value of customer base acquisition costs and goodwill to their
respective estimated fair values.
The following table details the transactions which resulted in provisions:
<TABLE>
<CAPTION>
PROVISION
TOTAL UNAMORTIZED TO REDUCE BALANCE AFTER PROVISION
INTANGIBLES CARRYING -------------------------
ACQUISITION PRIOR TO PROVISION VALUE CUSTOMER BASE GOODWILL
----------- ------------------ ---------- ------------- --------
<S> <C> <C> <C> <C>
CRC................... $1,588,000 $ 950,000 $ 638,000 $ --
ValueTel.............. 6,018,000 2,800,000 3,218,000 --
Quantum............... 834,000 300,000 534,000 --
UniNet................ 4,887,000 2,241,000 2,115,000 531,000
</TABLE>
Because of the higher than expected attrition rates, the Company analyzed
the expected remaining lives of its intangibles in accordance with SFAS No. 121.
Consequently, the Company has established new periods for amortizing its
customer base acquisition costs that it believes to be reasonable estimates of
the remaining lives of these intangibles. After the Company's reassessment of
amortization periods for its customer base acquisition costs, the remaining
useful lives assigned by the Company range from 4 to 6 years.
4. INCOME TAXES:
The Company follows the asset and liability method of accounting for
deferred income taxes prescribed by SFAS No. 109, "Accounting for Income Taxes."
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. A valuation allowance is
provided for that portion of any deferred tax asset, for which it is deemed more
likely than not that it will not be realized. A valuation allowance of
$1,227,000 has been established related to deferred tax assets resulting from
the provision to reduce the carrying value of intangibles due to the uncertainty
of realizing the full tax benefit of amortization of such intangible assets for
tax purposes over 15 years.
The provision (benefit) for income taxes is composed of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Current provision......................... $ 834,000 $448,000 $657,000
Deferred provision (benefit).............. (733,000) 212,000 189,000
--------- -------- --------
Total provision for income
taxes......................... $ 101,000 $660,000 $846,000
========= ======== ========
</TABLE>
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<PAGE> 106
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of the actual provisions for income taxes
to the expected amounts which are derived by applying the statutory rate to
reported pretax income. The expected statutory amount does not consider income
(loss) related to Blue Ridge prior to June 17, 1996 because Blue Ridge was a
partnership prior to that date.
<TABLE>
<CAPTION>
1997 1996 1995
----------- -------- --------
<S> <C> <C> <C>
Expected statutory provision (benefit)... $(2,494,000) $539,000 $955,000
Utilization of net operating loss
carryforwards.......................... -- -- (75,000)
Capital loss on investment writedown..... 87,000 107,000 --
Effect of merger expenses................ 63,000 -- --
Effect of intangibles amortization and
provisions............................. 1,235,000 -- --
Other.................................... (17,000) 14,000 (34,000)
----------- -------- --------
(1,126,000) 660,000 846,000
Valuation allowance on deferred tax
asset.................................. 1,227,000 -- --
----------- -------- --------
Actual tax provision................... $ 101,000 $660,000 $846,000
=========== ======== ========
</TABLE>
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of March 31, 1997 and 1996:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------
1997 1996
------------------------- ------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts..................... $ 525,000 $ -- $ 429,000 $ --
Depreciation................... -- 429,000 -- 411,000
Amortization................... 240,000 -- 41,000 --
Effect of sale-leaseback....... -- 72,000 -- --
Provision to reduce carrying
value of certain assets...... 1,294,000 -- -- --
Effect of conversion from cash
basis for income tax
purposes..................... -- 284,000 -- 240,000
Accounts receivable............ -- -- -- 929,000
Prepaid expenses............... -- -- -- 83,000
Accrued liabilities............ 19,000 -- 628,000 --
Other.......................... -- 9,000 -- 16,000
----------- -------- ---------- ----------
2,078,000 794,000 1,098,000 1,679,000
Valuation allowance............ (1,227,000) -- -- --
----------- -------- ---------- ----------
Total................ $ 851,000 $794,000 $1,098,000 $1,679,000
=========== ======== ========== ==========
</TABLE>
At March 31, 1997, the Company has capital loss carryforwards of $445,000
which expire in 2001 ($245,000) and 2002 ($200,000). The benefit from these
losses has not been recorded, as it is uncertain whether or not there will be
future capital gains to utilize the loss carryforwards.
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
In December 1995, the Company renewed its line of credit ("1996 Facility")
with a bank with $6,000,000 being available under the 1996 Facility. Borrowings
under the 1996 Facility were scheduled to mature on April 30, 1997 and bore
interest at 1% above the prime rate (9.25% at March 31, 1996). At March 31,
1996, $2,532,000 was outstanding under the 1996 Facility. The 1996 Facility was
secured by certain
F-21
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NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accounts receivable of the Company and required compliance with certain
financial and operating covenants which include minimum leverage and fixed
charge coverage ratios. At March 31, 1996, the Company was in compliance with
those covenants.
In May 1996, the Company entered into a $14,250,000 credit facility ("1997
Facility") with another bank which includes a revolving credit facility and term
loan facility. Borrowings under the 1997 Facility were used to repay and retire
the 1996 Facility. Borrowings under the revolving credit portion of the 1997
Facility may not exceed the lesser of $11,000,000 less any reductions the lender
may establish against such amount or 85% of eligible receivables. Borrowings
under the revolving facility bear interest at the prime rate plus 0.75% (9.0% at
March 31, 1997). Borrowings and unpaid interest on the revolving facility are
repayable in full at maturity of the facility on June 1, 1999.
At March 31, 1997, borrowings outstanding under the revolving facility were
$40,000. Unused borrowing capacity under the revolving facility at March 31,
1997 was $6,822,000. As part of the 1997 Facility, the Company was also allowed
to borrow $3,250,000 under a term loan facility. The term loan is repayable in
36 equal monthly principal installments of $90,278 plus accrued interest. The
term loan bears interest at the prime rate plus 3% (11.25% at March 31, 1997).
At March 31, 1997, the balance outstanding under the term facility was
$2,437,000. Substantially all of the assets of the Company including tangible
assets, receivables and general intangibles, the definition of which includes
but is not limited to intellectual property, business plans, business records
and licenses, are pledged as collateral under the 1997 Facility. The 1997
Facility requires compliance with certain financial and operating covenants
which include minimum leverage and fixed charge coverage ratios. As of March 31,
1997, the Company was not in compliance with certain financial covenants
enumerated in the 1997 Facility. Accordingly, the Company received a waiver with
respect to certain of such covenants from its lender as of March 31, 1997. As a
result of and in connection with the merger transactions consummated in May 1997
(See Note 13), the Company complied with certain of the financial covenants, and
has currently negotiated certain amendments to the credit facility to reflect
changes in financial position and anticipated changes in business strategies and
operating results associated with such transactions. While management believes
that the Company will be able to comply with the renegotiated loan agreement,
there can be no assurance that the Company will not require additional waivers
in the future or, if such waivers are required, that the lender will grant them.
At March 31, 1997 and 1996, $68,000 and $343,000, respectively, remained
outstanding on notes payable primarily to sellers of acquired entities incurred
in connection with acquisition of customer bases. Borrowings under these notes
payable are unsecured, bear interest at 8% and mature in February 2001.
National has a $2,000,000 line of credit with a bank, due on demand, which
expires on April 1, 1998. Terms of the agreement limit the amount advanced to
the lesser of $2,000,000 or the sum of 80% of National's eligible billed
accounts receivable, 50% of its unbilled accounts receivable, and 50% of its
equipment. Borrowings are secured by National's equipment, accounts receivable,
and general intangibles. The interest rate on the line of credit is prime plus
0.5%. The Company had no outstanding balances under the line of credit agreement
as of March 31, 1997 and 1996.
National also had a note payable of $599,061 and $600,000 at March 31, 1997
and 1996, respectively, that is due in full on December 7, 1998. This note
payable is collateralized by land and currently bears interest at 1.5% above
prime (9.75% at March 31, 1997).
National had a $400,000 letter of credit with a bank which expired June 1,
1997. The interest rate on this letter of credit was prime plus 0.5%. The
Company was also required to pay a yearly service fee equal to 2.0% of the face
amount of the letter. The Company had no drawings on this letter of credit as of
March 31, 1997 and 1996.
F-22
<PAGE> 108
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At March 31, 1996, the Company had other notes payable outstanding to banks
with aggregate balances of $109,000. Borrowings under these notes were fully
repaid by the Company during the year ended March 31, 1997.
Future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998............................. $1,112,000
1999............................. 1,699,000
2000............................. 329,000
2001............................. 16,000
----------
$3,156,000
==========
</TABLE>
Certain telecommunications equipment is leased under capital lease
agreements expiring in 1998. The following is an analysis of the equipment under
capital lease included in property and equipment:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Communications equipment............................. $ 604,000 $ 604,000
Less: accumulated depreciation....................... (360,000) (252,000)
--------- ---------
$ 244,000 $ 352,000
========= =========
</TABLE>
The following is a schedule by years of the future minimum lease payments
under capital lease together with the present value of the minimum lease
payments as of March 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 139,000
1999........................................................ 9,000
---------
Total minimum lease payments................................ 148,000
Amounts representing interest............................... (8,000)
---------
Present value of net minimum lease payments................. 140,000
Less: current portion....................................... (132,000)
---------
Long-term portion........................................... $ 8,000
=========
</TABLE>
6. EMPLOYEE BENEFIT PLANS:
In May 1994, the Company adopted a stock incentive plan (the "Plan") under
which certain employees are eligible to receive 100 shares of the Company's
common stock upon completion of their first anniversary of service. All shares
issued under the Plan are held by the Company for a period of three years from
the issue date, at which time the employee vests if they are still employed with
the Company. In the event the Company is sold, all employees vest immediately.
Approximately 15,000; 19,300 and 17,600 shares of common stock had been awarded
under the Plan at March 31, 1997, 1996 and 1995, respectively. Compensation
expense of $31,000, $51,000 and $42,000 was recognized in the years ended March
31, 1997, 1996 and 1995, respectively, related to the Plan.
In March 1996, the Company adopted a defined contribution retirement plan
for all eligible employees which qualifies under the provisions of Section
401(k)of the Internal Revenue Code and was retroactively effective to January 1,
1996. Employees are allowed to make tax deferred contributions ranging from 1%
to 15% of their eligible compensation. The Company matches 50% of the first 6%
of each employee's contribution and is eligible to make additional discretionary
contributions. The Company recognized expense for contributions of $30,000
during the fiscal year ended March 31, 1997.
United Wats operates a defined contribution retirement plan which qualified
under the provisions of Section 401(k) of the Internal Revenue Code. Employees
are allowed to make tax deferred contributions
F-23
<PAGE> 109
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ranging from 1% to 15% of their eligible compensation. United Wats matches 25%
of the first 6% of each employee's contribution and is eligible to make
additional discretionary contributions. Total profit sharing expense was $13,000
and $8,000 for the years ended March 31, 1997 and 1996, respectively.
National operates a defined contribution retirement plan which qualifies
under the provisions of Section 401(k) of the Internal Revenue Code. Employees
are eligible to become participants in the 401(k) Plan after completing six
months of service and after attaining the age of 21. Participants may contribute
an amount equal to 1% to 12% of their compensation. The 401(k) Plan provides for
a matching contribution by the Company in an amount equal to 50% of the
participants' contribution, not to exceed 6% of the participants' compensation.
Amounts charged to operations under the 401(k) Plan were approximately $47,000,
$41,000, and $13,000 for the years ended March 31, 1997, 1996, and 1995,
respectively.
7. STOCK WARRANTS:
The Company grants warrants to various directors, officers, employees and
nonemployees from time to time. The warrants vest in periods ranging from
immediately following grant date to ten years from grant date. Terms and
conditions of the Company's warrants, including exercise price and the period
warrants are exercisable, generally are at the discretion of the Company's Board
of Directors. Each warrant granted allows for the purchase of one share of the
Company's common stock. No warrants are exercisable for a period of more than
ten years.
The Company accounts for warrants issued under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income (loss) and
earnings (loss)per common share would have been reduced to the following pro
forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C> <C>
Net income (loss): As Reported $(6,789,000) $ 784,000
Pro Forma (6,986,000) (1,646,000)
Basic and diluted earnings (loss)
per share: As Reported (0.74) 0.10
Pro Forma (0.76) (0.20)
</TABLE>
Because the method of accounting prescribed by SFAS No. 123 has not been
applied to options granted prior to April 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
F-24
<PAGE> 110
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Company's stock warrants granted at March
31, 1997 and 1996 and changes during the years then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year.......... 1,202,002 $ 8.15 120,000 $7.50
Granted............................... 90,000 10.15 1,092,002 8.22
Exercised............................. -- -- -- --
Forfeited............................. (230,000) 9.00 (10,000) 7.78
Expired............................... -- -- -- --
--------- ------ --------- -----
Outstanding, end of year................ 1,062,002 $ 8.14 1,202,002 $8.15
========= ====== ========= =====
Exercisable, end of year................ 895,334 $ 8.21 1,002,000 $8.23
========= ====== ========= =====
Weighted average fair value of options
granted............................... $ 4.22 $ 4.41
========= =========
</TABLE>
The options outstanding at March 31, 1997 have exercise prices ranging from
$7.50 to $10.4375 with a remaining weighted average contractual life of 6.73
years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for options granted during the years ended March 31, 1997 and
1996:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
ASSUMPTIONS
----------------
1997 1996
---- ----
<S> <C> <C>
Risk free interest rate.................................... 5.9% 5.5%
Expected life (years)...................................... 3.1 5.6
Expected volatility........................................ 47.8% 40.3%
Expected dividends......................................... -- --
</TABLE>
On December 10, 1992, National granted an option to an officer of National
to purchase all or any part of the number of shares of National's common stock
which, when issued, would equal 5% of the total number of shares of common stock
outstanding. The exercise price was $150,000, or the pro-rata amount in the
event of partial exercise of the option. The option became exercisable, and was
exercised, upon the merger of National with Network. As a result, the Company
recognized $1,100,000 in compensation expense during the first quarter of the
year ended March 31, 1998.
8. COMMITMENTS:
At March 31, 1997, the Company was committed under noncancellable,
noncapitalizable agreements for fixed cost transmission facilities that require
minimum payments of approximately $19,100,000 in 1998, $9,450,000 in 1999,
$8,100,000 in 2000 and $3,375,000 in 2001.
F-25
<PAGE> 111
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company leases office facilities and certain equipment under
noncancellable operating leases having initial or remaining terms of more than
one year. Rent expense related to these leases was approximately $697,000,
$497,000, and $178,000 for the years ended March 31, 1997, 1996 and 1995,
respectively. Approximate minimum lease payments under these operating leases
are as follows:
<TABLE>
<S> <C>
1998.............................. $674,000
1999.............................. 672,000
2000.............................. 539,000
2001.............................. 242,000
2002.............................. 30,000
</TABLE>
In April 1996, the Company entered into a sale-leaseback transaction
whereby the Company sold communications equipment to a financial institution and
obtained a lease for the communications equipment. The lease requires annual
payments of $165,000 and expires in March 2000. No gain or loss was recognized
upon consummation of the sale-leaseback transaction. The lease is accounted for
as an operating lease.
Certain of the Company's facility leases include renewal options and all
leases include provisions for rent escalation to reflect increased operating
costs and/or require the Company to pay certain maintenance and utility costs.
9. CONTINGENCIES:
On February 8, 1996, President Clinton signed the Telecommunications Act of
1996 (the "Telecom Act"), which permits, without limitation, the Regional Bell
Operating Companies ("RBOCs") to provide domestic and international long
distance services to customers located outside of the RBOCs home regions;
permits a petitioning RBOC to provide domestic and international long distance
service to customers within its home regions upon a finding by the Federal
Communications Commission (the "FCC") that a petitioning RBOC has satisfied
certain criteria for opening up its local exchange network to competition and
that its provision of long distance services would further the public interest;
and removes existing barriers to entry into local service markets. Additionally,
there are significant changes in the manner in which carrier-to-carrier
arrangements are regulated at the federal and state level; procedures to revise
universal service standards; and, penalties for unauthorized switching of
customers. The FCC has instituted and, in most instances, completed proceedings
addressing the implementation of this legislation.
On August 8, 1996, the FCC released its First Report and Order in the
Matter of Implementation of the Local Competition Provisions in the Telecom Act
(the "FCC Interconnect Order"). In the FCC Interconnect Order, the FCC
established nationwide rules designed to encourage new entrants to participate
in the local service markets through interconnection with the incumbent local
exchange carriers ("ILEC"), resale of the ILECs retail services and unbundled
network elements. These rules set the groundwork for the statutory criteria
governing RBOC entry into the long distance market. The Company cannot predict
the effect such legislation or the implementing regulations will have on the
Company or the industry. Motions to stay implementation of the FCC Interconnect
Order have been filed with the FCC and federal courts of appeal. Appeals
challenging, among other things, the validity of the FCC Interconnect Order have
been filed in several federal courts of appeal and assigned to the Eighth
Circuit Court of Appeals for disposition. The Eighth Circuit Court of Appeals
has stayed the pricing provisions of the FCC Interconnect Order. The United
States Supreme Court has declined to review the propriety of the stay. The
Company cannot predict either the outcome of these challenges and appeals or the
eventual effect on its business or the industry in general.
On December 24, 1996, the FCC released a Notice of Proposed Rulemaking
seeking to reform the FCC's current access charge policies and practices to
comport with a competitive or potentially competitive local access service
market. On May 7, 1997, the FCC announced that it will issue a series of orders
that reform Universal Services Subsidy allocations, adopt various reforms to the
existing rate structure for interstate access
F-26
<PAGE> 112
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
that are designed to reduce access charges, over time, to more economically
efficient levels and rate structures. In particular, the FCC adopted changes to
its rate structures for Common Line, Local Switching and Local Transport rate
elements. The FCC generally removed from minute-of-use access charges costs that
are not incurred on a per-minute-of-use basis, with such costs being recovered
through flat rate charges. Additional charges and details of the FCC's actions
are to be addressed when Orders are released within the near future. Access
charges are a principal component of the Company's transmission costs. The
Company cannot predict whether or not the result of these proceedings will have
a material impact upon its financial position or results of operations.
On May 21, 1997, the former Chief Executive Officer ("CEO") of the Company
initiated litigation against the Company in an effort to obtain the release of
shares subject to the common stock escrow agreement discussed in Note 2, or to
be otherwise compensated. Based on the fair market value of freely tradable
common shares of the Company, the fair market value of the shares subject to
litigation at May 21, 1997 was approximately $2,650,000. The outcome of this
litigation, which the Company is vigorously defending, is uncertain. However, if
any of the escrowed shares of common stock are released, earnings (loss) per
common share would be reduced. The fair value of any shares released from escrow
or any cash payment made to the former officer in connection with the litigation
would be charged to expense.
The Company is involved in legal proceedings generally incidental to its
business. While the results of these various legal matters contain an element of
uncertainty, the Company believes that the probable outcome of any of these
matters, or all of them combined, should not have a material adverse effect on
the Company's consolidated results of operations or financial position.
10. RELATED PARTY TRANSACTIONS:
The Company held notes receivable and related accrued interest from various
employees of $211,000 and $262,000 as of March 31, 1997 and 1996, respectively.
These notes, which are unsecured, include non-interest bearing notes and notes
bearing interest at a rate of 8%.
The Company is indebted to shareholders under notes payable aggregating
$13,000 and $107,000, respectively, at March 31, 1997 and 1996. The note payable
outstanding at March 31, 1997 bears interest at 8% and matures October 1997. The
notes are secured by communications equipment.
The Company leases office space and a retail facility from shareholders
under two operating leases. Annual rentals under the leases totaled $33,000,
$37,000, and $36,000, respectively, for the years ended March 31, 1997, 1996 and
1995.
The Company made various payments to, and on the behalf of two consulting
companies owned by a shareholder and director of the Company. Amounts charged
for consulting expenses were $867,000, $676,000 and $583,000 for the years ended
March 31, 1997, 1996 and 1995, respectively.
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid by the Company during the years ended March 31, 1997, 1996
and 1995 amounted to $521,000, $351,000, and 151,000, respectively. Income taxes
paid during the years ended March 31, 1997, 1996 and 1995, were $1,538,000,
$619,000 and $648,000, respectively.
F-27
<PAGE> 113
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In conjunction with business combinations and customer base acquisitions
during the years ended March 31, 1997, 1996 and 1995, assets acquired and
non-cash consideration issued were as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Fair value of tangible assets
acquired........................... $ 776,000 $ 2,135,000 $ 438,000
Excess of cost over tangible assets
acquired........................... 4,887,000 7,330,000 1,771,000
Accounts receivable forgiven......... -- (893,000) (196,000)
Liabilities assumed.................. -- (650,000) --
Notes payable issued................. -- (532,000) --
Common stock issued.................. (1,862,000) (6,289,000) (232,000)
----------- ----------- ----------
Cash paid............................ $ 3,801,000 $ 1,101,000 $1,781,000
=========== =========== ==========
</TABLE>
For the year ended March 31, 1997, noncash transactions also included
$1,441,000 of transfers of marketable securities to officers and $801,000 of
transfers of marketable securities from officers. For the year ended March 31,
1996, noncash transactions also included debt incurred for purchase of equipment
of $29,000, relinquishment of the title to land in exchange for extinguishment
of debt of $345,000 and other noncash transactions of $8,000. For the year ended
March 31, 1995, noncash transactions included retirement of treasury stock of
$147,000, capital lease obligations incurred of $67,000, issuance of debt of
$600,000 to purchase land, other noncash transactions of $25,000 and redemption
of preferred stock of $191,000.
12. CONCENTRATIONS AND TELECOMMUNICATIONS INDUSTRY RISKS:
The Company faces intense competition in providing long distance
telecommunications service. Domestically, the Company competes for services with
AT&T, MCI, Sprint and WorldCom, the local exchange carriers ("LECs") and other
national and regional interexchange carriers ("IXCs"), where permissible.
Certain of these companies have substantially greater market share and financial
resources than the Company, and some of them are the source of communications
capacity used by the Company to provide its own services.
The Company's long distance telephone business is dependent upon lease or
resale arrangements with fiber-optic and digital microwave carriers for the
transmission of calls. The future profitability of the Company is based upon its
ability to transmit long distance telephone calls over transmission facilities
leased from others on a cost-effective basis. The Company is currently dependent
on three primary carriers, Frontier Communications Services, Inc., WorldCom
Network Services, Inc. and Sprint. The Company utilizes other fiber optic
carriers to a lesser extent to supplement communication transport services,
however, there can be no assurance that in the future the Company will continue
to have access, on an ongoing basis, to transmission facilities at favorable
rates.
The telecommunications industry is subject to rapid and significant changes
in technology. While the Company does not believe that, for the foreseeable
future, these changes will either materially and adversely affect the continued
use of fiber optic cable or materially hinder its ability to acquire necessary
technologies, the effect of technological changes, including changes relating to
emerging wireline and wireless transmission and switching technologies, on the
businesses of the Company cannot be predicted.
13. SUBSEQUENT EVENTS:
In May 1997, the Company acquired Eastern Telecom International Corporation
("Eastern"), a provider of long distance telecommunications services, in a
transaction to be accounted for as a purchase. The acquisition was consummated
with the issuance of 3,633,272 shares of the Company's common stock and cash
F-28
<PAGE> 114
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of $1,980,000. At March 31, 1997, Eastern had total assets of $7,352,000 and
shareholder's equity of $1,083,000. For the eleven month period ended March 31,
1997, Eastern had revenues of $20,429,000 and net income of $383,000.
Subsequent to the acquisition discussed above, four principals of Eastern
and National were elected to be members of the Board of Directors. In addition,
a new Chairman of the Board of Directors and CEO, Chief Financial Officer and
Treasurer, and Secretary were elected. The newly elected Chairman and Chief
Executive Officer and Chief Financial Officer and Treasurer formerly served in
similar capacities for Eastern. The newly elected Secretary formerly served as
President and Chief Executive Officer of National.
In December 1997, the Company signed a definitive agreement to merge with
IXC Communications, Inc. ("IXC"). Upon closing (which is expected to occur in
the second calendar quarter of 1998), IXC will acquire 100% of the outstanding
common stock of the Company and the Company will become a wholly owned
subsidiary of IXC. Under terms of the agreement, shareholders of the Company
will receive 0.2998 shares of IXC common stock for each share of the Company's
common stock. Warrants of the Company will be converted into options to purchase
shares of IXC common stock at the exchange ratio of 0.2998.
F-29
<PAGE> 115
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
(UNAUDITED)
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 1,087,067
Marketable securities..................................... --
Accounts receivable, net of allowance for doubtful
accounts of $2,338,000 at December 31, 1997............ 16,592,857
Other receivables......................................... 385,299
Deferred income tax asset................................. 344,599
Other current assets...................................... 723,284
-----------
Total current assets.............................. 19,133,106
Property and equipment
Land...................................................... 50,000
Building and improvement.................................. 554,890
Telecommunications equipment.............................. 5,440,388
Furniture and fixtures.................................... 3,250,402
-----------
9,295,680
Less accumulated depreciation............................. 4,357,809
-----------
Total property and equipment, net................. 4,937,871
Customer acquisition costs, net............................. 4,904,295
Goodwill, net............................................... 20,749,526
Other intangibles, net...................................... 44,637
Other assets................................................ 140,792
-----------
Total assets...................................... $49,910,227
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,381,560
Accrued transmission cost................................. 12,486,589
Accrued merger and other related charges.................. 345,000
Accrued compensation...................................... 1,193,073
Other accrued liabilities................................. 3,071,147
Current maturities of long-term debt and capital lease
obligations............................................ 117,516
-----------
Total current liabilities......................... 18,594,885
Deferred income tax liability............................... 676,114
Long-term debt and capital lease obligation................. 1,024,739
Series A convertible preferred stock -- $.01 par value; no
shares issued and outstanding at December 31, 1997 and
March 31, 1997 respectively............................... --
Stockholders' equity
Common stock -- $.0001 par value; 20,000,000 shares
authorized; 13,149,600 shares outstanding at December
31, 1997............................................... 1,315
Additional paid-in capital................................ 38,758,327
Retained earnings (deficit)............................... (9,052,863)
Treasury stock............................................ (92,290)
Unrealized holding loss on marketable securities.......... --
-----------
Total stockholders' equity........................ 29,614,489
-----------
Total liabilities and stockholders' equity........ $49,910,227
===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-30
<PAGE> 116
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues (Including excise taxes of $4,260,000 and
$3,334,000 for the nine months ended December 31, 1997 and
1996, respectively)....................................... $78,463,517 $63,430,220
Operating expenses:
Transmission costs........................................ 49,227,012 41,953,727
Selling, general and administrative....................... 21,250,354 16,604,849
Depreciation and amortization............................. 3,337,189 1,767,799
Provision for losses on accounts receivable............... 2,354,485 2,852,098
Merger expenses and other related charges................. 2,496,445 --
Provision to reduce carrying value of certain assets...... 4,024,946 4,050,000
Stock compensation related to merger...................... 1,100,000 --
----------- -----------
Total operating expenses.......................... 83,790,431 67,228,473
Operating income (loss)..................................... (5,326,914) (3,798,253)
Interest (income) expense, net.............................. 336,269 449,378
Other (income) expense...................................... (100,123) 19,031
----------- -----------
Income (loss) before income taxes........................... (5,563,060) (4,266,662)
Provision (benefit) for income taxes........................ 546,888 (152,718)
----------- -----------
Net income (loss) applicable to common shareholders......... $(6,109,948) $(4,113,944)
=========== ===========
Net income (loss) per share -- basic and
diluted................................................... $ (0.49) $ (0.45)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 117
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................... $(6,109,948) $(4,113,944)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation........................................... 1,200,104 818,462
Amortization........................................... 2,137,085 949,337
Provision for bad debts................................ 2,354,485 2,852,098
Provision for deferred income taxes.................... -- (1,157,374)
Gain on sale of assets................................. 22,928 --
Provision for employee stock incentive plan............ 4,091 38,062
Compensation expense related to exercise of stock
options............................................... 1,100,000 --
Loss on impairment of certain assets................... 4,024,946 4,050,000
Changes in assets and liabilities, net of effect of
business combinations:
(Increase) decrease in accounts receivable........... (3,181,820) (1,055,342)
(Increase) decrease in other current assets.......... 179,074 123,241
(Increase) decrease in other assets.................. 699,723 218,596
Increase (decrease) in accrued transmission costs.... 3,028,935 1,572,185
Increase (decrease ) in accounts payable............. (1,343,371) (1,643,607)
Increase (decrease ) in accrued merger costs......... 320,550 --
Increase (decrease) in accrued liabilities........... (210,283) 772,134
----------- -----------
Net cash provided by operating activities......... 4,226,499 3,423,848
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................... (1,121,965) (493,138)
Sale of short-term investments, net....................... 788,124 (3,829,181)
Acquisition and related costs............................. (2,508,493) --
Decrease (increase) in other intangible assets............ (45,394) 92,399
Proceeds from disposal of equipment....................... -- 764,363
----------- -----------
Net cash used in investing activities............. (2,887,728) (3,465,557)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit.......... 625,793 (1,378,689)
Principal payments on debt................................ (2,452,044) (1,008,169)
Proceeds from issuance of debt............................ -- 3,250,000
Decrease in capital lease obligation...................... (635,981) (63,305)
Common stock issued pursuant to employee stock plan....... 98,312 --
Equity issued pursuant to conversion of stock options..... 150,000 --
----------- -----------
Net cash provided by (used in) financing
activities..................................... (2,213,920) 799,837
----------- -----------
Net increase in cash and cash equivalents......... (875,149) 758,128
Effect of change in fiscal year-end............... -- 536,588
Cash and cash equivalents at beginning of period............ 1,962,216 1,460,232
----------- -----------
Cash and cash equivalents at end of period.................. $ 1,087,067 $ 2,754,948
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 118
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- MERGERS
In May 1997, Network Long Distance, Inc. (the "Company") merged with
Eastern Telecom International Corporation ("ETI"), a provider of long distance
telecommunication services, in a transaction accounted for as a purchase. The
merger was consummated with the issuance of 3,633,272 shares of the Company's
common stock and cash payments of $1,979,603. The transaction resulted in an
intangible asset of approximately $25,248,000 of which $3,815,000 and
$21,433,000 have been allocated to customer base and goodwill, respectively. The
Company is amortizing the customer base over a useful life of 3 years and the
goodwill over a useful life of 20 years. The following represents the pro forma
results of operations of the Company and ETI for the nine months ended December
31, 1997 and 1996, as if the acquisition had occurred as of the earliest date
presented.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues.......................................... $81,061,000 $79,037,000
Net loss.......................................... (7,368,000) (3,661,000)
Net loss per share................................ $ (0.57) $ (0.29)
</TABLE>
NOTE 2 -- BASIS OF PRESENTATION
The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the financial statements reflect all adjustments (of a normal and
recurring nature) which are necessary to present fairly the financial position,
results of operations and cash flows for the interim periods.
NOTE 3 -- REDUCTION IN CARRYING VALUE OF CERTAIN ASSETS
During the nine month period ended December 31, 1997 the Company incurred
non-cash charges related to a reduction in the carrying value of intangible
assets associated with certain acquisitions. During the quarter ended December
31, 1997, current management noted that the attrition rates of the customer
bases acquired under these acquisitions (the revenue of which currently
represents less than 10% of total Company revenue) were substantially higher
than the attrition expectations formerly established when the bases were
previously analyzed in the quarters ended December 31, 1996 and March 31, 1997.
As a result, applying the requirements of Statement of Financial Accounting
Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" (SFAS 121), management revised estimates of
the recoverability of these intangible assets, resulting in a non-cash charge of
$3,732,000. The write-down included $1,137,000 for customer acquisition costs
associated with the purchase of selected assets from Value Tel, Inc., $431,000
for goodwill and $1,000,000 for customer acquisition costs associated with the
purchase of selected assets from Universal Network Services, Inc., and the
remaining amount for customer acquisition costs associated with the purchase of
ten other customer bases. The fair values of these assets were determined by
estimating the present value of future cash flows to be generated by these
assets.
Because of the higher than expected attrition rates, the Company analyzed
the expected remaining lives of its customer base intangibles in accordance with
SFAS 121. Consequently, the Company has established new periods for amortizing
its customer base acquisition costs that it believes to be reasonable estimates
of the remaining lives of these intangibles. After the Company's reassessment of
amortization periods for its customer base acquisition costs, the remaining
useful lives assigned by the Company are three years. This change in the
remaining lives will be applied prospectively beginning January 1, 1998.
F-33
<PAGE> 119
NETWORK LONG DISTANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the revision of customer acquisition costs noted above,
the Company reviewed the carrying values of other long-lived assets, applying
the requirements of SFAS 121, and recognized impairments of $94,000 in other
intangible assets, $130,000 for a decommissioned switch to be disposed of, and
$69,000 for real estate to be disposed of.
NOTE 4 -- MERGER EXPENSES AND RELATED CHARGES
The Company incurred merger expenses and other related charges of $271,000
during the quarter ended December 31, 1997. This amount consisted of severance
payments, professional service fees and billing expenses incurred in connection
with the integration and consolidation of the ETI and National Teleservice, Inc.
(NTI) mergers in May, 1997.
NOTE 5 -- NET INCOME (LOSS) PER SHARE
Net income (loss) per share was calculated in accordance with Statement of
Financial Accounting Standard No. 128, "Earnings per Share." For the nine months
ended December 31, 1997 and 1996, weighted average shares outstanding on a basic
and diluted basis were 12,404,436 and 9,157,764, respectively. For the periods
presented, the potential common shares were not considered because their effects
would be anti-dilutive.
NOTE 6 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the nine months ended December 31, 1997 and 1996, interest paid
amounted to $395,000 and $465,000, respectively. Income taxes paid by the
Company during the nine months ended December 31, 1997 and 1996 were $62,000 and
$368,000, respectively.
NOTE 7 -- PROPOSED MERGER
In December 1997, the Company signed a definitive agreement to merge with
IXC Communications, Inc. (IXC). Upon closing (which is expected to occur in the
second calendar quarter of 1998), IXC will acquire 100% of the outstanding
common stock of the Company and the Company will become a wholly owned
subsidiary of IXC. Under terms of the agreement, shareholders of the Company
will receive 0.2998 shares of IXC common stock for each share of the Company's
common stock. Warrants of the Company will be converted into options to purchase
shares of IXC common stock at the exchange ratio of 0.2998.
F-34
<PAGE> 120
ANNEX A
GLOSSARY
Access charges -- The fees paid by long distance carriers to LECs for
originating and terminating long distance calls on their local networks.
Ameritech -- Ameritech Communications, Inc.
ATM (asynchronous transfer mode) -- An information transfer standard that
is one of a general class of technologies that relay traffic by way of an
address contained within the first five bytes of a standard 53-byte-long packet
or cell. The ATM format can be used by many different information systems,
including local area networks, to deliver traffic at varying rates, permitting a
mix of voice, video and data (multimedia).
AT&T -- AT&T Corp.
Cable & Wireless -- Cable & Wireless, P.L.C.
CAP (Competitive Access Provider) -- A company that provides its customers
with an alternative to the LEC for local transport of private line, special
access and interstate transport of switched access telecommunications service.
Capacity-intensive -- Refers to products which use comparatively large
amounts of bandwidth.
CCTS -- Consolidated Communications Telecom Services, Inc.
Central Offices -- The switching centers or central switching facilities of
the LECs.
Dedicated -- Refers to telecommunications lines dedicated or reserved for
use by particular customers along predetermined routes.
Digital -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies (both
fiber and microwave) employ a sequence of these pulses to represent information
as opposed to the continuously variable analog signal. The precise digital
numbers minimize distortion (such as graininess or snow in the case of video
transmission, or static or other background distortion in the case of audio
transmission). Both IXC's microwave and fiber optic facilities transmit digital
information.
Digital route miles -- Route miles of IXC's microwave and fiber optic
routes.
DS-1, DS-3 -- Standard telecommunications industry digital signal formats,
which are distinguishable by bit rate (the number of binary digits (0 and 1)
transmitted per second). DS-0 service has a bit rate of 64 kilobits per second
and can transmit only one voice or data transmission at a time. DS-1 service has
a bit rate of 1.544 megabits per second and can transmit 24 simultaneous voice
or data transmissions. DS-3 service has a bit rate of 45 megabits per second and
can transmit 672 simultaneous voice or data transmissions.
DS-3 miles -- A measure of the total capacity and length of a transmission
path, calculated as the capacity of the transmission path in DS-3s multiplied by
the length of the path in miles.
DTI -- Digital Teleport, Inc.
EBITDA -- Operating income (loss) plus depreciation and amortization.
EBITDA is not a measurement determined in accordance with GAAP, should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with GAAP and is not necessarily comparable with similarly titled
measures for other companies.
800/888 service -- A telecommunications service for businesses that allows
calls to be made to a specific location at no charge to the calling party. Use
of the "800" or "888" service code denotes calls that are to be billed to the
receiving party. A computer database in the provider's network translates the
800 or 888 number into a conventional telephone number.
A-1
<PAGE> 121
Enhanced data services -- Products and services designed for the transport
and delivery of integrated information to include voice, data and video and any
combination thereof.
Excel -- EXCEL Communications, Inc.
Facilities-based carrier -- Carriers who own transmission facilities.
FCC -- Federal Communications Commission.
Fiber miles -- The number of fiber route miles of a fiber optic route
multiplied by the number of fiber strands in the route.
Frame Relay -- A high-speed, data-packet switching service used to transmit
data between computers. Frame Relay supports data units of variable lengths at
access speeds ranging from 56 kilobits per second to 1.5 megabits per second.
This service is well-suited for connecting local area networks, but is not
appropriate for voice and video applications due to the variable delays which
can occur. Frame Relay was designed to operate at high speeds on modern fiber
optic networks.
Frontier -- Frontier Corporation.
GAAP -- Generally Accepted Accounting Principles.
GE Capital Communication -- GE Capital Communication Services Company.
GEIC -- General Electric Investment Corporation.
GST -- GST Net, Inc.
GTE -- GTE Corporation.
Hubs -- Collection centers located centrally in an area where
telecommunications traffic can be aggregated for transport and distribution.
ISDN (Integrated Services Digital Network) -- A complex networking concept
designed to provide a variety of voice, data and digital interface standards.
Incorporated into ISDN are many new enhanced services, such as high-speed data
file transfer, desktop video conferencing, telepublishing, telecommuting,
telepresence learning-remote collaboration, data network linking and home
information services.
Interexchange Carrier -- A company providing inter-LATA or long distance
services between LATAs on an intrastate or interstate basis.
Inter-LATA -- InterLATA calls are calls that pass from one LATA to another.
Typically, these calls are referred to as long distance calls.
Intra-LATA -- IntraLATA calls are those local calls that originate and
terminate within the same LATA.
Intranet -- An infrastructure based on Internet standards and technologies
that provides access to information within limited and well-defined groups such
as universities, governments and other large organizations.
Kilobit -- One thousand bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "kilobits per
second."
LATAs (local access and transport areas) -- The approximately 200
geographic areas that define the areas between which the RBOCs were prohibited
from providing long distance services prior to the Telecom Act of 1996.
LCI -- LCI International Management Services, Inc.
LEC (local exchange carrier) -- A company providing local telephone
services.
Level III -- Level III Communications, Inc.
A-2
<PAGE> 122
Local loop -- A circuit within a LATA.
Long distance switched services -- Telecommunications services such as
residential long distance services that are processed through digital switches
and delivered over long-haul circuits and other transmission facilities.
MCI -- MCI Communications Corporation.
Megabit -- One million bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "megabits per
second."
MFS -- MFS Network Technologies, Inc.
MOUs -- Minutes of use of long distance service.
Non-facilities-based carrier -- Carriers that do not own transmission
facilities.
NTFC -- NTFC Capital Corporation.
OC-3, OC-12, OC-48 and OC-192 -- Standard telecommunications industry
measurements for optical transmission capacity distinguishable by bit rate
transmitted per second and the number of voice or data transmissions that can be
simultaneously transmitted through fiber optic cable. An OC-3 is generally
equivalent to three DS-3s and has a bit rate of 155.52 megabits per second and
can transmit 2,016 simultaneous voice or data transmissions. An OC-12 has a bit
rate of 622.08 megabits per second and can transmit 8,064 simultaneous voice or
data transmissions. An OC-48 has a bit rate of 2,488.32 megabits per second and
can transmit 32,256 simultaneous voice or data transmissions. An OC-192 has a
bit rate of 9,953.28 megabits per second and can transmit 129,024 simultaneous
voice or data transmissions.
Off-net -- Refers to circuits on transmission facilities not owned by IXC.
On-net -- Refers to circuits on transmission facilities owned by IXC.
Optronic -- a combination of optical and electronic equipment.
Qwest -- Qwest Communications Corporation.
RBOCs (regional Bell operating companies) -- The seven local telephone
companies (formerly part of AT&T) established by court decree in 1982.
Rockwell International -- Rockwell International Corp.
Route miles -- The measure of the length of a transmission path in miles.
SONET (synchronous optical network technology) -- An electronics and
network architecture for variable-bandwidth products which enables transmission
of voice, video and data (multimedia) at very high speeds.
Sprint -- Sprint Corporation.
Switch -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
Telecom One -- Telecom One, Inc.
The Williams Companies -- The Williams Companies, Inc.
Vyvx -- Vyvx, Inc., a subsidiary of The Williams Companies, Inc.
Westel -- Westel International, Inc.
WilTech -- The WilTech Group, a subsidiary of The Williams Companies, Inc.
WilTel -- WilTel Network Services, Inc., a subsidiary of The Williams
Companies, Inc.
WorldCom -- WorldCom, Inc.
A-3
<PAGE> 123
ANNEX B
STOCK ACQUISITION
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
IXC COMMUNICATIONS, INC.,
IXC LONG DISTANCE, INC.,
PISCES ACQUISITION CORP.,
AND
NETWORK LONG DISTANCE, INC., AS AMENDED
DECEMBER 19, 1997
B-1
<PAGE> 124
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
THE MERGER............................................. B-5
Section 1.1 The Merger................................ B-5
Section 1.2 Effective Time............................ B-5
Section 1.3 Effects of the Merger..................... B-5
Section 1.4 Certificate of Incorporation and Bylaws... B-5
Section 1.5 Officers and Directors.................... B-6
Section 1.6 Further Actions........................... B-6
ARTICLE II
CONVERSION AND EXCHANGE OF SHARES, CLOSING............. B-6
Section 2.1 Conversion and Exchange of Shares......... B-6
Section 2.2 Surrender of Shares....................... B-7
Section 2.3 Stock Transfer Books...................... B-7
Section 2.4 Date, Time and Place of Closing........... B-7
Section 2.5 Deliveries by Network at Closing.......... B-7
Section 2.6 Deliveries by IXC at Closing.............. B-8
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF NETWORK.............. B-8
Section 3.1 Corporate Existence....................... B-8
Section 3.2 Subsidiaries.............................. B-8
Section 3.3 Corporate Power and Authority............. B-8
Section 3.4 Capitalization............................ B-8
Section 3.5 Binding Effect............................ B-9
Section 3.6 Execution and Delivery Permitted.......... B-9
Section 3.7 Reports and Financial Statements.......... B-9
Section 3.8 Absence of Certain Changes................ B-10
Section 3.9 No Undisclosed Liabilities................ B-11
Section 3.10 RESERVED.................................. B-11
Section 3.11 Benefit Plans; ERISA...................... B-11
Section 3.12 Litigation................................ B-12
Section 3.13 Compliance with Laws...................... B-13
Section 3.14 Taxes..................................... B-13
Section 3.15 Banks..................................... B-14
Section 3.16 Contracts................................. B-14
Section 3.17 Titles, Real Property Matters............. B-14
Section 3.18 Environmental Matters..................... B-15
Section 3.19 Broker's Fees............................. B-15
Section 3.20 Labor Matters............................. B-15
Section 3.21 Conflicts of Interest..................... B-15
Section 3.22 Insurance Coverage........................ B-16
Section 3.23 RESERVED.................................. B-16
Section 3.24 Correct Records........................... B-16
Section 3.25 Vote Required............................. B-16
Section 3.26 Accounting Matters........................ B-16
Section 3.27 Registration Statement and Proxy
Statement............................................. B-16
Section 3.28 Opinion of Financial Advisor.............. B-17
Section 3.29 Letters of Agency......................... B-17
</TABLE>
B-2
<PAGE> 125
<TABLE>
<S> <C>
Section 3.30 Permits................................... B-17
Section 3.31 Section 203 Not Applicable................ B-17
Section 3.32 Disclaimer................................ B-17
Section 3.33 Due Diligence Investigation............... B-17
Section 3.34 Form of Warrant........................... B-17
ARTICLE IV
COVENANTS OF NETWORK................................... B-17
Section 4.1 Maintenance of Business................... B-17
Section 4.2 Negative Covenants........................ B-18
Section 4.3 Organization, Goodwill.................... B-19
Section 4.4 RESERVED.................................. B-19
Section 4.5 Corporate Action.......................... B-19
Section 4.6 Third Party Consents...................... B-19
Section 4.7 Securities Laws........................... B-19
Section 4.8 Communications Laws....................... B-19
Section 4.9 Notice of Proceedings..................... B-19
Section 4.10 Confidentiality........................... B-20
Section 4.11 RESERVED.................................. B-20
Section 4.12 Adverse Events............................ B-20
Section 4.13 Shareholders' Approval.................... B-20
Section 4.14 Rule 145 Affiliates....................... B-20
Section 4.15 Tax Returns............................... B-21
Section 4.16 No Solicitation........................... B-21
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF IXC, IXC LONG
DISTANCE AND ACQUISITION.............................. B-21
Section 5.1 Corporate Existence....................... B-21
Section 5.2 Corporate Power and Authority............. B-21
Section 5.3 Capitalization............................ B-21
Section 5.4 Binding Effect............................ B-21
Section 5.5 Execution and Delivery Permitted.......... B-22
Section 5.6 Reports and Financial Statements.......... B-22
Section 5.7 Absence of Certain Changes................ B-23
Section 5.8 No Undisclosed Liabilities................ B-23
Section 5.9 RESERVED.................................. B-23
Section 5.10 Benefit Plans; ERISA...................... B-23
Section 5.11 Litigation................................ B-24
Section 5.12 Compliance with Laws...................... B-24
Section 5.13 Tax Returns............................... B-25
Section 5.14 Environmental Matters..................... B-25
Section 5.15 RESERVED.................................. B-25
Section 5.16 Labor Matters............................. B-25
Section 5.17 RESERVED.................................. B-25
Section 5.18 RESERVED.................................. B-25
Section 5.19 Correct Records........................... B-25
Section 5.20 Vote Required............................. B-25
Section 5.21 Accounting Matters........................ B-25
Section 5.22 Registration Statement and Proxy
Statement............................................. B-26
</TABLE>
B-3
<PAGE> 126
<TABLE>
<S> <C>
Section 5.23 RESERVED.................................. B-26
Section 5.24 Disclaimer................................ B-26
Section 5.25 Due Diligence Investigation............... B-26
ARTICLE VI
COVENANTS OF IXC....................................... B-26
Section 6.1 Maintenance of Business................... B-26
Section 6.2 Negative Covenants........................ B-26
Section 6.3 RESERVED.................................. B-27
Section 6.4 RESERVED.................................. B-27
Section 6.5 Corporate Action.......................... B-27
Section 6.6 Third Party Consents...................... B-27
Section 6.7 Securities Laws........................... B-27
Section 6.8 Communications Laws....................... B-27
Section 6.9 Notice of Proceedings..................... B-28
Section 6.10 Confidentiality........................... B-28
Section 6.11 RESERVED.................................. B-28
Section 6.12 RESERVED.................................. B-28
Section 6.13 Adverse Events............................ B-28
Section 6.14 RESERVED.................................. B-28
Section 6.15 Issuance of Shares........................ B-28
ARTICLE VII
ADDITIONAL AGREEMENTS.................................. B-28
Section 7.1 Applications to Commissions............... B-28
Section 7.2 Joint Proxy Statement and Registration
Statement............................................. B-29
Section 7.3 HSR Filings............................... B-29
Section 7.4 Expenses.................................. B-29
ARTICLE VIII
CONDITIONS TO CLOSING.................................. B-30
Section 8.1 IXC, IXC Long Distance and Acquisition
Conditions to Closing................................. B-30
Section 8.2 Network Conditions to Closing............. B-31
Section 8.3 Mutual Conditions to Obligations of
Network and IXC....................................... B-31
ARTICLE IX
MISCELLANEOUS.......................................... B-32
Section 9.1 Survival.................................. B-32
Section 9.2 Termination of Agreement; Termination
Fee................................................... B-32
Section 9.3 Effect of Termination or Abandonment...... B-33
Section 9.4 Liabilities............................... B-33
Section 9.5 Assignment................................ B-33
Section 9.6 Further Assurances........................ B-33
Section 9.7 Notices................................... B-33
Section 9.8 Entire Agreement.......................... B-34
Section 9.9 Rules of Construction..................... B-34
Section 9.10 Law Governing............................. B-34
Section 9.11 Waiver of Provisions...................... B-34
Section 9.12 Successors................................ B-35
Section 9.13 Counterparts.............................. B-35
Section 9.14 Public Statements or Releases............. B-35
Section 9.15 Severability.............................. B-35
Section 9.16 No Third Party Beneficiaries.............. B-35
</TABLE>
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STOCK ACQUISITION AGREEMENT AND PLAN OF MERGER
THIS STOCK ACQUISITION AGREEMENT AND PLAN OF MERGER (the "Agreement") is
made and entered into as of the 19th day of December, 1997, by and among IXC
Communications, Inc., a Delaware corporation ("IXC"), IXC Long Distance, Inc., a
Delaware corporation and a wholly-owned subsidiary of IXC ("IXC Long Distance"),
Pisces Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary
of IXC Long Distance ("Acquisition"), and Network Long Distance, Inc., a
Delaware corporation ("Network").
WHEREAS, Network is engaged in the business of providing communications
services;
WHEREAS, IXC Long Distance has formed Acquisition as a wholly-owned
subsidiary in order to effect the merger of Acquisition with and into Network
(the "Merger") in accordance with this Agreement and in accordance with the laws
of the state of Delaware so that, upon consummation of the Merger, Network will
be a wholly-owned subsidiary of IXC Long Distance, and Acquisition will cease to
exist;
WHEREAS, it is the intent of the parties that the Merger qualify as a
reorganization under Section 368(a)(1)(B) of the Internal Revenue Code of 1986,
as amended (the "Code"), and this Agreement is intended to be and is adopted as
a plan of reorganization within the meaning of Section 368(b) of the Code;
WHEREAS, it is the intent of the parties that the Merger shall be recorded
for accounting purposes as a pooling-of-interests;
WHEREAS, this Agreement has been approved by the respective boards of
directors of IXC, IXC Long Distance, Acquisition and Network; and
WHEREAS, the parties desire to induce each other to enter into this
Agreement by making certain representations, warranties and covenants contained
herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements, covenants, representations, warranties and promises set forth
herein, and in order to prescribe the terms and conditions of the Merger, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. At the Effective Time (as defined in Section
1.2), upon the terms and subject to the conditions hereof, and in accordance
with the General Corporation Law of the State of Delaware (the "Corporation
Law"), Acquisition will be merged with and into Network in the Merger, whereupon
Network shall continue as the surviving corporation (the "Surviving
Corporation") under the name "Eclipse Telecommunications, Inc.," and the
separate corporate existence of Acquisition shall cease.
Section 1.2 Effective Time. As promptly as practicable after the
satisfaction or, if permissible, waiver of the conditions set forth in Article
VIII, but subject to the terms of Section 2.2, the parties shall cause the
Merger to be consummated by filing a certificate of merger (the "Certificate of
Merger") with the Secretary of State of the State of Delaware in such form as
required by, and executed in accordance with the relevant provisions of, the
Corporation Law (the date and time of such filing, or such later date or time as
set forth herein, being the "Effective Time").
Section 1.3 Effects of the Merger. The Merger shall have the effects set
forth in Section 251 et seq. of the Corporation Law.
Section 1.4 Certificate of Incorporation and Bylaws. The Certificate of
Incorporation and the Bylaws of Network as in effect immediately prior to the
Effective Time shall be the Certificate of Incorporation and the Bylaws of the
Surviving Corporation until thereafter amended as provided by law, except that
at the Effective Time, Article I of the Certificate of Incorporation of the
Surviving Corporation shall be amended to read as follows: "The name of the
corporation is "Eclipse Telecommunications, Inc."
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Section 1.5 Officers and Directors. The directors of Acquisition
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation, and the officers of Network immediately prior to the
Effective Time shall be the initial officers of the Surviving Corporation, in
each case, until their respective successors are duly elected or appointed and
qualified. The directors of Network immediately prior to the Effective Time
shall resign from their positions as directors of Network, effective as of the
Effective Time.
Section 1.6 Further Actions. At and after the Effective Time, the
Surviving Corporation shall take all action as shall be required in connection
with the Merger, including, but not limited to, the execution and delivery of
any further deeds, assignments, instruments or documentation as are necessary or
desirable to carry out the provisions of this Agreement.
ARTICLE II
CONVERSION AND EXCHANGE
OF SHARES, CLOSING
Section 2.1 Conversion and Exchange of Shares. As of the Effective Time,
by virtue of the Merger and without any action on the part of any holder of any
shares of common stock, par value $.0001 per share, of Network (the "Network
Common"), Network, or IXC:
(a) All shares of Network Common which are held by Network, if any,
shall be canceled and retired and shall cease to exist and no stock of IXC
or other consideration shall be delivered in exchange therefor. Each share
of common stock, par value $.01 per share, of Acquisition shall be canceled
and retired and be converted into the right to receive one share of the
Surviving Corporation's common stock.
(b) Except as set forth in Section 2.1(a), each share of Network
Common issued and outstanding immediately prior to the Effective Time shall
be converted into the right to receive 0.2998 shares (the "Exchange Ratio")
of common stock, par value $.01 per share, of IXC (the "IXC Common") (the
"Share Consideration").
(c) All warrants or rights to purchase shares of Network Common issued
and outstanding immediately prior to the Effective Time (the "Warrants")
shall be canceled and converted into the right to receive an option (a "New
Warrant") to acquire shares of IXC Common equal to the number of shares of
Network Common subject to purchase under such Warrant multiplied by the
Exchange Ratio (the "Warrant Consideration"). Each New Warrant shall
reflect the application of the Exchange Ratio to the Warrant exchanged
therefor and contain other terms and conditions mutually acceptable to
Network and IXC; provided, however, that the period of time during which
each New Warrant may be exercised shall not be shorter than that of the
Warrant exchanged therefor. The Warrant Consideration and the Share
Consideration are referred to together herein as the "Merger
Consideration".
(d) Notwithstanding Section 2.1(b), no fractional share of IXC Common
shall be issued in the Merger as part of the Share Consideration. In lieu
thereof, any person who would otherwise have been entitled to receive a
fraction of a share of IXC Common shall receive cash (without interest) in
an amount equal to such fractional share of IXC Common multiplied by the
closing price of one share of IXC Common on the Nasdaq National Market
System at the close of business on the first business day preceding the
Effective Time. Network shall make available to the Agent, as required from
time to time following the Closing, cash necessary for this purpose and,
for the avoidance of doubt, the Merger Consideration includes cash payable
pursuant to this Section 2.1(d). Notwithstanding Section 2.1(c), if the
application of the Exchange Ratio to any Warrant would result in a New
Warrant being issued to acquire any fractional share, any such fractional
share less than one-half shall be rounded down to the prior whole share
number and any such fractional share of one-half or more shall be rounded
up to the next whole share number. No person will be entitled to dividends,
voting rights, or any other rights as a shareholder in respect of any
fractional shares.
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(e) Network acknowledges and represents that 313,000 shares of Network
Common issued to Michael Ross and held in escrow are included in the
13,393,678 shares of Network Common outstanding and that any release of
such shares from such escrow, whether to Mr. Ross, Network, or the
Surviving Corporation, will have no effect whatsoever on the Exchange
Ratio.
(f) In the event of any reclassification, recapitalization or stock
split with respect to IXC Common (or if a record date with respect to any
of the foregoing should occur) prior to the Effective Time, appropriate and
proportionate adjustments, if any, shall be made to the Exchange Ratio and
all references to the Exchange Ratio in this Agreement shall be deemed to
be the Exchange Ratio as so adjusted.
Section 2.2 Surrender of Shares. Promptly after the Effective Time, the
Surviving Corporation shall cause to be mailed (a) to each record holder, as of
the Effective Time, of an outstanding certificate or certificates which
immediately prior to the Effective Time represented Network Common (the
"Certificates"), and (b) to each record holder, as of the Effective Time, of a
Warrant, in each case, a form letter of transmittal which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates or
Warrants, as applicable, shall pass, only upon proper delivery thereof to the
trust company to act as agent for the holders of Network Common and Warrants in
connection with the Merger (the "Agent") and instructions for use in effecting
the surrender of the Certificates or Warrants, as applicable, for payment of the
Merger Consideration. Upon surrender to the Agent of a Certificate or Warrant,
together with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, and such other documents as may be
required pursuant to such instructions, the holder of each Certificate or
Warrant shall be entitled to receive in exchange therefor the Merger
Consideration and such Certificate or Warrant, respectively, shall then be
canceled. If payment of the Merger Consideration is to be made to a person other
than the person in whose name the surrendered Certificate or Warrant is
registered on the stock transfer books of Network, it shall be a condition of
payment that the Certificate or Warrant so surrendered shall be endorsed
properly or otherwise be in proper form for transfer and that the person
requesting such payment shall have paid all transfer and other taxes required by
reason of the payment of the Merger Consideration to a person other than the
registered holder of the Certificate or Warrant surrendered or shall have
established to the satisfaction of the Surviving Corporation that such taxes
either have been paid or are not applicable.
Section 2.3 Stock Transfer Books. At the close of business on the day of
the Effective Time, the stock transfer books of Network shall be closed and
thereafter there shall be no further registration or transfer of Network Common.
From and after the Effective Time, the holders of Network Common outstanding
immediately prior to the Effective Time shall cease to have any rights with
respect to Network Common except as otherwise provided herein or by applicable
law.
Section 2.4 Date, Time and Place of Closing. The closing of the Merger
(the "Closing") shall be held within five business days following the
satisfaction or waiver of all of the conditions set forth in Article VIII
hereof, at such place, time and date as the parties hereto shall mutually agree.
The date of the Closing is referred to herein as the "Closing Date."
Section 2.5 Deliveries by Network at Closing. At the Closing, and
thereafter as may be reasonably requested by IXC, Network shall deliver to IXC
the following, all in form and content reasonably acceptable to IXC and its
counsel:
(a) Certified copies of duly adopted resolutions of the Board of
Directors and stockholders of Network authorizing, approving, and
consenting to the execution and delivery of this Agreement, and the other
agreements contemplated hereby (the "Transaction Documents") to which it is
a party, to the consummation of the transactions contemplated herein and
therein, and to the performance of the agreements set forth herein and
therein;
(b) The waiver, release, consent, estoppel certificate or other
document of any person, corporation, association, or other entity of any
nature whatsoever, in form reasonably acceptable to IXC, which are a
condition to Closing of IXC, IXC Long Distance or Acquisition under Article
VIII hereof or which IXC in its reasonable judgment deems necessary to (i)
consummate the transactions contemplated hereby and (ii) make the
warranties and representations made by Network in this Agreement true;
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(c) Duly executed employment agreements (the "Employment Agreements")
in mutually reasonably satisfactory form and content and with such senior
executives of Network as IXC may reasonably request;
(d) An opinion of Network's counsel dated as of the Closing Date in
form and content reasonably satisfactory to IXC;
(e) All corporate minute books, stock ledger and transfer books and
all other books and records, and the corporate seal of Network; and
(f) Such other documents as IXC or its counsel may reasonably request.
Section 2.6 Deliveries by IXC at Closing. At the Closing, IXC will
deliver the following, all in form and content reasonably acceptable to Network
and its counsel:
(a) Certified copies of duly adopted resolutions of the Board of
Directors of IXC authorizing, approving, and consenting to the execution
and delivery of this Agreement and the Transaction Documents to which it is
a party, to the consummation of the transactions contemplated herein and
therein, and to the performance of the agreements set forth herein and
therein;
(b) The waiver, release, consent, estoppel certificate or other
document of any person, corporation, association, or other entity of any
nature whatsoever, in form reasonably acceptable to Network, which are a
condition to Closing of Network under Article VIII hereof or which Network
in its reasonable judgment deems necessary to (i) consummate the
transactions contemplated hereby and (ii) make the warranties and
representations made by IXC in this Agreement true;
(c) An opinion of IXC's counsel dated as of the Closing Date in form
and content reasonably satisfactory to Network;
(d) Duly executed Employment Agreements; and
(e) Such other documents as Network or its counsel may reasonably
request.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF NETWORK
Network represents and warrants to IXC as follows:
Section 3.1 Corporate Existence. Network and each of the Subsidiaries (as
defined in Section 3.2) is duly organized, validly existing, and in good
standing under the laws of the state of its incorporation. Attached hereto as
Exhibit 3.1 is a complete and correct copy of the Certificate of Incorporation
and Bylaws (together with all amendments thereto) of Network. Each of Network
and the Subsidiaries is duly certified or licensed in each state and
jurisdiction where such qualification, certification or licensing is necessary
or required for Network or such Subsidiary to conduct its business and offer
communications services.
Section 3.2 Subsidiaries. Network has no subsidiary corporations or any
other interest in any corporation, partnership, association or joint venture,
other than as described on Schedule 3.2 (the "Subsidiaries").
Section 3.3 Corporate Power and Authority. Each of Network and the
Subsidiaries has all requisite corporate power and authority to own its
properties and assets, and to carry on the business in which it is now engaged.
Network has the corporate power and authority to execute and deliver this
Agreement and the Transaction Documents to which it is a party, and to perform
its covenants set forth herein and therein.
Section 3.4 Capitalization. The authorized capital stock of Network at
December 19, 1997 consists of: (a) 20,000,000 shares of Network Common, of which
13,393,678 shares are issued and outstanding and no shares are held as treasury
stock and (b) 25,000,000 shares of preferred stock, par value $.01 per share, of
which no shares are issued and outstanding and no shares are held as treasury
stock. Other than this Agreement, and except as set forth on Schedule 3.4
hereto, there is not outstanding any subscription, option,
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warrant, call, right or other agreement or commitment obligating Network to
issue, sell, deliver or transfer (including any right of conversion or exchange
under any outstanding security or other instrument) any shares of the Network
Common or any other securities or shares of the capital stock of Network. Other
than this Agreement, and except as set forth on Schedule 3.4 hereto, there is
not outstanding any subscription, option, warrant, call, right or other
agreement or commitment obligating a Subsidiary to issue, sell, deliver or
transfer (including any right of conversion or exchange under any outstanding
security or other instrument) any securities or shares of the capital stock of
such Subsidiary. All such issued and outstanding shares are validly issued,
fully paid and nonassessable. There are no restrictions imposed by the
Certificate of Incorporation or Bylaws of Network, and there are no other
agreements, understandings or commitments, which would in any way affect or
impair the transactions contemplated hereby.
Section 3.5 Binding Effect. This Agreement and each of the Transaction
Documents to be executed and delivered by Network in connection herewith, when
executed and delivered, will be the legal, valid and binding obligation of
Network, enforceable against it in accordance with their terms, except as
enforceability may be limited by (a) applicable bankruptcy, reorganization,
insolvency, moratorium and similar laws affecting the enforcement of creditors'
rights generally and (b) general equitable principles (regardless of whether
enforceability is considered in a proceeding in equity or at law).
Section 3.6 Execution and Delivery Permitted. The execution, delivery and
performance of this Agreement, and the Transaction Documents, and the
consummation of the transactions contemplated hereby or thereby, will not
violate or result in a breach of any term of Network's or a Subsidiary's
Certificate of Incorporation or Bylaws, result in a breach of or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under or result in the termination of, or accelerate the
performance required by, any term in any material agreement, tariff or other
instrument to which Network or a Subsidiary is a party or by which it is bound
(unless such default has been previously waived by the other party to such
agreement, tariff or other instrument), violate any law or any order, rule,
judgment, decree or award or regulation applicable to Network or a Subsidiary of
any court or any regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over Network, such Subsidiary or any of
their respective properties; and will not result in the creation or imposition
of any lien, charge, or encumbrance of any nature whatsoever upon any of its
assets, which lien, charge or encumbrance has not been removed prior to Closing.
The Board of Directors of Network and the Stockholders have, or as of the
Closing Date shall have taken all actions required by law and by Network's
Certificate of Incorporation and Bylaws to authorize the execution, delivery and
performance of this Agreement, together with its Schedules and Exhibits, and the
consummation of the transactions contemplated by this Agreement or by any of the
Exhibits. Except as set forth on Schedule 3.6 hereto, none of the execution,
delivery or performance of this Agreement or any of the Transaction Documents,
or the consummation of the transactions contemplated hereby or thereby requires
any filing with or the consent or approval of any third party, including but not
limited to any governmental body or entity other than (a) compliance with the
Securities Act of 1933, as amended (the "Securities Act") and the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (b) applications to the
Federal Communications Commission ("FCC") and the certain state utility
regulatory commissions in states in which Network or a Subsidiary offers
services (such commissions together with the FCC constitute a "Commission" or
the "Commissions"), (c) notifications to the Federal Trade Commission (the
"FTC") and the Department of Justice (the "DOJ") under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and (d) the
filing with the Delaware Secretary of State of the Certificate of Merger in
respect of the Merger in accordance with the Corporation Law.
Section 3.7 Reports and Financial Statements. Since March 31, 1996, to
the extent Network has been required to make filings under the Securities Act,
the Exchange Act or applicable state laws and regulations, Network has filed
with the SEC or the applicable state regulatory authority, as the case may be,
all forms, statements, reports and documents (including all exhibits, amendments
and supplements thereto) required to be filed by it under each of the Securities
Act, the Exchange Act and applicable state laws and regulations, and the
respective rules and regulations thereunder, all of which complied in all
material respects with all applicable requirements of the appropriate act and
the rules and regulations thereunder. Network has previously delivered to IXC
true and complete copies of its (a) Annual Report on Form 10-K for the fiscal
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year ended March 31, 1997, as filed with the SEC, which includes the audited
consolidated financial statements of Network and the Subsidiaries for the fiscal
year then ended (the "Network Financial Statements"), (b) interim report on Form
10-Q for the quarters ended June 30, and September 30, 1997, which includes
unaudited consolidated financial statements of Network and the Subsidiaries for
the fiscal quarters then ended (the "Network Recent Financial Statements"), (c)
proxy and information statements relating to all meetings (whether annual or
special) of its shareholders (the "Shareholders"), and actions by written
consent in lieu of a Shareholders' meeting, from March 31, 1997 until the date
hereof, and (d) all other reports or registration statements filed by Network
with the SEC since June 30, 1997 (collectively, the "Network SEC Reports"). As
of their respective dates, the Network SEC Reports did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited interim financial statements of
Network and the Subsidiaries included in the Network SEC Reports and the Network
Financial Statements have been prepared in accordance with United States
generally accepted accounting principles ("GAAP") (except as may be indicated
therein or in the notes thereto) and fairly present in all material respects the
financial position of Network and the Subsidiaries as of the dates thereof and
the results of their operations and changes in financial position for the
periods then ended, subject, in the case of the unaudited interim financial
statements, to normal year-end and audit adjustments and the absence of
explanatory notes. The Network Financial Statements contain and reflect adequate
reserves for (a) all known liabilities or obligations of any nature, whether
absolute, contingent or otherwise, in accordance with GAAP and (b) all
reasonably anticipated losses and costs in excess of expected revenue relating
to such loss. The unaudited consolidated interim financial statements of
Network, and the Subsidiaries included in the Network SEC Reports, have been
similarly prepared and contain and reflect adequate reserves for (a) all known
liabilities or obligations of any nature, whether absolute, contingent or
otherwise, in accordance with GAAP and (b) all reasonably anticipated losses.
Section 3.8 Absence of Certain Changes. Except as set forth on Schedule
3.8, since September 30, 1997 there has not been:
(a) Any material adverse change in the financial condition,
operations, business or prospects of Network and the Subsidiaries (a
"Network Material Adverse Effect"), including, but not limited to, any
state or federal regulatory proceedings against Network or a Subsidiary
which could culminate in an order or other action which could have such an
adverse change, excluding generally known industry trends and competitive
conditions affecting the industry generally;
(b) Any material physical damage or destruction, whether or not
covered by insurance, which has resulted in, or reasonably could be
expected to result in a Network Material Adverse Effect;
(c) Any material labor dispute or threat thereof or any attempt to
organize or reorganize the employees of Network or a Subsidiary for the
purpose of collective bargaining;
(d) Any direct or indirect redemption, purchase or other acquisition
by Network of any of the Network Common or any other shares of capital
stock of Network, or declaration of or payment or distribution of any kind
of cash or other assets to any Shareholder;
(e) Any employment, severance, consulting or other compensation
contract, or any amendment or supplement thereto, entered into by Network
or a Subsidiary with any director or officer, or any increase of
compensation payable or to become payable to any of its officers, except
for increases in compensation in the ordinary course of business;
(f) Any communication, whether oral or written, to Network from
Network's customers or suppliers or agencies regulating Network notifying
it of, nor does Network, after making due inquiry, have any knowledge of,
any potential developments affecting it, which would reasonably lead it to
expect an Network Material Adverse Effect; or
(g) Any satisfaction or discharge of any material lien by Network or a
Subsidiary or payment by Network or a Subsidiary of any material obligation
or liability, other than an obligation or liability
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included in the unaudited consolidated interim balance sheet of Network and
the Subsidiaries as of September 30, 1997, current liabilities incurred
since such date in the ordinary course of business, liabilities incurred in
carrying out the transactions contemplated by this Agreement and
obligations and liabilities under, and pursuant to the terms of, the
contracts and agreements listed in Schedule 3.16 hereof;
(h) Any sale or transfer of any assets or cancellation by Network or a
Subsidiary of debts or claims having a value, in the aggregate, of more
than $500,000, except, in each case, in the ordinary course of business;
(i) Any knowing waiver by Network or a Subsidiary of any rights having
a value, in the aggregate, in excess of $500,000;
(j) Any mortgage, pledge or lien or other encumbrance of any of
Network or a Subsidiary's assets, tangible or intangible; or
(k) Any assignment, sale or transfer by Network or a Subsidiary of any
material patent, trademark, trade name, trade secret, copyright or other
intangible asset.
Section 3.9 No Undisclosed Liabilities. Except as set forth on Schedule
3.9, as of September 30, 1997, neither Network nor any Subsidiary had any
material liabilities, absolute or contingent, which are not shown on the Network
Recent Financial Statements. All liabilities, absolute or contingent, of Network
and any Subsidiary incurred subsequent to September 30, 1997, have, and as of
the Closing Date will have been incurred only in the ordinary course of
business. Neither Network nor any Subsidiary will, prior to the Closing, incur
any single such liability incurred subsequent to the date of this Agreement in
excess of $500,000 without the consent of IXC. The accounts, notes and other
receivables, whether current or non-current, of Network and any Subsidiary shown
in the Network Recent Financial Statements, and all such receivables of Network
and any Subsidiary as at the Closing, arose from bona fide transactions.
Section 3.10 RESERVED.
Section 3.11 Benefit Plans; ERISA.
(a) Schedule 3.11(a) lists all material contracts, agreements,
arrangements and understandings, whether written or oral, with respect to
the payment or delivery to any person of compensation, bonuses,
perquisites, benefits and other items of value by Network or any Subsidiary
providing benefits in excess of $25,000 per person per year.
(b) Schedule 3.11(b) lists each employee of Network or any Subsidiary
whose annual base salary is $75,000 or more and identifies the salary,
commissions, bonuses, perquisites and benefits for each such employee.
(c) No employee of Network or any Subsidiary will be entitled to
severance or any similar pay by virtue of the transactions contemplated by
this Agreement. Schedule 3.11(c) sets forth each employee of Network or any
Subsidiary who has any right to severance or any similar pay in excess of
$50,000 for any reason, listing the employee name, severance amount or
method of calculation, and the basis for such right.
(d) Schedule 3.11(d) contains a true and complete list of each written
pension, profit sharing, other deferred compensation, bonus, incentive
compensation, stock purchase, stock option, retirement, supplemental
retirement, severance or termination pay, medical, hospitalization, life
insurance, dental, disability, salary continuation, supplemental
unemployment benefits plan, program, arrangement or contract maintained,
contributed to, or required to be contributed to by Network or any Related
Party (hereinafter defined) for the benefit of any current or former
employee, director or agent of Network or any Related Party, whether or not
any of the foregoing is funded and whether or not subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (collectively,
the "Network Benefit Plans"). Network and its Related Parties do not have
any express or implied commitment or contract to create any additional
Network Benefit Plan or modify any existing Network Benefit Plan, in a
manner
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that would materially increase its costs other than as may be required to
comply with ERISA or the Code. Network has delivered to IXC, with respect
to each applicable Network Benefit Plan (i) true and complete copies of all
material documents embodying each Network Benefit Plan including, without
limitation, the plan and trust or other funding arrangement relating
thereto, summary plan descriptions, employee handbooks or personnel
manuals, and all amendments and supplements thereto; (ii) the most recent
annual report (Series 5500 and all schedules thereto), if any, required by
ERISA; and (iii) the most recent determination letter received from the
Internal Revenue Service ("IRS"), if any. For purposes of this Section
3.11, "Related Party" means any member of a controlled group of
corporations, a group of trades or businesses under common control or an
affiliated service group, within the meaning of Section 414(b), (c), (m) or
(o) of the Code, of Network.
(e) Except as provided in Schedule 3.11(e) none of the Network Benefit
Plans is intended by Network or any Related Party to meet, or is required
to meet, the requirements of Section 401(a) of the Code and no Network
Benefit Plan is subject to Title IV of ERISA.
(f) Network and any Related Party have performed the obligations
required to be performed by them under, and are not in default under or in
violation of, any and all of the Network Benefit Plans in any material
respect, and each Network Benefit Plan has been operated in all material
respects in accordance with the requirements of all applicable laws and
regulations. Neither any Network Benefit Plan or fiduciary nor Network or
any Related Party has taken any action, or failed to take any action, that
could subject it or any other person to any material liability for any
excise tax under Chapter 43 of the Code or for breach of fiduciary duty
with respect to or in connection with a Network Benefit Plan.
(g) Except as provided in Schedule 3.11(g) at no time has Network or
any Related Party been required to contribute to any "multiemployer plan"
(within the meaning of Section 3(37) of ERISA) and Network and its Related
Parties have no liability (contingent or otherwise) relating to the
withdrawal or partial withdrawal from a multiemployer plan. Network and its
Related Parties do not participate in any "multiple employer plans," within
the meaning of Code Section 413(c).
(h) No Network Benefit Plan provides or is required to provide group
health, medical, death or survivor benefits to any former or retired
employee of Network, a Related Party or beneficiary thereof, except to the
extent (i) required under any state law or (ii) under Section 601 of ERISA.
(i) No Network Benefit Plan or fiduciary has nor does Network or any
Related Party have any material liability to any participant, beneficiary
or other person under any provision of ERISA or any other applicable law by
reason of any payment of, or failure to pay, benefits or other amounts with
respect to or in connection with any Network Benefit Plan.
(j) Except as set forth on Schedule 3.11(j), each Network Benefit Plan
may be terminated by Network or its Related Parties within a period of
thirty (30) days following the Closing Date without acceleration or
additional vesting of any benefits and without payment of any amount as a
penalty, bonus, premium, severance pay or other compensation or amount.
Section 3.12 Litigation. Except as set forth in Schedule 3.12:
(a) There are no claims, suits, actions, or proceedings of any nature
whatsoever in law or in equity, pending before any court, governmental
department, commission, agency, instrumentality or authority or any
arbitrator, or, to the best knowledge of Network, threatened, nor are
there, to the best knowledge of Network, any investigations, whether or not
purportedly on behalf of Network, complaints or reviews by any court,
governmental department, commission, agency, instrumentality or authority
or any arbitrator pending or threatened against, relating to or affecting,
Network or a Subsidiary which could have a Network Material Adverse Effect.
(b) Neither Network nor any Subsidiary is operating under or subject
to, nor in default with respect to, any order, writ, injunction,
garnishment, levy or decree of any federal, state, municipal or other
governmental court, department, commission, board, bureau, agency or
instrumentality, which could have a Network Material Adverse Effect. The
use or ownership of Network's assets, the use or occupancy
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of Network's or a Subsidiary's real property, and any interests related
thereto, and the Merger does not constitute a default thereunder.
(c) During the past five years, there has not been nor is there now
pending, any claim(s) against any person in his or her capacity as either a
director or officer of Network or a Subsidiary. Network has no actual
knowledge or information of any act, error or omission which would give
rise to such a claim.
(d) There is no claim, legal action, suit, arbitration, governmental
investigation or other legal or other administrative proceeding, including
any bankruptcy proceeding, nor any order, decree or judgment in progress,
pending, in effect or, to the knowledge of Network threatened, against or
relating to Network or a Subsidiary, which would negatively affect the
transactions contemplated by this Agreement.
Section 3.13 Compliance with Laws. Except as set forth on Schedule 3.13,
(i) Network's and each of the Subsidiaries' operation of its business is in
compliance in all material respects with all applicable tariffs, laws,
regulations and orders, and (ii) neither Network nor any Subsidiary has received
written notice of any violation by Network or such Subsidiary of its tariffs or
of laws, regulations and orders from any governmental entity having authority to
enforce such tariffs, laws, regulations and orders, including, but not limited
to, the Communications Act of 1934 as amended by (a) the Telecommunications Act
of 1996 and (b) the Telephone Consumer Protection Act of 1991.
Section 3.14 Taxes. Except as set forth in Schedule 3.14, (a) all federal
income tax returns, and other federal tax returns, declarations of estimated tax
or estimated tax deposit forms of every nature required to be filed by Network
have been duly filed or will be duly filed as of Closing, and (b) all state,
county and local tax returns and declarations of estimated tax or estimated tax
deposit forms required to be filed by Network, have been duly filed (except
where failure to file such returns, declarations or forms described in this
clause (b) would not have a Network Material Adverse Effect) and all of the
returns, declarations and forms referred to in clauses (a) and (b) were or will
be when filed true, correct and complete in all material respects and Network
has paid all taxes which have become due and owing or pursuant to any assessment
received by it and has paid all installments of estimated tax due. None of such
tax returns of Network or any such Subsidiary contains, or will contain, a
disclosure statement under Section 6662 of the Code (or any predecessor statute)
or any similar provision of state, local or foreign law. Where such returns and
reports have not been audited and approved or settled, there has not been any
waiver or extension of any applicable statute of limitations, and Network has
not received any notice of deficiency or adjustment. Except as described on
Schedule 3.14, attached hereto and made a part hereof, the balance sheet in the
Network Recent Financial Statements contains liabilities which are and will be
sufficient for the payment of all respective federal, state, county, city and
local taxes and assessments, whether current or deferred. All taxes and other
assessments and levies which Network is required by law to withhold or to
collect have been duly withheld and collected, and have been paid over to the
proper governmental authorities or are held by Network in its bank accounts for
such payment. All statements and reports required to be filed under any chapter
of the Code by Network have been duly filed. No issue has been raised by the IRS
or any other taxing authority in any examination which reasonably could be
expected to result in a proposed deficiency for any period not previously
examined and no state of facts exists or has existed which would constitute
grounds for the assessment of any liability for taxes with respect to periods
prior to the Closing which have not been examined by the IRS or any other taxing
authority. Except as set forth in Schedule 3.14, there is no pending or, to the
knowledge of Network, threatened action, audit, proceeding or investigation with
respect to (i) the assessment or collection of taxes or (ii) a claim for refund
made by Network or any Subsidiary with respect to taxes previously paid. No
consent has been filed under Section 341(f) of the Code with respect to Network
or any of the Subsidiaries. Neither Network nor any of the Subsidiaries was
previously acquired in a "qualified stock purchase" under Section 338(d)(3) of
the Code and no elections under Section 338(g) of the Code, protective carryover
basis elections or offset prohibition elections are applicable to Network or any
such Subsidiary or any predecessor corporation. Neither Network nor any of the
Subsidiaries has participated in, or cooperated with, an international boycott
within the meaning of Section 999 of the Code. Except as disclosed in Schedule
3.14, neither Network nor any of the Subsidiaries is required to include in
income any adjustment pursuant to Section 481(a) of the Code (or similar
provisions of other law or regulations) by reason of change in accounting method
nor does Network or any Subsidiary have any knowledge that the IRS (or other
taxing
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authority) has proposed, or is considering, any such change in accounting
method. Neither Network nor any of the Subsidiaries is a party to any agreement,
contract, arrangement or plan that would result in the payment of any "excess
parachute payment" within the meaning of Section 280G of the Code. None of the
assets of Network or any of the Subsidiaries is property that is required to be
treated as owned by any other Person pursuant to the "safe harbor lease"
provisions of former Section 168(f)(8) of the Internal Revenue Code of 1954 as
amended and in effect immediately prior to the enactment of the Tax Reform Act
of 1986 and none of the assets of the Network or any such Subsidiary is "tax
exempt use property" within the meaning of Section 168(h) of the Code. None of
the assets of Network or any of the Subsidiaries secures any debt the interest
on which is tax exempt under Section 103 of the Code. No indebtedness of Network
or any of the Subsidiaries consists of "corporate acquisition indebtedness"
within the meaning of Section 279 of the Code. There is no currently binding
election with respect to taxes affecting Network or any of the Subsidiaries for
any period beginning on or after the Closing Date. Neither Network nor any of
the Subsidiaries has applied for and not yet received a ruling or determination
from a taxing authority regarding a past or prospective transaction of Network
or any of the Subsidiaries. Neither Network nor any of the Subsidiaries has been
included in any consolidated, combined or unitary Tax Return provided for under
the laws of the United States, any state or locality with respect to Taxes for
any taxable period for which the statue of limitations has not expired; has any
liability for the Taxes of any Person under Treasury Regulation Section 1.1502-6
(or any similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise; and there are not tax sharing agreements
in effect between Network or any of the Subsidiaries and any other Person. No
contract of Network or any of the Subsidiaries that is a long-term contract (for
purposes of Section 460 of the Code) has been reported on a method of tax
accounting other than the 100 percent percentage of completion method of income
tax purposes.
Section 3.15 Banks. Schedule 3.15 is a correct and complete list setting
forth the name of each bank in which Network has an account, line of credit,
credit facility or safe deposit box, the names of all persons authorized to draw
thereon or to have access thereto, and the name of each person holding a power
of attorney from Network or any Subsidiary.
Section 3.16 Contracts. Schedule 3.16 lists (or, in the case of oral
contracts, plans, agreements, arrangements and leases, describes) all of the
following contracts, plans, agreements, arrangements and leases to which Network
or any Subsidiary is a party: (a) each contract for the future purchase of
materials, services, supplies or equipment which (i) has a term in excess of one
year or (ii) obligates Network or any Subsidiary to pay, in one installment or
in the aggregate over its term or one year, whichever is shorter, an amount in
excess of $100,000; (b) each contract and letter of authorization with a
customer made in the ordinary course of business which generates revenues for
Network or any Subsidiary over its term or in any one twelve (12) month period,
whichever is shorter, in excess of $100,000; (c) each lease of, or license or
right to use, real and personal property which (i) has a term in excess of one
year or (ii) obligates Network or any Subsidiary to pay, in one installment or
in the aggregate over its term or one year, whichever is shorter, an amount in
excess of $100,000, which leases and licenses and rights shall be set forth
separately in Schedule 3.16; (d) each contract and agreement with Affiliates (as
defined in Section 3.26 below) of Network and each Subsidiary, (e) mortgages,
indentures, security agreements and other agreements and other instruments
relating to the borrowing of money by, or any extension of credit to, Network or
any Subsidiary; (f) partnership, joint venture or other arrangements or
agreements to which Network or a Subsidiary is a party involving the sharing of
profits; (g) contracts or commitments limiting the freedom of Network or any
Subsidiary to compete in any line of business or in any geographic area or with
any person; and (h) agreements pursuant to which Network or any Subsidiary
acquired (by merger, consolidation or acquisition of stock or assets or
otherwise) any corporation, partnership or other business organization or
division thereof. Except as set forth on Schedule 3.16 hereto, Network and each
Subsidiary has performed in all material respects all obligations required to be
performed by it to date and has not breached and is not in default under any
agreement, in any material respect, listed in Schedule 3.16 or to which it is a
party or by which it is bound, and all of the same are enforceable in accordance
with their terms.
Section 3.17 Titles, Real Property Matters. Schedule 3.17 contains
descriptions by categories of Network's and each Subsidiary's owned real
property (including all plants and structures located thereon)
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(the "Real Property") as of the date of this Agreement. Except as set forth in
Schedule 3.17, Network and each Subsidiary has good and marketable title in fee
simple to such properties, free and clear of all liens and encumbrances and use
restrictions. Network and each Subsidiary owns or leases all the furniture,
equipment and leasehold improvements located in the structures referred to in
Schedule 3.17. All other assets and property used in the business of Network and
each Subsidiary, and all assets and property reflected in the balance sheet
included in the Network Recent Financial Statements or acquired after the date
of such balance sheet (other than assets or property sold or otherwise disposed
of in the ordinary course of its business subsequent to such date) are in each
case free and clear of all security interests, mortgages, pledges, liens,
conditional sales, agreements, leases, encumbrances or charges of any nature
whatsoever except as set forth in Schedule 3.17. All real estate owned, leased
or licensed by Network, and the Subsidiaries, their uses, appurtenances and
improvements substantially comply with all applicable ordinances and
regulations, building, and zoning laws. The buildings, machinery and equipment
of Network and the Subsidiaries are in good and serviceable condition,
reasonable wear and tear excepted.
Section 3.18 Environmental Matters.
(a) To the knowledge of Network, operations of Network or any of its
Subsidiaries conducted at the Real Property, any of Network's or a
Subsidiary's previously owned real property and any real property
previously owned or now leased, licensed or otherwise occupied by Network
or such Subsidiary (each a "Site") at all times during such ownership,
lease, license or occupation complied in all respects with Environmental
Laws (as defined below), except for noncompliance that would not have a
Network Material Adverse Effect. Network and each Subsidiary has obtained
all governmental authorizations and permits under Environmental Laws
necessary for its operations. Network and each Subsidiary is in material
compliance with each term and condition of such authorizations and permits.
(b) The real property occupied by Network in connection with its
business or a Subsidiary's operations thereon are not, to the best
knowledge of Network, subject to (i) any federal, state, or local
investigation, to the best knowledge of Network, (ii) any judicial or
administrative proceeding alleging the violation of or liability under any
Environmental Law, or (iii) any outstanding written order or agreement with
any governmental authority or private party relating to any Environmental
Law.
(c) For the purpose of this Agreement, the term "Environmental Laws"
shall mean:
The Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986; the Emergency Planning and Community
Right-to-Know Act; the Resource Conservation and Recovery Act; the
Hazardous Materials Transportation Act of 1974; the Federal Water
Pollution Control Act; the Clean Air Act; the Federal Insecticide,
Fungicide and Rodenticide Act; the Safe Drinking Water Act; the Toxic
Substances Control Act; the Oil Pollution Act of 1990; any laws
regulating the use of biological agents or substances including medical
or infectious wastes, each as amended or supplemented through the date
hereof.
Section 3.19 Broker's Fees. Except as disclosed on Schedule 3.12, no
person or entity other than Morgan Stanley & Co. has been authorized to act as a
broker, finder, financial advisor or in any other similar capacity as to give
rise to any claim for brokerage or finder's fees or commissions with respect to
the transactions contemplated hereby by anyone claiming to have acted on behalf
of Network.
Section 3.20 Labor Matters. No group of employees of Network or a
Subsidiary is presently organized into a collective bargaining unit. No labor
union has recently attempted, or is presently attempting, to organize any of
Network's or a Subsidiary's employees into a collective bargaining unit. No
employees of Network or a Subsidiary are on strike or threatening to strike.
Section 3.21 Conflicts of Interest. Except as set forth on Schedule 3.21,
no director, officer, or employee of Network or a Subsidiary or any relative of
any of them, has (a) loaned to or guaranteed the loan of a third party to
Network or a Subsidiary or borrowed any money from Network or a Subsidiary or
(b) any interest in any property, real or personal whether owned or leased,
tangible or intangible, including but not limited to, software, inventions,
patents, trade names or trademarks used in connection with or pertaining to
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the business of Network, a Subsidiary or any lender, supplier, customer, sales
representatives or distributor of Network or a Subsidiary; provided, however,
that such director, officer, or employee or relative thereof shall not be deemed
to have such interest solely by virtue of the ownership of less than five
percent of any stock or indebtedness of any publicly held company, the stock or
indebtedness of which is traded on a recognized stock exchange.
Section 3.22 Insurance Coverage. Schedule 3.22 is a correct and complete
list of all material insurance held by Network and the Subsidiaries including
the policy number, name of carrier, coverage, term, expiration date and premium.
Network and each of the Subsidiaries have their buildings, plants and
properties, including, but not limited to telecommunications equipment and
inventories, insured for its actual cash value, but not exceeding the amount it
would cost to repair or replace such properties, against loss or damage by fire
and all other hazards and risks of the character usually insured against by
persons operating similar properties in the localities where such properties are
located under valid and enforceable policies issued by insurers of recognized
responsibility. Such insurance coverage will be continued in full force and
effect through the Closing. Neither Network nor any Subsidiary has not been
refused any insurance by an insurance carrier to which it has applied for
insurance during the past three years.
Section 3.23 RESERVED.
Section 3.24 Correct Records. The financial records, ledgers, account
books, minute books, stock certificate books, stock registers, and other
corporate records of Network and each of the Subsidiaries are current, correct
and complete in all material respects.
Section 3.25 Vote Required. The approval of the Merger and the adoption
of this Agreement by the holders of a majority of the voting power entitled to
be cast by all holders of the outstanding shares of Network Common (the "Network
Shareholder Approval") is the only vote of the holders of any class or series of
the capital stock of Network required to approve this Agreement, the Merger, and
the other transactions contemplated hereby.
Section 3.26 Accounting Matters. Neither Network nor, to Network's best
knowledge, any of its Affiliates (as defined below), has taken or agreed to take
any action that would prevent the accounting for the transactions contemplated
by this Agreement as a pooling of interests in accordance with GAAP and
applicable SEC regulations. For purposes of this Agreement, the term
"Affiliate," except where otherwise defined herein, shall mean, as to any
person, any other person which directly or indirectly controls, or is under
common control with, or is controlled by such person. As used in this
definition, "control" (including, with its correlative meanings, "controlled by"
and "under common control with") shall mean possession, directly or indirectly,
of power to direct or cause the direction of management or policies (whether
through ownership or securities or partnership or other ownership interests, by
contract or otherwise).
Section 3.27 Registration Statement and Proxy Statement. None of the
information supplied or to be supplied by or on behalf of Network for inclusion
or incorporation by reference in (a) the registration statement on Form S-4 or
any post-effective amendment to a registration statement on Form S-4 to be filed
with the SEC by IXC in connection with the issuance of shares of the IXC Common
in connection with the Merger (the "Registration Statement") will, at the time
the Registration Statement is filed with the SEC and at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and (b) the proxy
statement, in definitive form, relating to the meeting of the Shareholders to be
held in connection with the Merger and the transactions related thereto (the
"Proxy Statement") will, at the dates mailed to the Shareholders and at the time
of the meeting of the Shareholders to be held in connection with the Merger,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Registration Statement and the Proxy Statement will comply as to
form in all material respects with the provisions of the Securities Act and the
Exchange Act and the rules and regulations thereunder.
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Section 3.28 Opinion of Financial Advisor. Network has received the
opinion of Morgan Stanley & Co., dated as of the date hereof, to the effect
that, as of such date, the Merger Consideration is fair from a financial point
of view to the Shareholders.
Section 3.29 Letters of Agency. Network has made available to IXC true
and complete copies of all customer letters of agencies ("LOAs") as of September
30, 1997. To Network's knowledge, after diligent scrutiny as required by law,
all such LOAs were obtained in accordance with applicable law and were valid of
such date.
Section 3.30 Permits. All material franchises, permits, licenses,
qualifications, rights-of-way, easements, municipals and other approvals,
authorizations, orders, consents and other rights from, and filings with, any
government authority of any jurisdiction worldwide relating to the conduct of
Network's and each Subsidiary's business (collectively, "Permits") have been
duly obtained and are in full force and effect and there are no proceedings
pending or, to Network's knowledge, threatened which may result in the
revocation, cancellation or suspension, or any adverse modification, of any
Permit.
Section 3.31 Section 203 Not Applicable. The Board of Directors of
Network has taken all actions so that the restrictions contained in Section 203
of the Corporation Law applicable to a "business combination" (as defined in
such Section 203) will not apply to the execution, delivery or performance of
this Agreement or to the consummation of the Merger or the other transactions
contemplated by this Agreement or any of the Transaction Documents. Network does
not own any shares of the capital stock of IXC.
Section 3.32 Disclaimer. Network shall not be deemed to have made to IXC
any representation or warranty other than as expressly made by Network in this
Article III. Without limiting the generality of the foregoing, and
notwithstanding any otherwise express representations and warranties made by
Network in this Article III, Network makes no representation or warranty to IXC
with respect to:
(a) Any projections, estimates, or budgets heretofore delivered to or
made available to IXC of future revenues, expenses, or expenditures or
future results of operations; or
(b) Except as expressly covered by a representation or warranty
contained in this Article III, any other information or documents
(financial or otherwise) made available to IXC or its counsel, accountants,
or advisers with respect to Network.
Section 3.33 Due Diligence Investigation.
(a) Network acknowledges that it has had the opportunity to visit with
IXC and meet with IXC's respective officers and other representatives to
discuss the business and the assets, liabilities, financial condition, cash
flow, and operations of IXC.
(b) Network acknowledges that it has made its own independent
examination, investigation, analysis, and evaluation of IXC, including
Network's own estimate of the value of IXC's business.
(c) Network acknowledges that it has undertaken such due diligence
(including a review of the assets, liabilities, books, records, and
contracts of IXC) as Network deems adequate, including that described
above.
Section 3.34 Form of Warrant. Each of the agreements representing the
Warrants is of one of three forms provided to IXC entitled "Certificate for
Common Stock Purchase Warrant", "Non-Qualified Stock Option Award Agreement", or
"Representative's Stock Purchase Option or Warrant Agreement".
ARTICLE IV
COVENANTS OF NETWORK
Network covenants and agrees that from the date hereof to and including the
Effective Time:
Section 4.1 Maintenance of Business. Network shall, and shall cause each
of the Subsidiaries to, continue to carry on its business, maintain its plants
and equipment and keep its books of account, records and
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files in substantially the same manner as heretofore. Schedule 4.1 contains a
list of all expenses outside the ordinary course of business that Network
anticipates making, or anticipates that the Subsidiaries will make, prior to or
at Closing, excluding all legal, professional and investment advisor fees
incurred in connection with the Merger. Network will maintain, and will cause
each of the Subsidiaries to maintain, in full force and effect without reduction
insurance policies now in effect. Network will continue, and will cause each of
the Subsidiaries to continue, to carry on such activities, plans, capital and
operating programs which were approved by its board of directors prior to the
date hereof, provided that such activities, plans and programs shall not involve
expenditures exceeding $250,000 for each such activity, plan or program. If any
such activities, plans or programs exceed $250,000 they shall, prior to their
implementation, be submitted to IXC in writing, and shall have been approved by
IXC.
Section 4.2 Negative Covenants. Except for the permitted actions of
Network set forth on Schedule 4.2, without the prior written consent of IXC,
Network shall not, and shall not permit any of the Subsidiaries to:
(a) Issue, sell, purchase or redeem, or grant shares, options,
warrants or such other rights to purchase or otherwise agree to issue,
sell, purchase or redeem any shares of its capital stock or any other
securities of Network or such Subsidiary;
(b) Amend its Certificate of Incorporation or amend its Bylaws;
(c) Incur or prepay any liability for borrowed money, short term debt
or long term debt (as those terms are defined in GAAP), and at Closing,
Network shall have no Indebtedness as defined in IXC's Indenture relating
to its 12 1/2% Senior Notes due 2005, except as approved by IXC;
(d) Pay or guarantee any obligation or liability, other than
obligations or liabilities reflected in the balance sheet contained in the
Network Recent Financial Statements, when due, liabilities incurred since
the date of such balance sheet in the ordinary course of business and
obligations under contracts and agreements referred to in Schedules annexed
hereto or entered into in the ordinary course of business;
(e) Adopt or modify any severance, consulting, bonus, pension, profit
sharing, benefit or other compensation plan or arrangement or increase its
overall work force, other than in the normal course of business, or enter
into any written contract of employment requiring payments of more than
$75,000 in any 12 month period;
(f) Enter into or modify any contract or commitment, incur any
liability, absolute or contingent, waive or fail to enforce any right or
enter into any other transactions, other than in the ordinary course of
business;
(g) Willfully take any action that would or might reasonably be
expected to result in any representation or warranty set forth in this
Agreement being or becoming untrue in any material respect or in any of the
conditions to the consummation of the transactions contemplated by this
Agreement set forth in Article VIII hereof not being satisfied;
(h) Have declared, paid, made or become obligated to make any dividend
payment or other distribution to the Shareholders;
(i) Enter into any material contracts (or modify in a material way any
such existing contracts) for (i) the material purchase of communications
services unless such contracts are first approved by IXC, or (ii) acquire
(by merger, consolidation or acquisition of stock or assets or otherwise)
any corporation, partnership or other business organization or division
thereof;
(j) Willfully take any action which would, or would be reasonably
likely to, prevent accounting for the transactions contemplated by this
Agreement as a pooling-of-interests in accordance with GAAP and applicable
SEC regulations;
(k) Take any action which would, or would be reasonably likely to,
adversely affect the ability of the Merger to qualify for tax-free
treatment under the Code, both to the parties hereto and their respective
shareholders;
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(l) Make any changes in its accounting methods, except as required by
law, rule, regulation, or GAAP; or
(m) Fail to maintain its advertising and promotional expenditures in
the ordinary course of business consistent with past practice.
Section 4.3 Organization, Goodwill. Network shall preserve, and shall
cause each of the Subsidiaries to preserve, its business organization intact and
use its best efforts to substantially retain its present officers and employees
and preserve the good will of its suppliers, customers and others having
business relations with it.
Section 4.4 RESERVED.
Section 4.5 Corporate Action. Subject to the provisions of this
Agreement, Network shall take all necessary corporate and other action required
of it to carry out the transactions contemplated by this Agreement; provided,
however, that nothing in this Article IV or anywhere else in this Agreement
shall require Network to carry out such transactions if a Final Order (as
defined in Section 8.3 of this Agreement) of a Commission contains a term,
condition or provision which Network and IXC reasonably determine to be unduly
burdensome.
Section 4.6 Third Party Consents.
(a) Network will obtain, and will cause each of the Subsidiaries to
obtain, or cause to be obtained the consent of any third party whose
consent is required in order that Network can enter into and consummate the
transactions contemplated by this Agreement (assuming that IXC is able to
consummate such transactions) without material violation of any
representation, warranty or covenant made by it in this Agreement;
provided, however, that if in the reasonable business judgment of Network
and IXC, it would be impracticable to obtain regulatory approval of the
Merger in a jurisdiction, the failure to obtain such approval will not be a
breach of this covenant.
(b) Network will use its reasonable efforts, and will cause each of
the Subsidiaries to use its reasonable efforts, to cooperate with IXC to
obtain or cause to be obtained the consent of any third party whose consent
is required in order that the transactions contemplated by this Agreement
may be consummated without violation of any representation, warranty or
covenant made by IXC in this Agreement.
Section 4.7 Securities Laws. Network will cooperate, and will cause each
of the Subsidiaries to cooperate, with IXC in taking all action and providing
all information necessary to permit the transactions contemplated herein to be
consummated in compliance with all applicable federal and state securities laws
and regulations.
Section 4.8 Communications Laws.
(a) Network will take all reasonable action, and will cause each of
the Subsidiaries to take all reasonable action necessary to permit the
transactions contemplated herein to be consummated in compliance with all
applicable federal, state and local telecommunications laws governing or
applicable to Network the Subsidiaries and their respective businesses.
(b) Network will use its reasonable efforts, and will cause each of
the Subsidiaries to use its reasonable efforts, to cooperate with IXC to
permit the transactions contemplated herein to be consummated in compliance
with all applicable federal, state and local telecommunications laws
governing or applicable to IXC and its business.
Section 4.9 Notice of Proceedings. Network will, upon becoming aware of
any order or decree or any complaint praying for an order or decree restraining
or enjoining the consummation of this Agreement or the transactions contemplated
hereunder, or upon receiving any notice from any governmental department, court,
agency or commission of its intention to institute an investigation into, or
institute a suit or proceeding to restrain or enjoin the consummation of this
Agreement or such transactions, or to nullify or render ineffective this
Agreement or such transactions if consummated, promptly notify IXC in writing of
such order, decree, complaint or notice.
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Section 4.10 Confidentiality. Network shall maintain all information
gained from IXC in connection with its evaluation of the transactions
contemplated by this Agreement that is confidential and proprietary to IXC (the
"IXC Confidential Information") in strict confidence, and shall take all
precautions necessary to prevent disclosure, access to, or transmission of the
IXC Confidential Information, or any part thereof, to any third party, except
(a) for the exclusive purpose of evaluating the Merger and (b) as required by
law or order of any court having competent jurisdiction; provided, however, that
before disclosing any IXC Confidential Information under this exception, Network
shall give IXC sufficient notice to allow it to seek an appropriate protective
order, and (c) as is necessary or required for Network to satisfy its disclosure
obligations under applicable federal and state securities laws. Network shall
use its reasonable best efforts to ensure that any person or entity to whom they
disclose IXC Confidential Information shall keep such information confidential.
The IXC Confidential Information shall be used only for the purposes of
evaluating the transactions contemplated hereby and in the event the Closing
does not occur for any reason, Network shall, immediately upon IXC's request,
return all copies and recordings of the IXC Confidential Information in their
possession or under their control and delete all records thereof in any data
storage system maintained by or for Network. Network's obligations under this
Section 4.10 shall survive the Closing for a period of three years.
Section 4.11 RESERVED.
Section 4.12 Adverse Events. Promptly after the occurrence, or failure to
occur, of any event, the occurrence or failure of which (a) would result in a
Network Material Adverse Effect, or could reasonably be expected to result in a
Network Material Adverse Effect or materially adversely affect the ability of
Network to perform any of its obligations under this Agreement, (b) if known as
of the date of this Agreement, would have been required to be disclosed to IXC,
or (c) causes any representation or warranty contained in this Agreement or any
Schedule hereto to be untrue or inaccurate in any material respect at any time
from the date of this Agreement to and including the Closing Date, Network shall
provide to IXC all relevant information related thereto.
Section 4.13 Shareholders' Approval.
(a) Network shall, as soon as reasonably practicable after the date
hereof, (i) take all steps necessary to duly call, give notice of, convene,
and hold a meeting of the Shareholders (the "Network Meeting") for the
purpose of securing the Network Shareholder Approval, (ii) distribute to
the Shareholders the Proxy Statement in accordance with applicable federal
and state law and its Certificate of Incorporation and Bylaws, (iii)
recommend to the Shareholders the approval of the Merger, this Agreement,
the Transaction Documents to which Network is a party, and the transactions
contemplated hereby and thereby, and the adoption of this Agreement and
such Transaction Documents, and (iv) cooperate and consult with IXC with
respect to each of the foregoing matters.
(b) The Network Meeting shall be held on such date as Network and IXC
shall mutually determine.
(c) It shall be a condition to the obligation of Network to distribute
to the Shareholders the proxy statement that the opinion of Morgan Stanley
& Co. referred to in Section 3.28 shall not have been withdrawn.
Section 4.14 Rule 145 Affiliates. Network shall identify in a letter to
IXC all persons who are, and to Network's best knowledge who will be at the
Closing Date, "affiliates" of Network as such term is used in Rule 145 under the
Securities Act (or otherwise under applicable SEC accounting releases with
respect to pooling-of-interests accounting treatment). Network shall use all
reasonable efforts to cause its affiliates (including any person who may be
deemed to have become such an affiliate after the date of the letter referred to
in the prior sentence) to deliver to IXC on or prior to the Closing Date a
written acknowledgment of such persons' affiliate status, including such
person's agreement not to dispose of any Merger Consideration received by them
in any manner that would cause the transactions contemplated hereby not to
qualify for pooling-of-interests accounting treatment.
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Section 4.15 Tax Returns. Network shall provide to IXC for its review any
tax returns (a) with respect to the fiscal year ended March 31, 1997 and (b) for
any stub periods, due to be filed between the date of this Agreement and the
Effective Time.
Section 4.16 No Solicitation. Network agrees that, prior to the Effective
Time, it shall not, nor shall any of its directors, officers, employees, agents
or representatives, directly or indirectly, solicit, initiate or encourage
(including by way of furnishing or disclosing information) inquiries or
proposals concerning any merger, consolidation or acquisition or purchase of all
or any substantial portion of the assets or capital stock of Network ("Network
Acquisition Transaction") or negotiate or enter into any discussions or other
communications with any prospective purchaser (other than IXC or its affiliates)
with respect to any Network Acquisition Transaction, except to the extent
required for its Board of Directors and officers to meet their fiduciary duties
to the Shareholders. Network shall immediately advise IXC of any inquiries or
proposals relating to any Network Acquisition Transaction.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF IXC, IXC LONG DISTANCE AND ACQUISITION
IXC, IXC Long Distance, and Acquisition hereby represent and warrant to
Network as follows:
Section 5.1 Corporate Existence. Each of IXC, IXC Long Distance and
Acquisition is a corporation duly organized, validly existing and in good
standing under the laws of their respective jurisdictions of incorporation.
Attached hereto as Exhibit 5.1 is a complete and correct copy of the Certificate
of Incorporation and Bylaws (together with all amendments thereto) of IXC, IXC
Long Distance and Acquisition. Each of IXC, IXC Long Distance and Acquisition is
duly qualified, certified or licensed in each state and jurisdiction where such
qualification, certification or licensing is necessary or required for IXC, IXC
Long Distance and Acquisition to conduct their businesses. IXC Long Distance is
duly qualified, certified or licensed in each state and jurisdiction where such
qualification, certification or licensing is necessary or required for IXC Long
Distance to offer communication services.
Section 5.2 Corporate Power and Authority. Each of IXC, IXC Long Distance
and Acquisition has all requisite corporate power and authority to own its
properties and assets, and to carry on the business in which it is now engaged.
Each of IXC, IXC Long Distance and Acquisition has the corporate power and
authority to execute and deliver this Agreement and the Transaction Documents to
which it is a party, and to perform their respective covenants set forth herein
and therein.
Section 5.3 Capitalization. The authorized capital stock of IXC at
November 30, 1997 consists of: (a) 100,000,000 shares of IXC Common, of which
31,552,708 shares are issued and outstanding and (b) 3,000,000 shares of
preferred stock, par value $.01 per share, of which 1,400,000 shares are
designated as Convertible Preferred Stock, 900,000 shares are designated as
Exchangeable Preferred Stock, 2,000 shares are designated as Series 1 Preferred
Stock, and 12,550 shares are designated as Series 3 Preferred Stock. At November
30, 1997, there were 1,036,574 shares of Convertible Preferred Stock issued and
outstanding, 308,959 shares of Exchangeable Preferred Stock issued and
outstanding, 414.03 shares of Series 3 Preferred Stock issued and outstanding;
all of the previously issued Series 1 Preferred Stock had been redeemed and no
other shares of Preferred Stock were outstanding. Except as set forth on
Schedule 5.3, at November 30, 1997, there are no other classes of equity,
options, warrants, calls, rights or commitments or any other agreements of any
character relating to the sale, issuance or voting of any shares of capital
stock of IXC, or any securities convertible into or evidencing the right to
purchase any shares of capital stock of IXC. All such issued and outstanding
shares are validly issued, fully paid and nonassessable. There are no
restrictions imposed by the Certificate of Incorporation or Bylaws of IXC, and
there are no other agreements, understandings or commitments, which would in any
way affect or impair the transactions contemplated hereby.
Section 5.4 Binding Effect. This Agreement and each of the Transaction
Documents required to be delivered by IXC, IXC Long Distance or Acquisition in
connection herewith, when executed and delivered, will be the legal, valid and
binding obligation of IXC, IXC Long Distance or Acquisition, as applicable,
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enforceable against them in accordance with their terms, except as
enforceability may be limited by (a) applicable bankruptcy, reorganization,
insolvency, moratorium and similar laws affecting the enforcement of creditors'
rights generally and (b) general equitable principles (regardless of whether
enforceability is considered in a proceeding in equity or at law).
Section 5.5 Execution and Delivery Permitted. The execution, delivery and
performance of this Agreement, and the Transaction Documents and the
consummation of the transactions contemplated hereby or thereby will not violate
or result in a breach of any term of IXC's Certificate of Incorporation or
Bylaws or result in a breach of or constitute a default (or an event which, with
notice or lapse of time or both would constitute a default) under or result in
the termination of, or accelerate the performance required by or under any term
in any agreement, tariff, or other instrument to which either IXC, IXC Long
Distance or Acquisition is a party or by which either of them is bound (unless
such default has been previously waived by the other party to such agreement,
tariff, or other instrument), or violate any law or any order, rule, judgment,
decree, or award, or regulation applicable to them, of any court or any
regulatory body, administrative agency or other governmental instrumentality
having jurisdiction over them or their properties. Each of IXC's and
Acquisition's Board of Directors and, to the extent required, stockholders,
have, or as of the Closing Date shall have, taken all action required by law,
and by their respective Certificates of Incorporation and their respective
Bylaws to authorize the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated by this Agreement or by
any of its Exhibits, including the issuance of the IXC Shares. Except as set
forth on Schedule 5.5 hereto, none of the execution, delivery or performance of
this Agreement or any of the Transaction Documents, or the consummation of the
transactions contemplated hereby or thereby requires any filing with or the
consent or approval of any third party, including but not limited to any
governmental body or entity, other than (a) compliance with the Securities Act
and the Exchange Act, (b) applications to the FCC and certain state utility
regulatory commissions in states in which IXC, Network or a Subsidiary offers
services, (c) notifications to the FTC and the DOJ under the HSR Act, and (d)
the filing with the Delaware Secretary of State of the Certificate of Merger in
respect of the Merger in accordance with the Corporation Law.
Section 5.6 Reports and Financial Statements. Since December 31, 1996, to
the extent IXC has been required to make filings under the Securities Act, the
Exchange Act or applicable state laws and regulations, IXC has filed with the
SEC or the applicable state regulatory authority, as the case may be, all forms,
statements, reports and documents (including all exhibits, amendments and
supplements thereto) required to be filed by it under each of the Securities
Act, the Exchange Act and applicable state laws and regulations, and the
respective rules and regulations thereunder, all of which complied in all
material respects with all applicable requirements of the appropriate act and
the rules and regulations thereunder. IXC has previously delivered to Network
true and complete copies of its (a) Annual Reports on Form 10-K for the fiscal
year ended December 31, 1996, as filed with the SEC, which includes the audited
consolidated financial statements of IXC for the fiscal year then ended (the
"IXC Financial Statements"), (b) proxy and information statements relating to
all meetings of its shareholders (whether annual or special), and actions by
written consent in lieu of a shareholders' meeting, from December 31, 1996 until
the date hereof, (c) all other reports or registration statements filed by IXC
with the SEC since December 31, 1996 (collectively, the "IXC SEC Reports"). As
of their respective dates, the IXC SEC Reports did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited interim financial statements of
IXC included in the IXC SEC Reports and the IXC Financial Statements have been
prepared in accordance with GAAP (except as may be indicated therein or in the
notes thereto) and fairly present in all material respects the financial
position of IXC and its subsidiaries as of the dates thereof and the results of
their operations and changes in financial position for the periods then ended,
subject, in the case of the unaudited interim financial statements, to normal
year-end and audit adjustments and the absence of explanatory footnotes. The IXC
Financial Statements contain and reflect adequate reserves as of the date
thereof for all known liabilities or obligations of any nature, whether
absolute, contingent or otherwise, in accordance with GAAP. The unaudited
interim financial statements of IXC included in the IXC SEC Reports, have been
similarly prepared and contain and reflect adequate
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reserves as of the date thereof for all known liabilities or obligations of any
nature, whether absolute, contingent or otherwise, in accordance with GAAP.
Section 5.7 Absence of Certain Changes. Except as set forth on Schedule
5.7, since the date of the most recent balance sheet included in the IXC
Financial Statements, there has not been:
(a) Any material adverse change in the financial condition,
operations, business or prospects of IXC and its subsidiaries (an "IXC
Material Adverse Effect"), including, but not limited to, any state or
federal regulatory proceedings which could culminate in an order or other
action which could have such an adverse change, excluding generally known
industry trends and competitive conditions affecting the industry
generally;
(b) Any material physical damage or destruction, whether or not
covered by insurance, which has resulted in, or reasonably could be
expected to result in, an IXC Material Adverse Effect;
(c) Any material labor dispute or threat thereof or any attempt to
organize or reorganize the employees of IXC for the purpose of collective
bargaining;
(d) Any direct or indirect redemption, purchase or other acquisition
by IXC of any shares of IXC Common, or declaration of or payment or
distribution of any kind of cash or other assets with respect to the IXC
Common;
(e) Any communication, whether oral or written, to IXC from IXC's
customers or suppliers or agencies regulating IXC notifying IXC of, nor
does IXC, after making due inquiry, have any knowledge of, any potential
development affecting IXC, which would reasonably lead it to expect an IXC
Material Adverse Effect; or
(f) Any assignment, sale or transfer of any material patent,
trademark, trade name, trade secret, copyright or other intangible asset.
Section 5.8 No Undisclosed Liabilities. Except as set forth on Schedule
5.8 attached hereto and made a part hereof, as of September 30, 1997, neither
IXC nor any of its subsidiaries that are included in the IXC Financial
Statements had any material liabilities, absolute or contingent, which are not
shown on the IXC Financial Statements.
Section 5.9 RESERVED.
Section 5.10 Benefit Plans; ERISA.
(a) Schedule 5.10(a) contains a true and complete list of each written
pension, profit sharing, other deferred compensation, bonus, incentive
compensation, stock purchase, stock option, retirement, supplemental
retirement, severance or termination pay, medical, hospitalization, life
insurance, dental, disability, salary continuation, supplemental
unemployment benefits plan, program, arrangement or contract maintained,
contributed to, or required to be contributed to by IXC or any Related
Party (hereinafter defined) for the benefit of any current or former
employee, director or agent of IXC or any Related Party, whether or not any
of the foregoing is funded and whether or not subject to the ERISA
(collectively, the "IXC Benefit Plans"). IXC and its Related Parties do not
have any express or implied commitment or contract to create any additional
IXC Benefit Plan or modify any existing IXC Benefit Plan in a manner that
would materially increase its costs, other than as may be required to
comply with ERISA or the Code. IXC has delivered to Network, with respect
to each applicable IXC Benefit Plan (i) true and complete copies of all
material documents embodying each IXC Benefit Plan including, without
limitation, the plan and trust or other funding arrangement relating
thereto, summary plan descriptions, employee handbooks or personnel
manuals, and all amendments and supplements thereto; (ii) the most recent
annual report (Series 5500 and all schedules thereto), if any, required by
ERISA; and (iii) the most recent determination letter received from the
IRS, if any. For purposes of this Section 5.10, "Related Party" means any
member of a controlled group of corporations, a group of trades or
businesses under common control or an affiliated service group, within the
meaning of Section 414(b), (c), (m) or (o) of the Code, of IXC.
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(b) Except as provided in Schedule 5.10(b) none of the IXC Benefit
Plans is intended by IXC or any Related Party to meet, or is required to
meet, the requirements of Section 401(a) of the Code and no IXC Benefit
Plan is subject to Title IV of ERISA.
(c) IXC and any Related Party have performed the obligations required
to be performed by them under, and are not in default under or in violation
of, any and all of the IXC Benefit Plans in any material respect, and each
IXC Benefit Plan has been operated in all material respects in accordance
with the requirements of all applicable laws and regulations. Neither any
IXC Benefit Plan or fiduciary nor IXC or any Related Party has taken any
action, or failed to take any action, that could subject it or any other
person to any material liability for any excise tax under Chapter 43 of the
Code or for breach of fiduciary duty with respect to or in connection with
a IXC Benefit Plan.
(d) At no time has IXC or any Related Party been required to
contribute to any "multiemployer plan" (within the meaning of Section 3(37)
of ERISA) and IXC and its Related Parties have no liability (contingent or
otherwise) relating to the withdrawal or partial withdrawal from a multi
employer plan. IXC and its Related Parties do not participate in any
"multiple employer plans," within the meaning of Code Section 413(c).
(e) No IXC Benefit Plan provides or is required to provide group
health, medical, death or survivor benefits to any former or retired
employee of IXC, a Related Party or beneficiary thereof, except to the
extent (i) required under any state law or (ii) under Section 601 of ERISA.
(f) No IXC Benefit Plan or fiduciary has nor does IXC or any Related
Party have any material liability to any participant, beneficiary or other
person under any provision of ERISA or any other applicable law by reason
of any payment of, or failure to pay, benefits or other amounts with
respect to or in connection with any IXC Benefit Plan.
Section 5.11 Litigation. Except as set forth in Schedule 5.11:
(a) There are no claims, suits, actions, or proceedings of any nature
whatsoever in law or in equity, pending before any court, governmental
department, commission, agency, instrumentality or authority or any
arbitrator, or, to the best knowledge of IXC, threatened, nor are there, to
the best knowledge of IXC, any investigations, whether or not purportedly
on behalf of IXC, complaints or reviews by any court, governmental
department, commission, agency, instrumentality or authority or any
arbitrator pending or threatened against, relating to or affecting, IXC
which could reasonably be expected to have an IXC Material Adverse Effect.
(b) IXC is not operating under or subject to, nor in default with
respect to, any order, writ, injunction, garnishment, levy or decree of any
federal, state, municipal or other governmental court, department,
commission, board, bureau, agency or instrumentality, which could have an
IXC Material Adverse Effect. The issuance of shares of IXC Common in the
Merger will not constitute a default thereunder.
(c) As of December 16, 1997, during the past five years, there had not
been nor was there pending, any claim(s) against any person in his or her
capacity as either a director or officer of IXC. IXC has no actual
knowledge or information of any act, error or omission which would give
rise to such a claim.
(d) There is no claim, legal action, suit, arbitration, governmental
investigation or other legal or other administrative proceeding, including
any bankruptcy proceeding, nor any order, decree or judgement in progress,
pending, in effect, or, to the knowledge of IXC threatened, against or
relating to IXC or Acquisition, which could reasonably be expected to
materially negatively affect the transactions contemplated by this
Agreement.
Section 5.12 Compliance with Laws. Except as set forth on Schedule 5.12,
IXC has not received written notice of any violation by IXC of its tariffs or of
laws, regulations and orders from any governmental entity having authority to
enforce such tariffs, laws, regulations and orders, including, but not limited
to, the Communications Act of 1934 as amended by (a) the Telecommunications Act
of 1996 and (b) the
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Telephone Consumer Protection Act of 1991, which could reasonably be expected to
have an IXC Material Adverse Effect.
Section 5.13 Tax Returns. Except as set forth in Schedule 5.13, (a) all
federal income tax returns, and other federal tax returns, declarations of
estimated tax or estimated tax deposit forms of every nature required to be
filed by IXC have been duly filed or will be duly filed as of Closing, and (b)
all state, county and local tax returns and declarations of estimated tax or
estimated tax deposit forms required to be filed by IXC have been duly filed
(except where failure to file such returns, declarations or forms described in
this clause (b) would not have an IXC Material Adverse Effect) and all of the
returns, declarations and forms referred to in clauses (a) and (b) were or will
be when filed true, correct and complete in all material respects and IXC has
paid all taxes which have become due and owing or pursuant to any assessment
received by it and has paid all installments of estimated tax due. Where such
returns and reports have not been audited and approved or settled, there has not
been any waiver or extension of any applicable statute of limitations, and IXC
has not received any notice of deficiency or adjustment. Except as described on
Schedule 5.13, attached hereto and made a part hereof, the unaudited interim
balance sheet of IXC as of September 30, 1997, contains liabilities which are
and will be sufficient for the payment of all respective federal, state, county,
city and local taxes and assessments, whether current or deferred. All taxes and
other assessments and levies which IXC is required by law to withhold or to
collect have been duly withheld and collected, and have been paid over to the
proper governmental authorities or are held by IXC in its bank accounts for such
payment, except where the failure to so withhold will not have an IXC Material
Adverse Effect. All statements and reports required to be filed under any
chapter of the Code by IXC have been duly filed.
Section 5.14 Environmental Matters.
(a) To the knowledge of IXC, operations conducted on the real property
of IXC at all times complied in all respects with Environmental Laws,
except for non-compliance that would not have an IXC Material Adverse
Effect. IXC has obtained all governmental authorizations and permits under
Environmental Laws necessary for its operations. IXC is in material
compliance with each term and condition of such authorizations and permits.
(b) The real property occupied by IXC in connection with its business
and IXC's operations thereon are not to the best knowledge of IXC subject
to (i) any federal, state, or local investigation, (ii) any judicial or
administrative proceeding alleging a violation of or liability under any
Environmental Law, or (iii) any outstanding written order or agreement with
any governmental authority or private party relating to any Environmental
Law.
Section 5.15 RESERVED.
Section 5.16 Labor Matters. No group of employees of IXC is presently
organized into a collective bargaining unit. No labor union has recently
attempted, or to best knowledge of IXC is presently attempting, to organize any
of IXC's employees into a collective bargaining unit. No employees of IXC are on
strike or threatening to strike.
Section 5.17 RESERVED.
Section 5.18 RESERVED.
Section 5.19 Correct Records. The financial records, ledgers, account
books, minute books, stock certificate books, stock registers, and other
corporate records of IXC are current, correct and complete in all material
respects.
Section 5.20 Vote Required. No vote of the holders of any class or series
of the capital stock of IXC is required to approve this Agreement, the Merger,
and the other transactions contemplated hereby.
Section 5.21 Accounting Matters. To IXC's best knowledge, neither IXC nor
any of its Affiliates has taken or agreed to take any action that would prevent
the accounting for the transactions contemplated by this Agreement as a pooling
of interests in accordance with GAAP and applicable SEC regulations.
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Section 5.22 Registration Statement and Proxy Statement. None of the
information supplied or to be supplied by or on behalf of IXC for inclusion in
(a) the Registration Statement will, at the time the Registration Statement is
filed with the SEC and at the time it becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading and (b) the Proxy Statement will, at the dates mailed to
shareholders contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading. None of the SEC filings of IXC which contain information to be
incorporated by reference into the Registration Statements or the Proxy
Statement contained, or shall contain, as of the date of each such SEC filing,
any untrue statement of a material fact or omitted, or shall omit, as of the
date of such SEC filing, to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. The
Registration Statement will comply as to form in all material respects with the
provisions of the Securities Act and the Exchange Act and the rules and
regulations thereunder.
Section 5.23 RESERVED.
Section 5.24 Disclaimer. IXC shall not be deemed to have made to Network
any representation or warranty other than as expressly made by IXC in this
Article V. Without limiting the generality of the foregoing, and notwithstanding
any otherwise express representations and warranties made by IXC in this Article
V, IXC makes no representation or warranty to Network with respect to:
(a) Any projections, estimates, or budgets heretofore delivered to or
made available to Network of future revenues, expenses, or expenditures or
future results of operations; or
(b) Except as expressly covered by a representation or warranty
contained in this Article V, any other information or documents (financial
or otherwise) made available to Network or its counsel, accountants, or
advisers with respect to IXC.
Section 5.25 Due Diligence Investigation.
(a) IXC acknowledges that (i) it has had the opportunity to visit with
Network and meet with its respective officers and other representatives to
discuss the business and the assets, liabilities, financial condition, cash
flow, and operations of Network and (ii) all materials and information
requested by IXC have been provided to IXC to IXC's reasonable
satisfaction.
(b) IXC acknowledges that it has made its own independent examination,
investigation, analysis, and evaluation of Network, including IXC's own
estimate of the value of Network's business.
(c) IXC acknowledges that it has undertaken such due diligence
(including a review of the assets, liabilities, books, records, and
contracts of Network) as IXC deems adequate, including that described
above.
ARTICLE VI
COVENANTS OF IXC
IXC covenants and agrees that from the date hereof to and including the
Effective Time:
Section 6.1 Maintenance of Business. IXC shall continue to carry on its
telecommunications business and maintain its and keep its books of account,
records and files in substantially the same manner as heretofore.
Section 6.2 Negative Covenants. Except for the permitted actions of IXC
set forth on Schedule 6.2, without the prior written consent of Network, IXC
shall not:
(a) From the date hereof through the Effective Time, issue, sell,
purchase or redeem, or grant options to purchase or otherwise agree to
issue, sell, purchase or redeem any shares of its capital stock or other
securities of IXC except for fair value as determined as of the date of
grant or agreement in the good faith judgment of the IXC Board of
Directors;
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(b) RESERVED;
(c) Willfully take any action that would or might reasonably be
expected to result in any representation or warranty set forth in this
Agreement being or becoming untrue in any material respect or in any of the
conditions to the consummation of the transactions contemplated by this
Agreement set forth in Article VII hereof not being satisfied;
(d) Have made or become obligated to make any cash dividend payment or
other cash distribution to the holders of IXC Common;
(e) Willfully take any action which would, or would be reasonably
likely to, prevent accounting for the transactions contemplated by this
Agreement as a pooling-of-interests in accordance with GAAP and applicable
SEC regulations; or
(f) Willfully take any action which would, or would be reasonably
likely to, adversely affect the ability of the Merger to qualify for
tax-free treatment under the Code, both to the parties hereto and their
respective shareholders (except for any cash received in lieu of fractional
shares).
Section 6.3 RESERVED.
Section 6.4 RESERVED.
Section 6.5 Corporate Action. Subject to the provisions of this
Agreement, IXC shall take, and shall cause IXC Long Distance and Acquisition to
take, all necessary corporate and other action required of it to carry out the
transactions contemplated by this Agreement; provided, however, that nothing in
this Article VI or anywhere else in this Agreement shall require IXC to carry
out such transactions if a Final Order (as that term is defined in Section 8.3
of this Agreement) of a Commission contains a term, condition or provision
which, in IXC's sole determination, is unduly burdensome.
Section 6.6 Third Party Consents.
(a) IXC will obtain or cause to be obtained the consent of any third
party whose consent is required in order that IXC can enter into and
consummate the transactions contemplated by this Agreement (assuming that
Network is able to consummate such transaction) without material violation
of any representation, warranty or covenant made by it in this Agreement;
provided, however, that if in the reasonable business judgment of Network
and IXC, it would be impracticable to obtain regulatory approval of the
Merger in a jurisdiction, the failure to obtain such approval will not be a
breach of this covenant.
(b) IXC will use its reasonable efforts to cooperate with Network to
obtain or cause to be obtained the consent of any third party whose consent
is required in order that the transactions contemplated by this Agreement
may be consummated without violation of any representation, warranty or
covenant made by Network in this Agreement.
Section 6.7 Securities Laws. IXC will use its best efforts to take all
action necessary to permit the transactions contemplated herein to be
consummated in compliance with all applicable federal and state securities laws
and regulations.
Section 6.8 Communications Laws.
(a) IXC will take all action reasonable necessary to permit IXC to
consummate the transactions contemplated herein in compliance with all
applicable federal, state and local telecommunications laws governing or
applicable to IXC and its business (assuming that Network is able to
consummate such transaction).
(b) IXC will use its reasonable efforts to cooperate with Network to
permit the transactions contemplated herein to be consummated in compliance
with all applicable federal, state and local telecommunications laws
governing or applicable to Network and its business.
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Section 6.9 Notice of Proceedings. IXC will, upon becoming aware of any
order or decree or any complaint praying for an order or decree restraining or
enjoining the consummation of this Agreement or the transactions contemplated
hereunder, or upon receiving any notice from any governmental department, court,
agency or commission or its intention to institute an investigation into, or
institute a suit or proceeding to restrain or enjoin the consummation of this
Agreement or such transactions, or to nullify or render ineffective this
Agreement or such transactions if consummated, promptly notify Network in
writing of such order, decree, complaint, or notice.
Section 6.10 Confidentiality. IXC shall maintain all information gained
from Network in connection with its evaluation of the transactions contemplated
by this Agreement that is confidential and proprietary to Network (the "Network
Confidential Information") in strict confidence, and shall take all precautions
necessary to prevent disclosure, access to, or transmission of the Network
Confidential Information, or any part thereof, to any third party, except (a)
for the exclusive purpose of evaluating the Merger, (b) as required by law or an
order of any court having competent jurisdiction; provided, however, that before
disclosing any Network Confidential Information under this exception, IXC shall
give Network sufficient notice to allow it to seek an appropriate protective
order, and (c) as is necessary or required for IXC to satisfy its disclosure
obligations under applicable federal and state securities laws. IXC shall use
its reasonable best efforts to ensure that any person or entity to whom it
discloses Network Confidential Information shall keep such information
confidential. The Network Confidential Information shall be used only for the
purposes of evaluating the transactions contemplated hereby and in the event the
Closing does not occur for any reason, IXC shall, immediately upon Network's
request, return all copies and recordings of the Network Confidential
Information in its possession or under its control and delete all records
thereof in any data storage system maintained by or for IXC. IXC's obligations
under this Section 6.10 shall survive the Closing for a period of three years.
Section 6.11 RESERVED.
Section 6.12 RESERVED.
Section 6.13 Adverse Events. Promptly after the occurrence, or failure to
occur, of any event, the occurrence or failure of which (a) would result in an
IXC Material Adverse Effect or could reasonably be expected to result in an IXC
Material Adverse Effect or materially adversely affect the ability of IXC to
perform any of its obligations under this Agreement, (b) if known as of the date
of this Agreement, would have been required to be disclosed to Network, or (c)
causes any representation or warranty of IXC contained in this Agreement or any
Schedule hereto to be untrue or inaccurate in any material respect at any time
from the date of this Agreement to and including the Closing Date, IXC shall
provide to Network all relevant information related thereto.
Section 6.14 RESERVED.
Section 6.15 Issuance of Shares. Upon issuance of shares of the IXC
Common in the Merger as Merger Consideration, the IXC Shares will be duly
authorized, validly issued, fully paid and nonassessable, free and clear of any
lien, security interest or other encumbrance of any kind and free of any claim,
except for the rights of IXC pursuant to this Agreement.
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 Applications to Commissions. As soon as practicable after
execution of this Agreement, Network and IXC shall join in applications to the
Commissions requesting the approvals and authorizations of each such Commission
of the transactions contemplated by this Agreement. Each party shall pay its own
fees of the Commissions charged in connection with or incidental to the filing
and processing of the aforesaid applications, as well as all other fees and
expenses incurred in connection therewith. Each of the parties to this Agreement
agrees that if IXC, using its reasonable judgment, determines that an
application to any other state or federal agency for its approval or
authorization of the transactions contemplated herein is required, then
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IXC shall file such application and Network shall join in such application with
IXC and otherwise act in accordance with the provisions of this Section 7.1 with
respect to any such application.
Section 7.2 Joint Proxy Statement and Registration Statement.
(a) IXC and Network will prepare and file with the SEC as soon as
reasonably practicable after the date hereof the Registration Statement and
the Proxy Statement (together, the "Joint Proxy/Registration Statement").
For the avoidance of doubt, IXC shall, pursuant to the Registration
Statement (and post-effective amendments thereto prepared on such form or
forms as IXC may determine), register under the Securities Act the Share
Consideration and either the issuance of IXC Common upon exercise of a New
Warrant or the resale of IXC Common issued upon exercise of a New Warrant.
The parties hereto shall use reasonable efforts to (i) cause the
Registration Statement to be declared effective under the Securities Act as
promptly as practicable after filing and (ii) cause the Share Consideration
and either the shares of IXC Common issued upon exercise of the New
Warrants or the resale of shares of IXC Common issued upon exercise of the
New Warrants to be registered (or obtain an exemption from registration)
under the applicable state "blue sky" or securities laws; provided,
however, that no party shall be required to register or qualify as a
foreign corporation or take other action which would subject it to service
of process in any jurisdiction where IXC or the Surviving Corporation, as
the case may be, will not otherwise be, following the Merger, so subject."
Each of the parties hereto shall furnish all information concerning itself
which is required or customary for inclusion in the Joint
Proxy/Registration Statement. The parties shall use reasonable efforts to
cause the shares of IXC Common issuable in the Merger to be approved for
listing on the Nasdaq National Market ("NMS") upon official notice of
issuance. The information provided by any party hereto for use in the Joint
Proxy/Registration Statement shall be true and correct in all material
respects without omission of any material fact which is required to make
such information not false or misleading. No representation, covenant or
agreement is made by any party hereto with respect to information supplied
by any other party for inclusion in the Joint Proxy/Registration Statement.
(b) IXC shall use its best efforts to cause to be delivered to Network
letters of Ernst & Young LLP, dated a date within two business days before
the date of the Joint Proxy/Registration Statement, and addressed to
Network, in form and substance reasonably satisfactory to Network and
customary in scope and substance for "cold comfort" letters delivered by
independent public accountants in connection with registration statements
on Form S-4.
(c) Network shall use its best efforts to cause to be delivered to IXC
letters of Arthur Andersen & Co., dated a date within two business days
before the date of the Joint Proxy/Registration Statement, and addressed to
IXC, in form and substance reasonably satisfactory to IXC and customary in
scope and substance for "cold comfort" letters delivered by independent
public accountants in connection with registration statements on Form S-4.
(d) The Network Board of Directors shall recommend that the
Shareholders vote to adopt and approve the Merger on the terms and subject
to the conditions of this Agreement, and the Joint Proxy/Registration
Statement shall contain such recommendation.
Section 7.3 HSR Filings. IXC and Network each shall file or cause to be
filed with the FTC and the DOJ any notifications required to be filed by their
respective "ultimate parent" companies under the HSR Act and the rules and
regulations promulgated thereunder with respect to the transactions contemplated
hereby. The parties will use all commercially reasonable efforts to make such
filings promptly and to respond on a timely basis to any requests for additional
information made by either of such agencies, provided, however, that nothing in
this Agreement shall obligate any party (or any Affiliate) to sell or otherwise
dispose of or hold separate any substantial business asset or product line in
order to obtain any required governmental approval.
Section 7.4 Expenses. Except as otherwise provided herein, irrespective
of whether the transactions contemplated by this Agreement are consummated, all
costs and expenses incurred by Network shall be paid by Network and all costs
and expenses incurred by IXC and Acquisition shall be paid by IXC.
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ARTICLE VIII
CONDITIONS TO CLOSING
Section 8.1 IXC , IXC Long Distance and Acquisition Conditions to
Closing. The obligations of IXC, IXC Long Distance and Acquisition hereunder
are subject to the satisfaction or waiver of each of the following conditions at
or before Closing:
(a) All representations and warranties of Network in this Agreement
and any certificate or Schedule to be delivered pursuant hereto, which
Schedule shall not be amended by Network without IXC's prior written
consent, shall be true and accurate in all material respects on the date
hereof and on and as of the Closing, and Network shall have delivered to
IXC a certificate to such effect dated as of the Closing Date;
(b) There shall be no Network Material Adverse Effect from the date
hereof through the Closing Date and the average monthly revenues of
Network, as determined in accordance with Schedule 8.1(b), shall be at
least $8,400,000;
(c) Network shall perform and comply in all material respects with all
of its obligations under this Agreement which are to be performed or
complied with by it prior to the Closing Date;
(d) Network shall have delivered to IXC and Acquisition all of the
documents required to be delivered by them pursuant to this Agreement.
(e) IXC and IXC's counsel shall have approved the form and substance
of the documents delivered by Network pursuant to this Agreement, which
approval shall not be unreasonably withheld or delayed;
(f) There shall be no claims, actions or suits pending or threatened
against Network or a Subsidiary that would restrict or prohibit Network
from consummating the transactions contemplated herein;
(g) The Network Shareholder Approval shall have been obtained;
(h) Prior to the Closing, there shall not have occurred any damage,
destruction or loss in respect of Network or its assets exceeding $500,000
not covered by insurance;
(i) Network shall have delivered to IXC a Certificate of Good Standing
(or its equivalent) of Network and each of the Subsidiaries issued by the
Secretary of State of their States of incorporation as of a date no more
than 20 days prior to the Closing Date;
(j) Network shall have furnished to IXC a Certificate of the Secretary
of Network, certified as of the Closing Date, as to the incumbency and
signatures of the officers of Network executing this Agreement and any
Transaction Documents to which Network is a party;
(k) Neither Network nor any of the Subsidiaries shall have suffered or
incurred the loss, termination, suspension or adverse modification to, or
been threatened with any such loss, termination, suspension or adverse
modification to, any certificate, license or permit necessary or required
for Network or such Subsidiary to continue, both before and after the
Effective Time, to operate and conduct its business in the manner, and in
the geographic areas, currently conducted by it as of the date of this
Agreement, except such as would not have Network Material Adverse Effect;
(l) All Commission approvals and material regulatory approvals,
including all licenses, permits, authorizations, consents and other
approvals of and filings with any governmental or regulatory agency
required to be obtained or made in connection with the consummation of the
transactions contemplated by this Agreement shall have been obtained or
made by or on behalf of the parties; and
(m) All material consents of other third-parties required to have been
obtained in connection with the consummation of the transactions
contemplated by this Agreement shall have been obtained by or on behalf of
Network.
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Section 8.2 Network Conditions to Closing. The obligations of Network
hereunder are subject to the satisfaction or waiver of each of the following
conditions at or before Closing:
(a) All representations and warranties of IXC and Acquisition in this
Agreement and any certificate or Schedule to be delivered pursuant hereto,
which Schedule shall not be amended by IXC without Network's prior written
consent, shall be true and accurate in all material respects on the date
hereof and on and as of the Closing, and IXC and Acquisition shall have
delivered to the Network a certificate to such effect dated as of the
Closing Date;
(b) There shall be no IXC Material Adverse Effect from the date hereof
through the Closing Date;
(c) IXC and Acquisition shall perform and comply in all material
respects with all of their obligations under this Agreement which are to be
performed or complied with by IXC or Acquisition prior to or on the Closing
Date;
(d) IXC and Acquisition shall have delivered to Network all of the
documents required to be delivered by them by this Agreement;
(e) Network and Network's counsel shall have approved the form and
substance of the documents delivered by IXC and Acquisition pursuant to
this Agreement, which approval shall not be unreasonably withheld or
delayed;
(f) There shall be no claims, actions or suits pending or threatened
against IXC, IXC Long Distance or Acquisition that would restrict or
prohibit IXC, IXC Long Distance or Acquisition from consummating the
transactions contemplated herein;
(g) The Network Shareholder Approval shall have been obtained;
(h) IXC shall have delivered to Network Certificates of Good standing
(or their equivalent) issued by the Delaware Secretary of State for IXC,
IXC Long Distance and Acquisition, as of a date not more than 20 days prior
to Closing Date; and
(i) IXC shall have furnished to Network a Certificate of the Secretary
of IXC, IXC Long Distance and Acquisition certified as of the Closing Date,
as to the incumbency and signatures of the officers of IXC, IXC Long
Distance and Acquisition executing Agreement and any Transaction Document
to which they are a party.
Section 8.3 Mutual Conditions to Obligations of Network and IXC. The
obligations of Network and IXC hereunder are subject to:
(a) The receipt of Final Orders (as defined below) of the Commissions
approving and authorizing the transactions contemplated herein which Final
Orders are not to be unduly burdensome. For the purposes of this Agreement,
a "Final Order" shall mean an order of any Commission which is not subject
to rehearing by such Commission or to judicial review.
(b) The Registration Statement, at or before the Closing Date, having
become effective in accordance with the Securities Act and the nonexistence
of a stop order suspending such effectiveness at such time.
(c) The receipt by each of a letter from its independent public
accountants, dated as of the Closing Date, in form and substance reasonably
satisfactory, in each case, to Network and IXC, stating that the
transactions to be effected pursuant to this Agreement will qualify as a
pooling of interests transaction under GAAP and applicable SEC regulations.
(d) The shares of IXC Common issuable pursuant to the Merger having
been approved for listing on the NMS upon official notice of issuance.
(e) Any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
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ARTICLE IX
MISCELLANEOUS
Section 9.1 Survival. The several representations and warranties of the
parties contained in or made pursuant to this Agreement and the several
covenants and agreements of the parties contained in this Agreement shall expire
on the Closing Date and, except for the provisions of Sections 4.10, 6.10, 7.4,
9.2, 9.3, 9.4, 9.7, 9.8, 9.9, 9.10, 9.12, and 9.16, inclusive, of this
Agreement, the several covenants and agreements of the parties contained in this
Agreement shall expire on the termination or abandonment of this Agreement.
Section 9.2 Termination of Agreement; Termination Fee.
(a) The transactions contemplated hereby may be abandoned, and this
Agreement terminated, upon notice, at any time after the date of this
Agreement, but not later than the Closing, by:
(i) The mutual consent of the Boards of Directors of Network and
IXC;
(ii) IXC , if Network is in willful breach of any of its
representations, warranties, covenants or agreements under this
Agreement in any material respect and such breach has not been cured
within 20 business days of IXC's notice to Network of such breach;
(iii) Network, if IXC, IXC Long Distance or Acquisition is in
willful breach of any of its representations, warranties, covenants or
agreements under this Agreement in any material respect and such breach
has not been cured within 20 business days of Network's notice to IXC of
such breach;
(iv) Either Network or IXC, if the consummation of the Merger
contemplated herein has been enjoined and such injunction is not subject
to appeal or if a Final Order which contains an unduly burdensome term,
condition or provision is issued and no appeal is taken by either party
therefrom;
(v) Either Network or IXC, by written notice to the other, if the
Network Shareholders Approval shall not have been obtained at the
Network Meeting, including any adjournments thereof;
(vi) The Board of Directors of Network or IXC if the Merger
contemplated herein shall not have become effective on or before
December 31, 1998; provided, however, that the right to terminate this
Agreement under this Section 9.2(a)(vi) should not be available to any
party whose failure to fulfill any obligation under this Agreement has
been the cause of, or resulted in, the failure of the Effective Time to
occur on or before such date; and provided further, if any condition to
this Agreement shall fail to be satisfied by reason or the existence of
an injunction or order of any court or governmental or regulatory body,
then at the request of either party the deadline date referred to above
shall be extended for a reasonable period of time, not in excess of
sixty (60) days, to permit the parties to have such injunction vacated
or order reversed;
(vii) RESERVED; or
(viii) Network if it received a bona fide, fully funded offer to
acquire all of its outstanding common stock or all or substantially all
of its assets, which, after taking into account the payment to be made
to IXC under subsection (b) below, would in the opinion of the Network
Board of Directors result in a value (at the time of the closing of such
acquisition) to the Shareholders greater than $142,000,000.
(b) Upon termination of this Agreement by Network pursuant to
subsection (viii) of Section 9.2(a), Network agrees to pay IXC a fee in
immediately available funds equal to $7,500,000.
(c) Each of the parties acknowledge that the agreement contained in
this Section 9.2 is an integral part of the transactions contemplated by
this Agreement and that without such agreement, neither party would enter
into this Agreement; accordingly, if either party fails to pay promptly the
amount due pursuant to this Section 9.2, such party shall also pay the
other party's costs and expenses (including reasonable attorney's fees)
incurred in connection with collecting such amount, together with interest
on the amounts payable at the rate of 10% percent per annum.
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Section 9.3 Effect of Termination or Abandonment. If for any reason the
transactions contemplated hereby are terminated or abandoned pursuant to Section
9.2 hereof, all written schedules and other information and all copies of
material from the books and records of any party heretofore furnished to any
other party shall be returned promptly to the party furnishing the same and, in
such event, the provisions of this Agreement relating to confidential
information shall survive the termination of this Agreement and the abandonment
of the reorganization.
Section 9.4 Liabilities. In the event this Agreement is terminated and
the contemplated transactions are abandoned pursuant to Section 9.2 hereof, no
party hereto shall have any duty or liability to the other either for costs,
expenses, loss of anticipated profits or otherwise, except with respect to any
liability or damages incurred or suffered by a party as a result of the breach
by the other party of any of its representations, warranties, covenants or
agreements set forth in this Agreement, and except for any termination fee
payable under Section 9.2.
Section 9.5 Assignment. This Agreement shall not be assigned any party
without the other parties' prior written consent; provided, however, this
Agreement may be assigned by operation of law without consent of the other
parties in the event of a Merger, consolidation other change of control of a
party. Notwithstanding the foregoing, this Agreement and any Transaction
Document may be assigned without prior written notice or consent to any
Affiliate of IXC or entity which merges with or into IXC or acquires
substantially all the assets of IXC, so long as the consideration to be received
by the Shareholders shall not be different from that contemplated hereunder.
Section 9.6 Further Assurances. Subject to the terms and conditions of
this Agreement, from time to time prior to, at and after the Closing, Network
and IXC will and will cause their respective directors and officers to execute
all such instruments and take all such actions as IXC or Network, being advised
by counsel, shall reasonably request in connection with the carrying out and
effectuating of the intent and purpose hereof and all transactions and things
contemplated by this Agreement including, without limitation, the execution and
delivery of any and all confirmatory and other instruments in addition to those
to be delivered on the Closing, and any and all actions which may reasonably be
necessary or desirable to complete the transactions contemplated hereby.
Section 9.7 Notices. All notices, demands and other communications which
may or are required to be given hereunder or with respect hereto shall be in
writing, shall be given either by personal delivery or by nationally recognized
overnight courier or by telecopier, and shall be deemed to have been given or
made when personally delivered, one business day after delivered to a nationally
recognized overnight courier, postage prepaid and receipt requested, or one
business day after transmission by telecopier, receipt confirmed, addressed as
follows:
(a) If to IXC, IXC Long Distance or Acquisition, to:
IXC Communications, Inc.
1122 Capital of Texas Highway South
Austin, Texas 78746
Fax: (512) 328-1834
Attention: Jeffrey C. Smith, Esq.
with a copy to:
Riordan & McKinzie
695 Town Center Drive, Suite 1500
Costa Mesa, California 92626
Fax: (714) 549-3244
Attention: Michael P. Whalen, Esq.
or to such other address as IXC, IXC Long Distance or Acquisition, may from
time to time designate by notice to Network; and
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(b) If to Network, to:
Network Long Distance, Inc.
7000 Squibb, Suite 310
Mission, Kansas 66202
Fax: (913) 262-2730
Attention: Timothy A. Barton
with a copy to:
Blackwell Sanders Matheny Weary Lombardi LLP
2300 Main, Suite 1100
Kansas City, Missouri 64108
Fax: (816) 983-8080
Attention: James M. Ash, Esq.
or to such other address as Network may from time to time designate by
notice to IXC.
Section 9.8 Entire Agreement. This Agreement, together with all of the
Transaction Documents, constitutes the entire agreement between the parties and
supersedes and cancels any and all prior agreements between the parties relating
to the subject matter hereof.
Section 9.9 Rules of Construction. This Agreement shall be construed as
follows:
(a) Except as otherwise defined in this Agreement, words shall be
given their commonly understood meaning in agreements of this nature,
except that accounting terms shall be given the meaning ascribed thereto by
generally accepted accounting principles and interpretations;
(b) This Agreement has been negotiated on behalf of the parties hereto
with the advice of counsel and no general rule of contract construction
requiring an agreement to be more stringently construed against the drafter
or proponent of any particular provision shall be applied in construction
of this Agreement;
(c) The captions of Articles and Sections hereof are for convenience
only and shall not control or affect the meaning or construction of any of
the provisions of this Agreement;
(d) Throughout this Agreement, the masculine, feminine or neuter
genders shall be deemed to include the masculine, feminine and neuter, and
the singular and plural, and vice versa; and
(e) All of the exhibits and schedules attached hereto are incorporated
herein and made a part of this Agreement by reference thereto.
Section 9.10 Law Governing. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the state of Delaware, but
not including the choice of law rules thereof.
Section 9.11 Waiver of Provisions. The terms, covenants, representations,
warranties or conditions of this Agreement may be waived only by a written
instrument executed by the party waiving compliance. Such waiver shall be
authorized solely by the majority vote of the Board of Directors or, to the
extent permitted by applicable law, the Executive Committee of the party waiving
compliance or by officers authorized by such Board or Committee. The failure of
any party at any time or times to require performance of any provision hereof
shall in no manner affect the right at a later time to enforce the same. No
waiver by any party of any condition, or the breach of any provision, term,
covenant, representation or warranty contained in this Agreement, whether by
conduct or otherwise, in any one or more instances shall be deemed to be or
construed as a further or continuing waiver of any such condition or of the
breach of any other provision, term, covenant, representation or warranty of
this Agreement. The representations and warranties of Network and IXC contained
in this Agreement or in any certificate or other document delivered pursuant
hereto or in connection herewith prior to or at the Closing shall not be deemed
waived or otherwise amended or modified by any investigation made by any party
hereto.
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Section 9.12 Successors. All of the terms and conditions of this
Agreement shall be binding upon and inure to the benefit of the successors and
permitted assigns of IXC and Network. For the purpose of this Agreement, the
term "successors" shall include but not be limited to heirs, legatees, and
devisees.
Section 9.13 Counterparts. This Agreement may be executed in several
counterparts, and all so executed shall constitute one agreement, binding on all
of the parties hereto, notwithstanding that all parties are not signatory to the
original or the same counterpart.
Section 9.14 Public Statements or Releases. Network and IXC each agree
not to make, issue or release any public announcement, statement or
acknowledgment of the existence of, or reveal the terms, conditions and status
of, the transactions provided for in this Agreement, without first attempting to
the extent reasonably possible (and in all cases with regard to written matters)
to clear such announcement, statement, acknowledgment or revelation with the
other. Each agrees that it will not unreasonably withhold any such consent or
clearance from the other.
Section 9.15 Severability. In the event that any provision in this
Agreement be held invalid or unenforceable, by a court of competent
jurisdiction, such provision shall be severable from, and such invalidity or
unenforceability shall not be construed to have any effect on, the remaining
provisions of this Agreement, unless such provision goes to the essence of this
Agreement in which case the entire Agreement may be declared invalid and not
binding upon any of the parties.
Section 9.16 No Third Party Beneficiaries. This Agreement and the
obligations of parties hereunder shall operate exclusively for the benefit of
the parties executing this Agreement and their permitted successors and assigns
and not for the benefit of any other person or entity, including, without
limitation, any other shareholder, creditor, employee or former employee of
either Network or IXC and no such person or entity shall have any rights or
remedies hereunder.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day, month and year first above written.
IXC:
IXC COMMUNICATIONS, INC.
By: /s/ Jeffrey C. Smith
Name: Jeffrey C. Smith
Title: Senior Vice President
IXC LONG DISTANCE:
IXC LONG DISTANCE, INC.
By: /s/ Jeffrey C. Smith
Name: Jeffrey C. Smith
Title: Senior Vice President
ACQUISITION:
PISCES ACQUISITION CORP.
By: /s/ Jeffrey C. Smith
Name: Jeffrey C. Smith
Title: Senior Vice President
NETWORK:
NETWORK LONG DISTANCE, INC.
By: /s/ Tim A. Barton
Name: Tim A. Barton
Title: President
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LIST OF EXHIBITS AND SCHEDULES
EXHIBITS
<TABLE>
<S> <C>
3.1 Network Certificate of Incorporation and Bylaws
5.1 IXC and Acquisition Certificates of Incorporation and Bylaws
SCHEDULES
Network Schedules:
3.2 Network Subsidiaries, Other Interests
3.4 Options, Warrants, Etc.
3.6 Consents and Approvals
3.8 Material Adverse Changes
3.9 Undisclosed Liabilities
3.11(a) Employment Contracts
3.11(b) Employee Salary and Benefit Information
3.11(c) Employee Severance Information
3.11(d) Benefit Plans
3.11(e) Title IV Plans
3.11(g) Multi-Employer Plans
3.11(j) Non-Terminable Benefit Plans
3.12 Litigation
3.13 Exceptions to Compliance with Laws, Tariffs
3.14 Tax Filings and Audits
3.15 Bank Accounts
3.16 Other Contracts, Agreements, Leases, Etc.
3.17 Owned Real Property and Liens and Encumbrances
3.21 Conflicts of Interest
3.22 Insurance
4.1 Network Expenses Outside Ordinary Course
4.2 Permitted Actions
8.1(b) Revenue Test
IXC Schedules:
5.3 Options, Warrants, Etc.
5.5 Consents and Approvals
5.7 Material Adverse Changes
5.8 Undisclosed Liabilities
5.10(a) Benefit Plans
5.10(b) Non-Terminable Benefit Plans
5.11 Litigation
5.12 Exceptions to Compliance with Laws, Tariffs
5.13 Tax Filings and Audits
6.2 Permitted Actions
</TABLE>
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ANNEX C
MORGAN STANLEY
MORGAN STANLEY & CO.
INCORPORATED
1585 BROADWAY
NEW YORK, NEW YORK 10036
(212) 761-4000
December 19, 1997
Board of Directors
Network Long Distance, Inc.
11817 Canon Boulevard
Suite 600
Newport News, VA 23606
Gentlemen:
We understand that Network Long Distance, Inc. ("Network"), IXC
Communications, Inc. ("IXC"), IXC Long Distance, Inc., a wholly-owned subsidiary
of IXC ("IXC Long Distance"), and Pisces Acquisition Corp., a wholly-owned
subsidiary of IXC ("Pisces"), have entered into a Stock Acquisition Agreement
and Plan of Merger dated as of December 19, 1997 (the "Merger Agreement") which
provides, among other things, for the merger (the "Merger") of Pisces with and
into Network. Pursuant to the Merger, Network will become a wholly-owned
subsidiary of IXC and each outstanding share of common stock, par value $0.0001
per share, (the "Network Common Stock") of Network, other than shares held in
the treasury or any shares held by IXC or any affiliate of IXC, will be
converted into the right to receive 0.2998 shares (the "Exchange Ratio") of
common stock, par value $0.01 per share, of IXC (the "IXC Common Stock"). The
terms and conditions of the Merger are more fully set forth in the Merger
Agreement.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Merger Agreement is fair from a financial point of view to the holder of
shares of Network Common Stock.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of Network and IXC, respectively;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning Network prepared by the management
of Network;
(iii) analyzed certain financial projections prepared by the
management of Network;
(iv) discussed the past and current operations and financial condition
and the prospects of Network with senior executives of Network;
(v) discussed the past and current operations and financial condition
and the prospects of IXC with senior executives of IXC;
(vi) reviewed the reported prices and trading activity for the Network
Common Stock and the IXC Common Stock;
(vii) compared the financial performance of Network and IXC and the
prices and trading activity of the Network Common Stock and the IXC Common
Stock with that of certain other comparable publicly-traded companies and
their securities;
(viii) reviewed the financial terms, to the extent publicly available,
of certain comparable acquisition transactions;
C-1
<PAGE> 161
(ix) discussed with senior executives of Network and IXC their views
of the strategic, financial and operational benefits anticipated from the
Merger;
(x) participated in discussions and negotiations among representatives
of Network, IXC and certain other parties and their financial and legal
advisors;
(xi) reviewed the Merger Agreement; and
(xii) performed such other analysis as we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, we have assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of
Network. We have also assumed that the Merger will be consummated in accordance
with the terms set forth in the Merger Agreement, including, among other things,
that the Merger will be treated as a "pooling-of-interests" business combination
in accordance with U.S. Generally Accepted Accounting Principles and will be
treated as a tax-free reorganization and/or exchange, each pursuant to the
Internal Revenue Code of 1986. We have not made any independent valuation or
appraisal of the assets or liabilities of Network, nor have we been furnished
with any such appraisals. Our opinion is necessarily based on economic, market
and other conditions as in effect on, and the information made available to us
as of, the date hereof.
We have acted as financial advisor to the Board of Directors of Network in
connection with this transaction and will receive a fee for our services. In the
past, Morgan Stanley & Co. Incorporated and its affiliates have provided
financial advisory and financing services for IXC and its affiliates and have
received fees for the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of Network, except that this opinion may be included in its entirety
in any filing made by Network with the Securities and Exchange Commission with
respect to the Merger. In addition, we express no opinion or recommendation as
to how the holders of Network Common Stock should vote at the stockholders'
meeting held in connection with the Merger.
Based on and subject to the foregoing, we are of the opinion on the date
hereof that the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to the holders of shares of Network Common Stock.
Very truly yours,
MORGAN STANLEY & CO.
INCORPORATED
By: /s/ SCOTT W. MATLOCK
------------------------------------
Scott W. Matlock
Principal
C-2
<PAGE> 162
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
IXC Communications, Inc. is a Delaware corporation ("IXC Communications").
Article VII, Section 8 of IXC Communications' Bylaws provides that IXC
Communications shall indemnify its officers, directors, employees and agents to
the fullest extent permitted by the Delaware General Corporation Law ("DGCL").
Section 145 of the DGCL provides that a Delaware corporation has the power to
indemnify its officers and directors in certain circumstances.
Subsection (a) of Section 145 of the DGCL empowers a corporation to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation),
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding provided that such director or officer acted in good faith in
a manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, provided that such director or officer had no cause to believe his
or her conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
director or officer, or former director or officer, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person acted in any of the capacities set forth
above, against expenses actually and reasonably incurred in connection with the
defense or settlement of such action or suit provided that such director or
officer acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the corporation, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such director or officer shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery or
the court in which such action was brought shall determine that despite the
adjudication of liability, but in view of all the circumstances of the case,
such director or officer is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsections (a) and (b) or in the defense of any claim, issue or
matter therein, he or she shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him or her in connection
therewith; that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation shall have power to purchase and maintain insurance on
behalf of a director or officer of the corporation against any liability
asserted against him or her or incurred by him or her in any such capacity or
arising out of his or her status as such whether or not the corporation would
have the power to indemnify him or her against such liabilities under Section
145.
Article Tenth of the Restated Certificate of Incorporation of IXC
Communications, Inc. currently provides that each director shall not be
personally liable to IXC Communications or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability: (i) for any
breach of the director's duty of loyalty to IXC Communications, Inc. or its
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) for unlawful payment
of dividends or unlawful stock repurchases or redemptions as provided under
Section 174 of the DGCL; or (iv) for any transaction from which the director
derived an improper personal benefit.
II-1
<PAGE> 163
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1 Stock Acquisition Agreement and Plan of Merger, as amended,
by and among IXC Communications, Inc., IXC Long Distance,
Inc., Pisces Acquisition Corp. and Network Long Distance,
Inc. dated as of December 19, 1997 (incorporated by
reference from Annex B to the Proxy Statement/Prospectus
constituting Part I of this Registration Statement).
3.1+ Restated Certificate of Incorporation of IXC Communications,
Inc., as amended.
3.2 Bylaws of IXC Communications, Inc., as amended (incorporated
by reference to Exhibit 3.2 of IXC Communication, Inc.
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 filed with the Commission on November 14,
1997).
4.1 Indenture dated as of October 5, 1995 by and among IXC
Communications, Inc., on its behalf and as
successor-in-interest to I-Link Holdings, Inc. and IXC
Carrier Group, Inc., each of IXC Carrier, Inc., on its
behalf and as successor-in-interest to I-Link, Inc., CTI
Investments, Inc., Texas Microwave Inc. and WTM Microwave
Inc., Atlantic States Microwave Transmission Company,
Central States Microwave Transmission Company, Telcom
Engineering, Inc., on its behalf and as
successor-in-interest to SWTT Company and Microwave Network,
Inc., Tower Communication Systems Corp., West Texas
Microwave Company, Western States Microwave Transmission
Company, Rio Grande Transmission, Inc., IXC Long Distance,
Inc., Link Net International, Inc. (collectively, the
"Guarantors"), and IBJ Schroder Bank & Trust Company, as
Trustee, with respect to the 12 1/2% Series A and Series B
Senior Notes due 2005 (incorporated by reference to Exhibit
4.1 of IXC Communications, Inc.'s and each of the
Guarantor's Registration Statement on Form S-4 filed with
the Commission on April 1, 1996 (File No. 333-2936) (the
"S-4")).
4.2 Form of 12 1/2% Series A Senior Notes due 2005 (incorporated
by reference to Exhibit 4.6 of the S-4).
4.3 Form of 12 1/2% Series B Senior Notes due 2005 and
Subsidiary Guarantee (incorporated by reference to Exhibit
4.8 of the Amendment No. 1 to IXC Communications, Inc.
Registration Statement on Form S-1 filed with the Commission
on June 13, 1996 (File No. 333-4061)(the "S-1 Amendment")).
4.4 Amendment No. 1 to Indenture and Subsidiary Guarantee dated
as of June 4, 1996 by and among IXC Communications, Inc.,
the Guarantors and the Trustee (incorporated by reference to
Exhibit 4.11 of the S-1 Amendment).
4.5 Purchase Agreement dated as of March 25, 1997 by and among
IXC Communications, Inc., Credit Suisse First Boston
Corporation ("CS First Boston") and Dillon Read & Co. Inc.
("Dillon Read") (incorporated by reference to Exhibit 4.12
of IXC Communications, Inc. Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997 filed with the
Commission on May 15, 1997 (the "March 31, 1997 10-Q")).
4.6 Registration Rights Agreement dated as of March 25, 1997 by
and among IXC Communications, Inc., CS First Boston and
Dillon Read (incorporated by reference to Exhibit 4.13 of
the March 31, 1997 10-Q).
4.7 Amendment to Registration Rights Agreement dated as of March
25, 1997 by and between IXC Communications, Inc. and
Trustees of General Electric Pension Trust (incorporated by
reference to Exhibit 4.14 of the March 31, 1997 10-Q).
4.8 Registration Rights Agreement dated as of July 8, 1997 among
IXC Communications, Inc. and each of William G. Rodi, Gordon
Hutchins, Jr. and William F. Linsmeier (incorporated by
reference to Exhibit 4.15 of IXC Communications, Inc.
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997, as filed with the Commission on August 6, 1997 (the
"June 30, 1997 10-Q")).
4.9 Registration Rights Agreement dated as of July 8, 1997 among
IXC Communications, Inc. and each of William G. Rodi, Gordon
Hutchins, Jr. and William F. Linsmeier (incorporated by
reference to Exhibit 4.16 of the June 30, 1997 10-Q).
</TABLE>
II-2
<PAGE> 164
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
4.10 Purchase Agreement dated as of August 14, 1997 by and among
IXC Communications, Inc. and the initial purchasers named in
Schedule A thereto (incorporated by reference to Exhibit 4.1
of IXC Communications, Inc. Current Report on Form 8-K dated
August 20, 1997 and filed with the Commission on August 28,
1997 (the "August 1997 8-K")).
4.11 Indenture dated as of August 15, 1997 between IXC
Communications, Inc. and The Bank of New York (incorporated
by reference to Exhibit 4.2 of the August 1997 8-K).
4.12 First Supplemental Indenture dated as of October 23, 1997
among IXC Communications, Inc., the Guarantors, IXC
International, Inc. and IBJ Schroder Bank & Trust Company
(incorporated by reference to Exhibit 4.13 of IXC
Communications, Inc. Annual Report on Form 10-K for the year
ended December 31, 1997 filed with the Commission on March
16, 1998, (the "1997 10-K")).
4.13 Second Supplemental Indenture dated as of December 22, 1997
among IXC Communications, Inc., the Guarantors, IXC Internet
Services, Inc., IXC International Services, Inc. and IBJ
Schroder Bank & Trust Company (incorporated by reference to
Exhibit 4.14 of the 1997 10-K).
4.14 Third Supplemental Indenture dated as of January 6, 1998
among IXC Communications, Inc., the Guarantors, IXC Internet
Services, Inc., IXC International Services, Inc. and IBJ
Schroder Bank & Trust Company (incorporated by reference to
Exhibit 4.15 of the 1997 10-K).
4.15 Purchase Agreement dated as of March 25, 1998 among IXC
Communications, Inc., Goldman, Sachs & Co. ("Goldman"), CS
First Boston, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill") and Morgan Stanley & Co.
Incorporated ("Morgan Stanley") (incorporated by reference
to Exhibit 4.1 IXC Communications, Inc.'s Current Report on
Form 8-K dated March 30, 1998 and filed with the Commission
on April 7, 1998 (the "April 1998 8-K")).
4.16 Registration Rights Agreement dated as of March 30, 1998
among IXC Communications, Inc., Goldman, CS First Boston,
Merrill and Morgan Stanley (incorporated by reference to
Exhibit 4.2 of the April 1998 8-K).
5.1+ Opinion of Riordan & McKinzie, a Professional Law
Corporation regarding the validity of the issuance of the
securities registered hereunder.
8.1+ Opinion of Blackwell Sanders Matheny Weary & Lombardi LLP
regarding the tax consequences of the Merger (as defined in
the Proxy Statement/Prospectus constituting Part I of this
Registration Statement).
23.1+ Consent of Ernst & Young LLP for IXC.
23.2+ Consent of Arthur Andersen LLP for NLD.
23.3+ Consent of KPMG Peat Marwick LLP for NLD.
23.4+ Consent of Deloitte & Touche LLP for NLD.
23.5+ Consent of Yount, Hyde & Barbour, P.C. for NLD.
23.6+ Consent of Mayer Hoffman McCann L.C. for NLD.
23.7+ Consent of Riordan & McKinzie (included in the opinion filed
as Exhibit 5.1).
23.8+ Consent of Blackwell Sanders Matheny Weary & Lombardi LLP
(included in the opinion filed as Exhibit 8.1).
23.9+ Consent of Morgan Stanley & Co. Incorporated.
24.1* Power of Attorney.
99.1+ Form of Proxy Card.
99.2 Opinion of Morgan Stanley & Co. Incorporated (incorporated
by reference from Annex C to the Proxy Statement/Prospectus
constituting Part I of this Registration Statement).
</TABLE>
- ---------------
+ Filed herewith
* Previously filed
(b) Financial Statement Schedules
Not Applicable
II-3
<PAGE> 165
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (a) to
include any prospectus required by Section 10(a)(3) of the Securities Act;
(b) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; (c) to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such posteffective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form.
(d) That every prospectus (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
Registration Statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(e) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-4
<PAGE> 166
(g) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
II-5
<PAGE> 167
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Austin,
State of Texas, on April 14, 1998.
IXC Communications, Inc.,
a Delaware corporation
By: /s/ JAMES F. GUTHRIE
------------------------------------
James F. Guthrie
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman and Director April 14, 1998
- ---------------------------------------------------
Ralph J. Swett
* President, Chief Executive Officer April 14, 1998
- --------------------------------------------------- and Director (Principal Executive
Benjamin L. Scott Officer)
/s/ JAMES F. GUTHRIE Executive Vice President and Chief April 14, 1998
- --------------------------------------------------- Financial Officer (Principal
James F. Guthrie Financial and Accounting Officer)
* Director April 14, 1998
- ---------------------------------------------------
Richard D. Irwin
* Director April 14, 1998
- ---------------------------------------------------
Wolfe H. Bragin
* Director April 14, 1998
- ---------------------------------------------------
Carl W. McKinzie
* Director April 14, 1998
- ---------------------------------------------------
Phillip L. Williams
* Director April 14, 1998
- ---------------------------------------------------
Joe C. Culp
/s/ JEFFREY C. SMITH April 14, 1998
- ---------------------------------------------------
Jeffrey C. Smith
Attorney-in-fact
</TABLE>
II-6
<PAGE> 168
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
2.1 Stock Acquisition Agreement and Plan of Merger, as amended,
by and among IXC Communications, Inc., IXC Long Distance,
Inc., Pisces Acquisition Corp. and Network Long Distance,
Inc. dated as of December 19, 1997 (incorporated by
reference from Annex B to the Proxy Statement/Prospectus
constituting Part I of this Registration Statement). .......
3.1+ Restated Certificate of Incorporation of IXC Communications,
Inc., as amended. ..........................................
3.2 Bylaws of IXC Communications, Inc., as amended (incorporated
by reference to Exhibit 3.2 of IXC Communication, Inc.
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 filed with the Commission on November 14,
1997). .....................................................
4.1 Indenture dated as of October 5, 1995 by and among IXC
Communications, Inc., on its behalf and as
successor-in-interest to I-Link Holdings, Inc. and IXC
Carrier Group, Inc., each of IXC Carrier, Inc., on its
behalf and as successor-in-interest to I-Link, Inc., CTI
Investments, Inc., Texas Microwave Inc. and WTM Microwave
Inc., Atlantic States Microwave Transmission Company,
Central States Microwave Transmission Company, Telcom
Engineering, Inc., on its behalf and as
successor-in-interest to SWTT Company and Microwave Network,
Inc., Tower Communication Systems Corp., West Texas
Microwave Company, Western States Microwave Transmission
Company, Rio Grande Transmission, Inc., IXC Long Distance,
Inc., Link Net International, Inc. (collectively, the
"Guarantors"), and IBJ Schroder Bank & Trust Company, as
Trustee, with respect to the 12 1/2% Series A and Series B
Senior Notes due 2005 (incorporated by reference to Exhibit
4.1 of IXC Communications, Inc.'s and each of the
Guarantor's Registration Statement on Form S-4 filed with
the Commission on April 1, 1996 (File No. 333-2936) (the
"S-4")). ...................................................
4.2 Form of 12 1/2% Series A Senior Notes due 2005 (incorporated
by reference to Exhibit 4.6 of the S-4). ...................
4.3 Form of 12 1/2% Series B Senior Notes due 2005 and
Subsidiary Guarantee (incorporated by reference to Exhibit
4.8 of the Amendment No. 1 to IXC Communications, Inc.
Registration Statement on Form S-1 filed with the Commission
on June 13, 1996 (File No. 333-4061)(the "S-1
Amendment")). ..............................................
4.4 Amendment No. 1 to Indenture and Subsidiary Guarantee dated
as of June 4, 1996 by and among IXC Communications, Inc.,
the Guarantors and the Trustee (incorporated by reference to
Exhibit 4.11 of the S-1 Amendment). ........................
4.5 Purchase Agreement dated as of March 25, 1997 by and among
IXC Communications, Inc., Credit Suisse First Boston
Corporation ("CS First Boston") and Dillon Read & Co. Inc.
("Dillon Read") (incorporated by reference to Exhibit 4.12
of IXC Communications, Inc. Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997 filed with the
Commission on May 15, 1997 (the "March 31, 1997 10-Q")). ...
4.6 Registration Rights Agreement dated as of March 25, 1997 by
and among IXC Communications, Inc., CS First Boston and
Dillon Read (incorporated by reference to Exhibit 4.13 of
the March 31, 1997 10-Q). ..................................
4.7 Amendment to Registration Rights Agreement dated as of March
25, 1997 by and between IXC Communications, Inc. and
Trustees of General Electric Pension Trust (incorporated by
reference to Exhibit 4.14 of the March 31, 1997 10-Q). .....
</TABLE>
<PAGE> 169
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
4.8 Registration Rights Agreement dated as of July 8, 1997 among
IXC Communications, Inc. and each of William G. Rodi, Gordon
Hutchins, Jr. and William F. Linsmeier (incorporated by
reference to Exhibit 4.15 of IXC Communications, Inc.
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997, as filed with the Commission on August 6, 1997 (the
"June 30, 1997 10-Q")). ....................................
4.9 Registration Rights Agreement dated as of July 8, 1997 among
IXC Communications, Inc. and each of William G. Rodi, Gordon
Hutchins, Jr. and William F. Linsmeier (incorporated by
reference to Exhibit 4.16 of the June 30, 1997 10-Q). ......
4.10 Purchase Agreement dated as of August 14, 1997 by and among
IXC Communications, Inc. and the initial purchasers named in
Schedule A thereto (incorporated by reference to Exhibit 4.1
of IXC Communications, Inc. Current Report on Form 8-K dated
August 20, 1997 and filed with the Commission on August 28,
1997 (the "August 1997 8-K")). .............................
4.11 Indenture dated as of August 15, 1997 between IXC
Communications, Inc. and The Bank of New York (incorporated
by reference to Exhibit 4.2 of the August 1997 8-K). .......
4.12 First Supplemental Indenture dated as of October 23, 1997
among IXC Communications, Inc., the Guarantors, IXC
International, Inc. and IBJ Schroder Bank & Trust Company
(incorporated by reference to Exhibit 4.13 of IXC
Communications, Inc. Annual Report on Form 10-K for the year
ended December 31, 1997 filed with the Commission on March
16, 1998, (the "1997 10-K")). ..............................
4.13 Second Supplemental Indenture dated as of December 22, 1997
among IXC Communications, Inc., the Guarantors, IXC Internet
Services, Inc., IXC International Services, Inc. and IBJ
Schroder Bank & Trust Company (incorporated by reference to
Exhibit 4.14 of the 1997 10-K). ............................
4.14 Third Supplemental Indenture dated as of January 6, 1998
among IXC Communications, Inc., the Guarantors, IXC Internet
Services, Inc., IXC International Services, Inc. and IBJ
Schroder Bank & Trust Company (incorporated by reference to
Exhibit 4.15 of the 1997 10-K). ............................
4.15 Purchase Agreement dated as of March 25, 1998 among IXC
Communications, Inc., Goldman, Sachs & Co. ("Goldman"), CS
First Boston, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill") and Morgan Stanley & Co.
Incorporated ("Morgan Stanley") (incorporated by reference
to Exhibit 4.1 IXC Communications, Inc.'s Current Report on
Form 8-K dated March 30, 1998 and filed with the Commission
on April 7, 1998 (the "April 1998 8-K")).
4.16 Registration Rights Agreement dated as of March 30, 1998
among IXC Communications, Inc., Goldman, CS First Boston,
Merrill and Morgan Stanley (incorporated by reference to
Exhibit 4.2 of the April 1998 8-K).
5.1+ Opinion of Riordan & McKinzie, a Professional Law
Corporation regarding the validity of the issuance of the
securities registered hereunder. ...........................
8.1+ Opinion of Blackwell Sanders Matheny Weary & Lombardi LLP
regarding the tax consequences of the Merger (as defined in
the Proxy Statement/Prospectus constituting Part I of this
Registration Statement). ...................................
23.1+ Consent of Ernst & Young LLP for IXC. ......................
23.2+ Consent of Arthur Andersen LLP for NLD. ....................
23.3+ Consent of KPMG Peat Marwick LLP for NLD. ..................
23.4+ Consent of Deloitte & Touche LLP for NLD. ..................
23.5+ Consent of Yount, Hyde & Barbour, P.C. for NLD. ............
</TABLE>
<PAGE> 170
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
23.6+ Consent of Mayer Hoffman McCann L.C. for NLD. ..............
23.7+ Consent of Riordan & McKinzie (included in the opinion filed
as Exhibit 5.1). ...........................................
23.8+ Consent of Blackwell Sanders Matheny Weary & Lombardi LLP
(included in the opinion filed as Exhibit 8.1).
23.9+ Consent of Morgan Stanley & Co. Incorporated. ..............
24.1* Power of Attorney. .........................................
99.1+ Form of Proxy Card. ........................................
99.2 Opinion of Morgan Stanley & Co. Incorporated (incorporated
by reference from Annex C to the Proxy Statement/Prospectus
constituting Part I of this Registration Statement). .......
</TABLE>
- ---------------
+ Filed herewith
* Previously filed
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE
OF
INCORPORATION, AS AMENDED
Fiber Optic Communications, Inc., a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
1. The name of this corporation is Fiber Optic Communications,
Inc. Fiber Optic Communications, Inc. was originally incorporated under the
same name. The original Certificate of Incorporation of this corporation was
filed with the Secretary of State of the State of Delaware on July 27, 1992.
2. Pursuant to Sections 242 and 245 of the General Corporation
Law of the State of Delaware, this Restated Certificate of Incorporation has
been duly adopted and restates, integrates and further amends the provisions of
the Certificate of Incorporation of this corporation.
3. This Restated Certificate of Incorporation was duly consented
to, and adopted by, the holders of (i) a majority of the outstanding shares of
common stock, par value $.01 per share, of the Corporation and 10% Senior
Series 1 Cumulative Redeemable Preferred Stock, par value $.01 per share, of
this corporation ("Series 1 Preferred Stock"), consenting together as a class
and by (ii) over three-fourths (3/4s) of the outstanding shares of Series 1
Preferred Stock, acting without a meeting by unanimous written consent pursuant
to Section 228 of the General Corporation Law of the State of Delaware.
4. The text of the Restated Certificate of Incorporation as
heretofore amended or supplemented is hereby restated and further amended to
read in its entirety as follows:
FIRST: The name of this corporation (the "Corporation") is "IXC
Communications, Inc."
SECOND: The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle, Delaware 19801. The name of its
registered agent at such address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may now or hereafter be organized under the
General Corporation Law of the State of Delaware as set forth in Title 8 of the
Delaware Code.
FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is one hundred and three million (103,000,000)
consisting of (i) one
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hundred million (100,000,000) shares of common stock, par value $.01 per share,
and (ii) three million (3,000,000) shares of preferred stock, par value $.01
per share. The preferred stock may be issued at any time, and from time to
time, in one or more series pursuant hereto or to a resolution or resolutions
providing for such issue duly adopted by the board of directors (the "Board")
of the Corporation (authority to do so being hereby expressly vested in the
Board), and such resolution or resolutions shall also set forth the voting
powers, full or limited, or none, of each such series of preferred stock and
shall fix the designations, preferences and relative, participating, optional
or other special rights and qualifications, limitations or restrictions of each
such series of preferred stock.
Upon the filing of this Second Amendment to Restated
Certificate of Incorporation which amends Article FOURTH to read as set forth
above, and without any further action on the part of the holders thereof, each
issued and outstanding share of common stock will be reclassified and changed
into 0.8083 shares of common stock.
FIFTH: The business and affairs of the Corporation shall be managed
by and under the direction of the Board. The exact number of directors of the
Corporation shall be fixed by or in the manner provided in the Bylaws of the
Corporation (the "Bylaws").
SIXTH: In furtherance and not in limitation of the powers conferred
by statute, the Board is expressly authorized:
(a) to adopt, repeal, rescind, alter or amend in any respect the
Bylaws, and to confer in the Bylaws powers and authorities upon the directors
of the Corporation in addition to the powers and authorities expressly
conferred upon them by statute;
(b) from time to time to set apart out of any funds or assets of
the Corporation available for dividends an amount or amounts to be reserved as
working capital or for any other lawful purpose and to abolish any reserve so
created and to determine whether any, and, if any, what part, of the surplus of
the Corporation or its net profits applicable to dividends shall be declared in
dividends and paid to its stockholders, and all rights of the holders of stock
of the Corporation in respect of dividends shall be subject to the power of the
Board so to do;
(c) subject to the laws of the State of Delaware, from time to
time to sell, lease or otherwise dispose of any part or parts of the properties
of the Corporation and to cease to conduct the business connected therewith or
again to resume the same, as it may deem best; and
(d) in addition to the powers and authorities hereinbefore and by
the laws of the State of Delaware conferred upon the Board, to execute all such
powers and to do all acts and things as may be exercised or done by the
Corporation; subject, nevertheless, to the express provisions of such laws, of
the Restated Certificate of Incorporation of the Corporation and its Bylaws.
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<PAGE> 3
SEVENTH: Meetings of stockholders of the Corporation may be held
within or without the State of Delaware, as the Bylaws provide. The books
of the Corporation may be kept (subject to any provision of applicable law)
outside the State of Delaware at such place or places as may be designated
from time to time by the Board or in the Bylaws.
EIGHTH: The Corporation reserves the right to adopt, repeal, rescind,
alter or amend in any respect any provision contained in this Restated
Certificate of Incorporation in the manner now or hereafter prescribed by
applicable laws, and all rights conferred on stockholders herein are granted
subject to this reservation.
NINTH: The Corporation is to have perpetual existence.
TENTH: A director of this Corporation shall not be personally liable
to the Corporation or its stockholder for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, as the same exists or hereafter may be amended, or (iv) for
any transaction from which the director derived an improper personal benefit.
If the Delaware General Corporation Law hereafter is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Corporation, in addition to the limitation on
personal liability provided herein, shall be limited to the fullest extent
permitted by the amended Delaware Corporation Law. No amendment to or repeal
of this Article Tenth shall apply to or have any effect on the liability or
alleged liability of any director of the Corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
ELEVENTH:
A. Designation of Two Series of Preferred Stock. There are
hereby provided two series of preferred stock designated and to be known as
"10% Senior Series 1 Cumulative Redeemable Preferred Stock" and "10% Junior
Series 3 Cumulative Redeemable Preferred Stock."
B. Definitions. As used in this Eleventh Article, the following
terms shall have the meanings indicated:
1. "Common Stock" shall mean the common stock, $.01 par
value per share, issued or to be issued by the Corporation.
2. "Original Issue Date" shall mean, with respect to any
share of Series Preferred Stock, the date of the original issuance of such
shares.
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3. "Preferred Stock" shall mean the preferred stock,
$.01 par value per share, issued or to be issued by the Corporation.
4. "Series 1 Preferred Stock" shall mean the 10% Senior
Series 1 Cumulative Redeemable Preferred Stock, $.01 par value per share,
issued or to be issued by the Corporation.
5. "Series 3 Preferred Stock" shall mean the 10% Junior
Series 3 Cumulative Redeemable Preferred Stock, $.01 par value per share,
issued or to be issued by the Corporation.
6. "Series Preferred Stock" shall mean, collectively,
the Series 1 Preferred Stock and the Series 3 Preferred Stock.
C. Number of Shares. The number of shares constituting the
Series 1 Preferred Stock shall be 2,000. The number of shares constituting the
Series 3 Preferred Stock shall be 12,550.
D. Rights, Preferences, Privileges and Restrictions. The voting
powers and relative rights, preferences, restrictions and other mattes relating
to the Series Preferred Stock are as follows:
1. Dividends.
(a) The holders of shares of Series 1 Preferred
Stock then outstanding shall be entitled to receive, prior to the payment of any
dividend on any other Preferred Stock of the Corporation or the Common Stock of
the Corporation, when, as and if declared by the Board, out of funds legally
available for the payment of dividends, cumulative dividends in an annual amount
equal to $100 per share, plus an amount determined by applying a 10% annual
rate, compounded annually, to any accrued but unpaid dividend amount from the
last day of the period when such dividend accrues to the actual date of payment
of such dividend, and no more. The holders of shares of Series 3 Preferred
Stock then outstanding shall be entitled to receive, prior to the payment of any
dividend on any other Preferred Stock of the Corporation (other than the Series
1 Preferred Stock) or the Common Stock of the Corporation, when as and if
declared by the Board, out of funds legally available for the payment of
dividends, cumulative dividends in an annual amount equal to $100 per share,
plus an amount determined by applying a 10% annual rate, compounded annually, to
any accrued but unpaid dividend amount from the last day of the period when such
dividend accrues to the actual date of payment of such dividend, and no more;
provided, however, that (i) the Corporation may pay dividends on the
Corporation's 7-1/4% Junior Convertible Preferred Stock Due 2007 ("Convertible
Preferred Stock") with additional shares of Convertible Preferred Stock and (ii)
the Corporation may pay dividends on the Corporation's 12-1/2% Junior
Exchangeable Preferred Stock Due 2009 (the "Initial Exchangeable Preferred
Stock") and 12-1/2% Series B Junior Exchangeable Preferred Stock Due 2009 (the
"Series B Stock") with additional shares of Initial Exchangeable Preferred Stock
and Series B Stock, respectively. Such dividends on the outstanding shares of
Series Preferred Stock shall be payable on such date as the Board may from time
to time determine (each such date being a "dividend payment date"). The Board
may fix a record date for the determination of holders of shares of Series
Preferred Stock entitled to receive payment of a dividend declared thereon,
which record date shall not be more than sixty (60) days prior to the date fixed
for
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<PAGE> 5
the payment thereof. Each such annual dividend shall be fully cumulative and
shall accrue from day to day (whether or not declared) from the first day of
each period in which such dividend may be payable as herein provided, except
that the first annual dividend with respect to each share of Series Preferred
Stock shall accrue from the Original Issue Date of such share or such other
date as determined by the Board, except that dividends with respect to each
share of Series 3 Preferred Stock shall accrue from August 14, 1992.
Dividends, when, as and if declared, shall be payable in cash.
(b) The holder of each outstanding fractional
share of Series Preferred Stock shall be entitled to a ratably proportionate
amount of all dividends accruing with respect to each outstanding share of
Series Preferred Stock with the same Original Issue Date and all such dividends
with respect to each such outstanding fractional share shall be fully
cumulative and shall accrue (whether or not declared) and shall be payable in
the same manner and at such times as provided for in Section 1(a).
(c) All dividends paid with respect to the
outstanding shares of Series Preferred Stock pursuant to Section 1(a) shall be
paid pro rata to the holders of each class entitled thereto. Each Series 1
Preferred Stock holder's pro rata share of such dividends shall be calculated
by multiplying the total dividends to be paid by the percentage of (i) the
aggregate accrued but unpaid dividends to the date such payment is made on all
issued and outstanding shares of Series 1 Preferred Stock represented by (ii)
the aggregate accrued but unpaid dividends to the date such payment is made on
all shares (including fractional shares) of Series 1 Preferred Stock held by
such holder, and no more. Each Series 3 Preferred Stock holder's pro rata
share of such dividends shall be calculated by multiplying the total dividends
to be paid by the percentage of (i) the aggregate accrued but unpaid dividends
to the date such payment is made on all issued and outstanding shares of Series
3 Preferred Stock represented by (ii) the aggregate accrued but unpaid
dividends to the date such payment is made on all shares (including fractional
shares) of Series 3 Preferred Stock held by such holder, and no more.
2. Liquidation Rights of Series Preferred Stock:
(a) In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, the holders
of outstanding shares of Series Preferred Stock shall be entitled to be paid
out of the assets of the Corporation available for distribution to its
stockholders, whether such assets are capital, surplus, or earnings, before any
payment or declaration and setting apart for payment of any amount shall be
made in respect of the outstanding shares of any other Preferred Stock of the
Corporation or Common Stock of the Corporation, an amount equal to $1,000 per
share of Series Preferred Stock then outstanding, plus all accrued but unpaid
dividends thereon to the date such payment is actually made, and no more. If
upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets to be distributed among the holders of the
outstanding shares of Series Preferred Stock shall be insufficient to permit
the payment to such stockholders of the full preferential amounts set forth
above, then
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<PAGE> 6
the entire assets of the Corporation to be distributed shall be distributed (i)
first, ratably among the holders of outstanding shares of Series 1 Preferred
Stock based on the full preferential amounts for the number of outstanding
shares of Series 1 Preferred Stock held by each holder and (ii) second, ratably
among the holders of outstanding shares of Series 3 Preferred Stock based on
the full preferential amounts for the number of outstanding shares of Series 3
Preferred Stock held by each holder. The Corporation will mail written notice
of such liquidation, dissolution or winding up, not less than sixty (60) days
prior to the payment date stated therein, to each record holder of Series
Preferred Stock.
(b) A consolidation or merger of the Corporation
with or into any other corporation or corporations or a sale of all or
substantially all of the assets of the Corporation shall not be deemed to be a
liquidation, dissolution, or winding up of the Corporation as those terms are
used in this Section 2 unless such consolidation, merger or sale shall be in
connection with a dissolution or winding up of the Corporation.
(c) The payment of preferential amounts pursuant
to this Section 2 with respect to each outstanding fractional share of Series 1
Preferred Stock shall be equal to a ratably proportionate amount of the
preferential amount payable with respect to each outstanding share of Series 1
Preferred Stock with the same Original Issue Date. The payment of preferential
amounts pursuant to this Section 2 with respect to each outstanding fractional
share of Series 3 Preferred Stock shall be equal to the ratably proportionate
amount of the preferential amount payable with respect to each outstanding
share of Series 3 Preferred Stock with the same Original Issue Date.
3. Voluntary Redemption by the Corporation.
(a) The Corporation, at the option of the Board,
may at any time or from time to time redeem the outstanding shares of Series 1
Preferred Stock in whole or in part from any source of funds legally available
therefor. The Corporation, at the option of the Board, may at any time or from
time to time redeem the outstanding shares of Series 3 Preferred Stock in whole
or in part from any source of funds legally available therefor, provided that
there shall then be no outstanding shares of Series 1 Preferred Stock.
(b) The redemption price for each outstanding
share of Series Preferred Stock shall be equal to $1,000 plus an amount equal
to any accrued and unpaid dividends on such share through the Redemption Date
(as defined below), whether or not declared (the "Redemption Price").
(c) In the event of a redemption of only a part
of the outstanding shares of a class of Series Preferred Stock, the Corporation
shall effect such redemption pro rata according to the number of shares held by
each holder of outstanding shares of such class of Series Preferred Stock.
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<PAGE> 7
(d) At least ten (10) days and not more than
sixty (60) days prior to the date fixed for any redemption of shares of a class
of Series Preferred Stock (the "Redemption Date"), written notice (the
"Redemption Notice," and the class of Series Preferred Stock referenced in such
Redemption Notice shall be referred to herein as the "Redeemed Stock") shall be
sent, by registered mail, to each holder of record of the outstanding shares of
Redeemed Stock at his or her mailing address last shown on the records of the
Corporation. Any notice which is mailed in the manner herein provided shall be
conclusively presumed to have been duly given, whether or not the holder
received the notice, and failure duly to give the notice by mail, or any defect
in the notice, to any holder of shares of such class of Series Preferred Stock
designated for redemption shall not affect the validity of the proceedings for
the redemption of any other shares of such class of Series Preferred Stock.
The Redemption Notice shall state:
(i) whether all or less than all of the
outstanding shares of the class of Series Preferred Stock are to be redeemed
and the total number of shares being redeemed;
(ii) the number of outstanding shares of
Redeemed Stock held by the holder which the Corporation intends to redeem;
(iii) the Redemption Date and the
Redemption Price;
(iv) that from and after the Redemption
Date, dividends shall cease to accrue; and
(v) that the holder is to surrender to
the Corporation, in the manner and at the place designated, the certificate or
certificates representing the outstanding shares of Redeemed Stock to be
redeemed.
(e) On or before the Redemption Date, each holder
of outstanding shares of Redeemed Stock shall surrender the certificate or
certificates representing such shares to the Corporation, in the manner and at
the place designated in the Redemption Notice, and thereupon the Redemption
Price for such shares shall be payable to the order of the person whose name
appears on such certificate or certificates as the owner thereof, and each
surrendered certificate shall be cancelled and retired. In the event less than
all of the shares represented by any such certificate or certificates are
redeemed, a new certificate or certificates shall be issued representing the
unredeemed shares. All shares of the class of Series Preferred Stock called
for redemption will cease to accrue dividends as of the Redemption Date. After
the Redemption Date, holders of such class of Series Preferred Stock shall no
longer be treated as stockholders of the Corporation with respect to the shares
of Series Preferred Stock being redeemed, except with respect to the right to
receive the Redemption Price, without interest, upon the surrender of their
respective certificates.
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(f) The Corporation may, at its option, on or
prior to the Redemption Date, deposit with its transfer agent or other
redemption agent selected by the Board of Directors of the Corporation, as a
trust fund, a sum sufficient to redeem the shares called for redemption, with
irrevocable instructions and authority to such transfer agent or other
redemption agent to give or complete the Redemption Notice and to pay to the
respective holders of such shares, as evidenced by a list of such holders
certified by an officer of the Corporation, the Redemption Price upon
surrender of their respective share certificates. Such deposit shall be
deemed to constitute full payment of such shares to their holders. In case
the holders of any shares shall not, within five (5) years after such deposit,
claim the amount deposited for redemption thereof, such transfer agent or
other redemption agent shall, upon demand, pay over to the Corporation the
balance of such amount so deposited and shall thereupon be relieved of all
responsibility to the holders thereof. Any interest accrued on any funds so
deposited shall belong to the Corporation, and shall be paid to it from time
to time on demand.
(g) All shares of Series 1 Preferred Stock which
shall have been redeemed pursuant to this Section 3 shall thereupon be
restored to the status of authorized but unissued shares of Series 1 Preferred
Stock.
(h) All shares of Series 3 Preferred Stock which
shall have been redeemed pursuant to this Section 3 shall thereupon be
restored to the status of authorized but unissued shares of Series 3 Preferred
Stock.
4. Voting Rights. Except as otherwise provided herein or by the
General Corporation Law of the State of Delaware, holders of outstanding shares
of Series 1 Preferred Stock shall have no voting rights. At all meetings of
the stockholders of the Corporation and in the case of any actions of
stockholders in lieu of a meeting, each share of Series 3 Preferred Stock shall
entitle the holder thereof to one vote. Except as otherwise provided herein or
by the General Corporation Law of the State of Delaware, the holders of Common
Stock and Series 3 Preferred Stock shall vote together as a single class, and
neither the Common Stock nor Series 3 Preferred Stock shall be entitled to vote
as a separate class on any matter to be voted on by shareholders of the
Corporation, except that the holders of the Series 3 Preferred Stock shall be
entitled to vote as a separate class to elect one member of the Board of
Directors of the Corporation.
5. Restrictions and Limitations. Except as otherwise provided by
the General Corporation Law of the State of Delaware, no amendment to this
Restated Certificate of Incorporation shall be made by the Corporation which
would change any of the terms, rights, preferences, privileges or restrictions
provided herein so as to affect adversely any shares of Series Preferred Stock
without the prior written consent of the holders of at least a majority of each
of the Series 1 Preferred Stock and the Series 3 Preferred Stock entitled to
vote thereon and outstanding at the time such action is taken; provided that no
amendment will change (i) the rate or times at which or the manner in which
dividends on any series of the Series Preferred Stock accrue or become payable,
(ii) the preferences with
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respect to dividends and liquidation payments set forth in Section 1 and 2 or
(iii) the percentage of the holders of the Series Preferred Stock required to
approve any changes described in clauses (i) or (ii) above, without the prior
written consent of the holders of at least three-fourths (3/4s) of each of the
Series 1 Preferred Stock and the Series 3 Preferred Stock, as applicable, then
outstanding; and, provided further, that no change in the terms hereof may be
accomplished by merger or consolidation of the Corporation with another
corporation unless the Corporation has obtained the prior written consent of
the holders of the applicable percentages of the Series 1 Preferred Stock and
the Series 3 Preferred Stock then outstanding.
IN WITNESS WHEREOF, the Corporation has caused this Restated
Certificate of Incorporation to be signed and attested by its duly authorized
officers this 31st day of January 1994.
/s/ Ralph J. Swett
-------------------------------
Ralph J. Swett, President
Attest:
/s/ John J. Willingham
- -----------------------------
John J. Willingham, Secretary
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CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
IXC CARRIER GROUP, INC.
INTO
IXC COMMUNICATIONS, INC.
(PURSUANT TO SECTION 253 OF THE GENERAL
CORPORATION LAW OF DELAWARE)
IXC Communications, Inc., a Delaware corporation (the "Corporation"),
does hereby certify:
FIRST: That the Corporation is incorporated pursuant to the General
Corporation Law of the State of Delaware.
SECOND: That the Corporation owns all of the outstanding shares of each
class of the capital stock of IXC Carrier Group, Inc., a Delaware corporation
(the "Merging Corporation").
THIRD: That the Corporation, by the following resolutions of its Board
of Directors, duly adopted on the 6th day of October 1995, determined to merge
into itself the Merging Corporation on the conditions set forth in such
resolutions:
"RESOLVED, that the Corporation merge into itself its
subsidiary, IXC Carrier Group, Inc., a Delaware corporation, and assume
all of said subsidiary's liabilities and obligations;
FURTHER RESOLVED, that the President and Secretary of the
Corporation be, and they hereby are, directed to make, execute and
acknowledge a certificate of ownership and merger setting forth a copy
of the resolutions to merge IXC Carrier Group, Inc. into the
Corporation and to assume said subsidiary's liabilities and obligations
and the date of adoption thereof and to file the same in the office of
the Secretary of State of the State of Delaware and a certified copy
thereof in the Office of the Recorder of Deeds of New Castle County;
and
FURTHER RESOLVED, that the effective date of such merger is
November 30, 1995."
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed and this certificate to be signed by Ralph J. Swett, its President, and
John J. Willingham, its Secretary, this 28th day of November 1995.
IXC COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Ralph J. Swett
--------------------------------
Ralph J. Swett, President
ATTEST:
By: /s/ John J. Willingham
---------------------------------
John J. Willingham, Secretary [SEAL]
<PAGE> 11
EXECUTION COPY
CERTIFICATE OF DESIGNATION OF THE POWERS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
AND OTHER SPECIAL RIGHTS OF 7 1/4% JUNIOR
CONVERTIBLE PREFERRED STOCK DUE 2007 AND
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF
- ----------------------------------------------------------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
- ----------------------------------------------------------------------------
IXC Communications, Inc. (the "Company"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, does
hereby certify that, pursuant to authority conferred upon the board of
directors of the Corporation (the "Board of Directors") by its Restated
Certificate of Incorporation (hereinafter referred to as the "Restated
Certificate of Incorporation"), and pursuant to the provisions of Section 151
of the General Corporation Law of the State of Delaware, said Board of
Directors, at a meeting duly called and held on March 28, 1997, duly approved
and adopted the following resolution (the "Resolution"):
RESOLVED that, pursuant to the authority vested in the Board of Directors by
its Certificate of Incorporation, the Board of Directors does hereby create,
authorize and provide for the issuance of 7 1/4% Junior Convertible Preferred
Stock Due 2007, par value $.01 per share, with a stated value initially of
$100 per share, consisting of up to 1,400,000 shares having the designation,
preferences, relative, participating, optional and other special rights and
the qualifications, limitations and restrictions thereof that are set forth
in the Restated Certificate of Incorporation and in this Resolution as
follows:
(a) Designation. There is hereby created out of the authorized and
unissued shares of Preferred Stock of the Company a series of Preferred Stock
designated as the "7 1/4% Junior Convertible Preferred Stock Due 2007" (the
"Convertible Preferred Stock"). The number of shares constituting the
Convertible Preferred Stock shall be 1,400,000. The liquidation preference of
the Convertible Preferred Stock shall be $100 per share (the "Liquidation
Preference").
<PAGE> 12
(b) Rank. The Convertible Preferred Stock will, with respect to dividend
rights and rights on liquidation, winding-up and dissolution, rank (i) senior
to all classes of common stock and to each other class of Capital Stock or
series of Preferred Stock established hereafter by the Board of Directors of
the Company, the terms of which do not expressly provide that it ranks senior
to, or on a parity with, the Convertible Preferred Stock as to dividend rights
and rights on liquidation, winding-up and dissolution of the Company
(collectively referred to, together with all classes of common stock of the
Company, as "Junior Stock"); (ii) on a parity with each other class of Capital
Stock or series of Preferred Stock established hereafter by the Board of
Directors of the Company, the terms of which expressly provide that such class
or series will rank on a parity with the Convertible Preferred Stock as to
dividend rights and rights on liquidation, winding-up and dissolution
(collectively referred to as "Parity Stock"); and (iii) junior to each share of
Series 3 Preferred Stock now or hereafter outstanding and junior to each class
of Capital Stock or series of Preferred Stock established hereafter by the
Board of Directors of the Company, the terms of which hereafter established
classes or series expressly provide that such class or series will rank senior
to the Convertible Preferred Stock as to dividend rights or rights on
liquidation, winding-up and dissolution of the Company (collectively referred
to as "Senior Stock"). The Company may not authorize, create or increase the
authorized amount of any class or series of Senior Stock without the approval
of the holders of at least two-thirds of the shares of Convertible Preferred
Stock then outstanding, voting or consenting, as the case may be, as one class.
All claims of the holders of the Convertible Preferred Stock, including claims
with respect to dividend payments, redemption payments, mandatory repurchase
payments or rights upon liquidation, winding-up or dissolution, shall rank
junior to the claims of the holders of any debt of the Company and all other
creditors of the Company.
(c) Dividends. (i) Holders of the outstanding shares of Convertible
Preferred Stock will be entitled to receive, when, as and if declared by the
Board of Directors of the Company, out of funds legally available therefor,
dividends on each share of the Convertible Preferred Stock at a rate per annum
equal to 7 1/4% of the Liquidation
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Preference of such share payable quarterly (each such quarterly period being
herein called a "Dividend Period"). In addition to the dividends described in
the preceding sentence, holders of outstanding shares of Convertible Preferred
Stock which are Transfer Restricted Securities will be entitled to additional
dividends (the "Additional Dividends"), when, as and if declared by the Board
of Directors of the Company, out of funds legally available therefor, with
respect to the shares of Convertible Preferred Stock, which Additional
Dividends shall accrue as follows if any of the following events occur (each
such event in clauses (A) and (B) below being herein called a "Registration
Default"): (A) if by August 31, 1997, the Shelf Registration Statement has not
been declared effective by the Commission; or (B) if after the Shelf
Registration Statement is declared effective (1) the Shelf Registration
Statement thereafter ceases to be effective; or (2) the Shelf Registration
Statement or the related prospectus ceases to be usable (in each case except as
permitted below) in connection with resales of Transfer Restricted Securities
in accordance with and during the periods specified herein because either (I)
any event occurs as a result of which the related prospectus forming part of
such Shelf Registration Statement would include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein in the light of the circumstances under which they were made
not misleading, or (II) it shall be necessary to amend such Shelf Registration
Statement or supplement the related prospectus, to comply with the Securities
Act or the Exchange Act or the respective rules thereunder.
Additional Dividends shall accrue on the shares of Convertible Preferred
Stock which are Transfer Restricted Securities from and including the date on
which any such Registration Default shall occur, to but excluding the date on
which all such Registration Defaults have been cured, at a rate of 7 3/4% per
annum.
A Registration Default referred to in clause (B) of paragraph (c)(i) shall
be deemed not to have occurred and be continuing in relation to the Shelf
Registration Statement or the related prospectus if (i) such Registration
Default has occurred solely as a result of (x) the filing of a post-effective
amendment to the Shelf Registration Statement to incorporate annual audited
financial information with respect to the Company where such post-effective
amendment is not yet effective and needs to be
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declared effective to permit Holders to use the related prospectus or (y) other
material events with respect to the Company that would need to be described in
the Shelf Registration Statement or the related prospectus and (ii) in the case
of clause (y), the Company proceeds promptly and in good faith to amend or
supplement the Shelf Registration Statement and related prospectus to describe
such events unless the Company has determined in good faith that there are
material legal or commercial impediments in doing so; provided, however, that
in any case if such Registration Default occurs for a continuous period in
excess of 45 days, Additional Dividends shall be payable in accordance with the
immediately preceding paragraphs of this paragraph (c)(i) from the day such
Registration Default initially occurs until such Registration Default is cured.
Any amounts of Additional Dividends due pursuant to clauses (A) or (B) of
this paragraph (c)(i) or pursuant to the proviso contained in the preceding
sentence will be payable on the regular dividend payment dates with respect to
the Convertible Preferred Stock and on the same terms and conditions and
subject to the same limitations as pertain at such time for the payment of
regular dividends. The amount of Additional Dividends will be determined by
multiplying the applicable Additional Dividends rate by the aggregate
liquidation preference of the outstanding shares of Convertible Preferred
Stock, multiplied by a fraction, the numerator of which is the number of days
such Additional Dividend rate was applicable during such period (determined on
the basis of a 360-day year comprised of twelve 30-day months), and the
denominator of which is 360.
All dividends on the Convertible Preferred Stock, including Additional
Dividends, to the extent accrued, shall be cumulative, whether or not earned or
declared, on a daily basis from the Issue Date or, in the case of additional
shares of Convertible Preferred Stock issued in payment of a dividend, from the
date of issuance of such additional shares of Convertible Preferred Stock, and
shall be payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year (each a "Dividend Payment Date"), commencing on June
30, 1997 to holders of record on the March 15, June 15, September 15 and
December 15 immediately preceding the relevant Dividend Payment Date. Any
dividend on the Convertible Preferred Stock payable pursuant to this paragraph
(c)(i) on or prior to March 31, 1999 shall be, at the option of the Company,
payable (1) in cash or (2) through the issuance of a number of additional
shares
4
<PAGE> 15
(rounded to the nearest whole share) of Convertible Preferred Stock (the
"Additional Shares") equal to the dividend amount divided by the Liquidation
Preference of such Additional Shares. With respect to dividends accrued after
March 31, 1999, all dividends shall be payable in cash; provided, however, that
to the extent and for so long as the Company is prohibited by the terms of any
of its indebtedness then outstanding or by the terms of the Series 3 Preferred
Stock of the Company or any agreement or instrument to which the Company is
then subject, from paying cash dividends on the Convertible Preferred Stock,
such dividends will accrue on each share at the rate per annum equal to 8 3/4%
of the Liquidation Preference per share (instead of the 7 1/4% rate set forth
in the first paragraph of this paragraph (c)(i)) (together with any Additional
Dividends then payable, which for purposes of this paragraph shall be payable
at a rate of 0.50% over and above the 8 3/4% rate) payable through the issuance
of a number of Additional Shares (rounded to the nearest whole share) equal to
the dividend amount on such share divided by the Liquidation Preference of such
Additional Shares on the relevant Dividend Payment Date. Except as provided
herein, accrued and unpaid dividends, if any, will not bear interest or bear
dividends thereon.
(ii) All dividends paid with respect to shares of the Convertible Preferred
Stock pursuant to paragraph (c)(i) shall be paid pro rata to the holders
entitled thereto.
(iii) No full dividends may be declared or paid or set apart for the
payment of dividends by the Company on any Parity Stock for any period unless
full cumulative dividends in respect of each Dividend Period ending on or
before such period shall have been or contemporaneously are declared and paid
(or are deemed declared and paid) in full or declared and, if payable in cash,
a sum in cash sufficient for such payment set apart for such payment on the
Convertible Preferred Stock. If full dividends are not so paid, the
Convertible Preferred Stock will share dividends pro rata with the Parity
Stock.
(iv) The Company will not (A) declare, pay or set apart funds for the
payment of any dividend or other distribution with respect to any Junior Stock
or (B) redeem, purchase or otherwise acquire for consideration any Junior Stock
through a sinking fund or otherwise, unless (1) all accrued and unpaid
dividends with respect to the Convertible Preferred Stock and any Parity Stock
at the time such
5
<PAGE> 16
dividends are payable have been paid or funds have been set apart for payment
of such dividends and (2) sufficient funds have been paid or set apart for the
payment of the dividend for the current dividend period with respect to the
Convertible Preferred Stock and any Parity Stock. As used herein, the term
"dividend" does not include dividends payable solely in shares of Junior Stock
on Junior Stock or in options, warrants or rights to holders of Junior Stock to
subscribe or purchase any Junior Stock.
(v) Dividends on account of arrears for any past Dividend Period and
dividends in connection with any optional redemption may be declared and paid
at any time, without reference to any regular Dividend Payment Date, to holders
of record on such date, not more than 45 days prior to the payment thereof, as
may be fixed by the Board of Directors of the Company.
(vi) Dividends payable on the Convertible Preferred Stock for any period
other than a Dividend Period shall be computed on the basis of a 360-day
consisting year of twelve 30-day months and the actual number of days elapsed
in the period for which payable. Dividends payable on the Convertible
Preferred Stock for a full Dividend Period will be computed by dividing the per
annum dividend rate by four.
(vii) Certificates of Common Stock relating to Convertible Preferred Stock
surrendered for conversion by a registered Holder during the period from the
close of business on any regular record date next preceding any Dividend
Payment Date to the opening of business on such Dividend Payment Date (except
Convertible Preferred Shares called for redemption on a Redemption Date within
such period) must be accompanied by payment in cash of an amount equal to the
accrued but unpaid dividends thereon which such registered Holder is to receive
on such Dividend Payment Date with respect to the Convertible Preferred Stock
so surrendered.
(d) Liquidation Preference. (i) Upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, holders of Convertible
Preferred Stock will be entitled to be paid, out of the assets of the Company
available for distribution to its stockholders, the Liquidation Preference of
the outstanding shares of Convertible Preferred Stock, plus, without
duplication, an amount in cash equal to all accumulated and unpaid dividends
6
<PAGE> 17
(whether or not earned or declared and including Additional Dividends, if any,)
thereon to the date fixed for liquidation, dissolution or winding-up (including
an amount equal to a prorated dividend for the period from the last Dividend
Payment Date to the date fixed for liquidation, dissolution or winding-up that
would have been payable had the Convertible Preferred Stock been the subject of
an Optional Redemption on such date) before any distribution is made on any
Junior Stock. If, upon any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the amounts payable with respect to the
Convertible Preferred Stock and all Parity Stock are not paid in full, the
Convertible Preferred Stock and the Parity Stock will share equally and ratably
(in proportion to the respective amounts that would be payable on such shares
of Convertible Preferred Stock and the Parity Stock, respectively, if all
amounts payable thereon had been paid in full) in any distribution of assets of
the Company to which each is entitled. After payment of the full amount of the
Liquidation Preference of the outstanding shares of Convertible Preferred Stock
(and, if applicable, an amount equal to a prorated dividend), the holders of
shares of Convertible Preferred Stock will not be entitled to any further
participation in any distribution of assets of the Company.
(ii) For the purposes of this paragraph (d), neither the sale, conveyance,
exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Company nor the consolidation or merger of the Company with or into one or more
other entities shall be deemed to be a liquidation, dissolution or winding-up
of the Company.
(e) Redemption. (i) Optional Redemption. (A) The Convertible Preferred
Stock shall not be redeemable prior to April 3, 2000. On or after April 3,
2000, each share of the Convertible Preferred Stock may be redeemed (subject to
the legal availability of funds therefor) at any time, in whole or in part, at
the option of the Company, at the redemption prices (expressed as a percentage
of the Liquidation Preference of such share) set forth below, plus, without
duplication, an amount in cash equal to all accrued and unpaid Liquidated
Damages and all accrued and unpaid dividends to the date fixed for redemption
(the "Optional Redemption Date") (including an amount in cash equal to a
prorated dividend for the period from the Dividend Payment Date immediately
prior to the Optional Redemption Date) (the
7
<PAGE> 18
"Optional Redemption Price"). Notwithstanding the foregoing, prior to April 1,
2002, the Company shall only have the option to redeem shares of Convertible
Preferred Stock if, during the period of 30 consecutive Trading Days ending on
the Trading Day immediately preceding the date that the Redemption Notice is
mailed to holders, the Closing Bid Price for the Common Stock exceeded 150% of
the Conversion Price effective on the date of such Redemption Notice for at
least 20 of such Trading Days. If redeemed during the 12-month period
beginning April 1 of each of the years set forth below (or in the case of the
year 2000, April 3), the Optional Redemption Price per share shall be the
applicable percentage of the Liquidation Preference of such share set forth
below plus, without duplication, in each case, an amount in cash equal to all
accrued and unpaid Liquidated Damages and all accrued and unpaid dividends
(including an amount equal to a prorated dividend from the immediately
preceding Dividend Payment Date to the Optional Redemption Date), if any, to
the Optional Redemption Date:
<TABLE>
<CAPTION>
Year in which redemption occurs Percentage
------------------------------- ----------
<S> <C>
2000 . . . . . . . . . . . . . 104.83%
2001 . . . . . . . . . . . . . 104.03%
2002 . . . . . . . . . . . . . 103.22%
2003 . . . . . . . . . . . . . 102.42%
2004 . . . . . . . . . . . . . 101.61%
2005 . . . . . . . . . . . . . 100.81%
2006 . . . . . . . . . . . . . 100.00%
</TABLE>
(B) In the event of a redemption of only a portion of the then outstanding
shares of Convertible Preferred Stock, the Company shall effect such redemption
on a pro rata basis, except that the Company may redeem all of the shares held
by holders of fewer than 100 shares (or all of the shares held by holders who
would hold less than 100 shares as a result of such redemption), as may be
determined by the Company.
(ii) Mandatory Redemption. Each share of the Convertible Preferred Stock
(if not earlier redeemed or converted) shall be subject to mandatory redemption
in whole (to the extent of lawfully available funds therefor) on March 31, 2007
(the "Mandatory Redemption Date") at a price equal to 100% of the Liquidation
Preference of such share, plus, without duplication, all accrued and unpaid
Liquidated Damages and accrued and unpaid dividends thereon (including
8
<PAGE> 19
an amount equal to a prorated dividend thereon from the immediately preceding
Dividend Payment Date to the Mandatory Redemption Date), if any, to the
Mandatory Redemption Date (the "Mandatory Redemption Price").
(iii) Procedure for Redemption. (A) On and after the Optional Redemption
Date or the Mandatory Redemption Date, as the case may be (the "Redemption
Date"), unless the Company defaults in the payment of the applicable redemption
price, dividends will cease to accumulate on shares of Convertible Preferred
Stock called for redemption and all rights of holders of such shares will
terminate except for the right to receive the Optional Redemption Price or the
Mandatory Redemption Price, as the case may be, without interest; provided,
however, that if a notice of redemption shall have been given as provided in
paragraph (iii)(B) and the funds necessary for redemption (including an amount
in respect of all dividends that will accrue to the Redemption Date) shall have
been segregated and irrevocably set apart by the Company, in trust for the
benefit of the holders of the shares called for redemption, then dividends
shall cease to accumulate on the Redemption Date on the shares to be redeemed
and, at the close of business on the day on which such funds are segregated and
set apart, the holders of the shares to be redeemed shall, with respect to the
shares to be redeemed, cease to be stockholders of the Company and shall be
entitled only to receive the Optional Redemption Price or the Mandatory
Redemption Price, as the case may be, for such shares without interest from the
Redemption Date.
(B) With respect to a redemption pursuant to paragraph (e)(i) or (e)(ii),
the Company will send a written notice of redemption by first class mail to
each holder of record of shares of Convertible Preferred Stock, not fewer than
15 days nor more than 60 days prior to the Redemption Date at its registered
address (the "Redemption Notice"); provided, however, that no failure to give
such notice nor any deficiency therein shall affect the validity of the
procedure for the redemption of any shares of Convertible Preferred Stock to be
redeemed except as to the holder or holders to whom the Company has failed to
give said notice or except as to the holder or holders whose notice was
defective. The Redemption Notice shall state:
(1) whether the redemption is pursuant to paragraph (e)(i) or (e)(ii)
hereof;
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<PAGE> 20
(2) the Optional Redemption Price or the Mandatory Redemption Price, as
the case may be;
(3) whether all or less than all the outstanding shares of the Convertible
Preferred Stock are to be redeemed and the total number of shares of the
Convertible Preferred Stock being redeemed;
(4) the Redemption Date;
(5) that the holder is to surrender to the Company, in the manner, at the
place or places and at the price designated, his certificate or certificates
representing the shares of Convertible Preferred Stock to be redeemed; and
(6) that dividends on the shares of the Convertible Preferred Stock to be
redeemed shall cease to accumulate on such Redemption Date unless the Company
defaults in the payment of the Optional Redemption Price or the Mandatory
Redemption Price, as the case may be.
(C) Each holder of Convertible Preferred Stock shall surrender the
certificate or certificates representing such shares of Convertible Preferred
Stock to the Company, duly endorsed (or otherwise in proper form for transfer,
as determined by the Company), in the manner and at the place designated in the
Redemption Notice, and on the Redemption Date the full Optional Redemption
Price or Mandatory Redemption Price, as the case may be, for such shares shall
be payable in cash to the person whose name appears on such certificate or
certificates as the owner thereof, and each surrendered certificate shall be
canceled and retired. In the event that less than all of the shares
represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares.
(f) Voting Rights. (i) The holders of Convertible Preferred Stock, except
as otherwise required under Delaware law or as set forth in paragraphs (ii) and
(iii) below, shall not be entitled or permitted to vote on any matter required
or permitted to be voted upon by the stockholders of the Company.
(ii) (A) If (1) dividends on the Convertible Preferred Stock are in
arrears and unpaid for six or more Dividend Periods (whether or not
consecutive) (a "Dividend
10
<PAGE> 21
Default"); or (2) the Company fails to redeem the Convertible Preferred Stock on
March 31, 2007, or fails to otherwise discharge any redemption obligation with
respect to the Convertible Preferred Stock, then the number of directors
constituting the Board of Directors of the Company will be increased by two and
the Holders of the then outstanding shares of Convertible Preferred Stock
(together with the holders of Parity Stock upon which like rights have been
conferred and are exercisable), voting separately and as a class, shall have the
right and power to elect such two additional directors. Each such event
described in clauses (1) or (2) above is a "Voting Rights Triggering Event". A
Voting Rights Triggering Event shall not be deemed to have occurred if at the
time of such event there are less than 200,000 shares of Convertible Preferred
Stock then outstanding.
(B) The voting rights set forth in subparagraph (f)(ii)(A) above will
continue until such time as (x) in the case of a Dividend Default, all
dividends in arrears on the Convertible Preferred Stock are paid in full in
cash, (y) in all other cases, any failure, breach or default giving rise to
such Voting Rights Triggering Event is remedied or waived by the Holders of at
least two-thirds of the shares of Convertible Preferred Stock then outstanding
or (z) at any time there are less than 200,000 shares of Convertible Preferred
Stock outstanding, at which time the term of any directors elected pursuant to
the provisions of subparagraph (f)(ii)(A) above shall terminate and the number
of directors constituting the Board of Directors shall be decreased by two
(until the occurrence of any subsequent Voting Rights Triggering Event). At
any time after voting power to elect directors shall have become vested and be
continuing in the holders of Convertible Preferred Stock (together with the
holders of Parity Stock upon which like rights have been conferred and are
exercisable) pursuant to subparagraph (f)(ii)(A) hereof, or if vacancies shall
exist in the offices of directors elected by such holders, a proper officer of
the Company may, and upon the written request of the holders of record of at
least 25% of the shares of Convertible Preferred Stock then outstanding or the
holders of 25% of the shares of Parity Stock then outstanding upon which like
rights have been confirmed and are exercisable addressed to the secretary of
the Company shall, call a special meeting of the Holders of Convertible
Preferred Stock and the holders of such Parity Stock for the purpose of
electing the directors which such holders are entitled to elect pursuant to the
terms hereof;
11
<PAGE> 22
provided, however, that no such special meeting shall be called if the next
annual meeting of stockholders of the Company is to be held within 60 days
after the voting power to elect directors shall have become vested, in which
case such meeting shall be deemed to have been called for such next annual
meeting. If such meeting shall not be called by a proper officer of the
Company within 20 days after personal service to the secretary of the Company
at its principal executive offices, then the Holders of record of at least 25%
of the outstanding shares of Convertible Preferred Stock or the holders of 25%
of the shares of Parity Stock upon which like rights have been confirmed and
are exercisable may designate in writing one of their members to call such
meeting at the expense of the Company, and such meeting may be called by the
person so designated upon the notice required for the annual meetings of
stockholders of the Company and shall be held at the place for holding the
annual meetings of stockholders. Any holder of Convertible Preferred Stock or
such Parity Stock so designated shall have, and the Company shall provide,
access to the lists of holders of Convertible Preferred Stock and the holders
of such Parity Stock to be called pursuant to the provisions hereof. If no
special meeting of the Holders of Convertible Preferred Stock and the holders
of such Parity Stock is called as provided in this paragraph (f)(ii), then such
meeting shall be deemed to have been called for the next annual meeting of
stockholders of the Company or special meeting of the holders of any other
capital stock of the Company.
(C) At any meeting held for the purposes of electing directors at which the
Holders of Convertible Preferred Stock (together with the holders of Parity
Stock upon which like rights have been conferred and are exercisable) shall
have the right, voting together as a separate class, to elect directors as
aforesaid, the presence in person or by proxy of the holders of at least a
majority in voting power of the outstanding shares of Convertible Preferred
Stock (and such Parity Stock) shall be required to constitute a quorum thereof.
(D) Any vacancy occurring in the office of a director elected by the
Holders of Convertible Preferred Stock (and such Parity Stock) may be filled by
the remaining director elected by the Holders of Convertible Preferred Stock
(and such Parity Stock) unless and until such vacancy shall be filled by the
Holders of Convertible Preferred Stock (and such Parity Stock).
12
<PAGE> 23
(iii) (A) So long as any shares of the Convertible Preferred Stock are
outstanding, the Company will not authorize, create or increase the authorized
amount of any class or series of Senior Stock without the affirmative vote or
consent of holders of at least two-thirds of the shares of Convertible
Preferred Stock then outstanding, voting or consenting, as the case may be, as
one class, given in person or by proxy, either in writing or by resolution
adopted at an annual or special meeting (except that no such vote or consent
shall be required for the issuance of additional shares of Series 3 Preferred
Stock to be paid as dividends on such Series 3 Preferred Stock pursuant to the
terms of such Series 3 Preferred Stock).
(B) So long as any shares of the Convertible Preferred Stock are
outstanding, the Company will not amend this Certificate of Designation so as
to affect adversely the specified rights, preferences, privileges or voting
rights of Holders of shares of Convertible Preferred Stock or to authorize the
issuance of any additional shares of Convertible Preferred Stock (except to
authorize the issuance of additional shares of Convertible Preferred Stock to
be paid as dividends on the Convertible Preferred Stock, for which no consent
shall be necessary) without the affirmative vote or consent of Holders of at
least two-thirds of the issued and outstanding shares of Convertible Preferred
Stock, voting or consenting, as the case may be, as one class, given in person
or by proxy, either in writing or by resolution adopted at an annual or special
meeting.
(C) Except as set forth in paragraph (f)(iii)(A) or (B) above, (x) the
creation, authorization or issuance of any shares of any Junior Stock, Parity
Stock or Senior Stock, including the designation of a series of Convertible
Preferred Stock, or (y) the increase or decrease in the amount of authorized
Capital Stock of any class, including Preferred Stock, shall not require the
consent of Holders of Convertible Preferred Stock and shall not be deemed to
affect adversely the rights, preferences, privileges or voting rights of shares
of Convertible Preferred Stock.
(iv) In any case in which the Holders of Convertible Preferred Stock shall
be entitled to vote pursuant to this paragraph (f) or pursuant to Delaware law,
each Holder of Convertible Preferred Stock entitled to vote with respect to
such matters shall be entitled to one vote for each share of Convertible
Preferred Stock held.
13
<PAGE> 24
(v) Except as required by law, the Holders of the Convertible Preferred
Stock will not be entitled to vote on any merger or consolidation involving the
Company or a sale of all or substantially all the assets of the Company.
(g) Conversion. (i) At any time after 60 days from the Issue Date, at the
option of the Holder thereof, any share of Convertible Preferred Stock may be
converted at the Liquidation Preference thereof into fully paid and
nonassessable Common Stock (calculated as to each conversion to the nearest
1/100 of a share), at the Conversion Price, determined as hereinafter provided,
in effect at the time of conversion. Such conversion right shall expire at the
close of business on the Mandatory Redemption Date. In case a share of
Convertible Preferred Stock is called for optional redemption, such conversion
right in respect of the share of Convertible Preferred Stock so called shall
expire at the close of business on the applicable Optional Redemption Date,
unless the Company defaults in making the payment due upon redemption.
The price at which Common Stock shall be delivered upon conversion (herein
called the "Conversion Price") shall be initially $23.46 per share of Common
Stock. The Conversion Price shall be adjusted in certain instances as provided
in paragraph (g)(iv) and paragraph (g)(v).
(ii) In order to exercise the conversion privilege, the Holder of any share
of Convertible Preferred Stock to be converted shall surrender the certificate
for such share of Convertible Preferred Stock, duly endorsed or assigned to the
Company or in blank, at the office of the Transfer Agent or at any office or
agency of the Company maintained for that purpose, accompanied by written
notice to the Company in the form of Exhibit B that the Holder elects to
convert such share of Convertible Preferred Stock or, if fewer than all of the
shares of Convertible Preferred Stock represented by a single share certificate
are to be converted, the number of shares represented thereby to be converted.
Except as provided in paragraph (c)(viii), no payment or adjustment shall be
made upon any conversion on account of any dividends accrued on the shares of
Convertible Preferred Stock surrendered for conversion or on account of any
dividends on the Common Stock issued upon conversion. Such notice shall also
contain the office or the address to which the Company should deliver shares of
Common Stock issuable upon conversion (and any other payments or certificates
related thereto). Except as
14
<PAGE> 25
provided in paragraph (c)(viii), in no event shall the Company be obligated to
pay any converting Holder any unpaid dividend, whether or not in arrears, on
converted shares or any dividends on the shares of Common Stock issued upon
such conversion.
Shares of Convertible Preferred Stock shall be deemed to have been converted
immediately prior to the close of business on the day of surrender of such
shares of Convertible Preferred Stock for conversion in accordance with the
foregoing provisions, and at such time the rights of the Holders of such shares
of Convertible Preferred Stock as Holders shall cease, and the person or
persons entitled to receive the Common Stock issuable upon conversion shall be
treated for all purposes as the record holder or holders of such Common Stock
at such time. As promptly as practicable on or after the conversion date, the
Company shall issue and shall deliver to such office or agency as the
converting Holder shall have designated in its written notice to the Company a
certificate or certificates for the number of full Common Stock issuable upon
conversion, together with payment in lieu of any fraction of a share, as
provided in paragraph (g)(iii) hereof.
In the case of any conversion of fewer than all the shares of Convertible
Preferred Stock evidenced by a certificate, upon such conversion the Company
shall execute and the Transfer Agent shall authenticate and deliver to the
Holder thereof (at the address designated by such Holder), at the expense of
the Company, a new certificate or certificates representing the number of
unconverted shares of Convertible Preferred Stock.
(iii) No fractional Common Stock shall be issued upon the conversion of a
share of Convertible Preferred Stock. If more than one share of Convertible
Preferred Stock shall be surrendered for conversion at one time by the same
holder, the number of full shares of Common Stock which shall be issuable upon
conversion thereof shall be computed on the basis of the aggregate shares of
Convertible Preferred Stock so surrendered. Instead of any fractional share of
Common Stock which would otherwise be issuable upon conversion of any share of
Convertible Preferred Stock, the Company shall pay a cash adjustment in respect
of such fraction in an amount equal to the same fraction of the closing price
(as defined in paragraph (g)(iv)(7)) per share of Common Stock at the close of
business on the Business Day prior to the day of conversion.
15
<PAGE> 26
(iv) The Conversion Price shall be adjusted from time to time by the
Company as follows:
(1) If the Company shall hereafter pay a dividend or make a distribution in
Common Stock to all holders of any outstanding class or series of Common
Stock of the Company, the Conversion Price in effect at the opening of
business on the date following the date fixed for the determination of
shareholders entitled to receive such dividend or other distribution shall be
reduced by multiplying such Conversion Price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the
close of business on the Record Date (as defined in paragraph (g)(iv)(7))
fixed for such determination and the denominator shall be the sum of such
number of outstanding shares and the total number of shares constituting such
dividend or other distribution, such reduction to become effective
immediately after the opening of business on the day following the Record
Date. If any dividend or distribution of the type described in this
paragraph (g)(iv)(i) is declared but not so paid or made, the Conversion
Price shall again be adjusted to the Conversion Price which would then be in
effect if such dividend or distribution had not been declared.
(2) If the Company shall offer or issue rights or warrants to all holders
of its outstanding Common Stock entitling them to subscribe for or purchase
Common Stock at a price per share less than the Current Market Price (as
defined in paragraph (g)(iv)(7)) on the Record Date fixed for the
determination of shareholders entitled to receive such rights or warrants,
the Conversion Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect at the opening of
business on the date after such Record Date by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the
close of business on the Record Date plus the number of shares of Common
Stock which the aggregate offering price of the total number of shares of
Common Stock subject to such rights or warrants would purchase at such
Current Market Price and of which the denominator shall be the number of
shares of Common Stock outstanding at the close of business on the Record
Date plus the total number of additional shares of Common Stock subject to
such
16
<PAGE> 27
rights or warrants for subscription or purchase. Such adjustment shall
become effective immediately after the opening of business on the day
following the Record Date fixed for determination of shareholders entitled to
purchase or receive such rights or warrants. To the extent that shares of
Common Stock are not delivered pursuant to such rights or warrants, upon the
expiration or termination of such rights or warrants the Conversion Price
shall again be adjusted to be the Conversion Price which would then be in
effect had the adjustments made upon the issuance of such rights or warrants
been made on the basis of delivery of only the number of shares of Common
Stock actually delivered. If such rights or warrants are not so issued, the
Conversion Price shall again be adjusted to be the Conversion Price which
would then be in effect if such date fixed for the determination of
shareholders entitled to receive such rights or warrants had not been fixed.
In determining whether any rights or warrants entitle the holders to
subscribe for or purchase Common Stock at less than such Current Market
Price, and in determining the aggregate offering price of such shares of
Common Stock, there shall be taken into account any consideration received
for such rights or warrants, with the value of such consideration, if other
than cash, to be determined by the Board of Directors.
(3) If the outstanding shares of Common Stock shall be subdivided into a
greater number of shares of Common Stock, the Conversion Price in effect at
the opening of business on the day following the day upon which such
subdivision becomes effective shall be proportionately reduced, and,
conversely, if the outstanding shares of Common Stock shall be combined into
a smaller number of shares of Common Stock, the Conversion Price in effect at
the opening of business on the day following the day upon which such
combination becomes effective shall be proportionately increased, such
reduction or increase, as the case may be, to become effective immediately
after the opening of business on the day following the day upon which such
subdivision or combination becomes effective.
(4) If the Company shall, by dividend or otherwise, distribute to all
holders of its shares of Common Stock shares of any class of capital stock of
the Company (other than any dividends or distributions
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to which paragraph (g)(iv)(1) applies) or evidences of its indebtedness, cash
or other assets (including securities, but excluding any rights or warrants
of a type referred to in paragraph (g)(iv)(2) and excluding dividends and
distributions paid exclusively in cash and excluding any capital stock,
evidences of indebtedness, cash or assets distributed upon a merger or
consolidation to which paragraph (g)(v) applies) (the foregoing hereinafter
in this paragraph (g)(iv)(4) called the "Distributed Securities"), then, in
each such case, the Conversion Price shall be reduced so that the same shall
be equal to the price determined by multiplying the Conversion Price in
effect immediately prior to the close of business on the Record Date (as
defined in paragraph (g)(iv)(7)) with respect to such distribution by a
fraction of which the numerator shall be the Current Market Price (determined
as provided in paragraph (g)(iv)(7)) of the Common Stock on such date less
the fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a resolution of the Board
of Directors) on such date of the portion of the Distributed Securities so
distributed applicable to one share of Common Stock and the denominator shall
be such Current Market Price, such reduction to become effective immediately
prior to the opening of business on the day following the Record Date;
provided, however, that, in the event the then fair market value (as so
determined) of the portion of the Distributed Securities so distributed
applicable to one share of Common Stock is equal to or greater than the
Current Market Price on the Record Date, in lieu of the foregoing adjustment,
adequate provision shall be made so that each holder of Convertible Preferred
Stock shall have the right to receive upon conversion of a share of
Convertible Preferred Stock (or any portion thereof) the amount of
Distributed Securities such holder would have received had such holder
converted such share of Convertible Preferred Stock (or portion thereof)
immediately prior to such Record Date. If such dividend or distribution is
not so paid or made, the Conversion Price shall again be adjusted to be the
Conversion Price which would then be in effect if such dividend or
distribution had not been declared. If the Board of Directors determines the
fair market value of any distribution for purposes of this paragraph
(g)(iv)(4) by reference to the actual or when issued trading market for any
securities comprising all
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<PAGE> 29
or part of such distribution, it must in doing so consider the prices in such
market over the same period used in computing the Current Market Price
pursuant to paragraph (g)(iv)(7) to the extent possible.
Rights or warrants distributed by the Company to all holders of Common Stock
entitling the holders thereof to subscribe for or purchase shares of the
Company's capital stock (either initially or under certain circumstances),
which rights or warrants, until the occurrence of a specified event or events
("Dilution Trigger Event"): (i) are deemed to be transferred with such
Common Stock; (ii) are not exercisable; and (iii) are also issued in respect
of future issuances of Common Stock, shall be deemed not to have been
distributed for purposes of this paragraph (g)(iv)(4) (and no adjustment to
the Conversion Price under this paragraph (g)(iv)(4) shall be required) until
the occurrence of the earliest Dilution Trigger Event, whereupon such rights
and warrants shall be deemed to have been distributed and an appropriate
adjustment to the Conversion Price under this paragraph (g)(iv)(4) shall be
made. If any such rights or warrants, including any such existing rights or
warrants distributed prior to the date hereof, are subject to subsequent
events, upon the occurrence of each of which such rights or warrants shall
become exercisable to purchase different securities, evidences of
indebtedness or other assets, then the occurrence of each such event shall be
deemed to be such date of issuance and record date with respect to new rights
or warrants (and a termination or expiration of the existing rights or
warrants without exercise by the holder thereof). In addition, in the event
of any distribution (or deemed distribution) of rights or warrants, or any
Dilution Trigger Event with respect thereto, that was counted for purposes of
calculating a distribution amount for which an adjustment to the Conversion
Price under this paragraph (g)(iv)(4) was made, (1) in the case of any such
rights or warrants which shall all have been redeemed or repurchased without
exercise by any holders thereof, the Conversion Price shall be readjusted
upon such final redemption or repurchase to give effect to such distribution
or Dilution Trigger Event, as the case may be, as though it were a cash
distribution, equal to the per share redemption or repurchase price received
by a holder or holders of Common Stock with respect to such rights or
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<PAGE> 30
warrants (assuming such holder had retained such rights or warrants), made to
all holders of Common Stock as of the date of such redemption or repurchase,
and (2) in the case of such rights or warrants which shall have expired or
been terminated without exercise by any holders thereof, the Conversion Price
shall be readjusted as if such rights and warrants had not been issued.
Notwithstanding any other provision of this paragraph (g)(iv)(4) to the
contrary, capital stock, rights, warrants, evidences of indebtedness, other
securities, cash or other assets (including, without limitation, any rights
distributed pursuant to any shareholder rights plan) shall be deemed not to
have been distributed for purposes of this paragraph (g)(iv)(4) if the
Company makes proper provision so that each holder of shares of Convertible
Preferred Stock who converts a share of Convertible Preferred Stock (or any
portion thereof) after the date fixed for determination of shareholders
entitled to receive such distribution shall be entitled to receive upon such
conversion, in addition to the Common Stock issuable upon such conversion,
the amount and kind of such distributions that such holder would have been
entitled to receive if such holder had, immediately prior to such
determination date, converted such share of Convertible Preferred Stock into
Common Stock.
For purposes of this paragraph (g)(iv)(4) and paragraphs (g)(iv)(1) and (2),
any dividend or distribution to which this paragraph (g)(iv)(4) is
applicable that also includes Common Stock, or rights or warrants to
subscribe for or purchase Common Stock to which paragraph (g)(iv)(2) applies
(or both), shall be deemed instead to be (1) a dividend or distribution of
the evidences of indebtedness, cash, assets, shares of capital stock, rights
or warrants other than (A) such shares of Common Stock or (B) rights or
warrants to which paragraph (g)(iv)(2) applies (and any Conversion Price
reduction required by this paragraph (g)(iv)(4) with respect to such dividend
or distribution shall then be made) immediately followed by (2) a dividend or
distribution of such Common Stock or such rights or warrants (and any further
Conversion Price reduction required by paragraph (g)(iv)(1) and (2) with
respect to such dividend or distribution shall then be made), except that (1)
the Record Date of such
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<PAGE> 31
dividend or distribution shall be substituted as "the Record Date fixed for
the determination of stockholders entitled to receive such dividend or other
distribution", "Record Date fixed for such determination" and "Record Date"
within the meaning of paragraph (g)(iv)(1) and as "the Record Date fixed for
the determination of shareholders entitled to receive such rights or
warrants", "the date fixed for the determination of the shareholders entitled
to receive such rights or warrants" and "such Record Date" within the meaning
of paragraph (g)(iv)(2), and (2) any share of Common Stock included in such
dividend or distribution shall not be deemed "outstanding at the close of
business on the date fixed for such determination" within the meaning of
paragraph (g)(iv)(1).
(5) If the Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock cash (excluding any cash that is distributed upon
a merger or consolidation to which paragraph (g)(v) applies or as part of a
distribution referred to in paragraph (g)(iv)) in an aggregate amount that,
combined together with (1) the aggregate amount of any other such
distributions to all holders of its Common Stock made exclusively in cash
within the 12 months preceding the date of payment of such distribution, and
in respect of which no adjustment pursuant to this paragraph (g)(iv)(5) has
been made, and (2) the aggregate of any cash plus the fair market value (as
determined by the Board of Directors, whose determination shall be conclusive
and described in a resolution of the Board of Directors) of consideration
payable in respect of any tender offer by the Company or a Subsidiary of the
Company for all or any portion of the Common Stock concluded within the 12
months preceding the date of payment of such distribution, and in respect of
which no adjustment pursuant to paragraph (g)(iv)(4) has been made, exceeds
12.5% of the product of the Current Market Price (determined as provided in
paragraph (g)(iv)(7)) on the Record Date with respect to such distribution
times the number of shares of Common Stock outstanding on such date, then,
and in each such case, immediately after the close of business on such date,
the Conversion Price shall be reduced so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
the close of business on
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<PAGE> 32
such Record Date by a fraction (i) the numerator of which shall be equal to
the Current Market Price on the Record Date less an amount equal to the
quotient of (x) the excess of such combined amount over such 12.5% amount
divided by (y) the number of shares of Common Stock outstanding on the Record
Date and (ii) the denominator of which shall be equal to the Current Market
Price on such Record Date; provided, however, that, if the portion of the
cash so distributed applicable to one share of Common Stock is equal to or
greater than the Current Market Price of the Common Stock on the Record Date,
in lieu of the foregoing adjustment, adequate provision shall be made so that
each holder of Convertible Preferred Stock shall have the right to receive
upon conversion of a share of Convertible Preferred Stock (or any portion
thereof) the amount of cash such holder would have received had such holder
converted such share of Convertible Preferred Stock (or portion thereof)
immediately prior to such Record Date. If such dividend or distribution is
not so paid or made, the Conversion Price shall again be adjusted to be the
Conversion Price which would then be in effect if such dividend or
distribution had not been declared.
(6) If a tender or exchange offer made by the Company or any of its
Subsidiaries for all or any portion of the Common Stock expires and such
tender or exchange offer (as amended upon the expiration thereof) requires
the payment to shareholders (based on the acceptance (up to any maximum
specified in the terms of the tender offer) of Purchased Shares (as defined
below)) of an aggregate consideration having a fair market value (as
determined by the Board of Directors, whose determination shall be conclusive
and described in a resolution of the Board of Directors) that, combined
together with (1) the aggregate of the cash plus the fair market value (as
determined by the Board of Directors, whose determination shall be conclusive
and described in a resolution of the Board of Directors), as of the
expiration of such tender offer, of consideration payable in respect of any
other tender offers, by the Company or any of its Subsidiaries for all or any
portion of the Common Stock expiring within the 12 months preceding the
expiration of such tender offer and in respect of which no adjustment
pursuant to this paragraph (g)(iv)(6) has been made and (2) the aggregate
amount of any distributions to all holders of
22
<PAGE> 33
the Common Stock made exclusively in cash within 12 months preceding the
expiration of such tender offer and in respect of which no adjustment
pursuant to paragraph (g)(iv)(5) has been made, exceeds 12.5% of the product
of the Current Market Price (determined as provided in paragraph (g)(iv)(7))
as of the last time (the "Expiration Time") tenders could have been made
pursuant to such tender offer (as it may be amended) times the number of
shares of Common Stock outstanding (including any tendered shares) at the
Expiration Time, then, and in each such case, immediately prior to the
opening of business on the day after the date of the Expiration Time, the
Conversion Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
the close of business on the date of the Expiration Time by a fraction of
which the numerator shall be the number of shares of Common Stock outstanding
(including any tendered shares) at the Expiration Time multiplied by the
Current Market Price of the Common Stock on the Trading Day next succeeding
the Expiration Time and the denominator shall be the sum of (x) the fair
market value (determined as aforesaid) of the aggregate consideration payable
to shareholders based on the acceptance (up to any maximum specified in the
terms of the tender offer) of all shares validly tendered and not withdrawn
as of the Expiration Time (the shares deemed so accepted, up to any such
maximum, being referred to as the "Purchased Shares") and (y) the product of
the number of shares of Common Stock outstanding (less any Purchased Shares)
at the Expiration Time and the Current Market Price of the Common Stock on
the Trading Day next succeeding the Expiration Time, such reduction (if any)
to become effective immediately prior to the opening of business on the day
following the Expiration Time. If the Company is obligated to purchase
shares pursuant to any such tender offer, but the Company is permanently
prevented by applicable law from effecting any such purchases or all such
purchases are rescinded, the Conversion Price shall again be adjusted to be
the Conversion Price which would then be in effect if such tender offer had
not been made. If the application of this paragraph (g)(iv)(6) to any tender
offer would result in an increase in the Conversion Price, no adjustment
shall be made for such tender offer under this paragraph (g)(iv)(6).
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<PAGE> 34
(7) For purposes of this paragraph (g)(iv), the following terms shall have
the meaning indicated:
"closing price" with respect to any securities on any day means the closing
price on such day or, if no such sale takes place on such day, the average of
the reported high and low prices on such day, in each case on The Nasdaq
National Market or the New York Stock Exchange, as applicable, or, if such
security is not listed or admitted to trading on such national market or
exchange, on the principal national securities exchange or quotation system
on which such security is quoted or listed or admitted to trading, or, if not
quoted or listed or admitted to trading on any national securities exchange
or quotation system, the average of the high and low prices of such security
on the over-the-counter market on the day in question as reported by the
National Quotation Bureau Incorporated or a similar generally accepted
reporting service, or, if not so available, in such manner as furnished by
any New York Stock Exchange member firm selected from time to time by the
Board of Directors for that purpose, or a price determined in good faith by
the Board of Directors, whose determination shall be conclusive and described
in a resolution of the Board of Directors.
"Current Market Price" means the average of the daily closing prices per
share of Common Stock for the 10 consecutive trading days immediately prior
to the date in question; provided, however, that (A) if the "ex" date (as
hereinafter defined) for any event (other than the issuance or distribution
requiring such computation) that requires an adjustment to the Conversion
Price pursuant to paragraphs (g)(iv)(1), (2), (3), (4), (5) or (6) occurs
during such 10 consecutive trading days, the closing price for each trading
day prior to the "ex" date for such other event shall be adjusted by
multiplying such closing price by the same fraction by which the Conversion
Price is so required to be adjusted as a result of such other event, (B) if
the "ex" date for any event (other than the issuance or distribution
requiring such computation) that requires an adjustment to the Conversion
Price pursuant to paragraphs (g)(iv)(1), (2), (3), (4), (5) or (6) occurs on
or after the "ex" date for the issuance or distribution requiring such
computation and prior to the day in question, the closing price for each
trading day on and after the
24
<PAGE> 35
"ex" date for such other event shall be adjusted by multiplying such closing
price by the reciprocal of the fraction by which the Conversion Price is so
required to be adjusted as a result of such other event and (C) if the "ex"
date for the issuance or distribution requiring such computation is prior to
the day in question, after taking into account any adjustment required
pursuant to clause (A) or (B) of this proviso, the closing price for each
trading day on or after such "ex" date shall be adjusted by adding thereto
the amount of any cash and the fair market value (as determined by the Board
of Directors in a manner consistent with any determination of such value for
purposes of paragraphs (g)(iv)(4) or (5), whose determination shall be
conclusive and described in a resolution of the Board of Directors) of the
evidence of indebtedness, shares of capital stock or assets being distributed
applicable to one Common Stock as of the close of business on the day before
such "ex" date. For purposes of any computation under paragraph (g)(vi), the
Current Market Price on any date shall be deemed to be the average of the
daily closing prices per share of Common Stock for such day and the next two
succeeding trading days; provided, however, that, if the "ex" date for any
event (other than the tender offer requiring such computation) that requires
an adjustment to the Conversion Price pursuant to paragraph (g)(iv)(1), (2),
(3), (4), (5) or (6) occurs on or after the Expiration Time for the tender or
exchange offer requiring such computation and prior to the day in question,
the closing price for each trading day on and after the "ex" date for such
other event shall be adjusted by multiplying such closing price by the
reciprocal of the fraction by which the Conversion Price is so required to be
adjusted as a result of such other event. For purposes of this paragraph,
the term "ex" date (I) when used with respect to any issuance or
distribution, means the first date on which the Common Stock trades regular
way on the relevant exchange or in the relevant market from which the closing
price was obtained without the right to receive such issuance or
distribution, (II) when used with respect to any subdivision or combination
of Common Stock, means the first date on which the Common Stock trades
regular way on such exchange or in such market after the time at which such
subdivision or combination becomes effective and (III) when used with respect
to any tender or exchange offer means the first date on which the Common
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<PAGE> 36
Stock trades regular way on such exchange or in such market after the
Expiration Time of such offer. Notwithstanding the foregoing, whenever
successive adjustments to the Conversion Price are called for pursuant to this
paragraph (g)(iv), such adjustments shall be made to the Current Market Price
as may be necessary or appropriate to effectuate the intent of this paragraph
(g)(iv) and to avoid unjust or inequitable results, as determined in good
faith by the Board of Directors.
"fair market value" shall mean the amount which a willing buyer would pay a
willing seller in an arm's-length transaction.
"Record Date" shall mean, with respect to any dividend, distribution or other
transaction or event in which the holders of Common Stock have the right to
receive any cash, securities or other property or in which the Common Stock
(or other applicable security) is exchanged for or converted into any
combination of cash, securities or other property, the date fixed for
determination of shareholders entitled to receive such cash, securities or
other property (whether such date is fixed by the Board of Directors or by
statute, contract or otherwise).
(8) No adjustment in the Conversion Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in such
price; provided, however, that any adjustments which by reason of this
paragraph (g)(iv)(8) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
paragraph (g)(iv)(8) shall be made by the Company and shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may be.
No adjustment need be made for a change in the par value or no par value of
the Common Stock.
(9) Whenever the Conversion Price is adjusted as herein provided, the
Company shall promptly file with the Transfer Agent an Officers' Certificate
setting forth the Conversion Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment. Promptly after
delivery of such certificate, the Company shall prepare a notice of such
adjustment of the Conversion Price setting forth the
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adjusted Conversion Price and the date on which each adjustment becomes
effective and shall mail such notice of such adjustment of the Conversion
Price to each holder of Convertible Preferred Stock at such holder's last
address appearing on the register of holders maintained for that purpose
within 20 days of the effective date of such adjustment. Failure to deliver
such notice shall not affect the legality or validity of any such adjustment.
(10) In any case in which this paragraph (g)(iv) provides that an
adjustment shall become effective immediately after a Record Date for an
event, the Company may defer until the occurrence of such event issuing to
the holder of any share of Convertible Preferred Stock converted after such
Record Date and before the occurrence of such event the additional Common
Stock issuable upon such conversion by reason of the adjustment required by
such event over and above the Common Stock issuable upon such conversion
before giving effect to such adjustment.
(11) For purposes of this paragraph (g)(iv), the number of shares of Common
Stock at any time outstanding shall not include shares held in the treasury
of the Company but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of Common Stock. The Company shall
not pay any dividend or make any distribution on Common Stock held in the
treasury of the Company.
(v) In case of any consolidation of the Company with, or merger of the
Company into, any other corporation, or in case of any merger of another
corporation into the Company (other than a merger which does not result in
any reclassification, conversion, exchange or cancellation of outstanding
shares of Common Stock of the Company), or in case of any conveyance or
transfer of the properties and assets of the Company substantially as an
entirety, the holder of each share of Convertible Preferred Stock then
outstanding shall have the right thereafter, during the period such
Convertible Preferred Stock shall be convertible as specified in paragraph
(g)(i), to convert such share of Convertible Preferred Stock only into the
kind and amount of securities, cash and other property receivable upon such
consolidation, merger, conveyance or transfer by a holder of the number of
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<PAGE> 38
shares of Common Stock of the Company into which such share of Convertible
Preferred Stock might have been converted immediately prior to such
consolidation, merger, conveyance or transfer, assuming such holder of Common
Stock of the Company failed to exercise his rights of election, if any, as to
the kind or amount of securities, cash and other property receivable upon
such consolidation, merger, conveyance or transfer (provided that, if the
kind or amount of securities, cash and other property receivable upon such
consolidation, merger, conveyance or transfer is not the same for each share
of Common Stock of the Company in respect of which such rights of election
shall not have been exercised ("nonelecting share"), then for the purpose of
this paragraph (g)(v) the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, conveyance or transfer
by each nonelecting share shall be deemed to be the kind and amount so
receivable per share by a plurality of the nonelecting shares). Such
securities shall provide for adjustments which, for events subsequent to the
effective date of the triggering event, shall be as nearly equivalent as may
be practicable to the adjustments provided for in this paragraph (g)(v). The
above provisions of this Section shall similarly apply to successive
consolidations, mergers, conveyances or transfers.
(vi) In case:
(1) the Company shall declare a dividend (or any other distribution) on its
Common Stock payable otherwise than in cash out of its earned surplus; or
(2) the Company shall authorize the granting to all holders of its Common
Stock of rights or warrants to subscribe for or purchase any shares of capital
stock of any class or of any other rights; or
(3) of any reclassification of the Common Stock of the Company (other than a
subdivision or combination of its outstanding Common Stock), or of any
consolidation or merger to which the Company is a party and for which approval
of any shareholders of the Company is required, or the sale or transfer of all
or substantially all the assets of the Company; or
28
<PAGE> 39
(4) of the voluntary or involuntary dissolution, liquidation or winding up
of the Company;
then the Company shall cause to be filed with the Transfer Agent and at each
office or agency maintained for the purpose of conversion of the Convertible
Preferred Stock, and shall cause to be mailed to all holders at their last
addresses as they shall appear in the Convertible Preferred Stock Register, at
least 20 days (or 10 days in any case specified in clause (1) or (2) above)
prior to the applicable date hereinafter specified, a notice stating (x) the
date on which a record is to be taken for the purpose of such dividend,
distribution, rights or warrants, or, if a record is not to be taken, the date
as of which the holders of Common Stock of record to be entitled to such
dividend, distribution, rights or warrants are to be determined or (y) the date
on which such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up. Failure to give the notice requested
by this Section or any defect therein shall not affect the legality or validity
of any dividend, distribution, right, warrant, reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding up, or the vote
upon any such action.
(vii) The Company shall at all times reserve and keep available, free from
preemptive rights, out of its authorized but unissued shares of Common Stock
(or out of its authorized shares of Common Stock held in the treasury of the
Company), for the purpose of effecting the conversion of the Convertible
Preferred Stock, the full number of Common Stock then issuable upon the
conversion of all outstanding shares of Convertible Preferred Stock.
(viii) The Company will pay any and all document, stamp or similar issue or
transfer taxes that may be payable in respect of the issue or delivery of
Common Stock on conversion of the Convertible Preferred Stock pursuant hereto.
The Company shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that of the holder of the share of
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<PAGE> 40
Convertible Preferred Stock or the shares of Convertible Preferred Stock to be
converted, and no such issue or delivery shall be made unless and until the
Person requesting such issue has paid to the Company the amount of any such
tax, or has established to the satisfaction of the Company that such tax has
been paid.
(ix) (1) Notwithstanding any other provision in the preceding paragraphs
to the contrary, if any Change in Control occurs then, if the Company does not
elect to make a Change in Control Offer, the Conversion Price in effect shall
be adjusted immediately after such Change in Control as described below. In
addition, in the event of a Common Stock Change in Control (as defined in this
paragraph (g)(ix)), each share of the Convertible Preferred Stock shall be
convertible solely into common stock of the kind received by holders of Common
Stock as the result of such Common Stock Change in Control. For purposes of
calculating any adjustment to be made pursuant to this paragraph in the event
of a Change in Control, immediately after such Change in Control:
(A) in the case of a Non-Stock Change in Control (as defined in this
paragraph (g)(ix)), the Conversion Price shall thereupon become the lower of
(x) the Conversion Price in effect immediately prior to such Non-Stock Change
in Control, but after giving effect to any other prior adjustments, and (y)
the result obtained by multiplying the greater of the Applicable Price (as
defined in this paragraph (g)(ix)) or the then applicable Reference Market
Price (as defined in this paragraph (g)(ix)) by a fraction of which the
numerator shall be $100.00 and the denominator shall be the then current
Optional Redemption Price per share; and
(B) in the case of a Common Stock Change in Control, the Conversion Price in
effect immediately prior to such Common Stock Change in Control, but after
giving effect to any prior adjustments, shall thereupon be adjusted by
multiplying such Conversion Price by a fraction, of which the numerator shall
be the Purchaser Stock Price (as defined in this paragraph (g)(ix)) and the
denominator shall be the Applicable Price; provided, however, that in the
event of a Common Stock Change in Control in which (x) 100% of the value of
the consideration received by a holder of Common Stock is common stock of the
successor, acquiror, or other third
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<PAGE> 41
party (and cash, if any, is paid with respect to any fractional interests in
such common stock resulting from such Common Stock Change in Control) and (y)
all of the Common Stock will have been exchanged for, converted into, or
acquired for, common stock (and cash with respect to fractional interests) of
the successor, acquiror or other third party, the Conversion Price in effect
immediately prior to such Common Stock Change in Control shall thereupon be
adjusted by multiplying such Conversion Price by a fraction, of which the
numerator shall be one (1) and the denominator shall be the number of shares
of common stock of the successor, acquiror, or other third party received by
a holder of one share of Common Stock as a result of such Common Stock Change
in Control.
(3) For purposes of this paragraph (ix), the following terms shall have the
meanings indicated:
"Applicable Price" means (i) in the event of a Non-Stock Change in Control
in which the holders of the Common Stock receive only cash, the amount of
cash received by the holder of one share of Common Stock and (ii) in the
event of any other Non-Stock Change in Control or any Common Stock Change in
Control, the average of the Closing Bid Prices for the Common Stock during
the ten Trading Days prior to and including the record date for the
determination of the holders of Common Stock entitled to receive cash,
securities, property or other assets in connection with such Non-Stock Change
in Control or Common Stock Change in Control or, if there is no such record
date, the date upon which the holders of the Common Stock shall have the
right to receive such cash, securities, property or other assets, in each
case, as adjusted in good faith by the Board of Directors to appropriately
reflect any of the events referred to in paragraph (g)(iv)(1) through (6).
"Common Stock Change in Control" means any Change in Control in which more
than 50% of the value (as determined in good faith by the Board of Directors
of the Company) of the consideration received by holders of Common Stock
consists of common stock that for each of the ten consecutive Trading Days
referred to in the preceding paragraph has been admitted for listing or
admitted for listing subject to notice of issuance on a national securities
exchange or quoted on The Nasdaq
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National Market; provided, however, that a Change in Control shall not be a
Common Stock Change in Control unless either (i) the Company continues to
exist after the occurrence of such Change in Control and the outstanding
shares of Convertible Preferred Stock continue to exist as outstanding shares
of Convertible Preferred Stock, or (ii) not later than the occurrence of such
Change in Control, the outstanding shares of Convertible Preferred Stock are
converted into or exchanged for shares of convertible preferred stock of a
corporation succeeding to the business of the Company, which convertible
preferred stock has powers, preferences and relative, participating, optional
or other rights, and qualifications, limitations and restrictions,
substantially similar to those of the Convertible Preferred Stock.
"Non-Stock Change in Control" means any Change in Control other than a
Common Stock Change in Control.
"Purchaser Stock Price" means, with respect to any Common Stock Change in
Control, the product of (i) the number of shares of common stock received in
such Common Stock Change of Control for each share of Common Stock, and (ii)
the average of the per share Closing Prices for the common stock received in
such Common Stock Change in Control for the ten consecutive Trading Days
prior to and including the record date for the determination of the holders
of Common Stock entitled to receive such common stock, or if there is no such
record date, the date upon which the holders of the Common Stock shall have
the right to receive such common stock, in each case, as adjusted in good
faith by the Board of Directors to appropriately reflect any of the events
referred to in paragraph (g)(iv)(1) through (6); provided, however, that if
no such Closing Prices exist, then the Purchaser Stock Price shall be set at
a price determined in good faith by the Board of Directors of the Company.
"Reference Market Price" shall initially mean $13.50 (which is an amount
equal to 66-2/3% of the reported last sale price for the Common Stock on The
Nasdaq National Market on March 25, 1997), and in the event of any adjustment
to the conversion prices other than as a result of a Change in Control, the
Reference Market Price shall also be adjusted so that the ratio of the
Reference Market Price to the Conversion Price
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after giving effect to any such adjustment shall always be the same as the
ratio of $13.50 to the initial Conversion Price set forth in paragraph
(g)(i).
(h) Change in Control. (i) Upon the occurrence of a Change of Control
(the date of such occurrence being the "Change in Control Date"), the Company
shall be obligated to (1) purchase all or a portion of each holder's
Convertible Preferred Stock in cash pursuant to the offer described in
paragraph (h)(iii) (the "Change of Control Offer") at a purchase price equal to
100% of the Liquidation Preference, plus, without duplication, all accrued and
unpaid Liquidated Damages and all accrued and unpaid dividends, if any, to the
Change of Control Payment Date, including an amount in cash equal to a prorated
dividend for the period from the Dividend Payment Date immediately prior to the
Change of Control Payment Date to the Change of Control Payment Date or (2)
adjust the conversion price as provided under paragraph (g)(ix).
Notwithstanding the foregoing, the Company shall, prior to electing to make a
Change of Control Offer, make an offer to redeem all outstanding shares of
Series 3 Preferred Stock.
(ii) Prior to the mailing of the notice referred to in paragraph (h)(iii),
but in any event within 15 days following the date on which the Company knows
or reasonably should have known that a Change in Control has occurred, the
Company covenants that it shall promptly determine if the purchase of the
Convertible Preferred Stock would violate or constitute a default under the
Indenture or other indebtedness of the Company.
(iii) Within 15 days following the date on which the Company knows or
reasonably should have known that a Change in Control has occurred, the Company
must send, by first-class mail, postage prepaid, a notice to each holder of
Convertible Preferred Stock. Such notice shall state whether the Change of
Control Offer would be permitted under the Indenture or other indebtedness of
the Company, and if permitted, such notice shall contain all instructions and
materials necessary to enable such holders to tender Convertible Preferred
Stock pursuant to the Change of Control Offer. If the Change of Control Offer
would be permitted under the Indenture or other indebtedness of the Company,
such notice shall state:
(A) that a Change of Control has occurred, that the Change of Control Offer
is being made pursuant to
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this paragraph (h) and that all Convertible Preferred Stock validly tendered
and not withdrawn will be accepted for payment;
(B) the purchase price (including the amount of accrued dividends, if any)
and the purchase date (which must be no earlier than 30 days nor later than
75 days from the date such notice is mailed, other than as may be required by
law) (the "Change of Control Payment Date");
(C) that any shares of Convertible Preferred Stock not tendered will
continue to accrue dividends;
(D) that, unless the Company defaults in making payment therefor, any share
of Convertible Preferred Stock accepted for payment pursuant to the Change of
Control Offer shall cease to accrue dividends after the Change of Control
Payment Date;
(E) that holders electing to have any shares of Convertible Preferred Stock
purchased pursuant to a Change of Control Offer will be required to surrender
such shares of Convertible Preferred Stock, properly endorsed for transfer,
together with such other customary documents as the Company and the Transfer
Agent may reasonably request to the Transfer Agent and registrar for the
Convertible Preferred Stock at the address specified in the notice prior to
the close of business on the Business Day prior to the Change of Control
Payment Date;
(F) that holders will be entitled to withdraw their election if the Company
receives, not later than five Business Days prior to the Change of Control
Payment Date, a telegram, a telex, facsimile transmission or letter setting
forth the name of the holder, the number of shares of Convertible Preferred
Stock the holder delivered for purchase and a statement that such holder is
withdrawing his election to have such shares of Convertible Preferred Stock
purchased;
(G) that holders whose shares of Convertible Preferred Stock are purchased
only in part will be issued a new certificate representing the unpurchased
shares of Convertible Preferred Stock; and
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(H) the circumstances and relevant facts regarding such Change of Control.
If the Change of Control Offer would not be permitted under the Indenture
or other indebtedness of the Company, such notice shall state the Conversion
Price as adjusted pursuant to paragraph (g)(ix).
(iv) The Company will comply with any tender offer rules under the Exchange
Act which then may be applicable, including Rules 13e-4 and 14e-1, in
connection with any offer required to be made by the Company to repurchase the
shares of Convertible Preferred Stock as a result of a Change of Control. To
the extent that the provisions of any securities laws or regulations conflict
with provisions of this Certificate of Designation, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this Certificate of Designation by virtue
thereof.
(v) On the Change of Control Payment Date the Company shall (A) accept for
payment the shares of Convertible Preferred Stock validly tendered pursuant to
the Change of Control Offer, (B) pay to the holders of shares so accepted the
purchase price therefor in cash and (C) cancel and retire each surrendered
certificate. Unless the Company defaults in the payment for the shares of
Convertible Preferred Stock tendered pursuant to the Change of Control Offer,
dividends will cease to accrue with respect to the shares of Convertible
Preferred Stock tendered and all rights of holders of such tendered shares will
terminate, except for the right to receive payment therefor, on the Change of
Control Payment Date.
(vi) To accept the Change of Control Offer, the holder of a share of
Convertible Preferred Stock shall deliver, on or before the 10th day prior to
the Change of Control Payment Date, written notice to the Company (or an agent
designated by the Company for such purpose) of such holder's acceptance,
together with certificates evidencing the shares of Convertible Preferred Stock
with respect to which the Change of Control Offer is being accepted, duly
endorsed for transfer.
(i) Reissuance of Convertible Preferred Stock. Shares of Convertible
Preferred Stock that have been issued and reacquired in any manner, including
shares purchased or redeemed or exchanged, shall not be reissued as shares of
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<PAGE> 46
Convertible Preferred Stock and shall (upon compliance with any applicable
provisions of the laws of Delaware) have the status of authorized and
unissued shares of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of Preferred Stock; provided,
however, that so long as any shares of Convertible Preferred Stock are
outstanding, any issuance of such shares must be in compliance with the terms
hereof.
(j) Business Day. If any payment, redemption or exchange shall be required
by the terms hereof to be made on a day that is not a Business Day, such
payment, redemption or exchange shall be made on the immediately succeeding
Business Day.
(k) Limitation on Mergers and Asset Sales. The Company may not consolidate
with or merge with or into, or convey, transfer or lease all or substantially
all its assets to, any person unless: (1) the successor, transferee or lessee
(if not the Company) is organized and existing under the laws of the United
States of America or any State thereof or the District of Columbia and the
Convertible Preferred Stock shall be converted into or exchanged for and shall
become shares of such successor, transferee or lessee, having in respect of
such successor, transferee or lessee substantially the same powers, preference
and relative participating, optional or other special rights and the
qualifications, limitations or restrictions thereon, that the Convertible
Preferred Stock had immediately prior to such transaction; and (2) the Company
delivers to the Transfer Agent an Officers' Certificate and an Opinion of
Counsel stating that such consolidation, merger or transfer complies with this
Certificate of Designation. The successor, transferee or lessee will be the
successor company.
(l) Certificates. (i) Form and Dating. The Convertible Preferred Stock
and the Transfer Agent's certificate of authentication shall be substantially
in the form of Exhibit A, which is hereby incorporated in and expressly made a
part of this Certificate of Designation. The Convertible Preferred Stock
certificate may have notations, legends or endorsements required by law, stock
exchange rule, agreements to which the Company is subject, if any, or usage
(provided that any such notation, legend or endorsement is in a form acceptable
to the Company). Each Convertible Preferred Stock certificate shall be dated
the date of its authentication. The terms of the Convertible
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<PAGE> 47
Preferred Stock certificate set forth in Exhibit A are part of the terms of
this Certificate of Designation.
(A) Global Convertible Preferred Stock. The Convertible Preferred Stock
sold in reliance on Rule 144A shall be issued initially in the form of one or
more fully registered global certificates with the global securities legend and
restricted securities legend set forth in Exhibit A hereto (the "Global
Convertible Preferred Stock"), which shall be deposited on behalf of the
purchasers represented thereby with the Transfer Agent, at its New York office,
as custodian for DTC (or with such other custodian as DTC may direct), and
registered in the name of DTC or a nominee of DTC, duly executed by the Company
and authenticated by the Transfer Agent as hereinafter provided. The number of
shares of Convertible Preferred Stock represented by Global Convertible
Preferred Stock may from time to time be increased or decreased by adjustments
made on the records of the Transfer Agent and DTC or its nominee as hereinafter
provided.
(B) Book-Entry Provisions. In the event Global Convertible Preferred Stock
is deposited with or on behalf of DTC, the Company shall execute and the
Transfer Agent shall authenticate and deliver initially one or more Global
Convertible Preferred Stock certificates that (a) shall be registered in the
name of DTC for such Global Convertible Preferred Stock or the nominee of DTC
and (b) shall be delivered by the Transfer Agent to DTC or pursuant to DTC's
instructions or held by the Transfer Agent as custodian for DTC.
Members of, or participants in, DTC ("Agent Members") shall have no rights
under this Certificate of Designation with respect to any Global Convertible
Preferred Stock held on their behalf by DTC or by the Transfer Agent as the
custodian of DTC or under such Global Convertible Preferred Stock, and DTC may
be treated by the Company, the Transfer Agent and any agent of the Company or
the Transfer Agent as the absolute owner of such Global Convertible Preferred
Stock for all purposes whatsoever. Notwithstanding the foregoing, nothing
herein shall prevent the Company, the Transfer Agent or any agent of the
Company or the Transfer Agent from giving effect to any written certification,
proxy or other authorization furnished by DTC or impair, as between DTC and its
Agent Members, the operation of customary practices of DTC governing the
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<PAGE> 48
exercise of the rights of a holder of a beneficial interest in any Global
Convertible Preferred Stock.
(C) Certificated Convertible Preferred Stock. Convertible Preferred Stock
initially sold to certain "accredited investors" (as defined in Rule 501(a)(1),
(2), (3), (4), (5), (6) or (7) under the Securities Act) or sold in offshore
transactions pursuant to Regulation S under the Securities Act will be issued
in fully registered certificated form ("Certificated Convertible Preferred
Stock").
Except as provided in this paragraph (l)(i) or in paragraph (l)(iii), owners
of beneficial interests in Global Convertible Preferred Stock will not be
entitled to receive physical delivery of Certificated Convertible Preferred
Stock.
After a transfer of any Convertible Preferred Stock during the period of the
effectiveness of a Shelf Registration Statement with respect to such
Convertible Preferred Stock, all requirements pertaining to legends on such
Convertible Preferred Stock will cease to apply, the requirements requiring
that any such Convertible Preferred Stock issued to Holders be issued in global
form will cease to apply, and Certificated Convertible Preferred Stock without
legends will be available to the transferee of the Holder of such Convertible
Preferred Stock upon exchange of such transferring Holder's Convertible
Preferred Stock or directions to transfer such Holder's interest in the Global
Convertible Preferred Stock, as applicable.
(ii) Execution and Authentication. Two Officers shall sign the Convertible
Preferred Stock for the Company by manual or facsimile signature. The
Company's seal shall be impressed, affixed, imprinted or reproduced on the
Convertible Preferred Stock and may be in facsimile form.
If an Officer whose signature is on Convertible Preferred Stock no longer
holds that office at the time the Transfer Agent authenticates the Convertible
Preferred Stock, the Convertible Preferred Stock shall be valid nevertheless.
A Convertible Preferred Stock shall not be valid until an authorized
signatory of the Transfer Agent manually signs the certificate of
authentication on the Convertible Preferred Stock. The signature shall be
conclusive evidence
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<PAGE> 49
that the Convertible Preferred Stock has been authenticated under this
Certificate of Designation.
The Transfer Agent shall authenticate and deliver 1,000,000 shares of
Convertible Preferred Stock for original issue upon a written order of the
Company signed by two Officers or by an Officer and either an Assistant
Treasurer or an Assistant Secretary of the Company. In addition, the Transfer
Agent shall authenticate and deliver, from time to time, Additional Shares for
original issue upon order of the Company signed by two Officers or by an
Officer or either an Assistant Treasurer or Assistant Secretary of the Company.
Such orders shall specify the number of shares of Convertible Preferred Stock
to be authenticated and the date on which the original issue of Convertible
Preferred Stock is to be authenticated.
The Transfer Agent may appoint an authenticating agent reasonably acceptable
to the Company to authenticate the Convertible Preferred Stock. Unless limited
by the terms of such appointment, an authenticating agent may authenticate
Convertible Preferred Stock whenever the Transfer Agent may do so. Each
reference in this Certificate of Designation to authentication by the Transfer
Agent includes authentication by such agent. An authenticating agent has the
same rights as the Transfer Agent or agent for service of notices and demands.
(iii) Transfer and Exchange. (A) Transfer and Exchange of Certificated
Convertible Preferred Stock. When Certificated Convertible Preferred Stock is
presented to the Transfer Agent with a request to register the transfer of such
Certificated Convertible Preferred Stock or to exchange such Certificated
Convertible Preferred Stock for an equal number of shares of Certificated
Convertible Preferred Stock of other authorized denominations, the Transfer
Agent shall register the transfer or make the exchange as requested if its
reasonable requirements for such transaction are met; provided, however, that
the Certificated Convertible Preferred Stock surrendered for transfer or
exchange:
(1) shall be duly endorsed or accompanied by a written instrument of
transfer in form reasonably satisfactory to the Company and the Transfer
Agent, duly executed by the Holder thereof or its attorney duly authorized in
writing; and
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(2) in the case of Transfer Restricted Securities that are Certificated
Convertible Preferred Stock, are being transferred or exchanged pursuant to
an effective registration statement under the Securities Act or pursuant to
clause (I), (II) or (III) below, and are accompanied by the following
additional information and documents, as applicable:
(I) if such Transfer Restricted Securities are being delivered to the
Transfer Agent by a Holder for registration in the name of such Holder,
without transfer, a certification from such Holder to that effect in
substantially the form of Exhibit C hereto; or
(II) if such Transfer Restricted Securities are being transferred to the
Company or to a "qualified institutional buyer" ("QIB") in accordance with
Rule 144A under the Securities Act or pursuant to an exemption from
registration in accordance with Rule 144 or Regulation S under the
Securities Act, a certification to that effect (in substantially the form of
Exhibit C hereto); or
(III) if such Transfer Restricted Securities are being transferred to an
"accredited investor" as described in Rule 501(a)(1), (2), (3), (4), (5),
(6) or (7) under the Securities Act that is acquiring the Securities for its
own account, or for the account of such an accredited investor, in each case
in a minimum principal amount of $100,000 for investment purposes and not
with a view to, or for offer or sale in connection with, any distribution in
violation of the Securities Act, or in reliance on another exemption from
the registration requirements of the Securities Act: a certification to that
effect in substantially the form of Exhibit C hereto, and if the Company or
the Transfer Agent so requests, evidence reasonably satisfactory to them as
to the compliance with the restrictions set forth in the legend set forth in
paragraph (l)(iii)(G)(1) below.
(B) Restrictions on Transfer of Certificated Convertible Preferred Stock
for a Beneficial Interest in Global Convertible Preferred Stock. Certificated
Convertible Preferred Stock may not be exchanged for a
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<PAGE> 51
beneficial interest in Global Convertible Preferred Stock except upon
satisfaction of the requirements set forth below. Upon receipt by the
Transfer Agent of Certificated Convertible Preferred Stock, duly endorsed or
accompanied by appropriate instruments of transfer, in form satisfactory to
the Transfer Agent, together with:
(1) if such Certificated Convertible Preferred Stock is a Transfer
Restricted Security, certification that such Certificated Convertible
Preferred Stock is being transferred to a QIB in accordance with Rule 144A
under the Securities Act; and
(2) whether or not such Certificated Convertible Preferred Stock is a
Transfer Restricted Security, written instructions directing the Transfer
Agent to make, or to direct DTC to make, an adjustment on its books and
records with respect to such Global Convertible Preferred Stock to reflect an
increase in the number of shares of Convertible Preferred Stock represented
by the Global Convertible Preferred Stock,
then the Transfer Agent shall cancel such Certificated Convertible Preferred
Stock and cause, or direct DTC to cause, in accordance with the standing
instructions and procedures existing between DTC and the Transfer Agent, the
number of shares of Convertible Preferred Stock represented by the Global
Convertible Preferred Stock to be increased accordingly. If no Global
Convertible Preferred Stock is then outstanding, the Company shall issue and
the Transfer Agent shall authenticate, upon written order of the Company in the
form of an Officers' Certificate, a new Global Convertible Preferred Stock
representing the appropriate number of shares.
(C) Transfer and Exchange of Global Convertible Preferred Stock. The
transfer and exchange of Global Convertible Preferred Stock or beneficial
interests therein shall be effected through DTC, in accordance with this
Certificate of Designation (including applicable restrictions on transfer set
forth herein, if any) and the procedures of DTC therefor.
(D) Transfer of a Beneficial Interest in Global Convertible Preferred Stock
for a Certificated Convertible Preferred Stock.
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(1) Any person having a beneficial interest in Convertible Preferred
Stock that is being transferred or exchanged pursuant to an effective
registration statement under the Securities Act or pursuant to clause (I),
(II) or (III) below may upon request, and if accompanied by the information
specified below, exchange such beneficial interest for Certificated
Convertible Preferred Stock representing the same number of shares of
Convertible Preferred Stock. Upon receipt by the Transfer Agent of written
instructions or such other form of instructions as is customary for DTC from
DTC or its nominee on behalf of any person having a beneficial interest in
Global Convertible Preferred Stock and upon receipt by the Transfer Agent of
a written order or such other form of instructions as is customary for DTC
or the person designated by DTC as having such a beneficial interest in a
Transfer Restricted Security only, and upon the following additional
information and documents (all of which may be submitted by facsimile):
(I) if such beneficial interest is being transferred to the person
designated by DTC as being the owner of a beneficial interest in Global
Convertible Preferred Stock, a certification from such person to that
effect (in substantially the form of Exhibit C hereto);
(II) if such beneficial interest is being transferred to a QIB in
accordance with Rule 144A under the Securities Act or pursuant to an
exemption from registration in accordance with Rule 144 or Regulation S
under the Securities Act, a certification to that effect (in substantially
the form of Exhibit C hereto); or
(III) if such beneficial interest is being transferred to an "accredited
investor" as described in Rule 501(a)(1), (2), (3), (4), (5), (6) or (7)
under the Securities Act that is acquiring the security for its own
account, or for the account of such an accredited investor, in each case in
a minimum principal amount of $100,000 for investment purposes and not with
a view to, or for offer or sale in connection with, any distribution in
violation of the Securities Act, or in reliance on another exemption from
the registration requirements of the Securities Act, a
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certification to that effect from the transferor (in substantially the form
of Exhibit C hereto), and if the Company or the Transfer Agent so requests,
evidence reasonably satisfactory to them as to the compliance with the
restrictions set forth in the legend set forth in paragraph (l)(iii)(G)(1)
below;
then, the Transfer Agent or DTC, at the direction of the Transfer Agent, will
cause, in accordance with the standing instructions and procedures existing
between DTC and the Transfer Agent, the number of shares of Convertible
Preferred Stock represented by Global Convertible Preferred Stock to be reduced
on its books and records and, following such reduction, the Company will
execute and the Transfer Agent will authenticate and deliver to the transferee
Certificated Convertible Preferred Stock.
(2) Certificated Convertible Preferred Stock issued in exchange for a
beneficial interest in a Global Convertible Preferred Stock pursuant to this
paragraph (l)(iii)(D) shall be registered in such names and in such
authorized denominations as DTC, pursuant to instructions from its direct or
indirect participants or otherwise, shall instruct the Transfer Agent. The
Transfer Agent shall deliver such Certificated Convertible Preferred Stock to
the persons in whose names such Convertible Preferred Stock are so registered
in accordance with the instructions of DTC.
(E) Restrictions on Transfer and Exchange of Global Convertible Preferred
Stock. Notwithstanding any other provisions of this Certificate of Designation
(other than the provisions set forth in paragraph (l)(iii)(F)), Global
Convertible Preferred Stock may not be transferred as a whole except by DTC to
a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by
DTC or any such nominee to a successor depository or a nominee of such
successor depository.
(F) Authentication of Certificated Convertible Preferred Stock. If at any
time:
(1) DTC notifies the Company that DTC is unwilling or unable to continue as
depository for the Global Convertible Preferred Stock and a successor
depository for the Global Convertible Preferred Stock is not appointed by the
Company within 90 days after delivery of such notice;
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(2) DTC ceases to be a clearing agency registered under the Exchange Act;
(3) there shall have occurred and be continuing a Voting Rights Triggering
Event; or
(4) the Company, in its sole discretion, notifies the Transfer Agent in
writing that it elects to cause the issuance of Certificated Convertible
Preferred Stock under this Certificate of Designation,
then the Company will execute, and the Transfer Agent, upon receipt of a
written order of the Company signed by two Officers or by an Officer and either
an Assistant Treasurer or an Assistant Secretary of the Company requesting the
authentication and delivery of Certificated Convertible Preferred Stock to the
persons designated by the Company, will authenticate and deliver Certificated
Convertible Preferred Stock equal to the number of shares of Convertible
Preferred Stock represented by the Global Convertible Preferred Stock, in
exchange for such Global Convertible Preferred Stock.
(G) Legend. (1) Except as permitted by the following paragraph (2), each
certificate evidencing the Global Convertible Preferred Stock and the
Certificated Convertible Preferred Stock (and all Convertible Preferred Stock
issued in exchange therefor or substitution thereof) shall bear a legend in
substantially the following form:
"THE SECURITY EVIDENCED HEREBY (OR ITS PREDECESSOR) (AND THE COMMON STOCK
INTO WHICH THIS SECURITY IS CONVERTIBLE) WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES
SECURITIES ACT OF 1933 (THE "SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD,
PLEDGED OR OTHERWISE TRANSFERRED IN ABSENCE OF SUCH REGISTRATION OR AN
APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED
HEREBY (OR THE COMMON STOCK INTO WHICH THIS SECURITY IS CONVERTIBLE) IS
HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE
PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A
THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY (AND OF THE COMMON
STOCK INTO WHICH THIS SECURITY IN CONVERTIBLE) AGREES FOR THE
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BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY (AND THE COMMON STOCK INTO
WHICH THIS SECURITY IS CONVERTIBLE) MAY BE RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED, ONLY (1) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE
SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A
QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 144A, (2) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE 904 OF
REGULATION S UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF
AVAILABLE), (4) TO THE COMPANY OR (5) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND (B) IN ACCORDANCE WITH ALL APPLICABLE
SECURITIES LAWS OF THE STATES OF THE UNITED STATES."
(2) Upon any sale or transfer of a Transfer Restricted Security (including
any Transfer Restricted Security represented by Global Convertible Preferred
Stock) pursuant to Rule 144 under the Securities Act or an effective
registration statement under the Securities Act:
(I) in the case of any Transfer Restricted Security that is a Certificated
Convertible Preferred Stock, the Transfer Agent shall permit the Holder
thereof to exchange such Transfer Restricted Security for a Certificated
Convertible Preferred Stock that does not bear the legend set forth above
and rescind any restriction on the transfer of such Transfer Restricted
Security; and
(II) in the case of any Transfer Restricted Security that is represented
by a Global Convertible Preferred Stock, the Transfer Agent shall permit the
Holder thereof to exchange such Transfer Restricted Security for a
Certificated Convertible Preferred Stock Security that does not bear the
legend set forth above and rescind any restriction on the transfer of such
Transfer Restricted Security, if the Holder's request for such exchange was
made in reliance on Rule 144 and the Holder certifies to that effect in
writing to the Transfer Agent (such certification to be in the form set
forth on the reverse of the Transfer Restricted Security).
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(H) Cancellation or Adjustment of Global Convertible Preferred Stock. At
such time as all beneficial interests in Global Convertible Preferred Stock
have either been exchanged for Certificated Convertible Preferred Stock,
redeemed, repurchased or canceled, such Global Convertible Preferred Stock
shall be returned to DTC for cancellation or retained and canceled by the
Transfer Agent. At any time prior to such cancellation, if any beneficial
interest in Global Convertible Preferred Stock is exchanged for Certificated
Convertible Preferred Stock, redeemed, repurchased or canceled, the number of
shares of Convertible Preferred Stock represented by such Global Convertible
Preferred Stock shall be reduced and an adjustment shall be made on the books
and records of the Transfer Agent with respect to such Global Convertible
Preferred Stock, by the Transfer Agent or DTC, to reflect such reduction.
(I) Obligations with Respect to Transfers and Exchanges of Convertible
Preferred Stock. (1) To permit registrations of transfers and exchanges, the
Company shall execute and the Transfer Agent shall authenticate Certificated
Convertible Preferred Stock and Global Convertible Preferred Stock as required
pursuant to the provisions of this paragraph (iii).
(2) All Certificated Convertible Preferred Stock and Global Convertible
Preferred Stock issued upon any registration of transfer or exchange of
Certificated Convertible Preferred Stock or Global Convertible Preferred
Stock shall be the valid obligations of the Company, entitled to the same
benefits under this Certificate of Designation as the Certificated
Convertible Preferred Stock or Global Convertible Preferred Stock surrendered
upon such registration of transfer or exchange.
(3) Prior to due presentment for registration of transfer of any shares of
Convertible Preferred Stock, the Transfer Agent and the Company may deem and
treat the person in whose name such shares of Convertible Preferred Stock are
registered as the absolute owner of such Convertible Preferred Stock and
neither the Transfer Agent nor the Company shall be affected by notice to the
contrary.
(4) No service charge shall be made to a Holder for any registration of
transfer or exchange upon surrender of any Convertible Preferred Stock
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Certificate at the office of the Transfer Agent maintained for that purpose.
However, the Company may require payment of a sum sufficient to cover any tax
or other governmental charge that may be imposed in connection with any
registration of transfer or exchange of Convertible Preferred Stock
Certificates.
(5) Upon any sale or transfer of shares of Convertible Preferred Stock
(including any Convertible Preferred Stock represented by a Global
Convertible Preferred Stock Certificate) pursuant to an effective
registration statement under the Securities Act, pursuant to Rule 144 under
the Securities Act or pursuant to an opinion of counsel reasonably
satisfactory to the Company that no legend is required:
(A) in the case of any Certificated Convertible Preferred Stock, the
Transfer Agent shall permit the holder thereof to exchange such
Convertible Preferred Stock for Certificated Convertible Preferred
Stock that does not bear the legend set forth in paragraph (iii)(G)
above and rescind any restriction on the transfer of such Convertible
Preferred Stock; and
(B) in the case of any Global Convertible Preferred Stock, such
Convertible Preferred Stock shall not be required to bear the legend
set forth in paragraph (iii)(G) above but shall continue to be subject
to the provisions of paragraph (iii)(D) hereof; provided, however,
that with respect to any request for an exchange of Convertible
Preferred Stock that is represented by Global Convertible Preferred
Stock for Certificated Convertible Preferred Stock that does not bear
the legend set forth in paragraph (iii)(G) above in connection with a
sale or transfer thereof pursuant to Rule 144 (and based upon an
opinion of counsel if the Company so requests), the Holder thereof
shall certify in writing to the Transfer Agent that such request is
being made pursuant to Rule 144 (such certification to be
substantially in the form of Exhibit C hereto).
47
<PAGE> 58
(iv) Replacement Certificates. If a mutilated Convertible Preferred
Stock certificate is surrendered to the Transfer Agent or if the Holder of a
Convertible Preferred Stock certificate claims that the Convertible Preferred
Stock certificate has been lost, destroyed or wrongfully taken, the Company
shall issue and the Transfer Agent shall countersign a replacement
Convertible Preferred Stock certificate if the reasonable requirements of the
Transfer Agent and of Section 8-405 of the Uniform Commercial Code as in
effect in the State of New York are met. If required by the Transfer Agent
or the Company, such Holder shall furnish an indemnity bond sufficient in the
judgment of the Company and the Transfer Agent to protect the Company and the
Transfer Agent from any loss which either of them may suffer if a Convertible
Preferred Stock certificate is replaced. The Company and the Transfer Agent
may charge the Holder for their expenses in replacing a Convertible Preferred
Stock certificate.
(v) Temporary Certificates. Until definitive Convertible Preferred Stock
certificates are ready for delivery, the Company may prepare and the Transfer
Agent shall countersign temporary Convertible Preferred Stock certificates.
Temporary Convertible Preferred Stock certificates shall be substantially in
the form of definitive Convertible Preferred Stock certificates but may have
variations that the Company considers appropriate for temporary Convertible
Preferred Stock certificates. Without unreasonable delay, the Company shall
prepare and the Transfer Agent shall countersign definitive Convertible
Preferred Stock certificates and deliver them in exchange for temporary
Convertible Preferred Stock certificates.
(vi) Cancellation. (A) In the event the Company shall purchase or
otherwise acquire Certificated Convertible Preferred Stock, the same shall
thereupon be delivered to the Transfer Agent for cancellation.
(B) At such time as all beneficial interests in Global Convertible
Preferred Stock have either been exchanged for Certificated Convertible
Preferred Stock, redeemed, repurchased or canceled, such Global Convertible
Preferred Stock shall thereupon be delivered to the Transfer Agent for
cancellation.
(C) The Transfer Agent and no one else shall cancel and destroy all
Convertible Preferred Stock certificates surrendered for transfer, exchange,
replacement
48
<PAGE> 59
or cancellation and deliver a certificate of such destruction to the Company
unless the Company directs the Transfer Agent to deliver canceled Convertible
Preferred Stock certificates to the Company. The Company may not issue new
Convertible Preferred Stock certificates to replace Convertible Preferred Stock
certificates to the extent they evidence Convertible Preferred Stock which the
Company has purchased or otherwise acquired.
(m) Additional Rights of Holders. In addition to the rights provided to
Holders under this Certificate of Designation, Holders shall have the rights
set forth in the Registration Rights Agreement.
(o) Certain Definitions. As used in this Certificate of Designation, the
following terms shall have the following meanings (and (1) terms defined in the
singular have comparable meanings when used in the plural and vice versa, (2)
"including" means including without limitation, (3) "or" is not exclusive and
(4) an accounting term not otherwise defined has the meaning assigned to it in
accordance with United States generally accepted accounting principles as in
effect on the Issue Date and all accounting calculations will be determined in
accordance with such principles), unless the content otherwise requires:
"Business Day" means each day which is not a Legal Holiday.
"capital stock" of any person means any and all shares, interests, rights to
purchase, warrants, options, participation or other equivalents of or interests
in (however designated) equity of such person, including any Preferred Stock,
but excluding any debt securities convertible into or exchangeable for such
equity.
49
<PAGE> 60
"Change in Control" or "Change of Control" means: (i) the sale, lease,
transfer, conveyance other disposition (other than by way of merger or
consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act), (ii) the adoption of a plan relating to the liquidation or dissolution of
the Company, (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), (other than officers, directors and stockholders
of the Company and their affiliates on the date of this Certificate of
Designation), becomes the beneficial owner (as determined in accordance with
Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more
than 50% of the voting stock of the Company or (iv) the first day on which a
majority of the members of the board of directors (excluding the directors
elected pursuant to paragraph (f) are not Continuing Directors.
"Closing Bid Price" means on any day the last reported bid price on such
day, or in case no bid takes place on such day, the average of the reported
closing bid and asked prices, in each case on the Nasdaq National Market or, if
the Common Stock is not quoted on such system, on the principal national
securities exchange on which such stock is listed or admitted to trading, or if
not listed or admitted to trading on any national securities exchange, the
average of the closing bid and asked prices as furnished by any independent
registered broker-dealer firm, selected by the Company for that purpose.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors who (i) was a member of such Board of Directors on the
date of this Certificate of Designation or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board of Directors at the time of
such nomination or election.
"Default" means any event which is, or after notice or passage of time or
both would be, a Voting Rights Triggering Event.
"DTC" means The Depository Trust Company.
50
<PAGE> 61
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Holders" means the registered holders from time to time of the Convertible
Preferred Stock.
"Indenture" means the Indenture dated as of October 5, 1995 between the
Company and IBJ Schroder Bank & Trust Company.
"Issue Date" means the date on which the Convertible Preferred Stock is
initially issued.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York.
"Liquidated Damages" means, with respect to any share of Convertible
Preferred Stock, the Additional Dividends then accrued, if any, on such share
pursuant to paragraph (c).
"Officer" means the Chairman of the Board of Directors, the President, any
Vice President, the Treasurer, the Secretary or any Assistant Secretary of the
Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Transfer Agent. The counsel may be an employee of or counsel
to the Company or the Transfer Agent.
"person" means any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
51
<PAGE> 62
"Registration Rights Agreement" means the Registration Rights Agreement
dated March 25, 1997 among the Company, Credit Suisse First Boston Corporation
and Dillon, Read & Co. Inc. with respect to the Convertible Preferred Stock.
"SEC" or "Commission" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933.
"Series 3 Preferred Stock" means the 10% Junior Series 3 Preferred Stock of
the Company.
"Shelf Registration Statement" means a shelf registration statement filed
with the SEC to cover resales of Transfer Restricted Securities by holders
thereof, as required by the Registration Rights Agreement.
"Subsidiary" means any corporation, association, partnership, limited
liability company or other business entity of which more than 50% of the total
voting power of shares of capital stock or other interests entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by the Company, the Company and one or more
Subsidiaries or one or more Subsidiaries and any partnership the sole general
partner or the managing partner of which the Company or any Subsidiary or the
only general partners of which are the Company and one or more Subsidiaries or
one or more Subsidiaries.
"Trading Day" means, in respect of any securities exchange or securities
market, each Monday, Tuesday, Wednesday, Thursday and Friday, other than any
day on which securities are not traded on the applicable securities exchange or
in the applicable securities market.
"Transfer Agent" means the transfer agent for the Convertible Preferred
Stock appointed by the Company, which initially shall be ChaseMellon
Shareholder Services, L.L.C.
"Transfer Restricted Securities" means each share of Convertible Preferred
Stock (or the shares of Common Stock into which such share of Convertible
Preferred Stock is convertible) (including additional shares of Convertible
Preferred Stock issued in payment of dividends on the
52
<PAGE> 63
Convertible Preferred Stock, if any, as permitted in accordance with the terms
hereof) until (i) the date on which such security has been effectively
registered under the Securities Act and disposed of in accordance with the
Shelf Registration Statement or (ii) the date on which such security is
distributed to the public pursuant to Rule 144 under the Securities Act or is
saleable pursuant to Rule 144(k) under the Securities Act (or any successor
rule thereof) or would be saleable pursuant to Rule 144(k) under the Securities
Act had it not been held by, or had it never been held by, an affiliate of the
Company.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
53
<PAGE> 64
IN WITNESS WHEREOF, said IXC Communications, Inc., has caused this
Certificate of Designation to be signed by John J. Willingham, its Senior Vice
President and Chief Financial Officer, this 31st day of March, 1997.
IXC COMMUNICATIONS, INC.,
by /s/ John J. Willingham
----------------------------------
Name: John J. Willingham
Title: Senior Vice President
and Chief Financial Officer
54
<PAGE> 65
EXHIBIT A
FORM OF CONVERTIBLE PREFERRED STOCK
FACE OF SECURITY
[THE SECURITY EVIDENCED HEREBY (OR ITS PREDECESSOR) (AND THE COMMON STOCK
INTO WHICH THIS SECURITY IS CONVERTIBLE) WAS ORIGINALLY ISSUED IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF
1933 (THE "SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE
TRANSFERRED IN ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION
THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY (OR THE COMMON
STOCK INTO WHICH THIS SECURITY IS CONVERTIBLE) IS HEREBY NOTIFIED THAT THE
SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY
EVIDENCED HEREBY (AND OF THE COMMON STOCK INTO WHICH THIS SECURITY IS
CONVERTIBLE) AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY (AND
THE COMMON STOCK INTO WHICH THIS SECURITY IS CONVERTIBLE) MAY BE RESOLD,
PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1) TO A PERSON WHO THE SELLER
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF
RULE 144A UNDER THE SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR FOR THE
ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (2) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE
904 OF REGULATION S UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF
AVAILABLE), (4) TO THE COMPANY OR (5) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND (B) IN ACCORDANCE WITH ALL APPLICABLE
SECURITIES LAWS OF THE STATES OF THE UNITED STATES.]*
[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK,
TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OF PAYMENT,
AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH
OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON
__________________________________
* Subject to removal upon registration under the Securities Act of 1933 or
otherwise when the security shall no longer be a restricted security.
<PAGE> 66
IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO. HAS AN INTEREST
HEREIN.]**
[TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
CERTIFICATE OF DESIGNATION REFERRED TO BELOW.]**
IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND
TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH REGISTRAR AND
TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES
WITH THE FOREGOING RESTRICTIONS.
Number of Shares of Convertible
Certificate Number Preferred Stock
[ ] [ ]
CUSIP NO.: [ ]
7 1/4% Junior Convertible Preferred Stock Due 2007
(par value $0.01) (liquidation preference $100
per share of Convertible Preferred Stock)
of
IXC Communications, Inc.
IXC Communications, Inc., a Delaware corporation (the "Company"), hereby
certifies that [ ] (the "Holder") is the registered owner of fully paid
and non-assessable preferred securities of the Company designated the 7 1/4%
Junior Convertible Preferred Stock Due 2007 (par value $0.01) (liquidation
preference $100 per share of Convertible Preferred Stock) (the "Convertible
Preferred Stock"). The shares of Convertible Preferred Stock are transferable
on the books and records of the Registrar, in person or by a duly authorized
attorney, upon surrender of this certificate duly endorsed and in proper form
for transfer. The designation, rights, privileges,
__________________________________
** Subject to removal if not a global security.
2
<PAGE> 67
restrictions, preferences and other terms and provisions of the Convertible
Preferred Stock represented hereby are issued and shall in all respects be
subject to the provisions of the Certificate of Designation dated March [ ],
1997, as the same may be amended from time to time (the "Certificate of
Designation"). Capitalized terms used herein but not defined shall have the
meaning given them in the Certificate of Designation. The Company will provide
a copy of the Certificate of Designation to a Holder without charge upon
written request to the Company at its principal place of business.
Reference is hereby made to select provisions of the Convertible Preferred
Stock set forth on the reverse hereof, and to the Certificate of Designation,
which select provisions and the Certificate of Designation shall for all
purposes have the same effect as if set forth at this place.
Upon receipt of this certificate, the Holder is bound by the Certificate of
Designation and is entitled to the benefits thereunder.
Unless the Transfer Agent's Certificate of Authentication hereon has been
properly executed, these shares of Convertible Preferred Stock shall not be
entitled to any benefit under the Certificate of Designation or be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, the Company has executed this certificate this [ ] day
of [ ], [ ].
IXC COMMUNICATIONS, INC.,
By:
-------------------------------
Name:
Title:
[Seal]
By:
-------------------------------
Name:
Title:
3
<PAGE> 68
TRANSFER AGENT'S CERTIFICATE OF AUTHENTICATION
This is one of the Convertible Preferred Stock referred to in the within
mentioned Certificate of Designation.
Dated: [ ], [ ]
CHASEMELLON SHAREHOLDER
SERVICES, L.L.C.
as Transfer Agent,
By:
---------------------------
Authorized Signatory
4
<PAGE> 69
REVERSE OF SECURITY
Dividends on each share of Convertible Preferred Stock shall be payable at a
rate per annum set forth in the face hereof or as provided in the Certificate
of Designation (including Additional Dividends).
The shares of Convertible Preferred Stock shall be redeemable as provided in
the Certificate of Designation. The shares of Convertible Preferred Stock
shall be convertible into the Company's Common Stock in the manner and
according to the terms set forth in the Certificate of Designation.
As required under Delaware law, the Company shall furnish to any Holder upon
request and without charge, a full summary statement of the designations,
voting rights preferences, limitations and special rights of the shares of each
class or series authorized to be issued by the Company so far as they have been
fixed and determined and the authority of the Board of Directors to fix and
determine the designations, voting rights, preferences, limitations and special
rights of the class and series of shares of the Company.
5
<PAGE> 70
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers the shares of
Convertible Preferred Stock evidenced hereby to:
------------------------------
- -------------------------------------------------------------------------------
(Insert assignee's social security or tax identification number)
- -------------------------------------------------------------------------------
(Insert address and zip code of assignee)
and irrevocably appoints:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
agent to transfer the shares of Convertible Preferred Stock evidenced hereby on
the books of the Transfer Agent and Registrar. The agent may substitute
another to act for him or her.
Date:
------------------------------
Signature:
-------------------------
(Sign exactly as your name appears on the other side of this Convertible
Preferred Stock Certificate)
Signature Guarantee:***
------------------------------------------------------
- ------------------------
*** (Signature must be guaranteed by an "eligible guarantor institution" that
is, a bank, stockbroker, savings and loan association or credit union
meeting the requirements of the Registrar, which requirements include
membership or participation in the Securities Transfer Agents Medallion
Program ("STAMP") or such other "signature guarantee program" as may be
determined by the Registrar in addition to, or in substitution for, STAMP,
all in accordance with the Securities Exchange Act of 1934, as amended.)
6
<PAGE> 71
EXHIBIT B
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Convertible, Preferred Stock)
The undersigned hereby irrevocably elects to convert (the "Conversion") shares
of 7 1/4% Junior Convertible Preferred Stock (the "Convertible Preferred
Stock"), represented by stock certificate No(s). _______________ (the
"Convertible Preferred Stock Certificates") into shares of common stock
("Common Stock") of IXC Communications, Inc. (the "Company") according to the
conditions of the Certificate of Designations, Preferences and Rights of the
Convertible Preferred Stock (the "Certificate of Designation"), as of the date
written below. If shares are to be issued in the name of a person other than
the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates. No fee will be
charged to the holder for any conversion, except for transfer taxes, if any. A
copy of each Convertible Preferred Stock Certificate is attached hereto (or
evidence of loss, theft or destruction thereof).
The undersigned represents and warrants that all offers and sales by the
undersigned of the shares of Common Stock issuable to the undersigned upon
conversion of the Convertible Preferred Stock shall be made pursuant to
registration of the Common Stock under the Securities Act of 1933 (the "Act"),
or pursuant to any exemption from registration under the Act.
Any holder, upon the exercise of its conversion rights in accordance with the
terms of the Certificate of Designation and the Convertible Preferred Stock,
agrees to be bound by the terms of the Registration Rights Agreement.
Capitalized terms used but not defined herein shall have the meanings ascribed
thereto in or pursuant to the Certificate of Designation.
Date of Conversion: ________________________
Applicable Conversion Price: _______________
Number of shares of Convertible
Preferred Stock to be Converted: ____________
<PAGE> 72
Number of shares of
Common Stock to be Issued: _________________
Signature: _________________________________
Name: ______________________________________
Address:** _________________________________
Fax No.: ___________________________________
- -----------------------------
* The Company is not required to issue shares of Common Stock until the
original Convertible Preferred Stock Certificate(s) (or evidence of loss,
theft or destruction thereof) to be converted are received by the Company or
its Transfer Agent. The Company shall issue and deliver shares of Common
Stock to an overnight courier not later than three business days following
receipt of the original Convertible Preferred Stock Certificate(s) to be
converted.
** Address where shares of Common Stock and any other payments or certificates
shall be sent by the Company.
2
<PAGE> 73
EXHIBIT C
CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR
REGISTRATION OF TRANSFER OF CONVERTIBLE PREFERRED STOCK
Re: 7 1/4% Junior Convertible Preferred Stock Due 2007 (the "Convertible
Preferred Stock") of IXC Communications, Inc. (the "Company")
This Certificate relates to ____ shares of Convertible Preferred Stock held
in [ ] */ book-entry or [ ] */ definitive form by _______________ (the
"Transferor").
The Transferor*:
[ ] has requested the Transfer Agent by written order to deliver in exchange
for its beneficial interest in the Convertible Preferred Stock held by the
depository shares of Convertible Preferred Stock in definitive, registered form
equal to its beneficial interest in such Convertible Preferred Stock (or the
portion thereof indicated above); or
[ ] has requested the Transfer Agent by written order to exchange or
register the transfer of Convertible Preferred Stock.
In connection with such request and in respect of such Convertible Preferred
Stock, the Transferor does hereby certify that the Transferor is familiar with
the Certificate of Designation relating to the above captioned Convertible
Preferred Stock and that the transfer of this Convertible Preferred Stock does
not require registration under the Securities Act of 1933 (the "Securities
Act") because */:
[ ] Such Convertible Preferred Stock is being acquired for the Transferor's
own account without transfer.
[ ] Such Convertible Preferred Stock is being transferred to the Company.
[ ] Such Convertible Preferred Stock is being transferred (i) to a qualified
institutional buyer (as defined in Rule 144A under the Securities Act), in
reliance on Rule 144A or (ii) pursuant to an exemption from registration in
accordance with Rule 904 under the Securities Act (and, in the case of clause
(ii), based on an opinion of counsel if the Company so requests and together
__________________________________
*/Please check applicable box.
<PAGE> 74
with a certification in substantially the form of Exhibit E to the
Certificate of Designation).
[ ] Such Convertible Preferred Stock is being transferred to an accredited
investor within the meaning of Rule 501(a)(1), (2), (3), (4), (5), (6) or (7)
under the Securities Act pursuant to a private placement exemption from the
registration requirements of the Securities Act (together with a certification
in substantially the form of Exhibit D to the Certificate of Designation).
[ ] Such Convertible Preferred Stock is being transferred in reliance on and
in compliance with another exemption from the registration requirements of the
Securities Act (and based on an opinion of counsel if the Company so requests).
-------------------------------
[INSERT NAME OF TRANSFEROR]
Date: By
------------------------------- -------------------------------
2
<PAGE> 75
EXHIBIT D
FORM OF CERTIFICATE
TO BE DELIVERED BY ACCREDITED INVESTORS
_____________, _____
ChaseMellon Shareholder Services, L.L.C.
Attention: [ ]
Ladies and Gentlemen:
In connection with our proposed purchase of certain 7 1/4% Junior
Convertible Preferred Stock Due 2007 (the "Convertible Preferred Stock"), of
IXC Communications, Inc., a Delaware corporation (the "Company"), we represent
that:
(i) we are an "accredited investor" within the meaning of Rule
501(a)(1),(2),(3),(4),(5),(6) or (7) under the Securities Act of 1933 (the
"Securities Act") (an "Accredited Investor"), or an entity in which all of
the equity owners are Accredited Investors;
(ii) any purchase of Convertible Preferred Stock will be for our own account
or for the account of one or more other Accredited Investors as to which we
exercise sole investment discretion;
(iii) we have such knowledge and experience in financial and business
matters that we are capable of evaluating the merits and risks of purchasing
Convertible Preferred Stock and we and any accounts for which we are acting
are able to bear the economic risks of our or their investment;
(iv) we are not acquiring Convertible Preferred Stock with a view to any
distribution thereof in a transaction that would violate the Securities Act
or the securities laws of any State of the United States or any other
applicable jurisdiction; provided that the disposition of our property and
the property of any accounts for which we are acting as fiduciary shall
remain at all times without our control; and
(v) we acknowledge that we have had access to such financial and other
information, and have been afforded the opportunity to ask such questions of
representatives of the Company and receive answers
<PAGE> 76
thereto, as we deem necessary in connection with our decision to purchase
Convertible Preferred Stock.
We understand that the Convertible Preferred Stock has not been registered
under the Securities Act, and we agree, on our own behalf and on behalf of each
account for which we acquire any Convertible Preferred Stock, that such
Convertible Preferred Stock may be offered, resold, pledged or otherwise
transferred only (i) to a person whom we reasonably believe to be a qualified
institutional buyer (as defined in Rule 144A under the Securities Act) in a
transaction meeting the requirements of Rule 144A, in a transaction meeting the
requirements of Rule 144 under the Securities Act, outside the United States to
a foreign person in a transaction meeting the requirements of Rule 904 under
the Securities Act (and, unless such transfer occurs in a transaction meeting
the requirements of Rule 144A, based upon an opinion of counsel, if the Company
so requests), (ii) to the Company or (iii) pursuant to an effective
registration statement, and, in each case, in accordance with any applicable
securities laws of any State of the United States or any other applicable
jurisdiction. We understand that the registrar will not be required to accept
for registration of transfer any shares of Convertible Preferred Stock, except
upon presentation of evidence satisfactory to the Company that the foregoing
restrictions on transfer have been complied with. We further understand that
the Convertible Preferred Stock purchased by us will bear a legend reflecting
the substance of this paragraph. We further agree to provide to any person
acquiring any of the Convertible Preferred Stock from us a notice advising such
person that resales of the Convertible Preferred Stock are restricted as stated
herein.
We acknowledge that you, the Company and others will rely upon our
confirmations, acknowledgements and agreements set forth herein, and we agree
to notify you promptly in writing if any of our representations or warranties
herein ceases to be accurate and complete.
2
<PAGE> 77
THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK.
Very truly yours,
-------------------------------
(Name of Transferee)
By:
---------------------------
Name:
Title:
Address:
3
<PAGE> 78
EXHIBIT E
FORM OF CERTIFICATE TO BE DELIVERED IN
CONNECTION WITH TRANSFERS PURSUANT TO REGULATION S
__________, ____
ChaseMellon Shareholder Services, L.L.C.
Attention: [ ]
Ladies and Gentlemen:
In connection with our proposed sale of certain 7 1/4% Junior Convertible
Preferred Stock Due 2007 (the "Convertible Preferred Stock") of IXC
Communications, Inc., a Delaware corporation ("the "Company"), we represent
that:
(i) the offer of the Convertible Preferred Stock was not made to a person
in the United States;
(ii) at the time the buy order was originated, the transferee was outside
the United States or we and any person acting on our behalf reasonably
believed that the transferee was outside the United States;
(iii) no directed selling efforts have been made by us in the United States
in contravention of the requirements of Rule 903(b) or Rule 904(b) of
Regulation S under the Securities Act of 1933 (the "Securities Act"), as
applicable; and
(iv) the transaction is not part of a plan or scheme by us to evade the
registration requirements of the Securities Act.
You and the Company are entitled to rely upon this letter and you are
irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with
<PAGE> 79
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
----------------------------------
(Name of Transferor)
By:
-------------------------------
Name:
Title:
Address:
2
<PAGE> 80
IXC COMMUNICATIONS, INC.
CERTIFICATE OF DESIGNATION OF THE POWERS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
AND OTHER SPECIAL RIGHTS OF 12 1/2% JUNIOR
EXCHANGEABLE PREFERRED STOCK DUE 2009 AND 12 1/2% SERIES B
JUNIOR EXCHANGEABLE PREFERRED STOCK DUE 2009 AND
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
IXC Communications, Inc. (the "Company"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware, does hereby certify that (i) pursuant to authority conferred upon the
board of directors of the Company (the "Board of Directors") by its Restated
Certificate of Incorporation (hereinafter referred to as the "Restated
Certificate of Incorporation"), and pursuant to the provisions of Sections
141(c)(2) and 151 of the General Corporation Law of the State of Delaware, said
Board of Directors is authorized to issue Preferred Stock of the Company in one
or more series and has authorized a committee of the Board of Directors (the
"Placement Committee") to adopt the resolution set forth below and (ii) the
Placement Committee duly approved and adopted the following resolution on August
14, 1997 (the "Resolution"):
RESOLVED that, pursuant to the authority vested in the Board
of Directors by its Restated Certificate of Incorporation, and the
authority vested by such Board of Directors in a committee of the Board
(the "Placement Committee"), all the members of which are members of
such Board, the Placement Committee does hereby create, authorize and
provide for the issuance of 12 1/2% Junior Exchangeable Preferred Stock
Due 2009, par value $0.01 per share, with a stated value of $1000 per
share, initially consisting of up to 450,000 shares and 12 1/2% Series
B Junior Exchangeable Preferred Stock Due 2009, par value $0.01 per
share, with a stated value of $1,000
<PAGE> 81
2
per share, initially consisting of up to 450,000 shares (collectively,
the "Exchangeable Preferred Stock") having the designation,
preferences, relative, participating, optional and other special rights
and the qualifications, limitations and restrictions thereof that are
set forth in the Restated Certificate of Incorporation and in this
Resolution as follows:
(a) Designation. There is hereby created out of the authorized
and unissued shares of Preferred Stock of the Company (i) a series of Preferred
Stock designated as the "12 1/2% Junior Exchangeable Preferred Stock Due 2009"
(the "Initial Exchangeable Preferred Stock") and (ii) a series of Preferred
Stock designated as the "12 1/2% Series B Junior Exchangeable Preferred Stock
Due 2009" (the "Series B Stock"). The number of shares constituting the Initial
Exchangeable Preferred Stock shall be 450,000, and the number of shares
constituting the Series B Stock shall be 450,000. The Initial Exchangeable
Preferred Stock and the Series B Stock are referred to as the Exchangeable
Preferred Stock. The liquidation preference of the Exchangeable Preferred Stock
shall be $1000 per share (the "Liquidation Preference").
(b) Rank. The Exchangeable Preferred Stock will, with respect
to dividend rights and rights on liquidation, winding-up and dissolution, rank
(i) senior to all classes of common stock and to each other class of Capital
Stock or series of Preferred Stock established hereafter by the Board of
Directors of the Company, the terms of which do not expressly provide that it
ranks senior to, or on a parity with, the Exchangeable Preferred Stock as to
dividend rights and rights on liquidation, winding-up and dissolution of the
Company (collectively referred to, together with all classes of common stock of
the Company, as "Junior Stock"); (ii) on a parity with each share of Convertible
Preferred Stock now or hereafter outstanding and on a parity with each other
class of Capital Stock or series of Preferred Stock established hereafter by the
Board of Directors of the
<PAGE> 82
3
Company, the terms of which expressly provide that such class or series will
rank on a parity with the Exchangeable Preferred Stock as to dividend rights and
rights on liquidation, winding-up and dissolution (collectively referred to as
"Parity Stock"); and (iii) junior to each share of Series 3 Preferred Stock now
or hereafter outstanding and junior to each class of Capital Stock or series of
Preferred Stock established hereafter by the Board of Directors of the Company,
the terms of which hereafter established classes or series expressly provide
that such class or series will rank senior to the Exchangeable Preferred Stock
as to dividend rights or rights on liquidation, winding-up and dissolution of
the Company (collectively referred to as "Senior Stock"). All claims of the
holders of the Exchangeable Preferred Stock, including claims with respect to
dividend payments, redemption payments, mandatory repurchase payments or rights
upon liquidation, winding-up or dissolution, shall rank junior to the claims of
the holders of any debt of the Company and all other creditors of the Company.
(c) Dividends. (i) Holders of the outstanding shares of
Exchangeable Preferred Stock will be entitled to receive, when, as and if
declared by the Board of Directors of the Company, out of funds legally
available therefor, cumulative preferential dividends on each share of the
Exchangeable Preferred Stock at a rate per annum equal to 12 1/2% of the
Liquidation Preference of such share payable quarterly (each such quarterly
period being herein called a "Dividend Period"). In addition to the dividends
described in the preceding sentence, holders of outstanding shares of
Exchangeable Preferred Stock will be entitled to additional dividends (the
"Additional Dividends"), when, as and if declared by the Board of Directors of
the Company, out of funds legally available therefor, with respect to the shares
of Exchangeable Preferred Stock, which Additional Dividends shall accrue as
follows if any of the following events occur (each such event in clauses (A),
(B) and (C) below being herein called a "Registration Default"): (A) if by
October 6, 1997, neither the Exchange Offer Registration Statement nor the Shelf
Registration Statement has been filed with the SEC; (B) if by January 19, 1998,
neither the Registered Exchange Offer is consummated nor the Shelf
<PAGE> 83
4
Registration Statement declared effective by the SEC; or (C) if after January
19, 1998 and after either the Exchange Offer Registration Statement or the Shelf
Registration Statement is declared effective, such Registration Statement
thereafter ceases to be effective (in each case except as permitted below) in
connection with resales of Exchangeable Preferred Stock in accordance with and
during the periods specified herein.
Additional Dividends shall accrue on the shares of
Exchangeable Preferred Stock from and including the date on which any such
Registration Default shall occur, to but excluding the date on which all such
Registration Defaults have been cured, at a rate of .50% per annum.
A Registration Default referred to in clause (C) of paragraph
(c)(i) shall be deemed not to have occurred and be continuing in relation to a
Registration Statement or the related prospectus if (i) such Registration
Default has occurred solely as a result of (x) the filing of a post-effective
amendment to the Registration Statement to incorporate annual audited financial
information with respect to the Company where such post-effective amendment is
not yet effective and needs to be declared effective to permit Holders to use
the related prospectus or (y) other material events with respect to the Company
that would need to be described in the Registration Statement or the related
prospectus and (ii) in the case of clause (y), the Company proceeds promptly and
in good faith to amend or supplement the Registration Statement and related
prospectus to describe such events unless the Company has determined in good
faith that there are material legal or commercial impediments in doing so;
provided, however, that in any case if such Registration Default occurs for a
continuous period in excess of 45 days, Additional Dividends shall be payable in
accordance with the immediately preceding paragraphs of this paragraph (c)(i)
from the day such Registration Default initially occurs until such Registration
Default is cured.
Any amounts of Additional Dividends due pursuant to clauses
(A), (B) or (C) of this paragraph (c)(i) or pursuant to the proviso contained in
the preceding sentence will be payable on the regular dividend payment dates
with
<PAGE> 84
5
respect to the Exchangeable Preferred Stock and on the same terms and
conditions and subject to the same limitations as pertain at such time for the
payment of regular dividends. The amount of Additional Dividends will be
determined by multiplying the applicable Additional Dividends rate by the
aggregate liquidation preference of the outstanding shares of Exchangeable
Preferred Stock, multiplied by a fraction, the numerator of which is the number
of days such Additional Dividend rate was applicable during such period
(determined on the basis of a 360-day year comprised of twelve 30-day months),
and the denominator of which is 360.
All dividends on the Exchangeable Preferred Stock, including
Additional Dividends, to the extent accrued, shall be cumulative, whether or not
earned or declared, on a daily basis from the Issue Date or, in the case of
additional shares of Exchangeable Preferred Stock issued in payment of a
dividend, from the date of issuance of such additional shares of Exchangeable
Preferred Stock, and shall be payable quarterly in arrears on each February 15,
May 15, August 15 and November 15 (each, a "Dividend Payment Date"), commencing
on November 15, 1997, to holders of record on the February 1, May 1, August 1
and November 1 immediately preceding the relevant Dividend Payment Date. Any
dividend on the Exchangeable Preferred Stock payable pursuant to this paragraph
(c)(i) on or prior to February 15, 2001 shall be, at the option of the Company,
payable (1) in cash or (2) through the issuance of a number of additional shares
(including fractional shares) of Exchangeable Preferred Stock (the "Additional
Shares") equal to the dividend amount divided by the Liquidation Preference of
such Additional Shares. With respect to dividends accrued after February 15,
2001, all dividends shall be payable in cash.
Any dividend accruing after February 15, 2001 that is not paid
in cash on the relevant Dividend Payment Date shall accrue interest at a rate
per annum equal to the then applicable dividend rate per annum from such
Dividend Payment Date to the date of payment of such dividend. Such interest, if
any, shall be payable in cash on each Dividend Payment Date. Any accrued
interest not paid on a Dividend Payment Date shall accrue interest on such
interest pursuant to this paragraph. Any references herein to the payment of
<PAGE> 85
6
accrued and unpaid dividends shall be deemed to include any such interest.
(ii) In the event the Company notifies the holders of
Exchangeable Preferred Stock of its election not to make a Change of Control
Offer (as defined in paragraph (h)(i)) pursuant to paragraph (h)(iii), then,
within 60 days of the occurrence of the applicable Change of Control, holders of
a majority of the outstanding shares of the Exchangeable Preferred Stock will
designate an Independent Financial Advisor to determine, within 20 days of such
designation, in the opinion of such firm, the appropriate dividend rate that the
Exchangeable Preferred Stock should bear so that, after such reset, the
Exchangeable Preferred Stock would have a market value of 101% of the
Liquidation Preference; provided, however, that no such reset shall be required
to be made if such Independent Financial Advisor determines that the
Exchangeable Preferred Stock has a market value of 101% or greater. If within 5
days of the designation of an Independent Financial Advisor by the Holders, the
Company determines that such Independent Financial Advisor is reasonably
unacceptable to the Company, the Company shall designate a second Independent
Financial Advisor to determine, within 15 days of such designation, in its
opinion, such an appropriate reset dividend rate for the Exchangeable Preferred
Stock. In the event that the two Independent Financial Advisors cannot agree,
within 25 days of the designation of an Independent Financial Advisor by the
Holders of a majority of the outstanding shares of the Exchangeable Preferred
Stock, on the appropriate reset dividend rate, the two Independent Financial
Advisors shall, within 10 days of such 25th day, designate a third Independent
Financial Advisor, which, within 15 days of designation, will determine, in its
opinion, an appropriate reset dividend rate which is between the two rates
selected by the first two Independent Financial Advisors. Upon the determination
of the reset rate, the Exchangeable Preferred Stock shall accrue and accumulate
dividends at the reset rate as of the date of occurrence of the Change of
Control; provided, however, that the reset rate shall in no event be less than
12 1/2% per annum or greater than 15% per annum. The reasonable fees and
expenses including reasonable fees and expenses of legal counsel, if any, and
customary
<PAGE> 86
7
indemnification of each of the three above-referenced Independent Financial
Advisors, shall be borne by the Company.
(iii) All dividends paid with respect to shares of the
Exchangeable Preferred Stock pursuant to paragraph (c)(i) shall be paid pro rata
to the holders entitled thereto.
(iv) No dividend may be declared or paid or set apart for the
payment of dividends by the Company on any Parity Stock for any period unless
full cumulative dividends in respect of each Dividend Period ending on or before
such period shall have been or contemporaneously are declared and paid (or are
deemed declared and paid) in full or declared and, if payable in cash, a sum in
cash sufficient for such payment set apart for such payment on the Exchangeable
Preferred Stock. If full dividends are not so paid, the Exchangeable Preferred
Stock will share dividends pro rata with the Parity Stock.
(v) The Company will not (A) declare, pay or set apart funds
for the payment of any dividend or other distribution with respect to any Junior
Stock or (B) redeem, purchase or otherwise acquire for consideration any Junior
Stock through a sinking fund or otherwise, unless (1) all accrued and unpaid
dividends with respect to the Exchangeable Preferred Stock and any Parity Stock
at the time such dividends are payable have been paid or funds have been set
apart for payment of such dividends and (2) sufficient funds have been paid or
set apart for the payment of the dividend for the current dividend period with
respect to the Exchangeable Preferred Stock and any Parity Stock. As used
herein, the term "dividend" does not include dividends payable solely in shares
of Junior Stock on Junior Stock or in options, warrants or rights to holders of
Junior Stock to subscribe or purchase any Junior Stock.
(vi) Dividends on account of arrears for any past Dividend
Period and dividends in connection with any optional redemption may be declared
and paid at any time, without reference to any regular Dividend Payment Date, to
holders of record on such date, not more than 45 days prior
<PAGE> 87
8
to the payment thereof, as may be fixed by the Board of Directors of the
Company.
(vii) Dividends payable on the Exchangeable Preferred Stock
for any period other than a Dividend Period shall be computed on the basis of a
360-day consisting year of twelve 30-day months and the actual number of days
elapsed in the period for which payable. Dividends payable on the Exchangeable
Preferred Stock for a full Dividend Period will be computed by dividing the per
annum dividend rate by four.
(d) Liquidation Preference. (i) Upon any voluntary or
involuntary liquidation, dissolution or winding-up of the Company, holders of
Exchangeable Preferred Stock will be entitled to be paid, out of the assets of
the Company available for distribution to its stockholders, the Liquidation
Preference of the outstanding shares of Exchangeable Preferred Stock, plus,
without duplication, an amount in cash equal to all accumulated and unpaid
dividends (whether or not earned or declared and including Additional Dividends,
if any,) thereon to the date fixed for liquidation, dissolution or winding-up
(including an amount equal to a prorated dividend for the period from the last
Dividend Payment Date to the date fixed for liquidation, dissolution or
winding-up that would have been payable had the Exchangeable Preferred Stock
been the subject of an Optional Redemption on such date) before any distribution
is made on any Junior Stock. If, upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the amounts payable with respect to
the Exchangeable Preferred Stock and all Parity Stock are not paid in full, the
Exchangeable Preferred Stock and the Parity Stock will share equally and ratably
(in proportion to the respective amounts that would be payable on such shares of
Exchangeable Preferred Stock and the Parity Stock, respectively, if all amounts
payable thereon had been paid in full) in any distribution of assets of the
Company to which each is entitled. After payment of the full amount of the
Liquidation Preference of the outstanding shares of Exchangeable Preferred Stock
(and, if applicable, an amount equal to a prorated dividend), the holders of
shares of Exchangeable Preferred Stock will not be entitled to any
<PAGE> 88
9
further participation in any distribution of assets of the Company.
(ii) For the purposes of this paragraph (d), neither the sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Company nor the consolidation or merger of the Company with or into one or more
other entities shall be deemed to be a liquidation, dissolution or winding-up of
the Company.
(e) Redemption. (i) Optional Redemption. (A) Except as set
forth in clause (B) below, the Exchangeable Preferred Stock shall not be
redeemable at the option of the Company prior to August 15, 2002. On or after
August 15, 2002, each share of the Exchangeable Preferred Stock may be redeemed
(subject to the legal availability of funds therefor) at any time, in whole or
in part, at the option of the Company, at the redemption prices (expressed as a
percentage of the Liquidation Preference of such share) set forth below, plus,
without duplication, an amount in cash equal to all accrued and unpaid dividends
to the date fixed for redemption (the "Optional Redemption Date") (including an
amount in cash equal to a prorated dividend for the period from the Dividend
Payment Date immediately prior to the Optional Redemption Date) (the "Optional
Redemption Price"), if redeemed during the 12-month period beginning August 15
of each of the years set forth below:
<TABLE>
<CAPTION>
Year in which redemption
occurs Percentage
------ ----------
<S> <C>
2002.................................. 106.250%
2003.................................. 105.000
2004.................................. 103.750
2005.................................. 102.500
2006.................................. 101.250
2007 and thereafter................... 100.000
</TABLE>
(B) At any time and from time to time prior to August 15,
2000, the Company may redeem in the aggregate up to 35% of the outstanding
shares of Exchangeable Preferred
<PAGE> 89
10
Stock with the proceeds of one or more Public Equity Offerings at a redemption
price (expressed as a percentage of the Liquidation Preference thereof) of
112.500% plus accrued and unpaid dividends, if any, to the redemption date
(including an amount in cash equal to a prorated dividend for any partial
dividend period); provided, however, that at least $195 million aggregate
Liquidation Preference of the Exchangeable Preferred Stock remains outstanding
after each such redemption.
(C) In the event of a redemption of only a portion of the then
outstanding shares of Exchangeable Preferred Stock, the Company shall effect
such redemption on a pro rata basis, except that the Company may redeem all of
the shares held by holders of fewer than 100 shares (or all of the shares held
by holders who would hold less than 100 shares as a result of such redemption),
as may be determined by the Company.
(ii) Mandatory Redemption. Each share of the Exchangeable
Preferred Stock (if not earlier redeemed or converted) shall be subject to
mandatory redemption in whole (to the extent of lawfully available funds
therefor) on August 15, 2009 (the "Mandatory Redemption Date") at a price equal
to 100% of the Liquidation Preference of such share, plus, without duplication,
all accrued and unpaid dividends thereon (including an amount equal to a
prorated dividend thereon from the immediately preceding Dividend Payment Date
to the Mandatory Redemption Date), if any, to the Mandatory Redemption Date (the
"Mandatory Redemption Price").
(iii) Procedure for Redemption. (A) On and after the Optional
Redemption Date or the Mandatory Redemption Date, as the case may be (the
"Redemption Date"), unless the Company defaults in the payment of the applicable
redemption price, dividends will cease to accumulate on shares of Exchangeable
Preferred Stock called for redemption and all rights of holders of such shares
will terminate except for the right to receive the Optional Redemption Price or
the Mandatory Redemption Price, as the case may be, without interest; provided,
however, that if a notice of redemption shall have been given as provided in
subparagraph (iii)(B) and the funds necessary for redemption (including an
amount
<PAGE> 90
11
in respect of all dividends that will accrue to the Redemption Date) shall have
been segregated and irrevocably set apart by the Company, in trust for the
benefit of the holders of the shares called for redemption, then dividends shall
cease to accumulate on the Redemption Date on the shares to be redeemed and, at
the close of business on the day on which such funds are segregated and set
apart, the holders of the shares to be redeemed shall, with respect to the
shares to be redeemed, cease to be stockholders of the Company and shall be
entitled only to receive the Optional Redemption Price or the Mandatory
Redemption Price, as the case may be, for such shares without interest from the
Redemption Date.
(B) With respect to a redemption pursuant to paragraph (e)(i)
or (e)(ii), the Company will send a written notice of redemption by first class
mail to each holder of record of shares of Exchangeable Preferred Stock, not
fewer than 30 days nor more than 60 days prior to the Redemption Date at its
registered address (the "Redemption Notice"); provided, however, that no failure
to give such notice nor any deficiency therein shall affect the validity of the
procedure for the redemption of any shares of Exchangeable Preferred Stock to be
redeemed except as to the holder or holders to whom the Company has failed to
give said notice or except as to the holder or holders whose notice was
defective. The Redemption Notice shall state:
(1) whether the redemption is pursuant to
paragraph (e)(i) or (e)(ii) hereof;
(2) the Optional Redemption Price or the Mandatory
Redemption Price, as the case may be;
(3) whether all or less than all the outstanding shares of the
Exchangeable Preferred Stock are to be redeemed and the total number of
shares of the Exchangeable Preferred Stock being redeemed;
(4) the Redemption Date;
(5) that the holder is to surrender to the Company, in the
manner, at the place or places and at
<PAGE> 91
12
the price designated, his certificate or certificates representing the
shares of Exchangeable Preferred Stock to be redeemed; and
(6) that dividends on the shares of the Exchangeable Preferred
Stock to be redeemed shall cease to accumulate on such Redemption Date
unless the Company defaults in the payment of the Optional Redemption
Price or the Mandatory Redemption Price, as
the case may be.
(C) Each holder of Exchangeable Preferred Stock shall
surrender the certificate or certificates representing such shares of
Exchangeable Preferred Stock to the Company, duly endorsed (or otherwise in
proper form for transfer, as determined by the Company), in the manner and at
the place designated in the Redemption Notice, and on the Redemption Date the
full Optional Redemption Price or Mandatory Redemption Price, as the case may
be, for such shares shall be payable in cash to the person whose name appears on
such certificate or certificates as the owner thereof, and each surrendered
certificate shall be canceled and retired. In the event that less than all of
the shares represented by any such certificate are redeemed, a new certificate
shall be issued representing the unredeemed shares.
(f) Voting Rights. (i) The holders of Exchangeable Preferred
Stock, except as otherwise required under Delaware law or as set forth in
paragraphs (ii) and (iii) below, shall not be entitled to vote on any matter
required or permitted to be voted upon by the stockholders of the Company.
(ii) (A) If (1) dividends on the Exchangeable Preferred Stock
are in arrears and unpaid for six or more Dividend Periods (whether or not
consecutive) (a "Dividend Default"); (2) the Company fails to redeem the
Exchangeable Preferred Stock on August 15, 2009, or fails to otherwise discharge
any redemption obligation with respect to the Exchangeable Preferred Stock; (3)
a breach or violation of any of the provisions set forth under paragraph (l)
(Certain Additional Provisions) occurs and the breach or violation continues for
a period of 30 days or more after the Company
<PAGE> 92
13
receives notice thereof specifying the default from the holders of at least 25%
of the shares of Exchangeable Preferred Stock then outstanding; or (4) the
Company fails to pay at final maturity (giving effect to any applicable grace
period) the principal amount of any Indebtedness of the Company or any
Significant Subsidiary (other than any Permitted PSINet Non-Recourse Debt) or
the final maturity of any such Indebtedness is accelerated because of a default
and the total amount of such Indebtedness unpaid or accelerated exceeds $5
million, then the number of directors constituting the Board of Directors of the
Company will, subject to paragraph (f)(ii)(E), be increased by two and the
Holders of the then outstanding shares of Exchangeable Preferred Stock (together
with the holders of Parity Stock upon which like rights have been conferred and
are exercisable), voting separately and as a class, shall have the right and
power to elect such two additional directors. Each such event described in
clauses (1),(2),(3) or (4) above is a "Voting Rights Triggering Event".
(B) The voting rights set forth in paragraph (f)(ii)(A) above
will continue until such time as (x) in the case of a Dividend Default, all
dividends in arrears on the Exchangeable Preferred Stock are paid in full in
cash or (y) in all other cases, any failure, breach or default giving rise to
such Voting Rights Triggering Event is remedied or waived by the Holders of at
least a majority of the outstanding shares of Exchangeable Preferred Stock then
outstanding, at which time the term of any directors elected pursuant to the
provisions of paragraph (f)(ii)(A) above (subject to the right of holders of any
other preferred stock to elect directors) shall terminate forthwith and the
number of directors constituting the Board of Directors shall be decreased by
two (until the occurrence of any subsequent Voting Rights Triggering Event). At
any time after voting power to elect directors shall have become vested and be
continuing in the holders of Exchangeable Preferred Stock (together with the
holders of Parity Stock upon which like rights have been conferred and are
exercisable) pursuant to paragraph (f)(ii)(A) hereof, or if vacancies shall
exist in the offices of directors elected by such holders, a proper officer of
the Company may, and upon the written request of the holders of record of at
least 25%
<PAGE> 93
14
of the shares of Exchangeable Preferred Stock then outstanding or the holders of
25% of the shares of Parity Stock then outstanding upon which like rights have
been confirmed and are exercisable addressed to the secretary of the Company
shall, call a special meeting of the Holders of Exchangeable Preferred Stock and
the holders of such Parity Stock for the purpose of electing the directors which
such holders are entitled to elect pursuant to the terms hereof; provided,
however, that no such special meeting shall be called if the next annual meeting
of stockholders of the Company is to be held within 60 days after the voting
power to elect directors shall have become vested, in which case such meeting
shall be deemed to have been called for such next annual meeting. If such
meeting shall not be called by a proper officer of the Company within 20 days
after personal service to the secretary of the Company at its principal
executive offices, then the Holders of record of at least 25% of the outstanding
shares of Exchangeable Preferred Stock or the holders of 25% of the shares of
Parity Stock upon which like rights have been confirmed and are exercisable may
designate in writing one of their members to call such meeting at the expense of
the Company, and such meeting may be called by the person so designated upon the
notice required for the annual meetings of stockholders of the Company and shall
be held at the place for holding the annual meetings of stockholders. Any holder
of Exchangeable Preferred Stock or such Parity Stock so designated shall have,
and the Company shall provide, access to the lists of holders of Exchangeable
Preferred Stock and the holders of such Parity Stock to be called pursuant to
the provisions hereof. If no special meeting of the Holders of Exchangeable
Preferred Stock and the holders of such Parity Stock is called as provided in
this paragraph (f)(ii), then such meeting shall be deemed to have been called
for the next annual meeting of stockholders of the Company or special meeting of
the holders of any other capital stock of the Company.
(C) At any meeting held for the purposes of electing directors
at which the Holders of Exchangeable Preferred Stock (together with the holders
of Parity Stock upon which like rights have been conferred and are exercisable)
shall have the right, voting together as a
<PAGE> 94
15
separate class, to elect directors as aforesaid, the presence in person or by
proxy of the holders of at least a majority in voting power of the outstanding
shares of Exchangeable Preferred Stock (and such Parity Stock) shall be required
to constitute a quorum thereof.
(D) Any vacancy occurring in the office of a director elected
by the Holders of Exchangeable Preferred Stock (and such Parity Stock) may be
filled by the remaining director elected by the Holders of Exchangeable
Preferred Stock (and such Parity Stock) unless and until such vacancy shall be
filled by the Holders of Exchangeable Preferred Stock (and such Parity Stock).
(E) In the event that an event occurs at any time which
results in the holders of any Parity Stock having voting rights to elect
directors to the Board of Directors, holders of Exchangeable Preferred Stock
shall, whether or not such event otherwise constitutes a Voting Rights
Triggering Event pursuant to paragraph (f)(ii)(A), have the voting rights set
forth in paragraphs (f)(ii)(A) and (f)(ii)(B), and such event shall be deemed
(for purposes of this paragraph (f) only) to constitute a Voting Rights
Triggering Event. In addition, in the event that during a time in which
directors elected by the holders of Exchangeable Preferred Stock pursuant to
this paragraph (f)(ii) are serving on the Board of Directors ("Previously-
Elected Directors") an event occurs which results in holders of Parity Stock
having voting rights to elect (voting together with the holders of Exchangeable
Preferred Stock) at least two directors to the Board of Directors, the holders
of Exchangeable Preferred Stock shall vote together with the holders of such
Parity Stock to elect such new directors, and upon the election of the new
directors the Previously-Elected Directors shall (unless such Previously-
Elected Directors are elected as new directors) cease to serve on the Board of
Directors.
(iii) (A) So long as any shares of the Exchangeable Preferred
Stock are outstanding, the Company will not authorize, create or increase the
authorized amount of any class or series of Senior Stock without the affirmative
vote or consent of holders of at least
<PAGE> 95
16
two-thirds of the shares of Exchangeable Preferred Stock then outstanding,
voting or consenting, as the case may be, as one class, given in person or by
proxy, either in writing or by resolution adopted at an annual or special
meeting (except that no such vote or consent shall be required for the issuance
of additional shares of Series 3 Preferred Stock to be paid as dividends on such
Series 3 Preferred Stock pursuant to the terms of such Series 3 Preferred
Stock).
(B) So long as any shares of the Exchangeable Preferred Stock
are outstanding, the Company will not amend this Certificate of Designation so
as to affect adversely the specified rights, preferences, privileges or voting
rights of Holders of shares of Exchangeable Preferred Stock or to authorize the
issuance of any additional shares of Exchangeable Preferred Stock (except to
authorize the issuance of additional shares of Exchangeable Preferred Stock to
be paid as dividends on the Exchangeable Preferred Stock, for which no consent
shall be necessary) without the affirmative vote or consent of Holders of at
least a majority of the issued and outstanding shares of Exchangeable Preferred
Stock, voting or consenting, as the case may be, as one class, given in person
or by proxy, either in writing or by resolution adopted at an annual or special
meeting.
(C) Except as set forth in paragraph (f)(iii)(A) or (B) above,
(x) the creation, authorization or issuance of any shares of any Junior Stock,
Parity Stock or Senior Stock, including the designation of a series of
Exchangeable Preferred Stock, or (y) the increase or decrease in the amount of
authorized Capital Stock of any class, including Preferred Stock, shall not
require the consent of Holders of Exchangeable Preferred Stock and shall not be
deemed to affect adversely the rights, preferences, privileges or voting rights
of shares of Exchangeable Preferred Stock.
(D) Prior to the exchange of Exchangeable Preferred Stock for
Exchange Debentures, the Company shall not amend or modify the Exchange
Indenture (except as expressly provided therein in respect of amendments without
the consent of holders of Exchange Debentures) without
<PAGE> 96
17
the affirmative vote or consent of holders of at least a majority of the shares
of Exchangeable Preferred Stock then outstanding, voting or consenting, as the
case may be, as one class, given in person or by proxy, either in writing or by
resolution adopted at an annual or special meeting.
(iv) In any case in which the Holders of Exchangeable
Preferred Stock shall be entitled to vote pursuant to this paragraph (f) or
pursuant to Delaware law, each Holder of Exchangeable Preferred Stock entitled
to vote with respect to such matters shall be entitled to one vote for each
share of Exchangeable Preferred Stock held.
(g) Exchange. (i) Exchange for Debentures. (A) The Company
may, at its option, on any scheduled Dividend Payment Date, exchange the
Exchangeable Preferred Stock, in whole but not in part, for the Exchange
Debentures; provided however, that (1) on the date of such exchange there are no
accumulated and unpaid dividends on the Exchangeable Preferred Stock (including
the dividends payable on such date) or other contractual impediment to such
exchange; (2) there shall be funds legally available sufficient therefor; (3)
immediately after giving effect to such exchange, no Default (as defined in the
Exchange Indenture) shall have occurred and be continuing, and (iv) the Company
shall have delivered to the Trustee under the Exchange Indenture an opinion of
counsel with respect to the due authorization and issuance of the Exchange
Debentures.
(B) Upon any exchange pursuant to this paragraph (g)(i),
holders of outstanding shares of Exchangeable Preferred Stock will be entitled
to receive $1.00 principal amount of Exchange Debentures for each $1.00 of
liquidation preference of Exchangeable Preferred Stock held by them. Exchange
Debentures issued in exchange for Exchangeable Preferred Stock will be issued in
principal amounts of $1,000 and integral multiples thereof to the extent
possible, and will also be issued in principal amounts less than $1,000 so that
each holder of Exchangeable Preferred Stock will receive certificates
representing the entire amount of Exchange Debentures to which such holder's
shares of Exchangeable Preferred Stock entitle such holder;
<PAGE> 97
18
provided, however, that the Company may pay cash in lieu of issuing an Exchange
Debenture in a principal amount less than $1,000.
(ii) Procedures. (A) The Company will send a written notice of
exchange (the "Exchange Notice") by mail to each holder of record of shares of
Exchangeable Preferred Stock not fewer than 30 days nor more than 60 days before
the date fixed for such exchange (the "Exchange Date"); provided, however, that
no failure to give such notice nor any deficiency therein shall affect the
validity of the procedure for the exchange of any shares of Exchangeable
Preferred Stock to be exchanged except as to the holder or holders to whom the
Company has failed to give said notice or except as to the holder or holders
whose notice was defective. The Exchange Notice shall state:
(1) the Exchange Date;
(2) that the holder is to surrender to the Company, in the
manner and at the place or places designated, his certificate or
certificates representing the shares of Exchangeable Preferred Stock to
be exchanged;
(3) that dividends on the shares of Exchangeable Preferred
Stock to be exchanged shall cease to accrue on such Exchange Date
whether or not certificates for shares of Exchangeable Preferred Stock
are surrendered for exchange on such Exchange Date unless the Company
shall default in the delivery of Exchange Debentures; and
(4) that interest on the Exchange Debentures shall accrue from
the Exchange Date whether or not certificates for shares of
Exchangeable Preferred Stock are surrendered for exchange on such
Exchange Date.
(B) On and after the Exchange Date, dividends will cease to
accrue on the outstanding shares of Exchangeable Preferred Stock, and all rights
of the holders of Exchangeable Preferred Stock (except the right to receive
Exchange Debentures, an amount in cash, to the extent
<PAGE> 98
19
applicable, equal to the accumulated and unpaid dividends to the Exchange Date
and, if the Company so elects, cash in lieu of any Exchange Debenture that is in
a principal amount that is not an integral multiple of $1,000) will terminate.
The person entitled to receive the Exchange Debentures issuable upon such
exchange will be treated for all purposes as the registered holder of such
Exchange Debentures.
(C) On or before the Exchange Date, each holder of
Exchangeable Preferred Stock shall surrender the certificate or certificates
representing such shares of Exchangeable Preferred Stock, in the manner and at
the place designated in the Exchange Notice. The Company shall cause the
Exchange Debentures to be executed on the Exchange Date and, upon surrender in
accordance with the Exchange Notice of the certificates for any shares of
Exchangeable Preferred Stock so exchanged, duly endorsed (or otherwise in proper
form for transfer, as determined by the Company), such shares shall be exchanged
by the Company into Exchange Debentures. The Company shall pay interest on the
Exchange Debentures at the rate and on the dates specified therein from the
Exchange Date.
(iii) No Exchange in Certain Cases. Notwithstanding the
foregoing provisions of this paragraph (g), the Company shall not be entitled to
exchange the Exchangeable Preferred Stock for Exchange Debentures if such
exchange, or any term or provision of the Exchange Indenture or the Exchange
Debentures, or the performance of the Company's obligations under the Exchange
Indenture or the Exchange Debentures, shall materially violate or conflict with
any applicable law or agreement or instrument then binding on the Company or if,
at the time of such exchange, the Company is insolvent or if it would be
rendered insolvent by such exchange.
(iv) Exchange of Initial Exchangeable Preferred Stock for
Series B Stock. The Series B Stock will be issued by the Company only in
connection with an exchange offer, on a share for share basis, for the Initial
Exchangeable Preferred Stock as required pursuant to the Registration Rights
Agreement. Each share of Series B Stock issued in exchange for a share of
Initial Exchangeable Preferred Stock
<PAGE> 99
20
will be deemed to have the same liquidation preference and accrued and unpaid
dividends as the share of Initial Exchangeable Preferred Stock so exchanged.
(h) Change of Control. (i) Upon the occurrence of a Change of
Control (the date of such occurrence being the "Change of Control Date"), the
Company shall either (1) offer to purchase each holder's Exchangeable Preferred
Stock in cash pursuant to the offer described in paragraph (h)(iii) (the "Change
of Control Offer") at a purchase price equal to 101% of the Liquidation
Preference thereof, plus, without duplication, all accrued and unpaid dividends,
if any, to the Change of Control Payment Date, including an amount in cash equal
to a prorated dividend for the period from the Dividend Payment Date immediately
prior to the Change of Control Payment Date to the Change of Control Payment
Date or (2) notify each holder of the Company's election not to make an offer as
described in clause (1) above, in which case the dividend rate on the
Exchangeable Preferred Stock shall be subject to reset pursuant to paragraph
(c)(ii).
(ii) Prior to the mailing of the notice referred to in
paragraph (h)(iii), but in any event within 30 days following the date on which
the Company knows or reasonably should have known that a Change in Control has
occurred, the Company covenants that it shall promptly determine if the purchase
of the Exchangeable Preferred Stock would violate or constitute a default under
the indebtedness of the Company.
(iii) Within 30 days following the date on which the Company
knows or reasonably should have known that a Change in Control has occurred, the
Company must send, by first-class mail, postage prepaid, a notice to each holder
of Exchangeable Preferred Stock. Such notice shall state whether the Company has
elected to make an offer to purchase shares of Exchangeable Preferred Stock and
if it has so elected, such notice shall contain all instructions and materials
necessary to enable such holders to tender Exchangeable Preferred Stock pursuant
to the Change of
<PAGE> 100
21
Control Offer. If the Company has elected to make a Change of Control Offer,
such notice shall state:
(A) that a Change of Control has occurred, that a Change of
Control Offer is being made pursuant to this paragraph (h) and that all
Exchangeable Preferred Stock validly tendered and not withdrawn will be
accepted for payment;
(B) the purchase price (including the amount of accrued
dividends, if any) and the purchase date (which must be no earlier than
30 days nor later than 60 days from the date such notice is mailed,
other than as may be required by law) (the "Change of Control Payment
Date");
(C) that any shares of Exchangeable Preferred Stock not
tendered will continue to accrue dividends;
(D) that, unless the Company defaults in making payment
therefor, any share of Exchangeable Preferred Stock accepted for
payment pursuant to the Change of Control Offer shall cease to accrue
dividends after the Change of Control Payment Date;
(E) that holders electing to have any shares of Exchangeable
Preferred Stock purchased pursuant to a Change of Control Offer will be
required to surrender stock certificates representing such shares of
Exchangeable Preferred Stock, properly endorsed for transfer, together
with such other customary documents as the Company and the Transfer
Agent may reasonably request to the Transfer Agent and registrar for
the Exchangeable Preferred Stock at the address specified in the notice
prior to the close of business on the Business Day prior to the Change
of Control Payment Date;
(F) that holders will be entitled to withdraw their election
if the Company receives, not later than five Business Days prior to the
Change of Control Payment Date, a telegram, a telex, facsimile
transmission or letter setting forth the name of the
<PAGE> 101
22
holder, the number of shares of Exchangeable Preferred Stock the holder
delivered for purchase and a statement that such holder is withdrawing
his election to have such shares of Exchangeable Preferred Stock
purchased;
(G) that holders whose shares of Exchangeable Preferred Stock
are purchased only in part will be issued a new certificate
representing the unpurchased shares of Exchangeable Preferred Stock;
and
(H) the circumstances and relevant facts regarding such Change
of Control (including information with respect to pro forma historical
income, cash flow and capitalization after giving effect to such Change
of Control).
If the Company elects not to make a Change of Control Offer,
such notice shall state that the dividend rate on the Exchangeable Preferred
Stock is subject to adjustment pursuant to paragraph (c)(ii).
(iv) The Company will comply with any tender offer rules under
the Exchange Act which then may be applicable, including Rules 13e-4 and 14e-1,
in connection with any offer made by the Company to repurchase the shares of
Exchangeable Preferred Stock as a result of a Change of Control. To the extent
that the provisions of any securities laws or regulations conflict with
provisions of this Certificate of Designation, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under this Certificate of Designation by virtue
thereof.
(v) On the Change of Control Payment Date the Company shall
(A) accept for payment the shares of Exchangeable Preferred Stock validly
tendered pursuant to the Change of Control Offer, (B) pay to the holders of
shares so accepted the purchase price therefor in cash and (C) cancel each
surrendered certificate and retire the shares represented thereby. Unless the
Company defaults in the payment for the shares of Exchangeable Preferred Stock
tendered pursuant to the Change of Control Offer, dividends will cease to accrue
with respect to the shares of
<PAGE> 102
23
Exchangeable Preferred Stock tendered and all rights of holders of such tendered
shares will terminate, except for the right to receive payment therefor, on the
Change of Control Payment Date.
(vi) To accept the Change of Control Offer, the holder of a
share of Exchangeable Preferred Stock shall deliver, on or before the 10th day
prior to the Change of Control Payment Date, written notice to the Company (or
an agent designated by the Company for such purpose) of such holder's
acceptance, together with certificates evidencing the shares of Exchangeable
Preferred Stock with respect to which the Change of Control Offer is being
accepted, duly endorsed for transfer.
(i) Conversion or Exchange. Except as otherwise provided
herein, the holders of shares of Exchangeable Preferred Stock shall not have any
rights hereunder to convert such shares into or exchange such shares for shares
of any other class or classes or of any other series of any class or classes of
Capital Stock of the Company.
(j) Reissuance of Exchangeable Preferred Stock. Shares of
Exchangeable Preferred Stock that have been issued and reacquired in any manner,
including shares purchased or redeemed or exchanged, shall not be reissued as
shares of Exchangeable Preferred Stock and shall (upon compliance with any
applicable provisions of the laws of Delaware) have the status of authorized and
unissued shares of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of Preferred Stock; provided,
however, that so long as any shares of Exchangeable Preferred Stock are
outstanding, any issuance of such shares must be in compliance with the terms
hereof.
(k) Business Day. If any payment, redemption or exchange shall
be required by the terms hereof to be made on a day that is not a Business Day,
such payment, redemption or exchange shall be made on the immediately succeeding
Business Day.
<PAGE> 103
24
(l) Certain Additional Provisions. The Company covenants and
agrees for the benefit of the Holders as follows:
(i) SEC Reports. The Company shall file with the Trustee and
provide Holders, within 15 days after it files them with the SEC, copies of its
annual report and the information, documents and other reports which the Company
is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange
Act. Notwithstanding that the Company may not be required to remain subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company shall continue to file with the SEC and provide the Trustee and Holders
with such annual reports and such information, documents and other reports as
are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a
U.S. corporation subject to such Sections, such information, documents and other
reports to be so filed and provided at the times specified for the filing of
such information, documents and reports under such Sections.
(ii) Limitation on Indebtedness. (A) The Company shall not
Incur, and shall not permit any Restricted Subsidiary to Incur, directly or
indirectly, any Indebtedness unless, on the date of such Incurrence and after
giving pro forma effect thereto (including pro forma application of the net
proceeds therefrom) and to any other Indebtedness Incurred or repaid since the
end of the period referred to below and the receipt and application of the
proceeds thereof, either (i) the Indebtedness to Operating Cash Flow Ratio for
the Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
Indebtedness is Incurred would have been not more than 5.0 to 1.0, or (ii) the
Company's Consolidated Capital Ratio as of the end of the most recent fiscal
quarter for which internal financial statements are available immediately
preceding the date on which such Indebtedness is Incurred is less than 2.0 to
1.0.
<PAGE> 104
25
(B) Notwithstanding the foregoing paragraph (a), the Company
and its Restricted Subsidiaries may Incur any or all of the following
Indebtedness:
(1) Indebtedness Incurred pursuant to one or more Credit
Agreements; provided, however, that, after giving effect to any such
Incurrence, the aggregate principal amount of such Indebtedness then
outstanding does not exceed the greater of (A) $150,000,000 and (B) 85%
of the book value of the Accounts Receivables of the Company and its
Restricted Subsidiaries;
(2) Indebtedness owed to and held by the Company or a
Restricted Subsidiary; provided, however, that any subsequent issuance
or transfer of any Capital Stock which results in any Restricted
Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another
Restricted Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Indebtedness by the issuer thereof;
(3) the Exchange Debentures (including Exchange Debentures
issued in lieu of cash interest payments with respect to Exchange
Debentures);
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this paragraph
(l)(ii)(B));
(5) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to paragraph (l)(ii)(A) pursuant to clause (3) or (4)
of this paragraph (l)(ii)(B) or this clause (5);
(6) Hedging Obligations consisting of Interest Rate Agreements
directly related to Indebtedness permitted to be Incurred by the
Company and its Restricted Subsidiaries pursuant to this Certificate of
Designation.
(7) Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money
<PAGE> 105
26
obligations, in each case Incurred for the purpose of financing all or
any part of the purchase price or cost of construction or improvement
of property used in the business of the Company or such Restricted
Subsidiary;
(8) In the event that the PSINet Shares are held by the
Company or a Restricted Subsidiary, the Incurrence by the Company or
such Restricted Subsidiary of Permitted PSINet Non-Recourse Debt; and
(9) Indebtedness in an aggregate principal amount at any time
outstanding which, together with the amount of all other Indebtedness
of the Company and its Restricted Subsidiaries outstanding on the date
of such Incurrence (other than Indebtedness permitted by clauses (1)
through (8) of this paragraph (l)(ii)(B) and paragraph (l)(ii)(A)),
does not exceed 5% of Consolidated Tangible Assets.
(C) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to paragraph (l)(ii)(B) if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinated Obligations unless such
Indebtedness shall be subordinated to the Exchange Debentures to at least the
same extent as such Subordinated Obligations.
(D) For purposes of determining compliance with this paragraph (l)(ii),
(1) in the event that an item of Indebtedness meets the criteria of more than
one of the types of Indebtedness described above, the Company, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses and
(2) an item of Indebtedness may be divided and classified in more than one of
the types of Indebtedness described above.
(iii) Limitation on Restricted Payments. (A) The Company shall
not, and shall not permit any Restricted
<PAGE> 106
27
Subsidiary, directly or indirectly, to make a Restricted Payment if at the time
the Company or such Restricted Subsidiary makes such Restricted Payment:
(1) a Voting Rights Triggering Event shall have occurred and
be continuing (or would result therefrom);
(2) the Company is not able to Incur an additional $1.00 of
Indebtedness under paragraph (l)(ii)(A); or
(3) the aggregate amount of such Restricted Pay ment and all
other Restricted Payments since the Issue Date would exceed the sum of:
(I) an amount equal to the Cumulative Operating Cash
Flor for the period (taken as one accounting period) from the
beginning of the first full fiscal quarter commencing after
the Issue Date to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment less 1.50
times the Company's Cumulative Consolidated Interest Expense
for such period;
(II) the aggregate Net Cash Proceeds received by the
Company from the issuance or sale of its Parity Stock and
Junior Stock (in each case other than Disqualified Stock)
subsequent to the Issue Date (other than an issuance or sale
to a Subsidiary of the Company and other than an issuance or
sale to an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the
benefit of their employees);
(III) the amount by which Indebtedness of the Company
is reduced on the Company's balance sheet upon the conversion
or exchange (other than by a Subsidiary of the Company)
subsequent to the Issue Date of any Indebtedness of the
Company convertible or exchangeable for Parity Stock or Junior
Stock (in each case other than Disqualified
<PAGE> 107
28
Stock) of the Company (less the amount of any cash, or the
fair value of any other property, distributed by the Company
upon such conversion or exchange); and
(IV) an amount equal to the sum of (x) the net
reduction in Investments in any Person resulting from
dividends, repayments of loans or advances or other transfers
of assets (but excluding such interest, dividends, repayments,
advances or other transfers of assets to the extent any such
item increases Consolidated Net Income), in each case to the
Company or any Restricted Subsidiary from any Person
(including, without limitation, from Unrestricted
Subsidiaries), and (y) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair
market value of the net assets of an Unrestricted Subsidiary
at the time such Unrestricted Subsidiary is designated a
Restricted Subsidiary; provided, however, that the foregoing
sum shall not exceed, in the case of any Person (including any
Unrestricted Subsidiary), the amount of Investments previously
made (and treated as a Restricted Payment) by the Company or
any Restricted Subsidiary in such Person.
(B) The provisions of paragraph (l)(iii)(A) shall not
prohibit:
(1) any Restricted Payment made out of the proceeds of the
substantially concurrent sale of, or any acquisition of any Parity
Stock or Junior Stock of the Company made by exchange for, other Parity
Stock or Junior Stock, as the case may be, of the Company (in each case
other than Disqualified Stock and other than Parity Stock or Junior
Stock issued or sold to a Subsidiary of the Company or an employee
stock ownership plan or to a trust established by the Company or any of
its Subsidiaries for the benefit of their employees); provided,
however, that (I) such Restricted Payment shall be excluded in the
calculation of the amount of Restricted Payments and (II) the Net Cash
Proceeds from such sale shall be excluded from the
<PAGE> 108
29
calculation of amounts under paragraph (l)(iii)(A)(3)(II);
(2) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would
have complied with paragraph (l)(iii); provided, however, that at the
time of payment of such dividend, no other Voting Rights Triggering
Event shall have occurred and be continuing (or result therefrom);
provided further, however, that such dividend shall be included in the
calculation of the amount of Restricted Payments; or
(3) the repurchase or other acquisition of shares of, or
options to purchase shares of, common stock of the Company or any of
its Subsidiaries from employees, former employees, directors or former
directors of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former
directors), pursuant to the terms of the agreements (including
employment agreements) or plans (or amendments thereto) approved by the
Board of Directors under which such individuals purchase or sell or are
granted the option to purchase or sell, shares of such common stock;
provided, however, that the aggregate amount of such repurchases and
other acquisitions shall not exceed $1,000,000 in any calendar year;
provided further, however, that such repurchases and other acquisitions
shall be excluded in the calculation of the amount of Restricted
Payments.
(iv) Limitation on Restrictions on Distributions from
Restricted Subsidiaries. The Company shall not, and shall not permit any
Restricted Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to (A) pay dividends or make any other distributions on
its Capital Stock to the Company or a Restricted Subsidiary or pay any
Indebtedness owed to the
<PAGE> 109
30
Company, (B) make any loans or advances to the Company or (C) transfer any of
its property or assets to the Company, except:
(1) any encumbrance or restriction pursuant to an
agreement in effect at or entered into on the Issue
Date;
(2) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary on or prior to the
date on which such Restricted Subsidiary was acquired by the Company
(other than Indebtedness Incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant
to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Company) and outstanding on such date;
(3) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (1) or (2) of this paragraph (l)(iv) or
this clause (3) or contained in any amendment to an agreement referred
to in clause (1) or (2) of this paragraph (l)(iv) or this clause (3);
provided, however, that the encumbrances and restrictions with respect
to such Restricted Subsidiary contained in any such refinancing
agreement or amendment are no less favorable to the holders of
Exchangeable Preferred Stock than encumbrances and restrictions with
respect to such Restricted Subsidiary contained in such predecessor
agreements;
(4) any such encumbrance or restriction consisting of
customary nonassignment provisions in leases governing leasehold
interests to the extent such provisions restrict the transfer of the
lease or the property leased thereunder;
<PAGE> 110
31
(5) in the case of clause (C) above, restrictions contained in
IRU Agreements, security agreements or mortgages securing Indebtedness
or other obligations of a Restricted Subsidiary to the extent such
restrictions restrict the transfer of the property subject to such
security agreements or mortgages;
(6) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of
such Restricted Subsidiary pending the closing of such sale or
disposition; and
(7) any such encumbrance or restriction contained
in the PSINet Agreement.
(v) Limitation on Affiliate Transactions. (A) The Company
shall not, and shall not permit any Restricted Subsidiary to, enter into or
permit to exist any transaction (including the purchase, sale, lease or exchange
of any property, employee compensation arrangements or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction") unless
(1) such Affiliate Transaction is on terms that are no less favorable to the
Company or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (2) the Company delivers to the Transfer
Agent (I) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $1,000,000 a resolution of the Board of Directors set
forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (1) above and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of Directors
and (II) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $10,000,000, other than transactions with GE Capital
Communication and Excluded PSINet Transactions, an opinion as to the fairness to
the Company or such Restricted Subsidiary of such Affiliate Transaction from a
financial point of view issued by an investment banking firm of national
standing.
<PAGE> 111
32
(B) The provisions of the foregoing paragraph (l)(v)(A) shall
not prohibit (1) any Restricted Payment permitted to be paid pursuant to
paragraph (l)(iii), (2) any issuance of securities, or other payments, awards or
grants in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans approved by the
Board of Directors, (3) the grant of stock options or similar rights to
employees and directors of the Company pursuant to plans approved by the Board
of Directors, (4) loans or advances to employees in the ordinary course of
business in accordance with the past practices of the Company or its Restricted
Subsidiaries, but in any event not to exceed $500,000 in the aggregate
outstanding at any one time, (5) any employment or consulting arrangement or
agreement entered into by the Company or any of its Restricted Subsidiaries in
the ordinary course of business and consistent with the past practice of the
Company or such Restricted Subsidiary, (6) the payment of reasonable fees to
directors of the Company and its Restricted Subsidiaries who are not employees
of the Company or its Restricted Subsidiaries, (7) any Affiliate Transaction
between the Company and a Restricted Subsidiary or between Restricted
Subsidiaries, (8) transactions in connection with Permitted Businesses between
the Company and GE Capital Communication, (9) transactions between the Company
or any Restricted Subsidiary specifically contemplated by the PSINet Agreement
and (10) the issuance or sale of any Capital Stock (other than Disqualified
Stock) of the Company. Notwithstanding the foregoing, Affiliate Transactions
shall not include any transaction involving the sale, purchase, repurchase,
redemption, transfer, exchange or other acquisition or disposition of Senior
Notes, Exchangeable Preferred Stock or Convertible Preferred Stock by or from,
or the payment of principal of, premium, if any, and interest on, or liquidation
preference of and dividend on, any Senior Notes, Exchangeable Preferred Stock or
Convertible Preferred Stock, as the case may be, to any Affiliate of the Company
or any Affiliate of a Restricted Subsidiary of the Company; provided, however,
that such transaction is offered substantially concurrently to all other holders
of Senior Notes, Exchangeable Preferred Stock or Convertible Preferred Stock, as
the case may be, on the same terms and conditions;
<PAGE> 112
33
provided further, however, that such transaction is approved by a majority of
the disinterested members of the Board of Directors, other than transactions in
connection with the payment of principal of, premium, if any, and interest on,
or liquidation preference of and dividends on, Senior Notes, Exchangeable
Preferred Stock or Convertible Preferred Stock, as the case may be, pursuant to
the provisions of the indenture or certificate of designation governing the
payment of interest and principal, dividends and liquidation preference,
optional redemption, repurchases from the proceeds of an asset disposition and
repurchases upon a change of control.
(vi) When Company May Merge or Transfer Assets. The Company
shall not consolidate with or merge with or into, or convey, transfer or lease,
in one transaction or a series of transactions, all or substantially all its
assets to, any Person, unless: (1) the resulting, surviving or transferee Person
(the "Successor Company") shall be a Person organized and existing under the
laws of the United States of America, any State thereof or the District of
Columbia and the Successor Company (if not the Company) shall expressly assume
all the obligations of the Company under the Exchangeable Preferred Stock; (2)
immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary as a result of such transaction as having been Incurred by such
Successor Company or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing, (3) immediately after giving
effect to such transaction, the Successor Company would be able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (l)(ii)(A); (4)
immediately after giving effect to such transaction, the Successor Company shall
have Consolidated Net Worth in an amount that is not less than the Consolidated
Net Worth of the Company immediately prior to such transaction; and (5) the
Company shall have delivered to the Trustee an Officers' Certificate, stating
that such consolidation, merger or transfer and such assumption (if any) comply
with this Certificate of Designation.
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34
(m) Certificates. (i) Form and Dating. The Exchangeable
Preferred Stock and the Transfer Agent's certificate of authentication shall be
substantially in the form of Exhibit A, which is hereby incorporated in and
expressly made a part of this Certificate of Designation. The Exchangeable
Preferred Stock certificate may have notations, legends or endorsements required
by law, stock exchange rule, agreements to which the Company is subject, if any,
or usage (provided that any such notation, legend or endorsement is in a form
acceptable to the Company). Each Exchangeable Preferred Stock certificate shall
be dated the date of its authentication. The terms of the Exchangeable Preferred
Stock certificate set forth in Exhibit A are part of the terms of this
Certificate of Designation.
(A) Global Exchangeable Preferred Stock. The Exchangeable
Preferred Stock sold in reliance on Rule 144A shall be issued initially in the
form of one or more fully registered global certificates with the global
securities legend and restricted securities legend set forth in Exhibit A hereto
(the "Global Exchangeable Preferred Stock"), which shall be deposited on behalf
of the purchasers represented thereby with the Transfer Agent, at its New York
office, as custodian for DTC (or with such other custodian as DTC may direct),
and registered in the name of DTC or a nominee of DTC, duly executed by the
Company and authenticated by the Transfer Agent as hereinafter provided. Subject
to the terms hereof and to the requirements of applicable law, the number of
shares of Exchangeable Preferred Stock represented by Global Exchangeable
Preferred Stock may from time to time be increased or decreased by adjustments
made on the records of the Transfer Agent and DTC or its nominee as hereinafter
provided.
(B) Book-Entry Provisions. In the event Global Exchangeable
Preferred Stock is deposited with or on behalf of DTC, the Company shall execute
and the Transfer Agent shall authenticate and deliver initially one or more
Global Exchangeable Preferred Stock certificates that (a) shall be registered in
the name of DTC for such Global Exchangeable Preferred Stock or the nominee of
DTC and (b) shall be delivered by the Transfer Agent to DTC or pursuant to DTC's
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35
instructions or held by the Transfer Agent as custodian for DTC.
Members of, or participants in, DTC ("Agent Members") shall
have no rights under this Certificate of Designation with respect to any Global
Exchangeable Preferred Stock held on their behalf by DTC or by the Transfer
Agent as the custodian of DTC or under such Global Exchangeable Preferred Stock,
and DTC may be treated by the Company, the Transfer Agent and any agent of the
Company or the Transfer Agent as the absolute owner of such Global Exchangeable
Preferred Stock for all purposes whatsoever. Notwithstanding the foregoing,
nothing herein shall prevent the Company, the Transfer Agent or any agent of the
Company or the Transfer Agent from giving effect to any written certification,
proxy or other authorization furnished by DTC or impair, as between DTC and its
Agent Members, the operation of customary practices of DTC governing the
exercise of the rights of a holder of a beneficial interest in any Global
Exchangeable Preferred Stock.
(C) Certificated Exchangeable Preferred Stock. Exchangeable
Preferred Stock initially sold in offshore transactions pursuant to Regulation S
under the Securities Act will be issued in fully registered certificated form
("Certificated Exchangeable Preferred Stock").
Except as otherwise provided by applicable law or as provided
in this paragraph (m)(i) or in paragraph (m)(iii), owners of beneficial
interests in Global Exchangeable Preferred Stock will not be entitled to receive
physical delivery of Certificated Exchangeable Preferred
Stock.
After a transfer of any Initial Exchangeable Preferred Stock
during the period of the effectiveness of a Shelf Registration Statement with
respect to such Initial Exchangeable Preferred Stock, all requirements
pertaining to legends on such Initial Exchangeable Preferred Stock will cease to
apply, the requirements requiring that any such Initial Exchangeable Preferred
Stock issued to Holders be issued in global form will cease to apply, and
Certificated Exchangeable Preferred Stock without legends will be
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36
available to the transferee of the Holder of such Initial Exchangeable Preferred
Stock upon exchange of such transferring Holder's Initial Exchangeable Preferred
Stock or directions to transfer such Holder's interest in the Global
Exchangeable Preferred Stock, as applicable. Upon the consummation of a
Registered Exchange Offer with respect to the Initial Exchangeable Preferred
Stock pursuant to which Holders of such Initial Exchangeable Preferred Stock are
offered Series B Stock in exchange for their Initial Exchangeable Preferred
Stock, all requirements that Initial Exchangeable Preferred Stock be issued in
global form will cease to apply and Certificated Exchangeable Preferred Stock
with the restricted securities legend set forth in Exhibit A hereto will be
available to Holders of such Initial Exchangeable Preferred Stock that do not
exchange their Initial Exchangeable Preferred Stock, and Series B Stock in
certificated form will be available to Holders that exchange such Initial
Exchangeable Preferred Stock in such Registered Exchange Offer.
(ii) Execution and Authentication. Two Officers shall sign the
certificates representing Exchangeable Preferred Stock for the Company by manual
or facsimile signature. The Company's seal shall be impressed, affixed,
imprinted or reproduced on the Exchangeable Preferred Stock and may be in
facsimile form.
If an Officer whose signature is on certificates representing
Exchangeable Preferred Stock no longer holds that office at the time the
Transfer Agent authenticates the Exchangeable Preferred Stock evidenced thereby,
the shares of Exchangeable Preferred Stock evidenced thereby shall be valid
nevertheless.
A certificate representing Exchangeable Preferred Stock shall
not be valid until an authorized signatory of the Transfer Agent manually signs
the certificate of authentication on the Exchangeable Preferred Stock. The
signature shall be conclusive evidence that the Exchangeable Preferred Stock has
been authenticated under this Certificate of Designation.
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37
The Transfer Agent shall authenticate and deliver: (1) 300,000
shares of Initial Exchangeable Preferred Stock for original issue and (2)
300,000 shares of Series B Stock for issue only in a Registered Exchange Offer
pursuant to the Registration Rights Agreement, in each case upon a written order
of the Company signed by two Officers or by an Officer and either an Assistant
Treasurer or an Assistant Secretary of the Company. In addition, the Transfer
Agent shall authenticate and deliver, from time to time, Additional Shares for
original issue upon order of the Company signed by two Officers or by an Officer
or either an Assistant Treasurer or Assistant Secretary of the Company. Such
orders shall specify the number of shares of Exchangeable Preferred Stock to be
authenticated and the date on which the original issue of Exchangeable Preferred
Stock is to be authenticated and whether the Exchangeable Preferred Stock is to
be Initial Exchangeable Preferred Stock or Series B Stock.
The Transfer Agent may appoint an authenticating agent
reasonably acceptable to the Company to authenticate the Exchangeable Preferred
Stock. Unless limited by the terms of such appointment, an authenticating agent
may authenticate Exchangeable Preferred Stock whenever the Transfer Agent may do
so. Each reference in this Certificate of Designation to authentication by the
Transfer Agent includes authentication by such agent. An authenticating agent
has the same rights as the Transfer Agent or agent for service of notices and
demands.
(iii) Transfer and Exchange. (A) Transfer and Exchange of
Certificated Exchangeable Preferred Stock. When Certificated Exchangeable
Preferred Stock is presented to the Transfer Agent with a request to register
the transfer of such Certificated Exchangeable Preferred Stock or to exchange
such Certificated Exchangeable Preferred Stock for an equal number of shares of
Certificated Exchangeable Preferred Stock of other authorized denominations, the
Transfer Agent shall register the transfer or make the exchange as requested if
its reasonable requirements for such transaction are met; provided, however,
that the
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38
Certificated Exchangeable Preferred Stock surrendered for transfer or exchange:
(1) shall be duly endorsed or accompanied by a written
instrument of transfer in form reasonably satisfactory to the Company
and the Transfer Agent, duly executed by the Holder thereof or its
attorney duly authorized in writing; and
(2) in the case of Transfer Restricted Securities that are
Certificated Exchangeable Preferred Stock, are being transferred or
exchanged pursuant to an effective registration statement under the
Securities Act or pursuant to clause (I) or (II) below, and are
accompanied by the following additional information and documents, as
applicable:
(I) if such Transfer Restricted Securities are being
delivered to the Transfer Agent by a Holder for registration
in the name of such Holder, without transfer, a certification
from such Holder to that effect in substantially the form of
Exhibit B hereto; or
(II) if such Transfer Restricted Securities are being
transferred to the Company or to a "qualified institutional
buyer" ("QIB") in accordance with Rule 144A under the
Securities Act or pursuant to an exemption from registration
in accordance with Rule 144 or Regulation S under the
Securities Act, a certification to that effect (in
substantially the form of Exhibit B hereto).
(B) Restrictions on Transfer of Certificated Exchangeable
Preferred Stock for a Beneficial Interest in Global Exchangeable Preferred
Stock. Certificated Exchangeable Preferred Stock may not be exchanged for a
beneficial interest in Global Exchangeable Preferred Stock except upon
satisfaction of the requirements set forth below. Upon receipt by the Transfer
Agent of Certificated Exchangeable Preferred Stock, duly endorsed or accompanied
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39
by appropriate instruments of transfer, in form satisfactory to the Transfer
Agent, together with:
(1) if such Certificated Exchangeable Preferred Stock is a
Transfer Restricted Security, certification that such Certificated
Exchangeable Preferred Stock is being transferred to a QIB in
accordance with Rule 144A under the Securities Act; and
(2) whether or not such Certificated Exchangeable Preferred
Stock is a Transfer Restricted Security, written instructions directing
the Transfer Agent to make, or to direct DTC to make, an adjustment on
its books and records with respect to such Global Exchangeable
Preferred Stock to reflect an increase in the number of shares of
Exchangeable Preferred Stock represented by the Global Exchangeable
Preferred Stock,
then the Transfer Agent shall cancel such Certificated Exchangeable Preferred
Stock and cause, or direct DTC to cause, in accordance with the standing
instructions and procedures existing between DTC and the Transfer Agent, the
number of shares of Exchangeable Preferred Stock represented by the Global
Exchangeable Preferred Stock to be increased accordingly. If no Global
Exchangeable Preferred Stock is then outstanding, the Company shall issue and
the Transfer Agent shall authenticate, upon written order of the Company in the
form of an Officers' Certificate, a new Global Exchangeable Preferred Stock
representing the appropriate number of shares.
(C) Transfer and Exchange of Global Exchangeable Preferred
Stock. The transfer and exchange of Global Exchangeable Preferred Stock or
beneficial interests therein shall be effected through DTC, in accordance with
this Certificate of Designation (including applicable restrictions on transfer
set forth herein, if any) and the procedures of DTC therefor.
(D) Transfer of a Beneficial Interest in Global Exchangeable
Preferred Stock for a Certificated Exchangeable Preferred Stock.
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40
(1) Any person having a beneficial interest in Exchangeable
Preferred Stock that is being transferred or exchanged pursuant to an
effective registration statement under the Securities Act or pursuant
to clause (I) or (II) below may upon request, and if accompanied by the
information specified below, exchange such beneficial interest for
Certificated Exchangeable Preferred Stock representing the same number
of shares of Exchangeable Preferred Stock. Upon receipt by the Transfer
Agent of written instructions or such other form of instructions as is
customary for DTC from DTC or its nominee on behalf of any person
having a beneficial interest in Global Exchangeable Preferred Stock and
upon receipt by the Transfer Agent of a written order or such other
form of instructions as is customary for DTC or the person designated
by DTC as having such a beneficial interest in a Transfer Restricted
Security only, and upon the following additional information and
documents (all of which may be submitted by facsimile):
(I) if such beneficial interest is being transferred
to the person designated by DTC as being the owner of a
beneficial interest in Global Exchangeable Preferred Stock, a
certification from such person to that effect (in
substantially the form of Exhibit B hereto); or
(II) if such beneficial interest is being transferred
to a QIB in accordance with Rule 144A under the Securities Act
or pursuant to an exemption from registration in accordance
with Rule 144 or Regulation S under the Securities Act, a
certification to that effect (in substantially the form of
Exhibit B hereto);
then, the Transfer Agent or DTC, at the direction of the Transfer Agent, will
cause, in accordance with the standing instructions and procedures existing
between DTC and the Transfer Agent, the number of shares of Exchangeable
Preferred Stock represented by Global Exchangeable Preferred Stock to be reduced
on its books and records and, following such reduction, the Company will execute
and the Transfer
<PAGE> 120
41
Agent will authenticate and deliver to the transferee Certificated Exchangeable
Preferred Stock.
(2) Certificated Exchangeable Preferred Stock issued in
exchange for a beneficial interest in a Global Exchangeable Preferred
Stock pursuant to this paragraph (m)(iii)(D) shall be registered in
such names and in such authorized denominations as DTC, pursuant to
instructions from its direct or indirect participants or otherwise,
shall instruct the Transfer Agent. The Transfer Agent shall deliver
such Certificated Exchangeable Preferred Stock to the persons in whose
names such Exchangeable Preferred Stock are so registered in accordance
with the instructions of DTC.
(E) Restrictions on Transfer and Exchange of Global
Exchangeable Preferred Stock. Notwithstanding any other provisions of this
Certificate of Designation (other than the provisions set forth in paragraph
(m)(iii)(F)), Global Exchangeable Preferred Stock may not be transferred as a
whole except by DTC to a nominee of DTC or by a nominee of DTC to DTC or another
nominee of DTC or by DTC or any such nominee to a successor depository or a
nominee of such successor depository.
(F) Authentication of Certificated Exchangeable
Preferred Stock. If at any time:
(1) DTC notifies the Company that DTC is unwilling or unable
to continue as depository for the Global Exchangeable Preferred Stock
and a successor depository for the Global Exchangeable Preferred Stock
is not appointed by the Company within 90 days after delivery of such
notice;
(2) DTC ceases to be a clearing agency registered
under the Exchange Act;
(3) there shall have occurred and be continuing a
Voting Rights Triggering Event; or
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42
(4) the Company, in its sole discretion, notifies the Transfer
Agent in writing that it elects to cause the issuance of Certificated
Exchangeable Preferred Stock under this Certificate of Designation,
then the Company will execute, and the Transfer Agent, upon receipt of a written
order of the Company signed by two Officers or by an Officer and either an
Assistant Treasurer or an Assistant Secretary of the Company requesting the
authentication and delivery of Certificated Exchangeable Preferred Stock to the
persons designated by the Company, will authenticate and deliver Certificated
Exchangeable Preferred Stock equal to the number of shares of Exchangeable
Preferred Stock represented by the Global Exchangeable Preferred Stock, in
exchange for such Global Exchangeable Preferred Stock.
(G) Legend. (1) Except as permitted by the following paragraph
(2), each certificate evidencing the Global Exchangeable Preferred Stock and the
Certificated Exchangeable Preferred Stock (and all Exchangeable Preferred Stock
issued in exchange therefor or substitution thereof) shall bear a legend in
substantially the following form:
"THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES
ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF
THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY
BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER.
"THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE ISSUER THAT
(A) THIS SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED ONLY (i) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS
A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A,
(ii) IN AN
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43
OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE SECURITIES
ACT, (iii) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (iv)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR (v) TO THE COMPANY, IN EACH OF CASES (i) THROUGH (iv) IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE
RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.
"BY ITS ACQUISITION HEREOF, THE HOLDER REPRESENTS THAT (A) IT IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT") OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS
SECURITY IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S.
(2) Upon any sale or transfer of a Transfer Restricted
Security (including any Transfer Restricted Security represented by Global
Exchangeable Preferred Stock) pursuant to Rule 144 under the Securities Act or
an effective registration statement under the Securities Act:
(I) in the case of any Transfer Restricted Security
that is a Certificated Exchangeable Preferred Stock, the
Transfer Agent shall permit the Holder thereof to exchange
such Transfer Restricted Security for a Certificated
Exchangeable Preferred Stock that does not bear the legend set
forth above and rescind any restriction on the transfer of
such Transfer Restricted Security;
(II) in the case of any Transfer Restricted Security
that is represented by a Global Exchangeable Preferred Stock,
the Transfer Agent shall permit the Holder thereof to exchange
such Transfer Restricted Security for a Certificated
Exchangeable Preferred Stock Security that does not bear the
legend set forth above and rescind any restriction on the
transfer of such Transfer Restricted Security, if the Holder's
request for
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44
such exchange was made in reliance on Rule 144 and the Holder
certifies to that effect in writing to the Transfer Agent
(such certification to be in the form set forth on the reverse
of the Transfer Restricted Security); and
(III) in the case of any Transfer Restricted Security
that is represented by a Global Exchangeable Preferred Stock,
the Transfer Agent shall permit the Holder thereof to exchange
such Transfer Restricted Security (in connection with the
offer to exchange Series B Stock for Initial Exchangeable
Preferred Stock pursuant to the Registration Rights Agreement)
for another Global Exchangeable Preferred Stock that does not
bear the legend set forth above.
(H) Cancelation or Adjustment of Global Exchangeable Preferred
Stock. At such time as all beneficial interests in Global Exchangeable Preferred
Stock have either been exchanged for Certificated Exchangeable Preferred Stock,
redeemed, repurchased or canceled, such Global Exchangeable Preferred Stock
shall be returned to DTC for cancelation or retained and canceled by the
Transfer Agent. At any time prior to such cancelation, if any beneficial
interest in Global Exchangeable Preferred Stock is exchanged for Certificated
Exchangeable Preferred Stock, redeemed, repurchased or canceled, the number of
shares of Exchangeable Preferred Stock represented by such Global Exchangeable
Preferred Stock shall be reduced and an adjustment shall be made on the books
and records of the Transfer Agent with respect to such Global Exchangeable
Preferred Stock, by the Transfer Agent or DTC, to reflect such reduction.
(I) Obligations with Respect to Transfers and Exchanges of
Exchangeable Preferred Stock. (1) To permit registrations of transfers and
exchanges, the Company shall execute and the Transfer Agent shall authenticate
Certificated Exchangeable Preferred Stock and Global Exchangeable Preferred
Stock as required pursuant to the provisions of this paragraph (iii).
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45
(2) All Certificated Exchangeable Preferred Stock and Global
Exchangeable Preferred Stock issued upon any registration of transfer
or exchange of Certificated Exchangeable Preferred Stock or Global
Exchangeable Preferred Stock shall be the valid obligations of the
Company, entitled to the same benefits under this Certificate of
Designation as the Certificated Exchangeable Preferred Stock or Global
Exchangeable Preferred Stock surrendered upon such registration of
transfer or exchange.
(3) Prior to due presentment for registration of transfer of
any shares of Exchangeable Preferred Stock, the Transfer Agent and the
Company may deem and treat the person in whose name such shares of
Exchangeable Preferred Stock are registered as the absolute owner of
such Exchangeable Preferred Stock and neither the Transfer Agent nor
the Company shall be affected by notice to the contrary.
(4) No service charge shall be made to a Holder for any
registration of transfer or exchange upon surrender of any Exchangeable
Preferred Stock Certificate at the office of the Transfer Agent
maintained for that purpose. However, the Company may require payment
of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection with any registration of transfer or
exchange of Exchangeable Preferred Stock Certificates.
(5) Upon any sale or transfer of shares of Exchangeable
Preferred Stock (including any Exchangeable Preferred Stock represented
by a Global Exchangeable Preferred Stock Certificate) pursuant to an
effective registration statement under the Securities Act, pursuant to
Rule 144 under the Securities Act or pursuant to an opinion of counsel
reasonably satisfactory to the Company that no legend is required:
(A) in the case of any Certificated Exchangeable
Preferred Stock, the Transfer Agent shall
permit the holder thereof to exchange such
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46
Exchangeable Preferred Stock for Certificated
Exchangeable Preferred Stock that does not
bear the legend set forth in
paragraph (iii)(G) above and rescind any
restriction on the transfer of such
Exchangeable Preferred Stock; and
(B) in the case of any Global Exchangeable Preferred
Stock, such Exchangeable Preferred Stock shall not be
required to bear the legend set forth in paragraph
(iii)(G) above but shall continue to be subject to
the provisions of paragraph (iii)(D) hereof;
provided, however, that with respect to any request
for an exchange of Exchangeable Preferred Stock that
is represented by Global Exchangeable Preferred Stock
for Certificated Exchangeable Preferred Stock that
does not bear the legend set forth in paragraph
(iii)(G) above in connection with a sale or transfer
thereof pursuant to Rule 144 (and based upon an
opinion of counsel if the Company so requests), the
Holder thereof shall certify in writing to the
Transfer Agent that such request is being made
pursuant to Rule 144 (such certification to be
substantially in the form of Exhibit B hereto).
(iv) Replacement Certificates. If a mutilated Exchangeable
Preferred Stock certificate is surrendered to the Transfer Agent or if the
Holder of a Exchangeable Preferred Stock certificate claims that the
Exchangeable Preferred Stock certificate has been lost, destroyed or wrongfully
taken, the Company shall issue and the Transfer Agent shall countersign a
replacement Exchangeable Preferred Stock certificate if the reasonable
requirements of the Transfer Agent and of Section 8-405 of the Uniform
Commercial Code as in effect in the State of New York are met. If required by
the Transfer Agent or the Company, such Holder shall furnish an indemnity bond
sufficient in the judgment of the Company and the Transfer Agent to protect the
Company and the Transfer Agent from any loss which
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47
either of them may suffer if a Exchangeable Preferred Stock certificate is
replaced. The Company and the Transfer Agent may charge the Holder for their
expenses in replacing a Exchangeable Preferred Stock certificate.
(v) Temporary Certificates. Until definitive Exchangeable
Preferred Stock certificates are ready for delivery, the Company may prepare and
the Transfer Agent shall countersign temporary Exchangeable Preferred Stock
certificates. Temporary Exchangeable Preferred Stock certificates shall be
substantially in the form of definitive Exchangeable Preferred Stock
certificates but may have variations that the Company considers appropriate for
temporary Exchangeable Preferred Stock certificates. Without unreasonable delay,
the Company shall prepare and the Transfer Agent shall countersign definitive
Exchangeable Preferred Stock certificates and deliver them in exchange for
temporary Exchangeable Preferred Stock certificates.
(vi) Cancelation. (A) In the event the Company shall purchase
or otherwise acquire Certificated Exchangeable Preferred Stock, the same shall
thereupon be delivered to the Transfer Agent for cancelation.
(B) At such time as all beneficial interests in Global
Exchangeable Preferred Stock have either been exchanged for Certificated
Exchangeable Preferred Stock, redeemed, repurchased or canceled, such Global
Exchangeable Preferred Stock shall thereupon be delivered to the Transfer
Agent for cancelation.
(C) The Transfer Agent and no one else shall cancel and
destroy all Exchangeable Preferred Stock certificates surrendered for transfer,
exchange, replacement or cancelation and deliver a certificate of such
destruction to the Company unless the Company directs the Transfer Agent to
deliver canceled Exchangeable Preferred Stock certificates to the Company. The
Company may not issue new Exchangeable Preferred Stock certificates to replace
Exchangeable Preferred Stock certificates to the extent they evidence
Exchangeable Preferred Stock which the Company has purchased or otherwise
acquired.
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48
(m) Additional Rights of Holders. In addition to the rights
provided to Holders under this Certificate of Designation, Holders shall have
the rights set forth in the Registration Rights Agreement.
(n) Certain Definitions. As used in this Certificate of
Designation, the following terms shall have the following meanings (and (1)
terms defined in the singular have comparable meanings when used in the plural
and vice versa, (2) "including" means including without limitation, (3) "or" is
not exclusive and (4) an accounting term not otherwise defined has the meaning
assigned to it in accordance with United States generally accepted accounting
principles as in effect on the Issue Date and all accounting calculations will
be determined in accordance with such principles), unless the content otherwise
requires:
"Accounts Receivable" means, with respect to any Person, all
accounts receivable of such Person net of allowances for uncollectible accounts,
discounts, refunds and all other allowances as determined in accordance with
GAAP.
"Additional Assets" means (i) any property or assets (other
than Indebtedness and Capital Stock) in a Related Business; (ii) the Capital
Stock of a Person that becomes a Restricted Subsidiary as a result of the
acquisition of such Capital Stock by the Company or another Restricted
Subsidiary; or (iii) Capital Stock in any Person that at such time is a
Restricted Subsidiary; provided, however, that any such Restricted Subsidiary
described in clauses (ii) or (iii) above is primarily engaged in a Related
Business.
"Affiliate" of any specified Person means any other Person,
directly or indirectly, controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings
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49
correlative to the foregoing. For purposes of paragraphs (l)(iii) and (l)(v)
only, "Affiliate" shall also mean any beneficial owner of Capital Stock
representing 10% or more of the total voting power of the Voting Stock (on a
fully diluted basis) of the Company or of rights or warrants to purchase such
Capital Stock (whether or not currently exercisable) and any Person who would be
an Affiliate of any such beneficial owner pursuant to the first sentence hereof.
"Asset Swap" means an exchange of assets by the Company or any
of its Restricted Subsidiaries for one or more Permitted Businesses, assets to
be used in a Permitted Business, or for a controlling equity interest in any
Person whose assets consist primarily of one or more Permitted Businesses.
"Attributable Debt" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
dividend rate borne by the Exchangeable Preferred Stock compounded annually) of
the total obligations of the lessee for rental payments during the remaining
term of the lease included in such Sale/Leaseback Transaction (including any
period for which such lease has been extended).
"Average Life" means, as of the date of determina tion, with
respect to any Indebtedness or Preferred Stock, the quotient obtained by
dividing (i) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment of
such Indebtedness or redemption or similar payment with respect to such
Preferred Stock multi plied by the amount of such payment by (ii) the sum of all
such payments.
"Board of Directors" means the Board of Directors of the
Company or any committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
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50
"Capital Lease Obligations" means an obligation that is
required to be classified and accounted for as a capital lease for financial
reporting purposes in accordance with GAAP, and the amount of Indebtedness
represented by such obligation shall be the capitalized amount of such
obligation determined in accordance with GAAP; and the Stated Maturity thereof
shall be the date of the last payment of rent or any other amount due under such
lease prior to the first date upon which such lease may be terminated by the
lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into or exchangeable for
such equity.
"Change of Control" means the occurrence of any of the
following events:
(i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than one or more Permitted Holders,
is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that for purposes of this clause (i)
such person shall be deemed to have "beneficial ownership" of all
shares that any such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time, and
except that any person that is deemed to have beneficial ownership of
shares solely as a result of being part of a group pursuant to Rule
13d-5(b)(1) shall not be deemed to have beneficial ownership of any
shares held by a Permitted Holder forming a part of such group),
directly or indirectly, of more than 50% of the total voting power of
the Voting Stock of the Company (for the purposes of this clause (i),
such other person shall be deemed to beneficially own any Voting Stock
of a specified corporation held by a parent corporation, if such other
person is the beneficial owner (as defined in this clause (i)),
directly or indirectly, of more than 35% of the voting
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51
power of the Voting Stock of such parent corporation and the Permitted
Holders beneficially own (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of
the board of directors of such parent corporation);
(ii) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
(together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of the
Company was approved by a vote of a majority of the directors of the
Company then still in office who were either directors at the beginning
of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority
of the Board of Directors then in office; provided, however, that any
directors elected by holders of Preferred Stock of the Company pursuant
to any voting rights provisions included in the certificate of
designation relating to such Preferred Stock shall be excluded in
making any determination pursuant to this clause (ii); or
(iii) the merger or consolidation of the Company with or into
another Person or the merger of another Person with or into the
Company, or the sale of all or substantially all the assets of the
Company to another Person (other than a Person that is controlled by
the Permitted Holders), and, in the case of any such merger or
consolidation, the securities of the Company that are outstanding
immediately prior to such transaction and which represent 100% of the
aggregate voting power of the Voting Stock of the Company are changed
into or exchanged for cash, securities or property, unless pursuant to
such transaction such securities are changed into or exchanged for, in
addition to any other consideration, securities of the surviving
corporation that represent immediately after such transaction, at
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52
least a majority of the aggregate voting power of the Voting Stock of
the surviving corporation.
Notwithstanding the foregoing, a Change of Control shall not
be deemed to have occurred if, after such event that otherwise would constitute
a Change of Control, the Securities are rated Investment Grade by Moody's or
Standard & Poor's on the 30th day following the event that otherwise would
constitute a Change of Control (the "Change of Control Determination Date");
provided, however, that to the extent there is a "rating watch" with respect to
the Exchangeable Preferred Stock or other rating agency review on such 30th day,
then the Change of Control Determination Date shall be the first Business Day
thereafter on which the Exchangeable Preferred Stock is not subject to a "rating
watch" or other rating agency review by either Moody's or Standard & Poor's. The
term "Investment Grade", for such purpose, means a rating of Baa3 or higher in
the case of Moody's, or BBB- or higher in the case of Standard & Poor's.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means the party named as such in this Certificate of
Designation until a successor replaces it and, thereafter, means the successor.
"Consolidated Capital Ratio" of any Person as of any date
means the ratio of (i) the aggregate consolidated principal amount of
Indebtedness of such Person then outstanding to (ii) the greater of either (a)
the aggregate consolidated paid-in capital of such Person as of such date or (b)
the stockholders' equity as of such date as shown on the consolidated balance
sheet of such Person determined in accordance with GAAP.
"Consolidated Interest Expense" means, for any period, the
total interest expense of the Company and its consolidated Restricted
Subsidiaries, plus, to the extent not included in such total interest expense,
and to the extent incurred by the Company or its Restricted Subsidiaries,
without duplication, (i) interest expense attributable to capital leases and the
interest expense
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53
attributable to leases constituting part of a Sale/Leaseback Transaction, (ii)
amortization of debt discount and debt issuance cost, (iii) capitalized
interest, (iv) noncash interest expenses, (v) commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing, (vi) net costs associated with Hedging Obligations (including
amortization of fees), (vii) Preferred Stock dividends in respect of all (A)
Preferred Stock of Restricted Subsidiaries and (B) Preferred Stock of the
Company that is Disqualified Stock, in each case held by Persons other than the
Company or a Restricted Subsidiary, (viii) interest incurred in connection with
Investments in discontinued operations, (ix) interest accruing on any
Indebtedness of any other Person to the extent such Indebtedness is Guaranteed
by (or secured by the assets of) the Company or any Restricted Subsidiary and
(x) the cash contributions to any employee stock ownership plan or similar trust
to the extent such contributions are used by such plan or trust to pay interest
or fees to any Person (other than the Company) in connection with Indebtedness
Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net
income of the Company and its consolidated Subsidi aries; provided, however,
that there shall not be included in such Consolidated Net Income:
(i) any net income of any Person (other than the Company) if
such Person is not a Restricted Subsidiary, except that subject to the
exclusion contained in clause (iv) below, the net income of any such
Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Person during such period to the Company or a Restricted Subsidiary as
a dividend or other distribution (subject, in the case of a dividend or
other distribution paid to a Restricted Subsidiary, to the limitations
contained in clause (iii) below);
(ii) any net income (or loss) of any Person acquired by the
Company or a Subsidiary in a pooling of interests transaction for any
period prior to the date of such acquisition;
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54
(iii) any net income of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions
by such Restricted Subsidiary, directly or indirectly, to the Company,
except that subject to the exclusion contained in clause (iv) below,
the net income of any such Restricted Subsidiary for such period shall
be included in such Consolidated Net Income up to the aggregate amount
of cash actually distributed by such Restricted Subsidiary during such
period to the Company or another Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution paid to another Restricted Subsidiary, to the limitation
contained in this clause);
(iv) any gain (but not loss) realized upon the sale or other
disposition of any assets of the Company, its consolidated Subsidiaries
or any other Person (including pursuant to any sale-and-leaseback
arrangement) which is not sold or otherwise disposed of in the ordinary
course of business and any gain (but not loss) realized upon the sale
or other disposition of any Capital Stock of any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in account
ing principles.
Notwithstanding the foregoing, for the purpose of paragraph (l)(iii) only, there
shall be excluded from Consolidated Net Income any dividends, repayments of
loans or advances or other transfers of assets from any Person (including any
Unrestricted Subsidiary) to the Company or a Restricted Subsidiary to the extent
such dividends, repayments or transfers increase the amount of Restricted
Payments permitted under paragraph (l)(iii) (A)(3)(IV) thereof.
"Consolidated Net Worth" means, with respect to any Person as
of any date, the sum of: (i) the consolidated
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55
equity of the common stockholders of such Person and its consolidated
Subsidiaries as of such date plus (ii) the respective amounts reported on such
Person's balance sheet as of such date with respect to any series of preferred
stock (other than Disqualified Stock) that by its terms is not entitled to the
payment of dividends unless such dividends may be declared and paid only out of
net earnings in respect of the year of such declaration and payment, but only to
the extent of any cash received by such Person upon issuance of such preferred
stock, less (x) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going concern
business made within 12 months after the acquisition of such business)
subsequent to the Issue Date in the book value of any asset owned by such Person
or a consolidated Subsidiary of such Person, (y) all investments as of such date
in unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments), and (z) all unamortized debt discount and
expense and unamortized deferred charges as of such date, as determined in
accordance with GAAP.
"Consolidated Tangible Assets" means, with respect to any
Person as of any date, the sum of the consolidated gross book value as reflected
in accounting books and records of such Person of all its property, both real
and personal, less (i) the net book value of all its licenses, patents, patent
applications, copyrights, trademarks, tradenames, goodwill, non-compete
agreements or organizational expenses and other like intangibles, (ii)
unamortized debt discount and expenses, (iii) all reserves for depreciation,
obsolescence, depletion and amortization of its properties and (iv) all other
proper reserves which should be provided in connection with the business
conducted by such Person, all of the foregoing as determined in accordance with
GAAP.
"Convertible Preferred Stock" means the Company's 7 1/4%
Junior Convertible Preferred Stock Due 2007.
"Credit Agreements" means one or more debt facilities or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit
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56
loans, term loans, receivables financing (including through the sale of
receivables to such lenders or to special purpose entities formed to borrow from
such lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time.
"Cumulative Consolidated Interest Expense" means, with respect
to any Person, as of any date of determination, Consolidated Interest Expense
for the period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the Issue Date to the end of such Person's most
recently ended fiscal quarter for which internal financial statements are
available at such date of determination.
"Cumulative Operating Cash Flow" means, as of any date of
determination, Operating Cash Flow for the Company and its Restricted
Subsidiaries for the period (taken as one accounting period) from the beginning
of the first fiscal quarter commencing after the Issue Date to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at such date of determination.
"Currency Agreement" means in respect of a Person any foreign
exchange contract, currency swap agreement or other similar agreement designed
to protect such Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage
of time or both would be, a Voting Rights Triggering Event.
"Disqualified Stock" means, with respect to any Person, any
Capital Stock which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first
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57
anniversary of the Stated Maturity of the Exchangeable Preferred Stock;
provided, however, that any Capital Stock that would not constitute Disqualified
Stock but for provisions thereof giving holders thereof the right to require
such Person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the first anniversary of
the Stated Maturity of the Securities shall not constitute Disqualified Stock if
the "asset sale" or "change of control" provisions applicable to such Capital
Stock are not more favorable to the holders of such Capital Stock than the
comparable provisions of the Exchange Indenture; provided further, however, that
the Company's Convertible Preferred Stock outstanding on the Issue Date (and any
shares of Convertible Preferred Stock issued as payment of a dividend on
Convertible Preferred Stock) shall be deemed not to constitute Disqualified
Stock.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchange Date" means the date on which the Securities are
exchanged for the Exchangeable Preferred Stock.
"Exchange Debentures" means the debentures issuable pursuant
to the Exchange Indenture.
"Exchange Offer Registration Statement" means a registration
statement filed with the SEC with respect to a Registered Exchange Offer.
"Exchange Indenture" means the Indenture dated as of August
15, 1997, by and between the Company and The Bank of New York, as Trustee,
governing the Exchange Debentures.
"Excluded PSINet Transactions" means any transaction between
the Company or any of its Restricted Subsidiaries with PSINet Inc., so long as
at the time of engaging in, or contracting to engage in, such transaction, the
Company and its Subsidiaries have not acquired shares of PSINet Common Stock
other than the PSINet Shares.
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58
"GAAP" means generally accepted accounting principles in the
United States of America as in effect as of the Issue Date, including those set
forth in (i) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC. All ratios and
computations based on GAAP contained in this Certificate of Designation shall be
computed in conformity with GAAP.
"GE Capital Communications" means GE Capital Communications
Services Corporation.
"Guarantee" means any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness of any Person
and any obligation, direct or indirect, contingent or otherwise, of such Person
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness of such Person or (ii) entered into for the purpose of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Hedging Obligations" of any Person means the obligations of
such Person pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" means the Person in whose name a share of
Exchangeable Preferred Stock is registered on the Transfer Agent's books.
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59
"Incur" means issue, assume, Guarantee, incur or otherwise
become liable for; provided, however, that any Indebtedness or Capital Stock of
a Person existing at the time such Person becomes a Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred
by such Subsidiary at the time it becomes a Subsidiary. The term "Incurrence"
when used as a noun shall have a correlative meaning. The accretion of principal
of a non-interest bearing or other discount security shall be deemed the
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person
on any date of determination (without duplication):
(i) the principal in respect of (A) indebtedness of such
Person for money borrowed and (B) indebtedness evidenced by securities,
debentures, bonds or other similar instruments for the payment of which
such Person is responsible or liable, including, in each case, any
premium on such indebtedness to the extent such premium has become due
and payable;
(ii) all Capital Lease Obligations of such Person and all
Attributable Debt in respect of Sale/Leaseback Transactions entered
into by such Person;
(iii) all obligations of such Person issued or assumed as the
deferred purchase price of property, and all obligations of such Person
under any title retention agreement (but excluding trade accounts
payable arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of
any obligor on any letter of credit, banker's acceptance or similar
credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in
clauses (i) through (iii) above) entered into in the ordinary course of
business of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the tenth Business Day following payment on
the letter of credit);
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60
(v) the amount of all obligations of such Person with respect
to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any Subsidiary of such Person, the
liquidation preference with respect to, any Preferred Stock (but
excluding, in each case, any accrued dividends) of such Subsidiary
(which will constitute Indebtedness Incurred by such Subsidiary and not
Indebtedness Incurred by such Person);
(vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including
by means of any Guarantee;
(vii) all obligations of the type referred to in clauses (i)
through (vi) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of
the value of such property or assets or the amount of the obligation so
secured; and
(viii) to the extent not otherwise included in this
definition, Hedging Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Indebtedness to Operating Cash Flow Ratio" means, as of any
date of determination, the ratio of (a) the aggregate principal amount of all
outstanding Indebtedness of a Person and its Restricted Subsidiaries as of such
date on a consolidated basis, plus the aggregate liquidation preference of all
outstanding Preferred Stock of the Restricted Subsidiaries of such Person as of
such date (excluding any such Preferred Stock held by such Person or a Wholly
Owned Restricted Subsidiary of such Person), plus the
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61
aggregate liquidation preference or redemption amount of all Disqualified Stock
of such Person (excluding any Disqualified Stock held by such Person or a Wholly
Owned Restricted Subsidiary of such Person) as of such date to (b) Operating
Cash Flow of such Person and its Restricted Subsidiaries for the most recent
four-quarter period for which internal financial statements are available,
determined on a pro forma basis after giving effect to all acquisitions and
dispositions of assets (notwithstanding clause (ii) of the definition of
"Consolidated Net Income" and including Asset Swaps) made by such Person and its
Restricted Subsidiaries since the beginning of such four-quarter period through
such date as if such acquisitions and dispositions had occurred at the beginning
of such four-quarter period through such date as if such acquisitions and
dispositions had occurred at the beginning of such four-quarter period.
"Independent Financial Advisor" means a United States
investment banking firm of national standing in the United States which does
not, and whose directors, officers and employees or affiliates do not, have a
direct or indirect financial interest in the Company.
"Interest Rate Agreement" means in respect of a Person any
interest rate swap agreement, interest rate cap agreement or other financial
agreement or arrangement designed to protect such Person against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect
advance, loan or any other extensions of credit (other than advances, loans or
other extensions of credit to customers in the ordinary course of business that
are recorded as accounts receivable on the balance sheet of the lender and other
than commission, travel, relocation and similar advances to directors, officers
and employees made in the ordinary course of business) (including by way of
Guarantee or similar arrangement) or capital contribution to any Person (by
means of any transfer of cash or other property to others or any payment for
property or services for the account or use of such Person), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar
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62
instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary," the definition of "Restricted Payment" and paragraph
(l)(iii), (i) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of any Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors;
provided further, however, that an acquisition of assets, Capital Stock or other
securities by the Company or any of its Restricted Subsidiaries shall not be
deemed to be an Investment to the extent the consideration for such Capital
Stock or other securities consists of common equity securities of the Company.
"IRU" means an indefeasible right to use fiber or
telecommunications capacity.
"IRU Agreement" means an agreement pursuant to which an
interest in an IRU is sold or leased or otherwise transferred.
"Issue Date" means the date on which the Initial Exchangeable
Preferred Stock is originally issued.
"IXC Internet Capital Contribution" means the contribution by
the Company to IXC Internet Services, Inc. (so long as IXC Internet Services,
Inc. is a Subsidiary) of $10 million in cash, an IRU in two excess fibers in the
Company's network (including two fibers in network routes to be built or
acquired in the future) and space in certain points of
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63
presence, in each case as contemplated in connection with the transactions
contemplated by the PSINet Agreement.
"Legal Holiday" means a Saturday, a Sunday or a day on which
banking institutions are not required to be open in the State of New York.
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any conditional sale or other
title retention agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc. or its
successor.
"Net Cash Proceeds", with respect to any issuance or sale of
Capital Stock, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Officer" means the Chairman of the Board, the President, any
Vice President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two
Officers.
"Operating Cash Flow" means, with respect to any Person for
any period, the Consolidated Net Income of such Person for such period, (A) plus
(i) extraordinary net losses, net losses on sales of assets outside the ordinary
course of business during such period and noncash charges relating to
write-downs of property and equipment, to the extent such losses and charges
were deducted in computing such Consolidated Net Income, plus (ii) provision for
taxes based on income or profits, to the extent such provision for taxes was
included in computing such Consolidated Net Income, and any provision for taxes
utilized in computing the net losses under clause (i) hereof, plus (iii)
Consolidated Interest Expense of such Person and its
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64
Restricted Subsidiaries for such period, to the extent that any such expense
was deducted in computing such Consolidated Net Income, plus (iv) depreciation,
amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) and other noncash charges (excluding any such noncash charge to the
extent that it represents an accrual of or reserve for cash charges in any
future period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Restricted Subsidiaries for such period to the
extent that such depreciation, amortization and other noncash charges were
deducted in computing such Consolidated Net Income and (B) less all noncash
income for such period (excluding any such noncash income to the extent it
represents an accrual of cash income in any future period or amortization of
cash income received in a period). Notwithstanding the foregoing, the provision
for taxes on the income or profits of, and the depreciation and amortization and
other noncash charges of, a Restricted Subsidiary of the referent Person shall
be added to Consolidated Net Income to compute Operating Cash Flow only to the
extent (and in the same proportion) that the net income of such Restricted
Subsidiary was included in calculating the Consolidated Net Income of such
Person for such period and only if and to the extent such Restricted Subsidiary
could have paid such amount at the date of determination as a dividend or
similar distribution to the referent Person by such Restricted Subsidiary
without prior governmental approval (that has not been obtained), pursuant to
the terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
"Opinion of Counsel" means a written opinion from legal
counsel who is acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Permitted Business" means (i) any communications business and
(ii) any business reasonably related or ancillary thereto.
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"Permitted Holders" means the officers and directors of the
Company, and Trustees of General Electric Pension Trust, Grumman Hill
Associates, Inc. and Grumman Hill Investments, L.P., and each of their
respective officers and directors and their Related Parties.
"Permitted Investment" means an Investment by the Company or
any Restricted Subsidiary in (i) the Company, a Restricted Subsidiary or a
Person that will, upon the making of such Investment, become a Restricted
Subsidiary; provided, however, that the primary business of such Restricted
Subsidiary is a Related Business; (ii) another Person if as a result of such
Investment such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the Company or a
Restricted Subsidiary; provided, however, that such Person's primary business is
a Related Business; (iii) Temporary Cash Investments; (iv) receivables owing to
the Company or any Restricted Subsidiary if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances; (v) payroll, travel, commission and similar
advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses for accounting purposes and that are made
in the ordinary course of business; (vi) loans or advances to employees made in
the ordinary course of business consistent with past practices of the Company or
such Restricted Subsidiary; (vii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments; (viii) the
IXC Internet Capital Contribution; (ix) the Investment in PSINet Inc.
contemplated by the PSINet Agreement, including the Investment in shares of
PSINet Common Stock purchased pursuant to the PSINet Agreement and the $240
million value protection right provided for by the PSINet Agreement; and (x)
other Investments in any Person that in the aggregate do not exceed $30 million
(without regard to increases and decreases in the value of the Investments).
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66
"Permitted PSINet Non-Recourse Debt" means Indebtedness where
(i) the holders of such Indebtedness expressly agree that they will look solely
to the shares of PSINet Common Stock held by the issuer of such Indebtedness for
payment on or in respect of such Indebtedness and expressly waive any recourse
they may have on or with respect to such Indebtedness to the Company or any
Restricted Subsidiary, (ii) neither the Company nor any Restricted Subsidiary
(A) provides credit support (whether or not in the form of an undertaking,
agreement or instrument which would constitute Indebtedness), other than the
pledge by the issuer of such Indebtedness of shares of PSINet Common Stock, or
(B) is directly or indirectly liable and (iii) no default with respect to such
Indebtedness (including any rights which the holders thereof may have to take
enforcement action against the shares of PSINet Common Stock securing such
Indebtedness) would permit (upon notice, lapse of time or both) any holder of
any other Indebtedness of the Company or any Restricted Subsidiary to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
"Person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any
Person, means Capital Stock of any class or classes (however designated) which
is preferred as to the payment of dividends or distributions, or as to the
distribution of assets upon any voluntary or involuntary liquidation or
dissolution of such Person, over shares of Capital Stock of any other class of
such Person.
"principal" of any debt security means the principal of the
Security plus the premium, if any, payable on the Security which is due or
overdue or is to become due at the relevant time.
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67
"PSINet Agreement" means the IRU and Stock Purchase Agreement
dated as of July 22, 1997, between IXC Internet Services, Inc. and PSINet Inc.
and the related documents executed in connection therewith, in each case as in
effect as of the Issue Date.
"PSINet Common Stock" means the common stock of PSINet, Inc.
"PSINet Shares" means the shares of PSINet Common Stock
acquired by the Company or any Subsidiary pursuant to the terms of the PSINet
Agreement.
"Public Equity Offering" means an underwritten primary public
offering of common stock of the Company pursuant to an effective registration
statement under the Securities Act.
"Refinance" means, in respect of any Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue other Indebtedness in exchange or replacement for, such indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances
any Indebtedness of the Company or any Restricted Subsidiary existing on the
Issue Date or Incurred in compliance with this Certificate of Designation,
including Indebtedness that Refinances Refinancing Indebtedness; provided,
however, that (i) such Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being Refinanced, (ii) such
Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the Average Life of
the Indebtedness being Refinanced and (iii) such Refinancing Indebtedness has an
aggregate principal amount (or if Incurred with original issue discount, an
aggregate issue price) that is equal to or less than the aggregate principal
amount (or if Incurred with original issue discount, the aggregate accreted
value) then outstanding or committed (plus accrued interest on the principal
amount of Indebtedness Refinanced, and fees and
<PAGE> 147
68
expenses, including any premium and defeasance costs) under the Indebtedness
being Refinanced; provided further, however, that Refinancing Indebtedness shall
not include (x) Indebtedness of a Subsidiary that Refinances Indebtedness of the
Company (unless such Subsidiary was obligated under, or a guarantor of, the
Indebtedness being Refinanced) or (y) Indebtedness of the Company or a
Restricted Subsidiary that Refinances Indebtedness of an Unrestricted
Subsidiary.
"Registered Exchange Offer" means the offer by the Company,
pursuant to the Registration Rights Agreement, to holders of Initial
Exchangeable Preferred Stock to issue and deliver to such holders, in exchange
for the Initial Exchangeable Preferred Stock, a like aggregate liquidation
preference of Series B Stock registered under the Securities Act.
"Registration Rights Agreement" means the Registration Rights
Agreement dated August 14, 1997, among the Company and Credit Suisse First
Boston Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley and Co. Incorporated.
"Related Business" means any Permitted Business, the
businesses conducted by the Company and the Restricted Subsidiaries on the Issue
Date and any business related, ancillary or complementary to such businesses
conducted by the Company and the Restricted Subsidiaries on the Issue Date.
"Related Party" with respect to any Permitted Holder means (i)
any controlling stockholder, 80% (or more) owned Subsidiary, or spouse or
immediate family member (in the case of an individual) of such Principal or (ii)
any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding an 80% or more
controlling interest of which consist of such Permitted Holder or such other
Persons referred to in the immediately preceding clause (i).
<PAGE> 148
69
"Representative" means any trustee, agent or representative
(if any) for an issue of Senior Indebtedness of the Company.
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of, in the case of the Company, any Junior Stock or, in the case of
any Restricted Subsidiary, any Capital Stock (including any payment in
connection with any merger or consolidation involving such Person) or similar
payment to the direct or indirect holders of such Stock (other than dividends or
distributions payable solely in Junior Stock (other than Disqualified Stock) and
dividends or distributions to the extent paid to the Company or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Restricted Subsidiary to minority
stockholders (or owners of an equivalent interest in the case of a Subsidiary
that is an entity other than a corporation)), (ii) the purchase, redemption or
other acquisition or retirement for value of any Junior Stock of the Company or
Capital Stock of any direct or indirect parent of the Company or (iii) the
making of any Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Company
that is not an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to
property now owned or hereafter acquired whereby the Company or a Restricted
Subsidiary transfers such property to a Person and the Company or a Restricted
Subsidiary leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of
the Company secured by a Lien.
"Senior Notes" means the Company's 12 1/2% Senior
Notes Due 2005.
<PAGE> 149
70
"Series 3 Preferred Stock" means the Company's 10%
Junior Series 3 Cumulative Redeemable Preferred Stock.
"Shelf Registration Statement" means a registration statement
filed with the SEC covering resales of Exchangeable Preferred Stock.
"Significant Subsidiary" means any Restricted Subsidiary that
would be a "Significant Subsidiary" of the Company within the meaning of Rule
1-02 under Regulation S-X promulgated by the SEC.
"Standard & Poor's" means Standard & Poor's Ratings Group, or
its successor.
"Stated Maturity" means, with respect to any security, the
date specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Indebtedness" means the Exchange Debentures and
any other Indebtedness of the Company that specifically provides that such
Indebtedness is to rank pari passu with the Exchange Debentures in right of
payment and is not subordinated by its terms to any Indebtedness or other
obligation of the Company which is not Senior Indebtedness (as defined in the
Exchange Debenture).
"Subordinated Obligation" means any Indebtedness of the
Company (whether outstanding on the Issue Date or thereafter Incurred) which is
subordinate or junior in right of payment to the Exchange Debentures pursuant to
a written agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the
<PAGE> 150
71
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
(i) such Person, (ii) such Person and one or more Subsidiaries of such Person or
(iii) one or more Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (i)
any investment in direct obligations of the United States of America or any
agency thereof or obligations guaranteed by the United States of America or any
agency thereof, (ii) investments in time deposit accounts, certificates of
deposit and money market deposits maturing within 180 days of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States of America, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of
$50,000,000 (or the foreign currency equivalent thereof) and has outstanding
debt which is rated "A" (or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as defined in
Rule 436 under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor, (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) investments in commercial
paper, maturing not more than 90 days after the date of acquisition, issued by a
corporation (other than an Affiliate of the Company) organized and in existence
under the laws of the United States of America or any foreign country recognized
by the United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings
Group, and (v) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by Standard
<PAGE> 151
72
& Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"Trustee" means the party named as such in the Exchange
Indenture until a successor replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President
or any other officer or assistant officer of the Trustee assigned by the Trustee
to administer its corporate trust matters.
"Uniform Commercial Code" means the New York Uniform
Commercial Code as in effect from time to time.
"Unrestricted Subsidiary" means (i) any Subsidiary of the
Company that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of
its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien (excluding Liens incurred to secure obligations in respect of an IRU) on
any property of, the Company or any Restricted Subsidiary; provided, however,
that either (A) the Subsidiary to be so designated has total assets of $1,000 or
less or (B) if such Subsidiary has assets greater than $1,000, the Investment
resulting from such designation would be permitted under paragraph (l)(iii). The
Board of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that immediately after giving effect to such
designation (x) the Company could Incur $1.00 of additional Indebtedness under
paragraph (l)(iii)(A) and (y) no Default shall have occurred and be continuing.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the resolution of the Board of
Directors giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
<PAGE> 152
73
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock
or other interests (including partnership interests) of such Person then
outstanding and normally entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof.
"Wholly Owned Restricted Subsidiary" means a Restricted
Subsidiary all the Capital Stock of which (other than directors' qualifying
shares) is owned by the Company or one or more Wholly Owned Subsidiaries.
<PAGE> 153
IN WITNESS WHEREOF, said IXC Communications, Inc., has caused
this Certificate of Designation to be signed by James F. Guthrie, its
Chief Financial Officer and Executive Vice President, this 19th day of
August, 1997.
IXC COMMUNICATIONS, INC.,
By: /s/ JAMES F. GUTHRIE
----------------------------------
Name: James F. Guthrie
Title: Chief Financial Officer and
Executive Vice President
<PAGE> 154
EXHIBIT A
FORM OF EXCHANGEABLE PREFERRED STOCK
FACE OF SECURITY
[THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF
1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE
EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE
SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF
SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF
THIS SECURITY AGREES FOR THE BENEFIT OF THE ISSUER THAT (A) THIS SECURITY MAY BE
OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (i) TO A PERSON WHOM THE
SELLER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 144A, (II) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE
SECURITIES ACT, (iii) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (iv) PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (v) TO THE
ISSUER, IN EACH OF CASES (i) THROUGH (iv) IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND
EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY
FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.]*
[BY ITS ACQUISITION HEREOF, THE HOLDER REPRESENTS THAT (A) IT
IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN
AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S.]*/
- --------
* Subject to removal upon registration under the Securities Act of 1933 or
otherwise when the security shall no longer be a restricted security.
<PAGE> 155
2
[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"),
NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OF PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS
THE REGISTERED OWNER HEREOF, CEDE & CO. HAS AN INTEREST HEREIN.]**
[TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO
TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR
THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL
SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS
SET FORTH IN THE CERTIFICATE OF DESIGNATION REFERRED TO BELOW.]**
Certificate Number Number of Shares of Convertible
Preferred Stock
[ ] [ ]
CUSIP NO.: [ ]
12 1/2% Junior Exchangeable Preferred Stock Due 2009
(par value $0.01) (liquidation preference $1000
per share)
of
IXC Communications, Inc.
IXC Communications, Inc., a Delaware corporation (the
"Company"), hereby certifies that [ ] (the
- --------
** Subject to removal if not a global security.
<PAGE> 156
3
"Holder") is the registered owner of fully paid and non-assessable preferred
securities of the Company designated the 12 1/2% [Series B] Junior Exchangeable
Preferred Stock Due 2009 (par value $0.01) (liquidation preference $1000 per
share) (the "Exchangeable Preferred Stock"). The shares of Exchangeable
Preferred Stock are transferable on the books and records of the Registrar, in
person or by a duly authorized attorney, upon surrender of this certificate duly
endorsed and in proper form for transfer. The designation, rights, privileges,
restrictions, preferences and other terms and provisions of the Exchangeable
Preferred Stock represented hereby are issued and shall in all respects be
subject to the provisions of the Certificate of Designation dated August [ ],
1997, as the same may be amended from time to time (the "Certificate of
Designation"). Capitalized terms used herein but not defined shall have the
meaning given them in the Certificate of Designation. The ompany will provide a
copy of the Certificate of Designation to a Holder without charge upon written
request to the Company at its principal place of business.
Reference is hereby made to select provisions of the
Exchangeable Preferred Stock set forth on the reverse hereof, and to the
Certificate of Designation, which select provisions and the Certificate of
Designation shall for all purposes have the same effect as if set forth at this
place.
Upon receipt of this certificate, the Holder is bound by the
Certificate of Designation and is entitled to the benefits thereunder.
Unless the Transfer Agent's Certificate of Authentication
hereon has been properly executed, these shares of Exchangeable Preferred Stock
shall not be entitled to any benefit under the Certificate of Designation or be
valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has executed this certificate
this [ ] day of [ ], [ ].
IXC COMMUNICATIONS, INC.,
<PAGE> 157
4
By:
----------------------------------
Name:
Title:
[Seal]
By:
----------------------------------
Name:
Title:
<PAGE> 158
5
TRANSFER AGENT'S CERTIFICATE OF AUTHENTICATION
This is one of the Exchangeable Preferred Stock referred to in
the within mentioned Certificate of Designation.
Dated: [ ], [ ]
THE BANK OF NEW YORK
as Transfer Agent,
By:
----------------------------------
Authorized Signatory
<PAGE> 159
6
REVERSE OF SECURITY
Dividends on each share of Exchangeable Preferred Stock shall
be payable at a rate per annum set forth in the face hereof or as provided in
the Certificate of Designation (including Additional Dividends).
The shares of Exchangeable Preferred Stock shall be redeemable
as provided in the Certificate of Designation. The shares of Exchangeable
Preferred Stock shall be exchangeable at the Company's option into the Company's
12-1/2% Subordinated Exchange Debentures Due 2009 in the manner and according to
the terms set forth in the Certificate of Designation.
As required under Delaware law, the Company shall furnish to
any Holder upon request and without charge, a full summary statement of the
designations, voting rights preferences, limitations and special rights of the
shares of each class or series authorized to be issued by the Company so far as
they have been fixed and determined and the authority of the Board of Directors
to fix and determine the designations, voting rights, preferences, limitations
and special rights of the class and series of shares of the Company.
<PAGE> 160
7
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers the
shares of Exchangeable Preferred Stock evidenced hereby to:
---------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Insert assignee's social security or tax identification number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Insert address and zip code of assignee)
and irrevocably appoints:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
agent to transfer the shares of Exchangeable Preferred Stock evidenced hereby on
the books of the Transfer Agent and Registrar. The agent may substitute another
to act for him or her.
Date:
-----------------------
Signature:
---------------------------------
(Sign exactly as your name appears on the other side of this Exchangeable
Preferred Stock Certificate)
Signature Guarantee:***
--- ---------------------------------------------
- ------------------
*** (Signature must be guaranteed by an "eligible guarantor
institution" that is, a bank, stockbroker, savings and loan association or
credit union meeting the requirements of the Registrar, which requirements
include membership or participation in the Securities Transfer Agents Medallion
Program ("STAMP") or such other "signature
<PAGE> 161
8
- ------------
guarantee program" as may be determined by the Registrar in addition to, or in
substitution for, STAMP, all in accordance with the Securities Exchange Act of
1934, as amended.)
<PAGE> 162
EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR
REGISTRATION OF TRANSFER OF EXCHANGEABLE PREFERRED STOCK
Re: 12 1/2% Junior Exchangeable Preferred Stock Due 2009 (the "Exchangeable
Preferred Stock") of IXC Communications, Inc. (the "Company")
This Certificate relates to ____ shares of Exchangeable
Preferred Stock held in [ ] */ book-entry or [ ] */ definitive form by
_______________ (the "Transferor").
The Transferor*:
[ ] has requested the Transfer Agent by written order to deliver in
exchange for its beneficial interest in the Exchangeable Preferred Stock held by
the depository shares of Exchangeable Preferred Stock in definitive, registered
form equal to its beneficial interest in such Exchangeable Preferred Stock (or
the portion thereof indicated above); or
[ ] has requested the Transfer Agent by written order to exchange or
register the transfer of Exchangeable Preferred Stock.
In connection with such request and in respect of such
Exchangeable Preferred Stock, the Transferor does hereby certify that the
Transferor is familiar with the Certificate of Designation relating to the above
captioned Exchangeable Preferred Stock and that the transfer of this
Exchangeable Preferred Stock does not require registration under the Securities
Act of 1933 (the "Securities Act") because */:
[ ] Such Exchangeable Preferred Stock is being acquired for the
Transferor's own account without transfer.
[ ] Such Exchangeable Preferred Stock is being transferred to the
Company.
- -------- * /Please check applicable box.
<PAGE> 163
2
[ ] Such Exchangeable Preferred Stock is being transferred (i) to a
qualified institutional buyer (as defined in Rule 144A under the Securities
Act), in reliance on Rule 144A or (ii) pursuant to an exemption from
registration in accordance with Rule 904 under the Securities Act (and, in the
case of clause (ii), based on an opinion of counsel if the Company so requests
and together with a certification in substantially the form of Exhibit C to the
Certificate of Designation).
[ ] Such Exchangeable Preferred Stock is being transferred in reliance
on and in compliance with another exemption from the registration requirements
of the Securities Act (and based on an opinion of counsel if the Company so
requests).
[INSERT NAME OF TRANSFEROR]
Date: by
------------------ -----------------------------------
<PAGE> 164
EXHIBIT C
FORM OF CERTIFICATE TO BE DELIVERED IN
CONNECTION WITH TRANSFERS PURSUANT TO REGULATION S
----------, ----
The Bank of New York
Attention: [ ]
Ladies and Gentlemen:
In connection with our proposed sale of certain 12 1/2% Junior
Exchangeable Preferred Stock Due 2009 (the "Exchangeable Preferred Stock") of
IXC Communications, Inc., a Delaware corporation ("the "Company"), we represent
that:
(i) the offer of the Exchangeable Preferred Stock was not made
to a person in the United States;
(ii) at the time the buy order was originated, the transferee
was outside the United States or we and any person acting on our behalf
reasonably believed that the transferee was outside the United States;
(iii) no directed selling efforts have been made by us in the
United States in contravention of the requirements of Rule 903(b) or
Rule 904(b) of Regulation S under the Securities Act of 1933 (the
"Securities Act"), as applicable; and
(iv) the transaction is not part of a plan or scheme by us to
evade the registration requirements of the Securities Act.
You and the Company are entitled to rely upon this letter and
you are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with
<PAGE> 165
4
respect to the matters covered hereby. Terms used in this certificate have
the meanings set forth in Regulation S.
Very truly yours,
---------------------------------------------
(Name of Transferor)
by
------------------------------------------
Name:
Title:
Address:
<PAGE> 166
CERTIFICATE OF DESIGNATION OF THE POWERS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
AND OTHER SPECIAL RIGHTS OF
6 3/4% CUMULATIVE
CONVERTIBLE PREFERRED STOCK AND
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF
- --------------------------------------------------------------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
- --------------------------------------------------------------------------------
IXC Communications, Inc. (the "Company"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware, does hereby certify that (i) pursuant to authority conferred upon the
board of directors of the Company (the "Board of Directors") by its Restated
Certificate of Incorporation (hereinafter referred to as the "Restated
Certificate of Incorporation"), and pursuant to the provisions of Sections
141(c)(2) and 151 of the General Corporation Law of the State of Delaware, said
Board of Directors is authorized to issue Preferred Stock of the Company in one
or more series and has authorized a committee of the Board of Directors (the
"Finance Committee") to adopt the resolution set forth below and (ii) the
Finance Committee duly approved and adopted the following resolution on March
25, 1998 (the "Resolution"):
RESOLVED that, pursuant to the authority vested in the Board of
Directors by its Restated Certificate of Incorporation, and the
authority vested by such Board of Directors in a committee of the Board
(the "Finance Committee"), all the members of which are members of such
Board, the Finance Committee does hereby create, authorize and provide
for the issuance of 6 3/4% Cumulative Convertible Preferred Stock, par
value $.01 per share, with a stated value of $1000 per share, initially
consisting of up to 155,250 shares having the designation, preferences,
relative, participating, optional and other special rights and the
qualifications, limitations and restrictions thereof that are set forth
in the Restated Certificate of Incorporation and in this Resolution as
follows:
1. Designation. There is hereby created out of the authorized and
unissued shares of Preferred Stock of the Company a series of Preferred Stock
designated as the "6 3/4% Cumulative Convertible Preferred Stock" (the
"Cumulative Convertible Preferred Stock"). The number of shares constituting the
Cumulative Convertible Preferred Stock shall be 155,250, and such shares shall
be represented by stock certificates substantially in the form set forth in
Exhibit A hereto. The liquidation preference of the Cumulative Convertible
Preferred Stock shall be $1,000
<PAGE> 167
per share (the "Liquidation Preference"). The date the Cumulative Convertible
Preferred Stock is first issued is referred to as the "Issue Date".
2. Rank. The Cumulative Convertible Preferred Stock will, rank
(i) pari passu in right of payment with the Company's 7 1/4% Junior Convertible
Preferred Stock Due 2007 (the "7 1/4% Preferred Stock"), the Company's 12 1/2%
Junior Exchangeable Preferred Stock Due 2009 and 12 1/2% Series B Junior
Exchangeable Preferred Stock Due 2009 (collectively, the "Exchangeable Preferred
Stock") and each other class of Capital Stock or series of Preferred Stock
established hereafter by the Board of Directors, the terms of which expressly
provide that such class or series ranks on a parity with the Cumulative
Convertible Preferred Stock as to dividend rights and rights on liquidation,
dissolution and winding up of the Company (collectively referred to, as "Parity
Securities"); (ii) junior in right of payment to any Senior Securities (as
defined) as to dividends and upon liquidation, dissolution or winding up of the
Company and (iii) senior in right of payment as to dividend rights and upon
liquidation, dissolution or winding up of the Company to the Common Stock and
any Capital Stock of the Company that expressly provides that it will rank
junior to the Cumulative Convertible Preferred Stock as to dividend rights or
rights on liquidation, winding up and dissolution of the Company (collectively
referred to as "Junior Securities"). The Company may not authorize, create (by
way of reclassification or otherwise) or issue any class or series of Capital
Stock of the Company ranking senior in right of payment as to dividend rights or
upon liquidation, dissolution or winding up of the Company to the Cumulative
Convertible Preferred Stock ("Senior Securities") or any obligation or security
convertible or exchangeable into, or evidencing a right to purchase, shares of
any class or series of Senior Securities without the affirmative vote or consent
of the holders of at least 66-2/3% of the outstanding shares of Cumulative
Convertible Preferred Stock.
3. Dividends. The Holders of shares of the Cumulative Convertible
Preferred Stock will be entitled to receive, when, as and if dividends are
declared by the Board of Directors out of funds of the Company legally available
therefor, cumulative preferential dividends from the Issue Date of the
Cumulative Convertible Preferred Stock accruing at the rate of $67.50 per share
of Cumulative Convertible Preferred Stock per annum, or $16.875 per share of
Cumulative Convertible Preferred Stock per quarter, payable quarterly in arrears
on January 1, April 1, July 1, and October 1 of each year or, if any such date
is not a Business Day, on the next succeeding business day (each, a "Dividend
Payment Date"), to the Holders of record as of the next preceding December 15,
March 15, June 15, and September 15 (each, a "Record Date"). Accrued but unpaid
dividends, if any, may be paid on such dates as determined by the Board of
Directors. Dividends will be payable in cash except as set forth below.
Dividends payable on the Cumulative Convertible Preferred Stock will be computed
on the basis of a 360-day year of twelve 30-day months and will be deemed to
accrue on a daily basis. Dividends may, at the option of the Company, be paid in
Common Stock if, and only if, the documents governing the Company's indebtedness
that exists on the Issue Date then prohibit the payment of such dividends in
cash. If the Company elects to pay dividends in shares of Common Stock, the
number of shares of Common Stock to be distributed will be calculated by
dividing the amount of such dividend otherwise payable in cash by 95% of the
arithmetic average of the Closing Price (as defined) for the five Trading Days
(as defined) preceding the Dividend Payment Date. The Cumulative Convertible
Preferred Stock will not be redeemable unless all dividends accrued through such
redemption date shall have been paid in full.
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Notwithstanding anything to the contrary herein contained, the Company shall not
be required to declare or pay a dividend if another person (including, without
limitation, any of its subsidiaries) pays an amount to the Holders equal to the
amount of such dividend on behalf of the Company and, in such event, the
dividend will be deemed paid for all purposes.
Dividends on the Cumulative Convertible Preferred Stock will
accrue whether or not the Company has earnings or profits, whether or not there
are funds legally available for the payment of such dividends and whether or not
dividends are declared. Dividends will accumulate to the extent they are not
paid on the Dividend Payment Date for the quarter to which they relate.
Accumulated unpaid dividends will accrue and cumulate at a rate of 6.75% per
annum. The Company will take all reasonable actions required or permitted under
Delaware law to permit the payment of dividends on the Cumulative Convertible
Preferred Stock.
No dividend whatsoever shall be declared or paid upon, or any sum
set apart for the payment of dividends upon, any outstanding share of the
Cumulative Convertible Preferred Stock with respect to any dividend period
unless all dividends for all preceding dividend periods have been declared and
paid upon, or declared and a sufficient sum set apart for the payment of such
dividend upon, all outstanding shares of Cumulative Convertible Preferred Stock.
Unless full cumulative dividends on all outstanding shares of Cumulative
Convertible Preferred Stock due for all past dividend periods shall have been
declared and paid, or declared and a sufficient sum for the payment thereof set
apart, then: (i) no dividend (other than a dividend payable solely in shares of
Junior Securities or options, warrants or rights to purchase Junior Securities)
shall be declared or paid upon, or any sum set apart for the payment of
dividends upon, any shares of Junior Securities; (ii) no other distribution
shall be declared or made upon, or any sum set apart for the payment of any
distribution upon, any shares of Junior Securities; (iii) no shares of Junior
Securities shall be purchased, redeemed or otherwise acquired or retired for
value (excluding an exchange for shares of other Junior Securities or a
purchase, redemption or other acquisition from the proceeds of a substantially
concurrent sale of Junior Securities) by the Company or any of its subsidiaries;
and (iv) no monies shall be paid into or set apart or made available for a
sinking or other like fund for the purchase, redemption or other acquisition or
retirement for value of any shares of Junior Securities by the Company or any of
its subsidiaries. Holders of the Cumulative Convertible Preferred Stock will not
be entitled to any dividends, whether payable in cash, property or stock, in
excess of the full cumulative dividends as herein described.
4. Liquidation Preference. Upon any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Company after
payment in full of the liquidation preference (and any accrued and unpaid
dividends) on any Senior Securities, each Holder of shares of the Cumulative
Convertible Preferred Stock shall be entitled, on an equal basis with the
holders of the 7 1/4% Preferred Stock, the Exchangeable Preferred Stock and any
other outstanding Parity Securities, to payment out of the assets of the Company
available for distribution of the Liquidation Preference per share of the
Cumulative Convertible Preferred Stock held by such Holder, plus an amount equal
to the accrued and unpaid dividends on the Cumulative Convertible Preferred
Stock and Liquidated Damages (as defined) (if any) to the date fixed for
liquidation, dissolution, or winding up before any distribution is made on any
Junior Securities, including, without limitation, Common Stock of the Company.
After payment in full of the Liquidation Preference and an amount
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equal to the accrued and unpaid dividends and Liquidated Damages (if any), to
which Holders of Cumulative Convertible Preferred Stock are entitled, such
Holders will not be entitled to any further participation in any distribution of
assets of the Company. However, neither the voluntary sale, conveyance, exchange
or transfer (for cash, shares of stock, securities or other consideration) of
all or substantially all of the property or assets of the Company nor the
consolidation or merger of the Company with or into one or more corporations
will be deemed to be a voluntary or involuntary liquidation, dissolution or
winding up of the Company, unless such sale, conveyance, exchange, transfer,
consolidation or merger shall be in connection with a liquidation, dissolution
or winding up of the affairs of the Company or reduction or decrease in capital
stock.
5. Redemption. The Cumulative Convertible Preferred Stock may not
be redeemed at the option of the Company on or prior to April 5, 2000. After
April 5, 2000 the Company may redeem the Cumulative Convertible Preferred Stock.
Notwithstanding the foregoing, prior to April 1, 2002, the Company shall only
have the option to redeem shares of the Cumulative Convertible Preferred Stock
if, during the period of 30 consecutive Trading Days ending on the Trading Day
immediately preceding the date that the notice of redemption is mailed to
Holders, the Closing Price for the Common Stock exceeded $75 divided by the
Conversion Rate effective on the date of such notice for at least 20 of such
Trading Days. Subject to the immediately preceding sentence, the Cumulative
Convertible Preferred Stock may be redeemed, in whole or in part, at the option
of the Company after April 5, 2000, at the redemption prices specified below
(expressed as percentages of the Liquidation Preference thereof), in each case,
together with an amount equal to accrued and unpaid dividends on the Cumulative
Convertible Preferred Stock (excluding any declared dividends for which the
Record Date has passed) and Liquidated Damages (if any), to the date of
redemption, upon not less than 15 nor more than 60 days' prior written notice,
if redeemed during the period commencing on April 5, 2000 to March 31, 2001 at
105.40%, and thereafter during the 12-month period commencing on April 1 of each
of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR RATE
- ---- -------
<S> <C>
2001................................................ 104.73%
2002................................................ 104.05%
2003................................................ 103.38%
2004................................................ 102.70%
2005................................................ 102.03%
2006................................................ 101.35%
2007................................................ 100.68%
2008 and thereafter................................. 100.00%
</TABLE>
Except as provided in the preceding sentence, no payment or
allowance will be made for accrued dividends on any shares of Cumulative
Convertible Preferred Stock called for redemption.
On and after any date fixed for redemption (the "Redemption
Date"), provided that the Company has made available at the office of the
Transfer Agent a sufficient amount of cash to effect the redemption, dividends
will cease to accrue on the Cumulative Convertible
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Preferred Stock called for redemption (except that, in the case of a Redemption
Date after a dividend payment Record Date and prior to the related Dividend
Payment Date, holders of Cumulative Convertible Preferred Stock on the dividend
payment Record Date will be entitled on such Dividend Payment Date to receive
the dividend payable on such shares), such shares shall no longer be deemed to
be outstanding and all rights of the holders of such shares as holders of
Cumulative Convertible Preferred Stock shall cease except the right to receive
the cash deliverable upon such redemption, without interest from the Redemption
Date.
In the event of a redemption of only a portion of the then
outstanding shares of Cumulative Convertible Preferred Stock, the Company shall
effect such redemption on a pro rata basis, except that the Company may redeem
all of the shares held by Holders of fewer than 100 shares (or all of the shares
held by Holders who would hold less than 100 shares as a result of such
redemption), as may be determined by the Company.
With respect to a redemption pursuant hereto, the Company will
send a written notice of redemption by first class mail to each holder of record
of shares of Cumulative Convertible Preferred Stock, not fewer than 15 days nor
more than 60 days prior to the Redemption Date at its registered address (the
"Redemption Notice"); provided, however, that no failure to give such notice nor
any deficiency therein shall affect the validity of the procedure for the
redemption of any shares of Cumulative Convertible Preferred Stock to be
redeemed except as to the holder or holders to whom the Company has failed to
give said notice or except as to the holder or holders whose notice was
defective. The Redemption Notice shall state:
a. the redemption price;
b. whether all or less than all the outstanding shares of
the Cumulative Convertible Preferred Stock are to be redeemed and the total
number of shares of the Cumulative Convertible Preferred Stock being redeemed;
c. the Redemption Date;
d. that the holder is to surrender to the Company, in the
manner, at the place or places and at the price designated, his certificate or
certificates representing the shares of Cumulative Convertible Preferred Stock
to be redeemed; and
e. that dividends on the shares of the Cumulative
Convertible Preferred Stock to be redeemed shall cease to accumulate on such
Redemption Date unless the Company defaults in the payment of the redemption
price.
Each holder of Cumulative Convertible Preferred Stock shall
surrender the certificate or certificates representing such shares of Cumulative
Convertible Preferred Stock to the Company, duly endorsed (or otherwise in
proper form for transfer, as determined by the Company), in the manner and at
the place designated in the Redemption Notice, and on the Redemption Date the
full redemption price for such shares shall be payable in cash to the person
whose name appears on such certificate or certificates as the owner thereof, and
each surrendered certificate shall be canceled and retired. In the event that
less than all of the shares represented by any such certificate are redeemed, a
new certificate shall be issued representing the unredeemed shares.
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6. Voting Rights. Holders of record of shares of the Cumulative
Convertible Preferred Stock will have no voting rights, except as required by
law and as provided in this Section 6 and in Sections 2, 8 and 13 hereof. Upon
the accumulation of accrued and unpaid dividends on the outstanding Cumulative
Convertible Preferred Stock in an amount equal to six full quarterly dividends
(whether or not consecutive) (together with any event with a similar effect
pursuant to the terms of any other series of Preferred Stock upon which like
rights have been conferred, a "Voting Rights Triggering Event"), the number of
members of the Company's Board of Directors will be immediately and
automatically increased by two (unless previously increased pursuant to the
terms of any other series of Preferred Stock upon which like rights have been
conferred), and the Holders of a majority of the outstanding shares of
Cumulative Convertible Preferred Stock, voting together as a class (pro rata,
based on liquidation preference) with the holders of any other series of
Preferred Stock upon which like rights have been conferred and are exercisable,
will be entitled to elect two members to the Board of Directors of the Company.
Voting rights arising as a result of a Voting Rights Triggering Event will
continue until such time as all dividends in arrears on the Cumulative
Convertible Preferred Stock are paid in full. Notwithstanding the foregoing,
however, such voting rights to elect directors will expire when the number of
shares of Cumulative Convertible Preferred Stock outstanding is reduced to
13,500 or less.
In the event such voting rights expire or are no longer
exercisable because dividends in arrears have been paid in full, the term of any
directors elected pursuant to the provisions of this paragraph 6 above shall
terminate forthwith and the number of directors constituting the Board of
Directors shall be immediately and automatically decreased by two (until the
occurrence of any subsequent Voting Rights Triggering Event). At any time after
voting power to elect directors shall have become vested and be continuing in
the holders of Cumulative Convertible Preferred Stock (together with the holders
of any other series of Preferred Stock upon which like rights have been
conferred and are exercisable) pursuant to this paragraph 6, or if vacancies
shall exist in the offices of directors elected by such holders, a proper
officer of the Company may, and upon the written request of the holders of
record of at least 25% of the shares of Cumulative Convertible Preferred Stock
then outstanding or the holders of 25% of the shares of any other series of
Preferred Stock then outstanding upon which like rights have been conferred and
are exercisable addressed to the secretary of the Company shall, call a special
meeting of the Holders of Cumulative Convertible Preferred Stock and the holders
of such other series of Preferred Stock for the purpose of electing the
directors which such holders are entitled to elect pursuant to the terms hereof;
provided, however, that no such special meeting shall be called if the next
annual meeting of stockholders of the Company is to be held within 60 days after
the voting power to elect directors shall have become vested (or such vacancies
arise, as the case may be), in which case such meeting shall be deemed to have
been called for such next annual meeting. If such meeting shall not be called,
pursuant to the provision of the immediately preceding sentence, by a proper
officer of the Company within 20 days after personal service to the secretary of
the Company at its principal executive offices, then the Holders of record of at
least 25% of the outstanding shares of Cumulative Convertible Preferred Stock or
the holders of 25% of the shares of any other series of Preferred Stock upon
which like rights have been conferred and are exercisable may designate in
writing one of their members to call such meeting at the expense of the Company,
and such meeting may be called by the person so designated upon the notice
required for the annual meetings of stockholders of the Company and shall be
held at the place for holding the annual meetings of stockholders. Any Holder of
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Cumulative Convertible Preferred Stock or such other series of Preferred Stock
so designated shall have, and the Company shall provide, access to the lists of
Holders of Cumulative Convertible Preferred Stock and the holders of such other
series of Preferred Stock for any such meeting of the holders thereof to be
called pursuant to the provisions hereof. If no special meeting of the Holders
of Cumulative Convertible Preferred Stock and the holders of such other series
of Preferred Stock is called as provided in this paragraph 6, then such meeting
shall be deemed to have been called for the next meeting of stockholders of the
Company.
At any meeting held for the purposes of electing directors at
which the Holders of Cumulative Convertible Preferred Stock (together with the
holders of any other series of Preferred Stock upon which like rights have been
conferred and are exercisable) shall have the right, voting together as a
separate class, to elect directors as aforesaid, the presence in person or by
proxy of the Holders of at least a majority in voting power of the outstanding
shares of Cumulative Convertible Preferred Stock (and such other series of
Preferred Stock) shall be required to constitute a quorum thereof.
Any vacancy occurring in the office of a director elected by the
Holders of Cumulative Convertible Preferred Stock (and such other series of
Preferred Stock) may be filled by the remaining director elected by the Holders
of Cumulative Convertible Preferred Stock (and such other series of Preferred
Stock) unless and until such vacancy shall be filled by the Holders of
Cumulative Convertible Preferred Stock (and such other series of Preferred
Stock).
Except as set forth above and otherwise required by applicable
law, the creation, authorization or issuance of any shares of any Junior
Securities, Parity Securities or Senior Securities, or the increase or decrease
in the amount of authorized Capital Stock of any class, including Preferred
Stock, shall not require the affirmative vote or consent of Holders of
Cumulative Convertible Preferred Stock and shall not be deemed to affect
adversely the rights, preferences, privileges or voting rights of shares of
Cumulative Convertible Preferred Stock.
In any case in which the Holders of Cumulative Convertible
Preferred Stock shall be entitled to vote pursuant hereto or pursuant to
Delaware law, each Holder of Cumulative Convertible Preferred Stock entitled to
vote with respect to such matters shall be entitled to one vote for each share
of Cumulative Convertible Preferred Stock held.
Except as required by law, the Holders of the Cumulative
Convertible Preferred Stock will not be entitled to vote on any merger or
consolidation involving the Company or a sale of all or substantially all the
assets of the Company.
7. Conversion Rights. The Cumulative Convertible Preferred Stock
will be convertible at the option of the Holder, into shares of Common Stock at
any time, unless previously redeemed or repurchased, at a conversion rate of
13.748 shares of Common Stock per share of the Cumulative Convertible Preferred
Stock) (as adjusted pursuant to the provisions hereof, the "Conversion Rate")
(subject to the adjustments described below). The right to convert a share of
the Cumulative Convertible Preferred Stock called for redemption or delivered
for repurchase will
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<PAGE> 173
terminate at the close of business on the Redemption Date for such Cumulative
Convertible Preferred Stock or at the time of the repurchase, as the case may
be.
The right of conversion attaching to any share of Cumulative
Convertible Preferred Stock may be exercised by the Holder thereof by delivering
the share to be converted to the office of the Transfer Agent, or any agency or
office of the Company maintained for that purpose, accompanied by a duly signed
and completed notice of conversion in form reasonably satisfactory to the
Transfer Agent of the Company, such as that which is set forth in Exhibit B
hereto. The conversion date will be the date on which the share and the duly
signed and completed notice of conversion are so delivered. As promptly as
practicable on or after the conversion date, the Company will issue and deliver
to the Transfer Agent a certificate or certificates for the number of full
shares of Common Stock issuable upon conversion, with any fractional shares
rounded up to full shares or, at the Company's option, payment in cash in lieu
of any fraction of a share, based on the Closing Price of the Common Stock on
the Trading Day preceding the conversion date. Such certificate or certificates
will be delivered by the Transfer Agent to the appropriate Holder on a
book-entry basis or by mailing certificates evidencing the additional shares to
the Holders at their respective addresses set forth in the register of Holders
maintained by the Transfer Agent. All shares of Common Stock issuable upon
conversion of the Cumulative Convertible Preferred Stock will be fully paid and
nonassessable and will rank pari passu with the other shares of Common Stock
outstanding from time to time. Any shares of Cumulative Convertible Preferred
Stock surrendered for conversion during the period from the close of business on
any Record Date to the opening of business on the next succeeding Dividend
Payment Date must be accompanied by payment of an amount equal to the dividends
payable on such Dividend Payment Date on the shares of Cumulative Convertible
Preferred Stock being surrendered for conversion. No other payment or adjustment
for dividends, or for any dividends in respect of shares of Common Stock, will
be made upon conversion. Holders of Common Stock issued upon conversion will not
be entitled to receive any dividends payable to holders of Common Stock as of
any record time before the close of business on the conversion date.
The Conversion Rate shall be adjusted from time to time by the
Company as follows:
a. If the Company shall hereafter pay a dividend or make a
distribution in Common Stock to all holders of any outstanding class or series
of Common Stock of the Company, the Conversion Rate in effect at the opening of
business on the date following the date fixed for the determination of
shareholders entitled to receive such dividend or other distribution shall be
increased by multiplying such Conversion Rate by a fraction of which the
denominator shall be the number of shares of Common Stock outstanding at the
close of business on the Record Date (as defined below) fixed for such
determination and the numerator shall be the sum of such number of outstanding
shares and the total number of shares constituting such dividend or other
distribution, such increase to become effective immediately after the opening of
business on the day following the Record Date. If any dividend or distribution
of the type described in this provision (a) is declared but not so paid or made,
the Conversion Rate shall again be adjusted to the Conversion Rate which would
then be in effect if such dividend or distribution had not been declared.
b. If the outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the Conversion Rate
in effect at the opening of
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business on the day following the day upon which such subdivision becomes
effective shall be proportionately increased and, conversely, if the outstanding
shares of Common Stock shall be combined into a smaller number of shares of
Common Stock, the Conversion Rate in effect at the opening of business on the
day following the day upon which such combination becomes effective shall be
proportionately reduced, such increase or reduction, as the case may be, to
become effective immediately after the opening of business on the day following
the day upon which such subdivision or combination becomes effective.
c. If the Company shall offer or issue rights, options or
warrants to all holders of its outstanding Common Stock entitling them to
subscribe for or purchase Common Stock at a price per share less than the
Current Market Price (as defined below) on the Record Date fixed for the
determination of shareholders entitled to receive such rights or warrants, the
Conversion Rate shall be adjusted so that the same shall equal the rate
determined by multiplying the Conversion Rate in effect at the opening of
business on the date after such Record Date by a fraction of which the
denominator shall be the number of shares of Common Stock outstanding at the
close of business on the Record Date plus the number of shares of Common Stock
which the aggregate offering price of the total number of shares of Common Stock
subject to such rights, options or warrants would purchase at such Current
Market Price and of which the numerator shall be the number of shares of Common
Stock outstanding at the close of business on the Record Date plus the total
number of additional shares of Common Stock subject to such rights, options or
warrants for subscription or purchase. Such adjustment shall become effective
immediately after the opening of business on the day following the Record Date
fixed for determination of shareholders entitled to purchase or receive such
rights or warrants. To the extent that shares of Common Stock are not delivered
pursuant to such rights, options or warrants, upon the expiration or termination
of such rights or warrants the Conversion Rate shall again be adjusted to be the
Conversion Rate which would then be in effect had the adjustments made upon the
issuance of such rights or warrants been made on the basis of delivery of only
the number of shares of Common Stock actually delivered. If such rights or
warrants are not so issued, the Conversion Rate shall again be adjusted to be
the Conversion Rate which would then be in effect if such date fixed for the
determination of shareholders entitled to receive such rights or warrants had
not been fixed. In determining whether any rights or warrants entitle the
holders to subscribe for or purchase Common Stock at less than such Current
Market Price, and in determining the aggregate offering price of such shares of
Common Stock, there shall be taken into account any consideration received for
such rights or warrants, with the value of such consideration, if other than
cash, to be determined by the Board of Directors.
d. If the Company shall, by dividend or otherwise,
distribute to all holders of its shares of Common Stock shares of any class of
capital stock of the Company (other than any dividends or distributions to which
provision (a) of this Section applies) or evidences of its indebtedness, cash or
other assets (including securities, but excluding any rights or warrants of a
type referred to in paragraph (c) of this Section) (the foregoing hereinafter
called the "Distributed Securities"), then, in each such case, the Conversion
Rate shall be increased so that the same shall be equal to the rate determined
by multiplying the Conversion Rate in effect immediately prior to the close of
business on the Record Date (as defined below) with respect to such distribution
by a fraction of which the denominator shall be the Current Market Price
(determined as provided in provision g(ii) of this Section) of the Common Stock
on such date less the Fair Market Value (as
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<PAGE> 175
defined below) on such date of the portion of the Distributed Securities so
distributed applicable to one share of Common Stock and the numerator shall be
such Current Market Price, such increase to become effective immediately prior
to the opening of business on the day following the Record Date; provided,
however, that, in the event the then Fair Market Value (as so determined) of the
portion of the Distributed Securities so distributed applicable to one share of
Common Stock is equal to or greater than the Current Market Price on the Record
Date, in lieu of the foregoing adjustment, adequate provision shall be made so
that each Holder of Cumulative Convertible Preferred Stock shall have the right
to receive upon conversion of a share of Cumulative Convertible Preferred Stock
(or any portion thereof) the amount of Distributed Securities such holder would
have received had such holder converted such share of Cumulative Convertible
Preferred Stock (or portion thereof) immediately prior to such Record Date. If
such dividend or distribution is not so paid or made, the Conversion Rate shall
again be adjusted to be the Conversion Rate which would then be in effect if
such dividend or distribution had not been declared. If the Board of Directors
determines the Fair Market Value of any distribution for purposes hereof by
reference to the actual or when issued trading market for any securities
comprising all or part of such distribution, it must in doing so consider the
prices in such market over the same period used in computing the Current Market
Price pursuant to provision g(ii) of this section to the extent possible.
Rights or warrants distributed by the Company to all holders of
Common Stock entitling the holders thereof to subscribe for or purchase shares
of the Company's Capital Stock (either initially or under certain
circumstances), which rights or warrants, until the occurrence of a specified
event or events ("Dilution Trigger Event"): (i) are deemed to be transferred
with such Common Stock; (ii) are not exercisable; and (iii) are also issued in
respect of future issuances of Common Stock, shall be deemed not to have been
distributed for purposes of this provision (d) (and no adjustment to the
Conversion Rate under this provision (d) shall be required) until the occurrence
of the earliest Dilution Trigger Event, whereupon such rights and warrants shall
be deemed to have been distributed and an appropriate adjustment to the
Conversion Rate under this provision (d) shall be made. If any such rights or
warrants, including any such existing rights or warrants distributed prior to
the date hereof, are subject to subsequent events, upon the occurrence of each
of which such rights or warrants shall become exercisable to purchase different
securities, evidences of indebtedness or other assets, then the occurrence of
each such event shall be deemed to be such date of issuance and record date with
respect to new rights or warrants (and a termination or expiration of the
existing rights or warrants without exercise by the holder thereof). In
addition, in the event of any distribution (or deemed distribution) of rights or
warrants, or any Dilution Trigger Event with respect thereto, that was counted
for purposes of calculating a distribution amount for which an adjustment to the
Conversion Rate under this provision (d) was made, (1) in the case of any such
rights or warrants which shall all have been redeemed or repurchased without
exercise by any holders thereof, the Conversion Rate shall be readjusted upon
such final redemption or repurchase to give effect to such distribution or
Dilution Trigger Event, as the case may be, as though it were a cash
distribution, equal to the per share redemption or repurchase price received by
a holder or holders of Common Stock with respect to such rights or warrants
(assuming such holder had retained such rights or warrants), made to all holders
of Common Stock as of the date of such redemption or repurchase, and (2) in the
case of such rights or warrants which shall have expired or been terminated
without exercise by any holders thereof, the Conversion Rate shall be readjusted
as if such rights and warrants had not been issued.
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<PAGE> 176
Notwithstanding any other provision of this provision (d) to the
contrary, Capital Stock, rights, warrants, evidences of indebtedness, other
securities, cash or other assets (including, without limitation, any rights
distributed pursuant to any shareholder rights plan) shall be deemed not to have
been distributed for purposes of this provision (d) if the Company makes proper
provision so that each Holder of shares of Cumulative Convertible Preferred
Stock who converts a share of Cumulative Convertible Preferred Stock (or any
portion thereof) after the date fixed for determination of shareholders entitled
to receive such distribution shall be entitled to receive upon such conversion,
in addition to the Common Stock issuable upon such conversion, the amount and
kind of such distributions that such holder would have been entitled to receive
if such holder had, immediately prior to such determination date, converted such
share of Cumulative Convertible Preferred Stock into Common Stock.
For purposes of this provision (d), provision (a) and provision
(b), any dividend or distribution to which this provision (d) is applicable that
also includes Common Stock, or rights or warrants to subscribe for or purchase
Common Stock to which provision (b) applies (or both), shall be deemed instead
to be (1) a dividend or distribution of the evidences of indebtedness, cash,
assets, shares of capital stock, rights or warrants other than (A) such shares
of Common Stock or (B) rights or warrants to which provision (b) applies (and
any Conversion Rate increase required by this provision (d) with respect to such
dividend or distribution shall then be made) immediately followed by (2) a
dividend or distribution of such Common Stock or such rights or warrants (and
any further Conversion Rate increase required by provisions (a) and (b) with
respect to such dividend or distribution shall then be made), except that (1)
the Record Date of such dividend or distribution shall be substituted as "the
Record Date fixed for the determination of stockholders entitled to receive such
dividend or other distribution", "Record Date fixed for such determination" and
"Record Date" within the meaning of provision (a) and as "the Record Date fixed
for the determination of shareholders entitled to receive such rights or
warrants", "the date fixed for the determination of the shareholders entitled to
receive such rights or warrants" and "such Record Date" within the meaning of
provision (b), and (2) any share of Common Stock included in such dividend or
distribution shall not be deemed "outstanding at the close of business on the
date fixed for such determination" within the meaning of provision (a).
e. If the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock cash (excluding any cash that is
part of a distribution referred to in provision (d)) in an aggregate amount
that, combined together with (1) the aggregate amount of any other such
distributions to all holders of its Common Stock made exclusively in cash within
the 12 months preceding the date of payment of such distribution, and in respect
of which no adjustment pursuant to this provision (e) has been made, and (2) the
aggregate of any cash plus the Fair Market Value (as determined by the Board of
Directors, whose determination shall be conclusive and described in a resolution
of the Board of Directors) of consideration payable in respect of any tender
offer by the Company or a Subsidiary of the Company for all or any portion of
the Common Stock concluded within the 12 months preceding the date of payment of
such distribution, and in respect of which no adjustment pursuant to provision
(d) has been made, exceeds 10% of the product of the Current Market Price
(determined as provided below) on the Record Date with respect to such
distribution times the number of shares of Common Stock outstanding on such
date, then, and in each such case, immediately after the close of business on
such date, the Conversion Rate shall be
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<PAGE> 177
increased so that the same shall equal the price determined by multiplying the
Conversion Rate in effect immediately prior to the close of business on such
Record Date by a fraction (i) the denominator of which shall be equal to the
Current Market Price on the Record Date less an amount equal to the quotient of
(x) the excess of such combined amount over such 10% amount divided by (y) the
number of shares of Common Stock outstanding on the Record Date and (ii) the
numerator of which shall be equal to the Current Market Price on such Record
Date; provided, however, that, if the portion of the cash so distributed
applicable to one share of Common Stock is equal to or greater than the Current
Market Price of the Common Stock on the Record Date, in lieu of the foregoing
adjustment, adequate provision shall be made so that each holder of Cumulative
Convertible Preferred Stock shall have the right to receive upon conversion of a
share of Cumulative Convertible Preferred Stock (or any portion thereof) the
amount of cash such holder would have received had such holder converted such
share of Cumulative Convertible Preferred Stock (or portion thereof) immediately
prior to such Record Date. If such dividend or distribution is not so paid or
made, the Conversion Rate shall again be adjusted to be the Conversion Rate
which would then be in effect if such dividend or distribution had not been
declared.
f. If a tender or exchange offer made by the Company or
any of its subsidiaries for all or any portion of the Common Stock expires and
such tender or exchange offer (as amended upon the expiration thereof) requires
the payment to shareholders (based on the acceptance (up to any maximum
specified in the terms of the tender offer) of Purchased Shares (as defined
below)) of an aggregate consideration having a Fair Market Value that, combined
together with (1) the aggregate of the cash plus the Fair Market Value, as of
the expiration of such tender offer, of consideration payable in respect of any
other tender offers, by the Company or any of its subsidiaries for all or any
portion of the Common Stock expiring within the 12 months preceding the
expiration of such tender offer and in respect of which no adjustment pursuant
to this provision (f) has been made and (2) the aggregate amount of any
distributions to all holders of the Common Stock made exclusively in cash within
12 months preceding the expiration of such tender offer and in respect of which
no adjustment pursuant to provision (e) has been made, exceeds 10% of the
product of the Current Market Price as of the last time (the "Expiration Time")
tenders could have been made pursuant to such tender offer (as it may be
amended) times the number of shares of Common Stock outstanding (including any
tendered shares) at the Expiration Time, then, and in each such case,
immediately prior to the opening of business on the day after the date of the
Expiration Time, the Conversion Rate shall be adjusted so that the same shall
equal the price determined by multiplying the Conversion Rate in effect
immediately prior to the close of business on the date of the Expiration Time by
a fraction of which the denominator shall be the number of shares of Common
Stock outstanding (including any tendered shares) at the Expiration Time
multiplied by the Current Market Price of the Common Stock on the Trading Day
next succeeding the Expiration Time and the numerator shall be the sum of (x)
the Fair Market Value of the aggregate consideration payable to shareholders
based on the acceptance (up to any maximum specified in the terms of the tender
offer) of all shares validly tendered and not withdrawn as of the Expiration
Time (the shares deemed so accepted, up to any such maximum, being referred to
as the "Purchased Shares") and (y) the product of the number of shares of Common
Stock outstanding (less any Purchased Shares) at the Expiration Time and the
Current Market Price of the Common Stock on the Trading Day next succeeding the
Expiration Time, such reduction (if any) to become effective immediately prior
to the opening of business on the day following the Expiration Time. If the
Company is obligated to
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purchase shares pursuant to any such tender offer, but the Company is
permanently prevented by applicable law from effecting any such purchases or all
such purchases are rescinded, the Conversion Rate shall again be adjusted to be
the Conversion Rate which would then be in effect if such tender offer had not
been made. If the application of this provision (f) to any tender offer would
result in a decrease in the Conversion Rate, no adjustment shall be made for
such tender offer under this provision (f).
The Company may make voluntary increases in the Conversion Rate
in addition to those required in the foregoing provisions, provided that each
such increase is in effect for at least 20 calendar days.
In addition, in the event that any other transaction or event
occurs as to which the foregoing Conversion Rate adjustment provisions are not
strictly applicable but the failure to make any adjustment would adversely
affect the conversion rights represented by the Cumulative Convertible Preferred
Stock in accordance with the essential intent and principles of such provisions,
then, in each such case, either (i) the Company will appoint an investment
banking firm of recognized national standing, or any other financial expert that
does not (or whose directors, officers, employees, affiliates or stockholders do
not) have a direct or material indirect financial interest in the Company or any
of its subsidiaries, who has not been, and, at the time it is called upon to
give independent financial advice to the Company, is not (and none of its
directors, officers, employees, affiliates or stockholders are) a promoter,
director or officer of the Company or any of its subsidiaries, which will give
their opinion upon or (ii) the Board of Directors shall, in its sole discretion,
determine consistent with the Board of Directors' fiduciary duties to the
holders of the Company's Common Stock, the adjustment, if any, on a basis
consistent with the essential intent and principles established in the foregoing
Conversion Rate adjustment provisions, necessary to preserve, without dilution,
the conversion rights represented by the Cumulative Convertible Preferred Stock.
Upon receipt of such opinion or determination, the Company will promptly mail a
copy thereof to the Holders of the Cumulative Convertible Preferred Stock and
will, subject to the fiduciary duties of the Board of Directors, make the
adjustments described therein.
The Company will provide to Holders of the Cumulative Convertible
Preferred Stock reasonable notice of any event that would result in an
adjustment to the Conversion Rate pursuant to this section so as to permit the
Holders to effect a conversion of Cumulative Convertible Preferred Stock into
shares of Common Stock prior to the occurrence of such event.
g. For purposes of this section, the following terms shall
have the meaning indicated:
i. "Current Market Price" means the average of the
daily closing prices per share of Common Stock for the 10 consecutive trading
days immediately prior to the date in question.
ii. "Fair Market Value" shall mean the amount which
a willing buyer would pay a willing seller in an arm's-length transaction, under
usual and ordinary circumstances and after consideration of all available uses
and purposes without any compulsion
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upon the seller to sell or the buyer to buy, as determined by the Board of
Directors, whose determination shall be made in good faith and shall be
conclusive and described in a resolution of the Board of Directors.
iii. "Record Date" shall mean, with respect to any
dividend, distribution or other transaction or event in which the holders of
Common Stock have the right to receive any cash, securities or other property or
in which the Common Stock (or other applicable security) is exchanged for or
converted into any combination of cash, securities or other property, the date
fixed for determination of shareholders entitled to receive such cash,
securities or other property (whether such date is fixed by the Board of
Directors or by statute, contract or otherwise).
h. No adjustment in the Conversion Rate shall be required
unless such adjustment would require an increase or decrease of at least 1% in
such rate; provided, however, that any adjustments which by reason of this
paragraph are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this paragraph
shall be made by the Company and shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be. No adjustment need be made
for a change in the par value or no par value of the Common Stock.
i. Whenever the Conversion Rate is adjusted as herein
provided, the Company shall promptly file with the Transfer Agent an Officers'
Certificate setting forth the Conversion Rate after such adjustment and setting
forth a brief statement of the facts requiring such adjustment. Promptly after
delivery of such certificate, the Company shall prepare a notice of such
adjustment of the Conversion Rate setting forth the adjusted Conversion Rate and
the date on which each adjustment becomes effective and shall mail such notice
of such adjustment of the Conversion Rate to each holder of Cumulative
Convertible Preferred Stock at such holder's last address appearing on the
register of holders maintained for that purpose within 20 days of the effective
date of such adjustment. Failure to deliver such notice shall not affect the
legality or validity of any such adjustment.
j. In any case in which this paragraph provides that an
adjustment shall become effective immediately after a Record Date for an event,
the Company may defer until the occurrence of such event issuing to the holder
of any share of Cumulative Convertible Preferred Stock converted after such
Record Date and before the occurrence of such event the additional Common Stock
issuable upon such conversion by reason of the adjustment required by such event
over and above the Common Stock issuable upon such conversion before giving
effect to such adjustment.
k. For purposes of this paragraph, the number of shares of
Common Stock at any time outstanding shall not include shares held in the
treasury of the Company but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of Common Stock. The Company shall not
pay any dividend or make any distribution on Common Stock held in the treasury
of the Company.
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8. Certain Covenants.
a. Transactions with Affiliates
Without the affirmative vote or consent of the holders of
a majority of the outstanding shares of Cumulative Convertible Preferred Stock,
the Company will not, and will not permit any of its subsidiaries to, make any
payment to, or sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter into
or make or amend any contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that
are no less favorable to the Company or the relevant subsidiary than those that
would have been obtained in a comparable transaction by the Company or such
subsidiary with an unrelated Person and (ii) the Company files in its minute
books with respect to any Affiliate Transaction or series of related Affiliate
Transaction involving aggregate consideration in excess of $1.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the members
of the Board of Directors that are disinterested as to such Affiliate
Transaction.
As used herein, "Affiliate" of any specified Person means
any other Person directly or indirectly controlling or controlled by or under
direct or indirect common control with such specified Person. For purposes of
this definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by" and "under common control with"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise; provided that beneficial ownership of 10% or more of the voting
securities of a Person shall be deemed to be control.
The provisions of the foregoing paragraph shall not
prohibit (i) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the Board of
Directors, (ii) the grant of stock options or similar rights to employees and
directors of the Company pursuant to plans approved by the Board of Directors,
(iii) any employment or consulting arrangement or agreement entered into by the
Company or any of its subsidiaries in the ordinary course of business and
consistent with the past practice of the Company or such subsidiary, (iv) the
payment of reasonable fees to directors of the Company and its subsidiaries who
are not employees of the Company or its subsidiaries, (v) any Affiliate
Transaction between the Company and a subsidiary thereof or between such
subsidiaries (for purposes of this paragraph, "subsidiary" includes any entity
deemed to be an Affiliate because the Company or any of its subsidiaries own
securities in such entity or controls such entity), or (vi) transactions between
the Company or any subsidiary thereof specifically contemplated by the PSINet
Agreement dated as of July 22, 1997 between a subsidiary of the Company and
PSINet, as amended as of the date hereof.
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b. Payments for Consent
The Company nor any of its subsidiaries will, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
dividend or other distribution, fee or otherwise, to any Holder of shares of the
Cumulative Convertible Preferred Stock for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the Certificate of
Designations or the Cumulative Convertible Preferred Stock unless such
consideration is offered to be paid and is paid to all Holders of the Cumulative
Convertible Preferred Stock that consent, waive or agree to amend in the time
frame set forth in the solicitation documents relating to such consent, waiver
or agreement.
c. Reports
Whether or not required by the rules and regulations of
the Commission, so long as any shares of the Cumulative Convertible Preferred
Stock are outstanding, the Company will furnish to the Holders of the Cumulative
Convertible Preferred Stock (i) all quarterly and annual financial information
that would be required to be contained in a filing with the Commission on Forms
10-Q and 10-K if the Company were required to file such Forms, including
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants and (ii) all information that
would be required to be contained in a current report on Form 8-K if the Company
were required to file such reports. In the event the Company has filed any such
report with the Commission, it will not be obligated to separately finish the
report to any Holder unless and until such Holder requests a copy of the report.
In addition, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request.
9. Merger, Consolidation or Sale of Assets of the Company
In the event that the Company is party to any Fundamental Change
or transaction (including, without limitation, a merger other than a merger that
does not result in a reclassification, conversion, exchange or cancellation of
Common Stock), consolidation, sale of all or substantially all of the assets of
the Company, recapitalization or reclassification of Common Stock (other than a
change in par value, or from par value to no par value, or from no par value to
par value or as a result of a subdivision or combination of Common Stock) or any
compulsory share exchange (each of the foregoing, including any Fundamental
Change, being referred to as a "Transaction"), the Company will be obligated,
subject to applicable provisions of state law and the restrictions of the
Indenture, either to offer (a "Repurchase Offer") to purchase all of the shares
of Cumulative Convertible Preferred Stock on the date (the "Repurchase Date")
that is 75 days after the date the Company gives notice of the Transaction, at a
price (the "Repurchase Price") equal to $1,000.00 per share of Cumulative
Convertible Preferred Stock, together with an amount equal to accrued and unpaid
dividends on the Cumulative Convertible Preferred Stock through the Repurchase
Date or to adjust the Conversion Rate as described below. If a Repurchase Offer
is made, the Company shall deposit, on or prior to the Repurchase Date, with a
paying agent an amount of money sufficient to
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pay the aggregate Repurchase Price of the Cumulative Convertible Preferred Stock
which is to be paid on the Repurchase Date.
On or before the 15th day after the Company knows or reasonably
should know that a Transaction has occurred, the Company will be required to
mail to all Holders a notice of the occurrence of such Transaction and whether
or not the documents governing the Company's indebtedness permit at such time a
Repurchase Offer, and, as applicable, either the new Conversion Rate (as
adjusted at the option of the Company) or the date by which the Repurchase Offer
must be accepted, the Repurchase Price for the Cumulative Convertible Preferred
Stock and the procedures which the holder must follow to accept the Repurchase
Offer. To accept the Repurchase Offer, the Holder of a share of Cumulative
Convertible Preferred Stock will be required to deliver, on or before the 10th
day prior to the Repurchase Date, written notice to the Company (or an agent
designated by the Company for such purpose) of the holder's acceptance, together
with the certificates evidencing the Cumulative Convertible Preferred Stock with
respect to which the offer is being accepted, duly endorsed for transfer.
In the event the Company does not make a Repurchase Offer with
respect to a Transaction and such Transaction results in shares of Common Stock
being converted into the right to receive, or being exchanged for, (i) in the
case of any Transaction other than a Transaction involving a Common Stock
Fundamental Change (as defined below) (and subject to funds being legally
available for such purpose under applicable law at the time of such conversion),
securities, cash or other property, each share of the Cumulative Convertible
Preferred Stock shall thereafter be convertible into the kind and, in the case
of a Transaction which does not involve a Fundamental Change (as defined below),
amount of securities, cash and other property receivable upon the consummation
of such Transaction by a holder of that number of shares of Common Stock into
which a share of the Cumulative Convertible Preferred Stock was convertible
immediately prior to such Transaction, or (ii) in the case of a Transaction
involving a Common Stock Fundamental Change, common stock, each share of the
Cumulative Convertible Preferred Stock shall thereafter be convertible (in the
manner described therein) into common stock of the kind received by holders of
Common Stock (but in each case after giving effect to any adjustment discussed
below relating to a Fundamental Change if such Transaction constitutes a
Fundamental Change), other than as required by Delaware law.
If any Fundamental Change occurs, then the Conversion Rate in
effect will be adjusted immediately after such Fundamental Change as described
below. In addition, in the event of a Common Stock Fundamental Change, each
share of Cumulative Convertible Preferred Stock shall be convertible solely into
common stock of the kind received by holders of Common Stock as a result of such
Common Stock Fundamental Change.
The Conversion Rate in the case of any Transaction involving a
Fundamental Change will be adjusted immediately after such Fundamental Change:
(i) in the case of a Non-Stock Fundamental Change
(as defined below), the Conversion Rate will thereupon become the higher of (A)
the Conversion Rate in effect immediately prior to such Non-Stock Fundamental
Change, but after giving effect to any other prior
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adjustments effected, and (B) a fraction, the numerator of which is (x) the
redemption rate for one share of the Cumulative Convertible Preferred Stock if
the redemption date were the date of such Non-Stock Fundamental Change (or, for
the period commencing on the first date of original issuance of the Cumulative
Convertible Preferred Stock and through April 1, 1999, and the twelve-month
period commencing April 1, 1999, the product of 106.75% and 106.075%,
respectively), multiplied by $1000 plus (y) the amount of any then-accrued and
unpaid dividends on one share of the Cumulative Convertible Preferred Stock, and
the denominator of which is the greater of the Applicable Price or the then
applicable Reference Market Price; and
(ii) in the case of a Common Stock Fundamental
Change, the Conversion Rate in effect immediately prior to such Common Stock
Fundamental Change, but after giving effect to any other prior adjustments
effected, will thereupon be adjusted by multiplying such Conversion Rate by a
fraction of which the denominator will be the Purchaser Stock Price (as defined
below) and the numerator will be the Applicable Price; provided, however, that
in the event of a Common Stock Fundamental Change in which (A) 100% of the value
of the consideration received by a holder of Common Stock is common stock of the
successor, acquirer, or other third party (and cash, if any, is paid only with
respect to any fractional interests in such common stock resulting from such
Common Stock Fundamental Change) and (B) all Common Stock will have been
exchanged for, converted into, or acquired for common stock (and cash with
respect to fractional interests) of the successor, acquirer, or other third
party, the Conversion Rate in effect immediately prior to such Common Stock
Fundamental Change will thereupon be adjusted by multiplying such Conversion
Rate by the number of shares of common stock of the successor, acquirer, or
other third party received by a holder of one share of Common Stock as a result
of such Common Stock Fundamental Change.
The term "Applicable Price" means (i) in the case of a Non-Stock
Fundamental Change in which the holders of Common Stock receive only cash, the
amount of cash received by the holder of one share of Common Stock and (ii) in
the event of any other Non-Stock Fundamental Change or any Common Stock
Fundamental Change, the average of the Closing Price (as defined below) for
Common Stock during the ten Trading Days prior to the record date for the
determination of the holders of Common Stock entitled to receive such
securities, cash, or other property in connection with such Non-Stock
Fundamental Change or Common Stock Fundamental Change or, if there is no such
record date, the date upon which the holders of Common Stock shall have the
right to receive such securities, cash, or other property (such record date or
distribution date being hereinafter referred to as the "Entitlement Date") in
each case as adjusted in good faith by the Company to appropriately reflect any
of the events referred to above.
The term "Common Stock Fundamental Change" means any Fundamental
Change in which more than 50% of the value (as determined in good faith by the
Board of Directors of the Company) of the consideration received by holders of
Common Stock consists of common stock that for each of the ten consecutive
Trading Days prior to the Entitlement Date has been admitted for listing or
admitted for listing subject to notice of issuance on a national securities
exchange or quoted on the Nasdaq National Market; provided, however, that a
Fundamental Change shall not be a Common Stock Fundamental Change unless either
(i) the Company continues to exist after the occurrence of such Fundamental
Change and the outstanding Cumulative Convertible Preferred
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Stock continues to exist as outstanding Cumulative Convertible Preferred Stock
or (ii) not later than the occurrence of such Fundamental Change, the
outstanding Cumulative Convertible Preferred Stock is converted into or
exchanged for shares of convertible Preferred Stock of an entity succeeding to
the business of the Company or a subsidiary thereof, which convertible Preferred
Stock has powers, preferences, and relative, participating, optional, or other
rights and qualifications, limitations, and restrictions, substantially similar
to those of the Cumulative Convertible Preferred Stock.
The term "Fundamental Change" means the occurrence of any
Transaction or event in connection with a plan pursuant to which all or
substantially all Common Stock shall be exchanged for, converted into, acquired
for, or constitute solely the right to receive securities, cash, or other
property (whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification, recapitalization, or
otherwise), provided, that, in the case of a plan involving more than one such
Transaction or event, for purposes of adjustment of the Conversion Rate, such
Fundamental Change shall be deemed to have occurred when substantially all
Common Stock shall be exchanged for, converted into, or acquired for or
constitute solely the right to receive securities, cash, or other property, but
the adjustment shall be based upon the consideration that a holder of Common
Stock received in such Transaction or event as a result of which more than 50%
of Common Stock shall have been exchanged for, converted into, or acquired for
or constitute solely the right to receive securities, cash, or other property.
The term "Non-Stock Fundamental Change" means any Fundamental Change other than
a Common Stock Fundamental Change.
The term "Purchaser Stock Price" means, with respect to any
Common Stock Fundamental Change, the average of the Closing Prices for the
common stock received in such Common Stock Fundamental Change for the ten
consecutive Trading Days prior to and including the Entitlement Date, as
adjusted in good faith by the Company to appropriately reflect any of the events
referred to above.
The term "Reference Market Price" shall initially mean $38.79
(which is an amount equal to 66 2/3% of the reported last sales price for Common
Stock on the Nasdaq National Market on March 25, 1998) and in the event of any
adjustment of the Conversion Rate other than as a result of a Non-Stock
Fundamental Change, the Reference Market Price shall also be adjusted so that
the ratio of the Reference Market Price to the Conversion Rate after giving
effect to any such adjustment shall always be the same as the ratio of the
initial Reference Market Price to the initial Conversion Rate.
In case (1) the Company shall declare a dividend (or any other
distribution) on its Common Stock payable otherwise than in cash out of its
earned surplus; (2) the Company shall authorize the granting to all holders of
its Common Stock of rights or warrants to subscribe for or purchase any shares
of capital stock of any class or of any other rights; (3) of any
reclassification of the Common Stock of the Company (other than a subdivision or
combination of its outstanding Common Stock); (4) of any consolidation or merger
to which the Company is a party and for which approval of any shareholders of
the Company is required; (5) the sale or transfer of all or substantially all
the assets of the Company; or (6) of the voluntary or involuntary dissolution,
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liquidation or winding up of the Company; then the Company shall cause to be
filed with the Transfer Agent and at each office or agency maintained for the
purpose of conversion of the Cumulative Convertible Preferred Stock, and shall
cause to be mailed to all holders at their last addresses as they shall appear
in the Cumulative Convertible Preferred Stock Register, at least 20 days (or 10
days in any case specified in clause (1) or (2) above) prior to the applicable
date hereinafter specified, a notice stating (x) the date on which a record is
to be taken for the purpose of such dividend, distribution, rights or warrants,
or, if a record is not to be taken, the date as of which the holders of Common
Stock of record to be entitled to such dividend, distribution, rights or
warrants are to be determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their Common
Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up. Failure to give the notice requested by this Section
or any defect therein shall not affect the legality or validity of any dividend,
distribution, right, warrant, reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up, or the vote upon any such
action.
The Company shall at all times reserve and keep available, free
from preemptive rights, out of its authorized but unissued shares of Common
Stock (or out of its authorized shares of Common Stock held in the treasury of
the Company), for the purpose of effecting the conversion of the Cumulative
Convertible Preferred Stock, the full number of shares of Common Stock then
issuable upon the conversion of all outstanding shares of Cumulative Convertible
Preferred Stock.
The Company will pay any and all document, stamp or similar issue
or transfer taxes that may be payable in respect of the issue or delivery of
Common Stock on conversion of the Cumulative Convertible Preferred Stock
pursuant hereto. The Company shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that of the Holder of
the share of Cumulative Convertible Preferred Stock or the shares of Cumulative
Convertible Preferred Stock to be converted, and no such issue or delivery shall
be made unless and until the Person requesting such issue has paid to the
Company the amount of any such tax, or has established to the satisfaction of
the Company that such tax has been paid.
10. Reissuance of Cumulative Convertible Preferred Stock. Shares
of Cumulative Convertible Preferred Stock redeemed for or converted into Common
Stock or that have been reacquired in any manner shall not be reissued as shares
of Cumulative Convertible Preferred Stock and shall (upon compliance with any
applicable provisions of the laws of Delaware) have the status of authorized and
unissued shares of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of Preferred Stock; provided,
however, that so long as any shares of Cumulative Convertible Preferred Stock
are outstanding, any issuance of such shares must be in compliance with the
terms hereof.
11. Business Day. If any payment, redemption or exchange shall be
required by the terms hereof to be made on a day that is not a Business Day,
such payment, redemption or exchange shall be made on the immediately succeeding
Business Day.
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12. Additional Rights of Holders. In addition to the rights
provided to Holders under this Certificate of Designation, Holders shall have
the rights set forth in the Registration Rights Agreement.
13. Amendment, Supplement and Waiver. The Company may amend this
Certificate of Designation with the affirmative vote or consent of the holders
of a majority of the shares of Cumulative Convertible Preferred Stock then
outstanding, (including votes or consents obtained in connection with a tender
offer or exchange offer for the Cumulative Convertible Preferred Stock) and,
except as otherwise provided by applicable law, any past default or failure to
comply with any provision of this Certificate of Designation may also be waived
with the consent of such holders. Notwithstanding the foregoing, however,
without the consent of each Holder affected, an amendment or waiver may not
(with respect to any shares of the Cumulative Convertible Preferred Stock held
by a non-consenting Holder): (i) alter the voting rights with respect to the
Cumulative Convertible Preferred Stock or reduce the number of shares of the
Cumulative Convertible Preferred Stock whose Holders must consent to an
amendment, supplement or waiver, (ii) reduce the Liquidation Preference of any
share of the Cumulative Convertible Preferred Stock or adversely alter the
provisions with respect to the redemption of the Cumulative Convertible
Preferred Stock, (iii) reduce the rate of or change the time for payment of
dividends on any share of the Cumulative Convertible Preferred Stock, (iv) waive
a default in the payment of dividends or Liquidated Damages (if any) on the
Cumulative Convertible Preferred Stock, (v) make any share of the Cumulative
Convertible Preferred Stock payable in money other than United States dollars,
(vi) make any change in the provisions of the Certificate of Designation
relating to waivers of the rights of Holders of the Cumulative Convertible
Preferred Stock to receive the Liquidation Preference, dividends or Liquidated
Damages (if any) on the Cumulative Convertible Preferred Stock, or (vii) make
any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder
of the Cumulative Convertible Preferred Stock, the Company may (to the extent
permitted by, and subject to the requirements of, Delaware law) amend or
supplement this Certificate of Designation to cure any ambiguity, defect or
inconsistency, to provide for uncertificated shares of the Cumulative
Convertible Preferred Stock in addition to or in place of certificated shares of
the Cumulative Convertible Preferred Stock, to make any change that would
provide any additional rights or benefits to the Holders of the Cumulative
Convertible Preferred Stock or to make any change that the Board of Directors
determines, in good faith, is not materially adverse to Holders of the
Cumulative Convertible Preferred Stock.
14. Shelf Registration; Liquidated Damages. Pursuant to the
Registration Rights Agreement, the Company will agree to file a Shelf
Registration Statement with the Commission on the appropriate form under the
Securities Act with respect to the Cumulative Convertible Preferred Stock, any
depositary shares issued in connection with the Cumulative Convertible Preferred
Stock (the "Depositary Shares"), and Common Stock issuable upon conversion
thereof or paid as dividends thereon, to cover resales of the Depositary Shares,
the Cumulative Convertible Preferred Stock or such Common Stock by the Holders
thereof who satisfy certain conditions relating to the provision of information
in connection with the Shelf Registration Statement. The Company will use its
best efforts to cause the Shelf Registration Statement to be declared effective
as promptly as possible by
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the Commission. For purposes hereof, "Transfer Restricted Securities" means each
Depositary Share or share of the Cumulative Convertible Preferred Stock or
Common Stock issuable upon conversion thereof or paid as dividends thereon until
the earlier of (i) the date on which such Depositary Share or share of
Cumulative Convertible Preferred Stock or Common Stock has been effectively
registered under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (ii) the date on which such Depositary Share or share
of Cumulative Convertible Preferred Stock or Common Stock is eligible to be
distributed to the public pursuant to Rule 144(k) under the Securities Act.
The Registration Rights Agreement will provide that the Company
will (i) file the Shelf Registration Statement with the Commission on or prior
to 45 days after the Issue Date, (ii) use its best efforts to cause the Shelf
Registration to be declared effective by the Commission on or prior to June 26,
1998 and (iii) use its best efforts to maintain the effectiveness of the Shelf
Registration Statement until all Depositary Shares, shares of Cumulative
Convertible Preferred Stock and shares of Common Stock issued upon conversion
thereof or as dividends thereon that are not held by affiliates of the Company
(A) may be resold without restriction under Rule 144(k) under the Securities Act
or (B) have been sold pursuant to the Shelf Registration Statement (subject to
the Company's right to notify Holders that the Prospectus contained therein
ceases to be accurate and complete as a result of material business developments
for up to 120 days during such three-year period, provided that (A) no single
period may exceed 45 days and (B) such periods in the aggregate may not exceed
60 days in any calendar year). If (a) the Company fails to file the Shelf
Registration Statement required by the Registration Rights Agreement on or
before the date specified for such filing, (b) such Shelf Registration Statement
is not declared effective by the Commission on or prior to the date specified
for such effectiveness (the "Effectiveness Target Date") or (c) the Shelf
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted Securities
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (c) above a "Registration Default"),
then the Company will pay Liquidated Damages as required by the Registration
Rights Agreement to each Holder of shares of the Cumulative Convertible
Preferred Stock which are Transfer Restricted Securities (and the corresponding
Depositary Shares), with respect to the first 45-day period immediately
following the occurrence of such Registration Default in an amount equal to
$0.25 per year per Depositary Share ($5.00 per year per $1,000 in Liquidation
Preference of the Cumulative Convertible Preferred Stock) held by such Holder.
The amount of the Liquidated Damages will increase by an additional $2.50 per
year per $1,000 in Liquidation Preference of the Cumulative Convertible
Preferred Stock with respect to any subsequent period until all Registration
Defaults have been cured. In addition, holders of shares of the Cumulative
Convertible Preferred Stock which are Transfer Restricted Securities may receive
Liquidated Damages with respect to Common Stock which are Transfer Restricted
Securities issued in lieu of paying dividends in cash. The Liquidated Damages
amount per share of Common Stock will be equal to the Liquidated Damages per
share of Cumulative Convertible Preferred Stock, divided by the Conversion Rate.
All accrued Liquidated Damages will be paid by the Company, to the extent
permitted by applicable law, on each Dividend Payment Date and, to the extent
the net dividend payable on such date may be paid through the issuance of Common
Stock, may be paid in Common Stock (valued on the same basis as for the dividend
then payable). Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease. Notwithstanding anything to
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<PAGE> 188
the contrary herein contained, during any period, the Company will not be
required to pay Liquidated Damages with respect to more than one Registration
Default.
The summary herein of certain provisions of the Registration
Rights Agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the
Registration Rights Agreement, a copy of which is available upon request to the
Company.
15. Transfer and Exchange. When Cumulative Convertible Preferred
Stock is presented to the Transfer Agent with a request to register the transfer
of such Cumulative Convertible Preferred Stock or to exchange such Cumulative
Convertible Preferred Stock for an equal number of shares of Cumulative
Convertible Preferred Stock of other authorized denominations, the Transfer
Agent shall register the transfer or make the exchange as requested if its
reasonable requirements for such transaction are met and such transfer or
exchange is in compliance with applicable laws or regulations.
16. Certain Definitions. As used in this Certificate of
Designation, the following terms shall have the following meanings (and (1)
terms defined in the singular have comparable meanings when used in the plural
and vice versa, (2) "including" means including without limitation, (3) "or" is
not exclusive and (4) an accounting term not otherwise defined has the meaning
assigned to it in accordance with United States generally accepted accounting
principles as in effect on the Issue Date and all accounting calculations will
be determined in accordance with such principles), unless the content otherwise
requires:
"Board of Directors" mean the Board of Directors of the Company
or any committee thereof duly authorized to act on behalf of the Board.
"Business Day" means each day which is not a legal holiday.
"Capital Stock" of any person means any and all shares,
interests, rights to purchase, warrants, options, participation or other
equivalents of or interests in (however designated) equity of such person,
including any Preferred Stock, but excluding any debt securities convertible
into or exchangeable for such equity.
"Closing Price" means on any day the reported last bid price on
such day, or in case no sale takes place on such day, the average of the
reported closing bid and asked prices on the principal national securities
exchange on which such stock is listed or admitted to trading, or if not listed
or admitted to trading on any national securities exchange, the average of the
closing bid and asked prices as furnished by any independent registered
broker-dealer firm, selected by the Company for that purpose, in each case
adjusted for any stock split during the relevant period.
"Commission" means the Securities and Exchange Commission.
"Default" means any event which is, or after notice or passage of
time or both would be, a Voting Rights Triggering Event.
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<PAGE> 189
"Holders" means the registered holders from time to time of the
Cumulative Convertible Preferred Stock.
"Indenture" means the Indenture dated as of October 5, 1995, as
supplemented and amended, between the Company and IBJ Schroder Bank & Trust
Company.
"Liquidated Damages" means, with respect to any share of
Cumulative Convertible Preferred Stock, the additional amounts payable pursuant
to Section 14 hereof.
"Officers' Certificate" means a certificate signed by two
officers of the Company.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however designated)
which is preferred as to the payment of dividends, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Registration Rights Agreement" means the Registration Rights
Agreement among the Company, Goldman, Sachs & Co., Credit Suisse First Boston
Corporation, Merrill Lynch & Company and Morgan Stanley Dean Witter with respect
to the Cumulative Convertible Preferred Stock.
"Securities Act" means the Securities Act of 1933.
"Shelf Registration Statement" means a shelf registration
statement filed with the Commission to cover resales of Transfer Restricted
Securities by holders thereof, as required by the Registration Rights Agreement.
"Subsidiary" means any corporation, association, partnership,
limited liability company or other business entity of which more than 50% of the
total voting power of shares of capital stock or other interests entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by the Company, the Company and one or more Subsidiaries
or one or more Subsidiaries and any partnership the sole general partner or the
managing partner of which the Company or any Subsidiary or the only general
partners of which are the Company and one or more Subsidiaries or one or more
Subsidiaries.
"Trading Day" means, in respect of any securities exchange or
securities market, each Monday, Tuesday, Wednesday, Thursday and Friday, other
than any day on which securities are not traded on the applicable securities
exchange or in the applicable securities market.
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<PAGE> 190
"Transfer Agent" means the transfer agent for the Cumulative
Convertible Preferred Stock appointed by the Company, which initially shall be
BankBoston, N.A.
"Transfer Restricted Securities" means each share of Cumulative
Convertible Preferred Stock (or the shares of Common Stock into which such share
of Cumulative Convertible Preferred Stock is convertible) until (i) the date on
which such security has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement or (ii) the date
on which such security is distributed to the public pursuant to Rule 144 under
the Securities Act or is saleable pursuant to Rule 144(k) under the Securities
Act (or any successor rule thereof) or would be saleable pursuant to Rule 144(k)
under the Securities Act had it not been held by, or had it never been held by,
an affiliate of the Company.
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<PAGE> 191
IN WITNESS WHEREOF, said IXC Communications, Inc., has caused
this Certificate of Designation to be signed by James F. Guthrie, its Executive
Vice President and Chief Financial Officer, this 30th day of March, 1998.
IXC COMMUNICATIONS, INC.,
by /s/ JAMES F. GUTHRIE
---------------------------------------
Name: James F. Guthrie
Title: Executive Vice President
and Chief Financial Officer
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<PAGE> 192
EXHIBIT A
FORM OF CONVERTIBLE PREFERRED STOCK
FACE OF SECURITY
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933 (THE "SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD,
PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) TO A PERSON WHOM THE SELLER
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF
RULE 144A UNDER THE SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR FOR THE
ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (2) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE
903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (3) TO AN INSTITUTION
THAT IS AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3)
OR (7) UNDER THE SECURITIES ACT IN A TRANSACTION EXEMPT FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT, (4) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF
AVAILABLE), OR (5) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT, AND IN EACH CASE, IN ACCORDANCE WITH ALL APPLICABLE SECURITIES
LAWS OF THE STATES OF THE UNITED STATES.
IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE
REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH
REGISTRAR AND TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER
COMPLIES WITH THE FOREGOING RESTRICTIONS.
-1-
<PAGE> 193
Certificate Number Number of Shares of Convertible
Preferred Stock
[ ] [ ]
CUSIP NO.: 450713870
6 3/4% Cumulative Convertible Preferred Stock (par
value $0.01) (liquidation preference $1,000
per share of Convertible Preferred Stock)
of
IXC Communications, Inc.
IXC Communications, Inc., a Delaware corporation (the "Company"),
hereby certifies that [ ] (the "Holder") is the registered owner of fully paid
and non-assessable preferred securities of the Company designated the 6 3/4%
Cumulative Convertible Preferred Stock (par value $0.01) (liquidation preference
$1,000 per share of Cumulative Convertible Preferred Stock) (the "Cumulative
Convertible Preferred Stock"). The shares of Cumulative Convertible Preferred
Stock are transferable on the books and records of the Registrar, in person or
by a duly authorized attorney, upon surrender of this certificate duly endorsed
and in proper form for transfer. The designation, rights, privileges,
restrictions, preferences and other terms and provisions of the Cumulative
Convertible Preferred Stock represented hereby are issued and shall in all
respects be subject to the provisions of the Certificate of Designation dated
March [ ], 1998, as the same may be amended from time to time (the "Certificate
of Designation"). Capitalized terms used herein but not defined shall have the
meaning given them in the Certificate of Designation. The Company will provide a
copy of the Certificate of Designation to a Holder without charge upon written
request to the Company at its principal place of business.
Reference is hereby made to select provisions of the Cumulative
Convertible Preferred Stock set forth on the reverse hereof, and to the
Certificate of Designation, which select provisions and the Certificate of
Designation shall for all purposes have the same effect as if set forth at this
place.
Upon receipt of this certificate, the Holder is bound by the
Certificate of Designation and is entitled to the benefits thereunder.
Unless the Transfer Agent's Certificate of Authentication hereon
has been properly executed, these shares of Cumulative Convertible Preferred
Stock shall not be entitled to any benefit under the Certificate of Designation
or be valid or obligatory for any purpose.
-2-
<PAGE> 194
IN WITNESS WHEREOF, the Company has executed this certificate
this [ ] day of [ ], [ ].
IXC COMMUNICATIONS, INC.,
By:
----------------------------------
Name:
Title:
[Seal]
By:
----------------------------------
Name:
Title:
TRANSFER AGENT'S CERTIFICATE OF AUTHENTICATION
This is one of the Cumulative Convertible Preferred Stock
referred to in the within mentioned Certificate of Designation.
Dated: [ ], [ ]
BankBoston, N.A.
as Transfer Agent,
By:
---------------------------------
Authorized Signatory
-3-
<PAGE> 195
REVERSE OF SECURITY
Dividends on each share of Cumulative Convertible Preferred Stock
shall be payable at a rate per annum set forth in the face hereof or as provided
in the Certificate of Designation.
The shares of Cumulative Convertible Preferred Stock shall be
redeemable as provided in the Certificate of Designation. The shares of
Cumulative Convertible Preferred Stock shall be convertible into the Company's
Common Stock in the manner and according to the terms set forth in the
Certificate of Designation.
As required under Delaware law, the Company shall furnish to any
Holder upon request and without charge, a full summary statement of the
designations, voting rights preferences, limitations and special rights of the
shares of each class or series authorized to be issued by the Company so far as
they have been fixed and determined and the authority of the Board of Directors
to fix and determine the designations, voting rights, preferences, limitations
and special rights of the class and series of shares of the Company.
-4-
<PAGE> 196
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers the
shares of Cumulative Convertible Preferred Stock evidenced hereby to:
- --------------------------------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------
- ----------------------------
(Insert assignee's social security or tax identification number)
- --------------------------------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------
(Insert address and zip code of assignee)
and irrevocably appoints:
--------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------
__________agent to transfer the shares of Cumulative Convertible Preferred Stock
evidenced hereby on the books of the Transfer Agent and Registrar. The agent may
substitute another to act for him or her.
Date:
-----------------------
Signature:
-----------------------------------
(Sign exactly as your name appears on the other side of this Cumulative
Convertible Preferred Stock Certificate)
Signature Guarantee:*
------------------------------------------------
- --------
*
----- (Signature must be guaranteed by an "eligible guarantor
institution" that is, a bank, stockbroker, savings and loan association or
credit union meeting the requirements of the Registrar, which requirements
include membership or participation in the Securities Transfer Agents Medallion
Program ("STAMP") or such other "signature guarantee program" as may be
determined by the Registrar in addition to, or in substitution for, STAMP, all
in accordance with the Securities Exchange Act of 1934, as amended.)
-5-
<PAGE> 197
EXHIBIT B
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Convertible, Preferred Stock)
The undersigned hereby irrevocably elects to convert (the "Conversion") shares
of [ ]% Cumulative Convertible Preferred Stock (the "Cumulative Convertible
Preferred Stock"), represented by stock certificate No(s). ___ (the "Cumulative
Convertible Preferred Stock Certificates") into shares of common stock ("Common
Stock") of IXC Communications, Inc. (the "Company") according to the conditions
of the Certificate of Designation of the Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of the Cumulative Convertible
Preferred Stock and Qualifications, Limitations and Restrictions Thereof (the
"Certificate of Designation"), as of the date written below. If shares are to be
issued in the name of a person other than the undersigned, the undersigned will
pay all transfer taxes payable with respect thereto and is delivering herewith
such certificates. No fee will be charged to the holder for any conversion,
except for transfer taxes, if any. A copy of each Cumulative Convertible
Preferred Stock Certificate is attached hereto (or evidence of loss, theft or
destruction thereof).
The undersigned represents and warrants that all offers and sales by the
undersigned of the shares of Common Stock issuable to the undersigned upon
conversion of the Cumulative Convertible Preferred Stock shall be made pursuant
to registration of the Common Stock under the Securities Act of 1933 (the
"Act"), or pursuant to any exemption from registration under the Act.
Any holder, upon the exercise of its conversion rights in accordance with the
terms of the Certificate of Designation and the Cumulative Convertible Preferred
Stock, agrees to be bound by the terms of the Registration Rights Agreement.
Capitalized terms used but not defined herein shall have the meanings ascribed
thereto in or pursuant to the Certificate of Designation.
Date of Conversion:
----------------------------------
Applicable Conversion Rate:
--------------------------
Number of shares of Convertible
Preferred Stock to be Converted:
---------------------
Number of shares of
-1-
<PAGE> 198
Common Stock to be Issued:
----------------------------
Signature:
--------------------------------------------
Name:
-------------------------------------------------
Address:**
----------------------------------------------
Fax No.:
----------------------------------------------
* The Company is not required to issue shares of Common Stock until the
original Cumulative Convertible Preferred Stock Certificate(s) (or
evidence of loss, theft or destruction thereof) to be converted are
received by the Company or its Transfer Agent. The Company shall issue
and deliver shares of Common Stock to an overnight courier not later
than three business days following receipt of the original Cumulative
Convertible Preferred Stock Certificate(s) to be converted.
** Address where shares of Common Stock and any other payments or
certificates shall be sent by the Company.
-1-
<PAGE> 1
EXHIBIT 5.1
RIORDAN & MCKINZIE
A Professional Law Corporation
695 TOWN CENTER DRIVE, SUITE 1500
COSTA MESA, CALIFORNIA 92626
(714) 433-2900
April 14, 1998
9-098-001
IXC Communications, Inc.
1122 Capital of Texas Highway South
Austin, Texas 78746
Ladies and Gentlemen:
We have acted as counsel to IXC Communications, Inc., a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of up to 4,313,837 shares
(the "Merger Shares") of the Company's common stock, par value $.01 per share
(the "Common Stock") in connection with the terms of the Stock Acquisition
Agreement and Plan of Merger, as amended (the "Merger Agreement") dated as of
December 19, 1997 among the Company, IXC Long Distance, Inc., Network Long
Distance, Inc. and Pisces Acquisition Corp. This opinion is delivered to you in
accordance with the requirements of Item 601(b)(5) of Regulation S-K under the
1993 Act in connection with the Registration Statement on Form S-4 (File No.
333-48079), including all pre-effective and post-effective amendments thereto
(the "Registration Statement"), filed with the Securities and Exchange
Commission (the "Commission") under the 1933 Act.
In rendering the opinion set forth herein, we have made such investigations
of fact and law, and examined such documents and instruments, or copies thereof
established to our satisfaction to be true and correct copies thereof, as we
have deemed necessary under the circumstances.
Based upon the foregoing and such other examination of law and fact as we
have deemed necessary, and in reliance thereon, we are of the opinion that the
Merger Shares have been duly authorized and, upon issuance pursuant to the terms
of the Merger Agreement, will be validly issued, fully paid and non-assessable.
<PAGE> 2
IXC Communications, Inc.
April 14, 1998
Page 2
We advise you that certain principals and employees of Riordan & McKinzie
beneficially own capital stock of the Company and that Carl W. McKinzie, a
principal of Riordan & McKinzie, is a director of the Company.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus which is a part of the Registration Statement.
In giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the 1933 Act or the rules
and regulations of the Commission thereunder.
Very truly yours,
/s/ RIORDAN & MCKINZIE
<PAGE> 1
EXHIBIT 8.1
April 15, 1998
Network Long Distance, Inc.
11817 Canon Boulevard, Suite 600
Newport News, Virginia 23606
RE: IXC COMMUNICATIONS, INC.
REGISTRATION STATEMENT ON FORM S-4 (REGISTRATION NO. 333-48079)
---------------------------------------------------------------
Dear Ladies and Gentlemen:
You have requested our opinion concerning the material federal income
tax consequences to the Stockholders of Network Long Distance, Inc. ("NLD") from
the merger between NLD and a subsidiary of IXC Communications, Inc. ("IXC") in
which the NLD Stockholders will receive IXC Common Stock which has been
registered under the Securities Act of 1933, as amended, in connection with the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission (the "Commission") on March 17, 1998 (Registration No. 333-48079), as
amended by Amendment No. 1 filed with the Commission on April 15, 1998 (the
"Registration Statement").
The facts, as we understand them, and upon which, with your permission,
we rely in rendering the opinion expressed herein, are set forth in the
Registration Statement. Based on such facts, it is our opinion that the material
federal income tax consequences are accurately set forth under the heading "THE
MERGER -- Material Federal Income Tax Consequences of the Merger" in the
Registration Statement. No opinion is expressed as to any matter not discussed
therein.
This opinion is based on various statutory provisions, regulations
promulgated thereunder and interpretations thereof by the Internal Revenue
Service and the courts having jurisdiction over such matters, all of which are
subject to change either prospectively or retroactively. Also, any variation or
difference in the facts from those set forth in the Registration Statement may
affect the conclusion stated herein.
<PAGE> 2
Network Long Distance, Inc.
April 15, 1998
Page 2
This opinion is rendered to you solely for use in connection with the
Registration Statement. We consent to your filing this opinion as an exhibit to
the Registration Statement and to the reference to our firm under the heading
"THE MERGER -- Material Federal Income Tax Consequences of the Merger."
Very truly yours,
BLACKWELL SANDERS MATHENY WEARY & LOMBARDI LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 to the Registration Statement (Form S-4 No. 333-48079) and
related Prospectus of IXC Communications, Inc. for the registration of
approximately 4.3 million shares of its common stock (along with warrants and
options to purchase common stock) and to the incorporation by reference therein
of our report dated February 28, 1998, with respect to the consolidated
financial statements of IXC Communications, Inc. included in its Annual Report
(Form 10-K) for the year ended December 31, 1997, filed with the Securities and
Exchange Commission.
/s/ ERNST & YOUNG LLP
AUSTIN, TEXAS
APRIL 15, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of
our report dated January 21, 1998 in this registration statement and the
incorporation by reference in this registration statement of our report dated
June 26, 1997 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 this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Jackson, Mississippi
April 15, 1998
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Network Long Distance, Inc.:
We consent to the incorporation by reference of our report dated June 5,
1997 with respect to the consolidated balance sheets of Eastern Telecom
International Corporation and subsidiaries as of March 31, 1997 and April 30,
1996, and the related consolidated statements of operations, changes in
redeemable preferred stock and shareholders' equity and cash flows for the
eleven month period ended March 31, 1997 and each of the years in the two year
period ended April 30, 1996, which report appears in the Form 8-K/A of Network
Long Distance, Inc. dated June 26, 1997 and to the reference to our firm under
the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
April 14, 1998
Norfolk, Virginia
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-48079 of IXC Communications, Inc. on Form S-4 of our report on National
Teleservice, Inc. dated July 28, 1997, appearing in the Proxy
Statement/Prospectus, which is part of this Registration Statement, and to the
incorporation by reference in this Amendment No. 1 to Registration Statement No.
333-48079 of IXC Communications, Inc. on Form S-4 of our report on National
Teleservice, Inc. dated December 6, 1996 (May 12, 1997 as to Note 10) appearing
in the current report on Form 8-K/A dated May 7, 1997. We also consent to the
reference to us under the heading "Experts" in such Proxy Statement/Prospectus.
/s/ DELOITTE & TOUCHE LLP
April 14, 1998
Minneapolis, Minnesota
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in,
and the incorporation by reference in, this joint registration statement/proxy
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 this registration statement.
/s/ YOUNT, HYDE & BARBOUR, P.C.
Culpeper, Virginia
April 14, 1998
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in,
and the incorporation by reference in, this joint registration statement/proxy
of our report dated March 11, 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 this registration statement.
/s/ MAYER HOFFMAN MCCANN L.C.
Kansas City, Missouri
April 14, 1998
<PAGE> 1
EXHIBIT 23.9
CONSENT OF MORGAN STANLEY & CO. INCORPORATED
April 14, 1998
IXC Communications, Inc.
1122 Capital of Texas Highway South
Austin, TX 78746
Dear Sirs:
We hereby consent to the inclusion in the Registration Statement of IXC
Communications, Inc. ("IXC") on Form S-4, with respect to the shares of common
stock, par value $0.01 per share, of IXC, of our opinion letter appearing as
Annex C to the Proxy Statement/Prospectus which is a part of the Registration
Statement, and to the references to our firm name therein. In giving such
consent, we do not thereby admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations adopted by the Securities and Exchange
Commission thereunder nor do we admit that we are experts with respect to any
part of such Registration Statement within the meaning of the term "experts" as
used in the Securities Act of 1933, as amended, or the rules and regulations of
the Securities and Exchange Commission thereunder.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ SCOTT W. MATLOCK
--------------------------------------
Scott W. Matlock
Principal
<PAGE> 1
EXHIBIT 99.1
PROXY/VOTING INSTRUCTION CARD
NETWORK LONG DISTANCE, INC.
COMMON STOCK
This Proxy is solicited on behalf of the Board of Directors of Network Long
Distance, Inc. ("NLD"). The undersigned hereby constitutes and appoints John D.
Crawford and Timothy A. Barton, and each of them, true and lawful agents and
proxies (the "Proxies") with full power of substitution to represent and to
vote, as designated below, all of the shares of common stock of NLD held of
record by the undersigned on April 15, 1998, at the Special Meeting of
Stockholders to be held at NLD's corporate office, 11817 Canon Boulevard, Suite
600, Newport News, Virginia, on Tuesday, May 19, 1998, at 2:00 p.m. (Eastern
Time), and at any and all adjournments thereof, on all matters coming before
said meeting, including the consideration of the Merger Agreement, as described
below.
This proxy when properly executed will be voted in the manner directed by you.
If no direction is made, this proxy will be voted FOR approval of the Merger
Agreement.
You are encouraged to specify your choice by marking the appropriate box, but
you need not mark any box if you wish to vote in accordance with the Board of
Directors' recommendation. However, the Proxies cannot vote your shares unless
you sign and return this card.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
1. To approve the Stock Acquisition Agreement and Plan of Merger, dated December
19, 1997, by and among Network Long Distance, Inc., IXC Communications, Inc.,
IXC Long Distance, Inc. and Pisces Acquisition Corp. (the "Merger
Agreement").
[ ] FOR [ ] AGAINST
Printed Name
- --------------------------------------------------------------------------------
Signature
- --------------------------------------------------------------------------------
Date
- ------------------
TITLE (if applicable)
--------------------------------------------------------------------
<PAGE> 2
YOUR VOTE IS IMPORTANT!
UNDER DELAWARE LAW, THE FAILURE TO VOTE WILL HAVE THE SAME EFFECT AS A VOTE
AGAINST APPROVAL OF THE MERGER AGREEMENT.
Please follow these steps to ensure that your proxy is properly executed and
returned in time to be counted:
1. Mark your vote for the proposal in
one of the two boxes on the other
side of this card.
2. If you are the record owner of
shares of common stock of NLD,
print your name in the space
provided. If you are completing
this proxy card on behalf of a
corporation, partnership, limited
liability company or other entity
that is the record owner of shares
of common stock of NLD, print the
name of that entity in the space
provided.
3. Sign in the space provided. Also
enter the date. If you are signing
on behalf of a corporation,
partnership, limited liability
company or other entity, indicate
your position with that entity.
4. Mail the completed card with
signature in the enclosed reply
envelope to:
Network Long Distance, Inc.
Attention: Corporate Secretary
11817 Canon Boulevard, Suite 600
Newport News, Virginia 23606
If you have questions regarding completion of this proxy card, contact John V.
Leaf at (757) 873-1040.
