<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 17, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
IXC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 4813 74-2644120
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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:
<TABLE>
<S> <C>
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. [ ]
================================================================================
<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value
$0.01...................... 4,313,986(1) N/A $221,236,687(2) $65,265
- -----------------------------------------------------------------------------------------------------------------------------------
Warrants to purchase Common
Stock...................... 35,978(3) N/A $900,000(4) $266
- -----------------------------------------------------------------------------------------------------------------------------------
Options to purchase Common
Stock...................... 262,675(5) N/A $7,647,480(4) $2,256
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value
$0.01, issuable upon
exercise of Options and
Warrants................... 298,653 N/A (6) (6)
- -----------------------------------------------------------------------------------------------------------------------------------
Total................. $67,787
===================================================================================================================================
</TABLE>
(1) Represents, as of March 12, 1998, a number of shares of common stock, par
value $.01 per share (the "IXC Common Stock") of IXC Communications, Inc.
("IXC") based on: (a) the sum of: (i) 13,393,378 outstanding shares of
common stock, par value $.0001 per share (the "NLD Common Stock") of Network
Long Distance, Inc. ("NLD"), and (ii) 996,000 shares of NLD Common Stock
issuable upon exercise of options and warrants issued by NLD (which includes
all NLD Stock Purchase Warrants and NLD Options (each as defined below))
multiplied by (b) an exchange ratio (the "Exchange Ratio") of 0.2998 shares
of IXC Common Stock for each share of NLD Common Stock, as provided in the
acquisition agreement. Also includes 50 additional shares of IXC Common
Stock issuable in connection with fractional amounts.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f)(1) of the Securities Act of 1933, as amended (the "Securities
Act") and based on (a) the average of the high and low sales price of a
share of NLD Common Stock as reported by the Nasdaq National Market on March
12, 1998 ($15.375), and (b) the maximum number of shares of NLD Common Stock
which may be converted into shares of IXC Common Stock pursuant to the
acquisition agreement (14,389,378).
(3) Represents, as of March 12, 1998, warrants to purchase a number of shares of
IXC Common Stock, based on: (a) up to 120,000 shares of NLD Common Stock
issuable upon exercise of warrants issued to investors by NLD pursuant to
stock purchase warrant agreements dated February 24, 1994 ("NLD Stock
Purchase Warrants") multiplied by (b) the Exchange Ratio.
(4) Pursuant to Rule 457(f)(2) and (3) and (i) of the Securities Act, the
warrants will be issued in exchange for outstanding NLD Stock Purchase
Warrants and if exercised, IXC will receive an exercise price of $7.50 per
share. The options will be issued in exchange for outstanding NLD Options
and, if exercised, IXC will receive a weighted average exercise price of
$8.73 per share.
(5) Represents, as of March 12, 1998, options to purchase a number of IXC Common
Stock, based on: (a) up to 876,000 shares of NLD Common Stock issuable upon
exercise of options granted by NLD ("NLD Options") multiplied by (b) the
Exchange Ratio. Also includes 50 additional shares of IXC Common Stock
issuable in connection with fractional amounts.
(6) Pursuant to Rule 457(i) of the Securities Act, no additional registration
fee is required with respect to the shares of IXC Common Stock issuable upon
exercise of options to purchase IXC Common Stock.
-----------------------------
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> 3
[LOGO]
, 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 [ ], 1998, at
[ ] a.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 such 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, it is presently anticipated
that the transaction will be completed in the second quarter of 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,
JOHN CRAWFORD
Chairman of the Board and
Chief Executive Officer
<PAGE> 4
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 [ ], 1998, at [ ] a.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 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 [ ], 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,
JOHN V. LEAF
Secretary
Newport News, Virginia
, 1998
<PAGE> 5
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 16, 1998
<TABLE>
<S> <C>
[LOGO] [LOGO]
NETWORK LONG DISTANCE, INC. IXC COMMUNICATIONS, INC.
PROXY STATEMENT FOR SPECIAL MEETING OF PROSPECTUS FOR 4,313,986 SHARES OF COMMON
STOCKHOLDERS TO BE HELD ON STOCK AND OPTIONS AND WARRANTS TO PURCHASE
[ ], 1998 UP TO 298,653 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 [ ], [ ], 1998, at [ ] a.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 of common stock, par value $.01 per
share ("IXC Common Stock") of IXC and (iii) all options and warrants to purchase
NLD Common Stock outstanding prior to the time the Merger is effective shall be
converted into the right to receive options or warrants to purchase such 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 4,313,986 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 298,653 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 ,1998 the last reported
sale price of IXC Common Stock on the NNM was $[ ].
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to stockholders of NLD on or about [ ], 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 [ ], 1998.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION....................................... iii
DOCUMENTS INCORPORATED BY REFERENCE......................... iv
SUMMARY..................................................... 1
The Companies............................................. 1
The Special Meeting....................................... 2
Summary of Certain Information Concerning the Merger...... 2
Risk Factors.............................................. 6
Selected Historical Financial Data of IXC................. 7
Selected Historical Financial Data of NLD................. 8
Unaudited Selected Pro Forma Combined Financial
Information............................................ 9
Comparative Per Share Data................................ 10
Markets and Market Prices................................. 10
RISK FACTORS................................................ 12
THE COMPANIES............................................... 25
IXC....................................................... 25
NLD....................................................... 25
Acquisition Corp.......................................... 26
THE SPECIAL MEETING......................................... 26
Purpose of Special Meeting................................ 26
Place, Date, and Time of the Special Meeting; Record
Date................................................... 27
Voting at the Special Meeting............................. 27
Proxies................................................... 27
THE MERGER.................................................. 28
Description of the Merger................................. 28
Consummation of the Merger................................ 28
Background of the Merger.................................. 28
NLD's Reasons for the Merger; Recommendations of the NLD
Board.................................................. 30
IXC's Reasons for the Merger.............................. 31
Opinion of Morgan Stanley................................. 31
Nasdaq National Market.................................... 35
Certain Federal Income Tax Consequences of the Merger..... 35
Resales of IXC Common Stock Under Federal Securities
Laws................................................... 35
Accounting Treatment...................................... 36
Consents and Approvals.................................... 36
Appraisal Rights.......................................... 36
Interests of Certain Persons in the Merger................ 36
Conduct of Business after the Merger...................... 37
TERMS OF THE MERGER AGREEMENT............................... 37
The Merger................................................ 37
Effective Time of the Merger.............................. 38
Effects of the Merger on NLD Common Stock................. 38
Treatment of Stock Options and Warrants................... 38
Fractional Shares......................................... 39
Number of Shares of IXC Common Stock Anticipated to be
Issued Pursuant to the Merger Agreement................ 39
Appointment of the Exchange Agent......................... 39
Payment of the Merger Consideration; Surrender of NLD
Stock Certificates, NLD Options and NLD Warrants....... 39
</TABLE>
i
<PAGE> 7
<TABLE>
<S> <C>
Representations and Warranties............................ 40
No Solicitation........................................... 40
Conditions to the Merger.................................. 40
Covenants; Conduct of Business Prior to Effective Time.... 42
Termination of the Merger Agreement....................... 44
Fees and Expenses of the Merger........................... 45
COMPARATIVE RIGHTS OF STOCKHOLDERS.......................... 45
Number of Directors....................................... 45
Classification............................................ 46
Removal of Directors; Filling Vacancies on the Board of
Directors.............................................. 46
Limitation on Directors' Liability........................ 46
Indemnification........................................... 46
Restrictions on Business Combinations/Corporate Control... 47
Special Meetings.......................................... 47
Amendment or Repeal of the Charter and Bylaws............. 47
Cumulative Voting......................................... 47
Appraisal Rights in Mergers............................... 47
Dividends................................................. 48
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
FOR IXC AND NLD........................................... 49
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR
NLD.......................................................
MARKET PRICE AND DIVIDEND ON NLD'S COMMON STOCK AND RELATED
NLD STOCKHOLDER MATTERS................................... 62
Market Information........................................ 62
Holders of NLD Common Stock............................... 62
Security Ownership of Certain Beneficial Owners and
Management............................................. 63
Dividends................................................. 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF NLD'S FINANCIAL
CONDITION AND RESULTS OF OPERATION........................ 64
LEGAL MATTERS............................................... 72
EXPERTS..................................................... 72
FUTURE STOCKHOLDER PROPOSALS................................ 73
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> 8
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 of 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, proxy 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> 9
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, and March 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
[ ], 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> 10
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> 11
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 prospective
investors, 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 is expected to include over 11,500 digital route miles by the
end of the first quarter of 1998. 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> 12
THE SPECIAL MEETING
A Special Meeting of the stockholders of NLD (the "NLD Stockholders") will
be held on [ ], 1998 at [ ], 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 [ ], 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 [ ]% 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.
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
2
<PAGE> 13
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 therefore, 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 [ ] shares of IXC Common
Stock and Substitute Options and Substitute
Warrants to purchase [ ] 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.
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 become on 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."
3
<PAGE> 14
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 and their affiliates
beneficially owned shares of NLD Common Stock
representing [ ]% 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
stockholders of NLD 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 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.
4
<PAGE> 15
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."
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................... The Merger is intended to be 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
should be recognized by either IXC or NLD as a
result of the Merger and (ii) no gain or loss
should 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. On the other hand, if the Merger
does not qualify as a tax-free reorganization, each
NLD Stockholder will 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
5
<PAGE> 16
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 -- Certain 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 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 March 13, 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.
6
<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 has 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.
7
<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.
8
<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 statements of operations of NLD, using the
pooling of interests method of accounting for business combinations for NLD
contained elsewhere in this Proxy Statement/Prospectus.
The unaudited pro forma combined balance sheet data as of December 31, 1997
reflects the assumption that the Merger occurred as of that date. The unaudited
pro forma combined statement of operations data reflects 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.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenues................................ $ 528,827 $ 307,126 $ 179,159
Operating income (loss)............................... (54,529) (21,797) (5,073)
Income (loss) before extraordinary loss............... (105,831) (46,343) (11,433)
Basic and diluted loss per share(1):
Before extraordinary loss.......................... $ (3.65) $ (1.53) $ (0.48)
Weighted average basic and diluted shares............. 34,902 31,376 27,941
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 153,807
Total assets.......................................... 967,005
Total long-term debt and capital lease obligations.... 321,437
Redeemable preferred stock............................ 403,368
Stockholders' equity (deficit)........................ (18,341)
OTHER FINANCIAL DATA:
EBITDA(2)............................................. $ 17,281 $ 16,534 $ 16,762
</TABLE>
- ---------------
(1) 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 an exchange ratio of .2998 of IXC Common Stock for each
issued and outstanding share of NLD Common Stock.
(2) 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.
9
<PAGE> 20
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
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) [ ], 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.
10
<PAGE> 21
<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
[ ], 1998................................ [ ] [ ] [ ]
</TABLE>
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.
11
<PAGE> 22
RISK FACTORS
In addition to the other information contained in this Proxy
Statement/Prospectus, before tendering their shares of NLD Common Stock 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 may 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 [ ], 1998, the last trading day before the date of this Proxy
Statement/Prospectus, was $[ ] 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 stockholders of NLD 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. Although the parties intend the Merger to constitute a
tax-free reorganization, 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."
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<PAGE> 23
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. 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 in excess of $500.0 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, and additional equity and/or debt financings. IXC
intends to incur a substantial amount of additional indebtedness and may issue a
substantial amount of additional equity securities over the near term. 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 12 1/2%
Senior Notes Due 2005 (the "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 up to $28.0
million (approximately $18.0 million of which had been borrowed at March 1,
1998) entered into with NTFC Capital Corporation and Export Development
Corporation, in July 1997 (the "NTFC Equipment Facility"). 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
and other indebtedness, to pay cash dividends on IXC's 7 1/4% Junior Convertible
Preferred Stock Due 2007 (the "Convertible Preferred Stock") and IXC's 12 1/2%
Series B Junior Exchangeable Preferred Stock Due 2009 (the "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
13
<PAGE> 24
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 Combination."
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. Furthermore,
IXC may borrow an aggregate of up to $28.0 million (approximately $18.0 million
of which had been borrowed at March 1, 1998), under the NTFC Equipment Facility.
In addition, IXC is in discussions with various investment bankers, vendors and
lending institutions regarding several substantial additional debt financings.
If such additional debt financings occur, they will substantially increase IXC's
interest expense. 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 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 indenture for the indenture for the Senior Notes (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 or
other indebtedness or the Convertible Preferred Stock or the Exchangeable
Preferred Stock as payments become due or that the Company will be able to
refinance the Senior Notes or other indebtedness at maturity or the Convertible
Preferred Stock or the Exchangeable Preferred Stock upon mandatory redemption.
14
<PAGE> 25
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. 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 or other indebtedness; (ii) pay cash dividends on the Convertible
Preferred Stock and 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.
Although IXC has made significant progress, construction of the New York to Los
Angeles via St. Louis route is not yet complete. 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. Substantial portions of the route from New York to Los
Angeles via St. Louis and all of the route from Washington to Houston via
Atlanta are being constructed by contractors or, pursuant to cost-saving
arrangements, by third parties that will include 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
15
<PAGE> 26
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 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 3 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.
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.
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<PAGE> 27
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.
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.
17
<PAGE> 28
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
dealing with these problems. There can be no assurance that services,
technologies or businesses of acquired companies will be effectively assimilated
into the business or product offerings of the Company or that they will
contribute to 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 28.6%, 6.4%, 4.2% and 4.1% 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.
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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 even larger, and potentially stronger,
competitor (or competitors). In addition, Level 3 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 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
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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 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.
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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, 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.
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.
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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.
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.
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CONCENTRATION OF STOCK OWNERSHIP
As of February 1, 1998 Trustees of General Electric Pension Trust ("GEPT")
beneficially owned approximately 27.3% of the outstanding IXC Common Stock,
Grumman Hill Investments, L.P. ("GHI"), Richard D. Irwin and his affiliates
together beneficially owned approximately 10.7% of the outstanding IXC Common
Stock, and two of the members of senior management and their affiliates
beneficially owned approximately 13.5% of the outstanding IXC Common Stock. GEPT
owns 30% of the Convertible Preferred Stock. As a result, certain of these
stockholders, if they act together, generally would be able to elect a majority
of directors elected by the holders of the 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
"IPO"). 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; (iii) shares
issuable upon conversion of IXC convertible preferred stock, including
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
Convertible Preferred Stock is convertible into approximately 4.5 million shares
of IXC Common Stock at a purchase price of $23.46 per share. 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 996,000 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
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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
is expected to include over 11,500 digital route miles by the end of the first
quarter of 1998. 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.
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
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(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
inter-exchange 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
inter-exchange 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.
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 shares of IXC Common Stock in accordance with the Exchange
Ratio. 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 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 AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY, HAS AUTHORIZED THE EXECUTION AND DELIVERY OF THE AGREEMENT, AND
RECOMMENDS THAT NLD STOCKHOLDERS VOTE FOR APPROVAL OF THE AGREEMENT.
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PLACE, DATE, AND TIME OF THE SPECIAL MEETING; RECORD DATE
The Special Meeting is scheduled to be held on [ ], 1998 at
[ ], local 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 [ ], 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 [ ] 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, 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.
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
Agreement.
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 Agreement. Final negotiations between NLD
and IXC regarding the terms of the 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 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 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 Agreement was executed by the parties. See "NLD's Reasons for the Merger;
Recommendations of the NLD Board" and "Opinion of Morgan Stanley."
NLD'S REASONS FOR THE MERGER; RECOMMENDATIONS 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 option 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 public float and trading volume of shares of
NLD Common Stock, which could provide the NLD
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Stockholders with greater liquidity in their investment; (j) the structure of
the transaction and the terms of the 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 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. 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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion is a summary of certain United States federal
income tax consequences of the Merger to NLD Stockholders but it does not
purport to be a complete analysis of all the potential tax effects of such
transaction. This discussion, and any other discussion herein of the federal
income tax consequences of the Merger, 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. No information is provided herein
with respect to foreign, state or local tax laws or estate and gift tax
considerations. This information 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 not described below 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 to acquire NLD Common
Stock. 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." Neither IXC nor NLD
intends to request a ruling from the IRS with respect to the tax consequences
resulting from the Merger.
The Merger is intended to 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 could 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.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY. ACCORDINGLY, 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 stockholders
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of NLD 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
March 13, 1998 approximately 60% of the state regulatory approvals have been
obtained.
APPRAISAL RIGHTS
Under the Delaware General Corporation Law (the "DGCL"), the stockholders
of NLD 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 [ ] shares of NLD Common Stock (which represents approximately
[ ]% 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 [ ] 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 become on 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
[ ] shares of IXC Common Stock which is approximately [ ]% 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 [ ] 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 and the closing of the transactions
contemplated by the Merger Agreement (the "Closing"). The date on which 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 [ ] 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 therefore, and (c) contain such
terms and conditions as IXC and NLD shall agree upon. As of March 13, 1998, NLD
had issued NLD Options to purchase an aggregate of 876,000 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 4,313,986
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
[ ] shares, the number of shares of IXC Common Stock anticipated to be
issued pursuant to the Merger Agreement would represent approximately [ ]%
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
Option 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 its Board of Directors and
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 prospectus 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 (as
defined);
(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;
42
<PAGE> 53
(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) acquire (by merger, consolidation or
acquisition of stock or assets or otherwise) 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,
43
<PAGE> 54
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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<PAGE> 55
(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 with the NLD Board being able to increase the number of directors by a
resolution adopted by a majority of the NLD Board. 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 entitled
to vote for the election of directors.
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<PAGE> 56
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 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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<PAGE> 57
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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<PAGE> 58
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 dividend on IXC's preferred stock. Dividends on IXC's 10% Junior
Series 3 Cumulative Redeemable Preferred Stock (the "Series 3 Preferred Stock")
accumulate at a rate of 10% (based on the liquidation preference) plus interest.
In addition, the IXC Charter provides for quarterly dividend payments on its
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). No dividends can be paid
on the IXC Common Stock until all dividends are paid in full on the Exchangeable
Preferred Stock, the Convertible Preferred Stock and Series 3 Preferred Stock.
At December 31, 1997, the aggregate liquidation preference of the Series 3
Preferred Stock, the Convertible Preferred Stock and the Exchangeable Preferred
Stock were approximately $.7 million, $105.5 million and $309.0 million,
respectively. 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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<PAGE> 59
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
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.
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<PAGE> 60
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
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
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<PAGE> 61
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
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
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<PAGE> 62
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
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
52
<PAGE> 63
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
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
53
<PAGE> 64
IXC AND NLD
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On December 18, 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 common shares of NLD is based on the
Exchange Ratio or .2998 of IXC Common Stock for each issued and outstanding
share of NLD Common Stock.
54
<PAGE> 65
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
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.
55
<PAGE> 66
NLD
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS(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.
56
<PAGE> 67
NLD
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS(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.
57
<PAGE> 68
NLD
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS(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
58
<PAGE> 69
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
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%.
59
<PAGE> 70
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
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.
60
<PAGE> 71
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
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.
61
<PAGE> 72
MARKET PRICE AND DIVIDEND ON NLD'S 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 two fiscal years and each of the three quarterly periods
thereafter (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
</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 March 13, 1998, the closing price for the NLD Common
Stock as reported by the NNM was $15 1/2 per share.
HOLDERS OF NLD COMMON STOCK
The number of record owners of NLD Common Stock as of December 31, 1997,
was approximately 214. This number does not include stockholders who hold NLD
Common Stock in their accounts at broker/dealers.
62
<PAGE> 73
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)........................ 229,668 1.6% 68,854
Russell J. Page, Director(8)......................... 225,000 1.6% 67,455
Timothy J. Sledz, Director(9)........................ 322,251 2.4% 96,610
Albert A. Woodward, Director(10)..................... 10,700 -- 3,208
All Directors and Officers, as a Group(11)........... 6,534,282 45.4% 1,958,978
</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) 180,141 shares of NLD Common Stock owned by Value Tel, 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 Value
Tel, 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.
63
<PAGE> 74
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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<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income (loss) before income taxes:
Network............................................... $(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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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> 77
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 $86,006,615 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> 78
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 impede 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> 79
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 net income 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 lessor 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 credit 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 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 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 National'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> 80
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 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,
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<PAGE> 81
$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.
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
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.
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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.
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, are 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.
72
<PAGE> 83
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.
73
<PAGE> 84
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 Auditor's Report........................... F-3
Independent Auditor's 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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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
F-19
<PAGE> 103
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>
F-20
<PAGE> 104
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
<PAGE> 105
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> 106
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> 107
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> 108
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> 109
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> 110
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> 111
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> 112
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> 113
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> 114
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> 115
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> 116
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> 117
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> 118
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> 119
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 3 -- Level 3 Communications, Inc.
A-2
<PAGE> 120
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> 121
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> 122
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
THE MERGER............................................. 1
Section 1.1 The Merger................................ 1
Section 1.2 Effective Time............................ 2
Section 1.3 Effects of the Merger..................... 2
Section 1.4 Certificate of Incorporation and Bylaws... 2
Section 1.5 Officers and Directors.................... 2
Section 1.6 Further Actions........................... 2
ARTICLE II
CONVERSION AND EXCHANGE OF SHARES, CLOSING............. 2
Section 2.1 Conversion and Exchange of Shares......... 2
Section 2.2 Surrender of Shares....................... 3
Section 2.3 Stock Transfer Books...................... 4
Section 2.4 Date, Time and Place of Closing........... 4
Section 2.5 Deliveries by Network at Closing.......... 4
Section 2.6 Deliveries by IXC at Closing.............. 5
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF NETWORK.............. 6
Section 3.1 Corporate Existence....................... 6
Section 3.2 Subsidiaries.............................. 6
Section 3.3 Corporate Power and Authority............. 6
Section 3.4 Capitalization............................ 6
Section 3.5 Binding Effect............................ 6
Section 3.6 Execution and Delivery Permitted.......... 7
Section 3.7 Reports and Financial Statements.......... 7
Section 3.8 Absence of Certain Changes................ 8
Section 3.9 No Undisclosed Liabilities................ 10
Section 3.10 RESERVED.................................. 10
Section 3.11 Benefit Plans; ERISA...................... 10
Section 3.12 Litigation................................ 12
Section 3.13 Compliance with Laws...................... 12
Section 3.14 Taxes..................................... 13
Section 3.15 Banks..................................... 14
Section 3.16 Contracts................................. 14
Section 3.17 Titles, Real Property Matters............. 15
Section 3.18 Environmental Matters..................... 15
Section 3.19 Broker's Fees............................. 16
Section 3.20 Labor Matters............................. 16
Section 3.21 Conflicts of Interest..................... 16
Section 3.22 Insurance Coverage........................ 17
Section 3.23 RESERVED.................................. 17
Section 3.24 Correct Records........................... 17
Section 3.25 Vote Required............................. 17
Section 3.26 Accounting Matters........................ 17
Section 3.27 Registration Statement and Proxy
Statement............................................. 17
Section 3.28 Opinion of Financial Advisor.............. 18
Section 3.29 Letters of Agency......................... 18
</TABLE>
B-2
<PAGE> 123
<TABLE>
<S> <C>
Section 3.30 Permits................................... 18
Section 3.31 Section 203 Not Applicable................ 18
Section 3.32 Disclaimer................................ 18
Section 3.33 Due Diligence Investigation............... 19
Section 3.34 Form of Warrant........................... 19
ARTICLE IV
COVENANTS OF NETWORK................................... 19
Section 4.1 Maintenance of Business................... 19
Section 4.2 Negative Covenants........................ 20
Section 4.3 Organization, Goodwill.................... 21
Section 4.4 RESERVED.................................. 21
Section 4.5 Corporate Action.......................... 21
Section 4.6 Third Party Consents...................... 21
Section 4.7 Securities Laws........................... 22
Section 4.8 Communications Laws....................... 22
Section 4.9 Notice of Proceedings..................... 22
Section 4.10 Confidentiality........................... 22
Section 4.11 RESERVED.................................. 23
Section 4.12 Adverse Events............................ 23
Section 4.13 Shareholders' Approval.................... 23
Section 4.14 Rule 145 Affiliates....................... 24
Section 4.15 Tax Returns............................... 24
Section 4.16 No Solicitation........................... 24
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF IXC, IXC LONG
DISTANCE AND ACQUISITION.............................. 24
Section 5.1 Corporate Existence....................... 24
Section 5.2 Corporate Power and Authority............. 25
Section 5.3 Capitalization............................ 25
Section 5.4 Binding Effect............................ 25
Section 5.5 Execution and Delivery Permitted.......... 25
Section 5.6 Reports and Financial Statements.......... 26
Section 5.7 Absence of Certain Changes................ 27
Section 5.8 No Undisclosed Liabilities................ 27
Section 5.9 RESERVED.................................. 27
Section 5.10 Benefit Plans; ERISA...................... 28
Section 5.11 Litigation................................ 29
Section 5.12 Compliance with Laws...................... 29
Section 5.13 Tax Returns............................... 30
Section 5.14 Environmental Matters..................... 30
Section 5.15 RESERVED.................................. 30
Section 5.16 Labor Matters............................. 31
Section 5.17 RESERVED.................................. 31
Section 5.18 RESERVED.................................. 31
Section 5.19 Correct Records........................... 31
Section 5.20 Vote Required............................. 31
Section 5.21 Accounting Matters........................ 31
Section 5.22 Registration Statement and Proxy
Statement............................................. 31
</TABLE>
B-3
<PAGE> 124
<TABLE>
<S> <C>
Section 5.23 RESERVED.................................. 31
Section 5.24 Disclaimer................................ 31
Section 5.25 Due Diligence Investigation............... 32
ARTICLE VI
COVENANTS OF IXC....................................... 32
Section 6.1 Maintenance of Business................... 32
Section 6.2 Negative Covenants........................ 32
Section 6.3 RESERVED.................................. 33
Section 6.4 RESERVED.................................. 33
Section 6.5 Corporate Action.......................... 33
Section 6.6 Third Party Consents...................... 33
Section 6.7 Securities Laws........................... 34
Section 6.8 Communications Laws....................... 34
Section 6.9 Notice of Proceedings..................... 34
Section 6.10 Confidentiality........................... 34
Section 6.11 RESERVED.................................. 35
Section 6.12 RESERVED.................................. 35
Section 6.13 Adverse Events............................ 35
Section 6.14 RESERVED.................................. 35
Section 6.15 Issuance of Shares........................ 35
ARTICLE VII
ADDITIONAL AGREEMENTS.................................. 35
Section 7.1 Applications to Commissions............... 35
Section 7.2 Joint Proxy Statement and Registration
Statement............................................. 36
Section 7.3 HSR Filings............................... 37
Section 7.4 Expenses.................................. 37
ARTICLE VIII
CONDITIONS TO CLOSING.................................. 37
Section 8.1 IXC , IXC Long Distance and Acquisition
Conditions to Closing................................. 37
Section 8.2 Network Conditions to Closing............. 38
Section 8.3 Mutual Conditions to Obligations of
Network and IXC....................................... 39
ARTICLE IX
MISCELLANEOUS.......................................... 40
Section 9.1 Survival.................................. 40
Section 9.2 Termination of Agreement; Termination
Fee................................................... 40
Section 9.3 Effect of Termination or Abandonment...... 42
Section 9.4 Liabilities............................... 42
Section 9.5 Assignment................................ 42
Section 9.6 Further Assurances........................ 42
Section 9.7 Notices................................... 42
Section 9.8 Entire Agreement.......................... 43
Section 9.9 Rules of Construction..................... 43
Section 9.10 Law Governing............................. 44
Section 9.11 Waiver of Provisions...................... 44
Section 9.12 Successors................................ 44
Section 9.13 Counterparts.............................. 45
Section 9.14 Public Statements or Releases............. 45
Section 9.15 Severability.............................. 45
Section 9.16 No Third Party Beneficiaries.............. 45
</TABLE>
B-4
<PAGE> 125
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 Communications, Inc."
B-5
<PAGE> 126
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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<PAGE> 156
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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<PAGE> 157
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;
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<PAGE> 159
(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 and may not be used for any other purpose without our prior
written consent, 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
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<PAGE> 160
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> 161
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 (incorporated by reference to Exhibit 3.1
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")).
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")).
</TABLE>
II-2
<PAGE> 162
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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 "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 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 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).
5.1* Opinion of Riordan & McKinzie, a Professional Law
Corporation regarding the validity of the issuance of the
securities registered hereunder.
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).
24.1 Power of Attorney (included as the signature page of this
Registration Statement).
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
* To be filed by amendment
(b) Financial Statement Schedules
Not Applicable
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;
II-3
<PAGE> 163
(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.
(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-4
<PAGE> 164
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Austin, State of Texas,
on March 13, 1998.
IXC Communications, Inc.,
a Delaware corporation
By: /s/ JAMES F. GUTHRIE
------------------------------------
James F. Guthrie
Executive Vice President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below on this registration statement hereby constitutes and appoints Benjamin L.
Scott, President and Chief Executive Officer of IXC Communications, Inc. and
Jeffrey C. Smith, Senior Vice President, General Counsel and Secretary of IXC
Communications, Inc. and each of them his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities (unless revoked in writing) to
sign any and all amendments to this registration statement including any
post-effective amendments as well as any related registration statement (or
amendment thereto) filed in reliance upon Rule 462(b) under the Securities Act
of 1933, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting to
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
connection therewith, as fully to all intents and purposes as he might and could
do in person hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RALPH J. SWETT Chairman and Director March 13, 1998
- ---------------------------------------------------
Ralph J. Swett
/s/ BENJAMIN L. SCOTT President, Chief Executive March 13, 1998
- --------------------------------------------------- Officer and Director (Principal
Benjamin L. Scott Executive Officer)
/s/ JAMES F. GUTHRIE Executive Vice President and March 13, 1998
- --------------------------------------------------- Chief Financial Officer
James F. Guthrie (Principal Financial and
Accounting Officer)
/s/ RICHARD D. IRWIN Director March 13, 1998
- ---------------------------------------------------
Richard D. Irwin
/s/ WOLFE H. BRAGIN Director March 13, 1998
- ---------------------------------------------------
Wolfe H. Bragin
</TABLE>
II-5
<PAGE> 165
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ CARL W. MCKINZIE Director March 13, 1998
- ---------------------------------------------------
Carl W. McKinzie
/s/ PHILLIP L. WILLIAMS Director March 13, 1998
- ---------------------------------------------------
Phillip L. Williams
/s/ JOE C. CULP Director March 13, 1998
- ---------------------------------------------------
Joe C. Culp
</TABLE>
II-6
<PAGE> 166
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 (incorporated by reference to Exhibit 3.1
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")). .....................
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> 167
<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 "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 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 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). ............................
5.1* Opinion of Riordan & McKinzie, a Professional Law
Corporation regarding the validity of the issuance of the
securities registered hereunder. ...........................
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). ...........................................
24.1 Power of Attorney (included as the signature page of this
Registration Statement). ...................................
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
* To be filed by amendment
(b) Financial Statement Schedules
Not Applicable
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement Form S-4 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
MARCH 16, 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
March 16, 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
Norfolk, Virginia
March 16, 1998
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement 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
Registration Statement 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
March 16, 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
March 16, 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
March 16, 1998
<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 , 1998, at the Special Meeting of
Stockholders to be held at NLD's corporate office, 11817 Canon Boulevard, Suite
600, Newport News, Virginia, on , , 1998, at a.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.
